Annual report 2013 Aegon Bank N.V.
Aegon Bank N.V. Aegonplein 50 2591 TV The Hague
Annual report 2013 Aegon Bank N.V.
Contents Annual report 2013
5
Report of the Executive Board
6
Report of the Supervisory Board
20
Consolidated financial statements 2013 of Aegon Bank N.V.
22
Consolidated statement of financial position
23
Consolidated income statement
24
Consolidated statement of comprehensive income
25
Consolidated statement of changes in equity
26
Consolidated cash flow statement
27
Notes to the consolidated financial statements
29
Other information
98
Independent auditor’s report
98
Financial statements 2013 of Aegon Bank N.V.
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Statement of financial position
102
Income statement
103
Notes to the financial statements
104
Other information
116
Independent auditor’s report
117
Appendix Pillar 3
119
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Annual report 2013
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Report of the Executive Board Activities Aegon Bank N.V. is a public limited liability company organized and existing under the laws of the Netherlands. Aegon Bank N.V. is a wholly-owned subsidiary of Aegon Nederland N.V. (‘Aegon Nederland’), established in The Hague. Aegon Bank N.V. specializes in developing, selling and maintaining payment, savings and investment products.
Vision, ambition and core values As an Aegon Nederland group company, Aegon Bank N.V. occupies a well-defined position in terms of Aegon Nederland’s vision. Aegon Bank N.V. feels – entirely in line with Aegon Nederland’s vision – responsible for raising and developing people’s financial awareness and provides comprehensible solutions in a genuine dialogue to enable customers to make deliberate choices for their financial future. Our ultimate goal is to see our customers recommend our products and services to others. Aegon Bank N.V. does this by providing banking solutions which give customers added value. Our actions reflect Aegon’s core values: Cooperation: We treat our customers, staff and colleagues fairly. We communicate with our customers and each other with appreciation and respect. We treat our stakeholders in the way we would wish to be treated ourselves, allowing for individual and cultural differences. Exceeding expectations: We focus on our customers and have their interests at heart. We visualize the situations in which customers may find themselves. We offer products and services designed to improve the future and financial security of our stakeholders. We build long-term relationships by honoring our commitments. We want to exceed expectations of our customers Clarity: We do not embellish the facts. We provide clear, accurate and timely information about our products, performance and financial results. It is our policy to make financial matters simpler and easier to understand. Aegon Bank N.V. operates as a company that takes responsibility in an ever-evolving business environment. We seek to build long-term relationships with our customers, business partners and regulators, based on clear, honest and transparent business principles. We wish to be an employer of choice by creating a work environment where people can reach their full potential and individuality and diversity are respected. We have a long-term commitment to the communities in which we operate, ensuring continuity and contributing to sustainable economic growth.
Aegon Bank N.V.’s positioning Aegon Bank N.V. is achieving its vision and ambition through two business units: Aegon Bank and Knab. Aegon Bank focuses on the ‘income’ and ‘living’ market. A main focus of Aegon Bank is reinforcing the Aegon Nederland-wide pensions offerings. Customers are increasingly having to make provision for their current and future income and wealth since the government is changing the rules for pension provisions.
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We want to assist customers to achieve their ambitions, great and small, for tomorrow and the day after. We offer our customers clear, simple and high quality products. These products include both savings products, focused on security and investment products, focused on returns. Our processes are designed in the best possible way to benefit our customers. We always want to be doing better for the customer. Our concept of customer service addresses speed, accuracy, convenience and simplicity, and opportunities for customers to decide and arrange as much as possible themselves: - We provide customers with online information, a range of calculation tools and where possible self-service - Customers decide for themselves how and when to contact us, by telephone, email, chat or letter - We process customer requests as quickly as possible and without making mistakes - We use plain language in communications - Customers know what they can expect from us and the next steps in the process Aegon Bank focuses on customers whose income and wealth is in the middle-segment, in line with Aegon Nederland’s target group. We distribute our products direct to our customers. For more complex ‘advice’ products intermediaries and financial advisers continue to be a very important distribution channel to Aegon Bank N.V. Knab, an innovative new online banking initiative, was introduced late 2012 by Aegon Bank N.V. Knab is a bank for people who want to manage their money in an innovative way. Built together with customers, with the conviction that banking can be more personal and smarter and taking the customer’s financial situation as the starting point. Knab uses unique financial planning tools that help customers make the best decisions on their personal financial situation. Knab is an online bank that promises to be completely transparent about all its services and fees. Knab customers want to have insight into their personal financial situation and have better control over their money. They want their bank to help them organize their affairs in a smarter way. And to take active steps to alert them to opportunities that are relevant to their personal situation.
Aegon Bank N.V.’s strategy and objectives Aegon Bank N.V’s ultimate goal is to see our customers recommend our products and services to others and to achieve this we work with a strategy that rests on four pillars: - loyal customers - an effective business - proud employees - profitable growth Aegon Bank N.V. again defined objectives for the four pillars for 2013. To achieve these objectives, it is important that we continuously monitor the developments taking place around us. These developments are predominantly positive for Aegon Bank N.V. and the main ones in 2013 were: - Consumers prefer to use (tax driven) banking products to build up their wealth. The banking market keeps growing. The trend for life insurance products to be converted into tax driven banking solutions started in 2011, continued in 2012 and 2013 and is expected to continue the years after 2013. - In 2013 internet and mobile applications proved to be an important distribution and service channel for simple financial products that require no or only straightforward advice. Changing customer behavior, technical developments, and the transition from commission-based sales of financial products to a fee-based approach as of 1 January 2013 is expected to further accelerate the use of direct distribution channels. - Intermediaries and financial advisers continue to be a very important channel to Aegon Bank N.V. for the distribution of more complex ‘advice’ products. - Banking products are becoming simpler and more transparent. Financial service providers must differentiate themselves in other ways. - The government is changing the rules so that customers are increasingly having to make provision for their current and future income and wealth. Page 7 of 141
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Loyal customers objectives Aegon Bank N.V. wants to create fans. We do all we can to put customers’ interests first, guided by real contact with our customers, and we try to exceed their expectations. We aim to continually improve our service to customers. To achieve this Aegon Bank N.V. is focusing on: - Continuing to work with a customer orientation - Building long-term relationships with our customers Effective business objectives With the effective business objectives, Aegon Bank N.V. is aiming for operational excellence by: - Reducing complexity in products, processes and systems - Flawless execution - Innovation in customer contacts Proud employees objectives We want proud employees. Our aim is that our employees will recommend Aegon Bank N.V. as an employer. We invest in developing our employees so that they are able to offer our customers excellent service, can avoid complaints and think proactively about opportunities in the market for Aegon Bank N.V. that add value for our customers. Profitable growth objectives Aegon Bank N.V. is working towards being a sustainable, profitable business and to achieve this is focusing on: - Strengthening cooperation with distribution partners. We want to keep intermediaries as key distribution partners for bank-saving products, among others by working with them as they move towards a commission-free era. Intermediaries are a very important channel for the distribution of more complex ‘advice’ products, such as bank-saving products and investment products. We also want to develop alliances with various business partners to jointly sell banking products to their customers - Reinforcing Aegon’s direct business so that customers can directly purchase banking products that do not require advice or for which they have already received advice from a financial adviser - Growing through innovation - Using our capital efficiently
Course of events during the financial year Implementation of the strategy The main results of our strategy were: Loyal customers: - In 2012, Aegon Bank started replacing its two core banking systems with a state of the art software package that fully supports online services. Aegon Bank successfully implemented the new package during the first half of 2013. The new banking system was structured in line with the four elements of the customer service concept - speed, accuracy, customer decisionmaking, and convenience and simplicity. Aegon Bank shaped its organization so that the employees can put these elements into practice in the best possible way for our customers. - Aegon Bank meets the quality standards of the Customer-Focused Insurance Quality Label in its service. Aegon Bank applied higher standards for dealing with customer requests with the ambition of working towards handling all customers’ requests within 24 hours. This is already happening for a large proportion of customer requests. However, due to the implementation of the new banking system, our 24 hours service level decreased during a few months in 2013. The migration led to many customer questions. - Aegon Nederland started with the implementation of a new customer relation management tool for all its businesses. The goal is to further improve customer contact among others by focusing on our customers’ life events. In the second half of 2013, Aegon Bank started using this new tool for part of its customer contact. In 2014 the tool will be used for all customer contact. Page 8 of 141
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In 2013 we initiated more service oriented customer contact. For example by sending our customers electronic newsletters with financial tips and information and organizing webinars on a specific subject such as new pension legislation, investing and mortgage repayment. Customers appreciated these initiatives. Knab’s customers embraced our service concept based on the customer feedback. We use the feedback that we request from our customers to continuously improve our service.
Effective business: - In 2012, Aegon Bank started replacing its two current banking systems with a new package. Due to this new system, we are able to handle a large part of our customer requests with straight through processing. And we also offer our customers more online self-service tools. Since the second half of 2013, we have focused on continuous improvements throughout the organization. - In 2013 we improved the quality of our financial risk reporting. Proud employees - Our aim is that our employees recommend Aegon Bank N.V. In a global employee survey Aegon asks its employees worldwide to provide feedback on several topics. For Aegon Bank N.V. the survey shows that more than 75% of its employees is proud to work for Aegon Bank N.V. and recommend Aegon Bank N.V. as an employer. This is an increase compared to the previous survey. Employees understand and support Aegon Bank’s strategy and feel enabled to effectively contribute to the Bank’s operations and results. Employees particularly indicate that the organization should further improve the cooperation between the different parts of the organization. Profitable growth: - In 2013 Aegon Bank was again able to increase sales of bank-savings products. The intermediary channel made a significant contribution to this and, in addition, Aegon Bank retained Aegon customers whose capital sums were maturing by proactively offering them an Aegon Bank savings product. - The cooperation with strong business partners (Menzis and Eneco) led to more business propositions. - Aegon Bank introduced an online application process for an immediate annuity savings account. Customers are able to take out this product themselves if they do not need advice or of if they have already received advice from a financial adviser. - In its first full year Knab has been able to deliver good quality: banking services function properly, customer satisfaction is high and the Dutch Consumer association ranked Knab second in a study into the quality of customer services from Dutch banks1. New services were offered to its customers and at the end of 2013 a new media campaign was launched. Knab is well positioned for full commercial development in 2014. - In October 2013, Aegon Bank N.V. acquired a new asset class on its balance sheet by investing in a consumer loan portfolio. This transaction has a positive impact on Aegon Bank N.V’s risk return profile. The Customer-Focused Insurance Quality Label Aegon Nederland was awarded the Customer-Focused Insurance Quality Label in mid-2011. The aim of the quality label is to promote the trust of consumers in the insurance sector. It is issued by the Stichting toetsing verzekeraars, an independent foundation which monitors self-regulation among insurance companies. In order to obtain the Customer-Focused Insurance Quality Label, the Aegon Nederland insurance company must meet the required quality standards. These can be summarized in five themes: information, service, accessibility, satisfaction and quality. Aegon Bank has also committed to the standards. Aegon has made promises to its customers with regard to the five themes and these can be found on the Aegon website (http://www.aegon.nl/ 1
http://www.consumentenbond.nl/test/geld-verzekering/betalen-ensparen/betaalrekeningen/nieuws/2013/kwart-antwoorden-klantenservice-banken-fout/
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particulier/klantgericht-verzekeren). Aegon Bank applies higher standards for dealing with customer requests with the ambition of working towards handling all customers’ requests within 24 hours. This is already happening for a large proportion of customer requests. State-of-the-art savings product policy In developing and improving its savings products, Aegon Bank N.V. assigns priority to the interests of its customers. We set great store on proactively supplying information to our customers on matters such as interest rate changes and presenting our product range clearly and transparently on the internet. Putting the interests of customers first is also one of the main themes of the regulatory framework operated by the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten - AFM). The AFM has defined a number of principles: Avoid any foreseeable disappointment for savers; Communicate clearly and avoid misleading statements; Provide transparent and accessible products and services; Establish the savings policy and make sure that you can explain it to the customer. The AFM again reviewed Aegon Bank’s savings policy against these principles in 2013. We scored 4.8 on a five-point scale, which is an improvement compared to the score of 1.1 on 2012. The average score of all Dutch banks is 4.0. The implementation of the new banking system and the product rationalization that we successfully completed in 2013 have contributed to this high figure. Product development Aegon Bank N.V. Aegon Bank focused strongly on simplifying the product range in 2011. This continued in 2012 with the result that since early 2013 Aegon Bank has been offering its customers a clear and simple range of products. In the transition to a clear and simple product range Aegon Bank focused strongly on customer communication to ensure that customers were kept informed and that the impact on them was minimal. Knab offers customers payment, savings and investment products. It also offers customers information using a financial dashboard and digital cash book. Knab uses financial alerts to help customers save money and increases knowledge among others through online seminars. Finally, Knab’s customers can draw up their own financial plans that give them information on their income and capital now and in the future in different scenarios. In 2013 Knab completed its product offering with a credit card and with an investment product that offers the opportunity to invest periodically or a one-time deposit in AEX stocks, mutual funds and trackers. Aegon Bank Bemiddeling B.V. In 2013 Aegon Bank N.V. sold the shares in Aegon Bank Bemiddeling B.V. to Aegon Nederland at book value. Aegon Bank Bemiddeling B.V. maintains the portfolio that originated by selling mainly Aegon mortgages and life insurance products directly to customers. To service these customers in the best possible way we transferred the shares in Aegon Bank Bemiddeling B.V. to Aegon Nederland. Aegon Nederland will further maintain the portfolio. Basel III In 2013 Aegon Bank N.V. reported Basel III ratios to the Dutch Central Bank (De Nederlandsche Bank N.V. - DNB), namely the BIS-ratio based on the adjusted capital definition, the leverage ratio, the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). Basel III will be introduced in stages between 2015 and 2019. Minimum requirements will then apply to each ratio. The reported ratios show that Aegon Bank N.V. already complies with the proposed legislation and easily can meet the targets for solvency, leverage ratio, LCR and NSFR when the legislation becomes effective. Aligned with Aegon Bank N.V.’s strategy, the liquidity ratio was maintained at prudent levels and the solvency ratio ended the year slightly higher than in 2012. The solvency ratio is above our long term target and our stress tests show that we continue to have a stable and solvent financial position with substantial buffers to absorb any shock in the financial and other markets. As part of its proposition, Knab offers its customers the opportunity to contribute to the success of the company in the form of a subordinated bond, issued by Aegon Bank N.V. The subordinated bond qualifies as an Additional Tier 1 asset under the Basel III rules, thereby supporting Aegon Bank N.V’s solvency. Page 10 of 141
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Turbulent financial markets In 2013 the developments on the capital markets were mainly driven by the accommodative monetary policy of central banks in all major currencies. Expectations with respect to macroeconomic growth and inflation remained contained. After a promising start of the year, political issues in Spain and Italy dented the risk appetite in financial markets. The demand for safe havens which followed suit led to a drop in interest rates for core countries and to a lesser extent for the swap rates. The announcement from the Fed in May that they might start reducing the pace of monthly bond purchases took the market by surprise: long term interest rates increased significantly even though short term rates were anchored at low levels. In Europe, the ECB lowered their policy rate in two steps to 0.25%, while indicating that they would keep the policy rate at these or lower levels for an extensive period of time. Despite these policy actions and accompanying forward guidance, interest rates ended the year slightly higher than last year. There are some indications that the economic growth is gaining traction, but inflation has dropped to 0.8% and is well below the ECB target of below but close to 2%. Aegon Bank N.V. has hedged the majority of its interest rate exposure and therefore the rise in interest rates did not have an impact on regulatory capital ratios. Due to the continued improvement in credit spreads Aegon Bank N.V.’s investments gained a higher valuation. This is reflected in the strongly improved unrealized gains and losses and the positive results on financial transactions. As a consequence of these developments Aegon Bank N.V. lowered the interest rates on the savings accounts in 2013.
Financial information Summary of the financial results for 2012 Loss before tax improved from EUR 21.6 million in 2012 to EUR 17.1 million in 2013. Aegon Bank N.V.
Net interest income Net fee and commission income Result from financial transactions Impairment charges/(reversals) Total income including impairment Total charges Loss before tax Income tax Net loss after tax
2013 43,290 2,620 20,494 -4,786 61,618 78,717 -17,099 4,249 -12,850
2012 33,297 6,670 33,073 -702 72,338 93,959 -21,621 5,414 -16,207
Net interest and commission income Net interest income in 2013 showed an increase of EUR 10.0 million compared with 2012. During 2012, Aegon Bank N.V. decided to align savings rates more closely with market rates and as a result was reasonably able to continue the consolidation of savings interest income since the second half of the year 2012. During 2013 ECB rates decreased with 75bps which positively impacted interest expenses for the LTRO. In October 2013, Aegon Bank N.V. introduced a new asset class on its balance sheet by investing in a consumer loan portfolio. This transaction also had a positive impact on Aegon Bank N.V’s interest margin. Where the 4 th quarter of 2013 resulted in a positive net profit. Net commission income was down by EUR 4.0 million on 2012 mainly due to the sale of Aegon Bank Bemiddeling B.V. Costs and FTEs in 2013 versus 2012 Costs decreased from EUR 94.0 million in 2012 to EUR 78.7 million in 2012, The decrease shows that the cost-saving program which we started at the end of 2010 again led to lower administrative expenses in 2012. These cost savings were mainly due to the implementation of the new banking system for Aegon Bank. The decline in costs is furthermore due to the decrease Page 11 of 141
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of project costs related to the implementation of the new banking system and lower project cost at Knab. At 31 December 2013 AEGON Nederland employed 1262 (2012: 177) FTEs who carried out work for Aegon Bank N.V. or one of its subsidiaries. There were three reasons underlying the change in staff numbers. There was a fall in employee numbers at Aegon bank due to the reorganization started in late 2010 at Aegon Bank. The implementation of the new banking system was the last milestone in this reorganization. During 2013 Aegon Bank N.V. outsourced its IT operations to Aegon Nederland. The FTE’s responsible for the IT operations were transferred to Aegon Nederland. Furthermore Aegon Bank Bemiddeling B.V. was sold to Aegon Nederland. Result from financial transactions Since the introduction of hedge accounting in 2011 the result from financial transactions is less volatile. Compared with 2012, the result from financial transactions decreased by EUR 12,5 million. Mainly because of decreased net fair value change of derivatives. Net gains and losses on sales of investments were stable compared to 2012. Despite the gains recorded on these sales, the revaluation reserve increased by EUR 28.3 million bringing it to EUR 12.0 million positive at 31 December 2013. Impairment charges/(reversals) Impairment charges rose compared to 2012 with EUR 4.1 million. This movement is mainly due to the addition of the consumer loan portfolio that attributed EUR 2.8 million to the impairment charge. Impairment charges on mortgage loans rose with EUR 1.0 million. This increase is in line with the growth of portfolios. The loan provision levels are relatively low, this is mainly due to the fact that the portfolio is of good credit quality. Solvency and capital base At 31 December 2013, equity stood at EUR 321.5 million, representing an increase of EUR 15.8 million compared with 31 December 2011 caused mainly by the increase in the revaluation reserve of EUR 28.3 million. Against this there was the net loss of EUR 12.8 million. Aegon Bank N.V.’s rating Standard & Poor’s rating for Aegon Bank N.V. remained at A+ with a stable outlook during 2013. Fitch’s rating for Aegon Bank N.V. remained at A- during 2012 but the outlook was lowered from stable to negative in line with the changed outlook for Aegon N.V. Deposits from customers in 2013 versus 2012 In the course of 2013, deposits from customers fell by EUR 113 million, closing at EUR 4,282 million. The fall was mainly due to the outflow as a result of the ending of a tax efficient savings account (Levensloop). Aegon Bank N.V. realised an inflow on bank savings (banksparen) at Aegon Bank and on assets under management at Knab. Aegon Bank N.V. still faces fierce competition on the Dutch savings market. During 2013, Aegon Bank decided to align savings rates more closely with market rates. This decision led to Aegon Bank having a limited competitive position in some product categories leading to an outflow of short term deposits from customers. As a result of this strategic decision Aegon Bank managed to move from short to long term savings.
Key risks and uncertainties As a provider of bank savings and investment products, Aegon Bank N.V. is exposed to a variety of financial and operational risks. Aegon Bank N.V.’s financial risk exposure arises from the normal conduct of its business, a key component of which is to invest deposits from customers at its own risk and expense. Fluctuations in the international money and capital markets have an 2
The FTE number reflects the actual FTE that directly work for Aegon Bank. The FTE that indirectly work for Aegon bank are not included in this number Page 12 of 141
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impact on the value of investments and liabilities and, accordingly, constitute major risk components for Aegon Bank N.V. Financial risks include liquidity, interest rate and credit risks. Risk management focuses in particular on financial and operational risks. The main objective of Aegon Bank N.V.’s risk management system is to protect its stakeholders, including its customers, employees and shareholder, from events that may prevent the ongoing achievement of financial goals. Details of Aegon Bank N.V.’s risk control system are given in Section 4 of the financial statements.
Corporate social responsibility and code of conduct Aegon N.V. , which Aegon Bank N.V. is a part of, is at the center of society and wants to do business in a positive way, for the benefit of society. For Aegon N.V., corporate social responsibility (CSR) is not a program or a project. It is anchored in our code of conduct and in the way in which we do business. Corporate social responsibility and investing Aegon N.V. believes that running a successful business is compatible with promoting and protecting the environment, human rights and the wider community we operate in. Corporate social responsibility involves considering the interests of all stakeholders (including customers, employees, business partners, and investors). We also believe that, as a company, we can make a major contribution to the communities in which we operate, not only as a provider of long-term financial products and services, but also as a responsible employer and investor. Aegon N.V.’s long-term objective is to expand its operations profitably and responsibly. More information on CSR can be found in Aegon N.V.’s Sustainability Report at www.aegon.com. Investments As an Aegon N.V. group company, Aegon Bank N.V. recognizes its responsibilities as an investor in different countries and companies. Aegon Bank N.V. invests own funds in bonds and mortgage and consumer loans. We also offer a variety of products that give our customers access to investment funds, including equity funds managed by Aegon Investment Management B.V. Aegon Bank N.V. applies its core values to its Responsible Investment Policy. In pursuing our investment policy, we are guided by the principles set out in the Responsible Investment Policy in terms of human rights, labor rights, arms, health, the environment, animal welfare, corruption and tax. To give portfolio managers and analysts guidance and to increase transparency for shareholders and other stakeholders Aegon Bank N.V. has developed more detailed sectorial policies for industries where specific environmental, social and governance play an important role such as the oil, gas and mining industry, manufacturing industry, housing and real estate, forestry, agriculture and fisheries and financial institutions. Aegon Bank N.V. is seeking an investment portfolio that strikes a balance between fiduciary responsibility and risk/return considerations, on the one hand, and social responsibility arising from the values and principles set out in the Code of Conduct, on the other. In so doing, we use a blacklist and grey list. We do not actively invest in blacklisted companies. The blacklist is available at www.aegon.nl. Companies on the grey list are not automatically excluded. Where possible, Aegon N.V. will engage in a dialogue with those companies to encourage them to consider an alternative course of conduct. Aegon Bank N.V. can invest without restriction in companies that do not feature on the blacklist or grey list. Full details of the policy are available at: http://www.aegon.nl/particulier/fondsen2/verantwoord_beleggen Aegon Bank N.V. also offers customers the possibility to invest in sustainable funds, for example the Aegon Sustainable Index shares fund. Aegon Nederland involves its employees, among which the Aegon Bank employees, in corporate social responsibility. Aegon Nederland organizes several activities such as helping people with their home financial administration, discuss alternative ways to get to the office and discuss diversity and how we can benefit from each other’s differences. Page 13 of 141
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Aegon Bank N.V. is also promoting sustainability by offering its staff a new way of working: the use of mobile technology to perform activities independently of time and place. This makes it possible for Aegon Bank N.V. staff to work from home on a regular basis, thereby reducing commuter traffic. The alliances that Aegon Bank entered into in 2012 with Eneco and Menzis address social themes that concern Aegon Bank N.V. Working with Eneco, Aegon Bank is making a contribution to the development of renewable sources of energy. With Menzis, Aegon Bank is offering customers the ability to keep control over the healthcare they will need in old age. Healthcare costs are rising and will continue to do so. At the same time, the government is cutting spending severely and so there is a good chance that consumers will have to pay more for care and support into future. Rules of conduct The Code of Conduct sets out rules governing the way we expect our staff to behave. Our staff must comply with applicable laws and regulations, as well as internal company rules and regulations. Other rules of conduct include a ban on insider trading, fair treatment of stakeholders, provision of transparent products and services, anti-bribery and corruption rules and similar provisions.
The Dutch Banking Code On 9 September 2009, the Dutch Banking Association [Nederlandse Vereniging van Banken] adopted the Banking Code [Code Banken] in response to a report entitled ‘Restoring Trust’ published on 7 April 2009 by the Maas Committee, an advisory committee chaired by ING Group’s former CFO Cees Maas on the future of the banking industry. Effective 1 January 2010, the Banking Code lays down standards on governance, risk management, audits and remuneration. The Code uses the ‘apply or explain’ principle. Aegon Bank N.V. endorses the Banking Code and has devoted a great deal of attention to its implementation since 2010, following the appointment of the current Executive Board. Aegon Bank N.V. also endeavored to embed the values inherent in the Banking Code in its organization in 2012. A quarterly report on the Banking Code was introduced in 2012 for the Executive Board, the Supervisory Board and the Shareholder, and so this subject is a standard item on the agenda of their meetings. At Aegon Bank N.V. ‘customers’ interests first’ is already the starting point for everything we do. In addition to stating this concept in our core values, actual implementation of this way of thinking in the organization is the real challenge. Aegon Bank N.V. actively involves employees in initiatives at Aegon Bank N.V. to improve existing processes and/or products to the benefit of the bank’s customers. Although Aegon Bank N.V. already applies the principles of the Banking Code, in 2013 we critically examined our own organization to ascertain whether they could be tightened still further. Particular attention was focused on the principles on risk management in the course of 2013. Supervisory Board Composition and expertise The Supervisory Board has been evenly balanced, with two of its three members not being employed by Aegon. A profile has been prepared which includes detailed requirements on the expertise of the members of the Supervisory Board. The profile is an appendix to the Rules for the Supervisory Board and is also available on www.aegon.nl. The members of the Supervisory Board, together with the Executive Board, also took part in the Continuous Education program in 2013. The subjects dealt with included subjects as Internal Capital Adequacy Assessment Process (ICAAP), Internal Liquidity Adequacy Assessment Process Page 14 of 141
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(ILAAP), Corporate Governance, the implications of the duty of care to all stakeholders and monitoring the integrity of the institution and all who are involved. Duties and working methods Details of the duties and working methods of the Supervisory Board are set out in the Rules of the Supervisory Board. Besides the duties set out in the articles of association, these Rules also contain the best practice provisions in the Banking Code and the Dutch Corporate Governance Code. The members of the Supervisory Board and the Executive Board took part in the Continuous Education program in 2013. In collaboration with Nyenrode Business University, a program has been prepared for 2013 and beyond in which all the members of the Supervisory and Executive Boards will take part. The collective program has been put together to ensure that all the subjects included in provisions 2.1.8 and 3.1.3 of the Banking Code will be covered. The annual self-assessment of the Supervisory Board and the Executive Board with regard to 2013 took place on February 4, 2014. As stated in the Banking Code, once every three years, this assessment is performed under the supervision of an external party. 2013 was the first time the assessment took place under external supervision of KPMG. The committees established by the Supervisory Board are the Risk, Audit and Compliance Committee and the Remuneration Committee. The composition of the committees is determined by the Supervisory Board. The committees prepare the decision-making of the Supervisory Board on subjects in their delegated areas. The Supervisory Board remains responsible for the decisions prepared by the committees. Executive Board Composition and expertise Aegon Bank N.V.’s Executive Board consists of a CEO (Chairman) and a CFO (Financial Director) who, with their wide-ranging experience and skills, constitute a well balanced and expert board. Duties and working methods The duties and working methods of the Executive Board are set out in detail in the Rules of the Executive Board drawn up in early 2012. Besides the duties set out in the articles of association, these Rules also contain additional provisions derived from the best practice provisions in the Banking Code. The vision of Aegon Bank N.V. and Aegon Nederland puts the customers’ interests first. The vision of Aegon Bank N.V. is that we feel responsible for raising and developing people’s financial awareness and provides comprehensible solutions in a genuine dialogue to enable customers to make deliberate choices for their financial future. A core value within this vision is ‘customer passion’. Gender diversity Aegon Bank NV’s Supervisory Board and Management Board consists of a limited number of members. As a result, the balanced gender diversity is not easy to achieve and has not been achieved in 2013. Moreover, selection and appointment of members is based on expertise, skills and relevant experience.
