Annual Report - EFG Bank Group

efggroup

Annual Report - EFG Bank Group

Annual Report

2006


Consolidated Financial Statements

for the year ended December 31, 2006

Annual Report 2006 Group


Contents

3 Consolidated Financial Highlights

4 Report of the Board of Directors

6 EFG Group’s Activities

10 Group Presence

12 Board of Directors and Group Executives

13 Report of the Group Auditors

14 Consolidated Financial Statements

78 Review of Parent Bank Activities and Financials

79 Report of the Statutory Auditors

80 Parent Bank Financial Statements

Board of Directors and Advisory Board

EFG Group


Consolidated Financial Highlights

Balance sheet highlights

(All figures in millions of CHF) Dec. 31, 2006 Dec. 31, 2005

Cash and due from banks 13,740 11,374

Loans and advances to customers 60,919 46,010

Securities 21,927 19,374

Due to banks 17,408 17,139

Due to customers 49,813 37,075

Shareholders’ equity 8,466 7,841

Balance sheet total 101,837 80,333

Statement of income highlights

(All figures in millions of CHF) 2006 2005

Net interest income 2,692 2,241

Net banking fee and commission income

1,109 804

Operating expenses 2,054 1,770

Profit from operations 1,539 1,080

Profit after tax attributable to shareholders 1,157 840

Group personnel

Annual Report 2006

2006 2005

Average number of employees during the year 18,418 15,609

Group

3


4

Report of the Board of Directors on the

Consolidated Financial Statements for the year ended

December 31, 2006

2006 has been another very successful year for

the Geneva-headquartered EFG Group, which

continued its strong growth in its core business

activities and achieved a new record net profit of

CHF 1.2 billion. Each of the two subgroups

constituting the EFG Group, EFG International

and Eurobank EFG, continued to expand

substantially. At year-end 2006, the EFG Group

employed around 20,000 persons world-wide.

EFG International, EFG Group’s global private

banking arm based in Zurich and listed on the

Swiss exchange, SWX, saw its net profit

attributable to ordinary shareholders increase by

144% to CHF 204 million. This strong growth,

both organic and through acquisitions, once

more reflects the success of the entrepreneurial

model established by EFG International. Total

client assets under management or administration

(including loans) increased by some 45% to

exceed CHF 70 billion, backed by a similar rise in

the number of customer relationship officers to

400. At mid-April 2007, its market capitalisation

was in excess of CHF 8 billion.

Eurobank EFG, EFG Group’s full-service banking

arm based in Athens and listed on the Athens

Stock Exchange, strengthened both its position as

one of Greece’s largest banking and financial

institutions and its presence in Central and

South-Eastern Europe, showing consolidated net

profit nearing CHF 1 billion and a European

network totalling 1,300 branches and points of

sale. At mid-April 2007, its market capitalisation

was nearing EUR 12 billion.

The expansion of the EFG Group was also

geographical. The EFG International group

commenced private banking operations in the

Bahamas in early 2006 through the establishment

of a new banking subsidiary in Nassau following

the purchase, in late 2005, of the Latin American

private banking business of the Spanish-based

banking group Banco Sabadell. It opened a

branch in Dubai and representative offices in

Bahrain, Colombia, Ecuador, Mexico, Venezuela,

Indonesia and the Philippines. It established a

new banking subsidiary in Luxembourg and

purchased a second private bank in Monaco,

Banque Monégasque de Gestion, from the Italian

banking group UniCredito Italiano. In the UK,

EFG Private Bank Limited acquired the Harris

Allday partnership, a stockbroker based in

Birmingham, strengthening its position in the

domestic market. In Sweden, towards the end of

2006, EFG Investment Bank AB reached an

agreement to acquire a renowned local securities

and wealth management company, Quesada

Kapitalförvaltning AB.

EFG International also grew its existing expertise

in the sale, development and management of

structured products, hedge funds, funds-ofhedge-funds

and other alternative investment

products through the acquisitions of the

Bermuda-headquartered C. M. Advisors Ltd and,

in early 2007, the Miami-headquartered PRS

group.

The Eurobank EFG group continued to expand

its banking and other financial services presence

in Central and South-Eastern Europe. In

particular, in February 2006, it started retail

banking operations in Poland where, at the end

of 2006, it operated a network of 130 branches

and points of sale. During the year, it acquired

DZI Bank AD in Bulgaria, whose merger with the

Group’s existing local banking subsidiary,

EFG Group


Report of the Board of Directors (continued)

Bulgarian Postbank AD, will create the fourth

largest bank in the country as measured by total

assets, with a combined network of 280

branches. In Turkey, it acquired a 70%

shareholding in Istanbul-based Tekfenbank AS, a

bank employing 560 persons, focusing on smalland-medium-sized

enterprises through a network

of 31 branches. In addition, it entered the

Ukrainian banking market with the purchase of

Lviv-based Bank Universalniy, a bank with 480

employees, operating predominantly in Western

Ukraine through a network of 33 branches.

These last two acquisitions were completed in

February 2007.

This strong growth led to a substantial increase in

EFG Group’s total customer assets under

management or administration, which exceeded

CHF 140 billion at the end of the year 2006,

from slightly higher than CHF 100 billion at

year-end 2005. Eurobank EFG group’s solid

organic growth in loans and deposits across most

core business segments, both domestically and

abroad, was reflected in the increase in EFG

Group’s balance sheet totals, which exceeded

CHF 100 billion at year-end 2006, from

CHF 80 billion a year ago. On the asset side,

CHF 15 billion of this increase related to the

growth in loans and advances to customers and

CHF 3 billion were net investments in availablefor-sale

securities, while funding for the increase

in assets came in the majority from the

CHF 13 billion net increase in client deposits and

CHF 7 billion net additional funding through

liabilities evidenced by paper.

Against this backdrop, total operating income

rose by 24% to CHF 4.1 billion, while operating

expenses were kept to a 16% increase to

CHF 2.1 billion. Consequently, the cost-toincome

ratio has been reduced to 50%, from

53% a year before and 67% two years ago. As a

result, net consolidated profit for the year

reached CHF 1.2 billion, against CHF 0.8 billion

for the previous year.

94% of total operating income was comprised of

income from the Group’s core activities. Core

business growth was seen at all levels. In

particular, net interest income, coming essentially

from the Eurobank EFG group, increased by

Annual Report 2006

20% to CHF 2.7 billion as a result of the abovementioned

growth in total loans and advances to

customers, maintaining net interest rate margins

above 3%.

Net fee and commission income rose by 38% to

CHF 1.1 billion, stemming from the substantial

growth in customer assets under management or

administration at EFG International and the

increase in revenues from capital market services

in Greece.

Although loans and advances to customers

increased by 32% to CHF 61 billion, the increase

in total loan impairment loss for the year was

contained at CHF 0.5 billion. The vast majority

of these loans and provisions relates to the retail

and corporate banking activities carried out by

the Eurobank EFG group in Greece and Central

and South-Eastern Europe.

As at December 31, 2006, EFG Group’s total

shareholders’ equity reached CHF 8.5 billion,

compared to CHF 7.8 billion a year ago, mainly

as a result of the net profit for the year of

CHF 1.2 billion, partially offset by CHF 0.6 billion

of dividends paid. At year-end, the Group’s

consolidated regulatory capital-to-risk-weighted

assets ratio stood at 10.5%.

This continuing successful expansion is the result

of business models, which put clients at their

core, encourage entrepreneurship and capitalise

on talents.

Spiro J. Latsis

Chairman of the Board

Group

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6

EFG Group’s Activities

The EFG Group

The EFG Group, headquartered in Geneva, is a

worldwide banking and financial institution. It

is organised into two subgroups:

EFG International, Zurich, a global private

banking organisation listed on the Swiss

exchange, SWX;

− Eurobank EFG, Athens, a leading banking

and financial institution listed on the Athens

Stock Exchange, offering a full range of

banking, asset management, insurance and

other related services in Greece and Central

and South-Eastern Europe, and with offices

in London and Luxembourg.

EFG International

The EFG International group offers a broad

range of private banking products and services,

which include investment services, securities

brokerage, wealth management, deposits,

foreign exchange, lending (mainly secured by

assets pledged as collateral), custody services,

payment services, financial advisory,

management and sale of investment funds

(including hedge funds and funds-of-funds),

product structuring, trust services and personal

financial services. The group is headquartered in

Zurich and has offices in Geneva, the Swiss

Valais, Athens, Bahrain, Bogota, Birmingham,

Buenos Aires, Caracas, Dubai, Gibraltar,

Gothenburg, Guernsey, Hamilton (Bermuda),

Helsinki, Hong Kong, Jakarta, Jersey,

Kristianstad (Sweden), Lima, London, Lulea

(Sweden), Luxembourg, Makati City (the

Philippines), Malmo, Mexico City, Miami,

Monaco, Nassau, New York, Quito, Singapore,

Stockholm, Taipei and Vaduz (Liechtenstein).

The EFG International group’s successful

growth is the result of a strategy that combines

organic growth based on a business

development incentive scheme for customer

relationship officers and members of

management, and selective acquisitions.

EFG International has adopted an “open

platform” philosophy, allowing customer

relationship officers to select the financial

products that correspond best to their clients’

needs, irrespective of whether these products

have been developed internally or are being

offered by third-party institutions.

This business model is organised around a

reliable operational and IT platform and is

subject to strict internal controls.

The group also develops a wide range of

innovative products, tailored to meet its clients’

requirements, taking advantage of changing

financial market conditions. This offering

covers a broad spectrum of products (equities,

foreign exchange, fixed-income securities,

deposits, notes, derivatives, etc.), with specific

expertise in funds-of-funds, structured products,

hedge funds and other alternative investments.

In Europe, the EFG International group has

banking operations in Switzerland, the United

Kingdom, Guernsey, Sweden, Finland,

Luxembourg, Monaco, Liechtenstein and

Gibraltar.

EFG Group


EFG Group’s Activities (continued)

In Switzerland, EFG Bank takes care of an

international clientele, providing them with the

full range of the group’s financial products and

services. In addition, the Geneva offices of the

bank perform a large part of the IT processing

of branches of the bank and other banks of the

Group.

EFG Bank supplements its offshore service

offering through its Guernsey branch and

banking subsidiaries in Monaco, Gibraltar and

Liechtenstein. It also provides trust

administration services through its subsidiary in

the British Virgin Islands. EFG International

also has notable expertise in funds-of-hedgefunds

management through its subsidiary, C.M.

Advisors Ltd, headquartered in Hamilton

(Bermuda).

In London, EFG Private Bank Limited services

an international and domestic clientele. It is

authorised and regulated by the Financial

Services Authority. Through its Asset

Management division and its subsidiaries, EFG

Wealth Management Limited and EFG Platts

Flello Limited, it also provides asset

management and financial advisory services.

The bank also offers stockbroking services in

Birmingham and the Midlands region through

its division EFG Harris Allday. To meet the

offshore needs of its international clientele, the

bank has subsidiaries in Guernsey, EFG Private

Bank (Channel Islands) Limited, which provides

offshore private banking, and in Jersey, EFG

Offshore Limited, which specialises in trust and

company administration services. EFG Offshore

Limited also has trust and fund administration

subsidiaries in Geneva and Hong Kong.

In Monaco, EFG Eurofinancière d’Investissements

SAM provides its private and institutional

clients with personalised management of assets

as well as investment advisory services based on

traditional asset classes and investment funds,

particularly hedge funds and private equity

placements. It also caters to the needs of wealthy

families in offering family office services.

In Sweden and Finland, EFG Investment Bank AB

specialises in structured and other private

Annual Report 2006

banking products for a large number of

Scandinavian private and institutional clients.

Towards the end of 2006, EFG Investment

Bank AB announced the acquisition of a

local renowned securities brokerage and

wealth management company, Quesada

Kapitalförvaltning AB, which will allow the

bank to gain new clients and strengthen its

expertise in this area.

In Luxembourg, EFG International consolidates

its European Union activities through an

intermediary holding company and has a private

banking subsidiary as well as some of its

investment funds, providing its clients with

diverse investment strategies and a variety of

risk profiles, including alternative strategies and

industry-specific funds.

In the Middle East, EFG Bank has a DIFC

branch in Dubai and a representative office in

Bahrain to cover the regional markets.

In the Far East, EFG Bank has licensed banking

branches in Hong Kong and Singapore, and

representative offices in Jakarta and Makati

City in the Philippines. In addition, EFG

International has securities investment and

financial consulting subsidiaries in Taiwan.

Group

7


8

EFG Group’s Activities (continued)

The clientele in the Americas is serviced through

EFG Capital International Corp., a Miamibased

broker/dealer subsidiary, which has a

branch in New York and a subsidiary in Lima,

and EFG Bank & Trust (Bahamas) Limited, a

banking subsidiary based in Nassau. In

addition, EFG Bank has representative offices in

Bogota, Buenos Aires, Caracas, Mexico City

and Quito. Through its US operations the group

offers clients around the world efficient

securities trading on the American markets.

EFG International also offers alternative

investment products through its subsidiary,

PRS International Consulting Inc., an

investment services group headquartered in

Miami with a related investment fund

administration business based in the Cayman

Islands.

Eurobank EFG

In Greece, EFG Eurobank Ergasias SA

(“Eurobank EFG”) is one of the largest banking

and financial institutions, operating a network

of more than 360 branches and 100 other points

of sales throughout the country. Eurobank EFG

is the leader in Greece in consumer lending,

mutual fund management, private banking, life

insurance, investment banking, equity

brokerage and small business lending. It is also

among the largest lenders to small and medium

enterprises and large Greek corporations.

Eurobank EFG has a branch in London.

In the Greek retail banking sector, Eurobank

EFG has established a leading market position

through the continuous introduction of

innovative and high-quality products, a large

branch network, alternative distribution

channels and customised services to meet

clients’ increasingly sophisticated needs. The

bank and its subsidiaries offer an extensive

range of services, which includes savings and

investment products, mortgage lending,

consumer credit, small business lending, phone

banking, mobile banking and e-banking.

In the corporate and investment banking sector,

Eurobank EFG holds a prominent market

position, providing its corporate clients with a

large spectrum of integrated services and

solutions in the areas of corporate finance

(IPOs, capital raising, private equity placements,

debt issuance), corporate lending, shipping

finance, leasing and factoring. The bank’s

subsidiary, EFG Eurobank Securities SA, is the

leading equity and related derivative brokerage

firm in Greece.

The Eurobank EFG group is the largest mutual

fund manager in Greece. It offers a broad range

of investment funds and institutional asset

management services. Eurobank EFG is also the

local leader in private banking, focusing its

activity mainly on the local market and through

its Luxembourg-based subsidiary, EFG Private

Bank (Luxembourg) SA.

In the Greek life insurance market, Eurobank

EFG has become the leader, with an extensive

offering of bancassurance products.

Eurobank EFG is expanding in Central and

South-Eastern Europe, a region with a strong

EFG Group


EFG Group’s Activities (continued)

growth potential. It operates a sizeable network

of retail banking branches and points of sale in

Poland (Polbank EFG) and has large banking

subsidiaries, offering a full range of financial

services, in Romania (Bancpost SA), Bulgaria

(Bulgarian Postbank AD and DZI Bank AD),

Serbia (Eurobank EFG Stedionica AD Beograd),

Ukraine (Eurobank EFG) and Turkey

(Tekfenbank AS). In many of these countries,

the Eurobank EFG group also offers connected

financial services such as securities brokerage,

credit cards, leasing, mutual fund management,

factoring, real estate services and insurance.

Annual Report 2006

Group

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10

Group Presence

EFG Bank European Financial Group

24 quai du Seujet

1211 Geneva 2

Switzerland

Telephone (+41) 22 918 72 72

Facsimile (+41) 22 918 72 73

Website www.efggroup.com

Pericles Petalas: Chief Executive Officer

EFG International

14 Bahnhofstrasse

P.O. Box 2255

8022 Zurich

Switzerland

Telephone (+41) 44 226 18 50

Facsimile (+41) 44 226 18 55

Website www.efginternational.com

Lawrence D. Howell: Chief Executive Officer

Mexico City

Miami

New York

Nassau

Caracas

Bogota

Quito

Lima

Bermuda

British Virgin Islands

Buenos Aires

EFG Group

Birmingham

Guernsey

Jersey

Gothene

M

Gibraltar

London o

LL

Geneva

Monaco


Stockholm

nburg

almo

Lulea

Helsinki

Kristianstad

n

Warsaw

uxembourg

Zurich

Liechtenstein

Valais Belgrade

Bucharest

Sofia

Istanbul

Bahrain

Athens

Cyprus

Dubai

Annual Report 2006

Hong Kong Taipei

Singapore

Jakarta

Beijing

(Representative office)

Philippines

Eurobank EFG

EFG Eurobank Ergasias SA

20 Amalias Avenue

105 57 Athens

Greece

Telephone (+30) 210 333 7000

Facsimile (+30) 210 323 3866

Website www.eurobank.gr

Nicholas Nanopoulos: Chief Executive Officer

Group

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12

Board of Directors and Group Executives

(as at December 31, 2006)

Board of Directors Group Executives

Mr S. J. Latsis, Chairman (1) Mr P. Petalas, Group Chief Executive Officer

Ms A. M. L. Latsis, Vice-chairman Mr E. L. Bussetil, Group Finance Executive

Ms M. Latsis Mr E. Bertschy, Group Control and Regulatory Executive

Mr R. U. Ahmed (2) Mr P. de Figueiredo, Group Credit and Risk Executive

Mr J. P. Cuoni

Sir D. Davies

Mr A. B. Lévy

Mr E. Mathieu (1)

Mr H. Matthews

Mr A. Travis

(1) (2)

(1) (2)

(1) members of the Group Audit Committee

(2) members of the Group Risk Committee

EFG Group


Report of the Group Auditors to the

General Meeting of the Shareholders

As auditors of the group, we have audited the consolidated financial statements (statement of income,

balance sheet, statement of changes in equity, statement of cash flows, and notes set out on pages 14 to

73) of EFG Bank European Financial Group for the year ended December 31, 2006.

These consolidated financial statements are the responsibility of the board of directors. Our responsibility

is to express an opinion on these consolidated financial statements based on our audit. We confirm that

we meet the legal requirements concerning professional qualification and independence.

Our audit was conducted in accordance with Swiss Auditing Standards and with the International

Standards on Auditing, which require that an audit be planned and performed to obtain reasonable

assurance about whether the consolidated financial statements are free from material misstatement. We

have examined on a test basis evidence supporting the amounts and disclosures in the consolidated

financial statements. We have also assessed the accounting principles used, significant estimates made and

the overall consolidated financial statement presentation. We believe that our audit provides a reasonable

basis for our opinion.

In our opinion, the consolidated financial statements give a true and fair view of the financial position,

the results of operations and the cash flows in accordance with the International Financial Reporting

Standards (IFRS) and comply with Swiss law.

We recommend that the consolidated financial statements submitted to you be approved.

PricewaterhouseCoopers SA

Jean-Christophe Pernollet Heidrun Dyer

Geneva, April 27, 2007

Annual Report 2006

Group

13


14

Consolidated Statement of Income

for the year ended December 31, 2006

(All figures in millions of CHF) Note 2006 2005

Interest and discount income 6 6,831 4,728

Interest expense 6 (4,139) (2,487)

Net interest income 2,692 2,241

Banking fee and commission income 7 1,384 1,057

Banking fee and commission expense 7 (275) (253)

Net banking fee and commission income 1,109 804

Net insurance income 59 56

Non banking services 32 46

Core income 3,892 3,147

Dividend income 14 7

Net trading income 8 79 78

Gains less losses from investment securities 112 62

Other operating income 27 39 35

244 182

Operating income 4,136 3,329

Operating expenses 9 (2,054) (1,770)

Impairment losses on loans and advances 20 (543) (479)

Profit from operations 1,539 1,080

Share of results of associates 25 8 24

Profit before tax 1,547 1,104

Income tax expense 11 (390) (264)

Profit after tax attributable to shareholders 1,157 840

Of which minority interests 685 494

The notes on pages 18 to 73 form an integral part of these consolidated financial statements.

EFG Group


Consolidated Balance Sheet

at December 31, 2006

Assets

(All figures in millions of CHF) Note Dec. 31, 2006 Dec. 31, 2005

Cash and balances with central banks 14 4,309 2,776

Due from other banks 16 9,431 8,598

Financial instruments at fair-value-through-profit-or-loss 17 1,306 1,889

Derivative financial instruments 18 951 589

Loans and advances to customers 19 60,919 46,010

Available-for-sale investment securities 22 19,244 16,457

Other investment securities 23 1,377 1,028

Investments in associated undertakings 25 77 54

Intangible assets 26 1,574 686

Property, plant and equipment 27 1,609 1,314

Other assets 28 1,040 932

Total assets 101,837 80,333

Liabilities

Due to other banks 29 17,408 17,139

Derivative financial instruments 18 1,250 1,246

Due to customers 30 49,813 37,075

Liabilities evidenced by paper 31 21,865 14,925

Other liabilities 32 3,035 2,107

Total liabilities 93,371 72,492

Shareholders’ equity

Share capital 34 250 250

Reserves from retained earnings and for general banking risks 1,062 1,001

Reserves attributable to a related trust 1,715 1,599

Minority interests 36 5,439 4,991

Total shareholders’ equity 8,466 7,841

Total liabilities and shareholders’ equity 101,837 80,333

Of which subordinated liabilities 1,078 1,148

Of which liabilities to significant shareholders 14 11

The financial statements on pages 14 to 73 were approved for publication and for submission to the Shareholders’

Annual Meeting by the Board of Directors on April 27, 2007.

The notes on pages 18 to 73 form an integral part of these consolidated financial statements.

Annual Report 2006

Group

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16

Consolidated Statement of Changes in Equity

for the year ended December 31, 2006

Reserve from Reserve Reserve for

Share retained attributable to general Minority

(All figures in millions of CHF) Note capital earnings a related trust banking risks interests Total

Balance at January 1, 2005 250 402 1,054 25 2,568 4,299

Cash flow hedges:

net fair value results, net of tax - - (1) - (2) (3)

transfer to net profit, net of tax - - 6 - 9 15

Available-for-sale investment securities:

net fair value results, net of tax 22 - (1) 108 - 154 261

absorption of associates 22 - - (4) - (6) (10)

transfer to net profit, net of tax 22 - - (69) - (98) (167)

Dividends paid - (26) (1) - (241) (268)

New acquisitions - - - - 10 10

Share capital increase in subsidiaries - 604 79 - 1,088 1,771

Issue of preferred securities - - - - 1,184 1,184

Net increase in Group’s holdings in

subsidiaries - 1 (18) - (35) (52)

Other reserve movements - 1 8 - 12 21

Transfers resulting from Group

reorganisation - (80) 168 - (88) -

Profit for the year - 90 256 - 494 840

Currency translation differences - 3 22 - 33 58

Net purchases of treasury shares of

quoted subsidiary - (18) (9) - (91) (118)

Balance at December 31, 2005 250 976 1,599 25 4,991 7,841

Balance at January 1, 2006 250 976 1,599 25 4,991 7,841

Cash flow hedges:

net fair value results, net of tax - - 13 - 18 31

transfer to net profit, net of tax - - (4) - (5) (9)

Available-for-sale investment securities:

net fair value results, net of tax 22 - (2) (87) - (125) (214)

transfer to net profit, net of tax 22 - - 66 - 93 159

Dividends paid - (11) (199) - (354) (564)

Share capital increase in subsidiaries - 1 15 - 91 107

Issue of preferred securities - - (2) - 38 36

Net increase in Group’s holdings

in subsidiaries - (67) (69) - 5 (131)

Other reserve movements - (3) (5) - (6) (14)

Profit for the year - 131 341 - 685 1,157

Currency translation differences - 12 102 - 177 291

Net purchases of treasury shares of

quoted subsidiary - - (55) - (169) (224)

Balance at December 31, 2006 250 1,037 1,715 25 5,439 8,466

EFG Bank European Financial Group, Geneva, is the sole holding company at the head of the Group and all voting power at

general meetings is held by Latsis Family interests.

