Annual Report 2008 DEXIA CREDIT LOCAL SUMMARY
Consolidated 1 General presentation p. 1 4 financial statements p. 81
Dexia profile p. 1 Consolidated balance sheet p. 82 Message from the Chairman of the Consolidated income statement p. 84 Board of Directors and the Chief Consolidated statement of changes Executive Officer of Dexia SA p. 2 in equity p. 85 Profile of Dexia Credit Local p. 4 Consolidated cash flow statement p. 87 Message from the Chief Executive Cash and cash equivalents p. 88 Officer of Dexia Credit Local p. 5 Notes to the consolidated financial 2008 key figures p. 6 statements p. 89 Board of Directors (March 2009) p. 7 Statutory Auditors’ report on the Organization chart (March 2009) p. 8 consolidated financial statements p. 182 Principal subsidiaries and affiliated companies p. 9 Dexia Credit Local within the Dexia Group p. 10 5 Financial statements p. 185
Balance sheet p. 186 Off-balance sheet items p. 188 Management report p. 11 2 Income statement p. 189 Notes to the financial statements p. 190 Business review p. 12 Statutory Auditors’ general report p. 233 Risk management p. 23 Operating results p. 35 Capital stock and share data p. 42 Human resources and environmental data p. 44 Terms and compensation paid to members of management bodies p. 50 6 Shareholders’ Meeting p. 235 Significant events and outlook p. 60 Statutory Auditors’ special report on regulated agreements and commitments p. 236 Resolutions proposed to the Shareholders’ Meeting Corporate governance and of May 14, 2009 p. 237 3 internal control p. 63
Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 of the French Commercial Code p. 64 7 Additional information p. 239 Statutory Auditors’ Report p. 80 Legal and administrative information p. 240 Statutory Auditors p. 243 Statement of the person responsible for the registration document (document de référence) p. 244 The annual report may be consulted List of information published or released at the website www.dexia-creditlocal.fr during the previous twelve months (prepared March 20, 2009) p. 245 Cross-reference table p. 249
This free translation of the r egistration document published in the French language is provided solely for the convenience of English-speaking readers. The French version of the Dexia Credit Local registration document (document de réfé rence) was filed with the French Financial Markets Authority (Autorité des Marchés Financiers, or AMF) on April 15, 2009, in compliance with Article 212-13 of the AMF’s General Regulations. Annual Report 2008 GENERAL PRESENTATION
Dexia p rofile
Dexia is a European bank, with 36,760 staff members and core shareholders’ players with comprehensive banking and financial solutions, and on Retail equity of EUR 17.5 billion as of December 31, 2008. The Dexia Group and Commercial Banking in Europe, mainly Belgium, Luxembourg and focuses on Public and Wholesale Banking, providing local public finance Turkey.
( BUSINESS LINES
Public and Wholesale Banking Retail and Commercial Banking
As a consequence of the transformation plan initiated by Dexia in Dexia is a leading European bank that ranks among the three major banks November 2008, the Public and Wholesale Banking business line is in Belgium (1) and Luxembourg (2) and holds a strong position in Turkey. It is revisited in order to take into account the current market environment. also present in Slovakia . The bank offers a wide range of retail, commercial It will focus on markets combining strong commercial franchises, a long- and private banking services as well as insurance products to more than term funding capacity and potential for profitable growth. six million customers.
The commercial franchises in France, Belgium, Luxemburg, Italy and the This business line also includes asset management and investor services Iberian Peninsula have been confirmed and these markets will remain activities. Dexia Asset Management had EUR 79 billion of assets under core markets for Public and Wholesale Banking. Dexia will maintain a management as of December 31, 2008. The investor services business presence in Germany, Japan and Switzerland to keep platforms for access is conducted by RBC Dexia Investor Services, a joint venture with Royal to funding sources. The activities in the United Kingdom and in the United Bank of Canada, which offers its expertise in global custody, fund and States will be significantly reduced. pension administration and shareholder services to institutions around the world. Total assets under custody amounted to USD 1.9 trillion as of The ongoing financial crisis compromises neither our clients’ solvency nor December 31, 2008. their financing needs. And Dexia remains – in its core markets – a major player in public and infrastructure finance, financing for the health and social housing sectors, and for the social economy.
Its strategy in this field aims at strengthening the range of products and services provided to customers. This approach, which is already largely effective in Belgium, will enable the Group to go beyond its role as a specialist lender in order to offer better service to a broader customer base.
( RATINGS
The Group’s main operating entities – Dexia Bank Belgium, Dexia Credit by Fitch, A1 by Moody’s and A by Standard & Poor’s. Three of Dexia’s Local and Dexia Banque Internationale à Luxembourg – are rated (3) A+ European subsidiaries issue triple-A rated covered bonds.
(1) Source: Febelfin (Belgian financial sector federation), Les banques en 2007. Individual data. (2) Source: KPMG/Luxemburger Wort, Luxembourg Banks. Insights 2008. (3) As of April 9, 2009. Annual Report 2008 / DEXIA CREDIT LOCAL 1 GENERAL PRESENTATION 1 Message from the Chairman of the Board of Directors and the Chief Executive Officer of Dexia SA
Message from the Chairman of the Board of Directors and the Chief Executive Officer of Dexia SA
JEAN-LUC DEH AENE PIERRE MARIANI Chairman of the Board of Directors of Dexia SA Chief Executive Officer, Chairman of the Management Board of Dexia SA
The year 2008 was marked by the severe crisis which swept the financial Supported by a new and tightened management team consisting markets and seriously affected Dexia. The announcement, at the beginning of experienced bankers, we announced a raft of measures that were of the autumn, of the insolvency of the US bank Lehman Brothers suddenly absolutely vital to the company. Firstly, we undertook to transfer the revealed the imbalances in the financial sector, and these did not spare insurance activities of FSA, the US credit enhancement subsidiary and our Group. Too much exposure to the risks of the US market weakened a major factor in the crisis of confidence suffered by Dexia, signing an the confidence of market operators in the robustness of our bank, and agreement to sell FSA to Assured Guaranty, whilst retaining USD 17 billion the contraction of the interbank market led, at the end of September, to of assets in the Financial Products activity, on which the Belgian and French an intense liquidity crisis. Our shareholders and the French and Belgian governments grant a guarantee. FSA, which contributed EUR 3.1 billion to governments participated in the recapitalization of Dexia in an amount of Dexia’s loss in 2008, no longer constitutes a risk to the Group’s solvency, EUR 6.0 billion on September 30, 2008 in order to re-establish the Group’s which is at a high level in comparison to the sector as a whole. solvency. The French, Belgian and Luxembourg governments also granted on October 9, 2008 their guarantees in particular to certain new issues, We then redefined the measures necessary to reduce the imbalances: to ensure the Group has adequate liquidity. this was the object of the transformation plan presented on November 14, 2008 and implemented since that date. It revolves around three The financial crisis highlighted the need to apply stricter than ever fundamental axes for the future of Dexia: reduction of the Group’s risk banking discipline within the Group and to make an in-depth revision profile, priority given to clients and the historical business lines, and of the portfolio and the mode of development of Dexia, as well as the adaptation of the cost structure. method of financing its long-term commitments in order to cope with these new constraints. First of all, in addition to the agreement to sell FSA, reduction of the risk profile began with a limitation of market activities and a cessation of Called upon to lead the Group in these difficult circumstances, together we proprietary trading activities. Treasury management and risk management took the urgent steps required by that deteriorating situation and immediately were centralized. Bond investment activities were stopped and the worked to redefine the improved bases on which to rebuild Dexia’s future. corresponding assets still on the balance sheet will gradually be reduced.
2 DEXIA CREDIT LOCAL / Annual Report 2008 GENERAL PRESENTATION Message from the Chairman of the Board of Directors and the Chief Executive Officer of Dexia SA 1
Then we had to rethink the development of the Group’s business lines. Directors will propose to the next Shareholders’ Meeting that no dividend Dexia’s future profitability requires a refocusing on the Group’s principal be paid to shareholders for 2008.
business lines, local public finance and commercial banking, and its core GENERAL PRESENTATION markets, France, Belgium, Luxembourg, Turkey, Italy and the Iberian Of course 2009 is shaping up to be a difficult year, and the economic Peninsula. Beyond the losses strictly associated with the effects of the environment is not showing any signs of improvement in the short term, crisis, Dexia’s historical business lines showed good resilience, as witnessed but Dexia can rely on its solid attributes to rediscover its profitability. Firstly by the total deposits with the bank which at the end of December 2008 it can rely on the unceasing support of its shareholders, particularly the were at a level higher than in September 2008. Implementation of French, Belgian and Luxembourg governments, which have provided the the transformation plan will be reflected in 2009 by the cessation of means to maintain the bank’s liquidity and credit. Then Dexia has a client public finance activities in Australia, Eastern Europe (excluding Slovakia), franchise in which loyalty, so sorely tried of late, has never failed. Finally Mexico, India and Scandinavia. Dexia will only retain platforms providing the bank has the strength of its teams and members of staff who have access to local financing in Japan, Germany and Switzerland. Finally, the mobilized without demur to find solutions and to continue the work they bank activities in the United Kingdom and in the United States will be are doing with our clients. significantly reduced. With the benefit of acknowledged expertise on its principal markets and a The transformation plan relies on the shared endeavors of employees, re-found discipline, Dexia will be in a position to provide its clients with the management and shareholders alike. An exercise aimed at a cost reduction services they expect and to give its shareholders a promising future. That in the order of 15% over three years has now begun and is intended to is what gives us our underlying confidence in Dexia’s ability to rediscover give Dexia the efficiency and agility vital to its profitable development. the path to profitability and to controlled development. The workforce reduction necessary to adapt our organization to the new market environment and to the refocusing of activities is now under way, observing the rules of social dialogue which have always prevailed in Dexia. Management will receive no bonus for the year 2008. Finally, considering the net loss of EUR 3,326 million for 2008, and exceptionally, the Board of
Annual Report 2008 / DEXIA CREDIT LOCAL 3 GENERAL PRESENTATION 1 Profile of Dexia Credit Local
Profile of Dexia Credit Local
( THE LOCAL PUBLIC SECTOR BANK
In the midst of a worldwide financial crisis, Dexia Credit Local has refocused its business back on its historical markets – France, Italy and Spain – and An expanded range of banking services... expanded its traditional lending operations to play a comprehensive role • short- and long-term financing as specialist bank to the local sector, echoing the activities of its sister • debt restructuring companies Dexia Bank in Belgium and Dexia BIL in Luxembourg. • flows management Dexia Credit Local is also maintaining a specialized presence in North • asset-based and project finance America, the United Kingdom and Germany, maintaining relations both with local and regional players and specialist investors, and is retaining • lease financing and public-private partnerships (PPP) its leadership in each of these regions in the financing of the major • asset management infrastructure that plays such a vital role in the development of local and • insurance and services regional communities. • social engineering, in-home personal assistance In France, where Dexia Credit Local has been involved in Public & Wholesale … for all players in the local and regional market Banking since the Group was set up, the bank offers a wide range of banking products and services to all participants in the development of • local authorities infrastructure and local authority services. Thanks to its shared expertise • healthcare and partnership initiatives, the bank has won the confidence of the local • housing and urban development community. Its aim is to be able to meet all their financial requirements within a global and sustainable relationship. • companies active in the public sphere (private companies that serve as providers to local authorities) Within the regions, its commercial network maintains close contact with • insurance its customers and, by drawing on the expertise of its specialist teams, brings together all its know-how to meet the challenges of the local • public entities, universities, local and social development authority sector.
As a committed partner, Dexia Credit Local promotes citizens’ career development and youth civic involvement through the Dexia France Foundation.
Dexia Credit Local has ISO 9001 certification for all its activities in France.
4 DEXIA CREDIT LOCAL / Annual Report 2008 GENERAL PRESENTATION Message from the Chief Executive Officer of Dexia Credit Local 1
Message from the Chief Executive Officer of Dexia Credit Local GENERAL PRESENTATION
PASCAL POUPELLE Chief Executive Officer of Dexia Credit Local
Annus horribilis: the financial community truly had a horrible year in cessation of all proprietary trading activities, running-off of the existing 2008, and Dexia Credit Local did not escape unscathed. By the end of bond portfolios and stringent management of liquidity risks; reducing our the year, the Group had incurred a net loss, after minority interests, of cost base, notably through a pronounced refocusing of our international EUR 3.6 billion; had been recapitalized by an equivalent amount; and had operations and the simplification of our corporate governance and certain to obtain a guarantee in the autumn from the central governments of of our operating procedures; and redefining the objectives and ambitions Belgium, France and Luxembourg. of our Public & Wholesale Banking business.
Focused entirely on Public & Wholesale Banking, the same business as that This transformation will be achieved by leveraging our most important of the Group’s full-service universal banks in Belgium, Luxembourg and assets: our unrivaled expertise in the financing of the local sector and in Turkey, Dexia Credit Local was particularly hard hit in 2008 by the serious project finance, with 20 years of experience and a recognized unending difficulties experienced by its U.S. subsidiary, FSA. Had it not been for FSA, commitment to our customers; highly advanced methods and expertise in the Group would have finished the year at “operating break-even.” the matching of long-term assets, most notably through our subsidiaries specializing in the issuance of top-rated bonds; and our irreplaceable The Dexia Credit Local Group had founded its growth strategy of the human capital, unified by a strong corporate culture and a strong past several years on the assumption that it would always be able to commitment to the nurturing of customer relationships. access liquidity through the markets. This growth strategy was based on a deliberate growth in volumes, achieved through an ambitious As we begin to emerge from a crisis of historic proportions that has international expansion of its public finance business and through the allowed us to confirm the incredible loyalty of our customers, the support building of bond portfolios, at first in line with its traditional business and of our shareholders and the strength of our staff members, the Dexia later diversifying into a broader array of strategies. In spite of the abrupt Group’s Public & Wholesale Banking business line is taking every possible halt to which this quest for volumes was brought in the second half of the initiative to continue – in those countries in which it will maintain a strong year, outstanding loans continued to rise due to both inertia and the very presence – to serve its customers in their efforts to drive sustainable long terms to maturity of our loans. Total credit exposures (1) increased by growth in the local sector. With a newly re-equilibrated balance sheet, 14% to finish financial year 2008 at EUR 326 billion. Dexia Credit Local will put its incomparable experience and expertise to work for its customers, notably in the financing of local and regional public Under the terms of the Dexia Group’s strategic transformation plan, facilities, services and vital infrastructure, and through its strategic goal of Dexia Credit Local began a three-pronged turnaround program in the maintaining controlled, sustainable and profitable leadership. autumn: reducing our risk profile, with the sale of FSA’s insurance business,
(1) Excluding FSA assets and interbank lines.
Annual Report 2008 / DEXIA CREDIT LOCAL 5 GENERAL PRESENTATION 1 2008 key figures
2008 key figures
PUBLIC AND PROJECT FINANCE (1) (2) LONG-TERM FUNDING (EUR billions) (EUR billions)
(1) New commitments, excluding FSA (2) In order to have a consistent consolidation scope for comparison purposes for 2008 and 2007, the figures for 2007 have been restated to show the lending business without including data relative to securities. LONG-TERM CREDIT RATINGS At March 31, 2009 (1) OUTSTANDING MEDIUM- AND LONG-TERM LOANS BY COUNTRY Fitch Moody’s Standard DBRS (EUR billions) & Poor’s
Dexia Credit Local AA-* A1 A AA (low)
Dexia Municipal Agency AAA Aaa AAA Dexia Kommunalbank Deutschland AAA Financial Security Assurance Inc. AAA Aa3 AAA
Dexia Crediop A+ A2 A
Dexia Sabadell Baa2
* A+ since April 9, 2009.
DEXIA CREDIT LOCAL GROUP EMPLOYEES (1) Including Germany. (2) Iberian Peninsula, United Kingdom, Central and Eastern Europe, Sweden At December 31, 2008 and Switzerland. (3) Australia and Japan. (4) Including Mexico.
TOTAL ASSETS AND NET INCOME
Total assets Net income – Group share (EUR billions) (EUR billions)
2007 2008
0.979 (1 ) -3.556
(1 ) In accordance with the application of IFRIC 11,the net income figure for 2007 was reviewed and reduced by EUR 12 million.
6 DEXIA CREDIT LOCAL / Annual Report 2008 GENERAL PRESENTATION Board of Directors (March 2009) 1
Board of Directors (March 2009) GENERAL PRESENTATION
Chairman Jean-Luc Dehaene Chairman of the Board of Directors of Dexia SA Member of the European Parliament
Chief Executive Officer Pascal Poupelle
Fédération Nationale des Travaux Publics Pierre Mariani represented by Patrick Bernasconi, Chairman Chief Executive Officer of Dexia SA, Chairman of the Management Board of Dexia SA Fédération Française du Bâtiment represented by Didier Ridoret, Chairman Philippe Rucheton Jean-Pierre Brunel Chief Financial Officer Attorney-at-law and member of the Management Board of Dexia SA
Christian Costrejean Antoine Rufenacht Project Leader within Caisse des Dépôts’ Investment and New Mayor of Le Havre Business Development Department
Philippe Duron Francine Swiggers Member of Parliament for Calvados, Mayor of Caen Chairman of the Management Board of the Arco group
Jean-Pol Henry René Thissen Honorary Vice-President of the Chamber of Representatives Member of Parliament, Municipal Councilor of Waimes (Belgium) (Belgium)
Annual Report 2008 / DEXIA CREDIT LOCAL 7 GENERAL PRESENTATION 1 Organization chart (March 2009)
Organization chart (March 2009)
8 DEXIA CREDIT LOCAL / Annual Report 2008 GENERAL PRESENTATION Principal subsidiaries and affiliated companies 1
Principal subsidiaries and affiliated companies GENERAL PRESENTATION
(1) During the first quarter of 2009, Dexia Credit Local sold its interest in Kommunalkredit Austria (KA) to the Austrian state and purchased Kommunalkredit Austria’s interest in Dexia Kommunalkredit Bank (DKB). Following this transaction, Dexia Credit Local owns 100% of DKB and have no rights in KA. KA was deconsolidated as from October 1, 2008. (2) The remaining 10% is owned by Dexia SA. (3) In mid-November 2008, the Dexia Group announced the sale of FSA’s insurance activities, excluding its Financial products portfolio, to the Assured Guaranty Group, as a result of which the operations sold were classified as held for sale as at December 31, 2008.
Annual Report 2008 / DEXIA CREDIT LOCAL 9 GENERAL PRESENTATION 1 Dexia Credit Local within the Dexia Group
Dexia Credit Local within the Dexia Group
(1) Dexia shares are traded on both Euronext Brussels and the Luxembourg Stock Exchange.
10 DEXIA CREDIT LOCAL / Annual Report 2008 2 Management report MANAGEMENT REPORT MANAGEMENT
Business review 12 Capital stock and share data 42
1. Overview ...... 12 1. Capital stock and number of shares ...... 42
2. Local public sector ...... 13 2. Delegation of powers with regard to capital increases ...... 42 3. Long-term project fi nance ...... 16 3. Shareholder structure ...... 42 4. Insurance (Dexia Sofaxis) ...... 18 4. Dividends paid during the past three years ...... 43 5. Deposits & asset management ...... 18
6. Funding and fi nancial markets ...... 19
7. Financial Security Assurance (FSA) ...... 22 Human resources and environmental data 44
1. Human resources management ...... 44 Risk management 23 2. Sustainable development ...... 45 1. Credit risk ...... 24
2. Financial risks ...... 26 Terms and compensation paid 3. Litigation risks ...... 28 to members of management bodies 50 4. Operational risks ...... 28 1. Functions and other directorships held ...... 50 5. Information systems security ...... 29 2. Compensation and regulated agreements ...... 55 6. Risk management committees ...... 29
7. Payment systems security ...... 30 Signifi cant events and outlook 60 8. Risk monitoring in subsidiaries and branches ...... 31 1. Signifi cant events ...... 60 9. Risk monitoring at FSA ...... 31 2. Outlook ...... 62 10. Dexia Credit Local and FSA portfolios ...... 31
Operating results 35
1. Consolidated fi nancial statements ...... 35
2. Company fi nancial statements...... 39
3. Five-year fi nancial summary ...... 41
Annual Report 2008 / DEXIA CREDIT LOCAL 11 MANAGEMENT REPORT 2 Business review
Business review
( 1. OVERVIEW
1. Total customer exposures of EUR 219 billion at December 31, 2008 Analysis shows that 29% of the project finance business was with was 11% higher than the previous year, with most locations posting customers funded directly through the public sector, 42% with customers increases. FSA reported net insured capital of USD 632 billion, up 1.5% participating in activities regulated by the public sector and 29% with over December 31, 2007. customers operating in the private sector.
2. Due to the financial crisis and the Group’s decision to stop investing in In spite of its increased selectivity, Dexia was generally able to maintain securities issued by its customers in most countries, these remarks concern its positioning as Mandated Lead Arranger (MLA) in 2008: Dexia has just exclusively the origination of new loans. In order to make a meaningful been ranked as the fourth largest bank MLA for project finance for all comparison between 2008 and 2007, the 2007 data has been restated sectors and geographic regions by Euromoney/Dealogic, and sixth largest to show only the loan business without the figures for the securities by Thomson/Reuters. Dexia was also given first place in Europe and first business. place for public-private partnerships (PPP) by Euromoney, and second place for renewable energies by Infrastructure Journal. Excluding the bond business, total new lending declined 9% year-on- year to EUR 43,486 million in 2008. This reflected the group’s strategic 3. FSA generated USD 663 million in interest margin and present value decisions to increase margins and cease all new lending during the fourth premiums in 2008, down 48% from 2007. The U.S. municipal bond market quarter, in relation to the liquidity crisis. accounted for 88% of new business, as activity was rather constrained in the asset-backed securities (ABS) market. • In the public finance sector, total new lending amounted to EUR 34,396 million in 2008, down 11% from the previous year. 4. Total new long-term funding (excluding FSA) amounted to EUR 22.2 billion in 2008 (EUR 24.1 billion in 2007), with an average term • The project finance sector generated EUR 9,090 million in new lending, of 6.1 years (7.5 years in 2007). a 4% decrease. France, the International Headquarters and Spain accounted for approximately 50% of all new loans during the year.
12 DEXIA CREDIT LOCAL / Annual Report 2008 MANAGEMENT REPORT Business review 2
( 2. LOCAL PUBLIC SECTOR
2.1 LONG-TERM LENDING In 2008, new lending to the local social development sector declined 17% to EUR 766 million. Few large transactions were initiated by the private non-profit hospital sector during the year: the only exception a. New lending was Hôpitaux Privés de Metz (a so-called PSPH, or private, non-profit participant in the French public hospital service). In this EUR 116 million NEW LONG-TERM LENDING TO THE PUBLIC SECTOR co-lease, Dexia took a final share of 55%, half of which is expected to (EUR millions) be backed with funding from the European Investment Bank.
Total outstanding loans to the institutional customer sector were 12% MANAGEMENT REPORT MANAGEMENT higher year-on-year, and stood at EUR 12.6 billion at December 31, 2008.
Dexia exercises stringent control over the marketing of its structured finance products, which generated EUR 1,583 million in total originations for the year. These products are offered only to those customers with staff capable of properly monitoring them, and where large amounts are concerned. Dexia’s front-office teams are obliged to observe stringent rules of diversification of exposures, and the customer’s financial position is carefully evaluated in detail prior to any proposal being made. Finally, Dexia provides monitoring and assists its customers, notably with the evaluation of any restructuring of the credit agreements in response to changes in market conditions. Total new lending amounted to EUR 34,396 million in 2008, a decrease of 11% from the previous year. Although business increased during the second half of 2008, debt restructuring was down 22% for the full twelve months, with BUSINESS REVIEW BY LOCATION EUR 8,409 million in restructured loans.
France: The only sector in which the debt restructuring business approached In 2008, total new lending fell 35% to EUR 7,869 million, due essentially stability was public health, where it dipped only 2%. to the impact of the Group’s strategic decision to increase margins. Germany: EUR 2,215 million (-46%) New lending was therefore quite limited in November and December, at In 2008, long-term lending to local authorities in Germany fell sharply EUR 3.8 billion (down 84% from the previous year). (-46%) from the previous year. • In 2008, new lending to local authorities was 42 % lower, at The long-term lending market for local authorities in Germany showed EUR 4,511 million. This included EUR 110 million in local authority clear signs of a slowdown in 2008. The increase in local authorities’ refinancing loans (PRCL) funded by savings deposits from Caisse tax revenues improved their liquidity and ultimately allowed them to des Dépôts et Consignations (CDC) from Livret d’Epargne Populaire repay some loans. Also, the legal proceedings instituted by municipal regulated passbook savings accounts. At December 31, 2008, total governments against German banks caused demand for structured outstanding loans stood at EUR 51.2 billion, 5% higher than one year products to drop and local authorities to shun derivative products. In earlier. It should be noted that in 2008, Dexia Credit Local and HSBC this domestic environment, with the market contracting and structurally were lead managers on the first socially responsible bond issue: the low margins, the increase in the cost of funding caused new lending to entire EUR 50 million issue for the Nord Pas de Calais region was sold slow in the third quarter of 2008 and come to a complete standstill in to investors. the fourth quarter. • In the public health sector, new lending was down 19% in 2008 to In response to this situation, our German operations strove to intensify EUR 1,503 million, although total outstanding loans at the end of the their debt restructuring business. In 2008, over 50 debt restructurings were year were up 20% to EUR 8 billion. carried out for a total of EUR 870 million. The year’s most noteworthy • Total new lending to the institutional customer sector was down 22% transaction was the restructuring of several loans totaling EUR 230 million to EUR 1,855 million. Twenty-four percent of new lending was for for the German Land of Berlin. Another transaction worth mentioning was so-called PLS loans to promote affordable rental housing with funds the restructuring of a EUR 38 million forfaiting transaction with the city provided by the CDC after public auction. Excluding the PLS, new of Hamm. Deals were also carried out with the cities of Bonn, Cologne, lending to these customers was down 27%. Dortmund and Saarbrücken.
At EUR 1,090 million, of which 31% on PLS, new lending to the housing sector fell 25% in 2008, penalized by the performance of funding provided by Livret A regulated passbook savings accounts.
Annual Report 2008 / DEXIA CREDIT LOCAL 13 MANAGEMENT REPORT 2 Business review
North and South America (excluding Mexico & FSA): Israel: EUR 185 million (ILS 970 million) (Stable) EUR 11,579 million (USD 17,028 million) (+76%) New long-term lending remained relatively flat in 2008. Under financial In September 2008, in light of the crisis in the financial markets, Dexia crisis conditions, in September 2008, Dexia’s local management decided decided to cease all new operations. Consequently, no new loans were to cut business sharply while waiting for the local debt issue market to generated in the public finance sector during the fourth quarter. reopen.
New off-balance sheet lending (standby bond purchase agreements and The most noteworthy transactions during the year included a letters of credit) soared 70% to USD 14,476 million in 2008. In July, EUR 12 million (ILS 65 million) loan to the Regional Council of Mate Andra the decision was made to cap the portfolio for this sector, and so new and an EUR 8 million (ILS 45 million) loan with the municipal government lending slowed in the third quarter before coming to a complete halt in of Jerusalem. the fourth quarter. Italy: EUR 2,123 million (-43%) Although the municipal financial engineering business came to a halt in the New Italian public sector debt has fallen sharply since 2007, due primarily fourth quarter of 2008, it rose to USD 2,301 million from USD 257 million to balance sheet restrictions imposed by the central government on the previous year. local authorities. In June 2008, the central government also approved Lastly, the Canadian branch generated USD 251 million in new lending in a decree suspending the use of derivative products by local authorities. 2008 with a long-term loan with the city of Montreal in February. Consequently, since early 2008 Dexia has been focusing on diversification, by expanding its target customer base (utilities, healthcare, public housing/ Australia: EUR 173 million (AUD 302 million) (+32%) public building, the port authorities, universities, etc.). The 32% growth in new long-term lending in 2008 is attributable most notably to the fact that this business had started up in the third quarter In line with this diversification strategy, in 2008 Dexia took part in of 2007. transactions such as the financing of EUR 50 million for SMAT (private sector water agency, Province of Turin), EUR 40 million for ASAM S.p.A (public In 2008, the Australian long-term lending market was characterized by sector transportation agency, Province of Milan) and a EUR 40 million line demand for infrastructure loans, especially in the wastewater treatment of credit for SEA, the public sector agency responsible for the management sector. Most of the loans Dexia made to the local authorities in the State of two airports in the Milan area. Dexia also participated in the financing of of New South Wales were for wastewater treatment. the Campania region (EUR 889 million) and was lead manager/bookrunner on EUR 75 million of 20-year bonds for Cassa del Trentino, a local financial Central and Eastern Europe: EUR 1,001 million (+28%) intermediary. Throughout the first half of 2008, Central and Eastern Europe remained relatively untouched by the liquidity crisis affecting the western countries Japan: EUR 3,788 million (JPY 573,902 million) (+125%) (due in large part to the fact that the domestic markets in local currencies New long-term lending grew considerably in 2008, as Japanese operations remained liquid). During that period, the countries of Central and Eastern had started up in 2007. Europe were also relatively unaffected by the upward trends in margins observed elsewhere . Due to these very particular conditions and the The Japanese local public sector lending market was marked this year by restrictiveness of the group’s strategic commercial policy with regard the launch of a refinancing program for a portion of the local authority to margins, new long-term lending to the region slowed considerably debt initially held by the Japanese central government. It is worth during the first half and no new loans were extended during the fourth mentioning that in Japan most local authority borrowing traditionally quarter of 2008. takes place in the spring. Dexia also expanded its customer base during 2008 (56 different customers have received loans to date), most notably Despite difficult conditions, new long-term lending was up 28% among cities of average size. over 2007. Mexico: EUR 344 million (MXN 5,638 million) (-23%) United Kingdom: EUR 1,678 million (GBP 1,345 million) (-69%) The largest deal of 2008 was the financing of a total of MXN 7,000 million The U.K. market was hit head-on by the financial crisis. New long-term for the State of Mexico (Dexia final share: MXN 5,000 million). This lending fell 69% in 2008 due both to the consequences of the liquidity transaction completes a period that witnessed the refinancing of the crisis and to the exceptionnally high level of new lending in 2007. debt of Mexico’s largest states. Dexia also participated in the financing of police stations in the State of Guerrero (MXN 318 million). In 2008, 32% of new long-term lending was with the local authorities sector (GBP 434 million) and 68% with the public housing sector Since August 2008, all new lending has been halted. (GBP 912 million). This trend emphasizing public housing grew even more pronounced during the second half, as the margin levels the Public Iberian Peninsula: EUR 2,120 million (+24%) Works Loan Board (PWLB) offered local authorities excluded all of the New long-term lending was up 24% in spite of a relative flatness in private players. demand. The Dexia entity slowed lending sharply during the second half, and brought it to a complete halt in August 2008 as instructed to by The debt restructuring business rose sharply to GBP 1,127 million in the group. The new lending recorded during the second half consisted 2008 (GBP 188 million in 2007), with most of the deals coming from primarily of commitments taken prior to the decision to stop making outstanding loans in the Bradford & Bingley loan portfolio that Dexia new loans. acquired in 2007.
14 DEXIA CREDIT LOCAL / Annual Report 2008 MANAGEMENT REPORT Business review 2
The most noteworthy transactions include EUR 300 million for the Regional b. Outstanding Government of Valencia, EUR 120 million for the Oporto subway system, EUR 91 million for the Azores region and EUR 67 million for the Financial OUTSTANDING LONG-TERM LOANS Institute of the Regional Government of Catalonia. (EUR millions) International Headquarters: 0 The Public Finance International Headquarters generated no new long- term loans in 2008.
Sweden: EUR 897 million (SEK 8,677 million) (+94%). The Swedish central bank raised its key rate to 4.5% during the second quarter, allowing the market to adjust and new lending to resume at margin conditions deemed appropriate for the Swedish market. It is MANAGEMENT REPORT MANAGEMENT also worth mentioning the good performance posted by the financial engineering business, which concluded four structured deals.
Switzerland: EUR 425 million (CHF 671 million) (-67%). New lending fell in 2008 as a result of the new margin objective policy set in place for the Swiss market, in light of the increase in the cost of Dexia had total outstanding long-term public sector loans of EUR 191 billion funding observed in the market during that same period. at December 31, 2008, an 11% increase over the previous year.
It should be noted that half of all new lending came from loans purchased Loan asset growth was particularly strong in France (8%) and in North from Swiss Life, with the aim of building sales capacity to take advantage and South America (30%). of the opportunities for debt restructuring.
The most noteworthy transactions during the year included a EUR 63 million structured loan with the City of Lausanne and a EUR 79 million loan to 2.2 SHORT-TERM LOANS Grande Dixence SA for the construction and maintenance of a dike. It is also worth noting that five of Switzerland’s 26 cantons are now Dexia Total outstanding short-term loans amounted to EUR 8.5 billion at customers. December 31, 2008, down 11% from the previous year. France accounted for 93% of all short-term lending.
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( 3. LONG-TERM PROJECT FINANCE
3.1 ORIGINATIONS Germany: EUR 318 million (-46%) Eleven transactions totaling EUR 283 million were signed in 2008 with municipal companies in the energy and environment sectors. Dexia was LONG-TERM ORIGINATIONS – PROJECT FINANCE also Sole Arranger on the PPP financing of the construction of the new (EUR millions) Ministry of Finance for the Land of Brandenburg. In addition, Dexia was mandated to serve as financial advisor for a subsidiary of several municipal companies on the financing of a 400MW offshore wind farm.
North and South America (excluding Mexico): EUR 852 million (-43%). (USD 1,252 million). In the social infrastructure sector, Dexia Canada was MLA on three PPP financings of hospitals in British Columbia, for a total underwriting of CAD 622 million and a final share of CAD 226 million.
In the transportation sector Dexia was MLA on the CAD 108 million financing of the Edmonton (Alberta) beltway. Dexia also acted as MLA on a USD 100 million financing for the Chilean national railroad company.
In the renewable energies sector, Dexia financed three wind power projects totaling USD 124 million, including one as MLA. Dexia also acted as MLA New long-term originations declined 4% in 2008 to EUR 9,090 million. on the financing of two hydroelectric projects totaling USD 98 million, one in Chile and the other in Mexico. BUSINESS REVIEW BY LOCATION In the energy sector, the following transactions on which Dexia was France: EUR 1,884 million (+124%) MLA are worth noting: an underwriting of USD 562 million (final share: Dexia was very active in the financing of public-private partnerships (PPP) USD 135 million) on the financing of two drilling platforms (with a in 2008, serving as Mandated Lead Arranger (MLA) on nine transactions guarantee from KEXIM on 50%) and the USD 60 million financing of a totaling EUR 700 million, including most notably the financing of three natural gas power plant in Connecticut. Dexia also took a USD 70 million new prisons for the Ministry of Justice; hospitals in Saint Nazaire and in share (USD 50 million of which is guaranteed by KEIC) in the financing of Annemasse and a fiber optic network for the General Council of the two coal-fired power plants in Chile. Meurthe et Moselle department. In the environment sector, Dexia acted as MLA on a USD 50 million IDB In the renewable energies sector, Dexia served as MLA on the financing of loan to SABESP, the Sao Paulo water utility. two wind farms totaling EUR 75 million. Dexia also acquired the 20 MW
Fierville wind farm in order to offset the CO2 emissions generated by the Australia: EUR 467 million (-42%) (AUD 817 million) essentially in energy consumption of the group’s and its subsidiaries’ buildings (total the energy sector financing of EUR 36 million). Dexia was MLA on the refinancing of Babcock & Brown Power, with an underwriting of AUD 509 million (final share: AUD 273 million), and on In the energy sector, Dexia participated as MLA in financing the acquisition the refinancing of a portfolio of gas distribution assets for the Babcock & of a company that installs machinery for unloading and storage of Brown Infrastructure Fund (final share: AUD 74 million). Dexia also took a petroleum products, with an underwriting of EUR 105 million (final share: AUD 70 million share in a financing for Origin Energy, an AUD 87 million EUR 62 million). share in the financing of Singapore Power’s Australian subsidiary and a In the transport sector, Dexia was sole arranger on the financing for AUD 100 million share in the financing of the construction of two coal- Autoroutes Paris Rhin-Rhône (APRR, the toll road concession group: fired power plants in Western Australia. EUR 250 million) and for the Toulouse airport (EUR 115 million, along In the renewable energies sector, Dexia served as MLA on the financing with the associated interest rate hedge). of AUD 69 million for the construction of wind farms. Dexia also acted as Sole Arranger on three optimized operating lease Dexia also acted as MLA on the financing of the construction of a coal- transactions totaling EUR 384 million for the new regional express trains loading terminal (final share: AUD 43 million). ordered by the Languedoc Roussillon, PACA and Rhône Alpes regions.
In the telecom sector, Dexia provided EUR 50 million to Iliad (the holding Central and Eastern Europe: EUR 325 million (-43%) company for the Free telecom operator). In the transportation sector, it is worth noting the EUR 25 million financing of the Bina Istra highway in Croatia (the International Headquarters also took part in the deal). In the energy sector, Dexia participated as MLA on
16 DEXIA CREDIT LOCAL / Annual Report 2008 MANAGEMENT REPORT Business review 2
the refinancing of a power plant in Slovakia. It is also worth mentioning a Mexican construction company, and Dalkia) and the MXN 2,020 million EUR 34 million financing for PKE, a Polish regional electric company. underwriting of the PPP financing for a highway (intended final share: MXN 905 million). United Kingdom: EUR 1,003 million (+7%). (GBP 804 million) Dexia took part in seven PPP financings, including five as MLA. Most Iberian Peninsula: EUR 1,633 million (+87%) notably, as sole MLA, Dexia arranged GBP 114 million in financing for In the public transportation sector, Dexia was co-MLA with three other schools in Scotland and GBP 119 million to refinance five university housing banks on the EUR 196 million lease financing of trains for the Madrid units (Dexia also set up the interest rate hedge for these transactions). subway system. Dexia also acted as MLA on the EUR 120 million financing Lastly, Dexia underwrote GBP 98 million (50%) in PPP financing for of the Tenerife tramway. schools for the Knowsley Metropolitan Borough Council, (final share: Dexia was MLA on the following noteworthy transportation deals: the GBP 75 million). refinancing of a highway in Catalonia and the financing of portions totaling In the transportation sector, Dexia served as MLA on the financing for EUR 206 million of the A2 shadow toll road. Dexia also participated in two major acquisitions of railway rolling stock leasing companies: Dexia the refinancing of the Toledo-Consuegra shadow toll road (total share: REPORT MANAGEMENT provided GBP 155 million in financing for Deutsche Bank/Lloyds TSB’s EUR 168 million, shared by Dexia Sabadell and Dexia Ireland). acquisition of Porterbrook and arranged the GBP 247 million underwriting In the renewable energies sector, Dexia signed thirteen financings for solar of the financing of the acquisition of Angel Trains by a consortium led by power plants, nine of which as MLA (final share: EUR 412 million). the Babcock & Brown Infrastructure Fund and AMP Capital Investors (final share: GBP 183 million, shared with the International Headquarters). In the environment sector, Dexia was MLA on the EUR 205 million financing for the capital expenditure program of EMASESA, the water utility for the Dexia also took a GBP 34 million share in the financing of the acquisition region of Seville. of Biffa (waste collection and management) and a GBP 60 million share in the refinancing of the acquisition of the London airports company. Dexia also served as MLA on the EUR 65 million financing of additional buildings for the Ciudad Judicial in Barcelona. Italy: EUR 1,050 million (-22%) In the transportation sector, Dexia was MLA on three transactions: International Headquarters: EUR 1,338 million (-26%) the financing of the acquisition of Terminal Rinfuse, a port operator, In the transportation sector, Dexia participated as MLA, agent and by the Babcock & Brown Infrastructure Fund, with an underwriting of counterparty on the interest rate swap for the refinancing of the Istanbul EUR 120 million (final share: EUR 47 million); a EUR 150 million financing airport (final share: EUR 80 million, together with Denizbank). Dexia also for the highway concession operator Strada dei Parchi (Atlantia group); acted as MLA on the EUR 38 million financing of a bus fleet for the Geneva and a EUR 33 million financing (guaranteed in part by SACE) for the public transport system in Switzerland (Dexia also set up the interest rate construction of the Istanbul subway system. Dexia took a EUR 200 million hedge for the transaction) and took a EUR 30 million share in the financing share in a financing for Ferrovie dello Stato (construction of high speed of European railway rolling stock for a Babcock & Brown fund. trains) and contributed EUR 50 million to the financing of SATAP (second In the renewable energies sector, Dexia arranged the financing for two largest highway operator in Italy). solar power plants in Spain (final share: EUR 104 million) and the financing In the energy sector, Dexia was MLA on a financing for TERNA, the national for a wind farm in the Netherland Antilles (exposure: EUR 13 million: electrical grid company (final share: EUR 85 million). Dexia participated solely in the risk on this transaction, as all funding was provided by another institution). In the renewable energies sector, Dexia was also MLA on two transactions: EUR 27 million for the financing of a wind farm in Sardinia and In the energy and environment sectors, Dexia was MLA on the financing EUR 23 million for the financing of a solar power plant in the Puglia of the acquisition of Senoko, a thermal power plant in Singapore, by a Region. consortium led by GDF Suez and Marubeni. The following transactions are also worth mentioning: USD 150 million share in the prefinancing of oil In the environment sector, Dexia took a EUR 50 million final share in the exports by Rosneft (Russian national company) and USD 45 million share financing of Irisacqua (water distribution company in the province of in the financing of Lenenergo (Russian electric company). Gorizia) and a EUR 75 million share in the financing of ACEA S.p.A., the utility company of the City of Rome. In the telecom sector, Dexia contributed USD 50 million to the financing of Vimpelcom, the second largest mobile phone operator in Russia, Japan: EUR 47 million (+34%) (JPY 7,090 million) and USD 50 million to the refinancing of Orascom Telecom Holding in Dexia participated in its first primary PPP transaction (JPY 4,000 million for Egypt. the financing of the Haneda Airport international terminal) and financed a highway concession in Panama with a Japanese public guarantee from Sweden: EUR 52 million (-10%) NEXI (USD 30 million). Dexia acquired EUR 52 million in Vattenfall bonds (Swedish national producer of electricity). Mexico: EUR 123 million (EUR 19 million at December 31, 2007) (MXN 2,014 million) Dexia signed its two first MLA mandates, with the MXN 889 million PPP financing of the hospital in Victoria (project developed by Marnhos, a
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3.2 LONG-TERM EXPOSURE ( 4. INSURANCE (DEXIA SOFAXIS)
LONG-TERM EXPOSURE – PROJECT FINANCE (EUR millions) Despite a general decline in the market, new policies rose slightly (1.2%) in 2008, and the insurance companies collected total premiums of EUR 367 million. The decrease in the public hospital sector was compensated entirely by the strength of business with local and regional authorities, as the number of public sector employees insured grew by around 4% during the year.
Fees and commissions from the insurance brokerage business were fairly comparable year-on-year, at EUR 45 million.
At the same time, provision of services to local authorities was sharply higher, with net annual revenues increasing by more than 32% to EUR 1.2 million in 2008. Growth in the services business is coming from the fields of organizational rightsizing and human resources management.
Dexia’s total long-term exposure to the project finance sector rose 15% year-on-year to EUR 29 billion at December 31, 2008.
( 5. DEPOSITS & ASSET MANAGEMENT
Total assets under management from deposits, investment and other asset • In Italy, total deposits decreased 4% to EUR 1.7 billion, including management products for the Public & Wholesale Banking business line EUR 0.7 billion in demand deposits and EUR 1 billion in term declined 2% to EUR 10.6 billion at December 31, 2008. deposits.
• In France, assets under management declined 6% to EUR 6.7 billion • In Central and Eastern Europe, total deposits rose 3.5% to EUR 0.8 billion at December 31, 2008. Total deposits amounted to EUR 3.2 billion, at December 31, 2008, including EUR 0.7 billion in demand deposits. including: EUR 0.2 billion in demand deposits, EUR 1.2 billion in term • In Israel, total deposits rose 24% to EUR 950 million, including deposits and EUR 1.8 billion in certificates of deposit and medium- EUR 0.3 billion in demand deposits and EUR 0.6 billion in term term notes (MTNs) issued by Dexia Credit Local and marketed by deposits. Dexia CLF Banque. In the last quarter, mutual fund balances decreased significantly as they were transferred into term deposits and Dexia • In the United Kingdom, total term deposits increased 3% to Credit Local-issued negotiable debt securities (CDs and MTNs) due to EUR 0.2 billion at December 31, 2008. the high short-term interest rates and marketing campaign launched in October. This transfer generated a 3% increase in deposits on the balance sheet compared with September 30, 2008.
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( 6. FUNDING AND FINANCIAL MARKETS
6.1 LONG-TERM FUNDING Analysis of the Dexia Credit Local group funding program:
a. Public issues Senior debt (1) > 2 years New issues in New issues in (EUR millions) 2007 2008
France At December 31, 2008 Dexia Credit Local (consolidated)
Dexia Municipal Agency 14,831 9,787 Public issues EUR 11.1 billion (-6% vs. 2007)
Dexia Credit Local 3,363 3,124 Average maturity 5.2 years MANAGEMENT REPORT MANAGEMENT
Italy Public issues remained restricted nearly exclusively to the Dexia Credit Dexia Crediop 2,732 2,736 Local group’s two AAA issuers, Dexia Municipal Agency and Dexia Germany Kommunalbank Deutschland.
Dexia Kommunalbank Deutschland 3,158 6,566 The AAA covered bond activity continued to focus on the Euro market, with five new issues . While Dexia Municipal Agency remained the issuer of Subtotal - Europe 24,084 22,213 reference by continuing to develop its yield curve with three new benchmark United States issues – a three year (EUR 1.25 billion), a five year (EUR 2 billion) and a seven year (EUR 1 billion) – the German Pfandbriefe market held up well, FSA - Financial products (GICs) 4,424 826 allowing Dexia Kommunalbank Deutschland to successfully reposition TOTAL 28,508 23,039 itself as a benchmark issuer. The latter launched two new issues, a two
(1) The data include public offerings and private placements and borrowings on the year (EUR 1.5 billion) and a ten year (EUR 1.25 billion). The offerings retail and subsidized (EIB) markets, and exclude all intercompany loans and funding were very well received by final investors eager for high-quality credits, operations classified as short term (< 2 years). and order books were largely oversubscribed despite the highly volatile market conditions. The 2008 long-term funding program was carried out under unprecedented conditions due to the impact of the subprime crisis. Market conditions In addition to issuing new benchmarks, Dexia Municipal Agency and Dexia took a drastic turn for the worst in 2008 when all of the largest banks Kommunalbank Deutschland regularly increased their benchmark issues announced record-breaking losses and write-downs of impaired assets. to add liquidity to the market and in response to investors’ specific needs. The nadir was reached with the bankruptcy of Lehman Brothers in The increases allowed Dexia Municipal Agency to raise EUR 2.8 billion September 2008. The deterioration of FSA’s financial products portfolio on maturities between 2010 and 2019, and Dexia Kommunalbank affected Dexia’s credit, resulting in more onerous terms on its long-term Deutschland raised EUR 1 billion on maturities between 2010 and funding, especially from the last quarter of 2008 onward. 2018.
In 2008, the Dexia Credit Local group borrowed EUR 23 billion on long- Notwithstanding the difficulty in the covered bonds segment, IFR named term markets, compared with EUR 28.5 billion in 2007. Excluding FSA, Dexia “Issuer of the Year,” and Dexia Municipal Agency was awarded total funding raised amounted to EUR 22.2 billion with an average term “Best Issue of the Year” and “Best Non Debut Issue of the Year” for the of 6.1 years (7.5 years in 2007). five-year benchmark launched in January.
Investors’ appetite for issues with terms under two years remained strong In the absence of any real arbitrage and due to the low demand from in 2008, just like the previous year. The group raised a total of EUR 3 billion, investors outside the eurozone, the group was limited in its ability to including EUR 1.5 billion by Dexia Credit Local and EUR 1.4 billion by Dexia diversify its long-term funding in terms of currencies in 2008. In all, the Kommunalbank Deutschland in the Pfandbriefe market. equivalent of EUR 700 million was raised by increasing benchmarks denominated in U.S. dollars (USD 350 million) and pounds sterling (GBP Market conditions deteriorated considerably in the fourth quarter. Investors 200 million). Dexia Municipal Agency sold a new three-year Swiss franc focused on new issues covered by central government guarantees, which issue (CHF 250 million) and tapped its 2017 benchmark. restricted the amounts that could be offered by Dexia group entities. The final Dexia guarantee agreement (several but not joint guarantee During the final quarter, the public issues activity was restricted entirely provided by the Belgian, French and Luxembourg governments) was to the increase of existing Dexia Municipal Agency benchmarks , raising a signed December 9, 2008 and discussions with the rating agencies were total of EUR 585 million with an average term of 8.3 years. concluded in early January 2009. Dexia was therefore unable to take Dexia Credit Local raised CHF 150 million in order to fill a specific Swiss advantage of this new market segment until early 2009. franc need expressed by institutional investors.
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b. Private placements their cost of funding due to growing competition from the new segment of issues covered by central government guarantees.
At December 31, 2008 Dexia Credit Local (consolidated) Most of the funds were raised by Dexia Credit Local (EUR 757 million), and primarily with the EIB. Dexia Credit Local made several drawings, the Private placements EUR 8.2 billion (-14% vs. 2007) largest of which for the budget of the Agence Nationale de Rénovation Average maturity 6.9 years Urbaine .
Dexia Crediop also raised EUR 150 million (average maturity: 12 years) In 2008, a total of EUR 8.2 billion was raised through private placements, with the EIB. representing 37% of total funds raised (excluding FSA). Sixty-five percent of the funds were raised by the Group’s AAA issuers. Dexia Kommunalbank Deutschland raised EUR 87 million, primarily with KFW. Due to the tremendous volatility of the financial markets, investors showed a preference for “liquid” public issues over structured deals, as a means In December 2008, Dexia Credit Local obtained a total budget of of taking positions on interest rate trends. EUR 1.45 billion with the CDC. This budget is part of the EUR 5 billion program established by the French government to support French local Dexia Kommunalbank Deutschland raised EUR 3.2 billion (3% more than authorities. Dexia Credit Local made its first drawing under this budget in 2007) with an average maturity of 6.2 years. Under difficult conditions, at the end of 2008. Dexia Kommunalbank Deutschland was able to take advantage of the great support of its domestic investor base, which remained active until FSA raised USD 1,139 million (EUR 826 million) with an average term of early September. 2.4 years under its Guaranteed Investment Contracts (GIC) program.
Dexia Municipal Agency raised EUR 2 billion with an average maturity of 8.5 years (34% less than in 2007). Private placements remained restricted to “plain vanilla” issues, confirming the downward trend in structured 6.2 FINANCIAL MARKETS issues observed in 2007. In 2008, the most significant developments in the financial markets Dexia Credit Local raised EUR 2.3 billion (10% less than in 2007) with an were: average maturity of 6.6 years. Private placements represented the core (73%) of the long-term funds raised by the issuer. • The financial crisis that began in the United States during the summer of 2007 spread during 2008 to markets around the world. It intensified Including funds raised in 2008 with maturities of between 12 and 24 in September 2008 following the bankruptcy of Lehman Brothers, the months, Dexia Credit Local raised a total of EUR 3.8 billion through private U.S. investment bank. Debt markets, which had already been under a placements, compared with EUR 3.7 billion in 2007. great deal of stress, shut down completely, obliging monetary and other Dexia Crediop raised EUR 566 million with an average term of 6.2 years governmental authorities to take extraordinary measures. through institutional private placements. • Although these measures spared the markets from the worst, they did not manage to restore normalcy to the interbank and bond markets, c. Retail issues which remained under tremendous pressure. Central banks dropped key rates significantly and provided massive injections of liquidity, while governments recapitalized a large number of banks and announced At December 31, 2008 Dexia Credit Local (consolidated) economic support programs. Retail issues EUR 2 billion (+8% vs. 2007) • The spread of the financial and banking crisis to the so-called “real Average maturity 4.9 years economy” was accelerated by banks’ tightening of their lending conditions. The U.S. economy, which has been in a recession since Dexia Crediop was very active in the Italian retail market, raising a total November 2007, lost over 2.6 million jobs in 2008. Japan and the of EUR 2 billion with an average term of 4.9 years. Retail activity was European nations experienced declines in employment, investment particularly dynamic until March, when sales of retail issues began to slow and consumption, and the sharp fall in commodity prices and inflation in the wake of the questions surrounding FSA. that began in the third quarter of the year did nothing to reverse these trends. d. Subsidized funding • Investors ended 2008 with a very pronounced aversion to risk – resulting in a reallocation of financial investments that favored government At December 31, 2008 Dexia Credit Local (consolidated) bonds – and facing high volatility, with a great deal of illiquidity in many asset classes. Subsidized funding EUR 994 million (+13% vs. 2007) • The outlook for 2009 remains bleak. World growth will be low, leading Average maturity 10.7 years to less investment and further job losses, while the financial system will suffer the impact of deteriorating economic conditions. In the medium In 2008, EUR 994 million was raised, with an average maturity of 10.7 term the crucial question of the financing of domestic budget deficits years. This form of funding remains attractive, as the pricing is significantly will have to be raised in order to avoid significant new disruptions to lower than on private placements. Nevertheless, since October 2008, currency and interest rate markets. supranational issuers have also had to deal with the deterioration of
20 DEXIA CREDIT LOCAL / Annual Report 2008 MANAGEMENT REPORT Business review 2
Dexia Credit Local’s various financial markets activities were affected in The structuring of debt for project finance customers, which focuses the following ways: on the sale of hedging derivatives to these customers, continued the expansion begun in 2007, with some fifty transactions for a total • Credit spread portfolio-Public sector portfolio (CSP-PSP): volume of EUR 4 billion carried out in relation with the deals structured In 2008, the CSP activity was dominated by the defaults of many banks by the project finance units in Paris and London. including Lehman Brothers, Washington Mutual and three of the largest The macro-hedging business grew considerably in 2008, with Icelandic banks. In the wake of these events, the markets’ capacity to the hedging of trade flows with a nominal value of EUR 2 billion provide funding to their many participants quite simply disappeared. (establishment of new hedges and cancellation of existing ones). The In this environment, the key objective of the CSP and PSP portfolios internal macro-hedging desk became the largest hedging counterparty became the reduction of holdings in order to free up liquidity, while in terms of the number of transactions, and fifth largest in terms of attempting above all to preserve the quality of the portfolio. nominal value hedged for the structured portfolios of Dexia Credit Local • Long-term funding: and Dexia Municipal Agency. MANAGEMENT REPORT MANAGEMENT As described in Section 6.1 on funding, 2008 was marked by the sudden • Cash and liquidity management (CLM): deterioration of the markets, and funding conditions were particularly The year will always be remembered for the crisis in the money markets. difficult in the last quarter of 2008. The total disappearance of the interbank market during the last quarter In 2008, the Dexia Credit Local group borrowed EUR 23 billion on long- obliged central banks to take unprecedented measures to prop up term markets, compared with EUR 28.5 billion in 2007. Excluding FSA, market liquidity. Cash-swap spreads remained high all year long, the group raised total funding of EUR 22.2 billion with an average term reaching historically high levels in the last quarter. At the same time, of 6.1 years (compared with 7.5 years in 2007). the many reductions in central bank key rates and the decrease in the average duration of borrowings – imposed by the lack of supply (of new • Public finance market engineering (PFME): issues) – contributed to the results posted by the CLM desks. Structuring of debt for public sector customers declined in 2008: 1,352 customer transactions were structured and hedged for a total nominal value of EUR 12.6 billion, down 33% from the previous year. In France, 1,028 transactions with a total nominal value of EUR 7.8 billion were arranged.
The following graph presents Dexia Credit Local’s consolidated Value at Risk (VaR) on interest rates during the year:
VAR ON INTEREST RATES (1) ( EUR millions)
(1) Value at Risk: statistical assessment of the potential loss over a 99% confidence interval for a 10-day benchmark period for the TFM businesses.
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( 7. FINANCIAL SECURITY ASSURANCE (FSA)
FSA had a difficult year in 2008. While municipal finance did fairly well As a result, present value premiums fell to USD 82.7 million in 2008, during the first half, FSA faced considerable difficulties, especially in the a figure that is not comparable with the USD 390 million recorded in ABS and financial products sector, which made a major strategic review 2007. of the company necessary. On the financial products side, the early part of the year was spent By the end of the year, FSA had recorded only USD 663 million in interest strengthening the company’s liquidity. Business was much lower during the margin and present value premiums, a 48% decrease from 2007. second half of 2008, as the strategic review cited above had approved the running off of the asset portfolio and the interdiction of any new liabilities other than municipal deposits. Available municipal deposits became very scarce, due to uncertainties about the U.S. municipal market as a whole. 7.1 MUNICIPAL FINANCE What is more, the various announcements made by the rating agencies about FSA generated a significant competitive disadvantage. U.S. and international municipal finance activities Under these trying conditions, FSA maintained a margin of close to zero The total volume of U.S. municipal issues fell 9% to USD 391 billion in 2008, compared with a net gain of USD 88 million in 2007. in 2008. The decrease was exacerbated by a steady decrease in credit enhancement penetration rates, which fell from around 47% in 2007 to 9% in the fourth quarter of 2008. Growing uncertainty about the primary 7.3 SALE OF FSA’S INSURANCE OPERATIONS names in credit enhancement led good-quality issuers to go to market on the strength of their own ratings alone. On November 14, 2008, Dexia concluded a sale and purchase agreement This significant decrease in market volumes did not hurt FSA’s operations with Assured Guaranty for all of FSA Holdings, with the exception of its at first, as at the same time FSA increased its market share from an average financial products business. of approximately 25% in 2007 to 62% during the first quarter of 2008, This operation allows Dexia to disengage itself from an insurance business and this under highly satisfactory pricing and risk conditions. In fact, in the that is no longer part of its core business strategy and which presents the st 1 quarter, total present value premiums increased by more than 200% Group with a significant exposure to the U.S. market. over the 1st quarter 2007. Dexia’s total consideration will consist of USD 361 million in cash and Unfortunately, this favorable trend reversed rapidly starting in the second 44.6 million in newly issued Assured Guaranty shares. Based on the USD half, as the municipal market continued to contract and the rating agencies 8.10 per share closing price of Assured Guaranty’s stock on November 13, reassessed FSA’s rating, thereby creating a degree of uncertainty that 2008, the transaction results in (i) total consideration of USD 722 million, proved highly damaging to the company’s normal operations, and FSA’s (ii) half of which is to be paid in cash and half in stock (up to 75% in cash market share fell to 14% in the fourth quarter. and 25% in stock, at the discretion of the purchaser, prior to finalization After a year marked by extremely mixed results, FSA recorded a total of of the transaction). On March 16, 2009, the Shareholders’ Meeting of USD 531 million in present value premiums in 2008, an increase of 37% Assured Guaranty authorized the issue of the new shares. Under the terms over the previous year. of the deal, Dexia will become a shareholder of Assured Guaranty, with a stake representing at most 24.7% of that company’s capital. In the international market, the impact of the financial crisis began to be manifest at the start of the year and only continued to worsen, with An important step was already taken on January 20, 2009 when the sale a virtual shutdown of the markets at year-end. As a result, FSA’s new received the approval of the U.S. anti-trust authorities. Dexia intends to business, as measured in both insured nominal capital and premiums close this transaction during the second quarter of 2009. generated, was down approximately 90% in 2008. FSA’s financial products portfolio will be managed by FSA Asset Management, and has been excluded from the scope of the sale of FSA Holdings. The portfolio will be isolated from the transaction and allowed 7.2 ASSET-BACKED SECURITIES (ABS) to run off, under the responsibility of Dexia. The Belgian and French central AND FINANCIAL PRODUCTS governments will guarantee the assets of FSA Asset Management. This guarantee was approved by the European Commission on March 13, In response to the unprecedented deterioration of the financial markets 2009. Under the terms of the guarantee, Dexia will have to cover the first and economic outlook in the United States, which resulted notably in USD 4.5 billion in losses; at December 31, 2008, the Group had already a significant weakening of the credit quality of FSA’s mortgage-backed set aside approximately USD 2 billion in reserves. securities portfolio, during the second quarter Dexia’s senior management conducted an in-depth review of FSA’s businesses. Upon completion of the analysis, the decision was made in early August to get FSA out of all of its asset-backed securities related activities, in order to focus the company’s resources solely on public finance operations.
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Risk management
The Risk Management and Permanent Control department is responsible • Suspension or reduction of credit limits, especially on monoline for monitoring all credit, market, liquidity and operational risks, within insurers and banks. Bank credit limits are currently being lowered the meaning of French Banking Regulations Committee (CRB) Standard even further; 97-02 as modified. The Chief Risk Officer is head of the department and • Suspension of financial market powers that had been delegated to the
a member of the Dexia Credit Local Management Board. REPORT MANAGEMENT front office and suspension (except for very small amounts) of powers The Chief Risk Officer represents Dexia Credit Local on the Group Risk delegated to subsidiaries and branches; Management Committee (GRMC), which is chaired by the Dexia Group • Establishment of industry-specific provisions to take account of the Chief Risk Officer, himself a member of the Group’s Management deterioration of Dexia Credit Local’s risk parameters (provisions for Board. sensitive risks on corporates and asset-backed securities; provisions The Risk Management and Permanent Control department is responsible on U.S. RMBSs and provisions on monoline insurers); for ensuring that all types of risk (including credit, operational and market • Modification of the management of liquidity risk. risks) respect the limits established by the Group’s management bodies. The department recommends any measures it feels necessary for monitoring and reducing levels of risk. Liquidity crisis
The Risk Management and Permanent Control department adheres Dexia’s liquidity management strategy was severely tested during the strictly to the provisions laid down by the Dexia Group Risk Management 2007-2008 financial crisis, especially after the Lehman Brothers collapse. department (Group Risk Management) concerning risk appetite, The conditions discussed below concern the entire Dexia Group. measurement methods, limits and reporting methods. Although Dexia was not spared by the drought in the money and capital The Risk Management and Permanent Control department operates markets at the beginning of the crisis (with or without guarantees, free of any external influence from the front-office function. It does not with the exception of repos collateralized by highest quality assets), the report to any operational department, but has functional authority over Group was able to overcome the serious lack of liquidity thanks to the the specialized permanent control staff in each of the operating units support it received from the central governments of Belgium, France and concerned. Luxembourg and its considerable reserves of high quality assets.
Risk is monitored on a consolidated basis via risk units organized within Since October 9, 2008, a significant portion of Dexia’s sources of funding each branch or subsidiary and reporting directly or functionally to the has been covered by a maximum total EUR 150 billion guarantee provided head of the department. jointly by the central governments of Belgium, France and Luxembourg (at December 31, 2008, the total loan outstandings guaranteed amounted During the year, risk monitoring was carried out under the severely adverse to EUR 59 billion) on Dexia’s commitments to credit institutions and conditions of the crisis in the financial markets. institutional counterparties, and on all bonds and other types of debt Under these conditions, the Group undertook several measures during securities issued to the same types of counterparties, provided that these the fourth quarter: commitments, bonds and other debt securities mature prior to October 31, 2011 and were contracted, issued or renewed at some time between • Allowing the held-for-trading (HFT) portfolio to run off; October 9, 2008 and October 31, 2009.
• A portion of the bond portfolio was reclassified from “Financial assets In an economic environment that is still unstable, the Group’s liquidity has held for trading” and “Financial assets available for sale” into “Loans gradually improved since the difficulties experienced in late September/ and receivables,” while a portion of the bond portfolio was reclassified early October 2008 thanks to the guarantee provided by the central from “Financial assets held for trading” into “Financial assets available governments on October 9, 2008. In the first quarter of 2009, this support for sale;” allowed Dexia to issue two bonds totaling EUR 6.5 billion maturing in • Certain securities classified as “Financial assets available for sale” were 2011, and facilitated its access to funding markets and the stabilization of measured using in-house models, to recognize the fact that market its deposit base. This improvement was also supported by the intentional prices had become altogether unrepresentative of the securities’ reduction of the Group’s originations of new loans outside its primary true value. These assets were measured using stress-tested Basel II markets and the decrease of drawings under its confirmed lines of credit parameters for probability of default and loss given default, and an in the United States. Dexia will take advantage of every opportunity that illiquidity premium was factored in; the market may offer to lengthen the terms of its sources of funding.
• Lowering of market limits, in terms of both VaR and sensitivity; Dexia’s retail customers made only limited withdrawals of their deposits at the beginning of October, and the trend was short-lived and never truly threatened Dexia’s general liquidity position.
Annual Report 2008 / DEXIA CREDIT LOCAL 23 MANAGEMENT REPORT 2 Risk management
While the crisis did shake the very foundations of the Group’s liquidity risk The directives include a global emergency plan for liquidity, which is tested management, Dexia reacted to these changes by modifying its liquidity regularly. risk management guidelines and conducting a detailed analysis of its Dexia is able to reduce its liquidity risk by diversifying its sources of funding, current balance sheet and future growth plans, in order to sharply reduce which include primarily: its reliance on external funding sources. Dexia’s liquidity position, like those of many financial institutions, is highly reliant on the reopening • mortgage bonds (primarily the mortgage bonds issued by Dexia of money and capital markets and/or the continuing support provided Municipal Agency and the Pfandbriefe issued by Dexia Kommunalbank by the joint guarantee issued by the Belgian, French and Luxembourg Deutschland); federal authorities. • uncovered bonds (including bonds issued through the Bank’s own networks); Liquidity risk management • starting in 2009, bonds and commercial paper guaranteed by the Dexia’s approach to liquidity risk management has been reviewed in light Belgian, French and Luxembourg governments; of the current financial and liquidity crises. The general principle holds that Dexia’s future funding requirements must never exceed its proven • retail banking deposits (almost entirely in Belgium, Luxembourg and capacity to obtain guaranteed funding. Turkey);
The group’s future funding needs are determined dynamically and • Requests for proposals from central banks; exhaustively, taking into account the liquidity needs generated by current • bilateral and tripartite repos; and and future on- and off-balance sheet transactions. The group’s capacity to obtain guaranteed funding is calculated in a prudent manner, by applying • a great variety of non-guaranteed short-term funding sources, including the lessons learned from the current crisis. Dexia’s ability to satisfy all of its central bank deposits, commercial paper and certificates of deposit, future liquidity needs through its capacity to obtain guaranteed funding is fiduciary deposits and non-banking/interbank deposits, certain of which tested under both normal and various stress scenarios. The latter include enjoy sovereign guarantees. scenarios related to specific bank and market stresses, as well as to a Dexia employs a centralized liquidity risk management strategy. Although combination of the two. the various group entities manage their own liquidity positions, the Dexia The Bank’s short-term funding needs are monitored daily, while its longer Cash and Liquidity Management business line ensures that a standardized term funding needs (up to three years) are tracked monthly. Generally strategy is applied to and incorporated into the group as a whole. speaking, liquidity risk management is a fundamental component of Similarly, Dexia reviewed its internal transfer pricing system in 2008 in order Dexia’s three-year strategic financial plan. to more accurately reflect the rapidly changing costs of its principal sources This monitoring is controlled retrospectively and updated regularly in order of funding. This change is intended to motivate the group’s different to ensure that the Bank remains compliant with all the latest regulatory businesses to make sure that a healthy equilibrium is maintained between recommendations and best practices. the group’s ability to extend loans and its capacity to source funding.
In addition to the constraints imposed by the internal oversight of liquidity risk management, Dexia also takes account of all local regulatory constraints.
( 1. CREDIT RISK
The Risk Management and Permanent Control department uses tools 1.1 APPROVAL PROCESS it develops to monitor credit risk, in compliance with the procedure manuals established by the Dexia group and all regulatory and prudential The organization of the approval process takes into account the fact that constraints. the vast majority of lending decisions concern customers in the local public sector, which has low risk and is also subject to specific controls due to its Data regarding credit risk is included in the notes to the consolidated public nature. As such, the approval process: financial statements, in the tables presenting bank risk by geographical region and by category of counterparty, along with an analysis of the • provides for the delegation of powers to the French and international risk on the credit enhancement activity by industry and by internal credit sales network for local public sector customers in the Eurozone countries rating (pages 169-170 of the annual report) . and in North America, as well as in other countries where Dexia Credit Local has a significant local presence and a local Risk Management department (such as certain countries in Central and Eastern Europe, Israel, and Japan), using risk measurement tools developed together with the Risk Management and Permanent Control department;
24 DEXIA CREDIT LOCAL / Annual Report 2008 MANAGEMENT REPORT Risk management 2
• respects the limits established by the Dexia group Risk Management All these issues are presented first to the Validation Advisory Committee department; and then to the Group Risk Policies Committee and the Internal Audit department. The regulators are informed of all work performed by these • turns to the credit committees organized within the Dexia group bodies. All of the recommendations concerned are monitored regularly (Dexia Credit Local Credit Committees, Dexia Credit Committee and at the Group level. Management Credit Committee) for corporate lending, project finance, asset-based lending and the financing of local public sector customers The units concerned continued their work in 2008 and will maintain their in regions where no delegation of lending authority has been granted. efforts in 2009 with regard to: Restricted delegations of powers were given to the Dexia Credit Local • the work needed to improve the models to take account of all New York and London branches and to the Dexia Sabadell subsidiary recommendations; for their project finance activity; • roll-out, corresponding to the development plan for other internal • delegates specific powers for commitments relating to the investment credit rating systems for new or emerging types of customers for Dexia and trading portfolios, and turns to the Dexia group TFM Credit REPORT MANAGEMENT Credit Local; Committee for all amounts related to these activities that exceed the delegated powers. • the continuous work discussed above regarding the backtesting and development of software applications; Certain powers that had been delegated to the front offices and international entities were reviewed due to the financial crisis, resulting in • production of new, permanent risk weightings for the calculation of the reduction or temporary suspension of authorized amounts, depending the capital adequacy ratio, which requires very careful verification of on the type of transactions concerned. The original measures taken the accuracy of all data reported in Fermat, the central database for concerned notably those financial markets transactions recorded either adjusted regulatory risk calculation. on the Bank’s balance sheet or in the held-for-trading portfolio that was All group counterparties are now described using the same standard marked for runoff at the end of 2008. coding system, and the various entities continuously populate a common counterparty database (so-called participant database, or AIDA). All Dexia group exposures to the various counterparties are now reported once a 1.2 INTERNAL CREDIT RATINGS AND BASEL II month. REFORMS Lastly, in 2008, the Bank’s economic (or “risk-adjusted”) capital The internal credit rating system is of paramount importance for the requirements continued to be calculated on a quarterly basis, with new Dexia group, which has chosen the advanced approach under the Basel methodological advances (namely Credit VaR). Work began on stress- II solvency ratio and capital adequacy reforms. By letter dated December testing, in accordance with regulatory requirements. From the concrete 21, 2007, following its meeting of December 18, 2007, the Management implementation standpoint, an application for calculating the profitability Board of the Belgian Banking, Finance and Insurance Commission (CBFA) of transactions using Basel II risk parameters has been deployed in each authorized Dexia to use the advanced internal ratings-based approach for Dexia Credit Local location around the world, as well as in all group calculating and reporting credit risk-based capital adequacy requirements entities. Several hundred people are now assigned to this application, as from January 1, 2008. called RAROC.
This project was coordinated by a specialized team within the Risk The use of these models has been incorporated into the decisions made by Management and Permanent Control department, which complies with the Bank’s Risk Committees, and the conditions for their use are audited the guidelines established by Group Risk Management and maintains daily by the Internal Audit department and are examined for quality control contact with that department. It draws on all of the units in Dexia Credit purposes. Local, assigning responsibility for all functional and systems-related aspects of the project to members in each branch and subsidiary, as well as in every Dexia Credit Local central department concerned by the subject. 1.3 CREDIT LIMITS In 2007 and 2008, several models were developed for local authorities in Western Europe and their organizations, the U.S. municipal sector, public Credit limits are set in accordance with the specific technical characteristics housing, state-owned and similar public sector agencies, project finance of each type of counterparty, as outlined in the procedure manuals and other forms of specialized finance. established by Group Risk Management, which have been approved by the Risk Policy Committee and implemented at Dexia Credit Local. Development of models implies not just the initial calculation and subsequent annual backtesting of the parameters for probability of Simply put, the system factors in Dexia’s Tier 1 capital, the counterparty’s default, loss given default, credit conversion factors and any credit risk equity or the economic capital allocated to the transaction to calculate mitigants: it also means the development and maintenance of robust decreasing credit limits on the basis of the internal credit rating. software applications for the rating and oversight of each outstanding Dexia’s Credit Committees set individual limits for each project finance loan covered by one of the internal credit rating systems. The process also and asset-based lending transaction. Country and industry-specific credit includes the implementation and subsequent monitoring and updating, limits have also been established, depending on the characteristics of as needed, of all procedures (e.g. those regarding past dues and defaults) certain activities. that ensure that the provisions of Basel II are implemented at all levels concerned within the Bank.
Annual Report 2008 / DEXIA CREDIT LOCAL 25 MANAGEMENT REPORT 2 Risk management
Certain credit limits were reviewed during 2008, especially those for bank limits are examined on a regular basis and are reported to the Management counterparties. The system used to calculate credit limits was also reviewed Boards and to all appropriate Committees as part of the documentation in order to minimize risk. required by CRB Standard 97-02 as amended.
Once a quarter, Loan Monitoring Committees examine changes in sensitive transactions and Default Committees examine each case that meets the 1.4 MONITORING AND REPORTING criteria of default established by the banking regulators.
First-level monitoring is provided by the sales teams of the Head Office, branches and subsidiaries as part of their ongoing controls of their counterparties’ businesses. They are responsible for ensuring that credit 1.5 RESERVE POLICIES limits are respected each time a new lending decision is presented to the Once a quarter, a Reserves Committee, chaired by the Risk Management Credit Committee or for locally-delegated approval. and Permanent Control department, approves the amount of reserves Second-level monitoring is provided by the Risk Management and allocated and monitors the cost of risk. General reserves are calculated Permanent Control department, which monitors all of the Dexia Credit and maintained as required by International Financial Reporting Standards Local group’s exposures, past-due loans and non-performing loans. (IFRS). Changes in the quality of the commitments and compliance with credit
( 2. FINANCIAL RISKS
The Dexia Credit Local group makes a clear distinction between asset- a long-term management horizon. The ALM Committee is responsible liability management (ALM) transactions and market transactions. This for all risks other than the interest rate and currency risks on the Financial distinction is based on highly differentiated management objectives: Markets business lines.
• ALM includes all activities related to the management of Dexia Credit The financial crisis prompted the Dexia group to review the methods it Local’s structural risks, including interest rate, currency and balance uses to manage liquidity risk. Funding needs are calculated for the group sheet and off-balance sheet liquidity risks. Dexia uses macro-hedging as a whole, and are reviewed actively by including all of the resources transactions to reduce its total risk. The effectiveness of these hedges required to finance all current and future operations, as well as those is measured every month, as required by CRB Standard 90-15; consumed by off-balance sheet activities. Stress scenarios are developed using internal and market stress factors. • market transactions include primarily two types of strategies: locking in of credit margins, primarily on bonds held, and use of derivative Short-term liquidity needs are monitored daily, and medium- and longer- instruments to take positions on interest rates. term (up to three years) liquidity risk is reviewed every month. As a rule, management of liquidity risk is one of the most important factors taken into account in building the group’s three-year strategic plan.
2.1 ALM RISKS Liquidity risk management is backtested and reviewed regularly, in accordance with the recommendations of the regulatory authorities and Data regarding ALM risks is included in the notes to the consolidated with the best industry practices. financial statements, in the tables presenting liquidity and currency risks (pages 178-179 of the annual report). b. ALM risk supervision a. Scope • The Dexia ALM Committee (ALCO) meets once a month.
The structural risks may be defined as: It defines risk policy and risk hedging strategies for the entire group. The guidelines established by the Dexia ALM Committee give rise to • risks of fluctuations in the Bank’s net income subsequent to changes individual hedging decisions, but management authority may also be in market conditions (interest rates, exchange rates and the cost of delegated to the Dexia ALM department. liquidity), with the exception of market risks; and The Dexia ALM Committee ensures that these limits are applied • the risk of the Bank being insolvent. consistently based on its own scenarios for changes in interest rates. The goal of asset-liability management is to hedge - in part or in full - The operational autonomy given to certain subsidiaries is supervised all risks related to the structure of the balance sheet, for those assets by the Dexia ALM Committee, which, by delegating powers and and liabilities that have different interest rate, currency or amortization establishing limits, retains the means to control the policy set in place profiles. Residual risks may be maintained and managed in accordance within the subsidiaries. As for all risk committees, the Dexia Credit with the decisions of the ALM Committee, which are generally based on Local representative, who is either the Chief Executive Officer or the
26 DEXIA CREDIT LOCAL / Annual Report 2008 MANAGEMENT REPORT Risk management 2
Chief Risk Officer, has veto power over all decisions he believes may be • Delegated Asset-Liability Management: inappropriate for the entity. − by delegation of powers from the ALM Committee, performs the Bank’s • The Finance Committee meets once a month. short-term (less than two years) asset-liability management on the euro and the dollar, and manages all maturities of certain currencies for Under its new organization, the ALM function is divided into two which powers have been explicitly delegated by Group ALCO; separate but complementary parts: • Cash and Liability Management (CLM): − “strategic ALM,” under the authority of Group ALCO, and − raises the Bank’s short-term funding (i.e. less than two years) and − “local ALM,” under the authority of the Finance Committee. manages its short-term liquidity; By breaking Local ALM out from the global ALM scope, Group ALCO • Long-Term Funding: has given the Finance Committee authority over the operational management of its own balance sheet. Accordingly, the Local ALM − raises the Bank’s long-term funding (i.e. more than two years), based on MANAGEMENT REPORT MANAGEMENT unit is responsible for managing its own results and the interest rate an annual issuance schedule established by the ALM Committee; risk generated or borne by its own balance sheet. The scope of Dexia − issues subordinated borrowings, in accordance with the needs expressed Credit Local’s Local ALM includes: by the Finance department. − the commercial bank, • Credit Spread Portfolio: − the securities portfolio of the Local ALM, − invests almost exclusively in products not included in the usual scope − the technical processes resulting from its front office operations (e.g.: of operations of the group’s principal business lines; CPI-linked loan, average Euribor and Euribor in arrears, etc.). • Public Spread Portfolio: Local ALM uses mainly traditional ALM risk management applications − invests in bonds issued by counterparties within the scope of the Group’s to measure and monitor the risks inherent to ALM. Public & Wholesale Banking business line. Because this sector falls • The decisions of the Group ALM Committee are adapted operationally under a business line other than TFM, it is monitored by both of the by the Dexia Credit Local Tactical ALCO technical committee. The Risk business lines concerned; Management and Permanent Control department and the Financial • Credit Structuring Trading: Markets department both participate in the Tactical ALCO. − trading of bonds with short terms to maturity; c. Measurement of total interest rate risk • Sales:
ALM interest rate risk measurement has been standardized throughout − sales force at the disposal of the other Financial Markets business the Dexia group, and is based on several main metrics. lines.
The principal measurement used is that of the interest rate sensitivity of These activities are subject to two types of risks: the net present value (NPV) of assets and liabilities within the ALM scope. The scenario used for fixed rate exposures calculates the effect of a 100 • credit risk, or risk of default of the counterparty on a derivative contract basis point uniform shift in the yield curve. If Dexia Credit Local has too or the issuer of a purchased asset (in reality, most of the credit risk on many fixed-rate assets (base case) then its risk increases with an increase TFM activities is concentrated in the credit spread portfolio, the public in interest rates. spread portfolio and the credit structuring trading activities); • market risks, which may be defined as risks of fluctuations in the Bank’s net income or the value of the positions it has taken subsequent to 2.2 MARKET RISKS changes in market conditions (interest rates, exchange rates, share price, etc.). Data regarding market risks is included in the notes to the consolidated financial statements, in the tables presenting interest rate and equity b. Market risk supervision (“sensitivity of listed shares”) risk (pages 176-177 of the annual report ). Three committees are responsible for monitoring risks relating to the a. Scope Financial Markets activities: • the Market Risk and Guideline Committee (MRGC) meets once a month. The “Financial Markets” business lines refer to the Dexia Credit Local It is responsible for establishing and monitoring risk policies, such as group’s Treasury & Financial Markets (TFM) activities, including: guidelines and market risk limits for each activity and each desk, and • Financial Engineering and Derivatives: is charged notably with the monitoring of risk indicators;
− trading of interest rate derivatives, • the Dexia Credit Local Market Committee (the “Weekly Operational Committee”), which provides weekly monitoring of the implementation − structuring and sale of derivative instruments to its own customers, of all standards and decisions issued by the Dexia group Market Risk or to the customers of other business lines under master agreements Committee; signed with those business lines;
Annual Report 2008 / DEXIA CREDIT LOCAL 27 MANAGEMENT REPORT 2 Risk management
• the TFM Credit Committee, which examines all transactions related The risk monitoring process consists of establishing the following items essentially to the credit spread portfolio and to credit structuring for each entity and type of Financial Markets activity: trading. The Credit Committee reviews all transactions concerning • a list of currencies and instruments that may be traded; public sector issuers and corporate or project finance counterparties. • a VaR limit. The Risk Management and Permanent Control department measures risk regularly, and presents a quarterly market risk report to the Dexia Alarms were set off on numerous occasions in 2008 by the pressures Credit Local Management Board. The report includes various indicators observed in the markets, leading the appropriate committees to take a for monitoring the limits that have been allocated to the different types stance as often as necessary. of risk. At the same time, the increase in the level of risk during the year prompted the lowering of VaR limits and a closer scrutiny of portfolios. c. Risk monitoring methods
The principal risk metric used by Dexia Credit Local, and in fact by the entire Dexia group, is Value at Risk (VaR). The VaR calculated by the Dexia group measures the potential loss over a 99% confidence interval for a 10-day benchmark period.
( 3. LITIGATION RISKS
Dexia Credit Local’s activities do not entail any risks other than those Among the subsidiaries, it should be noted that, like other financial traditionally associated with the distribution of financial products to institutions, FSA is the subject of an investigation by U.S. authorities into customers. During 2008, no particular change was noted in the number the marketing of Guaranteed Investment Contracts (GICs). In addition, of disputes with customers, which remain few. several municipal governments have instituted legal proceedings against financial institutions, including FSA. Several suits have been consolidated It should be noted that a EUR 230,000 operational risk was recognized into a single dispute, which FSA is contesting. during the year.
