Notes to the Consolidated Financial Statements

Notes to the Consolidated Balance Sheet (Other)

 

Repurchase and resale agreements Commitments and contingent assets & liabilities Business combinations Assets pledged as security Assets under management Related party transactions Discontinued operations 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

 

 

	Repurchase and resale agreements
47

 

During 2008, NIBC transacted several repo transactions with third parties, in which notes amounting to a notional of EUR 1,964 million were transferred from NIBC to third parties in exchange for EUR 1,667 million in cash for periods ranging from one month up to three years. In the same period, NIBC transacted several reverse repo transactions with third parties, in which notes amounting to a notional of EUR 53 million were transferred to NIBC from third parties in exchange for EUR 40 million in deposit for periods ranging from four months up to one year.

 

	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 82 million at 31 December 2008 (2007: EUR 239 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		2008		2007
Contract amount
Committed facilities with respect to corporate loan financing		1,203		2,380
Guarantees granted		214		588
Irrevocable letters of credit		76		79
		1,493		3,047

 

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 56.

 

 

Legal proceedings

There were a number of legal proceedings outstanding against NIBC at 31 December 2008. No provision has been made, as legal advice indicates that it is unlikely that any significant loss will arise.

 

 

Liquidity facility

On 5 May 2006, a group of financial institutions provided an unconditional liquidity facility to NIBC, for a 3-year tenor, maturing in May 2009. At 31 December 2008, the size of this liquidity facility was EUR 850 million. Since the issue date in 2006, no draw downs have taken place under this facility.

 

	Business combinations
49

 

Acquisitions completed in 2008

In 2008, NIBC acquired 100% ownership of GRW Bearing GmbH, and 75% ownership of NIBusker Holding B.V. The total cash consideration including directly attributable costs for these acquisitions was EUR 100 million. Approximately EUR 20 million of this amount relates to goodwill (preliminary, subject to completion of the purchase price allocation process).

 

 

Name of acquired company	GRW Bearing GmbH
Transaction date	29 February 2008
Interest acquired	100%
Activity	Miniature, high precision ball and groove ball bearings manufacturer.

 

 

Name of acquired company	NIBusker Holding B.V.
Transaction date	16 April 2008
Interest acquired	75%
Activity	Niche player in the building/construction industry.

 

 

The fair value of assets and liabilities acquired and goodwill arising can be categorised as follows:

 

 

		Fair value				Acquiree’s carrying amount
in EUR millions		2008		2007		2008		2007
Cash at banks		3		-		3		-
Receivables		8		-		8		-
Inventories		17		-		17		-
Fixed assets		37		-		11		-
Intangible assets		28		-		-		-
Liabilities		(8)		-		(8)		-
Deferred tax liabilities		(5)		-		-		-
Fair value of net assets		80		-		31		-
Goodwill		20		-
TOTAL Purchase consideration		100		-

 

In EUR millions		2008		2007
Details of net assets acquired and goodwill are as follows:
Cash paid		99		-
Direct costs relating to the acquisition		1		-
Total purchase consideration		100		-
Purchase consideration settled in cash		100		-
Cash and cash equivalents in subsidiary acquired		(3)		-
Cash outflow on acquisition		97		-

 

The acquired businesses contributed net revenues of EUR 37 million and a net result of EUR 3 million (loss) to NIBC from acquisition date to 31 December 2008. If the acquisitions had occurred on 1 January 2008, net revenues from financial companies included as private equity investments would have been EUR 40 million, and the loss before allocations would have been EUR 1 million.

 

These amounts have been calculated using NIBC’s accounting policies and by adjusting the results of the subsidiary to reflect the additional depreciation and amortisation that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had applied from 1 January 2008, together with the consequential tax effects.

 

There were no acquisitions in the year ended 31 December 2007.

 

	Assets pledged as security
50

 

In EUR millions		2008		2007
Assets have been pledged as security in respect of the following liabilities and contingent liabilities:
Liabilities
Due to other banks		4,114		2,058
Debt securities in issue related to securitised loans and mortgages		5,835		7,214
Derivative financial liabilities		1,000		494
		10,949		9,766

 

In EUR millions		2008		2007
Details of the carrying amounts of assets pledged as collateral are as follows:
Assets pledged
Assets utilised as collateral		4,559		2,058
Cash		1,000		494
Securitised loans and mortgages		5,880		6,994
		11,439		9,546

 

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 5.9 billion (2007: EUR 4.9 billion).

 

As of 31 December 2008, the excess cash liquidity of NIBC was EUR 1.1 billion (2007: EUR 1.8 billion), consisting of EUR 1.0 billion (2007: EUR 0.9 billion) cash placed with the Dutch Central Bank and EUR 0.1 billion (2007: EUR 0.9 billion) placed overnight with other banks.

 

	Assets under management
51

 

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 2008, total assets held by NIBC on behalf of customers were EUR 2,520 million (2007: EUR 3,346 million).

 

	Related party transactions
52

 

Transactions related to employees

All transactions with employees are reported in the tables in note 55 Remuneration of Statutory Board Members, Supervisory Board Members, Share-based payments and Deferred cash.

  

 

Transactions related to associates

As at 31 December 2008, NIBC had EUR 245 million of loans advanced to its associates (2007: EUR 286 million). Besides interest income on these loans, NIBC earned EUR 7 million (2007: EUR 2 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. During 2007 and 2008, NIBC raised EUR 347 million, of which EUR 247 million was provided by four third-party investors and EUR 100 million by NIBC. The fund invests in infrastructure projects in Western Europe. In 2007, NIBC sold all of its assets related to this activity to the fund, and realised a gain on disposal in 2007 in Operating income of EUR 9 million. In addition to this, NIBC realised losses from its investment in the fund of EUR 15 million in 2008 (2007: nil) and earned fees of EUR 6 million (EUR 4 million). In NIBC’s Financial Statements, this fund is classified as an associate at Fair Value through Profit or Loss.

 

At 31 December 2008, NIBC had EUR 28 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 2008 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 and raised EUR 64 million, of which EUR 49 million was provided 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 2008 was minor. In NIBC’s Financial Statements, this fund is classified as an associate at Fair Value through Profit of Loss.

 

In 2008, NIBC paid fees relating to the servicing of its online retail savings programme NIBC Direct to Welke Beheer B.V. of EUR 2 million (2007: nil). In 2007, NIBC acquired a 25% stake in Welke Beheer B.V. In NIBC’s Financial Statements, this entity is classified as an associate (equity method).

 

 

Transactions involving NIBC’s shareholders

Significant related party transactions executed in 2008 and 2007 concern the following:

 

At 31 December 2008, NIBC had EUR 438 million of loans advanced to its parent and to entities controlled by its parent entity (2007: EUR 296 million).

 

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 2008, NIBC’s commitment was fully drawn. In 2008, NIBC earned fees of EUR 1 million (2007: EUR 1 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 adviser to Flowers Fund-II. NIBC performs fund-raising activities for this fund for which a placement fee is received.

 

In 2007, Mr. Enthoven, the then Chairman and Chief Executive Officer of NIBC and Mr. Jansen Schoonhoven, one of NIBC’s senior managers, served on the Transaction and Advisory Committee of Flowers Fund-II. This committee met weekly to discuss new investment prospects, structuring and execution of investments under consideration and enhancing value in current portfolio companies of  Flowers Fund-II. Mr. Enthoven and Mr. Jansen Schoonhoven stepped down from this committee at the beginning of 2008. At 31 December 2008, one member of NIBC’s Managing Board and some of NIBC’s employees had personally invested in Flowers Fund-II as limited partners.

 

NIBC’s US sub-prime related portfolio was sold on 24 August 2007 to a company controlled by the shareholders of NIBC Holding for USD 528 million. The acquisition by that company was partially funded by USD 248 million from NIBC Holding advanced in exchange for preference shares in the company, which were subsequently distributed by NIBC Holding to NIBC Holding’s shareholders as a dividend. During 2007, NIBC recognised a pre-tax trading loss of EUR 124 million on this portfolio. As of 24 August 2007, both NIBC Bank and NIBC Holding are no longer exposed to US sub-prime residential mortgage securities.

 

On 24 August 2007, NIBC entered into a total return swap under which all gains and losses on NIBC’s portfolio of US Commercial Real Estate structured credits (mainly CMBS and CRE CDOs) were transferred to NIBC Venture Capital N.V. (Veca), a public limited liability company incorporated under the laws of the Netherlands. Veca is indirectly a 100% subsidiary of NIBC Holding. Under the terms of the total return swap between Veca and NIBC, Veca prepaid the equivalent of EUR 948 million to NIBC. Veca financed itself through EUR 300 million of equity provided by NIBC Holding, EUR 198 million of subordinated financing provided by NIBC and EUR 450 million of senior debt provided by a third party.

 

Under the terms of the total return swap between NIBC and Veca, fair value movements on the US Commercial Real Estate portfolio are offset by compensating fair value movements on the total return swap. On 21 December 2007, NIBC terminated the total return swap by transferring the contractual rights to receive cash flows on the portfolio of US Commercial Real Estate structured credits to Veca. As a consequence of this transfer, NIBC de-recognised these assets on 21 December 2007. In the period from 1 January 2007 to 24 August 2007, NIBC recognised a trading loss of EUR 48 million net of tax on this portfolio.

