Annual report 2010 - Dexia.com

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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
Activity and results of the business lines // Legacy Portfolio Management DivisionTotal commitmentsof the Legacy Portfolio Management Division(in billions of EUR) 31/12/09 31/12/10 VariationTotal commitments (1) 187.2 153.4 -33.7Financial Products portfolio 10.7 10.3 -0.4Bond portfolio in run-off 134.2 111.7 -22.5PWB run-off commitments (1) 42.2 31.5 -10.8of whichdrawn US liquidity lines 0.1 0.1 0.0undrawn US liquidity lines 24.4 18.7 -5.7loans in run-off 17.7 12.7 -5.0Focus on loans in run-offJapan 5.1 0.5 -4.6International headquarters (Switzerland, Sweden…) 7.8 8.9 +1.1Central and Eastern Europe 2.3 2.0 -0.3Australia 1.4 0.0 -1.4Mexico 1.1 1.3 +0.1(1) Including off-balance-sheet commitments.Management reportResultsThe Legacy Portfolio Management Division includescontributions from the Group’s bond portfolios in run-off(including the Financial Products portfolio) and Public andWholesale Banking run-off commitments. The Division is alsoallocated part of the Treasury result. Entities to be divestedare still reported in the Core Division.Capital gains on the disposal of Crédit du Nord (EUR 153 million),booked in 2009, and on the sale of the stake in AssuredGuaranty, booked in 2010, were allocated to the Legacy Division.FSA Insurance was deconsolidated as from the secondquarter of 2009.In 2010, the legacy Division recorded a pre-tax loss ofEUR 216 million, against a EUR 376 million (including FSAInsurance) or EUR 305 million (excluding FSA Insurance)positive result in 2009.Over the year, the division posted a positive result in the firstquarter and losses in the last three quarters. This evolution isexplained, in particular, by the EUR 414 million (excluding FSAInsurance) fall in income compared to 2009 driven by:• EUR 373 million decrease in Treasury income allocated tothe division in line with the ongoing decrease of the liquiditygap,• the reduction of net margins on the PWB run-offcommitments (EUR -121 million) and on the bond portfolio inrun-off (EUR -162 million).The cost of risk, up by EUR 121 million (excluding FSAInsurance), was impacted by a reversal of collective provisionson ABS and subordinated debt booked in the bond portfolioin run-off, for an amount of EUR 184 million, and by aEUR 328 million increase in the provisions on the FinancialProducts portfolio.The significant changes impacting the different segments ofthe Legacy Division are set out in detail hereafter.The bond portfolio in run-off recorded a pre-tax loss ofEUR 10 million in 2010, against a loss of EUR 316 million in2009. Income was up EUR 115 million on 2009, principallydriven by EUR 293 million increase in trading income(CDS linked to synthetic securitization and CVA on CDSintermediation) which more than offset the reduction ofinterest margin (EUR -162 million) and deleveraging losses upby EUR 65 million given higher volumes of disposals in 2010.The cost of risk improved by EUR 184 million in 2010, markedby reversals of impairments, principally on ABS and on thebanking sector.The Financial Products portfolio posted a pre-tax loss ofEUR 299 million in 2010, against a EUR 169 million loss in2009. The EUR 204 million rise in income, to EUR 282 millionas a result of gains on own credit risk and of the sale of thestake in Assured Guaranty (EUR 153 million) did not totallyoffset the EUR 328 million rise of the cost of risk over the year,particularly because additional impairments were recorded inthe fourth quarter (more information on the Financial Productsportfolio is given in the chapter “Risk Management” of thisannual report on page 72).The total cash shortfalls and realised losses on the portfolioincreased by USD 431 million over the year, to USD 624 million.This includes USD 360 million shortfalls and USD 71 millionlosses on asset sales, mitigated by a release of collectiveimpairments.In a context characterized by a volatile economic environmentand large stocks of homes which will continue to weigh heavilyon the real estate market, at least in 2011, Dexia adaptedits US RMBS provisioning model to take more conservativeassumptions into account.As a consequence,• The expected economic losses (discounted expectedcash shortfalls) increased by USD 390 million in 2010 toUSD 1.796 billion. Such an estimate is made to the best ofDexia’s knowledge on the basis of market conditions as at theend of December 2010.Consolidatedfinancial statementsAdditional information Annual financial statementsAnnual report 2010 Dexia113
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Annual report 2010 - Dexia.com

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