Notes to the Consolidated Financial Statements

Notes to the Consolidated Balance Sheet (Other)

 

Fair value of financial instruments Repurchase and resale agreements Commitments and contingent assets & liabilities Assets pledged as security Assets under management Related party transactions Principal subsidiaries, joint ventures and associates Remuneration of the Statutory Board members, Supervisory Board members, share-based payments and deferred cash

Credit risk Market risk Liquidity risk Capital management Subsequent events Profit appropriation

 

	Fair value of financial instruments
46

 

Effective 1 January 2009, NIBC adopted the amendment to IFRS 7 for financial instruments that are measured at fair value in the balance sheet. This requires disclosure of each class of financial assets and liabilities within a three-level hierarchy, referring the respective basis of fair value measurement as follows:

• Quoted prices (unadjusted) in active markets for identical assets and liabilities (level 1);
• Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (level 2); and
• Inputs that are not based on observable market data (unobservable inputs) (level 3).

 

For an explanation of the fair value measurement hierarchy, reference is made to the accounting policies section on fair value estimation.

 

The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into levels 1 to 3 based on the degree to which the fair value is observable.

 

IN EUR millionS		Level 1		Level 2		Level 3		2009
FINANCIAL ASSETS AVAILABLE FOR SALE
Equity investments		10		-		84		94
Debt investments		-		713		1		714
		10		713		85		808
FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (INCLUDING TRADING)
Loans		-		1,103		-		1,103
Residential mortgages own book		-		5,817		-		5,817
Securitised residential mortgages		-		4,783		-		4,783
Debt investments		-		804		-		804
Enhanced investments		-		53		-		53
Equity investments (including investments in associates)		-		-		215		215
Derivative financial assets held for trading		-		2,816		-		2,816
Derivative financial assets used for hedging		-		242		-		242
		-		15,618		215		15,833
		10		16,331		300		16,641

 

IN EUR millionS		Level 1		Level 2		Level 3		2009
FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS (INCLUDING TRADING)
Own debt securities in issue		-		85		-		85
Debt securities in issue structured		-		2,453		-		2,453
Derivative financial liabilities held for trading		-		3,133		-		3,133
Derivative financial liabilities used for hedging		-		80		-		80
Subordinated liabilities		-		369		-		369
		-		6,120		-		6,120

 

Financial instruments are recorded at fair value

The following is a description of the determination of fair value for financial instruments that are recorded at fair value using either quoted prices or valuation techniques. These incorporate NIBC’s estimate of assumptions that a market participant would make when valuing the instruments.

 

 

Financial assets available for sale

 

Equity investments (listed) - level 1

The fair value of listed equity investments is based on quoted prices (unadjusted) in active markets.

 

Equity investments (unlisted) - level 3

The fair value of investments in equity funds is determined based on net asset value reported by the managers of these funds. These net asset values are analysed for reasonableness and adjusted to approximately the fair value at reporting date, where appropriate, for factors such as, amongst others, subsequent capital contributions and fund distributions, exchange rates and subsequent changes in the fair value of underlying investee companies, where these are known to NIBC.

 

The fair value of direct equity investments is established by applying capitalisation multiples to maintainable earnings. Maintainable earnings are estimated based on the normalised last twelve months’ Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA). Capitalisation multiples are derived from the enterprise value and the normalised last twelve months EBITDA at the acquisition date. On each balance sheet date, the capitalisation multiple of each equity investment is compared against those derived from the publicly available enterprise value and earnings information of traded peers, where these can be identified. Peer capitalisation multiples are normalised for factors such as, amongst others, differences in regional and economic environment, time lags in earnings information and one-off gains and losses.

 

The resulting enterprise value is adjusted for net debt, minority interests, illiquidity and management incentive plans to arrive at the fair value of the equity.

 

Debt investments - level 2

For the determination of fair value at 31 December 2009, NIBC incorporated market-observable prices (including broker quotes), interest rates and credit spreads derived from market-verifiable data. NIBC has determined fair value in a consistent manner over time, ensuring comparability and continuity of valuations.

 

Debt investments - level 3

For the level 3 debt investments NIBC uses valuation models that apply discounted cash flow analysis that incorporates both observable and unobservable data. Observable inputs include interest rates and collateral values; unobservable inputs include assumptions regarding credit spreads and market liquidity discounts.

 

 

Financial assets fair value through profit or loss

 

Loans - level 2

In an active market environment, these assets are marked-to-market by applying market bid quotes observed on the secondary market. The quotes received from other banks or brokers and applied in the marked-to-market process are calibrated to actual market trades as far as possible.

 

In certain instances, where the market is inactive, a discounted cash flow model is used based on various assumptions, including market interest rates, market credit spread levels and assumptions regarding market liquidity, where relevant. Additional pricing reference points have been obtained by collecting spreads using primary transactions that are comparable with the relevant loans.

 

Residential mortgages (own book and securitised) - level 2

The fair value of residential mortgages (both those NIBC holds in its own warehouse and those
NIBC has securitised) is determined by using a valuation model developed by NIBC. To calculate the fair value, NIBC discounts expected cash flows (after expected prepayments) to present value using inter-bank zero-coupon rates, adjusted for a spread that takes into account the credit spread risk of the mortgages and uncertainty relating to prepayment estimates.

 

On the basis of the available data on Residential Mortgage-Backed Securities (RMBS) spreads and offered mortgage rates, NIBC concluded that in 2009 the use of offered mortgage rates provides the best estimate of the spread applicable at the balance sheet date. The underlying assumption underpinning the valuations is that professional market parties interested in building exposures in the residential mortgage market would be indifferent between originating the loans themselves and acquiring existing portfolios.

 

The offered mortgage rate is determined by collecting mortgage rates from other professional lenders sorted by product, loan to value class and the fixed rate period. The discount spread is derived by comparing the mortgage offer rate to the market interest rates taking into account the upfront mortgage offering costs embedded in the mortgage offered rate.

 

Sensitivity analysis carrried out on the prepayment rates used in the valuation model of the residential mortgages showed that the variability in these rates does not have a significant impact on the total value of the Residential Mortgage portfolio.

 

Debt investments - level 2

For the determination of fair value at 31 December 2009, NIBC incorporated market-observable prices (including broker quotes), interest rates and credit spreads derived from market-verifiable data. NIBC has determined fair value in a consistent manner over time, ensuring comparability and continuity of valuations.

 

Enhanced investments - level 2

The Enhanced Investment portfolio consists of investments in tax-efficient funds and credit-fixed income funds.

 

The fund investments are valued based on observed transaction values for structures that are set up for third parties. The positions in credit-fixed income funds are valued using the valuation statements of the administrators. These valuations form the basis for arm’s-length market transactions in these funds and therefore serve as a reliable basis for valuation.

 

Equity investments (including investments in associates) - level 3

For the valuation method, reference is made to the section on equity investments (unlisted) at available for sale.

 

Derivatives financial assets and liabilities (held for trading and used for hedging) - level 2

Derivative products valued using a valuation technique with market-observable inputs are mainly interest rate swaps, currency swaps, credit default swaps and foreign exchange contracts. The most frequently applied valuation techniques include swap models using present value calculations. The models incorporate various inputs including foreign exchange rates, credit spread levels and interest rate curves. Credit derivative valuation models also require input as to the estimated probability of default and recovery value.

 

There were no transfers between the levels during 2009.

 

 

Financial liabilities at fair value through profit or loss (including trading)

 

Own liabilities designated at fair value through profit or loss - level 2

This portfolio was designated at fair value through profit or loss and is reported on the face of the balance sheet under the following headings:

• Own debt securities in issue (financial liabilities at fair value through profit or loss);
• Debt securities in issue structured (financial liabilities at fair value through profit or loss); and
• Subordinated liabilities (financial liabilities at fair value through profit or loss).

 

Debt securities in issue structured consist of notes issued with embedded derivatives that are tailored to specific investors’ needs. The return on these notes is dependent upon the level of certain underlying equity, interest rate, currency, credit, commodity or inflation-linked indices. The embedded derivative within each note issued is fully hedged on a back-to-back basis, such that effectively synthetic floating rate funding is created. Because of this economic hedge, the income statement is not sensitive to fluctuations in the price of these indices.

 

In the case of debt securities in issue structured and subordinated liabilities, the fair value of the notes issued and the back-to-back hedging swaps is determined using valuation models developed by a third party employing Monte Carlo simulation, lattice valuations or closed formulas, depending on the type of embedded derivative. These models use market-observable inputs (e.g. interest rates, equity prices) for valuation of these structures.

 

For each class of own financial liabilities at fair value through profit or loss, the expected cash flows are discounted to present value using interbank zero-coupon rates. The resulting fair value is adjusted for movements in the credit spread applicable to NIBC issued funding.

 

The following table shows a reconciliation of the opening and closing amount of level 3 financial assets which are recorded at fair value:

 

IN EUR millionS		At 1 January 2009		Total gains/(losses) recorded in the income statement		Total gains/(losses) recorded in equity		Purchases		Sales		Settle-ments		Transfers from level 1 and level 2		At 31 December 2009
AVAILABLE FOR SALE FINANCIAL ASSETS
Equity investments		99		(7)		(13)		7		(2)		-		-		84
Debt investments		9		(18)		10		-		-		-		-		1
FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (INCLUDING TRADING)
Equity investments (including investments in associates)		188		(9)		-		40		(4)		-		-		215
TOTAL LEVEL 3 FINANCIAL ASSETS		296		(34)		(3)		47		(6)		-		-		300

 

Gains less losses on level 3 financial instruments included in the profit or loss for the period comprise:

 

IN EUR millionS		Realised gains		Unrealised (losses)		Total 2009
Total gains/(losses) included in the income statement		6		(40)		(34)

 

The following table shows the impact on the fair value of level 3 instruments of using reasonably possible alternative assumptions by class of instrument:

 

In EUR millions		For the period ended 31 December 2009
		Carrying amount		Effect of reasonably possible alternative assumptions
Financial assets
AVAILABLE FOR SALE FINANCIAL ASSETS
Equity investments (unlisted)		84		2
Debt investments		1		1
FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (INCLUDING TRADING)
Equity investments (including investments in associates)		215		24

 

In order to determine the reasonably possible alternative assumptions, NIBC adjusted key unobservable valuation technique inputs as follows:

• For direct equity investments, NIBC adjusted the capitalisation multiples by increasing and decreasing the capitalisation multiples by 10 per cent, which is considered by NIBC to be within a range of reasonably possible alternatives based on capitalisation multiples of companies with similar industry and risk profiles; and
• For the debt investments, NIBC adjusted the weighted average calculated model price by 100 basis points.

 

	Repurchase and resale agreements
47

 

NIBC transacted several reverse repurchase transactions with third parties, in which notes amounting to a notional of EUR 1,205 million (with a fair value at 31 December 2009 of EUR 1,245 million) were transferred to NIBC from third parties at 31 December 2009 in exchange for EUR 1,228 million in deposits at 31 December 2009 for periods ranging from one day up to five days.

 

During 2009, NIBC transacted several reverse repo transactions with third parties, in a total notional amount of EUR 57 billion.

 

NIBC transacted several repurchase transactions with third parties, in which notes amounting to a notional of EUR 568 million (with a fair value at 31 December 2009 of EUR 558 million) were transferred from NIBC to third parties at 31 December 2009 in exchange for EUR 505 million in deposits at 31 December 2009 for periods ranging from one year up to three years.

 

During 2009, NIBC transacted several repo transactions with third parties, in a total notional amount of EUR 205 million.

 

NIBC conducts these transactions under terms agreed in Global Master Repurchase Agreements.

 

	Commitments and contingent assets & liabilities
48

 

At any time, NIBC has outstanding commitments to extend credit. Outstanding loan commitments have a commitment period that does not extend beyond the normal underwriting and settlement period of one to three months. Commitments extended to customers related to mortgages at fixed interest rates or fixed spreads are hedged with interest rate swaps recorded at fair value. These commitments are designated upon initial recognition at fair value through profit or loss.

 

NIBC provides financial guarantees and letters of credit to guarantee the performance of customers to third parties. These agreements have fixed limits and generally extend for a period of up to five years. Expirations are not concentrated in any period.

 

The contractual amounts of commitments (excluding residential mortgage commitments of EUR 19 million at 31 December 2009 (2008: EUR 82 million), which in these financial statements are measured at fair value through profit or loss) and contingent liabilities are set out in the following table by category. In the table, it is assumed that amounts are fully advanced.

 

The amounts for guarantees and letters of credit represent the maximum accounting loss that would be recognised at the balance sheet date if counterparties failed completely to perform as contracted.

 

In EUR millions		2009		2008
CONTRACT AMOUNT
Committed facilities with respect to corporate loan financing		1,088		1,009
Capital commitments		103		194
Guarantees granted		200		214
Irrevocable letters of credit		67		76
		1,458		1,493

 

These commitments and contingent liabilities have off-balance sheet credit risk because only commitment/origination fees and accruals for probable losses are recognised in the balance sheet until the commitments are fulfilled or expire. Many of the contingent liabilities and commitments will expire without being advanced in whole or in part. Therefore, the amounts do not represent expected future cash flows.

 

Details of concentrations of credit risk including concentrations of credit risk arising from commitments and contingent liabilities as well as NIBC’s policies for collateral for loans are set out in note 54.

 

 

Legal proceedings

There were a number of legal proceedings outstanding against NIBC at 31 December 2009. No provision has been made, as legal advice indicates that it is unlikely that any significant loss will arise.

 

	Assets pledged as security
49

 

In EUR millions		2009		2008
ASSETS HAVE BEEN PLEDGED AS SECURITY IN RESPECT OF THE FOLLOWING LIABILITIES AND CONTINGENT LIABILITIES:
LIABILITIES
Due to other banks		1,438		4,114
Debt securities in issue related to securitised loans and mortgages		5,231		5,835
Derivative financial liabilities		1,051		1,000
		7,720		10,949

 

In EUR millions		2009		2008
DETAILS OF THE CARRYING AMOUNTS OF ASSETS PLEDGED AS COLLATERAL ARE AS FOLLOWS:
ASSETS PLEDGED
Assets utilised as collateral		2,001		4,559
Securitised loans and mortgages		5,399		5,880
Cash		1,051		1,000
		8,451		11,439

 

As part of NIBC’s funding and credit risk mitigation activities, the cash flows of selected financial assets are transferred or pledged to third parties. Furthermore, NIBC pledges assets as collateral for derivative transactions. Substantially all financial assets included in these transactions are residential mortgages, other loan portfolios, debt investments and cash collateral. The extent of NIBC’s continuing involvement in these financial assets varies by transaction.

 

With respect to assets utilised as collateral, the total portfolio eligible for use to collateralise funding was EUR 7.0 billion (2008: EUR 5.9 billion).