 

In the first quarter of 2008, after NIBC Holding attracted EUR 400 million of new capital from its shareholders, NIBC’s loan to Veca was prepaid. As of that moment, Veca is fully financed by NIBC Holding and NIBC no longer has exposure to Veca.

 

On 21 December 2007, NIBC entered into a securities lending agreement with an entity controlled by NIBC Holding and a related party of NIBC, in which NIBC borrowed, on an unsecured basis, securities for a period ending 20 August 2009. The nominal value of the securities is EUR 612 million as at 31 December 2008 (2007: EUR 882 million).

 

In 2008, fees were paid to NIBC Holding of EUR 0 million (2007: EUR 3 million) related to asset management activities. Furthermore, in 2007 a fee of EUR 3 million was received from NIBC Holding, relating to NIBC’s role in the sale of an associate.

 

In 2007, NIBC supported the bid of J.C. Flowers together with J.P. Morgan and Bank of America to acquire SLM Corp (Sallie Mae), the US student loan company. NIBC committed USD 75 million to the Sallie Mae acquisition, of which about half is syndicated. NIBC subscribed to a further USD 20 million co-investment with J.C. Flowers. NIBC had a commitment of USD 100 million in the J.C. Flowers II LP, of which at 31 December 2007 USD 25 million was drawn. J.C. Flowers subsequently invoked the ‘material adverse effect’ clause and Sallie Mae responded with legal proceedings. In January 2008, Sallie Mae agreed to cease its pending lawsuit against JCF and the co-investors. In addition, the parties have agreed to terminate the merger agreement. The Buyer Group is not and will not be obligated to make any payment of any kind to Sallie Mae, which means that NIBC has no Sallie Mae-related exposure at 31 December 2008.

 

 

Loan from NIBC Bank 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 (2007: 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%.

 

	Discontinued operations
53

 

In 2007, NIBC discontinued its US structured credit investments and trading business. The income statement and cash flow statement of these activities in 2007 are displayed in the following table:

 

In EUR millions		2008		2007
Net interest income		-		11
Net fee and commission income		-		(4)
Net trading income		-		(196)
Operating income		-		(189)
Operating expenses		-		-
Operating profit		-		(189)
Result on disposal of subsidiaries		-		-
Tax		-		48
Result from discontinued operations		-		(141)
Net result attributable to parent shareholders		-		(141)

 

Cash flow statement discontinued operations
In EUR millions		2008		2007
Operating activities
Net result for the year		-		(141)
Derivatives financial instruments (assets and liabilities)		-		(11)
Operating assets		-		2,228
Operating liabilities		-		(2,076)
Cash flows from operating activities discontinued operations		-		-
Investing activities		-		-
Cash flows from investing activities discontinued operations		-		-
Financing activities		-		-
Cash flows from financing activities discontinued operations		-		-

 

	Principal subsidiaries, joint ventures and associates
54

 

		%		Country		Assets		Liabilities		Operating Income		Net result
Subsidiaries of NIBC Bank
NIBC Bank Ltd		100		Singapore
B.V. NIBC Mortgage Backed Assets		100		Netherlands
Parnib Holding N.V.		100		Netherlands
NIBC Foreign Debt Fund XIII B.V.		100		Netherlands
Counting House B.V.		100		Netherlands
Vredezicht 's-Gravenhage 110 B.V.		100		Netherlands
NIBC Principal Investments B.V.		100		Netherlands
GRW Reinfurt GmbH		100		Germany
NIBusker Holding B.V.		75		Netherlands
Joint Ventures
SR-Hypotheken N.V.		50		Netherlands		361		307		16		12
Associates (net asset value)
De Nederlandse Participatie Maatschappij voor de Nederlandse Antillen N.V.		100		Netherlands		31		31		1		-
PE express I B.V., Breskens		37.5		Netherlands		17		17		7		2
PE express II B.V., Breskens		37.5		Netherlands		17		17		6		1
PE express III B.V., Breskens		35		Netherlands		22		22		5		1
PE express IV B.V., Breskens		35		Netherlands		22		22		5		1
Welke Beheer B.V., Hoorn		25		Netherlands		15		15		11		1
Associates (designated at Fair Value through Profit or Loss)		NA 1		Netherlands		1,017		1,017		401		29
NA = not applicable.

 

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 for 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
55
	Members, Share based payments and Deferred cash

 

Remuneration of the Statutory Board Members

In the year under review, Mr. Drost joined NIBC as new Chairman and CEO on 1 May 2008 and Mr. Sijbrand as new CRO on 22 February 2008. At that time the Remuneration and Nominating Committee (RNC) was completing its discussions with the Statutory Board about the need for and the extent of a retention pool for selected senior executives. In an attempt to guarantee longer term stability and continuity in the leadership of NIBC, the RNC recommended and the Supervisory Board resolved to approve that such a retention pool, indeed, be created. In total 44 selected senior executives were awarded a combination of Restricted Depositary Receipts (RDRs) and Options. Additionally, and in keeping with NIBC’s overall remuneration philosophy and practice, all other employees also received an allocation of options, the number of which varied dependent on their respective corporate title. Simultaneously, and related to their investment of EUR 3 million (325 thousand CDRs at a price of EUR 9.06) in NIBC CDRs with own funds, members of the Managing Board were offered long-term sign on and/or retention awards in a mix of RDRs and Options with a combined value of EUR 6 million, which would have vested over a period of up to four years.

 

However, in the period after 31 December 2008 in view of the debate about executive compensation in financial institutions and in anticipation of a new 2009 Remuneration Policy, the Managing Board, Supervisory Board and Shareholders have jointly decided to fully rescind the aforementioned package at the original conditions, i.e. both the long-term sign on and retention awards for members of the Managing Board and the investments made by them. In the tables hereafter relating to Annual total regular remuneration, CDRs, RDRs and Options the effects of this rescinded package have been excluded.

 

In view of current market developments, the Statutory Board members also elected to waive any entitlement to regular 2008 variable compensation.

 

In the year under review, the average number of members of the Statutory Board appointed under the articles of association was 4.0 (2007: 4.0).

Mr. Enthoven (former Chairman and CEO) and Mr. Stegmann (former CRO) stepped down from their respective responsibilities and subsequently left NIBC in the early part of 2008. Due to the changes in the composition of the Statutory Board during 2008, the figures below are split in members and former members. The total regular remuneration costs (including pension costs) for the members and former members of the Statutory Board, appointed under the articles of association, excluding the above-mentioned one-off sign on and/or retention awards and including the contractual severance payments made to Messrs. Enthoven and Stegmann, amounted to EUR 4.0 million in 2008 (2007: EUR 2.9 million).

 

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

 

 

		Members										Former members
		Mr. Jeroen Drost 1		Mr. Jan van Nieuwen-huizen		Mr. Kees van Dijkhuizen		Mr. Jan Sijbrand 2		Total		Mr. Michael Enthoven 3		Mr. Jurgen Stegmann 4		Total
Base Salary 2008		466,667		400,000		400,000		344,444		1,611,111		385,000		226,667		611,667
Base Salary 2007		-		400,000		350,000		-		750,000		700,000		400,000		1,100,000
Short-term Bonus 2008		-		-		-		-		-		-		-		-
Short-term Bonus 2007		-		140,000		140,000		-		280,000		-		-		-
Deferred Compensation 2008		-		-		-		-		-		-		-		-
Deferred Compensation 2007 5		-		140,000		140,000		-		280,000		-		-		-
Total direct compensation 2008		466,667		400,000		400,000		344,444		1,611,111		385,000		226,667		611,667
Total direct compensation 2007		-		680,000		630,000		-		1,310,000		700,000		400,000		1,100,000
Pension costs 2008		88,581		86,509		86,509		66,160		327,759		20,093		13,110		33,203
Pension costs 2007		-		80,000		70,000		-		150,000		75,400		80,900		156,300
Severance Payments 2008		-		-		-		-		-		700,000		400,000		1,100,000
Expense Allowance 2008		800		1,200		1,200		1,028		4,228		300		200		500
Expense Allowance 2007		-		1,200		1,200		-		2,400		1,200		1,200		2,400
Other emoluments 2008		76,218		77,347		30,816		16,754		201,135		33,584		45,084		78,668
Other emoluments 2007		-		25,704		35,851		-		61,555		65,466		39,825		105,291
Total Remuneration 2008		632,266		565,056		518,525		428,386		2,144,233		1,138,977		685,061		1,824,038
Total Remuneration 2007		-		786,904		737,051		-		1,523,955		842,066		521,925		1,363,991
Variance 2008/2007		NA		(28%)		(30%)		NA		NA		35%		31%		34%
Joined NIBC on 1 May 2008: appointed as a member of the Statutory Board on 1 May 2008. Joined NIBC on 22 February 2008: appointed as a member of the Statutory Board on 22 February 2008. Stepped down as a member of the Statutory Board as from 30 January 2008 and employment ended with effect from 20 March 2008. Base salary payment 2008 relates to the period up to the end of employment including payment in lieu of notice. Stepped down as a member of the Statutory Board as from 30 January 2008 and employment ended with effect from 21 February 2008. Base salary payment 2008 relates to the period up to the end date of employment including payment in lieu of notice. The after-tax amounts of deferred compensation are mandatorily converted into RDRs, based on the fair market value of the depositary receipts calculated in accordance with the conditions of administration.

