pdf Volksbank Malta Ltd Annual Report 31 December 2010

Transcription

Directors’ Report
Volksbank Malta Limited – Annual Report 2010 - Page 1 of 79
Page
Annual Report
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
10
Cash Flow Statement
11
Notes to the Financial Statements
14
Independent Auditors’ Report
69
Directors’ Report
The directors present their report, together with the separate financial statements of Volksbank
Malta Limited for the year ended 31 December 2010.
Board of directors
Mr. Alfred Mallia Milanes (Chairman – appointed 29 April 2010)
Mr. Winston V. Zahra (Chairman – resigned 29 April 2010)
Dkfm. Werner Wess (Vice Chairman)
Mr. Herbert Skok (Managing Director)
Mr. Joseph Bugelli (Executive Board Member)
Mr. Michael Smutny (Non-Executive Board Member)
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 2010 observed one of the lowest interest rate scenarios following the start of
the financial crisis in 2008 which continued with the Eurozone debt crisis in 2010. In view of the
challenging environment experienced during the financial year 2010, the Bank registered a profit
after tax of EUR3.265 million for the year ended 31 December 2010. This compares with
EUR3.708 million profit after tax earned in the previous financial year, a decrease in profits of
12% or EUR443 thousand. The drop was primarily attributable to the sustained low interest rate
scenario experienced during the year. As a result Earnings per Share for the year ended 31
December 2010 dropped to EUR1.41 as against EUR1.61 registered in 2009.
Net interest income which is the main income contributor to the profit of the Bank stood at
EUR6.999 million, representing a decline of EUR1.016 million when compared to same period
last year. As already mentioned, this was primarily due to the sustained low market interest
rates, whereby the Bank is generally exposed to market rates due to its strong capital base of
circa EUR177 million.
As the markets continued to experience improvements throughout the whole financial year, the
Bank’s available-for-sale investment portfolio continued to reverse partial markdowns which were
recorded at the beginning of the financial crisis. This resulted in a further EUR1.235 million
recoveries during the year.
The Bank’s focus on effective cost management continued to provide positive results. The
economic environment within which the Bank operated prompted an even closer focus on
cautiously managing all areas of expenditure. This yielded good results, reducing the total
overheads by 2% compared to previous year’s levels, even after taking on board an annual
increase of 5% in personnel expenses.
The Bank continued to manage its balance sheet in a careful, prudent and conservative manner.
The Bank’s balance sheet registered a contraction of EUR62.227 million in asset volumes, when
compared to the previous financial year. The drop was entirely derived from the loans and
advances to customers’ category, as expected part of the international participations were repaid
during the year. Despite the decrease in the balance sheet, the Bank made significant progress
in its strategic goal to gradually increase the local business, registering an outstanding annual
growth of 50% in the loans and advances to the local community.
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. This has prompted management to adopt prudent
and cautious measures, which resulted in specific impairments amounting to EUR570 thousand.
Furthermore, an increase of EUR376 thousand in the collective allowance was mainly derived
from the deteriorations in the probability of default and also fuelled by the new business taken on
board during the financial year. Notwithstanding the increase in provisions, the Capital Adequacy
ratio of the Bank remained substantially strong, standing at 36% or 4.5 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 2010 the Bank
demonstrated its appreciation to its customers by organising several activities.
Corporate Governance
After three years in his capacity of Chairman, during the year Mr. Winston V. Zahra resigned from
Director of the Board. Mr. Alfred Mallia-Milanes was appointed and elected as Chairman of the
Bank during the Annual General Meeting held on the 29 April 2010.
Human Resources
The good 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. We are very
pleased at the exceptional staff retention rate that is one of the best in the international
Volksbank Group.
Volksbank in the Community
During the year under review Volksbank continued to support the local community through
various initiatives by utilising some of the profits generated to assist philanthropic and heritage
causes.
Future developments
The Bank is optimistic and looking forward to the year ahead. The main strategy of the Bank
remains to focus on the growth of local business in a prudent and conservative way. The Bank
believes that the Maltese economy offers immense opportunities and is willing to maximise
these to the full. Despite this, the Bank is also vigilant to exploit any opportunities that arise from
the international market in order to maximise profitability.
Events after the balance sheet date
There were no significant events after the balance sheet date which would warrant adjustment
or disclosure to the financial statements.
Dividends and Reserves
The Board of Directors paid a net interim dividend of EUR1.21 per share amounting to EUR2.8
million. The directors do not propose the payment of a final dividend. The directors recommend
that the said paid interim dividend be converted and declared as a final dividend at the Bank’s
general meeting.
At balance sheet date the Bank had retained earnings amounting to EUR12.022 million and a
negative revaluation reserve amounting to EUR3.024 million.
Approved by the Board of Directors on 14 April 2011 and signed on its behalf by:
Mr. Alfred Mallia-Milanes
Chairman
Mr. Herbert Skok
Managing Director
Mr. Joseph Bugelli
Executive Director
Registered Office
53, Dingli Street
Sliema, SLM 1902
Malta
Left to right: Herbert Skok, Werner Wess, Alfred Mallia-Milanes, Michael Smutny, Joseph Bugelli
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 year
which give a true and fair view of the financial position of the Bank as at the end of the financial
year and of the profit or loss of the Bank for that 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
Executive Director
As at 31 December 2010
Assets
Balances with Central Bank of Malta,
Treasury Bills 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
Income tax recoverable
Prepayments and accrued income
Other assets
2010
2009
Note
EUR 000
EUR 000
16
17
18
19
20
21
22
23
24
704
4,135
159,264
400,964
95,724
1,000
662
141
400
2,563
8
------------665,565
======
20,720
514
140,271
470,655
90,510
1,000
841
196
358
114
2,605
8
------------727,792
======
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
======
167,821
12,022
(3,024)
------------176,819
------------665,565
======
167,821
11,557
(4,259)
------------175,119
------------727,792
======
25
26
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
17
27
28
29
30
Total liabilities
Equity
Called up issued share capital
Retained earnings
Revaluation reserve
Total equity
Total liabilities and equity
31
31
As at 31 December 2010
2010
2009
Note
EUR 000
EUR 000
Contingent liabilities
36
63,604
12,749
Commitments
37
Memorandum items
=====
=====
18,109
22,430
=====
=====
The notes on pages 14 to 68 are an integral part of these financial statements.
