Banca del Sempione Annual Report Report on our forty-sixth year of operations, presented to the Shareholders’Meeting of 23 April 2007 Looking Beyond. To reach major milestones takes skill, dedication, and the ability to imagine original solutions. Choosing Banca del Sempione means trusting a partner that knows how to deal in financial markets with professionalism, pragmatism, and creativity. Contents 6 Bank’s governing bodies 9 Chairman’s report 1. Consolidated annual financial statements of the group Banca del Sempione 18 Consolidated balance sheet 19 Consolidated income statement 20 Consolidated statement of Cash Flows 21 Notes to the annual consolidated financial statements 39 Auditor’s Report 2. Other activities 46 Accademia SGR SpA 48 Base Investments SICAV 51 Banca del Sempione (Overseas), Nassau 3. Annual financial statements of Banca del Sempione 58 Balance sheet 59 Income statement 63 Notes to the annual financial statements 69 Auditor’s Report The Value of Balance. When one lays down ambitious objectives, technical skill is not enough. One needs to evaluate the context with prudence, the options in the field, the resources available, and the time horizon. Your Bank knows it, because it values good sense. Banca del Sempione Bank’s governing bodies Board of Directors of Management of the Submanagement of the Banca del Sempione Banca del Sempione Banca del Sempione Avv. Fiorenzo Perucchi* chairman Stefano Rogna general manager Ermes Bizzozero assistant manager Dr. Günter Jehring* vice chairman Roberto Franchi assistant general manager (01.01.07) Mario Contini assistant manager Bruno Armao Massimo Gallacchi manager Sascha Kever assistant manager (01.01.07) Prof. Francesco Arcucci Giordano Bellotti manager (01.01.07) Edgardo Maiocchi assistant manager Sergio Barutta* Athos Walter joint manager Beat Meier assistant manager Prof. Giampio Bracchi Maria Quagliozzi assistant manager Geom. Giuseppe Franchi* Gianluigi Righini assistant manager Arch. Giorgio Giudici Corrado Sartori assistant manager Sandro Medici* Massimo Valsangiacomo assistant manager Silvio Tarchini Peter Wüst assistant manager Guido Zanon assistant manager Auditor PricewaterhouseCoopers, Lugano *members of executive board Board of Directors of the Management of Banca del Sempione (Overseas) ltd., Internal auditors the branches Nassau Frank Leisinger chief inspector Chiasso Dr. Günter Jehring chairman Aurelio Pongelli inspector Roberto Piccioli joint manager–branch manager Alyson I. Yule managing director Bellinzona Dr. Roberto Franchi Claudio Delcò assistant manager–branch manager Arthur Seligman Locarno–Muralto Claudio Lanini assistant manager–branch manager Auditor PricewaterhouseCoopers, Nassau Banca del Sempione 67Annual Report 2006 Focalizzare il private banking graphic. Whatever its function and for whatever From tradition to innovation. In times of uncertainty and rapid change, it is important to be able to count on a sure, reliable, and consolidated point of reference. For this reason, your Bank never stops being itself, while at the same time looking to the future. Chairman’s Report 2006 was a favourable year for the world economy, and the Swiss economy also recorded strong economic growth. Our bank took advantage of this context, achieving above-average results. The rise in share prices on the world’s stock markets favoured high trading volume and, at the same time, made up for a bond mar- ket that was rather complicated and difficult to interpret because of uncertainties over interest rates. Almost across the board, central banks raised rates in the favourable context of economic growth, allowing for more appropriate management of inflation, the great enemy of a growth that is healthy and durable. Against the backdrop of this general stance, an uncertain US Federal Reserve, acting as an economic guide and having led the tightening phase, is now confronted with an economy where growth is slowing because of a stalled real estate market. In addition, the manufacturing sector has signalled weakness, especially the automotive sector, though domestic demand remains sustained. This uncertainty seems to be a spectre over financial markets which have lost the positive tone that drove them for a good part of 2006. Even Asian financial markets are a major question mark for global financial stability. Despite the ability of the Asian economies to maintain high growth rates, stock market performances in the region are typical of markets able enough to influence the more classical ones. In this context, it will be important to monitor the ability of the region’s central banks and regulatory authorities to carefully manage both economies when overheating and monetary policy, with a particular focus on decisions that the Chinese central bank will make on the necessary process of cur- rency revaluation. Speaking of foreign exchange markets, we cannot avoid mentioning the weakness of the Swiss franc against the major currencies, except for the US dollar and the Japanese yen which have also continued with a weak tone. Despite a series of interest rate hikes, the National Bank of Switzerland has not