Remuneration of the Statutory Board recognised as Personnel Expenses in the Income Statement 20081
		Members										Former members
		Mr. Jeroen Drost		Mr. Jan van Nieuwen-huizen		Mr. Kees van Dijkhuizen		Mr. Jan Sijbrand		Total		Mr. Michael Enthoven		Mr. Jurgen Stegmann		Total
Total Remuneration 2008 (see remuneration table above)		632,266		565,056		518,525		428,386		2,144,233		1,138,977		685,061		1,824,037
Deferred compensation 2008 (see remuneration table above)		-		-		-		-		-		-		-		-
Vesting of deferred compensation granted in previous years		-		944,683		238,448		-		1,183,131		-		-		-
Total remuneration recognised in the income statement 2008		632,266		1,509,739		-		-		-		1,138,977		685,061		1,824,037
In addition to the above, Personnel expenses in the 2008 Income Statement also include a further EUR 1.8 million relating to the vesting of the Managing Board’s sign on and retention awards, which were rescinded after 31 December 2008. In accordance with the company's accounting policy for share-based compensation, this amount has been credited to Other reserves.

 

Remuneration of the Statutory Board recognised as Personnel Expenses in the Income Statement 2007
		Members										Former members
		Mr. Jeroen Drost		Mr. Jan van Nieuwen-huizen		Mr. Kees van Dijkhuizen		Mr. Jan Sijbrand		Total		Mr. Michael Enthoven		Mr. Jurgen Stegmann		Total
Total Remuneration 2007 (see remuneration table above)		-		786,904		737,051		-		1,523,955		842,066		521,925		1,363,991
Deferred compensation 2007 (see remuneration table above)		-		(140,000)		(140,000)		-		(280,000)		-		-		-
Vesting of deferred compensation granted in previous years 1		-		1,005,558		73,112		-		1,078,670		(320,206)		(148,808)		(469,014)
Total remuneration recognised in the income statement 2007		-		1,652,462		670,163		-		2,322,625		521,860		373,117		894,977
As a result of their employment ending, Messrs. Enthoven and Stegmann have forfeited all their options.

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 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		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
Members in 2007
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		26,500		5,000		66,500
Mr. W.M. van den Goorbergh		35,000		38,000		5,000		78,000
Mr. N.W. Hoek		35,000		-		5,000		40,000
Mr. J. R. Inciarte until 30/10/07 1		29,167		8,333		4,166		41,666
Mr. A. de Jong		35,000		-		5,000		40,000
Mr. D.B. Marron until 30/04/07		11,667		-		1,667		13,334
Mr. D. Rümker 1		35,000		23,000		5,000		63,000
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		385,834		203,333		50,833		640,000
In line with Dutch tax regulations, an increase of 19% VAT is payable on the total remuneration payable to the relevant Supervisory Board member.

Stock Appreciation Rights

A Stock Appreciation Right (SAR) scheme was introduced in 2001 and is a cash settled variable compensation scheme. A SAR entitles the holder to a share in the growth of the Net Asset Value of NIBC Holding. The exercise value of part of the SARs awarded to Managing Directors (whether or not appointed under the Articles of Association) has been capped at EUR 126.37. As of 31 December 2005, all capped SARs were converted into NIBC Choice. The expected cost of the outstanding SARs is recognised as Personnel expenses during the vesting period of five years.

 

On 15 November 2007, the Supervisory Board together with the Managing Board decided to exercise their right to discontinue the SAR Plan and allow accelerated vesting of all unvested SARs against the exercise price of EUR 124.79, being the fair value as at 30 June 2007. All outstanding SARs were consequently exercised. The SAR liability as at 31 December 2007 is therefore nil. No new SARs were awarded in 2008.

 

With respect to SARs, an amount of EUR 0.8 million credit was recognised in Personnel expenses in the Income Statement in 2007. In 2008, no expenses were recognised in the Income Statement. 

 

The movement of the outstanding Stock Appreciation Rights can be analysed as follows:

 

 

		Staff		Total
Position at 1 January 2007		116,599		116,599
SAR rights exercised		(115,807)		(115,807)
Weighted average exercise price		124.79		124.79
SAR rights forfeited		(792)		(792)
Position at 31 december 2007		-		-

 

NIBC Choice

 

Introduction

In 2005, a new share-based compensation plan called NIBC Choice was introduced in close co-operation with the then new shareholders. This plan allowed Statutory Board members and all other employees to convert the after tax proceeds of their accumulated rights under NIBC’s various deferred compensation arrangements into common depositary receipts (with respect to vested rights) and restricted depositary receipts (with respect to unvested rights). All accumulated vested and unvested rights under the Stock Appreciation Rights plan and the Liquidity Event plan qualified for this conversion.

 

The opportunity to invest was offered in the firm belief that management and employee ownership that aligns personal financial interests with those of the other shareholders is instrumental in creating long-term value for NIBC. As an additional incentive for all those who chose to participate in NIBC Choice, NIBC offered Matching Options for common or restricted depositary receipts acquired. Additionally, the new shareholders exercised their discretion to grant additional Management Options to the members of the Statutory Board and selected executives.

 

All members of the then Statutory Board of NIBC chose to convert their after tax proceeds of vested amounts under the legacy plans into common depositary receipts and their after tax proceeds of unvested amounts under those plans into restricted depositary receipts. The purchase price of a depositary receipt when NIBC Choice was first introduced was EUR 18.25, equal to the share price paid by the then new shareholders. The initial NIBC Choice plan also allowed investment of own funds in common depositary receipts.

 

Components of variable compensation

Under NIBC’s remuneration policy, NIBC Choice forms a deferred compensation part of the variable compensation. The other part of the variable compensation is the award 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  CDRs and RDRs, are issued by Stichting Administratiekantoor NIBC Holding (the Foundation) in accordance with its conditions of administration (administratievoorwaarden) applicable to the relevant DRs.

 

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 similar pre-emptive rights as 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-emptive 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 was EUR 18.25. Employees are informed on a quarterly basis of the fair market value for the DRs, defined in the applicable conditions of administration.

 

RDRs cannot be transferred, and are subject to specific vesting rules. Up to 1 January 2008, they were subject to 5-year vesting with 1/5th vesting on the 1st of January of each year. In 2008, the vesting schedule was changed to 3-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 right of the Foundation to cancel the RDR in case of termination of employment, or in case of certain corporate events, such as restructurings.

 

As part of NIBC’s deferred compensation, NIBC Holding granted 439,013 new RDRs in 2008 (2008 RDRs) in respect of the financial year 2007. The conditions of administration applicable to these 2008 RDRs are in line with those applicable to the 2007 RDRs, except for the vesting period, which was reduced to 3-years as described above. The grant price of these 2008 RDRs, EUR 9.06, was determined on the price that was paid in that period by the external investors subscribing for the Rights Issue and not, as would normally be the case, on the basis of changes in the net asset value of NIBC Holding, calculated using a fixed formula contained in the conditions of administration of the Foundation, compared with the purchase price of EUR 18.25, which was determined when NIBC Choice was first introduced.

 

Additionally, the Supervisory Board approved a Statutory Board proposal to introduce a one-off retention package to selected senior executives in the first half of 2008 and 210,144 2008 RDRs were granted in this respect. The same grant price of EUR 9.06 per share was determined for this retention package. .

 

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 7-year exercise period with a possibility for a 3-year extension in case a liquidity event has not yet taken place before the end of the 7-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’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 same one-off retention package mentioned above, 1,491,400 options were granted to selected senior executives and other staff subject to the rules of the existing Option Plan. The exercise price of these options is 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.

 

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 the year-end 2008, 2,014,369 (2007: 1,964,712) CDRs were issued to employees. In 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). Of the position as at year-end 2008, 31,735 which is 1.4% of CDRs are considered cash settled (2007: 27,833 and 1.4%).