 

As of 31 December 2009, the excess cash liquidity of NIBC was EUR 2.6 billion (2008: EUR 1.1 billion), consisting of EUR 1.4 billion (2008: EUR 1.0 billion) cash placed with the DNB and EUR 1.2 billion (2008: EUR 0.1 billion) placed overnight with other banks.

 

	Assets under management
50

 

NIBC provides collateral management services, whereby it holds and manages assets or invests funds received in various financial instruments on behalf of the customer. NIBC receives fee income for providing these services. Assets under management are not recognised in the consolidated balance sheet. NIBC is not exposed to any credit risk relating to such placements, as it does not guarantee these investments.

 

At 31 December 2009, total assets held by NIBC on behalf of customers were EUR 2,668 million (2008: EUR 2,520 million).

 

	Related party transactions
51

 

Transactions related to employees

All transactions with employees are reported in the tables in note 53 Remuneration of Statutory Board members, Supervisory Board members, share-based payments and deferred cash.

 

 

Transactions related to associates

At 31 December 2009, NIBC had EUR 222 million of loans advanced to its associates (2008: EUR 245 million). Besides interest income on these loans, NIBC earned EUR 5 million (2008: EUR 7 million) in fees from these associates.

 

In June 2007, NIBC launched the NIBC European Infrastructure Fund I, (which was NIBC’s first third-party equity fund) with a final close in August 2008. Total commitments to the fund amount to EUR 347 million, of which EUR 247 million is committed by four third-party investors and EUR 100 million by NIBC. The fund invests in infrastructure projects in Western Europe. NIBC realised no losses from its investment in the fund in 2009 (2008: loss of EUR 15 million) and earned fees of EUR 4 million (2008: EUR 5 million). In NIBC’s financial statements, this fund is classified as an associate at fair value through profit or loss.

 

At 31 December 2009, NIBC had EUR 29 million of loans granted to a joint venture in which ‘NIBC Grondwaarde Fonds I’ acquired a 50% equity stake in June 2008. ‘NIBC Grondwaarde Fonds I’, a wholly owned subsidiary of NIBC, that invests in land in Western Europe, was launched in the second quarter of 2008. NIBC’s income from this fund in 2009 was minor. In NIBC’s financial statements, the joint venture is classified as an associate at fair value through profit or loss.

 

In September 2008, NIBC launched the NIBC European CMBS Opportunity Fund. Of the total committed fund size of EUR 64 million, EUR 49 million is committed by third-party investors and EUR 15 million by NIBC. The fund invests in commercial real estate in Western Europe. NIBC’s income from this fund in 2009 was EUR 2 million (2008: EUR 1 million), of which fee income of EUR 0.4 million (2008: EUR 0.4 million). In NIBC’s financial statements, this fund is classified as an associate at fair value through profit of loss.

 

In 2009, NIBC paid fees relating to the servicing of its online retail savings programme NIBC Direct to Welke Beheer B.V. of EUR 3 million (2008: EUR 2 million). In July 2009, NIBC’s equity stake in Welke Beheer B.V. diluted from 25% to 15%. In NIBC’s financial statements, this entity is classified as an associate (equity method), as NIBC still has significant influence.

 

 

Transactions involving NIBC’s shareholders

Significant related party transactions executed in 2009 and 2008 concern the following:

 

At 31 December 2009, NIBC had EUR 398 million of net exposures (assets minus liabilities) to its parent and to entities controlled by its parent entity (2008: EUR 418 million). The interest received and paid on this exposure was at arm’s length.

 

In June 2006, the general partner of J.C. Flowers II LP (together with its sister vehicle, ‘Flowers Fund II’), an investment fund managed by an affiliate of J.C. Flowers & Co., accepted a USD 100 million capital commitment from NIBC. The management fee and the profits interest otherwise payable by limited partners in such fund were waived with respect to the investment by NIBC. In addition, NIBC will receive a portion of (i) the profits interest payable to an affiliate of J.C. Flowers & Co. by investors in Flowers Fund II, and (ii) the management fee payable to J.C. Flowers & Co. by Flowers Fund II, in each case based on the percentage of aggregate capital commitments to Flowers Fund II represented by the capital commitment of NIBC. During 2009, NIBC’s commitment was fully drawn. In 2009, NIBC earned fees of EUR 0.6 million (2008: EUR 0.5 million) relating to this transaction.

 

Investment advisory firm J.C. Flowers & Co. receives a management fee from Flowers Fund II in consideration for acting as investment advisor to Flowers Fund II.

 

In June 2009, NIBC made a commitment of USD 10 million to ‘Flowers Fund III’, an investment fund managed by an affiliate of J.C. Flowers & Co.

 

In the first quarter of 2008, after NIBC Holding attracted EUR 400 million of new capital from its shareholders, a loan from NIBC Bank to NIBC Venture Capital N.V. (Veca), a public limited liability company incorporated under the laws of the Netherlands to which in 2007 the contractual rights to receive cash flows on a portfolio of US Commercial Real Estate structured credits were transferred, and indirectly a 100% subsidiary of NIBC Holding, was prepaid. As of that moment, Veca is fully financed by NIBC Holding and NIBC Bank no longer has exposure to Veca.

 

Fees paid to NIBC Holding related to asset management activities are nil for both 2009 and 2008.

 

 

Loan from NIBC to the Pension Fund

At the balance sheet date, NIBC has advanced a subordinated loan (interest charge: 0%) for an amount of EUR 3 million (2008: EUR 3 million) to the trustee-administered fund (NIBC’s Pension Fund). There will be no repayment of this loan until the fund has reached a solvency ratio of 150%.

 

	Principal subsidiaries, joint ventures and associates
52

 

		%		Country
SUBSIDIARIES OF NIBC BANK N.V.
NIBC Bank Ltd		100		Singapore
B.V. NIBC Mortgage Backed Assets		100		The Netherlands
Parnib Holding N.V.		100		The Netherlands
NIBC Foreign Debt Fund XIII B.V.		100		The Netherlands
Counting House B.V.		100		The Netherlands
Vredezicht 's-Gravenhage 110 B.V.		100		The Netherlands
NIBC Principal Investments B.V.		100		The Netherlands
GRW Bearing GmbH		93.4		Germany
NIBusker Holding B.V.		75		The Netherlands

 

		%		Country		In Eur millions
						Assets		Liabilities		Operating income		Net result
JOINT VENTURES
SR-Hypotheken N.V.		50		The Netherlands		322		265		3		2
ASSOCIATES (NET ASSET VALUE)
De Nederlandse Participatie Maatschappij voor de Nederlandse Antillen N.V.		100		The Netherlands		-		-		-		-
PE express I B.V.		37.5		The Netherlands		16		-		5		2
PE express II B.V.		37.5		The Netherlands		16		-		5		2
PE express III B.V.		35		The Netherlands		21		-		5		2
PE express IV B.V.		35		The Netherlands		21		-		5		2
ASSOCIATES (designated at fair value through profit or loss)		n/a		The Netherlands		1,310		817		472		21

 

In view of the control exercised by the government over the policy of NIBC’s wholly owned associate De Nederlandse Participatie Maatschappij voor de Nederlandse Antillen N.V., this company has not been treated as a subsidiary.

 

The list of participating interests and companies under which statements of liability have been issued, has been filed at the Chamber of Commerce in The Hague.

 

	Remuneration of the Statutory Board members, Supervisory Board members, share-based payments and deferred cash
53

 

Remuneration of the Statutory Board members

Towards the end of 2009, the Supervisory Board agreed a new remuneration policy for 2009 and beyond, taking into account relevant regulations, most notably (i) the Dutch Corporate Governance Code of 10 December 2008, (ii) the Dutch Banking Code of 9 September 2009 and (iii) the DNB/AFM Principles for Controlled Remuneration Policies of 6 May 2009.

 

Annual variable short-term incentive compensation for the Chairman and the members of the Statutory Board decreased significantly from a maximum of 200% of base salary in the past to a maximum of 75% for the Chairman and the members of the Statutory Board responsible for commercial activities, and from a maximum of 180% to 55% of base salary for the Chief Risk Officer, and from a maximum of 80% to 55% of base salary for the Chief Financial Officer. Of this short-term incentive compensation, maximum half will be paid in cash and the remaining half can be paid in deferred cash with a vesting period of 3 years. The base salaries of the Chairman and the other members of the Statutory Board remained unchanged.

 

In light of the special circumstances in the financial markets, the Statutory Board again requested, like last year, not to be considered for any short-term variable compensation for 2009. The Remuneration and Nominating Committee (RNC) very much appreciated this responsible initiative of the Statutory Board and has consequently recommended to the Supervisory Board that no short-term variable compensation be awarded for 2009 for the Chairman and the members of the Statutory Board. The Supervisory Board accepted the recommendations made by the RNC and decided accordingly.

The new remuneration policy also includes annual variable long-term incentive (LTI) compensation. Each member of the Statutory Board is entitled to an annual long-term incentive grant with a value of 25% of base salary at grant, in the form of Conditional Restricted Depositary Receipts (CRDR). This grant is subject to three-year cliff vesting and the realisation of certain financial and non-financial performance targets. The LTI relates to future performance only. The RNC has recommended to the Supervisory Board to grant this LTI as of 2009. The Supervisory Board accepted the recommendations made by the RNC and decided accordingly.

 

Regular annual remuneration

On 17 August 2009 Mr. Van Nieuwenhuizen (former Vice-Chairman) stepped down as Statutory Board member and subsequently left NIBC on 15 October 2009. Mr. Ten Heggeler joined NIBC on 17 August 2009 as Statutory Board member whilst Mr. Van Hessen was appointed as Statutory Board member on 10 September 2009. The following table shows that the total regular annual remuneration costs (including pension costs) for members and former members of the Statutory Board, appointed under the articles of association, amounted to EUR 3.6 million in 2009 (2008: EUR 4.0 million).

 

In the year under review, the average number of members of the Statutory Board appointed under the articles of association was 4.6 (2008: 4.0).

 

The breakdown of the amounts per member and former member of the Statutory Board is as follows:

 

 

One-off co-investment

In view of the debate about (executive) compensation in financial institutions and in anticipation of a new remuneration policy, the Statutory Board, Supervisory Board and shareholders jointly decided to fully rescind the one-off long term sign-on and/or retention awards granted in 2008. All transactions, including the personal investments made by the members of the Statutory Board were subsequently reversed at the original conditions.

 

As agreed at the date of recission, the new remuneration policy would include a modified alternative. The terms and conditions of this grant are modified in a manner that reduces the arrangement’s fair value, measured as the difference between the fair value of the modified equity instrument and that of the original equity instrument, both estimated as at the date of the modification. Subject to the Statutory Board members committing to a personal investment in NIBC, common depositary receipts up to 100% of their base salary in December 2009, the alternative offered the opportunity for NIBC to grant matching shares in the form of conditional restricted depositary receipts with an after-tax value equal to the value of the personal investment made. These matching shares are subject to four-year vesting with 1/4 vesting each year, the first such vesting having occurred on 1 January 2010, but they will vest immediately upon a change of control of NIBC Holding, in which case they (i) will become fully unconditional and (ii) be legally transferred.

 

This modified alternative is in line with common practice within private-equity owned companies and is what shareholders typically expect of Statutory Board members in that industry.

 

In addition to the matching shares, the Statutory Board members can earn performance shares (CRDRs), subject to service conditions (continuous employment) and the realisation of predetermined performance conditions. These performance shares will only vest upon a change of control of NIBC Holding and the attainment of an annual compounded hurdle rate. The number of performance shares that vest is based on a predetermined formula, however the Supervisory Board has the discretion to adjust the number of performance shares that will vest in the case of unfair or unintended effects.

 

As a result of a combined personal investment of EUR 1.7 million (184 thousand common depositary receipts at EUR 9.25) by the Statutory Board members, the total fair market value of this modified alternative amounts to EUR 3.0 million for the three Statutory Board members who agreed to rescind their 2008 one-off remuneration, a reduction of 45% compared to the original value of EUR 5.4 million in 2008. Including the two new Statutory Board members, the fair market value of the one-off co-investment for all Statutory Board members amounts to EUR 4.3 million in 2009. This amount can be allocated to the respective Statutory Board members as follows: Mr. Drost (EUR 1.7 million), Mr. Van Dijkhuizen (EUR 0.8 million), Mr. Sijbrand (EUR 0.5 million), Mr. Ten Heggeler (EUR 1.0 million) and Mr. Van Hessen (EUR 0.3 million).

 

Remuneration of the Statutory Board 1

 

Remuneration of the Statutory Board 1

 

Remuneration of the Supervisory Board members

The remuneration of the Supervisory Board members relates to their position within NIBC Holding and NIBC Bank.

 

in EUR		Annual fixed fees		Committee fees		Expense allowance		Total Remuneration
MEMBERS IN 2009
Mr. J.H.M. Lindenbergh 1		55,000		42,250		5,000		102,250
Mr. J.C. Flowers 1 / 2		7,500		5,500		833		13,833
Mr. C.H. van Dalen		35,000		15,000		5,000		55,000
Mr. W.M. van den Goorbergh 1		35,000		32,250		5,000		72,250
Mr. N.W. Hoek		35,000		10,000		5,000		50,000
Mr. A. de Jong		35,000		-		5,000		40,000
Mrs. S.A. Rocker 1 / 2		29,167		8,333		4,167		41,667
Mr. D. Rümker 1		35,000		11,500		5,000		51,500
Mr. R.S. Sinha 1 / 3		17,500		13,250		2,500		33,250
Mr. A.H.A. Veenhof		35,000		-		5,000		40,000
TOTAL		319,167		138,083		42,500		499,750
Members in 2008
Mr. J.H.M. Lindenbergh 1		55,000		48,000		5,000		108,000
Mr. J.C. Flowers 1		45,000		33,000		5,000		83,000
Mr. C.H. van Dalen		35,000		15,000		5,000		55,000
Mr. W.M. van den Goorbergh 1		35,000		38,000		5,000		78,000
Mr. N.W. Hoek		35,000		10,000		5,000		50,000
Mr. A. de Jong		35,000		-		5,000		40,000
Mr. D. Rümker 1		35,000		11,500		5,000		51,500
Mr. R.S. Sinha 1		35,000		26,500		5,000		66,500
Mr. A.H.A. Veenhof		35,000		-		5,000		40,000
TOTAL		345,000		182,000		45,000		572,000
In line with Dutch tax regulations, an increase of 19% VAT is payable on the total remuneration payable to the relevant Supervisory Board member. Mr. J.C. Flowers stepped down as a member of the Supervisory Board on 19 February 2009 and Mrs. S.A. Rocker was nominated on the same date as his replacement, which nomination was subsequently adopted in the Annual General Meeting of Shareholders on 29 April 2009. Mr. R.S. Sinha stepped down as a member of the Supervisory Board on 17 December 2009 and Mr D. Morgan was nominated on the same date as his replacement, which nomination will be subject to adoption in the Annual General Meeting of Shareholders on 18 May 2010 subject to approval of the DNB.