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Ethics statement, oath or promise in the financiel sector Upon their appointment as chairman and financial director, both members of the Executive Board signed an ethics statement. These statements have been placed on www.aegon.nl. The principles set out in the ethics statement have been taken from the Code of Conduct and the rules of conduct that apply to all staff at Aegon Bank N.V. The company’s employment contracts also refer to the Code of Conduct and rules of conduct. Based on new laws members of the Executive Board and members of the Supervisory Board must make an oath or a promise stating that they will make their best efforts to act in the benefit of the clients of the bank. The ethics statement issued by Aegon Bank N.V.’s Executive Board has been named ‘best practice’ in 2012 by the Maandblad voor accountancy en bedrijfseconomie professional magazine, based on research conducted by it and the Netherlands Institute of Chartered Accountants (NBA). According to the researchers, the AEGON Bank N.V. Executive Board formulated the statement exceptionally clearly and, for this reason, it has been designated best practice. The members of the Executive Board have personalized and refined the statement and divided it into a personal statement and a personal guarantee. For details of the continuous education program for the Executive Board, please refer to the information under 'Supervisory Board'. Employees Shortly after their appointment, all new recruits are provided with an e-learning module explaining the Code of Conduct covering themes such as providing information (not advising) customers and integrity and fraud. In 2013 the Compliance and Special Affairs departments again held awareness sessions attended by Aegon Bank N.V. employees. These sessions raise awareness of the laws and regulations applicable to Aegon and the Code of Conduct and rules of conduct governing Aegon staff. The Internal Audit Netherlands department found that these awareness-raising sessions reached over 90% of Aegon Bank N.V. staff. The main themes were duty of care, transparency and integrity and fraud. In addition to these main themes, attention was focused on the tasks and organization of Compliance and Special Affairs and trends in the area of external supervision. Risk management Risk management is high on our agenda. Aegon Bank N.V. has an autonomous risk management unit which reports on operational and financial risks to the financial director. The Executive Board chairman is responsible for adopting, implementing, monitoring and, where necessary, adjusting the company’s overall risk policy. The financial director is responsible for preparing risk management decisions. He has no individual commercial responsibility and functions independently from the other commercial areas of work. The financial director chairs the financial and operational risk committees. This allows the Executive Board to be advised directly of any material risks. Aegon Bank N.V.’s risk management system remains within the bounds of the risk management system operated by Aegon Nederland. Aegon Bank N.V. has also a Risk, Audit and Compliance Committee, consisting of Supervisory Board members. Aegon Bank N.V.’s risk appetite is documented in the Internal Capital Adequacy Assessment Process (ICAAP) document and translated in a monthly capital plan which is also monitored monthly and reported to the Executive Board and the Supervisory Board. Products are launched subject to a product approval process. This process is in conformity with the Banking Code and under it Aegon Bank N.V. must observe its duty of care, giving consideration to all the risks involved and having regard to the interests of its customers as well as its own. The Internal Audit Netherlands department has reviewed the product approval process and reported on the aspects highlighted in the Banking Code. The Supervisory Board is involved in determining Aegon Bank N.V.’s risk appetite by responding to a proposal made by Executive Board (prepared by the Risk and Capital Management department). The risk appetite consists of financial and non-financial risks and is reflected in the Page 16 of 141
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tolerance of a number of Key Risk Indicators. These are already available and active for financial risks and are being developed for non-financial risks. The Supervisory Board and the Executive Board check that business strategy is in line with the tolerance level adopted. Aegon Bank N.V.’s risk appetite is documented in the Internal Capital Adequacy Assessment Process and translated in a monthly capital plan which is also monitored monthly and reported to the Executive Board and the Supervisory Board. Audit Aegon Bank N.V. makes use of the services of an internal audit unit that occupies an independent position within Aegon Nederland. This unit performs audits on the basis of annual risk analyses to examine whether Aegon Bank N.V.’s key business processes are operating properly. The unit’s director reports directly to the chairman of the Executive Board and the chairman of the Risk, Audit and Compliance Committee of the Supervisory Board. Internal Audit Netherlands is part of Aegon Nederland. An annual risk analysis is performed at that level. This is included in the Audit Plan and contains a complete overview of the risks which is reconciled with the external auditors and DNB each year. Remuneration policy Criteria Aegon Nederland pursues a carefully defined, controlled and sustainable remuneration policy which is in line with (i) the remuneration policy adopted by Aegon and (ii) its strategy and risk appetite, objectives and values. It takes account of the long-term interests of Aegon and Aegon Bank N.V., the relevant international context and public support. The Aegon Fan strategy on four pillars: profitable growth, loyal customers, proud employees and an effective business. Concrete themes and actions are listed for each pillar to implement the Aegon Fan strategy and to achieve the Aegon vision. The Aegon Nederland remuneration policy applies to the company and, in principle, to all of its subsidiaries. Aegon Bank N.V. has its own remuneration policy which has been formulated within the framework of the Aegon Nederland remuneration policy. The Aegon Nederland Executive Board has responsibility for remuneration policy in the Netherlands, following the directions given by the Aegon Nederland Supervisory Board. Aegon Bank N.V. employs no staff. All of the staff and the Executive Board are employed by Aegon Nederland and are therefore covered by the Aegon Nederland remuneration policy. The Aegon Nederland remuneration policy is governed by the Aegon Group Global Remuneration Framework 2013 (GRF). The Regulation on Sound Remuneration Policies under the Financial Supervision Act 2011 has also been implemented. Directors’ remuneration The Aegon Bank N.V. remuneration policy states that directors will receive no severance pay if they have performed badly (‘no reward for failure’). The provision of severance pay at Aegon Bank N.V. takes into account not only the provisions of the Banking Code but also the relevant legislation and regulations, subdistrict court guidelines and the Aegon Redundancy Plan. Incentives Aegon has a variable pay system in place. The variable component is dependent on a mix of financial and non-financial indicators, including the extent to which contributions were made to implementing and achieving Aegon’s Fan Strategy. Balanced targets are set in terms of customers, risks, shareholders, and staff. With regard to the application of the Banking Code and the ‘comply or explain’ principle, Principle 6.3.2 is explained as follows. Principle 6.3.2: Any severance payment to a member of the Executive Board shall not exceed one year’s annual base salary (the “fixed” part of the remuneration). If a payment of up to one year’s annual base salary should be manifestly unreasonable for a member of the Executive Board who is removed in their first term of service, Page 17 of 141
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this Executive Board member shall qualify for a severance payment of up to two times their annual base salary. The Aegon Bank remuneration policy 2011 states that the policy conforms to social norms and national and international regulations and codes. Our remuneration policy therefore also complies with these norms from the Banking Code. However, the employment contracts of the current Executive Board do not contain any provision laying down a maximum for any severance payment. Aegon Bank will honour existing employment contracts but we will apply these provisions in future – in accordance with our remuneration policy – when appointing new board members and include them in their contract of employment. Governance The Executive Board carefully considers the interests of the company’s various stakeholders, including its customers, shareholder and employees, applying the Aegon Fan Strategy. For more details please refer to paragraph ‘Aegon Bank N.V.’s strategy and objectives’. The core values are a significant element of our staff appraisal system in which we also ensure that our vision and core value are embedded deeply in the organization. In 2013 tripartite consultations were held again between DNB, the internal audit unit and the external auditors to discuss the risk analyses, audit plan and key audit findings. The internal audit unit and external auditors maintained regular contact, sharing information throughout the year. The Compliance and Risk Management departments also submit reports to the Executive Board and Supervisory Board on the risks identified by them and their findings. These risks and findings are then addressed by the Findings Committee, which develops long-term solutions to any issues raised.
Prospects for 2014 2014 will be an important year for Aegon Bank N.V; Knab is well positioned for full commercial development in 2014 and growing customer numbers. Aegon Bank will focus mainly on operational excellence and improving its service step by step. Aegon Bank N.V. also expects that the implications of the government’s measures on pensions and healthcare as a result of the coalition agreement of October 2012 will become clear in 2014. Customers will have to make greater provisions themselves for their income and wealth now and for later. Aegon Bank N.V. wants to help its customers in this with services and products. Aegon Bank will remain a close cooperation with its partner the intermediary channel for the distribution of more complex ‘advice’ products. Aegon Bank N.V.’s solvency position and capital base give us confidence that even in these turbulent times Aegon Bank N.V. will be in excellent shape to continue providing the best service to its customers.
Events after the balance sheet date On the 1st of February 2013 SNS Reaal was nationalised by the Dutch government. The Ministery of Finance announced that they will impose a 1 billion-euro one-time levy on Dutch banks in 2014 to share the costs of the SNS nationalization. The levy is calculated over Aegon Bank’s share in the deposit guarantee scheme as per the 1st of February 2013. The levy will be imposed in three instalments during 2014 and will result in an estimated tax charge of EUR 9,5 million. The event gives no further information on the situation pertaining on the reporting date. As per the 1st of February 2014 Aegon bank redeemed a mortgage portfolio approximately amounting to EUR 460 million to AEGON leven. At the same date a portfolio was purchased from Aegon leven. The rationale behind the transactions was reducing the duration of the mortgage portfolio of Aegon Bank. As result of the sale a gain was realized amounting to EUR 52,7 million before tax. The transactions had a minimal impact on the BIS ratio as more capital intensive mortages (non NHG) were purchased. Page 18 of 141
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In conclusion In 2013 Aegon Bank successfully finalized the transition with the implementation of a new core banking system. We will continue building a sustainable profitable organization. Our staff delivered top performance and worked with heart and soul for our organization. Parallel to the transition, our employees were able to continue giving our customers the best possible service. We very much appreciate this dedication. Our main goal will continue to be to provide our customers with excellent service. Looking ahead, we will go on to make every effort to grow our business for the benefit of our customers, our shareholder and all other stakeholders in 2014. It is with confidence that we look to the future of Aegon Bank N.V. in 2014 and beyond.
Membership of AEGON Bank N.V.’s Executive Board In 2013, no changes were made to the membership of Aegon Bank N.V.’s Executive Board, which is made up of Mr. E.F.M. Rutten and Mr. M.R. de Boer.
The Hague, 14 April 2014
E.F.M. Rutten M.R. de Boer
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Report of the Supervisory Board Membership of AEGON Bank’s Supervisory Board The members of the Supervisory Board have been Mr. J.A.J. Vink (chairman), Mr. L. Jongsma and Mr. R.M. van der Tol since their appointment at the end of 2010. Mr. Vink and Mr. Jongsma are external members and Mr. van der Tol is associated with Aegon through other positions that they hold but do not bear any direct responsibility for Aegon Bank N.V. by virtue of their other posts at Aegon. The Supervisory Board met five times in 2013. The Supervisory Board also took part in its continuous education program in 2013. This program covered subjects including ICAAP, ILAAP, Corporate Governance, the implications of the duty of care to all stakeholders and monitoring the integrity of the institution and all who are involved. All members participated in the continuous education program.
Committees Risk, audit and compliance The Risk, Audit and Compliance Committee (RAC) is made up of Mr. Jongsma (chairman) and Mr. van der Tol. Its mandate is to do the preparatory work for the supervision exercised over the Executive Board in terms of the implementation, maintenance and operation of the company’s risk management systems and risk appetite. The Committee also monitors compliance with laws and regulations and with the procedures for preparing and publishing the financial statements. The RAC met four times in 2013. Remuneration As Aegon Bank N.V. is a licensed financial service provider, which is significant in terms of its size, internal organization and the nature, scope and complexity of its activities, the Supervisory Board has established a Remuneration Committee. The Remuneration Committee has also been established within the framework of the Regulation on Sound Remuneration Policies under the Financial Supervision Act 2011. Mr. Vink fulfills this role. The committee was established to monitor the existence of a sound remuneration policy. The committee ensures that the remuneration policy is generally consistent with the sound and prudent management of Aegon Bank N.V. in the long term and the long-term interests of shareholders. The committee met once in 2013. The Remuneration Committee acts in accordance with the principles as laid down in the Regulation on Sound Remuneration Policies under the Financial Supervision Act 2011, the Banking Code, the Global Remuneration Framework 2013 of Aegon NV and the Aegon Nederland Remuneration Policy.
Work of the Supervisory Board The responsibility of the Supervisory Board is to supervise the business and affairs of Aegon Bank N.V. and the policies pursued by the Executive Board. It also acts as a sparring partner for the Executive Board. The Supervisory Board chairman liaises with the chairman of the Executive Board. Items that regularly feature on the agenda include the quarterly, semi-annual and annual financial statements, operational and financial targets, compliance, risk management, and strategy.
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Throughout the year, the Supervisory Board amassed a large amount of information concerning the new ‘Knab’ bank concept developed at Aegon Bank N.V. This concept has also been a formal part of Aegon Bank N.V. since 1 January 2012. The Supervisory Board was also given extensive information on the selection and subsequent implementation of the new IT system. The annual assessment of the Executive Board and the annual self-assessment of the Supervisory Board took place on February 4 2014. As stated in the Banking Code, once every three years, this assessment is performed under the supervision of an external party. 2013 was the first time the assessment took place under external supervision of KPMG. The performance of the Executive Board was assessed both as a whole and at individual level. The Supervisory Board believes that the Executive Board makes a good team and that the different skills within the Executive Board complement and strengthen each other. The subjects reviewed in the self-assessment included the performance of the Supervisory Board, the commitment of the individual board members, the culture within the Supervisory Board and its relationship with the Executive Board. The Supervisory Board judged that all the abovementioned points could be described as positive. In addition to the Supervisory Board’s performance, the assessment also consisted of a review of its profile, membership and competencies. The Supervisory Board is of the opinion that its current membership is evenly balanced. The Continuous Education Program was also assessed and found to be positive. In accordance with the Banking Code, the Supervisory Board is satisfied that the Executive Board members meet the expertise requirements imposed by DNB. Based on new laws members of the Executive Board and members of the Supervisory Board must make an oath or a promise stating that they will make their best efforts to act in the benefit of the clients of the bank.
Remuneration policy Aegon Bank N.V.’s remuneration policy must be considered in the light of the fact that Aegon Bank N.V. is a member of the Aegon Group and hence is closely related to the remuneration policy operated by Aegon Nederland. Aegon Bank N.V.’s Supervisory Board reviews its remuneration policy against the Banking Code. The Supervisory Board chairman, who also sits on the Remuneration Committee, has remuneration policy as part of his portfolio. Aegon has a variable pay system in place. The variable component is dependent on a mix of financial and non-financial indicators in which the “Loyal Customer” target weighs heavily. Balanced targets are set in terms of customers, risk management, shareholders, and staff. The variable pay system is in compliance with the standards set by the Banking Code. The size of the variable pay component mitigates the risk of inappropriate pay-induced conduct. The two external Supervisory Board Members are paid an aggregate fee of EUR 37,500 per annum. The Aegon member receives no additional fee for his work as supervisory directors at Aegon Bank N.V. The Hague, 14 April 2014
L. Jongsma R.M. van der Tol J.A.J. Vink
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Consolidated financial statements 2013 of Aegon Bank N.V.
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Consolidated statement of financial position Note
31-12-2013
31-12-2012
Amounts in EUR thousand Assets Cash Amounts due from banks Mortgage loans and other loans Financial assets available-for-sale Financial assets at fair value through profit or loss Derivatives Deferred tax assets Other assets and receivables
5 6 7 8 8 9 13 10
Total assets
79.406 128.208 5.194.114 2.368.658 170.362 72.123 985 87.144
264.086 197.933 4.515.404 2.433.853 153.420 32.398 1.805 58.732
8.101.000
7.657.631
4.282.872 3.238.248 57.895 84.308 850 115.371
4.396.682 2.500.203 154.735 82.887 7.273 210.233
7.779.544
7.352.013
321.456
305.618
8.101.000
7.657.631
Equity and liabilities Savings deposits Amounts due to banks Derivatives Deferred tax liabilities Provisions Other liabilities and accruals
11 12 9 13 14 15
Total liabilities
Equity Total equity and liabilities
16
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Annual report 2013 Aegon Bank N.V.
Consolidated income statement Note
2013
2012
Amounts in EUR thousand
Income Interest income and related fees Interest expense and related fees
17.1 17.2
Net interest income Fee and commission income Fee and commission expense
18.1 18.2
Net fee and commission income Result from financial transactions
19
Total income
196.554 -153.264
206.569 -173.272
43.290
33.297
3.474 -854
8.611 -1.941
2.620
6.670
20.494
33.073
66.404
73.040
15.179 28 63.510
19.738 48 74.173
78.717
93.959
-4.786
-702
-17.099
-21.621
4.249
5.414
-12.850
-16.207
-12.870
-16.208
20
1
Expenses Employee expenses Depreciation expenses Other operating expenses
20.1 20.2 20.3
Total operating expenses Impairment charges / (reversals)
21
Income / (loss) before tax Income tax Net income / (loss) Net income / (loss) attributable to the parent company Net income / (loss) attributable to minority interest
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22
Annual report 2013 Aegon Bank N.V.
Consolidated statement of comprehensive income Note
2013
2012
-12.850
-16.207
59.503
128.823
-21.773 -9.432
-20.260 -27.141
Other comprehensive income for the period
28.298
81.422
Total comprehensive income / (loss)
15.448
65.215
Total comprehensive income attributable to the parent company
15.448
65.215
Amounts in EUR thousand Net income / (loss) Other comprehensive income Gains / (losses) on revaluation of available-for-sale investments Gains / (losses) transferred to the income statement on disposal and
16.2 19
impairment of available-for-sale investments Aggregate tax effect of items recognized in other comprehensive income / (loss)
13
The ‘aggregate tax effect of items recognized in other comprehensive income’ relates entirely to the revaluation reserves. Other comprehensive income, recorded by Aegon Bank, consists of items that eventually may be reclassified to the income statement.
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Consolidated statement of changes in equity Amounts in EUR thousand Share
Share
Retained
Revaluation
2013
capital
premium
earings
reserves
At January 1
37.437
326.212
-41.870
-16.296
135
305.618
-
-
-12.850
-
20
-12.830
-
-
-
28.298
-
28.298
-
-
-12.850
28.298
20
15.468
-
-
-
-
390
390
-
-
-
-
-20
-20
37.437
326.212
-54.720
12.002
525
321.456
Share
Share
Retained
Revaluation
2012
capital
premium
earings
reserves
Minority interest participations
At January 1
37.437
326.212
-25.662
-97.718
-
240.269
-
-
-16.208
-
1
-16.207
-
-
-
81.422
-
81.422
-
-
-16.208
81.422
1
65.215
-
-
-
-
135
135
-
-
-
-
-1
-1
37.437
326.212
-41.870
-16.296
135
305.618
Net income / (loss) recognized in the income statement Other comprehensive income / (loss) Total comprehensive income / (loss) Issuance of participations Dividends paid on participations At December 31
Net income / (loss) recognized in the income statement Other comprehensive income / (loss) Total comprehensive income / (loss) Issuance of participations Dividends paid on participations At December 31
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Minority interest participations
Total
Total
Annual report 2013 Aegon Bank N.V.
Consolidated cash flow statement Amounts in EUR thousand
Note
2013
2012
-17.099
-21.621
21 14 22
-2.668 39.616 4.495 -1.000 -2.943
-11.229 23.681 702 894 32.237
11 10 15
-113.811 -33.012 -90.509
-867.715 5.577 64.298
-216.931
-773.176
-966.575 101.272 -250.403 226.329 -997.494 1.111.000
-1.681.348 209.865 -227.942 -41.631 -770.008 1.620.471
-775.871
-890.593
Income / (loss) before tax Adjustments for: - Results from financial transactions - Amortization and depreciation - Impairment losses / (reversals) - additions (releases) in provisions - Tax receivable / (paid) Changes in: - Savings deposits - Other assets and receivables - Other liabilities and accruals
19 17/20.2
Net cash flows from operating activities
Purchase of loans and other receivables Sale and redemption of loans and other receivables Purchase of financial assets and liabilities at FVTPL Sale of financial assets and liabilities at FVTPL Purchase of financial assets available-for-sale Sale and redemption of financial assets available-forsale Net cash flows from investing activities
7 7 8 8 8 8
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Annual report 2013 Aegon Bank N.V.
Note
2013
12 12 16 16
738.027 390 -20
1.500.000
738.397
1.500.134
-254.405
-163.635
Cash and cash equivalents at the beginning of the year
462.019
625.654
Cash and cash equivalents at the end of the year
207.614
462.019
79.406 128.208 207.614
264.086 197.933 462.019
LTRO Funding received Proceeds of refinancing Saecure 13 Issuance of participations Dividends paid on participations Net cash flows from financing activities
Net increase / (decrease) in cash and cash equivalents
Cash Amounts due from banks
5 6
2012
135 -1
The cash flow statement has been prepared according to the indirect method. The net increase / (decrease) in cash and cash equivalents includes:
2013 Interest received Interest paid
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196.657 153.022
2012 198.265 172.736
Annual report 2013 Aegon Bank N.V.
Notes to the consolidated financial statements 1.
General information Aegon Bank N.V., incorporated and domiciled in the Netherlands, is a limited liability company organized under Dutch law and recorded in the Commercial Register of The Hague, under its registered address at Aegonplein 50, 2591 TV The Hague. Aegon Bank N.V. (or Aegon Bank) is a 100% subsidiary of Aegon Nederland N.V. (or Aegon Nederland), established in The Hague. Aegon Bank’s ultimate holding company is Aegon N.V. in The Hague. Aegon Bank and its group companies specialise in developing, selling and servicing savings and investment products as well as directly selling and servicing Aegon mortgage, life, non-life and pension products. Aegon Bank does not provide corporate loans or project financing.
2.
Summary of significant accounting policies
2.1.
Basis of presentation
2.1.1. Introduction The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), as adopted by the European Union (EU) and with Part 9 of Book 2 of the Netherlands Civil Code. The consolidated financial statements have been prepared in accordance with the historical cost convention and modified by the revaluation of those financial instruments (including derivatives) and financial liabilities that have been measured at fair value. Information on the standards and interpretations that were adopted in 2013 is provided below. With regard to the income statement of Aegon Bank N.V., article 402, Part 9 of Book 2 of the Netherlands Civil Code has been applied, allowing a simplified format. The consolidated financial statements of Aegon Bank N.V. will be submitted for approval by the Annual General Meeting of Shareholders The shareholders’ meeting can decide not to adopt the financial statements or to amend the financial statements.
2.1.2. Presentation The consolidated financial statements are presented in euros and all the values are rounded to the nearest thousand except when otherwise indicated. The items in the consolidated statement of financial position are, by and large, presented in decreasing order of liquidity. On the basis of the expected period within which an item is collected or repaid, it will be described either as current (within 12 months after balance sheet date) or non-current (more than one year after balance sheet date) in the notes.
2.1.3. Changes in presentation Apart from the requirements resulting from the application of revised standards the presentation of the financial statements is consistent with last year’s presentation.
2.1.4. Adoption of new IFRS accounting standards Aegon Bank applies new and amended standards that require restatement of previous financial statements. These include IFRS 10 “Consolidated Financial Statements”, IFRS 11 “Joint Arrangements”, and IAS 1 “Presentation of Financial Statements”. Application of IFRS 13 “Fair Value Measurement” is required prospectively as of the beginning of the annual reporting period. The nature and the impact of each new standard / amendment that has been applied for the first
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IFRS 7, ”Financial Instruments: Disclosures – Offsetting Financial Assets and Financial Liabilities” The amendments to IFRS 7 enable users of the financial statements to evaluate the effect or potential effect of netting arrangements, including rights of offset associated with the entity's recognized financial assets and recognized financial liabilities, on the entity’s financial position. The amendment affects disclosure only and is included in note 26. IFRS 10, “Consolidated Financial Statements” IFRS 10 replaces all the guidance on control and consolidation in IAS 27, “Consolidated and Separate Financial Statements”, and SIC-12, “Consolidation – Special Purpose Entities”. The application of this new standard has not impacted the financial position of Aegon Bank. IFRS 11, “Joint Arrangements” IFRS 11 replaces IAS 31, “Interests in Joint Ventures” and SIC-13, “Jointly-Controlled Entities — Non-Monetary Contributions by Venturers”. IFRS 11 removes the option to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture under IFRS 11 must be accounted for using the equity method. The application of this new standard has not impacted the financial position ofAegon Bank. IFRS 12, “Disclosure of Interests in Other Entities” IFRS 12 provides disclosure requirements on interests in subsidiaries, associates, joint ventures, and structured entities. This standard affects disclosure only and has therefore no impact on the financial position or performance of Aegon Bank. Aegon Bank has included the disclosures in note 4. IFRS 13, “Fair Value Measurement” IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. The application of IFRS 13 has not impacted the fair value measurements carried out by Aegon Bank, which is described in note 3. IFRS 13 requires specific disclosures on fair values, some of which replace existing disclosure requirements in other standards, including IFRS 7 Financial Instruments: Disclosures. Aegon Bank provides these disclosures in note 3. IAS 1, “Financial Statement Presentation – Presentation of Items of Other Comprehensive Income” The amendments require the grouping of items within other comprehensive income that may be reclassified to the profit or loss section of the consolidated income statement. The amendments also reaffirm existing requirements that items in other comprehensive income and profit or loss should be presented as either a single statement or two consecutive statements. The amendment affects presentation only and changes are included in the consolidated statement of comprehensive income. IAS 19R, “Employee Benefits” The revised standard eliminates the option to defer the recognition of actuarial gains and losses, known as the “corridor method”. The amendments streamline the presentation of changes in assets and liabilities arising from defined benefit plans, including requiring remeasurements to be presented in other comprehensive income, to immediately recognize all past service costs and to replace interest cost and expected return on plan assets with a net interest amount that is calculated by applying the discount rate to the net defined benefit liability (asset). As Aegon Bank does not have a defined benefit obligation, the revised standard does not impact the financial statements. IAS 27, “Separate Financial Statements” IAS 27 was amended following the issuance of IFRS 10. The revised IAS 27 deals only with the accounting for subsidiaries, associates and joint ventures in the separate financial statements of the parent company. The application of the amendments has not impacted the financial position of Aegon Bank. Page 30 of 141
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IAS 28, “Investments in Associates and Joint Ventures” IAS 28 was amended following the issuance of IFRS 10 and IFRS 11. The revised IAS 28 describes the application of the equity method to investments in joint ventures in addition to associates. Theapplication of the amendments has not impacted the financial position of Aegon Bank. Changes in standards not relevant for Aegon Bank In addition, the following new standards, amendments to existing standards and interpretationsare mandatory for the first time for the financial year beginning January 1, 2013 but are notcurrently relevant or do not have impact for Aegon Bank:
• Annual improvements 2009-2011 Cycle; • IFRS 1 First Time Adoption - Government Loans; and • IFRIC 20 - Stripping Costs in the Production Phase of a Surface Mine.
2.1.5. Future adoption of new IFRS accounting standards The following standards, amendments to existing standards and interpretations, published prior to January 1, 2014, were not early adopted by the company, but will be applied in future years:
IFRS 9, “Financial Instruments”*; IAS 32, “Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities”; IAS 36, “Impairment of Assets – Recoverable Amounts Disclosures for Non-Financial Assets”*; IAS 39/IFRS 9, “Novation of Derivatives and Continuation of Hedge Accounting”*; Annual improvements 2010-2012 Cycle*; Annual improvements 2011-2013 Cycle*; and IFRIC 21 – Levies*.