 

 

		Mr. Jeroen Drost		Mr. Jan van Nieuwen- huizen		Mr. Kees van Dijkhuizen		Mr. Jan Sijbrand		Subtotal Board Members		Staff 2		Total
Position as at 1 january 2007 (investment from own funds)		-		131,575		10,000		-		141,575		1,563,877		1,705,452
Position as at 1 january 2007 (granted)		-		57,754		-		-		57,754		156,705		214,459
Investments by/grants to new joiners		-		-		-		-		-		28,002		28,002
Weighted average grant price per CDR		-		-		-		-		-		19.68		19.68
Vesting of RDRs		-		2,236		520		-		2,756		49,023		51,779
CDRs repaid		-		-		-		-		-		(34,980)		(34,980)
Position as at 31 december 2007 (investment from own funds)		-		131,575		10,000		-		141,575		1,556,899		1,698,474
Position as at 31 december 2007 (granted)		-		59,990		520		-		60,510		205,728		266,238
Fair market value per CDR as at 31 December 2007 1		-		17.32		17.32		-		17.32		17.32		17.32
Position as at 1 january 2008 (investment from own funds)		-		131,575		10,000		-		141,575		1,556,899		1,698,474
Position as at 1 january 2008 (granted)		-		59,990		520		-		60,510		205,728		266,238
Investments by new joiners and existing personnel from own funds		-		-		-		-		-		74,268		74,268
Weighted average grant price per CDR		-		-		-		-		-		9.06		9.06
Vesting of RDRs		-		62,253		1,129		-		63,382		566,295		629,677
CDRs repaid		-		-		-		-		-		(654,288)		(654,288)
Position as at 31 december 2008 (investment from own funds)		-		131,575		10,000		-		141,575		976,879		1,118,454
Position as at 31 december 2008 (granted)		-		122,243		1,649		-		123,892		772,023		895,915
Fair market value per CDR as at 31 December 2008 1		-		11.95		11.95		-		11.95		11.95		11.95
The Fair Market Value per CDR is defined by the conditions of administration as parent shareholders’ equity, decreased by the revaluation reserve for corporate loans, the hedging reserve and proposed (but not yet paid out) dividend, increased by the difference between the acquisition price of NIBC N.V. in 2005 and the fair market value of NIBC N.V. on 30 June 2005, divided by the number of outstanding shares in NIBC Holding on the relevant balance sheet date. The fair market value is calculated including the effect of proposed dividend. Former members of the Statutory Board are included in these figures.

Restricted Depositary Receipts

As at the year-end 2008, 940,778 (2007: 1,047,725) RDRs were issued to employees, with a weighted average remaining vesting period of 1.13 years (2007: 1.02). 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 RDRs are considered cash settled (as opposed to equity settled) to the extent that, following vesting and conversion into CDRs, an employee has the right to demand payment against their fair value. Of the position as at year-end 2008, no RDRs were considered as cash settled (2007: 3,902 and 0.4%).

 

 

		Mr. Jeroen Drost		Mr. Jan van Nieuwen- huizen		Mr. Kees van Dijkhuizen		Mr. Jan Sijbrand		Subtotal Board Members		Staff 2		Total
Position as at 1 January 2007		-		68,934		2,596		-		71,530		661,620		733,150
Granted in 2007		-		11,311		3,049		-		14,360		408,446		422,806
Weighted average grant price per RDR		-		19.68		19.68		-		19.68		19.68		19.68
Forfeited		-		-		-		-		-		(56,452)		(56,452)
Vested into CDRs		-		(2,236)		(520)		-		(2,756)		(49,023)		(51,779)
Position as at 31 December 2007		-		78,009		5,125		-		83,134		964,591		1,047,725
Fair market value per RDR as at 31 December 2007 1		-		17.32		17.32		-		17.32		17.32		17.32
Position as at 1 January 2008		-		78,009		5,125		-		83,134		964,591		1,047,725
Granted in 2008 from annual remuneration 2007		-		9,828		7,418		-		17,246		421,767		439,013
Weighted average grant price per RDR		-		9.06		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		-		(62,253)		(1,129)		-		(63,382)		(566,295)		(629,677)
Position as at 31 December 2008		-		25,584		11,414		-		36,998		903,780		940,778
Fair market value per RDR as at 31 December 2008 1		-		11.95		11.95		-		11.95		11.95		11.95
The Fair Market Value per RDR is defined by the conditions of administration as parent shareholders’ equity, decreased by the revaluation reserve for corporate loans, the hedging reserve and proposed (but not yet paid out) dividend, increased by the difference between the acquisition price of NIBC N.V. in 2005 and the fair market value of NIBC N.V. on 30 June 2005, divided by the number of outstanding shares in NIBC Holding on the relevant balance sheet date. The fair market value is calculated including the effect of proposed dividend. Former members of the Statutory Board are included in these figures.

Options

As at the year end 2008, 4,438,293 (2007: 3,552,569) options on depositary receipts of NIBC Holding were in issue, with an weighted average remaining vesting period of 1.2 (2007: 1.6) years. 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 4.0 (2007: 5.1) years. All options are equity settled instruments.

 

 

		Mr. Jeroen Drost		Mr. Jan van Nieuwen- huizen		Mr. Kees van Dijkhuizen		Mr. Jan Sijbrand		Subtotal Board Members		Staff 2		Total
Position as at 1 January 2007		-		410,286		60,000		-		470,286		4,461,153		4,931,439
Options 2006/2007 granted		-		-		-		-		-		-		-
Average exercise price per Option		-		-		-		-
Options forfeited		-		-		-		-		-		(1,378,870)		(1,378,870)
Position as at 31 December 2007		-		410,286		60,000		-		470,286		3,082,283		3,552,569
Position as at 1 January 2008		-		410,286		60,000		-		470,286		3,082,283		3,552,569
Options 2008 granted		-		-		-		-		-		1,491,400		1,491,400
Average exercise price per Option		-		-		-		-		-		9.31		9.31
Options forfeited		-		-		-		-		-		(605,676)		(605,676)
Position as at 31 December 2008		-		410,286		60,000		-		470,286		3,968,007		4,438,293
Average fair value per Option at grant date 1		-		6.00		6.00		-		6.00		5.23		5.31
Weighted average exercise price per Option as at 31 December 2008		-		15.15		15.15		-		15.15		13.34		13.53
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 7 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 63% of the options outstanding at the end of 2008 (2007: 91%). 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. There were no new option series granted in 2007. For the options issued 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 4 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 5.31 at the end of 2008. Former members of the Statutory Board are included in these figures.

 

With respect to all instruments relating to NIBC Choice (CDRs, RDRs and Options), an amount of EUR 11 million was expensed through Personnel Expenses in 2008 (2007: EUR 20 million), of which EUR 0 million (2007: EUR 1 million credit) refers to cash settled instruments and EUR 5 million (2007: EUR 11 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 0 million (2007: EUR 1 million). With respect to the equity settled instruments, options and RDRs, 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 30 million payable is included (2007: EUR 28 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 42 million in relation to the share-based payments program granted by NIBC Holding.

 

	Credit risk
56

 

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;
• Mezzanine loans;
• Residential mortgages;
• Debt Investments portfolio;
• Cash management; and
• Counterparty risk on Derivatives.

 

The Debt Investments portfolio is further subdivided into:

• Debt from Financials, Sovereigns, Corporate entities and Structured Investments;
• Structured Credits; and
• Credit Fixed Income Funds.

 

The following table shows the maximum credit risk exposures, without taking collateral or any other credit risk reduction 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, mezzanine 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.

 

The on-balance sheet credit risk exposures are not directly comparable to the numbers in the Balance Sheet. The exposure amounts shown are broadly aligned with the regulatory capital view, except for derivatives, which show the positive replacement values only, without netting and without any potential future exposure add-on.

 

The table displays the book value of asset classes that are recognised as having distinct characteristics. For each class, risk is managed separately.

 

Corporate loans and mezzanine loans are recognised on the Balance Sheet under Loans and Securitised loans. The main differences are that the figures stated in the table also incorporate the off-balance sheet commitments. Furthermore, the figures in the table do not include loans from NIBC to NIBC Holding.

 

Residential Mortgages are recognised on the Balance Sheet under Residential mortgages own book and Securitised residential mortgages.

 

For Structured Investments, the figure in the table is lower than the figure on the Balance Sheet by EUR 364 million. The difference is mainly caused by an investment in a structured investment vehicle which includes securitised residential mortgages originated by NIBC. These positions in the risk figures are included under residential mortgages. On NIBC’s Balance Sheet these mortgages have been included under the residential mortgages as well as under Structured investments, in combination with a corresponding balance included in the line Deposits from customers on the liabilities side, reflecting NIBC’s liability with the structured investment vehicle.

 

The amount on Debt investments (other than Structured investments) is larger than the total of Debt investments on the Balance Sheet. This is mainly caused by the fact that the figures in the table include sold CDS protection.

 

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 counterparty risk on derivatives not being included in the risk figures. Furthermore, cash from securitisation vehicles of which NIBC does not own notes has been excluded from the risk figures.

 

Counterparty risk on derivates should be compared to Derivative financial assets held for trading and hedging on the Balance Sheet. The main difference concerns a swap position, which has been reported on a gross basis on the asset side, with a corresponding balance on the liability side of NIBC’s Balance Sheet, but which has been excluded in the figures of the table.

 

Exposure breakdown per portfolio
In EUR millions		31 December 2008		31 December 2007
Corporate Loans		8,098		10,251
Mezzanine Loans		249		204
Residential Mortgages		11,451		11,641
Debt investments portfolio
Debt from Financials, Sovereigns and Corporate entities and Structured Investments		1,458		2,663
Structured Credits		898		1,374
Credit Fixed Income Funds		35		133
Subtotal Debt investments portfolio		2,392		4,170
Cash management		1,616		3,500
Counterparty risk on Derivatives 1		3,110		2,726
Positive replacement values.

