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Trust
ANNUAL REPORT 2004
REPOR
T
2004
ENCOUNTER
EXPLORE
TRUST
PARTNERSHIP
Annual
Report
2004
NIBCapital aims to be a leading Merchant Bank in partnership with our clients in Northwest Europe and with our global clients in specific industry sectors. Our key assets are our people, capital and reputation. Our success depends on providing excellent services to our clients and maintaining an impeccable reputation founded on our business principles.
NIBCapital’s Business Principles
•
OUR PEOPLE ARE OUR FIRM.
•
WE AIM TO PROVIDE SUPERIOR SERVICE
TO OUR CLIENTS.
•
WE PURSUE EXCELLENCE IN OUR
PARTNERSHIPS.
•
WE SEEK TO PROVIDE OUTSTANDING RETURNS.
•
WE CONSIDER TRUST FUNDAMENTAL TO LONG
LASTING RELATIONSHIPS WITH OUR CLIENTS.
•
WE ARE FULLY AWARE OF OUR CORPORATE
SOCIAL RESPONSIBILITY.
Mission
Statement
3 Mission statement
5 Foreword - Trust
6 Business Model
8 Report of the Supervisory Board
18 Trust expressed by Joost Bicker Caarten
20 Report of the Managing Board
24 Trust expressed by Onno Boerwinkel
26 Results and Financial Position
34 Trust expressed by Inge van den Thillart
36 Risk Management
44 Trust expressed by Jan Verschoor
46 Review per Strategic Business Unit
56 Trust expressed by Wouter Jansen
58 Building Human Capital
60 Corporate Social Responsibility
61 Report of The Employees’ Council
62 Trust expressed by Jasper Krabbé
65 Annual Accounts 2004
99 Other Information
104 NIBCapital Organisation
106 Key figures
We made NIBCapital a stronger company in 2004. We continued to build on our aspiration to be a leading Merchant Bank in Northwest Europe and we accelerated the ascending line seen in 2003. We also continued to respond successfully to changing market conditions, as well as to the changing needs of our clients. However, markets remained difficult, as investor trust has been slow to return. Each new event that creates cynicism means that good companies must raise the bar even higher to set standards that rebuild trust. And that is why trust is the theme of our Annual Report this year.
In 2004 we had the pleasure of welcoming many new clients, who entrusted us with their business. Moreover, there was a strong increase in the innovative products and services we developed for clients. This gives us the confidence that we can successfully continue our quest to fulfill our aspirations. This Annual Report will give you a detailed view of how we executed on our business model this year and the steps we have taken to drive our growth initiatives for the future.
In addition, we would like to present six Dutch artists who were prepared to give an impression of their thoughts on trust. Their ideas have created intriguing pieces of work; from sculpture to glasswork, from photography to etching and from graphics to pastel. Finally, they show how precious relationships can be. But also how fragile they are, and that trust is essentially about just one thing - the absolute confidence of being able to rely on each other.
MICHAEL ENTHOVEN
CHAIRMAN OF THE MANAGING BOARD
NIBCapital’s excellent financial performance in 2004 underpins the success of its merchant banking strategy. NIBCapital substantially exceeded its ambitious 2004 financial targets, resulting in a record financial year. NIBCapital also accomplished most of its qualitative targets, which were given in the 2003 Annual Report.
These achievements include the improvement of relationships with clients, diversification of income sources, further strengthening of risk management disciplines and continuing investments in human capital and technology. Furthermore, NIBCapital intensified cooperation with its strategic partnerships and it realized several new partnerships.
ANNUAL ACCOUNTS AND DIVIDEND PROPOSAL
We hereby present the Annual Report 2004 which, in addition to the Report of the Managing Board, also includes NIBCapital’s 2004 Annual Accounts. These Annual Accounts were drawn up by the Managing Board and audited by PricewaterhouseCoopers Accountants N.V., who issued an unqualified opinion, dated 3 March 2005.The Supervisory Board proposes that you adopt the 2004 Annual Accounts as presented, without change. If you approve the Annual Accounts and the profit appropriation they specify, the result for the year, amounting to €175 million, will be distributed as cash dividend. In addition, NIBCapital will distribute€125 million cash dividend from other reserves. The Supervisory Board endorses the proposed dividend payments. We also propose that you discharge the Managing Board and the Supervisory Board for their respective management and supervision during the year.
PLENARY MEETINGS OF THE SUPERVISORY BOARD
The Supervisory Board met on eight occasions in 2004 to discuss such matters as the 2004 interim and full-year figures, the 2005 budget and the revised Medium Term Action Plan, risk and control related topics, the previously announced spin-off of NIB Capital Private Equity N.V., the composition of the Managing Board, new strategic partnerships, corporate governance including the implementation of the Dutch Corporate Governance Code, new Articles of Association and new charters for both the Supervisory Board and the Managing Board. The Annual Accounts, the auditor’s report to the Board and the management letter were discussed in the presence of the external auditor.
The majority of the discussions and decisions of the Supervisory Board were prepared in the five committees referred to below. The plenary meetings were attended by Mr. Stevens, Mr. Vrins, Mr. van den Goorbergh (all meetings), Mr. Groenenboom (seven meetings), Mr. Hulshoff (five meetings) and Mr. Lindenbergh (six meetings). On behalf of NIBCapital, all meetings were attended by the members of the Managing Board and by the Corporate Secretary.
The Supervisory Board held constructive discussions with the Managing Board and the two Shareholders, ABP (50%) and PGGM (50%), about the execution of the business model and the development of the financial results. Due to the better-than-expected financial performance, the existing Medium Term Action Plan has been evaluated. As a result of these discussions, the Supervisory Board and the Managing Board have decided to investigate the feasibility of several strategic options for NIBCapital, including an Initial Public Offering and a merger. The final outcome of this evaluation process is expected in the course of 2005. Members of the Supervisory Board and the Managing Board also consulted in committees of the Supervisory Board. Members of the Supervisory Board attended two consultation meetings between the Managing Board and the Employees’ Council and had separate discussions with the Employees’ Council about the profile of the Supervisory Board and the appointment of its members.
Report of the
CORPORATE GOVERNANCE
In the 2003 Annual Report, the Supervisory Board stated that NIBCapital supports the principles of the Dutch Corporate Governance Code (‘the Code’), although NIBCapital is a non-listed financial institution. Both in the meetings of the Supervisory Board and of its several committees, much attention has been paid to the implementation and impact of the Code. In close consultation between the Supervisory Board, the Managing Board and the Shareholders, a Policy Paper towards the Code has been finalized, as referred to in the Report of the Managing Board. This Policy Paper is available on the NIBCapital website. As a result of the implementation of the Code, several actions have been undertaken, such as an adjustment of the charters of the Supervisory Board, its committees and the Managing Board. The Supervisory Board emphasizes the importance of transparent and constructive cooperation between the Supervisory Board, the Shareholders, the Managing Board and Employees’ Council, as was the case in 2004.
MEETINGS OF THE COMMITTEES OF THE SUPERVISORY BOARD
The Supervisory Board is supported by five committees: the Risk Policy Committee, the Audit Committee, the Corporate Governance & Nominating Committee, the Strategic Committee and the Compensation & Management Development Committee.
THE RISK POLICY COMMITTEE
Members:Mr. J.H.M. Lindenbergh (Chairman) Mr. P.J. Groenenboom, and Mr. W.M. van den Goorbergh. Meetings:the Risk Policy Committee met four times in 2004.
Main topics:general lending policy and exposure to large borrowers; capital market positions; limits for and exposure to financial counterparties and countries; risk reports and provisions; opinions on individual transactions; the development of NIBC Petercam Derivatives N.V.; the charter of the Committee; and the education of its members.
Attendance:Mr. Lindenbergh, Mr. Van den Goorbergh (all meetings), Mr. Groenenboom (three meetings). On behalf of NIBCapital all meetings were attended by the Chief Risk Officer, the Managing Board member Financial Markets and the head of the BU Credit Risk Management. Furthermore, several other Managing Directors joined some of the meetings.