* Not yet endorsed by the European Union. IFRS 9, “Financial Instruments” IFRS 9, “Financial Instruments: Classification and Measurement” is part of the project to replace IAS 39 with a new standard. The project is divided into multiple components, classification and measurement of financial instruments, impairment and hedge accounting. The IASB has decided to defer the mandatory effective date until the issue date of the completed version of IFRS 9 is known. In addition the IASB decided to reopen IFRS 9 in order to consider interaction with the insurance project as well as the US FASB’s classification and measurement model for financial instruments. For impairment the IASB issued an exposure draft proposing the recognition and measurement of a credit loss allowance or provision based on expected losses rather than incurred losses. On hedge accounting the IASB is finalizing a more principle-based approach. Macro hedging is decoupled from the hedge accounting component, in order to avoid impact on the effective date or timing of the completing of this component. IFRS 9 is expected to have a significant impact on the entity’s financial statements because it will likely result in a reclassification and re-measurement of the financial assets of Aegon Bank N.V.. However, the full impact of IFRS 9 will only be clear after the remaining stages of the IASB’s project on IFRS 9 are completed and issued. IAS 32, “Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities” The amendments to IAS 32, “Financial Instruments: Presentation”, clarify the application of the offsetting requirements. The amendments are effective for annual periods beginning on or after January 1, 2014, with earlier application permitted. Aegon Bank N.V. expects that the amendment does not result in any changes to the classification, measurement or presentation of any items in the financial statements.
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IAS 36, “Impairment of Assets – Recoverable Amounts Disclosures for Non-Financial Assets” The IASB has issued amendments to IAS 36, “Impairment of Assets” relating to disclosures in respect of fair value less costs of disposal. The IASB has made changes to three disclosure requirements, including the requirement to add information about the fair value measurement of impaired assets when the recoverable amount is based on fair value less costs of disposal. The amendments are effective per January 1, 2014 with earlier application permitted. The amendment affects disclosure only and has therefore no impact on the financial position or performance of Aegon Bank N.V.. IAS 39/IFRS 9, “Novation of Derivatives and Continuation of Hedge Accounting” The IASB made a narrow-scope amendment to IAS 39 to permit the continuation of hedge accounting in certain circumstances in which the counterparty to a hedging instrument changes in order to achieve clearing for that instrument. The amendment is to be applied retrospectively with effective date January 1, 2014. Aegon Bank N.V. expects that the amendment does not result in any changes to the classification, measurement or presentation of any items in the financial statements. Annual improvements 2010-2012 Cycle The IASB issued, in 2013, a number of minor amendments to different standards and interpretations. These amendments, which are effective from January 1, 2014, deal with minor changes to the wordings used in the individual standards and seek to remove editorial and other inconsistencies in the literature. Aegon Bank N.V. expects that the improvements project does not result in any changes to the classification, measurement or presentation of any items in the financial statements. Annual improvements 2011-2013 Cycle The IASB issued, in 2013, a number of minor amendments to different standards and interpretations. These amendments, which are effective from January 1, 2014, deal with minor changes to the wordings used in the individual standards and seek to remove editorial and other inconsistencies in the literature. Aegon Bank N.V. expects that the improvements project does not result in any changes to the classification, measurement or presentation of any items in the financial statements.
The following amendments to the existing standard and interpretation, published prior to January 1, 2014, which are not yet effective for or early adopted by Aegon Bank N.V., will not significantly impact the financial position or financial statements:
IFRS 10 Consolidated Financial Statements - Amendment Investment Entities; IFRS 14 Regulatory Deferral Accounts*; IAS 19 Employee Benefits – Amendment Employee Contributions*; IAS 32 Financial Instruments: Presentation – Amendment Offsetting Financial Assets and Financial Liabilities; Annual improvements 2010-2012 Cycle*; Annual improvements 2011-2013 Cycle*; and IFRIC 21 – Levies*.
* Not yet endorsed by the European Union
2.2.
Use of estimates Introduction The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities as of the date
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of the financial statements and the reported amounts of revenues and expenses for the reporting period. Those estimates are inherently subject to change and actual results could differ from those estimates. Included among the material (or potentially material) reported amounts and disclosures that require extensive use of estimates are the fair value of assets and liabilities, the determination of impairments and the provision for doubtful debts. Although the estimates are based on careful assessment by management of current events and actions, actual results may differ from these estimates. Refer to note 3 for more information.
Changes of estimates No changes of estimates took place in 2013.
2.3.
Basis of consolidation
2.3.1. Subsidiaries The consolidated financial statements include the financial statements of Aegon Bank N.V. and its subsidiaries. Subsidiaries (including structured entities) are entities over which Aegon Bank N.V. has control. Aegon Bank N.V. controls an entity when Aegon Bank N.V. is exposed to, or has rights to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The assessment of control is based on the substance of the relationship between Aegon Bank N.V. and the entity and, among other things, considers existing and potential voting rights that are substantive. For a right to be substantive, the holder must have the practical ability to exercise that right. The subsidiary’s assets, liabilities and contingent liabilities are measured at fair value on the acquisition date and are subsequently accounted for in accordance with the accounting principles of Aegon Bank N.V., which is consistent with IFRS. Intra-group transactions are eliminated. Intra-group losses are eliminated, except to the extent that the underlying asset is impaired. Non-controlling interests are initially stated at their share in the fair value of the net assets on the acquisition date and subsequently adjusted for the non-controlling share in changes in the subsidiary’s equity. The excess of the consideration paid to acquire the interest and the fair value of any interest already owned, over the share of Aegon Bank N.V. in the net fair value of assets, liabilities and contingent liabilities acquired is recognized as goodwill. Negative goodwill is recognized directly in the income statement. If the fair value of the assets, liabilities and contingent liabilities acquired in the business combination has been determined provisionally, adjustments to these values resulting from the emergence of new evidence within twelve months after the acquisition date are made against goodwill. Contingent consideration is discounted and the unwinding is recognized in the income statement as an interest expense. Any changes in the estimated value of contingent consideration given in a business combination prior to the adoption of IFRS 3 (as revised in 2008) are recognized in goodwill. Any changes in the estimated value of contingent consideration given in a business combination after the adoption of IFRS 3 (as revised in 2008) are recognized in the income statement. The identifiable assets, liabilities and contingent liabilities are stated at fair value when control is obtained. Subsidiaries are deconsolidated when control ceases to exist. Any difference between the net proceeds plus the fair value of any retained interest and the carrying amount of the subsidiary including non-controlling interests is recognized in the income statement.
2.4.
Foreign exchange translation Transactions in foreign currencies are initially recorded at the functional currency rate prevailing at the date of the transaction. The functional currency is the euro. At the balance sheet date, Page 33 of 141
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monetary assets and monetary liabilities in foreign currencies and equity instruments in foreign currencies are translated to the functional currency at the closing rate of exchange prevailing on that date. Non-monetary items carried at cost are translated using the exchange rate at the date of the transaction, whilst assets carried at fair value are translated at the exchange rate when the fair value was determined. Exchange differences on monetary items are recognized in the income statement when they arise, except when they are deferred in other comprehensive income as a result of a qualifying cash flow. Exchange differences on non-monetary items carried at fair value are recognized in other comprehensive income or the income statement, consistently with other gains and losses on these items. Aegon Bank N.V. does not have investments in group entities of which the functional currency is not the euro.
2.5.
Offsetting of assets and liabilities Financial assets and liabilities are offset in the statement of financial position when Aegon Bank N.V. has a legally enforceable right to offset and has the intention to settle the asset and liability on a net basis or simultaneously.
2.6.
Cash Cash comprises cash and balances with DNB which are immediately payable on demand. These are short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known cash amounts, are subject to insignificant risks of changes in value and are held for the purpose of meeting short-term cash requirements. This item is stated at amortized cost. The initial valuation of this item is fair value.
2.7.
Amounts due from banks Amounts due from banks comprise credit balances in current accounts and receivables due from banks. These are short-term, highly liquid investments which are readily convertible to known cash amounts, are subject to insignificant risks of changes in value and are held for the purpose of meeting short-term cash requirements. This item is stated at amortized cost. The initial valuation of this item is fair value.
2.8.
Financial assets Financial assets (excluding derivatives) are recognized on the trade date when Aegon Bank N.V. becomes a party to the contractual provisions of the instrument and are classified for accounting purposes depending on the characteristics of the instruments and the purpose for which they were purchased. The accounting policies of derivatives are presented in note 2.9.
2.8.1. Classification The financial assets of AEGON Bank are classified as follows: Mortgage loans and other loans. These financial assets are recognized as loans (amortized cost) and consist of mortgage loans, loans to private individuals, and other loans. Financial assets available-for-sale. Financial assets at fair value through profit or loss. AEGON Bank designates a financial asset at fair value through profit or loss if doing so eliminates or significantly reduces a potential accounting mismatch.
2.8.2. Measurement Financial assets are initially recognized at fair value excluding interest accrued to date plus, in the case of a financial asset not at fair value through profit or loss, any directly attributable incremental transaction costs. Loans are subsequently carried at amortized cost using the effective interest rate method. Longterm loans as well as group loans are also stated at (amortized) cost. Page 34 of 141
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Financial assets at fair value through profit or loss are measured at fair value with all changes in fair value recognized in the line item ‘results from financial transactions’ in the income statement as incurred. Available-for-sale assets are recorded at fair value with unrealized changes in fair value recognized in other comprehensive income. The realized changes in fair value are recognized in the income statement.
2.8.3. Amortized cost The amortized cost of a debt instrument is the amount at which it is measured at initial recognition minus principal repayments, plus or minus the cumulative amortization of any difference between the initial amount and the maturity amount, and minus any reduction for impairment. The effective interest rate method is a method of calculating the amortized cost and of allocating the interest income or expense over the relevant period. The effective interest rate is the rate that discounts estimated future cash payments or receipts through the expected life of the debt instrument or, when appropriate, a shorter period to the net carrying amount of the instrument. When calculating the effective interest rate, all contractual terms are considered. Possible future credit losses are not taken into account. Charges and interest paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts are included in the calculation.
2.8.4. Fair value The financial statements provide information on the fair value of all financial assets, including those carried at amortized cost where the fair values are provided in the notes to the financial statements. The estimated fair values correspond with the amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. For quoted financial assets for which there is an active market, the fair value is the bid price at the balance sheet date. For quoted financial liabilities for which there is an active market, the fair value is the ask price at the balance sheet date. In the absence of an active market, fair value is estimated by using present value based or other valuation techniques. Where discounting techniques are applied, the discount rate is based on current market rates applicable to financial instruments with similar characteristics. The valuation techniques that include non-market observable inputs can result in a different outcome than the actual transaction price at which the asset was acquired. Such differences, known as ‘day one gains and losses’, are not recognized in the income statement immediately but are deferred. They are released over time to the income statement in line with the change in factors (including time) that market participants would consider in setting a price for the asset. Interest accrued to date is not included in the fair value of the financial asset. For more information on the determination of the fair value we refer to note 3.3.
2.8.5. Derecognition A financial asset is derecognized when: the contractual rights to the asset’s cash flows expire, Aegon Bank N.V. retains the right to receive cash flows from the asset or has an obligation to pay received cash flows in full without delay to a third party and either o has transferred the asset and substantially all the risks and rewards of ownership, or o has neither transferred nor retained all the risks and rewards but has transferred control of the asset. The transfer of an asset generally involves transferring the contractual right to receive the cash flows from the asset. Financial assets of which Aegon Bank N.V. has neither transferred nor Page 35 of 141
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retained significantly all the risk and rewards are recognized to the extent of the continuing involvement of Aegon Bank N.V.. If significantly all risks are retained, the assets are not derecognized. On derecognition, the difference between the disposal proceeds and the carrying amount is recognized in the income statement as a realized gain or loss. Any cumulative unrealized gain or loss previously recognized in the revaluation reserve in shareholders’ equity is also recognized in the income statement. Financial liabilities are derecognised when they cease to exist: when the obligation specified in the contract is either discharged, cancelled or expires. The following events also result in the derecognition of the original financial liabilities and the recognition of new financial obligations: the replacement of an existing liability with another liability from the same party, where the terms of the loan differ materially; a material change in the terms of the loan. The difference between the carrying amount of the original liability and the amount paid is stated in the income statement.
2.8.6. Collateral With the exception of cash collateral, assets received as collateral are not separately recognized as an asset until the financial asset they secure defaults. When cash collateral is recognized, a liability is recorded for the same amount.
2.8.7. Securities lending Financial assets that are lent to a third party against collateral, usually in the form of cash collateral are not derecognized as the securities are transferred legally but not economically. Therefore Aegon Bank N.V. retains substantially all the risks and rewards of the assets. A liability is recognized for cash collateral received, on which interest is accrued. A security that has been received under a security lending agreement is not recognized as an asset. A receivable is recognized for any related cash collateral paid by Aegon Bank N.V..
2.8.8. Repurchase agreements Repurchase agreements (repos) are financing agreements where securities are sold and where the seller has the obligation to repurchase the securities at a pre-agreed price at a specified time. Because the repurchase price is known and the economic risks are not transferred, these transactions do not meet the criteria of a ‘true sale’. Accordingly, the securities sold are not derecognized by the selling party. A liability to repay the funds received is recognized. The difference between sale and repurchase price is treated as investment income; the interest charge is added to the liability over the term of the contract using the effective interest rate method and recognized in the income statement. In reverse repurchase agreements Aegon Bank N.V. buys securities and has the obligation to sell them back on a specific date at a predetermined price. These securities are not recognised on the balance sheet as not all the risks and rewards are substantially transferred to Aegon Bank N.V.. A receivable is recognized for the amount paid. The difference between sale price and repurchase price is treated as investment income; the interest income is added to the receivable over the term of the contract using the effective interest rate method and recognized in the income statement.
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2.9.
Derivatives
2.9.1. Definition Derivatives are financial instruments, classified as held for trading financial assets, of which the value changes in response to an underlying variable, that require little or no net initial investment and are settled at a future date. Assets and liabilities may include derivative-like terms and conditions. With the exception of features embedded in contracts held at fair value through profit or loss, embedded derivatives that are not considered closely related to the host contract are bifurcated, carried at fair value and presented as derivatives. In assessing whether a derivative-like feature is closely related to the contract in which it is embedded, Aegon Bank N.V. considers the similarity of the characteristics of the embedded derivative and the host contract. Derivatives with positive values are reported as assets and derivatives with negative values are reported as liabilities.
2.9.2. Measurement All derivatives recognized on the statement of financial position are carried at fair value. All fair value changes are recognized in the income statement. The fair value is calculated net of the interest accrued to date and is based on market prices, when available. When market prices are not available, other valuation techniques, such as option pricing or stochastic modeling, are applied. The valuation techniques incorporate all factors that market participants would consider and are based on observable market data, to the extent possible.
2.9.3. Hedge accounting As part of its asset liability management, Aegon Bank N.V. enters into economic hedges to limit its risk exposure. These planned transactions are assessed to determine whether hedge accounting can and should be applied. Certain derivatives, that are used to economically hedge risks from a risk management perspective of Aegon Bank N.V., do not qualify for hedge accounting according to the specific rules of IFRS and are therefore classified as derivatives held for trading. For hedge accounting purposes, a distinction is made between fair value hedges, cash flow hedges and hedges of a net investment in a foreign operation. Aegon Bank N.V. currently only uses fair value hedges. Fair value hedges are hedges of a change in the fair value of an unrecognized firm commitment or an asset or liability (being hedged item) that is not held at fair value through profit or loss. The hedged item is remeasured to fair value in respect of the hedged risk and any resulting adjustment is recorded in the income statement. Hedge accounting is discontinued prospectively for hedges that are no longer considered effective. When hedge accounting is discontinued for a fair value hedge, the derivative continues to be carried on the statement of financial position with changes in its fair value recognized in the income statement. When hedge accounting is discontinued for a cash flow hedge because the cash flow is no longer expected to occur, the accumulated gain or loss in shareholders’ equity is recognized immediately in the income statement. In other situations where hedge accounting is discontinued for a cash flow hedge, including those where the derivative is sold, terminated or exercised, accumulated gains or losses in shareholders’ equity are amortized into the income statement when the income statement is impacted by the variability of the cash flow from the hedged item. Fair value hedge accounting under EU ‘carve out’ Aegon Bank N.V. applies fair value hedge accounting to portfolio hedges of interest rate risk (macro hedging) under the EU ‘carve out’ of IFRS-EU. The EU ‘carve-out’ macro hedging enables Page 37 of 141
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a group of derivatives (or proportions thereof) to be viewed in combination and jointly designated as the hedging instrument. Under the IFRS-EU ‘carve-out’, hedge accounting may be applied to mortgage loans and ineffectiveness only arises when the revised estimate of the amount of cash flows in scheduled time buckets falls below the designated amount of that bucket. The entity applies fair value hedge accounting for portfolio hedges of interest rate risk (macro hedging) under the EU ‘carve-out’ to specific mortgage loans portfolios. The hedging activities are designated under a portfolio fair value hedge on these mortgage loans. Changes in the fair value of the derivatives are recognized in the income statement, together with the fair value adjustment on the mortgages (hedged items) insofar as attributable to interest rate risk (the hedged risk). At the inception of the transaction Aegon Bank N.V. documents the relationship between hedging instruments and hedged items, its risk management objective, together with the methods selected to assess hedge effectiveness. Aegon Bank N.V. also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of the hedged items. If the hedge relationship no longer meets the criteria for hedge accounting, the cumulative adjustment of the hedged item is, in the case of interest bearing instruments, amortized through the income statement over the remaining term of the original hedge or recognized directly when the hedged item is derecognized.
2.10. Tax assets and liabilities Tax assets and liabilities are amounts payable and receivable by Aegon N.V., since Aegon N.V. heads the tax group.
2.10.1.
Current tax assets and liabilities
Tax assets and liabilities for current and prior financial years are measured at the amount expected to be paid to or recovered from the tax authorities, using the rates that have been substantively enacted on the reporting date. Aegon Bank N.V. is a member of the tax group headed by Aegon N.V, and any taxes it owes directly are set off at the level of the parent of the tax group as though it were an independent taxpayer. Aegon Bank N.V. is jointly and severally liable for all tax liabilities of the entire tax group. Current taxes are settled in current account with the parent company.
2.10.2.
Deferred tax assets and liabilities
Deferred tax assets and liabilities are recognized in the balance sheet of Aegon Bank N.V. for the estimated future tax effects of temporary differences between the carrying value of an item and its tax value, with the exception of differences arising from the initial recognition of goodwill and of assets and liabilities that do not impact taxable or accounting profits. A tax asset is recognized for tax loss carryforwards to the extent that it is probable at the reporting date that future taxable profits will be available against which the unused tax losses and unused tax credits can be utilized. Deferred tax assets and liabilities are reviewed at the balance sheet date and are measured at tax rates that are expected to apply when the asset is realized or the liability is settled. The carrying amount is not discounted and reflects the expectations of Aegon Bank N.V. concerning the manner of recovery or settlement. Deferred tax assets and liabilities are recognized in relation to the underlying transaction either in the income statement, other comprehensive income or directly in equity. Deferred tax assets and liabilities are, in general, deferred tax assets and liabilities in respect of the parent company.
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2.11. Other assets and receivables Other assets and receivables include equipment, trade and other receivables, and prepaid expenses. Trade and other receivables are initially recognized at fair value and are subsequently measured at amortized cost. Equipment is carried at cost less accumulated depreciation and impairment losses. It is depreciated on a straight line basis over its useful life to its residual value. Equipment is derecognized upon disposal or when no more future economic benefits are expected from its use or sale. The difference between the net proceeds and the carrying amount is recognized in the income statement at the time of sale or disposal.
2.12. Impairment of assets An asset is impaired if the carrying amount exceeds the amount that would be recovered through its use or sale. For tangible and intangible assets, financial assets and reinsurance assets, if not held at fair value through profit or loss, the recoverable amount of the asset is estimated when there are indications that the asset may be impaired. AEGON Bank assesses at each reporting date, whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (an incurred loss event) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include: indications that the borrower or a group of borrowers is experiencing significant financial difficulty; the probability that they will enter bankruptcy or other financial reorganisation; default or delinquency in interest or principal payments; and where observable data indicates that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaultsImpairment charges and reversals of financial assets are accounted for in note 21.
2.12.1.
Impairment of non-financial assets
Assets are tested individually for impairment when there are indications that the asset may be impaired. The impairment loss is calculated as the difference between the carrying and the recoverable amount of the asset, which is the higher of an asset’s value in use and its net selling price. The value in use represents the discounted future net cash flows from the continuing use and ultimate disposal of the asset and reflects its known inherent risks and uncertainties. Impairment losses are reversed when there is evidence that there has been a change in the estimates used to determine the asset’s recoverable amount since the recognition of the last impairment loss. The reversal is recognized in the income statement to the extent that it reverses impairment losses previously recognized in the income statement. The carrying amount after reversal cannot exceed the amount that would have been recognized if no impairment had taken place.
2.12.2.
Impairment of debt instruments
Debt instruments are impaired if there is objective evidence that a credit event has occurred after the initial recognition of the asset that has a negative impact on the estimated future cash flows. A specific security is considered to be impaired when it is determined that it is probable that not all amounts due (both principal and interest) will be collected as scheduled. Individually significant loans and other receivables are first assessed separately. All non-impaired assets measured at amortized cost are then grouped by credit risk characteristics and collectively tested for impairment. For debt instruments carried at amortized cost, the carrying amount of impaired financial assets is reduced through an allowance account. The impairment loss is calculated as the difference between the carrying and recoverable amount of the investment. The recoverable amount is Page 39 of 141
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determined by discounting the estimated probable future cash flows at the original effective interest rate of the asset. For variable interest debt instruments, the current effective interest rate under the contract is applied. For debt instruments classified as available-for-sale, the asset is impaired to its fair value. Any unrealized loss previously recognized in other comprehensive income is taken to the income statement in the impairment loss. After impairment the interest accretion on debt instruments that are classified as available-for-sale is based on the rate of return that would be required by the market for similar rated instruments at the date of impairment. Impairment losses recognized for debt instruments can be reversed if in subsequent periods the amount of the impairment loss decreases and that decrease can be objectively related to a credit event occurring after the impairment was recognized. For debt instruments carried at amortized cost, the carrying amount after reversal cannot exceed its amortized cost at the reversal date.
2.12.3.
Impairment of debt instruments and other loans
Mortgage and other loans are financial assets carried at amortised cost and are amounts due from banks and loans and advances to customers, Aegon Bank first assesses individually whether objective evidence of impairment exists for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If Aegon Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the income statement. Interest income continues to be accrued on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded as part of interest and similar income. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to Aegon Bank. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a future write–off is later recovered, the recovery is credited to the ’Credit loss expense’. The present value of the estimated future cash flows is discounted at the financial asset’s original EIR. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current EIR. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of the credit grading system, that considers credit risk characteristics such as asset type, collateral type, past–due status and other relevant factors. Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Page 40 of 141
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Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in relatedobservable data from year to year (such as changes in unemployment rates, property prices, payment status, or other factors that are indicative of incurred losses in the group and their magnitude). Themethodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Aegon Bank reviews its individually significant loans and advances at each statement-of-financialposition date to assess whether an impairment loss should be recorded in the income statement. In particular, management’s judgement is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. These estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance. Loans and advances that have been assessed individually (and found not to be impaired) are assessed together with all individually insignificant loans and advances in groups of assets with similar risk characteristics. This is to determine whether provision should be made due to incurred loss events for which there is objective evidence,but the effects of which are not yet evident. The collective assessment takes account of data from the loan portfolio (such as levels of arrears, credit utilisation, loan-to-collateral ratios, etc.), and judgements on the effect of concentrations of risks and economic data (including levels of unemployment, real estate prices indices and the performance of different individual groups). The impairment loss on loans and advances is disclosed in more detail in Note 7 and further described in Note 4.4.5.
2.12.4.
Impairment of equity instruments
For equity instruments, a significant or prolonged decline in fair value below initial cost is considered objective evidence of impairment and always results in a loss being recognized in the income statement. Significant or prolonged decline is defined by Aegon Bank N.V. as an unrealized loss position for generally more than six months or a fair value of less than 80% of the cost price of the investment. Equity investments are impaired to the asset’s fair value and any unrealized loss previously recognized in shareholders’ equity is taken to the income statement as an impairment loss and recognized in the income statement. Impairment losses on equity instruments cannot be reversed.
2.13. Savings deposits Savings deposits are stated at amortized cost (net of accrued interest). Accrued interest is recognised in the consolidated statement of financial position under 'other liabilities and accruals'. The balances are largely repayable on demand. The initial valuation of this item reasonably approximates fair value.
2.14. Amounts due to banks Amounts due to banks comprise debit balances and loans due from banks. Amounts due to banks are initially recognized at fair value plus transaction costs. They are then recognized at amortized cost using the effective interest rate method. Debt is derecognized when the financial obligation is discharged or cancelled.
2.15. Provisions A provision is recognized for present legal or constructive obligations arising from past events, when it is probable that it will result in an outflow of economic benefits and the amount can be reliably estimated. The amount recognized as a provision is the best estimate of the expenditure required to settle the present obligation at the balance sheet date, considering all its inherent risks and uncertainties, as well as the time value of money. The unwinding of the effect of discounting is recorded in the income statement as an interest expense. Page 41 of 141
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2.16. Assets and liabilities relating to employee benefits Aegon Bank itself does not have employees. The assets and liabilities arising from employee benefits for staff working for Aegon Bank are recognized in the financial statements of Aegon Nederland. The number of employees of Aegon Nederland amounts to 4.384 from which 126 work for Aegon Bank N.V. We further refer to the annual accounts of Aegon Nederland. One of Aegon Bank’s subsidiaries3 does have employees on its payroll. Aegon Bank has a defined benefit pension plan (basic package) and a defined contribution plan (package relating to income above a specified limit). The assets and liabilities arising from the defined benefit plan for the staff employed at the Aegon Bank subsidiary are recognized in the consolidated financial statements of Aegon Bank under ‘Provisions’.
2.16.1.
Short-term employee benefits
A liability is recognized for the undiscounted amount of short-term employee absences benefits expected to be paid within one year after the end of the period in which the service was rendered. Accumulating short-term absences are recognized over the period in which the service is provided. Benefits that are not service-related are recognized when the event that gives rise to the obligation occurs.
2.16.2.
Post-term employee benefits
Aegon Bank N.V. itself does not have employees. Pension costs comprise the pension charges recharged by Aegon Nederland. The contribution payable to the plan for services provided is recognized as an expense in the income statement. An asset is recognized to the extent that the contribution paid exceeds the amount due for services provided. The assets and liabilities arising from employee benefits for staff working for Aegon Bank N.V. relating to their defined benefit plan are recognized in the financial statements of Aegon Nederland. Refer to the financial statements of Aegon Nederland for more information on the pension plan and the defined benefit liabilities. The pension cost charged (post-employment benefit costs) to Aegon Bank N.V. are a fixed percentage of the salaries charged to the entity.”
2.17. Other liabilities and accruals Other liabilities and accruals are initially recognized at fair value plus transaction costs. They are then recognized at amortized cost using the effective interest rate method. A debt is derecognized when the financial obligation is discharged or cancelled. Unless stated otherwise, deferred interest and other accruals are recognised at (amortized) cost.
2.18. Equity Share capital is stated at par value. The share premium reserve, where applicable, relates to capital contributions which have occurred since incorporation without issuing new shares. The revaluation reserves represent the difference between the fair values of available-for-sale assets and (amortized) cost, taking into account income tax. Dividends and other distributions to holders of equity instruments are recognized directly in equity. A liability for dividends payable is not recognized until the dividends have been declared and approved. Based on their specific characteristics the client participations issued by Knab qualify as tier 1 capital under the applicable banking regulations. Due to the nature of the participation, the instrument also qualifies as equity under IFRS. In line with the treatment as equity the corresponding interest charges and discount on the fee are treated as dividend in the income statement. The dividend is shown on a net basis. This includes the deducted dividend tax on the discount and the interest. 3
This entity was sold to Aegon Nederland as at January 1, 2013
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2.19. Contingent assets and liabilities Contingent assets are disclosed in the notes if the inflow of economic benefits is probable, but not virtually certain. When the inflow of economic benefits becomes virtually certain, the asset is no longer contingent and its recognition is appropriate. A provision is recognized for present legal or constructive obligations arising from past events, when it is probable that it will result in an outflow of economic benefits and the amount can be reliably estimated. If the outflow of economic benefits is not probable, a contingent liability is disclosed, unless the possibility of an outflow of economic benefits is remote.
