ANNUAL REPORT 2012 FINANCIAL STATEMENTS
1 CONTENTS
CONTENTS
Chairman & CEO’S Statement 3
Board of Directors 7
General information 12
Directors’ report 15
Statement of compliance with the principles of good corporate governance 22
Independent auditor’s report 44
Income statement 47
Statement of comprehensive income 48
Statement of financial position 49
Statement of changes in equity 50
Statement of cash flows 51
Notes to the financial statements 53
Additional regulatory disclosures 120
Five year summary figures 125
Supplementary financial information 129 2 3
CHAIRMAN & CEO’S STATEMENT 4 5 6 7
BOARD OF DIRECTORS 8
Board of Directors
Joseph Sammut, Chairman Chairman of the Board since March 2007. Mr Sammut served in the Malta Civil Service for 42 years holding positions of Economic Secretary, Administrative Secretary and Head of the Civil Service and Secretary to the Cabinet in the Office of the Prime Minister. Other positions held by Mr Sammut include Chairman of Bank of Valletta plc, Ambassador to Saudi Arabia and GCC States, High Commissioner to India and Parliamentary Ombudsman. He is a member of Today Public Policy Think Tank.
Joaquim Francisco DA Silva Pinto, Chief Executive Officer Director on the Board since March 2007. Mr Silva Pinto started his career at Oporto University before moving into the financial services sector. In 1978 he joined UBP in the Foreign Department for Trade Finance Operations. In 1987 he joined BNP to launch business in northern Portugal, heading operations and leading trade business. In 1991 he joined Banif Group, taking responsibility for banking operations, finance, HR and corporate services of the northern region. Mr Silva Pinto went on to become the National Managing Director for Operations and later National Managing Director for Procedures and Quality. He then became General Managing Director of Operations of the commercial banks within the Banif Group and represented the Bank on national committees. He was appointed Chief Executive Officer of Banif Bank (Malta) plc in 2007.
Nuno Pedro Martins, Director Director on the Board since March 2007. Nuno Pedro Martins graduated in Chemical Engineering in 1992. He formed part of the Portuguese Embassy in Moscow as well as the Ministry for Foreign Affairs in Lisbon. He was also consultant with Andersen Consulting and PricewaterhouseCoopers, giving specialised advice to major Portuguese banks on process reengineering and IT. In 2003 Mr Martins joined Banif Group and in 2004 was appointed Head of Banif SA's Organisation and Quality Division, before accepting the appointment of Chief Operating Officer and Director of Banif Bank (Malta) plc. 9 BOAR D OF IRECTORS
Luis Avides Moreira, Director Director on the Board since December 2010. Joined Banif Financial Group in 1995 holding several senior management positions within Banif, SA. He headed the Corporate and Business Banking Unit of Banif Group and has vast experience in retail banking. Mr Avides Moreira is a graduate in Economics and has an MBA in Financial Services from the University of Porto.
Edward Cachia Caruana, Director Director on the Board since March 2008. Edward Cachia Caruana is a fellow of the Association of Chartered Certified Accountants, UK and a member of the Malta Institute of Accountants. In 1976 he was appointed partner at Joseph Tabone & Co, certified public accountants and auditors and in 1988 became managing partner retiring from the firm and from the accountancy profession in 1997. He took an active role in business organizations including that of serving on the councils of the Federation of Industries and the Malta Institute of Accountants. He was also a member of a number of boards including the Malta Stock Exchange.
Kenneth C. Mizzi, Director Director on the Board since April 2008. A qualified chartered accountant, after working with Touche Ross in London he returned to Malta to join the family business in 1971. He has served as Director on the Board of the Malta Development Corporation (1978-1980) and a number of other parastatal companies. He also served as director on the board of Mid-Med Bank Limited and of HSBC Fund Management (Malta) Limited. He is also managing director of SAK Limited, franchisee of The Body Shop in Malta, Managing Director of Muscats Motors Limited and United Acceptances Finance Limited and a Director of a number of other Mizzi Organisation companies. 10 BOAR D OF IRECTORS
Mark Portelli, Director Director on the Board since April 2008. A member of the Institute of Chartered Accountants in England and Wales and a graduate from the University of Manchester, he has served as a member of the board of a number of companies and public entities.
Maurice Mizzi, Director Director on the Board since April 2008. He read law at the University of Malta where he obtained a Diploma of Legal Procurator. He joined the family business in 1957 and was appointed on the board of a number of Mizzi Organisation companies. He is currently managing director of Continental Cars Limited, Mizzi Limited and Titan International Limited. He has held a number of chairmanships for the government including Mediterranean Film Studios (1984-1990) and the Malta Development Corporation (1997-1998). He has been Honorary Consul of Iceland since 1978. He also served as a director on the Board of Plaza Centres plc, Allcom Limited, Technical and Management Services Limited, Datatrak Holdings plc, Datatrak Systems Limited, Datastream Limited, and MaltaCom plc. He is currently also inter alia director of Mizzi Associated Enterprises and President of Mizzi Organisation and Maltese Chinese Chamber of Commerce.
Jorge Tomé, DIRECTOR Appointed on the Board in November 2012. He has an MA in Applied Economics, studied advanced management at the Chicago Business School and holds a BSc in Business Organisation and Administration. Jorge Tomé has over thirty years of experience in banking. Since February 2012 he is the Vice-Chairman and CEO of Banif, SA and its subsidiaries Banif - Banco de Investimento, SA, Banco Banif Mais, SA, Banif - Banco Internacional do Funchal (Brasil), SA and Banif - Banco de Investimento (Brasil), SA. He is also the Chairman of Banif Imobiliária, SA.
Before joining Banif he was a member of the Board of Directors of Caixa Geral de Depósitos and Chairman of its investment arm Caixa - Banco de Investimento (January 2008 – February 2012). He was also CEO of Caixa - Banco de Investimento (March 2002 – January 2008). Before this, he was member of the Board of Directors of Companhia de Seguros Açoreana, SA (1996- 2001), partner at Coopers & Lybrand, Portugal (1995-1996) and member of the Board of Directors of Banco Pinto & Sotto Mayor (1994-1995). 11 BOAR D OF IRECTORS
Gonçalo Botelho, DIRECTOR Appointed on the Board in February 2013. He studied advanced management at the Portuguese Catholic University and financial management at Stanford Business School. He obtained a BSc in Business Organisation and Administration and an MBA in Marketing. Gonçalo Botelho has twenty-two years of experience in the banking sector. Since March 2012 he has been Member of the Board of Directors of Banif - Banco Internacional do Funchal, SA and Banif - Banco de Investimento, SA.
Before joining Banif he was member of the Board of Directors of Caixa – Banco de Investimento (2005-2012) and Executive Director of Caixa – Banco de Investimentos (2000 -2005). He also worked at Banco Mello de Investimentos and Banque Nationale de Paris. Gonçalo Botelho was a Board Member of Caixa Geral Brasil, Banco Nacional de Investimento (Moçambique), CIFI – Corporación Interamericana para el Financiamiento de Infraestructura (Costa Rica), World Bank Group, Previsão – Sociedade Gestora de Fundos de Pensões, SA, La Seda Barcelona, Portugal Telecom, SGPS, SA (Audit Committee).
ADRIAN CUTAJAR, COMPANY SECRETARY Appointed as the Bank’s Company Secretary in June 2012. Adrian Cutajar graduated Doctor of Laws from the University of Malta in 2003 and holds a Masters of Arts in Financial Services from the University of Malta. Between 2004 and 2008, he held the position of Head of Legal and Compliance and Company Secretary with a financial services group listed on the Malta Stock Exchange. He is a member of the Chamber of Advocates, Malta and the Institute of Financial Services Practitioners. Dr Cutajar is currently director of Artio Corporate Services Limited, focusing on the provision of compliance, governance and company secretarial services to licence holders authorised by the Malta Financial Services Authority. 12 BOAR D OF IRECTORS
GENERAL INFORMATION 13 CEO STATEMENT general information
Directors
The Directors who served throughout the year were as follows:
Joseph Sammut (Chairman) Joaquim Francisco Da Silva Pinto (Chief Executive Officer) Nuno Pedro Martins (Executive Board Member) Luís Avides Moreira (Executive Board Member) Edward Cachia Caruana (Non-Executive Board Member) Kenneth Mizzi (Non-Executive Board Member) Mark Portelli (Non-Executive Board Member) Maurice Mizzi (Non-Executive Board Member)
The following changes took place during the year:
Artur Fernandes (resigned on 24th April 2012) Carlos David Duarte de Almeida (resigned on 24th April 2012) Simon Tortell (ceased on 15th June 2012) Jorge Humberto Correia Tomé (appointed as Non-Executive Board Member on 8th November 2012)
The following change took place after year-end:
Gonçalo Botelho (appointed as Non-Executive Board Member on 1st February 2013 and vested with the legal and judicial representation of the Bank)
Company secretary
Adrian Cutajar
The following changes took place during the year:
Simon Tortell (ceased on 15th June 2012) Adrian Cutajar (appointed as Company Secretary on 15th June 2012)
Registered office Auditors
Level 2, 203 Ernst & Young Malta Limited Rue D’Argens Certified Public Accountants Gzira GZR 1368 Regional Business Centre MALTA Achille Ferris Street Msida MSD 1751 MALTA 14 15
DIRECTORS’ REPORT 16 17 D IRECTORS’ REPORT DIRECTORS’ REPORT
The Directors present their annual report together with the audited financial statements of the Bank for the year ended 31st December 2012.
The Board of Directors who served during the year are as listed under the General information section.
Principal activities
Banif Bank (Malta) plc (the “Bank”) was incorporated on the 27th March 2007. The Bank was set up as a fully-owned subsidiary of Banif SGPS, SA with an authorised and issued share capital of EUR50 million and EUR15 million respectively.
The Bank was also granted a licence to operate as a credit institution on the 27th March 2007 in terms of the Banking Act, Cap. 371 of the Laws of Malta. The Bank opened to the public in January 2008, providing a full range of commercial banking services to both residents and non-residents through a network of nine branches, a corporate and business banking unit as well as an executive banking unit.
In 2012 Banif Bank (Malta) plc concluded its fifth year of business activity in Malta. Despite the persistence of the European sovereign debt crisis and the consequent markets uncertainty and volatility, the Bank has reaffirmed itself in the local market by registering further growth in its business and reached another important milestone, by registering the first annual profit since incorporation.
On 30th August 2012, the Bank issued EUR5 million Subordinated Unsecured Debt, which was fully subscribed by Banif SGPS, SA. On the same day, the 4% Cumulative Convertible Preference Shares, which were issued in February 2011, were converted to ordinary shares. No new issue of ordinary shares took place as the shareholders agreed that the conversion was not to be accompanied by a fresh issue of shares.
Review of business development and financial position
Business development
During 2012, the Bank remained focused on executing its vision through well defined strategies to increasingly become a point of reference and key player in the Maltese market. This is supported by the commitment of the Bank to continue pursuing the business growth strategy and by furthering investment in the Bank’s infrastructure, both in terms of its resource capability and the solutions and products offered to its customers. The Bank remains committed to increasing penetration in all the relevant retail sectors of the market, by offering differentiated products and services and by offering a high level quality of service to its customers.
Throughout 2012, the Bank operated a network of nine branches and four corporate and business teams. The Bank also continued to strengthen its operating capability and increasing functionality in the service utilities offered to its clients.
The Bank continued to develop its ATM network through the Acquiring Project, in that now other banks’ customers can make use of the Bank’s ATMs through all their VISA cards irrespective of the issuing bank. During 2012, the Bank also continued to enhance its card product portfolio, by placing two new card products on the market. It launched the first co-branded card between a bank and a major Maltese supermarket, offering various attractive benefits to mutual customers of the two organisations.
The Bank’s Internet Banking service (Banif@st) has also been enhanced to offer a number of new services including the sending of direct debit and direct credit files, the online application for debit cards and the ability to activate credit cards online. DIRECTORS’ REPORT - continued 18 IRECTORS’ REPORT D IRECTORS’
Review of business development and financial position - continued
In line with the business growth strategy and plans, the Bank continued implementing its recruitment programme to support the increased level of business and to ensure adequate back-office support. In fact, as at end of December 2012, the number of staff working at the Bank reached 153 (144 as at end of December 2011).
Financial performance
During 2012, the Bank registered its first profit after tax since incorporation of EUR0.173 million (2011: a loss after tax of EUR0.578 million). In total, operating income covered 102.38% of the operating expenses including net impairment provision (2011: 92.12%). This was mainly attributable to the fact that once again the Bank managed to increase its operating income, whilst at the same time keeping operating expenses under tight control.
The Bank continued registering growth in its lending and deposit portfolio and main income streams. Total assets increased by EUR8.342 million reaching EUR478.696 million by end of 2012. The slim increase in assets is mainly attributable to the fact that the Bank wanted to optimise the use of its capital by restructuring the composition of its balance sheet.
Steady growth has again been registered in loans and deposits. Loans have increased by EUR65.578 million, reaching EUR316.492 million by end of 2012, whilst deposits have increased by EUR169.123 million, reaching EUR430.996 million by end of 2012. The bigger increase in deposits helped the Bank to achieve a deposit transformation ratio of 73%.
The growth registered in loans in 2012 was relatively less than the previous two years. This was mainly due to two factors. The size of the loans portfolio is increasingly requiring a much bigger maintenance effort and the economic slowdown impacted business and investment. This translated itself into a lower demand for corporate loans and increased pressure on credit spreads.
With respect to the deposit portfolio, the growth registered up to end of December 2012 exceeded that registered in previous years. This growth was partly attributable to an increase in international and institutional deposits as well as an increase from the retail market. This was the result of a focused strategy to ensure a stronger liquidity position, reduced dependency on the renewal of maturing deposits, and as a result, decreased pressure on cost of funds in the medium to longer term.
During 2012, Banif Group informed all subsidiaries within the Group that the asset designation assigned to debt securities issued by a number of related and group entities had to be changed. It was considered that it would be more appropriate for holders of such securities to reclassify such assets to the ‘Loans and receivables’ category. The Bank reclassified three debt securities with a fair value of EUR6.456 million as at end of December 2012 from the ‘Held-for-trading’ and ‘Available-for-sale’ categories into the ‘Loans and receivables’ category during 2012. Consequently, the fair value of such financial assets amounting to EUR10.264 million was also re-stated in 2011. A re-statement was also made in the ‘Net interest income’ and 'Trading income’ captions in the statement of comprehensive income to reflect this change.
The Bank generated a total operating income of EUR10.751 million, representing a 22.21% increase when compared with the figure reported last year of EUR8.797 million. Net interest income from business
carried out with banks and non-banks amounted to EUR6.799 million (2011: EUR6.183 million). The increase is mainly the result of the increases registered in the loans and deposit portfolios. DIRECTORS’ REPORT - continued 19 D IRECTORS’ REPORT
Review of business development and financial position - continued
Net fee and commission income amounted to EUR1.348 million (2011: EUR1.255 million). The increase in net fee income and commissions was mainly attributable to higher level of net credit and debit card fees as a result of higher volume and usage of cards. An increase was also registered in net fees from lending, guarantees, trade finance and payments. However, this increase was offset by a reduction in charges on other retail banking services.
All this translated into a slightly lower ratio of net fee income and commissions as a percentage of net interest income. As at end of 2012, net fees and commissions stood at 19.8% of net interest income (2011: 20.3%). This reduction was mainly aimed at ensuring that the Bank achieves the projected growth and market penetration rate.
Trading income amounted to EUR2.604 million (2011: EUR1.359 million). This increase is mainly attributable to an increase in foreign currency exchange activities and increased gains from trading in local and foreign-quoted sovereign and corporate bonds.
Total operating expenses excluding impairment increased by 9.95%, from EUR8.730 million in 2011 to EUR 9.599 million in the year under review. Expenses relating to employee compensation and benefits including directors represent 49.33% (2011: 49.82%) of the total operating costs.
Impairment
Since the start of its operations, the Bank was using market probability of defaults in view of the fact that history of credit losses was practically inexistent. In 2012, the Bank felt it was time to start carrying out its collective impairment assessment using own data of losses and embarked on a plan to start using own probability of defaults analysed by the different segments of loan products offered.
The effect of this exercise, together with the impairment resulting from the specific assessment in line with the Bank’s provisioning policy, resulted in an increase in provisioning for impairment by a net amount of EUR0.902 million (2011: EUR0.820 million).
The gross increase in provision amounted to EUR1.701 million (2011: EUR1.188 million) whilst reversals of write- downs amounted to EUR0.799 million (2011: EUR0.375 million). Total provision for impairment as a percentage of gross loans and advances to customers stood at 0.91% as at end of December 2012 (2011: 0.80%).
Impairment as a percentage of credit risk taken through the loan portfolio increased in both 2011 and 2012. The provision for impairment as a percentage of risk-weighted assets increased from 0.81% as at end of 2011, to 0.92% as at end of December 2012. This is in line with expectations and is a result of the growth and the increased diversity in the loan portfolio. However, the rate is well below the market rate registered in 2012 of around 2.44%. The Bank monitors and controls rigorously the increased risk emanating from the growth in the lending portfolio, and constantly seeks to ensure that the level of provisioning is adequate and in line with the growth in credit risk. The Bank retains that the credit quality of its loan portfolio is satisfactory and the proportion of non-performing loans to total loans and advances to customers stands at very acceptable levels.
Tax
The Bank registered a profit before tax of EUR0.250 million (2011: loss EUR0.753 million). This attracted a tax charge of EUR0.077 million. As a result of the profit registered, the deferred tax asset reduced by EUR0.075 million, reaching EUR5.386 million by end of December 2012 (2011: EUR5.461 million). DIRECTORS’ REPORT - continued 20 IRECTORS’ REPORT D IRECTORS’
Review of business development and financial position - continued
The directors retain the Bank will be registering further profits in the forthcoming years, against which the unused tax losses can be utilised.
Financial position
The Bank continues to exercise sound asset and liability management with a view to ensure sustainable regulatory ratios in terms of liquidity and capital adequacy. The Bank is fully focused to raise and employ funds in the local retail and corporate business segments. In doing so, the Bank continues to invest heavily in strengthening the operational capability and consolidating the investments made in previous years.
The Bank closed the year under review with a total asset base of EUR478.696 million (2011: EUR470.354 million). The Bank managed to improve significantly its deposit into loan transformation ratio, with loans standing at 73.43% of customer deposits as at end of December 2012 (2011: 95.82%). The largest component of assets was still represented by loans and advances to customers which amounted to EUR316.492 million (as at end of 2011: EUR250.914 million).
During the year under review, the Bank decreased its investment portfolio designated at inception as ‘Available-for-sale’ as well as that designated as ‘Held-for-trading’. Towards the end of the year, the Bank started building a portfolio of bonds and equities designated at inception as ‘At fair value through profit and loss’. Total financial investments stood at EUR24.037 million (as at end of December 2011: EUR54.907 million). Following the initiative taken by Banif Group, the Bank reclassified EUR6.456 million (2011: EUR10.264 million) in bonds issued by related companies from the ‘Available-for-sale’ and ‘Held-for-trading’ categories to ‘Loans and receivables’.
In line with the growth strategy, the Bank increased further its investment in property and equipment and intangible assets by EUR0.531 million. As at end of December 2012 such investment amounted to EUR10.119 million (as at end of 2011: EUR9.588 million).
Outlook
In line with its growth strategy, the Bank intends to further expand its retail branch network, increasing the number of branches from nine to twelve by end of 2013. This will be complemented with further recruitment, spread amongst the commercial and support functions, and further investment in systems and support infrastructure. This will be backed by a capital plan that envisages increases in the level of Own Funds, predominantly through Core Equity Tier 1 capital with a view to ensure sound capital adequacy levels in terms of the new Capital Requirements Directive and Regulations.
Disclosure in terms of the Sixth Schedule to the Companies Act, Cap. 386 of the Laws of Malta
During the year ended 31st December 2012, no shares in the Bank were:
• purchased by it or acquired by it by forfeiture or surrender or otherwise; • acquired by another person in circumstances where the acquisition was by the Bank’s nominee, or by another with the Bank’s financial assistance, the Bank itself having a beneficial interest; or • made subject to pledge or other privileges, to a hypothec or to any other charge in favour of the Bank. DIRECTORS’ REPORT - continued 21 D IRECTORS’ REPORT
Preparation of financial statements and Directors’ responsibilities
The Companies Act, Cap. 386 of the Laws of Malta (the “Act”) requires the Directors of Banif Bank (Malta) plc to prepare financial statements for each financial year, which give a true and fair view of the financial position of the Bank as at the end of the financial year, and of the profit or loss of the Bank for that year in accordance with the requirements of International Financial Reporting Standards, as adopted by the European Union.
In preparing such financial statements, the Directors are required to:
• adopt the going concern basis unless it is inappropriate to presume that the Bank will continue in business; • select suitable accounting policies and apply them consistently from one accounting year to another; • make judgements and estimates that are reasonable and prudent; and • account for income and charges relating to the accounting year on the accruals basis.
The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy, at any time, the financial position of the Bank and to enable them to ensure that the financial statements have been properly prepared in accordance with the provisions of the Companies Act, Cap. 386 of the Laws of Malta and the Banking Act, Cap. 371 of the Laws of Malta.
The Directors are also responsible for safeguarding the assets of the Bank and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors, through management oversight, are responsible to ensure that the Bank establishes and maintains internal control to provide reasonable assurance with regards to the reliability of financial reporting, effectiveness and efficiency of operations and compliance with applicable laws and regulations.
Management is responsible, with oversight from the Directors, to establish a control environment and maintain policies and procedures to assist in achieving the objective of ensuring, as far as possible, the orderly and efficient conduct of the Bank’s business. This responsibility includes establishing and maintaining controls pertaining to the Bank’s objective of preparing financial statements as required by the Act and managing risks that may give rise to material misstatements in those financial statements. In determining which controls to implement to prevent and detect fraud, management considers the risks that the financial statements may be materially misstated as a result of fraud.
Auditors
Messrs. Ernst & Young Malta Limited have signified their willingness to continue in office as auditors of the Bank and a resolution proposing their reappointment will be put to the Annual General Meeting.
Approved by the Board of Directors and signed on its behalf on 26th March 2013 by:
JOAQUIM Francisco DA SILVA PINTO JOSEPH SAMMUT Chief Executive Officer Chairman
22
STATEMENT OF COMPLIANCE WITH THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE 23 STATEMENT OF COMPLIANCE WITH THE PRINCIPLES G OO D CORPORATE G OVERNANCE STATEMENT OF COMPLIANCE WITH THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE
Banif Bank (Malta) plc (the ‘Bank’) believes that good corporate governance should be the basis of every decision and action taken by the Bank. Despite the fact that The Code of Principles of Good Corporate Governance (the ‘Code’) contained in Appendix 5.1 to Chapter 5 of the Listing Rules, as issued by the Malta Financial Services Authority is not mandatory upon the Bank given that the Bank is not listed on the Malta Stock Exchange, the Bank has endorsed the Code and is committed to implement high standards of corporate governance, except where the business circumstances merit a different treatment.
This statement is divided into three sections with the first section indicating the extent to which the Bank has adopted the Code, and the second section providing reasons why the Bank is non-compliant with the same Code. The third section provides details of the Bank’s internal control system.
SECTION 1 – COMPLIANCE WITH THE CODE
PRINCIPLE 1 – THE BOARD
Every listed Company should be headed by an effective board, which should lead and control the company.
Main Principle – The Code The affairs of the Bank are managed by the Board of Directors.
The Bank’s Directors includes a mix of individuals with a solid academic and professional background who have distinguished themselves in diverse business sectors. All Directors hold or previously held key management positions in various local and international organisations.
The Board delegates certain responsibilities to the Executive Committee, the Audit Committee and the Properties Committee. Further detail in relation to the mentioned Committees can be found under Principle 4 below.
PRINCIPLE 2 – CHAIRMAN AND CHIEF EXECUTIVE
There should be a clear division of responsibilities at the head of the Company between the running of the board and the executive responsibility for the running of the company`s business. No one individual or small group of individuals should have unfettered powers of decision. Main Principle – The Code
The roles of the Chief Executive Officer and the Chairman of the Board are separate and distinct and are held by different individuals.
The Chairman leads and sets the agenda of each of the Board of Directors’ meetings. In addition, the Chairman is responsible for ensuring that all the Directors of the Board engage in effective discussions and ultimately take informed decisions. The Chairman also ensures that there is effective communication between the executive and non-executive Directors of the Bank, as well as with the shareholders.
The Chairman meets the independence criteria set out in the Code.
On the other hand, the Chief Executive Officer, who is also a member of the Board of Directors, heads the Executive Committee. He has been entrusted with the execution of the Bank’s strategy agreed by the Board and also acts as the link between the Board of Directors, whereby the strategy is set, and the Executive Committee, which is delegated with implementing such strategy. STATEMENT OF COMPLIANCE WITH THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE - continued 24
PRINCIPLE 3 – COMPOSTION OF THE BOARD
The board should not be so large as to be unwieldy. The board should be of sufficient size that the balance of skills and experience is appropriate for the requirements of the business and that changes to the board’s composition can be managed without undue disruption. The board should be composed of executive and non-executive Directors, including independent non-executives.