THE AUDIT COMMITTEE
Members:Mr. W.M. van den Goorbergh (Chairman), Mr. J.H.M. Lindenbergh, Mr. W.F.C. Stevens and Mr. C.A.Vrins
Meetings:the Audit Committee met six times in 2004.
Main topics:quarterly, semi-annual and annual financial reports, related press releases, and quarterly prices of Stock Appreciation Rights and Options; report to the Managing and Supervisory Board of PricewaterhouseCoopers including follow-up; 2005 budget and the revised Medium Term Action Plan; engagement letter and fee letter of the external auditor PricewaterhouseCoopers; International Financial Reporting Standards (IFRS); audit plan of PricewaterhouseCoopers and of the BU Internal Audit; progress reports of the BU Internal Audit; annual Internal Audit Report regarding ‘Regulation on Organisation & Control’ (‘Regeling Organisatie & Beheersing’) of the Dutch Central Bank; In Control Report; evaluation of the external and internal auditor, of the compliance-function and of the Audit Committee; the Dutch Corporate Governance Code; Information, Communication and Technology (ICT); the charter of the Audit Committee; and the education of its members.
Attendance:Mr. Van den Goorbergh, Mr. Vrins, Mr. Stevens (all meetings) and Mr. Lindenbergh (five meetings). On behalf of NIBCapital, all meetings were attended by the Chairman of the Managing Board, the Chief Financial Officer and the head of the BU Internal Audit & Compliance. Most meetings were also attended by other Managing Board members.
The external auditor, PricewaterhouseCoopers Accountants N.V., was also represented
at all meetings of the Audit Committee in 2004, including a part of one meeting without the members of the Managing Board present.
THE CORPORATE GOVERNANCE & NOMINATING COMMITTEE
Members:Mr. P.J. Groenenboom (Chairman), Mr. W.F.C. Stevens and Mr. C.A.Vrins Meetings:the Committee met four times in 2004.
Main topics:Implementation of the Dutch Code of Corporate Governance; new charters of the Supervisory Board including its profile; new charter of the Managing Board; new Articles of
Association; composition of the Managing Board; the charter of the Committee and the education of its members; and the appointment of the Vice-Chairman of the Supervisory Board.
Attendance:Mr. Groenenboom (three meetings), Mr. Stevens and Mr. Vrins (all meetings). On behalf of NIBCapital, all meetings were attended by the Chairman and Vice-Chairman of the Managing Board, the Chief Financial Officer, the head of the BU Legal Affairs and the Corporate Secretary.
Additionally, this Committee had three combined meetings with the Compensation & Management Development Committee about the appointments, performance evaluation, remuneration, and performance criteria of the Managing Board members and the other Managing Directors, as well as the determination of the total variable compensation pool.
THE STRATEGIC COMMITTEE
Members:Mr. W.M. van den Goorbergh (Chairman), Mr. J.H.M. Lindenbergh and Mr. W.F.C. Stevens. This committee is not a permanent committee, but is activated on occasion. On 5 August, 2004 the Supervisory Board decided to activate this committee temporarily in view of its decision to commence a strategic evaluation.
Meetings:the Committee met four times in 2004 to evaluate the Medium Term Action Plan and to consider strategic options for NIBCapital, including the possibility of an Initial Public Offering and a merger. In this process, the Strategic Committee and the Managing Board are supported by external advisors. Attendance:Mr. van den Goorbergh and Mr. Lindenbergh (all meetings), Mr. Stevens (three meetings). On behalf of NIBCapital, all meetings were attended by the Managing Board, some other Managing Directors and the Corporate Secretary.
THE COMPENSATION & MANAGEMENT DEVELOPMENT COMMITTEE
Members:Mr. C.A.Vrins (Chairman), Mr. M.J. Hulshoff and Mr. W.F.C. Stevens
Meetings:the Committee met seven times during 2004. Additionally, this Committee had three combined meetings with the Corporate Governance & Nominating Committee as mentioned above.
Main topics: the remuneration policy of NIBCapital in light of the Dutch Corporate Governance Code; funding and distribution of the total available pool for variable compensation (bonus and SARs); the total compensation for the individual Managing Board members and the other Managing Directors; the collective and individual performance targets which form the basis for the variable pay elements for this group; the future of the SAR plan in the light of a possible “Liquidity Event” resulting in a new Deferred Cash Plan for 2005; an initial outline of a Liquidity Event Plan (LEP); the charter of the Committee; various market benchmark reports for Managing Directors and specific SBUs; the performance and remuneration peer group of NIBCapital; the criteria and proposals for promotion to Managing Director as well as other Management Development aspects.
Attendance:Mr. Vrins, Mr. Stevens (all meetings) and Mr. Hulshoff (eight meetings). On behalf of NIBCapital, all meetings were attended by the Chairman of the Managing Board and a representative of the BU Human Resources with the Chief Financial Officer attending on a few occasions.
COMPOSITION OF THE SUPERVISORY BOARD
On 12 November, 2004 Mr. J.H.M. Lindenbergh was appointed Vice-Chairman of the Supervisory Board. Members of the Supervisory Board do not have any other relation with NIBCapital, and are therefore independent. The Supervisory Board adequately addressed potential conflicts of interest with NIBCapital transactions.
COMPOSITION OF THE MANAGING BOARD
As a result of the spin-off of NIB Capital Private Equity N.V. Mr. G.V.H. Doeksen resigned from the Managing Board on 1 April, 2004. On that same date, Mr. A.L.V. Dijkstra and Mr. J.L. van
Nieuwenhuizen were appointed by the Annual General Meeting of Shareholders as members of the Managing Board of NIB Capital N.V.
The Supervisory Board would like to thank the Managing Board, the staff, and the Employees’ Council of NIBCapital for their commitment to NIBCapital and their contribution to the excellent performance of NIBCapital in 2004.
THE HAGUE, 3 MARCH 2005
THE SUPERVISORY BOARD
WILLEM F.C. STEVENS, Chairman
J. HESSEL M. LINDENBERGH, Vice-Chairman WIM. M.VAN DEN GOORBERGH
PETER J. GROENENBOOM MAARTEN J. HULSHOFF CEES A.VRINS
MEMBERS OF THE SUPERVISORY BOARD
MR.W.F.C. STEVENS, 1938, DUTCH, CHAIRMANMember of the Supervisory Board since 2001; second term expires in 2007. Senior Counsel of Baker&McKenzie, former member of the Senate (1991-2003). Background:legal and fiscal counsel.
Member of the Supervisory Boards of Aegon N.V., Schiphol Group N.V., TBI Holdings B.V., AZL N.V. and Ermenegildo Zegna International N.V.
MR. J.H.M. LINDENBERGH, 1943, DUTCH,VICE-CHAIRMAN
Member of the Supervisory Board since 2004; first term expires in 2008. Former board member of ING Groep N.V.
Background:international banking and finance.
Member of the Supervisory Boards of Deutsche Börse AG, DHV Holding N.V., Gamma Holding N.V., Koninklijke Numico N.V., Petroplus International N.V., Reggeborgh Groep, Chairman of the Supervisory Board of Spyker Cars N.V., Member Board of Trustees University of Amsterdam, Senior Counsel Boer & Croon.
MR.W.M.VAN DEN GOORBERGH, 1948, DUTCH
Member of the Supervisory Board since 2003; first term expires in 2005.
Former Vice-Chairman and CFO of the Executive Board of Rabobank Nederland. Background:international banking and finance.
Member of the Supervisory Boards of Bank Nederlandse Gemeenten, Athlon Holding N.V., TIAS Business School and Chairman of the Supervisory Board of De Welten Groep. MR. P.J. GROENENBOOM, 1935, DUTCH
Member of the Supervisory Board since 2001; second term expires in 2007. Former Chairman of the Executive Board of Internatio-Müller N.V. Background:industrial management
Member of the Supervisory Boards of Imtech N.V., Stichting tot Beheer van Preferente Aandelen in IHC Caland N.V., KIT, Chairman of the Supervisory Boards of Philips Electronics Nederland B.V., Electrabel N.V., Tapijtfabriek H. Desseaux N.V., Fonds voor de Topsport, Q-park N.V.
