CALYON anglais entier.indd
Transcription
CALYON anglais entier.indd
shelf-registration DOCUMENT 2006 THE CRÉDIT AGRICOLE GROUP (source : Banque de France) (source : society) (source : The Banker) Calyon - SHELF-registration document 2006 I - II Calyon - shelf-registration document 2006 Contents I-II Calyon in the Crédit Agricole Group 1 Presentation of Calyon 3 Messages from the Chairman and the Chief Executive Officer History 2006 key figures Significant events in 2006 Business lines 4 6 8 10 11 2 Corporate governance and internal control 17 Chairman’s report to the annual general meeting of shareholders on 14 May 2007 Statutory Auditors’ report Executive officers’ and directors’compensation Executive Committee 18 30 31 41 3 Management report 43 Presentation of Calyon’s financial statements Calyon’s activity and results Recent trends and outlook Analysis of Calyon parent company financial statements Appendix to the management report 44 45 54 56 60 4 Financial statements 77 Consolidated financial statements for the year ended 31 December 2006 approved by the Board of Directors at its meeting of 28 February 2007 Statutory Auditors’ report on the consolidated financial statements Information on the parent company financial statements 5 General information Information on the company Additional information Statutory auditors’ special report on regulated agreements Persons responsible for the shelf-registration document and for auditing the accounts Cross-reference table 78 148 150 157 158 161 162 166 168 PReSENTATION of CALYON Shelf-registration document 2006 Calyon Credit Agricole’s corporate and investment banking subsidiary Profile Calyon was formed from the merger of Crédit Agricole Indosuez and Crédit Lyonnais’s Corporate and Investment Banking division to become Crédit Agricole’s Corporate and Investment Banking subsidiary. Backed by the Group’s credit ratings and financial solidity, Calyon is now a leading player in financial markets and is ranked among Europe’s top ten corporate and investment banks. With operations in 58 countries, Calyon offers its corporate and financial institution clients a full range of products and services in capital markets, brokerage, investment banking, structured finance, corporate banking and international private banking. Only the French version of the shelf-registration document has been submitted to the Autorité des Marchés Financiers. It is therefore the only version that is binding in law. The original French version of this shelf-registration document was registered with the AMF on 1st June 2007 under number R.07-088 in accordance with article 212-13 of the AMF’s Internal Regulations. It may not be used in support of a financial transaction unless accompanied by a transaction circular approved by the AMF. Calyon - shelf-registration document 2006 1 Presentation of Calyon 4Messages from the Chairman 6 History 8 2006 key figures 10 Significant events in 2006 11 Business lines and the Chief Executive Officer - PReSENTATION of CALYON Messages from the Chairmain and the Chief Executive Officer Message from Jean Laurent Calyon made good progress towards its growth ambitions in 2006. Significant commercial developments in all business lines drove a 24% increase in net banking income at constant scope and exchange rates. Throughout the year, Calyon took advantage of the positive economic background. It was involved in a number of high-profile transactions, extended its customer base and product range and expanded its international presence. The various business lines developed their global franchises. This was particularly the case in interest-rate and credit derivatives, real estate and international trade financing and leveraged finance. The significant growth in capital markets activities led to a greater balance between this business and investment banking. The Capital Markets and Investment Banking business line accounted for 61% of revenues, while Financing provided 39%. The development plan put in place by Calyon since 2005 is focused on enhancing commercial impetus and keeping a firm grip on operating expenses. Calyon has made steady progress relative to its main rivals in terms of net banking income, gross operating income and the cost/income ratio. Calyon accounted for almost a third of Crédit Agricole S.A.’s earnings in 2006. It has a central role within the Crédit Agricole Group, whose recent international expansion is providing fresh opportunities for Calyon’s various Corporate and Investment Banking activities. The dedication of Calyon’s staff and the commitment of its senior management to increasing market share, developing new products and improving the organisation are underpinning Calyon’s ambition of continuing its rise among the ranks of Europe’s leading corporate and investment banks. This collective ambition is founded on our values of expertise, consistency, dynamism and courage. As a result, I am confident that Calyon will continue to fulfil the role assigned to it by the Crédit Agricole group. Jean Laurent Chairman of the Board of Directors Calyon - shelf-registration document 2006 Message from Edouard Esparbès In 2006, Calyon made significant commercial breakthroughs in most of its business lines, due to efforts to strengthen its base of corporate and institutional clients. It also carried out targeted recruitment, particularly outside France, and this has substantially increased our origination capacity. Calyon’s international network employs more than 8,600 staff across 58 countries. The network was extended in 2006 with the opening of several branches and representative offices (in Algeria, Libya, India with two new branches and Kazakhstan). More than 70% of Calyon’s commercial revenues now come from outside France, and international net banking income is rising rapidly due to our often long-standing presence in highgrowth regions. We broadened our product range in 2006 to offer clients comprehensive and innovative solutions, particularly in structured financing and capital markets. We industrialised “flow” products extended the range of structured and hybrid products and redeployed our equity derivatives business. We significantly strengthened our range of Islamic products with the creation of a Global Islamic Banking product line based in Dubai. Our brokerage activities put in a remarkable performance in 2006, and Cheuvreux, CLSA and Calyon Financial are leaders in their markets. In early 2007, we started talks with Fimat (Société Générale’s listed derivatives brokerage subsidiary) with a view to merging Fimat with Calyon Financial to form one of the world’s leading players in the execution and clearing of listed derivatives. We focused on making our commercial organisation and infrastructure more efficient. Efforts to increase crossselling have been built into our reporting tools, and we have been able to industrialise our production platforms with new IT systems in capital markets, brokerage and the international network. We have organised our front office and support staff into teams concentrating on 16 major managerial projects, with the aim of maintaining progress. All profitability indicators improved. Gross operating income was up 35% at constant scope and exchange rates, the cost/income ratio fell by 3.2 points and ROE was 17.1%. These results confirm the wisdom of our strategy of generating balanced, profitable growth, with the focus on clients and international development. We have major ambitions for 2007. We will maintain our commercial momentum and our efforts to maximise efficiency, with the aim of strengthening our position among Europe’s best corporate and investment banks. Edouard Esparbès Chief Executive Officer - PReSENTATION of CALYON History 1863 Creation of Credit Lyonnais 1875 Creation of Banque d’Indochine 1894 Creation of the first “sociétés de Crédit Agricole”, later termed “Caisses Locales” (“Local Banks”) 1920 Set up of Office National de Credit Agricole, renamed Caisse Nationale de Credit Agricole (CNCA) in 1926 1945 Nationalisation of Credit Lyonnais 1959 Creation of Banque de Suez Calyon - shelf-registration document 2006 1975 Merger of Banque de Suez and Banque d’Indochine to form Banque Indosuez 1988 CNCA becomes a public limited company owned by Regional Banks and employees (“mutualisation”) 1996 Acquisition of Banque Indosuez by Credit Agricole, one of the world’s top 5 banking groups, to create an international investment banking arm 1997 Caisse Nationale de Credit Agricole consolidates within Credit Agricole Indosuez its existing international, capital markets and corporate banking activities 1999 Privatisation of Credit Lyonnais 2001 CNCA changes its name to Credit Agricole S.A. and goes public on 14 December 2001 2003 Successful combined takeover bid for Credit Lyonnais by Credit Agricole 2004 Creation of Calyon, the new brand and corporate name of the Credit Agricole Group’s financing and investment banking business, through a partial transfer of assets from Credit Lyonnais to Credit Agricole Indosuez - PReSENTATION of CALYON 2006 key figures Trends in earnings Net income - Group share In millions of euros Condensed income statements In millions of euros Net banking income 31.12.2005 31.12.2006 4,938 5,862 1,770* 2,288 Net income 1,716 1,848 Net income - Group share 1,632 1,771 Gross operating income * in 2005, before integrated-related costs Activité In billions of euros Return on equity (ROE) 31.12.2005 31.12.2006 Total assets 481.3 588.2 Gross loans 90.5 104.0 119.0 146.9 49.7 54.1 Customer deposit Assets under management (private banking) * in 2005, excluding the gain from selling financial services activities to the Crédit Agricole S.A. group Calyon - shelf-registration document 2006 Financial structure Ratings Shareholders’ equity In millions of euros Short-term Moody’s P1 Standard & Poor’s A1+ FitchRatings F1+ Long-term International solvency ratio (CAD/ESR) Moody’s Aa1 Standard & Poor’s AA- FitchRatings AA Headcount (average) Full-time equivalent France 2005 2006 4,813 4,474 International 11,553 8,627 Total 16,366 13,101 In 2005, including the staff of international retail banking activities sold to Crédit Agricole S.A. in the fourth quarter - PReSENTATION of CALYON Significant events in 2006 Strong performance A powerful international network Calyon benefited from a positive market environment and achieved a sharp improvement in operational and financial performance in 2006. This strong showing lends credence to its ambition of strengthening its position among Europe’s top ten corporate and investment banks by combining steady growth and profitability. More than two thirds of Calyon’s corporate and investment banking business is generated outside France, in 58 other countries. In capital markets, Calyon achieved record performance in interest-rate derivatives, along with strong growth in credit market activities and continuing progress in equity derivatives, in line with the business plan. CASAM, a 50/50 joint venture between Crédit Agricole Asset Management and Calyon, acquired Ursa Capital LLC, a US firm specialising in alternative managed accounts. This strong growth momentum required significant investment in order to increase processing capacity, improve production security and enhance execution quality. The Commission Bancaire extended its approval of Calyon’s internal market risk monitoring models to cover specific interest-rate risks in the credit markets business. Brokerage had an exceptional year, with business levels rising at all three brokerage units, i.e. CA Cheuvreux, Calyon Financial and CLSA. In Financing, Calyon made the most of its capacity for large deals. The structured financing business capitalised on its solid existing positions and made further progress. Calyon worked hard to develop businesses in attractive niche markets such as Islamic financing and the management of distressed debt in Europe, in which Calyon set up a partnership with Pirelli Re. The international network continued to strengthen and increase operational efficiency in 2006: - C orporate and investment banking revenues rose faster outside France than inside France. The firm pace of expansion was driven in particular by high-growth countries like India, the Gulf states and Brazil; - Calyon continued to deploy its business lines in these areas; - It started to introduce its new international IT system into several countries, and the system will be gradually rolled out as part of the streamlining of production sites. Other highlights in 2006 included: - t he obtaining of Financial Holding Company status in the USA, enabling Calyon to review its US growth strategy, - the opening of two new branches in India, - the creation of representative offices in Libya and Kazakhstan, - authorisation to set up a subsidiary in Algeria, - t he transformation of units in Belgium, Poland and Slovakia into branches. Calyon - shelf-registration document 2006 Business lines Calyon is one of Europe’s top ten corporate and investment banks alongside Deutsche Bank, Union des Banques Suisses, Crédit Suisse, HSBC, Royal Bank of Scotland, Barclays, BNP Paribas, Société Générale and ABN Amro. Corporate and investment banking Calyon oversees and develops its corporate client base via teams of senior bankers. These senior bankers manage global commercial relationships by calling on skills available in the various business lines, backed up by the Bank’s international network. In 2006, Calyon continued to implement this coverage model in its international network and in specific client sectors where global service is handled centrally. Similarly, the Financial Institutions Group ensures worldwide coverage of financial institutions. These comprise banks, central banks, investment banks, insurers, reinsurers, asset managers, hedge funds, pension funds, brokers and other financial intermediaries, sovereigns, regional and local authorities outside France and leasing companies, representing a total target client base of 1,100 groups and counterparties. In 2006, the system was strengthened in both sector and geographical terms. Sales forces were reorganised in France, redeployed in certain European markets and strengthened with the recruitment of senior bankers in Asia (including India and Thailand), the USA and the Middle East. Capital markets and investment banking Capital markets Treasury Calyon has an active presence in the world’s interbank money markets in 27 countries, via five liquidity centres: Paris, London, New York, Tokyo and Hong Kong. This centralised cash management ensures stable financing and helps Calyon manage its liquidity and short-term interest-rate risk in an efficient manner. Calyon also directly manages Credit Agricole S.A.’s treasury operations, which are key to the management of short-term fund flows between Crédit Agricole S.A., its subsidiaries and the Regional Banks. Foreign exchange With its electronic platforms and dedicated sales teams, Calyon provides customers with a broad range of forex products: cash transactions, options and structured currency products. Business focuses on the main international currencies (EUR, GBP, JPY, CHF, USD, AUD), but also covers Scandinavian, Eastern European, Asian, Latin American and Middle Eastern currencies. In 2006, Calyon was ranked the number one bank in France and 10th worldwide for forex (source: FX Week’s Best Banks Survey 2006). Commodities Calyon offers an integrated commodities service. It is a market-maker for a comprehensive range of energy commodities and metals. Calyon is a major player in markets for instruments indexed to oil, refined products, gas, electricity and CO2 emissions. It is a specialist in OTC metals derivatives and also trades a large number of precious and non-precious metals instruments, giving customers numerous hedging possibilities. Calyon is an active player in the market for commodityindexed structured placings, which is currently seeing rapid growth. Interest rate derivatives Calyon is an established player in interest rate swaps, exotic products and interest rate options. It also has a significant position in structured Euro Medium Term Notes. In 2006, business levels hit a new record, driven by firm growth in all regions. In a highly competitive environment in which the main players were particularly active, Calyon maintained its strong market position. It launched new products and enhanced its forex range. It also developed and deployed electronic platforms to meet all client needs. 10 - 11 PReSENTATION of CALYON Debt markets The new Debt Capital Markets (DCM) business line was set up in 2006 and offers a comprehensive range of debt instruments: investment grade and high yield bonds, hybrid capital instruments and structured ABS (AssetBacked Securities). The high grade and high yield origination team advises more than 500 issuers worldwide, including governments, public organisations, financial institutions and large corporations. Calyon’s excellent 2006 performance earned it the following rankings: 10th in euro-denominated bond issuance (source: Thomson Financial), 7th in eurodenominated ABS issuance (source: Thomson Financial B16G) and 2nd in euro-denominated ABCP (Asset-Backed Security Commercial Paper) issuance in the Conduits business (source: CP Ware). Credit markets and CDO Calyon has a global platform for syndicating, structuring, trading and managing credit instruments. The credit and CDO (Collateralised Debt Obligations) team comprises more than 200 professionals. In 2006, Calyon substantially increased its trading and distribution capacity for plain-vanilla products in the secondary market. Structured product business levels continued to rise. The plain-vanilla products and structured products businesses were merged to provide clients with a single point of contact for the whole range. The business benefited from increased marketing and distribution capacity. It also benefited from the diversification in plain-vanilla products – loans, bonds and CDSs (Credit Default Swaps) on investment-grade, high-yield or emerging-market underlyings – and in structured products, with constant innovation in synthetic structures and firm growth in the cash CDO business. In 2006, Calyon was named CDO Arranger of the Year Europe by ISR. It was also one of the world’s top 10 bookrunners of global structured product CDOs (source: Asset Backed Alert – November 2006) Equity derivatives The equity derivatives team has 11 sites in Europe, the USA and Asia. It handles the trading, sale and arbitrage of equity derivatives, index derivatives, simple or complex structured products, warrants, certificates and convertible bonds. After a year of reorganisation in 2005, 2006 was dedicated to consolidating the global organisation, particularly through efforts to strengthen the quant, trading and structuring teams. CASAM, a joint venture between Calyon and Crédit Agricole Asset Management, continued its development with the acquisition of Ursa Capital LLC, a US firm specialising in alternative managed accounts. In commercial terms, initiatives launched in new countries in 2005 started to pay off in 2006. In particular, Calyon covered more client segments in all geographical zones and further diversified its offering across traditional products, exotic structured products and fund derivatives. 2005’s sharp improvement in performance continued into 2006 on the back of strong demand from institutional investors, particularly outside France. Brokerage CA Cheuvreux Cheuvreux is a European equity broker, and is developing its activities in institutional brokerage in the main European equity markets. Its range of services also includes execution in 18 European markets, corporate brokerage and intermediation on behalf of individual clients of the Credit Agricole Group. Cheuvreux’s sales and execution team serves around 1,100 international institutions. It benefits from independent research of recognised quality, covering stocks representing 85% of continental Europe’s market capitalisation. In 2006, Cheuvreux was ranked number 1 in Europe for French equities (source: Institutional Investor). SRI (socially responsible investing) research was fully integrated with traditional financial analysis in 2005. Cheuvreux’s SRI research had a top 5 ranking in continental Europe in 2006 (source: Thomson Extel). At the start of the year, Cheuvreux expanded its Eastern European execution capacity in Poland, Hungary and the Czech Republic. Calyon Securities’ US electronic equity brokerage platform was fully integrated with Cheuvreux’s global equity execution platform. As a result, Cheuvreux will be able to offer combined Europe/North America execution services. Two years after it was set up, the Corporate Brokerage business saw strong growth in 2006. Cheuvreux leads the market for management and share buybacks for Calyon - shelf-registration document 2006 French issuers, and also ranks second in liquidity contracts. (Source: Euronext) Primary equity The Global Equity Capital Markets unit focuses on equity issuance. CLSA CLSA is recognised as one of the best brokers in Asia for the quality of its research, topping the Bloomberg rankings. In 2006, Calyon played a key role in the successful Aéroport de Paris IPO with the support of the Crédit Agricole group, which placed around 40% of the shares offered with the public. It is an acknowledged expert in brokerage, investment banking and placings. CLSA has more than 900 professionals in 11 Asian markets including Japan, as well as in London and New York. Calyon was also joint bookrunner in Banco Espirito Santo’s capital increase in Portugal. Calyon Financial In hybrid securities, Calyon was joint bookrunner for Artemis Conseil’s issue of a one billion euro bond exchangeable into PPR shares. Calyon Financial is one of the world’s leading futures and options brokers. It offers direct execution services on the main electronic stock exchanges and on openoutcry markets for futures, options and commodities. It provides centralised clearing on a global scale. It also offers quantitative risk management advisory services and fundamental technical analysis. Calyon Financial operates in the world’s 16 leading financial centres, and strengthened its international coverage in 2006 by opening a new office in Frankfurt and a representative office in China. It deployed sales teams in Brazil and the Middle East to increase its emerging-markets presence. In 2006, Calyon Financial continued its development in a fast-growing market, with a 35% year-on-year increase in trading volumes. Altura, Calyon Financial’s joint venture with BBVA in Madrid, was named “Best Spanish Listed Derivatives Broker” for the second consecutive year (source: Risk magazine). Calyon also confirmed its expertise in employee savings, setting up operations for companies including ASF, Vallourec, Veolia and Schneider. Advisory In the French market, Calyon advised on 17 transactions with a total value of 71.5 billion euros. In particular, Calyon advised ASF on its 14 billion euro privatisation. In Europe, Calyon advised Arcelor in its defence against Mittal Steel’s 33 billion euro takeover bid, and advised Casino on the sale of its Polish business. It also handled several cross-border mandates, such as Seb’s acquisition of Chinese company Supor and Crédit Agricole S.A.’s purchase of Cassa di Risparmio di Parma, Banca Popolare Friuladria and Banca Intesa branches. Financing Investment banking Global loan syndication In 2006, Global Investment Banking continued its geographical expansion into emerging markets in order to increase its international scale: In EMEA (Europe, Middle East and Africa), Calyon has an integrated platform linking London, Paris and Madrid for origination, structuring, distribution and secondary market activities. - in Latin America, it increased staffing, with facilitating cross-border deals with the USA and Europe one of the main objectives; - in the United Arab Emirates, it set up a team in Dubai covering the Middle East and North Africa; - in Hong Kong, it put together a primary equity team specialising in derivatives. It ranked second among investment banks in France and Spain (source: Euromoney), 6th in advisory in the French market (source: Agefi) and 3rd for primary equity transactions in France (source: Thomson Financial). In 2006, the syndication market grew by 12% on the back of acquisition financing deals. Calyon was lead arranger for a large number of major transactions, including Louis Delhaize (France), BAA (Spain), Numericable (France), MTC (Koweit), Gazprom (Russia) and Grupo IMSA (Mexico). In EMEA, this gave Calyon third place among bookrunners, and kept it in the global top 10 (source: Thomson Financial). 12 - 13 PReSENTATION of CALYON Project finance Real estate financing Calyon is a world leader in advising on and arranging project financing. It has global coverage, through seven international teams within an integrated business line. It has specific expertise in natural resources, electricity, environment, infrastructure and public-private partnerships. Calyon’s real estate financing business operates in 15 countries and offers global structured financing solutions to real estate professionals. 2006 brought strong growth in infrastructure, as well as in public-private partnerships, which has become the leading segment of the non-recourse financing market. Calyon played a leading role in this market, with deals including Uejongbu (South Korea), North South Bypass Tunnel (Australia), Optimep (France), Vinci Park (France) and Birmingham M6 (UK). The advisory business also made progress, as shown by mandates from Gazprom, Alcan Aramco and Total. Calyon was the world’s leading arranger of project finance in 2006 (source: Dealogic). Aircraft and rail financing Calyon is a world leader in this sector, with more than 30 years’ experience. In 2006, Calyon financed around 100 aircrafts and organised the creation of one of China’s leading aircraft leasing companies: Dragon Aviation Leasing Company. Several of Calyon’s deals won awards in 2006, and Calyon was named “Aircraft Finance House of the Year 2006” by Jane’s Transport Finance. The business was also extended into the rail sector, and Calyon’s activities included the financing of new equipment for Ermewa. Shipping financing 2006 highlights included deals relating to the Citylife project in Italy, Colony Capital and Kingdom Hotels International’s acquisition of Fairmont Hotels & Resorts Inc in the USA, the acquisition of Hilton International by Hilton Hotels Corporation in the USA and the acquisition of Groupe Taittinger by Starwood Capital in France. In 2006, Calyon was ranked the leading real estate bank in France and Spain and number four worldwide (source: Euromoney). Export, trade and commodity finance Export finance Calyon is a world leader in export finance, ranking fourth among global mandated arrangers (source: Dealogic). In 2006, it increased its business capacity in New York and Asia. It led and structured deals worth 3.7 billion euros and was awarded several Deal of the Year Awards, by Global Trade Review for the Orascon Telecom Algeria transaction; by Global Trade Review and Trade Finance Magazine for the China Oil & Gas Fund transaction; and by Trade Finance Magazine for the MAV transaction in Hungary. Trade finance The trade finance business achieved a significant increase in revenues in 2006, with high growth rates in Europe, Japan and the Middle East. Local sales forces were set up in the USA and Brazil. Commodity trade financing Calyon finances commodity trading by major traders and producers, securing payment for goods flows in the energy, metals and soft commodities segments. Calyon is a world leader in shipping financing. With gross outstandings of more than 9 billion euros at end-2006, Calyon finances a modern and diversified fleet of more than 1,000 ships for an international shipowner client base. 2006 brought a downturn in the shipping market after two excellent years. Against this background, the shipping financing team continued to develop its activities in a highly competitive market, signing 90 new deals (three quarters as arranger or sole lender) with a total arranged value of more than 6.5 billion euros. In 2006, the business expanded into Singapore, supporting the Hong Kong unit and strengthening its international position. It benefited from an extremely busy and volatile market, which boosted trading and generated strong growth in business volumes and revenues. Structured commodity financing Structured commodity financing is mainly focused on oil, gas, non-ferrous metals and certain agricultural commodities. The service is aimed at commodity producers and exporters in emerging-market countries. Calyon - shelf-registration document 2006 Calyon is acknowledged as one of the world’s leading players in this business. It arranged or co-arranged deals worth 6.6 billion dollars in 2006. It also won a Deal of the Year Award for the Russal deal in Russia by Global Trade Review and Trade and Forfaiting Review. Energy and structured financing advisory Based on its success and experience in advising on project financing deals, in 2006 Calyon broadened its advisory activities to include all structured financing deals in the oil, gas, electricity, metals and infrastructure sectors. In association with Global Investment Banking, this department is also developing advisory services relating to financing and pre-financing through debt and/or capital, using existing expertise in this area. Telecoms This business saw further firm growth in 2006, due to Calyon’s involvement in financing acquisitions such as Softbank’s purchase of Vodafone Japan and the purchase of TeleDanmark by investment funds. Calyon was also involved in consolidation between cable operators in Europe (NTL in the UK, Ypso-Numéricable in France) and the USA (Time Warner Cable). Acquisition financing The Global Financial Sponsor Group (GFSG) was set up through a collaboration between the Corporate Relations and Global Investment Banking units. It is a crossdiscipline unit in charge of Calyon’s relationships with investment funds worldwide. Within GFSG, the Leveraged Finance Group handles LBO acquisition financing deals. 2006 was another record year for the LBO markets, both in terms of the number of deals and in the amount of capital raised. Calyon was Mandated Lead Arranger for a number of major deals: in France (Elior, Pages Jaunes, Picard, Europcar), Spain (BAA), Italy (Fiat Avio) and the UK (Iglo-Birds Eye). Once again, Calyon was ranked among the top 10 European players of the year by IFR magazine, while Thomson Financial ranked it no.8 in Western Europe. Corporate Banking Corporate Banking & Services (CBS) is in charge of commercial banking activities in France. Its range of products and services is supported by the expertise of Calyon’s specialist business lines and by the capacity of Credit Agricole’s branch network (regional banks and LCL) along with its specialist subsidiaries (lease financing, asset management, factoring). The French Regions unit has 19 branches, and works with Crédit Agricole’s Regional Banks in the fields of coverage, corporate banking and capital markets. It serves a range of medium-sized companies, local authorities and financial institutions in France. Banque Saudi Fransi Calyon owns a 31.1% stake in Banque Saudi Fransi, a leading universal bank in Saudi Arabia that accounts for around 11% of lending in the country. BSF put in an excellent performance in 2006, helped by growth in fee and commission income and a sharp rise in equity brokerage revenues. International private banking The international private banking provides individual investors with a comprehensive wealth management service. Within Calyon, it provides customers with broad international coverage through its operations in Brazil (CA Brasil Private Capital Management), Spain (Calyon Espagne), Luxembourg (Crédit Agricole Luxembourg and its Belgian subsidiary CAGP), Monaco (Crédit Foncier de Monaco) and Switzerland (Crédit Agricole Suisse with its subsidiaries and branches in the Bahamas, Singapore, Lebanon, Uruguay and Hong Kong). 2006 brought solid organic growth. Assets under management increased to 54.1 billion euros at year-end and new operations were opened in Hong Kong, Lebanon and Uruguay. 14 - 15 PReSENTATION of CALYON 2006 key income statement data for Calyon’s main subsidiaries (contribution to consolidated net income) In millions of euros CA Suisse CLSA Net banking income 380 433 309 325 Gross operating income 167 143 44 126 Net income 121 91 25 85 * Group share accounted for using the equity method CA Cheuvreux Calyon Financial Banque Saudi Fransi 157* Calyon - shelf-registration document 2006 2 Corporate governance and internal control 18Chairman’s report to the annual general meeting of shareholders on 14 May 2007 18 22 30 Statutory Auditors’ report 31 Executive officers’ and directors’compensation 31 34 41 Corporate governance Internal control procedures Compensation paid to Executive Officers and Directors Offices held by Executive Officers and Directors Executive Committee 16 - 17 Corporate governance and internal control Chairman’s report to the annual general meeting of shareholders on 14 May 2007 as required by the “Financial Security Act” 2003-706 of 1 August 2003 (Code de commerce, article L 225-37; Code monétaire et financier, article L 621-18-3) To the Shareholders, In accordance with article L. 225-37 of the Code de Commerce and the principles and standards in force within Credit Agricole S.A. and the Credit Agricole Group as a whole as regards corporate governance and internal control, this report is presented alongside the management report drawn up by the Board of Directors, in order to provide you with information on the way in which the work done by the Board of Directors is prepared and organised, and on the internal control procedures implemented by Calyon. This report was submitted to the Board of Directors on 28 February 2007, and was prepared on the basis of work including that done by the heads of Periodic Control, Permanent Control and Compliance, the office of the Corporate Secretary and the Finance Department. Corporate governance By way of reference, this section contains information about the composition of the Board of Directors and the Management Board, their terms of office and compensation, as shown on pages 31 to 40 of this “Corporate governance and internal control” chapter. The preparation and organisation of work done by the Board of Directors comply with laws and regulations currently in force, the Company’s Articles of Association, the internal rules applying to the Board of Directors and internal directives. 1 - Board of Directors 1.1 General presentation At 31 December 2006, Calyon’s Board of Directors was made up of seventeen voting directors and one nonvoting director, Henri Moulard. Fifteen of these directors were appointed by shareholders in the general shareholders’ meeting and two were elected by employees. The company’s Articles of Association state that the Board of Directors shall be made up of between six and twenty directors, appointed for three-year terms. At least six of these directors shall be appointed by shareholders in the general shareholders’ meeting, and two elected by employees. Directors must own at least one share each in the Company. The age limit for directors is sixty five, although as an exceptional measure the term of office of a director who has reached the age limit may be renewed for a maximum of five subsequent one-year periods, provided the total number of directors aged sixty five or over does not exceed one-third of the number of directors in office. In 2006, Bernard Lolliot was appointed director to replace Jean-Yves Hocher, who resigned with effect from 1 January 2006. The functions of the Chairman, Jean Laurent, are separate from those of the Chief Executive Officer, Edouard Esparbès. The Management Board also includes deputy Calyon - shelf-registration document 2006 CEOs Yves Perrier and Marc Litzler. The terms of office of Management Board members were renewed in November 2006. Jean Laurent and Edouard Esparbès are both responsible officers in the sense of French banking regulations (CECEI rules). 1.2 - Modus operandi of the Board of Directors 1.2.1 - Board meetings The Articles of Association state that the Board shall meet whenever the interests of the Company so require, and that meetings shall be called by the Chairman or by any person authorised to do so by the Board of Directors. If the Board has not met for more than two months, the Chairman may be asked by at least one third of the Board members to call a meeting in order to consider a predetermined agenda. 1.2.2 - Powers of the Board of Directors The powers of the Board, as defined in article L.225-35 of the French Commercial Code, are set out in the Board’s internal rules, as follows: Under the duties given to it by law and taking into account the powers granted to the Management Board, the Board of Directors defines the Company’s strategies and general policies, and approves – on the basis of proposals by the Chief Executive Officer and/or the Deputy Chief Executive Officers, as applicable - the means, structures and plans designed to implement the strategies and general policies it has defined. It makes decisions on all matters concerning the governance of the Company referred to it by the Chairman and the Chief Executive Officer. In addition to the aforementioned powers and those conferred upon it by law, the Board of Directors takes decisions, on the basis of proposals by the Chief Executive Officer and/or any of the Deputy Chief Executive Officers: - relating to transactions involving: • t he creation, acquisition or sale of any subsidiaries or holdings, • the opening or closure of any branches abroad, • the acquisition, sale, exchange or transfer of ongoing businesses or business assets. that may result in an investment of over 50 million euros; -o r the provision of security to guarantee the Company’s commitments (including those not relating to transactions on the financial markets), when the security concerns Company assets with a value of more than 50 million euros. The Board approves proposals by the Chief Executive Officer or Deputy Chief Executive Officers relating to the purchase or sale of real estate made in the name and on behalf of the Company, when the amount involved exceeds 30 million euros. 1.2.3 - R eferral, information and decision-making procedures An internal directive describes these procedures and the conditions under which the Board operates. The agenda for each Board meeting is drawn up by the Board Secretary fifteen days before the scheduled date of the meeting. The Board Secretary sends information to the Directors in a timely manner, so that they can make an informed and useful contribution to the meeting. Head office departments or branches needing to refer matters to the Board or pass information on, in compliance with the predefined calendar of Board meetings, must inform the Secretary of the Board of Directors of the matters to be discussed, via the head of the relevant business line and in a timely manner. Proposals that are essentially legal in nature: - in view of the issues involved, their complexity or innovative nature, - or that concern the calling of a general meeting of shareholders’, a change to the composition of the Board of Directors or the Management Board, an amendment to the Memorandum and Articles of Association or a change in the capital, as well as decisions relating to authorisations to operate as a credit institution or investment services provider, shall be submitted by the relevant departments and prepared in conjunction with the Central Legal Department at least one month before the meeting is held. In accordance with articles L. 225-38 et seq. of the Code de Commerce, the Board of Directors: - authorises “regulated” related-party agreements prior to their signature: the directors and managers concerned by the agreement do not take part in the voting; these agreements are the subject of a special report drawn up by the independent auditors and provided to shareholders in the general meeting of shareholders; - t akes note of other significant agreements concerning “day to day business operations entered into under 18 - 19 Corporate governance and internal control normal conditions”, the list of which is also sent to the statutory auditors and made available at the general meeting of shareholders. For all other Board activities and decisions that are essentially operational in nature, including the reports required by laws and regulations or memoranda prepared by the Board on specific issues or the implementation of strategies defined by the Board, the relevant departments must ask the Board Secretary to include these matters on the agenda and then forward to the Corporate Secretary, at least ten days before the Board meeting, the corresponding referral and information memoranda together with all necessary related documents. These memoranda must include a brief, clear description of the operation, the amount at stake for the Company and the Group, the advantages and likely outcome within the framework of the Company or Group strategy, the timetable for decisions and action, as well as any legal or tax opinions that may have been requested from internal or external advisers. They must also contain the wording of the proposed resolution. A guide for directors, accompanied by compliance recommendations, has been distributed within the Credit Agricole S.A. group. 1.2.4 - Assessment of the Board’s performance The Board of Directors met five times according to the established schedule in 2006: on 17 January, 1 March, 16 May, 31 August and 21 November. Prior to each meeting, documentation was sent to Directors as early as possible to ensure that they were properly informed. Meetings dealt mainly with the following subjects: - t he full-year, half-year and quarterly financial statements, after examination by the Audit Committee, - approval of the annual budget, -p resentation of the annual internal control and risk management and monitoring report, and the report by the officer responsible for controlling investment services, -u pdates on the risk situation - presentation of global stress scenarios and developments of the Basel II project at Calyon, - information on the internal control and compliance system, - compliance updates, -p resentation of letters from the Commission Bancaire and other supervisory authorities, -m onitoring reports on the activities of certain subsidiaries, affiliates and business lines, - list of significant agreements signed or executed in 2005, - delegations of powers, particularly as regards bond issues, - remuneration of the Management Board. As part of the Board’s performance assessment, a document was sent to the Board in its January 2007 meeting setting out the main themes covered in Board meetings in 2006, along with certain Board organisation information. Board members were heavily involved in the work done by the Board. The average attendance rate was more than 93%. The average age of directors is fifty-eight. The Board considers that Mr Alphandery, Mr Comolli, Mr Dangeard and Mr Martin are independent directors in accordance with the recommendations of the AFEP/ MEDEF report. 2 - C ompensation Committee and Audit Committee Members of these committees are appointed by the Board of Directors in accordance with the Board’s internal rules. Compensation Committee The Compensation Committee consists of three designated Board members: -G eorges Pauget, Chairman, appointed on 17 January 2006, - Pierre Bru, appointed on 16 November 2004, -a nd Didier Martin, an independent director, in office since 4 September 2002. The Compensation Committee meets whenever necessary and whenever requested by the Chairman of the Board of Directors. Its role is to make recommendations to the Board of Directors concerning the ordinary and special compensation paid to members of the Board and its Chairman, as specified in the Articles of Association, as well as fees, benefits in kind and other pecuniary benefits granted to the Chief Executive Officer and Deputy Chief Executive Officers. It is also responsible for the information in the management report relating to the compensation received by corporate officers. The Committee met in March 2006. Calyon - shelf-registration document 2006 On the basis of its proposals, the following principles and rules have been adopted by the Board of Directors regarding the compensation of corporate officers: -a ttendance fees are distributed among directors on the basis of their attendance at Board meetings and at Audit and Compensation Committee meetings, and a fixed sum is paid to the Chairman of the Board; attendance fees are set according to the following rules: • t he amount of attendance fees paid by Calyon to members of the Board of Directors is calculated according to their attendance at Board meetings (3,000 euros per meeting); • members of the Compensation Committee and the Audit Committee receive an annual fee for their participation in these Committees (4,000 euros and 15,000 euros respectively); • an annual fee of 20,000 euros is paid to the Chairman of the Board of Directors; - compensation of Management Board members consists of a fixed salary and variable remuneration. The fixed component is determined by reference to market practices; the variable component is capped and is based on quantitative and/or qualitative criteria: • quantitative criteria may relate to: - the attainment of earnings objectives at Calyon (gross operating income etc.) and Crédit Agricole S.A. (net banking income, earnings per share etc.); -o r the performance of a Calyon business line; these quantitative criteria may determine the majority of the variable component, or may have equal ranking with qualitative criteria. • pre-determined qualitative criteria relate in particular to efforts to implement Calyon and the Crédit Agricole Group’s strategic plan. Compensation of Calyon’s CEO, Edouard Esparbès The fixed portion of the CEO’s compensation is set with reference to market practice for CEO compensation. The variable portion is based on two sets of criteria: - quantitative criteria (50% weighting in 2006) relating to Crédit Agricole S.A. financial performance indicators (20%) and an indicator representing Calyon’s financial performance (30%); - qualitative criteria (50% weighting in 2006), based on the general running of Calyon and the CEO’s contribution to resolving issues of general interest for the Group. Compensation of Calyon’s Deputy CEO in charge of Structured Finance, International and the following support functions: Organisation and Processing, Distressed Assets, Risks and Permanent Controls, Yves Perrier The fixed portion of the deputy CEO’s compensation is set with reference to market practice for deputy CEO compensation. The variable portion is based on two sets of criteria: - quantitative criteria (50% weighting in 2006) relating to Crédit Agricole S.A. financial performance indicators (20%) and an indicator representing Calyon’s financial performance (30%); - qualitative criteria (50% weighting in 2006) based on the officer’s supervision of International and ability to promote teamwork among the Management Board. Compensation of Calyon’s Deputy CEO in charge of Capital Markets and Brokerage, Marc Litzler The fixed portion of the deputy CEO’s compensation is set with reference to market practice for deputy CEO compensation. The variable portion is based on the performance of capital markets activities. Details on the components of corporate officers’ compensation are provided in this “Governance and Internal Control” chapter, on page 31 to 33. The Group’s key executives are covered by the supplementary pension plan, which cannot be individualised. Beneficiaries accrue benefits under this plan only if they remain within the Group until retirement age. Audit Committee Internal rules state that the Audit Committee shall consist of at least four people, designated by the Board of Directors from among the voting and non-voting directors, for their full term of office, and shall contain at least two members without other links to the Credit Agricole Group. The Chairman of the Committee is responsible for presenting an overview of works carried out within the Audit Committee to the Board of Directors. Its members are: -H enri Moulard, non-voting director, member of the Committee since November 2003, appointed Chairman on 1 April 2004, - Edmond Alphandery, independent director, and Philippe Geslin, both appointed in September 2002, Jean-Paul Chifflet, appointed on 16 November 2004, and Bernard Lolliot, appointed in March 2006. 20 - 21 Corporate governance and internal control Pursuant to Board rules, the Committee meets as often as necessary, and at least once every six months. Meetings shall be convened by its Chairman or by the Chairman of the Board of Directors. The Committee’s role is to examine and assess the internal control system, become acquainted with the activities of the statutory auditors and Internal Control officers, review drafts of annual and half-year parentcompany and consolidated financial statements, advise on the renewal or appointment of the statutory auditors, and examine any questions of a financial or accounting nature referred to it by the Chairman of the Board or the Chief Executive Officer. It can make recommendations on these matters and can also instruct the Chief Executive Officer to organise internal or independent audits, after having informed the Chairman of the Board of Directors. The Audit Committee met six times in 2006. It examined the annual, half-year and quarterly consolidated financial statements before presenting them to the Board. It monitored movements in credit risk reserves, market risks and structural interest-rate, exchange-rate and liquidity risks. The Committee was involved in the reappointment of the statutory auditors in 2006. The operating methods of the internal control system were discussed regularly: - review of the Periodic Control audit plan, - compliance updates, - implementation of permanent control. The Committee examined reports relating to 2005: the report on internal control and the report on risk measurement and surveillance, presented to the Commission Bancaire, and the report by officer responsible for controls on investment services, presented to the Autorité des Marchés Financiers. Detailed presentations were made on certain crossdiscipline themes such as the implementation of Basel II regulations within the Group, the organisation of processing and IT systems. The Committee heard reports by the statutory auditors whenever they examined financial statements. It also heard the Executive Committee member in charge of the Finance Department and the office of the Corporate Secretary, the Chief Financial Officer and the group Financial Controller, and various internal control officers (periodic control, risks and permanent control and compliance). The Chairman of the Audit Committee reported to the Board at each Board meeting. 3 - L imitations placed on the powers of the Chief Executive Officer by the Board of Directors The Board rules stipulate that in the performance of his duties the Chief Executive Officer is required to comply with the internal control rules that apply within the Crédit Agricole group, along with the strategies and decisions conferred by the law or by Board rules on the Board of Directors or the general meeting of shareholders. They also stipulate that the Chief Executive Officer is required to refer “all significant transactions concerning the Company’s strategic decisions or that may affect or alter its financial structure or scope of activity” to the Board of Directors, requesting instructions. In addition, as mentioned in point 1.2.2., as a purely internal limitation that is not binding on third parties, the Chief Executive Officer is required to obtain prior authorisation from the Board of Directors or its Chairman before entering into certain types of transactions. Internal control procedures Définition of the internal control system Within the Credit Agricole Group, the internal control system is defined as all procedures aimed at controlling activities and risks of all kinds and enabling transactions to be carried out properly, securely, and efficiently. This definition and the resulting principles are consistent with the work done by the financial market group under the guidance of the Autorité des Marchés Financiers. Like any internal control system, however, this system and these procedures have limits, relating in particular to inadequacies in procedures or IT systems, technical problems and staff shortcomings. Its main objectives are as follows: -a financial performance objective, to ensure effective and proper use of Group assets and resources and to protect against the risk of loss, - an information objective, to provide exhaustive, accurate and timely information for decision-making and risk management purposes, - a compliance objective, in respect of internal and external rules and regulations, - an objective to prevent and detect fraud and errors, Calyon - shelf-registration document 2006 -a n objective to compile accurate and exhaustive accounting records and prepare reliable and timely accounts and financial statements. - t he procedures of the various departments within Calyon and its subsidiaries and branches. Calyon, which is a wholly owned subsidiary of Credit Agricole S.A., complies with the rules laid down in French and international regulations and with the rules and regulations introduced by its parent company. 