Main Principle – The Code
The Board is composed of a non-executive Chairman, three executive Directors (including the Chief Executive Officer) and five non-executive Directors. CORPORATE G OVERNANCE OF COMPLIANCE WITH THE PRINCIPLES G OO D CORPORATE STATEMENT
The shareholders appoint or remove directors on the Board using a transparent approach, whereby each Director shall remain in office for a period of three years. Prior to being appointed, each Director undergoes the due diligence process by the Malta Financial Services Authority in order to establish that such Director is a fit and proper person pursuant to the Banking Act.
The Directors who served on the Board during the period under review were the following:
Joseph Sammut - Chairman Joaquim Francisco Da Silva Pinto Edward Cachia Caruana Jorge Humberto Correia Tomé 1 Carlos David Duarte de Almeida 2 Artur Fernandes 3 Luís Carlos Ferreira Avides Moreira Nuno Martins 1 th Kenneth Mizzi Appointed with effect from 8 November 2012 2 Resigned with effect from 24th April 2012 Maurice Mizzi 3 Resigned with effect from 24th April 2012 Mark Portelli 4 Ceased to hold position of Director with effect 4 Simon Tortell from 15th June 2012
In line with Principle 3 of the Code, the Bank considers that during the period under review the Board had two independent non-executive Directors, namely Joseph Sammut (the Chairman) and Edward Cachia Caruana.
The remuneration paid to the Directors is decided by the Parent Company in line with Group policy. STATEMENT OF COMPLIANCE WITH THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE - continued 25 STATEMENT OF COMPLIANCE WITH THE PRINCIPLES G OO D CORPORATE G OVERNANCE
PRINCIPLE 4 – THE RESPONSIBILITIES OF THE BOARD
The board has the first level responsibility of executing the four basic roles of corporate governance namely: accountability, monitoring, strategy formulation and policy development.
Main Principle – The Code
The Board of Directors determines the strategic goals and formulates the policies of the Bank. It also sets the Bank’s values and standards. The Board understands that high ethical standards should be applied in its decision making process. Decisions and strategies formulated by the Board seek to encompass the interests of all stakeholders including the Bank’s shareholders and employees.
The Board also regularly reviews the Bank’s performance against approved budgets and set targets.
In addition, the Board considers and determines credit proposals falling within the same Board’s credit sanctioning limits, as well as any credit decisions where the Directors have a direct or indirect interest. In such instances, such Directors shall inform the same Board of the nature of their interest at the meeting and shall not participate and vote in respect of that decision.
As detailed below, the Board of Directors have delegated certain responsibilities to various committees, with specific responsibilities, as follows:
The Executive Committee
The Executive Committee meets on a weekly basis to oversee the overall management of the Bank. The Executive Committee is composed of five members, the Chief Executive Officer, the Chief Operating Officer, the Chief Commercial Officer, the Chief Financial Markets and Investments Officer and the Chief Officer Corporate Services. Formulation of risk strategies and risk profiles, including policies conducive to the achievement of organisational goals, are the responsibility of the Executive Committee. However implementation is delegated to the Departmental Heads through a formally documented organisational structure with clear and transparent demarcation of functional responsibilities. The Executive Committee is also responsible for assessing credit facilities and taking credit decisions as prescribed in the Bank’s credit policy.
The Executive Committee also appointed the following committees within the Bank, namely, the Assets and Liabilities Committee (ALCO), the Budget and Planning Committee, the Credit Committee, the Products Committee and the ICAAP Committee. STATEMENT OF COMPLIANCE WITH THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE - continued 26
The Audit Committee
The Audit Committee monitors and reviews the effectiveness of the Bank’s control functions, including internal audit, the compliance and risk functions, and also monitors the financial reporting process and reviews the Bank’s internal financial controls.
The Audit Committee makes recommendations to the Board of Directors regarding the appointment of the Bank’s external auditors, their remuneration and terms of engagement.
The Properties Committee
CORPORATE G OVERNANCE OF COMPLIANCE WITH THE PRINCIPLES G OO D CORPORATE STATEMENT This Committee meets in order to discuss and advise the Executive Committee on any proposals for the acquisition or the rental of properties to be utilised for the Bank’s activities. At present, the members of this Committee are the Chief Officer Corporate Services and two non-executive directors. This Committee meets on a monthly basis.
Consequently, the Executive Committee, appointed the following management committees:
The Assets and Liabilities Committee
The Assets and Liabilities Committee (ALCO) meets on a regular basis to analyse financial information and to assess the impact that the various types of risks arising from changes in interest rates, exchange rates and the market, have on the profitability of the Bank and the various other components of the financial statements. This Committee also drives the commercial activity of the Bank and reviews liquidity risk, and capital adequacy risk. It also sets the framework for the design of policies to address and manage all these types of risks with a view to ensure that adequate mitigating actions are taken to reduce the negative impacts of adverse movements on the operations of the Bank and on the financial statements.
The ALCO is made up of the Members of the Executive Committee, and the coordinators of the Commercial Management Department, the Global Risk Department, the Business Development Department, the Treasury Department and the Finance & Reporting Department.
The Budget and Planning Committee
The purpose of the Budget and Planning Committee is to liaise closely with the members of the Executive Committee of the Bank in transposing the vision and strategic objectives adopted by the Board of Directors into detailed plans. The Committee is responsible for coordinating and assisting in the preparation of the budgets of all the commercial departments and all supporting back-office units. Furthermore, the Committee takes care of communicating the budgets, once these are approved by the Board of Directors, and also oversees the actual implementation of the Bank’s financial plans.
This Committee meets on a quarterly basis and is made up of the Members of the Executive Committee, and the coordinators of the Commercial Management Department, the Finance & Reporting Department, the Human Resources Department, the Corporate Services Department and the Information Technology Department. STATEMENT OF COMPLIANCE WITH THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE - continued 27 STATEMENT OF COMPLIANCE WITH THE PRINCIPLES G OO D CORPORATE G OVERNANCE
The Credit Committee
This Committee is responsible for assessing credit facilities and taking credit decisions within certain monetary and risk bands. Additionally, it makes recommendations to the Executive Committee on credit facilities which exceed its upper discretionary threshold.
The Committee is also coordinated at its different levels according to the same Credit Policy. It meets regularly and is chaired by the responsible person as indicated in the Bank’s Credit Policy.
The Products Committee
The purpose of the Products Committee is to maintain a structured approach towards assessing and developing new products. Product development is divided into two phases, the Conception Phase and the Implementation Phase.
During the Conception Phase the Products Committee focuses on the concepts and ideas that address business needs. During such Phase, the Committee is made up of the Chief Financial and Investments Officer, the Chief Commercial Officer and the coordinators of the Commercial Management Department and the Business Development Department.
Once a product concept is decided, the Products Committee moves to the Implementation Stage, during which the objective is to implement the proposed product in an efficient manner. During this stage the Committee is made up of representatives from the following departments, namely the Business Development Department, the Control & Compliance Department, the Finance & Reporting Department, the Global Risk Department, the Information Technology Department, the Quality Control and Processes Department and the Treasury Department.
The ICAAP Committee
In order to comply with Pillar 2 requirements emanating from the MFSA Banking Rule, as well as to better manage its overall risk-taking activities, the Bank has set up the ICAAP Committee.
This Committee meets on a regular basis in order to assess whether the risk undertaken by the Bank is in line with the risk apetite, strategies and capital plan. It identifies and quantifies the risks to which the Bank is exposed to and quantifies the risk-taking capacity of the Bank.
Besides submitting the ICAAP report to both the MFSA and the Bank of Portugal, the Committee is geared towards going beyond mere technical compliance with Pillar 2 by further reinforcing the soundness of the risk culture and economic capital management. As such, the ICAAP is formally updated for submission to the Regulator, in line with regulatory submission requirements which are normally annual. However, for internal use, the main constituent parts of the ICAAP are updated on a quarterly basis, to achieve more timely monitoring of the institution’s overall risk profile vis-à-vis the risk-taking capacity. Periodic ICAAP reviewing is drafted by the Bank’s Global Risk Department and submitted for the evaluation, feedback and contribution of the other active members of the ICAAP Committee, i.e. the Finance & Reporting Department and the Chief Financial Markets and Investments Officer, who acts as a continuing link with the Bank’s Executive Committee.
The Internal Audit Office does not take an active part in updating the ICAAP in order to maintain full objectivity in fulfilling its role of constructively and independently challenging the ICAAP. The reasoning, findings and conclusions of the IAO activity is formally embedded within the ICAAP document itself. STATEMENT OF COMPLIANCE WITH THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE - continued 28
PRINCIPLE 5 – BOARD MEETINGS
The board should meet regularly to discharge its duties effectively. Board members should be given ample opportunity during meetings to discuss issues set on the board agenda and convey their opinions.
Main Principle – The Code
The Board meets as regularly as deemed possible, at least quarterly, in order to discharge its duties effectively. The Chairman sets and circulates the agenda to all Directors. The Chairman, in collaboration with the Company Secretary, also ensures that all supporting material is circulated to all Directors well in
CORPORATE G OVERNANCE OF COMPLIANCE WITH THE PRINCIPLES G OO D CORPORATE STATEMENT advance, so that they have ample time to consider the information prior to the next scheduled meeting. The Chairman also ensures that the Directors participate actively in all Board meetings.
During 2012, the Board of Directors met 5 times.
Director’s attendance at Board Meetings during 2012 was as follows:
Members Attended Joseph Sammut - Chairman 5 Joaquim Francisco Da Silva Pinto 4 Edward Cachia Caruana 5 Jorge Humberto Correia Tomé 1 (out of 1) Carlos David Duarte de Almeida 3 (out of 3) Artur Fernandes Nil (out of 3) Luís Carlos Ferreira Avides Moreira 5 Nuno Martins 5 Kenneth Mizzi 5 Maurice Mizzi 5 Mark Portelli 5 Simon Tortell 1 (out of 3)*
* Dr Tortell did not attend all Board meetings due to health reasons.
PRINCIPLE 6 – INFORMATION AND PROFESSIONAL DEVELOPMENT
The board should:
• appoint the Chief Executive Officer; • actively participate in the appointment of senior management; • ensure that there is adequate training in the Company for Directors, management and employees; • establish a succession plan for senior management; and • ensure that all Directors are supplied with precise, timely and clear information so that they can effectively contribute to board decisions.
Main Principle – The Code STATEMENT OF COMPLIANCE WITH THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE - continued 29 STATEMENT OF COMPLIANCE WITH THE PRINCIPLES G OO D CORPORATE G OVERNANCE
The Board of Directors appoint the Chief Executive Officer as well as the members of senior management.
The Directors have access to the advice and services of the Company Secretary who is responsible for ensuring that the Board procedures and all applicable rules and regulations are followed. Furthermore, the Company Secretary ensures that the minutes faithfully record attendance, matters discussed, and decisions taken. Such minutes are circulated to all Directors in advance of meetings.
The Board and the Executive Committee ensure that the Bank applies schemes in order to recruit, retain, motivate and promote senior management. The Bank also encourages its management to move upwards in their career streams as well as to maintain high levels of morale amongst the Bank staff members.
PRINCIPLE 9 & 10 – RELATIONS WITH SHAREHOLDERS, THE MARKET AND INSTITUTIONAL SHARHOLDERS
The board shall serve the legitimate interests of the company, account to shareholders fully and ensure that the Company communicates with the market effectively. The board should as far as possible be prepared to enter into a satisfactory dialogue with institutional shareholders and market intermediaries based on the mutual understanding of objectives. The board shall use the general meeting to communicate with shareholders.
Main Principle 9 – The Code
The term ‘institutional shareholders’ should be interpreted widely and includes any person who by profession, whether directly or indirectly, takes a position in investments as principal, or Manager or holds funds for or on behalf of others and includes Custodians, banks, financial institutions, fund managers, stockbrokers, investment managers and others.
Main Principle 10 – The Code
The Bank provides regular and timely information to its shareholders in order for such shareholders to make informed decisions. Despite the fact that the Bank is not listed on any recognised investment exchange, the Bank communicates its long term strategic decisions to the market through press releases, interviews and the Bank’s Annual Report. It is believed that such communication enhances trust and confidence in the Bank and its management.
The Board ensures that the interests of the Bank’s shareholders are protected at all times. In addition, the Chairman ensures that the views of all shareholders are communicated to the Board. STATEMENT OF COMPLIANCE WITH THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE - continued 30
PRINCIPLE 11 – CONFLICTS OF INTEREST
Directors` primary responsibility is always to act in the interest of the Company and its shareholders as a whole irrespective of who appointed them to the board.
Main Principle – The Code
The Directors are strongly aware of their responsibility to act in the best interest of the Bank and their obligation to avoid conflicts of interest. Given that certain conflicts of interests arise naturally, the Bank has established a policy whereby any Director experiencing such conflict of interest is to make a frank declaration to the Board of Directors. CORPORATE G OVERNANCE OF COMPLIANCE WITH THE PRINCIPLES G OO D CORPORATE STATEMENT
In such instances, the relative Director does not participate in the discussion and does not vote on the matter. The minutes of the Board reflect the manner in which such situations were handled.
PRINCIPLE 12 – COPORATE SOCIAL RESPONSIBILITY
Directors should seek to adhere to accepted principles of corporate social responsibility in their day-to-day management practices of their company.
Main Principle – The Code
The Bank invests heavily in its workforce. The Bank has adopted a number of initiatives intended to make the employee’s experience at Banif a positive one. These include having an open-door policy to facilitate communication, study schemes, health insurances and loans with preferential rates, among others. The Bank employs a clear strategy of employee growth and development, achieved through training that is tailor-made to departmental and individual needs - learning that empowers employees and equips them with the necessary tools to further their personal and professional career.
Sustainability lies at the heart of the Bank’s operations, and is part and parcel of its business strategy. It has in place polices of transparency and accountability and its processes are environment-friendly, in line with its beliefs and with societal expectations.
The Bank’s Corporate Social Responsibility commitments support initiatives that give groups and individuals the tools to empower them and to increase their participation in society. Every year, the Bank earmarks a significant amount of funds to invest in projects related to the community. In 2012, the Bank supported projects of philanthropy, culture, heritage, youth, sports and education. STATEMENT OF COMPLIANCE WITH THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE - continued 31 STATEMENT OF COMPLIANCE WITH THE PRINCIPLES G OO D CORPORATE G OVERNANCE
SECTION 2 – NON-COMPLIANCE WITH THE CODE Principle 4 (Code provision 4.2.7)
Code provision 4.2.7 recommends that the Board, “develop a succession policy for the future composition of the board of Directors and particularly the executive component thereof, for which the Chairman should hold key responsibility”.
Given the fact that the Directors are appointed directly and exclusively by the Bank’s shareholders, the Bank does not consider the necessity to develop a succession policy for the Directors.
Principle 7
Principle 7 recommends that “The board should undertake an annual evaluation of its own performance and that of its committees”.
So far the Bank has not undertaken such independent evaluation of the Board and its committees, however any actions undertaken by the Board and its committees are indirectly evaluated through the results obtained by the Bank.
Principle 8
Code provision 8A recommends that “the board should establish a remuneration policy for Directors and senior executives. It should also set up formal and transparent procedures for developing such a policy and for establishing the remuneration packages of individual Directors”. In addition Code provision 8B recommends that “there should be a formal and transparent procedure for the appointment of new directors to the board. The procedure shall ensure inter alia, adequate information on the personal and professional qualifications of the candidates”.
As previously stated above, given the fact that the Directors are directly appointed by the Bank’s shareholders, the Bank does not consider the need to develop a Remuneration Committee and a Nomination Committee. STATEMENT OF COMPLIANCE WITH THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE - continued 32
SECTION 3 – INTERNAL CONTROL
The Board of Directors is ultimately responsible for internal control within the Bank. The Board is also responsible for ensuring that the basic roles of corporate responsibility, namely accountability, strategy formulation and policy development are implemented throughout the Bank. The Board of Directors delegates the authority to the Executive Committee to operate the Bank, within the limits set by the Executive Committee’s Terms of Reference.
On a regular basis, the Bank issues procedures to control and/or mitigate material operational risks. Such
CORPORATE G OVERNANCE OF COMPLIANCE WITH THE PRINCIPLES G OO D CORPORATE STATEMENT policies are subject to a periodic review, so as to adjust the process in accordance with the current operational risk profile. These Rules and Procedures are circulated and adhered to by staff at all times. In addition such Rules and Procedures are kept permanently on the Bank’s intranet, so that staff has access to such documents at all times. Any deviance from policy parameters must be sanctioned outside such policy, by the applicable sanctioning level.
The institution prides itself on practising high ethical and professional standards and a very serious view of any deviance is taken. A robust internal control mechanism premised on separate compliance, audit and risk functions is followed.
The central plank of the organisation’s risk activity is the full independence of the risk function and its segregation into risk management and risk control/oversight activities. Such compartmentalisation was implemented with effect from 2012, thereby reinforcing the already robust risk governance infrastructure:
• Risk control and oversight activities are performed by the Global Risk Department. The Global Risk Department is entrusted with setting the risk-related policies, risk metrics and other risk mitigation procedures. The Department identifies, quantifies and reports to top management the degree to which the Bank is exposed to different risks. These include solvency, credit (on a portfolio basis), concentration, market, liquidity, interest rate, operational, reputational and all other “residual” risks. • Risk management activities. The Bank’s Credit Analysis Office performs a risk management role at the micro level. That is to say, as a fully distinct internal entity (independent from the Global Risk Department, Commercial Department and all other internal Bank entities), Credit Analysis Office officials are involved in the credit sanctioning and renewal process. They analyse credit requests and make recommendations which seek to implement the risk policies, procedures and metrics formulated by the Global Risk Department. The Credit Committee sittings at different authorisation levels only approve granting and/or renewal of credit by consensus; each Credit Committee must have one official emanating from the Credit Analysis Office. The Credit Analysis Office official may withhold consensus by giving risk-based considerations effectively sending the credit decision to a higher sanctioning level than would otherwise be the case.
All risk officials cannot interact directly with customers thereby safeguarding full objectivity and avoiding the incidence of customer-induced bias. Such insularity coupled with functional independence and segregation of risk activity into two functions, ensures that the risks to which the Bank is exposed are tackled in a holistic manner designed to ensure that the entire organisation is aware of the nature, scale and degree of intensity of the risks involved in conducting the Bank’s operations. Segregation of risk control/oversight from risk management ensures that those who set risk policy, procedures and metrics do not get involved by becoming deal makers rather than deal questioners. STATEMENT OF COMPLIANCE WITH THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE - continued 33 STATEMENT OF COMPLIANCE WITH THE PRINCIPLES G OO D CORPORATE G OVERNANCE
In addition, the Bank believes in and practices an internal control mechanism founded on the four eyes principle, functional segregation and audit procedures. The Control & Compliance Department advises and keeps senior management informed on the implication of compliance laws and regulations that have a bearing on the Bank’s operations. The Department also identifies, documents and assesses the compliance risks associated with the Bank’s operational activities, including the development of new products and business practices.
The Internal Audit Office, on the other hand, monitors the conformity of the Bank’s operations with the set policies and standards and reviews key business processes and controls. The work of the internal audit office focuses on areas of greatest risk as determined by a risk management approach.
The responsibility for the development of financial forecasts of the Bank, in line with the strategic plans devised by the Board, is delegated to the Budget and Planning Committee. These financial forecasts provide the basis for continuous monitoring and control at various levels within the Bank. The relevant functions are then responsible to report on financial performance against plans to the Board on a monthly basis, identifying reasons for variances and, if necessary, corrective actions that need to be taken to ensure that objectives and targets set by the Board are achieved.
REMUNERATION REPORT
Directors’ remuneration for the financial year under review was as follows: EUR Directors’ salaries paid to full-time Bank employees 254,117
Directors’ fees 115,207
The Directors’ fees were paid to non-executive directors as follows:
Joseph Sammut - Chairman 69,881 Jorge Humberto Correia Tomé 4,373 Carlos David Duarte de Almeida 8,575 Artur Fernandes 3,098 Edward Cachia Caruana 7,690 Kenneth Mizzi 6,363 Maurice Mizzi 5,998 Mark Portelli 7,690 Simon Tortell 1,539 STATEMENT OF COMPLIANCE WITH THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE - continued
CORPORATE SOCIAL RESPONSIBILITY
Banif Bank acknowledges its responsibility towards the community it operates in – a community that has shown trust in the Bank ever since it laid its foundation stone in Malta. In a society that is increasingly facing a myriad of socio-economic challenges, it is strongly felt that companies have a duty to reach out to disadvantaged groups and individuals, to bridge gaps and address lacunae.
Spurred by one of Banif’s values – that of humanism – the Bank has a Corporate Social Responsibility policy that extends the Organisation’s support to local initiatives that help make a significant change in people’s lives. An effort is made to support projects that respect culture and heritage, philanthropy, and the empowerment of young people. STATEMENT OF COMPLIANCE WITH THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE - continued 35 STATEMENT OF COMPLIANCE WITH THE PRINCIPLES G OO D CORPORATE G OVERNANCE
Banif Bank’s flagship initiative The President’s Charity Fun Run
As the main sponsor and collaborator of the President’s Charity Fun Run since its very first edition four years ago, every year Banif Bank mobilises thousands of people to participate in the nation’s largest act of solidarity. The Bank’s flagship charity initiative is synonymous with Banif as every December a sea of indigo moves from Attard and Santa Venera to Valletta. It is an initiative that reaches out to society on many levels, promoting participation, philanthropy, sport, health and fitness.
The 2012 edition once again exceeded all expectations by attracting a record 13,000 people, who walked or ran to raise funds for the Malta Community Chest Fund and its deserving causes. STATEMENT OF COMPLIANCE WITH THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE - continued
Over the past years the Fun Run has generated hundreds of thousands of euro for L-Istrina, backed by Banif’s support. The Bank doubles the amount of funds collected and the Bank’s contribution in 2012 - ¤292,340 - was the largest contribution to L-Istrina, helping to make the 2012 edition a record-breaker.
The Bank also rallies its staff members who, apart from participating in the event, also give hands-on help with the organisation and logistics that this national event involves. STATEMENT OF COMPLIANCE WITH THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE - continued 37 STATEMENT OF COMPLIANCE WITH THE PRINCIPLES G OO D CORPORATE G OVERNANCE the Bank has a Corporate Social Responsibility policy that extends the Organisation’s support to local initiatives that help make a significant change in people’s lives.
Culture and Heritage Restoration of the Enthroned Madonna and Child
In 2012, a scientific conservation exercise on one of the finest and most significant Early Renaissance paintings in Malta was completed with the support of Banif Bank. The work comes from the inner circle of the great master Antonello da Messina and represents the Enthroned Madonna and Child. It is the surviving central panel of a triptych, commissioned for the old parish church of Zejtun around the first decade of the sixteenth century.
The University of Malta’s Research Programme for the Study of Late Medieval and Renaissance Art (Department of History of Art, Faculty of Arts) undertook diagnostic analysis of the painting, and embarked on an intervention to restore the painting to its former glory and give it back its original qualities.
STATEMENT OF COMPLIANCE WITH THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE - continued 39 STATEMENT OF COMPLIANCE WITH THE PRINCIPLES G OO D CORPORATE G OVERNANCE
Supporting Lejlet Lapsi
As part of the events organised by Lejlet Lapsi, Notte Gozitana, Banif Bank hosted an exhibition of digital photography by students from the Gozo Centre for Arts and Crafts. The works depicted rural themes and gave the students a platform to display their work to an audience.
Concerts in Gozo
Towards the end of 2012 the Gozo capital came alive with a number of cultural events put up for the Christmas season. A number of them were supported by Banif Bank, including opera and Christmas carol concert.
Initiatives for a better society Banif Bank marks Earth Hour 2012
In line with its sustainability strategy, Banif Bank joined other organisations around Malta and the world to mark Earth Hour, a global initiative taken by WWF that aims to increase public awareness to the problem of climate change. To this effect Banif Bank turned off the non-essential lights at its branches on Saturday 31st March, between 8.30 pm and 9.30 pm.
The initiative complements others taken by the Bank that show Banif’s concern for the great challenges in terms of sustainability of our planet. Some of these include providing financial products that promote better environmental practices, offering free internet banking to its clients and optimising eco-efficiency through practices that promote a more efficient use of energy.
Blood Donation
On World Kidney Day Banif Bank employees visited the Blood Donation Unit to give blood. The initiative is an annual one in the calendar of the Sports and Social Committee, in response to the National Blood Transfusion Centre’s periodic appeals for blood donors.