The financial statements on pages 7 to 68 were approved and authorised for issue by the Board
of Directors on 14 April 2011 and signed on its behalf by:
Chairman
Mr. Herbert Skok
Managing Director
Mr. Joseph Bugelli
Executive Director
Statement of Changes in Equity
For the year ended 31 December 2010
At 1 January 2009
Total comprehensive income for the period
Profit for the year
Share
capital
Retained
earnings
Revaluation
reserve
Total
EUR 000
EUR 000
EUR 000
EUR 000
167,821
--------------
11,649
--------------
(9,230)
----------
170,240
-----------
-
3,708
-
3,708
-------------------------
-------------------------
4,971
----------4,971
------------
4,971
-----------4,971
-------------
-------------
3,708
-------------
4,971
------------
8,679
-------------
-------------167,821
======
(3,800)
-------------11,557
======
-----------(4,259)
=====
(3,800)
------------175,119
======
167,821
--------------
11,557
--------------
(4,259)
------------
175,119
-----------
-
3,265
-
3,265
---------------------------
---------------------------
1,235
----------1,235
-----------
1,235
-----------1,235
------------
======
3,265
======
1,235
=====
4,500
=====
-------------167,821
======
(2,800)
-----------12,022
=====
-----------(3,024)
=====
(2,800)
------------176,819
======
Other comprehensive income, net of income tax:
Revaluation reserve (available-for-sale
financial assets):
Net change in fair value
Total other comprehensive income
Total comprehensive income for the
year
Distributions to owners
Dividend paid
At 31 December 2009
At 1 January 2010
Total comprehensive income for the period
Profit for the year
Other comprehensive income, net of income tax:
Revaluation reserve (available-for-sale
financial assets):
Net change in fair value
Total other comprehensive income
Total comprehensive income for the
year
Distributions to owners
Dividend paid
At 31 December 2010
Statement of Comprehensive Income
2010
2009
EUR 000
EUR 000
14,950
(7,951)
----------------6,999
----------------185
(43)
----------------142
----------------145
20,670
(12,655)
----------------8,015
----------------128
(14)
----------------114
----------------89
10
11
138
38
----------------321
----------------7,462
(427)
312
23
----------------(3)
----------------8,126
12
13
(946)
(1,086)
(126)
(322)
(1,100)
----------------3,882
(1,091)
(1,034)
(123)
(329)
(1,225)
----------------4,324
(617)
----------------3,265
=======
(616)
----------------3,708
=======
1,415
(180)
-----------------
5,245
(274)
-----------------
1,235
----------------4,500
=======
1.41
=======
4,971
----------------8,679
=======
1.61
=======
Note
Interest income
Interest expense
7
7
Net interest income
7
Fee and commission income
Fee and commission expense
8
8
Net fee and commission income
8
Net trading income
Net income/(expense) 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
22/23
14
Profit before income tax
Income tax expense
15
Profit for the year
Other comprehensive income
Revaluation reserve (available-for-sale financial assets)
Change in fair value
Income taxes
Other comprehensive income for the year, net of
income tax
Total comprehensive income for the year
Earnings per share
32
Cash Flow Statement
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
Increase/(decrease) in operating liabilities:
- Amounts owed to banks
- Amounts owed to customers
- Other payables
Net cash from/(used in) operating activities
before income tax
Income tax paid
Net cash flows from/(used in)
operating activities
Cash flows from investing activities
Proceeds on maturity of available-for-sale
instruments
Proceeds on disposal of available-for-sale
instruments
Purchase of available-for-sale instruments
Payments to acquire property and equipment,
and intangible assets
Net cash flows used in investing activities
Net cash inflows/(outflows) before financing
activities
c/f
2010
2009
EUR 000
EUR 000
17,216
(9,224)
145
(3,486)
------------
28,294
(19,279)
312
89
(1,003)
------------
4,651
8,413
66
(12,236)
68,747
253
3,385
(13,106)
(6,521)
4,795
116
---------------
(4,317)
(9,393)
(272)
---------------
59,618
(1,197)
--------------
(15,037)
(708)
--------------
58,421
--------------
(15,745)
--------------
28,185
18,378
(32,662)
2,490
(40,356)
(88)
--------------(4,565)
---------------
(227)
--------------(19,715)
---------------
53,856
---------------
(35,460)
---------------
Cash Flow Statement
Net cash inflows/(outflows) before financing
activities
b/f
Cash flows from financing activities
Dividends paid
Cash flows used in financing activities
Increase/(decrease) in cash and cash
equivalents
Analysed as follows:
Effect of exchange rate changes on cash
and cash equivalents
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
33
2010
2009
EUR 000
EUR 000
53,856
(35,460)
----------------
--------------
(2,800)
---------------(2,800)
----------------
(3,800)
-------------(3,800)
--------------
51,056
=======
(39,260)
======
22,412
28,644
---------------51,056
284
(39,544)
-------------(39,260)
(431,932)
---------------(380,876)
=======
(392,672)
-------------(431,932)
======
Notes to the Financial Statement
Page
Page
1
Reporting entity
14
21 Investment in subsidiaries
59
2
Basis of preparation
14
22 Property and equipment
60
3
Significant accounting policies
15
23 Intangible assets
61
4
Financial risk management
26
24 Deferred tax assets
62
5
Use of estimates and judgments
46
25 Prepayments and accrued income
62
6
Financial assets and liabilities
49
26 Other assets
63
7
Net interest income
50
27 Amounts owed to banks
63
8
51
28 Amounts owed to customers
63
9
Net trading income
51
29 Accruals and deferred income
63
30 Other liabilities
64
10 Net income/(expense) from
financial instruments carried at
fair value
51
31 Capital and reserves
64
11 Dividend income
51
32 Earnings per share
64
12 Net impairment loss
52
33 Cash and cash equivalents
65
13 Personnel expenses
53
34 Operating leases
65
14 Other administrative expenses
53
35 Capital commitments
66
15 Income tax expense
54
36 Contingent liabilities
66
37 Commitments
66
38 Related parties
66
16 Balances with Central Bank of Malta,
Treasury Bills and Cash
55
17 Derivatives held for risk
management
55
18 Loans and advances to banks
56
19 Loans and advances to customers
57
20 Investment securities
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.
2.2
Basis of measurement
The financial statements have been prepared on the historical cost basis except that the
following are measured at fair value:
•
•
2.3
derivative financial instruments
available-for-sale financial assets
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 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.
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.
2
Basis of preparation (continued)
2.5
Changes in accounting policies
There were no changes in the accounting policies of the Bank during the year.
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 in foreign currencies are translated into the functional currency at the spot
exchange rate at the date of the transaction. Monetary assets and liabilities denominated in
foreign currencies at the reporting date are retranslated into 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 denominated in foreign currencies that are measured at fair value are
retranslated into the functional currency at the spot exchange rate at the date that the fair
value was determined. Foreign currency differences arising on retranslation are recognised in
profit or loss, except for differences arising on the retranslation of available-for-sale equity
instruments which are recognised directly in equity. Non-monetary assets and liabilities that
are measured in terms of historical cost in a foreign currency are translated using the
exchange rate at the date of transaction.
3.2
Interest
Interest income and 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.
The calculation of the effective interest rate includes all 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
Significant accounting policies (continued)
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.
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 and
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 availablefor-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.
3.7
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
Income tax expense
Income tax expense comprises current and deferred tax. Current and deferred tax are
recognised in profit or loss except to the extent that it relates to items recognised directly in
equity, or in other comprehensive income
Current tax is the expected tax payable or receivable on the taxable income or loss 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 the
temporary differences when they reverse, based on the laws that have been enacted or
substantively enacted by 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.
3
3.8
Income tax expense (continued)
A deferred tax asset is recognised only 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.
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.
3.9
3.9.1
Recognition
The Bank initially recognises loans and advances, deposits, and subordinated liabilities on the
date at which they are originated. Regular way purchases and sales of financial assets are
recognised on the trade date at which the Bank commits to purchase or sell the asset. All
other financial assets and liabilities are initially recognised on the trade date at which the Bank
becomes a party to the contractual provisions of the instrument.
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
See accounting policies 3.10, 3.11, 3.12 and 3.13.
3.9.3
Derecognition
The Bank derecognises a financial asset when the contractual rights to the cash flows from
the financial asset expire, or when it transfers the financial asset 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 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.
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.
3
3.9.1
Financial assets and liabilities (continued)
3.9.3
Derecognition (continued)
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.
The Bank derecognises a financial liability when its contractual obligations are discharged or
are 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 recognised
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 IFRSs, 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.
3.9.6
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.
3
3.9
3.9.6
Fair value measurement (continued)
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 market 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.
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.
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, mid-market
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.
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.
3
3.9
3.9.7
Identification and measurement of impairment (continued)
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. All individually significant loans and advances 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,
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 modelling. 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 carried at amortised cost are measured 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 a subsequent event 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 transferring
the cumulative loss that has been recognised in other comprehensive income to profit or loss
as a reclassification adjustment. The cumulative loss that is reclassified from other
comprehensive income 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 time
value are reflected as a component of interest income.
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, 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
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 less than
three months, which 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 transaction, 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:
3.11.1 Fair value hedges
When a derivative is designated as the 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 (in
the same line item in the statement of comprehensive income as the hedged item).
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, 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 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 carried at fair value.
3
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.
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.
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.
3.13
Investment securities are initially measured at fair value plus incremental direct transaction
costs and subsequently accounted for as detailed below.
3.13.1 Available-for-sale
Available-for-sale investments are non-derivative investments that are designated as availablefor-sale or are not classified as another category of financial assets. 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.
Other fair value changes are recognised in other comprehensive income until the investment
is sold or impaired, whereupon the cumulative gains or losses previously recognised in other
comprehensive income are reclassified to profit or loss as a reclassification adjustment.
