kaupthing bank luxembourg sa | annual report 2006 - paperJam

| KAUPTHING BANK LUXEMBOURG S.A. | ANNUAL REPORT 2006 |

| KAUPTHING BANK LUXEMBOURG S.A. | ANNUAL REPORT 2006 |
TABLE OF CONTENTS
Financial Summary 3
Address by the Chairman of the Board of Directors 5
Management Report 6
Auditor`s Report 10
Balance Sheet 14
Profit and Loss Account 17
Notes to the Annual Accounts 18
Organisation 34

| KAUPTHING BANK LUXEMBOURG S.A. | ANNUAL REPORT 2006 |
FINANCIAL SUMMARY
Net revenues
120
in million EUR
100
Profit
60
in million EUR
50
Balance sheet
5000
in million EUR
4000
80
60
40
40
30
20
3000
2000
20
10
1000
0
98 00 02 04 2006
0
98 00 02 04 2006
0
98 00 02 04 2006
Assets under management and custody
5000
in million EUR
4000
Liable Capital
350
in million EUR
300
Revenue split
17%
Net profit
on financial
operations
46%
Net interest
income
250
3000
200
2000
150
100
1000
50
0
98 00 02 04 2006
0
98 00 02 04 2006
37%
Net commission
income
100
Return on Equity
in %
100
Cost-to-income
in %
150
Staff
80
80
120
60
60
90
40
40
60
20
20
30
0
98 00 02 04 2006
0
98 00 02 04 2006
0
98 00 02 04 2006

| KAUPTHING BANK LUXEMBOURG S.A. | ANNUAL REPORT 2006 |
ADDRESS BY THE CHAIRMAN OF THE BOARD OF DIRECTORS
2006 will be remembered as a year of strong growth, increased
profitability and improved asset quality. Considerable effort
has been invested in risk management, a new compliance function
has been established and a new function of operational
risk management is well underway.
Kaupthing Bank Luxembourg is essentially a mirror of the Group’s own strategic development,
having both employees and clients from all the 10 countries in which the Group operates.
This international pool of employees and the diverse client base closely reflects the cosmopolitan
environment of Luxembourg, where 40% of residents are of other nationalities than
Luxembourgish. The workforce doubles every day as commuters cross borders from Germany,
France and Belgium to work in Luxembourg. It is from this talent pool that the Bank employs 160
people of 18 different nationalities.
A continuously changing business environment requires quick actions and the Bank’s flat organizational
structure and its disciplined and fast decision making process is a vital part of the corporate
culture of the Bank and makes it competitive and responsive in the international banking
market in Luxembourg.
Sigurður Einarsson,
Executive Chairman
The Bank achieved a substantial increase in business volumes during the year and employs an
intelligent approach to increase effectiveness in all business areas, with more straight through
processing and streamlined processes that will ultimately reduce the risk of human errors. The
Bank left its old premises in rue Guillaume Schneider and moved to new offices in Kirchberg
during the year, a task that may have seemed like business as usual but was in fact the result of
hard work and detailed planning according to a tight time schedule. The meticulous organization
involved meant that employees were able to leave the old premises on a Friday and arrive at the
new fully operational premises the following Monday. All credit for this impressive achievement
should go to the Bank’s IT department and to the group of dedicated employees who were directly
involved in the project.
Finally I would like to thank all our employees for their continuous effort and remarkable dedication
to the Bank, as well as our valuable clients who I know have shared a successful 2006 with
the Bank.
Sigurður Einarsson
| 5 |

| KAUPTHING BANK LUXEMBOURG S.A. | ANNUAL REPORT 2006 |
MANAGEMENT REPORT 2006
In 2006 Kaupthing Bank Luxembourg consolidated its position as one of the leading Nordic
banks on the Luxembourg market. At the end of the first quarter of 2006 the Bank relocated to
new premises in Kirchberg, situated on Avenue J.-F. Kennedy in the heart of the financial district.
The new offices represent greatly improved working facilities, enabling the employees to take
better advantage of the opportunities presented to the Bank in the future. At the same time the
share capital of the Bank was increased by EUR 100 million to facilitate the fast growth of the
Bank. The Bank is already reaping the benefits of the above with all business units well exceeding
their stated goals for the year.
Managing Directors of
Kaupthing Bank,
Luxembourg
The diversity of the Bank’s activities has proven to be of utmost importance and will mitigate its
dependence on any single specific business area. The Bank’s core activities are private banking
and wealth management, financial markets activities including treasury and brokerage services
for both internal clients and external institutional counterparts, as well as corporate banking,
including participation as lead manager and arranger of syndicated credits. The Bank has also
built up expertise in the administration of mutual funds and offers insurance products through its
subsidiary Kaupthing Life and Pension.
Magnús Gudmundsson
The Bank reported an impressive 46% increase in the number of transactions in 2006. The balance
sheet expanded by 82% in 2006 to approximately EUR 4.9 billion, while the capital adequacy ratio
stands at 11.36%, well above the minimum capital requirement. Client deposits doubled to
EUR 1.1 billion during 2006 and lending to customers increased by 83% to EUR 3.3 billion. Net
revenues grew by 66% to EUR 120 million, whereas profits amounted to EUR 57 million, corresponding
to an increase of 86% from the previous year. Return on equity, adjusted for a capital increase
of EUR 100 million, was 25% and the cost-to-income ratio remained at a low level of 39%.
All divisions of the Bank performed well. The strong results of the Financial Markets division were
driven by increased business flow from institutional clients in 13 different countries in Europe, and
fast growing Private Banking and Proprietary Trading units. The profitability has doubled each
year since 2001 and was evenly driven by Treasury, Capital Markets and Foreign Exchange segments.
Business volumes have reached new record highs in Foreign Exchange for the year 2006
of EUR 60 billion, compared with EUR 45 billion in 2005. Same goes for Capital Markets where
business volumes reached EUR 15 billion compared with EUR 8.8 billion in 2005.
Johnie Brøgger
In 2006, the division added nine new professionals to its cosmopolitan team of 23 experts in the
global Financial Markets division. The new team members have enlarged the team’s network and
have added scale to the business targeted for growth. The division is therefore represented in all
the major European centres and centres its business on evolving lifelong partnerships based on
trust and discretion with its clients.
In its quest for quality and efficiency the Financial Markets division invests its time and capital
in numerous projects to support risk management and straight through processing. One of the
| 6 |

