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Habib Bank AG Zurich
Table of contents
Group key figures 2Letter from the Chairman and the President 4Habib Bank AG Zurich - the Group 5Group organisation structure 6Directors' report 8Group risk principles 12
Group Financial statements Balance sheet 16 Income statement 18 Cashflow statement 20 Statement of changes in equity 22 Summary of significant accounting principles 24 Notes to annual consolidated financial statements 28 Report of the Statutory Auditor 52
Bank Financial statements Balance sheet 54 Income statement 56 Statement of changes in equity 58 Notes to annual financial statements 59 Appropriation of profit / coverage of losses / other distributions 71 Report of the Statutory Auditor 72
Addresses 73
2
Habib Bank AG Zurich
GROUP
Group key figures*
in CHF million 31.12.10 31.12.11 31.12.12 31.12.13 31.12.14
Balance sheet
Total assets 8'032 8'354 7'850 7'772 9'804
Shareholder's equity1 827 880 877 873 987
Advances 2'892 2'645 2'351 2'871 3'408
Deposits 6'197 6'439 6'289 6'398 8'018
Income statement
Total income2 258.6 305.9 286.4 253.9 418.9
Operating expenses 141.6 151.6 159.9 175.1 178.3
Operating result 54.3 107.2 69.9 55.1 207.8
Group profit / loss 29.1 61.7 40.4 28.6 77.6
0
2000
4000
6000
8000
10000
20142013201220112010
8'032 8'3547'850 7'772
9'804
Total assets, in CHF million
0
200
400
600
800
1000
20142013201220112010
827880 877 873
987
Shareholder's equity1, in CHF million
0
500
1000
1500
2000
2500
3000
3500
20142013201220112010
2'8922'645
2'351
2'871
3'408
Advances, in CHF million
0
2000
4000
6000
8000
10000
20142013201220112010
6'197 6'439 6'289 6'398
8'018
Deposits, in CHF million
0
100
200
300
400
500
20142013201220112010
258.6305.9 286.4
253.9
418.9
Total income2, in CHF million
0
50
100
150
200
20142013201220112010
141.6151.6 159.9
175.1 178.3
Operating expenses, in CHF million
0
50
100
150
200
250
20142013201220112010
54.3
107.2
69.955.1
207.8
Operating result, in CHF million
0
10
20
30
40
50
60
70
80
20142013201220112010
29.1
61.7
40.4
28.6
77.6
Group profit / loss, in CHF million
* Effective 1 January 2013, the Group adopted the new accounting principles in accordance of FINMA Circular 2015/1 "Accounting - Banks"
1 Excl. minority interest in equity and in Group profit / loss
2 Including "Gross result from interest operations", "Result from comission business and services", "Result from trading activities and the fair value option" and "Other result from ordinary activities"
3
Habib Bank AG Zurich
GROUP
31.12.10 31.12.11 31.12.12 31.12.13 31.12.14
Key figures and ratios
Number of offices 177 197 219 253 278
Number of employees 3'289 3'308 3'823 4'140 4'456
Return on equity (ROE) (%)1 3.1% 6.4% 4.0% 2.8% 7.0%
Equity ratio (%) 11.7% 12.0% 12.7% 13.1% 12.3%
Cost / income ratio (%) 54.8% 49.6% 55.8% 69.0% 42.6%
Total capital ratio (%)2 16.1% 19.4% 21.8% 21.0% 19.5%
0
50
100
150
200
250
300
20142013201220112010
177197
219253
278
Number of offices
0
1000
2000
3000
4000
5000
20142013201220112010
3'289 3'3083'823
4'1404'456
Number of employees
0
1
2
3
4
5
6
7
8
20142013201220112010
3.1%
6.4%
4.0%
2.8%
7.0%
Return on equity (ROE) (%)1
0
3
6
9
12
15
20142013201220112010
11.7% 12.0% 12.7% 13.1%12.3%
Equity ratio (%)
0
10
20
30
40
50
60
70
80
20142013201220112010
54.8%49.6%
55.8%
69.0%
42.6%
Cost / income ratio (%)
0
5
10
15
20
25
20142013201220112010
16.1%
19.4%21.8% 21.0%
19.5%
Total capital ratio (%)2
1 Group profit / loss as percentage of equity of average at year end 2013 and 2014
2 Since 1 January 2013, capital adequacy has been determined in accordance with the standards in the "Basel III Accord"
4
Habib Bank AG Zurich
Letter from the Chairman and the President
It is our pleasure to present you with the 47th annual report of Habib Bank AG Zurich based on the new accounting principles issued by the Swiss Financial Market Supervisory Authority.
By the grace of God, Habib Bank AG Zurich delivered good results for 2014 while maintaining a strong capital base and high liquidity. Our Group maintained its conservative lending policy, with a high degree of discipline. This policy is characterised by a high percentage of fully secured and relatively short-term lending. As a result, advances to clients decreased to 43% of deposits received from clients. The remaining liquidity was placed in the interbank market or invested in investment-grade bonds.
During 2014, Ray Barnes joined our Board of Directors as a new member. Ray Barnes comes from a rich background of banking.
The Board of Directors has proposed that out of the profit for the year ended 31 December 2014 and a carry-over profit from last year adding up to a distributable amount of CHF 41'088'790.– the following appropria-tions should be made:
- Allocation to statutory retained earnings reserves CHF 2'000'000.–- Allocation to voluntary retained earnings reserves CHF 21'000'000.–- Distribution of dividend from distributable profit CHF 18'000'000.–- Profit and loss carried forward CHF 88'790.–
We would like to thank our clients for their loyalty to Habib Bank AG Zurich and for the trust they placed in us in 2014. We also wish to thank all our employees for their ongoing commitment and contribution to the success of Habib Bank AG Zurich.
Dr. Andreas Länzlinger Muhammad H. HabibChairman of the Board of Directors President
5
Habib Bank AG Zurich
Habib Bank AG Zurich - the Group
Habib Bank AG Zurich (hereinafter "the Bank") was incorporated in Switzerland in 1967 and is privately owned.
The Habib family has been actively involved in banking for over 170 years. Two family members, Mr. Muhammad H. Habib, President, and Mr. Mohamedali R. Habib, Joint President, are members of the General Management. Other members of the family are currently working their way up through the management grades.
The traditional values of the Habib family are: trust, integrity, respect, service and commitment.
The Bank has its Head Office and operation in Zurich and branches in the United Kingdom, the United Arab Emirates and Kenya. The Bank holds four wholly owned subsidiaries: Habib Canadian Bank, Canada, HBZ Bank Limited, South Africa, Habib European Bank Ltd., Isle of Man and HBZ Services FZ-LLC, United Arab Emirates. The Bank holds a 51% ownership interest in Habib Metropolitan Bank Ltd., Pakistan and HBZ Finance Ltd., Hong Kong (altogether "the Group").
The Bank and the Group are subject to the consolidated supervision of the Swiss Financial Market Supervisory Authority (FINMA). The Group has a strong capital base and liquidity ratios above industry standards and benefits from the political and economic stability of having its Head Office in Switzerland. Furthermore, the Group has close co-operation with the various regulatory bodies and central banks in the countries in which the Group operates.
The Group places a high emphasis on personal service in the countries it operates. The branches and subsidi-aries cover nine countries spread over four continents. At the end of 2014, 4'456 employees together with 278 offices are strategically well placed to provide maximum assistance to our local and international clien-tele. The Group is active in commercial banking, retail banking, trade finance business, wealth management and Islamic banking.
6
Habib Bank AG Zurich
GROUP
In 2014, the Group adapted its organisation structure to best support the achievement of the objectives set in the Group Strategic Plan 2013-2020. The new structure supports the focus on clients and the development of the client base and the business volumes. Moreover, it supports operational excellence in all countries and the centralised operations.
Board of Directors
The Board of Directors of the Bank is made up of non-executive and independent directors, all of whom have extensive experience in their respective field of competence.
Name Born Citizenship Board of Directors Audit CommitteeRisk & Control Committee
Dr. Andreas Länzlinger 1959 Swiss Chairman
Dr. Ulrich Grete 1942 Swiss Vice Chairman Member
Ray Barnes* 1945 British Member Member
Dr. Marco Duss 1943 Swiss Member Chairman
Urs Seiler 1949 Swiss Member Member Member
Ursula Suter 1954 Swiss Member Chairwoman* from 28 April 2014
General Management
General Management consists of two members of the Habib family and two non-family members. The majority of the members of General Management have residency in Switzerland.
Name Born Citizenship FunctionMuhammad H. Habib 1959 Swiss President and Head of Markets Overseas
Mohamedali R. Habib 1964 Canadian Joint President and Head of Markets Asia & Special Services
Shaun Wallis 1955 British Member of General Management and Head of Global Operations
Walter Mathis 1961 Swiss Member of General Management and Head of Shared Services
Group organisation structure
Management of the branch network
Name Born Citizenship Function CountryChristian Lerch 1959 Swiss Country Manager Switzerland
Anjum Iqbal 1952 British Country Manager United Kingdom
Arif Lakhani 1945 Pakistani Country Manager United Arab Emirates
Mohammad Ali Hussain 1954 Kenyan Country Manager Kenya
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Habib Bank AG Zurich
GROUP
Management of the subsidiaries
Name Born Citizenship Function Country
Muslim Hassan 1955 Canadian Chief Executive Officer Canada
Zafar Khan 1952 South African Chief Executive Officer South Africa
Mohammed Jafri 1951 British Chief Executive Officer Isle of Man
Atif Mufti 1973 Pakistani Chief Executive Officer United Arab Emirates*
Sirajuddin Aziz 1956 Pakistani Chief Executive Officer Pakistan
Ikram Quraishi 1948 USA Chief Executive Officer Hong Kong
* HBZ Services FZ-LLC
Group Internal Audit
Name Born Citizenship FunctionSyed Iftikhar Ali 1948 Pakistani Head of Group Internal Audit
Group Support Functions
Name Born Citizenship FunctionDr. Pascal Mang 1964 Swiss Head of Group Legal & Compliance
Ralph Schneider 1964 Swiss Head of Group Credit
Alfred Merz 1962 Swiss Head of Group Financial Control
Felix Gasser 1959 Swiss Head of Group Risk Control
Atif Mufti 1973 Pakistani Head of Group Operations
Syam Pillai Haja Alavudeen
19621966
Indian Indian
Heads of Group Information Technology
Sibel Sanus 1954 Turkish Head of Group Financial Institutions
Dr. Sitwat Husain 1964 Pakistani Head of Group Human Resources
Adnan Fasih 1967 Pakistani Head of Group Islamic Banking
8
Habib Bank AG Zurich
GROUP
Directors' report
Economic environment
Economic uncertainty remained throughout 2014.The expectations of a robust economic rebound did not materialise and global growth picked up only modestly compared to the previous year. A number of headwinds limited activity as both developed and emerging market economies continued to grapple with the aftermath of the Global Financial Crisis. Two developments in particular characterised the global economic context in 2014: First, the rebound of the US dollar in anticipation of higher US interest rates; second, the sharp decline of the oil price from mid-year onwards as global demand trailed supplies.
Among the large developed economies, the US economy continued to be the growth leader. 2014 marked the fifth year of economic expansion for the US despite harsh weather conditions earlier in the year, which saw growth contracting in the first quar-ter. Strong final demand, a pick-up in capital spend-ing and the ongoing recovery of housing activity sustained broad-based economic and employment growth. The drag from tighter fiscal policy eased, while the US Federal Reserve kept its policy rate unchanged, close to zero. Canadian growth held up well as a result of strong consumer spending despite gathering headwinds from the lower oil price. The UK economy surprised positively. However, the much expected first rate hike by the Bank of England was postponed as inflationary pressures subsided and the outlook for the eurozone, UK's most impor-tant trading partner, remained bleak. The eurozone disappointed once again. Unsolved structural issues, such as rigid labour markets but also unsustainable high levels of public debt in many countries, all but choked off the incipient recovery. Inflation also rolled over creating the risk for the eurozone to fall back into deflation. In this context, the European Central Bank increased its monetary stimulus by cutting interest rates, introducing negative deposit rates and launching a new programme for purchas-ing assets. The European Central Bank's stress test and asset quality review showed that many eurozone banks had made significant progress in de-risking
their balance sheets and shoring-up their capital. Despite weakness among its main European trading partners, Switzerland performed well in 2014 with growth lifted by private consumption and exports to other markets.
