pdf Volksbank Malta Ltd Annual Report 31 December 2012

Transcription

Annual Report
Page
Directors’ Report
3
Directors’ Responsibility for the Financial Statements
6
Separate Financial Statements:
Statement of Financial Position
7
Statement of Changes in Equity
9
Statement of Comprehensive Income
11
Statement of Cash Flows
12
Notes to the Financial Statements
14
Independent Auditors’ Report
71
Volksbank Malta Limited – Annual Report 2012 - Page 2
Directors’ Report
For the Year Ended 31 December 2012
The directors present their report together with the financial statements of Volksbank Malta Limited
for the year ended 31 December 2012.
Board of directors
Mr. Alfred Mallia Milanes (Chairman)
Dkfm. Werner Wess (Vice Chairman)
Mr. Herbert Skok (Managing Director)
Mr. Joseph Bugelli (Executive Board Member)
Mr. Hans Janeschitz (Non-Executive Board Member – appointed 11 April 2012)
Mr. Michael Smutny (Non-Executive Board Member – resigned 25 February 2012)
Principal activities
Volksbank Malta Limited is a licensed credit institution providing a full range of commercial banking
services to both residents and non-residents.
Review of business development and financial position
The financial year 2012 was characterised by the slowdown in the global economy as a result of the
continued Eurozone sovereign debt crisis. Operating within a challenging environment, the Bank
focused on prudent management to safeguard the value of the Bank’s financial position. Nevertheless
the Bank registered a profit after tax of EUR2.182 million for the financial year ended 31 December
2012. This represents a decrease of EUR2.079 million or 49% in profit after tax when compared with
the previous financial year. The decrease in earnings was primarily attributable to the drop registered
in the net interest income and due to a one-off event, namely the loss derived from the reduction in
concentration in exposure to Maltese sovereign debt. As a result Earnings per Share for the year
ended 31 December 2012 dropped to EUR0.95 as against EUR1.85 registered in 2011.
Net interest income, which is the main income contributor to the profit of the Bank, stood at
EUR7.126 million, decreasing by EUR1.439 million when compared to same period last year. Historic
low market interest rates prevailing during the financial year 2012 and the contraction in the Bank’s
balance sheet were the main contributing factors. It is to be noted that the Bank is generally exposed
to market rates.
The Bank recorded an increase of EUR2.597 million in the Revaluation Reserves. This was mainly
attributable to the reversal of negative reserve on the available-for-sale investment portfolio. The
Bank’s revaluation reserve as at 31 December 2012 stood at negative EUR4.819 million, mainly
derived from negative reserve on the derivatives held for hedging.
The economic environment within which the Bank operated prompted an even closer focus on
cautiously managing all areas of expenditure. Nevertheless, total overheads increased marginally by
1% or EUR26 thousand when compared to the previous year. The growth was mainly driven by the
increase in the administrative expenses and depreciation provision, which grew by EUR88 thousand.
On the other hand the increase was partially offset by the drop registered in the personnel expenses.
However, the Management of the Bank is determined to continue to promote cost efficiency
measures in order to contain costs at desired levels.
The Bank continued to manage its financial position in a careful, prudent and conservative manner.
The Bank’s financial position registered a contraction of EUR106.080 million in asset value, when
compared to the previous financial year. The decrease was recorded in the Loans and Advances
categories, as part of the international participations were repaid during the year and also in the
investment portfolio following the reduction in concentration to sovereign debt, as previously noted.
Despite the decrease in the financial position, the Bank continued to maintain a stable level of
business with the local community.
Directors’ Report (Continued)
Review of business development and financial position (continued)
The difficult economic conditions of the recent years had an indirect effect on the credit quality of the
Bank’s portfolio of loans and advances and also investment securities. This has prompted
management to adopt prudent and cautious measures, which resulted in specific impairments
amounting to EUR865 thousand. Furthermore, an increase of EUR911 thousand in the collective
allowance was mainly derived from the deteriorations in the probability of default. Notwithstanding
the increase in provisions, the Capital Adequacy ratio of the Bank remained substantially strong,
standing at 51% or 6.4 times more than the regulatory requirement.
Customer Orientation
Volksbank’s local business strategy is focused on building a strong bank-customer relationship for the
long-term. The personalised service and tailor-made solutions offered to our clients have become a
hallmark of the Bank’s dealings with its customers. The Bank operates from its prime location in
Sliema, Malta and from an agency in Victoria, Gozo. During 2012 the Bank demonstrated its
appreciation to its customers by organising a number of events.
Corporate Governance
Mr. Hans Janeschitz was appointed Director of the Board with effect from 11 April 2012.
Human Resources
The result achieved is attributable to the dedication of our staff members. During the year under
review the Bank continued to support its staff by improving several staff benefit schemes and
organising team-building events that were well patronised by our employees.
Volksbank in the Community
During the year under review Volksbank continued to support the local community through various
initiatives by assisting philanthropic and heritage causes.
Future developments
In view of the on-going restructuring and new strategy of Österreichische Volksbanken AG, being the
Bank’s ultimate shareholder, the Bank is now part of the “Non-core Business” division within the
Group. Österreichische Volksbanken AG has declared that Volksbank Malta will continue its business
activities according to the market situation and is in the process of being sold, as a going concern.
In the short term the main strategy of the Bank remains to maintain local business levels in a prudent
and conservative approach. On the other hand the Bank remains cautious to exploit any opportunities
that may arise from the international market in order to maximise profitability.
Directors’ Report (Continued)
Dividends and Reserves
The Board of Directors did not propose the payment of dividend for the financial year ended 31
December 2012.
The directors propose that the balance in retained earnings amounting to EUR14.965 million be carried
forward to the next financial period.
Approved by the Board of Directors on 11 April 2013 and signed on its behalf by:
Mr. Alfred Mallia-Milanes
Chairman
Mr. Herbert Skok
Managing Director
Mr. Joseph Bugelli
Director
Registered Office
53, Dingli Street
Sliema, SLM 1902
Malta
Left to right: Joseph Bugelli, Alfred Mallia-Milanes, Hans Janeschitz, Herbert Skok, Werner Wess
Directors’ Resposibilitiy
For the Financial Statements
The Companies Act, 1995 (Chapter 386, Laws of Malta) (the “Act”) requires the directors of
Volksbank Malta Limited (the “Bank”) to prepare financial statements for each financial period
which give a true and fair view of the financial position of the Bank as at the end of the financial
period and of the profit or loss of the Bank for that period in accordance with the requirements of
International Financial Reporting Standards as adopted by the EU.
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, 1995 (Chapter 386, Laws of Malta) and the Banking Act, 1994 (Chapter 371,
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 oversight of management, are responsible to ensure that the Bank
establishes and maintains internal control to provide reasonable assurance with regard to
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.
Signed on behalf of the Board of Directors by:
Chairman
Mr. Herbert Skok
Managing Director
Mr. Joseph Bugelli
Director
Statements of Financial Position
As at 31 December 2012
ASSETS
Balances with Central Bank of Malta and cash
Derivative assets held for risk management
Loans and advances to banks
Loans and advances to customers
Investment securities
Investment in subsidiaries
Property and equipment
Intangible assets
Deferred tax assets
Prepayments and accrued income
Other assets
2012
2011
Note
EUR 000
EUR 000
16
17
18
19
20
21
22
23
24
25
333
2,359
100,208
378,633
53,037
70
414
41
1,151
2,072
5
-------------538,323
======
652
4,377
126,449
414,301
92,761
1,070
473
85
1,077
3,148
10
-------------644,403
======
17
26
27
7,338
332,766
18,557
356
978
234
57
-------------360,286
======
9,196
442,275
16,310
1,045
1,710
559
50
-------------471,145
======
167,821
70
14,965
(4,819)
-------------178,037
-------------538,323
======
167,821
70
12,783
(7,416)
-------------173,258
-------------644,403
======
Total assets
LIABILITIES AND EQUITY
LIABILITIES
Derivative liabilities held for risk management
Amounts owed to banks
Amounts owed to customers
Current tax payable
Accruals and deferred income
Other liabilities
Provisions
28
29
30
Total liabilities
EQUITY
Called up issued share capital
Capital contributions
Retained earnings
Revaluation reserve
Total equity
Total liabilities and equity
31
31
31
The notes on pages 15 to 70 are an integral part of these financial statements.
Statements of Financial Position (Continued)
As at 31 December 2012
Note
2012
2011
EUR 000
EUR 000
Memorandum items
Contingent liabilities
Commitments
35
37
5,635
6,193
=====
=====
11,246
17,487
=====
=====
The financial statements on pages 7 to 70 were approved and authorised for issue by the Board
of Directors on 11 April 2013 and signed on its behalf by:
Chairman
Mr. Herbert Skok
Managing Director
Mr. Joseph Bugelli
Director
Statement of Changes in Equity
For the year Ended 31 December 2012
At 1 January 2011
Total comprehensive income for the year
Profit for the year
Other comprehensive income, net of tax:
Net change in fair value on available-for-sale financial assets
Net change in fair value of derivatives held for hedging purposes
Share
capital
Retained
earnings
Revaluation
reserve
Capital
contributions
Total
EUR 000
EUR 000
EUR 000
EUR 000
EUR 000
167,821
--------------
12,022
--------------
(3,024)
----------
----------
176,819
-----------
--------------
4,261
--------------
----------
----------
4,261
-----------
-------------------------------------
------------------------4,261
-------------
(1,707)
(2,685)
----------(4,392)
-----------(4,392)
------------
---------------------------------
(1,707)
(2,685)
-----------(4,392)
------------(131)
-------------
-------------------------167,821
======
(3,500)
------------(3,500)
-------------12,783
======
----------------------(7,416)
=====
70
-----------70
-----------70
=====
70
(3,500)
------------(3,430)
------------173,258
======
Total other comprehensive income
Contributions by and distributions to owners
Dividend paid
Total contributions by and distributions to owners
At 31 December 2011
Statement of Changes in Equity (Continued)
For the year Ended 31 December 2012
At 1 January 2012
Profit for the year
Other comprehensive income, net of tax:
Net change in fair value on available-for-sale financial assets
Net change in fair value of derivatives held for hedging purposes
Total other comprehensive income
At 31 December 2012
Share
capital
Retained
earnings
Revaluation
reserve
Capital
contributions
Total
EUR 000
EUR 000
EUR 000
EUR 000
EUR 000
167,821
--------------
12,783
--------------
(7,416)
----------
70
----------
173,258
-----------
--------------
2,182
--------------
----------
----------
2,182
-----------
------------------------------------167,821
======
------------------------2,182
------------14,965
======
2,624
(27)
----------2,597
-----------2,597
-----------(4,819)
=====
--------------------------------70
=====
2,624
(27)
-----------2,597
------------4,779
------------178,037
======
Statement of Comprehensive Income
For the year ended 31 December 2012
2012
2011
EUR 000
EUR 000
14,283
(7,157)
-------------7,126
-------------145
(20)
-------------125
-------------(37)
17,950
(9,386)
-----------8,564
-----------149
(25)
-----------124
-----------304
10
11
(1,103)
689
6
-------------(445)
-------------6,806
(195)
109
10
-----------228
-----------8,916
12
13
(1,776)
(1,200)
(152)
(332)
(1,280)
-------------2,066
116
-------------2,182
--------------
(1,466)
(1,277)
(137)
(325)
(1,199)
-----------4,512
(251)
-----------4,261
------------
2,974
(27)
(350)
--------------
(1,508)
(2,835)
(49)
------------
2,597
-------------4,779
======
0.95
======
(4,392)
-----------(131)
=====
1.85
=====
Note
Interest income
Interest expense
Net interest income
7
Fee and commission income
Fee and commission expense
Net fee and commission income
8
Net trading (expense)/income
Net loss from financial instruments
carried at fair value
Dividend income
Other operating income
9
Results from operating activities
Net impairment loss
Personnel expenses
Operating lease expenses
Depreciation and amortisation
Other administrative expenses
Profit before tax
Tax income/(expense)
22/23
14
15
Profit for the year
Other comprehensive income
Change in fair value:
- Available-for-sale financial assets
- Derivatives held for hedging purposes
- Taxes on other comprehensive income
Other comprehensive income for the year,
net of tax
Earnings per share
32
Statement of Cash Flows
Cash flows from operating activities
Interest and commission receipts
Interest and commission payments
Dividend income
Proceeds from trading activities
Payments to employees and suppliers
Operating profit before changes in
operating assets/liabilities
(Increase)/decrease in operating assets:
- Reserve deposit with Central Bank of Malta
- Loans and advances to banks
- Loans and advances to customers
- Other receivables
Increase/(decrease) in operating liabilities:
- Amounts owed to banks
- Amounts owed to customers
- Other payables
Cash (absorbed by)/generated from operating activities
Tax paid
Net cash (used in)/from operating activities
Cash flows from investing activities
Capital contribution provided to subsidiary
Proceeds from winding down of subsidiary
Net inflows from available-for-sale instruments
Net outflows from derivative instruments
Payments to acquire property and equipment,
and intangible assets
Net cash from investing activities
Net cash inflows before financing activities
c/fwd
2012
2011
EUR 000
EUR 000
14,918
(6,588)
689
(37)
(2,679)
------------
17,694
(7,933)
109
304
(3,269)
------------
6,303
6,905
300
(11,103)
34,551
5
31
111,219
(14,802)
(2)
(100,269)
2,247
(325)
--------------(68,291)
(997)
-------------(69,288)
--------------
88,844
(18,765)
(114)
--------------173,316
(680)
-------------172,636
--------------
1,000
42,066
(1,676)
(70)
333
-
(223)
--------------41,167
--------------(28,121)
---------------
(79)
--------------184
--------------172,820
---------------
Statement of Cash Flows (continued)
Net cash inflows before financing activities
2012
2011
Note
EUR 000
EUR 000
b/fwd
(28,121)
---------------
172,820
--------------
----------------------------(28,121)
======
(3,500)
70
--------------(3,430)
--------------169,390
======
40
(28,081)
--------------(28,121)
159
169,231
--------------169,390
(211,486)
--------------(239,607)
======
(380,876)
--------------(211,486)
======
Cash flows from financing activities
Dividends paid
Capital contribution received from parent
Net cash used in financing activities
Increase in cash and cash equivalents
Analysed as follows:
Effect of exchange rate changes on cash
and cash equivalents
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
33
Page
Page
1
Reporting entity
15
19 Loans and advances to customers
58
2
Basis of preparation
15
20 Investment securities
59
3
Significant accounting policies
16
21 Investment in subsidiaries
61
4
Financial risk management
28
22 Property and equipment
62
5
Use of estimates and judgments
48
23 Intangible assets
63
6
Financial assets and liabilities
51
24 Deferred tax assets and liabilities
64
7
Net interest income
52
25 Prepayments and accrued income
65
8
53
26 Amounts owed to banks
65
9
53
27 Amounts owed to customers
65
28 Accruals and deferred income
66
29 Other liabilities
66
30 Provisions
67
31 Capital and reserves
67
32 Earnings per share
68
33 Cash and cash equivalents
68
34 Operating leases
68
35 Capital commitments
69
36 Contingent liabilities
69
37 Commitments
69
38 Related parties
69
10 Net loss from financial
instruments carried at fair value
53
11 Dividend income
53
12 Net impairment loss
54
13 Personnel expenses
54
14 Other administrative expenses
55
15 Tax income/(expense)
55
16 Balances with Central Bank of
Malta and cash
56
17 Derivatives held for risk
management
57
18 Loans and advances to banks
58
1
Reporting entity
Volksbank Malta Limited (the “Bank”) is a limited liability company domiciled and
incorporated in Malta.