Shareholders’ equity of the Group is owned by both Latsis family interests through their shareholding in EFG Bank European

Financial Group (total shareholders’ equity CHF 1,312 million) and through their shareholding of a related trust in an

intermediate holding company (total shareholders’ equity CHF 1,715 million) and by minority interests.

The Group’s accounting policy on consolidation is detailed in note 2b.

The notes on pages 18 to 73 form an integral part of these consolidated financial statements.

EFG Group


Consolidated Statement of Cash Flows

for the year ended December 31, 2006

(All figures in millions of CHF) Note 2006 2005

Cash flows from operating activities

Interest received and net trading receipts 5,638 3,523

Interest paid (3,164) (1,730)

Fees and commissions received 1,549 1,176

Fees and commissions paid (303) (208)

Dividends received 5 -

Other income received 96 97

Cash payments to employees and suppliers (1,761) (1,382)

Income taxes paid (294) (220)

Cash flows from operating profits before changes in operating assets and liabilities 1,766 1,256

Changes in operating assets and liabilities

Net (increase) in cash and balances with central banks (778) (319)

Net decrease in financial instruments at fair-value-through-profit-or-loss 660 1,497

Net (increase) in loans and advances to other banks (464) (889)

Net (increase) in loans and advances to customers (13,249) (9,640)

Net (increase)/decrease in other assets and other liabilities 570 (300)

Net increase/(decrease) in due to other banks (315) 8,199

Net increase in due to customers 10,434 3,685

Net cash from/(used in) operating activities (1,376) 3,489

Cash flows from investing activities

Purchases of property, plant and equipment (451) (125)

Proceeds from sale of property, plant and equipment 34 43

Net (purchases) of available-for-sale investment securities (16,374) (13,083)

Proceeds from sale of available-for-sale investment securities 13,789 6,460

Purchases of held-to-maturity investment securities - (753)

Proceeds from sale of held-to-maturity investment securities 9 506

Acquisition of subsidiaries undertakings, net of cash acquired (402) (237)

Acquisition of associated undertakings (21) 75

Proceeds from sale of associated undertakings 22 6

Dividends from investment securities and associated undertakings 13 11

Proceeds from sale/liquidation of subsidiary undertakings net of cash disposed of 56 -

Net cash (used in) investing activities (3,325) (7,097)

Cash flows from financing activities

Proceeds from liabilities evidenced by paper 19,187 8,709

Repayments of liabilities evidenced by paper (12,821) (4,092)

Net proceeds from the issue of preferred securities - 1,184

Net proceeds from the sale/purchase of preferred securities 38 -

Net contribution by minority interest 113 1,560

Dividends paid (558) (259)

Purchases of treasury shares of quoted subsidiary (294) (164)

Proceeds from sale of treasury shares of quoted subsidiary 97 100

Net cash from financing activities 5,762 7,038

Effect of exchange rate changes on cash and cash equivalents 222 102

Net increase in cash and cash equivalents 1,283 3,532

Cash and cash equivalents at beginning of year 9,971 6,439

Cash and cash equivalents at end of year 15 11,254 9,971

The figures in the consolidated statement of cash flows cannot be directly traced from the balance sheet or statement

of income without additional information as a result of acquisitions and disposals of subsidiaries and net foreign

exchange differences arising on consolidation.

The notes on pages 18 to 73 form an integral part of these financial statements.

Annual Report 2006

Group

17


18

Notes to the Consolidated Financial Statements

1. Activities of the Group

The main activities of the EFG Group (the

Group”) are banking and financial services. The

Group primarily services its worldwide clientele

through its two listed subgroups, EFG

International and EFG Eurobank Ergasias SA.

EFG International and its subsidiaries (the “EFGI

group”) is a leading global private banking

group, offering private banking and asset

management services. The EFGI group is

incorporated in Switzerland and its shares are

listed on the Swiss Stock Exchange. The EFGI

group’s principal places of business are in the

Bahamas, Bermuda, the Channel Islands, Dubai,

Finland, Gibraltar, Hong Kong, Liechtenstein,

Luxembourg, Miami, Monaco, New York,

Singapore, Sweden, Switzerland, Taiwan and the

United Kingdom. EFG International also has

representative offices in Argentina, Colombia,

Equador, Mexico, Venezuela, Indonesia, the

Philippines and Bahrain. In Switzerland the EFGI

group’s offices are located in Zurich, Geneva,

Sion, Martigny, Verbier and Crans-Montana.

EFG Eurobank Ergasias SA and its subsidiaries

(the “Eurobank EFG group”) are active in retail,

corporate and private banking, asset

management, insurance, treasury, capital markets

and other services. The Eurobank EFG group is

incorporated in Greece and its shares are listed on

the Athens Stock Exchange. The Eurobank EFG

group operates mainly in Greece and in New

Europe (Bulgaria, Poland, Romania, Serbia &

Montenegro, Ukraine and Turkey).

The average number of employees of the EFG

Group during the year was 18,418 (2005:

15,609).

2. Principal accounting policies

The principal accounting policies adopted in the

preparation of these consolidated financial

statements are set out below:

(a) Basis of presentation

The consolidated financial statements are

prepared in accordance with International

Financial Reporting Standards (IFRS) issued by

the IASB and in particular with those IFRS

standards and IFRIC interpretations issued and

effective, or issued and early adopted, as at the

time of preparing these financial statements.

The policies set out below have been consistently

applied for the years 2005 and 2006.

The Group intends to adopt the following new

standards, amendments and interpretations to

existing standards, which are relevant to its

operations and are effective from the accounting

periods beginning on January 1, 2007 or later:

- IFRS 7, Financial Instruments: Disclosures,

and a complementary Amendment to IAS 1,

Presentation of Financial Statements - Capital

Disclosures

The consolidated financial statements are prepared

under the historical cost convention as modified by

the revaluation of available-for-sale investment

securities and of the financial assets and financial

liabilities (including derivative financial instruments)

at fair-value-through-profit-or-loss and by

the revaluation of investment property according

to the Fair value model adopted as per IAS 40. The

preparation of financial statements in conformity

with IFRS requires the use of estimates and

assumptions that affect the reported amounts of

assets and liabilities and disclosures of contingent

assets and liabilities at the date of the financial

statements and the reported amounts of revenues

and expenses during the reporting period.

Although these estimates are based on management’s

best knowledge of current events and

actions, actual results ultimately may differ from

those estimates.

The Group’s presentation currency is the Swiss

Franc (CHF), being the functional currency of the

holding company.

In the current year the Group considered all of

the new and revised Standards and

Interpretations issued by the International

Accounting Standards Board (IASB) and the

International Financial Reporting Interpretations

Committee (IFRIC) of the IASB effective for

accounting periods beginning on 1 January 2006.

With respect to IFRS 7, Management anticipates

that extended disclosure will be required in the

EFG Group


Notes to the Consolidated Financial Statements (continued)

areas of financial instruments and risk

management reporting.

(b) Consolidation

The Group is subject to full consolidation and

global regulatory supervision by the Swiss

Federal Banking Commission.

EFG Bank European Financial Group, (the

“Company”) is the sole holding company at the

head of the Group. The shareholders’ equity of

the Group is owned by both Latsis family

interests, through their shareholding in EFG Bank

European Financial Group and through their

shareholding of a related trust in an intermediate

holding company, and by minority interests.

Subsidiary undertakings are all entities over

which the Group, directly or indirectly, has the

power to exercise control over financial and

operating policies. The existence and effect of

potential voting rights that are currently

exercisable or convertible are considered when

assessing whether the Group controls another

entity. Subsidiaries are fully consolidated from

the date on which control is transferred to the

Group and are no longer consolidated from the

date that control ceases.

The purchase method of accounting is used to

account for the acquisition of subsidiaries by the

Group. The cost of an acquisition is measured at

the fair value of the assets given up, equity

instruments issued or liabilities undertaken at the

date of acquisition, plus costs directly

attributable to the acquisition. Identifiable assets

acquired and liabilities and contingent liabilities

assumed in a business combination are measured

initially at their fair values at the acquisition date

irrespective of the extent of any minority interest.

The excess of the cost of acquisition over fair

value of the identifiable net assets of the

subsidiary acquired (attributable to the Group) is

recorded as goodwill. If the cost of acquisition is

less than the fair value of the net assets of the

subsidiary acquired, the difference is recognised

directly in the statement of income. Increases of

the Group’s ownership interest in subsidiaries are

recorded as equity transactions and any

difference between the consideration given and

Annual Report 2006

the share of the new net assets acquired is

recorded directly in equity.

Gains or losses arising from disposals of

ownership interest that do not result in loss of

control by the Group are also recorded directly in

equity.

Intercompany transactions, balances and

unrealised gains on transactions between Group

companies are eliminated. Unrealised losses are

also eliminated but considered an impairment

indicator of the asset transferred.

The Group sponsors the formation of special

purpose entities, which may or may not be

directly owned subsidiaries for the purpose of

issuing short to medium term debt or asset

securitisation (see accounting policy (ab) below).

The entities may acquire assets directly from

Groups’ subsidiaries. These companies are

bankruptcy-remote entities and are consolidated

in the Group’s Financial Statements when the

substance of the relationship between the Group

and the entity indicates that the entity is

controlled by the Group.

Where necessary, accounting policies for

subsidiaries have been changed to ensure

consistency with the policies adopted by the

Group.

A listing of the Group’s principal subsidiaries is

set out in note 24.

(c) Associated undertakings

Investments in associated undertakings are

recognised initially at cost and subsequently

accounted for by the equity method of

accounting in the consolidated financial

statements. These are undertakings over which

the Group exercises significant influence but

which are not controlled, generally

accompanying a shareholding of between 20%

and 50% of the voting rights.

Equity accounting involves recognising, in the

statement of income, the Group’s share of the

associate’s post acquisition profit or loss for the

year. The Group’s interest in the associate is

carried on the balance sheet at an amount that

reflects its share of the net assets of the associate

Group

19


20

Notes to the Consolidated Financial Statements (continued)

and any goodwill identified on acquisition net of

any accumulated impairment losses. If the

Group’s share of losses of an associate equals or

exceeds its interest in the associate, the Group

discontinues recognising its share of further

losses, unless it has incurred obligations or made

payments on behalf of the associate. Where

necessary, the accounting policies used by the

associate have been changed to ensure

consistency with the policies of the Group.

A listing of the Group’s associated undertakings,

which are accounted for using the equity method,

is shown in note 25.

(d) Joint ventures

The Group’s interest in jointly controlled entities

are accounted for by the equity method of

accounting in the consolidated financial

statements and are treated as associates.

A listing of the Group’s joint ventures, is shown

in note 25.

(e) Foreign currencies

i) Functional and presentation currency

Items included in the financial statements of each

of the Group’s entities are measured using the

currency of the primary economic environment in

which the entity operates. The consolidated

financial statements are presented in CHF which

is the Group’s functional and presentation

currency.

Assets and liabilities of foreign subsidiaries are

translated using the closing exchange rate and

statement of income items at the average

exchange rate for the period reported. All

resulting exchange differences are recognised as a

separate component of equity (cumulative

translation adjustment).

Exchange differences arising from the

retranslation of the net investment in foreign

subsidiaries are taken to shareholders’ equity

until disposal of net investments and then

released to the statement of income.

(ii) Transactions and balances

Foreign currency transactions are translated into

the functional currency using the exchange rates

prevailing at the dates of the transactions.

Foreign exchange gains and losses resulting from

the settlement of such transactions and from the

translation at year-end exchange rates of

monetary assets and liabilities denominated in

foreign currencies are recognised in the statement

of income, except when deferred in equity as

qualifying cash flow hedges and qualifying net

investment hedges.

Translation differences on non-monetary items,

such as other financial assets held at fair-valuethrough-profit-

or-loss, are reported as part of the

fair value gain or loss. Translation differences on

non-monetary items, such as other financial

assets classified as available-for-sale financial

assets, are included in the fair value reserve in

equity.

Main foreign exchange rates against CHF used

by the Group were as follows:

2006 2005

Year-end Average Year-end Average

EUR 1.6069 1.5760 1.5551 1.5480

USD 1.2201 1.2467 1.3182 1.2511

GBP 2.3930 2.3121 2.2692 2.2671

(f) Derivative financial instruments and

hedging

Derivative financial instruments, including

foreign exchange contracts, forward currency

agreements and interest rate options (both

written and purchased), currency and interest

rate swaps, and other derivative financial

instruments, are initially recognised in the

balance sheet at fair value on the date on which a

derivative contract is entered and subsequently

are re-measured at their fair value. Fair values are

obtained from quoted market prices, including

recent market transactions, discounted cash flow

models and options pricing models, as

appropriate. All derivatives are carried as assets

when fair value is positive and as liabilities when

fair value is negative.

The best evidence of the fair value of a derivative

at initial recognition is the transaction price (i.e.,

the fair value of the consideration given or

received) unless the fair value of that instrument

is evidenced by comparison with other observable

current market transactions in the same

EFG Group


Notes to the Consolidated Financial Statements (continued)

instrument (i.e., without modification or

repackaging) or based on a valuation technique

whose variables include only data from

observable markets. When such evidence exists,

the Group recognises gains or losses on the

inception of the derivatives.

Certain derivatives, embedded in other financial

instruments, are treated as separate derivatives

when their risks and characteristics are not closely

related to those of the host contract and the host

contract is not carried at fair-value-through-profitor-loss.

These embedded derivatives are measured

at fair value with changes in fair value recognised

in the statement of income.

The method of recognising the resulting fair value

gain or loss depends on whether the derivative is

designated as a hedging instrument, and if so, the

nature of the item being hedged. The Group

designates certain derivatives as either: (i) hedges

of the fair value of recognised assets or liabilities or

unrecognised firm commitments (fair value hedge);

or, (ii) hedges of the exposure to variability in cash

flows of recognised assets or liabilities or highly

probable forecasted transaction (cash flow hedge)

or (iii) hedges of net investment in foreign

operations. Hedge accounting is used for

derivatives designated in this way provided certain

criteria are met.

The Group documents, at the inception of the

transaction, the relationship between hedging

instruments and hedged items, as well as its risk

management objective and strategy for

undertaking various hedge transactions. The

Group also documents its assessment, both at

hedge inception and on an ongoing basis, of

whether the derivatives that are used in hedging

transactions are highly effective in offsetting

changes in fair values or cash flows of hedged

items.

(i) Fair value hedge

Changes in the fair value of derivatives that are

designated and qualify as fair value hedges are

recorded in the statement of income, together

with any changes in the fair value of the hedged

asset or liability that are attributable to the

hedged risk.

Annual Report 2006

If the hedge no longer meets the criteria for hedge

accounting, the adjustment to the carrying

amount of a hedged item for which the effective

interest method is used is amortised to profit or

loss over the period to maturity. The adjustment

to the carrying amount of a hedged equity

security remains in retained earnings until the

disposal of the equity security.

(ii) Cash flow hedge

The effective portion of changes in the fair value

of derivatives that are designated and qualify as

cash flow hedges are recognised in equity. The

gain or loss relating to the ineffective portion is

recognised immediately in the statement of

income.

Amounts accumulated in equity are recycled to

the statement of income in the periods in which

the hedged item will affect profit or loss (for

example, when the forecast sale that is hedged

takes place).

When a hedging instrument expires or is sold, or

when a hedge no longer meets the criteria for

hedge accounting, any cumulative gain or loss

existing in equity at that time remains in equity

and is recognised when the forecast transaction is

ultimately recognised in the statement of income.

When a forecast transaction is no longer expected

to occur, the cumulative gain or loss that was

reported in equity is immediately transferred to

the statement of income.

(iii) Net investment hedge

Hedges of net investments in foreign operations

are accounted for similarly to cash flow hedges.

Any gain or loss on the hedging instrument

relating to the effective portion of the hedge is

recognised in equity; the gain or loss relating to

the ineffective portion is recognised immediately

in the statement of income. Gains and losses

accumulated in equity are included in the

statement of income when the foreign operation

is disposed of.

(iv) Derivatives that do not qualify for hedge

accounting

Certain derivative instruments do not qualify for

hedge accounting. Changes in the fair value of

any derivative instrument that does not qualify

Group

21


22

Notes to the Consolidated Financial Statements (continued)

for hedge accounting are recognised immediately

in the statement of income.

The fair values of derivative instruments held for

trading and hedging purposes are disclosed in

note 18.

(g) Offsetting financial instruments

Financial assets and liabilities are offset and the

net amount reported in the balance sheet when

there is a legally enforceable right to set off the

recognised amounts and there is an intention to

settle on a net basis, or realise the asset and settle

the liability simultaneously.

(h) Statement of income

(i) Interest income and expenses

Interest income and expenses are recognised in

the statement of income for all interest bearing

instruments on an accruals basis, using the

effective interest method. The effective interest

rate is the rate that exactly discounts estimated

future cash payments or receipts through the

expected life of the financial instrument or, when

appropriate, a shorter period to the net carrying

amount of the financial asset or financial liability.

When calculating the effective interest rate, the

Group estimates cash flows considering all

contractual terms of the financial instrument but

does not consider future credit losses. The

calculation includes all fees and points paid or

received between parties to the contract that are

an integral part of the effective interest rate,

transaction costs, and all other premiums or

discounts.

Once a financial asset or a group of similar

financial assets has been written down as a result

of an impairment loss, interest income is

recognised using the rate of interest used to

discount the future cash flows for the purpose of

measuring the impairment loss.

ii) Fees and commissions

Fees and commissions are generally recognised on

an accruals basis. Commissions and fees relating

to foreign exchange transactions, imports/

exports, remittances, bank charges, brokerage

activities and portfolio management are

recognised on the completion of the underlying

transaction.

(i) Property, plant and equipment

Property, plant and equipment is stated at cost

less accumulated depreciation and accumulated

impairment losses. Property, plant and equipment

is periodically reviewed for impairment, with any

impairment charge being recognised immediately

in the statement of income.

Depreciation is calculated on the straight-line

method to write down the cost of property, plant

and equipment, to their residual values over their

estimated useful life as follows:

- Land: No depreciation

- Freehold buildings: 40-50 years

- Leasehold improvements: over the life of the

lease contract or useful life if shorter

- Computer hardware and software: 3-10 years

- Other furniture and equipment: 4-20 years

- Motor vehicles: 5-7 years.

Property held for rental yields and/or capital

appreciation that is not occupied by the

companies in the Group is classified as

investment property. Investment properties are

carried at fair value and changes in the fair value

are recognised in the statement of income of the

period in which they arise. The Group employs

real estate experts who determine the fair value of

investment property by applying recognised

valuation techniques.

(j) Intangible assets

(i) Goodwill

Goodwill represents the excess of the cost of an

acquisition over the fair value of the Group’s

share of the net identifiable assets of the acquired

undertaking, at the date of acquisition. The cost

of acquisition is adjusted for changes in the

purchase consideration contingent on future

events.

Goodwill on acquisitions of subsidiaries is

included in ‘intangible assets’. Goodwill on

acquisitions of associates is included in

‘investments in associates’. Negative goodwill is

recognised in the statement of income. The

carrying amount of goodwill is re-assessed

EFG Group


Notes to the Consolidated Financial Statements (continued)

annually and if found to be impaired it is written

down to its recoverable amount.

Goodwill is allocated to cash generating units for

the purpose of impairment testing. Gains and

losses on the disposal of an entity include the

carrying amount of goodwill relating to the entity

sold.

(ii) Computer software

Costs associated with the maintenance of existing

computer software programmes are expensed as

incurred. Development costs associated with the

production of identifiable and unique products

controlled by the Group, that will probably

generate economic benefits exceeding costs

beyond one year, are recognised as intangible

assets and are amortised using the straight-line

method over 3 -5 years except for core systems

whose useful life may extend up to 10 years.

(iii) Other intangible assets

Other intangible assets are assets that are

separable or arise from contractual or other legal

rights, and are amortised over their useful lives.

These include intangible assets acquired in

business combinations.

(k) Financial assets

The Group classifies its financial assets in the

following categories: financial assets at fair-valuethrough-profit-or-loss;

loans and receivables;

held-to-maturity investments; and available-forsale

financial assets. Management determines the

classification of its investments at initial

recognition.

(i) Financial assets at fair-value-through-profitor-loss

This category has two sub-categories: financial

assets held for trading, and those designated at

fair-value-through-profit-or-loss at inception. A

financial asset is classified in this category if

acquired principally for the purpose of selling in

the short term or if so designated by

management. Derivatives are also categorised as

held for trading unless they are designated as

hedges.

(ii) Loans and receivables

Loans and receivables are non-derivative

financial assets with fixed or determinable

Annual Report 2006

payments that are not quoted in an active market,

other than those that the entity upon initial

recognition designates as at fair-value- throughprofit-or-loss

and those that the entity upon

initial recognition designates as available for sale.

They arise when the Group provides money,

goods or services directly to a debtor.

(iii) Held-to-maturity

Held-to-maturity investments are non-derivative

financial assets with fixed or determinable

payments and fixed maturities that the Group’s

management has the positive intention and ability

to hold to maturity. Were the Group to sell other

than an insignificant amount of held-to-maturity

assets, the entire category would be tainted and

reclassified as available for sale.

(iv) Available-for-sale

Available-for-sale investments are those intended

to be held for an indefinite period of time, which

may be sold in response to needs for liquidity or

changes in interest rates, exchange rates or equity

prices.

(v) Accounting treatment and calculation

Purchases and sales of financial assets at fairvalue-through-profit-or-loss,

held to maturity

and available-for-sale are recognised on trade

date, the date on which the Group commits to

purchase or sell the asset. Loans are recognised

when cash is advanced to the borrowers.

Financial assets are initially recognised at fair

value plus transaction costs for all financial assets

not carried at fair-value-through-profit-or- loss.

Financial assets are derecognised when the rights

to receive cash flows from the financial assets

have expired or where the Group has transferred

substantially all risks and rewards of ownership.