2.20. Interest income and expense (and related fees) Interest income generated by interest-bearing financial assets, including mortgages, loans and bonds, is recognized when the right to receive interest arises. Interest income is calculated according to the effective interest rate method. Interest charges include interest expense on loans and other borrowings. Interest expense on loans and other borrowings carried at amortized cost is recognized in the income statement using the effective interest method. Fee and commission income that form an integral part of the effective return on a financial asset or liability is recognized as an adjustment to the effective interest rate of the financial instrument.
2.21. Fee and commission income and expense Fee and commission income mainly comprises fees paid by third parties for services performed. Management fees and commission income from asset management, investment funds and sales activities are recognized as revenue in the period when the services were delivered or the sales were made. Fee and commission expense comprises fees paid to third parties for the sale of AEGON Bank products. These items do not include interest-type income and expense.
2.22. Employee expenses, depreciation and other operating expenses Employee expenses and other administration expenses incurred are allocated to the financial year to which they relate. Salaries, social security and pension contributions for staff employed by Aegon Nederland are recharged to Aegon Bank N.V. as services rendered to Aegon Bank N.V.. Provisions for retirement plans and other benefits payable to staff of Aegon Nederland are recognized in the financial statements of Aegon Nederland. Similarly, buildings and most of the other equipment used by Aegon Bank N.V. are made available by Aegon Nederland and the associated costs are recharged.
2.23. Result from financial transactions Results from financial transactions include:
2.23.1.
Realized gains and losses on financial investments
Gains and losses on financial investments include realized gains and losses on financial assets, other than those classified as at fair value through profit or loss.
2.23.2.
Net fair value change of derivatives
All changes in fair value are recognized in the income statement, unless the derivative has been designated as a hedging instrument in a cash flow hedge. Fair value movements of fair value hedge instruments are offset by the fair value movements of the hedged item, and the resulting hedge ineffectiveness, if any, is included in this line. In addition, the fair value movements of bifurcated embedded derivatives are included in this line.
2.24. Income tax Income tax is calculated at the current rate on the pre-tax profits over the financial year, taking into account any temporary and permanent differences between the profit determination in the financial statements and the profit calculation for tax purposes. Taxes comprise deferred and current taxes on profit. Taxes on net income are recognised in the income statement, unless the Page 43 of 141
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taxes relate to items that are recognized directly in other comprehensive income. In the latter case, the taxes are also recognised in other comprehensive income.
2.25. Events after the balance sheet date The financial statements are adjusted to reflect events that occurred between the balance sheet date and the date when the financial statements are authorized for issue, provided they give evidence of conditions that existed at the balance sheet date. Events that are indicative of conditions that arose after the balance sheet date are disclosed, but do not result in an adjustment of the financial statements themselves.
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3.
Critical accounting accounting policies
estimates
and
judgment
in
applying
Application of the accounting policies in the preparation of the financial statements requires management to apply judgment involving assumptions and estimates concerning future results or other developments, including the likelihood, timing or amount of future transactions or events. There can be no assurance that actual results will not differ materially from those estimates. Accounting policies that are critical to the financial statement presentation and that require complex estimates or significant judgment are described in the following sections.
3.1.
Continuity Management estimates that the organization has the resources to continue the business for the foreseeable future. Management is not aware of any material uncertainties which could give rise to doubt the continuity of the business. The financial statements are therefore based on the assumption that the organization will continue in business.
3.2.
Determination of having control over investees In making the determination whether Aegon Bank N.V. controls an investee, it has been analyzed whether Aegon Bank N.V. has power over the investee (existing rights that give it the current ability to direct the relevant activities). The outcome of this analysis depends on the following criteria: • Purpose and design of the investee; • What are the relevant activities (that drive the investee’s returns) and how decisions about them are taken; and • Whether rights of the investor give current ability to direct the relevant activities. The analysis also depends on whether Aegon Bank N.V. is exposed or has rights to variable returns from its involvement with the investee and whether Aegon Bank N.V. has the ability to use its powers over the investee to affect the amount of the investor’s returns. In addition, IFRS requires that the assessment also consider Aegon Bank N.V.’s relationships with other parties (who may be acting on Aegon Bank N.V.’s behalf) and the possibility that the investee contains deemed separate entities that should be assessed for control separately. In specific cases, which are described below, Aegon Bank N.V. applied judgment involving the criteria for consolidation to come to the conclusion whether Aegon Bank N.V. controls an investee. Investment vehicle An investment vehicle is considered to be any vehicle (fund) whose primary objective is investing and managing its assets with a view to generate superior returns. For the purpose of determining whether Aegon Bank N.V. controls an investment vehicles in particular the overall relationship between the investor, the investee being managed and other parties involved with the investee, have been analyzed, in determining whether it is an agent or a principal: a) The scope of its decision-making authority over the investee; b) The rights held by other parties; c) The remuneration to which it is entitled in accordance with the remuneration agreement; and d) The decision maker’s exposure to variability of returns from other interests that it holds in the investee. Investment funds Investment funds managed by Aegon Bank N.V. in which Aegon Bank N.V. holds an interest are consolidated in the financial statements if Aegon Bank N.V. has power over that investment fund and it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. In assessing control all Page 45 of 141
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interests held by Aegon Bank N.V. in the fund are considered, regardless of whether the financial risk related to the investment is borne by Aegon Bank N.V. or by the policyholders (unless the fund meets the definition of a deemed separate entity or under very strict facts and circumstances indicate a direct link between the policyholder and the fund can be assumed). In determining whether Aegon Bank N.V. has power the following has been considered: • Is the asset manager external or internal (i.e. an Aegon Bank N.V. subsidiary); • Is the investment mandate broad or narrow scoped; • The governance structure, such as an independent board of directors representing the participants which has substantive rights (e.g. to elect or remove the asset manager); and • Rights held by other parties (e.g. voting rights of participants that are substantive or not). If the above assessment indicates that Aegon Bank N.V. has power, it has been assessed whether Aegon Bank N.V. has exposure or rights to variability of returns. The following items were assessed: • Investments of Aegon Bank N.V.; • Guarantees provided by Aegon Bank N.V. on return of participants in specific investment vehicles; • Fees dependent on fund value (including, but not limited to, asset management fees); • Fees dependent on performance of the fund (including, but not limited to, performance fees); and • Other types of returns such as kick-back fees, economies of scale etc. For all investment funds Aegon Bank N.V. concluded that it is an agent and thus does not control those investment funds. Structured entities A structured entity is defined in IFRS 12 as “An entity that has been designed so that voting rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements.” In these instances the tests and indicators to assess control provided by IFRS 10 have more focus on the purpose and design of the investee (with relation to the relevant activities that most significantly affect the structured entity) and the exposure to variable returns, which for structured entities lies in interests through e.g. derivatives, and will not be focused on entities that are controlled by voting rights. Aegon Bank N.V. concluded for several structured entities that it controls those investees. Aegon Bank N.V. has been involved in the design of certain mortgage backed securitization deals and Aegon Bank N.V. also has the ability to use its power to affect the amount of the investee’s returns. Furthermore, Aegon Bank N.V. fully services the investees and can therefore influence the defaults of the mortgage portfolios. In addition the majority of risks for these securitization deals are maintained by Aegon Bank N.V.. These factors contributed to the conclusion that Aegon Bank N.V. has control.
3.3.
Determination of fair value and fair value hierarchy The following is a description of the methods of Aegon Bank N.V. of determining fair value and a quantification of its exposure to assets and liabilities measured at fair value. Fair value is defined as the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions (i.e. an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability). A fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place either: (a) in the principal market for the asset or liability; or
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(b) in the absence of a principal market, in the most advantageous market for the asset or liability. In accordance with IFRS 13, Aegon Bank N.V. uses the following hierarchy for determining and disclosing the fair value of assets and liabilities: Level I: quoted prices (unadjusted) in active markets for identical assets or liabilities that Aegon Bank N.V. can access at the measurement date; Level II: inputs other than quoted prices included within Level I that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices of identical or similar assets and liabilities) using valuation techniques for which all significant inputs are based on observable market data; and Level III: inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) using valuation techniques for which any significant input is not based on observable market data. The degree of judgment used in measuring the fair value of assets and liabilities generally inversely correlates with the level of observable valuation inputs. Aegon Bank N.V. maximizes the use of observable inputs and minimizes the use of unobservable valuation inputs when measuring fair value. Financial instruments, for example, with quoted prices in active markets generally have more pricing observability and less judgment is used in measuring fair value. Conversely, financial instruments for which no quoted prices are available have less observability and are measured at fair value using valuation models or other pricing techniques that require more judgment. The assets and liabilities categorization within the fair value hierarchy is based on the lowest input that is significant to the fair value measurement. The judgment as to whether a market is active may include, although not necessarily determinative, lower transaction volumes, reduced transaction sizes and, in some cases, no observable trading activity for short periods. In inactive markets, assurance is obtained that the transaction price provides evidence of fair value or determined that the adjustments to transaction prices are necessary to measure the fair value of the instrument. The majority of valuation techniques employ only observable market data, and so the reliability of the fair value measurement is high. However, certain assets and liabilities are valued on the basis of valuation techniques that feature one or more significant market inputs that are unobservable and, for such assets and liabilities; the derivation of fair value is more judgmental. An instrument in its entirety is classified as valued using significant unobservable inputs (Level III) if, in the opinion of management, a significant proportion of the instrument’s carrying amount is driven by unobservable inputs. “Unobservable” in this context means that there is little or no current market data available from which to determine the price at which an arm’s length transaction would be likely to occur. It generally does not mean that there is no market data available at all upon which to base a determination of fair value. Additional information is provided in the table headed “Effect of changes in significant unobservable assumptions to reasonably possible alternatives” below. While Aegon Bank N.V. believes its valuation techniques are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain instruments (both financial and nonfinancial) could result in a different estimate of fair value at the reporting date. To operationalize the fair value hierarchy of Aegon Bank N.V., individual instruments (both financial and non-financial) are assigned a fair value level based primarily on the type of instrument and the source of the prices (e.g. index, third-party pricing service, broker, internally modeled). Periodically, this logic for assigning fair value levels is reviewed to determine if any modifications are necessary in the context of the current market environment.
3.4.
Fair value of assets and liabilities The estimated fair values of the (financial) assets and liabilities of Aegon Bank N.V. are presented in following note. The estimated fair values correspond with the amounts that would be received Page 47 of 141
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to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When available, Aegon Bank N.V. uses quoted market prices in active markets to determine the fair value of investments and derivatives. In the absence of an active market, the fair value of investments in financial assets is estimated by using other market observable data, such as corroborated external quotes and present value or other valuation techniques. An active market is one in which transactions are taking place regularly on an arm’s length basis. A fair value measurement assumes that an asset or liability is exchanged in an orderly transaction between market participants, and accordingly, fair value is not determined based upon a forced liquidation or distressed sale. Valuation techniques are used when Aegon Bank N.V. determines the market is inactive or quoted market prices are not available for the asset or liability at the measurement date. However, the fair value measurement objective remains the same, that is, to arrive at the price at which an orderly transaction would occur between market participants at the measurement date under current market conditions (i.e. an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability). Therefore, unobservable inputs reflect the own assumptions of Aegon Bank N.V. about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk). These inputs are developed based on the best information available. Aegon Bank N.V. employs an oversight structure over valuation of financial assets and liabilities that includes appropriate segregation of duties. Senior management, independent of the investing functions, is responsible for the oversight of control and valuation policies and for reporting the results of these policies. For fair values determined by reference to external quotation or evidenced pricing parameters, independent price determination or validation is utilized to corroborate those inputs. Further details of the validation processes are set out below. Valuation of financial assets and liabilities is based on a pricing hierarchy, in order to maintain a controlled process that will systematically promote the use of prices from sources in which Aegon Bank N.V. has the most confidence, where the least amount of manual intervention exists and to embed consistency in the selection of price sources. Depending on asset type the pricing hierarchy consists of a waterfall that starts with making use of market prices from indices and follows with making use of third-party pricing services or brokers.
3.4.1. Debt securities The fair values of debt securities are determined by management after taking into consideration several sources of data. When available, Aegon Bank N.V. uses quoted market prices in active markets to determine the fair value of its debt securities. As stated previously, Aegon Bank N.V.’s valuation policy utilizes a pricing hierarchy which dictates that publicly available prices are initially sought from indices and third party pricing services. In the event that pricing is not available from these sources, those securities are submitted to brokers to obtain quotes. The majority of brokers’ quotes are non-binding. As part of the pricing process, Aegon Bank N.V. assesses the appropriateness of each quote (i.e., as to whether the quote is based on observable market transactions or not) to determine the most appropriate estimate of fair value. Lastly, securities are priced using internal cash flow modeling techniques. These valuation methodologies commonly use the following inputs: reported trades, bids, offers, issuer spreads, benchmark yields, estimated prepayment speeds, and/or estimated cash flows. To understand the valuation methodologies used by third-party pricing services Aegon Bank N.V. reviews and monitors the applicable methodology documents of the third-party pricing services. Any changes to their methodologies are noted and reviewed for reasonableness. In addition, Aegon Bank N.V. performs in-depth reviews of prices received from third-party pricing services on a sample basis. The objective for such reviews is to demonstrate that Aegon Bank N.V. can corroborate detailed information such as assumptions, inputs and methodologies used in pricing individual securities against documented pricing methodologies. Only third-party pricing services and brokers with a substantial presence in the market and with appropriate experience and expertise are used.
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Third-party pricing services will often determine prices using recently reported trades for identical or similar securities. The third-party pricing service makes adjustments for the elapsed time from the trade date to the balance sheet date to take into account available market information. Lacking recently reported trades, third-party pricing services and brokers will use modeling techniques to determine a security price where expected future cash flows are developed based on the performance of the underlying collateral and discounted using an estimated market rate. Also included within the modeling techniques for RMBS, CMBS and CDO securities are estimates of the speed at which the principal will be repaid over their remaining lives. These estimates are determined based on historical repayment speeds (adjusted for current markets) as well as the structural characteristics of each security. Periodically, Aegon Bank N.V. performs an analysis of the inputs obtained from third-party pricing services and brokers to ensure that the inputs are reasonable and produce a reasonable estimate of fair value. The asset specialists and investment valuation specialists consider both qualitative and quantitative factors as part of this analysis. Several examples of analytical procedures performed include, but are not limited to, recent transactional activity for similar debt securities, review of pricing statistics and trends and consideration of recent relevant market events. Other controls and procedures over pricing received from indices, third-party pricing services, or brokers include validation checks such as exception reports which highlight significant price changes, stale prices or un-priced securities. Additionally Aegon Bank N.V. performs back testing on a sample basis. Back testing involves selecting a sample of securities trades and comparing the prices in those transactions to prices used for financial reporting. Significant variances between the price used for financial reporting and the transaction price are investigated to explain the cause of the difference and to adjust the models if necessary. Credit ratings are also an important consideration in the valuation of securities and are included in the internal process for determining the view of Aegon Bank N.V. of the risk associated with each security. However, Aegon Bank N.V. does not rely solely on external credit ratings and there is an internal process, based on market observable inputs, for its view of the risks associated with each security. Aegon Bank N.V.’s portfolio of debt securities can be subdivided in Sovereign debt, Residential mortgage-backed securities (RMBS), Commercial mortgage-backed securities (CMBS), Asset backed securities (ABS), and Corporate bonds. Below relevant details in the valuation methodology for these specific types of debt securities are described. Sovereign debt When available, Aegon Bank N.V. uses quoted market prices in active markets to determine the fair value of its sovereign debt investments. When Aegon Bank N.V. cannot make use of quoted market prices, market prices from indices or quotes from third-party pricing services or brokers are used. Residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS) and asset-backed securities (ABS) Valuations of RMBS, CMBS and ABS are monitored and reviewed on a monthly basis. Valuations per asset type are based on a pricing hierarchy which uses a waterfall approach that starts with market prices from indices and follows with making use of third-party pricing services or brokers. The pricing hierarchy is dependent on the possibilities of corroboration of the market prices. If no market prices are available Aegon Bank N.V. uses internal models to determine fair value. Significant inputs included in the internal models are generally determined based on relative value analyses, which incorporate comparisons to instruments with similar collateral and risk profiles. Market standard models may be used to model the specific collateral composition and cash flow structure of each transaction. The most significant unobservable input is illiquidity premium which is embedded in the discount rate. Corporate bonds Valuations of corporate bonds are monitored and reviewed on a monthly basis. The pricing hierarchy is dependent on the possibility of corroboration of market prices when available. If no Page 49 of 141
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market prices are available, valuations are determined by a discounted cash flow methodology using an internally calculated yield. The yield is comprised of a credit spread over a given benchmark. In all cases the benchmark is an observable input. The credit spread contains both observable and unobservable inputs. Aegon Bank N.V. starts by taking an observable credit spread from a similar bond of the given issuer, and then adjust this spread based on unobservable inputs. These unobservable inputs may include subordination, liquidity and maturity differences. Corroboration On a quarterly basis level classifications are assigned to all securities. Those securities that have been priced by non-binding broker quotes are classified level II/III at first instance and are corroborated in order to assign the proper level. Aegon Bank N.V. compares the received quote against all available other evidence. If differences between the price used to measure the security and two additional prices are within a 3% difference range a level II is assigned, otherwise the security is classified as being level III. If quotes were not to be corroborated and did not seem to reflect a fair value, measures are taken to get a more reliable valuation; these securities always classify as level III.
3.4.2. Mortgage loans, private loans and other loans For private loans, fixed interest mortgage loans and other loans originated by Aegon Bank N.V., the fair value used for disclosure purposes is estimated by discounting expected future cash flows using a current market rate applicable to financial instruments with similar yield, credit quality and maturity characteristics. The market rate is adjusted for expenses, liquidity, credit risk, prepayment rates and lapse assumptions. The fair value of floating interest rate mortgage loans, policy loans and private placements used for disclosure purposes is assumed to be approximated by their carrying amount, adjusted for changes in credit risk. Credit risk adjustments are based on market observable credit spreads if available, or management’s estimate if not market observable.
3.4.3. Money market and other short-term investment and deposits with financial institutions The fair value of assets maturing within a year is assumed to be approximated by their carrying amount adjusted for credit risk where appropriate. Credit risk adjustments are based on market observable credit spreads if available, or management’s estimate if not market observable.
3.4.4. Derivatives Where quoted market prices are not available, other valuation techniques, such as option pricing or stochastic modeling, are applied. The valuation techniques incorporate all factors that a typical market participant would consider and are based on observable market data when available. Models are validated before they are used and calibrated to ensure that outputs reflect actual experience and comparable market prices. Fair values for exchange-traded derivatives, principally futures and certain options, are based on quoted market prices in active markets. Fair values for over-the-counter (OTC) derivative financial instruments represent amounts estimated to be received from or paid to a third party in settlement of these instruments. These derivatives are valued using pricing models based on the net present value of estimated future cash flows, directly observed prices from exchange-traded derivatives, other OTC trades, or external pricing services. Most valuations are derived from swap and volatility matrices, which are constructed for applicable indices and currencies using current market data from many industry standard sources. Option pricing is based on industry standard valuation models and current market levels, where applicable. The pricing of complex or illiquid instruments is based on internal models or an independent third party. For long-dated illiquid contracts, extrapolation methods are applied to observed market data in order to estimate inputs and assumptions that are not directly observable. To value OTC derivatives, management uses observed market information, other trades in the market and dealer prices.
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Aegon Bank N.V. normally mitigates counterparty credit risk in derivative contracts by entering into collateral agreements where practical and in ISDA4 master netting agreements to offset credit risk exposure. In the event no collateral is held by Aegon Bank N.V. or the counterparty, the fair value of derivatives is adjusted for credit risk based on market observable spreads. Changes in the fair value of derivatives attributable to changes in counterparty credit risk were not significant.
3.4.5. Embedded derivatives in bank products Some bifurcated derivatives embedded in bank products are not quoted on an active market. Valuation techniques are used to determine the fair values of these derivatives. Given the dynamic and complex nature of the cash flows relating to these derivatives, their fair values are often determined by using stochastic techniques under a variety of market return scenarios. A variety of factors are considered, including expected market prices and rates of return, equity and interest rate volatility, credit risk, correlations of market returns, discount rates and actuarial assumptions. The expected returns are based on risk-free interest rates, such as the London Inter-Bank Offered Rate (LIBOR) yield curve or the current rates on Dutch government bonds. Market volatility assumptions for each underlying index are based on observed market implied volatility data and/or observed market performance. As required for discounting cash flows, Aegon Bank N.V. applies a credit spread to the risk-free interest rate when computing the guarantee provisions. This own credit spread is derived from the spread used in the market for Credit Default Swaps in a reference portfolio of European life insurers (including Aegon N.V.).
3.4.6. Savings deposits Savings deposits are carried at amortized cost (with fair value being disclosed in the notes to the consolidated financial statements).
3.4.7. Other borrowings Other borrowings are either carried at fair value (if they are designated as financial liabilities at fair value through profit or loss) or amortized cost (with fair value being disclosed in the notes to the consolidated financial statements). For the determination of the fair value of the borrowings, the level hierarchy as described by IFRS is used. The preferred method of obtaining the fair value of the fair value option bonds is the quoted price (Level I). In case markets are less liquid or the quoted prices are not available, an internal model is used, using parameters which are market observable (Level II). Aegon Bank N.V. uses a discounted cash flow method including yield curves such as deposit rates, floating rate and 3-month swap rates. In addition Aegon Bank N.V. includes the own credit spread based on Aegon’s credit default swap curve.
4
International Swaps and Derivatives Associations Page 51 of 141
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Fair value hierarchy The table below provides an analysis of assets and liabilities recorded at fair value on a recurring and non-recurring basis by level of the fair value hierarchy. 2013
Level I
Level II
Level III
Total 2013
Assets carried at fair value AFS investments - Debt securities
454.836
1.473.738
440.084
2.368.658
460 -
169.902 72.123
-
170.362 72.123
455.296
1.715.763
440.084
2.611.143
Liabilities carried at fair value - Derivatives
-
53.952
3.943
57.895
Total liabilities
-
53.952
3.943
57.895
FVTPL investments - Investment fund units - Derivatives Total assets
2012
Level I
Level II
Level III
Total 2012
Assets carried at fair value AFS investments - Debt securities
423.324
1.788.003
222.527
2.433.854
463 -
152.957 32.398
-
153.420 32.398
423.787
1.973.358
222.527
2.619.672
Liabilities carried at fair value - Derivatives
-
148.386
6.349
154.735
Total liabilities
-
148.386
6.349
154.735
FVTPL investments - Investment fund units - Derivatives Total assets
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Movements in Level III financial instruments measured at fair value
2013
As at
Result
Result
Purchase
income 1-1-
Sales
Transfer
s
statement
As at
Result
31-12-
year-
2013
end
s
OCI
between
2013 I/II and III Assets carried at fair value AFS investments - Debt securities
222.527
2.112
3.462
173.678
-54.699
93.005
440.084
-
-
-
-
-
-
-
-
-
222.527
2.112
3.462
173.678
-54.699
93.005
440.084
-
- Derivatives
6.349
-2.668
-
262
-
-
3.943
-
Total liabilities
6.349
-2.668
-
262
-
-
3.943
-
2012
As at
- Other
Total assets Liabilities carried at fair value
Result
Result
Purchases
Sales
Transfers
As at
Result
between
31-12-
year-
2012
end
income 1-1-
statement
OCI
2012 I/II and III Assets carried at fair value AFS investments - Debt securities - Other Total assets
108.375
727
11.999
395
-45.681
146.712
222.527
-
-
-
-
-
-
-
-
-
108.375
727
11.999
395
-45.681
146.712
222.527
-
32.205
75
-
-25.931
-
-
6.349
-
32.205
75
-
-25.931
-
-
6.349
-
Liabilities carried at fair value - Derivatives Total liabilities
The total gains / (losses) in the last column relate to the total income in the financial year during which the financial instrument was held as Level III instrument.
Significant transfers between Levels I/II and Level III Aegon Bank N.V.’s policy is to record transfers of assets and liabilities between Level I, Level II and Level III at their fair values as of the beginning of each reporting period. During 2013, AEGON Bank transferred financial instruments with a value of EUR 123 million from Level II to Level III, the valuation method did not change in 2013 in comparison to 2012. Page 53 of 141
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Therefore no fair value movement was recorded related to the transfer. During 2012, AEGON Bank transferred financial instruments with a value of EUR 147 million from Level II to Level III, the valuation method did not change in 2012 in comparison to 2011. Therefore no fair value movement was recorded related to the transfer. There were no significant transfers between Level I and Level II of the fair value hierarchy during 2012 and 2013.
Significant unobservable assumptions The table below presents information about the significant unobservable inputs used for recurring fair value measurements for certain Level III assets and liabilities.
2013
Carrying amount
Valuation technique
Most important input
Range
Weighted average
Assets carried at fair value AFS investments Debt securities ABS Total assets at fair value Liabilities carried at fair value Derivatives
Total liabilities at fair value
440.084
Broker quote
Liquidity premium
n.a.
n.a.
Discounted cash flow
Credit spread
n.a.
n.a.
440.084
3.943
3.943
Effect of changes in significant unobservable assumptions to reasonably possible alternatives The following table shows the sensitivity of the fair value of Level III instruments to changes in key assumptions, by class of instrument. The effect of an increase of a reasonable possible alternative assumption on the carrying amount is shown in the column ‘positive’ and a decrease in the column ‘negative’.
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2013
Carrying amount
Most important input
Note
Effect of reasonably possible alternative assumptions positive
negative
Assets carried at fair value AFS investments Debt securities - ABS
Liabilities carried at fair value Derivatives - Embedded derivatives in bank contracts
440.084
3.943
Liquidity premium
a
-252
252
Credit spread
b
-
-
The table above presents the impact on a fair value measurement of a change in an unobservable input for financial instruments. The impact of changes in inputs may not be independent; therefore the descriptions provided below indicate the impact of a change in an input in isolation. a.
b.
The primary unobservable assumptions used in fair value measurement of asset backed securities is in general a liquidity premium in the discount rate. Changing the liquidity premium changes the discount rate when using the discounted cash flow model. Increasing or decreasing the liquidity premium respectively decreases or increases the value of the investment. Aegon Bank N.V. adjusted the discount rate with 100 basis points up or down for this input. To determine the fair value of the bifurcated embedded derivatives related to guarantees, a discount rate is used including own credit spread. An increase in the own credit spread results in lower valuation, while a decrease results in a higher valuation of the embedded derivatives. Aegon Bank N.V. increased or decreased the own credit spread by 20 basis points.
Fair value information about assets and liabilities not measured at fair value The following table presents the carrying values and estimated fair values of assets and liabilities, excluding assets and liabilities which are carried at fair value on a recurring basis. Certain financial instruments that are not carried at fair value are carried at amounts that approximate fair value, due to their short-term nature and generally negligible credit risk. These instruments include cash and cash equivalents, short-term receivables and accrued interest receivable, short-term liabilities, and accrued liabilities. These instruments are not included in the table below. Furthermore, for certain financial instruments disclosed in the table below, the carrying amounts of reasonably approximate the disclosed fair values at year-end. Therefore the unobservable inputs regarding the fair value are listed as not applicable (n.a.). There have not been changes in valuation techniques used to measure the fair value of these assets and liabilities. All of the instruments disclosed in the table are held at amortized cost.
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2013
Carrying amount December 31, 2013
Total estimated fair value, December 31, 2013
Level of fair value hierarchy
Level I
Level II
Valuation technique
Unobservable inputs
Level III
Assets Mortgage loans
Private loans
Liabilities Savings deposits
3.5.