2
Basis of preparation
2.1
Statement of compliance
The financial statements have been prepared and presented in accordance with
International Financial Reporting Standards as adopted by the EU (“the applicable
framework”). All references in these financial statements to IAS, IFRS or SIC / IFRIC
interpretations refer to those adopted by the EU. The financial statements have also
been drawn up in accordance with the provisions of the Banking Act, 1994 (Chapter 371,
Laws of Malta) and the Companies Act, 1995 (Chapter 386, Laws of Malta).
The Bank has availed itself of the exemption to present consolidated financial statements
of the Group of which it is the parent provided by IAS 27, Consolidated and Separate
Financial Statements, on the basis that its ultimate parent produces consolidated
financial statements available for public use that comply with IFRS.
These financial statements therefore represent the separate financial statements of the
Bank, in which the investments are accounted for on the basis of the direct equity
interest, rather than on the basis of the reported results and net assets of the investees.
2.2
Basis of measurement
The financial statements have been prepared on the historical cost basis except for the
following material items in the statement of financial position:
• derivative financial instruments, measured at fair value; and
• available-for-sale financial assets which are measured at fair value.
2.3
Functional and presentation currency
These financial statements are presented in euro (EUR), which is the Bank’s functional
currency. Except as otherwise indicated, financial information presented in euro has
been rounded to the nearest thousand.
2.4
Use of estimates and judgements
The preparation of the financial statements in conformity with IFRSs requires
management to make judgements, estimates and assumptions that affect the application
of accounting policies and the reported amounts of assets, liabilities, income and
expenses. Actual results may differ from these estimates.
2
Basis of preparation (continued)
2.4
Use of estimates and judgements (continued)
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to
accounting estimates are recognised in the period in which the estimates are revised and
in any future periods affected.
Information about significant areas of estimation uncertainty and critical judgements in
applying accounting policies that have the most significant effect on the amounts
recognised in the financial statements are described in notes 4 and 5.
3
Significant accounting policies
The accounting policies set out below have been applied consistently to all periods
presented in these financial statements.
3.1
Foreign currency transactions
Transactions in foreign currencies are translated into the Bank’s functional currency at
the spot exchange rates at the dates of the transactions. Monetary assets and liabilities
denominated in foreign currencies at the reporting date are retranslated to the functional
currency at the spot exchange rate at that date. The foreign currency gain or loss on
monetary items is the difference between amortised cost in the functional currency at
the beginning of the period, adjusted for effective interest and payments during the
period, and the amortised cost in foreign currency translated at the spot exchange rate at
the end of the period. Non-monetary assets and liabilities that are measured at fair value
in a foreign currency are translated to the functional currency at the spot exchange rate
at the date that the fair value was determined. Non-monetary items that are measured
based on historical cost in a foreign currency are translated using the spot exchange rate
at the date of transaction. Foreign currency differences arising on retranslation are
generally recognised in profit or loss. However, foreign currency differences arising from
the retranslation of available-for-sale equity instruments are recognised in other
comprehensive income.
3.2
Interest
Interest income and interest expense are recognised in profit or loss 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. When calculating the effective interest rate, the Bank
estimates future cash flows considering all contractual terms of the financial instrument,
but not future credit losses.
3
Significant accounting policies (continued)
3.2
Interest (continued)
The calculation of the effective interest rate includes all transaction costs and fees and
points paid or received that are an integral part of the effective interest rate. Transaction
costs include incremental costs that are directly attributable to the acquisition or issue of
a financial asset or liability.
Interest income and expense presented in the statement of comprehensive income
include:
•
•
interest on financial assets and financial liabilities at amortised cost calculated on an
effective interest basis; and
interest on available-for-sale investment securities calculated on an effective interest
basis.
Fair value changes on non-qualifying derivatives held for risk management purposes, are
presented in net income from other financial instruments carried at fair value in the
statement of comprehensive income.
3.3
Fees and commission
Fees and commission income and expense that are integral to the effective interest rate
on a financial asset or liability are included in the measurement of the effective interest
rate.
Other fees and commission income, including account servicing fees, placement fees
and syndication fees, are recognised as the related services are performed. When a loan
commitment is not expected to result in the draw-down of a loan, the related loan
commitment fees are recognised on a straight-line basis over the commitment period.
Other fees and commission expense relate mainly to transaction and service fees, which
are expensed as the services are received.
3.4
Net trading income
Net trading income comprises all realised and unrealised foreign exchange differences,
except in specific circumstances (see note 3.1).
3.5
Net income from other financial instruments carried at fair value
Net income from other financial instruments carried at fair value relates to realised, gains
and losses on derivative instruments, unrealised gains and losses on non-trading
derivatives held for risk management purposes that do not form part of qualifying hedge
relationships and realised gains and losses on available-for-sale investments.
3.6
Dividends
Dividend income is recognised when the right to receive income is established. Usually
this is the ex-dividend date for equity securities.
3
3.7
Lease payments
Payments made under operating leases are recognised in profit or loss on a straight-line
basis over the term of the lease.
3.8
Tax expense
Tax expense comprises current and deferred tax. Current and deferred tax are
recognised in profit or loss except to the extent that they relate to items recognised
directly in equity or in other comprehensive income
Current tax is the expected tax payable on the taxable income for the year, using tax
rates enacted or substantively enacted at the reporting date, and any adjustment to tax
payable in respect of previous years.
Deferred tax is recognised in respect of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used
for taxation purposes.
Deferred tax is measured at the tax rates that are expected to be applied to temporary
differences when they reverse, using tax rates enacted or substantively enacted at the
reporting date.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset
current tax liabilities against current tax assets, and they relate to income taxes levied by
the same tax authority on the same taxable entity, or on different tax entities, but they
intend to settle current tax liabilities and assets on a net basis or their tax assets and
liabilities will be realised simultaneously.
Additional income taxes that arise from the distribution of dividends by the Bank are
recognised at the same time as the liability to pay the related dividend is recognised.
A deferred tax asset is recognised for deductible temporary diffrences to the extent that
it is probable that future taxable profits will be available against which the asset can be
utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the
extent that it is no longer probable that the related tax benefit will be realised.
3.9
Financial assets and financial liabilities
3.9.1
Recognition
The Bank initially recognises loans and advances, deposits, and subordinated liabilities on
the date that they are originated. 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. All other financial assets and liabilities are initially recognised on the trade
date, which is the date that the Bank becomes a party to the contractual provisions of
the instrument.
3
3.9
Financial assets and financial liabilities (continued)
3.9.1
Recognition (continued)
A financial asset or financial liability is measured initially at fair value plus, for an item not
at fair value through profit or loss, transaction costs that are directly attributable to its
acquisition or issue.
3.9.2
Classification
3.9.2.1 Financial assets
The Bank classifies its financial assets in one of the following categories:
• fair value through profit or loss;
• loans and receivables; or
• available-for-sale.
See accounting policies 3.10, 3.11, 3.12 and 3.13.
3.9.2.2 Financial liabilities
The Bank classifies its financial liabilities, other than financial guarantees and loan
commitments, in one of the following categories:
• fair value through profit or loss; or
• other financial liabilities.
See accounting policies 3.11, 3.19 and 3.21.
3.9.3
Derecognition
3.9.3.1 Financial assets
The Bank derecognises a financial asset when the contractual rights to the cash flows
from the financial asset expire, or when it transfers the rights to receive the contractual
cash flows in a transaction in which substantially all the risks and rewards of ownership
of the financial asset are transferred or in which the Bank neither transfers nor retains
substantially all risks and rewards of ownership and it does not retain control of the
financial asset. Any interest in such transferred financial assets that qualify for
derecognition that is created or retained by the Bank is recognised as a separate asset or
liability in the statement of financial position.
On derecognition of a financial asset, the difference between the carrying amount of the
asset (or the carrying amount allocated to the portion of the asset transferred), and the
sum of (i) the consideration received (including any new asset obtained less any new
liability assumed) and (ii) any cumulative gain or loss that had been recognised in other
comprehensive income, is recognised in profit or loss.
3
3.9
Financial assets and financial liabilities (continued)
3.9.3
Derecognition (continued)
3.9.3.1 Financial assets (continued)
The Bank enters into transactions whereby it transfers assets recognised on its
statement of financial position, but retains either all or substantially all of the risks and
rewards of the transferred assets or a portion of them. If all or substantially all risks and
rewards are retained, then the transferred assets are not derecognised. Transfers of
assets with retention of all or substantially all risks and rewards include, for example,
securities lending and repurchase transactions.
In transactions in which the Bank neither retains nor transfers substantially all the risks
and rewards of ownership of a financial asset and it retains control over the asset, the
Bank continues to recognise the asset to the extent of its continuing involvement,
determined by the extent to which it is exposed to changes in the value of the
transferred asset.
In certain transactions the Bank retains the obligation to service the transferred financial
asset for a fee. The transferred asset is derecognised if it meets the recognition criteria.
An asset or liability is recognised for the servicing contract, depending on whether the
servicing fee is more than adequate (asset) or is less than adequate (liability) for
performing the servicing.
3.9.3.2 Financial liabilities
The Bank derecognises a financial liability when its contractual obligations are
discharged, cancelled or expire.
3.9.4
Offsetting
Financial assets and liabilities are offset and the net amount presented in the statement
of financial position when, and only when, the Bank has a legal right to set off the
amounts and intends either to settle on a net basis or to realise the asset and settle the
liability simultaneously.
Income and expenses are presented on a net basis only when permitted under IFRS, or
for gains and losses arising from a group of similar transactions such as in the Bank’s
trading activity.
3.9.5
Amortised cost measurement
The amortised cost of a financial asset or liability is the amount at which the financial
asset or liability is measured at initial recognition, minus principal repayments, plus or
minus the cumulative amortisation using the effective interest method of any difference
between the initial amount recognised and the maturity amount, minus any reduction for
impairment.
3
3.9
Financial assets and liabilities (continued)
3.9.6
Fair value measurement
Fair value is the amount for which an asset could be exchanged, or a liability settled,
between knowledgeable, willing parties in an arm’s length transaction on the
measurement date.
When available, the Bank measures the fair value of an instrument using quoted prices in
an active market for that instrument. A market is regarded as active if quoted prices are
readily and regularly available and represent actual and regularly occurring market
transactions on an arm’s length basis.
If a market for a financial instrument is not active, the Bank establishes fair value using a
valuation technique. Valuation techniques include using recent arm’s length transactions
between knowledgeable, willing parties (if available), reference to the current fair value of
other instruments that are substantially the same, discounted cash flow analyses and
option pricing models. The chosen valuation technique makes maximum use of inputs,
relies as little as possible on estimates specific to the Bank, incorporates all factors that
market participants would consider in setting a price, and is consistent with accepted
economic methodologies for pricing financial instruments.
Inputs to valuation techniques reasonably represent market expectations and measures
of the risk-return factors inherent in the financial instrument. The Bank calibrates
valuation techniques and tests them for validity using prices from observable current
market transactions in the same instrument or based on other available observable
market data.
Assets and long positions are measured at a bid price; liabilities and short positions are
measured at an asking price. Where the Bank has positions with offsetting risk, midmarket prices are used to measure the offsetting risk positions and a bid or asking price
adjustment is applied only to the net position as appropriate. Fair values reflect the credit
risk of the instrument and include adjustments to take account of the credit risk of the
Bank and the counterparty where appropriate.
Fair value estimates obtained from models are adjusted for any other factors, such as
liquidity risk or model uncertainties, to the extent that the Bank believes a third-party
market participant would take them into account in pricing a transaction.
The best evidence of the fair value of a financial instrument at initial recognition is the
transaction price, i.e., the fair value of the consideration given or received, unless the fair
value of that instrument is evidenced by comparison with other observable current
market transactions in the same instrument (i.e. without modification or repackaging) or
based on a valuation technique whose variables include only data from observable
markets. When transaction price provides the best evidence of fair value at initial
recognition, the financial instrument is initially measured at the transaction price and any
difference between this price and the value initially obtained from a valuation model is
subsequently recognised in profit or loss on an appropriate basis over the life of the
instrument but not later than when the valuation is supported wholly by observable
market data or the transaction is closed out.
3
3.9
3.9.7
Identification and measurement of impairment
At each reporting date the Bank assesses whether there is objective evidence that
financial assets not carried at fair value through profit or loss are 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 of the asset that can be estimated reliably.
Objective evidence that financial assets (including equity securities) are impaired can
include significant financial difficulty of the borrower or issuer, 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 group, or economic conditions that correlate with defaults in the group.
In addition, for an investment in an equity security, a significant or prolonged decline in its
fair value below its cost is objective evidence of impairment.
The Bank considers evidence of impairment for loans and advances at both a specific and
a collective level. All individually significant loans and advances are assessed for specific
impairment. Those found not to be specifically impaired are then collectively assessed
for any impairment that has been incurred but not yet identified. Loans and advances
that are not individually significant are collectively assessed for impairment by grouping
together loans and advances with similar risk characteristics.
In assessing collective impairment the Bank uses historical trends of the probability of
default, the timing of recoveries and the amount of loss incurred, adjusted for
management’s judgement as to whether current economic and credit conditions are
such that the actual losses are likely to be greater or less than suggested by historical
trends. Default rates, loss rates and the expected timing of future recoveries are
regularly benchmarked against actual outcomes to ensure that they remain appropriate.
Impairment losses on assets measured at amortised cost are calculated as the difference
between the carrying amount of the financial assets and the present value of estimated
future cash flows discounted at the assets’ original effective interest rate. Impairment
losses are recognised in profit or loss and reflected in an allowance account against loans
and advances. Interest on impaired assets continues to be recognised through the
unwinding of the discount. When an event occurring after the impairment was
recognised causes the amount of impairment loss to decrease, the decrease in
impairment loss is reversed through profit or loss.