2-O rganisation of the internal control system 1-R eference documents relating to internal control 1.1 - Laws and regulations 2.1 - Basic principles The organisational principles and components of Calyon’s internal control systems, which are common to all Crédit Agricole Group entities, are as follows: The internal control procedures implemented by Calyon comply with the laws and regulations governing French credit institutions and investment companies, and namely with: - - the Code Monétaire et Financier, - regulation 97-02 issued by the French Banking and Financial Regulatory Committee, which defines internal control. This regulation requires the implementation of a risk measurement and control system within institutions covered by the regulation, as well as information procedures and procedures for assessing the conditions under which internal control is carried out. 2.2 - Oversight Calyon’s internal control also takes into account the following international reference documents: complete coverage of activities and risks, responsibility of all persons involved, clear definition of tasks, separation of commitment and control functions, formal and up-to-date delegations of powers, formal and up-to-date standards and procedures, especially for accounting and information processing, - systems for measuring risks and performance, - systems for monitoring and controlling risk, - a control system that includes permanent controls (first and second-degree) and periodic controls (thirddegree: Group Internal Control and internal audits), as described below. - the Basel Committee’s recommendations, - t he applicable laws and regulations in the countries in which the Group operates. In order to ensure that the internal control system is consistent and efficient and that the above-mentioned principles are applied by all entities within the scope of Calyon’s internal control system, three separate persons responsible for Periodic Control (Control and Audit) Permanent Control and Compliance Control have been appointed. 1.2 - The main internal reference documents are: An Internal Control Committee, chaired by a member of the Management Board, is responsible for: -p rocedural memo 2006-11 on “the organisation of internal control within the Credit Agricole S.A. group”, - all documents issued by Crédit Agricole S.A. that are permanent, regulatory (external regulations and rules internal to the group) and mandatory, relating in particular to accounting (Crédit Agricole chart of accounts) and financial management, - the Crédit Agricole group’s Code of Conduct, - a set of procedures (intranet database of governance texts, maintained by Calyon’s office of the Corporate Secretary) relating to compliance, risks and permanent controls, particularly, - directive 99-01 on internal control within the Calyon group (currently being updated), along with directives issued in 2004 concerning internal control committees, internal control correspondents and operational risk managers, - r eviewing internal control procedures and the control system implemented, - deciding on corrective action to be taken to remedy weaknesses identified during audits, either in internal control reports or as a result of problems that have occurred, - monitoring the implementation of action following internal and external audits, - t aking any decisions necessary to make up for weaknesses in internal control. Its members are Credit Agricole S.A.’s Head of Group Internal Control, Calyon’s Head of Control and Audit, the Chief Financial Officer, the Head of Risk and Permanent Control and the Chief Compliance Officer. They may be joined by the heads of other Calyon departments in view of the matters under discussion. 22 - 23 Corporate governance and internal control The committee met four times in 2006. Local internal control committees have also been set up in several subsidiaries and branches, both in France and abroad. 2.3 - Board of Directors The Board of Directors is kept informed of the organisation, activities and results of internal control and of the main risks faced by the Bank. It approves the general organisation of the Bank and of its internal control system. In addition to regular information updates, the following reports relating to 2006: -a report on the conditions under which the internal control procedures were implemented; -a report on the measurement of risks and performance; -a report by the head of compliance in investment services, concerning the organisation of this function, its tasks and any observations and measures taken; will be presented in the Board’s May 2007 meeting. The Audit Committee has the task of examining and evaluating the internal control system and becoming acquainted with the internal control work done by internal control officers. (see section I. 2/ “Audit Committee”). 2.4 - Management Board The executive body is directly involved in the organisation and operation of the internal control system. It ensures that risk strategies and limits are compatible with Calyon’s financial situation (level of shareholders’ equity, results) and the strategies defined by the governing body. The executive body defines the group’s general organisation and ensures that it is implemented in an efficient way and by competent individuals. In particular, it clearly assigns roles and responsibilities in the area of internal control and allocates the appropriate resources to the system. It verifies that risk identification and measurement procedures appropriate to Calyon’s activities and organisation are adopted. It also verifies that it regularly receives the key information produced by these systems. It ensures that the internal control system is continuously monitored, to verify its suitability and efficiency. It is informed of the main problems identified by internal control procedures and the corrective measures proposed. 2.5 - S cope and global organisation of Calyon’s internal control systems In accordance with the principles applied within the Group, Calyon’s internal control system applies to its branches and subsidiaries in France and other countries, irrespective of whether they are under its sole control or joint control. Each entity within the Calyon group applies this principle to its own subsidiaries, thus creating a pyramidal internal control structure and reinforcing consistency between different Group entities. In this way, Calyon ensures that it has an adequate system within each of its risk-bearing subsidiaries, and that activities, risks and controls are identified and monitored on a consolidated basis within these subsidiaries, particularly as regards accounting and financial information. 3-B rief description of internal control and risk management procedures implemented within the group The internal control system is based on three levels of controls, which distinguish permanent control from periodic control: - Permanent control is carried out: •a t the first degree: on an ongoing basis, at the initiation of a transaction and during the transaction validation process, by operators themselves, by the unit’s hierarchy or by automated transaction processing systems, • at the second degree (first level), by staff separate from those who initiated the transaction and who may carry out operational activities, • at the second degree (second level) by staff exclusively working in at the final level of specialist permanent control with no authorisation to make commitments involving the taking of risk (credit or market risk control, accounting control, compliance control etc.). - Periodic control (third-degree) covers occasional onsite audits of accounting records relating to all of the company’s activities and functions by Group Control and Audit. 3.1 - First-degree controls First-degree controls are carried out by each employee on the transactions he/she handles, by referring to the applicable procedures. These controls concern front office units operating within business lines or divisions (Structured Finance, Capital Markets, Brokerage, Investment Banking, Distressed Assets, Private Banking). Calyon - shelf-registration document 2006 The controls essentially consist of operational checks by operators or account executives on their positions and limits. At the local level, the head of the entity is responsible for first-degree controls, while the head of the business line is responsible at central level. The organisation of risk and permanent control activities within Calyon is integrated into the Credit Agricole S.A. group’s Risk and Permanent Control business line. This business line combines all head office risk functions and activities, as well as local and regional officers in the international network. Operating staff are expected to remain vigilant at all times with regard to the transactions they handle. This vigilance should take the form of compliance with all procedures intended to ensure the procedural compliance, security, validity and completeness of transactions. Each line manager must check, for the activities for which he/she has responsibility, that his/her staff comply with the rules and internal procedures for processing transactions. Calyon holds certain powers in managing its risks. Any cases outside the scope of its powers, as well as certain significant risk strategies, are validated by the Group Risk Committee. 3.2 - Second-degree controls - first level As well as having responsibility for the administrative processing of all transactions, back offices perform checks on the activities of the front offices during the recording and execution of transactions, namely by comparing data in front office databases with back office data and information provided by the counterparties. These controls are coordinated locally by the entity’s head, via the Chief Operating Officer or the officer responsible for administration or finance. 3.3 - Second-degree controls - second level These controls are carried out centrally by specialised departments: 3.3.1 - Risk and Permanent Control Division The Risk and Permanent Control Division (RPCD) is responsible for the management of risks and permanent controls within Calyon. The purpose of this division is to control credit risks, market risks, country risks and operational risks. However, structural risks are managed by the Finance Department. To control these risks, it oversees the Group’s commercial development in order to minimise risk-related costs relating to the activities of the different business lines, entities or units. In addition, the RPCD is in charge of monitoring the permanent risk control system for the whole of Calyon. The RPCD is also in charge of implementing Basel II for all of Calyon. Calyon’s Head of Risk and Permanent Control reports to the Crédit Agricole S.A. group’s Head of Risk and Permanent Control and to Calyon’s Management Board. He is a member of the Bank’s Management Committee. The Head of Risk and Permanent Control is also responsible for permanent control within the meaning of regulation 97-02 as amended. Corporate governance is structured primarily around the following bodies: -a Counterparty Risk Committee, which decides on individual risks, - a Market Risk Committee, which defines applicable limits and supervises positions taken, - t he Strategy and Portfolio Committee which, for each business line and each geographical unit, defines and decides the main guidelines concerning the business development framework from the risk point of view, - the Sensitive Cases Committee, which decides on the classification of sensitive cases and doubtful customers, and proposes reserves that are validated by the Management Board. Credit risk is subject to a decision-making, monitoring and reserve-allocation process, in accordance with the internal rules of the Credit Agricole S.A. Group. Credit risk Any counterparty or group of counterparties is subject to limitations within the framework of specific procedures. The decision-making process requires two authorised front-office signatures (one relating to analysis of commitments, the other being that of the Chairman of the relevant Committee), as well as the independent opinion of the RPCD. If the RPCD’s opinion is negative, the decision-making power is passed on to the Chairman of the Committee immediately above. 24 - 25 Corporate governance and internal control Calyon has an internal rating system based on a fifteenpoint scale and methodologies adapted to each major type of counterparty. Credit decisions are subject to risk strategies that set the main guidelines (target customer base, types of approved products, total budgets and expected unit values etc.), which each geographical unit or business line must apply to its activities. When a case is considered to be outside the framework of the risk strategy in force, intermediary authorisations do not apply and a decision can only be made at Management Board level (CRC). The RPCD is responsible for monitoring commitments. It identifies, as soon as possible, assets that may deteriorate and initiates the most suitable measures to protect the Bank’s interests. The process for monitoring receivables is enhanced by a system of portfolio and sub-portfolio analyses on groupwide business line, geographical or sector basis. Analysing concentrations and, if applicable, recommendations for the reorganisation of the portfolio are an integral part of this exercise. In addition, portfolio reviews are organised periodically for each profit centre in order to verify that the portfolio complies with the risk strategy in force. The rating of certain counterparties under review may be adjusted at this time. Sensitive cases and major risks are monitored every quarter. For other risks, commitments and authorisations are reviewed annually. The adequacy of the level of reserves in relation to risk is assessed every quarter by the Management Board, on the proposal of the RPCD. Country risk Country risks are subject to an assessment and monitoring system based on a specific ratings methodology. Country ratings are updated quarterly. Each country with a rating below the threshold set in the Bank’s procedures is subject to limitations that are reviewed yearly. This approach also involves stress tests, with the aim of assessing the impact of unfavourable macroeconomic assumptions and quantifying the risks to which the Bank may be exposed in an unfavourable climate. Market risks Market risks are monitored using several approaches, including the Value at Risk (VaR) or one-day potential loss method with a confidence interval of 99%, as well as specific indicators for each market. The VaR-based market risk analysis is enhanced by looking at three types of aggregate stress scenarios: historical stress, hypothetical stress and adverse stress. Requests for market limits are examined to allow the setting of aggregate and operational limits (decisionmaking processes), quantitative limits (risk levels), qualitative limits (authorised instruments) and limits based on acceptable loss levels (alert thresholds). Operational risks Operational risk management relies mainly on a network of Permanent Control correspondents coordinated by the RPCD. Operational risks are monitored for each business line and each region, which ensures the reporting of losses and incidents, as well as their analysis by Internal Control Committees. Each quarter, the RPCD produces an operational risk scorecard showing movements in operational riskrelated costs and associated key events. The mapping process that began in 2004 continued in 2006. Mapping now covers all business lines at head office, the international network and brokerage and private banking subsidiaries. As regards the management of “essential” outsourced services, outsourcing contracts are being updated and control procedures are being improved. Implementation of Basel II Calyon continued to prepare for the implementation of the new Basel II regulations through a project structure defined in 2005 and spearheaded by the RPCD. Corporate governance is the responsibility of Steering Committees chaired by a member of the Management Board, and of Banking and Systems Project Committees, in concert with Credit Agricole S.A. through specific committees. Based on an audit of the whole Group system, Calyon implemented an action plan in 2006 covering all aspects of the project: -a s regards credit risk, the action plan covered methods, data quality and the standardisation of infor- Calyon - shelf-registration document 2006 mation systems in preparation for the adoption of the advanced Internal Ratings-Based approach (IRB) for the most significant portfolios; - as regards operational risk, the aim of the action plan is to use the advanced risk measurement approach (AMA). These two systems will be examined by the Commission Bancaire with a view to their validation in 2007. 3.3.2 - Finance Department Internal control system for accounting and financial information Roles and responsibilities related to the preparation and processing of accounting and financial information Calyon’s Finance Department is responsible for preparing the accounting and financial information of the Crédit Agricole group’s corporate and investment banking business. Within the Finance Department, Group Financial Control prepares Calyon’s parent-company and consolidated financial statements and sends to Crédit Agricole S.A.’s Accounting and Consolidation Department the information needed to prepare the Crédit Agricole Group’s accounting and financial information. The Finance Departments of consolidated entities are also responsible for preparing their financial statements and sending them to Group Financial Control. A number of people working within entities have responsibilities for preparing accounting and financial information. These responsibilities include the following: -A ctivity Monitoring Teams produce management results independently from front office teams; - back office teams check the validity of transactions and related accounting entries, and monitor payments; - Finance Departments (and decentralised accounting teams) reconcile management results with accounting results. An accounts control charter defines the roles of the various players and the permanent controls for which they are responsible. Procedures for the preparation and processing of accounting and financial information The Calyon group applies the Crédit Agricole Group’s accounting policies. The accounting treatment of complex instruments and transactions is subject to prior analysis by the Finance Department’s accounting standards team. Published financial information is based on accounting data and management data produced by two separate systems. Accounting data Each Calyon group entity produces a quarterly consolidation package, which feeds into the accounting consolidation system. The accounting consolidation system is common to the Crédit Agricole group, and is owned by Crédit Agricole S.A. Instructions are disseminated by Group Financial Control to entities’ finance departments, specifying the type of information to be collected, particularly with a view to preparing the notes to the consolidated financial statements. In 2006, as part of the Crédit Agricole Group’s 2006-2008 accounting project, Group Financial Control took steps to improve consolidation processes. Calyon also started to roll out a new accounting platform in certain international entities, allowing the standardisation of processes for preparing and processing financial information. This roll-out will continue in 2007. Management data Each entity reconciles the main items of its management results with the intermediate income statement balances produced from accounting data. Group Financial Control checks that the sum of business-line results equals the sum of entity results, which must in turn be equal to the Calyon group’s consolidated results. This check is made easier by the fact that the analytical unit (profit centre) is integrated within the entities’ accounting information system. Management data are prepared using calculation methods that ensure they are comparable over time. If reported information is not taken directly from the accounting information system, its sources and calculation methods are generally mentioned to make it easier to understand. Description of the accounting permanent control system Accounting permanent control is intended to provide adequate protection against the major risks that may damage the quality of accounting and financial information, presented below: - c ompliance of data with laws, regulations and Crédit Agricole group standards; - reliability and accuracy of data, allowing a true and fair view of the results and financial position of Calyon and entities within its scope of consolidation; - security of data preparation and processing methods, limiting operational risks with respect to Calyon’s commitments regarding published information; - prevention of fraud and accounting irregularities. 26 - 27 Corporate governance and internal control In 2006, Calyon reorganised its accounting permanent control system. The aim was to ensure that controls involved in managing accounting and financial information risks were well designed and worked as required. 3.3.4 – Compliance Calyon’s CEO receives periodical progress updates on the work being done to set up the accounting permanent control system. Compliance activities are carried out systematically at the business line, branch and subsidiary levels in France and abroad. Relations with statutory auditors The Chief Compliance Officer reports hierarchically to the Chief Executive Officer of Calyon and functionally to Credit Agricole S.A.’s compliance department. Assisted by a Head of Compliance and a Head of Financial Security, the Chief Compliance Officer also supervises the heads of compliance in the group’s various branches and subsidiaries. In 2006, new compliance manuals were distributed to staff, further training sessions were held and the product listing project was completed. In accordance with professional standards, the Statutory Auditors carry out the audit work on published accounting and financial information that they deem appropriate: -a udits of individual financial statements and consolidated financial statements, - limited review of half-year consolidated financial statements, - r eview of financial information released. As part of their statutory assignment, the Statutory Auditors present Calyon’s Board of Directors with the conclusions of their work. 3.3.3 - Information Security and Continuity Division The Information Security and Continuity Division (ISEC) is independent of the IT Processing Department. It has the resources to carry out permanent controls on information security and business continuity. As regards the security of IT systems, ISEC defines the rules and co-ordinates the security system, which involves a complete annual assessment of the system in terms of compliance with rules. It co-ordinates efforts to maintain an adequate level of security both in France and abroad. Internet systems are covered by large-scale specific controls. ISEC also carries out global co-ordination of business continuity plans across the group as a whole. Business continuity plans are evaluated and enhanced on an ongoing basis. A number of tests were carried out in 2006, both in France and abroad. Substantial resources are allocated to maintaining business continuity capacity in France and abroad, as closely as possible to business line needs. ISEC uses a network of correspondents and reports on Calyon’s security levels to a bimonthly committee formed to examine the security of information and business continuity plans, chaired by a member of the Executive Committee. Calyon’s Compliance organisation helps ensure that its operations and staff comply with laws and regulations, professional standards and practices and instructions given by the supervisory or executive body. Calyon’s compliance work was affected by several regulatory and legislative texts published in 2006. New procedural memos were issued and organisational measures were prepared to meet these new regulatory requirements. A monitoring system is being set up to meet regulatory requirements relating to market abuse. 2006 also saw the start of work to prepare for MIFID (Markets in Financial Instruments Directive), which is scheduled to come into force on 1 November 2007. 3.4 - Third-degree controls Group Internal Control and the internal audit teams that report to it have the responsibility for periodic controls on all Group entities. They do not have any responsibility for or authority over the units they audit. 3.4.1 - Group Internal Control Calyon’s Group Control and Audit, which comprises 50 inspectors, is an integral part of the Group’s Control and Audit division. Calyon’s Head of Group Control and Audit, who is in charge of periodic control at Calyon, reports hierarchically to the Head of Group Control and Audit at Credit Agricole S.A. and functionally to the Chief Executive Officer of Calyon. Group Control and Audit is responsible for ensuring that the internal control system within Calyon and its subsidiaries is consistent and efficient. Its assignments within audited entities include ensuring compliance with external and internal rules, ensuring the suitability of all types of systems for risk measurement and monitoring, and checking the reliability of accounting information, the quality of risk management, and the Calyon - shelf-registration document 2006 reliability and completeness of risk measurement information and systems. It carries out onsite checks of records concerning all business lines and the support functions of Calyon Group entities in France and abroad. In doing this, it: - performs global audits of Group entities; - c arries out thematic audits with the aim of evaluating the risk control and monitoring system; - carries out specific checks on activities organised in the form of international product lines. These audits form part of the annual audit plan, approved by Calyon’s Management Board and Credit Agricole S.A. Group Control and Audit. The conclusions and recommendations resulting from studies conducted by Group Control and Audit are communicated to Calyon’s Management Board, Credit Agricole S.A.’s Management Board and Credit Agricole S.A. Group Control and Audit. Half-yearly formal follow-ups are carried out by internal audit teams on audits carried out by internal and external internal control bodies (supervisory authorities or audit firms). For each recommendation made as a result of an audit, this system ensures that the planned corrective action is taken in accordance with a predetermined timetable, established according to priority. In addition, representatives from Group Control and Audit regularly attend local internal control committee meetings. These committees deal with permanent controls, the implementation of the enhanced compliance control programme, audits carried out and audit’s monitoring of recommendations made by Group Control and Audit and the supervisory authorities. 3.4.2 – Internal audit teams 130 people worked in the group’s internal audit units at end-2006. Regional or subsidiary audit managers are responsible for coordinating the audit teams in their area. The activities of these managers have been coordinated by a colleague of the Head of Group Control and Audit. The local audit units’ duties consist of: -a uditing the quality of internal control, processes and the regulatory compliance of operations throughout the entity, according to a three-year audit cycle; - carrying out occasional audits when requested by the Head of the entity and/or by Group Control and Audit; - checking that its recommendations and those made by Group Control and Audit or external audit bodies, particularly supervisory bodies, are implemented; - r eporting to Group Control and Audit on their activities. Each audit unit regularly identifies risk areas, on the basis of which it prepares an annual audit plan as part of a multi-year cycle, which must be approved by Group Internal Control. The Chairman of the Board of Directors 28 - 29 Corporate governance and internal control Statutory Auditors’ report Prepared in accordance with article L. 225-235 of the French Commercial Code (Code de commerce) on the report prepared by the Chairman of Calyon’s Board of Directors on the internal control procedures used for the preparation and processing of financial and accounting information Year ended 31 December 2006 To the Shareholders, In our capacity as Statutory Auditors of Calyon and in accordance with article L. 225-235 of the French Commercial Code (Code de commerce), we hereby report to you on the report of the Chairman of your Company in accordance with article L. 225-37 of the French Commercial Code (Code de commerce) for the year ended 31 December 2006. In his report, the Chairman is notably required to give an account of the conditions under which the duties of the Board of Directors are prepared and organised and on the control procedures in place within the Company. It is our responsibility to report to you on our observations on the information set out in the Chairman’s report on the internal control procedures relating to the preparation and processing of financial and accounting information. We performed our work in accordance with the professional guidelines applicable in France. These require us to perform procedures to assess the fairness of the information set out in the Chairman’s report on the internal control procedures relating to the preparation and processing of financial and accounting information. These procedures included: -o btaining an understanding of the objectives and general organisation of internal control, as well as the internal control procedures relating to the preparation and processing of financial and accounting information, as described in the Chairman’s report; - obtaining an understanding of the work performed to support the information given in the report. On the basis of these procedures, we have nothing to report in connection with the information on the internal control procedures relating to the preparation and processing of financial and accounting information, as set out in the Chairman’s report, prepared in accordance with article L. 225-37 of the French Commercial Code (Code de commerce). Neuilly-sur-Seine, 5 April 2007 The Statutory Auditors PriceWaterhouseCoopers Audit Gérard Hautefeuille Ernst & Young et Autres Valérie Meeus Calyon - shelf-registration document 2006 Executive officers’ and directors’ compensation Compensation paid to Executive Officers and Directors 1 - Board of Directors The following attendance fees were paid to Calyon’s Board members in 2006 for serving as Directors of Calyon, Credit Agricole S.A. and Credit Foncier de Monaco: Directors’ attendance fees in 2006 (in euros) Calyon Directors Attendance fees paid by Crédit Agricole S.A.(1) Attendance fees paid by Calyon Attendance fees paid by Crédit Foncier de Monaco Total 2006 Total 2005 Jean Laurent, Chairman 35,000 35,000 38,000 Edmond Alphandéry 30,000 30,000 33,000 15,000 15,000 15,000 16,000 43,000 44,500 Jean-Paul Chifflet 24,000 24,000 30,000 Jean-Dominique Comolli 12,000 12,000 3,000 15,000 50,000 50,500 Pierre Bastide Pierre Bru Yves Couturier 27,000 35,000 Franck E. Dangeard 12,000 Philippe Geslin 27,000 12,000 3,000 42,245 48,245 15,000 48,000 46,500 François Imbault 15,000 15,000 12,000 Bernard Lolliot 21,000 21,000 Didier Martin 19,000 19,000 22,000 Georges Pauget 19,000 19,000 18,000 Roger Gobin 33,000 15,245 Jean-Marie Sander 40,000 15,000 55,000 53,500 Henri Moulard, Non-voting director 34,500 30,000 64,500 65,000 (1) M eetings of the Credit Agricole S.A. Board of Directors give rise to the payment of a fee of 3,000 euros per meeting for each Director and 2,500 euros per meeting for the non-voting director, allocated according to their actual attendance at meetings. Additional fees were paid to members of the Committees according to their attendance at meetings of these Committees and to the Chairmen of these Committees. Mr Moulard received a fee of 15,000 euros in his capacity as Chairman of the Board’s Audit and Risk Committee. 30 - 31 Corporate governance and internal control Attendance fees paid to members of Calyon’s Board of Directors - the amount of attendance fees paid by Calyon to Members of the Board of Directors is calculated according to their attendance at Board meetings (3,000 euros per meeting); -m embers of the Compensation Committee and the Audit Committee receive an annual fee for their participation in these Committees (4,000 euros and 15,000 euros respectively); - an annual fee of 20,000 euros is paid to the Chairman of the Board of Directors. The Ordinary General Shareholders’ Meeting has set a cap of 500,000 euros on the total amount of directors’ attendance fees to be paid annually. Attendance fees are set according to the following rules: 2. Management Board 2006 Amount in euros Executive Officers Compensation(1) Fixed Variable Edouard Esparbès(4) Deputy Chief Executive Officer, 700,000 Credit Agricole S.A. CEO, Calyon 850,000 Yves Perrier Deputy Chief Executive Officer 600,000 800,000 Marc Litzler Deputy Chief Executive Officer 600,000 3,500,000 2005 Compensation(1) Directors’ attendance Benefits(2) fees 403,817 2006 Stock options(3) Existing plans Directors’ attendance Benefits(2) fees Variable Fixed 600,000 500,000 500,000 600,000 600,000 Plan Number Exercice price 2004 70,000 20.48 2006 70,000 33.61 2004 50,000 20.48 2006 55,000 33.61 2006 55,000 33.61 254,500 (1) Fixed compensation corresponds to salaries paid in year N and variable compensation to normal bonuses, exceptional bonuses and additional compensation relating to time spent outside France, paid in year N with respect to year N-1 (gross annual amounts); (2) Benefits consist almost entirely of the payment of sums to provide for retirement. (3) No stock options relating to shares in Calyon or a controlled company were granted during 2004, 2005 or 2006, as Credit Agricole S.A. decided to set up a single system at parent company-level to cover all group companies. No options were allocated in 2005 to members of Calyon’s Management Board by Credit Agricole S.A.; (4) The Chief Executive Officer is covered by the supplemental pension plan, which cannot be individualised, established for the Group’s key executives. Beneficiaries accrue benefits under this plan only if they remain within the Group until retirement age. The plan is a differential scheme that supplements the pensions acquired through general schemes and mandatory supplemental schemes during their career inside or outside the Credit Agricole Group. Provisions are booked on a global basis each year (without specific calculations for corporate officers), on the basis of profiles established as a function of the beneficiaries’ characteristics (average age, average pay and typical career, in order to recreate the pension rights of general schemes). Calyon’s Board of Directors decided the structure and level of compensation for Calyon’s Chief Executive Officer and Deputy Chief Executive Officers following a proposal from the Compensation Committee. Compensation principles Compensation comprises a fixed component and a variable component. Edouard Esparbes, Chief Executive Officer, Calyon - The fixed component is determined by reference to market practices; - The variable component, which consists of two parts, has been set as follows: •h alf based on quantitative financial performance indicators relating to the Crédit Agricole group and Calyon; -3 0% based on Calyon’s results (GOI, GOI after riskrelated costs), - 20% based on Crédit Agricole S.A.’s net income (Group share), • half based on an assessment of cost control and staff efforts to implement Calyon’s strategic plan. Yves Perrier, Deputy CEO, Calyon - The fixed component is determined by reference to market practices; - The variable component is determined as follows: • half based on quantitative criteria: Calyon - shelf-registration document 2006 -3 0% based on Calyon’s results (GOI, GOI after riskrelated costs), -2 0% based on Credit Agricole S.A. results, • half based on a qualitative assessment involving predefined objectives such as supervision of international activities and the ability to promote teamwork within the Management Board. Marc Litzler, Deputy CEO, Calyon - The fixed component is determined by reference to market practices; - The variable component based on the performance of capital markets activities. Under Mr Litzler’s contract, he has been guaranteed a minimum bonus of 3,400,000 euros with respect to 2006 only. 3. O ther compensation (paid by Crédit Agricole S.A. for duties performed within that company) 2006 Executive Officers amount in euros Compensation(1) Fixed Benefits(2)(5) Variable Stock options(3) - Existing plans Plan Jean Laurent(3) Chairman, Calyon Adviser to the CEO of Crédit Agricole S.A. 650,000 1,020,000 575,132 Georges Pauget(4) Director, Calyon CEO, Credit Agricole S.A. 800,000 650,000 263,030 Number 2003 2004 2006 Exercice price 40,164 70,000 100,000 14.59 20.48 33.61 2005 Executive Officers amount in euros Compensation Benefits(2) (1) Fixed Variable Stock options - Existing plans Plan Jean Laurent Chairman, Calyon CEO, Credit Agricole S.A. until 12/09/2005 650,000 700,000 542,700 Georges Pauget Director, Calyon CEO, Crédit Agricole S.A. since 12/09/2005 495,500 405,000 212,900 Number 2003 2004 40,164 70,000 Exercice price 14.59 20.48 (1) F ixed compensation corresponds to salaries paid in year N and variable compensation to bonuses paid in year N with respect to year N-1 (annual gross amounts). (2) Provision of accommodation and provision for retirement; since 1 January 2006, the CEO is no longer provided with accommodation. (3) C ompensation of Jean Laurent: -o n 7 March 2006, Crédit Agricole S.A.’s Board of Directors set Jean Laurent’s total 2006 compensation at 1,670,000 euros including a bonus of 1,020,000 paid in 2006 with respect to 2005. This decision was disclosed to the general meeting of shareholders of 17 May 2006 under regulated related-party agreements. - Jean Laurent’s benefits in kind correspond to the provision of accommodation and provision for retirement. (4) Compensation of Georges Pauget: - the fixed compensation of Georges Pauget, CEO of Crédit Agricole S.A., was set by the Board of Directors on 7 March 2006 with reference to market practices; - the variable component of Mr Pauget’s compensation is capped, and consists of two parts: the first is based on Group financial performance indicators and the results of the business lines for which he had responsibility (particularly the earnings per share of Crédit Agricole S.A. and the net income of Crédit Lyonnais and the Insurance and Private Banking business line); the second is determined by a qualitative assessment based on predefined targets; - Mr Pauget’s variable compensation was set at 650,000 euros, corresponding to the maximum bonus calculated over the two periods from 1 January to 12 September 2005 (with respect to his position as Deputy CEO in charge of Crédit Lyonnais and the Insurance and Private Banking business line) and from 12 September to 31 December 2005 (with respect to his position as CEO of Crédit Agricole S.A.). This amount was based on performance criteria defined by the Board of Directors in March 2005: • 40% based on Crédit Agricole S.A.’s earnings per share and the results of Crédit Lyonnais and the Insurance and Private Banking business line, • 60% based on the assessment of Mr Pauget’s preparation and implementation, as CEO, of the Crédit Agricole S.A. group’s development plan. (5) The Crédit Agricole group’s key executives are covered by the supplemental pension plan, which cannot be individualised. Beneficiaries accrue benefits under this plan only if they remain within the Group until retirement age. The plan is a differential scheme that supplements the pensions acquired through general schemes and mandatory supplemental schemes during their career inside or outside the Credit Agricole Group. Provisions are booked on a global basis each year (without individual calculations for corporate officers), on the basis of profiles established as a function of the beneficiaries’ characteristics (average age, average pay and typical career, in order to recreate the pension rights of general schemes). 32 - 33 Corporate governance and internal control Offices held by Executive Officers and Directors Management Board Last name, first name, business address and number of shares held Main office within the company Main offices outside the company / other significant offices Other professional details and professional activities in the last five years 2004 CEO and member of the Executive Committee, Calyon - Deputy CEO and member of the Executive Committee, Crédit Agricole S.A. - Director of Banque Saudi Fransi - Director of CA Cheuvreux S.A. - Director of Coface S.A. - Director of LCL - Director of Paris Ile de France, capital économique - C hairman of Sicav Marianne (until 2004) - Chairman and director of Synergie (GIE) (until 2004) - Vice-Chairman of Euro Securities Partners SAS (until 2004) - CEO of Caisse Régionale Paris Ile de France (until 2004) - CEO of Domaine de la Sablonnière SARL (until 2004) - Director and Vice-Chairman of Cedicam (GIE) (until 2004) - Director of Sacam SAS (until 2002) - Director of Sapacam (until 2002) - Director of Sci Cam S.A. (until 2002) - Director of Sacam Consommation 1 SAS (until 2002) - Director of Cirecam (GIE) (until 2004) - Director of Europay France S.A. (until 2004) - Director of Gecam (GIE) (until 2004) - Director of Holding Eurocard S.A. (until 2004) - Director of Sofinco S.A. (until 2004) - Member of the Executive Committee, TLJ SAS (until 2004) - Member of the Strategy Committee, Fireca (until 2004) - Deputy Corporate Secretary and member of the development committee, FNCA (until 2004) - Permanent representative of Caisse Régionale Paris Ile de France, director of Thomas Collet et Cie (until 2002) - Permanent representative of Caisse Régionale Paris Ile de France, director of Banque de Financement et de Trésorerie (until July 2004) - Manager of CA Titres CNS (until 2004) - Manager of Espace Diderot SARL (until 2004) 2004 Deputy CEO, Calyon - Member of the Executive Committee, Crédit Agricole S.A. - Director of CA Cheuvreux - Director of CLSA BV - Director of Stichting CLSA Foundation - Director of CCMA BV 2004 Deputy CEO of Calyon - Member of the Executive Committee, Crédit Agricole S.A. - Chairman of CA Cheuvreux - Chairman of Calyon Financial Inc - Chairman of CASAM - Chairman of CLSA BV - Chairman of Stichting CLSA - Manager of: Kepler, Copernic, Brahe - Co-manager of MLFG Date first appointed Term of office ends Edouard ESPARBES 9, quai du Président Paul Doumer 92920 Paris La Défense Cedex Yves PERRIER 9, quai du Président Paul Doumer 92920 Paris La Défense cedex Marc LITZLER 9, quai du Président Paul Doumer 92920 Paris La Défense cedex Calyon - shelf-registration document 2006 Board of Directors Last name, first name, business address and number of shares held Date first appointed Term of office ends Main office within the company 27/11/1997 2008 Chairman of the Board of Directors Main offices outside the company / other significant offices Other professional details and professional activities in the last five years Jean LAURENT 9, quai du Président Paul Doumer 92920 Paris La Défense Cedex Chairman of Institut Europlace de Finance - Vice-Chairman of Banco Espirito Santo (Portugal) - Director and member of the Appointment and Compensation Committee, Danone group - Director of Crédit Agricole Egypt S.A.E. - Member of the Supervisory Board and Member of the Financial Committee, Eurazeo - Member of the Supervisory Board, M6 Télévision - Member of the Audit Committee Chairman of the Supervisory Board, CNP Assurances - Director of Caixa Seguros - Director of CNP Capitalia Vita - Director of Icade - Director of Suez -D irector of Les Affiches Parisiennes - Director of GT Finances - Director of Polco S.A. Holds 1 share - C hief Executive Officer of Crédit Agricole S.A. Chairman of Crédit Lyonnais Chairman of Segespar Chairman of Union d’Etudes & d’Investissements Vice-Chairman of Banca Intesa (Italy) Director of Amacam Director of BGPI Director of Crédit Agricole Asset Management Director of S.A. Rue Impériale Member of the Executive Committee, FBF Member of the Board, AFB Member of the Board, Paris Europlace Member of Conseil National du Crédit et du Titre Edmond ALPHANDERY 4, place Raoul Dautry 75015 Paris 15/05/2002 2008 Director Holds 1 share Pierre BASTIDE n/a 14/03/2000 2007 Director - Director of LCL Manager of SNC Alli Domes Director of Credit Agricole S.A. - Chairman of SAS Sacam Developpement - Director of Banque Chalus - Director of Fondation du CA Pays de France - Director of Predi Retraites - Director of Predica - Director of Sacam Centre - Director of Sacam SAS - Director of Sapacam - Director of SCI CAM - Corporate Secretary of Gecam (GIE) - Corporate Secretary of SAS Rue La Boétie - Member the Management Committee, Adicam 16/05/2001 2008 Director Chairman of CRCAM Nord Midi-Pyrenées - Chairman of Sodagri - Director and member of the Compensation Committee, Crédit Agricole S.A. - Director of Chabrillac - Director of Inforsud Gestion - Director of Scicam - Director of Sacam - Director of Sacam Participations - Director of Idia Participation - Director of Sofipar - Director of Caisse Locale de Pont-deSalars - Chairman of the Institut Universitaire Technologique of Rodez - Chairman of NMP Développement SAS - Manager of G.F.A. du Pont des Rives - Manager of GAEC Recoules d’Arques - Non-voting Director of Grand Sud-Ouest Capital S.A. - C hairman of Caisse Régionale QuercyRouergue (absorbed by Caisse Régionale Nord Midi-Pyrénées in May 2004) - Chairman and CEO of Inforsud Gestion S.A. (until December 2004) - Chairman of Commission Nationale de Négociation and of Commission des Relations sociales, FNCA (until December 2004) - Office Member and Treasurer, FNCA - Chairman of Agrica (from January 1999 to December 2000) - Director of Sociétés des Caves de Roquefort (until 2003) - Vice-Chairman of Association des présidents de Caisses Régionales (until April 2001) - Director of Camarca - Director of CRCCA (Caisse de Retraite Complémentaire du Crédit Agricole) Holds 1 share Pierre BRU Causse Comtal 12033 RODEZ Cedex 9 Holds 1 share 34 - 35 Corporate governance and internal control Board of Directors Last name, first name, business address and number of shares held Date first appointed Term of office ends Main office within the company Main offices outside the company / other significant offices Other professional details and professional activities in the last five years 2007 Director Chief Executive Officer of CRCAM Centre-Est - Corporate Secretary and Office Member, FNCA - Director of Fédération Rhône- Alpes du Crédit Agricole - Chairman of Comité des Banques de la région Rhône-Alpes - Chairman of Sacam Développement SAS - Chairman of Pacifica S.A. - Chairman of Carvest representing CRCAM Centre-Est - Founding chairman of IMS, entreprendre pour la cité (Rhône-Alpes) - Vice-Chairman of SAS Rue La Béotie - Director of Attica GIE - Director of BGPI - Director of Crédit Agricole Capital Investissement et Finance (CACIF) - Director of Credit Agricole Financements (Switzerland) - Director of Deltager - Director of Predica S.A. - Director of Sacam Participations SAS - Director of Sacam SAS - Director of SCI Cam - Director and member of the Audit Committee, Suparex Associés - Director of Apis, Calixte Investissement, CA Création, GIE AMT, Greencam and Lyon Place Financière representing CRCAM Centre-Est - CEO of Sacam International SAS - Member of the Executive Committee, Sacam Santeffi SAS - Corporate Secretary of the Management Committee, Gecam GIE - Deputy Corporate Secretary of FNCA Jean-Paul CHIFFLET 1, rue Pierre 30/04/2004 de Truchis de Lays 69410 Champagne au Mont d’Or Member of the Audit Committee Holds 1 share Jean-Dominique COMOLLI 182-188, 31/08/2005 avenue de France 75639 Paris cedex 13 2008 Director Chairman of Altadis and Seita - Chairman of the Supervisory Board, Régie des Tabacs - Director of Aldeasa - Director of Logista - Director of Pernod-Ricard 2008 Director - Director of Predica, Permanent CEO of CRCAM Sud Rhône-Alpes representative of Sacam - Vice-Chairman of the Board of Directors, Crédit Agricole S.A. (until April 2004) - Member of the Strategy Committee and - Director of Sapacam S.A. of the Appointments and Governance (until June 2006) Committee, Crédit Agricole S.A. - Member of the Management Committee, GIE Pratica - Vice-Chairman of SAS Rue La Boétie (until December 2006) (until March 2005) - Corporate Secretary of FNCA (until December 2006) - Chairman of SAS Sacam Développement, director and permanent representative - Member of the Board of Directors, SCI CAM - Director of Sacam Participations SAS - Director of LCL - Member of the Partner Committee, SAS Ariane Crédit - Legal representative of manager CR SRA, manager at: Sarl Simcad, SNC Foncière du Vivarais, SCI du Vivarais, SCI Hautes Faventines, SCI 3 Rivières, SCI Le Grand Bleu, SCI Actipole, SCI Guerlande Un Holds 1 share Yves COUTURIER 48 rue La Boetie 75008 PARIS Holds 1 share 15/11/2000 Calyon - shelf-registration document 2006 Board of Directors Last name, first name, business address and number of shares held Term of office ends Main office within the company Main offices outside the company / other significant offices Other professional details and professional activities in the last five years 2008 Director Chairman and CEO of Thomson - Director of EDF - Director of Eutelsat - Director of Orange - Assistant CEO, France Telecom - Assistant CEO, Vice-Chairman of the Board of Directors, Thomson Multimédia 13/04/1999 2008 Director representing employees 15/05/2002 2007 Director Date first appointed Frank E. DANGEARD 46, quai 31/08/2005 Alphonse Le Gallo 92648 Boulogne Holds 1 share Jean-Frédéric DREYFUS 9, quai du Président Paul Doumer 92920 Paris La Défense cedex -M ember of the Conseil National de la Comptabilité, the Conseil Consultatif du Secteur Financier, the Board of Directors of the Université Paris Dauphine and the Conseil National du Développement durable Holds 1 share Philippe GESLIN Holds 1 share Member of the Audit Committee Chairman of the Supervisory Board, Etam Développement - Director of Crédit Foncier de Monaco - Director of Union Financière de France-Banque - Director of Gecina - Member of the Supervisory Board of Société Vermandoise de sucreries, representing Invelios Capital - Director of Société Sucrière de Pithiviers le Vieil, representing Invelios Capital - Non-voting director of Invelios Capital - Manager of Gestion Financière Conseil SARL - Chairman of Banque Française de l’Orient -D irector of Banque LibanoFrançaise S.A. Liban - Director of CAAM - Member of the Supervisory Board, Arc International S.A. France Roger GOBIN La Garde Route de Paris 44300 Nantes 16/05/2001 2008 Director Chairman of CRCAM Atlantique-Vendée - Chairman of Fédération des Caisses Régionales Pays de Loire / - Director and Member of the Audit and Risks Committee, Crédit Agricole S.A. Association (2001-2005) - Director of Pacifica S.A. - Director of Crédit Agricole Leasing - Director of Caisse Locale de Crédit Agricole de Pornic - Chairman of SAS Fireca - FNCA: Member of the Agriculture Financing Committee, of the Regional Banks Development Committee and the Companies and International Committee, Director of the association of chairmen 30/04/2004 2007 Director Chairman of CRCAM d’Ile de France - Chairman of SAS Domaine de la Sablonnière - Director of Socadif representing CRCAM Ile de France - Manager of SCI Bercy Villiot representing CRCAM Ile de France - Manager of SCI Agricole de l’Ile de France representing CRCAM Ile de France Holds 1 share François IMBAULT 26, quai de la Rapée 75596 Paris cedex 12 Holds 1 share - Director of Foncaris 36 - 37 Corporate governance and internal control Board of Directors Last name, first name, business address and number of shares held Date first appointed Term of office ends Main office within the company 01/03/2006 2007 Director Main offices outside the company / other significant offices Other professional details and professional activities in the last five years Bernard Lolliot Holds 1 share Member of the Audit Committee - C EO of CRCAM Centre-France - Chairman and CEO of Banque Chalus - Chairman of CACF Développement - Chairman of CACF Immobilier - Director of CA Solidarité et Développement - Director of CA Titres - Director of Cacif - Director of Fireca - Director of Pleinchamp S.A. - Director of Sofinco - Director of Synergie GIE - Manager of SNC Alli Domes representing CRCAM Ile de France - Manager of SCI Jaude -D irector of Cirecam GIE - Director of GPF Didier MARTIN 130, rue du Faubourg Saint-Honoré 75008 Paris 15/05/2002 2008 Director Member of the Compensation Committee Holds 1 share Lawyer and Partner, Cabinet Bredin Prat - Director of Europacorp S.A. Georges PAUGET 91-93, boulevard 30/04/2004 Pasteur 75015 Paris Holds 1 share 2007 Director Member of the Compensation Committee CEO of Crédit Agricole S.A. - Chairman of LCL - Director of Fondation de France - Member of the Executive Committee of the Fédération Bancaire Française and Chairman of the FBF’s retail banking and remote banking commission - Member of the Commission Advisory Council, Paris-Europlace - Permanent representative, Crédit Lyonnais - C hairman of Cedicam (2003-2006) - Director of Banque de Gestion Privée Indosuez S.A. (2003-2006) - Director of Europay France (2003-2006) - Director of Holding Eurocard (2004-2006) - Director and Deputy-Chairman of Pacifica S.A. (2003-2006) - Director and Deputy -Chairman of Predica S.A. (2003-2006) -A ssistant CEO and then Deputy CEO of Crédit Agricole S.A. - CEO of Crédit Lyonnais - Chairman of TLJ SAS and Member of the Executive Committee (2003-2006) - Chairman of Uni-Editions SAS (2003-2006) - Director of Predi-Retraite (2003-2005) - Chairman of Servicam SAS (until 2003) - CEO of LCL (until 03/11/2005) - Deputy CEO of Crédit Agricole S.A., - Head of Regional Banks, Insurance and Private Banking business lines (December 2003 September 2005) - Deputy CEO of Crédit Agricole S.A., - Head of Regional Banks and insurance business lines (January- December 2003) - CEO of Caisse Régionale Pyrénées Gascogne (until 2002) - Director of Bankoa S.A. (2005) - Director of Gecam (GIE) - Director of Crédit Agricole Indosuez S.A. (until 2003) - Director of Crédit Agricole Indosuez Cheuvreux S.A. (until 2003) - Director of Crédit Agricole Indosuez Cheuvreux Gestions S.A. (until 2003) - Director of Crédit Lyonnais (until 2003) - Director of Foncaris S.A. (until 2003) - Director of Mercagentes S.A., SVB (until 2003) - Director of Sacam SAS (until 2003) - Director of Sapacam SAS (until 2003) - Director of SCI CAM (until 2003) - Office of the Board FNCA (until 2003) - Crédit Agricole S.A. permanent representative, member of the supervisory board, Fonds de Garantie des Dépôts (until 2004) Calyon - shelf-registration document 2006 Board of Directors Last name, first name, business address and number of shares held Term of office ends Main office within the company Main offices outside the company / other significant offices 30/04/2004 2007 Director Chairman of CRCAM Alsace-Vosges - Director of Predica (until April 2004) Chairman of FNCA -D irector of Sapacam S.A. Chairman of SAS Rue La Boëtie (until 27/06/2002) - V ice-Chairman of the Board, Crédit Agricole - Director of SAS Sapacam S.A., representing SAS Rue La Boétie (until 30/12/2003) - Member of the Strategy Committee, the Appointments and Governance Committee and the Compensation Committee, Crédit Agricole S.A. - Director of LCL - Deputy-Chairman of SAS Sacam Développement - Chairman of Conseil Economique et Social d’Alsace - Chairman of CNMCCA - Chairman of the Executive Committee, Gecam (GIE) (since le 30/04/2003) - Chairman of Sacam Participations (SAS with variable capital) since 30/04/2003 - Director of Sacam since 07/09/2000 - Director of Scicam (non-trading property company) since 07/09/2000 - Legal representative of SAS Sacam Participations as Chairman of the following companies: SAS Segur, SAS Miromesnil, SAS Sacam Santeffi, SAS Sacam Assurance Caution, SAS Sacam Pleinchamp, SAS Sacam Expansion, SAS Sacam Fireca, SAS Sacam Progica, GIE Cirecam 9, quai 12/10/2005 du Président Paul Doumer 92920 Courbevoie 2008 Director Employee representative 2009 Non-voting director Date first appointed Other professional details and professional activities in the last five years Jean-Marie SANDER 48 rue de la Boétie 75008 PARIS Holds 1 share Dominique TOUNSI Holds 1 share Henri MOULARD Truffle Venture 25, rue Marbeuf 75008 Paris 18/11/2003 Chairman of the Audit Committee Chairman of HM et Associés SAS Chairman of Invest in Europe SAS Chairman of the Supervisory Board of Dixence SAS - Chairman of Attijariwaffa Bank Europe - Non-voting director, Chairman of the Audit and Risks Committee, Crédit Agricole S.A. - Non-voting director on the Board of Directors, Chairman of the Risks and Accounts Committee, LCL - Director of Elf Aquitaine - Director of Burelle S.A. - Director and Member of the Audit Committee, Foncia - Director and Chairman of the Compensation Committee, Unibail S.A - Director and member of the Audit Committee, Attijariwaffa Bank (Morocco) - Director and Chairman of the Audit Committee, Banque du Sud (Tunisia) - Member of Supervisory Board and Member of the Audit Committee, Financière Centuria SAS - Member of the Governance Committee and Chairman of the Compensation Committee, La Française de Placement Investissement SAS - Non-voting director of Gerpro (SAS) - Non-voting director, Chairman of the Appointments Committee and member of the Audit Committee, GFI Informatique S.A. - Office Member and Treasurer, Fondation de France - Chairman of the Executive Board, ABN Amro France (until 2001) - Chairman and CEO of Generali France Holding, GFA Vie, GFA Iard, France Vie, France IARD, la Fédération Continentale (until 2002) - Director of l’Equité, Europ Assistance (until 2002) - Director of Corifrance (until 2003) - Member of the Supervisory Board, DIL France (until 2003) - Director of GFI Informatique (until 2002) - Director of Isis (IFP subsidiary) (until 2001) - Non-voting director, Dietswell Engineering - Member of the Audit Committee, Unibail 38 - 39 Corporate governance and internal control The next Meeting of Shareholders in May 2007 will be asked to ratify the co-optation as Director of Jean Le Vourch, co-opted by the Board of Directors on 28 February 2007 to replace Roger Gobin. Other proposals to be put to this Meeting of Shareholders: - t he reappointment of directors whose terms of office are due to expire at the end of this Meeting: Jean-Paul Chifflet, Philippe Geslin, François Imbault, Bernard Lolliot, Georges Pauget and Jean-Marie Sander; - the appointment of Jean Philippe to replace Pierre Bastide. In accordance with laws and regulations in force, Marc Kyriacou has replaced Mrs Tounsi, who died on 19 April 2007, as director for the remaining term of office applying to directors elected by employees, which will end in 2008. Finally, Georges Pauget was appointed Chairman of Calyon by the Board of Directors on 14 May 2007, replacing Jean Laurent. Potential conflicts of interest among members of the Board of Directors and Management Board between their private interests or other duties and their duties with respect to Calyon To Calyon’s knowledge, there is no potential conflict of interest between the duties of members of the Board of Directors and Management Board with respect to Calyon and their private interests. Calyon’s Board of Directors and Management Board include corporate officers of companies (including Crédit Agricole Group companies) with which Calyon has commercial relationships. This may be a source of potential conflicts of interest between these officers’ duties with respect to Calyon and their duties with respect to these other companies. The directors’ charter is distributed to members of the Board of Directors to remind them in particular of their obligation to: -e nsure that their participation on the Board does not cause a fundamental conflict of interest at professional or private level, -a bstain from voting on any resolution involving a transaction that might result in a conflict of interests. Trading in the Company’s shares by Executive officers Calyon’s executives had no dealings in the Company’s shares in 2006 with a cumulative value of more than 5,000 euros (in accordance with article L. 621-18-2 of the Code Monétaire et Financier and article 223-26 of the Autorité des Marchés Financiers’ General Regulations as amended by the order of 4 January 2007). Calyon - shelf-registration document 2006 Executive Committee The composition of Calyon’s Executive Committee is as follows: Edouard Esparbès, Chief Executive Officer, chairman of the Executive Committee Yves Perrier, Deputy Chief Executive Officer Marc Litzler, Deputy Chief Executive Officer Jérôme Grivet, Head of Finance and Corporate Secretary Gilles de Dumast, Head of Investment Banking Ishan Kapur, Head of the Financial Institutionals Group Guy Laffineur, Head of Fixed Income Markets Bernard Mignucci, Head of International Pascal Poupelle, Head of Corporate Relations François Simon, Head of CA Cheuvreux Marc Tabouis, Head of Structured Finance 40 - 41 management report Calyon - shelf-registration document 2006 3 Management report 44 Presentation of Calyon’s financial statements 44 44 C hanges to accounting principles and methods Changes in the scope of consolidation 45 45 47 48 51 52 54 54 55 Calyon’s activity and results Economic and financial environment Consolidated results Results by business line Calyon consolidated balance sheet Prudential ratios Recent trends and outlook 2007 outlook Recent events 56Analysis of Calyon parent company financial statements 57 58 59 59 60 60 60 61 61 71 Five-year financial summary Recent changes in the share capital Authorisations to effect capital increases Information about the corporate officers Appendix to the management report Internal control Compliance Financial security Risk factors Social and environmental information 42 - 43 management report Presentation of Calyon’s financial statements Change to accounting principles and methods accounting principles and methods used by the Group and their mode of application. Application of IAS/IFRS accounting standards They did not have a significant impact on the financial statements during the period. The introductory note to the 2006 consolidated financial statements sets out the regulatory framework and highlights comparability issues with the figures for 2005. The Group did not apply optional standards and interpretations in 2006. Since 1 January 2005, Calyon’s consolidated financial statements have been prepared in accordance with International Financial Reporting Statements (IFRS) as adopted by the European Union at the balance sheet date. The IFRSs applicable to the annual financial statements and reporting information at the 31 December 2006 include new standards and new interpretations adopted by the International Financial Reporting Interpretations Committee (IFRIC) that were mandatory at 31 December 2006 and approved by the European Union. The standards consist of those used to prepare the consolidated financial statements at 31 December 2005, plus those that became mandatory for the first time in 2006. The differences relate to: - t he revision of IAS 19 (employee benefits) regarding actuarial gains and losses and group plans; - the revision of IAS 39 (financial instruments) regarding cash flow hedges on future intra-group transactions and the conditions for using the fair value option; - the revision of IAS 39 (financial instruments) and IFRS 4 (insurance contracts) relating to financial guarantee contracts; - IFRIC 4 (determining whether an arrangement contains a lease); - the amendment of IAS 21 regarding the net investment in a foreign entity. These new arrangements are described in Note 1 to the financial statements, « Principles and methods applicable in the Group », which provides a descrption of the main Changes in the scope of consolidation Changes in the scope of consolidation in 2006 had a limited impact on the financial statements. The most significant change was the sale of the 75% stake in Calyon Bank Egypt SAE in the third quarter of the year. This entity absorbed Egyptian American Bank to form Crédit Agricole Egypt SAE, in which Calyon now owns a 13% stake. Details of changes to Calyon’s scope of consolidation are presented in note 3.1 to the consolidated financial statements. For the purpose of comparing the results set out below, it should be noted that Calyon acquired LCL’s stake in Union de Banques Arabes et Françaises in mid-2005 and sold its international retail banking division to the Crédit Agricole S.A. group in the fourth quarter of 2005. Calyon - shelf-registration document 2006 Calyon’s activity and results Economic and financial environment 2006: global growth impetus confirmed For the third consecutive year, the world economy grew by around 5% in 2006, well above its historical growth rate. All zones put in a good performance, not just China and the USA but also Europe. Oil prices peaked in mid2006 and then fell significantly, easing fears of inflation. Against this background of firm growth and limited inflation, risk aversion was low and financial markets continued to benefit from abundant liquidity, which monetary tightening in the USA, Europe and Asia failed to stern. The US economy proved resilient again in 2006. In addition to higher oil prices and interest rates, there were problems in the US residential property market. The correction that began in 2005 was substantial in terms of both market activity and prices. This had a direct negative impact on growth, with a sharp decline in residential investment. However, consumer spending remained firm, due to rising disposable incomes. GDP growth was 3.4% in 2006, slightly higher than the 3.2% seen in 2005. In June, the Federal Reserve, under its new chairman Ben Bernanke, brought to an end the monetary tightening that had begun two years earlier. The Fed funds rate has since been steady at 5.25%. Inflation remains the number one risk according to the Fed. However, the Fed is taking into account the current slowdown in economic activity and its moderating effect on inflation. A surge in inflation is not a concern for the bond markets, and 10-year interest rates ended the year at 4.6%, only slightly higher than a year previously. The imbalances that characterise the US economy’s recent expansion (low consumer savings rate and a large current-account deficit) showed signs of stabilising. The public deficit even shrank. The dollar lost ground in 2006. The support provided by Fed rate hikes was taken away just as several central banks (in Asia and oilproducing countries) stated their intention to diversify their foreign exchange reserves away from the dollar. In the eurozone, the economy was surprisingly strong, beating even the most optimistic forecasts. Growth was 2.7%, twice the annual average in the previous five years. The expansion was fairly even across the zone. It was driven by higher exports (particularly in Germany) and renewed investment, which finally filtered through into higher employment and consumer spending. Although there is still plenty of progress to be made, the European labour market is improving. The jobless total fell by almost a million and the unemployment rate is at its lowest since the early 1990s. Improved labour market conditions are partly due to demographics, with the retirement of the baby boom generation, and stricter controls over unemployment benefit. However, it is also the result of certain reforms and an upturn in job creation. In fiscal terms, economic expansion has allowed a rapid reduction in public deficits. It has also allowed the European Central Bank to carry out regular rate hikes without affecting the confidence of economic agents, which remains high. The ECB’s refinancing rate ended the year at 3.50%, up from 2.25% at end-2005. Long-term interest rates also rose, although to a lesser extent, and they remain low in absolute terms with 10year rates under 4%. The drag on growth caused by higher interest rates remains limited, although signs of a slowdown are visible in mortgage and property price trends. France achieved economic growth of 2.0% in 2006. Activity was underpinned mainly by domestic demand, particularly consumer spending, resulting from the increased purchasing power of incomes. The recovery in business investment that started in late 2005 continued. As a result, employment continued to rise, although only slowly. Exports benefited from the buoyant global economic environment, and particularly from stronger growth in other European countries. However, the foreign trade balance remained negative due to structural competitiveness factors. Asia remained a major growth driver, and particularly China where growth remained above 10%. 2006 was a good year in Japan, with a 2.2% increase in GDP. However, there remain some doubts about how sustainable this growth is, and particularly about the solidity of consumer spending. Another highlight was the end of Japanese 44 - 45 deflation, which prompted the central bank to abandon the zero interest rate policy it had followed for five years. management report Emerging markets: further strong growth Growth in the ten new European Union countries accelerated in 2006, with GDP rising by 5.8% as opposed to 5.4% in 2005. This growth was driven both by exports to the eurozone and domestic demand. Together with these countries’ sensitivity to oil prices, this pushed up inflation and led to a cycle of monetary tightening in most countries (Hungary: +200bp, Slovakia: +175bp, Czech Republic: +50bp) alongside the rate hikes carried out by the ECB. The exception was Poland, which combined the lowest inflation in the European Union with strong growth (GDP up 5.8% in 2006), and left interest rates unchanged. At the same time, ongoing budget deficits and the abandonment of official objectives relating to eurozone entry led to a temporary increase in risk premiums in Poland and Hungary. These countries’ 10-year yield spreads with respect to Germany widened by 50bp and 130bp respectively between May and June 2006. In Hungary, the government elected in April 2006 adopted a fiscal tightening package to address the deterioration in the public finances. Hungary’s budget deficit rose to 10% of GDP in 2006. Emerging Asia’s very strong growth became even stronger in 2006, with GDP in the 10 main countries rising by 8.4% after 7.8% in 2005, mainly due to firm external demand. India continued to make progress, based on a rapid expansion in the private sector and in investment. China sought to maintain the quality of its growth by adopting a series of measures to rein in bank lending and curb excess investment in certain sectors. The Chinese renminbi appreciated in 2006, rising by 3.5% against the dollar, on the back of: a sharp rise in the trade surplus (+70% relative to 2005); a 4.5% rise in foreign direct investment. In most Asian economies, inflation – arising mainly from commodity price movements – was controlled through higher exchange rates in addition to domestic interest rate hikes. However, fears of an excessively rapid rise in the exchange rate and problems with managing domestic liquidity resulting from capital inflows prompted Thailand to impose capital controls in December 2006. Latin America benefited fully from surging commodity prices, which enabled countries to maintain external balances and firm growth. In Brazil, Lula was elected for a second term, and there was impressive macroeconomic stability. The trade surplus hit a record 50 billion dollars, inflation fell to a 7-year low of 3.1% late in the year and domestic interest rates continued to move independently of US rates, falling by 475bp. Mexico achieved GDP growth of 4.6%. It benefited from US growth, along with firm domestic demand resulting from historically low interest rates and investor optimism following the election of President Calderon. Risks were concentrated in a few countries that responded badly to positive global conditions, such as Argentina, where inflation rose, and Venezuela, where high oil prices opened the way for populist measures. In the Middle East, petrodollars continued to build up, with current-account surpluses reaching a cumulative 900 billion dollars since 2000. This money has been used to reduce debt, build up external assets and meet domestic investment needs. It has also been invested in regional stockmarkets, which consolidated in 2006 after sharp rises in previous years, and real estate. There was upward pressure on regional currencies, such as the Saudi Arabian riyal. However, these countries need to ensure long-term economic diversification and are using fiscal measures such as grants to limit the inflationary impact of the weak dollar. As a result, they are maintaining their dollar pegs until monetary union (involving the six countries of the Gulf Cooperation Council) takes place. This is due to happen in 2010 but will probably be delayed. Calyon - shelf-registration document 2006 Consolidated results Summary consolidated income statement - main items In millions of euros Net banking income Operating expenses Gross operating income* Risk-related costs Income from equity affiliates 2006 2005 2005 excl disposal gain on financial services business Change 2006/2005 Change at constant scope and exchange rates 5,862 4,938 4,938 19% 24% (3,574) (3,168) (3,168) 13% 18% 2,288 1,770 1,770 29% 35% 9 87 87 (90%) 166 125 125 33% Net gains/(losses) on disposal of other assets 5 203 Integration-related costs 0 (86) 2,468 2,099 Pre-tax income Disposal gain on financial services business 202 1 ns (86) ns 202 1,897 30% Tax (620) (383) (383) 62% Net income 1,848 1,716 202 1,514 22% Net income (group share) 1,771 1,632 202 1,430 24% * In 2005, before integration-related costs In 2006, this category of expenses no longer exists, since the integration is complete Net banking income rose by 24% at constant scope and exchange rates to 5,862 million euros. This strong performance resulted from good momentum in all business lines, particularly capital markets and investment banking, where the pace of growth remained high. Income from equity affiliates consists almost entirely of the contribution from Banque Saudi Fransi. It rose by 33% due to improved performance at BSF in a region benefiting from the positive economic consequences of high oil prices. Calyon’s dense international network is being strengthened all the time. It significantly increased its revenues in 2006, particularly in high-growth regions. The tax charge rose by 62% due to the use of all remaining tax-loss carryforwards, following strong performance by all Group entities. Operating expenses increased by 18% at constant scope and exchange rates to 3,574 million euros. Fixed costs rose only half as fast as net banking income. The rise in expenses reflects growth in Calyon’s workforce and greater investment in the international network’s IT systems, along with projects to develop capital markets and brokerage infrastructure. After minority interests, net income (Group share) was 1,771 million euros, up 24% relative to 2005 excluding disposal gains on financial services activities. Gross operating income rose by 35% at constant scope and exchange rates, to 2,288 million euros. For the third consecutive year, risk-related costs were negative, with the amount of reserve releases exceeding additions by 9 million euros in 2006. This reflects the ongoing positive risk environment. Collective reserves were stable, totalling 1,125 million euros at 31 December 2006. 46 - 47 Results by business line The organisation of Calyon’s business lines is described on page 127 of this document in note 6 to the financial statements, “Segment reporting”. Financing 2006 2005 Change 2006/2005 Change at constant scope and exchange rates Net banking income 2,091 1,778 18% 18% Operating expenses (843) (753) 12% 12% Gross operating income* 1,248 1,025 22% 23% 5 (12) ns 158 120 32% (5) (6) ns Pre-tax income* 1,406 1,127 25% Tax (337) (252) 34% Net income* 1,069 875 22% management report In millions of euros Risk-related costs Income from equity affiliates Net gains/(losses) on disposal of other assets * In 2005, before integration-related costs In 2006, this category of expenses no longer exists, since the integration is complete Operational and financial performance in the financing business improved further in 2006: The operating environment was positive overall, although there was constant pressure on margins. The return on risk-weighted assets remained firm due to increased business levels and faster portfolio turnover through active balancesheet management. The cost/income ratio improved by two points, falling to 40.3%, reflecting a very high level of operational efficiency. Net banking income rose by 18% to 2,091 million euros. The structured financing business has leading global positions, and benefited from excellent commercial momentum in leveraged financing, real estate financing and international trade financing. The syndication business consolidated its top 10 position, arranging an increasing number of large deals. Net banking income in commercial banking increased at a more moderate pace, reflecting the Group’s policy of allocating capital to high-value-added businesses. With operating expense growth limited to 12%, gross operating income rose by 22% to 1,248 million euros. Risk-related costs were negative, with a net release of 5 million euros. Net income increased by 22% to 1,069 million euros. Calyon - shelf-registration document 2006 Capital markets and investment banking 2006 2005 Change 2006/2005 Change at constant scope and exchange rates 3,306 2,556 29% 30% (2,406) (1,972) 22% 23% 900 584 54% 56% Risk-related costs 0 (7) ns Income from equity affiliates 1 0 ns Net gains/(losses) on disposal of other assets 0 20 ns 901 597 51% (243) (146) 66% 658 451 46% In millions of euros Net banking income Operating expenses Gross operating income* Pre-tax income* Tax Net income* * In 2005, before integration-related costs In 2006, this category of expenses no longer exists, since the integration is complete Net banking income in the capital markets and investment banking business continued to grow strongly, rising by 29% to 3,306 million euros. In accordance with planned changes to Calyon’s business mix, this segment’s contribution to total corporate and investment banking revenues is increasing steadily, and was 61.3% in 2006. In capital markets, there was excellent performance in interest-rate derivatives, strong growth in credit derivatives and CDOs and further steady growth in equity derivatives, in line with the 2006-2008 development plan. 2006 was a record year in brokerage. CA Cheuvreux and CLSA’s equities businesses and Calyon Financial’s listed derivatives business performed excellently. Revenues rose by 33% to record levels in 2006. Investment banking completed some major deals, particularly in Europe, as well as strengthening its network by extending it further outside France. Operating expenses increased by 22% to 2,406 million euros. In addition to higher variable remuneration arising from strong business levels, this rise was due to significant investment aimed at enhancing capital markets IT systems and bolstering the workforce in all business areas. Gross operating income increased by 54% to 900 million euros, while the cost/income ratio fell by 4.4 percentage points to 72.8%. Net income surged by 46% to 658 million euros. 48 - 49 International private banking 2006 2005 Change 2006/2005 Change at constant scope and exchange rates 474 415 14% 15% (322) (315) 2% 2% 152 100 52% 54% Risk-related costs 4 7 Income from equity affiliates 7 5 20 1 Pre-tax income* 183 113 Tax (42) (27) Net income* 141 86 In millions of euros Net banking income Operating expenses Gross operating income* management report Net gains/(losses) on disposal of other assets * In 2005, before integration-related costs In 2006, this category of expenses no longer exists, since the integration is complete Net banking income rose by 14% to 474 million euros in 2006, with contributions from all geographical markets, i.e. Switzerland, Luxembourg, Monaco, Spain and Brazil. Expenses rose by a mere 2% to 322 million euros. This firm grip on costs allowed an 8-point improvement in the cost/income ratio to 67.9%. Together with strong financial market performance, these units benefited from positive commercial momentum and active promotion of higher-value-added products. Revenues from brokerage activities and from the design and sale of structured products were particularly impressive. Net new money was another major performance driver, taking total assets under management to 54.1 billion at 31 December 2006. Gross operating income was 152 million euros in 2006, up 52% relative to 2005. Proprietary asset management and other activities 2006 2005 Change 2006 / 2005 Net banking income (9) 14 ns Operating expenses (3) (19) (84%) (12) (5) ns Risk-related costs 0 108 ns Income from equity affiliates 0 0 ns (10) 188 ns 0 (86) ns (22) 205 ns 2 56 ns (20) 261 ns In millions of euros Gross operating income* Net gains/(losses) on disposal of other assets Integration-related costs Pre-tax income Tax Net income * In 2005, before integration-related costs In 2006, this category of expenses no longer exists, since the integration is complete This business line did not generate any significant earnings in 2006. Calyon - shelf-registration document 2006 Calyon consolidated balance sheet At 31 December 2006, Calyon had total assets of 588 billion euros, up 107 billion euros or 22% relative to 31 December 2005. Most of the increase came from the rise in outstanding book positions in the capital markets business (securities held for trading, derivatives and repo transactions). The decline in the dollar against the euro in 2006 dragged down total assets by 9.7 billion euros. Assets In billions of euros 31.12.2006 31.12.2005 30.9 37.2 260.5 200.8 Financial assets available for sale 24.6 23.1 Loans and advances to customers (excluding repos) 89.1 84.1 142.6 106.1 39.2 28.8 1.3 1.2 588.2 481.3 31.12.2006 31.12.2005 60.1 58.1 192.9 158.1 80.8 68.4 132.1 99.9 Debt securities in issue 62.8 47.3 Accruals, deferred income and sundry liabilities 46.3 37.3 0.8 0.7 12.4 11.5 588.2 481.3 Cash, due from central banks, French postal system and banks (excluding repos) Financial assets at fair value (excluding repos) Repos Accruals, prepayments and sundry assets Goodwill Total Liabilities and shareholders’ equity In billions of euros Due to central banks, current accounts with French postal system and banks (excluding repos) Financial liabilities at fair value (excluding repos) Customer accounts (excluding repos) Repos Minority interests Shareholders’ equity Total Interbank transactions Calyon has access to all the world’s major liquidity centres, with a particular focus on the larger markets of Paris, New York, London, Hong Kong and Tokyo. This optimises the uses and sources of interbank funds within the group. Financial assets and liabilities at fair value through profit or loss (excluding repos) Financial assets at fair value through profit or loss (excluding repos) rose by 59.7 billion euros, while financial liabilities at fair value through profit or loss (excluding repos) rose by 34.8 billion euros. Financial assets consist mainly of the positive fair value of derivative financial instruments and the portfolio of securities held for trading. Financial liabilities consist mainly of the negative fair value of derivatives and securities sold short. The increase in these items arose mainly from derivative instruments. Although Calyon generally has netting agreements with its counterparties that reduce the credit risk relating to these instruments, IFRS rules allow limited netting of positive and negative fair values on derivatives with the same counterparty. As a result, the rapid growth in capital markets activities involving this 50 - 51 kind of financial instrument automatically increased the book balances of these items. Securities purchased or sold under repurchase agreements Repo activities are mainly focused on Paris, which accounted for 79% of securities purchased and 94% of securities sold under repo agreements. The increase in these items reflects growth in trading and arbitrage activities, which make heavy use of repos. management report Loans and advances to customers Outstanding customer loans increased by 6% or 5 billion euros. International lending continued to account for most of the total. Debt securities in issue Apart from traditional refinancing via interbank borrowings, Calyon raises liquidity via issuing paper in the main financial markets (particularly in the US, via Calyon North America and Calyon’s US branch, the UK, via Calyon’s UK branch, and France). Shareholders’ equity (Group share) Shareholders’ equity (Group share) totalled 12.4 billion euros, up by almost 1 billion euros relative to 31 December 2005. Movements in shareholders’ equity (Group share) arose mainly from: - net income for 2006: + 1.77 billion euros -d istribution of dividends with respect to 2005: -0.5 billion euros - r eduction in translation adjustments (-0.2 billion euros) due to the fall in the dollar. Prudential ratios European solvency ratio In accordance with regulations, Calyon has calculated its European solvency ratio on a half-yearly basis. This calculation is shown in the table below, which details the risks of Calyon measured in credit risk equivalents (after counterparty weighting) and the regulatory capital levels on the dates indicated, calculated in accordance with the French CRBF regulations on solvency ratios (91-05 and 95-02) and capital (90-02). In millions of euros 31.12.2006 31.12.2005 Credit risk 113,715 116,382 Market risk 12,072 21,482 8,406 17,490 Equity risk 351 244 Foreign exchange risk 273 312 12 18 3,030 3,417 125,787 137,864 Tier 1 12,080 12,143 Tier 2 4,115 1,793 Tier 3 258 175 Deductions (2,165) (1,166) Total available capital 14,288 12,945 Tier 1 solvency ratio 9.6 % 8.8 % Total solvency ratio 11.4 % 9.4 % Risk Interest rate risk Commodity risk isks calculated by internal R model Total weighted risks (denominator) Available capital At 31 December 2006, Calyon’s total solvency ratio was 11.4%, as opposed to 9.4% at 31 December 2005. Its Tier 1 solvency ratio was 9.6%, up from 8.8% at 31 December 2005. Calyon - shelf-registration document 2006 At year-end, the main components of shareholders’ equity were as follows: - Tier 1 capital was 12,080 million euros, after deducting a total of 1,329 million euros mainly for intangible assets and first-time consolidation differences. Tier 1 capital included 630 million dollars of preferred shares and 2,535 million dollars of super-subordinated notes taken up by Credit Agricole S.A., which help protect solvency ratios against movements in the dollar; - Tier 2 capital of 4,115 million euros included 3,864 million euros of redeemable subordinated notes, the balance being made up of participating securities and unrealised capital gains. The 2,322 million euro increase in 2006 resulted from issuance totalling 1,700 million dollars and 1,100 million euros with a view to obtaining Financial Holding Company status in the USA; - The 2,165 million euros of deductions included 915 million euros of non-consolidated investments in affiliates and other items of capital in credit institutions; - Tier 3 capital was 258 million euros. Risk-weighted assets stood at 125.8 billion euros at 31 December 2006, down 12.1 billion compared with 31 December 2005 (-8.8%). Credit risks fell by 2.7 billion euros. Balance-sheet downsizing operations limited the growth in outstandings generated by the Bank’s robust commercial development. Market risks fell by 9.4 billion euros with respect to 31 December 2005. This decrease resulted mainly from the use of an internal Value at Risk model to measure issuer risk on interestrate instruments. Solvency ratio reform The proposed transposition of the European CRD system (2006-48-EC and 2006-49-EC) into French law was adopted on 20 February 2007, in the form of two decrees, one on “capital requirements applicable to credit institutions and investment companies”, the other amending CRB and CRBF regulations. Until 1 January 2008, all financial institutions may continue to report their ratios in CAD/ESR format (European solvency ratio). Since the period ended 30 September 2005, Calyon has produced a consolidated table of its CRD risk-weighted assets on a quarterly basis. As from the period ended 30 June 2007, during the parallel calculation phase preceding application of the new ratio, Calyon will report its CRD ratio to the Banking Commission at the different reporting levels required, in the requisite COREP regulatory format. 52 - 53 Recent trends and outlook 2007 outlook management report 2007: global yet moderate slowdown In 2007, the main uncertainty lies with the US economy. A continued slowdown in growth would probably spread to all other regions. World economic numerous imbalances would increase financial market volatility, fostering a climate of turbulence for the dollar and the equity markets. However, in the central scenario, the slowdown will not degenerate into recession. In the US, growth prospects are clouded by uncertainties. The inversion of the interest rate curve suggests that there is a risk of recession, but at the same time, the labour market is showing resilience and is consolidating foundations for growth. The anticipated dip in economic activity, with projected average growth of 2.3% in 2007, appears to reflect a loss of momentum in the middle of the cycle rather than the end of a cycle. In response, the US Federal Reserve could start to lower key rates before the end of the year, as investors are anticipating. Once concerns over growth have been mitigated, long rates and the dollar are expected to resume on an uptrend during the second half. In 2007, the euro zone could be adversely affected by a number of shocks. In addition to slower growth in the US, Europe will be exposed to domestic shocks, including tighter fiscal policies in countries such as Germany and Italy and a continued downturn in the property markets. However, these shocks will be cushioned by a brighter job outlook and by persistently favourable financial conditions. The business climate remains sound, suggesting that the slowdown in growth will be shortlived. Average growth over the full year is projected to be about 2%. In this climate, the European Central Bank is likely to continue its policy of raising interest rates during the first half, but not excessively, so as to curtail the rise in the euro, which is foreseeable in the short term. Likewise, while long rates are expected to edge up, the movement will probably be modest and is not likely to adversely affect the equity markets. In 2007, growth in the French economy looks set to continue to be near its potential, i.e. 2.1%. Domestic demand will continue to serve as the main growth driver. The measures adopted to protect purchasing power (increase in the “prime pour l’emploi” earned income tax credit, the income tax cut and the “Bouclier Fiscal”, maximum income tax rate) will serve as a stimulus for persistently robust consumer spending, providing that there are no major reversals in fiscal policy direction following the spring 2007 elections. In Japan, GDP growth is projected to remain close to its potential of 1.8% in 2007. It will be driven by business investment. The Central Bank is expected to continue cautiously to fine-tune its monetary policy, with the key rate to reach 0.75% by the end of 2007. China will continue to act as a driver, as the government continues to achieve more balanced sources of growth through increased domestic demand. Calyon In 2007, Calyon intends to play its part in pursuing the Crédit Agricole S.A. group’s 2006-2008 development plan and to consolidate its position as one of Europe’s top ten corporate and investment banks. The financing business will make extensive use of the international network to support expected growth in its commercial activity. It will also step up efforts to win new business in order to expand the customer base and increase business volumes. In capital markets and investment banking, the capital markets business intends to bolster its strong international position in interest-rate derivatives, pursue its existing growth plan in equity derivatives, strengthen its business base through greater diversification of revenue sources and types, and become more operationally robust. The brokerage business will seek to maintain its high profitability levels after an exceptional 2006. Calyon - shelf-registration document 2006 Recent events Press release dated 26 March 2007 Press release dated 9 January 2007 Citic East China and Calyon Financial Announce Joint Venture Agreement to Form Chinese Futures Brokerage Calyon and Société Générale plan to merge their brokerage activities currently carried out by Calyon Financial and Fimat Calyon and Société Générale have entered into exclusive negotiations regarding a possible merger of their brokerage activities, currently carried out by Calyon Financial and Fimat respectively. The newly formed entity would be a world leader in execution and clearing of listed financial futures and options (number 3 in the US in particular)1. This combined group would provide access to more than 70 derivatives exchanges to an international base of institutional clients. It would also be a major player in interdealer brokerage of listed or OTC derivatives and cash products such as prime brokerage services. The combination of both parties’ customer base, as well as their respective products and services, would ensure the new group’s competitiveness in the coming years as well as creating a strong potential for cross-selling. The considered merger would be jointly controlled by Société Générale and Calyon, with headquarters located in Paris. The two groups will commence mutual due-diligence processes, with the aim of signing a definitive agreement. Prospects for the newly created group would be presented at the time of signing of the definitive agreement. The project will be subject to a consultation of employee representatives. Ranking based on customer segregated funds on US markets and customer amounts required on foreign markets as of 31/10/2006 (source: Commodity Futures Trading Commission) 1 Citic East China (Group) Corp., Ltd and Calyon Financial Hong Kong Ltd. today announced the signing of a joint venture agreement, forming a new futures brokerage entity established under the Closer Economic Partnership Arrangement (referred as CEPA). If all approvals are obtained as per schedule, the joint venture may become the first futures brokerage in Shangai and second futures brokerage in China that is jointly owned by a Chinese firm and a Hong Kong brokerage firm. Citic East China will be the majority shareholder. Citic Futures is part of China’s top State-Owned Enterprise, namely Citic Group. Citic Futures currently has memberships on the Shangai Futures Exchange, Dalian Commodity Exchange and Zhengzhou Commodity Exchange. Calyon Financial Hong Kong is a part of Calyon Financial Group, which is wholly owned by Calyon Credit Agricole CIB and part of the Credit Agricole Group in France. Calyon Financial is a leading global futures brokerage firm and has access to more than 70 global financial and commodity exchanges. After signing the agreement, the joint venture will seek regulatory approval from the China Securities Regulatory Commission (CSRC) and relevant required regulatory bodies. The overall approval process is anticipated to conclude within three to six months. News release of 16 May 2007 on Crédit Agricole S.A.’s first-quarter 2007 results In its news release concerning its first-quarter 2007 results, Crédit Agricole S.A. reported record earnings in Calyon’s corporate and investment banking activities, which benefited from strong commercial momentum in all areas and generated record quarterly revenues. 54 - 55 management report Analysis of Calyon parent company financial statements The Calyon parent company operates in all Group business lines except brokerage and international private banking, which are handled by subsidiaries. Gross operating income amounted to 1,878 million euros in 2006, an increase of 596 million euros or 46% relative to 2005. Calyon’s total assets were 486.8 billion euros at yearend, substantially higher than a year previously (363.4 billion euros). The increase in total assets resulted mainly from growth in securities activities (repo transactions with interbank customers, fixed- and variableincome securities held on own account for trading). This was driven by a rapid advance in market transaction volumes. At 31 December 2006, Calyon accounted for 82.7% of the Calyon group’s total assets, up from 75.5% at 31 December 2005. The risk environment was positive in 2006, resulting in a net release of 5 million euros from risk reserves, as opposed to a net release of 206 million in 2005. Following the decisions taken by the General Meeting of 16 May 2006, the payment of some dividends in shares led to a 316 million euro capital increase and a share premium of 692 million euros. After dividend payments during 2006 and net income for the year, shareholders’ equity totalled 9.9 billion euros, up 10.9% relative to the end-2005 figure of 8.9 billion euros. In 2006, Calyon generated net banking income of 4,175 million euros, an increase of 910 million euros (27.9%) compared with the 2005 figure of 3,264 million euros. Calyon’s net banking income accounted for 71.2% of the Calyon group’s total. This sharp rise in net banking income was driven by trading portfolio operations (securities, interest-rate derivatives and forex trading). Growth in capital markets transactions accounted for a large portion of Calyon’s performance in 2006, particularly structured credit, equity derivatives and interest-rate derivatives transactions. General operating expenses totalled 2,231 million euros, an increase of 308 million euros or 16% relative to 2005. The rise reflects variable remuneration, which increased in line with strong business growth, while growth in fixed personnel costs was limited. Personnel costs rose by 17.2% to 1,364 million euros. The tax charge was 399 million euros, substantially higher than the 137 million euros in 2005. The increase was due to higher taxable income and the fact that tax loss carryforwards had been used up completely both in France and abroad. Overall, Calyon’s net income was 1,531 million euros, up 181 million euros or 13.4% relative to 2005. Calyon Paris generated net income of 851 million euros, while branches contributed 680 million euros. As a result, Calyon accounted for 86% of the Calyon group’s consolidated income. Calyon - shelf-registration document 2006 Five-year financial summary 2002 2003 2004 992,250,432 1,142,480,673 3,119,771,484 36,750,016 42,314,099 115,547,092 115,547,092 127,257,523 125,494 121,991 465,813 497,286 382,645 332 640 37 704 1,790 31 35 135 120 318 Income after tax, depreciation, amortisation and provisions 271 562 745 1,350 1,531 Dividends paid 240 432 250 1,551 2,049 Share capital at year-end Number of shares issued 2005 2006 3,119,771,484 3,435,953,121 Results and transactions for the year (in millions of euros) Gross revenues Income before tax, depreciation, amortisation and provisions Corporate income tax Per share data (in euros) Income after tax but before depreciation, amortisation and provisions (1) 8.19 (2) 14.36 Income after tax, depreciation, amortisation and provisions (1) 7.36 (2) 13.32 Dividend per share 6.57 (3) (0.85) (3) 10.25 6.45 5.05 (5) 11.57 11.68 (5) 12.03 (4) (4) 2.16 13.42 16.10 Personnel Number of employees (6) 5,340 (6) 4,905 (6) 6,562 (6) 7,782 (6) 7,735 Wages and salaries paid during the financial year (in millions of euros) 494 534 756 869 962 Employee benefits and social contributions (in millions of euros) 153 166 257 289 337 (1) (2) (3) (4) (5) (6) Calculation based on Calculation based on Calculation based on Calculation based on Calculation based on Average headcount. number number number number number of of of of of shares in issue shares in issue shares in issue shares in issue shares in issue excluding treasury excluding treasury excluding treasury excluding treasury excluding treasury stock stock stock stock stock at end-2002, i.e. at end-2003, i.e. at end-2004, i.e. at end-2005, i.e. at end-2006, i.e. 36,513,824. 42,179,533. 115,547,092. 115,547,092. 127,257,523. 56 - 57 Recent changes in share capital The table below shows changes in Calyon’s share capital over the last five years. Date and type of transaction Share capital at 31 December 2001 15/05/2002 Capital increase following CPR merger management report 05/06/2002 Scrip dividend payment Amount of share capital (in euros) Number of shares 937,997,523 34,740,649 + 6,377,184 + 236,192 + 45,440,325 + 1,682,975 Exercise of options + 2,435,400 + 90,200 Share capital at 31 December 2002 992,250,432 36,750,016 30/06/2003 Scrip dividend payment Cancellation of treasury shares 18/11/2003 Capital increase following transfer of CAIC shares to Crédit Agricole S.A. Exercise of options Share capital at 31 December 2003 30/04/2004 + 68,712,435 + 2,544,905 (2,743,902) (101,626) + 82,522,908 +3,056,404 + 1,738,800 + 64,400 1,142,480,673 42,314,099 Capital increase following Crédit Agricole S.A.’s transfer of a portfolio of debt instruments to Calyon + 163,974,240 + 6,073,120 Share issue for cash + 297,000,000 + 11,000,000 01/05/2004 Capital increase following transfer of Crédit Lyonnais’ corporate and investment banking activities to Calyon 27/05/2004 Cancellation of treasury shares + 1,380,335,229 + 51,123,527 (3,633,282) (134 566) Scrip dividend payment + 139,614,624 + 5,170,912 Share capital at 31 December 2004 3,119,771,484 115,547,092 Share capital at 31 December 2005 3,119,771,484 115,547,092 316,181,637 11,710,431 3,435,953,121 127,257,523 Scrip dividend payment Share capital at 31 December 2006 Calyon - shelf-registration document 2006 Authorisations to effect capital increases Information required by Order 2004-604 of 24 June 2004, reforming the system applicable to negotiable securities. Table summarising authorisations in force granted by the General Meeting of Shareholders to the Board of Directors to effect capital increases (article L 225-100 of the Code de Commerce). Authorisation valid at 31 December 2006 Meeting of shareholders’ (resolution) Duration Purpose, extent and limits of grants Use made of grants during 2006 Grant of authorisation to the Board of Directors to increase the capital by a nominal amount of up to 400,000,000 euros 16 May 2006 (12th resolution) 26 months, i.e. until 16 July 2008 - t hrough the issue of shares for cash, with preferential subscription None rights maintained, - and/or through the capitalisation of reserves, earnings or share premiums Authorisation expired in 2006 Meeting of shareholders’ (resolution) Duration of authorisation Purpose, extent and limits of the authorisation 30 April 2004 (24th and 25th resolutions) 2 years, i.e. until 30 April 2006 Grant of authorisation to the Board of Directors to increase the capital by issuing shares for cash up to a nominal amount of up None to 400,000,000 euros with preferential subscription rights waived in favour of Crédit Agricole S.A. Use made of authorisations in 2006 Information about the corporate officers Information relating to the compensation, terms of office and functions of corporate officers as required by article L.225-102-1 of the Code de Commerce, the new economic regulations act of 15 May 2001, the financial security act of 1 August 2003 and order 2004-604 of 24 June 2004, is provided in the “Governance and internal control” chapter on pages 31-40 of this document. Information relating to trading in the Company’s shares by Calyon’s executives in 2006, required by article L.62118-2 of the Code Monétaire et Financier, and article 223-26 of the Autorité des Marchés Financiers’ general regulations as amended by the order of 4 January 2007, is provided in the “Governance and internal control” chapter on page 40 of this document. 