3.14
Investment in subsidiaries are 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
accumulated impairment losses.
Cost includes expenditures that are 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.
3
3.15
Property and equipment (continued)
3.15.1 Recognition and measurement (continued)
The gain or loss on disposal of an item of property and equipment is determined by comparing
the proceeds from disposal with the carrying amount of the item of property and equipment,
and are recognised net within other income 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 embodied within the part
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 recognised in profit or loss as incurred.
3.15.3 Depreciation
Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful
lives of each part of an item of property and equipment, 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 reassessed at each financial year
end and adjusted if appropriate.
3.16
Intangible assets
Software acquired by the Bank is stated at cost less accumulated amortisation and
accumulated impairment losses. Expenditure on internally developed software is recognised
as an asset when the Bank is able to demonstrate its intention and ability to complete the
development and use the software in a manner that will generate future economic benefits,
and can reliably measure the costs to complete the development. The capitalised costs of
internally developed software include all costs directly attributable to developing the software,
and are amortised over its useful life. Internally developed software is stated at capitalised
cost less accumulated amortisation and impairment.
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 is three to five years.
Amortisation methods, useful lives and residual values are reviewed at each financial year-end
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
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 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.
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 groups of assets (the
“cash-generating unit” or “CGU”).
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. Impairment losses
recognised in respect of CGUs are allocated first to reduce the carrying amount of any
goodwill allocated to the CGU and then to reduce the carrying amount of the other assets in
the unit (group of units) on a pro rata basis.
Impairment losses recognised in prior periods are assessed at each reporting date for any
indications that the loss has decreased or no longer exists. An impairment loss is reversed if
there has been a change in the estimates used to determine the recoverable amount. 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.
3
3.20
Provisions (continued)
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. Financial guarantee liabilities are
initially recognised at their fair value, and the initial fair value is amortised over the life of the
financial guarantee. The financial guarantee liability is subsequently carried at the higher of this
amortised amount and the present value of any expected payment when a payment under the
guarantee has become probable. Financial guarantees are included within other liabilities.
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 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 adopted
New standards and interpretations applicable to the current year
A number of amendments to standards and interpretations which are effective for annual
periods beginning on or after 1 January 2010, did not have any effect on the financial
statements.
New standards and interpretations not yet effective
A number of new standards, amendments to standards and interpretations are effective for
the annual periods beginning on or after 1 January 2011, 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 mostly economically hedged. 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.
The Board of Directors is 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.
4
Financial risk management (continued)
4.1
Introduction and overview (continued)
Risk management framework (continued) 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 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 General Manager and 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 submitted to the Board.
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. The Board of
Directors has delegated responsibility for the management of credit risk to the Executive
Officers and to Group Risk Management. 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.
Authorisation limits are allocated from ÖVAG to two senior managers to exercise their
authority jointly. Furthermore all new credit lines must be rated, analysed and approved in
terms of set group guidelines by the responsible risk manager, prior to facilities being
committed to customers by the business unit concerned. Large facilities require approval
by ÖVAG Group Credit Risk Management.
4
4.2
Credit risk (continued)
•
•
•
•
•
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 Group Risk Management.
Regular reports are provided to 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 required to implement Bank credit policies and procedures. 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
Exposure to credit risk
Loans and
advances to
customers
In thousands of EUR
Carrying amount
Individually impaired
2010
400,964
======
2009
470,655
======
Loans and
advances to banks
2010
2009
159,264
=====
140,271
=====
Investment
securities
2010
95,724
=====
2009
90,510
=====
Grade 4: Impaired
2,786
---------------
1,039
---------------
------------
------------
------------
------------
Gross amount
Allowance for impairment
2,786
(669)
--------------2,117
---------------
1,039
(99)
--------------940
---------------
-----------------------
-----------------------
-----------------------
-----------------------
Grade 1: Low-fair risk
Grade 2-3: Watch list
Grade 4: Impaired
169,649
5,935
835
---------------
133,101
12,166
242
---------------
14,560
------------
------------
------------
------------
Gross amount
Allowance for impairment
176,419
(732)
--------------175,687
---------------
145,509
(357)
--------------145,152
---------------
14,560
(2)
-----------14,558
------------
-----------------------
-----------------------
-----------------------
1,796
--------------1,796
---------------
3,560
--------------3,560
---------------
-----------------------
-----------------------
-----------------------
-----------------------
321,003 144,706
-------------------------321,003 144,706
---------------- -------------470,655 159,264
======= ======
140,271
-----------140,271
-------------140,271
======
95,724
-----------95,724
-----------95,724
=====
90,510
-----------90,410
------------90,510
======
Carrying amount
Collectively impaired
Carrying amount
Past due but not impaired
Grade 4-5: Impaired*
Carrying amount
Neither past due nor impaired
Grade 1-3: Low-fair risk
Carrying amount
Total carrying amount
221,364
--------------221,364
--------------400,964
======
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 EUR3.928 million for 2010 (2009: EUR3.971 million).
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 Credit Administration 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.
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. 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 reviewed every year and residential real
estate is 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 2010 or 2009.
An estimate of the fair value of collateral and other security enhancements held against loans
and advances to customers is shown below
4
4.2
2010
2009
EUR 000
EUR 000
2,735
50
2
1,039
-
Against collectively assessed loans
Property
Debt securities
Equities
Other
88,558
953
1,203
27,082
52,436
355
380
28,597
Against past due but not impaired
Property
Other
1,713
78
3,507
75
51,226
4,405
--------------
57,948
7,282
--------------
178,005
======
151,619
======
Against individually impaired
Property
Debt securities
Equities
Against neither past due nor impaired
Property
Other
Total
No collateral or other security enhancements are held against other financial assets.