4.237.307
4.637.723
-
684.508
714.642
-
4.282.872
4.313.692
-
-
-
4.637.723
Discounted cash flow
714.642
Discounted cash flow
4.313.692
Discounted cash flow
Liquidity premium; spreads for credit risk, expenses and prepayments, lapse assumptions Liquidity premium; spreads for credit risk, expenses and prepayments, lapse assumptions
-
Impairment of financial assets There are a number of significant risks and uncertainties inherent in the process of monitoring investments and determining if impairment exists. These risks and uncertainties include the risk that the assessment of Aegon Bank N.V. of an issuer’s ability to meet all of its contractual obligations will change based on changes in the credit characteristics of that issuer and the risk that the economic outlook will be worse than expected or have more of an impact on the issuer than anticipated. Any of these situations could result in a charge against the income statement to the extent of the impairment charge recorded. Debt securities These securities are impaired and an impairment loss recognized when it is considered probable that not all of the amounts due will be received according to schedule. The following factors are taken into consideration. Industry sectors and individual debt securities are regularly monitored for evidence of impairment. This evidence may include one or more of the following: 1) deteriorating market to book ratio, 2) increasing industry risk factors, 3) deteriorating financial condition of the issuer, 4) covenant violations, 5) high probability of bankruptcy of the issuer or 6) recognized credit rating agency downgrades. Residential mortgage-backed securities (RMBS) are monitored and reviewed on a monthly basis. Detailed cash flow models using the current collateral pool and capital structure on the portfolio are performed quarterly. Model output is generated under a base and several stress-case scenarios. Aegon Bank N.V.’s RMBS asset specialists utilize industry modeling software to perform a loan-by-loan, bottom- up approach to modeling. Key assumptions used in the models are projected defaults, loss severities, and prepayments. Each of these key assumptions varies greatly based on the significantly diverse characteristics of the current collateral pool for each security. Loan-to-value, loan size, and borrower credit history are some of the key characteristics used to determine the level of assumption that is utilized. Page 56 of 141
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Defaults were estimated by identifying the loans that are in various delinquency buckets and defaulting a certain percentage of them over the near-term and long-term. Assumed defaults on delinquent loans are dependent on the specific security’s collateral attributes and historical performance. Loss severity assumptions were determined by obtaining historical rates from broader market data and by adjusting those rates for vintage, specific pool performance, collateral type, mortgage insurance and estimated loan modifications. Prepayments were estimated by examining historical averages of prepayment activity on the underlying collateral. Once the entire pool is modeled, the results are analyzed by internal asset specialists to determine whether or not a particular tranche or holding is at risk for not collecting all contractual cash flows taking into account the seniority and other terms of the tranches held. Aegon Bank N.V. will impair its particular tranche to fair value where it would not be able to receive all contractual cash flows. Commercial mortgage-backed securities (CMBS) are monitored and reviewed on a monthly basis. Detailed cash flow models using the current collateral pool and capital structure on the portfolio are performed quarterly. Model output is generated under base and several stress-case scenarios by Aegon Bank N.V.’s CMBS asset specialists. For conduit securities, a widely recognized industry modeling software is used to perform a loan-by-loan, bottom-up approach to modeling. For nonconduit securities, a CMBS asset specialist works closely with Aegon Bank N.V.’s real estate valuation group to determine underlying asset valuation and risk. Both methodologies incorporate external estimates on the property market, capital markets, property cash flows, and loan structure. Results are then closely analyzed by the asset specialist to determine whether or not a principal or interest loss is expected to occur. Aegon Bank N.V. will impair a particular tranche to fair value where it would not be able to receive all contractual cash flows. Other ABS securities are monitored and reviewed on a monthly basis. Where ratings have declined to below investment grade, the individual debt securities have been modeled. Results are then closely analyzed by the asset specialist to determine whether or not a principal or interest loss is expected to occur. Aegon Bank N.V. will impair its particular tranche to fair value where it would not be able to receive all contractual cash flows. Mortgage loans For mortgage loans which are valued at amortized cost, the carrying amount of the impaired financial assets is reduced through an allowance account. The impairment loss is calculated as the difference between the carrying and recoverable amount of the investment. The recoverable amount is determined by discounting the estimated probable future cash flows at the original effective interest rate of the asset.
3.6.
Recognition of deferred tax assets Deferred tax assets are established for the tax benefit related to deductible temporary differences, carry forwards of unused tax losses and carry forwards of unused tax credits when in the judgment of management it is more likely than not that Aegon Bank N.V. will receive the tax benefits. Since there is no absolute assurance that these assets will ultimately be realized, management reviews the deferred tax positions of Aegon Bank N.V. periodically to determine if it is more likely than not that the assets will be realized. Periodic reviews include, among other things, the nature and amount of the taxable income and deductible expenses, the expected timing when certain assets will be used or liabilities will be required to be reported and the reliability of historical profitability of businesses expected to provide future earnings. Furthermore, management considers tax-planning strategies it can utilize to increase the likelihood that the tax assets will be realized. These strategies are also considered in the periodic reviews.
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3.7.
Recognition of provisions Provisions are established for contingent liabilities when it is probable that a past event has given rise to a present obligation or loss and the amount can be reasonably estimated. Management exercises judgment in evaluating the probability that a loss will be incurred. The estimate of the amount of a loss requires management judgment in the selection of a proper calculation model and the specific assumptions related to the particular exposure.
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4.
Risk management
4.1.
Governance and risk management structure The Executive Board of Aegon Bank is responsible for Aegon Bank’s risk management and risk control system. The Executive Board reports to the shareholder and the regulator in accordance with the terms of licence. One member of the Executive Board of parent company Aegon Nederland is member of the Supervisory Board of Aegon Bank. The other two members of the Supervisory Board are independent of Aegon Bank and Aegon Nederland. These independent members also have a seat on the Supervisory Board of Aegon Nederland. Aegon Bank operates a risk control system consistent with Aegon N.V.’s Internal Control Framework. The Executive Board and management recognize the importance of efficient and effective risk management. As a provider of bank savings and investment products, Aegon Bank is exposed to a variety of risks, both financial and operational. Risk management focuses in particular on the financial and operational risks. The main objective of AEGON Bank’s risk management system is to protect its stakeholders, including its shareholder, customers and employees, from events that may prevent the ongoing achievement of financial goals. Aegon Bank manages risks in accordance with the principles and guidelines adopted by Aegon N.V. Under the supervision of Aegon Nederland, Aegon Bank operates a solid risk management system geared to controlling local operations and events. Aegon Bank’s financial risk exposure arises from its normal conduct of business, a key component of which is to invest savings accounts at its own risk and expense. Fluctuations in the international money and capital markets have an impact on the value of investments and liabilities and, accordingly, constitute major risk components for Aegon Bank. Asset and liability management, applied by Aegon Bank to protect its statement of financial position, solvency and liquidity, plays a key role in ensuring an acceptable level of exposure to managed financial risks, such as liquidity risk, interest rate risk, credit risk and foreign exchange rate risk. Aegon Bank’s risk management policy is aimed at optimizing and limiting its risk exposure for the different types of asset and credit rating category in line with Aegon Bank’s risk appetite. Diversification and the risk spreading are the cornerstones of this policy. Limits are set for a variety of financial risks and for the total financial risk exposure. Within its policy rules and limits, Aegon Bank uses derivatives to hedge certain risks, either partly (interest rate risk) or almost fully (foreign exchange rate risk). Aegon Bank’s policy on the use of derivatives specifies control, authorisation, execution and monitoring requirements for the use of these instruments. The policy also specifies measures to limit counterparty credit risk when using derivatives, such as contractual requirements for the receipt and provision of collateral. See note 4.4.3. Aegon Bank’s statement of financial position is subjected to monthly stress tests involving hypothetical scenarios in accordance with a stress testing framework. Management uses the outcomes of these “what if?” scenarios to manage Aegon Bank’s risks exposure and capital position. The models, scenarios and assumptions are regularly reviewed and, where necessary, updated. The effects of hypothetical financials shocks on net income and equity, the statement of financial position, solvency and liquidity are reviewed against the limits set. Adjustments are made when potential effects exceed or threaten to exceed these limits. Finally, a capital buffer is maintained to cover unexpected potential losses in line with Aegon Bank’s risk appetite and desired credit rating. The capital buffer must also meet the capital adequacy requirements set by the Dutch Central Bank in line with the Capital Requirements Directive (CRD) III as included in the Revised Capital Requirements Directive.
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4.2.
Solvency Pursuant to guidance issued by the Dutch Central Bank, the level of capital is subject to certain requirements. In 2009 the Basel II requirements were introduced. Aegon Bank’s capital is reviewed against its on-balance sheet and off-balance sheet assets. These assets are weighted according to their risk level. The minimum total capital ratio (also known as the BIS ratio) is 8%. The table below shows the amounts at year-ends 2013 and 2012 calculated in accordance with the Basel II requirements.
Paid-up and called-up capital Share premium reserve Participations Other reserve Profit/loss for the year
Total Risk weighted assets Solvency ratio
4.3.
2013
2012
37.437
37.437
326.212
326.212
525 (41.870)
135 (25.662)
(12.850)
(16.208)
309.454
321.914
1.850.801
2.004.575
16,72%
16,06%
Product information Banking products comprise savings accounts and investment contracts. Aegon Bank N.V.’s income consists of a margin on investments for savings products and a management fee for investment products. The savings accounts generally have few restrictions or conditions and so account holders have great flexibility in withdrawing their money. The banking products also include investment products with index-linked returns on which management fees are charged on the basis of performance.
4.4.
IFRS sensitivities The sections below set out the estimated sensitivity of Aegon Bank N.V.’s net income and equity in various scenarios. The analyses show how net income and equity would be affected by movements in each type of market risk at the reporting date. These possible changes are designated as shocks since, for determining sensitivities, they are deemed to occur suddenly. Each sensitivity analysis sets out the extent to which a given shock could affect management’s critical estimates and assessments when applying Aegon Bank N.V.’s reporting policies. Market consistent assumptions are applied to the measurement of unlisted investments and obligations. Although management’s short-term assumptions may change if there is a reasonable change in a risk factor, long-term assumptions are not altered unless there is evidence of a permanent change. This is reflected in the sensitivity analyses below. The analysis of each type of market risk assumes that the exposures on the reporting date are representative of the entire year and that the shocks occur at the beginning of the year. The results of the analysis ignore risk management measures taken to cushion losses to the extent that they are not reflected in the reporting. Depending on the movements on the financial markets, these measures may include disposals of investments, changing the composition of the investment portfolio and adjusting interest rates on deposits from customer. Mitigating action by management is only taken into account to the extent that it forms part of existing policy and procedures, such as existing hedging programs and adjustments to interest rates. One-off action that requires a change in policy is ignored. Page 60 of 141
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The results also ignore interactions between factors and they assume no changes to circumstances with respect to all other assets and liabilities. Consequently, the results of the analyses cannot be extrapolated or interpolated for smaller or larger variations, as the effects need not be linear. The sensitivity results do not represent the outcomes that would have been achieved if risk components had been different, because the analyses are based on exposures at year-end rather than the actual exposures during the year. Nor are the sensitivity results intended as a reliable prediction of future income or equity. Furthermore the analysis does not take into account the variety of options available to management to respond to changes in the financial markets, such as reallocating portfolio assets. In addition, the sensitivities are not a reliable forecast of the impact of a possible shock on another date as the portfolio may then have a different composition. No risk management process can clearly predict future results.
4.4.1. Currency exchange rate risk Aegon Bank is not exposed to significant currency exchange risk. Aegon Bank’s policy is to fully hedge any foreign currency exchange positions.
4.4.2. Interest rate risk Aegon Bank invests deposits from customers, such as savings accounts repayable on demand and deposits, largely in fixed-rate securities. Aegon Bank incurs interest rate risk due to the mismatch between the duration of fixed-rate securities on the one hand, and the duration of deposits from customers on the other. Interest rate risk is defined by Aegon Bank as “the potential change in the net interest income or market value of a portfolio as a result of a future change in the interest rate term structure.” Interest rate levels and fluctuations have an impact on the attractiveness of products for existing and prospective customers and their risk perception. The potential effects of market fluctuations and customer preferences are controlled by Aegon Bank through asset liability management and by having these risks reflected in the pricing of its products. Aegon Bank uses two complementary methods for measuring interest rate risk. First of all, the Value at Risk (historical VaR) and Price Value of a Basis Point measures are monitored on a daily basis. The Value at Risk is calculated for a 1 year horizon on a 99,9% confidence level based on 5 years of historic data. The maximum tolerated VAR has been set on 18% of the regulatory capital of Aegon Bank. As per year end the historic VaR amounts to EUR 7,4 million (2012: EUR 28,1 million). The maximum tolerated Price Value of a Basis Point has been set on 0,1% of the regulatory capital of Aegon Bank. As per year end the historic Price Value of a Basis Point amounts to EUR 32 thousand (2012: EUR 181 thousand). At the end of 2013, the limits for both measures had not been exceeded (as in 2012). Quarterly stress tests are also performed. This stress testing is performed according to the market value approach (six stress scenarios) and Earnings at Risk. Aegon Bank manages duration mismatches (i.e. between the average maturities of its assets and liabilities) within certain bandwidths. In addition to point-in-time analyses, Aegon Bank applies risk models to assess and manage interest rate risk. Interest rates at the end of each of the last five years
3-month EURIBOR 10-year Dutch government
2013
2012
2011
2010
2009
0,29% 2,35%
0,19% 1,61%
1,36% 2,39%
1,01% 3,28%
0,70% 3,55%
The tables below show the earlier of the contractual interest rate adjustment date or maturity date of financial assets and loans.
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2013
Note
<1 year
1<5 year
5 < 10 year
> 10 year
Total
Financial assets AFS
8
2.260.049
82.610
7.646
18.353
2.368.658
Financial assets FVTPL (excl. derivatives)
8
170.362
-
-
-
170.362
218.783 684.508 270.702
633.852 718
853.994 879
2.530.678 -
4.237.307 684.508 272.299
1.173.993
634.570
854.873
2.530.678
5.194.114
3.604.404
717.181
862.519
2.549.031
7.733.135
<1 year
1<5 year
5 < 10 year
> 10 year
Total
Loans to the private sector - Mortgage loans - Loans to private individuals - Other loans Total loans
7
Total financial assets and loans 2012
-
Financial assets AFS
8
2.326.423
59.466
23.124
24.840
2.433.853
Financial assets FVTPL (excl. derivatives)
8
153.420
-
-
-
153.420
607.206 9.845 617.051
806.866 140 807.006
2.740.460
7
350.869 350.869
18 2.740.478
4.505.401 10.003 4.515.404
2.830.712
676.517
830.130
2.765.318
7.102.677
Loans to the private sector - Mortgage loans - Loans to private individuals - Other loans Total loans Total financial assets and loans
-
Sensitivity of interest rates Aegon Bank’s net income and equity are sensitive to changes in interest rates. Aegon Bank measures this sensitivity for its various holdings of financial assets and liabilities. Interest rate changes may cause different assets to have different effects on net income and equity. The table below shows the estimated total effect of a parallel shift in the yield curve on net income and equity. 2013 Estimated approximate effect Net income Equity Shift up 100 basis points Shift down 100 basis points
-5.710 5.710
-15.911 15.916
2012 Estimated approximate effect Net income Equity -6.142 6.142
-14.241 14.245
4.4.3. Credit risk Aegon Bank invests savings accounts in risk-bearing fixed-rate instruments, including corporate bonds, mortgage loans, and structured credits. The value of these assets may decline due to any (perceived) decline in counterparty creditworthiness, credit rating downgrades, or defaults (failure to meet financial obligations such interest payments or principal repayments). Potential reductions in value of this kind are referred to as credit risk. Aegon Bank manages credit risk through diversification of and by setting permanent and temporary exposure limits for asset categories, rating categories, sectors, countries and individual counterparties or groups. Exposures are reported and reviewed against these set limits at least once every month. AEGON Bank also applies deterministic stress scenarios (credit spread Page 62 of 141
Annual report 2013 Aegon Bank N.V.
shocks) to measure the effects on its net income, equity, and solvency. These effects are tested against the set limits. Where necessary, adjustments are made by reducing the exposures. By adding consumer loans to the asset mix, Aegon Bank has further diversified its assets. After an extensive analysis by experts from Aegon Asset Management, Aegon Bank decided to set limits on the maximum credit limit, and to exclude any loans from borrowers which are overdue or which have an active BKR registration. This has resulted in a highly fragmented portfolio of consumer loans, carrying a floating interest rate. The table below shows Aegon Bank’s maximum credit exposure in financial assets and its holdings of derivatives, including the securities received for them. The maximum credit risk for all other items is the carrying amount. Please refer to note 24 and 25 for further information on capital commitments and contingencies and on assets pledged, which may expose AEGON Bank to credit risk. 2013
Maximu m exposur e credit risk
Collateral received
Net exposure
Cash
Real
Amounts in EUR thousand
Guaran tees
estate
Master
Surplus
netting
collateral
Total
agreement Shares Debt securities Mortgage loans Private loans Other loans Derivativ es with pos. values Total
170.362
-
-
-
-
-
-
170.362
2.368.658
-
-
-
-
-
-
2.368.658
4.237.307
145.777
3.483.875
597.356
-
-310.043
3.916.964
320.343
684.508
-
-
-
-
-
-
684.508
272.299
-
-
-
-
-
-
272.299
-
-
72.123
-
72.123
-
3.483.875
597.356
72.123
-310.043
3.989.087
3.816.170
72.123
7.805.257
145.777
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2012
Maximum exposure credit risk
Collateral received
Cash
Real
Guarante es
Securiti es Amounts in EUR thousand
estate
Net exposure
Master
Surplus
Total
netting
collateral
agreem ent
Shares
153.420
-
-
-
-
-
-
153.420
-
-
-
-
-
2.433.853
3.718.585
561.406
-
-344.428
4.001.092
504.308
-
-
-
-
-
9.990
-
-
-
-
-
14
Debt securitie s Mortgage loans Private loans Other loans Derivativ es with pos. values
2.433.853
32.398
-
-
-
32.398
-
32.398
-
Total
7.135.075
65.528
3.718.585
561.406
32.398
-344.428
4.033.489
3.101.586
4.505.400
65.528
9.990
14
-
Debt securities Collateral for structured securities such as ABS, RMBS and CMBS is not included in the table above. Whilst collateral for structured securities is present, the collateral is however related to the cash flows for paying the principal and interest on the securities and not to mitigate credit risk. The credit risk management relating to structured securities is disclosed in the credit risk concentrations section of this note. Mortgages The real estate collateral for mortgages comprises mainly residential properties. The collateral received for residential mortgages is measured as the foreclosure value which is indexed periodically. Cash collateral for mortgage loans includes the savings that have been received to redeem the underlying mortgage loans at redemption date. These savings are separately presented on the credit side of the statement of financial position, but reduce the credit risk for the mortgage loan as a whole. Guarantees that have been received regarding mortgage loans that fulfill certain criteria of the Dutch Mortgage Loan Guarantee (Nationale Hypotheek Garantie or NHG) are presented in the guarantees column. These specific mortgage loans are partly guaranteed by the Dutch Government Trust (Stichting Waarborgfonds Eigen Woningen). The guarantee encompasses the remaining debt for these mortgage loans, being the remainder of the mortgage loan (had this been an annuity-based repaid mortgage loan) minus the foreclosure value.
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The ‘surplus collateral’ column represents the surplus value of individual mortgage loans (where the value of the real estate is higher than the value of the mortgage loan) as Aegon Bank N.V. is not entitled to this part of the collateral. Aegon Bank N.V. has no assets received as non-cash collateral which can be sold or which themselves can serve as collateral without the owner of the assets being in default. Aegon Bank also receives cash collateral or other financial assets for financial assets that have been transferred to another party under reverse repurchase agreements. See note 25 ‘Transfers of financial assets’ for more information.
Counterparty risk To manage concentrations of exposure to individual counterparties and groups of counterparties and encourage the spread of credit risk, Aegon Bank uses a policy of internal and external limits. Internal limits are set on the basis of the issuer’s credit rating. The credit limits applied by Aegon Bank in millions of euros were as follows at the end of 2013: Credit ratings5
AAA AA A BBB BB B CCC or lower
Limits 2013 135 135 95 63 38 19 8
2012 135 135 95 63 38 19 8
If a credit rate downgrade causes the credit risk to exceed a set limit, the risk is lowered to within the set limit once this becomes practically possible, this limit being dependent on the quality of the asset in question. Any deviation from these limits will, in all cases, require the explicit approval of Aegon Bank's Executive Board. As per year end 2013 no limits had been exceeded. As per year end 2012 the limit for B credit ratings was exceeded due to the downgrade of two positions in the portfolio. Similar to other banks, Aegon Bank also prevents concentrations of exposure to individual counterparties and groups of counterparties by applying the ‘large exposures rules’ set forth in Chapter 7 of the Regulation on Solvency Requirements for Credit Risk [Regeling solvabiliteitseisen voor het kredietrisico], which in turn is based on the Prudential Rules Decree [Besluit prudentiële regels] (Sections 102-104). Finally, Aegon Bank’s exposure to ‘single names’ is tested against limits set by Aegon N.V. Counterparty credit risk derivatives transactions Aegon Bank engages in derivatives trades through Aegon Derivatives N.V. with individual counterparties under ISDA (International Swaps and Derivatives Association) Master Agreements. The ISDA Master Agreement and all confirmations entered into constitute a single agreement, allowing obligations to be aggregated and netted. As a result, AEGON Bank incurs credit risk on the net market value of the sum total of all transactions rather than on each individual transaction. To further reduce credit risk, Aegon Bank uses a Credit Support Annex (CSA). The CSA, which is also a part of the Master Agreement, requires a counterparty to post collateral for any negative fair value. Collateral is usually provided in cash or highly rated bonds.
5
The issuer’s rating for fixed-interest loans is used when applying the credit limit for each counterparty. Page 65 of 141
Annual report 2013 Aegon Bank N.V.
The interest rate swaps used by Aegon Bank to mitigate interest rate risk are entered into through Aegon Derivatives N.V. under a standard ISDA Master Agreement and CSA which also provide for margining. The fair value of derivatives is adjusted for the credit risk based on observable market spreads. Changes in the fair value of derivatives resulting from changes in counterparty risk were insignificant. The ratings distribution of the financial assets is presented in the table in note 4.4.4 ‘Credit rating’.
4.4.4. Credit rating The rating distribution of financial assets of Aegon Bank N.V. are presented in the table that follows, organized by rating category and split by assets that are valued at fair value and assets that are valued at amortized cost. Investments by rating
2013 Amortized cost
Sovereign exposure AAA AA A BBB BB B CCC or lower Assets not rated Total on balance credit exposure Of which past due and / or impaired assets
2012 Fair value
Amortized cost
Fair value
88.000 54.139 105.100 25.000 18
527.542 738.879 354.363 432.841 215.364
9.971 18
334.214 762.180 464.139 514.496 175.721
4.921.857 5.194.114
46.173 47.257 6.698 242.024 2.611.143
4.505.414 4.515.403
56.473 120.957 6.134 185.355 2.619.669
72.553
1.396
51.246
3.439
The ‘Assets not rated’ category relates for EUR 4.237 mln. (2012 EUR 4.505 mln.) to a mortgages loans portfolio that consists of performing loans. Furthermore the majority of the mortgage loans in guaranteed by the NHG. The consumer loan portfolio contributes for EUR 684 mln. to the category ‘not rated’. The ‘Sovereign’ category in this table is entirely government paper with a AAA rating.
Supplementary information on credit concentration in certain sectors Investments in European countries with elevated credit risk In order to present the most conservative view of the investments in certain European countries with elevated credit risk (Portugal, Italy, Ireland, Greece and Spain), the following categories have been taken into account: government bonds, Residential Mortgage-backed Securities (RMBS), investments in bonds of banks and investments in other corporates in these European countries.
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2013 Central government
Banks
RMBS
Other corporates
At December 31
Greece
Ireland
Amortized cost Fair value
-
-
14.948
-
20.000
34.948
-
-
14.809
-
19.350
34.159
Amortized cost Fair value
-
-
52.122
-
-
52.122
-
-
52.821
-
-
52.821
Amortized cost Fair value
-
44.031
19.991
17.002
89.431
170.456
-
38.158
19.572
16.223
91.310
165.263
Amortized cost Fair value
-
28.710
25.625
15.888
55.553
125.776
-
29.396
25.216
13.051
54.842
122.505
Amortized cost Fair value
-
72.742
112.686
32.890
164.984
383.302
-
67.554
112.419
29.274
165.502
374.749
Italy
Portugal
Spain
Total
2012 Central government
Banks
RMBS
Other corporates
At December 31
Greece
Ireland
Italy
Portugal
Spain
Total
Amortized cost Fair value
-
-
14.931
-
25.000
39.931
-
-
14.156
-
19.094
33.250
Amortized cost Fair value
-
-
51.223
-
-
51.223
-
-
50.065
-
-
50.065
Amortized cost Fair value
-
135.405
23.493
19.966
77.707
256.572
-
117.537
24.277
17.716
75.228
234.758
Amortized cost Fair value
-
-
25.475
15.880
65.953
107.308
-
-
24.709
11.624
62.211
98.544
Amortized cost Fair value
-
135.405
115.123
35.846
168.660
455.034
-
117.537
113.208
29.339
156.533
416.617
Page 67 of 141
Annual report 2013 Aegon Bank N.V.
Credit risk concentration The tables that follow present specific risk concentration information for financial assets. Credit risk concentration – debt securities and money market investments 2013 Asset Backed Securities Collateralised mortgage backed securities Financials Industrial Utility Sovereign exposure Total
2012
493.571 674.153 423.787 196.242 50.756 530.149 2.368.658
402.058 682.251 641.563 281.238 426.744 2.433.854
1.396
3.439
Of which past due and / or impaired assets
Credit risk concentration – mortgage loans 2013 Apartment Office Retail Other commercial Family houses Total
2012
881.296 223 430 1.077 3.354.281 4.237.307
944.044 221 572 1.065 3.559.498 4.505.400
72.469
51.231
Of which past due and / or impaired assets
Unconsolidated structured entities The carrying amounts for the unconsolidated structured securities (RMBSs, CMBSs, ABSs and other ABSs) as presented above best represents the entity's maximum exposure to loss as there are no other interests or obligations which could have an impact on the maximum exposure to loss. The maximum exposure to loss is determined without taking account of any collateral held or other credit enhancements (e.g. netting agreements that do not qualify for offset). The unconsolidated structured securities are presented in the line item "Investments" of the statement of financial position. The composition of the structured entities portfolios of Aegon Bank N.V. are widely dispersed if one would look at the individual amount per entity. This is shown in the following table together with the number of individual entities. 2013 EUR 0 < 10 mln > EUR 10 < 25 mln > EUR 25 < 50 mln > EUR 50 < 75 mln At December 31
Number of entities
Carrying amount 59 21 11 2 93
237.057 357.716 375.497 113.781 1.084.050
For the most significant structured entities the following table presents the maximum exposure to loss for Aegon Bank N.V. by type of structured entity and by seniority of interest. Also shown are the amounts of losses that in each case would be absorbed first by investors whose interests rank junior to those of Aegon Bank N.V.. This is represented by the amounts directly next to entity’s maximum exposure to loss. In each case, the amounts shown reflect the fair value of those interests as at the reporting date. Furthermore, the table presents a comparison of Aegon Bank Page 68 of 141
Annual report 2013 Aegon Bank N.V.
N.V.’s interest with the total assets greater than 25 million of those unconsolidated structured entities. Subordinated
Mezzanine interests
Most senior interests
Total
Carrying amount of
interests
Total
interest in structured entity
Max.
Poten
Max.
Potential
Max.