MR. M.J. HULSHOFF, 1947, DUTCH
Member of the Supervisory Board since 2001; first term expires in 2005. Chairman of the Managing Board of Rodamco Europe N.V.
Background:international banking, insurance and real estate. Member of the Supervisory Board of TEB N.V.
MR. C.A.VRINS, 1940, DUTCH
Member of the Supervisory Board since 1999; second term expires in 2005. Former Chairman of ABVA KABO FNV.
Background:governmental management.
Remuneration
Report
INTRODUCTIONThis report informs shareholders of the remuneration arrangements for the Managing Board and the Supervisory Board of NIBCapital. It comprises three parts. The first part outlines the remuneration policy and practices for 2004 and provides details of the remuneration payable to the Managing Board with respect to the performance of 2004 (including performance-related remuneration which is paid in 2005). The second part of the report describes the remuneration policy for 2005, which will be submitted for adoption to the Annual General Meeting of Shareholders. The third part provides details of the remuneration arrangements for the Supervisory Board.
NIBCapital believes in the benefits of a transparent and coherent corporate governance structure. Therefore, the remuneration report meets the standards of the Code and uses the “apply or explain” approach. This remuneration report will be published on the NIBCapital website.
I. REMUNERATION POLICY AND PRACTICES 2004
The objective of the remuneration policy of NIBCapital is to attract, retain and motivate highly qualified staff, consistent with NIBCapital’s ambition to be a leading Merchant Bank in Northwest Europe. The total remuneration levels of the Managing Board are based on a market comparison with the Labour Market Peer Group, details of which can be found on page 16.
Remuneration principally consists of base salary and variable compensation. The variable compensation is performance-related and comprises both a short term bonus as well as a long term deferred compensation element in the form of Stock Appreciation Rights (SARs). Approximately two-thirds of the total
compensation of the Managing Board in 2004 (excluding pension) consists of variable compensation. The emphasis on the variable part of the remuneration package reflects the high performance culture at NIBCapital and is, broadly, in line with the compensation policies in our Labour Market Peer Group. The remuneration policy reflects the business strategy which is focused on the transformation of NIBCapital into a leading Merchant Bank and the creation of long term shareholder value.
BASE SALARY
Base salary levels of the Managing Board were not adjusted in 2004, with the exception of the base salary of Mr. Dijkstra. This exception was made to bring his salary in line with the compensation levels of the other Managing Board members. The base salary of Mr. Van Nieuwenhuizen was not adjusted following his appointment to the Managing Board in 2004.
VARIABLE COMPENSATION
Each year, the variable compensation pool is determined on the basis of a combination of NIBCapital’s total compensation ratio (total personnel-related expenses as a percentage of total revenue) and
NIBCapital’s pay-out ratio (total variable compensation as a percentage of the operating result before tax and pay-out of variable compensation) Variable compensation consists of a short term bonus and long term deferred compensation through the use of SARs.
BONUS
Mr. Enthoven and Mr. Stegmann have been statutory members of the Managing Board for the entire year 2004. The short term bonus for statutory members of the Managing Board is determined on the basis of the balanced scorecard methodology, which includes corporate financial (50%) and individual (50%) performance criteria. These financial targets are: operating profit, return on net asset value and efficiency ratio. The specific details of targets are not disclosed as these qualify as commercially sensitive information. Targets are revised annually to ensure that they remain stretching but realistic.
Mr. Enthoven and Mr. Stegmann can earn a discretionary short term bonus of up to 75% of their base salary upon 100% realisation of the score card metrics. However, in view of NIBCapital’s extraordinary
performance this year, the Supervisory Board decided to exercise its discretion to grant Mr. Stegmann a short term bonus for 2004 of 100% of his base salary for that year. In respect of Mr. Enthoven it was decided to grant him a discretionary short term bonus for 2004 of 75% of his base salary for that year.
Mr. Dijkstra and Mr. Van Nieuwenhuizen have been appointed statutory members of the Managing Board in the course of 2004. For 2004, their variable compensation was determined on the basis of the then applicable balanced scorecard methodology which includes corporate financial (25%), SBU financial (25%) and individual performance criteria (50%). The amount of Mr. Dijkstra’s short term bonus is discretionary whereas Mr. Van Nieuwenhuizen can earn a discretionary short term bonus of up to 75% of his base salary upon 100% realisation of the score card metrics. However, in view of NIBCapital’s extraordinary performance and the relative performance of their respective SBUs, the Supervisory Board decided to exercise its discretion and grant both Mr. Van Nieuwenhuizen and Mr. Dijkstra for 2004 a short term bonus equivalent to 100% of their base salary for that year.
These bonuses also recognise the shared responsibility of the Managing Board for the successful overall transformation of NIBCapital in the past few years, in particular the significant improvement in the management of risk which have started to show the intended results, the change of the Corporate Finance SBU from a more traditional lending business to a full-service merchant banking unit with a significantly larger percentage of non-interest income, and the ongoing development of the Financial Markets SBU, more specifically the creation of a successful Investment Management business.
DEFERRED COMPENSATION
Deferred compensation is normally provided through SARs. For the Managing Board, the target annual expected economic value of the SAR grant is, on average, 100% of base salary for Managing Board members and 90% of base salary for the Chairman. The number of SARs granted in any year is subject to the same balanced scorecard methodology used for the bonus.
Based on the SAR plan, Managing Board members are entitled to a pay-out upon exercise of the SAR, in cash, equal to the value increase of the SARs during the 5-year SAR term. The changes in value of the SARs are linked directly to NIBCapital’s Net Asset Value (“NAV”) development during the performance period. The SAR only pays out in case of an NAV increase. Each SAR grant has a term of five years, after which either the benefit is paid to the member of the Managing Board, or the SARs lapse in case NAV has not met the threshold level.
Following the approval of the financial figures each year by the Supervisory Board, the SARs may be exercised during the open periods. The taxes due are for the account of the member of the Managing Board. There are no best practice provisions explicitly referring to SAR plans in the Dutch Corporate Governance Code. NIBCapital considers the plan to be performance-related, as the pay-out only occurs based on increased NAV performance. The management of NIBCapital contributes directly to NAV performance and this measure is not influenced by market conditions.
Over the 5-year SAR term, twenty percent of the SAR grant vests each year following the date of grant, provided the Managing Board member is still employed at such time. NIBCapital considers a vesting schedule comprising five years appropriate, as it enhances the Managing Board member’s long-term commitment to the company and supports its main business objective of creating long term value for shareholders.
Towards the end of the year and following the announcement that a Liquidity Event might take place in 2005, the Compensation & Management Development Committee discussed the appropriateness of the SAR plan as an effective long term incentive component under these changed conditions. Following these discussions and subsequent to obtaining external advice, the Compensation & Management Development Committee recommended to the Supervisory Board to suspend the SAR plan in 2005 (for awards based on performance in 2004) and replace it with a Deferred Cash Plan, based on a number of reasons:
• The possibility that, as a result of the extraordinary performance and value creation over the last few years, the internal cost limits agreed for the SAR plan would be exceeded;
• The expected Liquidity Event;
• The accounting treatment of SAR plans under new IFRS reporting standards.
It was felt that at this specific moment in time granting SARs with a 5-year performance outlook would not be the appropriate long term incentive. In addition, the retention of key individuals is now more important than ever. The expected value which was originally accrued for the financing of the SAR plan will now be used to fund the Deferred Cash Plan.
Under the Deferred Cash Plan, payment of the (conditionally) granted cash amount will be deferred until respectively the first, second and third anniversary of the date of grant, when 1/3 of the granted amount will accrue to the participant, provided the participant is still employed with NIBCapital.