4
4.2
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
2010
2009
2010
2009
2010
2009
Corporate
355,668
429,760
-
-
19,142
27,875
Sovereign
11,355
13,081
-
-
58,665
45,860
Banks
-
-
159,264
140,271
13,461
12,579
Retail
33,941
27,814
-
-
-
-
Concentration by sector
Equity
-
-
-
-
4,456
4,196
------------400,964
======
-------------470,655
======
-------------159,264
======
------------140,271
======
------------95,724
======
------------90,510
======
-
-
-
-
15,809
14,725
400,964
470,655
159,264
140,271
75,459
71,589
Concentration by location
North America
Europe
Latin America and Caribbean
-
-
-
-
4,456
4,196
-------------
--------------
--------------
-------------
-------------
-------------
400,964
470,655
159,264
140,271
95,724
90,510
======
======
======
======
======
======
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
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 if motor vehicles and motor
cycles
- transport and storage
- accommodation and food service activities
- final and insurance activities
- real estate activities
- professional, scientific and technical activities
- administrative and support service activities
- public administration and defence compulsory social security
- other services activities
- household and individuals
Gross loans and advances
2010
2009
EUR 000
EUR 000
1,351
244
8,542
22,212
34,090
1,423
13,446
23,571
34,864
13,444
6,091
14,014
80,998
167,220
24,180
10,323
90
510
19,056
-------------402,365
======
16,597
3,576
13,478
153,262
154,667
27,134
6,370
95
464
22,164
-------------471,111
======
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+
Not Rated
Corporate
Rated AA- to AA+
Rated A- to A+
Rated BBB- to BB+
Rated B- to B+
Rated C to CCC
Not Rated
Credit Institutions
Rated AA- to AA+
Rated A- to A+
Rated BBB- to BB+
Not Rated
Loans and advances
to banks
Investment
securities
2010
2009
2010
2009
2010
2009
2,308
3,462
-
-
58,665
-
45,860
-
219,056
317,541
-
-
2,933
8,066
8,143
4,456
2,820
9,050
10,165
5,840
4,196
-------------221,364
=====
-------------321,003
======
512
6
124,188
20,000
-------------144,706
======
180
62
132,798
7,231
------------140,271
======
11,281
2,180
------------95,724
======
6,065
4,334
2,180
------------90,510
======
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 interbank 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:
At 31 December
Average for the period
Maximum for the period
Minimum for the period
2010
2009
80%
123%
283%
25%
102%
143%
400%
37%
4
4.3
Liquidity risk (continued)
Maturity analysis for financial liabilities
In thousands of EUR
Gross
nominal
outflow
Carrying
amount
Less
than 1
month
1-3
months
3 months
to 1 year
More
than 5
years
1-5
years
31 December 2010
Non-derivative liabilities
Derivative liabilities held for
risk management
Unrecognised loan commitments
444,438
445,617
29,832
67,323
336,390
12,072
-
35,075
35,152
31,252
1,033
1,642
1,225
-
6,121
7,186
3
1,234
5,031
918
-
-
18,109
18,109
-
-
-
-
515,208
516,488
259
75,746
424,856
15,627
-
30,280
30,318
24,902
3,991
1,425
-
-
2,447
2,882
-
225
2,564
93
-
-
22,430
22,430
-
-
-
-
31 December 2009
Non-derivative liabilities
Derivative liabilities held for
risk management
Unrecognised loan
commitments
The previous 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 outflow disclosed in the previous table represents 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
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)
In thousands of EUR
31 December 2010
Balances with CBM, Treasury bills
and cash
Other assets
Total assets
Other liabilities
Equity
Carrying
amount
Less
than 3
months
704
159,264
400,964
94,686
8,909
-----------664,527
======
444,438
35,075
9,233
175,781
------------664,527
======
379
147,896
357,439
17,000
-----------522,714
======
426,366
32,223
------------458,589
======
329
15,516
6,000
----------21,845
======
6,000
725
----------6,725
=====
630
1,149
7,000
--------8,779
=====
903
----------903
=====
1,177
26,860
41,800
----------69,837
======
12,072
1,224
----------13,296
=====
18,429
----------18,429
======
----------=====
325
9,232
4,457
8,909
-------------22,923
======
9,233
175,781
------------185,014
======
64,125
64,125
15,120
79,245
7,876
87,121
56,541
143,662
18,429
162,091
(162,091)
-
561
(561)
95
(95)
20
(20)
445
113,685
421,973
23,120
------------559,223
======
490,615
28,867
------------519,482
======
6,619
19,368
13,500
----------39,487
=====
3,966
734
----------4,700
=====
731
1,255
4,000
----------5,986
=====
5,000
679
---------5,679
====
150
28,059
32,800
-----------61,009
=====
15,627
--------15,627
====
15,329
----------15,329
=====
----------=====
20,275
19,086
4,195
5,636
-------------49,192
======
7,183
177,555
-------------184,738
======
39,741
39,741
34,787
74,528
307
74,835
45,382
120,217
15,329
135,546
(135,546)
-
348
(348)
217
(217)
1
(1)
Interest sensitivity gap
Cumulative gap
% change interest rate for the period
100bps increase
100bps decrease
31 December 2009
Balances with CBM and cash
Other assets
Total assets
Other liabilities
Equity
Interest sensitivity gap
Cumulative gap
% change interest rate for the period
100bps increase
100bps decrease
20,720
140,271
470,655
92,944
5,636
-------------730,226
======
515,208
30,280
7,183
177,555
------------730,226
======
3-6
months
6-12
months
1-5
years
More
than
5 years
Noninterest
bearing
4
4.4
Market risks (continued)
4.4.1
Interest rate risk (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 2010
Balances with the CBM and cash
Investments
Other assets
Total assets
Other liabilities
Total liabilities
Equity
Net on balance sheet financial
position
Total
EUR
USD
GBP
CHF
Other
704
694
6
4
-
-
4,135
95,724
159,264
400,964
4,774
-------------665,565
======
4,135
95,724
35,527
369,603
4,716
----------510,399
======
9,937
246
29
-----------10,218
=====
872
378
2
--------1,256
====
112,525
30,737
20
------------143,282
======
403
7
--------410
====
6,121
444,438
35,075
3,112
-------------488,746
6,121
292,029
27,426
3,067
----------328,643
8,760
6,282
32
----------15,074
391
973
2
---------1,366
143,251
10
------------143,261
7
394
1
------402
176,819
-------------665,565
======
176,819
----------505,462
======
-----------15,074
=====
--------1,366
====
------------143,261
======
------402
===
4,937
(4,856)
(110)
21
8
(243)
243
(6)
6
% Change in Exchange rates to EUR
5% increase
5% decrease
1
(1)
-
4
4.4
4.4.2
Foreign exchange risk (continued)
Total
EUR
USD
GBP
CHF
Other
20,720
20,669
25
15
-
11
514
90,510
140,271
470,655
5,122
------------727,792
======
514
90,510
20,784
419,862
5,058
------------557,397
======
-
-
-
23,579
266
16
------------23,886
======
823
467
5
----------1,310
=====
95,039
50,060
43
-------------145,142
======
46
------57
===
2,447
515,208
30,280
4,738
------------552,673
2,447
351,811
23,555
4,678
------------382,491
18,288
5,545
19
------------23,852
1,138
12
----------1,150
145,108
3
29
-------------145,140
1
39
------40
175,119
-------------
175,119
-------------
-------------
-----------
--------------
-------
727,792
======
557,610
======
23,852
=====
1,150
=====
145,140
======
40
===
34
160
2
17
5% increase
2
8
-
1
5% decrease
(2)
(8)
-
(1)
In thousands of EUR
31 December 2009
Balances with the CBM, Treasury bills
and cash
Investments
Other assets
Total assets
Derivative liabilities held for risk
management
Other liabilities
Total liabilities
Equity
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.
4.6
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.
4
4.6
Capital management (continued)
As at 1 January 2008, the Bank implemented Banking Rule (BR04) “Capital Requirements
of Credit Institutions Authorised under the Banking Act 1994”, thereby becoming
compliant with respect to Pillar 1 capital requirements under the Basel II framework,
adopting the internal ratings based approach and the standardised approach to allocate
capital against credit risk. Basel II also introduces requirements for market risk and
operational risk calculated under the basic indicator approach.
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.
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.
4
4.6
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 2010
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 (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
Exposure
value
Weighted
amount
Capital
requirement
59,159
90
175,837
160,261
13,232
45
51,563
160,261
1,059
4
4,125
12,821
238,133
51,157
1,000
9,540
------------695,177
======
177,581
25,215
1,000
21,487
-------------450,384
14,206
2,017
80
1,719
-----------36,031
21,132
1,691
341
------------471,857
======
27
------------37,749
======
Operational risk capital requirement
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
167,821
11,922
(2,040)
(3,024)
(975)
------------173,704
Additional own funds
Upper tranche
Lower tranche
Deductions
IFRS Prudential Filters: Increases to Additional Own Funds
Capital solvency ratio
734
(734)
189
------------173,893
======
36.85%
======
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
Capital Management (continued)
In thousands of EUR
Exposure
value
Weighted
amount
Capital
requirement
66,232
95
3,462
154,796
234,828
14,751
47
3,462
46,953
234,828
1,180
4
277
3,756
18,786
243,617
38,890
1,000
8,562
------------751,482
======
173,729
16,743
1,000
19,547
-------------511,060
13,898
1,339
80
1,564
-----------40,884
21,946
1,756
55
-------------533,061
======
4
----------42,644
=====
31 December 2009
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 (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
Foreign Exchange Risk capital requirement
Own funds
Original own funds – Tier 1
Ordinary shares
Profit and loss account
Intangible assets
167,821
11,557
(196)
------------179,182
Additional own funds – Tier 2
Collective impairment allowances
Capital solvency ratio
357
------------179,539
======
33.68%
======
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 counterparty 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.
5.1.1 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.
5.2
Critical accounting judgements in applying the Bank’s accounting policies
Critical accounting judgements made in applying the Bank’s accounting policies include:
5.2.1 Valuation of financial instruments
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:
5
Use of estimates and judgements (continued)
5.2
(continued)
5.2.1
Valuation of financial instruments (continued)
z
z
z
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.
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.
