Accounts and Reports 2005 2005Contents 40 Management report Risk management . 1 – Credit risks 4 2 – FSA risk management Business review and results . 3 – The Basel II Project 1 – Business review 4 – Market risks 2 – Results 5 – Asset and liability management (ALM) 3 – Acquisition of own shares 6 – Liquidity management 7 – Operational risk management 14 Corporate governance . 8 – Economic capital 1 – Shareholders’ relations 9 – Capital adequacy and risk-weighted assets 1.1. Shareholders’ base 1.2. Relations among shareholders 1.3. Relations with shareholders Consolidated financial statements 1.4. Circular FMI/2003-02 from the Banking, Financial and Insurance Commission 48 1.5. Compliance with current legislations Consolidated balance sheet. 2 – Management of the Dexia Group 50 2.1. Group organization Consolidated statement of income . 2.2. The Board of Directors of Dexia SA 2.3. The Management Board of Dexia SA 51 Consolidated statement of change in equity. 3 – Control of Dexia Group 3.1. Internal control 53 Consolidated cash flow statement . – Internal audit – Ethics and compliance 54 – Report from the Chairman of the Board of Directors on the con- Notes to the consolidated financial statements. ditions for the preparation and organization of the work of the Board of Directors and the internal audit procedures established Reconciliations required for the first-time by the company 146 adoption of IFRS (Dexia GAAP to EU GAAP). 3.2. External control – Board of Statutory Auditors Impact of first-time application – Protocol on the prudential structure of the Dexia Group 155 of IFRS 32&39 and IFRS 4. Report of the Board of Statutory Auditors on the consolidated financial statements 160 for the year ended December 31, 2005. Financial statements Additional information 162 Balance sheet. Agenda of the Ordinary Shareholders’ Meeting 184 as of May 10, 2006 . 163 Off-balance sheet items . 186 General data . 164 Statement of income . 165 Notes to the financial statements . Report of the Board of Statutory Auditors on the annual financial statements for the year ended 181 December 31, 2005 . The “Annual Report 2005 activities” and the “Annual Report 2005 Accounts and Reports” together represent the annual report of the Dexia holding. The “Annual Report 2005 Accounts and Reports” contains the consolidated financial statements, the annual financial statements and the management report of the Board of Directors of Dexia. Management report 4 Business review and results . 14 Corporate governance . 40 Risk management . Management report 3 Business review and results 1 have been acquired/developed in a number of European countries, among which France, Spain, Switzerland and Slovakia. Business review Treasury and Financial Markets a) Group profile in 2005 Dexia’s principal businesses give the Group an intensive presence in the capital markets, whether for the funding and management of the A European bank, world leader in Public Finance Group’s balance sheet, or for the engineering of sophisticated prod- Dexia was born of the alliance in 1996, of two major players in local ucts and solutions delivered to clients of the various business lines. public finance in Europe: Crédit local de France and Crédit This business segment is not only a key support entity for the whole Communal de Belgique. Both institutions, together with Banque Group, but it is also an important profit center which generates sub- Internationale à Luxembourg (BIL) were united in 1999 into one pub- stantial earnings. licly quoted company named Dexia. This was one of the very first cross-border mergers in the European banking sector. Today, Dexia Specialized units ranks among the 15 largest financial institutions of the euro zone, The fast developments of Dexia in its two main markets, and its and services two main markets: local authorities and similar institu- strong franchise in Luxembourg, have given rise to specialist activi- tions on a global scale, and the personal sector and households on ties in Asset Management, Insurance and Fund Services. Dexia Asset a regional scale, mostly in Belgium and Luxembourg. Management has acquired a strong renown in Europe and today dis- tributes over one third of its products among institutions and through Local public sector third party channels. Dexia Insurance Services supplies all the life Since its merger in 1999 and the subsequent acquisition of FSA in the and nonlife insurance products sold in the retail networks of the US, Dexia has become the world’s largest player in local public finance. Group in Belgium and Luxembourg and in France. In fund services, Dexia’s high level of expertise, its long-term horizon and the very high RBC Dexia Investor Services has recently been formed as a joint ven- solvency of its customers, grant a superior quality of franchise. ture with Royal Bank of Canada and ranks among the ten largest custodian banks worldwide. Personal sector Not only the bank of local authorities, Dexia is also a leading retail Expertise, performance and rating bank in Belgium, servicing the financial needs of several