58 - 59 Appendix to the management report management report Internal control Under the French financial security act (Loi de Securité Financière or LSF) of 1 August 2003, the Chairman of the Board of Directors must submit a report to the General Meeting of Shareholders, in conjunction with the annual management report, detailing how the Board prepares and organises its work and describing internal control procedures implemented by the company. This report includes information on the procedures and organisation of the internal control system applied throughout the company. Control and Audit Group Control and Audit forms an integral part of the Credit Agricole S.A. Group’s control and audit business line. It is responsible for conducting periodic controls covering the entire range of activities specified by Banking and Financial Regulation Committee regulation 97-02 as amended, and for ensuring compliance with the Group’s internal regulations across all Calyon units. It also analyses the hedging of all types of risks incurred by the Group, and is the final level of control for assessing the effectiveness of the control and audit system. reported to the Head of Group Control and Audit in his previous capacity as head of Control and Audit, has become part of the Risk and Permanent Control Division. Compliance Calyon’s Compliance organisation helps ensure that Calyon’s operations and staff comply with laws and regulations, professional standards and practices and instructions given by the supervisory or executive body. Compliance activities are carried out systematically at the business line, branch and subsidiary levels in France and abroad. Overall, the Calyon group has 200 staff (full-time equivalent) dedicated to compliance, with a significant proportion working in international private banking. The Chief Compliance Officer reports hierarchically to the Chief Executive Officer of Calyon and functionally to Credit Agricole S.A.’s compliance services. Assisted by a Head of Compliance and a Head of Financial Security, he also supervises the heads of compliance in the group’s various branches and subsidiaries. Several major compliance projects took place in 2006: The departmental head reports to the Credit Agricole group’s Head of Group Control and Audit and Calyon’s Chief Executive Officer on the work and investigations in hand. Group Control and Audit operates independently of the various business units and therefore has neither responsibility for nor authority over the activities it monitors. To this end, Group Control and Audit and the local internal audit units of the various branches and subsidiaries carry out checks on all aspects of group entities’ activities and operations. Local audit teams monitor implementation of recommendations made by the various internal and external control bodies on a twice-yearly basis. In 2006, Group Control and Audit refocused on periodic control in accordance with the aforementioned regulation. The internal control co-ordination team, which previously -n ew compliance manuals were distributed to Calyon staff, - a new system for monitoring the personal transactions of staff carrying out sensitive activities was introduced, - a market abuse monitoring system was selected and the resulting project began its operational phase, - FIDES training continued and specific compliance training was introduced for front office sales teams, - a product database was created for Calyon France and the international network, - the MIFID project reached its operational phase, in line with the European MIFID directive, - s econd-level compliance checks continued, with nine new assignments carried out, - most internal and external recommendations concerning the securities reporting system were implemented, - the suitability monitoring system for market transactions Calyon - shelf-registration document 2006 was finalised, covering the transactions of the capital markets department (France and international) and those of the French Regions department, - the system for reporting non-compliance incidents to Crédit Agricole S.A.’s compliance department operated normally, with 16 incidents reported in 2006. Financial security The financial security department’s work was affected by several regulatory and legislative texts published in 2006. New procedural memos were issued and organisational measures were prepared to meet these new regulatory requirements. Risk factors The organisation of the Group’s risk management operations is presented in Note 4 to the financial statements on page 106. The note describes the risk monitoring and consolidation system, risk factors and the methods used to identify and measure risk. Calyon’s risk exposure and management Basel II For Calyon, the reform of the international solvency ratio poses three main challenges: Internal control systems and methods: - integration of Singapore and the Gulf countries into the “Fircosoft” prior transaction filtering system, which now covers almost all Calyon entities, - implementation in October 2006 of a new customer relationship tool for all Calyon entities (except private banking), which will be the sole basis for identifying customers, - selection of an automated transaction and account movement surveillance tool (handling monitoring and profiling activities as part of anti-money laundering efforts) and start of the project. In 2006, the Financial Security unit continued to oversee risks falling within its scope. There was a significant increase in issues referred to it by operational staff for its opinion. Anti-money laundering training was given to more than 3,500 staff either in training sessions or through e-learning. Financial Security’s supervision of KYC (know your customer) forms for new customer relationships ceased in October 2006. This was a temporary arrangement pending the introduction of the Kiwis tool, which now classifies customers by money laundering risk. Financial Security looked at 4,688 new customer relationships in the first ten months of the year. -p roviding the Credit Agricole group with the specific expertise of Calyon’s business lines in applying of Basel II reforms, - ensuring that Calyon’s shareholders’ equity covers its portfolio risks, - improving and standardising day-to-day risk management. Since mid-2004, the implementation of the reform has been co-ordinated by the Risk and Permanent Control Division (RPCD), with the assistance of all of Calyon’s business lines and support functions. The work is organised into assignments covering banking and IT systems. Governance is provided by: - s teering committees chaired by the Management Board, - banking and IT Project Committees chaired by the RPCD and the Organisation and Processing Division respectively, - and specific Crédit Agricole S.A. group-level committees, with the involvement of subsidiaries and the Regional Banks. In 2006, governance was strengthened by two additional committees. The first focused on preparing the authorisation file and was chaired by a representative of the 60 - 61 Management Board, while the other was dedicated to data quality. As in 2005, the Management Board, the Board of Directors and the Control and Audit Committee were regularly informed of the project’s progress. management report In line with the conclusions of an audit covering the entire system conducted by Crédit Agricole S.A.’s Group Control and Audit, work in 2006 focused on: -d eveloping additional methods, - improving documentation and ensuring that all methods are documented, - improving data quality, - introducing more formal processes for default management, - f inalising the collation of loss histories, - industrialising certain aspects of the IT system. Calyon aims to gain authorisation from the Commission Bancaire to use the IRB (Internal Ratings Based) method in 2007. Credit risk given default. These models have been implemented in tools for granting loans and quantifying credit risk. Overall, Calyon has ensured that the risk parameters that are required by Basel II and allow the calculation of capital requirements are implemented as part of the Bank’s internal management. They are used by all people involved in the process of granting loans and measuring and monitoring credit risks. When a loan is granted, the projected returns on the loan are calculated using these risk parameters defined in accordance with Basel II. Credit policy and risk strategies Credit decisions depend on upstream risk strategies that define the boundaries within which each business line or geographical entity must conduct its activities: industrial sectors included (or excluded), type of counterparty, nature and duration of transactions and products authorised, category or intensity of risks incurred, existence and value of guarantees, overall portfolio volume, definition of individual and overall risk level, diversification criteria. Portfolio risks Internal rating system The internal rating system covers all methods, procedures and controls allowing credit risk and loss given default measurements and borrower ratings for all of our exposures. Calyon uses an internal ratings system that assesses the quality of risks taken on all counterparties on which it bears risk. Methods used cover all types of counterparty and combine quantitative and qualitative criteria. They are devised using the expertise of the various financing activities within Calyon or the Crédit Agricole group if they cover customers shared by the whole Group. The rating scale has 15 positions. The internal rating of corporate customers is conducted under a system deployed across the Credit Agricole group, known as “FRANE” (corporate rating regulatory support functions), which ensures that uniform ratings are applied throughout the group. Within Calyon, the internal rating of counterparties forms the basis for the approval of commitments and is one of the fundamental aspects of the process for granting, monitoring and quantifying credit risks. Calyon has opted for the advanced internal ratings approach with respect to the Basel II reforms. As a result, in addition to borrower rating methods, Calyon has defined and implemented methods to estimate loss Decision-making and individual risk monitoring within Calyon are backed up by a portfolio risk monitoring system that enables the group to assess counterparty risks for its overall portfolio and for each of the constituent sub-portfolios, according to a breakdown by business line, sector, geographic zone, or any delineation that brings out specific risk characteristics in the overall portfolio. Portfolio reviews are conducted periodically at each profit centre in order to check that the portfolio adheres to the risk strategy in force, to assess the various segments of the portfolio against one another and against any aspects of the operating environment or external impacts that may be influencing them, and finally to reassess the internal rating of the counterparties under review. A concentration analysis is carried out in order to detect any concentration deemed to be excessive for both the overall portfolio and the constituent sub-portfolios. Calyon employs credit risk modelling tools to implement this portfolio approach. In particular, it uses an internal portfolio model that enables it to calculate expected loss, volatility and unexpected loss indicators, while factoring in the positive impact of the protection purchased (credit default swaps, securitisations), and to measure the effects of diversification via a correlation model. Calyon - shelf-registration document 2006 Sector risks Calyon’s portfolio is analysed by major industrial sector at regular intervals, at least once a quarter. The RPCD reviews the risks within each sector in terms of commitments, level of risk (expected loss, economic capital) and concentration. The latter is assessed on two levels: the sector’s weighting within Calyon’s overall portfolio and the level of diversification within each sector. At the same time, the economic and financial risks of each significant sector are analysed and leading indicators of deterioration are monitored. Stress scenarios are also prepared where necessary. In the light of these various analyses, the RPCD recommends measures to diversify or protect sectors at risk of deterioration. Country risk Country risk is the risk that economic, financial, political or social conditions in a foreign country will affect the bank’s financial interests. It does not differ in nature from “elementary” risks (credit, market and operational risks). It constitutes a set of risks resulting from the bank’s vulnerability to a specific political, macroeconomic and financial environment. The group manages and controls its country risks according to the following principles: -a ctivities exposed to country risk are defined and identified through the development and monitoring of analytical country risk management tools; - acceptable country risk exposure limits are determined through annual reviews of country strategies, depending on the portfolio’s vulnerability to country risk. This degree of vulnerability is determined by the type and structure of transactions, the quality of counterparties and the term of commitments. Exposure limits may be reviewed more frequently if developments in a particular country make this necessary. These strategies and limits are validated by Calyon’s Strategy and Portfolio Committee or Country Risk Committee and Credit Agricole S.A.’s Group Risk Management Committee; - country risk is evaluated on a regular basis. Ratings on each country to which the group is exposed are updated quarterly. These ratings are based on various criteria (economic, financial, political, crisis scenarios) developed according to the bank’s own methodology. Specific events may cause ratings to be adjusted outside of the quarterly schedule; - the Country and Portfolio Risk department validates transactions whose size, maturity and exposure may potentially affect the quality of the portfolio; - c ountry risk exposure is monitored and controlled both quantitatively (amount and term of exposure) and qualitatively (portfolio vulnerability) through specific and regular reports on all country risk exposures. Country risk policy Calyon’s exposure to risk in emerging-market and nonOECD countries increased substantially in 2006 (+33.7% in dollar at end-December 2006). At the same time, Calyon prioritised transactions in the least risky countries and endeavoured to improve its overall risk profile. The increase resulted from exposure to risk at local entities and offshore operations. The quality of the portfolio continued to improve in 2006, aided by the ongoing healthy market environment in emerging-market countries. Ratings on 8 countries were upgraded, while four were downgraded in 2006. The increase in assets was concentrated in the least risky emerging market countries. Countries in which economic, financial or political developments are deemed to be a potential cause for concern are monitored closely in terms of both ratings and management of the group’s exposure limits and levels. Collective reserves The method for calculating collective reserves has been applied since 2005 with the aim of complying with IAS 39. Collective reserves are booked whenever objective impairment indicators are identified for one or more homogenous portfolio subsets. Such subsets requiring collective reserves are identified by listing assets whose risk level has already deteriorated and by analysing industrial sectors and countries as described above. Stress scenarios Credit stress scenarios are devised to assess Calyon’s risk of loss in the event of a serious deterioration in the economic and financial environment. There are two types of stress scenario: the first aims to reflect the equity and revenue impact of a macroeconomic deterioration affecting the whole portfolio. The second focuses on a section of the portfolio that constitutes a homogeneous set of risks. Scenarios are devised either as part of risk strategies to support decisions, or for occasional enhanced surveillance requirements. 62 - 63 Use of credit derivatives The Bank uses credit derivatives and a range of risk transfer instruments, including securitisation, in managing its banking book. Outstanding amounts of protection purchased in the form of credit derivatives came to 12.5 billion euros in nominal value at end-2006. The notional amount of sell positions totalled 2.6 billion euros. 2006 trends Portfolio analysis management report Net values on Calyon’s consolidated balance sheet At 31 December 2006 Net exposure (1) Lending to customers % change As % of total In millions of euros As % of total 101,466 63% 87,415 65% 16% 59,519 37% 47,085 35% 26% Lending to banks Leasing Total At 31 December 2005 In millions of euros 476 0% 505 0% (6%) 161,461 100% 135,005 100% 20% Source: financial statements (1) Figures entered on the balance sheet are net of reserves Net lending to customers represented almost two thirds of loans and advances on the balance sheet at 31 December 2006. The increase of 14 billion euros (or 16%) includes the impact of the dollar’s decline against the euro. Changes in the “due from banks” item resulted mainly from an increase in securities purchased under repo agreements. Breakdown of Calyon’s gross outstandings by geographical region Gross outstandings (1) In millions of euros 31 December 2006 31 December 2005 % of total 2006 France (including overseas departments & territories) 28,803 31,629 18% Other European Union countries 64,103 40,311 40% Rest of Europe 8,679 7,766 5% North America 24,727 14,543 15% 8,008 8,653 5% Central & South America Africa & Middle East Asia/Pacific (excluding Japan) Japan Total (balance sheet) 9,424 9,961 6% 12,864 12,779 8% 5,139 10,493 3% 161,747 136,135 100% Source: financial statements (1) Including leasing, but excluding receivables from subsidiaries. With no reallocation of guarantees or credit insurance that shift risk for the group. Excluding repos, which rose by 24 billion euros, Calyon’s consolidated gross outstandings were near-flat in 2006. Outstandings are highly diversified, reflecting the predominance of international activities, which account for more than 80% of total loans and receivables. The breakdown also reflects Calyon’s strong positions in Europe, and not just France. Europe accounts for 45% of Calyon’s total outstandings. Calyon - shelf-registration document 2006 Breakdown of Calyon’s gross outstandings by customer type Gross outstandings (1) In millions of euros 31 December 2006 Central government, government agencies and local authorities Financial institutions Personal customers and small businesses Corporate customers and other, including insurance companies Total (balance sheet) 31 December 2005 % of total 2006 3,743 7,018 2% 81,359 56,338 51% 3,505 4,409 2% 73,140 68,370 45% 161,747 136,135 100% Source: financial statements (1) Including leasing, but excluding receivables from subsidiaries. The breakdown of outstandings by customer type shows a balance between corporate and financial institution customers. Most repo transactions involve financial institutions. Personal customer outstandings relate to Calyon’s international private banking activity. Breakdown of Calyon’s exposure by economic sector Sector In millions of euros Exposure at 31/12/2006 % Exposure at 31/12/2005 % Energy 49,144 17% 38,109 18% Other, securitisation vehicles 47,915 16% 36,947 17% Heavy industry 22,154 8% 13,444 6% Telecoms 22,096 8% 13,971 7% Production and distribution of consumer goods 20,049 7% 14,271 7% Property 16,497 6% 10,656 5% Automotive 15,329 5% 11,229 5% Aerospace 13,176 4% 11,836 6% Shipping 12,295 4% 9,440 4% Media and publishing 10,668 4% 5,723 3% Food 9,700 3% 7,325 3% Other industries 9,097 3% 7,532 4% IT and technology 8,728 3% 5,942 3% Tourism, hotels and restaurants 7,458 3% 4,965 2% Construction 6,845 2% 6,518 3% Healthcare and pharmaceuticals 6,107 2% 5,164 2% Other transport 6,085 2% 4,013 2% Wood, paper and packaging 4,394 1% 1,851 1% Utilities 2,929 1% 2,622 1% Other 2,825 1% 931 0% Total 293,491 100% 212,491 100% Source: Risk and Permanent Control Division Scope: Gross on - and off-balance sheet outstanding loans to industrial and commercial companies and potential future risk, including securities transactions and derivatives. Potential risk consists of the additional coefficient on future risk of market transactions and undrawn confirmed credit facilities. 64 - 65 management report The proportion of outstandings concerning the energy sector, including the upstream, downstream, production and trading segments, was relatively stable at 17%, which is similar to the sector’s share of the broad economy. Calyon lends to integrated oil majors and large European electricity companies. It also provides trade finance to specialist energy traders. To a lesser extent, it lends to independent producers and carries out project financing. As a result, the cumulative credit risk is mitigated by the diversity of activities financed. High energy prices are also having an impact on the scale of outstandings. Outstandings in the “other” category include those relating to holding companies with diversified activities, which cannot be classified in any one sector, and securitisations (8%) whose risks relate to customers that also have a range of activities. Heavy industry (8% of total exposure) includes sectors benefiting from strong global growth, i.e. chemicals, steel and building materials. The portfolio consists of major multinational companies. The telecoms portfolio (8% of total exposure) is focused on incumbent operators and leading mobile players in countries where mobile telephony is the main vehicle for development (i.e. emerging-market countries). We are continuing to monitor this sector closely given rapid technological developments and the declining market shares of incumbent operators. Consumer goods companies (7% of total exposure) mainly consist of leading French retailers with extensive operations outside France, and few manufacturers. Real estate (6% of total exposure) maintained a relatively stable position in the portfolio. The amount of risk genuinely related to real estate development is low, and the portfolio is mainly European. The USA accounts for less than 15% of the real estate portfolio, with risks concentrated on the main homebuilders. We have a cautious approach to the automotive sector, which accounts for 5% of total exposure. Risks associated with automotive equipment makers are low. Exposure to North American carmakers is no more than 15% of the total. In the shipping and aircraft sectors (4% of exposure each), Calyon mainly provides financing secured on assets, structured finance or loans to leading companies. No other sector accounts for more than 4% of total exposure. Impairment and risk coverage policy Loan loss risks are covered by two types of impairment charges, which were adapted to meet new accounting standards in 2005: - individual impairment to cover probable losses on impaired loans; - collective impairment to cover the risk of deteriorating credit profiles affecting certain countries, industry sectors and counterparties that are not in default, due to the decline in their credit ratings. The impairment policy applies to all impaired and sensitive loans: - either after an individual examination of the counterparty’s situation and of the Bank’s security, depending on various scenarios; - or through collective impairment in the case of loans not in default, country risks and sensitive sectors. Doubtful loans and advances to banks and customers amounted to 2,059 million euros, or 1.27% of gross receivables on the balance sheet at 31 December 2006. The apparent coverage rate of doubtful loans with individual impairment charges was 42%. However, in reality the figure was stable with respect to 2005 at 59%, taking into account not just impairment charges but also partial transfers to profit and loss and purchase discounts on new investments. In addition to the 865 million euros of individual impairment on doubtful and non-performing loans, Calyon had 1,125 million euros of collective impairment at 31 December 2006. Calyon - shelf-registration document 2006 Bad and doubtful debts and impairment by geographical zone 31.12.2006 In millions of euros Gross Doubtful debts outstandings outstanding Impairment on doubtful debts Bad debts outstanding Impairment on bad debts Total France (including overseas departments & territories) 28,803 109 (50) 184 (92) 28,661 Other European Union countries 64,103 61 (23) 809 (111) 63,969 Rest of Europe 8,679 5 59 (59) 8,620 North America 24,727 155 (26) 137 (74) 24,627 Central & South America 8,008 31 (21) 168 (127) 7,860 Africa & Middle East 9,424 1 150 (138) 9,286 12,864 11 170 (137) 12,722 5,139 7 2 (2) 5,137 161,747 380 1,679 (740) 160,882 Asia/Pacific (excluding Japan) Japan Total The geographical breakdown of doubtful debts and impairment shows: - an above-average impairment rate for Africa, the Middle East and Asia, where doubtful loans mainly relate to old arrangements on which a high level of impairment has been booked; (5) (125) - a lower impairment rate in the USA (due to the writeoff of unrecoverable losses and the genuine prospects of recovery on these loans), the European Union and Japan. Bad and doubtful debts and impairment by type of customer 31.12.2006 In millions of euros Central government, government agencies and local authorities Financial institutions Gross Doubtful debts outstandings outstanding Impairment on doubtful debts 3,743 Bad debts outstanding Impairment on bad debts Total 101 (90) 3,653 81,359 9 (3) 185 (184) 81,172 Personal customers and small businesses 3,505 24 (14) 117 (85) 3,406 Corporate customers and other, including insurance companies 73,140 347 (108) 1,276 (381) 72,651 161,747 380 (125) 1,679 (740) 160,882 Total Counterparty risks on capital market activities The tables below set out Calyon’s exposure to counterparty risks resulting from forward and options transactions on interest rates, currencies, commodities and precious metals. At 31 December 2006, the market replacement cost (or positive market value) of these instruments, after factoring in the impact of netting and collateralisation, was 13.66 billion euros, 12.27 billion euros of which related to the trading portfolio. This amount breaks down by counterparty type as follows: 66 - 67 Market value Before netting and collateralisation Impact After netting and collateralisation 0.78 (0.30) 0.48 85.18 (79.31) 5.87 9.84 (2.53) 7.31 Before netting and collateralisation Impact After netting and collateralisation 0.51 (0.16) 0.35 OECD financial institutions and similar bodies 75.83 (50.39) 25.44 Other counterparties 11.39 (2.70) 8.69 In billions of euros OECD governments and central banks and similar bodies OECD financial institutions and similar bodies management report Other counterparties Potential credit risk, estimated on the basis of regulatory add-ons, amounted to 34.48 billion euros, 33.71 billion euros of which related to the trading portfolio. This amount breaks down by counterparty type as follows: Potential credit risk In billions of euros OECD governments and central banks and similar bodies Market risk Almost all (99%) transactions are concluded in order to manage positions. The balance may be considered as hedging in accordance with accounting standards. The definition of market risks, risk measurement and management methods and the organisation of the risk management system at Calyon are described in note 4.2 to the financial statements. The counterparty risk on OTC equity and index derivatives can be estimated at: Value at Risk (VaR) -m arket value, which amounted to 2.87 billion euros, of which 0.22 billion euros related to OECD financial institutions (or equivalent) and 2.65 billion euros to other counterparties; -p otential risk estimated on the basis of regulatory add-ons, totalling 8.07 billion euros, of which 3.91 billion related to OECD financial institutions (or equivalent) and 4.16 billion euros to other counterparties. VaR is the central plank of the risk measurement system. Calyon has set an overall risk limit, expressed in VaR terms, for all its capital markets activities which stood at 35 million euros at 29 December 2006. The table below shows changes in the VaR of activities grouped according to their principal risk factor: Commodities Forex Interest rate Credit Equities Netting Calyon Max 2006 7 3 18 16 12 (10) 29 Min 2006 2 1 7 6 5 (23) 12 Average 2006 4 2 11 10 8 (17) 18 Calyon - shelf-registration document 2006 At 29 December 2006: - Credit VaR was 11 million euros, based on the scope of credit market activities. - Equity VaR was 8 million euros, covering the equity derivatives, equity funds and brokerage activities (mainly CLSA and Cheuvreux). - Fixed-income VaR was 9 million euros, relating to the treasury and interest-rate derivatives activities. - Forex VaR was 2 million euros, relating to cash forex and forex options activities. - Commodities VaR was 3 million euros. In 2006, average VaR was 18 million euros, with a maximum of 29 million euros. The significant level of netting reflects healthy risk diversification. The overall VaR trend for capital markets activities in 2006 was as follows: VaR Calyon 30/12/2005 - 29/12/2006 (in millions of euros) Equity risk Calyon’s equity risk results mainly from trading and arbitrage transactions involving equities, carried out as part of capital markets activities involving equity derivatives and funds. It also results, to a lesser extent, from CA Cheuvreux and CLSA’s equity brokerage activities. These activities are described in the description of Calyon’s business lines in the “Presentation of Calyon” section. As mentioned in note 7.18, neither the Calyon parent company nor any of its subsidiaries hold any own shares. Equity risk arising from trading and arbitrage activities is monitored using a 99% “Value at Risk” (VaR) method. This measures the greatest risk, based on a number of parameters and scenarios, once the most adverse 1% of occurrences have been eliminated. Average, minimum and maximum VaR figures and the VaR figure on 29 December 2006 are analysed by risk factor – and equity risk in particular – in the management report on p 68. The scope and organisation of the market risk management system are described in note 4.2 to the financial statements. 68 - 69 Global interest rate risk Legal risks Assessment To Calyon’s knowledge, on the date this document was registered, there were no exceptional events, litigation or arbitration proceedings, other than those mentioned below, that have recently had or may in future have a significant impact on the group’s financial position, activity, assets or results, and that are not reflected in the financial statements at 31 December 2006. management report Calyon uses the gap method to measure its overall interest-rate risk. This consists of determining maturity schedules and interest rates for all assets, liabilities and hedging derivatives at fixed, adjustable and inflationlinked interest rates, until the adjustment date for adjustable-rate items, until the contractual date for fixed-rate items and using model-based conventions for items without a contractual maturity. The results of these measurements at 31 December 2006, based on entities fully consolidated by Calyon, are as follows: In billions of euros Average gaps (on all currencies) 0-1 year 1-5 years 5-10 years 0.2 1.0 0.7 Based on these gaps, the sensitivity of net banking income in the first year (2007) is a loss of less than 2 million euros in the event of an adverse 100-basis-point movement in all interest rates. The cumulative discounted risk for the next ten years, based on the same assumptions, represents less than 0.5% of regulatory capital. Calyon’s exposure to interest-rate risk in its customer transactions is limited through interest-rate matching carried out on customer assets by its market teams, and due to the low level of non-remunerated deposits. Liquidity risk Like all credit institutions, Calyon is exposed to liquidity risk, i.e. the risk of lacking sufficient funds to meet its commitments at their maturity, particularly in the event of a general shortage of liquidity, either in the market or in a given currency. Calyon’s Treasury department manages this risk. Each month a regulatory liquidity ratio is calculated. This ratio compares cash and assets with a low residual term against similarly short-term liabilities. This ratio must equal at least 100%. Calyon’s liquidity ratio was 107% on 31 December 2006. In the normal course of its business, Calyon is involved in a number of litigation and arbitration proceedings in several countries. Provisions are booked in respect of these litigation and arbitration proceedings when it is likely that they will result in an outflow of cash. The main ongoing legal proceedings corresponding with the above criteria and involving Calyon group entities are described in the 2004 and 2005 management reports. The cases presented below are those in which there were some changes in 2006: - FONDS CLARIDEN - A settlement was negotiated in 2006, and the matter is now closed. -M ONTLAUR - Calyon is a defendant in a wrongful action suit filed against several financial institutions in March 1995. The lower court’s dismissal of the claims made by plaintiffs was confirmed on appeal. The plaintiffs have lodged a further appeal. -O TOR - A settlement has been reached, putting an end to this dispute. - S AN DIEGO CITY EMPLOYEES’ RETIREMENT SYSTEM - Investors that acquired shares in a listed company as part of a public offering in 2001 have initiated a class action suit against the company, its directors, the sellers of the shares and the members of the placing syndicate, including Calyon. The members of the placing syndicate requested that the suit be rejected, and the request was accepted by the judge, although the plaintiffs still have the option to appeal. Binding agreements Calyon is not bound to any patent or licence, nor to any industrial, commercial or financial supply contract. Calyon - shelf-registration document 2006 Industrial and environmental risks Off-balance sheet commitments Calyon does not have any measurements of the impact of industrial and environmental risks. Calyon confirms that no material off-balance sheet commitments have been omitted from its financial statements, in accordance with current accounting standards. Employee, social and environmental information Information on the workforce and employee relations Calyon’s headcount Breakdown by business line at 31 December 2006 Breakdown by region at 31 December 2006 Calyon employees in France Breakdown by type of contract at 31 December 2006 Training contracts Number of contracts signed in 2006 308 Student interns 272 Professionalisation contracts (qualification, orientation, adaptation contracts) Apprenticeship contracts 32 4 70 - 71 Breakdown of the active permanent workforce at end-2006 management report Breakdown by gender and category Age structure Age and length of service The average age and length of service did not change in 2006, and remained at 43 years and 15 years respectively. Working time Contractual working time Breakdown of active permanent employees at 31 December 2006 by contractual working time Management Hourly Daily 93 3% 925 2,882 97% Other 0 Total 2,975 Part-time staff Number of part-time permanent staff by working time in 2005 < 70% ≥ 70% and < 90% ≥ 90% Total % of permanent part-time staff Non% management 100% % % 1,018 26% 0 2,882 74% 0 0 925 100% Total 100% 3,900 100% Breakdown of part-time staff by working time 2006 NonManagement management Total 12 32 44 159 152 311 12 19 31 183 203 386 6.2% 21.9% 9.9% Calyon - shelf-registration document 2006 Employment management New permanent employees Permanent staff departures (final departures) 2006 Management Resignation Nonmanagement 104 2005 Total % Total % 3 107 39% 106 19% Voluntary departure (external transfer) 25 3 28 10% 281 50% Retirement and early retirement 53 23 76 29% 103 18% Redundancy 44 3 47 17% 61 11% Death 4 4 8 3% 3 1% Other (departure during trial period etc.) 4 1 5 2% 6 1% 234 37 271 100% 560 100% Total Promotions 2006 2005 Men Women Promotion within non-managerial category 40 106 Promotion from non-managerial to managerial 21 190 Promotion within managerial category Total % Total Men Women Total 146 23 102 125 52 73 15 36 51 118 308 215 137 352 251 276 527 253 275 528 48% 52% 100% 48% 52% 100% 72 - 73 Compensation Individual salaries Average base monthly basic salaries for active permanent employees in 2006 (in euros) Men Women Total Managers 5,681 4,170 5,091 Non-managers 2,369 2,410 2,399 Total 5,294 3,515 4,450 management report Collective incentive plans Total variable compensation paid in 2006 (in euros) Number of beneficiaries Gross amount paid Average amount Profit sharing Incentive plan Employee savings plan top-up 37,139,953 5,008 7,416 6,174,265 4,183 1,476 Company-wide agreements Company-wide agreements signed during the year Topic of agreement Number Salary and related 4 Staff representation bodies 0 Training 0 Total 4 Absenteeism / reason / status Absenteeism (number of working days) 2006 Reason for absence Managerial Men 2005 Non-managerial Women Men Total Women Number Total % Number % Illness – less than 3 days 519 566 148 690 1,923 2% 1,116 1% Illness – 3 days and over 5,460 7,663 2,350 9,069 24,542 25% 58,744 39% 219 165 647 365 1,396 1% 798 Travel accidents Workplace accidents Maternity/paternity leave Strikes 357 278 1 110 746 1% 914 1% 1,180 16,944 164 2,070 20,358 21% 24,585 16% 1 2 8 17 28 51 1% Authorised leave 1,622 5,919 225 4,515 12,281 13% 23,807 16% Other reasons 9,084 20,253 1,091 5,238 35,666 37% 39,454 26% 18,442 51,790 4,634 22,074 96,940 100% 149,469 100% Total Calyon - shelf-registration document 2006 Training Number of employees trained Management Non-management Women Total 925 521 1,446 Men 1,403 205 1,608 Total 2,328 726 3,054 Number of hours of training Total 74,184 21,360 95,544 2006 Knowledge area No. of hours 2005 % No. of hours % Knowledge of Crédit Agricole S.A. group 1,216 1% 392 1% Personnel and business management 7,900 9% 9,521 13% 88 0% Insurance Banking, law, economics Financial management (accounting, management control, tax etc.) 39,947 47% 34,056 48% Purchasing, marketing, distribution 3,544 4% 1,439 2% IT, networks, telecommunications 7,610 9% 6,164 9% Office systems, business-specific software, new technology 7,328 9% 3,604 5% 12,000 14% 10,992 15% 88 0% 40 0% Personal development, communication 4,864 6% 5,089 8% Human resources 1,159 1% 85,744 100% Risk Languages Health and safety Human rights and environment (sustainable development) Total 71,296 100% 74 - 75 Environmental information Calyon and the “Equator Principles » management report Since 2003, Calyon has integrated social and environmental risks into its project financing decisions and is currently the only French bank to have adopted the Equator Principles, which are based on International Finance Corporation (IFC) directives. To meet this commitment, Calyon has set up a unit in charge of implementing the Equator Principles worldwide. This unit, consisting of operational staff from the project financing business, co-ordinates the practical aspects of implementing the Principles. It manages the network of local correspondents and provides special training for staff concerned. As well as acting as an internal interface, the co-ordination unit represents Calyon with respect to the IFC, other Equator Principles signatory banks and non-governmental organisations (NGOs). In addition, the Equator Principles Committee monitors the assessment and management of environmental and social risks. It is the authority in charge of ensuring compliance with rules. The Equator Principles Committee was set up in 2006 and meets several times per year. It rates projects as A, B or C based on the risks involved and their environmental impact, with A representing the largest risks and C the smallest. Specific consultations are held for all issues likely to be rated A and for any urgent matters. Since Calyon signed up to the Equator Principles, it has held special training sessions devised with the help of external consultants. More than 150 staff from the Project Financing business and internal departments (legal, compliance, industry and sector research etc.) have received training, specifically relating to tools for assessing and analysing environmental and social risks. Equator Principles awareness-raising initiatives have been organised within the group. In applying the Equator Principles, Calyon has developed a method for classifying projects according to identified risks. It was also behind the creation of a standardised assessment tool, developed by a company called Sustainable Finance, which is now used by several signatory banks. The method involves an assessment matrix, and makes the process of rating projects – by business sector (oil, chemicals, telecoms, healthcare etc.) and by area of influence – more consistent, more uniform and, most importantly, easier. An alert system complements the analysis, taking into account the political context in order to reduce financial risk further. Calyon is also part of the testing group that is helping to make practical improvements to this tool, ensuring that it adapts to changes in the market and in customer requirements. Version 3 has been in use since 1 November 2006. The new version allows more detailed assessment and analysis of transaction risks. Most discrepancies resulting from incorrect assessment of risk criteria in previous versions have been corrected. A project’s final rating is now given directly by the expert system, which also carries out consistency checks between the various answers. All new projects have to be evaluated using this procedure. In addition, Calyon is also classifying projects financed before these principles were adopted. All outstanding projects initiated before 2003 are also being categorised. Between 1 January 2005 and December 2006, Calyon assessed 312 projects: - 21 were given an A rating - 257 were given a B rating - 34 were given a C rating In collaboration with the IFC and other banks, Calyon has been involved in improving the Equator Principles through dialogue with NGOs representing civil society. As a result, a revised version of the Equator Principles was introduced in July 2006. The “EP2” principles now apply to all projects with a total cost of 10 million dollars or more (as opposed to 50 million dollars previously) and have been extended to project finance advisory activities. Each signatory bank now has to make public the number of projects financed and their categorisation. These principles are recognised as a world standard and as the expression of best environmental and social practice in the field of project finance. Calyon - shelf-registration document 2006 4 Financial information 78Consolidated financial statements for the year ended 31 December 2006 approved by the Board of Directors at its meeting of 28 February 2007 78 79 82 83 84 85 87 Foreword General background Income statement Consolidated balance sheet Changes in shareholders’ equity Cash flow statement Notes to the consolidated financial statements 148 Statutory Auditors’ report on the consolidated financial statements 150Information on the parent company financial statements 151 Balance sheet 152 152 153 154 155 Off-balance sheet items Income statement Changes in accounting methods Changes in share capital and share premiums Investments in subsidiaries and associates 76 - 77 financial statements Consolidated financial statements for the year ended 31 December 2006 approved by the Board of Directors at its meeting of 28 February 2007 The financial statements consist of the foreword, general framework, the income statement, the balance sheet, the statement of changes in shareholders’ equity, the cash flow statement and the Notes to the financial statements. Foreword Regulatory framework On 19 July 2002, the European Union adopted EC Regulation 1606/2002, which requires European companies whose securities are traded on a regulated market to produce consolidated financial statements under IFRS as from 2005. Applicable standards and comparability The consolidated financial statements have been prepared in accordance with IAS /IFRS and IFRIC interpretations as adopted by the European Union and applicable at 31 December 2006. The accounting principles and methods applied are the same as those used to prepare the consolidated financial statements for the Group for the year ended 31 December 2005, supplemented by the provisions of those standards and interpretations that must be applied in 2006 for the first time. These cover the following: This regulation was supplemented by EC Regulation 1725/2003 of 29 September 2003 on the application of international accounting standards, by EC Regulation 2086/2004 of 19 November 2004 allowing the adoption of IAS 39 in an amended format, and by EC Regulations 2236/2004, 2237/2004 and 2238/2004 of 29 December 2004, 211/2005 of 4 February 2005, 1073/2005 of 7 July 2005, 1751/2005 of 25 October 2005, 1864/2005 of 15 November 2005, 1910/2005 of 8 November 2005, 2106/2005 of 21 December 2005, 108/2006 of 11 January 2006 and 708/2006 of 8 May 2006. - the revision to IAS 19, Employee Benefits, pertaining to actuarial gains and losses and Group plans, - the revisions to IAS 39 on financial instruments and pertaining to cash flow hedging for future intra-group transactions and the conditions for using the fair value option, - the revisions to IAS 39 on financial instruments and of IFRS 4 on insurance contracts and applying to financial guarantee contracts, - the IFRIC 4 interpretation on conditions for determining whether an agreement contains a lease, - the amendment to IAS 21 on net investment in a foreign entity. Under the French Ministry of Finance decree No. 2004/1382 of 20 December 2004, companies, even if they are not publicly traded, may prepare their financial statements using IFRS as of 2005. All Calyon entities have elected for this option. The application of these new provisions had no material impact on the company’s income statement or balance sheet for the period. Calyon - shelf-registration document 2006 The Group has not applied the provisions of those standards, interpretations and amendments that are optional for the period. General background This applies to: Since the Extraordinary General Meeting of 30 April 2004, the company’s name has been Calyon. Its trading name is Calyon Corporate and Investment Bank. - IFRS 7 on information to be provided on financial instruments, - the amendment to IAS 1 on additional information to be provided on equity, - IFRIC 7 applying to the financial statement restatement approach under IAS 29, - IFRIC 8 clarifying the scope of IFRS 2, - IFRIC 9, Reassessment of embedded derivatives. The first three standards and interpretation will produce an impact only on the presentation of the Group’s financial statements. The last two interpretations are not expected to produce any material impact on the income statement or balance sheet. Financial statements presentation format Calyon uses summarised documents formats (balance sheet, income statement, statement of changes in shareholders’ equity, cash flow statement) advised by CNC recommendation 2004-R.03 of 27 October 2004. Legal presentation of Calyon Address and registered office of the company: 9 quai du Président Paul Doumer, 92920 Paris La Défense cedex France. Registration number: 304 187 701, Nanterre Trade and Companies Registry. APE code: 651 C. Corporate form Calyon is a societe anonyme (joint stock corporation) with a Board of Directors, governed by the laws and regulations applicable to credit institutions and joint stock corporations and by its Articles of Association. 78 - 79 Simplified organisational chart of Calyon Calyon International Network CIB 100 % CGB Calyon Global Banking 100 % Calyon Bank Hungary 100 % Calyon Bank Ukraine 100 % Banco Calyon Brasil 24 % Calyon Holdings (UK) Ltd 100 % Calyon Global Partners Inc 100 % Calyon Bank Turk AS 13 % Calyon Bank (Egypt) SAE 100 % Calyon Australia Ltd 100 % Filiales USA Branches Europe : Germany, Italy, Luxembourg, United Kingdom, Spain, Belgium, Finland, Sweden, Czech, Poland, Slovakia Asia : Japan, Taiwan, South Korea, China, Hong-Kong, India, Malaisia, Philippines, Singapore, Thailand, Vietnam Corporate and Investment Banking Américas : United States of America Others : Gulf, South Africa, Yemen Capital Markets & Investment Banking 100 % CA Chevreux 100 % CA Chevreux North America Inc. 100 % Other European subsidiaries and branches Financing 100 % Calyon Securities (USA) Inc 100 % CCMA - Calyon Capital Market Asia bv 100 % Calyon Securities Japan 100 % CPR Online 65 % CLSA Group 100 % Calyon North America Holdings Inc 9% 100 % Calyon Financial Inc 100 % Calyon Financial SNC 50 % CASAM 50 % Altura Markets International Private Banking financial statements 100 % Calyon Rusbank 100 % CCMI - Calyon Capital Market International 76 % 100 % CAI Banque Privée Holding 29 % CA Suisse and subsidiaries 71 % 100 % C.F.A. - Compagnie Française de l’Asie 40 % CA Luxembourg and subsidiaries 60 % 98 % Fininvest 2% 68 % CFM - Crédit Foncier Monaco 100 % CA Brasil DTVM 100 % CLINFIM 100 % Calyon Airfinance 31 % B.S.F.- Banque Saudi Fransi 100 % CLIFAP 100 % Calyon Asia Shipfinance 47 % UBAF - Union de Banques Arabes et Françaises Calyon - shelf-registration document 2006 Related parties Relations between consolidated companies within the Calyon group The Calyon group’s related parties comprise companies within the Credit Agricole S.A. group with which it has a stockholding relationship and/or joint directors. The information provided in this report is supplemented by the information given in the statutory auditors’ special report on regulated agreements on page 162 to 165. Relations with the Credit Agricole S.A. group On- and off-balance sheet sums outstanding representing transactions between the Calyon group and the rest of the Credit Agricole S.A. group are summarised in the following table: Outstandings In millions of euros 31 december 2006 Loans Loans and advances 4,375 Trading derivatives outstandings 8,251 Liabilities Loand and advances 2,219 Trading derivatives outstandings 7,136 Subordinated debts 6,142 Preference shares 418 Financing commitments Financing commitments received Guarantees received 94 1,363 The loans and accounts outstandings identify cash relations between Calyon and the rest of the Credit Agricole S.A. group. Trading derivatives outstandings mainly represent Crédit Agricole group interest-rate hedging transactions arranged by Calyon in the market. Subordinated debt outstanding increased following the issue of securities during the period in view of obtaining Financial Holding Company status in the USA. The amount of these issues was 1,700 million dollars and 1,100 million euros. The information concerning preferred shares appears in note 7.18. A list of Calyon group companies can be found in note 12 to the consolidated financial statements. Transactions and outstandings at the period end between fully consolidated companies are eliminated in full on consolidation. Therefore, the consolidated financial statements are only affected by transactions between fully consolidated companies and proportionally consolidated companies to the extent of the interests held by other shareholders. The corresponding sums outstanding in the consolidated balance sheet at 31 December 2006 concern the UBAF group, Altura and Chauray for the following amounts: - due from banks: 6 million euros - due to banks: 24 million euros Relations with the executive officers and senior management Detailed information on senior management compensation is provided in note 8.7 to the financial statements “Executive officers’ compensation”. 