Annual report 2010 - Dexia.com

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Update on the transformation planManagement reportConsolidatedfinancial statementsAdditional information Annual financial statementsBalance SHEET Core & Legacy DivisionS(in billions of EUR) 31/12/09 31/12/10AssetsCore Division 415.8 432.5Retail and Commercial Banking 50.9 56.1Public and Wholesale Banking 216.4 214.3Asset Management and Services 31.5 29.5Asset Management 0.3 0.3Investor Services 9.5 9.7Insurance 21.7 19.4Group Center 52.0 50.5Derivatives 40.7 47.1Other assets 24.2 35.1Legacy Portfolio Management Division 161.8 134.3Bond portfolio in run-off 134.2 111.7Public and Wholesale Banking run-off loans 16.9 12.3Financial Products portfolio 10.7 10.3liabilitiesCore Division 415.8 432.5Covered bonds 75.9 74.4Commercial funding 140.6 145.1Long-term unsecured funding 40.4 45.7Short-term secured and unsecured funding 66.3 61.1Equity 12.0 10.7Derivatives 58.4 72.3Other 22.2 23.0Legacy Portfolio Management Division 161.8 134.3Financial Products (GICs) 7.1 5.0Covered bonds 24.8 24.2Long-term State guaranteed funding 22.3 44.1Long-term unsecured funding 7.7 3.6Short-term State guaranteed funding 27.7 0Short-term secured and unsecured funding 72.2 57.3Deleveraging programmeIn 2010, the Group continued with the active balance sheetdeleveraging policy it began at the end of 2008.Within the Legacy Division, the bond portfolio in run-offwas reduced by EUR 22.5 billion in 2010 and amountedto EUR 111.7 billion as at 31 December 2010, comparedto EUR 134.2 billion as at 31 December 2009 andEUR 158 billion as at 31 December 2008. Bonds were soldfor a total of EUR 18.8 billion in 2010, with a negative impactof EUR 184 million on the statement of income.The Financial Products portfolio was reduced by USD 1.6 billionin 2010, principally through natural amortisation, andamounted to USD 13.8 billion as at 31 December 2010 againstUSD 15.4 billion at the end of 2009 and USD 16.1 billion atthe end of 2008.The Group also sold non-core loans of the Public and WholesaleBanking business line, for a total amount of EUR 4.8 billionin 2010, with a negative impact of EUR 48 million on thestatement of income.Furthermore, the amount of undrawn liquidity lines in theUnited States (1) fell by USD 9.2 billion in 2010, to USD 24 billionas at 31 December 2010, thus reducing the potentialextent of stress on those liquidity facilities.Within the Core Division, the Group also sold bonds fromits ALM portfolios, for an amount of EUR 3.6 billion, witha positive impact of EUR 20 million on the statement ofincome.In total, EUR 27.2 billion of bonds and loans were disposedof in 2010, with a negative impact of EUR 213 million onthe statement of income, or a 0.78% average loss on thenominal amount.Since the beginning of the transformation plan in the end ofOctober 2008, bonds and loans for an amount of EUR 52.4 billionwere sold, with a negative impact of EUR 464 million onthe statement of income, or a 0.89% average loss on thenominal amount.Combined with the natural amortisation and the absence ofnew production, these sales enabled the balance sheet of theLegacy Division to be reduced by EUR 28 billion in 2010, toEUR 134 billion as at 31 December 2010.The Group balance sheet total was EUR 567 billion as at31 December 2010, against EUR 578 billion as at 31 December2009 and EUR 651 billion as at 31 December 2008.14 Dexia Annual report 2010(1) Stand-By Purchase Agreements (SBPA).