( 4. OPERATIONAL RISKS
Operational risks are defined as the risk of a loss resulting from inadequate The involvement of the business line EVPs guarantees the effectiveness or failed internal processes, people and systems, or from external events. of the system. They include notably all risks related to information systems security and litigation. Dexia has chosen to include the reputation risk into its b. Collec tion, analysis and processing of incidents operational risk management. The Dexia group has defined a procedure for compiling operational risk events and operational losses as required by the provisions of Basel ORGANIZATION AND MONITORING II. Operational risk correspondents are responsible for identifying and analyzing all incidents with the help of the central operational risk unit. Depending on the results of this analysis, corrective or preventive measures a. Operational risk management are taken to reduce exposure to operational risk.
The Dexia group has elected to apply the standardized approach allowed Dexia has a shared operational risk management tool that includes a under the Basel II directives and has implemented processes and a module for compiling incidents in the various group entities. management tool as called for in the paper on “Sound Practices for the Management and Supervision of Operational Risk” published by the Basel A quarterly report summarizing all significant operational risk events is Committee on Banking Supervision. sent to the Management Board and to each business line EVP (in the Head Office, subsidiaries and branches). A specialized team in the Dexia Credit Local Risk Management and Permanent Control department is responsible for operational risk, and works with a network of correspondents in each department and entity.
28 DEXIA CREDIT LOCAL / Annual Report 2008 MANAGEMENT REPORT Risk management 2 c. Risk mapping same method for these risk and control self assessments. Depending on the results, action plans may be set in place to control exposure to risk. In addition to the operational risk events that have already been observed, it is essential that the Bank anticipate all potential risks within each of Various reports analyze the Bank’s risk profile by entity, by activity, by its activities. By evaluating the principal areas at risk, including the process and by type of event (as defined in the Basel II accord) and are effectiveness of all existing controls, the Dexia group can plot its risk presented to the Management Board each year. profile. Departments and entities throughout the Dexia group all use the
( 5. INFORMATION SYSTEMS SECURITY MANAGEMENT REPORT MANAGEMENT
Information systems security includes all measures taken to shield data quickly substitute this site for the main site, if need be. This system was from any threat to its confidentiality, integrity or availability. successfully tested in 2008.
All these measures are described in the Dexia Credit Local information Information systems security is managed by three players: systems security policy manual, which defines all applicable principles by • the IT Security Committee is responsible for recommending security area of security, along with the roles and responsibilities of the various policies to the Management Board, for establishing specific directives players in the IS security process, using a body of directives, specific security for each area, and for ensuring that they are implemented. The policies, rules and operating procedures and the guidelines provided by committee comprises representatives from the various business ISO standard 27000/17799. line stakeholders, including risk management, compliance, IT and Under the supervision of a specialized steering committee, each operating logistics. The Committee meets every two months, and is chaired by department participated in the preparation of a business continuity plan the member of the Management Board in charge of risk management (BCP). Under the plan, the impacts of a disaster affecting IT equipment or and permanent control; facilities or information systems or of a loss of service are analyzed from a • the Information Systems Security Officer is responsible for recommending “business unit” perspective in order to identify all mission-critical activities. security policies and directives to the IT Security Committee. He oversees The results of this analysis were used to establish business recovery times the practical implementation of the rules that make up the security that are compatible with operating requirements. The implementation policy, increases employee awareness and provides advice to the various of this recovery strategy is based on the use of formal, documented departments. The IT Security Manager is a member of the Operational technical guidelines, procedures and organizational structures. The BCP Risk Management, Permanent Control and Security department, which and these procedures are all updated once a year and on a regular basis, guarantees his independence from the operations area; in accordance with a schedule defined by the Management Board. The results of the tests are reported to the steering committee. • IT departments are responsible for designing and implementing all security hardware and software, and for implementing all associated Moreover, Dexia Credit Local has placed critical systems for data production operational rules and procedures. They also perform first- and second- with a service provider, in a single center under highly secure physical level controls over the correct application of security. The job of IT conditions and connected via redundant high-speed links with a point- Security Manager was created within the IT department in order to to-point link between the IT production site and Dexia Credit Local Head coordinate these actions. Office. Dexia Credit Local has also set up a mirror site to prepare for any failure in these systems. Dexia periodically backs data up and can very
( 6. RISK MANAGEMENT COMMITTEES
Several committees are responsible for risk management within Dexia The principal committees are: Credit Local. The Risk Committees were modified in early 2006, in line with • the Risk Policy Committee, which selects risk measurement policies, the reorganization of the Dexia group. The roles, areas of responsibility and rules and methods; composition of the committees were all specified. Decisions are reached by consensus and the risk management representatives of Dexia Credit • the Dexia and Dexia Credit Local Credit Committees (weekly), which rule Local have veto power within the group committees if they judge that one on all transactions submitted to them. The Credit Guideline Committee, of the committee’s decisions is not applicable to the entity. a sub-group of the Credit Committee, may establish limits that are lower than those resulting from the application of group principles and recommend delegations of powers to be given to the various entities or establish specific limits for certain industry-specific risks;
Annual Report 2008 / DEXIA CREDIT LOCAL 29 MANAGEMENT REPORT 2 Risk management
• the Dexia and Dexia Credit Local ALM Committees (ALCO: monthly) • L oan Monitoring Committees at both the G roup and entity levels make decisions in accordance with their individual authorities and (quarterly Watchlist Committee), which monitor developments in limits. They define the interest rate, currency and liquidity risk strategies sensitive transactions; employed by all Dexia group entities and by Dexia Credit Local and all • D efault Committees at both the Dexia and entity levels (quarterly) of its subsidiaries and branches with significant ALM activities; which classify loans as being in default in accordance with the criteria • the Dexia Credit Local Weekly Operational Committee, which adapts established by the banking supervisors; the decisions of the Treasury & Financial Markets Committee for • the Validation Advisory Committee which is the Dexia G roup committee implementation; that approves all models for credit, market, ALM, operational and • the New Products Committee (monthly), which validates all of the economic capital risks. products of Dexia Credit Local and its branches. Each subsidiary has its own committee;
( 7. PAYMENT SYSTEMS SECURITY
Dexia Credit Local uses the following payment systems: Authorization thresholds in foreign currencies are established and updated regularly; • the Swift network is used for interbank settlements on transactions negotiated by the front office traders in the Financial Markets activities • there is an effective segregation of duties between users and operators. department and any funds transfers requested by other Dexia Credit Existing profiles accurately reflect all defined rules. The process for Local departments (especially on the international business managed authorizing access to payment systems has been incorporated into the by the Head Office and on settlements of foreign invoices); Bank’s user authorization management procedures. More particularly, back offices and the IT Security Manager are all required to perform • the French Ministerial Budget and Accounting Control Service (SCBCM) controls; network is used for drawings and collections on loans to public sector customers; • management of messages (technical and functional) from the Swift network has been properly secured; • the French Retail Clearing (CORE) and CRISTAL/TARGET2 systems are used for most payments to private sector customers; • hardware used for payments (servers, card readers, cards, etc.) is situated in protected areas, and accessible only to officially authorized • lastly, some payments to private sector customers may be made by persons. These measures are covered by documented procedures; check. • the Bank’s business continuity plan includes a body of procedures It should be noted that Dexia Credit Local does not provide its customers guaranteeing continuity of payment in the event of a disaster. These with payment means. measures are operational, and the plan is tested regularly; Payment systems security is controlled by a body of procedures and • with regard to compliance, the financial markets back office department measures: is responsible for controlling financial flows. • lending and financial markets back offices are responsible for payment As provided for by its audit program, the Internal Audit department processes, and front office traders are prevented from accessing these reviews payment systems security as often as is dictated by its assessment systems; of the risk. Any recommendations issued are monitored regularly to verify • rules regarding the approval of payments are clearly defined. Specifically that they have been carried out. all payments must be authorized by two different members of the back office concerned. The only exception to this rule is for payments of amounts under EUR 1,000,000 initiated automatically by the Financial Markets information system, which require only one authorization.
30 DEXIA CREDIT LOCAL / Annual Report 2008 MANAGEMENT REPORT Risk management 2
( 8. RISK MONITORING IN SUBSIDIARIES AND BRANCHES
Each subsidiary and branch has its own local risk management structure. • report to the Dexia Credit Local Risk Management and Permanent These structures: Control department either directly (branches) or functionally (subsidiaries). • are segregated strictly from the front offices;
( 9. RISK MONITORING AT FSA MANAGEMENT REPORT MANAGEMENT
Risk is monitored at two different levels at FSA. The first level of monitoring Underwriting Committee of the Board of Directors. A number of is performed by FSA’s Risk Management department, which is segregated Dexia representatives serve on the Underwriting Committee, which from the front office and is managed by a member of the FSA Management is chaired by the Chief Risk Officer of Dexia (who is also a member of Board. The second is provided by Dexia Credit Local, in collaboration with the Management Board) and also includes the Chief Risk Officer of the Dexia group, which has set up a three-pronged risk management Dexia Credit Local; system: • close operational control provided by the Dexia Credit Local Risk • a quarterly review is performed by the Board of Directors of FSA and Management and Permanent Control department and the Dexia group two specialized risk committees: Risk Management department, with (i) the establishment in 2007 of an FSA Risk Monitoring Committee, which generally meets every two − the Underwriting Committee, which is chaired by a member of the months and (ii) the creation of a specialized unit within Dexia Credit Dexia group Management Board, provides a detailed review of all Local responsible for monitoring FSA’s risk situation. commitments and examines all issues pertaining to risk policy, Against the background of the crisis in the financial markets, different − the Investment Committee, which establishes guidelines for investment analyses were performed in 2008 to determine which businesses FSA policy and evaluates investment performance; should cease and which should be continued, with the Risk Management • strict oversight of the business through (i) the use of rules for delegation departments carrying out several related projects. During the summer of authority between Dexia Credit Local and FSA, specifying the types of 2008, Dexia decided to cease all ABS-related operations. Moreover, of activities that are authorized and establishing commitment limits for due to the amplitude of the provisions set aside due to the U.S. real each type of counterparty and (ii) ‘underwriting guidelines,’ which are estate crisis, all assumptions used were systematically reviewed at every approved by the Board of Directors, with the understanding that FSA quaterly accounting close in collaboration with the FSA Risk Management must comply with all requisite single risk limits and all limits established department. Lastly, as was done with the rest of the Dexia group, bank by Dexia. Any transactions that fail to comply with the aforementioned credit limits were lowered in the financial products business and more rules and any modifications of guidelines must be examined by the stringent restrictions were placed upon the types of securities in which Dexia group and Dexia Credit Local Risk Management departments FSA Asset Management may invest. and approved by the Dexia Management Credit Committee and the
( 10. DEXIA CREDIT LOCAL AND FSA PORTFOLIOS
Dexia Credit Local and FSA were affected in several ways by the deepening An additional EUR 3.9 million provision was recognized on Lehman of the crisis in 2008: Brothers assets.
• FSA raised its provisions considerably on U.S. retail mortgage-backed • The cost of risk on the banking sector amounted to EUR 671 million. securities (RMBS). The pre-tax provisions were increased in 2008 to USD This includes provisions for prospective losses on below investment 2.0 billion on the insured portfolio and to USD 1,516 million on the grade corporates, ABS and even the U.S. port sector, to which Dexia financial products portfolio, including USD 797 million for projected Credit Local has several exposures. actual losses. Dexia banka Slovensko set aside a EUR 100 million provision to cover A EUR 300 million collective provision was also set aside for U.S. RMBS foreign exchange transactions with customers who have been unable exposure. to meet the required margin calls.
Annual Report 2008 / DEXIA CREDIT LOCAL 31 MANAGEMENT REPORT 2 Risk management
The above cost of risk includes impairment provisions and write-offs • Volatility increased and interest rates fell, leading the Bank to close on banking sector assets, including most notably EUR 211 million a certain number of positions, lower VaR limits and establish special on exposure to Lehman Brothers, EUR 62 million on Icelandic banks, monitoring of all collateral agreements, due to the size of Dexia Credit EUR 10 million on Hypo Real Estate Bank and EUR 12.9 million on Local’s derivatives portfolio. Washington Mutual. Although the size of Dexia Credit Local’s bond portfolio exposed it to • The continuous widening of spreads had an adverse affect on both severe impact from these events, it should be noted that the quality of assets measured at fair value through equity and portfolios recognized the portfolio remains good: at fair value through profit or loss. • 93.8% of Dexia Credit Local’s exposure is rated investment grade; Spreads widened even faster after Lehman Brothers went under, leading • 63% of all exposure is on securities issued by public sector names or to prices that were totally disconnected from the intrinsic value of the state-owned companies. underlying securities. Dexia Credit Local chose to apply recent provisions allowing for the modification of IAS 39, and reclassified certain assets as loans and receivables. 10.1 DEXIA CREDIT LOCAL PORTFOLIO • The liquidity environment became extremely problematic when interbank markets froze subsequent to the bankruptcy of Lehman Brothers. Dexia managed the liquidity situation at the group level, Remarks in order to optimize the available sources of financing, and for all The data below were prepared in accordance with IFRS 7, which employs currencies – especially the U.S. dollar, in light of the amplitude of Dexia the concept of maximum exposure to credit risk. Credit Local’s commitments in that country. Thanks to the size of its good quality reserves and to the tripartite sovereign guarantee provided The exposures shown include all non-derivative product balance sheet on October 9 by France, Belgium and Luxemburg, the group was able assets at their net carrying amount (i.e. the accounting value less all to weather the very severe liquidity crisis. specific provisions), all derivative products at their mark-to-market value and off-balance sheet commitments on the undrawn portion of borrowing Pressure from the freeze in interbank markets and stress related to the facilities and guarantees given. exercise of liquidity guarantees (standby purchase agreements) provided to U.S. investors on municipal issues led Dexia to take advantage of It should be recalled that – in accordance with the principles of Basel the emergency measures offered by the two national central banks, II – exposures to credit risk are presented net of the impact of any credit Banque de France and Banque Nationale Belge. risk mitigants. Exposures are analyzed by type of counterparty and by geographical region, after taking account of all guarantees; guarantors Liquidity will improve only with the reopening of the interbank lending are, however, substituted only if the risk weighting of the guarantor is market and the sale of issues covered by the guarantees provided by better than that of the borrower. the French, Belgian and Luxembourg central governments.
32 DEXIA CREDIT LOCAL / Annual Report 2008 MANAGEMENT REPORT Risk management 2
Dexia Credit Local (consolidated data, excluding FSA)
ANALYSIS OF MAXIMUM EXPOSURE TO CREDIT RISK BY TYPE OF ANALYSIS OF MAXIMUM EXPOSURE TO CREDIT RISK COUNTERPARTY – SPECIFIC BY GEOGRAPHIC REGION MANAGEMENT REPORT MANAGEMENT
ANALYSIS OF MAXIMUM EXPOSURE TO CREDIT RISK BY TYPE OF COUNTERPARTY - GENERAL
IMPAIRMENT ON CREDIT RISK AND COUNTERPARTY CREDIT RISK
Loans 12/31 /2007 12/31 /2008 Change Change (%) (EUR millions)
Non-performing loans under collection 182 275 93 51%
Provisions allocated 57 104 47 83%
Market transactions 12/31 /2007 12/31 /2008 Change (EUR millions)
Provisions on banks 0 336 336
Provisions on mid-corporates 0 100 100
Annual Report 2008 / DEXIA CREDIT LOCAL 33 MANAGEMENT REPORT 2 Risk management
10.2 FSA PORTFOLIO Financial products portfolio
On November 14, 2008, Dexia concluded a sale and purchase agreement FSA had a total of USD 16.5 billion in its financial products portfolio with Assured Guaranty for all of FSA Holdings, with the exception of its at December 31, 2008 (versus USD 17 billion the previous year), and financial products business. set reserves aside because of its significant exposure to U.S. RMBSs. The portfolio is exposed to liquidity risk on the expected maturity of its FSA’s financial products portfolio will be managed by FSA Asset GIC liabilities and the necessity of providing collateral. This risk – which Management, and has been excluded from the scope of the sale of FSA is being monitored closely by the Dexia and FSA Risk Management Holdings. The portfolio will be isolated from the transaction and allowed departments – is relatively limited, as Dexia has extended a liquidity line to run off, under the responsibility of Dexia. The Belgian and French central to FSA. This portfolio has been incorporated into the banking scope as governments will guarantee the assets of FSA Asset Management. This from December 31, 2008. guarantee was approved by the European Commission on March 13, 2009. Under the terms of the guarantee, Dexia will have to cover the first USD 4.5 Investment portfolio billion in losses; at December 31, 2008, the Group had already set aside approximately USD 2 billion in reserves (USD 1.5 billion on the financial FSA’s investment portfolio, which amounted to nearly USD 6 billion at products portfolio and collective impairment provisions totaling USD 420 December 31, 2008, remains very highly diversified and of good quality million on the U.S. RMBSs). If total losses ultimately exceed USD 4.5 billion, as most of its exposure is to the U.S. municipal sector. the central governments will receive common stock or preference shares of Dexia. This system shall be submitted to an extraordinary session of ANALYSIS OF FSA INSURED PORTFOLIO BY CREDIT RATING the Dexia Shareholders’ Meeting for its approval.
At December 31, 2008, FSA was rated AAA/ negative outlook by S&P and Fitch, and Aa3/developing outlook by Moody’s.
Insurance portfolio
In 2008, the total value of FSA’s net par outstandings in its insurance portfolio dipped USD 2.1 billion (0.5%) to USD 424.4 billion, 72% of which in the municipal public sector and 28% in asset-backed securities and project finance.
The year was marked both by Dexia’s strategic decision to cease all new ABS business – due mainly to the problems with the U.S. RMBS portfolio – and by the general lack of activity in structured products. These factors resulted in an 18% year-on-year decrease of the ABS portfolio. The most notable trends included:
• Residential mortgages: net par outstandings decreased by around 14% to USD 17 billion due to the runoff of the portfolio. Throughout 2008, the deterioration of the real estate market and the continual increase in default and loss severity rates called for the greatest prudence with regard to this type of ABS. Claims were paid on the problems experienced with HELOC-type exposures;
• Consumer receivables: net par outstandings of this type of ABS fell by a net 48% to USD 6 billion due to the rapid runoff of the portfolio, which is comprised mostly of securitized automobile loans;
• Pooled corporate: this portfolio declined by around 4.3% to USD 74.4 billion due primarily to the natural runoff of the portfolio in the absence of any new originations, although a few transactions were carried out early in the year;
• Municipals: total net par outstandings increased by 8% in 2008 to USD 306 billion. Activity was fairly brisk during the first half of the year when several monoline insurers had their ratings cut. During the second half, however, the troubled credit market, the review of FSA’s credit rating announced by Moody’s on July 21st (and subsequently by S&P and Fitch) and the lower penetration rate achieved by monoline insurers in the municipal market all resulted in a slowdown in business during the third quarter that only got worse during the fourth (-3%).
34 DEXIA CREDIT LOCAL / Annual Report 2008 MANAGEMENT REPORT Operating results 2
Operating results
( 1. CONSOLIDATED FINANCIAL STATEMENTS
1.1 CHANGES IN THE SCOPE OF CONSOLIDATION Other movements: REPORT MANAGEMENT
The details of the scope of consolidation and all changes therein are • Under the terms of an agreement with the Austrian government, Dexia presented in organization chart and in list form in the notes to the financial Credit Local increased its stake in Dexia Kommunalkredit Bank from statements. 50.84% to 100% .
The principal changes to the group scope of consolidation in 2008 were:
Newly consolidated companies: 1.2 PRESENTATION OF THE CONSOLIDATED FINANCIAL STATEMENTS • First time consolidation of Dexia Habitat; The consolidated financial statements of Dexia Credit Local were • First time consolidation of Domiserve + in the scope of Domiserve. prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Commission at the time the financial Deconsolidated companies: statements were closed. They are presented in accordance with French National Accounting Council (CNC) Recommendation 2004-R.03 dated • Kommunalkredit Austria and its subsidiaries were deconsolidated on October 27, 2004. October 1, 2008. In compliance with the application of IFRIC 11, the net income figure for 2007 was reviewed and revised downward by EUR 12 million.
1.3 CONSOLIDATED INCOME STATEMENT
The primary components of consolidated net income (loss) are presented below for the years ended December 31st.
2007 2008 (EUR millions)
Net banking income 1,800 1,974
Operating expenses (670) (789)
OPERATING INCOME BEFORE COST OF RISK 1,130 1,185
Cost of risk (46) (3,387)
OPERATING INCOME 1,084 (2,202)
Income from investments in associates 58 (53)
Capital gains (losses) on other assets 0 (1,036)
Amortization and impairment of goodwill (1) 0 (1,181)
PRE-TAX INCOME FROM CONTINUING OPERATIONS 1,142 (4,472)
Corporate income tax (108) 556
NET INCOME (LOSS) 1,034 (3,916)
Minority interests 55 (360)
NET INCOME (LOSS) – GROUP SHARE 979 (3,556)
Basic earnings per share (EUR) 11.25 (40.85)
Fully diluted earnings (loss) per share (EUR) 11.25 (40.85)
(1) In 2008, the purchase goodwill on FSA was written down in full, resulting in an impairment loss of EUR 1,181 million.
Annual Report 2008 / DEXIA CREDIT LOCAL 35 MANAGEMENT REPORT 2 Operating results
The deepening financial crisis in 2008 had very severe impacts on the and a EUR 1,181 million impairment loss on the write-down of all of the cost of risk of the Dexia Credit Local group, both for the FSA subsidiary – remaining goodwill from the acquisition of that company. which set aside provisions of EUR 1,331 million on its financial products The net loss in 2008 also included a net loss of EUR 105 million on portfolio and EUR 1,302 million on its insurance business, which was the deconsolidation of Kommunalkredit Austria associated with the directly affected by the crisis in the financial and mortgage markets in assumption of full control over Dexia Kommunalkredit Bank. the United States – and for the banking business, where the cost of risk was particularly marked by the impact of the bankruptcy of Lehman Brothers (EUR 211 million) and the provisions on various other banking a. Net banking income (NBI) institutions (EUR 85 million). Consolidated net banking income increased 9.7% to EUR 1,974 million It should also be noted that the signing on November 14, 2008 of a contract in 2008 from EUR 1,800 million the previous year. for the sale of FSA Holdings’ insurance business to Assured Guaranty Net banking income has three components: interest margin, the technical resulted in the recognition of a projected EUR 940 million disposal loss margin of insurance companies and other revenues.
2007 2008 Change Change in % (EUR millions)
Net interest income 1,297 1,769 +472 36.4%
Technical margin of insurance companies 306 339 +33 10.8%
Other revenues 197 (134) (331) -168.0%
NET BANKING INCOME 1,800 1,974 +174 9.7%
NET INTEREST INCOME income and to other income. Technical margin of insurance companies Net interest income includes all interest income and expense items on increased by 10.8% to EUR 339 million in 2008 (EUR 306 million in all balance sheet instruments and derivatives, regardless of the type 2007), including the impact of changes in the value of the U.S. dollar: at of portfolio in which they have been classified. Net interest income a constant exchange rate, the technical margin would have increased by increased by EUR 472 million (36.4%) to EUR 1,769 million in 2008, 18.8% to EUR 362 million. from EUR 1,297 million in 2007. OTHER REVENUES TECHNICAL MARGIN OF INSURANCE COMPANIES Other revenues include essentially all net fees and commissions, gains and The line “Technical margin of insurance companies” is used only to losses on financial instruments at fair value through profit or loss (held for report the credit enhancement activity of FSA, the U.S. subsidiary. This trading, foreign exchange and hedging), and gains and losses on financial line includes only those specific earnings that cannot be assigned to either assets available for sale. of the other two lines in NBI. Thus, FSA also contributes to net interest
2007 2008 Change Change in % (EUR millions)
Net fees and commissions 98 118 20 20.4%
Losses on financial instruments at fair value through profit or loss (295) (357) (62) 21.0%
Gains on financial assets available for sale 390 81 (309) -79.2%
Other income and expenses 4 24 20 500.0%
OTHER REVENUES 197 (134) (331) -168.0%
Net fees and commissions continued to grow due to the expansion of The Bank posted a EUR 62 million larger net loss on financial instruments at the project finance business. fair value through profit or loss than the previous year. Most of this increase was attributable to the EUR 91 million net foreign exchange loss recorded The gains on financial assets available for sale were generated by in 2008 (EUR 52 million of which from FSA), while a EUR 53 million gain decreases of balance sheet items (disposals or repayments) including was recognized in 2007. loans, borrowings and securities classified as available for sale. The significant capital gains on disposals of listed shares recorded in 2007 (EUR 213 million) did not reoccur in 2008.
36 DEXIA CREDIT LOCAL / Annual Report 2008 MANAGEMENT REPORT Operating results 2
b. Operating expenses
Operating expenses rose EUR 119 million (17.8%) to EUR 789 million in 2008, from EUR 670 million the previous year.
2007 2008 Change in % (EUR millions)
Payroll costs (359) (343) -4.5%
Other general administrative expenses (213) (349) 63.8%
Depreciation, amortization and impairment of non-current assets (52) (56) 7.7%
Amortization of deferred insurance contract acquisition costs (46) (41) -10.9%
Total general operating expenses (670) (789) 17.8% MANAGEMENT REPORT MANAGEMENT NBI 1,800 1 974 9.7%
Operating ratio 37.2% 40.0%
The operating ratio worsened from 37.2% to 40.0%, as costs grew more AMORTIZATION OF DEFERRED INSURANCE CONTRACT quickly than revenues in 2008. ACQUISITION COSTS This heading was created in order to incorporate FSA’s insurance activity. PAYROLL COSTS Certain general operating expenses relating to insurance contract Payroll costs fell EUR 16 million (4.5%) due essentially to the payment of acquisition costs are deferred and amortized over the life of the contracts. lower variable compensation, especially at FSA. The premiums relating to these same insurance contracts are also amortized over the same period. Part of the decrease in costs during the OTHER GENERAL ADMINISTRATIVE EXPENSES year is attributable to the decrease of the U.S. dollar. Administrative expenses increased by 63.9% from EUR 213 million in 2007 to EUR 349 million in 2008, including the impact of a EUR 43 million provision for restructuring on the implementation of the Dexia transformation plan and a EUR 60 million provision on the deconsolidation of FSA. c. Cost of risk
The cost of risk includes three distinct components, the details of which are presented below.
2007 2008 Change (EUR millions)
Impairment of fixed income securities available for sale 2 (1,191) (1,193)
Provisions and losses on credit enhancement business (23) (1,381) (1,358)
Provisions and losses on customer loans (25) (815) (790)
TOTAL (46) (3,387) (3,341)
FIXED INCOME SECURITIES AVAILABLE FOR SALE • provisions on various other – especially Icelandic – banking institutions This consists primarily of provisions recognized by FSA on its financial (EUR 85 million); products portfolio. • the recognition of a provision covering the risk on suppliers of credit enhancement (EUR 29 million); CREDIT ENHANCEMENT This consists primarily of provisions recognized by FSA on its FSA Insurance • the recognition of a provision covering Spanish RMBS risk portfolio. (EUR 32 million);
CUSTOMER LOANS • the recognition of a collective provision covering the U.S. RMBS risk (EUR 300 million); The cost of risk related to customer loans was marked in 2008 by: • the recognition of a provision covering customer derivative transactions • the impact of the bankruptcy of investment bank Lehman Brothers at Dexia banka Slovensko (EUR 100 million). (EUR 211 million);
Annual Report 2008 / DEXIA CREDIT LOCAL 37 MANAGEMENT REPORT 2 Operating results
The quality of the portfolio of financial assets (customer loans and securities) and the policy for reserving these assets when they must be written down for impairment are demonstrated in the ratios below:
At December 31, 2007 At December 31, 2008
Impaired financial assets / Total financial assets 0.11% 0.76%
Allocated reserves / Impaired financial assets (1) 33.7% 59.6%
Allocated reserves / Total financial assets 0.04% 0.46%
(1) Figures for 2007 have been restated.
The coverage ratio on impaired assets increased sharply (59.6% compared 1.4 CONSOLIDATED TOTAL ASSETS AND EQUITY with 33.7% the previous year), due to the impairment observed by FSA AT DECEMBER 31, 2008 on its exposures to residential mortgage-backed securities in its financial products portfolio (primarily HELOC, Alt-A, subprime and Option ARM). Total consolidated assets increased 20.0% to EUR 414 billion at December 31, 2008 (EUR 345 billion in 2007). d. Income from investments in associates a. Interbank transactions The share in the net losses of associates accounted for using the equity method amounted to EUR 53 million, versus net income of At December 31, 2008, the group was a net borrower on the interbank EUR 58 million in 2007. This EUR 111 million drop is basically attributable market for a total of EUR 55.3 billion, 29.5% less than the EUR 78.4 billion to Kommunalkredit Austria, as well as to the provisions recognized on the recorded at December 31, 2007. This decrease is attributable primarily Icelandic banks (EUR 71 million) and on Lehman Brothers (EUR 11 million), to the reclassification of certain available-for-sale and held-for-trading and, at Dexia Epargne Pension, by impairment losses on various listed financial assets into interbank loans and receivables as allowed by the shares (EUR 26 million) and bonds (EUR 3 million). amendment to IAS 39 and IFRS 7 “Reclassifications of financial assets.” On October 1, 2008, the Dexia Credit Local group reclassified EUR 7 billion In 2008, the net loss from investments in associates also included of assets as interbank loans. EUR 12 million in impairment on the goodwill recognized on Kommunalkredit Austria. b. Customer loans e. Corporate income tax At December 31, 2008, total outstanding customer loans were 69.8% higher, at EUR 248.9 billion (EUR 146.6 b illion at December 31, 2007). The Bank recognized EUR 556 million in tax income in 2008, versus The sharp EUR 102.3 billion rise in customer loans is linked primarily to the EUR 108 million in tax expense in 2007, due primarily to the losses incurred reclassification of certain available-for-sale and held-for-trading financial by FSA. Dexia Crediop recorded EUR 77 million in tax income during the assets as allowed by the amendment to IAS 39 and IFRS 7 “Reclassifications year on a tax option that allows the company to pay taxes immediately of financial assets.” On October 1, 2008, the Dexia Credit Local group at the reduced rate of 16% on items that would ordinarily be taxable in reclassified EUR 70 billion of assets as customer loans. the future at a rate of 32.32%. c. Securities portfolio f. Net income (loss) The total value of investments in government securities, bonds and The net loss – group share amounted to EUR 3,556 million, compared other fixed-income securities, and in equities and other variable-income (1) with EUR 979 million in net income in 2007. securities decreased 55.1%, from EUR 150.4 billion to EUR 67.6 billion at Minority interests went from positive EUR 55 million to negative December 31, 2008. The sharp EUR 82.8 billion decline in the securities EUR 360 million. portfolio in 2008 is related primarily to the reclassification of EUR 77 billion in certain securities into loans and receivables on October 1, 2008, as The change in the group’s share of net income (loss) yields the following allowed by the amendment to IAS 39 and IFRS 7 “Reclassifications of Return On Equity: financial assets.”
2007 2008 d. Equity and ratios
Return On Equity (ROE) 18.08% -63.06% The equity of the Dexia Credit Local Group (net of minority interests) fell by EUR 7.63 billion to a deficit of EUR 2.10 billion at December 31, 2008 The ROE is calculated as the ratio of the group’s share of net income (loss) (positive balance of EUR 5.53 billion at December 31, 2007). to average shareholders’ equity (excluding minority interests and after Equity was affected by the change in reserves for unrealized or deferred allocation of net income loss ). The decline in the ROE reflects the very gains and losses, which decreased by EUR 7.1 billion during the year. sharp deterioration of earnings in 2008. Excluding unrealized items, the normal decrease in equity would have been EUR 468 million, including essentially a EUR 3,556 million loss for (1 ) In accordance with the application of IFRIC 11,the net income figure for 2007 was reviewed and reduced by EUR 12 million. the year, less the payment of EUR 415 million in dividends (including
38 DEXIA CREDIT LOCAL / Annual Report 2008 MANAGEMENT REPORT Operating results 2
EUR 20 million for the TSSDI super-subordinated perpetual notes), plus a Dexia Credit Local has applied the Basel II principles since January 1, 2008. EUR 3.5 billion increase in subscribed capital stock and additional paid-in Those of FSA’s activities being sold to Assured Guaranty are deducted from capital on the capital increase at the end of 2008. regulatory capital for the purpose of calculating the consolidated capital adequacy ratio. Those of FSA’s activities that are being kept are henceforth Details of changes in equity are presented in the notes to the financial included in the group’s global risk calculations. statements. In light of the application of the Basel II principles regarding equity and From a capital adequacy standpoint, Dexia Credit Local had consolidated risk volumes, the Tier 1 ratio went from 7.49% in 2007 to 7.51% and the regulatory capital of: capital adequacy ratio went from 11.18% in 2007 to 12.48%.
2007 2008 (EUR millions)
Total equity 8,386 9,982 MANAGEMENT REPORT MANAGEMENT Including Tier 1 capital 5,616 6,007
( 2. COMPANY FINANCIAL STATEMENTS
2.1 INCOME STATEMENT
2007 2008 Change 2008/2007 (EUR millions)
Net banking income (loss) (12) (2,343) (2,331)
Operating expenses (273) (348 ) (75 )
OPERATING INCOME BEFORE COST OF RISK (285) (2,691) (2,406 )
Cost of risk (13) (331 ) (318 )
OPERATING INCOME (LOSS) (298) (3,022) (2,724)
Capital gains (losses) on other assets 32 (2,364) (2,396)
PRE-TAX INCOME (LOSS) FROM CONTINUING OPERATIONS (266) (5,386) (5,120)
Corporate income tax credit (expense) 107 449 342
Recovery of general banking risks reserve (FRBG) 478 0 (478)
NET INCOME (LOSS) 319 (4,937) (5,256)
Basic earnings (loss) per share (EUR) 3.67 (56.71)
Fully diluted earnings (loss) per share (EUR) 3.67 (56.71)
Annual Report 2008 / DEXIA CREDIT LOCAL 39 MANAGEMENT REPORT 2 Operating results
Dexia Credit Local posted a net loss of EUR 4,937 million in 2008, The capital losses recorded on disposals of non-current assets consist compared with net income of EUR 319 million in 2007. basically of a provision set aside on the announcement of the sale of FSA Holdings Ltd to Assured Guaranty. The EUR 2 billion provision was The EUR 2,343 million net banking loss included the impact of significant projected on the basis of the selling price announced. Dexia Credit Local impair ment of all of the available for sale portfolios. This impair ment , also recorded a EUR 205 million provision to take account of the January 5, which represented a total charge of EUR 3,076 million, was attributable 2009 sale of its stake in the Kommunalkredit Austria group to the Austrian to the crisis in the spreads of the issuers and to the illiquidity observed government. in the markets; this included close to EUR 239 million in specific losses related to the bankruptcy of Lehman Brothers and the Icelandic banks Dexia Credit Local recognized tax income of EUR 449 million on the during the third quarter of 2008. deferred taxes on the reserves set aside on the securities portfolios.
The cost of risk increased by EUR 318 million to EUR 331 million (EUR 13 million in 2007), reflecting the recognition of specific provisions for those industries touched directly by the crisis, and in particular for the credit risk on the ABS and RMBS portfolios.
2.2 BALANCE SHEET
Total assets amounted to EUR 213.4 billion at December 31, 2008, portfolios are presented in the notes to the financial statements. These compared with EUR 212.8 billion in 2007. securities consist mainly of French and foreign bonds, negotiable debt securities and government securities, with the balance consisting of shares a. Assets of mutual funds.
CUSTOMER LOANS INVESTMENTS IN SUBSIDIARIES, ASSOCIATES, AFFILIATED COMPANIES AND OTHER LONG-TERM EQUITY INVESTMENTS Outstanding customer loans, excluding credit institutions, increased by Total long-term equity investments amounted to EUR 3 billion at December 22% to EUR 51.0 billion at December 31, 2008, from EUR 41.8 billion 31, 2008, down EUR 2.1 billion from the previous year due to the reserves the previous year. set aside on Dexia Credit Local’s stake in FSA Holdings Ltd., which is to be SECURITIES HELD FOR TRADING, SECURITIES AVAILABLE FOR sold to the Assured Guaranty group. The value of the investments was SALE AND SECURITIES HELD TO MATURITY written down entirely on the basis of the selling price agreed upon. The total value of securities held reached EUR 86.2 billion compared with EUR 113.4 billion at December 31, 2007. Changes in the various
The main acquisitions of shares and control were:
New equity investments in 2008 Name and capital of the company Representing > 10% of the capital• La Cité, with capital stock of EUR 37,000 • Poitou–Charentes Energies Renouvelables, with capital stock of EUR 750,400 • Exterimmo, with capital stock of EUR 50,000,000 • Penates Funding, with capital stock of EUR 62,000 Representing > 66% of the capital• Dexia Habitat, with capital stock of EUR 4,000,000 • Dexia Carbon Fund Managers, with capital stock of EUR 132,000
b. Liabilities DEBT SECURITIES Debt securities traditionally represent a significant portion of Dexia Credit BANKS AND FINANCIAL INSTITUTIONS Local’s liabilities, and they amounted to EUR 39.5 billion at December 31, Dexia Credit Local’s interbank debt amounted to EUR 129.7 billion at 2008 (EUR 57.3 billion in 2007). December 31, 2008, and consisted primarily of short-term borrowings Most of the group’s long-term debt is issued by Dexia Municipal due to the liquidity crisis. At December 31, 2008, EUR 44 billion of the Agency. group’s funding was provided by central banks.
40 DEXIA CREDIT LOCAL / Annual Report 2008 MANAGEMENT REPORT Operating results 2
( 3. FIVE-YEAR FINANCIAL DATA SUMMARY
(EUR) 2004 2005 2006 2007 2008
EQUITY
Capital stock 1,327,004,846 1,327,004,846 1,327,004,846 1,327,004,846 500,513,102 (1)
Number of shares 87,045,757 87,045,757 87,045,757 87,045,757 87,045,757
SIMPLIFIED INCOME STATEMENT
Revenues 3,173,995,095 4,823,522,282 5,720,380,887 6,286,809,567 9,182,903,606 REPORT MANAGEMENT Earnings before income tax, depreciation, amortization and net impairment charges 621,013,426 581,231,271 674,274,260 1,083,821,549 566,890,589
Income tax expense (credit) 87,787,313 65,109,549 60,748,365 (107,696,679) 448,898,743 Earnings after income tax, depreciation, amortization and net impairment charges 519,268,420 424,907,461 472,624,576 319,477,197 (4,936,685,288)
Dividends 579,724,742 341,219,367 300,307,862 396,058,194 None (2)
PER SHARE DATA
Revenues 36.46 55.41 65.72 72.22 105.50 Earnings after income tax and before depreciation, amortization and net impairment charges 6.13 5.93 7.05 13.69 1.36
Income tax expense (credit) 1.01 0.75 0.70 (1.24) 5.16 Earnings after income tax, depreciation, amortization and net impairment charges 5.97 4.88 5.43 3.67 (56.71)
Dividends 6.66 3.92 3.45 4.55 0.00
Employees at December 31 1,394 1,513 1,472 1,612 1,737
Managerial staff 934 1,120 1,068 1,178 1,267
Other staff 460 393 404 434 470
Gross payroll 88,598,443 105,254,010 116,441,912 129,010,486 134,280,062
Payroll taxes and employee benefits 32,751,363 40,323,671 40,387,857 37,544,986 49,038,929
(1) By resolution of the Combined Shareholders’ Meeting of December 22, 2008, Dexia Credit Local increased its capital by EUR 3.5 billion in cash, and then reduced its capital stock by EUR 4.3 billion, resulting in final capital stock of EUR 500.5 million. (2) Exceptionally, there will be no dividend payment.
Annual Report 2008 / DEXIA CREDIT LOCAL 41 MANAGEMENT REPORT 2 Capital stock and share data
Capital stock and share data
( 1. CAPITAL STOCK AND NUMBER OF SHARES
At December 31, 2008, Dexia Credit Local had capital stock of The capital stock is divided into 87,045,757 shares. EUR 500,513,102. The Combined Shareholders’ Meeting of December No other securities have been issued that provide access to the capital 22, 2008 approved the increase and subsequent reduction of the bank’s stock of Dexia Credit Local. capital, which previously amounted to EUR 1,327,004,846, in order to absorb the losses forecast at that time for the 2008 financial year.
( 2. DELEGATION OF POWERS WITH REGARD TO CAPITAL INCREASES
A resolution authorizing capital increases was adopted by the Extraordinary premium or income in line with a correlating distribution of bonus common Shareholders’ Meeting of May 15, 2007. The Board of Directors is stock or increase in the par value of the existing shares. authorized to increase, at its discretion, the capital stock in an amount This authorization was granted for a period of 26 months as from the not to exceed EUR 1 billion, by issuing, with or without additional paid- Shareholders’ Meeting of May 15, 2007. It was not used during either in capital, common stock and eventually by capitalizing reserves, share the most recent financial year or the previous year.
( 3. SHAREHOLDER STRUCTURE
The capital stock of Dexia Credit Local is held directly and almost exclusively No material changes have taken place in the shareholder structure in the by Dexia SA. In accordance with Article 14 of the Company’s by-laws, past five years. each member of the Board of Directors holds one registered share of its stock.
2004 2005 2006 2007 2008
Capital stock (EUR) 1,327,004,846 1,327,004,846 1,327,004,846 1,327,004,846 500,513,102
Number of shares 87,045,757 87,045,757 87,045,757 87,045,757 87,045,757
Dexia SA 99.98% 99.98% 99.98% 99.98% 99.98%
Individual investors 0.02% 0.02% 0.02% 0.02% 0.02%
Indirect ownership of the capital of Dexia Credit Local: • Arco Group, a Belgian limited liability cooperative company and Holding Communal, a Belgian corporation, each hold more than 13% of the • Ethias Group, the Belgian federal government, French central bank’s capital; government and the three Belgian Regions, each hold more than 5% of the bank’s capital; • Caisse des Dépôts et Consignations holds more than 17% of the b ank’s capital.
42 DEXIA CREDIT LOCAL / Annual Report 2008 MANAGEMENT REPORT Capital stock and share data 2
( 4. DIVIDENDS PAID DURING THE PAST THREE YEARS
Dividends paid in respect of the three previous years:
(EUR) 2005 2006 2007
Net dividend per share 2.88 4.49 (1) 4.55 Amount per share eligible for the tax allowance (Article 158.3-2 of the French General Tax Code) 2.88 (2) 4.49 (2) 4.55 (2) Total amount eligible for the tax allowance (Article 158.3-2 of the French General (2) (2) (2) Tax Code) 250,691,780.16 390,835,448.93 396,058,194.35 REPORT MANAGEMENT
(1) Including EUR 1.04 under the terms of the Extraordinary Shareholders’ Meeting of September 4, 2006. (2) At a rate of 40%.
In light of the results obtained in 2008, the Shareholders’ Meeting was not requested to approve payment of any dividend.
Annual Report 2008 / DEXIA CREDIT LOCAL 43 MANAGEMENT REPORT 2 Human resources and environmental data
Human resources and environmental data
( 1. HUMAN RESOURCES MANAGEMENT
1.1 EMPLOYEE AGREEMENT • 2007: (amount allocated) EUR 4.45 million (payment in 2008);
As the Bank’s management and labor unions did not sign an employee • 2008: In light of the financial position of the Dexia Credit Local group, agreement, management decided to unilaterally apply its own proposals no amount was provisioned for discretionary profit-sharing in 2008. for specific and general measures as from January 1, 2008, while ensuring equal treatment for both genders. French legal profit-sharing The amount set aside for the special reserve for French legal profit-sharing (RSP) is the higher of the RSP calculated by the statutory formula and 1.2 GROUP EMPLOYEE SAVINGS PLAN the RSP calculated using an extraordinary formula that is capped under the terms of the French legal profit-sharing agreement dated June 29, The following agreements were applied to calculate the amounts paid in 2007. 2008 in respect of 2007: The ceiling applied to the profit-sharing paid in 2008 in respect of 2007 • the discretionary profit-sharing agreement dated June 30, 2005 in was EUR 10.511 million. respect of financial years 2005, 2006 and 2007; Eligibility for French legal profit-sharing is subject to the same seniority • the French legal profit-sharing agreement dated June 29, 2007 in requirement as that imposed for discretionary profit-sharing. respect of financial years 2007, 2008 and 2009. The amount due is prorated on the employee’s salary, and is capped at four The following was negotiated in 2008: times the social security ceiling. The total amount paid to an employee within a single year may not exceed three-fourths of that same ceiling. • a discretionary profit-sharing agreement in respect of financial years 2008, 2009 and 2010. Employees are required to allocate their individual profit-sharing payments to either the PEG or to a restricted savings account. Discretionary profit-sharing The following gross amounts were paid in past years in respect of French Under the terms of the June 30, 2005 agreement and its amendment legal profit-sharing: dated June 29, 2007, the amount of discretionary profit-sharing depends • 2006: (amount allocated) EUR 9.21 million (payment in 2007); on the degree to which the annual budget is met. If the contractual target is met fully, this amount would represent 0.3% of the Dexia Credit Local • 2007: (amount allocated) EUR 10.51 million (payment in 2008); group’s consolidated gross operating income (GOI), excluding the income • 2008: In light of the financial position of the Dexia Credit Local group, of FSA and any currency effects. no amount was provisioned for French legal profit-sharing in 2008. Employees must have been with the company at least three months to qualify for discretionary profit-sharing. Employee stock ownership program
Discretionary profit-sharing is paid based on two criteria: 60% is prorated Employees of Dexia Credit Local are eligible to participate in the employee on the length of service of each beneficiary and 40% is proportional to the stock ownership program established for the entire Dexia group, with the gross annual compensation paid for the year in question (capped at three understanding that the ESOP originally planned for 2008 was deferred. times the annual social security ceiling at December 31 of that year). Only shares issued by Dexia SA, the group’s Belgian holding company, may be included in mutual funds or directly held by employees as part of The amounts paid out under the discretionary profit-sharing program may the group employee savings program. be paid directly to the beneficiaries or invested in the group employee savings plan (PEG). The employer makes a 30% matching contribution for all discretionary profit-sharing invested in shares of Dexia via a mutual fund.
The following amounts were paid in past years in respect of discretionary profit-sharing (gross amounts excluding matching contribution):
• 2006: (amount allocated) EUR 4.28 million (payment in 2007);
44 DEXIA CREDIT LOCAL / Annual Report 2008 MANAGEMENT REPORT Human resources and environmental data 2
1.3 KEY HUMAN RESOURCES DATA WITHIN THE UES
(Dexia Credit Local and Dexia CLF Banque)
2007 2008
Employee present at December 31 1,587 1,629
Under fixed-term contracts 175 159
Under long-term contracts 1,412 1,470
Analysis of changes in long-term contracts during the year
New hires 218 144 MANAGEMENT REPORT MANAGEMENT Terminations (16) (15)
Resignations (66) (61)
Working hours
35-hour workweek Master agreement of November 14, 2000, with effect from January 1, 2001
Absenteeism (all classifications of personnel) 3.10% 4.10%
Part-time employees (% of total workforce) 6.9% 7.2%
Compensation (EUR)
Gross distributed payroll 102,959,424 117 ,900,549
Employer payroll taxes 60,933,056 70,150,827
Average annual salary - men 65,541 68,135
Average annual salary - women 47,094 49,115
Training
% of gross payroll 4.45% 4.22%
Number of days (all training programs) 5,061 4,880
Health and safety conditions
Number of times the health and safety committee met during the year 8 5
Employee benefit programs (EUR)
Contribution to the funding of employee council programs 1,259,356 1,455,008
( 2. SUSTAINABLE DEVELOPMENT
The following text is intended to provide a summary of Dexia Credit L. 225-102-1 of the French Commercial Code. The information provided Local’s sustainable development policy in 2008, as required by Articles 1 herein will be expanded upon in detail for the Dexia group as a whole on and 2 of Decree 2002-221 dated February 20, 2002, pursuant to Article the group website: www.dexia.com.
Annual Report 2008 / DEXIA CREDIT LOCAL 45 MANAGEMENT REPORT 2 Human resources and environmental data
2.1 COMMITMENTS TO AND MEMBERSHIP IN INTERNATIONAL AND DOMESTIC INITIATIVES
Dexia Credit Local’s deep commitment to sustainable development is reflected in its involvement in three United Nations programs.
Program Objectives
United Nations Environment Programme (UNPE) “Statement by Financial This statement is intended to encourage signatory banks and financial agencies Institutions on the Environment & Sustainable Development” to commit to sustainable development, notably by helping to preserve the environment. United Nations Global Compact Launched in July 2000 and placed under the direct authority of the Secretary General of the U.N., the “United Nations Global Compact” brings together companies that commit to implementing the goal of “sustainable development” on the basis of ten principles in the areas of human rights, labor standards, the environment, and anti-corruption measures. United Nations Environment Programme (UNEP) “Declaration on Launched in June 2007, on the eve of the G8 Summit in Potsdam, the Climate Change by the Financial Services Sector” “Declaration on Climate Change by the Financial Services Sector” is the financial services sector’s first global commitment to address this problem. The signatories recognize the contribution of human activities to climate change and undertake to incorporate this issue into their decisions on a daily basis.
In 2008, Dexia Credit Local manifested these commitments through a series of concrete initiatives.
Commitments undertaken by Dexia Credit Local in line with the Actions taken by Dexia Credit Local in 2008 “Declaration on Climate Change by the Financial Services Sector” Promote awareness and understanding of the risks and opportunities associated - Sustainable development training for Dexia Credit Local employees, and with climate change incorporation of the specific issues associated with their business lines
Quantify these risks and opportunities and incorporate them into lending - Establishment of a quantitative goal to reduce the CO2 footprint of loans to activities the energy sector, under the terms of the energy guidelines Dexia adopted in November 2008 Help customers manage the risks and opportunities associated with climate - Implementation of decision aids for the thermal renovation of buildings
change by assessing their exposure and providing products and services that - Offering “CO2 loans” designed to offset the residual CO2 emissions generated improve their ability to adapt by projects undertaken by the local public sector
Reduce Dexia Credit Local’s direct impact on climate change and its carbon - Establishment of quarterly reporting of direct CO2 emissions footprint, assessing and disclosing the Bank’s annual emissions with - Implementation of measures to reduce the impacts of business trips
transparency - Implementation of measures to reduce CO2 emissions generated by energy use in Dexia’s main buildings Incorporate climate change into the decision-making process in order to - Organization of a conference on environmental policies for major European promote and protect growth in the companies in which Dexia Credit Local Union cities invests - Participation of Dexia Credit Local in Club ViTeCC, an organization of cities and regions devoted to adapting to climate change sponsored under the Caisse des Dépôts’ Mission Climat program
2.2 LOCAL AND REGIONAL SUSTAINABLE − Simulation of energy renovation projects DEVELOPMENT - In partnership with Promodul, Dexia has developed a “Toolbox” In 2008, Dexia Credit Local reorganized the range of products it provides to for evaluating the energy efficiency and CO2 emissions of public assist customers with sustainable development into five strategic areas: administrative buildings, simulating renovations and estimating the cost and energy savings generated by renovations. • Building - Promodul has developed a version of the Toolbox for use by the general Dexia Credit Local provides its customers with a variety of services to public, to evaluate energy efficiency in private homes and simulate the assist them with the thermal renovation of their buildings. impact of energy-related renovations. − Posting of energy efficiencies
Dexia Credit Local provides its customers with Display®, a software application that allows the energy-saving performance of public buildings to be evaluated and publicly displayed in the form of an energy poster.
46 DEXIA CREDIT LOCAL / Annual Report 2008 MANAGEMENT REPORT Human resources and environmental data 2
− Dexia Crediop also confirmed its positioning in this strategic sector in SUPPORT FOR THE CONSTRUCTION AND RENOVATION Italy in 2008, providing EUR 110 million to finance a water management OF LOCAL BUILDINGS project in the Po Valley and a water distribution project for the Province In September 2008, Dexia and Fédération Française du Bâtiment (FFB) entered into the “Build 2008-2011” partnership, of Gorizia. committing to provide support for construction and renovation of local buildings as part of the Grenelle Environment initiative. A • Autonomy and aging total budget of EUR 3 billion has been set aside to finance these Along with its efforts on behalf of the environment and to promote types of investments. Dexia will also provide local governments with diagnostic tools for evaluating the energy efficiency and energy conservation, Dexia Credit Local is maintaining its support to accessibility of so-called “public access establishments” (ERP). the social welfare sector by establishing partnerships and providing customized financial structures.
• Green transport − Assistance to the disabled is now provided through two programs, one concentrating on accessibility and the other on employment. Dexia Credit Local provides its customers with a variety of services REPORT MANAGEMENT to promote green transport and the renewal of public transport - Development of accessibility solutions, including subsidized loans, infrastructure. dedicated budgets (in partnership with the Fédération Française du Bâtiment) and special vehicles for the transportation of persons with − Reduction of vehicular fuel consumption reduced levels of mobility (VTPMR).
- In France, with its “Zero CO2” products, Dexia Location Longue Durée offers its customers a comprehensive strategy for the prevention (green driving lessons), reduction and offsetting of the CO emitted PARTNERSHIP WITH FÉDÉRATION DES ENTREPRISES 2 SOCIALES POUR L’HABITAT by their fleet, including a carbon audit of the fleet and its replacement On June 12, 2008, Dexia Credit Local signed an accessibility with green vehicles. services agreement with the French Federation of ESH-type public housing corporations (Fédération des Entreprises Sociales Pour − Expansion of the public transport product offer l’Habitat). - In June 2008, Dexia provided EUR 128.2 million in financing to the The agreement commits Dexia to establishing accessibility Languedoc-Roussillon region for the acquisition of 25 new regional training programs and technical diagnostic solutions for the Federation’s member public housing corporations. express trains.
- In April 2008, Dexia Crediop won the 2008 Metro Award for the “Most - Development of employment solutions, including employment reviews Innovative Project.” Dexia Crediop financed the Metro 5 light metro in for public service agencies and the “Harmony” (wide range of in-home Milan. The line is to be entirely automated, with no human conductor, personal services), “Temps Fort” (employee training) and “Second and is the first subway project in Italy ever financed under a public- Chance” (retraining after an accident) programs. private partnership. − Dexia Credit Local also has several programs to support the local public • Renewable energies health and social welfare sectors.
Dexia Credit Local has made the financing of renewable energies a - “Optimized” PLS-type affordable loans to promote rental housing: PLS major strategic focus in its commitment to the fight against climate provides optimal tax treatment along with optimal financial terms in change. combination with a customized loan.
− The Bank has put together a range of solutions (including loans and In April 2008, the French government entrusted Dexia with operating leases) well suited to the specific needs of the different types EUR 820 million of the total EUR 2.6 billion budget it has set aside of technologies, including solar, wind, and wood energy. to promote PLS affordable rental housing loans, confirming Dexia’s - Toward this end, in April 2008 Dexia signed an agreement with Ecotral, positioning as the largest distributor of PLS loans in France. a supplier of energy-related services, to promote the installation of solar - New project finance solutions using administrative emphyteutic leases photovoltaic equipment in the eastern part of France. This agreement and operating leases. will enable Dexia to provide local authorities and public housing corporations in the region with comprehensive solutions incorporating PARTNERSHIP WITH THE GENERAL COUNCIL OF THE planning, installation, financing and even the operation of solar power DEUX-SÈVRES DEPARTMENT equipment on their buildings. On January 17, 2008, Dexia signed a three-year financial partnership agreement to promote the development of services • Water and waste management for the elderly in the French Deux-Sèvres department. Dexia has Dexia provides financing solutions suited to the challenges and specific offered the General Council of the department a wide range of products and services, including financing solutions and access characteristics of projects for the purification and distribution of to the Bank’s financial expertise. drinking water.
− In May 2008 Dexia Credit Local was Lead Arranger on a USD 150 million 12-year loan for Sabesp, the water company for the City of Sao Paulo, Brazil. The funds will be used to finance the cleanup of the Tietê River.
Annual Report 2008 / DEXIA CREDIT LOCAL 47 MANAGEMENT REPORT 2 Human resources and environmental data
sensitization; recruitment; training; career and mobility management; INNOVATIVE PRODUCTS compensation; and compatibility of one’s professional and personal Dexia Credit Local offers its customers many innovative products, lives. including CO2 loans and socially responsible bonds:
- CO2 loan In November 2008, Dexia Sofaxis had its “Professional Equality” In 2008, Dexia Credit Local created the first loan that allows local certification renewed for a period of three years. authorities to voluntarily contribute to the fight against climate change. The loan allows customers to offset CO2 emissions, • Employee involvement in sustainable development, notably through: over a single year or over the entire life of the equipment or the activity (heating, lighting, professional travel, etc.) by purchasing − Specialized training sessions, and the corresponding carbon dioxide emission quotas though the market and then canceling them. − Special events, such as the ones on sustainable production and In connection with its “2008 Elections” program, Dexia offered consumption held during the 2008 Sustainable Development Week.
to offset the CO2 emissions generated by France’s 400 most prominent local officials in the performance of their duties. Social commitment - Socially responsible bonds Created in 1993, the Dexia France Foundation promotes civic spirit so Dexia Credit Local was one of the Lead Managers on a EUR 50 million, 15-year “socially responsible bond offering” that everyone participates in sustainable development at the local and – the first ever in Europe – for the Regional Council of Nord-Pas- regional levels. de-Calais. The bonds were sold only to investors and funds that had been officially recognized as socially responsible, and the • Launch of the “Become Eco-Citizens!” call for projects arranging banks were also required to have an active sustainable development strategy. Proceeds of the bonds will be used to − In 2008, the Dexia France Foundation launched a call for projects from finance major infrastructure and alternative transportation troubled youth assisted by local mainstreaming centers, to enable them systems. to rally and take action in favor of the environment through concrete measures to foster sustainable development in their neighborhoods. The Dexia France Foundation selected 29 of the 52 projects submitted, Human resources management including notably: a project to clean up the Eure River in Evreux, with an apprenticeship in waste sorting; production of an animated film on For many years Dexia Credit Local has been pursuing a comprehensive “Eco-friendly Actions in the Workplace” in Perpignan; and production action plan to incorporate its corporate social responsibility policy into of educational “Eco Citizenship” kits in Nice, which were distributed the everyday management of its human resources. In 2008, three issues to every school in the city. received particular attention: mainstreaming the disabled, gender equality and employee involvement in sustainable development. • Citizenship Academy
ATTRACTING AND RETAINING TALENT − In March 2007, the Dexia France Foundation created its Citizenship Because leadership is a core component of Dexia’s human Academy. The goal of the Academy is to help young people from resources policy, the leadership model is now used in recruiting disadvantaged neighborhoods throughout France each year to acquire interviews and at all annual performance reviews. In April 2008, the principles of citizenship, living it and expressing the concept fully. a forum on the subject of leadership within organizations was In 2008, 73 young people from troubled neighborhoods throughout set up in Brussels by the Institute for Management Development (IMD) and sponsored by Dexia Corporate University. France participated in six training sessions. In June 2008, the Dexia Corporate University also organized • Corporate skills sponsorship its fifth Lead Corporate Executive Program – an MBA training program for current and prospective senior executives – on the − Since June 2006, Dexia Credit Local has allowed employees to take two topic of Dexia’s commitment to social well-being. hours a month out of their work schedule to sponsor young people participating in local mainstreaming centers. Results were quite positive • Mainstreaming the disabled in 2008: 67 employees took part in the program, and by the end of the − The need to incorporate disabled persons into certain posts was a first half 18 young people had already found work. selection criterion for the companies providing services within the Dexia Credit Local also maintains an active policy of communicating Tour Dexia corporate office building in La Défense. A study of ways to and sensitizing its customers to the importance of environmental and promote the employment of persons with disabilities was carried out social issues: with the assistance of an independent firm. • In connection with the local elections held in March 2008, Dexia Credit − Dexia Credit Local’s front office staff all received sensitivity training on Local helped inform citizens about and sensitize them to local issues. The the issues of disability and accessibility during sessions organized in Bank used its website to post information about local issues of specific January 2008 by the Mission Handicap unit, in collaboration with the interest to local residents and, with the help of the French Broadcasting Human Resources department. Authority (CSA), conducted surveys identifying voters’ expectations • Gender equality with regard to the challenges faced by the coming administration. The results of these surveys were then published in the mass media. − On July 24, 2008, Dexia Credit Local signed an agreement regarding gender equality in the workplace. The agreement applies the general • Dexia Credit Local helps spread best sustainable development practices principle of equality to the following areas: communications and through several national and international events.
48 DEXIA CREDIT LOCAL / Annual Report 2008 MANAGEMENT REPORT Human resources and environmental data 2
− Dexia organized the 2008 edition of the Rubans du Développement with Comité 21), “Elected Officials and Waste” and “Elected Officials, Durable sustainable development awards, acknowledging the most Energy and Climate” (in collaboration with Amorce). exemplary initiatives undertaken by French local authorities, in partnership with the Association of French Mayors, the Association of Management of direct environmental impacts Mayors of Large French Cities and Comité 21 (French committee for the environment and sustainable development) and with the support The primary objective of Dexia Credit Local’s policy of reducing its direct of nine other partners. The rules of the competition were modified in environmental impacts is to reduce the CO2 emitted by energy consumption 2008: emphasis is now placed on general sustainable development in its buildings and its employees’ professional travel needs. policies rather than on individual exemplary actions undertaken by • Energy consumption and business trips local authorities, and the certification obtained is valid for a period of two years and posted on a sign at the entrance to the winner’s town, − In France, Dexia Credit Local has been using only green electricity in its city or region. Thirteen local authorities were awarded this certification main buildings since January 1, 2008. This allows Dexia to avoid over
in 2008. 325 metric tons of CO2 emissions, or the electricity consumed each REPORT MANAGEMENT year by 1,200 French people, i.e. one half of Dexia’s total headcount − Dexia created a website that provides information highlighting and in France at December 31, 2007. tracking the best practices employed by those outstanding local authorities who have been awarded Rubans du Développement − Increased use was made of videoconferencing in 2008, with the Durable: www.rubansdudeveloppementdurable.com installation of five videoconferencing units (including one mobile unit) in Dexia Credit Local’s building in Paris and two units in the Dexia − Dexia Crediop supports Roma per Kyoto, a project to develop strategies Crediop building in Rome. to counter the negative impacts of global warming, whose funding is shared equally by the European Community and the City of Rome. − Since the summer of 2008, the Dexia Credit Local employee council website has been matching up employees interested in car pooling. • The Bank’s sensitization strategy also incorporates the publication of several books and studies targeted at local authorities: Dexia Credit Local is also maintaining its policy of generating less waste and using less paper. − Analysis of the financial challenges associated with making establishments that welcome disabled persons in France accessible (January 2008), a • Waste management and paper consumption collective effort by Dexia, the Federation of Associations for Disabled − Selective sorting of waste: recycling areas are available on each floor Adults and Youths (APAJH), and Fédération Française du Bâtiment and of the Tour Dexia in Paris. Accèsmétrie. − Dexia Credit Local has undertaken several measures to reduce its − 2008 study of sustainable development policies in European cities, consumption of paper, such as improving the quality of the paper it carried out by the Ambiente Italia research institute with assistance uses (and decreasing the weight) and using only recycled, bleach-free from Dexia and Dexia Crediop. virgin paper from sustainably-managed forests. − Dexia Editions published three works on sustainable development in 2008: “Acting Together for Sustainable Regions” (in collaboration
QUALITY ACTION PLAN In 2008, Dexia Credit Local and some of its subsidiaries pursued a quality action plan covering both their internal management and their relationships with their customers. In 2008, the ISO 9001 certification of all of Dexia Credit Local’s front office, financial and administrative activities in France was renewed. Dexia Sofaxis also had its ISO 9001 quality certification renewed, as well as its OHSAS 18001 (Occupational Health and Safety), ISO 14001 (Environmental Management System) and SA 8000 (Social Accountability) certifications.
Annual Report 2008 / DEXIA CREDIT LOCAL 49 MANAGEMENT REPORT 2 Terms and compensation paid to members of management bodies
Terms and compensation paid to members of management bodies
Pursuant to Article L. 225-102-1 of the French Commercial Code, the Local from January 1 to December 31, 2008 are presented below, together directorships and functions of each director and officer of Dexia Credit with the compensation paid them during that year.
( 1. FUNCTIONS AND OTHER DIRECTORSHIPS HELD
Chairman of the Board of Directors Vice Chairman of the Board of Directors
Jean-Luc Dehaene Dominique Marcel (since October 22, 2008) (through October 9, 2008)
68 years old 53 years old
Member of the European Parliament Chairman of the Management Board of Compagnie des Alpes Chairman of the Board of Directors of Dexia SA 89, rue Escudier – 92772 Boulogne Billancourt Cedex Dexia SA – Place Rogier 11 – B-1210 Brussels – Belgium • Chairman of the Executive Board of Compagnie des Alpes (since • Chairman of the Board of Directors of Dexia SA (since October 2008) October 2008)
• Vice Chairman of the Board of Directors of Dexia Bank Belgium (since • Director of Dexia SA (through October 2008) October 2008) • Chairman and Chief Executive Officer of Financière Transdev (through • Director of Dexia BIL (since November 2008) July 2008)
• Director of InBev • Permanent representative of Financière Transdev, Director of Société Européenne pour le Développement des Transports Publics (Transdev) • Director of Umicore (through July 2008) • Director of Lotus Bakeries • Chairman of the Supervisory Board of CDC Dl. GmbH (Germany) • Director of Trombogenics • Director of CDC Entreprises (through July 2008) • Director of Novovil • Director of Société Forestière de la Caisse des Dépôts (through July 2008) Pierre Richard • Chairman of the Supervisory Board (through October 2008), then (through October 7, 2008) Chairman of the Management Board (since October 2008) of 67 years old Compagnie des Alpes
38, rue Guynemer – 75006 Paris • Director of Icade SA (through July 2008)
• Chairman of the Board of Directors of Dexia SA (through • Director of CNP Assurances (through July 2008) October 2008) • Director of Accor (through August 2008) • Vice Chairman of Dexia Bank Belgium (through October 2008) • Permanent representative of Caisse des Dépôts, member of the • Vice Chairman of Dexia BIL (through October 2008) Supervisory Board of Société Nationale Immobilière (through July 2008) • Member of the Supervisory Board of Le Monde • Director of the Société du Grand Théâtre des Champs-Elysées • Director of Air France - KLM • Chairman and Chief Executive Officer of CDC Entreprises Capital • Director of Generali France Holding Investissement (through July 2008) • Director of EDF Energies Nouvelles • Chairman and Chief Executive Officer of CDC Infrastructure (through July 2008)
50 DEXIA CREDIT LOCAL / Annual Report 2008 MANAGEMENT REPORT Terms and compensation paid to members of management bodies 2
• Chairman of the Board of Directors of BAC Participations (through • Permanent representative of Dexia Credit Local, Director of Dexia CLF July 2008) Banque
• Director of CDC Entreprises Portefeuille (from March through • Director of Dexia Epargne Pension (through November 2008) July 2008) • Permanent representative of Dexia Credit Local, member of SOFCA-GIE • Permanent representative of Compagnie des Alpes, Director of (through November 2008) Compagnie du Mont-Blanc (CMB) (since November 2008) • General partner of SCI Bayoli • Chairman of Compagnie des Alpes – Domaines Skiables (since October 2008)
• Director of Eiffage (since June 2008) Members of the Board of Directors
• Director of Grévin et Compagnie (since October 2008) Fédération Nationale des Travaux Publics represented by Patrick Bernasconi* REPORT MANAGEMENT
53 years old Chief Executive Officer Chairman of Fédération Nationale des Travaux Publics Pascal Poupelle 3, rue de Berri – 75008 Paris (since November 13, 2008) • Chairman of Fédération Nationale des Travaux Publics 54 years old • Chairman of Bernasconi T P Member of the Management Board of Dexia SA • Chairman of Science et Industrie Dexia SA – Place Rogier 11 – B-1210 Brussels – Belgium • Chairman of the Board of Directors and Chief Executive Officer of • Vice Chairman of Dexia Crediop (since December 2008) L’Immobilière des Travaux Publics • Chairman of the Board of Directors of Dexia Sabadell (since • Director of SMAVIE BTP December 2008) • Permanent representative of Fédération Nationale des Travaux Publics, • Director of Financial Security Assurance Holdings Ltd (since member of the Supervisory Board of BTP Banque December 2008) • Permanent representative of Fédération Nationale des Travaux Publics, • Permanent representative of Dexia Credit Local, member of SOFCA-GIE Vice Chairman of SMA BTP (since November 2008) • Co-legal manager of SCI Bernasconi Frères • Director of Crédit Agricole Asset Management group (CAAM group) (through September 2008) • General partner of Casa Déco
• Non-voting board member of Arianespace (through September 2008) Fédération Française du Bâtiment represented by Christian Baffy* (through June 13, 2008) • Director of Crédit Agricole Leasing (through September 2008) 58 years old • Director of LCL Monétaire Medium (through December 2008) Chairman of the Board of Directors of SMA BTP • Director of LCL Obligations Court Terme Euro (through December 114, rue Émile Zola – 75015 Paris 2008) • Chairman of Fédération Française du Bâtiment (through June 2008) • Chairman of the Board of Directors of LCL Obligations Euro • Chairman of the Board of Directors of SMA BTP (since September 2008) Gérard Bayol (Chief Executive Officer through November 13, 2008 and Director • Vice Chairman of the Supervisory Board of Banque du Bâtiment et des through February 3, 2009) Travaux Publics (through June 2008)
55 years old • Permanent representative of Fédération Française du Bâtiment, Director and Vice Chairman of SMA BTP (through June 2008) Dexia Credit Local - Tour Dexia La Défense 2 - 1, Passerelle des Reflets - 92913 La Défense • Permanent representative of SMA BTP, Member of the Supervisory Board of Banque du Bâtiment et des Travaux Publics (since • Permanent representative of Dexia Credit Local, member of the September 2008) Supervisory Board of Dexia Municipal Agency • Permanent representative of Fédération Française du Bâtiment, Director • Director of Dexia Crediop and Vice Chairman of SMAVIE BTP (through June 2008) • Chairman of the Board of Directors of Dexia Sofaxis • Director of SMAVIE BTP * Independent member
Annual Report 2008 / DEXIA CREDIT LOCAL 51 MANAGEMENT REPORT 2 Terms and compensation paid to members of management bodies
• Vice Chairman of the Supervisory Board of SAGENA (since October • Director of SGAM BTP 2008) • Chairman of SE LICOMI (since September 2008) • Permanent representative of Fédération Française du Bâtiment, • Member of the Supervisory Board of Faiveley SA (since September Non-voting board member of ECOFI Investissements (through 2008) June 2008) • Legal manager of PPS 70 (since February 2008) • Permanent representative of Fédération Française du Bâtiment, Director of Union des Caisses de France du Réseau Congés Intempéries du BTP • Permanent representative of SMA BTP, Chairman of Château des Deux (through June 2008) Rives (since September 2008)
• Permanent representative of Fédération Française du Bâtiment, Director • Chairman of Investimo (since September 2008) of Groupement des Entreprises de Travaux Publics et de Bâtiment pour • Chairman of Cap Foncier 21 SAS (from September to December la Défense (through June 2008) 2008) • Chairman of the Board of Directors of Immobilière 3F (since September 2008) Fédération Française du Bâtiment represented by • Permanent representative of SMA BTP, Director of L’Auxiliaire (since Didier Ridoret* (since June 13, 2008) September 2008) 57 years old • Permanent representative of SMA BTP, Director of CAM BTP (since September 2008) Chairman of Fédération Française du Bâtiment 33, avenue Kléber – 75016 Paris • Permanent representative of SMA BTP, Director of SAGE VIE (since September 2008) • Chairman of Fédération Française du Bâtiment (since June 2008)
• Permanent representative of SMA BTP, Legal manager of SFP (since • Deputy Chief Operating Officer of the Ridoret Group September 2008) • Co-legal manager of Elibois SARL • Permanent representative of SMA BTP, Legal manager of SC 53/55 rue • Chief Executive Officer of Financière Ridoret SAS Desnouettes (since September 2008) • Co-legal manager of France Menuisiers SARL • Permanent representative of SMA BTP, Legal manager of SC Saint Jacques du Haut Pas (since September 2008) • Co-legal manager of Menuiseries Niortaises SARL
• Permanent representative of SMA BTP, Legal manager of SC Le Fontane • Chief Executive Officer of Ridoret Menuiserie SA (since September 2008) • Co-legal manager of Roche Alu SARL • Permanent representative of SMA BTP, Legal manager of SC Michelet • Co-legal manager of Roche France SARL Luce (since September 2008) • Co-legal manager of Roche PVC SARL • Permanent representative of SMA BTP, Legal manager of SAGIMMO (since September 2008) • Chief Executive Officer of SAG SAS
• Chairman and Chief Executive Officer of Baffy SA • Co-legal manager of Pont de la Reine SCI
• Legal manager of Baffy Invest SARL • Legal manager of La Source SCI
• Legal manager of B J Immobilier SARL • Vice Chairman of the Supervisory Board of BTP Banque SA (since September 2008) • Legal manager and then liquidator of BD (through April 2008) • Permanent representative of Fédération Française du Bâtiment, Director • Legal manager and then liquidator of L’Orle d’Or (through May 2008) and member of the Steering Committee of Union des Caisses de France • Legal manager of PIC Transactions (through June 2008) du Réseau Congés Intempérie du BTP (since June 2008)
• Co-legal manager of Espace Cracovie SCI • Permanent representative of Fédération Française du Bâtiment, non-voting board member of ECOFI Investissements SA (since • Legal manager of La Ferme de Champlon September 2008) • Non-voting board member of Ecofi Euro Crédit • Permanent representative of Fédération Française du Bâtiment, Vice • Non-voting board member of BTP Obligations Chairman of SMA BTP (since June 2008)
• Non-voting board member of BTP Associations • Permanent representative of Fédération Française du Bâtiment, Vice Chairman of SMAVIE BTP (since June 2008) • Non-voting board member of BTP Rendement
* Independent member
52 DEXIA CREDIT LOCAL / Annual Report 2008 MANAGEMENT REPORT Terms and compensation paid to members of management bodies 2
Christophe Béchu* Jean-Pol Henry* (Director through January 22, 2009) 65 years old 34 years old Honorary Vice Chairman of the House of Representatives President of the General Council of Maine-et-Loire 118, rue de la Madeleine – 6041 Gosselies – Belgium Hôtel du Department – Place Michel Debré – 49000 Angers
• Permanent representative of the Maine-et-Loire department, Chairman Pierre Mariani of the Board of Directors and Chief Executive Officer of Société (Director since October 22, 2008) d’Equipement du Maine-et-Loire (SODEMEL) 52 years old • Permanent representative of the Maine-et-Loire department, Chairman of the Board of Directors and Chief Executive Officer of Terra Botanica Chairman of the Management Board of Dexia SA
(formerly SEM T.B. 49) Dexia SA – Place Rogier 11 – B-1210 Brussels – Belgium REPORT MANAGEMENT
• Partner of LIU SCI (since April 2008) • Chief Executive Officer of Dexia SA (since October 2008)
• Director of Dexia Bank Belgium (since October 2008)
Jean-Pierre Brunel* • Director of Dexia BIL (since November 2008)
65 years old • Director of Banc West Corp (USA) (through October 2008)
226, rue Georges Besse – 30000 Nîmes • Director of Bank of the West (USA) (through October 2008)
• Director of Services Conseil Expertises Territoires • Director of TEB Mali (Turkey) (through October 2008)
• Chairman of the Board of Directors of Le Nouveau Logis - Centre • Director of UkrSibbank (Ukraine) (through October 2008) Limousin SA d’HLM • Director of BNL (Italy) (through October 2008)
• Director of BMCI (Maroc) (through October 2008) Philippe Duron* • Director of Cetelem (through October 2008) 61 years old • Director of Cardif (through October 2008) Member of Parliament for Calvados – Mayor of Caen • Director of BICI (Senegal) (through October 2008) Abbaye aux Dames – Place Reine Mathilde – 14035 Caen cedex
Axel Miller Jacques Guerber (Director through October 7, 2008) (Director through December 29, 2008) 43 years old 59 years old 150, avenue Blücher – 1180 Uccle – Belgium Dexia SA – Place Rogier 11 – B-1210 Brussels – Belgium • Chief Executive Officer and Chairman of the Management Board of • Vice-Chairman of the Manangement Board of Dexia SA (through Dexia SA (through October 2008) November 2008) • Director of Dexia Bank Belgium (through October 2008) • Director of Dexia SA (through October 2008) • Director of Dexia BIL (through October 2008) • Director of Dexia Bank Belgium (through December 2008) • Director of Crédit du Nord (through October 2008) • Director of Dexia BIL (through December 2008) • Vice Chairman of the Board of Directors of Financial Security Assurance • Director of Crédit du Nord Holdings Ltd (through October 2008) • Director of Financial Security Assurance Holdings Ltd (through • Director of Carmeuse Holding SA December 2008) • Member of the Management Board of Fédération des Entreprises de • Chairman of the Supervisory Board of Dexia Municipal Agency (through Belgique (through October 2008) December 2008)
• Chairman of the Board of Directors of Dexia Participation Luxembourg
* Independent member
Annual Report 2008 / DEXIA CREDIT LOCAL 53 MANAGEMENT REPORT 2 Terms and compensation paid to members of management bodies
Alain Quinet Francine Swiggers (Director from October 22, 2008 to February 4, 2009) 56 years old 47 years old Chairman of the Management Board of the ARCO Group Member of the Management Board of Caisse des Dépôts 6, avenue Livingstone – 1000 Brussels – Belgium 56, rue de Lille – 75007 • Director of Dexia SA • Director of Dexia SA (since October 2008) • Director and Chairman of the Management Board of Arcofin CVBA • Director of Accor (since August 2008) • Director and Chairman of the Management Board of Arcopar CVBA • Chairman and Chief Executive Officer of CDC Entreprises Capital • Chairman of the Board of Directors and Chairman of the Management Investissement (since July 2008) Board of Arcoplus CVBA • Chairman of the Board of Directors of CDC Infrastructure (since • Chairman of the Board of Directors and Chairman of the Management July 2008) Board of Auxipar NV • Permanent representative of Caisse des Dépôts, Director of CDC • Chairman of the Board of Directors of Interfinance CVBA International SA (since May 2008) • Chairman of the Board of Directors and Chairman of the Management • Director of CNP Assurances (since September 2008) Board of Arcosyn BV • Member of the Supervisory Board of Compagnie des Alpes (since • Director of Sofato October 2008) • Chairman of the Board of Directors of Procura • Permanent representative of Caisse des Dépôts, member of the Supervisory Board of Compagnie Nationale du Rhône (since • Director of Aquafin NV November 2008) • Director of VDK – Caisse d’Epargne • Director of Eiffage (since June 2008) • Director of De Warande (since April 2008) • Chairman and Chief Executive Officer of Financière Transdev (since • Director of Hogeschool Universiteit Brussel (since January 2008) September 2008)
• Permanent representative of the Caisse des Dépôts, Director of Fonds Stratégique d’Investissement (since December 2008) René Thissen*
• Director of the Société Forestière de la Caisse des Dépôts (since 62 years old November 2008) Member of Parliament – Member of the Municipal Council of Waimes • Director of Icade SA (since July 2008) 23, rue de Bouhémont – 4950 Waimes – Belgium
• Permanent representative of Financière Transdev, Director of Société • Director of Centre Hospitalier Chrétien Européenne pour le Développement des Transports Publics (Transdev) • Chairman of Contrat de Rivière Amblève (since September 2008) • Director of Unio Bruxelles ASBL
• Chairman of the Board of Directors of Société Wallonne des Eaux François Rebsamen* (Director through October 23, 2008) • Chairman of the Board of Directors of SAGIMA SA 57 years old
Senator – Mayor of Dijon – 19, rue Amiral Courbet – 21000 Dijon Representatives of the employee council
Jean-Claude Trochain Antoine Rufenacht* Valérie Hudé 69 years old
Mayor of Le Havre – Place de l’Hôtel de Ville – 76600 Le Havre
• Legal manager of Société Financière Interocéanique
• Director of Etablissement Public Foncier de Normandie
• Chairman of the Board of Directors of Armor (through November 2008)
• Legal manager of the Société civile SFEC, (since October 2008)
* Independent member
54 DEXIA CREDIT LOCAL / Annual Report 2008 MANAGEMENT REPORT Terms and compensation paid to members of management bodies 2
( 2. COMPENSATION AND REGULATED AGREEMENTS
2.1 COMPENSATION AND BENEFITS PAID IN 2008 The variable compensation paid to the Chief Executive Officer of Dexia SA comprises two portions: The compensation of members of the Management Board of Dexia SA – including that of Pascal Poupelle, the Chief Executive Officer of Dexia • the first, G roup portion is based on the same formula related to the Credit Local – is set by the Board of Directors of Dexia SA based on results of Dexia SA described previously; the proposals of the Compensation Committee. The compensation of • the second, individual portion is based on the achievement of individual members of the Management Board of Dexia SA is subject to periodic objectives established on the basis of Dexia’s in-house leadership model. review by the Compensation Committee with the assistance of a The Compensation Committee is responsible for identifying all of the specialized, independent consultant. Chief Executive Officer’s personal objectives and evaluating the degree REPORT MANAGEMENT The Chief Executive Officer’s compensation is established by the Board of to which they were achieved. Directors of Dexia Credit Local, after discussion with the Compensation A coefficient between 0% and 100% (with a 50% target rate) is applied Committee of Dexia SA. to each of these portions. An upper limit on variable compensation is The compensation of the members of the Management Board of Dexia established for each member of the Management Board of Dexia SA, SA comprises both a fixed and a variable component. resulting in each portion representing a percentage of fixed compensation. The members of the Management Board and Executive Committee of Fixed compensation is based on the types and importance of the duties Dexia SA and those of the primary entities within the Dexia Group have performed by each (and taking account of market benchmarks for suggested that they not receive any variable compensation in respect of similarly-scaled functions). 2008. This proposal was accepted by the Compensation Committee and by the January 29, 2009 meeting of the Board of Directors of Dexia SA. The variable compensation paid to the members of the Management Board of Dexia SA, with the exception of the Chief Executive Officer of Starting in 2009, Dexia will comply with the criteria provided for in Decree Dexia SA, comprises three portions: 2009-348, adopted in France on March 30, 2009, as well as with all rules concerning good corporate governance applicable in France and • the first, Group portion is based on a formula related to the results in Belgium. of Dexia SA, and is applied identically to all employees concerned within the Dexia group. The formula is based on four indicators: gross operating income, excluding non-recurring items; net income excluding non-recurring items; total net income; and the group’s relative PER 2.2 DIRECTORS’ FEES (compared to the average PER of the DJ EuroStoxx Banks index). For the first three indicators, Dexia’s performance is compared to the The directors’ fees paid to the directors of Dexia Credit Local were set by budget; the Shareholders’ Meeting of May 16, 2006 at EUR 300,000.
