laiki annual cover ENG 05

Transcription

ANNUAL REPORT > 2005
ANNUAL REPORT > 2005
4
Financial Highlights
5
Chairman’s Statement
9
Group Managing Director’s Comments
13
Corporate Social Responsibility
22
Institutional, Economic Developments
26
Financial Results
28
Corporate Governance Report
40
Group Risk Management
46
Financial Statements
53
Important Addresses
137
R E P O R T
Board of Directors & Senior Executive Management
A N N U A L
Page
2 0 0 5
CONTENTS
L A I K I
G R O U P
BOARD OF DIRECTORS &
SENIOR EXECUTIVE MANAGEMENT
4
BOARD OF DIRECTORS
Kikis N. Lazarides
Michael R. Erotokritos
Theophilos Theophilou
Marios E. Lanitis
Platon E. Lanitis
Andreas Louroutzatis
Rena Rouvitha Panou
Christos Papaellinas
Andreas Philippou
George Psimolophitis
Anthony Townsend
Chairman
Group Managing Director
SENIOR EXECUTIVE MANAGEMENT
Panayiotis Kounnis
General Manager
Michael Louis
General Manager
Neoklis Lysandrou
General Manager
Petros Petrou
General Manager
Christos Stylianides
General Manager
SECRETARY
Stelios Hadjijoseph
MANAGER GROUP FINANCIAL CONTROL
Annita Philippidou
AUDITORS
PricewaterhouseCoopers Ltd
LEGAL ADVISERS
Tassos Papadopoulos & Co
REGISTERED OFFICE
154, Limassol Avenue, 2025 Nicosia
NOTE
The Annual General Meeting will be held on June 15, 2006 at 6:00 p.m., at Hilton Park Hotel, Nicosia.
Capital resources
Share capital
Reserves
Minority interest
Total equity
Loan capital
Total capital resources
2003
Cí ‘000
2002
Cí ‘000
2001
Cí ‘000
106.183
83.469
65.951
51.425
19.871
42.761
21.100
9.511
(51.284)
(9.263)
153.648
193.191
35.735
382.574
213.154
595.728
152.450
152.731
34.904
340.085
214.124
554.209
152.450
127.962
29.393
309.805
215.068
524.873
151.819
119.423
26.039
297.281
148.723
446.004
149.404
152.895
28.062
330.361
149.015
479.376
R E P O R T
2004
Cí ‘000
A N N U A L
Profit before provision for
impairment of advances
Profit/(loss) attributable
to the shareholders of the Bank
2005
Cí ‘000
2 0 0 5
FINANCIAL HIGHLIGHTS OF THE GROUP
5
Customer deposits
Advances
Total assets
5.726.421 4.636.846 4.148.060 4.010.462 3.756.460
3.995.698 3.490.148 3.123.582 2.913.825 2.601.348
7.118.731 5.878.129 5.075.474 4.878.240 4.714.635
Capital adequacy ratio
Return on assets
Return on equity
Per ordinary share
Earnings - cent
Dividend - cent
11,9%
0,66%
13,12%
13,3%
0,39%
7,21%
13,8%
0,19%
3,45%
12,3%
(1,07%)
(17,88%)
14,5%
(0,21%)
(2,76%)
14,0
6
6,9
3
3,1
-
(17,0)
-
(3,1)
8
ANALYSIS OF SHAREHOLDERS
■
■
■
■
■
■
■
Issued Capital: 306.408.118
Category of Shareholders
No. of Shareholders
Public or Private Companies,
Insurance Companies, Partnerships,
659
Business Names, Municipalities
Private Individuals
22.397
Provident Funds, Trusts,
217
Pension Schemes, etc.
Clubs, Churches, Institutions
39
Staff of Laiki Group
2.055
Investment Schemes registered
in the name of companies,
126
Mutual Funds
Minors
1356
Total
26.849
No. of Shares
Percentage %
150.848.159
106.693.348
49,23
34,82
33.142.868
5.550.306
8.545.112
10,82
1,81
2,80
1.023.375
604.950
0,33
0,19
306.408.118
100,00
L A I K I
G R O U P
Our vision encompasses a
larger and more efficient
Laiki Group with a significant
international presence and
with bright prospects for our
customers, shareholders and,
surely, our staff.
We proceed with
optimism and
confidence along
new paths of growth
and progress.
A N N U A L
R E P O R T
2 0 0 5
STATEMENT OF THE CHAIRMAN OF LAIKI GROUP
KIKIS N. LAZARIDES
9
The financial results of Laiki Group in 2005 were highly satisfactory despite the fact that our operations in
Cyprus and abroad were conducted in an intensely competitive environment. The significantly improved
profitability achieved during the year under review was mainly the result of the strategy we implemented for
the development of qualitative business, the continuous containment of operating costs and the
improvement of the quality of the loan portfolio, as well as the commitment of the staff of the Group to
better performance.
The profit before provisions reached Cí 106,2 m., compared with Cí 83,5 m. in 2004, while the profit after
provisions rose to Cí 59,8 m., recording an increase of 63,7% compared with 2004. The profit attributable
to the shareholders doubled to Cí 42,8 m. The return on equity climbed from 7,2% in 2004 to 13,1%. The
strategic target of the Group is for the return on equity to reach 14,0% by 2008.
Under the present conditions of intense competition we attach particular importance to the provision of a
large variety of products with features tailored to the needs of the customers of the Group, the upgrading
the service quality and the mobilisation of all the staff to promote sales for the purpose of increasing
revenues. This strategy had very positive results, as operating income rose by 15,4% over 2004.
In the local financial market, our Group improved its position in a very large number of sectors, taking
advantage of the emerging opportunities. Rapid expansion of magnitudes, which was higher than the
market growth, was recorded in Greece as well.
S T A T E M E N T
C H A I R M A N ’ S
G R O U P
L A I K I
10
In 2005 a coordinated effort was made to contain operating costs by the promotion of a series of policy
measures. Among these were the simplification and centralisation of the procedures, which do not require
the physical presence of the customer and the exploitation of the alternative distribution channels.
Technology provides significant capabilities for upgrading the quality of the services we provide to our
customers, improvement in productivity and more efficient operation. The strategy, which was
implemented for the containment of operating costs was successful in that, in combination with the very
satisfactory increase in operating income, the cost to income ratio improved from 62,95% in 2004 to
58,77% in 2005. At corporate level, the relevant target provides for a further reduction of the cost to income
ratio to 56% by 2008.
During the previous year strategic moves were made that will shape the future course of the Group as
regards the internationalisation of its operations. The expansion into Serbia through the acquisition of
Centrobanka a.d., which has recently been renamed Laiki Bank a.d., marks a significant change in the
strategy of the Group for international expansion, as it differentiates the approach followed hitherto, in
which emphasis was placed to countries where there is a significant presence of Greeks and Cypriots of
the diaspora. In January 2006 the takeover was completed through the purchase of the majority
shareholding of the Serbian bank Centrobanka a.d. by the acquisition of 90,43% of its capital. This move
constitutes a landmark and is the first step in the promotion of the strategic objective for a significant
presence in the emerging market of the Balkans.
Furthermore, we continued the successful implementation of the strategy, which we have followed in the
Greek market, Australia and the United Kingdom. The contribution of overseas operations to the total
profitability of the Group reached Cí 25,3 m, which corresponds to 23,8%. More specifically, in the Greek
market, the profit before provisions increased by 19,3% compared with 2004, which is particularly
satisfactory taking into account the expansion of the branch network of the Bank and the intensely
competitive environment in which it was achieved.
An important development was the establishment of the new bank in Guernsey, in the Channel Islands, in
March 2005, through which alternative options and competitive deposit products are offered.
The reduction in the ratio of non-performing loans to total loans is a major priority. For this purpose,
emphasis was given to the further strengthening of the procedures for collecting loans, which are in arrear,
to the improvement of the assessment procedure for new credit facilities and to the systematic and stricter
control of non-performing loans. The results are considered very satisfactory as the ratio of nonperforming loans to total loans excluding suspension of interest decreased to 10,1% compared with 11,5%
at the end of 2004. Our Group has set as a strategic target the further reduction of the ratio of nonperforming loans to the total of gross loans to 8% by 2008, taking into consideration the introduction of
stricter regulations relating to the categorisation of non-performing loans by the Central Bank of Cyprus as
from 01/01/2006.
A noteworthy event is the change in the share composition of the Group, which took place in February 2006,
after the decision of HSBC to sell its stake in the share capital due to the change in its strategy in the wider
region. I would like to take this opportunity to thank them for the excellent and long-standing relationship we
have had. The stake of 21,16% which HSBC held has been distributed as follows: 9,98% was bought by the
Marfin Financial Group, 8,18% by the Tosca Investment Fund and 3% by Laiki Bank (Nominees) Ltd. This
change in the composition of shareholding does not alter the fundamentals of the Group. On the contrary,
it creates a new dynamism for its future course, especially as regards its overseas operations.
At this point I would like to express our warmest thanks to Mr Michalis Sarris for his contribution to the
Group during his time as a member of the Board of Directors of Laiki Bank. I would also like to wish him
every success in the difficult task he has undertaken as Minister of Finance.
In conclusion, I reiterate that in 2005 the Group achieved to a great extent the main strategic targets set.
These achievements must not create a climate of complacency but should constitute the basis for greater
dynamism and systematic work. The contributors to this success are the management, the staff, the
shareholders, our customers and the public at large in the countries in which the Group operates. I would
like to extend my sincere thanks to all of them for the confidence they are showing in us.
Kikis N. Lazarides
Chairman
Nicosia, 3 April, 2006
2 0 0 5
R E P O R T
Taking into account the financial strength of the Group, the development programmes in progress, as well
as the need to maintain its strong capital adequacy, the Board of Directors has decided to recommend to
the Annual General Meeting of shareholders the payment of a dividend of six cents per share for the
financial year 2005.
A N N U A L
A firm objective of the Group remains the promotion and implementation of systems at the technological
and organisational level operating on a common platform and in a coordinated fashion in the markets
where the Group is active. In this context, in 2005 the treasury system became operational in Cyprus and
the United Kingdom, while in 2006 it will operate in Greece and Australia. At the same time, the
introduction will begin, of a new banking system in Greece, with the aim of expanding its operation by
2008 to all the markets in which the Group has a presence.
11
A N N U A L
R E P O R T
2 0 0 5
COMMENTS ON THE RESULTS FOR 2005
BY MICHAEL R. EROTOKRITOS
GROUP MANAGING DIRECTOR
13
DOMESTIC BANKING OPERATIONS
In the year under review, banking operations in the Cypriot market were conducted in intensely competitive
conditions, especially with regard to advances. The main characteristics of developments were the slight
recovery of the local banking market, the reduction of interest rates by 1,25 percentage points, the
spectacular acceleration of the growth rate of deposits in foreign currency and the further increase in
demand for loans for construction and housing purposes.
In the retail banking sector we focused our efforts on quality of service, the development of innovative
products and on the exploitation of the opportunities that emerged. As regards deposits, the main pillars
of our efforts was the development of a large number of deposit products, with the aim of offering our
customers an enhanced and comprehensive line of products characterised by flexibility with regard to
their personal needs. In the case of advances, emphasis was given to the promotion of products, which
cover mainly the housing needs of customers. The gradual introduction of customer service officers
constitutes part of the policy for the further upgrading of the quality of service. Along with the expansion of
operations, strong effort was made to improve the quality of advances.
The main goal of the Card Service in 2005 was to continue to play a leading role in the field of plastic
money and promote payments through the use of cards while at the same time contributing significantly to
the Group’s profitability. Within this context, the incentives offered to customers for the usage of their
cards were significantly enhanced through special campaigns. Emphasis was placed on the enrichment
LAIKI GROUP - GROUP MANAGING DIRECTOR’S COMMENTS
of the variety of products through the introduction of the Card n’go card and of the of interest-free
instalments scheme. As a result, the turnover in the Cypriot and foreign market recorded an increase
of 12,9%.
In 2005 the installation of the new card management system began, which will afford, inter alia, the Bank
the potential of introducing smart cards to the Cypriot market in 2006. The new system will upgrade
significantly the way the Bank’s cards operate in matters of security and authorisation and will increase the
capacity to design and introduce innovative products and offers.
In the commercial business sector efforts were focused on the strengthening of customer relations and on
the enhancement of the quality of the loan portfolio, with very positive results.
In the sector of Large Corporates and Organisations, the demand for loans for investment purposes and
working capital was weak. Our permanent objective in this sector is the provision of comprehensive
14
solutions for the financial needs of our customers with a high standard of professionalism and market
awareness. Emphasis was given to the further enhancement of the quality of service, attracting new
customers and improving the quality of the loan portfolio.
During the year, the implementation of the policy of simplification and centralisation of procedures, which
do not require the physical presence of the customer, was pursued further. These activities come within
the context of our continuous efforts to upgrade the standard of customer service and promote changes,
which create conditions of more efficient operation. As a consequence of the simplification of procedures,
the front line personnel will have more free time to promote sales, including cross-selling.
The Treasury continued to manage with professionalism the liquid funds of the Bank, achieving very high
yields, while at the same time hedging interest rate and exchange risk. Within this context, emphasis was
given to increasing the bonds portfolio, thus significantly increasing yields without a corresponding
increase in the risk undertaken. The operation of the new technologically advanced treasury system
played an important role in the upgrading of the service.
In 2005 the international business sector showed rapid expansion as indicated by the spectacular
increase of deposits in foreign currency over and above the most optimistic expectations. The efforts of
our Group focused on the upgrading of the services we provide through the enhancement of our customer
service. At the same time, the promotion policy of products and services continued through lawyers,
accountants and other professionals.
Particular emphasis was laid on the expansion of Private Banking Service operations. Efforts were
concentrated on expanding operations through the development of new products and on concluding
the Treasury. The results were particularly satisfactory, since the funds under management recorded a
significant growth, while profitability at operating profit level advanced by 46,3%. It is noteworthy that
recently the Service was awarded the Annual Private Banking and Wealth Management Award by
Euromoney as the best private banking service in Cyprus.
2 0 0 5
was a significant increase in the number of structured products, which were developed in cooperation with
R E P O R T
agreements for strategic cooperation with international financial organisations. Within this context, there
of the loan portfolio for the gradual reduction of the ratio of non-performing loans. As regards the
extension of new advances, emphasis was given to the further improvement of the loan application
procedure. The ability to repay and the creditworthiness of customers constitute the most important
criteria in the assessment of loan applications. With regard to existing loan facilities, priority was given to
A N N U A L
Besides the intensified efforts to expand our operations, measures were stepped up to improve the quality
increasing the collection of arrears. For this purpose the Debt Collection Unit was further strengthened
and at the same time a centralised system of debt collection/recovery was implemented with excellent
results. The effort to improve further the quality of loans and to reduce the ratio of non-performing loans
will also continue this year unwaveringly. The three pillars of our strategy are: expansion of operations,
efficient operation and quality of portfolio.
As regards banking operations in the Cyprus market, the prospects for 2006 are considered to be very
positive, given that the economy will show satisfactory growth and the Cyprus Stock Exchange will
maintain its upward trend. Restrictive factors in this respect are the intense competition, the introduction of
stricter regulations by the Central Bank of Cyprus with regard to the suspension of interest and the
categorisation of non-performing loans, and the subdued demand for investments by the traditional
sectors of the economy. Priority will be given to sectors of the market, which present comparatively larger
margins for growth, such as cards, international business units and private banking.
Laiki eBank
2005 was yet another very successful year for Laiki eBank since it launched the public with innovative, for
the Cypriot market, services and products. At the same time it achieved a significant rise in the number of
users of electronic banking (private individuals and businesses) which exceeded 100.000, recording a
increase of 10,2%. Of especial importance for the Group was the effort to transfer routine transactions
from the branches to the alternative distribution channels, achieving a rise in electronic transactions
of 22,9%.
Laiki eBank was the first to introduce in Cyprus self-service accounts or of the Do-It-Yourself (D.I.Y.) type,
providing customers with the possibility of selecting themselves the features of the accounts and thus
enjoying flexible products, which fully match their personal needs.
15
Laiki eBank developed also the innovative service Laiki SMS Banking, which provides customers fast,
easy, secure and two-way access to banking and stock exchange information and transaction through a
mobile telephone.
INSURANCE SERVICES
Despite the fact that the growth rate of the life insurance market continued to be low, 2005 was a very
successful year for Laiki Cyprialife as it achieved a significant increase in its net profits. The factors, which
contributed positively to this performance, were the introduction of new insurance products on the market,
the policy followed to contain costs, the more effective management of insurance reserves and the
improved performance of investments.
Three new medical schemes, individual and group, were promoted on the market with great success.
16
There was also a campaign of direct promotion of the “Death from Accident” benefit to existing customers,
which had a very positive response.
In 2005 Laiki Insurance Ltd consolidated its leading position in the market and continued its upward
course, recording total premiums of more than Cí 28 m and increasing significantly its after tax profits.
The factors, which contributed to the achievement of these positive results, were, inter alia, further efforts
to rationalise the pricing policy, the provision of innovative products, the successful implementation of new
methods for the management of claims, with their timely settlement as the main characteristic, the
improvement of the management of debtors and the control of administrative costs.
As regards the life insurance market and the prospects for 2006, this is expected to continue its gradual
recovery, bearing in mind the prospects of the sector and existing insurance needs. The expansion of the
general insurance market is expected to continue to be higher than the rate of increase of the nominal GDP.
OTHER FINANCIAL SERVICES
The Cyprus Popular Bank (Finance) Ltd in 2005 had to face major structural changes in the business
environment and conditions of intense competition while the new car market declined. Under these
conditions, special priority was given to introducing new, very competitive products such as the financing
of the purchase of a car at 0% interest rate for six months. The company maintained its policy of granting
advances at a flat, but lower interest rate, which led to very attractive financing proposals, which benefited
the consumers. These moves had a positive impact in the market. Emphasis was also attached to the
improvement of the quality of its portfolio, which began to produce positive results.
products and the further enhancement of the quality of its customer service. Priority was also given to the
penetration of sectors with comparatively greater prospects for expansion, such as construction.
Laiki Brokerage E.P.E.Y. Ltd, a subsidiary of Laiki Investments E.P.E.Y. Public Co. Ltd and one of the
largest brokerage firms in Cyprus, increased its market share considerably by continuing to provide quality
2 0 0 5
factoring services. At the strategy level, the company focused its activities on the development of new
R E P O R T
Laiki Factors Ltd continued its profitable course while maintaining a leading role in the provision of
In cooperation with Laiki eBank, the new service Laiki ASE eTrading was introduced through which its
investor-customers are in a position to use their own computer to trade shares in the Athens Exchange,
maintaining a euro account with Laiki Bank. In addition, the innovative service Global eTrading has also
been launched.
A N N U A L
service within a comprehensive network of electronic service, such as Laiki eTrading and Laiki Telebank.
Laiki EDAK and Asset Management Ltd, which manages more than Cí 80 m, continued to expand its
activities in the sector of management of institutional capital, which includes provident and pension funds
and insurance and investment companies.
In the investment banking sector, Laiki Investments E.P.E.Y. Public Co Ltd retained its leading role in the
advisory services market. In the bonds issue market, the Company had a 76% market share, while in the
mergers and acquisitions sector it achieved a 25% share.
As regards the prospects of the other financial services for 2006, it is anticipated that the finance market
will decelerate due to the continuing effort to improve the loan portfolio and the application of stricter
criteria. Wider growth potentials, however, will emerge when leasing is introduced. The factoring market is
expected to expand at a growth rate similar to that of the nominal GDP. The prospects for the CSE will
depend directly on the trend of the results of listed companies, as well as on the trend of the international
stock exchanges and particularly the Athens Stock Exchange. The rate of implementation of the common
platform, an electronic tool for trading between the CSE and ATHEX, will be of major importance for the
further development of the CSE.
INTERNATIONAL EXPANSION
In 2005 Laiki Group proceeded with major strategic moves, within the framework of the strategy for the
internalisation of its operations and the diversification of its sources of income. A very important
development was the establishment of a new bank in the Channel Islands, Laiki Bank (Guernsey) Ltd,
which commenced operations in March 2005. The year under review marked the change in the strategy,
which we have followed so far, i.e. to operate banking units only in countries with a significant presence of
17
Greek and Cypriot communities. The decision to expand into Serbia with the acquisition of Centrobanka
a.d. is the first step in the implementation of the strategy of the Group for extending its presence in the
emerging market of the Balkans.
The contribution of foreign operations to the total profitability of the Group before provisions amounted to
Cí 25,3 m., which corresponds to 23,8% of the total.
Laiki Bank (Hellas) S.A. and subsidiaries
The Greek banking system recorded high rates of growth in 2005 under conditions of continuously,
intensifying competition. Credit extension to households and businesses in Greece, which represents 81%
of GDP, continues to be below the European average (above 100% in relation to GDP). This creates an
attractive environment with significant prospects for further growth of financial activities. Within this
environment, Laiki Group improved its position in the market, while the contribution of the activities in the
Greek market to profits before provisions amounted to 16,4%.
18
Advances and deposits maintained for yet another year their upward trend, recording increases of 24,3%
and 23,4% respectively. These performances were higher than those of the market. To this end, an
important role was played by the successful strategy that the Group followed in Greece in the retail
banking sector and particularly in the sector of housing loans. In this sector advances recorded an
increase which exceeded 70%, well above the corresponding growth rate of the total market. In line with
the expansion in the retail banking sector, the presence of the Bank was significantly strengthened in the
sector of small and medium-sized businesses to which the loans granted grew by more than 31%. The
significant growth of activities in the retail banking sector and in the small and medium-sized business
sector are mainly the result of the Group’s centralised mechanism and the provision of attractive and
competitive products, with pricing that reflects the rational assessment of the risks undertaken.
Within the context of the continuous expansion of the branch network of the Bank, in 2005 seven new
branches commenced operations, raising the total number of branches of the Bank to 55 at the end of the
year, from 46 at the end of 2004. For yet another year Laiki eBank continued its upward course in the
Greek market, providing upgraded services with subscribers now totalling 18.000, and the usage level of
the services more than doubling.
Within the context of the continuous effort to maintain the satisfactory quality of the loan portfolio, the
Group in Greece set up upgraded infrastructures which ensure the effective assessment, management
and pricing of the risks undertaken. These upgraded infrastructures include, inter alia, the operation of an
independent service for evaluating credit facilities, and also the strengthening of the framework of risk
management, particularly in view of the commitments to timely compliance with the new requirements of
Basel II.
2005 was yet another good year for Laiki Factoring S.A., which, despite the difficulties in this segment,
further strengthened its presence in the market. The infrastructure of the company was significantly
improved by the operation of the new, upgraded computer system.
The insurance companies Laiki Life S.A. and Laiki Insurance Agents Ltd continued their upward and
successful course despite their recent establishment, offering a wide range of bancassurance products.
At the same time, Laiki A.E.D.A.K. and Laiki Attalos S.A., who are active in the investment sector, achieved
satisfactory results, covering the investment needs of the Group’s customers.
2 0 0 5
to strengthen its activities in the area of property leasing.
R E P O R T
its significant presence in the leasing sector for movable equipment and professional vehicles, as well as
A N N U A L
Within the intensely competitive environment which has emerged, Laiki Leasing S.A. managed to maintain
Laiki United Kingdom
In the United Kingdom the past year was one of the best in terms of profitability. Moreover, the targets set
in relation to deposits and advances were achieved.
In the English market, apart from the traditional sectors and the sector of electronic banking, priority was
given to the promotion of private banking and to funds management. The decision to move the central
offices to new premises in Cavendish Square in London in February was part of the penetration strategy
into other ethnic or professional groups, besides the second and third generation Greek and Cypriot
expatriates.
Laiki Bank (Guernsey) Ltd
A very important event within the framework of the strategy for international expansion was the
establishment of the new bank on Guernsey, which began operations in March. The new subsidiary is in
the British group of islands, Channel Islands, which are one of the most famous financial centres in the
world. Laiki Bank (Guernsey) Ltd provides a range of competitive deposit products, while from the first
year of operation the results were very encouraging.
Laiki Bank (Australia) Ltd
The Bank of the Group in Australia continued its steady upward course in 2005. It is worth mentioning that
the very positive results were achieved despite investments for expanding the branch network, developing
electronic banking and strengthening the technological infrastructure. At the end of 2005, our network
there numbered nine branches in comparison with eight in 2004.
19
Laiki Bank a.d.
In January this year the takeover was completed of the majority share capital in the Serbian bank
Centrobanka a.d. with the acquisition of 90,43% of its capital. This was within the framework of our
strategy for the further internationalisation of our operations. The expansion in Serbia will provide
additional dynamism to the operations of the Group, resulting in the creation of added value for our
shareholders.
SUPPORT SERVICES
Infrastructure – Technology
Realising the capabilities and prospects afforded by modern technology, Laiki Group pursued further in
2005 the strategic implementation of technological infrastructure projects. Indicatively, it is noted that in
2005 the expenditure on technology projects exceeded Cí 9 m.
20
In the year under review, the centralised system of collection/recovery of debts was implemented, which
automates many of the procedures, which were hitherto done manually. In addition, the new treasury
system came into operation in Cyprus and the United Kingdom and will soon operate in Greece and
Australia as well. At the same time, the installation began of the new card management system.
Furthermore, work continued on the implementation of the risk management system of the “Toxotis”
programme and also on other projects, which support the efforts to centralise and simplify procedures
and reduce operating costs. An important project, which will require a great deal of effort, is the one
relating to the introduction of the euro. Work on this project has already started.
Human Resources
In 2005 the employee opinion survey was completed. The aim was to improve the degree of motivation
and the level of satisfaction of the employees, in order to achieve the corporate targets of the Group. The
results of the survey are already being utilised. In addition, training programmes were provided on
specialised subjects as well as on subjects concerning sales and the quality of service. The employee
performance appraisal procedure was upgraded, while the implementation of the scheme of succession
and development of managers is in progress.
During the year, the restrictive policy on recruitment in relation to operations in the local market remained
in force, within the context to control operating costs.
recently revised to cover the period 2006-2008. Our Group has set targets aiming by 2008 to increase the
return on capital, increase revenues, reduce further the cost to income ratio, to raise in productivity and
reduce the ratio of non-performing loans. As regards the local market, the primary objective is the increase
in market share of deposits and advances.
For the achievement of these objectives, our strategic pillars are:
The rapid growth of operations
The continuous improvement of operating efficiency and productivity through the simplification and
centralisation of procedures
2 0 0 5
R E P O R T
Within the framework of the annual procedure for strategic planning, the strategic plan of the Group was
A N N U A L
STRATEGIC ACTION 2006
The further dynamic expansion of our operations abroad, especially in the Greek market
The upgrading of the risk management system in order to improve the quality of advances
The continuous provision of attractive products
The exploitation of technology and continuation of the provision of high quality service.