Available-for-sale financial assets and financial

assets at fair-value-through-profit-or-loss are

subsequently carried at fair value. Loans and

receivables and held-to-maturity investments are

carried at amortised cost using the effective

interest method. Gains and losses arising from

changes in the fair value of the ‘financial assets at

fair-value-through-profit-or-loss’ category are

included in the statement of income in the period

in which they arise. Gains and losses arising from

changes in the fair value of available-for-sale

financial assets are recognised directly in equity,

Group

23


24

Notes to the Consolidated Financial Statements (continued)

until the financial asset is derecognised or

impaired at which time the cumulative gain or

loss previously recognised in equity should be

recognised in profit or loss. However, interest

calculated using the effective interest method is

recognised in the statement of income. Dividends

on available-for-sale equity instruments are

recognised in the statement of income when the

entity’s right to receive payment is established.

The fair values of quoted investments in active

markets are based on current bid prices. If the

market for a financial asset is not active (and for

unlisted securities), the Group establishes fair

value by using valuation techniques. These

include the use of recent arm’s length

transactions, reference to the current fair value of

another instrument that is substantially the same,

discounted cash flow analysis, option pricing

models and other valuation techniques

commonly used by market participants.

(l) Impairment of financial assets

The Group assesses at each balance sheet date

whether there is objective evidence that a

financial asset or group of financial assets is

impaired. A financial asset or a group of financial

assets is impaired and impairment losses are

incurred if, there is objective evidence of

impairment as a result of one or more events that

occurred after the initial recognition of the asset

(a ‘loss event’) and that loss event (or events) has

an impact on the estimated future cash flows of

the financial asset or group of financial assets that

can be reliably estimated. Objective evidence that

a financial asset or group of assets is impaired

includes observable data that comes to the

attention of the Group about the following loss

events:

1) significant financial difficulty of the issuer or

obligor;

2) a breach of contract, such as a default or

delinquency in interest or principal payments;

3) the Group granting to the borrower, for

economic or legal reasons relating to the

borrower’s financial difficulty, a concession

that the lender would not otherwise consider;

4) it becoming probable that the borrower will

enter bankruptcy or other financial

reorganisation;

5) the disappearance of an active market for that

financial asset because of financial difficulties;

or

6) observable data indicating that there is a

measurable decrease in the estimated future

cash flows from a group of financial assets

since the initial recognition of those assets,

although the decrease cannot yet be identified

with the individual financial assets in the

group, including:

- adverse changes in the payment status of

borrowers in the group; or

- national or local economic conditions that

correlate with defaults on the assets in the

group.

(i) Assets carried at amortised cost

The Group first assesses whether objective

evidence of impairment exists individually for

financial assets that are individually significant,

and individually or collectively for financial

assets that are not individually significant. If the

Group determines that no objective evidence of

impairment exists for an individually assessed

financial asset, whether significant or not, it

includes the asset in a group of financial assets

with similar credit risk characteristics and

collectively assesses them for impairment. Assets

that are individually assessed for impairment and

for which an impairment loss is or continues to

be recognised are not included in a collective

assessment of impairment.

If there is objective evidence that an impairment

loss on loans and receivables or held-to-maturity

investments carried at amortised cost has been

incurred, the amount of the loss is measured as

the difference between the asset’s carrying

amount and the present value of estimated future

cash flows (excluding future credit losses that

have not been incurred) discounted at the

financial asset’s original effective interest rate.

The carrying amount of the asset is reduced

through the use of an allowance account and the

amount of the loss is recognised in the statement

of income. If a loan or held-to-maturity

investment has a variable interest rate, the

EFG Group


Notes to the Consolidated Financial Statements (continued)

discount rate for measuring any impairment loss

is the current effective interest rate determined

under the contract. As a practical expedient, the

Group may measure impairment on the basis of

an instrument’s fair value using an observable

market price.

The calculation of the present value of the

estimated future cash flows of a collateralised

financial asset reflects the cash flows that may

result from foreclosure less costs for obtaining

and selling the collateral, whether or not

foreclosure is probable.

For the purposes of a collective evaluation of

impairment, financial assets are grouped on the

basis of similar credit risk characteristics (i.e., on

the basis of the Group’s grading process that

considers asset type, industry, geographical

location, collateral type, past-due status and other

relevant factors). Those characteristics are relevant

to the estimation of future cash flows for groups of

such assets by being indicative of the debtors’

ability to pay all amounts due according to the

contractual terms of the assets being evaluated.

Future cash flows in a group of financial assets

that are collectively evaluated for impairment are

estimated on the basis of the contractual cash

flows of the assets in the Group and historical

loss experience for assets with credit risk

characteristics similar to those in the Group.

Historical loss experience is adjusted on the basis

of current observable data to reflect the effects of

current conditions that did not affect the period

on which the historical loss experience is based

and to remove the effects of conditions in the

historical period that do not exist currently.

Estimates of changes in future cash flows for

groups of assets should reflect and be

directionally consistent with changes in related

observable data from period to period (for

example, changes in unemployment rates,

property prices, payment status, or other factors

indicative of changes in the probability of losses

in the group and their magnitude). The

methodology and assumptions used for

estimating future cash flows are reviewed

regularly by the Group to reduce any differences

between loss estimates and actual loss experience.

Annual Report 2006

When a loan is uncollectable, it is written off

against the related provision for loan impairment.

Such loans are written off after all the necessary

procedures have been completed and the amount

of the loss has been determined. Subsequent

recoveries of amounts previously written off

decrease the amount of the provision for loan

impairment in the statement of income.

If, in a subsequent period, the amount of the

impairment loss decreases and the decrease can be

related objectively to an event occurring after

the impairment was recognised (such as an

improvement in the debtor’s credit rating), the

previously recognised impairment loss is reversed by

adjusting the allowance account. The amount of the

reversal is recognised in the statement of income.

(ii) Available-for-sale assets

In case of equity and debt investments classified

as available-for-sale, a significant or prolonged

decline in the fair value of the security below its

cost is considered in determining whether the

assets are impaired. If any such evidence exists

for available-for-sale financial assets, the

cumulative loss, measured as the difference

between the acquisition cost and the current fair

value, less any impairment loss on that financial

asset previously recognised in profit or loss, is

removed from equity and recognised in the

statement of income.

Impairment losses recognised in the statement of

income on equity instruments are not reversed

through the statement of income. If, in a

subsequent period, the fair value of a debt

instrument classified as available-for-sale increases

and the increase can be objectively related to an

event occurring after the impairment loss was

recognised in the statement of income, the

impairment loss is reversed through the statement

of income.

(m) Sale and repurchase agreements and

securities lending

(i) Sale and repurchase agreements

Securities sold subject to repurchase agreements

(‘repos’) are reclassified in the financial

statements as pledged assets when the transferee

has the right by contract or custom to sell or

repledge the collateral; the counterparty liability

Group

25


26

Notes to the Consolidated Financial Statements (continued)

is included in amounts due to other banks or

deposits due to customers, as appropriate.

Securities purchased under agreements to resell

(«reverse repos») are recorded as loans and

advances to other banks or customers as

appropriate. The difference between the sale and

repurchase price is treated as interest and accrued

over the period of the repo agreements using the

effective interest method.

(ii) Securities lending

Securities lent to counterparties are also retained

in the financial statements.

Securities borrowed are not recognised in the

financial statements, unless these are sold to third

parties, in which case the purchase and sale are

recorded with the gain or loss included in trading

income. The obligation to return them is recorded

at fair value as a trading liability.

(n) Borrowings

Borrowings are recognised initially at fair value,

being their issue proceeds (fair value of

consideration received) net of transaction costs

incurred. Borrowings are subsequently stated at

amortised cost; any difference between proceeds

net of transaction costs and the redemption value

is recognised in the statement of income over the

period of the borrowings using the effective

interest method.

If the Group purchases its own debt, it is removed

from the balance sheet, and the difference

between the carrying amount of a liability and

the consideration paid is included in Gains less

losses from investment securities.

(o) Financial liabilities at fair-valuethrough-profit-or-loss

The Group classifies its financial liabilities in the

following categories: financial liabilities held for

trading and financial liabilities that are

designated by the Group at the time of initial

recognition as measured at fair-value-throughprofit-or-loss.

From January 1, 2005, the Group has early

adopted the amended version of IAS 39:

Recognition and Measurement – the Fair Value

Option to financial liabilities, or group of

financial liabilities managed and evaluated on a

fair value basis, in order to reduce accounting

inconsistencies and complexities. Specifically, the

following liabilities are designated as at fairvalue-through-profit-or-loss

:

(i) liabilities contractually linked to the

performance of assets (unit-linked products) and

(ii) structured products (customer deposits and

notes issued) containing embedded derivatives

that are managed using a mix of derivative and

non - derivative instruments.

Gains and losses arising from changes in the fair

value of the fair-value-through-profit-or-loss

liabilities are included in the statement of income

in the period in which they arise.

(p) Leases

(i) Accounting for leases as lessee

Leases of property, plant and equipment where

the Group has substantially all the risks and

rewards of ownership are classified as finance

leases. Finance leases are capitalised at the

inception of the lease at the lower of the fair value

of the leased property or the present value of the

minimum lease payments. Each lease payment is

allocated between the liability and finance

charges so as to achieve a constant rate on the

finance balance outstanding. The interest element

of the finance cost is charged to the statement of

income over the lease period. The property, plant

and equipment acquired under finance leases is

depreciated over the shorter of the useful life of

the asset or the lease term.

Leases where a significant portion of the risks

and rewards of ownership are retained by the

lessor are classified as operating leases. Payments

made under operating leases (net of any

incentives received from the lessor) are charged to

the statement of income on a straight-line basis

over the period of the lease.

(ii) Accounting for leases as lessor

1) Finance leases:

When assets are leased out under a finance lease,

the present value of the lease payments is

recognised as a receivable. The difference between

the gross receivable and the present value of the

EFG Group


Notes to the Consolidated Financial Statements (continued)

receivable is recognised as unearned finance

income. Lease income is recognised over the term

of the lease using the net investment method,

which reflects a constant periodic rate of return.

2) Operating leases:

Assets leased out under operating leases are

included in property, plant and equipment in the

balance sheet. They are depreciated over their

expected useful lives on a basis consistent with

similar owned property, plant and equipment.

Rental income (net of any incentives given to

lessees) is recognised on a straight-line basis over

the lease term.

(q) Deferred and current income tax

Deferred income tax is provided, using the

liability method, on all temporary differences

arising between the tax bases of assets and

liabilities, and their carrying values for financial

reporting purposes. The expected effective tax

rates are used to determine deferred income tax.

The principal temporary differences arise from

loan impairment, depreciation of property, plant

and equipment, pension and other retirement

benefits obligations, and revaluation of certain

financial assets and liabilities, including

derivative instruments.

Deferred tax assets are only recognised to the

extent that it is probable that they will crystallise in

the future. Deferred tax related to changes in fair

values of available-for-sale investments and cash

flow hedges, which are taken directly to equity, is

also charged or credited directly to equity and is

subsequently recognised in the statement of

income, together with the deferred gain or loss.

Income tax payable on profits, based on the

applicable tax law in each jurisdiction is

recognised as an expense in the period in which

profits arise. The tax effects of income tax losses

available for carry forward are recognised as an

asset when it is probable that future taxable

profits will be available against which these losses

can be utilised.

(r) Employee benefits

(i) Pension obligation

The Group operates various pension schemes

which are either defined contribution or defined

Annual Report 2006

benefit plans, depending on prevailing practice in

each country.

For defined contribution plans, the Group pays

contributions into a separate legal entity or to

publicly or privately administered pension plans.

The Group has no further payment obligations

once the contributions have been paid. The

contributions are recognised as employee benefit

expense in the year to which they relate. This

applies to most of the locations where the Group

operates except principally for Switzerland.

In Switzerland, the Group maintains several

pension plans, which are classified as defined

contribution or defined benefit plans according to

Swiss pension law. However, these plans

incorporate certain guarantees of minimum

interest accumulation and conversion of capital

to pension. As a result, these plans have been

reported as defined benefit pension plans.

The Group’s legal obligation in respect of these

plans is, in fact, only to pay contributions at

defined rates, and the defined benefit reporting is

based on a constructive and not a legal obligation

of the employer.

Pension cost and liability has been measured

using the projected unit credit actuarial cost

method and assumptions established as defined in

IAS19. The calculations have been carried out by

independent actuaries at the applicable reporting

dates.

The pension expenses recognized in the statement

of income for these plans considered as defined

benefits for IAS 19 purposes is the actuarially

determined expense less the amount of employee

contributions.

Actuarial gains and losses are recognised as

income or expense when the net cumulative

unrecognised actuarial gains and losses for each

individual plan at the end of the previous

reporting year exceeded 10% of the higher of the

defined benefit obligation and the fair value of

plan assets at that date. These gains and losses are

recognised over the expected average remaining

working lives of the employees participating in

the plans.

Group

27


28

Notes to the Consolidated Financial Statements (continued)

(ii) Standard legal staff retirement indemnity

obligations

In accordance with local labour legislation at

some of the Group’s subsidiaries, if employees

remain in their employment until normal

retirement age, they are entitled to a lump sum

payment which is based on the number of years

of service and the level of remuneration at the

date of retirement. Provision has been made for

the actuarial value of the lump sum payable on

retirement (SRLI) using the projected unit credit

method. Under this method, the cost of

providing retirement indemnities is charged to

the statement of income so as to spread the cost

over the period of service of the employees, in

accordance with actuarial valuations which are

performed every year. The SRLI obligation is

calculated as the present value of the estimated

future cash outflows using interest rates of

government securities which have terms to

maturity approximating the terms of the related

liability.

Actuarial gains and losses that arise in calculating

the Group’s obligation in respect of the standard

legal staff retirement obligations are charged

directly in the profit and loss for the year.

In addition, one of the Group’s main subsidiaries

has enhanced the above provision by taking into

consideration potential separations before

normal retirement based on the terms of previous

Voluntary Separation Schemes. It recognizes

separation indemnity when it is demonstrably

committed to separations either according to

detailed formal plans which are announced and

cannot be withdrawn or as a result of mutually

agreed termination terms. Benefits payable in

more than 12 months from the balance sheet date

are discounted to present value.

(iii) Performance based cash payments

The Group’s management awards high

performing employees with bonuses in cash, from

time to time, on a discretionary basis. Cash

payments requiring only Management approval

are recognised as employee benefit expenses on

an accrual basis. Cash payments requiring

General Meeting approval as distribution of

profits to staff are recognised as employee benefit

expense in the accounting period that they are

approved by the Company’s shareholders.

(iv) Performance based share-based payments

The Group’s management awards highperforming

employees with bonuses in the form

of shares and share options, from time to time, on

a discretionary basis. The shares vest in the

period granted. The fair value of the shares

granted is recognised as an employee benefit

expense with a corresponding increase in share

capital (par value) and share premium.

Options, following vesting periods of 20 to 32

months, are exercisable on alternative dates

within a 24 or 36 month period, only if the

holders are still employed by the Group. The fair

value of the options granted is recognised as an

employee benefit expense with a corresponding

increase in shareholders’ equity. The proceeds

received net of any directly attributable

transaction costs are credited to shareholders’

equity when the options are exercised.

(s) Insurance activities

(i) Revenue recognition

Premiums are recognised as revenue (earned

premiums) proportionally over the period of

coverage. For long term contracts, revenue is

recognised upon issue / receipt. The matching

expense is recognised together with the

recognition of mathematical provisions. Interest

income is recognised on an accrual basis.

(ii) Provision for insurance liabilities

Insurance provisions are classified as follows:

1) Mathematical provisions

Mathematical provisions represent insurance

provisions for long-term life insurance contracts.

They are calculated in accordance with actuarial

techniques, after taking into account the technical

assumptions imposed by supervisory authorities

(mortality table and the technical interest rate in

effect at the contract’s inception), as the

difference between the actuarial present value of

the Group’s liabilities and the present value of the

premiums to be received.

2) Unearned premiums’ provisions

Unearned premiums’ provisions represent part of

net premiums received, regarding contracts with

annual commencement and termination dates,

which differ from the Group’s fiscal year, and

they cover proportionately the period from the

EFG Group


Notes to the Consolidated Financial Statements (continued)

reporting date to the termination of the period

covered by the respective premium.

3) Outstanding claims’ provisions

Outstanding claims provisions concern liabilities

on claims occurred and reported but not fully

settled by the end of the reporting period. The

specified liabilities are examined on a case-bycase

basis by professional valuers, based on

existing information (loss adjustors’ reports,

medical reports, court decisions etc). The Group

recognises additional provisions regarding claims

incurred but not reported (IBNR) by the end of

the reporting period. The calculation of these

provisions is based on statistical methodologies in

order to estimate the average cost per claim and

the number of claims.

(iii) Liability adequacy

At each reporting date, the Group performs tests

to assess the adequacy of the recognised

insurance provisions, after deducting deferred

acquisition costs, in accordance with IFRS 4. In

case the assessment results to inadequate

provisions, the entire deficiency is recognised in

the statement of income.

To assess the mathematical provisions for life

insurance contracts, the Group compares the

recognised provisions with the present values of

the estimated liabilities regarding the specified

group of contracts. To assess the adequacy of the

outstanding claims provisions the triangulation

methodology is used, based on statistical data of

the last five years.

(iv) Reinsurance

Contracts entered into by the Group with

reinsurers under which the Group is compensated

for losses on one or more contracts issued by the

Group and that meet the classification

requirements for insurance contracts are

classified as reinsurance contracts held.

The benefits to which the Group is entitled under

its reinsurance contracts held are recognised as

reinsurance assets. These assets consist of shortterm

balances due from reinsurers, as well as

longer term receivables that are dependent on the

expected claims and benefits arising under the

related reinsured insurance contracts. Amounts

recoverable from or due to reinsurers are

Annual Report 2006

measured consistently with the amounts

associated with the reinsured insurance contracts

and in accordance with the terms of each

reinsurance contract. Reinsurance liabilities are

primarily premiums payable for reinsurance

contracts and are recognised as an expense when

due.

The Group assesses its reinsurance assets for

impairment at each reporting date. If there is

objective evidence that the reinsurance asset is

impaired, the Group reduces the carrying amount

of the reinsurance asset to its recoverable amount

and recognises that impairment loss in the

statement of income.

(t) Repossessed properties

Land and buildings repossessed through the

auction process to recover impaired loans are,

except where otherwise stated, included in

“Other Assets”. Assets acquired from the

auction process are held temporarily for

liquidation and are valued at the lower of cost

and net realisable value. Any gains or losses on

liquidation are included in “Other operating

income”.

(u) Related party transactions

Related parties include associates, directors, their

close families, companies owned or controlled by

them and companies whose financial and

operating policies they can influence.

Transactions of a similar nature are disclosed on

an aggregate basis. All banking transactions that

are entered into with related parties are in the

normal course of business and on an arm’s length

basis.

(v) Provisions

Provisions are recognised when the Group has a

present legal or constructive obligation as a result

of past events, it is probable that an outflow of

resources embodying economic benefits will be

required to settle the obligation, and a reliable

estimate of the amount of the obligation can be

made.

(w) Segment reporting

A segment is a distinguishable component of the

Group that is engaged in providing products or

Group

29


30

Notes to the Consolidated Financial Statements (continued)

services within a particular economic

environment. The Group is organised into five

main business segments. Segment revenue,

segment expenses and segment performance

include transfers between business segments.

Such transfers are accounted for at competitive

prices in line with charges to unaffiliated

customers for similar services.

(x) Treasury shares of quoted subsidiaries

Where the Company, or any of its subsidiaries,

purchases shares in the quoted share capital of any

company in the Group, or obtains rights to do so,

the consideration paid, including any directly

attributable incremental costs (net of income

taxes), is deducted from total shareholders’ equity

until the shares are cancelled, reissued or disposed

of. Where such shares are subsequently sold or

reissued, any consideration received is included in

shareholder’s equity.

Incremental costs directly attributable to the issue

of new shares from Group’s quoted subsidiaries

are shown in equity as a deduction from the

proceeds, net of tax.

(y) Dividend distributions

Dividend distribution on ordinary shares is

recognised as a deduction in the Group’s equity

when approved by the corresponding company’s

shareholders. Interim dividends are recognised as

a deduction in the Group’s equity when approved

by the local Board of Directors.

(z) Preferred Securities

Callable non-voting preferred securities, which

have no fixed redemption date and pay noncumulative

dividend are classified as equity.

Incremental costs directly attributable to the issue

of new preferred securities are shown in equity as

a deduction from the proceeds, net of tax.

Dividend distribution on preferred securities is

recognised as a deduction in the Group’s equity

on the date it is due.

Where preferred securities, issued by the Group,

are repurchased, the consideration paid including

any directly attributable incremental costs (net of

income taxes), is deducted from shareholders’

equity. Where such securities are subsequently

called or sold, any consideration received is

included in shareholders’ equity.

(aa) Derecognition

The Group enters into transactions where it

transfers assets recognised on its balance sheet,

but retains either all risks and rewards of the

transferred assets or a portion of them. If all or

substantially all risks and rewards are retained,

the transferred assets are not derecognised from

the Balance Sheet. In transactions where the

Group neither retains nor transfers substantially

all the risks and rewards of ownership of a

financial asset, it derecognises the asset, if control

over the asset is lost.

(ab) Securitisations

The Group securitises various financial assets,

which generally results in the sale of the assets to

special purpose entities (see accounting policy (b)

above), which, in turn issue securities to

investors. Interests in the securitised financial

assets may be retained in the form of

subordinated tranches or other residual interests.

(ac) Fiduciary activities

Where the Group acts in a fiduciary capacity,

such as nominee, trustee or agent, assets and

income arising on fiduciary activities, together

with related undertakings to return such assets to

customers, are excluded from on-balance sheet

positions.

(ad) Cash and cash equivalents

Cash and cash equivalents includes cash in hand,

deposits held at call with banks, other short-term

highly liquid investments with original maturities

of three months or less, and bank drafts.

ae) Comparatives

Where necessary, comparative figures have been

adjusted to conform with changes in presentation

in the current year.

3. Critical accounting estimates and

judgements in applying accounting

policies

In the process of applying the Group’s accounting

policies, the Group’s management makes various

EFG Group


Notes to the Consolidated Financial Statements (continued)

judgments, estimates and assumptions that affect

the reported amounts of assets and liabilities

recognized in the financial statements within the

next financial year. Estimates and judgments are

continually evaluated and are based on historical

experience and other factors, including

expectations of future events that are believed to

be reasonable under the circumstances.

(a) Impairment losses on loans and

advances

The Group continually reviews its loan portfolios

to assess impairment. In determining whether an

impairment loss should be recorded in the

statement of income, the Group makes judgments

as to whether there is any observable data

indicating that there is a measurable decrease in

the estimated future cash flows from a portfolio

of loans before the decrease can be identified with

an individual loan in that portfolio. This evidence

may include observable data indicating that there

has been an adverse change in the payment status

of borrowers in a group, or national or local

economic conditions that correlate with defaults

on assets in the group. Management uses

estimates based on historical loss experience for

assets with credit risk characteristics and

objective evidence of impairment similar to those

in the portfolio when scheduling its future cash

flows. The methodology and assumptions used

for estimating both the amount and timing of

future cash flows are reviewed regularly to reduce

any differences between loss estimates and actual

loss experience.