Potential
Maximum
Potential
Assets
exposur
tial
exposur
losses
exposure
losses borne
exposure
losses
Liabilities
structured
Assets of
e to
losse
e to
borne by
to loss
by more
to loss
borne by
entity
loss
s
loss
more
junior
borne
junior
interests
by
interests
more junior interests
more junior intere sts
Residentia
-
-
-
-
330.935
2.914.846
330.935
2.914.846
661.871
5.829.691
1.323.742
5.302
-
2.635
70.477
110.780
526.274
118.717
596.751
232.132
1.193.502
461.629
-
-
-
-
39.625
-
39.625
-
79.250
-
158.501
5.302
-
2.635
70.477
481.341
3.441.120
489.277
3.511.597
973.253
7.023.193
1.943.871
l mortgage backed securities (RMBSs) Asset Backed Securities (ABSs) ABSs – Other Total
4.4.5. Past due and impaired financial assets The tables in this section provide information on financial assets which are past due or impaired. A financial asset is past due when a counterparty has failed to make a payment when it was due under the contract. A financial asset is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset and that event has an impact on the estimated future cash flows of the financial asset that can be reliably estimated. Aegon Bank N.V. takes the following factors into account when deciding whether to impair financial assets: significant financial difficulty of the issuer or obligor; a breach of contract, such as a default or delinquency in interest or principal payments; the lender, for economic or legal reasons relating to the borrower's financial difficulty, granting to the borrower a concession that the lender would not otherwise consider; it becoming probable that the borrower will enter bankruptcy or other financial reorganization; the disappearance of an active market for that financial asset because of financial difficulties; or observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group. After the impairment loss is reversed in a subsequent period, the asset is no longer considered to be impaired. When the terms and conditions of the financial assets have been renegotiated, the terms and conditions of the new agreement apply in determining whether the financial assets are past due. Page 69 of 141
Annual report 2013 Aegon Bank N.V.
At year end, no collateral, except that for mortgage loans, was held for financial assets which were past due or which had undergone individual impairment. The carrying amount of the assets that are (partly) impaired is: Impaired financial assets 2013 Mortgage loans Consumer loans Other Total
2012
72.200 69.559 42
50.980
141.801
50.994
14
The carrying amount of the impaired financial assets is approximately equal to the fair value. The interest income from impaired assets was EUR 3,7 million (2012: EUR 2,6 million). For the mortgage loans which were past due of which had undergone individual impairment collateral was held. The majority of these mortgage loans qualifies as guaranteed by the NHG. The loan allowance amounts to EUR 14,1 million compromising EUR 11,0 million consumer loans and EUR 3,2 million mortgage loans (2012 EUR 2,0 mln mortgage loans). Past due but not impaired financial assets 2013
Mortgage loans Other loans Consumer loans Total 2012
0-6 months 250 250 0-6 months
6-12 months
> 1 year
19 19 6-12 months
2013
42 42 > 1 year
269 42 311 2012
Mortgage loans Other loans
251 -
-
-
251 -
Total
251
-
-
251
4.4.6. Equity market risk and other investments risk Fluctuations in equity markets, real estate markets and capital markets may have a negative impact on the profitability and capital position of AEGON Bank. However, AEGON Bank has very limited equity investments and is therefore not exposed to significant risks arising from shocks in equity prices.
4.4.7. Derivatives risk Aegon Bank is exposed to foreign exchange rate fluctuations and movements in the fair value of its investments as a result of changes in the term structure of interest rates and credit spreads. To hedge all or any part of this risk, Aegon Bank only uses customary financial derivatives, such as interest rate swaps, futures, and currency contracts.
4.4.8. Liquidity risk Aegon Bank operates a liquidity risk policy that focuses on holding sufficient highly liquid assets so that liquidity requirements can be met both in normal market conditions and in extreme situations resulting from unforeseen circumstances. Key risk factors for Aegon Bank include the liquidity of its investments and the fact that a large portion of savings deposits are repayable on demand. Page 70 of 141
Annual report 2013 Aegon Bank N.V.
By adding consumer loans to the asset mix, Aegon Bank has further reduced its cash flow mismatch. The contractual repayments on consumer loans on average have a shorter maturity than mortgages and bonds. Aegon Bank undertakes very stringent hypothetical stress tests on a monthly basis, simulating two parallel shocks: an unexpected and sudden loss of customer confidence in Aegon Bank leading to an unexpected and very rapid drawdown of savings deposits; and an unexpected and extreme decline in the liquidity of assets, meaning that the investment portfolio can be liquidated less quickly and at considerably lower market values. Aegon Bank can generate sufficient liquidity, after taking into account appropriate management actions, to meet the liquidity needs in this hypothetical stressed liquidity scenario. In addition, Aegon Bank monitors the inflow and outflow of savings deposits on a daily basis, in the light of market conditions and its overall cash position. As at December 31, 2013 Aegon Bank holds EUR 893 million (2012: EUR 747 million) of its investments in money market products and sovereign bonds that are readily saleable or redeemable on demand in the event of a liquidity shortfall. AEGON Bank expects that it will continue to be able to meet its commitments on the basis of its operating cash flows and revenues from financial assets.
Maturity analysis assets – (for non-derivatives) The tables below show the residual maturities for each category of financial assets at year-end 2012 and 2013. These tables do not take into account repayments, interest coupons or dividend to be received and reinvested. On demand
Mortgage loans, debt securities and other loans Investment funds Other assets Total
Mortgage loans, debt securities and other loans Investment funds Other assets Total
<1
1<5
5 < 10
> 10
Total
year
year
year
year
2013
133.000
637.210
1.751.869
1.327.456
3.713.237
7.562.772
170.362 20.531 323.893
41.786 678.996
24.827 1.776.696
1.327.456
3.713.237
170.362 87.144 7.820.278
On demand
<1
1<5
5 < 10
> 10
Total
year
year
year
year
2012
-
592.651
1.434.000
1.445.005
3.477.601
6.949.257
153.420 742 154.162
29.656 622.307
26.529 1.460.529
1.445.005
1.805 3.479.406
153.420 58.732 7.161.409
Maturity analysis liabilities – gross undiscounted contractual cash flows (for nonderivatives) The tables below show the remaining contractual maturities for each category of financial liability at year-end 2012 and 2013. When the counterparty has a choice of when an amount is paid, the liability is included on the basis of the earliest date on which it can be required to be paid. Financial liabilities that are payable on demand with a given delay are reported in the category Page 71 of 141
Annual report 2013 Aegon Bank N.V.
‘On demand’. If there is a notice period, Aegon Bank N.V. has to assume that notice is given immediately and the repayment is presented at the earliest date after the end of the notice period. When the amount payable is not fixed, the amount reported is determined by reference to the conditions existing at the reporting date. For example, if the amount payable varies with changes in an index, the amount disclosed may be based on the level of the index at the reporting date. The amounts shown in the table below are presented on an undiscounted basis and, accordingly, cannot be reconciled with the corresponding items in the balance sheet. On demand
Deposit from customers (incl. accrued interest) Other liabilities (incl. amounts due to banks) Total
1<5
5 < 10
> 10
Total
year
year
year
2013
2.904.380
175.719
780.928
481.126
28.766
4.370.919
2.418
1.074.337
1.590.959
721.308
525
3.389.547
2.906.798
1.250.056
2.371.887
1.202.434
29.291
7.760.466
On demand
Deposit from customers (incl. accrued interest) Other liabilities (incl. amounts to banks) Total
<1 year
<1
1<5
5 < 10
> 10
Total
year
year
year
year
2012
3.188.664
104.275
978.551
218.223
38.105
4.527.818
3.457
73.254
2.500.985
151
135
2.577.982
3.192.121
177.529
3.490.442
218.374
38.240
7.116.706
Maturity analysis – derivatives (contractual cash flows) The table below shows the liquidity analysis for derivative financial instruments, based on the undiscounted contractual net cash inflows and outflows on derivative instruments that settle on a net basis, and the undiscounted gross inflows and outflows on those derivatives that require gross settlement. For gross settled derivatives, cash flows are presented in the table below for both the ‘paying leg’ and the ‘receiving leg’. The credit risk on the ‘receiving leg’ is mitigated by collateral and ISDA ‘master netting’ agreements as explained for ‘credit risk’. This table includes all financial derivatives regardless of whether they have a positive or a negative value.
Page 72 of 141
Annual report 2013 Aegon Bank N.V.
2013
On demand
Cash inflows Cash outflows 2012
<1 year -
On demand
Cash inflows Cash outflows
100.411 -149.095 <1 year
-
18.617 -67.201
1<5 year 645.506 -715.830 1<5 year 125.509 -268.458
5 < 10 year 815.961 -740.292 5 < 10 year 258.563 -233.597
> 10 year 699.163 -646.632 > 10 year 234.021 -207.652
Total 2013 2.261.040 -2.251.848 Total 2012 636.710 -776.908
4.4.9. Other risks Catastrophes The operating results and financial position can be adversely affected by natural and man-made disasters such as hurricanes, riots, fires and explosions. Furthermore, natural disasters, terrorism and fires could disrupt Aegon Bank N.V.’s operations and result in significant loss of property, substantial personnel losses and the destruction of company and customer information.
Legislation and regulation Aegon Bank N.V.’s activities are subject to comprehensive regulation and supervision. Changes in current legislation and regulation may affect Aegon Bank N.V.’s products and operations. Changes in financial services regulations may also negatively impact the sale of new products. Additionally, new or amended legislation or regulations may be more restrictive or result in higher costs than lead to higher costs than is currently the case.
Legal proceedings Aegon Bank N.V. faces significant risks of litigation and regulatory investigations and actions in connection with its activities. Increasingly in recent years, the financial services sector has faced litigation, regulatory investigations and actions from a range of governmental and regulatory bodies relating to generally accepted practices in the industry. A judgment on a large claim or strict measures by regulatory bodies may have serious consequences for Aegon Bank N.V.’s operations, operating results and financial position.
Page 73 of 141
Annual report 2013 Aegon Bank N.V.
5.
Cash Cash and cash equivalents include cash and demand balances held at DNB. DNB requires Aegon Bank to place 1% of their deposits with agreed maturity or the savings accounts (without restrictions to withdraw their money) in an account with DNB. This deposit is renewed twelve times per year, based on an updated valuation of total assets. The interest rate is approximately 0,25% per year-end 2013. These deposits are therefore not freely available. Other cash and cash equivalents are unrestricted. Due to the nature of this asset the total amount classifies as current assets.
Average balance on deposit with DNB at year-end Average minimum required balance on deposit by DNB for year-end period
6.
2013
2012
126.771 34.540
207.355 44.270
Amounts due from banks 2013 Bank accounts Deposits Total
100.208 28.000 128.208
2012 58.933 139.000 197.933
Amounts due from banks comprise receivables from banks in the Netherlands and abroad and cash collateral provided. Of the amounts due from banks EUR 74,0 million (2012 EUR 32,5 million) relates to cash positions of consolidated securitizations. Bank accounts are payable on demand, and deposits have a maturity of less than three months. The carrying amounts disclosed reasonably approximate the fair values at year-end. The cash collateral provided amounts to EUR 28 million (2012: EUR 139 million). These accounts are used as collateral for the interest rate swaps held. These cash collateral accounts are not freely available. Due to the nature of this asset the total amount classifies as current assets.
7.
Mortgage loans and other loans Mortgages loans and other loans include advances granted in the conduct of business other than advances to credit institutions. 2013 Loans to the private sector - Mortgage loans - Consumer loans - Other loans Total
Fair value
Current Non-current Total
Page 74 of 141
2012
4.237.307 684.508 272.299
4.505.400 10.004
5.194.114
4.515.404
5.555.408
5.031.792
2013
2012
567.651 4.626.463 5.194.114
350.868 4.164.536 4.515.404
Annual report 2013 Aegon Bank N.V.
Certain mortgage loans shown within the category amortized loans are designated in portfolio fair value interest rate hedging relationships, and are fair valued with respect to the hedged interest rate. This resulted in a higher carrying value of EUR 53,0 million (2012: EUR 182,8 million). The mortgages that are structured through SPV’s SAECURE 8 and 13 represent EUR 2.513,2 (2012: EUR 1.4338 million) of the total mortgages balance. Refer to note 25.2 for pledged assets. The increase in Consumer loans of EUR 684.5 million relates to the consumer loan portfolio that was purchased during 2013. The loans were structured through a securitization (Kigoi) which is fully consolidated in Aegon Bank. Loan allowance account Movements on the loan allowance account during the year were as follows: 2013 At January 1 Impairment losses Amounts written off Transferred as part of Kigoi transaction At December 31
8.
2012
1.954 4.786 -686 8.131
1.316 702 -63 -
14.186
1.954
Other financial assets Other financial assets exclude derivatives. See note 9 for ‘Derivatives’. For a summary of all financial assets and financial liabilities at fair value through profit or loss see note 23.
Available-for-sale financial assets (AFS) Financial assets at fair value through profit or loss (FVTPL) Total financial assets, excluding derivatives 2013
Debt securities Other investments At December 31 2012
Debt securities Other investments At December 31
AFS
2.368.658 2.368.658 AFS
2.433.853 2.433.853
FVTPL
170.362 170.362 FVTPL
153.420 153.420
2013
2012
2.368.658 170.362 2.539.020
2.433.853 153.420 2.587.273
Total
2.368.658 170.362 2.539.020 Total
2.433.853 153.420 2.587.273 2013
Current Non-current Total financial assets, excluding derivatives
462.768 2.076.252 2.539.020
Fair value
2.368.658 170.362 2.539.020 Fair value
2.433.853 153.420 2.587.273 2012 395.202 2.192.071 2.587.273
The ‘Other investments at fair value through profit or loss’ consist of participations in a money market investment fund held at own expense.
Page 75 of 141
Annual report 2013 Aegon Bank N.V.
None of the financial assets has been reclassified during the financial year. Refer to note 25.2 for pledged assets.
8.1.
Investments in unconsolidated structured entities Available for sale assets contains investments in unconsolidated entities. Aegon Bank N.V. has not provided financial or other support to unconsolidated structured entities without having a contractual obligation to do so. Aegon Bank N.V. does not have intentions to provide financial or other support to unconsolidated structured entities in which Aegon Bank N.V. has an interest or previously had an interest. The following table presents total income received from Aegon Bank N.V.'s interests in unconsolidated structured entities. Total income for the year ended December 31, 2013 Commission and Interest Total gains and Total fees income losses
Type of asset in unconsolidated entity Residential mortgage backed securities Commercial mortgage backed securities Asset Backed Securities ABS's - Other Total
-
14.166 235 5.995 519 20.915
17.376 19 2.457 83 19.934
31.542 253 8.452 602 40.849
The following table summarizes the carrying values recognized in the statement of financial position of Aegon Bank N.V.'s interests in unconsolidated structured entities.
Type of asset in unconsolidated entity
Loans
Residential mortgage backed securities Commercial mortgage backed securities Asset Backed Securities ABS's - Other Total
9.
For the year ended December 31, 2013 Investments Commitments Derivative and guarantees instruments
Assets
Total Liabilities
-
654.859
-
-
654.859
-
-
19.294
-
-
19.294
-
-
359.028 50.870 1.084.050
-
-
359.028 50.870 1.084.050
-
Derivatives Derivative asset 2013 2012 Derivatives not designated in a hedge Derivatives designated as fair value hedges Total
Derivative liability 2013 2012
26.514
30.959
8.682
13.764
45.609
1.439
49.213
140.972
72.123
32.398
57.895
154.735
2013 Current Non-current Total net derivatives
-144 14.372 14.228
2012 -144 -122.194 -122.338
See also note 23 for a summary of all financial assets and financial liabilities at fair value through profit or loss. Page 76 of 141
Annual report 2013 Aegon Bank N.V.
9.1.
Use of derivatives Derivatives not designated in a hedge Derivative asset 2013 2012 Derivatives held as an economic hedge Bifurcated embedded derivatives Total
Derivative liability 2013 2012
26.514
30.959
-
-
26.514
30.959
4.739 3.943 8.682
7.414 6.349 13.763
Aegon Bank uses derivatives for risk management purposes. Aegon Bank’s exposure to interest rate risk, arising from its investments on the one hand and its commitments on the other, is adjusted to what it considers to be an appropriate level by using derivates. The instruments used are interest rate swaps (IRSs) and futures. Only a small part of Aegon Bank’s products involve guarantees to customers. The extent of Aegon Bank’s guarantee obligation varies according to changes in the underlying assets and will only become effective on the end date of the underlying contract. The guarantee obligation is to be regarded as a written put position. Customers pay a mark-up for the guarantees. The market and interest rate risks in these guarantees are hedged through futures contracts.
Hedge accounting Aegon Bank’s fair value hedges consist of interest rate swaps that are used to protect against changes in the fair value of fixed-rate instruments due to movements in market interest rates. Gains and losses on derivatives designated under fair value hedge accounting are recognized in the income statement. The effective portion of the fair value change on the hedged item is also recognized in the income statement. As a result, only the net accounting ineffectiveness has an impact on the net result. For the year ended 31 December 2013, Aegon Bank recognized EUR -/- 129,7 million of fair value changes on mortgage loans under fair value hedge accounting under the EU carve-out in the income statement (2012: EUR 182,8 million). This amount was offset by EUR 127,3 million fair value changes recognized on the derivatives used as hedging instrument (2012: EUR -/- 179,1 million). This offset is only possible when using the EU carve-out on hedge accounting as otherwise the hedge would not have been “highly” effective as required by IFRS. This means that profit (before tax) would have been EUR 129,7 million higher under IFRS as issued by the IASB (2012: EUR 182,8 million lower). The total net accounting ineffectiveness recognized in the income statement was EUR -/- 2,5 million in 2013 (2012: EUR 3,6 million). As at 31 December 2013, the fair values of outstanding derivatives designated under fair value hedge accounting was EUR 3,6 million negative, presented in the balance sheet as EUR 45,6 million under assets and EUR 49,2 million under liabilities (2012: EUR 139,5 million, EUR 1,4 million under assets and EUR 140,9 million under liabilities).
Page 77 of 141
Annual report 2013 Aegon Bank N.V.
10.
Other assets and receivables Note Equipment Receivables Accrued income Total
2013
2012
59.368 27.776 87.144
28 31.866 26.838 58.732
10.1. Receivables 2013
2012
Investment debtors Receivable from DNB relating to DSB Other receivables Current account with Aegon Nederland Provision for doubtful debts Total
15 24.800 15.881 19.122 -450 59.368
7.389 28.386 6.820 -10.729 31.866
Current Non-current Total
34.541 24.827 59.368
5.337 26.529 31.866
The carrying amounts disclosed reasonably approximate the fair values at year-end. In 2009, a further provision was accrued relating to the deposit guarantee scheme following the failure of DSB Bank. This provision is based on Aegon Bank’s relative market share times the estimated overall loss. The provision for DSB Bank totaled EUR 6,6 million (2012: EUR 8,6 million). The DSB Bank provision was netted against amounts owed by the Dutch Central Bank. The gross receivable therefore amounted to EUR 31,4 million (2012: EUR 37,1 million). The accounting of the receivable was effected in accordance with the guidelines issued by Dutch Central Bank. Information on provision for doubtful debts: This provision relates to investment debtors and other receivables. 2013 At January 1 Additions charged to earnings
10.729 291 -10.570 450
Written off At December 31
2012 11.606 2 -879 10.729
10.2. Accrued income 2013 Accrued interest Prepaid expenses Total
27.123 653 27.776
2012 25.895 943 26.838
The account ‘Accrued income’ is classified entirely as current assets. The carrying amounts disclosed reasonably approximate the fair values at year end.
Page 78 of 141
Annual report 2013 Aegon Bank N.V.
11.
Savings deposits 2013 At January 1 Deposits Withdrawals Interest credited At December 31
2012
4.396.683 1.326.613 -1.537.094 96.670 4.282.872 2013
Current Non-current Total
5.264.398 1.483.950 -2.461.684 110.018 4.396.682 2012
2.992.052 1.290.820 4.282.872
3.150.898 1.245.784 4.396.682
The savings deposits comprise EUR 130,7 million of savings related to ‘Bankspaarhypotheken’ (2012: EUR 52,3 million). The received deposits related to the ‘Bankspaarhypotheken’ are directly invested in a sub participation of the mortgage of the specific client. The sub participation in the mortgages and the related deposits are shown gross in the financial statements as there is no intention to (directly) settle the deposit with the mortgage. The carrying amounts disclosed reasonably approximate the fair values at year-end.
12.
Amounts due to banks Note LTRO and notes Repurchase agreements At December 31
Current Non-current Total
2013
2012
2.238.027 1.000.221 3.238.248
1.500.000 1.000.203 2.500.203
2013
2012
1.048.581 2.202.167 3.250.748
203 2.500.000 2.500.203
12.1. LTRO and notes LTRO On March 1, 2012, Aegon Bank N.V. borrowed EUR 1,5 billion from the European Central Bank, under its Long Term Refinancing Operation (LTRO) program. The borrowing has a 3 year term; the interest rate per year end is 0,25%. The borrowing is fully collateralized with debt securities. The funds were mainly used to fund the mortgage loan production of Aegon Bank N.V.. Notes On March 27, 2013 Aegon Bank sold EUR 1,1 billion of mortgage loans to a SPE. Aegon bank purchased all of the debt securities issued by the SPE, SAECURE 13 NHG B.V. Aegon Bank controls this SPE and therefore the SPE is consolidated by Aegon Bank. Aegon Bank has privately placed EUR 750 million (Class A1 and A2) of the debt securities issued by the SPE. The remaining balance has been retained by Aegon Bank.
12.2. Repurchase agreements At the end of December 2010, Aegon Bank entered into a repurchase agreement for EUR 1 billion with ABN AMRO. Security was provided in the form of A2 notes of SAECURE 8. As per December 24, 2012 the repurchase agreement with ABN AMRO has been repaid. On the same day Aegon Page 79 of 141
Annual report 2013 Aegon Bank N.V.
Bank has entered in a new repurchase agreement with Bank of America. The A1 en A2 notes of SAECURE 8 have been provided as collateral for this repurchase agreement. At year-end 2013 these notes have a par value of EUR 1.135 million (2012: EUR 1.166 million).
13.
Deferred tax 2013 Deferred tax assets Deferred tax liabilities Total net deferred tax liability / (asset)
2012
985 -84.308 83.323
1.805 -82.887 -81.082
Movement in deferred tax 2013
At January 1 Charged to income statement Charged to equity At December 31 Deferred tax assets Deferred tax liabilities
2012
At January 1 Charged to income statement Charged to equity At December 31 Deferred tax assets Deferred tax liabilities
Financial assets
Pension plan
Other
Total
82.887 -8.011 9.432 84.308
-77 77 -
-1.728 743 -985
81.082 -7.191 9.432 83.323
84.308
-
985 -
985 84.308
Financial assets
Pension plan
Other
Total
14.363 41.383 27.141 82.887
-70 -7 -77
-1.728 -1.728
14.293 39.648 27.141 81.082
82.887
77 -
1.728 -
1.805 82.887
Deferred tax assets and liabilities are netted if there is a legally enforceable right to net current tax assets and liabilities and the deferred tax items relate to the same taxation authority. Deferred tax assets are recognized for temporary differences, carry forward of unused tax losses and carry forward of unused tax credits when, in the opinion of management, it is probable that they can be utilized. All deferred taxes are non-current.
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Annual report 2013 Aegon Bank N.V.
14.
Provisions 2013 Provisions for retirement benefit plans Other provisions Total
2012
850 850
874 6.399 7.273
2013 Current Non-current Total
2012
850 850
5.264 2.009 7.273
14.1. Defined benefit liabilities The retirement benefit plan related to the defined benefit plan for staff at Aegon Bank Bemiddeling, a subsidiary of Aegon Bank. As this subsidiary was sold to Aegon Nederland these pension obligations are recognized in the financial statements of Aegon Nederland N.V.
14.2. Other provisions Movements in other provisions 2013
At January 1 Additions charged to earnings Used during the year Unused amounts reversed through the income statement Transfer due to ABB transaction At December 31
Restructuring
Commissions
Other
Total
4.884 -3.035 -1.000
1.515 -
-
6.399 -3.035 -1.000
-
-1.515
-
-1.515
850 Restructuring
Commissions
Other
850 Total
7.171 894 -2.902 -279
2.052 633 -1.170 -
961 -961 -
10.184 1.527 -5.033 -279
4.884
1.515
-
6.399
2012 At January 1 Additions charged to earnings Used during the year Unused amounts reversed through the income statement Other movements At December 31
2013 Current Non-current Total
850 850
2012 5.264 1.135 6.399
The restructuring provision fully consists of the provision created in 2011 for Aegon Bank. The provision for refundable commission fees is accrued for potential refunds of handling fees in the event of a redemption. The level of the provision is based on the refund terms agreed for the various products and redemption percentages established on the basis of recent experience. The provision fully relates to Aegon Bank Bemiddeling B.V. (ABB) that was sold to Aegon Nederland . Page 81 of 141
Annual report 2013 Aegon Bank N.V.
15.
Other liabilities and accruals Note
2013
Other liabilities Accruals Total
2012
27.324 88.047 115.371
60.077 150.156 210.233
15.1. Other liabilities 2013 Investment creditors Current account with AEGON Nederland N.V. Guarantee deposits Other liabilities Total
Current Non-current Total
2012
1.166 26.158
51.884 4.573 141 3.479
27.324
60.077
2013
2012
27.324 27.324
60.077 60.077
The carrying amounts disclosed reasonably approximate fair value at year-end.
15.2. Accruals 2013 Accrued interest Accrued expenses Total
2012 88.047
-
135.478 15.736
88.047
150.156
This item comprises interest payable and is classified entirely as current liabilities. The carrying amounts disclosed reasonably approximate fair value at year-end.
16.
Equity 2013 Share capital Share premium Revaluation reserves Retained earnings Participations Net income / (loss) At December 31
Page 82 of 141
37.437 326.212 12.002 -41.870 525 -12.850 321.456
2012 37.437 326.212 -16.296 -25.662 135 -16.208 305.618
Annual report 2013 Aegon Bank N.V.
16.1. Share capital 2013 Authorized share capital Not issued
2012
90.756 53.319 37.437
90.756 53.319 37.437
The authorized share capital is EUR 90,7 million, divided into 200.000 shares of EUR 453,78 nominal value each, of which 82.500 shares have been issued and fully paid. There have been no changes since the previous financial year. In 2013 and 2012, Aegon Bank did not pay dividend to Aegon Nederland N.V. During 2013 Aegon Bank complied with the requirements of the regulators. Under Dutch law, the amount that is available to pay dividends consists of equity less the outstanding share capital and reserves required by law. The insurance and banking regulator (DNB) restricts distributions of capital.
16.2. Revaluation reserves
At January 1 Gross revaluation Net (gains) / losses transferred to income statement Tax effect At December 31
2013
2012
-16.296 59.503 -21.773 -9.432 12.002
-97.718 128.823 -20.260 -27.141 -16.296
The revaluation reserves for available-for-sale financial assets comprise unrealized gains and losses on these investments, net of tax. Upon sale of available-for-sale securities, the realized result is recognized through the income statement. In the event of impairments, the unrealized loss is recognized through the income statement. The revaluation reserve is a restricted reserve. As the revaluation reserve was negative at yearend 2012, the other capital components were restricted for EUR 16,2 million in 2012. At year-end 2013 the revaluation reserve had a positive value of EUR 12,0 mln.
16.3. Participations 2013 At January 1 Issuance of participations Net income / (loss) attributable to minority interest Dividends paid on participations At December 31
135 390 20 -20 525
2012 135 1 -1 135
Aegon Bank issues client participations under the brandname Knab. The participations have the following characteristics:
The participations are subordinated perpetual liabilities issued by Aegon Bank N.V. Holders of the participations are entitled to a 50% discount on the monthly Knab fee and an interest rate of initial 5% on the notional of the participation. The interest rate will be evaluated periodically and can be adjusted as a result of market circumstances and no step ups will be applied. The bank has the right to waive one or more monthly interest payments and the discount on the fee. In case of waived interest payments, no accumulation will be applied. Page 83 of 141
Annual report 2013 Aegon Bank N.V.