In the last two years, Laiki Group has begun a new course with self-confidence and steady strides forward,
thanks to the changes made in various fields. Today there is better coordination, better planning and
greater confidence in the future and in our capabilities. These elements must be exploited and
strengthened. We remain devoted to the objectives, which have been set and we are confident that all of
us can jointly achieve them.
21
CORPORATE SOCIAL RESPONSIBILITY
For Laiki Group, Corporate Social Responsibility includes a package of principles, commitments and
policies which are expressed in practice. The Group perceives Corporate Social Responsibility as a
perpetual value, as a business practice closely linked with its strategy and based on the active adoption of
L A I K I
G R O U P
the principles of the triptych of society, human resources and culture.
The Corporate Social Responsibility which is being developed in the Group is multi-dimensional.
It includes a set of initiatives which are implemented with consistency and precision at the level of society,
employees, education, sport and culture.
The Radiomarathon constitutes a social attitude of the Group and a perennial parameter of the collective
efforts of a large number of people, such as the Management, the executives and all staff members of the
Group, as well as all socially responsible citizens. It has become the major charitable institution in Cyprus
with an international dimension, since it is held in countries where the Group operates and where there are
Greek communities. This year the Radiomarathon completed 16 years of voluntary commitment to children
22
with special needs. In these 16 years, the Radiomarathon has developed into a mass social institution
which has been embraced by the whole society and has contributed substantially to overcoming the social
prejudice which prevailed with regard to people with special needs. The mass participation of the staff
of the Group, the hundreds of volunteers and every Cypriot citizen made a substantial contribution
towards achieving the aims of the 16th Radiomarathon, which raised over Cí 1,5 m.
Our social policy is also practised in the countries where the Group operates. In Greece, Laiki Bank
(Hellas) S.A. undertook many social activities and cultural events with emphasis on education and culture,
and supported the Radiomarathon, maximising its positive contribution to society for the sake of the
welfare of society as a whole and the promotion of human values. The Radiomarathon in Greece aims to
become a point of reference for private initiative in the area of Corporate Social Responsibility. In a survey
published in the Press, it was the 2nd best-known programme of Corporate Social Responsibility in
Greece, in the field of the child. In addition, in 2005, Laiki Bank (Hellas) S.A. launched a particularly
important activity, the Voluntary Service Programme, which makes it possible, for any one who wishes,
to become automatically a supporter of the institution in alternative ways, by completing a
simple application.
A similar programme has also been adopted in Cyprus within the framework of the endeavour to found the
friends of the Radiomarathon.
Kingdom the procedures have been completed for the operation of a Day Care Centre, for the purpose of
improving the quality of life of the children with special needs in the community.
In 2005 the educational programmes of the Laiki Group Cultural Centre enjoyed great success.
Specifically, within the framework of the exhibition “The History of Advertising in Cyprus 1878-1978”, the
2 0 0 5
United Kingdom, Australia, Canada, New York and South Africa. It is worth noting that in the United
R E P O R T
The Radiomarathon has also managed to carry the message of love thousands of kilometres away: to the
from the elementary schools. As a consequence of the huge response, the programme has been
organised for a second consecutive year, attracting to date more than 11.500 children.
In addition, two educational programmes titled “Games in the Past I & II” were launched, which offer all
A N N U A L
specially designed programme “I Write, Draw and Advertise”, with artistic activities, attracted great interest
elementary school pupils the opportunity to become acquainted with the ancient civilisation of Cyprus
through the valuable collection of ancient Cypriot art kept in the Pierides Museum – Laiki Group. Also at
the Museum in 2005, the thematic exhibition “Eleonora’s Dress” was held within the framework of the
annual institution “Ancient Cypriot Art Meets Contemporary Art”.
23
L A I K I
G R O U P
We innovate and implement a
multidimensional social policy
which aims to contribute to
improving the quality of life of
Cypriot society.
We thus reciprocate for
the confidence shown
in us by the people.
INSTITUTIONAL, ECONOMIC DEVELOPMENTS
The rate of growth of the Cyprus economy in 2005 exhibited an acceleration estimated at 4,0% as against
3,8% in 2004, despite the increase in energy costs and the deceleration of the rate of growth in the
member states of the European Union. On the demand side, growth originated mainly from private
consumption and private investment in construction. Tourist arrivals in 2005 increased by 5,2%. On the
G R O U P
wholesale and retail trade, restaurants and hotels and financial intermediation.
L A I K I
supply side, growth, apart from the construction sector, was based mainly on the tertiary sectors, such as
economically active population. Inflation increased to 2,6% from 2,3% in 2004, mainly due to the increase
The acceleration of economic activity in 2005 is also reflected in the labour market, with the maintenance
of conditions of almost full employment. The unemployment rate increased slightly to 3,7% of the
in the price of oil.
The fiscal deficit as a percentage of GDP is estimated to have narrowed to 2,4% as a result of the
successful implementation of the Convergence Programme.
26
The rate of expansion of the total money supply accelerated to 10,4%, compared with 5,6% in 2004. The
main source of the liquidity expansion was the inflow of net foreign assets. At the same time, bank credit
to the private sector decelerated to 6,3% compared with 6,4% the previous year, reflecting the subdued
demand for loans. The largest share of new bank credit was absorbed by the sector of loans for housing
and construction purposes. Despite the acceleration of the rate of growth of the economy, the demand for
loans from the major sectors of production was subdued.
An important change that took place in the institutional framework was the implementation of stricter
regulations relating to the suspension of interest. On the basis of these regulations, as from January 2004
interest receivable on advances which are more than six months in arrears (instead of nine months as it
was before) and which are not fully secured, is no longer recognised as income. From January 1st 2006,
this period has been reduced to three months.
An important development was the entry of the Cyprus pound into the Exchange Rate Mechanism II in May
2005, which is a stage before joining the eurozone. As expected, the central rate of the euro against the
Cyprus pound was set at 1 euro = 0,585274 pound, while the standard fluctuation band of +/- 15% will
apply. The policy of the Central Bank is to maintain the exchange rate within the narrow fluctuation band of
+/- 2,25%, which is one of the assessment criteria for accession to the eurozone. The strategic aim of the
Government is the introduction of the euro on January 1st 2008.
continuation and the strengthening of fiscal consolidation with the implementation of the updated
Convergence Programme. Another major challenge concerns the implementation of the National
Programme for the Lisbon Strategy, which focuses on the promotion of structural reforms covering three
chapters: macroeconomics, structural and microeconomic policies and employment.
The new Cyprus Stock Exchange general index followed an upward trend and closed at 1704,76 units at
the end of 2005, recording an annual increase of 68,4% compared with a decrease of 10,0% in 2004. In
2006, a significant development at the institutional level will be the operation of the common trading
platform with the Athens Stock Exchange.
2 0 0 5
the preparation for entering the Eurozone. For the achievement of this aim, a major factor is the
R E P O R T
of structural changes with the aim to improve stability and competitiveness. The first challenge concerns
A N N U A L
The Cyprus economy faces today important challenges that make imperative the need for the promotion
In 2006 the rate of growth of the Cyprus economy is expected to decelerate slightly to about 3,8%,
reflecting the high cost of energy. Tourist arrivals are expected to increase by 5,8%. Inflation is expected to
fluctuate at around 2,5% and to remain at a low level as a result, mainly, of the stabilisation of the price of
oil, the anticipated containment of salary increases and the restrictive fiscal policy. Public finances are
expected to show further improvement in view of the commitment of the Government for fiscal
consolidation and meeting the Maastricht convergence criteria.
RATE OF GROWTH OF THE CYPRUS ECONOMY & EU
5,00
4,00
3,00
2,00
1,00
0,00
■ Cyprus
1996
■ ∂U 25
1997
1998
1999
2000
2001
2002
2003
2004
27
FINANCIAL RESULTS
SUMMARY OF GROUP RESULTS
The financial results of Laiki Group for the year 2005 are extremely satisfactory. The profit before
provisions increased by 27,2% reaching Cí 106,2 m whereas the profit after provisions rose to Cí 59,8 m
G R O U P
having recorded an increase of 102,7% and surged to Cí 42,8 m compared to Cí 21,1 m in 2004.
L A I K I
recording an increase of 63,7% compared to last year. The profit attributable to the shareholders doubled
biggest part of the operating income. The Group’s successful strategy for the improvement of the quality
Operating income increased by 15,4% compared to 2004 reaching Cí 257,5 m. This increase is mainly
attributed to the very satisfactory growth of 12,2% recorded in net interest income, which comprises the
of its loan portfolio and the increase of the collections from loans in arrears, the more rational pricing of
products and the higher returns from the Group’s foreign currency liquid funds are the main factors that
contributed to this particularly satisfactory growth of the net interest income.
28
The operating expenses of the Group had a restricted increase of 8,4% compared to 2004. The slowdown
in the rate of increase of expenses is a reflection of the Group’s successful efforts to control the operating
expenses and improve productivity. The fact that the other operating expenses of the Group in Cyprus
remained stable compared to 2004, is considered especially successful. It is worth noting that the
containment of the increase in operating expenses combined with the particularly satisfactory growth of
the operating income led to the improvement of the cost to income ratio in Cyprus from 61,54% on
31.12.2004 to 56,72% on 31.12.2005. For the Group the cost to income ratio dropped from 62,59% on
31.12.2004 to 58,77% on 31.12.2005.
The provision for impairment of advances of the Group dropped by 1,2% compared to 2004 and
amounted to Cí 46,4 m. This further reduction in provisions is indicative of the gradual and steady
recovery of the advances portfolio of the Group. The Group takes all the necessary measures to minimise
the negative impact on its profitability from the stricter Central Bank of Cyprus regulations that have been
put into effect as from 01.01.2006 regarding the suspension of interest and the categorisation of nonperforming loans.
The insurance operations of the Group recorded an extremely satisfactory growth of their profit before
provisions of 123,4%, i.e. their operating profit more than doubled compared to 2004. The factors that
contributed to this particularly satisfactory growth were the improved returns of investments, the launching
of new products that enhanced new business, the more rational acceptance and pricing of insurance risk,
the efficient management of claims and the containment of operating expenses.
The considerably improved profitability achieved by the Group in 2005 is a result of its substantially
economy are positive and the tourism industry is registering a satisfactory recovery. Based on these
financial conditions, and given that they do not change substantially, it is expected that the profitability of
OPERATING INCOME
The operating income of the Group rose by 15,4% compared to 2004. Net interest income increased by
12,2% compared to 2004. The Group’s net interest margin remained at a high level of the order of 2,92%
compared to 2,93% in 2004 and 2,79% in 2003, despite the negative effect of the consecutive decreases
in the base rate of the Cyprus Pound.
A N N U A L
R E P O R T
the Group for 2006 will maintain its upward trend.
2 0 0 5
improved operating profitability and the further reduction in provisions. The indications for the Cyprus
This achievement is mainly attributable to the successful efforts to improve the quality of the Group’s loan
portfolio and increase the collections of overdue balances. The high net interest margin is also attributed
to the continuation of the more rational pricing policy of the Group’s banking products and the better
returns of its foreign currency liquid funds.
Net commissions recorded a satisfactory growth of 4,8% compared to 2004. The commissions from stock
exchange and foreign exchange transactions in Cyprus and the credit-related commissions in Greece were
particularly improved in 2005. The foreign exchange income recorded a slight increase compared to 2004.
The Group’s other income, which mainly consists of the income from the insurance operations of the
O P E R A T I N G I N C O M E [ in Cí m ]
2005
257,5
+15,4%
2004
223,1
0
50
100
150
200
250
+45,3%) ■ Foreign exchange (+
+1%) ■ Net fees and commissions (+
+4,8%)
■ Other income (+
+12,2%) ■ (Loss)/profit on disposal and revaluation of securities
■ Net interest income (+
300
29
R E S U L T S
turnover in the general insurance sector and also a satisfactory growth in the life insurance sector. During
2005 there was increased interest for life insurance, health and accident insurance and for investment type
products, especially during the last months of 2005.
L A I K I
G R O U P
-
F I N A N C I A L
Group, rose by 45,3% compared to 2004. During 2005 the Group achieved a significant expansion of
OPERATING EXPENSES
Group operating expenses displayed a restricted increase of 8,4% compared to last year. The greatest
part of the Group’s operating expenses consists of staff costs that rose by 9,5% compared to 2004.
Staff costs in Cyprus, which constitute the greatest part of the Group’s staff costs, rose by 8,4% compared
to 2004. This increase was anticipated as a consequence of the annual salary increases and the
employer’s defined benefit contributions to which the Group is committed as per the collective
30
agreements in force. Due to the Group’s policy to freeze recruitments in Cyprus, the number of staff
decreased from 2.424 on 31.12.2004 to 2.416 on 31.12.2005. Overseas, the increase in staff costs is
mainly attributed to the increase in staff numbers due to the expansion of operations. In Greece the
number of employees rose from 794 on 31.12.2004 to 876 on 31.12.2005 and in Australia from 94 to 109
respectively. In the United Kingdom and Guernsey the staff numbers remained stable.
The depreciation, amortization and goodwill impairment of the Group increased by 16,7% compared to
2004. It is noted that with the adoption of the revised International Accounting Standard 36 and
International Financial Reporting Standard 3 as from 01.01.2005, the Group performs periodical
impairment tests on goodwill included in its assets, instead of the amortisation of goodwill over a specified
O P E R A T I N G E X P E N S E S [ in Cí m ]
151,3
2005
+8,4%
139,6
2004
0
50
100
+9,5%) ■ Depreciation, amortisation & impairment (+
+16,7%)
■ Staff costs (+
+6,8%) ■ Fine from Committee for the Protection of Competition
■ Other expenses (+
150
250
acquisitions of the Group. An amount of Cí 4,2 m, of the total impairment of Cí 8,8 m is related to the
acquisition of the Paneuropean Group (2004:amortisation Cí 3,2 m) and Cí 4,6 m is related to the
acquisition of Laiki Attalos Securities S.A. in Greece (2004:amortisation Cí 0,9 m). It should be noted that
the goodwill on the acquisition of Laiki Attalos Securities S.A. has been fully written off as at 31.12.2005.
2 0 0 5
Income Statement of the Group was charged with an impairment of goodwill of Cí 8,8 m regarding past
R E P O R T
period of time as was the practise in the past. As a result of the annual impairment test the Consolidated
worth noting that the other expenses of the Group in Cyprus remained stable compared to 2004. The
containment of the other expenses of the Group in Cyprus resulted from the Group’s successful strategy
for continuous control of the operating expenses in spite of the rapid growth of the Group’s sizes in Cyprus
(increase in deposits 23,6% and increase in advances 7,7%). The other expenses of the Greek operations
A N N U A L
The other expenses of the Group showed a lower increase of the order of 6,8% compared to 2004. It is
had a restrained increase of 9,8% while the other expenses of the operations in the United Kingdom,
Guernsey and Australia rose by 23% compared to 2004 due to the expansion of the operations of the
Group and the higher costs that resulted from the relocation of the Head Offices of the Bank in the UK to
new premises in Cavendish Square in London and the opening of a new branch in Australia.
PROFIT BEFORE PROVISIONS BY BUSINESS SEGMENT
The chart shown below depicts the analysis of the profit before provisions by business segment, including
the impairment of goodwill of Cí 8,8 m that burdened the results upto 31.12.2005. It should be noted that,
excluding the impairment of goodwill, the profit before provisions for the Financial and other services
segment increases to Cí 21,8 m or by 16,4% over 2004.
PROFIT BEFORE PROVISIONS BY BUSINESS SEGMENT
3,0%
22,4%
74,6%
5,3%
16,1%
78,6%
■ Banking services
■ Insurance services
■ Financial &
other services
2004
2005
Total
31.12.2004
Cí m
31.12.2005
Cí m
Change
%
62,3
2,5
83,4
5,6
+34,0%
+123,4%
18,7
17,2
-8,3%
83,5
106,2
+27,2%
31
R E S U L T S
F I N A N C I A L
G R O U P
L A I K I
In the insurance segment, both the general and life insurance sectors recorded exceptionally satisfactory
growths in profitability.
The increase of the profitability in the general insurance sector is attributable to the more rational pricing
and acceptance of the insurance risks, the further promotion of insurance products through the Bank’s
branch network, the efficient management of claims, the increased collections of overdue balances and
the containment of expenses.
The factors that contributed to the positive performance of the life insurance sector were the quality
management of the insurance reserves, the increased returns on the investments, the launching of new
innovative insurance products that boosted new business and the containment of the operating expenses.
PROFIT BEFORE PROVISIONS BY GEOGRAPHICAL AREA
32
The chart show below depicts the analysis of the profit before provisions by geographical area, including
the impairment of goodwill of Cí 8,8 m that burdened the results upto 31.12.2005. Excluding the
impairment, the profit before provisions in Cyprus rises to Cí 87,4 m (increase of 40% compared to 2004)
and in Greece it is increased to Cí 19,7 m (increase of 35,1% compared to 2004). The contribution of the
Greek operations to the Group profit before provisions, excluding the impairment of goodwill, reached
17,1%. It is noted that the goodwill on the acquisition of Laiki Attalos Securities S.A. as at 31.12.2005 has
been fully written off and therefore this impairment charge is non-recurring.
PROFIT BEFORE PROVISIONS BY GEOGRAPHICAL AREA
17,4%
7,7%
74,9%
16,4%
7,4%
31.12.2004 31.12.2005
Cí m
Cí m
76,2%
■ Cyprus
■ Greece
■ United Kingdom,
Australia & Guernsey
2004
2005
Total
Change
%
62,4
14,6
80,9
17,4
+29,6%
+19,3%
6,5
7,9
+22,2%
83,5
106,2
+27,2%
that it is still in a growing phase. The profit before provisions grew by 19,3% compared to last year. It
should be noted that as from the beginning of 2005 the Group adopted the revised International
Accounting Standard 36 and the International Financial Reporting Standard 3 and as a result the Group in
Greece was charged with its share (Cí 2,3 m) of the full and non-recurring impairment of the investment in
2 0 0 5
The Group in Greece recorded a very satisfactory improvement in profitability, especially having in mind
R E P O R T
GREEK OPERATIONS
Despite the fact that the quality of the loan portfolio remains satisfactory, it was considered necessary to
charge the results of the Group in Greece with a provision for impairment of advances of Cí 11,1 m
compared to Cí 5,9 m in 2004. This is due to the conservative policy of the Group concerning provisions
A N N U A L
Laiki Attalos Securities S.A.
and the expansion of the loan portfolio.
Due to the impairment charge and the higher provisions, the profit after tax was reduced to Cí 3,3 m
Excluding the impairment charge, the profit before provisions increases by 35,1% and the profit after tax
by 8,2% compared to 2004, as shown in the table below. It should be noted that the corporation tax rate in
Greece is 32%.
Operating income recorded a very satisfactory growth of 16,1% compared to 2004 mainly due to the
upward trend of the net interest income and the increased credit-related commissions. The net interest
margin of the Group in Greece reached 2,55%. The operating expenses, excluding the impairment of
goodwill, increased by only 6,8%, demonstrating the strict and systematic control that is exercised
over costs.
The cost to income ratio on 31.12.2005 reached 66,2%. Excluding the impairment of goodwill, the cost to
income ratio is reduced to 61,7% compared to 67,1% on 31.12.2004, despite the investments made to
expand the branch network of the Group in Greece. The number of staff rose from 794 on 31.12.2004 to
876 on 31.12.2005 whereas the number of branches increased from 48 on 31.12.2004 to 55 on
31.12.2005.
It is worth noting that our Group in Greece offers a complete range of financial products and services.
Apart from banking, the Group is successfully active in other financial services sectors such as Leasing
and Factoring, Insurance (both general and life) and Stockbroking. In the banking sector, special
emphasis is placed on the expansion of the retail banking operations and in the further enhancement of
the small and medium-size companies clientele.
33
R E S U L T S
F I N A N C I A L
G R O U P
L A I K I
OTHER OVERSEAS OPERATIONS
Within the framework of the Group’s strategy for geographical expansion of its operations, the Group
established a new bank in Guernsey. The island of Guernsey is part of a wider complex of islands, the
Channel Islands, which are one of the most reputable financial services centres in the world, especially in
relation to the advantages they offer for tax planning. The new Bank commenced its operations in March
2005 under the name Laiki Bank (Guernsey) Ltd and it is a 100% subsidiary of Laiki Bank. Laiki Bank
(Guernsey) Ltd offers a range of competitive deposit products whereas the spectrum of its products and
services is continuously expanding.
Within the context of the same strategy, in a move that marks the first step to an important presence of the
Group in the Balkan region, Laiki Bank has acquired the Serbian bank Centrobanka a.d. The acquisition
was effected through a Public Offer to the shareholders of the Bank which was concluded and the control
was attained in January 2006 with the acquisition of 90,43% of the share capital, at a total cost of
34
Euro 33,6 m. The results of the subsidiary in Serbia will be included in the consolidated results of the
Group as from 2006.
The operating profitability of the Group’s operations in the United Kingdom, Guernsey and Australia had a
very satisfactory growth of 22,2%, in spite of the extra expenses relating to the relocation of the UK Bank’s
Head Offices to new premises in Cavendish Square in London and the opening of a new branch in
Australia.
The provisions in the United Kingdom and Australia dropped due to significant recoveries made in 2005.
The total profits after tax in the United Kingdom, Guernsey and Australia had a very satisfactory increase
of 64,7% and amounted to Cí 6,7 m.
PROVISION FOR IMPAIRMENT OF ADVANCES
The provision for impairment of advances dropped by 1,2% compared to 2004 to Cí 46,4 m. The
percentage of non-performing loans to total loans (excluding interest in suspense) dropped to 10,1%
compared to 11,5% on 31.12.2004. It is notable that this was achieved without significant write-offs.
Write-offs take a long time to be made, and as a result the non-performing loans of the Cyprus operations
are high, due to the long period it takes for the liquidation of collaterals and especially of property.
Realisation of property abroad takes 1-2 years whereas in Cyprus the same process may take 10 years or
from 10,1% to 7,9%.
The percentage coverage of non-performing loans by accumulated provisions registered a satisfactory
increase compared to 2004 and reached 64,2%. The percentage coverage of non-performing loans by
accumulated provisions is an important indicator that is closely followed by analysts. The Group is on a
2 0 0 5
we note that if write-offs of Cí 100 m were effected, then the above percentage would have decreased
R E P O R T
more. This fact also encourages borrowers not to be timely in the settlement of their arrears. Indicatively
not covered by provisions is covered by tangible securities.
The Group is taking all necessary measures to contain the negative effect of the even stricter criteria for
the definition of non-performing loans imposed by the Central Bank of Cyprus from 01.01.2006. From
A N N U A L
very satisfactory track of improvement of this indicator. It is noted that the amount of non-performing loans
01.01.2006, based on the new regulation of the Central Bank of Cyprus, all advances which are in arrears
for more than three months are classified as non-performing.
35
NON-PERFORMING LOANS/TOTAL LOANS
12,00%
11,00%
10,00%
31.12.2003
31.12.2004
30.06.2005
30.09.2005
31.12.2005
ACCUMULATED PROVISIONS/NON-PERFORMING LOANS
70,0%
60,0%
50,0%
31.12.2003
31.12.2004
30.06.2005
30.09.2005
31.12.2005
R E S U L T S
F I N A N C I A L
G R O U P
L A I K I
BALANCE SHEET ANALYSIS
The Group’s advances rose to Cí 4,3 bln recording a very satisfactory annual increase of 14,7%.
In Cyprus, advances reached Cí 2,5 bln and recorded an annual increase of 7,7%. The greatest growth
in the advances of the Group was recorded in the retail sector especially for private consumption
and housing.
The advances of the Group in Greece achieved a very satisfactory annual growth of 24,3% and rose to
Cí 1,3 bln with a substantial increase of the small and medium-size enterprises portfolio as well as the
advances for housing and consumption purposes.
In the United Kingdom and Australia the annual increase of advances was particularly satisfactory and
reached 27,2% and 31,1% respectively.
36
The Group’s customer deposits reached Cí 5,7 bln recording an exceptionally satisfactory annual growth
of 23,5%.
The deposits in Cyprus had an annual increase of 23,6% which is particularly satisfactory. The factors that
contributed to this high increase include the significant growth of the deposits in foreign currency in the
Cypriot banking system and the appreciation of the exchange rate of the United States Dollar against the
Cyprus Pound.
GROSS CUSTOMER ADVANCES
[ in Cí m ]
6.000
6
5.000
5
CUSTOMER DEPOSITS
+14,7%
+23,6%
4.000
4
3.000
3
+7,7%
2
2.000
+24,3%
1
1.000
00
[ in Cí m ]
+23,5%
+23,4%
+27,2% +31,1%
Group
■ 31.12.2004
Cyprus
Greece
■ 31.12.2005
U. K.
& Guernsey
Australia
+16,8% +33,8%
Group
Cyprus
Greece
U. K.
& Guernsey
Australia
In the United Kingdom and Guernsey the customer deposits grew by 16,8%, while the deposits in Australia
A N N U A L
registered a particularly satisfactory increase of 33,8%.
PROSPECTS
The main performance ratios of the Group are as follows:
Earnings per share (cent)
Return on assets
Return on equity
Cost/Income ratio
2 0 0 5
increase is particularly satisfactory, as it has been achieved in a particularly competitive environment.
R E P O R T
In Greece, the Group’s customer deposits reached Cí 1,4 bln, recording an annual growth of 23,4%. This
2003
2004
2005
3,1
0,19%
3,45%
66,38%
6,9
0,39%
7,21%
62,59%
14,0
0,66%
13,12%
58,77%
The Group’s profitability prospects for the future, given the current financial conditions, are very positive.
It is anticipated that the Group’s profitability for 2006 and for the coming years will continue to be on an
upward trend.
The positive future prospects are reinforced even further through the cooperation with Marfin Financial
Group, which, together with the Tosca Investment Fund, are the new major shareholders of Laiki Group.
37
L A I K I
G R O U P
It is our permanent aim in
the constantly changing
environment to continuously
enhance the standard of
service to our customers
and enrich our products
and services.
Our main objective
is the anthropocentric
approach to the
customer.
CORPORATE GOVERNANCE REPORT
The Cyprus Stock Exchange (CSE) adopted in September 2002 a Corporate Governance Code for
companies, which are listed on the Stock Exchange. The Code requires listed companies to include a
Report on Corporate Governance in their Annual Report. The Board of Directors has agreed to the
L A I K I
G R O U P
introduction of the Code and taken the necessary decisions for its full implementation.
40
In September 2003 the Board adopted a Revised Corporate Governance Code. The Revised Code
contains all the provisions of the Code issued by the Cyprus Stock Exchange and also to a great extent the
provisions in the Revised Combined Code issued in the United Kingdom by the Financial Reporting
Council in July 2003.
The Board of Directors states that it has adopted and fully complies with the provisions of the CSE Code
and also of its Revised Code.