Banif and the Festa Season
Banif Bank cherishes what lies at the heart of the local community. To participate in the celebrations leading up to the feast-day in each town and village where Banif has a branch, the Bank’s branch façades pay homage to the locality’s saint by prominently displaying a poster of the venerated saint’s statue. STATEMENT OF COMPLIANCE WITH THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE - continued
Empowering youth Banif Bank sponsors the FISEC Games Malta 2012
Malta was the host country for the FISEC Games in 2012, supported by Banif Bank – an event that brought together 800 Catholic school students aged between 14 and 17 from 9 different countries including Malta. The youngsters took part in various sports events including futsal, basketball, volleyball, table tennis, athletics, swimming and football. The initiative provided aspiring young athletes with an opportunity to compete against their foreign peers, while promoting a healthy lifestyle and strengthening Catholic values. STATEMENT OF COMPLIANCE WITH THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE - continued 41 STATEMENT OF COMPLIANCE WITH THE PRINCIPLES G OO D CORPORATE G OVERNANCE
Collaboration with MCAST
Collage, acrylics, ink, impasto on wood... these are just a few materials that students set to work with, to create a set of bright and vibrant art works commissioned by Banif Bank (Malta) plc for its 2013 desk calendar. The students, second-years at the MCAST Institute of Art and Design, were given the task to present works for selection and were mostly given a free rein with style and materials. The result is an astonishing and eclectic set of works, smartly packaged in Banif’s 2013 desk calendar. Banif’s collaboration with MCAST sought to give students a platform for exposure and a chance to bridge their education with the requirements of industry.
The students were also given the opportunity to showcase their work during an evening of youth talent organised as part of the Duke of Edinburgh Awards at the Mediterranean Conference Centre. STATEMENT OF COMPLIANCE WITH THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE - continued 42
Sponsorship of the Duke of Edinburgh Awards
As a young Bank, Banif believes in the spirit of youth, recognising that a direct investment in the young people of today will reap the benefits of empowered citizens of tomorrow.
In line with this belief Banif Bank sponsored the 11th edition of the Duke of Edinburgh Awards Forum 2012. The Forum hosted 280 delegates from 66 countries, awarding young participants aged 14 and over, for undertaking voluntary projects and activities related to self-development.
Banif Bank close to the Gozo business community CORPORATE G OVERNANCE OF COMPLIANCE WITH THE PRINCIPLES G OO D CORPORATE STATEMENT Banif Bank (Malta) plc is committed to supporting local enterprises to grow their business. The Bank is focused on the provision of a whole range of banking services centred around business needs, and, more than a bank, Banif seeks to be a trusted partner.
To achieve this Banif strives to develop collaboration agreements with leading local entities in order to understand the real needs of the business communities in Malta and Gozo. Proof of this is the three-year agreement with the Gozo Tourism Association (GTA), intended to assist the GTA in promoting Gozo as a distinct and unique destination.
Circolo Gozitano
Banif Bank is supporting the Circolo Gozitano with a sponsorship that will help the Association organise its events. Every year the Circolo puts up a number of important events in Gozo’s calendar including the Ġieħ Għawdex awards and Gozo Day. STATEMENT OF COMPLIANCE WITH THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE - continued 43 STATEMENT OF COMPLIANCE WITH THE PRINCIPLES G OO D CORPORATE G OVERNANCE
GOING CONCERN
Having taken into consideration the Bank’s performance and the Bank’s future strategic goals, the Directors declare that the Bank is able to continue operating as a going concern for the foreseeable future.
Approved by the Board of Directors and signed on its behalf on 26th March 2013 by:
JOAQUIM Francisco DA SILVA PINTO JOSEPH SAMMUT Chief Executive Officer Chairman
INDEPENDENT AUDITORS REPORT 45 STATEMENT OF COMPLIANCE WITH THE PRINCIPLES G OO D CORPORATE G OVERNANCE INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF BANIF BANK (MALTA) PLC
We have audited the accompanying financial statements of Banif Bank (Malta) plc (‘the Bank’), set on pages 47 to 119, which comprise the statement of financial position as at 31 December 2012 and the statement of comprehensive income, statement of changes in equity and the statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes.
Directors’ Responsibility for the Financial Statements
As described in the Directors’ Report set out on pages 3 to 8, the directors are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards as adopted by the European Union and the requirements of the Companies Act, Cap. 386 and the Banking Act, Cap. 371 of the Laws of Malta, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate for the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by directors, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements:
• give a true and fair view of the financial position of the Bank as at 31 December 2012, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union; and • have been properly prepared in accordance with the requirements of the Companies Act, Cap. 386 and the Banking Act, Cap. 371 of the Laws of Malta.
INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF BANIF BANK (MALTA) PLC - continued 46
Report on other legal and regulatory requirements
Auditors’ Responsibility
We are required by the Banking Act, Cap. 371 of the Laws of Malta, to report whether we have obtained all the information and explanations which to the best of our knowledge and belief are necessary for the purposes of our audit, whether in our opinion proper books of account have been kept by the Bank so far as appears from our examination thereof, whether these financial statements are in agreement with the books, and whether in our opinion, and to the best of our knowledge and according to the explanations given to us, these financial statements give the information required by law or regulations in the manner so required and give a true and fair view.
We have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit. In our opinion proper books of account have been kept by the Bank so far as appears from our examination thereof and the financial statements are in agreement with the books.
CORPORATE G OVERNANCE OF COMPLIANCE WITH THE PRINCIPLES G OO D CORPORATE STATEMENT We also have responsibilities under the Companies Act, Cap. 386 of the Laws of Malta to report to you if in our opinion:
• the information given in the directors’ report is not consistent with the financial statements; • adequate accounting records have not been kept, or that returns adequate for our audit have not been received from branches not visited by us; • the financial statements are not in agreement with the accounting records; • we have not received all the information and explanations we require for our audit; and • if certain disclosures of directors’ remuneration specified by law are not made in the financial statements, giving the required particulars in our report.
We have nothing to report to you in respect of these responsibilities.
This copy of the audit report has been signed by Anthony Doublet for and on behalf of
Ernst & Young Malta Limited Certified Public Accountants
26 March 2013 47 INCOME STATEMENT
INCOME STATEMENT
Year ended 31 December 2012
2012 2011 Notes EUR’000 EUR’000
Interest receivable and similar income on loans and advances and balances with the Central Bank of Malta and other instruments 5 16,384 10,823 on financial assets classified as loans and receivables 5 328 789 on debt and other fixed income instruments 5 283 567 Interest payable and similar expense 6 (10,196) (5,996)
Net interest income 6,799 6,183
Fees and commission income 1,781 1,597 Fees and commission expense (433) (342)
Net fees and commission income 7 1,348 1,255
Net trading income 8 2,604 1,359
Net operating income 10,751 8,797
Employee compensation and benefits 9 (4,735) (4,349) Other administrative expenses 10 (4,197) (3,690) Depreciation of property and equipment 21 (461) (467) Amortisation of intangible assets 22 (206) (224)
Total operating expenses (9,599) (8,730)
Net operating profit before impairment and provisions 1,152 67
Net impairment losses 11 (902) (820)
Profit/(loss) before tax 250 (753)
Income tax (expense)/credit 12 (77) 175 Profit/(loss) for the year 173 (578)
EUR EUR Profit/(loss) per share 13 0.63c (2.10c)
48
STATEMENT OF COMPREHENSIVE INCOME year ended 31 December 2012 INCOME STATEMENT
2012 2011 EUR’000 EUR’000
Other comprehensive income Available-for-sale investments change in fair value 42 (4)
Other comprehensive income for the year, net of tax 42 (4)
Total comprehensive income for the year, net of tax 215 (582)
The accounting policies and explanatory notes on pages 53 to 119 form an integral part of the financial statements.
49 STATEMENT OF FINANCIAL POSITION
STATEMENT OF FINANCIAL POSITION as at 31 December 2012
2012 2011 Notes EUR’000 EUR’000 ASSETS Cash and balances with Central Bank of Malta 14 7,119 7,771 Cheques in course of collection 3,386 4,323 Financial investments held-for-trading 15 22,405 32,617 Financial assets designated at fair value through profit and loss 17 500 - Financial investments available-for-sale 16 1,132 22,290 Loans and advances to banks 18 107,622 127,780 Loans and advances to customers 19 313,592 248,915 Other loans and receivables – debt securities 19 6,456 10,264 Property and equipment 21 6,369 6,441 Intangible assets 22 664 728 Derivative financial instruments 24 3 109 Prepayments and accrued income 25 3,820 3,533 Deferred tax asset 23 5,386 5,461 Other assets 242 122
TOTAL ASSETS 478,696 470,354
LIABILITIES Amounts owed to banks 26 13,844 181,518 Amounts owed to customers 27 430,996 261,873 Derivative financial instruments 24 51 34 Debt securities in issue 28 5,000 - Other liabilities 29 2,388 2,787 Accruals and deferred income 30 4,872 2,812
TOTAL LIABILITIES 457,151 449,024
EQUITY Issued capital 31 32,500 32,500 Retained earnings 32 (10,993) (11,166) Revaluation reserve 32 38 (4)
TOTAL EQUITY 21,545 21,330
TOTAL LIABILITIES AND EQUITY 478,696 470,354
Memorandum items Contingent liabilities 36 7,311 4,905 Commitments 36 63,647 67,060
The accounting policies and explanatory notes on pages 53 to 119 form an integral part of the financial statements. The financial statements on pages 47 to 119 were authorised for issue by the Board of Directors and signed on it’s behalf on 26th March 2013 by:
JOAQUIM Francisco DA SILVA PINTO JOSEPH SAMMUT Chief Executive Officer Chairman 50
STATEMENT OF CHANGES IN EQUITY
Issued Revaluation Retained capital reserve earnings Total EUR’000 EUR’000 EUR’000 EUR’000 STATEMENT OF FINANCIAL POSITION STATEMENT
At 1 January 2011 25,000 - (10,588) 14,412
Issued share capital 7,500 - - 7,500
Loss for the year - - (578) (578)
Other comprehensive income: Available for sale investments change in fair value - (4) - (4) Total comprehensive income - (4) (578) (582)
Balance at 31 December 2011 32,500 (4) (11,166) 21,330
At 1 January 2012 32,500 (4) (11,166) 21,330
Profit for the year - - 173 173
Other comprehensive income: Available for sale investments change in fair value - 42 - 42 Total comprehensive income - 42 173 215
Balance at 31 December 2012 32,500 38 (10,993) 21,545
The accounting policies and explanatory notes on pages 53 to 119 form an integral part of the financial statements. 51 STATEMENT OF CHAN G ES IN EQUIT Y
STATEMENT OF CASH FLOWS
2012 2011 EUR’000 EUR’000
Operating activities Interest received 16,370 11,705 Fees and commission received 1,919 1,447 Interest paid (8,289) (5,399) Fees and commission paid (433) (342) Proceeds/cash lossses from trading activities 3,791 (332) Payments to employees and suppliers (8,855) (7,817)
Operating gain/(loss) before changes in operating assets/liabilities 4,503 (738)
(Increase)/decrease in operating assets Reserve deposit with Central Bank of Malta 417 1,809
Loans and advances to banks 1 282 Loans and advances to customers (65,578) (93,964) Financial investments held-for-trading 9,552 (27,742) Financial assets at fair value through profit and loss (500) - Other loans and receivables 3,808 (9,962) Other assets 995 (4,611)
Increase/(decrease) in operating liabilities Amounts owed to banks (26,467) 39,267 Amounts owed to customers 169,123 (171,806) Other liabilities (650) 447
Operating profit/(loss) after changes in operating assets/liabilities 95,204 (267,018)
Income tax paid (2) (3)
Net cash flows from/(used in) operating activities 95,202 (267,021)
Investing activities Purchase of property and equipment and intangible assets (388) (1,711) Purchase of available-for-sale investments (389) (40,665) Proceeds from sale of available-for-sale investments 21,629 18,371 Interest received on available-for-sale investments 355 486
Net cash flows from/(used in) investing activities 21,207 (23,519) STATEMENT OF CASH FLOWS - Continued 52
2012 2011 EUR’000 EUR’000
Financing activities Proceeds from issue of cumulative convertible preference shares - 7,500
STATEMENT OF CASH FLOWS STATEMENT Proceeds from issue of debt securities 5,000 -
Net cash flows from financing activities 5,000 7,500
Increase/(decrease) in cash and cash equivalents 121,409 (283,040)
Effects of exchange rate changes on cash and cash equivalents (46) 8,294 Net increase/(decrease) in cash and cash equivalents 121,455 (291,334)
Increase/(decrease) in cash and cash equivalents 121,409 (283,040)
Cash and cash equivalents at beginning of year (11,120) 271,920
Cash and cash equivalents at end of year (note 34) 110,289 (11,120)
The accounting policies and explanatory notes on pages 53 to 119 form an integral part of the financial statements.
53 STATEMENT OF CASH FLOWS
NOTES TO THE FINANCIAL STATEMENTS
1. CORPORATE INFORMATION
Banif Bank (Malta) plc (“the Bank”) is a public limited liability company domiciled and incorporated in Malta. The company was incorporated on 27 March 2007. It started operating as a fully-fledged retail bank during January 2008.
Banif Bank (Malta) plc is a subsidiary of Banif SGPS, SA, a company registered in Portugal, with its registered address at 30, Rua de Joao Tavira, 9004-509, Funchal, Madeira, Portugal.
2. BASIS OF PREPARATION
2.1 Statement of compliance
The financial statements have been prepared and presented in accordance with the provisions of the Banking Act, Cap. 371 and the Companies Act, Cap. 386 (the “Act”) of the Laws of Malta, which requires adherence to International Financial Reporting Standards (IFRSs) as adopted by the European Union.
The Bank presents its statement of financial position broadly in order of liquidity. An analysis regarding recovery or settlement within 12 months after the reporting date (current) and more than 12 months after the reporting date (non-current) is presented in note 37.
The Act specifies that in the event that any one of its provisions is in conflict or not compatible with IFRSs and their interpretation as adopted by the European Union or its application is incompatible with the obligation for the financial statements to give a true and fair view, that provision shall be departed from in order to give a true and fair view. The Bank has not departed from any IFRS provisions as adopted by the European Union.
2.2 Basis of measurement
The financial statements have been prepared under the historical cost basis except for available-for-sale financial assets, derivative financial instruments, financial assets designated at fair value through profit or loss and financial assets held-for-trading which are measured at fair value.
2.3 functional and presentation currency
The financial statements are presented in Euro (EUR), which currency represents the functional and presentation currency of the Bank. All values are rounded to the nearest EUR thousand.
2.4 use of estimates and judgements
In preparing the financial statements, management is required to make judgements, estimates and assumptions that affect reported income, expenses, assets, liabilities and disclosure of contingent assets and liabilities. Use of available information and application of judgement are inherent in the formation of estimates. Actual results in the future could differ from such estimates and the differences may be material to the financial statements. These estimates are reviewed on a regular basis and if a change is needed, it is accounted in the period the changes become known.
In the opinion of the management, the accounting estimates, assumptions and judgements made in the course of preparing these financial statements are not difficult, subjective or complex to a degree which would warrant their description as significant in terms of the requirements of IAS 1 (revised) -‘Presentation of financial statements’, except as disclosed below. NOTES TO THE FINANCIAL STATEMENTS - Continued 54 2. BASIS OF PREPARATION - Continued
2.4 use of estimates and judgements - Continued The most significant uses of judgement and estimates are as follows:
Going concern
The Bank’s management has made an assessment of the Bank’s ability to continue as a going concern
NOTES TO THE FINANCIAL STATEMENTS TO NOTES and is satisfied that the Bank has the resources to continue in business for the foreseeable future. Furthermore, the management is not aware of any material uncertainties that may cast significant doubt upon the Bank’s ability to continue as a going concern. Therefore, the financial statements continue to be prepared on the going concern basis.
Fair value of financial instruments
Where the fair value of financial assets and financial liabilities recorded on the statement of financial position cannot be derived from active markets, it is determined using a variety of valuation techniques that include the use of mathematical models. The inputs to these models are derived from observable market data where possible, but where observable market data is not available, judgement is required to establish fair values. The judgements include considerations of liquidity and model inputs such as volatility for longer dated derivatives and discount rates, prepayment rates and default rate assumptions for asset backed securities. The valuation of financial instruments is described in more detail in Note 38.
Impairment losses on loans and advances
The Bank reviews its individually significant loans and advances at each reporting date to assess whether an impairment loss should be recorded in the income statement. In particular, judgement by management is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. In estimating these cash flows, the Bank makes judgements about the borrower’s financial situation and the net realisable value of the collateral. These estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance.
Loans and advances that have been assessed individually, and found not to be impaired, are assessed together with all individually insignificant loans and advances in groups of assets with similar risk characteristics, to determine whether provision should be made, due to incurred loss events for which there is objective evidence but whose effects are not yet evident. The collective assessment takes account of data from the loan portfolio (such as type of credit, credit quality, level of arrears, etc.), concentrations of risks and economic data (including levels of unemployment, real estate prices indices, country risk and the performance of different individual groups).
The impairment loss on loans and advances is disclosed in more detail in Note 11 and Note 19.
Impairment of available-for-sale investments
The Bank reviews its debt securities classified as available-for-sale investments at each reporting date to assess whether they are impaired. This requires similar judgement as applied to the individual assessment of loans and advances.
Deferred tax assets
Deferred tax assets are recognised in respect of tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits, together with future tax planning strategies. In exercising its judgement management has taken into account historic trends, budgets and the ability to carry forward losses for offset indefinitely. NOTES TO THE FINANCIAL STATEMENTS - Continued 2. BASIS OF PREPARATION - Continued 55 NOTES TO THE FINANCIAL STATEMENTS
2.5 Standards, interpretations and amendments to published standards as endorsed by the European Union effective in the current year
The accounting policies adopted are consistent with those of the previous financial year, except for the following amendments to IFRS effective as of 1 January 2012:
• IAS 12 Income Taxes (Amendment) – Deferred Taxes: Recovery of Underlying Assets; and • IFRS 7 Financial Instruments: Disclosures (Amendments) - Enhanced Derecognition Disclosure Requirements. The effective date is for annual periods beginning on or after 1 July 2011.
The amended standards did not have an impact on the financial statements or performance of the Bank.
2.6 Standards, interpretations and amendments to published standards as endorsed by the EU that are not yet effective
Up to date of approval of these financial statements, certain new standards, amendments and interpretations to existing standards have been published but which are not yet effective for the current reporting year and which the Bank has not early adopted, but plans to adopt upon their effective date. The new and amended standards are as follows:
• IAS 1 Amendments – Presentation of items of other comprehensive income, effective for financial years beginning on or after 1 July 2012; • IAS 19 Amendments – Employee benefits, effective for financial years beginning on or after 1 January 2013. • IAS 27 Revised – Separate financial statements, effective for financial years beginning on or after 1 January 2014; • IAS 28 Revised – Investments in associates and joint ventures, effective for financial years beginning on or after 1 January 2014; • IAS 32 Amendments – Offsetting of financial assets and financial liabilities presentation, effective for financial years beginning on or after 1 January 2014; • IFRS 7 Amendments – Financial instruments: Disclosures – Offsetting of financial assets and financial liabilities, effective for financial years beginning on or after 1 January 2013; • IFRS 10 – Consolidated financial statements, effective for financial years beginning on or after 1 January 2014. • IFRS 11 – Joint arrangements, effective for financial years beginning on or after 1 January 2014; • IFRS 12 – Disclosures of interests in other entities (effective for financial years beginning on or after 1 January 2014; • IFRS 13 - Fair Value Measurement, effective for financial years beginning on or after 1 January 2013; and • IFRIC 20 – Stripping costs in the production phase of a surface mine, effective for financial years beginning on or after 1 January 2013.
Except as explained below, the changes resulting from these standards are not expected to have a material effect on the financial statements of the Bank.
IFRS 13 – Fair Value Measurement, effective for financial years beginning on or after 1 January 2013. The standard becomes effective for annual periods beginning on or after 1 January 2013. IFRS 13 does not change when an entity is required to use fair value, but rather, provides guidance on how to measure the fair value of financial and non-financial assets and liabilities, when required or permitted by IFRS. There are also additional disclosure requirements.
IFRS 7 Amendments – Financial instruments: Disclosures – Offsetting of financial assets and financial liabilities, effective for financial years beginning on or after 1 January 2013. These amendments require an entity to disclose information about rights to set-off and related arrangements (e.g., collateral agreements). The disclosures would provide users with information that is useful in evaluating the effect of netting arrangements on an entity’s financial position. The new disclosures are required for all recognised financial instruments that are set off in accordance with IAS 32 Financial Instruments: Presentation. The disclosures also apply to recognised financial instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are set off in accordance with IAS 32. NOTES TO THE FINANCIAL STATEMENTS - Continued 56 2. BASIS OF PREPARATION - Continued
2.7 Standards, interpretations and amendments to published standards that are not yet endorsed by the European Union
Up to date of approval of these financial statements, certain new standards, amendments and interpretations to existing standards have been published but which are not yet endorsed by the European Union. The Bank plans to adopt upon their effective date. The new and amended standards are as follows: NOTES TO THE FINANCIAL STATEMENTS TO NOTES • IFRS 7 Amendments – Disclosure for initial application of IFRS 9, effective for financial years on or after 1 January 2015; • IFRS 9 – Financial instruments, effective for financial years beginning on or after 1 January 2015. • Transition Guidance Amendments to IFRS 10, IFRS 11 and IFRS 12, effective for financial years beginning on or after 1 January 2013; • Investment entities Amendments to IFRS 10, IFRS 12 and IAS 27, effective for financial years beginning on or after 1 January 2014; and • Improvements to IFRSs issued May 2012 (various effective dates).
Except as explained below, the changes resulting from these standards are not expected to have a material effect on the financial statements of the Bank.
IFRS 9, as issued, reflects the first phase of the IASB’s work though the adoption date is subject to the recently issued Exposure Draft on the replacement of IAS 39 and applies to classification and measurement of financial assets and liabilities as defined in IAS 39. The standard was initially effective for annual periods beginning on or after 1 January 2013, but Amendments to IFRS 9, Mandatory Effective Date of IFRS 9 and Transition Disclosures, issued in December 2011, moved the mandatory effective date to 1 January 2015. In subsequent phases, the Board will address impairment and hedge accounting. The Bank will quantify the effect of the adoption of the first phase of IFRS 9 in conjunction with the other phases, when issued, to present a comprehensive picture.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue recognition
Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Bank and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised:
Interest income and expense
Interest income and expense are recognised in the income statement using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts, through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. The effective interest rate is established on initial recognition of the financial asset and liability and is not revised subsequently.
The calculation of the effective interest rate includes all fees paid or received, transaction costs, and discounts or premiums that are an integral part of the effective interest rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or liability.
Fee and commission income
Fee and commission income is accounted for in the period when receivable, except where such income is charged to cover the cost of a continuing service to, or risk borne for, the customer, or is interest in nature. In these cases, such income is recognised on an appropriate basis over the relevant period. NOTES TO THE FINANCIAL STATEMENTS - Continued 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 57 NOTES TO THE FINANCIAL STATEMENTS
Dividend income
Revenue is recognised when the right to receive payment is established.
Net trading income
Results arising from trading activities include all gains and losses from changes in fair value and related interest income or expense and dividends for financial assets and financial liabilities "held-for-trading".
Leases
The determination of whether an arrangement is a lease, or it contains a lease, is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.
Bank as a lessee
Leases which do not transfer to the Bank substantially all the risks and benefits incidental to ownership of the leased items are operating leases. Operating lease payments are recognised as an expense in the income statement on a straight-line basis over the term of the lease. Contingent rents payable are recognised as an expense in the period in which they are incurred.
Foreign currency translation
These financial statements are presented in Euro, which is the Bank’s functional and presentation currency. Transactions in foreign currencies are initially recorded in the functional currency rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the reporting date, whereas non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.
Gains and losses arising from such foreign exchange translations are taken to profit or loss, except for gains and losses resulting from the translation of available-for-sale non-monetary assets, which are recognised in equity.
Financial instruments
Financial assets in the scope of IAS 39 are classified as either financial assets at fair value through profit or loss, held-for-trading, loans and receivables, held-to-maturity investments, or available-for- sale financial assets, as appropriate. When financial assets or financial liabilities are recognised initially, they are measured at fair value, plus, in the case of financial assets or financial liabilities not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial assets or financial liabilities. The Bank determines the classification of its financial assets after initial recognition and, where allowed and appropriate, re-evaluates this designation at each financial period-end.