 

Components of variable compensation - NIBC Choice

NIBC Choice is NIBC’s share-based and deferred compensation plan and governs all variable compensation components in the form of equity, equity-related and deferred cash compensation. In addition to this, variable compensation can consist of a discretionary short-term cash bonus. NIBC Choice is only open to management and employees and contains restrictions relating to termination of employment or certain corporate events, such as restructurings, affecting the rights that would otherwise accrue to them.

 

Depositary receipts

The depositary receipts (DRs), consisting of common depositary receipts (CDRs) and restricted depositary receipts (RDRs), are issued by Stichting Administratiekantoor NIBC Holding (the Foundation) in accordance with its relevant conditions of administration (administratievoorwaarden).

 

The Foundation issues a DR for each ordinary share it holds in NIBC Holding. The Foundation exercises the voting rights in respect of each of these ordinary shares at its own discretion, while the holder of a DR is entitled to the dividends and other distributions declared payable in respect of the underlying ordinary share. Holders of DRs cannot exercise voting rights or request a power of attorney from the Foundation to vote in respect of our ordinary shares.

 

Under the conditions of administration, the holders of DRs have pre-emption rights similar to other shareholders of NIBC Holding, subject to the Foundation having been given pre-emptive rights. Consequently, when given these pre-emptive rights, the Foundation will exercise the pre-emption rights attached to the ordinary shares underlying the DRs if these holders so elect.

 

The purchase price established for a DR when NIBC Choice was first introduced in 2005 was EUR 18.25. RDRs cannot be transferred, and are subject to specific vesting rules. Up to 1 January 2008, they were subject to five-year vesting with 1/5th vesting on the 1st of January of each year. In 2008, the vesting schedule was changed to three-year vesting, with 1/3rd vesting each year on the 1st of January, to better align with vesting practices in other financial institutions. Additionally, RDRs are subject to certain limitations, including the forfeiture of the RDR in the case of termination of employment, or in the case of certain corporate events, such as restructurings.

 

In 2009, no new RDRs were granted by NIBC Holding. Instead a new arrangement was set up under which the 2008 short-term deferred compensation was delivered in the form of a deferred cash bonus, subject to three-year vesting, the first such vesting to occur on 1 January 2010.

 

In 2009, Statutory Board members made a combined personal investment of EUR 1.7 million (184 thousand NIBC CDRs at a price of EUR 9.25). In relation to that co-investment the Statutory Board members were granted 184 thousand matching shares (CRDRs) on a net after-tax basis representing a 1:1 match. Furthermore, the Statutory Board members are entitled to earn additional performance shares (CRDRs). The number of performance shares contained in this one-off variable compensation is in principle uncapped, but the Supervisory Board has the discretion to adjust the ultimate number in the case of unfair or unintended effects. For determining the number of performance shares, a specific formula will be applied by the Supervisory Board upon a change of control. Therefore the conditions attached to the performance shares are recognised as vesting conditions. For reporting purposes the number of performance shares for all Statutory Board members combined which will eventually vest is currently estimated at 38 thousand.

 

The matching shares were awarded to the Statutory Board with an underlying fair value of EUR 9.25, which was determined by the Supervisory Board, based on an agreed price-to-book ratio observed in the market at grant date based on net asset value. The number of performance shares will be calculated upon a change of control or any other liquidity event as a percentage of the number of matching shares that represents one year’s net base salary at the time of grant, using a pre-agreed formula.

 

The terms and conditions applicable to these CRDRs are in line with those applicable to the 2008 RDRs, except for the calculation of the grant price, the vesting period and certain performance conditions.

 

The CRDRs (matching shares) which were awarded to the Statutory Board members in 2009 in relation to their co-investment in NIBC are subject to four-year vesting with 1/4th vesting each year, for the first time on 1 January 2010 and will become fully unconditional and vest immediately upon change of control of NIBC Holding. The conditional performance shares will vest immediately upon a change of control or any other liquidity event.

 

Stock option plan

NIBC Choice also comprises an employee option plan (the Option Plan) which allowed NIBC Holding to grant options to members of its Statutory Board and employees up to a maximum of 5% of its share capital as at 14 December 2005 on a fully diluted basis. The Option Plan was introduced with the intention of further enhancing the attractiveness of converting accumulated rights under the legacy plans into NIBC Choice by granting options to employees who converted their entitlements into DRs. In addition, options were granted to encourage investment of own funds by employees in CDRs and as part of the compensation of senior management and other employees. NIBC may decide to grant further options under the current Option Plan.

 

Each option gives the option holder the right to be issued one CDR. The options are only exercisable by the option holder. Of the options granted on a certain date, 50% vests after three years and the remainder vests after four years from the date of grant and the options granted in 2005 and 2006 have a seven-year exercise period with a possibility for a three-year extension in the case a liquidity event has not yet taken place before the end of the seven-year period, provided that such a period will end no later than 14 December 2015. As a general rule, all options shall be forfeited for no consideration upon termination of employment of an option holder. However, vested options are exercisable during open periods, provided that the option holder is still employed by NIBC or, if no longer employed by NIBC, during the next open period following termination. An open period generally is the 21-day period following the date of approval of our annual, semi-annual or quarterly results, taking into account NIBC’s internal regulations on private investment transactions.

 

The exercise price of an option is equal to the fair market value of a DR at the date of grant as defined and calculated in accordance with the conditions of administration of the Foundation. This fair market value is based on the changes in NIBC Holding’s net asset value, calculated using a fixed formula, relative to the exercise price of EUR 18.25, which was determined when NIBC first introduced the Option Plan in December 2005. The resulting exercise price at the date of grant for options granted prior to 31 March 2006 ranged from EUR 18.25 in December 2005 to EUR 18.49 in March 2006 per option. Any dividends payable shall be deducted from the exercise price of an option. The exercise price at the date of grant for options granted in 2006 on or after 31 March 2006 ranged from EUR 19.81 in April 2006 to EUR 20.67 in September 2006.

 

In June 2008, as part of the one-off retention package, 1,492,900 options with a four-year exercise period were granted to selected senior executives and other staff subject to the rules of the existing Option Plan. The exercise price of these options was determined at EUR 9.06. Any dividends payable shall be deducted from the exercise price of an option. The Statutory Board may allow for a cashless exercise, allowing the holder to convert his options into fewer CDRs than he would otherwise be entitled to, while not having to pay the exercise price. Upon the occurrence of certain corporate events, such as capital adjustments, payment of stock dividends, an issue of shares or recapitalisations, the Statutory Board, following consultation with the Supervisory Board, may adjust the number of options and/or the exercise price as is equitable to reflect the event.

 

In 2009 no new options were granted to employees.

 

Carried interest

Additionally, with respect to some key investment professionals within Merchant Banking, separate performance-related reward arrangements (‘carried interest’) are agreed upon. These reward arrangements are partly related to the employment of the investment professionals and partly related to their own investments in the specific funds. All related expenses are recognised under personnel expenses in the income statement. The actual payment of carried interest, if any, to the investment professionals is subject to specific conditions.

 

Common Depositary Receipts

As at year-end 2009, 2,484,235 (2008: 2,014,369) CDRs were issued to employees. Of the position as at year-end 2009, 16,114 which is 0.6% of CDRs are considered cash-settled (2008: 31,735 and 1.4%); the remaining 99.4% is considered equity-settled. In the case an employee has the right to demand cash settlement against their fair value, the CDRs are considered cash-settled (as opposed to equity-settled).

 

		Mr. Jeroen Drost		Mr. Kees van Dijkhuizen		Mr. Jan Sijbrand		Mr. Rob ten Heggeler		Mr. Jeroen van Hessen		Subtotal Board Members		Staff 2		Total
POSITION AT 1 JANUARY 2008 (Investment from own funds)		-		10,000		-		-		-		10,000		1,688,474		1,698,474
POSITION AT 1 JANUARY 2008 (Granted)		-		520		-		-		-		520		265,718		266,238
Investments from own funds		-		-		-		-		-		-		74,268		74,268
Weighted average grant price per CDR		-		-		-		-		-		-		9.06		9.06
Vesting of RDRs		-		1,129		-		-		-		1,129		628,548		629,677
CDRs repaid		-		-		-		-		-		-		(654,288)		(654,288)
POSITION AT 31 DECEMBER 2008 (Investment from own funds)		-		10,000		-		-		-		10,000		1,108,454		1,118,454
POSITION AT 31 DECEMBER 2008 (Granted)		-		1,649		-		-		-		1,649		894,266		895,915
Fair market value per CDR at 31 December 2008 1				9.06								9.06		9.06		9.06
POSITION AT 1 JANUARY 2009 (Investment from own funds)		-		10,000		-		-		30,699		40,699		1,077,755		1,118,454
POSITION AT 1 JANUARY 2009 (Granted)		-		1,649		-		-		29,378		31,027		864,888		895,915
Investments from own funds		75,676		32,433		21,622		43,244		10,811		183,786		-		183,786
Weighted average grant price per CDR		9.25		9.25		9.25		9.25		9.25		9.25		-		9.25
Vesting of RDRs		-		3,602		-		-		9,630		13,232		273,354		286,586
CDRs repaid		-		-		-		-		-		-		(506)		(506)
POSITION AT 31 DECEMBER 2009 (Investment from own funds)		75,676		42,433		21,622		43,244		41,510		224,485		1,077,249		1,301,734
POSITION AT 31 DECEMBER 2009 (Granted)		-		5,251		-		-		39,008		44,259		1,138,242		1,182,501
Fair market value per CDR at 31 December 2009 1		9.25		9.25		9.25		9.25		9.25		9.25		9.25		9.25
The fair market value per CDR is calculated based on price-to-book ratios observed in the market at grant date based on net asset value. Former members of the Statutory Board are included in these figures. Former members stepped down as members of the Statutory Board in 2008 or 2009.

 

Restricted Depositary Receipts

As at year-end 2009, 587,455 (2008: 940,778) RDRs were issued to employees, with a weighted average remaining vesting period of 0.64 years (2008: 1.13). A requirement for vesting at the vesting date is that the holder is still employed by NIBC or one of its group companies. Of the position as at year-end 2009, no RDRs were considered as cash-settled (2008: nil).

 

		Mr. Jeroen Drost		Mr. Kees van Dijkhuizen		Mr. Jan Sijbrand		Mr. Rob ten Heggeler		Mr. Jeroen van Hessen		Subtotal Board Members		Staff 2		Total
POSITION AT 1 JANUARY 2008		-		5,125		-		-		-		5,125		1,042,600		1,047,725
Granted in 2008 as part of 2007 annual remuneration		-		7,418		-		-		-		7,418		431,595		439,013
Weighted average grant price per RDR		-		9.06		-		-		-		9.06		9.06		9.06
Granted in 2008 from one-off long-term sign-on and/or retention incentive awards		-		-		-		-		-		-		210,144		210,144
Weighted average grant price per RDR		-		-		-		-		-		-		9.18		9.18
Forfeited		-		-		-		-		-		-		(126,427)		(126,427)
Vested into CDRs		-		(1,129)		-		-		-		(1,129)		(628,548)		(629,677)
POSITION AT 31 DECEMBER 2008		-		11,414		-		-		-		11,414		929,364		940,778
Fair market value per RDR at 31 December 2008 1		-		9.06		-		-		-		9.06		9.06		9.06
POSITION AT 1 JANUARY 2009		-		11,414		-		-		30,593		42,007		898,771		940,778
Granted in 2009 as part of 2008 annual remuneration		-		-		-		-		-		-		-		-
Weighted average grant price per RDR		-		-		-		-		-		-		-		-
Forfeited		-		-		-		-		-		-		(66,737)		(66,737)
Vested into CDRs		-		(3,602)		-		-		(9,630)		(13,232)		(273,354)		(286,586)
POSITION AT 31 DECEMBER 2009		-		7,812		-		-		20,963		28,775		558,680		587,455
Fair market value per RDR at 31 December 2009 1		9.25		9.25		9.25		9.25		9.25		9.25		9.25		9.25
The fair market value per CDR is calculated based on price-to-book ratios observed in the market at grant date based on net asset value. Former members of the Statutory Board are included in these figures. Former members stepped down as members of the Statutory Board in 2008 or 2009.

 

Conditional Restricted Depositary Receipts

At year-end 2009, 183,786 (2008: nil) CRDRs were awarded to Statutory Board members to match their personal co-investment in NIBC CDRs, with a weighted average remaining vesting period of 3.0 years (2008: nil). These CRDRs are subject to four-year vesting with 1/4th vesting each year on 1 January, for the first time on 1 January 2010 provided that the holder is still employed by NIBC prior to the vesting date. These CRDRs will become fully unconditional and vest immediately upon change of control of NIBC Holding. The number of performance shares is dependent on certain performance targets, and will be calculated upon a change of control event as a percentage of the number of matching shares that represents one year’s net base salary at the time of grant. For reporting purposes, the number of performance shares for the combined Statutory Board is estimated at 37,691 CRDRs, based on NIBC’s current long-term forecast. Depending on the assumptions applied, this number can vary over time. The conditional performance shares will vest immediately upon a change of control of NIBC Holding. Of the position at year-end 2009, no CRDRs were considered cash-settled (2008: nil).

 

		Mr. Jeroen Drost		Mr. Kees van Dijkhuizen		Mr. Jan Sijbrand		Mr. Rob ten Heggeler		Mr. Jeroen van Hessen		Total Board Members
POSITION AT 1 JANUARY 2009		-		-		-		-		-		-
One-off matching shares (CRDRs) awarded in 2009		75,676		32,433		21,622		43,244		10,811		183,786
Weighted average grant price per CRDR		9.25		9.25		9.25		9.25		9.25		9.25
One-off performance shares (CRDRs) awarded in 2009 1		11,471		6,555		6,555		6,555		6,555		37,691
Weighted average grant price per CRDR		9.25		9.25		9.25		9.25		9.25		9.25
Forfeited		-		-		-		-		-		-
Vested into conditional CDRs		-		-		-		-		-		-
POSITION AT 31 DECEMBER 2009		87,147		38,988		28,177		49,799		17,366		221,477
Fair market value per CRDR at 31 December 2009 2		9.25		9.25		9.25		9.25		9.25		9.25
The number of performance shares is estimated and can vary over time depending on the assumptions applied. The fair market value per CDR is calculated based on price-to-book ratios observed in the market at grant date based on net asset value.

 

Options

At year-end 2009, 3,883,983 (2008: 4,439,793) options on CDRs of NIBC Holding were in issue, with a weighted average remaining vesting period of 0.8 years (2008: 1.2). Of this total position, 1,174,502 options are vested at 31 December 2009. A requirement for vesting at the vesting date is that the holder is still employed by NIBC Holding or one of its group companies. The weighted average exercise period of the options is 3.0 years (2008: 4.0). All options are equity-settled instruments.

