KAUPTHING BANK LUXEMBOURG S.A. | ANNUAL REPORT 2006 · The Bank’s subsidiaries Kaupthing Life and Pension (KLP) and Kaupthing Asset Management Ge-neva have been developing positively

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

TABLE OF CONTENTS

Financial Summary 3

Address by the Chairman of the Board of Directors 5

Management Report 6

Auditor`s Report 10

Balance Sheet 14

Profit and Loss Account 17

Notes to the Annual Accounts 18

Organisation 34



FINANCIAL SUMMARY

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ADDRESS BY THE CHAIRMAN OF THE BOARD OF DIRECTORS

2006 will be remembered as a year of strong growth, increased profitability and improved asset quality. Considerable effort has been invested in risk management, a new compliance func-tion has been established and a new function of operational risk management is well underway.

Kaupthing Bank Luxembourg is essentially a mirror of the Group’s own strategic develop-

ment, having both employees and clients from all the 10 countries in which the Group oper-

ates. This international pool of employees and the diverse client base closely reflects the cos-

mopolitan environment of Luxembourg, where 40% of residents are of other nationalities than

Luxembourgish. The workforce doubles every day as commuters cross borders from Germany,

France and Belgium to work in Luxembourg. It is from this talent pool that the Bank employs 160

people of 18 different nationalities.

A continuously changing business environment requires quick actions and the Bank’s flat organi-

zational structure and its disciplined and fast decision making process is a vital part of the cor-

porate culture of the Bank and makes it competitive and responsive in the international banking

market in Luxembourg.

The Bank achieved a substantial increase in business volumes during the year and employs an

intelligent approach to increase effectiveness in all business areas, with more straight through

processing and streamlined processes that will ultimately reduce the risk of human errors. The

Bank left its old premises in rue Guillaume Schneider and moved to new offices in Kirchberg

during the year, a task that may have seemed like business as usual but was in fact the result of

hard work and detailed planning according to a tight time schedule. The meticulous organization

involved meant that employees were able to leave the old premises on a Friday and arrive at the

new fully operational premises the following Monday. All credit for this impressive achievement

should go to the Bank’s IT department and to the group of dedicated employees who were di-

rectly involved in the project.

Finally I would like to thank all our employees for their continuous effort and remarkable dedica-

tion to the Bank, as well as our valuable clients who I know have shared a successful 2006 with

the Bank.

Sigurður Einarsson

Sigurður Einarsson, Executive Chairman


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MANAGEMENT REPORT 2006

In 2006 Kaupthing Bank Luxembourg consolidated its position as one of the leading Nordic

banks on the Luxembourg market. At the end of the first quarter of 2006 the Bank relocated to

new premises in Kirchberg, situated on Avenue J.-F. Kennedy in the heart of the financial district.

The new offices represent greatly improved working facilities, enabling the employees to take

better advantage of the opportunities presented to the Bank in the future. At the same time the

share capital of the Bank was increased by EUR 100 million to facilitate the fast growth of the

Bank. The Bank is already reaping the benefits of the above with all business units well exceeding

their stated goals for the year.

The diversity of the Bank’s activities has proven to be of utmost importance and will mitigate its

dependence on any single specific business area. The Bank’s core activities are private banking

and wealth management, financial markets activities including treasury and brokerage services

for both internal clients and external institutional counterparts, as well as corporate banking,

including participation as lead manager and arranger of syndicated credits. The Bank has also

built up expertise in the administration of mutual funds and offers insurance products through its

subsidiary Kaupthing Life and Pension.

The Bank reported an impressive 46% increase in the number of transactions in 2006. The balance

sheet expanded by 82% in 2006 to approximately EUR 4.9 billion, while the capital adequacy ratio

stands at 11.36%, well above the minimum capital requirement. Client deposits doubled to

EUR 1.1 billion during 2006 and lending to customers increased by 83% to EUR 3.3 billion. Net

revenues grew by 66% to EUR 120 million, whereas profits amounted to EUR 57 million, correspond-

ing to an increase of 86% from the previous year. Return on equity, adjusted for a capital increase

of EUR 100 million, was 25% and the cost-to-income ratio remained at a low level of 39%.

All divisions of the Bank performed well. The strong results of the Financial Markets division were

driven by increased business flow from institutional clients in 13 different countries in Europe, and

fast growing Private Banking and Proprietary Trading units. The profitability has doubled each

year since 2001 and was evenly driven by Treasury, Capital Markets and Foreign Exchange seg-

ments. Business volumes have reached new record highs in Foreign Exchange for the year 2006

of EUR 60 billion, compared with EUR 45 billion in 2005. Same goes for Capital Markets where

business volumes reached EUR 15 billion compared with EUR 8.8 billion in 2005.

In 2006, the division added nine new professionals to its cosmopolitan team of 23 experts in the

global Financial Markets division. The new team members have enlarged the team’s network and

have added scale to the business targeted for growth. The division is therefore represented in all

the major European centres and centres its bus iness on evolving lifelong partnerships based on

trust and discretion with its clients.