All regular way purchases and sales of financial assets are recognised on the trade date, which is the date that the Bank commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the market place. NOTES TO THE FINANCIAL STATEMENTS - Continued 58 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Financial Instuments - Continued
Derivatives recorded at fair value through profit or loss
The Bank uses derivatives such as cross currency swaps and forward foreign exchange contracts. Derivatives are recorded at fair value and carried as assets when their fair value is positive and as liabilities when their fair value is negative. Changes in the fair value of derivatives are included in ‘Net trading income’. NOTES TO THE FINANCIAL STATEMENTS TO NOTES
Financial assets and financial liabilities held-for-trading
Financial assets or financial liabilities held-for-trading, comprising financial instruments held-for-trading other than derivatives, are recorded in the statement of financial position at fair value. Changes in fair value are recognised in profit or loss. Interest and dividend income or expenses are recorded in income according to the terms of the contract, or when the right to the payment has been established.
Included in this classification are debt securities, equities and short positions in debt securities and securities which have been acquired principally for the purpose of selling or repurchasing in the near term.
Financial assets and financial liabilities designated at fair value through profit or loss
Financial assets and financial liabilities classified in this category are those that have been designated by management on initial recognition. Management may only designate an instrument at fair value through profit or loss upon initial recognition when the following criteria are met, and designation is determined on an instrument-by-instrument basis:
• the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognising gains or losses on them on a different basis; • the assets and liabilities are part of a group of financial assets, financial liabilities or both, which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; and • the financial instrument contains one or more embedded derivatives, which significantly modify the cash flows that would otherwise be required by the contract.
Financial assets and financial liabilities at fair value through profit or loss are recorded in the statement of financial position at fair value. Changes in fair value are recognised in profit or loss. Interest earned or incurred is accrued in interest income or expense, respectively, according to the terms of the contract.
Held-to-maturity financial investments
'Held-to-maturity' financial investments are non-derivative financial assets with fixed or determinable payments and fixed maturity. Such assets are classified as held-to-maturity when the Bank has the positive intention and ability to hold to maturity. Investments intended to be held for an undefined period are not included in this classification. Other long-term investments that are intended to be held- to-maturity, such as bonds, are subsequently measured at amortised cost. This cost is computed as the amount initially recognised minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initially recognised amount and the maturity amount. This calculation includes all fees and points paid or received between parties to the contract, that are an integral part of the effective interest rate, transaction costs and all other premiums and discounts. For investments carried at amortised cost, gains and losses are recognised in income when the investments are derecognised or impaired, as well as through the amortisation process.
The Bank did not include any assets in this category during 2012 and 2011. NOTES TO THE FINANCIAL STATEMENTS - Continued 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 59
Financial Instuments - Continued NOTES TO THE FINANCIAL STATEMENTS
Loans and advances to banks and to customers and other loans and receivables
‘Loans and advances to banks’, ‘loans and advances to customers’ and ‘other loans and receivabes – debt securities’ are non-derivative financial assets with fixed or determinable payments and fixed maturities that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not classified as ‘financial assets held-for-trading’, designated as ‘financial investment – available-for-sale’ or ‘financial assets designated at fair value through profit or loss’.
After initial measurement, loans and advances to banks and to customers are subsequently measured at amortised cost using the effective interest rate method, less allowance for impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the effective interest rate. The amortisation is included in ‘interest receivable and similar income’ in the income statement. The losses arising from impairment are recognised in ‘net impairment losses’.
Available-for-sale financial investments
Available-for-sale financial investments include equity and debt securities. Equity investments classified as ‘available-for-sale’ are those which are neither classified as ‘held-for-trading’ nor ‘designated at fair value through profit or loss’. Debt securities in this category are those which are intended to be held for an indefinite period of time and which may be sold in response to needs for liquidity or in response to changes in the market conditions.
After initial recognition, available-for-sale financial assets are measured at fair value with gains or losses being recognised directly in equity (other comprehensive income) in the ‘revaluation reserve’. When the investment is disposed of, the cumulative gain or loss previously recognised in equity is recognised in the income statement in ‘net trading income’. Where the Bank holds more than one investment in the same security they are deemed to be disposed of on a first-in first-out basis. Interest earned whilst holding available-for-sale financial investments is reported as interest income using the effective interest rate. Dividends earned whilst holding available-for-sale financial investments are recognised in the income statement as ‘inter’ when the right of the payment has been established. The losses arising from impairment of such investments are recognised in the income statement in ‘impairment losses on financial investments’ and removed from the ‘revaluation reserve’.
Reclassification of financial assets
As from 1 July 2008, the Bank was permitted to reclassify, in certain circumstances, non-derivative financial assets out of the ‘held-for-trading’ category and into the ‘available-for-sale’, ‘loans and receivables’, or ‘held-to-maturity’ categories. From this date it was also permitted to reclassify, in certain circumstances, financial instruments out of the ‘available-for-sale’ category and into the ‘loans and receivables’ category. Reclassifications are recorded at fair value at the date of reclassification, which becomes the new amortised cost.
For a financial asset reclassified out of the ‘available-for-sale’ category, any previous gain or loss on that asset that has been recognised in equity is amortised to profit or loss over the remaining life of the investment using the effective interest rate. Any difference between the new amortised cost and the expected cash flows is also amortised over the remaining life of the asset, using the effective interest rate. If the asset is subsequently determined to be impaired, then the amount recorded in equity is recycled to the income statement.
The Bank may reclassify a non-derivative trading asset out of the ‘held-for-trading’ category and into the ‘Loans and receivables’ category, if it meets the definition of loans and receivables and if the Bank has the intention and ability to hold the financial asset for the foreseeable future or until maturity. If a financial asset is reclassified, and if the Bank subsequently increases its estimates of future cash receipts as a result of increased recoverability of those cash receipts, the effect of that increase is recognised as an adjustment to the effective interest rate from the date of the change in estimate. NOTES TO THE FINANCIAL STATEMENTS - Continued 60 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Reclassification is at the election of management, and is determined on an instrument by instrument basis. The Bank does not reclassify any financial instrument into the fair value through profit or loss category after initial recognition.
Derecognition of financial assets and financial liabilities
NOTES TO THE FINANCIAL STATEMENTS TO NOTES Financial assets
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised when:
• the rights to receive cash flows from the asset have expired; or • the Bank has transferred its rights to receive cash flows from the asset, or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and • the Bank has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
When the Bank has transferred its rights to receive cash flows from an asset or has entered into a pass- through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Bank’s continuing involvement in the asset.
Financial liabilities
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expired. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the income statement.
Repurchase and reverse repurchase agreements
Securities sold under agreements to repurchase at a specified future date are not derecognised from the statement of financial position, as the Bank retains substantially all of the risks and rewards of ownership. The corresponding cash received is recognised in the statement of financial position as an asset with a corresponding obligation to return it, including accrued interest as a liability, reflecting the transaction’s economic substance as a loan to the Bank. The difference between the sale and repurchase prices is treated as interest expense and is accrued over the life of agreement using the effective interest rate. When the counterparty has the right to sell or repledge the securities, the Bank reclassifies those securities in its statement of financial position to financial assets held for trading pledged as collateral or to financial investments available-for-sale pledged as collateral, as appropriate.
Conversely, securities purchased under agreements to resell at a specified future date are not recognised in the statement of financial position. The consideration paid, including accrued interest, is recorded in the statement of financial position, reflecting the transaction’s economic substance as a loan by the Bank. The difference between the purchase and resale prices is recorded in net interest income and is accrued over the life of the agreement using the effective interest rate.
If securities purchased under agreement to resell are subsequently sold to third parties, the obligation to return the securities is recorded as a short sale within financial liabilities held for trading and measured at fair value with any gains or losses included in net trading income. NOTES TO THE FINANCIAL STATEMENTS - Continued 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 61 NOTES TO THE FINANCIAL STATEMENTS
Determination of fair value
The fair value for financial instruments traded in active markets at the reporting date is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions) without any deduction for transaction costs.
For all other financial instruments not traded in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include the discounted cash flow method, comparison to similar instruments for which market observable prices exist, options pricing models, credit models and other relevant valuation models.
Certain financial instruments are recorded at fair value using valuation techniques in which current market transactions or observable market data are not available. Their fair value is determined using a valuation model that has been tested against prices or inputs to actual market transactions and using the Bank’s best estimate of the most appropriate model assumptions. Models are adjusted to reflect the spread for bid and ask prices to reflect costs to close out positions, counterparty credit and liquidity spread and limitations in the models. Also, profit or loss calculated when such financial instruments are first recorded is deferred and recognised only when the inputs become observable, or on derecognition of the instrument.
An analysis of fair values of financial instruments and further details as to how they are measured are provided in Note 38.
Impairment of financial assets
The Bank assesses at each reporting date whether there is evidence that a financial asset or group of financial assets is impaired. Financial assets are impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset, and that the loss event has an impact on the future cash flows on the asset that can be estimated reliably.
The Bank considers evidence of impairment at both a specific asset and collective level. All individually significant financial assets are assessed for specific impairment. All significant assets found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Assets that are not individually significant are collectively assessed for impairment by bringing together financial assets (carried at amortised cost) with similar risk characteristics.
Loans and advances to banks and to customers
For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of the Bank’s internal credit grading system that considers credit risk characteristics such as asset type, industry, geographical location, collateral type, past-due status and other relevant factors.
Objective evidence that financial assets are impaired can include default or delinquency by a borrower, restructuring of a loan or advance by the Bank on terms that the Bank would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the Bank, or economic conditions that correlate with defaults in the Bank.
For loans and advances to banks and loans and advances to customers carried at amortised cost, the amount of the loss is measured as the difference between the carrying amount of the financial assets and the present value of estimated cash flows discounted at the assets’ original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. The calculation of the present value of the estimated future cash flows of a collateralised loan reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. The carrying amount of the asset is reduced through NOTES TO THE FINANCIAL STATEMENTS - Continued 62 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
the use of an allowance account and the amount of the loss is recognised in the income statement. Once a loan is assessed as impaired and provided against, all interest accruing on that facility is immediately suspended, i.e. such interest is no longer recognised as income or as an asset in the financial statements.
If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss
NOTES TO THE FINANCIAL STATEMENTS TO NOTES is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to the "net impairment losses".
Renegotiated and rescheduled loans
Where possible, the Bank seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement on new loan conditions. Once the terms have been renegotiated any impairment is measured using the original effective interest rate as calculated before the modification of terms and the loan is no longer considered past due. Management continually reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan’s original effective interest rate.
Property and equipment
All property and equipment is stated at cost (excluding the costs of day-to-day servicing), less accumulated depreciation and accumulated impairment. Changes in the expected useful life are accounted for by changing the depreciation period or method, as appropriate, and treated as changes in accounting estimates.
Depreciation is calculated on the straight line basis so as to write off the cost of each asset to its residual value over its estimated useful economic life. Land is not depreciated. The estimated useful lives are as follows:
Land and buildings:
Freehold 20 years Leasehold 10 years
Computer equipment 4 years Other equipment 6–10 years
Property and equipment is derecognised upon disposal, or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit and loss in the period the asset is derecognised. The asset’s residual value, useful life and method are reviewed, and adjusted if appropriate, at each financial period end.
Intangible assets
Intangible assets consist of computer software and other intangibles which include licenses. Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite.
Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life is reviewed at least at each financial period end. Changes in the expected useful life or the expected pattern of consumption of future NOTES TO THE FINANCIAL STATEMENTS - Continued 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 63 NOTES TO THE FINANCIAL STATEMENTS economic benefits embodied in the asset, is accounted for by changing the amortisation period or method as appropriate, and treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the income statement in the expense category consistent with the function of the intangible asset.
Amortisation is calculated using the straight-line method to write down the cost of intangible assets to their residual values over their estimated useful lives. Computer software is amortised over 4 years.
Intangible assets with indefinite useful lives are not amortised, but are tested for impairment annually either individually or at the cash generating unit level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis. Other intangibles are assessed as having an indefinite useful life.
A summary of the policies applied to the Bank’s intangible assets is as follows:
Computer software Other intangibles Useful lives Finite Indefinite Amortisation method used Amortised on a straight line basis No amortisation
Impairment of non-financial assets
The Bank assesses at each reporting date or more frequently, if events or changes in circumstances indicate that the carrying value may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Bank makes an estimate of the asset’s recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. Impairment losses are recognised in the income statement, in those expense categories consistent with the function of the impaired asset.
For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist, or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised. If that is the case the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognised for the asset in prior years. Such reversal is recognised in profit or loss. After such a reversal the depreciation charge is adjusted in future periods to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.
Taxation
Current income tax
Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from, or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date. Current income tax relating to items recognised directly in equity is recognised in equity and not in profit or loss.
Deferred income tax
Deferred income tax is provided using the liability method on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences, except: NOTES TO THE FINANCIAL STATEMENTS - Continued 64 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Taxation - Continued
Deferred income tax - continued
• where the deferred income tax liability arises from the initial recognition of goodwill or of an asset, or a liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and • in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be NOTES TO THE FINANCIAL STATEMENTS TO NOTES controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred income tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised except:
• where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and • in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred income tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.
The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Unrecognised deferred income tax assets are reassessed at each reporting date, and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.
Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Deferred income tax relating to items recognised directly in equity is recognised in equity and not in profit or loss.
Deferred income tax assets and deferred income tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.
Retirement benefit costs
The Bank contributes towards the government pension defined contribution plan in accordance with local legislation and to which it has no commitment beyond the payment of fixed contributions. These obligations are recognised as an expense in the income statement, as they accrue. The Bank does not contribute towards any other retirement benefit plans.
Cash and cash equivalents
For the purpose of the statement of cash flows, cash and cash equivalents comprise:
(i) cash in hand and deposits repayable on call or short notice or with an original contractual period to maturity of less than three months, with any bank or financial institution;
(ii) short-term highly liquid investments which are readily convertible into known amounts of cash without notice, subject to an insignificant risk of changes in value and with an original contractual period of maturity of less than three months; and
(iii) advances to/from banks repayable within three months from the date of the advance. NOTES TO THE FINANCIAL STATEMENTS - Continued 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 65 NOTES TO THE FINANCIAL STATEMENTS
Financial guarantees
In the ordinary course of business, the Bank gives financial guarantees, consisting of letters of credit, guarantees and acceptances. Financial guarantees are initially recognised in the financial statements at fair value, being the premium received. Subsequent to initial recognition, the Bank’s liability under each guarantee is measured at the higher of the amortised premium and the best estimate of expenditure required to settle any financial obligation arising as a result of the financial guarantee.
The premium received is recognised in the income statement in "fees and commission income" on a straight line basis over the life of the guarantee.
Revaluation reserve
The reserve recorded in equity on the Bank’s statement of financial position includes a revaluation reserve, which comprises of changes in fair value of available-for-sale investments.
Cumulative convertible preference shares
The cumulative convertible preference shares were treated entirely as equity. The terms of the contract envisaged that such shares were convertible into ordinary shares only upon a fresh issue of ordinary shares. Cumulative dividends were payable only when the first dividends were paid to ordinary shareholders.
All the preference shares in issue were converted into ordinary shares during 2012. However, shareholders agreed that this was not to be accompanied by a fresh issue of ordinary shares during that same year. The preference dividend payable on the preference shares was foregone on conversion.
4. SEGMENT INFORMATION
The segment reporting of the Bank is made in terms of the business segments which it conducts its business in, as the risks and rates of return are affected predominantly by differences in the products and services produced. The Bank is currently organised into three main business segments:
Retail banking – principally handling customers’ deposits, providing consumer loans, overdrafts and funds transfer facilities; Corporate banking – principally handling loans and other credit facilities and deposit and current accounts for corporate and institutional customers; Other – principally treasury and other central functions.
Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss. Income taxes are managed on a group basis and are not allocated to operating segments.
Interest income is reported net, as management does not rely on the gross income or expense but primarily relies on net interest revenue as a performance measure.
Other than revenue generated from business carried out with Banif, SA, no revenue from transactions with a single external customer or counterparty amounted to 10% or more of the Bank’s total revenue in 2012 or 2011. This is included with the "other" business segment in the tables below and a detailed analysis of all the balances held, and income earned is included in Note 35 dealing with related party disclosures. NOTES TO THE FINANCIAL STATEMENTS - Continued 66 4. SEGMENT INFORMATION - Continued
No reconciliation is required since there are no differences between the measurements of the reportable segments’ profits or losses, assets and liabilities and the entity’s profit or loss, assets and liabilities.
The following tables present income, profit and certain asset and liability information regarding the Bank’s business segments for the years ended 31 December 2012 and 2011:
Retail Corporate NOTES TO THE FINANCIAL STATEMENTS TO NOTES Banking Banking Other Total 2012 2012 2012 2012 EUR’000 EUR’000 EUR’000 EUR’000
Net operating income Net interest income 3,137 2,442 1,220 6,799 Net fee and commission income 520 768 60 1,348 Net trading income - - 2,604 2,604
Total operating income 3,657 3,210 3,884 10,751 Net impairment losses (512) (390) - (902)
Net operating income 3,145 2,820 3,884 9,849
Employee compensation and benefits (3,130) (895) (710) (4,735) Other administrative expenses (2,457) (881) (859) (4,197) Depreciation of property and equipment (370) (60) (31) (461) Amortisation of intangible assets (110) (52) (44) (206)
Segment result (2,922) 932 2,240 250
Income tax expenses (77)
Profit for the year 173
Assets and liabilities Segment assets 206,291 116,740 142,081 465,112 Unallocated assets 13,584
Total assets 478,696
Segment liabilities 303,551 60,355 85,048 448,954 Unallocated liabilities 8,197
Total liabilities 457,151 NOTES TO THE FINANCIAL STATEMENTS - Continued 4. SEGMENT INFORMATION - Continued 67
NOTES TO THE FINANCIAL STATEMENTS
Retail Corporate Banking Banking Other Total 2011 2011 2011 2011 EUR’000 EUR’000 EUR’000 EUR’000
Net operating income Net interest income 2,677 2,807 699 6,183 Net fee and commission income 382 683 190 1,255 Net trading income - - 1,359 1,359
Total operating income 3,059 3,490 2,248 8,797 Net impairment losses (424) (396) - (820)
Net operating income 2,635 3,094 2,248 7,977
Employee Compensation and benefits (2,635) (1,102) (612) (4,349) Other administrative expenses (2,021) (928) (741) (3,690)
Depreciation of property and equipment (243) (129) (95) (467) Amortisation of intangible assets (116) (63) (45) (224)
Segment result (2,380) 872 755 (753)
Income tax credit 175
Loss for the year (578)
Assets and liabilities Segment assets 159,308 101,153 200,430 460,891 Unallocated assets 9,463
Total assets 470,354
Segment liabilities 223,653 40,347 183,799 447,799 Unallocated liabilities 1,225
Total liabilities 449,024
There was no other segmental information of relevance to report as at the reporting date. Geographical segmentation information is not appropriate, due to the limited size of the market. NOTES TO THE FINANCIAL STATEMENTS - Continued 68
5. INTEREST RECEIVABLE AND SIMILAR INCOME
2012 2011 EUR’000 EUR’000
On loans and advances to banks (note i) 1,874 550
NOTES TO THE FINANCIAL STATEMENTS TO NOTES On loans and advances to customers (note ii) 14,479 10,216 On debt securities classified as loans and receivables 328 789 On balances with Central Bank of Malta 31 57
16,712 11,612 On available-for-sale, debt and fixed income instruments interest (note iii) 284 568 amortisation of discounts and premiums (1) (1) 283 567
Total interest receivable and similar income 16,995 12,179
i. The income earned from loans and advances to banks is almost entirely made up of interest earned on balances and placements held with banks in Banif Group.
ii. Interest income on loans and advances to customers includes that generated from impaired financial assets which amounted to EUR935,426 (2011: EUR634,408).
iii. Interest income on available-for-sale investments includes an amount of EUR202,572 (2011: EUR543,264) the fair value of which is determined at level 3 of the fair value hierarchy.
6. INTEREST PAYABLE AND SIMILAR EXPENSE
2012 2011 EUR’000 EUR’000
On amounts owed to banks 445 758 On amounts owed to customers 9,579 5,238 On debt securities in issue 172 - 10,196 5,996 NOTES TO THE FINANCIAL STATEMENTS - Continued 69 NOTES TO THE FINANCIAL STATEMENTS
7. NET FEES AND COMMISSION INCOME
2012 2011 EUR’000 EUR’000
Fees and commission income Credit related fees and commissions 744 715 Other fees 1,037 882
1,781 1,597
Fees and commission expense Other fees (433) (342)
Net fees and commission income 1,348 1,255
8. NET TRADING INCOME
2012 2011 EUR’000 EUR’000
Debt securities Net interest 732 418 Realised gains/(losses) on sale 1,880 (237) Unrealised fair value (losses)/gains (619) 1,000
1,993 1,181
Foreign exchange From derivatives (122) (25) From commercial business activities 733 203
611 178
Net trading income 2,604 1,359
‘Debt securities’ income includes the results of buying and selling, changes in the fair value and the related interest income and expense of debt securities, classified as ‘held-for-trading’.
‘Foreign exchange income from derivatives’ includes gains and losses from spot and forward contracts and other currency derivatives.
‘Foreign exchange income from commercial business activities’ includes gains from foreign exchange in retail trade, as well as from foreign exchange transactions carried through debit and credit cards. NOTES TO THE FINANCIAL STATEMENTS - Continued 70
9. EMPLOYEE COMPENSATION AND BENEFITS
2012 2011 EUR’000 EUR’000
Directors’ remuneration 369 436 NOTES TO THE FINANCIAL STATEMENTS TO NOTES Wages and salaries executive officers and senior managerial 1,820 1,573 other managerial, supervisory and clerical 2,231 2,061 others 47 50 Social security costs executive officers and senior managerial 82 67 other managerial, supervisory and clerical 181 157 others 5 5
4,366 3,913
Total employee compensation and benefits 4,735 4,349
The average number of persons employed by the Bank during the years 2012 and 2011 was as follows:
2012 2011 Number of Number of employees employees
Executive officers and managerial 41 36 Other supervisory and clerical 103 91 Others 3 3 147 130
10. OTHER ADMINISTRATIVE EXPENSES
Administrative expenses include:
2012 2011 EUR’000 EUR’000
Auditors’ remuneration (note i) 40 66 Information system and communications 939 873 Business development 858 690 Corporate services (note ii) 1,094 1,162 Regulatory expenses (note iii) 329 101 Other 937 798 4,197 3,690 NOTES TO THE FINANCIAL STATEMENTS - Continued 10. OTHER ADMINISTRATIVE EXPENSES - Continued 71
NOTES TO THE FINANCIAL STATEMENTS i. Auditors’ remuneration include assurance related services of EUR10,599 (2011: EUR17,936), payable to the Bank’s auditors. No non-audit services were provided during 2012 (2011: EUR17,818). ii. Corporate services include operating lease payments amounting to EUR246,942 (2011: EUR225,227). iii. In terms of Legal Notice 109 of 2010 amending the Depositor Compensation Scheme Regulations of 2003, the Bank paid an additional cash contribution to the Depositor Compensation Scheme in March 2012 of EUR89,106. In terms of Legal Notices 159 and 340 of 2012, the Bank paid an additional supplementary contribution of EUR79,480. This is included under Regulatory expenses.
In total, from incorporation up to 31 December 2012, the Bank has contributed EUR320,330 in variable contributions. This represents 0.133% of eligible deposits as at end of December 2011. In terms of said Regulations, the Bank is obliged to pay additional cash contributions to the Scheme, in line with increases in eligible deposits as at end of December of each year by 1st of March of the following year. The cash contribution to be paid in 2013 amounts to EUR160,364.
11. NET IMPAIRMENT LOSSES
2012 2011 EUR’000 EUR’000
Write-downs Loans and advances to customers Collective impairment 878 657 Individual impairment 823 531 Bad debts written off - 7
1,701 1,195
Reversals of write-downs Loans and advances to customers Collective impairment (474) (211) Individual impairment (325) (164)
(799) (375)
Net impairment losses 902 820
In 2012, the Bank initiated a process of using its own history of credit losses and probability of defaults, for the purpose of calculating the collective provision for impairment. Before that, the Bank was using market probability of defaults given the limited history of credit losses. The effect of this change is reflected in the amounts for 2012. NOTES TO THE FINANCIAL STATEMENTS - Continued 72
12. INCOME TAX (EXPENSE)/CREDIT
The components of income tax for the years ended 31 December 2012 and 2011 are:
2012 2011 EUR’000 EUR’000
NOTES TO THE FINANCIAL STATEMENTS TO NOTES Income statement: Current income tax (2) (3) Deferred income tax (75) 178 (77) 175
The tax on (profit)/loss on ordinary activities and the result of accounting (profit)/loss multiplied by the applicable tax rate in Malta of 35% are reconciled as follows:
2012 2011 EUR’000 EUR’000
(Profit)/loss before tax (250) 753
Tax at the applicable rate of 35% (87) 264 Tax effect of: non-recoverable foreign withholding tax (2) (3) non-deductible expenses (66) (86) other difference 78 - Income tax (expense)/credit (77) 175
NOTES TO THE FINANCIAL STATEMENTS - Continued 73 NOTES TO THE FINANCIAL STATEMENTS
13. PROFIT/(LOSS) PER SHARE
Basic profit per share amounts are calculated by dividing net profit attributable to the shareholders of the Bank as shown in the statement of comprehensive income, divided by the weighted average number of ordinary shares outstanding during the year. The preference shares were converted to ordinary shares in 2012 and the payment of the convertible preference dividend was foregone.