80 - 81 Income statement In millions of euros Notes 31.12.2006 31.12.2005 Interest receivable and similar income 5.1 11,729 10,303 Interest payable and similar expense 5.1 (13,689) (10,247) Fee and commission income 5.2 3,173 2,962 Fee and commission expense 5.2 (1,249) (1,044) Ne gains (losses) on financial instruments at fair value through profit or loss 5.3 5,390 2,466 5.4, 7.4 297 288 financial statements Net gains (losses) on available-for-sale financial assets Income related to other activities 5.5 297 300 Expenses related to other activities 5.5 (86) (90) 5,862 4,938 5.6, 8.1, 8.4 (3,468) (3,057) 5.7 (106) (111) Net banking income General operating expenses Depreciation, amortisation and impairment of property, plant & equipment and intangible assets Gross operating income* 2,288 1,770 Risk-related costs 5.8 9 87 Share of net income of affiliates 3.3 166 125 Net gains (losses) on other assets 5.9 5 203 Integration-related costs Goodwill Pre-tax income Income tax Net income Minority interests (86) 3.6 5.10 2,468 2,099 (620) (383) 1,848 1,716 77 84 Net income – Group share 1,771 1,632 Earnings per share 14.59 14.13 Diluted earnings per share 14.59 14.13 * in 2005, before integration-related costs Calyon - shelf-registration document 2006 Consolidated balance sheet Assets In millions of euros Notes 31.12.2006 31.12.2005 Cash, due from central banks and French postal system 7.1 1,787 4,890 Financial assets at fair value through profit or loss 7.2 359,535 288,302 4.2, 4.4 344 493 Derivative hedging instruments Financial assets available-for-sale 7.4 24,551 23,147 Due from banks 4.1, 4.3, 7.5, 7.6 59,519 47,085 Loans and advances to customers 4.1, 4.3, 7.5, 7.6 101,942 87,920 Securities portfolio 4.2, 4.4 3 Held-to-maturity financial assets 7.6, 7.8 Current tax assets 1 31 Deferred tax assets 7.10 743 711 Accruals, prepayments and sundry assets 7.11 37,053 26,154 Fixed assets held for sale 7.12 Investments in equity affiliates 2 3.3 668 524 Investment property 7.14 16 200 Property, plant and equipment 7.15 646 616 Intangible assets 7.15 82 57 3.6 1,250 1,214 588,170 481,316 Goodwill Total Assets Liabilities In millions of euros Notes 31.12.2006 31.12.2005 Due to central banks and current accounts with French postal system 7.1 80 457 Financial liabilities at fair value through profit or loss 7.2 302,991 239,393 Derivative hedging instruments 4.4 188 639 4.3, 7.7 78,810 72,912 4.1, 4.3, 7.7 84,035 71,665 4.3, 7.9 62,830 47,311 Due to banks Customer accounts Debt securities in issue Valuation adjustment on portfolios of hedged items 4.4 Current tax liabilities 2 438 135 Deferred tax liabilities 7.10 191 216 Accruals, deferred income and sundry liabilities 7.11 38,175 30,863 Liabilities associated with fixed assets held for sale 7.12 General reserves 7.17 920 1,169 Subordinated debt Shareholders’ equity 4.3, 7.9 6,277 4,342 7.18 13,235 12,212 Shareholders’ equity – Group share 12,396 11,496 Share capital and reserves 7,686 6,678 Consolidated reserves 2,569 2,611 Unrealised or deferred gains or losses 370 575 Net income for the year 1,771 1,632 839 716 588,170 481,316 Minority interests Total Liabilities and shareholder’s equity 82 - 83 Changes in shareholders’ equity Unrealised or deferred gains or losses Share capital and reserves In millions of euros Shareholders’ equity at 1 January 2005 Share Share premiums and other capital reserves (1) 3,120 6,646 Elimination of treasury shares 0 Retained earnings – Group share 9,766 Net Change in in income, fair value of Change fair value group On foreign available- of hedging share exchange for-sale instrufinancial ments assets (76) 199 125 0 Total equity, group share Minority interests Total shareholders’ equity 10,014 681 10,695 (489) (32) (521) 97 (1) 96 (37) (1) (38) 1,632 84 1,716 (61) (61) Capital increase financial statements Dividends paid in 2005 (489) (489) Change in value of available-for-sale securities (IAS 39) 97 Cash flow hedges (IAS 39) (37) 2005 net income 1,632 1,632 Impact of acquisitions/ disposals on minority interests Share of change in equity of associates companies accounted for under the equity method Change in goodwill 309 Other changes Shareholders’ equity at 31 December 2005 Capital increase (30) (30) 10,879 233 88 0 383 (58) 11,496 716 12,212 7,759 316 692 1,008 1,008 (1,551) (1,551) (1,551) (56) (1,607) 100 1 101 (138) (1) (139) 1,771 77 1,848 157 157 Change in value of available-for-sale securities (IAS 39) 296 74 (28) 3,120 Dividends paid in 2006 0 309 (30) 100 Cash flow hedges (IAS 39) (138) 2006 net income 1,771 Impact of acquisitions/ disposals on minority interests Share of change in equity of associates companies accounted for under the equity method (32) (32) (36) (36) Change in goodwill Shareholders’ equity at 31 December 2006 (32) (222) Other changes 3,436 6,832 0 10,268 1,008 11 396 (50) 1,771 (32) (222) (50) (272) (36) (5) (41) 12,396 839 13,235 (1) Includes share premiums and parent company’s statutory reserve The changes in the “Unrealised or deferred gains or losses” category in 2006 resulted from the following factors: - the euro’s rise against most other currencies, particularly the US dollar, caused translation adjustments to fall by 222 million euros during the year; -h igher interest rates dragged down the fair value of certain cash flow hedging derivatives by 138 million euros; - the fair value of certain securities in the “availablefor-sale assets” category rose in value, contributing to a 100 million euro rise in shareholders’ equity. Calyon - shelf-registration document 2006 Cash flow statement The cash flow statement is presented using the indirect method. Operating activities are Calyon’s revenue generating activities. Tax inflows and outflows are included in full within operating activities. Investing activities show the impact of cash inflows and outflows associated with purchases and sales of investments in consolidated and non-consolidated compa- nies, property, plant and equipment and intangible assets. This section includes strategic equity interests classified as available for sale. Financing activities show the impact of cash inflows and outflows associated with shareholders’ equity and longterm financing. Net cash and cash equivalents include cash, debit and credit balances with central banks and the French postal system, and debit and credit sight balances with banks. In millions of euros 2006 2005 2,468 2,099 109 113 0 0 Net charge to provisions (118) (718) Share of net income of affiliates (166) (125) Net loss/(gain) on investing activities (7) (221) Net loss/(gain) on financing activities 1,467 324 Other movements 1,119 (295) Total non-cash items included in pre-tax income and other adjustments 2,404 (922) Change in interbank items (16,545) (3,903) Change in customer items (942) (1,131) 3,788 (14,141) (3,380) 5,740 Pre-tax income Amortisation and depreciation of property, plant & equipment and intangible assets Depreciation and impairment of goodwill and other fixed assets Change in financial assets and liabilities Change in non-financial assets and liabilities Taxes paid (107) (253) Net decrease/(increase) in assets and liabilities used in operating activities (17,186) (13,688) Total net cash provided by operating activities (A) (12,314) (12,511) 45 (4,144) Change in equity investments Change in property, plant & equipment and intangible assets (145) (67) Total net cash provided/(used) by investing activities (B) (100) (4,211) Cash received from/(paid to) shareholders (543) (294) 297 (1,134) Other cash provided/(used) by financing activities Total net cash provided/(used) by financing activities (C) (246) (1,428) Effect of exchange rate changes on cash and cash equivalents (D) 1,064 (829) Net increase/(decrease) in cash & cash equivalents (A + B+ C + D) (11,596) (18,979) (6,073) 12,906 Opening cash and cash equivalent Cash, central banks, French postal system (assets & liabilities) 4,433 19,204 Interbank sight balances ( assets & liabilities) (10,506) (6,298) Closing cash and cash equivalents (17,669) (6,073) Cash, central banks, French postal system (assets & liabilities) 1,705 4,433 Interbank sight balances (assets & liabilities) (19,374) (10,506) Change in net cash and cash equivalents (11,596) (18,979) 84 - 85 financial statements Calyon - shelf-registration document 2006 Notes to the consolidated financial statements Note 1: Accounting principles and methods 88 1.1 Significant accounting policies 88 1.2 Consolidation principles and methods (IAS 27, 28, 31) 96 Note 2: Assessments and estimates used to prepare the financial statements 99 Note 3: Scope of consolidation 101 3.1Changes in the scope of consolidation over the period 101 3.2 Main acquisitions during the year 101 3.3 Investments in equity affiliates 102 3.4Securitisation transactions and special-purpose vehicles 102 3.5Investments in non-consolidated companies 103 3.6 Goodwill 104 Note 4: Financial management, exposure to risk and hedging policy 4.1 Credit Risk 4.2 Market risk 4.3 Liquidity and financing risk 4.4 Derivative hedging instruments 4.5 Operational risk 4.6 Insurance and risk coverage 105 107 112 118 121 121 122 Note 5: Notes to the income statement 123 5.1 Interest income and expense 123 5.2 Net fee and commission income 123 5.3Net gains (losses) on financial instruments at fair value through profit or loss 124 5.4Net gains (losses) on available-for-sale financial assets 124 5.5Net income and expenses related to other activities 124 5.6 General operating expenses 124 5.7Depreciation, amortisation and impairment of property, plant and equipment and intangible assets 125 5.8 Risk-related costs 125 5.9 Net income on other assets 126 5.10 Income tax 126 Note 6: Segment reporting Definition of business segments Presentation of business lines 6.1 Analysis by business line 6.2Geographical analysis of business line information 127 127 127 127 128 Note 7: Notes to the balance sheet at 31 December 2006 129 7.1 Cash, due from central banks and French postal system 129 7.2Financial assets and liabilities at fair value through profit or loss 129 7.3 Derivative hedging instruments 130 7.4 Financial assets available-for-sale 130 7.5Due from banks and loans and advances to customers 131 7.6 Impairment deducted from assets 132 7.7Due to banks and customer accounts 133 7.8 Held-to-maturity financial assets 133 7.9Debt securities in issue and subordinated debt 134 7.10 Deferred tax assets and liabilities 134 7.11Accruals, prepayments and sundry assets and liabilities 135 7.12Fixed assets held-for-sale and associated liabilities 135 7.13 Investments in equity affiliates 136 7.14 Investment property 136 7.15Property, plant and equipment and intangible assets (excluding goodwill) 136 7.16 Goodwill 137 7.17 Reserves 137 7.18 Shareholders’ equity 137 Note 8: Employee benefits and other compensation 139 8.1 Personnel costs 139 8.2 Average number of employees 139 8.3 Post-employment benefits, defined contribution plans 139 8.4Post-employment obligations, defined benefit plans 140 8.5 Other employee benefits 141 8.6 Share-based payments 142 8.7 Executive officers’ compensation 142 Note 9: Financing and guarantee commitments 142 Note 10: Fair value of assets and liabilities measured at amortised cost 143 Note 11: Subsequent events 144 Note 12: Scope of consolidation at 31 December 2006 145 86 - 87 Note 1 : Accounting principles and methods Employee benefits (IAS 19) In accordance with IAS 19, employee benefits are recorded in four categories: 1.1 Significant accounting policies Non-current assets (IAS 16, 36, 38, 40) financial statements The Calyon group applies component accounting for all of its non-current tangible and intangible assets. In accordance with the provisions of IAS 16, the depreciable amount takes account of the potential residual value of property, plant and equipment. Land is measured at cost less any impairment charges. Property used in operations, investment property and equipment are measured at cost less accumulated depreciation and impairment charges. Purchased software is measured at purchase price less accumulated depreciation and impairment charges. Proprietary software is measured at cost less accumulated depreciation and impairment charges. Other than software, intangible assets principally comprise purchased goodwill, which is measured on the basis of the corresponding future economic benefits or expected service potential. Fixed assets are amortised over their estimated useful life. The following components and depreciation periods have been adopted by the Calyon group following the application of component accounting for fixed assets. These depreciation periods are adjusted according to the type of asset and its location: Component Land Depreciation period Not depreciable Structural works 30 to 80 years Non-structural works 8 to 40 years Plant and equipment 5 to 25 years Fixtures and fittings 5 to 15 years Computer equipment 3 to 7 years Specialist equipment 4 to 5 years Based on available information, Calyon has concluded that impairment testing would not lead to any change in the existing depreciable amount of its non-current assets (excluding goodwill) as of the balance sheet date. - s hort-term employee benefits, such as wages, salaries, security contributions and bonuses payable within 12 months of the end of the period, - long-term employee benefits (long-service awards, bonuses and compensation payable 12 months or more after the end of the period, - termination benefits, - post-employment benefits, which in turn are recorded in the two following categories: defined-benefit plans and defined-contribution plans. Retirement and early retirement benefits – defined benefit plans In keeping with IAS 19, these commitments are stated based on a set of actuarial, financial and demographic assumptions, and in accordance with the projected unit credit method. Under this method, for each year of service, a charge is booked in an amount corresponding to the employee’s vested benefits for the period. The charge is calculated based on the discounted future benefit. The Calyon Group does not use the optional “corridor” approach and recognises all actuarial differences in profit and loss. The Group has opted not to apply the option allowed under IAS 19 § 93, under which actuarial gains or losses are recognised in a special statement of changes in shareholders’ equity rather than in the income statement. Consequently, the amount of the reserve is equal to: - the present value of the obligation to provide the defined benefits as of the balance sheet date, calculated in accordance with the actuarial method recommended by IAS 19; - less the fair value of any assets allocated to covering these commitments, which may be represented by an eligible insurance policy. In the event that 100% of the obligation is fully covered by such a policy, the fair value of the policy is deemed to be the value of the corresponding obligation, i.e. the amount of the corresponding actuarial liability. Pension schemes – defined contribution plans French employers contribute to a variety of compulsory pension schemes. Plan assets are managed by independent organisations and the contributing companies have no legal or implicit obligation to pay additional contributions if the funds do not have sufficient assets to cover all benefits corresponding to services rendered by employees during the year and during prior years. Consequently, the Calyon Group has no liabilities in this Calyon - shelf-registration document 2006 respect other than their ongoing contributions for the past financial year. when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. Share-based payments (IFRS 2) 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. Marketquoted rates provide the best estimate of fair value for financial instruments quoted in an active market. For financial instruments that are not quoted in an active market, fair value is determined using valuation techniques. IFRS 2 on share-based payment requires share-based payment transactions to be measured and recognised in the income statement and balance sheet. The standard applies to share option plans granted after 7 November 2002, in accordance with the option taken by the Group, which have not yet vested at 1 January 2005 and covers two possible cases: - s hare-based payment transactions settled in equity instruments, - share-based payment transactions settled in cash. The only share-based payments initiated by the Crédit Agricole S.A. group that are eligible for IFRS 2 are transactions settled in equity instruments. Options granted are measured at their fair value on the date of grant using the Black & Scholes model. These options are recognised as a charge under “Personnel costs”, with a corresponding adjustment to equity, spread over the vesting period. Employee share issues made as part of an employee share ownership plan are also governed by IFRS 2. The Calyon group applies the treatment set out in the release issued by the CNC on 21 December 2004, supplemented by the release issued by the CNC on 7 February 2007. Shares may be offered to employees with a discount of no more than 20%. These plans have no vesting period but the shares are subject to a lock-up period of five years. The benefit granted to employees is measured as the difference between the fair value per share acquired taking account of the lock-up period and the purchase price paid by the employee on the issue date multiplied by the number of shares issued. Since the charge corresponding to this benefit is not material at the group level, it has not been recognised. Securities Classification of financial assets Under IAS 39, financial assets are divided into four categories: - f inancial assets at fair value through profit or loss classified as held for trading and financial assets designated as at fair value through profit or loss, - available-for-sale financial assets, - held-to-maturity investments, - loans and receivables. 1. Financial assets at fair value through profit or loss classified as held for trading and financial assets designated as at fair value through profit or loss According to IAS 39, this portfolio comprises securities that are classified under financial assets at fair value through profit or loss either as a result of a genuine intention to trade them or designated as at fair value by Calyon. Financial assets or liabilities at fair value through profit or loss classified as held for trading are assets or liabilities acquired or generated by the enterprise primarily for purposes of making a profit from shortterm price fluctuations or an arbitrage margin. Designation of financial assets as at fair value through profit or loss means that derivatives embedded in hybrid instruments do not have to be recognised and measured separately. Financial instruments (IAS 32 et 39) In the 2006 financial statements, financial assets and liabilities are treated in accordance with IAS 39 as endorsed by the European Commission on 19 November 2004, together with EC regulations 1751/2005 of 25 October 2005 and 1864/2005 of 15 November 2005 on use of the fair value option. However, the Calyon group elected not to use the fair value option to measure its financial liabilities at 31 December 2006. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, Securities that are classified under financial assets at fair value through profit or loss are recognised at fair value at inception, excluding transaction costs attributable directly to their acquisition (which are taken directly to profit or loss) and including accrued interest. They are carried at fair value and changes in fair value are taken to profit or loss. No impairment provisions are booked for this category of securities. 88 - 89 financial statements 2. Held-to-maturity investments This category includes securities with fixed or determinable payments and fixed maturities that Calyon has the intention and ability to hold until maturity other than: Where there is objective evidence of impairment, a provision is booked to match the difference between the carrying amount and the estimated recoverable amount discounted at the original effective interest rate. - s ecurities that are initially classified as financial assets at fair value through profit or loss at the time of initial recognition; - s ecurities that are classified as available-for-sale assets; - s ecurities that fall into the “Loans and receivables” category. Hence, debt securities that are not traded in an active market cannot be included in the “Held-tomaturity investments” category. 4. Available-for-sale financial assets IAS 39 defines available-for-sale financial assets as the default category. To classify investments as held to maturity, an entity must have the positive intention and ability to hold them to maturity; otherwise the entire portfolio must be reclassified as available for sale and may not subsequently be reclassified as held to maturity for a period of two years. However, there are certain exceptions to this rule: - t he investment is close to maturity (less than three months); - the sale occurs after the entity has collected substantially all of the financial asset’s original principal (about 90%); - the sale is justified by an isolated or unforeseeable event beyond the entity’s control; - if it is anticipated that the investment will be impaired, due to a worsening of the issuer’s condition (in which case the asset must recorded in the available for sale category). Held-to-maturity securities are initially recognised at acquisition cost, including transaction costs that are directly attributable to the acquisition and including accrued interest. They are subsequently measured at amortised cost using the effective interest method. According to IAS 39, the methods of accounting for available-for-sale securities are the following: -a vailable-for-sale securities are initially recognised at acquisition cost, including transaction costs that are directly attributable to the acquisition and including accrued interest; - accrued interest is recognised in the balance sheet under the appropriate category of loans and advances and booked to the income statement as interest and similar income; - changes in fair value are recorded in reversible shareholders’ equity. If the securities are sold, these changes are reversed out and recognised in profit or loss. Amortisation of any premiums or discounts on fixed-income securities is taken to profit and loss using the effective interest rate method; - when there is objective evidence of significant or prolonged impairment for equity securities or impairment evidenced by the appearance of a credit risk for debt securities, the unrealised loss recognised under shareholders’ equity is reversed out and recorded in profit or loss for the year. In case of subsequent enhancements, such impairment is recovered through profit or loss for debt instruments but not for equity instruments. Conversely, for equity instruments, any positive change in fair value in case of recovery is recognised in a shareholders’ equity account. Valuation of investments All financial instruments classified as financial assets at fair value through profit or loss or as available-for-sale financial assets are measured at fair value. Where there is objective evidence of impairment, a provision is booked to match the difference between the carrying amount and the estimated recoverable amount discounted at the initial effective interest rate. In case of subsequent enhancements, the surplus provision is recovered. The fundamental valuation method is the price quoted in an active market. If this is not possible, Calyon uses recognised valuation techniques based mainly on recent transactions. 3. Loans and receivables Loans and receivables comprise unlisted financial assets that generate fixed or determinable payments. When there is no quoted price for an equity security and no recognised valuation method, the Calyon group uses methods based on objective, verifiable criteria, such as revalued net assets or any other method of valuing equity securities. They are recognised at amortised cost using the effective interest method adjusted for any impairment provisions. If there is no satisfactory method, or if the estimates obtained using the various methods differ excessively, Calyon - shelf-registration document 2006 the security is valued at cost and is recorded under ’Available-for-sale securities’. Impairment Impairment is booked when there are objective signs of impairment of assets other than assets held for trading. Impairment is evidenced by a prolonged or significant decline in the value of the security for equity securities or by the appearance of significant deterioration in credit risk evidenced by a risk of non recovery for debt securities. With few exceptions, Calyon deems that a prolonged or significant decline is presumed to exist when the equity instrument has lost 30% or more of its value over a period of six consecutive months. This criterion of prolonged or significant decline in the value of the security is a necessary but not sufficient condition to justify the booking of a provision. A charge is made to such provision only if the impairment will result in a probable loss of all or part of the invested amount. Recognition date Calyon recognises securities classified as held to maturity on the settlement/delivery date. Other securities, regardless of type or classification, are recognised on the trading date. Financial liabilities (IAS 32) 1. D istinction between liabilities and shareholders’ equity A debt instrument or financial liability is a contractual obligation to: -d eliver cash or another financial asset; - exchange instruments under potentially unfavourable conditions. An equity instrument is a contract evidencing a residual interest in an enterprise after deduction of all of its liabilities (net assets). The Calyon group has granted shareholders of certain fully consolidated subsidiaries an undertaking to acquire their holdings in these subsidiaries, at a price to be determined according to a pre-defined formula which takes account of future developments in their business. These undertakings are in substance put options granted to the minority shareholders, which in accordance with the provisions of IAS 32, means that the minority interests are treated as a liability rather than as shareholders’ equity. The following accounting treatment has been applied: -w hen a put option is granted to the minority shareholders of a fully consolidated subsidiary, a liability is recognised in the balance sheet; on initial recognition, the liability is measured at the estimated present value of the exercise price of the options granted; the IFRIC confirmed this treatment at its meeting of 2 November 2006; - the corresponding asset is recognised by reducing the share of net assets belonging to the minority interests concerned to zero and accounting for the balance as goodwill; - s ubsequent changes in the estimated value of the exercise price will affect the amount of the liability and on the asset side, the amount of goodwill recognised; - the share of income due to the minority shareholders is deducted from the amount of goodwill recognised. Purchase of treasury shares Treasury shares (or equivalent derivatives, such as options to buy shares) purchased by the Calyon group, including shares held to hedge stock option plans, do not meet the definition of a financial asset and are deducted from shareholders’ equity. They do not generate any impact on the income statement. 2. Temporary purchases and sales of securities Temporary sales of securities (securities lending/ borrowing, repurchase agreements) do not fulfil the derecognition conditions of IAS 39 and are regarded as collateralised financing. Assets lent or sold under repurchase agreements are kept on the balance sheet. If applicable, monies received, representing the liability to the transferee, are recognised on the liabilities side of the balance sheet. Items borrowed or bought under repurchase agreements are not recognised on the transferee’s balance sheet. Instead, if the items are subsequently sold, the transferee recognises the amount paid out representing its receivable from the transferor. Revenue and expenses relating to such transactions are taken to profit and loss on a pro rata temporis basis, except in the case of assets and liabilities designated at fair value through profit or loss. Lending operations Loans are principally allocated to the ’Loans and receivables’ category. In accordance with IAS 39, they are initially valued at fair value and subsequently valued at amortised cost using the effective interest rate method. The effective interest rate is the rate that exactly discounts estimated future cash payments to the original net loan amount, including any discounts and any 90 - 91 transaction income or costs that are an integral part of the effective interest rate. Subordinated loans and repurchase agreements (represented by certificates or securities) are included under the various categories of loans and advances according to counterparty type. financial statements Revenue calculated using the effective interest rate on receivables is booked to profit and loss as interest and similar income. In addition to the disclosures required by IAS, the Calyon group continues to provide the information previously required by CRC Regulation 2002-03 applicable to individual accounts. Hence, the Calyon group classifies impaired loans or receivables within the meaning of international standards into three separate categories: bad debts, doubtful debts and restructured loans (loans that have been restructured due to customer default). Impaired loans or receivables In accordance with IAS 39, loans recorded under ’loans and receivables’ are impaired when one or more loss events occurs in the collection of such loans. Once these loans and receivables have been identified, they may be individually or collectively assessed for impairment. Impairment charges are booked in the amount of the loss incurred, which is equal to the difference of the carrying value of the loans (amortised cost) and the sum of estimated future cash flows, discounted at the original effective interest rate. Impairment charges are booked to provisions or as discounts on loans restructured due to customer default. account of their specific characteristics); - the borrower’s financial position is such that an identified risk exists regardless of whether the loan or advance is in arrears; - the bank and borrower are in legal proceedings. When a loan is recorded as doubtful, all other loans or commitments relating to that borrower are also recorded in their entirety as doubtful debts, whether or not they are collateralised. Calyon makes the following distinction between doubtful and bad debts: -D oubtful debts are all doubtful loans and advances which do not fall into the bad debt category. - Bad debts are those for which the prospects of recovery are highly impaired and which are likely to be written off in time. Restructured performing loans These are loans on which the entity has changed the initial financial terms and conditions (interest rate, duration) due to a counterparty risk, while reclassifying the outstanding amount into performing loans. The reduction in future payments to the counterparty at the time of restructuring gives rise to recognition of a discount. Credit risk provisions for loans individually assessed for impairment Once a loan is classified as doubtful, an impairment is deducted from the asset in an amount equal to the probable loss. Probable losses in respect of off-balance sheet items are covered by provisions recognised as liabilities in the balance sheet. The following distinctions are made: - loans individually assessed for impairment: these are doubtful loans covered by provisions and loans restructured due to customer default that have been discounted; - loans collectively assessed for impairment: these are loans that are not individually assessed for impairment, for which impairment is determined for a uniform class of loans displaying similar credit risk characteristics. Bad and doubtful debts Loans and advances of all kinds, even those which are guaranteed, are classified as bad or doubtful if they carry an identified credit risk arising from one of the following events: Calyon books impairments for all foreseeable losses in respect of bad and doubtful debts, discounted at the initial effective interest rate. Foreseeable losses in respect of portfolios of small loans with similar characteristics may be estimated on a statistical basis rather than individually assessed. - t he loan or advance is at least three months in arrears (six months for mortgage loans and property leases and nine months for loans to local authorities, to take - the nominal value of the loan, - the sum of the loan’s expected future cash flows discounted at the original effective interest rate. Treatment of discounts and impairment Discounts in respect of restructured loans and impairment charges against doubtful debts are recognised in profit or loss under risk-related costs. This discount corresponds to the shortfall in future cash flow, discounted at the original effective interest rate. It is equal to the difference between: Calyon - shelf-registration document 2006 For restructured loans classified as performing, the discount is amortised to profit or loss in net interest income over the life of the loan. For restructured loans classified as doubtful and all non-restructured doubtful loans, impairment charges and reversals are recognised in risk-related costs and any increase in the carrying amount of the loan arising from an impairment reversal or discount amortisation over time is recognised in net interest income. Credit risk provisions for loans collectively assessed for impairment Statistical and historical customer default experience shows that there is an identified risk of partial uncollectibility of loans classified as performing. To cover these risks, which cannot by nature be allocated to individual loans, Calyon takes various collective impairment charges by way of deduction from asset values, such as sector provisions, country impairment charges and impairment charges for sensitive exposure (still under surveillance), using models based on statistical experience. Sensitive exposure is calculated in accordance with Basel II models. Financial liabilities IAS 39 as endorsed by the European Union recognises two categories of financial liabilities: - f inancial liabilities at fair value through profit or loss classified as held for trading. Fair value changes on this portfolio are recognised in profit or loss. However, the Calyon group has elected not to use the fair value option to measure its financial liabilities; - other financial liabilities: this category includes all other financial liabilities. These liabilities are initially measured at fair value (including transaction income and costs) and subsequently at amortised cost using the effective interest method. Derivatives Derivatives are financial assets or liabilities and are recognised on the balance sheet at fair value at inception of the transaction. At each balance sheet date, derivatives are measured at fair value, whether they are held for trading purposes or used for hedging. Any change in the value of derivatives on the balance sheet is recorded in an account in the income statement (except in the special case of a cash flow hedging relationship). Hedge accounting Fair value hedges reduce the risk of a change in the fair value of a recognised asset or liability or an unrecognised firm commitment. Cash flow hedges reduce exposure to changes in cash flows resulting from a particular risk on a recognised asset or liability (for example, some or all future interest payments on a floating-rate liability) or on a highly likely forecast transaction. Hedging of a net investment in a foreign activity is intended to reduce the risk of a fall in fair value arising from the exchange rate risk on an investment made abroad in a currency other than the euro. Micro-hedges must meet the following criteria in order to be eligible for hedge accounting: - the hedging instrument and the instrument hedged must be eligible; - there must be formal documentation from inception, primarily including the individual identification and characteristics of the hedged item, the hedging instrument, the nature of the hedging relationship and the nature of the hedged risk; - the effectiveness of the hedge must be demonstrated, at inception and retrospectively. The change in value of the derivative is recorded in the accounts as follows: - fair value hedges: the change in value of the derivative is recognised in the income statement symmetrically with the change in value of the hedged item in the amount of the hedged risk and only the net amount of any hedging ineffectiveness is recognised in the income statement; - cash flow hedges: the change in value of the derivative is recognised in the balance sheet in a special reversible shareholders’ equity account and any inefficient portion of the hedge is recognised in the income statement. Profits and losses on the derivative under reversible shareholders’ equity are then taken to income symmetrically with the hedged transactions; - hedging of a net investment in a foreign activity: the change in value of the derivative is recognised in the balance sheet in a shareholders’ equity translation adjustment account and the inefficient component of the hedge is recognised in the income statement. In the case of macro-hedging (i.e. hedging a group of assets or liabilities with the same exposure to the risks that is designated as being hedged), the Group documents such hedging relationships based on a gross position in derivative instruments and hedged items. The effectiveness of macro-hedging relationships is measured by maturity schedules based on average outstandings. In addition, the effectiveness of macro- 92 - 93 hedging relationships must be measured through prospective and retrospective testing. financial statements Depending on whether a macro cash flow hedging or fair value hedging relationship has been documented, the change in the value of the derivative is recorded by applying the same principles as those previously described for micro-hedging. Embedded derivatives An embedded derivative is the component of a hybrid contract that meets the definition of a derivative product. Embedded derivatives must be accounted for separately from the host contract if the following three conditions are met: - the hybrid contract is not measured at fair value through profit or loss; - the embedded component taken separately from the host contract has the characteristics of a derivative; - the characteristics of the derivative are not closely related to those of the host contract. Recognition of margins on structured financial instruments at inception Under IAS 39, margins on structured products and complex financial instruments may be recognised at inception only if these financial instruments can be reliably measured from inception. This condition is met when such instruments are measured using prices in an active market or based on ’standard’ internal models that use “observable” market data. Instruments traded in an active market If there is an active market, the instrument is stated at the quoted price on that market. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The market values adopted are buying prices for net selling positions and selling prices for net buying positions. These values also factor in counterparty risks. Instruments not traded in an active market In the absence of an active market, fair value is determined using valuation techniques and models incorporating all factors that market participants would consider in setting a price. These fair values are determined by factoring in liquidity risk and counterparty risk. Instruments valued using internal models based on observable market data When models used are based on standard models (e.g. discounted cash flows or Black & Scholes) using observable market data (e.g. yield curves or implied volatility ranges for options), the margin at inception on such instruments is recognised immediately in profit or loss. Instruments valued using internal models based on non-observable market data In this case, the transaction price is deemed to reflect the instrument’s market value. The margin at inception is deferred and amortised to profit or loss generally over the period during which the market data is deemed to be non-observable. If market data subsequently become ’observable’, the remaining deferred margin is recognised immediately in profit or loss. Financial guarantees and financing commitments Financial guarantees are contracts that call for specific payments to be made to reimburse the holder for a loss incurred due to a specified debtor’s failure to make a payment when due under the terms of a debt instrument. Financial guarantee contracts are recognised at fair value initially then subsequently at the higher of: - the amount calculated in accordance with IAS 37 – “Provisions, Contingent Liabilities and Contingent Assets”; or - the amount initially recognised, less any amortization recognised in accordance with standard IAS 18 – “Revenues ”. Financing commitments that are not designated as assets at fair value through profit and loss or that are not treated as derivative instruments within the meaning of IAS 39 are not recognised on the balance sheet. They are, however, covered by reserves in accordance with IAS 37. Derecognition of financial instruments A financial asset (or group of financial assets) is fully or partially derecognised if: - the contractual rights to the cash flows from the financial asset expire or are transferred or are deemed to have expired or been transferred because they belong de facto to one or more end beneficiaries; - s ubstantially all the risks and rewards of ownership in the financial assets are transferred. Calyon - shelf-registration document 2006 In this case, any rights or obligations created or retained at the time of transfer are recognised separately as assets and liabilities. In France, the rate of tax on income from ordinary activities and deferred tax is 34.43%. Deferred taxes are not discounted. If the contractual rights to the cash flows are transferred but Calyon retains some of the risks and rewards of ownership as well as control, the financial assets are recognised to the extent of the Group’s continuing involvement in the asset. Income taxes (IAS 12) Calyon has been 99.9%-owned by the Credit Agricole group since 27 December 1996 and some of its subsidiaries form part of the tax consolidation group at the Credit Agricole S.A. level. The tax charge takes into account current income taxes on taxable income and expenses for the year, along with deferred taxes. This standard requires that deferred taxes be recognised in the following cases: A deferred tax liability should be recognised for any taxable temporary differences between the carrying amount of an asset or liability on the balance sheet and its tax base, unless the deferred tax liability arises from: - initial recognition of goodwill, - initial recognition of an asset or liability in a transaction: - that is not a business combination, and - that does not affect either the accounting or the taxable profit (tax loss) as of the transaction date. A deferred tax asset should be recognised for any deductible temporary differences between the carrying amount of an asset or liability on the balance sheet and its tax basis, insofar as it is probable that a future taxable profit will be available against which such deductible temporary differences can be allocated. A deferred tax asset should also be recognised for carrying forward unused tax losses and tax credits insofar as it is probable that a future taxable profit will be available against which the unused tax losses and tax credits can be allocated. Deferred taxes and liabilities are measured at the tax rates that are expected to apply when the asset is realised or the liability is settled, based on tax rates that have been enacted or substantially enacted by the balance sheet date. The tax rates applicable in each country are used. Taxable unrealised gains on securities do not generate any taxable temporary differences between the carrying value of the asset and the tax basis. As a result, deferred tax is not recognised on these gains. When securities are classified as available for sale, the tax charge actually borne by the entity with respect to these unrealised gains is reclassified as a charge to shareholders’ equity. In France, all but 5% of long-term capital gains on the sale of investments in participating interests, as defined by the General Tax Code and which come under longterm tax rules, are exempt from tax as from the tax year commencing on 1 January 2007; this 5% is taxed at the standard tax rate. Hence, deferred tax is recognised only on the taxable portion of the unrealised gains at the end of the financial year. Deferred tax is recognised in net income for the year, unless the tax arises from: -e ither a transaction or event that is recognised directly through equity, during the same year or during another year, in which case it is directly debited or credited to equity; - or a business combination. Deferred tax assets and liabilities are offset against each other if, and only if: -the entity has a legal right to offset current tax assets against current tax liabilities; and -the deferred tax assets and liabilities apply to taxes levied by the same taxing authority: - either on the same taxable entity, - or on different taxable entities that intend either to settle current tax assets and liabilities on a net basis, or to settle their tax assets and liabilities at the same time during each future financial year in which it is expected that substantial deferred tax assets or liabilities will be paid or recovered. Provisions (IAS 37,19) Calyon has identified all obligations (legal or constructive) resulting from a past event for which it is probable that an outflow of resources will be required to settle the obligation, and for which the due date or amount of the settlement is uncertain but can be reliably estimated. 94 - 95 Calyon has set aside general provisions for such obligations to cover: Non-monetary assets are treated differently depending on the type of asset: - -a ssets at historical cost are valued at the exchange rate on the transaction date; - assets at fair value are measured at the exchange rate on the closing date. operational risks, employee benefits, financing commitment execution risks, claims and liability guarantees, tax risks. financial statements Leases (IAS 17) As required by IAS 17, leases are analysed in accordance with their substance and financial reality. They are classified as operating leases or finance leases. Operating leases are treated as an acquisition of a fixed asset by the lessee financed by a loan from the lessor. In the lessor’s accounts, analysis of the economic substance of the transactions results in the following: Foreign exchange differences on non-monetary items are recognised: - in the income statement if the gain or loss on the nonmonetary item is recorded in the income statement; - in shareholders’ equity if the gain or loss on the nonmonetary item is recorded in shareholders’ equity. 1.2 C onsolidation principles and methods (IAS 27, 28, 31) Scope of consolidation - r ecognition of a financial receivable from the customer, which is amortised by the lease payments received; - lease payments are broken down into interest and principal, known as financial amortisation. In the lessee’s accounts, finance leases and leases with purchase options are restated such that they are recognised in the same way as if the asset had been purchased on credit. In the income statement, the theoretical depreciation charge (the charge that would have been recognised if the asset had been purchased) and the finance charges (incurred in connection with the financing) are recorded in the place of the lease payments. Currency transactions (IAS 21) In accordance with IAS 21, a distinction is made between monetary and non-monetary items. At the balance sheet date, monetary assets and liabilities denominated in foreign currencies are converted into the functional currency of Calyon at the closing exchange rate. Foreign exchange differences arising from translation are recorded in the income statement. There are two exceptions to this rule: - for available-for-sale financial assets, only the foreign exchange difference calculated on amortised cost is taken to the income statement; the balance is recorded in shareholders’ equity; - foreign exchange differences on monetary items classified as cash flow hedges or that are part of a net investment in a foreign entity are recorded in shareholders’ equity. The consolidated financial statements include the accounts of Calyon and of all companies over which Calyon exercises control, in accordance with IAS 27, IAS 28 and IAS 31, and which as such are included in the scope of consolidation of Calyon, and which have a material impact on the overall consolidated financial statements. In application of the general principles set out in IAS 27 and IAS 28 (investments in subsidiaries and associates) and IAS 31 (interests in joint ventures), materiality is assessed in the light of several criteria including the size of the company’s earnings or shareholders’ equity in relation to the earnings or shareholders’ equity of the consolidated group. Materiality is deemed to exist when the following criteria are met: - total assets exceed 10 million euros ; - Calyon directly or indirectly holds more than 20% of existing and potential voting rights. Definitions of control All entities falling under exclusive control, joint control or material influence are consolidated, providing that their contribution is deemed to be material and that they are not covered under the exclusions described below. Exclusive control is presumed to exist if Calyon owns over half of the voting rights in an entity, whether directly or indirectly through subsidiaries, except if, in exceptional circumstances, it can be clearly demonstrated that such ownership does not give it control. Exclusive control also exists if Calyon, as the owner of half or less than half of Calyon - shelf-registration document 2006 the voting rights in an entity, holds majority power within management bodies. Joint control is exercised in joint ventures in which each of the two or more co-owners are bound by a contractual contribution that provides for joint control. Significant influence is defined as the power to influence but not control a company’s financial and operational policies. Calyon is presumed to have significant influence if it owns 20% or more of the voting rights in an entity, whether directly or indirectly through subsidiaries. Consolidation of special-purpose entities The consolidation of special-purpose entities (structures created to manage a transaction or group of similar transactions) is specified by SIC 12. A special-purpose entity (SPE) is consolidated if it is in substance controlled by the Calyon group, even in the absence of a capital link. Whether or not a special-purpose entity is controlled in substance is determined by considering the following criteria: Consolidation methods The consolidation methods are respectively defined by IAS 27, 28 and 31, based on the type of control exercised by Calyon over the entities that can be consolidated, regardless of their business or of whether or not they have legal entity status: -e ntities under exclusive control are fully consolidated, including entities with different account structures, even if their business are not an extension of that of Calyon ; - entities under joint control are proportionally consolidated, including entities with different account structures, even if their business are not an extension of that of Calyon ; - entities over which Calyon exercises significant influence are consolidated under the equity method. Full consolidation consists of eliminating the book value of the shares held in the consolidating company’s financial statements and aggregating all assets and liabilities carried by the consolidated companies, and determining and separately identifying the value of the minority interests in their net assets and earnings. - t he activities of the SPE, in substance, are conducted on behalf of a Calyon group company according to its specific business needs, such that this company obtains benefits from the SPE’s activities; - this company, in substance, has the decision-making powers to obtain a majority of the benefits of the SPE’s activities or has delegated such decision-making powers by establishing an “autopilot” mechanism; - this company, in substance, has rights to obtain a majority of the benefits of the SPE’s activities and as a result may be exposed to the risks related to the SPE’s activities; or - this company, in substance, retains the majority of the residual risks or risks arising from ownership relating to the SPE or its assets, in order to obtain benefits from its activities. Proportional consolidation consists of eliminating the book value of the shares held in the consolidating company’s financial statements and aggregating a proportion of the assets, liabilities and results of the company concerned representing the consolidating company’s interest. Exclusions from the scope of consolidation An interest in a controlled entity or an entity under significant influence is excluded from the scope of consolidation if it is acquired and held exclusively with a view to its subsequent disposal in the near future. Such interests are recorded in assets held for sale. Group internal transactions affecting the consolidated balance sheet and income statement are eliminated, with the exception of losses realised when selling assets reflecting an effective reduction in the carrying value of these assets. Minority equity interests held by venture capital entities are also excluded from the scope of consolidation insofar as they are classified under financial assets designated as at fair value through profit or loss. The equity method consists of eliminating the book value of the shares held in the Group’s financial statements and accounting for its interest in the underlying equity and results of the companies concerned. Consolidation adjustments and eliminations The Group makes all material adjustments required to ensure the application of consistent accounting policies in the consolidated financial statements. Translation of foreign subsidiaries’ financial statements (IAS 21) Financial statements of subsidiaries expressed in foreign currencies are translated into euros in two stages: - the local currency (or, if applicable, the currency in which the accounts are prepared) is converted into the functional currency using the historical rate method, 96 - 97 financial statements and all foreign exchange gains or losses are fully and immediately taken to the income statement; - the functional currency is then converted into the consolidation currency using the exchange rate at the balance sheet date and the translation adjustment is recorded in a separate line under shareholders’ equity, showing the share attributable to the entity and the share attributable to minority interests. This adjustment is taken to the income statement when all or part of the interest in the foreign subsidiary is sold or liquidated. The functional currency of an entity is closely linked to whether or not the entity is independent or not independent: - t he functional currency of an entity that is not independent is the functional currency on which it is dependent, i.e. the currency in which its main transactions are denominated; - the functional currency of an independent foreign entity is its local currency, other than in exceptional circumstances. Business combinations Goodwill (IFRS 3) Business combinations after the transition date (1 January 2004) are accounted for using the purchase method in accordance with IFRS 3. The cost of a business combination is the aggregate of the fair values, on the date of acquisition, of assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer, in exchange for control of the acquiree, plus any costs directly attributable to the business combination. On the date of acquisition, the acquiree’s identifiable assets, liabilities and contingent liabilities which satisfy the conditions for recognition set out in IFRS 3 are recognised and at their fair value. Restructuring liabilities are only recognised as a liability if the acquiree is under an obligation to complete the restructuring on the date of acquisition. The initial valuation of assets, liabilities and contingent liabilities may be revised within a period of twelve months after the date of acquisition. The excess of the cost of acquisition over the fair value of the Group’s share in the net assets acquired is recognised in the balance sheet as goodwill if the acquiree is fully or proportionately consolidated. If the acquiree is accounted for using the equity method, the excess is included under the heading “investments in affiliates”. Any negative goodwill is recognised immediately through profit or loss. When the Group increases its holding in an entity which it already controls, in the absence of specific accounting rules, the additional shares purchased give rise to the recognition of an additional amount of goodwill by comparing the acquisition price of the shares with the share in the net assets acquired. This approach may be subject to change in the future, notably as a function of observable accounting practices in the banking sector or as regulations evolve. Goodwill is carried in the balance sheet at its initial amount in the currency of the acquiree and translated at the year-end exchange rate. It is tested for impairment whenever there is objective evidence that it may be impaired and at least once a year. For the purpose of impairment testing, goodwill is allocated to the Cash Generating Units (CGUs) that are expected to benefit from the business combination. The Group has defined its CGUs as the smallest identifiable group of assets and liabilities within its core businesses that can operate on the basis of a specific business model. Impairment testing consists of comparing the carrying amount of each CGU, including any goodwill allocated to it, with its recoverable amount. Recoverable amount is defined as the higher of fair value less costs to sell and value in use, which is the present value of the future cash flows expected to be derived from continuing use of the CGU, as set out in mediumterm business plans prepared by the Group for management purposes. When the recoverable amount is lower than the carrying amount, an irreversible impairment loss is recognised through profit or loss and deducted from the goodwill allocated to the CGU. This impairment is irreversible. Non-current assets held for sale and discontinued operations (IFRS 5) A non-current asset (or a disposal group) is classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. For this to be the case, the asset (or disposal group) must be available for immediate sale in its present condition and its sale must be highly probable. Calyon - shelf-registration document 2006 The relevant assets and liabilities are shown separately on the balance sheet under ’Non-current assets held for sale’ and ’Liabilities associated with non-current assets held for sale’. A non-current asset (or disposal group) classified as held for sale is measured at the lower of its carrying amount and fair value less costs to sell. A charge for impairment of unrealised gains is recognised in the income statement. Unrealised gains are no longer amortised when they are reclassified. A discontinued operation is a component of the entity that has either been disposed of, or is classified as held for sale and: - r epresents a separate major line of business or geographical area of operations; - is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; - is a subsidiary acquired exclusively with a view to resale. Are disclosed on a separate line of the income statement: - t he post-tax profit or loss of discontinued operations until the date of disposal; - the post-tax gain or loss recognised on the disposal or on measurement to fair value less costs to sell of the assets and liabilities constituting the discontinued operations. Note 2 : Assessments and estimates used to prepare the financial statements A certain number of estimates have been made by management to draw up the financial statements for the year ended 31 December 2006. These estimates are based on certain assumptions and involve risks and uncertainties as to their actual achievement in the future. Actual results may be influenced by many factors, including but not limited to: -a ctivity in domestic and international markets, - fluctuations in interest and exchange rates, - the economic and political climate in certain industries or countries, - changes in regulations or legislation. The list is not exhaustive. Accounting estimates based on assumptions are principally used to value the following assets and liabilities: Financial instruments at fair value through profit or loss Most instruments traded over the counter are measured using models that are based on observable market data. For example, the fair value of interest rate swaps is usually determined using market yield curves on the reporting date. Other financial instruments are generally measured on a discounted cash flow basis. The fair value of complex financial instruments that are not traded on an active market is determined using valuation techniques. As described in the section on significant accounting policies, the margin at inception is only immediately recognised in profit or loss where the valuation models used are based on market data that is regarded as observable. Market data is regarded as observable if the market risks department can obtain data from several sources independent of the front offices on a regular basis (daily if possible), for example from brokers or pricing services that collect data from a sufficient number of market participants. A dedicated data management team, which reports to the market risks department, regularly checks the relevance of data obtained in this way and formally documents it. Conversely, some complex products with a basket component, where valuation requires correlation or volatility data that are not directly comparable with market data, may be regarded as non-observable. Most of these instruments are complex fixed-income products, credit derivatives (certain correlation products or products whose measurement incorporates non-observable credit spreads), equity derivatives (certain products with multiple underlying instruments), or hybrid products and, to a lesser extent, foreign exchange and commodities products. Certain traditional market financial instruments with a long maturity may also be classified as ’nonobservable’ if the only market data available to measure them are for terms that are shorter than the contractual maturity of such instruments and must extrapolated in order to measure fair value. Market data is officially classified as ’observable’ and ’non-observable’ by a monthly valuation committee which comprises representatives from the front office, the independent market risks department and the finance department. 