5
Use of estimates and judgements (continued)
5.3
(continued)
5.2.1
Valuation of financial instruments (continued)
In thousands of EUR
Level 1
Level 2
Level 3
Total
31 December 2010
-
4,135
-
4,135
89,087
-----------
6,637
----------
-----------
95,724
-----------
89,087
=====
10,772
=====
=====
99,859
=====
----------
6,121
----------
-----------
6,121
----------
=====
6,121
=====
=====
6,121
====
-
514
-
514
84,134
-----------
6,376
-----------
---------
90,510
-----------
84,134
=====
6,890
=====
====
91,024
=====
-----------
2,447
----------
----------
2,447
----------
=====
2,447
=====
====
2,447
====
31 December 2009
5.2.2
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
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
In thousands of EUR
31 December 2010
Derivative assets held for risk
management
-
704
-
-
704
704
4,135
-
159,264
400,964
-
95,724
-
4,135
159,264
400,964
95,724
4,135
159,264
400,964
95,724
management
6,121
-
-
-
444,438
35,075
6,121
444,438
35,075
6,121
444,438
35,075
-
732
-
-
732
732
514
-
140,271
470,655
-
90,510
19,988
-
514
140,271
470,655
19,988
90,510
514
140,271
470,655
19,988
90,510
2,447
-
-
-
515,208
30,280
2,447
515,208
30,280
2,447
515,208
30,280
31 December 2009
management
Treasury Bills
management
Loans and advances are reported net of impairment allowances to reflect the estimated
recoverable amounts as at the balance sheet date. In the case of loans and advances which
are repriceable in the short term, the carrying value approximates the fair value. 93% of the
Bank’s loans and advances to customers and 99% 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. 97%
of the Bank’s amounts owed to banks and customers are repriceable within six months.
6
6.2
Fair value hedging relationships
Certain investments shown within the available-for-sale category are designated in qualifying
fair value interest rate hedging relationships (2010: EUR72.584 million; 2009: EUR65.283
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 discounts and premium
Total interest income
Interest expense
On amounts owed to banks
On amounts owed to customers
Amortisation of discounts and premium
Total interest expense
Net interest income
2010
2009
EUR 000
EUR 000
4
1,559
10,686
2,701
-----------14,950
------------
9
3,748
14,408
2,199
306
-------------20,670
--------------
(6,865)
(166)
(920)
-----------(7,951)
(12,208)
(447)
-------------(12,655)
-----------6,999
=====
-------------8,015
======
Included with interest income on debt and other fixed income instruments is an amount of
offsetting gains and losses amounting to a net gain of EUR52,090 (2009: net loss of
EUR124,368) resulting from qualifying fair value hedges.
8
Fee and commission income
Credit related fees and commission
Retail banking
Portfolio and other management fees
Fee and commission expense
Portfolio and other management fees
Other fees paid
9
EUR 000
EUR 000
123
62
-----185
------
72
54
2
-----128
------
(15)
(28)
-----(43)
-----142
===
(11)
(3)
-----(14)
-----114
===
2010
2009
EUR 000
EUR 000
145
===
89
===
Net income/(expense) from financial instruments carried at fair value
Movement in fair value of derivatives
Realised losses
11
2009
Net trading income
Foreign exchange gains
10
2010
2010
2009
EUR 000
EUR 000
189
(51)
--------138
====
73
(500)
--------(427)
====
Dividend income
No dividend income was received from the investment in Mezzanine Management Central
Europe Limited during the year (2009: EUR0.31 million).
12
Net impairment loss
Write-downs
- specific allowances
- collective allowances
Investment Securities
-specific allowances
Reversals of write-downs
- collective allowances
Net impairment loss
2010
2009
EUR 000
EUR 000
(570)
(376)
-----------(946)
(95)
----------(95)
-----------(946)
------------
(1,057)
----------(1,152)
-----------
----------------------(946)
=====
61
----------61
----------(1,091)
=====
13
Personnel expenses
Personnel expenses incurred by the Bank during the year are analysed as follows:
2010
2009
EUR 000
EUR 000
124
16
2
---------142
----------
112
14
2
----128
-----
890
54
---------944
---------1,086
====
852
54
-------906
-------1,034
====
Directors’ emoluments:
Fees (including wages and salaries)
Other emoluments
Compulsory social security contributions
Wages and salaries
Compulsory social security contributions
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
14
2010
2009
No.
No.
6
28
1
---35
==
6
26
1
---33
==
Other administrative expenses
Included in Administrative expenses are fees charged by the Bank’s auditors for the year as
follows:
Auditors’ remuneration in EUR
(exclusive of VAT)
Audit
Services
Other
Assurance
Services
EUR
EUR
Tax
Advisory
Services
EUR
Other
Non-Audit
Services
EUR
38,325
7,798
===================================
15
Income tax expense
15.1
Income tax expense, which is based on the taxable profit for the year comprises:
Current tax
- Current year
- Adjustments for prior years
Deferred tax
- Origination and reversal of
temporary differences
2010
2009
EUR 000
EUR 000
839
--------839
538
(61)
-------477
(222)
--------617
====
139
--------616
====
The current tax expense is made up of Malta tax payable.
15.2
Income tax 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:
2010
2009
EUR 000
EUR 000
3,882
====
4,324
====
Income 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/(Over) provision in prior years
Other
1,359
1,513
(25)
441
29
(895)
117
32
--------617
====
47
(1,324)
(61)
--------616
====
Income tax expense
16
Balances with Central Bank of Malta and Cash
Balances with Central Bank of Malta
- Reserve Deposit
Other deposits
Treasury Bills
Cash
2010
2009
EUR 000
EUR 000
379
11
314
--------704
====
445
30
19,988
257
----------20,720
=====
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.
17
Derivatives held for risk management
Instrument type:
- Interest rate
- Foreign exchange
Instrument type:
- Interest rate
- Foreign exchange
Net derivatives held for risk management
Net derivatives held for risk management analysed as follows:
Fair value hedges of interest rate risk
Other derivatives held for risk management
2010
2009
EUR 000
EUR 000
625
3,510
----------4,135
=====
492
22
----------514
=====
(2,688)
(3,433)
-----------(6,121)
=====
(1,986)
=====
(2,426)
(21)
----------(2,447)
=====
(1,933)
=====
(1,825)
(161)
----------(1,986)
=====
(1,583)
(350)
----------(1,933)
=====
17
Derivatives held for risk management (continued)
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
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. The instruments used include interest rate swaps,
cross-currency interest rate swaps, forward contracts, options 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
Allowances for uncollectibility
Amounts include:
Due from related companies
- unsubordinated
Collective allowance for impairment
Balance at 1 January
Impairment loss for the year:
- Charge
Balance at 31 December
2010
2009
EUR 000
EUR 000
606
157,483
1,177
--------------159,266
(2)
--------------159,264
======
2,341
137,780
150
--------------140,271
--------------140,271
======
158,188
======
132,798
======
-
-
(2)
--------------(2)
======
--------------======
Interest amounting to EUR1.511 million (2009: EUR3.722 million) was received from related
companies during the year.
Loans and advances to banks include amounts of EUR9.233 million (2009: EUR19.087
million) held under reverse repo agreements.
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
Allowances for uncollectibility
Net loans and advances to customers
Amounts include:
Due from related companies
- unsubordinated
Specific allowance for impairment
- Charge for the year
- Recoveries
Collective allowance for impairment
- Charge for the year
- Write-off
- Recoveries
Total allowances for impairment
2010
2009
EUR 000
EUR 000
17,577
87,294
297,494
-------------402,365
(1,401)
-------------400,964
======
14,610
75,708
380,793
-------------471,111
(456)
-------------470,655
======
133,954
======
213,242
======
(99)
(394)
(570)
-------------(669)
--------------
(95)
390
-------------(99)
--------------
(357)
(418)
(375)
-------------(732)
-------------(1,401)
=====
61
-------------(357)
-------------(456)
=====
The aggregate amount of impaired loans and advances amounted to EUR2,786,041 (2009:
EUR1,039,305). Total interest that would have accrued on the impaired loans in the current
and preceding financial years would have amounted to EUR367,586 (2009: EUR102,947).
No interest income on impaired loans and advances to customers was recognised during
2010 (2009: EUR177,772).