• a second, business portion is specific to each member of the At its February 20, 2009 meeting, the Board of Directors decided to reduce Management Board on the basis of his individual responsibilities. by 25% the directors’ fees allocated to each director in respect of 2008. This portion is determined using a performance management system A total of EUR 132,429 was paid in respect of 2008. Detailed information whereby a management contract was established for each member regarding these allocations is provided below in Table 3. of the Management Board (with the exception of the Chief Executive Any directors’ fees, or portions thereof, paid to a member of the Officer). This management contract establishes a series of duties Management Board by a Dexia Group company or an unrelated company and objectives to attain in 2008. Quarterly or half-yearly meetings, in which that person exercises a directorship on behalf of Dexia would be depending on the case, are planned between the Chief Executive deducted from that person’s fixed or variable compensation. Officer and the persons concerned to evaluate the extent to which these objectives have been attained. In most cases, the attainment of these objectives is measured in comparison with performance indicators included in the management contract; 2.3 SUMMARY TABLES
• the third, individual portion is based on the achievement of individual The following tables are recommended by the AFEP-MEDEF corporate objectives established for each member of the Management Board on governance code. They include information pertaining to the directors the basis of Dexia’s in-house leadership model. The Chief Executive and officers of Dexia Credit Local, along with details of the compensation Officer is responsible for identifying all personal objectives and paid to them by Dexia G roup entities. evaluating the degree to which they were achieved.
The same principles are applied to the Chief Executive Officer’s variable compensation, although the second portion of his variable compensation is based almost entirely on the extent to which Dexia Credit Local’s own goals a re met.
Annual Report 2008 / DEXIA CREDIT LOCAL 55 MANAGEMENT REPORT 2 Terms and compensation paid to members of management bodies
Table 1 - Summary of compensation and options and shares granted
2007 2008
Compensation paid Valuation of Total Compensation paid Valuation of Total in respect options granted in respect options granted of the year during the year of the year during the year (detailed in Table 2) (detailed in Table 4)
Gérard Bayol 852,750 182,500 1,035,250 437,083 44,840 481,923
Jean-Luc Dehaene - - - 38,000 (1) 0 38,000
Jacques Guerber 1,247,570 255,500 1,503,07 0 640,000 75,331 715,331
Pierre Mariani - - - 230,610 (1) 0 230 610
Axel Miller 1,890,840 547,500 2,438,340 1,486,210 (2) 344,000 1,830,210
Pascal Poupelle - - - 62,500 (3) 0 62,500
Pierre Richard 400,000 0 400,000 300,000 (2) 0 300,000
(1) As from October 7, 2008. (2) Through October 8, 2008. (3) As from November 13, 2008.
Table 2 - Summary of compensation paid
Gérard Bayol Amounts paid Amounts in respect of 2008 in respect of 2007 Due Paid
• Fixed compensation 450,000 - 437,083
• Variable compensation 402,750 0 0
• Extraordinary compensation 0-0
• Directors’ fees 0-0
• Other benefits (a’) (b) - (a’) (b)
TOTAL 852,750 0 437,083
Jean-Luc Dehaene Amounts paid Amounts in respect of 2008 in respect of 2007 Due Paid
• Fixed compensation - - 10,000 (1)
• Variable compensation -00
• Extraordinary compensation --0
• Directors’ fees - - 28,000 (2)
• Other benefits --0
TOTAL - 0 38,000
(1) As from October 7, 2008. (2) Paid by Dexia SA.
56 DEXIA CREDIT LOCAL / Annual Report 2008 MANAGEMENT REPORT Terms and compensation paid to members of management bodies 2
Jacques Guerber Amounts Amounts in respect of 2008 in respect of 2007 Due Paid
• Fixed compensation 640,000 - 640,000
• Variable compensation 607,570 0 0
• Extraordinary compensation 0-0
• Directors’ fees 0-0
• Other benefits (a’) (b) (c) - (a’) (b) (c)
TOTAL 1,247,57 0 0 640,000 MANAGEMENT REPORT MANAGEMENT
Pierre Mariani Amounts Amounts in respect of 2008 in respect of 2007 Due Paid
• Fixed compensation - - 229 170 (1)
• Variable compensation -00
• Extraordinary compensation --0
• Directors’ fees --0 1,440 (d) • Other benefits --(a) (b) (c)
TOTAL - 0 230,610
(1) As from October 7, 2008.
Axel Miller Amounts Amounts in respect of 2008 in respect of 2007 Due Paid
• Fixed compensation 825,000 - 636,500 (1)
• Variable compensation 1,039,500 0 0
• Extraordinary compensation 0 - 825,000 (2)
• Directors’ fees 0-0 26,340 (e) 24,710 (e) • Other benefits (a) (b) (c) - (a) (b) (c)
TOTAL 1,890,840 0 1,486,210
(1) Through October 8, 2008. (2) Termination benefit corresponding to one year of fixed salary.
Pascal Poupelle Amounts Amounts in respect of 2008 in respect of 2007 Due Paid
• Fixed compensation - - 62,500 (1)
• Variable compensation -00
• Extraordinary compensation --0
• Directors’ fees --0
• Other benefits --(b) (c)
TOTAL - 0 62,500
(1) As from November 13, 2008.
Annual Report 2008 / DEXIA CREDIT LOCAL 57 MANAGEMENT REPORT 2 Terms and compensation paid to members of management bodies
Pierre Richard Amounts paid Amounts in respect of 2008 in respect of 2007 Due Paid
• Fixed compensation 400,000 - 300,000 (1)
• Variable compensation 000
• Extraordinary compensation 0-0
• Directors’ fees 0-0
• Other benefits 0-0
TOTAL 400,000 0 300,000
(1) Through October 8, 2008. (a) Amount paid by Dexia for the supplemental pension plans: - In 2007: Axel Miller (EUR 137,800) - In 2008: Pierre Mariani (EUR 32,800); Axel Miller (EUR 192,200) (a’) Total amount paid in respect of the discretionary supplemental pension: - In 2007, EUR 861,920 - In 2008, EUR 1,029,915 These contributions are not considered to be vested benefits. (b) A company car is made available for professional and personal use. The corresponding costs are not included in the amounts listed in this section. (c) Death, disability and health insurance: - Collective annual premiums of EUR 157,993 were paid in 2007 for supplemental death, permanent disability and health coverage for the Belgian members of the Dexia SA Management Board, and EUR 36,526.60 for mandatory and supplemental death, disability and health coverage for the French members of the Dexia SA Management Board. - Collective annual premiums of EUR 262,352 were paid in 2008 for supplemental death, permanent disability and health coverage for the Belgian members of the Dexia SA Management Board, and EUR 37,285.44 for mandatory and supplemental death, permanent disability and health coverage for the French members of the Dexia SA Management Board. (d) Fixed annual compensation for entertainment expenses. (e) Fixed annual compensation for entertainment expenses and rental of a personal car.
Table 3 - Summary of directors’ fees paid by Dexia Credit Local
Board Member Directors’ fees paid Directors’ fees paid in respect of 2007 in respect of 2008 Gérard Bayol 00 Christophe Béchu - 12,857 Jean-Pierre Brunel 20,000 21,000 (1) Jean-Luc Dehaene -0 Philippe Duron 20,000 10,714 FFB (Christian Baffy) 26,000 (1) 8,786 (1) FFB (Didier Ridoret) - 6,429 FNTP (Patrick Bernasconi) 20,000 19,500 (1) Jacques Guerber 00 Jean-Pol Henry 15,000 (2) 8,036 (2) Dominique Marcel 20,000 6,429 Pierre Mariani -0 Axel Miller 00 Pascal Poupelle -0 Alain Quinet -0 François Rebsamen 20,000 2,143 Pierre Richard 00 Antoine Rufenacht 20,000 0 (3) Francine Swiggers 19,500 (4) (5) 14,143 (4) (5) René Thissen 15,000 (2) 11,250 (2) TOTAL 195,500 121,287
(1) Including amount paid due to their participation in the Audit Committee. (2) Net of withholding tax. (3) Due to his request not to receive any director’s fee in respect of 2008. (4) Including amount paid due to their participation in the Audit Committee and net of withholding tax. (5) Dexia SA paid directors’ fees to Francine Swiggers in respect of her duties at Dexia SA equal to EUR 7,000 in respect of 2007 and EUR 64,000 in respect of 2008.
58 DEXIA CREDIT LOCAL / Annual Report 2008 MANAGEMENT REPORT Terms and compensation paid to members of management bodies 2
Table 4 – Stock warrants or options granted during the year to directors and officers of the Company
Ever year since it was unified, the Dexia group has set up a stock option plan in favor of certain Dexia group employees. The options issued under the plan are subscription rights that each provide the holder with the right, during a limited exercise period, to acquire one new Dexia share at an exercise price equal to the value of the Dexia share on the date the options are granted.
The members of the Management Board of Dexia SA and Gérard Bayol were all granted Dexia options under the 2008 Plan.
Options granted to directors Plan date Type of options Valuation of options Number Exercise price** Exercise period and officers of the Company by method used of options for the consolidated granted financial statements during the year January 1, 2012 Gérard Bayol June 30, 2008 Subscription options 44,840 50,000* 12.65 to June 29, 2018
January 1, 2012 REPORT MANAGEMENT Jacques Guerber June 30, 2008 Subscription options 75,331 84,000* 12.65 to June 29, 2018
Pierre Mariani - - 0 0 - - January 1, 2012 Axel Miller June 30, 2008 Subscription options 344,000 200,000* 10.09 to June 29, 2018
Pascal Poupelle - - 0 0 - -
* In 2008, performance options were introduced in addition to the so-called traditional options (number of performance options was equal to 20% of the number of traditional options). The performance options will become fully vested on June 30, 2011 if – and only if – (i) the average total shareholder return (“TSR”) of Dexia is equal to or greater than the average TSR of the Euro Stoxx Banks Index during the period from June 30, 2008 to June 30, 2011 and (ii) the beneficiary is still an active employee at that date. TSR corresponds to the return obtained by a shareholder who acquired the share at the beginning of a period (for market value = MVt) and sold it at the end of the period (for market value = MVt’), and who received dividends (D) between times. TSR measures the performance over the period considered and is one of the market metrics used for creation of value. ** In Belgium, the exercise price is equal either to the closing price of the Dexia share on the Euronext Brussels exchange on the trading day preceding the offer, or to the average closing prices of the Dexia share on the Euronext Brussels Eurolist during the 30 trading days preceding the offer. In France, the exercise price can be no lower than 95% of the average opening prices of the Dexia share on the Euronext Brussels Eurolist during the 20 trading days preceding the offer.
Insofar as no stock warrant or option was exercised during 2008 and that no performance shares have been issued in favor of the directors and officers of Dexia, Tables 5, 6 and 7 in the appendices to the AFEP-MEDEF code of December 2008 have not been included here.
2.4 REGULATED AGREEMENTS • Pierre Mariani is entitled to participate in the new discretionary supplemental pension plan for those members of the Management Dexia Credit Local has never entered into any special agreement that would Board of Dexia SA with Belgian employment contracts. When he benefit a member of its senior management. However, certain members retires he shall be entitled to receive all of the capital generated by the of the Management Board of Dexia SA and Gérard Bayol participate in a investment of the annual contributions. The latter are calculated as a discretionary supplemental pension plan set in place by Dexia. fixed percentage of his capped annual fixed compensation. Several pension plans are applicable to the directors of Dexia Credit Local:
• Jacques Guerber and Gérard Bayol are entitled, so long as certain 2.5 SPECIAL AGREEMENTS conditions are met, to receive pension annuities of an amount equal • In the event Dexia should terminate its employment agreement with to 75% of the gross fixed compensation they each received during Pierre Mariani, the latter shall be entitled to receive a one-time lump the two years preceding their retirement, less any amounts they may sum severance payment based on the AFEP-MEDEF rules in effect. receive in respect of the pension légale d’origine privée legal pension. A supplemental survivors’ annuity is also provided for their beneficiaries • In the event Dexia should terminate its employment agreement with in the event that they should die prior to retirement. Pascal Poupelle, the latter shall be entitled to receive a severance payment based on the arrangements in force within the Company. • The plan to which Axel Miller was affiliated provided for a benefit equal to an annual pension annuity, should he live to retirement, of an amount equal to 80% of his capped fixed compensation. When he left the Company, the pension rights were definitively determined in accordance with all applicable pension regulations and legal provisions;
Annual Report 2008 / DEXIA CREDIT LOCAL 59 MANAGEMENT REPORT 2 Significant events and outlook
Significant events and outlook
( 1. SIGNIFICANT EVENTS
1.1 FINANCIAL CRISIS – DEXIA STRATEGIC Disposal of FSA TRANSFORMATION PLAN In line with its new strategic orientations, in November 2008 Dexia signed The financial crisis that began in the United States during the summer of a sale and purchase agreement with Assured Guaranty Ltd (Assured 2007 spread during 2008 to markets around the world. It intensified in Guaranty) for the sale of all of FSA Holdings (FSAH) other than its financial September 2008 following the bankruptcy of Lehman Brothers, the U.S. products business. investment bank. Debt markets shut down completely, obliging monetary This transaction enabled Dexia to withdraw from an insurance business and other governmental authorities to take extraordinary measures. that was no longer one of its core businesses and which created a Dexia was deeply affected by the financial crisis and the scarcity of liquidity significant exposure to the U.S. market. in the markets in 2008, due to its great dependency on financial markets The transaction resulted in (i) total consideration of USD 722 million, (ii) and the vulnerability created by its too rapid international expansion. paid half in cash and half in equity (which proportions may be changed With government assistance (EUR 6.4 billion in new capital and guarantees to up to 75% in cash and 25% in equity, at the discretion of the buyer, on Dexia’s funding), the new management team undertook the group’s prior to finalization of the sale) and (iii) Dexia holding a 24.7% equity turnaround by launching, in the fourth quarter of 2008, a transformation stake in Assured Guaranty. plan whose major strategic foci are: FSA’s USD 16.5 billion financial products portfolio, which is managed by • reducing of the group’s risk profile by significantly cutting back trading FSA Asset Management (FSAM), was excluded from the scope of the sale operations and by allowing the bond portfolios to run off; of FSAH and placed in runoff, under Dexia’s supervision.
• refocusing Dexia back on its franchises with its traditional public sector, As part of the transaction, the Belgian and French central governments retail and commercial banking customers, in the primary markets and have agreed to provide guarantees for any final losses over USD 4.5 b illion in well-targeted geographical regions; in the businesses retained by Dexia, in compensation for which those countries’ governments would receive Dexia common stock or preference • implementing a 15% cost reduction program; shares.
• reorganizing the management team, while simplifying the group’s Under the terms of the U.S. Hart-Scott-Rodino antitrust law of 1976 organizational structure and improving corporate governance. (HSR), Assured Guaranty’s intended acquisition of FSAH was subject to a mandatory waiting period. As that period expired on January 20, 2009, the sale process is continuing, and is expected to be concluded in the 1.2 IMPLEMENTATION OF THE DEXIA CREDIT LOCAL spring of 2009. STRATEGIC TRANSFORMATION PLAN Withdrawal from Kommunalkredit Austria
Changes of managers At the end of 2008, Dexia announced that, via its Dexia Credit Local The managerial changes within Dexia Credit Local were notably the subsidiary, it was (i) withdrawing from Kommunalkredit Austria, which under replacement of Pierre Richard by Jean-Luc Dehaene as Chairman of the the impact of the financial crisis had appealed to the Austrian government Board of Directors, and the replacement of Gérard Bayol by Pascal Poupelle for support, and (ii) acquiring full control of Dexia Kommunalkredit as Chief Executive Officer. Pascal Poupelle is also the member of the Dexia Bank. Under the recapitalization plan for Kommunalkredit Austria, Dexia SA Management Board responsible for the Public & Wholesale Banking Credit Local sold its 49% stake in Kommunalkredit Austria and acquired business line. Kommunalkredit Austria’s 49% stake in Dexia Kommunalkredit Bank, making the latter a wholly-owned subsidiary of Dexia Credit Local. The membership of the Management Board of Dexia Credit Local was expanded to include the representatives of the international Public & Wholesale Banking network, Project Finance and Innovation and Financial Engineering businesses.
60 DEXIA CREDIT LOCAL / Annual Report 2008 MANAGEMENT REPORT Significant events and outlook 2
Reorganization of certain businesses and of 1.3 MODIFICATION OF THE CAPITAL STOCK geographical focus At December 31, 2008, Dexia Credit Local had capital stock of Dexia’s Board of Directors decided to improve control over the group’s EUR 500,513,102. The Combined Shareholders’ Meeting of December 22, trading activities (Treasury & Financial Markets, or TFM) by streamlining 2008 approved the increase and subsequent reduction of the Bank’s their organization. There are now two financial markets platforms, one capital, which previously amounted to EUR 1,327,004,846, in order to in Brussels for trading and centralized cash management, and the other absorb the losses forecast at that time for the 2008 financial year. in Dublin for managing the “runoff portfolios.” Accordingly, the Dexia Credit Local financial markets platform in Paris is modifying its focus to concentrate on funding and front office support. 1.4 IMPLEMENTATION OF THE MARKETS IN Following an analysis of its geographical positioning, the group has FINANCIAL INSTRUMENTS DIRECTIVE (MIFID) decided to focus back on those markets where the group already has an established sales presence, access to local long-term funding and potential The Compliance department carefully monitored the implementation REPORT MANAGEMENT for profitable growth. Although Dexia’s established presence has been of MiFID, notably in order to ensure that all procedures and codes were confirmed in France, Belgium, Luxembourg, Italy and the Iberian Peninsula, applied correctly, as they had been updated to take account of all the this new orientation will impact the operations of several Dexia Credit regulatory changes. Local locations, either in part or in full. Similarly, the Internal Audit department initiated two investigations in Dexia Credit Local’s operations in Australia, Eastern Europe (with the 2008 specifically targeting MiFID, the first regarding the classification of exception of Dexia banka Slovensko), Mexico, India and Scandinavia will Customer Investment Profiles and the second regarding Best Execution. be halted, sold or backed with partners. These assignments extended into 2009.
The group will retain its operations in Japan, Germany and Switzerland for the access to sources of funding they provide, especially German mortgage bonds, but all new front office activity will be halted. 1.5 USE OF THE ADVANCED INTERNAL RATINGS- BASED APPROACH (BASEL II REFORMS) Dexia Credit Local will make significant cutbacks to its operations in the United Kingdom and North America. At the end of 2007, the Management Board of the Belgian Banking, Finance and Insurance Commission (CBFA) authorized Dexia to use the Among the strategic projects that will be undertaken to improve Dexia advanced internal ratings-based approach for the calculation and reporting Credit Local’s business model are modifications to the organization of of credit risk-based capital adequacy requirements as from January 1, the front offices (Network France, marketing, project finance operations, 2008. This authorization was subject to various terms and conditions, etc.) the correct implementation of which was verified by the Internal Audit department throughout 2008. Cost reduction and rightsizing of labor
As part of the effort to reduce the group’s cost base, several decisions will begin to impact many of the group’s entities in 2009. 1.6 QUALITY ACTION PLAN On the recommendation of the members of the Management Boards In 2008, the ISO 9001 certification of all of Dexia Credit Local’s front office, and the Executive Committees of Dexia SA and of the group’s largest financial and administrative activities in France was renewed. entities, the Dexia Board of Directors has decided not to pay any variable compensation to these members in respect of 2008. These principles were, of course, applied to the members of the Management Board of Dexia Credit Local.
On the recommendation of its directors, the Dexia Board of Directors also decided to reduce their own compensation for 2009.
At its February 20, 2009 meeting, the Board of Directors of Dexia Credit Local voted to reduce the fee s each director receives by 25% for the 2008 financial year.
The human resources right-sizing plan calls for an overall reduction of 900 positions throughout the Dexia group in 2009: Dexia Credit Local will account for 259 of those positions.
Annual Report 2008 / DEXIA CREDIT LOCAL 61 MANAGEMENT REPORT 2 Significant events and outlook
( 2. OUTLOOK
Today, in France as elsewhere, local and regional (sub-national) authorities In 2007, the combination of the moderate growth in non-capital spending play a vital role alongside central governments in managing public policies and a sharp increase in revenues during that same year (3.8% in volume) and delivering public services to their inhabitants, both directly and resulted in the first surplus the sub-national public sector has recorded indirectly. In many countries, the local and regional strata of government since 2002: EUR 4.8 billion, or 0.04% of GDP. Sub-national public debt are increasingly being entrusted with responsibilities, leading to financial (EUR 1,205 billion, or 9.8% of GDP and 16.6% of total public debt) was transfers and a new distribution of budgets between the public sector down 1.8% in volume in 2007, reversing the trend observed during the players. period 2002-2007 (2.2% average annual increase). On a standalone basis, the debt of the local public sector (excluding the Federal states) was down In Europe, due to the continuing decentralization process and transfers of 1.4% to EUR 691 billion (5.1% of GDP and 9.5% of total public debt). responsibilities, local and regional authorities continue to expand their clout These decreases result notably from the budget reduction efforts made in the economy. Accordingly, the reform of the role of the Autonomous by sub-national authorities, which are increasingly assigned responsibility Communities that began in Spain in 2006 continued in 2008, as did the for and governance over public funds, notably through the use of internal reform of the federal system in Germany and the decentralization of stability pacts. France. Other countries have initiated profound territorial reforms, such as Denmark, which in 2007 established a new institutional organization Sub-national authorities are therefore well positioned to take on the whereby the number of municipalities was reduced by two-thirds and the financial and economic crisis that began during the summer of 2007 13 counties were replaced by 5 regions; Finland, with its Law of 2007 and intensified in September 2008. The financial crisis may have several on the restructuring of local authorities and public services; and Latvia, types of impacts on these local authorities, such as increased interest which will divide the number of municipalities by a factor of close to five expense on variable-rate loans (occasionally for only a short period), by the end of 2009 . Several of the new EU Member States have initiated risks on assets invested in non-guaranteed securities, the deterioration decentralization programs aimed at increasing local responsibilities of funding conditions, etc. The economic crisis is expected to have an and adapting financing methods (creating new grants, introducing adverse impact on the revenues received by local authorities, especially as equalization mechanisms, reforming the national and local tax systems, concerns the tax receipts at the mercy of volatile economic earnings, while deregulating borrowing, etc.), most notably Bulgaria, Slovakia, Romania increasing certain types of expenses, such as those related to the strain on and Slovenia. Several European countries are now exploring opportunities social services placed by lower household earnings and unemployment. to create regional governments to improve the administration of major Local and regional authorities do, however, have certain means at their programs, such as infrastructure and healthcare, with the most advanced disposal to combat this crisis, or at least to reduce its impact to the greatest discussions taking place in Slovenia, Portugal, Greece, Hungary, Romania, extent possible. As leaders in public investment, they will be major players Lithuania and Latvia. in the stimulus plans set in place by several European countries, which will focus primarily on improvements to infrastructure. Sub-national public sector expenditure (i.e. by local and regional governments, federated entities and related public sector agencies) grew Under economic conditions plagued by uncertainties about the financial by 2.0% in volume in 2007, to over EUR 1,900 billion, representing 15.5% markets and the scarcity of liquidity, Dexia Credit Local is fortunate to of total GDP and 33.9% of total public spending. This increase was slightly have been provided with a three-year sovereign guarantee from Belgium, lower than the 2.4% average annual volume growth in sub-national public Luxembourg and France for its bond issues. It will put its expertise to work sector expenditure recorded between 2002 and 2007. This dip did not as the whole Dexia group implements a transformation plan. Dexia Credit affect capital expenditure, which maintained its strong growth in 2007 Local’s goal will be to meet the many needs of the local public service (+4.5% in volume) on the momentum from 2006, notably in the 12 new sector with an expanded offer of products and services while recapturing Member States (+11.0% in volume in 2007) where the European structural its traditional profitability. and cohesion funds continued to leverage local expenditure. With close to EUR 210 billion in 2007, the sub-national public sector accounted for two-thirds of total public capital expenditure in Europe.
62 DEXIA CREDIT LOCAL / Annual Report 2008 Corporate governance 3 and internal control
Report of the Chairman of the 4. Preparation and processing of accounting Board of Directors, prepared in and fi nancial information ...... 71 accordance with Article L. 225-37 5. Internal controls: main risks and specifi c GOVERNANCE CORPORATE AND INTERNAL CONTROL measures ...... 74 of the French Commercial Code 64 6. Assessment of internal controls ...... 79 1. Preparation and organization of the duties of the Board of Directors ...... 64
2. Corporate internal control objectives ...... 65 Statutory Auditors’ Report 80 3. Main participants in the internal control process (organization, roles and resources) ...... 66
Annual Report 2008 / DEXIA CREDIT LOCAL 63 CORPORATE GOVERNANCE AND INTERNAL CONTROL 3 Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 of the French Commercial Code
Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 of the French Commercial Code
This report describes the principles and procedures in effect during 2008. The present report, established by the Chairman of the Board of Directors of Dexia Credit Local, was prepared by the General Secretariat in cooperation For the preparation of the present report, as a credit institution, Dexia with the Internal Audit department, which gathered the appropriate Credit Local refers to French Banking Regulations Committee (CRB) information from all of the operating and support departments concerned, Standard 97-02, as modified by the decrees of March 31, 2005, June 17, and notably the Risk Management and Permanent Control department. 2005, February 20, 2007, July 2, 2007, September 11, 2008 and January 14, 2009, which defines the aims, principles and procedures of This report also takes account of the meetings of the Chairman of the internal controls, and to the reference framework published by the French Board of Directors and the Chairman of the Management Board, as well Financial Markets Authority (AMF). as the summaries of the Audit Committee’s meetings.
( 1. PREPARATION AND ORGANIZATION OF THE DUTIES OF THE BOARD OF DIRECTORS
Dexia Credit Local applies best practices with regard to corporate No non-voting members have been appointed. governance. These practices govern the functioning of the Board of The members of the Board of Directors are required to comply with Directors and its specialized committees. a charter defining their responsibilities; this charter was drawn up in accordance with the principles embodied in Dexia Credit Local’s code of ethics. 1.1 BOARD OF DIRECTORS This charter, one of several documents available for viewing in the Company’s registered office, reminds members in particular how important The Board of Directors is responsible for establishing the operational it is that they participate actively in the Board’s work. The charter also guidelines of Dexia Credit Local and ensuring that they are implemented. It reminds members of the Board of Directors that they fill sensitive roles, and acts out of concern for the Company, including its shareholders, customers therefore are subject to the strictest requirements regarding trading in the and employees. There are no potential conflicts of interest between the shares of Dexia. All transactions must be signaled in advance to the Chief duties of the members of the Board of Directors with respect to Dexia Compliance Officer of Dexia Credit Local, and receive his prior approval. Credit Local and their personal interests or other duties. The Board of Directors meets at least once every quarter. In 2008, it met As of February 2009, the Board of Directors is composed of 13 members, seven times, with a 77% attendance rate. who are elected by the Shareholders’ Meeting in light of their individual expertise and the contribution that they may make to the administration of The Chairman of the Board of Directors and the Chief Executive Officer the Company. The Board’s makeup was modified in November 2008 with provide the members of the Board of Directors with all information - the nomination of Jean-Luc Dehaene to replace Pierre Richard, who has strategic information in particular - that they require to correctly perform resigned from his functions. The post of Chief Executive Officer, dissociated their duties. from that of Chairman, was awarded to Pascal Poupelle in place of Gérard Prior to each meeting, the members of the Board of Directors are provided Bayol. As Chief Executive Officer, Pascal Poupelle has been granted the with an agenda and all reports and documents relating to items appearing broadest powers to act under all circumstances in the name of Dexia Credit on the agenda. Local, which he represents in its dealings with third parties. All statutory appointments made to the Board of Directors are done in As of February 2009, the Board is composed of four members representing compliance with the prevailing legislation and the terms of the Company’s the Company’s virtually exclusive shareholder, Dexia; two French and two by-laws. At each Board meeting, the Chief Executive Officer presents the Belgian local elected officials; and five other directors, three of whom are activity and the accounts for the preceding period. The Board also reviews independent members. The criterion used to ascertain independence is the work of the Audit Committee, internal controls and risk monitoring based on the recommendations contained in the AFEP- MEDEF corporate on an ongoing basis. governance code .
64 DEXIA CREDIT LOCAL / Annual Report 2008 CORPORATE GOVERNANCE AND INTERNAL CONTROL Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 3 of the French Commercial Code
In 2008, the financial crises that affected the Group (1) prompted the Board The Audit Committee includes three members of the Board of Directors (2). of Directors to pay special attention to FSA ; changes in the Austrian The Audit Committee meets at least twice yearly; the Committee met (Dexia Kommunalkredit Bank and Kommunalkredit Austria) and Slovakian six times in 2008. In addition to the three traditional meetings held (Dexia banka Slovensko) entities; the conditions required for application last year spent almost entirely on the examination of the company and of the second pillar of Basel II; and the organizational changes made to consolidated annual and six-month financial statements and the various the Group. business reviews for Risk Management, permanent control and periodic control, three extraordinary sessions were devoted to the assessment of In addition, the Board of Directors was systematically informed of all FSA’s situation, the quarterly financial statements and the liquidity position. reports and follow-up letters issued by the regulatory authorities, as well as Given the importance of the Audit Committee in verifying and monitoring the responses issued by the senior management of Dexia Credit Local. the preparation of the financial statements, its assignments and resources All information regarding compensation and benefits paid to directors and are discussed in detail in the following part of the present report. officers of the Company are presented in the “Terms and compensation The Compensation Committee of the Board of Directors of Dexia SA of the directors and officers” section of the management report. is consulted about policies regarding the compensation and benefits provided to the members of the Dexia Credit Local Management Board, as well as about the employee stock ownership policy. 1.2 SPECIALIZED COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors may create specialized committees, comprising between two and five members of the Board of Directors, including a Chairman. Committee meetings may be held in the absence of the
Chairman of the Board of Directors. The Chairman of each specialized GOVERNANCE CORPORATE AND INTERNAL CONTROL committee presents a report on its actions to the Board of Directors.
( 2. CORPORATE INTERNAL CONTROL OBJECTIVES
2.1 ROLE OF INTERNAL CONTROL More specifically, the roles assigned to the internal control function in place within Dexia Credit Local are designed to: Like all credit institutions, the Dexia Credit Local Group is subject to the oversight of the French Banking Commission. The objectives and • Verify that the Risk Management process in place is sound and organization of the internal control function at Dexia Credit Local are effective. defined by the Monetary and Financial Code and French Banking and The internal control function is designed to provide the Management Financial Regulatory Committee (CRB) Standard 97-02 as modified Board with a guarantee that the risks assumed by the Group are (compliance with which is verified regularly by the Internal Audit compatible with the policy established by the Board of Directors and department), and by the laws and regulations of the countries in which the Management Board. Dexia Credit Local conducts business. • Ensure that the accounting and financial information produced is The internal control procedures provided for by CRB Standard 97-02 accurate and relevant. as modified state that several control systems should be established to ensure: The main objective of the financial information is to present a true and fair view of the financial situation of Dexia Credit Local in a consistent, • the compliance of transactions and internal procedures; exhaustive and transparent fashion. The internal control process is • accurate and reliable accounting and financial information; centered on attaining this objective.
• security of information processing; Dexia Credit Local has established a body of procedures and controls as part of the organization of the internal control system designed to improve • systems for measuring and monitoring risks and results. the Bank’s compliance with all regulations and capital adequacy policies, while ensuring that available resources are productively managed.
It should be mentioned that this system, like any control system, cannot be considered an absolute guarantee of the proper achievement of the Company’s objectives.
(1) For both the Dexia Group and the Dexia Credit Local Group, the word “Group” as used in the present report includes the entire entity, meaning the parent company and all consolidated companies. (2) Patrick Bernasconi, Chairman ; Jean-Pierre Brunel, Francine Swiggers. The Board of Directors of February 4, 2009 appointed Jean-Pierre Brunel Chairman of the Audit Committee, replacing Patrick Bernasconi, who remains a member of the Audit Committee.
Annual Report 2008 / DEXIA CREDIT LOCAL 65 CORPORATE GOVERNANCE AND INTERNAL CONTROL 3 Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 of the French Commercial Code
2.2 GENERAL STRUCTURE OF THE INTERNAL These reference documents can be divided into four major categories: CONTROL FUNCTION • charters have been drafted for each business line or activity, detailing The Dexia Credit Local internal control system is based on a segregation of the objectives and reference policies that the Group has established duties adapted to the specific characteristics of each entity. It distinguishes and creating a conceptual framework for the organization and running between: of the area concerned. Two examples are the Internal Audit and Compliance charters that have been set in place by the Dexia Group;
Permanent control, excluding compliance • codes provide a set of rules of conduct, or best practices to be observed by all employees in each activity, regardless of their direct and functional This control function is responsible for verifying that the Risk Management reporting lines. With respect to this, in 2002 the Group adopted a system set in place is sound and effective, and guarantees the quality of code of ethics which was then distributed to all employees at the Head all accounting and financial information. Office and in the subsidiaries and branches and was updated in 2008 to The organization of the permanent control function (excluding compliance) take account of the provisions of the Markets in Financial Instruments is discussed in detail in Section 3.6 below; Directive (MiFID) and its transposition into French regulations;
• rules of conduct – also called directives – are the first-level operating Compliance control impact of these charters and codes. They spell out the practical This control function ensures that regulations and procedures implications of the quality standards that have been set, define limits are continuously applied and that no risk is run of administrative, and organize the system whereby authority is delegated. In this manner, disciplinary, financial or reputational sanction due to their absence or the rules of conduct established by Dexia Group Risk Management non-application. specify how all credit limits are to be determined throughout the Dexia Credit Local Group; The organization of the compliance function is discussed in detail in Section 3.7 below. • procedures define – in compliance with all relevant charters, codes and directives – the organization, tasks and monitoring necessary for Periodic control, or internal audit the performance of a given activity. Each employee must have access within his or her department or area to a procedure manual covering This control function, carried out by the Internal Audit department of his or her function. Similarly, service contracts allow two departments Dexia Credit Local, in close cooperation with the internal audit function or two Dexia Group entities with a customer-supplier relationship to of the Dexia Group, is responsible for monitoring the performance and formalize this by establishing the level of service expected. the effective application of controls, in the parent company and all its Moreover, the definition of processes performed as part of quality subsidiaries and branches. certification, even though focusing primarily on customer satisfaction, The organization of the internal audit function is discussed in detail in has led the Company to develop a comprehensive control plan for its Section 3.8 below; activity.
Internal reference documents
To ensure that everyone participating in the internal control system has access to the same relevant information and instructions, the Dexia Credit Local Group has compiled a standard reference system of instructions.
( 3. MAIN PARTICIPANTS IN THE INTERNAL CONTROL PROCESS (ORGANIZATION, ROLES AND RESOURCES)
3.1 CHIEF EXECUTIVE OFFICER AND MANAGEMENT To assist him in this assignment, the Chief Executive Officer relies on BOARD the Management Board, whose members are continuously involved in the internal control system through their operational functions, their The Chief Executive Officer is the Chairman of the Management Board participation in various supervisory committees and the audit and other and has ultimate responsibility for guaranteeing that the Bank’s internal reports with which they are systematically provided. controls function properly. He defines and coordinates the internal control policies of the Dexia Credit Local Group. He also allocates resources and The head of Periodic Control, the Chief Compliance Officer and the Chief establishes deadlines for implementation of the actions that have been Risk Officer all report directly to the Chief Executive Officer. decided upon with respect to these policies. He verifies that the objectives In November 2008, a new organization of Dexia SA was set in place: that have been set are attained, and that the internal control system the new Chief Executive Officer of Dexia Credit Local is a member of meets all requirements. Lastly, he modifies these requirements whenever the Management Board of Dexia SA and is responsible for the Public & warranted by internal and external changes. Wholesale Banking business. He is responsible for the oversight of all of
66 DEXIA CREDIT LOCAL / Annual Report 2008 CORPORATE GOVERNANCE AND INTERNAL CONTROL Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 3 of the French Commercial Code
Dexia Credit Local’s domestic and international subsidiaries and branches. The organization of these committees was modified following the The Group’s new organization is designed to improve coordination reorganization of the Dexia Group in January 2006 to include committees between Dexia SA and Dexia Credit Local, as well as the authority of the at Group level and committees specific to the entity. The definition of the Chief Executive Officer over all the entities that report to Dexia Credit role of each committee, its scope of responsibility and its composition were Local, which contributes to greater control over the entire scope of Dexia approved by the Group Management Board. In each of the Group risk Credit Local and to an optimized internal control function. committees, Dexia Credit Local is represented by its Chief Executive Officer and the Chief Risk Officer or a member of the Risk Management and Permanent Control department. All decisions are reached by consensus, but Dexia Credit Local’s representative on these bodies does retain veto 3.2 OPERATIONS STAFF power for his entity if he believes that the risk profile or measure proposed As provided by the policies of the Dexia Group, the heads and employees is not suited to the specific characteristics of his entity. of areas involved in operations are responsible for the application and The responsibilities and composition of the Dexia Credit Local committees smooth running of internal control procedures within their areas of activity. were redefined based on the organization and the committees created They are responsible namely for analyzing the risk on each transaction at Group level. All decisions are reached by consensus. In the event of they initiate, and for verifying that such transactions are in compliance a persistent disagreement, the Chairman of the committee, himself a with the internal control procedures in their departments. In the event member of the Management Board, makes the final decision. that a change in the internal or external conditions under which they work should affect internal control, they must propose or implement – The deepening financial crises led to the implementation of more stringent depending upon their level of responsibility – any changes required in risk monitoring conditions, by reducing or even eliminating certain order to maintain Risk Management at the desired level. delegations of authority (especially for capital markets transactions); by freezing or lowering certain limits, including those on counterparty
credit and market risks; and by developing improved analyses for general GOVERNANCE CORPORATE AND INTERNAL CONTROL industry credit risk. 3.3 RISK MANAGEMENT AND PERMANENT CONTROL DEPARTMENT These committees intervene in several aspects of internal control: • at the Dexia Group level by the The Management Board has entrusted the Risk Management and Total risk is defined and managed Risk Policy Committee (RPC); Permanent Control department with a dual responsibility: monitoring and management of risk – in compliance with the guidelines established by the • Credit risk is managed by several different committees, including Management Board – and oversight of the Bank’s permanent controls. notably:
The Chief Risk Officer is a member of the Dexia Credit Local Management − Credit Committees (weekly) approve those public finance, corporate Board and is a member of the committee placed under the authority of and project finance, and financial markets credit proposals over which the Chief Risk Officer of the Dexia Group, which includes all of the Chief they have responsibility, as determined by the types of counterparties, Risk Officers within the entities and the functional EVPs at the Dexia the degree of complexity, and the exposure limits involved; Group level. The Chief Risk Officer has no reporting relationship with the other units, and carries out his assignments free of any intervention by − the Loan Monitoring Committees (Watchlist Committee, quarterly) the operating functions. examine sensitive loans;
The Risk Management and Permanent Control department is responsible − the Dexia Group and Dexia Credit Local Default Committees (quarterly) for all of the risks generated by the banking activity, as defined by are responsible for ranking the potential severity of delinquencies in CRB Standard 97-02 as modified, namely credit, market, liquidity and accordance with the Dexia Group’s classification system for non- operational risks. As stated above, the Risk Management and Permanent performing loans and identifying the measures to be taken to limit Control department is responsible for the permanent control function any losses; within the Bank. − the Reserves Committee (quarterly) decides on the appropriate reserves The Department adheres strictly to the provisions laid down by the to be allocated to non-performing loans under collection; Dexia Group concerning risk measurement methods, exposure limits, − the Validation Advisory Committee, which is the Dexia Group committee and reporting procedures, all of which are defined by Group Risk that approves all models for credit, market, ALM, operational and Management. economic capital risks.
In order to consolidate risk monitoring in the Dexia Credit Local Group, • Market risk: the Risk Management structures in place in each branch and subsidiary all report directly (branches) or functionally (subsidiaries) to the Chief − the Dexia and Dexia Credit Local ALM Committees (ALCO, monthly) Risk Officer. make decisions in accordance with their individual authorities and limits, and establish strategies for interest rate, currency and liquidity risks for all Group entities and for Dexia Credit Local and its subsidiaries and branches for whom this activity is significant; 3.4 COMMITTEES − the Market Risk and Guidelines Committee (MRGC, monthly) monitors A number of committees form an integral part of the Dexia Credit Local compliance with the market risk limits set by the Dexia Group or Dexia internal control mechanism. Credit Local, analyzes operations and defines operational guidelines.
Annual Report 2008 / DEXIA CREDIT LOCAL 67 CORPORATE GOVERNANCE AND INTERNAL CONTROL 3 Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 of the French Commercial Code
The role of these committees is explained in greater detail in the sections correspondents for each subsidiary and branch. These correspondents are on market risk and ALM. responsible for day-to-day monitoring in their entities, and for coordination with the appropriate departments at Head Office. • Diversification: Since November 2008, the Chief Executive Officer of Dexia Credit Local has − the New Products Committee (monthly) verifies prior to the launch of responsibility for the Public & Wholesale Banking business and oversight any new activities or products that the corresponding risks have been of the international entities (see Section 3.1). The EVP-International which correctly analyzed, measured and managed, and that adequate Risk is designed along the same geographic lines, is henceforth a member of Management systems have been put in place. Each subsidiary has its the Management Board of Dexia Credit Local. own New Products Committee (with the exception of FSA, for which all new products are reviewed by the Management Board); The Risk Management and permanent control, compliance and internal audit functions are all overseen directly by the appropriate departments − the Commercial Risk Evaluation Committee (quarterly) follows sales of the Head Office of Dexia Credit Local. activity and analyzes commercial risks in connection with sales of structured loans and operations. It guides sales planning of these Under this setup, the manager of each of these functions in a subsidiary or operations on this basis. branch reports either functionally (subsidiaries) or directly (branches) to the manager of the same department at Head Office. The latter participates • Major IT, regulatory and organizational projects: in the recruitment, career development, evaluation, compensation and − project steering committees monitor the progress of projects, provide target setting of his counterpart in each subsidiary and branch. the corresponding resource planning, make all final decisions and For all entities, monitoring is based on a system of delegation of authority organize reporting to the Management Board of the Dexia Credit and regular reviews provided to the appropriate departments at Head Local Group; Office and the Management Board of the Dexia Credit Local Group, and − the IT Security Committee, whose main assignments are described the participation of the members of the Management Board in the various below in the section on IT Security. administrative and decision-making bodies within each subsidiary.
The tasks performed by most of these bodies are reviewed every quarter by the Management Board. 3.6 PERMANENT CONTROL EXCLUDING COMPLIANCE
3.5 MONITORING OF SUBSIDIARIES AND BRANCHES The Chief Risk Officer, a member of the Management Board, has oversight over all permanent controls other than compliance. The Dexia Credit Local Group employs several tools to monitor and verify the operations of its subsidiaries and branches, depending upon the degree Oversight of the permanent control function is based on the use of of their autonomy from the parent company. French subsidiaries that have decentralized risk measurement and monitoring teams within the Head been created to house a specific activity (special-purpose entities, or filiales Office departments or the subsidiaries and branches, and on the use of outils) depend on the services provided by Head Office departments, permanent control monitoring committees to perform monitoring on a and are included within the scope of the latter’s internal control system. consolidated basis. Hence, monitoring is quite well integrated. The leasing companies and The organization of the permanent control function is based on three Dexia Municipal Agency are examples of these SPEs. levels of control: Other French subsidiaries, such as Dexia Sofaxis and Dexia CLF Banque, • first-level controls are performed by the operating departments. Each have a far more extensive scope of activity and operate using their own employee and his line manager perform these controls directly on staff for all permanent control assignments. These subsidiaries have, all transactions processed by that employee, in compliance with the consequently, established their own internal control systems within their procedures in effect; organizations. These systems are modeled on the best practices developed at the Head Office, while taking into account the special characteristics • second-level controls are performed by specialized personnel within of these subsidiaries’ own activities. each operating department, who submit their reports and observations to the Risk Management and Permanent Control department; Foreign subsidiaries and branches each have their own staffs and engage in a range of activities as appropriate to their local markets. They are granted • third-level controls are performed within the Risk Management and varying degrees of autonomy according to their size, and rely to a greater Permanent Control department by the unit responsible for oversight or lesser extent on the services provided by the Head Office departments. of these controls. In order to guarantee all possible synergies between Like the French subsidiaries, foreign subsidiaries and branches have set these various levels of control, the unit is housed within the Operational up internal control systems that are adapted to their size, their activities Risk Management, IT Security and Permanent Control department. and the specificities of the local market. The third-level controls are based on a control plan whose results are Until mid-November 2008, the monitoring of international entities was reported to the Management Board of Dexia Credit Local every quarter. coordinated by the Executive Vice President of Dexia SA responsible for These controls cover the primary processes involved in the Bank’s Public Finance & Credit Enhancement (now called Public & Wholesale operations, and were selected in collaboration with the operational Banking), with the help of the Dexia Group’s International Headquarters. departments. They incorporate both the business process mappings This department is organized into geographical regions and includes
68 DEXIA CREDIT LOCAL / Annual Report 2008 CORPORATE GOVERNANCE AND INTERNAL CONTROL Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 3 of the French Commercial Code
prepared in line with the ISO 9001 Quality project and the risk mapping Each Dexia Credit Local Group entity has a Compliance Officer. Their role and controls implemented for operational risk management purposes. is to ensure that the Group’s general integrity policy and the compliance charter are respected in each of the entities, to update the rules in response The subsidiaries and branches have taken into account all laws and to changes in the local activities or environment (legal or business) and to regulations in the countries in which they operate and their own inform managers and employees about the importance of measures against organization and size when setting up their permanent control systems. money laundering, the financing of terrorism and market manipulation. These controls are performed on behalf and under the control of the Risk They report to the Chief Compliance Officer of Dexia Credit Local on either Management and Permanent Control department, which has functional a functional (subsidiaries) or a direct (branches) basis. When new locations authority to ensure that they are performed in a consistent and independent are created they are assigned a compliance manager. The latter receives manner and prepares the consolidated reports. The Department may support from the Head Office, which provides him with all of the standard request justified explanations of any malfunctions observed. documents to prepare the basic rules to be applied locally.
In 2008, in accordance with Dexia Group policy, the Compliance action plan was successfully completed. The Compliance department performs 3.7 COMPLIANCE a regulatory watch by continuously updating all of the applicable laws and regulations. A comprehensive guide to compliance procedures The Dexia Credit Local Group participates in highly regulated sectors, and was prepared and is kept up to date. A control plan was organized and must at all times be in a position to verify that it remains in compliance implemented. The mapping of compliance risks was updated. with all laws, regulations and securities exchange rules. In addition to the aforementioned constraints, the Group has also developed its own internal Accordingly, in line with the new definition of the scope of intervention rules. The rules of good conduct have been put together in two sets of of the compliance function that includes the protection of personal documents: a general integrity policy and a compliance charter. A copy information, the Compliance department has taken responsibility for of the code of ethics recapping these rules is provided to all employees. A updating the disclosures of processes carried out with the French Data GOVERNANCE CORPORATE AND INTERNAL CONTROL specific front office code of good conduct was drawn up and is distributed Protection Agency (CNIL). to all concerned employees. In May 2008 the code was updated, notably to take account of the modifications introduced by the implementation of the provisions of MiFID. 3.8 PERIODIC CONTROL As part of its fight against money laundering, the Dexia Group complies Periodic control includes both the internal audit and bank inspection with all French rules as well as the local rules in each of its international functions. locations. In addition to these basic conditions, the Group has also implemented even stricter standardized criteria in terms of the acceptability Internal audit is responsible for promoting internal controls within the and reputations of its customers. The Group strives to secure relationships Group and providing ongoing verification of the efficiency and correct only with counterparties whose identities are clearly established and application of the internal control systems in place. who meet its own criteria in terms of integrity and responsibility. The In order to do so, internal audit notably assesses through its assignments general position paper regarding the prevention of money laundering and whether the risks assumed by the Dexia Credit Local Group in the the fight against the financing of terrorism was updated in May 2008, performance of its various activities and in all the entities which it comprises and is available to all employees. “USA Patriot Act” certification for all are identified and hedged sufficiently. It also verifies that the guidelines appropriate Group entities is available on the Dexia website. and directives of the Chief Executive Officer are applied. A new round of mandatory training sessions was begun for all Dexia A Group-wide internal audit charter lays out the fundamental principles Credit Local employees in the fourth quarter of 2008, and will continue governing the internal audit function within the Dexia Group, by describing during the first half of 2009. its aims, role, responsibilities and operating procedures. Compliance is organized as a single function, from the holding company The Internal Audit department of Dexia Credit Local evaluates the of the Dexia Group all the way down to the foreign subsidiaries of functioning of the internal control system for all entities that make up Dexia Credit Local. Compliance is an independent function that, since Dexia Credit Local, including the Head Office, the French sales network, the reorganization in October 2008, reports to the Secretary General and all subsidiaries, branches, and representative offices in France and of Dexia. abroad. At Dexia Credit Local, the responsibility for the compliance function was The Internal Audit department is held accountable for the performance of modified to take account notably of the organization set in place at the its assignment by the Board of Directors and the Chief Executive Officer Dexia Group level. Since January 2009, the Chief Compliance Officer of Dexia Credit Local. reports directly to the Secretary General . He also serves as the French Ministry of Finance’s anti-money laundering (Tracfin) correspondent, Internal Audit reports to the Chief Auditor, who in turn reports directly to as part of the Bank’s obligations in the fight against money laundering the Chief Executive Officer of Dexia Credit Local and functionally to the and the financing of terrorism. One of the CCO’s employees, who is Group Chief Auditor, as provided for by the internal audit charter. The formally accredited by the French Financial Markets Authority (AMF), acts Chief Auditor has direct access to the Chairman of the Board of Directors. as Investment Services Control Manager for both Dexia Credit Local and In addition, the Bank Inspection function is assigned to him. Dexia CLF Banque, both of which provide investment services.
Annual Report 2008 / DEXIA CREDIT LOCAL 69 CORPORATE GOVERNANCE AND INTERNAL CONTROL 3 Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 of the French Commercial Code
In accordance with local regulations, the managers of the Internal Audit the internal control mechanism. Each action plan is approved by the departments of the subsidiaries report to either the Chairman of the local Management Board of the entity concerned and is monitored regularly Management Board, the Board of Directors or the Supervisory Board (or to ensure it is correctly implemented. the Audit Committee), and report functionally to the Chief Auditor of The results of the audits and the action plans are included in the annual Dexia Credit Local. management report provided for by CRB Standard 97-02 as modified and The Internal Audit departments of the New York and Tokyo branches in the half-yearly report presented to the Dexia Credit Local Management report directly to the Chief Auditor of Dexia Credit Local. Board and to the Audit Committee (which reports to the Board of Directors). A copy of the annual report on internal controls is sent to the The role of bank inspection is to carry out tests of compliance with fraud Banking Commission. prevention procedures and to verify that the rules of compliance and the Company’s by-laws are being followed. The operations of the Internal Audit function are governed by the new organization set in place in 2007, which better reflects the organization Every year, the Dexia Credit Local Bank Inspection unit prepares an action of the Dexia Group and is characterized by the consolidation of the audit plan including some 20 investigations and controls, involving the providing function. A single audit plan is established for the entire Group, and is of investment services and employee ethics, and specific functions such overseen by the five heads of the “Segments,” which are the lines of as controls of trading rooms in the Head Office and the subsidiaries and business and combined horizontal support functions. branches. This organization has not modified the responsibilities of the Dexia Credit It also conducts investigations at the request of the Chief Executive Officer Local Internal Audit department. The existing auditors all continue to and the Chief Auditor. In 2008, the Bank Inspection unit successfully report directly to the Chief Auditor of Dexia Credit Local, who remains performed a total of 22 assignments, identifying the causes of and the primary contact for the Management Board of Dexia Credit Local, responsibilities for several small internal incidents of fraud and establishing its Audit Committee and its banking regulators. The Chief Auditor corrective and preventive measures. continues to ensure that all risks generated by the activities of Dexia Dexia banka Slovensko, the Slovak subsidiary, which is developing Credit Local, its subsidiaries and its branches are properly hedged. The generalist banking activities, has both central and regional audit units, Chief Auditor participates in the oversight of the audit function within which are namely responsible for supervision of the regional branches the Dexia Group. and agencies. The internal audit function is based on two structures: the Internal In all, 47 auditors and inspectors worked in the internal audit and bank Audit Management Committee (IAMC) and the Internal Audit Executive inspection areas in 2008 (four additional posts were provided for but Committee (IAEC). remained unfilled). The Internal Audit Management Committee is composed of the Chief A standardized audit methodology developed in cooperation with Auditor of Dexia SA, who serves as Chairman, and the Chief Auditors of Dexia Group covers analysis of the risk universe and the planning and Dexia Bank Belgium , Dexia Credit Local, and Dexia Banque Internationale performance of audits, and is used by all Group entities. à Luxembourg. The IAMC defines the Dexia Group’s internal audit procedures, approves the Group’s comprehensive audit plan, identifies The frequency with which activities are audited (every one, two, three, four the resources to be used, defines the segments, and appoints the segment or five years at Dexia Credit Local, and at least once every three years in the heads. United States and for certain subsidiaries) is determined by an analysis of the degree of risk that each presents. All operating processes are audited The Internal Audit Executive Committee is composed of the Chief at least once every three years, while the remaining, less risky processes Auditor of Dexia SA, who serves as Chairman; the Chief Auditors of are audited less frequently. The annual audit plan is established based Dexia Bank Belgium , Dexia Credit Local, and Dexia Banque Internationale upon these frequencies and submitted to the Management Boards of the à Luxembourg; the heads of the various segments; and the head of the entities concerned, and subsequently to their Audit Committees and/or Audit, Process, Management & Organization unit. The IAEC defines the their Board of Directors or Supervisory Board for approval. audit universe and updates it regularly; validates the risk mapping prepared by each of the segment heads; prepares the Group’s comprehensive audit In 2008, the initial audit plan was rearranged, notably to ensure the plan for approval; sees that all audit assignments are optimally planned; appropriateness of its internal control systems or capital markets activities. suggests changes needed to the function’s resources, procedures and Thus, starting in the first quarter, a major review was conducted of the tools; defines the training policy for the audit staff; analyzes the results supervision of the Dexia Group’s front offices. At the end of the year, of performance monitoring of the internal audit function; and validates as requested by the senior management of the Dexia Group, an audit all reports prepared for internal and external use. of the Group’s market risks was performed in 44 Dexia Group entities by an independent audit firm, in coordination with the Dexia Internal An Audit, Process, Management & Organization unit exists at the Dexia SA Audit department. Similarly, at the request of the Dexia and Dexia Credit level, with correspondents within each of Dexia Bank Belgium, Dexia Credit Local Management Boards, additional audits were carried out in those Local and Dexia Banque Internationale à Luxembourg. It is responsible subsidiaries that had already experienced malfunctions in their capital for regulatory watch issues; audit procedures and tools; monitoring of markets activities, in Germany and in Slovakia. recommendations; reports prepared for internal and external use; contacts with the operational Risk Management and compliance functions; and Each audit gives rise to an adversarial review and a list of recommendations, coordination of the auditors’ schedules for carrying out the audit plan. which are incorporated into action plans. These are intended to correct any weaknesses discovered during the audits, in order to strengthen
70 DEXIA CREDIT LOCAL / Annual Report 2008 CORPORATE GOVERNANCE AND INTERNAL CONTROL Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 3 of the French Commercial Code
3.9 DEXIA GROUP The departments most specifically concerned by internal control are the following: Dexia’s senior management group is the Group Management Board. • the Group Internal Audit department, which reports directly to the Chief The Group Management Board is responsible for oversight of the Dexia Executive Officer and Chairman of the Management Board, establishes Group and its various business lines. all procedures used within the Group, coordinates and helps perform audits of horizontal functions in all concerned entities, audits all Group As part of the Group’s transformation plan, the Management Board functions, and audits the audit functions within the different entities. of Dexia SA was renewed by the meeting of the Board of Directors on November 13, 2008 in order to reduce the size of the Group’s senior The new organization set in place in 2007 as described in Section 3.8 management team and to simplify the decision-making processes. The has encouraged a greater degree of consolidation of the various Management Board, which is chaired by the Chief Executive Officer, was components of the internal audit function within the Group; reduced from ten to five members. The members of the Management Board are responsible for the business lines and the primary horizontal • the Group Risk Management department prepares the decisions to be functions for the entire Group: Public & Wholesale Banking and Retail & taken in the Group in terms of risk strategy and appetite for exposure, Commercial Banking. The finance and risk functions are also represented and identifies the internal resources needed to manage this risk. The on the Dexia SA Management Board. The members of the Dexia SA roles of the Group Risk Management department and the committees Management Board have functional authority over their correspondents organized at the Dexia Group level were described in Sections 3.3 on the Dexia Credit Local Management Board. and 3.4;
The Group Management Board may meet in its expanded form, known as • the Chief Compliance Officer, who reports directly to the Chief the Group Executive Committee. The Executive Committee is responsible Executive Officer and Chairman of the Management Board, heads up for the operational management of the Group, and accordingly also has the network of Compliance Officers within the various entities and oversight over the Group’s other control and support functions. ensures compliance with the integrity policy and the propagation of GOVERNANCE CORPORATE AND INTERNAL CONTROL an ethical culture (see Section 3.7). In addition to the five members of the Management Board, the Group Executive Committee also includes the heads of Treasury & Financial Markets; Operations & IT; Strategy, M&A and Transversal Projects; Human Resources; and Tax, Legal & Compliance.
( 4. PREPARATION AND PROCESSING OF ACCOUNTING AND FINANCIAL INFORMATION
4.1 FINANCIAL STATEMENTS subsidiaries that do not have their own accounting department. It is also responsible for the preparation of the consolidated financial statements The principal goal of the financial statements is to present a true and fair of the Dexia Credit Local Group. One unit specializes in monitoring view of a company’s net worth, financial position and earnings. compliance with regulatory standards and rules of prudence.
CRB Standard 97-02 as modified concerning internal control stipulates The Accounting Functions department also monitors and verifies the in its section on accounting that the organization put in place must accounting data produced by French and foreign subsidiaries and guarantee the existence of a set of procedures referred to as the “audit branches, as part of the consolidation process. In particular, it verifies that trail.” This audit trail must allow all accounting information provided to be the information provided is consistent and complies with Group rules. tied back to an original supporting document, and vice versa. This is the basic policy on which the Dexia Credit Local Group bases the organization Generally speaking, the Accounting Functions department has various of its accounting function. means at its disposal to obtain the information it requires to fulfill its assignment of monitoring the accounting function in the broadest sense of the term. It is represented on all committees that may relate to its a. Duties and organization of the Accounting Functions department assignment, or is at least provided with a copy of the meeting minutes. Accounting staff frequently make site visits to foreign subsidiaries and The Accounting Functions department of Dexia Credit Local plays a central branches. The department participates in changes to IT systems in order role. It reports directly to the CFO of the Company, who is a member of to ensure that its specific needs are taken into account. the Management Board. In addition to the units in charge of the accounting IT system and standards, The Accounting Functions department is responsible for preparation of the accounting standards, control and development unit within the the financial statements of Dexia Credit Local, as well as those of any Accounting Functions department includes an independent accounting
Annual Report 2008 / DEXIA CREDIT LOCAL 71 CORPORATE GOVERNANCE AND INTERNAL CONTROL 3 Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 of the French Commercial Code
verification team and a quality assurance team. The accounting system has data provided by the management systems, the Accounting Functions been adapted to raise the level of quality and efficiency of its processes and department will establish the tables for the notes which form an integral to make the consolidated accounting information it produces more reliable part of the financial statements. The Accounting Functions department on a continuing basis, especially in the context of the uniform application then performs crosschecks between the summary reports and the notes of International Financial Reporting Standards (IFRS) throughout the Dexia to the financial statements. Throughout the entire process, reviews and Credit Local Group. The independent verification team was set in place in tests of reasonableness and of compliance with the established procedures 2005 and participates in the permanent control system. It strives to verify are conducted in accordance with the reporting delegations that have the materiality and the relevance of the controls performed during the been established. quarterly account closings for the consolidation scope within the Head The same work is performed in each of the entities that make up the Dexia Office of Dexia Credit Local, and regularly carries out assignments in the Credit Local Group, although the degrees of complexity may vary with the international entities, with a frequency suited to the size and financial size of these entities and the activities in which they engage. risks of the entity involved, notably to ensure that all accounting methods are properly applied. PREPARATION OF THE CONSOLIDATED FINANCIAL STATEMENTS
PREPARATION OF THE FINANCIAL STATEMENTS The financial statements of the international entities that are prepared under local standards are restated to ensure consistency with the In order to prepare the financial statements, data is largely automatically accounting policies of the Dexia Credit Local Group (IFRS as adopted in the posted to Dexia Credit Local’s accounting system by the upstream European Union). These policies are compiled into a consolidation manual management systems used to manage customer transactions, financial that is provided to each Dexia Credit Local Group entity. Operational market counterparties and general operating expenses. When a instructions are also provided to the entities at each closing date by the transaction is recorded in any of these management systems, automated Head Office financial accounting consolidation unit. These instructions charts of accounts automatically generate accounting entries. These set out improvements to be made to the process in light of remarks entries feed into the financial statements using a single accounting system evinced during preceding periods, and provide details of any changes incorporating dual standards (French GAAP and EU IFRS). (systems, new data to be provided, etc.) to be taken into consideration The exhaustiveness and accuracy of the source entries are guaranteed during the period. by the internal control systems of the financial control departments. Should an entity experience any difficulty interpreting these policies, it The team in charge of enforcing standards and policies validates the can request help from the consolidation unit which, in collaboration with automated charts of accounts under both sets of accounting standards, the accounting standards unit, will provide an appropriate reply. Members as well as the processing of complex or unusual transactions. The latter of these teams make periodic trips to the entities in France and abroad in are occasionally entered manually, but they are then covered by specific order to undertake a regular review and to identify any changes in internal internal control procedures. or external conditions which may have an accounting impact. First-level controls are performed by accounting teams specializing by line of Using their financial statements that have been restated to Group norms, business, notably through the analysis of bank reconciliations and technical each of the entities of the Dexia Credit Local Group fills in a consolidation suspense accounts. Each month, all transactions recorded in the general package which is incorporated automatically into the consolidation system. ledger system are reconciled with those in the management systems, and Checks are performed on the information that is collected every quarter tests of symmetry are performed on micro hedging transactions. In order as well as on data relating to intercompany transactions, the financial to verify the comparability of interest expense and income from one period statements, and the notes to the financial statements. to another, these items are measured against average outstandings to calculate more easily comparable average rates. Finally, these departments These checks are aimed at ensuring the comparability of the information also draft reports summarizing the work performed and identifying any provided and its compliance with Group rules, and gaining a better points requiring special attention or procedural improvements to be made understanding of the principal changes that have taken place in in subsequent closings. comparison with prior periods. The consolidation unit performs specific adjustments intended notably to eliminate intercompany transactions and Additional checks are also performed by other units of the Accounting incorporate any changes in the scope of consolidation. Functions department during monthly, quarterly and annual closings. The work done by the business line accounting teams is reviewed periodically A specialized accounting permanent control team performs additional to ensure that all controls included in a standardized list have been checks to ensure the proper application and quality of the control correctly performed. The summary report issued by these accounting procedures of the various accounting teams in the Head Office and the teams is also reviewed. The financial accounts are reconciled with the subsidiaries, suggesting improvements to enhance the effectiveness and management accounts every quarter, and comparability between periods standardization of these procedures and incorporating all of the best is verified using analytical tests. Explanations of the main changes must practices found within the Group. be provided. APPROVAL OF THE FINANCIAL STATEMENTS The accounting entries generated during this process are subsequently Once it has finalized the company financial statements and the consolidated compiled and aggregated using an automated, standardized process, financial statements, the Accounting Functions department presents to form the financial statements of Dexia Credit Local prepared under them to the Chief Financial Officer and the Chief Executive Officer of French GAAP and the Company’s contribution to the consolidated Dexia Credit Local for review. The financial statements are subsequently financial statements prepared under EU IFRS. The same is true of all Dexia examined by the Management Board, and then presented to the Audit Credit Local subsidiaries whose accounting is performed at the Head Committee. As required by law, the Board of Directors of Dexia Credit Office. From these financial statements, supplemented in some cases by
72 DEXIA CREDIT LOCAL / Annual Report 2008 CORPORATE GOVERNANCE AND INTERNAL CONTROL Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 3 of the French Commercial Code
Local approves the company financial statements and the consolidated manuals, as well as the guidelines issued by the Accounting Functions financial statements and presents them to the Shareholders’ Meeting department. They examine the internal audit reports provided to them. along with the Group management report. The Board of Directors also Lastly, they verify the accuracy and consistency of the management report examines the report of its Chairman on internal control procedures as and the financial accounting statements, as well as the consistency of the presented to the Shareholders’ Meeting. overall document with the items they have audited.
PUBLICATION OF THE FINANCIAL STATEMENTS OF DEXIA CREDIT These reviews enable the Statutory Auditors to obtain reaso nable LOCAL assurance that the financial statements they are certifying are free from The summary financial statements are then incorporated into the annual any material misstatement. report, which is equivalent to the document de référence required in France by article 212–13 of the General Regulations of the French Financial Markets Authority (AMF). Using these reports together with 4.2 MANAGEMENT AND SEGMENT DATA information gathered throughout the closing process, the Accounting Functions department also prepares the written comments for the section The financial statements (balance sheet, off-balance sheet, income of the management report that covers the preparation and analysis of statement, cash flow statement, and notes) are not the only quantified the accounts. analyses released by Dexia Credit Local to its shareholders and the public. They are supplemented by activity reports, results by business line and This accounting and financial information is made public through several discussions of outlook and risk assessments, which are all incorporated into means: the annual report or transmitted at presentations to financial analysts. • the financial statements are published in BALO, the French official Some of these reports are provided directly by the operating departments journal of required publications; or the Risk Management and Permanent Control department. Their
• the annual report equivalent to the document de référence is filed in accuracy is therefore guaranteed by each department’s internal control GOVERNANCE CORPORATE AND INTERNAL CONTROL both paper and electronic formats with the French Financial Markets system. Authority (AMF): it is also filed with the Clerk of the French Commercial Most of this information calls for data from different sources to be Court and is posted on the Dexia Credit Local website; rearranged or compiled; certain high-level figures must be broken down • the half-yearly report is filed in electronic form with the AMF and posted and accounting data needs to be restated in order to respect management on the Dexia Credit Local website ; constraints. All this information is provided to the editors of the annual report by the Planning and Financial Control department. Like the • as required by disclosure regulations, all annual and interim reports Accounting Functions department, the latter reports to the member of are posted on the website of an AMF-certified distributor of financial the Dexia Credit Local Management Board responsible for accounting news releases (Hugin). and financial control. The Planning and Financial Control department The Accounting Functions department and the Corporate Communications contributes to the preparation of financial information in two main department perform reciprocal control crosschecks to ensure the ways: consistency of the accounting and financial information published and made available to the public. a. Preparation of the Public & Wholesale Banking management dashboard b. Role of the Statutory Auditors The monthly management dashboard includes a number of key indicators, The committee composed of two statutory audit firms (the “Statutory including new lending and outstanding long- and short-term loans; Auditors”) is involved throughout the entire process of verifying the amounts on deposit and assets under management; present value financial and accounting information in order to increase efficiency and premiums and insured capital on the credit enhancement business, etc. transparency. As part of their review, the Statutory Auditors analyze The report is compiled based on information provided by the Sales and accounting procedures and evaluate the internal control systems in Financial Engineering-France department, sourced from its information place for the sole purpose of determining the type, period and scope of system, and also by the international entities. Written comments on their tests. Their review is not intended to provide any specific opinions the various figures are prepared in collaboration with the respective regarding the effectiveness and reliability of the internal controls; however, departments. they may choose to share any recommendations they have with regard to The controls implemented systematically during the preparation of this internal control procedures and systems that could improve the quality of management dashboard are based on the following principles: the accounting and financial information prepared. • the Proofreading Committee, composed of all contributors to the Their evaluation of internal controls is based notably on substantive management dashboard, ensures the overall consistency between the tests, such as obtaining confirmations from a sample of external results presented and the activity effectively reported within each scope. counterparties. For certain activities, checks of operational consistency are performed They issue instructions to the statutory or internal auditors of the subsidiaries by the Financial Control department on the basis of disclosures created and centralize all work performed. They call summary review meetings and distributed by the teams in charge of the various activities; activity is to present the findings of their audits, and evaluate the interpretation of analyzed in relation to the previous year’s results, providing an economic legal and regulatory statutes as performed by the accounting standards explanation and confirmation of results for the current year; team. They are provided with all accounting and consolidation procedure
Annual Report 2008 / DEXIA CREDIT LOCAL 73 CORPORATE GOVERNANCE AND INTERNAL CONTROL 3 Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 of the French Commercial Code
• the management dashboard is presented for final validation by The earnings from the Personal Financial Services line of business are the Management Board. The report, which provides year-to-date passed through to Crédit du Nord (of which Dexia is a 20% shareholder) information, and a commentary that is updated each month, is used and Dexia banka Slovensko, the Slovak subsidiary. during the closing of the annual accounts to provide data for inclusion In sum, all of these procedures allow complete income statements to be in the annual report. prepared for each business line, in order to foster a better understanding of individual profitability and contribution to the total net income of b. Calculation of earnings by line of business Dexia Credit Local. The business lines are defined at the Dexia Group level. Dexia Credit COMPILATION PROCESS Local is active essentially in the Public & Wholesale Banking and Financial Markets lines of business. French and foreign entities with their own financial control units produce the Public & Wholesale Banking management dashboard and calculation In order to provide investors with a deeper understanding of the profitability of earnings by business line locally using the same standards and principles, of these business lines, the Planning and Financial Control department is which may be adapted with respect to each entity’s size, organization responsible for preparing an income statement for each of them. and systems. This standardized list of instructions - the “Financial Control The calculation of income by business line is monitored each quarter, and Procedures and Standards Manual” - is used throughout the Dexia relies essentially on two types of management data: Group.
• loan margins on the Public & Wholesale Banking business are prepared Dexia Credit Local’s Planning and Financial Control department coordinates, by the Planning and Financial Control department, by compiling data monitors, and supervises the entire process. Using applications developed from the accounting system – such as average outstanding loans and in collaboration with the Dexia Group Financial Control department, it the interest margin rate – that is generated automatically in much the provides all Dexia Credit Local Group entities with standardized, secure same way as the pure accounting data; data-gathering tools in order to render the data collection process more reliable and effective. Lastly, it compiles all of the data collected. • financial margins on the Treasury & Financial Markets and transformation businesses are calculated by the Market Risk Management department, While information is being compiled by line of business, the Accounting which reports to the Risk Management and Permanent Control Functions department oversees the consolidation process. department, using the internal bill-back system present in each profit At each stage of the preparation of the consolidated data, the Planning and center in the financial activities area. Financial Control department and the Accounting Functions department Loan margins and financial margins are combined with other types of have set in place controls of consistency based on the reconciliation of income, such as commissions, to calculate net banking income (NBI) for the management and accounting data. Reconciliation of management each business line, and the sum of these NBI figures by business line is earnings with accounting earnings is an important component of internal reconciled with the NBI figure generated by the Accounting Functions control, which ensures the accuracy of both. department. These reconciliations continued to be improved in 2008, notably at the The other items in the income statement are also allocated by business line, Head Office of Dexia Credit Local where any variances are analyzed and especially as concerns “general operating expenses.” and “depreciation, explained. amortization and impairment provisions.” The sum of these business line income statement items is reconciled at subtotal level with the income statement generated by the Accounting Functions department.
( 5. INTERNAL CONTROLS: MAIN RISKS AND SPECIFIC MEASURES
Banking generates four main types of risks: credit risk, market risk, As regards the supervision of risks in the subsidiaries and branches, each structural risk (relating to interest rates, foreign currencies and liquidity) entity has its own local Risk Management structure. These structures are and operational risk. strictly independent of the front offices and report to the Dexia Credit Local Risk Management and Permanent Control department either directly Monitoring of all these risks is performed jointly by the appropriate (branches) or functionally (subsidiaries). committees and the Risk Management and Permanent Control department, with the help of tools that it develops, in compliance with Each local Risk Management structure has one or more correspondents the guidelines established by the Dexia Group and all regulatory and in charge of managing operational risk and permanent controls and supervisory constraints. implementing the Basel reforms. In general, all the Risk Management
74 DEXIA CREDIT LOCAL / Annual Report 2008 CORPORATE GOVERNANCE AND INTERNAL CONTROL Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 3 of the French Commercial Code
measures present at Dexia Credit Local are also found in each subsidiary All year long in 2008, the financial crises led to: and branch. − freezing or lowering the credit limits of a certain number of Apart from the general principles described above, the means used by counterparties, and especially bank counterparties; Dexia Credit Local to manage these risks in practice, both on a day-today − restricting, or even suspending delegations of powers, especially those basis and under exceptional circumstances, are described hereafter. granted to the front offices to carry out capital markets transactions. Approvals for all transactions were progressively transferred to the Credit Committees. 5.1 CREDIT RISK c. Monitoring and reporting Credit risk is the risk of loss relating to the inability of the Bank’s customers or other counterparties to meet their financial obligations. The monitoring process is based upon two levels:
The principles of credit Risk Management are explained in the section • first-level monitoring is provided by front offices in the Head Office, on Credit risk in the section of the management report dealing with branches and subsidiaries as part of the ongoing monitoring of the Risk Management (page 24 of the annual report), and data regarding financial soundness of their counterparties; counterparty credit risk to banks is included in the notes to the • second-level monitoring is provided by the Risk Management and consolidated financial statements, in the tables presenting bank risk by Permanent Control department, which collects and consolidates geographical region and by category of counterparty (page 169 of the exposures, delinquent payments, consolidated non-performing loans annual report ). and consolidated allowances every quarter. a. Approval process Every quarter, the Management Board examines a risk review that
recapitulates changes in the Bank’s various risks. Consolidated risk GOVERNANCE CORPORATE AND INTERNAL CONTROL Any commitment that can give rise to a credit risk must be approved monitoring at the level of the subsidiaries and branches is based on the in accordance with a lending approval process organized according to risk methodology described above. volume, type of counterparty and complexity of the commitment. The process is based on the delegation of decision-making authority for Risk monitoring at FSA is basically provided by its quarterly, internal relatively low-risk customers in the local government sector in Western Underwriting Committee. It is chaired by the Chief Risk Officer, who is a Europe and North America. Limited powers in the area of project finance member of the Dexia Management Board. The Underwriting Committee have been delegated to Dexia Credit Local’s New York and London retrospectively reviews all transactions that took place the previous branches and to the Spanish subsidiary Dexia Sabadell. These delegations quarter; approves all guidelines and procedures; approves all transactions of authority are governed by stringent rules. Outside the areas covered not included in the delegations of powers granted to management, by delegated authority, it is mandatory to obtain the approval of the especially in new areas of activity; and certifies the quarterly risk reviews. Dexia Credit Committees (those of Dexia Credit Local and Dexia, and the The committee also examines FSA’s reinsurance terms, which are a major Management Credit Committee) for matters pertaining to private sector criterion for evaluation in the monitoring of the subsidiary’s risks. Lastly, all financing, project finance (except for limited cases), asset-based lending transactions whose sizes exceed certain limits are submitted to the Dexia and lending to local public sector customers. Management Credit Committee. Dexia has also established an FSA Risk Monitoring Committee, which regularly assesses all subjects of interest For the main entities of Dexia Credit Local, collateral management is carried involving risk m anagement at FSA. out by a centralized knowledge center, which provides regular reports on potential variance observed in the payment of collateral. It should Against the background of the crisis in the financial markets, a number be noted in this area that new, more stringent procedures governing of analyses were performed in 2008 to determine which businesses FSA the establishment of contracts have been set in place for all derivatives should cease and which should be continued, with the Risk Management transactions. All existing contracts are presently being updated with these departments carrying out several related projects. During the summer new clauses. of 2008, Dexia decided to cease all ABS-related operations. Moreover, due to the amplitude of the provisions set aside for effects of the U.S. b. Credit limits real estate crisis, all assumptions used were systematically reviewed at every accounting close in collaboration with the FSA Risk Management Credit limits are established for each type of counterparty on the basis department. Lastly, as was done with the rest of the Dexia Group, bank of Dexia’s Tier 1 capital, the counterparty’s equity or internal economic credit limits were lowered in the financial products business and more capital, generating variable amounts based on the internal rating of the stringent restrictions were placed upon the types of securities in which counterparty, the type of transaction and the country involved. Specific FSA Financial Products may invest. rules for private-sector companies have been set at the Dexia Group level, with a view to limiting the impact on shareholders’ equity in the event of d. Internal credit ratings a default. Specific limits are established for each individual project and asset finance transaction. Limits have also been established for certain In accordance with the rules applicable to the entire Dexia Group, each sectors, such as wind power and solar energy. counterparty is assigned an internal risk rating. This rating is determined
Annual Report 2008 / DEXIA CREDIT LOCAL 75 CORPORATE GOVERNANCE AND INTERNAL CONTROL 3 Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 of the French Commercial Code
solely by the risk methodology at the start of a relationship or transaction b. Monitoring and is subsequently assessed on a regular and formal basis, in principle annually, except for counterparties classified as “watch list,” which are Two committees are responsible for the monitoring of financial markets- reviewed quarterly. related risks:
As Dexia Credit Local has elected to apply the advanced internal ratings- • the Market Risk Group Committee (MRGC) meets monthly at the Dexia based method under the Basel II reform of the solvency ratio and capital Group level. Dexia Credit Local is represented by either the Chief Risk adequacy requirements, the Company develops internal credit rating Officer or the EVP-Financial Markets, who have an explicit mandate systems (SNI) for each type of counterparty. This 18-level scale includes two defining their decision-making authority. The MRGC is responsible for levels for counterparties in default. Counterparties not currently covered defining and monitoring all risk policies, such as guidelines and market by an SNI are rated based on expert systems and credit scores. risk limits.
At the end of 2007, the Belgian Banking, Finance and Insurance The committee notably establishes guidelines for the development of Commission (CBFA) authorized Dexia to use the advanced internal ratings- all new market activities. based approach as from January 1, 2008. This authorization was subject The Dexia Credit Local Risk Management and Permanent Control to various terms and conditions, the correct implementation of which was department provides the Dexia Credit Local Management Board with verified by the Internal Audit department throughout 2008. a quarterly (or more frequently, if need be) report informing it of all changes in the Bank’s consolidated risks (exposures, limits, limits that e. Reserve policies have been exceeded) and changes to its monitoring system (modification of measurement methods or guidelines); Once a quarter, a Reserves Committee, chaired by the Risk Management and Permanent Control department, approves the amount of reserves • the Dexia Credit Local financial markets committee is called the Weekly allocated and monitors the cost of risk. General reserves are calculated Operational Committee. It meets monthly to provide local monitoring of and maintained as required by IFRS regulations. the correct application of the standards and decisions set down by the Dexia Market Risk Group Committee, and ensures that all information is provided to the appropriate Dexia Credit Local managers.
5.2 MARKET RISKS The Risk Management and Permanent Control department’s Market Risk Management unit measures risk regularly.
a. Scope Their report, which is presented quarterly to the Management Board, is based on various indicators for monitoring the limits allocated to the Market risk is the risk of loss relating to fluctuations in market prices and various risks, and which are presented in detail in the management interest rates, their interactions and their level of volatility. report. Dexia Credit Local also manages a bond portfolio including: a proprietary In addition to these regular quarterly presentations, the Chief Risk Officer credit spread portfolio; an investment portfolio, comprising positions and the EVP-Financial Markets presented the Management Board with taken in the course of the Bank’s lending to players in the local sector; frequent progress reports on risk during the second half of 2008, especially and lastly a more actively-managed held-for-trading portfolio. as regards the Company’s liquidity position. This bond portfolio is managed to avoid exposure to interest rate risk by means of appropriate hedges, but remains subject to price risk relating to the market’s assessment of the issuer’s situation. 5.3 STRUCTURAL RISKS: INTEREST RATES, FOREIGN The management principles for these risks are detailed in the section CURRENCY AND LIQUIDITY on Financial risks – Market risks in the Risk Management section of the management report (page 27 of the annual report), and quantitative a. Scope exposure data for equity risk and interest rate risk is presented in the notes to the consolidated financial statements (“Sensitivity of listed shares” on Structural risks are grouped together and designated as Asset-Liability page 177 and “Risk on resetting of interest rates: analysis by time until Management (ALM) risks. The purpose of ALM is to hedge the risks next interest rate reset date – analysis of assets and liabilities” on page 175 relating to this balance sheet structure, either partially or in full. Apart et seq. of the annual report ). from interest rate risks and foreign currency risks relating to the Financial Markets activity, all other significant interest rate risks, foreign currency In light of the volatility of the financial markets, and given the difficulty risks and liquidity risks of Dexia Credit Local are the responsibility of the experienced in funding its portfolios in the appropriate terms, with the ALM Committee. resultant consequences in 2008 on the Bank’s earnings and its liquidity risks, at the end of 2008 the Bank decided to cease all trading operations, The management principles governing these risks are detailed in the and to allow the credit spread portfolio to run off, in order diminish its size. Section Financial risks – ALM risks in the Risk Management section of Dexia Credit Local is currently reorganizing its capital markets operations, the management report (page 26 of the annual report), and quantitative in order to reduce the Bank’s risk profile. exposure data for interest rate, foreign currency and liquidity risk is presented in the notes to the consolidated financial statements (“Liquidity risk ” on page 178 and “Foreign currency risk ” on page 179 of the annual report).