98 - 99 financial statements The gross impact on 2006 results of applying the principle of amortising the margin at inception to Calyon financial statements was (46) million euros. At 31 December 2006, margins not yet recognised in profit or loss amounted to 445 million euros gross. Periodic updating of mapping of products regarded as non-observable did not produce any material impact on the financial statements. All market products, regardless of their method of recognition in profit or loss, are subject to the risk management system described in the note on market risks. As a result, products for which the variables are regarded as ’non-observable’ within the meaning of IAS 39 are subject to the same control rules as other products (risk indicator monitoring, stress tests, limits, etc.). Retirement and other employee benefits, stock option plans Liabilities for retirement and other employee benefits are based on assumptions made by management with respect to the discount rate, staff turnover rate and probable increases in salary and social security costs. If the actual figures differ from the assumptions made, the liability may increase or decrease in future years. The return on plan assets is also estimated by management. Returns are estimated on the basis of expected returns on fixed-income securities, and notably bonds. Impairment of unrecoverable debts Impairment provisions are deducted from the carrying value of loans and advances when there is objective evidence of a risk of non-recovery. The provisions are discounted and estimated on the basis of several factors, notably business or sector-related. It is possible that future assessments of the credit risk may differ significantly from current estimates, which may lead to an increase or decrease in the amount of the impairment. Collective impairment is also taken against performing loans. The amount is based on the probability of default in each rating class assigned to borrowers, but also on management’s experienced judgement. A change in estimates within the meaning of IAS 8 (accounting policies, changes in accounting estimates and errors) was made in 2006 regarding collective credit risk provisions. The change was intended to improve portfolio segmentation and the parameters used for estimating impairment, to better reflect Calyon’s risk of loss. The change was based on the experience gained over time and is consistent with the work done to prepare for the Basel II reform. It has no material impact on the overall level of collective provisions. Provisions Share-based payment plans are measured primarily using the Black & Scholes model. A description of the plans and valuation methods is given in the paragraph on sharebased payments. Certain estimates may be made to determine the amount of provisions: Full details of all employee benefits are provided in note 8. - the reserve for legal and tax risks is based on management’s best estimate in light of the information in its possession at 31 December 2006. Impairments Goodwill impairment Equity instruments (other than those held for trading) are tested for impairment and an impairment charge recognised in case of a prolonged or significant decline in their value. In general, a prolonged or significant decline is presumed to have occurred when the instrument has lost at least 30% of its value over a period of six consecutive months. However, management may also take account of other factors (type of investment, issuer’s position, short-term prospects, etc.) which may change or prove to be incorrect during subsequent years. Goodwill is tested for impairment at least once a year. The assumptions made to measure the fair value of goodwill may influence the amount of any impairment loss taken. The method used is described in note 1.2 “Consolidation principles and methods”. Recognition of deferred tax assets Deferred tax assets are recognised on all deductible temporary differences to the extent that management believes there will be sufficient taxable profits in the future to offset these differences. Calyon - shelf-registration document 2006 Note 3 : Scope of consolidation The detailed scope of consolidation at 31 December 2006 is given in note 12. 3.1 Changes in the scope of consolidation over the period The main changes in the scope of consolidation between 31 December 2005 and 31 December 2006 were as follows: - Sagrantino, European NPL S.A., DGAD International SARL, Indosuez Levante S.A., Indosuez Norte SL, Casam subsidiaries acquired in the USA: Casam Americas LLC, Lyra Capital LLC, Casam Advisers LLC, Alternative Investment and Research Technologies, Lyra Partners LLC, Casam Cayman Ltd, Casam US Holding Inc, - Calyon Financial Canada and Calyon Financial Hong Kong. Removals The following companies whose activities became insignificant or are being discontinued or liquidated were deconsolidated: 3.2 M ain acquisitions during the year - As part of a strategic partnership, Calyon (67%) and Pirelli Re (33%) set up a joint venture operating in the European impaired loans market. This transaction was authorised by the Italian competition authority and market regulator. The gross carrying value of portfolios acquired and managed by this joint venture was 2 billion euros at 31 December 2006. CL Property Broadwalk, CL Group Management Ltd, BFC Holding, CPR BK, CL Rouse Limited UK, Indosuez Holding UK, the Multinational Asset Co. Limited structure, the Casam Systeïa Equity Linked Fund , ICF IIa and ICF III funds following the liquidation of their assets, - Calyon Bank Czech Republic following the transfer of its business to a branch newly created by Calyon in the Czech Republic. Following the absorption of Egyptian American Bank S.A.E. by Calyon Bank Egypt S.A.E. (since renamed Crédit Agricole Egypt S.A.E.) decided by the extraordinary shareholders’ meetings of both companies held on 27 June 2006 and approved by Egypt’s Central Bank in July 2006, Calyon owns a 13.09% stake in this new entity. On 31 August 2006, Crédit Agricole Egypt S.A.E. left Calyon’s scope of consolidation, since Calyon no longer had any control over this company. Finally, Clim was absorbed by Clinfim and no longer features in the scope of consolidation. Additions The following entities entered the scope of consolidation in 2006: - Bletchley Investments Limited, - Aylesbury, - Calyon Investments, previously known as Crédit Lyonnais Capital Market Plc, which had been deconsolidated in January 2006 following the discontinuation of its business, was reactivated to become Aylesbury’s parent company and therefore rejoined the scope of consolidation, - Minerva SRL, Partnership with Pirelli Re in the impaired loans market Development of CASAM CASAM (Crédit Agricole Structured Asset Management), a 50%-owned subsidiary of Calyon, acquired the entire capital of Ursa Capital LLC, a US holding company specialising in alternative managed accounts. 100 - 101 3.3 Investments in equity affiliates 31.12.2006 financial statements In millions of euros Equityaccounted value Market value 31.12.2005 Net Total Net assets banking income income Share of net income Equityaccounted value Market value Net Total Net assets banking income income Share of net income Financial institutions (breakdown) : 596 2,934 18,517 853 638 159 510 4,272 17,549 689 479 120 Banque Saudi Fransi 574 2,934 16,112 832 635 158 488 4,272 15,256 666 477 119 Crédit Agricole Financement Suisse 22 2,405 21 3 1 22 2,293 23 2 1 Non-financial companies (breakdown) : 72 450 90 19 7 14 141 44 12 5 CASAM 18 179 37 2 1 4 33 12 3 9 38 27 14 6 3 23 14 6 3 Groupe Cholet Dupont 8 102 23 4 1 7 85 18 3 1 CASAM (USA) affiliates 21 131 3 (1) (1) CLSA BV affiliates 16 CA AM Espana Holding SIM SPA Selezione e distributione Net book value of investments in affiliates 1 668 2,934 18,967 943 The market value shown in the above table is the quoted price of the shares on their trading market at 31 December. It may not be representative of the realisable value of the securities. The change in Banque Saudi Fransi’s stockmarket value should be compared with the performance of Saudi Arabia’s TASI stockmarket index, which fell from 16,712.64 at 31 December 2005 to 7,933.29 at 31 December 2006. 657 166 524 4,272 17,690 733 491 125 Securitisation transactions carried out on behalf of customers commercial paper in the euro money markets. Calyon issues letters of credit to guarantee a portion of the risk of default attaching to the assets securitised by its customers, which amounted to 0.93 billion euros at 31 December 2006. No reserves were considered necessary at 31 December 2006. Calyon had also granted a total of 21.51 billion euros in cash lines to these SPEs at 31 December 2006; - C alyon manages a consolidated SPE (ESF), to which it had granted cash lines totalling 759 million euros at 31 December 2006; - Calyon manages a consolidated French credit institution, Ester Finance Titrisation, to which it had granted 92 million euros of guarantees at 31 December 2006. These transactions usually involve the creation of special purpose entities (SPEs) which are not consolidated if Calyon does not exercise control. The criterion of control is usually assessed on an “in substance” basis (i.e. based on ownership of the risks and rewards). At 31 December 2006, Calyon had granted 339.5 million euros in letters of credit and 2.07 billion euros in cash lines to SPEs that are neither consolidated nor managed by the Bank. 3.4 S ecuritisation transactions and special-purpose vehicles Calyon has carried out various types of transactions on behalf of its customers: - it manages five non-consolidated SPEs in Europe and America (Hexagon Finance a.r.l., LMA, H2O, Atlantic Asset Securitization Corp and La Fayette Asset Securitization) in relation to transactions carried out by customers. These SPEs finance themselves by issuing Securitisation transactions on own account As part of its portfolio management strategy, Calyon carries out synthetic securitisation transactions to transfer the credit risk on some of its portfolios to the market. In 2006, the Bank carried out 7 new securitisations in Europe and the USA for a total of 32.9 billion euros. These transactions formed part of efforts to manage outstanding risks in the financing business. Calyon - shelf-registration document 2006 At 31 December 2006, there were 15 outstanding synthetic securitisation transactions maturing between 2007 and 2013, with a total nominal value of 56.6 billion euros. Calyon had retained a total of 2,012 million euros in non-investment-grade risk, plus a residual share in the investment-grade tranches amounting to 744 million euros. The loans concerned are kept on the bank’s balance sheet, while most of the credit enhancement is recognised in financial instruments. Other special purpose entities - Units in funds Special purpose entities and funds are consolidated when the Group exercises control in substance. The entities concerned appear in the list of consolidated companies in note 12 to the consolidated financial statements. At 31 December 2006, Calyon fully consolidated 8 funds: Casam Systeïa Global Macro, Casam Systeïa Pair Trading, Casam Systeïa Event Driven, Casam Systeïa Equity Quant, Casam Systeïa Futures Euro, Alcor, Mezzasia and Korea 21st Century Trust. 3.5 Investments in non-consolidated companies 31.12.2006 In millions of euros 31.12.2005 Net book value % interest Net book value % interest Attijari Wafa Bank (formerly Banque Commerciale du Maroc) 57 1.44 31 1.44 SIIC de Paris 12 2.00 20 5.02 Gestion Immobilière de Sites Industriels et Commerciaux (GISIC) 16 99.99 16 99.99 1301 Sixth Avenue 30 18.26 33 18.60 CA Preferred Funding LLC 49 2.00 53 2.00 CLCM Limited Partnership 13 99.90 16 99.00 Bolsas Y Mercados 56 2.20 23 ns Immarex 30 100.00 28 100.00 GATX 17 ns 65 ns BFO 138 99.71 135 99.71 CAI Risk Solutions Assurances 56 100.00 50 100.00 CAI Risk Solutions Insurances 16 100.00 17 100.00 Sicovam Holding 15 6.37 38 6.40 Indosuez W.I Carr Malaysia 11 100.00 11 100.00 Indosuez Beteiligungs und Verwaltungs 13 100.00 13 100.00 Banque Libano Française SAL 19 8.57 19 8.99 Chicago Board of Trade*** 29 ns New-York Mercantile Exchange*** 24 ns 14 100.00 18 33.33 Pagson Holding CY 22 100.00 Calyon Algeria 26 100.00 Redcliffe Investment 11 100.00 FX Alliance 12 4.34 Crédit Agricole Egypte SAE** 81 13.09 Financière Saint Nicaise 10 16.70 CL Rouse London** 38 100.00 337 100.00 CPR BK** China Euro Securities Ltd * Other shares Net book value * equity affiliates in 2006 ** deconsolidated companies in 2006 *** reclassified under other available-for-sale securities in 2006 218 362 1,303 1,015 102 - 103 3.6 Goodwill In millions of euros Additions 01.01.2006 (Acquisitions) Decreases (Disposals) Impairment losses Translation during the adjustments period Other movements 31.12.2006 Corporate and Investment Banking Calyon Egypt SAE S.A. (25) 0 132 Crédit Lyonnais Securities Asia BV 116 Calyon (incl. transfer of Crédit Lyonnais activities) 682 682 9 9 CPR Online financial statements 25 Crédit Agricole Cheuvreux S.A. 132 93 (14) (14) 181 International retail banking CA Suisse S.A. Crédit Agricole Luxembourg CA Brasil DTVM 292 286 (1) 2 Private Bank in Spain Gross value (6) 11 2 3 1,269 10 96 3 (39) (20) (1) 1,305 Calyon (incl. transfer of Crédit Lyonnais activities) (55) (55) Accumulated impairment losses (55) (55) Corporate and Investment Banking Calyon Egypt SAE 25 (25) 0 Crédit Agricole Cheuvreux S.A. 132 Crédit Lyonnais Securities Asia BV 116 Calyon (incl. transfer of Crédit Lyonnais activities) 627 627 9 9 CPR Online 132 93 (14) (14) 181 International retail banking CA Suisse S.A. Crédit Agricole Luxembourg CA Brasil DTVM 292 286 (1) 2 Private Bank in Spain Net book value (6) 11 2 3 1,214 Over the 2006 financial year, goodwill was the subject of impairment tests, based on the assessment of the fair value or value in use of the Cash-Generating Units (CGUs) to which they are attached. Fair value is the amount that could be obtained by selling a CGU through a transaction under normal market conditions. It is based on observed prices in recent transactions involving comparable entities or on multiples that are in line with valuation practices common in the CGU’s market (e.g. a percentage of assets under management). 10 96 3 (39) (20) (1) 1,250 Value in use is determined by calculating the present value of the CGU’s estimated future cash flows based on its medium-term plans. The following assumptions were used: - estimated future cash flows: projections between 3 and 5 years, -p erpetual growth rate: rates range between 0% and 3.5% depending on the CGU, - discount rate: rates range between 10.3% and 15% depending on the CGU. These tests led to no impairment charge being recorded over the 2006 financial year. We estimate that a reasonable change in the assumptions used to determine the recoverable value of CGUs would not require further goodwill provisions. Calyon - shelf-registration document 2006 In millions of euros Additions 01.01.2005 (Acquisitions) Decreases (Disposals) Impairment losses Translation during the adjustments period Other movements 31.12.2005 Corporate and Investment Banking Calyon Egypt SAE Crédit Agricole Cheuvreux S.A. Crédit Lyonnais Securities Asia BV Calyon (incl. transfer of Crédit Lyonnais activities) 22 3 25 132 61 132 56 (1) 116 682 CPR Online 682 9 9 International retail banking CA Suisse S.A. Crédit Agricole Luxembourg Gross value 104 190 (2) 292 (2) 1,267 11 1,012 11 258 (1) Calyon (incl. transfer of Crédit Lyonnais activities) (55) (55) Accumulated impairment losses (55) (55) Corporate and Investment Banking Calyon Egypt SAE Crédit Agricole Cheuvreux S.A. Crédit Lyonnais Securities Asia BV Calyon (incl. transfer of Crédit Lyonnais activities) 22 3 25 132 61 132 56 (1) 116 627 627 International retail banking CA Suisse S.A. 104 CPR Online Crédit Agricole Luxembourg (2) 292 9 9 11 Other Net value 190 11 2 957 Note 4 : F inancial management, exposure to risk and hedging policy Asset and liability management: structural financial risk and global interest rate risk 260 2 (1) 0 (2) 0 1,214 This Committee meets once per quarter, and is the asset-liability decision-making body for all of Calyon. It intervenes either directly or, in asset-liability management areas that have been formally delegated to foreign branches and subsidiaries, in a general coordination and supervisory role. Structural financial risks The Asset and Liability Committee defines the financial and asset-liability management policies of Calyon in close co-operation with Credit Agricole S.A. This committee is chaired by the Executive Committee member in charge of Finance, and comprises the Executive Committee members, the Chief Finance Officer, heads of the Structured Finance, Capital Markets and International segments, the heads of the Asset-Liability Management, Treasury and Credit Portfolio Management units, as well as a Finance representative from Credit Agricole S.A. and representatives of market risk control teams from Calyon and Crédit Agricole S.A. The management of financial risks covers the monitoring and supervision of the Calyon group’s structural and operational financial risks in France and abroad, excluding risks taken on trading floors. It includes the direct management of Calyon’s equity and long-term positions, the consolidation of such positions taken at group level and special monitoring of entities specifically exposed to either interest-rate risk outside of capital markets activities or to liquidity risks incurred in their operations. Global interest rate risk Beyond the direct management of interest-rate positions related to long-term financing, periodic measurements enable monitoring of global interest-rate risk by 104 - 105 financial statements identifying differences in the maturity and type of interest rates for balance sheet and off-balance sheet items in the form of mismatch schedules. Interest-rate risks other than in of market activities are managed within a limit delegated by Credit Agricole S.A. The Group uses the gap method to measure its global interest-rate risk. This consists of determining maturity schedules and interest rates for all assets, liabilities and hedging derivatives at fixed, adjustable and inflationlinked interest rates: until the adjustment date for adjustable-rate items, until the contractual date for fixed-rate items and using model-based conventions for items without a contractual maturity. Calyon’s exposure to interest-rate risk in its customer transactions is limited through interest-rate matching carried out on customer assets by its market teams, and due to the low level of non-remunerated deposits. Credit, market and operational risk management Banking risk management within Calyon is organised by the Risk and Permanent Control Division (RPCD) which has the task of optimising the cost of risk for the various business lines, with regard to the policies developed in these lines. Calyon constantly adapts its risk management processes and practices to the development of the Bank’s activities, new regulatory requirements and best practices in risk management. The scope of risk control covers counterparty risk – including the monitoring of individual risks and a global portfolio approach including the management of country risk – along with market risks and operational risks. The RPCD is also in charge of implementing the Basel II project for all of Calyon. The Group’s risk and permanent control organisation Calyon’s risk management was reorganised in 2006. This was due to the application of CRBF regulation 97-02 (as amended), which requires permanent control to be separated from periodic control (at the Control and Audit level). A Permanent Control Department was set up within the Risk Management and Control Department, which has been renamed the Risk and Permanent Control Division. The Permanent Control Department now covers both internal control and operational risk management. It also supervises accounting control and IT risk management. The organisation of risk and permanent control activities within Calyon is integrated into the Credit Agricole S.A. group’s Risk and Permanent Control business line. Thus, risk management is delegated to Calyon under formally adopted subsidiarity and delegation principles. Within this framework, the RPCD regularly reports its major risks to Credit Agricole S.A.’s Group Risks Division, and has Credit Agricole S.A.’s Group Risks Committee approve those cases which exceed its delegated limits as well as substantial risk strategies at the Credit Agricole S.A. group level. Within Calyon, the Risk and Permanent Control Division is a worldwide organisation with the following main characteristics: -a ll risk management tasks and business lines, whatever their nature or location, are grouped together within the Division. The RPCD has six departments: Individual Counterparty Risks, Administration of Counterparty Risks, Country and Portfolio Risks, Market Risks (including development of methods for measuring market risk and counterparty risks on market transactions), Permanent Control and Operational Risks, and Projects and Corporate Secretariat; - all of Calyon’s local and regional RPCD managers within the international network report directly to the RPCD’s managers at Head Office; - Calyon’s head of Risk and Permanent Control reports hierarchically to Credit Agricole S.A.’s head of Group Risk Management; - Calyon’s head of Risk and Permanent Control reports functionally to Calyon’s Management Board and is a member of Calyon’s Executive Committee; - Governance is structured around the following decision-making bodies: -a Counterparty Risk Committee, which decides on individual risks (ad hoc approvals or annual line renewals), whatever the nature of the operation (on- or off-balance sheet, credit or market transaction); - a Market Risk Committee, which carries out strict supervision of positions taken for the Bank’s own account and defines applicable limits; - a Strategy and Portfolio Committee, which studies and decides on the main development guidelines for each business line and each geographical unit; it also decides on the main risk limits used in the global portfolio, and periodically reviews their utilisation. Calyon - shelf-registration document 2006 4.1 Credit Risk A credit risk occurs when a counterparty is unable to honour its obligations and when the book value of these obligations in the bank’s records is positive. The counterparty may be a bank, an industrial or commercial enterprise, a government and its various entities, an investment fund or a natural person. The exposure may be a loan, debt security, deed of property, performance exchange contract, performance bond or unused confirmed commitment. The risk also includes the settlement risk inherent in any transaction entailing an exchange of cash or physical goods outside a secure settlement system. General principles of credit risk management Any counterparty or group of counterparties is attributed limits intended to frame the amount of commitments, whatever the type of counterparty (corporate, sovereign, banks, financial institutions, local authorities, SPEs, etc.). The delegations vary according to the quality of the risk, assessed by an internal rating of the counterparty. The credit decision must enter within the formally approved risk strategies. Second-level control of compliance with limits is made by the RPCD, supplemented by a process for monitoring individual risks and portfolio risks, notably in order to detect any possible deterioration in the quality of the counterparty and our commitments as far ahead as possible. Where the risk is substantiated, a collective and specific impairment policy is put into effect. Decision-making, monitoring and impairment Credit decisions: New transactions are approved according to a decisionmaking process based on two front-office signatures, one by a commitment analysis unit, the other by a front-office manager as signing officer. The decision is supported by an independent opinion of the RPCD and must take Basel II parameters into account, notably the internal rating of the counterparty and the predictive Loss Given Default (LGD) attributed to the proposed transactions; a calculation of ex-ante profitability (RAROC) must also be included in the credit file. In the event that the RPCD’s opinion is negative, the decision-making power is passed up to the chairman of the higher committee and, if necessary, all the way up to the Management Board via the Counterparty Risks Committee. Monitoring of commitments First-degree controls on compliance with the conditions accompanying a credit decision are carried out by the front office. The RPCD is in charge of second-degree controls. Monitoring of commitments is carried out for this purpose, and portfolio business is monitored constantly in order to identify assets that could deteriorate at an early stage. The aim is to carry out practical initiatives as early as possible so as to protect the Bank’s interests. The main methods used in this monitoring are: -“ Control Committees” which meet monthly to examine deviations and exceptions (arrears, excess drawings and breaches of limits, ongoing syndications, flawed legal documentation, review frequency etc.); - monthly “Early Warning Committees” which endeavour, by various means, to identify early signs of potential deterioration in loans which are healthy but deemed sensitive, in order to reduce or cover the risk exposure; - quarterly reviews of Major Risks regardless of the quality of borrowers concerned; - a regular search for excessive concentrations with respect to the amount of economic capital employed and the amount of existing commitments, assessed according to several criteria pertaining to the individual borrower concerned (quality based on internal rating, size of the company, influence of its local environment). These steps lead to: - c hanges in internal ratings of counterparties which are, where necessary, classified as sensitive; - practical decisions to reduce or cover commitments at risk; - possible transfers of assets to the specialised recovery unit. Monitoring of sensitive business and impairment “Sensitive items”, whether debts on the watch list without default, or doubtful or bad debts, are managed on a daily basis within the entities, and enhanced surveillance is carried out on a quarterly basis: -q uarterly sensitive business review committees are held locally, in order to provide an update of the scope and changes in impairment for each entity. Central committees are also convened under the chairmanship of the RPCD, in order to proceed with a joint examination of the classification of these loans as Doubtful or Sensitive Business. The definition of default complies with the required Basel II definition; - these committees propose specific impairment decisions which are then validated by the Management Board. 106 - 107 financial statements The method for calculating impairment was reviewed in 2004 in order to comply with IAS 39, both for specific and collective impairment. Annually-reviewed limits and risk strategies are applied to each country whose rating is below the threshold set by the Group’s procedures. Use of credit derivatives As part of its portfolio management strategy, the Bank uses credit derivatives together with a series of risk transfer instruments including securitisations. The implementation of a reporting and regular review system has strengthened the increasingly sophisticated country risk supervision mechanism, on a portfolio basis, through greater use of quantitative tools. The purpose is to reduce concentration of exposure to corporate risk, diversify the portfolio and reduce loss levels. This approach is supplemented by scenario analyses that aim to test the impact of unfavourable macroeconomic and financial assumptions, and will help develop an integrated view of the risks to which the bank could be exposed in situations of extreme pressure. Risks related to these transactions are monitored by the Market Risks Division with the help of indicators including VaR for all own-account liquid purchases and sales of protection. Country risk Country risk is the risk that economic, financial, political or social conditions in a foreign country will affect the bank’s financial interests. It does not differ in nature from “elementary” risks (credit, market and operational risks). It constitutes a set of risks resulting from the bank’s vulnerability to a specific political, macroeconomic and financial environment. The system for assessing and monitoring country risk within Calyon is based on an internal rating model. Internal country ratings include criteria relating to economic solidity, the ability to pay, governance and political stability. Concentrations by customer type Due from banks and loans and advances to customers by customer type 31.12.2006 In millions of euros Gross o/w doubtful debts Impairment of doubtful debts o/w bad debts Impairment of bad debts 101 (90) 3,653 Total Central government, government agencies and local authorities 3,743 Financial institutions 81,359 9 (3) 185 (184) 81,172 3,505 24 (14) 117 (85) 3,406 73,140 347 (108) 1,276 (381) 72,651 161,747 380 (125) 1,679 (740) 160,882 Personal and small business customers Companies (including insurance companies) and other Total Net accrued interest Collective provisions Net book value 1,704 (1,125) 161,461 Calyon - shelf-registration document 2006 31.12.2005 In millions of euros Gross o/w doubtful debts Impairment of doubtful debts o/w bad debts Impairment of bad debts Total 86 (72) 6,932 Central government, government agencies and local authorities 7,018 Financial institutions 56,338 240 (211) 100 (88) 56,039 4,409 34 (11) 131 (131) 4,267 68,370 831 (316) 901 (547) 67,507 136,135 1,128 (552) 1,218 (838) 134,745 Personal and small business customers Companies (including insurance companies) and other Total 23 (14) Net accrued interest 1,379 Collective provisions (1,119) Net book value 135,005 Commitments given to customers by customer type In millions of euros 31.12.2006 31.12.2005 4,917 4,578 25,478 21,650 3,914 4,501 Financing commitments to customers Central government, government agencies and local authorities Financial institutions Personal and small business customers Companies (including insurance companies) and other customers 59,351 56,099 Total 93,660 86,828 Guarantee commitments given to customers Local authorities Financial institutions Personal and small business customers 179 159 7,511 7,521 922 786 Companies (including insurance companies) and other customers 26,934 22,007 Total 35,546 30,473 31.12.2006 31.12.2005 6,501 8,826 Financial institutions 32,215 24,373 Personal and small business customers 18,334 16,081 Companies (including insurance companies) and other customers 26,709 22,180 Total 83,759 71,460 276 205 84,035 71,665 Customers accounts by customer type In millions of euros Central government, government agencies and local authorities Accrued interest Net book value 108 - 109 Concentration by geographical area Due from banks and loans and advances to customers by geographical area 31.12.2006 financial statements In millions of euros Gross o/w doubtful debts Impairment of doubtful debts o/w bad debts Impairment of bad debts Total France (including overseas departments & territories) 28,803 109 (50) 184 (92) 28,661 Other European Union countries (23) 809 (111) 63,969 59 (59) 8,620 (74) 24,627 64,103 61 Rest of Europe 8,679 5 North America 24,727 155 (26) 137 Central & South America 8,008 31 (21) 168 (127) 7,860 Africa & Middle East 9,424 1 150 (138) 9,286 12,864 11 170 (137) 12,722 5,139 7 2 (2) 5,137 161,747 380 1,679 (740) 160,882 Asia and Pacific (excluding Japan) Japon Total (5) (125) Net accrued interest 1,704 Collective provisions (1,125) Net book value 161,461 31.12.2005 In millions of euros Gross o/w doubtful debts Impairment of doubtful debts o/w bad debts Impairment of bad debts Total France (including overseas departments & territories) 31,629 209 (148) 126 (98) 31,383 Other European Union countries 40,311 230 (32) 257 (147) 40,132 Rest of Europe 7,766 140 (125) 142 (108) 7,533 North America 14,543 278 (75) 275 (139) 14,329 Central & South America 8,653 140 (104) 54 (29) 8,520 Africa & Middle East 9,961 80 (54) 254 (224) 9,683 Asia and Pacific (excluding Japan) 12,779 39 (14) 110 (93) 12,672 Japon 10,493 12 Total 136,135 1,128 10,493 (552) 1,218 (838) 134,745 Net accrued interest 1,379 Collective provisions (1,119) Net book value 135,005 Calyon - shelf-registration document 2006 Commitments given to customers by geographical area In millions of euros 31.12.2006 31.12.2005 France (including overseas departments & territories) 30,449 26,972 Other European Union countries 22,822 21,037 Rest of Europe 4,626 4,459 North America Financing commitments to customers 25,738 25,702 Central & South America 2,411 3,103 Africa & Middle East 2,464 2,098 Asia and Pacific (excluding Japan) 4,075 2,434 Japon 1,075 1,023 Total 93,660 86,828 11,367 10,439 Other European Union countries 8,815 6,540 Rest of Europe 1,595 2,261 North America 4,025 4,843 Central & South America 3,557 2,461 Africa & Middle East 1,306 1,166 Asia and Pacific (excluding Japan) 4,603 2,337 278 426 35,546 30, 473 31.12.2006 31.12.2005 France (including overseas departments & territories) 17,831 18,283 Other European Union countries Guarantee commitments given to customers France (including overseas departments & territories) Japon Total Customer accounts by geographical area In millions of euros 21,342 14,538 Rest of Europe 6,881 6,362 North America 8,783 8,622 Central & South America 4,966 3,173 Africa & Middle East 6,296 6,524 Asia and Pacific (excluding Japan) 10,870 7,969 Japon 6,790 5,989 Total 83,759 71,460 Accrued interest Net book value 276 205 84,035 71,665 110 - 111 Derivative financial instruments 31.12.2006 In millions of euros Governments, OECD central banks and similar OECD financial institutions and similar Other counterparties Total 31.12.2005 Market value Potential credit risk Market value Potential credit risk 783 508 797 490 85,180 75,836 99,170 55,466 9,839 11,387 11,814 9,308 95,802 87,731 111,781 65,264 81,671 75,216 100,960 Risk on: financial statements - interest rate, exchange rate and commodities 54,599 - equity and index derivatives 14,131 12,515 10,821 10,664 Impact of netting agreements 82,141 53,250 95,914 40,603 Total after impact of netting agreements 13,661 34,481 15,867 24,661 4.2 Market risk Market risk is the risk of a negative impact on the income statement or balance sheet of adverse fluctuations in the value of financial instruments following changes in market parameters: - interest rates: interest-rate risk is the risk of a change in the fair value of the a financial instrument or the future cash flows from a financial instrument due to a change in the interest rates; -e xchange rates: exchange-rate risk is the risk of a change in the fair value of a financial instrument due to a change in exchange rates; -p rices: price risk is the risk of a change in the price or volatility of equities, commodities, baskets of equities and share price indexes. The instruments most exposed to this risk are variable-income securities, equity derivatives and commodity derivatives. Calyon has a well-developed system for controlling market risks, comprising an independent Risk Management organisation, robust and consistent control and reporting procedures and a reliable and exhaustive assessment system. Work undertaken to consolidate these parts of the system has led to the internal model being validated by the regulatory authorities across a most of Calyon’s activities. It applies mainly to the Bank’s trading books. Organisation Decision-making and risk monitoring committees The entire system falls under the authority of the Market Risk Committee. This committee is chaired by the member of Calyon’s Management Board in charge of supervising the Risk and Permanent Control Division, and meets twice a month. It monitors and analyses market risks and their evolution. It ensures compliance with supervision indicators, specific management rules and defined limits. It sets limits for the operational units within the overall limit fixed by the Strategy and Portfolio Committee. This committee includes members of Calyon’s Executive Committee, a representative of Credit Agricole S.A. Group Risks Division, heads of Market Risk Management and officers in charge of capital markets activities. Minutes from these committee meetings are sent to Calyon’s Chief Executive Officer, who is also informed about risks, strategies and projected movements as part of Strategy and Portfolio Committee meetings. Finally, Internal Audit carries out regular audits to ensure compliance with the Group’s internal control standards. Scope The system covers all market risks, which are defined as potential losses associated with variations in interest rates, exchange rates, the prices of shares, the prices of commodities and their volatility, as well as the quality of the issuers of the securities in question. Risk control Market risk control forms an independent global function within the Risk and Permanent Control Division: Calyon - shelf-registration document 2006 At the global level, Risk Management monitors, controls and reports on market risks for all product lines. Its duties include: Calyon has set an overall risk limit, expressed in VaR terms, for all its capital markets activities which stood at 35 million euros at 29 December 2006. - s etting limits and ensuring compliance with them, - analysing market portfolio risks on a permanent basis, - validating risks and results, - analysing and monitoring complex transactions. Stress scenarios Since VaR does not reflect the potential impact of extreme market conditions, Calyon uses a set of stress scenarios, developed using three complementary approaches: Quantitative analysis: - identifies and analyses market risks, - validates valuation models, - proposes provisions and valuation adjustments, - proposes methods for assessing the model’s parameters. The Activity Monitoring Team is in charge of producing management results data and risk indicators for all activities subject to market risk limits. Its functions include: - independently collecting market data, - producing management results, - producing risk indicators. Cross-company teams supplement this system and have the tasks of ensuring international consolidation, reporting, defining the overall risk policy, ensuring the consistency of market parameters and monitoring the quality of the internal model. Market risk measurement and management methodology The management of market risks is based on several indicators that are used to devise overall or specific risk limits. These limits are intended to cover all risk factors. Value at Risk (VaR) VaR is the central plank of the risk-measurement system. The regulatory authorities’ validation of the internal model supports the use of VaR in the operational monitoring of market risks: -h istorical scenarios, which replicate the impact of major past crises on the current portfolio, - hypothetical scenarios, which anticipate likely shocks, modelled with the help of our economists, - adverse scenarios, which anticipate unfavourable market movements in the light of Calyon’s current positions. These scenarios are adjusted to the risks existing in the various portfolios on which they are calculated. Portfolios at all levels, from the most specific to the most general, are evaluated on a regular basis and on request. The results are presented to the Market Risk Committee. Other indicators VaR measurement is associated with a set of complementary and explanatory indicators, most of which are subject to limits: -o perational indicators allow risk controls to be honed. These indicators are calculated for each activity (issuer risk, authorised currencies, maximum terms), and include a system of loss alerts and stop losses; - analytical indicators are used by Risk Management for explanatory purposes. These market activities are managed through a system of market risk indicators accompanied by limits designed to cover all market risk factors, including market movements (fixed income, equities, forex), correlations and credit issues. Control procedures - V aR is a measure of the potential loss that Calyon’s portfolio could suffer in the event of adverse movements in market parameters over a one-day period and for a confidence interval of 99%, based on one year of historical data; - Calyon’s internal model is based on an historic VaR model, except in the case of commodities, for which a Monte Carlo model is applied. Limit monitoring General product line limits are determined at group level, after which more specific limits are defined if necessary. Risk Management monitors all limits on a daily basis, and reports any breaches to the appropriate levels of the group. Limit breaches and significant variations in results are reported to the Market Risk Committee. 112 - 113 financial statements Backtesting Under the internal model, a daily loss should not exceed VaR more than two or three times per year. These activities are managed through a system of market risk indicators accompanied by limits designed to cover all risk factors. These indicators are: Backtesting allows permanent comparisons between VaR and the daily results of product lines, calculated both on the basis of real positions and assuming unchanged positions. This allows the relevance of VaR measurements to be assessed. In 2006, there was only one exception to Calyon’s global VaR: on one day, the previous day’s loss estimate underestimated the actual loss. - VaR (historical, 99%, daily, including credit spread and correlation risk), - credit sensitivity, - sensitivity to correlation, - sensitivity to recovery rates, - sensitivity to interest rates. The system also includes stop loss limits and stress testing. Use of credit derivatives Independent teams belonging to the Risk and Permanent Control Division are responsible for valuation, calculating risk indicators, setting limits and validating models. Within the capital markets business, Calyon has developed a credit derivatives business encompassing trading, structuring and selling credit derivatives to its customers. The products handled range from simple products (credit default swaps), where the principal risk factor is credit spreads, through to more structured products that introduce other more complex risk factors (e.g. correlation). Positions are measured at fair value with deductions for model and data uncertainties. Calyon - shelf-registration document 2006 Derivative financial instruments: analysis by remaining maturity Hedging – Fair value of assets 31.12.2006 Exchange-traded 31.12.2005 Over-the-counter 1-5 years Over 5 years Total notional amount outstanding Total notional amount outstanding 33 16 168 247 In millions of euros Under 1 1-5 years year Interest rate instruments: 2 Futures 2 Over 5 years Under 1 year 117 2 Forward rate agreements Interest rate swaps 115 Swaptions 33 16 164 1 1 Other options 1 1 Currency and gold: 9 9 Currency futures 6 6 Currency options 3 Caps, floors and collars 17 3 Other: 2 2 Equity and index derivatives 2 2 Precious metal derivatives Commodity derivatives Credit derivatives Other Sub-total 2 Forward currency transactions Net book value 2 126 35 154 11 280 46 16 16 179 264 165 229 344 493 Derivative financial instruments held for trading – Fair value of assets 31.12.2006 Exchange-traded 31.12.2005 Over-the-counter 1-5 years Over 5 years Total notional amount outstanding Total notional amount outstanding 11,141 30,763 55,415 97,331 85,633 10,650 27,568 41,435 79,653 491 3,142 13,979 17,612 38 1 39 In millions of euros Under 1 year 1-5 years Interest rate instruments: Over 5 years 12 Under 1 year Futures Forward rate agreements 2 Interest rate swaps Swaptions Caps, floors and collars Other options Currency and gold: Currency futures Currency options Other: Equity and index derivatives 12 126 2 13 186 398 85 25 2,666 5,720 5 9,101 348 5,681 5 6,119 41 186 398 2,318 39 2,982 18,061 5,525 445 1,017 16 25,064 7,019 1,348 66 7 9,016 14,737 8,440 Precious metal derivatives Commodity derivatives 1,009 Credit derivatives 1,009 1 1 15,614 Other 11,042 4,177 379 1 15 Sub-total 18,199 5,711 843 14,824 36,499 162 111 14,986 36,610 Forward currency transactions Net book value 18,199 5,711 843 55,420 131,496 109,386 273 55,420 131,769 109,386 114 - 115 Hedging instruments – Fair value of liabilities 31.12.2006 Exchange-traded 31.12.2005 Over-the-counter 1-5 years Over 5 years Total notional amount outstanding Total notional amount outstanding 46 88 23 157 521 44 88 21 153 2 3 In millions of euros Under 1 1-5 years year Over 5 years Interest rate instruments: Under 1 year Futures Forward rate agreements Interest rate swaps Swaptions 1 financial statements Caps, floors and collars Other options 1 Currency and gold: 5 1 1 6 Currency futures 3 1 4 Currency options 2 14 2 Other: Equity and index derivatives Precious metal derivatives Commodity derivatives Credit derivatives Other Sub-total 51 89 Forward currency transactions 28 (3) Net book value 79 86 23 23 163 535 25 104 188 639 Derivative financial instruments held for trading – Fair value of liabilities 31.12.2006 Exchange-traded 31.12.2005 Over-the-counter 1-5 years Over 5 years Total notional amount outstanding Total notional amount outstanding 9,556 32,496 54,749 96,801 87,733 8,758 28,055 39,944 76,757 638 4,376 14,804 19,818 59 1 In millions of euros Under 1 year 1-5 years Over 5 years Interest rate instruments: Under 1 year Futures Forward rate agreements 1 Interest rate swaps Swaptions Caps, floors and collars Other options 160 5 1 60 165 Currency and gold: 85 2,882 5,224 82 8,273 Currency futures 85 335 5,185 5 5,610 Currency options 2,547 39 77 2,663 Other: 4,245 1,348 66 8,596 6,359 757 21,371 Equity and index derivatives 4,245 1,348 66 18 5,677 Commodity derivatives 533 533 Credit derivatives 252 8,387 13,535 Precious metal derivatives Other Sub-total 4,330 1,348 66 Forward currency transactions Net book value 252 7,793 6,359 757 14,909 21,034 44,079 55,588 126,445 346 4,330 1,348 66 21,380 109,655 346 44,079 55,588 126,791 109,655 Calyon - shelf-registration document 2006 Structural currency risk The Group’s structural currency risk results from its otherthan-temporary investments in assets denominated in foreign currencies, mainly the equity of its foreign operating entities, whether they result from acquisitions, transfers of funds from Head Office or the capitalisation of local earnings. Hedging of structural currency risk is managed centrally and arranged following decisions by the Bank’s AssetLiability Management Committee. Calyon’s structural currency positions are also included with those of Crédit Agricole S.A., which are presented five times a year to its Asset-Liability Management Committee, chaired by its CEO. The Group’s policy is usually to borrow funds in the investment currency in order to neutralise the investment’s sensitivity to currency risk. These borrowings are documented as investment hedging instruments. In some cases, and for illiquid currencies in particular, the investment gives rise to a purchase of the local currency, and the resulting currency risk may be hedged through forward transactions. Operational currency risk The Bank is further exposed to operational currency positions on its income and expenses stated in foreign currencies, both at Head Office and in its foreign operations. The Group’s general policy is to limit net operational currency positions as far as possible by periodically hedging them, usually without prior hedging of earnings not yet generated except if they have a high probability and a high risk of impairment. Overall, the Group’s policy for managing its structural currency positions has two main objectives: - f irstly, to protect the Group’s solvency ratio against currency fluctuations; unhedged structural currency positions will be scaled so as to equal the proportion of risk-weighted assets denominated in the currencies concerned and unhedged by other types of equity in the same currency; - secondly, to reduce the risk of a fall in asset value. Rules and authorisations applicable to the management of operational positions are put in place by decision of the Asset-Liability Management Committee. Analysis of the consolidated balance sheet by currency 31.12.2006 In millions of euros EUR Other EU currencies 31.12.2005 Assets Equity and liabilities 371,872 Assets Equity and liabilities 345,153 318,274 295,676 34,736 49,113 22,474 24,931 USD 120,591 139,914 92,646 117,390 JPY 22,019 24,008 25,535 18,924 Other currencies Total 38,952 29,982 22,387 24,395 588,170 588,170 481,316 481,316 Price risk Price risk arises from variations in the price and volatility of equities, commodities, baskets of equities and share price indexes. The following in particular are subject to this risk: floating-rate instruments, equity derivatives and commodity derivatives. Calyon takes on exposure to price risk in its equity and commodity derivatives activities within its capital markets business, and in its brokerage activities within CA Cheuvreux, CLSA and Calyon Financial. 