In its quest for quality and efficiency the Financial Markets division invests its time and capital

in numerous projects to support risk management and straight through processing. One of the

Magnús Gudmundsson

Johnie Brøgger

Managing Directors of Kaupthing Bank, Luxembourg

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| MANAGEMENT REPORT 2006 |

milestones last year was becoming a CLS third party member during the last quarter of 2006, pav-

ing the way for additional growth of the Foreign Exchange business.

Assets under management and custody, in the Private Banking department, grew by 25% to

EUR 4 billion. The number of customers increased rapidly and numerous new bespoke products

were created for the client base. The year also saw an increase in the numbers of both new and

existing clients using our wealth management services, including portfolio management, tax and

legal service, family and company legal issues, as well as company structures for equity and real

estate holdings.

Private Banking hired a marketing manager to develop Kaupthing’s brand with a particular focus

on brand communication to clients. Our updated client correspondence and client web access

are both part of this ongoing development and information upgrade. Interactivity has increased

between Private Banking and potential sources of new clients both within Luxembourg and

abroad. The Bank is now seeking to promote its brand in a wider variety of venues than before.

In late 2006 Private Banking expanded the representative office in Spain by appointing an ad-

ditional manager, as the office is proving to be an important growth area. Private Banking now

employs 50 senior account managers, assistant account managers and portfolio managers. This

team has members from all of the Nordic nationalities and the UK, reflecting the Bank’s strategic

emphasis on targeting the markets in which Kaupthing Bank operates.

The Institutional and Corporate Banking division met its targets with the successful expansion

of the Bank’s lending business within asset finance. The division has further strengthened its

competencies in financing wind turbines, vessels and real estate. The division has increased its

transaction flow significantly during the year and has taken an active part in the syndicated loan

market both in the capacity as arranger and co-arranger. This conforms well to the Bank’s phi-

losophy of aiming to add value to our customers in close cooperation with partners across the

financial landscape.

The overall loan book has increased again during the past year, a development primarily at-

tributable to increased lending to our growing base of Private Banking customers. Included in

the range of lending products offered to our Private Banking customers is Kaupthing Mortgage,

which forms part of the Bank’s dedication to meeting the customer’s entire need for premium fi-

nancial solutions. The aggregate credit exposure towards Private Banking customers accounts for

65% of the entire loan book of the Bank. The remainder is lending to corporate customers (10%)

and financial institutions (25%). Well secured loan portfolios in conjunction with ongoing efforts

to maintain and enhance the Bank’s risk management tools, have led to a year without losses on

the loan book. The provision for loan losses stands at 0.14% of total outstanding loans as per 31

December 2006.


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Regarding the Bank’s exposure to risks, we kindly refer you to the notes 6.3 and 6.4 of the annual

accounts as at 3 1 December 2006.

Within the Investment Funds division, the Bank provides fund administration services for a

number of investment funds encompassing both UCITS III and UCI funds. At year-end the Bank’s

Fund Administration administered assets of EUR 400 million. The Bank’s efforts in Fund Distribu-

tion were focused on establishing a platform for the enhanced and diversified distribution of the

Group’s investment funds. Several funds have been streamlined for increased distribution efforts,

and these initial initiatives will be leveraged upon with increased distribution efforts.

The Bank’s subsidiaries Kaupthing Life and Pension (KLP) and Kaupthing Asset Management Ge-

neva have been developing positively during the year. KLP implemented new IT systems which

will enable it to progress to the next level of development and actively introduce and sell its

services throughout the Kaupthing network. Kaupthing Geneva is actively developing its product

offering, which will pave the way for new opportunities with comprehensive financial services on

top of its established Private Banking and Asset Management services.

The year 2006 was marked by substantial growth and profitability in all business areas, supported

by a set of business principles moulded over the years and now firmly embedded in the Bank’s

unique corporate culture. The Bank will continue to emphasise attracting, developing and mo-

tivating exceptional professionals, the Bank’s most valuable asset. This culture is the foundation

of the Bank’s goals which are to provide premium financial services and to build long-term rela-

tionships with our clients by emphasizing our unique service culture, providing solid long-term

investment returns and being competitive in the international markets.

No significant events have occurred during the period from 31 December 2006 to date.

Magnús Gudmundsson Johnie BrøggerManaging Director Managing Director

February 15th, 2007


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To the board of directors of

KAUPTHING BANK LUXEMBOURG S.A.

35a, avenue J.-F. Kennedy

L-1855 Luxembourg

Report on the annual accounts

Following our appointment by the board of directors dated February 24, 2006, we have audited

the accompanying annual accounts of KAUPTHING BANK LUXEMBOURG S.A., which comprise

the balance sheet as at December 31, 2006 and the profit and loss account for the year then

ended, and a summary of significant accounting policies and other explanatory notes.

Board of directors’ responsibility for the annual accounts

The board of directors is responsible for the preparation and fair presentation of these annu-

al accounts in accordance with Luxembourg legal and regulatory requirements relating to the

preparation of the annual accounts. This responsibility includes: designing, implementing and

maintaining internal control relevant to the preparation and fair presentation of annual accounts

that are free from material misstatement, whether due to fraud or error; selecting and applying

appropriate accounting policies; and making accounting estimates that are reasonable in the

circumstances.