BOARD OF DIRECTORS
The Board meets regularly (in 2005 it met nine times) which ensures that the Directors are able to review
corporate strategy, the Budget and the results of the Bank and its subsidiaries, acquisitions, major capital
outlays and other important transactions.
The Directors are informed in writing and in time for all Board meetings and have at their disposal all
necessary documents for each meeting. All Directors have access to the advice and services of the
Secretary.
All eleven directors offer themselves for re-election at regular intervals and at least every three years.
In addition, none of the Directors had a material interest, directly or indirectly in any contract of
significance with the Company or any of its subsidiaries.
It is also confirmed that there is clear separation of the positions, duties and responsibilities of the
Chairman of the Board Kikis N. Lazarides and the Group Managing Director Michael R. Erotokritos.
Marios Lanitis, Platon Lanitis, Andreas Louroutziatis, Rena Rouvitha Panou, Christos Papaellinas, Andreas
Philippou, George Psimolophitis, Theophilos Theophilou and Anthony Townsend are non-executive
Directors.
The Board of Directors includes five independent non-executive directors as defined by its Revised Code,
namely: Andreas Louroutziatis, Christos Papaellinas, George Psimolophitis, Theophilos Theophilou and
Information relating to lending to Directors and their related parties is shown in Note 50 of the Financial
Statements. It is confirmed that such lending had been approved by it in the ordinary course of business
and at arm’s length.
GOING CONCERN
The Board of Directors is satisfied that Laiki Group has adequate resources to continue in business.
2 0 0 5
R E P O R T
executive directors as required by the CSE and the Revised Code.
A N N U A L
Anthony Townsend and maintain a balance between executive, non-executive and independent non-
BOARD COMMITTEES
The Board has appointed an Audit Committee and also a Nomination and a Remuneration Committee as
provided by Corporate Governance.
The Board has appointed for the first time an Audit Committee with written terms of reference years before
the adoption of a Corporate Governance Code. These terms of reference were revised in order to comply
with the principles of the Code and the guidelines of the Central Bank of Cyprus. The Committee
comprises exclusively non-executive directors, namely: Anthony Townsend (Chairman), Andreas
Louroutziatis, Andreas Philippou, George Psimolophitis and Theophilos Theophilou. The majority of the
members of the Committee are independent non-executive directors.
The Committee meets regularly to consider the reports of the Internal Audit Department of the Group,
the Auditors’ fees, the financial statements and other matters falling within its terms of reference.
The Committee is assisted in the execution of its duties by the audit committees appointed by major
group subsidiaries.
The Nomination Committee has the responsibility for selecting competent and suitable individuals for
filling Board positions and makes its recommendations to the Board. The appointments are made by the
Board and are subject to the approval of the Annual General Meeting. The Committee may also from time
to time review the size and composition of the Board and make recommendations to the Board with regard
to any changes deemed necessary.
The Members of the Nomination Committee are Kikis N. Lazarides (Chairman), Marios Lanitis, Andreas
Louroutziatis, Christos Papaellinas and Anthony Townsend. The majority of the members of the Committee
are independent non-executive directors.
41
LAIKI GROUP - CORPORATE GOVERNANCE REPORT
The Remuneration Committee determines the remuneration of each executive director in accordance with
written terms of reference, which take into account the provisions of the Code.
The Remuneration Policy of the Bank states that the Committee in determining the remuneration of
executive directors takes into account the responsibilities, experience and performance of directors,
comparative remuneration in the banking industry and the profitability of the Group.
The Members of the Remuneration Committee are the non-executive directors: Andreas Philippou
(Chairman), Christos Papaellinas, George Psimolophitis and Theophilos Theophilou. The majority of the
members of the Committee are independent non-executive directors. The Remuneration of Directors is
shown in Note 50 of the Financial Statements.
INTERNAL CONTROL SYSTEM
42
The Board of Directors has the overall responsibility for maintaining a proper internal control environment,
which safeguards, among others, the assets of the Group and its clients, the accuracy and confidentiality
of transactions, the reliability of financial information and compliance with applicable regulations.
To this end, the management of each business entity within the Group is tasked with introducing and
operating internal control systems, which are commensurate with the scale and complexity of operations,
and comprises, as a minimum, the following:
clear organisational structure and division of responsibility, including supervision of day-to-day
operations
drafting and monitoring of implementation of strategic and operating plans and budgets for each
material line of business
effective internal communication lines that disseminate information quickly and to the appropriate
level
documented procedures for key areas of activity and frequent briefing of staff through circulars,
announcements, and training seminars on prescribed Group policies and practices
adequate segregation of duties and avoidance of assigning duties leading to conflicting
responsibilities
frequent compilation of financial and operational performance statistics
support of key activities by reliable and secure information systems
approval of transactions by appropriate and authorised persons
a well established financial control environment
In addition, at Group level suitable risk management units exist for supporting the Asset and Liability
Committee (ALCO) in drafting and monitoring implementation of the overall risk policy and in managing
individual risks. For measurable risks, in particular, Group procedures require determination and periodic
revision of acceptable maximum exposure limits.
An internal control system aims at mitigating, but not eliminating, the risks faced by the entity, and
provides reasonable but not absolute assurance that material loss will not be incurred.
The adequacy and proper operation of internal controls in individual areas of operation are reviewed
2 0 0 5
R E P O R T
adequate insurance cover
A N N U A L
existence of business resumption and contingency plans
periodically by an independent internal audit function, and its findings are reported to the Audit
Committee. The latter informs the Board regarding important issues, and presents also an annual report
on the adequacy and efficiency of the internal control systems of the Group. The report for the year 2005
confirmed the adequacy and effectiveness of the internal control systems of the Group.
Based on the above, the Board states that it is satisfied with the adequacy of the system of internal control
and also the procedures for ensuring that the information supplied by the Bank to investors is correct and
complete. In addition, the Board states that it had not come to its attention any violation of the Stock
Exchange Laws and Regulations.
The Board has also appointed the Secretary of the Bank Stelios Hadjijoseph as Officer responsible for
compliance with the Code of Corporate Governance.
RELATIONS WITH SHAREHOLDERS
Laiki Group, recognising the importance of communicating to the shareholders correct and timely
information, publishes its results on a quarterly basis. The results and other information relating to the
activities of the Group are presented at meetings, which are attended by analysts, journalists,
shareholders and investors.
The Bank encourages shareholders to attend the Annual General Meeting and in its relations with
shareholders complies with the requirements of the Companies Law and the Corporate Governance Code.
The Bank has also appointed Irene Constantinou as Investor Relations Officer.
43
LAIKI GROUP - CORPORATE GOVERNANCE REPORT
MEMBERS OF THE BOARD ELIGIBLE FOR RE-ELECTION
Curriculum vitae of Members of the Board of Directors of the Bank who offer themselves for re-election:
Kikis N. Lazarides
He graduated from the Pancyprian Commercial Lyceum, Larnaca. He studied Economics (BSc) on a
Commonwealth scholarship at Southampton University. On his return to Cyprus he was employed at the
Ministry of Finance from 1958 to 1963. In 1961, he was appointed on the team of experts for establishing
the Central Bank of Cyprus where he held the position of Director of Economic Research from 1963 to
1969. He has in the past been, amongst others, Chairman of the Cyprus Cardiological Institute, Chairman
of Cyprus Airways, Alternate Governor of the International Monetary Fund, Chairman of the Cyprus Sports
Organisation and member of the National Committee of the “Athens 2004” Games. He is currently
Chairman of the Cyprus Olympic Committee (since 1984), Member of the Executive Committee of the
Association of European National Olympic Committees, Chairman of the University of Cyprus and
44
Chairman of the Cyprus Cultural Foundation. In 1970 he was appointed Chief Executive of Laiki Bank and
has been Chairman of Laiki Group since 1992. In 1998 he was awarded an Honorary Doctorate in
Economics and Social Sciences by Southampton University and in 2000 an Honorary Doctorate by City
University. He has been the honorary consul of the Principality of Monaco in Cyprus since 1995.
Theophilos Theophilou
He received his B.Sc (Economics) from the University of Southampton. He is a Member of the Institute of
Chartered Accountants in England and Wales and the Association of Certified Public Accountants of
Cyprus. He started his career with the Cyprus Government in 1962 and in 1972 he was appointed
Assistant Accountant General. In 1982 he was appointed Auditor General, a position he held until his
retirement in 1997. In the same year he was appointed Member of the Public Service Commission for a sixyear term. He served as a Member of the Investigating Committees for the Chemical Industries and the
Co-Operative Movement. He was Chairman of the Cyprus Ports Authority, the Pancyprian Company of
Bakers, the Auditing Service of the Co-Operative Societies, the Tax Amnesty Committee and Member of
various other Boards and Committees. He also served as Member of the Boards of Laiki Insurance and
Laiki Cyprialife and Chairman of their Audit Committees. He is a Member of the Board of Laiki Bank
(Hellas) and Chairman of its Audit Committee.
Phil Economics from the University of Cambridge and a Science Master’s in Management (Fulbright
scholarship) from the M.I.T. She started her career at Laiki Group in 1981 and then worked for a number of
years as a management consultant in the USA. Following her return to Laiki Bank in 1991 she was
responsible for the development of the overseas operations of Laiki Group. Among the duties assigned to
her were the development of the operations in the United Kingdom and the representative offices as well
2 0 0 5
She obtained her B.Sc. Economics (Metcalfe scholarship) from the London School of Economics, a M.
R E P O R T
Rena Rouvitha Panou
She has been a Member of the Board of Laiki Bank (Hellas) S.A. since its establishment in 1992. In
January 2000 she was appointed General Manager of Laiki Group responsible, apart from the international
operations, for Treasury, Risk Management and Private Banking as well as for the establishment of the
Group’s subsidiary in Australia. She is a Member of the Boards of the Group’s subsidiaries in Greece and
A N N U A L
as the establishment and operation of the Group’s subsidiary bank in Greece - Laiki Bank (Hellas) S.A..
Laiki Bank (Australia) Ltd. In 2002 she was appointed to the Board of Laiki Bank and Managing Director of
Laiki Bank Hellas.
45
Anthony Kenyon Daltry Townsend
He attended Malborough College in the United Kingdom and started his career with the Hong Kong and
Shanghai Banking Corporation (HSBC) in 1956. He had worked in Hong Kong, Malaysia, Vietnam,
Thailand and Indonesia and from 1981 he worked at HSBC Group Head Office at Senior Management
positions. In 1992 he was appointed Executive Director of the HSBC Group. He is now retired and lives in
Paphos, Cyprus.
GROUP RISK MANAGEMENT
The Group, as a financial organisation, is exposed to risks, which may adversely affect its financial results
and the realisation of its strategic objectives. For this reason, the Group continuously monitors on a
unified basis, and in various ways any likely adverse developments, concerning its operations, in order to
G R O U P
In view of the new demanding and more competitive market conditions, the unified risk management
L A I K I
avoid the accumulation of excessive risks.
banking practice.
process is carried out by the Group Risk Management Division, which was set up last year. The new
Division manages credit risk, market risk, and operational risk within a complete and spherical framework.
The management of the various risks is based on local and international guidelines, as well as on modern
In addition, Laiki Group recognises that the risk management process is of utmost importance in view of
the requirements of the Second Basel Agreement (Basel II), as well as of the directives of the European
Union (CAD3), which all banking institutions have to adopt internationally. For these reasons, Laiki Group
46
proceeded with the installation of a new specialised Treasury system, which will cover the needs for
statistical data, and also with the introduction of new methods and procedures in order to achieve full
compliance and accurate measurement of all the categories of market risk. At the same time, the new
Treasury system will contribute to reducing to a minimum the capital funds required to face these risks, in
view of the requirements of Basel II.
CREDIT RISK
Credit risk stems from the likely non-promptly repayment of existing and contingent obligations of
counterparties to the Group, resulting in loss of funds.
MANAGEMENT OF CREDIT RISK
The management of credit risk aims at the timely recognition and assessment of these contingencies, as
well as at the limitation and minimisation of the percentage which is not repaid. These aims are achieved
through the development of a “disciplined culture” of credit risk throughout the Group, as well as risk
transparency and rational risk-taking.
management.
Any changes in the quality of the loan portfolio are closely monitored through evaluation systems for the
timely development of strategies that aim to minimise any increases in the risks undertaken.
RATING SYSTEMS
An automated internal rating system is maintained which assesses the behaviour of new and existing
2 0 0 5
environment, the strategic policy of the Group and the short- and long-term objectives of risk
R E P O R T
are revised at least annually. The various methods are adapted to reflect the current economic
A N N U A L
The methodologies of credit risk management are based on recognised international practices and they
customers on a monthly basis and acts at the same time as a warning risk signal. The internal rating
system is combined with credit-scoring models for physical persons which are based on both
demographic and objective criteria (e.g. income, property) and by Moody’s Risk Advisor system for
medium and large businesses. Moody’s Risk Advisor system assesses the financial strength of the
customer based on financial and qualitative data, as well as the sector of the economy in which the
customer operates.
MARKET RISKS
Market risks arise from the potential change of certain market variables (interest rates, exchange rates,
etc.) over which the Group has no control, resulting in a possible loss of funds.
Recognition and categorisation of market risks
a) Interest rate risk.
The risk arises from the fluctuation in the value of financial instruments and net interest income of the
Group, as a result of changes in market interest rates.
b) Exchange risk.
The risk arises from changes in the value of financial instruments and other assets and liabilities, due
to fluctuations in exchange rates.
47
The risk arises when the Group is not in a position to meet its current and future obligations when the
maturity of assets and liabilities does not coincide.
d) Counterparty risk.
The Group runs the risk of loss of funds due to the likely non-promptly repayment of existing and likely
obligations by counterparty banks.
e) Country risk.
The Group runs the risk of loss of funds because of possible political, financial and other events in a
LAIKI
GROUP
-
GROUP
RISK
MANAGEMENT
c) Liquidity risk.
specific country in which the funds or assets of the bank have been placed or invested with different
local banks and financial institutions.
f)
48
Risk from changes in the prices of equity shares and other securities.
The risk relating to loss of funds emanates from the adverse movement in equity shares or other
securities held by the Group.
All these risks, from a) to f), are managed in an integrated and spherical framework by the Group Risk
Management Division. The Group Risk Management Division proposes the policy for managing these risks
and submits recommendations about the extent of the acceptable risks and limits to be adopted either to
the Asset and Liability Committee (ALCO) or to the senior management of the Group. At regular intervals,
the Group Risk Management Division submits reports to ALCO and to senior management, relating to the
level, the management and the state of the risks. The limits are proposed by the Group Risk Management
Division on an annual basis, having first been set at Group level, reflecting the risk framework acceptable
to the Group. The limits are subsequently allocated to the various departments, units and subsidiaries of
the Group, according to the volume of their operations.
EVALUATION AND ASSESSMENT OF MARKET RISKS
Group Risk Management Division has already proceeded with the setting up of a uniform policy and
methodology in the Group regarding the assessment of market risks. The assessment of market risks
is carried out on a daily basis both by means of printed reports and through real time enquiry screens –
on line.
is entirely independent of the Treasury. Any limit excesses are referred to Group Risk Management, which
also recommends the open position limits under which the Group can operate.
2 0 0 5
The daily monitoring, control and verification of any limit excesses is carried out by the Back Office, which
R E P O R T
MONITORING AND CONTROL OF RISKS
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and
systems or from external events and includes legal risk.
A N N U A L
OPERATIONAL RISK
For the better monitoring, assessment and management of operational risk, a specialised operational risk
management department has been set up within the Group Risk Management Division, while additional
procedures are underway for the timely and effective collection and processing of the necessary
information from the whole spectrum of the Group’s operations.
49
L A I K I
G R O U P
The successes of the Group are
the result of an all-round and
coordinated effort at all levels
and are due to a great extent
to the conscientious work,
dedication and professional zeal
of the staff of the Group.
Our human resources
are the most valuable
asset of the Group.
FINANCIAL STATEMENTS > 2005
CONTENTS
Page
L A I K I
G R O U P
CONSOLIDATED FINANCIAL STATEMENTS
54
Report of the Board of Directors
55
Auditors’ Report
57
Consolidated Income Statement
58
Consolidated Balance Sheet
59
Consolidated Statement of Changes in Equity
60
Consolidated Cash Flow Statement
61
Notes to the Consolidated Financial Statements
62
Laiki Group operates through subsidiary companies, branches and representative offices in Cyprus
and abroad.
Review of operations
The Chairman’s statement and the comments of the Group Managing Director on pages 9 to 21 present the
developments in the Group’s activities and operations during 2005.
Results for the year
The results for 2005 are shown in the consolidated income statement on page 58. The Group profit before
provision for impairment of advances reached Cí 106,2 m compared to Cí 83,5 m in 2004. After provision for
impairment of advances of Cí 46,4 m and share of results of associates of Cí 1,4 m, profit before tax reached
Cí 61,2 m against Cí 32,9 m in 2004. After tax (Cí 17,3 m) and minority interest (Cí 1,1 m), net profit
attributable to the equity holders of the Bank reached Cí 42,8 m against Cí 21,1 m in 2004.
The results for the year 2005 are further analysed on pages 28 to 37.
Dividend
The Board of Directors recommends a dividend payment of 12% (2004: 6%) which corresponds to 6 cent
(2004: 3 cent) per share. The remaining net profit for the year is transferred to reserves.
Share capital
In July 2005 2.397.000 shares that resulted from the re-investment of the final dividend of 2004 were issued.
As a result the issued and fully paid share capital of the Bank increased from 304.011.000 shares in 2004 to
306.408.000 in 2005. The Share Capital and Share Premium Reserve are presented in Notes 39 and 40 of the
Financial Statements.
Risk management
As any other financial institution, Laiki Group is exposed to risks. The nature of these risks as well as the way
to deal with them are explained in Note 47 of the Financial Statements.
Post balance sheet events
Post balance sheet events are shown in Note 53 of the Financial Statements.
Anticipated developments / prospects
The main strategic goals of the Group are the qualitative expansion of its operations, both in Cyprus and
overseas, with operating costs under constant control and the improvement in the quality of the advances
portfolio. The Group’s strategic targets until 2008 are to reduce the ratio of non-performing loans to total loans
to 8%, to raise return on equity to 14% (taking into account the new funds from the issue of the Rights in 2006)
and to reduce the cost to income ratio to 56%.
R E P O R T
Principal activities
The principal activities of Laiki Group continue to be the provision of banking, financial and insurance
services.
A N N U A L
The Board of Directors presents its report together with the audited consolidated financial statements for the
year ended 31 December, 2005.
2 0 0 5
REPORT OF THE BOARD OF DIRECTORS
55
L A I K I
G R O U P
The Group’s profitability prospects for the future, given the current financial conditions, are very positive.
It is anticipated that the Group’s profitability for 2006 and for the coming years will continue to be on an
upward trend.
56
The positive future prospects of Laiki Group are reinforced even further through the cooperation with Marfin
Financial Group, which, together with the Tosca Investment Fund, are the new major shareholders of Laiki
Group. This new start gives a fresh dynamism to our activities, enforces our presence in Greece and many
other countries and offers a new prospect for the customers, the shareholders and, of course, the staff.
Board of Directors
The members of the Board of Directors of the Bank are shown on page 4.
In August 2005 Michalis Sarris retired from the Board of Directors.
Kikis N. Lazarides, Rena Rouvitha Panou and Anthony Townsend retire by rotation and, being eligible, offer
themselves for re-election.
In September 2005 Theophilos Theophilou was appointed Director in accordance with Article 98 of the Articles
of Association and being eligible offers himself for re-election.
The remuneration of the Members of the Board of Directors are shown in Note 50 of the Financial statements
Statement by the Members of the Board of Directors
The Members of the Board of Directors which are shown on page 4 and are responsible for the preparation of
the Financial Statements state that the information presented in the financial statements is true and complete
and this information is the product of painstaking and diligent work.
Auditors
The auditors of the Bank, PricewaterhouseCoopers Limited, have expressed their willingness to continue in
office. A resolution giving authority to the Board of Directors to fix their remuneration will be proposed at the
Annual General Meeting.
By order of the Board
Kikis N. Lazarides
Chairman
2. We conducted our audit in accordance with International Standards on Auditing. Those Standards require
that we plan and perform the audit to obtain reasonable assurance about whether the 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 the Board of Directors, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
3. In our opinion, the consolidated financial statements give a true and fair view of the financial position of the
Group as of 31 December, 2005 and its financial performance and its cash flows for the year then ended in
accordance with International Financial Reporting Standards as they were adopted by the European Union
and the International Financial Reporting Standards as they were issued by the International Accounting
Standards Board and the requirements of Cyprus Companies Law, Cap.113.
Report on other legal requirements
4. Pursuant to the requirements of the Companies Law, Cap. 113, we report the following:
We have obtained all the information and explanations we considered necessary for the purposes of our
audit.
In our opinion, proper books of account have been kept by the Company.
The Company’s financial statements are in agreement with the books of account.
In our opinion and to the best of our information and according to the explanations given to us, the
consolidated financial statements give the information required by the Companies Law, Cap. 113 in the
manner so required.
In our opinion, the information given in the report of the Board of Directors on pages 55 to 56 is
consistent with the financial statements.
PricewaterhouseCoopers Limited
Chartered Accountants
R E P O R T
A N N U A L
Report on the consolidated financial statements
1. We have audited the consolidated financial statements of The Cyprus Popular Bank Public Company
Limited (the Company) and its subsidiaries (the Group) on pages 58 to 136, which comprise the
consolidated balance sheet as at 31 December, 2005, and the consolidated income statement,
consolidated statement of changes in equity and consolidated cash flow statement for the year then ended
and the related notes. These financial statements are the responsibility of the Company’s Board of
Directors. Our responsibility is to express an opinion on these financial statements based on our audit. This
report is made solely to the Company’s members, as a body, in accordance with Section 156 of the
Companies Law, Cap. 113. Our audit work has been undertaken so that we might state to the Company’s
members those matters we are required to state to them in an auditor’s report and for no other purpose. To
the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the
Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we
have formed.
2 0 0 5
AUDITORS’ REPORT TO THE MEMBERS OF THE CYPRUS
POPULAR BANK PUBLIC COMPANY LIMITED
57
CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2005
Supplementary
information
L A I K I
G R O U P
Note
58
Interest income
Interest expense
4
4
Net interest income
Fee and commission income
Fee and commission expense
5
5
Net fee and commission income
Profit/(loss) on disposal and revaluation of securities
Foreign exchange income
Other income
6
7
Operating income
2005
Cí ‘000
2004
Cí ‘000
2005
Euro ‘000
358.868
(185.600)
302.153
(147.694)
625.748
(323.625)
173.268
154.459
302.123
53.689
(2.984)
51.333
(2.949)
93.617
(5.204)
50.705
48.384
88.413
738
12.234
20.564
(6.014)
12.146
14.148
1.286
21.332
35.856
257.509
223.123
449.010
Staff costs
Depreciation, amortisation and impairment
Administrative expenses
11
12
13
(94.128)
(19.653)
(37.545)
(85.955)
(16.843)
(36.856)
(164.128)
(34.268)
(65.466)
Profit before provision for impairment of advances
Provision for impairment of advances
14
106.183
(46.398)
83.469
(46.949)
185.148
(80.902)
59.785
36.520
104.246
Profit before impairment of available-for-sale
financial assets
Impairment of available-for-sale financial assets
Share of profit from associates
41
28
1.420
(4.942)
1.313
Profit before tax
Tax
15
61.205
(17.305)
32.891
(11.440)
106.723
(30.175)
43.900
21.451
76.548
1.139
42.761
351
21.100
1.986
74.562
43.900
21.451
76.548
14,0
6,9
24,4
Profit for the year
Attributable to:
Minority interest
Equity holders of the Bank
Earnings per share – for profit attributable to
to the equity holders of the Bank
Earnings per share - cent
41
16
The notes on pages 62 to 136 are an integral part of these consolidated financial statements.