million cus- Dexia’s success lies not only in its renowned franchise and distri- tomers. Its commercial presence was enlarged with the acquisition bution skills, but also in its ability to conceive efficient products and of Artesia Banking Corporation in 2001. Over the years, and initially develop innovative solutions to the financial requirements of its from its Luxembourg base, Dexia has also developed private bank- clients. In all of its business lines, Dexia has been able to attract ing services catering for affluent customers in Belgium, France and and deploy the best professional skills. It exercises the highest other European countries. standards in terms of underwriting, risk monitoring, operational dis- ciplines and product performance. Dexia has one of the highest Business lines credit ratings in the banking industry: its three main entities – Dexia Crédit Local, Dexia Bank and Dexia BIL – are AA/Aa2/AA+ rated; Public/Project Finance and Credit Enhancement two of its subsidiaries in Europe issue AAA-rated secured bonds; Dexia’s global leadership in public finance is deservedly renowned. finally FSA is a AAA-rated monoline insurance company. The Group operates several subsidiaries and branches in twenty- six countries worldwide. The main ones are Dexia Crédit Local in France and its main subsidiaries abroad, Dexia Bank in Belgium, Dexia Crediop in Italy, and Financial Security Assurance (FSA) in the b) Group activities in 2005 United States. The very large size of the market, the quality and sol- 1. RBC Dexia Investor Services vency of borrowers, and the large and growing needs for essential public infrastructures, offer wide opportunities for the Dexia Group In June 2005 Dexia and Royal Bank of Canada (RBC) announced an to underwrite valuable business and expand its international cover- accord aiming to associate their activities providing financial services age. Size, innovation, expertise and a long-term view are the key to institutional investors in one company in which they have equal ingredients of Dexia’s success in this business line, which repre- holdings. The new entity, RBC Dexia Investor Services, ranks in the sents over one half of its earnings. Execution is provided in differ- top ten of custodian banks worldwide and offers a complete range ent forms: straightforward lending, sophisticated project financing of services to institutional investors throughout the world. schemes and credit enhancement. In addition, insurance, payments, RBC Dexia Investor Services has been operational since January asset management and other services are offered to clientele. 2006. Personal Financial Services In Belgium, Dexia Bank is one of the country’s top players in retail 2. Continuing the integration of Artesia Banking banking. It offers a complete range of banking and insurance ser- Corporation vices to a clientele of households and small and medium-sized After the acquisition in 2001 of the major Belgian bancassurance enterprises. In Luxembourg, Dexia BIL has a similar position among group Artesia Banking Corporation, which essentially consisted of the retail banks of the Grand Duchy. In that country, a private bank- three companies carrying on their activities on the Belgian financial ing business has been developed over the years and now extends services market (Artesia Bank, which operated in the field of man- beyond Belgium and Luxembourg. Several units and joint ventures agement and financial engineering, BACOB Bank, active in the field Dexia Accounts and Reports 2005 4 of retail banking services and DVV Insurance, active in insurance), Within the context of simplification of the organization chart of Dexia Dexia Bank, BACOB Bank and Artesia Banking Corporation merged Bank Belgium, the insurance companies DVV Insurance and Dexia on April 1, 2002. In 2005, the process of integrating these three enti- Insurance are merged into a new entity, Dexia Insurance Belgium. ties continued at a sustained pace and the integration can now be considered as accomplished. Dexia Bank Belgium decides to transfer to Dexia Banque Internationale à Luxembourg the shares it holds in Dexia Fund Services Belgium. End of IT integration In 2005, IT integration was completed with the field of investments. July 2005 Since March 2005, Dexia Bank has had an entirely integrated IT sys- tem. Dexia Bank Belgium decides to transfer its holding in Parfibank to Dexia SA and to merge Parfibank with the bank. Reorganization of the network in line with its optimum October 2005 configuration Dexia Private Bank (Switzerland), a subsidiary belonging to Dexia BIL, The network of Dexia Bank branches continues to evolve towards announces the opening of its new representative office in Bahrain. optimum configuration. The year 2005 saw the closure of 118 branches in addition to the 213 points of sale already closed previ- November 2005 ously. As at December 31, 2005, Dexia Bank had 1,069 branches. In 2006 a further 57 branches will be closed, so that network inte- Dexia Asset Management opens two new offices, one in Denmark gration can be completed in 2006.