TOTAL CASH COMPENSATION
Compared to 2003 total cash compensation (base salary plus annual bonus plus deferred cash bonus) for Mr. Enthoven has increased by 22%, for Mr. Stegmann and Mr. Van Nieuwenhuizen by 14% and for Mr. Dijkstra by 6%.
PENSION
Mr. Enthoven has relinquished his rights to participate in the NIBCapital pension plan for the Managing Board. With respect to Mr. Stegmann and Mr. Dijkstra, a “final pay” pension arrangement applies (annual accrual of 2%) up to a salary limit of€278,000 for Mr Dijkstra, respectively €350,000 for Mr. Stegmann. Furthermore, a defined contribution arrangement is applicable with respect to the salary above these amounts, with a cap on the basis for pension contributions at €400,000. Mr. Van Nieuwenhuizen is entitled to a defined benefit pension arrangement up to €77,347 (annually adjusted for general wage increases in line with the Collective Labour Agreement for Banks in the Netherlands) under the NIBCapital employee pension plan, and an additional defined contribution arrangement with a maximum salary limit of
€400.000. All premiums are paid by NIBCapital. The pensionable age for all Managing Board members is 62 years.
LOANS
As a policy, the Company does not provide loans to its executives. As per 31 December 2004 there are no loans outstanding.
CONTRACTS OF EMPLOYMENT
The contracts for the current members of the Managing Board are entered into for an indefinite period and provide for a notice period of two months upon termination by the Company, and a notice period of one month upon termination by the individual. With respect to Mr. Van Nieuwenhuizen, a notice period of four months upon termination by the Company is applicable, and two months upon termination by the individual. On departure at the request of the Company, severance pay is agreed for Mr. Enthoven, Mr. Stegmann and Mr. Dijkstra amounting to 1.5 months’ gross salary (including the average bonus of the last three years) for each full year of service until the age of 50, and 2 months gross salary per full year of service after that; with a minimum severance arrangement amounting to 12 months gross salary (including the average bonus of the last three years). Mr. Van Nieuwenhuizen has no severance arrangements in place. EXPENSE ALLOWANCE
All Managing Board members are entitled to an expense allowance which covers specifically identified minor expenses that can no longer be directly claimed from NIBCapital.
OTHER EMOLUMENTS
Like all employees, Managing Board members are entitled to a subsidy towards the cost of medical insurance and mortgage interest paid.
FORMER MEMBERS OF THE MANAGING BOARD
Mr. Doeksen is no longer a member of the Managing Board of NIBCapital and, in light of his departure, received a compensation for outstanding SAR rights granted and provided for prior to 2004 amounting to
€263,344 in 2004, in line with the arrangements agreed with all other employees whose employment was transferred to AlpInvest Partners.
II. REMUNERATION POLICY 2005
The Compensation & Management Development Committee recognises the importance of having a consistent approach to the remuneration policy and practices of NIBCapital. However, it equally feels it is important to respond adequately to external as well as internal developments. The announcement that a Liquidity Event might take place in 2005, the introduction of IFRS and the implications of the Dutch Corporate Governance Code have led the Committee to modify the remuneration policy for 2005. In summary, the remuneration policy for the Managing Board of NIBCapital is based on five principles: • Total target remuneration levels should reflect market median remuneration levels of a labour market
peer group consisting of relevant (divisions of) financial institutions active in the Dutch, German and British financial markets. In the event of superior performance of the Managing Board, total remuneration levels should be broadly in line with 75%-ile (3rd Quartile) levels of the labour market peer group; • Base salary levels of the Managing Board should be broadly in line with market median levels of the
labour market peer group;
• Annual base salary levels of the Managing Board members are equal, with the exception of the Chairman;
• In the event of target performance a discretionary bonus of up to 75% of base salary can be awarded but in the case of superior performance and at the discretion of the Supervisory Board a bonus of up to 100% of base salary can be awarded to any Managing Board member;
• With regard to deferred compensation, a discretionary Deferred Cash Bonus of up to 100% of base salary can be awarded in line with the new Deferred Cash Plan which replaces the previous SAR plan for 2005. LABOUR MARKET PEER GROUP 2005
In order to be able to recruit the right calibre of executives for the Managing Board, and to secure long-term retention of current Managing Board members, NIBCapital has taken external reference data into account in determining compensation levels. For this purpose a labour market peer group was defined consisting of relevant (divisions of) financial institutions active in the Dutch, German and British market, with which NIBCapital competes for talent and business.
The companies were selected based on strategic considerations (e.g.: comparable clients, geographical focus, service and strategy) and tactical considerations (e.g. comparable activities such as Corporate Finance, Financial Markets, and Asset/Investment management for third parties). The labour market peer group consists of the following financial institutions:
ABN AMRO Wholesale Clients SBU Barclays Capital
Bear Stearns, London
BNP Paribas, Corporate and Investment Banking Deutsche Bank, Corporate & Investment Banking Dresdner Kleinwort Wasserstein
Fortis Merchant Bank ING Bank Wholesale Kempen & Co Rabo Securities
BASE SALARY
In 2005, no adjustments will be made to the base salary levels of the Managing Board. BONUS
With respect to the bonus for 2005, the performance measures applying to Mr. Van Nieuwenhuizen and Mr. Dijkstra have been aligned with the performance measures that already applied to Mr. Enthoven and Mr. Stegmann in 2004. Consequently, the short term bonus for all Managing Board members is awarded on the basis of a consistent balanced scorecard methodology, supported by corporate financial (50%) and individual (50%) performance criteria. For 2005 the agreed criteria are: operating profit, efficiency ratio, comprehensive return on net asset value and non-interest income ratio. Specific details are not disclosed as these are considered to be commercially sensitive.
This change in policy underpins a shift in strategic focus of NIBCapital, from an emphasis on
maximisation of results of the separate Business Units to an increased focus on the synergy between the Business Units, in particular between those of Corporate Finance and Financial Markets. Alignment of the performance measures used for each Managing Board member will emphasise and encourage this strategic shift. DEFERRED COMPENSATION
The Compensation & Management Development Committee have agreed to suspend the current SAR plan for the performance year 2004, for awards to be made in February 2005, and to replace it with a Deferred Cash Plan. The Compensation & Management Development Committee will investigate alternative arrangements for long term incentive plans and will take decisions as soon as practically possible in 2005. CONTRACTS OF EMPLOYMENT
The Company does not consider it to be appropriate to adjust existing contractual agreements that were put in place prior to the publication of the Dutch Corporate Governance Code. In future, NIBCapital will comply with the provisions of the Code when new appointments to the Managing Board occur.
III. REMUNERATION SUPERVISORY BOARD
The annual remuneration for the Chairman of the Supervisory Board is €51,000, for the Vice-Chairman
€42,500 and for the members it amounts to €34,000. Membership of the Risk Policy Committee and Strategic Committee (operational as of 5 August 2004) results in an annual fee of€11,500 whereas membership of the Corporate Governance & Nominating Committee results in an annual fee of
€5,000. With effect from 1 July 2004 and in recognition of their increased workload the annual fee for members of the Compensation & Management Development Committee has been increased to
€10,000. As of the 1 January 2005 the fee for members of the Audit Committee will equally increase to
€10,000 annually. To cover minor expenses an expense allowance of€5,000 is awarded.
In accordance with the Dutch Corporate Governance Code, the Company does not award performance related pay to the members of the Supervisory Board. As a policy, NIBCapital does not provide stock options, shares or loans to members of the Supervisory Board. Furthermore, no Supervisory Board member holds shares or stock options in NIBCapital on a personal basis. There are no loans outstanding.
“My work is frozen facets of emotions, that are partly generated in an explosive manner – like with the fast process of glass blowing – and partly come into being in a thoughtful and well-planned out manner, similar to the time-consuming process of wood and bronze work. The position of the pieces underlines the meaning. Sometimes they are positioned firmly on a surface, or perhaps they hang as it were on a silk thread.”