2.477
CONSOLIDATED BALANCE SHEET
2005
Cí ‘000
2004
Cí ‘000
2005
Euro ‘000
17
18
432.091
1.365.173
471.569
945.680
753.425
2.380.411
19
20
35
23
24
25
26
172.890
3.995.698
15.817
6.303
339.005
544.546
77.874
10.490
1.776
5.880
46.246
15.110
89.832
124.214
3.490.148
13.702
6.967
202.151
385.248
67.102
9.747
1.314
4.935
54.128
101.224
301.464
6.967.179
27.580
10.991
591.113
949.508
135.788
18.290
3.096
10.253
80.637
26.347
156.637
7.118.731
5.878.129
12.412.719
37
11
122.538
5.726.421
171.833
256.367
126.857
15.063
7.290
96.634
69.722
4.636.846
173.836
231.498
110.456
9.483
8.192
83.887
213.666
9.984.988
299.621
447.019
221.195
26.265
12.712
168.498
Loan capital
38
6.523.003
213.154
5.323.920
214.124
11.373.964
371.671
Share capital and reserves attributable
to the Bank’s equity holders
Share capital
Share premium
Reserves
39
40
41
153.648
4.843
188.348
152.450
2.949
149.782
267.912
8.445
328.417
Minority interest
346.839
35.735
305.181
34.904
604.774
62.310
Total equity
382.574
340.085
667.084
7.118.731
5.878.129
12.412.719
Assets
Cash and balances with Central Banks
Due from other banks
Financial assets at fair value
through profit or loss
Advances to customers
Reinsurance assets
Corporate bonds and debentures
Government bonds and treasury bills
Available-for-sale financial assets
Other assets
Tax refundable
Deferred tax assets
Investments in associates
Intangible assets
Investment property
Property and equipment
37
28
29
30
31
Total assets
Liabilities
Due to other banks
Customer deposits
Senior debt
Insurance contract liabilities
Other liabilities
Tax payable
Deferred tax liabilities
Retirement benefit obligations
Total equity and liabilities
32
33
34
35
36
K. N. Lazarides, Chairman
Th. Theophilou, G. Psimolophitis, Members of the Board of Directors
A. Philippidou, Manager Group Financial Control
R E P O R T
Note
A N N U A L
Supplementary
information
2 0 0 5
31 DECEMBER 2005
59
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
∞ttributable to equity holders of the Bank
Fair value
and
currency
Share
Share
translation
Revenue
capital
premium
reserves
reserves
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
G R O U P
Total
Balance 1 January 2004
as previously reported
Prior year adjustment
152.450
-
2.949
-
9.998
213
115.015
-
29.393
-
309.805
213
Balance 1 January 2004 as restated
152.450
2.949
10.211
115.015
29.393
310.018
L A I K I
Note
Minority
interest
Revaluation of available-for-sale
financial assets
Revaluation of property
Deferred tax
Transfer from fair value reserves
to income statement
Impairment of available-for-sale
financial assets
Exchange differences arising in the year
Change in the minority interest from the
share issue and the acquisition of
shareholding in Laiki Bank (Hellas) S.A.
to revenue reserves
41
41
41
-
-
(3.668)
3.389
(895)
-
-
(3.668)
3.389
(895)
41
-
-
(371)
-
-
(371)
41
41
-
-
4.942
59
-
-
-
-
-
5.277
5.277
-
-
160
-
-
Profit recognised directly in equity
Profit for the year
-
-
3.296
-
160
21.100
5.160
351
8.616
21.451
Total recognised profit for 2004
-
-
3.296
21.260
5.511
30.067
152.450
2.949
13.507
136.275
41
41
41
41
41
-
-
4.350
(168)
74
675
41
-
-
(132)
Profit recognised directly in equity
Profit for the year
-
-
4.799
-
126
42.761
(308)
1.139
4.617
43.900
Total recognised profit for 2005
-
-
4.799
42.887
831
48.517
1.198
1.894
-
(9.120)
-
-
(9.120)
3.092
1.198
1.894
-
(9.120)
-
(6.028)
153.648
4.843
18.306
60
Balance 31 December 2004/
1 January 2005
Revaluation of available-for-sale
financial assets
Deferred tax
Defence tax on deemed distribution
to revenue reserves
Dividend
Reinvestment of dividend
Balance 31 December 2005
41
41,51
39,40,51
(160)
(6)
132
170.042
Cí ‘000 Cí ‘000
(117)
4.942
(58)
34.904 340.085
(15)
(5)
(288)
-
4.335
(168)
74
(11)
387
-
35.735 382.574
CONSOLIDATED CASH FLOW STATEMENT
2004
Cí ‘000
43
534.110
189.118
Tax paid
(13.779)
Net cash from operating activities
520.331
Cash flows from investing activities
Purchase of property and equipment
Purchase of computer software
Proceeds from disposal of property and equipment
Proceeds from disposal of computer software
Additions less proceeds from redemption of
available-for-sale financial assets
Income received from available-for-sale financial assets
Dividend received from investments in associates
31
29
31
28
Net cash used in investing activities
Cash flows from financing activities
Dividend paid
Interest paid on loan capital
Proceeds from issue of senior debt
Repayment of loan from syndication of banks
34
Net cash (used in)/from financing activities
Effects of exchange rate changes on cash
and cash equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
44
(5.466)
183.652
(11.316)
(2.215)
443
30
(6.862)
(4.013)
1.846
-
(137.576)
15.634
475
(48.967)
7.944
798
(134.525)
(49.254)
(6.029)
(10.197)
-
(9.936)
173.836
(69.597)
(16.226)
94.303
-
911
369.580
229.612
1.400.558
1.170.946
1.770.138
1.400.558
R E P O R T
2005
Cí ‘000
A N N U A L
Cash generated from operations
Note
2 0 0 5
61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
L A I K I
G R O U P
1. GENERAL INFORMATION
Country of incorporation
The Cyprus Popular Bank Public Company Ltd (“the Bank”) was established in Cyprus in 1901 under the
name “Popular Savings Bank of Limassol”. In 1924 it was registered as the first public company in Cyprus
under the name “The Popular Bank of Limassol Ltd”. In 1967 the Bank changed its name to “Cyprus Popular
Bank Ltd’’ and on 26 May, 2004 it was renamed to “Cyprus Popular Bank Public Company Ltd”. The Bank’s
shares are listed on the Cyprus Stock Exchange.
Principal activities
The principal activities of the Group, which are unchanged from last year, are the provision of banking,
financial and insurance services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
62
The main accounting policies adopted in the preparation of these consolidated financial statements are set
out below. These policies have been consistently applied to all years presented in these consolidated
financial statements unless otherwise stated.
Basis of preparation
These consolidated financial statements have been prepared in accordance with International Financial
Reporting Standards (IFRSs) as they were adopted by the European Union and the IFRSs as they were issued
by the International Accounting Standards Board (IASB). The consolidated financial statements comply with
both these reporting frameworks because at the time of their preparation all applicable IFRSs issued by the
IASB have been adopted by the EU through the endorsement procedure established by the European
Commission. In addition, the consolidated financial statements have been prepared in accordance with the
requirements of the Cyprus Companies Law, Cap. 113 and the Cyprus Stock Exchange Law and Regulations.
The consolidated financial statements have been prepared under the historical cost convention as modified
by the revaluation of land and buildings, investment property, available-for-sale financial assets, financial
assets and all derivative financial instruments held at fair value through profit or loss.
The preparation of financial statements in conformity with IFRSs requires the use of certain critical accounting
estimates and requires management to exercise its judgment in the process of applying the accounting
policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and
estimates are significant to the consolidated financial statements are disclosed in Note 3.
Adoption of new and revised IFRSs
As from 1 January, 2005, the Group adopted all IFRSs and International Accounting Standards (IASs), which
are relevant to its operations.
Until 31 December, 2004, the goodwill was:
Amortised by equal annual instalments on a straight-line basis as follows:
- Goodwill relating to the acquisition and increase in participating interest in subsidiary companies
abroad over 10 years
- Goodwill relating to the acquisition of Paneuropean Insurance Group over 12 years
Assessed for an indication of impairment at each balance sheet date.
A N N U A L
(a) The adoption of IFRS 3 (issued 2004) “Business Combinations” and IAS 36 (revised 2004), “Impairment
of Assets”, resulted in a change in the accounting policy for goodwill.
2 0 0 5
Adoption of new and revised IFRSs (continued)
The adoption of the above Standards did not have a material effect on the Group’s financial statements
except for the following:
R E P O R T
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
As from 1 January, 2005:
The Group ceased amortisation of goodwill.
Accumulated amortisation as at 31 December, 2004 has been eliminated with a corresponding
decrease in the cost of goodwill (Note 29).
Goodwill is tested annually for impairment, on 31 December of each year, as well as when there are
indications of impairment.
63
(b) The Group has reassessed the estimated useful lives of its intangible assets in accordance with the
provisions of IAS 38 (revised 2004) “Intangible Assets”. No adjustment resulted from this reassessment.
(c) With the adoption of IAS 39 (revised 2003) “Financial Instruments: Recognition and Measurement”, the
Group reassessed the classification of investments and transferred certain investments from the
“Corporate bonds and debentures” and “Held-to-maturity investments” categories to the “Available-forsale financial assets” category. In accordance with the transitional provisions of the standard, the transfer
of investments was applied retrospectively.
As at 31 December, 2004 the value of investments transferred from “Held-to-maturity investments” and
“Corporate bonds and debentures” to “Available-for-sale financial assets” was Cí 406.686.000. As a
consequence of this transfer, the available-for-sale financial assets fair value reserves increased by
Cí 258.000 as at 31 December, 2004. The adjustment made in the available-for-sale financial assets fair
value reserves on 1 January, 2004 was Cí 213.000.
(d) The Group adopted from 1 January, 2005, IAS 39 (amendment 2005) “Financial Instruments: Recognition
and Measurement – The Fair Value Option” with effective date 1 January, 2006, as is explained in the
accounting policy for investments.
L A I K I
G R O U P
(e) The IAS 24 (revised 2003) “Related Party Disclosures” has affected the identification of related parties
and some other related party disclosures.
64
(f)
The adoption of IFRS 4 (issued 2004) “Insurance Contracts” resulted in changes in the presentation of
insurance contracts. The changes in the presentation were made retrospectively and the Group has
adjusted all the comparative information in accordance with the provisions of this standard.
All changes in the accounting policies have been made in accordance with the transitional provisions of the
respective standard.
On the date of approval of these consolidated financial statements, the following accounting standards have
been issued but are not applicable in the preparation of these consolidated financial statements:
(a) IAS 19 (Amendment) Employee Benefits (effective from 1 January, 2006)
This amendment introduces the option of an alternative recognition approach for actuarial gains and
losses. It may impose additional recognition requirements for multi-employer plans where insufficient
information is available to apply defined benefit accounting. It also adds additional disclosure
requirements. As the Group does not intend to change the accounting policy for recognition of actuarial
gains and losses and does not participate in any multi-employer plans, adoption of this amendment will
only impact the format and extent of disclosures presented in the consolidated financial statements. The
Group will apply this amendment from 1 January, 2006.
(b) IAS 39 and IFRS 4 (Amendment) Financial Guarantee Contracts (effective from 1 January, 2006)
The amendment relates to issued financial guarantees, other than those previously asserted by the entity
to be insurance contracts, and to the recognition and valuation method of such guarantees. The Group
will apply this amendment from 1 January, 2006.
(c) IAS 21 (Amendment) Net Investment in a Foreign Operation (effective from 1 January, 2006)
The Group will apply this amendment from 1 January, 2006.
(d) IFRS 1 (Amendment) First-time adoption of International Financial Reporting Standards and
IFRS 6 (Amendment) Exploration for and Evaluation of Mineral Resources (effective from 1
January, 2006)
This amendment is not applicable to the Group’s operations.
(e) IFRS 7 Financial Instruments: Disclosures and IAS 1 Presentation of Financial Statements –
Capital Disclosures (effective from 1 January, 2007)
IFRS 7 introduces new disclosures to improve the information about financial instruments. It requires the
disclosure of qualitative and quantitative information about exposure to risks arising from financial
instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk,
including sensitivity analysis to market risk. It replaces IAS 30 Disclosures in the Financial Statements of
(f)
IAS 39 (Amendment) Cash Flow Hedge Accounting of Forecast Intragroup Transactions
(effective from 1 January, 2006)
(g) IFRS 6 Exploration and Evaluation of Mineral Resources (effective from 1 January, 2006)
(h) IFRIC 4 Determining whether an Arrangement contains a Lease (effective from 1 January, 2006)
(i)
IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental
Rehabilitation Funds (effective from 1 January, 2006)
(j)
IFRIC 6 Liabilities arising from Participating in a Specific Market – Waste Electrical and
Electronic Equipment (effective from accounting periods beginning 1 December, 2005)
(k) IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in
Hyperinflationary Economies (effective for accounting periods beginning 1 March, 2006)
(l)
IFRIC 8 Scope of IFRS 2 (effective for accounting periods beginning 1 May, 2006)
Group accounts
(a) Subsidiaries
Subsidiaries are those entities over which the Group, directly or indirectly, has power to govern the
financial and operating policies. Usually in these entities there is a shareholding of more than 50% of the
voting rights. The consolidated financial statements consolidate the financial statements of the Bank and
its subsidiaries.
2 0 0 5
(e) IFRS 7 Financial Instruments: Disclosures and IAS 1 Presentation of Financial Statements –
Capital Disclosures (effective from 1 January, 2007) (continued)
Banks and similar Financial Institutions, and disclosures requirements in IAS 32, Financial Instruments:
Disclosure and Presentation. The amendment to IAS 1 introduces disclosures about the level of an
entity’s capital and how it manages capital. The Group assessed the impact of IFRS 7 and the
amendment to IAS 1 and the additional disclosures required. The Group intends to apply IFRS 7 and the
amendment to IAS 1 from accounting periods beginning 1 January, 2007.
R E P O R T
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
A N N U A L
2.
65
L A I K I
G R O U P
2.
66
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Group accounts (continued)
(a) Subsidiaries (continued)
Subsidiaries are consolidated from the date on which control is transferred to the Group and are no
longer consolidated from the date that control ceases. The purchase method of accounting is used to
account for the acquisition of subsidiaries. The cost of an acquisition is measured at the fair value of the
assets given up, equity instruments issued or liabilities undertaken at the date of acquisition, plus costs
directly attributable to the acquisition. The excess of the cost of acquisition over the fair value of the
Group’s share of the identifiable net assets of the subsidiary acquired is recorded as goodwill.
Intercompany transactions, balances and unrealised gains and losses on transactions between group
companies are eliminated on consolidation. Where necessary, the accounting policies of subsidiaries
have been changed to ensure consistency with the policies adopted by the Group.
(b) Transactions and minority interests
The Group treats transactions with minority interests as transactions with third parties. Purchases from
minority interests result in goodwill, being the difference between any consideration paid and the
relevant share acquired of the carrying value of net assets of the subsidiary.
(c) Associates
Associates are entities over which the Group has significant influence but not control. Usually, in these
entities the Group has a shareholding between 20% and 50% of the voting rights.
Investments in associates are accounted for using the equity method of accounting and are initially
recognised at cost. Under this method the Group’s share of post-acquisition profits or losses of
associates is recognised in the income statement and its share of post-acquisition movements in
reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the
carrying amount of the investment.
Foreign currency translation
(a) Functional and presentation currency
Items included in the financial statements of each entity of the Group are measured using the currency of
the primary economic environment in which the entity operates (“the functional currency”). The
consolidated financial statements are presented in Cyprus pounds, which is the functional and
presentation currency of the parent.
(b) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates
prevailing at the date of the transaction. Foreign exchange gains and losses resulting from the
settlement of such transactions and from the translation at year-end exchange rates of monetary assets
and liabilities denominated in foreign currencies are recognised in the income statement, except in the
cases of net investment hedges where foreign exchange gains and losses are transferred to reserves.
Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of
that balance sheet.
Income and expenses for each income statement are translated at average exchange rates.
All resulting exchange differences are recognised in the foreign exchange reserves in equity.
Goodwill and fair value adjustments arising on the acquisition of overseas subsidiaries prior 31
December, 2004, are translated in Cyprus pounds at the rate of exchange ruling at the date of
acquisition. From 1 January, 2005, goodwill and fair value adjustments arising from the acquisition of
overseas subsidiaries are treated as assets and liabilities of the overseas subsidiary and translated at
the closing rate.
Interest income and expense
Interest income and expense is recognised in the income statement for all interest bearing assets and
liabilities on an accrual basis. Interest income includes interest earned on advances, investments held-tomaturity, financial assets available-for-sale, financial assets at fair value through profit or loss as well as
discount and premium on government bonds and treasury bills and other financial instruments.
The Group adopts the policy of suspending income on non-performing loans. In these cases, the recognition
of income is suspended until it is received and therefore, it is not included in the income statement but it is
transferred to an income suspense account.
In cases where this is imposed by the local authorities, the Group adopts the policy of non-accrual of income.
Instalment finance and leasing
Income from instalment finance and leasing is recognised in the income statement in a systematic manner
based on instalments receivable during the year so as to provide a constant periodic rate of return using the
net investment method. The difference between the gross amounts receivable from instalment finance and
leasing and the present value of the receivable represents unearned income. The present value of the
receivable is recognised in the balance sheet under “Advances to customers’’.
Income and expense from fees, commissions and provision of services
Fees and commissions are generally recognised on an accrual basis when the service has been provided.
Sales of services are recognised in the accounting period in which the services are rendered, by reference to
completion of the specific transaction assessed on the basis of the actual services provided as a proportion
of the total services to be provided.
2 0 0 5
R E P O R T
Foreign currency translation (continued)
(c) Group companies
The results and financial position of all the group entities that have a functional currency different from
the presentation currency are translated into the presentation currency as follows:
A N N U A L
67
L A I K I
G R O U P
Dividend income
Dividend income is recognised in the income statement when the right to receive payment is established.
68
Insurance contracts
Through its insurance subsidiaries, the Group issues insurance contracts to customers. Under these
contracts the Group accepts significant insurance risk, by agreeing to compensate the contract holder on the
occurrence of a specified uncertain future event.
(a) Premiums
Gross insurance premiums for general insurance business are recognized in the income statement over
the period covered by the related insurance contract. The proportion of premiums which relates to
periods of risk extending beyond the end of the year is reported as unearned premium and is calculated
on a daily basis.
Life assurance business premiums are accounted for when receivable.
Reinsurance premiums are accounted for in the same accounting period as the insurance premiums to
which they relate.
(b) Claims and reinsurance recoveries
Gross insurance claims for general insurance business include paid claims and provisions for
outstanding claims. The provisions for outstanding claims are based on the estimated ultimate cost of all
claims that have occurred but not settled at the balance sheet date, whether reported or not. They also
include a reduction for the expected value of salvage and other recoveries. Provisions for claims incurred
but not reported (IBNR) are made on an estimated basis, using previous years’ experience and taking
into account anticipated future changes and developments.
Gross insurance claims for life assurance reflect the total cost of claims arising during the year, including
claim handling costs and any policy holder bonuses allocated in anticipation of a bonus declaration. The
technical reserves for non-unit-linked liabilities (long-term business provision) are calculated based on
annual actuarial estimates. The technical reserves for unit-linked liabilities are at least the element of any
surrender or transfer value which is calculated by reference to the relevant fund.
Reinsurance recoveries are accounted for in the same period as the related claim.
(c) Value of life policies in force
A value is placed on life insurance contracts that are in force at the balance sheet date. The value of the
life policies in force is determined by discounting future earnings expected to emerge from business
currently in force, using appropriate assumptions in assessing factors such as recent experience and
general economic conditions. Movements in the value of in-force policies are included in the income
statement in “Other Income”.
Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax
bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax is determined
using tax rates and laws that have been enacted or substantially enacted by the balance sheet date and are
expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.
Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available
against which the temporary differences can be utilised.
Dividend distribution
Dividend distribution to the Bank’s equity holders is recognised as a liability in the consolidated financial
statements in the period in which the dividends are approved by the Bank’s equity holders.
Retirement benefits
The Group operates defined retirement benefit plans in Cyprus, in the United Kingdom and Greece. A defined
benefit plan is a plan that defines lump sum or pension benefit to be provided as a function of one or more
factors such as years of service and employee salary.
Annual contributions are made for these plans in order to build up sufficient reserves or funds during the
employees’ service life, which will fund the related benefits to be given to the employees upon retirement. The
cost of these benefits is charged to the income statement.
Retirement benefit costs relating to the defined benefit plans and which are included in staff costs are
assessed using the projected unit credit method.
Under this method, the cost of providing defined benefit pensions is charged to the income statement so as
to spread the regular cost over the service lives of employees in accordance with the advice of professionally
qualified actuaries who value the plan at least once every three years.
The obligation for the defined benefit plans is measured at the present value of the estimated future cash
outflows using interest rates of government securities, which have terms to maturity approximating the terms
of the related liability.
Actuarial gains or losses which exceed 10% of the greater of the present value of the Group’s obligation and
the fair value of the plan assets, are amortised over the expected average remaining working lives of the
participating employees.
2 0 0 5
R E P O R T
Tax
Current tax liabilities and assets for the current and prior periods are measured at the amount expected to be
paid to or recovered from the taxation authorities using the tax rates and laws that have been enacted or
substantially enacted by the balance sheet date.
A N N U A L
69
L A I K I
G R O U P
Retirement benefits (continued)
Certain Group companies operate defined contribution plans. A defined contribution plan is a plan under
which the company and the employees pay fixed contributions into a separate fund.
70
The benefits provided to the employees participating in defined contribution plans are based on the return of
the fund. Each fund is governed by specified regulations as agreed between the two parties and in
compliance with relevant statutory obligations. The contributions of the Group to the defined contribution
plans are charged to the income statement in the year in which they arise.
The Group has no legal or constructive obligations to pay further contributions if the scheme does not hold
sufficient assets to pay all employees the benefits relating to employee service in the current and prior
periods.
The Group also pays contributions to the Government Social Insurance Fund in accordance with legal
requirements.
Cash and cash equivalents
For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than
three months maturity and include cash and balances with Central Banks, including the minimum reserve
requirement that the Bank is obliged to place with Central Banks for liquidity purposes, government bonds
and treasury bills and amounts due from other banks.
Advances to customers are presented on the Balance Sheet net of any accumulated provisions for
impairment. Advances are written off if they cannot be recovered.
Recoverability of loans and other advances granted to customers is assessed on a case-by-case basis using
the repayment history of the customer. For individually significant amounts, impairment test includes other
factors such as the financial status of customer, alternative sources of finance available, the extent to which
credit worthy guarantors can support the customer and the realisable value of the security.
A credit risk provision for loan impairment is established if there is objective evidence that the Bank will be
unable to collect all amounts due on a loan according to the original contractual terms. In situations where the
loans are fully secured or there are reasonable grounds that the loan will be fully recovered, no provision is
established. The provision is measured as the difference between the loan’s carrying amount and the
recoverable amount, including all securities.
Impaired loans are continuously monitored and reviewed quarterly. If the amount of an impairment loss
decreases in a subsequent period, and the decrease can be related objectively to an event occuring after the
impairment was recognised, the excess is written back by reducing the loan impairment provision account,
accordingly.
(a) Financial assets at fair value through profit or loss
This category has two sub-categories: financial assets held for trading and those designated at fair value
through profit or loss at inception. A financial asset is classified in the held for trading category if acquired
principally for the purpose of generating a profit from short-term fluctuations in price. Derivative financial
instruments are also categorised as held for trading unless they are designated as accounting hedges.
Financial assets designated as at fair value through profit or loss at inception are those that are managed
and their performance is evaluated on a fair value basis, in accordance with a documented Group’s
investment strategy. Information about these financial assets is provided internally on a fair value basis to
the Group entity’s key management personnel.
(b) Loans and Receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are
not quoted in an active market and for which there is no intention of trading. Investment in corporate
bonds and debentures acquired directly from the issuer are classified in this category.
(c) Held-to-maturity investments
Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and
fixed maturities that the management has the positive intention and ability to hold to maturity.
(d) Available-for-sale financial assets
Available-for-sale financial assets are non-derivatives that are either designated in this category or not
classified in any of the other categories. These assets are acquired for an indefinite period of time.
Regular way purchases and sales of investments are recognized on trade-date which is the date on which
the Group commits to purchase or sell the asset. Investments are initially recognized at fair value plus
transaction costs for all financial assets not carried at fair value through profit or loss. Investments are
derecognized when the rights to receive cash flows from the investments have expired or have been
transferred and the Group has transferred substantially all risks and rewards of ownership. Available-forsale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair
value. Loans and receivables and held-to-maturity investments are carried at amortised cost using the
effective interest method.
2 0 0 5
R E P O R T
Investments
The Group classifies its investments in the following categories: financial assets at fair value through profit or
loss, loans and receivables, held-to-maturity investments and available-for-sale financial assets. The
classification depends on the purpose for which the investments were acquired. Management determines the
classification of investments at initial recognition and re-evaluates this designation at every balance sheet date.
A N N U A L
71
L A I K I
G R O U P
72
Investments (continued)
Realised and unrealised gains and losses arising from changes in the fair value of financial assets at fair value
through profit or loss are included in the income statement in the period in which they arise. Unrealised gains
and losses arising from changes in the fair value of available-for-sale financial assets are recognised in
equity. When available-for-sale financial assets are sold or impaired, the accumulated fair value adjustments
are included in the income statement.
The fair value of investments quoted in an active market is based on quoted bid prices. If the market for a
financial asset is not active and for unlisted securities, the Group establishes fair value by using valuation
techniques. These include the use of recent arm’s length transactions, reference to other instruments that are
substantially the same and discounted cash flow analysis, making maximum use of market inputs and relying
as little as possible on entity specific inputs.
The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or
a group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a
significant or prolonged decline in the fair value of the security below its cost is considered as an indicator of
possible impairment. If any such evidence exists for available-for-sale financial assets the cumulative loss
which is measured as the difference between the acquisition cost and the current fair value, less any
impairment loss on that financial asset previously recognised in profit or loss, is removed from equity and
recognised in the income statement. Impairment losses recognised in the income statement on equity
instruments are not reversed through the income statement.
Derivative financial instruments
Derivative financial instruments include forward exchange contracts, currency and interest rate swaps and
other derivative financial instruments. These are initially recognised in the balance sheet at fair value, which
includes transaction costs and subsequently are remeasured at their fair value. Fair values are obtained from
quoted market prices, discounted cash flow models and other pricing models as appropriate. All derivatives
are shown as financial assets at fair value through profit or loss when fair value is positive and as financial
liabilities when fair value is negative.
A derivative may be embedded in another financial instrument, known as “host contract”. In such
combinations, the derivative instrument is separated from the host contract and treated as separate
derivative, provided that its risks and economic characteristics are not closely related to the host contract and
the host contract is not carried at fair value with unrealised gains and losses reported in the income
statement.
The Group uses derivatives to provide effective economic hedging under the direction of the Group Risk
Management Unit. In cases where derivatives are used for the hedge of a net investment in a foreign entity
and the criteria of IAS 39 for hedge accounting are satisfied, any fair value changes are included in reserves.
In all other cases the fair value adjustments on derivative financial instruments are included in the income
statement.
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the net identifiable assets of
the acquired undertaking at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in the
balance sheet in “Intangible Assets”. Goodwill is tested for impairment annually and whenever there are such
indications and carried at cost less accumulated impairment losses. Goodwill is allocated to cash-generating
units for the purpose of impairment testing, using the country of operation and economic segment as the
allocation bases.
Computer software
Costs that are directly associated with identifiable and unique computer software products controlled by the
Group and that will probably generate economic benefits exceeding costs beyond one year are recognised as
intangible assets. Subsequently computer software are carried at cost less any accumulated amortisation and
any accumulated impairment losses. Expenditure, which enhances or extends the performance of computer
software programmes beyond their original specifications is recognised as a capital improvement and added
to the original cost of the computer software.
Costs associated with maintenance of computer software programmes are recognised as an expense when
incurred. Computer software costs are amortised using the straight-line method over their useful lives, not
exceeding a period of 5 years. Amortisation commences when the computer software is available for use and
is included within “Depreciation, amortisation and impairment” in the income statement.
Operating leases
Leases in which a significant portion of the risks and rewards of ownerships are retained by the lessor are
classified as operating leases. Payments made under operating leases (net of any incentives received from
the lessor) are charged to the income statement on a straight-line basis over the period of the lease.
Land and buildings are shown at fair value, based on valuations by external independent valuers, less
subsequent depreciation for buildings. Any accumulated depreciation at the date of revaluation is eliminated
against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the
asset. Revaluations are carried out with sufficient regularity to ensure that the carrying amount does not differ
materially from that which would be determined using fair value at the balance sheet date. All other property
and equipment are stated at historical cost less depreciation. Historical cost includes expenditure that is
directly attributable to the acquisition of property and equipment.
2 0 0 5
R E P O R T
Investment property
Investment property includes land and buildings, owned by the Group with the intention of earning rentals or
for capital appreciation or both, and are not used by the Group. Investment property is stated at fair value, as
is determined by independent professional valuers who apply recognised valuation techniques. Changes in
fair values are included within “Other income” in the income statement.
A N N U A L
73
L A I K I
G R O U P
74
Property and equipment (continued)
Increases in the carrying amount arising on revaluation of land and buildings are credited to fair value
reserves in shareholders’ equity. Decreases that offset previous increases of the same asset are charged
against those reserves. All other decreases are charged to the income statement. Each year the difference
between depreciation based on the revalued carrying amount of the asset charged to the income statement
and depreciation based on the asset’s original cost is transferred from property fair value reserves to retained
earnings.
Land is not depreciated. Depreciation on other property and equipment is calculated using the straight-line
method to allocate the cost or revalued amount of each asset less their residual values, over their estimated
useful lives. The estimated useful lives are as follows:
Freehold buildings
Furniture and equipment
Years
33
3 Ì¤¯ÚÈ 10
Property leased for up to 33 years is depreciated on a straight-line basis over the term of the lease.