76 DEXIA CREDIT LOCAL / Annual Report 2008 CORPORATE GOVERNANCE AND INTERNAL CONTROL Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 3 of the French Commercial Code b. Monitoring 5.4 OPERATIONAL RISKS
The monitoring of ALM risks is organized around three committees: a. Scope • the Dexia ALM Committee (ALCO) meets monthly: Operational risks are defined as the risk of a loss resulting from inadequate For the entire scope of the Group, it defines risk policy and the methods or failed internal processes, people and systems, or from external events. used to hedge risks. The guidelines set by the Dexia ALM Committee They include in particular all risks related to information systems security enable individual hedging decisions to be made, but management and litigation. Dexia has chosen to include the reputation risk into its authority may also be delegated to the Dexia ALM department; operational Risk Management. It ensures that these limits are used consistently according to its own scenarios for interest rate movements. As with all risk committees, the b. Organization and monitoring representative of Dexia Credit Local is either the Chief Executive Officer or the Chief Risk Officer ; OPERATIONAL RISK MANAGEMENT The Dexia Group has elected to apply the standardized approach allowed • F inance Committee. under the Basel II directives and has implemented processes and a Group ALCO has given the Finance Committee authority over the management tool as called for in the paper on “Sound Practices for the operational management of its own balance sheet. Accordingly, the Management and Supervision of Operational Risk” published by the Basel Local ALM unit is responsible for managing its own results and the Committee on Banking Supervision. interest rate risk generated or borne by its own balance sheet. The A specialized team in the Dexia Credit Local Risk Management and scope of Dexia Credit Local’s Local ALM includes: Permanent Control department is responsible for operational risk, and − the commercial bank, works with a network of correspondents in each department and entity. The involvement of the business line EVPs guarantees the effectiveness GOVERNANCE CORPORATE AND INTERNAL CONTROL − the securities portfolio of the Local ALM, of the system. − the technical processes resulting from its front office operations (e.g.: Operational Risk Management is coordinated at Dexia Group level by the CPI-linked loan , average Euribor and Euribor in arrears, etc.). Operational Risk Management Committee (ORMC) which meets once Local ALM uses mainly traditional ALM Risk Management applications a month. to measure and monitor the risks inherent to ALM. COLLECTION, ANALYSIS AND PROCESSING OF INCIDENTS The committee includes the Chief Executive Officer and/or the Chief The Dexia Group has defined a procedure for compiling operational Risk Officer, the CFO and the EVP-Financial Markets; risk events and operational losses as required by the provisions of Basel • the decisions of the Finance Committee and the Group ALM Committee II. Operational risk correspondents are responsible for identifying and are adapted operationally by the Local (Tactical ALCO) Committee, which analyzing all incidents with the help of the central operational risk unit. meets every week for the Dexia Credit Local entity and in which the Risk Depending on the results of this analysis, corrective or preventive measures Management and Permanent Control department and the Financial are taken to reduce exposure to operational risk. Markets department participate. The committee’s main purpose is to Dexia has a shared operational Risk Management tool that includes a ensure weekly monitoring of risks related to new originations. module for compiling incidents in the various Group entities.
In any case, the three committees monitor the change in risk based on A quarterly report summarizing all significant operational risk events is the sensitivity of the “net present value” of the assets and liabilities sent to the Management Board and to each business line EVP (in the Head within the ALM scope (ALM NPV) to a given change (100 basis points) Office, subsidiaries and branches). in market interest rates.
The tightening of liquidity conditions resulted in much closer monitoring RISK MAPPING of the situation throughout 2008: daily reports were provided to the In addition to the operational risk events that have already been observed, Dexia Group, stress scenarios were prepared, specific characteristics for the Dexia Group to be able to plot its risk profile it is necessary to of Dexia Credit Local Group entities were incorporated, reserves were assess all potential areas of risks and take account of all existing controls. inventoried, etc. Departments and entities throughout the Dexia Group all use the same method for these risk and control self assessments. Depending on the These issues were all incorporated into the knowledge center housed results, action plans may be set in place to control exposure to risk. within one of the Group entities, Dexia Bank Belgium, which manages liquidity on a global basis in order to ensure the greatest possible Various reports analyze the Bank’s risk profile by entity, by activity, by optimization of the Bank’s funding conditions and the adequacy of process and by type of event (as defined in the Basel II accord) and are its reserves. presented to the Management Board each year.
Annual Report 2008 / DEXIA CREDIT LOCAL 77 CORPORATE GOVERNANCE AND INTERNAL CONTROL 3 Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 of the French Commercial Code
c. Information systems security • IT departments are responsible for designing and implementing all security hardware and software, and for implementing all associated Information systems security includes all measures taken to shield data operational rules and procedures. They also perform first- and second- from any threat to its confidentiality, integrity or availability. level controls over the correct application of security. The job of IT All these measures are described in the Dexia Credit Local information Security Manager was created within the IT department in order to systems security policy manual, which defines all applicable principles by coordinate these actions. area of security, along with the roles and responsibilities of the various Moreover, the business continuity plans of the subsidiaries and branches players in the IS security process, using a body of directives, specific security are reviewed every year to ensure that they all provide sufficient security policies, rules and operating procedures and the guidelines provided by and to draft any action plans that may be needed. ISO standard 27000/17799. Under the supervision of a specialized steering committee, each operating d. Litigation risks department participated in the preparation of a business continuity plan The General Secretariat performs six main functions: (BCP). Under the plan, the impacts of a disaster affecting IT equipment or facilities or information systems or of a loss of service are analyzed from • internal consulting; a “business” perspective in order to identify all mission-critical activities. • drafting and supervision of legally binding deeds and documents; The results of this analysis were used to establish business recovery times that are compatible with operating requirements. The implementation of • management of amounts under collection; this recovery strategy is based on the use of formal, documented technical • maintaining a watch in its areas of specialization; guidelines, procedures and organizational structures. The BCP and these procedures are all updated once a year on a regular basis, in accordance • legal secretariat services for Dexia Credit Local and its subsidiaries; with a schedule defined by the Management Board. The results of the tests are reported to the steering committee. • administrative supervision of investments, trademarks and delegations of power. It should be noted that, in light of the difficulty of carrying out a “business” test that is comprehensive and in real time, simultaneously with a normal It therefore plays a key role in preventing matters from being taken to day’s worth of new originations, since operations were moved to the litigation, anticipating changes in the law and ensuring compliance with new Tour Dexia, the steering committee has elected to postpone the the principles of corporate governance. comprehensive test. Functional relationships have been established between the General Moreover, Dexia Credit Local has placed critical systems for data Secretariat of Dexia Credit Local and the equivalent structure for the Dexia production with a service provider, in a single center under highly secure Group, in order to promote discussion of legal strategies and cases. physical conditions and connected via redundant high-speed links with a Similarly, the General Secretariat of Dexia Credit Local has established point-to-point link between the IT production site and Dexia Credit Local regular contacts with its counterparts in the subsidiaries and branches, headquarters. Dexia Credit Local has also set up a mirror site to prepare with exchanges of all appropriate information. for any failure in these systems. Dexia periodically backs data up and can very quickly substitute this site for the main site, if need be. This system A reporting application for risks on the areas covered was set in place was successfully tested in 2008. within the business line.
Information systems security is managed by three players: e. Insurance of operational risks
• the IT Security Committee is responsible for recommending security Dexia Credit Local currently has traditional property insurance, including policies to the Management Board, for establishing specific directives general hardware and facilities multi-risk, vehicle and third-party liability. for each area, and for ensuring that they are implemented. The All French subsidiaries are covered under these polices. committee comprises representatives from the various “business line” stakeholders, including Risk Management, compliance, IT and logistics. Dexia Credit Local has also subscribed policies for the following risks: The Committee meets every two months, and is chaired by the Chief directors and officers liability for the members of the management bodies, Risk Officer; third-party professional liability, loss of banking operations and so-called “comprehensive bank coverage”, which covers fraud and the financial • the IT Security Manager is responsible for recommending security impact of damage to assets and/or documents. These guarantees are policies and directives to the IT Security Committee. He oversees the likewise in effect for all French and foreign entities controlled by Dexia practical implementation of the rules that make up the security policy, Credit Local (given its special nature and size, FSA has an appropriately- increases employee awareness and provides advice to the various scaled, specific level of guarantee). departments. The IT Security Manager is a member of the Operational Risk Management, Permanent Control and Security department, which guarantees his independence from the operations area;
78 DEXIA CREDIT LOCAL / Annual Report 2008 CORPORATE GOVERNANCE AND INTERNAL CONTROL Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 3 of the French Commercial Code
( 6. ASSESSMENT OF INTERNAL CONTROLS
6.1 CHIEF EXECUTIVE OFFICER AND MANAGEMENT The Audit Committee reports on its work and observations to the Board BOARD of Directors.
Under the organization in effect in 2008, the Chief Executive Officer, In performing its assignments, the Audit Committee has unfettered access assisted by the Management Board that he chairs, plays a vital role in the to the Statutory Auditors, the Chief Auditor and the Chief Compliance assessment of internal control. He therefore has access to several sources Officer of Dexia Credit Local. It informs the Chief Executive Officer of its of information to enable him to accomplish all of his duties in this area. contacts immediately. The Chief Executive Officer has no potential conflicts of interest between It is informed of the conclusions drawn from any inspections performed his duties with respect to Dexia Credit Local and his personal interests by the regulatory bodies and from any internal audit assignments, and or other duties. may request copies of the audit reports. It is also empowered to suggest The members of the Management Board each have a personal interest in any additional assignments. operational responsibilities by business line or by function. They therefore The committee can request any information that it may deem to be have a comprehensive understanding of the constraints and opportunities useful. in their respective fields of activity, and are thus able to define internal control procedures and to judge their efficacy.
The most sensitive horizontal, Group-wide committees are chaired by a 6.3 DEXIA GROUP member of the Management Board, who can subsequently summarize CORPORATE GOVERNANCE GOVERNANCE CORPORATE AND INTERNAL CONTROL the work involved for all the members. The Dexia Group plays a major role in monitoring internal control within the Dexia Credit Local Group. The latter’s managerial organization actively The Management Board has also implemented a system of delegation involves representatives of the Dexia Group: the Board of Directors of Dexia and reporting that requires the operations departments to present and Credit Local includes the Chairman of the Dexia SA Management Board. approve the key indicators, through which it is able to judge the quality In addition, the Group Management Board and Executive Committee and smooth running of the internal control system. are provided with copies of all reports on Company-wide audits, which Internal audit is also a valued source of information for the Chief Executive generally concern Dexia Credit Local and its subsidiaries. Officer and the Management Board. They receive all the audit reports, The Chairman of the Board of Directors of Dexia Credit Local is copied which are discussed and commented on during meetings. They approve all on the Internal Audit department’s business review, and he has access to recommendations and action plans. All audit recommendations are now all audit reports. He may regularly query the Chief Executive Officer of monitored every six months, and the Internal Audit department provides Dexia Credit Local about internal controls. Lastly, he may ask the Group the Management Board with monitoring reports. The Chief Executive Internal Audit department or an independent audit firm to investigate Officer can also request Internal Audit to perform assignments that are any Dexia Credit Local function, if he feels it is warranted. not scheduled in the annual audit plan on topics that he feels require immediate attention.
During 2008, the Dexia and Dexia Credit Local Management Boards asked Jean-Luc Dehaene the Internal Audit department to carry out several additional assignments, Chairman of the Board of Directors to ensure that risk exposure was properly covered, notably in the capital markets businesses and in reaction to the events that took place in the subsidiaries.
The Statutory Auditors, as part of their audit of the financial statements, and the regulators (in France, essentially the Banking Commission and the Financial Markets Authority), as part of their inspections, make recommendations for improving specific internal control issues. The Management Board subsequently takes the necessary steps so that these recommendations are implemented as quickly as possible.
6.2 AUDIT COMMITTEE
The Audit Committee is delegated by the Board of Directors to assist it in performing its financial control of Dexia Credit Local. The Audit Committee focuses specifically on those procedures covering the preparation of the financial statements and Risk Management, and is also responsible for managing relationships with the Statutory Auditors.
Annual Report 2008 / DEXIA CREDIT LOCAL 79 CORPORATE GOVERNANCE AND INTERNAL CONTROL 3 Statutory Auditors’ Report
Statutory Auditors’ Report
This is a free translation into English of the Statutory Auditors’ report issued in French prepared in accordance with Article L.225-235 of French company law on the report prepared by the Chairman of the Board of Directors on the internal control procedures relating to the preparation and processing of accounting and financial information issued in French and is provided solely for the convenience of English speaking users.
This report should be read in conjunction and construed in accordance with French law and the relevant professional standards applicable in France.
To the Shareholders,
In our capacity as Statutory Auditors of Dexia Credit Local and in accordance with Article L.225-235 of French company law (Code de c ommerce), we hereby report to you on the report prepared by the Chairman of the Board of Directors of your company in accordance with Article L.225-37 of French company law (Code de c ommerce ) for the year ended December 31, 2008.
It is the Chairman’s responsibility to prepare, and submit to the Board of Directors for approval, a report on the internal control and risk management procedures implemented by the company and containing the other disclosures required by Article L.225-37 of French company law (Code de commerce ), particularly in terms of corporate governance.
It is our responsibility:
• to report to you on the information contained in the Chairman’s report in respect of the internal control procedures relating to the preparation and processing of the accounting and financial information, and
• to attest that this report contains the other disclosures required by Article L.225-37 of French company law (Code de commerce ), it being specified that we are not responsible for verifying the fairness of these disclosures.
We conducted our work in accordance with professional standards applicable in France.
Information on the internal control procedures relating to the preparation and processing of accounting and financial information
The professional standards require that we perform the necessary procedures to assess the fairness of the information provided in the Chairman’s report in respect of the internal control procedures relating to the preparation and processing of the accounting and financial information. These procedures consisted mainly in:
• obtaining an understanding of the internal control procedures relating to the preparation and processing of the accounting and financial information on which the information presented in the Chairman’s report is based and the existing documentation;
• obtaining an understanding of the work involved in the preparation of this information and the existing documentation;
• obtaining an understanding of the evaluation process in place and assessing the quality and appropriateness of its documentation with respect to the information on the evaluation of internal control procedures;
• determining if any significant weaknesses in the internal control procedures relating to the preparation and processing of the accounting and financial information that we would have noted in the course of our engagement are properly disclosed in the Chairman’s report.
On the basis of our work, we have nothing to report on the information in respect of the company’s internal control procedures relating to the preparation and processing of accounting and financial information contained in the report prepared by the Chairman of the Board of Directors in accordance with Article L.225-37 of French company law (Code de c ommerce ).
Other disclosures
We hereby attest that the Chairman’s report includes the other disclosures required by Article L. 225-37 of French company law (Code de c ommerce ).
Courbevoie and Neuilly-sur-Seine, April 14, 2009
The Statutory Auditors MAZARS DELOITTE & ASSOCIES
Hervé HELIAS François ARBEY José-Luis GARCIA
80 DEXIA CREDIT LOCAL / Annual Report 2008 Consolidated 4 financial statements
Consolidated balance sheet 82 Notes to the consolidated fi nancial statements 89 Assets ...... 82 1. Accounting methods and scope Liabilities ...... 83 of consolidation - accounting policies and valuation methods ...... 89
2. Notes on the assets...... 108 Consolidated income statement 84 3. Notes on the liabilities ...... 125
4. Other notes on the balance sheet ...... 139
5. Notes on the income statement ...... 149 Consolidated statement of changes FINANCIAL CONSOLIDATED STATEMENTS in equity 85 6. Notes on off-balance sheet items ...... 160
7. Notes on exposure to risk at December 31, 2008 ...... 161
8. Analysis by geographic region and by line Consolidated cash fl ow statement 87 of business ...... 180
Cash and cash equivalents 88 Statutory Auditors’ report on the consolidated fi nancial statements 182
Annual Report 2008 / DEXIA CREDIT LOCAL 81 CONSOLIDATED FINANCIAL STATEMENTS 4 Consolidated balance sheet
Consolidated balance sheet
( ASSETS
Note At December 31, 2006 At December 31, 2007 At December 31, 2008 (EUR millions)
I. Cash, central banks and postal checking accounts 2.0 1,069 1,553 632
II. Financial assets at fair value through profit or loss 2.1 17,970 24,098 25,418
III. Hedging derivatives 4.1 7,449 10,367 8,119
IV. Financial assets available for sale 2.2 114,360 130,761 60,674
V. Interbank loans and advances 2.3 20,212 20,832 35,892
VI. Customer loans and advances 2.4 129,131 146,568 248,916
VII. Fair value revaluation of portfolio hedge 123 (364) 2,084
VIII. Financial assets held to maturity 2.5 1,364 1,272 1,131
IX. Current tax assets (1) 2.6 141 142 37
X. Deferred tax assets 2.6 67 436 2,613
XI. Accruals and other assets (1) 2.7 9,625 7,343 21,457
XII. Non current assets held for sale 4.6 0 0 6,225
XIII. Investments in associates 2.8 417 459 275
XIV. Investment property 2.9 200
XV. Tangible fixed assets 2.9 494 499 504
XVI. Intangible assets 2.10 60 71 77
XVII. Goodwill 2.11 1,385 1,387 206
TOTAL ASSETS 303,869 345,424 414,260
(1) Taxes other than current income tax are from now presented under line XI. “Accruals and other assets:” at December 31, 2007, EUR 19 million were thus reclassified from line IX. “ Current tax assets”, with no impact on earnings for the period.
82 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Consolidated balance sheet 4
( LIABILITIES
Note At December 31, 2006 At December 31, 2007 At December 31, 2008 (EUR millions)
I. Central banks and postal checking accounts 3.0 3,388 7,630 64,222
II. Financial liabilities at fair value through profit or loss 3.1 11,575 12,290 24,641
III. Hedging derivatives 4.1 13,277 13,755 27,819
IV. Interbank borrowings and deposits 3.2 80,796 99,247 91,210
V. Customer borrowings and deposits 3.3 20,141 19,938 17,619
VI. Debt securities 3.4 157,445 176,010 172,853
VII. Fair value revaluation of portfolio hedge (31) (447) 1,386
VIII. Current tax liabilities (1) 3.5 61 60 123
IX. Deferred tax liabilities 3.5 699 260 23
X. Accruals and other liabilities (1) 3.6 3,953 5,216 5,372
XI. Liabilities included in disposal groups held for sale 4.6 0 0 5,697
XII. Technical provisions of insurance companies 3.7 145 134 0
XIII. Provisions 3.8 127 102 203
XIV. Subordinated debt 3.9 4,309 4,942 5,002 CONSOLIDATED FINANCIAL CONSOLIDATED STATEMENTS XV. Equity 3.10 7,984 6,287 (1,910)
XVI. Shareholders’ equity, Group share 7,172 5,528 (2,107)
XVII. Capital stock and additional paid-in capital 3,114 3,114 6,614
XVIII. Reserves and retained earnings (2) 2,123 2,889 3,456
XIX. Unrealised or deferred gains and losses 853 (1,454) (8,621)
XX. Net income for the period (2) 1,082 979 (3,556)
XXI. Minority interests 812 759 197
TOTAL LIABILITIES 303,869 345,424 414,260
(1) Taxes other than current income tax are from now presented under line X. “Accruals and other liabilities:” at December 31, 2007, EUR 17 million were thus reclassified from line VIII. “ Current tax liabilities”, with no impact on earnings for the period. (2) According to IFRIC 11 “Group and Treasury Share transactions”, expenses relative to stock option plans were reclassified under Reserves and retained earnings for EUR 12 million at December 31, 2007.
Annual Report 2008 / DEXIA CREDIT LOCAL 83 CONSOLIDATED FINANCIAL STATEMENTS 4 Consolidated income statement
Consolidated income statement
Note 2006 2007 2008 (EUR millions)
I. Interest income (3) 5.1 38,438 50,405 55,836
II. Interest expense 5.1 (37,113) (49,108) (54,067)
III. Fee and commission income 5.2 128 147 181
IV. Fee and commission expense 5.2 (34) (49) (63) V. Net gains (losses) on financial instruments at fair value though profit or loss 5.3 95 (295) (357)
VI. Net gains (losses) on financial assets available for sale (3) 5.4 322 390 81
VII. Other income (1) 5.5 504 506 506
VIII. Other expenses (1) 5.6 (199) (196) (143)
IX. Net banking income 2,141 1,800 1,974
X. Operating expenses (2) 5.7 (572) (618) (733) XI. Depreciation, amortisation and impairment of tangible fixed assets and intangible assets 5.8 (43) (52) (56)
XII. Gross operating income 1,526 1,130 1,185
XIII. Cost of risk 5.9 (44) (46) (3,387)
XIV. Operating income 1,482 1,084 (2,202)
XV. Income (losses) from associates (2) 5.10 57 58 (53)
XVI. Net gains (losses) on other assets 5.11 0 0 (1,036)
XVII. Impairment of goodwill 5.12 0 0 (1,181)
XVIII. Income before tax 1,539 1,142 (4,472)
XIX. Income tax 5.13 (380) (108) 556
XXI. Net income 1,159 1,034 (3,916)
XXII. Minority interests 77 55 (360)
XXIII. Net income, G roup share (2) 1,082 979 (3,556)
Earnings per share, Group share
- Basic (in EUR) 12.43 11.25 (40.85)
- Diluted (in EUR) 12.43 11.25 (40.85)
(1) Including technical margin of insurance companies 310 306 339
(2) According to IFRIC 11 “Group and Treasury Share transactions”, expenses relative to stock option plans were reclassified under Reserves and retained earnings at December 31, 2007: this reclassification leads to increase on one hand the Operating expenses by EUR 9 million, and to decrease on the other hand the Income (losses) from associates by EUR 3 million. As a consequence, the Net income, Group share is reduced by EUR 12 million at December 31, 2007. (3) EUR 2 million were reclassified in 2007 from line I. “Interest income” to line VI. “ Net gains (losses) on financial assets available for sale”, with no impact on earnings for the period.
84 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Consolidated statement of changes in equity 4
Consolidated statement of changes in equity
Core shareholders’ equity Unrealized or deferred gains and losses Minority interests
Capital Reserves, Total Change in Change in Cumulative Total Share- Core Unrealized Total Equity stock, retained fair value fair value of translation holders’ share- or deferred additional earnings of financial cash flow differences equity, holders’ gains and paid-in and net assets hedges, net Group equity losses capital income for available of taxes share the period for sale, net of (EUR millions) taxes
At January 1, 2006 3,114 2,489 5,603 1,117 (70) 59 1, 106 6, 709 700 70 770 7, 479
Movements during the period
Changes in capital 0 0 0 0013 13 13 Changes in additional paid-in capital 0 0 0 000 00
Dividends (361) (361) 0 (361) (21) (21) (382)
Translation adjustment 0 (25) 1 (150) (174) (174) 0 (23) (23) (197) Changes in fair value of financial assets available for sale through equity 058 58 58 (4) (4) 54 Changes in fair value of derivatives through equity 0 43 43 43 2245 Changes in fair value of financial assets available for sale through profit or loss 0 (181) (181) (181) 0 0 (181) FINANCIAL CONSOLIDATED STATEMENTS Changes in fair value of derivatives through profit or loss 0 0 00 000
Net income for the period 1,082 1,082 0 1,082 77 77 1,159
Other movements (1) 0(4)(4)0000(4)(2)0(2)(6)
At December 31, 2006 3,114 3,206 6,320 969 (26) (91) 852 7,172 767 45 812 7,984
Annual Report 2008 / DEXIA CREDIT LOCAL 85 CONSOLIDATED FINANCIAL STATEMENTS 4 Consolidated statement of changes in equity
Core shareholders’ equity Unrealized or deferred gains and losses Minority interests
Capital Reserves, Total Change in Change in Cumulative Total Share- Core Unrealized Total Equity stock, retained fair value fair value of translation holders’ share- or deferred additional earnings of financial cash flow differences equity, holders’ gains and paid-in and net assets hedges, net Group equity losses capital income for available of taxes share the period for sale, net of (EUR millions) taxes
At D ecember 31 , 2006 3,114 3, 206 6, 320 969 (26) (91) 852 7, 172 767 45 812 7,984
Movements during the period
Changes in capital 0 0 0 0018 18 18 Changes in additional paid-in capital 0 0 0 000 00
Dividends (320) (320) 0 (320) (19) (19) (339)
Translation adjustment 0 41 12 (194) (141) (141) 0 (21) (21) (162) Changes in fair value of financial assets available for sale through equity 0 (2,010) (2,010) (2,010) (89) (89) (2,099) Changes in fair value of derivatives through equity 0 89 89 89 1190 Changes in fair value of financial assets available for sale through profit or loss 0 (215) (215) (215) 2 2 (213) Changes in fair value of derivatives through profit or loss 0 (29) (29) (29) 0 0 (29)
Net income for the period (2) 979 979 0 979 55 55 1,034
Other movements (1) (2) 033000030003
At December 31, 2007 3,114 3,868 6,982 (1,215) 46 (285) (1,454) 5,528 821 (62) 759 6,287
Movements during the period
Changes in capital (826) 0 (826) 0 (826) 92 92 (734) Changes in additional paid-in capital 4,326 0 4,326 0 4,326 0 0 4,326
Dividends (415) (415) 0 (415) (19) (19) (434)
Translation adjustment 0 (202) (34) 147 (89) (89) 0 13 13 (76) Changes in fair value of financial assets available for sale through equity 0 (6,739) (6,739) (6,739) (296) (296) (7,035) Changes in fair value of derivatives through equity 0 (1,078) (1,078) (1,078) (10) (10) (1,088) Changes in fair value of financial assets available for sale through profit or loss 0 753 753 753 86 86 839 Changes in fair value of derivatives through profit or loss 0 (14) (14) (14) 0 0 (14)
Net income for the period (3,556) (3,556) 0 (3,556) (360) (360) (3,916)
Other movements (1) 03300003(68) 0 (68) (65)
At December 31, 2008 6,614 (100) 6,514 (7,403) (1,080) (138) (8,621) (2,107) 466 (269) 197 (1,910)
(1) The other movements are all discussed in note 3.10.c.. (2) According to IFRIC 11 “Group and Treasury Share Transactions”, expenses relative to stock option plans were reclassified under Reserves and retained earnings for EUR 12 million at December 31, 2007.
86 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Consolidated cash-flow statement 4
Consolidated cash flow statement
(EUR millions) At December 31, 2006 At December 31, 2007 At December 31, 2008 Cash flow from operating activities Net income (1) 1,159 1,034 (3,916) Adjustments for: • Depreciation, amortization and other impairment 50 62 1,253 • Impairment on bonds, equities, loans and other assets (55) (58) 1,466 • Net gains on investments (136) (237) 1,014 • Changes in provisions 61 42 1,567 • Unrealized gains and losses (39) (82) (2) • Income (losses) from associates (1) (57) (58) 53 • Dividends from associates 17 21 22 • Deferred taxes 58 (161) (828) • Other adjustments (1) 094 Changes in operating assets and liabilities (1) 7,386 (202) 17,681 NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 8,444 370 18,314 Cash flow from investing activities Purchases of fixed assets (89) (106) (102) Sales of fixed assets 596 Acquisitions of unconsolidated equity shares (128) (122) (195) Sales of unconsolidated equity shares 288 463 145 Acquisitions of subsidiaries (45) (24) (10) Sales of subsidiaries 430 NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 35 223 (156) CONSOLIDATED FINANCIAL CONSOLIDATED STATEMENTS Cash flow from financing activities Issuance of new shares 18 18 3,654 Reimbursement of capital 000 Issuance of subordinated debt 36 1,142 320 Reimbursement of subordinated debt (67) (282) (376) Purchases of treasury stock 000 Sales of treasury stock 000 Dividends paid (382) (339) (434) NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (395) 539 3,164 Net cash provided 8,084 1,132 21,322 Cash and cash equivalents at the beginning of the period 11,263 18,900 19,708 Cash flow provided (used) by operating activities 8,444 370 18,314 Cash flow provided (used) by investing activities 35 223 (156) Cash flow provided (used) by financing activities (395) 539 3,164 Effect of exchange rate changes and changes in scope of consolidation on cash and cash equivalents (447) (324) 544 CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD 18,900 19,708 41,574 Additional information Income tax paid (308) (309) (99) Dividends received 45 45 33 Interest received (2) 37,501 48,943 55,814 Interest paid (36,655) (47,683) (54,008) (1) According to IFRIC 11 “Group and Treasury Share Transactions”, data for 2007 were restated as far as expenses relative to stock option plans “ Income (losses) from associates” and EUR 9 million under “Other adjustments”). (2) EUR 2 million were reclassified in 2007 from line I. “Interest income” to line VI. “ Net gains (losses) on financial assets available for sale”, with no impact on earnings for the period.
Annual Report 2008 / DEXIA CREDIT LOCAL 87 CONSOLIDATED FINANCIAL STATEMENTS 4 Cash and cash equivalents
Cash and cash equivalents
For the purpose of the consolidated cash flow statement, cash and cash equivalents include the following balances with current maturities of less than 90 days:
Analysis by nature At December 31, 2006 At December 31, 2007 At December 31, 2008 (EUR millions)
Cash, central banks and postal checking accounts (note 2.0) 1,069 1,552 632
Interbank loans and advances (note 2.3) 6,806 9,948 18,776
Loans and securities available for sale (note 2.2) 2,632 2,207 827
Loans and securities held for trading (note 2.1) 286 153 273
Loans and securities designated at fair value (note 2.1) 0 0 0
Accruals and other assets (note 2.7) 8,107 5,848 21,066
TOTAL 18,900 19,708 41,574
Of which restricted cash At December 31, 2006 At December 31, 2007 At December 31, 2008 (EUR millions)
Mandatory reserves (1) 1,037 951 494
Cash collateral 8,107 5,848 21,066
Other 000
TOTAL 9,144 6,799 21,560
(1) Minimum reserve deposits credit institutions must have with the European Central Bank (ECB) or other central banks.
88 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
Notes to the consolidated financial statements
( 1. ACCOUNTING METHODS AND SCOPE OF CONSOLIDATION - ACCOUNTING POLICIES AND VALUATION METHODS
1.1 GROUP COMPANIES AND CONSOLIDATION • Deconsolidated companies: METHODS − Kommunalkredit Austria and it subsidiaries were deconsolidated on October 1, 2008. a. Criteria for consolidation and use of the equity method • Other movements :
Dexia Credit Local applies all rules pertaining to credit institutions with − as part of an agreement with the Austrian central government, Dexia regard to the scope of consolidation resulting from: Credit Local increased its stake in Dexia Kommunalkredit Bank from 50.84% to 100%. • IAS 27 preparation and the presentation of the consolidated financial statements of a group of companies controlled by a parent company; c. Impact of changes of scope on the consolidated • IFRS 3 Business Combinations, and the impact of accounting methods income statement on consolidation; None of these changes had a material impact on the 2008 consolidated • IAS 28 on accounting for Investment in Associates; financial statements, with the exception of the items described below concerning FSA Holdings and Kommunalkredit Austria. • IAS 31 on accounting for Interest in Joint Ventures.
The policies laid down by these standards imply that all companies over d. Significant events in 2008 which the Group exercises exclusive or joint control or notable influence Dexia was deeply affected by the financial crisis and scarcity of liquidity in FINANCIAL CONSOLIDATED STATEMENTS must be consolidated. the markets, due to its strong dependence on financial markets and the All companies that are controlled exclusively or jointly, or over which is fragility induced by its exceedingly rapid expansion abroad. held some notable influence, are consolidated. On October 9, 2008, the governments of Belgium, Luxembourg and Pursuant to the principle of a true and fair view of the financial statements France provided respectively 60.5%, 36.5% and 3% of a sovereign of the Group, any companies not making a material contribution to the guarantee on all repayment obligations of Dexia SA, Dexia Banque consolidated financial statements should not be included in the scope Internationale à Luxembourg, Dexia Bank Belgium and Dexia Credit Local of consolidation. and their foreign branches up to the value of their respective shares. The total guarantee provided by the three sovereign governments is not Companies whose cumulative total assets and net income represent less to exceed EUR 150 billion. During the year, Dexia Credit Local and its than 1% of total consolidated assets and net income (i.e. respectively branches recorded a total charge of EUR 12.3 million under the terms EUR 4.14 billion and EUR -35.6 million in 2008) are considered to be of this guarantee. below the materiality threshold. At December 31, 2008, the sum of the total assets and the sum of the net incomes of the companies that were The Combined Shareholders’ Meeting of December 22, 2008 elected not consolidated were below these thresholds. to increase the capital of Dexia Credit Local by EUR 3.5 billion in cash, bringing the Company’s total capital to EUR 4.8 billion. In the light of b. Changes in the scope of consolidation compared the losses projected for 2008 as a whole, the Combined Shareholders’ with December 31, 2007 Meeting voted to reduce the capital by EUR 4.3 billion, to EUR 500.5 million. The capital stock now amounts to a total of EUR 500,513,102.75, The principal changes to the Group scope of consolidation in 2008 are comprising 87,045,757 shares with a par value of EUR 5.75 per share. shown below: The deepening financial crisis in 2008 had very severe impacts on the • Newly consolidated companies: Dexia Credit Local Group’s cost of risk. − first time consolidation of Dexia Habitat;
− first time consolidation of Domiserve + in Domiserve scope of consolidation.
Annual Report 2008 / DEXIA CREDIT LOCAL 89 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
The cost of risk was impacted heavily by the FSA subsidiary – which set 44.6 million shares originally called for. The substitution price is set at aside provisions of EUR 1,331 million on its financial products portfolio USD 8.1 per share. and EUR 1,302 million on its FSA Insurance Company, which was directly Insofar as the number and the value of the shares at the time the contract affected by the crisis in the financial and mortgage markets in the United is concluded are not yet certain at present, the USD 8.1 per share value States. The two portfolios both recognized substantial impairment shall be used for accounting purposes. losses on their exposure to residual mortgage backed securities (RMBS, Just like every previous quarter, the earnings figure for the fourth quarter including primarily HELOC, Alt-A, subprime and Option ARM products). of 2008 will remain consolidated within each line of the income statement, The impact of the crisis on FSA’s portfolio of financial products included as Dexia Credit Local still retains the control over this business. On the other the recognition of a EUR 300 million collective provision for impairment hand, the accounting earnings generated as from October 1, 2008 shall on U.S. RMBS risk. be attributable to Assured Guaranty. The selling price is based on the net Exposure to the banking sector also proved quite costly, with the cost of assets sold at September 30, 2008, unless any extraordinary circumstances risk in 2008 incorporating: should arise. • EUR 211 million on the bankruptcy of the Lehman Brothers investment The sale of FSA’s insurance business is taking place as provided for in the bank; schedule that has been prepared, and the transaction is expected to close • EUR 85 million in provisions on various (notably Icelandic) banking during the second quarter of 2009. institutions; The goodwill on FSA was written down in full in 2008, generating an • EUR 29 million in provisions for risks on providers of credit impairment loss of EUR 1,181 million enhancement; In Austria, Kommunalkredit Austria, Dexia Credit Local’s partner in • EUR 32 million for a provision covering RMBS exposure in Spain; Central and Eastern Europe, turned to the Austrian central government • EUR 100 million for a provision covering customer derivatives for assistance in the fourth quarter of 2008. transactions at Dexia banka Slovensko. As a result of the recapitalization plan set in place, Dexia Credit Local The deterioration of the credit spread market in 2008 had a undertook to: considerable impact (EUR 308 million) on the revaluation of those of the • sell its 49% stake in Kommunalkredit Austria; FSA subsidiary’s liabilities classified at fair value option. • subscribe to EUR 200 million in Kommunalkredit Austria preference In accordance with the amendments to IAS39 and IFRS7 Reclassification shares; of Financial Assets, the Dexia Credit Local Group reclassified a portion of • acquire Kommunalkredit Austria’s 49% holding in Dexia Kommunalkredit its financial assets available for sale and held for trading representing a Bank, the joint venture created by Kommunalkredit Austria (49% share) total of EUR 79.6 billion. The impact of this reclassification is described in and Dexia Credit Local (51% share) in order to oversee all operations Note 2.14 Reclassification of financial assets. in Central and Eastern Europe. Dexia Credit Local decided to deconsolidate Kommunalkredit Austria as As part of the implementation of the Dexia transformation plan it has from October 1, 2008 an increased its stake in Dexia Kommunalkredit been decided to cut back on certain businesses. Bank to 100%. The transformation plan is intended to improve the Group’s risk profile A EUR 105 million net loss was recognized on the transaction in the 2008 and focus it back on its most commercially successful operations. financial statements. On November 14, 2008, a sales agreement was signed selling FSA Holdings’ insurance business to Assured Guaranty. The ultimate completion of the agreement is subject to the satisfaction of various regulatory and other conditions, but Dexia Credit Local considers the likelihood that the transaction will be successfully finalized to be highly probable. Information received subsequent to December 31, 2008 confirms Dexia Credit Local’s position of considering that the FSA Insurance Company sale will go through. Based on this information, and in compliance with IFRS 5, Dexia Credit Local has elected to apply the following accounting treatment: the assets and liabilities of FSA Insurance Company’s activities have been broken out on a separate line of the assets and the liabilities on the consolidated balance sheet, and the difference between the net assets sold and the selling price – an estimated loss of EUR 940 million – was recorded in “Net gain (loss) on long-term investments.” The contract of sale provides for half of the total consideration for the sale to be settled in cash (USD 361 million), with the other half to be paid in Assured Guaranty stock (44.6 million shares). At the date the contract was signed, the value of the shares amounted to USD 361 millions (at a price per share of USD 8.10 for Assured Guaranty stock on the signing date). When the contract is ultimately finalized, Assured Guaranty will have the option of substituting payment in cash for the payment in shares initially provided for. This option is may not exceed 22.3 million of the
90 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
1.2 DEXIA CREDIT LOCAL SCOPE OF CONSOLIDATION AT DECEMBER 31, 2008 CONSOLIDATED FINANCIAL CONSOLIDATED STATEMENTS
(1) During the first quarter of 2009, Dexia Credit Local sold its interest in Kommunalkredit Austria (KA) to the Austrian state and purchased Kommunalkredit Austria’s interest in Dexia Kommunalkredit Bank (DKB). Following this transaction, Dexia Credit Local owns 100% of DKB and have no rights in KA. KA was deconsolidated as from October 1, 2008. (2) The remaining 10% is owned by Dexia SA. (3) In mid-November 2008, the Dexia Group announced the sale of FSA’s insurance activities, excluding its Financial products portfolio, to the Assured Guaranty Group, as a result of which the operations sold were classified as held for sale as at December 31, 2008.
Annual Report 2008 / DEXIA CREDIT LOCAL 91 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
a. Fully-consolidated subsidiaries
Name Head office % interest
Dexia CLF Banque 1 passerelle des Reflets, Tour Dexia, La Défense 2, 92913 La Défense France 80
Dexia CLF Immo 1 passerelle des Reflets, Tour Dexia, La Défense 2, 92913 La Défense France 100
Dexia CLF Régions Bail 1 passerelle des Reflets, Tour Dexia, La Défense 2, 92913 La Défense France 100
Dexia Kommunalbank Deutschland AG Charlottenstrasse 82 - D - 10969 Berlin Germany 100
Dexia Crediop Via Venti Settembre 30 - 00187 Rome Italy 70
Dexia Flobail 1 passerelle des Reflets, Tour Dexia, La Défense 2, 92913 La Défense France 100
Floral 1 passerelle des Reflets, Tour Dexia, La Défense 2, 92913 La Défense France 100
SISL 180 rue des Aubépines L1145 Luxembourg 100
Crediop Overseas Bank Ltd. (1) P.O. Box 707 G- 1446 West Bay Road -Grand Cayman - British West Indies 100
Dexia Crediop per la Cartolarizzazione (1) Via Venti Settembre 30 - 00187 Rome Italy 100
Dexia Crediop Ireland (1) 6 George’s Dock IFSC Dublin 1 -Ireland 100
Dexia Kommunalkredit Bank AG (7) Turkenstrass 9 - A-1092 Vienna - Austria 100
Dexia banka Slovensko (2) Hodzova ul. 11 010 11 - Zilina - Slovakia 84.40
Dexia Kommunalkredit Czech Republic (2) Krakovskà 1366/25 - CZ - 110 00 Prague Czech Republic 100
Dexia Kommunalkredit Bank Polska (2) ul. Sienna 39 00-121 Warsaw - Poland 100
Dexia Sofaxis Route de Créton 18100 Vasselay France 99.98
SNC Sofcah (3) Route de Créton 18100 Vasselay France 99.98
SNC Sofcap (3) Route de Créton 18100 Vasselay France 99.98
SARL DS Formation France (3) Route de Créton 18100 Vasselay France 99.98
SNC Sofim (3) Route de Créton 18100 Vasselay France 99.98
SA Dexia DS Services (3) Route de Créton 18100 Vasselay France 100
Dexia Location Longue Durée (4) 1 passerelle des Reflets, Tour Dexia, La Défense 2, 92913 La Défense France 49
Dexia Bail 1 passerelle des Reflets, Tour Dexia, La Défense 2, 92913 La Défense France 99.83
Dexia Municipal Agency 1 passerelle des Reflets, Tour Dexia, La Défense 2, 92913 La Défense France 100
Dexia Israel Bank Ltd. (5) 19 Ha’arbaha str., Hatihon building - Tel Aviv PO Box 709 - Tel Aviv 61200 - 65.31 Israel
Dexia Sabadell SA Paseo de las doce Estrellas, 4 Campo de las Naciones 28042 Madrid Spain 60
CBX.IA 1 1 passerelle des Reflets, Tour Dexia, La Défense 2, 92913 La Défense France 100
CBX.IA 2 (6) 1 passerelle des Reflets, Tour Dexia, La Défense 2, 92913 La Défense France 100
Dexia Habitat 1 passerelle des Reflets, Tour Dexia, La Défense 2, 92913 La Défense France 100
Dexia Credit Local Asia Pacific Pty Ltd. Level 23, Veritas House - 207 Kent Street Sydney NSW 2000 Australia 100
Dexia Delaware LLC 15, East North Street - Dover, Delaware 19901 USA 100
Dexia Crédito Local México SA de CV Sofol Filial Insurgentes Sur 1228 Col. Tlacoquemecalt del Vall 03100 Mexico D.F. 100
Dexia México Servicios SA de CV (13) Insurgentes Sur 1228 Col. Tlacoquemecalt del Vall 03100 Mexico D.F. 100
Dexia Holdings Inc. (12) 31 West 52nd Street - New York, NY 10019 USA 90
Financial Security Assurance Holdings Ltd. (8) 31 West 52nd Street - New York, NY 10019 USA 99.34
Financial Security Assurance Inc. (10) 31 West 52nd Street - New York, NY 10019 USA 100
FSA Insurance Company (10) 31 West 52nd Street - New York, NY 10019 USA 100
Transaction Services Corporation (10) 31 West 52nd Street - New York, NY 10019 USA 100
92 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
Name Head office % interest
CLFG Corp (10) 31 West 52nd Street - New York, NY 10019 USA 100
FSA Portfolio Management Inc. (10) 31 West 52nd Street - New York, NY 10019 USA 100
FSA Services (Australia) Pty Ltd. (10) Level 23, Veritas House - 207 Kent Street Sydney NSW 2000, Australia 100
Financial Security Assurance (UK) Ltd. (10) 1 Angel Court - London, EC2R 7AE United Kingdom 100
FSA Services (Japan) Inc. (10) Meiji Seimei Kan 5F 2-1-1 Marunouchi Chiyoda-ku Tokyo 100-0000 Japan 100
Financial Security Assurance International Ltd. (10) XL house 3 Bermudiana Road - PO Box HM 11 Hamilton, Bermuda 100
FSA FP Financial Products Inc. (9) 31 West 52nd Street - New York, NY 10019 USA 100
FSA Asset Management LLC (9) 31 West 52nd Street - New York, NY 10019 USA 100
FSA Capital Markets Services LLC (9) 31 West 52nd Street - New York, NY 10019 USA 100
FSA Capital Management Services LLC (9) 31 West 52nd Street - New York, NY 10019 USA 100
FSA Administrative Services LLC NY (10) 31 West 52nd Street - New York, NY 10019 USA 100
FSA Global Funding LTD (9) (10) P.O Box 1093 GT, Cowpass Center 2nd Floor, Crewe Road Grand Cayman, 100 Cayman Islands British West Indies
Commercial Mortgage Company III-R2, Inc. (11) P.O Box 1093 GT, Cowpass Center 2nd Floor, Crewe Road Grand Cayman, 100 Cayman Islands British West Indies
Enterprise Company R, Inc. (11) P.O Box 1093 GT, Cowpass Center 2nd Floor, Crewe Road Grand Cayman, 100 Cayman Islands British West Indies
Premier International Funding (9) (10) P.O Box 1093 GT, Cowpass Center 2nd Floor, Crewe Road Grand Cayman, 0 Cayman Islands British West Indies
FSA Capital Markets Services (Caymans) Ltd. (9) P.O Box 1093 GT, Cowpass Center 2nd Floor, Crewe Road Grand Cayman, 0 Cayman Islands British West Indies
FSA Credit Protection Ltd UK (10) 1 Angel Court - London, EC2R 7AE United Kingdom 100
FSA Services (Americas) Inc. (10) Paseo de Las Palmas 405-604 Col Lomas de Chapultepec, 11000 Mexico City, 100 Mexico CONSOLIDATED FINANCIAL CONSOLIDATED STATEMENTS
FSA Mexico Holding Inc. (10) 31 West 52nd Street - New York, NY 10019 USA 100
FSA International Credit Protection Ltd. (Cayman) (10) Offices of M&C Corporate Services Limited, PO Box 309 GT, Ugland House, 100 South Church Street, George Town, GC, Cayman Islands
FSA Seguros Mexico SA (10) Paseo de Las Palmas 405-604 Col Lomas de Chapultepec, 11000 Mexico City, 100 Mexico
FSA Portfolio Asset Limited (UK) (9) 1 Angel Court - London, EC2R 7AE United Kingdom 100
Dexia CAD Funding LLC 445 Park Avenue 7th Floor New York New York 10022 USA 100
Dexia Public Finance Switzerland SA Rue de Jargonnant 2 - CH 1207 Geneva Switzerland 100
(1) Companies consolidated by Dexia Crediop. (2) Companies consolidated by Dexia Kommunalkredit Bank AG. (3) Companies consolidated by Dexia Sofaxis. (4) Dexia Location Longue Durée is fully consolidated due to the contractually-defined relationships existing between the shareholders. (5) 65.99% of voting rights held. (6) CBX.IA2 is 70.85% held by Dexia Credit Local and 29.15% by CBX.IA 1. (7) Under the terms of an agreement with the Austrian central government, during the first quarter of 2009 Dexia Credit Local sold its holding in Kommunalkredit Austria (KA) to the Austrian central government and bought Kommunalkredit Austria’s holding in Dexia Kommunalkredit Bank (DKB). Following this sale, Dexia Credit Local holds 100% of DKB, and no longer holds any voting rights in KA. KA was deconsolidated as from October 1, 2008. (8) In mid-November 2008, Dexia Group signed a commitment to sell the insurance business of the FSA Group. This transaction is expected to close during the second quarter of 2009. (9) Companies consolidated by FSA Holdings Ltd. and maintained in the scope of consolidation of the Dexia Credit Local Group under the terms of the agreement signed mid-November cited in (8). (10) Companies consolidated by FSA Holdings Ltd. intended for sale under the terms of the agreement signed mid-November cited in (8). (11) Companies consolidated by FSA Global Funding Ltd. intended for sale under the terms of the agreement signed mid-November cited in (8). (12) The remaining 10% is owned by Dexia SA. (13) Company consolidated by Dexia Crédito Local México SA de CV.
Annual Report 2008 / DEXIA CREDIT LOCAL 93 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
b. Non- fully consolidated subsidiaries
Name Head office % interest Carrying amount Reason of shares including for exclusion fair-value a djustment (EUR thousands) Dexia Assuréco 1 passerelle des Reflets, Tour Dexia, La Défense 2, 99. 99 1,798 Below threshold 92913 La Défense France CLF Marne La Vallée Participations 1 passerelle des Reflets, Tour Dexia, La Défense 2, 99. 94 96 Below threshold 92913 La Défense France Dexia Editions 1 passerelle des Reflets, Tour Dexia, La Défense 2, 99. 98 512 Below threshold 92913 La Défense France CBX. GEST 1 passerelle des Reflets, Tour Dexia, La Défense 2, 99. 94 674 Below threshold 92913 La Défense France Dexint Développement 1 passerelle des Reflets, Tour Dexia, La Défense 2, 99. 89 55 Below threshold 92913 La Défense France Compagnie pour le Foncier et l’Habitat 1 passerelle des Reflets, Tour Dexia, La Défense 2, 100 3,049 Below threshold 92913 La Défense France Dexia Global Structured Finance 445 Park Avenue New York NY 10022 USA 100 0 Below threshold
Dexia Kommunalkredit Polska sp. Z o.o ul. Sienna 39 00 -121 Warsaw - Poland 100 500 Below threshold
Guide Pratique de la Décentralisation 1 passerelle des Reflets, Tour Dexia, La Défense 2, 99. 74 68 Below threshold 92913 La Défense France Dexia Kommunalkredit Bulgaria 19 Karnigradska Sofia 1000 - Bulgaria 100 496 Below threshold
Dexia Kommunalkredit Romania 42 Dorobantilor street, 1st district 010573 100 290 Below threshold Bucharest Roumania Municipalia Hodzova 11, 010 11 Zilina - Slovakia 60 20 Below threshold
Dexia Kommunalkredit Hungary Horvat u. 14-24 - 1027 Budapest - Hungary 100 354 Below threshold
Dexia Kommunalkredit Adriatic Radnicka cesta 80 HR - 10000 Zagreb Croatia 100 341 Below threshold
Dexia CLF Avenir 1 passerelle des Reflets, Tour Dexia, La Défense 2, 99. 85 74 Below threshold 92913 La Défense France Dexia CLF Développement 1 passerelle des Reflets, Tour Dexia, La Défense 2, 99. 83 58 Below threshold 92913 La Défense France Dexia CLF Energy 1 passerelle des Reflets, Tour Dexia, La Défense 2, 99. 89 106 Below threshold 92913 La Défense France Dexia CLF Organisation 1 passerelle des Reflets, Tour Dexia, La Défense 2, 99. 89 53 Below threshold 92913 La Défense France Genebus Lease 1 passerelle des Reflets, Tour Dexia, La Défense 2, 99. 89 56 Below threshold 92913 La Défense France SISL UKCO Limited One Skill Street London EC2Y 8HQ United Kingdom 100 52 Below threshold
Dexia Finance 1 passerelle des Reflets, Tour Dexia, La Défense 2, 99. 97 2,935 Below threshold 92913 La Défense France DCL Investissements 1 passerelle des Reflets, Tour Dexia, La Défense 2, 99.76 40 Below threshold 92913 La Défense France DCL Projets 1 passerelle des Reflets, Tour Dexia, La Défense 2, 99.76 40 Below threshold 92913 La Défense France Dexia Credit Local Research & Development A/320, Defence Colony, New Dehli 110024 India 100 2 Below threshold India Private LTD Dexiarail 1 passerelle des Reflets, Tour Dexia, La Défense 2, 99.76 40 Below threshold 92913 La Défense France Dexshiplease 1 passerelle des Reflets, Tour Dexia, La Défense 2, 99.76 40 Below threshold 92913 La Défense France Rodexbail 1 passerelle des Reflets, Tour Dexia, La Défense 2, 99.76 40 Below threshold 92913 La Défense France Dexia Carbon Fund I 69 route d’Esch L 1470 Luxembourg 70 12,635 Below threshold
Dexia Carbon Fund Managers 69 route d’Esch L 1470 Luxembourg 100 132 Below threshold
SAS Qualnet Route de Créton 18100 Vasselay France 64.98 1,487 Below threshold
94 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4 c. Joint companies consolidated by the proportionate method
Head office % interest Name
Domiserve 6 rue André Gide 92320 Chatillon France 50
Domiserve + 6 rue André Gide 92320 Chatillon France 50 d. Joint companies non consolidated by the proportionate method
None e. Associated companies accounted for by the equity method
Head office % interest Name
Cre dit du Nord (1) 28, place Rihour 59800 Lille France 10
Dexia Epargne Pension 76 rue de la Victoire, 75009 Paris France 25.35
Kommunalkredit Austria (2) Turkenstrass 9 - A-1092 Vienna - Austria 0
(1) The 10% stake by Dexia Credit Local must be considered cumulatively with the 10% stake held by Dexia Bank Belgium, giving the Dexia group a notable influence that justifies the use of the equity method. (2) Kommunalkredit Austria was consolidated by the equity method up until September 30, 2008. Under the terms of an agreement with the Austrian central government, during the first quarter of 2009 Dexia Credit Local sold its holding in Kommunalkredit Austria (KA) to the Austrian central government and bought Kommunalkredit Austria’s holding in Dexia Kommunalkredit Bank (DKB). Following this sale, Dexia Credit Local holds 100% of DKB, and no longer holds any voting rights in KA. KA was deconsolidated as from October 1, 2008. f. Associated companies not accounted for by the equity method
Head office % interest Carrying amount Reason for exclusion of shares including fair-value a djustment Name (EUR thousands)
80, bd Auguste Blanqui 75013 FINANCIAL CONSOLIDATED STATEMENTS Le Monde Investisseurs Paris France 35.75 2,233 Below threshold Via Giovanbattista Vico, 5 00192 Istituto per il Credito Sportivo Rome Italy 21.62 24,658 Below threshold SPS - Sistema Permanente di Servizi Scpa in liquidazione e concordato preventivo Via Livorno, 36 00162 Rome Italy 20.4 0 Below threshold 75, rue Saint-Lazare 75009 Paris Sogama Crédit Associatif France 14.71 815 Below threshold
SNC du Chapitre 72, rue Riquet 31000 Toulouse 50 4 Below threshold Walker house P.O. Box 265 GT George Town, Grand Cayman Dexia Fondelec Energy Efficiency Cayman Islands, and Emissions reduction Fund British West Indies 28.2 8,818 Below threshold Broughton House 6-8 Sackville street - London - W1S 3DG Impax New Energy Investor United Kingdom 24.99 11,776 Below threshold 283, route d’Arlon - 1150 European public infrastructure managers Luxembourg 20.00 3 Below threshold 17 cours Valmy - Tour Société Générale 92972 Paris La Défense GIE loco 13 bis - France 20.00 0 Below threshold 1 av Eugène Freyssinet 78280 SAS THEMIS Guyancourt - France 40.50 267 Below threshold
La Cité 35 rue de la Gare 75019 Paris 25.5 9 Below threshold 104 avenue de France 75646 Exterimmo Paris Cedex 13 40 20,000 Below threshold
Annual Report 2008 / DEXIA CREDIT LOCAL 95 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
g. Companies which are neither consolidated nor disclosing segment reporting in line with management reporting and accounted for by the equity method in which the external financial communications. Group has at least a 10% stake and whose carrying amount is over EUR 10 million • Amendments to existing standards
None . − IAS 1 Presentation of Financial Statements - Amendment applicable as from January 1, 2009. The impact mainly results in additional disclosures regarding Dexia Credit Local’s statement of changes in equity and statement of income. The impact of this amendment is 1.3 ACCOUNTING POLICIES AND VALUATION being assessed. METHODS − IFRS 2 Share-Based Payment - Vesting Conditions and Cancellations, applicable as from January 1, 2009 which will have no material impact on Dexia Credit Local. a. Applicable accounting standards − IAS 23 Borrowing Costs - Amendment applicable as from January 1, 2009 that requires the capitalization of borrowing costs. It will have APPLICATION OF IFRS RULES ADOPTED BY EUROPEAN no material impact on Dexia Credit Local. COMMISSION (IFRS EU) − IAS 39 Financial Instruments: Recognition and Measurement and The European Commission published Regulation EC 1606/2002 on July IFRS 7 Financial Instruments: Disclosures - A mendment applicable as 19, 2002, requiring listed groups to apply IFRS as from January 1, 2005. from July 1, 2008, permitting the reclassification of some financial This regulation has been updated several times since 2002, validating the instruments. various texts published by the International Accounting Standards Board (IASB) with the exception of certain rules included in IAS 39. This amendment enables companies to transfer some non-derivative financial assets out of: The European Commission has carved out some paragraphs of IAS 39 with the objective of enabling European companies to reflect appropriately in - held for Trading into Available for Sale and into Loans and Receivables, their consolidated financial statements the financial hedges they enter and into in the course of their interest rate Risk Management (application of - available for Sale into Loans and Receivables. interest rate portfolio hedging and the possibility of hedging deposits). Dexia Credit Local applied this possibility to reclassify for some financial Dexia Credit Local’s consolidated financial statements have therefore assets as from October 1, 2008. The impact and further information been prepared in accordance with all IFRS regulations and interpretations on financial statements is disclosed in Note 2.14 Reclassification of published and endorsed by the EC up to the accounting closing. financial assets. The consolidated financial statements are stated in millions of euros (EUR) • Interpretations unless otherwise noted. They are compliant with CNC Recommendation 2004 R 03 published on October 27, 2004. − IFRIC 13 - Customer Loyalty Programs, which will be applicable as from July 1, 2008 but has no impact on Dexia Credit Local. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect amounts reported. − IFRIC 14 - IAS 19 Limit of a Defined Benefit Asset, Minimum Funding While management believes it has considered all available information in Requirements and their Interaction, will be applicable as from January developing these estimates, actual results could differ from such estimates 1, 2008. This interpretation will have no material impact on Dexia and the differences have a material impact on the consolidated financial Credit Local. statements.
TEXTS PUBLISHED BUT NOT YET ADOPTED BY THE EUROPEAN COMMISSION b. Changes in accounting standards during the year For information purposes, note that the following IASB and IFRIC texts published in 2008 had not been adopted by the European Commission at EUROPEAN COMMISSION ENDORSEMENT December 31, 2008 and are not applicable to Dexia Credit Local: In 2008, the European Commission endorsed the following IASB and • Standards IFRIC texts: Revised IFRS 3 Business Combinations, which replaces the standard as • Standards issued in 2004 and will be effective for annual reporting periods that Revised IAS 14 “Segment Reporting.” The IASB issued a revised IAS begin on or after July 1, 2009. The revision of this standard impacts 14 Segment Reporting (IFRS 8) in January 2008 that has no significant Dexia Credit Local for several reasons: impact for Dexia Credit Local. IFRS 8 will supersede IAS 14 for annual − for new acquisitions, Dexia Credit Local can no longer capitalize reporting periods that begin on or after January 1, 2009. It will allow acquisition-related costs as part of the cost of the business acquired;
96 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
− in case of a step-acquisition, Dexia Credit Local will first remeasure c. Accounting Policies applied to consolidated the existing associate to fair value with recognition of the fair value financial statements adjustments to previously recognized assets and liabilities in profit or loss; CONSOLIDATION − for each new investment in a non-controlling interest in an acquired entity, Dexia Credit Local has the possibility to make an option for the Scope of consolidation “full goodwill method”; The consolidated financial statements include the parent company, its − for new acquisitions, an analysis will be required to determine whether subsidiaries and Special Purpose Entities (SPE). Subsidiaries and SPEs are or not a contingent liability of the acquiree is a present obligation. those entities in which Dexia Credit Local, directly or indirectly, has the power to exercise control over financial and operating policies. Revised IFRS 1 First Time Adoption of IFRS, applicable as from July 1, 2009, which has no impact at Dexia Credit Local level, because Dexia Subsidiaries are consolidated from the date on which effective control is Credit Local has already adopted International Financial Reporting transferred to Dexia Credit Local and are no longer consolidated as from Standards. the date on which Dexia Credit Local loses significant influence over such subsidiary. Intercompany transactions, balances and unrealized gains and • Amendments to existing Standards losses on transactions between Dexia Credit Local’s companies have been − IAS 27 Consolidated and Separate Financial Statements - Amendments eliminated. Intra-group losses may indicate an impairment that requires applicable as from July 1, 2009. This amendment should be seen in recognition in the consolidated financial statements. When necessary, relation with the revised IFRS 3 Business Combinations. This amendment adjustments have been amended to ensure consistency with the policies mainly concerns changes in a parent’s controlling ownership of a applied by Dexia Credit Local. subsidiary. The impact of this amendment on Dexia Credit local is Equity and net income attributable to minority interests are shown being assessed. separately in the balance sheet and income statement respectively. − IAS 32 and IAS 1 Puttable Financial Instruments and Obligations Arising on Liquidation Improvements to IFRS – Amendments applicable as from Jointly controlled entities January 1, 2009, which will have no impact on Dexia Credit Local. A joint venture (JV) is a contractual arrangement whereby two or more − Amendment to IFRS 1 First Time Adoption IFRS and to IAS 27 parties undertake an economic activity that is subject to joint control. Consolidated and Separate Financial Statements - Cost of an Investment Joint ventures are accounted for via the proportionate consolidation in a subsidiary, jointly-controlled entity or associate - Amendments also method. In the consolidated financial statements, joint ventures are
applicable from January 1, 2009. The impact of this amendment on integrated by combination of their share of the assets, liabilities, income FINANCIAL CONSOLIDATED STATEMENTS Dexia Credit local will be no material. and expenses.
− IAS 39 Financial Instruments: Recognition and Measurement: Eligible The same consolidation treatment as for subsidiaries is applied for Hedged Items - Amendment being applicable as from July, 1 2009. The intercompany transactions. impact of this assessment on Dexia Credit Local is being assessed. Associates Annual Improvements to IFRS in 2008. Investments in associates are accounted for using the equity method. The International Accounting Standards Board (IASB) issued on May 22, Associates are investments where Dexia Credit Local has significant 2008 Improvements to IFRSs — a collection of minor amendments to the influence, but does not exercise control. This is usually the case when existing standards in its annual improvements project. These amendments Dexia Credit Local owns between 20% and 50% of the voting rights. are effective for annual periods beginning on or after 1 January 2009, The ownership share of net income for the year is recognized as income although entities are permitted to adopt them earlier (option not chosen from associates and the investment is recorded in the balance sheet at an by Dexia Credit Local). The revision of these standards will not have a amount that reflects its share of the net assets including net goodwill. material impact on Dexia Credit Local. Unrealized gains on transactions between Dexia Credit Local and its • Interpretations associates are eliminated to the extent of Dexia Credit Local’s interest. Unrealized losses are also eliminated unless the transaction shows evidence − IFRIC 15 Agreements for the Construction of Real Estate, which will of an impairment of the asset transferred. Losses from investments be applicable as from January 1, 2009, and has no impact on Dexia in associates cease to be recorded once the carrying amount of the Credit Local; investment reaches zero, unless Dexia Credit Local is required to assume − IFRIC 16 Hedges of a Net Investment in a Foreign Operation, which or guarantee the associate’s obligation. will also be applicable as from October 1, 2008, and has no impact on Dexia Credit Local; OFFSETTING FINANCIAL ASSETS AND FINANCIAL LIABILITIES − IFRIC 17 Distributions of Non-cash Assets to Owners, which will be applicable as from July 1, 2009, and has no impact on Dexia Credit In certain circumstances financial assets and financial liabilities are offset Local. and the net amount reported in the balance sheet. This may happen
Annual Report 2008 / DEXIA CREDIT LOCAL 97 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
when there is a legally enforceable right to set off the recognized amounts FINANCIAL ASSETS and there is an intention that expected future cash flows will be settled on a net basis, or that the asset will be realized and the liability settled Interbank and customer loans and advances simultaneously. Assets are presented before any allowance for loss on Loans categorized as “loans and advances,” being those not included impairment. within held for trading , available for sale or designated at fair value through profit or loss, are carried at amortized cost, i.e. the historical cost principal amount, net of any deferred fees and material direct costs FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS on loans and of any unamortized premiums or discounts. The consolidated financial statements are stated in EUR (functional and presentation currency) which is the currency of the country where Dexia Financial assets held for trading Credit Local is registered. Securities held for trading are securities acquired for generating a profit from short-term fluctuations in price or dealer’s margin, or are securities Foreign currency translation included in a portfolio in which a pattern of short-term profit taking exists. On consolidation, the income statements and cash flow statements Trading securities are initially recognized at fair value and subsequently of foreign entities that have a functional currency different from Dexia re-measured at fair value. All related realized and unrealized gains and Credit Local’s presentation currency are translated into Dexia Credit Local’s losses are included in “Net gains (losses) on financial instruments at fair presentation currency (EUR) at average exchange rates for the year or the value through profit or loss.” Interest earned while holding trading assets period and their assets and liabilities are translated at the closing rate. is reported under “I nterest income.“ Dividends received are recognized in “Net gains (losses) on financial instruments at fair value through profit Exchange differences arising from the translation of the net investment in or loss. foreign subsidiaries and associates and of borrowings and other currency instruments designated as hedges of such investments, are recorded as a All purchases and sales of securities held for trading that require delivery cumulative translation difference within shareholders’ equity. On disposal within the time frame established by regulation or market convention of a foreign entity, such exchange differences are recognized in the income (“regular way” purchases and sales) are recognized on the trade date. statement. Financial assets designated at fair value through profit or loss Foreign currency transactions These assets are recognized at fair value through profit or loss. Unrealized For individual Dexia Credit Local entities, foreign currency transactions gains or losses are recognized in the income statement under “Net gains are accounted for using the exchange rate at the date of the transaction. (losses) on financial instruments at fair value through profit or loss.” Outstanding balances denominated in foreign currencies at year-end are Interest income is accrued using the effective interest rate method. Interest translated at closing rates for monetary items and non-monetary items is classified as “Interest income.” carried at fair value. Historical rates are used for non-monetary items Under the fair value option amendment, a financial asset, a financial carried at cost. The resulting exchange differences from monetary items liability or a group of financial instruments can be designated by the entity are recorded in the consolidated income statement; for non-monetary as “at fair value through profit or loss”, provided that doing so results in items carried at fair value, the exchange differences follow the same more relevant information. It is used: accounting treatment as for fair value adjustments. • when such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; TRADE DATE AND SETTLEMENT DATE ACCOUNTING • when a group of financial assets, financial liabilities or both is managed All “regular way” purchases and sales of financial assets and financial and its performance is evaluated on a fair value basis, in accordance liabilities are recognized on the settlement date, which is the date on with a documented Risk Management or investment strategy; which a financial asset or a financial liability is delivered to or by Dexia Credit Local, except for trading financial instruments which are recognized • when an instrument contains an embedded derivative that is not and derecognized at trade date. For assets and liabilities recognized at fair narrowly linked to the host contract. value, Dexia Credit Local recognizes from the trade date any unrealized The use of the fair value option is an accounting policy choice which gains or losses arising from revaluing the contract to fair value at the should be made for the entire financial instrument, at initial recognition reporting date. and when certain conditions of documentation are fulfilled. These unrealized gains and losses are recognized in the income statement unless the transactions have been assigned to cash flow hedge relationships Financial assets available for sale and held to maturity or are related to assets available for sale. Management determines the appropriate classification of its investments at the time of the purchase. However, under certain conditions, financial assets could be reclassified retrospectively.
98 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
Listed securities with fixed maturity are classified as “financial assets held i.e. the income statement difference is less than 10%, the early repayment to maturity” (HTM) when management has both the intent and the ability indemnity is amortized over the remaining term of the new loan. If not, i.e. to hold the assets to maturity. the difference exceeds 10%, the early repayment indemnity is recognized immediately in the income statement. Securities, loans and receivables intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices, are classified Case of early repayment without refinancing as “available for sale“ (AFS). When the loan has been extinguished, the early repayment indemnity, as well as any gains or losses of unamortized premium or discount, is Securities, loans and receivables are initially recognized at fair value recognized in the income statement as income for the period, as required (which includes transaction costs). Interest is recognized based on the by IFRS. effective interest rate method and is recognized within the net interest income. Unrealized gains and losses arising from changes in the fair value Impairment on financial assets of financial assets classified as available for sale are recognized within Dexia Credit Local records allowances for impairment losses when there is equity. an objective evidence that a financial asset or group of financial assets is Held-to-maturity (HTM) investments are carried at amortized cost using impaired, in accordance with IAS 39 (§58-70). The impairments represent the effective interest method, less any allowance for impairment. the management’s best estimates of losses at each balance-sheet date.
When available-for-sale securities are reclassified retrospectively as Loans An interest bearing financial asset is impaired if its carrying amount is and Receivables according to the amendment IAS 39 issued in October greater than its estimated recoverable amount. 2008, the available-for-sale reserve at December 31, 2008 is the amortized Off-balance sheet commitments are impaired in case of uncertainty about available-for-sale reserve related to the securities transferred on October the counterparty. Loan commitments are classified as impaired if the 1, 2008. credit worthiness of the client has deteriorated to an extent that makes repayment of any loan and associated interest payments doubtful. Realized gains and losses on sales of financial assets For financial assets not revalued through the income statement, realized Two types of allowances for impairment losses are recorded on assets: gains or losses on disposals are the differences between the proceeds • Specific loss allowance: The amount of the provision on specifically received (net of transaction costs) and the costs or amortized costs identified assets is the difference between the carrying amount and the of the investments. The cost is systematically determined (FIFO) on a recoverable amount, being the present value of expected cash flows, portfolio basis. When a financial asset available for sale is sold, the total excluding guarantees and collateral, discounted using the effective of gains or losses recognized earlier in equity is reclassified in the income interest rate at the time of the test of impairment. Impairment and FINANCIAL CONSOLIDATED STATEMENTS statement. reversal of impairment are recognized on a case-by-case basis in accordance with the standard. Accounting for early repayment indemnities Financial assets with small balances that share similar risk characteristics Dexia Credit Local has determined the accounting principles applicable are generally aggregated in their measurement. to the restructuring of loans in accordance with AG 62 of IAS 39 dealing with the restructuring of financial liabilities. • Collective allowance: Loss impairments cover incurred losses not covered by specific impairment where there is objective evidence Regarding the method of accounting for early repayment indemnities, that probable losses are present in segments of the portfolio or other there are several possibilities depending on whether the early repayment lending-related commitments at the balance-sheet date. These have is recognized as not being an extinguishment (with refinancing) or as an been estimated based upon historical patterns of losses in each extinguishment (no refinancing). segment, the credit ratings allocated to the borrowers and the current economic environment in which the borrowers operate. Dexia Credit Case of early repayment with refinancing Local develops for that purpose credit risk models using an approach The method of accounting for early repayment indemnities differs that combines appropriate default probabilities and losses given default depending on whether the restructuring results in terms that are that are subject to regular back testing and are based on Basel II data substantially different from those set initially. and risk models.
In accordance with the principles of AG 62, Dexia Credit Local considers At closing date, Dexia Credit Local’s management reviews the environment that the terms are substantially different when the net present value of in order to determine if the data used for the model needs to be adjusted. the cash flows under the new terms, including any fees paid net of any If such adjustments are useful (e.g. related to the concentration of risk for fees received, is at least 10% different from the discounted net present a business segment), an additional provision is recognized. value of the remaining cash flows from the original loan. The country risk component is included within collective and specific The early repayment indemnity is recognized immediately in the income impairment. statement or else amortized over the remaining term of the modified loan When a financial asset is determined by management as being uncollectible, depending on the results of the eligibility test. If the eligibility test is passed, it is written off against its related impairment; subsequent recoveries
Annual Report 2008 / DEXIA CREDIT LOCAL 99 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
are recognized within the cost of risk in the income statement, in the Liabilities designated at fair value through profit or loss heading “Impairment on loans and provisions for credit commitments.” Accounting principles for financial liabilities designated at fair value If the amount of the impairment subsequently decreases due to an event through profit or loss are the same as those used for financial assets. occurring after the write-down of the initial impairment, the release of the provision is credited to the cost of risk. Borrowings Financial assets available for sale (AFS assets) are only subject to specific Borrowings are recognized initially at fair value, being their issue proceeds loss risk allowances. net of transaction costs incurred. Subsequently borrowings are stated at amortized cost and any difference between net proceeds and the “Available for sale” (AFS) listed equities are valued at fair value through redemption value is recognized in the statement of income over the period “Unrealized or deferred gains and losses” or within the income statement of the borrowings using the effective interest rate method. in the case of impairment. Impairments are recognized if the carrying amount is no longer considered as recoverable. Debts are included in the financial statement, based on their underlying economic characteristics more than their legal form. Dexia Credit Local analyses all equities that have declined by more than 25% of their quoted price. Management examines the risk and takes the decision to impair based on its recoverability. A prolonged decline in the fair DERIVATIVES value below its cost is also objective evidence of impairment. Impairment on equity securities cannot be reversed in the income statement due to Fair value derivatives later recovery of quoted prices. Derivative financial instruments generally include foreign exchange contracts, currency and interest rate futures, forward rate agreements, Impairment on financial assets included in held to maturity (HTM) or fixed currency and interest rate swaps and currency and interest rate options income financial assets in AFS is reported in “Cost of risk.” Impairment on (both written and purchased). All derivatives are initially recognized in the variable income financial assets in AFS is reported in “Net gains (losses) balance sheet at fair value and are subsequently re-measured at fair value. on financial assets available for sale.” Fair values are obtained from quoted market prices, discounted cash flow Sale and repurchase agreements and lending of securities models and option pricing models as appropriate. Securities sold subject to a linked repurchase agreement (repos) remain The amount reported on these lines of the balance sheet includes the recognized in the financial statements as financial assets held for trading, premium paid/received net of amortization, the fair value adjustment financial assets available for sale or financial assets held to maturity. The and accrued interest, the sum of all elements representing the fair value corresponding liability is included in “Interbank borrowings and deposits” of the derivative. or “Customer deposits” as appropriate. Certain derivatives embedded in other financial instruments are treated Securities purchased under agreements to resell (reverse repos) are as separate derivatives when: recorded as: • their risks and characteristics are not closely related to those of the • an obligation to return securities within off-balance sheet items; and host contract;
• “Interbank loans and advances” or “Customers loans and advances” • the hybrid contract is not carried at fair value with unrealized gains and as appropriate. losses reported in the income statement.
The difference between the sale and repurchase price is treated as interest Hedging derivatives income or expense and is amortized over the life of the agreements using On the date a derivative contract is entered into, Dexia Credit Local may the effective interest rate method. designate certain derivatives as either:
Securities lent to counterparties are retained in the financial statements. • a hedge of the fair value of a recognized asset or liability or a firm Securities borrowed are not recognized in the financial statements. If they commitment (fair value hedge); are sold to third parties, the obligation to return them is recorded at fair value in “Financial liabilities at fair value though profit or loss” and the • a hedge of a future cash flow attributable to a recognized asset or gain or loss is included in “Net gains (losses) on financial instruments at liability or a forecasted transaction (cash flow hedge); fair value through profit or loss.” • a hedge of a net investment in a foreign entity (net investment hedge).
FINANCIAL LIABILITIES If a derivative is not designated in a hedging relationship, it is to be deemed held for trading or as part of operation designated at fair value Liabilities held for trading through profit or loss. Liabilities held for trading follow the same accounting rules as those for Hedge accounting may be used for derivatives designated in this way, loans and securities held for trading. provided certain criteria are met.
100 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
The primary criteria for a derivative instrument to be accounted for as a Hedge relationships are used to reduce the interest rate risk exposure hedge include inter alia: stemming from the selected category of assets or liabilities designated as the qualifying hedged items. • formal documentation of the hedging instrument, hedged item, hedging objective, strategy and relationship between the hedging The Company performs a global analysis of interest rate risk exposure. instrument and the hedged item must be prepared before hedge This consists of assessing fixed rate exposure taking into account all the accounting is applied; exposure coming from balance sheet and off-balance sheet items. This global analysis may exclude certain components of the exposure, such as • the hedge is documented showing that it is expected to be effective financial market activities, provided that the risk exposure stemming from both prospectively and retrospectively in offsetting changes in fair the excluded activities is monitored on an activity-by-activity basis. value or cash flows attributable to the hedged risk in the hedged item throughout the reporting period; The entity selects assets and/or liabilities to be entered into the hedge of interest rate risk exposure of the portfolio. The entity defines at inception • the hedge shall be effective at inception and on an ongoing basis. the risk exposure to be hedged, the length of the time-band, the method Dexia Credit Local entities use internal derivative contracts (internal and the frequency with which it performs tests. The entity consistently hedging) mainly to cover their interest rate risk. If the contracts cannot applies the same methodology for selecting assets and liabilities entering be offset with non-Group counterparties, then the criteria for employing in the portfolio. Assets and liabilities are included on a cumulative basis in hedge accounting have not been met. all the time-bands of the portfolio. Hence, when they are removed from the portfolio, they must be removed from all the time-bands on which Internal derivative contracts between separate divisions within the same they had an impact. legal entity and between separate entities within the consolidated group can qualify for hedge accounting in the consolidated financial statements The entity may choose which assets and/or liabilities it wishes to classify only if the internal contracts are offset by derivative contracts with a party into the portfolio provided they are included in the global analysis. Demand external to the consolidated group. In this case, the external contract is deposits and savings accounts may be included in the portfolio based on regarded as the hedging instrument. behavioral study for estimating expected maturity date. The entity may designate as qualifying hedged items different categories of assets or Changes in the fair value of derivatives that are designated and documented liabilities such as “available for sale” assets or loan portfolios. in a fair value hedging relationship, and which comply with the criteria provided above, are recorded in the income statement, along with the Hedging consists of derivatives whose positions may offset each other. corresponding change in fair value of the hedged assets or liabilities that The hedging items are recognized at their full fair value (including accrued is attributable to that specific hedged risk. interest expense or income) with adjustments accounted for in the income statement. If the hedge no longer meets the criteria for hedge accounting, the FINANCIAL CONSOLIDATED STATEMENTS adjustment to the carrying amount of a hedged interest-bearing financial In the balance sheet, revaluations are recognized as: instrument is amortized to net profit or loss over the period to maturity • fair value revaluation of portfolio hedges in assets; through an adjustment of the yield of the hedged item. • fair value revaluation of portfolio hedges in liabilities; Changes in the fair value of derivatives that are designated and qualify as cash flow hedges and that prove to be highly effective in relation • part of the heading “loans and receivables available for sale.”. to the hedged risk, are recognized in the hedging reserve in equity as Effectiveness tests consist of verifying that the hedging objective, i.e. “Unrealized or deferred gains and losses” (see ”Consolidated statement reducing the interest rate risk exposure, is fulfilled. Inefficiency can come of change in equity”). only from overhedging due to non-contractual events occurring within The non-effective portion of the changes in the fair value of the derivatives the categories of assets or liabilities. is recognized in the income statement. Amounts deferred in equity are transferred to the income statement and classified as revenue or expense in the periods during which the hedged firm commitment or forecast FAIR VALUE OF FINANCIAL INSTRUMENTS transaction affects the income statement. Fair value is the amount for which an asset could be exchanged, or a Certain derivative transactions, while providing effective economic hedges liability settled, between knowledgeable, willing parties in an arm’s-length under Dexia Credit Local’s Risk Management positions, do not qualify transaction. for hedge accounting under the specific rules in IFRS and are therefore Market prices are used to determine fair value, where an active market treated as derivatives held for trading with fair value gains and losses (such as a recognized exchange) exists, as it is the best evidence of the reported in income. fair value of a financial instrument. Active market prices are not, however, available for a significant number of the financial assets and liabilities held Hedging of the interest rate risk exposure of a portfolio or issued by Dexia Credit Local. Dexia Credit Local has decided to apply IAS 39 as adopted by the European Union because it better reflects the way Dexia Credit Local manages its If the market for a financial instrument is not active, recourse is provided by activities. valuation techniques. A valuation technique reflects what the transaction price would have been on the measurement date in an arm’s length
Annual Report 2008 / DEXIA CREDIT LOCAL 101 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
exchange motivated by normal business considerations, i.e. the price amount of the deferred day one profit or loss is taken entirely in the that would be received by the holder of the financial asset in an orderly income statement. transaction that is not a forced liquidation or forced sales.
The valuation model should attempt to take into account all factors that NON-CURRENT ASSETS HELD FOR SALE market participants would consider when pricing the asset. In this context, Dexia Credit Local used its proper valuation model and market assumptions, If the carrying amount of a non-current asset or disposal group will be i.e. present value or other estimation and valuation techniques based on recovered principally through a sale transaction, rather than through market conditions existing at balance sheet dates. continuing use, it is classified as held for sale if:
Financial investments classified as at fair value through profit or loss, • it is available for immediate sale in its present condition; and available for sale or designated at fair value through profit or loss, • its sale is highly probable. derivatives and other transactions undertaken for trading purposes are measured at fair value by reference to quoted market prices when An entity shall measure a non-current asset (or disposal group) classified available. If quoted market prices are not available, then fair values are as held for sale at the lower of its carrying amount and fair value less costs estimated on the basis of pricing models or discounted cash flows using to sell. Non-current assets or disposal groups classified as held for sale are either observable and/or unobservable market data. presented separately in the balance sheet (asset, liability and equity).
For assets and liabilities classified at fair value through profit or loss or available for sale (AFS) and derivatives, when quoted prices are not INTEREST INCOME AND EXPENSE available, the pricing models try to reflect as precisely as possible the Interest income and expense are recognized in the income statement for all market conditions at the calculation date as well as the changes in the interest bearing instruments on an accrual basis using the effective interest credit quality of the financial instruments and the market liquidity. rate method based on the purchase price (including transaction costs). The following remarks may be said of the fair value of loans and Transaction costs are incremental costs that are directly attributable to the receivables: acquisition of a financial asset or liability and are used for the calculation • the fair value of fixed-rate loans and mortgages is estimated by of effective interest rate. An incremental cost is one that would not have comparing market interest rates when the loans were granted with been incurred if the entity had not acquired the financial instrument. current market rates offered on similar loans; Accrued interest is reported in the same line as the related financial asset • cap, floor and prepayment options are included in determining the fair or liability in the balance sheet. value of loans and receivables. Once a financial asset has been written down to its estimated recoverable amount, interest income is thereafter recognized based on the rate of Day one profit or loss interest that was used to discount the future cash flow s for measuring The best evidence of the fair value of a derivative at initial recognition the recoverable amount. is the transaction price (i.e., the fair value of the consideration given or received) unless the fair value of that instrument is: FEE AND COMMISSION INCOME AND EXPENSE • evidenced by comparison with other observable current market transactions in the same instrument (i.e., without modification or Fees and commissions are recognized in accordance with IAS 18. Per repackaging); or this standard, most of the commissions arising from Dexia Credit Local’s activities are recognized on an accrual basis over the life of the underlying • based on a valuation technique whose variables include only data from transaction. observable markets. Commissions and fees arising from significant acts such as negotiating, The difference between the transaction price and the fair value based or participating in the negotiation of a transaction for a third party, such on a valuation technique is commonly referred to as ”Day one profit or as the arrangement of the acquisition of loans, equity securities or other loss.” securities or the purchase or sale of businesses, are recognized based on Where the fair value is determined using validated valuation models for the stage of completion of the underlying transaction. which all inputs are market observable, Dexia Credit Local recognizes the For asset management operations, revenue consists principally of day one profits or losses at initial recognition in the income statement. investment company and mutual fund management and administration Where such evidence does not exist, day one profit or loss is deferred and fees. Revenue from asset management is recognized as earned when recognized in the income statement to the extent that it arises from a the service is provided. Performance fees are recognized when they are change in a factor (including time) that market participants would consider definitively acquired. in setting a price. The unrecognized amount of day one profit is amortized on the remaining life of the transaction. If subsequently, the inputs become market observable, or when the instrument is derecognized, the remaining
102 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
Commitment fees on lines of credit are recognized as part of the effective in its insured portfolio. If an individual policy risk has a probable loss as of interest rate if the line is used, and recorded as commission income on the balance sheet date, a specific reserve is established. For the remaining expiry if the line is not used. policy risks in the portfolio, a general reserve is established to account for the inherent credit losses that can be statistically estimated.