JOOST BICKER C AARTEN
Trust
2004, BLOWN GLASS, SHOELACE, FLEXIBLE STEEL, 72X35X5 CMJoost Bicker Caar ten (1962, Leiden) completed his education at the City Academy in Maastricht (1982-1987) and at the glass design depar tment of the Gerrit Rietveld Academy in Amsterdam (1987-1989). He has also followed numerous master classes in The Netherlands and abroad. His work has been included in the collections of the Gemeentemuseum in The Hague, the Glasmusea in Leerdam and the Musée des Beaux Ar ts in Gent. He also exhibits regularly in galleries and museums in the Netherlands and abroad.
Photo: Ad Hupkes and Joost Bicker Caar ten, The Hague
“Trust develops if you are prepared to investigate the limits, to take a good look at fears and to take risks. In art, it’s not harmony that is the focus for me, but the area next to the harmony. What’s interesting is that every figure generates an ‘after figure’; an emotional reflection, where the figure is shaped by the impression of the viewer. The way this glass object hangs on a string requires trust. Do I trust it, and why? Or perhaps I don’t, and where does the trust end?”
INTRODUCTION
The Managing Board is proud to report on this record year in NIBCapital´s history. Due to the strong growth of our results in 2003 and 2004, we have exceeded the financial targets, defined in our Medium Term Action Plan (2003-2007). This strong development underpins the view of the Managing Board that NIBCapital fulfils a clear client need: with our compact merchant banking business model we are an attractive option for an increasing number of clients.
MARKET CIRCUMSTANCES AND MARKET POSITION
Relatively weak economic conditions in Northwest Europe led to uncertainty and volatility in the corporate and financial markets in 2004. The less attractive risk return profile of the European stock markets resulted in an increasing demand for alternative investments, such as credits. A lack of supply of these alternative investments put continuing pressure on credit spreads. We expect this demand for alternative investments to continue. Potentially better economic conditions may lead to a more balanced supply and demand credit curve in the course of 2005, resulting in a more appropriate risk reward. NIBCapital has optimally benefited from these market circumstances. We believe that we perform at our best in volatile and uncertain markets, because of our in-depth knowledge of clients and markets, our selective focus, diversified income sources and strict risk management discipline. We are able to respond quickly and reallocate our resources if necessary. Our client and product franchises have strengthened in 2004, despite uncertain market circumstances and increased competition in most markets. We have been able to improve our league table positions in several segments, such as the Dutch M&A market, the Dutch ABS, MBS, CDO and CLO market, the international shipping and oil services industry, and the leveraged finance and PFI markets in the Benelux and the UK.
STRATEGY
Our strategy is derived from our clients' needs, our core competencies and our business values and principles. We focus on regional origination with a primary focus on Northwest Europe and global distribution, with the aim of optimising the use of our economic capital. Our human capital, as our core asset, is key in executing our strategy.
Due to the better-than-expected financial performance, the existing Medium Term Action Plan 2003-2007 has been evaluated and adjusted with new and higher financial goals for 2005-2007. Consequently, the Managing Board and the Supervisory Board decided to evaluate strategic alternatives for NIBCapital, including an Initial Public Offering and a merger. The final outcome of this evaluation process is expected in the course of 2005.
CLIENTS
Our goal is to add value for our clients and to seek high quality client relationships. Our key success factor is our cross-functional client focus. We offer this through a fully integrated business model managed with four commercial Strategic Business Units (SBUs): Corporate Finance, Principal Investments, Financial Markets and Investment Management. Through a matrix organization model we combine client, market, and product expertise and creativity, and offer our clients integrated financial solutions to their complex issues. Our challenge is to anticipate our client’s needs, by understanding their business and the markets they operate in, and by reacting adequately to new developments in these industries. Our compact and professional organization, including a bank with a solid credit rating, puts us in a unique position to take advantage of growth opportunities in selected markets. Our innovative and
entrepreneurial strategic partnerships add significant value to our business proposition.
Report of the
CORE COMPETENCIES
NIBCapital has been building its merchant banking business model on a longstanding tradition of understanding and managing risk. Our impeccable reputation in the market is crucial to both our origination and distribution activities. This has resulted in strong client and product franchises in selected markets. We continue to expand our competencies geographically, primarily through organic growth. HUMAN CAPITAL
Our people are our firm. We want to create a challenging and rewarding environment for our people, while upholding our business values of integrity, respect and professionalism, and our business principles. We constantly invest in our staff, through talent development programmes, state-of-the art evaluation processes and thorough selection processes, and by offering competitive compensation packages, including a substantial performance-related variable component. We aim to be an employer of choice.
FINANCIAL RESULTS 2004
NIBCapital had an excellent year in 2004, resulting in a net profit of€175 million, an increase of 136 % compared to the €74 million reported in the high performing year 2003. All our business lines showed an upward trend in performance both in terms of revenues and profits. We combined strong revenue growth with strict risk management and cost discipline. We also realized most of our non-financial targets for 2004 as explained below.
By starting several new activities, adding a number of new strategic partnerships, and continuing to invest in human capital and technology, we created a solid foundation for the further prosperous growth of the firm. For financial details and analysis, including the expected impact of the new IFRS reporting, we refer to the chapter Financial Results and to the Annual Accounts 2004.
NON-FINANCIAL TARGETS AND PERFORMANCE 2004
TARGETS 2004
• Strengthen the relationship with our clients
• Focus the expertise and innovative strength of all our people
• Further strengthen our risk management discipline
• Originate and distribute risk at an increasing velocity
• Continue to diversify our income sources
• Intensify the co-operation with our strategic partners
• Continue to invest in human capital
PERFORMANCE 2004
• Substantially more lead-financing and advisory mandates
• Growth of core client base and increased cross SBU client solutions
• Investments in risk systems and staff leading to a release of credit provisions
• Successful placement of several CLOs and CDOs in European and US markets, strong syndication performance
• New partnerships (Bear Stearns, NIBC Wealth Management, Finance Ideas), start financial markets business in Asia, increased investment management activities
• Successful development of strategic partnerships such as Harcourt Investment Consulting • Improved performance evaluation and talent
development system, start of analyst program and upgrade of staff by new hiring across the firm
CORPORATE GOVERNANCE
As stated in our 2003 Annual Report, the Managing Board values the work carried out by the Corporate Governance Committee Tabaksblat, which resulted in a new Dutch Corporate Governance Code. We believe in a transparent and coherent corporate governance structure. Our corporate governance model is based on constructive and transparent cooperation between our Shareholders, our Supervisory Board with its five committees, our Managing Board with its several functional committees, and the Employees´ Council. This cooperation is laid down in a governance framework of charters, with clear guidelines for the assignment of duties and responsibilities, (financial) reporting, risk management and internal control, compliance, and remuneration policy.
In close cooperation with the Supervisory Board and the Shareholders, we have defined the company policy towards the Code. This policy is laid down in a detailed Policy Paper, which is published on our website. NIBCapital applies all principles and best practices of the Code, with the exception of the following best practices:
• The employment contracts for the present members of the Managing Board remain unchanged. This means that NIBCapital does not comply with best practices II.1.1 (appointment for a maximum period of four years) and II.2.7 (severance pay maximized at a one year’s fixed salary). NIBCapital will apply these best practises for new members of the Managing Board. We refer to the Remuneration Report for the relevant details of the employment contracts of the Managing Board members.
• NIBCapital takes the position that it is not active as an institutional investor as defined in the Code. However, NIBCapital has decided that it will nevertheless adhere to the relevant principle. Taking into account the limited number of equity investments in listed companies we will report on our voting behaviour and policy on an annual basis rather than quarterly.
In 2004 we adjusted our charters and articles of association in order to comply with the Code. These adjustments and other implementation measures have been limited, as NIBCapital´s corporate governance structure and policy already met most of the principles and best practices before the implementation of the Code in 2004. Both this 2004 Annual Report and our company website include all requirements of the Code.