Despite weakness in the property and external sec-tors, the Chinese economy maintained a real growth rate of some 7%. Official interventions were largely limited to smoothing out volatility in the interbank market and industry-specific weaknesses. Growth in Hong Kong slowed on weaker goods and service exports. Other emerging markets struggled even more. Brazil suffered from delayed structural reforms and a drop of business confidence and Russia came under pressure when Western governments adopted sanctions to counter the country's annexation of Crimea. The country was also hit by the steep fall in oil price, which also affected the Middle East. The United Arab Emirates, however, continued to benefit from its regional safe-haven status and its property markets sustained its remarkable recovery for another year. South African growth was ham-pered by mining strikes and numerous bottlenecks. Weak commodity prices represented another major headwind. Kenya's economy experienced decent growth as the Central Bank of Kenya held the policy rate stable. Pakistan weathered another chal-lenging year fairly successfully. Although the pro-longed political stand-off during the late summer did affect activity negatively, the economy still managed to grow at a decent pace. Inflation con-tinued to decline, which allowed the State Bank of Pakistan to cut the discount rate late in the year. The International Monetary Fund approved further disbursements under its current programme, which helped to strengthen the external funding position.
Banking sector
The business environment for the banking industry continued to be dominated by extremely low inter-est rates in the developed world. Short-term rates remained anchored by highly accommodative global
9
Habib Bank AG Zurich
GROUP
monetary policy and remained close to their histori-cal lows. Against expectations, US capital market rates tended lower despite the end of asset pur-chases by the US Federal Reserve. In the eurozone, the introduction of negative deposit rates by the European Central Bank in June depressed rates even further. To counter sustained upward pressure on the Swiss franc, the Swiss National Bank followed suit in December and announced the introduction of negative interest rates and to end the EUR/CHF floor of 1.20 in January 2015. Among emerging markets, central banks with an easing bias prevailed with the notable exception of South Africa.
The development of credit demand, on the other hand, varied greatly across economies and regions. While in the US credit growth expanded at a healthy pace, the eurozone experienced another year of credit contraction as the economy as a whole con-tinued to deleverage, albeit at a slower pace. With European banks shrinking their balance sheets further, more financing activity moved to the capi-tal markets and non-traditional lenders in Europe. Credit and loan growth in emerging markets stayed well ahead of the developed world but progressed at different rates depending on the region.
The private banking and wealth management busi-ness represented a strong franchise for many banks. With asset prices rising on average, global wealth accumulation continued unabated. The fastest growth came once again from emerging markets, in particular Asia.
The global banking sector remained the focus of official regulators. Meeting regulatory requirements, be it in terms of capital, compliance or investor pro-tection once again tied up significant financial and human resources and exerted downward pressure on operating margins. Moreover, record fines hit several global banking institutions for alleged past wrong doings in various business activities.
Operational performance and outlook
General comments
2014 was a good year for the Group. The operating result reached CHF 207.8 million, which represents an increase of CHF 152.7 million over 2013.
The after-tax return on equity was at 7.0% in 2014 compared to 2.8% in 2013.
The Group decided to apply the new regulatory requirements (FINMA Circular 2015/1 "Accounting - Banks"), coming into force beginning 2015, to the 2014 financial statements. This has required a restatement of the 2013 figures.
Income statement
The Group recorded a profit of CHF 77.6 million in 2014, which represents an increase of CHF 49 mil-lion against 2013.
"Gross result from interest operations" amounted to CHF 224.1 million, which represents an increase of CHF 39.4 million against the previous year. This development was mainly due to an increase of the balance sheet items "Amounts due in respect of cus-tomer deposits", "Amounts due from customers" and "Other financial instruments at fair value".
The "Subtotal result from commissions business and services" amounted to CHF 75.6 million, which rep-resents an increase of CHF 7.6 Million against 2013.
"Result from trading activities and the fair value option" amounted CHF 104.5 million against a nega-tive figure of CHF 2.1 million for the previous year. That difference mainly comes from two facts. First, the application of new options available within the FINMA Circular 2015/1 "Accounting - Banks", gen-erated a revaluation of the financial instruments with fair value option of CHF 54.1 million. Second, the adopted consolidation policy resulted in an income
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Habib Bank AG Zurich
GROUP
amounting to CHF 29.4 million deriving from the translation of financial statements of branches.
"Subtotal operating expenses" increased by CHF 3.2 million to CHF 178.3 million compared to 2013.
"Personnel expenses" decreased by CHF 0.5 million compared to 2013 to CHF 121.3 million. The main rea- son for the slight decrease was the re-positioning and subsequent cost savings of the Group's UK operations.
The average number of employees during 2014 of the Group was 4'298 compared to 3'982 during 2013.
"General and administrative expenses" amounted to CHF 57.0 million, which represents an increase of CHF 3.7 million against 2013, mainly due to higher office space expenses and other operating expenses driven by the Group's branch expansion strategy.
"Changes in reserves for general banking risks" amounted to CHF 76.6 million against CHF 5.4 million for the previous year. The Group follows a prudent reserve policy in order to face uncertainty due to the strong Swiss Franc and activities in emerg-ing countries.
The increase of "Taxes", from CHF 19.1 million in 2013 up to CHF 56.2 million in 2014, was driven by the substantial improvement of the Group's profit.
Due to a strict cost control and increased income, the Group's cost / income ratio improved from 69% to 42.6%.
Balance sheet
The balance sheet reached CHF 9'803.5 million, i.e. an increase of CHF 2'031.6 million compared to 2013. This is mainly due to the increased focus on deposit mobilisation.
"Liquid assets" amounted to CHF 941.0 million against CHF 853.3 million for 2013, which repre-sents an increase of CHF 87.7 million.
"Advances" (i.e. "Amounts due from customers" and "Mortgage loans") reached CHF 3'408.2 million against CHF 2'871.3 million in 2013, i.e. an increase of CHF 536.9 million.
"Other financial instruments at fair value" and "Financial investments" amounted to CHF 3'081.8 million. The increase against 2013 is CHF 1'119.3 million. The Group invested a large part of deposited funds in local government papers. The general inter-est rate decrease provided substantial revaluation profits on these instruments.
"Amounts due in respect of customer deposits" reached CHF 8'017.8 million against CHF 6'397.6 million for the previous year. All countries contrib-uted to the increase of CHF 1'620.2 million.
Capital and liquidity
The Group has a strong capital base as well as a high liquidity ratio.
The capital adequacy ratios stand at Bank level at 24.4%, and at Group level at 19.5%, and the level of liquidity coverage ratio amounts at Bank level to 272% and at Group level to 303%.
Both significantly exceed the regulatory requirements.
Operations
In late 2013, we completed a new seven-year Group Strategic Plan 2013-2020, which was approved by the Board of Directors in early 2014. The Plan calls for three phases, the first of which covers 2014 / 2015 and involves a substantial programme of IT, operational and business projects. These projects aim at improv-ing operational efficiency, at fostering consistent systems, processes, products and services, at improv-ing regulatory compliance and at refining corporate governance and risk. All this has the intent of increa- sing consistency across the Group and providing a stable, efficient and focused platform for growth for the remainder of the Group Strategic Plan.
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Habib Bank AG Zurich
GROUP
Significant improvements were realised concerning the Group's proprietary banking system, Master hPLUS, both from a functional and technical and organisational point of view. From a functional point of view, we worked on two plans, the first focus-ing on client service and the second concentrating on operational and regulatory issues. Concerning our clients, we have implemented a better suite of products and services (such as e-banking, SMS mobile banking, cards products and various lending products), and concerning operational and regulatory issues we have greatly improved our processes and efficiency, as well as enhancing risk controls and reporting capabilities to local regulators.
From a technical and organisational point of view, in 2014 Master hPLUS has been rolled out as a single core product in eight out of nine countries.
Finally, during 2014 we have reviewed and substan-tially improved our Group governance documents (policies, directives and guidelines), which led to a strengthening of our Group Corporate Governance and to a more focused operation.
Outlook
Thanks to our unique place in the market and inter-national presence, the previously achieved organisa-tional and technical objectives, and a sound financial basis, we are well positioned to achieve the planned increase of our business. We plan to increase our deposit base in all countries with further expansion of our branch network of our subsidiaries in Canada, South Africa and Pakistan.
Alongside continued business growth, the prepara-tion to transform our UK operations into a sub-sidiary has been completed and we are awaiting the final regulators' approval in 2015. In March 2015, our Hong Kong deposit taking company received the regulator's authorisation to act as a Restricted License Bank, which will enable us to expand our product suite and brand image in the region and to increase our business with China. The Swiss opera-
tion will continue strengthening its offer to small and medium enterprises. The impact of negative interest rates will have a limited impact on the Group's over-all result. Finally, in 2015 we will continue to roll out the newly established "SIRAT" product suite in our Islamic branches.
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Habib Bank AG Zurich
GROUP
Group risk principles
Risk & Control Framework
The Risk & Control Framework of the Group is the cornerstone for risk management and control. The Risk & Control Framework provides the basis to effectively identify, assess and manage risks within the Group. Furthermore, it defines which body has the overall responsibility for a particular risk class, who manages it and who performs independent risk control.
Risk organisation
At the level of the Board of Directors, the responsi-bilities are the following:• the Board of Directors is responsible for the strategic direction, supervision and control of the Group, and for defining our overall risk tolerance by means of a risk appetite statement and overall risk limits;• the Risk & Control Committee is responsible for assisting the Board of Directors in fulfilling its oversight responsibilities by providing guidance regarding risk governance and the development of the risk profile, including the regular review of major risk exposures and overall risk limits; and• the Audit Committee is responsible for assisting the Board of Directors in fulfilling its oversight responsibilities by monitoring General Manage- ment's approach with respect to financial reporting, internal controls and accounting. Additionally, the Audit Committee is responsible for monitoring the independence and the performance of the Group Internal Audit and external auditors.
At the operational level, the Group operates with a three-line of defence model whereby business functions, risk management oversight and assurance roles are performed by functions independent of one another.
Furthermore, a clear distinction is made between "risk owners", "risk managers" and "risk controllers":• Risk owners bear the overall supervision and responsibility for the management of specific risk classes or risk types;
• Risk managers focus on the monitoring and proactive management of risk. They initiate risk management measures and can change the risk profile; • Risk controllers independently monitor and assess risk as well as highlight deviations from target risk parameters and non-compliance with policies.
Risk management principles
The following general principles support the Group's effort to maintain an appropriate balance between risk and return:• We protect the financial strength of the Group by controlling our risk exposures and avoiding potential risk concentrations at individual exposure levels, at specific portfolio levels and at an aggregate Group- wide level across all risk types;• We protect our reputation through a sound risk culture characterised by a holistic and integrated view of risk, performance and reward, and through full compliance with our standards and principles;• We systematically identify, classify and measure risks applying best practice;• We ensure management accountability, whereby Business Line Management owns all risks assumed throughout the Group and is responsible for the continuous and active management of all risk expo- sures to ensure that risk and return are balanced;• We set up independent risk control functions or units, which monitor effectiveness of risk manage- ment and oversee risk-taking activities;• We disclose risks to the Board of Directors, regu- lators and other stakeholders in a comprehensive and transparent manner.
Internal controls
Internal controls are a set of instruments used to monitor and control operational and other business risks. This process involves evaluating reports from the internal and external auditors on an ongoing basis, assessing risks and adjusting business proc-esses and the internal control system. The organisa-tional units responsible for internal controls therefore work closely with other organisational units within
13
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the Group. We see risk management as an on-going, multi-level and integral process within the Group.
Credit risk
Credit risk arises from the possibility that a counter-party, i.e. private clients, corporate clients, financial institution and issuer or sovereign does not fulfil its contractual obligations or the credit quality deterio-rates. In order to manage potential default risk and other prevailing credit risks most effectively, it is divided into the following risk types: client credit risk, credit issuer risk, credit counterparty risk, coun-try risk (including cross-border / transfer risk), settle-ment risk and credit concentration risk.
