THE HAGUE, Netherlands, Feb. 23 /PRNewswire/ --
- Net profit at EUR 92 million for the year 2008, despite the
challenging market environment
- Fourth quarter results significantly impacted by market
conditions resulting in a net loss of EUR 61 million, mainly driven by
fair value adjustments and impairments on equity and mezzanine
investments
- Strong capitalisation with Tier-1 ratio of 16.6% (core
Tier-1 ratio at 13.5% and BIS-ratio at 18.9%) and continued focus on
de-risking by reducing non-client related portfolios
- Further improved diversity of funding; over EUR 5 billion in
external funding raised since the beginning of 2008
- Decrease of operational expenses by 14%
- Members of the Managing Board voluntarily waived their end
of year performance bonus
Jeroen Drost, Chief Executive Officer of NIBC
"The financial crisis that intensified in 2008 left few in the market unscathed. What began the year as an interbank crisis spread into the real economy. This is reflected in our fourth quarter results that were impacted by fair value adjustments and impairments on equity and mezzanine investments. For the year 2008 we made a profit of EUR 92 million and further strengthened our capital and liquidity position. By addressing the situation at an early stage, we minimised the impact on our financial performance and by the autumn were in a relatively stable shape. We sharpened our strategy and streamlined our organisation in order to focus on our strengths and are well placed to continue to deliver value added support to our key mid-sized clients."
NIBC Bank key figures *
In EUR millions +/- Q4 Q3 +/- Q4 +/-
2008 2007 2008 2008 2007
Profit after tax from
continuing operations 93 242 -61% -61 45 38
Net profit attributable to
parent shareholder 92 98 -6% -61 45 34
Efficiency ratio 54% 45% 48% 48%
Return on net asset value
(after tax) 6% 17% -16% 13% 11%
* Figures in this press release are not audited
Note: small differences are possible in the tables due to rounding
Recent developments
Financial results NIBC Bank for the year 2008
- Net profit attributable to parent shareholders decreased by 6% to EUR 92 million; 2007 net profit included losses on discontinued operations. Profit after tax from continuing operations amounted to EUR 93 million in 2008, a decline of 61% compared to 2007. This decrease is mainly due to fair value adjustments and impairments on equity investments and mezzanine investments, partly compensated by positive trading income.
- NIBC's continued de-risking of the balance sheet resulted in total assets of EUR 28.8 billion as at 31 December 2008, compared to EUR 31.8 billion at year-end 2007. The de-risking primarily focused on reducing non-client related portfolios in the financial markets area and contributed to the strong Tier-1 ratio of 16.6%, with the core Tier-1 ratio at 13.5% and the BIS-ratio at 18.9%.
- Operational expenses were reduced by 14% in 2008, mainly as a result of the decrease in staff numbers, primarily due to natural turnover, and lower variable compensation.
Funding diversification strategy
- Diversification of funding is a key objective of NIBC's strategy. In 2008, NIBC took decisive steps to diversify its funding and ensured stable, transparent and tightly-controlled liquidity, which helped in Q3 and Q4 of 2008.
- NIBC's covered bond programme was launched in the second quarter of 2008 under which EUR 0.7 billion was issued in 2008.
- NIBC Direct, NIBC's online retail savings programme, was successfully launched in September 2008 in the Netherlands and recently reached the EUR 1 billion mark. On 3 February 2009, NIBC Direct was launched in Germany.
- In December 2008, NIBC successfully issued EUR 1.4 billion Medium Term Notes under the Dutch state's Credit Guarantee Scheme. In February 2009, a second issue of EUR 1.5 billion was closed.
- All in all NIBC has raised over EUR 5 billion in external funding since the beginning of 2008, which positions the bank well for the coming period.
Transactions
NIBC Bank arranged important transactions in its home markets and was thus able to support its key mid-sized clients during these challenging times.
- NIBC European Infrastructure Fund closed three transactions. The Fund took a minority stake in Electrawinds Biostoom NV, owner of the bio steam power plant that is currently being built in Ostend and acquired a 49% stake in the SAV group, an investment in waste incineration assets. As lead investor of a consortium consisting of infrastructure funds (the Appia Consortium), the Fund acquired Welcome Break Group Holdings, the second largest Motorway Service Areas operator in the United Kingdom.
- NIBC acted as mandated co-lead arranger in the buyout of See Tickets International, the ticketing service of Joop van den Ende's Stage Entertainment.
- Together with Commonwealth Investments, NIBC raised EUR 64 million for the European CMBS Opportunity Fund. This fund aims to capture some of the opportunities that have arisen in the current credit environment.
- NIBC Capital Partners closed several transactions for the NIBC Merchant Banking Fund. In the Netherlands, it provided EUR 20 million growth capital to CycloMedia Technology, acquired a significant majority stake in the Dutch sheet pile specialist Busker Hei- en Waterwerken and invested in the management buy-out of Euretco, a retail service provider. In Germany, the fund acquired Gebr. Reinfurt GmbH Co. KG, a specialist manufacturer of miniature, high-precision ball bearings.
- Bookrunners and Mandated Lead Arrangers NIBC and Scotia Capital successfully closed syndication of the USD 225 million Term Loan for GE SeaCo SRL. The facility raised an oversubscription in general syndication and was increased to USD 250 million.
- NIBC acted as advisor to the family shareholders in the sale of Grolsch to SABMiller.
- Bookrunners and Mandated Lead Arrangers NIBC Bank, Bank of Scotland, and Standard Chartered Bank successfully closed syndication of the USD 465 million Secured Finance Facility for Bully 1 Limited. Bully 1 is a joint venture of Shell EP Offshore Ventures Ltd. and Frontier Drillships Ltd., a subsidiary of Frontier Drilling.
- NIBC sold its stake in Vitae to Manpower Netherlands.
Sharpened strategy
- We sharpened our strategy and streamlined our organisation in order to focus on our strengths. Our strengths lie in our credit skills, especially in asset finance, our strong mid market franchise, our investment management capabilities, and our high quality people and their entrepreneurial sprit. The shift to a structure based around the two pillars of Merchant Banking and Specialised Finance enables us to perform more effectively in addressing the needs of our mid-sized clients.
- With strong capital adequacy, diversified funding and a healthy geographical and industrial business mix, NIBC remains in a strong position to further deliver market leading services to its clients. This is exemplified by the transactions we did in 2008.