Based on the discretion of management the bank may have the right to repay the notional after five year of the issue. The bank is required to repay the liability after 30 year when 1) the specific interest payment date has not been waived 2) When based on the judgement of management (in consultation with the regulator) the bank has acquired sufficient capital to replace the participations as capital. Prepayments can only be executed based on regulatory grounds and with approval of the regulator As set out in the prospectus the bank may in specific situations obliterate the notional of the participations
Based on the specific characteristics the participation qualifies as tier 1 capital under the applicable banking regulations. Due to the nature of the participation, the instrument also qualifies as equity under IFRS. The discount on the fee is netted on the corresponding fee income. In line with the treatment as equity the corresponding interest charges are treated as dividend in the income statement. The dividend is shown on a net basis. This includes the deducted dividend tax on the discount and the interest. As at December 31, 2013, Aegon Bank has issued 105 participations with a corresponding value of EUR 525 thousand (2012: 27 participations with a corresponding value of EUR 135 thousand).
17.
Interest income and expense
17.1. Interest income and related fees 2013
2012
441 352 157.447 38.314 196.554
1.645 801 128.112 76.011 206.569
2013
2012
Derivatives Amounts due to banks Savings deposits Total
50.292 21.476 81.496 153.264
35.364 26.687 111.221 173.272
Fair value through profit or loss
2013 50.292
2012 35.364
Other Total
102.972 153.264
137.908 173.272
Cash Amounts due from banks Mortgage loans and other loans Debt securities Total
17.2. Interest expense and related fees
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Annual report 2013 Aegon Bank N.V.
18.
Fee and commission income and expense
18.1. Fee and commission income 2013 Fee income from asset management Revenue from customer transactions Total
3.091 383 3.474
2012 4.770 3.841 8.611
18.2. Fee and commission expense 2013 Commissions Total
19.
2012
854 854
Result from financial transactions 2013 2.668 -5.304 21.773 1.357 20.494
Net fair value change of guarantees Net fair value change of derivatives Realized gains / (losses) on financial assets available-for-sale Realised gains / (losses) on FVTPL participations inv. funds Total
20.
1.941 1.941
2012 -75 11.291 20.260 1.597 33.073
Employee expenses and other operating expenses
20.1. Employee expenses 2013 Salaries Social security charges Post-employment benefit costs Other personnel costs Total
8.066 1.081 1.907 4.125 15.179
2012 11.088 1.326 2.322 5.002 19.738
At December 31, 2013 the Aegon Nederland Group employed 126 (2012: 177) FTEs who carried out work for Aegon Bank or its subsidiaries. The salaries, social security contributions and pension contributions for staff employed by Aegon Nederland are recharged to Aegon Bank. The total staff costs including intra-group charges are shown in the table below. Salaries expenses decreased from EUR 19,7 million to EUR 15,2 million in 2013 as a result of the sale of Aegon Bank Bemiddeling the outsourcing of its activities to Aegon Nederland and the effects of the cost savings program which we started at the end of 2010. The assets and liabilities arising from employee benefits for staff working for Aegon Bank N.V. are recognized in the financial statements of Aegon Nederland. Refer to the financial statements of Aegon Nederland for more information on the pension plan and the defined benefit liabilities. The pension cost charged (post-employment benefit costs) to Aegon Bank N.V. are a fixed percentage of the salaries charged to the entity. “Other employee expenses” mainly comprise the costs of hiring temporary workers and interim staff
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Annual report 2013 Aegon Bank N.V.
20.2. Depreciation 2013 Depreciation of equipment Total
2012
28 28
48 48
20.3. Other operating expenses
Office expenses IT and consultancy fees Investment management expenses Printing and postage Recharged costs of support organizations Addition /(release) restructuring provision Other operating expenses Total
2013
2012
1.404 16.820 13.080 507 31.368 -1.000 1.331 63.510
1.374 31.483 9.800 918 28.352 616 1.630 74.173
Other operating expenses decreased from EUR 74,2 million to EUR 63,5 million as result of the project expenses for the new banking system for Aegon Bank and Knab in 2012. Remuneration Auditor Ernst & Young Accountants has served as Aegon Bank N.V.’s independent public accountant for each of the fiscal years in the two-year period ended December 31, 2013, for which audited financial statements appear in this Annual Report. The fees for services rendered by Ernst & Young Accountants to Aegon Bank N.V. need not be disclosed in this Annual Report, based on article 382a.3 of Book 2 of the Netherlands Civil Code. The aggregate fees for professional services and other services rendered by Ernst & Young Accountants to Aegon N.V. are disclosed in the Annual Report of Aegon N.V.
20.4. Remuneration (former) members Executive Board Current and former members of the Executive Board are regarded as key management personnel. The remuneration for current and former directors recharged to the company in the financial year pursuant to Section 383:1 of Book 2 of the Netherlands Civil Code is set out below (amounts in euros). 2013 Current Executive Board members Gross salary and social security contributions Pension premium Other benefits Total
579.819 107.432 29.868 717.119
2012 561.347 105.326 29.868 696.540
In 2012 the Dutch Government introduced a special tax-levy for employers: the ‘crisis tax’ (16% payable on salary expenses above EUR 150 thousand). This resulted employee expenses for the Executive Board of Aegon Bank amounting to EUR 63 thousand. Mortgage loans Executive Board On the reporting date, members of the Executive Board had mortgage loans totaling EUR 1,5 million from a company associated with Aegon Nederland (2012: EUR 1,5 million) at interest rates ranging from 1,7% variable to 4,0% in line with the terms and conditions available to the employees of Aegon Nederland. No repayments were received in 2012 and 2013.
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Annual report 2013 Aegon Bank N.V.
20.5. Remuneration (former) members Supervisory Board Members and former members of the Supervisory Board are regarded as key management personnel. No costs were recharged to Aegon Bank for internal Supervisory Board members. This is in accordance with Aegon Bank’s remuneration policy. The remuneration for current and former external supervisory directors charged to the company in the financial year pursuant to Section 383:1 of Book 2 of the Netherlands Civil Code was EUR 46 thousand (2012: EUR 46 thousand). This remuneration consists entirely of gross pay and the employer’s share of social security charges. Mortgage loans Supervisory Board On the reporting date, supervisory directors had mortgage loans from a company associated with Aegon Nederland totaling EUR 1,53 million (2012: EUR 1,57 million) at an average interest rate of 3,7% (2012: 4,0%). Repayments of EUR 40 thousand were received in 2013 (2012: EUR 48,9 thousand).
21.
Impairment charges / (reverals) 2013 Impairment charges comprise: Financial assets AFS Loans Total Reversals of impairment charges comprise: Financial assets AFS Loans Total Net impairment charges / (reversals)
22.
2012
4.972 4.972
702 702
-186 -186
-
4.786
702
Income tax 2013 Current tax - current year Deferred tax - changes in deferred tax Income tax for the period (income) / charge
2012
2.943
-45.062
-7.192
39.648
-4.249
-5.414
The nominal tax rate in the Netherlands in 2012 and 2013 was 25% and remain the same in 2014.
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Annual report 2013 Aegon Bank N.V.
Reconciliation between standard and effective income tax: 2013 Income before tax
-17.099
-21.621
-4.275
-5.405
26
-8
-4.249
-5.413
Income tax calculated using weighted average applicable statutory rates Difference due to the effects of: - changes in tax rates / bases - adjustments to prior years Income tax for the period (income) / charge
23.
2012
Summary of financial assets and financial liabilities at fair value through profit or loss The table that follows summarizes the carrying amounts of financial assets and financial liabilities that are classified as at fair value through profit or loss, with appropriate distinction between those financial assets and financial liabilities held for trading and those that, upon initial recognition, were designated as at fair value through profit or loss. Derivatives which are used in hedge accounting or are a guarantee are classified as “designated”. All other derivatives are classified as “held for trading”. Note
Financial assets Derivatives with positive values investment fund units held at own expense Total financial assets at FVTPL
Derivatives with negative values Total financial liabilities at FVTPL
Trading
2013 Designated
Trading
2012 Designated
26.514 460
45.609 169.902
30.959 463
1.439 152.957
26.974
215.511
31.422
154.396
Trading
2013 Designated
Trading
2012 Designated
8.682 8.682
49.213 49.213
13.764 13.764
140.972 140.972
Gains and losses recognized in the income statement on financial assets and financial liabilities classified as at fair value through profit or loss can be summarized as follows:
Trading Net gains and losses
2013 Designated
281
-1.560
2012 Trading 9.201
Designated -3.612
Derivatives Although all derivatives are classified as at fair value through profit or loss a distinction is made between derivatives used for hedge accounting and embedded derivatives that are designated as at fair value through profit and loss and all other derivatives that are held for trading.
Changes in the fair value of financial liabilities designated at fair value through profit or loss were not attributable to changes in credit spread. There are also no differences between the carrying Page 88 of 141
Annual report 2013 Aegon Bank N.V.
amounts of these financial liabilities and the contractual amounts payable at maturity (net of surrender penalties).
24.
Commitment and contingencies
24.1. Other commitments and contingencies Aegon Bank acts as guarantor for the fulfilment of the obligations of Stichting AEGON Beleggingsgiro towards the customers of Aegon Bank. Aegon Bank is a member of the tax group headed by Aegon N.V, and any taxes it owes directly are set off at the level of the parent of the tax group. Aegon Bank is jointly and severally liable for all tax liabilities of the entire tax group.
24.2. Off-balance sheet assets As part of its core activities, Aegon Bank enters into contracts and maintains relationships with customers for a variety of financial services. In consideration of these services, Aegon Bank is paid a fee linked to the value of assets, the investment returns or the risks involved in the contract. Aegon Bank’s financial services include asset management for institutional investors and investments funds operating on the retail market. These assets are held by customers and, accordingly, are not reported in Aegon Bank’s statement of financial position. The total amount of assets related to these services was EUR 206 million (2012: EUR 227 million). Related to the consumer loans portfolio Aegon Bank has an undrawn commitment amounting to EUR 175 million. Deposit guarantee scheme The deposit guarantee scheme is a scheme that guarantees certain bank deposits of account holders in the event that a bank fails in the Netherlands. The scheme provides security for deposits up to a maximum of EUR 100.000 per account holder per bank, irrespective of the number of accounts. In the case of a joint account with two persons, it applies per person as a maximum. The scheme covers almost all savings accounts, current accounts and short-term deposits, but not shares or bonds. If, when a credit institution fails, insufficient funds remain to pay its account holders the guaranteed amounts in full or at all, DNB will make payment up to the above-mentioned maximum amounts. This total amount will then be refunded to DNB by the banks in accordance with a cost allocation scheme. The Ministry of Finance and DNB are engaged in the creation of a fund for the financing of the Deposit Guarantee Scheme. The change is occasioned by the experience of the credit crisis and upcoming European legislation. Under the new funding method, banks will pay risk-weighted ex ante contributions to the DGS. This new policy is to take effect on 1 July 2015. Nationalization SNS Reaal As a result of the nationalization of SNS Reaal the Ministry of Finance will impose a levy (resolutie heffing) on the banking sector. The levy is calculated over Aegon Bank’s share in the deposit guarantee scheme as per the 1st of February 2013. The levy will be imposed in three instalments during 2014 and will result in an estimated charge of EUR 9,5 million.
24.3. Litigations and proceedings Litigation Aegon Bank is involved in litigation on account of its normal business operations. The litigation involves claims for compensation and the cancellation or nullification of contracts. This mainly concerns the ‘Sprintplan’ product, a variation on share lease products with the loan principal guaranteed on maturity by means of a built-in guarantee. Sprintplan products were sold between 1997 and 2002 and have since expired. In a few cases, the courts has found against Aegon Bank, ordering AEGON Bank to pay damages or refund interest payments to participants. Page 89 of 141
Annual report 2013 Aegon Bank N.V.
On 5 June 2009 the Dutch Supreme Court handed down its decision in a case brought by Stichting GeSP against Aegon Bank concerning the ‘Sprintplan’ product. The Supreme Court upheld the ruling issued by the Amsterdam Court of Appeal on 15 November 2007, saying that liability could not be established in a group action. Liability for damages, if any, would have to be established on the basis of the circumstances of each individual case. The Supreme Court ruling is expected to have no material impact on Aegon Bank or its financial position. In our opinion, appropriate legal efforts are made to deal with the claims filed. Wherever claims are unfounded, a defense was conducted. In certain cases, a settlement was attempted. There is no assurance, however, that pending proceedings will be dealt with in accordance with our expectations or that pending or future proceedings will not lead to unforeseen obligations. Other than that, Aegon Bank has no knowledge of any threatened legal or arbitration proceedings which could have a material impact on Aegon Bank or its financial condition.
25.
Transfers of financial assets Depending on the type of transaction, it is possible that Aegon Bank N.V. transfers assets. Transfers occur when Aegon Bank N.V. transfers contractual rights to receive cash flows of financial assets or when Aegon Bank N.V. retains the contractual rights to receive the cash flows of the transferred financial asset, but assumes a contractual obligation to pay the cash flows to one or more recipients in that arrangement. In the normal course of business Aegon Bank N.V. is involved among others in the following transactions: 1. Transferred financial assets that are not derecognized in their entirety: a. Securities lending; whereby Aegon Bank N.V. legally (but not economically) transfers assets and receives cash and non-cash collateral. The transferred assets are not derecognized. The obligation to repay the cash collateral is recognized as a liability. The non-cash collateral is not recognized; b. Repurchase activities; whereby Aegon Bank N.V. receives cash for the transferred assets. The financial assets are legally (but not economically) transferred, but are not derecognized. The obligation to repay the cash received is recognized as a liability. 2. Transferred financial assets that are derecognized in their entirety and Aegon Bank N.V. does not have a continuing involvement (normal sale); 3. Transferred financial assets that are derecognized in their entirety, but where Aegon Bank N.V. has a continuing involvement: a. Securitizations whereby mortgage loans are transferred to a securitization vehicle which is not part of the Group and where Aegon Bank N.V. has a continuing involvement in the transferred assets. 4. Collateral accepted in the case of securities lending, reverse repurchase agreement and derivative transactions; 5. Collateral pledged in the case of (contingent) liabilities, repurchase agreements, securities borrowing and derivative transactions. The following disclosures provide details for transferred financial assets that are not derecognized in their entirety, transferred financial asset that are derecognized in their entirety, but where Aegon Bank N.V. has a continuing involvement and assets accepted and pledged as collateral.
25.1. Transferred financial assets that have not been derecognized in their entirety Repurchase activities At the end of December 2010, Aegon Bank entered into a repurchase agreement for EUR 1 billion with ABN Amro. Security was provided in the form of A2 notes of SAECURE 8. As per December 24, 2012 the repurchase agreement with ABN Amro has been repaid. On the same day Aegon Bank has entered in a new repurchase agreement with Bank of America. The A1 and A2 notes of SAECURE 8 have been provided as collateral for this repurchase agreement.
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Aegon Bank retains substantially all risks and rewards of those transferred assets, this includes credit risk, settlement risk, country risk and market risk. The assets are transferred in return for cash collateral or other financial assets. Non-cash collateral is not recognized in the statement of financial position. Cash collateral is recorded on the statement of financial position as an asset and an offsetting liability is established for the same amount as Aegon Bank is obligated to return this amount upon termination of the lending arrangement. Cash collateral is usually invested in pre-designated high quality investments.
There are no non-cash financial assets that have been transferred to another party under security lending and repurchase activities where the counterparty does not have the right to sell or repledge. Assets received as collateral with respect to investments that are recognized in the statement of financial position are disclosed in note 4.4.4 ‘Credit risk’. No reverse repurchase transactions took place in 2013 and 2012.
25.2. Assets pledged Aegon Bank is required to pay cash for margin calls to be able to trade in derivatives on the securities markets. Aegon Bank is required to hold a certain percentage of its assets relating to its banking activities in an account with the DNB. The amount of assets pledged for banking activities are as follows: Assets pledged as collateral for banking activities
2013
2012
Assets pledged with DNB
79.405
264.086
For assets sold under a repurchase agreement cash is received and a repayment obligation is recognized. The assets pledged for the repurchase agreement consist of: Assets pledged for repurchase agreements Cash received Pledged non-cash collateral Net exposure
2013 1.000.221 -1.127.320 -127.099
2012 1.000.203 -1.127.118 -126.915
Furthermore Aegon Bank has posted collateral on the loan issued by the European Central Bank of EUR 1,5 billion, for which available for sale assets is needed as collateral. The loan is a 'bullet loan' and has to be repaid including cumulated interest at February 26, 2015. Interest cumulated as at December 31, 2013 is EUR 19 million (2012: EUR 11 million). The fair value of the collateral posted is EUR 1.879 billion (2012 EUR 1.859 billion). Difference between collateral value and collateral needed is EUR 191 million (2012: EUR 129 million), which is available as an additional credit facility. The balances held in account with the DNB are shown in note 5 ‘Cash’. Securitizations SAECURE 8 was launched in 2010 to improve Aegon Bank’s cash position. Aegon Bank sold EUR 1,6 billion of mortgage loans at fair value to Aegon Levensverzekering N.V. Aegon Levensverzekering N.V. sold – a different – mortgage portfolio to a Special Purpose Entity (SPE) at nominal value, at the same time transferring legal title. Aegon Bank purchased all of the debt securities issued by the SPE, SAECURE 8 NHG B.V. Aegon Bank controls SAECURE 8 NHG B.V. and therefore the SPE is consolidated by Aegon Bank. The mortgage loans are carried in Aegon Bank’s consolidated statement of financial position at amortised cost. At 31 December 2013, the carrying amount of these securitised mortgage loans was EUR 1.318 million (2012: EUR 1.434 million).
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Annual report 2013 Aegon Bank N.V.
Aegon Levensverzekering N.V. has granted Aegon Bank the option to repurchase the mortgage loans at nominal value after four years if the SPE chooses to repurchase the debt securities early and to sell the mortgage loans. All of the rights of Aegon Bank’s in relation to SAECURE 8 are valued in the SAECURE 8 swap contract. On March 27, 2013 Aegon Bank sold EUR 1,1 billion of mortgage loans to SAECURE 13 NHG B.V.. Aegon bank purchased all of the debt securities issued by the SPE. Aegon Bank controls this SPE and therefore the SPE is consolidated by Aegon Bank. Aegon Bank has privately placed EUR 100 million of the Class A1 tranche and EUR 650 million of the Class A2 tranche. The remaining tranches will be retained by Aegon Bank. the carrying amount of these securitised mortgage loans was EUR 1.194 million. The consumerloan portfolio has been structured through a SPV named KIGOI 2013 B.V. Aegon Bank has provided the SPV with a bridge loan amounting to the consideration paid for the consumerloan portfolio. This bridge loan has been replaced by notes during 2014. Aegon Bank controls this SPE and therefore the SPE is consolidated by Aegon Bank.
26.
Offsetting, enforceable master netting arrangements and similar arrangements The table below provides details relating to the effect or potential effect of netting arrangements, including rights of set-off associated with the entity's recognized financial assets and recognized financial liabilities. Financial assets and liabilities are offset in the statement of financial position when Aegon Bank N.V. has a legally enforceable right to offset and has the intention to settle the asset and liability on a net basis, or to realize the asset and settle the liability simultaneously. Aegon Bank N.V. mitigates credit risk in derivative contracts by entering into collateral agreements, where practical, and in ISDA master netting agreements for each of the legal entities of Aegon Bank N.V. to facilitate Aegon Bank N.V.’s right to offset credit risk exposure. The credit support agreement will normally dictate the threshold over which collateral needs to be pledged by Aegon Bank N.V. or its counterparty. Transactions requiring Aegon Bank N.V. or its counterparty to post collateral are typically the result of over-the-counter derivative trades, comprised mostly of interest rate swaps, currency swaps and credit swaps. These transactions are conducted under terms that are usual and customary to standard long-term borrowing, derivative, securities lending and securities borrowing activities, as well as requirements determined by exchanges where the bank acts as intermediary.
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Annual report 2013 Aegon Bank N.V.
Financial assets subject to offsetting, enforceable master netting arrangements and similar agreements 2013
Related amounts not set off in the statements of financial position Gross amounts
Gross amounts of
Net amounts of
Financial
Cash collateral
Net
of recognized
recognized financial
financial assets
instruments
received
amount
financial
liabilities set off in
presented in the
assets
the statement of
statement of
surplus
financial position
financial position
collateral)
(excluding
Derivatives
72.123
-
72.123
72.123
-
-
At
72.123
-
72.123
72.123
-
-
December 31 2012
Related amounts not set off in the statements of financial position Gross amounts
Gross amounts of
Net amounts of
Financial
Cash collateral
Net
of recognized
recognized financial
financial assets
instruments
received
amount
financial
liabilities set off in
presented in the
assets
the statement of
statement of
surplus
financial position
financial position
collateral)
(excluding
Derivatives
32.398
-
32.398
32.398
-
-
At
32.398
-
32.398
32.398
-
-
December 31
Financial liabilities subject to offsetting, enforceable master netting arrangements and similar agreements
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Annual report 2013 Aegon Bank N.V.
2013
Related amounts not set off in the statements of financial position Gross amounts
Gross amounts of
Net amounts of
Financial
Cash
Net
of recognized
recognized financial
financial liabilities
instruments
collateral
amount
financial
assets set off in the
presented in the
liabilities
statement of
statement of
financial position
financial position
pledged
Derivatives
57.895
-
57.895
128.123
-28.000
-42.228
At
57.895
-
57.895
128.123
-28.000
-42.228
December 31 2012
Related amounts not set off in the statements of financial position Gross amounts
Gross amounts of
Net amounts of
Financial
Cash
Net
of recognized
recognized financial
financial liabilities
instruments
collateral
amount
financial
assets set off in the
presented in the
liabilities
statement of
statement of
financial position
financial position
pledged
Derivatives
154.736
-
154.736
32.398
139.000
-16.662
At
154.736
-
154.736
32.398
139.000
-16.662
December 31
27.
Group companies The organization chart of Aegon Bank and its principal subsidiary at year-end 2013 was as follows:
Aegon Bank N.V.
SAECURE 8 NHG B.V.
SAECURE 13 NHG B.V.
KIGOI 2013 B.V.
On January 1, 2013 Aegon Bank Bemiddeling B.V. was sold to Aegon Nederland N.V. for EUR 91, 4 million.
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Annual report 2013 Aegon Bank N.V.
Investments in structured entities SAECURE 8 NHG, SAECURE 13 NHG and KIGOI are not wholly owned subsidiaries of Aegon Bank. Based on IFRS consolidation requirements Aegon Bank consolidates the special purpose entities as group companies (see also 2.4). The structures entities relate to the securitization of mortgage loans and private loans. The contractual agreements with these entities do not include provisions in which Aegon Bank could be required to provide financial support in certain circumstances. Aegon Bank has not provided, nor has intentions to provide, financial or other support without having a contractual obligation to do so.
28.
Related party transactions Aegon Bank undertakes a range of transactions with entities in the Aegon N.V. group; the principal ones are described below. Employees of Aegon Nederland, including key management personnel, may make use of financing and insurance facilities at prices available to agents. The benefit to the employees is equivalent to the margin made by agents. The conditions for these products are the same for key management personnel and other staff. Aegon Bank offers products to employees of Aegon Nederland, including key management personnel of Aegon Bank itself, on the same terms and conditions as for other members of staff. Aegon Nederland provides Aegon Bank with administrative support and facilities at cost. All transactions with group companies pass through Aegon Nederland and are accounted for in the current account with Aegon Nederland. Total recharged expenses in 2013 were EUR 31,4 million (2012: EUR 28,4 million). At the end of the year, AEGON Bank had a current account asset to Aegon Nederland of EUR 19,1 million (2012: liability EUR 17,3 million). EUR 0,3 million (2012: 0,5 million) of interest on the intercompany current account was charged through the income statement in 2013. Aegon Bank has identified the following associates as related parties: • Aegon Nederland N.V. • Aegon N.V. • Aegon Levensverzekering N.V. • Aegon Spaarkas N.V. • Aegon Investment Management B.V. • Aegon Derivatives N.V. • Aegon Hypotheken B.V. • Aegon Paraplufonds I • Aegon Paraplufonds IV • Aegon Geldmarktfonds • Amvest Vastgoed BV
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Annual report 2013 Aegon Bank N.V.
The financial relationship between Aegon Bank and these entities is reflected in their bank accounts with Aegon Bank. These positions are recognized in the Savings deposits and consequently the related parties have a claim against Aegon Bank. The table below shows the related parties’ claims against Aegon Bank at year-end (in millions):
Aegon Nederland N.V. Aegon Spaarkas N.V.
2013
2012
0,0 0,0
8,3 1,8
0,0
10,1
Aegon Nederland N.V. Investment and derivative activities are undertaken through Aegon Investment Management B.V. and Aegon Derivatives N.V. and securities custody through Aegon Custody B.V. Costs are recharged on normal commercial terms. The recharge was EUR 3,9 million (2012: EUR 4,4 million). Aegon Bank has received cash collateral on derivative positions via AEGON Derivatives N.V, see also note 6. In 2013 Aegon Bank N.V. sold the shares in Aegon Bank Bemiddeling B.V. to Aegon Nederland at book value. Aegon N.V. Aegon Bank is a member of the Aegon N.V. tax group and settles its current tax liabilities with the head of the tax group as if it were an autonomous taxpayer. Aegon Bank is jointly and severally liable for all tax liabilities of the entire tax grouping. Aegon Investment Management B.V. Aegon Bank received a management fee for investments in Aegon Funds (Aegon Paraplufonds I and IV) via Aegon Bank of EUR 2,5 million (2012: EUR 3,5 million). The fee is based on the service level agreement between the funds, the manager (Aegon Investment Management B.V.) and Aegon Bank. Aegon Levensverzekering N.V. The mortgages held by Aegon Bank are managed and administered by Aegon Levensverzekering N.V. The recharge for these services was EUR 6,3 million (2012: EUR 4,0 million). Aegon Bank N.V. offers a ‘Banksparen’ mortgage product in cooperation with Aegon Hypotheken B.V. Aegon Hypotheken paid Aegon Bank EUR 1,2 million for this in 2013 (2012: EUR 1,2 million). The recharges are on normal commercial terms. Aegon Hypotheken B.V During 2012 Aegon Hypotheken B.V. sold several mortgage portfolios to Aegon Bank with a total at market value for EUR 1,7 billion (2013: 0). As per year end 2013 Aegon Hypotheken B.V. had an position of EUR 50 mln short term borrowing with Aegon Bank. Aegon bank charges Euribor + 0,25% for this borrowing to Aegon Hypotheken B.V. Aegon Geldmarktfonds Aegon Bank invests its short term cash in an Aegon fund amounting to EUR 170 million (2012: 153 million) Amvest Vastgoed BV During 2013 Aegon Bank entered into a credit facility with Amvest Vastgoed BV amounting to EUR 20 million. As per year the outstanding balance amounts to EUR 10 million. The interest received on the facility amounts to 0,1 mln. for 2013. Amvest vastgoed B.V. is a 50% joint venture of Aegon Nederland.
Page 96 of 141
Annual report 2013 Aegon Bank N.V.
29.
Events after the balance sheet date On the 1st of February 2013 SNS Reaal was nationalised by the Dutch government. The Ministery of Finance announced that they will impose a 1 billion-euro one-time levy on Dutch banks in 2014 to share the costs of the SNS nationalization. The levy is calculated over Aegon Bank’s share in the deposit guarantee scheme as per the 1st of February 2013. The levy will be imposed in three instalments during 2014 and will result in an estimated tax charge of EUR 9,5 million. The event gives no further information on the situation pertaining on the reporting date. As per the 1st of February 2014 Aegon bank redeemed a mortgage portfolio approximately amounting to EUR 460 million to AEGON leven. At the same date a portfolio was purchased from Aegon leven. The rationale behind the transactions was reducing the duration of the mortgage portfolio of Aegon Bank. As result of the sale a gain was realized amounting to EUR 52,7 million before tax. The transactions had a minimal impact on the BIS ratio as more capital intensive mortages (non NHG) were purchased. The Hague, April 14, 2014 Supervisory Board L. Jongsma R.M. van der Tol J.A.J. Vink
Executive Board E.F.M. Rutten M.R. de Boer
Page 97 of 141
Annual report 2013 Aegon Bank N.V.
Other information To: the Supervisory Board and the Executive Board of Aegon Bank N.V.