Impairment losses on available-for-sale investment securities are recognised by
reclassifying the losses accumulated in the fair value reserve in equity to profit or loss.
The cumulative loss that is reclassified from equity to profit or loss is the difference
between the acquisition costs, net of any principal repayment and amortisation, and the
current fair value, less any impairment loss previously recognised in profit or loss.
Changes in impairment provisions attributable to the application of the effective interest
method are reflected as a component of interest income.
3
3.9
3.9.7
Identification and measurement of impairment (continued)
If, in a subsequent period, the fair value of an impaired available-for-sale debt security
increases and the increase can be objectively related to an event occurring after the
impairment loss was recognised in profit or loss, then the impairment loss is reversed,
with the amount of the reversal recognised in profit or loss. However, any subsequent
recovery in the fair value of an impaired available-for-sale equity security is recognised
directly in other comprehensive income.
The Bank writes off certain loans and advances and investment securities when they are
determined to be uncollectible.
3.10
Cash and cash equivalents
Cash and cash equivalents include notes and coins on hand, unrestricted balances held
with the Central Bank of Malta and highly liquid financial assets with original maturities of
three months or less from the acquisition date that are subject to insignificant risk of
changes in their fair value, and are used by the Bank in the management of its short-term
commitments.
Cash and cash equivalents are carried at amortised cost in the statement of financial
position.
3.11
Derivatives held for risk management purposes and hedge accounting
Derivatives held for risk management purposes include all derivative assets and liabilities
that are not classified as trading assets or liabilities. Derivatives held for risk
management purposes are measured at fair value in the statement of financial position.
The Bank designates certain derivatives held for risk management as hedging
instruments in qualifying hedging relationships. On initial designation of the hedge, the
Bank formally documents the relationship between the hedging instrument(s) and
hedged item(s), including the risk management objective and strategy in undertaking the
hedge, together with the method that will be used to assess the effectiveness of the
hedging relationship. The Bank makes an assessment, both at the inception of the
hedge relationship as well as on an ongoing basis, as to whether the hedging
instrument(s) is (are) expected to be ‘highly effective’ in offsetting the changes in the fair
value or cash flows of the respective hedged item(s) during the period for which the
hedge is designated, and whether the actual results of each hedge are within a range of
80-125 percent.
These hedging relationships are discussed below:
When a derivative is designated as a hedging instrument in a hedge of the change in fair
value of a recognised asset or liability or a firm commitment that could affect profit or
loss, changes in the fair value of the derivative are recognised immediately in profit or
loss together with changes in the fair value of the hedged item that are attributable to the
hedged risk.
3
3.11
Derivatives held for risk management purposes and hedge accounting (continued)
3.11.1 Fair value hedges
If the hedging derivative expires or is sold, terminated, or exercised, or the hedge no
longer meets the criteria for fair value hedge accounting, or the hedge designation is
revoked, then hedge accounting is discontinued prospectively. Any adjustment up to
that point to a hedged item for which the effective interest method is used, is amortised
to profit or loss as part of the recalculated effective interest rate of the item over its
remaining life.
3.11.2 Cash flow hedges
When a derivative is designated as the hedging instrument in a hedge of the variability in
cash flows attributable to a particular risk associated with a recognised asset or liability or
a highly probable forecast transaction that could affect profit or loss, the effective portion
of changes in the fair value of the derivative is recognised in other comprehensive
income and presented in the hedging reserve in equity. The amount recognised in other
comprehensive income is reclassified to profit or loss as a reclassification adjustment in
the same period as the hedged cash flows affect profit or loss, and in the the same line
item in the statement of comprehensive income. Any ineffective portion of changes in
the fair value of the derivative is recognised immediately in profit or loss.
If the hedging derivative expires or is sold, terminated, exercised, or the hedge no longer
meets the criteria for cash flows hedge accounting, or the hedge designation is revoked,
then hedge accounting is discontinued prospectively. In a discontinued hedge of a
forecast transaction the cumulative amount recognised in other comprehensive income
for the period when the hedge was effective is reclassified from equity to profit or loss
as a reclassification adjustment when the forecast transactions occurs and affects profit
or loss. If the forecast transaction is no longer expected to occur, then the balance in
other comprehensive income is reclassified immediately to profit or loss as a
reclassification adjustment.
3.11.3 Other non-trading derivatives
When a derivative is not held for trading, and is not designated in a qualifying hedge
relationship, all changes in its fair value are recognised immediately in profit or loss as a
component of net income from other financial instruments at fair value through profit or
loss.
3.12
Loans and advances
Loans and advances are non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market and that the Bank does not intend to
sell immediately or in the near term.
Loans and advances are initially measured at fair value plus incremental direct transaction
costs, and subsequently measured at their amortised cost using the effective interest
method.
When the Bank purchases a financial asset and simultaneously enters into an agreement
to resell the asset (or a substantially similar asset) at a fixed price on a future date
(“reverse repo” or “stock borrowing”), the arrangement is accounted for as a loan or
advance, and the underlying asset is not recognised in the Bank’s financial statements.
3
3.13
Investment securities are classified as available-for-sale financial assets and initially
measured at fair value plus incremental direct transaction costs.
Available-for-sale investments are non-derivative investments that are designated as
available-for-sale or are not classified as another category of financial assets.
Available-for-sale investments comprise equity and debt securities. Unquoted equity
securities whose fair value cannot be reliably measured are carried at cost. All other
available-for-sale investments are carried at fair value.
Interest income is recognised in profit or loss using the effective interest method.
Dividend income is recognised in profit or loss when the Bank becomes entitled to the
dividend. Foreign exchange gains or losses on available-for-sale debt security
investments are recognised in profit or loss. Impairment losses are recognised in profit or
loss.
Other fair value changes other than impairment losses, are recognised in other
comprehensive income and presented in the fair value reserve in equity until the
investment is sold, whereupon the cumulative gains or losses previously recognised in
equity are reclassified to profit or loss as a reclassification adjustment.
3.14
Investment in subsidiaries is stated at cost less any accumulated impairment losses.
3.15
3.15.1 Recognition and measurement
Items of property and equipment are measured at cost less accumulated depreciation
and any accumulated impairment losses.
Cost includes expenditure that is directly attributable to the acquisition of the asset.
Purchased software that is integral to the functionality of the related equipment is
capitalised as part of that equipment.
When parts of an item of property or equipment have different useful lives, they are
accounted for as separate items (major components) of property and equipment.
The gain or loss on disposal of an item of property and equipment is determined by
comparing the net proceeds from disposal with the carrying amount of the item of
property and equipment, and is recognised net within other income or expense in profit
or loss.
3.15.2 Subsequent costs
The cost of replacing part of an item of property or equipment is recognised in the
carrying amount of the item if it is probable that the future economic benefits of the
expenditure will flow to the Bank and its cost can be measured reliably. The carrying
amount of the replaced part is derecognised. The costs of the day-to-day servicing of
property and equipment are expensed as incurred.
3
3.15
Property and equipment (continued)
3.15.3 Depreciation
Items of property and equipment are depreciated from the date they are available for
use. Depreciation is calculated to write off the cost of items of property and equipment
less their estimated residual values using the straight-line basis over their estimated
useful lives since this most closely reflects the expected pattern of consumption of the
future economic benefits embodied in the asset.
The estimated useful lives for the current and comparative periods vary between five and
seven years.
Depreciation methods, useful lives and residual values are reviewed at each reporting
date and adjusted if appropriate.
3.16
Intangible assets
Software acquired by the Bank is stated at cost less accumulated amortisation and any
accumulated impairment losses.
Subsequent expenditure on software assets is capitalised only when it increases the
future economic benefits embodied in the specific asset to which it relates. All other
expenditure is expensed as incurred.
Amortisation is recognised in profit or loss on a straight-line basis over the estimated
useful life of the software, from the date that it is available for use since this most
closely reflects the expected pattern of consumption of the future economic benefits
embodied in the asset. The estimated useful life of software for the current and
comparative periods is five years.
Amortisation methods, useful lives and residual values are reviewed at each reporting
date and adjusted if appropriate.
3.17
Leased assets – lessee
Lease agreements entered into by the Bank are operating leases and the leased assets
are not recognised in the Bank’s statement of financial position.
3.18
Impairment of non-financial assets
The carrying amounts of the Bank’s non-financial assets, other than deferred tax assets,
are reviewed at each reporting date to determine whether there is any indication of
impairment. If any such indication exists, then the asset’s recoverable amount is
estimated.
The recoverable amount of an asset or cash-generating unit (“CGU”) is the greater of its
value in use and its fair value less costs to sell. In assessing value in use, the estimated
future cash flows are discounted to their present value using a pre-tax discount rate that
reflects current market assessments of the time value of money and the risks specific to
the asset or CGU.
For the purpose of impairment testing, assets that cannot be tested individually are
grouped together into the smallest group of assets that generates cash inflows from
continuing use that are largely independent of the cash inflows of other assets or CGUs.
3
3.18
Impairment of non-financial assets (continued)
An impairment loss is recognised if the carrying amount of an asset or a CGU exceeds its
recoverable amount. Impairment losses are recognised in profit or loss.
An impairment loss is reversed only to the extent that the asset’s carrying amount does
not exceed the carrying amount that would have been determined, net of depreciation or
amortisation, if no impairment loss had been recognised.
3.19
Deposits and subordinated liabilities
Deposits and subordinated liabilities are the Bank’s sources of debt funding.
When the Bank sells a financial asset and simultaneously enters into an agreement to
repurchase the asset (or a similar asset) at a fixed price on a future date (“repo” or
“stock lending”), the arrangement is accounted for as a deposit, and the underlying asset
continues to be recognised in the Bank’s financial statements.
The Bank classifies capital instruments as financial liabilities or equity instruments in
accordance with the substance of the contractual terms of the instruments.
Deposits and subordinated liabilities are initially measured at fair value plus incremental
direct transaction costs, and subsequently measured at their amortised cost using the
effective interest method.
3.20
Provisions
A provision is recognised if, as a result of a past event, the Bank has a present legal or
constructive obligation that can be estimated reliably, and it is probable that an outflow of
economic benefits will be required to settle the obligation. Provisions are determined by
discounting the expected future cash flows at a pre-tax rate that reflects current market
assessments of the time value of money and, where appropriate, the risks specific to the
liability. The unwinding of the discount is recognised as finance cost.
A provision for onerous contracts is recognised when the expected benefits to be
derived by the Bank from a contract are lower than the unavoidable cost of meeting its
obligations under the contract. The provision is measured at the present value of the
lower of the expected cost of terminating the contract and the expected net cost of
continuing with the contract. Before a provision is established, the Bank recognises any
impairment loss on the assets associated with that contract.
3.21
Financial guarantees
Financial guarantees are contracts that require the Bank to make specified payments to
reimburse the holder for a loss it incurs because a specified debtor fails to make payment
when due in accordance with the terms of a debt instrument. Liabilities arising from
financial guarantees are initially measured at fair value, and the initial fair value is
amortised over the life of the financial guarantee. The liability is subsequently carried at
the higher of this amortised amount and the present value of any expected payment to
settle the liability when a payment under the guarantee has become probable. Financial
guarantees are included within other liabilities.
3
3.22
Employee benefits
The Bank contributes towards the State pension defined contribution plan in accordance
with local legislation and to which it has no commitment beyond the payment of fixed
contributions.
Obligations for contributions to the defined contribution plan are
recognised as an expense in profit or loss during the year in which these are incurred.
3.23
Earnings per share
The Bank presents basic earnings per share (EPS) data for its ordinary shares. Basic EPS
is calculated by dividing the profit or loss attributable to ordinary shareholders of the Bank
by the weighted average number of ordinary shares outstanding during the period.
3.24
New standards and interpretations not yet adopted
A number of new standards, amendments to standards and interpretations are effective
for the annual periods beginning after 1 January 2012, and have not been applied in
preparing these financial statements. None of these are expected to have a significant
effect on the financial statements of the Bank.
4
Financial risk management
4.1
Introduction and overview
The Bank is a traditional retail bank and its core business is the taking of deposits,
holding of financial instruments and the granting of loans supported by basic retail
services such as money transfer, spot currency exchange, currency forward contracts
and interest rate swaps entered into for risk management purposes. The Bank does not
keep a trading book and its treasury is restricted to liquidity management, occasionally
involving interest rate swaps and forward transactions that are entered into for risk
management purposes. Therefore the main risks assumed are: (a) counterparty credit
risk arising from loans, investments in securities and equity participations; (b) liquidity risk
arising from maturity mismatches; (c) market risk; and (d) operational risk.
This note presents information about the Bank’s exposure to each of the above risks, the
Bank’s objectives, policies and processes for measuring and managing risk, and the
Bank’s management of capital.
Risk management framework
The Bank’s risk management policies are established to identify and analyse the risks
faced by the Bank, to set appropriate risk limits and controls, and to monitor risks and
adherence to limits.
The most material risks as perceived by management are identified through the annual
Internal Capital Adequacy Assessment Process, which process uses a methodology that
is validated by the Malta Financial Services Authority (MFSA), ÖVAG Group and the
Bank’s internal auditors.
Risk management policies and systems are reviewed regularly to reflect changes in
market conditions, products and services offered. The Bank, through its training and
management standards and procedures, aims to develop a disciplined and constructive
control environment, in which all employees understand their roles and obligations.
4
Financial risk management (continued)
4.1
Introduction and overview (continued)
Risk management framework (continued)
As at the reporting date, the Board of Directors was composed of three Non-Executive
Directors and two Executive Directors. It has overall responsibility for the establishment
and oversight of the Bank’s risk management framework, which includes the
identification of risks, how to mitigate those risks and to ensure that the Bank has
adequate capital to cover both expected and unexpected losses.
The Board has established three management committees, namely the Audit
Committee, the Management Committee and the Asset and Liability Committee (ALCO).
These committees share with the Members of the Board of Directors the ultimate
responsibility for directing the activity of the Bank and to ensure that it is well run and
delivering the outcomes for which it has been set up by implementing the set strategy
and by exercising good oversight and stewardship.
The Audit Committee is composed of two Non-Executive Directors and a representative
appointed by the Shareholders. The Independent Auditors are invited to attend at every
Audit Committee meeting. The Committee reviews audit findings and monitors progress
to resolve the said findings in a timely manner thus mitigating any additional risks
identified. The Committee also reviews findings on data quality, the reporting process
and effectiveness of the Bank's internal controls and the audit of the annual financial
statements. The Audit Committee is assisted in these functions by the Internal Audit.