Responsibility of the Réviseur d’Entreprises

Our responsibility is to express an opinion on these annual accounts based on our audit. We

conducted our audit in accordance with International Standards on Auditing as adopted by the

Institut des Réviseurs d’Entreprises. Those standards require that we comply with ethical require-

ments and plan and perform the audit to obtain reasonable assurance whether the annual ac-

counts are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclo-

sures in the annual accounts. The procedures selected depend on the judgement of the Réviseur

d’Entreprises, including the assessment of the risks of material misstatement of the annual ac-

counts, whether due to fraud or error. In making those risk assessments, the Réviseur d’Entreprises

considers internal control relevant to the entity’s preparation and fair presentation of the annual

accounts in order to design audit procedures that are appropriate in the circumstances, but not

for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An

audit also includes evaluating the appropriateness of accounting policies used and the reasona-

bleness of accounting estimates made by the board of directors, as well as evaluating the overall

presentation of the annual accounts. We believe that the audit evidence we have obtained is

sufficient and appropriate to provide a basis for our audit opinion.

AUDITOR´S REPORT


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Opinion

In our opinion, the annual accounts give a true and fair view of the financial position of KAUPTHING

BANK LUXEMBOURG S.A. as of December 31, 2006, and of the results of its operations for the

year then ended in accordance with Luxembourg legal and regulatory requirements relating to

the preparation of the annual accounts.

Report on other legal and regulatory requirements

The management report, which is the responsibility of the board of directors, is in accordance

with the annual accounts.

Luxembourg, February 15th, 2007

KPMG Audit S.à r.l.

Réviseurs d’Entreprises

E. Dollé

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BALANCE SHEET AS AT DECEMBER 31, 2006

Notes 2006 2005

Assets (expressed in Euro)

Cash, balances with central banks and post office banks 6.1 448,164 25,824,859

Loans and advances to credit institutions 3.1, 6.1, 6.3

repayable on demand 173,781,096 63,960,831

other loans and advances 1,127,280,250 536,596,421

1,301,061,346 600,557,252

Loans and advances to customers 3.2, 6.1, 6.3 3,279,804,793 1,787,604,479

Debt securities and other fixed-income securities 3.3, 4.2, 6.1, 6.3

issued by public bodies 150,370 4,645

issued by other borrowers 229,591,084 203,121,717

229,741,454 203,126,362

Shares and other variable-yield securities 3.4, 6.1, 6.3 46,346,015 41,520,577

Shares in affiliated undertakings 3.5, 3.8, 6.1, 6.3 7,247,726 7,247,726

Intangible assets 3.6, 3.8 1,133,038 844,119

Tangible assets 3.8 4,839,365 1,016,819

Other assets 1,653,673 1,613,550

Prepayments and accrued income 52,309,867 31,642,678

Total assets 4,924,585,441 2,700,998,421

Off balance sheet items

Contingent liabilities 5.1, 6.1, 6.3 367,014,320 30,792,021

of which: guarantees and assets pledged as collateral security 367,014,320 30,792,021

Commitments 5.2, 6.1, 6.3 - -

Fiduciary Operations 8,453,915 13,693,729

The accompanying notes form part of these annual accounts.

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BALANCE SHEET AS AT DECEMBER 31, 2006

Notes 2006 2005

Liabilities (expressed in Euro)

Amounts owed to credit institutions 4.1, 6.1


with agreed maturity dates or periods of notice 3,334,630,079 1,865,220,641

3,417,433,719 1,884,565,359

Amounts owed to customers other debts 4.2, 6.1


with agreed maturity dates or periods of notice 483,222,535 343,138,752

1,121,829,108 626,401,395

Other liabilities 4.3 895,572 303,934

Accruals and deferred income 41,277,896 17,793,431

Provisions for liabilities and charges

provisions for taxation 21,074,644 11,856,924

other provisions 12,752,296 7,756,763

33,826,940 19,613,687

Subordinated liabilities 4.4, 6.1 - -

Fund for general banking risks - -

Subscribed capital 4.5 200,000,000 100,000,000

Reserves 4.6 5,859,588 2,525,782

Profit brought forward 46,461,027 19,149,218

Profit for the financial year 57,001,591 30,645,615

Total Liabilities 4,924,585,441 2,700,998,421

The accompanying notes form part of these annual accounts.

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PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED DECEMBER 31, 2006

Notes 2006 2005

(expressed in Euro)

Interest receivable and similar income 7 197,900,909 91,463,336 of which: arising from debt securities and other fixed-income securities 6,827,066 5,479,347 Interest payable and similar charges (142,467,773) (65,210,755)

Net interest income 55,433,136 26,252,581

Income from shares and other variable-yield securities 583,261 268,108

Commission receivable 7 59,147,201 38,638,143 Commission payable (15,094,024) (9,299,706)

Net commission income 44,053,177 29,338,437

Net profit on financial operations 7 19,381,131 15,989,771

Other operating income 12,253 563

Total operating income 119,462,958 71,849,460

General administrative expenses Staff costs (30,095,449) (19,603,822) of which : - wages and salaries (25,558,937) (16,273,131) - Social security costs (1,375,283) (956,848) of which: social security costs relating to pensions (822,299) (531,363) Other administrative expenses (16,630,837) (9,466,431) (46,726,286) (29,070,253)