116 - 117 4.3 Liquidity and financing risk Liquidity and financing risk is the risk of loss if a company is unable to meet its financial commitments in timely fashion and at reasonable prices when they reach maturity. These commitments include obligations to depositors and suppliers, as well as commitments in respect of loans and investments. financial statements Calyon, as a credit institution, complies with the liquidity requirements set out in the following texts: - C RBF regulation 88-01 of 22 February 1988 relating to liquidity, - F rench Banking Commission instruction 88-03 of 22 April 1988 relating to liquidity, - F rench Banking Commission instruction 89-03 of 20 April 1989 relating to the conditions for including refinancing agreements in liquidity calculations. Like all credit institutions, Calyon is exposed to the risk that it may not have the necessary funds to meet its commitments when they fall due. This may happen in the event of a general crisis of confidence or liquidity in the market. Liquidity risk is managed in the following ways: - liquidity risk is measured by looking at applications and sources of funds based on their contractual or modelled maturity schedules. This approach shows amounts falling due in various periods, which vary over time. Short-term liquidity risk is measured by comparing schedules for assets to be repaid and liabilities falling due, and the Bank’s transformation mismatch is also measured, notably at one and five years, by identifying the difference in amount between bank lending granted and long maturity securities held on the one hand, and financial resources available in the long term on the other; -a suitable policy for matching applications and sources of funds, and for maintaining liquid assets. In addition to the applicable regulatory ratios, Calyon’s policy for managing its short-term and medium-term liquidity risk is set by its Asset-Liability Management Committee as part of the Crédit Agricole group’s policy on this issue. Short-term liquidity management is handled by the Bank’s Treasury Department. It renews the necessary financing and manages suitable portfolios of liquid assets. It also sets rules and limits on the Bank’s various global liquidity centres and ensures compliance with the applicable regulatory liquidity coefficient. Calyon’s medium- to long-term liquidity management is provided centrally by the Asset-Liability Management Department of the Finance Department. This management includes: -d efining internal transformation policies, rules and procedures, both on an overall basis for major currencies and on a specific basis for certain local currencies; - determining medium- and long-term financing needs, as well as the needs of financial transactions concerning equity and long-term financing; - carrying out transactions decided upon by the AssetLiability Management Committee; - monitoring the creditworthiness of Calyon. The Financing Committee shared by the Treasury Department and the Finance Department’s Asset-Liability Management unit also meets periodically to analyse developments in long-term resource requirements and in the market. It sets the financial terms of new transactions. Other than liquidity arising from subordinated or perpetual debt, the greater part of Calyon’s long-term liquidity resources comes from debt issues in various forms (certificates of deposit, BMTN, EMTN), customer deposits and interbank borrowings, some of which are entered into with Credit Agricole S.A. Calyon makes extensive use of its Euro Medium Term Notes (EMTN) programmes: There is a programme governed by English law, for a maximum amount of 30 billion euros, and a programme governed by French law for a maximum amount of 4 billion euros. Unless stated otherwise, issues carried out under these programmes for Calyon’s international customers are “structured”, meaning that the coupon paid and/or the amount redeemed on maturity comprises a component which is linked to one or more market indexes (equity, interest rate, currency or commodity indexes). Similarly, certain issues are termed “Credit Linked Notes” meaning that the redemption is reduced in the event of default on the part of a third party who is contractually defined at the time of issue. Finally, Calyon has put various types of subordinated debt into place, either in the form of borrowings or in the form of securities. As well as contributing to the Bank’s solvency ratios, they help with its overall medium- and long-term financing. Calyon - shelf-registration document 2006 Subordinated debt issues Super-subordinated notes The activity of any bank involves making constant changes to its liabilities with respect to movements in its capital uses. Subordinated debt therefore forms part of the continuous management of Calyon’s liabilities and equity. The super-subordinated notes issued by Calyon are fixed-rate or adjustable-rate perpetual borrowings, senior to ordinary shares but subordinated to all subordinated debt. The coupons are non-cumulative and subordinated to Calyon’s annual net income which must be sufficient to remain positive after payment of the coupon due for the financial year in question. Redeemable subordinated notes Considering the current operating structure of the Credit Agricole S.A. group, Calyon no longer issues redeemable subordinated notes (“TSR”) but uses subordinated borrowings entered into with Credit Agricole S.A. These loans are generally at an adjustable rate with interest paid quarterly or annually. Issues by Calyon provide for the possibility of early redemption by the issuer after the tenth anniversary of their being put into place, subject to the prior agreement of the Company Secretary of the Commission Bancaire. Depending on the issue, the interest rate may be increased after the first possible date for early redemption by the issuer. The subordinated borrowings may be distinguished from ordinary loans and bonds due to the ranking of the debt contractually defined in the subordination clause. For borrowings obtained by Calyon, and in the event of liquidation, they will be reimbursed after secured and ordinary-ranking creditors have been paid, but before reimbursement of Calyon’s participating securities and loans. To date, five issues of Super-Subordinated Notes have been made, three at a fixed rate and two at an adjustable rate. They were all underwritten by Credit Agricole S.A. Breakdown of debt securities in issue and subordinated debt by currency 31.12.2006 In millions of euros Bonds EUR Fixed rate 333 Floating rate Fixed-term subordinated debt 31.12.2005 Perpetual subordinated debt 31 USD Fixed rate 3 Floating rate 2,094 Fixed-term subordinated debt Perpetual subordinated debt 406 106 26 316 866 31 1 1,967 Bonds 1,989 JPY 68 2 913 2,140 71 Floating rate Other currencies 248 29 95 Fixed rate Fixed rate Floating rate 64 Total 610 Fixed rate 581 29 Floating rate before the impact of hedging contracts 4,129 2,020 819 2,024 2,197 68 0 406 245 26 4,061 2,020 413 1,779 2,171 118 - 119 Due from banks and loans and advances to customers: analysis by remaining date 31.12.2006 In millions of euros 31.12.2005 Under 3 3 months months to 1 year 1 to 5 years Over 5 years Under 3 3 months months to 1 year Total 1 to 5 years Over 5 years Total Loans and advances to banks 44,555 5,224 5,780 3,004 58,563 32,890 5,844 5,404 2,252 46,390 Loans and advances to customers (including lease finance) 47,626 9,497 28,593 17,468 103,184 42,471 9,900 25,262 12,112 89,745 Total 92,181 14,721 34,373 20,472 161,747 75,361 15,744 30,666 14,364 136,135 Accrued interest 1,949 financial statements Provisions Net book value 1,688 (2,235) (2,818) 161,461 135,005 Due to banks and customer accounts: analysis by remaining maturity 31.12.2006 In millions of euros 31.12.2005 Under 3 3 months months to 1 year 1 to 5 years Over 5 years Total Due to banks 68,072 5,478 1,805 1,472 76,827 42,232 Customer accounts 68,228 4,209 8,255 3,066 83,857 59,039 136,300 9,687 10,060 4,538 160,585 101,271 Total Accrued interest Book value Under 3 3 months months to 1 year 1 to 5 years Over 5 years Total 15,087 14,299 307 71,925 8,801 2,707 913 71,460 23,888 17,006 1,220 143,385 2,260 1,192 162,845 144,577 Debt securities in issue and subordinated debt 31.12.2006 In millions of euros Under 3 3 months months to 1 year 31.12.2005 1 to 5 years Over 5 years Total Under 3 3 months months to 1 year 1 to 5 years Over 5 years Total 21 24 46 2 47 25 74 Debt securities in issue Interest-bearing notes 1 Negotiable debt securities: . Issued in France 12,201 395 3,105 3,429 19,130 3,889 1,883 1,359 1,966 9, 097 . Issued in other countries 19,547 19,197 3,493 123 42,360 20,321 12,617 3,808 183 36,929 260 190 144 16 610 89 406 308 16 819 32,009 19,782 6,771 3,592 62,154 24,299 14,908 5,522 2,190 46,919 Bonds Debt securities in issue Total 8 8 Accrued interest Net book value 676 392 62,830 47,311 Subordinated debt Fixed-term subordinated debt 589 Perpetual subordinated debt Total Accrued interest Book value 589 3,540 4,129 2,020 2,020 5,560 6,149 99 99 1 1 944 980 2,024 26 2,171 2,197 970 3,151 4,221 128 121 6,277 4,342 Calyon - shelf-registration document 2006 4.4 Derivative hedging instruments Fair value hedges A fair value hedge is a hedge of the exposure to changes in the fair value of a fixed-rate financial instrument caused by changes in interest rates. Fair value hedges transform fixed-rate assets or liabilities into adjustablerate assets or liabilities. In the Calyon Group, foreign currency-denominated net investments in foreign subsidiaries and branches are generally hedged against currency risk by currency borrowings or currency derivatives. Cash flow hedges Items hedged are principally fixed-rate loans, securities, deposits and subordinated debt. Fair value hedges include, notably, the hedging of fixedrate subordinated debt, deposits, securities and loans. Net investment hedges Net investment hedges cover the currency risk inherent in holding net investments in foreign operations. A cash flow hedge is a hedge of exposure to variability in cash flows arising from variable rate financial instruments. Items hedged are principally variable-rate loans and deposits. In the Calyon group, cash flow hedging is essentially tied to the global management of interest-rate risk. Derivative hedging instruments 31.12.2006 En millions d’euros Derivative hedging instruments Positive market value 31.12.2005 Negative market value Positive market value Negative market value Micro-hedging 320 154 303 633 · fair value hedges 280 127 294 627 · cash flow hedges 40 27 9 6 Macro-hedges (fair value) 23 33 186 Macro-hedges (cash flow) 1 · hedges of net foreign investment Total 344 1 188 4 493 6 639 4.5 Operational risk Operational risk is the risk of loss resulting from shortcomings in internal procedures or information systems, human error or external events that are not linked to a credit, market or liquidity risk. In accordance with principles in force within the Credit Agricole S.A. group, Calyon’s Permanent Control - Operational Risk division has set up a qualitative and quantitative system for identifying, evaluating, preventing and supervising operational risks in accordance with Basel II regulations. This operational risk management system comprises the following five components: -o rganisation of the operational risk management function: supervision of the system by the Management Board through the operational risk unit of Calyon’s Internal Control Committee, the work done by the Risk and Permanent Control Division and by subsidiaries and business lines via a network of Operational Risk Managers; - identification and qualitative evaluation of risks through risk mapping, along with indicators that allow monitoring of the most sensitive processes; 120 - 121 -n otification of operational losses and reporting of alerts for significant incidents, with consolidation in a database allowing the measurement and monitoring of risk-related costs; - c alculation and allocation of economic capital with respect to operational risks; - periodic reporting via operational risk scorecards. financial statements The aim is that this system will be approved by the French Banking Commission as an “advanced measurement approach” (AMA) in 2007. Operational risk management relies on a network of around 50 Operational Risk Managers, most of whom are also Permanent Control Correspondents, who cover all Group subsidiaries and business lines and are co-ordinated by the Risk and Permanent Control Division. The system is monitored by internal control committees under the authority of each entity’s management. To enable operational risk-related costs to be measured and monitored, a unified loss notification and alert reporting procedure has been implemented across the entire scope of application. The data required by the internal model for calculating the economic capital allocation, in accordance with the Basel II advanced method, have been integrated into a single database that provides five years of historical data. Calyon has thus been able to carry out initial simulations of capital calculations using the advanced method for the 2001-2005 period. The operational risk mapping process, launched at the end of 2004 with the aim of covering Calyon’s head office business lines and all of its international units and subsidiaries, has been completed. Annual updates will be carried out. Finally, a quarterly operational risk scorecard is produced, highlighting key events and movements in costs related to these risks. These scorecards provide global confirmation of the main sources of risks, i.e. litigation, inadequate compliance with regulations and good commercial practices and process management (particularly relating to market operations). These sources of risks determine the priorities of preventative or corrective action plans (FIDES programme). 4.6 Insurance and risk coverage Calyon has broad insurance coverage of its operating risks in accordance with guidelines set by its parent company, Credit Agricole S.A., with the aim of protecting its balance sheet and its income statement. In line with the principle of harmonising policies regarding the transfer of personal and property risk to insurance companies, and the principle of setting up a differentiated insurance policy for each business line in terms of civil liability and fraud, Calyon is covered by all Group insurance policies set up by Credit Agricole S.A. with highly rated insurance companies (AIG, AXA, ACE, AGF, Chubb, GAN Eurocourtage, Zurich, etc.), for high intensity risks: - fraud and “All Risks Securities” insurance, operating losses, professional liability, operating liability, liability of Directors and Corporate Officers, property damage (operational buildings and IT). The latter programme only concerns France, while the other programmes apply on a worldwide level. In addition, the business line subsidiaries manage their own smaller risks. Small and common risks that cannot be insured in an economically satisfactory manner are kept as deductibles within Calyon or spread within the Credit Agricole S.A. group by the Group’s own reinsurance company. This general framework may vary according to local regulations and specific requirements of countries in which the Calyon group operates. It is generally complemented by local insurance. Continuity of operations A global co-ordination and verification system is in place to ensure continuity of operations, and benefits from specific monitoring by the Management Board. Calyon assesses and improves its back-up systems on an ongoing basis. It carried out in-depth tests in 2006, both in France and worldwide, and covering all subsidiaries and branches. Calyon - shelf-registration document 2006 Note 5 : N otes to the income statement 5.1 Interest income and expense In millions of euros 31.12.2006 31.12.2005 Loans and advances to banks 4,697 2,840 Loans and advances to customers 4,919 3,146 822 700 1,208 3,324 65 28 Accrued interest receivable on available-for-sale financial assets Accrued interest receivable on hedging instruments Lease finance Other interest income 18 265 Interest Income 11,729 10,303 Deposits by banks (6,184) (4,141) Customer accounts (2,829) (1,708) (190) (630) (2,779) (2,083) Available-for-sale financial assets Debt securities in issue Subordinated debt Accrued interest payable on hedging instruments Lease finance (289) (207) (1,374) (1,472) (44) (6) (13,689) (10,247) Other interest and similar expense Interest expense 5.2 Net fee and commission income In millions of euros Interbank transactions 31.12.2006 31.12.2005 Income Expense Net Income Expense Net 29 (134) (105) 41 (103) (62) Customer transactions 500 (27) 473 733 (287) 446 Securities transactions 1,159 (286) 873 592 (182) 410 7 (20) (13) 13 (13) 863 (340) 523 614 (127) 487 * Net revenue from mutual fund management 11 (59) (48) 239 (47) 192 * Net revenue from payment systems 84 (41) 43 53 (32) 21 520 (342) 178 677 (253) 424 3,173 (1,249) 1,924 2,962 (1,044) 1,918 Foreign exchange transactions Financial future and forward instruments and other off-balance sheet transactions (including brokerage) Banking and financial services: * Other Net fee and commission income 122 - 123 5.3 Net gains (losses) on financial instruments at fair value through profit or loss In millions of euros Dividends received Unrealised or realised gains or losses on financial assets/liabilities at fair value through profit or loss Profit or loss on currency transactions and similar financial instruments Ineffective portion of fair value hedges 31.12.2006 4,490 2,459 771 8 3 (15) 5,390 2,466 31.12.2006 31.12.2005 59 76 Ineffective portion of cash flow hedges financial statements Net gains (losses) on financial instruments at fair value through profit or loss 31.12.2005 126 14 5.4 Net gains (losses) on available-for-sale financial assets In millions of euros Dividends received Realised gains or losses on available-for-sale financial assets Impairment losses on variable-income securities Net gains (losses) on available-for-sale financial assets 214 253 24 (41) 297 288 31.12.2006 31.12.2005 Gains on available-for-sale financial assets result mainly from dividends on variable-income securities (59 million euros) and disposal gains (214 million euros) realised mainly on sales of equities. 5.5 Net income and expenses related to other activities In millions of euros Net income from investment properties 86 0 Other net income (expense) 125 210 Net income (expense) from other activities 211 210 31.12.2006 31.12.2005 (2,435) (2,025) (42) (48) (991) (984) (3,468) (3,057) 5.6 General operating expenses In millions of euros Personnel costs Taxes other than income or payroll-related External services and other expenses Operating expenses Calyon - shelf-registration document 2006 5.7 Depreciation, amortisation and impairment of property, plant and equipment and intangible assets In millions of euros Depreciation and amortisation Impairment provisions Total 31.12.2006 31.12.2005 (107) (111) 1 0 (106) (111) This item covers depreciation, amortisation and impairment of intangible assets and property, plant and equipment assigned to the company’s operations. 5.8 Risk-related costs In millions of euros 31.12.2006 31.12.2005 Charge to provisions and impairment (391) (663) Counterparty risks (282) (334) Risks and expenses (109) (329) Write-back of provisions and impairment 384 706 Counterparty risks 348 395 Risks and expenses 36 311 Net change in provisions and impairment (7) 43 Bad debts written off – not provided for (21) (46) Recoveries on bad debts written off 38 65 Other losses (1) 25 9 87 Risk-related costs In 2006, there was a net release of 66 million euros from impairment reserves on loans and receivables (61 million euros in 2005). This figure breaks down as follows: -1 39 million euros of net releases relating to individual risks, - 73 million euros of net additions to collective reserves. General reserves, which represented a net charge of 73 million euros in 2006, mainly cover litigation and tax risks. 124 - 125 5.9 Net Income on other assets In millions of euros Property, plant and equipment and intangible assets 31.12.2005 0 1 Gains 1 7 Losses (1) (6) 5 202 Consolidated equity investments Gains 35 282 Losses (30) (80) 5 203 31.12.2006 31.12.2005 (652) (252) 32 (131) (620) (383) Net gains (losses) on other assets financial statements 31.12.2006 Most gains on other assets consisted of a disposal gain on Crédit Foncier de Monaco shares and deconsolidation or disposal gains on entities that left the scope of consolidation in 2006. In 2005, the 203 million euro net gain resulted from disposals of consolidated entities, mainly within the Crédit Agricole S.A. group. These disposals were intended to complete the initiative to bring the Credit Agricole S.A. group’s legal organisation into line with the managerial structure of its business lines. 5.10 Income tax Tax charge In millions of euros Current tax charge Deferred tax charge Tax charge for the period Reconciliation of theoretical tax rate and effective tax rate Base Tax rate Tax charge 2,302 34.43% (793) 2.48% (57) Impact of different rates on foreign subsidiaries (3.69%) 85 Impact of losses for the year, utilisation of tax loss carry forwards and temporary differences (8.64%) 199 2.35% (54) 26.91% (620) Income before tax, goodwill impairment and share of net income of associates Impact of permanent timing differences Effective tax rate and tax charge Impact of other items Calyon - shelf-registration document 2006 Note 6 : Segment reporting Definition of business segments The naming of Calyon’s business lines corresponds to the definitions applied within the Credit Agricole S.A. group. The capital markets and investment banking business encompasses the capital markets activities (treasury, foreign exchange, commodities, interest-rate derivatives, debt markets, credit markets and CDOs, and equity derivatives), the investment banking activities (mergers and acquisitions and equity capital market), as well as equity and futures brokerage activities carried out by CA Cheuvreux, CLSA and Calyon Financial. Presentation of business lines The Bank’s activities are based around two predominant business segments: financing on the one hand, and capital markets and investment banking on the other. Together, these represent virtually all of Credit Agricole S.A.’s corporate and investment banking business. Calyon is also present in international private banking through its establishments in Switzerland, Luxembourg, Monaco, Spain and Brazil. The financing activities encompass syndication, commercial banking in France and internationally, and structured financing: project, aircraft, shipping, acquisition, real estate, trade, export and structured commodities finance. 6.1 Analysis by business line 31.12.2006 In millions of euros Financing Capital markets and investment banking Total Corporate and investment banking International Private Banking Proprietary asset management & other activities Total Net banking income 2,091 3,306 5,397 474 (9) 5,862 Operating expenses (843) (2,406) (3,249) (322) (3) (3,574) Gross operating income 1,248 900 2,148 152 (12) 2,288 5 4 9 1 159 7 166 (5) 20 (10) 5 Risk-related costs Share of net income of affiliates Net gains or losses on other assets 5 158 (5) Pre-tax income 1,406 901 2,307 183 (22) 2,468 Corporate income tax (337) (243) (580) (42) 2 (620) Net income 1,069 658 1,727 141 (20) 1,848 (38) (28) (66) (11) 1,031 630 1,661 130 - of which investments in affiliates 637 31 668 - of which goodwill arising during the period 38 (2) 36 582,438 5,732 588,170 8,100 150 8,250 Minority interest Net income - group share (77) (20) 1,771 Business line assets: Total assets Allocated capital at 31 december 2006 126 - 127 31.12.2005 financial statements In millions of euros Financing Capital markets and investment banking Total Corporate and investment banking International Private Banking International retail banking Proprietary asset management & other activities Total Net banking income 1,778 2,556 4,334 415 175 14 4,938 Operating expenses (753) (1,972) (2,725) (315) (109) (19) (3,168) Gross operating income (before integration-related costs) 1,025 584 1,609 100 66 (5) 1,770 Risk-related costs (12) (7) (19) 7 (9) 108 Share of net income of affiliates 120 120 5 Net gains or losses on other assets 87 125 (6) 20 14 1 188 Pre-tax income 1,127 597 1,724 113 57 Corporate income tax Integration-related costs 203 (86) (86) 205 2,099 (252) (146) (398) (27) (14) 56 (383) Net Income 875 451 1,326 86 43 261 1,716 Minority interest (39) (20) (59) (8) (17) Net income – group share 836 431 1,267 78 26 261 1,632 499 25 524 69 188 257 472,444 8,872 481,316 8,000 176 8,176 (84) Business line assets: - of which investments in affiliates - of which goodwill arising during the period Total assets Allocated capital at 31 december 2005 Each segment’s assets are determined on the basis of balance sheet accounting items for each business line. The allocation of Calyon’s capital to each business line is based on regulatory prudential ratio requirements. Each segment’s liabilities, equivalent to allocated shareholders’ equity, are determined using a normalised calculation of capital allocation by business line. The allocated capital represents 6% of risk-weighted assets as defined for the international solvency ratio. The capital requirements thus calculated are incremented by 50% of the value of shares in equity affiliates. 6.2 Geographical analysis of business line information The geographical analysis of business line assets and results is based on the places where operations are booked for accounting purposes. In millions of euros 31.12.2006 31.12.2005 Net banking income Business line assets Net banking income Business line assets France (including overseas departments & territories) 2,283 431,474 1,893 351,204 Other European Union countries 1,191 38,906 449 14,734 Rest of Europe 418 27,543 935 35,378 North America 933 39,254 747 32,102 Central & South America 19 215 13 179 Africa & Middle East 84 4,767 236 4,565 Asia and Pacific (excluding Japan) 772 32,219 568 21,162 Japon 162 13,792 97 21,992 5,862 588,170 4,938 481,316 Total Calyon - shelf-registration document 2006 Note 7 : Notes to the balance sheet at 31 december 2006 7.1 Cash, due from central banks and French postal system 31.12.2006 In millions of euros Assets Cash 31.12.2005 Liabilities 28 Assets 29 Liabilities Due to central banks, French postal system 1,759 80 4,861 457 Total 1,787 80 4,890 457 7.2 Financial assets and liabilities at fair value through profit or loss Financial assets at fair value through profit or loss In millions of euros Financial assets held for trading Financial assets designated as at fair value Fair value on balance sheet Of which lent securities 31.12.2006 31.12.2005 359,497 288,285 38 17 359,535 288,302 4,729 2,735 31.12.2006 31.12.2005 Financial assets held for trading In millions of euros Due from banks 34 Loans and advances to customers 86 Pledged securities 0 Securities bought under repurchase agreements Securities held for trading - Treasury bills and similar items 99,057 87,466 128,671 91,313 27,568 21,851 - Bonds and other fixed-income securities (1) * Listed securities * Unlisted securities 59,137 36,734 7,369 182 - Equities and other variable-income securities * Listed securities * Unlisted securities 34,487 32,475 110 71 Derivative financial instruments 131,769 109,386 Fair value on balance sheet 359,497 288,285 (1) Including mutual funds. 128 - 129 Financial liabilities designated as at fair value In millions of euros 31.12.2006 31.12.2005 Securities held for trading - Equities and other variable-income securities * Listed securities * Unlisted securities Fair value on balance sheet 38 17 38 17 31.12.2006 31.12.2005 38,040 29,317 110,087 81,320 28,073 19,095 financial statements Financial liabilities held for trading In millions of euros Securities sold short Pledged securities Securities sold under repurchase agreements Debt securities in issue Accounts due to customers 6 Amounts due to banks Derivative financial instruments 126,791 109,655 Fair value on balance sheet 302,991 239,393 31.12.2006 31.12.2005 7.3 Derivative hedging instruments Detailed information is provided in note 4.4. on cash flow and fair value hedging, particularly for interest rates and exchange rates. 7.4 Financial assets available-for-sale In millions of euros Securities measured at fair value Treasury bills and similar items 12,376 11,498 9,567 5,834 435 1,332 647 1,586 Bonds and other fixed-income securities (1) * Listed securities * Unlisted securities Equities and other variable-income securities * Listed securities * Unlisted securities 1,366 2,897 Total available-for-sale securities 24,391 23,147 Total available-for-sale receivables Accrued interest Fair value on balance sheet(2) (1) including 786 million euros of impairment on securities and receivables in 2006 including 615 million euros of impairment on securities and receivables in 2005 3 157 24,551 23,147 Calyon - shelf-registration document 2006 Unrealised gains and losses on available-for-sale financial assets 31.12.2006 In millions of euros 31.12.2005 Fair value Unrealised gains Unrealised losses Fair value Unrealised gains Unrealised losses Treasury bills and similar items 12,376 2 1 11,498 3 3 Bonds and other fixed-income securities 10,002 42 7,166 97 33 710 223 3,468 28 10 1,303 269 1,015 284 72 Equities and other variable-income securities Non-consolidated investments Available-for-sale receivables Accrued interest Fair value on balance sheet 3 157 24,551 Deferred tax Total unrealised gains and losses net of tax 35 3 536 36 23,147 (103) 24,551 433 36 23,147 412 121 (38) (3) 374 118 7.5 Due from banks and loans and advances to customers Due from banks In millions of euros 31.12.2006 31.12.2005 28,603 31,447 20 111 29,870 14,737 4 50 56 45 Due from banks Loans and advances Pledged securities Securities bought under repurchase agreements Subordinated loans Securities not traded in an active market Other loans and interest Total Accrued interest Impairment Net book value 9 58,562 46,390 1,153 961 (196) (266) 59,519 47,085 130 - 131 Loans and advances to customers In millions of euros 31.12.2006 31.12.2005 8,264 8,260 Other loans 74,045 70,518 Securities bought under repurchase agreements 12,876 3,780 440 231 2,624 2,503 4,463 3,916 102,712 89,241 793 726 (2,039) (2,552) 101,466 87,415 472 503 1 1 473 504 Customer items Bills discounted Subordinated loans Securities not traded in an active market financial statements Short-term advances 33 Current accounts in debit Total Accrued interest Impairment Net book value Lease finance Property leasing Equipment leasing, rental contracts with purchase option and similar transactions Total Accrued interest 3 2 Impairment (1) Net book value Total 476 505 101,942 87,920 7.6 Impairment deducted from assets 01.01.2006 Changes in scope Charges Amount used and write-backs Interbank loans 266 2 3 (63) Customer loans 2,552 (46) 330 (611) of which collective provisions 1,119 In millions of euros Lease finance 73 1 Translation adjustments (139) Other movements 31.12.2006 (12) 196 (47) 2,039 (67) 1,125 (1) Held-to-maturity securities Other assets Total On available-for-sale assets Total asset provisions 18 51 (9) 384 (684) 2,837 (44) (93) 612 240 44 (91) (19) 3,449 196 428 (775) (112) 71 131 (34) 2,366 (34) 3,152 786 Calyon - shelf-registration document 2006 01.01.2005 Changes in scope Charges Amount used and write-backs Translation adjustments Other movements 31.12.2005 Interbank loans 172 27 58 (66) 13 62 266 Customer loans 3,106 (145) 428 (1,065) 226 2 2,552 1,090 12 (71) 88 In millions of euros of which collective provisions Lease finance 1,119 1 1 Held-to-maturity securities Other assets Total 0 33 (2) 7 (22) 2 3,312 (120) 493 (1,153) 241 18 64 2,837 7.7 Due to banks and customer accounts Due to banks In millions of euros Deposits Pledged securities 31.12.2006 31.12.2005 59,298 56,642 347 4 Securities sold under repurchase agreements 17,180 15,279 Total 76,825 71,925 Accrued interest 1,985 987 Net book value 78,810 72,912 Customer accounts In millions of euros 31.12.2006 31.12.2005 Current accounts in credit 19,823 28,143 Other customer accounts 60,736 40,006 Securities sold under repurchase agreements Total Accrued interest Net book value 7.8 Held-to-maturity financial assets Calyon does not have a portfolio of held-to-maturity financial assets. 3,200 3,311 83,759 71,460 276 205 84,035 71,665 132 - 133 7.9 Debt securities in issue and subordinated debt In millions of euros 31.12.2006 31.12.2005 46 74 . Issued in France 19,130 9,097 . Issued in other countries 42,360 36,929 610 819 Debt securities in issue Interest-bearing notes Negotiable debt securities: Bonds financial statements Debt securities in issue Total Accrued interest Book value 8 62,154 46,919 676 392 62,830 47,311 4,129 2,024 Subordinated debt Fixed-term subordinated debt Perpetual subordinated debt 2,020 2,197 Total 6,149 4,221 Accrued interest Book value 128 121 6,277 4,342 7.10 Deferred tax assets and liabilities Deferred tax liabilities In millions of euros Assets available-for-sale 31.12.2006 31.12.2005 100 81 Cash flow hedges (1) 54 Other timing differences 46 36 Other deferred tax liabilities 46 45 Total deferred tax liabilities 191 216 Deferred tax assets In millions of euros 31.12.2006 31.12.2005 Non-deductible reserves 404 250 Non-deductible accrued expenses 146 117 Cash flow hedges 23 Other deferred tax assets 170 344 Total deferred tax assets 743 711 Calyon - shelf-registration document 2006 7.11 Accruals, prepayments and sundry assets and liabilities Prepayments, accrued income and sundry assets In millions of euros Sundry assets 31.12.2006 31.12.2005 24,231 14,320 19,598 9,857 4,633 4,457 Inventory accounts and miscellaneous 6 Miscellaneous debtors Settlement accounts Prepayments and accrued income 12,822 11,834 Items in course of transmission to other banks 3,464 2,424 Adjustment and suspense accounts 7,976 6,502 Accrued income 1,133 1,802 152 89 Prepayments Other Net book value 97 1,017 37,053 26,154 Accruals, deferred income and sundry liabilities In millions of euros Sundry liabilities (1) Settlement accounts Miscellaneous creditors 31.12.2006 31.12.2005 22,993 17,515 5,218 5,102 17,775 12,367 Liabilities related to trading securities 20 Other 26 Accruals and deferred income Items in course of transmission to other banks (2) Adjustment and suspense accounts Deferred income Accrued expenses Other Net book value 15,182 13,348 4,154 5,252 7,700 5,143 865 1,047 2,327 1,906 136 38,175 30,863 31.12.2006 31.12.2005 (1) Amounts are stated inclusive of accrued interest. (2) Amounts are stated net 7.12 Fixed assets held-for-sale and associated liabilities In millions of euros Fixed assets held for sale Liabilities associated with assets held for sale 2 134 - 135 7.13 Investments in equity affiliates Details are given in the “scope of consolidation” section in note 3.3. 7.14 Investment property In millions of euros Gross value Depreciation and impairment financial statements Net book value In millions of euros Gross value Depreciation and impairment Net book value Decreases Increases (redemption (acquisitions) and disposals) 01.01.2006 Changes in scope Translation adjustments Other movements 31.12.2006 322 (7) 5 (169) (8) (109) 34 (122) 7 (6) 13 6 84 (18) 200 0 (1) (156) (2) (25) 16 01.01.2005 Changes in scope Decreases Increases (redemption (acquisitions) and disposals) Translation adjustments Other movements 31.12.2005 341 (23) 47 (33) 17 (27) 322 (165) 16 (12) 21 (13) 31 (122) 176 (7) 35 (12) 4 4 200 7.15 Property, plant and equipment and intangible assets (excluding goodwill) In millions of euros 01.01.2006 Changes in scope Increases (acquisitions, business combinations) Decreases (redemption and disposals) Translation adjustments Other movements 31.12.2006 1 120 (2) 109 (73) (31) 107 1,230 Property, plant and equipment Gross value Accrued interest (1) Depreciation and impairment Net book value (504) 616 (2) 228 11 (89) 66 18 (75) (584) 20 (7) (13) 32 646 Intangible assets Gross value Depreciation and impairment Net book value (171) 32 (12) (4) 1 256 (18) 12 4 (1) (174) 57 11 14 0 0 0 82 01.01.2005 Changes in scope Increases (acquisitions, business combinations) Decreases (redemption and disposals) Translation adjustments Other movements 31.12.2005 1 233 (71) 86 (189) 20 41 1,120 (611) 91 (84) 143 (15) (28) (504) 622 20 2 (46) 5 13 616 286 (43) 24 (61) 7 15 228 (215) 30 (21) 63 (4) (24) (171) 71 (13) 3 2 3 (9) 57 (1) Accrued rents on assets let to third parties. In millions of euros Property, plant and equipment Gross value Accrued interest (1) Depreciation and impairment Net book value Intangible assets Gross value Depreciation and impairment Net book value (1) Accrued rents on assets let to third parties. Calyon - shelf-registration document 2006 7.16 Goodwill Details are given in the «scope of consolidation» section in note 3.6. 7.17 Reserves In millions of euros Financing commitment execution risks Operational risks 01.01.2006 Litigation 544 Synergy-related costs Other risks and expenses Reserves Write-backs, Write-backs, amount amount used released 9 (28) Other Translations movements adjustments 2 6 257 Restructuring Charges 44 Employee retirement and similar benefits Equity investments Changes in scope 31.12.2006 (1) 26 (6) (9) 48 (10) (8) 22 (4) 305 144 (62) (55) (81) (3) 478 6 (6) 16 (16) 40 (40) 256 (4) 10 (35) (44) (68) (4) 111 1,169 (13) 211 (107) (135) (193) (12) 920 At 31 December 2006, reserves for employment-related liabilities and similar reflect the impact of regulatory changes to pension liabilities in France (following the amendment to the Fillon act) and the UK (following the updating and harmonisation of mortality tables), and increased by 48 million euros. The 478 million euros of litigation reserves break down as follows: - tax disputes: 80 million euros - employment-related disputes: 3 million euros - legal disputes: 395 million euros 7.18 Shareholders’ equity Ownership structure at 31 December 2006 Calyon (parent-company) has share capital of 3,435,953,121 euros. It is divided into 127,257,523 shares with a par value of 27 euros each, fully paid-up. No shares are held by Calyon (parent-company) or by any of its subsidiaries. To the best of the company’s knowledge, there is no shareholders’ agreement. At 31 December 2006, ownership of Calyon (parentcompany)’s capital and voting rights was as follows: Number of shares 31.12.2006 % of share capital % of voting rights 121,246,753 95.28 95.28 SACAM Développement ** 2,838,193 2.23 2.23 C.A. Bourse * 2,623,011 2.06 2.06 Delfinances * 504,652 0.40 0.40 44,897 0.04 0.04 100.00 100.00 Shareholder Crédit Agricole S.A. CPR G * Individuals Total * Held by the Crédit Agricole S.A. group. ** Held by the Crédit Agricole group. 17 127,257,523 136 - 137 Preferred shares Issuer list Date of issue Amount of issue in millions of dollars 31.12.2006 in millions of euros 31.12.2005 in millions of euros dec-98 230 175 195 june-02 320 243 272 550 418 467 Calyon Preferred Funding LLC Calyon Preferred Funding II LLC Total Earnings per share financial statements 31.12.2006 Net income used to calculate earnings per share (in millions of euros) 31.12.2005 1,771 1,632 121,402,307 115,547,092 0 0 121,402,307 115,547,092 Basic earnings per share 14.59 14.13 Diluted earnings per share 14.59 14.13 Average number of ordinary shares in issue during the year Number of potentially dilutive shares Weighted average number of ordinary shares used to calculate fully diluted earnings per share Dividends Calyon’s Board of Directors has proposed a net dividend of 16.10 euros per share with respect to 2006, subject to shareholders’ approval in the general meeting of shareholders. Dividend paid in respect of year Net amount in millions of euros 2004 250 2005 1,551 2006 2,049 Appropriation of net income and proposed dividend for 2006 The appropriation of net income and the fixing of the dividend for 2006 are proposed in the draft resolutions presented by the Board of Directors to Calyon’s general meeting of shareholders to be held on 14 May 2007. The proposed resolution is drafted as follows: The General Meeting determines that the net income for the 2006 financial year amounts to 1,530,909,518.89 euros. Pursuant to article L. 232-10 paragraph 1 of the French Commercial Code, the General Meeting decides to appropriate 76,545,475.94 euros to the statutory reserve, thereby increasing said reserve to an amount of 292,980,726.16 euros, corresponding to 8.53% of the registered capital. Noting that the Company is free from all other reserve obligations and that the income available for distribution is 1,785,702,485.72 euros after taking into account retained earnings of 331,338,442.77, the General Meeting decides to distribute: - all income available for distribution, i.e. 1,785,702,485.72 euros and - 263,143,634.58 euros from the available “share premium” reserve, making a total of 2,048,846,120.30 euros. As a result, the General Meeting sets a dividend of 16.10 euros with respect to the period ended 31 December 2006 for each share entitled to this dividend, i.e. 127,257,523 shares. This dividend is eligible for the 40% tax allowance provided for in article 158/3/2 of the General Tax Code, for the benefit only of shareholders who are natural persons. The General Meeting fixes the date for payment of the dividend at 6 June 2007. In accordance with the law, the General Meeting formally takes note of the amounts of dividends paid for the last three financial years: Calyon - shelf-registration document 2006 Financial year Number of shares receiving dividends Net dividend per share (in euros) French tax already paid (in euros) Total (in euros) 5.125(*) 15.375 2003 42,179,533 10.25 2004 115,547,092 2.16(**) 2005 115,547,092 13.42(***) * Only for those shares which are not held by companies belonging to Credit Agricole S.A.’s tax consolidation group. ** Dividend eligible for the 50% tax allowance provided for in article 158/3/2 of the General Tax Code, solely for shareholders who are natural persons. *** Dividend eligible for the 40% tax allowance provided for in article 158/3/2 of the General Tax Code, solely for shareholders who are natural persons. Note 8 : Employee benefits and other compensation 8.1 Personnel costs Analysis of personnel costs In millions of euros Salaries Other social security expenses Incentive schemes and profit-sharing Payroll-related tax Total personnel costs 8.2 Average number of employees 2006 2005 France 4,474 4,813 Outside France 8,627 11,553 13,101 16,366 Total 8.3 Post-employment benefits, defined contribution plans There are various compulsory retirement plans to which employers must contribute. The funds are managed by independent organisations and the employers have no legal or implied obligation to pay additional contributions should the funds not have sufficient assets to pay the benefits corresponding to current and past service rendered by employees. Consequently, Calyon has no liability in this respect other than the contributions payable. Within Calyon, there are several compulsory defined contribution plans, the main ones being Agirc/Arrco, which are French supplementary retirement plans, supplemented by an «Article 83»-type plan. 31.12.2006 31.12.2005 (1,845) (1,600) (474) (330) (52) (39) (64) (56) (2,435) (2,025) 138 - 139 8.4 Post-employment obligations, defined benefit plans Change in actuarial liability In millions of euros 31.12.2006 31.12.2005 774 720 Current service cost 30 26 Interest cost financial statements Actuarial liability at 31/12 / N-1 34 31 Employee contributions 7 7 Plan revision / curtailment / settlement 9 (12) Acquisition, divestments (change in scope of consolidation) Early retirement allowances Benefits paid (obligatory) Actuarial gains(losses) Actuarial liability at 31/12 / N 1 1 (29) (16) 27 31 853 788 The difference between the closing figure in 2005 and the opening figure in 2006 is due in particular to changes in scope. Breakdown of net charge recognised in the income statement In millions of euros 31.12.2006 31.12.2005 Current service cost 30 26 Interest cost 34 31 (29) (6) Expected return on assets during the period Amortisation of past-service costs Amortisation of actuarial gains (losses) Gains (losses) on plan curtailment / settlement 2 13 16 5 (6) 55 61 31.12.2006 31.12.2005 540 470 Expected return on assets 29 15 Actuarial gains (losses) on plan assets 23 15 Employer contributions 25 44 Employee contributions 8 7 1 1 Benefits paid (27) (12) Fair value of assets / reimbursement rights at 31/12/N 599 540 Net charge recognised in the income statement Fair value of plan assets and reimbursement rights In millions of euros Fair value of assets / reimbursement rights at 31/12/N-1 Plan revision / curtailment / settlement Acquisition, divestments (change in scope of consolidation) Early retirement allowances Calyon - shelf-registration document 2006 Net position In millions of euros 31.12.2006 31.12.2005 Closing actuarial liability 853 788 Closing actuarial liability 853 788 Closing fair value of assets / reimbursement rights 599 540 Closing net position (liability) asset 254 248 2006 2005 The net position is hedged by a reserve for employee liabilities. Information on annualised return on plan assets (1) In millions of euros Breakdown of assets - % bonds 74% 74% - % equitie 16% 16% - % other 10% 10% Defined benefits plans/key actuarial assumptions (1) In millions of euros Discounting rate (2) 2006 2005 2,25% to 4,25% 2,5% to 4,09% Expected rate of return on plan assets and reimbursement rights Expected salary increases 4% 4% 2,65% to 3,55% 2,50% 4% 4% Increase in healthcare costs Other (detail) n/a (1) Calculated on the basis of the assets of Calyon (parent-company) in France. (2) Calculated on the basis of the discount rates defined by the Group and on the residual term of the commitments. 8.5 Other employee benefits Calyon gives its employees an interest in its development and in its results via a number of mechanisms. Under the profit-sharing agreement, the special reserve is calculated according to the statutory formula as of 2005, pursuant to article L.442-2 of the Employment Code. It is shared among beneficiaries in proportion to their gross salary subject to statutory caps. An incentive agreement was concluded for the 2004, 2005 and 2006 financial years in order to give employees an interest in the improvement in Calyon’s gross profitability and overall performance, excluding the impact of extraordinary elements. The amounts distributed in the last five years have been as follows: (In millions of euros) Financial year Year of payment Profit-sharing scheme 2005 2006 2004 2005 29.1 2003 2004 23.4 2002 2003 10.7 2001 2002 12.9 Incentive scheme 37.1 10.0 4.1 Calyon also has an employee savings plan which completes the above systems. Moreover, Calyon pays out long-service bonuses associated with the awarding of workers’ medals. 140 - 141 8.6 Share-based payments No stock options relating to shares in Calyon or a controlled company were granted during 2006, as Credit Agricole S.A. decided to set up a single system at parent company-level to cover all group companies. 