The Group manages its credit risk within a conserva-tive framework by evaluating the creditworthiness of the borrowing counterparties, setting appropriate credit limits and obtaining collateral as deemed nec-essary. For each collateral type a minimum haircut is defined in order to account for the volatility in market values according to the nature and liquidity of the collateral. Around 35% of the Group's credit exposure is secured by property and only 18% is unsecured.
The Group's credit risk appetite is defined and moni-tored through a comprehensive system of credit limits.
The Group has its own rating system for corporate clients. Each credit is assessed as to the borrower's credit worthiness, collateral coverage and collateral quality requirements, as well as the underlying trans-action rationale, business potential and any addi-tional risk mitigations. Personal credits are usually only granted on a fully collateralised basis. Collateral coverage is monitored on a regular basis and accord-ing to the prevailing market conditions.
Adequate and clear segregation of duties is established among the various organisational units involved in the acquisition of credit business, the analysis and approval of a credit request, and the subsequent administration.
Bank counterparties, issuers and sovereigns are ana-lysed according to their financial performance and their external rating. Over 75% of the credit exposure to financial institutions is of investment-grade qual-ity and the remaining 25% consists mainly of trade finance exposure in emerging markets where the Group is closely related to and monitors the portfolio with a set of country limits.
As for non-performing loans, the Group is in a com-fortable position. After taking the collateral at market value and the specific provisions into account, the net unsecured and unprovided position at the end of December 2014 was only CHF 10.5 million.
Country risks are monitored quarterly and are either guaranteed with the World Bank (MIGA) or provid-ed for in accordance with the guidelines of the Swiss Bankers Association using international ratings.
Liquidity risk
The Group applies a prudent approach to liquid-ity risk management. The Group Asset & Liability Management Committee oversees liquidity and mar-ket risks regularly.
The Group grants advances and loans to clients both on a short-term basis and with tenors generally up to five years. Funding is primarily obtained through deposits, which are mainly at sight, or short-term deposits. Wholesale funding is not significant and deposits are well diversified. No single depositor accounts for more than 5% of the Group's total deposits. Excess liquidity is held as bank placements or financial investments. The latter primarily consist of bond portfolios of sovereign issuers or other issu-ers of high quality.
The contractual maturities of the Group's financial assets exceed the contractual maturities of the finan-cial liabilities. However, when determining maturity gaps, the stickiness of deposits or economic matu-rities needs to be considered, which significantly
14
Habib Bank AG Zurich
GROUP
In addition, branches and subsidiaries have placed excess liquidity in bank placements or in financial investments with tenors usually up to three to five years. While the volume of financial investments is kept limited, the average duration of the fixed income portfolios creates interest rate risk exposure given the absence of long-term wholesale financing.
As for foreign exchange risks, the Group pursues a risk-averse approach and aims at keeping potential foreign exchange losses low. The Group neither speculates on foreign exchange movements nor pur-sues proprietary foreign exchange trading activities.
Profits earned in the Bank's branches are subject to exchange rate risk up to their remittance to Habib Bank AG Zurich, Zurich. These risks are monitored at the Head Office, and profits hedged as felt appropri-ate. Capital and reserves held in the branches are also subject to foreign exchange risk insofar as they are held in local currencies. Any foreign exchange trans- lation gains or losses on these capital and reserves are taken to the income statement in the year in which they occur.
Operational risk
Operational risk is defined as the risk of direct or indirect loss, or damaged reputation, resulting from inadequate or failed internal processes, from people or systems, or from external events.
The Group makes use of six operational risk man-agement processes, which consist of key risk indica-tors, change risk assessment, risk self-assessment, scenario analysis, risk event management and issue management and action tracking.
Furthermore, three types of risk mitigation are used and comprise control enhancement, business con-tinuity management and other mitigation measures (risk avoidance, risk reduction, risk transfer).
To proactively address risks related to potential busi-ness disruptions, business impact analyses, crisis
reduces the contractual gaps. Furthermore, individu-al clients groups in different countries will not act in the same way and at the same time.
In general, the Group is exposed to potential larger depositor outflows and sudden adverse market devel-opments. Therefore, related scenarios have been analysed as part of the three liquidity stress tests per-formed throughout the Group. The stress test results showed that the liquid assets available could absorb projected outflows in all cases.
The Group maintains a strong liquidity position, which is further supported by established repo functionalities. In addition, liquidity coverage ratio targets have been defined for all operating group companies.
The short-term liquidity disposition and liquidity situation of individual countries are monitored by the respective Country Treasury functions. In addi-tion, liquidity reserves are held both on Group and on country level and contingency funding plans are in place for the Group, all branches and subsidiaries.
Market risk
The Group is exposed to interest rate risk, foreign exchange risk and, to a very limited extent, to equi-ties and commodities risk.
The Group's market risk appetite is defined and monitored through a comprehensive system of mar-ket risk limits. Furthermore, the Group regularly performs scenarios and stress tests for interest rate and foreign exchange risks based on prevailing risk exposures.
The Group is exposed to interest rate risk due to interest periods set for advances made to clients exceeding the interest periods for client deposits taken. To limit interest rate risk, most client advances are agreed on a three or six month base rate plus a credit spread.
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GROUP
management teams and business continuity plans have been established for the Group as well as all branches and subsidiaries.
Legal and compliance risk
Legal risk is the risk that the Group will conduct activities or carries out transactions in which it is inadequately covered or is left exposed to potential litigation. It is the possibility that a failure to meet legal requirements may result in unenforceable con-tracts, litigation, fines, penalties or claims for dam-ages or other adverse consequences.
Compliance risk is the risk of legal or regulatory sanctions, material financial loss, or loss to the repu-tation the Group may suffer as a result of its failure to comply with laws, regulations, rules, related self-regulatory organisation standards, and codes of con-duct applicable to its banking activities.
Measures aimed at minimising legal and compli-ance risks include raising staff awareness of legal and regulatory issues through training, and internal directives and controls to ensure adherence to the legal and regulatory requirements within which the Group operates.
In line with the development of the legal and regu-latory environment of the industry, the Group has consistently invested in personnel and technical resources to ensure adequate compliance coverage. A comprehensive framework of policies and regular specialised training sessions ensure that staff receive appropriate ongoing education and training in this area.
Reputation risk
Reputation risk is the risk that illegal, unethical or inappropriate behaviour by the Group itself, employ-ees or clients or representatives of the Group may damage Habib Bank AG Zurich's reputation, leading potentially to a loss of business, fines or penalties.
The Group has established a Code of Conduct and promotes transparency and ethical behaviour.
Systemic risk
Systemic risk can be defined as a risk of disruption to financial services that is caused by an impairment of all or parts of the financial system and has the potential to have serious negative consequences for the real economy.
The Group analyses on a regular basis factors that could have a destabilising impact on the financial system, which include amongst others fragile eco-nomic development, continued financial market uncertainty, numerous political crises, increased ex-posure to cyber attacks as well as the ever-increasing extent and complexity of regulations. Based on this analysis, the Group implements mitigating measures wherever possible.
Risk assessment
The Board of Directors conducted a risk assessment of major risk exposures of the Bank and the Group in 2014.
16
Habib Bank AG Zurich
GROUP
Note 31.12.14 31.12.13
Assets
Liquid assets 941'016'888 853'327'819
Amounts due from banks 2'061'059'726 1'857'781'349
Amounts due from securities financing transactions 1 18'767'086
Amounts due from customers 2 2'972'811'140 2'683'737'425
Mortgage loans 2 435'419'767 187'616'972
Trading portfolio assets 3 707'381 439'618
Positive replacement values of derivative financial instruments 4 20'615'774 12'161'635
Other financial instruments at fair value 3 1'956'773'047 1'078'169'000
Financial investments 6/7 1'125'111'322 884'383'787
Accrued income and prepaid expenses 123'278'850 82'606'132
Non-consolidated participations 9 87'823 127'017
Tangible fixed assets 10 90'629'110 79'037'342
Intangible assets 11 5'140'175 6'853'565
Other assets 12 52'069'330 45'633'074
Total assets 9'803'487'419 7'771'874'735
Balance sheet at 31 December 2014 (before appropriation)
17
Habib Bank AG Zurich
GROUP
Note 31.12.14 31.12.13
Liabilities
Amounts due to banks 370'241'284 240'513'918
Liabilities from securities financing transactions 1
Amounts due in respect of customer deposits 8'017'828'492 6'397'607'689
Negative replacement values of derivative financial instruments 4 21'637'974 11'746'824
Accrued expenses and deferred income 128'954'146 76'651'420
Other liabilities 12 35'115'000 17'655'342
Provisions 15 22'967'365 10'315'108
Reserves for general banking risks 555'832'400 502'014'560
Bank's capital 150'000'000 150'000'000
Minority interest in equity 197'351'764 136'204'230
Retained earnings reserves 217'268'504 223'828'435
Currency translation reserves 8'675'204 -23'315'391
Group profit / loss 77'615'286 28'652'601
- of which minority interests group profits / losses 22'441'639 7'959'206
Total liabilities 9'803'487'419 7'771'874'735
Off balance sheet transactions
Contingent liabilities 22 1'139'144'136 1'141'327'916
Irrevocable commitments 45'712'100 26'877'501
Credit commitments 23 221'270'809 173'000'926
18
Habib Bank AG Zurich
GROUP
Income statement
Note 2014 2013
Result from interest operations
Interest and discount income 232'970'799 260'600'897
Interest and dividend income from trading portfolios
Interest and dividend income from financial investments 205'855'109 76'778'502
Interest expense -214'685'855 -152'651'656
Gross result from interest operations 224'140'053 184'727'744
Changes in value adjustments for default risks and losses from interest operations -14'599'358 -8'914'382
Subtotal net result from interest operations 209'540'695 175'813'362
Result from commission business and services
Commission income from securities trading and investment activities 5'672'159 5'199'741
Commission income from lending activities 28'237'720 30'022'863
Commission income from other services 46'378'704 36'493'102
Commission expense -4'654'917 -3'693'083
Subtotal result from commission business and services 75'633'666 68'022'623
Result from trading activities and the fair value option 25 104'539'235 -2'110'039
Other result from ordinary activities
Result from the disposal of financial investments 16'975'202 2'584'954
Income from participations
Result from real estate 570'146 662'559
Other ordinary income 140'111
Other ordinary expenses -2'808'943 -71'548
Subtotal other result from ordinary activities 14'736'405 3'316'076
19
Habib Bank AG Zurich
GROUP
Note 2014 2013
Operating expenses
Personnel expenses 26 -121'335'539 -121'857'921
General and administrative expenses 27 -56'991'414 -53'256'095
Subtotal operating expenses -178'326'953 -175'114'015
Value adjustments on participations, depreciation and amortisation on tangible fixed and intangible assets -11'759'200 -10'421'582
Changes to provisions and other value adjustments, and losses -6'566'683 -4'367'049
Operating result 207'797'163 55'139'374
Extraordinary income 28 2'675'030 700'398
Extraordinary expenses 28 -70'624 -2'598'445
Changes in reserves for general banking risks -76'619'639 -5'439'000
Taxes 30 -56'166'644 -19'149'726
Group profit / loss 77'615'286 28'652'601
- of which minority interests in group profit / loss 22'441'639 7'959'206
20
Habib Bank AG Zurich
GROUP
Cashflow statement
in CHF 000's 2014 2013
Source of funds
Use of funds
Source of funds
Use of funds
Cash flow from operating activities 271'453 64'095 56'051 72'662Group profit for the period 77'615 28'653
Change in reserves for general banking risks 76'620 5'439Value adjustments on participation depreciations and amortisation on tangible fixed assets and intangible assets 11'759 10'422
Provisions and other value adjustments 6'567 16'109
Changes in value adjustments for default risks and losses 14'599 8'914
Currency translation reserves 31'990 14'788
Accrued income and prepaid expenses 40'673 16'923
Accrued expenses and deferred income 52'303 2'623
Previous year's dividend 23'422 24'842
Cash flow from shareholders' equity transaction
Bank's capital
Recognised in reserves
Cash flow from transactions in respect of participations, tangible fixed assets and intangible assets 7'484 15'384 2'231 22'327
Non-consolidated participations 39
Real estate 6'934 9'546 1'742 9'526
Other tangible fixed assets 511 5'838 489 4'234
Intangible assets 8'567
21
Habib Bank AG Zurich
GROUP
in CHF 000's 2014 2013
Source of funds
Use of funds
Source of funds
Use of funds
Cash flow from the banking operations
Medium to long-term business (> 1 year) 717'652 600'435 405'875 265'395
Amounts due to banks 14'585 233
Amounts due in respect of customer deposits 117'165 44'458
Other liabilities 17'460 17'655
Amounts due from banks
Amounts due from customers 441'768 23'353
Mortgage loans 247'803 23'025
Other financial instruments at fair value 346'196 384'950
Financial investments 126'674 174'326
Other accounts receivable 6'436 3'270
Short-term business 1'632'432 1'861'418 410'489 403'934
Amounts due to banks 115'142 171'914
Liabilities from securities financing transactions
Amounts due in respect of customer deposits 1'503'056 122'401
Negative replacement values for derivative financial instruments 9'891 4'837
Amounts due from banks 203'279 278'063
Amounts due from securities financing transactions 18'767
Amounts due from customers 730'842 226'740
Trading portfolio assets 267 190
Positive replacement values for derivative financial instruments 8'454 5'280
Other financial instruments at fair value 532'408
Financial investments 367'401
Currency differences 4'343 4'998
Liquidity 87'689 110'328
Liquid assets 87'689 110'328
Total 2'629'021 2'629'021 874'646 874'646
22
Habib Bank AG Zurich
GROUP
Statement of changes in equity
In CHF 000's
Reserves for general
banking risk
Bank's capital
Currency translation
reserves
Minority interest
in equity
Retained earnings reserves
Groupprofit
or loss Total
Effect of the restatement 8'639 8'991 17'630
Equity at 01.01.14 502'016 150'000 -23'315 136'204 223'829 28'652 1'017'385
Transfer of profits to retained earnings 7'959 20'693 -28'652
Capital increase / decrease
Currency translation differences 31'991 26'639 58'930
Dividends and other distributions -11'422 -12'000 -23'422
Other allocations to (transfers from) the reserves for general banking risks 53'817 22'803 76'620
Other allocations to (transfers from) other reserves 14'869 -15'253 -384
Group profit / loss 77'615 77'615
Equity at 31.12.14 555'832 150'000 8'675 197'352 217'269 77'615 1'206'743
24
Habib Bank AG Zurich
GROUP
The Habib Bank AG Zurich Group's annual financial statements have been drawn up in accordance with the accounting rules incorporated into the Swiss Banking Act and its accompanying ordinance, together with FINMA Circular 2015/1 "Accounting - Banks".