 

Corporate loans

 

Credit approval process

In principle, all individual credit proposals are approved in the Transaction Committee. 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 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.

 

The figure that follows 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 rated; a small part of the corporate loan portfolio was not rated at 31 December 2008. All figures presented in this section are based on both on- and off-balance sheet items, unless otherwise stated.

 

 

 

 

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

 

The following tables show a breakdown in percentages of the corporate loan portfolio among regions and industry sectors, as per 31 December 2008 and 2007. The commercial real estate figures include an amount of EUR 630 million in Securitised loans. NIBC has retained notes for an amount of EUR 127 million, whereas EUR 503 million has been sold.

 

 

Corporate Loan exposure per industry sector, 31 December 2008
in %	The Netherlands	United Kingdom	Germany	Rest of EU	Non EU Europe	North America	South East Asia	Other	Total (%)		Total (in EUR millions)
Aviation	0	0	-	0	-	0	0	-	1		102
Commercial Real Estate	22	0	7	1	0	0	0	-	30		2,350
Financial Services	1	0	0	0	0	-	0	0	2		144
Food/Agriculture	0	0	0	0	0	0	0	0	1		44
Health/Education	0	4	1	0	0	0	0	0	5		443
Infrastructure	4	4	3	1	0	0	0	0	12		964
Manufacturing	2	2	1	2	2	1	1	1	12		973
Shipping	1	2	0	1	1	2	7	2	17		1,402
Trade	6	3	1	1	0	0	0	0	11		909
Utilities	2	0	0	0	0	0	0	0	3		217
Other	2	4	0	0	0	-	0	0	7		551
Total	41	19	13	8	4	4	8	4	100		8,098
Total (In EUR millions)	3,237	1,552	1,085	619	295	324	694	292			8,098

 

Corporate Loan exposure per industry sector, 31 December 2007
in %	The Netherlands	United Kingdom	Germany	Rest of EU	Non EU Europe	North America	South East Asia	Other	Total (%)		Total (in EUR millions)
Aviation	0	0	-	0	-	0	0	-	1		116
Commercial Real Estate	18	2	9	1	0	0	0	0	30		3,121
Financial Services	1	-	0	-	-	-	-	-	1		137
Food/Agriculture	1	-	0	0	-	-	-	-	2		170
Health/Education	1	5	1	0	-	-	-	-	7		733
Infrastructure	4	6	0	1	0	0	-	-	11		1,156
Manufacturing	3	3	1	2	1	1	1	2	13		1,356
Shipping	1	1	0	1	1	2	6	2	14		1,488
Trade	7	3	2	1	-	0	-	0	13		1,219
Utilities	2	0	-	0	0	0	0	-	3		291
Other	2	2	-	0	0	-	-	-	4		465
Total	39	21	13	9	4	4	7	4	100		10,251
Total (In EUR millions)	4,028	2,189	1,287	862	372	374	719	421			10,251

 

Country risk

Country risk is potentially an important cause of increased counterparty default risk since a large number of related 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. 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. 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 have some form of collateralisation. Loans can be collateralised by mortgages on real estate and ships, by receivables, leases 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 confirms that its interest is legally enforceable with independent third-party experts. Loans in the shipping and oil and gas sectors are secured by moveable assets such as ships and drilling vessels. The commercial real estate 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 equipment, inventory, debtors, and third-party credit protection (e.g. guarantees). The value of these types of collateral can be more difficult to determine, therefore such collateral is attributed a nil value in order to be conservative.

 

It is impracticable for NIBC to estimate the total fair value of collateral. NIBC, therefore, does not disclose this fair value. Furthermore, NIBC recognises that the fair 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 case of a quick sale. Furthermore, different asset types can be subject to very different asset price volatilities.

 

The following chart shows the breakdown of collateralised and uncollateralised exposures by industry sector as per 31 December 2008 and 2007. The term collateralised may indicate full or partial collateralisation.

 

 

 

 

Past due loan amounts

Past due loan amounts are reported to the Transaction Committee (TC) on a monthly 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 the tables that follow. The outstanding amounts refer to the on-balance sheet amounts of those facilities with an arrear. The amounts in arrear are the actual amounts past due as at 31 December 2008 and 2007 respectively. The term collateralised may indicate full or partial collateralisation. The column labelled Impairment Amount includes on-balance sheet impairment amounts only (2008: EUR 80 million; 2007: EUR 57 million).

 

The impairment amounts presented in the following two tables have been determined based on the assumption that these instruments have been classified to the Amortised Cost category in 2008. The 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.

 

 

Past due loan amounts, 31 December 2008
in EUR millions		Outstanding							Amount in Arrear
		Collateralised	Not Collateralised		Total		% of On Balance		Collateralised	Not Collateralised		Total		% of On Balance		Impairment Amount
AGE OF PAYMENT IN ARREAR
Up to 30 days		391	36		427		6.1		17	0		17		0.2		11
30 - 60 days		63	0		63		0.9		5	0		5		0.1		4
60 - 90 days		19	14		33		0.5		0	14		14		0.2		-
SUBTOTAL LESS THAN 90 DAYS		474	50		524		7.5		22	14		35		0.5		16
Over 90 days		40	11		51		0.7		4	6		9		0.1		8
No payment arrear		6,107	335		6,442		91.8		0	0		0		0.6		56
TOTAL		6,621	396		7,017		100		25	19		45		0.6		80
Past due loan amounts, 31 December 2007
in EUR millions		Outstanding							Amount in Arrear
		Collateralised	Not Collateralised		Total		% of On Balance		Collateralised	Not Collateralised		Total		% of On Balance		Impairment Amount
AGE OF PAYMENT IN ARREAR
Up to 30 days		176	17		193		2.4		31	2		33		0.4		3
30 - 60 days		10	0		10		0.1		0	0		0		0.0		-
60 - 90 days		0	0		0		0.0		0	0		0		0.0		-
SUBTOTAL LESS THAN 90 DAYS		186	17		203		2.5		31	2		33		0.4		3
Over 90 days		73	40		113		1.4		10	26		36		0.4		26
No payment arrear		7,025	840		7,865		96.1		0	0		0		0.0		28
TOTAL		7,283	897		8,180		100		41	28		69		0.8		57

 

 

The following graph shows the rating distribution of the outstanding amounts of all loans with an amount past due. The total outstanding amount at 31 December 2008 is EUR 575 million and at 31 December 2007 EUR 316 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. NR stands for not rated; a small part of the corporate loan portfolio was not rated at 31 December 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.

 

If an impairment amount is taken against a facility, the entire outstanding amount of that particular debtor is classified as impaired. Apart from debtors with an impairment amount, NIBC also considers as impaired those debtors with a default rating (9 or 10), although, due to over-collateralisation, no individual impairment amount may have been assigned to it.

 

The following two tables show an overview of impairments as at 31 December 2008 and 2007, 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- and off-balance sheet amounts of impaired facilities. IBNR stands for Incurred But Not Reported.

 

The impairment amount presented in the following two tables have been determined based on the assumption that these instruments have been classified to the Amortised Cost category in 2008. The 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.

 

 

Impairment per Region
in eur millions		31 December 2008					31 December 2007
		Exposure	Impaired Exposure	Impairment Amount	Write-offs		Exposure	Impaired Exposure	Impairment Amount	Write-offs
The Netherlands		3,237	108	21	8		4,028	90	17	5
United Kingdom		1,552	92	34	1		2,189	78	21	-
Germany		1,085	32	17	-		1,287	18	10	2
Rest of EU		619	13	6	-		862	1	-	2
Non EU Europe		295	-	-	-		372	-	-	-
North America		324	24	3	-		374	22	5	-
South East Asia		694	-	-	1		719	4	4	2
Other		292	0	0	-		421	-	0	-
IBNR Corporate Loans				2					-
Total		8,098	271	83	10		10,251	213	57	11

 

Impairment per Industry Sector
in eur millions		31 December 2008					31 December 2007
		Exposure	Impaired Exposure	Impairment Amount	Write-offs		Exposure	Impaired Exposure	Impairment Amount	Write-offs
Aviation		102	40	9	0		116	41	11	2
Commercial Real Estate		2,350	9	3	1		3,121	12	7	-
Financial Services		144	8	0	-		137	11	0	-
Food/Agriculture		44	1	0	0		170	1	0	-
Health/Education		443	23	4	-		733	-	-	-
Infrastructure		964	67	16	8		1,156	116	22	-
Manufacturing		973	38	8	1		1,356	22	11	4
Shipping		1,402	19	1	-		1,488	2	1	-
Trade		909	28	21	0		1,219	7	3	-
Utilities		217	-	-	-		291	-	-	-
Other		551	39	18	-		465	0	-	5
IBNR Corporate Loans				2					-
Total		8,098	271	83	10		10,251	213	57	11

 

Mezzanine loans

Mezzanine loans are originated and monitored by Merchant Banking and are separated from the (senior) corporate loan portfolio.

 

As NIBC controls some of the funds set up and managed by NIBC (NIBC Funds), the mezzanine investments made by these funds are assets in the Consolidated Financial Statements of NIBC.