2012 2011 EUR’000 EUR’000
Net profit/(loss) attributable to shareholders 173 (578)
2012 2011 000s 000s
Weighted average number of ordinary shares 27,541 27,541
The weighted average number of ordinary shares of 2011, previously disclosed as 25,000,000, was adjusted retrospectively since the number of ordinary shares outstanding increased as a result of the conversion of the preference shares into ordinary shares in 2012.
The net loss attributable to the shareholders in 2011 was also revised from EUR0.741million to EUR0.578million since the preference dividend payable on the preference shares was foregone on conversion.
14. CASH AND BALANCES WITH CENTRAL BANK OF MALTA
2012 2011 EUR’000 EUR’000
Balances with Central Bank of Malta 3,939 5,008 Cash 3,180 2,763 7,119 7,771
The average balance of the reserve deposit, required at year end in terms of Article 32 of the Central Bank of Malta Act, Cap. 204 of the Laws of Malta, with the Central Bank of Malta was of EUR2,721,932 (2011: EUR3,139,064).
The balances with Central Bank of Malta also include an amount of EUR686,905 (2011: EUR406,675) which is pledged in favour of the Depositor Compensation Scheme, in terms of the Depositor Compensation Scheme Regulations of 2003 as amended by Legal Notices 109 of 2010, 159 and 340 of 2012. NOTES TO THE FINANCIAL STATEMENTS - Continued 74
15. FINANCIAL INVESTMENTS HELD-FOR-TRADING
Financial investments designated as ‘Held-for-Trading’ included the following:
2012 2011 EUR’000 EUR’000 NOTES TO THE FINANCIAL STATEMENTS TO NOTES
i. Debt and other fixed income instruments 19,053 29,433 ii. Other non-fixed income instruments 3,352 3,184 22,405 32,617
i. Debt and other fixed income instruments
Government debt securities: local 10,614 599 foreign 3,973 - 14,587 599
Debt securities issued by banks: local 1,959 2,727 foreign 1,490 21,077 Other debt securities 1,017 5,030
Other debt securities 4,466 28,834 19,053 29,433
Listing status: listed on Malta Stock Exchange 12,573 3,383 listed elsewhere 6,480 26,050
19,053 29,433
Summary of movements during the year:
At the beginning of the year 29,433 3,282 acquisitions 51,306 34,166 disposals (14,894) (3,632) redemptions 46,614 - movement in fair value (135) (4,391) exchange adjustment - 8 reclassifications (43) - At the end of the year 19,053 29,433
NOTES TO THE FINANCIAL STATEMENTS - Continued 15. FINANCIAL INVESTMENTS HELD-FOR-TRADING - Continued 75
NOTES TO THE FINANCIAL STATEMENTS
ii. Other non-fixed income instruments
2012 2011 EUR’000 EUR’000
Debt securities issued by banks: foreign 3,352 3,184
Listing status: listed elsewhere 3,352 3,184
Summary of movements during the year:
At the beginning of the year 3,185 - acquisitions 10,154 3,092 disposals (7,050) - redemptions (3,092) - movement in fair value 155 93 At the end of the year 3,352 3,185
Financial assets held-for-trading with a carrying amount of EUR19,052,905 (2011: EUR29,652,665) have been pledged in favour of the Central Bank of Malta against the provision of credit facilities. The Bank has determined that it retains substantially all the risks and rewards of these securities, which include credit risk and market risk, and therefore it has not derecognised them. In addition, it recognises a financial liability for cash received as collateral (Note 26). NOTES TO THE FINANCIAL STATEMENTS - Continued 76
16. FINANCIAL INVESTMENTS – AVAILABLE-FOR-SALE
Financial investments classified as ‘available-for-sale’ were made as follows:
2012 2011 EUR’000 EUR’000
i. Debt and other fixed income instruments 1,132 661 NOTES TO THE FINANCIAL STATEMENTS TO NOTES ii. Other non-fixed income instruments - 21,629
1,132 22,290
i. Debt and other fixed income instruments Government debt securities 1,132 661
Listing status: listed on Malta Stock Exchange 1,132 661
Summary of movements during the year
At the beginning of the year 661 - acquisitions 388 665 redemptions - - movement in fair value 40 (4) reclassifications 43 - At the end of the year 1,132 661
ii. Other non-fixed income instruments
Other debt securities - 21,629
The amount in 2011 represented an investment in Class A Notes, issued by a related company.
2012 2011 EUR’000 EUR’000
Summary of movements during the year
At the beginning of the year 21,629 - acquisitions - 40,000 disposals (21,629) (18,371) At the end of the year - 21,629
Financial assets with a carrying amount of EUR1,132,271 (2011: EUR660,965) have been pledged in favour of the Depositors’ Compensation Scheme in terms of Legal Notices 109 of 2010, 159 and 340 of 2012 amending the Depositor Compensation Scheme Regulations of 2003. NOTES TO THE FINANCIAL STATEMENTS - Continued 77
NOTES TO THE FINANCIAL STATEMENTS
17. FINANCIAL ASSETS DESIGNATED AT FAIR VALUE THROUGH PROFIT AND LOSS
Financial assets designated at fair value through profit and loss include the following:
2012 2011 EUR’000 EUR’000
Equity and other non-fixed income instruments 500 -
Equity and other non-fixed income instruments Other equity instruments local 500 -
Listing status: listed on Malta Stock Exchange 500 -
Summary of movements during the year
At the beginning of the year - - acquisitions 500 -
At the end of the year 500 -
18. LOANS AND ADVANCES TO BANKS 2012 2011 EUR’000 EUR’000
Repayable on call and at short notice 867 111,780 Placements 106,755 16,000 107,622 127,780 NOTES TO THE FINANCIAL STATEMENTS - Continued 78
19. LOANS, ADVANCES AND DEBT SECURITIES 2012 2011 EUR’000 EUR’000
Repayable on call and at short notice 57,240 59,274 Term loans and advances 259,252 191,640 NOTES TO THE FINANCIAL STATEMENTS TO NOTES
Gross loans and advances to customers 316,492 250,914 Other loans and receivables – debt securities 6,456 10,264 322,948 261,178
Less allowance for impairment losses (2,900) (1,999) Loans, advances and debt securities 320,048 259,179
Allowances for impairment: Individually assessed allowances 1,324 826 Collectively assessed allowances 1,576 1,173 2,900 1,999
Gross amount of loans individually determined to be impaired, before deducting the individually assessed impairment allowance 12,736 8,217
Loans and advances to customers includes an amount of EUR3.588million (2011: EUR3.642 million) classified as doubtful facilities.
NOTES TO THE FINANCIAL STATEMENTS - Continued 79
NOTES TO THE FINANCIAL STATEMENTS
20. RECLASSIFICATION OF FINANCIAL ASSETS
In 2012, in line with Banif Group, the Bank reviewed its financial assets portfolio, to assess whether the asset designation assigned to its intra-group financial assets was appropriate. As a rare circumstance, it was determined that the market for these assets was not active and it was appropriate to classify under the loans and receivables category since their acquisition. The change in classification did not give rise to a change in the carrying amount. There were no fair value gains or losses on reclassification and in previous reporting periods. The effective interest rate and estimated amounts of cash flows the Bank expects to recover, as at the date of reclassification, is the coupon rate and the nominal amount respectively.
The impact of the above disclosed matter was adjusted in the comparative financial statements as follows:
As previously Effect of Amounts as reported reclassification reclassified EUR’000 EUR’000 EUR’000
Income statement
Interest receivable and similar income: on financial assets classified as loans and receivables - 789 789 on debt and other fixed income intruments 783 (216) 567 Net trading income 1,932 (573) 1,359 2,715 - 2,715
Statement of financial position
Financial assets held-for-trading 41,402 (8,785) 32,617 Financial investments available-for-sale 23,769 (1,479) 22,290 Other loans and receivables – debt securities - 10,264 10,264 65,171 - 65,171 NOTES TO THE FINANCIAL STATEMENTS - Continued 80
21. PROPERTY AND EQUIPMENT
Land and Computer Other buildings equipment equipment Total EUR’000 EUR’000 EUR’000 EUR’000
Cost: NOTES TO THE FINANCIAL STATEMENTS TO NOTES At 1 January 2011 4,938 1,095 866 6,899 Additions 1,067 141 230 1,438
At 31 December 2011 6,005 1,236 1,096 8,337 Additions 325 32 35 392 Disposal - (2) (1) (3) At 31 December 2012 6,330 1,266 1,130 8,726
Depreciation: At 1 January 2011 483 670 276 1,429 Depreciation charge for the year 203 134 130 467
At 31 December 2011 686 804 406 1,896 Depreciation charge for the year 220 102 139 461 At 31 December 2012 906 906 545 2,357
Net book value: At 31 December 2012 5,424 360 585 6,369 At 31 December 2011 5,319 432 690 6,441 At 1 January 2011 4,455 425 590 5,470
Land and buildings include an amount of EUR2,353,963 (2011: EUR2,061,695) relating to the cost of acquisition of properties to serve as branches for the Bank’s retail business activities. The fair value of the land and building approximates the carrying amount.
In the figures reported above, there is included an amount of EUR302,628 (2011: EUR24,802) representing cost of assets still not put to use as at year end. Accordingly, no depreciation charge was taken on this amount.
Future capital expenditure which was authorised by the Board, but has to date not yet been contracted for, amounted to EUR3,158,920 (2011: EUR3,168,973). Additionally an amount of EUR148,071 (2011: EUR295,804) has been contracted for, but not provided for in the financial statements (Note 36). NOTES TO THE FINANCIAL STATEMENTS - Continued 81
NOTES TO THE FINANCIAL STATEMENTS
22. INTANGIBLE ASSETS
Computer Other software intangibles Total EUR’000 EUR’000 EUR’000
Cost: At 1 January 2011 810 109 919 Additions 308 24 332
At 31 December 2011 1,118 133 1,251 Additions 158 - 158 Disposals (16) - (16)
At 31 December 2012 1,260 133 1,393
Amortisation: At 1 January 2011 299 - 299 Amortisation charge for the year 212 12 224
At 31 December 2011 511 12 523 Amortisation charge for the year 194 12 206
At 31 December 2012 705 24 729
Net book value: At 31 December 2012 555 109 664
At 31 December 2011 607 121 728
At 1 January 2011 511 109 620
Computer software includes EUR28,359 (2011: EUR199,231) worth of assets which are not put to use. The remaining average amortisation period is of 3 years.
Other intangibles includes an amount of EUR108,500 purchased in 2008 and which represents an asset with an indefinite useful life. This relates to the amount paid to VISA to be able to form part of the VISA network throughout the period during which debit and credit cards are offered to clients of the Bank. In determining the useful life of this asset, the following factors were taken into consideration: i. the expected usage of the asset by the Bank in that the useful life of this asset is entirely tied to the intention of the Bank to indefinitely continue offering VISA debit and credit cards to its customers; ii. the stability of the business area in which the asset operates, and changes in the market demand for the service offered through this asset; and iii. the period of control over the asset and legal or similar limits of the use of this asset.
This indefinite useful life assessment has been reviewed by the end of the reporting period and events and circumstances still support this assessment. NOTES TO THE FINANCIAL STATEMENTS - Continued 82
23. DEFERRED TAX ASSET
Deferred income tax at 31 December relates to the following:
2012 2011 EUR’000 EUR’000
Deferred income tax asset is attributable to the following:
NOTES TO THE FINANCIAL STATEMENTS TO NOTES excess of capital allowances over depreciation (63) (158) allowances for impairment 1,015 700 unused tax losses 4,434 4,919 5,386 5,461
Unused tax losses do not expire. Based on the Bank’s operating trends and forecasts, the deferred tax asset is expected to be utilised from available taxable profits in the foreseeable future.
24. DERIVATIVE FINANCIAL INSTRUMENTS
During the year, the Bank entered into a number of currency forward contracts with clients and an equivalent number of back-to-back arrangements with Banif, SA.
The forward contracts entered into are contractual agreements to buy or sell a currency at a specified rate and date in the future. On the other hand, in the cross currency swaps entered into, the Bank carries out a spot transaction paying a specified amount in one currency and receiving a specific amount in another currency and agrees to do the inverse at a specified rate and date in the future.
The table below shows the fair values of derivative financial instruments, together with their notional amounts. The notional amount, recorded gross, is the amount of a derivative’s underlying asset, reference rate or index and is the basis upon which changes in the value of derivatives are measured. The notional amounts indicate the volume of transactions outstanding at the year end and are indicative of neither the market risk nor the credit risk.
Notional Notional Assets Liabilities amount Assets Liabilities amount 2012 2012 2012 2011 2011 2011 EUR’000 EUR’000 EUR’000 EUR’000 EUR’000 EUR’000
Derivatives held-for-trading Forward foreign exchange - 46 1,258 106 34 5,994 Currency swaps 3 5 12,153 3 - 9,792 3 51 13,411 109 34 15,786 NOTES TO THE FINANCIAL STATEMENTS - Continued 83
NOTES TO THE FINANCIAL STATEMENTS
25. PREPAYMENTS AND ACCRUED INCOME 2012 2011 EUR’000 EUR’000
Prepayments 621 472 Other financial assets 1,886 1,435 Accrued income 1,313 1,626 3,820 3,533
‘Other financial assets’ relate to amounts pledged in favour of VISA. These funds are in turn held by VISA in the Deutsche Global Liquidity Managed Euro – Advisory Fund. Income generated from this investment is paid to the Bank on a monthly basis.
26. AMOUNTS OWED TO BANKS 2012 2011 EUR’000 EUR’000
Term loans and advances 13,255 181,426
Repayable on demand 589 92 13,844 181,518 Amounts include: Due to banks within Banif Group 993 153,518 Due to the Central Bank of Malta against security on financial investments 12,800 25,700 13,793 179,218
The amount of term loans and advances includes an amount of EUR12.8 million (2011: EUR25.7 million) owed to the Central Bank of Malta secured by a pledge on securities (Note 15). NOTES TO THE FINANCIAL STATEMENTS - Continued 84
27. AMOUNTS OWED TO CUSTOMERS 2012 2011 EUR’000 EUR’000
Term deposits 339,620 205,436 Repayable on demand 91,376 56,437 430,996 261,873
NOTES TO THE FINANCIAL STATEMENTS TO NOTES Included in ‘amounts owed to customers’ were deposits of EUR7.845 million (2011: EUR9.837 million) held as collateral for loan commitments and irrevocable commitments under guarantees and import letters of credit.
28. DEBT SECURITIES IN ISSUE 2012 2011 EUR’000 EUR’000
10% subordinated unsecured debt 5,000 -
On 30th August 2012, the Bank issued EUR5 million which was fully subscribed by Banif SGPS, SA. The debt is unlisted, bears interest at 10% per annum and is repayable in five years.
29. OTHER LIABILITIES 2012 2011 EUR’000 EUR’000
Bills payable 1,019 1,652 Accounts payable and sundry creditors 923 672 Obligations under financial guarantees 446 463 2,388 2,787
The movement in ‘Obligations under financial guarantees’ is as follows:
2012 2011 EUR’000 EUR’000
At 1 January 463 245 Arising during the year 1,201 1,045 Utilised (146) (568) Unused amounts reversed (1,072) (259) At 31 December 446 463 NOTES TO THE FINANCIAL STATEMENTS - Continued 85
NOTES TO THE FINANCIAL STATEMENTS
30. ACCRUALS AND DEFERRED INCOME 2012 2011 EUR’000 EUR’000
Accrued interest 4,056 2,149 Accrued operating expenditure (Note i) 600 589 Accrued capital expenditure 216 74 4,872 2,812 i. Accrued operating expenditure mainly relates to amounts in relation to the provision of day-to-day services and specific non-recurring expenditure.
31. ISSUED CAPITAL 2012 2011 Shares of Shares of EUR1 each 2012 EUR1 each 2011 000s EUR’000 000s EUR’000
Authorised Ordinary shares 50,000 50,000 42,500 42,500 4% cumulative convertible preference shares at EUR1 each - - 7,500 7,500 50,000 50,000 50,000 50,000
Issued and fully paid up At 1 January 25,000 25,000 25,000 25,000 Ordinary shares converted from preference shares 7,500 7,500 - - 4% cumulative convertible preference shares at EUR1 each - - 7,500 7,500 At 31 December 32,500 32,500 32,500 32,500
The issued ordinary shares rank pari passu for all purposes and, in the event that a poll is demanded, each share entitles the holder thereof to one vote.
In 2012, the 4% cumulative convertible preference shares were converted to ordinary shares. No new issue of ordinary shares took place as the shareholders agreed that the conversion was not to be accompanied by a fresh issue of ordinary shares (Note 33). NOTES TO THE FINANCIAL STATEMENTS - Continued 86
32. RESERVES
Retained earnings
Retained earnings represent accumulated losses registered since the incorporation of the Bank. The majority of these losses are attributable to costs incurred in the setting up of the banking operations. NOTES TO THE FINANCIAL STATEMENTS TO NOTES
Retained earnings include an amount of EUR1.717 million (2011: EUR1.017 million) placed in the Depositor Compensation Scheme Reserve. This Reserve is excluded for the purposes of the Own Funds calculation (Note 39).
Revaluation reserve
The revaluation reserve is used to record movements in the fair value of available-for-sale equity shares and debt securities, net of deferred taxation thereon. The revaluation reserve is not available for distribution.
33. EVENTS AFTER THE REPORTING DATE
The Bank has taken the necessary measures to increase its total Capital Adequacy Ratio, primarily by way of restructuring the mix of risk-weighted assets. Furthermore the process of increasing capital through further injections of Core Equity Tier 1 capital by existent shareholders and the participation of new shareholders is well underway. This is in line with the growth strategy and capital plan being pursued by the Bank to ensure that the capital base adequately supports the growing operations of the Bank.
34. CASH AND CASH EQUIVALENTS
Analysis of balances of cash and cash equivalents as shown in the statement of cash flows: 2012 2011 EUR’000 EUR’000 Cash 3,180 2,763 Balances with Central Bank of Malta (excluding reserve deposit and Depositor Compensation Scheme pledged deposits) 531 588 Loans and advances to banks 107,622 127,780 Amounts owed to banks (1,044) (142,251)
Cash and cash equivalents 110,289 (11,120) Adjustment to reflect balances with contractual maturity of more than three months (9,392) (34,847) Per statement of financial position 100,897 (45,967)
Analysed as follows: Cash and balances with Central Bank of Malta (excluding reserve deposit and 4,397 4,632 Reserve deposit with Central Bank of Malta 2,722 3,138 Loans and advances to banks 107,622 127,779 Amounts owed to banks (13,844) (181,518) 100,897 (45,967) NOTES TO THE FINANCIAL STATEMENTS - Continued 87
NOTES TO THE FINANCIAL STATEMENTS
35. RELATED PARTY DISCLOSURES
During the course of its business, the Bank conducted business on commercial terms with various related parties. No material specific provisions for impairment were made in respect of amounts due by related parties during the financial years ending 2012 and 2011, and no amounts were written off during both years.
The amount of related party transactions and outstanding balances and the percentage that such represent of the respective caption in the statement of financial position are disclosed in the tables below.
Related Related party Statement party Statement as a % Related of as a % Related of of the party financial of the total party financial total balance position balance balance position balance 2012 2012 2012 2011 2011 2011 EUR’000 EUR’000 % EUR’000 EUR’000 %
Statement of financial position Assets Financial investments held-for-trading - 22,405 0% 9,725 32,617 30% Financial investments available-for-sale - 1,132 0% 21,629 22,290 97% Loans and advances to banks 107,358 107,622 99% 127,130 127,780 99% Loans and advances to customers 7,604 313,592 2% 7,926 248,915 3% Other loans and receivables – debt securities 6,456 6,456 100% 10,264 10,264 100% Derivative financial instruments 3 3 100% 74 109 68% Prepayments and accrued income 176 3,820 5% 432 3,533 12% Other assets - 23,666 0% - 24,846 0% Total assets 121,597 478,696 25% 177,180 470,354 38%
Liabilities Amounts owed to banks 993 13,844 7% 153,518 181,518 85% Amounts owed to customers 5,860 430,996 1% 5,996 261,873 2% Derivative financial instruments 5 51 10% 34 34 100% Debt securities in issue 5,000 5,000 100% - - 0% Other liabilities 201 7,260 3% 200 5,599 4% Total liabilities 12,059 457,151 3% 159,748 449,024 36% Net assets 109,538 17,432
Related party balances are analysed as follows: 2012 2011 EUR’000 EUR’000
Parent company (5,000) - Related banks 106,265 (16,645) Related companies 11,999 35,668 Entities controlled by non-executive directors (2,406) (373) Shareholders (23) (28) Directors (1,297) (1,190) Net assets 109,538 17,432 NOTES TO THE FINANCIAL STATEMENTS - Continued 88 35. RELATED PARTY DISCLOSURES - CONTINUED
Related Related party party Related as a % Related as a % party Income of the total party Income of the total transactions statement transactions transactions statement transactions 2012 2012 2012 2011 2011 2011 EUR’000 EUR’000 % EUR’000 EUR’000 %
Income statement NOTES TO THE FINANCIAL STATEMENTS TO NOTES Interest receivable 2,186 16,995 13% 2,283 12,178 19% Interest payable 701 10,196 7% 941 5,996 16% Trading income 1,835 2,604 71% 507 1,359 37% Other administrative expenses 307 4,197 7% 329 3,690 9% NOTES TO THE FINANCIAL STATEMENTS - Continued 35. RELATED PARTY DISCLOSURES - CONTINUED 89
NOTES TO THE FINANCIAL STATEMENTS
The following table provides a detailed analysis of the total amount of transactions and balances, which have been entered into with related parties for the relevant financial year:
2012 Income Expenses Amounts Amounts Related party from charged owed owed related by related by related to related parties parties parties parties Type of EUR’000 EUR’000 EUR’000 EUR’000 transactions Related banks - - - - Trading income - - 107,358 - Loan to banks 1,869 - 74 - Interest receivable - - - 993 Amounts owed to banks - 444 - - Interest payable - - 3 4 Derivatives Related companies - - 5,500 - Loans to customers 198 - 19 - Interest receivable on loans to customers - - - 5,000 Debt securities - 172 - 173 Interest Payable on debt securities - - 6,456 - Loans and receivables - - 46 - Interest receivable on loans and receivables 1,835 - - - Trading income - - - 22 Amounts owed to customers Shareholders - - - 23 Amounts owed to customers - - - - Interest payable Entities controlled by non-executive Directors - 83 - - Professional fees - 158 - - Rent - 17 - - Motor vehicle leases - - - 4,178 Amounts owed to customers - 37 - 9 Interest payable - - 1,754 - Loans to customers 102 - 9 - Interest receivable - - 27 - Prepaid expenses - 49 - 9 Operating expenses Directors - - - 1,638 Amounts owed to customers - 48 - 10 Interest payable - - 350 - Loans to customers 17 - 1 - Interest receivable
4,021 1,008 121,597 12,059 NOTES TO THE FINANCIAL STATEMENTS - Continued 90 35. RELATED PARTY DISCLOSURES - CONTINUED
2011 Income Expenses Amounts Amounts Related party from charged owed owed related by related by related to related parties parties parties parties Type of EUR’000 EUR’000 EUR’000 EUR’000 transactions
Related banks 10 - - - Trading income - - 127,130 - Loan to banks NOTES TO THE FINANCIAL STATEMENTS TO NOTES 2,070 - 342 - Interest receivable Amounts owed - - - 153,518 to banks - 738 - 81 Interest payable Related companies Loans and advances - - 13,761 - to customers Financial asset - - 9,725 - held-for-trading Financial asset - - 21,629 - available-for-sale 497 - - - Trading income - - 74 34 Derivatives Amounts owed to - - - 5 customers Shareholders Amounts owed - - - 28 to customers - 2 - - Interest payable Entities controlled by non-executive Directors - 135 - - Professional fees - 167 - - Rent - 27 - - Motor vehicle leases Amounts owed - - - 4,403 to customers - 154 - 1 Interest payable Loans and advances - - 4,029 - to customers 204 - 20 - Interest receivable - - 70 - Prepaid expenses - - - 90 Operating expenses
Directors Amounts owed - - - 1,560 to customers - 47 - 28 Interest payable Loans and advances - - 400 - to customers 9 - - - Interest receivable 2,790 1,270 177,180 159,748
The Bank also issued demand and bank guarantees on behalf of entities controlled by non-executive Directors, amounting to EUR142,627, that were all fully secured (2011: EUR191,726). NOTES TO THE FINANCIAL STATEMENTS - Continued 35. RELATED PARTY DISCLOSURES - CONTINUED 91
NOTES TO THE FINANCIAL STATEMENTS
Terms and conditions of transactions with related parties The above mentioned outstanding balances arose from the ordinary course of business. The interest charged to, and by related parties, is at normal commercial rates.
