Annual report 2010 - Dexia.com

Activity and results of the business lines // Legacy Portfolio Management DivisionManagement reportConsolidatedfinancial statementsAdditional information Annual financial statementsLegacy PortfolioManagement DivisionActivitySince the first quarter of 2010, Dexia has regrouped itsportfolios in run-off as well as some non-core Public andWholesale Banking loans and off-balance sheet commitmentswithin a specific division, the Legacy Portfolio ManagementDivision (Legacy Division) alongside the core business lines,now brought together in the Core Division.The Legacy Division contains:• the bond portfolio in run-off;• the Financial Products portfolio;• non-core public sector loans and off-balance sheetcommitments, mainly liquidity lines in the United States (1) ,referred to as Public and Wholesale Banking run-offcommitments.The Legacy Division is the subject of a voluntary asset disposalpolicy with the aim of reducing the Group’s short-term liquiditygap and limiting its risk profile. Dedicated and centralizedteams are responsible for monitoring the division’s variousportfolios and for implementing its asset sale programme.From EUR 227 billion at the end of 2008, the commitmentsof the Legacy Division (on and off-balance-sheet) werereduced to EUR 187 billion at the end of 2009. In 2010,Dexia accelerated its efforts to reduce those commitments,which amounted to EUR 153 billion as at 31 December 2010,after EUR 27.2 billion of asset disposal in 2010.The bond portfolio in run-off amounted to EUR 111.7billion at year-end 2010, a reduction of EUR 22.5 billion on2009, and of EUR 46.3 billion on 2008. Thanks to the Group’svoluntary balance-sheet deleveraging, EUR 18.8 billion bondswere disposed of from this portfolio, with an impact on thestatement of income of EUR 184 million, or a 1% averageloss on the nominal amount. Over the year, EUR 8 billionof bonds were amortized and the size of the portfolio wasinflated by a EUR 4.4 billion currency impact.The portfolio is well diversified by asset class, sector, countryand currency, and this enables Dexia to benefit from variousdisposal opportunities on the market. Sales made have enabledthis diversification to be maintained and the portfolio remainsof good credit quality, at 95% investment grade (against97% at year-end 2009). Rating migrations were principallydue to the impact of deleveraging and to the downgrade ofthe Greek Sovereign. The stock of impairments was down toEUR 884 million at year-end 2010, against EUR 956 million atyear-end 2009.At the end of 2008, Dexia also placed the FinancialProducts portfolio in run-off, amounting to USD 13.8 billion(EUR 10.3 billion) at the end of 2010. The majority of thisportfolio consists of US RMBS (68%) and it is 40% investmentgrade compared to 43% by the end of 2009. The mostsensitive assets of the Financial Products portfolio (about 75%of the total portfolio) are covered by a specific guaranteescheme, granted by the States of Belgium and France. Thatguarantee was approved by the European Commission on(1) Stand-By Purchase Agreements (SBPA).13 March 2009 and provides for Dexia to cover a first loss ofUSD 4.5 billion. If final losses exceed USD 4.5 billion, Dexiacan ask the States to fund the additional losses in exchangefor Dexia common shares or profit shares. In addition tothis scheme, the Guaranteed Investment Contracts (GICs),which amounted to USD 5.01 billion at the end of December2010 and are partly funding the Financial Products portfolio,benefit from a State liquidity guarantee. Importantly, since thefourth quarter of 2008, Dexia’s Tier 1 is protected against allfuture potential losses on this portfolio as the entire USD 4.5billion first loss has been fully accounted for in the Group’sregulatory solvency ratios (2) .Over 2010, the Financial Products portfolio was reduced byUSD 1.6 billion supported by USD 0.4 billion asset sales andby the natural amortization of the portfolio. The expectedweighted average life of the portfolio was 9.2 years at yearend2010.Public and Wholesale Banking run-off commitmentsamounted to EUR 31.5 billion as at 31 December 2010,down EUR 10.8 billion on 2009 and EUR 15.1 billion on2008. They comprised non-core public sector loans in runoff,including loans in Japan, Switzerland, Sweden, Centraland Eastern Europe, Australia, Mexico and the United Statesfor an amount of EUR 12.7 billion as at 31 December 2010as well as off-balance-sheet commitments, mainly undrawnliquidity lines in the United States for an amount of USD 24.0billion (EUR 18.7 billion) at the end of 2010.EUR 4.8 billion of non-core public sector loans, mainly bookedin Japan, were sold in 2010. The accelerated pace of sales willenable the Group to bring forward the closure of some of itsinternational entities in 2011.The amount of undrawn liquidity lines in the United Statesfell by USD 9.2 billion (EUR 5.7 billion) in 2010, reducing thepotential liquidity stress on those facilities.(2) More detailed information on the State guarantee is provided in thenote 9.4.C. to the consolidated financial statements in this Annual Report(page 184).112 Dexia Annual report 2010