ORIGINAL GOALS (2003-2007)
• Double operating profit to €200 million
• Increase return on economic capital to at least 10%
• Maintain efficiency ratio below 40%
NON FINANCIAL TARGETS 2005
• Diversify and improve quality of income
• Increase non-interest income component of total income
• Increase investment management activities by establishing new investment funds • Evaluate and execute a number of new business initiatives
• Continue to invest in human capital and information technology • Improve efficiency and effectiveness of cost structure
REVISED GOALS (2005-2007)
• Grow sustainable net profit to more than
€ 200 million with moderate volatility • Comprehensive return on net asset value in
excess of 12% through the credit cycle
• Maintain efficiency ratio below 40%, adjusted for minority interests
COMPOSITION OF THE MANAGING BOARD
As a result of the spin-off of NIB Capital Private Equity N.V. Mr. G.V.H. Doeksen resigned from the Managing Board on 1 April, 2004. On that same date, Mr. A.L.V. Dijkstra and Mr. J.L. van Nieuwenhuizen were appointed by the Annual General Meeting of Shareholders as members of the Managing Board of NIB Capital N.V. COMMITTEE OF MANAGING DIRECTORS
NIBCapital's internal management model has been designed to support the merchant banking strategy, based on multi-disciplinary teamwork and transaction execution. The Committee of Managing Directors (CMD), comprises the four-man Managing Board and ten other Managing Directors, each responsible for a client or product (S)BU. In early 2005, the Supervisory Board approved the appointment of Mr. F. van Raab van Canstein and Mr. J. Besuijen as Managing Directors and new members of the CMD.
OWNERSHIP OF NIB CAPITAL BANK N.V.
In May 2004, NIB Capital N.V. acquired the 15% remaining shares of its main subsidiary NIB Capital Bank N.V. from the Dutch Government. This acquisition was already agreed upon by our Shareholders and the Dutch Government in 1999. NIBCapital now owns 99.99% of the legal and economic interest of NIB Capital Bank N.V.
OUTLOOK 2005
NIBCapital’s positioning for the coming years remains favourable as a result of our client-focused merchant banking business model. We see many opportunities for further growth. The positive development of the results in 2004 is a confirmation that our client strategy is effective. We will continue to execute our strategy as a Merchant Bank in order to realize our new medium term financial goals.
In view of market uncertainty and volatility, we prefer not to make any statements regarding NIB Capital’s net profit in 2005. On the basis of our growth plans we are confident about the development of the comprehensive return on net asset value in 2005.
The Managing Board would like to thank the clients of NIBCapital for their trust in our firm in 2004. As a client-oriented organization we will continue to pursue our mission to address our client needs creatively, professionally and effectively.
The Managing Board would like to express their gratitude to our staff for their enormous commitment and contribution to the excellent performance of NIBCapital in 2004.
THE HAGUE, 3 MARCH 2005
THE MANAGING BOARD
MICHAEL ENTHOVEN, Chairman JURGEN B.J. STEGMANN, Vice-Chairman ANTOINE L.V. DIJKSTRA
JAN L. VAN NIEUWENHUIZEN
Onno Boerwinkel:
“‘People at the lake’ is part of a whole series of pastel paintings: people sitting in shady surroundings around a lake in Italy. Everything shows that it’s a warm day coming to its end, connecting people and nature in harmony. ‘That the good things in life go on’ is the
main theme, the basso
continuothat people can trust. This means that everyone can take their place again the next day and simply continue where they
left off.Con tanta
fiducia, a cuore aperto…”
“For years, oil paint was a daily battle. To get it to dry faster, the ‘bother’ of the paintbrushes, turpentine and the imposing odour that you simply can’t avoid. No, I prefer pastel. What’s there is there; it’s dry immediately and what’s more, it’s scentless, free from unwelcome associations – this makes it neutral. Still, pastel is a very complex technique. But because of the stratification it makes possible , it’s rich in tone, texture and at the same time reliable.”
Onno Boerwinkel (Middelburg, 1950) studied at the Rijks Academy in Amsterdam (1970-1975). The painter and ar tist lives and works in Amsterdam and has had many successful exhibitions in museums and galleries, both in The Netherlands and abroad.
ONNO BOERWINKEL
In 2004, NIBCapital posted a net profit of€175 million, compared to €74 million in 2003.
This increase in net profit is the result of the focused execution of our merchant banking business model, our investments in human capital, our information technology systems, our cost-effectiveness and state-of-the-art risk management.
The net profit incorporates non-recurring income of€1 million, while the 2003 net profit included non-recurring income of€7 million. The non-recurring income is comprised of the transaction result of
€246 million on the spin-off of NIB Capital Private Equity N.V. and goodwill impairment based on the value of the remaining business of€245 million, as announced as a post balance sheet date in the 2003 Annual Report. The 2003 non-recurring income relates to discontinued business activities. The above-mentioned non-recurring items are not shown as extraordinary in the Annual Accounts. NIBCapital believes analysis should concentrate on recurring or structural revenues and expenses. The table below summarises NIBCapital’s operating income, operating expenses and net operating result as disclosed in the Annual Accounts and the restated structural figures.
Adjusted for-non-recurring results, amortisation of goodwill and cost price adjustments, the operating results was €212 million, compared with €124 million in 2003, an increase of 71%. All business lines showed substantial improvement in their performance.
Results and
Financial Position
HIGHLIGHTS 2004
• Net profit increases 136% to €175 million from €74 million • Operating income increases by 22% to €435 million • Efficiency ratio remains stable at around 38% • Very low level of provisions for credit risks in 2004 • Return on net asset value increases from 6.4% to 12.2%
• Broadening of activities leads to further diversification of revenues and improvement of the quality of the operating result
OPERATING RESULT ANNUAL ACCOUNTS
2004 2003 2004 2003
INCOME 435 358 681 398
EXPENSES 167 134 167 164
OPERATING RESULT 212 124 458 131
Shareholders’ equity before profit appropriation and proposed repayment from other reserves amounted to €1.9 billion, down 11% from 2003. The decline stemmed from dividend distribution and repayment of reserves to the shareholders, totalling €400 million, partly compensated by the profit for the year 2004 and fair market revaluation of equity participations and commercial property not used by NIBCapital. If the proposed distributions (as explained on page 32) are approved by the Annual General Meeting of Shareholders on 30 March 2005 the shareholders’ equity will amount to €1.6 billion.
OPERATING RESULT
The table below shows the details of NIBCapital’s operating result.
KEY FIGURES 2004 2003 CHANGE
NET PROFIT 175 74 136%
OPERATING RESULT 212 124 71%
TOTAL ASSETS 24,956 21,549 16%
ASSETS UNDER MANAGEMENT FOR THIRD PARTIES (*) 4,865 2,906 67%
SHAREHOLDERS' EQUITY (**) 1,868 2,092 -11%
TIER 1 RATIO NIBCAPITAL BANK (***) 10.7% 12.8%
AVERAGE NUMBER OF ACTIVE EMPLOYEES (FTE) 673 637 6%
(*) FOR COMPARISON PURPOSES 2003 FIGURES HAVE BEEN RESTATED
(**) BEFORE PROFIT APPROPRIATION AND REPAYMENT FROM SHARE PREMIUM AND OTHER RESERVES (***) AFTER PROPOSED DIVIDEND
in millions of euros
OPERATING RESULT 2004 2003 CHANGE
INTEREST 269 270 0%
COMMISSION 43 35 25%
RESULT FROM FINANCIAL TRANSACTIONS 90 21 329%
OTHER REVENUE 33 32 3%
OPERATING INCOME 435 358 22%
PERSONNEL EXPENSES 110 81 35%
OTHER ADMINISTRATIVE EXPENSES 46 43 7%
DEPRECIATION 11 10 11%
OPERATING EXPENSES 167 134 25%
VALUE ADJUSTMENTS TO RECEIVABLES -18 68 -127%
OPERATING RESULT BEFORE TAXATION 286 156 83%
TAXATION 74 32 131%
OPERATING RESULT 212 124 71%
OPERATING INCOME
In 2004, operating income increased 22% to €435 million. This increase reflects the focus of NIBCapital on more client and distribution related income. Interest margin remained flat while commission income and other revenues rose by 90% to €166 million. The increase in non-interest income from 25% to 38% of total income comprises the following items:
• An increase of commission income by 25% to €43 million. This increase stemmed mainly from a growth in assets under management to €4.9 billion.