These accounts, which are based on the following consolidation and accounting policies, give a true and fair view of the Bank and the Group's assets, of its financial position and of the results of its opera-tions.
Consolidation principles
Scope of the consolidationThe Group accounts incorporate the annual financial statements of Habib Bank AG Zurich, Zurich and its subsidiaries. Refer to note 8 for a list of consolidated subsidiaries.
Method of consolidationThe Group’s capital consolidation follows the pur-chase method.
The interest in equity and profit or loss attributable to minority shareholders are disclosed separately. Intra-group assets and liabilities as well as expenses and income from intra-group transactions are eliminated.
Consolidation periodThe consolidation period for all Group companies is the calendar year. The closing date for the consoli-dated financial statements is 31 December.
Foreign currency translation
In the financial statements of individual Group compa-nies and branches, income and expenditure in foreign currencies are translated at the exchange rate ruling as at the transaction date. Amounts due from and due to third parties in foreign currencies are translated at the year-end rate. Gains and losses arising from currency translations into the local currencies are charged to the income statement as "Result from trading activities and the fair value option".
Summary of significant accounting principles
For consolidation purposes, the balance sheets of the financial statements of branches and subsidiaries based outside Switzerland are translated into Swiss francs at exchange rates prevailing at the Group reporting date. The corresponding income statements are translated at the average rates of the respective year. Foreign exchange differences arising from the translation of the financial statements of subsidiaries are recorded within the equity, whereas those from the translation of financial statements of branches are recorded in the income statement as "Result from trading activities and the fair value option".
The following exchange rates of the major currencies were used for the balance sheet: 31.12.14 31.12.131 US dollar 0.99 0.891 pound sterling 1.54 1.47100 UAE dirham 26.95 24.19100 Pakistan rupees 0.98 0.84100 South Africa rand 8.51 8.50
The following exchange rates of the major currencies were used for the income statement: 31.12.14 31.12.131 US dollar 0.92 0.921 pound sterling 1.51 1.45100 UAE dirham 24.98 25.15100 Pakistan rupees 0.91 0.92100 South Africa rand 8.48 9.60 Valuation and accounting principles
The valuation and accounting principles are consist-ent for the Bank and the Group.
The financial statements of all group companies used for consolidation comply with the below valuation and accounting principles.
25
Habib Bank AG Zurich
GROUP
Recording of transactions
Transactions are recorded at the transaction date. Prior to the value date, forward foreign exchange and precious metal transactions are carried as off balance sheet business. Receivables and payables are disclosed according to the domicile or residency of clients.
Liquid assets and amounts due to and from banks and amounts due in respect of customer deposits
These amounts, including interest due but not paid, are shown at nominal value.
Amounts due from and liabilities from securities financing transactions
The Group buys and sells securities under agree-ments to re-sell or re-purchase substantially identical securities. Such agreements do not normally con-stitute economic sales and are therefore treated as financing transactions. Securities sold subject to such agreements continue to be recognised in the balance sheet. The proceeds from the sale of these securities are treated as liabilities. Securities purchased under agreements to re-sell are recognised as loans collat-eralised by securities, or as cash deposits against which the Group's securities are pledged.
Amounts due from customers and mortgage loans
These claims are reported at nominal value. All customer loans are assessed individually for default risks and, where necessary, value adjustments made in accordance with Group policy. These value adjust-ments take into account the value of any collateral (at lending values) and the financial standing of the borrower. They are set off against the corresponding assets.
Several Islamic Banking branches in Pakistan and South Africa maintain "Assets held under Ijarah" agreements. Acquired assets under this agreement are stated at cost less accumulated depreciation and impairment, if any.
Value adjustments for default risks
Receivables where it is considered unlikely that the debtor will fulfill his obligations are considered at risk. In particular, receivables where interest and commissions are more than 90 days overdue are considered to be at risk. Interest at risk, and interest, which is impaired, are not recognised as income but are deducted, together with value adjustments against the capital amount of the respective assets. Should the collection of interest in respect of "Amounts due from customers" and "Mortgage loans" be uncertain, interest is not calculated.
For consumer loans, specific value adjustments according to time-based criteria are built where inter-est is overdue for more than 60 days.
Value adjustments for country risk are assessed in accordance with the guidelines on the management of country risk from the Swiss Bankers Association. Furthermore, country-specific general credit risk value adjustments are maintained based on the dif-ferentiated risk profiles recognised for individual sectors of the loan portfolios, or where uncertainty is reflected by additional value adjustments. Value adjustments for country risk, as well as country specific general credit risk value adjustments, are deducted from "Amounts due from customers".
Trading portfolio assets
"Trading portfolio assets" positions consist mainly of precious metals. They are valued at fair value as at the balance sheet date.
Other financial instruments at fair value
"Other financial instruments at fair value" which are traded on an active market and meet the conditions for an assessment at fair values according to FINMA Circular 2015/1 "Accounting - Banks" and which are not intended to be held until maturity are valued according to this principle.
26
Habib Bank AG Zurich
GROUP
Financial investments
"Financial investments" consist mainly of fixed inter-est securities. The majority of these are acquired with the intention of holding them until maturity and are hence carried at cost adjusted for the amortisation of premiums and discounts using the accrual method.The remaining investments in this positions are val-ued at the lower of cost or market value principle. This position also includes real estate, assumed from the lending business for resale, and a number of securities, both of which are valued at the lower of cost or market value.
Derivative financial instruments
Derivative financial instruments consist entirely of trading instruments which are reported at fair value. The realised and non-realised gains and losses from these transactions are reported under "Result from trading activities and the fair value option".
The Group had no significant open derivative trans-actions on its own account at the balance sheet date. Positive and negative replacement values of open derivative financial instruments on behalf of clients are shown in the balance sheet as a separate line item. The respective contract volumes are shown in the notes.
Non-consolidated participations
Long-term holdings in associated companies, none of which exceed 10%, are valued at cost less any economically necessary depreciation.
Tangible fixed assets
"Tangible fixed assets" used for more than one accoun- ting period and which exceed the thresholds defined by the Group are capitalised. In this case, they are depreciated on a straight-line basis over the period of their estimated useful lifetime. Estimated life times have been set as follows:
Bank buildings and residential apartments 25-50 yearsLeasehold improvements 5-10 yearsFurniture 4-7 yearsOther fixed assets 3-5 yearsSoftware (acquired) 3-5 years
No depreciation is charged on land except where value adjustments have been made to allow for a reduction in market value. The tangible fixed assets are re-assessed whenever circumstances suggest that their value may have fallen below their book value.
Intangible assets: Goodwill
Goodwill in the balance sheet results from the pre-mium paid over net asset value from an acquired company. In such cases, the recorded goodwill is reviewed for impairment every year and written off over five years on a straight line basis.
Provisions
The Group records "Provisions" to cover specific risks that are based on a past event that represent a prob-able obligation and for which the amount can be reliably estimated.
Reserves for general banking risks
These taxed reserves are held in line with the Group's prudent policies as precautionary reserves to hedge against latent risks in the Group's operating activities. They form part of the "Tier 1" capital of the Group.
Off balance sheet items
Contingent liabilities relate mainly to irrevocable commitments originating from letters of credit and guarantees. These are generally fully secured. Necessary provisions are recorded on balance sheet under "Provisions". "Contingent liabilities", together with "Irrevocable commitments", call liabilities and acceptance credits, are recorded at nominal value.
27
Habib Bank AG Zurich
GROUP
Fiduciary transactions are converted into Swiss francs at the rates prevailing at the balance sheet date and are shown at nominal value.
Taxes and deferred taxes
Income taxes are based on the tax laws of each tax authority and are expensed in the period in which the related profits are made. Deferred taxes arising from temporal differences between the stated values of assets and liabilities in the consolidated sheet and their corresponding tax values are recongnised as deferred tax assets or deferred tax liabilities. Deferred tax assets are capitalised if there is likely to be enough taxable profit to offset these differences in future.
Pension plan commitments
In Switzerland, the occupational benefit plans are covered by Allianz Suisse Insurance Company. All employees are insured in accordance with the law, the foundation document and the regulations of the benefit plan. In the other countries pension liabilities are covered by insurance companies or are posted directly to the balance sheet. The employer contribu-tion is included under "Personnel costs".
Amounts due from and due to related parties and governing bodies
Amounts due from and due to related parties include credit lines to Board Members and General Mana-gement. These transactions have been executed in accordance with the current internal regulations on staff loans, advances and deposits.
Amounts due from and due to related parties are included in table 16.
Changes from the previous year / Transition to FINMA Circular 2015/1 "Accounting - Banks".
Effective 1 January 2014, the Group adopted the FINMA Circular 2015/1 "Accounting - Banks". The aforementioned accounting policies have been
applied in the preparation of the financial statements for the year ended 31 December 2014.
The opening balances of the consolidated financial statement as at 1 January 2013, as well as the con-solidated income statement for 2013 have undergone a restatement.
The following paragraphs explain the principal adjustments made by the Group in restating its con-solidated financial statements as per 1 January 2013.
Financial investments at fair valueFinancial investments held by Habib Metropolitan Bank Ltd., which fulfill the criteria for the applica-tion of the fair value option, were revalued from amortised costs to fair value as of 1 January 2013 and reclassified to the balance sheet position "Other financial instruments at fair value". The net impact of the revaluation amounted to CHF 17.6 million (CHF 27.1 million less deferred tax liabilities of CHF 9.5 million) was recognised in equity with no effect on the consolidated income statement 2013. The result-ing effects on the Group's equity are disclosed in the statement of changes in equity.