Value adjustments in respect of tangible and intangible assets (2,262,221) (880,081)

Other operating charges (400,000) -

Net value adjustments in respect of loans and advances and Provisions for contingent liabilities and for commitments (394,796) (2,606,569)

Income from the writing back of amounts included in the fund For general banking risks - 250,000

Profit on ordinary activities before tax 69,679,655 39,542,557

Tax on profit on ordinary activities (11,641,272) (8,857,307)

Profit on ordinary activities after tax 58,038,383 30,685,250

Other taxes not shown under the preceding items (1,036,792) (39,635)

Profit for the financial year 57,001,591 30,645,615 The accompanying note forms part of these annual accounts.

| NOTES TO THE ANNUAL ACCOUNTS |


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NOTES TO THE ANNUAL ACCOUNTS AS AT DECEMBER 31, 2006

1 General

Kaupthing Luxembourg S.A. (“the Company”) was incorporated in the Grand-Duchy of Luxem-

bourg on April 2, 1998 as a limited liability company (“Société Anonyme”). The Ministry of Finance

granted the Company a banking licence on December 24, 1999. The Company subsequently

changed its articles of incorporation on January 18, 2000 and its name to KAUPTHING BANK

LUXEMBOURG S.A. (the “Bank”).

The Bank is thus permitted to carry out all banking activities. Its principal activities are private

banking, loans to customers, interbank deposits, fund administration and holding company domi-

ciliation.

The Bank, which is a subsidiary of Kaupthing Bank hf., is included in the consolidated accounts

of that company (“the parent company”). The consolidated accounts may be obtained from the

registered office of the parent company at Borgatúni 19, 105 Reykjavik, Iceland.

On the basis of the criteria set out by the Luxembourg law, the Bank is exempted from establish-

ing consolidated accounts and a consolidated management report.

2 Summary of significant accounting policies

The Bank’s accounting policies are in accordance with regulations in force in the Grand-Duchy of

Luxembourg and, in particular, the modified law of June 17, 1992, relating to the annual accounts

of credit institutions.

2.1 Fixed assets

2.1.1 Intangible assets

Intangible assets are included at purchase price less accumulated amortisation.

Intangible assets consist of software amortised over 4 years on a linear basis. Since January 1,

2006, formation expenses and costs in relation to capital increases are directly expensed when

incurred.

2.1.2 Tangible assets

Tangible assets are included at purchase price less accumulated depreciation. Tangible assets are

depreciated over their expected useful life.

The rates and methods of depreciation are as follows:

Rates Method

Office equipment, fixtures and fittings 25% linear

Company cars 25% linear

Fixtures and fittings costing less than EUR 867 or whose expected useful life does not exceed one

year are charged directly to profit and loss account for the year.

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2.1.3 Shares in affiliated undertakings

Holdings are recorded at purchase price. If the valuation is lower than the purchase price, value

adjustments are booked to account for the unrealised loss.

2.2 Current assets

2.2.1 Debt securities and other fixed-income securities

Holdings are recorded at purchase price. Value adjustments are made for securities in the struc-

tural portfolio for which the valuation is lower than the purchase price. The valuation is the market

value on the balance sheet date or the estimated realisable value or the quotation which best

represents the inherent value of the securities held.

2.2.2 Shares and other variable-yield securities

Holdings are recorded at purchase price. If the valuation is lower than the purchase price, value

adjustments are booked to account for the unrealised loss.

Holdings hedged by derivative financial instruments are maintained at purchase price.

2.2.3 Loans and advances

Loans and advances are disclosed at their nominal value. Accrued interest not received is recorded

under the heading “Prepayments and accrued income” on the asset side of the balance sheet.

2.2.4 Value adjustments in respect of current assets

The policy of the Bank is to establish specific provisions to cover the risk of loss and of the non-

recovery of debtors.

Value adjustments are deducted from the relevant current assets.

2.2.5 Provision for assets at risk

A tax free lump sum provision is accounted for based on the Bank’s assets at risk. These assets

are determined in accordance with the regulatory provisions governing the computation of the

capital adequacy ratio. The lump sum provision is apportioned between the relevant assets at

risk in accordance with the provisions of the Luxembourg Monetary Institute circular letter dated

December 16, 1997. The portion related to the assets at risk is deducted from these assets.

2.3 Fund for general banking risks

Up to December 31, 2004, the Bank had established a fund for general banking risks to cover

the particular risks associated with banking activities. The remaining amount was fully reversed

through the profit and loss account for the year ended December 31, 2005.

2.4 Purchase price of fungible assets

The Bank values fungible assets by the weighted average price method.



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2.5 Valuation of foreign currency balances and transactions

2.5.1 Foreign currency translation

The share capital of the Bank is expressed in Euro (“EUR”) and the accounting records are main-

tained in that currency.

Shares in affiliated undertakings included in fixed assets as well as intangible and tangible assets

are converted at the historic rate. All other assets and liabilities denominated in a currency other

than EUR are converted into EUR at the rate of exchange ruling at the balance sheet date.

Income and charges in foreign currencies are converted into EUR at the rate of exchange ruling

on the date of the transaction.

Foreign currency differences arising from these valuation principles are taken to profit and loss

account.