Internal Audit undertakes both regular and ad-hoc reviews of risk management controls
and procedures, the results of which are reported to the Audit Committee. The Internal
Auditor is also the Committee’s Secretary.
The Management Committee is made up of the Executive Officers of the Bank, namely
the Managing Director, the Executive Director, the Company Secretary and Chief
Financial Controller. The Committee’s role is to regularly review and evaluate the
corporate strategy, major operational and financial plans, risk policies and performance
objectives.
It also monitors corporate performance against budgets and past
performance, ensuring compliance to all relevant laws, regulations and codes of best
business practice. The minutes of the Management Committee Meetings are submitted
to the Board.
The ALCO is composed of the Executive Officers of the Bank and the Treasury
Managers. The ALCO reviews levels of liquidity to ensure that future commitments are
adequately funded and ensures compliance with regulatory requirements and approves
exposures involving the assumption of market, interest rate and maturity transformation
risks. The minutes of the ALCO Meetings are also submitted to the Board.
4
4.2
Credit risk
Credit risk is the risk of financial loss to the Bank if a customer or counterparty to a
financial instrument fails to meet its contractual obligations, and arises principally from
the Bank’s loans and advances to customers and other banks, derivative transactions and
investment debt securities.
Management of credit risk
The Bank has in place the standards, policies and procedures of the ÖVAG Group for the
control and monitoring of credit risk. The Bank also complies with limits and standards
imposed by the Banking Rules issued by the Malta Financial Services Authority. Credit
decisions for the acquisition of assets require the approval of both Executive Directors
and a also of a Senior Manager. Higher volume transactions require also the approval of
the ÖVAG Risk Management. International business is also approved by the Board of
Directors.
Two separate departments, Risk and Credit Administration, are responsible for the
oversight of the Bank’s credit risk, including:
•
Formulating credit policies in consultation with business units, covering collateral
requirements, credit assessment, risk grading and reporting, documentary and legal
procedures, and compliance with regulatory and statutory requirements.
•
Renewals and reviews of facilities are subject to the same review process.
•
Limiting concentrations of exposure to counterparties, geographies and industries
(for loans and advances), and by issuer, credit rating band, market liquidity and
country (for investment securities).
•
Maintaining the Bank’s risk gradings in order to categorise exposures according to
the degree of risk of financial loss faced and to focus management on the attendant
risks. The risk grading system is used in determining where impairment provisions
may be required against specific credit exposures. The current risk-grading
framework consists of five rating classes, divided into 25 sub-classes reflecting
varying degrees of risk of default. The responsibility for assigning the appropriate
risk rating class lies with the responsible risk manager. Risk ratings are subject to
regular reviews by ÖVAG Group Risk Management.
•
Regular reports are provided to ÖVAG Group Risk Management on the credit quality
of local portfolios and appropriate corrective action is taken.
•
Providing advice, guidance and specialist skills to business units to promote best
practice throughout the Bank in the management of credit risk.
Each business unit is responsible for the quality and performance of its credit portfolio
and for monitoring and controlling all credit risks in its portfolios, including those subject
to central approval.
Regular audits of business units and the Bank’s credit processes are undertaken by
Internal Audit.
4
4.2
Credit risk (continued)
Exposure to credit risk
Loans and
advances to
customers
In thousands of EUR
Carrying amount
Individually impaired
Grade 4: Doubtful
Gross/revalued amount
Allowance for impairment
Carrying amount
Collectively impaired
Grade 1: Low-fair risk
Grade 2-3: Watch list
Grade 4: Doubtful
Gross amount
Allowance for impairment
Carrying amount
Loans and
advances to banks
Investment
securities
2012
2011
2012
2011
2012
2011
378,633
======
414,301
=======
100,208
=====
126,449
======
53,037
=====
92,761
=====
5,076
-----------5,076
(1,924)
------------3,152
-------------
4,092
----------------------4,092
(1,716)
------------- -------------2,376
-----------------------
----------------------------------
4,878
---------4,878
(2,282)
---------2,596
----------
4,574
-----------4,574
(1,625)
-----------2,949
------------
347,011
11,299
19,230
------------377,540
(2,059)
------------375,481
-------------
267,626
788
15,230
537
----------------------283,393
788
(1,150)
(3)
------------- -------------282,243
784
-----------------------
1,935
-----------1,935
(1)
-----------1,934
------------
----------------------------
----------------------------------
-------------------------
6,169
------------6,169
-------------
---------------------
-----------------------
-------------------
-----------------------
123,513
99,424
-------------- ------------123,513
99,424
-----------------------414,301 100,208
====== ======
124,515
--------------124,515
-----------126,449
======
50,441
-----------50,441
---------53,037
=====
89,812
-----------89,812
-----------92,761
=====
Past due but not impaired
Grade 4: Doubtful *
Carrying amount
Neither past due nor impaired
Grade 1-3: Low-fair risk and
Watch list
Carrying amount
Total carrying amount
------------------------378,633
======
*
No impairment allowance has been provided against past due but not impaired category in view of
the collateral held by the Bank.
Loans with renegotiated terms amounted to EUR9.464 million for 2012 (2011: EUR9.856 million).
Description of Grades:
Grade 1: Low-fair risk. The interest or principal repayment is paid up-to-date or is overdue by less than 30
days.
Grade 2-3: Watch list. The interest or principal repayment is overdue by 30 days and over but not
exceeding 90 days.
Grade 4: Doubtful (Collectively Impaired). The interest or principal repayment is overdue by over 90 days
but excess is not recognised as ‘default’ in terms of VBAG Group Standards.
Grade 4: Doubtful (Individually Impaired). All credit exposures that satisfy the ‘default’ conditions as per
VBAG Group standards and consequently entered in the Bank’s Recovery Database system.
4
4.2
Impaired loans and investment securities
Impaired loans and securities are loans and advances and investment debt securities for
which the Bank determines that there is objective evidence of impairment and it does
not expect to collect all principal and interest due according to the contractual terms of
the loan / securities agreement(s). These loans are graded 4 and 5 in the Bank’s internal
credit risk rating system.
Past due but not impaired loans
Loans and securities where contractual interest or principal payments are past due but
the Bank believes that impairment is not appropriate on the basis of the level of security /
collateral available and / or the stage of collection of amounts owed to the Bank.
Loans with renegotiated terms
Loans with renegotiated terms are loans that have been restructured due to deterioration
in the borrower’s financial position and where the Bank has made concessions that it
would not otherwise consider.
Allowances for impairment
The Bank establishes an allowance for impairment losses that represents its estimate of
incurred losses in its loan portfolio. The main components of this allowance are a
specific loss component that relates to individually significant exposures, and a collective
loan loss allowance established for groups of homogeneous assets in respect of losses
that have been incurred but have not been identified on loans subject to individual
assessment for impairment.
Write-off policy
The Bank writes off a loan or an investment debt security balance (and any related
allowances for impairment losses) when the Bank’s Risk Manager determines that the
loan or security is uncollectible. This determination is reached after considering
information such as the occurrence of significant changes in the borrower’s / issuer’s
financial position such that the borrower / issuer can no longer pay the obligation, or that
proceeds from collateral will not be sufficient to pay back the entire exposure.
Collateral
The Bank holds collateral against loans and advances to customers in the form of
hypothecary rights over immovable assets, registered rights over moveable assets and
guarantees. The asset held as collateral is assigned a fair value at the time of credit
approval. The value assigned is regularly monitored to identify assets that need
revaluation.
4
4.2
Collateral (continued)
The value of financial instruments is monitored on a monthly basis, the exchange rate of
currencies is monitored every six months, commercial immovable property is generally
reviewed every year and residential real estate is generally reviewed every three years.
Generally collateral is not held over loans and advances to banks, except when securities
are held as part of reverse repurchase and securities borrowing activity. Collateral usually
is not held against investment securities, and no such collateral was held at 31
December 2012 and 31 December 2011.
An estimate of the fair value of collateral and other security enhancements held against
loans and advances to customers is shown below:
Against individually impaired
Property
Debt securities
Equities
Other
Against collectively assessed loans
Property
Debt securities
Equities
Other
Against past due but not impaired
Property
Other
Against neither past due nor impaired
Property
Other
Total
2012
2011
EUR 000
EUR 000
4,700
-
3,707
43
2
315
138,025
1,766
1,110
96,629
95,511
1,970
1,507
126,778
-
6,140
26
--------------
20,941
398
--------------
272,230
======
257,338
======
No collateral or other security enhancements are held against other financial assets.
4
4.2
Concentration of credit risk
The Bank monitors concentrations of credit risk by sector and by geographic location. An
analysis of concentrations of credit risk from loans and advances and investment
securities at the reporting date is shown below:
Loans and advances
to customers
In thousands of EUR
Loans and advances
to banks
Investment
securities
2012
2011
2012
2011
2012
2011
Corporate
339,370
372,293
-
-
5,405
3,944
Sovereign
Concentration by sector
8,143
9,229
-
-
34,414
73,888
Banks
-
-
100,208
126,449
10,622
11,980
Retail
31,120
32,779
-
-
-
-
Equity
------------378,633
======
-------------414,301
======
-------------100,208
======
------------126,449
======
2,596
------------53,037
======
2,949
-------------92,761
======
-
-
-
-
8,198
8,657
378,633
414,301
100,208
126,449
42,243
81,155
-------------
--------------
--------------
--------------
2,596
--------------
2,949
--------------
Concentration by location
North America
Europe
Latin America and
Caribbean
378,633
414,301
100,208
126,449
53,037
92,761
======
======
======
======
======
======
Concentration by location for loans and advances is analysed based on the location of the
counterparty. Concentration by location for investment securities is analysed based on
the location of the issuer of the security.
4
4.2
Concentration of credit risk (continued)
An analysis of concentration of loans and advances to customers by industry is shown
below:
The following are industry concentrations, gross of allowances:
- agriculture
- quarrying
- manufacturing
- electricity, gas and water supply
- construction
- wholesale and retail trade, repairs of motor vehicles and motor cycles
- transport and storage
- accommodation and food service activities
- financial and insurance activities
- real estate activities
- professional, scientific and technical activities
- administrative and support service activities
- public administration and defence compulsory social security
-human health and social work activities
- other services activities
- household and individuals
Gross loans and advances
2012
2011
EUR 000
EUR 000
1,228
240
2,464
5,193
14,971
3,732
5,845
12,053
113,354
169,622
23,629
9,450
152
5,072
796
14,815
-------------382,616
======
1,300
176
3,711
6,720
31,872
13,377
6,306
12,428
141,214
145,122
23,093
10,127
86
5,220
544
15,871
-------------417,167
======
An analysis of the credit quality of assets which are neither past due nor impaired, based
on Standard & Poor’s rating agency, is shown below:
Loans and advances
to customers
In thousands of EUR
Sovereign
Rated A- to A+
Rated BBB- to BBB+
Not Rated
Corporate
Rated A- to A+
Rated BBB- to BBB+
Rated B- to B+
Not Rated
Credit Institutions
Rated AA- to AA+
Rated A- to A+
Rated BBB- to BBB+
Not Rated
Loans and advances
to banks
Investment
securities
2012
2011
2012
2011
2012
2011
-
1,154
-
-
-
34,414
-
73,888
-
-
92,655
29,704
-
-
2,180
3,225
-
3,944
-
-------------======
-------------123,513
======
25
1
99,297
100
-------------99,423
======
31
124,484
------------124,515
======
6,973
3,649
------------50,441
======
8,075
1,725
2,180
------------89,812
======
-
4
4.3
Liquidity risk
Liquidity risk is the risk that the Bank will encounter difficulty in meeting obligations in
respect of its financial liabilities that are settled by delivering cash or another financial
asset.
Management of liquidity risk
The Bank’s approach to managing liquidity is to ensure, as far as possible, that it will
always have sufficient liquidity to meet its liabilities when due, under both normal and
stressed conditions, without incurring unacceptable losses or risking damage to the
Bank’s reputation.
Treasury receives information from other business units regarding the liquidity profile of
financial assets and liabilities and details of other projected cash flows arising from
projected future business. Treasury then maintains a portfolio of short-term liquid assets,
largely made up of short-term liquid investment securities, loans and advances to banks
and other inter-bank facilities, to ensure that sufficient liquidity is maintained within the
Bank.
The daily liquidity position is monitored and regular liquidity stress testing is conducted
under a variety of scenarios covering both normal and more severe market conditions.
All liquidity policies and procedures are subject to review and approval by ALCO. Daily
reports cover the liquidity position of the Bank. A summary report, including any
exceptions and remedial action taken, is submitted regularly to ALCO.
Exposure to liquidity risk
The key measure used by the Bank for managing liquidity risk is the ratio of net liquid
assets to deposits from customers. For this purpose net liquid assets are considered as
including cash and cash equivalents and investment grade debt securities for which there
is an active and liquid market less any deposits from banks, other borrowings and
commitments maturing within the next month. A similar, but not identical, calculation is
used to measure the Bank’s compliance with the liquidity limit established by the Bank’s
Regulator, the Malta Financial Services Authority. Details of the reported Bank’s ratio of
net liquid assets to deposits from customers at the reporting date and during the
reporting period were as follows:
2012
2011
At 31 December
Average for the period
Maximum for the period
Minimum for the period
384%
156%
384%
37%
254%
134%
304%
45%
4
4.3
Liquidity risk (continued)
Maturity analysis for financial liabilities
In thousands of EUR
Carrying
amount
Gross
nominal
outflow
Less than
1 month
1-3
months
3 months
to 1 year
1-5
years
31 December 2012
Non-derivative liabilities
Derivative liabilities held for
risk management
Unrecognised loan commitments
332,766
333,049
80,076
199
252,774
-
18,557
18,619
16,005
1,826
645
143
7,338
8,042
-
1,258
6,037
747
11,246
11,246
-
-
-
-
442,275
443,457
134,752
65,886
235,433
7,386
16,310
16,373
13,243
675
1,195
1,260
9,196
9,945
4
875
7,830
1,236
17,487
17,487
-
-
-
-
31 December 2011
Non-derivative liabilities
Derivative liabilities held for
risk management
Unrecognised loan
commitments
The above table shows the undiscounted cash flows on the Bank’s non-derivative financial
liabilities and unrecognised loan commitments on the basis of their earliest possible
contractual maturity. The Bank’s expected cash flows on these instruments vary
significantly from this analysis. For example, demand deposits from customers are
expected to maintain a stable or increasing balance; and unrecognised loan commitments
are not all expected to be drawn down immediately.