Update on the transformation planIn 2010, the evolution of the balance sheet was very severelyaffected by the volatility of interest rates and exchange rates.A consequence of the fall in interest rates was an appreciationof the fair value of derivatives and an increase of theamount of cash collateral. Without the impact associatedwith the variation of the fair value of derivatives and theincrease of cash collateral posted, the balance sheet total fellby 9% in 2010, to EUR 448 billion (1) .Improvement to the liquidity profileIn 2010, the Group raised EUR 44.4 billion of wholesalemedium and long-term funding. The funds raised consist ofEUR 23.2 billion in government-guaranteed debt, EUR 13.6billion in covered bonds, EUR 4.4 billion in long-term securedfunding other than covered bonds and EUR 3.2 billion insenior non-secured funding.The Group made considerable progress in reducing its shorttermliquidity gap. Short-term funding requirements fell byEUR 48 billion in 2010, to EUR 119 billion as at 31 December2010. This represents a decrease of EUR 141 billion since thepeak reached in October 2008.This significant reduction of the short-term fundingrequirement was under unfavourable interest-rate conditionsresulting in an increase of the amount of cash collateral ofEUR 8 billion in 2010 despite a very turbulent macroeconomicenvironment, marked by the sovereign crisis which weighedheavily on the funding of many European banks.This good performance was achieved by virtue of:• the sustained pace of the balance sheet deleveragingprogramme. EUR 27.2 billion of bonds and Public andWholesale Banking run-off loans were sold in 2010 (cf. sectionon “Deleveraging programme” above);• the swift execution of the long-term funding programme;• the reduction of the Public and Wholesale Banking lendingactivity, this being aligned to the Group’s long-term fundingcapacity;• the increase in retail deposits, particularly in Belgium and inTurkey. They were EUR 87.7 billion as at 31 December 2010,against EUR 81.5 billion at the end of 2009.All this contributed to rebalance the Group’s funding profile,by reducing short-term funding, and by increasing the sharefunded by stable resources (particularly commercial deposits),in accordance with the undertakings to the EuropeanCommission.In addition, Dexia also considerably improved its short-termfunding mix. Indeed, Dexia accelerated the cutback of centralbank borrowings (EUR -32 billion compared to the end ofDecember 2009) and since October 2010 was no longerfunded by short-term guaranteed debt, in view of therepayment of the short-term loans. The shift towards longertermbilateral and tri-party repos was confirmed in 2010.As at 31 December 2010, the total amount of central bankeligible securities was EUR 108 billion (of which EUR 42 billionwere unencumbered), allowing for a major liquidity bufferdespite the Group’s active balance sheet deleverage policy.In June 2010, Dexia fully exited the government guaranteedmechanism for its funding, put in place in October 2008.Considering the improvement of its liquidity situation andin line with its undertakings to the European Commission,the Group stopped to issue guaranteed debt four monthsbefore the formal end date of 30 October 2010. The exit(1) Unaudited pro forma figures.process was conducted gradually, Dexia waiving the benefitof the guarantee for contracts with a maturity of up toone month and contracts with no fixed maturity as early asOctober 2009. Then the Group ceased to use the guaranteefor its deposit contracts, particularly interbank deposits, from1 March 2010, and finally stopped the issuance of shorttermguaranteed instruments on 31 May 2010 and of allmedium and long-term guaranteed debt on 30 June 2010.All outstanding instruments issued under the governmentguarantee framework before 30 June 2010 will continue tobenefit from the government guarantee in accordance withtheir terms and conditions. Total outstanding guaranteeddebt amounted to EUR 44.4 billion as at 31 December 2010(against EUR 50.4 billion as at 31 December 2009). Thisguaranteed outstanding will be fully written down in 2014,of which approximately 40% in 2011.More detailed information on the government guaranteeis provided in the note 9.4.C. to the consolidated financialstatements in this Annual Report (page 184).Cost reductionIn order to maintain profitability of the Group refocused on itsmain franchises, in 2008 Dexia announced a target reductionto its cost base of 15% in three years, or EUR 600 million bythe end of 2011.As at 31 December 2010, costs were EUR 3,703 million,down 10% on the end of December 2008. 2010 costs wereseverely impacted by restructuring charges in an amount ofEUR 145 million.Other undertakingsUndertakings with regard to the businesslinesDexia undertook to align the loan activity of the Publicand Wholesale Banking business line with its covered bondissue capacity and to observe a level of risk-adjusted returnon capital (RAROC) at a minimum 10%. In 2010, newundertakings amounted to EUR 10.3 billion and, for the entirebusiness line, the level of 10% was respected.Restrictions on dividends and hybridinstrumentsThe agreement with the European Commission providescertain restrictions on dividends and hybrid instruments.Until the end of 2011, Dexia can only pay dividends onordinary shares in the form of new shares. During that period,the amount of dividend in shares may not be more than 40%of Dexia net income Group share over the financial year towhich the dividend relates.Dexia may only pay coupons on its subordinated debtinstruments and hybrid capital if there is a contractualobligation and will make no call until the end of 2011.On the other hand, and until 31 December 2014, Dexia willlimit any form of dividend on its ordinary shares and any callor discretionary payment of a coupon on subordinated debtinstruments and hybrid capital so that, after the payment, theGroup’s core Tier 1 ratio remains above or equal to:• 10.6% as at 31 December 2010 and then decreasing eachyear to 10.2% as at 31 December 2014;• the sum 12.5% of the weighted risks of the Legacy Divisionand 9.5% of the weighted risks of the other business lines.Management reportConsolidatedfinancial statementsAdditional information Annual financial statementsAnnual report 2010 Dexia15
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