2.5.2 Valuation of transactions not subject to currency risk

Swap transactions not linked to balance sheet items

The spot result realised in cash terms is offset by the result arising from the revaluation of the

forward leg. The premium/discount is spread prorata temporis.

Over-the-counter closed forward transactions

Future profits that are certain to arise are deducted from future losses that are certain to arise in

the same currency.

A provision is created for any excess losses; any excess profits are deferred.

Over-the-counter closed options

Options sold hedged by options bought so that no open position exists are considered to be

neutral in relation to currency fluctuations.

Financial futures

Margin calls on financial futures traded on a recognised market are booked daily. Gains and losses

on trading positions are directly booked in the profit and loss account.

2.5.3 Valuation of transactions subject to currency risk

Over-the-counter speculative forward transactions

Provision is made for unrealised losses on forward transactions, which do not represent the hedg-

ing of a spot position. Unrealised gains are not accounted for.

3 Detailed disclosures relating to asset headings

3.1 Loans and advances to credit institutions

Loans and advances to affiliated undertakings amount to EUR 950,254,859 (2005: EUR

354,320,986).

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3.2 Loans and advances to customers

Loans and advances to affiliated undertakings amount to EUR 4,178,628 (2005: EUR 6,086,378).

3.3 Debt securities and other fixed-income securities

This heading includes debt securities, whether quoted on a recognised market or not, issued by

public bodies, credit institutions or other issuers and which are not included under another bal-

ance sheet heading.

Quoted and non-quoted securities are analysed as follows:

2006 2005 EUR EUR

Securities quoted on a recognised market 209,658,198 188,758,628

Securities not quoted on a recognised market 20,083,256 14,367,734

229,741,454 203,126,362

All the debt securities and other fixed-income securities held are included in the structural portfolio.

3.4 Shares and other variable-yield securities

This heading includes shares, holdings in investment funds and other variable-yield securities

whether quoted on a recognised market or not which are not included in fixed asset investments.

Quoted and non-quoted shares and other variable-yield securities are analysed as follows:

2006 2005 EUR EUR

Securities quoted on a recognised market (*) 45,480,079 41,277,618

Securities not quoted on a recognised market 865,936 242,959

46,346,015 41,520,577

(*) of which shares and other variable-yield securities held for hedging purposes:

EUR 23,198,502 (2005: EUR 14,459,638).

3.5 Shares in affiliated undertakings

As at December 31, 2006, the Bank holds at least 20% of the capital of the following

non-quoted undertakings :

% held Capital and reserves Result for the December 31, 2006 (*) year 2006 (*) EUR EUR

Kaupthing Life & Pension S.A. 100% 6,489,050 49,669

12, rue Guillaume Schneider

L-2522 Luxembourg

Kaupthing Asset Management S.A. 100% (94,673) (348,303)

1, rue de Rive

CH-1204 Genève (*) Unaudited figures.



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3.6 Intangible assets

This heading consists of:

2006 2005

EUR EUR

Formation expenses - 145,968

Software 1,133,038 698,151

1,133,038 844,119

Formation expenses consist of costs in relation to capital increases. They have been fully amor-

tized in 2006.

3.7 Assets denominated in foreign currencies

Assets denominated in currencies other than EUR have a total value of EUR 2,712,998,947 as at

December 31, 2006 (2005: EUR 1,572,873,320). The gap between non EUR denominated assets

and non EUR denominated liabilities is covered by off-balance sheet instruments.

3.8 Movements on fixed assets

FIXED ASSETS Gross value Additions Reductions Gross value Cumulative Net book (in EUR) at the at the value value beginning of end of adjustments at the the financial the financial balance year year sheet date

1. Shares in affiliated undertakings 7,247,726 - - 7,247,726 - 7,247,726

2. Intangible assets 2,617,352 796,929 - 3,414,281 (2,281,243) 1,133,038

of which:

a) Formation expenses 291,440 - - 291,440 (291,440) -

b) Software 2,325,912 796,929 - 3,122,841 (1,989,803) 1,133,038

3. Tangible assets 3,593,260 5,594,939 (67,250) 9,120,949 (4,281,584) 4,839,365

of which:

a) Office equipment fixtures

and fittings 3,096,491 5,081,730 - 8,178,221 (3,951,403) 4,226,818

b) Company cars 496,769 513,209 (67,250) 942,728 (330,181) 612,547

TOTAL 13,458,338 6,391,868 (67,250) 19,782,956 (6,562,827) 13,220,129

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4 Detailed disclosures relating to liability headings

4.1 Amounts owed to credit institutions

Amounts owed to affiliated undertakings amount to EUR 2,356,648,664 (2005: EUR 1,091,571,060).

4.2 Amounts owed to customers

Amounts owed to affiliated undertakings amount to EUR 3,417,765 (2005: EUR 6,386,158).

4.3 Other liabilities

This heading consists of the following:

2006 2005

EUR EUR

Short-term payables 443,645 -

Preferential creditors 451,927 303,934

895,572 303,934

4.4 Subscribed capital

On March 29, 2006, an Extraordinary General Meeting of the Shareholders resolved to increase

the subscribed capital of the Bank by an amount of EUR 100,000,000 by the issue of 1,000,000

new additional shares each with a nominal value of EUR 100. The capital increase has been fully

subscribed and paid by a contribution in cash by the parent company.