The gross nominal outflows disclosed in the previous table represent the contractual,
undiscounted cash flows relating to derivative financial liabilities held for risk management
purposes. The disclosure shows a net amount for derivatives that are net settled, but a
gross inflow and outflow amount for derivatives that have simultaneous gross settlement
(e.g., forward exchange contracts and currency swaps).
4
4.4
Market risk
Market risk is the risk that changes in market prices, such as interest rates, equity prices,
foreign exchange rates and credit spreads (not relating to changes in the obligor’s /
issuer’s credit standing) will affect the Bank’s income or the value of its holdings of
financial instruments. The objective of market risk management is to manage and
control market risk exposures within acceptable parameters, while optimising the return
on risk.
Management of market risk
The Bank manages market risk through risk limits and individual risk positions approved
by ÖVAG Group. Treasury’s open currency positions are monitored by Risk Management
and by ALCO.
Overall authority for market risk is vested in ALCO. Group Risk is responsible for the
development of detailed risk management policies (subject to review and approval by
ALCO) and for the day-to-day review of their implementation.
4.4.1
Interest rate risk
Exposure to interest rate risk – non-trading portfolios
The principal risk to which non-trading portfolios are exposed is the risk of loss from
fluctuations in the future cash flows or fair values of financial instrument because of a
change in market interest rates. Interest rate risk is managed principally through
monitoring interest rate gaps and by having pre-approved limits for repricing bands.
ALCO is the monitoring body for compliance with these limits and is assisted by Risk
Management in its day-to-day monitoring activities. A summary of the Bank’s interest
rate gap position on non-trading portfolios is shown in the table below. The pre-tax effect
on profit or loss and equity resulting from a change in interest rates shown in the table
relates to variable rate instruments. The analysis is performed up to the 12 month period.
The impact on profit or loss and equity as a result of a change in interest rates on fixed
rate instruments carried at fair value is not significant as these are almost entirely hedged
through qualifying hedging instruments.
Investment securities in the table below have been adjusted by the fair value amount to
reflect the nominal value on which interest is calculated.
4
4.4
Market risk (continued)
4.4.1
Interest rate risk (continued)
In thousands of EUR
31 December 2012
Balances with CBM and cash
Other assets
Total assets
Other liabilities
Equity
Carrying
amount
Less
than 3
months
333
100,208
378,633
50,796
6,112
-----------536,082
======
332,766
18,557
8,963
175,796
------------536,082
======
49
88,469
359,923
-----------448,441
======
314,616
17,361
------------331,977
======
441
7,777
---------8,218
====
12,300
146
----------12,446
=====
11,190
163
5,000
--------16,383
=====
913
----------913
=====
108
10,770
21,180
----------32,058
=====
5,850
137
----------5,987
=====
22,020
----------22,020
=====
----------=====
284
2,596
6,112
-------------8,992
======
8,963
175,796
------------184,759
======
116,464
116,464
(4,228)
112,236
15,440
127,676
26,071
153,747
22,020
175,767
(175,767)
-
1,019
(1,019)
(26)
26
39
(39)
349
113,309
270,409
16,000
------------400,067
======
433,014
13,872
------------446,886
======
84
131,469
2,000
----------133,553
=====
1,073
202
----------1,275
=====
1,581
213
2,000
----------3,794
=====
802
976
---------1,778
====
1,216
12,210
37,610
-----------51,036
=====
7,386
1,260
--------8,646
====
33,191
----------33,191
=====
----------=====
303
10,259
3,253
10,240
-------------24,055
======
12,560
174,551
-------------187,111
======
(46,819)
(46,819)
132,278
85,459
2,016
87,475
42,390
129,865
33,191
163,056
(163,056)
-
(410)
(410)
827
(827)
5
(5)
Interest sensitivity gap
Cumulative gap
% change interest rate for the period
100bps increase
100bps decrease
31 December 2011
Other assets
Total assets
Other liabilities
Equity
Interest sensitivity gap
Cumulative gap
% change interest rate for the period
100bps increase
100bps decrease
652
126,449
414,301
94,054
10,240
-------------645,696
======
442,275
16,310
12,560
174,551
------------645,696
======
3-6
months
6-12
months
1-5
years
More
than
5 years
Noninterest
bearing
4
4.4
4.4.1
Interest rate risk (continued)
Exposure to interest rate risk – non-trading portfolios (continued)
The management of interest rate risk against interest rate gap limits is supplemented by
monitoring the sensitivity of the Bank’s financial assets and liabilities to interest rate
segments.
Overall non-trading interest rate risk positions are managed by ÖVAG Group Global
Treasury, which uses investment securities, advances to banks, deposits from banks and
derivative instruments to manage the overall position arising from the Bank’s non-trading
activities.
In the banking book the interest rate risk is valued primarily using the stress tests (200
Basis Point movement) stipulated by the Austrian Financial Market Authority (FMA). The
interest rate risk in the banking book is also quantified by means of the periodic gap
analysis in the course of a “fixed interest rate balance” and through analyses of the
interest income on the basis of elasticity analyses. ÖVAG Group ALM Support Unit
performs the assessment of the interest rate risk at least once a quarter and this is
submitted to the regulatory authorities. Furthermore it is agreed with ÖVAG Group
Market Risk Management that total interest rate risk is not to exceed 10% of Own
Funds, as calculated by the FMA-approved SAP-ALM IT application.
4.4.2
Foreign exchange risk
Foreign exchange risk is attached to those monetary assets and monetary liabilities of
the Bank that are not denominated in the functional currency of the Bank. Transactional
exposures give rise to foreign currency gains and losses that are recognised in the profit
or loss. Currency risk is mitigated by a closely monitored currency position policy and is
managed through matching within the foreign currency portfolio. Mismatches, which are
allowed temporarily and for small amounts, are continuously monitored and regularised
immediately. The Bank ensures that its net exposure is kept to an acceptable level by
buying and selling foreign currencies spot or forward rates when considered appropriate.
The methodology used to calculate the minimum capital requirements for foreign
exchange risk is based on the statutory requirements, mainly in terms Banking Rule 08.
The open foreign exchange positions are reported on a weekly basis by the Bank to
ÖVAG Group Global Treasury Coordination, which in turn performs the calculation of the
foreign exchange risk at Group level.
4
4.4
4.4.2
Foreign exchange risk (continued)
In thousands of EUR
31 December 2012
Balances with the CBM and cash
Derivative assets held for risk
management
Other assets
Total assets
Derivative liabilities held for risk
management
Other liabilities
Total liabilities
Equity
Net on balance sheet financial
position
Total
EUR
USD
GBP
CHF
Other
333
2,359
315
2,359
9
9
-
-
53,037
100,208
378,633
3,753
-------------538,323
======
53,037
96,062
375,006
3,707
------------530,486
======
2,448
212
32
-----------2,701
=====
141
355
--------505
====
3,060
------------3,060
======
1,557
14
--------1,571
====
7,338
7,338
332,766
18,557
1,625
-------------360,286
328,833
14,036
1,576
----------351,783
3,314
39
----------3,353
461
2
---------463
3,146
------------3,146
787
746
8
---------1,541
178,037
-------------538,323
======
178,037
------------529,820
======
-----------3,353
=====
--------463
====
----------3,146
=====
---------1,541
====
-
666
(652)
42
(86)
30
(4)
4
2
(2)
% Change in Exchange rates to EUR
5% increase
5% decrease
(33)
33
2
(2)
4
4.4
4.4.2
Foreign exchange risk (continued)
Total
EUR
USD
GBP
CHF
Other
652
629
10
13
-
-
4,377
92,761
126,449
414,301
5,863
------------644,403
======
4,377
92,761
119,974
406,481
5,802
------------630,024
======
4,754
237
32
---------5,033
====
204
372
--------589
====
587
7,211
19
---------7,817
====
930
10
------940
===
9,196
442,275
16,310
3,364
------------471,145
9,196
431,584
12,660
3,324
------------456,764
2,347
2,605
32
-----------4,984
101
564
3
--------668
7,810
2
1
------------7,813
433
479
4
------916
Equity
173,258
--------------
173,258
---------------
------------
---------
----------
-------
644,403
======
630,022
=======
4,984
=====
668
====
7,813
====
916
===
-
2
49
(79)
4
24
5% increase
2
(4)
-
1
5% decrease
(2)
4
-
(1)
In thousands of EUR
31 December 2011
Balances with the CBM and cash
management
Other assets
Total assets
management
Other liabilities
Total liabilities
Net on balance sheet financial
position
% Change in Exchange rates to EUR
4
4.5
Operational risk
Operational risk is the risk of direct or indirect loss arising from a wide variety of causes
associated with the Bank’s processes, personnel, technology and infrastructure, and
from external factors other than credit, market and liquidity risks such as those arising
from legal and regulatory requirements and generally accepted standards of corporate
behaviour. Operational risks arise from all of the Bank’s operations and are faced by all
business entities.
The Bank’s objective is to manage operational risk so as to balance the avoidance of
financial losses and damage to the Bank’s reputation with overall cost effectiveness and
to avoid control procedures that restrict initiative and creativity.
The primary responsibility for the development and implementation of controls to
address operational risk is assigned to senior management within each business unit.
This responsibility is supported by the development of overall ÖVAG Group standards for
the management of operational risk in the following areas:
•
•
•
•
•
•
•
•
•
•
requirements for appropriate segregation of duties, including the independent
authorisation of transactions
requirements for the reconciliation and monitoring of transactions
compliance with regulatory and other legal requirements
documentation of controls and procedures
requirements for the periodic assessment of operational risks faced, and the
adequacy of controls and procedures to address the risks identified
requirements for the reporting of operational losses and proposed remedial action
development of contingency plans
training and professional development
ethical and business standards
risk mitigation, including insurance where this is effective.
Compliance with ÖVAG Group standards is supported by a programme of periodic
reviews undertaken by Internal Audit. The results of Internal Audit reviews are discussed
with the management of the business unit to which they relate, with summaries
submitted to the Audit Committee and senior management of the Bank and ÖVAG Group
Audit.
The capital requirement for operational risk is measured on the Standardised Approach.
4
4.6
Capital management
Regulatory capital
The Bank’s Regulator, the Malta Financial Services Authority, sets and monitors the
capital requirements for the Bank. The parent company and individual banking operations
are directly supervised by their local regulators.
In implementing current capital requirements the Malta Financial Services Authority
requires the Bank to maintain a prescribed ratio of total capital to total risk-weighted
assets.
Regarding compliance with Banking Rule (BR04) “Capital Requirements of Credit
Institutions Authorised under the Banking Act 1994”, with respect to Pillar 1 capital
requirements under the Basel II framework, as from 30 September 2012 the Bank
started to report under the Standardised Approach with respect to Pillar 1 capital
requirements under the Basel II to allocate capital against credit risk assumed.
The second pillar of Basel II (Supervisory Review and Evaluation Process) involves both
banks and regulators taking a view on whether a Bank should hold additional capital
against risks not covered in Pillar 1. Part of the Pillar 2 process is the Internal Capital
Adequacy Assessment Process (“ICAAP”) which is the bank’s self assessment of risks
not captured by Pillar 1.
The Bank’s capital base is divided in two categories, as defined in Banking Rule (BR03)
“Own Funds of Credit Institutions Authorised under the Banking Act, 1994”:
•
“Original own funds” comprise share capital, retained earnings and reserves created
by appropriations of retained earnings. The book value of goodwill and intangible
assets are deducted in arriving at original own funds calculations.
•
“Additional own funds” comprise qualifying subordinated loan capital, collective
impairment allowance, and revaluation reserves arising from the revaluation of
tangible fixed assets and financial fixed assets.
The Bank’s policy is to maintain a strong capital base so as to maintain investor, creditor
and market confidence and to sustain future development of the business. The impact
of the level of capital on shareholders’ return is also recognised and the Bank recognises
the need to maintain a balance between the higher returns that might be possible with
greater gearing and the advantages and security afforded by a sound capital position.
4
4.6
Capital management (continued)
Capital allocation
The allocation of capital between specific operations and activities is, to a large extent,
driven by optimisation of the return achieved on the capital allocated. The amount of
capital allocated to each operation or activity is based primarily upon the regulatory
capital, but in some cases the regulatory requirements do not reflect fully the varying
degree of risk associated with different activities. In such cases the capital requirements
may be flexed to reflect differing risk profiles, subject to the overall level of capital to
support a particular operation or activity not falling below the minimum required for
regulatory purposes. The process of allocating capital to specific operations and activities
is undertaken independently of those responsible for the operation, by the Bank’s Risk
Management and Credit Administration and is subject to review by the Board of
Directors or ALCO as appropriate.
Although maximisation of the return on risk-adjusted capital is the principal basis used in
determining how capital is allocated within the Bank to particular operations or activities,
it is not the sole basis used for decision making. Account is also taken of synergies with
other operations and activities, the availability of management and other resources, and
the fit of the activity with the Bank’s longer term strategic objectives. The Bank’s
policies in respect of capital management and allocation are reviewed regularly by the
Board of Directors.
The Bank complied with all externally imposed capital requirements throughout the
period. There have been no material changes in the Bank’s management of capital
during the period.
The Solvency Ratio of the Bank is calculated below.
4
4.6
In thousands of EUR
31 December 2012
Banking Book Credit Risk Capital Requirements
By exposure classes:
Standardised approach (SA)
Central governments or central banks
Regional governments or local authorities
Administrative bodies and non-commercial undertakings
Institutions
Corporates
Past due
Retail
Exposures collateralized with real estate
Collective investment undertakings (CIU)
Other assets
Banking Book Notional Risk Weighted Assets
Operational risk capital requirement
Original
exposure value
Weighted
amount
Capital
requirement
22,146
359
109,275
366,893
6,009
6,729
35,639
10,862
7,115
------------565,027
======
76
26,435
263,626
6,364
4,378
13,975
10,862
7,115
-------------332,831
6
2,115
21,090
509
350
1,118
869
569
-----------26,626
15,133
1,211
107
------------348,071
======
9
----------27,846
=====
Foreign Exchange Risk capital requirement
Own funds
Original own funds
Paid up capital
Reserves
Deductions
IFRS prudential filters (deductions)
Additional own funds
Upper tranche
Lower tranche
Deductions
IFRS Prudential Filters: Increases to Additional Own Funds
Total gross own funds
Capital solvency ratio
167,821
12,735
92
(4,952)
------------175,695
2,059
-------------2,059
-------------177,755
======
51.07%
======
Note: The above capital adequacy ratio is calculated in accordance with Basel II requirements
(Capital Requirements Directive). The reserves exclude EUR100k which are set aside for the
purpose of the Depositor Compensation Scheme.