 

		Mr. Jeroen Drost		Mr. Kees van Dijkhuizen		Mr. Jan Sijbrand		Mr. Rob ten Heggeler		Mr. Jeroen van Hessen		Subtotal Board Members		Staff 2		Total
POSITION AT 1 JANUARY 2008		-		60,000		-		-		-		60,000		3,492,569		3,552,569
Options granted in 2008		-		-		-		-		-		-		1,492,900		1,492,900
Average exercise price per option		-		-		-		-		-		-		9.31		9.31
Options forfeited		-		-		-		-		-		-		(605,676)		(605,676)
POSITION AT 31 DECEMBER 2008		-		60,000		-		-		-		60,000		4,379,793		4,439,793
POSITION AT 1 JANUARY 2009		-		60,000		-		-		207,056		267,056		4,172,737		4,439,793
Options granted in 2009		-		-		-		-		-		-		-		-
Average exercise price per option		-		-		-		-		-		-		-		-
Options forfeited		-		-		-		-		-		-		(555,810)		(555,810)
POSITION AT 31 DECEMBER 2009		-		60,000		-		-		207,056		267,056		3,616,927		3,883,983
OF WHICH VESTED AT 31 DECEMBER 2009		-		30,000		-		-		78,528		108,528		1,065,974		1,174,502
Average fair value per option at grant date 1		-		6.00		-		-		5.43		5.56		5.23		5.25
Weighted average exercise price per option at 31 December 2009		-		15.15		-		-		13.68		14.01		13.35		13.39
The fair value of the options at grant date is calculated using a Black & Scholes pricing model. For the options issued in 2005, the fair value was calculated using an implied volatility of 24%, based on the implied volatility of long-term options of peer-banks, an exercise period of seven years, an exercise price of EUR 18.25, a fair value of the underlying CDR of EUR 18.25, a risk-free rate of return of 3.2% and expected dividend pay-outs of nil (as based on the NIBC Choice option regulation, these are periodically adjusted in the exercise price). These options represent 59% of the options outstanding at the end of 2009 (2008: 63%). The fair value at grant date of the two smaller series of options issued in 2006 are calculated in the same way using the same volatility, exercise period and dividend assumptions, but with updated input variables for the risk-free rate of return, exercise price and fair value of the underlying. No new options were granted in 2007 and 2009. For the options granted in 2008, the fair value was calculated using an implied volatility of 45%, based on the implied volatility of long-term options of peer-banks, an exercise period of four years, an exercise price of EUR 9.06, a fair value of the underlying CDR of EUR 9.06, a risk-free rate of return of 4.25% and expected dividend pay-outs of nil. The average fair value at grant date was EUR 5.25 at the end of 2009. Former members of the Statutory Board are included in these figures. Former members stepped down as members of the Statutory Board in 2008 or 2009.

 

With respect to all instruments relating to NIBC Choice (CDRs, RDRs, CRDRs, options and deferred cash), an amount of EUR 8 million was expensed through personnel expenses in 2009 (2008: EUR 11 million), of which EUR 1 million (2008: nil) refers to cash-settled instruments (deferred cash) and EUR 4 million (2008: EUR 5 million) to equity-settled instruments. With respect to the cash-settled instruments, the amount expensed during the vesting period through the income statement is based on the number of instruments originally granted at grant date and at balance sheet date, their fair value at grant date and at balance sheet date, the vesting period and estimates of the number of instruments that will be forfeited during the remaining vesting period.

 

The liability in the balance sheet with respect to cash-settled instruments is EUR 1 million (2008: nil). With respect to the equity-settled instruments (CDRs, RDRs, CRDRs and options) the amount expensed during the vesting period through the income statement is based on the number of instruments granted at balance sheet date, their fair value at grant date, the vesting period and estimates of the number of instruments that will be forfeited during the remaining vesting period.

 

In the current account position with NIBC Holding, an amount of EUR 31 million payable is included (2008: EUR 30 million) relating to NIBC Choice. This is a result of NIBC Holding pushing down expenses with respect to NIBC Choice (on both cash- and equity-settled instruments) to its subsidiaries. In view of IFRIC 11, NIBC has a receivable in the current account position with NIBC Holding for the capital contribution of EUR 45 million (2008: EUR 42 million) in relation to the share-based payments programme granted by NIBC Holding.

 

	Credit risk
54

 

NIBC defines credit risk as the current or potential threat to the company’s earnings and capital as a result of a counterparty’s failure to make required debt or financial payments on a timely basis or to comply with other conditions of an obligation or agreement, including the possibility of restrictions on or impediments to the transfer of payments from abroad.

 

At NIBC almost every activity is related to credit risk, which is present in many portfolios. The following portfolios that contain credit risk are distinguished:

• Corporate Loans;
• Investment Management Loans;
• Residential Mortgages;
• Debt Investments;
• Cash Management; and
• Derivatives.

 

The Debt Investments portfolio is further subdivided into:

• Debt from financial institutions and sovereign entities;
• Securitisations; and
• Enhanced investments and credit fixed income funds.

 

NIBC defines the credit risk contained in the Debt Investments portfolio as issuer risk, which is the credit risk on the issuer of the debt security (e.g. public bond).

 

During the course of 2009, NIBC introduced two main changes in its reporting policies. The first one relates to its internal definitions for defaulted and impaired exposure in the Corporate Loan portfolio, in order to allow further differentiation between these assets. The section on corporate loan impairments that follows provides more information on this topic. The second change refers to an adjustment in the geographical segmentation used for reporting purposes. In order to allow comparability between 2009 and 2008, the 2008 figures have been adjusted to reflect the new reporting policies and therefore differ from the numbers published in the 2008 annual report.

 

Additional adjustments that have occurred in the 2008 figures relate to the following:

• Transfer of loans from the Corporate Loan portfolio to the Investment Management Loan portfolio (the latter being shown as ‘mezzanine loans’ in 2008). The exposure of these loans in 2008 amounted to EUR 8 million and therefore 2008 exposures have been adjusted accordingly; and
• The 2008 amount of EUR 765 million for debt from financial institutions and sovereign entities is different to that published in last year’s annual report. Last year’s annual report aggregated debt from financial institutions and sovereign entities together with the Enhanced Investments portfolio. In 2009, enhanced investments are presented in a separate section; therefore 2008 numbers have also been adjusted to reflect this. Furthermore, in 2008 certain exposures with an AAA-rated government guarantee, which were classified as sovereign, have been reclassified as financial institutions. The section on debt investments provides further information on this.

 

Table 54-1 shows the maximum credit risk exposures, without taking collateral or any other credit risk mitigation into consideration. The credit risk analysis includes all financial assets subject to credit risk. Non-financial assets and equity are not included. Off-balance sheet exposures are included where relevant: loan commitments and guarantees to corporate entities, Investment Management loan commitments and Credit Default Swaps (CDS) where NIBC is a protection seller. Sold protection creates an off-balance sheet exposure to the reference entity, in addition to the counterparty risk on the CDS counterparty for the CDS premium payments.

 

The maximum credit risk exposures are not directly comparable to the numbers on the balance sheet.

 

Corporate loans and Investment Management loans are recognised on the balance sheet under loans and securitised loans. The main difference is that the figures stated in table 54-1 also incorporate the off-balance sheet commitments. Furthermore, the figures in table 54-1 do not include loans from NIBC Bank to NIBC Holding.

 

Residential mortgages are recognised on the balance sheet under residential mortgages own book and securitised residential mortgages.

 

The maximum credit risk exposure on debt investments is larger than the total of debt investments on the balance sheet due to off-balance sheet exposures that are included in the maximum credit risk exposure.

 

The cash management exposure should be compared to cash and balances with central banks and due from other banks on the balance sheet. The major difference is caused by cash from collateral postings due to credit risk on derivatives not being included in the risk figures. An additional difference is the inclusion in cash management of a tax receivable on the balance sheet.

 

Credit risk on derivatives should be compared to derivative financial assets held for trading and hedging on the balance sheet. The main difference comes from the exclusion of swaps from the maximum credit risk exposures due to their risk-offsetting nature.

 

Table 54-1 Credit risk exposure breakdown per portfolio
In EUR millions		31 December 2009		31 December 2008
Corporate loans		8,572		8,090
Investment Management loans		245		257
Residential mortgages		10,601		11,451
DEBT INVESTMENTS PORTFOLIO
Debt from financial institutions and sovereign entities		1,509		765
Securitisations		738		898
Enhanced investments/Credit fixed income funds		48		729
SUBTOTAL DEBT INVESTMENTS PORTFOLIO		2,295		2,392
CASH MANAGEMENT
Cash		2,183		1,616
Repo		1,228		0
SUBTOTAL CASH MANAGEMENT		3,411		1,616
Derivatives 1		2,825		3,110
1. Positive replacement values.

 

Corporate loans

 

Credit approval process

In principle, all individual credit proposals are approved in the Transaction Committee (TC). Proposals and amendments of smaller scale can be approved by the Credit Risk Management department (CRM). All approvals of individual credit proposals are granted only after CRM has made a credit risk assessment and has analysed proposals by taking into consideration, among others, aggregate limits set per country, per industry segment, and per individual counterparty.

 

CRM assesses counterparty risk and validates counterparty credit ratings and loss given default (LGD) ratings based on the internally-developed rating system.

 

NIBC has applied an internally-developed credit rating methodology since 2000. This methodology consists of two elements: a counterparty credit rating that reflects the probability of default of the borrower, and an anticipated loss element that expresses the potential loss in the event of default. All counterparties are reviewed at least once a year. The internal counterparty credit ratings are generated on a scale from 1 to 10 and are mapped to the corresponding credit ratings of Standard & Poor’s, labelled from AAA to D.

 

Graph 54-2 shows the distribution of on- and off-balance sheet corporate loan exposures per counterparty credit rating. The numbers on the horizontal axis refer to NIBC’s internal rating scale, whereas the letters inside the parentheses refer to the Standard & Poor’s equivalent ratings. NR stands for not rateable, which was a negligible portion (0.1% of corporate loans) at 31 December 2009. All figures presented in this section are based on both on- and off-balance sheet items, unless otherwise stated.

 

 

Graph 54-2 On- and off-balance corporate loan exposure, 31 December 2009 and 2008

 

The portfolio effects of individual credit proposals are also assessed. The total One Obligor Exposure (OOE) and both sector and country concentrations are taken into account.

Tables 54-3 and 54-4 show a breakdown in percentages of the Corporate Loan portfolio among regions and industry sectors, at 31 December 2009 and 31 December 2008. The commercial real estate figures include an amount of EUR 616 million in securitised loans. This concerns the Mesdag Delta securitisation; NIBC has retained notes amounting to EUR 145 million, whereas EUR 471 million has been sold. Furthermore, the industry sector ‘Financial Services’ includes a collateralised loan of EUR 396 million (the collateral is a pool of prime Dutch residential mortgages) to an investment-grade financial institution. The term Exposure includes both on- and off-balance sheet amounts and applies to all graphs in this section.

 

Table 54-3 Corporate loan exposure per industry sector and region, 31 December 2009
in %	The Netherlands	United Kingdom	Germany	Europe	North America	Asia/Pacific	Other		Total (%)		Total (in EUR millions)
Aviation	0	0	-	0	0	0	-		1		76
Commercial Real Estate	18	0	7	1	-	-	0		26		2,289
Financial Services	6	-	1	0	-	-	-		7		615
Food/Agriculture	1	-	0	0	-	-	-		2		178
Health/Education	0	4	1	0	-	-	-		6		488
Infrastructure	3	5	1	1	-	-	-		10		895
Manufacturing	2	2	0	3	1	2	2		12		1,013
Shipping	1	1	0	2	2	6	2		15		1,255
Trade	7	3	1	1	-	-	-		11		995
Utilities	1	0	0	0	0	0	0		3		238
Other	3	3	1	1	0	-	-		7		529
Total	43	20	13	10	4	8	3		100		8,572
Total (In EUR millions)	3,689	1,692	1,055	857	343	657	278				8,572

 

Table 54-4 Corporate loan exposure per industry sector and region, 31 December 2008
in %	The Netherlands	United Kingdom	Germany	Europe	North America	Asia/Pacific	Other		Total (%)		Total (in EUR millions)
Aviation	0	0	-	0	0	0	-		1		102
Commercial Real Estate	22	-	7	1	-	-	0		30		2,349
Financial Services	1	-	0	-	-	-	-		2		138
Food/Agriculture	0	-	0	0	-	-	-		1		44
Health/Education	0	4	1	0	-	-	-		5		443
Infrastructure	4	4	3	1	-	-	-		12		964
Manufacturing	2	2	1	4	1	1	1		12		973
Shipping	1	2	0	3	2	8	1		17		1,402
Trade	6	3	1	1	-	-	-		11		909
Utilities	2	0	-	0	0	0	-		3		217
Other	2	4	-	0	0	-	-		7		551
Total	41	19	13	11	4	10	2		100		8,090
Total (In EUR millions)	3,229	1,552	1,085	914	338	778	194				8,090

 

Country risk

Country risk is potentially an important cause of increased counterparty default risk since a large number of individual debtors could default at the same time. NIBC’s policy is to attempt to minimise country risk by monitoring the following elements:

• Gross country exposure: As a rule, NIBC allocates exposure to the country in which the borrower’s cash flows are generated. Gross country exposure is defined as the aggregate maximum exposure (both drawn and undrawn) to all borrowers or guarantors in a given country;
• Net country exposure: Net country exposure is the gross country exposure modified to take into account the value of certain moveable assets, such as ships and aircraft, that secure loans to borrowers in a given country, besides corporate guarantees. After applying a valuation formula, the fair market value of such collateral is deducted facility by facility from the gross exposure under all lending facilities in a given country, in order to generate the net country exposure; and
• Country limits: A country limit system is maintained to manage country risks by net country exposure for certain countries. In general, NIBC does not apply a country limit to the member countries of the Organisation for Economic Co-operation and Development (OECD). For other selected countries, a methodology is applied based on government bond ratings provided by Moody’s or Standard & Poor’s to determine country limits.

 

 

Collateral

An important element in NIBC’s credit approval process is the assessment of collateral. Almost all loans and guarantees have some form of collateralisation. Loans can be collateralised by mortgages on real estate and ships, by receivables, lease receivables or liens on machinery and equipments, or by third-party guarantees and other similar agreements. A loan is deemed to be collateralised, fully or partly, if such assets are legally pledged in support of the loan.

 

In general, NIBC requests collateral to protect its interests. NIBC ascribes value to collateral accepted for loans and guarantees, based on the condition that the collateral is sufficiently liquid, that documentation is effective and that enforcing NIBC’s legal rights to the collateral will be successful. The type and quantity of the collateral depends on the type of transaction, the counterparty and the risks involved. The most significant types of collateral securing the loan portfolio are tangible assets, such as real estate, ships and equipment.