INSURANCE ACTIVITY Dexia Credit Local establishes a specific reserve for the present value of the estimated loss, net of recoveries, when, in management’s opinion, General principles likelihood of a future loss on a particular insured obligation is probable and reasonably estimable at the balance sheet date. When an insured Financial Security Assurance (FSA) is active in credit enhancement of public obligation has met the criteria for establishing a specific reserve and the finance and asset-backed obligations. transaction pays a premium in installments, those premiums, if expected Dexia Credit Local is applying IFRS 4 which allows a company to account to be received prospectively, are considered as a form of recovery and are for insurance contracts under local GAAP if they qualify as such under no longer earned as premium revenue. this standard. A specific reserve is determined using cash flow or similar models that Hence, Dexia Credit Local has decided to use local accounting policies represent Dexia Credit Local’s estimate of the net present value of the to evaluate technical provisions for contracts that fall under the scope anticipated shortfall between: of IFRS 4. • expected payments on the insured obligation plus anticipated loss The amounts received and paid relating to insurance products (including adjustment expenses; and non-life claims) are reported respectively under “other income” and • anticipated cash flow from and proceeds to be received on sales of any “other expenses.” “Technical margin of insurance companies” is stated collateral supporting the obligation and other anticipated recoveries. in a footnote to the income statement. The estimated loss, net of recovery, on a transaction is discounted using Losses and changes in provisions for credit enhancement activities, which the risk-free rate appropriate for the term of the insured obligation at the are similar to banking activities, are reported under “Impairment of loans time the reserve is established. and provisions on financing commitments.” Dexia Credit Local records a general reserve to reflect the credit risks Amortization of deferred acquisition costs is presented under a separate inherent in its portfolio. General reserves in addition to specific reserves heading within operating expense. represent Dexia Credit Local’s estimate of the total reserves. Generally, All other items arising from insurance activities are classified according to when an insured credit deteriorates to a point where claims are expected, their nature in the balance sheet, except for technical provisions, which a specific reserve is established. CONSOLIDATED FINANCIAL CONSOLIDATED STATEMENTS are identified under a separate heading. The general reserve amount established considers all levels of protection (e.g. reinsurance and over-collateralization). Net par outstanding for Technical provisions of insurance companies policies originated in the current period is multiplied by loss frequency and severity factors. The loss factors used for calculation are the product FSA activity of default frequency rates obtained from Moody’s and severity factors Financial guaranty insurance generally provides an unconditional and obtained from S&P. Moody’s is chosen due to its credibility, large population, irrevocable guaranty that protects the holder of a financial obligation statistical format and reliability of future update. Dexia Credit Local applies against non-payment of principal and interest when due. Upon a payment an experience factor to the results of the statistical calculation. default on an insured obligation, Dexia Credit Local is generally required to pay the principal, interest or other amounts due in accordance with Liability adequacy test the obligation’s original payment schedule or, at its option, to pay such amounts on an accelerated basis. The contract may be considered as a An insurer applies a Liability Adequacy Test for its insurance products, in derivative or an insurance contract depending on certain legal or economic accordance with IFRS 4. Dexia Credit Local assesses at each reporting date characteristics. whether its recognized insurance liabilities are adequate, using current estimates of future cash flows under its insurance contracts. Gross and ceded premiums received in upfront payouts are earned in proportion to the amount of risk outstanding over the expected period of For non-life insurance, the Liability Adequacy Test is a sufficiency test coverage. Deferred premium revenue and prepaid reinsurance premiums within IFRS 4 that examines if premium and reserves are sufficient to represent the portion of premium that is applicable to coverage of risk to cover any open claim files and claims that are expected to occur within be provided in the future on policies in force. the contractual duration of the contracts.
Dexia Credit Local establishes provisions for losses based on its estimate Reinsurance of specific and non-specific losses. Dexia Credit Local also establishes Dexia Credit Local’s reinsurance contracts with third parties that contain provisions for loss adjustment expenses, consisting of the estimated cost enough insurance risk to be classified as an insurance contracts continue of settling claims, including legal and other fees and expenses associated to be accounted for in accordance with local GAAP. with administering the claim process. Dexia Credit Local calculates a loss and loss adjustment expenses liability based upon identified risks inherent
Annual Report 2008 / DEXIA CREDIT LOCAL 103 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
A reinsurance asset is impaired if, and only if: Foreign exchange losses on liabilities for the acquisition of an asset as well as the interest on specific or general borrowings to finance the • there is objective evidence, as a result of an event that occurred after construction of qualifying assets are expensed immediately. Where the initial recognition of the reinsurance asset, that the cedant may not carrying amount of an asset is greater than its estimated recoverable receive all amounts due to it under the terms of the contract; and amount, it is written down to its recoverable amount. Gains and losses • that event has a reliably measurable impact on the amounts that the on disposals of property and equipment are determined by reference to cedant will receive from the reinsurer. their carrying amount and are included in “Net gains (losses) on other assets.” Expenditure that enhances or extends the benefits of real estate To measure the solvency of a reinsurer, we refer to its attributed credit or fixed assets is capitalized and subsequently depreciated. rating and the impairment rules. Investment properties are those properties held to earn rentals or for Deferred acquisition costs capital appreciation. Dexia Credit Local may also partly use certain Deferred acquisition costs are comprised of expenses related to the investment properties. production of business, including commissions paid on reinsurance If the “own use” portions can be sold separately or leased out separately assumed, compensation and related costs of underwriting and marketing under a finance lease then these portions are accounted for separately. personnel, certain rating agency fees, premium taxes, and certain other If the “own use” portions cannot be sold separately, the property is an underwriting expenses, and reduced by commission income on premiums investment property only if Dexia Credit Local holds an insignificant portion ceded to reinsurers. for its own use.
Deferred acquisition costs are amortized over the period in which the Investment properties are recorded at acquisition cost less accumulated related premiums are earned. Amortization of deferred acquisition costs depreciation and impairment. Investment properties are depreciated over is presented on a separate heading within general operating expense. their useful lives on a straight-line basis. When an insured issue is retired or defeased prior to the end of the expected period of coverage, the remaining deferred acquisition cost is INTANGIBLE ASSETS recognized in the income statement. Recoverability of deferred acquisition costs is determined by: Intangible assets mainly consist of internally generated and acquired software. Costs associated with maintaining computer software • considering future revenues (deferred premium revenue and expected programs are recognized as expense as incurred. However, expenditure future installments); and that enhances or extends the benefits of computer software programs • the present value of anticipated losses and loss adjustment expense. beyond one year is used to increase the original cost of the software. Computer software development costs recognized as assets are amortized using the straight-line method over their useful lives from the time the TANGIBLE FIXED ASSETS software is available for use. This amortization period is usually between Tangible fixed assets include office buildings, furnishings and equipment, three and five years. and investment properties. When the carrying amount of an intangible asset is greater than its All office buildings, furnishings and equipment are stated at historical cost estimated recoverable value, an impairment loss is recognized and the less accumulated depreciation and impairment. Depreciation is calculated carrying amount of this asset is written down to its estimated recoverable using the straight-line method to write down the cost of such assets to value. Gains and losses on disposals of intangible assets are determined their residual values over their estimated useful lives. by reference to their carrying amount and are included in “Other income” and ‘Other expense” in the income statement. Expenditure that enhances The service lives for the main tangible fixed assets are as follows: or extends the benefits is capitalized and subsequently depreciated. • structure of the building: 50 years;
• roof, and frontage: 30 years; GOODWILL
• technical installations: 10 to 30 years; Goodwill • fixture and fittings: 10 to 30 years; Goodwill represents the excess of the cost of an acquisition over the • leasehold improvements, equipment and furniture: 2 to 12 years; fair value of Dexia Credit Local’s share of the net assets of the acquired subsidiary or associated undertaking at the date of acquisition. Goodwill • computer equipment: 3 to 6 years; on acquisitions occurring on or after January 1, 2004 is reported in the • vehicles: 2 to 5 years. balance sheet as an intangible asset.
An item of property and equipment can be composed of different parts Goodwill is allocated to cash generating units for the purpose of with individually varying useful lives. In such a case, each part is depreciated impairment testing. Cash generating units are designed by the criteria of separately over its estimated useful life. legal entity, geographic area and business segment.
104 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
Changes in percentage of ownership in fully-consolidated companies DEFERRED INCOME TAX are considered as transactions with shareholders. Therefore, neither fair Deferred income tax is recognized in full, using the liability method, on value adjustments nor goodwill adjustments are made, when percentage temporary differences arising between the tax bases of assets and liabilities increases or decreases take place without necessitating a change in the and their carrying amounts in the financial statements. consolidation method. The difference between the value of the net assets purchased or sold and the purchase or selling price is recorded directly The rates enacted or substantively enacted at the balance-sheet date are in equity. used to determine deferred income tax.
Deferred tax assets are recognized to the extent that it is probable that Impairment of goodwill future taxable profit will be available against which the temporary The carrying amount of goodwill is reviewed at year-end or when differences can be utilized. circumstances or events indicate that there may be uncertainty over the carrying amount. It is written down for impairment when the recoverable Deferred income tax is recognized on temporary differences arising from amount of the business is insufficient to support the carrying amount. investments in subsidiaries, associates and joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it Other assets is probable that the difference will not reverse in the foreseeable future. Other assets are comprised primarily of accrued income (non-interest Deferred tax related to fair value re-measurement of available-for-sale related), prepayments and other accounts receivable. They also include investments and cash flow hedges, which are charged or credited directly insurance products (reinsurance, insurance premiums receivable, etc.), to equity, is also credited or charged directly to equity and is subsequently construction contracts, inventories and plan assets relating to employee recognized in the income statement together with the deferred gain or benefit obligations. These other assets are recorded at amortized cost less loss. impairment if applicable. Benefits granted to employees are recognized in accordance with IAS 19 requirements. EMPLOYEE BENEFITS
Employee benefit obligations are measured at the present value of the LEASES estimated future cash outflows using interest rates of corporate bonds rated AA, which have terms to maturity approximating the terms of Dexia Credit Local company is the lessor the related liability and taking into consideration also actuarial and When assets held are subject to a finance lease, the present value of the demographic assumptions. lease payments is recognized as a receivable. The difference between the gross receivable and the present value of the receivable is recognized as Qualified internal and independent actuaries carry out valuations of FINANCIAL CONSOLIDATED STATEMENTS unearned finance income. Lease income is recognized over the term of these obligations. All valuation assumptions and results are reviewed and the lease using the net investment method (before tax), which reflects a validated by an independent actuary for Dexia Credit Local who ensures constant periodic rate of return. that all calculations are standardized and calculated in compliance with IAS 19 and IFRS 2. Dexia Credit Local company is the lessee Pension obligations A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset. An operating lease is a lease Dexia Credit Local operates a number of defined benefit and defined other than a finance lease. contribution plans throughout the world, the assets of which are generally held in independent insurance companies. The pension plans are generally When an operating lease is terminated before the lease period has expired, funded by payments from employees and by the relevant Dexia Credit any payment to be made to the lessor by way of penalty is recognized as Local companies. an expense in the period in which termination takes place.
Amortization of those assets is included in “Other expenses.” Defined benefit plans
If the lease agreement substantially transfers the risk and rewards of For defined benefit plans, pension expense is assessed using the projected ownership of the asset, the lease is recorded as a finance lease and the unit credit method. Under this method, the cost of providing pensions related asset is capitalized. At inception, the asset is recorded at the lower is charged to the income statement so as to spread the regular cost over of the present value of the minimum lease payments or fair value and the service lives of employees. Dexia Credit Local has elected to apply the is depreciated over its estimated useful life. The corresponding rental “corridor method.” Net cumulative unrecognized actuarial gains and obligations are recorded as borrowings and interest payments are recorded losses exceeding the corridor (the greater of 10% of the present value using the effective interest rate method. of the gross defined benefit obligation or 10% of the fair value of any plan assets) are recognized in income over the average remaining life of the plan.
Annual Report 2008 / DEXIA CREDIT LOCAL 105 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
The defined obligation is presented net of plan assets as a liability unless PROVISIONS FOR CONTINGENCIES AND CHARGES the assets are held by a Group entity in which case the assets are recorded A provision represents a liability of uncertain timing or amount. gross in the related lines of the assets. Provisions are recognized based on their discounted value when:
Defined contribution pension plans • Dexia Credit Local has a present legal or implicit obligation as a result Dexia Credit Local’s contributions to defined contribution pension plans of past events; are charged to the income statement in the year to which they relate. The • it is probable that an outflow of resources embodying economic benefits obligation of Dexia Credit Local is limited to the contributions that Dexia will be required to settle the obligation; Credit Local agrees to pay into the fund on behalf of the employees. • a reliable estimate of the amount of the obligation can be made. Other postretirement obligations Some Dexia Credit Local companies provide postretirement health care DIVIDENDS ON COMMON STOCK benefits to their retirees. The entitlement to these benefits is usually based on the employee remaining in service up to retirement age and Dividends on common stock are recognized in equity in the period in the completion of a minimum service period. The expected costs of these which they are declared (authorized and no longer at the discretion of the benefits are accrued over the period of employment, using a methodology entity). Dividends for the year that are declared after the balance-sheet similar to that for defined benefit pension plans. date are disclosed in the subsequent events note.
Other long-term benefits EARNINGS PER SHARE This mainly includes provisions for service awards that will be received by employees when they become entitled to this right. Basic earnings per share is calculated by dividing net income before minority interests available to common shareholders by the weighted Termination benefits average number of shares of common stock outstanding during the Provisions are set aside for these benefits when all conditions for eligibility year. are met.
RELATED-PARTY TRANSACTIONS Vacation benefits Standard annual leave and seniority-based vacation leave are recognized Parties are considered to be related if one party has the ability to control when they accrue to employees. A provision is made for the estimated the other party or exercise significant influence over the other party in liability for annual leave and long-service leave accrued to employees up making financial or operational decisions. The ultimate parent of the to the balance-sheet date. Group is Dexia SA, incorporated in Belgium. Relations with companies accounted for by the equity method are reported, as are relationships Benefits granted of equity instruments with the directors. Dexia Credit Local can, under specified vesting conditions (typology of employee, completion of continuing service for a specified period, etc..) SEGMENT REPORTING grant options on equity instruments after a vesting period served by the employee on a contractual basis. The fair value of the service rendered A segment is a distinguishable component of Dexia Credit Local that is by employees is recognized as an expense in the income statement with engaged either in providing products or services (business segment) or in a corresponding increase in the equity of Dexia Credit Local or that of providing products or services within a particular economic environment its parent company, Dexia, upon satisfaction of any specified vesting (geographic segment), which is subject to risks and rewards that are conditions. different from those of other segments. Segments with a majority of revenue earned from sales to external customers and whose revenue, result Dexia Credit Local applies IFRIC 11 from January 1, 2008. In case of or assets are 10% or more of all the segments are reported separately. employees benefits granted involving equity instruments of the parent, this interpretation requires that the expenses (corresponding to the fair Geographic segments (primary segment reporting) value of the service rendered) be recognized in equity (contribution from Dexia Credit Local’s business segments are managed on a worldwide basis. the parent) and not as income received from the parent. They operate in four main geographic areas: The information for 2007 has been restated in order to be comparable • Eurozone (countries using the euro as currency); (EUR- 11.8 million in the income statement). The impact on equity during 2008 amounted to EUR 4 million. • rest of Europe (European countries which do not belong to the euro zone);
• U.S.;
• rest of world.
106 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
Segmentation by activity (secondary segment reporting) The results of each business line also include:
Dexia Credit Local’s reportable segments are defined using the • the earnings from commercial transformation, including the “management approach,” which are those used by management to management costs of this transformation and the Group equity allocated strategically manage Dexia Credit Local and make business decisions. to this activity on the basis of medium and long-term outstandings;
Dexia Credit Local is organized as follows: • interest on economic capital: economic capital is allocated to the • Public & Wholesale Banking, business lines for internal purposes and the return on economic capital is used to measure the performance of each business line; • Personal Financial Services, • funding cost. • Treasury and Financial Markets, Segment assets and liabilities are comprised of operating assets and • other. liabilities, being the majority of the balance sheet but excluding items The “other” part is mainly composed of: such as tax assets and liabilities.
• equity portfolios not allocated to other segments; The accounting policies of the segments are the same as those described in the summary of significant accounting policies. • unallocated equity;
• building property, other tangible fixed assets and intangible assets not CASH AND CASH EQUIVALENTS attributable to other business lines; For the purposes of the statement of cash flow, cash and cash equivalents • items non attributable to other segments. comprise balances with terms to maturity of under three months included within cash and balances with central banks, interbank loans and advances, financial assets held for trading, financial assets available for sale and financial assets designated at fair value through profit or loss. CONSOLIDATED FINANCIAL CONSOLIDATED STATEMENTS
Annual Report 2008 / DEXIA CREDIT LOCAL 107 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
( 2. NOTES ON THE ASSETS
2.0 CASH, CENTRAL BANKS AND POSTAL CHECKING ACCOUNTS (ITEM I - ASSETS)
2007 2008 (EUR millions)
Cash 27 48
Mandatory reserve deposits with central banks 951 493
Other central bank deposits and balances with postal checking accounts 575 91
TOTAL 1,553 632
of which included in cash and cash equivalents 1,552 632
2.1 FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (ITEM II - ASSETS)
This line includes both the portfolio held for trading and all financial assets at fair value through profit or loss (see point regarding “Financial assets at fair value through profit or loss“ in note 1.3 Accounting policies and valuation methods).
2007 2008 (EUR millions)
Loans and securities 18,370 5,848
Derivatives (see note 4.1.b) 5,728 19,570
TOTAL 24,098 25,418
a. Analysis by counterparty
2007 2008
Held for trading Designated Total Held Designated Total (EUR millions) at fair value for trading at fair value
Public sector 2,104 210 2,314 465 199 664
Banks 4,720 260 4,980 1,097 89 1,186
Other sectors 11,015 61 11,076 3,959 39 3,998
TOTAL 17,839 531 18,370 5,521 327 5,848
of which included in cash and cash equivalents 153 0 153 273 0 273
of which included in finance leases 000000
108 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4 b. Analysis by type
2007 2008
Held for trading Designated Total Held Designated Total (EUR millions) at fair value for trading at fair value
Loans 423 140 563 4 7 11
Bonds issued by public bodies 112 210 322 5 179 184
Other bonds and fixed-income instruments 17,304 158 17,462 5,512 114 5,626
Equities and other variable-income instruments 0 23 23 0 27 27
TOTAL 17,839 531 18,370 5,521 327 5,848 c. Treasury bills and other eligible bills for refinancing with central banks
2007 2008 (EUR millions)
TOTAL 53 d. Securities pledged under repurchase agreements (repos)
2007 2008 (EUR millions)
Included in bonds issued by public bodies 95
Included in other bonds and fixed-income instruments 561 907
e. Analysis by maturity and interest rate: see To determine the fair value for unlisted financial instruments classified FINANCIAL CONSOLIDATED STATEMENTS notes 7.7 and 7.4 under the fair value option, the pricing tools used and procedures followed are determined by Group Risk Management. The pricing tool is f. Analysis of the fair value: see note 7.1 a discounted cash flow model whereby the net present value is determined using an interest rate yield curve applicable for similar securities. The Dexia Credit Local Group uses the fair value option mainly to eliminate or significantly reduce the measurement or the recognition inconsistency (also called the accounting mismatch) that otherwise arises from measuring financial assets or recognizing the gains and losses on them on a different basis.
Annual Report 2008 / DEXIA CREDIT LOCAL 109 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
g. Reclassification of financial assets (IAS 39 amended): see note 2.14
2.2 FINANCIAL ASSETS AVAILABLE FOR SALE (ITEM IV - ASSETS)
a. Analysis by counterparty
2007 2008 (EUR millions)
Public sector 54,908 30,052
Banks 33,786 27,556
Other sectors 41,960 3,004
Performing assets 130,654 60,612
Impaired loans 00
Impaired bonds issued by public bodies 00
Other impaired bonds and fixed-income instruments 9 219
Impaired equities and other variable-income instruments 165 93
Impaired assets (1) 174 312
Total assets before impairment 130,828 60,924
Specific impairment (67) (250)
Collective impairment 00
TOTAL ASSETS NET OF IMPAIRMENT 130,761 60,674
of which included in cash and cash equivalents 2,207 827
(1) At December 31, 2008, the impaired assets pertain primarily to bonds issued by Icelandic banks and Lehman Brothers.
b. Analysis by type
2007 2008 (EUR millions)
Loans 00
Bonds issued by public bodies 46,253 24,648
Other bonds and fixed-income instruments 83,806 35,720
Equities and other variable-income instruments 769 556
TOTAL 130,828 60,924
c. Transfers between portfolios
2007 2008 (EUR millions)
Securities held to maturity transferred to the available-for-sale portfolio during the year 0 0
Unrealized gains and losses recognized in total equity on the transfer of securities held to maturity 0 0
Securities transferred to the held-to-maturity portfolio during the year 0 0
Impact on total equity of the transfer to the held-to-maturity portfolio 0 0
d. Convertible bonds included in the available-for-sale portfolio
None.
110 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4 e. Analysis by maturity and interest rate: see notes 7.7 et 7.4 f. Analysis of fair value: see note 7.1 g. Analysis of quality: see note 2.13 “Quality of financial assets” h. Reclassification of financial assets (IAS 39 amended): see note 2.14
2.3 INTERBANK LOANS AND ADVANCES (ITEM V - ASSETS) a. Analysis by type
2007 2008 (EUR millions)
Nostro accounts 808 3,898
Reverse repurchase agreements (reverse repos) 2,274 3,372
Debt instruments 319 7,197
Other interbank loans and advances (1) 17,431 21,434
Performing assets 20,832 35,901
Impaired loans and advances 00
Impaired assets 00
Total assets before impairment 20,832 35,901
Specific impairment 00
Collective impairment 0 (9)
TOTAL 20,832 35,892 FINANCIAL CONSOLIDATED STATEMENTS
of which included in cash and cash equivalents 9,948 18,776
of which included in finance leases 00
(1) Interbank loans and advances include in part loans granted to other Dexia Group entities. b. Analysis by maturity and interest rate: see notes 7.7 et 7.4 c. Analysis of fair value: see note 7.1 d. Analysis of quality: see note 2.13 “Quality of financial assets” e. Reclassification of financial assets (IAS 39 amended): see note 2.14
Annual Report 2008 / DEXIA CREDIT LOCAL 111 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
2.4 CUSTOMER LOANS AND ADVANCES (ITEM VI - ASSETS)
a. Analysis by counterparty
2007 2008 (EUR millions)
Public sector 109,904 177,434
Other sectors 36,758 71,247
Performing assets 146,662 248,681
Impaired loans and advances 179 246
Impaired debt instruments (1) 0 1,898
Impaired assets 179 2,144
Total assets before impairment 146,841 250,825
Specific impairment (2) (52) (1,159)
Collective impairment (3) (221) (750)
TOTAL 146,568 248,916
of which included in finance leases 1,294 1,591
(1) These are securities from FSA’s financial products business. (2) The specific impairment at December 31, 2008 included EUR 1,059 million in provisions related to FSA’s financial products business. (3) The collective impairment at December 31, 2008 included EUR 316 million in provisions related to FSA’s financial products business.
b. Analysis by type
2007 2008 (en EUR millions)
Reverse repurchase agreements (reverse repos) 037
Loans and advances 142,809 168,762
Debt instruments 3,853 79,882
Performing assets 146,662 248,681
Impaired loans and advances 179 246
Impaired debt Instruments (1) 0 1,898
Impaired assets 179 2,144
Total assets before impairment 146,841 250,825
Specific impairment (2) (52) (1,159)
Collective impairment (3) (221) (750)
TOTAL 146,568 248,916
of which included in finance leases 1,294 1,591
(1) These are securities from FSA’s financial products business. (2) The specific impairment at December 31, 2008 included EUR 1,059 million in provisions related to FSA’s financial products business. (3) The collective impairment at December 31, 2008 included EUR 316 million in provisions related to FSA’s financial products business.
c. Analysis by maturity and interest rate: see notes 7.7 and 7.4
d. Analysis of fair value: see note 7.1
e. Analysis of quality: see note 2.13 “Quality of financial assets”
f. Reclassification of financial assets (IAS 39 amended): see note 2.14
112 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
2.5 FINANCIAL ASSETS HELD TO MATURITY (ITEM VIII - ASSETS) a. Analysis by counterparty
2007 2008 (EUR millions)
Public sector 1,015 942
Banks 75 21
Other sectors 182 168
Performing assets 1,272 1,131
Impaired bonds issued by public bodies 00
Other impaired bonds and fixed-income instruments 00
Impaired assets 00
Total assets before impairment 1,272 1,131
Specific impairment 00
TOTAL 1,272 1,131 b. Analysis by type
2007 2008 (EUR millions)
Bonds issued by public bodies 731 617
Other bonds and fixed-income instruments 541 514
TOTAL 1,272 1,131 CONSOLIDATED FINANCIAL CONSOLIDATED STATEMENTS c. Analysis by maturity and interest rate: see notes 7.7 and 7.4 d. Analysis of fair value: see note 7.1 e. Analysis of quality: see note 2.13 “Quality of financial assets”
2.6 TAX ASSETS (ITEMS IX AND X - ASSETS)
2007 2008 (EUR millions)
Current income tax 142 37
Current tax assets (1) 142 37
Deferred tax assets (see note 4.2) 436 2,613
(1) In 2007, o ther taxes were transferred from “Current tax assets” to “Others assets”.
Annual Report 2008 / DEXIA CREDIT LOCAL 113 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
2.7 ACCRUALS AND OTHER ASSETS (ITEM XI - ASSETS)
2007 2008 (EUR millions)
Other assets (1) 410 373
Other assets specific to insurance companies (2) 1,074 0
Cash collateral (3) 5,859 21,084
ACCRUALS AND OTHER ASSETS 7,343 21,457
of which, included in cash and cash equivalents 5,848 21,066
(1) In 2007, other taxes were transferred from “Current tax assets” to “Other assets“. (2) The FSA businesses included in the sale to the Assured Guaranty Group are presented on a line Non-current assets held for sale. (3) The increase in cash collateral is essentially attributable to the change in interest rates in 2008.
a. Other assets
Analysis by type 2007 2008 (EUR millions)
Accrued income 710
Deferred expense 12 17
Other accounts receivable 373 303
Plan assets 00
Long term construction contracts 00
Inventories 00
Others taxes (1) 18 13
Performing assets 410 343
Impaired assets (2) 0 212
Total assets before impairment 410 555
Specific impairment (2) 0 (182)
TOTAL 410 373
(1) In 2007, others taxes were transferred from “Current tax assets” to “Others assets”. (2) The impaired assets comprise derivatives transactions with banking (Lehman Brothers) and other customer counterparties.
b. Other assets specific to insurance companies
Analysis by type 2007 2008 (1) (EUR millions)
Share of the reinsurers in the technical reserves 00
Receivables resulting from direct insurance transactions 42 0
Premiums still to be issued 00
Deferred acquisition costs 236 0
Other insurance assets 796 0
Performing assets 1,074 0
Impaired insurance assets 00
Impaired assets 00
Total assets before impairment 1,074 0
Specific impairment 00
TOTAL 1,074 0
(1) The FSA businesses included in the sale to the Assured Guarantee Group are presented on the line “Non-current assets held for disposal”.
114 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
2.8 INVESTMENTS IN ASSOCIATES (ITEM XIII - ASSETS) a. Carrying amount
2007 2008 (EUR millions)
At January 1 417 459
• Acquisitions 061
• Disposals 00
• Change in consolidation scope (in) (2) 21 0
• Change in consolidation scope (out) (3) 0 (35)
• Share of income before income taxes 78 (40)
• Share of income tax (20) (1)
• Dividends paid (21) (22)
• Share of unrecognized and deferred losses (34) (133)
• Changes in goodwill (see below) (4) 14 (12)
• Impairment: additions 00
• Impairment: recoveries and reversals 00
• Translation adjustments (1) 12
• Other movements 3 (4)
At December 31 459 275
(1) Impact of changes in exchange rates between January 1, and December 31, on balances in foreign currencies at January 1, and impact of the difference between average and year-end exchange rates on movements for the year. (2) Dexia Epargne Pension is accounted for by the equity method as from October 1, 2007. (3) Kommunalkredit Austria was deconsolidated on October 1, 2008. (4) In 2007, EUR 14 million in goodwill was recognized on Dexia Epargne Pension. CONSOLIDATED FINANCIAL CONSOLIDATED STATEMENTS
In 2008, the goodwill related to Kommunalkredit Austria was written down in full for impairment.
Annual Report 2008 / DEXIA CREDIT LOCAL 115 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
b. Goodwill included in carrying amount
2007 2008 (EUR millions)
Acquisition cost at January 1 106 120
• Change in consolidation scope (in) (2) 14 0
• Change in consolidation scope (out) (3) 0 (17)
• Transfers 00
• Post-acquisition adjustment 00
• Translation adjustments (1) 00
• Other movements 00
Acquisition cost at December 31 120 103
Accumulated amortization at January 1 (23) (23)
• Additions 00
• Disposals and retirements 00
• Change in consolidation scope (in) 00
• Change in consolidation scope (out) (3) 05
• Transfers 00
• Post-acquisition adjustment 00
• Translation adjustments (1) 00
• Other movements. 00
Accumulated amortization at December 31 (23) (18)
Accumulated impairment at January 1 00
• Additions 0 (12)
• Disposals, retirements and reversals 00
• Change in consolidation scope (in) 00
• Change in consolidation scope (out) (3) 012
• Transfers 00
• Post-acquisition adjustment 00
• Translation adjustments (1) 00
• Other movements 00
Accumulated impairment at December 31 00
NET CARRYING VALUE AT DECEMBER 31 97 85
(1) Impact of changes in exchange rates between January 1, and December 31, on balances in foreign currencies at January 1, and impact of the difference between average and year-end exchange rates on movements for the year. (2) Substantially all of the goodwill recognized on Dexia Epargne Pension reflects the change in the value of the building contributed by CLF Patrimoniale. (3) Deconsolidation of Kommunalkredit Austria on October 1, 2008.
c. List of major associates at December 31, 2008
Year of acquisition Goodwill Carrying value at Fair value at (EUR millions) 12/31/2008 12/31/2008
Cre dit du Nord 2000 71 254 350
Dexia Epargne Pension 2007 14 21 21
TOTAL 85 275 371
116 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
2.9 INVESTMENT PROPERTY AND TANGIBLE FIXED ASSETS (ITEMS XIV AND XV - ASSETS) a. Movements
Investment Tangible fixed assets property Land and buildings Office furniture and other equipment Total
Own use Own use Own use Own use Operating (EUR millions) owner finance lease owner finance lease lease
Acquisition cost at January 1, 2007 6 426 0 155 0 54 635
• Acquisitions 01601502960
• Post acquisition adjustment 0000000
• Disposals and retirements (6) (1) 0 (18) 0 (7) (26)
• Change in consolidation scope (in) 0000000
• Change in consolidation scope (out) (2) 0 (19) 0 0 0 0 (19)
• Transfers 0 3 0 (8) 0 0 (5)
• Translation adjustments (1) 0 1 0 (3) 0 0 (2)
• Other movements 0000000
Acquisition cost at December 31, 2007 0 426 0 141 0 76 643 Accumulated depreciation and impairment at January 1, 2007 (4) (32) 0 (92) 0 (17) (141)
• Post acquisition adjustment 0000000
• Additions 0 (8) 0 (12) 0 (10) (30)
• Disposals and retirements 400170421
• Change in consolidation scope (in) 0000000 CONSOLIDATED FINANCIAL CONSOLIDATED STATEMENTS • Change in consolidation scope (out) 0300003
• Transfers 0004004
• Translation adjustments (1) 0001001
• Other movements 0 0 0 (2) 0 0 (2) Accumulated depreciation and impairment at December 31, 2007 0 (37) 0 (84) 0 (23) (144) NET CARRYING VALUE AT DECEMBER 31, 2007 0 389 0 57 0 53 499
(1) Impact of changes in exchange rates between January 1, and December 31, on balances in foreign currencies at January 1, and impact of the difference between average and year-end exchange rates on movements for the year. (2) Disposals of buildings with a gross value of EUR 19 million are related to the deconsolidation of CLF Patrimoniale, following its merger into Dexia Epargne Pension (which is accounted for by the equity method).
Annual Report 2008 / DEXIA CREDIT LOCAL 117 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
Investment Tangible fixed assets property Land and buildings Office furniture and other equipment Total
Own use Own use Own use Own use Operating (EUR millions) owner finance lease owner finance lease lease
Acquisition cost at January 1, 2008 0 426 0 141 0 76 643
• Acquisitions 0 5 0 11 0 47 63
• Post acquisition adjustment 0000000
• Disposals and retirements 0 (1) 0 (14) 0 (12) (27)
• Change in consolidation scope (in) 0000000
• Change in consolidation scope (out) 0000000
• Transfers 0 0 0 (27) 0 0 (27)
• Translation adjustments (1) 0403007
• Other movements 0000000
Acquisition cost at December 31, 2008 0 434 0 114 0 111 659 Accumulated depreciation and impairment at January 1, 2008 0 (37) 0 (84) 0 (23) (144)
• Post acquisition adjustment 0000000
• Additions 0 (9) 0 (12) 0 (16) (37)
• Disposals and retirements 000130720
• Change in consolidation scope (in) 0000000
• Change in consolidation scope (out) 0000000
• Transfers 0009009
• Translation adjustments (1) 0 (1) 0 (2) 0 0 (3)
• Other movements 0000000 Accumulated depreciation and impairment at December 31, 2008 0 (47) 0 (76) 0 (32) (155) NET CARRYING VALUE AT DECEMBER 31, 2008 0 387 0 38 0 79 504
(1) Impact of changes in exchange rates between January 1, and December 31, on balances in foreign currencies at January 1, and impact of the difference between average and year-end exchange rates on movements for the year.
b. Fair value of investment property
None.
c. Capitalized expenses on the construction of tangible fixed assets
None.
d. Contractual obligations relating to investment property at the end of the period
None.
118 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
2.10 INTANGIBLE ASSETS (ITEM XVI - ASSETS)
2007 2008
Internally Other Total Internally Other Total developed intangible developed intangible (EUR millions) software assets (2) software assets (2)
Acquisition cost at January 1 144 98 242 167 113 280
• Acquisitions 27 19 46 17 21 38
• Post-acquisition adjustment 000000
• Disposals and retirements (2) (1) (3) 0 0 0
• Change in consolidation scope (in) 011000
• Change in consolidation scope (out) 000000
• Transfers (2) (2) (4) 0 (2) (2)
• Translation adjustments (1) 0 (1) (1) 3 2 5
• Other movements 0 (1) (1) 0 0 0
Acquisition cost at December 31 167 113 280 187 134 321 Accumulated depreciation and impairment at January 1 (106) (76) (182) (123) (86) (209)
• Post-acquisition adjustment 000000
• Additions (19) (13) (32) (19) (16) (35)
• Disposals and retirements 000000
• Change in consolidation scope (in) 000000
• Change in consolidation scope (out ) 000000
• Transfers 224022 CONSOLIDATED FINANCIAL CONSOLIDATED STATEMENTS • Translation adjustments (1) 0 1 1 0 (2) (2)
• Other movements 000000 Accumulated depreciation and impairment at December 31 (123) (86) (209) (142) (102) (244) NET CARRYING VALUE AT DECEMBER 31 44 27 71 45 32 77
(1) Impact of changes in exchange rates between January 1, and December 31, on balances in foreign currencies at January 1, and impact of the difference between average and year-end exchange rates on movements for the year. (2) Other intangible assets include primarily purchased software.
Annual Report 2008 / DEXIA CREDIT LOCAL 119 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
2.11 GOODWILL (ITEM XVII - ASSETS)
a. Movements
2007 2008 (EUR millions)
Acquisition cost at January,1 1,703 1,705
• Acquisitions 00
• Post-acquisition adjustment 00
• Disposals 00
• Change in consolidation scope (in) (2) 20
• Change in consolidation scope (out) 00
• Transfers 00
• Translation adjustments (1) 00
• Other movements 00
Acquisition cost at December, 31 1,705 1,705
Accumulated amortization and impairment at January, 1 (318) (318)
• Post-acquisition adjustment 00
• Additions (3) 0 (1,181)
• Disposal, recoveries and reversals 00
• Change in consolidation scope (in) 00
• Change in consolidation scope (out) 00
• Transfers 00
• Translation adjustments (1) 00
• Other movements 00
Accumulated depreciation and impairment at December, 31 (318) (1,499)
CARRYING AMOUNT AT DECEMBER, 31 1,387 206
(1) Impact of changes in exchange rates between January 1, and December 31, on balances in foreign currencies at January 1, and impact of the difference between average and year-end exchange rates on movements for the year. (2) The goodwill is attributable to the first-time consolidation of Dexia Kommunalkredit Polska. (3) The goodwill on FSA was fully impaired in June 2008.
At December 31, 2008, each goodwill has been tested for impairment test: no adjustment was required.
b. Analysis of net goodwill by company
Year of acquisition Goodwill (EUR millions)
Dexia Crediop 1996 129
Dexia Sofaxis 1999 59
Dexia banka Slovensko 2000 4
Dexia Israel Bank Ltd. 2001 12
Dexia Kommunalkredit Polska 2007 2
TOTAL 206
120 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
2.12 LEASES a. Group as lessor
FINANCE LEASES
Gross investment in finance leases 2007 2008 (EUR millions)
Less than 1 year 126 121
1 year to 5 years 337 385
Over 5 years 829 1,083
Subtotal (1) 1,292 1,589
Unearned future finance income on finance leases (2) 00
Net investment in finance leases (1)- (2) 1,292 1,589
Additional information 2007 2008 (EUR millions)
Contingent lease payments recognized in income statement during the period 0 0
Uncollectible finance lease receivables included in the provision for loan losses at the end of the period 1 1
Residual values unguaranteed by lessees 00
Estimated fair value of finance leases 1,293 1,589
Accumulated impairment for uncollectible minimum lease payments receivable 1 1
OPERATING LEASES CONSOLIDATED FINANCIAL CONSOLIDATED STATEMENTS Future net minimum lease receivables under operating leases 2007 2008 (EUR millions)
Less than 1 year 17 24
1 year to 5 years 36 51
Over 5 years 86
TOTAL 61 81
Amount of contingent rents recognized in income during the period 0 1 b. Group as lessee
FINANCE LEASES None
OPERATING LEASES
Future net minimum lease payments under operating leases 2007 2008 (EUR millions)
Less than 1 year 15 9
1 year to 5 years 42 6
Over 5 years 79 5
TOTAL 136 20
The decrease in future net minimum lease payments stems from the reclassification of FSA leasing contracts into activities held for disposal.
Annual Report 2008 / DEXIA CREDIT LOCAL 121 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
2007 2008 (EUR millions) 21 Future minimum sublease payments expected to be received under non-cancelable subleases at the balance sheet date
2007 2008 Lease and sublease payments recognized as expenses during the year (EUR millions)
Minimum lease payments 31 24
Contingent lease payments 00
Sublease payments (1) (1)
TOTAL 30 23
2.13 QUALITY OF FINANCIAL ASSETS
2007 2008 (EUR millions)
Analysis of performing financial assets
Interbank loans and advances 20,832 35,901
Customer loans and advances 146,662 248,681
Financial assets held to maturity 1,272 1,131
Financial assets available-for-sale 130,654 60,612
fixed revenue instruments 130,050 60,149
variable revenue instruments 604 463
Assets from insurance companies (note 2.7) 1,074 0
Other accounts receivable and other assets (note 2.7) 372 303
TOTAL PERFORMING FINANCIAL ASSETS 300,866 346,628
Collective impairment (221) (759)
NET TOTAL PERFORMING FINANCIAL ASSETS 300,645 345,869
122 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
Gross amount Specific Impairment Net amount
2007 2008 2007 2008 2007 2008 (EUR millions)
Analysis of Impaired financial assets
Interbank loans and advances 000000
Customer loans and advances 179 2,144 (52) (1,159) 127 985
Financial assets held to maturity 000000
Financial assets available-for-sale 174 312 (67) (250) 107 62
fixed revenue instruments 9 219 (9) (195) 0 24
variable revenue instruments 165 93 (58) (55) 107 38
Assets from insurance companies (note 2.7) 0 0 0 0 0 0
Other accounts receivable and other assets (note 2.7) 0 212 0 (182) 0 30
Total 353 2,668 (119) (1,591) 234 1,077
Analysis of performing and Impaired financial assets
Interbank loans and advances 20,832 35,901 0 0 20,832 35,901
Customer loans and advances 146,841 250,825 (52) (1,159) 146,789 249,666
Financial assets held to maturity 1,272 1,131 0 0 1,272 1,131
Financial assets available-for-sale 130,828 60,924 (67) (250) 130,761 60,674
fixed revenue instruments 130,059 60,368 (9) (195) 130,050 60,173
variable revenue instruments 769 556 (58) (55) 711 501
Assets from insurance companies (note 2.7) 1,074 0 0 0 1,074 0
Other accounts receivable and other assets (note 2.7) 372 515 0 (182) 372 333 FINANCIAL CONSOLIDATED STATEMENTS
Total financial assets 301,219 349,296 (119) (1,591) 301,100 347,705
Collective impairment (221) (759) (221) (759)
NET TOTAL 300,998 348,537 (119) (1,591) 300,879 346,946
2.14 RECLASSIFICATION OF FINANCIAL ASSETS What is more, in light of the extraordinary deterioration of the markets, (IAS 39 AMENDED) the Group reclassified from “ Financial assets held for trading” to “ Financial assets available for sale” certain assets that were no longer held in view On October 1, 2008, the Dexia Credit Local Group reclassified certain of a sale in the short term. financial assets from “Financial assets held for trading” to “Financial assets available for sale” and “Loans and receivables”, and certain assets from The reclassifications were made on October 1, 2008. The financial assets “ Financial assets available for sale” to “Loans and receivables”, as allowed were all recorded in their new accounting category at their fair value on by the amendments to IAS 39 and IFRS 7 “ Reclassification of financial the transfer date. assets” adopted by the European Union on October 15, 2008. The fair value adjustment on the securities available for sale (AFS Reserve) More specifically, after the bankruptcy of Lehman Brothers and the that would have been recorded if the reclassification had not taken place ensuing financial crisis, the Group considered that the prices observed on is calculated using valuation models that take account of changes in the certain financial assets were no longer representative of a “fair value” but liquidity of the various markets, in the absence of representative market constituted instead distressed prices or merely indicative prices produced prices. by brokers, as these assets could no longer be traded on active markets. The securities reclassified included fixed rate bonds (with coupons of The Group opted to reclassify as “Loans and receivables” those financial between zero and 12.5%, and effective rate of between 0.48% and assets that it has the intention and ability to hold during a foreseeable 27.31%). Still, insofar as the interest rates on the bonds held for trading or future. available for sale that were reclassified had been hedged, the interest rate risk is primarily a revisable rate included in the sensitivity of the ALM.
Annual Report 2008 / DEXIA CREDIT LOCAL 123 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
The expected cash flows will therefore vary with changes in short term For those assets reclassified from “Financial assets available for sale” to interest rates. “Loans and receivables“, the reclassification had no impact on the future net interest margin. As the financial assets available for sale reclassified were essentially covered by interest rate hedges, their carrying amount is sensitive to For those assets reclassified from “ Financial assets held for trading“ to changes in interest rates: it was consequently the fall in rates at the end “ Financial assets available for sale” or “ Loans and receivables”, the future of 2008 that is responsible for the increase in the value of these assets at net interest margin will be affected by the amortization of revaluations December 31 (EUR 78.6 b illion) compared with their value on the date of prior periods (estimated value: EUR 302 million). This amount shall they were reclassified (EUR 73.8 billion). be spread over the remaining term to maturity of the reclassified assets (estimated values: EUR 79 million in 2009 and EUR 52 million in 2010).
Carrying Carrying Fair value of Amount not Amount not Tax effect Net Premium/ Premium/ amount amount of reclassified taken through taken through Discount Discount of assets reclassified assets at profit or AFS Reserve amortization amortization Date of reclassification: reclassified, assets at December 31, loss (1) and (3) due to through net through AFS October 1, 2008 at October 1, December 2008 (2) due to reclassification income reserve (EUR millions) 2008 31,2008 reclassification (1) From “Financial assets held for trading” to “ Loans and receivables” 3,570 3,430 3,369 (61) 16 (45) 16 (2) From “Financial assets held for trading” to “ Financial assets available for sale” 2,264 2,220 2,220 1 0 1 12 (3) From “Financial assets available for sale” to “Loans and receivables” 73,774 78,620 76,664 (1,956) 788 (1,168) 200
(34) Collective impairment set up during the quarter through profit or loss due to reclassification towards Loans and receivables
Tax impact 9
124 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
( 3. NOTES ON THE LIABILITIES
3.0 CENTRAL BANKS, POSTAL CHECKING ACCOUNTS (ITEM I - LIABILITIES)
(EUR millions) 2007 2008
Central b anks (1) 7,630 64,222
Postal checking accounts 00
TOTAL 7,630 64,222
(1) Under conditions where interbank liquidity is becoming increasingly scarce, since September 2008 Dexia Credit Local has been using the funding facilities offered by the central banks.
3.1 FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS (ITEM II – LIABILITIES)
(EUR millions) 2007 2008
Liabilities held for trading 00
Liabilities designated at fair value 7,008 6,977
Derivatives (see note 4.1.b) 5,282 17,664
TOTAL 12,290 24,641 a. Analysis by nature of liabilities held for trading
(EUR millions) 2007 2008
Bonds issued by public bodies 00
Others bonds 00
Repurchase agreements 00 FINANCIAL CONSOLIDATED STATEMENTS
Equities and other variable income securities 00
TOTAL 00 b. Analysis by nature of liabilities designated at fair value
(EUR millions) 2007 2008
Non subordinated liabilities 7,008 6,977
Subordinated liabilities 00
TOTAL 7,008 6,977 c. Analysis by maturity and interest rate: see Until 2007, all changes in fair value related to changes in credit spreads notes 7.7 and 7.4 were marginal for those liabilities benefitting from a AAA guarantee from FSA. These changes in value represent most of the change in d. Analysis of fair value: see notes 7.1 and 7.2.j 2008, subsequent to the agreement to sell FSA and the deterioration of spreads. The Dexia Credit Local Group uses the fair value option mainly to The valuation tools and procedures used to calculate the fair value of eliminate or significantly reduce the measurement or the recognition “financial liabilities at fair value through profit or loss” are determined by inconsistency (also called the accounting mismatch) that otherwise arises the Risk Management department. The model used is based on discounted from measuring financial liabilities or recognizing the gains and losses on cash flows. The net present value is determined using a market rate of them on a different basis. interest and takes account of the Group’s own credit risk. FSA uses the fair value option essentially for financial liabilities for which the conditions required for hedge accounting are not met or may run a risk of not being satisfied.
Annual Report 2008 / DEXIA CREDIT LOCAL 125 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
3.2 INTERBANK BORROWINGS AND DEPOSITS (ITEM IV - LIABILITIES)
a. Analysis by nature
(EUR millions) 2007 2008
Demand deposits 564 4,395
Repurchase agreements 58,716 22,307
Other debts 39,967 64,508
TOTAL 99,247 91,210
b. Analysis by maturity and interest rate: see notes 7.7 and 7.4.
c. Analysis of fair value: see note 7.1
3.3 CUSTOMER BORROWINGS AND DEPOSITS (ITEM V - LIABILITIES)
a. Analysis by nature
(EUR millions) 2007 2008
Demand deposits 1,340 1,658
Saving deposits 53 43
Term deposits 14,602 12,754
Repurchase agreements 855 124
Other debts 3,088 3,040
TOTAL 19,938 17,619
b. Analysis by maturity and interest rate: see note 7.7 and 7.4
c. Analysis of fair value: see note 7.1
3.4 DEBT SECURITIES (ITEM VI - LIABILITIES)
a. Analysis by nature
(EUR millions) 2007 2008
Certificates of deposit 28,873 14,176
Savings bonds 00
Non-convertible bonds 147,137 158,677
Convertible debt 00
Other dilutive instruments 00
TOTAL 176,010 172,853
b. Analysis by maturity and interest rate: see notes 7.7 and 7.4.
c. Analysis of fair value see: note 7.1
126 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
3.5 TAX LIABILITIES (ITEMS VIII AND IX - LIABILITIES)
2007 2008 (EUR millions)
Current income tax 60 123
Current tax liabilities (1) 60 123
Deferred tax liabilities (see note 4.2) 260 23
(1) Other taxes were transferred from “Current tax liabilities” to “Other liabilities”.
3.6 ACCRUALS AND OTHER LIABILITIES (ITEM X - LIABILITIES)
2007 2008 (EUR millions)
Other liabilities (1) 913 1,068
Other liabilities specific to insurance companies 2,016 0
Cash collateral 2,287 4,304
TOTAL 5,216 5,372
(1) Other taxes were transferred from “Current tax liabilities” . a. Other liabilities
2007 2008 (EUR millions)
Accrued costs 42 70
Deferred income 108 278 FINANCIAL CONSOLIDATED STATEMENTS
Grants 86 84
Other assistance received 11
Salaries and social charges (payable) 245 97
Dividends payable to shareholders 00
Other taxes (1) 17 18
Long term construction contracts 00
Other accounts payable and other liabilities 414 520
TOTAL 913 1,068
(1) Other taxes were transferred from “Current tax liabilities” .
Annual Report 2008 / DEXIA CREDIT LOCAL 127 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
b. Liabilities relating to insurance companies
2007 2008 (EUR millions)
Deposits from assignees 00
Debts resulting from direct insurance transactions (1) 1,980 0
Debts resulting from reinsurance transactions (1) 33 0
Other insurance liabilities (1) 30
TOTAL 2,016 0
(1) Impact of the agreement to sell FSA’s insurance business.
3.7 TECHNICAL PROVISIONS OF INSURANCE COMPANIES (ITEM XII - LIABILITIES)
a. Analysis by nature
2007 2008 (EUR millions)
General reserve related to credit enhancement (1) 68 0
Case-basis reserve to credit enhancement (1) 66 0
TOTAL 134 0
(1) Impact of the agreement to sell FSA’s insurance business.
b. Movements
General reserve related Case-basis reserve related Total (EUR millions) to credit enhancement to credit enhancement
At January 1, 2007 105 40 145
Additions 05353
Unused amounts reversed and amounts utilized during the year (28) (21) (49)
Passage of time and effect of changes in discount rate 0 0 0
Change in consolidation scope (in) 0 0 0
Change in consolidation scope (out) 0 0 0
Transfers 000
Translation adjustment (1) (9) (6) (15)
Other movements 000
AT DECEMBER 31,2007 68 66 134
(1) Impact of changes in exchange rates between January 1, and December 31, on balances in foreign currencies at January 1, and impact of the difference between average and year-end exchange rates on movements for the year.
128 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
General reserve related Case-basis reserve related Total (EUR millions) to credit enhancement to credit enhancement
At January 1, 2008 68 66 134
Additions 37 862 899
Unused amounts reversed and amounts utilized during the year 0 (8) (8)
Passage of time and effect of changes in discount rate 0 0 0
Change in consolidation scope (in) 0 0 0
Change in consolidation scope (out) 0 0 0
Transfers (2) (105) (920) (1,025)
Translation adjustment (1) 000
Other movements 000
AT DECEMBER 31,2008 0 0 0
(1) Impact of changes in exchange rates between January 1, and December 31, on balances in foreign currencies at January 1, and impact of the difference between average and year-end exchange rates on movements for the year. (2) Impact of the agreement to sell FSA’s insurance business.
3.8 PROVISIONS (ITEM XIII - LIABILITIES) a. Analysis by nature
2007 2008 (EUR millions)
Litigation claims 81 86
Restructuring 043 CONSOLIDATED FINANCIAL CONSOLIDATED STATEMENTS Defined benefits plans 14 19
Other postretirement obligations 00
Other long term employee benefits 33
Provision for off-balance sheet credit commitments 113
Onerous contracts 00
Other p rovisions 339
TOTAL PROVISIONS 102 203
Annual Report 2008 / DEXIA CREDIT LOCAL 129 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
b. Movements
Litigation Restructuring Pensions Provision for Onerous Other Total claims and other off-balance contracts provisions employee sheet credit (EUR millions) benefits commitments
At January 1, 2007 103 0 20 1 0 3 127
Additions 21 0 4 1 0 1 27 Unused amounts reversed and amounts utilized during the year (34) 0 (7) (1) 0 (1) (43) Passage of time and effect of changes in discount rate 0 0 0 0 0 0 0
Change in consolidation scope (in) 0 0 0 0 0 0 0
Change in consolidation scope (out) 0 0 0 0 0 0 0
Transfers (1) 0 0 0 0 0 (1)
Translation adjustment (1) (8) 0 0 0 0 0 (8)
Other movements 0 0 0 0 0 0 0
AT DECEMBER 31,2007 81 0 17 1 0 3 102
(1) Impact of changes in exchange rates between January 1, and December 31, on balances in foreign currencies at January 1, and impact of the difference between average and year-end exchange rates on movements for the year.
Litigation Restructuring Pensions Provision for Onerous Other Total claims and other off-balance contracts provisions employee sheet credit (EUR millions) benefits commitments
At January 1, 2008 81 0 17 1 0 3 102
Additions 37 43 8 101 0 35 224 Unused amounts reversed and amounts utilized during the year (34) 0 (3) 0 0 (1) (38) Passage of time and effect of changes in discount rate 0 0 0 0 0 0 0
Change in consolidation scope (in) 0 0 0 0 0 0 0
Change in consolidation scope (out) 0 0 0 0 0 0 0
Transfers (1)0 0 (89) 0 0 (90)
Translation adjustment (1) 3 000025
Other movements 0 0 0 0 0 0 0
AT DECEMBER 31,2008 86 43 22 13 0 39 203
(1) Impact of changes in exchange rates between January 1, and December 31, on balances in foreign currencies at January 1, and impact of the difference between average and year-end exchange rates on movements for the year.
130 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4 c. Provisions for pensions and other long-term benefits
Long-term benefit obligations
2007 2008 (EUR millions)
Change in present value of benefit obligations
Benefit obligation at beginning of year 63 61
Current service cost 33
Interest cost 33
Plan participants’ contributions 00
Adjustments 00
Actuarial losses (gains) (4) (6)
Benefits paid 0 (2)
Expenses paid 00
Taxes paid 00
Premiums paid (3) 0
Acquisitions/divestitures 01
Plan curtailments (1) 0
Plan settlements 00
Exchange rate changes 00
BENEFIT OBLIGATIONS AT END OF YEAR 61 60
Change in plan assets
Fair value of plan assets at beginning of year 40 43 CONSOLIDATED FINANCIAL CONSOLIDATED STATEMENTS Expected return on plan assets 22
Actuarial gains (losses) on plan assets 0 (2)
Employer contributions 42
Mem ber contributions 00
Benefits paid (3) (2)
Expenses paid 00
Taxes paid 00
Premiums paid 00
Plan settlements 00
Acquisitions/divestitures 00
Exchange rate changes 00
FAIR VALUE OF PLAN ASSETS AT END OF YEAR 43 43
Amounts recognized in the balance sheet
Present value of funded obligations 48 48
Fair value of plan assets 43 43
Deficit (surplus) for funded plans 55
Present value of unfunded obligations 88
Unrecognized net actuarial gains (losses) 44
Unrecognized past service benefits (costs) (1) 0
Effect of limit 00
Annual Report 2008 / DEXIA CREDIT LOCAL 131 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
Long-term benefit obligations
2007 2008 (EUR millions)
NET LIABILITY (ASSET) 16 17
Amounts recognized in the balance sheet
Liabilities 17 19
Assets (1) (2)
NET LIABILITY (ASSET) 16 17
Components of costs
Amounts recognized in the income statement
Current service cost 33
Interest cost 33
Expected return on plan assets (2) (2)
Expected return on reimbursement assets 00
Amortization of past service cost 00
Amortization of net gain/loss 00
Effect of limit 00
Curtailment loss (gain) recognized (1) 0
Settlement loss (gain) recognized 00
TOTAL COSTS RECOGNIZED IN THE INCOME STATEMENT 3 4
Actual return on plan assets 2 (1)
Actual return on reimbursement assets 00
Balance sheet reconciliation
Balance sheet liability (asset) 18 17
Expense recognized in income statement during the year 34
Amounts recognized in equtiy during the year 00
Employer contributions made during the year (4) (2)
Benefits paid directly by the company during the year 00
Credit to reimbursements 00
Acquisitions/divestitures 01
Exchange rate adjustment - gain/loss 00
BALANCE SHEET LIABILITY (ASSET) AT END OF YEAR (1) 17 20
(1) Only the largest plans have been included in this note.
2007 2008 Breakdown of plans by type of assets
1. Equity securities 4.97% 4.78%
2. Debt securities 92.41% 94.11%
3. Real estate assets 0. 00% 0. 00%
4. Other 2.62% 1.11%
100. 00% 100. 00%
132 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
2007 2008 Historical gain and loss data
1. Difference between the actual and expected return on plan assets
a. In amount 0 (3)
b. In percentage of plan assets 0% (6%)
2. Difference between the assumptions used and the values observed for liabilities (1)
a. In amount (4) (6)
b. In percentage of present value of plan liabilities (7%) (10%)
(1) Due essentially to change in assumptions.
Range of assumptions used to calculate expense Europe Discount Rate (1) Inflation Expected return on Expected return on Expected return on Salary increase rate equities bonds other assets
December 31, 2007 4.42% - 5.5% 2.5% 6.5% - 8.5% 3.5% - 5.5% 3.8% - 5.8% 2.5% - 4%
December 31, 2008 4.22% - 6% 2.5% 3% - 6% 3% - 6% 3% - 6% 2.5% - 4%
(1) As a general principle, the discount rate is equal to the expected return on bonds in plan assets.
3.9 SUBORDINATED DEBT (ITEM XIV - LIABILITIES) a. Analysis by nature
Convertible subordinated debt 2007 2008 (EUR millions)
Perpetual subordinated notes 00 FINANCIAL CONSOLIDATED STATEMENTS
Other subordinated borrowings 00
TOTAL 00
Non convertible subordinated debt 2007 2008 (EUR millions)
Perpetual subordinated notes 1,195 1,245
Other subordinated borrowings 3,747 3,757
TOTAL 4,942 5,002
2007 2008 (EUR millions)
Hybrid capital and redeemable preference shares 00 b. Analysis by maturity and interest rate: see notes 7.7 and 7.4 c. Analysis of fair value: see note 7.1
Annual Report 2008 / DEXIA CREDIT LOCAL 133 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
d. Detailed information
Currency Due Amount a) Early repayment conditions Interest rate (%) in millions b) Subordination conditions c) Convertibility conditions USD No fixed 250.0 a) Early repayment impossible during first 10 years without the approval of Libor USD 3M + 1.1 maturity the General Secretariat of the Banking Commission and unless replaced by sharesholders’equity of equivalent or better quality. Repayment possible at each due date for interest payments beginning 10/01/2012 with the approval of the General Secretariat of the Banking Commission
b) Repayment at par value, after all creditors but preferred ranking over From 2012, LIBOR USD subordinated profit-sharing loans and preference shares 3M + 1. 85
c) No conversion USD No fixed 1,190.0 a) Early repayment impossible during first 10 years without the approval of Libor USD 3M + 0.39 maturity the General Secretariat of the Banking Commission and unless replaced by sharesholders’equity of equivalent or better quality. Repayment possible at each due date for interest payments beginning 04/05/2015 with the approval of the General Secretariat of the Banking Commission
b) Repayment at par value, after all creditors but preferred ranking over From 04/06/2015, subordinated profit-sharing loans and preference shares LIBOR USD 3M + 1.14
c) No conversion EUR No fixed 200.0 a) Early repayment impossible during first 10 years without the approval of EURIBOR 3M + 0. 79 maturity the General Secretariat of the Banking Commission and unless replaced by sharesholders’equity of equivalent or better quality. Repayment possible at each due date for interest payments beginning 07/01/2015 with the approval of the General Secretariat of the Banking Commission
b) Repayment at par value, after all creditors but preferred ranking over From July 2015 through subordinated profit-sharing loans and preference shares July 2020, EURIBOR 3M + 1. 40, then EURIBOR c) No conversion 3M + 2. 15 EUR 12/01 /2014 100.0 a) Repayment possible at each due date for interest payments beginning 93,25% * CMS 12/22/2004, subject to prior approval of the General Secretariat of the Banking Commission
b) No specific conditions
c) No conversion EUR 02/12/2019 300.0 a) Repayment possible at each due date for interest payments beginning 4.375 02/12/2014 with the approval of the General Secretariat of the Banking Commission.
b) Repayment at par value, after all creditors but preferred ranking over From 02/12/2014: subordinated profit-sharing loans and preference shares 4. 412
c) No conversion EUR 07/09/2017 500.0 a) Repayment possible at each due date for interest payments beginning EURibor 3M + 0. 15 07/09/2012 with the approval of the General Secretariat of the Banking Commission.
b) Repayment at par value, after all creditors but preferred ranking over From 07/09/2012, subordinated profit-sharing loans and preference shares EURIBOR 3M + 0. 65
c) No conversion EUR 06/10/2009 13.0 a) Repayment possible at each due date for interest payments, subject to prior EURIBOR 3M + 0. 35 approval of the General Secretariat of the Banking Commission
b) No specific conditions
c) No conversion
134 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
Currency Due Amount a) Early repayment conditions Interest rate (%) in millions b) Subordination conditions c) Convertibility conditions EUR 06/10/2009 48.6 a) Repayment possible at each due date for interest payments, subject to prior EURIBOR 3M + 0. 35 approval of the General Secretariat of the Banking Commission
b) No specific conditions
c) No conversion EUR 06/27/2011 640.0 a) No early repayment possible. EURIBOR 3M + 0. 58
b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares
c) No conversion EUR 01/01/2015 450.0 a) Repayment possible at each due date for interest payments beginning EURIBOR 3M + 0. 32 01/01/2010 subject to the prior approval of the General Secretariat of the Banking Commission
b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares
c) No conversion EUR 12/28/2017 300.0 a) Repayment possible at each due date for interest payments beginning EURIBOR 3M + 1. 45 12/28/2012 subject to the prior approval of the General Secretariat of the Banking Commission
b) Repayment at par value, after all creditors but preferred ranking over through 12/28/2012, subordinated profit-sharing loans and preference shares then EURIBOR 3M+1. 95 c) No conversion USD 09/27 /2012 60.0 a) Repayment possible at each due date for interest payments beginning Libor USD 3M + 0.5925 10/01/2007 subject to the prior approval of the General Secretariat of the Banking Commission CONSOLIDATED FINANCIAL CONSOLIDATED STATEMENTS b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares
c) No conversion USD 04/01 /2013 130.0 a) Repayment possible at each due date for interest payments beginning Libor USD 3M + 0.5475 04/01/2008 subject to the prior approval of the General Secretariat of the Banking Commission
b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares
c) No conversion USD 04/01 /2013 200.0 a) Repayment possible at each due date for interest payments beginning Libor USD 3M + 0.4975 04/01/2008 subject to the prior approval of the General Secretariat of the Banking Commission
b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares
c) No conversion USD 10/01 /2013 200.0 a) Repayment possible at each due date for interest payments beginning Libor USD 3M+ 0. 4625 10/01/2008 subject to the prior approval of the General Secretariat of the Banking Commission
b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares
c) No conversion
Annual Report 2008 / DEXIA CREDIT LOCAL 135 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
Currency Due Amount a) Early repayment conditions Interest rate (%) in millions b) Subordination conditions c) Convertibility conditions USD 01 /02 /2014 100.0 a) Repayment possible at each due date for interest payments beginning Libor USD 3M + 0.485 01/01/2009 subject to the prior approval of the General Secretariat of the Banking Commission
b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares
c) No conversion USD 07/01 /2014 135.0 a) Repayment possible at each due date for interest payments beginning Libor USD 3M + 0.43 07/01/2009 subject to the prior approval of the General Secretariat of the Banking Commission
b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares
c) No conversion USD 10/01 /2014 265.0 a) Repayment possible at each due date for interest payments beginning Libor USD 3M + 0.33 10/01/2009 subject to the prior approval of the General Secretariat of the Banking Commission
b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares
c) No conversion EUR 06/20/2018 300.0 a) Repayment possible at each due date for interest payments beginning EURIBOR 3M +1.5 06/20/2013 subject to the prior approval of the General Secretariat of the Banking Commission
b) Repayment at par value, after all creditors but preferred ranking over From 06/20/2013 subordinated profit-sharing loans and preference shares EURIBOR 1 Year + 2 c) No conversion EUR 11/20 /2012 3.0 a) No early repayment 6.450
b) No specific conditions
c) No conversion EUR 12/09 /2009 5.0 a) No early repayment 6.150
b) No specific conditions
c) No conversion EUR 10/11 /2010 2.5 a) No early repayment 6.550
b) No specific conditions
c) No conversion EUR 06/30 /2013 1.0 a) No early repayment 6.600
b) No specific conditions
c) No conversion EUR (DEM) 06/02 /2009 10.2 a) No early repayment 6.630
b) No specific conditions
c) No conversion EUR (DEM) 06/02 /2009 4.6 a) No early repayment 6.630
b) No specific conditions
c) No conversion
136 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
Currency Due Amount a) Early repayment conditions Interest rate (%) in millions b) Subordination conditions c) Convertibility conditions EUR 06/01/2012 3.5 a) No early repayment 6.970
b) No specific conditions
c) No conversion EUR 06/30/2009 13.0 a) No early repayment EURIBOR 6M + 1. 25
b) No specific conditions
c) No conversion EUR 06/30/2011 15.0 a) No early repayment 6.400
b) No specific conditions
c) No conversion EUR 07/01/2013 5.0 a) No early repayment EURIBOR 6M + 2. 10
b) No specific conditions
c) No conversion EUR 11/07/2012 5.0 a) No early repayment 6.210
b) No specific conditions
c) No conversion EUR 11/12/2012 5.0 a) No early repayment 6.080
b) No specific conditions
c) No conversion EUR 03/07/2013 10.0 a) No early repayment 5.280
b) No specific conditions CONSOLIDATED FINANCIAL CONSOLIDATED STATEMENTS c) No conversion EUR 01/04/2010 18.0 a) No early repayment 5.500
b) No specific conditions
c) No conversion EUR 08/17/2011 10.0 a) No early repayment 30 Y CMS Pounds
b) No specific conditions
c) No conversion EUR 06/30/2014 10.0 a) No early repayment 6.250
b) No specific conditions
c) No conversion EUR 06/30/2014 10.0 a) No early repayment 6.450
b) No specific conditions
c) No conversion EUR 06/02/2014 20.0 a) No early repayment 6.250
b) No specific conditions
c) No conversion EUR 06/01/2017 14.0 a) No early repayment 5.080
b) No specific conditions
c) No conversion
Annual Report 2008 / DEXIA CREDIT LOCAL 137 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
Currency Due Amount a) Early repayment conditions Interest rate (%) in millions b) Subordination conditions c) Convertibility conditions EUR 06/01 /2017 22.0 a) No early repayment 4.875
b) No specific conditions
c) No conversion EUR 06/01 /2018 20 a) No early repayment 5.570
b) No specific conditions
c) No conversion EUR 06/01 /2018 21.784 a) No early repayment 5.625
b) No specific conditions
c) No conversion EUR 12/23 /2015 6.8 a) No early repayment EURIBOR 3M + 0. 25
b) A fter all creditors but preferred ranking over subordinated profit-sharing loans and preference shares
c) No conversion EUR 10/29/2018 19.7 a) Repayment possible at the option of the Issuer on 10/29/2013 or annually EURIBOR 3M + 4. 75 thereafter, but - in both cases - only if the Issuer is able to document/confirm, in accordance with the Austrian Banking Act, replacement of the principal amount of Notes so redeemed by issuing other capital in the same amount and of at least equivalent own funds quality.
b) In the event of the dissolution, liquidation or bankruptcy of the Issuer, the obligations under the Notes may be satisfied only after the non-subordinated claims of creditors have been satisfied.
c) No conversion
3.10 EQUITY b. Super subordinated perpetual note
Dexia Credit Local issued a EUR 700 millions super subordinated perpetual a. Capital stock note in the fourth quarter of 2005.
At January 1, 2008, Dexia Credit Local had capital stock of EUR The notes bear interest at a fixed rate of 4.3% for the first 10 years. 1,327,004,846, divided into 87,045,757 shares. Subsequently, if they are not called, they will bear interest at a floating rate equal to 3-month Euribor plus 1.73% per year, payable quarterly. The Combined Shareholders’ Meeting of December 22, 2008 decided to: The payment of interest may, and in certain cases must, be suspended. The principal may also be reduced through the incorporation of losses. • increase the capital by EUR 3,500,000,000 by increasing the par value of the shares comprising the capital; All interest not paid at these dates will be lost and will no longer be owed by the issuer. • reduce the capital by EUR 4,326,491,744 by reducing the par value of the shares. The note is included in both accounting and regulatory capital calculations. Interest payments are treated like dividends and deducted directly from The capital stock of Dexia Credit Local as modified by the decision of the shareholders’s equity. Combined Shareholders’ Meeting of December 22, 2008 amounts to EUR 500,513,102, divided into 87,045,757 shares. In 2007 and 2008, such interest payments amounted to EUR 20 million, tax included.
138 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4 c. Other movements EUR 14 million for the minority interests and EUR 25 million for the Group’s equity. The impact of the remeasurement of this liability was to reduce Dexia Credit Local had entered into contracts to purchase shares held Group’s equity by EUR 2 million and minority interests by EUR 3 million by the directors of Financial Security Assurance Holdings Ltd. (FSA) and at that date. the company White Mountains at a low price based on a contractual formula. The contracts covered the remaining 2% of the shares of FSA At December 31, 2008, the value of that debt amounted to EUR 32 million, not held by the Group. including EUR 10 million for the minority interests and EUR 22 million for the Group’s. The impact of the remeasurement of this liability was to At December 31, 2005, this liability was worth a total of EUR 94 million, increase the Group’s equity by EUR 3 million, and the minority interests including EUR 48 million for the minority interests and EUR 46 million for by EUR 5 million at that date. the Group’s equity: the impact of the remeasurement of this liability in 2008 was to lower both the Group’s equity and the value of the minority Under the terms of the sale of FSA’s insurance business, the liability to interests by EUR 6 million each. the directors of FSA remains the responsibility of the Dexia Credit Local Group. On May 12, 2006, Dexia Credit Local acquired the 1% held by White Mountains for EUR 43 million, thereby decreasing the value of the In 2007, Dexia Kommunalkredit Bank’s acquisition of 5.42% of the Group’s equity by EUR 2.5 million and the value of the minority interests minority interests of Dexia banka Slovensko reduced the Group’s equity by EUR 1.5 million. by EUR 3 million.
At December 31, 2007, the value of the liability to the directors of FSA In 2008, Dexia Credit Local’s agreement to acquire the minority holding the remaining 1% not held by the Group following the acquisition interests of Dexia Kommunalkredit Bank decreased minority interests by of the shares of White Mountains amounted to EUR 39 million, including EUR 71 million.
( 4. OTHER NOTES ON THE BALANCE SHEET
4.1 DERIVATIVES a. Analysis by type CONSOLIDATED FINANCIAL CONSOLIDATED STATEMENTS 2007 2008
Assets Liabilities (EUR millions) Assets Liabilities Derivatives at fair value through profit or loss (see notes 2.1 and 3.1) 5,728 5,282 19,570 17,664
Derivatives designated as fair value hedges 4,641 8,383 3,276 21,025
Derivatives designated as cash flow hedges 1,180 803 562 1,745 Derivatives designated as hedges of a net investment in a foreign entity 0000
Derivatives designated as portfolio hedges 4,546 4,569 4,281 5,049
Hedging derivatives 10,367 13,755 8,119 27,819
TOTAL DERIVATIVES 16,095 19,037 27,689 45,483
Annual Report 2008 / DEXIA CREDIT LOCAL 139 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
b. Detail of derivatives held at fair value through profit or loss
2007 2008
Notional amount Assets Liabilities Notional amount Assets Liabilities
To receive To deliver To receive To deliver (EUR millions)
Foreign exchange derivatives 26,466 26,293 884 162 26,451 26,125 1,317 392
Interest rate derivatives 310,499 314,864 4,428 4,700 386,905 396,826 16,612 17,176
Equity derivatives 351 351 10 10 304 304 17 17
Credit derivatives (1) 24,414 71,608 396 399 10,405 4,359 1,616 71
Commodity derivatives 62 62 10 11 62 62 8 8
TOTAL 361,792 413,178 5,728 5,282 424,127 427,676 19,570 17,664
(1) The change observed is attributable to the agreement to sell FSA’s insurance businesses to the Assured Guaranty Group.
c. Detail of derivatives designated as fair value hedges
2007 2008
Notional amount Assets Liabilities Notional amount Assets Liabilities
To receive To To deliver To receive To deliver (EUR millions)
Foreign exchange derivatives 43,416 45,104 997 2,777 44,073 46,338 1,031 3,940
Interest rate derivatives 171,347 169,713 3,150 5,223 183,163 182,643 1,962 16,728
Equity derivatives 11,343 11,045 442 383 9,996 9,891 268 353
Credit derivatives 50 50 3 0 45 48 0 3
Commodity derivatives 123 123 49 0 71 71 15 1
TOTAL 226,279 226,035 4,641 8,383 237,348 238,991 3,276 21,025
d. Detail of derivatives designated as cash flow hedges
2007 2008
Notional amount Assets Liabilities Notional amount Assets Liabilities
To receive To deliver To receive To deliver (EUR millions)
Foreign exchange derivatives 2,110 1,690 490 77 3,251 2,946 540 334
Interest rate derivatives 52,704 52,699 690 726 55,269 55,269 22 1,411
Equity derivatives 00000000
Credit derivatives 00000000
Commodity derivatives 00000000
TOTAL 54,814 54,389 1,180 803 58,520 58,215 562 1,745
2007 2008 (EUR millions) Amount removed from fair value reserve on CFH derivatives and included in the carrying amount of a non financial instrument, in case of a CFH on forecast transaction 0 0
140 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4 e. Detail of derivatives designated as hedges of a net investment in a foreign entity
2007 2008
Notional amount Assets Liabilities Notional amount Assets Liabilities
To receive To deliver To receive To deliver (EUR millions)
Foreign exchange derivatives 0 0 0 00000
TOTAL 00000000 f. Detail of derivatives designated as portfolio hedges
2007 2008
Notional amount Assets Liabilities Notional amount Assets Liabilities
To receive To deliver To receive To deliver (EUR millions)
Foreign exchange derivatives 0 0 0 00000
Interest rate derivatives 477,877 472,763 4,546 4,569 378,278 381,275 4,281 5,049
TOTAL 477,877 472,763 4,546 4,569 378,278 381,275 4,281 5,049
4.2 DEFERRED TAXES a. Analysis by type
2007 2008 (EUR millions) CONSOLIDATED FINANCIAL CONSOLIDATED STATEMENTS Deferred tax assets before impairment 437 3,042
Impairment on deferred tax assets (1) (429)
Deferred tax assets (see note 2.6) (1) 436 2,613
Deferred tax liabilities (see note 3.5) (1) (260) (23)
TOTAL 176 2,590
(1) Deferred tax assets and liabilities are netted out when they concern the same tax entity.
The sharp change in the net deferred tax situation is primarily attributable to the recognition of deferred tax assets on the fair value reserve on securities available for sale and on cash flow hedges at December 31, 2008. This fair value reserve amounted to (EUR 11,211) million at December 31, 2008 versus (EUR 1,551) million at December 31, 2007.
Annual Report 2008 / DEXIA CREDIT LOCAL 141 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
b. Movements
2007 2008 (EUR millions)
At January 1 (632) 176
Charge/credit recognized in the income statement (see note 5.13) 139 829
Effect of change in tax rates - impact on the income statement (see note 5.13) 22 (1)
Movements directly recognized in shareholders’ equity 646 2,056
Effect of change in tax rates - impact on shareholders’equity 5 0
Change in scope of consolidation 00
Translation adjustment (18) 66
Other movements (1) 14 (536)
AT DECEMBER 31 176 2,590
(1) FSA’s business operations were the subject of a sale agreement with the Assured Guaranty Group: a portion of the deferred taxes was therefore transferred to specific balance sheet lines set aside for “ Non-current assets held for sale” at December 31, 2008.
c. Deferred taxes coming from assets of the balance sheet
2007 2008 (EUR millions)
Loans (and loan loss provisions) 130 (1,673)
Securities 243 993
Derivatives (475) (2,287)
Investments in associates 00
Tangible fixed assets and intangible assets (13) (15)
Other asset specific to insurance companies (76) 0
Accruals and other assets 814
TOTAL (183) (2,968)
d. Deferred taxes coming from liabilities of the balance sheet
2007 2008 (EUR millions)
Derivatives 1,052 4,279
Borrowings, deposits and issues of debt securities (244) 1,088
Provisions 13
Pensions 57
Other liabilities specific to insurance companies (26) 0
Tax losses carried forward 76 863
Regulatory provisions (400) (99)
Entity with special tax status (173) (161)
Accruals and other liabilities 69 7
TOTAL 360 5,987
142 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
4.3 RELATED-PARTY TRANSACTIONS
ANALYSIS BY NATURE
Key Parent Entities with Subsidiaries (3) Associates (3) Joint ventures Other related management company joint control in which the parties (4) (Dexia) or significant entity is a influence over partner (3) the entity (2) 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 (EUR millions)
Loans (1) 1 1 3,114 1,814 0 270000008,036 23,610
Interest income on loans 0 0 156 6001000000497834
Borrowings 0 0 34 44 340 1,622 0 0 56 52 0 0 61,445 57,088
Interest expense on deposits 0 0 (1) (1) (21) (31) 0 0 (4) (2) 0 0 (2,133) (3,055)
Net commissions 0000000011002(1)
Guarantees issued by the Group00000000000047,759 11,524 Guarantees received by the Group 0 0 0 2150000540009,356 11,655
(1) Loans to key management personnel were granted at general market conditions. (2) This refers to the main shareholders of Dexia (2007 - 2008) : Arcofin, Holding Communal , Groupe Caisse des Dépôts. (3) This includes the non-consolidated investments listed in notes 1.2.b “non consolidated subsidiaries”, 1.2.d “joint companies not consolidated by the proportionate method“, and 1.2.f “ Associated companies not accounted for by the equity method’. (4) This item includes loans and borrowings with entities of Belgian and Luxemburg sub-groups consolidated by Dexia, the parent company of Dexia Credit Local.
4.4 COMPENSATION OF KEY MANAGEMENT PERSONNEL
2007 2008 (EUR millions)
Short-term benefits (1) 55 FINANCIAL CONSOLIDATED STATEMENTS
Post-employment obligations (2) 07
Other long-term benefits 00
Termination benefits 00
Share-based payments (3) 00
(1) Includes salary, bonus and other benefits (2) Includes pension obligations calculated in compliance with IAS 19. Until December 31, 2007, these commitments were borne by Dexia Etablissement Stable. (3) Includes the cost of stock options and the discount given on capital increases reserved for employees.
4.5 ACQUISITIONS AND DISPOSALS Dexia Credit Local deconsolidated Kommunalkredit Austria on October 1, 2008 and increased its stake in Dexia Kommunalkredit Bank to 100%. Kommunalkredit Austria, Dexia Credit Local’s partner in Central and Eastern Europe, appealed to the Austrian central government for support A EUR 105 million net loss was recognized on the transaction in the 2008 during the fourth quarter of 2008. financial statements (see notes 5.11 “Net gains (losses) on other assets” and 2.8 “Investments in associates,” section b, point (3)). As a result of the recapitalization plan set in place, Dexia Credit Local undertook to:
• sell its 49% holding in that company;
• acquired Kommunalkredit Austria’s 49% stake in Dexia Kommunalkredit Bank, the joint venture created by Kommunalkredit Austria (49% holding) and Dexia Credit Local (51% holding), in order to oversee all operations in Central and Eastern Europe.