 

Responsibility for the management of direct investment exposures rests with Merchant Banking. Direct investment transactions with respect to mezzanine exposures are approved by the Investment Committee (IC) of NIBC. The IC also decides on impairments and revaluations.

 

Responsibility for the management of NIBC Funds (indirect investments) rests also with Merchant Banking. Indirect investment transactions are approved by the Investment Committees of the Funds, subject to the investment guidelines stipulated in the fund agreements between the general partner and the limited partners.

 

The tables that follow show a breakdown of mezzanine loans per region and industry sector, respectively, at 31 December 2008 and 2007.

 

 

Breakdown of mezzanine exposure per region
in eur millions		31 December 2008				31 December 2007
		Exposure		%		Exposure		%
The Netherlands		107		43.1		56		27.4
United Kingdom		62		24.9		42		20.9
Germany		44		17.6		22		10.9
Rest of EU		30		12.0		37		18.0
North America		0		0.0		40		19.5
Other		6		2.3		7		3.4
Total		249		100		204		100

 

Breakdown of mezzanine exposure per industry sector
in eur millions		31 December 2008				31 December 2007
		Exposure		%		Exposure		%
Food/Agriculture		0		0.0		37		18.3
Manufacturing		121		48.5		31		15.4
Real Estate		5		2.0		6		3.2
Trade		61		24.5		128		63.0
Other		62		24.9		0		0.1
Total		249		100		204		100

 

Impairment amounts

As at 31 December 2007, the total impairment amount for mezzanine loans was EUR 6 million, spread over the different sectors. The impairment amount increased to EUR 18 million as at 31 December 2008. The increase can be attributed to a single impairment with a size of EUR 15 million in the automotive sector, partly offset by a EUR 3 million of impairment amount write-off. The remaining impairment amount consists of small impairments, spread over the different sectors.

 

The impairment amount of EUR 15 million refers to an asset which is not collateralised. Past-due amounts for mezzanine exposures are insignificant, due to the fact that most are payments in kind.

 

 

Residential mortgages

At 31 December 2008, the composition of the residential mortgage portfolio (EUR 11,451 million) was as follows:

 

Breakdown of Residential Mortgage Portfolio, 31 December 2008
in eur millions
Dutch Own book portfolio		5,509
Dutch Securitised portfolio		5,250
German portfolio		692
Total		11,451

 

Dutch 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 services. 29% of the mortgage loan portfolio as at 31 December 2008 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 theretained positions is EUR 89 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 a 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 further improve results, the arrears management is largely managed in-house. This ensures a dedicated team focused on minimising losses.

 

The first month of arrears is managed by the services. When amounts in arrears are outstanding longer than one month, the arrears management is transferred to the NIBC Arrears Management department. At the end of 2008, NIBC managed in-house about 70% of the Dutch residential mortgage portfolio arrears longer than one month. As of 2009, all arrears longer than one month will be managed in-house. The following table shows the arrears overview of the total Dutch mortgage portfolio as at 31 December 2008 and 2007.

 

 

Arrears Overview, Dutch Residential Mortgage portfolio
in %		31 December 2008		31 December 2007
No arrears		97.5		97.1
0< ≤30 days		1.6		2.0
30< ≤60 days		0.4		0.6
60< ≤90 days		0.2		0.2
>90 days		0.3		0.2
Total		100		100
Total (in EUR millions)		10,759		10,912

 

Risk Measurement

Risk of loss is measured by assigning Probability of Default (PD), and Loss Given Default (LGD) estimates for every loan. The PD expresses the probability of any borrower entering into default, whereas the LGD measures the loss incurred when a default has taken place. These parameters are determined by an in-house developed Basel II Advanced Internal Ratings Based Model that has been in use since 2006. This model is used for solvency reporting to the Dutch Central Bank (DNB). The PD estimates are dependent on a variety of factors, of which the key factors are Debt-to-Income and Loan-to-Value ratios. The following table shows the PD distribution of the Dutch mortgage portfolio as at 31 December 2008 and 2007. A PD of 100% means that a borrower is more than 90 days in arrears.

 

 

Rating class allocation of Residential Mortgages
in %		Own book Dutch mortgages				Securitised Dutch mortgages
		31 December 2008		31 December 2007		31 December 2008		31 December 2007
Probability of Default
<= 1%		95.5		92.0		97.7		97.2
1-2%		1.0		1.3		0.1		0.2
2-5%		1.3		1.6		1.1		1.3
5-99%		1.3		1.5		0.8		1.2
100%		0.4		0.3		0.2		0.2
Not rated		0.5		3.4		0.0		0.0
Total		100		100		100		100
Total (in EUR millions)		5,509		4,557		5,250		6,355

 

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;
• A CDS with a government-backed financial counterparty protects EUR 797 million of the Dutch portfolio against credit losses.

 

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 Cadastre index, which is based on market observables. The following pie charts show a breakdown of the LTiMV for the portfolio not covered by the CDS or the NHG programme as at 31 December 2008 and 2007. Only 7% 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.

 

 

 

 

German Portfolio

The German Residential Mortgage portfolio amounted to EUR 692 million as at 31 December 2008 (31 December 2007: EUR 728 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 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;
• NIBC secures mortgage loans by first-lien mortgage rights;
• NIBC allows the borrower 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 risk life insurance or limits the LTV to 60%; and
• In addition to desk valuations, NIBC has on-site inspections of its properties.

 

In order to control the credit risk of the German 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 arrears. They claim the outstanding amount with an arrears letter sent every two weeks. In case of private insolvency or arrears beyond 90 days, responsibility is taken over by the special servicer.

 

The following table shows an overview of the arrears as at 31 December 2008 for the German mortgage portfolio. Due to migration of the mortgage portfolio to a new servicer, 31 December 2007 arrears figures are not comparable to the 31 December 2008 figures presented below. As it is market practice in Germany to start the foreclosure procedure after being 6 months in arrears (180 days), the arrears 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.

 

 

Arrears overview, German Residential Mortgage Portfolio
in %		31 December 2008
No arrears		95.8
0< ≤30 days		1.9
30< ≤60 days		1.1
60< ≤90 days		0.4
>90 days		1.0
Total		100
Total (in EUR millions)		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, the majority of mortgage loans contain an annuity repayment, 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. De-risking and liquidity-improving transactions are responsible for a significant decline in NIBC’s debt investments exposures.

 

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 Asset & Liability Committee (ALCO), 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 ALCO.

 

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. Reference is made to note 57 on Market Risk, which contains more information on these variables.

 

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

• Debt from Financials, Sovereigns, Corporate entities and Structured Investments;
• Structured Credits; and
• Credit Fixed Income Funds.

 

Debt from Financials, Sovereigns, Corporate entities and Structured investments

NIBC has invested in debt issued by Financial Institutions, Sovereigns and Corporate entities, partly in the form of sold CDS protection.

 

Part of this investment is embedded in the so-called structured investments, where profits are enhanced by setting up investment structures with financial counterparties. Through the structured investments portfolio, NIBC invests in highly-rated debt. These debt investments are either issued or guaranteed by AAA, AA or A-rated financial institutions. The tables that follow show that the Structured Investment portfolio has decreased significantly from EUR 1,415 million as at 31 December 2007 to EUR 694 million as at 31 December 2008.

 

 

Structured investments, 31 December 2008
Book value, in eur millions		AAA		AA		A		BBB		BB		B		NR		Total
Financial Institutions		68		529		97		-		-		-		1		694
Total		68		529		97		-		-		-		1		694

 

 

Structured investments, 31 December 2007
Book value, in eur millions		AAA		AA		A		BBB		BB		B		NR		Total
Financial Institutions		50		970		395		-		-		-		-		1,415
Total		50		970		395		-		-		-		-		1,415

 

 

Including the investments in debt from Financial Institutions in the structured investments portfolio, the issuer risk on debt from Financials, Sovereigns and Corporate entities has decreased from EUR 2,663 million as at 31 December 2007 to EUR 1,458 million as at 31 December 2008, as the following tables present.

 

 

Debt investments and sold CDS (including Structured Investments), 31 December 2008
Book value, in eur millions		AAA		AA		A		BBB		BB		B		NR		Total
Financial Institutions		414		584		183		0		7		0		52		1,240
Sovereigns		206		10		-		0		3		0		0		218
Corporate entities		-		-		-		0		0		0		0		0
Total		619		594		183		0		9		0		52		1,458

 

 

Debt investments and sold CDS (including Structured Investments), 31 December 2007
Book value, in eur millions		AAA		AA		A		BBB		BB		B		NR		Total
Financial Institutions		415		1,344		590		0		0		0		7		2,356
Sovereigns		11		0		56		0		0		0		0		67
Corporate entities		7		41		158		24		6		5		0		240
Total		433		1,385		804		24		6		5		7		2,663

 

 

Exposure on debt issued by Financial Institutions has been reduced by almost 50%. The increase in the non-rated exposure relates to a guarantee provided on NIBC’s former Curacao subsidiary. The issuer risk on corporate debt has been reduced to zero as at 31 December 2008.