4
4.6
In thousands of EUR
31 December 2011
Banking Book Credit Risk Capital Requirements
By exposure classes:
Standardised approach (SA)
Central governments or central banks
Regional governments or local authorities
Institutions
Corporates (applies only for Leasing Companies)
Internal ratings based Approach (IRB)
Corporates
Retail
Equity IRB
Other non credit-obligation assets
Banking Book Notional Risk Weighted Assets
Operational risk capital requirement
Original
exposure
value
Weighted
amount
Capital
requirement
74,574
86
142,637
219,922
43
37,969
119,353
3
3,038
9,548
176,799
49,262
1,070
9,133
------------673,483
======
147,416
14,343
1,070
17,917
-------------338,111
11,793
1,147
86
1,433
-----------27,048
17,651
1,412
69
------------355,831
======
6
-----------28,466
=====
Foreign Exchange Risk capital requirement
Own funds
Original own funds
Paid up capital
Reserves
Deductions
IFRS prudential filters (deductions)
Other Deductions brought forward from excess in
Additional Own Funds
Additional own funds
Upper tranche
Lower tranche
Deductions
IFRS Prudential Filters: Increases to Additional Own Funds
Capital solvency ratio
167,821
8,474
(1,450)
(7,416)
(213)
------------167,216
1,150
(1,150)
1
------------167,217
======
46.99%
======
Note: The above capital adequacy ratio is calculated in accordance with Basel II requirements
(Capital Requirements Directive). The reserves exclude EUR100k which are set aside for the
purpose of the Depositor Compensation Scheme.
5
Use of estimates and judgements
The Directors consider the development, selection and disclosure of the Bank’s critical
accounting policies and estimates, and the application of these policies and estimates.
These disclosures supplement the commentary on financial risk management (see note
4).
5.1
Key sources of estimation uncertainty
5.1.1
Allowances for credit losses
Assets accounted for at amortised cost are evaluated for impairment on a basis
described in accounting policy 3.9.7.
The specific component of the total allowances for impairment applies to financial assets
evaluated individually for impairment and is based upon management’s best estimate of
the present value of the cash flows that are expected to be received. In estimating these
cash flows, management makes judgements about a counterparty’s financial situation
and the net realisable value of any underlying collateral. Each impaired asset is assessed
on its merits, and the workout strategy and estimate of cash flows considered
recoverable are independently approved by the Risk Management function.
Collectively assessed impairment allowances cover credit losses inherent in portfolios of
loans and advances with similar credit risk characteristics when there is objective
evidence to suggest that they contain impaired loans and advances, but the individually
impaired items cannot yet be identified. In assessing the need for collective loss
allowances, management considers factors such as credit quality, portfolio size,
concentrations, and economic factors. In order to estimate the required allowance,
assumptions are made to define the way inherent losses are modelled and to determine
the required input parameters, based on historical experience and current economic
conditions. The accuracy of the allowances depends on the estimates of future cash
flows for specific counterparty allowances and the model assumptions and parameters
used in determining collective allowances.
5.1.2
Determining fair values
The determination of fair value for financial assets and liabilities for which there is no
observable market price requires the use of valuation techniques as described in
accounting policy 3.9.6. For financial instruments that trade infrequently and have little
price transparency, fair value is less objective, and requires varying degrees of judgement
depending on liquidity, concentration, uncertainty of market factors, pricing assumptions
and other risks affecting the specific instrument.
5
5.2
Critical accounting judgements in applying the Bank’s accounting policies
5.2.1
Valuation of financial instruments
Critical accounting judgements made in applying the Bank’s accounting policies include:
The Bank’s accounting policy on fair value measurements is discussed in accounting
policy 3.9.6.
The Bank measures fair values using the following fair value hierarchy that reflects the
significance of the inputs used in making the measurements:



Level 1: Quoted market price (unadjusted) in an active market for an identical
instrument.
Level 2: Valuation techniques based on observable inputs, either directly (i.e., as prices)
or indirectly (i.e., derived from prices). This category includes instruments valued
using: quoted market prices in active markets for similar instruments; quoted prices for
identical or similar instruments in markets that are considered less than active; or other
valuation techniques where all significant inputs are directly or indirectly observable
from market data.
Level 3: Valuation techniques using significant unobservable inputs. This category
includes all instruments where the valuation technique includes inputs not based on
observable data and the unobservable inputs have a significant effect on the
instrument’s valuation. This category includes instruments that are valued based on
quoted prices for similar instruments where significant unobservable adjustments or
assumptions are required to reflect differences between the instruments.
Fair values of financial assets and financial liabilities that are traded in active markets are
based on quoted market prices or dealer price quotations. For all other financial
instruments the Bank determines fair values using valuation techniques.
Valuation techniques include net present value and discounted cash flow models,
comparison to similar instruments for which market observable prices exist, BlackScholes and other valuation models. Assumptions and inputs used in valuation
techniques include risk-free and benchmark interest rates, credit spreads and other
premia used in estimating discount rates, bond and equity prices, foreign currency
exchange rates, equity and equity index prices and expected price volatilities and
correlations.
The objective of valuation techniques is to arrive at a fair value
determination that reflects the price of the financial instrument at the reporting date that
would have been determined by market participants acting at arm’s length.
The Bank uses widely recognised valuation models for determining the fair value of
common and more simple financial instruments, like interest rate and currency swaps that
use only observable market data and require little management judgement and estimation.
5
5.2
Critical accounting judgements in applying the Bank’s accounting policies (continued)
5.2.1
Valuation of financial instruments (continued)
Observable prices and model inputs are usually available in the market for listed debt and
equity securities, exchange traded derivatives and simple over the counter derivatives like
interest rate swaps. Availability of observable market prices and model inputs reduces the
need for management judgement and estimation and also reduces the uncertainty
associated with determination of fair values. Availability of observable market prices and
inputs varies depending on the products and markets and is prone to changes based on
specific events and general conditions in the financial markets.
The table below analyses financial instruments measured at fair value at the end of the
reporting period, by the level in the fair value hierarchy into which the fair value
measurement is categorised.
In thousands of EUR
Level 1
Level 2
Level 3
Total
31 December 2012
31 December 2011
5.2.2
46,260
----------46,260
=====
-----------=====
2,359
6,777
---------9,136
=====
7,338
----------7,338
=====
----------=====
----------=====
2,359
53,037
----------55,396
=====
7,338
----------7,338
=====
87,632
----------87,632
=====
-----------=====
4,377
5,129
---------9,506
=====
9,196
----------9,196
=====
----------=====
----------=====
4,377
92,761
----------97,138
=====
9,196
----------9,196
=====
Qualifying hedge relationships
In designating financial instruments in qualifying hedge relationships, the Bank has
determined that it expects the hedge to be highly effective over the period of the
hedging relationship.
6
Financial assets and liabilities
6.1
Accounting classification and fair values
The table below sets out the Bank’s classification of each class of financial assets and liabilities and their carrying amounts and fair values (excluding accrued interest).
Derivatives
Loans and
receivables
Availablefor-sale
Other
amortised
cost
Total
carrying
amount
Fair
value
2,359
-
333
100,208
378,633
-
53,037
-
333
2,359
100,208
378,633
53,037
333
2,359
100,208
378,633
53,037
7,338
-
-
-
332,766
18,557
7,338
332,766
18,557
7,338
332,766
18,557
31 December 2011
4,377
-
652
126,449
414,301
-
92,761
-
652
4,377
126,449
414,301
92,761
652
4,377
126,449
414,301
92,761
9,196
-
-
-
442,275
16,310
9,196
442,275
16,310
9,196
442,275
16,310
In thousands of EUR
31 December 2012
Loans and advances are reported net of impairment allowances to reflect the estimated recoverable amounts as at the reporting date. In the case of loans and advances
which are repriceable in the short term, the carrying value approximates the fair value. 97% of the Bank’s loans and advances to customers and 89% of the Bank’s loans
and advances to banks are repriceable within six months. Financial liabilities at amortised cost comprise amounts owed to banks and to customers. 98% of the Bank’s
amounts owed to banks and customers are repriceable within six months.
6
6.2
Fair value hedging relationships
Certain investment securities shown within the available-for-sale category are designated
in qualifying fair value interest rate hedging relationships (2012: EUR34.414 million; 2011:
EUR73.357 million) and are fair valued with respect to the hedged interest rate.
7
Net interest income
Interest income
On balances with Central Bank of Malta
On loans and advances to banks
On loans and advances to customers
On debt and other fixed income instruments
Amortisation of premiums and discounts
Total interest income
Interest expense
On amounts owed to banks
On amounts owed to customers
On derivative financial instruments
Total interest expense
Net interest income
2012
2011
EUR 000
EUR 000
2
1,011
10,631
-----------11,644
-----------3,320
(681)
-----------2,639
-----------14,283
=====
5
1,709
12,623
-------------14,337
-------------4,735
(1,122)
-------------3,613
-------------17,950
======
(5,755)
(116)
(1,286)
-----------(7,157)
(7,743)
(211)
(1,432)
-------------(9,386)
=====
7,126
=====
======
8,564
======
An amount of offsetting gains and losses amounting to a net loss of EUR21,154 (2011:
net loss of EUR2.832 million) resulting from qualifying fair value hedges with respect to
fixed income instruments, has been recognised in Other Comprehensive Income.
8
Fee and commission income
Credit related fees and commission
Retail banking
Fee and commission expense
Portfolio and other management fees
Other fees paid
9
2012
2011
EUR 000
EUR 000
100
45
-----145
------
105
44
-----149
------
(18)
(2)
-----(20)
-----125
===
(8)
(17)
-----(25)
-----124
===
Net trading (expense)/income comprises net foreign exchange (losses)/gains.
10
Net loss from financial instruments carried at fair value
Movement in fair value of derivatives
Realised gains/losses on derivatives
Realised loss on disposal of securities (see note 10.1)
2012
2011
EUR 000
EUR 000
(229)
114
(987)
----------(1,103)
=====
1
(196)
--------(195)
====
10.1
The Bank, in line with the change in Group strategy, disposed of a number of Malta
Government securities in order to reduce its exposure to sovereign risk. The losses on
related hedging instruments have been netted from this amount.
11
Dividend income
Dividend income was received from the liquidation of the subsidiary company VB
Finance Limited and from the investment in Mezzanine Management Central Europe
Limited.
12
Net impairment loss
Write-downs
Loans and advances to customers and banks
- specific allowances
- collective allowances
- specific allowances
Net impairment loss
13
2012
2011
EUR 000
EUR 000
(208)
(911)
(1,047)
(419)
(657)
-----------(1,776)
=====
-----------(1,466)
=====
Personnel expenses
Personnel expenses incurred by the Bank during the year are analysed as follows:
Directors’ emoluments:
Fees (including wages and salaries)
Other emoluments
Compulsory social security contributions
Wages and salaries
Compulsory social security contributions
Other employee – related expenses
2012
2011
EUR 000
EUR 000
126
13
2
---------141
---------970
60
29
---------1,059
---------1,200
====
129
15
2
---------146
---------1,073
58
---------1,131
---------1,277
====
The weekly average number of persons employed by the Bank during the year was as
follows:
Executive and senior managerial
Other managerial, supervisory and clerical
Others
2012
2011
No.
No.
8
24
1
---33
==
7
26
1
---34
==
14
Other administrative expenses
Included in administrative expenses are fees charged by the Bank’s independent auditors
for the year as follows:
Audit
Other
Tax
Other
Services Assurance
Advisory
Non-Audit
Services
Services
Services
Auditors’ remuneration in EUR
(exclusive of VAT)
EUR
EUR
EUR
EUR
40,000
=====
=====
6,000
=====
6,375
=====
15
15.1
Tax income/(expense), which is based on the taxable profit for the year comprises:
2012
2011
EUR 000
EUR 000
(308)
(977)
424
--------116
====
726
--------(251)
====
Current tax
- Current year
Deferred tax
- Origination and reversal of temporary differences
15.2
Tax income/(expense) for the year and the result of the accounting profit multiplied by
the tax rate applicable in Malta, the Bank’s country of incorporation, are reconciled as
follows:
2012
2011
Profit before tax
Tax at the applicable rate of 35%
Tax effect of:
- Effective tax rates applied to compute temporary differences
- Depreciation charges not deductible by way of capital
allowances
- Flat rate foreign tax credit
- Under provision in prior years
- Exempt dividend income received
- Other
EUR 000
EUR 000
2,066
====
4,512
====
(723)
(1,579)
(405)
11
(15)
1,060
205
(6)
--------116
====
(10)
1,263
129
(65)
--------(251)
====
16
Balances with Central Bank of Malta and cash
16.1
Balances with Central Bank of Malta
- Reserve Deposit
- Other deposit
Other
Cash
2012
2011
EUR 000
EUR 000
48
13
272
--------333
====
300
48
84
220
--------652
====
16.2
Balances held with the Central Bank of Malta for Minimum Reserve Requirement bear
an interest rate equal to the minimum bid rate set by the European Central Bank (ECB)
on its main refinancing operations as per Regulation (EC) No 1745/2003 of the ECB of 12
September 2003.
16.3
Other deposits with Central Bank of Malta as at 31 December 2012 comprise a deposit
of EUR48,300 (2011: EUR48,300) which is pledged in favour of the Depositor
Compensation Scheme.
17
Derivatives held for risk management
Instrument type:
- Interest rate
- Foreign exchange
Instrument type:
- Interest rate
- Foreign exchange
Net derivatives held for risk management
2012
2011
EUR 000
EUR 000
735
1,624
----------2,359
=====
767
3,610
----------4,377
=====
(5,726)
(1,612)
-----------(7,338)
=====
(4,979)
=====
(5,613)
(3,583)
----------(9,196)
=====
(4,819)
=====
(4,686)
(293)
----------(4,979)
=====
(4,659)
(160)
----------(4,819)
=====
Net derivatives held for risk management analysed as follows:
Fair value hedges of interest rate risk
Other derivatives held for risk management
17.1
Fair value hedges of interest rate risk
The Bank uses interest rate swaps to hedge its exposure to changes in the fair value of
its fixed rate available-for-sale investment securities. Interest rate swaps are matched to
specific securities.
17.2
Cash flow hedges
The bank uses interest rate swaps to hedge its exposure to changes in cash flows of its
fixed rate financial assets (loans and advances to customers)
17.3
Other derivatives held for risk management
The Bank uses other derivatives, not designated in a qualifying hedge relationship, to
manage its exposure to foreign currency and interest rate risk. The instruments used
include interest rate swaps, cross-currency interest rate swaps, forward contracts and
foreign currency exchange swaps.