| MANAGEMENT REPORT 2006 |
milestones last year was becoming a CLS third party member during the last quarter of 2006, paving
the way for additional growth of the Foreign Exchange business.
Assets under management and custody, in the Private Banking department, grew by 25% to
EUR 4 billion. The number of customers increased rapidly and numerous new bespoke products
were created for the client base. The year also saw an increase in the numbers of both new and
existing clients using our wealth management services, including portfolio management, tax and
legal service, family and company legal issues, as well as company structures for equity and real
estate holdings.
Private Banking hired a marketing manager to develop Kaupthing’s brand with a particular focus
on brand communication to clients. Our updated client correspondence and client web access
are both part of this ongoing development and information upgrade. Interactivity has increased
between Private Banking and potential sources of new clients both within Luxembourg and
abroad. The Bank is now seeking to promote its brand in a wider variety of venues than before.
In late 2006 Private Banking expanded the representative office in Spain by appointing an additional
manager, as the office is proving to be an important growth area. Private Banking now
employs 50 senior account managers, assistant account managers and portfolio managers. This
team has members from all of the Nordic nationalities and the UK, reflecting the Bank’s strategic
emphasis on targeting the markets in which Kaupthing Bank operates.
The Institutional and Corporate Banking division met its targets with the successful expansion
of the Bank’s lending business within asset finance. The division has further strengthened its
competencies in financing wind turbines, vessels and real estate. The division has increased its
transaction flow significantly during the year and has taken an active part in the syndicated loan
market both in the capacity as arranger and co-arranger. This conforms well to the Bank’s philosophy
of aiming to add value to our customers in close cooperation with partners across the
financial landscape.
The overall loan book has increased again during the past year, a development primarily attributable
to increased lending to our growing base of Private Banking customers. Included in
the range of lending products offered to our Private Banking customers is Kaupthing Mortgage,
which forms part of the Bank’s dedication to meeting the customer’s entire need for premium financial
solutions. The aggregate credit exposure towards Private Banking customers accounts for
65% of the entire loan book of the Bank. The remainder is lending to corporate customers (10%)
and financial institutions (25%). Well secured loan portfolios in conjunction with ongoing efforts
to maintain and enhance the Bank’s risk management tools, have led to a year without losses on
the loan book. The provision for loan losses stands at 0.14% of total outstanding loans as per 31
December 2006.
| 7 |

| KAUPTHING BANK LUXEMBOURG S.A. | ANNUAL REPORT 2006 |
Regarding the Bank’s exposure to risks, we kindly refer you to the notes 6.3 and 6.4 of the annual
accounts as at 3 1 December 2006.
Within the Investment Funds division, the Bank provides fund administration services for a
number of investment funds encompassing both UCITS III and UCI funds. At year-end the Bank’s
Fund Administration administered assets of EUR 400 million. The Bank’s efforts in Fund Distribution
were focused on establishing a platform for the enhanced and diversified distribution of the
Group’s investment funds. Several funds have been streamlined for increased distribution efforts,
and these initial initiatives will be leveraged upon with increased distribution efforts.
The Bank’s subsidiaries Kaupthing Life and Pension (KLP) and Kaupthing Asset Management Geneva
have been developing positively during the year. KLP implemented new IT systems which
will enable it to progress to the next level of development and actively introduce and sell its
services throughout the Kaupthing network. Kaupthing Geneva is actively developing its product
offering, which will pave the way for new opportunities with comprehensive financial services on
top of its established Private Banking and Asset Management services.
The year 2006 was marked by substantial growth and profitability in all business areas, supported
by a set of business principles moulded over the years and now firmly embedded in the Bank’s
unique corporate culture. The Bank will continue to emphasise attracting, developing and motivating
exceptional professionals, the Bank’s most valuable asset. This culture is the foundation
of the Bank’s goals which are to provide premium financial services and to build long-term relationships
with our clients by emphasizing our unique service culture, providing solid long-term
investment returns and being competitive in the international markets.
No significant events have occurred during the period from 31 December 2006 to date.
February 15 th , 2007
Magnús Gudmundsson
Managing Director
Johnie Brøgger
Managing Director
| 8 |