 

Structured credits

NIBC sold its US residential mortgage backed securities in 2007. During 2007, the US commercial real estate exposure was sold from NIBC Bank to NIBC Holding, except for a very small residual US collateralised exposure (EUR 2 million). The European portfolio is a mix of mainly residential and commercial real estate that has also seen negative revaluations, although less extreme than the US assets. Both due to revaluations and due to the sale of assets, the total exposure decreased by EUR 467 million in 2008. More importantly, NIBC has been able to reduce significantly its exposure to lower-rated securities. The exposure to BBB or lower-rated securities was reduced from EUR 292 million as at 31 December 2007 to EUR 141 million as at 31 December 2008. With the exception of EUR 2.6 million, all the 2008 equity notes are exclusively retained notes from NIBC’s own securitisations.

 

The following tables show an overview of NIBC’s structured credit portfolio at 31 December 2008 and 2007.

 

Structured credits (including equity notes own securitisations), 31 December 2008
Book value, in eur millions		AAA		AA		A		BBB		BB		B		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		59		73		10		-		-		448
Total European Structured Credits		473		155		126		96		30		0		15		896
US - Collaterised		2		-		-		-		-		-		-		2
Total Structured Credits		475		155		126		96		30		1		15		898

 

 

Structured credits (including equity notes own securitisations), 31 December 2007
Book value, in eur millions		AAA		AA		A		BBB		BB		B		Equity		Total
EU - ABS		18		12		5		1		5		-		-		42
EU - CDO		192		53		18		22		24		-		35		345
EU - CMBS		140		88		47		35		7		-		-		317
EU - RMBS		335		61		100		126		36		1		-		659
Total European Structured Credits		686		214		171		184		72		1		35		1,363
US - Collaterised		4		-		-		-		-		-		7		11
Total Structured Credits		690		214		171		184		72		1		42		1,374

 

 

Geographic distribution

The following chart presents the distribution of the issuers of the assets in the European Structured Credits portfolio by geographic region, as at 31 December 2008 and 2007. NIBC allocates exposure to a region based on the geographic location in which the counterparty or issuer’s cash flows are generated. The geographic distribution illustrates that the vast majority of these assets were originated by European issuers.

 

 

 

 

Credit Fixed Income Funds

The Credit Fixed Income Funds portfolio contains investments in credit fixed income funds managed by hedge funds and asset managers. During 2008, the portfolio was reduced significantly. Its total book value was reduced from EUR 133 million as at 31 December 2007 to EUR 35 million as at 31 December 2008.

 

 

Cash management

NIBC is also exposed to issuer risk as a result of cash management activities. In 2008, NIBC’s risk management framework for cash management has been adjusted, incorporating a more conservative attitude by taking into account the deteriorated global markets and concern about numerous financial entities.

 

Risk monitoring and measurement

NIBC only places its excess cash with a selected number of Sovereign 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 Dutch Central Bank (DNB), for which no limit is set. For the approved financial counterparties, a monitoring process is in place within the Market Risk Management department.

 

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 at 31 December 2008, Treasury had placed EUR 23 million with an AA-rated financial institution and the remaining cash surplus of EUR 1 billion with the DNB. Furthermore, at 31 December 2008, EUR 467 million was placed at third-party account providers. The Non-Treasury-Sovereigns exposure consisted of tax receivables with a value of EUR 12 million, and EUR 63 million was placed with the current account at the DNB.

 

 

Cash management, 31 December 2008
in eur millions		AAA		AA		A		Total
Treasury - Financial institutions		-		23		-		23
Treasury - Sovereigns/DNB		1,050		-		-		1,050
Non-Treasury - Financial institutions		22		421		24		467
Non-Treasury - Sovereigns/DNB		75		-		-		75
Total		1,148		444		24		1,616

 

 

Counterparty risk on derivatives

Counterparty risk measures the loss in case of a default of the counterparty in derivative transactions. NIBC’s counterparty risk can be split into exposures on Financial Institutions and Corporate entities. NIBC’s policy is to minimise counterparty risk. Therefore, NIBC only enters into Over The Counter (OTC) contracts with financials institutions that are investment grade. 2008 was a turbulent year for these markets as well, due to volatile foreign exchange and interest rates, rating migrations and several defaults of well-established financial institutions. These events did not have a severe financial impact on NIBC.

 

Risk monitoring and measurement

Counterparty risk is based on the mark-to-market value and add-on of the derivative. The add-on reflects a potential future change in mark-to-market value during the remaining lifetime of the derivative contract. For financial institutions, separate limits for counterparty 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.

 

Exposures

The table that follows shows NIBC’s exposures from counterparty risk allocated across the rating class of the underlying counterparty. The exposure shown is the sum of the positive mark-to-market value of derivative contracts excluding the effect of netting and collateral exchange.

 

 

Counterparty exposure excluding netting and collateral, 31 December 2008
in eur millions		AAA		AA		A		BBB		BB		B		CCC		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 counterparties to mitigate credit risk on OTC derivatives by means of Credit Support Annexes (CSAs). Positive mark-to-market values can be netted with negative mark-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 weekly 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 counterparty exposure on derivates, as presented in the following table.

 

 

Counterparty exposure including netting and collateral, 31 December 2008
in eur millions		AAA		AA		A		BBB		BB		B		CCC		D		NR		Total
Financial institutions		1		121		99		-		-		-		-		-		-		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
57

 

This section describes the market risk inherent in books that have a regulatory market risk treatment and the overall interest rate risk of the bank. In line with the general de-risking policy, these risks have been considerably reduced.

 

 

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. NIBC’s historical VaR measure calculates risk based on the assumption that the future will behave as the past four years. To mitigate this weakness of the VaR measure, 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 outcomes. The Income Statement for all trading portfolios is also monitored daily.

 

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 mark-to-market losses with a confidence level of 99% will not exceed, based upon 4 years of historical data for changes in interest rates, credit spreads and both simultaneously. 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 Chief Risk Officer on a daily basis.

 

 

Exposures

 

Interest rate risk in the Trading portfolio

During 2007 and 2008, various portfolios that had a regulatory market risk treatment have been closed. At the end of 2008, the books that have a regulatory market risk treatment consisted effectively of only the Trading portfolio. In this section, all books that had a regulatory market risk treatment are referred to as the Trading portfolio. For this portfolio, the implemented de-risking policy can be observed in the 2008 statistics. Although the VaR was higher at the end of 2008 than at the end of 2007, during the year the interest BPV and the interest VaR were, on average, substantially lower.

 

The Trading portfolio consisted at the end of 2008 mainly of interest rate-driven exposures. Activities comprise short-term (up to 2 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.

 

 

Key risk statistics Trading portfolio, 2008
in eur thousands		Interest rate
		BPV		VaR
High		113		1,237
Average		1		521
Low		(151)		186
Year-end 2008		(101)		773

 

 

Key risk statistics Trading portfolio, 2007
in eur thousands		Interest rate
		BPV		VaR
High		646		7,451
Average		42		3,384
Low		(706)		354
Year-end 2007		(26)		375

 

 

Interest rate risk in the Mismatch portfolio

NIBC concentrates the strategic interest rate risk position of the bank in the Mismatch portfolio. It exclusively contains swap positions with which a view on future interest rate developments is taken. Also for this portfolio, the average exposure during 2008 has been significantly lower than during 2007.

 

 

Key risk statistics Mismatch portfolio, 2008
in eur thousands		Interest rate
		BPV		VaR
High		(93)		6,123
Average		(275)		3,898
Low		(355)		1,861
Year-end 2008		(309)		5,652

 

Key risk statistics Mismatch portfolio, 2007
in eur thousands		Interest rate
		BPV		VaR
High		(268)		11,194
Average		(487)		7,355
Low		(729)		4,794
Year-end 2007		(268)		4,888

 

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:

• 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 Structured Credits portfolio. For the Debt Investments portfolio, the interest rate risk is relatively small compared to the Mismatch portfolio. The average interest rate VaR was EUR 370,000 over 2008. The interest rate risk on the Residential Mortgage portfolio is hedged within small facilitating limits. The average interest rate VaR for this portfolio was EUR 303,000 over 2008. The Residual interest rate risk portfolio (also known as Corporate Treasury portfolio) contains the funding activities of the bank and the loans to counterparties. The interest rate risk of this portfolio is nearly fully hedged. The average interest rate VaR was EUR 488,000 over 2008.

 

 

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 our 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. 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
58

 

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 stress tested liquidity forecast 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 worldwide 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;
• Conservative assumptions for prepayments, callable funding and collateral cash-out flows (payments from CSAs) are made;
• A conservative liquidity buffer is maintained for intraday payments;
• A government-guaranteed issue of EUR 1.5 billion in February 2009 and a conservative amount of expected retail savings proceeds are included; and
• A committed liquidity facility that is available to NIBC until May 2009 is excluded.

 

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

 

In the light of these projections, and NIBC’s continued access to the guaranteed funding scheme of the state of the Netherlands through to 31 December 2009, 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 show the maturity calendar of the Consolidated Balance Sheet (assets and liabilities) at 31 December 2008. The maturity table of the assets is based upon the fair value (discounted cash flows) for those assets which are classified as Fair Value through Profit or Loss or Available for Sale. The maturity table of the liabilities is based upon undiscounted cash flows. Financial liabilities at Fair Value through Profit or Loss are therefore restated to nominal amounts. These tables exclude cash flows from derivatives. Note 28 to the Consolidated Financial Statements shows the cash flow table of the derivatives.