(b) Estimated impairment of goodwill

The Group tests annually whether goodwill has

suffered an impairment in accordance with the

accounting policy stated in note 2(j). The

recoverable amounts of cash-generating units are

determined based either on value-in-use or on fair

values less cost to sell calculations. These

calculations are based on profitability and cash

flow projections, which require the use of

estimates such as growth rates for revenues and

expenses and profit margins.

(c) Fair value of financial instruments

The fair value of financial instruments that are

not quoted in an active market are determined by

Annual Report 2006

using valuation techniques. Where valuation

techniques are used to determine fair values, they

are validated and periodically reviewed by

qualified personnel independent of the personnel

that created them. All models are certified before

they are used, and models are calibrated to ensure

that outputs reflect actual data and comparative

market prices. To the extent practicable, models

use only observable data, however areas such as

credit risk (both own and counterparty),

volatilities and correlations require management

to make estimates. Changes in assumptions about

these factors could affect the reported fair value

of financial instruments.

(d) Impairment of available-for-sale equity

investments

The Group determines that available-for-sale

equity investments are impaired when there has

been a significant or prolonged decline in the fair

value of the equity investments below their cost.

In determining what is significant or prolonged

the Group’s management exercises judgment. In

making this judgement, the Group evaluates

among other factors, the normal volatility in

share price. In addition, impairment may be

appropriate when there is evidence of

deterioration in the financial health of the

investee, industry and sector performance,

changes in technology, and operational and

financing cash flows.

(e) Securitisations and special purpose

entities

The Group sponsors the formation of special

purpose financing entities (SPEs) for various

purposes including asset securitisation. The

Group may or may not directly own the SPEs and

consolidates those SPEs that it controls. In

determining whether the Group controls an SPE,

it makes judgements about its exposure to the

risks and rewards related to the SPE and about its

ability to make operational decisions for the SPE

in question.

(f) Income taxes

The Group is subject to income taxes in various

jurisdictions and estimates are required in

determining the provision for income taxes.

There are many transactions and calculations for

Group

31


32

Notes to the Consolidated Financial Statements (continued)

which the ultimate tax determination is uncertain

during the ordinary course of business. The

Group recognizes liabilities for anticipated tax

audit issues based on estimates of whether

additional taxes will be due. Where the final tax

outcome of these matters is different from the

amounts that were initially recorded, such

differences will impact the income tax and

deferred tax provisions in the period in which

such determination is made.

4. Financial risk management

(a) Use of financial instruments

By its nature the Group’s activities are related to

the use of financial instruments including

derivatives. The Group accepts deposits from

customers, at both fixed and floating rates, and

for various periods and seeks to earn above

average interest margins by investing these funds

in high quality assets. The Group seeks to

increase these margins by consolidating shortterm

funds and lending for longer periods at

higher rates, whilst maintaining sufficient

liquidity to meet claims that might fall due. The

Group also seeks to raise its interest margins by

obtaining above average margins, net of

provisions, through lending to commercial and

retail borrowers within a range of credit

standing. Such exposures include both onbalance

sheet loans and advances and off-balance

sheet guarantees and other commitments, such as

letters of credit.

The Group also trades in financial instruments,

where it takes positions in traded and over the

counter instruments, including derivatives, to

take advantage of short-term market movements

in the equity and bond markets, and in currency

and interest rate prices. Under the supervision of

the Group’s board of directors, the local boards

of directors at each of the Group’s entities, place

trading limits on the level of exposure that can be

taken in relation to overnight and intra-day

market positions, as well as limits in longer

durations. With the exception of specific hedging

arrangements, foreign exchange and interest rate

exposures associated with these derivatives are

normally concluded to hedge outstanding

positions, thereby controlling the variability in

the net cash amounts required to offset market

positions.

(i) Fair value hedges

The Group hedges a proportion of its existing

interest rate risk resulting from any potential

decrease in the fair value of fixed rate availablefor-sale

bonds and any potential increase in the

fair value of deposits denominated both in local

and foreign currencies, using interest rate and

cross currency interest rate swaps. The net fair

value of these swaps at December 31, 2006 was

CHF 193 million negative (2005: CHF 547

million negative) (note 18).

(ii) Cash flow hedges

The Group hedges a proportion of its existing

interest rate risk resulting from any cash flow

variability associated with future interest rate

changes on variable rate assets or liabilities or

unrecognised highly probable forecast

transactions using interest rate swaps. The net

fair value of these swaps at December 31, 2006

was CHF 12 million negative (2005: CHF 27

million negative) (note 18).

(b) Financial risk factors

The Group’s activities expose it to a variety of

financial risks: credit risk, market risk (including

currency risk and interest rate risk) and liquidity

risk. The Group’s overall risk management

policies focus on the unpredictability of financial

markets and seek to minimise potential adverse

effects on the Group’s financial performance,

financial position and cash flows.

(i) Credit risk

The Group takes on exposure to credit risk,

which is the risk that a counterparty will be

unable to pay amounts in full when due.

Impairment provisions are recognised for losses

that have been incurred at the balance sheet date.

Significant changes in the economy, or in the

health of a particular industry segment that

represents a concentration in the Group’s

portfolio, could result in losses that are different

from those provided for at the balance sheet date.

Management therefore carefully manages its

exposure to credit risk.

The Group structures the levels of credit risk it

undertakes by placing limits on the amount of

EFG Group


Notes to the Consolidated Financial Statements (continued)

risk accepted in relation to one borrower, or

groups of borrowers, and to geographical and

industry segments. Such risks are monitored on a

revolving basis and are subject to an annual or

more frequent review. The exposure to any one

borrower including banks and brokers is further

restricted by sub limits covering on- and offbalance

sheet exposures, and daily delivery risk

limits in relation to trading items such as forward

foreign exchange contracts. Actual exposures

against limits are monitored on a daily basis.

The Group is active in the corporate, retail,

mortgage and lombard lending markets. Credit

risk is well spread over a diversity of personal and

commercial customers. Exposure to credit risk is

managed through regular analysis of the ability

of borrowers and potential borrowers to meet

interest and capital repayment obligations and by

changing the lending limits where appropriate.

The Group reduces its credit risk associated with

loans and advances to customers by entering into

collateralised arrangements. The types of

collateral that the Group primarily obtains are

cash deposits and other cash equivalents, real

estate, securities, and bank guarantees. The

Group as at December 31, 2006, has 58% (2005:

68%) of the total aggregate amount of the net

loans and advances to customers covered by

collateral.

Economic sector risk concentrations within the

Group’s customer loan portfolio are analysed in

note 19.

1) Derivatives

The Group maintains control limits on net open

derivative positions, that is, the difference

between purchase and sale contracts, by both

amount and term. At any one time, the amount

subject to credit risk is limited to the current fair

value of instruments that are favourable to the

Group (i.e. derivatives with positive fair value),

which in relation to derivatives is only a small

fraction of the contract notional amount used to

express the volume of instruments outstanding.

This credit risk exposure is managed as part of

the overall lending limits with customers,

together with potential exposure from market

movements. Collateral or other security is not

usually obtained for credit risk exposures on

these instruments, except where the Group

Annual Report 2006

requires margin deposits from counterparties.

Further details of the Group’s derivative

instruments are provided in note 18.

2) Master netting arrangements

The Group further restricts its exposure to credit

losses by entering into master netting

arrangements with counterparties with which it

undertakes a significant volume of transactions.

Master netting arrangements do not generally

result in an offset of balance sheet assets and

liabilities, as transactions are usually settled on a

gross basis. However, the credit risk is reduced by

a master netting arrangement to the extent that if

an event of default occurs, all amounts with the

counterparty are terminated and settled on a net

basis. The Group’s overall exposure to credit risk

on derivative instruments subject to master

netting arrangements can change substantially

within a short period since it is affected by each

transaction subject to the arrangement.

3) Credit related commitments

The primary purpose of credit related

commitments is to ensure that funds are available

to a customer as required. Guarantees and

standby letters of credit carry the same credit risk

as loans since they represent irrevocable

assurances that the Group will make payments in

the event that a customer cannot meet its

obligations to third parties. Documentary and

commercial letters of credit, which are written

undertakings by the Group on behalf of a

customer authorising a third party to draw drafts

on the Group up to a stipulated amount under

specific terms and conditions, are normally

secured by the underlying shipment of goods to

which they relate and therefore carry less risk

than a loan.

Commitments to extend credit represent unused

portions of authorisations to extend credit in the

form of loans, guarantees or letters of credit.

With respect to credit risk on commitments to

extend credit, the Group is potentially exposed to

loss in an amount equal to the total unused

commitments. However, the likely amount of loss

is less than the total unused commitments, as

most commitments to extend credit are

contingent upon customers maintaining specific

credit standards. The Group monitors the term to

maturity of credit commitments because longer

Group

33


34

Notes to the Consolidated Financial Statements (continued)

term commitments generally have a greater

degree of credit risk than shorter-term

commitments.

4) Geographical concentration of assets,

liabilities and off balance sheet items

An analysis of the geographical concentration of

assets, liabilities and off-balance sheet items to

illustrate the concentrations of credit risk in

relation to geographical areas is shown in note

37.

Geographical sector risk concentrations within

the Group’s customer loan portfolio are analysed

in note 19.

(ii) Market risk

The Group takes on exposure to market risks.

Market risks arise from open positions in interest

rate, currency and equity products, all of which

are exposed to general and specific market

movements. The Group applies a ‘value at risk’

(VaR) methodology to estimate the market risk of

positions held and the potential economic loss,

based upon a number of assumptions for various

changes in market conditions.

The VaR that the Group measures is an estimate

with a confidence level set at 99% (2005: 95%)

of the potential loss that might arise if the current

positions were to be held unchanged for a 10 day

horizon (holding period). The measurement is

structured so that within a 10-day horizon losses

exceeding the VaR figure should occur, on

average, no more than once every 4 years. Actual

outcomes are monitored regularly to test the

validity of the assumptions and the parameters

used in the VaR calculation.

Since VaR constitutes an integral part of the

Group’s market risk control regime, VaR limits

have been established for all (trading and

banking book) operations. The average daily VaR

for the Group during the year ended December

31, 2006 for a one-day holding period was CHF

31.5 million (2005: CHF 14.3 million).

However, the use of this approach does not

prevent losses outside of these limits in the event

of more significant market movements.

1) Currency risk

The Group takes on exposure to the effects of

fluctuations in the prevailing foreign currency

exchange rates on its financial position and cash

flows. Under the supervision of the Group Board

of Directors, the local Boards of Directors set

limits on the level of exposures which are

monitored daily. The table in note 41 summarises

the Group’s exposure to foreign currency

exchange rate risk at December 31, 2006 and

December 31, 2005. Included in the table are the

Group’s assets and liabilities at carrying amounts

categorised by currency.

2) Interest rate risk

The Group takes on exposure to the effects of

fluctuations in the prevailing levels of market

interest rates on its financial positions and cash

flows. Cash flow interest rate risk, is the risk that

the future cash flows of a financial instrument

will fluctuate because of changes in market

interest rates. Fair value interest rate risk, is the

risk that the value of a financial instrument will

fluctuate because of changes in market interest

rates. Interest margins may increase as a result of

such changes but may reduce or create losses in

the event that unexpected movements arise.

Under the supervision of the Group Board of

Directors, the local Boards of Directors sets

limits on the level of mismatch of interest rate

repricing that may be undertaken, which is

monitored on a daily basis.

The table in note 42 summarises the Group’s

exposure to interest rate risk. Included in the

table are the Group’s assets and liabilities at

carrying amounts, categorised by the earlier of

contractual repricing or maturity dates. The

yearly average effective interest rates for

monetary financial instruments are summarised

in note 42.

(iii) Liquidity risk

The Group is exposed to daily calls on its

available cash resources from overnight deposits,

current accounts, maturing deposits, loan drawdowns

and guarantees and from margin and

other calls on cash-settled derivatives. The Group

maintains cash resources to meet all of these

needs. Under the supervision of the Group Board

of Directors, the local Boards of Directors set

liquidity limits to ensure that sufficient funds are

available to meet such calls. The table in note 44

analyses the Group’s assets and liabilities into

relevant maturity groupings based on the

EFG Group


Notes to the Consolidated Financial Statements (continued)

remaining period at the balance sheet date to the

contractual maturity date.

The matching and controlled mismatching of the

maturities and interest rates of assets and

liabilities is fundamental to the management of

the Group. It is unusual for banks to be

completely matched, as transacted business is

often of uncertain term and of different types. An

unmatched position potentially enhances

profitability, but also increases the risk of losses.

The maturities of assets and liabilities and the

ability to replace, at an acceptable cost, interest

bearing liabilities as they mature are important

factors in assessing the liquidity of the Group and

its exposure to changes in interest rates and

exchange rates.

Liquidity requirements to support calls under

guarantees and standby letters of credit are

considerably less than the amount of the

commitment because the Group does not

generally expect the third party to draw funds

under the agreement.

The total outstanding contractual amount of

commitments to extend credit does not

necessarily represent future cash requirements, as

many of these commitments will expire or

terminate without being funded.

c) Fair values of financial assets and liabilities

Fair value is the amount for which an asset could

be exchanged or a liability settled, between

knowledgeable, willing parties in an arm’s length

transaction. A market price, where an active

market (such as a recognised stock exchange)

exists, is the best evidence of the fair value of a

financial instrument. However market prices are

not available for a significant number of financial

assets and liabilities held and issued by the group.

Therefore, for financial instruments where no

market price is available, the fair values of the

group are estimated using present value or other

estimation and valuation techniques based on

current prevailing market conditions.

The values derived using these techniques are

significantly affected by underlying assumptions

concerning both the amounts and timing of

future cash flows and the discount rates used.

The following methods and assumptions indicate

Annual Report 2006

that the fair values of financial assets and

liabilities approximate their carrying amounts:

1) trading assets, derivatives and other

transactions undertaken for trading purposes

as well as treasury bills, available-for-sale

securities and assets and liabilities designated

at fair-value-through-profit-or-loss are

measured at fair value (see notes 17, 18, 22,

30, 31 and 32) by reference to quoted market

prices when available. If quoted market prices

are not available, then the fair values are

estimated using valuation techniques based on

observable market data;

2) substantially all of the Group’s other financial

assets and liabilities are at floating rates of

interest, which re-price at frequent intervals.

Therefore the Group has no significant

exposure to fair value fluctuations and the

carrying value of the financial assets and

liabilities is substantially equivalent to their

fair values, unless otherwise stated.

5. Operational Risk

Operational risk is the risk of loss or business

suspension resulting from failures in business

processes, systems and people, or from external

causes, whether accidental or deliberate. It is

limited by means of organisational measures,

automation, internal controls, security measures,

authorisation frameworks, written procedures,

legal documentation and support, and

compliance checks under the responsibility of

management.

Group

35


36

Notes to the Consolidated Financial Statements (continued)

6. Net interest income

(All figures in millions of CHF) 2006 2005

Interest and discount income

Banks and customers 5,997 4,165

Trading securities 77 58

Other securities 757 505

Total interest and discount income 6,831 4,728

Interest expense

Banks and customers (3,562) (2,116)

Liabilities evidenced by paper (577) (371)

Total interest expense (4,139) (2,487)

Net interest income 2,692 2,241

Derivative financial instruments contribute CHF 1.7 million (2005: CHF 1 million) to interest income and

CHF 1.8 million (2005: CHF 1.1 million) to interest expense.

7. Net banking fee and commission income

(All figures in millions of CHF) 2006 2005

Commission income from lending activities 219 197

Commission income from securities and investment activities 1,060 681

Commission income from other services 105 179

Banking fee and commission expenses (275) (253)

Net banking fee and commission income 1,109 804

8. Net trading income

(All figures in millions of CHF) 2006 2005

Interest rate instruments 24 6

Equities 26 11

Foreign exchange 29 61

Total 79 78

Foreign exchange net trading income includes gains and losses from spot and forward contracts, options, futures and

translated foreign currency assets and liabilities. Income from interest rate instruments includes the results of making

markets in government securities, corporate debt securities, money market instruments, interest rate and currency

swaps, options and other derivatives. Equities trading income includes the results of making markets in equity

securities and equity derivatives such as swaps, options, futures and forward contracts.

9. Operating expenses

(All figures in millions of CHF) 2006 2005

Staff costs (note 10) 1,197 1,017

Administrative expenses 556 483

Depreciation and impairment of property, plant and equipment (note 27) 138 156

Amortisation and impairment of intangible assets (note 26) 36 12

Operating lease rentals 127 102

Total 2,054 1,770

EFG Group


Notes to the Consolidated Financial Statements (continued)

10. Staff costs

(All figures in millions of CHF) 2006 2005

Wages, salaries and staff bonuses 889 689

Social security costs 148 125

Pension costs - defined contribution and defined benefit schemes 53 89

Other 107 114

Total 1,197 1,017

The average number of employees of the Group during the year was 18,418 (2005: 15,609).

11. Income tax expense

(All figures in millions of CHF) 2006 2005

Current tax 368 295

Deferred tax (credit) / debit (note 12) 22 (31)

Total tax charge 390 264

The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the basic rate of

tax of the most material entity of the Group as follows:

Profit before tax 1,547 1,104

Tax at the applicable tax rate of 29% (2005: 32%) 449 354

Tax benefit of reduced tax rate (5%) of the Group’s material

subsidiary EFG Eurobank Ergasias SA (53) (51)

Income and expenses not subject to tax (62) (42)

Tax effect of different tax rates in other countries and other differences (12) 3

Total 322 264

One-off taxation of non-taxed reserves of the Group’s material

subsidiary EFG Eurobank Ergasias SA 68 -

Total 390 264

Following a new law that was enacted in Greece, in November 2006, the non-taxed reserves of EFG Eurobank

Ergasias SA that had been accounted for and presented in the financial statements for the year ended December 31,

2005, which would be taxable on distribution and which have not been distributed or capitalised, were subject to

one-off taxation at a rate of 10% or 15% based on the tax status of the respective reserves. As a result EFG Eurobank

Ergasias SA paid the amount of CHF 68 million, accompanied by a specific statement questioning the proper

applicability of the law on legal grounds. This legal dispute is not expected to be resolved quickly.

Annual Report 2006

Group

37


38

Notes to the Consolidated Financial Statements (continued)

12. Deferred income tax

Deferred income taxes are calculated on all temporary differences under the liability method using an expected

effective tax rate of 25% (2005: 25%).

(All figures in millions of CHF) 2006 2005

The movement on the deferred income tax account is as follows:

At January 1 138 89

Exchange adjustment 4 1

Income statement (debit)/credit (note 11) (22) 31

Available for sale securities:

fair value measurements 125 (16)

transfer to net profit (11) 29

fair value hedge (77) (10)

Cash flow hedges (9) (5)

Other temporary differences (3) 19

At December 31 145 138

(All figures in millions of CHF) Dec. 31, 2006 Dec. 31, 2005

The deferred income tax assets and (liabilities) are attributable to the following items:

Valuation temporary differences accounted for directly to reserves (16) (53)

Valuation temporary differences accounted through the statement of income 18 19

Cash flow hedges (8) (1)

PPE temporary differences 23 39

Pensions and other post retirement benefits 40 42

Loan impairment 82 105

Unused tax losses 19 -

Other temporary differences 23 5

Deferred income tax assets (note 28) 181 156

Deferred income tax liabilities (note 32) 36 18

Net deferred income tax 145 138

(All figures in millions of CHF) 2006 2005

The deferred income tax debit/(credit) in the statement of income

comprises the following temporary differences:

Valuation temporary differences (1) 13

Utilised losses carried forward 3 7

PPE temporary differences 19 (74)

Pensions and other post retirement benefits (2) (2)

Loan impairment 19 27

Other temporary differences (16) (2)

Deferred income tax debit/(credit) (note 11) 22 (31)

EFG Group


Notes to the Consolidated Financial Statements (continued)

13. Analysis of Swiss and foreign income and expenses from ordinary banking activities

as per the operating location

Consolidated statement of income 2006

(All figures in millions of CHF) Swiss Foreign Total

Interest and discount income 105 6,726 6,831

Interest expense (7) (4,132) (4,139)

Net interest income 98 2,594 2,692

Banking fee and commission income 195 1,189 1,384

Banking fee and commission expense (30) (245) (275)

Net banking fee and commission income 165 944 1,109

Net insurance income - 59 59

Non banking services - 32 32

Core income 263 3,629 3,892

Dividend income - 14 14

Net trading income 18 61 79

Gains less losses from other securities - 112 112

Other operating income 1 38 39

19 225 244

Operating income 282 3,854 4,136

Operating expenses (165) (1,889) (2,054)

Impairment losses on loans and advances - (543) (543)

Profit from operations 117 1,422 1,539

Share of results of associates before tax - 8 8

Profit before tax 117 1,430 1,547

Income tax expense (22) (368) (390)

Net profit after tax attributable to shareholders 95 1,062 1,157

Of which minority interests 51 634

2005

685

(All figures in millions of CHF) Swiss Foreign Total

Interest and discount income 71 4,657 4,728

Interest expense (7) (2,480) (2,487)

Net interest income 64 2,177 2,241

Banking fee and commission income 155 902 1,057

Banking fee and commission expense (24) (229) (253)

Net banking fee and commission income 131 673 804

Net insurance income - 56 56

Non banking services - 46 46

Core income 195 2,952 3,147

Dividend income - 7 7

Net trading income 15 63 78

Gains less losses from other securities 3 59 62

Other operating income 3 32 35

21 161 182

Operating income 216 3,113 3,329

Operating expenses (197) (1,573) (1,770)

Impairment losses on loans and advances - (479) (479)

Profit from operations 19 1,061 1,080

Share of results of associates before tax - 24 24

Profit before tax 19 1,085 1,104

Income tax expense (10) (254) (264)

Net profit after tax attributable to shareholders 9 831 840

Of which minority interests 4 490 494

Annual Report 2006

Group

39


40

Notes to the Consolidated Financial Statements (continued)

14. Cash and balances with central banks

(All figures in millions of CHF) Dec. 31, 2006 Dec. 31, 2005

Cash in hand 901 598

Balances with central banks 3,408 2,178

Total 4,309 2,776

Mandatory reserve deposits with central banks 2,081 1,202

15. Cash and cash equivalents

(All figures in millions of CHF) Dec. 31, 2006 Dec. 31, 2005

For the purpose of the statement of cash flows, cash and cash equivalents

comprise the following balances with original maturities less than 90 days:

Cash and balances with central banks 2,228 1,574

Due from other banks 7,954 7,605

Financial instruments at fair-value-through-profit-or-loss 252 319

Available-for-sale investment securities and other investment securities 820 473

Total 11,254 9,971

16. Due from other banks

(All figures in millions of CHF) Dec. 31, 2006 Dec. 31, 2005

Items in course of collection from other banks 2,161 1,674

Placements with other banks 7,270 6,924

Total 9,431 8,598

Settlement balances with other banks 246 1,735

Pledged deposits with other banks 889 943

EFG Group


Notes to the Consolidated Financial Statements (continued)

17. Financial instruments at fair-value-through-profit-or-loss

(All figures in millions of CHF) Dec. 31, 2006 Dec. 31, 2005

Issued by public bodies:

government 451 1,401

other public sector securities - -

Sub-total 451 1,401

Issued by other issuers:

banks 186 95

other 369 185

Sub-total 555 280

Total trading 1,006 1,681

Other financial assets at fair-value-through-profit-or-loss

unit linked contracts 201 208

hedge funds 99 -

Total other financial assets at fair-value-through-profit-or-loss 300 208

Total 1,306 1,889

Equity securities 191 182

Treasury bills and other eligible bills 32 452

Other debt securities 783 1,047

Other financial assets at fair-value-though-profit-or-loss 300 208

Total 1,306 1,889

Securities acceptable by central banks as collateral or for discount 769 1,001

Pledged with central banks 162 818

18. Derivative financial instruments

The Group utilises the following derivative instruments for both hedging and non-hedging purposes:

Currency forwards represent commitments to purchase or sell foreign and domestic currency. Foreign currency and

interest rate futures are contractual obligations to receive or pay a net amount based on changes in currency rates or

interest rates, or buy or sell foreign currency or a financial instrument on a future date, at a specified price, established

in an organised financial market. Since future contracts are collateralised by cash or marketable securities and changes

in the futures contract value are settled daily with the exchange, the credit risk is negligible.