- In the context of the sharpened strategy and enhanced focus, and to keep pace with the changed market circumstances, NIBC has improved the efficiency of the organisation and continues to focus on cutting costs where possible and appropriate.
- Risk Management was a major focus throughout 2008. A new Chief Risk Officer was appointed and Risk Management staff was strengthened. Main priorities in 2008 were a tightly controlled liquidity plan, controlling the structured credit portfolios and keeping a close watch on the loan portfolio.
Supervisory Board
As per 19 February 2009, Mr. Flowers resigned as member of the Supervisory Board. The Supervisory Board has nominated Mrs. Rocker, Managing Director at J.C. Flowers & Co. LLC, for appointment in his place.
NIBC Bank profit & loss 1
In EUR millions +/- Q4 Q3 +/- Q4 +/-
2008 2007 2008 2008 2007
Net interest income 213 238 57 58 51
Net fee and commission
income 43 62 8 9 19
Dividend income 50 84 10 11 20
Net trading income 84 -24 5 22 -24
Gains less losses from
financial assets -62 107 -88 -3 16
Share in result of
Associates 8 1 1 0 0
Other operating income 2 6 0 1 0
Operating income 337 474 -29% -6 98 -107% 82 -108%
Personnel expenses -108 -135 -17 -27 -22
Other operating expenses -66 -59 -19 -18 -15
Depreciation and
Amortisation -8 -17 -2 -2 -2
Operating expenses -181 -211 -14% -38 -47 -19% -39 -3%
Impairment of corporate
Loans -42 -2 -17 -1 -4
Impairment of other
interest bearing assets -20 1 - -20
Total expenses -242 -212 14% -75 -48 57% -44 73%
Operating profit 95 262 -64% -82 50 38
Tax -1 -20 20 -4 0
Profit after tax from
continuing operations 93 242 -61% -61 45 38
Result from discontinued
Operations -141 -2
Net profit 93 101 -7% -61 45 36
Result attributable to
minority interest -1 -3 0 -1 -1
Net profit attributable to
parent shareholder 92 98 -6% -61 45 34
1) All figures exclude the consolidation effect of controlled non-financial investments (see enclosure for more information)
Income and expenses for the year 2008 compared to the year 2007
- Operating income declined 29% in the year 2008 compared to the year 2007. This decrease is mainly due to substantial negative fair value adjustments and impairments on equity and mezzanine investments and lower business volume in the current market resulting in lower interest, fee and dividend income, partly compensated by higher trading income in 2008.
- Client activity-related income sources, i.e. interest, fee and dividend income and gains less losses from financial assets, collectively account for EUR 244 million in income.
- Trading income is by its nature more volatile. A significant part of NIBC's balance sheet is designated as fair value through profit or loss. This means that as a result of credit spread movements, trading income is affected by mark-to-market movements on both assets and liabilities. The trading income of EUR 84 million was positively affected by repurchases and revaluations of liabilities.
- Operating expenses were reduced by 14% in 2008. This was caused by a decrease in staff numbers, mainly due to natural turnover, and lower variable compensation.
- Total impairments in 2008 were EUR 62 million, of which EUR 42 million concerned impairments on our corporate loan portfolio (which is approximately 52 bps of our corporate loan portfolio). The remaining impairments were on our mezzanine investments and other interest bearing assets.
- In 2008, tax expense decreased from EUR 20 million to EUR 1 million, which is mainly explained by the lower operating profit, partially off-set by a decrease of income components not subject to tax.
NIBC Bank other key figures
31-Dec 31-Dec 31-Dec
2008 2007 2007
Basel II Basel II Basel I
Tier-1 ratio 16.6% 12.7% 11.7%
Core Tier-1 ratio 13.5% 10.2% 9.4%
BIS-ratio 18.9% 15.0% 13.4%
Shareholders' equity (in EUR
million) 1,638 1,558 1,558
Number of FTEs (end of period) 614 703 703
Risk weighted assets (in EUR billion) 11.5 14.2 15.4
Shareholders' equity and capital ratios
- In 2008, shareholders' equity of NIBC Bank increased from EUR 1,558 million(1) to EUR 1,638 million. The increase of EUR 80 million mainly stems from the net profit of EUR 92 million.
- The further de-risking of the balance sheet resulted in total assets of EUR 28.8 billion as at end-December 2008, compared to EUR 31.8 billion at year-end 2007. This de-risking has primarily taken place by reducing non-client related portfolios in the financial markets area.
- In July 2008, NIBC reclassified certain assets, for which no active market existed and which management intends to hold for the foreseeable future. These reclassifications have a positive effect of EUR 124 million on net profit. The fair value loss that would have been recognised in the revaluation reserve would have amounted to EUR 220 million. For further detail, please refer to the enclosures.
- The capital ratios of NIBC Bank are very strong (Tier-1 ratio of 16.6%, core Tier-1 ratio of 13.5% and a BIS-ratio of 18.9%) and well above the industry standard.
NIBC Holding results
- NIBC Holding is the parent company of NIBC Bank.
- The US commercial real estate securities portfolio in NIBC Holding is the main difference between NIBC Holding and NIBC Bank. NIBC had no exposure to US residential mortgages since August 2007. The total US commercial real estate securities portfolio has a carrying value of EUR 195 million at 31 December 2008 (being 28% of the nominal value).
- NIBC Holding posted a consolidated net loss of EUR 312 million in the fourth quarter of 2008, which is primarily the result of our yearly recalculations of the goodwill on our balance sheet that originates from the takeover by ABP/PGGM in 1999 (a non-cash event, resulting in an impairment of EUR 217 million) and the reported loss in the Bank in the fourth quarter. This results in an overall loss in NIBC Holding of EUR 414 million for the year 2008.
- The shareholders of NIBC Holding invested an additional EUR 400 million of equity in the first quarter of 2008, a clear endorsement of the strategy. This resulted in the capital ratios of NIBC Holding remaining very strong with a Tier-1 ratio of 16.7%, core Tier-1 ratio of 13.4% and a BIS-ratio of 19.0%.
- NIBC Holding will not pay any dividend to its shareholders over the year 2008.
Two pillar strategy: Merchant Banking and Specialised Finance
NIBC has sharpened its business strategy around two strategic pillars - Merchant Banking and Specialised Finance. We have streamlined our structure to concentrate on what we are good at.
- Combining advice, financing and co-investing, NIBC offers integrated solutions to mid-cap clients in the Benelux and Germany. In addition to the wide range of merchant bank activities, NIBC is a meaningful player in a select number of clearly defined asset financing classes. NIBC employs its credit skills to provide asset financing in sectors such as corporate lending, leveraged finance, oil & gas services, infrastructure, shipping and real estate.