Due to decreasing market values, the Group expe-rienced a net loss of CHF 7.5 million in 2013 on its "Other financial instruments at fair value".
Foreign exchange impactUnder the previous accounting principles year-end rates were used for the translation of income statements from foreign branches and subsidiaries. Following the new accounting standard and hence applying average rates for the translation of these income statements, the consolidated income state-ment 2013 increased by CHF 2.0 million.
Events after the balance sheet date
No events that would adversely affect the financial statements included in this report occurred after the balance sheet date.
28
Habib Bank AG Zurich
GROUP
1 Structure of securities financing transactions (assets and liabilities)
Notes to annual consolidated financial statements
in CHF 000's 31.12.14 31.12.13
Book value of receivables from cash collateral related to securities borrowing and reverse-repurchase transactions* 18'767
Book value of payables from cash collateral posted for securities lending and repurchase transactions*
Book value of securities lent in connection with securities lending or delivered as collateral in connection with securities borrowing as well as securities in own portfolio transferred in connection with repurchase transactions 18'767
- of which those with an unrestricted right to resell or pledge
Fair value of securities serving as collateral posted for securities lending or securities borrowed or securities received in connection with reverse-repurchase transactions with an unrestricted right to resell or repledge them
- of which repledged securities
- of which resold securities
* Before taking into consideration any netting agreements
29
Habib Bank AG Zurich
GROUP
2 Collateral for loans and off-balance sheet transactions, as well as impaired loans / receivables
Type of collateral
in CHF 000'sMortgage coverage
Secured by other
collateral Unsecured Total
Loans (before offsetting any value adjustments)
Due from customers 941'930 1'620'927 639'268 3'202'124
Mortgage loans 435'420 435'420
- Residential and commercial property 402'780 402'780
- Commercial premises 32'640 32'640
Total loans (before netting any value adjustments) 31.12.14 1'377'350 1'620'927 639'268 3'637'544
31.12.13 1'108'156 1'544'138 406'725 3'059'019
Total loans (after netting any value adjustments) 31.12.14 1'201'558 1'583'367 623'304 3'408'229
31.12.13 1'021'585 1'469'959 379'810 2'871'354
Off balance sheet
Contingent liabilities 15'874 451'050 672'220 1'139'144
Irrevocable commitments 45'712 45'712
Credit commitments 3'241 150'961 67'069 221'271
Total off balance sheet 31.12.14 19'115 602'011 785'001 1'406'127
31.12.13 28'222 1'194'732 118'252 1'341'206
in CHF 000's Gross debt
amount
Est. liqui-dation value of the
collateral Net debt
amount
Individual value
adjustments
Impaired loans / receivables
31.12.14 368'461 117'555 250'906 226'708
31.12.13 308'902 71'268 237'634 185'938
30
Habib Bank AG Zurich
GROUP
3 Breakdown of trading portfolios and other financial instruments at fair value
in CHF 000's 31.12.14 31.12.13Assets
Trading portfolios 707 440Debt instruments, money-market instruments, money-market transactions
- of which listed
Equity interests
Precious metals and commodities 707 440Other trading assets
Other financial instruments at fair value 1'956'773 1'078'169Debt instruments 1'839'980 974'070Structure products
Others 116'793 104'099
Total assets 1'957'480 1'078'609 - of which determined by valuation model 17'223 4'806 - of which securities allowed for repo transactions in accordance with liquidity requirements 1'298 1'334
32
Habib Bank AG Zurich
GROUP
4 Presentation of derivative financial instruments
Trading instruments
in CHF 000's
Positivereplacement
values
Negativereplacement
valuesContractvolume
Interest rate instruments
Forward contracts, including FRAs
Swaps
Futures
Options (OTC)
Options (exchange-traded)
Foreign exchange / precious metals
Forward contracts 18'949 13'335 3'035'469 Combined interest rates / currency swaps
Futures
Options (OTC)
Options (exchange-traded)
Equity interests / indices
Forward contracts
Swaps
Futures
Options (OTC)
Options (exchange-traded) 5'416
Credit derivatives
Credit default swaps
Total return swaps
First-to-default swaps
Other credit derivatives
Other
Forward contracts 1'668 8'303 1'138'035 Swaps
Futures
Options (OTC)
Options (exchange-traded)
Total before taking into consideration netting agreements
Total at 31.12.14 20'616 21'638 4'178'919 - of which determined by using a valuation model
33
Habib Bank AG Zurich
GROUP
in CHF 000's
Positive replacement
value(accumulated)
Negative replacement
value(accumulated)
Total after taking into consideration netting agreements
Total at 31.12.14 20'616 21'638
at 31.12.13 12'162 11'747
5 Breakdown by counterparties of derivative financial instruments
in CHF 000's
Central clearing
parties
Banks and securities
dealers Other clientsPositive replacement values (after taking into consideration netting contracts) 291 18'634 1'691
The Group has no hedging instruments.
Trading instruments
in CHF 000's
Positivereplacement
values
Negativereplacement
valuesContractvolume
Total at 31.12.13 12'162 11'747 2'350'164 - of which determined by using a valuation model
34
Habib Bank AG Zurich
GROUP
6 Breakdown of financial investments
Book value Fair value
in CHF 000's 31.12.14 31.12.13 31.12.14 31.12.13
Debt instruments 1'115'015 874'397 1'116'937 879'570
- of which held until maturity 1'115'015 874'397 1'116'937 879'570
- of which not held until maturity
Equity interests 1'120 647 1'044 647
Real estate 8'976 9'340 13'833 10'039
Total 1'125'111 884'384 1'131'813 890'256
- of which securities allowed for repo transactions in accordance with liquidity requirements 177'029 225'642
in CHF 000's AAA AA A BBB BB to B Unrated
Book values 230'189 106'707 194'841 250'108 330'171 13'095
Rating category is based on the sovereign foreign currency long-term rating system from S&P.
7 Breakdown of the counterparty according to rating
35
Habib Bank AG Zurich
GROUP
8 List of consolidated companies in which the Bank permanently holds direct or indirect participation of significance
Business activities
Share capital (in 1'000)
Capital share
Proporti-on of vo-
ting rights Direct
ownership
Indirect
ownership
Company name and registered office
Habib Canadian Bank Limited, Toronto, Canada Bank CAD 30'000 100% 100% 100% 0%
HBZ Bank Limited, Durban, South Africa Bank ZAR 50'000 100% 100% 100% 0%
Habib European Bank Limited, Douglas, Isle of Man Bank GBP 5'000 100% 100% 100% 0%
HBZ Services FZ-LLC, Dubai, UAE Service centre AED 300 100% 100% 100% 0%
Habib Metropolitan Bank Ltd., Karachi, Pakistan Bank PKR 10'478'315 51% 51% 51% 0%HBZ Finance Ltd., Hong Kong Deposit-taking
company HKD 300'000 51% 51%
51%
0%
36
Habib Bank AG Zurich
GROUP
Reporting year
In CHF 000's Acquisition cost
Accumulated amortisations or
value adjustments (equity valuation)
Book value at 31.12.13 Reclassifications Investments Divestments Amortisations
Value adjustments of participations
interestBook value at
31.12.14 Market valueOther participation with no market value
- HBZ Int. Exchange Co (Singapore) Pte Ltd., Singapore 39 39 -39- S.W.I.F.T. SCRL, Belgium 88 88 88Total 127 127 -39 88
9 Presentation of participations
10 Tangible fixed assets
Reporting year
in CHF 000'sAcquisi- tion cost
Accumulated depreciation
Book value at 31.12.13
Reclassi-fications
Invest- ment
Divest- ment*
Depreci- ation Reversals
Book value at 31.12.14
Bank buildings 91'436 -29'181 62'254 7'444 5'880 -3'268 -1'080 71'230
Other real estate 15'037 -8'236 6'801 2'103 1'054 -2'238 7'719
Proprietary or separately acquired software 2'980 -2'809 171 133 10 -91 223
Other tangible fixed assets 39'825 -30'013 9'811 5'705 501 -4'559 -1 11'457
Tangible assets acquired under financial leases:
- of which bank buildings
- of which other real estate
- of which other tangible fixed assets
Total 149'277 -70'240 79'037 15'384 7'445 -10'156 -1'081 90'629
* including net of foreign currency adjustments
37
Habib Bank AG Zurich
GROUP
Reporting year
In CHF 000's Acquisition cost
Accumulated amortisations or
value adjustments (equity valuation)
Book value at 31.12.13 Reclassifications Investments Divestments Amortisations
Value adjustments of participations
interestBook value at
31.12.14 Market valueOther participation with no market value
- HBZ Int. Exchange Co (Singapore) Pte Ltd., Singapore 39 39 -39- S.W.I.F.T. SCRL, Belgium 88 88 88Total 127 127 -39 88
Reporting year
in CHF 000'sAcquisi- tion cost
Accumulated depreciation
Book value at 31.12.13
Reclassi-fications
Invest- ment
Divest- ment*
Depreci- ation Reversals
Book value at 31.12.14
Bank buildings 91'436 -29'181 62'254 7'444 5'880 -3'268 -1'080 71'230
Other real estate 15'037 -8'236 6'801 2'103 1'054 -2'238 7'719
Proprietary or separately acquired software 2'980 -2'809 171 133 10 -91 223
Other tangible fixed assets 39'825 -30'013 9'811 5'705 501 -4'559 -1 11'457
Tangible assets acquired under financial leases:
- of which bank buildings
- of which other real estate
- of which other tangible fixed assets
Total 149'277 -70'240 79'037 15'384 7'445 -10'156 -1'081 90'629
* including net of foreign currency adjustments
38
Habib Bank AG Zurich
GROUP
12 Breakdown of other assets and other liabilities
Other assets Other liabilities
in CHF 000's 31.12.14 31.12.13 31.12.14 31.12.13
Compensation account 4'245 11'338 4'513
Deferred income tax recognised as assets 29'341 37'602
Others 18'483 8'031 23'777 13'142
Total 52'069 45'633 35'115 17'655
11 Intangible assets
Reporting year
in CHF 000's
Acqui- sition
cost
Accumu- lated
amorti-sations
Book value at31.12.13
Invest- ment
Divest- ment
Amorti- sations
Book value at31.12.14
Goodwill 8'567 -1'713 6'854 -1'714 5'140
Patents
Licenses
Other intangible assets
Total 8'567 -1'713 6'854 -1'714 5'140
39
Habib Bank AG Zurich
GROUP
13 Disclosure of assets pledged or assigned to secure own commitments and of assets under reservation at ownership*
in CHF 000's Book valueEffective
commitments
Assets pledged
Amounts due from banks 391 Financial investments 11'298 Assets put under ownership reservation
Total 11'689
* Excluding securities financing transactions
14 Payable to own employee benefit plans
31.12.14 31.12.13
Payables to employee benefit plans 141 123
Commitments to own pension and welfare plans
The Group does not maintain its own pension plans. The occupational benefit plans in the countries are covered by insurance companies. All employees are insured in accordance with the law, the foundation document and the regulations of the benefit plan.
In accordance with the contractual and legal conditions of the benefit plan in the countries, there can be neither economic liabilities that exceed the contributions set by the regulations of the benefit plan, nor economic benefits for the Group. In addition, during both the reporting year and during the previous year, there were no non-committed plans, nor was there an employer-paid contribution reserve, such that the expenses shown in the income statement equal the actual expenses for pension and welfare plans for the reporting period.