Annual Report 2008 / DEXIA CREDIT LOCAL 143 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
4.6 ACTIVITIES HELD FOR DISPOSAL Assured Guaranty stock (44.6 million shares). At the date the contract was signed, the value of the shares amounted to USD 361 millions (at a price On November 14, 2008, a sales agreement was signed selling FSA per share of USD 8.10 for Assured Guaranty stock on the signing date). Holdings’ insurance business to Assured Guaranty. When the contract is ultimately finalized, Assured Guaranty will have The ultimate completion of the agreement is subject to the satisfaction of the option of substituting payment in cash for the payment in shares various regulatory and other conditions, but Dexia Credit Local considers initially provided for. This option is may not exceed 22.3 million of the the likelihood that the transaction will be successfully finalized to be 44.6 million shares originally called for. The substitution price is set at highly probable. Information received subsequent to December 31, USD 8.1 per share. 2008 confirms Dexia Credit Local’s position of considering that the FSA Insurance Company sale will go through. Insofar as the number and the value of the shares at the time the contract is concluded are not yet certain at present, the USD 8.1 per share value Based on this information, and in compliance with IFRS 5, Dexia Credit shall be used for accounting purposes. Local has elected to apply the following accounting treatment: the assets and liabilities of FSA Insurance Company’s activities have been broken Just like every previous quarter, the earnings figure for the fourth quarter out on a separate line of the assets and the liabilities on the consolidated of 2008 will remain consolidated within each line of the income statement, balance sheet, and the difference between the net assets sold and the as Dexia Credit Local still retains the control over this business. On the other selling price – an estimated loss of EUR 940 million – was recorded in “Net hand, the accounting earnings generated as from October 1, 2008 shall gain (loss) on long-term investments.” be attributable to Assured Guaranty. The selling price is based on the net assets sold at September 30, 2008, unless any extraordinary circumstances As FSA Insurance’s activities do not constitute an operating segment of should arise. the Dexia Local Group, they are not required to be treated as discontinued operations. The sale of FSA’s insurance business is taking place as provided for in the schedule that has been prepared, and the transaction is expected to close The contract of sale provides for half of the total consideration for the sale during the second quarter of 2009. to be settled in cash (USD 361 million), with the other half to be paid in
a. Income statement
(EUR millions) 2008 4th quarter 2008
Interest margin 148 37
Commissions (2) (1)
Net gains (losses) on financial instruments at fair value though profit or loss (475) (204)
Net gains (losses) on financial assets available for sale 0 (4)
Other income (1) 508 126
Other expenses (1) (120) (35)
Net banking income 59 (81)
Operating expenses (98) (50)
• Payroll costs (26) (12)
• General and administrative expenses (31) (29)
• Deferred acquisition costs (41) (9)
A mortization and impairment of tangible fixed assets and intangible assets (2) 23
Gross operating income (41) (108)
Cost of risk (1,385) (464)
Operating income (1,426) (572)
Income (losses) from associates 00
Net gains (losses) on other assets 00
Impairment of goodwill 00
Income before tax (1,426) (572)
Income tax 555 220
Net income (871) (352)
Minority interests (92) (37)
NET INCOME, GROUP SHARE (779) (315)
(1) Including technical margin of insurance companies 371 91
144 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4 b. Balance sheet
At December 31, 2008 (EUR millions)
Cash, central banks and postal checking accounts 1
Interbank loans and advances 100
Customer loans and advances 19
Financial assets available for sale 4,172
Derivatives 158
Tax assets 562
Other assets 1,213
Non current assets held for sale 6,225
Derivatives (1,069)
Debt securities (513)
Technical provisions of insurance companies (1,080)
Other liabilities (1) (3,035) Liabilities included in non-current assets held for sale (5,697)
(1) Including a EUR 693 million loss related to the updating of the fair value of activities held for disposal.
Net assets held for sale 1,210
Expected purchase price 517
Loss related to the updating of the fair value of activities held for disposal (693) CONSOLIDATED FINANCIAL CONSOLIDATED STATEMENTS
4.7 SHARE-BASED PAYMENTS
2007 2008 Dexia stock option plans (number of options) (1)
Outstanding at beginning of period 12,604,164 12,810,282
Granted during the period 2,296,200 2,256,950
Forfeited during the period (22,000) (22,000)
Exercised during the period (2) (2,068,082) (88,100)
Outstanding at the end of the period 12,810,282 14,957,132
Exercisable at the end of the period 5,975,924 8,227,724
(1) Outstanding options also include the options granted to the employees of Dexia Credit Local in 1999. (2) The weighted average exercise prices for 2007 and 2008 was respectively EUR 13.58 and EUR 11.50 per share.
Annual Report 2008 / DEXIA CREDIT LOCAL 145 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
2007 2008
Weighted-average Number Weighted-average Weighted-average Range of Number of Weighted-average remaining of outstanding exercise price remaining exercise prices outstanding options exercise price (EUR) contractual life (years) options (EUR) contractual life (years)
5. 95 - 8. 10000000
10. 97 - 11. 37 1,644,035 11.37 4.0 1,546,885 11.37 4.34
11. 88 - 13. 66 3,023,236 13.31 4.77 5,267,236 13.46 6.38
13. 81 - 14. 58 647,800 14.58 2.38 647,800 0 1.92
17. 23 - 17. 86 880,761 17.86 4.0 880,761 0 3.00
18. 03 - 18. 20 2,296,250 0 7.44 2,296,250 0 6.49
18. 20 - 18. 62 2,022,000 0 8.5 2,022,000 0 7.5
23.25 2,296,200 0 9.5 2,296,200 0 8.5
TOTAL 12,810,282 14,957,132
2007 Plan (1) 2008 Plan (1) Dexia stock option plans
Grant date 06/29 /2007 06/30 /2008
Number of instruments granted 2,296 ,200 2,256,950
Exercise price (EUR) 23.25 12.65
Share price at grant date (EUR) 23.35 10.28
Contractual life (years) 10 years 10 years
Settlement Dexia Equities Dexia Equities
Fair value per granted instrument at grant date (EUR) 3.65 0.8968
(1) Dexia used the fair value obtained by an independent third party.
2007 2008 (EUR millions)
Equity-settled arrangements 94
Cash-settled arrangements (1) 19 (16)
Arrangements with alternative settlements 00
TOTAL EXPENSES 28 (12)
2007 2008 (EUR millions)
Debts for cash-settled arrangements (1) 76 0
Debts for arrangements with alternative settlements 00
TOTAL LIABILITIES 76 0
(1) FSA’s incentive plan. In 2008, due to the fall of Dexia shares , the provision constituted in the past has been reversed.
146 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
Amounts included in expense for the year
(EUR millions) 2007 2008
Dexia Credit Local Group 2003 plan 10
Dexia Credit Local Group 2004 plan 00
Dexia Credit Local Group 2005 plan 10
Dexia Credit Local Group 2006 plan 11
Dexia Credit Local Group 2007 plan 42
Capital increase 21
Dexia contribution 00
NET EXPENSE 94
Performance shares granted at FSA Payout percentages are interpolated for compound annual growth rates between 7% and 19%. Through 2004, performance shares were awarded under the 1993 Equity Plan . This plan authorizes the discretionary grant of performance shares by In 2004, FSA adopted the 2004 Equity Plan , which continues the incentive the Human Resources Committee to key employees. The amount earned compensation program formerly provided under the Company’s 1993 for each performance share depends on the attainment of certain growth Equity Participation Plan. The 2004 Equity Plan provides for performance rates of adjusted book value per outstanding share over a three-year share units comprised 90% of performance shares (which provides for period. payment based upon the Company’s performance over specified three- year performance cycles as described above) and 10% of shares of Dexia Performance shares issued prior to January 1, 2005 permitted the restricted stock. participant to elect, at the time of award, growth rates including or excluding realized and unrealized gains and losses on the investment The Dexia restricted stock component is a fixed plan, where the Company portfolio. Performance shares issued after January 1, 2005 do not offer purchases Dexia shares, which cost is amortized over 2.5-year and 3.5-year the option to include the impact of unrealized gains and losses on the vesting periods. In 2008 and 2007, FSA purchased shares to economically investment portfolio. No payout occurs if the compound annual growth defease its liability for $3.8 million and $4.7 million, respectively. These rate of adjusted book value and book value per outstanding share over amounts are being amortized to expense over the employees’ vesting specified three-year performance cycles is less than 7%, and a 200% periods. FINANCIAL CONSOLIDATED STATEMENTS payout occurs if the compound annual growth rate is 19% or greater.
Oustanding Granted during Earned during Forfaited during Outstanding Share price FSA shares at beginning of the period the period the period at end of period at date of grant (in USD) period
2007 1,210,294 306,368 (364,510) (37,550) 1,114,602 145.61
2008 1,114,602 313,245 (349,533) (100,901) 977,413 156.99
4.8 INSURANCE CONTRACTS • note 5.6 “Other expense”, “Expense included in the technical margin of insurance companies”; In the Dexia Credit Local group, the insurance contracts are related to FSA’s credit enhancement activity. • note 5.7 “Operating expense”, for information concerning the amounts of deferred acquisition costs; The main figures related to this activity feature in the following notes: • note 5.9 “Cost of risk”; • note 2.7 “Accruals and other assets” item b. “Other assets specific to insurance companies”; • note 6.4 “Insurance activity - commitments given” and “Insurance activity - commitments received”; • note 3.6 “Accruals and other liabilities” item b. “Other liabilities specific to insurance companies”; • the technical margin of insurance companies is provided in footnote (1) to the consolidated income statement. • note 3.7 “Technical provisions of insurance companies”; FSA’s insurance businesses have been sold to the Assured Guaranty Group. • note 5.5 “Other income”, “Income included in the technical margin T he lines concerned by this business have been transferred to specific lines of insurance companies”; on the balance sheet at December 31, 2008 “Non-current assets held for sale ” and “Liabilities on non-current assets held for sale”).
Annual Report 2008 / DEXIA CREDIT LOCAL 147 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
4.9 CAPITAL SHARES
2007 2008
Number of shares authorized 87,045,757 87,045,757
Number of shares issued and fully paid 87,045,757 87,045,757
Number of shares issued and not fully paid 00
Par value of the share Not applicable 5.75
Outstanding as of January 1 87,045,757 87,045,757
Number of shares issued 00
Number of shares cancelled 00
Outstanding as of December 31 87,045,757 87,045,757
Rights, preferences and restrictions, including restrictions 00
Number of shares of treasury stock 00
Number of shares reserved for issue under stock options and contracts for the sale of shares (1) Not applicable Not applicable
(1) Under the stock option plans of Dexia Credit Local, these are Dexia shares that are granted to the employees.
4.10 EXCHANGE RATES
The primary exchange rates are presented in the following schedule.
2007 2008
Closing rate (1) Average rate (2) Closing rate (1) Average rate (2)
Australian dollar AUD 1.67488 1.63595 2.03052 1.75065
Canadian dollar CAD 1.44391 1.46757 1.69433 1.56554
Swiss f ranc CHF 1.65515 1.64623 1.48605 1.57869
Czech k oruna CZK 26.59395 27.70165 26.85506 25.01881
Danish k rone DKK 7.45754 7.45178 7.44885 7.45531
British pound s terling GBP 0.73357 0.68741 0.95352 0.80181
Hong Kong dollar HKD 11.47739 10.75978 10.82746 11.44726
Hungarian forint HUF 252.66391 251.30372 265.27436 250.32327
Israeli shekel ILS 5.66349 5.63379 5.28802 5.23374
Japenese y en JPY 164.90047 162.09071 126.68903 151.48539
Korean w on KRW 1,377.67839 1,279.97630 1,759.71731 1,612.48892
Mexican p eso MXN 16.05866 15.06571 19.32699 16.37246
Norwegian k rone NOK 7.96428 8.01127 9.73709 8.28041
New Zealand dollar NZD 1.89946 1.86280 2.42531 2.09129
Swedish k rone SEK 9.42195 9.26363 10.88411 9.67792
Singapore dollar SGD 2.11858 2.06969 2.01301 2.06892
New Turkish l ira TRY 1.70600 1.77191 2.13320 1.90531
US d ollar USD 1.47180 1.37942 1.39710 1.47071
(1) Rate observed on Reuters at 4.45pm on the last business day of the month of December. (2) Average of the closing rates used by the Dexia Group.
148 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
( 5. NOTES ON THE INCOME STATEMENT
5.1 INTEREST INCOME - INTEREST EXPENSE (ITEMS I AND II - INCOME STATEMENT)
2007 2008 (EUR millions)
Interest income 50,405 55,836
a) Interest income on assets not measured at fair value 13,133 15,398
Cash, central banks and postal checking accounts 63 58
Interbank loans and advances 1,204 1,634
Customer loans and advances 5,928 7,881
Financial assets available for sale (1) 5,594 5,321
Financial assets held to maturity 63 56
Impaired assets 122
Other 280 426
b) Interest income on assets measured at fair value 37,272 40,438
Loans and securities held for trading 778 667
Loans and securities designated at fair value 30 25
Derivatives held for trading 10,313 13,256
Derivatives used for hedging 26,151 26,490
Interest expense (49,108) (54,067)
a) Interest expense on liabilities not measured at fair value (12,727) (13,528)
Interbank borrowings and deposits (4,404) (5,027) CONSOLIDATED FINANCIAL CONSOLIDATED STATEMENTS Customer borrowings and deposits (2) (1,146) (818)
Debt securities (3) (6,885) (7,374)
Subordinated debt (244) (234)
Preferred shares and hybrid capital 00
Amounts covered by sovereign guarantees 0 (12)
Other (3) (48) (63)
b) Interest expense on liabilities measured at fair value (36,381) (40,539)
Liabilities held for trading 00
Liabilities designated at fair value (2) (285) (311)
Derivatives held-for-trading (10,303) (13,399)
Derivatives used for hedging (25,793) (26,829)
NET INTEREST INCOME 1,297 1,769
(1) In 2007, EUR 2 million was reclassified from line I. “Interest income on financial assets available for sale” to line VI. “Net gains (losses) on financial assets available for sale”, with no impact on net earnings for the year. (2) In 2007, EUR 252 million was reclassified from “Customer borrowings and deposits” to “Liabilities designated at fair value”. (3) In 2007, EUR 1 million was reclassified from “Other” to “Debt securities”.
Annual Report 2008 / DEXIA CREDIT LOCAL 149 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
5.2 FEE AND COMMISSION (ITEMS III AND IV - INCOME STATEMENT)
2007 2008
Income Expense Net (EUR millions) Income Expense Net
Lending activity 48 (23) 25 76 (25) 51
Insurance activity and broking 47 (4) 43 47 (4) 43
Purchase and sale of securities 2 (3) (1) 3 (4) (1)
Purchase and sales of shares of mutual funds 606505
Management of mutual funds 000000
Administration of mutual funds 000000
Payment services 7 (5) 2 10 (5) 5
Commissions paid to business providers 000000
Financial engineering 15 0 15 18 (5) 13 Services on securities other than custodial services 1 (2) (1) 0 (3) (3)
Custodial services 1 (1) 0 1 (2) (1)
Issuance and underwriters of securities 4 (2) 2 3 (3) 0
Securitization commissions 000000
Private banking 000000
Compensation and settlement-delivery 101101
Intermediation on repos and reverse repos 000000
Other 15 (9) 6 17 (12) 5
TOTAL 147 (49) 98 181 (63) 118
5.3 NET GAINS (LOSSES) ON FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS (ITEM V - INCOME STATEMENT)
2007 2008 (EUR millions)
Net trading income (431) (544)
Net result of hedge accounting 47 2
Net result of financial instruments designated at fair value through profit or loss (*) 3 (32)
Change in own credit risk 33 308
Net result of foreign exchange transactions 53 (91)
TOTAL (295) (357)
(*) Including trading derivatives used under the fair value option 165 793
All interest received and paid on assets, liabilities and derivatives is recorded in the net interest income, as required by IFRS.
Thus, net gains (losses) on trading transactions and net gains (losses) on hedging transactions include only the change in the clean value of derivatives, the revaluation of assets and liabilities qualified as hedges and the revaluation of the portfolio held for trading.
150 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
ANALYSIS OF NET RESULT OF HEDGE ACCOUNTING
2007 2008 (EUR millions)
Fair value hedges 22
Fair value changes of the hedged item attributable to the hedged risk (2,302) 13,199
Fair value changes of the hedging derivatives 2,304 (13,197)
Cash flow hedges 45 0
Fair value changes of the hedging derivatives – ineffective portion 0 0
Discontinuation of cash flow hedge accounting (strong possibility no longer exists that cash flows will occur) 45 0
Hedges of net investments in a foreign operations 00
Fair value changes of the hedging derivatives – ineffective portion 0 0
Portfolio hedge 00
Fair value changes of the hedged item (84) 702
Fair value changes of the hedging derivatives 84 (702)
TOTAL 47 2 Amount recycled in net interest margin from the fair value reserve on cash flow hedges (on derivatives for which the hedging relationship has been interrupted) 19 19
5.4 NET GAINS (LOSSES) ON FINANCIAL ASSETS AVAILABLE FOR SALE (ITEM VI - INCOME STATEMENT)
2007 2008 (EUR millions)
Dividends on securities available for sale 24 11
Net gain (loss) on disposals of loans and securities available for sale (1) 358 78 FINANCIAL CONSOLIDATED STATEMENTS
Impairment of variable-income securities available for sale (1) (32)
Net gain (loss) on disposals of securities held to maturity 00
Net gain (loss) on disposals of debt securities 924
TOTAL 390 81
(1) In 2007, EUR 2 million was reclassified from interest income to loans and securities available for sale. In addition, the EUR 358 million figure in 2007 includes EUR 213 million in capital gains on disposals of listed shares.
5.5 OTHER INCOME (ITEM VII - INCOME STATEMENT)
Income included in the technical margin of insurance companies 2007 2008 (EUR millions)
Premiums and subscription fees received (1) 486 459
Charges to provisions - Reinsurers’ share 00
Changes in technical reserves - Reinsurers’ share 00
Other technical income 00
TOTAL 486 459
(1) Premiums and subscription fees received correspond to FSA’s financial guarantee activity.
Annual Report 2008 / DEXIA CREDIT LOCAL 151 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
Other operating income 2007 2008 (EUR millions)
Changes in inventory 00
Operating taxes 02
Lease income 13 18
Other banking income 01
Other income 726
TOTAL 20 47
TOTAL OTHER INCOME 506 506
5.6 OTHER EXPENSES (ITEM VIII - INCOME STATEMENT)
Expenses included in the technical margin of insurance companies 2007 2008 (EUR millions)
Premiums received transferred to reinsurers (1) (180) (120)
Premiums and subscription fees paid 00
Charges to provisions 00
Adjustments of technical reserves 00
Other technical expenses 00
TOTAL (180) (120)
(1) Premiums received correspond to FSA’s financial guarantee activity.
Other operating expense 2007 2008 (EUR millions)
Changes in inventory 00
Operating taxes 00
Maintenance and repair of investment property that generated income during the year 0 0
Other banking expenses 0 (1)
Other expenses (16) (22)
TOTAL (16) (23)
TOTAL OTHER EXPENSES (196) (143)
5.7 OPERATING EXPENSES (ITEM X - INCOME STATEMENT)
2007 2008 (EUR millions)
Payroll costs (359) (343)
General and administrative expenses (213) (349)
Deferred acquisition costs (46) (41)
TOTAL (618) (733)
152 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4 a. Payroll c osts
2007 2008 (EUR millions)
Compensation and salary expense (220) (240)
Social security and insurance expense (70) (78)
Employee benefits (47) (12)
Restructuring costs 00
Other (22) (13)
TOTAL (359) (343)
EMPLOYEE INFORMATION
2007 2008
Fully Proportionately Fully consolidated Proportionately Total (Full time equivalent) consolidated consolidated Total consolidated
Executive staff 59 4 63 53 3 56
Administrative staff 3,763 10 3,773 4,065 14 4,079 Non-administrative and other personnel 23 0 23 24 0 24
TOTAL 3,845 14 3,859 4,142 17 4,159
2007
Rest of Rest (Full time equivalent) France Belgium Luxembourg Italy Spain Europe U.S. of world Total
Executive staff 2400311811663 CONSOLIDATED FINANCIAL CONSOLIDATED STATEMENTS
Administrative staff 1,891 0 1 235 42 955 549 100 3,773 Non-administrative and other personnel 00000512623
TOTAL 1,915 0 1 238 43 978 572 112 3,859
2008
France Belgium Luxembourg Italy Spain Rest of U.S. Rest Total (Full time equivalent) Europe of world
Executive staff 23 0 0 3 1 13 10 6 56
Administrative staff 2,044 0 0 241 47 1,065 554 128 4,079 Non-administrative and other personnel 0 0 000514524
TOTAL 2,067 0 0 244 48 1,083 578 139 4,159
Annual Report 2008 / DEXIA CREDIT LOCAL 153 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
b. General and administrative expenses
2007 2008 (EUR millions)
Cost of premises (8) (7)
Rent expense (1) (28) (23)
Fees (39) (48)
Marketing, advertising and public relations (17) (19)
IT expense (21) (39)
Software, research and development (8) (12)
Maintenance and repair (8) (8)
Restructuring costs 0 (43)
Insurance (except related to pensions) (5) (3)
Stamp tax (3) (4)
Other taxes (25) (31)
Other general and administrative expenses (51) (112)
TOTAL (213) (349)
of which maintenance and repair expenses of investment property that did not generate income during the year. 0 0
(1) This amount does not include IT rental expenses, which appears on the “IT expense” line.
5.8 AMORTIZATION AND IMPAIRMENT OF TANGIBLE FIXED ASSETS AND INTANGIBLE ASSETS (ITEM XI - INCOME STATEMENT)
A mortization 2007 2008 (EUR millions)
Amortization of investment property 00
Amortization of land and buildings, office furniture and other equipment (8) (9)
Amortization of computer equipment (4) (4)
Amortization of other tangible fixed assets (8) (8)
Amortization of intangible assets (32) (32)
TOTAL (52) (53)
Impairment 2007 2008 (EUR millions)
Impairment of investment property 00
Impairment of land and buildings, office furniture and other equipment 0 0
Impairment of other tangible fixed assets 00
Impairment of assets held for sale 00
Impairment of long term construction contracts 00
Impairment of intangible assets 0 (3)
TOTAL 0 (3)
TOTAL AMORTIZATION AND IMPAIRMENT (52) (56)
154 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
5.9 COST OF RISK (ITEM XIII - INCOME STATEMENT)
2007 2008
Collective Specific T otal Collective Specific Total impairment Impairment impairment Impairment and (EUR millions) and losses losses Credit (loans, commitments and securities held to maturity) (54) 29 (25) (524) (291) (815)
Credit enhancement 28 (51) (23) (37) (1,344) (1,381)
Fixed-income securities available for sale 2 2 (1,191) (1,191)
TOTAL (26) (20) (46) (561) (2,826) (3,387)
In 2008, the cost of risk was impacted heavily by the FSA subsidiary – Exposure to the banking sector also proved quite costly, with the cost of which set aside provisions of EUR 1,331 million on its financial products risk in 2008 incorporating: portfolio and EUR 1,302 million on its FSA Insurance Company, which were • EUR 211 million on the bankruptcy of the Lehman Brothers investment directly affected by the crisis in the financial and mortgage markets in the bank; United States. The two portfolios both recognized substantial impairment losses on their exposure to residual mortgage backed securities (RMBS, • EUR 85 million in provisions on various (notably Icelandic) banking including primarily HELOC, Alt-A, subprime and Option ARM products). institutions; The impact of the crisis on FSA’s portfolio of financial products included • EUR 29 million in provisions for risks on providers of credit the recognition of a EUR 300 million collective provision for impairment enhancement; on U.S. RMBS risk. • EUR 32 million for a provision covering RMBS exposure in Spain;
• EUR 100 million for a provision covering customer derivatives transactions at Dexia banka Slovensko.
DETAIL OF COLLECTIVE AND SPECIFIC IMPAIRMENTS CONSOLIDATED FINANCIAL CONSOLIDATED STATEMENTS
2007 2008
Collective impairment Additions Recoveries Total Additions Recoveries and Total (EUR millions) and uses uses
Loans and securities held to maturity (78) 24 (54) (573) 49 (524)
Off-balance sheet commitments 000000
Total credit (78) 24 (54) (573) 49 (524)
Credit enhancement 0 28 28 (37) 0 (37)
TOTAL (78) 52 (26) (610) 49 (561)
Annual Report 2008 / DEXIA CREDIT LOCAL 155 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
2007 Total Specific impairment Additions Recoveries Losses Collections (EUR millions)
Interbank loans and advances 00000
Customer loans and advances (21) 50 (2) 2 29
Financial assets held to maturity 00000
Accruals and other assets 00000
Off-balance sheet commitments (1)1000
Total credit (22) 51 (2) 2 29
Credit enhancement (54) 21 (18) 0 (51)
Fixed-income securities (8) 10002
TOTAL (84) 82 (20) 2 (20)
2008 Total Specific impairment Additions Recoveries Losses Collections (EUR millions)
Interbank loans and advances 00000
Customer loans and advances (102) 15 (4) 1 (90)
Financial assets held to maturity 00000
Accruals and other assets (182)000(182)
Off-balance sheet commitments (19)000(19)
Total credit (303) 15 (4) 1 (291)
Credit enhancement (945) 8 (407) 0 (1,344)
Fixed-income securities (1,191)000(1,191)
TOTAL (2,439) 23 (411) 1 (2,826)
5.10 INCOME (LOSSES) FROM ASSOCIATES (ITEM XV - INCOME STATEMENT)
2007 2008 (EUR millions)
Income before tax 78 (40)
Taxes (20) (1)
Impairment on goodwill 0 (12)
TOTAL 58 (53)
156 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
5.11 NET GAINS (LOSSES) ON OTHER ASSETS (ITEM XVI - INCOME STATEMENT)
2007 2008 (EUR millions)
Net gains (losses) on disposals of buildings 00
Net gains (losses) on disposals of other non-current assets 00
Net gains (losses) on disposals of consolidated equity investments 0 (1,036)
TOTAL 0 (1,036)
In 2008, under the terms of the agreement to sell FSA’s insurance business, The net gains (losses) on other assets also include a EUR 96 million loss on this line included a EUR 940 million estimated loss, including: the deconsolidation of the Kommunalkredit Austria associated with the assumption of full control of Dexia Kommunalkredit Bank AG. • a EUR 693 million loss on the fair value adjustment of the activities held for sale (see note 4.6 “Activities held for disposal”);
• EUR 201 million in provisions on the translation adjustment; and
• EUR 46 million on transaction costs.
5.12 IMPAIRMENT OF GOODWILL (ITEM XVII - INCOME STATEMENT)
2007 2008 (EUR millions)
Impairment of goodwill 0 (1,181)
TOTAL 0 (1,181)
In 2008, the goodwill on FSA was written down in full. CONSOLIDATED FINANCIAL CONSOLIDATED STATEMENTS 5.13 CORPORATE INCOME TAX (ITEM XIX - INCOME STATEMENT)
Detail of tax expense 2007 2008 (EUR millions)
Current taxes (279) (277)
Deferred taxes 154 839
Tax on prior years’ income (6) 6
Deffered taxes on prior years 7 (11)
Provisions for tax litigations 16 (1)
TOTAL (108) 556
Annual Report 2008 / DEXIA CREDIT LOCAL 157 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
2008 effective tax expense
The standard corporate tax rate applicable in France is 34.43%. The tax rate applied on the contributions of foreign subsidiaries is the rate applied locally in accordance with each individual national tax treatment.
The effective average tax rate used in 2008 amounted to 17.17%. The difference between these two rates can be analyzed as follows:
2007 2008 (EUR millions)
Income (loss) before income taxes 1,142 (4,472)
Net income (loss) from associates 58 (53)
Impairment of goodwill 0 (1,181)
Tax base 1,084 (3,238)
Applicable tax rate at end of the period 34.43% 34.43%
Theoretical corporate income tax at the standard rate 373 (1,115)
Impact of differences between foreign tax rates and the standard French tax rate (23) 15
Tax effect of non-deductible expenses 4 418
Tax effect of non-taxable income (187) (193)
Impact of items taxed at a reduced rate (4) (48)
Other additional taxes or tax savings (17) (40)
Write-down of deferred tax assets (1 ) 0 406
Liability method (22) 0
Provision for tax litigations (16) 1
CORPORATE INCOME TAX RECORDED IN THE INCOME STATEMENT 108 (556)
EFFECTIVE TAX RATE 9.98% 17.17%
(1 ) Under the agreement to sell FSA’s insurance businesses and the review of the Dexia Credit Local Group’s activities in the United States, the deferred tax base was adjusted and a provision was recognized at December 31, 2008.
Tax consolidation group • Dexia CLF Organisation;
Dexia Etablissement Stable in France is the head of the tax group • Dexia CLF Avenir; consolidating the following companies: • Dexia Habitat; • Dexia Credit Local; • CBX Gestion (former Europrojet Développement); • Floral; • Dexint Développement; • Dexia CLF Immo; • Dexia Flobail; • Compagnie pour le Foncier et l’Habitat; • Dexia Bail; • CLF Marne-la-Vallée Participation; • Dexia Finance; • Dexia Editions; • Dexia Sofaxis; • Dexia Assuréco; • Guide Pratique de la Décentralisation; • Dexia Municipal Agency; • CBX IA 1; • Dexia CLF Développement; • CBX IA 2. • Genebus Lease; Tax savings arising from the netting off of the profits and losses of • Dexia CLF Energy; companies within the tax group are recognized as a profit in the accounts of Dexia SA Etablissement stable.
158 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
5.14 EARNINGS PER SHARE a. Basic earnings per share
Basic earnings per share is obtained by dividing “Net income, Group share” by the weighted-average number of common shares outstanding during the year, less the average number of common shares purchased by the Company and held as treasury stock.
2007 2008
Net income, Group share (EUR millions) 979 (3,556)
Weighted-average number of common shares (millions) 87 87
Basic earnings per share (in EUR) 11.25 (40.85) b. Diluted earnings per share is based on the monetary value of the subscription rights attached to the outstanding options. Diluted earnings per share is calculated by adjusting the average number of common shares outstanding to reflect the potential conversion into The number of shares calculated in the manner described above is dilutive common shares of the options granted to employees. compared to the number of shares that would have been issued assuming the options were exercised. For stock options, the calculation of the number of shares that could have been acquired at fair value (calculated as the average annual share price) No adjustments were made to “Net income, Group share” as there are no financial instruments convertible into Dexia shares.
2007 2008
Net income, Group share (EUR millions) 979 (3,556)
Weighted-average number of common shares (millions) 87 87
Adjustment for stock-options (millions) 00
Weighted- average number of common shares used for the calculation of diluted earnings per share (millions) 87 87 FINANCIAL CONSOLIDATED STATEMENTS
Diluted earnings per share (in EUR) 11.25 (40.85)
Annual Report 2008 / DEXIA CREDIT LOCAL 159 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
( 6. NOTES ON OFF-BALANCE SHEET ITEMS
6.1 REGULAR WAY TRADE
2007 2008 (EUR millions)
Assets to be delivered 3,229 1,708
Liabilities to be received 10,249 3,098
6.2 GUARANTEES
2007 2008 (EUR millions)
Guarantees given to credit institutions 566 469
Guarantees given to customers (1) 6,864 10,069
Guarantees received from credit institutions 927 873
Guarantees received from customers 13,753 15,665
Guarantees received from sovereign governments 0 18,835
(1) In 2007, EUR 25,685 million in Standby Bond Purchase Agreement (SBPA) commitments were reclassified from “Loan commitments given to customers” to “Guarantees given to customers”.
6.3 LOAN COMMITMENTS
2007 2008 (EUR millions)
Loan commitments given to credit institutions 807 642
Loan commitments given to customers (1) 59,405 51,199
Loan commitments received from credit institutions 6,330 11,270
Loan commitments received from customers 23 5
(1) In 2007, EUR 25,685 million in Standby Bond Purchase Agreement (SBPA) commitments were reclassified from “Loan commitments given to customers” to “Guarantees given to customers”.
6.4 OTHER COMMITMENTS
2007 2008 (EUR millions)
Insurance activity - Commitments given (1) 394,270 0
Insurance activity - Commitments received (1) 93,780 0
Banking activity - Commitments given (2) 97,845 79,755
Banking activity - Commitments received 24,359 45,735
(1) At December 31, 2008, following the signature of the agreement to sell FSA’s insurance business to the Assured Guaranty Group, the off-balance sheet commitments relative to the insurance activities were included in the discontinued operations held for sale. (2) The 2007 figures have been restated.
160 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
( 7. NOTES ON EXPOSURE TO RISK AT DECEMBER 31, 2008
7.0 EXPOSURES TO RISKS AND HEDGING • suspension or reduction of credit limits, especially on monoline STRATEGIES insurers and banks. Bank credit limits are currently being lowered even further; a. Risk factors and Risk Management • suspension of financial market powers that had been delegated to the front office and suspension (except for very small amounts) of powers The Risk Management and Permanent Control department is responsible delegated to subsidiaries and branches; for monitoring all credit, market, liquidity and operational risks, within the meaning of French Banking Regulations Committee (CRB) Standard 97-02 • establishment of industry-specific provisions to take account of the as modified. The Chief Risk Officer is head of the department and a deterioration of Dexia Credit Local’ s risk parameters (provisions for member of the DCL Management Board. sensitive risks on corporates and asset-backed securities, provisions on U.S. RMBSs and provisions on monoline insurers); The Chief Risk Officer represents Dexia Credit Local on the Group Risk Management Committee (GRMC), which is chaired by the Dexia Group • modification of the management of liquidity risk. Chief Risk Officer, himself a member of the Group’s Management Board. Liquidity crisis Dexia’s liquidity management strategy was severely tested during the The Risk Management and Permanent Control department is responsible 2007-2008 financial crisis, especially after the Lehman Brothers collapse. for ensuring that all types of risk (including credit, operational and market The conditions discussed below concern the entire Dexia Group. risks) respect the limits established by the Group’s management bodies. The department recommends any measures it feels necessary for monitoring Although Dexia was not spared by the drought in the money and capital and reducing levels of risk. markets at the beginning of the crisis (with or without guarantees, with the exception of repos collateralized by highest quality assets), the The Risk Management and Permanent Control department adheres Group was able to overcome the serious lack of liquidity thanks to the strictly to the provisions laid down by the Dexia Group Risk Management support it received from the central governments of Belgium, France and department (Group Risk Management) concerning risk appetite, Luxembourg and its considerable reserves of high quality assets. measurement methods, limits and reporting methods. Since October 9, 2008, a significant portion of Dexia’s sources of funding The Risk Management and Permanent Control department operates has been covered by a maximum total EUR 150 billion guarantee provided free of any external influence from the front office function. It does not
jointly by the central governments of Belgium, France and Luxembourg (at FINANCIAL CONSOLIDATED STATEMENTS report to any operational department, but has functional authority over December 31, 2008, the total loan outstandings guaranteed amounted the specialized permanent control staff in each of the operating units to EUR 59 billion) on Dexia’s commitments to credit institutions and concerned. institutional counterparties, and on all bonds and other types of debt Risk is monitored on a consolidated basis via risk units organized within securities issued to the same types of counterparties, provided that these each branch or subsidiary and reporting directly or functionally to the commitments, bonds and other debt securities mature prior to October head of the department. 31, 2011 and were contracted, issued or renewed at some time between October 9, 2008 and October 31, 2009. During the year, risk monitoring was carried out under the severely adverse conditions of the crisis in the financial markets. In an economic environment that is still unstable, the Group’s liquidity has gradually improved since the difficulties experienced in late September/ Under these conditions, the Group undertook several measures during early October 2008 thanks to the guarantee provided by the central the fourth quarter: governments on October 9, 2008. In the first quarter of 2009, this support • allowing the trading portfolio to run off; allowed Dexia to issue two bonds totaling EUR 6.5 billion maturing in 2011, and facilitated its access to funding markets and the stabilization of • a portion of the bond portfolio was reclassified from “Financial assets its deposit base. This improvement was also supported by the intentional held for trading” and “Financial assets available for sale” into “Loans reduction of the Group’s originations of new loans outside its primary and receivables,” while a portion of the bond portfolio was reclassified markets and the decrease of drawings under its confirmed lines of credit from “Financial assets held for trading” into “Financial assets available in the United States. Dexia will take advantage of every opportunity that for sale“; the market may offer to lengthen the terms of its sources of funding.
• certain securities classified as “Financial assets available for sale” were Dexia’s retail customers made only limited withdrawals of their deposits measured using in-house models, to recognize the fact that market at the beginning of October, and the trend was short-lived and never truly prices had become altogether unrepresentative of the securities’ threatened Dexia’s general liquidity position. true value. These assets were measured using stress-tested Basel II parameters for probability of default and loss given default, and an While the crisis did shake the very foundations of the Group’s liquidity risk illiquidity premium was factored in; management, Dexia reacted to these changes by modifying its liquidity risk management guidelines and conducting a detailed analysis of its • lowering of market limits, in terms of both VaR and sensitivity; current balance sheet and future growth plans, in order to sharply reduce its reliance on external funding sources. Dexia’s liquidity position, like
Annual Report 2008 / DEXIA CREDIT LOCAL 161 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
those of many financial institutions, is highly reliant on the reopening Similarly, Dexia reviewed its internal transfer pricing system in 2008 in order of money and capital markets and/or the continuing support provided to more accurately reflect the rapidly changing costs of its principal sources by the joint guarantee issued by the Belgian, French and Luxembourg of funding. This change is intended to motivate the Group’s different federal authorities. businesses to make sure that a healthy equilibrium is maintained between the Group’s ability to extend loans and its capacity to source funding. Liquidity Risk Management Dexia’s approach to liquidity Risk Management has been reviewed in light CREDIT RISK of the current financial and liquidity crises. The general principle holds The Risk Management and Permanent Control department uses tools that Dexia’s future funding requirements must never exceed its proven it develops to monitor credit risk, in compliance with the procedure capacity to obtain guaranteed funding. manuals established by the Dexia Group and all regulatory and prudential The Group’s future funding needs are determined dynamically and constraints. exhaustively, taking into account the liquidity needs generated by current Approval process and future on- and off-balance sheet transactions. The Group’s capacity to The organization of the approval process takes into account the fact that obtain guaranteed funding is calculated in a prudent manner, by applying the vast majority of lending decisions concern customers in the local public the lessons learned from the current crisis. Dexia’s ability to satisfy all of its sector, which has low risk and is also subject to specific controls due to its future liquidity needs through its capacity to obtain guaranteed funding is public nature. As such, the approval process: tested under both normal and various stress scenarios. The latter include scenarios related to specific bank and market stresses, as well as to a • provides for the delegation of powers to the French and international combination of the two. sales network for local public sector customers in the Eurozone countries and in North America, as well as in other countries where Dexia Credit The Bank’s short-term funding needs are monitored daily, while its longer Local has a significant local presence and a local Risk Management term funding needs (up to three years) are tracked monthly. Generally department (such as certain countries in Central and Eastern Europe, speaking, liquidity Risk Management is a fundamental component of Israel, and Japan), using risk measurement tools developed together Dexia’s three-year strategic financial plan. with the Risk Management and Permanent Control department; This monitoring is controlled retrospectively and updated regularly in order • respects the limits established by the Dexia Group Risk Management to ensure that the Bank remains compliant with all the latest regulatory department; recommendations and best practices. • turns to the credit committees organized within the Dexia Group In addition to the constraints imposed by the internal oversight of (Dexia Credit Local Credit Committees, Dexia Credit Committee and liquidity Risk Management, Dexia also takes account of all local regulatory Management Credit Committee) for corporate lending, project finance, constraints. asset-based lending and the financing of local public sector customers The directives include a global emergency plan for liquidity, which is tested in regions where no delegation of lending authority has been granted. regularly. Restricted delegations of powers were given to the Dexia Credit Local New York and London branches and to the Dexia Sabadell subsidiary Dexia is able to reduce its liquidity risk by diversifying its sources of funding, for their project finance activity; which include primarily: • delegates specific powers for commitments relating to the investment • mortgage bonds (primarily the mortgage bonds issued by Dexia and trading portfolios, and turns to the Dexia Group TFM Credit Municipal Agency and the Pfandbriefe issued by Dexia Kommunalbank Committee for all amounts related to these activities that exceed the Deutschland); delegated powers. • uncovered bonds (including bonds issued through the Bank’s own Certain powers that had been delegated to the front offices and networks); international entities were reviewed due to the financial crisis, resulting in • starting in 2009, bonds and commercial paper guaranteed by the the reduction or temporary suspension of authorized amounts, depending Belgian, French and Luxembourg governments; on the type of transactions concerned. The original measures taken concerned notably those financial markets transactions recorded either • retail banking deposits (almost entirely in Belgium, Luxembourg and on the Bank’s balance sheet or in the trading portfolio that was marked Turkey); for runoff at the end of 2008. • Requests for proposals from central banks; Internal credit ratings and Basel II reforms • bilateral and tripartite repos; and The internal credit rating system is of paramount importance for the Dexia Group, which has chosen the advanced approach under the Basel • a great variety of non-guaranteed short-term funding sources, including II solvency ratio and capital adequacy reforms. By letter dated December central bank deposits, commercial paper and certificates of deposit, 21, 2007, following its meeting of December 18, 2007, the Belgian fiduciary deposits and non-banking/interbank deposits, certain of which Banking, Finance and Insurance Commission (CBFA) authorized Dexia enjoy sovereign guarantees. to use the advanced internal ratings-based approach for calculating Dexia employs a centralized liquidity Risk Management strategy. Although and reporting credit risk-based capital adequacy requirements as from the various Group entities manage their own liquidity positions, the Dexia January 1, 2008. Cash and Liquidity Management business line ensures that a standardized This project was coordinated by a specialized team within the Risk strategy is applied to and incorporated into the Group as a whole. Management and Permanent Control department, which complies with
162 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
the guidelines established by Group Risk Management and maintains daily by the Internal Audit department and are examined for quality control contact with that department. It draws on all of the units in Dexia Credit purposes. Local, assigning responsibility for all functional and systems-related aspects of the project to members in each branch and subsidiary, as well as in every Credit limits Dexia Credit Local central department concerned by the subject. Credit limits are set in accordance with the specific technical characteristics of each type of counterparty, as outlined in the procedure manuals In 2007 and 2008, several models were developed for local authorities in established by Group Risk Management, which have been approved by Western Europe and their organizations, the U.S. municipal sector, public the Risk Policy Committee and implemented at Dexia Credit Local. housing, state-owned and similar public sector agencies, project finance and other forms of specialized finance. Simply put, the system factors in Dexia’s Tier 1 capital, the counterparty’s equity or the economic capital allocated to the transaction to calculate Development of models implies not just the initial calculation and decreasing credit limits on the basis of the internal credit rating. subsequent annual backtesting of the parameters for probability of default, loss given default, credit conversion factors and any credit risk Dexia’s Credit Committees set individual limits for each project finance mitigants, it also means the development and maintenance of robust and asset-based lending transaction. Country and industry-specific credit software applications for the rating and oversight of each outstanding limits have also been established, depending on the characteristics of loan covered by one of the internal credit rating systems. The process also certain activities. includes the implementation and subsequent monitoring and updating, Certain credit limits were reviewed during 2008, especially those for bank as needed, of all procedures (e.g. those regarding past dues and defaults) counterparties. The system used to calculate credit limits was also reviewed that ensure that the provisions of Basel II are implemented at all levels in order to minimize risk. concerned within the Bank. Monitoring and reporting All these issues are presented first to the Validation Advisory Committee First-level monitoring is provided by the sales teams of the Head Office, and then to the Group Risk Policies Committee and the Internal Audit branches and subsidiaries as part of their ongoing controls of their department. The regulators are informed of all work performed by these counterparties’ businesses. They are responsible for ensuring that credit bodies. All of the recommendations concerned are monitored regularly limits are respected each time a new lending decision is presented to the at the Group level. Credit Committee or for locally-delegated approval. The units concerned continued their work in 2008 and will maintain their Second-level monitoring is provided by the Risk Management and efforts in 2009 with regard to: Permanent Control department, which monitors all of the Dexia Credit • the work needed to improve the models to take account of all Local group’s exposures, past-due loans and non-performing loans. recommendations; Changes in the quality of the commitments and compliance with credit
limits are examined on a regular basis and are reported to the Management FINANCIAL CONSOLIDATED STATEMENTS • roll-out, corresponding to the development plan for other internal Boards and to all appropriate Committees as part of the documentation credit rating systems for new or emerging types of customers for Dexia required by CRB Standard 97-02 as amended. Credit Local; Once a quarter, Loan Monitoring Committees examine changes in sensitive • the continuous work discussed above regarding the backtesting and transactions and Default Committees examine each case that meets the development of software applications; criteria of default established by the banking supervisors. • production of new, permanent risk weightings for the calculation of the capital adequacy ratio, which require very careful verification of Reserve policies the accuracy of all data reported in Fermat, the central database for Once a quarter, a Reserves Committee, chaired by the Risk Management adjusted regulatory risk calculation. and Permanent Control department, approves the amount of reserves allocated and monitors the cost of risk. General reserves are calculated All Group counterparties are now described using the same standard and maintained as required by International Financial Reporting Standards coding system, and the various entities continuously populate a common (IFRS). counterparty database (so-called participant database, or AIDA). All Dexia Group exposures to the various counterparties are now reported once FINANCIAL RISKS a month. The Dexia Credit Local Group makes a clear distinction between asset- Lastly, in 2008, the Bank’s economic (or “risk-adjusted”) capital liability management (ALM) transactions and market transactions. This requirements continued to be calculated on a quarterly basis, with new distinction is based on highly differentiated management objectives: methodological advances (namely Credit VaR). Work began on stress- • ALM includes all activities related to the management of Dexia Credit testing, in accordance with regulatory requirements. From the concrete Local’s structural risks, including interest rate, currency and balance implementation standpoint, an application for calculating the profitability sheet and off-balance sheet liquidity risks. Dexia uses macro-hedging of transactions using Basel II risk parameters has been deployed in each transactions to reduce its total risk. The effectiveness of these hedges Dexia Credit Local location around the world, as well as in all Group is measured every month, as required by CRB Standard 90-15; entities. Several hundred people are now assigned to this application, called RAROC. • market transactions include primarily two types of strategies: locking in of credit margins, primarily on bonds held, and use of derivative The use of these models has been incorporated into the decisions made by instruments to take positions on interest rates. the Bank’s Risk Committees, and the conditions for their use are audited
Annual Report 2008 / DEXIA CREDIT LOCAL 163 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
ALM RISKS for managing its own results and the interest rate risk generated or borne Scope by its own balance sheet. The scope of Dexia Credit Local’s Local ALM includes: Structural risks may be defined as: − the commercial bank; • risks of fluctuations in the Bank’s net income subsequent to changes in market conditions (interest rates, exchange rates and the cost of − the securities portfolio of the Local ALM; liquidity), with the exception of market risks; and − the technical processes resulting from its front office operations (e.g.: • the risk of the Bank being insolvent. fixed rate inflation, averaged Euribor and post-fixed Euribor, etc.).
The goal of asset-liability management is to hedge - in part or in full - Local ALM uses mainly traditional ALM Risk Management applications to all risks related to the structure of the balance sheet, for those assets measure and monitor the risks inherent to ALM. and liabilities that have different interest rate, currency or amortization profiles. Residual risks may be maintained and managed in accordance • The decisions of the Group ALM Committee are adapted operationally with the decisions of the ALM Committee, which are generally based on by the Dexia Credit Local Tactical ALCO technical committee. The Risk a long-term management horizon. The ALM Committee is responsible Management and Permanent Control department and the Financial for all risks other than the interest rate and currency risks on the Financial Markets department both participate in the Tactical ALCO. Markets business lines. Measurement of total interest rate risk The financial crisis prompted the Dexia Group to review the methods it ALM interest rate risk measurement has been standardized throughout uses to manage liquidity risk. Funding needs are calculated for the Group the Dexia Group, and is based on several main metrics. as a whole, and are reviewed actively by including all of the resources The principal measurement used is that of the interest rate sensitivity of required to finance all current and future operations, as well as those the net present value (NPV) of assets and liabilities within the ALM scope. consumed by off-balance sheet activities. Stress scenarios are developed The scenario used for fixed rate exposures calculates the effect of a 100 using internal and market stress factors. basis point uniform shift in the yield curve. If Dexia Credit Local has too Short-term liquidity needs are monitored daily, and medium- and longer- many fixed-rate assets (base case) then its risk increases with an increase term (up to three years) liquidity risk is reviewed every month. As a rule, in interest rates. management of liquidity risk is one of the most important factors taken into account in building the Group’s three-year strategic plan. MARKET RISKS Scope Liquidity Risk Management is backtested and reviewed regularly, in The “Financial Markets” business lines refer to the Dexia Credit Local accordance with the recommendations of the regulatory authorities and Group’s Treasury & Financial Markets (TFM) activities, including: with the best industry practices. • Financial Engineering and Derivatives: ALM risk supervision • The Dexia ALM Committee (ALCO) meets once a month. − trading of interest rate derivatives;
It defines risk policy and risk hedging strategies for the entire Group. − structuring and sale of derivative instruments to its own customers, The guidelines established by the Dexia ALM Committee give rise to or to the customers of other business lines under master agreements individual hedging decisions, but management authority may also be signed with those business lines. delegated to the Dexia ALM department. • Delegated Asset-Liability Management:
The Dexia ALM Committee ensures that these limits are applied − by delegation of powers from the ALM Committee, performs the Bank’s consistently based on its own scenarios for changes in interest rates. short-term (less than two years) asset-liability management on the euro The operational autonomy given to certain subsidiaries is supervised and the dollar, and manages all maturities of certain currencies for by the Dexia ALM Committee, which, by delegating powers and which powers have been explicitly delegated by Group ALCO. establishing limits, retains the means to control the policy set in place within the subsidiaries. As for all risk committees, the Dexia Credit • Cash and Liability Management (CLM): Local representative, who is either the Chief Executive Officer or the − raises the Bank’s short-term funding (i.e. less than two years) and Chief Risk Officer, has veto authority over those decisions he feels are manages its short-term liquidity. not applicable to the entity. • Long-Term Funding: • The Finance Committee meets once a month. − raises the Bank’s long-term funding (i.e. more than two years), based on Under its new organization, the ALM function is divided into two separate an annual issuance schedule established by the ALM Committee; but complementary parts: − issues subordinated borrowings, in accordance with the needs expressed − “strategic ALM,” under the authority of Group ALCO; and by the Finance department. − “local ALM,” under the authority of the Finance Committee. • Credit Spread Portfolio: By breaking Local ALM out from the global ALM scope, Group ALCO has − invests almost exclusively in products not included in the usual scope given the Finance Committee authority over the operational management of operations of the Group’s principal business lines. of its own balance sheet. Accordingly, the Local ALM unit is responsible
164 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
• Public Spread Portfolio: Alarms were set off on numerous occasions in 2008 by the pressures observed in the markets, leading the appropriate committees to take a − invests in bonds issued by counterparties within the scope of the Group’s stance as often as necessary. Public & Wholesale Banking business line. Because this sector falls under a business line other than TFM, it is monitored by both of the At the same time, the increase in the level of risk during the year prompted business lines concerned. the lowering of VaR limits and a closer scrutiny of portfolios.
• Credit Structuring Trading: RISK MANAGEMENT COMMITTEES − trading of bonds with short terms to maturity. Several committees are responsible for Risk Management within Dexia Credit Local. Decisions are reached by consensus and the Risk Management • Sales: representatives of Dexia Credit Local have veto power within the Group − sales force at the disposal of the other Financial Markets business committees if they judge that one of the committee’s decisions is not lines. applicable to the entity.
These activities are subject to two types of risks: The principal committees are:
• credit risk, or risk of default of the counterparty on a derivative contract • the Risk Policy Committee, which selects risk measurement policies, or the issuer of a purchased asset (in reality, most of the credit risk on rules and methods; TFM activities is concentrated in the credit spread portfolio, the public • the Dexia and Dexia Credit Local Credit Committees (weekly), which rule spread portfolio and the credit structuring trading activities); on all transactions submitted to them. The Credit Guideline Committee, • market risks, which may be defined as risks of fluctuations in the Bank’s a sub-group of the Credit Committee, may establish limits that are net income or the value of the positions it has taken subsequent to lower than those resulting from the application of Group principles and changes in market conditions (interest rates, exchange rates, share recommend delegations of powers to be given to the various entities price, etc.). or establish specific limits for certain industry-specific risks;
Market risk supervision • the Dexia and Dexia Credit Local ALM Committees (ALCO: monthly) make decisions in accordance with their individual authorities and Three committees are responsible for monitoring risks relating to the limits. They define the interest rate, currency and liquidity risk strategies Financial Markets activities: employed by all Dexia Group entities and by Dexia Credit Local and all • the Market Risk and Guideline Committee (MRGC) meets once a month. of its subsidiaries and branches with significant ALM activities; It is responsible for establishing and monitoring risk policies, such as • the Dexia Credit Local Weekly Operational Committee, which adapts guidelines and market risk limits for each activity and each desk, and the decisions of the Treasury & Financial Markets Committee for
is charged notably with the monitoring of risk indicators; FINANCIAL CONSOLIDATED STATEMENTS implementation; • the Dexia Credit Local Market Committee (the “Weekly Operational • the New Products Committee (monthly), which validates all of the Committee”), which provides weekly monitoring of the implementation products of Dexia Credit Local and its branches. Each subsidiary has of all standards and decisions issued by the Dexia Group Market Risk its own committee; Committee; • loan Monitoring Committees at both the Group and entity levels • the TFM Credit Committee, which examines all transactions related (quarterly Watchlist Committee), which monitor developments in essentially to the credit spread portfolio and to credit structuring sensitive transactions; trading. The Credit Committee reviews all transactions concerning public sector issuers and corporate or project finance counterparties. • default Committees at both the Dexia and entity levels (quarterly) which classify loans as being in default in accordance with the criteria The Risk Management and Permanent Control department measures established by the banking supervisors; risk regularly, and presents a quarterly market risk report to the Dexia Credit Local Management Board. The report includes various indicators • the Validation Advisory Committee which is the Dexia Group committee for monitoring the limits that have been allocated to the different types that approves all models for credit, market, ALM, operational and of risk. economic capital risks.
Risk monitoring methods RISK MONITORING IN SUBSIDIARIES AND BRANCHES The principal risk metric used by Dexia Credit Local, and in fact by the Each subsidiary and branch has its own local Risk Management structure. entire Dexia Group, is value at risk (VaR). The VaR calculated by the Dexia These structures: Group measures the potential loss over a 99% confidence interval for a 10-day benchmark period. • are segregated strictly from the front offices;
The risk monitoring process consists of establishing the following items • report to the Dexia Credit Local Risk Management and Permanent for each entity and type of Financial Markets activity: Control department either directly (branches) or functionally (subsidiaries). • a list of currencies and instruments that may be traded; Risk monitoring at FSA • a VaR limit. Risk is monitored at two different levels at FSA. The first level of monitoring is performed by FSA’s Risk Management department, which is segregated from the front office and is managed by a member of the FSA Management
Annual Report 2008 / DEXIA CREDIT LOCAL 165 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
Board. The second is provided by Dexia Credit Local, in collaboration with type of risk hedged, and the method used to evaluate both the prospective the Dexia Group, which has set up a three-pronged Risk Management and the retrospective effectiveness. system: Insofar as interest rate risk is concerned, the hedging of securities is based • a quarterly review is performed by the Board of Directors of FSA and either on previously identified fixed rate assets or liabilities, in portfolios of two specialized risk committees: either fixed rate assets or liabilities. The derivative contracts entered into allow the Bank to reduce the exposure to the value of these instruments − the Underwriting Committee, which is chaired by a member of the caused by changes in interest rates. Dexia Group Management Board, provides a detailed review of all commitments and examines all issues pertaining to risk policy; The hedging of identified assets and liabilities concerns primarily loans, securities available for sale and securities issued by the Group. − the Investment Committee, which establishes guidelines for investment policy and evaluates investment performance. The hedging of portfolios of financial assets or liabilities established by foreign currency concerns both: • strict oversight of the business through (i) the use of rules for delegation of authority between Dexia Credit Local and FSA, specifying the types • fixed rate loans: customer loans; and of activities that are authorized and establishing commitment limits for • fixed rate customer resources (debt issues). each type of counterparty and (ii) ‘underwriting guidelines,’ which are approved by the Board of Directors, with the understanding that FSA The amount hedged is designated by establishing a maturity schedule must comply with all requisite single risk limits and all limits established for the term to maturity of the outstanding balances due of the items by Dexia. Any transactions that fail to comply with the aforementioned hedged, and by designating an amount by maturity band considered. rules and any modifications of guidelines must be examined by the These maturities are determined taking account of the transactions’ Dexia Group and Dexia Credit Local Risk Management departments contractual characteristics. and approved by the Dexia Management Credit Committee and the The prospective effectiveness of each hedging relationship is measure Underwriting Committee of the Board of Directors. A number of by ensuring that for each maturity band, the outstandings of the items Dexia representatives serve on the Underwriting Committee, which hedged is greater than the outstanding balances of the designated is chaired by the Chief Risk Officer of Dexia (who is also a member of hedging instruments. the Management Board) and also includes the Chief Risk Officer of Dexia Credit Local; The retrospective effectiveness is measured by ensuring that the monthly change in the outstanding balance hedged at the opening of the period • close operational control provided by the Dexia Credit Local Risk does not highlight any retrospective overhedging. Management and Permanent Control department and the Dexia Group Risk Management department, with (i) the establishment in 2007 of Insofar as interest rate risk is concerned, the Group uses hedging derivatives an FSA Risk Monitoring Committee, which generally meets every two to cover changes in the income and expenses associated with variable months and (ii) the creation of a specialized unit within Dexia Credit rate assets and liabilities. Local responsible for monitoring FSA’s risk situation. Most highly probably future transactions are also hedged. The items Against the background of the crisis in the financial markets, different hedged are positioned in maturity schedules, by currency and by interest analyses were performed in 2008 to determine which businesses FSA rate index. The Group uses derivatives to hedge all or a portion of its should cease and which should be continued, with the Risk Management exposure to risks engendered by these variable rate instruments. departments carrying out several related projects. During the summer of 2008, Dexia decided to cease all ABS-related operations. Moreover, due to the amplitude of the provisions set aside on account of the U.S. real estate crisis, all assumptions used were systematically reviewed at every quarterly accounting close in collaboration with the FSA Risk Management department. Lastly, as was done with the rest of the Dexia Group, bank credit limits were lowered in the financial products business and more stringent restrictions were placed upon the types of securities in which FSA Asset Management may invest.
b. Interest rate hedge management
The hedging relationships initiated by the Group mainly concern hedges of interest rate risk and currency risk using swaps, options and currency futures.
Based on the strategy pursued, derivatives are designated either as fair value hedges, cash flow hedges or hedges of net investments in foreign currencies.
In every case, each hedging relationship is formally documented from the outset, with a description of the strategy pursued, designating the underlying instrument hedged and the instrument used to hedge it, the
166 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
7.1 FAIR VALUE a. Fair value of assets
December 31, 2007 December 31, 2008
Carrying Fair value Unrecognized Carrying Fair value Unrecognized amount fair value amount fair value (EUR millions) adjustment adjustment Cash, central banks and postal checking accounts 1,553 1,553 0 632 632 0 Loans and securities at fair value through profit or loss (see note 2.1) (1) 18,370 18,370 5,848 5,848
Derivatives (see note 4.1.a) (1) 16,095 16,095 27,689 27,689
Financial assets available for sale (1) 130,761 130,761 60,674 60,674
Interbank loans and advances 20,832 20,852 20 35,892 33,116 (2,776)
Customer loans and advances 146,568 148,549 1,981 248,916 249,587 671
Fair value revaluation of portfolio hedges (1) (2) (364) (364) 2,084 2,084
Financial assets held to maturity 1,272 1,448 176 1,131 1,191 60
Investments in associates 459 843 384 275 371 96
Other assets 9,878 9,878 0 24,894 24,894 0
Non current assets held for sale 0 0 0 6,225 6,225 0
TOTAL 345,424 347,985 2,561 414,260 412,311 (1,949)
(1) For these items, the fair value is taken to be equal to their carrying amount. (2) The line “Fair value revaluation of portfolio hedges” corresponds to the remeasurement of the interest rate risk on assets covered by portfolio hedges. These assets are included in the lines “ Customer loans and advances”, “ Interbank loans and advances” and “Financial assets available for sale”.
b. Analysis of fair value of liabilities, excluding shareholders’equity FINANCIAL CONSOLIDATED STATEMENTS
December 31, 2007 December 31, 2008
Carrying Fair value Unrecognized Carrying Fair value Unrecognized amount fair value amount fair value (EUR millions) adjustment adjustment Central banks, postal checking accounts, interbank borrowings and deposits 106,877 106,903 26 155,432 152,942 (2,490) Financial liabilities at fair value through profit and loss (see note 3.1.a) (1) 7,008 7,008 6,977 6,977
Derivatives (see note 4.1.a) (1) 19,037 19,037 45,483 45,483
Customer borrowings and deposits 19,938 19,944 6 17,619 17,568 (51)
Fair value revaluation of portfolio hedges (1) (2) (447) (447) 1,386 1,386
Debt securities 176,010 176,018 8 172,853 169,516 (3,337)
Subordinated debt 4,942 4,945 3 5,002 4,986 (16)
Other liabilities 5,772 5,772 0 5,721 5,721 0 Liabilities included in non-current assets held for sale 0 0 0 5,697 5,697 0
TOTAL 339,137 339,180 43 416,170 410,276 (5,894)
(1) For these items, the fair value is taken to be equal to their carrying amount. (2) The line “Fair value revaluation of portfolio hedges” corresponds to the remeasurement of the interest rate risk on liabilities covered by portfolio hedges. These liabilities are included in the lines “Interbank borrowings and deposits”, “ Customer borrowings and deposits” and “Debt securities”.
Annual Report 2008 / DEXIA CREDIT LOCAL 167 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
The fair value presented above does not include impacts related to interest • of EUR 1.4 billion on “Subordinated debt”; and rates, with the exception of “Liabilities held for trading” and “Liabilities • of EUR 0.5 billion on “Customer borrowings and deposits” related to at fair value through profit or loss”. the FSA subsidiary’s guaranteed investment contracts (GICs). The use of observed credit spreads on the Group’s liabilities would lead to a reduction in fair value:
• of EUR 10.2 billion on “Debt securities”;
c. Methods used to determine the fair value of financial instruments
December 31, 2008 Fair value of financial assets Level 1 (1) Level 2 (2) Level 3 (3) Total (EUR millions)
Interbank loans and advances 0 26,868 6,248 33,116
Customer loans and advances 0 173,422 76,165 249,587
Loans and securities at fair value through profit or loss (see note 2.1) 2,377 2,174 1,297 5,848
Derivatives (see note 4.1.a) 175 27,096 418 27,689
Financial assets available for sale 13,262 45,904 1,508 60,674
Financial assets held to maturity 87 761 343 1,191
Fair value revaluation of portfolio hedges 0 2,084 0 2,084
TOTAL 15,901 278,309 85,979 380,189
(1) Price quoted on an active market for the same type of instrument. (2) Price quoted on an active market for a similar type of instrument or use of a valuation model, all of whose most significant parameters are observable. (3) Use of a valuation model, not all of whose most significant parameters are observable.
December 31, 2008 Fair value of financial liabilities Level 1 (1) Level 2 (2) Level 3 (3) Total (EUR millions)
Central banks, postal checking accounts, interbank borrowings and deposits 0 151,974 968 152,942
Customer borrowings and deposits 0 10,998 6,570 17,568
Financial liabilities at fair value through profit and loss (see note 3.1.a) 451 31 6,495 6,977
Derivatives (see note 4.1.a) 166 44,966 351 45,483
Fair value revaluation of portfolio hedges 7 1,379 0 1,386
Debt securities 6,707 162,809 0 169,516
Subordinated debt 0 4,986 0 4,986
TOTAL 7,331 377,143 14,384 398,858
(1) Price quoted on an active market for the same type of instrument. (2) Price quoted on an active market for a similar type of instrument or use of a valuation model, all of whose most significant parameters are observable. (3) Use of a valuation model, not all of whose most significant parameters are observable.
d. Disclosure of difference between transaction prices 7.2 EXPOSURE TO CREDIT RISK and modeled values (day one profit or loss) Credit risk exposure is disclosed in the same way as reported to the No material deferred day one profit was recognized in 2007 or 2008. Company’s management and is: Transactions generating a profit on the first day (essentially perfect matches) are measured using observable market parameters. • for balance sheet assets other than derivative contracts, the net carrying amount (i.e. carrying amount after deduction of specific provisions);
168 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
• for derivatives contracts, the market value recognized on the balance a. Banking sheet (in 2007, this value was increased by a so-called add-on, a margin for potential credit risk: the figures for 2007 have not been restated Credit risk exposure is broken down by geographical region and by in the tables that follow); counterparty taking into account all guarantees obtained.
• for off-balance sheet commitments, the amount included in the note: This means that when credit risk exposure is guaranteed by a third-party this is the undrawn part of financing commitments, end the maximum whose weighted risk (for Basel regulations) is lower than that of the direct amount Dexia Credit Local is committed to pay for the guarantees it borrower, the exposure is assigned to the guarantor’s geographical region has granted to third parties; and industrial segment.
• for FSA’s credit risk exposure, the par outstanding net of reinsurance. Credit risk exposure is based on a scope that encompasses the fully- consolidated subsidiaries of Dexia Credit Local Group and includes 50% of the joint venture Domiserve.
EXPOSURE BY GEOGRAPHIC REGION
At December 31, 2007 At December 31, 2008 (EUR millions)
France 98,326 103,238
Belgium 17,115 25,983
Germany 38,671 36,758
Italy 53,260 53,160
Luxembourg 3,129 4,752
Other EU countries 68,100 70,736
Rest of Europe 9,870 9,281
Turkey 409 522
U.S. and Canada 66,514 72,302
South and Central America 2,588 2,895
Southeast Asia 4,965 3,097 FINANCIAL CONSOLIDATED STATEMENTS
Japan 10,212 20,893
Rest of world (1) 10,805 8,645
TOTAL 383,964 412,262
(1) Includes supranational entities.
EXPOSURE BY CATEGORY OF COUNTERPARTY
At December 31, 2007 At December 31, 2008 (EUR millions)
Central governments 44,312 45,127
Local governments 207,829 234,298
Financial institutions 66,330 74,412
Private companies 16,372 16,724
Monoline insurers 14,918 7,898
ABS/MBS 22,343 18,421
Project finance 11,618 14,974
Private individuals, SME, sole traders 242 408
TOTAL 383,964 412,262
Annual Report 2008 / DEXIA CREDIT LOCAL 169 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
b. Credit enhancement
All credit enhancement pertains to FSA.
ANALYSIS BY SECTOR
At December 31, At December 31, 2008 At December 31, 2007 2008 at constant Retained operations Operations held dollar (EUR millions) for sale
Corporate debt 40,229 0 39,298 37,303
Residential mortgages 13,458 0 12,226 11,605
Consumer finance 7,863 0 4,323 4,104
Financial products portfolio 12,274 9,783 9,287
Other securized assets 22,915 0 17,662 16,766
Asset-backed securities (ABS) 96,739 9,783 73,509 79,065
General municipal spending 77,609 0 89,516 84,973
Specific municipal spending financed by taxes 33,875 0 39,695 37,680
Public services 30,129 0 36,032 34,203
Transportation 11,827 0 15,249 14,475
Health 9,510 0 8,722 8,280
Housing 5,207 0 5,321 5,051
Other municipal spending 23,940 0 24,805 23,546
Municipal bonds (Munis) 192,097 0 219,340 208,208
TOTAL 288,836 9,783 292,849 287,273
The par ceded to reinsurers represented EUR 86 billion in 2008 and EUR 94 billion in 2007.
ANALYSIS BY INTERNAL CREDIT RATING
At December 31, 2007 At December 31, 2008
Retained operations Operations held for sale (EUR millions)
AAA 86,862 3,548 56,425
AA 80,685 2,559 93,428
A 86,735 849 102,188
BBB 31,751 1,210 30,205
“ Speculative” categories 2,803 1,617 10,603
TOTAL 288,836 9,783 292,849
c. Maximum exposure to credit risk
The Dexia Credit Local Group decided to provide a detailed breakdown of its credit risk exposure by financial instrument category as from 2008 onwards.
170 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
The data for 2007 in the table below have not been restated.
At December 31, 2007 At December 31, 2008
Maximum exposure to Maximum exposure (en EUR millions) credit risk to credit risk
Debt securities (1) 147,155
Loans and advances (at amortized cost) 169,169
Other financial assets 8,789
Off balance-sheet items 337,403
Financial assets available for sale (excluding variable income securities) 61,075
Financial assets designated at fair value (excluding variable income securities) 298
Financial assets held for trading (excluding variable income securities) 5,506
Loans and advances (at amortized cost) 270,425
Financial assets held to maturity 1,310
Derivatives 5,570
Other financial instruments 538
Loan commitments granted 54,827
Guarantee commitments granted 22,496
TOTAL 662,516 422,045 (1) 86% of all debt securities are classified as available for sale.
When a bond insured by FSA is recognized among Group assets, the Financial collateral consists primarily of cash collateral and term deposits, guarantee provided by FSA has been taken out of exposures shown but also includes, to a lesser extent, investment grade bonds (AAA to AA above. sovereign or banking issuers),shares of mutual funds and equities listed CONSOLIDATED FINANCIAL CONSOLIDATED STATEMENTS on recognized markets. The collateral held by Dexia Credit Local Group is comprised of financial collateral. This table includes only collateral eligible under Basel II and held directly by Dexia Credit Local. d. Credit quality of unimpaired financial assets
At December 31, 2008
AAA to AA- A+ to BBB- Non investment grade Total (EUR millions) or unrated Financial assets available for sale (excluding variable income securities) 33,085 27,254 715 61,054 Financial assets designated at fair value (excluding variable income securities) 5 271 22 298 Financial assets held for trading (excluding variable income securities) 3,299 2,166 38 5,503
Loans and advances (at amortized cost) 150,479 100,275 17,474 268,228
Financial assets held to maturity 501 673 136 1,310
Derivatives 2,401 1,627 1,382 5,410
Other financial instruments 11 18 509 538
Loan commitments granted 39,397 11,949 3,469 54,815
Guarantee commitments granted 18,018 2,950 1,418 22,386
TOTAL 247,196 147,183 25,163 419,542
Annual Report 2008 / DEXIA CREDIT LOCAL 171 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
No significant restructured loan assets are on the balance sheet.
The credit quality of financial assets reflects internal credit ratings (Basel II guidelines), or external ratings when internal ratings are not available.
e. Past-due and impaired financial assets
At December 31, 2007 At December 31, 2008
Past-due but not impaired Carrying Guarantees Past-due but not impaired Carrying Guarantees financial assets amount of and other financial assets amount of and other individually enhancements individually enhancements Less than 90 days Over Less than 90 90 days Over impaired received impaired received 90 days to 180 days 180 days days to 180 days 180 days financial on past due financial on past due assets or impaired assets or impaired (EUR millions) loans loans Financial assets available for sale (excluding variable income securities) 000900002190 Loans and advances (at amortized cost) 508 130 26 179 90 389 287 293 2,144 100 Financial assets held to maturity 0000000000 Other financial instruments 000000002110
TOTAL 508 130 26 188 90 389 287 293 2,574 100
f. Assets obtained by taking possession of collateral and other credit enhancements during the period
None
g. Movements on impairment on financial assets
2007
At January 1 Additions Reversals Other Transfers At Recoveries Charge-offs adjustments (1) between December 31 directly allowances recognized in (EUR millions) profit and loss Specific impairment on financial assets (193) (30) 87 17 0 (119) 2 (2) Interbank loans and advances 000000 00 Customer loans and advances (94) (21) 50 13 0 (52) 2 (2)
Securities held to maturity 000000 00
Securities available for sale (99) (9) 37 4 0 (67) 0 0
Accruals and other assets 000000 00 Collective impairment on financial assets (171) (78) 24 4 0 (221) 0 0
TOTAL (364) (108) 111 21 0 (340) 2 (2)
(1) Other adjustments include notably the impact of changes in exchange rates and in the scope of consolidation during the year.
172 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
2008
At January 1 Additions Reversals Other Transfers At Recoveries Charge-offs adjustments (1) between December 31 directly directly allowances (2) recognized in recognized in (EUR millions) profit or loss profit or loss Specific impairment on financial assets (119) (1,507) 22 7 6 (1,591) 0 (4) Interbank loans and advances 0 0 0 0 0 0 0 0 Customer loans and advances (52) (102) 15 (1,020) 0 (1,159) 0 (4) Securities held to maturity 0 0 0 0 0 0 0 0 Securities available for sale (67) (1,223) 7 1,027 6 (250) 0 0
Fixed revenue securities (9) (1,191) 0 1,001 4 (195) 0 0 Variable revenue securities (58) (32) 7 26 2 (55) 0 0 Accruals and other assets 0 (182) 0 0 0 (182) 0 0 Collective impairment on financial assets (221) (573) 49 (14) 0 (759) 0 0
TOTAL (340) (2,080) 71 (7) 6 (2,350) 0 (4)
(1) Other adjustments include notably the impact of changes in exchange rates and in the scope of consolidation during the year. (2) The transfers between allowances include impairments on FSA’s securities transfered to operations held for sale. h. Credit risk information on loans and receivables designated at fair value through profit or loss
Maximum Maximum exposure Change in fair value attributable Change in fair value of credit derivative
exposure to to credit risk to changes in credit risk hedging loans and receivables designated FINANCIAL CONSOLIDATED STATEMENTS credit risk hedged by a credit at fair value through profit or loss derivative Change of the Cumulative Change of the Cumulative (EUR millions) period amount period amount
At December 31, 2007 12305500
At December 31, 2008 700000
Every quarter, the Dexia Credit Local Group measures the fair value of its assets by discounting the future cash flows. i. Credit risk information about financial liabilities designated at fair value through profit or loss
Carrying amount Amount of change in fair value Difference between carrying attributable to changes in credit risk amount and contractually amount required to be paid (EUR millions) Change of the period Cumulative amount at maturity (1)
At December 31, 2007 7,008 0 0 161
At December 31, 2008 6,975 (356) (356) 699
(1) Amount includes the premium/discount and change in market value .
Until 2007, changes in fair value related to credit spreads were only marginal on liabilities covered by a AAA guarantee from FSA. These fair value adjustments represented most of the change in 2008, following the signature of the agreement to sell FSA and the deterioration of spreads.
Annual Report 2008 / DEXIA CREDIT LOCAL 173 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
7.3 INFORMATION ABOUT COLLATERAL
a. Nature of the assets received as collateral if this collateral can be sold or repledged
2007 2008
Fair value Fair value Fair value Fair value of collateral held of collateral sold of collateral held of collateral sold (EUR millions) or repledged or repledged
Equity instruments 0 0 0 0
Debt securities 110 0 11,026 0
Loans and advances 3,585 0 1,378 0
Non financial assets 0 0 0 0
TOTAL 3,695 0 12,404 0
Collateral is obtained in connection with the repurchase agreement activities.
b. Financial assets pledged as collateral for liabilities or contingent liabilities
2007 2008 (EUR millions)
Carrying amount of financial assets pledged as collateral for liabilities 49,117 51,781
Carrying amount of financial assets pledged as collateral for contingent liabilities 0 0
Assets are pledged primarily to collateralize repurchase agreements and debts to Dexia Credit Local Group sister companies.
174 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
7.4 RISK ON RESETTING OF INTEREST RATES: ANALYSIS BY TIME UNTIL NEXT INTEREST RATE RESET DATE
Demand deposits are declared in the “Demand”column, as the information presented below takes into account the current maturity until the next date of which interest rates are reset from an accounting standpoint, rather than assumptions based on observed behavioral data. a. Analysis of assets
At December 31, 2008
Demand Less than 3 3 months to 1 to 5 years Over 5 years No fixed Accrued Fair value Impairment Total (EUR millions) months 1 year maturity interest adjustment Cash, central banks and postal checking accounts 565 67 0 0 0 0 0 632 Financial assets at fair value through profit or loss 0 3,697 1,134 546 1,916 24 2,067 16,034 25,418
Hedging derivatives 5,234 2,885 8,119 Financial assets available for sale 73 16,538 7,203 10,078 26,013 65 833 121 (250) 60,674 Interbank loans and advances 8,413 16,119 4,168 3,487 2,752 0 264 698 (9) 35,892 Customer loans and advances 2,918 44,127 47,473 30,441 110,180 0 2,599 13,087 (1,909) 248,916 Fair value revaluation of portfolio hedges 2,084 2,084 Financial assets held to maturity 0 40 128 409 540 0 14 0 0 1,131
Tax assets 3,079 (429) 2,650 Accruals and other assets 33 21,387 15 1 63 121 19 0 (182) 21,457 Investments CONSOLIDATED FINANCIAL CONSOLIDATED STATEMENTS in associates 293 (18) 275
Tangible fixed assets 660 (156) 504 Intangible assets and goodwill 2,024 (1,741) 283 Non-current assets held for sale 6,229 0 (4) 6,225
TOTAL 12,002 101,975 60,121 44,962 141,464 12,495 11,030 34,909 (4,698) 414,260
Annual Report 2008 / DEXIA CREDIT LOCAL 175 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
b. Analysis of liabilities, excluding shareholders’ equity
At December 31, 2008
Demand Less than 3 3 months to 1 to 5 years Over 5 years No fixed Accrued Fair value Total (EUR millions) months 1 year maturity interest adjustment Central banks, postal checking accounts, interbank borrowings and deposits 33,597 108,080 5,960 2,885 4,161 0 567 182 155,432 Financial liabilities at fair value through profit and loss 0 798 1,374 1,316 2,682 0 2,067 16,404 24,641
Hedging derivatives 5,095 22,724 27,819 Customer borrowings and deposits 3,541 9,851 811 1,471 1,765 0 121 59 17,619
Debt securities 2 52,030 25,576 41,217 49,241 0 2,717 2,070 172,853 Fair value revaluation of portfolio hedges 1,386 1,386
Tax liabilities 146 146 Accruals and other liabilities 31 4,775 60 57 115 324 10 5,372 Technical provisions of insurance companies 0 0
Provisions 203 203
Subordinated debt 0 4,288 46 63 517 0 71 17 5,002 Liabilities included in non-current assets held for sale 5,024 673 5,697
TOTAL 37,171 179,822 33,827 47,009 58,481 5,697 10,648 43,515 416,170
c. Sensitivity gap of the balance sheet
Demand Less than 3 months 3 months to 1 year 1 to 5 years Over 5 years No fixed maturity (EUR millions)
At December 31, 2008 (25,169) (77,847) 26,294 (2,047) 82,983 6,798
The sensitivity gap of the balance sheet is hedged by derivatives.
7.5 SENSITIVITY TO INTEREST RATE RISK Because of the reorientation of the TFM businesses, the Risk Policy Committee of November 7, 2008 decided to reduce TFM VaR limits, Value at risk (VaR) is the indicator used to measure interest rate risk for especially for the credit spread risk on the trading portfolio. Treasury and Financial Markets activities and to measure sensitivity for ALM activities. TFM also manages the credit spread portfolio (CSP) business line and the portfolio of commitments on public sector bonds, which is presently being allowed to run off. Treasury and Finance Markets (TFM) The detailed Value at Risk usage of Dexia Credit Local Group is shown Treasury and Finance Market activities are mainly intended as a support in the table below. function for the Group. The Dexia Credit Local Group calculated interest rate and Forex VaR based TFM engages in trading activities, and takes non trading-related mainly on a parametrical method (99%, 10 days), and a credit spread VaR risk positions in relation to the short-term balance sheet and to cash based on an historical method (but only for the trading desks). management activities.
176 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
2007
Interest rate and currency (Trading and banking activities) Spread (Trading) VaR (10 days, 99%) (EUR millions) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Average 22.0 19.7 7.1 9.9 5.6 5.8 7.2 12.0 By risk factor Maximum 26.8 32.9 10.3 14.4 7.5 6.4 13.1 14.6
Average 22.3
Total Maximum 39.4
Limit 78.6
2008
Interest rate and currency (Trading and banking activities) Spread (Trading) VaR (10 days, 99%) (EUR millions) Q11 Q22 Q33 Q44 Q11 Q2 Q3 Q4
Average 9.0 15.0 11.2 13.5 19.8 19.6 20.5 30.0 By risk factor Maximum 14.9 20.3 15.4 19.0 29.7 22.1 31.5 58.6
Average 34.6
Total Maximum 77.6
Limit 79
The risks on equities (trading), inflation, commodities and CO2 all have VaR that are either equal to zero or immaterial.
ALM sensitivity (1)
The basis point value (BPV) measures the change in the net economic value of assets and liabilities for a 1 basis point increase in the yield curve. CONSOLIDATED FINANCIAL CONSOLIDATED STATEMENTS
2007 2008 BPV (EUR millions)
TOTAL (66) (59)
(1) Excluding positions of insurance companies.
For the sensitivity calculation, the term to maturity of the portfolio until the next interest rate refixing date is defined using assumptions on the observed behavior of customers and not on legal repayment date (see note 7.4).
7.6 SENSITIVITY OF LISTED SHARES EaR is lower than VaR because most listed shares have a positive AFS reserve. Value at Risk (VaR) measures the potential change in market value, while the notion of Earnings at Risk (EaR) measures the impact of the VaR Listed shares are tested for impairment when market value is more scenario on reported earnings. that 25% below cost, and/or when the share price suffers a prolonged decline. The VaR calculated by Dexia Credit Local measures the potential loss over a 99% confidence interval for a 10-day holding period. The -25% column represents the value of the impairment that could be recognized if share prices were to fall by 25%.
Annual Report 2008 / DEXIA CREDIT LOCAL 177 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
Market value VaR (1) % VaR EaR -25% (EUR millions)
At March 31, 2007 460.3 36.6 8.0% 0.0 0.0
At June 30, 2007 509.6 33.6 6.6% 0.0 0.0
At September 30, 2007 442.0 36.3 8.2% 0.0 (7.2)
At December 31, 2007 182.2 23.8 13.1% 0.0 (4.6)
At March 31, 2008 143.4 23.9 16.6% (4.0) (5.4)
At June 30, 2008 130.7 24.5 18.8% (14.0) (18.9)
At September 30, 2008 94.2 21.2 22.5% (18.4) (18.2)
At December 31, 2008 25.0 8.3 33.2% (1.1) (1.0)
(1) VaR measures the potential loss that could be incurred on a position of EUR 100 million.