Currency and interest rate swaps are commitments to exchange one set of cash flows for another. Swaps result in an

economic exchange of currencies or interest rates (for example, fixed rate for floating rate) or a combination of all

these (i.e. cross-currency interest rate swaps). Except for certain currency swaps, no exchange of principal takes place.

The Group’s credit risk represents the potential cost to replace the swap contracts if counterparties fail to perform

their obligation. This risk is monitored on an ongoing basis with reference to the current fair value, a proportion of

the notional amount of the contracts and the liquidity of the market. To control the level of credit risk taken, the

Group assesses counterparties using the same techniques as for its lending activities - and/or marks to market with

bilateral collateralisation agreements over and above an agreed threshold.

Foreign currency and interest rate options are contractual agreements under which the seller (writer) grants the

purchaser (holder) the right, but not the obligation, either to buy (a call option) or sell (a put option) at or by a set

date or during a set period, a specific amount of a foreign currency or a financial instrument at a predetermined price.

In consideration for the assumption of foreign exchange or interest rate risk, the seller receives a premium from the

purchaser. Options may be either exchange-traded or negotiated between the Group and a customer (OTC). The

Group is exposed to credit risk on purchased options only, and only to the extent of their carrying amount, which is

their fair value.

Annual Report 2006

Group

41


42

Notes to the Consolidated Financial Statements (continued)

18. Derivative financial instruments (continued)

The notional amounts of certain types of financial instruments provide a basis for comparison with instruments

recognised on the balance sheet but do not necessarily indicate the amounts of future cash flows involved or the

current fair value of the instruments and, therefore, do not indicate the Group's exposure to credit or price risks. The

derivative instruments become favourable (assets) or unfavourable (liabilities) as a result of fluctuations in market

interest rates or foreign exchange rates relative to their terms. The aggregate contractual or notional amount of

derivative financial instruments on hand, the extent to which instruments are favourable or unfavourable and, thus

the aggregate fair values of derivative financial assets and liabilities can fluctuate significantly from time to time. The

fair values of derivative instruments held are set out in the following table:

Dec. 31, 2006

Contract/

notional Fair values

(All figures in millions of CHF) amount Assets Liabilities

Derivatives held for trading

OTC currency derivatives:

currency forwards 15,482 128 (114)

currency swaps 3,106 52 (34)

OTC currency options bought and sold 9,628 54 (53)

Sub-total 234 (201)

OTC interest rate derivatives:

interest rate swaps 41,002 522 (552)

cross-currency interest rate swaps 831 31 (113)

forward rate agreements 7,175 2 (2)

OTC interest rate options 23,313 42 (55)

Sub-total 597 (722)

Exchange traded interest rate futures 1,056 4 (4)

Exchange traded interest rate options 1,578 1 (1)

Sub-total 602 (727)

OTC index options 386 11 (10)

Exchange traded index futures 154 - (1)

Exchange traded index options bought and sold 24 - -

Forward security contracts 6 - -

Credit default swaps 646 1 (3)

Commodity swaps 6 - -

Total derivative assets/(liabilities) held for trading 848 (942)

Derivatives designated as fair value hedges

Interest rate swaps 6,365 83 (273)

Cross-currency interest rate swaps 208 8 (11)

Sub-total 91 (284)

Derivatives designated as cash flow hedges

Interest rate swaps 2,595 12 (24)

Sub-total 12 (24)

Total derivative assets/(liabilities) held for hedging 103 (308)

Total derivative assets/(liabilities) 951 (1,250)

EFG Group


Notes to the Consolidated Financial Statements (continued)

18. Derivative financial instruments (continued)

Dec. 31, 2005

Contract/

notional Fair values

(All figures in millions of CHF) amount Assets Liabilities

Derivatives held for trading

OTC currency derivatives:

currency forwards 13,352 111 (100)

currency swaps 6,293 63 (43)

OTC currency options bought and sold 7,673 114 (107)

Sub-total 288 (250)

OTC interest rate derivatives:

interest rate swaps 18,410 220 (319)

cross-currency interest rate swaps 862 40 (43)

OTC interest rate options 2,623 2 (1)

Sub-total 262 (363)

Exchange traded interest rate futures 3,243 1 (6)

Exchange traded interest rate options 4,593 5 (7)

Sub-total 268 (376)

OTC index options 253 18 (17)

Exchange traded index futures 125 - (1)

Exchange traded index options bought and sold 28 - -

Forward security contracts 712 1 (2)

Credit default swaps 966 1 (2)

Securities sold and not yet repurchased - - (11)

Commodity swaps 8 1 (1)

Total derivative assets/(liabilities) held for trading 577 (660)

Derivatives designated as fair value hedges

Interest rate swaps 8,424 11 (523)

Cross-currency interest rate swaps 237 - (35)

Sub-total 11 (558)

Derivatives designated as cash flow hedges

Interest rate swaps 1,077 1 (28)

Sub-total 1 (28)

Total derivative assets/(liabilities) held for hedging 12 (586)

Total derivative assets/(liabilities) 589 (1,246)

Annual Report 2006

Group

43


44

Notes to the Consolidated Financial Statements (continued)

19. Loans and advances to customers

(All figures in millions of CHF) Dec. 31, 2006 Dec. 31, 2005

Lending to medium size and large corporate entities 20,303 15,994

Consumer lending 18,158 14,303

Mortgage lending 14,950 10,637

Small business lending 8,893 6,262

Provision for impairment losses on loans and advances (note 20) (1,385) (1,186)

Total 60,919 46,010

Due from associated undertakings, unsubordinated - 12

Securitised loans 8,905 3,565

Loans and advances to customers include securitised assets. Analysis of Group's securitisation is presented in note 31.

Loans and advances to customers include finance lease receivables as detailed below:

(All figures in millions of CHF) Dec. 31, 2006 Dec. 31, 2005

Gross investment in finance lease receivables:

Less than 1 year 562 369

Between 1 and 5 years 2,157 882

Over 5 years 461 1,015

3,180 2,266

Unearned future finance income on finance leases (747) (468)

Net investment in finance leases 2,433 1,798

Less: provision for impairment losses (40) (32)

2,393 1,766

The net investment in finance leases is analysed as follows:

Less than 1 year 440 280

Between 1 and 5 years 1,825 668

Over 5 years 168 850

2,433 1,798

Less: provision for impairment losses (40) (32)

2,393 1,766

Credit risk

The Group takes on exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when

due. The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to

one borrower, or groups of borrowers, and to geographical and, when needed industry segments. Such risks are monitored on

a revolving basis and are normally subject to an annual or more frequent review.

The Group is active in the corporate, retail, mortgage and lombard lending markets. Credit risk is well spread over a diversity of

personal and commercial customers. Economic sector risk concentrations within the Group's customer loan portfolio were as follows:

Dec. 31, 2006 Dec. 31, 2005

Private individuals 49% 49%

Commerce and services 32% 31%

Manufacturing 10% 10%

Construction 4% 3%

Shipping 1% 2%

Government bodies 1% 1%

Other 3% 4%

Total 100% 100%

Geographic sector risk concentrations within the Group's customer loan portfolio were as follows:

(All figures in millions of CHF) Dec. 31, 2006 Dec. 31, 2005

Greece 47,552 78% 38,074 83%

Switzerland 409 1% 304 1%

Other Western European countries 3,098 5% 1,017 2%

Other countries 9,860 16% 6,615 14%

Total 60,919 100% 46,010 100%

EFG Group


Notes to the Consolidated Financial Statements (continued)

20. Provisions for impairment losses on loans and advances to customers

(All figures in millions of CHF) 2006 2005

At January 1 1,186 935

Arising from acquisitions 8 5

Impairment losses on loans and advances charged in the year 543 479

Exchange adjustments 51 9

Recoveries 27 53

Loans written off during the year as uncollectible (430) (295)

At December 31 1,385 1,186

21. Collateral for loans

The Group reduces its credit risk associated with loans and advances to customers by entering into collateralised

arrangements. The types of collateral that the Group obtains are primarily cash deposits and other equivalents, real

estate, securities and bank guarantees. The value of the collaterals that the Group obtained were as follows:

Secured by Other

(All figures in millions of CHF) mortgage collaterals Unsecured Total

Loans

Due from clients 2,277 20,276 23,416 45,969

Mortgage loans 11,209 1,430 2,311 14,950

At December 31, 2006 13,486 21,706 25,727 60,919

At December 31, 2005 11,526 19,805 14,679 46,010

Off-balance sheet

Contingent liabilities 43 867 2,277 3,187

Irrevocable commitments - 168 - 168

At December 31, 2006 43 1,035 2,277 3,355

At December 31, 2005 28 277 1,778 2,083

Annual Report 2006

Group

45


46

Notes to the Consolidated Financial Statements (continued)

22. Available-for-sale investment securities

(All figures in millions of CHF) Dec. 31, 2006 Dec. 31, 2005

Issued by public bodies:

government 12,324 12,872

other public sector 106 300

Sub-total 12,430 13,172

Issued by other issuers:

banks 2,699 1,172

other 4,115 2,113

Sub-total 6,814 3,285

Total 19,244 16,457

Listed 16,495 14,694

Unlisted 2,749 1,763

Total 19,244 16,457

Equity securities 842 610

Debt securities 18,402 15,847

Total 19,244 16,457

Securities acceptable by central banks as collateral or for discount 16,758 14,993

Unamortised discounts and premiums included above 73 262

Pledged securities with central banks, clearing system companies and

other stock markets clearing houses 10 27

Credit facility with central banks secured by the above 3,689 849

The movement in the available-for-sale investment securities is as follows:

(All figures in millions of CHF) 2006 2005

Net book value at January 1 16,457 9,148

Arising from acquisitions 88 190

Exchange adjustments 411 273

Additions 16,320 13,213

Disposals and redemptions (13,798) (6,732)

Amortisation of discounts and premiums and accrued interest 105 88

Net gains from other changes in fair value (339) 277

Net book value at December 31 19,244 16,457

EFG Group


Notes to the Consolidated Financial Statements (continued)

22. Available-for-sale investment securities (continued)

Equity reserve: revaluation of the available-for-sale investment securities.

Gains and losses arising from the changes in the fair value of available-for-sale investment securities are recognised

as reserves directly in equity. The movements of the reserves were as follows:

(All figures in millions of CHF) 2006 2005

As at January 1 267 182

Exchange adjustments 9 1

Net losses from changes in fair value arising on absorption of associates - (10)

Sub-total - (10)

Net (losses)/gains from changes in fair value (339) 277

Deferred income taxes 125 (16)

Sub-total (214) 261

Net gains transferred to net profit on disposal (79) (185)

Provision for impairment transferred to statement of income 22 20

Deferred income taxes (11) 29

Sub-total (68) (136)

Net losses/(gains) from fair value hedges transferred to statement of income 304 (21)

Deferred income taxes (77) (10)

Sub-total 227 (31)

At December 31 221 267

Of which attributable to minority interests 128 156

The above table excludes the impact of the adjustments to the available-for-sale investment portfolios of the

associated undertakings (note 25), the net effect of which amounted to CHF 1.6 million (2005: CHF 1.5 million) to

shareholders' equity.

Annual Report 2006

Group

47


48

Notes to the Consolidated Financial Statements (continued)

23. Other investment securities

Dec. 31, 2006 Dec. 31, 2005

Balance Balance

(All figures in millions of CHF) Sheet Sheet

Held-to-maturity investment securities 1,377 1,028

Total 1,377 1,028

Issued by public bodies:

government 988 611

other public sector 195 187

Sub-total 1,183 798

Issued by other issuers:

banks 194 166

other - 64

Sub-total 194 230

Total 1,377 1,028

The movement in held-to-maturity securities is as follows:

(All figures in millions of CHF) 2006 2005

Net book value at January 1 1,028 556

Exchange adjustments 22 9

Acquisitions 1,971 753

Disposals and redemptions (1,645) (291)

Accrued interest 1 2

Transfer - (1)

Net book value at December 31 1,377 1,028

EFG Group


Notes to the Consolidated Financial Statements (continued)

24. Shares in subsidiary undertakings

Direct Indirect

voting voting Country of Issued share capital

(Issued share capital in thousands) % % incorporation Line of business Dec. 31, 2006

EFG International 49 49 Switzerland Holding company CHF 79,335

EFG International (Bermuda) Ltd 100 49 Bermuda Holding company USD 105,024

EFG Bank 100 49 Switzerland Bank CHF 62,410

EFG Investment Bank AB 100 49 Sweden Bank SEK 100,000

EFG Capital International Corp. 100 49 USA Broker-dealer USD 12,200

EFG Investment (Luxembourg) SA 100 49 Luxembourg Holding company EUR 541,623

EFG Finance (Guernsey) Ltd 100 49 Guernsey Financial company EUR 530,009

EFG Bank (Gibraltar) Ltd 100 49 Gibraltar Bank GBP 3,000

EFB Bank (Luxembourg) SA 100 49 Luxembourg Bank EUR 20,000

Banque Monégasque de Gestion 100 49 Monaco Bank EUR 6,400

C.M. Advisors Ltd 100 49 Bermuda Hedge fund management USD 12

EFG Bank & Trust (Bahamas) Ltd 100 49 Bahamas Bank USD 10,000

SIF Swiss Investment Funds SA 100 49 Switzerland Funds administration CHF 2,500

EFG Eurofinancière d'Investissements SAM 100 49 Monaco Bank EUR 16,000

EFG Finance (Jersey) Ltd 100 49 Jersey Financial company CHF 250,000

EFG Finance (Bermuda) Ltd 100 49 Bermuda Financial company USD 12

Bank von Ernst (Liechtenstein) AG 100 49 Liechtenstein Bank CHF 25,000

EFG Private Bank Ltd 100 49 United Kingdom Bank GBP 88,235

EFG Private Bank (Channel Islands) Ltd 100 49 Guernsey Bank GBP 5,000

EFG Offshore Ltd 100 49 Jersey Trust company GBP 9

EFG Platts Flello Ltd 100 49 United Kingdom Financial planning GBP 2

New Capital Fund Management Ltd 100 49 Ireland Asset management EUR 125

Planning for Financial Independence Ltd 100 49 United Kingdom Financial planning GBP 1

EFG Wealth Management Ltd 100 49 United Kingdom Asset management GBP 238

EFG Eurobank Ergasias SA 41 41 Greece Bank EUR 1,264,113

EFG Business Services SA 100 41 Greece Payroll and advisory services EUR 3,816

EFG Eurobank Asset Management SA 100 41 Greece Asset management EUR 2,930

EFG Eurobank Ergasias Leasing SA 100 41 Greece Leasing company EUR 47,000

EFG Eurobank Securities SA 100 41 Greece Capital markets and investment services EUR 12,000

EFG Eurolife General Insurance SA 100 41 Greece Insurance services EUR 352

EFG Eurolife Life Insurance SA 100 41 Greece Insurance services EUR 1,468

EFG Factors SA 100 41 Greece Factoring company EUR 13,500

EFG Insurance Services SA 100 41 Greece Insurance brokerage EUR 300

EFG Internet Services SA 100 41 Greece Internet and electronic banking EUR 4,403

EFG Mutual Funds Management Company SA 100 41 Greece Mutual fund management EUR 1,115

EFG Telesis Finance SA 100 41 Greece Investment banking EUR 15,807

Eurobank Cards SA 100 41 Greece Credit card management EUR 3,082

Eurobank Fin and Rent SA

(formerly EFG Autorental SA) 100 41 Greece Vehicle leasing and rental EUR 588

Eurobank Properties REIC 55 23 Greece Investment services EUR 51,972

Eurobank Property Services SA 100 41 Greece Real estate services EUR 587

Financial Planning Services SA 100 41 Greece Receivables collection EUR 5,000

Global Fund Management SA 72 30 Greece Investment advisors EUR 1,500

OPEN 24 SA 100 41 Greece Sundry services EUR 2,989

be-Business Exchanges SA 71 29 Greece Business-to-business electronic commerce EUR 2,415

Best Direct SA 100 41 Greece Sundry services EUR 60

Bulgarian Post Bank AD 100 41 Bulgaria Bank BGN 207,716

Bulgarian Retail Services AD 100 41 Bulgaria Credit card management BGN 700

DZI Bank AD 91 38 Bulgaria Bank BGN 50,000

EFG Auto Leasing EOOD 100 41 Bulgaria Vehicle leasing and rental BGN 5

EFG Leasing EAD 100 41 Bulgaria Leasing company BGN 50

EFG Property Services Sofia AD 80 33 Bulgaria Real estate services BGN 150

EFG Hellas Cayman Islands Ltd 100 41 Cayman Islands Special purpose financing vehicle USD 15

GFM Levant Capital (Cayman) Ltd 73 30 Cayman Islands Fund management USD -

Berberis Investments Ltd 100 41 Guernsey Holding company USD 100

EFG Hellas Funding Ltd 100 41 Jersey Special purpose financing vehicle EUR 10

CEH Balkan Holdings Ltd 100 41 Cyprus Holding company USD 57,911

Eurocredit Retail Services Ltd 100 41 Cyprus Credit card management CYP 300

Aristolux Investment Fund

Management Company SA 98 41 Luxembourg Investment fund management EUR 125

EFG Private Bank (Luxembourg) SA 100 41 Luxembourg Bank EUR 70,000

Annual Report 2006

Group

49


50

Notes to the Consolidated Financial Statements (continued)

24. Shares in subsidiary undertakings (continued)

Direct Indirect

voting voting Country of Issued share capital

(Issued share capital in thousands) % % incorporation Line of business Dec. 31, 2006

Eurobank EFG Fund Management

Company (Luxembourg) SA 100 41 Luxembourg Fund management EUR 1,200

Eurobank EFG Holding (Luxembourg) SA 100 41 Luxembourg Holding company EUR 31

EFG New Europe Funding BV 100 41 Netherlands Finance company EUR 18

Polbank Dystrybucja Sp. z o.o.

(formerly EFG Express Kredit Spolca

Z Organiczona Odpowiedzialnocia) 100 41 Poland Sundry services PLN 8,100

Bancpost SA 78 32 Romania Bank RON 448,255

EFG Eurobank Securities SA

(formerly Capital Securities SA) 100 41 Romania Stock brokerage RON 2,000

EFG Eurobank Finance SA 100 41 Romania Investment banking RON 3,688

EFG Eurobank Leasing SA 100 41 Romania Leasing company RON 3,551

EFG Eurobank Mutual Funds Management

Romania SAI SA 96 40 Romania Mutual fund management RON 1,080

EFG Eurobank Property Services SA 80 33 Romania Real estate services RON 548

EFG IT Shared Services SA 100 41 Romania Informatics data processing RON 7,060

EFG Retail Services IFN SA

(formerly EuroLine Retail Services SA) 95 39 Romania Credit card management RON 775

EFG Leasing AD Beograd 100 41 Serbia Leasing company EUR 100

EFG Property Services DOO Beograd 80 33 Serbia Real estate services EUR 100

Eurobank EFG Stedionica AD Beograd

(formerly EFG Eurobank AD Beograd) 100 41 Serbia Bank CSD 15,018,200

EFG Retail Services AD Beograd

(formerly EuroLine Retail Services AD) 100 41 Serbia Credit card management EUR 200

EFG Istanbul Holding AS 100 41 Turkey Holding company TRY 8,696

EFG Istanbul Menkul Degerler AS 100 41 Turkey Capital market services TRY 8,450

Anaptyxi 2006-1 PLC - - United Kingdom Special purpose financing vehicle GBP 13

Anaptyxi APC Limited - - United Kingdom Special purpose financing vehicle - -

Anaptyxi Holdings Limited - - United Kingdom Special purpose financing vehicle - -

Anaptyxi Options Limited - - United Kingdom Special purpose financing vehicle - -

EFG Hellas Plc 100 41 United Kingdom Special purpose financing vehicle GBP 13

Karta 2005-1 Plc - - United Kingdom Special purpose financing vehicle GBP 13

Karta APC Ltd - - United Kingdom Special purpose financing vehicle GBP 15

Karta Holdings Ltd - - United Kingdom Special purpose financing vehicle GBP 13

Karta LNI 1 Ltd - - United Kingdom Special purpose financing vehicle GBP -

Karta Options Ltd - - United Kingdom Special purpose financing vehicle GBP -

Themeleion Mortgage Finance Plc - - United Kingdom Special purpose financing vehicle GBP 13

Themeleion II Mortgage Finance Plc - - United Kingdom Special purpose financing vehicle GBP 13

Themeleion III Mortgage Finance Plc - - United Kingdom Special purpose financing vehicle GBP 13

Themeleion III Holdings Ltd - - United Kingdom Special purpose financing vehicle - -

Eurobank EFG Ukraine Distribution LLC 100 41 Ukraine Sundry services UAH 3,164

Private Financial Holdings Ltd 100 100 United Kingdom Holding company GBP 30,638

Private Financial Investments Holding Ltd 100 100 Jersey Holding company GBP 130,381

EFG Ora Funding Ltd - - Cayman Islands Special purpose financing vehicle USD 1

EFG Ora Funding Ltd II - - Cayman Islands Special purpose financing vehicle EUR 1

EFG Exchange Holdings Ltd 100 100 Cayman Islands Holding company EUR 2,935

EFG Consolidated Holdings SA 100 100 Luxembourg Holding company EUR 220,000

EFG Audit & Consulting Services SA 100 100 Switzerland Internal audit services CHF 200

Direct voting % represents the voting power of companies' immediate parent(s).

Indirect voting % represents the voting power of the ultimate parent company EFG Bank European Financial Group.

EFG Eurobank Ergasias SA and EFG International and their material subsidiaries have been fully consolidated on the basis that

the EFG Group exercises control over the Boards of Directors, management, policies and strategies of these entities.