Transactions with key management personnel of the Bank During the year under review, the following banking transactions were carried out with key management personnel.
Senior executive management 2012
Balance Income as at from key 31.12.12 management EUR’000 EUR’000
Residential mortgages 594 14 Other personal lending 75 -
Balance Interest as at paid to key 31.12.12 management EUR’000 EUR’000
Customer deposits 370 10
Balance Income 2011 as at from key 31.12.11 management EUR’000 EUR’000
Residential mortgages 621 13 Other personal lending 60 1
Balance Interest as at paid to key 31.12.11 management EUR’000 EUR’000
Customer deposits 365 6
Directors’ remuneration and salaries to executive officers are separately disclosed in Note 9 of these financial statements.
Terms and conditions of transactions with key management personnel The above mentioned outstanding balances arose from the ordinary course of business on substantially the same terms as for comparable transactions with persons of a similar standing, or where applicable, other employees.
Immediate and ultimate parent The immediate and ultimate parent of Banif Bank (Malta) plc is Banif SGPS, SA, a company registered in Portugal, with its registered address at 30, Rua de Joao Tavira, 9004-509, Funchal, Madeira, Portugal.
During 2012, Banif Group informed the Commercial Registry Office (Conservatória do Registo Comercial) in Portugal, that Banif SGPS (the “Parent”) has merged with Banif SA (a related bank). Banif SGPS ceased to exist and the shareholding it had in Banif Bank (Malta) plc was transferred to Banif SA. NOTES TO THE FINANCIAL STATEMENTS - Continued 92
36. CONTINGENT LIABILITIES AND COMMITMENTS
As part of its business activities, the Bank enters into various irrevocable commitments and contingent liabilities. Letters of credit, guarantees (including standby letters of credit) commit the Bank to make payments on behalf of customers in the event of a specific act, generally related to the import or export of goods.
NOTES TO THE FINANCIAL STATEMENTS TO NOTES Commitments to extend credit represent contractual commitments to make loans and revolving credits. Commitments generally have fixed expiry dates, or other termination clauses. Since commitments may expire without being drawn upon, the total contract amounts do not necessarily represent future cash requirements.
However, the potential credit loss is less than the total unused commitments since most commitments to extend credit are contingent upon customers meeting specific conditions. The Bank monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments.
Even though these obligations are not recognised on the statement of financial position, they do contain credit risk and are therefore part of the overall risk of the Bank.
The total outstanding commitments and contingent liabilities are as follows:
2012 2011 EUR’000 EUR’000
Contingent liabilities Guarantees 6,881 4,549 Documentary credits 430 356 7,311 4,905 Commitments Undrawn commitments to lend 60,340 63,595 Capital commitments (Note 21) Authorised but not contracted for 3,159 3,169 Contracted for 148 296 3,307 3,465 Total commitments 63,647 67,060 NOTES TO THE FINANCIAL STATEMENTS - Continued 36. CONTINGENT LIABILITIES AND COMMITMENTS - CONTINUED 93
NOTES TO THE FINANCIAL STATEMENTS
Operating lease commitments - Bank as lessee
In 2012, the Bank did not enter into any new contracts of commercial lease for immovable property.
Details of all the other contracts entered into to date are as follows: i. 10-year commercial lease for immovable property which is cancellable by giving one year’s notice (starting 2008); ii. 20-year term contract which is cancellable after the first 10 years of the contract by giving one year’s notice (starting 2008); iii. 5-year term contract with the option to extend the term for further periods of 12 months each (starting 2008); iv. 15-year term contract, with the right to terminate the lease after 5 years to be used for retail purposes (starting 2010); and v. 6-year term contract to be used as an extension to the current Head Office premises.
Future minimum lease payments under non-cancellable operating leases as at 31 December are as follows:
2012 2011 EUR’000 EUR’000
Within one year 260 242 After one year but not more than five years 955 1,027 After more than five years - 171 1,215 1,440
Legal claims
Litigation is a common occurrence in the banking industry due to the nature of the business. The Bank has an established protocol for dealing with such legal claims. Once professional advice has been obtained, and the amount of damages reasonably estimated, the Bank makes adjustments to account for any adverse effects which the claims may have on its financial standing. At year end, there were no significant unresolved legal claims. NOTES TO THE FINANCIAL STATEMENTS - Continued 94
37. FINANCIAL INSTRUMENT AND RISK MANAGEMENT
Financial risk management
The Bank’s main activities are subject to a combination of financial risks which are inherent to the
NOTES TO THE FINANCIAL STATEMENTS TO NOTES business of banking. Financial risks are managed by the Bank within statutory limits and within internal parameters established by the Board of Directors.
Fair values
The reporting of fair values is intended to guide users as to the amount, timing and certainty of cash flows.
The amounts stated for cash balances, balances with the Central Bank of Malta and loans and advances to banks are highly liquid assets. The Directors regard the amount shown in the statement of financial position for these items as reflecting their fair value in that these assets will be realised for cash in the immediate future. The fair value of derivative financial instruments and financial assets held for trading are detailed in Note 38.
Amounts owed to customers are entirely made up of deposit liabilities, with short maturities. Their carrying amounts at the reporting date are therefore approximating their fair value.
Loans and advances to customers are reported net of allowances to reflect their estimated recoverable amounts which are not deemed to defer materially from their fair value. The carrying value approximates the fair value in case of loans which are repriceable at the Bank’s discretion.
The amounts for contingent liabilities and commitments fairly reflect the cash outflows that are expected to arise upon their occurrence.
Market risk
Market risk is the risk that the fair value of future cash flows of financial instruments will fluctuate due to changes in market variables such as prices and interest rates, the correlations between them and their levels of volatility.
Market risk comprises three types of risks, namely:
- interest rate risk: results from fluctuations in the future cash flows of financial assets and liabilities and fair value of financial instruments due to interest rate repricing gaps, changes in the yield curves and volatilities in the market interest rates, - credit spread risk: results from exposures to changes in credit quality of a counterparty or an issuer of debt, essentially bonds; and - foreign currency exchange rate risk: results from exposure to changes in prices, spot or forwards, and volatility of currency rates. NOTES TO THE FINANCIAL STATEMENTS - Continued 37. FINANCIAL INSTRUMENT AND RISK MANAGEMENT - CONTINUED 95
NOTES TO THE FINANCIAL STATEMENTS
Management of market risk
The primary objective of market risk management is to ensure that the risk-reward relationship entrenched in managing the Bank’s resources is optimised in a manner that it does not expose the Bank to losses over and above its risk appetite. To achieve this objective, the Bank establishes limits and controls positions rigorously. The Bank carries out accurate and regular assessments of how the outcome of multiple risk metrics impacts results.
The Bank´s market risk appetite is defined by the Board of Directors and implemented by the Treasury Department, which coordinates the setup of risk limits and controls the Bank´s market exposures in the financial markets. The exposures and limits are reviewed on a regular basis by senior management in the Executive Committee and in the ALCO (Asset & Liability Committee).
Risk measurement techniques
A variety of risk measurement techniques are used to estimate potential future losses derived from its exposures, both in the short and long term. The risk measurement techniques used for short-term periods essentially include the Value-at-Risk (VaR) approach and sensitivity analysis. For the longer-term, the primary risk measure used is the Stress Test which intends to quantify negative impacts under multiple scenarios and simultaneous variations.
VaR - Value-at-Risk
On a day-to-day basis, the value-at-risk approach is used to measure potential future losses in its exposures to market risk.
VaR measures the potential future loss in market value of a given portfolio under normal market conditions using defined confidence levels over a defined period. The value-at-risk for a total portfolio represents a measure of diversified market risk, aggregated, using pre-determined correlations in that portfolio.
Stress tests
The Bank uses stress tests to quantify potential future losses that may arise from a combination of multiple factors that may have an effect on the Bank’s exposure to market risks. The Stress Test model analyses the risk-reward relationship and takes into consideration the potential actions to be carried out by the Bank to mitigate its market risk exposures.
Although the Bank considers VaR to be an important measure of risk, it also recognises that it has limitations in so far as it depends on historical data, purports to estimate risk up to a defined confidence level and assumed good asset liquidity, and reflects possible losses under relatively normal market conditions. On the contrary, the stress test model helps the Bank to determine the effects of potentially extreme market developments on the value of the Bank´s market risk sensitive exposures, both on highly liquid and less liquid assets and market positions.
The correlations between market risk factors employed by the Bank´s current stress tests are estimated from historical volatile market conditions and the resultant estimated correlations proved to be consistent with those observed during recent periods of market stress. The test scenarios are defined and conducted on a regular basis, and reported on a timely basis to Senior Management. NOTES TO THE FINANCIAL STATEMENTS - Continued 96 37. FINANCIAL INSTRUMENT AND RISK MANAGEMENT - CONTINUED
Currency risk
Currency risk is the risk of the exposure of the Bank’s financial position and cash flow to adverse movements in foreign exchange rates.
The Directors set limits on the level of exposure by currency and in total, which are monitored daily, and hedging strategies are used to ensure that positions are maintained within established limits. NOTES TO THE FINANCIAL STATEMENTS TO NOTES
During the year under review, the Bank’s financial assets and liabilities were mainly held in Euro, United States Dollar and Great Britain Pound as indicated below. The Bank did not have any significant exposure to currency risk at 31st December 2012 and 31st December 2011.
2012 2011
Assets Liabilities Assets Liabilities EUR’000 EUR’000 EUR’000 EUR’000
Euro 427,448 405,257 449,452 434,380 United States Dollar 42,618 41,485 18,098 8,198 Great Britain Pound 6,228 7,230 2,570 5,701 Other 2,402 3,179 234 745 478,696 457,151 470,354 449,024
Interest rate risk
Interest rate risk arises in the Bank’s operations due to interest rate fluctuations resulting from interest earning assets and interest bearing liabilities, which mature or are repriced at different times or in different amounts. Floating rate assets and liabilities are also exposed to basis risk, which is the difference in repricing characteristics of the various floating rate indices.
The Bank adopts a policy to match the currency and maturity of individual transactions through treasury operations, to minimise the risk of adverse fluctuations in interest rates or exchange rates affecting financial assets and financial liabilities. NOTES TO THE FINANCIAL STATEMENTS - Continued 37. FINANCIAL INSTRUMENT AND RISK MANAGEMENT - CONTINUED 97
NOTES TO THE FINANCIAL STATEMENTS
The table below analyses interest-bearing assets and liabilities between those that have a fixed rate and a variable rate:
2012 2011
Fixed Variable Fixed variable EUR’000 EUR’000 EUR’000 EUR’000
Assets Financial investments held-for-trading 4,397 4,631 29,433 3,184 Financial investments available-for-sale 1,132 - 661 21,629 Reserve deposit with Central Bank of Malta - 2,722 - 3,139 Loans and advances to banks 106,755 867 16,000 111,780 Loans and advances to customers 44,506 271,986 - 250,914 Other loans and receivables – debt securities 6,456 - 6,479 3,785 177,902 278,927 52,573 394,431 Liabilities Amounts owed to banks 13,255 589 181,426 92 Amounts owed to customers 339,620 91,376 205,436 56,437 Debt securities in issue 5,000 - - -
357,875 91,965 386,862 56,529
Sensitivity analysis - effect on profit before tax
The table below indicates the sensitivity of the loss before tax to a reasonable possible change in interest rates, with all other variables held constant.
The sensitivity of the loss before tax is the effect of the assumed changes in interest rates on the net interest and trading income for one year, based on the floating rate of trading and non-trading financial assets and financial liabilities held at 31st December 2012.
Sensitivity Sensitivity of net interest of trading Change in income income 2012 basis points EUR’000 EUR’000 Assets repriced +100/-100 2,284/(2,284) 28/(28) Liabilities repriced +100/-100 (766)/766 - 1,518/(1,518) 28/(28)
Sensitivity Sensitivity of net interest of trading income income 2011 Change in basis points EUR’000 EUR’000
Assets repriced +100/-100 3,229/(3,229) 27/(27) Liabilities repriced +100/-100 (471)/471 - 2,758/(2,758) 27/(27) NOTES TO THE FINANCIAL STATEMENTS - Continued 98 37. FINANCIAL INSTRUMENT AND RISK MANAGEMENT - CONTINUED
Credit risk
Credit risk is the risk that a counterparty will be unable to fulfil the terms of his obligations when due. The Bank manages and controls credit risk by setting limits on the amount of risk it is willing to accept for individual counterparties and for industry concentrations, and by monitoring exposures in relation to such limits. NOTES TO THE FINANCIAL STATEMENTS TO NOTES In view of the nature of its business, the Bank’s financial assets are inherently and predominately subject to credit risk. Thus, management has put in place internal control systems to evaluate, approve and monitor credit risks relating to both investment and loan portfolios.
The Bank also rigorously applies a credit quality review process to provide early identification of possible changes in the creditworthiness of counterparties, including regular collateral revisions.
With respect to credit risk arising from the components of the statement of financial position, which comprise amounts due from banks, loans and advances to customers, prepayments and accrued income and commitments, the Bank’s exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments.
The table below shows the maximum exposure to credit risk for the components of the statement of financial position. The maximum exposure is shown gross, before the effect of mitigation through the use of master netting and collateral agreements.
Gross Gross maximum maximum exposure exposure 2012 2011 Notes EUR’000 EUR’000
Balances with Central Bank of Malta (excluding cash at hand) 14 3,939 5,008 Financial investments held-for-trading 15 22,405 32,617 Financial assets designated at fair value through profit and loss 17 500 - Financial investments available-for-sale 16 1,132 22,290 Loans and advances to banks 18 107,622 127,780 Loans and advances to customers 19 316,492 250,914 Other loans and receivables – debt securities 19 6,456 10,264 Other assets 7,306 7,979 Total 465,852 456,852 Contingent liabilities 36 7,311 4,905 Undrawn commitments to lend 36 60,340 63,595 Total 67,651 68,500 Total credit risk exposure 533,503 525,352 NOTES TO THE FINANCIAL STATEMENTS - Continued 37. FINANCIAL INSTRUMENT AND RISK MANAGEMENT - CONTINUED 99
NOTES TO THE FINANCIAL STATEMENTS
Risk concentrations of the maximum exposure to credit risk
Concentration risk is the risk that one particular exposure or group of exposures leads to significant losses, as a result of an inadequate diversification of the credit exposures. This risk is managed by setting levels on risk concentration indices calculated for each of the following risk drivers:
• industry sector; • client/counterparty; • collateral; • currency; and • product.
Each index is organised into five levels of concentration with the maximum level having a coefficient of 0.05 and the minimum level having a coefficient of 1. Management is informed on a regular basis on the calculated risk concentrations, and actions to address high coeffecients are taken as deemed necessary.
This calculation then provides the basis for allocating economic capital as per Banking Rule BR/12.
Business segment concentration
The Bank is mainly exposed to three main business segments with home loans representing 47% of the total loan portfolio, as at end of 2012.
Corporate lending Home loans Consumer credit
47%
37%
16%
The Bank exercises tight monitoring on the performance of the home loan portfolio. It has a specific home loan credit policy laying down parameters to guide the manner in which these loans are granted with a view to ensure that the lending is of high quality. The policy also provides detailed guidance on the monitoring that is done on a regular basis once credit is granted. NOTES TO THE FINANCIAL STATEMENTS - Continued 100 37. FINANCIAL INSTRUMENT AND RISK MANAGEMENT - CONTINUED
Risk concentrations of the maximum exposure to credit risk - Continued Business segment concentration - Continued
Whilst the bulk of the collateral is composed of hypothecary charges over property as illustrated in the chart on the previous page, the Bank applies a particularly prudent approach towards valuation of same. In this respect, in all cases, an independent Bank’s architect’s valuation is procured at inception
NOTES TO THE FINANCIAL STATEMENTS TO NOTES and updated on an ongoing basis in line with regulatory norms (Banking Rule BR/04). The independent architect’s valuation is applied to all lending covered by hypothecary charges over property, and for all exposure amounts, even in respect of home loan facilities of relatively smaller values.
The risk emanating from the high home loan concentration reported above is well mitigated by the following:
i. sound credit approval process where lending (including home loans) must be approved by credit committees composed of three officials, one of whom represents the risk management function having no quantitative personal targets; ii. very low single-name risk - the home loan sub-portfolio is spread out over a wide customer base resulting in granularity such that no single customer (or group of connected home loan customers) comprises any significant proportion of such sub-portfolio; iii. historically in Malta, home loans are characterised by very low default rates and this is very well replicated in the Bank where the average home loan default rate at end of 2012 stood at 0.75% and 0.44% over home loans to resident customers only; and iv. the invariable independent architect’s valuation (as reported above).
Client/counterparty concentration
The maximum on-balance sheet credit exposure to any client, group of connected clients or counterparty as at 31 December amounted to EUR5.023 million (2011: EUR4.995 million) before taking account of collateral or other credit enhancements and no value exposure when considering it net of such protection.
In terms of Banking Rule BR/02, every credit institution and banking group is required to report all exposures exceeding 10% of own funds, on a quarterly basis to MFSA. The total amount of exposures which exceeded 10% of own funds represented 12.85% of the total loan portfolio as at end of 2012 (2011: 26.6%). These exposures are strictly monitored by management, and as evidenced during 2012, every reasonable step is taken to reduce this concentration and spread risk over a wider customer base, with further growth in the loan portfolio. NOTES TO THE FINANCIAL STATEMENTS - Continued 37. FINANCIAL INSTRUMENT AND RISK MANAGEMENT - CONTINUED 101
NOTES TO THE FINANCIAL STATEMENTS
Risk concentrations of the maximum exposure to credit risk - Continued Sector concentration
An industry sector analysis of the Bank’s financial assets including commitments, before and after taking into account collateral held or other credit enhancements, is as follows:
Gross Net Gross Net maximum maximum maximum maximum exposure exposure exposure exposure 2012 2012 2011 2011 EUR’000 EUR’000 EUR’000 EUR’000
Agriculture 1,231 7 865 524 Fishing 1,834 1,133 1,900 1,064 Manufacturing 15,562 3,191 11,276 4,109 Electricity 1,382 1,086 4,198 3,753 Water supply, sewerage waste management and remediation activities 305 1 601 292 Construction 37,287 11,400 40,440 11,033
Wholesale and retail trade 32,993 13,453 24,779 8,865 Transport, storage and communication 12,585 6,995 9,690 6,223 Hotels and restaurants, excluding related construction activities 5,789 3,781 2,825 1,786 Information and communication 3,715 1,878 6,980 4,565 Financial services 138,393 133,866 203,206 201,800 Real estate, renting and business activities 15,085 8,805 10,555 4,853 Professional, scientific and technical activities 2,060 1,440 2,010 1,324 Administrative and support service activities 8,311 4,349 4,020 1,625 Public administration 16,402 16,402 1,284 1,283 Education 374 114 392 327 Health and social work 2,076 1,493 1,500 1,343 Arts, entertainment and recreation 7,140 291 5,968 469 Other Services activities 58 58 81 54 Households and individuals 230,817 50,431 192,483 56,325 Other 104 104 299 299 533,503 260,278 525,352 311,916 NOTES TO THE FINANCIAL STATEMENTS - Continued 102 37. FINANCIAL INSTRUMENT AND RISK MANAGEMENT - CONTINUED
Collateral and other credit enhancements
The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters.
The main types of collateral obtained are as follows: NOTES TO THE FINANCIAL STATEMENTS TO NOTES • for corporate lending, charges over real estate properties, cash or securities; and • for retail lending (including home loans and consumer credit), mortgages over residential properties, cash or securities.
As illustrated below, mortgages over residential properties represented 58% (2011: 56%) of the total loan portfolio as at end of 2012.
Cash or quasi cash Secured by commercial property Secured by residential property Other security Unsecured
24%
2%
15%
1%
58%
Management monitors the market value of collateral, requests additional collateral in accordance with the underlying agreement, and monitors the market value of collateral obtained during its review of the adequacy of the allowance for impairment losses.
It is the Bank’s policy to dispose of repossessed properties in an orderly fashion. The proceeds are used to reduce or repay the outstanding claim. In general, the Bank does not occupy repossessed properties for business use.
The Bank’s Global Risk Department regularly conducts periodic analysis and reporting, in respect of the concentration inherent in both the loan portfolio (main asset) as well as the deposit portfolio (main liability). Such analysis considers concentration from the points of view of the above factors plus various other dimensions such as mean weighted interest rate spread charged on facilities and paid on deposits, concentration on loan book analysed by risk rating, level of non-performing exposures and degree of credit risk mitigation on same by way of extendible value collateral etc.
NOTES TO THE FINANCIAL STATEMENTS - Continued 37. FINANCIAL INSTRUMENT AND RISK MANAGEMENT - CONTINUED 103
NOTES TO THE FINANCIAL STATEMENTS
Credit quality per class of financial assets
The credit quality of financial assets is managed by the Bank using internal credit ratings. The table below shows an analysis between performing and non-performing exposures. In case of the latter, the distinction is based on the classification made for the purposes of the ‘Past Due’ exposure class reporting in terms of Banking Rule 04.
2012 2011 EUR’000 EUR’000
Performing credit exposures Regular 287,318 232,439 Past due but not impaired 16,438 10,258 303,756 242,697 Non-performing and impaired credit exposures Past due by less than 90 days 9,149 4,575 Past due by more than 90 days 3,587 3,642
12,736 8,217
Total credit exposures 316,492 250,914
The table below shows the credit performance status of loans and advances to customers, analysed in the three main business segments that the Bank operates in:
Neither Past due past due Past due and nor but not individually impaired impaired impaired Total Notes EUR’000 EUR’000 EUR’000 EUR’000
At 31 December 2012
Loans and advances to customers 19 Small business, corporate and Government lending 98,651 8,584 10,138 117,373 Consumer lending 19,975 1,051 337 21,363 Residential mortgages 141,526 4,382 1,093 147,001 Other 27,166 2,421 1,168 30,755 Total 287,318 16,438 12,736 316,492 NOTES TO THE FINANCIAL STATEMENTS - Continued 104 37. FINANCIAL INSTRUMENT AND RISK MANAGEMENT - CONTINUED
Credit quality per class of financial assets
Neither Past due past due Past due and nor but not individually impaired impaired impaired Total Notes EUR’000 EUR’000 EUR’000 EUR’000
NOTES TO THE FINANCIAL STATEMENTS TO NOTES At 31 December 2011
Loans and advances to customers 19 Small business, corporate and Government lending 84,387 6,258 6,220 96,865 Consumer lending 12,726 571 16 13,313 Residential mortgages 103,859 2,399 547 106,805 Other 31,467 1,030 1,434 33,931 Total 232,439 10,258 8,217 250,914
During 2012, the Bank has revised the classification of the grading assigned to loans such that only ‘Regular’ and not past due exposures are reported under 'High Grade'. Such revision is also being applied to prior year’s disclosure.
The table below shows the credit quality by class of asset for loan-related financial assets that are not impaired and are exposed to credit risk, based on the Bank’s credit rating system.