| KAUPTHING BANK LUXEMBOURG S.A. | ANNUAL REPORT 2006 |
AUDITOR´S REPORT
To the board of directors of
KAUPTHING BANK LUXEMBOURG S.A.
35a, avenue J.-F. Kennedy
L-1855 Luxembourg
Report on the annual accounts
Following our appointment by the board of directors dated February 24, 2006, we have audited
the accompanying annual accounts of KAUPTHING BANK LUXEMBOURG S.A., which comprise
the balance sheet as at December 31, 2006 and the profit and loss account for the year then
ended, and a summary of significant accounting policies and other explanatory notes.
Board of directors’ responsibility for the annual accounts
The board of directors is responsible for the preparation and fair presentation of these annual
accounts in accordance with Luxembourg legal and regulatory requirements relating to the
preparation of the annual accounts. This responsibility includes: designing, implementing and
maintaining internal control relevant to the preparation and fair presentation of annual accounts
that are free from material misstatement, whether due to fraud or error; selecting and applying
appropriate accounting policies; and making accounting estimates that are reasonable in the
circumstances.
Responsibility of the Réviseur d’Entreprises
Our responsibility is to express an opinion on these annual accounts based on our audit. We
conducted our audit in accordance with International Standards on Auditing as adopted by the
Institut des Réviseurs d’Entreprises. Those standards require that we comply with ethical requirements
and plan and perform the audit to obtain reasonable assurance whether the annual accounts
are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the annual accounts. The procedures selected depend on the judgement of the Réviseur
d’Entreprises, including the assessment of the risks of material misstatement of the annual accounts,
whether due to fraud or error. In making those risk assessments, the Réviseur d’Entreprises
considers internal control relevant to the entity’s preparation and fair presentation of the annual
accounts in order to design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An
audit also includes evaluating the appropriateness of accounting policies used and the reasonableness
of accounting estimates made by the board of directors, as well as evaluating the overall
presentation of the annual accounts. We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our audit opinion.
| 10 |

| KAUPTHING BANK LUXEMBOURG S.A. | ANNUAL REPORT 2006 |
Opinion
In our opinion, the annual accounts give a true and fair view of the financial position of KAUPTHING
BANK LUXEMBOURG S.A. as of December 31, 2006, and of the results of its operations for the
year then ended in accordance with Luxembourg legal and regulatory requirements relating to
the preparation of the annual accounts.
Report on other legal and regulatory requirements
The management report, which is the responsibility of the board of directors, is in accordance
with the annual accounts.
Luxembourg, February 15 th , 2007
KPMG Audit S.à r.l.
Réviseurs d’Entreprises
E. Dollé
| 12 |

| KAUPTHING BANK LUXEMBOURG S.A. | ANNUAL REPORT 2006 |
| 13 |

| KAUPTHING BANK LUXEMBOURG S.A. | ANNUAL REPORT 2006 |
BALANCE SHEET AS AT DECEMBER 31, 2006
Notes 2006 2005
Assets
(expressed in Euro)
Cash, balances with central banks and post office banks 6.1 448,164 25,824,859
Loans and advances to credit institutions 3.1, 6.1, 6.3
repayable on demand 173,781,096 63,960,831
other loans and advances 1,127,280,250 536,596,421
1,301,061,346 600,557,252
Loans and advances to customers 3.2, 6.1, 6.3 3,279,804,793 1,787,604,479
Debt securities and other fixed-income securities 3.3, 4.2, 6.1, 6.3
issued by public bodies 150,370 4,645
issued by other borrowers 229,591,084 203,121,717
229,741,454 203,126,362
Shares and other variable-yield securities 3.4, 6.1, 6.3 46,346,015 41,520,577
Shares in affiliated undertakings 3.5, 3.8, 6.1, 6.3 7,247,726 7,247,726
Intangible assets 3.6, 3.8 1,133,038 844,119
Tangible assets 3.8 4,839,365 1,016,819
Other assets 1,653,673 1,613,550
Prepayments and accrued income 52,309,867 31,642,678
Total assets 4,924,585,441 2,700,998,421
Off balance sheet items
Contingent liabilities 5.1, 6.1, 6.3 367,014,320 30,792,021
of which: guarantees and assets pledged as collateral security 367,014,320 30,792,021
Commitments 5.2, 6.1, 6.3 - -
Fiduciary Operations 8,453,915 13,693,729
The accompanying notes form part of these annual accounts.
| 14 |

| KAUPTHING BANK LUXEMBOURG S.A. | ANNUAL REPORT 2006 |
BALANCE SHEET AS AT DECEMBER 31, 2006
Notes 2006 2005
Liabilities
(expressed in Euro)
Amounts owed to credit institutions 4.1, 6.1
repayable on demand 82,803,640 19,344,718
with agreed maturity dates or periods of notice 3,334,630,079 1,865,220,641
3,417,433,719 1,884,565,359
Amounts owed to customers other debts 4.2, 6.1
repayable on demand 638,606,573 283,262,643
with agreed maturity dates or periods of notice 483,222,535 343,138,752
1,121,829,108 626,401,395
Other liabilities 4.3 895,572 303,934
Accruals and deferred income 41,277,896 17,793,431
Provisions for liabilities and charges
provisions for taxation 21,074,644 11,856,924
other provisions 12,752,296 7,756,763
33,826,940 19,613,687
Subordinated liabilities 4.4, 6.1 - -
Fund for general banking risks - -
Subscribed capital 4.5 200,000,000 100,000,000
Reserves 4.6 5,859,588 2,525,782
Profit brought forward 46,461,027 19,149,218
Profit for the financial year 57,001,591 30,645,615
Total Liabilities 4,924,585,441 2,700,998,421
The accompanying notes form part of these annual accounts.
| 15 |