 

NIBC initially values collateral based on fair market value when structuring the transaction, and evaluates the collateral (semi-) annually during the lifetime of the loan. NIBC typically seeks confirmation from independent third-party experts that its interests are legally enforceable. Loans in the shipping and oil & gas sectors are secured by moveable assets such as ships and drilling vessels. The Commercial Real Estate Loan portfolio is primarily collateralised by mortgages on financed properties. Collateral value is estimated using third-party appraisers, whenever possible, or valuation techniques based on common market practice. Other commercial loans are, to a large extent, collateralised by assets such as inventory, debtors, and third-party credit protection (e.g. guarantees).

 

It is impracticable for NIBC to estimate the total fair market value of collateral. NIBC, therefore, does not disclose this fair market value. Furthermore, NIBC recognises that the fair market values of collateral in a diverse portfolio may not present a correct indication of the recovery prospects. Some asset types are more liquid than others and may thus require a smaller haircut in the case of a quick sale. Furthermore, different asset types can be subject to very different asset price volatilities.

 

Graph 54-5 shows the breakdown of collateralised and uncollateralised exposures by industry sector at 31 December 2009 and 31 December 2008. The term collateralised indicates full or partial collateralisation. 

 

 

Graph 54-5 Breakdown of (un)collateralised exposures per industry sector,
31 December 2009 and 2008

 

Past due loan amounts

Past due loan amounts are reported to the TC on a quarterly basis. Payments may be past due for various reasons. However, late payments that are not yet received are not automatically assumed to be uncollectible.

 

An overview of the past due amounts of all corporate loan exposures is provided in tables 54-6 and 54-7. The exposure amounts refer to both on- and off-balance sheet amounts of those facilities with an arrear, whereas the outstanding amounts refer to the on-balance sheet amounts only. The amounts in arrear are the actual amounts past due at 31 December 2009 and 31 December 2008 respectively. The term Collateralised may indicate full or partial collateralisation. The column labelled Impairment Amount includes on-balance sheet impairment amounts only (31 December 2009: EUR 110 million; 31 December 2008: EUR 79 million). The inclusion of Incurred but not Reported (IBNR) impairment amounts on the line with no payment arrears brings the total impairment amount for 2009 to EUR 113 million (2008: EUR 81 million). Tables 54-9 and 54-10 provide more information on impairment amounts.

 

The impairment amounts presented in tables 54-6 and 54-7 have been determined based on the assumption that these instruments have been classified to the amortised cost category in 2008. The total amount differs from the impairment amount presented in note 16 to the consolidated financial statements, due to the reclassification under the amendment of IAS 39, whereby assets have been reclassified from the available for sale category to the amortised cost category.

 

 

Table 54-6 Past due loan amounts, 31 December 2009
in EUR millions		Exposure							Outstanding
		Collateralised	Not collateralised		Total		% of exposure		Collateralised	Not collateralised		Total		% of on balance
AGE OF PAYMENT IN ARREAR
1- 5 days		158	0		158		1.8		119	0		119		1.6
6 - 30 days		118	-		118		1.4		91	-		91		1.2
31 - 60 days		8	-		8		0.1		8	-		8		0.1
61 - 90 days		15	-		15		0.2		9	-		9		0.1
SUBTOTAL LESS THAN 90 DAYS		299	0		299		3.5		226	0		226		3.0
Over 90 days		70	2		73		0.8		70	1		71		1.0
No payment arrear		7,600	600		8,200		95.7		6,737	407		7,144		96.0
TOTAL		7,970	602		8,572		100		7,033	408		7,441		100
in EUR millions		Amount in Arrear
		Collateralised	Not collateralised		Total		% of on balance		Impairment amount
AGE OF PAYMENT IN ARREAR
1- 5 days		2	0		2		0.0		8
6 - 30 days		3	-		3		0.0		-
31 - 60 days		8	-		8		0.1		1
61 - 90 days		2	-		2		0.0		7
SUBTOTAL LESS THAN 90 DAYS		15	0		15		0.2		16
Over 90 days		29	1		30		0.4		17
No payment arrear		-	-		-		0.0		79
TOTAL		44	1		45		0.6		113

 

 

Table 54-7 Past due loan amounts, 31 December 2008
in EUR millions		Exposure							Outstanding
		Collateralised	Not collateralised		Total		% of exposure		Collateralised	Not collateralised		Total		% of on balance
AGE OF PAYMENT IN ARREAR
1- 5 days		384	53		437		5.4		247	19		266		3.8
6 - 30 days		212	27		238		2.9		144	17		161		2.3
31 - 60 days		68	0		68		0.8		63	0		63		0.9
61 - 90 days		40	14		55		0.7		19	14		33		0.5
SUBTOTAL LESS THAN 90 DAYS		704	94		798		9.9		474	50		524		7.5
Over 90 days		86	6		92		1.1		40	5		45		0.6
No payment arrear		6,823	378		7,201		89.0		6,105	335		6,441		91.9
TOTAL		7,613	477		8,090		100		6,619	390		7,009		100
in EUR millions		Amount in Arrear
		Collateralised	Not collateralised		Total		% of on balance		Impairment amount
AGE OF PAYMENT IN ARREAR
1- 5 days		15	0		15		0.2		5
6 - 30 days		2	0		2		0.0		7
31 - 60 days		5	0		5		0.1		4
61 - 90 days		0	14		14		0.2		-
SUBTOTAL LESS THAN 90 DAYS		22	14		35		0.5		16
Over 90 days		3	2		6		0.1		8
No payment arrear		-	-		-		0.0		57
TOTAL		25	16		41		0.6		81

 

Graph 54-8 shows the rating distribution of the exposure amounts (expressed as the sum of drawn and undrawn amounts) of all loans with an amount past due. The total exposure amount at 31 December 2009 is EUR 372 million (2008: EUR 889 million) and the total drawn amount at 31 December 2009 is EUR 297 million (2008: EUR 569 million). The numbers on the horizontal axis refer to NIBC’s internal rating scale, whereas the letters inside the parentheses refer to the Standard & Poor’s equivalent ratings.

 

 

Graph 54-8 Distribution of exposure amounts (drawn plus undrawn) with a payment arrear per rating category, 31 December 2009 and 2008

 

Impairment amounts

Credit officers and CRM monitor the quality of counterparties in the portfolios on a regular basis. On a quarterly basis, the entire Corporate Loan portfolio is assessed for impairment. All existing impairments are reviewed as well.

 

NIBC calculates an impairment amount by taking certain factors into account, particularly the available collateral securing a loan. An impairment amount is recorded only if the total outstanding amount is greater than the sum of the net present value of the realisable collateral value and any other cash flow that NIBC expects to collect on the loan.

 

In 2009, NIBC reviewed its internal definitions for defaulted and impaired exposure in order to allow further differentiation between these assets. Whereas in 2008 these definitions were aligned and were both applied at a counterparty level, as of 2009 NIBC considers a default occurring at a counterparty level, whereas an impairment is taken at the facility level. According to NIBC’s new definitions, when a default occurs (in line with the Basel II definition) then the entire exposure and outstanding amount of the borrower are classified as defaulted. On the contrary, if an impairment amount is taken against a facility, only the outstanding amount of that particular facility is classified as impaired. This means that all obligors with impaired facilities are considered to be in default and carry a default rating of 9 or 10, but not all defaulted facilities are considered impaired. This revision of definitions explains why the impaired exposure at 31 December 2008 mentioned in Tables 54-9 and 54-10 differs from those reported in NIBC’s annual report in 2008.

 

Tables 54-9 and 54-10 show an overview of impairments at 31 December 2009 and 31 December 2008, subdivided in regions and industry sectors, respectively. The column labelled Exposure includes both on- and off-balance sheet amounts, and the column labelled Impairment Amount refers to the on-balance sheet amounts of impaired facilities.

 

The impairment amounts presented in tables 54-9 and 54-10 have been determined based on the assumption that these instruments have been classified to the amortised cost category in 2008. The total amount differs from the impairment amount presented in the note 16 to the consolidated financial statements, due to the reclassification under the amendment of IAS 39, whereby assets have been reclassified from the available for sale category to the amortised cost category.

 

Table 54-9 Impairment per region
in eur millions		31 December 2009					31 December 2008
		Exposure	Impaired exposure	Impairment amount	Write-offs		Exposure	Impaired exposure	Impairment amount	Write-offs
The Netherlands		3,689	124	54	1		3,229	47	19	8
United Kingdom		1,692	20	17	15		1,552	41	34	1
Germany		1,055	56	30	0		1,085	25	17	-
Europe		857	0	0	9		914	9	6	-
North America		343	14	9	0		338	7	3	-
Asia/Pacific		657	4	1	0		778	-	-	1
Other		278	0	0	0		194	0	0	-
IBNR Corporate loans				3					2
TOTAL		8,572	218	113	25		8,090	130	81	10

 

Table 54-10 Impairment per industry sector
in eur millions		31 December 2009					31 December 2008
		Exposure	Impaired exposure	Impairment amount	Write-offs		Exposure	Impaired exposure	Impairment amount	Write-offs
Aviation		76	32	18	0		102	23	9	0
Commercial Real Estate		2,289	7	1	0		2,349	7	1	1
Financial Services		615	80	29	-		138	2	0	-
Food/Agriculture		178	1	0	-		44	1	0	0
Health/Education		488	6	6	-		443	5	4	-
Infrastructure		895	14	11	0		964	16	16	8
Manufacturing		1,013	30	27	6		973	14	8	1
Shipping		1,255	3	0	1		1,402	4	1	-
Trade		995	46	18	9		909	26	21	0
Utilities		238	-	-	-		217	-	-	-
Other		529	0	0	9		551	31	18	-
IBNR Corporate loans				3					2
TOTAL		8,572	218	113	25		8,090	130	81	10

 

Loans without impairments and past due amounts

At 31 December 2009, the size of the corporate loan exposure that carries neither impairments nor past due amounts equals EUR 8,037 million (2008: EUR 7,129 million). The weighted average counterparty credit rating stood at 6+ in NIBC’s internal rating scale.

 

Graph 54-11 shows the distribution of exposure amounts without impairments and past due amounts, at 31 December 2009 and 31 December 2008. NR stands for not rateable, which at 31 December 2009 was negligible (0.5% of all loans without defaults and past due amounts). Furthermore, a very small portion of this portfolio segment (1.8% at 31 December 2009; 1.6% at 31 December 2008) carried a default rating of either 9 or 10. No impairment amounts have been taken on these exposures as NIBC does not expect any losses for various reasons, e.g. due to over-collateralisation or seniority in the capital structure.

 

 

Graph 54-11 Distribution of exposure amount without defaults and past due amounts per rating category, 31 December 2008 and 2009

 

Investment Management loans

 

Investment Management (IM) loans are originated and monitored by the Investment Management BU (part of Merchant Banking) and are separated from the Corporate Loan portfolio. IM loans are unsecured, subordinated loans that may contain equity characteristics such as attached warrants or conversion features. As such, IM loans typically carry a higher risk profile than corporate loans, which is compensated by higher expected returns. Examples of this exposure include mezzanine loans, convertible loans and shareholder loans.

 

The IM loan investments can be divided into indirect investments and direct investments. Indirect investments are investments made through funds set up and managed by NIBC (NIBC Funds) that are controlled by NIBC and thus consolidated into the financial statements of NIBC. Direct investments are all other investments.

 

The responsibility for the management of both the direct and the indirect investment exposures rests with Merchant Banking. Direct investment transactions with respect to IM loans are approved by the Investment Committee (IC) of NIBC. Indirect investment transactions are approved by the investment committees of the NIBC Funds, subject to the investment guidelines stipulated in the fund agreements between the manager of the NIBC Fund and the investors.

 

Investment officers monitor the quality of counterparties in the portfolio on a regular basis. On a quarterly basis, the entire IM Loan portfolio is assessed for impairment. All existing impairments are reviewed as well. Impairments of indirect investment exposures are determined by the manager of the NIBC Fund. All impairments are reviewed and approved by the IC.

 

In line with the special nature of the asset class, the IM loans typically carry lower internal counterparty credit ratings and often higher LGDs than corporate loans.

 

Tables 54-12 and 54-13 show a breakdown of IM loans per region and industry sector, respectively, at 31 December 2009 and 31 December 2008.

 

Table 54-12 Breakdown of IM loans per region
in eur millions		31 December 2009				31 December 2008
		Exposure		%		Exposure		%
The Netherlands		147		60%		115		45%
United Kingdom		62		25%		62		24%
Germany		29		12%		44		17%
Europe		0		0%		30		12%
North America		-		-		-		-
Asia/Pacific		6		3%		6		2%
Other		-		-		-		-
TOTAL		245		100%		257		100%

 

Table 54-13 Breakdown of IM loans per industry sector
in eur millions		31 December 2009				31 December 2008
		Exposure		%		Exposure		%
Commercial Real Estate		17		7%		7		3%
Financial Services		4		2%		6		2%
Food/Agriculture		22		9%		-		-
Health/Education		0		0%		-		-
Infrastructure		0		0%		-		-
Manufacturing		55		23%		121		47%
Trade		134		55%		61		24%
Other		11		5%		62		24%
TOTAL		245		100%		257		100%

 

Impairment amounts

At 31 December 2009, impairment amounts on IM loans amounted to EUR 30 million (2008: EUR 18 million, of which EUR 15 million was in the manufacturing sector and the remainder was spread over various sectors).

 

The net difference of EUR 12 million results from new impairments that were recognised in the sectors manufacturing (EUR 17 million), trade (EUR 15 million), other sectors (EUR 6 million) and an impairment amount of EUR 7 million that was transferred from the Corporate Loan portfolio, partly offset by an impairment amount write-off of EUR 33 million in the manufacturing sector.

 

The impairment amount of EUR 15 million in the trade sector refers to an asset which is not collateralised.

 

At 31 December 2009, a drawn amount of EUR 31 million shows a past due (for 31-60 days), non-impaired amount of EUR 2 million. EUR 1 million is collateralised and EUR 1 million is not collateralised. In 2008, an uncollateralised drawn amount of EUR 6 million showed a past due (for above 90 days) amount of EUR 3 million.

 

Residential mortgages

 

At 31 December 2009, the composition of the Residential Mortgage portfolio (EUR 10,601 million) was as shown in Table 54-14:

 

Table 54-14 Breakdown of Residential Mortgage portfolio
in eur millions		31 December 2009		31 December 2008
Dutch Own Book portfolio		5,223		5,509
Dutch Securitised portfolio		4,783		5,250
German Own Book portfolio		594		692
TOTAL		10,601		11,451

 

Dutch Residential Mortgage portfolio

The Dutch Residential Mortgage portfolio contains loans that have been originated on a white-label basis (i.e. the mortgage products offered do not contain the NIBC brand) by business partners following set underwriting criteria. The servicing and administration of the Mortgage portfolio is outsourced to third-party servicers. 29% of the Mortgage Loan portfolio at 31 December 2009 has a Dutch government guarantee (NHG guarantee) in accordance with the general terms and conditions set by the Stichting Waarborgfonds Eigen Woningen (WEW, Social Housing Guarantee Fund).