7.7 LIQUIDITY RISK: ANALYSIS BY TERM TO MATURITY
Demand deposits and saving deposits are included in the “Demand” column, even though they have no fixed repayment date.
a. Analysis of assets
At December 31, 2008
Demand Less than 3 3 months to 1 to 5 years Over 5 years No fixed Accrued Fair value Impairment Total (EUR millions) months 1 year maturity interest adjustment Cash, central banks and postal checking accounts 565 67000 00 632 Financial assets at fair value through profit or loss 0 273 1,178 3,723 2,119 24 2,067 16,034 0 25,418
Hedging derivatives 5,234 2,885 8,119 Financial assets available for sale 71 757 3,977 16,640 38,460 65 833 121 (250) 60,674 Interbank loans and advances 8,369 10,407 2,004 7,374 6,785 0 264 698 (9) 35,892 Customer loans and advances 1,429 3,468 16,717 59,306 154,219 0 2,599 13,087 (1,909) 248,916 Fair value revaluation of portfolio hedges 2,084 2,084 Financial assets held to maturity 0 40 78 410 589 0 14 0 0 1,131
Tax assets 3,079 (429) 2,650 Accruals and other assets 7 21,387 15 1 69 141 19 0 (182) 21,457 Investments in associates 293 (18) 275
Tangible fixed assets 660 (156) 504 Intangible assets and goodwill 2,024 (1,741) 283 Non current assets held for sale 6,229 0 (4) 6,225
TOTAL 10,441 36,399 23,969 87,454 202,241 12,515 11,030 34,909 (4,698) 414,260
178 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4 b. Analysis of liabilities, excluding shareholders’ equity
At December 31, 2008
Demand Less than 3 3 months to 1 1 to 5 years Over 5 years No fixed Accrued Fair value Total (EUR millions) months year maturity interest adjustment Central banks, postal checking accounts, interbank borrowings and deposits 33, 634 95, 300 5,798 9,822 10,129 0 567 182 155, 432 Financial liabilities at fair value through profit and loss 0 437 1,462 1, 464 2, 807 0 2, 067 16, 404 24, 641
Hedging derivatives 5, 095 22, 724 27,819 Customer borrowings and deposits 3, 530 1, 800 1,558 4,013 6, 538 0 121 59 17, 619
Debt securities 2 29,004 16,433 60,837 61, 790 0 2, 717 2, 070 172, 853 Fair value revaluation of portfolio hedges 1, 386 1, 386
Tax liabilities 146 146 Accruals and other liabilities 31 4,799 34 57 115 326 10 5, 372 Technical provisions of insurance companies 00
Provisions 203 203
Subordinated debt 0 0 93 1, 140 3, 681 0 71 17 5, 002 Liabilities included in non-current assets held for sale 5, 024 673 5,697
TOTAL 37, 197 131, 340 25, 378 77, 333 85, 060 5, 699 10,648 43, 515 416, 170 CONSOLIDATED FINANCIAL CONSOLIDATED STATEMENTS
NET LIQUIDITY GAP
Demand Less than 3 months 3 months to 1 year 1 to 5 years Over 5 years No fixed maturity (EUR millions)
At December 31, 2008 (26,756) (94, 941 ) (1, 409) 10,121 117, 181 6, 816
This table takes into account neither the liquidity of assets nor any decision to refinance an asset; certain long-term assets may be sold to meet liquidity needs.
7.8 CURRENCY RISK
At December 31, 2007 Classification by original currency (EUR millions) EUR Other EU currencies USD Other currencies Total
Total assets 239,271 21,779 53,390 30,984 345,424
Total liabilities and shareholders’ equity 235,914 18,538 69,689 21,283 345,424
NET BALANCE SHEET POSITION 3,357 3,241 (16,299) 9,701 0
Annual Report 2008 / DEXIA CREDIT LOCAL 179 CONSOLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
At December 31, 2008 Classification by original currency EUR Other EU currencies USD Other currencies Total (EUR millions)
Total assets 257,435 28,154 90,036 38,635 414,260 Total liabilities and shareholders’ equity 265,144 17,157 107,910 24,049 414,260
NET BALANCE SHEET POSITION (7,709) 10,997 (17,874) 14,586 0
7.9 RISK WEIGHTED ASSETS
2007 2008 (EUR millions)
Credit risk 71,817 75,136
Market risk 3,233 1,909
Operational risk N/A 2,915
TOTAL 75,050 79,960
( 8. ANALYSIS BY GEOGRAPHIC REGION AND BY LINE OF BUSINESS
8.1 ANALYSIS BY GEOGRAPHIC REGION
Eurozone Rest of Europe United States Rest of world Total (countries employing the (EUR millions) euro)
At December 31, 2007
Net banking income 1,266 112 374 48 1,800
Income (losses) from associates (1) 5800058
Income before income taxes (1) 866 90 163 23 1,142
TOTAL ASSETS 279,368 1,032 59,341 5,683 345,424
Of which, investments in associates 459000459
At December 31, 2008
Net banking income 923 100 854 97 1,974
Income (losses) from associates (53)000(53)
Income before income taxes (328) 69 (4,246) 33 (4,472)
TOTAL ASSETS 323,017 1,572 80,632 9,039 414,260
Of which, investments in associates 275000275
(1) In accordance with the application of IFRIC 11 Group and Treasury Share Transactions, all expenses relative to the stock option plans have been reclassified into consolidated reserves at December 31, 2007: the impacts of this reclassification were to increase operating charges by EUR 9 million, and to decrease the share in the income (losses) from associates by EUR 3 million. Net income for the year for 2007 was thus reduced by a total of EUR 12 million.
The geographic region is assigned on the basis of the country in which the company that engaged in the transaction is located, and not the country in which the counterparty is located.
180 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
8.2 ANALYSIS BY LINE OF BUSINESS
Public & Wholesale Personal Financial Treasury and Other Total (EUR millions) Finance Services Financial markets
At December 31, 2007
Net banking income 1,455 35 90 220 1,800
Income (losses) from associates * 21 26 0 11 58
Income before income taxes * 862 38 40 202 1,142
Subtotal assets (1) 240,088 643 81,925 738 323,394 Of which, investments in associates 169 254 0 36 459
Subtotal liabilities (2) 157,479 741 147,025 1 305,246
At December 31, 2008
Net banking income 1,224 35 682 33 1,974
Income (losses) from associates 0 (31) 0 (22) (53)
Income before income taxes (3,033) (35) (157) (1,247) (4,472)
Subtotal assets (1) 246,135 763 124,271 1,194 372,363 Of which, investments in associates 0 253 0 22 275
Subtotal liabilities (2) 139,521 1,059 211,139 (1,511) 350,208
(1) Includes interbank loans and advances, customer loans and advances, loans and securities held for trading, financial assets available for sale, investments in associates, and other assets specific to insurance companies. (2) Includes interbank loans borrowings and deposits, customer deposits, debt securities, and technical provisions of insurance companies. * In accordance with the application of IFRIC 11 Group and Treasury Share Transactions, all expenses relative to the stock option plans have been reclassified into consolidated reserves at December 31, 2007: the impacts of this reclassification were to increase operating charges by EUR 9 million, and to decrease the share in the income (losses) from associates by EUR 3 million. Net income for the year for 2007 was thus reduced by a total of EUR 12 million .
Various costs and income are retroceded or transferred at market • interest on capital at risk: capital at risk is allocated to the commercial FINANCIAL CONSOLIDATED STATEMENTS conditions in the management accounts between the various lines of lines of products for internal purposes, and return on capital at risk is business and, more particularly, between the commercial lines of products, used to measure the performance of each commercial line; financial markets and new lending and service centers. The net results of • the cost of funding. each line of products also include:
• payments of commercial transformation margins, including the costs of managing such transformations and the capital allocated to this activity on the basis of the level of outstanding medium-and long- term loans;
Annual Report 2008 / DEXIA CREDIT LOCAL 181 CONSOLIDATED FINANCIAL STATEMENTS 4 Statutory Auditors’ report on the consolidated financial statements
Statutory Auditors’ report on the consolidated financial statements
This is a free translation into English of the Statutory Auditors’ report on the consolidated financial statements issued in the French language and is provided solely for the convenience of English speaking users.
The Statutory Auditors’ report includes information specifically required by French law in such reports, whether modified or not. This information is presented below the opinion on the consolidated financial statements and includes explanatory paragraphs discussing the Auditors’ assessments of certain significant accounting and auditing matters. These assessments were made for the purpose of issuing an audit opinion on the consolidated financial statements taken as a whole and not to provide separate assurance on individual account captions or on information taken outside of the consolidated financial statements.
This report should be read in conjunction with, and is construed in accordance with, French law and professional auditing standards applicable in France.
To the Shareholders,
In compliance with the assignment entrusted to us by your shareholder’s Annual General Meeting, we hereby report to you, for the year ended on December 31, 2008, on:
• the audit of the accompanying consolidated financial statements of Dexia Credit Local;
• the justification of our assessments;
• the specific verification required by law.
The consolidated financial statements have been approved by the Board of Directors. Our responsibility is to express an opinion on these financial statements based on our audit.
I OPINION ON THE CONSOLIDATED FINANCIAL STATEMENTS
We conducted our audit in accordance with professional standards applicable in France. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, using sample testing techniques or other selection methods, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made, as well as evaluating the overall financial statements presentation. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
In our opinion, the consolidated financial statements give a true and fair view of the assets and liabilities and of the financial situation of Dexia Credit Local as of December 31, 2008, and of the results of its operations for the year then ended, in accordance with the International Financial Reporting Standards (IFRS) as adopted by the European Union.
Without qualifying our opinion, we draw your attention to the following matters:
• comments and information on section “ Risk management” of the management report and note 7.0 of the consolidated financial statements relating to the consequences of the crisis on the financial and liquidity situation of Dexia Credit Local.
• note 1.3 “ Accounting policies and valuation methods” and note 2.14 of the consolidated financial statements which present the change in accounting method made on the basis of the October 15, 2008 amendment to IAS 39.
• note 1.1 “ Group companies and consolidation methods“ relating to the accounting rules applied to the sale of FSA insurance activities.
II JUSTIFICATION OF ASSESSMENTS
The financial and economic crisis, resulting in the dramatic increase of volatility and strong reduction of liquidity on certain markets, and by a difficulty to apprehend financial and economic outlooks has several impacts on credit institutions, in particular on their activities, their results, their risks and their refinancing, as exposed on notes 1.1.d and 7.0 of the consolidated financial statements. This situation creates specific conditions this year in the accounts completion, particularly as regards accounting estimates. It is in this context and in accordance with the requirements of article L. 823-9 of the French Company Law (Code de commerc e) relating to the justification of our assessments that we bring to your attention the following matters:
182 DEXIA CREDIT LOCAL / Annual Report 2008 CONSOLIDATED FINANCIAL STATEMENTS Statutory Auditors’ report on the consolidated financial statements 4
Accounting estimates:
Valuation of financial instruments − As mentioned in note 1.3 of the consolidated financial statements your Company uses internal models to value financial instruments that are not listed on liquid markets. Our procedures consisted in reviewing the control procedures for the models used, assessing the underlying data and assumptions, and verifying that the risks and results related to these instruments were taken into account.
− We have reviewed as well the control procedures relating to the identification of financial instruments that can no longer be traded on an active market or for which market parameters could no longer be observed, and the methodology used for their valuation as a consequence.
Valuation of certain financial liabilities accounted at fair value − As mentioned in note 3.1 of the notes to the consolidated financial statements, your Company assessed the impact of changes in its own credit risk with respect to the valuation of certain of the notes financial liabilities measured at fair value through profit and loss. We have verified the appropriateness of the data used for this purpose.
Impairment of credit and counteraparty risks − Your Company records depreciations to cover the credit risks inherent to its activities, as mentioned on note 1.3 of the consolidated financial statements. We examined the system used to control monitoring of credit risks, impairment procedures, evaluation of the risk of non-collection and the level of credit risk cover provided by specific and general provisions;
Accounting of deferred taxes assets − As mentioned in note 4.2 of the notes to the consolidated financial statements, your Company has booked deferred tax assets on the fair value reserve for financial assets available for sale and for cash flow hedges derivative instruments as at December 31, 2008. We examined the main estimates and assumptions which have conducted to the accounting of these deferred taxes.
Provisions on employee benefits commitments − As mentioned in note 1.3.b of the notes to the consolidated financial statements, your Company also records provisions for its employee benefits commitments. We examined the method used to evaluate these commitments and the assumptions and parameters used.
Change in accounting method As mentioned in notes 1.3.b and 2.14 of the notes to the consolidated financial statements, the Group has reclassified a financial assets portfolio into the category “available for sale” and “loans and receivables”, in accordance with IAS 39 and IFRS 7 amendment adopted on October 15, 2008.
We checked that all conditions required for the application of this amendment were met and that the accounting rules retained and information provided complied with the aforementioned accounting rule. FINANCIAL CONSOLIDATED STATEMENTS
Other accounting rules As it is mentioned in notes 4.6 and 4.8 of the notes to the consolidated financial statements, the Group has signed with Assured Guaranty a share purchase agreement for FSA insurance activities on November 14, 2008. We checked that the conditions required for the application of the requirements defined by IFRS 5 to classify these activities in “non current assets held for sale” were met.
These assessments were performed as part of our audit approach for the consolidated financial statements taken as a whole and therefore contributed to the expression of our unqualified opinion expressed in the first part of this report.
III SPECIFIC VERIFICATION
We have also verified the information given in the Group management report as required by French law. We have no matters to report regarding its fair presentation and consistency with the consolidated financial statements.
Courbevoie and Neuilly-sur- Seine, April 14, 2009
The Statutory Auditors
MAZARS DELOITTE & ASSOCIES
Hervé HELIAS François ARBEY José-Luis GARCIA
Annual Report 2008 / DEXIA CREDIT LOCAL 183 4 CONSOLIDATED FINANCIAL STATEMENTS
184 DEXIA CREDIT LOCAL / Annual Report 2008 5 Financial statements
Balance sheet 186 Notes to the fi nancial statements 190
Assets ...... 186 1. Accounting policies and valuation methods ...... 190
Liabilities and equity ...... 187 2. Notes on the assets...... 196
3. Notes on the liabilities and equity ...... 209
4. Notes on the off balance sheet ...... 217 Off-balance sheet items 188 5. Notes on the income statement ...... 222
6. Notes on the long-term equity investments ...... 228
Income statement 189 7. Dexia Credit Local securities portfolios ...... 230
Statutory Auditors’ general report 233 FINANCIAL STATEMENTS FINANCIAL STATEMENTS
Annual Report 2008 / DEXIA CREDIT LOCAL 185 FINANCIAL STATEMENTS 5 Balance sheet
Balance sheet
( ASSETS
Note At December 31, At December 31, At December 31, (EUR millions) 2006 2007 2008
I. Cash, central banks and postal checking accounts 2.1 949 685 275
II. Government securities 2.2 4,678 3,607 3,066
III. Interbank loans and advances 2.3 26,385 36,248 34,289
IV. Customer loans and advances 2.4 34,628 41,757 51,048
V. Bonds and other fixed income securities 2.5 58,141 109,818 83,144
VI. Equities and other variable income securities 2.6 278 280 299
VII. Long-term equity investments 2.7 5,042 5,151 3,077
VIII. Intangible assets 2.8 48 56 54
IX. Tangible fixed assets 2.9 17 20 18
X. Unpaid capital 000
XI. Uncalled capital 000
XII. Treasury stock 000
XIII. Other assets 2.10 5,038 4,182 18,239
XIV. Accruals and other assets 2.10 8,433 11,059 19,935
TOTAL ASSETS 143,637 212,863 213,444
186 DEXIA CREDIT LOCAL / Annual Report 2008 FINANCIAL STATEMENTS Balance sheet 5
( LIABILITIES AND EQUITY
Note At December 31, At December 31, At December 31, (EUR millions) 2006 2007 2008
I. Interbank borrowings and deposits 3.1 70,927 93,995 129,716
II. Customer deposits 3.2 5,322 4,551 3,581
III. Debt securities 3.3 48,627 57,269 39,502
IV. Other liabilities 3.4 615 36,623 12,689
V. Accruals and other liabilities 3.4 8,875 10,922 19,451
VI. Provisions for risks and charges 3.5 846 978 1,840
VII. General banking risks reserve 47800
VIII. Subordinated debt 3.6 4,763 5,373 5,423
EQUITY 3.7 3,184 3,152 1,242
IX. Capital stock 1,327 1,327 501
X. Additional paid-in capital 1,087 1,087 5,414
XI. Reserves and retained earnings 297 419 264
XVII. Net income for the year 473 319 (4,937)
TOTAL LIABILITIES AND EQUITY 143,637 212,863 213,444 FINANCIAL STATEMENTS FINANCIAL STATEMENTS
Annual Report 2008 / DEXIA CREDIT LOCAL 187 FINANCIAL STATEMENTS 5 Off-balance sheet items
Off-balance sheet items
Note At December 31, At December 31, At December 31, (EUR millions) 2006 2007 2008
COMMITMENTS GIVEN
I . Financing commitments given 4.1 18,689 22,066 42,833
II . Guarantees given 4.2 60,283 66,357 53,332
III. Other commitments given 4.3 10,151 59,401 35,029
COMMITMENTS RECEIVED
IV. Financing commitments received 4.4 2,390 12,104 9,912
V. Guarantees received 4.4 8,395 9,298 13,913
VI. Commitments related to securities 4.5 1,380 798 604
VII. Commitments related to foreign currency transactions 4.6 123,415 107,460 105,325
VIII. Commitments related to forward and derivatives financial instruments 4.7 665,119 831,549 822,963
188 DEXIA CREDIT LOCAL / Annual Report 2008 FINANCIAL STATEMENTS Income statement 5
Income statement
Note 2006 2007 2008 (EUR millions)
I. Interest income 5.0 19,592 26,508 27,254
II. Interest expense 5.0 (19,468) (26,761) (27,200)
III. Income from variable income securities 5.1 191 213 559
IV. Fee commission and income 5.2 13 17 15
V. Fee commission and expense 5.2 (12) (18) (15)
VI. A. Net gains on held-for-trading portfolio transactions 5.3 519 778 175
VI. B. Net losses on available-for-sale portfolio transactions 5.3 (28) (750) (3,133)
VII. Other banking income 5.7 126
VIII. Other banking expense 5.7 (3) (1) (4)
NET BANKING INCOME 805 (12) (2,343)
IX. General operating expenses 5.4 (229) (248) (322)
X. Depreciation and amortization (27) (25) (26)
GROSS OPERATING INCOME 549 (285) (2,691)
XI. Cost of risk 5.5 (18) (13) (331)
OPERATING INCOME AFTER COST OF RISK 531 (298) (3,022)
XII. Net gain (loss) on long-term investments 5.6 0 32 (2,364)
INCOME BEFORE TAX 531 (266) (5,386)
XIII. Non-recurring items 5.8 000
XIV. Corporate income tax 5.9 (58) 107 449
XV. Net recovery of general banking risks reserve 0 478 0
NET INCOME 473 319 (4,937)
Basic earnings per share (EUR) 5.43 3.67 (56.71 ) FINANCIAL STATEMENTS FINANCIAL STATEMENTS
F ully-diluted earnings per share (EUR) 5.43 3.67 (56. 71 )
Annual Report 2008 / DEXIA CREDIT LOCAL 189 FINANCIAL STATEMENTS 5 Notes to the financial statements
Notes to the financial statements
( 1. ACCOUNTING POLICIES AND VALUATION METHODS
1.1 HIGHLIGHTS Accordingly, the accounts of Dexia Credit Local now show a value of zero for the net carrying amount of Dexia Holdings Inc., the holding Highlights of 2008: vehicle for the FSA shares;
• as Dexia is highly dependent upon the financial markets and has been • in 2008, the worsening of the financial crisis had a very considerable made fragile by its excessively rapid international growth, the Group impact on the values of the both portfolio of securities available for was deeply affected by the financial crisis and the increasing scarcity sale and on Dexia Credit Local’s cost of risk: of liquidity in the markets; − a global impairment loss of EUR 3,133 million was recorded on the • on October 9, 2008, the governments of Belgium, Luxembourg and securities available for sale portfolio, France provided a sovereign guarantee to Dexia Credit Local. The − guarantee shall be for a minimum of three years, and include all the cost of risk increased by EUR 318 million under the impact of the debts issued as from that date and maturing no later than October financial crisis and the significant impairment losses recorded on bank 31, 2011. The governments of Belgium, France and Luxembourg assets (bankruptcy of Lehman Brothers and financial positions of the provided respectively 60.5%, 36.5% and 3% of the entire amount Icelandic banks), guaranteed, which covers all the repayment obligations of Dexia SA, • as part of the implementation of the Dexia transformation plan it has Dexia Banque Internationale à Luxembourg, Dexia Bank Belgium and been decided to cut back on certain businesses. Dexia Credit Local and their foreign branches up to the value of their respective shares. The total guarantee provided by the three sovereign governments is not to exceed EUR 150 billion. 1.2 ACCOUNTING POLICIES AND VALUATION During the year, Dexia Credit Local recorded a total charge of METHODS USED TO PRESENT THE FINANCIAL EUR 12.3 million under the terms of this guarantee; STATEMENTS
• the Combined Shareholders’ Meeting of December 22, 2008 elected The balance sheet, income statement and off-balance sheet are presented to increase the capital of Dexia Credit Local by EUR 3.5 billion in in accordance with the standards applicable to banks. cash, bringing the Company’s total capital to EUR 4.8 billion. In the light of the losses projected for 2008 as a whole, the Combined The annual financial statements have been prepared in accordance with Shareholders’ Meeting voted to reduce the capital by EUR 4.3 billion, the principles and standards contained in European Council Directives to EUR 500.5 million. governing the financial statements of banking institutions, in compliance with French Accounting Regulations Committee (CRC) Standards 99-04 The capital stock now amounts to a total of EUR 500,513,102.75, and 00-03 as modified. comprising 87,045,757 shares with a par value of EUR 5.75 per share; a. Changes in accounting policies and valuation • during the fourth quarter of 2008, Dexia Credit Local sold its 49% stake methods in Kommunalkredit Austria to the Austrian government for EUR 1, No changes have been made to the accounting policies and valuation and received in exchange the stake held by Kommunalkredit Austria methods applied to the annual financial statements. in Dexia Kommunalkredit Bank, which is now fully owned by Dexia Credit Local. b. Measurement of items in the balance sheet, At December 31, 2008, Dexia Credit Local set aside a EUR 205 million off-balance sheet, income statement and summary reserve for the impairment of the full value of the shares of financial statements Kommunalkredit Austria; VALUATION METHODS AND PRESENTATION • in light of the agreement that was signed for the sale of the FSA’s insurance The financial statements have been prepared in accordance with the rules business to Assured Guaranty Ltd., a EUR 2,152 million impairment loss of prudence and fundamental accounting principles: was recognized by Dexia Credit Local on its Dexia Holdings Inc. shares. This impairment was calculated based on the price at which the stake • business continuity ; held in FSA was sold to the Assured Guaranty Group. • segregation of accounting periods ;
190 DEXIA CREDIT LOCAL / Annual Report 2008 FINANCIAL STATEMENTS Notes to the financial statements 5
• consistency of methods . • bonds and other fixed-income securities;
Customer loans • equities and other variable-income securities. Any loans granted but not yet disbursed are shown as off-balance sheet In accordance with French Banking Regulations Committee (CRB) items. Standard 2005-01 and modifying CRB Standard 90-01, they are analyzed Current and accrued interest on customer loans is recognized in banking in the notes to the financial statements under “Securities held for trading,” income on an accrual basis, as is the interest on missed payments. Interest “Securities available for sale” and “Securities held to maturity.” on non-performing loans reported in net banking income is neutralized Securities held for trading by the recognition of an equivalent amount of impairment. Securities held for trading are securities traded on a liquid market that are All related fees and commissions received are recorded directly to purchased or sold with the intention of being sold or repurchased within income. a short period of time. The Dexia Credit Local held for trading portfolio consists primarily of adjustable-rate bonds. Securities held for trading For both accounting and tax purposes, all early repayment penalties on are taken to the balance sheet at cost, including accrued interest and loans recognized up to December 31, 2004 will continue to be amortized excluding acquisition expenses. At each period end, they are marked to over the remaining life of the related loans in proportion to the outstanding market and the resulting unrealized gain or loss is taken to the income interest that would have had to be paid. The balance of outstanding statement. penalties to be amortized is classified under deferred income.
Since January 1, 2005, all early repayment penalties on loans are taken Securities available for sale into income at the repayment date. These consist of securities that are not recognized as securities held for trading, securities held to maturity, portfolio activity securities, other long- Customer loans are stated in the balance sheet net of provisions for term investments, investments in associates or investments in related possible losses. They are broken out into four separate categories: parties. performing loans, restructured performing loans, non-performing loans under collection and doubtful non-performing loans. The portfolio constitutes a liquidity reserve, and consists primarily of fixed and adjustable-rate bonds but also includes some variable - income Loans that have been restructured under non-market conditions are securities. Fixed-rate bonds are generally hedged against interest rate risk included in the second category through their final maturity. They are by means of interest rate and/or currency swaps representing specific, marked down for impairment in an amount equal to the present value of allocated hedges (micro hedges). The use of this technique has the effect the future interest payments gap. This mark-down is taken immediately of creating synthetic adjustable or variable-rate assets that are immunized into expense under the cost of risk, and is reversed into income on an against interest rate risk. accrual basis over the remaining term of the loan. Securities available for sale are taken to the balance sheet at cost, excluding Non-performing loans are considered to be doubtful as soon as their acquisition expenses and accrued interest, which are recorded separately. repayment becomes highly uncertain and it becomes apparent that they Any premiums or discounts, corresponding to the difference between will eventually be written off. the acquisition cost and redemption price, are recorded in the balance sheet and amortized to the income statement on a quasi yield-to-maturity Non-performing loans are downgraded from “under collection” to basis over the remaining life of the securities. This method is applied to “doubtful” either one year at the latest after they were initially classified all securities in the portfolio. as non-performing or immediately if the loan had previously been classified as a restructured performing loan. The interest on these loans is no longer At closing, in application of the principles of prudence, securities available included in net interest margin once they have been classified as doubtful for sale are recorded on the balance sheet at their acquisition cost or their non-performing. selling price at closing. FINANCIAL STATEMENTS
Loans are classified as non-performing when there is a contingent or If no active market is available for a given financial instrument, valuation certain risk of total or partial non-payment. Non-performing loans are techniques are used to calculate the realizable value (or the market value, defined as follows: local government loans with installments that are as defined elsewhere in the notes) of the instrument. The valuation model more than nine months overdue; real estate loans with installments must factor in all of the parameters considered by market players when that are more than six months overdue; loans with installments that are measuring the value of the asset. In such cases, Dexia Credit Local uses more than three months overdue. Loans to borrowers that have filed for its own valuation models, taking into account the market conditions at bankruptcy are classified as loans under collection, this category being the date of the valuation as well as any changes in the credit risk quality analyzed in the notes to the financial statements in the same way as of these financial instruments and market liquidity. non-performing loans. If the impairment in the value of the securities exceeds the related Impairment on non-performing loans is computed on the basis of the unrealized hedging gain, a provision corresponding to the difference estimated loss exposure. Interest is written down fully. is deducted from the securities’ carrying value. A reserve is booked on the liabilities side of the balance sheet for any unrealized hedging losses Securities transactions that are not offset by an increase in the market value of the hedged Securities held by the Dexia Credit Local Group are recorded on the assets securities. side of the balance sheet under the following headings: Gains and losses on disposals of marketable securities available for sale • government securities eligible for central bank refinancing; are calculated using the FIFO method.
Annual Report 2008 / DEXIA CREDIT LOCAL 191 FINANCIAL STATEMENTS 5 Notes to the financial statements
Any securities available for sale transferred to the held-to-maturity market price determined over a sufficiently long period in view of the portfolio are transferred at cost. estimated holding period to eliminate the impact of any wide swings in market prices. At each period end, and for each line of securities, Any provisions for impairment in value that are no longer required if the fair value represents less than book value, a provision is booked are released to the income statement over the remaining life of the for the unrealized loss. For the purpose of determining the provision, securities. unrealized losses are not netted against unrealized gains, which are not Securities held to maturity recognized. Securities held to maturity consists of fixed-income securities with fixed Gains and losses on disposals of portfolio securities are determined using maturities that have been acquired or transferred from “securities available the FIFO method. for sale” and “securities held for trading” with the explicit intention of being held to maturity. Sale and repurchase agreements and lending of securities Securities may be sold under repurchase agreements, lent or borrowed for They are either financed with back-to-back resources or hedged in order the purpose of reducing Dexia Credit Local’s short-term liquidity cost. The to neutralize the effect of interest rate fluctuations on earnings. Hedging securities may or may not be physically delivered to the buyer. instruments consist solely of interest rate and/or currency swaps. When securities are sold under a repurchase agreement, a debt The use of these specific, allocated hedges has the effect of creating corresponding to the value of the repurchase commitment is recognized synthetic adjustable– or variable-rate assets that are immunized against in the balance sheet. The interest paid on the funds received is recognized interest rate risk. in the income statement on an accrual basis. Securities held to maturity are stated at cost, excluding acquisition Gains and losses on repurchase agreements are calculated using the same expenses and accrued interest at the date of acquisition, which are method as for outright sales, depending on the portfolio from which the recorded separately. Premiums and discounts, representing the difference securities were taken. between the cost of the securities, excluding accrued interest, and the redemption price, are amortized on a yield-to-maturity basis over the Transactions involving the simultaneous cash sale and forward purchase remaining life of the securities. of the same securities are accounted for in the same way as repurchase agreements. The cash held in connection with repurchase agreements is Unrealized gains are not recognized and no provisions are booked for periodically adjusted to take account of changes in the market value of unrealized losses at the balance sheet date except in cases where: the securities during the term of the contract, so as to reduce the credit • the ability of the issuer to honor its repayment obligations appears risk incurred by the buyer as a result of any impairment in value of the uncertain; or collateral represented by the securities.
• it is probable that the securities will not be held to maturity due to a Loaned securities are reclassified as receivables for an amount equal to change in circumstances. the carrying value of the loaned securities. At each balance sheet date, the receivable is remeasured using the valuation principles applicable to Should a material proportion of all securities held to maturity be sold or the securities that have been loaned. transferred to another portfolio category, Dexia Credit Local would no longer be authorized to classify any securities previously or subsequently Borrowed securities are recorded as securities held for trading, with a acquired as held to maturity until the third following full financial year, contra entry to a liability to the lender. At each balance sheet date, the unless said sale or transfer does not call into question the Bank’s intention borrowed securities and the corresponding liability are remeasured using of maintaining its other securities held to maturity through their maturity the valuation principles applicable to securities held for trading. (e.g. sale of one particular held-to-maturity security whose issuer’s credit quality has deteriorated significantly, or in the case of securities held for Long term investments trading or available for sale that were previously transferred into held-to- Investments in associates maturity under extraordinary market conditions that required a change Investments in associates represent investments that are intended to: of strategy and which may once more be traded on an active market). All • be held on a long-term basis to exercise influence or control over the previously acquired securities held to maturity are reclassified as “securities issuer, or available for sale” at their carrying amount at the same time that the other securities are reclassified. • underpin banking relations with the company concerned.
Portfolio securities They are stated at cost excluding any related acquisition expenses. At This category includes variable-income securities purchased on a regular the balance sheet date, these shares are measured at the lower of cost basis with the intention of selling them at a profit in the medium term. At or value in use, i.e. the fair value based on the utility of the investment the time of purchase, the Company has no intention of investing in the to Dexia Credit Local. long-term development of the issuer’s business or of actively participating In the case of companies whose net assets are at least equal to their value in its day-to-day management. when the last shares were acquired, fair value to the Group is considered Portfolio securities are taken to the balance sheet at cost excluding as being at least equal to the historical cost of the investment. The same acquisition expenses. At each period end, they are stated at the lower of applies when any impairment in value can reasonably be expected to historical cost and fair value to the Group. Fair value is determined based reverse in the current year. In all other cases, a range of criteria are applied on a range of criteria, including the issuer’s outlook and the length of the to determine the possible need to record a provision for impairment in estimated holding period. For listed securities, fair value is the average value in accordance with the rules of prudence.
192 DEXIA CREDIT LOCAL / Annual Report 2008 FINANCIAL STATEMENTS Notes to the financial statements 5
In accordance with CRB Standard 89-01, differences arising on translation Discounts and premiums on debt securities at the year-end rate of investments denominated in foreign currencies that Bond discounts and premiums and redemption premiums are amortized are financed in euro are taken to shareholders’ equity, under “Cumulative on a straight-line basis over the remaining life of the bonds from the translation adjustments,” and not to the income statement. date of acquisition. They are recorded in the consolidated balance sheet under the relevant liabilities accounts. Amortization is taken to the income In the event of disposal of part of the Group’s interest in an associate, the statement under “Interest expense on bonds and other fixed-income resulting gain or loss is determined using the FIFO method. securities.” Other long-term investments Other liabilities This category comprises variable-income securities acquired with the aim This heading includes mainly collateral (guarantee deposits) payable under of developing long-term business ties with the issuer, although Dexia swap transactions, which is recognized at its carrying amount. Credit Local is not in a position to influence the management of the issuer due to the small proportion of voting rights held. Other long-term Provisions securities are taken to the balance sheet at cost, excluding acquisition Provisions for risks and charges are set aside at their present value expenses. At each period end, they are stated at the lower of historical cost when: and value in use. The value in use of other long-term securities corresponds to the price that the Company would be willing to pay to acquire them, • Dexia Credit Local has a legal or implicit obligation resulting from past taking into account the purpose for which they are acquired, irrespective events; of whether or not the securities are listed. Gains and losses on disposals • it is probable that financial resources will need to be outlaid to extinguish of other long-term securities are determined using the FIFO method. this obligation; and
Tangible and intangible assets • it is possible to estimate with reasonable precision the amount of the Those assets are stated at cost and depreciated or amortized using the obligation. straight-line method over their estimated useful lives, unless otherwise General (or collective) provisions on customer loans are included in this stated, as follows: furniture and fixtures are depreciated over ten years heading. These provisions cover the risk of impairment in the absence of and office equipment generally over five years. Software is amortized any signs of specific impairment but when there are objective indications over three to five years. that losses will probably be incurred in certain sectors of the portfolio or on Other assets other financing commitments underway at the balance sheet date. These This heading includes mainly collateral (guarantee deposits) receivable potential losses are estimated on the basis of the historical loss record under swap transactions, which is recognized at its carrying amount. and trends specific to each sector, while taking account of the general economic environment in which the borrower operates. To calculate these Debt securities reserves, Dexia Credit Local has created a credit risk model based on an Debt securities include bonds and money market instruments. approach including probabilities of default and of losses given default.
Bonds Regulatory tax reserves are set aside in the financial statements for Bonds are recorded at face value. The related accrued interest is computed medium- and long-term credits and accelerated depreciation. Provisions at contractual rates and recorded under interest expense. against derivatives are booked in accordance with the rules specified below in the paragraph concerning forward and derivatives financial Zero-coupon bonds are recorded at their issue price. At each period instruments . end, accrued interest for the period, computed on the basis of the yield to maturity announced at the time of issue, is charged to the income Retirement and other post-employment benefits are calculated in accordance with the local regulations applicable in each country and are statement as expenses on debt securities and an equivalent amount is FINANCIAL STATEMENTS added to the debt on the liabilities side of the balance sheet through to recognized as expenses for the year. These commitments are recalculated the maturity date so as to gradually increase the carrying amount of the each year using an actuarial method and recognized under reserves. The debt to the amount repayable at maturity. amounts concerned are not material, and are presented in n ote 5.5.b.
Bond issuance costs are deferred and amortized on a straight-line basis These reserves also include provisions for deferred taxes. over the life of the bonds. Since January 1, 2005, premiums paid or Subordinated debt received on bonds acquired by Dexia Credit Local are recognized directly Subordinated redeemable notes issued by Dexia Credit Local are considered through profit or loss. as Tier 2 capital for the purpose of calculating the European capital Bonds denominated in foreign currencies are accounted for in the same adequacy ratio, in accordance with CRB Standard 90-02 (Article 4-d). way as foreign currency transactions. Forward and derivatives financial instruments Money market instruments Dexia Credit Local uses forward and derivatives financial instruments in Money market instruments are stated at face value. Interest on medium- the normal course of business, mainly as hedges against interest rate term notes, BMTN (domestic short- or medium-term notes) and negotiable and currency risks and, to a lesser extent, in order to take advantage certificates of deposit is recorded under “Interest expense” on an accrual of favorable interest rate and currency trends. The instruments used basis. Prepaid interest on commercial paper is recorded under “Accruals include interest rate and/or currency swaps, FRAs, caps, floors, interest and other assets” on the transaction date and amortized over the residual rate options, futures, credit default swaps and credit spread options. life of the paper.
Annual Report 2008 / DEXIA CREDIT LOCAL 193 FINANCIAL STATEMENTS 5 Notes to the financial statements
Forward and derivatives financial instruments are valued and accounted Macro-hedging for in accordance with CRB Standards 90-15 and 92-04 based on the This category includes contracts that are intended to hedge and manage initial purpose of the transaction. The four transaction categories are Dexia Credit Local’s overall exposure to interest rate risks on assets, specific hedges, hedges of overall exposures, isolated open positions and liabilities and off-balance sheet items, other than micro-hedges, contracts specialist portfolio management. representing isolated open positions and contracts acquired for specialist portfolio management purposes. For transactions in all categories, the commitment or notional amount is recorded as an off-balance sheet commitment over the life of the contract, Macro-hedges have the effect of reducing Dexia Credit Local’s overall i.e. from the date of signing of the contract to its maturity or the start exposure to interest rate risks on its business transactions. date of the reference period in the case of forward rate agreements. Expenses and income on macro-hedges are recorded in the income The amount of the commitment is adjusted to reflect any changes in statement on an accrual basis under “Interest income on macro-hedges” notional amounts, so as to show at all times the maximum current or and “Interest expense on macro-hedges.” The contra entry is recorded future commitment. Each contract is recorded separately and is classified in the balance sheet in an accruals account until such time as the funds in one of the above four categories. The accounting treatment of gains are collected or disbursed. and losses depends on the underlying purpose of the transaction, as determined by its category. Equalization payments on unwound macro-hedges are recognized in the following manners: Upfront cash payments on hedging transactions are amortized over the remaining life of the instrument. All transactions are now amortized on • equalization payments on swaps unwound before January 1, 2005 a quasi-yield-to-maturity basis. are amortized when the unwinding of the position is not linked to a prior change in the overall interest rate risk to be hedged, or are taken Hedging transactions into income symmetrically to those components that resulted in the Micro-hedging modification of said risk; Micro-hedges are used to cover interest rate risks on a specific item or • as from January 1, 2005, the equalization payment is recognized group of items with similar characteristics, identified at the outset. The through profit or loss. criteria applied to determine whether transactions qualify as micro-hedges are as follows: Position management • the hedged item must contribute to the bank’s overall exposure to Dexia Credit Local conducts three types of position management fluctuations in prices or interest rates; transactions:
• the contracts must be purchased or sold for the specific purpose of • specialist held-for-trading portfolio management; reducing the bank’s exposure to fluctuations in prices or interest rates in • position-taking; respect of the hedged item and are identified as such at the outset. • credit derivatives. Instruments meeting this definition consist primarily of swaps acquired as micro-hedges of primary issues, bonds held in the “securities available Specialist held-for-trading portfolio management for sale” and “securities held to maturity” portfolios and customer loans. This activity covers transactions with local governments and their The hedging instruments have the effect of creating synthetic variable- or symmetrical transactions entered into with banks. Its purpose is the adjustable-rate assets or liabilities which are immunized against interest specialist management of a held for trading portfolio comprising specific rate risk. interest rate swaps and other interest rate-based derivatives. The portfolio is actively managed based on sensitivity criteria, within predefined interest Expenses and income on micro-hedges are recorded in the income rate exposure limits set internally in accordance with CRB Standard 97-02, statement in the same way as the expenses and income on the hedged as modified. Positions are centralized and results calculated on a daily item or group of similar items. basis. • In cases where the hedged item is repaid early (or even disposed of), Gains and losses are recognized on a mark-to-market basis, as follows: the following accounting treatment is applied to the equalization payment received or paid due to the early unwinding of the hedging • total future cash-flows are marked to market on a monthly basis and the instrument: resulting unrealized gain or loss is taken to the income statement;
− if the hedge was unwound before January 1, 2005 the equalization • all payments made or received are recorded directly in the income payment is spread over the remaining life of the cancelled statement. transaction; Mark-to-market gains and losses are calculated on derivatives using the − if the hedge was unwound after January 1, 2005 the equalization replacement cost method. This method consists of taking each individual payment is recognized in profit or loss during the period in which the contract and simulating a new contract which, at the balance sheet date, hedge was unwound. However, the equalization payment paid by Dexia closes the open position created by the original contract. The differences Credit Local is charged against income only for the portion that exceeds in cash-flows between the actual and simulated contracts are then gains not yet recorded in income on the symmetric position. discounted.
In both cases, the inventory of deferred equalization payments is recorded The portfolio valuation takes into account portfolio management costs in accrued assets or liabilities. and credit risks.
194 DEXIA CREDIT LOCAL / Annual Report 2008 FINANCIAL STATEMENTS Notes to the financial statements 5
For purposes of this activity, the Dexia Credit Local New York branch Position-management transactions centrally manages the risks generated by the portfolios. The transfer of risk These represent forward currency transactions that do not meet the criteria is performed through internal contracts. These contracts are put in place, for qualification as hedged forward currency transactions as defined in recorded and valued in accordance with CRB Standard 90-15. CRB Standard 89-01, in that they do not relate simultaneously to loans and borrowings or to spot currency transactions. Such transactions are entered Position-taking into with the aim of taking advantage of exchange rate movements. Derivatives held in the position-taking portfolio are intended to keep isolated positions open in order to take advantage of any favorable interest Gains and losses on position-management transactions are determined rate movements. The portfolio also includes all contracts that do not fulfill and accounted for by converting movements in the currency accounts the criteria for classification in the other categories. into euros at the forward rate applicable to the remaining terms of the contracts. Gains and losses are recognized in accordance with the prudence principle as follows: Foreign currency transactions In accordance with CRB Standard 89-01, as amended by Standard 90-01, • provisions are booked for any unrealized losses calculated as a result of Dexia Credit Local recognizes foreign currency transactions in open periodic mark-to-market valuations; unrealized gains are not recognized account in each of the currencies concerned. in the income statement; Specific foreign currency position accounts are maintained in each currency • interest and equalization payments are recognized in the income showing the position in that currency and the EUR equivalent. statement on an accrual basis. At each period end, the difference between the value of the foreign Credit derivatives currency position account translated into EUR at the year-end spot rate and Dexia Credit Local acquires credit risks primarily when the Group is the end the value of the foreign currency position in the euro equivalent account is investor in the underlying bonds. These transactions therefore represent taken to the income statement. Differences arising on the translation into credit substitutes. They are recorded in a portfolio of “isolated open EUR of investments in foreign currency-denominated non-consolidated positions”. companies financed in euros are recorded in shareholders’ equity under Premiums received on credit derivatives are accrued on a straight-line “Cumulative translation adjustments.” basis over the life of the derivatives. Differences arising on the translation into EUR of securities held to maturity These contracts are periodically remeasured. Unrealized losses are recorded denominated and financed in foreign currencies are recognized on a even when there is no established default risk, while unrealized gains are symmetrical basis with the differences arising on translation of the related never recognized. financing. The balance sheets of foreign consolidated subsidiaries of Dexia Credit Currency instruments Local are translated into EUR at the period-end exchange rate, with the Dexia Credit Local uses currency swaps and forward purchases and sales exception of shareholders’ equity, which is translated at the historical rate. of foreign currencies to hedge its currency risks. Currency swaps are used Income statement items are translated at the average rate for the period. to match funding currencies with the currencies of the assets financed. Differences arising on translation are recorded as a separate component Forward purchases and sales of foreign currencies are used to offset or of shareholders’ equity under “Cumulative translation adjustments.” reduce the impact of exchange rate fluctuations on specific items or groups of similar items. A limited number of unhedged foreign exchange Cost of risk positions are also established in connection with Dexia Credit Local’s The cost of risk includes movements in provisions for losses on interbank position-taking activities. and customer loans, fixed-income securities held to maturity (in the case
In accordance with CRB Standard 89-01, currency instruments are classified of recognized risk of default by the issuer) and off-balance sheet items FINANCIAL STATEMENTS as either hedged transactions or position-management transactions. This (other than off-balance sheet derivatives), as well as loan losses, recoveries categorization determines the applicable accounting treatment for the of loans written off in prior years, and movements in other provisions and related gains and losses. reserves for credit risks and contingencies relating to these items.
Currency instruments in both categories are recorded as off-balance sheet Non-recurring items commitments over the life of the contract, i.e. from the date of signing Non-recurring income and expenses result from events or transactions that of the contract to the start date of the reference period. do not relate to the ordinary business operations or routine management of the assets and liabilities of the Company. Each contract is recorded separately and is classified in one of the categories defined by the regulation. The accounting treatment of income depends They represent material items of income and expense that do not depend on the category and reflects the substance of the transaction. on decisions made in connection with the routine management of the business or of the Company’s assets and liabilities, but which result from Hedging transactions external events that are exceptional in terms of their infrequency and The difference between the forward rate and the spot rate – the contango their impact on net income. or backwardation – is recognized in the income statement on an accrual basis. The position is initially recorded at the spot rate and its value is Corporate income tax gradually adjusted over the life of the contract to take into account the The standard French corporate income tax rate for both current and contango or backwardation. deferred taxes is 34.43%.
Annual Report 2008 / DEXIA CREDIT LOCAL 195 FINANCIAL STATEMENTS 5 Notes to the financial statements
The income of foreign subsidiaries is taxed at the rates prevailing in the The Dexia SA Établissement Stable records the benefits achieved through countries in which they operate. tax consolidation.
Tax consolidation Company consolidating the financial statements of Dexia Credit Dexia Credit Local has adopted the tax consolidation method. Local Dexia SA, Place Rogier 11, B-1210 Brussels. The Dexia SA Établissement Stable in France became head of the tax consolidation group in 2002.
Only the Établissement Stable is liable for the payment of corporate income taxes and the annual fixed taxes paid each year by the Group as a whole. In its individual financial statements, Dexia Credit Local recognizes its income tax expense on a standalone basis.
( 2. NOTES ON THE ASSETS
2.1 CASH, CENTRAL BANKS AND POSTAL CHECKING ACCOUNTS (ITEM I - ASSETS)
a. Accrued interest
0
b. Detail analysis, excluding accrued interest
At December 31, 2007 At December 31, 2008 (EUR millions)
Cash 00
Deposits with cental banks and issuing institutions 685 275
Deposits with postal checking accounts 00
TOTAL 685 275
196 DEXIA CREDIT LOCAL / Annual Report 2008 FINANCIAL STATEMENTS Notes to the financial statements 5
2.2 GOVERNMENT SECURITIES ELIGIBLE FOR CENTRAL BANK REFINANCING (ITEM II - ASSETS)
This item includes government securities eligible for central bank refinancing a. Accrued intest
(EUR millions) 90 b. Analysis by term to maturity, excluding accrued interest
Less than 3 months 3 months to 1 year 1 to 5 years Over 5 years At December 31, 2008 (EUR millions)
40 65 63 2,808 2,976 c. Analysis by type of portfolio and movements for the year, excluding accrued interest
Banking activity and other Total
Held for trading Available for sale Held to maturity (EUR millions)
Cost at December 31, 2007 103 3,233 188 3,524
Movements for the year:
• Acquisitions 0 277 119 396
• Disposals and redemptions (55) (491) (119) (665)
• Transfers 0 0 0 0
• Translation adjustments 0 0 (8) (8)
• Other movements 0000
Cost at December 31, 2008 48 3,019 180 3,247
Impairment at December 31, 2007 0 (2) 0 (2)
Movements for the year:
• Charges 0 (269) 0 (269)
• Recoveries 0000
• Translation adjustments 0000
• Other movements 0000 FINANCIAL STATEMENTS FINANCIAL STATEMENTS
Impairment at December 31, 2008 0 (271) 0 (271)
NET CARRYING AMOUNT AT DECEMBER 31, 2008 48 2,748 180 2,976
At December 31, 2008 there were EUR 99 million in loaned securities in the available-for-sale portfolio and EUR 55 million in the held-to-maturity portfolio.
Annual Report 2008 / DEXIA CREDIT LOCAL 197 FINANCIAL STATEMENTS 5 Notes to the financial statements
d. Transfers between portfolios
No transfers were made between portfolios in 2008.
e. Listed and unlisted securities, excluding accrued interest
Carrying amount Market value Net unrealized capital gain (EUR millions) at December 31, 2008 at December 31, 2008 at December 31, 2008
Listed securities (1) 2,904 2,939 35
Unlisted securities 72
TOTAL 2,976
1) “Listed” means quoted on a stock exchange.
Total Held for trading Available for sale Held to maturity Analysis by type of portfolio (EUR millions)
Listed securities (1) 2,904 48 2,744 112
Unlisted securities 72 4 68
TOTAL 2,976 48 2,748 180
1) “Listed” means quoted on a stock exchange.
f. Unrealized capital gains and losses on securities
Available for sale Held to maturity (EUR millions)
Unrealized capital gains 35 0
Unrealized capital losses 00
2.3 INTERBANK LOANS AND ADVANCES (ITEM III - ASSETS)
a. Accrued interest
(EUR millions) 103
b. Analysis by term to maturity, excluding accrued interest
At December 31, At December 31, Less than 3 months 3 months to 1 year 1 to 5 years Over 5 years (EUR millions) 2007 2008
Demand loans and advances 8,723 4,512 4,512
Term loans and advances 27,388 29,674 16,245 1,568 6,629 5,232
TOTAL 36,111 34,186 20,757 1,568 6,629 5,232
198 DEXIA CREDIT LOCAL / Annual Report 2008 FINANCIAL STATEMENTS Notes to the financial statements 5 c. Analysis of non-performing loans, excluding accrued interest
At December 31, 2007 At December 31, 2008
Total Non-performing Doubtful Total Valuation of risk loans under non-performing (EUR millions) collection loans
Gross non-performing loans 0 58 0 58
Accumulated impairment (1) 0 (37) 0 (37)
NET NON-PERFORMING LOANS 0 21 0 21
(1) This amount corresponds to the impairment of receivables from the Lehman Brothers investment bank. d. Analysis of term loans by degree of subordination, excluding accrued interest
At December 31, 2007 At December 31, 2008 (EUR millions)
Subordinated interbank loans 524 730
Non-subordinated interbank loans 26,864 28,944
TOTAL 27,388 29,674
2.4 CUSTOMER LOANS (ITEM IV - ASSETS) a. Accrued interest
(EUR millions) 454 b. Analysis by term to maturity, excluding accrued interest
Less than 3 months 3 months to 1 year 1 to 5 years Over 5 years No fixed maturity At December 31, (EUR millions) or not analyzed 2008
940 1,364 7,386 40,904 0 50,594 c. Analysis by type of borrower, excluding accrued interest FINANCIAL STATEMENTS FINANCIAL STATEMENTS
At December 31, 2007 At December 31, 2008
Total Public sector Other sectors Total (EUR millions)
Performing loans 41,251 30,585 19,910 50,495
Restructured performing loans 0000
Non-performing loans under collection 72 0 11 11
Doubtful non-performing loans 8 3 85 88
TOTAL 41,331 30,588 20,006 50,594
Annual Report 2008 / DEXIA CREDIT LOCAL 199 FINANCIAL STATEMENTS 5 Notes to the financial statements
d. Analysis of non-performing loans, excluding accrued interest
At December 31, 2007 At December 31, 2008 Valuation of risk (EUR millions)
Gross non-performing loans under collection 84 16
Accumulated impairment (12) (5)
Net non-performing loans under collection 72 11
Gross doubtful non-performing loans 39 136
Accumulated impairment (31) (48)
Net doubtful non-performing loans 888
e. Analysis by degree of subordination, excluding accrued interest
At December 31, 2007 At December 31 , 2008 (EUR millions)
Subordinated customer loans 810
Non-subordinated customer loans 41,323 50,584
TOTAL 41,331 50,594
2.5 BONDS AND OTHER FIXED INCOME SECURITIES (ITEM V - ASSETS)
a. Accrued interest
(EUR millions) 676
b. Analysis by term to maturity, excluding accrued interest
Less than 3 months 3 months to 1 year 1 to 5 years Over 5 years At December 31 , 2008 (EUR millions)
1,498 3,780 13,147 64,043 82,468
c. Analysis by type of issuer, excluding accrued interest
At December 31, 2007 At December 31 , 2008 Type of issuer (EUR millions)
Public sector issuers 40,745 29,496
Other issuers 68,439 52,972
TOTAL 109,184 82,468
The sharp decrease in the securities portfolio is attributable to the absence of any borrowed securities at December 31, 2008.
200 DEXIA CREDIT LOCAL / Annual Report 2008 FINANCIAL STATEMENTS Notes to the financial statements 5 d. Listed and unlisted securities, excluding accrued interest
Carrying amount Market value Unrealized capital gain (EUR millions) at December 31, 2008 at December 31, 2008 at December 31, 2008
Listed securities (1) 45,308 45,389 81
Unlisted securities 37,160
TOTAL 82,468
1) “Listed” means quoted on a stock exchange.
Total Held for trading Available for sale Held to maturity Analysis by type of portfolio (EUR millions)
Listed securities (1) 45,308 14,801 29,850 657
Unlisted securities 37,160 4,403 32,213 544
TOTAL 82,468 19,204 62,063 1,201
1) “Listed” means quoted on a stock exchange. e. Analysis by type of portfolio and movements for the year, excluding accrued interest
Banking business and other Total
Held for trading Available for sale Held to maturity (EUR millions)
Cost at December 31, 2007 52,643 55,818 1,471 109,932
Movements for the year:
• Acquisitions 2,685 8,132 168 10,985
• Disposals and redemptions (1) (36,659) (1,891) (356) (38,906)
• Other changes 0 161 0 161
• Translation adjustments 535 2,909 (82) 3,362
Cost at December 31, 2008 19,204 65,129 1,201 85,534
Impairment at December 31, 2007 0 (748) 0 (748)
Movements for the year:
(2)
• Charges 0 (2,233) 0 (2,233) FINANCIAL STATEMENTS
• Recoveries 020 2
• Other changes 0 0 0 0
• Translation adjustments 0 (87) 0 (87)
Impairment at December 31, 2008 0 (3,066) 0 (3,066)
NET CARRYING AMOUNT AT DECEMBER 31, 2008 19,204 62,063 1,201 82,468
(1) The sharp decrease in the held-for-trading portfolio is attributable to the maturing of securities loaned during the year ended December 31, 2008. In the held-to-maturity portfolio, the decrease is attributable solely to securities having been redeemed. (2) A comment regarding the change is provided in Note 5.4.
At December 31, 2008, the total value of securities loaned amounted to EUR 3,457 million in the held-for-trading portfolio, EUR 18,570 million in the available-for-sale portfolio and EUR 167 million in the held-to-maturity portfolio.
Annual Report 2008 / DEXIA CREDIT LOCAL 201 FINANCIAL STATEMENTS 5 Notes to the financial statements
f. Analysis by degree of subordination, excluding accrued interest
At December 31, 2007 At December 31, 2008 (EUR millions)
Subordinated bonds and other subordinated fixed income securities issued by credit institutions 200 442
Subordinated bonds and other subordinated fixed income securities issued by other companies 0 0
Non subordinated bonds and other non subordinated fixed income securities 108,984 82,026
TOTAL 109,184 82,468
of which: listed subordinated bonds and other listed subordinated fixed income securities 0 0
g. Transfers between portfolios
No transfers were made between portfolios in 2008.
h. Held-for-trading portfolio, excluding accrued interest
At December 31, 2007 At December 31, 2008 (EUR millions)
Mark-to-market gains (losses) 945 (2,546 )
i. Available-for-sale and held-to-maturity portfolios, excluding accrued interest
At December 31, 2007 At December 31, 2008 (EUR millions)
Unrealized gains (redemption value higher than carrying amount) 28 513
Unrealized losses (redemption value lower than carrying amount) 19 787
j. Analysis of non-performing loans, excluding accrued interest
At December 31, 2007 At December 31, 2008 Valuation of risk (EUR millions)
Gross non-performing loans 0 163
Accumulated impairment (1) 0 (147)
Net non-performing loans 016
(1) Impairment concerns essentially securities issued by Icelandic banks.
202 DEXIA CREDIT LOCAL / Annual Report 2008 FINANCIAL STATEMENTS Notes to the financial statements 5
2.6 EQUITIES AND OTHER VARIABLE INCOME SECURITIES (ITEM VI - ASSETS) a. Analysis by type of portfolio and movements for the year
Banking activity and other Total
Held for trading Available for sale (EUR millions)
Cost at December 31, 2007 0 328 328
Movements for the year:
• Acquisitions 0 279 279
• Dis posals and redemptions 0 (250) (250)
• Other movements 000
• Translation adjustments 0 (10) (10)
Cost at December 31, 2008 0 347 347
Impairment at December 31, 2007 0 (48) (48)
Movements for the year:
• Charges 0 (14 ) (14 )
• Recoveries 00 0
• Other movements 000
• Translation adjustments 0 14 14
Impairment at December 31, 2008 0 (48) (48)
NET CARRYING AMOUNT AT DECEMBER 31, 2008 0 299 299 b. Transfers between portfolios
No transfers were made between portfolios in 2008. c. Listed and unlisted securities
Carrying amount at Market value Unrealized capital gain (EUR millions) December 31, 2008 at December 31, 2008 at December 31, 2008
Listed securities 137 144 7
Unlisted securities 162 FINANCIAL STATEMENTS
Total 299 d. Unrealized capital gains (losses) on variable income securities
Available for sale securities (EUR millions)
Unrealized capital gains 7
Unrealized capital losses 0
Annual Report 2008 / DEXIA CREDIT LOCAL 203 FINANCIAL STATEMENTS 5 Notes to the financial statements
2.7 LONG-TERM EQUITY INVESTMENTS (ITEM VII - ASSETS)
a. Accrued interest
0
b. Analysis by type of issuer and movements for the year
Dexia Group related parties Other long-term equity investments Total
Credit institutions Other Credit institutions Other (EUR millions)
Cost at December 31, 2007 4,523 202 420 31 5,176
Movements for the year:
• Acquisitions (1) 241 4 124 21 390
• Dis posals and redemptions (2) 0 0 (84) (27) (111)
• Transfers 00000
• Translation adjustments (3) 38 0 0 0 38
• Other movements 00000
Cost at December 31, 2008 4,802 206 460 25 5,493
Impairment at December 31, 2007 (17) (1) 0 (7) (25)
Movements for the year:
• Charges (2,152 0 (240) (4) (2,396)
• Recoveries 00066
• Reversals 00000
• Transfers 00000
• Translation adjustments (1) 0 0 0 (1)
• Other movements 00000
Impairment at December 31, 2008 (2,170) (1) (240) (5) (2,416) NET CARRYING AMOUNT AT DECEMBER 31, 2008 2,632 205 220 20 3,077 (1) The primary acquisitions in 2008 pertained to capital increases in the following subsidiaries: Dexia Kommunalkredit Bank, Kommunalkredit Austria, Dexia Municipal Agency and Dexia Sabadell. (2) The disposals concerned primarily the Société Générale and Tikiphone shares. (3) The translation adjustments pertained to the Dexia Holdings Inc. subsdidiary.
c. Listed and unlisted securities
Carrying amount Market value Unrealized capital gain (EUR millions) at December 31, 2008 at December 31, 2008 at December 31, 2008
Listed securities 000
Unlisted securities 3,077
TOTAL 3,077
204 DEXIA CREDIT LOCAL / Annual Report 2008 FINANCIAL STATEMENTS Notes to the financial statements 5 d. Significant investments
Cost Impairment Net carrying amount Listed securities at December 31, 2008 at December 31, 2008 at December 31, 2008
000
Cost at Impairment at Net carrying % interest Interest in Last balance December 31, December 31, amount at in equity equity at sheet date Unlisted securities 2008 2008 December 31, December 31, (EUR millions) 2008 2008
TOTAL 5,493 2,416 3,077
Principal interests in long-term equity investments
Dexia Municipal Holdings (1) 2,152 2,152 0 90.00 2,245 Dec. 31, 2008
Dexia Municipal Agency 946 0 946 100.00 1,142 Dec. 31, 2008
Dexia Crediop 581 0 581 70. 00 748 Dec. 31, 2008
Societe d’Investissement Suisse Luxembourgeoise 354 0 354 100.00 787 Dec. 31, 2008
Dexia Kommunalbank Deutschland 253 0 253 100.00 291 Dec. 31, 2008
Kommunalkredit Austria (2) 205 205 0 49.00 Not available Dec. 31, 2008
Crédit du Nord 184 0 184 10. 00 151 Dec. 31, 2008
Dexia Kommunalkredit Bank 160 0 160 50.84 163 Dec. 31, 2008
Dexia Sabadell, SA 142 0 142 60. 00 208 Dec. 31, 2008
CBX. IA 2 100 0 100 70. 85 46 Dec. 31, 2008
Dexia Epargne Pension 60 35 25 25. 35 33 Dec. 31, 2008
Dexia Israel Bank Ltd. 56 0 56 65.31 64 Dec. 31, 2008
Dexia Sofaxis 50 0 50 99. 98 64 Dec. 31, 2008
CBX. IA 1 40 0 40 100. 00 1 Dec. 31, 2008
Dexia Flobail 39 0 39 100. 00 141 Dec. 31, 2008
Dexia CLF Immo 34 18 16 100.00 16 Dec. 31, 2008
Dexia Credit Local Asia Pacific Pty Ltd. 26 0 26 100.00 23 Dec. 31, 2008
Floral 23 0 23 100. 00 59 Dec. 31, 2008 FINANCIAL STATEMENTS FINANCIAL STATEMENTS Exterimmo 20 0 20 40.00 Not available Dec. 31, 2008
Dexia CLF Régions Bail 8 0 8 100.00 17 Dec. 31, 2008
Dexia CLF Banque 7 0 7 80.00 9,459 Dec. 31, 2008
(1) Total impairment of Dexia Holdings Inc. shares in light of the agreement to sell FSA’s insurance business to Assured Guaranty Ltd. (2) Total impairment of Kommunalkredit Austria shares in light of the sale to the Austrian government.
Annual Report 2008 / DEXIA CREDIT LOCAL 205 FINANCIAL STATEMENTS 5 Notes to the financial statements
2.8 INTANGIBLE ASSETS (ITEM VIII - ASSETS)
DETAILED ANALYSIS AND MOVEMENTS FOR THE YEAR
Start-up costs Other intangible assets Total (EUR millions)
Cost at December 31, 2007 0 215 215
Movements for the year:
• Increases 02222
• Decreases 000
• Other 000
• Translation adjustments 033
Cost at December 31, 2008 0 240 240
Amortization and impairment at December 31, 2007 0 (159) (159)
Movements for the year:
• Charges 0 (26) (26)
• Recoveries 000
• Other 000
• Translation adjustments 0 (1) (1)
Amortization and impairment at December 31, 2008 0 (186) (186)
NET CARRYING AMOUNT AT DECEMBER 31, 2008 0 54 54
Intangible assets include primarily purchased software and capitalized in-house software development.
206 DEXIA CREDIT LOCAL / Annual Report 2008 FINANCIAL STATEMENTS Notes to the financial statements 5
2.9 TANGIBLE FIXED ASSETS (ITEM IX - ASSETS)
DETAILED ANALYSIS AND MOVEMENTS FOR THE YEAR
Land and Fixtures, Other property Assets under Total buildings equipment, and equipment construction and furniture and prepayments (EUR millions) vehicles
Cost at December 31, 2007 1 46 18 0 65
Movements for the year:
• Acquisitions 01304
• Disposals and retirements 0 0 (13) 0 (13)
• Transfers (1) 0 (41) 41 0 0
• Other 00000
• Translation adjustments 00000
Cost at December 31, 2008 1 6 49 0 56
Capital gains at December, 31, 2008 0 0 0 0 0
Depreciation and impairment at December 31, 2007 0 (34) (11) 0 (45)
Movements for the year:
• Charges 0 (1) (3) 0 (4)
• Recoveries 0 0 11 0 11
• Transfers (1) 0 32 (32) 0 0
• Other 00000
• Translation adjustments 00000
Depreciation and impairment at December 31, 2008 0 (3) (35) 0 (38)
NET CARRYING AMOUNT AT DECEMBER 31, 2008 1 3 14 0 18
(1) Transfers pertain to internal reclassifications. FINANCIAL STATEMENTS FINANCIAL STATEMENTS
Annual Report 2008 / DEXIA CREDIT LOCAL 207 FINANCIAL STATEMENTS 5 Notes to the financial statements
2.10 OTHER ASSETS AND ACCRUALS (ITEMS XIII AND XIV - ASSETS)
DETAILED ANALYSIS
At December 31, 2007 At December 31, 2008 (EUR millions)
Other assets
Premiums paid on swaptions issued 394
Premiums paid on options 79 128
Guarantee deposits paid (1) 3,761 17,184
Tax receivables 21
Deferred tax assets 308 741
Other non-current financial assets 091
Other assets 29 0
TOTAL OTHER ASSETS 4,182 18,239 (1) Guarantee deposits paid consist nearly entirely of collateral deposited under contracts with the primary counterparties trading on derivatives markets. The increase in cash collateral is due essentially to the change in interest rates in 2008.
At December 31, 2007 At December 31, 2008 (EUR millions)
Accruals and other assets
Premiums and deferred charges on borrowings 344 347
Premiums on loans and other deferred charges on loans 107 51
Premiums and deferred charges on hedging transactions 1,069 972
Premiums and deferred charges on trading transactions 0 810
Accrued income on hedging transactions 5,693 4,192
Accrued income on trading transactions 2,543 12,209
Unrealized translation losses 749 718
Other accrued income 554 636
TOTAL ACCRUALS AND OTHER ASSETS 11,059 19,935
2.11 ANALYSIS OF ASSETS BY CURRENCY
At December 31, 2008 Classification by currency of origin (EUR millions)
In EUR 56,124
In other EU currencies 29,811
In other currencies 127,509
TOTAL ASSETS 213,444
208 DEXIA CREDIT LOCAL / Annual Report 2008 FINANCIAL STATEMENTS Notes to the financial statements 5
( 3. NOTES ON THE LIABILITIES AND EQUITY
3.1 INTERBANK BORROWINGS AND DEPOSITS (ITEM I - LIABILITIES) a. Accrued interest
(EUR millions) 331 b. Analysis by term to maturity, excluding accrued interest
At December 31, At December 31, Less than 3 months 3 months to 1 year 1 to 5 years Over 5 years (EUR millions) 2007 2008
Demand deposits (1) 1,033 51,965 51,965
Term deposits (2) 92,674 77,420 54,561 3,035 12,476 7,348
TOTAL 93,707 129,385 106,526 3,035 12,476 7,348 (1) In an economic environment where interbank liquidity is becoming increasingly scarce, since September 2008 Dexia Credit Local has been turning to funding facilities provided by central banks. This funding amounted to EUR 44 billion at December 31, 2008. (2) Including EUR 9 billion in securities under repurchase agreements.
3.2 CUSTOMER DEPOSITS (ITEM II - LIABILITIES) a. Accrued interest
(EUR millions) 22 b. Analysis by term to maturity, excluding accrued interest
At December 31, At December 31, Less than 3 months 3 months to 1 year 1 to 5 years Over 5 years (EUR millions) 2007 2008
Demand deposits 0 0
Term deposits 4,521 3,559 1,654 29 415 1,461
TOTAL 4,521 3,559 1,654 29 415 1,461 FINANCIAL STATEMENTS FINANCIAL STATEMENTS c. Analysis by type of customer, excluding accrued interest
At December 31, 2007 At December 31, 2008 (EUR millions)
Public sector 601 1,551
Other sectors 3,920 2,008
TOTAL 4,521 3,559
Annual Report 2008 / DEXIA CREDIT LOCAL 209 FINANCIAL STATEMENTS 5 Notes to the financial statements
3.3 DEBT SECURITIES (ITEM III - LIABILITIES)
a. Accrued interest
(EUR millions) 297
b. Analysis by term to maturity, excluding accrued interest
Less than 3 months 1 to 5 years Over 5 years At December (EUR millions) 3 months to 1 year 31, 2008
Interbank and money market securities and notes 13,754 7,728 9,432 5,133 36,047
Bonds 515 98 584 1,961 3,158
TOTAL 14,269 7,826 10,016 7,094 39,205
c. Analysis by type of security and movements for the year, excluding accrued interest
Interbank and money Bonds Total market securities (EUR millions) and notes
At December 31, 2007 (1) 51,298 5,472 56,770
Movements for the year:
• New issues 17,999 199 18,198
• Redemptions (33,548) (2,636) (36,184)
• Translation adjustments 298 123 421
• Other 000
AT DECEMBER 31, 2008 36,047 3,158 39,205
(1) The opening values at December 31, 2007 were the subject of EUR 4,136 million of a line by line reclassification.
This line includes EUR 289 million in issue premiums, of which EUR 26 million had been amortized at December 31, 2008.
210 DEXIA CREDIT LOCAL / Annual Report 2008 FINANCIAL STATEMENTS Notes to the financial statements 5
3.4 OTHER LIABILITIES AND ACCRUALS (ITEMS IV AND V - LIABILITIES)
DETAIL ANALYSIS
At December 31, 2007 At December 31, 2008 (EUR millions)
Other liabilities
Guarantee deposits received 481 3,311
Premiums on options sold 169 412
Other creditors (1) 35,973 8,966
TOTAL OTHER LIABILITIES 36,623 12,689
Accruals and other liabilities
Deferred income on loans 84 86
Discounts recognized on purchase of receivables 00
Deferred income on hedging transactions 1,163 1,040
Deferred income on trading transactions 0 775
Deferred gains on hedging contracts 0 210
Accrued charges on hedging transactions 6,058 4,706
Accrued charges on trading transactions 2,449 11,352
Unrealized translation gains 537 815
Other deferred income 334 60
Other accrued charges 297 129
Other accrued liabilities 0 278
TOTAL ACCRUALS AND OTHER LIABILITIES 10,922 19,451
(1) At December 31, 2007, EUR 36 billion corresponded to liabilities related to borrowed securities. FINANCIAL STATEMENTS FINANCIAL STATEMENTS
Annual Report 2008 / DEXIA CREDIT LOCAL 211 FINANCIAL STATEMENTS 5 Notes to the financial statements
3.5 PROVISIONS FOR RISKS AND CHARGES (ITEM VI - LIABILITIES)
At December Additions Recoveries Other At December (EUR millions) 31, 2007 movements (3) 31, 2008
Provisions for risks and charges on 462 968 (61) (29) 1,340
• Pensions and similar commitments (1) 850013
• Financing commitments 149 126 (31) (4) 240
• Other financial instuments 157 574 0 (10) 721
• Other risks and charges (2) 148 263 (30) (15) 366
• Country risk 00000
PROVISIONS FOR DEFERRED TAXES 174 6 (17) 0 163
Regulated reserves 342 11 (16) 0 337
• Provisions for medium- and long-term loans 310000310
• Provisions for accelerated tax depreciation 25 9 (13) 0 21
• Provision for investment 72(3)06
TOTAL 978 985 (94) (29) 1,840 (1) Provisions for termination benefits and service awards amounted to EUR 13 million. (2) An analysis of the principal changes is provided in Note 5.5. (3) The other movements concern the amortization of disposal gains generated on transfers of loans to Dexia Municipal Agency (EUR 18 million) and to unrealized foreign currency adjustments.
3.6 SUBORDINATED DEBT (ITEM VIII - LIABILITIES)
a. Accrued interest
(EUR millions) 62
b. Movements for the year, excluding accrued interest
Total (EUR millions)
At December 31, 2007 5,309
M ovements for the year:
• New issues 299
• Maturities and redemptions (340)
• Translation adjustments 93
• Other movements 0
AT DECEMBER 31, 2008 5,361
212 DEXIA CREDIT LOCAL / Annual Report 2008 FINANCIAL STATEMENTS Notes to the financial statements 5 c. Detailed informations regarding subordinated borrowings
Currency Due Amount a) Early repayment conditions Interest rate (%) (in millions) b) Subordination conditions c) Convertibility conditions EUR No fixed maturity 200 a) Early repayment impossible during first 10 years without the approval of the EURIBOR 3M + 0.79 General Secretariat of the Banking Commission and unless replaced by equity From July 2015, EURIBOR 3M of equivalent or better quality. Repayment possible at each due date for interest + 1.40 payments, beginning July 1, 2015, with the approval of the General Secretariat of From July 2020, EURIBOR 3M the Banking Commission +2.15 b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion
EUR No fixed maturity 700 a) Early repayment impossible during first five years without the approval of the EURIBOR 3M + 0.73 General Secretariat of the Banking Commission and unless replaced by equity of Super subordinated perpetual equivalent or better quality note. b) Repayment at par value, after all creditors but preferred ranking over subordinated Beginning November 18, 2015, profit-sharing loans and preference shares Euribor 3M + 1.73 c) No conversion
USD No fixed maturity 250 a) Early repayment impossible during first 10 years without the approval of the LIBOR USD 3M + 1.1 General Secretariat of the Banking Commission and unless replaced by equity Beginning October 1, 2012, of equivalent or better quality. Repayment possible at each due date for interest LIBOR USD 3M + 1.85 payments, beginning October 1, 2012, with the approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion
USD No fixed maturity 1190 a) Early repayment impossible during first 10 years without the approval of the LIBOR USD 3M + 0,39 General Secretariat of the Banking Commission and unless replaced by equity Beginning April 5, 2015, of equivalent or better quality. Repayment possible at each due date for interest LIBOR USD 3M + 1.14 payments, beginning April 5, 2015, with the approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion
EUR June 10, 2009 13 a) Early repayment possible at each due date for interest payments with the approval EURIBOR 3M+0.35 of the General Secretariat of the Banking Commission b) No specific conditions c) No conversion
EUR June 10, 2009 49 a) Early repayment possible at each due date for interest payments with the approval EURIBOR 3M+0.35 of the General Secretariat of the Banking Commission b) No specific conditions c) No conversion
EUR June 27, 2011 640 a) No early repayment possible EURIBOR 3M+0.58 FINANCIAL STATEMENTS FINANCIAL STATEMENTS b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion
USD September 27, 2012 60 a) Early repayment possible at each due date for interest payments beginning October LIBOR USD 3M+0.5925 1, 2007 with the approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion
USD April 1, 2013 130 a) Early repayment possible at each due date for interest payments beginning April 1, LIBOR USD 3M+0.5475 2008 with the approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion
USD April 1, 2013 200 a) Early repayment possible at each due date for interest payments beginning April 1, LIBOR USD 3M+0.4975 2008 with the approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion
Annual Report 2008 / DEXIA CREDIT LOCAL 213 FINANCIAL STATEMENTS 5 Notes to the financial statements
Currency Due Amount a) Early repayment conditions Interest rate (%) (in millions) b) Subordination conditions c) Convertibility conditions USD October 1, 2013 200 a) Early repayment possible at each due date for interest payments beginning October LIBOR USD 3M+0.4625 1, 2008 with the approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion
USD January 1, 2014 100 a) Early repayment possible at each due date for interest payments beginning January LIBOR USD 3M+0.485 1, 2009 with the approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion
USD July 1, 2014 135 a) Early repayment possible at each due date for interest payments beginning July 1, LIBOR USD 3M+0.43 2009 with the approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion
USD October 1, 2014 265 a) Early repayment possible at each due date for interest payments beginning October LIBOR USD 3M+0.33 1, 2009 with the approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion
EUR December 1, 2014 100 a) Early repayment possible at each due date for interest payments beginning 93.25% * CMS December 22, 2004 with the approval of the General Secretariat of the Banking Commission b) No specific conditions c) No conversion
EUR January 1, 2015 450 a) Early repayment possible at each due date for interest payments beginning January EURIBOR 3M+0.32 1, 2010 with the approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion
EUR July 9, 2017 500 a) Repayment possible at each due date for interest payments beginning July 9, 2012 EURIBOR 3M+0.15 with the approval of the General Secretariat of the Banking Commission Beginning July 9, 2012, b) Repayment at par value, after all creditors but preferred ranking over subordinated EURIBOR 3M+0.65 profit-sharing loans and preference shares c) No conversion
EUR December 28, 2017 300 a) Early repayment possible at each due date for interest payments beginning EURIBOR 3M+1.45 December 28, 2012 with the approval of the General Secretariat of the Banking Beginning December 28, 2012, Commission Euribor 3M+1.95 b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion
EUR June 20, 2018 300 a) Early repayment possible at each due date for interest payments beginning June EURIBOR 3M+1.5 20, 2013 with the approval of the General Secretariat of the Banking Commission Beginning June 20, 2013, b) Repayment at par value, after all creditors but preferred ranking over subordinated EURIBOR 1 year + 2 profit-sharing loans and preference shares c) No conversion
EUR December 2, 2019 300 a) Early repayment possible at each due date for interest payments beginning Fixed Rate 4.375 February 12, 2014 with the approval of the General Secretariat of the Banking Beginning February 12, 2014, Commission. EURIBOR 3M + 0.72 b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion
214 DEXIA CREDIT LOCAL / Annual Report 2008 FINANCIAL STATEMENTS Notes to the financial statements 5
3.7 EQUITY
DETAILED ANALYSIS OF EQUITY
Total (EUR millions)
At December 31, 2007:
Capital stock 1,327
Additional paid-in capital 1,087
Commitments to increase capital stock and APIC 0
Legal reserves 133
Other reserves 379
Cumulative translation adjustments (93)
Net income for the year 319
Interim dividends 0
EQUITY AT DECEMBER 31, 2007 3,152
Movements for the year:
Capital stock (1) (826)
Additional paid-in capital (1) 4,326
Commitments to increase capital stock and APIC 0
Reserves and retained earnings 0
Cumulative translation adjustments (78)
Dividends paid (-) (396)
Net loss for the year (4,937)
Other movements 0
At December 31, 2008:
Capital stock (1) 501
Additional paid-in capital 5,414
Commitments to increase capital stock and APIC 0
Legal reserves 133
Other reserves 302 FINANCIAL STATEMENTS
Retainted earnings 0
Cumulative translation adjustments (171)
Net loss for the year (2) (4,937)
Interim dividends 0
EQUITY AT DECEMBER 31, 2008 1,242
(1) The Combined Shareholders’ Meeting of Decembre 22, 2008 resolved that Dexia Credit Local shall increase its capital stock in cash by EUR 3.5 billion and reduce its capital stock by EUR 4.3 billion, bringing its total capital stock to EUR 500.5 million. Dexia Credit Local had capital stock of EUR 500,513,102.75, divided into 87,045,757 shares with a par value of EUR 5.75 per share. (2) The Shareholders’ Meeting is requested, on an extraordinary basis, not to pay a dividend in respect of the financial year ended December 31, 2008. A dividend per share of EUR 4.55 was paid in respect of 2007. A dividend per share of EUR 3.45 was paid in respect of 2006, together with an extraordinary dividend per share of EUR 1.04. A dividend per share of EUR 2.88 was paid in respect of 2005.
Annual Report 2008 / DEXIA CREDIT LOCAL 215 FINANCIAL STATEMENTS 5 Notes to the financial statements
3.8 ANALYSIS OF LIABILITIES AND EQUITY BY CURRENCY
At December 31, 2008 Classification by currency of origin (EUR millions)
In EUR 58,784
In other EU currencies 21,535
In other currencies 133,126
TOTAL LIABILITIES AND EQUITY 213,444
3.9 OTHER NOTE TO THE BALANCE SHEET
TRANSACTIONS WITH RELATED PARTIES – ANALYSIS BY ITEM
Total o.w. Related parties (1) (EUR millions)
Items III, IV Interbank loans and advances and customer loans and advances 85,337 32,202
Assets Items V, VI, VII Securities held 86,520 4,636
Items XIII, XIV Other assets and accruals 38,174 6,167
Items I, II Interbank borrowings and deposits and customer deposits 133,297 69,750
Item III Debt securities 39,502 5,905 Liabilities Item VIII Subordinated debt 5,423 5,423
Items IV, V Other liabilities and accruals 32,140 2,561
(1) Related parties refers to entities included within the scope of consolidation of the Dexia Group.
( 4. NOTES ON THE OFF- BALANCE SHEET
4.1 FINANCING COMMITMENTS GIVEN (ITEM I - OFF-BALANCE SHEET)
This item includes financing commitments given and commitments given on securities and on loaned foreign currencies. Financing commitments on loans and lines of credit include loans granted but not disbursed at December 31, 2008.
Analysis by type of beneficiary
At December 31, 2007 At December 31, 2008 (EUR millions)
Commitments to credit institutions 6,816 7,214
Commitments to customers (1) 15,026 35,131
Commitments given on securities 224 488
TOTAL 22,066 42,833
(1) The increase in commitments to customers in 2008 is attributable to the standby bond purchase agreements (SBPA) of the New York branch.
216 DEXIA CREDIT LOCAL / Annual Report 2008 FINANCIAL STATEMENTS Notes to the financial statements 5
4.2 GUARANTEES GIVEN (ITEM II - OFF-BALANCE SHEET) a. Analysis by type of beneficiary
At December 31, 2007 At December 31, 2008 (EUR millions)
Guarantees given to credit institutions 26,120 31,693
Guarantees given to customers 40,237 21,639
TOTAL 66,357 53,332 b. Analysis by type of transaction
At December 31, 2007 At December 31, 2008 (EUR millions)
Types of guarantees given
• Guarantees 66,357 53,332
• Endorsements 00
• Liens on assets 00
TOTAL 66,357 53,332 c. Contingent liabilities and risks and losses that are not quantifiable at the date the financial statements are prepared.
There are no contingent liabilities, risks or losses that are not quantifiable at the date the financial statements are prepared.
4.3 ASSETS PLEDGED AS COLLATERAL (ITEM III - OFF-BALANCE SHEET)
Mortgages (1) Pledges on goodwill (2) Pledges on other assets Pledges on future (EUR millions) (3) assets (4) As collateral for debts and commitments of the Company 0 0 0 0
Balance sheet liabilities 0 0 0 0
Off-balance sheet items 0 0 35,029 0
(1) Stated at the lower of the mortgage value and the carrying amount of the mortgaged real estate. (2) Value of the pledge. FINANCIAL STATEMENTS (3) Carrying amount of the assets pledged. This amount includes EUR 6.7 billion and EUR 1.3 billion in loans given as collateral for borrowings from international financial institutions and from Dexia LDG Banque SA, respectively, and EUR 27 billion in collateral pledged to central banks. (4) Value of future assets concerned.
Annual Report 2008 / DEXIA CREDIT LOCAL 217 FINANCIAL STATEMENTS 5 Notes to the financial statements
4.4 FINANCING COMMITMENTS AND GUARANTEES RECEIVED (ITEMS IV AND V - OFF-BALANCE SHEET)
These items include all financing and guarantee commitments received from credit institutions, commitments received on securities and on foreign currency borrowings.