- Nimble and flexible, NIBC reacts swiftly to the demands of its clients and the markets. NIBC is an accessible and innovative player, constantly seeking to develop state-of-the-art new products and services that are tailored to meet clients' evolving needs.
Profit after tax from continuing operations of NIBC Bank per strategic
pillar
In EUR millions +/- Q4 Q3 +/- Q4 +/-
2008 2007 2008 2008 2007
Merchant Banking -55 140 -87 -5 26
Specialised Finance 148 102 26 50 12
NIBC Total 93 242 -61% -61 45 38
Allocation
To give a clear overview of the results of the two strategic pillars Merchant Banking and Specialised Finance, income and expenses are allocated as follows:
- The expenses incurred within Risk Management and Corporate Center are allocated to the two strategic pillars based on the number of FTEs in each pillar.
- Certain client-related portfolios are managed by Merchant Banking and Specialised Finance together; all related income and expenses of these portfolios (interest, fee and trading income, but also impairments) are therefore allocated equally to the two strategic pillars.
- Treasury income and expenses are booked as part of Specialised Finance. However, the income on the strategic mismatch position is allocated equally to the two strategic pillars.
Merchant Banking
Through the Merchant Banking business, NIBC advises, finances, and co-invests with its mid-cap clients in the Benelux and Germany.
In EUR millions +/- Q4 Q3 +/- Q4 +/-
2008 2007 2008 2008 2007
Net interest income 48 65 13 11 12
Net fee and commission
Income 33 35 5 6 13
Dividend income 10 38 1 1 9
Net trading income -3 -6 0 -3 0
Gains less losses from
financial assets -60 107 -87 -3 15
Share in result of
Associates 3 1 1 0 0
Other operating income 1 2 0 0 0
Operating income 32 242 -87% -67 13 49
Operating expenses -73 -94 -23% -14 -19 -26% -20 -32%
Impairment of corporate
Loans -22 0 -9 -1 1
Impairment of other
interest bearing assets -20 1 -21
Total expenses -115 -93 -44 -20 123% -20 121%
Operating profit -83 149 -111 -7 30
Tax 28 -9 23 2 -3
Profit after tax -55 140 -139% -87 -5 26
Activities
The following services are provided by Merchant Banking:
- Coverage bankers maintain long-term relationships and provide strategic advice to NIBC's mid-cap clients in the Benelux and Germany. Together with product specialists operating in multidisciplinary teams, client teams deliver a wide range of customised products and solutions, including M&A advisory, financing, derivative products, mezzanine and equity investments.
- M&A provides advisory services in close cooperation with the coverage bankers. It executes M&A-related transactions, including mergers, acquisitions, disposals and buyouts.
- Investment Management creates and manages funds that are open to third- party investors. Funds have been developed in the fields of private equity and mezzanine (in companies), infrastructure and real estate. Investment Management also manages and services the bank's direct investments and investments in third-party funds.
Financial Results
Net interest income consists of the interest margin on the allocated corporate loan portfolio and the mezzanine portfolio managed by Investment Management. Fee income consists of M&A fees, Investment Management fees and fees on the allocated corporate loan portfolio. Dividend income and gains less losses from financial assets relate to NIBC's own equity/mezzanine investments portfolio. Net trading income is mark-to-market income on the equity/mezzanine investments portfolio and the allocated corporate loan portfolio.
- In line with the difficult market circumstances, the Merchant Banking activities were under pressure in 2008.
- In the fourth quarter of 2008, the level of gains less losses from financial assets was affected by the turmoil in the financial markets, which led to significant negative fair value adjustments and impairments on equity investments. Although we saw some profitable exits in the first half of 2008, no material exits took place in the second half of the year.
- The decline in net interest income mainly reflects the decrease in the average size of the allocated corporate loan portfolio.
- Fee income stayed relatively stable during the year, but saw a slowdown in the second half of the year as a result of the deteriorating economic environment.
- The decrease in dividend is due to large one-off dividends of EUR 21 million received on equity investments in the first half of 2007.
- Lower operating expenses are mainly the result of a decrease in the variable compensation and the number of staff.
- The impairment amount relates for EUR 22 million to impairments on the allocated corporate loan portfolio and for EUR 20 million to impairments on the mezzanine investments and other interest bearing assets.
- In 2008, tax expense turned into a gain of EUR 28 million, which is mainly explained by the lower profit before tax, partially off-set by a decrease of income components not subject to tax.
Specialised Finance
Specialised Finance provides asset and project financing in a select
number of clearly-defined asset classes: corporate lending, leveraged finance,
shipping, oil & gas services, infrastructure and real estate. It also includes
NIBC's retail activities in the residential mortgage market and in savings via
NIBC Direct.
In EUR millions +/- Q4 Q3 +/- Q4 +/-
2008 2007 2008 2008 2007
Net interest income 165 173 44 47 39
Net fee and commission
Income 10 27 3 3 6
Dividend income 40 46 10 10 11
Net trading income 87 -18 5 25 -24
Gains less losses from
financial assets -2 1 -1 0 1
Share in result of
Associates 4 0 0 0 -1
Other operating income 1 4 0 0 0
Operating income 305 233 31% 61 85 -28% 32 88%
Operating expenses -108 -117 -8% -24 -28 -14% -19 29%
Impairment of corporate
Loans -20 -2 -8 0 -5
Impairment of other
interest bearing assets 0 0 0
Total expenses -128 -119 7% -32 -29 11% -24 33%
Operating profit 178 113 57% 29 56 -48% 9
Tax -29 -11 -3 -6 3
Profit after tax 148 102 45% 26 50 -48% 12 123%
Activities
Specialised Finance groups together services in the following areas:
- Origination structures, arranges and underwrites debt financing for its clients and is organised around six asset classes: corporate lending, leveraged finance, shipping, oil & gas services, infrastructure & renewables and real estate.
- Structuring is the liaison between the origination and distribution teams and is responsible for structuring highly sophisticated transactions for clients as well as fund and tax structuring.
- The distribution team is the integrated distribution platform of NIBC and matches investor appetite with NIBC's origination network and structuring capabilities.
- Portfolio management works closely together with NIBC's coverage bankers and origination teams to monitor borrower performance. The team proactively monitors credit quality and covenant compliance of borrowers and reviews the status of assets provided as collateral.