 

A large part of the Dutch Residential Mortgage portfolio has been securitised. In most cases, NIBC has retained junior notes and other positions related to these securitisation programmes. These securitisation programmes are consolidated on NIBC’s balance sheet. The notional amount of the retained positions is EUR 65 million.

 

Risk governance

In order to control the credit risk in the origination of residential mortgages, an acceptance policy framework has been formulated to screen residential mortgage applications. Acceptance depends on the following underwriting criteria:

• Conformity with the Code of Conduct on Mortgage Credits of the Dutch Bankers Association;
• A check of an applicant’s credit history with the Dutch National Credit Register (Bureau Krediet Registratie or BKR), a central credit agency used by financial institutions in the Netherlands, which records five years of financial commitments and negative credit events;
• Mortgage loans are secured by first ranking mortgage rights;
• A maximum loan-to-foreclosure value of 130% is applied and payment protection insurance for amounts exceeding 125% loan-to-foreclosure value is required; and
• Underwriting criteria for mortgages with an NHG guarantee are set in accordance with the general terms and conditions set by the WEW. The WEW finances itself by a one-off up-front charge to the borrower as a percentage of the principal amount of the mortgage loan. The NHG guarantee covers losses on the outstanding principal, accrued unpaid interest, and disposal costs, caused by foreclosure.

 

 

Arrears management

In order to control the credit risk of the Residential Mortgage portfolio, NIBC has established standardised procedures to manage all loan amounts in arrears. To improve further results, the arrear management is largely managed in-house. This ensures a dedicated team focused on minimising losses.

 

The first month in arrear is managed by the servicers. When amounts in arrear are outstanding longer than one month, the arrear management is transferred to the NIBC Arrear Management department. At 31 December 2009, NIBC managed in-house more than 95% of the Dutch Residential Mortgage portfolio in arrear longer than one month. Table 54-15 shows the overview of the total Dutch Residential Mortgage portfolio in arrear at 31 December 2009 and 31 December 2008.

 

Table 54-15 Overview of Dutch Residential Mortgage portfolio in arrear
in %		31 December 2009		31 December 2008
No arrear		97.7		97.5
0< ≤30 days		1.4		1.6
30< ≤60 days		0.3		0.4
60< ≤90 days		0.1		0.2
>90 days		0.4		0.3
Total		100		100
Total (in EUR millions)		10,006		10,759

 

Risk measurement

Risk of loss is measured by assigning Probability of Default (PD) and LGD estimates for every loan. The PD expresses the probability of any borrower going into default, whereas the LGD measures the potential loss when a default has taken place. These parameters are determined by an in-house developed Basel II AIRB model that has been in use since 2006. This model is used for solvency reporting to the DNB. The PD estimates are dependent on a variety of factors, of which the key factors are debt-to-income and loan-to-foreclosure-value ratios. Table 54-16 shows the PD distribution of the Dutch Residential Mortgage portfolio at 31 December 2009 and 31 December 2008. A PD of 100% means that a borrower is more than 90 days in arrears.

 

Table 54-16 Rating class allocation of Dutch residential mortgages
in %		Own book Dutch mortgages				Securitised Dutch mortgages
		31 December 2009		31 December 2008		31 December 2009		31 December 2008
Probability of Default
≤ 1%		95.8		95.5		98.2		97.7
1-2%		0.8		1.0		0.1		0.1
2-5%		1.0		1.3		0.7		1.1
5-99%		1.3		1.3		0.7		0.8
100%		0.6		0.4		0.3		0.2
Not rated		0.4		0.5		0.0		0.0
Total		100		100		100		100
Total (in EUR millions)		5,223		5,509		4,783		5,250

 

Risk mitigation and collateral management

Credit losses are mitigated in a number of different ways:

• The underlying property is pledged as collateral;
• 15% of the Dutch Own Book portfolio and 43% of the Securitised portfolio are covered by the NHG programme;
• For the part of the Dutch portfolio that has been securitised, credit losses higher than the retained positions are attributable to investors in the securitisation programmes; and
• At 31 December 2009, EUR 711 million (2008: EUR 797 million) of credit protection by means of a CDS guarantee structure in a synthetic securitisation was in place, in connection with NIBC’s residential mortgages own book.

 

For the portfolio not covered by the CDS or the NHG programme, the underlying property is the primary collateral for any mortgage loan granted, though savings and investment deposits may also serve as additional collateral.

 

A measurement for potential losses, taking into account indexation of house prices and seasoning, is achieved by calculating the Loan-to-Indexed-Market-Value (LTiMV). The indexation is made by using the Kadaster index, which is based on market observables. Graphs 54-17 and 54-18 show a breakdown of the LTiMV for the portfolio not covered by the CDS or the NHG programme at 31 December 2009 and 31 December 2008. Only 11% of the total portfolio has an LTiMV above 100%. For the remainder of the portfolio, the indexed collateral value is sufficient to cover the entire loan balance outstanding.

 

Graphs 54-17/18 Loan-to-indexed-market-value of portfolio not covered by CDS/NHG programme

 

 

German Residential Mortgage portfolio

The German Residential Mortgage portfolio amounted to EUR 594 million at 31 December 2009 (31 December 2008: EUR 692 million). The majority of this portfolio was acquired from third parties via two portfolio purchases. The purchased portfolios contain highly seasoned loans with low loan-to-market values (LTV). The servicing and administration of the total German Residential Mortgage portfolio is outsourced to third-party servicers, including arrears and foreclosure management.

 

In order to control the credit risk in the origination of residential mortgages, an acceptance policy and underwriting criteria have been formulated to screen residential mortgage applications. Acceptance of newly originated mortgages depends on the following criteria:

• All applicants are checked by SCHUFA (similar to the BKR) and other private credit bureaus, such as Infoscore;
• First-ranking rights on mortgage loans;
• A maximum of 111% of the purchase price for owner-occupied properties and up to 100% for buy-to-let properties. For additional risk (e.g. applicants older than 50 years), NIBC requires a life insurance or limits the LTV to 60%; and
• In addition to desk valuations, NIBC conducts on-site inspections of its properties.

 

In order to control the credit risk of the German Residential Mortgage portfolio, NIBC has established standardised procedures to manage all loan amounts in arrear. The arrear process starts directly at the servicer by means of countered direct debits, i.e. when a direct withdrawal from the borrower’s account fails. The servicer contacts the customer to get insight into the reason for being in arrear. They claim the outstanding amount with an arrear letter sent every two weeks. In the case of private insolvency or being in arrear beyond 90 days, responsibility is taken over by the special servicer.

 

Table 54-19 shows an overview of the German Residential Mortgage portfolio in arrear at 31 December 2009 and 31 December 2008. As it is market practice in Germany to start the foreclosure procedure after being six months in arrear (180 days), the mortgages in arrear of more than 90 days for the German portfolio are higher in comparison to the Dutch portfolio. Furthermore, the foreclosure procedure takes, on average, 18 months to complete, which is substantially longer than in the Netherlands, where it takes, on average, six to nine months.

 

 

Table 54-19 Overview of German Residential Mortgage portfolio in arrear
in %		31 December 2009		31 December 2008
No arrear		96.3		95.8
0< ≤30 days		1.2		1.9
30< ≤60 days		1.1		1.1
60< ≤180 days		1.0		0.7
>180 days		0.5		0.6
Total		100		100
Total (in EUR millions)		594		692

 

As is the case in the Netherlands, the underlying property is the primary collateral for any mortgage loan granted. In contrast to the Dutch market, where the majority of mortgage loans contain an interest-only debt profile, the majority of mortgage loans in Germany contain an annuity debt profile, leading to a lower outstanding balance during the lifetime of the loan. The majority of the underlying collateral for the German portfolio is located in former West Germany.

 

Debt investments

 

The Debt Investments portfolio is exposed to issuer risk, which is the risk of losing the principal amount on products like bonds and CDS positions (where it concerns sold protection). It is calculated based on the book value.

 

 

Risk monitoring and measurement

The risks are controlled by applying an exposure limit structure. All transactions must fit into the predetermined limits. The limit structure by issuer is approved in the ALCO/TC, and is, in general, based on the external credit ratings of the counterparty. Any deviation from the limit framework relates to specific transactions and is approved by the ALCO/TC.

 

Apart from the exposure limit structure, risk is also monitored by assessing credit spread risk. Both sensitivity analysis (basis point values) and Value-at-Risk numbers are used. Note 55 on market risk contains more information on these variables.

 

In the remainder of this section, the exposure has been divided into the following three categories:

• Debt from financial institutions and sovereign entities;
• Securitisations; and
• Enhanced investments and credit fixed income funds.

 

 

Debt from financial institutions and sovereign entities

NIBC has invested in debt issued by financial institutions and sovereign entities, partly in the form of sold CDS protection. Tables 54-20 and 54-21 present the exposures including off-balance positions, at 31 December 2009 and 31 December 2008. Off-balance positions refer to the CDS protection sold by NIBC to third parties.

 

In table 54-21 the amount of EUR 765 million is different to that published in last year’s annual report, since last year’s annual report aggregated debt from financial institutions and sovereign entities together with the Enhanced Investments portfolio. In 2009, enhanced investments are presented in a separate section; therefore 2008 numbers have been adjusted to reflect this. Furthermore, in 2008 certain exposures with an AAA-rated government guarantee totalling EUR 206 million in 2008, which were classified as sovereign, have been reclassified as financial institutions. In 2009 the exposure of financial institutions guaranteed by a AAA-rated government equals EUR 336 million and by a AA-rated government equals EUR 48 million.

 

Table 54-20 Debt from financial institutions and sovereign entities, 31 December 2009 (including off-balance positions)
Book value, in eur millions		AAA		AA		A		BBB		BB		≤B		NR		Total
Financial institutions		559		313		575		3		9		-		50		1,509
Sovereign entities		-		-		-		-		-		-		-		0
Total		559		313		575		3		9		-		50		1,509

 

Table 54-21 Debt from financial institutions and sovereign entities, 31 December 2008 (including off-balance positions)
Book value, in eur millions		AAA		AA		A		BBB		BB		≤B		NR		Total
Financial institutions		552		55		86		0		7		-		52		752
Sovereign entities		-		10		-		-		3		-		-		13
Total		552		65		86		0		10		-		52		765

 

In order for NIBC to manage its short-term liquidity, investments in short-term liquid debt issued by financial institutions have been made and this resulted in the increase compared to 2008.

 

 

Securitisations

NIBC has been an active participant in the securitisation market in the past decade, both as an investor in as well as an originator of securitisations. Activities were primarily focused on the Western European and North American securitisation markets. In 2007, NIBC’s perspective on the securitisation market changed and a policy of refraining from new investments and active de-risking was implemented. As part of this policy, next to individual assets sales, the complete North American Residential Mortgage-Backed portfolio was closed and the remaining North American exposures (Commercial Mortgage-Backed Securities (CMBS) and Commercial Real Estate-Collateralised Debt Obligations (CRE-CDO)) were transferred from NIBC Bank to NIBC Holding. The only North American exposure remaining in NIBC Bank relates to a European originated Collateralised Loan Obligation (CLO) with mostly North American underlying collateral (EUR 2 million at 31 December 2009). The Western European portfolio is also subject to a de-risking policy.

 

NIBC’s total securitisation exposure is composed of the exposure relating from its activities as an investor in and originator of securitisations. The exposure relating to NIBC’s activities as an originator can be split into exposure relating to consolidated and non-consolidated securitisations. In the case a securitisation programme is consolidated on NIBC’s balance sheet, the exposure to the underlying commercial real estate loans or residential mortgages is included in the total exposures presented in Note 54 on credit risk in the corporate loans or residential mortgages sections respectively. More detailed descriptions and tables relating to the different types of securitisation exposure (investor, originator consolidated and originator non-consolidated) are included in the Risk Management section.

 

Tables 54-22 and 54-23 present an overview of the total exposure to securitisations at 31 December 2009 and 31 December 2008. NIBC’s exposure to the Western European market, resulting from its activities as an investor and originator of non-consolidated securitisation, decreased to EUR 705 million at 31 December 2009 from EUR 896 million at 31 December 2008. Next to this portfolio, a new Securitised Treasury Liquidity Investment portfolio was set up to invest NIBC’s excess cash in liquid, short-term Dutch RMBS securities rated AAA. At 31 December 2009, EUR 31 million was invested in this portfolio.

 

 

Table 54-22 Exposure to securitised products, 31 December 2009
Book value, in eur millions		AAA		AA		A		BBB		BB		<BB		Equity		Total
EU - ABS		10		6		1		1		1		-		-		19
EU - CDO		0		33		80		41		8		38		1		200
EU - CMBS		73		20		38		27		9		13		-		181
EU - RMBS		135		55		48		40		14		12		-		305
TOTAL EUROPEAN SECURITISATIONS		219		114		167		109		33		63		1		705
NL - RMBS AAA		31		-		-		-		-		0		-		31
TOTAL SECURITISED TREASURY LIQUIDITY INVESTMENTS		31		-		-		-		-		-		-		31
US - Collateralised 1		0		1		-		0		-		0		0		2
TOTAL US SECURITISATIONS		0		1		-		0		-		0		0		2
TOTAL SECURITISATION EXPOSURE		250		115		167		109		33		64		1		738

 

Table 54-23 Exposure to securitised products, 31 December 2008
Book value, in eur millions		AAA		AA		A		BBB		BB		<BB		Equity		Total
EU - ABS		4		7		1		1		1		-		-		13
EU - CDO		107		58		34		14		12		-		15		239
EU - CMBS		105		43		32		9		7		-		-		196
EU - RMBS		258		49		58		73		10		-		-		448
TOTAL EUROPEAN SECURITISATIONS		473		156		126		96		30		-		15		896
NL - RMBS AAA		-		-		-		-		-		-		-		-
TOTAL SECURITISED TREASURY LIQUIDITY INVESTMENTS		-		-		-		-		-		-		-		-
US - Collateralised 1		2		-		-		-		0		-		0		2
TOTAL US SECURITISATIONS		2		-		-		-		0		0		0		2
TOTAL SECURITISATION EXPOSURE		475		156		126		96		30		1		15		898

 

 

Geographic distribution of securitisations

Graphs 54-24 and 54-25 present the distribution of the Securitisations portfolio (both non-consolidated originator and investor) by geographic region, at 31 December 2009 and 31 December 2008. NIBC allocates exposure to a region based on the geographic location in which the cash flows are generated. The geographic distribution illustrates that the majority of these assets is located in Western Europe, mainly in the Netherlands, the United Kingdom and Germany. The classification Europe also relates primarily – though not exclusively – to these countries, and consists almost completely of CLO transactions. The charts further show that NIBC’s exposure to several of the perceived as riskier EU countries such as Spain, Ireland and Portugal is very limited. At 31 December 2009, NIBC had zero exposure on Greece. With respect to the exposure with Spanish collateral (EUR 48 million or 6% of the Securitisations portfolio at 31 December 2009), 73% (equalling EUR 35 million) concerns
AAA-rated senior exposure.