At December 31, 2007 At December 31, 2008 (EUR millions)
Financing guarantees received from credit institutions 6,800 8,696
Currencies borrowed but not yet received 4,489 1,216
Guarantees received from credit institutions 1,160 1,109
Guarantees received from local authorities or claims on local authorities acquired as guarantees 8,138 10,913
Other commitments received 815 1,891
TOTAL 21,402 23,825
4.5 COMMITMENTS RELATED TO SECURITIES (ITEM VI - OFF-BALANCE SHEET)
a. Analysis by type of transaction
At December 31, 2007 At December 31, 2008 (EUR millions)
Purchases
Spot 399 0
Forward 0 302
Sales
Spot 399 0
Forward 0 302
TOTAL 798 604
b. Isolated open positions
Unrealized gains on isolated open positions 0
4.6 COMMITMENTS RELATED TO FOREIGN CURRENCY TRANSACTIONS (ITEM VII - OFF-BALANCE SHEET)
Spot and forward foreign currency transactions are presented at their value in their accounting currency, translated at the closing foreign exchange rate at the end of the year.
The lines “foreign currencies to be received” and “foreign currencies to be delivered” each amounted to EUR 52 billion at December 31, 2008.
218 DEXIA CREDIT LOCAL / Annual Report 2008 FINANCIAL STATEMENTS Notes to the financial statements 5
4.7 COMMITMENTS RELATED TO FORWARD AND DERIVATIVES FINANCIAL INSTRUMENTS (ITEM VIII - OFF- BALANCE SHEET) a. Analysis by type of use and instrument
At December At December Hedging Trading Fair value at 31, 2007 31, 2008 December 31, Micro- Macro- Isolated open Specialized 2008 hedging hedging position trading Type of transaction portfolio (EUR millions) management
Foreign currency instruments (a) 52,271 50,815 18,460 27,462 2,097 2,796 (1,462)
• Forward currency purchases and sales 20,502 15,542 0 13,540 2,002 0 0
• Currency and interest rate swaps 31,769 35,265 18,460 13,914 95 2,796 (1,462)
• Currency futures 0000000
• Currency options 0000000
• Forward currency agreements 0808000
Other financial instruments 831,549 822,963 122,882 471,876 10,471 217,734 (6,053)
Interest rate instruments (b)
• Interest rate swaps 780,238 763,276 114,198 468,876 1,771 178,431 (7,662)
• Futures 575 2,371 0 0 31 2,340 0
• Forward rate agreements 15,775 7,416 157 3,000 3,929 330 15
• Interest rate options 19,934 38,160 1,409 0 269 36,482 52
Other forward purchases and sales (c)
• Other options 15,027 11,740 7,118 0 4,471 151 1,542
• Other futures 0000000
• Other forward purchases and sales 0000000
TOTAL 883,820 873,778 141,342 499,338 12,568 220,530 (7,515)
(a) Amount to be delivered. (b) Face value/notional amount. (c) Purchase/selling price agreed between the parties. b. Analysis by type of market
Over-the-counter market Organized market Total at December 31, 2008 Type of transaction (EUR millions) FINANCIAL STATEMENTS FINANCIAL STATEMENTS Foreign currency instruments 50,815 0 50,815
Other financial instruments
• Interest rate instruments 808,356 2,867 811,223
• Other forward purchases and sales 11,684 56 11,740
TOTAL 870,855 2,923 873,778 c. Analysis of forward contracts and options
Forward contracts Options Total at December 31, 2008 Type of instrument (EUR millions)
Foreign currency instruments 50,815 50,815
Other financial instruments
Interest rate instruments 780,187 31,036 811,223
Other forward purchases and sales 8,396 3,344 11,740
TOTAL 839,398 34,380 873,778
Annual Report 2008 / DEXIA CREDIT LOCAL 219 FINANCIAL STATEMENTS 5 Notes to the financial statements
d. Analysis by term to maturity
Less than 1 year 1 to 5 years Over 5 years Total Type of instrument (EUR millions) at December 31, 2008
Foreign currency instruments 27,174 7,597 16,044 50,815
Other financial instruments
Interest rate instruments 390,739 81,905 338,579 811,223
Other forward purchases and sales 899 1,164 9,677 11,740
TOTAL 418,812 90,666 364,300 873,778
e. Off-balance sheet forward transactions, including • Position management securities, currencies and other forward and derivatives financial instruments The position management strategy includes three types of activities: − specialist trading portfolio management; Commitments related to interest rate derivatives are recorded in compliance with CRB Standards 88-02 and 90-15: − position-taking;
• forward contracts are carried at the nominal value of the contracts; − credit derivatives.
• options are carried at the par value of the underlying instrument. The specialist trading portfolio management activity includes all transactions entered into with local governments and the symmetrical Dexia Credit Local uses forward and derivatives financial instruments as transactions executed with banking counterparties. These transactions part of the three following strategies: include primarily interest rate swaps. Specialized duration management • Asset-liability management is employed for the transactions included in this activity.
This includes all transactions intended to cover and manage the total Derivatives held in the position-taking portfolio are intended to keep interest rate exposure of the Company. ALM is carried out primarily isolated positions open in order to take advantage of any favorable through the use of swaps and futures contracts. movements in interest rates or exchange rates. These transactions include primarily interest rate swaps and forward foreign exchange • Specific hedging transactions. Hedges are used to cover interest rate risks on a specific item or a group Dexia Credit Local uses two types of credit derivatives - credit default of items with similar characteristics, identified at the outset. swaps and credit spread options - as part of its investment management Instruments meeting this definition consist primarily of swaps acquired strategy. as micro hedges of primary issues, bonds in the available for sale or held to maturity portfolios, and customer loans. The hedging instruments f. Risk monitoring have the effect of creating synthetic variable- or adjustable-rate assets or liabilities, which are immunized against interest rate risk. Risk is measured regularly by the Risk Management and Permanent Control department. The main risk indicator used by Dexia Credit Local, Foreign currency swaps are also classified as hedges when they are used and throughout the entire Dexia Group, is VaR. to transform sources of funding in one currency into the currency used in the transactions they finance in the goal of reducing currency risk. The VaR calculated by the Dexia Group measures the potential loss over a 99% confidence interval over a 10-day period.
The risk management system consists of allocating the following items to each entity, and for each type of financial markets activity:
• a liste of foreign currencies and transactional structures likely to be used;
• a VaR limit.
220 DEXIA CREDIT LOCAL / Annual Report 2008 FINANCIAL STATEMENTS Notes to the financial statements 5
4.8 TRANSACTIONS WITH RELATED PARTIES
ANALYSIS BY ITEM
Total o.w. Related parties (1) (EUR millions)
Item I Financing commitments given 42,833 7,994
Item II Guarantees given 53,332 44,419 Off-balance Item IV Financing commitments received 9,912 7,100 sheet Item V Guarantees received 13,913 138 Items III, VI, VII, VIII Other commitments given and received 963,921 201,612
(1) Related parties refers to entities included within the scope of consolidation of the Dexia Group.
( 5. NOTES ON THE INCOME STATEMENT
5.1 INTEREST INCOME AND INTEREST EXPENSE
2007 2008 (EUR millions)
Interest income on:
Interbank loans (1) 1,846 2,432
Customer loans (a) 1,868 2,375
Bonds and other fixed income securities (b) 4,041 3,962
Macro-hedging transactions (d) 18,753 18,485
TOTAL INTEREST INCOME 26,508 27,254
Interest expense on:
Interbank loans (1) (4,183) (4,543)
Customer loans (a) (309) (175)
Bonds and other fixed income securities (c) (3,545) (3,624)
Macro-hedging transactions (d) (18,724) (18,858) FINANCIAL STATEMENTS FINANCIAL STATEMENTS TOTAL INTEREST EXPENSE (26,761) (27,200)
NET INTEREST INCOME (EXPENSE) (253) 54
(1) Including EUR -1,341 million in transactions with related parties. a. Interest income and expenses on customer loans b. Interest income on bonds and fixed income securities Interest income and expenses on customer loans represented a net amount of EUR 2,200 million. The heading includes EUR 3,962 million in accrued interest on bonds and other fixed income securities, amortization of discounts and premiums The heading includes EUR 2,040 million in accrued interest income and on securities held to maturity and securities available for sale, and the expense on customer loans. related hedging gains and losses on these securities. It also includes EUR 18 million in early repayment penalties.
The line also reflects EUR 142 million in income on financing commitments and guarantees.
Annual Report 2008 / DEXIA CREDIT LOCAL 221 FINANCIAL STATEMENTS 5 Notes to the financial statements
c. Interest expenses on bonds and fixed income d. Income and expenses on macro-hedging securities transactions
This line represents EUR 3,624 million in interest expenses for Income and expenses on macro-hedging transactions amounted Dexia Credit Local. respectively to EUR 18,485 million and EUR 18,858 million. These amounts are recognized respectively in Items I and II of the income statement. In addition to interest expense on bonds and other fixed-income securities, the heading also includes interest rate hedging gains and losses on specifically-identified money market, bond, and subordinated debt issues.
5.2 ANALYSIS OF INCOME FROM VARIABLE INCOME SECURITIES (ITEM III - INCOME STATEMENT)
2007 2008 (EUR millions)
Dexia Group related parties 202 533 (1)
Other related parties and long-term investments 023
Shares and other variable income securities 11 4
TOTAL 213 559
(1) Including EUR 400 million in dividends from the SISL subsidiary
5.3 ANALYSIS OF FEE AND COMMISSION (ITEMS IV AND V - INCOME STATEMENT)
a. Detailed analysis of fee and commission income (Item IV - Income statement)
Type 2007 2008 (EUR millions)
Loans 15 13
Other financial services 22
TOTAL 17 15
b. Detailed analysis of fee and commission expense (Item V - Income statement)
Type 2007 2008 (EUR millions)
Loans (4) (1)
Derivatives transactions (2) (2)
Securities transactions 0 (3)
Other financial services (12) (9 )
TOTAL (18) (15)
222 DEXIA CREDIT LOCAL / Annual Report 2008 FINANCIAL STATEMENTS Notes to the financial statements 5
5.4 ANALYSIS OF GAINS (LOSSES) ON SECURITIES PORTFOLIOS (ITEM VI - INCOME STATEMENT)
2007 2008 (EUR millions)
Gains (losses) on:
Securities held for trading 780 (344)
Securities available for sale (1) (806) (3,133)
Foreign exchange transactions 54 104
Other financial instruments 0 414
Impairment 00
TOTAL 28 (2,958)
(1) This line includes all gains and losses on disposals and charges to/recoveries from provisions on the portfolios concerned and all gains and losses on the portfolio securities activity. The portfolios of securities held for trading and available for sale suffered from the tremendous volatility and illiquidity of the financial markets
Gains and losses on disposal and changes in provisions for impairment on securities available for sale were as follows:
2007 2008 (EUR millions)
• Charges to impairment (839) (3,116)
• Recoveries of impairment 33 3
Subtotal (806) (3,113)
• Disposal losses (49) (95)
• Disposal gains 49 75
Subtotal 0 (20)
TOTAL (806) (3,133)
5.5 GENERAL OPERATING EXPENSES (ITEM IX - INCOME STATEMENT) a. Detailed analysis
2007 2008 (EUR millions)
Payroll costs (192) (211) FINANCIAL STATEMENTS FINANCIAL STATEMENTS
• Salaries and wages (129) (139)
• Social security (63) (72)
Other administrative expenses (56) (111)
• Taxes and duties (21) (22)
• Other administrative expenses (35) (46)
• Provision for restructuring 0 (43)
TOTAL (248) (322)
Annual Report 2008 / DEXIA CREDIT LOCAL 223 FINANCIAL STATEMENTS 5 Notes to the financial statements
b. Employee information
2007 2008
Total employees at December 31 1,612 1,737
• E xecutive management 159 160
• O ther management 1,019 1,107
• A dministrative personnel 434 470
Payroll cost (EUR millions) (192) (206)
• S alaries and benefits (129) (130)
• P ayroll taxes (38) (53)
• E mployer contribution to discretionary benefit plans 00
• O ther payroll costs (24) (22)
• P ension cost (1) (1)
Provisions for pensions (EUR millions) 0 (5)
• C harges (+) (2) (5)
• R ecoveries (-) 20
TOTAL (192) (211)
5.6 COST OF RISK (ITEM XI - INCOME STATEMENT)
Charges and losses Reversals and recoveries Total 2008 (EUR millions)
Provisions for impairment and losses on loans (61) 12 (49)
Provisions on financing commitments (127) 32 (95)
Provisions for risks (188) 0 (188)
Regulated reserves (2) 3 1
TOTAL (378) 47 (331)
The cost of risk went up sharply in 2008. This included EUR 37 million in provisions recognized on receivables from Lehman Brothers, and EUR 47 million in industry-specific reserves set aside to cover the effects of the crisis on the specific activities in the portfolio.
An additional provision of EUR 186 million was set aside to reflect the entire impairment loss on the Dexia Holdings Inc shares resulting from the sale of FSA to the Assured Guaranty Group.
224 DEXIA CREDIT LOCAL / Annual Report 2008 FINANCIAL STATEMENTS Notes to the financial statements 5
5.7 NET GAIN (LOSS) ON LONG-TERM INVESTMENTS (ITEM XII - INCOME STATEMENT) a. Detailed analysis
2007 Total 2008 Total
Related parties Other Related parties Other (EUR millions)
Provisions for impairment (1) (1) (1) (2) (2,152) (244) (2,396)
Recoveries of impairment 0 2 2055
Subtotal (1) 1 0 (2,152) (239) (2,391)
Disposal losses 0 (1) (1) 0 (6) (6)
Disposal gains 15 18 33 0 33 33
Subtotal 15 17 32 0 27 27
TOTAL 14 18 32 (2,152) (212) (2,364)
(1) Including EUR 2,152 million and EUR 205 million, respectively, for impairment of the shares of Dexia Holdings Inc. and Kommunalkredit Austria. b. Analysis by type of investment
2007 2008 (EUR millions)
Investments in associates 18 (212)
Investments in related parties 14 (2,152)
Other long-term equity investments 00
Securities held to maturity 00
Building 00
TOTAL 32 (2,364)
5.8 OTHER BANKING INCOME AND EXPENSES a. Other banking income (Item VII - Income statement)
2007 2008 FINANCIAL STATEMENTS (EUR millions)
Other banking income 03
Other miscellaneous income 23
TOTAL 26 b. Other banking expenses (Item VIII - Income statement)
2007 2008 (EUR millions)
Other banking expenses (1) (4)
Other miscellaneous expenses 00
TOTAL (1) (4)
Annual Report 2008 / DEXIA CREDIT LOCAL 225 FINANCIAL STATEMENTS 5 Notes to the financial statements
5.9 NON-RECURRING ITEMS (ITEM XIII - INCOME STATEMENT)
2007 2008 (EUR millions)
Non-recurring income 00
Non-recurring expenses 00
5.10 CORPORATE INCOME TAX (ITEM XIV - INCOME STATEMENT)
a. Analysis of tax credit (expense)
2007 2008 (EUR millions)
Corporate income tax (32) (37)
Deferred taxes 139 486
Other 00
TOTAL 107 449
In 2008, the tax rate used for France amounted to 34.43%. The tax rate applicable to foreign branches is generally lower.
b. Exceptions to the general valuation principles, as provided for by tax law
2007 2008 (EUR millions)
Regulated reserves 4 (1)
• Provisions for medium- and long-term loan losses 90
• Provisions for investment (5) (1)
Accelerated tax depreciation 2 (5)
c. Tax consolidation
The Dexia SA Établissement Stable in France became head of the tax consolidation group in 2002. Dexia Credit Local is part of that group.
226 DEXIA CREDIT LOCAL / Annual Report 2008 FINANCIAL STATEMENTS Notes to the financial statements 5
5.11 COMPENSATIONS PAID TO THE MEMBERS OF THE MANAGEMENT BOARD AND THE BOARD OF DIRECTORS
(EUR millions) Compensation paid to the members of the Management Board and the Board of Directors of the Company in respect of their functions within the Company and its subsidiaries and associated companies
Management Board 5
Board of Directors 0
TOTAL 5
Outstanding amounts owed, contingent liabilities in their favor and other material commitments from which they benefit.
Management Board 5
Board of Directors 0
TOTAL 5
All advances and loans granted during the year were extended under the conditions traditionally applied to members of management bodies.
5.12 ANALYSIS BY GEOGRAPHICAL REGION AND LINE OF BUSINESS a. Analysis by geographical region
Net banking income Gross operating income Net income (EUR millions)
France 30 (233) (2,602)
Foreign branches (2,373) (2,458) (2,335)
TOTAL (2,343) (2,691) (4,937) b. Analysis by line of business
Net banking income Gross operating income Net income
2007 2008 2007 2008 2007 2008 (EUR millions)
Public & Wholesale Banking 336 (916) 142 (1,139) 102 (3,614)
Personal Financial Services 000000 FINANCIAL STATEMENTS FINANCIAL STATEMENTS Asset Management 000000
Treasury and Financial Markets (354) (1,911) (394) (1,961) (317) (1,823)
Unallocated equity 6 484 (33) 409 534 500
TOTAL (12) (2,343) (285) (2,691) 319 (4,937)
Annual Report 2008 / DEXIA CREDIT LOCAL 227 FINANCIAL STATEMENTS 5 Notes to the financial statements
( 6. NOTES ON THE LONG-TERM EQUITY INVESTMENTS
Company Capital stock Additional paid-in Last year Last year (EUR) capital, reserves revenues or net net income and retained banking income (loss) earnings
1 - Details concerning the subsidiaries and associates whose carrying amount exceeds 1% of Dexia Credit Local’s capital stock
A - Subsidiaries (50% to 100% owned) Dexia CLF Immo 1 Passerelle des Reflets - Tour Dexia La Défense 2 - 92913 La Défense 2,364,700 13,250,196 793,822 617,474 Dexia Credit Local Asia Pacific Pty. Ltd. Level 23, 207 Kent Street, Sydney, NSW, 2000 26,269,120 1,344,325 197,277,599 (4,295,070) Dexia Sabadell (*) Paseo de las Doce Estrallas 4 - E - 28042 Madrid 237,061,000 59,803,745 84,980,033 48,747,141 Dexia Crediop (*) Via Venti settembre N. 30 - I00187 Rome 450,210,000 481,180,355 182,708,471 136,287,105 Dexia Holdings Inc. 31 West 52nd Street - NY 10019 New York 1,889,676,916 579,046,599 30,390,637 25,276,551 Dexia Kommunalbank Deutschland Charlottenstr. 82 - D - 10969 Berlin 162,500,000 127,600,000 3,000,000 400,000 Dexia Municipal Agency 1 Passerelle des Reflets - Tour Dexia La Défense 2 - 92913 La Défense 946,000,000 104,397,000 244,512,000 91,265,000 Floral 1 Passerelle des Reflets - Tour Dexia La Défense 2 - 92913 La Défense 22,867,353 34,478,553 3,554,556 2,302,729 Dexia Israel Bank Ltd. 3 Heftman Str. - 64737 Tel-Aviv Israel 33,320,575 55,266,315 24,137,077 10,205,728 SISL 180, rue des Aubépines L 1145 - Luxembourg 337,650,000 438,202,671 67,421,383 11,540,299 Dexia Sofaxis Route de Creton - 18110 Vasselay 613,020 46,295,820 26,151,425 16,768,951 CBX. IA 1 1 Passerelle des Reflets - Tour Dexia La Défense 2 - 92913 La Défense 1,130,004 977,358 (987,439) (999,997) CBX. IA 2 1 Passerelle des Reflets - Tour Dexia La Défense 2 - 92913 La Défense 141,140,624 (49,865,069) 19,157,679 1,365,050 Dexia Flobail 1 Passerelle des Reflets - Tour Dexia La Défense 2 - 92913 La Défense 56,100,175 (70,041,313) 11,329,482 (26,970,910) Dexia Kommunalkredit Bank Türkenstrasse 9 - A - 1092 Vienna 220,000,000 238,746,116 29,706,996 (139,120,917) Dexia CLF Banque 1 Passerelle des Reflets - Tour Dexia La Défense 2 - 92913 La Défense 7,625,000 4,199,000 10,207,000 892,000 Dexia Bail 1 Passerelle des Reflets - Tour Dexia La Défense 2 - 92913 La Défense 4,550,000 (734,554) 2,097,448 695,448 Dexia CLF Regions Bail 1 Passerelle des Reflets - Tour Dexia La Défense 2 - 92913 La Défense 7,625,000 5,373,797 4,029,912 1,790,620
B - Associates (10% to 50% owned) Crédit du Nord 28, Place Rihour - 59800 Lille 740,263,248 602,688,000 931,564,000 168,230,000 Dexia Epargne Pension 76 rue de la Victoire - 75009 Paris 193,674,375 23,380,055 388,953,899 (85,168,055) Exterimmo 100-104 Avenue de France- 75013 Paris 50,000,000 0 Not available Not available Kommunalkredit Austria Türkenstrasse 9 - A - 1092 Vienna 18,530,850 276,349,193 38,667,111 24,608,386 (*) Companies that produce financial statements in IFRS only
2 - General information
A - Other companies not included in Section 1-A
French companies
Foreign companies
B - Other companies not included in Section 1-B and other long-term investments in companies less than 10% owned
French companies
Foreign companies
228 DEXIA CREDIT LOCAL / Annual Report 2008 FINANCIAL STATEMENTS Notes to the financial statements 5
Interest Carrying amount Dividend received Loans and advances Guarantees Activity in equity of securities held by Dexia Credit Local granted by given by (%) Gross Net during the year Dexia Credit Local Dexia Credit Local
100,00% 33,691,141 16,232,370 0 0 150,162,282 Real estate financing
100,00% 26,269,120 26,269,120 0 1,018,898,445 0 Bank, credit institution
60,00% 142,236,600 142,236,600 0 2,155,841, 749 5,702,946,754 Bank, credit institution
70,00% 581,223,585 581,223,585 37,866,500 1,417,156,078 5,158,147,965 Bank, credit institution
90,00% 2,151,508 476 0 0 148,755,934 0 Credit enhancement
100,00% 253,339,375 253,339,375 5,000,000 1,592,675,648 0 Bank, credit institution
100,00% 945,999,909 945,999,909 70,080,000 3,500,000 000 5,338,380,825 Société de crédit foncier Capital markets financing on behalf 100,00% 23,080,690 23,080,690 0 0 0 of the partent company
65,31% 56,002,387 56,002,387 579,488 86,564,123 173,465,763 Bank, credit institution
100,00% 353,514,002 353,514,002 400,000,000 86,598,455 0 Management of equity interests Holding company for investments 99,98% 50,056,308 50,056,308 13,821,233 0 0 in insurance brokerages Acquisition of land, buildings and 100,00% 40,314,880 40,314,880 0 24,935,028 64,972 real property rights
70,85% 100,000,058 100,000,058 0 175,481,051 94,518,950 Real estate lease financing
100,00% 39,127,397 39,127,397 0 667,671,155 1,462,673,682 Real estate lease financing
50,84% 160,226,100 160,226,100 0 4,087,699 048 1,771,105,155 Holding company
80,00% 6,738,631 6,738,631 4,199,948 1,899,201,495 10,906,504,624 Bank, credit institution
100,00% 5,121,549 5,121,549 0 115,495,863 135,126,980 Real estate lease financing
100,00% 7,941,401 7,941,401 104,999 358,182,471 414,113,304 Real estate lease financing FINANCIAL STATEMENTS FINANCIAL STATEMENTS
10,00% 184,463,311 184,463,311 18,975,048 0 0 Bank, credit institution Capital engineering, life insurance 25,35% 60,159,075 25,383,075 0 0 0 and other insurance Acquisition of land, buildings and 40,00% 20,000,000 20,000,000 0 0 0 real property rights
49,00% 205,228,070 0 2,996,301 0 0 Bank, credit institution
12,763,927 11,692,672 265,957 91,420,228 0
3,789,927 3,789,927 1,082,505 18,597,233,274 141,685,689
28,750,515 22,775,020 480,911 715,589,803 591,545,202
884,954 884,954 0 0 0
Annual Report 2008 / DEXIA CREDIT LOCAL 229 FINANCIAL STATEMENTS 5 Notes to the financial statements
( 7. DEXIA CREDIT LOCAL SECURITIES PORTFOLIOS
7.1 AVAILABLE-FOR-SALE PORTFOLIO
Market value Portfolio value Unrealized Unrealized Net carrying (EUR millions) gains losses amount
Bonds and other fixed income securities
French bonds 2,072 2,140 0 0 2,072
• Public sector bodies 99 105 0 0 99
Central governments 00000
Local authorities 99 105 0 0 99
• Other issuers 1,973 2,036 0 0 1,973
Credit institutions 1,578 1,619 0 0 1,578
Other private companies 395 417 0 0 395
Super-subordinated perpetual notes 00000
Foreign bonds 60,063 62,986 72 0 59,991
• Public sector bodies 26,848 27,581 33 0 26,815
Central governments 1,777 1,862 7 0 1,770
Local authorities 25,071 25,719 26 0 25,045
• Other issuers 33,215 35,405 39 0 33,176
Credit institutions 11,690 12,443 8 0 11,682
Other private companies 21,525 22,962 31 0 21,494
Super-subordinated perpetual notes 00000
TOTAL BONDS AND OTHER FIXED INCOME SECURITIES 62,135 65,126 72 0 62,063
Equities and other variable income securities
• Mutual funds 285 344 0 0 285
• Equities 21 0 7 0 14
TOTAL EQUITIES AND OTHER VARIABLE INCOME SECURITIES 306 344 7 0 299
Government securities
• Public sector bodies 2,783 3,019 35 0 2,748
Central governments 2,130 2,283 34 0 2,096
Local authorities 653 736 1 0 652
TOTAL GOVERNMENT SECURITIES 2,783 3,019 35 0 2,748
TOTAL 65,224 68,489 114 0 65,110
230 DEXIA CREDIT LOCAL / Annual Report 2008 FINANCIAL STATEMENTS Notes to the financial statements 5
7.2 HELD-TO-MATURITY PORTFOLIO
Redemption Premium Provisions Net carrying (EUR millions) value (discount) for impairment amount Bonds and other fixed income securities
French bonds 75 0 0 75
• Public sector bodies 0000
Central governments 0 0 0 0
Local authorities 0 0 0 0
• Other issuers 75 0 0 75
Credit institutions 25 0 0 25
Other private companies 50 0 0 50
Super-subordinated perpetual notes 0 0 0 0
Foreign bonds 1, 123 3 0 1, 126
• Public sector bodies 977 3 0 980
Central governments 252 0 0 252
Local authorities 725 3 0 728
• Other issuers 146 0 0 146
Credit institutions 90 0 0 90
Other private companies 56 0 0 56
Super-subordinated perpetual notes 0 0 0 0
TOTAL BONDS AND OTHER FIXED INCOME SECURITIES 1,198 3 0 1, 201 Government securities
• Public sector bodies 180 0 0 180
Central governments 98 0 0 98
Local authorities 82 0 0 82
TOTAL GOVERNMENT SECURITIES 180 0 0 180 FINANCIAL STATEMENTS FINANCIAL STATEMENTS TOTAL 1, 378 3 0 1, 381
Annual Report 2008 / DEXIA CREDIT LOCAL 231 FINANCIAL STATEMENTS 5 Notes to the financial statements
7.3 HELD-FOR-TRADING PORTFOLIO
Cost (1) Market value (1) (EUR millions)
Bonds and other fixed income securities
French bonds 209 199
• Public sector bodies 00
Central governments 00
Local authorities 00
• Other issuers 209 199
Credit institutions 102 104
Other private companies 107 95
Foreign bonds 21,541 19,005
• Public sector bodies 1,639 1,602
Central governments 470 448
Local authorities 1,169 1,154
• Other issuers 19,902 17,403
Credit institutions 3,897 3,493
Other private companies 16,005 13,910
TOTAL BONDS AND OTHER FIXED INCOME SECURITIES 21,750 19,204
Government securities
• Public sector bodies 50 48
Central governments 50 48
Local authorities 00
TOTAL GOVERNMENT SECURITIES 50 48
TOTAL 21,800 19,252
(1) Cost and market value both include all accrued interest
232 DEXIA CREDIT LOCAL / Annual Report 2008 FINANCIAL STATEMENTS Statutory Auditors’ general report 5
Statutory Auditors’ general report
This is a free translation into English of the Statutory A uditors’ report in French, and is provided solely for the convenience of English-speaking readers.
This report includes information specifically required by French law and this is presented after the opinion on the financial statements. This information includes an explanatory paragraph discussing the auditors’ assessment of certain significant accounting matters. These assessments were made for the purpose of issuing an opinion on the financial statements taken as a whole and not to provide separate assurance on individual account captions or on information taken outside of the financial statements. The report also includes information relating to the specific verification of information in the management report.
This report should be read in conjunction with French law and professional auditing standards applicable in France.
To the Shareholders,
In compliance with the assignment entrusted to us by your Shareholder’s Annual General Meeting, we hereby report to you, for the year ended December 31, 2008, on:
• the audit of the accompanying financial statements of Dexia Credit Local;
• the justification of our assessments;
• the specific verifications and information required by law.
These financial statements have been approved by the Board of Directors. Our role is to express an opinion on these financial statements based on our audit.
I OPINION ON THE FINANCIAL STATEMENTS
We conducted our audit in accordance with professional standards applicable in France. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, using sample testing techniques or other selection methods, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made, as well as evaluating the overall financial statements presentation. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
In our opinion, the financial statements give a true and fair view of the assets and liabilities and of the financial situation of Dexia Credit Local as of December 31, 2008, and of the results of its operations for the year then ended, in accordance with the accounting rules and principles applicable in France. FINANCIAL STATEMENTS FINANCIAL STATEMENTS Without qualifying our opinion, we draw your attention to note 1.1 of the financial statements regarding the impact of the financial and liquidity crisis on the financial and liquidity situation of Dexia Credit Local.
II JUSTIFICATION OF ASSESSMENTS
The financial and economic crisis, which resulted in the dramatic increase of volatility and strong reduction of liquidity on certain markets, and by a difficulty to apprehend financial and economic outlooks has several impacts on credit institutions, in particular on their activities, their results, their risks and their refinancing, as exposed on note 1.1 of the financial statements. This situation creates specific conditions this year in the accounts completion, particularly as regards accounting estimates. It is in this context and in accordance with article L. 823-9 of the French Commercial Code regarding the basis of our opinion that we bring to your attention the following points:
• As mentioned in note 1.2.b of the notes to the annual financial statements, your Company uses internal models to value financial instruments that are not listed on liquid markets in the more difficult context of the financial crisis. Our procedures consisted in reviewing the control procedures for the models used, assessing the underlying data and assumptions, and verifying that the risks and results related to these instruments were taken into account.
Annual Report 2008 / DEXIA CREDIT LOCAL 233 FINANCIAL STATEMENTS 5 Statutory Auditors’ general report
• We have reviewed as well the control procedures relating to the identification of financial instruments that can no longer be traded on an active market or for which market parameters could no longer be observed, and the methodology used for their valuation as a consequence.
• As discussed in note 1.2 of the notes to the annual financial statements:
− Your Company records both specific provisions and general reserves for credit risks inherent to its activities (sections on “Customer loans,” “Provisions” and “Position management - Credit derivatives;”);
− Your company calculates any impairment of its available for sale securities portfolio based on their market value, net of any micro-hedges, (section on “Securities transactions - Securities available for sale.”)
− Your Company calculates any impairment of its portfolio securities, subsidiaries, associates, participating interests and other long-term investments on the basis of their going-concern value or their value in use (sections on “Securities transactions - Portfolio securities,” and “Securities transactions – Subsidiaries, associates, participating interests and other long-term investments”);
− Your company calculates provisions for retirement and other post-employment benefits in accordance with local regulations, by entity, as discussed in the section on “Provisions and reserves.”
We have assessed the reasonableness of these estimates taking into account the specific context of the current crisis.
These assessments were made in the context of our audit of the financial statements, taken as a whole, and therefore contributed to the opinion we formed and which is expressed in the first part of this report.
III SPECIFIC INFORMATION AND VERIFICATIONS
We have also performed the specific verifications required by French law.
We have no matters to report regarding the following:
• the fair presentation and the conformity with the financial statements of the information given in the Board of Directors’ report and in the documents addressed to the shareholders with respect to the financial situation and the financial statements;
• the fair presentation of the information presented in the Board of Directors’ report relating to remunerations and benefits granted to the relevant directors together with any other commitments made in their favour in connection with, or subsequent to, their appointment, termination or change in current function.
In accordance with French law, we have ensured that the required information concerning the purchase of investments and controlling interests has been properly disclosed in the Board of Directors’ report.
Courbevoie and Neuilly-sur- Seine, April 14, 2009
The Statutory Auditors
MAZARS DELOITTE & ASSOCIES
Hervé HELIAS François ARBEY José-Luis GARCIA
234 DEXIA CREDIT LOCAL / Annual Report 2008 6 Shareholders’ Meeting
Statutory Auditors’ special report Resolutions proposed on regulated agreements and to the Shareholders’ Meeting commitments 236 of May 14, 2009 237 SHAREHOLDERS’ MEETING
Annual Report 2008 / DEXIA CREDIT LOCAL 235 SHAREHOLDERS’ MEETING 6 Statutory Auditors’ special report on regulated agreements and commitments
Statutory Auditors’ special report on regulated agreements and commitments
This is a free translation into English of the Statutory Auditor’s report issued in the French language and is provided solely for the convenience of English speaking readers. This report should be read in conjunction with, and construed in accordance with, French law and professional auditing standards applicable in France.
To the shareholder,
In our capacity as the Statutory Auditors of Dexia Credit Local, we hereby present to you our report on regulated agreements and commitments. We are not responsible for ascertaining whether any agreement and commitments exist but for informing you, based on the information provided to us, of terms and conditions of those which we were notified. It is not our role to determine whether they are beneficial or appropriate. It is your responsibility, under the terms of Article R.225-31 of the French Commercial Code, to assess the benefits arising from these agreements prior to their approval.
We performed our work in accordance with professional standards applicable in France. Those standards require that we plan and perform all procedures deemed necessary to verify that the information provided to us is consistent with the underlying documents from which it was extracted.
Agreements and commitments authorized during the year.
In accordance with Article L.225-40 of the French Commercial Code, we have been notified of one agreement that has been authorized by the Board of Directors.
Supplemental pension commitment Gérard Bayol joined Dexia SA as its Chief Executive Officer, with effect from January 1, 2007, as part of the board of managers of the Dexia Group who are eligible to receive a supplemental pension annuity that is equal to 75% of his average fixed compensation during the two years preceding his retirement, less any amounts he may receive of the legal pension.
This commitment was presented to and approved by the Board of Directors at its February 22, 2008 meeting.
Continuing agreements and commitments entered into in prior years
Moreover, in accordance with Article R.225-30 of the French Commercial Code, we have been advised that the execution of the following agreements and commitments, approved during previous years, has been carried over into the past year.
Tax group agreement On November 19, 2002, the Supervisory Board authorized Dexia Credit Local to enter into a new tax group agreement. Effective January 1, 2002 and for a period of five years (renewable), the head of the French tax group has been Dexia Etablissement Stable. This entity holds 95% of the share of Dexia Credit Local following restructuring operations (unwinding of cross-shareholdings between Dexia Credit Local and CCB and merger of Dexia France) and a capital increase, both carried out in 2000.
In accordance with the applicable tax regulations, the agreement provides that the new head of the tax group benefits from any related tax savings instead of Dexia Credit Local. The change of the head of the tax group does not affect Dexia Credit Local subsidiaries.
Dexia Municipal Agency The “declaration of support” agreement of September 16, 1999 between Dexia Credit Local and Dexia Municipal Agency, which was approved by the Combined Shareholders’ Meeting of January 10, 2000, benefits the holders of bonds issued by Dexia Municipal Agency. This agreement stipulates that Dexia Credit Local will hold over 95% of the share capital of Dexia Municipal Agency on a long-term basis. In addition, Dexia Credit Local will ensure that Dexia Municipal Agency develops its activity in compliance with the provisions of Articles L.515-13 through L. 515-33 of the French Financial and Monetary Code concerning “société de crédit foncier” mortgage credit companies and has the financial resources it needs to meet its obligations.
Courbevoie and Neuilly-sur-S eine, April 14, 2009
The Auditors MAZARS DELOITTE & ASSOCIES
Hervé HELIAS François ARBEY José-Luis GARCIA
236 DEXIA CREDIT LOCAL / Annual Report 2008 SHAREHOLDERS’ MEETING Resolutions proposed to the Shareholders’ Meeting of May 14, 2009 6
Resolutions proposed to the Shareholders’ Meeting of May 14, 2009
FIRST RESOLUTION: APPROVAL OF THE FINANCIAL FOURTH RESOLUTION: DISCHARGE FOR MEMBERS STATEMENTS OF THE MANAGEMENT BODIES
The Shareholders’ Meeting, having heard the reports of the Board of By virtue of the adoption of the preceding resolutions, the Shareholders’ Directors, the Chairman of the Board of Directors, and the Statutory Meeting gives full and unconditional discharge to the directors and officers Auditors, approves the information contained in the management report of the Company for the performance of their duties during the year ended and the financial statements at December 31, 2008 as presented, as well December 31, 2008. as all the transactions set out in these financial statements or mentioned in the reports, showing, a net loss of EUR 4,936,685,152.72. FIFTH RESOLUTION: APPROPRIATION OF NET INCOME
SECOND RESOLUTION: APPROVAL The Shareholders’ Meeting resolves to allocate the EUR 4,936,685,152.72 OF THE CONSOLIDATED FINANCIAL STATEMENTS net loss for the year in the following manner: • EUR 4,326,491,744.21 to the blocked reserve account created to purge The Shareholders’ Meeting, having heard the reports of the Board of a portion of the losses for the year ended December 31, 2008; Directors, the Chairman of the Board of Directors and the Statutory Auditors, approves the information contained in the management • EUR 302,445,347.96 to general reserves; report and the consolidated financial statements at December 31, 2008 as presented, as well as all the transactions set out in these consolidated • EUR 82,649,174.42 to the legal reserve; and financial statements or mentioned in the reports, showing a net loss, • EUR 225,098,886.13 to additional paid-in capital. Group share of EUR 3,555,799,409. Following these allocations, the blocked reserve and the general reserves will be equal to zero, the legal reserve will amount to EUR 50,051,310.28 THIRD RESOLUTION: APPROVAL OF ANY REGULATED and additional paid-in capital will amount to EUR 861,932,618.14. AGREEMENTS AND COMMITMENTS
The Shareholders’ Meeting, having heard the Statutory Auditors’ special report on regulated agreements and commitments governed by Article L. 225-38 of the French Commercial Code, approves, pursuant to Article L. 225-40 of the Commercial Code, all regulated agreements and commitments mentioned therein.
Pursuant to Article 243 bis of the French General Tax Code, the Shareholders’ Meeting recalls the dividends paid in respect of the three previous years:
(EUR) 2005 2006 2007
Net dividend per share 2.88 4.49 (1) 4.55
Amount per share eligible for the allowance (Article 158,3-2 of the General Tax Code) 2.88 (2) 4.49 (2) 4.55 (2)
Total amount eligible for the tax allowance (Article 158,3-2 of the General Tax Code) 250,691,780.16 (2) 390,835,448.93 (2) 396,058,194.35 (2) SHAREHOLDERS’ MEETING (1) Including EUR 1.04 under the terms of the extraordinary session of the Shareholders’ meeting held September 4, 2006. (2) At a rate of 40%.
Annual Report 2008 / DEXIA CREDIT LOCAL 237 SHAREHOLDERS’ MEETING 6 Resolutions proposed to the Shareholders’ Meeting of May 14, 2009
SIXTH RESOLUTION: CERTIFICATION NINTH RESOLUTION: RATIFICATION OF THE FINANCIAL STATEMENTS OF THE REPLACEMENT OF A DIRECTOR
Pursuant to Article L. 822-14 of the French Commercial Code, the The Shareholders’ Meeting ratifies the February 4, 2009 decision of Shareholders’ Meeting acknowledges that the financial statements and the Board of Directors to appoint Pascal Poupelle as director, to replace consolidated financial statements for the year ended December 31, 2008 Gérard Bayol, who has resigned, for the remainder of the latter’s term of are certified by the Statutory Auditors: office, i.e. through the Shareholders’ Meeting held to approve the financial statements for the year ending December 31, 2010. • Hervé Hélias , partner , representing the firm Mazars; and
• François Arbey and José-Luis Garcia, partners, representing the firm Deloitte & Associés. TENTH RESOLUTION: CONFIRMATION OF THE APPOINTMENT OF A DIRECTOR
SEVENTH RESOLUTION: RATIFICATION In accordance with the provisions of Article 13 of the by-laws, the OF THE REPLACEMENT OF A DIRECTOR Shareholders’ Meeting confirms the appointment of Antoine Rufenacht as director. The Shareholders’ Meeting ratifies the February 4, 2009 resolution of the Board of Directors to appoint Philippe Rucheton as director, to replace Jacques Guerber, who has resigned, for the remainder of the latter’s term ELEVENTH RESOLUTION: DIRECTORS’ FEES of office, i.e. through the Shareholders’ Meeting held to approve the financial statements for the year ending December 31, 2010. The Shareholders’ Meeting resolves to reduce by 25% the total budget allocated annually to the Board of Directors for directors’ fees, and to set the total value at EUR 225,000.
EIGHTH RESOLUTION: RATIFICATION This amount shall remain in effect until such time as the Shareholders’ OF THE REPLACEMENT OF A DIRECTOR Meeting shall resolve otherwise. The Shareholders’ Meeting ratifies the February 4, 2009 decision of the Board of Directors to appoint Christian Costrejean as director, to replace TWELFTH RESOLUTION: POWERS TO CARRY OUT Alain Quinet, who has resigned, for the remainder of the latter’s term of FORMALITIES office, i.e. through the Shareholders’ Meeting held to approve the financial statements for the year ending December 31, 2010. The Shareholders’ Meeting gives full powers to the bearer of the original, a copy or an excerpt of the minutes of the Meeting to perform all legal filing and publication formalities.
238 DEXIA CREDIT LOCAL / Annual Report 2008 7 Additional information
Legal and administrative List of information published information 240 or released during the previous twelve months (prepared 1. General information concerning Dexia Credit Local ...... 240 March 20, 2009) 245
2. Outlook ...... 242
Cross-reference table 249
Statutory Auditors 243
Statement of the person responsible for the registration document (document de référence) 244 ADDITIONAL INFORMATION
Annual Report 2008 / DEXIA CREDIT LOCAL 239 ADDITIONAL INFORMATION 7 Legal and administrative information
Legal and administrative information
( 1. GENERAL INFORMATION CONCERNING DEXIA CREDIT LOCAL
Background Dexia Credit Local is one of the three principal entities of the Dexia group, the Franco-Belgian group created in 1996 through the merger of Crédit Local de France and Crédit Communal de Belgique, two credit institutions specialized in the financing of local governments and participants in local economies.
Legal name As specified in its by-laws, the Company’s legal name is Dexia Credit Local. Trade name The Company uses the trade name Dexia Public Finance Bank – DPFB.
Country of origin The Company’s country of origin is France. Incorporation date and term It was incorporated in Paris on August 28, 1989 for a term of 99 years.
Registration It is registered with the Clerk of the Commercial Court of Nanterre under 351 804 042, and its APE business identifier code is 6492Z.
Registered office Since March 1, 2007, the Company’s registered office and chief place of business is: Tour Dexia La Défense 2 – 1, passerelle des Reflets – La Défense (92913) (telephone: +33 (0)1 58 58 77 77).
Business structure Dexia Credit Local is a French corporation (société anonyme) with a Board of Directors, as governed by Articles L. 225- 17 Applicable legislation et seq. of the French Commercial Code and Article L. 511-1 of the French Monetary and Financial Code.
Business purpose The purposes for which the Company is established are: - to conduct in France and abroad any and all credit operations promoting local development and, in particular, local amenities, mainly for the benefit of local authorities and public corporations, local authority-backed agencies, local semi- public companies, concessionary public service companies and, more generally, agencies carrying out development or housing schemes, or which have entered into an agreement with a local authority for the construction or management of local amenities; - to carry out, for the benefit of the above parties, insurance brokerage activities and any consulting and assistance work in matters of financial management, financial engineering and, more generally, to offer any and all services to facilitate their financial management subject to the legislative provisions relating to the exercise of certain regulated professions; - to receive cash deposits from local authorities and local public corporations in accordance with the regulations applicable to such bodies; - to hold the funds lent to customers, pending their use; - to issue debt securities in France and abroad in order to fund the Company’s lending operations. For this purpose, the Company may: - create subsidiaries; - hold interests in companies whose business is likely to contribute to the Company’s business purpose; - establish and manage reserve funds securing loans granted to the agencies mentioned in the first paragraph of this Article. The Company may also carry out any and all transactions falling within the scope of its business purpose on behalf of and on the instructions of agencies and institutions set up to serve the public interest.
240 DEXIA CREDIT LOCAL / Annual Report 2008 ADDITIONAL INFORMATION Legal and administrative information 7
Financial year The Company’s financial year begins January 1 and ends December 31.
Appropriation of net income (loss) Net income for the year, less any prior-year losses and the appropriations provided for in Article 37 of the by-laws, (5% for the legal reserve prescribed by law) plus any retained earnings, is available for distribution to shareholders. The Shareholders’ Meeting determines the fraction of income available for distribution to be paid out to shareholders in the form of dividends, based on the recommendations made by the Board of Directors. The balance of income available for distribution, if any, is allocated either to unappropriated retained earnings or to one or more reserves, by decision of the Shareholders’ Meeting, which also decides on the use to be made of said reserves. The Shareholders’ Meeting may also decide to pay dividends to shareholders out of distributable reserves, but only after the year’s income available for distribution has been distributed in full. In this case, the related resolution must clearly indicate the reserves against which the dividends are to be charged. The terms and conditions of payment of the dividend will be decided by the Shareholders’ Meeting or, failing that, by the Board of Directors, but dividends must be paid within nine months of the fiscal year-end, unless this period is extended by order of the French Commercial Court ruling on an application by the Board of Directors. Notwithstanding the foregoing and in the cases provided for by applicable legislation, the Board of Directors is authorized to pay interim dividends to be deducted from the total dividends for the year just ended or the current year, prior to the approval of the related financial statements by the Shareholders’ Meeting. The amounts and payment dates of such interim dividends will be decided by the Board of Directors. At the time of determination of the final dividend, the Shareholders’ Meeting will be responsible for verifying that the provisions of the above-mentioned paragraph have been fully complied with in respect of the total dividend (including any interim dividend).
Shareholders’ Meetings Notice of Shareholders’ Meetings Shareholders’ Meetings are called in accordance with applicable regulations. They are conducted at the Company’s registered office or any other location mentioned in the notice of meeting. All shareholders are entitled to obtain copies of the documents they need to be able to make informed decisions about the matters put to the vote at Shareholders’ Meetings and to assess the management and control of the Company. The types of documents concerned and the rules governing their transmission to or consultation by shareholders are prescribed by law and the applicable regulations. Right to attend Shareholders’ Meetings All shareholders are entitled to attend General Meetings upon presentation of a proof of identity, provided that they have settled all capital calls relating to their shares. Shareholders may choose to be represented by another shareholder. Proxies should be filed at the registered office at least five days before the Shareholders’ Meeting. Voting rights Shares carry voting rights based on the proportion of capital represented, with each share being entitled to one vote. Each person present at the Shareholders’ Meeting is entitled to exercise one vote for each share held and each share for which he or she holds a proxy.
Place where Company’s legal All documents and information concerning the Company may be consulted at its registered office. Please address any documents may be consulted requests to: Responsibility for information Didier Casas, Secretary General and member of the Management Board (+33 (0)1 58 58 58 70), Jean Le Naour, Chief Financial Officer and member of the Management Board (+33 (0)1 58 58 58 50). ADDITIONAL INFORMATION
Annual Report 2008 / DEXIA CREDIT LOCAL 241 ADDITIONAL INFORMATION 7 Legal and administrative information
( 2. OUTLOOK
Recent events The Company was profoundly impacted by the financial crisis, and the significant deterioration of its financial position necessitated its being recapitalized by its parent company, Dexia SA, which had in turn received support from public authorities. With the dramatic deterioration of financial markets, funding terms and conditions were particularly problematic during the fourth quarter of 2008.
Trends In an environment marked by the financial crisis and the deterioration of the Company’s earnings, measures were implemented by both the Dexia group and Dexia Credit Local. These initiatives included a transformation plan intended to reduce the Company’s risk profile, focus Dexia’s businesses back on its traditional customer franchises, reduce costs, simplify the organization and strengthen corporate governance. The transformation plan is aimed at restoring the Dexia group and its Dexia Credit Local subsidiary to their traditional profitability, subject to the uncertainties still surrounding the financial markets.
Control To the best of the Company’s knowledge, no agreement exists whose implementation could, at a later date, bring about a change in its control.
Legal proceedings and arbitration For at least the last twelve months, the Company was not involved in any governmental or legal proceedings or arbitration (including any proceeding of which the Company is aware that is currently in suspense or that has been threatened) that could have or has recently had a material impact on the Company’s financial position or profitability.
Material changes Since the end of the last financial year for which audited financial statements have been released, the Company’s financial position has deteriorated considerably. Major initiatives were undertaken with regard to the organization of the Company’s businesses (notably through the implementation of a transformation plan) and the Company’s senior management was modified significantly (replacement of the Chairman of the Board of Directors and the Chief Executive Officer, and restructuring of the composition of the Management Board).
Major contracts The Company has not entered into any major contracts (other than those entered into in the normal course of business) that could confer upon any member of the group a right or an obligation that could have a material impact upon its capacity to carry out its obligations to the holders of the securities it has issued.
242 DEXIA CREDIT LOCAL / Annual Report 2008 ADDITIONAL INFORMATION Statutory Auditors 7
Statutory Auditors
The principal and substitute Statutory Auditors of Dexia Credit Local are:
Principal Statutory Auditors Substitute Statutory Auditors
• Mazars • Charles de Boisriou (appointment renewed at the Shareholders’ Meeting of May 16, 2008, (appointed in replacement of Yves Robin by the Shareholders’ Meeting for a six-year term) of May 16, 2008, for a six-year term)
Represented by Hervé Hélias, Partner Exaltis - 61, rue Henri Regnault - 92075 La Défense Cedex Exaltis 61, rue Henri Regnault - 92075 La Défense Cedex • BEAS • Deloitte & Associés (appointed in replacement of Benoît Desauw by the Shareholders’ (appointed in replacement of Caderas Martin by the Shareholders’ Meeting of May 16, 2008, for a six-year term) Meeting of May 16, 2008, for a six-year term) Represented by Mireille Berthelot, Partner Represented by François Arbey and José-Luis Garcia, Partners 7-9, Villa Houssay - 92524 Neuilly-sur-Seine Cedex 185, avenue Charles de Gaulle - 92524 Neuilly-sur-Seine Cedex
ANALYSIS OF FEES PAID TO THE STATUTORY AUDITORS
2007 2008
Mazars % Caderas % Mazars % Deloitte % (EUR thousands) Martin
Audit Statutory audit, certification, examination of company and consolidated financial statements 2,808 97.26% 920 100.00% 2,295 99.70% 2,082 97.88%
Other assignments 79 2.74% 0 0.00% 7 0.30% 45 2.12%
Subtotal 2,887 100.00% 920 100.00% 2,302 100.00% 2,127 100.00%
Other services Legal, tax and human resources advisory services 0 0.00% 0 0.00% 0 0.00% 0 0.00%
Internal audit 0 0.00% 0 0.00% 0 0.00% 0 0.00% Other (disclosure required when >10% of audit fees) 0 0.00% 0 0.00% 0 0.00% 0 0.00%
Subtotal 0 0.00% 0 0.00% 0 0.00% 0 0.00%
TOTAL 2,887 100.00% 920 100.00% 2,302 100.00% 2,127 100.00% ADDITIONAL INFORMATION
Annual Report 2008 / DEXIA CREDIT LOCAL 243 ADDITIONAL INFORMATION 7 Statement of the person responsible for the registration document (document de référence)
Statement of the person responsible for the registration document (document de référence )
This is a free translation into English of the Statutory Auditors’ report issued in the French language and is provided solely for the convenience of English- speaking readers. This report should be read in conjunction with, and construed in accordance with, French law and professional auditing standards applicable in France.
The person responsible for the Dexia Credit Local registration document ( document de référence) is:
Pascal Poupelle, Chief Executive Officer of Dexia Credit Local
DECLARATION OF THE PERSON RESPONSIBLE FOR THE REGISTRATION DOCUMENT
I the undersigned, Pascal Poupelle, Chief Executive Officer of Dexia Credit Local,
Hereby declare, after have taken all reasonable measures to this end, that, to the best of my knowledge, the information contained in the present registration document is accurate and contains no omission that would alter its meaning.
Hereby declare, to the best of my knowledge, that the financial statements have been prepared in accordance with all applicable accounting standards and present a true and fair view of the assets, financial position and earnings of the Company and of all the companies included in the scope of consolidation, and that the management report on page 11 of the present document presents a true and fair view of changes in the revenues, earnings and financial position of the Company and of all the companies included in the scope of consolidation and a description of the main risks and uncertainties to which they are exposed.
I have obtained an audit opinion from the Statutory Auditors in which they state that they have verified the information concerning the financial position and the accounts provided in the present document and have reviewed the entire document.
The historical financial data presented in this document have been discussed in reports by the Statutory Auditors on pages 182 and 233 of the present document, as well as those included by reference for financial years 2006 and 2007, respectively on pages 174 and 233 of the 2006 registration document and on pages 181 and 243 of the 2007 registration document. The Statutory Auditors’ reports on the 2008 parent company and consolidated financial statements do contain some observations.
La Défense, A pril 15, 2009
Pascal Poupelle
Chief Executive Officer
244 DEXIA CREDIT LOCAL / Annual Report 2008 ADDITIONAL INFORMATION List of information published or released during the previous twelve months (prepared March 20, 2009) 7
List of information published or released during the previous twelve months (prepared March 20, 2009)
Type of information Publication media and date I - Revenues and earnings Revenues for Q4 2008 BALO: March 13, 2009 June 30, 2008 interim financial statements BALO: October 15, 2008 Revenues for Q3 2008 BALO: September 30, 2008 Revenues for Q2 2008 BALO: September 10, 2008 Approval of parent company and consolidated financial statements BALO: June 2, 2008 Revenues for Q1 2008 BALO: May 30, 2008 2007 parent company and consolidated financial statements BALO: April 23, 2008 II – Corporate events Appointments and resignation of directors Les Petites Affiches: March 13, 2009 Appointment within Dexia Credit Local Public & Wholesale Banking business Member of the Management Board Information note: January 19, 2009 Resignation of a director Resignation of the Chief Executive Officer Appointment of the Chief Executive Officer Les Petites Affiches: December 19, 2008 Resignations of directors and of the Chairman of the Board of Directors Appointments of directors and appointment of the Chairman of the Board of Directors Les Petites Affiches: October 29, 2008 Change of permanent representative of Fédération Française du Bâtiment – Director of Dexia Credit Local Les Petites Affiches: July 22, 2008 Modification of the capital stock Les Petites Affiches: December 23, 2008 Notice convening the Combined Shareholders’ Meeting of December 22, 2008 BALO: November 17, 2008 Board of Directors of Dexia of October 20 Press release: October 20, 2008 The Board of Directors of Dexia decided this morning to appoint Jean-Luc Dehaene, former Prime Minister of Belgium, and Pierre Mariani, member of the Executive Committee of BNP Paribas, as members of the Board of Directors Press release: October 7, 2008 Resignations of Pierre Richard and Axel Miller (Dexia) Press release: September 30, 2008 Appointment within Dexia Credit Local: IT department Information note: September 11, 2008 Appointment within Dexia Credit Local: Network-France Information note: August 29, 2008 Appointments within Dexia Credit Local: Network-France Internal Audit department Risk Management and Permanent Control department Information note: July 7, 2008 Appointments within Dexia Credit Local: Network-France Information note: May 23, 2008 Change in the organization of Treasury & Financial Markets department Information note: May 16, 2008 Appointments within Dexia Credit Local: Planning and Financial Control department Information note: May 13, 2008 Notice convening the Shareholders’ Meeting of May 16, 2008 BALO: April 7, 2008 Appointments within Dexia Credit Local: Network-France Specialized and Real Estate Finance department Information note: March 21, 2008 Appointments within Dexia Credit Local: New Business Development department Information note: March 10, 2008 III – Other information European Commission approval obtained for the guarantee on FSA’s financial products portfolio Press release: March 15, 2009 Dexia releases annual results: EUR 3,326 million net loss in 2008; Tier 1 ratio remains strong, at 10.6% Press release: February 26, 2009 ADDITIONAL INFORMATION
Annual Report 2008 / DEXIA CREDIT LOCAL 245 ADDITIONAL INFORMATION 7 List of information published or released during the previous twelve months (prepared March 20, 2009)
Type of information Publication media and date Dexia Economic Report for February 2009 – Concerned local authorities respond to the economic and financial crisis Press release: February 20, 2009 On February 4, Dexia launched its first reference bond offering with sovereign guarantees Press release: February 5, 2009 Financial position of European regional and local authorities was strong in 2007 Press release: February 5, 2009 Dexia implements its transformation plan to consolidate its turnaround, and is expected to announce a projected net loss of EUR 3 billion Press release: January 30, 2009 Launch of the seventh edition of the Rubans sustainable development awards Press release: January 22, 2009 Expiration of the waiting period required by the Hart-Scott-Rodino antitrust law for the expected acquisition by Assured Guaranty Ltd of Dexia’s FSA Holdings subsidiary Press release: January 21, 2009 Ten years of restorations in the hospital sector in France Press release: January 20, 2009 Young people from the mission locale (local mainstreaming center) in Douaisis region recompensed by the Dexia France Foundation under the 2008 call for works Press release: January 13, 2009 Dexia announces exposure to Madoff Investment Securities Press release: December 15, 2008 Nord Pas de Calais Region launched a bond offering with Dexia and HSBC France as Lead Managers Press release: December 12, 2008 FSA – Rumors Press release: November 11, 2008 Dexia gives itself a quantitative objective to limit the CO2 impact of its energy-related financing activities Press release: November 10, 2008 Dexia pulls out of Kommunalkredit Austria AG and assumes full control of Dexia Kommunalkredit Bank AG Press release: November 3, 2008 Dexia banka Slovensko – regulated information Press release: October 28, 2008 The credit risks on HRE will have only a limited impact on the solvency of the Dexia Group Press release: October 6, 2008 Dexia – Hypo Real Estate (HRE) Press release: October 5, 2008 Dexia raises EUR 6.4 billion with the Belgian, French and Luxembourg governments Press release: September 30, 2008 Dexia and Fédération des ESH provide accessibility evaluations to 40 ESH-type public housing corporations Press release: September 25, 2008 Once again, Dexia Sabadell structures financing for 60 trains and 302 cars for the Madrid subway system Press release: September 23, 2008 “Bâtir 2008-2011”: EUR 3 billion for stimulating investment in the building industry Press release: September 19, 2008 Dexia: Lehman Brothers-related losses estimated at around EUR 350 million Press release: September 18, 2008 Economic report, press release: French local authorities are experiencing the first effects of the economic slowdown, but limit indebtedness Press release: September 16, 2008 Dexia announces the results of its strategic review of FSA Press release: August 11, 2008 Latest edition of the Financial Memento-Guide Press release: July 28, 2008 Urban mayors come out in favor of sustainable and inter-communal development Press release: July 22, 2008 Dexia and Toulouse-Blagnac airport: a financial partnership to build the airport of tomorrow Press release: June 25, 2008 Dexia will provide a USD 5 billion confirmed standby letter of credit for FSA’s financial products business Press release: June 23, 2008 Dexia Sabadell won the Spanish National Energy Commission’s RFP Press release: June 23, 2008 Local communities, local finances Press release: June 12, 2008 Dexia finances Antares, the French firefighters’ radio-communications network Press release: June 12, 2008 9th edition of FOCUS Press release: June 5, 2008 Dexia and the public procurement agency of the Calvados department confirm their financial partnership Press release: May 30, 2008 The Languedoc-Roussillon region chooses Dexia to finance 25 regional express trains Press release: May 29, 2008 The congress of the Council of Europe launches “The Prize of the Regions” Press release: May 29, 2008 Dexia carries out first evaluation of accessibility of a government building with the prefecture of the Jura department Press release: May 22, 2008 Dexia is sole a rranger of the public-private partnership for the ‘City of Health’ in Saint-Nazaire, for EUR 305 million Press release: May 22, 2008 Dexia remains largest distributor of PLS affordable rental housing loans in France Press release: April 17, 2008 The Board of Directors of Dexia nominates Deloitte as sole Statutory Auditor at the 2008 Shareholders’ Meeting Press release: April 8, 2008 Dexia Credit Local’s 2007 registration document [Document de référence filed with AMF, the regulator] AMF: April 3, 2008 Dexia and Ecotral combine their talents to support sustainable development Press release: April 3, 2008 Luxembourg Financial Sector Supervisory Commission (CSSF) provides certificate of approval on March 2, 2009 concerning the 3rd supplement to the basic prospectus dated December 30, 2008 AMF: March 2, 2009 CSSF provides certificate of approval on February 2, 2009 concerning the 2nd supplement to the basic prospectus dated December 30, 2008 AMF: February 2, 2009 CSSF provides certificate of approval on January 22, 2009 concerning the 1st supplement to the basic prospectus dated December 30, 2008 AMF: January 22, 2009
246 DEXIA CREDIT LOCAL / Annual Report 2008 ADDITIONAL INFORMATION List of information published or released during the previous twelve months (prepared March 20, 2009) 7
Type of information Publication media and date CSSF provides certificate of approval on January 22, 2009 concerning the basic prospectus dated December 30, 2008 AMF: January 22, 2009 CSSF provides certificate of approval on October 20, 2008 concerning the 7th supplement to the basic prospectus dated November 29, 2007 AMF: October 20, 2008 CSSF provides certificate of approval on September 16, 2008 concerning the 6th supplement to the basic prospectus dated November 29, 2007 AMF: September 16, 2008 CSSF provides certificate of approval on September 2, 2008 concerning the 5th supplement to the basic prospectus dated November 29, 2007 AMF: September 2, 2008 CSSF provides certificate of approval on August 1, 2008 concerning the 4th supplement to the basic prospectus dated November 29, 2007 AMF: August 1, 2008 CSSF provides certificate of approval on May 22, 2008 concerning the 3rd supplement to the basic prospectus dated November 29, 2007 AMF: May 22, 2008 CSSF provides certificate of approval on April 23, 2008 concerning the 2nd supplement to the basic prospectus dated November 29, 2007 AMF: April 23, 2008 CSSF provides certificate of approval on April 8, 2008 concerning the 1st supplement to the basic prospectus dated November 29, 2007 AMF: April 8, 2008 Press release: Specific financial disclosures at June 30, 2008 Hugin: August 29, 2008 Press release: Dexia Credit Local: 2008 six month interim financial report Hugin: August 29, 2008 2008 six month interim financial report filed with the AMF Hugin: August 29, 2008 Press release: Latest developments in the business of Dexia Credit Local Hugin: July 31, 2008 Press release: Dexia Credit Local: 1st supplement to the EMTN program Hugin: April 10, 2008 Press releases: Dexia Credit Local: release of the 2007 annual report Hugin: April 3, 2008 Dexia Credit Local: 2007 French version of the annual r eport equivalent to the document de référence filed with the AMF Hugin: April 3, 2008 N otes and bonds issued Dexia Credit Local – EMTN 813 TR 1 EUR 3,500,000,000 maturing March 2011 guaranteed by the central governments of France, Belgium and Luxembourg Hugin: March 19, 2009 Dexia Credit Local – EMTN 811 TR 1 EUR 150,000,000 maturing November 2010 guaranteed by the central governments of France, Belgium and Luxembourg Hugin: March 19, 2009 Dexia Credit Local – EMTN 817 TR 1 EUR 250,000,000 maturing September 2010 guaranteed by the central governments of France, Belgium and Luxembourg Hugin: March 19, 2009 Dexia Credit Local – EMTN 807 TR 1 EUR 179,000,000 maturing March 2010 guaranteed by the central governments of France, Belgium and Luxembourg Hugin: March 17, 2009 Dexia Credit Local – EMTN 809 TR 1 JPY 25,000,000,000 maturing October 27, 2011 guaranteed by the central governments of France, Belgium and Luxembourg Hugin: March 12, 2009 Dexia Credit Local – EMTN 810 TR 1 EUR 13,000,000 maturing March 2010 guaranteed by the central governments of France, Belgium and Luxembourg Hugin: March 11, 2009 Dexia Credit Local – EMTN 808 TR 1 EUR 8,000,000 maturing March 2010 guaranteed by the central governments of France, Belgium and Luxembourg Hugin: March 11, 2009 Dexia Credit Local – EMTN 806 TR 1 EUR 100,000,000 maturing March 2010 guaranteed by the central governments of France, Belgium and Luxembourg Hugin: March 11, 2009 Dexia Credit Local – EMTN 803 TR 1 EUR 3,000,000,000 maturing October 28, 2011 guaranteed by the central governments of France, Belgium and Luxembourg Hugin: February 12, 2009 Dexia Credit Local – EMTN 799 TR 1 EUR 1,250,000,000 maturing January 2011 guaranteed by the central governments of France, Belgium and Luxembourg Hugin: January 26, 2009 Dexia Credit Local – EMTN 798 TR 1 EUR 589,000,000 maturing September 2011 guaranteed by the central governments of France, Belgium and Luxembourg Hugin: January 19, 2009 Dexia Credit Local – EMTN 791 TR 1
JPY 6,000,000,000 maturing December 8, 2009 Hugin: September 5, 2008 ADDITIONAL INFORMATION
Annual Report 2008 / DEXIA CREDIT LOCAL 247 ADDITIONAL INFORMATION 7 List of information published or released during the previous twelve months (prepared March 20, 2009)
Type of information Publication media and date Dexia Credit Local – EMTN 790 TR 1 JPY 1,000,000,000 maturing December 18, 2009 Hugin: August 22, 2008 Dexia Credit Local – EMTN 789 TR 1 JPY 9,000,000,000 maturing August 14, 2009 Hugin: August 12, 2008 Dexia Credit Local – EMTN 785 TR 1 EUR 15,000,000 maturing July 30, 2023 Hugin: July 29, 2008 Dexia Credit Local – EMTN 786 TR 1 EUR 15,000,000 maturing July 30, 2023 Hugin: July 29, 2008 Dexia Credit Local – EMTN 773 TR 2 EUR 50,000,000 maturing June 18, 2010 Hugin: July 2, 2008 Dexia Credit Local – EMTN 782 TR 1 EUR 50,000,000 maturing July 2, 2009 Hugin: July 1, 2008 Dexia Credit Local – EMTN 781 TR 1 EUR 90,000,000 maturing July 2009 Hugin: June 30, 2008 Dexia Credit Local – EMTN 779 TR 1 EUR 22,650,000 maturing September 24, 2014 Hugin: June 26, 2008 Dexia Credit Local – EMTN 776 TR 1 EUR 15,000,000 maturing June 2009 Hugin: June 16, 2008 Dexia Credit Local – EMTN 775 TR 1 GBP 25,000,000 maturing June 2009 Hugin: June 16, 2008 Dexia Credit Local – EMTN 773 TR 1 EUR 165,000,000 maturing June 18, 2010 Hugin: June 16, 2008 Dexia Credit Local – EMTN 772 TR 1 JPY 16,080,000,000 maturing June 16, 2009 Hugin: June 13, 2008 Dexia Credit Local – EMTN 770 TR 1 JPY 4,000,000,000 maturing June 2009 Hugin: June 11, 2008 Dexia Credit Local – EMTN 762 TR 1 EUR 20,000,000 maturing June 6, 2023 Hugin: June 5, 2008 Dexia Credit Local – EMTN 768 TR 1 JPY 13 850,000,000 maturing June 4, 2009 Hugin: June 3, 2008 Dexia Credit Local – EMTN 765 TR 1 EUR 1,000,000,000 maturing May 2009 Hugin: May 27, 2008 Dexia Credit Local – EMTN 763 TR 1 EUR 200,000,000 maturing May 2009 Hugin: May 27, 2008 Dexia Credit Local – EMTN 761 TR 1 HKD 360,000,000 maturing May 23, 2018 Hugin: May 21, 2008 Dexia Credit Local – EMTN 757 TR 1 EUR 10,000,000 maturing May 15, 2012 Hugin: May 13, 2008 Dexia Credit Local – EMTN 756 TR 1 EUR 10,000,000 maturing May 15, 2010 Hugin: May 13, 2008 Dexia Credit Local – EMTN 755 TR 1 JPY 1,000,000,000 maturing May 11, 2009 Hugin: May 9, 2008 Dexia Credit Local – EMTN 753 TR 1 EUR 15,000,000 maturing May 13, 2018 Hugin: May 7, 2008 Dexia Credit Local – EMTN 748 TR 1 EUR 20,000,000 maturing August 4, 2020 Hugin: April 17, 2008 Dexia Credit Local – EMTN 743 TR 1 USD 100,000,000 maturing April 2009 Hugin: April 14, 2008 Dexia Credit Local – EMTN 739 TR 1 EUR 25,000,000 maturing April 2, 2015 Hugin: April 1, 2008 Dexia Credit Local – EMTN 738 TR 1 EUR 7,500,000 maturing March 30, 2011 Hugin: March 28, 2008 Dexia Credit Local – EMTN 735 TR 1 EUR 7,000,000 maturing March 26, 2016 Hugin: March 25, 2008 Dexia Credit Local – EUR 9,500,000 maturing February 18, 2010 Hugin: August 8, 2008
248 DEXIA CREDIT LOCAL / Annual Report 2008 ADDITIONAL INFORMATION Cross-reference table 7
Cross-reference table
HEADINGS IN THE SCHEDULE IN ANNEX XI OF ARTICLE 14 OF COMMISSION REGULATION (EC) NO 809/2004
Page(s)
1. Responsibility
1.1 Identification of the persons responsible 244
1.2 Declaration of responsibility 244
2. Statutory Auditors
2.1 Identification of the Statutory Auditors 243
2.2 Statutory Auditors during the period covered by the historical financial data 243
3. Risk factors 23 to 34 / 161 to 166
4. Information concerning the issuer
4.1 Background of the company
4.1.1 Legal name and trade name 240
4.1.2 Registration place and number 240
4.1.3 Incorporation date and term 240 4.1.4 Registered office, business structure, applicable legislation, country of origin, address, telephone number of registered office 240
4.1.5 Recent events affecting the issuer and which could have a material impact on the evaluation of its solvency 242
5. Business review
5.1 Main activities
5.1.1 Main categories of services provided 4 and 5 / 12 to 18
5.1.2 New products and activities 4 and 5 / 60 to 62
5.1.3 Main markets 12 to 18
5.1.4 Illustration of the stated competitive positioning 1 / 12
6. Organization chart
6.1 Description of the group and situation occupied therein by the issuer 10 / 240
6.2 Shareholding relationship with other group entities 10 / 42
7. Trend data 7.1 Details of the significant deterioration affecting the outlook since the date of the last financial statements 2 and 3 / 5 / 23 and 24 / 60 / 89 and 90 / 161 and 162 /190 / 242 7.2 Item(s) reasonably likely to have a material impact on the outlook of the issuer, at least for the current year 2 and 3 / 5 / 23 and 24 / 60 to 62 / 89 and 90 / 161 and 162 / 190 / 242
8. Forecasts or estimates of net income (loss) None
9. Corporate governance 9.1 Name, address and function within the issuing company of the members of corporate governance bodies, and activities performed outside the company 50 to 54 9.2 Declaration of absence of conflicts of interest for the members of the Board of Directors 64 ADDITIONAL INFORMATION
Annual Report 2008 / DEXIA CREDIT LOCAL 249 ADDITIONAL INFORMATION 7 Cross-reference table
Page(s)
10. Primary shareholders 10.1 Identity of the primary direct and indirect shareholders Type of control 10 / 42 Steps taken to ensure that control is not exercised in an abusive manner None
10.2 Known agreements that could lead to a change of control 242
11. Financial information regarding the assets, financial position and earnings Registration documents 2006* 11.1 Historical financial data and 2007**
11.2 Financial reports
Consolidated financial statements 35 to 39 / 81 to 181
Company financial statements 39 to 40 / 185 to 232
11.3 Audit of the annual historical financial data 11.3.1 Report of the Statutory Auditors on the consolidated financial statements 182 / 244 Report of the Statutory Auditors on the company financial statements 233 / 244
11.3.2 Other information in the registration document verified by the Statutory Auditors 11 to 62 / 64 to 79 / 237 and 238
11.3.3 Financial data in the registration document not taken from the audited financial statements None
11.4 Date of the most recent financial data
11.4.1 Last year for which the financial data were audited 182 / 233
11.5 Interim financial data 11.5.1 Quarterly and six-month data None Audit of interim financial data None
11.6 Legal proceedings and arbitration 242
11.7 Material changes in financial position 242
12. Major contracts 242
13. Information from third parties, declarations of specialists and declarations of interests None
14. Documents available to the public
Place where documents may be consulted during the period of validity of the registration documents 241
* In accordance with Article 28 of Commission Regulation (EC) no 809-2004, for reference purposes we have included the financial data for the year ended December 31, 2006, and the Statutory Auditors’ reports on the consolidated and the Company financial statements for that period, presented respectively on pages 174 and 233 of the 2006 registration document (filed on April 3, 2007 with the French Financial Markets Authority [AMF] under D. 07-0265). ** In accordance with Article 28 of Commission Regulation (EC) no 809-2004, for reference purposes we have included the financial data for the year ended December 31, 2007, and the Statutory Auditors’ reports on the consolidated and the Company financial statements for that period, presented respectively on pages 181 and 243 of the 2007 registration document (filed on April 3, 2007 with the French Financial Markets Authority [AMF] under D. 08-0196).
250 DEXIA CREDIT LOCAL / Annual Report 2008 Dexia Location Longue Durée R BC Dexia Investor Services Bank France Subsidiaries 22, rue des Deux Gares 105, rue Réaumur - F-75002 Paris F-92564 Rueil-Malmaison Cedex Tel: + 33 1 70 37 83 00 Tel: + 33 1 57 69 55 55 Administration of securities accounts, services for and affiliates www.dexia-lld.fr institutional investors and mutual funds Long-term leasing and management of public in France sector vehicle fl eets Dexia Municipal Agency International SUBSIDIARIES 1, passerelle des Refl ets Tour Dexia – La Défense 2 CBX.IA 2 TSA 92202 subsidiaries and 1, passerelle des Refl ets F-92919 La Défense Cedex Le Tour Dexia – La Défense 2 Tel: + 33 1 58 58 77 77 TSA 92202 www.dexia-ma.com locations F-92919 La Défense Cedex Dexia Credit Local’s société de crédit foncier Tel: + 33 1 58 58 77 77 Acquisition and administration of buildings Dexia Sofaxis SUBSIDIARIES Route de Creton F-18100 Vasselay Dexia Bail Germany 1, passerelle des Refl ets Te: + 33 2 48 48 10 10 Tour Dexia – La Défense 2 www.dexia-sofaxis.com Dexia Kommunalbank Deutschland Employer risks insurance brokerage and TSA 92202 Charlottenstraße 82 management advisory services for local authorities F-92919 La Défense Cedex D-10969 Berlin and hospitals Tel : + 33 1 58 58 84 06 Tel: + 49 30 25 59 8-0 Equipment lease fi nancing www.dexia.de Dexia CLF Banque AFFILIATES 1, passerelle des Refl ets Australia Tour Dexia – La Défense 2 Crédit du Nord Dexia Credit Local Asia Pacifi c Pty Ltd TSA 72200 Level 23 F-92919 La Défense Cedex 28, place Rihour 59800 Lille 207, Kent Street Tel: + 33 1 58 58 88 02 Sydney NSW 2000 Banking services for the local public sector Tel: + 33 3 20 40 30 40 Federation of regional banks, second network of Tel: + 61 2 925 13 961 Dexia CLF Régions Bail the Société Générale group 1, passerelle des Refl ets Austria and Central Europe Tour Dexia – La Défense 2 Dexia Épargne Pension TSA 92202 76, rue de la Victoire Dexia Kommunalkredit Bank F-92919 La Défense Cedex F-75009 Paris Türkenstraße 9 Tel: + 33 1 58 58 84 06 Tel: + 33 1 55 50 15 15 A-1092 Vienna Real estate lease fi nancing, mainly for the local www.dexia-ep.com Tel: +43 1 31 6 31 public sector Insurance company providing asset optimization www.dexia-kom.com and social engineering services Dexia Éditions Dexia Kommunalkredit Bulgaria 1, passerelle des Refl ets Domiserve Sofi a 1000, 19 Karnigradska Tour Dexia – La Défense 2 6, rue André Gide Tel: + 359 897 886 761 TSA 92202 F-92320 Châtillon Bulgaria F-92919 La Défense Cedex Tel: 0810 55 55 55 www.dexia-kom.bg Tel: + 33 1 58 58 78 78 www.domiserve.com www.dexia-editions.com Assistance for in-home services Dexia Kommunalkredit Czech Republic a.s Publication of specialized works on topics Karlova 27, 110 00 Prague 1 concerning the local public sector Czech Republic OTHER DEXIA GROUP COMPANIES Tel: + 420 221 146 331 Dexia Flobail IN FRANCE 1, passerelle des Refl ets Dexia Kommunalkredit Hungary kft. Tour Dexia – La Défense 2 Horvàt u. 14-24 TSA 92202 Dexia Asset Management France 1027 Budapest F-92919 La Défense Cedex Washington Plaza Hungary Tel: + 33 1 58 58 84 06 40, rue Washington Tel: + 36 1 224 76 50 Lease fi nancing of local investments (notably for F-75408 Paris Cedex 08 energy conservation and environmental protection) Tel: + 33 1 53 93 40 00 www.dexia-am.com Dexia Habitat Management of mutual funds 1, passerelle des Refl ets Tour Dexia – La Défense 2 Dexia Ingénierie Sociale TSA 92202 13, rue Croquechâtaigne F-92919 La Défense Cedex BP 30064 Tel: + 33 1 58 58 77 77 F-45380 La Chapelle St Mesmin Acquisition of holdings in public housing Tel: + 33 2 36 56 00 00 corporations [email protected] Supplemental medical insurance for employees of private and para-public companies
Annual Report 2008 / DEXIA CREDIT LOCAL 251 Dexia Kommunalkredit Polska Italy Cayman Islands UI. Sienna 39 PL-00-121 Warsaw Dexia Crediop Dexia Credit Local Grand Cayman Poland Via Venti Settembre, 30 Branch Tel: + 48 22 586 32 00 I-00187 Rome c/o CIBC Bank and Trust Company (Cayman) Ltd www.dexia-kom.pl Tel: + 39 06 47 71 1 PO Box 694 GT www.dexia-crediop.it 11 Dr Roy’s Drive Dexia Kommunalkredit Bank Polska Grand Cayman UI. Sienna 39 Tel: +1 212 515 7000 PL-00-121 Warsaw Luxembourg Poland Tel: + 48 22 586 32 00 SISL Ireland www.dexia-kom.pl 180, rue des Aubépines L-1145 Dexia Credit Local Dublin Branch Dexia Kommunalkredit Romania SRL Luxembourg 6 George’s Dock 42 Dorobantilor Street Tel: +352 45 90 3297 IRL-IFSC Dublin 1 1st District Tel: + 353 1 670 27 00 010573 Bucharest Romania Mexico Tel: + 40 21 619 34 07 Japan Dexia Crédito Local México Dexia banka Slovensko Insurgentes Sur 1228 Dexia Credit Local Bank Tokyo Branch Col. Tlacoquemecalt del Valle, Hodzova 11 Meiji Seimei Kan 5F 03100 Mexico DF 01011, Zilina 2-1-1 Marunouchi, Chiyoda-ku, Tel: + 52 55 56 87 75 45 Slovakia Tokyo 100-0005 Tel: + 421 41 51 11 101, 102 Tel: + 81 3 6268 4180 www.dexia.sk Switzerland Sweden Dexia Public Finance Switzerland Spain 2, rue de Jargonnant Dexia Public Finance Norden Dexia Sabadell CH-1207 Geneva Box 7573 Tel: + 41 22 718 01 20 Paseo de las Doce Estrellas 4 Engelbrektsplan 2 Campo de las Naciones S-10393 Stockholm Tel: + 46 8 407 57 00 E-28042 Madrid BRANCHES Tel: + 34 91 721 33 10 www.dexiasabadell.es Canada United States Dexia Credit Local Canada Branch REPRESENTATIVE OFFFICE 800 Square Victoria, Bureau 1620 Financial Security Assurance CP 201, Montreal (Quebec) 31 West 52nd Street Canada H4Z 1 E3 China New York, NY 10019 Tel: + 1 514 868 1200 Tel: + 1 212 826 01 00 Dexia Credit Local www.fsa.com Beijing Representative Offi ce United States Room B 603B, F 16 Focus Place 19 Jimrong Street – Xochong District India Dexia Credit Local New York Branch Beijing - China 445 Park Avenue Tel: +86 (0) 10 6657 5858 Dexia Credit Local Research New York, NY 10022 and Development India Private Ltd USA Mercantile House 1003 Tel: + 1 212 515 70 00 KG Marg, New Delhi 110001 www.dexia-americas.com Tel: + 91 11 14 35 20 805 AFFILIATES
United Kingdom Israel South Africa Dexia Public Finance Bank INCA Dexia Israel Bank Ltd. Shackleton House PO Box 1847 – Gallo Manor 19 Ha’arbaha Str. – Hatihon Building 4 Battle Bridge Lane 2152 Johannesburg PO Box 709 London SE1 2RB South Africa 61200 Tel Aviv United Kingdom Tel: + 27 11 202 22 00 Tel: + 972 3 764 76 00 Tel: + 44 207 378 77 57 www.uk-dexia.com
252 DEXIA CREDIT LOCAL / Annual Report 2008 Graphic design and production: Translation: Tectrad Photo credit, pages 3 and 5: Marc Vanderslagmolen g