| NOTES TO THE ANNUAL ACCOUNTS |
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED DECEMBER 31, 2006
Notes 2006 2005
(expressed in Euro)
Interest receivable and similar income 7 197,900,909 91,463,336
of which: arising from debt securities and other fixed-income securities 6,827,066 5,479,347
Interest payable and similar charges (142,467,773) (65,210,755)
Net interest income 55,433,136 26,252,581
Income from shares and other variable-yield securities 583,261 268,108
Commission receivable 7 59,147,201 38,638,143
Commission payable (15,094,024) (9,299,706)
Net commission income 44,053,177 29,338,437
Net profit on financial operations 7 19,381,131 15,989,771
Other operating income 12,253 563
Total operating income 119,462,958 71,849,460
General administrative expenses
Staff costs (30,095,449) (19,603,822)
of which :
- wages and salaries (25,558,937) (16,273,131)
- Social security costs (1,375,283) (956,848)
of which: social security costs relating to pensions (822,299) (531,363)
Other administrative expenses (16,630,837) (9,466,431)
(46,726,286) (29,070,253)
Value adjustments in respect of tangible and intangible assets (2,262,221) (880,081)
Other operating charges (400,000) -
Net value adjustments in respect of loans and advances and
Provisions for contingent liabilities and for commitments (394,796) (2,606,569)
Income from the writing back of amounts included in the fund
For general banking risks - 250,000
Profit on ordinary activities before tax 69,679,655 39,542,557
Tax on profit on ordinary activities (11,641,272) (8,857,307)
Profit on ordinary activities after tax 58,038,383 30,685,250
Other taxes not shown under the preceding items (1,036,792) (39,635)
Profit for the financial year 57,001,591 30,645,615
The accompanying note forms part of these annual accounts.
| 17 |

| KAUPTHING BANK LUXEMBOURG S.A. | ANNUAL REPORT 2006 |
NOTES TO THE ANNUAL ACCOUNTS AS AT DECEMBER 31, 2006
1 General
Kaupthing Luxembourg S.A. (“the Company”) was incorporated in the Grand-Duchy of Luxembourg
on April 2, 1998 as a limited liability company (“Société Anonyme”). The Ministry of Finance
granted the Company a banking licence on December 24, 1999. The Company subsequently
changed its articles of incorporation on January 18, 2000 and its name to KAUPTHING BANK
LUXEMBOURG S.A. (the “Bank”).
The Bank is thus permitted to carry out all banking activities. Its principal activities are private
banking, loans to customers, interbank deposits, fund administration and holding company domiciliation.
The Bank, which is a subsidiary of Kaupthing Bank hf., is included in the consolidated accounts
of that company (“the parent company”). The consolidated accounts may be obtained from the
registered office of the parent company at Borgatúni 19, 105 Reykjavik, Iceland.
On the basis of the criteria set out by the Luxembourg law, the Bank is exempted from establishing
consolidated accounts and a consolidated management report.
2 Summary of significant accounting policies
The Bank’s accounting policies are in accordance with regulations in force in the Grand-Duchy of
Luxembourg and, in particular, the modified law of June 17, 1992, relating to the annual accounts
of credit institutions.
2.1 Fixed assets
2.1.1 Intangible assets
Intangible assets are included at purchase price less accumulated amortisation.
Intangible assets consist of software amortised over 4 years on a linear basis. Since January 1,
2006, formation expenses and costs in relation to capital increases are directly expensed when
incurred.
2.1.2 Tangible assets
Tangible assets are included at purchase price less accumulated depreciation. Tangible assets are
depreciated over their expected useful life.
The rates and methods of depreciation are as follows:
Rates Method
Office equipment, fixtures and fittings 25% linear
Company cars 25% linear
Fixtures and fittings costing less than EUR 867 or whose expected useful life does not exceed one
year are charged directly to profit and loss account for the year.
| 18 |

| NOTES TO THE ANNUAL ACCOUNTS |
2.1.3 Shares in affiliated undertakings
Holdings are recorded at purchase price. If the valuation is lower than the purchase price, value
adjustments are booked to account for the unrealised loss.
2.2 Current assets
2.2.1 Debt securities and other fixed-income securities
Holdings are recorded at purchase price. Value adjustments are made for securities in the structural
portfolio for which the valuation is lower than the purchase price. The valuation is the market
value on the balance sheet date or the estimated realisable value or the quotation which best
represents the inherent value of the securities held.
2.2.2 Shares and other variable-yield securities
Holdings are recorded at purchase price. If the valuation is lower than the purchase price, value
adjustments are booked to account for the unrealised loss.
Holdings hedged by derivative financial instruments are maintained at purchase price.
2.2.3 Loans and advances
Loans and advances are disclosed at their nominal value. Accrued interest not received is recorded
under the heading “Prepayments and accrued income” on the asset side of the balance sheet.
2.2.4 Value adjustments in respect of current assets
The policy of the Bank is to establish specific provisions to cover the risk of loss and of the nonrecovery
of debtors.
Value adjustments are deducted from the relevant current assets.
2.2.5 Provision for assets at risk
A tax free lump sum provision is accounted for based on the Bank’s assets at risk. These assets
are determined in accordance with the regulatory provisions governing the computation of the
capital adequacy ratio. The lump sum provision is apportioned between the relevant assets at
risk in accordance with the provisions of the Luxembourg Monetary Institute circular letter dated
December 16, 1997. The portion related to the assets at risk is deducted from these assets.
2.3 Fund for general banking risks
Up to December 31, 2004, the Bank had established a fund for general banking risks to cover
the particular risks associated with banking activities. The remaining amount was fully reversed
through the profit and loss account for the year ended December 31, 2005.
2.4 Purchase price of fungible assets
The Bank values fungible assets by the weighted average price method.
| 19 |