• Result from financial transactions more than tripled to €90 million as result of higher income from structured credit trading, results on loan portfolio trades, active roles in distressed debt restructuring and increased income from client-driven derivatives and hedgefund related transactions, partly offset by deteriorating results at NIBC Petercam Derivatives. Furthermore, the SBU Principal Investments booked substantially improved results compared to 2003.
Other revenue remained stable and comprises mainly dividends on participations.
OPERATING EXPENSES
In 2004, NIBCapital’s operating expenses amounted to €167 million, up €34 million (25%) from 2003. The increase in personnel expenses was largely due to an increase in FTE’s in the consolidated strategic partnerships and an increase of compensation costs, including higher Stock Appreciation Right costs, which are accounted for in NIBCapital’s profit & loss account.
The average number of Full Time Equivalents (FTE’s) in active service increased 6% to 673 in 2004 compared to 637 in 2003. This includes an increase in the number of FTE’s in the consolidated partnerships of around 25 FTE’s and an increase of around 10 FTE’s in the Netherlands and the wholly-owned foreign offices.
Other administrative expenses rose 7% to €46 million, which is fully attributable to the expense of the IFRS project costs. Excluding these costs, other administrative expenses dropped 2% due to tight cost control and savings from rationalisation of corporate processes. The increased depreciation charge is due to a higher level of ICT investments and the full refurbishment, including a new dealing room, of The Hague Offices, which was completed in the first quarter of 2005.
Value adjustments to receivables dropped significantly to an €18 million release in 2004 compared to a
non interest 166 interest 269 2004 435 non interest 88 interest 266 2003 358 Total Income
€68 million loss in 2003. This is a reflection of the current business environment and the tightening of the credit risk policies since 2000.
The effective tax rate increased to 26% compared to 21% in 2003. This increase is due to the decrease of the share of tax exempted income in total income, in combination with the management decision not to recognise certain deferred tax assets.
In 2004, the operating profit per FTE almost doubled in 2004 to €425.000, while the efficiency ratio
remained stable at around 38%, compared to 2003.
RESULTS BY STRATEGIC BUSINESS UNIT
The overview below gives a breakdown of the operating results before taxation per SBU and the comparative figures for the year 2003.
The SBU Operating results before tax are shown after pre-tax minority interest. Further details per
OPERATING RESULT BEFORE TAXATION PER SBU 2004 2003 CHANGE
CORPORATE FINANCE 144 55 162%
PRINCIPAL INVESTMENTS 45 -40
MORTGAGE BANKING 49 59 -17%
TRADING & DISTRIBUTION 72 56 28%
FINANCIAL MARKETS 121 115 5%
INVESTMENT MANAGEMENT 5 2 150%
CORPORATE CENTER -21 19
TOTAL SBUS INCL PRE-TAX MINORITY INTEREST 294 151 95%
PRE-TAX MINORITY INTEREST -8 5
TOTAL OPERATING RESULT BEFORE TAX 286 156 83%
2003 FIGURES HAVE BEEN RESTATED TO REFLECT CHANGES IN SBU BUSINESS ALLOCATION FOR COMPARISON in millions of euros expenses 167 38% operating result 212 49% expenses 134 38% operating result 124 35% 2004 435 2003 358 other 56 13% other 100 27%
other: taxes, provisions and third party interests. Total Income
NET PROFIT
Net profit increased to €175 million from€74 million in 2003. On the basis of the structural operating profit, the other results components are summarised below.
The non recurring results in 2004 include the results from the events announced in the post balance sheet date in the 2003 Annual Report. These events are:
• SPIN-OFF NIB CAPITAL PRIVATE EQUITY N.V.
Following a further review of the group’s strategy in 2003, management decided to position NIBCapital Private Equity as a stand-alone company. This transaction completed the optimisation of the financial structure of NIBCapital.
On 20 January, 2004 NIBCapital signed a restructuring agreement between NIBCapital and its Shareholders, the ABP and PGGM pension funds. This agreement states that the shares of NIB Capital Private Equity N.V. will be distributed as repayment of share premium in kind. The approval for this repayment was received at the Annual General Meeting of Shareholders of 1 April, 2004. Following the above, NIBCapital Private Equity is no longer consolidated as from 1 January 2004, hence we have excluded the results of NIB Capital Private Equity N.V. from the 2003 operating result in this
management analysis and included the contribution of NIB Capital Private Equity N.V. in 2003 and the result of the spin-off in 2004 of€246 million as a non-recurring item.
• GOODWILL IMPAIRMENT
In addition, NIBCapital has included a goodwill impairment of€245 million in the 2004 Annual Accounts. This impairment is based on an internal valuation analysis of the remaining business. The capitalised goodwill is related to the acquisition of De Nationale Investeringsbank N.V. in 1999 and Alpinvest Holding N.V. in 2000.
All cost price adjustments have been fully amortised as at 31 December 2003, hence the amortisation of cost price adjustments are zero in 2004.
The decrease in minority interests to €4 million positive relates to the strategic partnerships NIBC Petercam Derivatives, NIBC Wealth Management and Harcourt Investment Consulting.
NET PROFIT 2004 2003 CHANGE
OPERATING RESULT 212 124 71%
NET NON-RECURRING RESULTS (*) 1 7
AMORTISATION OF GOODWILL -42 -44
AMORTISATION OF COSTPRICE ADJUSTMENTS 0 -6
MINORITY INTERESTS 4 -7
NET PROFIT 175 74 136%
(*) 2003 INCLUDING OPERATIONAL RESULT NIB CAPITAL PRIVATE EQUITY N.V.
2004 INCLUDING TRANSACTION RESULT ON THE SALE OF NIBCAPITAL PRIVATE EQUITY AND A GOODWILL IMPAIRMENT ON THE REMAINING BUSINESS
BALANCE SHEET AND RATIOS
The risk profile of NIBCapital is translated into economic capital criteria formulated by management. Economic capital is defined as the company’s visible shareholders’ equity, less capitalised goodwill plus the fund for general banking risks, the estimated value of NIBCapital Private Equity (only in 2003) and issued hybrid capital. The difference between the allocated economic capital and the available economic capital can be used for dividends, growth and expansion. The table below shows the maximum distribution over the various risks as well as the allocated and available economic capital over 2004 and 2003. The economic capital framework was further refined during 2004. For comparative purposes the 2003 figures have been adjusted. However the totals remained virtually unchanged.
In the table above the economic capital for mortgages exceeds the maximum. This is temporary. Planned securitisations in the first half of 2005 will bring the economic capital allocation below the maximum. NIB Capital’s total assets at year-end 2004 amounted to €24.9 billion, up 16% on year-end 2003 (€21.6 billion). The increase in total assets stemmed mainly from the growth of the residential mortgage activities (€4.1 billion). Of this growth €1.9 billion stemmed from government-guaranteed mortgages under the “Nationale Hypotheek Garantie”. Other assets remained, on balance, relatively stable.
Shareholders’ equity before profit appropriation and proposed repayment from other reserves amounted to €1.9 billion, down 11% from 2003. The decline stemmed from dividend distribution and the repayment of reserve to the shareholders, totalling €400 million, partly offset by the profit for the year 2004 and fair market revaluation of equity participations and commercial property not used by NIBCapital.
