CONSOLIDATED ANNUAL REPORT 2018 List of contents CONSOLIDATED MANAGEMENT REPORT 3 AUDIT REPORT 6 CONSOLIDATED BALANCE SHEET 14 CONSOLIDATED OFF BALANCE SHEET 16 CONSOLIDATED PROFIT AND LOSS ACCOUNT 17 NOTES TO THE CONSOLIDATED ANNUAL ACCOUNTS 20 CONSOLIDATED MANAGEMENT REPORT MANAGEMENT REPORT The financial performance of the Group in 2018 depicts the strategic moves, the diminution of In 2018, the Group continued to implement the risk appetite and the evolution of financial the strategy and the risk appetite framework markets, but at the same time the Group is developed in late 2017 and which has pleased to announce another profitable year. resulted in a repositioning towards core markets and in lowering the overall risk As part of the continued reduction in risk profile. Consequently, the Group focused its appetite the balance sheet has been reduced business development on low and medium by 18% to EUR 1.560bn, mainly through risk activities, finalized the disposal of the the decrease of customer deposits from representative office in Moscow and initiated EUR 1.592bn in 2017 to EUR 1.190bn the closure of the Bahamas operations. in 2018, this was mainly caused by the Private Banking staff was also reinforced to Group-initiated derisking programme. On pursue the development of the activities on the asset side, the loan book decreased core European and UK markets. from EUR 523m in 2017 to EUR 457m Following the merger with Banque Havilland in 2018 following the new risk appetite and Institutional Services S.A. (Previously the non-renewal of some loans. Cash at the Banco Popolare (Luxembourg) S.A.) in Central Bank decreased from EUR 328m October 2017 and the integration of in 2017 to EUR 211m in 2018, which is a result institutional operations on the Group’s IT predominantly of institutional clients whose 2018 platform, synergies across business lines deposits have to be invested in the highest have been successfully implemented, allowing quality of assets. The Group’s investment the Group to propose a wide offer of solutions portfolio has been reduced, from EUR 755m to both private and institutional clients. in 2017 to EUR 717m in 2018. CFD activity The renewal of the governance initiated was more muted due to the volatility in the in 2017 was continued in 2018. The Board markets and as a result shares held for I CONSOLIDATED ANNUAL REPORT I I REPORT ANNUAL CONSOLIDATED I of Directors has been strengthened at the hedging purposes fell from EUR 44.4m BH annual general meeting mid-2018 and is in 2017 to EUR 11.1m in 2018. To further the predominantly composed of independent business development of Banque Havilland directors. The Group is also pleased to (Monaco) SAM, the Group increased the announce the appointment of Lars Rejding capital of its subsidiary by EUR 4m to •••••• as CEO, effective January 2019. EUR 13.6m. 3 The decrease in the risk profile of the The selective lending policy, focusing on Group resulted in a lowering of the interest a client’s repayment capacity and prime margin achieved to EUR 24.3m from collateral, minimizes the cost of risk on EUR 37.8m, mainly due to the new loan loans and advances. In 2018, this resulted book profile. Commission income benefited in a net value adjustment reversal of from the diversification effect provided by EUR 3.4m in 2017 (EUR 0.1m in 2017). The the Institutional clients and fell only by lending policy continues to be conservative, EUR 0.6m to EUR 19.7m in 2018. predominantly against primary homes The financial environment in 2018 had been in select locations and eligible security characterised by continued low levels of portfolios. At times, standalone asset- central bank interest rates in the Eurozone. backed loans at modest loan to values The ECB rate has remained at -0.40%, a are being granted to support our clients. continued sign of an anaemic growth rate. Since the creation of the Group in 2009, However, US and UK economies follow loan losses from new origination have a different path: the Fed raised its rate been negligible and this is a testament to four times in 2018, from 1.5% to 2.5% and the expertise in cross-border lending that the Bank of England made its second rate the Group has established and continues rise since 2007 to take the rate to 0.75% to build upon. (from 0.5% in 2017). Widespread jitters in the credit markets in late 2018 as a result of As during previous years, the Group the uncertainties surrounding the European continues to invest heavily to comply with banking sector and also Brexit negatively the evolving national and international affected the bond portfolio resulting in a regulatory environment. In the normal net financial loss of 5.2m in 2018, against a cycle of the regulatory process the Group, profit of EUR 13.9m in 2017 driven by positive like all credit institutions, was subject to market effect. A substantial portion of these regulatory inspections and investigations unrealised losses were