| KAUPTHING BANK LUXEMBOURG S.A. | ANNUAL REPORT 2006 |
2.5 Valuation of foreign currency balances and transactions
2.5.1 Foreign currency translation
The share capital of the Bank is expressed in Euro (“EUR”) and the accounting records are maintained
in that currency.
Shares in affiliated undertakings included in fixed assets as well as intangible and tangible assets
are converted at the historic rate. All other assets and liabilities denominated in a currency other
than EUR are converted into EUR at the rate of exchange ruling at the balance sheet date.
Income and charges in foreign currencies are converted into EUR at the rate of exchange ruling
on the date of the transaction.
Foreign currency differences arising from these valuation principles are taken to profit and loss
account.
2.5.2 Valuation of transactions not subject to currency risk
Swap transactions not linked to balance sheet items
The spot result realised in cash terms is offset by the result arising from the revaluation of the
forward leg. The premium/discount is spread prorata temporis.
Over-the-counter closed forward transactions
Future profits that are certain to arise are deducted from future losses that are certain to arise in
the same currency.
A provision is created for any excess losses; any excess profits are deferred.
Over-the-counter closed options
Options sold hedged by options bought so that no open position exists are considered to be
neutral in relation to currency fluctuations.
Financial futures
Margin calls on financial futures traded on a recognised market are booked daily. Gains and losses
on trading positions are directly booked in the profit and loss account.
2.5.3 Valuation of transactions subject to currency risk
Over-the-counter speculative forward transactions
Provision is made for unrealised losses on forward transactions, which do not represent the hedging
of a spot position. Unrealised gains are not accounted for.
3 Detailed disclosures relating to asset headings
3.1 Loans and advances to credit institutions
Loans and advances to affiliated undertakings amount to EUR 950,254,859 (2005: EUR
354,320,986).
| 20 |

| NOTES TO THE ANNUAL ACCOUNTS |
3.2 Loans and advances to customers
Loans and advances to affiliated undertakings amount to EUR 4,178,628 (2005: EUR 6,086,378).
3.3 Debt securities and other fixed-income securities
This heading includes debt securities, whether quoted on a recognised market or not, issued by
public bodies, credit institutions or other issuers and which are not included under another balance
sheet heading.
Quoted and non-quoted securities are analysed as follows:
2006 2005
EUR
EUR
Securities quoted on a recognised market 209,658,198 188,758,628
Securities not quoted on a recognised market 20,083,256 14,367,734
229,741,454 203,126,362
All the debt securities and other fixed-income securities held are included in the structural portfolio.
3.4 Shares and other variable-yield securities
This heading includes shares, holdings in investment funds and other variable-yield securities
whether quoted on a recognised market or not which are not included in fixed asset investments.
Quoted and non-quoted shares and other variable-yield securities are analysed as follows:
2006 2005
EUR
EUR
Securities quoted on a recognised market (*) 45,480,079 41,277,618
Securities not quoted on a recognised market 865,936 242,959
46,346,015 41,520,577
(*) of which shares and other variable-yield securities held for hedging purposes:
EUR 23,198,502 (2005: EUR 14,459,638).
3.5 Shares in affiliated undertakings
As at December 31, 2006, the Bank holds at least 20% of the capital of the following
non-quoted undertakings :
% held Capital and reserves Result for the
December 31, 2006 (*) year 2006 (*)
EUR
EUR
Kaupthing Life & Pension S.A. 100% 6,489,050 49,669
12, rue Guillaume Schneider
L-2522 Luxembourg
Kaupthing Asset Management S.A. 100% (94,673) (348,303)
1, rue de Rive
CH-1204 Genève
(*) Unaudited figures.
| 21 |

| KAUPTHING BANK LUXEMBOURG S.A. | ANNUAL REPORT 2006 |
3.6 Intangible assets
This heading consists of:
2006 2005
EUR
EUR
Formation expenses - 145,968
Software 1,133,038 698,151
1,133,038 844,119
Formation expenses consist of costs in relation to capital increases. They have been fully amortized
in 2006.
3.7 Assets denominated in foreign currencies
Assets denominated in currencies other than EUR have a total value of EUR 2,712,998,947 as at
December 31, 2006 (2005: EUR 1,572,873,320). The gap between non EUR denominated assets
and non EUR denominated liabilities is covered by off-balance sheet instruments.
3.8 Movements on fixed assets
FIXED ASSETS Gross value Additions Reductions Gross value Cumulative Net book
(in EUR) at the at the value value
beginning of end of adjustments at the
the financial the financial balance
year year sheet date
1. Shares in affiliated undertakings 7,247,726 - - 7,247,726 - 7,247,726
2. Intangible assets 2,617,352 796,929 - 3,414,281 (2,281,243) 1,133,038
of which:
a) Formation expenses 291,440 - - 291,440 (291,440) -
b) Software 2,325,912 796,929 - 3,122,841 (1,989,803) 1,133,038
3. Tangible assets 3,593,260 5,594,939 (67,250) 9,120,949 (4,281,584) 4,839,365
of which:
a) Office equipment fixtures
and fittings 3,096,491 5,081,730 - 8,178,221 (3,951,403) 4,226,818
b) Company cars 496,769 513,209 (67,250) 942,728 (330,181) 612,547
TOTAL 13,458,338 6,391,868 (67,250) 19,782,956 (6,562,827) 13,220,129
| 22 |