18
Repayable on call and at short notice
Term loans and advances: Current
Term loans and advances: Non-current
Gross loans and advances to banks
Less collective allowances for impairment
Amounts include:
Due from parent company
- unsubordinated
Collective allowance for impairment
Balance as at 1 January
Impairment loss for the year:
- Charge for the year
Balance at 31 December
2012
2011
EUR 000
EUR 000
4,179
96,032
--------------100,211
(3)
--------------100,208
======
213
125,021
1,216
--------------126,450
(1)
--------------126,449
======
99,297
======
109,514
======
(1)
-
(2)
--------------(3)
======
(1)
--------------(1)
======
Interest amounting to EUR 0.891 million (2011: EUR1.559 million) was received from
parent company during the year.
19
Repayable on call and at short notice
Term loans and advances: Current
Term loans and advances: Non-current
Gross loans and advances to customers
Less: Allowances for impairment
Net loans and advances to customers
Amounts include:
Due from related companies - unsubordinated
2012
2011
EUR 000
EUR 000
20,135
71,575
290,906
-------------382,616
(3,983)
-------------378,633
======
18,574
78,863
319,730
-------------417,167
(2,866)
-------------414,301
======
85,367
======
96,062
======
19
Loans and advances to customers (continued)
Specific allowances for impairment
Balance at 1 January
Collective allowances for impairment
Balance at 1 January
Total allowances for impairment
2012
2011
EUR 000
EUR 000
(1,716)
(669)
(208)
-----------(1,924)
------------
(1,047)
-----------(1,716)
------------
(1,150)
(732)
(909)
-----------(2,059)
-----------(3,983)
=====
(418)
-----------(1,150)
-----------(2,866)
=====
Loans and advances to customer with a carrying amount of EUR5 million where pledged
against the provision of credit lines by the Central Bank of Malta.
The aggregate amount of impaired loans and advances amounted to EUR5,076,036
(2011: EUR4,092,301). Total interest that would have accrued on the impaired loans in
the current and preceding financial years would have amounted to EUR959,738 (2011:
EUR702,769). Interest income on impaired loans and advances to customers amounting
to EUR 93,955 was recognised during 2012 (2011: Nil).
20
Available-for-sale
Debt and other fixed income instruments
Equity and other non-fixed income instruments
- Gross
- Less specific impairment allowance
2012
2011
EUR 000
EUR 000
36,594
-----------
75,644
------------
18,725
(2,282)
----------16,443
----------53,037
=====
18,742
(1,625)
-----------17,117
-----------92,761
=====
20
Investment securities (continued)
Debt instruments with a carrying amount of EUR39,386,528 (2011: EUR73,888,338)
have been pledged against the provision of credit lines by the Central Bank of Malta. At
31 December 2012, no amounts were outstanding against these credit lines.
The Bank has a callable commitment of EUR1.459 million (2011: EUR1.459 million) on
one of its equity instruments. As at 31 December 2012 the fair value amount invested
stood at EUR2.596 million (2011: 2.949 million).
Debt instruments with a carrying amount of EUR4,180,185 were issued by indirect
shareholders.
During the year, a specific impairment allowance amounting to €656,921 was
recognised in profit or loss on equity and other non-fixed income instruments. This
amount was transferred from revaluation reserve.
20.1
Debt and other fixed income instruments
Issued by other issuers
- foreign banks
- others
Listing status
- listed
- unlisted
- subordinated
- unsubordinated
At 1 January
Amortisation
Acquisitions
Redemptions
Fair value adjustments
At 31 December
2012
2011
EUR 000
EUR 000
2,180
34,414
---------36,594
=====
2,180
73,464
---------75,644
=====
34,414
2,180
-----------36,594
=====
73,464
2,180
-----------75,644
=====
2,180
34,414
-----------36,594
=====
2,180
73,464
-----------75,644
=====
75,644
(771)
(39,320)
1,041
-----------36,594
=====
74,764
1,327
20,407
(18,829)
(2,025)
-----------75,644
=====
20
Investment securities (continued)
20.2
Equity and other non-fixed income instruments
2012
2011
EUR 000
EUR000
10,622
5,821
----------16,443
=====
9,800
7,317
----------17,117
=====
11,847
4,596
----------16,443
=====
12,169
4,948
----------17,117
=====
-subordinated
-unsubordinated
8,245
8,198
----------16,443
=====
8,035
9,082
----------17,117
=====
At 1 January
Amortisation
Acquisitions
Redemptions
Fair value adjustments
Impairment
17,117
90
(1,986)
1,879
(657)
-----------16,443
=====
20,960
(205)
2,000
(3,911)
(1,727)
-----------17,117
=====
Issued by
- foreign banks
- others
Listing status
- listed on foreign stock markets
- foreign unlisted
At 31 December
21
Name of the
company
21.1
Incorporated
in
Nature of
business
Equity interest
2012
2011
2012
2011
%
%
EUR 000
EUR 000
VB Finance Limited
Malta
IT services
-
100
-
1,000
ÖVAG Finance
(Jersey) Limited
Jersey
Investment
Company
100
100
70
--------70
====
70
--------1,070
====
VB Finance Limited has been struck off the Registry of Companies on 27 November
2012. Upon liquidation a dividend of EUR0.588 million (2011: Nil) was received by the
Bank.
22
Improvement
to premises
Motor
Vehicles
Furniture
and
fittings
Equipment
Total
674
14
(9)
-----------679
-----------679
154
(2)
-----------831
------------
231
1
---------232
---------232
6
(40)
---------198
----------
315
24
----------339
----------339
50
(2)
----------387
-----------
842
37
(155)
---------724
---------724
14
(6)
---------732
----------
2,062
76
(164)
-----------1,974
-----------1,974
224
(50)
-----------2,148
------------
432
100
(6)
-----------526
------------
102
47
---------149
----------
190
28
----------218
-----------
676
87
(155)
---------608
----------
1,400
262
(161)
-----------1,501
------------
526
107
(2)
-----------631
------------
149
34
(23)
---------160
----------
218
35
(2)
----------251
-----------
608
89
(5)
---------692
----------
1,501
265
(32)
-----------1,734
------------
242
====
153
====
200
====
129
===
83
===
38
===
125
===
121
===
136
===
166
===
116
===
40
===
662
====
473
====
414
====
In thousands of euro
Cost
Balance at 1 January 2011
Additions
Disposals
Balance at 31 December 2011
Additions
Disposals
Accumulated depreciation
and
impairment losses
Depreciation for the year
Disposals
Depreciation for the year
Disposals
Carrying amounts
There were no capitalised borrowing costs related to the acquisition of property and
equipment as at the reporting date.
23
Intangible assets
Intangible assets comprised purchased software analysed as follows:
Cost
Additions
1,348
7
----------1,355
=====
Additions
1,355
24
----------1,379
=====
Accumulated amortisation and impairment losses
Amortisation for the year
Amortisation for the year
Carrying amounts
1,207
63
----------1,270
=====
1,270
68
----------1,338
=====
141
=====
85
=====
41
=====
There were no capitalised borrowing costs related to the acquisition of intangible assets
as at the reporting date.
24
Deferred tax assets and liabilities
24.1
Deferred tax assets and liabilities are attributable to the following:
Assets
Impairment allowance
and other provisions
Fair value movements on
financial instruments:
- at fair value through
profit or loss
- available-for-sale
Net tax assets
24.2
Liabilities
Net
2012
2011
2012
2011
2012
2011
EUR 000
EUR 000
EUR 000
EUR 000
EUR 000
EUR 000
-
-
(23)
(36)
(23)
(36)
1,618
1,219
-
-
1,618
1,219
12
246
--------1,876
====
246
--------1,465
====
(702)
---------(725)
====
(352)
---------(388)
====
12
(456)
---------1,151
====
(106)
---------1,077
====
Movements in temporary differences during the year
2012
Fair value movements on financial
instruments
- at fair value through profit or loss
2011
Fair value movements on financial
instruments
- at fair value through profit or loss
Balance at
1 January
Recognised
in profit or
loss
Recognised in
other
comprehensive
income
Balance at 31
December
EUR 000
EUR 000
EUR 000
EUR 000
(36)
13
-
(23)
1,219
399
-
1,618
(106)
---------1,077
====
12
---------424
====
(350)
---------(350)
====
12
(456)
---------1,151
====
(10)
453
(26)
766
-
(36)
1,219
14
(57)
---------400
====
(14)
---------726
====
(49)
---------(49)
====
(106)
---------1,077
====
25
Accrued income
Prepayments
26
2012
2011
EUR 000
EUR 000
1,659
413
---------2,072
====
2,754
394
---------3,148
====
2012
2011
EUR 000
EUR 000
252,769
79,998
-------------332,766
======
339,935
102,340
-----------442,275
======
332,293
======
389,900
======
Term deposits
Repayable on demand
Amounts include:
- due to related companies
Interest amounting to EUR5.664 million (2011: EUR6.997 million) was charged by the parent
company during the year.
27
Term deposits
Repayable on demand
2012
2011
EUR 000
EUR 000
3,956
14,601
----------18,557
=====
8,264
8,046
------------16,310
=====
27
Amounts owed to customers (continued)
Amounts include:
- due to related companies
2012
2011
EUR 000
EUR 000
74
=====
49
=====
Amounts owed to related parties comprise deposits by the Bank’s subsidiary and key
management personnel.
28
Accrued interest
Other
29
2012
2011
EUR 000
EUR 000
842
136
1,539
171
------978
===
---------1,710
====
2012
2011
EUR 000
EUR 000
121
113
---------234
====
277
17
265
---------559
====
Other liabilities
Bills payable
Cash collateral for commitments
Other
30
Provisions
Provisions made during the year
Provisions used during the year
Provisions reversed during the year
Severance
Payment
Total
50
7
------57
===
50
7
------57
===
Severance payments provision is provided and calculated in accordance with Group
guidelines.
31
Capital and reserves
31.1
Share capital
Authorised
Ordinary ‘A’ shares of EUR72.7
Ordinary ‘B’ shares of EUR1,816.8
Issued and fully paid up
Ordinary ‘A’ shares of EUR72.7
2012
2011
No. of shares
EUR 000
EUR 000
2,500,000
20,000
--------------2,520,000
=======
181,750
36,336
------------218,086
======
181,750
36,336
------------218,086
======
2,308,400
=======
167,821
======
167,821
======
Both classes of ordinary shares rank equally in the distribution of ordinary dividend. In
addition, Ordinary ‘B’ Shares will be entitled to a dividend of eight per cent (8%) on a noncumulative basis.
31.2
Capital contributions are advances by the parent company to enable the Bank finance its
investment in subsidiary. These contributions are unsecured, interest free and payable at
the option of the Bank.
31.3
Revaluation reserve
The revaluation reserve comprises the cumulative net change in fair value of available-forsale assets held by the Bank, net of tax.
31.4
Dividends
During the year, the Company did not pay interim dividends (2011: EUR3.5 million,
representing EUR1.52 per share).
32
Earnings per share
The calculation of basic earnings per share at 31 December 2012 was based on the profit
attributable to ordinary shareholder of EUR 2,182 million (2011: EUR 4,261 million) and a
weighted average number of ordinary shares outstanding of 2,308,400 (2011: 2,308,400).
33
Cash and cash equivalents
33.1
Balances of cash and cash equivalents as shown in the statement of financial position are
analysed below:
2012
2011
Analysis of balances of cash and cash equivalents:
Cash
Other deposits
Cash and Cash Equivalents
Adjustment to reflect balances with contractual
maturity of more than three months (see note 32.2)
Analysed in the statement of financial position or
notes as follows:
Cash
Balances with Central Bank of Malta
Other deposits
EUR 000
EUR 000
86,227
272
13
(326,119)
-----------------(239,607)
123,569
220
84
(335,359)
-----------------(211,486)
7,382
----------------
(103,688)
----------------
(232,225)
=======
(315,174)
=======
272
48
13
100,208
(332,766)
----------------(232,225)
=======
220
348
84
126,449
(442,275)
----------------(315,174)
=======
33.2
Movement in assets not recognised as cash and cash equivalents above are shown gross of
movements in provisions for collective allowances (see note 18).
34
Operating leases
Non-cancellable operating lease rentals relating to the Bank’s premises are payable as
follows:
2012
2011
Less than one year
Between one and five years
EUR 000
EUR 000
150
332
------482
===
149
482
------631
===
35
Capital commitments
At the reporting date the Bank had the following capital commitments in respect of
acquisition of property and equipment and intangible assets:
2012
2011
EUR 000
EUR 000
158
===
919
===
Authorised but not contracted for
36
Contingent liabilities represent guarantee obligations incurred on behalf of third parties.
37
Commitments
Undrawn formal standby facilities, credit facilities
and
other commitments to lend
38
Related parties
38.1
Parent and ultimate controlling party
2012
2011
EUR 000
EUR 000
11,246
17,487
=====
=====
The immediate parent company of Volksbank Malta Limited is Österreichische Volksbanken
AG, which is incorporated and registered in Austria, the registered address of which is,
Kolingasse 14-16, 1090 Vienna, Austria.
38.2
Transactions with key management personnel
Key management personnel and their immediate relatives have transacted with the Bank
during the year as follows:
2011
2012
Maximum
balance
Closing
balance
Maximum
balance
Closing
balance
EUR 000
EUR 000
EUR 000
EUR 000
542
3
44
528
11
595
3
60
581
20
Mortgage lending and other secured loans
Credit card
Other loans
38
Related parties (continued)
38.2
Transactions with key management personnel (continued)
Interest rates on balances outstanding from related parties are charged on an arm’s length
transaction basis. The mortgages and secured loans granted are secured over property of the
respective borrowers. Other balances are not secured and no guarantees have been
obtained.
Loans and advances to directors and key management personnel as at 31 December 2012
amounted to EUR539,044 (2011: EUR601,743). These are included in “loans and advances
to customers”. Effective interest is charged at 1.74% per annum and amounted to
EUR9,707 for the year ended 31 December 2012.
Deposits by directors and companies under their control and key management personnel as
at 31 December 2012 amounted to EUR22,199 (2011: EUR40,610) and are included in
“amounts owed to customers”. Interest paid on deposits by directors and companies under
their control and key management personnel during 2012 amounted to EUR150.
The Bank acquired supplies from a company owned and controlled by a director of the Bank,
amounting to EUR25,123 during the financial year ended 31 December 2012. The Bank also
used the services of a company owned and controlled by an immediate relative of a director,
amounting to EUR799 during the financial year ended 31 December 2012.
In addition to their salaries, the Bank also provides non-cash benefits to directors and
executive officers in the form of use of car.
Directors’ compensations are disclosed in note 13 to these financial statements.
Total remuneration payable to key management personnel amounting to EUR187,719 (2011:
EUR239,600) is included in “personnel expenses” (see note 13).