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet
date.
Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down
immediately to its recoverable amount.
Expenditure for repairs and maintenance of property and equipment is charged to the income statement of the
year in which they were incurred. The cost of major renovations and other subsequent expenditure are included
in the carrying amount of the asset or recognised as a separate asset, as appropriate, when it is probable that
future economic benefits associated with the asset will flow to the Group and the cost of the asset can be
measured reliably. Major renovations are depreciated over the remaining useful life of the related asset.
Gains and losses on disposal of property and equipment are determined by comparing proceeds with
carrying amount and are included in the income statement. When revalued assets are sold, the amounts
included in the property fair value reserves are transferred to retained earnings.
Properties in the course of construction for administrative purposes or for purposes not yet determined are
carried at cost less any impairment loss where the recoverable amount of the asset in the course of
construction is estimated to be lower than its carrying value. Depreciation for these assets commences when
the assets are ready for their intended use.
Loan capital
Loan capital is recognised initially at fair value, being the issue proceeds (fair value of consideration received)
net of transaction costs incurred. Loan capital is subsequently stated at amortised cost and any difference
between net proceeds and the redemption value is recognised in the income statement over the period of the
borrowings.
When convertible bonds are issued, the fair value of the conversion option is determined. This amount is
recorded separately in shareholders’ equity. The Group does not recognise any change in the value of this
option in subsequent periods. The remaining obligation to make future payments of principal and interest to
bond holders is recalculated using a market interest rate for an equivalent non-convertible bond and is
presented on an amortised cost basis in loan capital until extinguished on conversion or maturity of the bonds.
Share capital
Ordinary shares are classified as equity.
Provisions
Provisions are recognised when the Group has a present legal or constructive obligation as a result of past
events, it is more likely than not that an outflow of resources will be required to settle the obligation, and a
reliable estimate of the amount of the obligation can be made. Where the Group expects a provision to be
reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset
but only when the reimbursement is virtually certain.
The Group recognises a provision for onerous contracts when the expected benefits to be derived from a
contract are less than the unavoidable costs of meeting the obligations under the contract.
Credit-related transactions
Acceptances comprise undertakings by the Group to pay bills of exchange drawn on customers. The Group
expects most acceptances to be settled simultaneously with the reimbursement from the customers.
Acceptances are accounted for as off-balance sheet transactions and are disclosed as contingent liabilities
and commitments.
2 0 0 5
R E P O R T
Impairment of non-financial assets
Assets that have an indefinite useful life are not subject to amortisation and are tested annually for
impairment. Assets that are subject to depreciation or amortisation are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment
loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The
recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes
of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable
cash flows (cash-generating units).
A N N U A L
75
L A I K I
G R O U P
76
Credit-related transactions (continued)
The Group is involved in trading transactions whereby it issues guarantees and documentary credits (known
as credit-related instruments) on behalf of its customers. These instruments are treated as credit
commitments and thus not shown on the balance sheet unless and until the Group is called upon to make a
payment under the instrument. Assets arising from payments to a third party where the Group is awaiting
reimbursement from the customer are shown on the balance sheet, less any necessary provisions.
Fiduciary activities
Assets and income arising thereon together with related undertakings to return such assets to customers are
excluded from these financial statements where the Group acts in a fiduciary capacity such as nominee, trustee
or agent.
Segment reporting
Business segments provide products or services that are subject to risks and returns that are different from
those of other business segments. Geographical segments provide products or services within a particular
economic environment that are subject to risks and returns that are different from those of segments
operating in other economic environments.
The primary segment of the Group is by business class. There are three major classes of business:
(a) Banking services, which include the activities of Cyprus Popular Bank Public Company Ltd, Laiki Bank
(Hellas) S.A., Laiki Bank (Australia) Ltd and Laiki Bank (Guernsey) Ltd.
(b) Insurance services, which include the activities of the life assurance and general insurance subsidiaries of
the Group.
(c) Financial and other services, which include the activities of all other subsidiaries of the Group.
The secondary geographical segments of the Group are analysed as follows:
(a) Operations in Cyprus, which incorporate the activities of all Group companies in Cyprus.
(b) Operations in Greece.
(c) Operations in the United Kingdom, which incorporate the activities of Laiki Bank (Guernsey) Ltd.
(d) Operations in Australia.
The costs of each Group company are apportioned based on the relevant geographical segment above.
The pricing of the transactions between the Group companies is on an arms-length basis.
Comparatives
Where necessary, comparative figures have been adjusted to conform with changes in presentation in the
current year. Comparative figures were adjusted to conform with changes in accounting policies, as explained
above.
(a) Impairment losses on advances
The Group reviews its loan portfolio to assess impairment at least quarterly. In determining whether an
impairment loss should be recorded in the income statement, the Group makes judgments as to whether
there is sufficient evidence indicating that the balance of a loan or a portfolio of loans outstanding will not
be fully recovered. This evidence may include an adverse change in the payment status of the borrower,
the repayment history and the realisable value of the collateral, if any. The methodology and assumptions
used are reviewed regularly to minimise any differences between loss estimates and actual loss
experience.
(b) Fair value of financial instruments
The fair value of financial instruments that are not quoted in an active market are determined using
valuation techniques. The Group uses its judgment to select a variety of methods and make assumptions
that are mainly based on market conditions existing at each balance sheet date. The valuation techniques
used are frequently assessed to ensure their validity and appropriateness. Changes in methods and
assumptions about these factors could affect the reported fair value of financial instruments.
(c) Estimated impairment of goodwill
The Group tests annually whether goodwill has suffered any impairment in accordance with the accounting
policy stated in Note 2. The recoverable amounts of cash-generating units have been determined based
on value in use calculations. These calculations require the use of estimates as shown in Note 29.
If the revised estimated net margin at 31 December, 2008 was 10% lower than management’s estimates
at 31 December, 2005, the Group would have recognised a further impairment against goodwill by
Cí 5.283.000. If the revised estimated after-tax rate applied to the discounted cash flows was 10% higher
than management’s estimates at 31 December, 2005, the Group would have recognised a further
impairment of goodwill of Cí 8.153.000.
2 0 0 5
R E P O R T
Critical accounting estimates and assumptions
The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will,
by definition, seldom equal the related actual results. The estimates and assumptions that have a significant
risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial
year are discussed below:
A N N U A L
3. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
Accounting estimates and judgments are continually evaluated and are based on historical experience and
other factors, including expectations of future events that are believed to be reasonable under the
circumstances.
77
L A I K I
G R O U P
3. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (continued)
78
Critical accounting estimates and assumptions (continued)
(d) Value of life policies in force
The value of life policies in force is determined in consultation with qualified actuaries as shown in Note 2.
The value of life policies in force is calculated by discounting future profits that are expected to emerge
from in force business at a discount rate that includes a risk margin. The risk margin reflects the
uncertainty in expected future profits. Projections of profit are based on prudent assumptions relating to
macroeconomic fundamentals, future mortality, persistency and level of administrative and selling
expenses, and average return on investments. The assumptions used in the actuarial valuation are shown
in Note 29. The assumptions and valuation method are reviewed on each reporting date. Any changes in
the estimates and assumptions made are likely to have an effect on the value of life policies in force.
(e) Life assurance business
The estimate for future benefits for long term life insurance contracts is determined by an actuarial
valuation by using appropriate assumptions such as mortality rates, returns on investments made to
cover the future insurance claims, the growth in administrative expenses and the maintainability of
insurance policies. Mortality rates used are based on international standardised tables that reflect past
experience. The average return of investment estimate is established by using current returns, as well as,
predictions on economy’s and capital markets’ performance.
The assumptions and valuation method are reviewed on each reporting date. Any adjustments are
reflected in the insurance contract liabilities in the consolidated balance sheet.
An estimate for gross claims relating to short term general and health insurance contracts, is made at the
balance sheet date, whether reported or not. The estimate takes into account past experience and related
insurance market trends.
(f) Insurance policy claims
Insurance liabilities for claims are calculated by using information relating to the claim, experience and
other relevant factors, on a case-by-case basis.
The Group is liable for all events covered by the policy even if the loss is discovered after the policy’s
expiry date. The method employed to estimate the total cost of claims occurred but not reported is shown
in Note 47.
(g) Retirement benefits
The present value of liabilities arising from staff retirement benefits is determined with an actuarial
valuation using specific assumptions. These assumptions are shown in Note 11. According to the relevant
Group’s accounting policy for retirement benefits, any adjustment (or changes) in the assumptions are
likely to have an effect on the level of the unrecognised actuarial loss.
Critical judgments in applying Group accounting policies
(a) Held-to-maturity investments
The Group follows the guidance provided in IAS 39 and classifies non-derivative financial assets with fixed
or determinable payments and fixed maturity as held-to-maturity investments. Critical judgment is
required when applying the classification, which takes into account the Group’s intention and ability to
hold investments to maturity. If the Group fails to hold the investments to maturity for any reason other
than those explained in IAS 39, all financial assets held in the asset class will have to be reclassified as
available-for-sale financial assets. Under these circumstances, investments will be presented at fair value
and not amortised cost, while the book value of investments will increase by Cí 8.500.000 with a
corresponding credit in the fair value reserve under equity.
(b) Impairment of available-for-sale investments
The Group follows the guidance provided in IAS 39 to determine if an investment has been impaired. This
decision requires critical judgment. In making this judgment, the Group evaluates among other factors
whether there has been a significant or prolonged decline in the fair value of the investment compared to
cost, as well as the financial viability and the short term future of the investment by considering factors
such as the industry and sector performance, changes in technology and operational and financing cash
flows.
If the estimates made regarding the duration and extent of fair values being below cost, do not materialise
within 2006, the Group will not suffer significant losses in the 2006 consolidated financial statements.
2 0 0 5
R E P O R T
Critical accounting estimates and assumptions (continued)
(h) Tax
The Group is subject to income tax in various jurisdictions in which it operates. In order to establish the
corporation tax, as presented in the balance sheet, significant assumptions are required. For specific
transactions and calculations the ultimate tax determination is uncertain. The Group recognises liabilities
for anticipated tax issues based on estimates of whether additional taxes will be due. Where the final tax
outcome of these matters is different from the amounts that were initially recorded, such differences will
impact the income tax and deferred tax provisions in the period in which such determination is made.
A N N U A L
3. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (continued)
79
L A I K I
G R O U P
4. NET INTEREST INCOME
Interest income
Interest from advances to customers
Interest from other banks
Interest from bonds and other interest
Interest expense
Interest on customer deposits
Interest to other banks
Interest on loan capital and other interest
2005
Cí ‘000
2004
Cí ‘000
260.497
67.587
30.784
231.178
48.601
22.374
358.868
302.153
150.342
22.487
12.771
115.235
20.866
11.593
185.600
147.694
2005
Cí ‘000
2004
Cí ‘000
49.591
1.976
2.122
47.688
1.634
2.011
53.689
51.333
1.545
1.439
1.562
1.387
2.984
2.949
80
5. NET FEE AND COMMISSION INCOME
Fee and commission income
Banking related fees and commissions
Portfolio and other management fees
Other fees and commissions
Fee and commission expense
Fees paid
Commissions paid
6. PROFIT/(LOSS) ON DISPOSAL AND REVALUATION OF SECURITIES
2005
Cí ‘000
Loss on disposal of financial assets at fair value
Profit/(loss) on revaluation of financial assets
at fair value through profit or loss
(844)
2004
Cí ‘000
(2.660)
1.582
(3.354)
738
(6.014)
Income from insurance operations
Dividend from available-for-sale financial assets
Dividend from financial assets at fair value through profit or loss
Fair value gains on investment property
Other income
61.823
(69.745)
23.076
56.285
(49.825)
3.477
15.154
9.937
51
293
509
4.557
135
199
3.877
20.564
14.148
2 0 0 5
2004
Cí ‘000
R E P O R T
Net premiums and other income from insurance contracts (Note 8)
Net benefits, claims and other expenses from insurance contracts (Note 9)
Net income from assets backing policyholders liabilities (Note 10)
2005
Cí ‘000
A N N U A L
7. OTHER INCOME
8. NET PREMIUMS AND OTHER INCOME FROM INSURANCE CONTRACTS
2005
Cí ‘000
2004
Cí ‘000
Long-term insurance contracts without fixed terms
Long-term insurance contracts with fixed and guaranteed terms
Long-term insurance contracts with discretionary participating feature (DPF)
Short-term insurance contracts:
Premiums receivable
Change in unearned premiums provision
31.389
2.390
2.180
30.721
2.042
2.414
36.274
(1.498)
32.746
(1.277)
Premium revenue arising from insurance contracts issued
70.735
66.646
Short-term reinsurance contracts:
Premiums payable
Change in unearned premiums provision
Long-term reinsurance contracts
(13.152)
676
(2.134)
(11.841)
(69)
(1.796)
Premium revenue ceded to reinsurers on contracts issued
(14.610)
(13.706)
56.125
52.940
3.015
378
2.305
2.597
517
231
61.823
56.285
Net premium revenue
Other income from insurance contracts:
Policy administration and asset management
Surrender benefits
Change in the value of life policies in force (Note 29)
81
9. NET BENEFITS, CLAIMS AND OTHER EXPENSES FROM INSURANCE
CONTRACTS
L A I K I
G R O U P
2005
Cí ‘000
82
Insurance benefits
Insurance contracts claims
Insurance contracts claims recovered from reinsurers
Commission paid and other expenses from insurance contracts
Insurance benefits
Long-term insurance contracts without fixed terms (unit-linked):
Death benefits
Change in unit price
Long-term insurance contracts with discretionary participating feature (DPF):
Death benefits
Interest credited
Long-term insurance contracts with fixed and guaranteed terms:
Death, maturity and surrender benefits
(Decrease)/increase in liabilities
2004
Cí ‘000
48.581
19.933
(6.874)
8.105
30.867
17.758
(6.099)
7.299
69.745
49.825
21.380
20.801
17.318
7.280
4.966
1.175
3.840
972
421
(162)
435
1.022
48.581
30.867
Reinsurance
Cí ‘000
Net
Cí ‘000
Insurance claims
Gross
Cí ‘000
2005
Current year claims
Additional cost for prior year claims
2004
Current year claims
Additional cost for prior year claims
17.433
2.500
(6.456)
(418)
10.977
2.082
19.933
(6.874)
13.059
13.075
4.683
(5.027)
(1.072)
8.048
3.611
17.758
(6.099)
11.659
Interest income
Profit/(loss) from disposal and revaluation of securities
Dividends
Fair value gains on investment property
5.895
16.629
507
45
4.315
(971)
133
-
23.076
3.477
2005
Cí ‘000
2004
Cí ‘000
76.438
70.128
14.973
187
2.530
14.311
188
1.328
94.128
85.955
11 . S T A F F C O S T S
Salaries and employer’s contributions
Retirement benefit costs:
Defined benefit plan
Defined contribution plan
Other staff costs
The number of employees of the Group at the end of the year analysed by class of business was as follows:
Banking services
Insurance services
Financial and other services
2005
2004
3.008
317
253
2.932
315
247
3.578
3.494
Defined Benefit Plans
The amounts recognised in the balance sheet with respect to the defined benefit plans are shown below:
2005
Cí ‘000
Present value of funded obligations
Fair value of plan assets
Present value of unfunded obligations
Unrecognised actuarial loss
Retirement benefit obligations in the balance sheet
2004
Cí ‘000
11.705
(5.215)
6.550
(3.723)
6.490
115.640
(25.496)
2.827
103.975
(22.915)
96.634
83.887
2 0 0 5
2004
Cí ‘000
R E P O R T
2005
Cí ‘000
A N N U A L
10. NET INCOME FROM ASSETS BACKING POLICYHOLDER LIABILITIES
83
11. STAFF COSTS (continued)
L A I K I
G R O U P
Defined Benefit Plans (continued)
The amounts recognised in the income statement with respect to the defined benefit plans are as follows:
2004
Cí ‘000
2005
Cí ‘000
Current service cost
Interest cost on plan liabilities
Expected return on plan assets
Actuarial loss recognised in the year
8.417
6.599
(265)
222
8.442
5.444
425
14.311
14.973
The actual return on plan assets was a profit of Cí 971.000 (2004: profit of Cí 194.000).
Movement in the retirement benefit obligations recognised in the balance sheet:
84
2004
Cí ‘000
2005
Cí ‘000
Balance 1 January
Total expenses charged in the income statement
Payments to departing members
Contributions paid
Exchange differences
83.887
14.973
(1.790)
(425)
(11)
72.734
14.311
(2.684)
(465)
(9)
Retrement benefit obligations in the balance sheet
96.634
83.887
The principal assumptions used in the actuarial valuations were:
Discount rate
Average expected return on plan assets
Average increase in basic insurable earnings
Average increase in total salaries
Average increase in inflation
Rate of increase of pension payments
Cyprus
2005
United
Kingdom
Greece
Cyprus
2004
United
Kingdom
5,0%
5,0%
4,5%
7,0%
2,5%
-
4,7%
6,6%
4,1%
2,9%
2,6%
3,9%
3,9%
3,0%
2,0%
-
6,0%
6,0%
4,5%
7,5%
2,5%
-
6,0%
6,6%
4,5%
2,5%
2,5%
Greece
3,9%
3,9%
3,0%
2,0%
-
7.264
3.575
8.814
7.756
1.391
3.326
4.370
-
19.653
16.843
2005
Cí ‘000
2004
Cí ‘000
13. ADMINISTRATIVE EXPENSES
Occupancy costs
Computer maintenance costs
Marketing and sales expenses
Operating lease rentals
Printing and stationery expenses
Telephone expenses
Audit fees
Profit on disposal of property and equipment (Note 31)
Other administrative expenses
3.563
3.834
7.471
6.650
2.135
1.531
300
(47)
12.108
2.966
4.015
7.373
6.044
1.963
1.419
280
(650)
13.446
37.545
36.856
2005
Cí ‘000
2004
Cí ‘000
64.279
(17.881)
65.346
(18.397)
46.398
46.949
14. PROVISION FOR IMPAIRMENT OF ADVANCES
Provision for impairment of advances for the year (Note 22)
Release of provision and recoveries (Note 22)
2 0 0 5
2004
Cí ‘000
R E P O R T
Depreciation of property and equipment (Note 31)
Fair value adjustment of property (Note 31)
Amortisation of computer software (Note 29)
Amortisation of goodwill (Note 29)
Impairment of goodwill (Note 29)
2005
Cí ‘000
A N N U A L
12. DEPRECIATION, AMORTISATION AND IMPAIRMENT
85
15. TAX
L A I K I
G R O U P
2005
Cí ‘000
86
2004
Cí ‘000
Current year tax
Cyprus corporation tax
Defence tax
Overseas tax
Deferred tax (Note 37)
7.366
22
5.227
(1.305)
4.097
57
5.527
523
Total current year tax
11.310
10.204
5.995
1.236
17.305
11.440
Prior year tax
Total tax charge
As from 1 January, 2003 the profit of the Bank and its subsidiaries in Cyprus are subject to corporation tax at
the rate of 10%. For the years 2003 and 2004 only, profits over Cí 1 m were subject to additional corporation
tax at the rate of 5%.
Under certain circumstances, interest may be subject to defence tax at the rate of 10%. In this case 50% of
interest income may be exempted from corporation tax, leading to an effective tax rate of 15%. In certain
circumstances dividends from overseas may be subject to defence tax at the rate of 15%.
The profit from overseas operations is subject to taxation at the tax rates applicable in the countries in which
the profit is derived.
The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the
applicable tax rates as follows:
2005
Cí ‘000
2004
Cí ‘000
Profit before tax
61.205
32.891
Tax calculated at the applicable tax rates
Tax effect of expenses not deductible for tax purposes
Tax effect of income not subject to tax
Tax effect of different tax rates in Greece, the
United Kingdom, Australia and Guernsey
6.121
2.971
(1.145)
4.598
2.747
(369)
3.363
3.228
Total current year tax
11.310
10.204
Weighted average number of shares in issue during the year
Earnings per share – cent
42.761
21.100
2005
‘000
2004
‘000
305.167
304.011
14,0
6,9
Fully diluted earnings per share is not disclosed, as the price for the conversion of debentures is higher than
the market price of the Cyprus Popular Bank Public Company Ltd share at the Cyprus Stock Exchange as at
31 December, 2005.
17. CASH AND BALANCES WITH CENTRAL BANKS
87
Cash and balances with Central Banks include obligatory minimum reserves held for liquidity purposes.
These reserves are not available for financing the Group’s operational transactions.
2005
Cí ‘000
2004
Cí ‘000
Cash in hand
Balances with Central Banks other than obligatory
reserves for liquidity purposes
Obligatory reserves for liquidity purposes
69.773
51.767
221.577
140.741
243.331
176.471
Cash and balances with Central Banks (Note 44)
432.091
471.569
2005
Cí ‘000
2004
Cí ‘000
37.966
1.327.207
28.645
917.035
1.365.173
945.680
895.176
422.752
47.245
-
508.106
368.058
63.287
6.229
1.365.173
945.680
18. DUE FROM OTHER BANKS
Items in course of collection from other banks
Placements with other banks
Maturity analysis
Repayable on demand
Three months or less
Over three months but less than one year
Over one but less than five years
2 0 0 5
2004
Cí ‘000
R E P O R T
Profit attributable to the equity holders of the Bank
2005
Cí ‘000
A N N U A L
16. EARNINGS PER SHARE
L A I K I
G R O U P
19. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS
88
Debt securities
Equity securities
Derivative financial instruments with positive fair value (Note 42)
Debt securities
Listed on the Cyprus Stock Exchange
Listed on other Stock Exchanges
Not listed
Equity securities
Not listed
2005
Cí ‘000
2004
Cí ‘000
83.144
85.182
4.564
45.938
76.120
2.156
172.890
124.214
23.255
58.089
1.800
22.666
3.052
20.220
83.144
45.938
35.263
49.563
356
26.181
49.340
599
85.182
76.120
2005
Cí ‘000
2004
Cí ‘000
74.742
98.148
35.408
88.806
172.890
124.214
The carrying amounts of the above financial assets are classified as follows:
Held for trading
Designated at fair value through profit or loss at inception
Financial assets at fair value through profit or loss are presented as part of “Cash generated from operations”
in the cash flow statement (Note 43).
Changes in fair values of financial assets at fair value through profit or loss are recorded in “Profit/(loss) on
disposal and revaluation of securities” in the income statement (Note 6).
Financial assets designated at fair value through profit or loss at inception are those whose performance is
evaluated on a fair value basis, in accordance with a documented Group’s investment strategy. Information
about these financial assets is provided internally on a fair value basis to the Group entity’s key management
personnel. The Group’s investment strategy is to invest free cash resources in equity securities as part of the
Group’s long-term capital growth strategy.
Instalment finance and leasing (Note 21)
3.936.572
378.741
3.387.838
375.168
Provision for impairment of advances (Note 22)
4.315.313
(319.615)
3.763.006
(272.858)
3.995.698
3.490.148
The amount of income suspended is included in provision for impairment of advances.
Maturity analysis
Repayable on demand
Over five years
Analysis by sector
Trade
Manufacturing
Tourism
Property and construction
Personal, professional and home loans
Other sectors
Analysis by geographical area
Cyprus
United Kingdom
Greece
Australia
2005
Cí ‘000
2004
Cí ‘000
986.769
806.229
309.427
888.767
1.324.121
1.018.942
586.125
311.143
863.749
983.047
4.315.313
3.763.006
782.897
382.483
379.632
749.798
1.548.396
472.107
741.728
343.103
319.556
626.610
1.334.005
398.004
4.315.313
3.763.006
2.461.783
345.074
1.334.810
173.646
2.285.683
271.342
1.073.558
132.423
4.315.313
3.763.006
2 0 0 5
2004
Cí ‘000
R E P O R T
2005
Cí ‘000
A N N U A L
20. ADVANCES TO CUSTOMERS
89
L A I K I
G R O U P
21. INSTALMENT FINANCE AND LEASING
90
2005
Cí ‘000
2004
Cí ‘000
Gross investment in hire purchase and finance leases
Unearned finance income
449.380
(70.639)
437.043
(61.875)
Present value of minimum hire purchase and finance lease payments
378.741
375.168
Provision for impairment of hire purchase and finance leases
(43.139)
(44.187)
335.602
330.981
88.268
93.545
208.583
58.984
65.899
87.595
247.129
36.420
449.380
437.043
76.577
80.088
176.082
45.994
61.430
75.016
210.447
28.275
378.741
375.168
Gross investment in hire purchase and finance leases
Over five years
Present value of minimum hire purchase and finance lease payments
Over five years
The most important terms of the hire purchase contracts are as follows:
The hirer pays a nominal fee at the end of the hire purchase term in exchange for the right to purchase the
goods.
The hirer pays monthly instalments including interest on the amount outstanding.
The hirer is responsible for any loss or damage incurred on the goods concerned.
The most important terms of the finance lease contracts are as follows:
The lessee undertakes the equipment under lease for the rental period concerned and pays during that
period rentals and any other amounts that are payable in accordance with the terms of the contract.
The rentals and any other amounts payable are subject to interest.
The lessee is obliged to maintain the equipment in good condition and to compensate the owner for any
damage or fault occurred.
Upon expiry of the agreement, the lessee can either return the equipment to the owner or pay a minimal
annual nominal fee in exchange for the right to continue to use the equipment.
Suspension
of income
Total
Cí ‘000
Cí ‘000
Cí ‘000
2005
Balance 1 January
Provision for impairment of advances for the year
Release of provision and recoveries
Loans written-off
Suspension of income for the year
218.349
64.279
(17.881)
(15.650)
(231)
-
54.509
(8.099)
(2.238)
26.577
272.858
64.279
(25.980)
(17.888)
(231)
26.577
Balance 31 December
248.866
70.749
319.615
2004
Balance 1 January
Provision for impairment of advances for the year
Release of provision and recoveries
Loans written-off
Suspension of income for the year
180.246
65.346
(18.397)
(8.579)
(267)
-
36.626
(5.181)
(1.193)
24.257
216.872
65.346
(23.578)
(9.772)
(267)
24.257
Balance 31 December
218.349
54.509
272.858
The total amount of non-performing loans, including accumulated income suspended, amounts to
Cí 498.014.000 (2004: Cí 479.020.000). The total amount of non-performing loans excluding accumulated
income suspended amounts to Cí 427.265.000 (2004: Cí 424.511.000).
23. CORPORATE BONDS AND DEBENTURES
This amount comprises of non-quoted bonds and debentures in Cypriot companies acquired directly from the
issuer and is measured at amortised cost.