- Retail markets activities include residential mortgage origination in the Netherlands and Germany on the basis of white labelling through a number of distribution partners and NIBC's online retail savings initiative, NIBC Direct.
Financial Results
Net interest income mainly consists of interest margin on the allocated corporate loan portfolio, the residential mortgages portfolio and commercial treasury portfolios. Fee income comprises fee income on the allocated corporate loan portfolio. Net trading income is mark-to-market income on the commercial treasury portfolios and allocated corporate loan portfolio.
- The decline in net interest income in 2008 is mainly due to a smaller average corporate loan portfolio.
- The lower fee income fully reflects the low level of origination as a result of the challenging business climate and the decreased average corporate loan portfolio.
- Dividend income within Specialised Finance is a stable source of income. The small decrease in this line item reflects the decrease of the average structured investment portfolio in 2008.
- In 2008, net trading income was positively affected by repurchases and revaluations of liabilities.
- Operating expenses fell by 8% because staff numbers decreased and variable compensation was lower.
- The impairment amount relates to impairments on the allocated corporate loan portfolio.
Profile of NIBC
NIBC is a Dutch merchant bank that offers integrated solutions to mid-cap clients in the Benelux and Germany through a combination of advising, financing and co-investing. The bank is also a meaningful player in a select number of clearly defined asset financing classes. It employs its expertise to provide asset financing in sectors such as corporate lending, leveraged finance, oil & gas services, infrastructure, real estate and shipping.
NIBC is an integrated, nimble and flexible organisation that reacts swiftly to the demands of its clients and markets. It is an innovative player that constantly seeks to develop products and services that are tailored to meet clients' evolving needs.
NIBC's clients are mid-cap companies, financial institutions, institutional investors, financial sponsors, family offices and high net worth entrepreneurs/owners. NIBC has offices in The Hague, Brussels, Frankfurt, London, Singapore and New York.
Enclosures
- Financial Report 2008, NIBC Bank N.V.
- Financial Report 2008, NIBC Holding N.V.
Disclaimer
The figures in this press release and the enclosures are not audited.
Presentation of information
The Annual Accounts of both NIBC Bank N.V. and NIBC Holding N.V. ("NIBC") are prepared in accordance with International Financial Reporting Standards as adopted by the European Union ('IFRS-EU'). In preparing the financial information in the Financial Reports for the year ended 31 December 2008 for both NIBC Bank N.V. and NIBC Holding N.V. (the "Financial Reports"), the same accounting principles are applied as in the 2007 NIBC's Annual Accounts except for the changes further explained in the Financial Report. All figures in this press release, the Financial Reports, and the enclosures are not audited. Small differences are possible in the tables due to rounding.
Condensed Financial Report for the year ended 31 December 2008
Non Audited Figures
NIBC Bank N.V.
23 February 2009
TABLE OF CONTENTS
Disclaimer
Explanatory Remarks
Consolidated Income Statement
Consolidated Balance Sheet
Consolidated Statement of Changes in Shareholders' Equity
Condensed Consolidated Cash Flow Statement
General information, most significant critical accounting estimates and
judgements
Index to the notes to the consolidated accounts
Income Statement
1 Segment reporting
2 Net trading income
3 Gains less losses from financial assets
4 Personnel expenses
5 Tax
Balance Sheet
6 Own debt securities in issue - Financial Liabilities at Amortised Cost
7 Debt securities in issue related to securitised mortgages - Financial
Liabilities at Amortised Cost
Own debt securities in issue - Financial Liabilities Fair Value Through
Profit
8 or Loss
9 Debt securities in issue structured - Financial Liabilities Fair Value
Through Profit or Loss
10 Subordinated liabilities - Amortised Cost
11 Subordinated liabilities - Fair value through profit or loss
Additional Information
12 Capital and shares
Impact reclassification financial instruments on the financial
position and
13 performance
14 Business combinations
15 Discontinued operations
16 Related party transactions
17 Legal proceedings
18 Subsequent events
19 Commitments and contingent assets and liabilities
DISCLAIMER
Presentation of information
The Financial Statements of NIBC Bank N.V. ("NIBC") are
prepared in accordance with International Financial
Reporting Standards as adopted by the European Union
('IFRS-EU'). In preparing the financial information in
this Condensed Financial Report for the year ended 31
December 2008 (the "Condensed Financial Report"), the
same accounting principles are applied as in the 2007
NIBC's Financial Statements except for the changes
further explained in the General Information paragraph of
the Condensed Financial Report. All figures in this
Condensed Financial Report are unaudited. Small
differences are possible in the tables due to rounding.
Cautionary statement regarding forward-looking statements
Certain statements in the Condensed Financial Report are
not historical facts and are "forward-looking" statements
that relate to, among other things, NIBC's business,
result of operation, financial condition, plans,
objectives, goals, strategies, future events, future
revenues and/or performance, capital expenditures,
financing needs, plans or intentions, as well as
assumptions thereof.
These statements are based on NIBC's current view with
respect to future events and financial performance. Words
such as "believe", "anticipate", "estimate", "expect",
"intend", "predict", "project", "could", "may", "will",
"plan" and similar expressions are intended to identify
forward-looking statements but are not the exclusive
means of identifying such statements.
By their very nature, forward-looking statements involve
uncertainties and are subject to certain risks,
including, but not limited to (i) general economic
conditions, in particular in NIBC's core and niche
markets, (ii) changes in the availability of, and costs
associated with, sources of liquidity such as interbank
funding, as well as conditions in the credit markets
generally, including changes in borrower and counterparty
creditworthiness (iii) performance of financial markets,
including developing markets, (iv) interest rate levels,
(v) credit spread levels,
(vi) currency exchange rates, (vii) general competitive
factors, (viii) general changes in the valuation of
assets (ix) changes in law and regulations, including
taxes (x) changes in policies of governments and/or
regulatory authorities, (xi) the results of our strategy
and investment policies and objectives and (xii) the
risks and uncertainties as addressed in the Interim
Financial Report, the occurrence of which could cause
NIBC's actual results and/or performance to differ from
those predicted in such forward-looking statements and
from past results.
The forward-looking statements speak only as of the date
hereof. NIBC does not undertake any obligation to update
or revise forward-looking statements contained in the
Condensed Financial Report, whether as a result of new
information, future events or otherwise. Neither NIBC nor
any of its directors, officers, employees do make any
representation, warranty or prediction that the results
anticipated by such forward-looking statements will be
achieved, and such forward-looking statements represent,
in each case, only one of many possible scenarios and
should not be viewed as the most likely or standard
scenario.