8.7 Executive officers’ compensation financial statements Calyon’s principal executive officers include all members of the Executive Committee. The members of the Executive Committee are as follows: the Chief Executive Officer of Calyon, the deputy CEOs, the CEO of Cheuvreux and the officers responsible for Calyon’s main businesses. Compensation and benefits paid to Executive Committee members in 2006 were as follows: - S hort-term employee benefits: 25 million euros comprising fixed and variable pay including social security charges, as well as benefits in kind, - Post-employment benefits: 7.7 million euros comprising termination benefits and supplementary pension benefits arranged for the Group’s principal executives - Other long-term employee benefits: the amount granted under long-service bonuses is insignificant, - Termination benefits: insignificant. Payments in Calyon shares: no allotment of Calyon shares in 2006. Note 9 : Financing and guarantee commitments Contingent liabilities and off-balance sheet commitments given and received In millions of euros 31.12.2006 31.12.2005 Commitments given 165,340 145,244 Financing commitments 124,751 105,947 Banks 31,091 19,120 Customers 93,660 86,828 Confirmed credit lines - Confirmed documentary credits - Other confirmed credit lines Other Guarantee commitments 7,499 8,945 85,345 77,174 816 708 40,589 39,296 Banks Confirmed credit lines 1,971 915 Other 3,072 7,908 Customers 35,546 30,473 Guarantees 23,108 18,250 - Property guarantees 1,801 2,086 - Loan repayment guarantees 7,047 6,804 Other 3,590 3,333 Commitments received 56,281 45,628 Financing commitments 5,771 8,323 Banks 4,959 7,674 Customers 812 649 Guarantee commitments 50,510 37,305 Banks 11,533 6,272 Customers Guarantees received from government bodies or similar Other 7,994 8,804 30,983 22,229 Calyon - shelf-registration document 2006 Note 10 : Fair value of assets and liabilities measured at cost 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. The fair values shown below are estimates made on the reporting date. They are likely to change in subsequent periods due to developments in market conditions or other factors. Calculations represent best estimates. These estimates are based on a certain number of assumptions. To the extent that these models contain uncertainties, the fair values shown may not be achieved upon actual sale or immediate settlement of the financial instruments concerned. In practice, and in line with the going-concern principle, not all these financial instruments would necessary be settled immediately at the values estimated below. Fair value of assets and liabilities measured at amortised cost 31.12.2006 In millions of euros 31.12.2005 Carrying value Estimated market value Carrying value Valeur de marché estimée 59,519 59,519 47,085 47,085 101,942 101,892 87,920 87,897 Assets Due from banks Loans and advances to customers Held-to-maturity financial assets Investment properties 16 16 200 232 Due to banks 78,810 78,810 72,912 72,912 Customer accounts 84,035 84,035 71,665 71,665 Debt securities in issue 62,830 62,830 47,311 47,293 6,277 6,277 4,342 4,342 Liabilities Subordinated debt In some cases, market values are close to book values. This is particularly the case for: - f loating-rate assets or liabilities where changes in interest rates have no significant influence on fair value as the rates on these instruments are frequently adjusted to market rates; - short-term assets or liabilities where the redemption value is considered to be close to the market value; - sight liabilities; - transactions for which there are no reliable observable data. 142 - 143 Note 11 : Subsequent events Press release dated 26 March 2007 The main post-balance-sheet event concerns the plan to combine brokerage subsidiary Calyon Financial with Fimat (Société Générale group), as well as the joint venture between Citic East China and Calyon Financial as reported by the 9 January 2007 and the 26 March 2007 press releases (reproduced below). Citic East China and Calyon Financial Announce Joint Venture Agreement to Form Chinese Futures Brokerage financial statements Press release dated 9 January 2007 Calyon and Société Générale plan to merge their brokerage activities currently carried out by Calyon Financial and Fimat Calyon and Société Générale have entered into exclusive negotiations regarding a possible merger of their brokerage activities, currently carried out by Calyon Financial and Fimat respectively. The newly formed entity would be a world leader in execution and clearing of listed financial futures and options (number 3 in the US in particular)1. This combined group would provide access to more than 70 derivatives exchanges to an international base of institutional clients. It would also be a major player in interdealer brokerage of listed or OTC derivatives and cash products such as prime brokerage services. The combination of both parties’ customer base, as well as their respective products and services, would ensure the new group’s competitiveness in the coming years as well as creating a strong potential for cross-selling. The considered merger would be jointly controlled by Société Générale and Calyon, with headquarters located in Paris. The two groups will commence mutual due-diligence processes, with the aim of signing a definitive agreement. Prospects for the newly created group would be presented at the time of signing of the definitive agreement. The project will be subject to a consultation of employee representatives. Ranking based on customer segregated funds on US markets and customer amounts required on foreign markets as of 31/10/2006 (source: Commodity Futures Trading Commission) 1 Citic East China (Group) Corp., Ltd and Calyon Financial Hong Kong Ltd. today announced the signing of a joint venture agreement, forming a new futures brokerage entity established under the Closer Economic Partnership Arrangement (referred as CEPA). If all approvals are obtained as per schedule, the joint venture may become the first futures brokerage in Shangai and second futures brokerage in China that is jointly owned by a Chinese firm and a Hong Kong brokerage firm. Citic East China will be the majority shareholder. Citic Futures is part of China’s top State-Owned Enterprise, namely Citic Group. Citic Futures currently has memberships on the Shangai Futures Exchange, Dalian Commodity Exchange and Zhengzhou Commodity Exchange. Calyon Financial Hong Kong is a part of Calyon Financial group, which is wholly owned by Calyon Credit Agricole CIB and part of the Credit Agricole Group in France. Calyon Financial is a leading global futures brokerage firm and has access to more than 70 global financial and commodity exchanges. After signing the agreement, the joint venture will seek regulatory approval from the China Securities Regulatory Commission (CSRC) and relevant required regulatory bodies. The overall approval process is anticipated to conclude within three to six months. Calyon - shelf-registration document 2006 Note 12 : Scope of consolidation at 31 December 2006 Calyon scope of consolidation (a) Country Method Parent company % of control CALYON France Parent 100.00 100.00 Saudi Arabia equity 31.11 Australia full 100.00 Egypt full Singapore full 100.00 Banks and financial institutions Calyon Australia Ltd M CAI Merchant Bank Asia LTD Cogenec 100.00 100.00 31.11 31.11 31.11 100.00 100.00 100.00 100.00 100.00 100.00 Banque Saudi Fransi - BSF Crédit Agricole (Egypt) S.A.E. % of interest 31.12.2006 31.12.2005 31.12.2006 31.12.2005 75.00 75.00 Monaco full 99.99 99.99 99.99 99.99 Crédit Agricole Financement Switzerland equity 20.00 20.00 20.00 20.00 Crédit Agricole Luxembourg Luxembourg full 100.00 100.00 100.00 100.00 Crédit Agricole Suisse Switzerland full 100.00 100.00 100.00 100.00 Bahamas full 100.00 100.00 100.00 100.00 Turkey full 100.00 99.96 100.00 99.96 Monaco full 70.12 77.11 68.94 75.93 Crédit Agricole Suisse (Bahamas) Calyon Turk Bank A.S. Crédit Foncier de Monaco Finanziaria Indosuez International Ltd Switzerland full 100.00 100.00 100.00 100.00 Calyon Uruguay S.A. Uruguay full 100.00 100.00 100.00 100.00 Calyon Bank Slovakia AS Slovakia full 100.00 100.00 100.00 100.00 Russia full 100.00 100.00 100.00 100.00 Ukraine full 100.00 100.00 100.00 100.00 Czech Republic full Hungary full 100.00 100.00 100.00 100.00 Poland full 100.00 100.00 100.00 100.00 Brazil full 100.00 100.00 100.00 100.00 France proportional 47.32 43.93 47.32 43.93 Spain proportional 50.00 50.00 35.00 36.41 Calyon Rusbank SA Calyon Bank Ukraine Calyon Bank Czech Republic M Calyon Bank Hungary Ltd Calyon Bank Polska SA Banco Calyon Brasil UBAF (Union de Banques Arabes et Françaises) Stockbrokers Altura Calyon Financial Inc Calyon Financial Pte Singapore Calyon Financial SNC Crédit Agricole Cheuvreux Nordic AB SB Crédit Agricole Cheuvreux S.A. Crédit Agricole Cheuvreux Italia SIM SPA Credit Agricole Cheuvreux North America, Inc Cholet Dupont (group) Crédit Agricole Cheuvreux Espana S.A. Crédit Agricole Cheuvreux International Ltd Crédit Agricole Cheuvreux Securities Ltd CAI Derivatives Products PLC Calyon Financial Canada In Calyon Securities USA Inc. CLSA BV (group) Calyon Financial Hong Kong 100.00 In 100.00 USA full 100.00 100.00 100.00 100.00 Singapore full 100.00 100.00 100.00 100.00 France full 100.00 100.00 100.00 100.00 Sweden full 100.00 100.00 100.00 100.00 France full 100.00 100.00 100.00 100.00 Italy full 100.00 100.00 100.00 100.00 USA full 100.00 100.00 100.00 100.00 France equity 33.40 33.40 33.40 33.40 Spain full 100.00 100.00 100.00 100.00 United Kingdom full 100.00 100.00 100.00 100.00 Hong-Kong full 100.00 100.00 100.00 100.00 Ireland full 99.98 99.98 99.98 99.98 Canada full 100.00 100.00 USA full 100.00 100.00 100.00 100.00 Hong-Kong full 100.00 100.00 77.74 73.19 Hong-Kong full 100.00 100.00 144 - 145 Calyon scope of consolidation (a) Country Method Investment companies BFC Holding % of interest ns France full Cie Française de l’Asie (CFA) France full 100.00 100.00 100.00 100.00 Doumer Finance SAS France full 100.00 100.00 100.00 100.00 Fletirec (group) France full 100.00 100.00 100.00 100.00 Fininvest France full 98.27 98.27 98.27 98.27 United Kingdom full 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 ICF Cayman Holdings Calyon Air Finance SA 99.55 99.34 France full ns United Kingdom full France full 100.00 100.00 100.00 100.00 USA full 100.00 100.00 100.00 100.00 IPFO France full 100.00 100.00 100.00 100.00 Mescas France full 100.00 100.00 100.00 100.00 Switzerland full 100.00 100.00 100.00 100.00 Spain equity 45.00 45.00 45.00 45.00 Casam Systeïa Global Macro Ireland full 99.60 100.00 99.60 100.00 Casam Systeïa Pair Trading Ireland full 99.57 100.00 99.57 100.00 Casam Systeïa Event Driven Ireland full 99.63 100.00 99.63 100.00 Casam Equity Quant Ireland full 96.90 100.00 96.90 100.00 Casam Futures Euro Ireland full 97.22 100.00 97.22 100.00 Indosuez Holding UK Ltd financial statements % of control 31.12.2006 31.12.2005 31.12.2006 31.12.2005 CAI BP Holding Calyon North America Holding SAFEC Crédit Agricole Assets Management Espana Holding 100.00 100.00 Casam Systeïa Equity Linked Fund L Ireland full 100.00 Multinational Asset Co. Limited L Cayman full 43.93 European Sovereign Funding SA France full 100.00 100.00 100.00 FCC Masterace France full 100.00 100.00 100.00 0.00 United Kingdom full 100.00 100.00 100.00 100.00 Calyon Investments Crédit Lyonnais Rouse limited 100.00 43.93 ns United Kingdom full LF Investiments LP USA full 100.00 100.00 100.00 100.00 CLASI USA full 100.00 100.00 100.00 100.00 Calyon Leasing Corporation USA full 100.00 100.00 100.00 100.00 Calyon Global Partners Inc. USA full 100.00 100.00 100.00 100.00 Japon full 100.00 100.00 100.00 100.00 USA full 100.00 100.00 100.00 100.00 United Kingdom full 100.00 100.00 100.00 100.00 Crédit Lyonnais Leasing Japan Company Ltd Calyon North America Inc. Calyon Holdings Calyon Capital Market Asia BV 100.00 0.00 100.00 Netherlands full 100.00 100.00 100.00 100.00 Calyon Capital Market International France full 100.00 100.00 100.00 100.00 Calyon Securities Japan Japan full 100.00 100.00 100.00 100.00 Doumer Philemon France full 100.00 100.00 100.00 100.00 South Korea full 100.00 100.00 100.00 100.00 France equity 50.00 50.00 50.00 50.00 Korea 21st Century Trust CASAM Casam Americas LLC In USA equity 50.00 50.00 Lyra Capital LLC In USA equity 50.00 50.00 Casam Advisers LLC In USA equity 50.00 50.00 Alternative Investment and Research Technologies In USA equity 50.00 50.00 Lyra Partners LLC In USA equity 50.00 50.00 Casam Cayman Ltd In USA equity 50.00 50.00 Casam US Holding Inc In USA equity 50.00 50.00 Calyon - shelf-registration document 2006 Calyon scope of consolidation (a) Country Method % of control % of interest 31.12.2006 31.12.2005 31.12.2006 31.12.2005 Leasing companies Ergifrance France full 100.00 100.00 100.00 100.00 Financière Immobilière Calyon France full 100.00 100.00 100.00 100.00 Cardinalimmo France full 49.61 49.61 49.61 49.61 Other CA Brasil DTVM CA Conseil SA Calyon Preferred Funding LLC Calyon Preferred Funding II LLC 100.00 Brazil full 100.00 100.00 100.00 Luxembourg full 99.99 99.99 99.99 99.99 USA full 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 USA full Fonds ICF II a L Cayman full 100.00 100.00 Fonds ICF III L Cayman full 100.00 100.00 Fonds Mezzasia Hong Kong full 100.00 100.00 88.87 Fonds Alcor Hong Kong full 99.05 98.30 93.62 89.51 Merisma France full 100.00 100.00 100.00 100.00 Calixis Finance France full 89.90 89.80 89.90 89.80 Italy full 60.00 60.00 60.00 60.00 LSF Italian Finance Company SRL 86.60 Minerva S.R.L. In Italy full 90.00 90.00 Sagrantino In Netherlands full 100.00 67.00 European NPL S.A. In Luxembourg full 67.00 67.00 DGAD International SARL In Luxembourg full 100.00 100.00 Indosuez Holding SCA II Luxembourg full 100.00 100.00 100.00 100.00 Indosuez Management Luxembourg II Luxembourg full 100.00 100.00 100.00 100.00 Indosuez International Finance Netherlands full 100.00 100.00 100.00 100.00 SNC Doumer France full 99.94 99.94 99.94 99.94 Chauray Contrôle SAS France proportional 34.00 34.00 34.00 France full France full 100.00 100.00 100.00 100.00 100.00 100.00 100.00 CPR BK ns CPR Online SNC Haussmann Anjou 100.00 France full 100.00 In Spain full 100.00 Indosuez Norte SL In Spain full 95.00 Crédit Lyonnais Property Broadwalk ns United Kingdom full United Kingdom full 99.90 United Kingdom full 99.90 ns United Kingdom full Indosuez Levante S.A. Calyon Finance Guernesey Calyon Financial Products Calyon Capital Market Group Mngt Ltd 34.00 100.00 100.00 95.00 100.00 100.00 99.90 99.90 99.90 99.90 100.00 99.90 99.90 100.00 Ester Finance France full 99.99 99.99 99.99 99.99 Capital Plus France full 100.00 100.00 100.00 100.00 100.00 100.00 100.00 CLIM M France full France full 100.00 100.00 Calyon Global Banking France full 100.00 100.00 100.00 CLIFAP France full 100.00 100.00 100.00 100.00 Carr Indosuez Asia SA France full 100.00 100.00 100.00 100.00 Calyon Asia Shipfinance Services Ltd Hong Kong full 99.99 99.99 99.99 99.99 Calyon Investment Products Limited Cayman full 100.00 100.00 100.00 100.00 CLINFIM 100.00 100.00 Aylesbury In Netherlands full 100.00 100.00 Bletchley Investments Limited In Netherlands full 82.22 82.22 (a) : Included (In) the scope of consolidation. Excluded from (Out) the scope of consolidation because the entity is non-significant (ns) or has been merged (M), liquidated (L), spun off (SO), sold or transferred out (S). Change (C) of consolidation method. 146 - 147 financial statements Statutory Auditors’ report on the consolidated financial statements This is a free translation into English of the Statutory Auditors’ report issued in the French language and is provided solely for the convenience of English speaking readers. The Statutory Auditors’ report includes information specifically required by French law in all audit reports, whether qualified or not, and this is presented below the opinion on the consolidated financial statements. This information includes an explanatory paragraph discussing the auditors’ assessments of certain significant accounting and auditing matters. These assessments were considered for the purpose of issuing an audit opinion on the consolidated financial statements taken as a whole and not to provide separate assurance on individual account captions or on information taken outside of the consolidated financial statements. This report should be read in conjunction with, and construed in accordance with, French law and professional auditing standards applicable in France For the year ended 31 December 2006 To the Shareholders, In compliance with the assignment entrusted to us by your Shareholders’ Meeting, we have audited the accompanying consolidated financial statements of Calyon for the year ending 31 December 2006. The consolidated financial statements have been approved by the Board of Directors. Our role is to express an opinion on these financial statements based on our audit. I. O pinion on the consolidated financial statements We have conducted our audit in accordance with professional standards applicable in France. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements give a true and fair view of the assets, liabilities, financial position and results of the companies and entities included in the consolidated group in accordance with the IFRS standards as adopted in the European Union. II. Justification of our assessments In accordance with the requirements of article L. 823-9 of the Code de Commerce (French company law) relating to the justification of our assessments, we bring to your attention the following matters: - As indicated in note 2 to the financial statements, the Group establishes impairment to cover the risk on non-recoverable loans inherent to its business activities. We have reviewed the arrangements put in place by the management to identify and evaluate these risks and to determine the amount of impairment it considers necessary, and we have verified that these accounting estimates were based on documented methods that conform to the principles described in notes 1.1 and 2 to the consolidated financial statements. - The Group uses internal models to assess the fair value of financial instruments that are not traded on organised markets. We have reviewed the procedures Calyon - shelf-registration document 2006 used by management to determine and control these models and the parameters used and whether they reflect the risks associated with such instruments, we have verified that these accounting estimates were based on documented methods that conform to the principles described in notes 1.1 and 2 to the consolidated financial statements. We also reviewed and tested the procedures implemented by executive management: (i) to identify margins on financial instruments calculated on the basis of non-observable market parameters or determined on the basis of valuation models that are not widely used; (ii) to recognise these margins accordingly in the income statement. -A s a customary part of the process of preparing financial statements, the Group’s management has made a number of other accounting estimates as explained in note 2 to the financial statements notably on the costs of pension provision and future employee benefits, permanent decline in value of non-consolidated participating interests, provisions for operating risks, provisions for legal risks, impairment of goodwill and deferred taxes. We have reviewed the methods and assumptions used as described in notes 1.1 and 2 to the financial statements, assessed the resulting valuations and checked that the notes give appropriate information. We assessed whether these estimates were reaseonable. Our assessments were made in the context of our audit of the consolidated financial statements, taken as a whole, and therefore assisted us in reaching our unqualified opinion as expressed in the first part of this report. III. Specific verification In accordance with professional standards applicable in France, we have also verified the information given in the Group management report. We have no comments to report with respect to the fairness of their presentation and consistency with the consolidated financial statements. Neuilly-sur-Seine, 5 April 2007 The Statutory Auditors PriceWaterhouseCoopers Audit Gérard Hautefeuille Ernst & Young et Autres Valérie Meeus 148 - 149 financial statements Information on the parent company financial statements Calyon’s annual financial statements for the period ended 31 December 2006, some items of which are reproduced below, are covered by the Statutory Auditors’ general report, which presents an unqualified opinion containing observations about the changes in accounting methods discussed below. The annual financial statements and the general auditors’ report can be obtained at the company’s registered office. Calyon - shelf-registration document 2006 Balance sheet (at 31 December 2006 and at 31 December 2005) Assets In millions of euros Cash, money market and interbank items Cash due from central banks and French postal system 31.12.2006 31.12.2005 207,707 162,683 1,440 4,318 36,641 33,975 169,626 124,390 Loans and advances to customers 94,410 80,707 Securities portfolios 98,262 66,971 Bonds and other fixed-income securities 61,813 40,824 Equities and other variable-income securities 36,449 26,147 6,630 5,800 425 388 5,972 5,200 Treasury bills and similar items Due from banks Fixed assets Participating interests and other long-term investments Investments in non-consolidated companies Property, plant and equipment 64 38 169 174 Accruals, prepayments and sundry assets 79,836 47,279 Other assets 59,890 36,768 Accruals and prepayments 19,946 10,511 486,845 363,440 31.12.2006 31.12.2005 203,821 160,869 Intangible assets Treasury shares Total assets Liabilities and shareholders’ equity In millions of euros Money market and interbank items Due to central banks and current accounts with French postal system 57 68 203,764 160,801 Customer accounts 76,715 61,640 Other liabilities 76,715 61,640 Due to banks Debt securities in issue 65,367 48,795 Accruals, deferred income and sundry liabilities 121,660 75,825 Other liabilities 104,166 64,059 17,494 11,766 Provisions and subordinated debt 9,250 7,260 General reserves for risks and expenses 2,106 2,123 Subordinated debt 7,144 5,137 Accruals and deferred income Fund for general banking risks 105 105 Shareholders’ equity (excl. FRBG) 9,927 8,946 Share capital 3,436 3,120 Share premiums 4,250 3,558 341 273 Reserves Excess of restated assets over historical cost Regulated reserves and investment grants Consolidated reserves Net income for the year Total liabilities 38 45 331 600 1,531 1,350 486,845 363,440 150 - 151 Off-balance sheet items (at 31 December 2006 and at 31 December 2005) In millions of euros 31.12.2006 31.12.2005 Guarantees and commitments given 261,213 187,699 Financing commitments given 128,122 105,281 Guarantees given 132,442 81,471 649 947 Guarantees and commitments received 36,390 22,309 Financing commitments given 14,112 15,302 Guarantees given 20,414 5,781 1,864 1,226 financial statements Securities commitments given Securities commitments given Income statement (at 31 December 2006 and at 31 December 2005) In millions of euros Net interest and similar income 2006 2005 (3,035) (135) Income from variable-income securities 520 364 Net commission and fee income 306 280 5,971 2,457 Net income from financial transactions Other net banking income Net banking income Operating expenses Depreciation and amortisation Gross operating income Risk-related costs Net operating income Net income (loss) on disposal of fixed assets Pre-tax income on ordinary activities 413 298 4,175 3,264 (2,231) (1,923) (66) (59) 1,878 1,282 5 206 1,883 1,488 40 82 1,923 1,570 Integration-related costs (76) Net extraordinary items Corporate income tax Net allocation to FGBR and regulated reserves Net income (2) (399) (137) 7 (5) 1,531 1,350 Calyon - shelf-registration document 2006 Changes in accounting methods Calyon prepares its financial statements in accordance with the accounting standards applicable to banks in France. The following changes have been made in accounting methods and the presentation of the financial statements in relation to last year: In accordance with CRC regulation 2005-04 of 3 November 2005 amending CRC regulation 2000-03 relating to summarised documents, the terms “reserves” relating to assets and “general reserves for risks and expenses” on the liabilities side, along with the related additions and releases on the income statement, have been replaced by the terms “impairment” and “reserves”. Calyon has since 1 January 2006 applied CNC opinion 2006-05 relating to the recognition of the alternative minimum tax. This opinion relates to the accounting consequences of the decision to make the alternative minimum tax no longer deductible from income tax. It becomes a charge deductible from taxable income based on the amount paid in 2006. As a result, this charge is now recognised in the “taxes other than on income or payroll-related” item. Also as regards changes in tax law, Calyon has since 1 January 2006 applied CNC opinion 2006-12 relating to releases of impairment charges and the neutralisation of tax impacts on the parent company financial statements. To allow an impairment charge on a depreciable non-current asset to be tax-deductible, the impairment charge must be transferred to a depreciation account at the definitive impairment amount at each accounts closing. The amount of the transfer is equal to the difference between the addition to depreciation based on the new depreciable amount and the addition to depreciation that would have been recognised in the absence of impairment. Calyon did not make any financial collateral arrangement with a right of re-use in 2006. As a result, it did not have to apply CNC opinion 2006-10 of 30 June 2006 relating to the recognition of assets provided as collateral under these agreements. 152 - 153 Changes in share capital and share premiums In millions of euros Share capital At 31 December 2003 1,142 Change in share capital 1,977 Change in share premiums At 31 December 2004 3,119 Share premiums 709 1,977 2,926 3,635 6,754 financial statements Change in share premiums Change in share capital 3,119 3,435 Breakdown of change in share capital: 2004 Payment of dividends in shares 140 New share issues for cash 297 Change in capital resulting from transfer and merger transactions Elimination of treasury shares 3,559 6,678 316 692 692 4,251 7,686 2005 2006 316 (4) 2004 Payment of dividends in shares 292 New share issues for cash 609 Elimination of treasury shares (76) 1,544** Breakdown of change in share premiums by origin: Change in capital resulting from transfer and merger transactions (76) 316 Change in share premiums At 31 December 2006 1,851 2,926 Change in share capital At 31 December 2005 Total 2,032** 2005 2006 692 (76)* (7) * Transfer of CAIS Holding shares and allotment of bonus shares to Crédit Agricole S.A. ** Of which: 3,076 million euros relating to the transfer of Crédit Lyonnais’ corporate and investment banking activities 500 million euros relating to the transfer of a portfolio of debt securities by Crédit Agricole S.A. Calyon - shelf-registration document 2006 Investments in subsidiaries and associates (Article L 233-15 of the Code of Commerce) In millions of local currency units Companies Currency Reserves and retained earnings before appropriation of earnings Share capital Percentage ownership In millions of euros Book value of investments In millions of euros In millions (original currency) Loans and Guarantees advances and other outstanding commitments granted by given by Calyon Calyon Revenues for the year ended 31.12.2006 Net income for the year ended 31.12.2006 Dividends received by Calyon during the year I – Investments whose book value exceeds 1% of Calyon’s share capital* A – Banking subsidiaries (more than 50% owned) CPR BK EUR 42 88 100.00 336 BFO EUR 77 15 99.71 138 11 3 CFA (Cie française de L’Asie) EUR 183 12 100.00 252 32 30 22 20 Crédit Agricole Cheuvreux EUR 39 115 100.00 308 CHF 44 EUR 150 USD 42 SEK 94 USD 15 EUR 13 Mescas EUR 31 (55) 100.00 83 EUR 56 CAI Risk Solutions Assurance EUR 50 (1) 100.00 50 Crédit Agricole Luxembourg EUR 84 25 59.38 71 CHF 176 Crédit Agricole Suisse CHF 579 459 71.23 590 CHF 1,238 JPY 8,415 EUR 2,234 USD 416 Calyon North America Holding USD 80 120 100.00 79 CAI BP Holding EUR 93 1 100.00 93 CHF 623 8 100.00 312 145 15 100.00 311 USD 6 63 (38) 100.00 35 EUR 420 1 100.00 420 EUR 1,150 100.00 1,150 Calyon Holdings (ex CLI Ltd) GBP 40 76.19 Calyon Investments (ex CLCM) GBP 1 99.80 Banco Calyon Brasil SA BRL 319 EUR 231 Calyon Global Banking EUR Crédit Lyonnais Rouse London GBP Doumer Philemon SAS Merisma 2 86.03 Total 2 12 6 EUR 21 96 28 11 USD 69 EUR 40 618 196 66 87 EUR 197 JPY 5,000 USD 90 Calyon Capital Markets Intl 192 28 39 19 27 101 2 96 1 1 27 16 23 64 20 19 23 746 7 7 33 9 28 4 6 79 EUR 45 USD 10 5,117 B – Banking associates (10-50% owned) Calyon Preferred Funding LLC USD 460 Calyon Preferred Funding 2 LLC USD CASAM EUR U.B.A.F. EUR Crédit Agricole Egypt S.A.E. EGP 30 50.00 175 28 640 40 50.00 243 38 37 78 (2) 50.00 38 36 (3) 249 8 47.32 121 USD 1 147 38 10 EUR 1 USD 45 USD 3 742 21 5 1,148 239 Total 13.09 CHF 14 75 652 II. – General information relating to other subsidiaries and associates A – Subsidiaries not covered in I. above a) French subsidiaries (aggregate) 126 b) Foreign subsidiaries (aggregate) 273 Total 399 B – Associates not covered in I. above a) French subsidiaries (aggregate) 44 b) Foreign subsidiaries (aggregate) 244 Total 288 Total 6,456 * Detail not provided concerning securities 1301 AVENUE OF THE AMERICAS, CA PREFERRED CAPITAL. 154 - 155 financial statements Calyon - shelf-registration document 2006 5 General information 158 Information on the company 158 R egistered office 158 158 158 158 158 158 158 158 Financial year Date of establishment and duration Legal status Material contracts Recent trends Significant changes Documents on display Calyon publications 161 Additional information 161 Fees paid to Statutory Auditors 162Statutory auditors’ special report on regulated agreements 166Persons responsible for the shelf-registration document and for auditing the accounts 166 167 Responsibility statement Statutory Auditors 156 - 157 general information Information on the company Registered office Recent trends 9 quai du Président Paul Doumer 92920 Paris La Défense Tel: 33 1 41 89 00 00 Website: www.calyon.com Calyon’s prospects have not suffered any significant deterioration since 31 December 2006, the date of its latest audited and published financial statements. See Management report, “Recent trends and outlook” section. Financial year The company’s financial year begins on 1 January and ends on 31 December each year. Date of establishment and duration Significant changes There has been no exceptional event or dispute since 31 December 2006 likely to have a significant effect on the financial position, activity, results or assets of the Calyon company and group. The company was incorporated on 23 November 1973. Its term ends on 25 November 2064, unless the term is extended or the company is wound up before that date. Documents on display Legal status This document is available at www.calyon.com and on the website of the Autorité des Marchés Financiers www.amf-france.org Calyon is a French société anonyme (limited-liability corporation) governed by ordinary company law, in particular the Second Book of the Code de Commerce. Calyon is a credit institution approved in France and authorised to conduct all banking operations and provide all investment and related services referred to in the Code Monétaire et Financier. In this respect, Calyon is subject to oversight by French supervisory authorities, particularly the Commission Bancaire. In its capacity as a credit institution authorised to provide investment services, Calyon is subject to the Code Monétaire et Financier, particularly the provisions relating to the activity and control of credit institutions and investment service providers. Material contracts Calyon has not entered into any material contracts conferring a significant obligation or commitment for the Calyon group, apart from those concluded within the normal conduct of its business. A copy of the Articles of Association may be consulted at the registered office: 9, quai du President-Paul-Doumer 92920 Paris La Defense. Calyon publications The annual information report below lists the information published or made public by the Calyon group in the last twelve months to meet legal or regulatory obligations applying to financial instruments, issuers of financial instruments and financial instrument markets as required by article 222.7 of the AMF’s General Regulations. Calyon - shelf-registration document 2006 Shelf-registration document Available on the Calyon website (www.calyon.fr) and on the Autorité des Marchés Financiers website (www.amf-france.org): Publication dates Type of document 31/05/2006 Shelf registration document - AMF registration n° R.06-078 05/10/2006 Update of the shelf registration document R.06-078 – AMF n° D.06-0295-A01 Issue programmes and prospectuses as issuer or guarantor Available on the Bourse de Luxembourg website (www.bourse.lu) and approved by the CSSF Publication dates Type of document 18/08/2006 Prospectus relating to the warrant and certificate issue programmes of Calyon, Calyon Financial Products (Guernsey) Limited and Calyon Finance (Guernsey) Limited 31/08/2006 Supplement to the 18/08/2006 prospectus 27/09/2006 Prospectus relating to the 4 billion euro EMTN (Euro Medium Term Note) issue programme of Calyon, Calyon Financial Products (Guernsey) Limited and Calyon Finance (Guernsey) Limited 27/09/2006 Prospectus/offering circular relating to the 30 billion euro Structured Euro Medium Term Note issue programme of Calyon, Calyon Financial Products (Guernsey) Limited and Calyon Finance (Guernsey) Limited 11/10/2006 Supplement to the 27/09/2006 prospectus 27/10/2006 Supplement to the 27/09/2005 prospectus/offering circular Available on the Hong Kong Securities and Futures Commission website (www.sfc.hk) Publication dates Type of document 26/06/2006 Memorandum and prospectus relating to the retail notes issue programme of Calyon Financial Products (Guernsey) Limited 26/10/2006 Addendum to the 26/06/2006 prospectus Available on the Hong Kong Stock Exchange website (www.hkex.com.hk) Publication dates Type of document 08/06/2006 Prospectus relating to the warrant issue programme of Calyon Financial Products (Guernsey) Limited 23/06/2006 Addendum no.1 to the 08/06/2006 prospectus 27/10/2006 Addendum no.2 to the 08/06/2006 prospectus Available on the Singapore Exchange Securities Trading Limited website (www.sgx.com) Publication dates Type of document 28/06/2006 Prospectus relating to the warrant placing programme of Calyon Financial Products (Guernsey) Limited 27/10/2006 Addendum to the 28/06/2006 prospectus 158 - 159 Press releases general information Published on the Calyon website (www.calyon.com) Publication dates Type of document 03/08/2006 Calyon (67%) and Pirelli Re (33%) set up a joint venture to invest in non performing loans in Europe: Italy, Germany, and Poland the main markets 19/09/2006 Crédit Agricole Structured Asset Management acquires Ursa Capital LLC 08/01/2007 Calyon and Société Générale plan to merge their brokerage activities currently carried out by Calyon Financial and Fimat 26/03/2007 Citic East China and Calyon Financial Announce Joint Venture Agreement to Form Chinese Futures Brokerage 14/05/2007 Georges Pauget takes over from Jean Laurent as Calyon Chairman Documents filed with the Registrar of the Nanterre commercial court Available on the www.infogreffe.fr website (Calyon ID number: 304 187 701) Filing notice published in the Gazette du palais: 3 Boulevard du Palais 75004 Paris Publication dates Type of document Filing number Filing notice 23/03/2006 Minutes to the Board meeting appointment of a director or directors N° 8649 N°81 and 82 published 22 and 23 March 2006 15/06/2006 Minutes to the Shareholders’ meeting appointment of new alternate auditors change(s) to the articles of association Minutes to the Board meeting – capital increase Updated articles of association 2005 annual financial statements N° 15887 165-166 published on 14 and 15 June 2006 N° 7491/7492 Publications in the Bulletin des Annonces Légales Obligatoires (BALO) Published on the www.balo.journal-officiel.gouv.fr website Publication dates Type of document Article number 13/03/2006 Quarterly position at 31 December 2005 N° 2276 12/04/2006 Notice of the general meeting of shareholders of 16 May 2006 N° 3783 30/05/2006 Quarterly position at 31 March 2006 N° 7561 26/05/2006 2005 annual financial statements N° 10051 27/09/2006 Quarterly position at 30 June 2006 N° 14461 01/12/2006 Quarterly position at 30 September 2006 N° 17605 16/03/2007 Quarterly position at 31 December 2006 N° 02806 Publications in the Journal spécial des sociétés 8, rue Saint Augustin 75080 Paris cedex 02 Publication dates Type of document number 05 and 06/07/2006 Parent company financial statements 2005 N° 186 and 187 Calyon - shelf-registration document 2006 Additional information Fees paid to Statutory Auditors College of Auditors of Calyon (1) (2) Ernst & Young in thousands of euros Amount (excluding VAT) PricewaterhouseCoopers % Amount (excluding VAT) % 2006 2005 2006 2005 2006 2005 2006 2005 Issuer 4,283 3,361 54.4% 62.0% 2,929 3,128 48.2% 46.6% Fully-consolidated subsidiaries 1,253 1,580 15.9% 29.2% 2,758 2,626 45.4% 39.1% 1,846 451 23.5% 8.3% 83 595 1.4% 8.9% Audit Independent audit, certification, review of parent company and consolidated financial statements Ancillary assignments (3) Issuer Fully-consolidated subsidiaries Subtotal 297 21 3.8% 0.4% 187 274 3.0% 4.1% 7,679 5,413 97.6% 99.9% 5,957 6,623 98.0% 98.7% 176 6 2.2% 0.1% 123 24 2.0% 1.3% Other services Legal, tax, personnel-related Others to be disclosed (if >10% of audit fees) 13 Subtotal Total 0.2% 67 189 6 2.4% 0.1% 123 91 2.0% 1.3% 7,868 5,419 100% 100% 6,080 6,714 100% 100% Other statutory auditors engaged in the audit of fully consolidated Calyon group subsidiaries Mazars & Guerard Amount in thousands of euros (excluding VAT) 2006 2005 Deloitte Amount (excluding VAT) % 2006 2005 2006 2005 KPMG Amount (excluding VAT) % 2006 2005 2006 2005 Autres Amount (excluding VAT) % 2006 2005 2006 2005 % 2006 2005 Audit Independent audit, certification, review of parent company and consolidated financial statements 150 Ancillary assignments Total (1) (2) (3) 145 100% 96.7% 5 150 318 3.3% 150 100% 100% 211 100% 98.1% 4 318 71 1.9% 215 100% 100% These figures indicate the annual cost of Statutory Auditors’ fees Including fully consolidated Calyon subsidiaries audited by the College of Auditors Ancillary assignments in accordance with AMF regulation 2002-06 71 89 100% 89% 230 444 98.3% 97.6% 11 11% 4 11 1.7% 2.4% 100 100% 100% 234 455 100% 100% 160 - 161 general information Statutory auditors’ special report on regulated agreements This is a free translation into English of the Statutory Auditors’ report issued in the French language and is provided solely for the convenience of English speaking readers. This report should be read in conjunction with, and construed in accordance with, French law and professional auditing standards applicable in France. Year ended 31 December 2006 To the Shareholders, II - A greements entered into in prior years which remained in force during the year In our capacity as statutory auditors of your company, we are required to report on certain contractual agreements with related parties. In accordance with the Decree of 23 March 1967, we have been informed that the following agreements, approved in prior years, remained effective during the year ended 31 December 2006. We are not required to ascertain whether any other agreements exist, but to inform you, on the basis of the information provided to us, of the terms and conditions of agreements indicated to us. We are not required to comment as to whether they are beneficial or appropriate. In accordance with article 92 of the decree of 23 March 1967, it is your responsibility to evaluate the benefits for the company of entering into these agreements, with a view to approving them. We have performed our assignment in accordance with the prevailing standards of the profession in France; which require us to verify that the information given to us is consistent with the documents from which it derives. I-A greements entered into during the year We inform you that we have not been made aware of any agreements entered into during the year and covered by article L.225-86 of the Commercial Code. 2.1 - With Crédit Agricole S.A. 2.1.1 - Subscription for preference shares or super-subordinated notes (SSNs) Reminder of agreement Further to the link-up between the corporate and investment banking businesses of Crédit Agricole S.A. and Crédit Lyonnais, Crédit Lyonnais made a partial asset transfer to Calyon (formerly Crédit Agricole Indosuez). In view of the above transaction, it was deemed necessary to increase Calyon’s shareholders’ equity. Crédit Agricole S.A. authorised to carry out a series of transactions aimed at increasing Calyon’s shareholders’ equity by a total amount of up to 3 billion euros. Terms of execution during the year In accordance with this autorisation, Crédit Agricole S.A. notably subscribed to an issue of deeply subordinated notes for an amount of 1,730 million dollars. An amount of 108.5 million dollars in interest with respect to these notes was paid to Crédit Agricole S.A. during the 2006 financial year. Calyon - shelf-registration document 2006 2.2 - With Crédit Lyonnais 2.2.1 - S ale by Calyon of Banque Francaise Commerciale Antilles-Guyane (BFC-AG) to Credit Lyonnais Reminder of agreement In order that BFC-AG be provided with adequate supervision for its retail banking activity, Calyon sold its stake in BFC-AG to Credit Lyonnais, which became its sole core shareholder, on 1 July 2005. The disposal includes a claw-back clause that expires on the closing date of the financial statements for 2008, and provides for a price adjustment in the event that restructuring costs incurred between the disposal date and the closing date of the 2008 financial year is less than 33 million euros. Given Calyon’s subscription, before the disposal, to BFCAG’s capital increase of around 18 million euros, the divested unit’s recurrent losses and the trend for 2005, the consideration was set at one euro, without liability guarantee. Terms of execution during the year 2.2.3 - Indemnity agreement by Calyon for Crédit Lyonnais Reminder of agreement Crédit Lyonnais’s corporate and investment banking division (BFI) was transferred to Calyon on 30 April 2004 with retroactive effect from 1 January 2004 for accounting and legal purposes. However, Calyon preferred to agree a deferment, until 31 December 2004 at the latest, with regard to short, medium and long-term commercial outstandings. To respect the principles of retroactive effet from 1 January 2004, Calyon undertook to indemnify Crédit Lyonnais from the counterparty risks relating to these outstandings from that date. Terms of execution during the year The amount of the guarantee stood at 248 million euros at 31 December 2006. Remuneration for 2006 totalled 3 million euros. 2.2.4 - Unlimited liability guarantee given to Calyon by Crédit Lyonnais in relation to the sale of Crédit Lyonnais Rouse Ltd The claw-back clause was not exercised in 2006. Reminder of agreement 2.2.2 - Acquisition by Calyon of Credit Lyonnais’ stake in Union des Banques Arabes et Francaises (UBAF) On completion of Crédit Lyonnais’s transfer of CBI to Calyon (formerly CAI), Crédit Lyonnais sold London-based futures trading and brokerage company Crédit Lyonnais Rouse Ltd to Calyon on 28 May 2004. Reminder of agreement On 1 July 2005, Calyon signed an agreement with Credit Lyonnais to acquire its holding in UBAF. In conjunction with the sale, Crédit Lyonnais gave Calyon an unlimited liability guarantee, with a maximum excess charge for Calyon of around 30 million of sterlings. Terms of execution during the year Calyon acquired the 43.93% shareholding in UBAF for 236 million euros. In addition, Calyon assumed Credit Lyonnais’ commitments with regard to MACO in return for Credit Lyonnais’ payment to Calyon of a sum covering any loss resulting from the possible liquidation of MACO, as estimated on the date the agreement was signed. Calyon undertook, in the event that the loss borne by Calyon upon liquidation of MACO should prove smaller than the amount of the payment, to repay to Credit Lyonnais 80% of the difference between the loss actually borne and the sum paid to Calyon. Finally, Calyon took on at par value the subordinated loans and bonds with warrants issued to UBAF by Credit Lyonnais. Terms of execution during the year As the guarantee was not invoked during the year, no impact was recorded in the accounts. 2.2.5 - C ounter-guarantees given to Crédit Lyonnais by Calyon for CFP and CFG issues Reminder of agreement The assets transferred to Calyon by Crédit Lyonnais included all the shares indirectly held by Crédit Lyonnais in Calyon Financial Products (Guernsey) Limited (formerly « CLFP ») and Calyon Finance (Guernsey) Limited (formerly « CLFG »), governed by the laws of the Bailiwick of Guernsey. 162 - 163 general information The issues or issue programmes of the foreign subsidiaries of Crédit Lyonnais, transferred to Calyon (formerly CAI) on 30 April 2004 as part of the transfer of the CBI assets, were guaranteed by the Crédit Lyonnais. Some of these emissions are not covered by a clause enabling Calyon (formerly CAI) to replace Crédit Lyonnais as guarantor; Crédit Lyonnais will therefore remain guarantor of the issues previously carried out by companies that are no longer its subsidiaries following the asset transfer. Calyon has therefore given Crédit Lyonnais a counterguarantee covering the latter’s guarantee relating to commitments existing at the date of the asset transfer, i.e. 30 April 2004. This counter-guarantee issued on 30 April 2004 is not remunerated. The indicative amount mentioned in the agreement does not represent the final amount of the risk to be underwritten: many of the products are structured products whose redemption amount includes the final return paid to bearers (indexed to an interest rate or option structure). Moreover, in some cases redemption will take the form of the “physical” delivery of shares. Terms of execution during the year Calyon issued further guarantees on 4 May 2004 for EMTN issues by CFP and CFG under their English-law programme for a maximum value of 20 billion euros, and on 10 May 2004 for issues under their French-law programme for a maximum value of 2 billion euros and as when they carry out issues for warrants or certificates. Finally, Calyon issued a guarantee for issues by CFP and CFG under their « EMTN structured products» programme set up on 30 July 2004, and for the warrants issued by CFP under its « Hong Kong warrants » programme established on 29 July 2004. These guarantees are not remunerated. Terms of execution during the year Calyon’s guarantee concerning the issues carried out by CFP and CFG under their « EMTN structured products» programme was renewed on 27 September 2006. The guarantee concerning CFP’s « Hong Kong warrants » programme was renewed on 18 August 2006. 2.4 - With BANCA INTESA As the counter-guarantee was not invoked during the year, no impact was recorded in the accounts. 2.4.1 A greements between Calyon and Banca Intesa in private banking 2.3 - With CFP, CFG and CNA Reminder of agreement 2.3.1 G uaranteed delivered by Calyon to these subsidiaries on the occasion of their debt issues Reminder of agreement The issuance programmes of Calyon Financial Products (Guernsey) Limited (formerly CFLP), Calyon Finance (Guernsey) Limited (formerly CLFG) and Calyon North America (formerly CLNA) concern the following securities: Euro Medium Term Notes (EMTN), US Commercial Paper (USCP), certificates and warrants. Calyon issues guarantees to cover the payment of sums (principal, interest, fees and related sums) due to the holders of the aforementioned securities, issued between 1 May 2004 and 30 April 2007 by Calyon Financial Products (Guernsey) Limited (CFP), Calyon Finance (Guernsey) Limited (CFG) and Calyon North America (CNA). Calyon issued a guarantee on 30 April 2004 for issues of US commercial paper by CNA. The nominal value of such paper in circulation can at no time exceed 10 billion euros. In accordance with decisions taken jointly by Crédit Agricole S.A. and Banca Intesa and the strategy of developing cooperation between Calyon and Banca Intesa in private banking, approved by the CAI Board of Directors on 26 November 2002, a proposal has been submitted to the Board of Directors for the sale of the Italian private banking entity, Crédit Agricole Indosuez Private Banking Italia SpA, together with its subsidiary IAF, to Banca Intesa, and subsequently the possible acquisition by Calyon of a minority shareholding in the domestic private banking subsidiary of Banca Intesa and by Banca Intesa of a shareholding in CAI Suisse (now CA Suisse). Terms of execution during the year A call option contract entitling Calyon to buy 10% of the capital of the new private banking entity in Italy, on terms to be specified, was signed on 14 January 2005 between Calyon and Banca Intesa. A call option contract entitling Banca Intesa to buy 10% of the capital of CA Suisse (formerly CAI Suisse), on terms to be specified, was signed on 14 January 2005 between Banca Intesa and CAI BP Holding, guaranteed by Calyon. Calyon - shelf-registration document 2006 2.5 - With the corporate officers 2.6 - With SNC DOUMER 2.5.1 G uarantee given by Calyon to individuals relating to operations in the United States 2.6.1 Loan granted by Calyon to SNC Doumer Reminder of agreement The Board has authorised a guarantee by Calyon covering risks relating to the financing of legal costs to which a number of corporate officers or senior managers could find themselves personally exposed on the occasion of financial transactions having an impact particularly in the United States. Reminder of agreement The building at 9, quai du Président Paul Doumer, the registered office of Calyon, is owned by SNC Doumer. Calyon has granted SNC Doumer a margin-free loan. Terms of execution during the year The principal on the loan stood at 7,459,241.98 euros at 31 December 2006. Interest amounted to 225,738.61 euros. The beneficiaries of this guarantee are the Chairman and the Chief Executive Officer, the Deputy Chief Executive Officers and the Assistant Chief Executive Officers. Neuilly-sur-Seine, 5 April 2007 Terms of execution during the year This guarantee remains in place for as long as the persons in question remain in office and in any case for as long as they are likely to subject to legal action or complaints relating to their official capacity. The Statutory Auditors PriceWaterhouseCoopers Audit Gérard Hautefeuille Ernst & Young et Autres Valérie Meeus 164 - 165 general information Persons responsible for the shelf-registration document and for auditing the accounts Responsibility statement I hereby certify that, to my knowledge and after all due diligence, the information contained in this registration document is true and accurate and contains no omissions likely to affect the import thereof. I have obtained a letter from the statutory auditors, PricewaterhouseCoopers Audit and Ernst & Young et Autres upon completion of their work in which they state that they have verified the information relating to the financial situation and financial statements provided in this registration document and read the document as a whole. Executed in Paris, 1 June 2007 The Chief Executive Officer of Calyon Edouard Esparbès Calyon - shelf-registration document 2006 Statutory Auditors Statutory Auditors Ernst & Young et Autres PricewaterhouseCoopers Audit Member of the Ernst & Young network Member of the Versailles regional association of statutory auditors Member of the PricewaterhouseCoopers network Member of the Versailles regional association of statutory auditors Company represented by: Valérie Méeus Head office: 41 Rue Ibry 92576 Neuilly Sur Seine Company represented by: Gérard Hautefeuille Head office: 63 Rue de Villiers 92200 Neuilly Sur Seine Alternate auditors PICARLE ET ASSOCIES Pierre Coll Member of the Versailles regional association of statutory auditors Member of the Paris regional association of statutory auditors 63 Rue de Villiers 92200 Neuilly Sur Seine Company represented by: Denis Picarle Head office: Faubourg de l’Arche – 11 allée de l’Arche 92400 Courbevoie Mandates Length of statutory auditors’ mandates Ernst & Young et Autres (until 30 June 2006 known as Barbier Frinault et Autres) was appointed Statutory Auditor for six financial periods by the shareholders’ meeting of 10 May 2000. This mandate was renewed for a period of six years at the General Meeting of Shareholders on 16 May 2006. PricewaterhouseCoopers Audit was appointed Statutory Auditor by the General Meeting of Shareholders of 30 April 2004, to replace Cabinet Alain Laine, which had been appointed at the Meeting of 10 May 2000 for six financial periods and has since resigned. This mandate was renewed for a period of six years at the General Meeting of Shareholders on 16 May 2006. Length of alternate auditors’ mandates The General Meeting of Shareholders of 16 May 2006 appointed Picarle et Associes as alternate auditors to Barbier Frinault et Autres for a period of six years (replacing Mr Peuch-Lestrade whose mandate expired at the end of the 16 May 2006 Meeting). Mr Pierre Coll was appointed Alternate Auditor to PricewaterhouseCoopers Audit by the General Meeting of Shareholders of 30 April 2004 for the duration of the mandate of his predecessor, Mr Olivier Peronnet, who had been appointed by the Meeting of 10 May 2000 and has since resigned. This mandate was renewed for a period of six years at the General Meeting of Shareholders on 16 May 2006. 166 - 167 Cross-reference table The following table indicates the page references corresponding to the main information headings required by regulation EC 809/2004 (annex XI) enacting the terms of the “Prospectus” Directive. Headings required by regulation EC 809/2004 (annex XI) Page number 1. Persons responsible 166 2. Statutory Auditors 167 3. Risk factors 61 to 71 – 104 to 122- 137 general information 4. Information about the issuer 4.1 History and trend of the Society 6 to 7 – 10 – 79 – 158 5. Business overview 5.1 Principal activities 5.1.3 Principal markets 6. Organisational structure 6.1 Brief description of the Group and the issuer’s position 6.2 Dependence relationships within the Group 11 to 16 11 to 16 – 127 to 128 80 I – II 81 7. Trend information 158 8. Profit forecasts or estimates N/A 9. Administrative, management and supervisory bodies 9.1 9.2 Information concerning members of the administrative and management bodies Conflicts of interest at the administrative, management and supervisory bodies 10. Major shareholders 34 to 40 40 137 11.Financial information concerning the issuer’s assets and liabilities, financial position and profits and losses 11.1 Historical financial information* 78 to 155 11.2 Financial statements 78 to 147 11.3 Auditing of historical annual financial statements 11.4 Age of latest financial information 11.5 Interim and other financial information 11.6 Legal and arbitration proceedings 11.7 Significant change in the issuer’s financial or commercial position 148 to 149 78 N/A 70 158 12. Material contracts 158 13. Third party information and statements by experts and declarations of any interest N/A 14. Documents on display 158 * In accordance with article 28 of EC regulation 809/2004 and article 212-11 of the AMF’s general regulations, the following are incorporated for reference purposes: the consolidated financial statements for the period ended 31 December 2005, the statutory auditors’ report on the consolidated financial statements for the period ended 31 December 2005 and the Group’s management report as presented on pages 76-153, 154-155 and 42-74 of Calyon’s shelf-registration document registered by the AMF on 31 May 2005 under number R.06-078. www.calyon.com 9, quai du Président Paul Doumer 92920 Paris La Défense cedex Tél : 33 (0) 1 41 89 00 00 Fax : 33 (0) 1 41 89 12 77 Calyptus - Design by : www.profil-design.com - Crédit photos : Fico ; Patrick Sordoillet