40
Habib Bank AG Zurich
GROUP
In CHF 000's Balance at 31.12.13
Use in conformity with designated
purpose ReclassificationsCurrency
differencesPast due interest,
recoveriesNew creations
charged to income Releases to income Balance at 31.12.14Provisions for deferred taxes 1'947 555 1'344 -221 3'624 Provisions for pension fund obligations
Provisions for default risks 3'909 512 4'421 Provisions for other business risks 8'368 -1'356 682 7'047 14'741 Provisions for restructuring
Other provisions 181 181 Total provisions 10'315 -1'356 3'909 1'237 9'084 -221 22'967
Reserves for general banking risks 502'015 53'818 555'832
Value adjustments for default risks and country risks 187'665 -6'903 -3'909 27'027 8'116 44'367 -27'056 229'308 - of which value adjustments for default risks in respect of impaired loans 185'938 -6'903 -3'909 27'027 8'116 43'494 -27'056 226'708 - of which value adjustments for latent risks 1'727 873 2'600
15 Value adjustments and provisions and reserves for general banking risks
41
Habib Bank AG Zurich
GROUP
In CHF 000's Balance at 31.12.13
Use in conformity with designated
purpose ReclassificationsCurrency
differencesPast due interest,
recoveriesNew creations
charged to income Releases to income Balance at 31.12.14Provisions for deferred taxes 1'947 555 1'344 -221 3'624 Provisions for pension fund obligations
Provisions for default risks 3'909 512 4'421 Provisions for other business risks 8'368 -1'356 682 7'047 14'741 Provisions for restructuring
Other provisions 181 181 Total provisions 10'315 -1'356 3'909 1'237 9'084 -221 22'967
Reserves for general banking risks 502'015 53'818 555'832
Value adjustments for default risks and country risks 187'665 -6'903 -3'909 27'027 8'116 44'367 -27'056 229'308 - of which value adjustments for default risks in respect of impaired loans 185'938 -6'903 -3'909 27'027 8'116 43'494 -27'056 226'708 - of which value adjustments for latent risks 1'727 873 2'600
42
Habib Bank AG Zurich
GROUP
16 Disclosure amounts due from / to related parties
in CHF 000's Amounts due from Amounts due to
31.12.14 31.12.13 31.12.14 31.12.13
Qualified holdings 44'473 32'195
Associates 20
Transactions with members of governing bodies 1'224 750 10'349 12'153
Other related parties
43
Habib Bank AG Zurich
GROUP
17 Maturity structure of financial instruments
Due
in CHF 000'sOn
demand CallableWithin
3 months
Between 3 and 12
months
Between 12 months
and 5 yearsAfter
5 yearsNo
maturity Total
Asset / financial instruments
Liquid assets 587'358 293'886 59'773 941'017
Amounts due from banks 132'303 23'810 1'746'595 158'352 2'061'060
Amounts due from securities financing transactions
18'767
18'767
Amounts due from customers 489'410 1'414'922 710'899 315'551 42'029 2'972'812
Mortgage loans 27'751 13'978 341'050 52'640 435'420
Trading portfolio assets 707 707
Positive replacement values of derivative financial instruments
657
19'958 20'616
Other financial instruments at fair value 11'671 941'223 586'550 300'536 116'793 1'956'773
Financial investments 677'067 13'010 54'055 212'980 158'387 9'612 1'125'111
Total 31.12.14 1'887'504 23'810 3'546'561 1'938'280 1'456'132 553'592 126'404 9'532'283
31.12.13 997'446 638'201 2'892'322 996'593 1'555'867 467'849 9'340 7'557'618
Liabilities / financial instruments
Amounts due to banks 156'415 119'935 79'306 9'494 5'092 370'242
Liabilities from securities financing transactions
Amounts due in respect of customer deposits
4'570'261
362'335
1'924'402
949'625
186'005 25'200 8'017'828
Negative replacement values of derivative financial instruments 589 21'049
21'638
Total 31.12.14 4'727'266 362'335 2'065'386 1'028'931 195'499 30'292 8'409'708
31.12.13 3'559'800 11'746 2'185'564 783'577 97'021 12'160 6'649'868
44
Habib Bank AG Zurich
GROUP
18 Assets and liabilities broken down by domestic and foreign origin in accordance with domicile principle
in CHF 000's 31.12.14 31.12.13
Domestic Foreign Domestic ForeignAssets
Liquid assets 124'037 816'980 103'019 750'309
Amounts due from banks 295'693 1'765'367 267'519 1'590'262
Amounts due from securities financing transactions 18'767
Amounts due from customers 95'126 2'877'685 23'619 2'660'118
Mortgage loans 435'420 187'617
Trading portfolio assets 476 231 440
Positive replacement values of derivative financial instruments 24 20'592 91 12'071
Other financial instruments at fair value 1'956'773 1'078'169
Financial investments 120'985 1'004'127 54'059 830'325
Accrued income and prepaid expenses 14'225 109'054 6'693 75'913
Non-consolidated participations 88 127
Tangible fixed assets 10'909 79'721 11'540 67'497
Intangible assets 5'140 6'854
Other assets 4'939 47'130 449 45'184
Total 671'552 9'131'934 467'429 7'304'446
Liabilities
Amounts due to banks 1'083 369'159 240'514 Liabilities from securities financing transactions
Amounts due in respect of customer deposits 122'289 7'895'538 114'408 6'283'200
Negative replacement values of derivative financial instruments 9 21'629 140 11'607
Accrued expenses and deferred income 5'933 123'021 1'598 75'053
Other liabilities 9'380 25'736 17'655
Provisions 10'636 12'331 10'315
Reserves for general banking risks 229'382 326'450 202'690 299'325
Bank's capital 150'000 150'000
Minority interest in equity 197'352 136'204
Retained earnings reserves 217'269 223'828
Currency translation reserves 8'675 -23'315
Group profit / loss 3'374 74'241 -3'334 31'987
Total 758'030 9'045'457 666'015 7'105'860
Receivables and payables are reported according to the domicile or residency of clients in Switzerland (incl. Liechtenstein).Other assets / liabilities are reported according to location.
45
Habib Bank AG Zurich
GROUP
19 Breakdown of total assets by countries or regions (domicile principle)
in CHF 000's 31.12.14 31.12.13Assets
Europe 1'680'179 17.1% 1'587'146 20.4%
of which Switzerland 503'674 5.1% 499'347 6.5%
United Kingdom 844'327 8.6% 675'671 8.7%
Others 332'178 3.4% 412'128 5.3%
North America 239'324 2.4% 132'959 1.7%
Asia 7'178'093 73.3% 5'242'530 67.5%
of which UAE 2'546'860 26.0% 2'020'861 26.0%
Pakistan 3'910'030 39.9% 2'564'763 33.0%
Others 721'203 7.4% 656'906 8.5%
Other countries 705'891 7.2% 809'240 10.4%
of which South Africa 328'608 3.4% 305'765 3.9%
Others 377'283 3.8% 503'475 6.5%
Total assets 9'803'487 100.0% 7'771'875 100.0%
20 Breakdown of total assets by credit rating of regions (risk domicile principle)
in CHF 000'sNet foreign exposures
at 31.12.14Net foreign exposures
at 31.12.13AAA 2'259'160 23.0% 2'164'047 27.8%
AA+ to AA- 134'415 1.4% 86'498 1.1%
A+ to A- 2'917'948 29.8% 2'388'145 30.7%
BBB+ to BBB- 181'289 1.8% 300'395 3.9%
BB+ to B- 4'129'248 42.1% 2'677'592 34.5%
CCC 5'079 0.1% 5'079 0.1%
Unrated 176'349 1.8% 150'119 1.9%
Total 9'803'487 100.0% 7'771'875 100.0%
Rating category is based on the sovereign foreign currency long-term rating system from S&P.
46
Habib Bank AG Zurich
GROUP
21 Assets and liabilities broken down by the most important currencies for the Group
in CHF 000's CHF USD GBP AED PKR Other Total
Asset
Liquid assets 123'852 180'153 6'422 539'519 80'215 10'855 941'016
Amounts due from banks 6'631 713'888 163'726 606'984 32'771 537'061 2'061'061
Amounts due from securities financing transactions 18'767 18'767
Amounts due from customers 12'467 711'969 449'802 697'706 941'451 159'416 2'972'812
Mortgage loans 104 372'744 13'830 48'742 435'420
Trading portfolio assets 476 50 181 707
Positive replacement values for derivative financial instruments 24 610 19'958 23 20'616
Other financial instruments at fair value 1'956'773 1'956'773
Financial investments 267'374 377'739 108'745 409 231'415 139'430 1'125'111
Accrued income and prepaid expenses 14'048 7'927 1'669 13'316 84'458 1'861 123'279
Non-consolidated participations 88 88
Tangible fixed assets 10'909 11'318 20'558 29'746 18'098 90'629
Intangible assets 5'140 5'140
Other assets 693 6'290 1'002 10'047 29'165 4'872 52'069
Total assets shown in balance sheet 441'701 1'998'121 743'294 2'261'284 3'438'549 920'539 9'803'487
Delivery claims from spot exchange transactions, foreign exchange forwards and foreign exchange options 8'953 844'132 78'391 122 1'005'794 149'512 2'086'904
Total assets 450'654 2'842'253 821'685 2'261'406 4'444'343 1'070'051 11'890'391
47
Habib Bank AG Zurich
GROUP
in CHF 000's CHF USD GBP AED PKR Other Total
Liabilities
Amounts due to banks 1'653 80'132 5'583 16'733 257'928 8'214 370'242
Liabilities from securities financing transactions
Amounts due in respect of customer deposits 128'815 1'895'792 693'507 1'865'989 2'678'173 755'554 8'017'829
Negative replacement values of derivative financial instruments
9
559 21'049
21 21'638
Accrued expenses and deferred income 5'933 434 5'563 19'209 86'875 10'940 128'954
Other liabilities 462 915 7'592 14'254 10'395 1'497 35'115
Provisions 10'637 2'486 7'960 1'885 22'968
Reserves for general banking risks 229'381 284'789 23'817 17'845 555'832
Bank's capital 150'000 150'000
Minority interest in equity 163'990 33'362 197'352
Retained earnings reserves 195'598 21'671 217'269
Currency translation reserves 8'675 8'675
Group profit / loss -2'944 -2'551 36'983 33'257 12'870 77'614
Total liabilities shown in balance sheet 728'218 1'977'273 712'738 2'237'957 3'305'113 842'188 9'803'487
Delivery commitments from spot exchange transactions, foreign exchange forwards and foreign exchange options
6'819 878'166 64'323
983'659 153'937
2'086'904
Total liabilities 735'037 2'855'439 777'061 2'237'957 4'288'772 996'125 11'890'391
Net position for each currency -286'517 20'848 30'556 23'327 133'436 78'351
48
Habib Bank AG Zurich
GROUP
22 Breakdown of contingent liabilities
in CHF 000's 31.12.14 31.12.13Credit guarantees and similar 363'549 321'787Performance-related guarantees and similar 17'683Irrevocable commitments due to documentary credits 775'595 745'527Other contingent liabilities 56'331Total 1'139'144 1'141'328
23 Breakdown of committed credits
in CHF 000's 31.12.14 31.12.13Commitments arising from deferred payments
Commitments arising from acceptances 162'044 173'001
Other credit commitments 59'226
Total 221'271 173'001
24 Breakdown of fiduciary transactions
in CHF 000's 31.12.14 31.12.13
Fiduciary investments with third-party companies 89'745 103'963
Fiduciary loans
Fiduciary transactions from securities lending and borrowing which are carried out by the Bank acting under its own name but on behalf of clients
16'171
12'594
Other fiduciary transactions
Total 105'917 116'557
49
Habib Bank AG Zurich
GROUP
25 Breakdown of the result from trading activities and the fair value option
in CHF 000's 2014 2013
Result from trading activities
Interest rate instruments (incl. funds) 54'114 -11'023
Unrealised forex gains / losses on reserves held in foreign currencies 33'007 -9'364
Foreign exchange 17'373 18'435
Commodities / precious metals 46 -158
Total 104'539 -2'110
- of which from the fair value option applied to assets 54'114 -11'023
26 Breakdown of personnel expenses
in CHF 000's 2014 2013
Salaries and additional allowances 109'377 108'088
- of which expenses related to share-based compensation and alternative forms of variable compensation
Social insurance obligations 7'669 8'977
Value adjustments for economic benefits or obligations arising from pension funds
Other personnel expenses 4'290 4'793
Total 121'336 121'858
50
Habib Bank AG Zurich
GROUP
28 Analysis of extraordinary income and expenses
in CHF 000's 2014 2013Extraordinary income
Release of provisions no longer required 296 Profit on sale of fixed assets 203 509 Recoveries and others 2'175 191 Total 2'675 700
Extraordinary expenses
Other 71 2'598 Total 71 2'598
27 Breakdown of general and administrative expenses
in CHF 000's 2014 2013
Office space expenses 18'793 15'520
Expenses for information technology and telecommunications 7'830 7'475
Expenses for motor vehicles, machinery, furniture and other equipment and operating lease expenses 4'288 4'347
Audit fees 1'706 2'271
- of which for financial and regulatory audits 1'611 1'850
- of which for other services 95 421
Other operating expenses 24'374 23'643
Total 56'991 53'256
51
Habib Bank AG Zurich
GROUP
29 Breakdown of operating result broken down according domestic and foreign origin according to the principle of permanent establishment
2014 2013
in CHF 000's Switzerland Abroad Switzerland Abroad
Net result from interest operations 10'525 199'016 11'049 164'764
Result from commission business and services 7'644 67'989 6'254 61'769
Result from trading activities and the fair value option 30'102 74'438 -7'504 5'394
Other result from other ordinary activities 22'708 -7'972 21'247 -17'931
Total net income 70'979 333'471 31'046 213'996
Personnel expenses 21'315 100'021 22'046 99'812
General and administrative expenses 11'815 45'176 12'479 40'777
Operating expenses 33'130 145'197 34'525 140'589 Value adjustments on participations, depreciation and amortisation on tangible fixed and intangible assets -1'716 -10'043 -1'175 -9'247
Changes to provisions and other value adjustments, and losses -1'334 -5'233 2'662 -7'029
Operating result % Switzerland / Abroad
34'79916.7%
172'99883.3%
-1'992-3.6%
57'131103.6%
Taxes% Switzerland / Abroad
-1'641 2.9%
-54'526 97.1%
-1'356 7.1%
-17'794 92.9%
Group profit / loss% Switzerland / Abroad
3'3744.3%
74'24195.7%
-3'334-11.6%
31'987111.6%
Income and expenditure Switzerland: includes the Zurich Branch and the Zurich Head Office.