38.3
Other related party transactions
Administrative expenses
Administrative expenses include management fees amounting to EUR244,796 (2011:
EUR277,690) charged by the parent.
Net fees and commission income
Net fees and commission income include EUR6,112 (2011: EUR13,539) charged by the
parent company.
Net interest income
Net interest income includes EUR2,265,022 (2011: EUR3,003,973) interest income from the
parent and affiliated companies and EUR6,949,157 (2011: EUR8,428,932) interest expense
paid to the parent and affiliated companies.
38.4
Related party balances
Information on amounts due to/by related parties are set out in notes 17, 18, 19, 21, 26, 27
and 28 to these financial statements. Amounts due to/by directors, key management
personnel, close members of the family of directors and key management personnel and
company controlled by a director of the Bank are disclosed in note 37.2.
Appendices
Page
Appendix I -
Additional Disclosures in accordance with
the requirements of Banking Rule 07
i
Appendix II - Income statement - 5 year summary
iii
Appendix III - Statement of Financial Position - 5 year summary
iv
Appendix IV - Statement of Cash Flows - 5 year summary
v
Appendix V - Accounting Ratios - 5 year summary
vi
Volksbank Malta Limited – Annual Report 2012 – Page 74
Additional Disclosures in accordance with the
requirements of Banking Rule 07
31 December 2012
Introduction
In accordance with Banking Rule 07 (BR/07), “Publication of Annual report and Audited Financial
Statements”, the Bank has prepared this report which contains Pillar 3 disclosures, which are
listed in paragraphs 3 and 4 of Appendix 2 Part 2 of BR/07. It is to be noted that the Bank
qualifies under the significant subsidiary of a European Economic Area credit institution and thus
the full additional disclosures of Appendix 2 of BR/07 are compiled by the parent credit institution
(ÖVAG) on the basis of the consolidated financial statements.
Consistent with the banking regulations, these disclosures are not subject to external audit
except where they are equivalent to those prepared under International Financial Reporting
Standards requirements in the Bank’s Annual Report (particularly Note 4 – Financial Risk
Management). These disclosures have been appropriately verified internally by the Bank’s Risk
Manager.
Internal Capital Adequacy Assessment Process
The Internal Capital Adequacy Assessment Process (ICAAP) requires banks to take all necessary
measures to guarantee at all times that there are sufficient capital resources for current business
activities and those planned for future as well as the associated risks. Internal methods and
procedures developed by the banks may be used for this purpose. The size and complexity of
the business activities plays a key role in the design of the strategies, methods and systems
required for implementing the ICAAP.
The ICAAP is a revolving management circuit which starts with defining risk strategy, identifying,
quantifying and aggregating risks, determining risk-bearing ability, allocating capital, establishing
limits and leads to ongoing risk monitoring. The individual elements of the circuit are performed
with varying regularity. All the activities described in the circuit are examined at least once a year
to ensure that they are up to date, adequate and also adjusted to current underlying conditions
when necessary.
The process involves both a quantitative assessment of individual types of risk and an
assessment of the existing methods and systems for monitoring and managing risks (qualitative
assessment). The risk assessment concept is used on a scoring procedure, thus providing a
comprehensive overview of the risk situation of the Bank.
The basis for the quantitative implementation of the ICAAP is the risk bearing capacity calculation
which demonstrates that adequate capital is in place at all times to provide sufficient cover for
risks that have been entered into and which also ensures such cover is available for the future.
For this purpose, firstly all individual risks are aggregated into a total bank risk. The existing
previously-defined risk-covering capital is then compared with this total bank risk. In the course
of the risk monitoring process, compliance with the defined limits is monitored, the risk-bearing
ability is calculated and the annual ICAAP Report is produced.
Standardised Approach
Following the formation in Austria of a “Kreditinstitute-Verbund” (Association with a joint liability
and joint funding scheme) in accordance with section 30a, Austrian Banking Act, ÖVAG and its
subsidiaries switched from the F-IRB approach to the Standardised Approach, whilst leaving all
risk management systems "IRB fit".
Volksbank Malta Limited – Annual Report 2012 – Page i
Additional Disclosures in accordance with the
requirements of Banking Rule 07
31 December 2012
Remuneration Report
Remuneration Policy
The Managing Director, as the Head of Human Resources of the Bank, is responsible for making
recommendations to the Board on the Bank’s remuneration policy and, within the terms of the
agreed policy and the Staff Rules and Procedures, making recommendations for the individual
remuneration packages of all staff members.
Remuneration of the Board of Directors
The Directors of the Bank are remunerated as follows:
(a) Board Members who are employees of ÖVAG or any one of its subsidiaries have their
compensation determined by their employer and do not receive any additional compensation
from Volksbank Malta Limited for serving as Board Members. Executive Directors who are
employed with Volksbank Malta Limited are eligible to receive a maximum performancerelated pay equivalent to two months’ Basic Salary that will not exceed 17% of the total
annual remuneration. Board Members who are employed with ÖVAG or other subsidiaries of
ÖVAG, except Volksbank Malta Limited, may receive additional remuneration and
performance-related pay from their respective employers and such remuneration is outside
the scope of the Remuneration Policy of Volksbank Malta Limited.
(b) Board Members who are not full-time employees of ÖVAG or any of its subsidiaries are
engaged as directors (i) on a contractual basis, (ii) for a definite time period, (iii) receive a fixed
fee and (iv) are not remunerated further by any type of incentive- or performance-based
remuneration. The said fixed fee is a nominal fixed remuneration not dependant on the
Bank’s performance. No additional fees are payable for chairing the Board, chairing of
committees, for attending meetings or for bank-related work engaged after the election to
director. This remuneration is determined by the shareholders by means of an extraordinary
resolution that is normally approved during the Annual General Meeting of the Bank.
Remuneration of the Executive Officers
The maximum performance-related pay that the Executive Officers may receive from Volksbank
Malta Limited is twice the monthly Basic Salary that will not exceed 17% of the total annual
remuneration. The Managing Director is employed by ÖVAG and may receive additional
remuneration and performance-related pay from ÖVAG and such remuneration is outside the
scope of the Remuneration Policy of Volksbank Malta Limited.
Volksbank Malta Limited – Annual Report 2012 – Page ii
Income Statement – 5 Year Summary
31 December 2012
Interest income
Interest expense
Net interest income
Fees and commissions income
Fees and commissions expense
Net (loss)/gain from financial
instruments carried at fair value
and net trading (expense)/income
Dividend income
Other operating income
Operating income
Net impairment loss)
Other expenses inclusive of
personnel expenses and operating
lease expenses
Depreciation and amortisation
Profit before tax
Profit for the year
2012
2011
2010
2009
2008
EUR 000
EUR 000
EUR 000
EUR 000
EUR 000
12,997
(5,871)
----------7,126
-----------
16,518
(7,594)
----------8,564
-----------
14,950
(7,951)
----------6,999
-----------
20,670
(12,655)
----------8,015
-----------
45,773
(33,397)
----------12,376
-----------
145
(20)
----------125
-----------
149
(25)
----------124
-----------
185
(43)
----------142
-----------
128
(14)
----------114
-----------
168
(45)
----------123
-----------
(1,140)
689
6
----------(445)
----------6,806
109
109
10
----------228
----------8,916
283
0
38
----------321
----------7,462
(338)
312
23
----------(3)
----------8,126
(26)
288
14
----------276
----------12,775
(1,776)
(1,466)
(946)
(1,091)
(358)
(2,632)
(332)
----------2,066
(2,613)
(325)
----------4,512
(2,312)
(322)
----------3,882
(2,382)
(329)
----------4,324
(2,573)
(316)
----------9,528
116
----------2,182
=====
(251)
----------4,261
=====
(617)
----------3,265
=====
(616)
----------3,708
=====
(841)
----------8,687
=====
Volksbank Malta Limited – Annual Report 2012 – Page iii
Statements of Financial Position – 5 Year Summary
31 December 2012
Assets
management
Investments securities
Investments in subsidiaries
Intangible assets
Deferred tax assets
Tax recoverable
Other assets
Total assets
Liabilities and equity
Liabilities
management
Current tax payable
Other liabilities
Provisions
Equity
Called up issued share capital
Retained earnings
Revaluation reserve
Total equity and liabilities
Memorandum items
Commitments
2012
2011
2010
2009
2008
EUR 000
EUR 000
EUR 000
EUR 000
EUR 000
333
652
704
20,720
1,072
2,359
100,208
378,633
53,037
70
414
41
1,151
2,072
5
------------538,323
======
4,377
126,449
414,301
92,761
1,070
473
85
1,077
3,148
10
------------644,403
======
4,135
159,264
400,964
95,724
1,000
662
141
400
2,563
8
------------665,565
======
514
140,271
470,655
90,510
1,000
841
196
358
114
2,605
8
------------727,792
======
6,509
342,218
457,194
67,951
1,000
953
186
771
118
6,990
8
------------884,970
======
7,338
332,766
18,557
356
978
234
57
-------------360,286
--------------
9,196
442,275
16,310
1,045
1,710
559
50
-------------471,145
--------------
6,121
444,438
35,075
748
1,649
673
42
-------------488,746
--------------
2,447
515,208
30,280
1,219
2,916
567
36
------------552,673
-------------
8,599
658,924
39,673
1,454
5,211
839
30
------------714,730
-------------
167,821
70
14,965
(4,819)
------------178,037
------------538,323
======
167,821
70
12,783
(7,416)
------------173,258
------------644,403
======
167,821
12,022
(3,024)
------------176,819
------------665,565
======
167,821
11,557
(4,259)
------------175,119
------------727,792
======
167,821
11,649
(9,230)
------------170,240
------------884,970
======
5,635
=====
6,193
=====
4,939
=====
12,749
=====
14,054
=====
11,246
=====
17,487
=====
18,109
=====
22,430
=====
24,983
=====
Volksbank Malta Limited – Annual Report 2012 – Page iv
Statements of Cashflows – 5 Year Summary
31 December 2012
Cash flows from operating activities
Interest and commissions receipts
Interest and commission payments
Dividend Income
Proceeds from trading activities
Payments to employees and suppliers
Operating profit before changes in operating
assets/liabilities
(Increase)/decrease in operating assets:
Reserve deposit with Central Bank of Malta
Treasury Bills
Trading financial instruments
Other receivables
Increase/(decrease) in operating liabilities:
Other payables
Cash (absorbed by)/generated from operating
activities
Tax paid
Net cash flows (used in)/from operating
activities
Cash flows from investing activities
Capital contribution provided to subsidiary
Proceeds from winding down of subsidiary
Proceeds on maturity of investment security
Proceeds on disposal of available-for-sale
instruments
Purchase of available-for-sale instruments
Purchase of intangible and tangible assets
Net cash flows (used in)/from investing
activities
Cash flows from financing activities
Dividends paid
Capital contributions received from parent
Net cash used in financial activities
Increase/(decrease) in cash and cash
equivalents
Effect of exchange rate changes on cash and
cash equivalents
Net increase/(decrease) in cash and cash
equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
2012
2011
2010
2009
2008
EUR 000
EUR 000
EUR 000
EUR 000
EUR 000
14,918
(6,588)
689
(37)
(2,679)
--------------
17,694
(7,933)
109
304
(3,269)
--------------
17,216
(9,224)
145
(3,486)
-----------
28,294
(19,279)
312
89
(1,003)
-----------
44,307
(32,340)
288
696
(3,671)
-----------
6,303
6,905
4,651
8,413
9,280
300
(11,103)
(34,551)
5
31
111,219
(14,802)
(2)
66
(12,236)
68,747
-
253
3,385
(13,106)
-
24,339
58,097
18,079
1,184
16
(100,269)
2,247
(325)
--------------
88,844
(18,765)
(114)
--------------
(6,521)
4,795
116
-------------
(4,317)
(9,393)
(272)
-----------
(99,608)
7,369
392
-------------
(68,291)
(997)
--------------
173,316
(680)
--------------
59,618
(1,197)
-------------
(15,037)
(708)
-----------
19,148
(1,190)
--------------
(69,288)
--------------
172,636
--------------
58,421
-------------
(15,745)
-----------
17,958
--------------
1,000
40,390
-
(70)
22,740
-
28,185
-
18,378
2,490
3,235
7,767
(223)
--------------
(22,407)
(79)
--------------
(32,662)
(88)
-------------
(40,356)
(227)
-----------
(14,784)
(818)
------------
41,167
--------------
184
--------------
(4,565)
-------------
(19,715)
-----------
(4,600)
-------------
---------------------------
(3,500)
70
-------------(3,430)
--------------
(2,800)
------------(2,800)
-------------
(3,800)
----------(3,800)
-----------
(7,100)
----------(7,100)
-----------
28,121
======
169,390
======
51,056
======
(39,260)
======
6,258
======
40
159
22,412
284
20,440
(28,081)
-------------(28,121)
169,231
-------------169,390
28,644
-------------51,056
(39,544)
-----------(39,260)
(14,182)
------------6,258
(211,486)
-------------(239,607)
======
(380,876)
-------------(211,486)
=======
(431,932)
-------------(380,876)
======
(392,672)
------------(431,932)
======
(398,930)
------------(392,672)
======
Volksbank Malta Limited – Annual Report 2012 – Page v
Accounting Ratios - 5 Year Summary
31 December 2011
Net interest income and other operating
income to total assets
Operating expenses to total assets
Profit before tax to total assets
Profit before tax to equity
Profit after tax to equity
Shares in issue (thousands)
Net assets per share (EUR)
2012
2011
2010
2009
2008
%
%
%
%
%
1.3
0.6
0.4
1.2
1.2
1.3
0.5
0.7
2.6
2.5
1.1
0.4
0.6
2.2
1.8
1.1
0.4
0.6
2.5
2.1
1.4
0.3
1.1
5.6
5.1
2012
2011
2010
2009
2008
2,308.4 2,308.4 2,308.4 2,308.4 2,308.4
77.1
75.1
76.6
75.9
73.7
0.9
1.8
1.4
1.6
3.8
Dividends per share (EUR)
-
1.5
1.2
1.7
3.1
Dividend cover
-
1.2
1.2
1.0
1.2
Earnings per share (EUR)
Volksbank Malta Limited – Annual Report 2012 – Page vi
Imprint
Published by:
Volksbank Malta Limited
53 Dingli Street
Sliema SLM 1902
Malta
Company Registration Number: C 30432
Tel.: +356 2777 7777
Fax: +356 2133 6090
Web: www.volksbank.com.mt
Email: info@volksbank.com.mt
Photography:
Dragan Nikolic
Netty Skok-Farrugia

pdf Volksbank Malta Ltd Annual Report 31 December 2012

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