EFG Group


Notes to the Consolidated Financial Statements (continued)

25. Investments in associated undertakings

(All figures in millions of CHF) 2006 2005

At January 1 54 86

Exchange adjustments 2 1

Additions 10 57

Disposal of associated undertakings (12) (3)

Transfer to subsidiaries fully consolidated / absorbed (4) (108)

Dividends collected (2) (4)

Share capital increase 21 1

Share of results for the year 8 24

At December 31 77 54

Principal associates

Country Dec. 31, 2006 2006

Direct of Share

voting incorpo- of net Profit/

(All figures in millions of CHF) % ration Line of business Assets Liabilities assets (loss)

Cardlink SA 50.0 Greece Management of automated processes 1 1 - -

Dias SA 42.2 Greece Closed-End Funds 140 9 55 22

Filoxenia SA 22.0 Greece Hotel - - - -

SOFITEL Athens Airport SA 50.5 Greece Hotel 47 36 5 (4)

TEFIN SA 50.0 Greece Motor vehicle sales financing 12 2 6 (2)

Unitfinance SA 40.0 Greece Financing company 49 40 3 4

Total 249 88 69 20

Direct voting % represents the voting power of companies' immediate parent(s).

Associates are accounted for in the consolidated financial statements using the equity method of accounting.

TEFIN SA, Cardlink SA and Unitfinance SA are joint ventures.

Annual Report 2006

Group

51


52

Notes to the Consolidated Financial Statements (continued)

26. Intangible assets

Computer Other Total

software intangible intangible

(All figures in millions of CHF) and licences Goodwill assets assets

Cost

At January 1, 2005 - 3,882 26 3,908

Elimination of accumulated amortisation up to 31/12/04 - (3,575) - (3,575)

Exchange adjustments - 2 - 2

Arising on acquisitions - 152 28 180

Goodwill adjustment - 6 - 6

Additions 46 120 1 167

Transfers 10 - 4 14

At December 31, 2005 56 587 59 702

Accumulated amortisation and impairment

At January 1, 2005 - 3,575 - 3,575

Elimination of accumulated amortisation up to 31/12/04 - (3,575) - (3,575)

Exchange adjustments - 1 (2) (1)

Transfers 5 - - 5

Amortisation charge for the year 6 - 6 12

At December 31, 2005 11 1 4 16

Net book value at December 31, 2005 45 586 55 686

Cost

At January 1, 2006 56 587 59 702

Exchange adjustments 3 11 1 15

Arising on acquisitions 1 634 132 767

Goodwill adjustment - (10) 18 8

Additions 51 87 - 138

Disposal and write-off (2) - - (2)

Transfers 1 - - 1

At December 31, 2006 110 1,309 210 1,629

Accumulated amortisation and impairment

At January 1, 2006 11 1 4 16

Exchange adjustments - 4 - 4

Disposal and write-off (1) - - (1)

Amortisation charge for the year 19 - 17 36

At December 31, 2006 29 5 21 55

Net book value at December 31, 2006 81 1,304 189 1,574

EFG Group


Notes to the Consolidated Financial Statements (continued)

26. Intangible assets (continued)

Impairment testing

Goodwill arising from a business combination is allocated, at acquisition, to the cash generating units (CGUs) that

are expected to benefit from that business combination and form part of the Group's primary business segments (see

note 40).

The carrying amounts allocated to each CGU containing goodwill or intangible assets are as follows:

Total goodwill

Other intangible and other

(All figures in millions of CHF) Goodwill assets intangible assets

Private Banking 717 152 869

Holding and other 115 - 115

New Europe 472 37 509

At December 31, 2006 1,304 189 1,493

Private Banking 351 31 382

Holding and other 115 - 115

New Europe 120 24 144

At December 31, 2005 586 55 641

Carrying values have been compared to recoverable amounts, calculated as either fair values less costs to sell or to

amounts determined from value-in-use calculations. The key assumptions used in the two methodologies are:

i) For fair values, calculations are based upon both Net Asset Value and goodwill/intangible assets, based on

comparable market transactions (typically 2% to 5% of Assets under Management for the Private Banking segment)

and secondly on calculations using a PE approach (range between 7 and 15) based on similar transactions for

comparable listed companies.

ii) For the value-in-use calculations are those regarding the discount rates, growth rates and cash flow projections

based on financial budgets approved by Management covering a 5-year period. Management estimates discount rates

using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the

CGUs. The growth rates are based on respective market growth forecasts. Cash flows beyond the 5-year period are

extrapolated using growth rates of future changes in the market.

a) For the Asset Management, Private Banking and Insurance segment - The pre-tax discount rate applied to cash

flow projections is 10%. The growth rate used to extrapolate cash flows beyond the 5-year period is 3% and does

not exceed the average long-term growth rate for the relevant markets.

b) For the New Europe segment - the pre-tax discount rate applied to cash flow projections is between 14% to 21%

depending on the CGU. The growth rate used to extrapolate cash flows beyond the 5-year period is 3.5% and does

not exceed the average long-term growth rate for the relevant markets.

Annual Report 2006

Group

53


54

Notes to the Consolidated Financial Statements (continued)

27. Property, plant and equipment Land, Furniture,

buildings, equipment, Computer Total

leasehold motor hardware Investment property, plant

(All figures in millions of CHF) improvements vehicles software properties and equipment

Cost

At January 1, 2005 622 278 680 394 1,974

Transfers 17 - (66) (8) (57)

Arising from acquisition 9 4 5 - 18

Exchange adjustments 27 11 10 3 51

Additions 134 41 66 42 283

Fair value adjustments through income statement - - - 22 22

Fair value adjustments through reserves - - - 1 1

Disposals and write-offs (20) (8) (40) (40) (108)

At December 31, 2005 789 326 655 414 2,184

Accumulated depreciation

At January 1, 2005 216 168 415 - 799

Transfers (24) - (32) - (56)

Arising from acquisition 1 1 2 - 4

Exchange adjustment 10 4 5 - 19

Disposals and write-offs (13) (4) (35) - (52)

Impairment charge for the year 1 - 13 - 14

Charge for the year 31 30 81 - 142

At December 31, 2005 222 199 449 - 870

Net book value at December 31, 2005 567 127 206 414 1,314

Cost

At January 1, 2006 789 326 655 414 2,184

Transfers (11) (1) 2 11 1

Arising from acquisition 19 14 7 - 40

Exchange adjustments 42 20 28 14 104

Additions 189 62 103 39 393

Fair value adjustments through income statement - - - 13 13

Fair value adjustments through reserves - - - 1 1

Disposals and write-offs (32) (25) (67) (3) (127)

At December 31, 2006 996 396 728 489 2,609

Accumulated depreciation

At January 1, 2006 222 199 449 - 870

Transfers 2 - (2) - -

Arising from acquisition 3 9 5 - 17

Exchange adjustment 4 13 24 - 41

Disposals and write-offs (4) (17) (45) - (66)

Charge for the year 36 32 70 - 138

At December 31, 2006 263 236 501 - 1,000

Net book value at December 31, 2006 733 160 227 489 1,609

The fire insurance value of buildings is CHF 536 million (2005: CHF 441 million) and of other tangible assets

CHF 211 million (2005: CHF 226 million).

EFG Group


Notes to the Consolidated Financial Statements (continued)

27. Property, plant and equipment (continued)

Leasehold improvements are in respect of premises occupied by the Group for its own activities. Included in the above

CHF 74 million (2005: CHF 17 million) relating to assets under construction.

The net book value of finance leases included in property, plant and equipment as at December 31, 2006 was CHF 64 million

(December 31, 2005: CHF 67 million).

During 2005, the Group revised its accounting estimate in respect of a subsidiary's IT platform, which resulted in an impairment

loss amounting to CHF 14 million. This loss has been recorded in the statement of income as a depreciation expense of the current

year.

Investment properties

With effect from January 1, 2002, due to the substantial increase in the size of the bank's investment property portfolio, the

directors elected to introduce the fair value model for a more appropriate presentation of the portfolio. The determination of fair

value was based on market prices. Valuations were performed by professionally qualified surveyors who perform valuations for

the group on an independent basis.

This change in accounting policy has been applied with effect from 2002. Retained earnings as at January 1, 2002 were adjusted

to reflect the cumulative fair valuation of prior years representing a before tax and minority interest gain of CHF 47.4 million

(after tax and minority interest gain of CHF 35 million). During 2006, a before tax and minority interest net gain from fair

valuation of investment properties of CHF 13.2 million (2005: CHF 21.5 million) was recognised in other operating income (after

tax and minority interest gain CHF 8.4 million (2005: CHF 3.4 million)) and properties previously classified as investment

properties of CHF 11.1 million were transferred out .

During the year ended December 31, 2006 an amount of CHF 26.4 million (December 31, 2005: CHF 21.8 million) was

recognised as rental income from investment property in non banking services. There were no capital commitments in relation to

investment property as at December 31, 2006 (December 31, 2005: nil).

Annual Report 2006

Group

55


56

Notes to the Consolidated Financial Statements (continued)

28. Other assets

(All figures in millions of CHF) Dec. 31, 2006 Dec. 31, 2005

Prepaid expenses and accrued income 243 245

Deferred tax asset (note 12) 181 156

Repossessed properties 100 87

Other assets 516 444

Total 1,040 932

29. Due to other banks

(All figures in millions of CHF) Dec. 31, 2006 Dec. 31, 2005

Items in course of collection 1,225 508

Deposits from other banks 16,183 16,631

Total 17,408 17,139

Amounts due to:

settlement balances with banks 260 1,760

30. Due to customers

(All figures in millions of CHF) Dec. 31, 2006 Dec. 31, 2005

Savings and current accounts 20,019 16,819

Term deposits and repurchase agreements 28,863 19,714

Unit linked products 931 542

Total 49,813 37,075

Amounts due to:

associated undertakings 39 7

The carrying amount of structured deposits and liabilities of Unit-linked products classified as at fair-value-throughprofit-or-loss

at December 31, 2006 is CHF 1,122 million (December 31, 2005: CHF 839 million). The fair value

change as at December 31, 2006 amounts to CHF 29 million loss (December 31, 2005: CHF 46 million gain), which

is attributable to changes in market conditions (changes in fair value attributable to credit risk are immaterial).

The changes in the fair value of structured deposits and liabilities of Unit-linked products are offset in the statement

of income against changes in the fair value of structured derivatives and assets classified as at fair-value-throughprofit-or-loss,

respectively.

EFG Group


Notes to the Consolidated Financial Statements (continued)

31. Liabilities evidenced by paper

EFG Hellas Plc (incorporated in the United Kingdom), EFG Hellas Cayman Islands Plc and EFG Ora Funding Limited

II (incorporated in the Cayman Islands) are special purpose financing vehicles. The debt instruments issued by these

financing vehicles are guaranteed by EFG Eurobank Ergasias SA. The net proceeds are applied by the issuers to meet

part of the general financing requirements of the Group

(All figures in millions of CHF) Dec. 31, 2006 Dec. 31, 2005

Short-term debt

- Commercial Paper (ECP) 2,865 2,168

Long-term debt

- Medium-term notes (EMTN) 11,657 7,868

- Subordinated 1,078 1,146

- Securitised 5,674 3,199

- Exchangeable 591 544

Annual Report 2006

19,000 12,757

Total 21,865 14,925

The following tables analyse the liabilities evidenced by paper by contractual maturity and also into fixed and floating

rate:

Dec. 31, 2006

Within 1 - 5 Over 5

(All figures in millions of CHF) 1 year years years Total

ECP

Fixed rate 2,846 - - 2,846

Accrued interest 19 - - 19

EMTN

Fixed rate 554 766 648 1,968

Accrued interest 46 - - 46

Floating rate 2,820 6,209 572 9,601

Accrued interest 42 - - 42

Subordinated

Fixed rate - - 308 308

Accrued interest 1 - - 1

Floating rate - - 615 615

Accrued interest 1 - 153 154

Securitised

Fixed rate - 25 - 25

Floating rate - 1,175 4,424 5,599

Accrued interest 50 - - 50

Exchangeable

Fixed rate - 562 - 562

Accrued interest 29 - - 29

Total liabilities evidenced by paper 6,408 8,737 6,720 21,865

57

Group


58

Notes to the Consolidated Financial Statements (continued)

31. Liabilities evidenced by paper (continued)

Dec. 31, 2005

Within 1 - 5 Over 5

(All figures in millions of CHF) 1 year years years Total

ECP

Fixed rate 2,158 - - 2,158

Accrued interest 10 - - 10

EMTN

Fixed rate 77 478 892 1,447

Accrued interest 42 - - 42

Floating rate 1,592 4,555 216 6,363

Accrued interest 16 - - 16

Subordinated

Fixed rate - - 378 378

Accrued interest 1 - - 1

Floating rate - - 767 767

Securitised

Fixed rate 16 23 - 39

Accrued interest 1 - - 1

Floating rate - 1,167 1,985 3,152

Accrued interest 7 - - 7

Exchangeable

Fixed rate - 544 - 544

Total liabilities evidenced by paper 3,920 6,767 4,238 14,925

32. Other liabilities

(All figures in millions of CHF) Dec. 31, 2006 Dec. 31, 2005

Current tax liabilities 85 97

Acquisition obligations 430 249

Deferred income and accrued expenses 289 361

Staff retirement leaving indemnity provision and obligations (note 33) 110 96

Insurance liabilities 690 470

Trading liabilities 330 -

Deferred tax liabilities (note 12) 36 18

Other liabilities 1,065 816

Total 3,035 2,107

EFG Group


Notes to the Consolidated Financial Statements (continued)

33. Standard legal staff retirement indemnity obligations

(All figures in millions of CHF) 2006 2005

Movement in the liability for standard legal staff retirement indemnity obligations:

Liability for staff retirement indemnity obligations at 1 January 90 77

Cost for the year (see below) 26 13

Benefits paid (10) -

Exchange adjustments 4 -

Liability for staff retirement indemnity obligations at 31 December 110 90

Expense recognised in the statement of income:

Current service cost 6 5

Interest cost 4 3

Additional cost 13 5

Actuarial gains / losses 3 -

Total included in staff costs (note 10) 26 13

Actuarial assumptions Dec. 31, 2006 Dec. 31, 2005

Principal actuarial assumptions (expressed as weighted averages):

Discount rate 4.25 4.5

Future salary increases 3.5 4

Inflation rate 2.5 3

34. Called-up share capital

Dec. 31, 2006 Dec. 31, 2005

Number Total Number Total

(Nominal value in millions of CHF) of shares nominal value of shares nominal value

Authorised, issued and fully paid

Ordinary share capital 900,000 250 900,000 250

Total share capital 900,000 250 900,000 250

35. Treasury shares of quoted subsidiary

Two quoted subsidiaries of the Group held treasury shares as at December 31, 2006.

EFG Eurobank Ergasias SA held its own shares representing 1.75% (2005: 0.59%) of its share capital. The shares

were acquired at a total cost of CHF 258 million (2005: CHF 75 million).

EFG International held its own shares for a value of CHF 7 million.

The Group's shareholders' equity has been reduced by the total cost of own shares purchased.

On 23 February 2007, EFG Eurobank Ergasias SA sold 7,451,005 treasury shares at a price of EUR 29.40 each.

36. Information related to minority interests

As at December 31, 2006, included within minority interests are CHF 514 million (December 31, 2005: CHF 542

million) of Bons de Participation and CHF 1,264 million (December 31, 2005: CHF 1,184 million) of preferred

securities issued by EFG International and EFG Eurobank Ergasias SA (via its Special Purpose Entity, EFG Hellas

Funding Limited) respectively.

Annual Report 2006

Group

59


60

Notes to the Consolidated Financial Statements (continued)

37. Geographical concentration

Dec. 31, 2006

Total Total Credit

Capital

expenditure

and forward

(All figures in millions of CHF) assets liabilities commitments placements

Geographical concentrations of assets, liabilities

and off balance sheet items

Switzerland 1,474 2,081 29 136

Greece 61,762 53,838 1,799 68

United Kingdom 5,468 14,012 71 328

Luxembourg 1,654 303 72 -

Other Western European countries 11,136 7,168 231 38

Canada and USA 1,860 655 4 2

Africa and Middle East 236 501 10 10

Asia and Oceania 2,306 2,162 46 12

Eastern European and other countries 15,941 12,651 641 59

Total 101,837 93,371 2,903 653

Dec. 31, 2005

Total Total Credit

Capital

expenditure

and forward

(All figures in millions of CHF) assets liabilities commitments placements

Geographical concentrations of assets, liabilities

and off balance sheet items

Switzerland 2,220 1,145 28 3

Greece 51,598 44,353 934 15

United Kingdom 4,855 13,858 598 67

Luxembourg 1,036 143 1 -

Other Western European countries 8,706 4,169 145 111

Canada and USA 1,398 339 3 37

Africa and Middle East 173 455 8 -

Asia and Oceania 1,886 1,616 32 30

Eastern European and other countries 8,461 6,414 222 4

Total 80,333 72,492 1,971 267

38. Operating lease commitments

Dec. 31, 2006 Dec. 31, 2005

Land Furniture, Land Furniture,

and equipment, and equipment,

(All figures in millions of CHF) buildings vehicles buildings vehicles

Leases as lessee - Non-cancellable operating lease rentals are payable as follows:

Less than 1 year 69 5 68 4

Between 1 and 5 years 42 12 17 8

Over 5 years 28 - 2 -

Total 139 17 87 12

Leases as lessor - Non-cancellable operating lease rentals are receivable as follows:

Less than 1 year 22 - 21 -

Between 1 and 5 years 58 - 57 -

Over 5 years 59 - 49 -

Total 139 - 127 -

EFG Group


Notes to the Consolidated Financial Statements (continued)

39. Contingent liabilities and commitments

Dec. 31, 2006 Dec. 31, 2005

Contract Contract

(All figures in millions of CHF) amount amount

Contingent liabilities

Guarantees, etc.:

guarantees and irrevocable L/Cs 2,234 862

other guarantees 953 1,109

Sub-total 3,187 1,971

Commitments

Documentary credits 168 112

Capital expenditure 33 15

Forward placements 468 254

Sub-total 669 381

Total 3,856 2,352

Legal proceedings

There were a number of legal proceedings outstanding against the Group as at the year-end. The Group's management and its

legal advisors believe that the outcome of existing lawsuits will not have a significant impact on the Group's consolidated

financial statements.

40. Business segments

The Group is organised into five main business segments (excluding holding activities):

Retail banking - incorporating customer current accounts, savings, deposits, investment savings products, credit and debit cards,

consumer loans, small business banking and mortgages.

Corporate banking - incorporating direct debit facilities, current accounts, deposits, overdrafts, loan and other credit facilities,

foreign currency and derivative products to corporate entities.

Global and capital markets - incorporating investment banking services including corporate finance, merger and acquisitions

advice, custody, equity brokerage, financial instruments trading and institutional finance to corporate and institutional entities,

as well as, specialised financial advice and intermediation to private and large retail individuals as well as small and large

corporates.

Private Banking - incorporating private banking services, including total wealth management, to medium and high net worth

individuals, insurance, mutual fund and investments savings products, institutional asset management and fund-of-hedge-fund

management.

Holding and other operations - comprise mainly investing activities, including property management and investment, electronic

commerce, the management of unallocated capital and the closed-end funds which have been absorbed by the Group.

New Europe - incorporating operations in Romania, Bulgaria, Serbia, Cyprus, Poland and Turkey.

Transactions between the business segments are on normal commercial terms and conditions.

Annual Report 2006

Group

61


62

Notes to the Consolidated Financial Statements (continued)

40. Business segments (continued)

2006

Retail Corporate

Global and

capital Private Holding New

(All figures in millions of CHF) banking banking markets banking and other Europe Total

Total revenue 1,813 414 464 947 5 493 4,136

Profit/(loss) from operations 617 275 291 424 (21) (47) 1,539

Profit/(loss) before tax 618 275 291 424 (14) (47) 1,547

Income tax expense (390)

Net profit after tax attributable to shareholders 1,157

Of which minority interests 685

Segment assets at December 31 32,329 17,486 22,270 16,652 3,088 9,935 101,760

Associates at December 31 9 - - 68 - - 77

32,338 17,486 22,270 16,720 3,088 9,935 101,837

Segment liabilities at December 31 18,274 7,411 26,222 19,288 16,695 5,481 93,371

2005

Retail Corporate

Global and

capital Private Holding New

(All figures in millions of CHF) banking banking markets banking and other Europe Total

Total revenue 1,538 366 360 691 41 333 3,329

Profit/(loss) from operations 512 190 241 222 (102) 17 1,080

Profit/(loss) before tax 513 189 241 223 (79) 17 1,104

Income tax expense (264)

Net profit after tax attributable to shareholders 840

Of which minority interests 494

Segment assets at December 31 25,160 14,538 14,924 12,020 9,015 4,622 80,279

Associates at December 31 9 - - 45 - - 54

25,169 14,538 14,924 12,065 9,015 4,622 80,333

Segment liabilities at December 31 16,060 4,575 20,653 12,933 15,625 2,646 72,492

EFG Group


Notes to the Consolidated Financial Statements (continued)

41. Currency risk

Group entities are exposed to effects of fluctuations in the prevailing foreign currency exchange rates on their financial position

and cash flows. Under the supervision of the Group Board of Directors, the local Boards of Directors set limits on the level of

exposure, which are monitored daily. The table below summarises the Group's exposure to foreign currency exchange rate risk

at December 31. Included in the table are the Group's assets and liabilities at carrying amounts, categorised between Swiss franc,

euro, US dollar, pound Sterling and other currencies.

Dec. 31, 2006

(All figures in millions of CHF) CHF EUR USD GBP Other Total

Assets

Cash and balances with central banks 20 3,426 23 6 834 4,309

Due from other banks 474 4,462 3,456 188 851 9,431

Financial instruments at fair-value-through-profit-or-loss - 991 52 12 251 1,306

Derivative financial instruments 18 721 119 30 63 951

Loans and advances to customers 2,573 49,663 3,279 89 5,315 60,919

Available-for-sale investment securities 126 14,079 2,801 476 1,762 19,244

Other investment securities - 710 660 - 7 1,377

Investments in associated undertakings - 77 - - - 77

Intangible assets 358 693 341 135 47 1,574

Property, plant and equipment 25 1,155 3 12 414 1,609

Other assets 6 783 83 2 166 1,040

Total assets 3,600 76,760 10,817 950 9,710 101,837

Liabilities

Due to other banks 194 11,226 3,725 278 1,985 17,408

Derivative financial instruments 317 1,352 (846) 33 394 1,250

Due to customers 933 30,332 11,674 360 6,514 49,813

Liabilities evidenced by paper - 19,873 1,394 124 474 21,865

Other liabilities 723 7,749 (4,273) (164) (1,000) 3,035

Total liabilities 2,167 70,532 11,674 631 8,367 93,371

Net balance sheet position 1,433 6,228 (857) 319 1,343 8,466

Off balance sheet net notional position (503) (222) 316 222 106 (81)

Contingent liabilities and commitments 32 2,536 343 188 757 3,856

Annual Report 2006

Group

63


64

Notes to the Consolidated Financial Statements (continued)

41. Currency risk (continued)

Dec. 31, 2005

(All figures in millions of CHF) CHF EUR USD GBP Other Total

Assets

Cash and balances with central banks 36 2,242 17 5 476 2,776

Due from other banks 1,234 4,688 2,194 234 248 8,598

Financial instruments at fair-value-through-profit-or-loss - 1,658 119 - 112 1,889

Derivative financial instruments 117 304 156 8 4 589

Loans and advances to customers 1,090 38,685 2,976 1,189 2,070 46,010

Available-for-sale investment securities 94 12,631 2,316 145 1,271 16,457

Other investment securities 118 686 174 - 50 1,028

Investments in associated undertakings - 54 - - - 54

Intangible assets 273 368 18 27 - 686

Property, plant and equipment 26 994 1 10 283 1,314

Other assets 27 786 32 28 59 932

Total assets 3,015 63,096 8,003 1,646 4,573 80,333

Liabilities

Due to other banks 270 13,813 1,733 112 1,211 17,139

Derivative financial instruments 411 4,298 (2,786) (375) (302) 1,246

Due to customers 368 23,220 8,761 1,523 3,203 37,075

Liabilities evidenced by paper 147 13,574 638 121 445 14,925

Other liabilities 157 3,324 (813) 49 (610) 2,107

Total liabilities 1,353 58,229 7,533 1,430 3,947 72,492

Net balance sheet position 1,662 4,867 470 216 626 7,841

Off balance sheet net notional position (114) (189) 85 134 166 82

Contingent liabilities and commitments 55 1,860 290 - 147 2,352

EFG Group


Notes to the Consolidated Financial Statements (continued)

42. Interest rate risk

Group entities take on exposure to the effects of fluctuations in the prevailing levels of market interest rates on their financial

positions and cash flows. Interest margins may increase as a result of such changes but may reduce or create losses in the event

that unexpected movements arise. Under the supervision of the Group Board of Directors, the local Boards of Directors set limits

on the level of mismatch of interest rate repricing that may be undertaken, which is monitored on a daily basis.