Performing and not impaired exposures
Sub- High Standard Standard Grade Grade Grade Total Notes EUR’000 EUR’000 EUR’000 EUR’000 At 31 December 2012 Financial investments held-for-trading 15 13,590 8,815 - 22,405 Financial assets available-for-sale 16 1,132 - - 1,132 Loans and advances to banks 18 161 107,461 - 107,622 Cheques in course of collection - 3,386 - 3,386
Loans and advances to customers 19 Small business, corporate and Government lending 98,651 8,579 5 107,235 Consumer lending 19,975 1,006 45 21,026 Residential mortgages 141,526 4,382 - 145,908 Other 27,166 2,387 34 29,587 Sub-total 287,318 16,354 84 303,756
Total 302,201 136,016 84 438,301 NOTES TO THE FINANCIAL STATEMENTS - Continued 37. FINANCIAL INSTRUMENT AND RISK MANAGEMENT - CONTINUED 105
NOTES TO THE FINANCIAL STATEMENTS
Credit quality per class of financial assets - Continued
Performing and not impaired exposures
Sub- High Standard Standard Grade Grade Grade Total Notes EUR’000 EUR’000 EUR’000 EUR’000 At 31 December 2011
Financial assets held-for-trading 15 693 31,924 - 32,617 Financial assets available-for-sale 16 22,290 - - 22,290 Loans and advances to banks 18 - 127,780 - 127,780 Cheques in course of collection - 4,323 - 4,323
Loans and advances to customers 19 Small business, corporate and Government lending 84,387 6,256 2 90,645 Consumer lending 12,726 539 32 13,297 Residential mortgages 103,859 2,399 - 106,258 Other 31,467 944 86 32,497 Sub-total 232,439 10,138 120 242,697
Total 255,422 174,165 120 429,707
Ageing analysis of past due but not impaired per class of financial asset
From From Less than 31 to 60 61 to 90 Over 30 days days days 90 days Total EUR’000 EUR’000 EUR’000 EUR’000 EUR’000
At 31 December 2012
Loans and advances to customers Small business, corporate and Government lending 8,566 13 5 - 8,584 Consumer lending 953 53 45 - 1,051 Residential mortgages 4,201 180 - - 4,381 Other 2,322 65 35 - 2,422
Total 16,042 311 85 - 16,438 NOTES TO THE FINANCIAL STATEMENTS - Continued 106 37. FINANCIAL INSTRUMENT AND RISK MANAGEMENT - CONTINUED
Credit quality per class of financial assets - Continued Ageing analysis of past due but not impaired per class of financial asset - Continued
From From Less than 31 to 60 61 to 90 Over 30 days days days 90 days Total EUR’000 EUR’000 EUR’000 EUR’000 EUR’000
NOTES TO THE FINANCIAL STATEMENTS TO NOTES At 31 December 2011 Loans and advances to customers Small business, corporate and Government lending 6,238 19 2 - 6,259 Consumer lending 513 25 32 - 570 Residential mortgages 2,399 - - - 2,399 Other 852 92 86 - 1,030
Total 10,002 136 120 - 10,258
Ageing analysis of fair value of the collateral on past due but not impaired loans
The table below analyses the fair value of the collateral amount of loans and advances to customers, which were past due but not impaired:
From From Less than 31 to 60 61 to 90 Over 30 days days days 90 days Total EUR’000 EUR’000 EUR’000 EUR’000 EUR’000
At 31 December 2012 Loans and advances to customers Small business, corporate and Government lending 18,199 - - - 18,199 Consumer lending 1,142 33 1 - 1,176 Residential mortgages 6,052 268 - - 6,320 Other 3,698 130 50 - 3,878 Total 29,091 431 51 - 29,573
From From Less than 31 to 60 61 to 90 Over 30 days days days 90 days Total EUR’000 EUR’000 EUR’000 EUR’000 EUR’000
At 31 December 2011 Loans and advances to customers Small business, corporate and Government lending 16,937 90 - - 17,027 Consumer lending 291 - - - 291 Residential mortgages 3,888 - - - 3,888 Other 1,135 42 154 - 1,331 Total 22,251 132 154 - 22,537
NOTES TO THE FINANCIAL STATEMENTS - Continued 37. FINANCIAL INSTRUMENT AND RISK MANAGEMENT - CONTINUED 107
NOTES TO THE FINANCIAL STATEMENTS
Collateral repossessed
During the year, the Bank took possession of one property with a carrying value of EUR142,628, and term deposits pledged in favour of the Bank with a carrying value of EUR25,661 (2011: EUR50,058).
Renegotiated credit
The Bank renegotiated credit amounting to EUR6,935,012 during 2012 (2011: EUR4,505,396).
Impairment assessment
Allowances are assessed collectively for losses on loans and advances that are not individually significant (including credit cards, residential mortgages and unsecured consumer lending) and for individually significant loans and advances where there is not yet objective evidence of individual impairment. Allowances are evaluated on each reporting date with each portfolio receiving a separate review.
- The collective assessment takes account of impairment that is likely to be present in the portfolio, even though there is not yet objective evidence of the impairment in an individual assessment. Impairment losses are estimated by taking into consideration the following information: probabilities of default based on credit ratings determined through an internal rating system; - historical losses on the portfolio; - current economic conditions; - the approximate delay between the time a loss is likely to have been incurred and the time it will be identified as requiring an individually assessed impairment allowance; and - expected receipts and recoveries once impaired. Local management is responsible for deciding the length of this period which can extend for as long as one year. The impairment allowance is then reviewed by credit management to ensure alignment with the Bank’s overall policy.
During 2012, the Bank started using a model including a segmented structure of probability of defaults based on its own history of credit losses for the basis of calculating collective allowances of impairment, such that each segment of loans now has its own structure of probabilities of default that best reflect the credit risk characteristics of the portfolio. This was not possible before, given the limited history of losses that the Bank had accumulated since starting operations. Before 2012, the Bank used market probability of defaults for that purpose. The Bank has plans to continue updating the model with developments in credit losses on an annual basis.
Financial guarantees and letters of credit are assessed and provision made in a similar manner as for loans.
Internal ratings
The Bank applies a 12-step internal rating system (IRS) which encapsulates the risk profile associated with each and every lending relationship on its banking book.
The IRS comprises 12 credit rating levels which constitute a continuum of progressively increasing risk profile ranging from A1 (best rating, least risky) to E (loss, worst case representing full risk materialisation). The rating of every lending relationship (including groups of connected customers) is an important tool that helps management to identify both non-performing exposures and the better-performing borrowing customers.
In the case of non-performing exposures, the system serves as a trigger for prompt corrective action to be taken whereas in the case of better-performing exposures, the Bank is empowered to segment the premium customers and tailor a higher-quality banking experience. In both cases, the timely identification and taking of action based on the characteristics of the relationship, is mutually beneficial to both Bank and customer.
The 12 internal rating levels are mapped to the MFSA’s 5-step credit grading system contained in Banking NOTES TO THE FINANCIAL STATEMENTS - Continued 108 37. FINANCIAL INSTRUMENT AND RISK MANAGEMENT - CONTINUED
Internal ratings - Continued
Rule BR/09/2008.01, Paragraph 21. viz.: Regular, Watch, Substandard, Doubtful, Loss.
Besides the Days’ Delinquency (which is an overriding criterion), other risk factors are ingrained in the assignment of the credit rating for the borrowing customer. These include inter alia overall macroeconomic
NOTES TO THE FINANCIAL STATEMENTS TO NOTES conditions; specific market segment in which customer operates; knowledge of customer including track record; trading and financial performance; and the level of collateral (if any).
Any lending relationship exhibiting any form of default, is reported by exception in Delinquent Reports generated and monitored on a daily basis by the Bank unit where the relationship is domiciled. At the end of each calendar month, a Non-performing Exposures Report is generated where any non-performing exposures still not regularised during the course of the month, are reported. This is subjected to high- level scrutiny by the Commercial Management Department, Credit Recoveries Office and Global Risk Department officials who inter alia reconsider the internal rating for possible action (maintain, downgrade or upgrade). The recommendations made by such officials are then agreed with an Executive Committee member leading to monthly internal rating revisions of non-performing customers.
In respect of the performing lending relationships, by default, reviews are conducted on a six-monthly basis, except where the relationship is objectively analysed to constitute such a favourable risk profile that a yearly review exercise is deemed to suffice. For the yearly review exception to apply, written authority by way of specific credit committee decision is required.
Full reviews of non-performing relationships (apart from the monthly exercise mentioned above) are conducted on more frequent intervals often quarterly but even on an ad hoc basis when it is felt appropriate.
All credit requests, including reviews of existing borrowing customers, must be authorised by a three- member Credit Committee at appropriate discretionary levels as defined by the Bank’s Credit Policies. At each Credit Committee and at all levels, one member represents the risk management function. This official cannot be substituted by another official from a business unit and cannot be assigned any credit portfolio growth targets (in order to maintain objectivity). All Credit Committee members are free to raise a divergence of opinion, stating reasons. Unless a consensual Credit Committee decision is reached, the credit decision must be taken by a higher-level credit committee within the lending hierarchy, as defined in the Credit Policies.
Credit risk exposure for each internal risk rating
The table below indicates the level of exposures of the loans and advances to customers’ caption in the statement of financial position items (before taking into account collateral) in each risk rating class.
Average unsecured share of exposure Total 2012 % EUR’000 High Grade Risk rating class A1 92.87 2,626 Risk rating class A2 26.20 82,138 Risk rating class A3 10.32 213,335 Standard Risk rating class B 10.03 4,474 Substandard Risk rating class C and D 11.49 13,919
316,492 NOTES TO THE FINANCIAL STATEMENTS - Continued 37. FINANCIAL INSTRUMENT AND RISK MANAGEMENT - CONTINUED 109
NOTES TO THE FINANCIAL STATEMENTS
Credit risk exposure for each internal risk rating - Continued
Average unsecured share of exposure Total 2011 % EUR’000 High Grade Risk rating class A1 93.74 557 Risk rating class A2 24.08 56,754 Risk rating class A3 14.04 181,773 Standard Risk rating class B 16.02 3,391 Substandard Risk rating class C and D 15.33 8,439 250,914
Liquidity risk
Liquidity risk is the risk of the exposure of the Bank’s mismatches in its portfolio of assets, liabilities and commitments. The Bank continuously monitors liquidity risk by identifying and monitoring changes in funding required to meet liquidity requirements. Its policy to match currency exposures and maturity positions almost entirely results in few or no open risk positions.
The liquidity position is assessed and managed under a variety of scenarios, giving due consideration to stress factors relating to both the market in general and specifically to the Bank. From a regulatory point of view, the Bank adheres to Banking Rule BR/05, which stipulates that every credit institution is required to maintain a minimum liquid-asset proportion of 30% of the total deposit liabilities net of deductions. As at end of December 2012, the Bank’s proportion of liquid assets to short-term liabilities as reduced stood at 63.62% (2011: 49.63%).
The table below summarises the maturity profile of the Bank’s financial liabilities at 31 December 2012 and 31 December 2011 based on contractual undiscounted repayment obligation.
Repayments which are subject to notice are treated as if notice were to be given immediately. However, the Bank expects that many customers will not request repayment on the earliest date the Bank could be required to pay. The table does not reflect the expected cash flows indicated by the Bank’s deposit retention history.
Between Less three than months Between three and one and More than months one year two years two years Others Total EUR’000 EUR’000 EUR’000 EUR’000 EUR’000 EUR’000
Financial liabilities At 31 December 2012 Amounts owed to banks 13,868 - - - - 13,868 Amounts owed to customers 183,820 122,683 68,702 74,881 - 450,086 Derivative financial instruments 26 25 - - - 51 Debt securities in issue 250 250 500 6,500 - 7,500 Other liabilities 5,250 1,798 191 22 - 7,261
Total undiscounted liabilities 2012 203,214 124,756 69,393 81,403 - 478,766
NOTES TO THE FINANCIAL STATEMENTS - Continued 110 37. FINANCIAL INSTRUMENT AND RISK MANAGEMENT - CONTINUED
Liquidity risk - Continued
Between Less three than months Between three and one and More than months one year two years two years Others Total EUR’000 EUR’000 EUR’000 EUR’000 EUR’000 EUR’000
Financial liabilities NOTES TO THE FINANCIAL STATEMENTS TO NOTES At 31 December 2011 Amounts owed to banks 92 - - 181,717 - 181,809 Amounts owed to customers 96,883 62,657 52,421 63,223 - 275,184 Derivative financial instruments 12 22 - - - 34 Other liabilities 4,311 603 205 480 - 5,599 Total undiscounted liabilities 2011 101,298 63,282 52,626 245,420 - 462,626
The table below shows the contractual expiry by maturity of the Bank’s commitments:
Not later Between than one and More than one year five years five years Total EUR’000 EUR’000 EUR’000 EUR’000
At 31 December 2012 Capital commitments 3,307 - - 3,307
Loan commitments 58,234 2,106 - 60,340 Guarantees 6,881 - - 6,881 Documentary credits 430 - - 430 Total 68,852 2,106 - 70,958
At 31 December 2011 Capital commitments 3,465 - - 3,465 Loan commitments 59,417 4,178 - 63,595 Guarantees 4,549 - - 4,549 Documentary credits 356 - - 356 Total 67,787 4,178 - 71,965 NOTES TO THE FINANCIAL STATEMENTS - Continued 37. FINANCIAL INSTRUMENT AND RISK MANAGEMENT - CONTINUED 111
NOTES TO THE FINANCIAL STATEMENTS
Maturity analysis of assets and liabilities
The table below shows an analysis of assets and liabilities analysed according to when they are expected to be recovered or settled:
Between Less three than months Between three and one and More than months one year two years two years Others Total EUR’000 EUR’000 EUR’000 EUR’000 EUR’000 EUR’000
At 31 December 2012 Assets Cash and balances with the Central Bank 7,119 - - - - 7,119 Cheques in course of collection 3,386 - - - - 3,386 Financial investments held-for-trading 2,477 5,900 2,052 11,976 - 22,405 Financial assets designated at fair-value through proft and loss - - - - 500 500 Financial investments available-for-sale - - - 1,132 - 1,132 Loans and advances to banks 107,622 - - - - 107,622
Loans and advances to customers 53,200 17,941 31,069 211,382 - 313,592 Other loans and receivables – debt securities - 1,456 - 5,000 - 6,456 Property and equipment - - - - 6,369 6,369 Intangible assets - - - - 664 664 Derivative financial instruments - 3 - - - 3 Prepayments and accrued income 3,674 146 - - - 3,820 Deferred tax asset - - - - 5,386 5,386 Other assets 99 143 - - - 242 Total 177,577 25,589 33,121 229,490 12,919 478,696
Liabilities Amounts owed to banks 13,844 - - - - 13,844 Amounts owed to customers 180,564 115,724 63,502 71,206 - 430,996 Derivative financial instruments 26 25 - - - 51 Debt securities in issue - - - 5,000 - 5,000 Other liabilities 2,388 - - - - 2,388 Accruals and deferred income 2,861 1,798 191 22 - 4,872 Total 199,683 117,547 63,693 76,228 - 457,151
NOTES TO THE FINANCIAL STATEMENTS - Continued 112 37. FINANCIAL INSTRUMENT AND RISK MANAGEMENT - CONTINUED
Maturity analysis of assets and liabilities - Continued
Between Less three than months Between three and one and More than months one year two years two years Others Total EUR’000 EUR’000 EUR’000 EUR’000 EUR’000 EUR’000 NOTES TO THE FINANCIAL STATEMENTS TO NOTES At 31 December 2011 Assets Cash and balances with the Central Bank 7,771 - - - - 7,771 Cheques in course of collection 4,323 - - - - 4,323 Financial investments held-for-trading 12,470 15,011 439 4,697 - 32,617 Financial investments available-for-sale - - - 22,290 - 22,290 Loans and advances to banks 127,780 - - - - 127,780 Loans and advances to customers 46,864 12,359 16,773 172,919 - 248,915
Loans and receivables – debt securities - 3,785 1,479 5,000 - 10,264 Property and equipment - - - - 6,441 6,441 Intangible assets - - - - 728 728 Derivative financial instruments 33 74 2 - - 109 Prepayments and accrued income 3,129 369 - 35 - 3,533 Deferred tax asset - - - - 5,461 5,461 Other assets 122 - - - - 122 Total 202,492 31,598 18,693 204,941 12,630 470,354
Liabilities Amounts owed to banks 181,518 - - - - 181,518 Amounts owed to customers 95,227 58,203 48,749 59,694 - 261,873 Derivative financial instruments 12 22 - - - 34 Other liabilities 2,787 - - - - 2,787 Accruals and deferred income 1,524 603 205 480 - 2,812 Total 281,068 58,828 48,954 60,174 - 449,024
Operational risk
Operational risk is the risk of loss arising from systems failure, human error, fraud or external events (including legal risk). When controls fail to perform, operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financial loss. The Bank cannot expect to eliminate all operational risks, but through control framework and by monitoring and responding to potential risks, the Bank is able to manage and mitigate the risks. Controls include effective segregation of duties, access, authorisation and reconciliation procedures, staff education and assessment processes, including the use of internal audit.
The Bank adopts the Banif Group’s Operational Risk Management Framework (BORMF). Each internal Bank entity is directly involved in the management of operational risk to the extent that an Operational Risk Manager must be appointed by each entity. The Global Risk Management Department (GRD) is responsible for the coordination of all operational risk activities within the Bank, as well as their control and oversight. NOTES TO THE FINANCIAL STATEMENTS - Continued 37. FINANCIAL INSTRUMENT AND RISK MANAGEMENT - CONTINUED 113
NOTES TO THE FINANCIAL STATEMENTS
Operational risk - Continued
In terms of BORMF, every effort is made to ensure that operational risks are curtailed, minimised and/or mitigated to inhibit, or at least significantly reduce, the incidence of operational risks materialising into operational losses. The Framework comprises: i. Risk identification. Relevant operational risks are identified through various execution tools. The latter include detailed questionnaires, ongoing reporting of operational risk events, near misses and losses. At internal-entity level, each entity’s operational risk manager must gather, filter and report the data to GRD in a standardised format. ii. Operational risk reporting threshold. Any operational risk event equating to, or exceeding the sum of EUR50, must be reported. The quantum used reflects a bias towards prudence over practicality. iii. Operational loss database. The aforementioned reporting provides the basis for the compilation of an operational loss database. Regular updating of the database, with newly emerging internal losses and/or near misses keeps it up-to-date and enriches it over time. iv. Operational risk measurement. Key result indictors (KRIs) are identified and losses are quantified. This leads to the formulation of an Enterprise Risk Management matrix which is used to determine key operational risks, their impact and likely severity. v. Operational risk assessment. The operational risk events are evaluated. Interactions with the internal stakeholders involved are held. Proposals are formulated for action intended to eliminate, reduce, and/ or mitigate the impact and likelihood of recurrence. Decisions are then taken at the appropriate level. vi. Monitoring and controlling. This is an ongoing process involving, inter alia, the reviewing of KRIs, loss and near-miss levels, and self-assessment procedures in place. vii. Reporting. This involves the disclosure of losses and indicators of operational risks. A specific software application is used to ensure a methodical approach which generates consistent and standardised reporting.
During 2012 implementation of the BORMF continued in full swing. The Operational Risk Managers (ORMs) appointed from each internal entity, continued to report operational risk events, in a way which conforms to the categorisation prescribed by the Basel Committee of Banking Supervision (i.e. by business line and event type). The quality and quantity of reporting spread throughout the whole year was very encouraging and serves to grow the operational risk event database, thereby providing a more representative universe on which to conduct meaningful operational risk modelling.
A major plank in the Bank’s efforts to properly manage and control operational risk, remains the Business Continuity Plan (BCP) which is formalised and in place and covers the whole organisation.
The Bank presently applies the Basic Indicator Approach under Pillar 1 of the Internal Convergence of Capital Measurement & Capital Standards (Basel II Accord) in order to calculate the capital charge. Accordingly, as set out in the yearly ICAAP reviews submitted to MFSA, the Bank allocates 15% of average of gross income over the last three years, as regulatory capital in respect of operational risk.
38. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Bank uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:
Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;
Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and
Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data.
NOTES TO THE FINANCIAL STATEMENTS - Continued 114 38. FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
The following table shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy:
Level 1 Level 2 Level 3 Total EUR’000 EUR’000 EUR’000 EUR’000
At 31 December 2012
NOTES TO THE FINANCIAL STATEMENTS TO NOTES Financial assets Derivative financial instruments Currency swaps - 3 - 3 Sub-total - 3 - 3 Financial investments held-for-trading Fixed income instruments Government debt securities - 14,587 - 14,587 Debt securities issued by banks - 3,449 - 3,449 Other corporate debt securities - 1,017 - 1,017
Non-fixed income instruments
Debt securities issued by banks - 3,352 - 3,352 Sub-total - 22,405 - 22,405
Financial investments available-for-sale Fixed income instruments Government debt securities - 1,132 - 1,132 Sub-total - 1,132 - 1,132
Financial assets designated at fair value through profit and loss Non-fixed income instruments Other corporate debt securities 500 - - 500 Sub-total 500 - - 500 Total 500 23,540 - 24,040
Financial liabilities Derivative financial instruments Forward foreign exchange - 46 - 46 Currency swaps - 5 - 5 Total - 51 - 51 NOTES TO THE FINANCIAL STATEMENTS - Continued 38. FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED 115 NOTES TO THE FINANCIAL STATEMENTS
Level 1 Level 2 Level 3 Total EUR’000 EUR’000 EUR’000 EUR’000 At 31 December 2011 Financial assets Derivative financial instruments Forward foreign exchange - 106 - 106 Currency swaps - 3 - 3 Sub-total - 109 - 109
Financial investments held-for-trading Fixed income instruments Government debt securities - 599 - 599 Debt securities issued by banks - 23,804 - 23,804 Other corporate debt securities - 5,030 - 5,030
Non-fixed income instruments Debt securities issued by banks - 3,184 - 3,184 Other corporate debt securities - - - - Sub-total - 32,617 - 32,617
Financial investments availabl-for-sale Fixed income instruments Government debt securities - 661 - 661 Other corporate debt securities - - - -
Non-fixed income instruments Other corporate debt securities - - 21,629 21,629 Sub-total - 661 21,629 22,290 Total - 33,387 21,629 55,016
Financial liabilities Derivative financial instruments Forward foreign exchange - 34 - 34 Total - 34 - 34
Financial assets whose fair value has been determined using level 3 valuation technique consist of instruments valued at par on the basis of the price willing to be paid by the issuer of the instrument.
The following is a description of the determination of fair value for financial instruments which are recorded at fair value using valuation techniques. These incorporate the Bank’s estimate of assumptions that a market participant would make when valuing the instruments.
Derivatives
Derivative products valued using a valuation technique with market observable inputs are mainly currency swaps and forward foreign exchange contracts. The most frequently applied valuation techniques include forward pricing and swap models, using present value calculations. The models incorporate various inputs including the foreign exchange spot and forward rates and interest rate curves.
Other trading assets
Other trading assets valued using a valuation technique consists of certain debt securities. The Bank values the securities using valuation models which use discounted cash flow analysis which incorporates either only observable data or both observable and non-observable data. Observable inputs include assumptions regarding current rates of interest and real estate prices; unobservable inputs include assumptions regarding future default rates, prepayment rates and market liquidity discounts. NOTES TO THE FINANCIAL STATEMENTS - Continued 116
39. CAPITAL MANAGEMENT
It is the Bank’s policy to actively manage its capital base to cover risks inherent in the business and at the same time to support the development of the business, to maximise shareholders’ value and to meet all the regulatory requirements. Capital management policy is monitored by the Assets and Liabilities Committee . NOTES TO THE FINANCIAL STATEMENTS TO NOTES The Bank manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its activities.
The Bank’s capital base is classified in accordance with Banking Rule BR/03 imposing own funds requirements for credit institutions and banking groups. It is made up of the following components:
i. Original own funds comprising the following:
a. Ordinary share capital – the ordinary issued share capital is made up of 32.5 million (2011: 25 million) Ordinary Shares of EUR1 each. These shares rank pari passu for all purposes and, in the event that a poll is deemed necessary, each share will entitle the holder thereof to one vote.
b. Retained earnings – this reserve holds profits net of accumulated losses. Such profits, when available, are distributed in accordance with the provisions of the Bank’s dividend policy.
c. Depositor Compensation Scheme Reserve – the amount appropriated to this reserve is excluded from original own funds.
d. Intangible assets – the net book value of intangible assets which mainly comprise computer software (Note 22) is deducted from original own funds.
e. Revaluation reserve – the reserve includes the cumulative net change in fair values of available-for- sale financial investments held by the Bank, net of deferred taxes. The reserve is not available for distribution.
ii. Additional own funds comprising the following:
a. Subordinated loan capital – on 30th August 2012, the Bank issued EUR5 million which was fully subscribed by Banif SGPS, SA. The debt is unlisted, bears interest at 10% per annum and is repayable within five years. In terms of Clause 2.1.7 of Appendix of Banking Rule 03, the amount of EUR4.667 million was included as part of the Lower Tranche of Additional Own Funds.
b. Preference share capital – the preference share capital of 7.5 million 4% Cumulative Convertible Preference Shares of EUR1 each was converted into ordinary shares on 30th August 2012.
c. Collective impairment allowances – this includes the provisions made in the profit and loss account to take account of impairment that is likely to be present in the loan portfolio, even though there is not yet objective evidence of the impairment in an individual assessment (Note 19).
Externally imposed capital requirements
The Malta Financial Services Authority (MFSA) requires each bank and banking group, to maintain minimum ratios, taking into account both balance sheet assets and off-balance sheet transactions as follows:
i. total own funds to risk-weighted assets of 8%, and ii. original own funds to risk-weighted assets of 4%. NOTES TO THE FINANCIAL STATEMENTS - Continued 39. CAPITAL MANAGEMENT - CONTINUED 117 NOTES TO THE FINANCIAL STATEMENTS
Externally imposed capital requirements - Continued
During 2012, the Bank continued the preparation for the implementation of the new Capital Requirements Directive (CRDIV) and Regulations (CRR), although no agreement has been reached on the final official text.
As at end of 2012, the text of the proposal for a Directive and Regulation was still being discussed in political trialogues. Following the meeting held on 4th December where an agreement was not reached, another Ecofin meeting on the matter was scheduled to take place in 2013.
According to the European Council’s fifth compromise text (agreed on 15th May 2012) Member States were to apply the provisions of CRDIV as from 1st January 2013, whilst according to the European Parliament (EP) text Member States shall apply the provisions of CRDIV from 1st January 2014. However, with respect to the CRR, according to both Council’s fifth compromise text and the EP text, the CRR had to come into force on 1st January 2013. It is now clear that a postponement to 1st January 2014 is more probable.