| NOTES TO THE ANNUAL ACCOUNTS |
4 Detailed disclosures relating to liability headings
4.1 Amounts owed to credit institutions
Amounts owed to affiliated undertakings amount to EUR 2,356,648,664 (2005: EUR 1,091,571,060).
4.2 Amounts owed to customers
Amounts owed to affiliated undertakings amount to EUR 3,417,765 (2005: EUR 6,386,158).
4.3 Other liabilities
This heading consists of the following:
2006 2005
EUR
EUR
Short-term payables 443,645 -
Preferential creditors 451,927 303,934
895,572 303,934
4.4 Subscribed capital
On March 29, 2006, an Extraordinary General Meeting of the Shareholders resolved to increase
the subscribed capital of the Bank by an amount of EUR 100,000,000 by the issue of 1,000,000
new additional shares each with a nominal value of EUR 100. The capital increase has been fully
subscribed and paid by a contribution in cash by the parent company.
As at December 31, 2006, the subscribed and fully paid share capital of the Bank is
EUR 200,000,000 made up of 2,000,000 shares with a nominal value of EUR 100 each.
4.5 Reserves
Reserves are summarised as follows:
2006 2005
EUR
EUR
Legal reserve 2,616,057 1,083,776
Net worth tax reserve 3,243,531 1,442,006
5,859,588 2,525,782
In accordance with article 72 of the Luxembourg company law, an amount of 5% of net profits
should be allocated to a non distributable legal reserve, until this reserve reaches 10% of the
subscribed capital. As a result, the 2007 Annual General Meeting of the Bank should allocate an
amount of EUR 2,850,080 to the legal reserve, in respect of the 2006 financial year.
In 2006 and in accordance with paragraph 8a of the net worth tax law, the Bank has deducted from
its tax basis for net worth tax, the net worth tax incurred during the financial year, amounting to
EUR 797,570. Such a deduction is subject to allocating an amount equal to five times the net worth
tax deducted, amounting to a total of EUR 3,987,850, to a reserve, by a resolution of the 2007 Annual
General Meeting of Shareholders.
| 23 |

| KAUPTHING BANK LUXEMBOURG S.A. | ANNUAL REPORT 2006 |
4.6 Liabilities denominated in foreign currencies
Liabilities denominated in currencies other than EUR have a total value of EUR 2,121,912,163 as
at December 31, 2006 (2005: EUR 1,294,955,564). The gap between non EUR denominated assets
and non EUR denominated liabilities is covered by off-balance sheet instruments.
5 Information relating to off-balance sheet items
5.1 Contingent liabilities
Contingent liabilities consist of guarantees and other direct substitutes for loans.
Contingent liabilities to affiliated undertakings amount to EUR 279,428,023 (2005: nil).
5.2 Commitments
The Bank is member of the “Association pour la Garantie des Dépôts, Luxembourg” (“A.G.D.L.”).
The A.G.D.L. has for its exclusive object the establishment of a system of mutual guarantee of
deposits placed with members by private individuals and by small companies without distinction
of nationality or residence. No provision has been made in respect of specific liabilities arising
under this scheme.
5.3 Open forward agreements at the balance sheet date
5.3.1 Transactions linked to exchange rates
The Bank is engaged in forward foreign exchange transactions (swaps, outrights) in the normal
course of its banking business. A significant portion of these transactions has been contracted to
hedge the effects of fluctuations in exchange rates.
5.3.2 Transactions linked to interest rates
A significant portion of these transactions has been contracted to hedge the effects of fluctuations
in interest rates.
5.3.3 Transactions linked to other market rates
A significant portion of these transactions has been contracted to hedge the effects of fluctuations
in market prices.
5.4 Management and representative services supplied by the Bank
The Bank’s services to third parties consist of:
• Management and advice on asset management;
• Safekeeping and administration of marketable securities;
• Fund administration;
• Holding company domiciliation;
• Credit activities.
| 24 |

| NOTES TO THE ANNUAL ACCOUNTS |
6 Information relating to financial instruments
6.1 Disclosures relating to primary financial instruments in relation to non trading
activities
The following tables provide an analysis of the carrying amount of primary financial assets and
financial liabilities of the Bank into relevant maturity groupings based on the remaining periods
to repayment.
As at December 31, 2006, primary financial assets and liabilities are analysed as follows (in EUR):
Financial assets Less than Between three Between one More than Total
three months months and year and five years
one year five years
Cash, balances with central banks
and post office banks 448,164 - - - 448,164
Loans and advances to credit
institutions 1,230,812,522 50,162,369 20,086,455 - 1,301,061,346
Loans and advances to customers 2,864,455,220 247,718,945 61,457,614 106,173,014 3,279,804,793
Debt securities and other
fixed-income securities 4,413,394 55,509,723 93,751,161 76,067,176 229,741,454
Shares and other variable-yield
securities (*) - - 46,346,015 - 46,346,015
Total 4,100,129,300 353,391,037 221,641,245 182,240,190 4,857,401,772
(*) of which EUR 23,198,502 are held for hedging purposes.
Financial liabilities Less than Between three Between one More than Total
three months months and year and five years
one year five years
Amounts owed to credit
institutions 2,911,817,922 93,147,459 389,809,400 22,658,938 3,417,433,719
Amounts owed to customers 1,066,650,124 55,178,984 - - 1,121,829,108
Contingent liabilities 367,014,320 - - - 367,014,320
Total 4,345,482,366 148,326,443 389,809,400 22,658,938 4,906,277,147
| 25 |