Explanatory Remarks
Consolidation non-financial companies
In 2008, NIBC invested in a number of non-financial companies over which NIBC exercises control. IFRS requires NIBC to treat these non-financial companies as subsidiaries and thereby consolidate these investments in NIBC's Financial Statements 2008. NIBC believes that combining these non-financial companies with the core banking business does not provide a meaningful basis for discussion of the financial condition and results of operations. Therefore, in the presentation of NIBC's results in the press release, the effects of a line-by-line consolidation in the income statement of these non- financial companies are removed. The reconciliation between the income statement 2008 in this Condensed Financial Report and the income statement 2008 excluding these consolidation effects as presented in the press release is displayed below.
Income statement 2008
In EUR millions Financial Consolidation Excluding Income
Statements effect consolidation statement
(IFRS) effect 2007
NET INTEREST INCOME 207 (6) 213 238
NET FEE AND COMMISSION
INCOME 43 0 43 62
DIVIDEND INCOME 50 0 50 84
NET TRADING INCOME 81 (2) 84 (24)
GAINS LESS LOSSES FROM
FINANCIAL ASSETS (57) 4 (62) 107
SHARE IN RESULT OF
ASSOCIATES 7 (1) 8 1
OTHER OPERATING INCOME 40 39 2 6
OPERATING INCOME 371 34 337 474
PERSONNEL EXPENSES 125 18 108 135
OTHER OPERATING
EXPENSES 73 7 66 59
DEPRECIATION AND
AMORTISATION 17 10 8 17
OPERATING EXPENSES 215 34 181 211
IMPAIRMENT OF CORPORATE
LOANS 42 0 42 2
IMPAIRMENT OF OTHER
INTEREST BEARING ASSETS 20 1 20 (1)
TOTAL EXPENSES 277 35 242 212
PROFIT BEFORE TAX FROM
CONTINUING OPERATIONS 94 (0) 95 262
TAX 1 (0) 1 20
PROFIT AFTER TAX FROM
CONTINUING OPERATIONS 93 0 93 242
RESULT FROM
DISCONTINUED OPERATIONS 0 0 0 (141)
NET PROFIT 93 0 93 101
RESULT ATTRIBUTABLE TO 1 (0) 1 3
MINORITY INTEREST
NET PROFIT ATTRIBUTABLE
TO PARENT SHAREHOLDERS 92 0 92 98
Consolidated Income
Statement
For the period ended 31
December
In EUR millions notes 31-Dec-08 31-Dec-07
NET INTEREST INCOME 207 238
NET FEE AND COMMISSION INCOME 43 62
DIVIDEND INCOME 50 84
NET TRADING INCOME 2 81 (24)
GAINS LESS LOSSES FROM
FINANCIAL ASSETS 3 (57) 107
SHARE IN RESULT OF ASSOCIATES 7 1
OTHER OPERATING INCOME 40 6
OPERATING INCOME 371 474
PERSONNEL EXPENSES 4 125 135
OTHER OPERATING EXPENSES 73 59
DEPRECIATION AND AMORTISATION 17 17
OPERATING EXPENSES 215 211
IMPAIRMENT OF CORPORATE LOANS 42 2
IMPAIRMENT OF OTHER INTEREST
BEARING ASSETS 20 (1)
TOTAL EXPENSES 277 212
PROFIT BEFORE TAX FROM
CONTINUING OPERATIONS 94 262
TAX 5 1 20
PROFIT AFTER TAX FROM
CONTINUING OPERATIONS 93 242
RESULT FROM
DISCONTINUED
OPERATIONS 15 0 (141)
NET PROFIT 93 101
RESULT ATTRIBUTABLE TO
MINORITY INTEREST 1 3
NET PROFIT ATTRIBUTABLE TO
PARENT SHAREHOLDERS 92 98
Consolidated Balance Sheet
In EUR millions 31-Dec-08 31-Dec-07
ASSETS
FINANCIAL ASSETS AT AMORTISED COST
- CASH AND BALANCES WITH CENTRAL BANKS 1,113 874
- DUE FROM OTHER BANKS 1,770 3,145
- LOANS AND RECEIVABLES
- Loans 6,303 1,794
- Debt Investments 738
- Securitised Loans 630 638
FINANCIAL ASSETS AT AVAILABLE FOR SALE
- LOANS 0 5,164
- EQUITY INVESTMENTS 108 144
- DEBT INVESTMENTS 35 311
FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (INCLUDING
TRADING)
- LOANS 1,136 1,374
- RESIDENTIAL MORTGAGES OWN BOOK 6,201 5,285
- SECURITISED RESIDENTIAL MORTGAGES 5,250 6,356
- DEBT INVESTMENTS 641 2,329
- STRUCTURED INVESTMENTS 1,079 1,212
- INVESTMENTS IN ASSOCIATES 188 147
- DERIVATIVE FINANCIAL ASSETS HELD FOR TRADING 3,137 2,641
- DERIVATIVE FINANCIAL ASSETS USED FOR HEDGING 215 85
INVESTMENTS IN ASSOCIATES (EQUITY METHOD) 40 44
INTANGIBLE ASSETS 44 -
PROPERTY, PLANT AND EQUIPMENT 102 72
INVESTMENT PROPERTY 30 1
CURRENT TAX 6 40
OTHER ASSETS 80 153
TOTAL ASSETS 28,846 31,809
Consolidated Balance Sheet
In EUR millions notes 31-Dec-08 31-Dec-07
LIABILITIES
FINANCIAL LIABILITIES AT AMORTISED COST
- DUE TO OTHER BANKS 5,537 4,700
- DEPOSITS FROM CUSTOMERS 2,293 1,516
- OWN DEBT SECURITIES IN ISSUE 6 5,974 9,035
- DEBT SECURITIES IN ISSUE RELATED TO 7 5,744 7,214
SECURITISED MORTGAGES
FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS (INCLUDING
TRADING)
- DEBT SECURITIES IN ISSUE STRUCTURED 8 3,110 4,152
- OWN DEBT SECURITIES IN ISSUE 9 168 215
- DERIVATIVE FINANCIAL LIABILITIES HELD FOR 3,439 2,374
TRADING
- DERIVATIVE FINANCIAL LIABILITIES USED FOR 42 53
HEDGING
OTHER LIABILITIES 158 244
DEFERRED TAX 39 4
EMPLOYEE BENEFIT OBLIGATIONS 8 11
SUBORDINATED LIABILITIES
- AMORTISED COST 10 229 236
- FAIR VALUE THROUGH PROFIT OR LOSS 11 467 497
TOTAL LIABILITIES 27,208 30,251
SHAREHOLDERS' EQUITY