A N N U A L
Provisions
R E P O R T
2 0 0 5
22. PROVISION FOR IMPAIRMENT OF ADVANCES
91
L A I K I
G R O U P
24. GOVERNMENT BONDS AND TREASURY BILLS
92
2005
Government bonds and treasury bills eligible for
rediscounting with the Central Bank of Cyprus
Other government bonds and treasury bills
Maturity analysis
Over five years
Not listed
Held for
trading
Cí ‘000
Held-tomaturity
Cí ‘000
Availablefor-sale
Cí ‘000
Total
Cí ‘000
37.924
15.645
218.364
2.557
10.446
54.069
266.734
72.271
53.569
220.921
64.515
339.005
3.521
32.709
17.339
20.119
107.011
72.549
21.242
2.510
16.260
45.745
20.119
113.042
121.518
84.326
53.569
220.921
64.515
339.005
37.924
14.492
1.153
218.364
2.464
93
3.823
60.692
-
260.111
77.648
1.246
53.569
339.005
220.921
64.515
Movement for the year
Balance at 1 January
Additions
Redemptions
Amortisation of premium/discount
Revaluation
127.687
156.134
(60.900)
(1.999)
(1)
-
40.325
26.318
(2.318)
456
(266)
Balance at 31 December
220.921
64.515
19.570
14.569
127.560
127
8.859
31.466
155.989
46.162
34.139
127.687
40.325
202.151
3.849
20.327
9.963
48.065
12.000
66.069
1.553
13.957
26.368
51.914
12.000
100.353
37.884
34.139
127.687
40.325
202.151
19.570
13.489
1.080
97.560
33
30.094
1.609
31.465
7.251
118.739
44.987
38.425
34.139
127.687
40.325
202.151
166.303
88.800
(127.370)
(44)
(2)
-
27.761
24.053
(11.073)
(529)
113
127.687
40.325
2004
Government bonds and treasury bills eligible for
rediscounting with the Central Bank of Cyprus
Other government bonds and treasury bills
Maturity analysis
Over five years
Not listed
Additions
Redemptions
Revaluation
Not listed
519.611
24.935
364.623
20.625
544.546
385.248
18.940
515.781
9.825
11.742
360.892
12.614
544.546
385.248
Balance 1 January
Additions
Redemptions
Revaluation for the year
385.248
215.104
(77.528)
4.601
(319)
17.440
351.837
116.041
(67.074)
(3.781)
236
(12.011)
544.546
385.248
The deficit or surplus from the revaluation of investments at fair value at the year end is accounted for in the
fair value reserves.
The Group holds 34,7% of the issued share capital of Universal Life Insurance Co. Ltd, the total issued share
capital of which is Cí 3,3 m. The Group does not exercise significant influence in the management of the
company and, consequently, the company is not considered to be an associate. This investment is accounted
for as an available-for-sale financial asset.
The fair value of the Bank’s shareholding in Universal Life Insurance Co. Ltd and Lumiere T.V. Ltd has been
estimated using available financial information for those companies.
The fair value of the listed available-for-sale financial assets in equity was determined based on the closing
prices of the shares at 31 December, 2005.
26. OTHER ASSETS
Interest receivable
Receivables arising from insurance and reinsurance contracts (Note 27)
Non-current financial assets held for sale
Other assets
2005
Cí ‘000
2004
Cí ‘000
30.689
10.670
11.684
24.831
21.605
12.629
5.210
27.658
77.874
67.102
2 0 0 5
2004
Cí ‘000
R E P O R T
Debt securities
Equity securities
2005
Cí ‘000
A N N U A L
25. AVAILABLE-FOR-SALE FINANCIAL ASSETS
93
27. RECEIVABLES ARISING FROM INSURANCE AND REINSURANCE CONTRACTS
L A I K I
G R O U P
2005
Cí ‘000
Amounts due from contract holders
Provision for impairment of receivables from contract holders
Amounts due from agents, brokers and intermediaries
Provision for impairment of receivables from agents,
brokers and intermediaries
Amounts due from reinsurers
2004
Cí ‘000
5.781
(200)
5.268
5.796
(152)
6.997
(660)
481
(417)
405
10.670
12.629
2005
Cí ‘000
2004
Cí ‘000
28. INVESTMENTS IN ASSOCIATES
94
Balance 1 January
Share of results after tax
Dividend from associate
Disposal of Laiki CLR Ventures Ltd
4.935
1.420
(475)
-
9.434
1.313
(798)
(5.014)
Balance 31 December
5.880
4.935
The Group’s share in the associate company JCC Payments Systems Ltd, which was incorporated in Cyprus
and is not listed in the Cyprus Stock Exchange, amounts to 30% at 31 December, 2005 (2004: 30%). The
financial information of the company is as follows:
Assets
Liabilities
Revenues
Profit
Issued share capital
2005
Cí ‘000
2004
Cí ‘000
23.568
3.988
10.017
4.735
1.000
19.295
2.866
9.821
4.524
1.000
Laiki Investments E.P.E.Y. Public Company Ltd, in which the Bank has a shareholding of 57%, held at 31
December, 2005, 26,7% (2004: 26,7%) of the share capital of Viewfair Ltd. Viewfair Ltd was incorporated in
Cyprus and is a dormant company.
Net book value
Year ended 31 December 2004
Net book value at the beginning of the year
Additions
Amortisation charge (Note 12)
Change in the value of life policies
in force (Note 8)
Net book value at the end of the year
At 31 December 2004
Cost or valuation
Accumulated amortisation
Net book value
Additions
Disposals
Amortisation charge (Note 12)
Impairment charge (Note 12)
Change in the value of life policies
in force (Note 8)
Policies
in force
Total
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
46.131
(16.672)
15.255
(8.938)
21.822
-
83.208
(25.610)
29.459
6.317
21.822
57.598
29.459
62
(4.370)
6.317
4.013
(3.326)
21.822
-
57.598
4.075
(7.696)
(30)
(50)
231
-
231
(80)
25.121
6.954
22.053
54.128
19.172
(12.218)
22.053
-
87.370
(33.242)
25.121
6.954
22.053
54.128
25.121
(8.814)
6.954
2.215
(32)
(3.575)
-
22.053
-
54.128
2.215
(32)
(3.575)
(8.814)
46.145
(21.024)
(12)
31
2.305
-
2.305
19
16.295
5.593
24.358
46.246
At 31 December 2005
Cost or valuation
Accumulated amortisation and impairment
25.109
(8.814)
21.439
(15.846)
24.358
-
70.906
(24.660)
Net book value
16.295
5.593
24.358
46.246
2 0 0 5
Computer
software
R E P O R T
At 1 January 2004
Cost or valuation
Accumulated amortisation
Goodwill
A N N U A L
29. INTANGIBLE ASSETS
95
29. INTANGIBLE ASSETS (continued)
L A I K I
G R O U P
Impairment test for goodwill
Goodwill is allocated to the Group’s cash-generating units (CGUs) identified according to country of
operation and business segment for impairment test purposes. A segment-level summary of the goodwill
allocation is presented below:
96
Life
assurance
business
General
insurance
business
Banking
business
Total
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
Cyprus
Greece
9.610
-
5.114
-
1.571
14.724
1.571
Total
9.610
5.114
1.571
16.295
The recoverable amount of a CGU is determined based on value-in-use calculations. These calculations use
cash flow projections based on financial budgets approved by management covering a three-year period.
Cash flows beyond the three-year period are extrapolated using the estimated growth rates stated below. The
growth rate does not exceed the long-term average growth rate for the business in which the CGU operates.
Key assumptions used for value-in-use calculations are:
Net profit margin
Profit growth rate
Discount rate
Life
assurance
business
General
insurance
business
11,4%
3,0%
12,0%
4,7%
3,0%
12,0%
Management determines the budgeted net profit margin based on past performance and its expectations for
the market development. The weighted average profit growth rate used is consistent with the macroeconomic
forecasts for the country of operation. The pre-tax discount rate used reflects specific risks relating to the
CGU.
The impairment of goodwill for the year ended 31 December, 2005 is analysed as follows:
Cí ‘000
Impairment of goodwill relating to the acquisition of the
subsidiary company Laiki Attalos Securities S.A.
Impairment of goodwill relating to the acquisition of Paneuropean Insurance group
4.614
4.200
8.814
The impairment of goodwill relating to the acquisition of Paneuropean Insurance Group, in the life assurance
and general insurance businesses, resulted from the management expectations for low business volume
growth rate, in the absence of any recent evidence of increasing penetration, which is defined as the ratio of
total market insurance premiums over gross domestic product.
Value of life policies in force
The value of life policies in force is determined in consultation with qualified actuaries and is calculated by
discounting future profits that are expected to emerge from in-force business at a discount rate that includes a risk
margin. The risk margin is designed to reflect uncertainties in expected profit. Projections of profit are based on
prudent assumptions relating to long-term economic conditions, future mortality, persistency and level of
administrative and selling expenses, and average return on investments. The key assumptions used in the
actuarial valuation are: risk discount rate (net of tax) of 9% (2004: 10%), average return on investments (gross of
tax) of 5,5% (2004: 6%) and inflation rate of 3,5% (2004: 3,5%).
30. INVESTMENT PROPERTY
2005
Cí ‘000
2004
Cí ‘000
Transfer from the category “Property and equipment” (Note 31)
Fair value gains
14.556
554
-
Balance 31 December
15.110
-
The investment properties are valued annually on 31 December by independent, professionally qualified
valuers with adequate and relevant experience on the nature and the location of the property. Changes in the
fair value are included in the income statement in “Other income”.
Within “Other income” in the income statement, an amount of Cí 964.000 is also included, that concerns
income from operating lease rentals from investment properties held by the Group.
2 0 0 5
R E P O R T
Impairment test for goodwill (continued)
The impairment of goodwill relating to the acquisition of Laiki Attalos Securities S.A. derived after the change
in the Athens Stock Exchange climate and the reduction in the trading volume which resulted in a significant
reduction in the company’s operations.
A N N U A L
29. INTANGIBLE ASSETS (continued)
97
L A I K I
G R O U P
31. PROPERTY AND EQUIPMENT
98
Property
Equipment
Total
Cí ‘000
Cí ‘000
Cí ‘000
At 1 January 2004
Cost or valuation
Accumulated depreciation
90.470
(8.834)
59.882
(39.677)
150.352
(48.511)
Net book value
81.636
20.205
101.841
Additions
Disposals
Depreciation charge (Note 12)
81.636
3.315
(1.429)
1.997
(1.726)
(144)
20.205
3.547
(138)
(6.030)
(9)
101.841
6.862
(1.567)
1.997
(7.756)
(153)
83.649
17.575
101.224
At 31 December 2004
Cost or valuation
90.788
(7.139)
59.985
(42.410)
150.773
(49.549)
Net book value
83.649
17.575
101.224
83.649
7.425
(241)
(14.556)
17.575
3.891
(155)
-
101.224
11.316
(396)
(14.556)
(404)
(168)
(1.622)
83
(5.642)
(3)
(404)
(168)
(7.264)
80
74.166
15.666
89.832
At 31 December 2005
Cost or valuation
82.781
(8.615)
62.633
(46.967)
145.414
(55.582)
Net book value
74.166
15.666
89.832
Additions
Disposals
Transfer to the category “Investment property” (Note 30)
Transfer to the category
“Non-current financial assets held for sale”
Depreciation charge (Note 12)
In the cash flow statement, proceeds from sale of property and equipment comprise:
2005
Cí ‘000
2004
Cí ‘000
Net book value
Transfer from reserves to income statement (Note 41)
396
47
-
1.567
650
(371)
Proceeds from disposal of property and equipment
443
1.846
At 31 December, 2004 a valuation of the Group’s property was performed by independent professional valuers
based on their existing use. Increases in the carrying amount arising on the revaluation were credited to
property fair value reserves in shareholders’ equity. Decreases that offset previous increases of the same asset
are charged against those reserves. All other decreases are charged to the income statement under
“Depreciation, amortisation and impairment” (Note 12).
Cost or valuation of property
Property stated at revalued amounts
Property stated at cost – leasehold buildings
2005
Cí ‘000
2004
Cí ‘000
68.513
14.268
77.863
12.925
82.781
90.788
The net book value of revalued property that would have been included in the financial statements had the
assets been carried at cost less depreciation is Cí 35.107.000 (2004: Cí 35.140.000). The amount of property
and equipment not depreciated is Cí 31.535.000 (2004: Cí 32.500.000).
2 0 0 5
R E P O R T
Included within the property of the Group is an amount of Cí 679.000 (2004: Cí 265.000) which represents
buildings under construction.
A N N U A L
31. PROPERTY AND EQUIPMENT (continued)
99
L A I K I
G R O U P
32. DUE TO OTHER BANKS
100
Maturity analysis
Repayable on demand
Cyprus
United Kingdom
Greece
2005
Cí ‘000
2004
Cí ‘000
47.366
74.968
204
28.355
33.162
8.205
122.538
69.722
64.201
11.135
47.202
28.340
8.981
32.401
122.538
69.722
2005
Cí ‘000
2004
Cí ‘000
2.022.234
2.917.693
688.286
93.431
4.777
1.578.354
2.387.376
570.902
100.214
-
5.726.421
4.636.846
3.875.406
290.685
1.382.377
177.953
3.134.954
248.786
1.120.080
133.026
5.726.421
4.636.846
33. CUSTOMER DEPOSITS
Maturity analysis
Repayable on demand
Over five years
Cyprus
United Kingdom and Guernsey
Greece
Australia
34. SENIOR DEBT
During 2004 the Bank set up a Euro Medium Term Note Programme for a total amount of euro 750 m.
Pursuant to the Programme the Bank has the ability to issue senior and/or subordinated debt in accordance
to its needs.
In July 2004 the Bank issued euro 300 m of senior debt from the above Programme. The bonds are repayable
three years from their issue 2004/2007 and pay interest every three months. The interest rate is set at the
three-month rate of euro (Euribor) plus 0,5%.
The bonds are listed on the Luxembourg Stock Exchange and their market value at 31 December, 2005 was
euro 300,5 m, Cí 172,3 m (2004: euro 299,6 m, Cí 173,8 m).
Gross
Claims incurred and reported
Claims incurred but not reported
Unearned premiums
20.982
2.392
14.556
20.513
1.753
13.068
Long-term insurance contracts:
With fixed and guaranteed terms
With DPF
Without fixed terms (unit-linked)
16.245
41.752
160.440
16.284
40.543
139.337
256.367
231.498
2 0 0 5
2004
Cí ‘000
R E P O R T
2005
Cí ‘000
A N N U A L
35. INSURANCE CONTRACT LIABILITIES AND REINSURANCE ASSETS
101
Recoverable from reinsurers
Short term insurance contracts:
Unearned premiums
9.830
1.016
4.018
8.719
651
3.359
With DPF
233
171
549
236
175
562
15.817
13.702
Net
Unearned premiums
11.152
1.376
10.538
11.794
1.102
9.709
With DPF
16.012
41.581
159.891
16.048
40.368
138.775
240.550
217.796
(continued)
Movement in insurance contract liabilities and reinsurance assets
L A I K I
G R O U P
Claims
102
2005
Gross Reinsurance
Cí ‘000
Cí ‘000
2004
Net
Gross Reinsurance
Cí ‘000
Cí ‘000
Cí ‘000
Net
Cí ‘000
Notified claims
Incurred but not reported
20.513
1.753
(8.719)
(651)
11.794
1.102
19.273
1.096
(6.326)
(294)
12.947
802
Balance 1 January
22.266
(9.370)
12.896
20.369
(6.620)
13.749
(15.333)
4.369
(10.964)
(13.200)
2.605
(10.595)
13.925
2.501
15
(5.427)
(419)
1
8.498
2.082
16
10.414
4.685
(2)
(1.927)
(3.429)
1
Balance 31 December
23.374
(10.846)
12.528
22.266
(9.370)
12.896
Notified claims
Incurred but not reported
20.982
2.392
(9.830)
(1.016)
11.152
1.376
20.513
1.753
(8.719)
(651)
11.794
1.102
Balance 31 December
23.374
(10.846)
12.528
22.266
(9.370)
12.896
Cash paid for claims settled
in the year
Increase in liabilities arising from:
Current year claims
Prior year claims
8.487
1.256
(1)
Unearned premium provision
2005
Gross Reinsurance
Cí ‘000
Cí ‘000
2004
Net
Gross Reinsurance
Cí ‘000
Cí ‘000
Cí ‘000
Net
Cí ‘000
Balance 1 January
Increase in the year
13.068
1.488
(3.359)
(659)
9.709
829
11.652
1.416
(3.428)
69
8.224
1.485
Balance 31 December
14.556
(4.018)
10.538
13.068
(3.359)
9.709
2 0 0 5
(continued)
2004
2005
Gross Reinsurance
Net
Gross Reinsurance
Net
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
Balance 1 January
Liabilities released for payments
on death, surrender and other
terminations in the year
Other movements
16.284
(236)
16.048
15.195
(201)
14.994
Balance 31 December
16.245
45
(84)
3
(233)
45
(81)
16.012
(31)
1.120
16.284
(32)
(3)
(236)
(63)
1.117
A N N U A L
Long-term insurance contracts with fixed and guaranteed terms
R E P O R T
Movement in insurance contract liabilities and reinsurance assets (continued)
16.048
103
Long-term insurance contracts with DPF
2004
2005
Gross Reinsurance
Net
Gross Reinsurance
Net
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
Balance 1 January
Other movements
40.543
(175)
40.368
39.595
(151)
39.444
Balance 31 December
41.752
34
1.175
4
(171)
38
1.175
41.581
(23)
971
40.543
(24)
(175)
(47)
971
40.368
(continued)
Movement in insurance contract liabilities and reinsurance assets (continued)
L A I K I
G R O U P
Long-term insurance contracts without fixed terms
104
2004
2005
Gross Reinsurance
Cí ‘000
Balance 1 January
Changes in unit prices
139.337
Balance 31 December
160.440
302
20.801
Cí ‘000
Net
Gross Reinsurance
Cí ‘000
Cí ‘000
(562) 138.775
132.132
13
-
315
20.801
(549) 159.891
(75)
7.280
139.337
Cí ‘000
Net
Cí ‘000
(485) 131.647
(77)
-
(152)
7.280
(562) 138.775
Estimation of long term insurance policy obligations –
Sensitivity Analysis
For long-term life insurance contracts, an actuarial valuation is carried out to estimate the future liabilities from
the payment of benefits as per insurance contract terms. The principal assumptions used for the valuation are
as follows:
Mortality
An appropriate base table of standard mortality is used, which reflects the best historical estimate of
mortality.
Persistency
Persistency rates are reviewed annually taking into account the Group’s experience by contract type.
Investment returns
The average investment returns estimate is calculated using the present return for each investment
class, as well as, expectations about the performance of the economy and the capital markets.
Administration expenses
The current level of expenses in combination with the expected inflation rate is taken as an appropriate
expense base.
Change
Effect on
insurance
liabilities
Cí ‘000
(a) Insurance contracts with no fixed terms and share in profits
Improvement in mortality
Worsening of mortality
Lowering of investment returns
Increase of investment returns
-7,5%
+7,5%
-1%
+1%
104
(77)
4.653
(3.385)
(b) Insurance contracts with fixed and guaranteed terms
Improvement in mortality
Worsening of mortality
Lowering of investment returns
Increase of investment returns
Increase in renewal expenses
Decrease in renewal expenses
Increase in expenses’ inflation
Decrease in expenses’ inflation
-7,5%
+7,5%
-1%
+1%
+10%
-10%
+1%
-1%
(12)
16
13
(9)
11
(10)
4
(3)
36. OTHER LIABILITIES
Interest payable
Derivative financial instruments with
negative fair value (Note 42)
Other liabilities
2005
Cí ‘000
2004
Cí ‘000
34.502
27.505
3.666
88.689
1.969
80.982
126.857
110.456
A N N U A L
Estimation of long term insurance policy obligations –
Sensitivity Analysis (continued)
The effect of the percentage change in the above parameters on the insurance liabilities level as at the
balance sheet date is:
R E P O R T
2 0 0 5
(continued)
105
37. DEFERRED TAX ASSETS AND LIABILITIES
L A I K I
G R O U P
Deferred tax assets and liabilities are calculated on all temporary differences under the liability method using
effective tax rates (Note 15). Deferred tax assets and liabilities are offset when there is a legally enforceable
right to offset current tax assets against current tax liabilities and when the deferred taxes relate to the same
taxation authority. The movement in deferred tax is as follows:
2005
Cí ‘000
Balance 1 January
(Credit)/debit in income statement (Note 15)
(Credit)/debit in property fair value reserves (Note 41)
2004
Cí ‘000
6.878
(1.305)
(74)
15
5.448
523
895
12
5.514
6.878
2005
Cí ‘000
2004
Cí ‘000
606
3.968
2.646
70
590
3.921
2.694
987
7.290
8.192
887
136
753
785
136
393
1.776
1.314
Deferred tax assets and liabilities are recoverable as follows:
106
Deferred tax liabilities
Differences between depreciation and wear and tear allowances
Value of contracts in force
Other temporary differences
Deferred tax assets
Finance lease contracts
Tax losses
The (credits)/debits relating to deferred tax in the income statement include the following temporary
differences:
2005
Cí ‘000
Differences between depreciation and wear and tear allowances
Value of contracts in force
Finance lease contracts
Tax losses
2004
Cí ‘000
(15)
48
(112)
(1.226)
197
23
385
635
(717)
(1.305)
523
Convertible debentures 2001/2006
Non-convertible debentures 2003/2009
Eurobonds due 2011
Capital securities
8.754
6.796
30.000
15.000
103.048
50.000
8.754
6.796
30.000
15.000
104.018
50.000
Equity element of convertible debentures (Note 39)
213.598
(444)
214.568
(444)
Total loan capital
213.154
214.124
The repayment date of the convertible debentures 2001/2006 falls in the period of “over three months but less
than one year” from the balance sheet date and the repayment date of eurobonds due 2011 falls in the period
of “over five years’’ from the balance sheet date. The repayment date of the remaining debentures falls in the
period of “over one but less than five years” from the balance sheet date. The capital securities are perpetual.
In March 1997 the Bank issued Cí 15 m convertible debentures due 2006. The debentures pay interest every
six months on 30 June and 31 December of each year. Interest was fixed at 7% on nominal value for the first
two years. Thereafter, interest is reset every six months based on the average interest rate of government
bonds in the preceding six-monthly period.
The debentures were convertible into Cyprus Popular Bank Public Company Ltd shares in June of each year
until 2003. The conversion price was set at Cí 1,20 (adjustment due to bonus issue) per share in the years
2000 to 2003. The conversion price was adjusted every time there was a new issue of shares, according to
the terms of the debenture issue.
In the period from 30 June, 2001 to 30 June, 2006, the Bank has the right to repurchase all or part of the
debentures at par and to pay the holder an amount equal to the nominal value of debentures plus any
accrued interest. In such a case, the holder of the debentures reserves the right to convert the debentures
into shares, according to the terms of the debenture issue.
The debentures are not secured and they rank for payment after the claims of depositors and other creditors.
2 0 0 5
2004
Cí ‘000
R E P O R T
2005
Cí ‘000
A N N U A L
38. LOAN CAPITAL
107
L A I K I
G R O U P
38. LOAN CAPITAL (continued)
108
In June 2001 the Bank issued Cí 6,7 m convertible debentures due 2010. The debentures pay interest every
six months on 31 January and 31 July of each year. Interest was fixed at 7% on nominal value for the first year.
Thereafter, interest is reset based on the higher of the average interest rate of government bonds plus 0,25%
or the highest interest offered on yearly deposits plus 0,25%.
The debentures are convertible into Cyprus Popular Bank Public Company Ltd shares in July of each year
from 2003 to 2009. The conversion price is set at Cí 5,70 per share in the years 2003 to 2009. The conversion
price is adjusted every time there is a new issue of shares, according to the terms of the debenture issue.
In the period from 31 July, 2003 to 25 June, 2010, the Bank has the right to repurchase all or part of the
debentures at par and to pay the holder an amount equal to the nominal value of debentures plus any
accrued interest. In such a case, the holder of the debentures reserves the right to convert the debentures into
shares.
In June 1999 the Bank issued Cí 30 m non-convertible debentures due 2009. The debentures pay interest
every six months on 31 May and 30 November of each year. Interest was fixed at 7,25% on nominal value for
the first year. Thereafter, the debentures pay floating interest. The floating interest rate is equal to the average
interest rate of government bonds for one year plus 0,75% or the highest interest rate offered by the Bank for
one year customer deposits plus 0,75%, whichever is higher.
After 31 May, 2003, the Bank has the right to repurchase all or part of the debentures at par and to pay the
holder an amount equal to the nominal value of the debentures plus any accrued interest.
In April 2003 the Bank issued Cí 15 m non-convertible debentures due 2007. The debentures pay interest
every six months on 30 June and 31 December of each year. Interest was fixed at 6,50% on nominal value until
31 December, 2004. Thereafter, the debentures pay floating interest. The floating interest rate is equal to the
weighted average base rate for the relevant six-monthly period plus 1%.
The Bank has the right to repurchase the debentures in the market, by special agreement or by offer to all
debenture holders at any price.
The Bank has the option to redeem the bonds in whole on or after 28 November, 2006.
The bonds constitute unsecured, subordinated obligations of the Bank and they rank for payment after the
claims of the depositors and other creditors.
The bonds are listed on the Luxembourg Stock Exchange and their market value at 31 December, 2005 was
euro 181,4 m, Cí 104,0 m (2004: euro 180,4 m, Cí 103,5 m).
Capital securities
In June 2003 the Bank issued Cí 25 m capital securities, which were offered to a limited number of investors.
In September 2003 the Bank issued an additional Cí 25 m capital securities, which were offered to the Bank’s
shareholders and to the public. The securities pay floating interest, which is revised at the beginning of each
interest period. The floating interest rate is equal to the base rate at the beginning of the period plus 1,2%. The
capital securities pay interest quarterly at 31 March, 30 June, 30 September and 31 December in each year.
The capital securities are perpetual, but can be repurchased in full at the option of the Bank at nominal value
plus accrued interest on 30 June, 2008 or at any interest payment date thereafter, after approval from the
Central Bank of Cyprus.
In case the capital securities are not repurchased by the Bank 10 years after their issue, then the holder has
the right to exchange the securities with ordinary shares of the Bank at any interest payment date thereafter,
at a discount of 10% on the average price of the ordinary share as this will be traded on the Cyprus Stock
Exchange for a period of one month before the respective exchange date.
The capital securities constitute direct non-secured and subordinated obligations of the Bank. They rank for
payment after the claims of depositors and other creditors.
2 0 0 5
R E P O R T
Eurobonds due 2011
In November 2001 the Bank issued euro 180 m step-up floating rate subordinated bonds redeemable in whole
on 28 November, 2011. The bonds pay interest every three months in arrears on 28 February, 28 May, 28
August and 28 November in each year. Interest is set at 1,40% above the three-month rate of euro (“Euribor”).
After 28 November, 2006 interest will be set at 2,8% above Euribor.