As at December 31, 2006, the subscribed and fully paid share capital of the Bank is

EUR 200,000,000 made up of 2,000,000 shares with a nominal value of EUR 100 each.

4.5 Reserves

Reserves are summarised as follows:

2006 2005

EUR EUR

Legal reserve 2,616,057 1,083,776

Net worth tax reserve 3,243,531 1,442,006

5,859,588 2,525,782

In accordance with article 72 of the Luxembourg company law, an amount of 5% of net profits

should be allocated to a non distributable legal reserve, until this reserve reaches 10% of the

subscribed capital. As a result, the 2007 Annual General Meeting of the Bank should allocate an

amount of EUR 2,850,080 to the legal reserve, in respect of the 2006 financial year.

In 2006 and in accordance with paragraph 8a of the net worth tax law, the Bank has deducted from

its tax basis for net worth tax, the net worth tax incurred during the financial year, amounting to

EUR 797,570. Such a deduction is subject to allocating an amount equal to five times the net worth

tax deducted, amounting to a total of EUR 3,987,850, to a reserve, by a resolution of the 2007 An-

nual General Meeting of Shareholders.



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4.6 Liabilities denominated in foreign currencies

Liabilities denominated in currencies other than EUR have a total value of EUR 2,121,912,163 as

at December 31, 2006 (2005: EUR 1,294,955,564). The gap between non EUR denominated assets

and non EUR denominated liabilities is covered by off-balance sheet instruments.

5 Information relating to off-balance sheet items

5.1 Contingent liabilities

Contingent liabilities consist of guarantees and other direct substitutes for loans.

Contingent liabilities to affiliated undertakings amount to EUR 279,428,023 (2005: nil).

5.2 Commitments

The Bank is member of the “Association pour la Garantie des Dépôts, Luxembourg” (“A.G.D.L.”).

The A.G.D.L. has for its exclusive object the establishment of a system of mutual guarantee of

deposits placed with members by private individuals and by small companies without distinction

of nationality or residence. No provision has been made in respect of specific liabilities arising

under this scheme.

5.3 Open forward agreements at the balance sheet date

5.3.1 Transactions linked to exchange rates

The Bank is engaged in forward foreign exchange transactions (swaps, outrights) in the normal

course of its banking business. A significant portion of these transactions has been contracted to

hedge the effects of fluctuations in exchange rates.

5.3.2 Transactions linked to interest rates

A significant portion of these transactions has been contracted to hedge the effects of fluctuations

in interest rates.

5.3.3 Transactions linked to other market rates

A significant portion of these transactions has been contracted to hedge the effects of fluctuations

in market prices.

5.4 Management and representative services supplied by the Bank

The Bank’s services to third parties consist of:

• Management and advice on asset management;

• Safekeeping and administration of marketable securities;

• Fund administration;

• Holding company domiciliation;

• Credit activities.

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6 Information relating to financial instruments

6.1 Disclosures relating to primary financial instruments in relation to non trading activities

The following tables provide an analysis of the carrying amount of primary financial assets and

financial liabilities of the Bank into relevant maturity groupings based on the remaining periods

to repayment.

As at December 31, 2006, primary financial assets and liabilities are analysed as follows (in EUR):

Financial assets Less than Between three Between one More than Total three months months and year and five years one year five years

Cash, balances with central banks

and post office banks 448,164 - - - 448,164

Loans and advances to credit

institutions 1,230,812,522 50,162,369 20,086,455 - 1,301,061,346

Loans and advances to customers 2,864,455,220 247,718,945 61,457,614 106,173,014 3,279,804,793

Debt securities and other

fixed-income securities 4,413,394 55,509,723 93,751,161 76,067,176 229,741,454

Shares and other variable-yield

securities (*) - - 46,346,015 - 46,346,015

Total 4,100,129,300 353,391,037 221,641,245 182,240,190 4,857,401,772

(*) of which EUR 23,198,502 are held for hedging purposes.

Financial liabilities Less than Between three Between one More than Total three months months and year and five years one year five years

Amounts owed to credit

institutions 2,911,817,922 93,147,459 389,809,400 22,658,938 3,417,433,719

Amounts owed to customers 1,066,650,124 55,178,984 - - 1,121,829,108

Contingent liabilities 367,014,320 - - - 367,014,320

Total 4,345,482,366 148,326,443 389,809,400 22,658,938 4,906,277,147


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6.1 Disclosures relating to primary financial instruments in relation to non trading activities (continued)

As at December 31, 2005, primary financial assets and liabilities are analysed as follows (in EUR):

Financial assets Less than Between three Between one More than Total three months months and year and five years one year five years

Cash, balances with central banks

and post office banks 25,824,859 - - - 25,824,859

Loans and advances to credit

institutions 506,985,029 73,500,863 20,071,360 - 600,557,252

Loans and advances to customers 1,688,878,850 59,381,111 4,791,588 34,552,930 1,787,604,479

Debt securities and other

fixed-income securities - 17,193,721 148,572,281 37,360,360 203,126,362

Shares and other variable-yield

securities (*) - - 41,520,577 - 41,520,577

Total 2,221,688,738 150,075,695 214,955,806 71,913,290 2,658,633,529

(*) of which EUR 14,459,638 are held for hedging purposes.