| KAUPTHING BANK LUXEMBOURG S.A. | ANNUAL REPORT 2006 |
6.1 Disclosures relating to primary financial instruments in relation to non trading
activities (continued)
As at December 31, 2005, primary financial assets and liabilities are analysed as follows (in EUR):
Financial assets Less than Between three Between one More than Total
three months months and year and five years
one year five years
Cash, balances with central banks
and post office banks 25,824,859 - - - 25,824,859
Loans and advances to credit
institutions 506,985,029 73,500,863 20,071,360 - 600,557,252
Loans and advances to customers 1,688,878,850 59,381,111 4,791,588 34,552,930 1,787,604,479
Debt securities and other
fixed-income securities - 17,193,721 148,572,281 37,360,360 203,126,362
Shares and other variable-yield
securities (*) - - 41,520,577 - 41,520,577
Total 2,221,688,738 150,075,695 214,955,806 71,913,290 2,658,633,529
(*) of which EUR 14,459,638 are held for hedging purposes.
Financial liabilities Less than Between three More than Total
three months months and five years
one year
Amounts owed to credit
institutions 1,542,548,163 69,011,743 273,005,453 1,884,565,359
Amounts owed to customers 606,092,552 20,308,843 - 626,401,395
Contingent liabilities 30,792,021 - - 30,792,021
Total 2,179,432,736 89,320,586 273,005,453 2,541,758,775
| 26 |

| NOTES TO THE ANNUAL ACCOUNTS |
6.2 Disclosures relating to derivative financial instruments
The following tables provide an analysis of the derivative financial assets and liabilities of the Bank
into relevant maturity groupings based on the remaining periods to repayment.
As at December 31, 2006, over the counter derivative financial assets and liabilities are analysed
as follows (in EUR):
Financial assets Less than Between three Between one Total Positive
(notional amounts) three months months and year and fair value
one year five years
Instruments linked to exchange rates
- forward currency transactions 89,989,621 33,427,194 - 123,416,815 18,620,032
- currency swap contracts 620,687,935 214,075,817 - 834,763,752 4,099,927
- currency option contracts 474,698 - - 474,698 2,394
Instruments linked to interest rates 49,979,938 87,057,835 35,424,515 172,462,288 5,246,103
Instruments linked to other
market rates 935,102,679 9,748,343 - 944,851,022 171,310
1,696,234,871 344,309,189 35,424,515 2,075,968,575 28,139,766
Financial liabilities Less than Between three Between one Total Negative
(notional amounts) three months months and year and fair value
one year five years
Instruments linked to exchange rates
- forward currency transactions 104,129,357 32,336,241 - 136,465,598 18,438,452
- currency swap contracts 573,550,369 172,199,080 - 745,749,449 8,765,941
- currency option contracts 474,698 - - 474,698 2,394
Instruments linked to interest rates 89,022,491 107,526,413 28,608,505 225,157,409 5,252,245
767,176,915 312,061,734 28,608,505 1,107,847,154 32,459,032
As at December 31, 2006, the net fair value of derivative financial assets and liabilities is a loss of EUR
4,319,266 (2005: gain of EUR 150,645).
| 27 |

| KAUPTHING BANK LUXEMBOURG S.A. | ANNUAL REPORT 2006 |
6.2 Disclosures relating to derivative financial instruments (continued)
As at December 31, 2005, over the counter derivative financial assets and liabilities are analysed
as follows (in EUR):
Financial assets Less than Between Between More than Total Positive
(notional amounts) three three one year five years fair value
months months and and five
one year years
Instruments linked to exchange rates
- forward currency transactions 212,373,471 19,917,873 - - 232,291,344 21,469,394
- currency swap contracts 508,961,205 61,683,980 - - 570,645,185 2,394,754
- currency option contracts 30,705,069 - - - 30,705,069 111,145
Instruments linked to interest rates - 13,315,579 20,103,927 12,186,341 45,605,847 372,371
Instruments linked to other
market rates 431,584,948 64,965,234 - 3,372,681 499,922,863 119,638
1,183,624,693 159,882,666 20,103,927 15,559,022 1,379,170,308 24,467,302
Financial liabilities Less than Between Between More than Total Negative
(notional amounts) three three one year five years fair value
months months and and five
Instruments linked to exchange rates
one year
- forward currency transactions 246,392,028 21,590,693 - - 267,982,721 21,585,285
- currency swap contracts 275,623,248 29,668,036 - - 305,291,284 2,345,871
- currency option contracts 30,705,069 - - - 30,705,069 111,145
Instruments linked to interest rates - 13,315,579 17,000,000 1,686,341 32,001,920 274,356
years
552,720,345 64,574,308 17,000,000 1,686,341 635,980,994 24,316,657
6.3 Disclosures relating to credit risk
The Bank is exposed to credit risk mainly through its lending, investing and hedging activities and
in cases where the Bank acts as an intermediary on behalf of customers and issues guarantees.
The Bank’s primary exposure to credit risk arises from its loans and advances and debt securities.
The credit exposure in this regard is represented by the carrying amounts of the assets in the balance
sheet.
The Bank is also exposed to off balance sheet credit risk through guarantees issued and instruments
linked to exchange, interest and other market rates (forward transactions, swap and option
contracts). The credit exposure in respect of instruments linked to exchange, interest and other
market rates are equal to the equivalent at risk according to the initial risk approach.
| 28 |

| KAUPTHING BANK LUXEMBOURG S.A. | ANNUAL REPORT 2006 |
6.3 Disclosures relating to credit risk (continued)
The credit risk exposure as at December 31, 2006 can be analysed as follows (in EUR):
Gross risk exposure
Loans and advances to credit institutions 1,301,061,346
Loans and advances to customers 3,279,804,793
Secured 3,085,340,582
Unsecured 194,464,211
Debt securities and other fixed-income securities 229,741,454
Shares and other variable-yield securities 46,346,015
Contingent liabilities 367,014,320
Secured 361,442,810
Unsecured 5,571,510
Derivatives
Instruments linked to exchange rates 36,754,135
Instruments linked to interest rates 1,988,098
Instruments linked to other market rates 56,691,062
5,319,401,223
The credit risk exposure as at December 31, 2005 can be analysed as follows (in EUR):
Gross risk exposure
Loans and advances to credit institutions 600,557,252
Loans and advances to customers 1,787,604,479
Secured 1,647,817,020
Unsecured 139,787,459
Debt securities and other fixed-income securities 203,126,362
Shares and other variable-yield securities 41,520,577
Contingent liabilities 30,792,021
Secured 29,018,229
Unsecured 1,773,792
Derivatives
Instruments linked to exchange rates 27,703,878
Instruments linked to interest rates 388,039
Instruments linked to other market rates 14,039,646
2,705,732,254
| 30 |