reversed in the first in 2017. The outcome of these had already quarter of 2019. been provisioned in the 2017 accounts The Group continues to invest in its staff and so there is no impact on the 2018 and in its operational platform. Staff cost consolidated annual accounts. The Group’s rose from EUR 36.4m in 2017 to EUR 37.9m decision of exiting the Bahamas market 2018 in 2018 as a consequence of the full year has had no impact on the valuation of the effect of the merger with Banque Havilland participation in the books of the Group. Institutional Services and numerous hirings Against the background of the strategic performed since 2017 in the management, control functions and in operations to repositioning in 2018 and the continuous support subsidiaries. The Group had investment in internal and external I CONSOLIDATED ANNUAL REPORT I I REPORT ANNUAL CONSOLIDATED I an average of 245 employees in 2018, resources to deal with the ever-changing BH against 219 in 2017. Other administrative regulatory environment, the Management expenses are reduced by EUR 3.7m of the Group is pleased to announce a profit to EUR 19.3m. for the year of EUR 2.4m. •••••• 4 The Group continues to maintain very strong Group’s exposure to risks, please refer to ratios, with statutory capital adequacy notes 7.3 and 7.4 of these annual accounts. finishing the year above 20 %, compared to a The Group has maintained its “Contracts board mandated minimum of 17% and LCR For Differences” (CFD) activity. This activity (Liquidity Coverage Ratio) above 200 %. consists of the issuing of CFD contracts On behalf of the Group’s Authorized to clients served by the Group or by other Management and the shareholder, we would Banque Havilland Group entities. The CFDs like to express our thanks to the clients and issued are fully hedged by the acquisition employees of Banque Havilland S.A. of the underlying asset or by backing the operation with another CFD on the market. Capital and Risk Management The Group’s business is exposed to several Activities of the Group in the field of risks, such as credit, market, liquidity, research and development operational, reputational and other business The Group did not undertake any activities risks. The Group continues to maintain a in terms of Research and Development. robust approach to risk management with an Acquisition of the Group’s own shares independent department reporting directly to the Authorized Management and the There were no shares in the company held by the company at any point during the Board of Directors. The Risk Management financial year. Department ensures that each key risk of the business is identified and properly managed Branches & representation offices by applying a holistic view. Key risk areas are As per the end of 2018, the Group operates managed through a framework of policies, one branch in the UK and one branch in procedures and limits with regular reviews Zurich. The branch engages in Private of such framework. During 2018, the Group Banking activity and lending to Private has further enhanced its control framework Banking clients. both in terms of staff and technology to face The Bank operates a representative office the increase in business. The Group has no in Dubai. structured credit obligations or derivatives (such as CDOs, SIVs, CLOs or CDS) in its loan Post-closing events or bond portfolios, a position it has maintained 2018 The Bank received regulatory approval since its inception. Additional information on for the acquisition of the remaining 47.5% risk management is available on request in of the share capital of Banque Havilland accordance with part 8 of the EU Regulation (Liechtenstein) A.G. not already held and No 575/2013 (CRR: “Capital Requirements successfully closed the transaction in Regulation”). For further information on the January 2019. I CONSOLIDATED ANNUAL REPORT I I REPORT ANNUAL CONSOLIDATED I BH Luxembourg, 20th May 2019 •••••• Lars Rejding Frederic Genet 5 CEO Chairman of the Board of Directors Audit report To the Board of directors of Banque Havilland S.A. REPORT ON THE AUDIT OF THE Surveillance du Secteur Financier” (CSSF). CONSOLIDATED ACCOUNTS Our responsibilities under those Regulation, Law and standards are further described Opinion in the “Responsibilities of the “Réviseur We have audited the consolidated d’Entreprises Agréé” for the Audit of the accounts of Banque Havilland S.A. and its Consolidated Accounts” section of our subsidiaries (the “Group”), which comprise report. We are also independent of the the consolidated balance sheet as at Group in accordance with the International December 31, 2018, and the consolidated Ethics Standards Board for Accountants’ profit and loss account for the year then Code of Ethics for Professional Accountants ended, and notes to the consolidated (IESBA Code) as adopted for Luxembourg accounts, including a summary of by the CSSF together with the ethical significant accounting policies.