The table below summarises the Group's exposure to interest rate risks. Included in the table are the Group's assets and liabilities

at carrying amounts, categorised by the earlier of contractual repricing or maturity dates. The carrying amounts of derivative

financial instruments, which are principally used to reduce the Group's exposure to interest rate movements, are reported under

the heading “Non-interest bearing”.

Dec. 31, 2006

Non-

Up to 3 3 - 12 1 - 5 Over 5 interest

(All figures in millions of CHF) months months years years bearing Total

Assets

Cash and balances with central banks 3,848 - - - 461 4,309

Due from other banks 8,657 440 20 - 314 9,431

Financial instruments at fair-value-throughprofit-or-loss

369 69 146 230 492 1,306

Derivative financial instruments - - - - 951 951

Loans and advances to customers 48,836 4,501 5,214 1,948 420 60,919

Available-for-sale investment securities 3,734 2,938 4,098 6,762 1,712 19,244

Other investment securities 1,377 - - - - 1,377

Investments in associated undertakings - - - - 77 77

Intangible assets - - - - 1,574 1,574

Property, plant and equipment - - - - 1,609 1,609

Other assets - - - - 1,040 1,040

Total assets 66,821 7,948 9,478 8,940 8,650 101,837

Liabilities

Due to other banks 16,679 275 33 60 361 17,408

Derivative financial instruments - - - - 1,250 1,250

Due to customers 45,419 1,538 296 730 1,830 49,813

Liabilities evidenced by paper 18,580 1,634 1,232 404 15 21,865

Other liabilities - - - - 3,035 3,035

Total liabilities 80,678 3,447 1,561 1,194 6,491 93,371

On balance sheet interest sensitivity gap (13,857) 4,501 7,917 7,746 2,159 8,466

Annual Report 2006

Group

65


66

Notes to the Consolidated Financial Statements (continued)

42. Interest rate risk (continued)

Dec. 31, 2005

Up to 3 3 - 12 1 - 5 Over 5

Noninterest

(All figures in millions of CHF) months months years years bearing Total

Assets

Cash and balances with central banks 2,498 - - - 278 2,776

Due from other banks 8,519 18 34 - 27 8,598

Financial instruments at fair-value-throughprofit-or-loss

314 310 254 610 401 1,889

Derivative financial instruments - - - - 589 589

Loans and advances to customers 37,676 4,221 2,511 1,325 277 46,010

Available-for-sale investment securities 2,018 1,420 3,471 8,619 929 16,457

Other investment securities 496 532 - - - 1,028

Investments in associated undertakings - - - - 54 54

Intangible assets - - - - 686 686

Property, plant and equipment - - - - 1,314 1,314

Other assets - - - - 932 932

Total assets 51,521 6,501 6,270 10,554 5,487 80,333

Liabilities

Due to other banks 16,351 662 44 33 49 17,139

Derivative financial instruments - - - - 1,246 1,246

Due to customers 36,036 310 74 334 321 37,075

Liabilities evidenced by paper 12,548 969 770 637 1 14,925

Other liabilities - - - - 2,107 2,107

Total liabilities 64,935 1,941 888 1,004 3,724 72,492

On balance sheet interest sensitivity gap (13,414) 4,560 5,382 9,550 1,763 7,841

The table below summarises the yearly effective average interest rate for monetary financial instruments:

Dec. 31, 2006 Dec. 31, 2005

% %

Assets

Due from other banks 4.0 2.5

Financial instruments at fair-value-through-profit-or-loss 4.1 2.6

Loans and advances to customers 7.3 7.0

Available-for-sale investment securities 3.9 3.0

Liabilities

Due to other banks 3.4 2.1

Due to customers 2.4 1.7

Liabilities evidenced by paper 3.5 2.6

EFG Group


Notes to the Consolidated Financial Statements (continued)

43. Analysis of Swiss and foreign assets, liabilities and shareholders’ equity

Dec. 31, 2006

(All figures in millions of CHF) Swiss Foreign Total

Assets

Cash and balances with central banks 19 4,290 4,309

Due from other banks 649 8,782 9,431

Financial instruments at fair-value-through-profit-or-loss - 1,306 1,306

Derivative financial instruments 26 925 951

Loans and advances to customers 409 60,510 60,919

Available-for-sale investment securities 65 19,179 19,244

Other investment securities - 1,377 1,377

Investments in associated undertakings - 77 77

Intangible assets 203 1,371 1,574

Property, plant and equipment 26 1,583 1,609

Other assets 5 1,035 1,040

Total assets 1,402 100,435 101,837

Liabilities

Due to other banks 201 17,207 17,408

Derivative financial instruments 39 1,211 1,250

Due to customers 1,346 48,467 49,813

Liabilities evidenced by paper - 21,865 21,865

Other liabilities 98 2,937 3,035

Total liabilities 1,684 91,687 93,371

Shareholders' equity 2,763 5,703 8,466

Total liabilities and shareholders' equity 4,447 97,390 101,837

Dec. 31, 2005

(All figures in millions of CHF) Swiss Foreign Total

Assets

Cash and balances with central banks 35 2,741 2,776

Due from other banks 1,357 7,241 8,598

Financial instruments at fair-value-through-profit-or-loss 2 1,887 1,889

Derivative financial instruments 31 558 589

Loans and advances to customers 303 45,707 46,010

Available-for-sale investment securities 39 16,418 16,457

Other investment securities 119 909 1,028

Investments in associated undertakings - 54 54

Intangible assets 160 526 686

Property, plant and equipment 26 1,288 1,314

Other assets 14 918 932

Total assets 2,086 78,247 80,333

Liabilities

Due to other banks 171 16,968 17,139

Derivative financial instruments 33 1,213 1,246

Due to customers 889 36,186 37,075

Liabilities evidenced by paper - 14,925 14,925

Other liabilities 55 2,052 2,107

Total liabilities 1,148 71,344 72,492

Shareholders' equity 2,589 5,252 7,841

Total liabilities and shareholders' equity 3,737 76,596 80,333

Annual Report 2006

Group

67


68

Notes to the Consolidated Financial Statements (continued)

44. Maturity of assets and liabilities

Group entities are exposed to daily calls on their available cash resources from overnight deposits, current accounts,

maturing deposits, loan drawdowns, guarantees and from margin and other calls on cash settled derivatives. No

Group entity maintains cash resources to meet all of these needs, as experience shows that a minimum level of

reinvestment of maturing funds can be predicted with a high level of certainty. Under the supervision of the Group

Board of Directors, the local Boards of Directors set limits on the minimum proportion of maturing funds available

to meet such calls.

The table below analyses assets and liabilities of the Group into relevant maturity groupings based on the remaining

period at balance sheet date to the contractual maturity date.

Dec. 31, 2006

Up to 1 1 - 3 3 - 12 1 - 5 Over 5

(All figures in millions of CHF) month months months years years Total

Assets

Cash and balances with central banks 4,305 4 - - - 4,309

Due from other banks 7,908 934 426 41 122 9,431

Financial instruments at fair-value-throughprofit-or-loss

282 8 133 308 575 1,306

Derivative financial instruments 174 66 76 121 514 951

Loans and advances to customers 14,648 2,900 17,638 11,859 13,874 60,919

Available-for-sale investment securities 1,555 716 2,116 4,695 10,162 19,244

Other investment securities 417 451 - - 509 1,377

Investments in associated undertakings - - - - 77 77

Intangible assets - - - - 1,574 1,574

Property, plant and equipment 1 - - - 1,608 1,609

Other assets 440 49 149 100 302 1,040

Total assets 29,730 5,128 20,538 17,124 29,317 101,837

Liabilities

Due to other banks 12,679 4,282 245 57 145 17,408

Derivative financial instruments 136 88 95 177 754 1,250

Due to customers 29,463 4,066 2,947 12,580 757 49,813

Liabilities evidenced by paper 1,990 1,542 2,849 8,918 6,566 21,865

Other liabilities 1,319 189 147 471 909 3,035

Total liabilities 45,587 10,167 6,283 22,203 9,131 93,371

Net liquidity gap (15,857) (5,039) 14,255 (5,079) 20,186 8,466

EFG Group


Notes to the Consolidated Financial Statements (continued)

44. Maturity of assets and liabilities (continued)

Dec. 31, 2005

Up to 1 1 - 3 3 - 12 1 - 5 Over 5

(All figures in millions of CHF) month months months years years Total

Assets

Cash and balances with central banks 2,769 - 7 - - 2,776

Due from other banks 8,170 377 17 34 - 8,598

Financial instruments at fair-value-throughprofit-or-loss

447 24 262 315 841 1,889

Derivative financial instruments 163 86 66 72 202 589

Loans and advances to customers 9,142 4,514 8,464 10,597 13,293 46,010

Available-for-sale investment securities 1,037 691 885 3,972 9,872 16,457

Other investment securities 261 220 19 - 528 1,028

Investments in associated undertakings - - - - 54 54

Intangible assets - - - - 686 686

Property, plant and equipment 1 - - - 1,313 1,314

Other assets 344 27 74 66 421 932

Total assets 22,334 5,939 9,794 15,056 27,210 80,333

Liabilities

Due to other banks 9,544 6,791 686 43 75 17,139

Derivative financial instruments 138 119 39 220 730 1,246

Due to customers 21,228 2,772 972 11,587 516 37,075

Liabilities evidenced by paper 1,374 650 1,810 6,757 4,334 14,925

Other liabilities 831 77 255 30 914 2,107

Total liabilities 33,115 10,409 3,762 18,637 6,569 72,492

Net liquidity gap (10,781) (4,470) 6,032 (3,581) 20,641 7,841

Annual Report 2006

Group

69


70

Notes to the Consolidated Financial Statements (continued)

45. Acquisition of subsidiaries

Details of acquisitions of subsidiaries during the year ended December 31, 2006 that gave rise to goodwill and

intangible assets are as follows:

DZI Bank AD

In December 2006, the Group, through its subsidiary EFG Eurobank Ergasias SA, acquired 91.29% of the share

capital of DZI Bank AD, which operates in Bulgaria.

Global Fund Management SA

In March 2006, the Group, through its subsidiary EFG Eurobank Ergasias SA, increased its shareholding in Global

Fund Management SA, Athens, to 72% from 44.44%; as a result the company has been transferred from investments

in associated undertakings to subsidiary undertakings and is consolidated using the full consolidation method.

Best Direct SA

In March 2006, the Group, through its subsidiary EFG Eurobank Ergasias SA (through its 100% subsidiary Open 24

SA), acquired 100% of the share capital of Best Direct SA, a company providing sundry services.

C.M.Advisors Limited

On February 13, 2006, the Group, through its subsidiary EFG International, acquired 100% of the issued share

capital of C.M.Advisors Limited (CMA). Bermuda-based CMA focuses on both managing fund-of-hedge-funds and

research of hedge funds. The transaction gave rise to an estimated goodwill of CHF 263.6 million, taking into account

the estimated deferred consideration and to the recognition of intangible assets for CHF 65.2 million. The intangible

assets are amortised over 4 to 14 year periods depending on their nature.

Harris Allday

On August 18, 2006, the Group, through its subsidiary EFG International, acquired 100% of the business and assets

of Harris Allday Stockbrokers (a partnership), a United Kingdom Birmingham-based private client stockbroker. The

transaction gave rise to goodwill of CHF 54.8 million and to the recognition of intangible assets of CHF 49.3 million.

The intangible assets related to client relationships are amortised over a 10 to 20 year period and the intangible

related to the trademark is amortised over 25 years.

Banque Monégasque de Gestion

On November 1, 2006, the Group, through its subsidiary EFG International, acquired 100% of the issued share

capital of the Monaco-based private banking organisation. The transaction gave rise to goodwill of CHF 30.9 million

and to the recognition of intangible assets of CHF 11.1 million. The intangible assets are amortised over a 15 year

period.

Fair value of Other Goodwill for

net assets intangible deferred tax on

(All figures in millions of CHF) Consideration acquired assets intangibles Goodwill

DZI Bank AD 325 46 - - 279

Global Fund Management SA 3 1 - - 2

Best Direct SA - (1) - - 1

C.M.Advisors Limited 336 7 65 - 264

Harris Allday 105 1 49 - 55

Banque Monégasque de Gestion 60 22 11 (4) 31

Other acquisitions 9 - 7 - 2

Total 838 76 132 (4) 634

The above acquisitions have been accounted for by the purchase method of accounting. The acquired companies

contributed a net profit of CHF 48 million to the Group during the period from the date of their acquisition to

December 31, 2006. If the acquisitions had been completed on January 1, 2006, the acquired companies would have

contributed revenue of CHF 155 million and net profit of CHF 57 million for the year ended December 31, 2006.

Included in the CHF 76 million of fair value of net assets acquired are CHF 197 million of cash and cash equivalents.

The initial accounting for some of the business combinations that were effected during the period is presented

provisionally since the determination of the subsidiaries' identifiable assets, liabilities or contingent liabilities, or the

cost of the combinations has not been finalised.

EFG Group


Notes to the Consolidated Financial Statements (continued)

46. Fiduciary transactions

(All figures in millions of CHF) Dec. 31, 2006 Dec. 31, 2005

Fiduciary deposits with third parties 6,135 5,481

Fiduciary loans 18 23

Total 6,153 5,504

47. Related party transactions

Parties are considered to be related if one party has the ability to control the other party, or exercise significant

influence over the other party, in making financial or operational decisions.

A number of banking transactions are entered into with related parties in the normal course of business and on an

arm's length basis. These include loans, deposits, letters of guarantee and derivatives. The impact of transactions with

related parties on the statement of income is not significant. The volumes of related party transactions and

outstanding balances are as follows:

(All figures in millions of CHF) Dec. 31, 2006 Dec. 31, 2005

Loans and advances to customers 25 221

Available-for-sale investment securities 81 38

Letters of guarantee issued 4 3

Deposits from customers 341 226

At December 31, 2006, included in loans and advances to customers, are credit facilities granted to members of the

Group Board of Directors, Group committees and Group executive employees of CHF 15 million (December 31,

2005: CHF 21 million).

48. Post balance sheet events

Quesada Kapitalförvaltning, Stockholm

On December 22, 2006, the Group, through its subsidiary EFG International, announced that it had reached an

agreement to acquire the Stockholm-based securities and wealth management company Quesada Kapitalförvaltning

AB from Quesada AB, a Swedisch financial Group and the transaction is expected to close in April 2007.

PRS Group

On January 8, 2007, the Group, through its subsidiary EFG International, announced that it had reached an

agreement to acquire PRS Group from its main founder. PRS Group has been a leader in hedge fund investing since

1987, offers a broad range of family office type of private banking services, as well as discretionary asset management

services. The transaction closed on 30 March 2007.

Prospera Securities AD Beograd

In January 2007, the Group, through its subsidiary EFG Eurobank Ergasias SA, announced the agreement for the

acquisition of 74.16% of the share capital of Prospera Securities AD Beograd, a capital markets and investments

services company operating in Serbia. Closing of the transaction is subject to regulatory approvals and is expected to

occur in the second quarter of 2007.

DZI Bank AD, Sofia

In February 2007, the Group, through its subsidiary EFG Eurobank Ergasias SA, increased its participation in the

company to 94.2% as a result of a tender offer on the Bulgarian Stock Exchange.

Universal Bank OJSC, Lviv

On March 1, 2007, the Group, through its subsidiary EFG Eurobank Ergasias SA, concluded its acquisition of

99.34% of the share capital of Universal Bank in Ukraine.

Tekfenbank AS, Istanbul

On March 16, 2007, the Group, through its subsidiary EFG Eurobank Ergasias SA, concluded the acquisition of 70%

of the share capital of Istanbul-based Tekfenbank AS.

Annual Report 2006

Group

71


72

Notes to the Consolidated Financial Statements (continued)

48. Post balance sheet events (continued)

Liabilities evidenced by paper

In January 2007, the Group, through its subsidiary EFG Eurobank Ergasias SA (through its subsidiary EFG Hellas

Plc (Cayman Islands)), issued CHF 250 million senior fixed rate notes maturing in 2011, under its Euro Medium Term

Note (EMTN) program.

In March 2007, the Group, through its subsidiary EFG Eurobank Ergasias SA (through its subsidiary EFG Hellas Plc

(Cayman Islands)), issued EUR 750 million floating rate notes under its Euro Medium Term Note (EMTN) program.

49. Share options

The Group's two listed subsidiaries EFG Eurobank Ergasias SA and EFG International (as from 2006) grant share

options to executive directors, management and employees. All options are equity-settled and may be exercised

wholly or partly and converted into shares, at their owners' option provided that the vesting requirements are met.

As at December 31, 2006, EFG Eurobank Ergasias SA had outstanding 3 million share options at an average price of

CHF 24 (EUR 15) per share, (as at December 31, 2005: 1.5 million share options at an average price of CHF 28

(EUR 18) per share). The fair value of options granted for the year ended December 31, 2006, was CHF 17 million

(EUR 11 million).

The fair value of options granted is determined using the Monte Carlo valuation method, which simulates the share

price path taking into account the terms and conditions upon which the options were granted. The fair value

measurement is based on the assumption that the options will be exercised by the employees on the first possible

occasion the options are in-the-money.

EFG International issued 761,548 options pursuant to the Employee Stock Option Plan ("the 2006 Option Plan")

with a grant date of February 28, 2006. These options have an exercise price of CHF 25.33.

A deemed value of each option was estimated to be CHF 9.19 using a modified version of the Black Scholes Merton

formula which takes into account expected dividend yield as well as other funding costs during the period between

the end of the vesting period and the earliest exercise date. The significant inputs into the model were spot share price

(CHF 36.25), expected volatility (21%), dividend yield (2%), other funding costs (5%) the expected life of the options

(72 months) and the risk free rate (2.03%). Expected volatility was calculated using the 100 day average of volatility

of other private banks listed in Switzerland combined with a statistical analysis of implied market volatilities for

options with similar expected lives.

50. Outsourcing

The Group does not outsource any significant activities and/or operations.

51. Swiss banking law requirements

The EFG Group is subject to consolidated supervision by the Swiss Federal Banking Commission. The consolidated

financial statements of the Group are prepared in accordance with International Financial Reporting Standards

(IFRS). Set out below are the deviations which would result if the provisions of the Banking Ordinance and the

Guidelines of Swiss Banking Commission governing financial statement reporting, pursuant to Article 23 through

Article 27 of Banking Federal Ordinance, were applied in the preparation of the consolidated financial statements of

the Group.

(a) Financial investments

Under IFRS, available-for-sale financial investments are carried at fair value. Changes in the fair value of available-forsale

financial investments are recorded as increases or decreases to shareholders' equity (see consolidated statement of

changes in equity) until an investment is sold, collected or otherwise disposed of, or until an investment is determined to

be impaired. At the time an available-for-sale investment is determined to be impaired, the cumulative unrealised gain or

loss previously recognised in shareholders' equity is included in the statement of income for the period.

On disposal of an available-for-sale investment, the difference between the net disposal proceeds and carrying

amount, including any previously recognised unrealised gain or loss arising from a change in fair value reported in

shareholders' equity, is included in the statement of income for the period.

Under Swiss law, financial investments are carried at the lower of cost or market value. Reductions, as well as gains

or losses on disposals, are included in gains less losses from investment securities.

EFG Group


Notes to the Consolidated Financial Statements (continued)

51. Swiss banking law requirements (continued)

(b) Fair value option

Under IFRS, the Group has two sub-categories of financial assets, those held for trading and those designated as fairvalue-through-profit-or-loss

at inception. A financial asset is classified in this category if acquired principally for the

purpose of selling it in the short-term or if so designated by management.

Under Swiss law, the fair value option is not available.

(c) Derivative financial instruments

Under the specific rules of IAS 39, the majority of the Group's derivative financial instruments are classified as trading

and reflected on the balance sheet at fair values. Changes in fair values are reflected in net trading income.

Under Swiss law, the majority of the Group's derivative financial instruments qualify for hedge accounting and are

recorded on balance sheet at their fair values (gross positive and negative replacement values). Changes in fair values

are accounted for in accordance with the accounting treatment of the item being hedged.

(d) Goodwill and intangible assets

Under both IFRS and under Swiss law, goodwill and intangibles resulting from acquisitions and mergers are

capitalized in the balance sheet.

Under IFRS, goodwill is not amortized but is tested for impairment at least annually and is carried at cost less

accumulated impairment losses. Intangible assets are amortized on a systematic basis over their useful lives. In

addition, intangible assets are tested for impairment when there is any indication that the asset may be impaired.

Intangible assets are carried at cost less amortization and accumulated impairment losses.

Under Swiss law, goodwill and intangibles are amortized over six, seven or ten years on the straight-line basis. The

net carrying value of intangibles is, in addition, reappraised annually, with any reduction to the net carrying value

taken immediately as an expense in the statement of income.

(e) Extraordinary income and expense

Under IFRS, items of income and expense can only be classified as extraordinary if they are clearly distinct from the

ordinary activities and their occurrence is expected to be rare.

Under Swiss law, income and expense items related to other accounting periods, as long as they are attributable to

corrections or mistakes from previous periods, and/or not directly related with the core business activities of the

enterprise (e.g. realised gains on sale of investments in associated undertakings or property, plant and equipment) are

recorded as extraordinary income or expense.

In 2006, there were no material reclassifications with respect to extraordinary income and expense items.

(f) Investment properties

The Group applies the fair value model of IAS 40 for its investment properties. Such investments are hence remeasured

to fair value with changes recognised in the income statement in the period in which they arise.

Under Swiss Law, investment properties are carried out under the cost model.