SHARE CAPITAL 13 80 80
OTHER RESERVES 274 296
RETAINED EARNINGS 1,175 1,073
NET RESULT ATTRIBUTABLE TO PARENT SHAREHOLDERS 92 98
TOTAL PARENT SHAREHOLDERS' EQUITY 1,621 1,547
TOTAL MINORITY INTEREST 17 11
TOTAL SHAREHOLDERS' EQUITY 1,638 1,558
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 28,846 31,809
Consolidated Statement of
Changes in Shareholders'
Equity
In EUR millions ATTRIBUTABLE TO PARENT
SHAREHOLDERS (1)
SHARE OTHER RETAINED NET MINORITY TOTAL
CAPITAL RESERVES EARNINGS PROFIT INTEREST
BALANCE AT 1 JANUARY 2007 80 470 923 243 - 1,716
FIRST TIME ADOPTION 24 24
CAPITAL CONTRIBUTION SHARE
BASED PAYMENTS (2)
BALANCE AT 1 JANUARY 2007 80 470 947 243 - 1,740
NET RESULT ON CASH FLOW
HEDGING INSTRUMENTS (11) (11)
REVALUATION LOANS AND
RECEIVABLES (NET OF TAX) (117) (117)
REVALUATION EQUITY (41) 17 (24)
INVESTMENTS (NET OF TAX)
(3)
REVALUATION DEBT (6) (6)
INVESTMENTS (NET OF TAX)
REVALUATION PROPERTY, 1 1
PLANT AND EQUIPMENT (NET
OF TAX)
TOTAL GAINS AND LOSSES 0 (174) 17 0 0 (157)
RECOGNISED DIRECTLY IN
EQUITY
PROFIT APPROPRIATION 243 (243) 0
NET RESULT FOR THE PERIOD 98 3 101
COMPREHENSIVE NET RESULT 0 (174) 260 (145) 3 (56)
DIVIDENDS (4) (146) (1) (147)
CAPITAL CONTRIBUTION OF THIRD 9 9
PARTIES IN A SUBSIDIARY
CONTROLLED BY NIBC
CAPITAL CONTRIBUTION SHARE 12 12
BASED PAYMENTS (2)
BALANCE AT 31 DECEMBER 80 296 1,073 98 11 1,558
2007
BALANCE AT 1 JANUARY 2008 80 296 1,073 98 11 1,558
NET RESULT ON CASH FLOW 40 40
HEDGING INSTRUMENTS
REVALUATION LOANS AND (14) (14)
RECEIVABLES (NET OF TAX)
REVALUATION EQUITY (36) (36)
INVESTMENTS (NET OF TAX)
REVALUATION DEBT (12) (12)
INVESTMENTS (NET OF TAX)
REVALUATION PROPERTY, 0 0
PLANT AND EQUIPMENT (NET
OF TAX)
TOTAL GAINS AND LOSSES 0 (22) 0 0 0 (22)
RECOGNISED DIRECTLY IN
EQUITY
TRANSFER NET RESULT TO 98 (98) 0
RETAINED EARNINGS
NET PROFIT 92 1 93
COMPREHENSIVE NET RESULT 0 (22) 98 (6) 1 71
CAPITAL CONTRIBUTION OF THIRD 5 5
PARTIES IN A SUBSIDIARY
CONTROLLED BY NIBC
CAPITAL CONTRIBUTION SHARE 4 4
BASED PAYMENTS
BALANCE AT 31 DECEMBER 80 274 1,175 92 17 1,638
2008
(1) See note 12 for the impact of the implementation of IASB
amendment "IAS 39 Financial Instruments: Recognition and Measurement"
on Shareholders' Equity at 31 December 2008.
(2) Shareholders' equity at 1 January 2007 has been increased by EUR 24
million and at 31 December 2007 by EUR 36 million compared to the
figures displayed in the financial statements 2007 due to the
implementation of IFRS IFRIC 11.
(3) In 2004, NIBC sold a number of investments and did not release the
corresponding revaluation reserve of EUR 17 million. The correction
of this error, to transfer the reserve of EUR 17 million directly to
retained earnings, has no effect on the income statements of 2007,
nor on total shareholders' equity and the balance sheet total at 31
December 2007.
(4) Dividends in 2007 are comprised of EUR 61 million final ordinary
dividend over 2006 and EUR 85 million extraordinary dividend in 2007.
Condensed Consolidated Cash Flow Statement
For the year ended 31 December
In EUR millions 31-Dec-08 31-Dec-07
CASH FLOWS FROM OPERATING ACTIVITIES 3,096 2,609
CASH FLOWS FROM INVESTING ACTIVITIES (117) (24)
CASH FLOWS FROM FINANCING ACTIVITIES (4,187) (587)
NET INCREASE / (DECREASE) IN CASH AND (1,208) 1,998
CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT 1 3,976 1,978
JANUARY
NET INCREASE / (DECREASE) IN CASH AND (1,208) 1,998
CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT 31 2,768 3,976
DECEMBER
RECONCILIATION OF CASH AND CASH
EQUIVALENTS:
- CASH AND BALANCES WITH CENTRAL 1,113 874
BANKS
- DUE FROM OTHER BANKS (MATURITY 3 1,655 3,102
MONTHS OR LESS)
2,768 3,976
NIBC Bank N.V.
General Information
NIBC Bank N.V. (the "Company"), together with its subsidiaries ("NIBC" or the "Group") is a Dutch merchant bank that offers integrated solutions to mid- cap clients in the Benelux and Germany through a combination of advising, financing and co-investing. The bank is also a meaningful player in a select number of clearly defined asset classes. It employs its expertise to provide asset financing in sectors such as leveraged finance, oil & gas services, infrastructure and real estate. NIBC's clients are mid-cap companies, financial institutions, institutional investors, financial sponsors, family offices and high net worth entrepreneurs/owners. NIBC has offices in The Hague, Brussels, Frankfurt, London and Singapore.
NIBC Bank N.V. is domiciled in The Netherlands, and is a 100% subsidiary of NIBC Holding N.V.
Where necessary comparative figures have been adjusted to conform to changes in presentation in the current year.