20
Available-for-sale
- debt and other fixed income instruments
- equity and other non-fixed income instruments
2010
2009
EUR 000
EUR 000
85,850
9,874
----------95,724
=====
80,784
9,726
-----------90,510
=====
The Bank has a callable commitment of EUR10 million on one of its equity instruments. As
at end of year the amount invested stood at EUR 4.456 million.
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
2010
2009
EUR 000
EUR 000
11,281
74,569
---------85,850
=====
10,399
70,385
---------80,784
=====
85,850
-----------85,850
=====
80,784
-----------80,784
=====
9,534
76,316
-----------85,850
=====
8,444
72,340
-----------80,784
=====
80,784
920
32,472
(28,786)
460
-----------85,850
=====
59,333
(312)
40,275
(22,529)
4,017
-----------80,784
=====
20
Investment securities (continued)
20.2
Equity and other non-fixed income instruments
2010
EUR 000
EUR 000
2,180
7,694
----------9,874
=====
2,180
7,546
----------9,726
=====
3,237
6,637
----------9,874
=====
3,350
6,376
----------9,726
=====
-subordinated
-unsubordinated
4,456
5,418
----------9,874
=====
4,196
5,530
----------9,726
=====
At 1 January
Amortisation
Acquisitions
Redemptions
Fair value adjustments
9,726
148
-----------9,874
=====
8,618
3,350
(2,242)
-----------9,726
=====
Issued by
- foreign banks
- others
Listing status
- listed on foreign stock markets
- foreign unlisted
At 31 December
21
2009
Name of the
Company
Incorporated Nature of
in
Business
Current
Equity Interest
%
2010
2009
EUR 000
EUR 000
VB Finance Limited
Jersey
IT services
100
1,000
1,000
ÖVAG Finance
(Jersey) Limited
Jersey
Investment
Company
100
--------1,000
====
--------1,000
====
The cost of the equity investment in ÖVAG Finance (Jersey) Limited is EUR1.
22
EUR 000
Cost or deemed cost
At 1 January 2009
Additions
Disposals
1,907
152
(41)
-------2,018
====
At 31 December 2009
At 1 January 2010
Additions
Disposals
2,018
82
(38)
-------2,062
====
At 31 December 2010
Depreciation
At 1 January 2009
Charge for the year
Disposals
954
263
(40)
-------1,177
====
At 31 December 2009
At 1 January 2010
Charge for the year
Disposals
1,177
260
(37)
-------1,400
====
At 31 December 2010
Carrying amounts
At 1 January 2009
953
===
841
===
841
===
662
===
At 31 December 2009
At 1 January 2010
At 31 December 2010
There were no capitalised borrowing costs related to the acquisition of property and
equipment during the year (2009: Nil).
23
Intangible assets
Software
EUR 000
Cost
At 1 January 2009
Additions
Disposals
At 31 December 2009
At 1 January 2010
Additions
Disposals
At 31 December 2010
Amortisation
At 1 January 2009
Charge for the year
Disposal
At 31 December 2009
At 1 January 2010
Charge for the year
Disposals
At 31 December 2010
Carrying amounts
At 1 January 2009
At 31 December 2009
At 1 January 2010
At 31 December 2010
1,265
76
-------1,341
====
1,341
7
-------1,348
====
1,079
66
-------1,145
====
1,145
62
-------1,207
====
186
===
196
===
196
===
141
===
There were no capitalised borrowing costs related to the acquisition of intangible assets
during the year (2009: Nil).
24
Deferred tax assets
24.1
Deferred tax assets and liabilities are attributable to the following:
Assets
2010
2009
Impairment allowance
Fair value movements of
financial assets
Tax assets/ (liabilities)
24.2
Property and
equipment
Impairment allowance
Financial assets at fair
value through profit or
loss
Fair value movements
on investments
2009
EUR 000
EUR 000
EUR 000
EUR 000
EUR 000
EUR 000
453
193
(10)
-
(12)
-
(10)
453
(12)
193
110
(153)
(43)
177
177
---------------------------------------------------------------------------------------------------------------------563
(163)
400
370
(12)
358
==================================================
Balance
1 January
2009
Recognised
in profit or
loss
Recognised
in equity
Balance 31
December
2009
Recognised
in profit or
loss
Recognised
in equity
Balance 31
December
2010
(12)
-
-
(12)
2
-
(10)
285
(92)
-
193
260
-
453
101
(47)
-
54
(40)
-
14
(57)
397
(274)
123
(180)
________________________________________________________________________________
771
(139)
(274)
358
222
(180)
400
=============================================================
Accrued income
Prepayments
26
Net
2010
Movement in temporary differences during the year
In thousands of EUR
25
Liabilities
2010
2009
2010
2009
EUR 000
EUR 000
2,291
272
---------2,563
====
2,484
121
---------2,605
====
2010
2009
EUR 000
EUR 000
8
===
8
===
Other assets
Other receivables
27
Term deposits
Repayable on demand
Amounts include:
- due to related companies
2010
2009
EUR 000
EUR 000
436,867
7,571
-------------444,438
======
515,191
17
------------515,208
======
420,435
======
510,207
======
Interest amounting to EUR5.875 million (2009: EUR10.734 million) was paid to related
companies during the year.
28
Term deposits
Repayable on demand
Amounts include:
- due to related companies
29
2010
2009
EUR 000
EUR 000
22,782
12,293
-------------35,075
======
14,614
15,666
-----------30,280
=====
32
=====
83
=====
2010
2009
EUR 000
EUR 000
1,493
156
2,690
226
---------2,916
====
Accrued interest
Other
---------1,649
====
30
Other liabilities
Bills payable
Cash collateral for commitments
Other
31
Capital and reserves
31.1
Share capital
Authorised
Ordinary ‘A’ shares of EUR 72.7
Ordinary ‘B’ shares of EUR 1,816.8
Issued and fully paid up
Ordinary ‘A’ shares of EUR 72.7
2010
2009
EUR 000
EUR 000
208
397
68
---------673
====
396
171
---------567
====
2010
2009
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
Reserves
Revaluation reserve
The revaluation reserve comprises the cumulative net change in fair value of available-forsale assets held by the Bank, net of tax.
31.3
Dividends
During the year, the Company declared and paid an interim dividend of EUR2.8 million (2009:
EUR3.8 million), representing EUR1.21 per share (2009: EUR1.65).
32
Earnings per share
The calculation of basic earnings per share at 31 December 2010 was based on the profit
attributable to ordinary shareholders of EUR3.265 million (2009: EUR3.708 million) and the
number of ordinary shares in issue during the year amounting to 2,308,400 (2009:
2,308,400).
33
Cash and cash equivalents
Balances of cash and cash equivalents as shown in the balance sheet are analysed below:
Analysis of balances of cash and cash equivalents:
Cash
Other
Treasury bills
Cash and Cash Equivalents
Adjustment to reflect balances with contractual
maturity of more than three months
Analysed in the balance sheet or notes as follows:
Cash
Balances with Central Bank of Malta
Other deposits
Treasury bills
34
2010
2009
EUR 000
EUR 000
45,165
314
11
(426,366)
-----------------(380,876)
38,406
258
30
19,988
(490,614)
-----------------(431,932)
96,406
----------------
77,715
-----------------
(284,470)
=======
(354,217)
=======
314
379
11
159,264
(444,438)
----------------(284,470)
=======
258
474
19,988
140,271
(515,208)
---------------(354,217)
=======
Operating leases
Non-cancellable operating lease rentals relating to the bank’s premises are payable as
follows:
Less than one year
Between one and five years
2010
2009
EUR 000
EUR 000
126
338
------464
===
120
420
------540
===
35
Capital commitments
At balance sheet date the Bank had the following capital commitments in respect of
acquisition of property and equipment and intangible assets:
Authorised but not contracted for
36
2010
2009
EUR 000
EUR 000
271
===
281
===
2010
2009
EUR 000
EUR 000
58,665
4,939
------------63,604
=====
11,829
920
------------12,749
=====
Guarantees and assets pledged as collateral security:
- pledged Malta Government Stocks
- guarantees
The Malta Government Stocks are pledged in favour of the Central Bank of Malta in
connection with facilities provided under monetary policy operations.