Annual Report 2006

Group

73


EFG Group


Annual Report 2006


Contents

78 Review of Parent Bank activities and financial statements

79 Report of the statutory auditors

80 Parent Bank financial statements

EFG Bank European Financial Group


EFG Bank European Financial Group

Parent Bank Financial Statements

for the year ended December 31, 2006

Annual Report 2006

77


78

Review of Parent Bank Activities and Financial Statements

Activities

EFG Bank European Financial Group, based in

Geneva, is the parent bank of the EFG Group. As

such, its primary activity consists of supervising

the EFG Group. This supervision is performed by

the Board of Directors and its Group Audit and

Risk Committees and, at the executive level, by

the Group Executive Committee, Group Risk

Unit, Group Control and Regulatory Unit, and

Group Finance Department.

The Bank also has a Banking Department, which

services private banking clients using the

operating platform provided by its Swiss

subsidiary, EFG Bank.

Results for the year ended

December 31, 2006

The profit for the year reached CHF 11.0 million,

slightly ahead of last year’s CHF 10.0 million.

Net interest income rose by CHF 1.1 million to

CHF 3.3 million as a result of the increase in

interest rates, while net commission income and

service fees remained relatively stable at

CHF 4.9 million, against CHF 5.1 million for the

previous year. Trading income amounted to

CHF 0.5 million compared to CHF 0.7 million a

year before and consists essentially of income on

foreign exchange transactions entered into on

behalf of clients.

Dividend income increased significantly to

CHF 13.1 million versus CHF 9.3 million for the

previous year as a result of more dividends

distributed by the Bank’s direct subsidiaries.

Operating expenses remained relatively stable at

CHF 10.3 million versus CHF 10.7 million for

the previous year.

At December 31, 2006, total assets amounted to

CHF 694 million versus CHF 690 million a year

ago, with no major change in the balance sheet

structure. Shareholders’ equity increased by

CHF 11 million, reflecting the net profit for the

year.

Proposal for the appropriation of

available earnings as at December 31, 2006

With the inclusion of the balance brought

forward of CHF 61,744, the available

earnings at December 31, 2006 amounted to

CHF 11,087,668.

The Board of Directors proposes that this

amount be appropriated as follows:

CHF

Allocation to general legal reserve 600,000

Allocation to other reserves 10,400,000

Retained earnings carried forward 87,668

EFG Bank European Financial Group


Report of the Statutory Auditors to the

General Meeting of the Shareholders

As statutory auditors, we have audited the accounting records and the financial statements (statement of

income, balance sheet and notes set out on pages 80 to 89) of EFG Bank European Financial Group for

the year ended December 31, 2006.

These financial statements are the responsibility of the board of directors. Our responsibility is to express

an opinion on these financial statements based on our audit. We confirm that we meet the legal

requirements concerning professional qualification and independence.

Our audit was conducted in accordance with Swiss Auditing Standards, which require that an audit be

planned and performed to obtain reasonable assurance about whether the financial statements are free

from material misstatement. We have examined on a test basis evidence supporting the amounts and

disclosures in the financial statements. We have also assessed the accounting principles used, significant

estimates made and the overall financial statement presentation. We believe that our audit provides a

reasonable basis for our opinion.

In our opinion, the accounting records and financial statements and the proposed appropriation of

available earnings comply with Swiss law and the company’s articles of incorporation.

We recommend that the financial statements submitted to you be approved.

PricewaterhouseCoopers SA

Jean-Christophe Pernollet Christophe Kratzer

Geneva, April 27, 2007

Annual Report 2006

79


80

Statement of Income

for the year ended December 31, 2006

Operating income and expenses

(All figures in thousands of CHF) Note 2006 2005

Interest income

Interest and discount income 3,317 2,164

Interest and dividend income from financial investments 119 131

Interest expenses (121) (83)

Net interest income 3,315 2,212

Commissions and service fees

Commission income from lending activities 91 662

Commission income from securities and investment activities 5,893 5,842

Commission income from other services 5,097 5,378

of which central costs recharged to subsidiaries 11 4,131 4,199

Commission expenses (6,164) (6,742)

of which service fees recharged by subsidiaries 11 (5,386) (5,993)

Net commission income 4,917 5,140

Income from trading activities, net 10 496 635

Other ordinary income

Income from investments in subsidiaries 13,147 9,340

Real estate income 595 562

Other ordinary income 4 4

Other ordinary expenses - -

Net other ordinary income 13,746 9,906

Operating expenses

Personnel expenses 6,087 6,054

Other operating expenses 11 4,195 4,657

Total operating expenses 10,282 10,711

Gross operating profit 12,192 7,182

Net profit for the year

Gross operating profit 12,192 7,182

Depreciation of fixed assets (122) (167)

Valuation adjustments, provisions and losses 13 (9) (14,767)

Extraordinary income 14 12 44,379

Extraordinary expenses 14 (555) (25,186)

Taxes (492) (1,400)

Net profit for the year 11,026 10,041

Proposed appropriation of available earnings

Net profit for the year 11,026 10,041

Retained earnings brought forward from the previous year 62 21

Available earnings as per balance sheet 11,088 10,062

Allocation of available earnings

Allocation to general legal reserve 600 600

Allocation to other reserves 10,400 9,400

Retained earnings carried forward 88 62

EFG Bank European Financial Group


Balance Sheet

at December 31, 2006

Assets

(All figures in thousands of CHF) Note Dec. 31, 2006 Dec. 31, 2005

Cash 1,264 5,010

Money market instruments 1,221 8,528

Due from banks 130,544 119,691

Due from clients 59,106 57,207

Mortgage loans 4,868 3,664

Securities and precious metal trading portfolio - 157

Financial investments 5,058 7,054

Investments in subsidiaries 478,954 475,354

Fixed assets 9,269 9,391

Accrued income and prepaid expenses 3,550 3,603

Other assets 12 521 524

Total assets 694,355 690,183

Of which amounts receivable from subsidiaries

or significant shareholders 6,345 24,168

Liabilities

Money market instruments 477 2,400

Due to banks 1,125 3,024

Due to clients in form of savings or deposit accounts 4,648 6,132

Other amounts due to clients 49,367 48,595

Accrued expenses and deferred income 1,140 4,048

Other liabilities 12 634 546

Valuation adjustments and provisions 7 54,631 54,131

Total liabilities 112,022 118,876

Shareholders' equity

Share capital 8 250,000 250,000

Reserve for general banking risks 6,7 10,345 10,345

General legal reserve 19,200 18,600

Other reserves 291,700 282,300

Retained earnings brought forward 62 21

Net profit for the year 11,026 10,041

Total shareholders' equity 6 582,333 571,307

Total liabilities and shareholders' equity 694,355 690,183

Of which liabilities to subsidiaries or significant shareholders 22,306 19,271

Annual Report 2006

81


82

Off-Balance Sheet Positions

at December 31, 2006

(All figures in thousands of CHF) Notes Dec. 31, 2006 Dec. 31, 2005

Contingent liabilities 665,303 910,737

Derivative financial instruments

Positive gross replacement values 43 430

Negative gross replacement values 105 295

Underlying contract volumes 47,090 89,558

Fiduciary transactions 9 1,142,155 1,140,613

EFG Bank European Financial Group


Notes to the Financial Statements

1. Description of business activity

EFG Bank European Financial Group is the

parent bank of the EFG Group.

In this capacity it provides supervision on

subsidiaries in respect of strategic issues, risk

management, control environment and internal

control systems, financial reporting and

compliance with Swiss regulatory requirements.

This Group-wide supervision is performed

through the following corporate bodies: the

Board of Directors and its delegated Group Audit

and Risk, which are supported, at the Executive

level, by the Group Executive Committee, Group

Risk Unit, Group Control and Regulatory Unit

and Group Finance Department and, at the audit

level, by the Group Internal Audit function (EFG

Audit and Consulting Services SA).

In addition, in its capacity as a bank, it offers a

full range of private banking services, via the

operational and IT platform of its Swiss private

banking subsidiary, EFG Bank.

At December 31, 2006, the number of staff

employed by the Bank was 16 (2005:16)

2. Accounting policies, risk management

and outsourcing

(a) Accounting policies

The statutory financial statements have been

prepared in accordance with the accounting and

valuation principles laid down in the Swiss Code

of Obligations, the Federal Law on Banks and

Savings Banks, the Swiss Banking Ordinance and

the Directives of the Swiss Federal Banking

Commission on Accounting Standards. These

principles require that the statutory financial

statements show a prudent view of the financial

position and result of operations. Each asset and

liability are valued on an individual basis.

Transaction recording and presentation in the

balance sheet

All transactions of the Bank are entered into its

books on the day they are transacted. The

balance sheet is prepared according to the

following principles: securities transactions, as

well as payments, are entered in the balance sheet

Annual Report 2006

on the day of transaction; deposits and loans, as

well as spot and forward/foreign exchange

transactions, are entered in the balance sheet on

their respective value dates.

Cash and money market instruments

Such assets are recorded in the balance sheet at

their nominal value.

Balances due from banks and clients, and

mortgages

These are stated at nominal value, net of specific

provisions in respect of doubtful receivables.

Securities and precious metal trading portfolio

Assets held in this category are valued at fair

value. Securities that are not regularly traded are

valued at the lower of cost or market value.

Structured products are marked to model.

Financial investments

Securities are held on a medium or long-term

basis, i.e. until their maturity. Bonds held for the

medium term are valued at the lower of cost or

market value. Bonds held for the long-term, i.e.

until their maturity, are valued under the straightline

method. Equities are valued at the lower of

cost or market/fair value.

Reductions in market value below cost are

recorded in the statement of income under

“Other ordinary expenses”. Any subsequent

increases in market value of previously writtendown

financial investments up to initial cost are

recorded in the statement of income under

“Other ordinary income”.

Investments in subsidiaries

Such assets are stated at the acquisition price less

any write-downs to reflect a prolonged

diminution in value.

Fixed assets

Fixed assets comprise buildings owned by the

Bank, fixtures and fittings, computer and

telecommunication equipment, and other office

equipment, the purchase cost of which, or the

project they relate to, exceeds CHF 10,000.

Purchases below this threshold are expensed.

Buildings are recorded in the balance sheet at

their acquisition price.

83


84

Notes to the Financial Statements (continued)

Other fixed assets are depreciated on a straightline

basis over their estimated useful economic

life, which are as follows:

- Fixture and fittings : between 5 and 10 years;

- Computers and telecommunications

equipment: between 3 and 4 years;

- Other fixed assets : between 5 and 10 years.

Valuation adjustments and provisions

Value of assets, including loans, is adjusted when

a prolonged impairment in value of these assets is

identified, in accordance with the general

principle of prudence. In addition, loans are riskevaluated

according to the domicile of the risk.

Specific provisions in respect of doubtful

receivables are netted against corresponding

assets.

Provisions are set up to cover each additional

probable, material liability that has been

identified in respect of situations existing at the

date of the balance sheet, in accordance with the

general principle of prudence.

In addition, general provisions may be set up on

a global basis for undetermined risks.

Taxes

Provisions are set up for taxes due on net

income, but not yet paid, and included in the

balance sheet under “Accrued expenses and

deferred income ”.

Reserve for general banking risks

The reserve for general banking risks is,

according to Art. 11a of the Swiss Banking

Ordinance, considered as part of the

shareholders’ equity of the Bank.

Foreign currencies

Assets and liabilities denominated in foreign

currencies on the balance sheet are translated into

Swiss francs at the year-end market exchange

rates.

Transactions in foreign currency are translated

into Swiss francs at the rates prevailing on the

dates of the transactions.

Foreign currency positions are marked to market

and the result taken to the statement of income.

Currency swaps, which are used for hedging

foreign currency loans, are valued under the

accrual method.

Main foreign exchange rates against CHF were as

follows:

2006 2005

Dec. 31 Average Dec. 31 Average

EUR 1.6069 1.5731 1,5551 1,5481

GBP 2.3930 2.3082 2,2692 2,2672

USD 1.2201 1.2536 1,3182 1,2513

Derivatives

The term “derivative” incorporates interest rate,

currency, equity (or indices) and other

instruments in the form of forward contracts,

options (traded or over-the-counter), swaps or

futures.

Transactions entered into on a proprietary basis

or on behalf of clients are marked to market and

the result included in the statement of income

under “Income from trading activities”, except

certain transactions entered into for hedging

purposes which may require a different treatment

(see below). The market value of derivative

contracts undertaken for the Bank’s own account

or on behalf of clients corresponds to the

replacement value of these contracts. Positive and

negative replacement values are included in the

balance sheet under “Other assets” and “Other

liabilities” respectively and are not netted, unless

proper netting agreements are in place with

counterparties.

Hedging transactions are valued and recognised

to the statement of income using the same

methodology as used for the underlying

transactions.

(b) Risk management

The main activity of the Bank consists of carrying

out supervision of subsidiaries. It alos provides

private banking services using the operating

platform of its Swiss subsidiary, EFG Bank,

whereby most of the transactions are entered into

on behalf of clients, whose assets are normally

held off balance sheet. The Bank maintains only

relatively small proprietary positions, usually for

asset and liability management purposes. The

policy of the Bank regarding market, credit and

EFG Bank European Financial Group


Notes to the Financial Statements (continued)

liquidity risks, as well as the use of derivatives, is

set in this context.

The operational infrastructure provided by EFG

Bank comprises the Accounting, Treasury, Risk

Management, private banking (partly), Back

Office, Legal and Compliance, Credit, IT and

Logistics departments of EFG Bank, which also

work on behalf of the Bank.

Written regulations and directives are issued by the

management – and approved where appropriate,

by the Board of Directors – concerning credit and

market risks, the approval and supervisory

procedure for credit, liquidity monitoring and the

mitigation of operational risks associated with

private banking transactions, back-office

processes, fund transfers, recording of

transactions, legal and compliance aspects, and

information technology.

Market risk

Market risk limits are determined by the risk

policy framework approved by the Board of

Directors.

As regards interest rate risk, the Bank limits its

balance sheet-related exposure by a policy of

matched refinancing. It is not the Bank’s policy to

engage in active interest rate trading.

The risk associated with interest rate variation is

monitored on a monthly basis by management

based on aggregated interest positions provided

by the Accounting department, on a daily basis

by the Treasury department based on ongoing

positions held at the trading desk and on a

random basis by the Risk Management

department.

The Bank carries out foreign currency

transactions both for its clients and on its own

account. It is not part of the Bank’s policy,

however, to take up significant foreign currency

positions. The overall net nominal positions per

currency are subject to intraday and overnight

limits. The total intraday foreign exchange

position is monitored by the Risk Management

department on a random basis. The total

overnight foreign exchange position is monitored

on a daily basis by senior management and the

Risk Management department.

Annual Report 2006

The low usage of derivatives is part of the

prudent risk management policy followed by the

Bank.

Market risks are managed using «value-at-risk»,

scenario analysis and stress testing.

Liquidity risk

The size of the Bank’s capital and reserves and its

matched refinancing policy, ensure that it avoids

incurring any significant liquidity risk. In

addition, liquidity is supervised on a daily basis

by the Accounting department, under the

supervision of the Risk Management department,

based on positions held at the Treasury desk.

Credit risk

Due to the private banking nature of the activity,

most of the credit exposure towards clients is

secured by liquid assets pledged as collateral.

Discount factors and diversification rules apply

when determining the loanable value of assets

pledged as collateral. Most of the assets pledged

as collateral are valued daily, and more frequently

during periods of high market volatility.

In addition, in the ordinary course of business,

the Bank has credit exposure to reputable

banking and brokerage counterparties.

Credit risk management is carried out at two

levels. On the one hand, the granting and renewal

of credit limits to customers are subject to a

procedure involving different levels of approval

(Credit Department, Credit Committee and

Board of Directors), according to the amount and

type of collateral involved. Responsibility for the

approval of limits in favour of banking

counterparties resides primarily with the Board of

Directors. On the other hand, outstanding credit

commitments, limits and adequacy of collateral

of each borrower (or group of borrowers), large

exposures and country risk are monitored on an

ongoing and independent basis by the Loan

Administration section of the Credit Department.

An internal grading system is used as a

supporting tool for determining any provisioning

requirement for doubtful debts on an individual

basis.

Operational risk

Operational risk is the risk of loss or business

suspension resulting from failures in business

85


86

Notes to the Financial Statements (continued)

processes, systems and people, or from external

causes, whether accidental or deliberate. It is

limited by means of organisational measures,

automations, internal controls, security

measures, authorisation frameworks, written

procedures, legal documentation and support,

and compliance checks under the responsibility of

the Management. In addition, operational

statistics are produced for the attention of the

Management.

Furthermore, the Bank’s operations are included

in the monitoring process of operational risk

performed at Group level, which includes the

follow-up of key operational risk-related control

issues and the reporting of operational losses.

(c) Outsourcing

Back offices, information technology,

transactions execution and settlement, custody

and corporate actions, electronic fund transfers,

asset management, daily risk management

activities, legal and compliance have been

outsourced to the Bank’s Swiss subsidiary, EFG

Bank, using common operating procedures and

platform, but with distinct supervision by the

Bank’s Management.

Salary and pension fund administration have

been outsourced to a third party service company

specialising in this area. IT development projects

may also be outsourced on a case-by-case basis.

EFG Bank European Financial Group


Notes to the Financial Statements (continued)

3. Fire insurance value of fixed assets

(All figures in thousands of CHF) Dec. 31, 2006 Dec. 31, 2005

Investment properties 16,931 16,931

Other tangible fixed assets 1,000 1,000

4. Pledged or assigned assets in guarantee of own liabilities

Dec. 31, 2006 Dec. 31, 2005

Book value Book value

of pledged Actual of pledged Actual

(All figures in thousands of CHF) assets liabilities assets liabilities

Balance sheet positions

Money market instruments 1,098 - 395 -

Total 1,098 - 395 -

5. Pension

The pension schemes cover employees for retirement pension and against disability or death (in which case spouse

and dependent children are the beneficiaries). They are run in accordance with applicable Swiss law and regulation

on pension. Up until December 31, 2003, retirement schemes were defined-benefit schemes. However, on January 1,

2004, except for 5 employees aged over 51 years old for whom a defined-benefit scheme (insured through an

insurance company) remains in place, all other retirement schemes became defined-contribution schemes. Generally

funded by employees and employers, the schemes are legally independent from the Bank. Employer’s contribution

expenses are booked as personnel expenses. The Bank has no liability towards the pension funds (2005: nil).

6. Statements of changes in shareholders’ equity

Share Legal General Other Available

(All figures in thousands of CHF) capital reserve banking reserves earnings

Balance at beginning of the year 250,000 18,600 10,345 282,300 10,062 571,307

Allocation to/from reserves - 600 - 9,400 (10,000) -

Net profit for the year - - - - 11,026 11,026

Balance at end of the year 250,000 19,200 10,345 291,700 11,088 582,333

Annual Report 2006

87


88

Notes to the Financial Statements (continued)

7. Valuation adjustments and provisions/Reserve for general banking risks

Recoveries,

doubtful New

Balance at Change or interest, provisions Balance at

Dec. 31, Specific reclass. of exch. charged to Reversals Dec. 31,

(All figures in thousands of CHF) 2005 usage provisions differences earnings in earnings 2006

Valuation adjustments and

provisions for credit risks 620 (567) - (3) - - 50

Valuation adjustments and

provisions for country risks 36 - - - - - 36

Other provisions 54,095 - - 500 54,595

Total valuation adjustments

and provisions 54,751 (567) - (3) 500 54,681

Less: valuation adjustments

netted against assets (620) (50)

Total valuation adjustments and

provisions as per balance sheet (liabilities) 54,131 54,631

Reserve for general banking risks 10,345 10,345

The reserve for general banking risks has already been taxed.

8. Capital structure and significant shareholders

Dec. 31, 2006 Dec. 31, 2005

Total Dividend Total Dividend

nominal Number bearing nominal Number bearing

(Nominal value in thousands of CHF) value of units capital value of units capital

Capital structure

Share capital 250,000 900,000 250,000 250,000 900,000 250,000

Total share capital 250,000 900,000 250,000 250,000 900,000 250,000

Dec. 31, 2006 Dec. 31, 2005

Nominal Participation Nominal Participation

in % in %

Significant shareholders

Mrs A M L Latsis 37,500 15 37,500 15

Mrs H Latsis 37,500 15 37,500 15

Mrs M Latsis 37,500 15 37,500 15

Mr S J Latsis 12,500 5 12,500 5

Mr J S Latsis, Jr 25,000 10 25,000 10

The Banque de Dépôts Trust, beneficiaries

of which are Latsis family members 100,000 40 100,000 40

9. Fiduciary transactions

(All figures in thousands of CHF) Dec. 31, 2006 Dec. 31, 2005

Deposits with third party banks 1,084,250 1,080,516

Deposits with Group banks 57,397 59,058

Loans and other fiduciary transactions 508 1,039

Total 1,142,155 1,140,613

EFG Bank European Financial Group


Notes to the Financial Statements (continued)

10. Income from trading activities, net

(All figures in thousands of CHF) 2006 2005

Foreign exchange and banknotes 496 635

Total 496 635

11. Related party transactions

Commission income from other services includes fees amounting to CHF 4,131 (2005: CHF 4,199) charged by the

Bank to affiliates in respect of Group risk, finance and internal control monitoring activities performed in its capacity

as Group parent bank.

Commission expenses include fees amounting to CHF 5,386 (2005: CHF 5,993) charged by the Bank's Swiss

subsidiary, EFG Bank, in respect of the management of some of the Bank's customers.

Other operating expenses include fees amounting to CHF 1,019 (2005: CHF 1,032) charged to the Bank by its Swiss

subsidiary, EFG Bank, in respect of transactions execution and settlement, back offices, custody and corporate

actions, electronic fund transfers, daily risk management activities, information technology, legal, compliance and

other support, which it provides to the Bank.

12. Other assets and other liabilities

Other assets and other liabilities essentially consist of various receivables and payables and gross replacement values of

derivatives. The net balance of the balancing account relating those derivatives, if any, for which marking to market did

not generate a corresponding entry to the statement of income (e.g. certain hedging instruments), is immaterial.

13. Valuation adjustments, provisions and losses

(All figures in thousands of CHF) 2006 2005

Increase in provision for general banking risks - 14,755

Other 9 12

Total 9 14,767

14. Extraordinary income and expenses

(All figures in thousands of CHF) 2006 2005

Extraordinary income

Profit on sale of a 25% investment in a subsidiary to another Group company - 19,780

Profit on sales of shares in a subsidiary to another Group company and

to staff of that subsidiary - 24,561

Other 12 38

Total 12 44,379

Extraordinary expenses

Supplemental general provision (500) (24,595)

Other (55) (591)

Total (555) (25,186)

Annual Report 2006

89


Images: Bridgeman Art Library

“Allee des Alyscamps in Arles” by Vincent Van Gogh

“Boating on the Seine” by Pierre Auguste Renoir

“In the Golden Olden Time” by John Atkinson Grimshaw

“Rue de l’Abreuvoir, Montmartre under snow» by Maurice Utrillo

“Longtown Castle” by Huw S. Parsons


EFG Bank European Financial Group

24 quai du Seujet

1211 Geneva 2

Switzerland

Telephone (+41) 22 918 72 72

Facsimile (+41) 22 918 72 73

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