Basis of Preparation
The Group's condensed financial report over the financial year 2008 should be read in conjunction with NIBC's annual financial statements for the year ended 31 December 2007.
The accounting policies adopted are consistent with those of the annual financial statements for the year ended 31 December 2007, as described in the annual financial statements for the year ended 31 December 2007 except for the changes further explained. In 2008 NIBC reclassified certain financial assets out of the held-for-trading and available-for-sale categories if specified conditions were met.
The preparation of financial information requires the use of certain critical accounting estimates. It also requires management to exercise judgement in the process of applying the Group's accounting policies. The most significant areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the condensed financial information are described below under 'Most significant critical accounting estimates and judgements'.
New standards and interpretations
Standards, amendment and interpretations effective in 2008
The following standards, amendments and interpretations to published standards are mandatory for accounting periods beginning on or after 1 January 2008:
- IFRIC 11, 'IFRS 2 - Group and treasury share transactions'. IFRIC 11 provides guidance on whether share-based transactions involving treasury shares or involving group entities (for example, options over a parent's shares) should be accounted for as equity-settled or cash-settled share-based payment transactions in the stand-alone accounts of the parent and group companies. IFRIC 11 was implemented with effect from 1 January 2008. The retrospective application of IFRIC 11 affected the Group's equity position as of 1 January 2007 and 31 December 2007. The impact at 1 January 2007 amounts to a credit of EUR 24 million and at 31 December 2007 to a credit of EUR 36 million compared to the amounts presented in the financial statements of NIBC Bank N.V. for the year ended 31 December 2007.
- IFRIC 14, 'IAS 19 - The limit on a defined benefit asset, minimum funding requirements and their interaction'. IFRIC 14 provides guidance on assessing the limit in IAS 19 on the amount of the surplus that can be recognised as an asset. It also explains how the pension asset or liability may be affected by a statutory or contractual minimum funding requirement. NIBC has applied IFRIC 14 from 1 January 2008, but it has no material impact on NIBC's financial position.
Amendments effective from 1 July 2008
The IAS 39, 'Financial instruments: Recognition and measurement', amendment on reclassification of financial assets permits reclassification of certain financial assets out of the held-for-trading and available-for-sale categories if specified conditions are met. The related amendment to IFRS 7, 'Financial instruments: Disclosures', introduces disclosure requirements with respect to financial assets reclassified out of the held-for-trading and available-for-sale categories. The amendment is effective prospectively from 1 July 2008. The Group adopted the amendment from 1 July 2008.
Standards, amendments and interpretations early adopted by NIBC
IFRS 8, 'Operating segments' (effective 1 January 2009). IFRS 8 replaces IAS 14 'Segment Reporting' and aligns segment reporting with the requirements of the US standard SFAS 131, 'Disclosures about segments of an enterprise and related information'. The new standard requires a 'management approach', under which segment information is presented on the same basis as that used for internal reporting purposes. NIBC Bank N.V. decided to early adopt IFRS 8 as of the third quarter of 2008. This has resulted in a decrease in the number of reportable segments presented. In addition, the segments are reported in a manner that is consistent with the internal reporting provided to the chief operating decision-maker.
Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group
The following standards, amendments and interpretations to existing standards have been published and are mandatory for the Group's accounting periods beginning on or after 1 January 2009 or later periods, but the Group has not early adopted them:
- IAS 27 (Revised), 'Consolidated and separate financial statements' (effective from 1 July 2009).The revised standard requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is re-measured to fair value and a gain or loss is recognised in profit or loss. The group will apply IAS 27 (Revised) prospectively to transactions with non-controlling interests from 1 January 2010.
- IFRS 3 (Revised), 'Business combinations' (effective from 1 July 2009). The revised standard continues to apply the acquisition method to business combinations, with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re-measured through the income statement. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair vale or at the non-controlling interest's proportionate share of the acquiree's net assets. All acquisition-related costs should be expensed. The group will apply IFRS 3 (Revised) prospectively to all business combinations from 1 January 2010.
- IAS 23 (Amendment), 'Borrowing costs'. The amendment requires an entity to capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (one that takes a substantial period of time to get ready for use or sale) as part of the cost of that asset. The option of immediately expensing those borrowing costs will be removed. NIBC will apply IAS 23 (Amended) from 1 January 2009, but the Standard is currently not applicable to NIBC as NIBC has no qualifying assets.
- IFRIC 13, 'Customer loyalty programmes'. IFRIC 13 clarifies that where goods or services are sold together with a customer loyalty incentive (for example, loyalty points or free products), the arrangement is a multiple- element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement using fair values. IFRIC 13 is not relevant to NIBC's operations because NIBC does not operate any loyalty programmes.
- IAS 1 (Revised), 'Presentation of financial statements' (effective from 1 January 2009). The revised standard will prohibit the presentation of items of income and expenses (that is, 'non-owner changes in equity') in the statement of changes in equity, requiring 'non-owner changes in equity' to be presented separately from owner changes in equity. All non-owner changes in equity will be required to be shown in a performance statement, but entities can choose whether to present one performance statement (the statement of comprehensive income) or two statements (the income statement and statement of comprehensive income). Where entities restate or reclassify comparative information, they will be required to present a restated balance sheet as at the beginning comparative period in addition to the current requirement to present balance sheets at the end of the current period and comparative period. The group will apply IAS 1 (Revised) from 1 January 2009. It is likely that both the income statement and statement of comprehensive income will be presented as performance statements.
- IFRS 2 (Amendment), 'Share-based payment: Vesting conditions and cancellations' (effective from 1 January 2009). The amended standard deals with vesting conditions and cancellations. It clarifies that vesting conditions are service conditions and performance conditions only. Other features of a share-based payment are not vesting conditions. As such these features would need to be included in the grant date fair value for transactions with employees and others providing similar services, that is, these features would not impact the number of awards expected to vest or valuation thereof subsequent to grant date. All cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The group will apply IFRS 2 (Amendment) from 1 January 2009, but is not expected to have a material impact on the Group's financial statements.
'Financial assets - reclassification'
In accordance with the amendment to IAS 39: 'Reclassifications of Financial Assets' NIBC may reclassify certain non-derivative financial assets held for trading to either the loans and receivables or available for sale categories. The amendment also allows the transfer of certain non-derivative financial assets from available for sale to loans and receivables.
NIBC is allowed to reclassify certain financial assets out of the held for trading category if they are no longer held for the purpose of selling of repurchasing them in the near term.