30 Presentation of current taxes, deferred taxes and disclosure of the tax rate
in CHF 000's 2014 2013Income taxes 63'771 24'408Deferred tax expenses -7'604 -5'259Taxes 56'166 19'149
Average tax rate 30.7% 44.3%
52
Habib Bank AG Zurich
GROUP
Report of the Statutory Auditor
To the General Meeting ofHabib Bank AG ZurichZurich
Report of the Statutory Auditor on the Consolidated Financial Statements
As statutory auditor, we have audited the accompanying consolidated financial statements of Habib Bank AG Zurich, which comprise the balance sheet, income statement, statement of changes in equity, cash flow statement and notes (pages 16 to 51 of the annual report) for the year ended 31 December 2014.
Board of Directors' ResponsibilityThe Board of Directors is responsible for the preparation of the consolidated financial statements in accordance with the provi-sions governing the preparation of financial statements for banks and the requirements of Swiss law. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation and fair presentation of consoli-dated financial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is fur-ther responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances.
Auditor's ResponsibilityOur responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Swiss law and Swiss Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgement, including the assessment of the risks of material mis-statement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the entity's preparation of the consolidated financial statements 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 system. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the consolidated financial state-ments. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
OpinionIn our opinion, the consolidated financial statements for the year ended 31 December 2014 give a true and fair view of the finan-cial position, the results of operations and the cash flows in accordance with the provisions governing the preparation of financial statements for banks and comply with Swiss law.
Report on Other Legal Requirements
We confirm that we meet the legal requirements on licensing according to the Auditor Oversight Act (AOA) and independence (article 728 CO and article 11 AOA) and that there are no circumstances incompatible with our independence.
In accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system exists, which has been designed for the preparation of consolidated financial statements according to the instructions of the Board of Directors.
We recommend that the consolidated financial statements submitted to you be approved.
KPMG AG
Ertugrul Tüfekçi Mirko Liberto Licensed Audit Expert Licensed Audit ExpertAuditor in Charge
Zurich, 20 April 2015
Habib Bank AG Zurich
54 BANK
Balance sheet at 31 December 2014 (before appropriation)
Note 31.12.14 31.12.13
Assets
Liquid assets 754'274'639 668'260'423
Amounts due from banks 1'580'953'168 1'571'356'532
Amounts due from securities financing transactions
Amounts due from customers 1 1'473'372'474 1'294'775'470
Mortgage loans 1 373'190'848 137'309'404
Trading portfolio assets 707'381 439'618
Positive replacement values of derivative financial instruments 2 634'400 878'811
Other financial instruments at fair value
Financial investments 4 817'340'429 691'520'172
Accrued income and prepaid expenses 33'787'224 28'915'132
Participations 237'569'135 225'431'859
Tangible fixed assets 37'528'826 38'491'229
Intangible assets 5'140'175 6'853'566
Other assets 6 19'417'697 15'108'273
Total assets 5'333'916'396 4'679'340'489
Habib Bank AG Zurich
55 BANK
Note 31.12.14 31.12.13
Liabilities
Amounts due to banks 69'271'194 69'304'835
Liabilities from securities financing transactions
Amounts due in respect of customer deposits 4'259'131'763 3'691'058'502
Negative replacement values of derivative financial instruments 2 568'191 858'062
Accrued expenses and deferred income 36'036'665 14'205'278
Other liabilities 6 22'711'638 22'678'509
Provisions 7 13'121'908 8'367'802
Reserves for general banking risks 488'000'000 458'000'000
Bank's capital 8 150'000'000 150'000'000
Statutory retained earnings reserves 75'000'000 75'000'000
Voluntary retained earnings reserves 178'986'247 176'541'796
Profit carried forward / loss carried forward 525'705 99'779
Profit / loss (result of the period) 40'563'085 13'225'926
Total liabilities 5'333'916'396 4'679'340'489
Off balance sheet transactions
Contingent liabilities 297'273'480 353'717'090 Irrevocable commitments 45'712'100 1'724'000 Credit commitments 12 70'933'878 27'819'006
Habib Bank AG Zurich
56 BANK
Income statement
Note 2014 2013
Result from interest operations
Interest and discount income 97'388'510 91'742'392
Interest and dividend income from trading portfolios
Interest and dividend income from financial investments 17'721'919 11'483'474
Interest expense -14'533'926 -15'772'298
Gross result from interest operations 100'576'503 87'453'568
Changes in value adjustments for default risks and losses from interest operations -3'120'380 495'462
Subtotal net result from interest operations 97'456'123 87'949'030
Result from commission business and services
Commission income from securities trading and investment activities 5'180'402 4'873'402
Commission income from lending activities 17'646'605 17'882'571
Commission income from other services 22'946'027 15'769'838
Commission expense -2'022'158 -1'520'794
Subtotal result from commission business and services 43'750'876 37'005'017
Result from trading activities and the fair value option 14 38'155'473 -213'779
Other result from ordinary activities
Result from the disposal of financial investments 2'492'973
Income from participations 12'851'972 11'849'945
Result from real estate 222'430 379'062
Other ordinary income 4'986'000 4'540'552
Other ordinary expenses -68'809
Subtotal other result from ordinary activities 18'060'403 19'193'723
Habib Bank AG Zurich
57 BANK
Note 2014 2013
Operating expenses
Personnel expenses 15 -59'908'920 -66'304'607
General and administrative expenses 16 -42'570'268 -42'979'692
Subtotal operating expenses -102'479'188 -109'284'299
Value adjustments on participations and depreciation and amortisation on tangible fixed and intangible assets -5'762'645 -5'357'125
Changes to provisions and other value adjustments and losses -5'982'569 -4'250'786
Operating result 83'198'472 25'041'781
Extraordinary income 17 2'420'400 153'997
Extraordinary expenses 17 -70'685 -41'864
Changes in reserves for general banking risks -30'000'000
Taxes 18 -14'985'103 -11'927'987
Profit / loss (result for the period) 40'563'085 13'225'926
Habib Bank AG Zurich
58 BANK
Statement of changes in equity
In CHF 000's
Reserves for general
banking riskBank's capital
Statutoryretained earnings reserves
Voluntary retained
earnings and profit / loss
carried forward
Bankprofit
or loss Total
Equity at 01.01.14 458'000 150'000 75'000 176'642 13'226 872'868 Transfer of profits to retained earnings 13'226 -13'226Capital increase / decrease
Currency translation differences 1'644 1'644 Dividends and other distributions -12'000 -12'000Other allocations to (transfers from) the reserves for general banking risks
30'000
30'000
Other allocations to (transfers from) other reserves
Profit / loss (result of the period) 40'563 40'563
Equity at 31.12.14 488'000 150'000 75'000 179'512 40'563 933'075
Habib Bank AG Zurich
59 BANK
1 Collateral for loans and off-balance sheet transactions, as well as impaired loans / receivables
Notes to annual financial statements
Type of collateral
in CHF 000'sMortgage coverage
Secured by other
collateral Unsecured Total
Loans (before offsetting any value adjustments)
Due from customers 470'177 481'889 575'972 1'528'038
Mortgage loans 373'191 373'191
- Residential and commercial property 373'191 373'191
- Commercial premisesTotal loans (before netting any value adjustments) 31.12.14 843'368 481'889 575'972 1'901'229
31.12.13 668'275 545'767 267'725 1'481'767
Total loans (after netting any value adjustments) 31.12.14 841'040 445'455 561'068 1'846'563
31.12.13 635'700 540'536 255'849 1'432'085
Off balance sheet
Contingent liabilities 6'062 222'640 68'572 297'273
Irrevocable commitments 45'712 45'712
Credit commitments 2'068 24'038 44'828 70'934
Total off balance sheet 31.12.14 8'130 246'679 159'111 413'919
31.12.13 10'533 371'440 1'287 383'260
in CHF 000's Gross debt
amount
Est. liqui-dation value of the
collateral Net debt
amount
Individual value
adjustmentsImpaired loans / receivables
31.12.14 116'330 48'794 67'537 52'067
31.12.13 122'947 13'713 109'234 47'955
Habib Bank AG Zurich
60 BANK
2 Presentation of derivative financial instruments
Trading instruments
in CHF 000's
Positivereplacement
values
Negativereplacement
valuesContractvolume
Interest rate instruments
Forward contracts, including FRAs
Swaps
Futures
Options (OTC)
Options (exchange-traded)
Foreign exchange / precious metals
Forward contracts 634 568 124'034 Combined interest rates / currency swaps
Futures
Options (OTC)
Options (exchange-traded)
Equity interests / indices
Forward contracts
Swaps
Futures
Options (OTC)
Options (exchange-traded) 5'416
Credit derivatives
Credit default swaps
Total return swaps
First-to default swaps
Other credit derivatives
Other
Forward contracts
Swaps
Futures
Options (OTC)
Options (exchange-traded)
Total before taking into consideration netting agreements
Total at 31.12.14 634 568 129'450 - of which determined by using a valuation model
Habib Bank AG Zurich
61 BANK
in CHF 000's
Positive replacement
value(accumulated)
Negative replacement
value(accumulated)
Total after taking into consideration netting agreements
Total at 31.12.14 634 568
at 31.12.13 879 858
3 Breakdown by counterparties of derivative financial instruments
in CHF 000's
Central clearing
parties
Banks and securities
dealers Other clientsPositive replacement values (after taking into consideration netting contracts) 634
The Bank has no hedging instruments.
Trading instruments
in CHF 000's
Positivereplacement
values
Negativereplacement
valuesContractvolume
Total at 31.12.13 879 858 194'495 - of which determined by using a valuation model
Habib Bank AG Zurich
62 BANK
in CHF 000's AAA AA A BBB BB to B Unrated
Book values 221'734 106'707 179'808 201'381 104'227 3'484
Rating category is based on the sovereign foreign currency long-term rating system from S&P.