MAXIMUM AVERAGE AVERAGE
ALLOCATION ALLOCATION ALLOCATION
2004 2003
CREDIT RISK:
CORPORATE FINANCE 900 675 661
FINANCIAL MARKETS 200 162 158
MORTGAGE BANKING 100 113 130
MARKET RISK (VALUE AT RISK):
FINANCIAL MARKETS 200 200 208
CORPORATE CENTER 200 165 165
DIVERSIFICATION EFFECT -100 -115 -100
EQUITY/MEZZANINE RISK 300 110 106
OPERATIONAL AND OTHER RISK 200 200 200
TOTAL 1,510 1,528
TOTAL AVAILABLE ECONOMIC CAPITAL
BEFORE DIVIDEND DISTRIBUTION 1,929 1,837
SURPLUS ECONOMIC CAPITAL 419 309
The capital ratio, i.e. shareholders’ equity as a percentage of total assets, was about 7.4% at the end of 2004, a 24% decline compared to year-end 2003. This however should be seen in the light of the allocated economic capital (as explained on page 40), which shows that the use of economic capital remained relatively stable from 2003 to 2004. Because NIBCapital believes that in the near future no substantial additional capital is needed to grow the current business, it proposes a €300 million dividend distribution in these Annual Accounts. After dividend distribution the Tier-1 ratio of NIB Capital Bank N.V. will be 10.7%, which NIBCapital believes is a strong and comfortable level. If no dividend distribution had been proposed in the 2004 Annual Accounts, the Tier-1 level would remain at the same level as 2003 (12.8%).
The net earnings per share increased to €6.42 in 2004 from €2.71 in 2003. For the evaluation of the realised return on shareholders’ equity, NIBCapital’s specific accounting policies must be taken into consideration. In particular, the capitalisation of goodwill paid on acquisitions and the recognition of the costs of option schemes on the profit and loss account distort comparison with most other financial companies. The operational return on net asset value, defined as the operating result divided by the average sum of economic capital less hybrid capital gives a ratio that is more suitable for comparison purposes within the financial sector. The operating return on net asset value increased to 12.2% in 2004 from 6.4% in 2003, which exceeds the original 2007 target of 10% in the Medium Term Action Plan. NIBCapital proposes to pay out the full net profit for the year 2004 (€175 million) as cash dividend. In addition, NIBCapital proposes to distribute €125 million cash dividend from the other reserves. The total proposed pay-out amounts to €11.02 per share. If the proposed distributions are approved by the Annual General Meeting of Shareholders on 30 March 2005, shareholders’ equity will amount to €1.6 billion. The graph below shows the development of NIBCapital’s Risk weighted assets and realised return. The return of 1.46% is the highest return since 1999.
-2.000 4.000 6.000 8.000 10.000 12.000 14.000 16.000 1999 2000 2001 2002 2003 2004 0,00% 0,20% 0,40% 0,60% 0,80% 1,00% 1,20% 1,40% 1,60% RWA
Return on Risk Weighted assets Return on Risk Weighted Assets
INTERNATIONAL FINANCIAL REPORTING STANDARDS
(“IFRS”)
Starting 1 January 2005, NIBCapital will adopt IFRS. This will result in first time adoption adjustments to Shareholders' Equity as of that date. All amounts in this paragraph are net of (deferred) tax.
FIRST TIME ADOPTION IMPACT ON FINANCIAL INSTRUMENTS (IAS 32 AND 39)
NIBCapital aims to provide as much insight as possible into the market value of individual assets. As a result, NIBCapital has opted under IFRS to value its assets based on “fair value”. The First Time Adoption ('FTA') includes mainly:
• Commercial loans and equity investments (the latter is no change from Dutch GAAP) are classified as Available for Sale portfolios showing the movements in fair value in the revaluation reserve within shareholders' equity
• Upfront fees on existing corporate loans are required to be amortised over the expected maturity of the corporate loans, hence the historical upfront fees are reversed in the FTA.
• The IFRS impairment rules for the commercial loans are applied, however the impact is negligible. • The Financial Market portfolios including residential mortgages will all be classified as fair value through
profit or trading. Both classifications result in booking of all fair value adjustments directly into the income statement.
• NIBCapital manages its interest rate risk in terms of fair value on the basis of sensitivity of its fixed rate assets (corporate loans, mortgages and investments) and liabilities (funding). In addition to these sensitivity-based hedge activities, in order to lock in the interest rate margin of the banking book, certain floating assets are swapped into fixed rate positions, using (cross currency) interest rate swaps. Under IFRS derivatives are required to be valued at fair value, with changes in the income statement, while the hedged assets are valued at fair value, with changes in the revaluation reserve and hedged liabilities are valued at amortised cost. In order to mitigate the volatility in the income statement hedge accounting (fair value hedge accounting, respectively cash flow hedge accounting) is applied.
The total first time adoption impact of IAS 32 and 39 on Shareholders' Equity will be presented together with the announcement of the first quarter results 2005.
NIBCapital will use the option in IAS 32 and 39 allowing for first time adoption on 1 January, 2005 without showing restated comparative figures over 2004. The main reason is the late announcement of the final IAS 32 and 39 standards by the IAS Board and the subsequent “carved out” approval (4th quarter 2004) of these standards by the European Community. Consequently, NIBCapital did not have all formal documentation in respect of macro hedging for 2004 in place. This can not be reconstructed retrospectively. However, we will present pro-forma comparative figures 2004 for financial instruments indicating the basis for preparation of these comparatives to allow for analysis.
FIRST TIME ADOPTION IMPACT OF OTHER IFRS ITEMS
The Fund for General Banking Risks (€136 million) will be reclassified to retained earnings. The first time adoption effect on the retained earnings related to pension scheme obligations and the Stock Appreciation Rights program (SARs) will be respectively €13 million (negative) and €16 million (positive). The latter follows from the IFRS rule that only vested SARs should be provided for.
Furthermore, the balance sheet total will grow approximately €4 billion as a result of the consolidation of the Dutch Mortgage Backed Securities transactions originated and arranged by NIBCapital.
“One of the characteristics of graphics is that it requires a planned approach. Every step in the process is definite. This means that you should not begin if you don’t trust your own ideas. On the other hand, it means that you can’t do anything except have trust in your own skills and your interaction with the materials and technique.”
INGE VAN DEN THILLART
Natural trust
2004, ETCHING, MULTI-COLOUR PRINTING, 120X80 CMInge van den Thillar t (1962, Groesbeek) graduated in 2002 from the Utrecht School of the Ar ts. She received the Kunstanjer Prize for Sculpture and Design from the Prins Bernhard Culture Fund for her final project. Van den Thillar t regularly exhibits in galleries throughout The Netherlands.
“In my graphics, the most important elements are shaped by rhythm and colour. I derive the images from the landscapes that I happen to stray upon. ‘Natural trust’ is inspired by the only primeval forest that still exists in Europe, Bialowieza National Park on the border of Poland and White Russia, where I travelled last
September. This forest stands for growth and endurance – something achieved if you literally give it the time and space. For that you need trust and you have to grant trust.”
MANAGING RISK
Financial risk management is at the heart of the banking industry. NIBCapital’s diversifying spectrum of activities and the implicitly growing complexity of our product range result in exposures to different levels of risk. NIBCapital systematically manages credit, market, liquidity and operational risk and has organized its risk management functions accordingly. Since risk management is about assessing, measuring and controlling risk and acting accordingly and proactively, NIBCapital has sophisticated and integrated risk management systems to measure and manage financial risk on an enterprise-wide basis.
This Risk Management chapter is an integral part of the Annual Accounts.
The risk management framework that NIBCapital has developed over the last few years facilitates the generation of integrated risk profiles and stress scenarios. It also supports the new IFRS rules and provides sufficient data to meet the new Basel II requirements. This framework underpins internal decision making, optimising Risk Adjusted Return On Capital (RAROC) and impairment calculations. It also supports and maintains the Aa3/AA-/A+ rating of NIB Capital Bank N.V.
RISK MANAGEMENT ORGANIZATION
The risk management activities are predominantly organized out of the Corporate Risk Management function. Various risk management BUs and committees deal with the mai