The amendments distinguish between those financial assets which would be eligible for classification as loans and receivables and those which would not. The former are those instruments which, apart from being held with the intent of sale in the near term, have fixed or determinable payments, are not quoted in an active market and contain no features that could cause the holder not to recover substantially all of its initial investment, except through credit deterioration.
Financial assets that are not eligible for classification as loans and receivables, may be transferred from held for trading to available for sale, only in rare circumstances arising from a single event that is unusual and highly unlikely to recur in the near term.
Financial assets that would now meet the criteria to be classified as loans and receivables, may be transferred from held for trading to loans and receivables, if the entity has the intention and the ability to hold them for the foreseeable future.
In addition, financial assets that would now meet the criteria to be classified as loans and receivables, may be classified out of the available for sale category to loans and receivables, if the entity has the intention and the ability to hold them for the foreseeable future.
Reclassifications are recorded at the fair value of the financial asset as of the reclassification date. The fair value at the date of reclassification becomes the new cost or amortised cost as applicable. Gains or losses due to changes in the fair value of the financial asset recognised in profit or loss prior to reclassification date shall not be reversed. Effective interest rates for financial assets reclassified to the loans and receivables category are determined at the reclassification date as the discount rate applicable to amortise the fair value back to expected future cash flows at that date. Subsequent increases in estimated future cash flows will result in a prospective adjustment to the effective interest rate applied.
For financial assets reclassified from available for sale to loans and receivables, previous changes in fair value that have been recognised in the equity revaluation reserve shall be amortised to profit or loss over the remaining life of the asset using the effective interest rate method. If such assets are subsequently determined to be impaired, the remaining balance of losses previously recognised in equity shall be released to profit or loss to the extent of the impairment loss amount and if necessary, additional impairment losses shall be recorded in profit or loss to the extent they exceed the remaining valuation reserve in equity.
Changes to the classification of financial assets
As of 1 July 2008, the effective date of the amendments to IAS 39 and IFRS 7, the classification of the following financial assets was changed:
- Loans and receivables: loans and receivables, except for those that were designated at fair value through profit or loss, were reclassified out of the available for sale category to loans and receivables at amortised cost.
- Debt investments:
- EU Structured Credits originated after 1 July 2007 were reclassified out of the available for sale category to loans and receivables at amortised cost to the extent the assets meet the definition of loans and receivables.
- EU Corporate Credits and EU Structured Credits originated before 1 July 2007 were reclassified out of the held for trading category to loans and receivables at amortised cost to the extent the assets meet the definition of loans and receivables.
- EU CDO Equity: EU CDO Equity was reclassified out of the held for trading category to the available for sale category. Any subsequent change in fair value (other than amortisation of interest through the new effective interest rate) from the fair value at the date of reclassification will be recorded in the (available for sale) revaluation reserve unless it is determined to be impaired or until the instrument is derecognised.
The amendments to IFRS 7 regarding reclassifications require disclosure of, among others, the impact of the reclassification for each category of financial assets on the financial position and performance of NIBC. See note 12 to the condensed financial report for a description of the effect of the reclassifications.
Change in accounting policy
Segment report
Basis of segment preparation
The segment information has been prepared in accordance with IFRS 8, 'Operating Segments', which defines requirements for the disclosure of financial information of an entity's operating segments as NIBC decided to early adopt IFRS 8. IFRS 8 replaces IAS 14, 'Segment Reporting'.
Accounting methods
IFRS 8 requires the disclosure of the information used by the chief operating decision maker to allocate resources and to assess performance. Management reporting in NIBC is based on IFRS. Segment reporting under IFRS 8 requires a presentation of the segment results based on management reporting methods and a reconciliation between the results of the operating segments and the Group's condensed financial report.
Business combinations
The majority interests in the non-financial companies acquired in 2008 are consolidated in this condensed financial report. For the impact of these acquisitions on the different balance sheet line items and income statement line items reference is made to the notes to the Group's condensed financial report.
Most significant critical accounting estimates and judgements
NIBC makes estimates and assumptions that affect the reported amounts of assets and liabilities. Estimates and judgements 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.
Fair value of certain financial instruments
The fair value of a financial instrument is the amount at which the instrument could be exchanged or settled between knowledgeable willing parties in an arm's length transaction. NIBC determines fair value either by reference to a quoted price in an active market for a given financial instrument or, when a quoted price in an active market is not available, by using a valuation technique.
If NIBC determines fair value using valuation techniques (for example, in the case of mortgage loans, loans (for disclosure purposes only) and certain debt investments)), the valuation is determined by discounting to present value the cash flows (after expected pre-payments) that it expects to receive from holding the instrument. These discounted cash flow models require management to estimate a number of parameters, including interest rate yield curves, credit spreads, liquidity risk premiums, equity and commodity prices, option volatilities and currency rates. Some parameters are either directly observable or are implied from instrument prices in the market place. In light of the dramatic widening in credit spreads, valuations have become particularly sensitive to this parameter. Due to absence of liquidity in a number of financial instruments, directly observable data on credit spreads is sparse.
The calculation of fair value for any financial instrument may also require adjustment of the quoted price or the value generated by the valuation technique to reflect the cost of credit risk and liquidity risk (where not embedded in underlying models or prices used) or to reflect hedging costs not captured in the valuation model (to the extent that they would be taken into account by market participants in determining a price).
The process of determining fair value for illiquid instruments using valuation techniques requires estimation of the expected maturity of an instrument (and therefore the expected cash flows), certain pricing parameters, or other assumptions or model characteristics. Although NIBC calibrates its valuation techniques against industry standards and observable transaction prices (to the extent that this is possible in current market conditions), the calculation of fair value is an inherently subjective process, particularly when data on observable transactions is sparse.
In the first half of 2008, market conditions were characterised by the near absence of liquidity in credit markets and a significant widening of credit spreads. In these market conditions, the estimation of the fair value of NIBC's residential mortgage loans, loans (for disclosure purposes only) and its own liabilities designated at Fair Value through Profit or Loss and the financial assets reclassified out of held for trading and available for sale category is highly judgemental and necessarily subjective, given the absence of market transactions and other observable market data. Consequently, the ranges within which NIBC has estimated the fair value of these portfolios have widened significantly.
Gains (or losses) are recognised upon initial recognition only when such profits (or losses) can be measured by reference to observable current market transactions or valuation techniques based on observable market inputs.
SOURCE NIBC Bank N.V.