In addition, at year end, the Bank pledged 4.8% Malta Government Stock 2016 (ISIN
MT0000011149), face value EUR100k and market price of 106.49, in favour of the Depositor
Compensation Scheme.
37
Commitments
Undrawn formal standby facilities, credit facilities and other
commitments to lend
38
Related parties
38.1
Parent and ultimate controlling party
2010
2009
EUR 000
EUR 000
18,109
=====
22,430
=====
The immediate and ultimate 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
Related parties (continued)
38.2
Transactions with key management personnel
Key management personnel and their immediate relatives have transacted with the Bank
during the year as follows:
2010
Maximum
balance
2010
Closing Maximum
balance
balance
EUR 000 EUR 000
Mortgage lending and other secured loans
Credit card
Other Loans
620
3
42
2009
620
15
2009
Closing
balance
EUR 000 EUR 000
678
3
16
667
12
Interest rates on balances outstanding 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 2010
amounted to EUR634,791 (2009: EUR678,674). These are included in “loans and advances
to customers”. Effective interest is charged at 1.74% per annum and amounted to
EUR11,436 for the year ended 31 December 2010.
Deposits by directors and companies under their control and key management personnel as
at 31 December 2010 amounted to EUR52,531 (2009: EUR37,737) and are included in
“amounts owed to customers”. Effective interest is payable at 1.07% per annum and
amounted to EUR563 for the year ended 31 December 2010.
The Bank acquired supplies from a company owned and controlled by a director of the Bank,
amounting to EUR19,093 during the financial year ended 31 December 2010. The Bank also
used the services of a company owned and controlled by a director of the Bank, amounting
to EUR10,154 during the financial year ended 31 December 2010.
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 executive officers amounting to EUR217,189 (2009:
EUR205,705) is included in “personnel expenses” (see note 13).
All transactions with directors, key management personnel, close members of the family of
directors and key management personnel and with the companies controlled by the directors
of the Bank, were made on an arm’s length basis.
38.3
Other related party transactions
Administrative expenses
Administrative expenses include management fees amounting to EUR255,538 (2009:
EUR295,704) charged by the parent.
Net fees and commission income
Net fees and commission income include EUR23,542 (2009: EUR31,903) charged by the
parent company.
Net interest income
Net interest income includes EUR4,060,252 (2009: EUR9,039,812) interest income from the
parent and affiliated companies and EUR9,051,062 (2009: EUR13,485,673) 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 18, 19, 21, 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 38.2.
To the Members of Volksbank Malta Limited
Report on the Separate Financial Statements
We have audited the separate financial statements of Volksbank Malta Limited (the “Bank”) as
set out on pages 5 to 71, which comprise the statement of financial position as at 31 December
2010 and the statements of comprehensive income, changes in equity and cash flows for the
year then ended, and notes, comprising a summary of significant accounting policies and other
explanatory information.
Directors’ Responsibility for the Financial Statements
As explained more fully in the Directors’ Responsibilities Statement set out on page 4, the
directors are responsible for the preparation of financial statements that give a true and fair view
in accordance with International Financial Reporting Standards as adopted by the EU and the
Companies Act, 1995 (Chapter 386, Laws of Malta) (the “Act”) and the Banking Act, 1994
(Chapter 371, Laws of Malta), and for such internal control as the directors determine are
necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. This
report, including the opinion, has been prepared for and only for the Company’s members as a
body in accordance with Article 179 of the Act and Article 31 of the Banking Act, 1994 (Chapter
371, Laws of Malta), and may not be appropriate for any other purpose.
In addition, we read the Directors’ Report and consider the implications for our report if we
become aware of any apparent material misstatements of fact.
We conducted our audit in accordance with International Standards on Auditing. Those standards
require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements. The procedures selected depend on our judgement,
including the assessment of the risks of material misstatement of the financial statements,
whether due to fraud or error. In making those risk assessments, we consider internal control
relevant to the entity’s preparation of financial statements that give a true and fair view in order
to design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of accounting
estimates made by management, as well as evaluating the overall presentation of the financial
statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion on Separate Financial Statements
In our opinion, the separate financial statements:
•
•
give a true and fair view of the unconsolidated financial position of the Bank as at 31
December 2010, and of its financial performance and its cash flows for the year then ended
in accordance with International Financial Reporting Standards as adopted by the EU; and
have been properly prepared in accordance with the Companies Act, 1995 (Chapter 386,
Laws of Malta) and the Banking Act, 1994 (Chapter 371, Laws of Malta).
Report on Other Legal and Regulatory Requirements
Matters on which we are required to report by the Banking Act, 1994 (Chapter 371, Laws of
Malta)
In our opinion:
•
we have obtained all the information and explanations which, to the best of our knowledge
and belief, were necessary for the purpose of our audit;
•
proper books of account have been kept by the Bank so far as appears from our examination
thereof;
•
the Bank’s financial statements are in agreement with the books of account; and
•
to the best of our knowledge and belief and, on the basis of the explanations given to us, the
financial statements give the information required by law in force in the manner so required.
Matters on which we are required to report by exception by the Companies Act, 1995 (Chapter
386, Laws of Malta) (the “Act”), other than those reported upon above
We have nothing to report in respect of the following matters where the Act requires us to report
to you if, in our opinion:
•
the information given in the Directors’ Report for the financial year for which the financial
statements are prepared is not consistent with the financial statements; or
•
certain disclosures of directors’ remuneration specified by the Act are not made.
Noel Mizzi(Partner) for and on behalf of
KPMG
Registered Auditors
14 April 2011
Appendices
Appendix
Additional Disclosures in accordance with
the requirements of Banking Rule 07
I
Income statement - 5 year summary
II
Balance sheet - 5 year summary
III
Statement of cash flows - 5 year summary
IV
Accounting Ratios - 5 year summary
V
Additional Disclosures in acordance with the
requirements of Banking Rule 07
31 December 2010
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.
Foundation - Internal Rating Based Approach and Standardised Approach
As a matter of principle, ÖVAG and the Bank, measure exposures at default (EAD) as required by
the foundation-internal ratings based (F-IRB) approach, pursuant to EU Directive 2006 48/EC Ann.
VII, P 3.
ÖVAG has a permanent concession to use the standardised approach for calculation of risks
related to sovereigns, central banks and administrative bodies. Also it is not obligatory to rate
physical (non-corporate) borrowers for risks below EUR3,000. ÖVAG also has a temporary
concession to use the standardised approach for calculation of risks related to financial
institutions. The ÖVAG Group has implemented a new rating process for financial institutions so
that by 2013 it will be able to adopt the F-IRB as well for these risks.
Foundation - Internal Rating Based Approach and Standardised Approach (continued)
For the F-IRB approach, the Bank relies on the estimation parameters specified by the regulator.
EAD for the Retail portfolio is often estimated by the ÖVAG Group. EAD under Basel II is based
on given parameters for the F-IRB Approach and corresponds largely to the overall exposure
concept of the ÖVAG Group. The main difference consists in the Group’s more conservative
approach in recognising externally approved credit lines and other off-balance-sheet transactions
with the full amount without using a Credit Conversion Factor (i.e. CCF of 100%). Within ÖVAG
Group, EAD is used to compute regulatory capital. Internal risk managers use the more
conservative total exposure amount.
For the asset classes treated under the F-IRB approach, regulatory capital requirements are
calculated based on loss given defaults (LGDs) computed in accordance with supervisory
specifications. LGDs for domestic retail exposures are estimated internally following supervisory
requirements. All other asset classes are subject to the relevant minimum regulatory standards.
Internal ÖVAG risk management employs the LGDs measured under the F-IRB approach for the
asset classes that are admitted for the F-IRB even under Basel II. Internal bank estimates are
used for those remaining asset classes that are measured based on expert estimates rather than
by empirical/statistical methods for lack of a sufficient dataset. No specific haircuts need to be
applied to the asset classes that are not subject to the F-IRB approach as these are implicit in the
expert estimates.