The new thresholds being imposed envisage a minimum Core Equity Tier 1 and Tier 1 on all banks operating in Member States of 4.5% and 6% respectively. Total Capital Adequacy Ratio is to remain at 8%. However, when taking into consideration a maximum 2.5% ratio imposed by way of a Capital Conservation Buffer, the Total Capital Adequacy Ratio could go up to a maximum of 10.5% implemented gradually over the transitional period, that as things stand today, will most probably run from 1st January 2014 till 31st December 2019.
Pillar 1 capital requirements are based on standard rules and set the minimum own funds requirements to cover credit risk, market risk and operational risk of the credit institution. The Bank uses the Standardised Approach for credit risk and the Basic Indicator Approach for operational risk. As far as market risk is concerned the Bank allocates capital to the trading book risk-weighted assets entirely derived from foreign exchange risk.
Pillar 2 involves an assessment of the additional capital that is required to mitigate those risks that are not adequately covered by Pillar 1. This is a two-tier process that involves the internal assessment that needs to be carried out by the institution and the review process that has to be carried out by the Regulator.
In terms of Banking Rule BR/12, during the year, the Bank has set up a specific department, named Global Risk Department, to continue implementing the necessary structures to allocate capital to cover Pillar 2 risks and ensure constant monitoring of the risks undertaken by the Bank.
This department is also responsible to steer and direct the work carried out by the ICAAP Working Group composed of members from Treasury, Finance and Reporting and Control and Compliance Departments. This working group reports to the ALCO. The working group meets on a regular basis to monitor the adequacy of the Bank’s capital, assists ALCO members in devising strategies to make efficient use of capital, and assists in devising the level and structure of capital required.
Pillar 3 covers the quantitative and qualitative disclosure requirements that an institution has to abide by to ensure transparency about its conduction of business activities. This is addressed by MFSA Banking Rule BR/07. In terms of BR/07, the Bank is a ‘significant local subsidiary’ of Banif SGPS, SA which is an entity registered in Portugal and is therefore exempted from full risk disclosure requirements under Pillar 3.
During the year under review, the Bank has complied with the externally imposed capital requirements. NOTES TO THE FINANCIAL STATEMENTS - Continued 118 39. CAPITAL MANAGEMENT - CONTINUED
Externally imposed capital requirements - Continued
The table below reconciles the risk weighted assets to the positions reported in the statement of financial position:
2012 2011
Face Weighted Face Weighted
NOTES TO THE FINANCIAL STATEMENTS TO NOTES value amount value amount EUR’000 EUR’000 EUR’000 EUR’000
On-balance sheet assets Cash and balances with Central Bank of Malta 7,119 - 7,771 - Cheques in course of collection 3,386 678 4,323 865 Financial assets held-for-trading 22,405 5,601 32,617 24,076 Financial assets at fair value through profit or loss 500 500 - - Financial investments – available-for-sale 1,132 - 22,290 - Loans and advances to banks 107,622 53,731 127,780 8,695 Loans and advances to customers (gross) 316,492 185,356 250,914 146,771
Loans and receivables – debt securities 6,456 6,456 10,264 10,264 Property and equipment 6,369 6,369 6,441 6,441 Intangible assets 664 664 728 728 Derivative financial instruments 3 3 108 106 Other assets 5,628 5,628 5,583 5,583 Prepayments and accrued income 3,820 3,820 3,533 3,533 481,596 268,806 472,353 207,062 Off-balance sheet items Guarantees 6,881 3,507 4,549 1,618 Documentary credits 430 244 356 158 Undrawn commitments 60,340 24,853 63,595 28,291 67,651 28,604 68,500 30,067
Total adjusted assets and off-balance sheet items 297,410 237,129 Operational risk - notional weighted assets 15,421 9,862 Foreign exchange risk - notional weighted assets 2,494 1,129 Total adjusted assets 315,325 248,120 NOTES TO THE FINANCIAL STATEMENTS - Continued 39. CAPITAL MANAGEMENT - CONTINUED 119 NOTES TO THE FINANCIAL STATEMENTS
Externally imposed capital requirements - Continued
2012 2011 EUR’000 % EUR’000 %
Own funds Tier 1 Original own funds Ordinary shares 32,500 25,000
Reserves Retained earnings Unadjusted balance (10,993) (11,166) Adjustment for: Depositor Compensation Scheme Reserve (1,717) (1,017) Revaluation 38 (4) (12,672) (12,187)
Intangible assets (664) (728)
Unrealised fair value movements - (1,074) Total original own funds 19,164 11,011
Tier 2 Additional own funds Cumulative convertible non-redeemable preference shares - 7,500 Collective impairment allowances 1,576 1,173 Subordinated loan capital 4,667 - 6,243 8,673
Unrealised fair value movements - 1,074 Total additional own funds 6,243 9,747
Total own funds 25,407 20,758 Capital adequacy ratio 8.06 8.37
120
ADDITIONAL REGULATORY DISCLOSURES
The additional regulatory disclosures have been prepared by the Bank in accordance with the disclosure requirements of Banking Rule 07. The Bank publishes these disclosures on an annual basis as part of the Annual Report and Financial Statements. The additional regulatory disclosures have been subject to internal review procedures and the Bank is satisfied that the internal verification procedures ensure that
NOTES TO THE FINANCIAL STATEMENTS TO NOTES these disclosures are fairly presented.
Pillar 1 - Allocation of minimum regulatory capital
The Bank concluded its fourth year of operations, with most of the initiatives being directed at offering a complete service proposition to customers and growth in the lending and deposit portfolios. The Bank remained also strongly committed to ensure that the minimum set of risk assessment and control activities were aligned with Banif Group’s strategy.
The Bank complies with the Basel II requirements as far as Pillar 1 requirements are concerned, allocating regulatory capital to cover the following types of risk exposure:
i. credit risk using the Standardised Approach; ii. operational risk using the Basic Indicator Approach; and iii. market risk.
Under the Standardised Approach, the exposure value of an asset is made up of the balance-sheet value, and the resultant value of the off-balance sheet items after the application of the relevant credit conversion factors, as defined in Annex II of Banking Rule 04/07.
The strategies pursued throughout 2012 led the Bank to enter into or maintain claims in the following exposure classes:
i. claims or contingent claims on central governments or central banks; ii. claims or contingent claims on institutions – including banks; iii. claims or contingent claims on corporate – including entities not considered as a small or medium sized entity; iv. claims or contingent retail claims – including exposures to individual persons or to a small or medium sized entity; v. claims or contingent claims secured on real estate property; vi. past due items; vii. claims in the form of covered bonds; viii. securitisation positions; ix. short-term claims on institutions and corporate; and x. other items.
Allocation of minimum regulatory capital
The table on the next page summarises the on-balance sheet and off-balance sheet assets organised in the respective exposure classes and the respective risk-weighted amounts together with the associated capital required calculated at 8% of the risk-weighted amount as reported to MFSA in line with Banking Rule 04. ADDITIONAL REGULATORY DISCLOSURES - Continued 121 NOTES TO THE FINANCIAL STATEMENTS
2012 2011
Weighted Capital Face Weighted Capital Face value amount required value amount required EUR’000 EUR’000 EUR’000 EUR’000 EUR’000 EUR’000
On-balance sheet assets Claims on government or central banks 21,357 1,699 136 9,354 3,086 247 Claims on institutions 114,420 58,314 4,665 150,639 25,814 2,065 Claims on corporates 21,571 21,571 1,726 15,402 15,399 1,232 Claims on retail 42,057 40,481 3,238 50,351 30,232 2,419 Claims secured by real estate 255,055 126,294 10,104 193,834 110,421 8,834 Past due items 3,588 2,788 223 3,642 3,031 243 Covered bonds - - - 3,674 1,837 147 Securitisation - - - 21,629 - - Other items 23,548 17,659 1,413 23,828 17,242 1,379 481,596 268,806 21,505 472,353 207,062 16,566
Off-balance sheet items Claims on government or central banks 2,551 2,551 204 1,164 914 73 Institutions 189 95 8 - - - Corporates 647 647 52 - - - Claims on retail 19,933 8,573 686 18,251 10,562 845 Claims secured by real estate 44,289 16,738 1,339 49,085 18,591 1,486 Past due items 42 - - - - - 67,651 28,604 2,289 68,500 30,067 2,404
Sub-total 297,410 23,794 237,129 18,970 Operational risk - notional weighted assets 15,421 1,234 9,862 789 Foreign exchange risk - notional weighted assets 2,494 200 1,129 90 Total weighted assets and capital required 315,325 25,228 248,120 19,849
EUR’000 % EUR’000 % Own funds Original own funds Ordinary shares 32,500 25,000 Retained earnings (12,710) (12,183) Revaluation reserve 38 (4) Intangible assets (664) (728) Unrealised fair value movements - (1,074) 19,164 11,011
Additional own funds Cumulative convertible non-redeemable preference shares - 7,500 Collective impairment allowances 1,576 1,173 Subordinated loan capital 4,667 - Unrealised fair value movements - 1,074 6,243 9,747
Total own funds 25,407 20,758 Capital adequacy ratio 8.06 8.37 ADDITIONAL REGULATORY DISCLOSURES - Continued 122
Pillar 2 - Internal Capital Adequacy Assessment Process
In order to comply with Pillar 2 requirements emanating from MFSA Banking Rule 12/08, as well as to better manage its overall risk-taking activities, the Bank has, during 2012, continued to implement the existing structures and mechanisms to allocate economic capital to cover other risks not adequately covered by Pillar 1. NOTES TO THE FINANCIAL STATEMENTS TO NOTES However, the frequency of updating the ICAAP was increased from the mandatory annual submission (of the full report to the Regulator) to quarterly updates prepared for internal use. The quarterly updates do not contain a full-text report, but include all the major constituent analytical tools and models included in the annual submission made to the Regulator. This enables more timely monitoring of the Bank’s overall risk’s position, mitigation by way of risk-taking capacity levels and gives scope for more prompt fine- tuning as soon as this is deemed necessary.
As from early 2012, the Global Risk Department (GRD) has assumed a leading role in drafting the ICAAP reviews which, however, still involve the active participation of the Chief Financial Markets and Investments Officer, Finance & Reporting Department and the critical scrutiny of Internal Audit Office. The Bank’s Board of Directors through its executive arm, the EC, is formally updated on all findings, conclusions and recommendations.
For the first time, the Bank factored in its own probability of default (PD) and loss given default (LGD) values for three main exposure classes which together account for around 81% of the Bank’s loan portfolio. This was possible given that data gathering started from the start of operational activity in 2008 resulting in a 5-year time series which was sufficient to provide a statistically meaningful modelling universe.
In this way, the Bank has further reinforced its already strong commitment to the soundness of the risk culture as well as ongoing and dynamic capital management.
The ICAAP review process
The Bank conducted its third review exercise of the ICAAP in June 2012 and submitted a report to MFSA accordingly. This was followed up by quarterly updates as aforesaid, for internal use.
In line with the recommendations issued by the Authority, the ICAAP process has been independently followed and evaluated by the Internal Audit Office of the Bank. The Office has also reviewed the tools used to quantify the risks as well as the final ICAAP report.
This review focused mainly on the degree of compliance with the objectives set for the ICAAP as per Banking Rule 12, which namely include:
i. that credit institutions should have a process for assessing their overall capital adequacy in relation to their risk profile and have in place a strategy for maintaining their capital levels; and ii. ensuring that the credit institutions have sufficient capital to support all material risk which their business exposes them to.
Throughout the ICAAP process, and also during the course of this review, the concept of proportionality has been maintained in such a way that the structure and complexity of the ICAAP model presented has taken into consideration the size of the Bank and the level of risks and their complexity, as at end of December 2011. 2012 end-of-quarter reference dates were used in the subsequent quarterly updates.
The Bank maintained the same methodology as in the previous review exercise carried out in 2011. For the material risk types identified in the ICAAP process, the risk quantification methodologies that were chosen ADDITIONAL REGULATORY DISCLOSURES - Continued 123 NOTES TO THE FINANCIAL STATEMENTS
Pillar 2 - Internal Capital Adequacy Assessment Process - Continued took into consideration their adequacy in light of the risk management techniques in place and the availability of relevant information. The following risk types were considered material and were therefore quantified: i. credit risk; ii. liquidity risk; iii. interest rate risk; iv. operational risk; v. IT risk; vi. strategy risk; vii. compliance risk; viii. reputational risk; ix. concentration risk; and x. business risk.
The economic capital calculation was carried out taking into consideration a 99.93% confidence level, in line with the confidence level used in the quantification exercise done by Banif Financial Group. The Group maintained the same confidence level as in previous ICAAP exercises, amidst the challenging economic scenario characterised by the deepening of the sovereign debt crisis and the series of downgrades of important players in the financial services sector.
From the risk quantification exercise, three of the ten risk types identified above, namely credit risk, liquidity risk and concentration risk, in aggregate represented 76.5% (2011: 86%) of the overall economic capital allocation of the Bank. ADDITIONAL REGULATORY DISCLOSURES - Continued 124
Pillar 2 - Internal Capital Adequacy Assessment Process
Governance, Control and Reporting
Throughout the year, the Bank carried out further revisions and introduced new procedures to ensure the adequacy of existing processes, the definition of control mechanisms and the development of new risk management practices.
NOTES TO THE FINANCIAL STATEMENTS TO NOTES The governance model was again reviewed in order to further strengthen the overall risk awareness by the Board of Directors and the Global Risk Management Department. This was complemented with an assessment of the Bank’s risk profile vis-a-vis internal capital adequacy, control and consumption.
The Bank continues to implement its own ICAAP Framework, in order to fulfil the MFSA’s requirement on the matter, to align the same ICAAP with that of the Group’s general approach and to ensure the adoption of industry best practices.
The ICAAP review exercise is supported through formal documentation, complete with the detailed description of all calculations performed, as well as assumptions and methodologies used in the process. This documentation is subject to internal validation by the different areas involved in ICAAP formulation and endorsed by the Chief Executive Officer.
The following participated actively in the Bank’s ICAAP review exercise:
• the Board of Directors, through its executive arm the Executive Committee; • the Global Risk Management Department; and • Banif Financial Group’s Risk Function.
The Bank’s Internal Audit Office performed a critical role of scrutinising, evaluating, questioning and challenging the ICAAP, and this input is embeded within the ICAAP document.
In line with the review exercise, the Bank continued developing the internal capital assessment process mechanism, taking into consideration its specific risk profile and risk exposure.
The Bank’s Board of Directors retains that the ICAAP exercise carried out covered all material risks, in order to determine the capital requirement over a three-year time horizon. In February 2013, the Board approved a business plan for the forthcoming three-year period from 2013 to 2015, in which a series of increases in share capital were planned to provide the necessary capital buffers for the Bank to keep pursuing its strategic objectives, as well as meet additional capital requirements emanating from the implementation of CRD IV. The potential effect on capital as a result of stress scenarios was also taken into consideration.
125 NOTES TO THE FINANCIAL STATEMENTS
FIVE YEAR SUMMARY FIGURES
INCOME STATEMENT 2012 2011 2010 2009 2008 EUR’000 EUR’000 EUR’000 EUR’000 EUR’000
Interest receivable and similar income on loans and advances and balances with the Central Bank of Malta 16,384 10,823 6,760 2,206 866 on debt and other fixed income instruments 328 789 - - - on financial assets classified as loans receivables 283 567 - - - Interest payable and similar expense (10,196) (5,996) (3,449) (1,102) (314) Net interest income 6,799 6,183 3,311 1,104 552
Fees and commission income 1,781 1,597 1,022 396 84 Fees and commission expense (433) (342) (216) (61) (24) Net fees and commission income 1,348 1,255 806 335 60
Net trading income 2,604 1,359 1,009 416 13
Net operating income 10,751 8,797 5,126 1,855 625
Employee benefits and expenses (4,735) (4,349) (3,712) (2,834) (1,750) Other administrative expenses (4,197) (3,690) (4,182) (3,321) (3,128) Depreciation of property and equipment (461) (467) (485) (463) (341) Amortisation of intangible assets (206) (224) (128) (94) (74) Total operating expenses (9,599) (8,730) (8,507) (6,712) (5,293)
Net operating profit/ (loss) before impairment and provisions 1,152 67 (3,381) (4,857) (4,668) Net impairment losses (902) (820) (670) (367) (149) Loss before tax 250 (753) (4,051) (5,224) (4,817) Income tax credit (77) 175 1,376 1,694 1,661 Loss for the year 173 (578) (2,675) (3,530) (3,156)
EUR EUR EUR EUR EUR Loss per share 0.63c (2.10c) (10.7c) (14.1c) (13.1c) FIVE YEAR SUMMARY FIGURES - Continued 126
STATEMENT OF FINANCIAL POSITION 2012 2011 2010 2009 2008 EUR’000 EUR’000 EUR’000 EUR’000 EUR’000
ASSETS Cash and balances with Central Bank of Malta 7,119 7,771 6,607 5,051 614 Cheques in course of collection 3,386 4,323 1,737 2,255 47 NOTES TO THE FINANCIAL STATEMENTS TO NOTES Financial investments held-for-trading 22,405 32,617 4,179 6,766 - Financial assets at fair value through profit and loss 500 - - - - Financial investments available for sale 1,132 22,290 - - - Loans and advance to banks 107,622 127,780 276,543 84,887 15,143 Loans and advances to customers 313,592 248,915 155,764 59,487 11,445 Other loans and receivables - debt securities 6,456 10,264 - - - Property and equipment 6,369 6,441 5,470 5,781 3,872 Intangible assets 664 728 620 442 445 Derivative financial instruments 3 109 314 895 -
Prepayments and accrued income 3,820 3,533 1,768 728 401 Deferred tax asset 5,386 5,461 5,283 3,905 2,205 Other assets 242 122 356 169 134 TOTAL ASSETS 478,696 470,354 458,641 170,366 34,306
LIABILITIES Amounts owed to banks 13,844 181,518 6,000 3,835 - Amounts owed to customers 430,996 261,873 433,679 146,066 21,616 Derivative financial instruments 51 34 216 878 - Subordinated Loans 5,000 - - - - Other liabilities 2,388 2,787 2,332 1,604 819 Accruals and deferred income 4,872 2,812 2,002 896 1,254 TOTAL LIABILITIES 457,151 449,024 444,229 153,279 23,689
EQUITY Issued capital 32,500 32,500 25,000 25,000 15,000 Retained earnings (10,993) (11,166) (10,588) (7,913) (4,383) Revaluation reserve 38 (4) - - - TOTAL EQUITY 21,545 21,330 14,412 17,087 10,617
TOTAL LIABILITIES AND EQUITY 478,696 470,354 458,641 170,366 34,306
Memorandum items
Contingent liabilities 7,311 4,905 5,159 2,902 1,172
Commitments 63,647 67,060 63,254 37,250 13,376 FIVE YEAR SUMMARY FIGURES - Continued 127 NOTES TO THE FINANCIAL STATEMENTS
STATEMENT OF CASH FLOWS 2012 2011 2010 2009 2008 EUR’000 EUR’000 EUR’000 EUR’000 EUR’000
Operating activities Interest received 16,370 11,705 5,836 2,033 652 Fees and commission received 1,919 1,447 1,022 396 84 Interest paid (8,289) (5,399) (2,351) (828) (135) Fees and commission paid (433) (342) (216) (61) (24) Proceeds from trading activities 3,791 (332) 1,015 275 13 Payments to employees and suppliers (8,855) (7,817) (7,868) (6,557) (4,156)
Operating loss before changes in operating assets/liabilities 4,503 (738) (2,562) (4,742) (3,566)
Increase/(decrease) in operating assets Reserve deposit with Central Bank of Malta 417 1,809 (1,496) (3,213) (239) Loans and advances to banks 1 282 15,181 (6,063) (9,401)
Loans and advances to customers (65,578) (93,964) (96,947) (48,409) (11,594) Financial investments held-for-trading 9,552 (27,742) 2,499 (6,640) - Financial assets at fair value through profit or loss (500) - - - - Other loans and receivables 3,808 (9,962) - - -
Other receivables 995 (4,611) 315 (2,244) (181)
Decrease/(increase) in operating liabilities Amounts owed to Banks (26,467) 39,267 - - - Amounts owed to customers 169,123 (171,806) 287,613 124,450 21,614 Other payables (650) 447 700 578 371 Operating (loss)/profit after changes in operating assets/liabilities 95,204 (267,018) 205,303 53,717 (2,996) Income tax paid (2) (3) (2) (7) (3)
Net cash flows (used in)/from operating activities 95,202 (267,021) 205,301 53,710 (2,999)
Investing activities Purchase of property and equipment and intangible assets (388) (1,711) (569) (2,639) (3,794) Purchase of available-for-sale instruments (389) (40,665) - - - Proceeds from available-for-sale instruments 21,629 18,371 - - - Interest received on available-for-sale instruments 355 486 - - - Net cash flows used in investing activities 21,207 (23,519) (569) (2,639) (3,794) FIVE YEAR SUMMARY FIGURES - Continued 128
STATEMENT OF CASH FLOWS - Continued
2012 2011 2010 2009 2008 EUR’000 EUR’000 EUR’000 EUR’000 EUR’000
Financing activities
NOTES TO THE FINANCIAL STATEMENTS TO NOTES Proceeds from increase in paid up value of issued share capital - - - 10,000 6,000 Proceeds from issue of cumulative convertible preference shares - 7,500 - - - Proceeds from issue of debt securities 5,000 - - - - Net cash flows from financing activities 5,000 7,500 - 10,000 6,000
(Decrease)/increase in cash and cash equivalents 121,409 (283,040) 204,732 61,071 (793)
Effects of exchange rate changes on cash and cash equivalents 46 8,294 1,045 (7) - Net (decrease)/increase in cash and cash equivalents 121,455 (291,334) 203,687 61,078 (793) (Decrease)/ increase in cash and cash equivalents 121,409 (283,040) 204,732 61,071 (793)
Cash and cash equivalents at beginning of year (11,120) 271,920 67,188 6,117 6,910 Cash and cash equivalents at end of year 110,289 (11,120) 271,920 67,188 6,117
ACCOUNTING RATIOS 2012 2011 2010 2009 2008 % % % % %
Net interest income and other operating income to total assets 2.25 1.87 1.12 1.09 1.82 Operating expenses to total assets 2.01 1.86 1.85 3.94 15.43 Cost-to-income ratio 89.28 99.24 165.96 361.83 846.88 Profit/(loss) before tax to total assets 0.05 (0.16) (0.88) (3.07) (14.04) Profit/(loss) before tax to equity 1.16 (3.53) (28.11) (30.57) (45.37) Profit/(loss) after tax to equity 0.80 (2.71) (18.56) (20.66) (29.73)
2012 2011 2010 2009 2008 Shares in issue (millions) 32.5 32.5 25 25 25 Net assets per share (Euro cents) 66 66 58 68 42 Profit/(loss) per share (Euro cents) 0.63 (2.10) (10.7) (14.1) (13.1)
129 NOTES TO THE FINANCIAL STATEMENTS
SUPPLEMENTARY FINANCIAL INFORMATION SHAREHOLDING INFORMATION
The issued share capital stood at EUR32,500,000 as at 31 December 2012, made up of 32,500,000 (2011: 25,000,000) fully paid up ordinary shares of EUR1 each. In 2011, the Bank had 7,500,000 fully paid up 4% Cumulative Convertible Preference shares at a nominal value of EUR 1 each. The preference shares were converted into ordinary shares on 30 August 2012.
The ordinary shares are held as follows:
No. of shares
Banif SGPS, SA (511 029 730) 25,499,999 PG Holdings Ltd (C 8569) 1,750,000 Virtu Investments Ltd (C 42860) 1,750,000 Mizzi Capital Projects Ltd (C 42406) 1,750,000 SAK Ltd (C 3240) 1,750,000
Banif Comercial SGPS, SA (505 843 200) 1 32,500,000
The percentage holdings stand as follows: %
Banif SGPS, SA (511 029 730) 78.46% PG Holdings Ltd (C 8569) 5.38% Virtu Investments Ltd (C 42860) 5.38% Mizzi Capital Projects Ltd (C 42406) 5.38% SAK Ltd (C 3240) 5.38% Banif Comercial SGPS SA (505 843 200) 0.02% 100%
Each of the shareholders owning five point thirty-eight per centum (5.38%) of the ordinary issued share capital, are entitled to appoint one director in line with the Bank’s Articles of Association. Each ordinary share entitles the shareholder to one voting right.
During 2012, Banif Group informed the Commercial Registry Office (Conservatória do Registo Comercial) in Portugal, that Banif SGPS (the “Parent”) has merged with Banif SA (a related bank). Banif SGPS ceased to exist and the shareholding it had in Banif Bank (Malta) plc was transferred to Banif SA.