intervened to reverse this trend. While on the one hand a weak currency may be convenient for the domestic economy, boosting exports and services, especially tourism, on the other hand it is undeniable that the constant erosion of pur- chasing power versus foreign partners, and especially Europe, is not a development that Swiss authorities welcome. But if speculation that favours debt in low interest-rate currencies and investment in higher yield currencies but which are fundamentally weak were to slow, we believe that the Swiss franc will inevitably ap- preciate against the euro. Our bank has been able to profit from these basic conditions, operating shrewdly in favour of client portfolios and at the same time generating positive returns. As a result, we are able to present financial statements that show clear growth compared to the previous year. Our summary comments follow. Banca del Sempione 89Annual Report 2006 Lending Operations And Interest Income The overall result was positive. Interest income growth was mainly driven by treasury operations, lifted by the general increase in interest rates. Lending volume was mostly unchanged, but we contracted several major loans which, adequately guaranteed, generated mutual satisfaction for both the bank and our clients. Commission Income Commissions on financial operations were boosted by a stock market that was more volatile than in the previ- ous year, but with a bullish tone. Commissions increased 12% on 2005, despite an increase in commission expenses as a result of major new business co-operation with market counterparties. Trading Operations Trading profit was less than expected. Clients preferred to allocate their investments and assets outside of the foreign exchange market, working against the bank’s foreign exchange operations. Nonetheless, trading operations contributed to revenues; operations are managed very conservatively, avoiding spec- ulative transactions. Client Assets In 2006, the bank generated attractive results in its efforts to increase assets under management as it fine-tuned its structure. We opened new channels for gaining new clients and strengthened our market presence in several traditional areas. The result was a 7.8% increase (net of double counting), in part boosted by changes in exchange rates and market prices. Operating Costs The increase in operating costs was contained and in any case much lower than the increase in revenues. The bank carefully controlled all spending items without forgetting, however, to strengthen its organisation, where necessary, to provide, and improve where possible, an excellent level of quality in client services. Net Earnings At the consolidated level, the item under review showed a quite considerable 48% increase totaling CHF 8.029.000. This result was due to extraordinary revenues generated by the sale of the equity investment in Banknord Ge. Pa. Fi. SpA. as well as to extraordinary costs attributable to a rather highly prudential alloca- tion to reserves. Gross earnings for the year, which offer a clearer picture of the business trend, showed a remarkable 28% rise anyway. In view of this result, the Board proposes the following allocation of the CHF 7.034.000 in net earnings available to the parent company: CHF 500.000 allocation to the legal reserve CHF 2.100.000 allocation to other reserves CHF 3.500.000 dividend CHF 934.000 carried forward The Board of Directors thanks all the staff members and the Bank’s Management for the deep commitment and dedication demonstrated in the execution of their tasks. Our sincere thanks to the Federal Banking Commission for their co-operation and to the independent auditors for the work they have done and the suggestions they have offered. Avv. Fiorenzo Perucchi Chairman of the Board of Directors Banca del Sempione 10 11 Annual Report 2006 PROVIDE SECURITY AND BUILD THE FUTURE. The desire for progress is always accompa- nied by moments of uncertainty, unpre- dictable events, and hostile situations. But humanity has always found a way to thrive anew on these difficulties. The histo- ry of the Ticino area of Bellinzona is an example of this: over the centuries the fruit of people’s labour has been repeatedly destroyed and rebuilt, because of flooding, armed conflict, and political upheavals. Yet, with the passage of time, the region has become a world renowned economic and cultural centre. Banca del Sempione maintains a constant commitment to protecting its client’s assets, ensuring confidentiality, preserving value over time, and transitions to new generations. Torretta bridge At The Centre Of Lepontine Valleys’Political Destinies On 30 September 1513, the western face of Mount Crenone crumbled, hitting and devastating the valley floor of the Biasca region, right at the passage to Blenio valley. The rubble formed a 60-metre high barrier that obstructed the course of the river Brenno and soon formed a five kilometre lake at the top of the landslide. The village of Malvaglia was entirely flooded and only the bell tower emerged atop the waters, while the village of Loderio was completely wiped off the face of the earth.