Financial liabilities Less than Between three More than Total three months months and five years one year

Amounts owed to credit

institutions 1,542,548,163 69,011,743 273,005,453 1,884,565,359

Amounts owed to customers 606,092,552 20,308,843 - 626,401,395

Contingent liabilities 30,792,021 - - 30,792,021

Total 2,179,432,736 89,320,586 273,005,453 2,541,758,775

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6.2 Disclosures relating to derivative financial instruments

The following tables provide an analysis of the derivative financial assets and liabilities of the Bank

into relevant maturity groupings based on the remaining periods to repayment.

As at December 31, 2006, over the counter derivative financial assets and liabilities are analysed

as follows (in EUR):

Financial assets Less than Between three Between one Total Positive(notional amounts) three months months and year and fair value one year five years

Instruments linked to exchange rates

- forward currency transactions 89,989,621 33,427,194 - 123,416,815 18,620,032

- currency swap contracts 620,687,935 214,075,817 - 834,763,752 4,099,927

- currency option contracts 474,698 - - 474,698 2,394

Instruments linked to interest rates 49,979,938 87,057,835 35,424,515 172,462,288 5,246,103

Instruments linked to other

market rates 935,102,679 9,748,343 - 944,851,022 171,310

1,696,234,871 344,309,189 35,424,515 2,075,968,575 28,139,766

Financial liabilities Less than Between three Between one Total Negative(notional amounts) three months months and year and fair value one year five years


- forward currency transactions 104,129,357 32,336,241 - 136,465,598 18,438,452

- currency swap contracts 573,550,369 172,199,080 - 745,749,449 8,765,941

- currency option contracts 474,698 - - 474,698 2,394

Instruments linked to interest rates 89,022,491 107,526,413 28,608,505 225,157,409 5,252,245

767,176,915 312,061,734 28,608,505 1,107,847,154 32,459,032

As at December 31, 2006, the net fair value of derivative financial assets and liabilities is a loss of EUR

4,319,266 (2005: gain of EUR 150,645).


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6.2 Disclosures relating to derivative financial instruments (continued)

As at December 31, 2005, over the counter derivative financial assets and liabilities are analysed

as follows (in EUR):

Financial assets Less than Between Between More than Total Positive(notional amounts) three three one year five years fair value months months and and five one year years


- forward currency transactions 212,373,471 19,917,873 - - 232,291,344 21,469,394

- currency swap contracts 508,961,205 61,683,980 - - 570,645,185 2,394,754

- currency option contracts 30,705,069 - - - 30,705,069 111,145

Instruments linked to interest rates - 13,315,579 20,103,927 12,186,341 45,605,847 372,371

Instruments linked to other

market rates 431,584,948 64,965,234 - 3,372,681 499,922,863 119,638

1,183,624,693 159,882,666 20,103,927 15,559,022 1,379,170,308 24,467,302

Financial liabilities Less than Between Between More than Total Negative(notional amounts) three three one year five years fair value months months and and five

one year years


- forward currency transactions 246,392,028 21,590,693 - - 267,982,721 21,585,285

- currency swap contracts 275,623,248 29,668,036 - - 305,291,284 2,345,871

- currency option contracts 30,705,069 - - - 30,705,069 111,145

Instruments linked to interest rates - 13,315,579 17,000,000 1,686,341 32,001,920 274,356

552,720,345 64,574,308 17,000,000 1,686,341 635,980,994 24,316,657

6.3 Disclosures relating to credit risk

The Bank is exposed to credit risk mainly through its lending, investing and hedging activities and

in cases where the Bank acts as an intermediary on behalf of customers and issues guarantees.

The Bank’s primary exposure to credit risk arises from its loans and advances and debt securities.

The credit exposure in this regard is represented by the carrying amounts of the assets in the bal-

ance sheet.

The Bank is also exposed to off balance sheet credit risk through guarantees issued and instru-

ments linked to exchange, interest and other market rates (forward transactions, swap and option

contracts). The credit exposure in respect of instruments linked to exchange, interest and other

market rates are equal to the equivalent at risk according to the initial risk approach.


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6.3 Disclosures relating to credit risk (continued)

The credit risk exposure as at December 31, 2006 can be analysed as follows (in EUR):

Gross risk exposure

Loans and advances to credit institutions 1,301,061,346

Loans and advances to customers 3,279,804,793

Secured 3,085,340,582

Unsecured 194,464,211

Debt securities and other fixed-income securities 229,741,454

Shares and other variable-yield securities 46,346,015

Contingent liabilities 367,014,320

Secured 361,442,810

Unsecured 5,571,510

Derivatives

Instruments linked to exchange rates 36,754,135

Instruments linked to interest rates 1,988,098

Instruments linked to other market rates 56,691,062

5,319,401,223

The credit risk exposure as at December 31, 2005 can be analysed as follows (in EUR):

Gross risk exposure

Loans and advances to credit institutions 600,557,252

Loans and advances to customers 1,787,604,479

Secured 1,647,817,020

Unsecured 139,787,459

Debt securities and other fixed-income securities 203,126,362

Shares and other variable-yield securities 41,520,577

Contingent liabilities 30,792,021

Secured 29,018,229

Unsecured 1,773,792

Derivatives

Instruments linked to exchange rates 27,703,878

Instruments linked to interest rates 388,039

Instruments linked to other market rates 14,039,646

2,705,732,254

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6.3 Disclosures relating to credit risk (continued)

Loans and advances to customers are usually secured by cash, listed investments and third party

guarantees.