 

 

Graphs 54-24/25 Distribution of securitisations per region

 

 

Impairments on securitisations

As the majority of the Securitisations portfolio is on accounting classification amortised cost or available for sale, the respective assets are subject to a quarterly impairment analysis. These analyses were first executed 31 December 2008 and resulted in EUR 7 million impairments. At 31 December 2009, total impairments have increased to EUR 38 million. EUR 25 million of the total impairments at 31 December 2009 is related to equity positions in both NIBC’s own securitisations as well as securitisations of other parties.

 

Enhanced investments and credit fixed income funds

Enhanced investments are investments where returns are enhanced by setting up investment structures with financial counterparties. Through the Enhanced Investments portfolio, NIBC invests in highly-rated debt. This debt is either issued or guaranteed by financial institutions that have at minimum a single-A rating. The Enhanced Investments portfolio has decreased significantly from EUR 694 million at 31 December 2008 to EUR 36 million at 31 December 2009.

 

The Credit Fixed Income Funds portfolio contains investments in credit fixed income funds managed by hedge funds and asset managers. During 2009, the portfolio was further reduced. Its total book value reduced from EUR 35 million at 31 December 2008 to EUR 12 million at 31 December 2009.

 

Tables 54-26 and 54-27 present NIBC’s exposures in these two portfolios at 31 December 2009 and 31 December 2008.

 

 

Table 54-26 Enhanced Investments and Credit Fixed Income Funds portfolios, 31 December 2009
in eur millions		AAA		AA		A		BBB		BB		B		NR		Total
Financial institutions		27		-		9		-		-		-		12		48
Total		27		-		9		-		-		-		12		48

 

Table 54-27 Enhanced Investments and Credit Fixed Income Funds portfolios, 31 December 2008
in eur millions		AAA		AA		A		BBB		BB		B		NR		Total
Financial institutions		68		529		97		-		-		-		36		729
Total		68		529		97		-		-		-		36		729

 

Cash management

 

NIBC is exposed to credit risk also as a result of cash management activities. In 2009, NIBC’s risk management framework for cash management continued with a more conservative attitude by taking into account the deteriorated global markets and concern about numerous financial institutions.

 

 

Risk monitoring and measurement

NIBC only places its excess cash with a selected number of sovereign entities and investment-grade financial institutions. Limits only exist for short maturities up to one week and vary per counterparty. If there are not enough counterparties in the market to place all the excess cash, NIBC deposits it at the DNB, for which no limit is set. For the approved financial institutions, a monitoring process is in place within the Financial Markets Credit Risk department (FMCR).

 

 

Correspondent banking and third-party account providers

Apart from the exposure in cash management, NIBC holds foreign currency accounts at correspondent banks and also utilises third-party account providers for internal securitisations.

 

 

Exposures

As shown in table 54-28, at 31 December 2009, NIBC’s Treasury department had placed EUR 1,353 million with the DNB and EUR 66 million with two financial institutions. Furthermore, EUR 749 million was placed at third-party account providers, of which EUR 153 million relates to securitisation-related liquidity facilities. The Non-Treasury – Sovereign entities exposure consists entirely of tax receivables.

 

 

Table 54-28 Cash, 31 December 2009
in eur millions		AAA		AA		A		BBB		Total
Treasury - Financial institutions		-		1		65		-		66
Treasury - Sovereign entities/DNB		1,353		-		-		-		1,353
Non-Treasury - Financial institutions		2		377		362		8		749
Non-Treasury - Sovereign entities		14		-		-		-		14
Total		1,370		378		427		8		2,183

 

At 31 December 2009, NIBC’s Treasury department had also placed EUR 1,228 million with financial institutions by means of reverse repo transactions against receipt of collateral, as shown in Table 54-29. There were no repo transactions at 31 December 2008.

 

 

Table 54-29 Repo, 31 December 2009
in eur millions		AAA		AA		A		NR		Total
Treasury - Financial institutions		-		1,228		-		-		1,228
Total		-		1,228		-		-		1,228

 

 

Credit risk on derivatives

 

Credit risk on derivatives measures the loss in the case of a default of the counterparty in derivative transactions. NIBC’s credit risk on derivatives can be split into exposures on financial institutions and corporate entities. NIBC’s policy is to minimise this risk. Therefore, NIBC only enters into Over The Counter (OTC) contracts with financial institutions that are investment grade, or with corporate entities to which the exposure is secured by some form of collateral.

 

 

Risk monitoring and measurement

Credit risk on derivatives is based on the marked-to-market value and add-on of the derivative. The add-on reflects a potential future change in marked-to-market value during the remaining lifetime of the derivative contract. For financial institutions, separate limits for credit risk are in place, based on the external rating and the maturity. For corporate clients, NIBC only enters into a derivative transaction as part of its relationship management. The credit approval process for these derivatives is closely linked with the credit approval process of the loan. These proposals are reviewed in the TC and both the loan and the derivative are treated as a single package whereby the derivative often benefits from the security/collateral supporting the loan.

 

 

Exposures

Tables 54-30 and 54-31 show NIBC’s exposures from credit risk on derivatives allocated across the rating class of the underlying counterparty, at 31 December 2009 and 31 December 2008. The exposure shown is the sum of the positive marked-to-market value of derivative contracts excluding the effect of netting and collateral exchange, with the exception of certain swaps which have been excluded at 31 December 2009 due to their risk off-setting nature.

 

 

Table 54-30 Derivative exposure excluding netting and collateral, 31 December 2009
in eur millions		AAA		AA		A		BBB		BB		B		CCC		CC		D		NR		Total
Financial institutions		36		1,722		568		3		-		-		-		-		-		2		2,332
Corporate entities		-		1		5		88		136		237		10		1		15		1		493
TOTAL		36		1,723		573		90		136		237		10		1		15		4		2,825

 

Table 54-31 Derivative exposure excluding netting and collateral, 31 December 2008
in eur millions		AAA		AA		A		BBB		BB		B		CCC		CC		D		NR		Total
Financial institutions		29		2,196		378		-		-		-		-		-		-		4		2,607
Corporate entities		-		4		6		125		230		89		8		-		2		38		502
TOTAL		29		2,199		385		125		230		89		8		-		2		42		3,110

 

 

Collateral

To the extent possible, NIBC attempts to limit credit risk from derivatives. Therefore, NIBC enters into bilateral collateral agreements with financial institutions to mitigate credit risk on OTC derivatives by means of CSAs. Positive marked-to-market values can be netted with negative marked-to-market values and the remaining exposure is mitigated through bilateral collateral settlements. Accepted collateral is mainly cash collateral. The primary counterparties in these CSAs are large international banks with ratings of A or higher. NIBC generally carries out daily cash collateral exchange to account for changes in the market value of the contracts included in the CSA.

 

The terms and conditions of these CSAs are in line with general International Swaps and Derivatives Association credit support documents. The collateral from CSAs significantly decreases the credit exposure on derivatives, as presented in table 54-32 at 31 December 2009 and in table 54-33 at December 2008.

 

 

Table 54-32 Derivative exposure including netting and collateral, 31 December 2009
in eur millions		AAA		AA		A		BBB		BB		B		CCC		CC		D		NR		Total
Financial institutions		15		238		76		2		-		-		-		-		-		1		333
Corporate entities		0		1		5		87		133		236		9		1		11		0		482
TOTAL		15		239		81		90		133		236		9		1		11		1		815

 

Table 54-33 Derivative exposure including netting and collateral, 31 December 2008
in eur millions		AAA		AA		A		BBB		BB		B		CCC		CC		D		NR		Total
Financial institutions		1		121		99		-		-		-		-		-		-		0		221
Corporate entities		-		4		6		125		230		89		8		-		2		36		501
TOTAL		1		125		106		125		230		89		8		-		2		36		722

 

	Market risk
55

 

NIBC defines market risk as the current and prospective threat to its earnings and capital as a result of movements in market prices. Market risk, therefore, includes price risk, interest rate risk and foreign exchange risk, both within and outside the Trading book. For fixed-income products, market risk also includes credit spread risk, which is the risk due to movements of underlying credit curve. The predominant market risk drivers for NIBC are interest rate risk and credit spread risk.

 

 

Risk monitoring and measurement

Interest Basis Point Value (BPV), credit BPV, interest Value at Risk (VaR), and credit VaR measures are calculated on a daily basis for the major currencies and reviewed by the Market Risk department:

• Interest and credit BPV measure the sensitivity of the market value for a change of one basis point in each time bucket of the interest rate and credit spread, respectively;
• The interest VaR, credit spread VaR and total VaR measure the threshold value, which daily marked-to-market losses with a confidence level of 99% will not exceed, based upon four years of historical data for weekly changes in interest rates, credit spreads and both simultaneously. For the Trading portfolio, additional VaR scenarios based upon daily historical market data and a 10-day holding period are used, both for limit-setting as well as for the calculation of the capital requirement; and
• As future market price developments may differ from those that are contained by the four-year history, the risk analysis is complemented by a wide set of scenarios, including scenarios intended as stress testing and vulnerability identification, both based on historical events and on possible future events.

 

Limits are set on all the indicators (BPV and VaR, interest, credit and total). The limits and utilisation are reported to the ALCO once every two weeks. Any significant breach of market risk limits is reported to the CRO on a daily basis. The income statement for the Trading portfolio is also monitored daily.

 

 

Exposures

 

Interest rate risk in the Trading portfolio

At the beginning of 2009, the books that have a trading-book market risk treatment from a regulatory perspective consisted effectively of interest rate risk trading. The de-risking performed in 2008 was maintained in 2009, which is demonstrated by the relatively low level of the VaR in 2009.

 

 

Table 55-1 Key risk statistics of Trading portfolio, 31 December 2009
in eur thousands		Interest rate
		BPV		VaR
Max 1		(248)		1,482
Average		(53)		540
Min 2		111		138
YEAR-END 2009		(30)		253
1. Max: value farthest from zero. 2. Min: value closest to zero.

 

Table 55-2 Key risk statistics of Trading portfolio, 31 December 2008
in eur thousands		Interest rate
		BPV		VaR
Max 1		(151)		1,237
Average		1		521
Min 2		113		186
YEAR-END 2008		(101)		773
1. Max: value farthest from zero. 2. Min: value closest to zero.

 

Activities comprise short-term (up to two years) interest position-taking, money market and bond futures trading and swap spread position-taking. The interest rate spread risk between positions in swaps and bond futures is also taken into account in the VaR. The portfolio is also used for facilitating derivative transactions with corporate clients.

 

 

Interest rate risk in the Mismatch portfolio

NIBC concentrates the strategic interest rate risk position of NIBC in the Mismatch portfolios. These portfolios exclusively contain swap positions with which a view on future interest rate developments is taken. Next to the USD Mismatch portfolio, which was reported at year-end 2008 and includes a small EUR position, a EUR Mismatch portfolio was set up in 2009.

 

 

Table 55-3 Key risk statistics of USD Mismatch portfolio, 31 December 2009
in eur thousands		Interest rate
		BPV		VaR
Max 1		(540)		7,306
Average		(299)		5,738
Min 2		(229)		4,556
YEAR-END 2009		(230)		5,388
1. Max: value farthest from zero. 2. Min: value closest to zero.

 

 

Table 55-4 Key risk statistics of USD Mismatch portfolio, 31 December 2008
in eur thousands		Interest rate
		BPV		VaR
Max 1		(355)		6,123
Average		(275)		3,898
Min 2		(93)		1,861
YEAR-END 2009		(309)		5,652
1. Max: value farthest from zero. 2. Min: value closest to zero.

 

 

Table 55-5 Key risk statistics of EUR Mismatch portfolio, 31 December 2009
in eur thousands		Interest rate
		BPV		VaR
Max 1		(562)		6,780
Average		(449)		5,322
Min 2		(257)		2,926
YEAR-END 2009		(497)		6,380
1. Max: value farthest from zero. 2. Min: value closest to zero.

 

Interest rate risk in other portfolios

Apart from the Trading portfolio and the Mismatch portfolio, interest rate risk is also present, but to a lesser extent, in the following portfolios (henceforth collectively referred to as Banking book):

• Debt Investments portfolio;
• Residential Mortgage portfolio; and
• Residual Interest Rate Risk portfolio.

 

The interest rate risk in the Debt Investments portfolio appears mainly in the Securitisations portfolio. The interest rate risk on the Residential Mortgage portfolio is hedged within small facilitating limits. The Residual Interest Rate Risk portfolio (also known as Corporate Treasury portfolio) contains the funding activities of NIBC and the loans to counterparties.

 

Tables 55-6 and 55-7 give the interest rate sensitivity for the EUR, the USD and the GBP in the Trading, Mismatch and Banking books at year-end 2009 and 2008. For the other currencies the interest rate risk is minimal. The most significant change is the interest rate risk in the euro mismatch position.

 

 

Table 55-6 Interest rate statistics, 31 December 2009
in eur thousands		BPV						Total
		Trading		Mismatch		Banking
EUR		(40)		(481)		85		(435)
USD		10		(247)		14		(223)
GBP		(0)		-		49		49
Other		1		-		3		3
TOTAL		(30)		(727)		151		(606)

 

 

Table 55-7 Interest rate statistics, 31 December 2008
in eur thousands		BPV						Total
		Trading		Mismatch		Banking
EUR		(89)		19		38		(32)
USD		(13)		(329)		67		(275)
GBP		-		-		49		49
Other		1		1		(1)		1
TOTAL		(101)		(309)		153		(257)

 

Currency risk

 

Apart from some investments by NIBC in funds managed by Merchant Banking, all of NIBC’s positions in foreign currencies, including those of subsidiaries, are hedged by either funding these investments in the appropriate foreign currency or by hedging the exposures using cross-currency swaps or foreign exchange contracts. The most relevant exposures in foreign currencies for NIBC are USD, GBP and JPY. As a result of this policy, NIBC does not actively maintain open currency positions other than translation exposures arising from future income in foreign currencies. The Finance department determines on a monthly basis NIBC’s currency positions and reports to Risk Management. When currency positions exceed NIBC’s small facilitating foreign currency exposure limits for that currency, NIBC reduces its positions by FX spot or FX forward transactions. The total foreign currency position, by nominal amount, is generally under EUR 25 million, in accordance with historical figures over the last few years.

 

	Liquidity risk
56

 

NIBC defines liquidity risk as the inability of the company to fund its assets and meet its obligations as they become due, at acceptable cost.