 

Consolidated Balance Sheet, 31 December 2008
in EUR millions		Not dated		Receivable on demand		Due within 3 months		Due between 3 and 12 months		Due between 1 and 5 years		Due after 5 years		Total
Assets
Financial assets at amortised cost
Cash and balances with central banks		-		1,113		-		-		-		-		1,113
Due from other banks		-		1,624		31		12		103		-		1,770
Loans and Receivables
Loans		-		-		335		175		2,530		3,263		6,303
Debt investments		-		-		1		39		223		475		738
Securitised loans		-		-		7		-		-		623		630
Financial assets at available for sale
Loans		-		-		-		-		-		-		-
Equity investments		108		-		-		-		-		-		108
Debt investments		-		-		-		-		7		28		35
Financial assets fair value through profit or loss (including trading)
Loans		-		-		9		-		728		399		1,136
Residential mortgages own book		-		-		15		18		107		6,061		6,201
Securitised residential mortgages		-		-		1		1		10		5,238		5,250
Debt investments		-		-		-		12		492		137		641
Structured investments		-		-		67		555		457		-		1,079
Investments in associates		188		-		-		-		-		-		188
Investments in associates (equity method)		40		-		-		-		-		-		40
Intangible assets		44		-		-		-		-		-		44
Property, plant and equipment		102		-		-		-		-		-		102
Investment property		30		-		-		-		-		-		30
Current tax		-		-		-		6		-		-		6
Deferred tax		-		-		-		-		-		-		-
Other assets		-		-		-		80		-		-		80
Total assets (excluding derivatives)		512		2,737		466		898		4,657		16,224		25,494

 

Consolidated Balance Sheet, 31 December 2008
in EUR millions		Not dated		Payable on demand		Due within 3 months		Due between 3 and 12 months		Due between 1 and 5 years		Due after 5 years		Total
Liabilities
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 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 liabilities		-		-		-		158		-		-		158
Current tax		-		-		-		-		-		-		-
Deferred tax		-		-		-		-		39		-		39
Employee benefit obligations		-		-		-		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 interest rate cash flows		-		1,238		3,363		3,682		8,514		10,677		27,474

 

The following tables show the maturity calendar of the Consolidated Balance Sheet (assets and liabilities) at 31 December 2007. The maturity table of the assets is based upon the fair value (discounted cash flows) for those assets which are classified as Fair Value through Profit & Loss or Available for Sale. The maturity table of the liabilities is based upon undiscounted cash flows. Financial liabilities at Fair Value through Profit & Loss are therefore restated to nominal amounts. These tables exclude cash flows from derivatives. Note 28 to the Consolidated Financial Statements shows the cash flow table of the derivatives.

 

Consolidated Balance Sheet, 31 December 2007
in EUR millions		Not dated		Receivable on demand		Due within 3 months		Due between 3 and 12 months		Due between 1 and 5 years		Due after 5 years		Total
Assets
Financial assets at amortised cost
Cash and balances with central banks		-		874		-		-		-		-		874
Due from other banks		-		684		2,418		5		38		-		3,145
Loans and Receivables
Loans		-		-		570		97		423		704		1,794
Debt investments		-		-		-		-		-		-		-
Securitised loans		-		-		-		-		-		638		638
Financial assets at available for sale
Loans		-		-		231		337		2,144		2,452		5,164
Equity investments		144		-		-		-		-		-		144
Debt investments		-		-		-		-		15		296		311
Financial assets fair value through profit or loss (Including trading)
Loans		-		-		-		8		53		1,313		1,374
Residential mortgages own book		-		-		11		14		87		5,173		5,285
Securitised residential mortgages		-		-		2		2		17		6,335		6,356
Debt investments		-		-		155		133		439		1,602		2,329
Structured investments		-		-		70		371		618		153		1,212
Investments in associates		147		-		-		-		-		-		147
Investments in associates (equity method)		44		-		-		-		-		-		44
Intangible assets		-		-		-		-		-		-		-
Property, plant and equipment		72		-		-		-		-		-		72
Investment property		1		-		-		-		-		-		1
Current tax		-		-		-		40		-		-		40
Deferred tax		-		-		-		-		-		-		-
Other assets		-		-		-		153		-		-		153
Total assets (excluding derivatives)		408		1,558		3,457		1,160		3,834		18,666		29,083

 

 

Consolidated Balance Sheet, 31 December 2007
in EUR millions		Not dated		Payable on demand		Due within 3 months		Due between 3 and 12 months		Due between 1 and 5 years		Due after 5 years		Total
Liabilities
Financial liabilities at amortised cost
Due to other banks		-		607		1,966		901		1,042		184		4,700
Deposits from customers		-		292		284		206		364		370		1,516
Own debt securities in issue		-		-		1,290		2,590		4,975		180		9,035
Debt securities in issue related to securitised mortgages		-		-		22		-		-		7,192		7,214
Financial liabilities fair value through profit or loss (Including trading)
Own debt securities in issue		-		-		26		67		92		33		218
Debt securities in issue structured		-		-		360		223		1,595		1,942		4,120
Other liabilities		-		-		-		244		-		-		244
Current tax		-		-		-		-		-		-		-
Deferred tax		-		-		-		-		4		-		4
Employee benefit obligations		-		-		-		5		6		-		11
Subordinated liabilities
Amortised Cost		-		-		-		8		55		173		236
Fair Value through Profit or Loss		-		-		-		10		48		469		527
Total liabilities (excluding derivatives)		-		899		3,948		4,254		8,181		10,543		27,824
Estimated contractual interest cash flows		-		-		299		749		2,803		2,225		6,075
Total liabilities (excluding derivatives, including estimated interest rate cash flows)		-		899		4,247		5,003		10,984		12,768		33,899

	Capital management
59

 

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 our 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-I 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 our capital allocation and usage process, assisting us in allocating our 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 investment 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 investment 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 bank-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 structured credits 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 structured credits) or is not part of Basel II Pillar I 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 calculates the amount of economic capital usage of each business based on the risk of its activities.

• For the corporate loan portfolios, which use 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 investment 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;
• For the Investment Management portfolios, NIBC calculates economic capital usage for mezzanine investments 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 3 ‘pillars’:

• Pillar 1 describes the capital adequacy requirements for 3 risk types; Credit risk, Market risk and Operational risk;
• Pillar 2 describes the additional Supervisory Review Process (SREP) where regulators analyse the internal capital adequacy process of the individual banks;
• Pillar 3 displays the required risk reporting standards, supporting additional market discipline in the international capital markets.

 

Under Basel II, 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 Rating Based (AIRB) approach as further specified in Basel II for the majority of its business. As of 1 January 2008, NIBC has started using the AIRB. A small residue of exposures is measured on the standardised approach. For market risk, NIBC has adopted an internal model VaR approach. NIBC has adopted the standardised approach for measuring operational risk.

 

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 2008 on its website in the course of 2009.

 

The following table displays the composition of regulatory capital as at 31 December 2008 and 31 December 2007. NIBC complied with the DNB’s Basel II capital requirements.

 

 

Regulatory capital as at 31 December
IN EUR millionS		2008		2007		2007
		Basel II		Basel II		Basel I
		Actual		Pro-forma		Actual
Tier-I
Called up share capital		80		80		80
Share premium		238		238		238
Deduction of own shares (Treasury shares)		0		0		0
Eligible reserves		1,175		1,073		1,073
Net profit		92		98		98
Minority interests		17		11		11
Deduction of certain securitisation exposures not included in risk-weighted assets		(13)		(28)		-
Deduction excess of expected losses over impairment allowances		(39)		(25)		-
Core Tier-I capital		1,550		1,447		1,500
Innovative hybrid Tier-I capital		130		136		136
Non-innovative hybrid Tier-I capital		229		220		220
Total Tier-I capital		1,909		1,803		1,856
Tier-2
Reserves arising from revaluation of property and unrealised gains on Available for Sale equities		43		78		78
Qualifying subordinated liabilities
Undated loan capital		-		6		6
Dated loan capital		268		302		302
Deduction of certain securitisation exposures not included in risk-weighted assets		(13)		(28)		-
Deduction excess of expected losses over impairment allowances		(39)		(25)		-
Total Tier-2 capital		259		333		386
Deduction of certain securitisation exposures not included in risk-weighted assets		-		-		(160)
Total capital resources		2,168		2,136		2,082

 

 

	Subsequent events
60

 

On 10 February 2009 NIBC issued a three-year senior unsecured bond of EUR 1.5 billion under the Dutch State’s Credit Guarantee Scheme. On 30 March 2009 NIBC issued a five-year senior unsecured bond of EUR 1.5 billion under the Dutch State’s Credit Guarantee Scheme. Both bonds were issued under NIBC’s European Medium Term Note programme.

 

	Profit appropriation
61

 

The profit appropriation is included in the Other Information.