At December 31, 2006, guarantees received from affiliated undertakings amount to

EUR 494,000,000 (2005: EUR 297,664,627) to secure loans and advances to customers.

Credit risk concentrations on total on and off balance sheet are analysed as follows:

2006 2005

EUR EUR

Corporates 2,732,456,654 1,478,938,077

Credit institutions 1,951,639,066 899,008,938

Individuals 635,155,104 326,824,723

Public sector 150,399 960,516

5,319,401,223 2,705,732,254

Credit institutions, corporates and individuals are mainly from Zone A countries.

6.4 Information on the management of other risks

Liquidity Risk

A cash management system enables the Bank to achieve a daily automatic “vostro-nostro” recon-

ciliation of its main correspondent accounts.

The Bank is able to identify possible cash flow errors, to determine adjusted opening balances

and generate an accurate cash flow projection to better channel short-term liquidity needs.

The Managing Directors receive a daily report on the overall liquidity situation of the Bank.

Interest Rate Risk

The Bank monitors its interest rate risk by analysing the different maturity gaps in the balance

sheet.

The calculation is performed using periods from one day to twelve months. The model enables

the Bank to supervise the non-synchronized interest rate positions, the impact of gaps on the

net interest income, the re-evaluation of the gap compared to the actual interest rate curve, and

finally the consequences on the risk limits. A value at risk calculation estimates the profit and loss

impact if interest rates go up or down by 1%.

Guidelines have been approved by the Board of Directors, setting out the principles for measure-

ment of/and limitations on mismatches identified.


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6.4 Information on the management of other risks (continued)

Exchange Rate Risk

The Bank’s main exposure to foreign exchange risk arises from USD, ISK, ISV, CHF, DKK, GBP and

JPY.

A foreign exchange position system provides an overall view of the currency risk and related profit

or loss impact as soon as the dealer has closed a deal with either a private client or a financial

institution.

Management controls the exchange rate risk through the daily liquidity report received from the

Financial Markets department.

Market Risk

The Bank is subject to market risk through its portfolio of debt securities and shares and other

variable yield securities. Derivative instruments are used for hedging purposes.

Back to back transactions initiated by customers of the Bank do not expose the Bank to market

risk.

The Bank has put in place procedures in order to monitor market risk. Guidelines are reviewed and

approved by the Board of Directors on a yearly basis.

7 Information on the profit and loss account

Interest receivable and similar income, commission receivable and net profit on financial opera-

tions mainly originate from Central and Western Europe.

8 Other information

8.1 Personnel

The average number of persons employed during the financial year was as follows:

2006 2005

Management 2 2

Other executives 7 7

Employees 126 82

135 91

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8.2 Administrative, managerial and supervisory bodies

Remuneration paid to the various bodies of the Bank during the financial year was as follows:

2006 2005

EUR EUR

Administrative board 111,000 80,370

Managerial board 4,846,102 3,806,307

4,957,102 3,886,677

The amount of loans and advances granted to members of the Board of Directors and commit-

ment entered into on their behalf by way of guarantees of any kind amounted to EUR 7,576,948 at

December 31, 2006 (2005: EUR 4,368,837).

8.3 Fees billed by KPMG Audit S.à r.l., Luxembourg and other member firms

Fees billed (excluding VAT) to the Bank by KPMG Audit S.à r. l., Luxembourg and other member

firms of the KPMG network during the year are as follows:

2006 2005

EUR EUR

Audit fees 250,709 254,300

Audit-related fees 15,400 15,970

Tax fees 128,468 65,893

All other fees 28,343 45,461

422,920 381,624

Such fees are presented under other administrative expenses in the profit and loss account.


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ORGANISATION

Board of Directors

Sigurður Einarsson, Chairman of the Board

Managing Directors

Johnie W. Brøgger Magnús Gudmundsson

Internal Audit

Jean-Louis Frey

Compliance

Xavier Leydier

IT

Olafur HilmarssonGeneral Manager

Operation

Anne RasselGeneral Manager

Private Banking

Björn JonssonDeputy Managing Director

Financial Markets

Alexandre SimonDirector

Corporate Banking

Peter RaunGeneral Manager

Investment Funds

Bo MatthiesenGeneral Manager

Legal

Eggert HilmarssonGeneral Manager

Meinbach Consulting & Design 2007

Kaupthing Bank Luxembourg S.A. 35a, avenue J.-F. Kennedy

L-1855 LuxembourgTel +352 46 31 31 Fax +352 46 31 [email protected]

Documents

KAUPTHING BANK LUXEMBOURG S.A. | ANNUAL REPORT 2006 · The Bank’s subsidiaries Kaupthing Life and Pension (KLP) and Kaupthing Asset Management Ge-neva have been developing positively