 

Maintaining a sound liquidity and funding profile is one of NIBC’s most important risk management objectives. NIBC analyses its funding profile by mapping all assets and liabilities into time buckets that correspond to their maturities. Based on projections prepared by the business units and reviewed by Risk Management, and the current asset and liability maturity profiles, a liquidity stress test is prepared and presented once every two weeks to the ALCO, in order to create continuous monitoring of the liquidity position.

 

 

Assumptions

This stress scenario assumes a world-wide liquidity shortage in which no unsecured wholesale funding can be raised by NIBC and external sales or securitisations of assets are not possible. In addition, the following assumptions are made:

• In order to maintain NIBC’s business franchise, it is assumed that new asset production continues at a level where the current books are maintained constant;
• A conservative amount of expected retail savings’ proceeds are included;
• Conservative assumptions for prepayments, callable funding and collateral cash-out flows (payments from CSAs) are made; and
• A conservative liquidity buffer is maintained for intraday payments.

 

The projection of NIBC’s liquidity in this way is necessarily a subjective process and requires management to make assumptions about, for example, the fair value of eligible collateral, further funding from retail deposits, and potential outflow of cash collateral placed by NIBC with derivative counterparties.

 

In the light of these projections, NIBC is confident that sufficient liquidity is available for it to meet maturing obligations over the next 12 months.

 

 

Maturity calendar consolidated balance sheet

The following tables present the cash flows payable by NIBC in respect of non-derivative financial liabilities and assets relevant for liquidity risk by the remaining contractual maturities at 31 December. The amounts disclosed in the tables for the non-derivative financial liabilities are contractual undiscounted cash flows. Financial liabilities at fair value through profit or loss are therefore restated to nominal amounts. The estimated interest cash flows related to the liabilities are reported on a separate line item. The financial asset cash flows are based upon the fair value (discounted cash flows) for those assets that are classified at fair value through profit or loss or available for sale.

 

The differences between the table and the stress scenario are mainly caused by the following items, that are included in the stress scenario analysis and not in the maturity calendar of the consolidated balance sheet:

• New asset production;
• Collateralised funding capacity of internal securitisations and individual bonds;
• Additional proceeds from retail savings; and
• Conservative assumptions with respect to possible cash outflows (e.g. CSA collateral, callable funding).

 

 

Liquidity maturity calendar at 31 December 2009
in EUR millions		Not dated		Payable on demand		Due within three months		Due between three and twelve months		Due between one and five years		Due after five years		Total
Liabilities (undiscounted cash flows)
FINANCIAL LIABILITIES AT AMORTISED COST
Due to other banks		-		111		232		1,246		880		132		2,601
Deposits from customers		-		2,314		386		770		633		229		4,332
Own debt securities in issue		-		-		443		470		7,723		200		8,836
Debt securities in issue related to securitised mortgages		-		-		11		-		-		5,220		5,231
FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS (INCLUDING TRADING)
Own debt securities in issue		-		-		28		14		18		25		85
Debt securities in issue structured		-		-		72		268		479		1,634		2,453
Other
Other liabilities		-		-		-		214		-		-		214
Current tax		-		-		-		-		-		-		-
Deferred tax		-		-		-		-		22		-		22
Employee benefits		-		-		-		2		3		-		5
SUBORDINATED LIABILITIES
Amortised cost		-		-		-		-		30		102		132
Fair value through profit or loss		-		-		-		23		67		279		369
TOTAL LIABILITIES (EXCLUDING DERIVATIVES)		-		2,425		1,172		3,007		9,855		7,821		24,280
Estimated contractual interest cash flows		-		-		102		309		1,512		1,232		3,155
TOTAL LIABILITIES (excluding derivatives, including estimated contractual interest rate cash flows)		-		2,425		1,274		3,316		11,367		9,053		27,435
TOTAL ASSETS RELEVANT FOR MANAGING LIQUIDITY RISK AT FAIR VALUE (excluding derivatives and interest cash flows)		1,642		2,096		2,181		858		4,474		14,880		26,131

 

 

Liquidity maturity calendar at 31 December 2008
in EUR millions		Not dated		Payable on demand		Due within three months		Due between three and twelve months		Due between one and five years		Due after five years		Total
Liabilities (undiscounted cash flows)
FINANCIAL LIABILITIES AT AMORTISED COST
Due to other banks		-		493		2,135		1,289		1,277		343		5,537
Deposits from customers		-		745		62		186		719		581		2,293
Own debt securities in issue		-		-		776		1,161		3,838		199		5,974
Debt securities in issue related to securitised mortgages		-		-		60		-		-		5,684		5,744
FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS (INCLUDING TRADING)
Own debt securities in issue		-		-		-		80		53		34		167
Debt securities in issue structured		-		-		138		267		847		1,807		3,059
Other
Other liabilities		-		-		-		158		-		-		158
Current tax		-		-		-		-		-		-		-
Deferred tax		-		-		-		-		39		-		39
Employee benefits		-		-		-		4		4		-		8
SUBORDINATED LIABILITIES
Amortised cost		-		-		-		56		30		143		229
Fair value through profit or loss		-		-		16		34		-		500		550
TOTAL LIABILITIES (EXCLUDING DERIVATIVES)		-		1,238		3,187		3,235		6,807		9,291		23,758
Estimated contractual interest cash flows		-		-		176		447		1,707		1,386		3,716
TOTAL LIABILITIES (excluding derivatives, including estimated contractual interest rate cash flows)		-		1,238		3,363		3,682		8,514		10,677		27,474
TOTAL ASSETS RELEVANT FOR MANAGING LIQUIDITY RISK AT FAIR VALUE (excluding derivatives and interest cash flows)		1,445		1,804		466		898		4,657		16,224		25,494

 

Liquidity maturity calendar derivatives

The following tables present the derivative financial instruments that will be settled on a net basis into relevant maturity classes based on the contractual maturity date at 31 December 2009 and 2008. The amounts disclosed in the tables are the contractual undiscounted cash flows.

 

Derivatives, at 31 December 2009
IN EUR millionS		Less than three months		Between three months and one year		One to five years		Five years or more		Total
DERIVATIVES HELD FOR TRADING
Interest rate derivatives (net settled)
Inflow		421		1,604		7,140		3,189		12,354
Outflow		(444)		(1,633)		(7,117)		(2,829)		(12,023)
Credit derivatives
Inflow		2		4		8		-		14
Outflow		(1)		(3)		(2)		-		(6)
DERIVATIVES USED FOR HEDGING
FX forward (gross settled)
Inflow		2,615		40		29		-		2,684
Outflow		(2,634)		(40)		(29)		-		(2,703)
Interest rate derivatives (net settled)
Inflow		25		326		309		135		795
Outflow		(30)		(306)		(351)		(150)		(837)
TOTAL INFLOW		3,063		1,974		7,486		3,324		15,847
TOTAL OUTFLOW		(3,109)		(1,982)		(7,499)		(2,979)		(15,569)

 

Derivatives, at 31 December 2008
IN EUR millionS		Less than three months		Between three months and one year		One to five years		Five years or more		Total
DERIVATIVES HELD FOR TRADING
Interest rate derivatives (net settled)
Inflow		1,295		2,452		6,855		4,567		15,169
Outflow		(1,387)		(2,529)		(6,896)		(4,072)		(14,884)
Credit derivatives
Inflow		1		4		8		-		13
Outflow		(1)		(4)		(7)		-		(12)
DERIVATIVES USED FOR HEDGING
FX forward (gross settled)
Inflow		2,451		84		91		-		2,626
Outflow		(2,263)		(84)		(91)		-		(2,438)
Interest rate derivatives (net settled)
Inflow		153		89		295		202		739
Outflow		(134)		(71)		(205)		(155)		(565)
TOTAL INFLOW		3,900		2,629		7,249		4,769		18,547
TOTAL OUTFLOW		(3,785)		(2,688)		(7,199)		(4,227)		(17,899)

 

Liquidity maturity calendar off-balance sheet

The following table shows the contractual maturity of NIBC’s contingent liabilities and commitments.

Each undrawn loan or capital commitment is included in the time band containing the earliest date it can be drawn down.

 

For issued financial guarantee contracts, the maximum amount of the guarantee is allocated to the earliest period in which the guarantee could be called.

 

Liquidity maturity calendar off-balance sheet at 31 December 2009
IN EUR millionS		Less than three months		Between three months and one year		One to five years		Five years or more		Total
CONTRACT AMOUNT
Committed facilities with respect to corporate loan financing		1,088		-		-		-		1,088
Capital commitments		103		-		-		-		103
Guarantees granted		200		-		-		-		200
Irrevocable letters of credit		67		-		-		-		67
		1,458		-		-		-		1,458

 

Liquidity maturity calendar off-balance sheet at 31 December 2008
IN EUR millionS		Less than three months		Between three months and one year		One to five years		Five years or more		Total
CONTRACT AMOUNT
Committed facilities with respect to corporate loan financing		1,009		-		-		-		1,009
Capital commitments		194		-		-		-		194
Guarantees granted		214		-		-		-		214
Irrevocable letters of credit		76		-		-		-		76
		1,493		-		-		-		1,493

 

	Capital management
57

 

Overview

It is NIBC’s policy to maintain a strong capital base, to meet regulatory capital requirements at all times and to support the development of its business by allocating capital efficiently. Allocation of capital to the business is based on an economic capital approach. Economic capital is the amount of capital which NIBC allocates as a buffer against potential losses from business activities, based upon its assessment of risks. The economic capital NIBC allocates to each business is based on the assessment of risk of its activities. It differs from Basel II regulatory capital as in certain cases NIBC assesses the specific risk characteristics of its business activities in a different way than the regulatory method. Total regulatory capital however, in combination with a minimum benchmark Tier-1 ratio does form a limit to the maximum amount of economic capital that can be allocated to the business.

 

Combining the risk-based economic capital of each business to its profit delivers a RAROC for each business. Economic capital and RAROC are key tools in NIBC’s capital allocation and usage process, assisting in allocating shareholders’ equity as efficiently as possible, based on expectations of both risks and return. Usage of economic capital is assessed once every two weeks in the ALCO. The ALCO resets the maximum allocation level of economic capital to and within each business, taking into account business expectations, NIBC’s desired risk profile and the regulatory requirements.

 

 

Methodology

NIBC uses the business model of each activity as the basis for determining the economic capital approach. If the business model of an activity is trading, distribution or investing for a limited period, a market risk approach based upon VaR and scaled to a one-year horizon is used to calculate the economic capital usage. A business model based on ‘buy-to-hold’ or investing to maturity leads to a credit risk approach being applied based upon estimations of PD and LGD. For all activities, add-ons for operational risk are calculated. Furthermore, NIBC allocates economic capital for business risk, reputation risk and model risk on a group-wide level.

 

The economic capital approach differs from the regulatory approach in which only the trading books are assigned a market risk approach. In the regulatory framework, activities that are not trading but have a business model based on distribution or investment for a limited period are often assigned a credit risk approach, following Basel II regulations or regulatory industry practice, whereas in the economic capital framework NIBC applies a market risk approach similar to that of the trading activities. Risks and economic capital are monitored accordingly.

 

The main differences between the economic capital and regulatory framework come from the Residential Mortgage portfolio, the European Securitisations portfolio and NIBC’s interest rate mismatch position. Economic capital is determined by a market risk approach for these activities, which follows from their business model. The regulatory approach is either a credit risk approach (residential mortgages and European securitisations) or is not part of Basel II Pillar 1 at all (mismatch position).

 

 

Capital allocation

NIBC allocates economic capital to all its business activities in the form of limits set by the ALCO, and calculate the amount of economic capital usage of each business based on the risk of its activities.

• For the Corporate Loan portfolio, which uses a major part of the economic capital, NIBC calculates economic capital usage by means of a credit risk approach largely based upon the Basel II regulatory capital formula and an add-on for concentration risk;
• For the Debt Investments and Trading portfolios, Residential Mortgage portfolio and the interest rate mismatch position, NIBC uses a market risk approach to determine economic capital usage. Economic capital usage for these portfolios is calculated using VaR, calculated with four years of historical data and scaled to a one-year horizon; and
• For the Investment Management portfolios, NIBC calculates economic capital usage for IM loans by applying a credit approach based upon the Basel II regulatory capital formula. NIBC uses fixed percentages for the equity investments.

 

 

Basel II regulatory capital

The objective of Basel II is to improve the capital adequacy of the banking industry by making it more responsive to risk.

Basel II is structured on three pillars:

• Pillar 1 describes the capital adequacy requirements for three risk types: credit risk, market risk and operational risk;
• Pillar 2 describes the additional supervisory review and evaluation process (SREP) where regulators analyse the internal capital adequacy process of the individual banks; and
• In Pillar 3 the required risk reporting standards are displayed, supporting additional market discipline in the international capital markets.

 

Under Basel II and subject to approval from the regulator, banks have the option to choose between various approaches, each with a different level of sophistication in risk management, ranging from ‘standardised’ to ‘advanced’.

 

For credit risk, NIBC has adopted the Advanced Internal Ratings Based (AIRB) approach as further specified in Basel II for its corporate and retail exposure classes, and is in the process of including institutions. As of 1 January 2008, NIBC has started using the AIRB approach. A small residue of exposures is measured on the standardised approach.

 

For market risk, NIBC has adopted an internal model VaR approach.

 

For measuring operational risk, NIBC has adopted the standardised approach.

 

The basis for Pillar 2 is NIBC’s Internal Capital Adequacy Assessment Process (ICAAP), which is NIBC’s self-assessment of risks not captured by Pillar 1.

 

Pillar 3 is related to market discipline and complements the operation of Pillars 1 and 2, aiming to make banks more transparent. NIBC will publish its Pillar 3 disclosures as at 31 December 2009 on its website in the course of 2010.

The following table displays the composition of regulatory capital as at 31 December 2009 and 31 December 2008. NIBC complies with the DNB’s Basel II capital requirements.

 

 

Regulatory capital as at 31 December
IN EURO millionS		2009		2008
TIER-1
Called-up share capital		80		80
Share premium		238		238
Eligible reserves		1,273		1,175
Net profit		44		92
Minority interests		18		17
Deduction of certain securitisation exposures not included in risk-weighted assets		(18)		(13)
Deduction excess of expected losses over impairment allowances		(31)		(39)
CORE TIER-1 CAPITAL		1,604		1,550
Innovative hybrid Tier-1 capital		89		130
Non-innovative hybrid Tier-1 capital		221		229
TOTAL TIER-1 CAPITAL		1,914		1,909
TIER-2
Reserves arising from revaluation of property and unrealised gains on available for sale equities		34		43
Qualifying subordinated liabilities
Undated loan capital		32		-
Dated loan capital		238		268
Deduction of certain securitisation exposures not included in risk-weighted assets		(18)		(13)
Deduction excess of expected losses over impairment allowances		(31)		(39)
TOTAL TIER-2 CAPITAL		255		259
		2,169		2,168

	Subsequent events
58

There are no subsequent events.

 

	Profit appropriation
59

The profit appropriation is included in the section Other Information.