A N N U A L
38. LOAN CAPITAL (continued)
109
L A I K I
G R O U P
39. SHARE CAPITAL
2005
Shares
‘000
2004
Shares
‘000
2005
Cí ‘000
2004
Cí ‘000
Authorised
Ordinary shares of Cí 0,50 each
400.000
400.000
200.000
200.000
Issued and paid-up
304.011
2.397
304.011
-
152.006
1.198
152.006
-
Balance 31 December
306.408
304.011
153.204
152.006
444
444
153.648
152.450
Equity element of convertible debentures (Note 38)
Share capital 31 December
110
The subsidiary companies Laiki Cyprialife Ltd, Paneuropean Insurance Co Ltd, Philiki Insurance Co Ltd and
Cyprialife Ltd held as at 31 December, 2005 a total of 6.471.000 (2004: 6.324.000) shares of the Bank,
percentage of 2,1% (2004: 2,1%) as part of their financial assets at fair value through profit or loss.
40. SHARE PREMIUM
2005
Cí ‘000
2004
Cí ‘000
Balance 1 January
2.949
1.894
2.949
-
Balance 31 December
4.843
2.949
2005
Cí ‘000
2004
Cí ‘000
Revenue reserves
Balance 1 January
Profit for the year attributable to equity holders of the Bank
Transfer from property fair value reserves
Dividend paid
Defence tax on deemed distribution
136.275
42.761
132
(9.120)
(6)
115.015
21.100
160
-
Balance 31 December
170.042
136.275
Share premium is not available for distribution to equity holders.
41. RESERVES
Property fair value reserves
Balance 1 January
Transfer to revenue reserves
Deferred tax on revaluation (Note 37)
Transfer to income statement
14.959
(168)
(132)
74
-
12.996
3.389
(160)
(895)
(371)
Balance 31 December
14.733
14.959
1.970
258
741
213
Balance 1 January as restated
Transfer to income statement due to impairment
of available-for-sale financial assets
2.228
954
4.350
4.942
(3.668)
Balance 31 December
6.578
2.228
Currency translation reserves
Balance 1 January
(3.680)
675
(3.739)
59
Balance 31 December
(3.005)
(3.680)
Available-for-sale financial asset fair value reserves
Balance 1 January as previously reported
Prior year adjustment
Total reserves at 31 December
188.348
149.782
According to the Companies Law and the Articles of Association of the Bank there is no restriction in the
distribution of reserves. According to the regulations of the Central Bank of Cyprus the reserves arising from
exchange differences are not available for distribution.
From the tax year commencing 1 January, 2003 onwards companies, which do not distribute 70% of their
profits after tax, as defined by the Special Contribution Defence Law, within two years after the end of the
relevant tax year, will be deemed to have distributed as dividends 70% of these profits. Special contribution
for defence at 15% will be payable on such deemed dividends to the extent that the shareholders (companies
and individuals) at the end of the period of the two years after the end of the relevant tax year, are Cyprus tax
residents. The amount of deemed distribution is reduced by any actual dividends paid out of the profits of the
relevant year during the following two years. This special contribution for defence is payable for the account of
the shareholders.
2 0 0 5
2004
Cí ‘000
R E P O R T
2005
Cí ‘000
A N N U A L
41. SHARE CAPITAL (continued)
111
42. FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS
L A I K I
G R O U P
The derivative financial instruments, used by the Group, and the method of determining their fair value are as
follows.
112
Forward foreign exchange contracts specify the rate at which two currencies will be exchanged at a future
date; the exchange rate agreed is determined when the deal is made. Forward foreign exchange contracts are
revalued daily (using the current exchange rates) by calculating the new forward rate until the settlement of
the contract, based on the current market rates.
Currency swaps are commitments to exchange specific amounts of two different currencies including interest,
at a future date. The currency swaps are fairly valued (using the current exchange rates) by calculating the
new swap points at the time of the revaluation.
Interest rate swaps are commitments to exchange one set of cash flows based on a fixed interest rate with
one set of cash flows based on a floating interest rate. The cash flows are calculated on a fixed notional
amount and for a fixed period of time. The fair value of interest rate swaps is calculated by comparing the
present value of the discounted cash flows at the date of the revaluation with the current outstanding notional
amount of the swap.
The notional amounts of those contracts provide a basis for comparison with other financial instruments
recognised on the balance sheet, but they do not indicate the amounts of future cash flows or the fair value of
the instruments and, therefore, do not present the Group’s exposure to credit and other market risks. The
derivative instruments become favourable (assets) or unfavourable (liabilities) as a result of fluctuations in
market interest rates or foreign exchange rates relative to their terms.
The notional and fair value of derivatives was:
2005
Contract/
Notional
amount
2004
2005
Fair value
Assets Liabilities
Contract/
Notional
amount
2004
Fair value
Assets Liabilities
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
Derivatives
Foreign exchange derivatives:
Currency forwards
Currency swaps
178.626
502.867
147
3.608
643
2.250
163.934
336.235
1.174
632
607
417
Interest rate derivatives:
Interest rate swaps
322.966
809
773
251.782
350
945
4.564
3.666
2.156
1.969
Change in:
Due to other banks
Customer deposits
Other liabilities
Financial assets at fair value through profit or loss
Reinsurance assets
Other assets
Cash generated from operations
61.205
32.891
(1.420)
(1.139)
7.264
3.575
8.814
(554)
(2.305)
(911)
(15.634)
10.197
(47)
-
4.942
(1.313)
(351)
7.756
3.326
4.370
1.391
(231)
3.999
(7.944)
9.936
(650)
(97)
69.045
58.025
52.816
1.089.575
24.869
16.401
12.747
(44.501)
532.386
12.539
2.949
10.980
22.271
(48.676)
(505.550)
(2.115)
664
(168.649)
(17.372)
(11.916)
(23.882)
(2.169)
(345.778)
2.882
(2.505)
(45.327)
11.775
21.744
534.110
189.118
2 0 0 5
2004
Cí ‘000
R E P O R T
Profit before tax
Adjustment for:
Impairment of available-for-sale financial assets
Share of results of associates after tax (Note 28)
Minority interest
Depreciation of property and equipment (Note 31)
Amortisation of computer software (Note 29)
Fair value adjustment of property (Note 12)
Fair value gain on investment property
Increase in the value of life policies in force (Note 29)
Income from available-for-sale financial assets
Interest paid on loan capital
Profit on disposal of investments in associates
2005
Cí ‘000
A N N U A L
43. CASH GENERATED FROM OPERATIONS
113
G R O U P
44. CASH AND CASH EQUIVALENTS
Cash and balances with Central Banks (Note 17)
Due from other banks – due within three months (Note 18)
Government bonds and treasury bills –
due within three months (Note 24)
L A I K I
2005
Cí ‘000
2004
Cí ‘000
432.091
1.317.928
471.569
876.164
20.119
51.914
1.770.138
-
1.399.647
911
1.770.138
1.400.558
45. SEGMENTAL ANALYSIS
By business class (primary segment)
114
Banking
services
Insurance Financial and
services other services
Eliminations
Total
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
376.307
87.940
51.591
-
515.838
30.896
4.413
1.009
(36.318)
-
407.203
92.353
52.600
(36.318)
515.838
Profit before tax and impairment
of goodwill
49.333
9.772
10.914
70.019
Profit before tax
49.333
5.572
6.300
61.205
2005
External revenues
Revenues from other
group companies
Total revenues
Tax
(17.305)
Profit for the year
Assets
43.900
6.341.823
5.874
297.261
-
473.767
6
Total assets
Liabilities
Loan capital
7.112.851
5.880
7.118.731
6.229.446
213.154
273.794
-
19.763
-
6.523.003
213.154
Banking
services
Insurance Financial and
services other services
Eliminations
Total
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
1.420
8.271
155
5.105
1.420
13.531
6.694
282
288
7.264
3.270
-
26
4.200
279
4.614
3.575
8.814
35.533
-
10.865
46.398
317.253
62.059
44.279
22.445
4.172
772
(27.389)
-
339.698
66.231
45.051
(27.389)
423.591
Profit before tax, amortisation of
goodwill and impairment of
available for-sale financial assets
25.614
5.648
10.941
42.203
Profit before tax
21.974
1.071
9.846
32.891
2005
Other items
Share of results of associates
after tax (Note 28)
Capital expenditure
Depreciation of property and
equipment (Note 31)
Amortisation of computer
software (Note 29)
Provision for impairment
of advances (Note 14)
2004
External revenues
Revenues from other
group companies
Total revenues
Tax
21.451
5.138.556
4.929
262.197
-
472.441
6
5.873.194
4.935
5.878.129
Total assets
Liabilities
Loan capital
423.591
(11.440)
Profit for the year
Assets
Investment in associates
-
5.053.237
214.124
247.869
-
22.814
-
5.323.920
214.124
A N N U A L
By business class (primary segment) (continued)
R E P O R T
2 0 0 5
45. SEGMENTAL ANALYSIS (continued)
115
L A I K I
G R O U P
By business class (primary segment) (continued)
116
2004
Other items
Share of results of associates
after tax (Note 28)
Capital expenditure
Depreciation of property and
equipment (Note 31)
Amortisation of computer
software (Note 29)
Provision for impairment
of advances (Note 14)
Impairment of available-for-sale
financial assets (Note 41)
Banking
services
Insurance
services
Financial and
other services
Eliminations
Total
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
1.313
8.955
924
996
1.313
10.875
7.098
359
299
7.756
3.015
335
28
3.154
283
881
3.326
4.370
38.297
-
8.652
46.949
3.305
1.423
214
4.942
By geographical segment
United
Kingdom
Cyprus
Greece
and Guernsey
Australia
Total
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
2005
Total revenues
Capital expenditure
Assets
Liabilities
382.881
9.833
4.741.714
4.388.008
89.362
2.809
1.653.441
1.423.978
28.659
304
499.207
529.930
14.936
585
224.369
181.087
515.838
13.531
7.118.731
6.523.003
2004
Total revenues
Capital expenditure
Assets
Liabilities
313.732
7.288
3.919.101
3.558.526
73.197
3.062
1.402.640
1.180.687
25.556
203
374.996
449.563
11.106
322
181.392
135.144
423.591
10.875
5.878.129
5.323.920
Total revenues
Interest expense per income statement
Fee and commission expense per income statement
Net benefits, claims and other expenses from
insurance contracts (Note 7)
Operating income per income statement
2005
Cí ‘000
2004
Cí ‘000
515.838
(185.600)
(2.984)
423.591
(147.694)
(2.949)
(69.745)
(49.825)
257.509
223.123
46. CONTINGENCIES AND COMMITMENTS
117
Credit-related financial instruments
Credit-related financial instruments include commitments relating to documentary credits and guarantees,
which are designed to meet the financial requirements of the Group’s customers. The credit risk on these
transactions represents the contract amount. However, the majority of these facilities are offset by
corresponding obligations of third parties.
Acceptances
Guarantees
A N N U A L
By geographical segment (continued)
Reconciliation with the amounts included in the income statement:
R E P O R T
2 0 0 5
2005
Cí ‘000
2004
Cí ‘000
67.533
365.398
69.109
308.736
432.931
377.845
Unutilised credit facilities
The amount of approved unutilised credit facilities was Cí 860.207.000 (2004: Cí 679.673.000).
Trustee services
The Bank acts as a trustee of approved investments of insurance companies according to the provisions of
the Insurance Companies Laws of 1984 and 1990. The value of all approved investments under trust as at
31 December, 2005 was Cí 13 m (2004: Cí 14 m).
46. CONTINGENCIES AND COMMITMENTS (continued)
L A I K I
G R O U P
Capital commitments
Capital expenditure contracted but not provided for at 31 December, 2005 amounted to Cí 7,4 m (2004: Cí 12,9 m).
Legal proceedings
As at 31 December, 2005 there were pending litigations against the Group in connection with its activities.
Based on legal advice the Board of Directors believes that there is adequate defence against all claims and it
is not expected that the Group will suffer any significant damage. Therefore, no provision has been made in
the financial statements regarding these cases.
Operating lease commitments
The Group leases various branches, offices and warehouses under non-cancelable operating lease
agreements. The leases have varying terms, escalation clauses and renewal rights.
The future aggregate minimum lease payments under non-cancelable operating leases are as follows:
118
Less than one year
Over five years
2005
Cí ‘000
2004
Cí ‘000
1.568
3.384
780
1.686
3.161
495
5.732
5.342
47. FINANCIAL AND INSURANCE RISK MANAGEMENT
As other financial institutions the Group is exposed to several risks. These are continually monitored with various
methods so that the concentration of unreasonable risks is avoided. The nature of these risks and the way the
Group deals with them are explained below.
Credit risk
Credit risk is the risk of loss due to a borrower or counter party default from actual, contingent or potential
claims. Credit risk management focuses on ensuring a disciplined risk culture, risk transparency and
intelligent risk taking.
Industry sector and sub-sector analyses supported by economic forecasts provide the main guideline to the
credit policy that is reviewed at least semi-annually.
Credit risk concentrations may arise at industry or customer level. Such concentrations are analysed and
monitored on an ongoing basis to minimise any potential excessive exposure to a single industry, industry subsector or customer. Loan portfolio exposures are managed to adhere to the credit policy guideline limits set for
each industry sector.
Balancing the risk-return relationship is vital for the continuing success of the Group. The risk-return relationship
is analysed at customer and product level by the internal pricing mechanism that has been developed to
incorporate both the risk taken by the Group and the expected return.
Customer quality rating is applied to new and existing customers. A customer-oriented internal rating system
with clear and objective defined quality grades is maintained. The internal rating system evaluates each
customer’s and group of customers’ repayment ability at least on a quarterly basis. This ensures that the
customers’ rating reflects the fairly up-to-date default risk taken and acts as a warning sign for monitoring
purposes. The ongoing quality evaluation is supported by periodic audits conducted by both the Credit Risk
Management and Internal Audit Departments.
The internal rating system is complemented by credit scoring models for retail customers and Moody’s Risk
Advisor for medium and large businesses. Moody’s Risk Advisor is a modern and widely used system that rates
the financial strength of companies based on their financial statements, industry risk, the company’s standing
within the industry sector it operates and the quality of its management.
Changes in the quality of the loan portfolio are monitored closely to develop timely and appropriate strategies to
avoid increases in risks taken.
The customer internal rating system is the basis for developing internal probabilities of default that will assist in
future credit risk taking decisions and credit risk monitoring.
Credit risk methodologies are adapted to reflect the changing financial environment. The credit quality review
methods used and actions taken are reviewed annually and are adapted to fall in line with both the Group’s
overall strategic direction and the short-term and long-term objectives of risk management.
2 0 0 5
R E P O R T
Credit risk (continued)
Limits of authority and segregation of duties in the lending processes are in place to maintain objectivity,
independence and control over new and existing lending exposures.
A N N U A L
47. FINANCIAL AND INSURANCE RISK MANAGEMENT (continued)
119
47. FINANCIAL AND INSURANCE RISK MANAGEMENT (continued)
L A I K I
G R O U P
Counterparty risk
The Group runs the risk of loss of funds due to the possible untimely repayment of existing and future
obligations by counterparty banks.
120
Within its daily operations the Group is transacting with banks and other financial organisations in Cyprus and
abroad. By conducting these transactions the Group is running the risk of losing funds due to the possible
untimely repayment to the Group of the existing and future obligations of the counterparty banks.
The counterparty limits are proposed from the Treasuries and are examined by the Group Risk Management
on a consolidated basis once a year. The limits are initially determined on a Group basis to reflect the level of
risk which is acceptable by the Group and are then apportioned to the different departments of Treasury
maintained by the Group in Cyprus and abroad according to the needs and the volume of operations of each
Treasury. The maximum size of limits in general terms is determined by the Central Bank of Cyprus and the
limits proposed by Group Risk Management are more conservative.
Assessments of counterparty risk are undertaken using a scoring model. Other than the financial data
impeded in this model, the judgment of risk officers on other non-financial data is also inserted in the system
in order to determine the maximum counterparty allowable limit which Group top management can approve.
The Bank Scoring Model used by Laiki Group evaluates each Bank according to a set of quantitative and
qualitative criteria. Regarding the quantitative criteria (capital adequacy, profitability, liquidity, etc.) the Banks
are assessed with certain ratios, which are drawn from the software package of Bankscope. Qualitative
criteria are provided on a judgmental basis, since these are according to the judgment of the risk-officer
based on past experience and management quality with the particular counterparty under evaluation.
The exposure to any one borrower is further restricted by sub limits covering money market, capital market,
foreign exchange operations, as well as, daily settlement risk limits. Actual exposures against limits are
monitored daily.
Country risk
The Group runs the risk of loss of funds due to the possible political, economic and other events in a particular
country where funds have been placed or invested in several counterparties.
All countries are assessed by Group Risk Management according to their economic ratings (Moody’s,
Standard and Poor’s). Existing country credit risk exposures are monitored and reviewed daily against
approved limits. Review of limits occurs at least annually with the smaller and lower rated countries being
subject to greater and more frequent analysis and assessment.
The Group’s main measurement methodology is Present Value of a Basis Point methodology (PVBP) for
measuring, monitoring and managing interest rate risk in its trading and banking book. PVBP shows the effect
on the Group’s net interest income and consequently to its profitability, from a one basis point change in the
current interest rate yield curve of a specific currency.
The Group uses exposure calculations and associated limit structures in PVBPs for monitoring:
(a)
(b)
(c)
(d)
Exposure in each currency per predefined time period.
Total exposure in each main currency.
Exposure in all currencies per predefined time period.
Total exposure in all periods and all currencies
The Group’s interest rate risk exposures are mainly created from the retail activity and are usually hedged
through the commencement of transactions in derivative products or interbank market. In addition, there is
limited activity in the trading book, with positions in fixed bonds and futures.
In regular intervals of time the Group evaluates its exposure by calculating a “maximum potential loss”
scenario at bank level and at consolidated level. The maximum potential loss is calculated by assuming
simultaneous shifts in the interest rate yield curves in all currencies in a direction that adversely affects the
Group’s position.
The following tables summarise the Group’s exposure to interest rate risks. Included in the tables are the
Group’s assets and liabilities at carrying amounts categorised by contractual reprising date for floating rate
items and maturity date for fixed rate items. These tables include in the interest net open position, the
positions stemming from the life insurance policy contract liabilities and the assets which relate to the above
insurance policy contracts. These positions are not positions of the Group but positions of the owners of the
insurance contracts. The 2004 comparative tables have been adjusted accordingly.
2 0 0 5
R E P O R T
Interest rate risk
Interest rate risk is the risk of fluctuations in the value of financial instruments and in the Group’s net interest
income as a result of adverse changes in the market interest rates. Interest rate risk arises from holding assets
and liabilities, on and off-balance sheet positions, with different maturity dates or reprising dates.
A N N U A L
4 7 . FINANCIAL AND INSURANCE RISK MANAGEMENT (continued)
121
L A I K I
G R O U P
Interest rate risk (continued)
122
Up to
1 month
3 months
or less
Over 3
months
but less
than
1 year
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
430.870
1.120.596
200.284
90
44.164
20
-
-
1.111
129
432.091
1.365.173
24.600
2.976.322
-
54.267
473.325
-
11.306
186.496
-
542
334.480
-
25.075
-
82.175
15.817
172.890
3.995.698
15.817
1.160
-
-
5.143
-
-
6.303
26.490
61.109
118.475
119.990
12.784
157
339.005
299.660
4.206
-
219.950
77
-
39
-
904
-
10.489
-
24.936
74.425
5.880
46.246
15.110
89.832
544.546
90.140
5.880
46.246
15.110
89.832
4.883.904 1.009.012
360.570
461.079
48.348
355.818
7.118.731
93.950
4.421.740
171.833
28.548
533.897
-
40
732.260
-
37.299
-
1.225
-
-
122.538
5.726.421
171.833
16.635
272
41
948
15.064
256.367
116.250
256.367
149.210
-
-
-
-
-
96.634
96.634
Loan capital
4.704.158
6.352
562.717
153.047
732.341
53.755
38.247
-
16.289
-
469.251
-
6.523.003
213.154
Total liabilities
4.710.510
715.764
786.096
38.247
16.289
469.251
6.736.157
Net interest
sensitivity gap
173.394
293.248
(425.526)
422.832
32.059
2005
Assets
Cash and balances with
Central Banks
Financial assets at fair
value through profit or loss
Reinsurance assets
Corporate bonds and
debentures
Government bonds and
treasury bills
Available-for-sale
financial assets
Other assets
Intangible assets
Investment property
Total assets
Liabilities
Due to other banks
Customer deposits
Senior debt
Insurance contract
liabilities
Other liabilities
Retirement benefit
obligations
Over 1
year
but less
than
5 years
Over
5 years
Noninterest
bearing
Total
2004
Assets
Central Banks
Financial assets at fair
value through profit or loss
Reinsurance contracts
Corporate bonds and
debentures
treasury bills
Available-for-sale
financial assets
Other assets
Intangible assets
Total assets
Liabilities
Due to other banks
Customer deposits
Senior debt
Insurance contract
liabilities
Other liabilities
Retirement benefit
obligations
Loan capital
Total liabilities
Net interest
sensitivity gap
Up to
1 month
3 months
or less
Over 3
months
but less
than
1 year
Over 1
year
but less
than
5 years
Over
5 years
Noninterest
bearing
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
Total
448.532
726.334
9.876
122.494
12.305
96.170
-
-
856
682
471.569
945.680
21.962
2.690.365
-
20.882
405.219
-
11.000
125.258
-
1.835
241.084
-
2.104
-
68.535
26.118
13.702
124.214
3.490.148
13.702
1.450
-
-
5.517
-
-
6.967
29.459
65.378
98.907
8.355
52
-
202.151
63.602
2.057
-
301.050
-
-
-
9.747
-
20.596
66.359
4.935
54.128
101.224
385.248
78.163
4.935
54.128
101.224
3.983.761
924.899
343.640
256.791
11.903
357.135
5.878.129
37.448
3.468.044
173.836
32.274
389.657
-
594.570
-
177.608
-
6.967
-
-
69.722
4.636.846
173.836
15.114
-
-
-
9.479
231.498
103.538
231.498
128.131
-
-
-
-
-
83.887
83.887
3.694.442
421.931
594.570
177.608
16.446
418.923
5.323.920
6.796
154.018
53.310
-
-
-
214.124
3.701.238
575.949
647.880
177.608
16.446
418.923
5.538.044
282.523
348.950
(304.240)
79.183
(4.543)
A N N U A L
R E P O R T
2 0 0 5
123
L A I K I
G R O U P
A significant part of the interest rate exposure is hedged through interest rate swaps instruments.
124
For Group assets and liabilities at 31 December, 2005 an immediate and sustained increase of 1% in market
interest rates would increase the profits by Cí 0,26 m (2004: Cí 0,73 m) for the following year.
Currency risk
Currency risk relates to the risk of fluctuations in the value of financial instruments and assets and liabilities
due to changes in exchange rates. Currency risk arises from an open position, either overbought or oversold,
in a foreign currency, creating exposure to a change in the relevant exchange rate. This may arise from the
holding of assets in one currency funded by liabilities in another currency or from a spot or forward foreign
exchange trade or forward exchange derivatives including options.
The Group enters into foreign exchange transactions in order to accommodate customer needs and for
hedging its own exposure. It is the Group’s policy not to be involved in any FX forward exposure risk for any
currency without hedging. To this effect, the Group’s Treasuries engage only in limited active FX spot
proprietary trading, within predefined limits.
The Group uses exposure calculations and associated limit structures for monitoring:
(a) Open position by currency – net long / short position of each currency.
(b) Total net short position – sum of short positions in all currencies.
(c) Maximum loss limits – maximum level of losses resulting from foreign exchange fluctuations on a daily
/ monthly / yearly basis.
The Group Risk Management Unit calculates the maximum potential loss for the open positions in different
currencies by working on stress testing scenarios. These scenarios assume large fluctuations in all currencies
in a way that could adversely affect the Group profitability.
The following tables summarise the Group’s exposure to currency risk. Included in the tables are the Group’s
assets and liabilities at carrying amounts, categorised by currency. The tables also present the notional amount
of foreign exchange derivatives, which are used to reduce the Group’s exposure to currency movements,
categorised by currency. These tables include in the currency net open position, the positions stemming from
the life insurance policy contract liabilities and the assets which relate to the above insurance policy contracts.
These positions are not positions of the Group but positions of the owners of the insurance contracts. The 2004
comparatives have been adjusted accordingly.
Cyprus
Pound
2005
Assets
Central Banks
Reinsurance assets
Corporate bonds and
debentures
treasury bills
Available-for-sale
financial assets
Other assets
Intangible assets
Investment property
United States
Euro
Dollar
Sterling
Pound
Australian
Other
Dollar currencies
Cí ‘000
Total
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
325.757
104.519
77.058
193.331
22.301
931.640
2.065
173.067
4.644
26.444
266 432.091
(63.828)1.365.173
65.960
65.801
1.812.192 1.272.469
15.739
78
28.347
313.854
-
3.598
331.650
-
2.136
175.122
-
7.048 172.890
90.411 3.995.698
15.817
6.303
-
-
-
-
-
6.303
261.264
49.231
18.457
7.569
-
2.484
339.005
27.683
50.186
5.880
40.499
15.110
69.342
259.357
21.537
5.135
9.433
206.482
8.105
-
42.141
7.514
375
9.606
8.883
2.574
237
1.451
224
-
544.546
90.140
5.880
46.246
15.110
89.832
Total assets
2.800.434 1.953.430 1.529.186
577.585
221.491
36.605 7.118.731
Liabilities
Due to other banks
Customer deposits
Senior debt
Other liabilities
3.620
25.904
39.962
1.969.632 1.246.750 1.541.606
- 171.833
255.885
482
88.338
28.062
5.209
95.572
822
-
48.189
564.484
22.601
240
650
307.589
4.851
-
4.213 122.538
96.360 5.726.421
- 171.833
- 256.367
149 149.210
96.634
Loan capital
Minority interest
Equity
2.413.047 1.473.853 1.586.777
110.107 103.047
10.040
25.695
346.839
-
635.514
-
313.090
-
100.722 6.523.003
- 213.154
35.735
- 346.839
Total liabilities and equity
2.880.033 1.602.595 1.586.777
635.514
313.090
100.722 7.118.731
Net on-balance
sheet position
Net notional position
of derivative financial instruments
Net currency position
(79.599) 350.835
(57.591)
(57.929)
(91.599)
(64.117)
(15.544) (288.738)
71.273
69.563
114.060
49.961
(95.143)
13.682
11.634
22.461
(14.156)
62.097
A N N U A L
Currency risk (continued)
R E P O R T
2 0 0 5
125
Currency risk (continued)
L A I K I
G R O U P
Cyprus
Pound
126
Cí ‘000
2004
Total assets
Total liabilities and equity
United States
Euro
Dollar
Cí ‘000
Cí ‘000
2.546.879 1.570.446 1.012.924
2.643.457 1.298.636 1.057.372
Sterling
Pound
Cí ‘000
Australian
Other
Dollar currencies
Cí ‘000
Cí ‘000
471.389
516.754
182.040
256.248
94.451 5.878.129
105.662 5.878.129
Net on-balance sheet position
Net notional position of
derivative financial instruments
(96.578) 271.810
(44.448)
(45.365)
(74.208)
(11.211)
4.148 (196.709)
49.144
54.276
96.989
(14.009)
Net currency position
(92.430)
4.696
8.911
22.781
(25.220)
75.101
Total
Cí ‘000
Liquidity risk
Liquidity risk may be defined as the risk that the bank, either does not have sufficient financial resources
available to enable it to meet obligations as they fall due, or can secure them at excessive cost.