5 Breakdown of the counterparty according to rating
Book value Fair value
in CHF 000's 31.12.14 31.12.13 31.12.14 31.12.13
Debt instruments 816'855 691'447 819'307 696'765
- of which held until maturity 816'855 691'447 819'307 696'765
- of which not held until maturity
Equity interests 485 73 409
Real estate
Total 817'340 691'520 819'716 696'765
- of which securities allowed for repo transactions in accordance with liquidity requirements 177'029 225'642
4 Breakdown of financial investments
6 Breakdown of other assets and other liabilities
Other assets Other liabilities
in CHF 000's 31.12.14 31.12.13 31.12.14 31.12.13
Compensation account 3'257 6'980 10'146
Deferred income taxes recognised as assets 8'968 7'603
Others 7'193 7'505 15'732 12'532
Total 19'418 15'108 22'711 22'678
Habib Bank AG Zurich
64 BANK
7 Value adjustments and provisions and reserves for general banking risks
In CHF 000's Balance at 31.12.13
Use in conformity with designated
purpose ReclassificationsCurrency
differencesPast due interest,
recoveriesNew creations
charged to income Releases to income Balance at 31.12.14Provisions for deferred taxesProvisions for pension fund obligations
Provisions for default risks
Provisions for other business risks 8'368 -1'356 682 5'428 13'122
Provisions for restructuring
Other provisions
Total provisions 8'368 -1'356 682 5'428 13'122
Reserves for general banking risks 458'000 30'000 488'000
Value adjustments for default risks and country risks 49'682 -4'817 5'655 -441 16'277 -11'689 54'667
- of which value adjustments for default risks in respect of impaired loans 47'955 -4'817 5'655 -441 15'404 -11'689 52'067
- of which value adjustments for latent risks 1'727 873 2'600
Habib Bank AG Zurich
65 BANK
In CHF 000's Balance at 31.12.13
Use in conformity with designated
purpose ReclassificationsCurrency
differencesPast due interest,
recoveriesNew creations
charged to income Releases to income Balance at 31.12.14Provisions for deferred taxesProvisions for pension fund obligations
Provisions for default risks
Provisions for other business risks 8'368 -1'356 682 5'428 13'122
Provisions for restructuring
Other provisions
Total provisions 8'368 -1'356 682 5'428 13'122
Reserves for general banking risks 458'000 30'000 488'000
Value adjustments for default risks and country risks 49'682 -4'817 5'655 -441 16'277 -11'689 54'667
- of which value adjustments for default risks in respect of impaired loans 47'955 -4'817 5'655 -441 15'404 -11'689 52'067
- of which value adjustments for latent risks 1'727 873 2'600
Habib Bank AG Zurich
66 BANK
8 Bank's capital
in CHF 000's 31.12.14 31.12.13
Total nominal
value Quantity
Capital eligible for
dividends
Total nominal
value Quantity
Capital eligible for
dividend
Bank's capital / cooperative capital 150'000 1'500'000 150'000 150'000 1'500'000 150'000
- of which paid up
Total Bank's capital 150'000 1'500'000 150'000 150'000 1'500'000 150'000
Authorised capital
- thereof executed capital increases
9 Disclosure of holders of significant participations
in CHF 000’s 31.12.14 31.12.13
At nominal value
At nominal value
Significant shareholders and groups of shareholders with voting agreements
voting shares
Gefan Finanz AG, Zug 150'000 100% 150'000 100%
non-voting shares
Benefical holdings: Gefan Finanz AG is 100% owned by a trust structure, which represents in equal shares the four branches of the Mohamedali Habib Family. No individual has a beneficial interest of 10% or more in the shares of Habib Bank AG, Zurich.
Habib Bank AG Zurich
67 BANK
12 Breakdown of credit commitments
in CHF 000's 31.12.14 31.12.13
Commitments arising from deferred payments
Commitments arising from acceptances 24'176 27'819
Other credit commitments 46'758
Total 70'934 27'819
11 Breakdown of total assets by the credit rating of regions (risk domicile principle)
in CHF 000'sNet foreign exposures
at 31.12.14Net foreign exposures
at 31.12.13
AAA 1'882'418 35.3% 1'780'540 38.1%
AA+ to AA- 94'892 1.8% 57'731 1.2%
A+ to A- 2'612'559 49.0% 2'142'143 45.8%
BBB+ to BBB- 173'957 3.3% 223'467 4.8%
BB+ to B- 391'898 7.3% 328'654 7.0%
CCC 5'079 0.1% 5'079 0.1%
Unrated 173'114 3.2% 141'726 3.0%
Total 5'333'916 100.0% 4'679'340 100.0%
Rating category is based on the sovereign foreign currency long-term rating system from S&P on an immediate borrower basis.
10 Disclosure amounts due from / to related parties
in CHF 000's Amounts due from Amounts due to
31.12.14 31.12.13 31.12.14 31.12.13
Qualified holdings 44'473 32'195
Group companies 30'360 48'220 23'274 41'190
Associates 7
Transactions with members of governing bodies 1'224 750 7'428 10'021
Other related parties
Habib Bank AG Zurich
68 BANK
13 Breakdown of fiduciary transactions
in CHF 000's 31.12.14 31.12.13
Fiduciary investments with third-party companies 89'745 103'963
Fiduciary investments with group companies and affiliated companies 13'969 23'510 Fiduciary loans
Fiduciary transactions from securities lending and borrowing which are carried out by the Bank acting under its own name but on behalf of clients 16'171 12'594
Other fiduciary financial transactions
Total 119'885 140'067
14 Breakdown of the results from trading activities and the fair value option
in CHF 000's 2014 2013
Result from trading activities
Interest rate instruments (incl. funds)
Unrealised forex gains / losses on reserves held in foreign currencies 33'007 -9'364
Foreign exchange 5'103 9'308
Commodities / precious metals 46 -158
Total 38'155 -214
- of which from the fair value option applied to assets
Habib Bank AG Zurich
69 BANK
15 Breakdown of personnel expenses
in CHF 000's 2014 2013
Salaries and additional allowances 53'098 58'525
- of which expenses related to share-based compensation and alternative forms of variable compensation
Social insurance obligations 5'587 5'618
Value adjustments for economic benefits or obligations arising from pension funds
Other personnel expenses 1'224 2'162
Total 59'909 66'305
16 Breakdown of general and administrative expenses
in CHF 000's 2014 2013
Office space expenses 6'456 5'548
Expenses for information technology and telecommunications 4'160 4'180
Expenses for motor vehicles, machinery, furniture and other equipment and operating lease expenses 1'159 1'337
Audit fees 1'300 1'509
- of which for financial and regulatory audits 1'275 1'419
- of which for other services 25 90
Other operating expenses 29'495 30'406
Total 42'570 42'980
Habib Bank AG Zurich
70 BANK
17 Analysis of extraordinary income and expenses
in CHF 000's 2014 2013Extraordinary income
Release of provisions no longer required 42 Profit on sale of fixed assets 203 19 Recoveries and others 2'175 135 Total 2'420 154
Extraordinary expenses
Other 71 42 Total 71 42
18 Presentation of current taxes, deferred taxes and disclosure of the tax rate
in CHF 000's 2014 2013Income taxes 13'620 13'250Deferred tax expenses 1'364 -1'322Taxes 14'985 11'927
Average tax rate 16.4% 52.9%
Habib Bank AG Zurich
71 BANK
Appropriation of profit / coverage of losses / other distributions
The Board of Directors will submit the following proposal to the General Meeting of Shareholder in respect of the distribution of profit.
in CHF 000's 31.12.14 31.12.13Profit / loss (result for the period) 40'563 13'226Profit carried forward / loss carried forward 526 100Distributable profit 41'089 13'326
Appropriation of profit
- Allocation to statutory retained earnings reserves -2'000 0- Allocation to voluntary retained earnings reserves -21'000 -800- Distribution of dividend from distributable profit -18'000 -12'000Profit carried forward 89 526
Habib Bank AG Zurich
72 BANK
Report of the Statutory Auditor
To the General Meeting ofHabib Bank AG ZurichZurich
Report of the Statutory Auditor on the Financial Statements
As statutory auditor, we have audited the accompanying financial statements of Habib Bank AG Zurich, which comprise the balance sheet, income statement, statement of changes in equity and notes (pages 54 to 70 of the annual report) for the year ended 31 December 2014. Board of Directors' ResponsibilityThe Board of Directors is responsible for the preparation of the financial statements in accordance with the provisions govern-ing the preparation of financial statements for banks, the requirements of Swiss law and the company's articles of incorporation. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation of financial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances.
Auditor's ResponsibilityOur responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Swiss law and Swiss Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the entity's preparation of the financial statements 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 system. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting esti-mates made, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
OpinionIn our opinion, the financial statements for the year ended 31 December 2014 give a true and fair view of the financial position, the results of operations and the cash flows in accordance with the provisions governing the preparation of financial statements for banks and comply with Swiss law and the company's articles of incorporation.
Report on Other Legal Requirements
We confirm that we meet the legal requirements on licensing according to the Auditor Oversight Act (AOA) and independence (article 728 CO and article 11 AOA) and that there are no circumstances incompatible with our independence.
In accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system exists, which has been designed for the preparation of financial statements according to the instructions of the Board of Directors.
We further confirm that the proposed appropriation of available earnings complies with Swiss law and the company's articles of incorporation. We recommend that the financial statements submitted to you be approved.
KPMG AG
Ertugrul Tüfekçi Mirko LibertoLicensed Audit Expert Licensed Audit ExpertAuditor in Charge
Zurich, 20 April 2015
73
Habib Bank AG Zurich
Addresses
Head Office and operation
Habib Bank AG ZurichWeinbergstrasse 59, PO Box 2258042 Zurich / Switzerland
Telephone: (+4144) 269 45 00Telefax: (+4144) 269 45 35
Branches
United Kingdom Habib Bank AG ZurichHabib House42 MoorgateLondon EC2R 6JJ / UK
Telephone: (+44207) 452 0200Telefax: (+44207) 628 1787
United Arab Emirates Habib Bank AG ZurichUmm Al SheifShaikh Zayed RoadPO Box 3306Dubai / UAE
Telephone: (+9714) 2214535 / 3735200 / 2607999 Telefax: (+9714) 3384857 / 3384595
Kenya Habib Bank AG ZurichHabib HouseKoinange StreetPO Box 30584 00100Nairobi / Kenya
Telephone: (+254-20) 341172 / 6 / 7 Telefax: (+254-20) 2217004
74
Habib Bank AG Zurich
Subsidiaries
Habib Canadian Bank, Canada Habib Canadian Bank918 Dundas Street EastSuite 1 – BMississauga, Ontario L4Y 4H9 / Canada
Telephone: +1 (905) 276 5300Telefax: +1 (905) 276 5400
HBZ Bank Limited, South Africa HBZ Bank Limited135 Jan Hofmeyr RoadPO Box 1536, WestvilleWandsbeck 3631 / South Africa
Telephone: (+2731) 267 4400Telefax: (+2731) 267 1193
Habib European Bank Ltd., Habib European Bank Ltd.Isle of Man 14 Athol Street
Douglas / Isle of Man IM1 1JATelephone: (+441624) 622 554 / 629 857 Telefax: (+441624) 627 135
HBZ Services FZ LLC, HBZ Services FZ LLCUnited Arab Emirates Dubai Outsource Zone
PO Box 186997Dubai / UAE
Telephone: (+9714) 4456744Telefax: (+9714) 2284211
Habib Metropolitan Bank Ltd., Habib Metropolitan Bank Ltd.Pakistan Spencer's Building
I.I. Chundrigar RoadKarachi / Pakistan
Telephone: (+9221) 111-14-14-14Telefax: (+9221) 3263 0404
HBZ Finance Limited, HBZ Finance LimitedHong Kong 1701-05, 17 / F, Wing On House,
71 Des Voeux Road Central,Hong Kong
Telephone: (+852) 2521 4631Telefax: (+852) 2810 4477
75
Habib Bank AG Zurich
Representative offices
Bangladesh Habib Bank AG ZurichBDBL Bhaban, 1st floor(Bangladesh Development Bank Ltd.)12 Kawran Bazar C / ADhaka 1000 / Bangladesh
Telephone: (+88) 02 811 51 00
Hong Kong Habib Bank AG Zurich1701-05 17 / F, Wing On House,71 Des Voeux Road Central, Hong Kong
Telephone: (+852) 2521 4631Telefax: (+852) 2810 4477
Pakistan Habib Bank AG ZurichHBZ PlazaI.I. Chundrigar Road Karachi / Pakistan
Telephone: (+9221) 3227 4878Telefax: (+9221) 3227 4879