| NOTES TO THE ANNUAL ACCOUNTS |
6.3 Disclosures relating to credit risk (continued)
Loans and advances to customers are usually secured by cash, listed investments and third party
guarantees.
At December 31, 2006, guarantees received from affiliated undertakings amount to
EUR 494,000,000 (2005: EUR 297,664,627) to secure loans and advances to customers.
Credit risk concentrations on total on and off balance sheet are analysed as follows:
2006 2005
EUR
EUR
Corporates 2,732,456,654 1,478,938,077
Credit institutions 1,951,639,066 899,008,938
Individuals 635,155,104 326,824,723
Public sector 150,399 960,516
5,319,401,223 2,705,732,254
Credit institutions, corporates and individuals are mainly from Zone A countries.
6.4 Information on the management of other risks
Liquidity Risk
A cash management system enables the Bank to achieve a daily automatic “vostro-nostro” reconciliation
of its main correspondent accounts.
The Bank is able to identify possible cash flow errors, to determine adjusted opening balances
and generate an accurate cash flow projection to better channel short-term liquidity needs.
The Managing Directors receive a daily report on the overall liquidity situation of the Bank.
Interest Rate Risk
The Bank monitors its interest rate risk by analysing the different maturity gaps in the balance
sheet.
The calculation is performed using periods from one day to twelve months. The model enables
the Bank to supervise the non-synchronized interest rate positions, the impact of gaps on the
net interest income, the re-evaluation of the gap compared to the actual interest rate curve, and
finally the consequences on the risk limits. A value at risk calculation estimates the profit and loss
impact if interest rates go up or down by 1%.
Guidelines have been approved by the Board of Directors, setting out the principles for measurement
of/and limitations on mismatches identified.
| 31 |

| KAUPTHING BANK LUXEMBOURG S.A. | ANNUAL REPORT 2006 |
6.4 Information on the management of other risks (continued)
Exchange Rate Risk
The Bank’s main exposure to foreign exchange risk arises from USD, ISK, ISV, CHF, DKK, GBP and
JPY.
A foreign exchange position system provides an overall view of the currency risk and related profit
or loss impact as soon as the dealer has closed a deal with either a private client or a financial
institution.
Management controls the exchange rate risk through the daily liquidity report received from the
Financial Markets department.
Market Risk
The Bank is subject to market risk through its portfolio of debt securities and shares and other
variable yield securities. Derivative instruments are used for hedging purposes.
Back to back transactions initiated by customers of the Bank do not expose the Bank to market
risk.
The Bank has put in place procedures in order to monitor market risk. Guidelines are reviewed and
approved by the Board of Directors on a yearly basis.
7 Information on the profit and loss account
Interest receivable and similar income, commission receivable and net profit on financial operations
mainly originate from Central and Western Europe.
8 Other information
8.1 Personnel
The average number of persons employed during the financial year was as follows:
2006 2005
Management 2 2
Other executives 7 7
Employees 126 82
135 91
| 32 |

| KAUPTHING BANK LUXEMBOURG S.A. | ANNUAL REPORT 2006 |
8.2 Administrative, managerial and supervisory bodies
Remuneration paid to the various bodies of the Bank during the financial year was as follows:
2006 2005
EUR
EUR
Administrative board 111,000 80,370
Managerial board 4,846,102 3,806,307
4,957,102 3,886,677
The amount of loans and advances granted to members of the Board of Directors and commitment
entered into on their behalf by way of guarantees of any kind amounted to EUR 7,576,948 at
December 31, 2006 (2005: EUR 4,368,837).
8.3 Fees billed by KPMG Audit S.à r.l., Luxembourg and other member firms
Fees billed (excluding VAT) to the Bank by KPMG Audit S.à r. l., Luxembourg and other member
firms of the KPMG network during the year are as follows:
2006 2005
EUR
EUR
Audit fees 250,709 254,300
Audit-related fees 15,400 15,970
Tax fees 128,468 65,893
All other fees 28,343 45,461
422,920 381,624
Such fees are presented under other administrative expenses in the profit and loss account.
| 33 |

| KAUPTHING BANK LUXEMBOURG S.A. | ANNUAL REPORT 2006 |
ORGANISATION
Board of Directors
Sigurður Einarsson, Chairman of the Board
Johnie W. Brøgger
Managing Directors
Magnús Gudmundsson
Internal Audit
Compliance
Jean-Louis Frey
Xavier Leydier
IT
Private Banking
Corporate Banking
Legal
Olafur Hilmarsson
General Manager
Björn Jonsson
Deputy Managing Director
Peter Raun
General Manager
Eggert Hilmarsson
General Manager
Operation
Anne Rassel
General Manager
Financial Markets
Alexandre Simon
Director
Investment Funds
Bo Matthiesen
General Manager
| 34 |

Meinbach Consulting & Design 2007

Kaupthing Bank Luxembourg S.A.
35a, avenue J.-F. Kennedy
L-1855 Luxembourg
Tel +352 46 31 31
Fax +352 46 31 32
info@kaupthing.lu
www.kaupthing.lu