The Group recognises the nature of liquidity risk and manages the risk through a well-developed liquidity
management structure comprising of a diverse range of controls, procedures and limits. The Group has to
comply with liquidity ratios set by both foreign and local banking regulators, as well as, with internal limits.
The Group monitors and manages liquidity risk through the use of the following set of controls:
(a) Balance in the Minimum Reserve Account as set by the local regulators.
(b) Mismatch ratios between maturing assets and liabilities for time periods up to one month.
(c) Ratio of liquid assets over total customer deposits.
A substantial portion of the Group’s assets is funded with customer deposits and bonds issued by the Bank.
Savings and sight deposits cover immediate cash needs while long-term investment needs are usually
covered by the issue of bonds and time deposits.
Although deposits may be withdrawn on demand with no advance notice, the large spread by number and
type of depositors helps to ensure against unexpected fluctuations and constitutes a stable deposit base.
Long-term policy decisions, which affect the Group’s liquidity, rest with the Group Assets and Liabilities
Committee (ALCO). To this effect, the Group maintains adequate cash and cash equivalents in all major
currencies.
The following tables analyse assets and liabilities of the Group into relevant maturity groupings based on the
remaining period from the balance sheet date to the contractual maturity date. These tables include in the net
liquidity gap positions stemming from the life insurance policy contract liabilities and the assets which relate
to the above insurance policy contracts. These positions are not positions of the Group but positions of the
owners of the insurance contracts. The 2004 comparatives have been adjusted accordingly.
2005
Assets
Cash and balances with Central Banks
Reinsurance assets
Other assets
Intangible assets
Investment property
On
demand
3 months
or less
Over 3
months
but less
than
1 year
Over 1
year
but less
than
5 years
Over
5 years
Cí ‘000
Cí ‘000
Cí ‘000
Cí ‘000
Total
Cí ‘000
Cí ‘000
280.178
895.176
19.411
422.752
47.245
110
-
4.845
753.950
5
14.478
-
1.977
771.176
5.417
20.119
24.704
26.255
-
12.862
304.183
10.400
113.042
54.730
14.844
-
132.392 432.091
- 1.365.173
56.593
96.613 172.890
872.470 1.293.919 3.995.698
15.817
6.303
6.303
121.518
84.326 339.005
408.227
56.880 544.546
17.353
17.210
90.140
5.880
5.880
46.246
46.246
15.110
15.110
89.832
89.832
Total assets
1.948.632 1.291.811
557.306 1.482.574 1.838.408 7.118.731
Liabilities
Due to other banks
Customer deposits
Senior debt
Other liabilities
47.366
74.968
2.022.234 2.917.693
19.155
61.594
39.398
-
204
688.286
32.512
18.114
-
93.431
171.833
36.946
5.645
-
- 122.538
4.777 5.726.421
- 171.833
167.754 256.367
24.459 149.210
96.634
96.634
Loan capital
2.131.194 3.051.214
-
739.116
8.754
307.855
51.352
293.624 6.523.003
153.048 213.154
Total liabilities
2.131.194 3.051.214
747.870
359.207
446.672 6.736.157
Net liquidity gap
(182.562) (1.759.403) (190.564) 1.123.367 1.391.736
2004
Total assets
Total liabilities
1.584.942
1.660.545
Net liquidity gap
1.056.940
2.479.572
(75.603) (1.422.632)
473.983 1.292.222
619.982
366.660
(145.999)
925.562
382.574
1.470.042 5.878.129
411.285 5.538.044
1.058.757
340.085
A N N U A L
Liquidity risk (continued)
R E P O R T
2 0 0 5
127
L A I K I
G R O U P
128
Fair value of assets and liabilities
The fair value represents the amount at which an asset could be exchanged, or a liability settled, in an arm’s
length transaction between two knowledgeable parties. Differences therefore can arise between book values
recorded under the historical cost and fair value estimates. The definition of fair value assumes that the Group
is a going concern without any intention or requirement to curtail materially the scale of its operations or to
undertake a transaction on adverse terms. Generally accepted methods of determining fair value include
reference to quoted market prices or to prices prevailing for similar financial instruments.
With reference to the above, the book value of the Group’s assets and liabilities is not materially different from
their fair value with the exception of investments held-to-maturity and investments in associates.
(a) Due from other banks
Due from other banks include inter-bank placements and items in the course of collection. The fair value
of floating as well as fixed rate placements closely approximates their book value since their average
maturity is between three to six months.
(b) Advances to customers
Advances to customers are net of provisions for impairment. The vast majority of advances is floating
rated and as such its fair value is its book value.
(c) Investments held-to-maturity
The fair value of investments held-to-maturity amounts to Cí 229.421.000. Fair value for investments
held-to-maturity is based on market prices or broker/dealer price quotations. Where this information is not
available, fair value has been estimated using quoted market prices for securities with similar credit,
maturity and yield characteristics.
(d) Deposits
The estimated fair value of deposits with no stated maturity, which includes non-interest-bearing
deposits, is the amount repayable on demand. The estimated fair value of fixed as well as floating
interest-bearing deposits closely approximates their book value since their average maturity is less than
one year.
(e) Loan capital
Loan capital is floating rated and its fair value closely approximates its book value.
(f) Investments in associates
Investments in associates are accounted for in the consolidated financial statements under the equity
method of accounting. Under this method the book value of the investment consists of the Group’s share
of the net assets of the associated company.
For a portfolio of insurance contracts, the principal risk that the Group faces under its insurance contracts is
that the actual claim and benefit payments exceed the carrying amount of the insurance liabilities. The Group
has developed its insurance underwriting strategy to diversify the type and geographical location of insurance
risks accepted.
(a) Long-term life insurance contracts
For contracts where death is the insured risk, the main source of uncertainty is that epidemics such as
AIDS and wide-ranging lifestyle changes (eating, smoking and exercise habits), could result in future
mortality being significantly worse than in the past.
This risk is taken into account when the periodical adjustment of the mortality risk charges takes place, in
accordance with the provisions of the insurance contracts.
The Group manages this risk through reinsurance arrangements and its underwriting strategy. The
underwriting strategy is intended to ensure that the risks underwritten are well diversified in terms of type
of risk and the level of insured benefits and to reflect the medical history of the applicant.
The table below presents the concentration of insured benefits before reinsurance arrangements across
five bands of insured benefits per individual life assured, at the balance sheet date:
2005
Benefits assured (Cí’000)
0 - 200
200 - 400
400 - 800
800 -1.000
Over 1.000
Cí ‘m
2.188
272
101
22
25
2.608
2004
83,9%
10,4%
3,9%
0,8%
1,0%
Cí ‘m
2.005
183
68
14
15
87,8%
8,0%
3,0%
0,6%
0,6%
2.285
The risk is concentrated in the lower value band of up to Cí 200.000. This has not materially changed from
last year.
2 0 0 5
R E P O R T
Insurance risk
The risk under any one insurance contract is the possibility that the insured event occurs and the uncertainty
of the amount of the resulting claim. By the very nature of an insurance contract, this risk is random and
therefore unpredictable.
A N N U A L
129
L A I K I
G R O U P
Insurance risk (continued)
(b) Short-term life insurance contracts
These contracts are mainly team contracts renewable annually, issued to employers to insure their
commitments to their employees for death and disability.
The insurance risk is affected by the factors affecting long-term life insurance contracts, as mentioned
above. Additionally it depends on the industry in which the employer operates.
The following table analyses the aggregated insured benefits for short-term life insurance contracts
before and after reinsurance arrangements at the balance sheet date by industry sector (disability
benefits under the terms of the insurance contract are equal or smaller than death benefits).
Industry
130
Government & Semi-Governmental Organisations
Financial
Retail
Tourism
Shipping
Manufacturing
Construction
Other
Total benefits
Before
reinsurance
After
reinsurance
Cí ‘000
Cí ‘000
523.927
309.974
29.482
27.140
18.643
17.410
14.685
11.448
952.709
55,0%
32,5%
3,1%
2,9%
2,0%
1,8%
1,5%
1,2%
75.611
41.893
8.600
7.587
4.302
3.677
5.234
4.676
49,9%
27,6%
5,7%
5,0%
2,8%
2,4%
3,5%
3,1%
151.580
(c) General business - frequency and severity of claims
The principal risk that the Group faces under its insurance contracts is that the actual claims and benefit
payments exceed the book amount of the insurance liabilities. This could occur because the frequency or
severity of claims and benefits are greater than estimated.
The Group manages these risks through its underwriting strategy, adequate reinsurance arrangements
and proactive claims handling.
The underwriting strategy aims to ensure that only acceptable risks are undertaken by the Group. There
are in place underwriting instructions and limits that facilitate the company’s objective. Furthermore, the
company has an internal Risk & Survey Department, which is responsible for the proactive compliance of
our clients with specific safety standards.
The claims handling strategy of the Group aims to ensure that the company deals efficiently and
effectively with every claim from the time it occurs in order to proceed with a speedy settlement and to
avoid adverse developments and increased cost.
(d) General business - sources of uncertainty in the estimation of future claim payments
Insurance contract claims are usually payable on a claims-occurrence basis. The Group is liable for all
insured events that occurr during the term of the contract, even if the loss is discovered after the end of
the contract term. As a result, some claims are settled over a long period of time and the largest element
of the claims provision relates to incurred but not reported claims (IBNR).
The estimated cost of claims includes direct expenses to be incurred in settling claims, net of the
expected subrogation value and other recoveries.
The Group takes all reasonable steps to ensure that it has appropriate information regarding its claims
exposures. However, given the uncertainty in establishing claims provisions, it is likely that the final
outcome will prove to be different from the original liability established. The liability for these contracts
comprises a provision for IBNR, a provision for reported claims not yet paid and a provision for unexpired
risks (where and if applicable) at the balance sheet date.
In calculating the estimated cost of reported claims not yet paid, the Group uses a case-by-case review
methodology for all claims and the estimated cost of these claims is based on the facts of each claim,
information available and information of settling claims with similar characteristics in previous periods.
The estimation of IBNR is generally subject to a greater degree of uncertainty than the estimation of the
cost of settling claims already notified to the Group, where information about the claim event is available.
IBNR claims may not be apparent to the insured until many years after the event that gave rise to the
claims has happened.
The Group’s estimate of IBNR provision is based on previous years’ experience (on average) and takes
into account anticipated future changes and developments.
2 0 0 5
R E P O R T
Insurance risk (continued)
(c) General business - frequency and severity of claims (continued)
The Group has in place a conservative reinsurance program, which includes proportional, excess of loss
and catastrophe coverage. All reinsurance companies are at least A rated by Standard & Poor’s or similar
rating agencies. The objective of the reinsurance program is to reduce the Group’s exposure within
acceptable limits. The annual reinsurance program is reviewed and approved by the Reinsurance
Committee of the Board of Directors.
A N N U A L
131
48. DIRECTORS’ INTEREST
L A I K I
G R O U P
The beneficial interest in the Bank’s share capital owned by the directors, their spouses and minor children
and by companies in which they hold directly or indirectly at least 20% of the voting rights in a general meeting
was as follows:
Beneficial interest
at 31 December, 2005
Beneficial interest
at 3 April, 2006
0,35%
0,01%
8,73%
0,06%
0,01%
0,35%
0,01%
8,73%
0,06%
0,01%
Kikis N. Lazarides
Michalis R. Erotokritos
Marios and Platon E. Lanitis*
Christos Papaellinas
Rena Rouvitha Panou
* The percentage controlled by Messrs Marios and Platon E. Lanitis is made up of the holdings of Lanitis E.C. Holdings Ltd
(31.12.2005: 8,66%, 03.04.2006: 8,66%), Mr. Marios E. Lanitis (31.12.2005: 0,04%, 03.04.2006: 0,04%) and Mr. Platon E.
132
Lanitis (31.12.2005: 0,02%, 03.04.2006: 0,02% ).
49. SHAREHOLDERS WITH MORE THAN 5% OF SHARE CAPITAL
Shareholding in excess of 5% of the Bank’s share capital is held by the following:
HSBC Finance (Netherlands)
Lanitis E.C. Holdings Ltd
Provident Fund of the Employees of
Cyprus Popular Bank Ltd
Marfin Financial Group Holdings S.A.
Tosca Investment Fund
Shareholding at
31 December, 2005
Shareholding at
3 April, 2006
21,16%
8,66%
8,66%
5,66%
-
5,66%
9,98%
8,18%
2005
Cí ‘000
2004
Cí’000
3
7
3
7
56.568
3.551
71.500
3.900
10
10
60.119
75.400
934
696
Total advances
61.053
76.096
Tangible securities
95.675
115.452
Interest income
3.687
3.920
Deposits
4.323
4.483
115
159
Advances to Directors and their
connected persons:
More than 1% of the net assets of the Group
Less than 1% of the net assets of the Group
Advances to other key management
personnel and their connected persons
Interest expense
Additionally, there are contingent liabilities of Cí 16.800.000 (2004: Cí 17.100.000) for guarantees and
Cí 4.900.000 (2004: Cí 4.300.000) for letters of credit to Directors and their connected persons, whose credit
facilities exceed an amount equivalent to 1% of the net assets of the Group. For Directors and their connected
persons, whose credit facilities do not exceed the 1% threshold of the net assets of the Group, there are
contingent liabilities of Cí 10.000 for guarantees (2004: Cí 10.000) and Cí 450.000 for letters of credit (2004:
Cí 400.000). There were no contingent liabilities to other Group key management personnel.
Connected persons include the spouse, minor children and companies in which a director holds directly or
indirectly at least 20% of the voting rights in a general meeting.
The deposits by associates of the Bank at 31 December, 2005 were Cí 5.591.000 (2004: Cí 4.979.000). At 31
December, 2005 there were deposits of Cí 6.339.000 (2004: Cí 3.680.000) and advances of Cí 5.273.000
(2004: Cí 1.806.000) with the HSBC Group, which was regarded as a related party. The deposits of the
provident funds of the employees of Laiki Group, which are also regarded as related parties, were
Cí 5.840.000 (2004: Cí 5.596.000).
The above transactions are carried out as part of the normal banking activities of the Group, on commercial
terms.
2 0 0 5
2004
Number of
Directors
R E P O R T
2005
Number of
Directors
A N N U A L
50. RELATED PARTY TRANSACTIONS
133
50. RELATED PARTY TRANSACTIONS (continued)
L A I K I
G R O U P
Group key management personnel compensation
134
2005
Cí ‘000
2004
Cí ‘000
Compensation of Directors:
Fees
149
67
Remuneration under executive role:
Salaries and other short-term benefits
Employer’s social insurance contributions
Retirement benefits plan expense
380
49
14
424
53
12
Total remuneration under executive role
443
489
Total compensation of Directors
592
556
Compensation of other key management personnel
Salaries and other short-term benefits
Employer’s social insurance contributions
Retirement benefits plan expense
321
35
99
304
33
93
Total compensation of other key management personnel
455
430
1.047
986
Total compensation of key management personnel
Key management personnel for 2005 and 2004 include eleven Directors, two of which had executive duties,
and five General Managers.
During 2005, an Executive Director’s total remuneration including contributions to retirement benefits plan
was in the range of Cí 150.000 to Cí 200.000 and an Executive Director’s total remuneration including
contributions to retirement benefits plan was in the range of Cí 250.000 to Cí 300.000. During 2004 an
Executive Director’s total remuneration including contributions to retirement benefits plan was in the range of
Cí 150.000 to Cí 200.000 and an Executive Director’s total remuneration including contributions to retirement
benefits plan was in the range of Cí 300.000 to Cí 350.000.
Following the withdrawal of the Chairman from his executive duties on 30 September, 2005, a provision of
Cí 500.000 has been made for an amount due to him, as provided by his employment contract. Between
1 October, 2005 and 31 December, 2005, the Chairman’s pension amounted to Cí 41.000.
A N N U A L
In the Annual General Meeting, which is scheduled for 24 May 2006, the Board of Directors has decided to
propose a dividend of 12% (6 cent per share of 50 cent nominal value).
52. INVESTMENTS IN SUBSIDIARY COMPANIES
The main subsidiary companies of the Group are as follows:
Activity
Laiki Bank (Hellas) S.A.
Laiki Leasing S.A.
Laiki Factoring S.A.
Laiki A.E.D.A.K.
Laiki Attalos Securities S.A.
Laiki Life S.A.
Laiki Insurance Agencies S.A.
Laiki Bank (Australia) Ltd
Laiki Bank (Guernsey) Ltd
Laiki Cyprialife Ltd
Laiki Insurance Ltd
Laiki Brokers (Insurance & Consultancy
Services) Ltd
Laiki Insurance Agencies Ltd
Philiki Insurance Co Ltd
Paneuropean Insurance Co Ltd
Cyprialife Ltd
The Cyprus Popular Bank (Finance) Ltd
Laiki Factors Ltd
Laiki Investments E.P.E.Y.
Public Company Ltd
Laiki Brokerage E.P.E.Y. Ltd
Laiki E.D.A.K. and Asset Management Ltd
Laiki Lefkothea Centre Ltd
Labancor Ltd
LCL Cavendish Place Properties Ltd
Auction Yard Ltd
Banking
Leasing
Factoring and invoice
discounting
Mutual funds management
Brokerage
Life assurance
Insurance agents
Banking
Banking
Life assurance
General insurance
2 0 0 5
In July 2005 a dividend payment of Cí 9.120.000 took place (3 cent per share of 50 cent nominal value). The
dividend has been accounted for in shareholders’ equity as an appropriation of retained earnings. An amount
of Cí 3.092.000 has been re-invested in shares of the Bank.
R E P O R T
51. DIVIDENDS
Issued Shareholding
capital
Cí ‘000
59.744
11.391
78%
89%
3.471
683
1.744
1.583
103
23.296
1.697
6.200
8.000
89%
87%
82%
89%
89%
100%
100%
100%
100%
Reinsurance agents
Insurance agents
Investment company
Investment company
Investment company
Instalment finance and
leasing
Factoring and invoice
discounting
100
100
5.765
8.250
5.000
100%
100%
100%
100%
100%
3.000
100%
500
100%
Investment banking
Brokerage
Asset management
Property development
Auctions
40.000
1.000
1.000
500
100
1.000
150
57%
57%
57%
100%
100%
100%
100%
135
L A I K I
G R O U P
52. INVESTMENTS IN SUBSIDIARY COMPANIES (continued)
136
The Cyprus Popular Bank Public Company Ltd is registered in Cyprus and operates in Cyprus and the United
Kingdom. Laiki Bank (Hellas) S.A., Laiki Leasing S.A., Laiki Factoring S.A., Laiki A.E.D.A.K., Laiki Attalos
Securities S.A., Laiki Life S.A. and Laiki Insurance Agencies S.A. are registered and operate in Greece. Laiki
Bank (Australia) Ltd is registered and operates in Australia. Laiki Bank (Guernsey) Ltd is registered and
operates in Guernsey. All other subsidiary companies are registered and operate in Cyprus.
There were no changes in the participation rates in the subsidiary companies during the year ended 31
December, 2005.
53. POST BALANCE SHEET EVENTS
The Cyprus Popular Bank Public Company Ltd successfully completed the Public Offer for the purchase of the
majority share capital of the Serbian Bank Centrobanka a.d. on 20 January, 2006. The Bank acquired 90,43%
of the total share capital of Centrobanka a.d. for a total amount of euro 33,6 m.
Centrobanka a.d. is based in Belgrade and has 5 branches, 3 business units and 22 sub-branches. It has a
market share in Serbia of 1,6% in deposits and 1,4% in advances.
Due to the short period of time between the acquisition’s completion date and the date of preparation of the
financial statements, the provision of additional information about the acquisition is not possible.
54. SUPPLEMENTARY INFORMATION
The income statement for the year ended 31 December, 2005, as well as the balance sheet as at 31 December,
2005, in euro, constitute supplementary information. The translation from Cyprus pounds (the Group’s
functional currency) to euro for the purpose of this supplementary information was performed using the
exchange rate for euro as at 31 December, 2005, which was 0,5735.
55. APPROVAL OF FINANCIAL STATEMENTS
The financial statements were approved by the Board of Directors on 3 April, 2006.
IMPORTANT ADDRESSES > 2005
IMPORTANT ADDRESSES
G R O U P
CYPRUS
GROUP’S HEAD OFFICES
Laiki Group Building
154 Limassol Avenue
P.O. Box 22032, 1598 Nicosia
Tel: 22-552000, Fax: 22-811491
E-mail: laiki.telebank@laiki.com
LAIKI eBANK
www.laikiebank.com, Tel: 8000 2000
Calls from overseas: 357 22 887766
INVESTOR RELATIONS
E-mail: investorrelations@laiki.com
Tel: 22-811865, Fax: 22-811811
MAIN BRANCHES LAIKI BANK
L A I K I
NICOSIA
Main Branch Nicosia (001)
39 Arch. Makarios III Avenue, 1065 Nicosia
Tel: 8000 2000, Fax: 22-812250
LIMASSOL
138
Main Branch Limassol (020)
Corner Athinon & N. Xiouta, 3041 Limassol
Tel: 8000 2000, Fax: 25-815141
LARNACA
Main Branch Larnaca (040)
33 Lord Byron St., 6023 Larnaca
Tel: 8000 2000, Fax: 24-814111
PAPHOS
Main Branch Paphos (063)
10 Apostolou Pavlou Avenue, 8046 Paphos
Tel: 8000 2000, Fax: 26-816182
FAMAGUSTA AREA
Main Branch Paralimni (037)
102-104 April 1st Str., 5280 Paralimni
Tel: 8000 2000, Fax: 23-813016
DOMESTIC BANKING
154 Limassol Avenue, P.O.Box 22032, 1598 Nicosia
Tel: 22-811101, Fax: 22-811489
INTERNATIONAL OPERATIONS
154 Limassol Avenue, P.O.Box 22032, 1598 Nicosia
Tel: 22-811123, Fax: 22-811489
SUBSIDIARY COMPANIES
LAIKI FINANCE
19 Stasinou Str., Engomi, 2404 Nicosia
P.O.Box 24515, 1300 Nicosia
Tel: 22-552000, Fax: 22-367296
LAIKI INVESTMENTS (FINANCIAL SERVICES)
39 Evagorou, Etita Court, 1st floor, 1066 Nicosia
Tel: 22-718300, Fax: 22-718568
LAIKI FACTORS
39 Arch. Makarios III Avenue, 1065 Nicosia
Tel: 22-552000, Fax: 22-812333
LAIKI CYPRIALIFE
64 Arch. Makarios & 1 Karpenisiou
1077 Nicosia
Tel: 22-887777, Fax: 22-887460
LAIKI INSURANCE
35,37 & 45 Vyzantiou Str.
2064 Strovolos, Nicosia
Tel: 22-887600, Fax: 22-887509
HEAD OFFICES
16 Panepistimiou, 106 72 Athens
Tel: 30210 33 50 000, Fax: 30210 32 43 141
SUBSIDIARY COMPANIES
LAIKI LEASING S.A.
24 Sygrou & Hadjichristou Avenue
117 42 Athens
Tel: 30210 90 03 400, Fax: 30210 90 03 401
LAIKI BANK A.D.
22 Dalmatinska Str. 11000 Belgrade,
Tel: 38111 3306425, Fax: 38111 3241448
REPRESENTATIVE OFFICES
LAIKI FACTORING S.A.
USA - NEW YORK
24 Sygrou & Hadjichristou Avenue
117 42 Athens
Tel: 30210 90 03 460, Fax: 30210 90 03 461
LAIKI AEDAK
450, Park Avenue
19th floor, suite no. 1901
New York, NY 10022
Tel: 1212 319 3515, Fax: 1212 319 3516
E-mail: laiki.ny@laiki.com
16 Panepistimiou, 106 72 Athens
Tel: 30210 33 50 200, Fax: 30210 33 50 111
CANADA - TORONTO
5 Kanari, 106 71 Athens
Tel: 30210 36 79 500, Fax: 30210 36 44 912
484, Danforth Avenue, 2nd floor
Toronto, Ontario M4K 1P6
Tel: 1416 466 8180, Fax: 416 466 9609
E-mail: laiki.toronto@laiki.com
LAIKI LIFE INSURANCE COMPANY S.A.
MONTREAL
54 Cyprus & Electroupoleos
164 52 Argyroupoli
Tel: 30210 99 46 680, Fax: 30210 99 38 187
5724, Ave. du Parc Montreal,
Quebec H2V 4H1
Tel: 1514 495 8118, Fax: 1514 495 9746
E-mail: laiki.montreal@bellnet.ca
LAIKI ATTALOS SECURITIES S.A.
LAIKI INSURANCE AGENTS LTD
54 Cyprus & Electroupoleos
164 52 Argyroupoli
Tel: 30210 99 46 660, Fax: 30210 99 38 731
LAIKI BANK (AUSTRALIA) LTD
Laiki Bank House, Level 4, 219-223,
Castlereagh Street, Sydney NSW 2000
Tel: 612 8262 9000, Fax: 612 9283 7723,
E-mail: iba_info@laiki.com
LAIKI BANK UK
14 Cavendish Place, London W1G 9DJ
Tel: 4420 7307 8400, Fax: 4420 7307 8404
E-mail: ukenquiries@laiki.com
SOUTH AFRICA - JOHANNESBURG
2nd Floor, Village Walk Office Complex
Village Walk Shopping Centre, Corner Maude & Rivonia
Drive Sandown, 2146 Gauteng
Tel: 27 11 263 9880, Fax: 27 11 884 0558,
E-mail: laiki.sa@laiki.com
RUSSIA - MOSCOW
Office 1005A, 10th floor World Trade Centre,
Entrance no. 3, Krasnopresneskaya Nab. 12,
Moscow 123610
Tel: +7495 9670185, Fax: +7495 9670186
E-mail: laiki.moscow@laiki.com
2 0 0 5
LAIKI BANK (GUERNSEY) LTD
21 Glategny Esplanade, St Peter Port,
Guernsey, Channel Islands, GYI, 4HX
Tel: 44 (0) 1481 722988, Fax: 44 (0) 1481 722998
R E P O R T
LAIKI BANK (HELLAS) S.A.
A N N U A L
OVERSEAS
139

laiki annual cover ENG 05

Transcription

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