Classification
LGD estimates and related methods are classified at the highest level based on the following
asset classes, following the Basel II model:
•
Central governments (Sovereigns) or central banks
•
Local authorities: Regional Government, Provinces and Local Councils
•
Public sector entities
•
Credit institutions (Financial Institutions)
•
Corporates
•
Retail
Furthermore, LGDs for individual asset classes may depend on the respective region. Such a
differentiation is particularly relevant because of major statutory differences among central
governments, local authorities and public-sector entities. Moreover, there is a principal
dependence of LGD on the seniority of the exposure and its collateral. Consequently, LGD
basically depends on the following factors: asset class, region, seniority and collateral. However,
these four characteristics are not equally relevant in all asset classes. For the central government
or the local authority asset class, for example, the collateral aspect is not particularly significant,
in contrast to the regional factor. Consequently, LGD in those two asset classes is differentiated
by region rather than by collateral. On the other hand, collateral is extremely important in the
corporate asset class. For that reason, the type of collateral is assigned major importance as an
essential factor of influence in estimating LGD. Accordingly, to reduce complexity the focus in
each asset class is on those characteristics that are considered to have a material impact on the
value of LGD in that class, while the other characteristics are neglected.
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 Report (Continued)
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 performance-related
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.
Income Statement – 5 Year Summary
31 December 2010
Interest income
Interest expense
Net interest income
Fees and commissions income
Fees and commissions expense
Net (expense)/income from financial
instruments carried at fair value and
Net trading income
Dividend income
Other operating income
Operating income
Net (impairment loss) / impairment
reversals
Other expenses inclusive of
personnel expenses and operating
lease expenses
Depreciation and amortisation
Income tax
Profit for the year
2010
2009
2008
2007
2006
EUR 000
EUR 000
EUR 000
EUR 000
EUR 000
14,950
(7,951)
----------6,999
-----------
20,670
(12,655)
----------8,015
-----------
45,773
(33,397)
----------12,376
-----------
40,964
(30,561)
----------10,403
-----------
29,189
(20,350)
----------8,839
-----------
185
(43)
----------142
-----------
128
(14)
----------114
-----------
168
(45)
----------123
-----------
147
(62)
----------85
-----------
102
(78)
----------24
-----------
283
0
38
----------321
----------7,462
(338)
312
23
----------(3)
----------8,126
(26)
288
14
----------276
----------12,775
322
2,226
10
----------2,558
----------13,046
(132)
886
8
----------762
----------9,625
(946)
(1,091)
(358)
(44)
(105)
(2,312)
(322)
----------3,882
(2,382)
(329)
----------4,324
(2,573)
(316)
----------9,528
(2,268)
(324)
----------10,410
(1,948)
(303)
----------7,269
(617)
----------3,265
=====
(616)
----------3,708
=====
(841)
----------8,687
=====
(1,259)
----------9,151
=====
(624)
----------6,645
=====
Statement of Financial Position– 5 Year Summary
31 December 2010
Assets
Balances with CBM, Treasury bills
and Cash
management
Investments securities
Investments in subsidiaries
Intangible assets
Plant and equipment
Deferred tax asset
Tax Recoverable
Other assets
Total assets
Liabilities and equity
Liabilities
management
Deferred tax liability
Current tax payable
Other liabilities
Provisions
Equity
Called up issued share capital
Retained earnings
Revaluation reserves
Total equity and liabilities
Memorandum items
Commitments
2010
2009
2008
2007
2006
EUR 000
EUR 000
EUR 000
EUR 000
EUR 000
704
20,720
1,072
27,362
28,201
4,135
159,264
400,964
95,724
1,000
141
662
400
0
2,564
8
------------665,565
======
514
140,271
470,655
90,510
1,000
196
841
358
114
2,605
8
------------727,792
======
6,509
342,218
457,194
67,951
1,000
186
953
771
118
6,990
8
-------------884,970
======
3,156
306,697
475,636
74,425
1,000
26
610
113
5,517
27
-------------894,569
======
3,997
120,156
493,521
61,003
1,000
155
413
13
113
5,519
20
-------------714,111
======
6,121
444,439
35,075
748
1,649
674
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
-------------
3,680
673,129
32,304
1,574
4,310
447
23
------------715,467
-------------
2,040
505,382
24,593
639
3,816
453
18
------------536,941
-------------
167,821
12,022
(3,024)
------------176,818
------------665,565
======
167,821
11,557
(4,259)
------------175,119
------------727,792
======
167,821
11,649
(9,230)
------------170,240
------------884,970
======
167,821
10,062
1,219
------------179,102
------------894,569
======
167,821
7,611
1,738
------------177,170
------------714,111
======
63,451
=====
12,749
=====
14,054
=====
11,133
=====
947
=====
18,109
=====
22,430
=====
24,983
=====
18,645
=====
12,786
=====
Statement of Cashflows – 5 Year Summary
31 December 2010
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
Net cash from/(used in) operating activities
before income tax
Tax paid
Net cash flows from/(used in) operating
activities
Cash flows from investing activities
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
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
2010
2009
2008
2007
2006
EUR 000
EUR 000
EUR 000
EUR 000
EUR 000
17,216
(9,224)
145
(3,486)
--------------
28,294
(19,279)
312
89
(1,003)
-----------
44,307
(32,340)
288
696
(3,671)
-----------
47,192
(36,515)
2,226
79
(1,257)
-----------
33,638
(25,850)
886
543
(2,365)
-----------
4,651
8,413
9,280
11,725
6,852
66
(12,236)
68,747
-
253
3,385
(13,106)
-
24,339
58,097
18,079
1,184
16
(8,793)
(120,808)
17,835
2,841
(4)
(16,244)
14,834
5,473
(8,644)
(205)
(3)
(6,521)
4,795
116
--------------
(4,317)
(9,393)
(272)
-------------
(99,608)
7,369
392
-----------
(99,651)
7,711
(6)
-------------
112,414
6,920
(199)
------------
59,618
(1,197)
--------------
(15,037)
(708)
-------------
19,148
(1,190)
-----------
(189,150)
(366)
--------------
121,198
(319)
-------------
58,421
--------------
(15,745)
-------------
17,958
-----------
(189,516)
--------------
120,879
-------------
28,185
-
18,378
2,490
3,235
7,767
4,000
9,402
12,159
(32,662)
(88)
--------------
(40,356)
(227)
-------------
(14,784)
(818)
-----------
(28,095)
(392)
------------
(3,253)
(326)
---------
(4,565)
--------------
(19,715)
-------------
(4,600)
-----------
(15,085)
-------------
8,580
---------
(2,800)
-------------(2,800)
--------------
(3,800)
------------(3,800)
-------------
(7,100)
----------(7,100)
-----------
(6,700)
----------(6,700)
-----------
(4,900)
----------(4,900)
-----------
51,056
======
(39,260)
======
6,258
=====
(211,301)
======
124,559
======
22,412
284
20,440
(205)
(73)
28,644
-------------51,056
======
(431,932)
-------------(380,876)
======
(39,544)
-------------(39,260)
======
(392,672)
---------------(431,932)
=======
(14,182)
-----------6,258
=====
(398,930)
-------------(392,672)
======
(211,096)
--------------(211,301)
======
(187,629)
--------------(398,930)
======
124,632
------------124,559
======
(312,188)
--------------(187,629)
======
Accounting Ratios – 5 Year Summary
31 December 2010
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)
2010
2009
2008
2007
2006
%
%
%
%
%
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
1.2
0.3
1.2
5.8
5.1
1.2
0.3
1.0
4.1
3.8
2010
2009
2008
2007
2006
2,308.4 2,308.4 2,308.4 2,308.4 2,308.4
76.6
75.9
73.7
77.6
76.8
Earnings per share (EUR)
1.4
1.6
3.8
4.0
2.9
Dividends per share (EUR)
1.2
1.7
3.1
2.9
2.1
Dividend Cover
1.2
1.0
1.2
1.4
1.4
Imprint
Published by:
Volksbank Malta Limited
53 Dingli Street
Sliema SLM 1902
Malta
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 2010

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