Independent auditor’s report Report on the consolidated financial statements We have audited the accompanying consolidated financial statements 2013 of Aegon Bank N.V., the Hague, the Netherlands (as set out on pages 22 to 97), which comprise the consolidated statement of financial position as at December 31, 2013, the consolidated income statement and statements of comprehensive income, changes in equity and cash flow for the year then ended and notes, comprising a summary of the significant accounting policies and other explanatory information. Management’s responsibility Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the Dutch Civil Code, and for the preparation of the Report of the Executive Board in accordance with Part 9 of Book 2 of the Dutch Civil Code. Furthermore management is responsible for such internal control as it determines is necessary to enable the preparation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Dutch law, including the Dutch Standards on Auditing. This requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about 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 judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation 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. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion with respect to the consolidated financial statements In our opinion, the consolidated financial statements give a true and fair view of the financial position of Aegon Bank N.V. as at December 31, 2013 its result and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the Dutch Civil Code.
Page 98 of 141
Annual report 2013 Aegon Bank N.V.
Report on other legal and regulatory requirements Pursuant to the legal requirement under Section 2:393 sub 5 at e and f of the Dutch Civil Code, we have no deficiencies to report as a result of our examination whether the Report of the Executive Board, to the extent we can assess, has been prepared in accordance with Part 9 of Book 2 of this Code, and whether the information as required under Section 2:392 sub 1 at b-h has been annexed. Further we report that the Report of the Executive Board, to the extent we can assess, is consistent with the consolidated financial statements as required by Section 2:391 sub 4 of the Dutch Civil Code. Amsterdam, April 14, 2014
Ernst & Young Accountants LLP
signed by A.B. Roeders
Page 99 of 141
Annual report 2013 Aegon Bank N.V.
Page 100 of 141
Annual report 2013 Aegon Bank N.V.
Financial statements 2013 of Aegon Bank N.V.
Report of the Executive Board See page 6 of the annual report for the Report of the Executive Board.
Page 101 of 141
Annual report 2013 Aegon Bank N.V.
Statement of financial position (before profit appropriation) note
31-12-2013
31-12-2012
Amounts in EUR thousand
Assets Cash Amounts due from banks Mortgage loans and other loans Shares in group companies Financial assets available for sale Financial assets fair value through profit or loss Derivatives Deferred tax asset Other assets and receivables
3 4 5 8 6 6 7 12 9
Total assets
79.406 77.837 3.203.630 2.105.151 2.368.658 170.362 72.123 985 54.140
264.086 159.861 3.081.666 1.580.330 2.433.853 153.420 32.398 1.664 55.091
8.132.292
7.762.369
4.282.872 2.500.748 750.000 57.895 62.808 850 155.663
4.396.682 2.500.203
7.810.836
7.456.751
321.456
305.618
8.132.292
7.762.369
Equity and liabilities Savings deposits Amounts due to banks Other borrowings Derivatives Deferred tax liabilities Provisions Other liabilities and accruals
Equity
Total equity and liabilities
Page 102 of 141
10 11 12 7 13 14 15
16
154.735 51.978 5.759 347.394
Annual report 2013 Aegon Bank N.V.
Income statement
2013
2012
Amounts in EUR thousand Net income / (loss) group companies Other income / (loss) after tax Financial assets, excluding derivatives
-12.850
7.634 -23.841
-12.850
-16.207
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Annual report 2013 Aegon Bank N.V.
Notes to the financial statements 1.
General information Aegon Bank N.V., incorporated and domiciled in the Netherlands, is a limited liability company organized under Dutch law and recorded in the Commercial Register of The Hague, under its registered address at Aegonplein 50, 2591 TV The Hague. Aegon Bank N.V. (or Aegon Bank) is a 100% subsidiary of Aegon Nederland N.V. (or Aegon Nederland), established in The Hague. Aegon Bank’s ultimate holding company is Aegon N.V. in The Hague. Aegon Bank and its group companies specialise in developing, selling and servicing savings and investment products as well as directly selling and servicing Aegon mortgage, life, non-life and pension products. Aegon Bank does not provide corporate loans or project financing.
2.
Summary of significant accounting policies
2.1.
Basis of preparation The financial statements have been prepared in accordance with accounting principles in the Netherlands as embodied in Part 9 of Book 2 of the Netherlands Civil Code. Based on article 2:362.8 of the Netherlands Civil Code, the valuation principles applied are based on International Financial Reporting Standards (IFRS) as adopted by the European Union (EU), as used for the preparation of the consolidated financial statements of Aegon Bank N.V.. With regard to the income statement of Aegon Bank N.V., article 402, Part 9 of Book 2 of the Netherlands Civil Code has been applied, allowing a simplified format. For the accounting policies we refer to the accounting policies set out in note 2 of the consolidated financial statements. These also apply to the separate financial statements unless stated otherwise.
2.2.
Changes in presentation There were no changes in presentation during the year.
2.3.
Group companies SAECURE 8 NHG, SAECURE 13 NHG and KIGOI are not wholly owned subsidiaries of Aegon Bank (refer to note 27 in the consolidated accounts). These associates are stated at their net asset value, determined on the basis of IFRS as applied in the consolidated financial statements of the Group. For details on the accounting policies applied for the group companies refer to the consolidated financial statements.
Page 104 of 141
Annual report 2013 Aegon Bank N.V.
3.
Cash Refer to note 5 ‘Cash’ of the consolidated financial statements for more information.
4.
Amounts due from banks 2013 Bank accounts Deposits Total
2012
49.837 28.000 77.837
20.861 139.000 159.861
Amounts due from banks comprise receivables from banks in the Netherlands and abroad and cash collateral provided. Of the amounts due from banks EUR 74,0 million (2012 EUR 32,5 million) relates to cash positions of consolidated securitizations. Bank accounts are payable on demand, and deposits have a maturity of less than three months. The carrying amounts disclosed reasonably approximate the fair values at year-end. The cash collateral provided amounts to EUR 28 million (2012: EUR 139 million). These accounts are used as collateral for the interest rate swaps held. These cash collateral accounts are not freely available. Due to the nature of this asset the total amount classifies as current assets.
5.
Mortgage loans and other loans Loans to the private sector - Mortgage loans - Other loans Total
Fair value
Current Non-current Total
6.
2013
2012
3.063.513 140.117 3.203.630
3.071.649 10.017 3.081.666
3.607.570
3.536.202
2013
2012
424.400 2.779.230 3.203.630
283.559 2.798.107 3.081.666
Other financial assets
Available-for-sale financial assets (AFS) Financial assets at fair value through profit or loss (FVTPL) Total financial assets, excluding derivatives
2013
2012
2.368.658 170.362 2.539.020
2.433.853 153.420 2.587.273
Page 105 of 141
Annual report 2013 Aegon Bank N.V.
2013
Debt securities Other investments At December 31 2012
Debt securities Other investments At December 31
Current Non-current Total financial assets, excluding derivatives
AFS
2.368.658 2.368.658 AFS
2.433.853 2.433.853
FVTPL
170.362 170.362 FVTPL
2.368.658 170.362 2.539.020 Total
153.420 153.420
2.433.853 153.420 2.587.273
Fair value
2.368.658 170.362 2.539.020 Fair value
2.433.853 153.420 2.587.273
2013
2012
514.558 2.024.462 2.539.020
533.574 2.053.699 2.587.273
Movement schedule financial assets, mortgage loans, other loans
Page 106 of 141
Total
Annual report 2013 Aegon Bank N.V.
2013
Shares FVTPL
At January 1
153.420
2.433.853
3.071.649
10.017
Acquisitions/ origination Disposals/ repayment
250.665
840.441
209.588
130.100
-235.080
-975.721
-63.438
-191
48.125
-152.814
1.548
21.773
-
186
170.362
Shares FVTPL
Revaluation Realized in the income statement Impairment losses / (reversals) At December 31 2012
At January 1 Acquisitions Disposals
Revaluation Realized in the income statement Impairment losses / (reversals) At December 31
Debt securities AFS
Mortgage loans
Private loans
Other financial assets
Total
-
5.668.939 1.430.794
-
1.274.238
-
-
-104.880
-
-
23.322
-1.473
-
-
-1.288
2.368.658
3.063.513
140.117
-
5.742.649
Debt securities AFS
Mortgage loans
Private loans
Other financial assets
Total
51.097
3.154.397
116.612
17.749
101.107
3.440.962
202.019
749.747
2.807.608
-
-
3.759.374
-101.293
-1.620.471
-19.553
-6.765
-100.000
1.848.082
16
128.823
166.982
-967
-
294.854
1.581
21.357
-1.107
21.831
-
-
-
-
-
-
153.420
2.433.853
3.071.649
10.017
-
5.668.939
The revaluation for mortgages relates to hedge accounting.
7.
Derivatives Note
Derivatives not designated in a hedge Derivatives designated as fair value hedges Total
Derivative asset 2013 2012
Derivative liability 2013 2012
26.514 45.609
30.959 1.439
8.682 49.213
13.764 140.972
72.123
32.398
57.895
154.736
Page 107 of 141
Annual report 2013 Aegon Bank N.V.
2013 Current Non-current Total net derivatives
7.1.
2012
-144 14.372 14.228
-144 -122.194 -122.338
Use of derivatives Derivatives not designated in a hedge Derivative asset 2013 2012
Derivatives held as an economic hedge Bifurcated embedded derivatives Total
8.
Derivative liability 2013 2012
26.514
30.959
4.739
7.414
-
-
3.943
6.349
72.123
32.398
8.682
13.764
Group companies 2013 At January 1 Acquisition Of Kigoi Divestments and liquidations Net income / (loss) for the financial year Dividends received Net change SPV SAECURE 13 Net change SPV SAECURE 8 At December 31
2012
1.580.330 718.785 -91.875
3.884 -105.973 2.105.151
2.705.818 7.634 -1.067.897 -65.224 1.580.330
End of July 2012 Aegon Bank Bemiddeling B.V. merged with all of its subsidiaries and Beheer- en Financieringsmaatschappij Pythagoras B.V. The merge has been applied retrospectively and has formally been executed as per January 1, 2012. During 2012 Aegon Bank Bemiddeling B.V. distributed a dividend amounting to EUR 1.068 million to AEGON Bank N.V. In 2013 Aegon Bank Bemiddeling B.V. was sold to Aegon Nederland for EUR 91,9 million. For a list of names and locations of the most important group companies, refer to note 27 of the consolidated financial statements.
9.
Other assets and receivables Note Equipment Receivables Accrued income Total
Page 108 of 141
2013 35.954 18.186 54.140
2012 27 33.789 21.275 55.091
Annual report 2013 Aegon Bank N.V.
9.1.
Receivables 2013
2012
Investment debtors Receivable from DNB relating to DSB Other receivables Provision for doubtful debts Total
760 24.800 10.845 -450 35.954
10.355 28.386 5.777 -10.729 33.789
Current Non-current Total
11.128 24.827 35.954
7.259 26.529 33.788
Information on provision for doubtful debts: This provision relates to investment debtors and other receivables. 2013 At January 1 Additions charged to earnings Used during the year At December 31
9.2.
10.729 291 -10.570 450
2012 11.606 2 -879 10.729
Accrued income 2013 Accrued interest Prepaid expenses Total
17.533 653 18.186
2012 20.328 947 21.275
The account ‘Accrued income’ is classified entirely as current assets. The carrying amounts disclosed reasonably approximate the fair values at year end.
10.
Savings deposits Refer to note 11 ‘Savings deposits’ of the consolidated financial statements for more information.
11.
Amounts due to banks Note LTRO and notes Repurchase agreements At December 31
2013
2012
1.500.527 1.000.221 2.500.748
1.500.000 1.000.203 2.500.203
Refer to note 12 ‘Amounts due to banks’ of the consolidated financial statements for more information.
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Annual report 2013 Aegon Bank N.V.
12.
Other borrowings The other borrowings relate to the loan provided by Saecure 13. This relates to the part of the notes that have been placed externally. For the company financial statements the loan results in an borrowing between Aegon Bank and Saecure 13. A specific part of the mortgages in the Aegon Bank statement of financial position have been pledged as part of these notes. Refer to note 12 ‘Amounts due to banks’ of the consolidated financial statements for more information.
13.
Deferred tax
Deferred tax assets Deferred tax liabilities Total net deferred tax liability / (asset)
2013
2012
985 -62.808 -61.823
1.664 -51.978 -50.314
Movement in deferred tax 2013
At January 1 Charged to income statement Charged to equity Other At December 31 Deferred tax assets Deferred tax liabilities
2012
At January 1 Charged to income statement Charged to equity Other At December 31 Deferred tax assets Deferred tax liabilities
Page 110 of 141
Financial assets
Pension plan
Other
Total
51.978 -1.365 12.195 62.808
-77 77 -
-1.587 602 -985
50.314 -686 12.195 61.823
62.808
-
985 -
985 62.808
Financial assets
Pension plan
Other
Total
-40.438 58.277 34.139 51.978
-70 -7 -77
-1.587 -1.587
-40.508 56.683 34.139 50.314
51.978
77 -
1.587 -
1.664 51.978
Annual report 2013 Aegon Bank N.V.
14.
Provisions 2013 Provisions for retirement benefit plans Other provisions Total
2012
850 850
874 4.885 5.759
2013 Current Non-current Total
2012
850 850
4.885 874 5.759
14.1. Defined benefit liabilities In 2013 this provision has been transferred to Aegon Nederland due to the transfer of Aegon Bank Bemiddeling. Refer to note 14.1 12‘Defined benefit liabilities’ of the consolidated financial statements for more information.
14.2. Other provisions Movements in other provisions 2013
Restructuring
Other
Total
At January 1 Additions charged to earnings Used during the year Unused amounts reversed through the income statement Other movements At December 31
4.885 -3.035 -1.000 850 Restructuring
Other
4.885 -3.035 -1.000 850 Total
6.671 894 -2.680 4.885
961 -961 -
7.632 894 -3.641 4.885
2012 At January 1 Additions charged to earnings Used during the year Unused amounts reversed through the income statement Other movements At December 31 2013 Current Non-current Total
15.
2012 850 850
4.885 4.885
Other liabilities and accruals Note Other liabilities Accruals Total
2013 67.616 88.047 155.663
2012 197.779 149.615 347.394
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Annual report 2013 Aegon Bank N.V.
15.1. Other liabilities 2013 Investment creditors Current account with AEGON Nederland N.V. Other liabilities Total
36 3.622 63.958
52.075 96.816 48.888
67.616
197.779
2013 Current Non-current Total
2012
67.091 525 67.616
2012 197.644 135 197.779
The carrying amounts disclosed reasonably approximate fair value at year-end.
15.2. Accruals 2013 Accrued interest
2012
88.047
134.313
88.047
149.615
15.302 Total
This item comprises interest payable and is classified entirely as current liabilities. The carrying amounts disclosed reasonably approximate fair value at year-end.
16.
Equity 2013 Share capital Share premium Revaluation reserves Retained earnings Participations Net income / (loss) At December 31
2012
37.437 326.212 12.002 -41.870 525 -12.850 321.456
37.437 326.212 -16.296 -25.662 135 -16.208 305.618
16.1. Share capital 2013 Authorized share capital Not issued
90.756 53.319 37.437
2012 90.756 53.319 37.437
The authorized share capital is EUR 90,7 million, divided into 200.000 shares of EUR 453,78 nominal value each, of which 82.500 shares have been issued and fully paid. There have been no changes since the previous financial year. In 2013 and 2012, Aegon Bank did not pay dividend to Aegon Nederland N.V. During 2013 Aegon Bank complied with the requirements of the regulators.
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Annual report 2013 Aegon Bank N.V.
16.2. Statement of changes in equity 2013
Share capital
Share premium
Revaluation reserves
Retained earnings
Net income / (loss)
Minority interest Participations
At January 1
37.437
326.212
-16.296
-25.662
-16.208
135
305.618
Net income 2012 retained Net income 2013 Total net income / (loss)
-
-
-
-16.208
16.208
-
-
-
-
-
-
-12.850
20
-12.830
-
-
-
-16.208
3.358
20
-12.830
-
-
28.298
-
-
28.298
-
-
28.298
-
-
-
28.298
-
-
-
-
-
390
390
-
-
-
-
-
-20
-20
-
-
-
-
-
370
370
37.437
326.212
12.002
-41.870
-12.850
525
321.456
Changes revaluation reserves Other comprensive income / (loss) Issuance of participations Dividends paid on participations Equity changes from relation with shareholder At December 31
Total 2013
Page 113 of 141
Annual report 2013 Aegon Bank N.V.
2012
Share capital
Share premium
Revaluation reserves
Retained earnings
Net income / (loss)
Minority interest Participatio ns
At January 1
37.437
326.212
-97.718
94.501
-120.163
-
240.269
Net income 2011 retained Net income 2012 Total net income / (loss)
-
-
-
-120.163
120.163
-
-
-
-
-
-
-16.208
1
-16.207
-
-
-
120.163
103.955
1
-16.207
-
-
81.422
-
-
-
81.422
-
-
81.422
-
-
-
81.422
135
135
Changes revaluation reserves Other comprensive income / (loss) Issuance of participations Dividend paid on participations Equity changes from relation with shareholder At December 31
Total 2012
-
-
-
-
-
-1
-1
-
-
-
-
-
134
134
37.437
326.212
-16.296
-25.662
-16.208
135
305.618
Refer to note 16 ‘Equity’ of the consolidated financial statements for more information on equity.
17.
Remuneration Executive and Supervisory Board Refer to note 20 of the consolidated financial statements for information on the remuneration of the Executive and Supervisory Board.
18.
Remuneration Auditor Refer to note 20 of the consolidated financial statements for information on the remuneration of the Auditor.
19.
Related party transactions Refer to note 28 of the consolidated financial statements for information on the related party transactions.
20.
Commitment and contingencies Refer to note 24 of the consolidated financial statements for more information. Page 114 of 141
Annual report 2013 Aegon Bank N.V.
21.
Events after the balance sheet date On the 1st of February 2013 SNS Reaal was nationalised by the Dutch government. The Ministery of Finance announced that they will impose a 1 billion-euro one-time levy on Dutch banks in 2014 to share the costs of the SNS nationalization. The levy is calculated over Aegon Bank’s share in the deposit guarantee scheme as per the 1st of February 2013. The levy will be imposed in three instalments during 2014 and will result in an estimated tax charge of EUR 9,5 million. The event gives no further information on the situation pertaining on the reporting date. As per the 1st of February 2014 Aegon bank redeemed a mortgage portfolio approximately amounting to EUR 460 million to AEGON leven. At the same date a portfolio was purchased from Aegon leven. The rationale behind the transactions was reducing the duration of the mortgage portfolio of Aegon Bank. As result of the sale a gain was realized amounting to EUR 52,7 million before tax. The transactions had a minimal impact on the BIS ratio as more capital intensive mortages (non NHG) were purchased. The Hague, April 14, 2014 Supervisory Board L. Jongsma R.M. van der Tol J.A.J. Vink
Executive Board E.F.M. Rutten M.R. de Boer
Page 115 of 141
Annual report 2013 Aegon Bank N.V.
Other information Statutory provisions regarding profit appropriation Appropriation of profit will be determined in accordance with article 23 of the Articles of Association of Aegon Bank N.V. The relevant provisions read as follows: 1. The profit made in any financial year will be at the disposal of the Annual General Meeting. 2. Distribution of profit shall take place after adoption of the financial statements which show this to be permissible. 3. The Annual General Meeting may decide to an interim distribution, if the requirements are met as evidenced by an interim statement of net assets pursuant to Section 2:105(4) of the Netherlands Civil Code. 4. The Annual General Meeting may resolve to make interim distributions and/or distributions charged to a reserve of the company. 5. Distributions on shares may only take place up to the amount of the distributable equity.
Proposal for profit appropriation A proposal will be put to the General Meeting of Shareholders to appropriate the result for the financial year as follows: To be withdrawn from the retained earnings Net result This proposal has not yet been incorporated in the financial statements.
Page 116 of 141
12.850 _______ 12.850
Annual report 2013 Aegon Bank N.V.
To: the Supervisory Board and the Executive Board of Aegon Bank N.V.
Independent auditor’s report Report on the company financial statements We have audited the accompanying company financial statements 2013 of Aegon Bank N.V., the Hague, the Netherlands (as set out on pages 101 to 116), which comprise the statement of financial position as at December 31, 2013, the income statement for the year then ended and the notes, comprising a summary of the significant accounting policies and other explanatory information. Management's responsibility Management is responsible for the preparation and fair presentation of these company financial statements and for the preparation of the Report of the Executive Board, both in accordance with Part 9 of Book 2 of the Dutch Civil Code. Furthermore management is responsible for such internal control as it determines is necessary to enable the preparation of the company financial statements that are free from material misstatement, whether due to fraud or error. Auditor's responsibility Our responsibility is to express an opinion on the company financial statements based on our audit. We conducted our audit in accordance with Dutch law, including the Dutch Standards on Auditing. This requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the company financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the company financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the company financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the company 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. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the company financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion with respect to the company financial statements In our opinion, the company financial statements give a true and fair view of the financial position of Aegon Bank N.V. as at December 31, 2013 and of its result for the year then ended in accordance with Part 9 of Book 2 of the Dutch Civil Code.
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Report on other legal and regulatory requirements Pursuant to the legal requirement under Section 2:393 sub 5 at e and f of the Dutch Civil Code, we have no deficiencies to report as a result of our examination whether the Report of the Executive Board, to the extent we can assess, has been prepared in accordance with Part 9 of Book 2 of this Code, and whether the information as required under Section 2:392 sub 1 at b-h has been annexed. Further we report that the Report of the Executive Board, to the extent we can assess, is consistent with the company financial statements as required by Section 2:391 sub 4 of the Dutch Civil Code.
Amsterdam, April 14, 2014
Ernst & Young Accountants LLP
signed by A.B. Roeders
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Appendix Pillar 3
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1.
Summary Since the introduction of the Basel II Capital Framework, codified in the Dutch Financial Supervision Act [Wet financieel Toezicht], requirements have been set for the disclosure of information to the public. These requirements are contained in Pillar 3 ‘Disclosures and Market Discipline’ of the Basel II Capital Framework. The Pillar 3 requirements are reflected in Sections 3:74a and 3:280a of the Financial Supervision Act. The Sections refer to Appendix XII (Technical Criteria on Disclosure) of the revised Banking Directive (2006/48/EC), Part 2 (General requirements) and Part 3 (Qualifying requirements for the use of particular instruments or methodologies). This schedule is added to the financial statements to comply with the disclosure requirements, to the extent that certain disclosures are not included in the financial statements.
1.1.
ICAAP, SREP and Pillar 3 within Basel II The ICAAP and SREP form part of the Basel II framework. Basel II is the abbreviation for the second Basel Capital Framework drawn up by the Basel Committee on Banking Supervision. 6 It has been embedded in European7 and Dutch8 legislation and regulations. The European Banking Authority (EBA) has drawn up guidelines for the interpretation of ICAAP. At AEGON Bank, the ICAAP is interpreted on the basis of these guidelines. The Internal Capital Adequacy Assessment Process (ICAAP) is a continuous monitoring process that has been put in place by AEGON Bank N.V. (AEGON Bank) to ensure capital adequacy relative to its material risk exposure and risk profile. As part of this ongoing and forward-looking process, AEGON Bank identifies, assesses and, where possible, quantifies material risks. Stress testing and forward-looking element play an important role in the process. AEGON Bank’s management determines the amount of capital to be held to cover material risks relative to its risk profile on the basis of its internal standards. In the course of the ICAAP process, AEGON Bank not only assesses its current capital adequacy but also estimates its capital adequacy for the coming years. This analysis therefore projects new activities as well as current activities. At AEGON Bank, capital adequacy is assessed on a Capital Planning sheet. Once the Capital Planning document has been drawn up, the outcomes are continually reviewed against this document, which is fine-tuned where necessary by AEGON Bank’s management. The new Basel III requirements will be phased in during the period 1 January 2015 to 1 January 2019. The Basel III requirements mean increasing the capital and liquidity levels required with the aim of making the banking sector more stable and the financial system more robust. The present ICAAP 2013 does take account of the Basel III requirements and indicators. On December 31, 2013 AEGON Bank NV already met the new requirements. Basel II Basel II is based on three pillars which have the combined aim of increasing the stability of banks.
6
International Convergence of Capital Measurement and Capital Standards, A Revised Framework, November 2005. 7 Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions (recast). Directive 2006/49/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions (recast). 8 Dutch Financial Supervision Act [Wet op het financiële toezicht] (Wft) and the related Prudential Rules Decree [Besluit prudentiële regels]. Page 120 of 141
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Pillar 1: Regulatory Capital (minimum capital requirement) Pillar 1 refers to the minimum capital to be held by banks to cover credit, operational and market risks. No capital buffer needs to be carried for interest rate risks in the non-trading book, i.e. the banking book, under Pillar 1. Pillar 1 approach chosen at AEGON Bank AEGON Bank’s Executive Board has chosen to use the Standardised Approach (SA) to credit risk. This approach means that, depending on the asset and rating category, a standardised credit risk weighting is applied to the assets concerned.9 To determine the capital requirement for operational risk, AEGON Bank’s Executive Board has adopted the Basic Indicator Approach (BIA). Accordingly, the capital requirement for operational risk is defined as 15% of average net interest and non-interest income for the last three financial years.10 As AEGON Bank does not undertake trading activities or hold trading positions, market risk does not apply. Pillar 2: Supervisory Review As explained above, the ICAAP and SREP constitute the Pillar 2 of Basel II. Under Pillar 2, AEGON Bank’s Executive Board and senior management must perform an integrated analysis. The risks identified, including Pillar 1 risks, have to be measured and aggregated, after which it is possible to a make a link to the capital requirement. The Executive Board will then continuously monitor and, where necessary, escalate these risks. Pillar 3: Disclosures and market discipline Finally, Basel II lays down requirements for the disclosure of information to the public. These requirements are set out in Pillar 3 ‘Disclosures and Market Discipline’. 11 AEGON Bank is implementing the Pillar 3 requirements by publishing this document as a specific schedule to the financial statements.
2.
Risk Governance and Risk Appetite
2.1.
Risk Governance at AEGON Bank This section deals with internal governance at AEGON Bank in relation to risk management. The Executive Board of AEGON Bank NV is ultimately responsible and oversees risk management at AEGON Bank. The Executive Board ensures that the risks associated with AEGON Bank’s business activities are reviewed, allocated within the organisation and managed. Part of this process involves taking care to ensure that effective risk management and control systems are in place. The Executive Board of AEGON Bank NV is responsible for establishing its Risk Governance structure and Risk Appetite (see Section 3.2). The risk governance structure is based on a “3 lines of defence” model, also used at AEGON Nederland and the AEGON Group. In this model, AEGON Bank has defined three lines of defence within risk management and each function is given a suitable position within the organisational structure. Each line has its own specific responsibilities with regard to risk management.
9
The sum of the products of the credit-risk weight multiplied by the carrying value results in the risk-weighted assets (RWA) associated with the credit risk. 10 The capital requirement multiplied by 12.5 produces the amount of operational risk-weighted assets (RWA). 11 The Pillar 3 requirements are reflected in Sections 3:74a and 3:280a of the Financial Supervision Act. The Sections refer to Appendix XII (Technical Criteria on Disclosure) of the revised Banking Directive (2006/48/EC), Part 2 (General requirements) and Part 3 (Qualifying requirements for the use of particular instruments or methodologies). Page 121 of 141
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Figure 3 Relations Overview: “3 lines of defence”
A fourth (external auditor) and fifth line (DNB/AFM) could also be added as external lines of defence. The external auditor provides an objective external assessment of the risks that exist and the effectiveness of the measures taken with regard to risk management and internal auditing. External regulatory bodies provide the framework within which AEGON Bank must act in order to manage risks. In addition, external regulatory bodies oversee compliance with legislation and regulations. The responsibilities of the different functions within AEGON Bank are shown in the table below/ Table 5 RASCI
Identifying risks Assessing risks Determining risk treatment Monitoring risks Reporting risks
2.1.1.
Executive Board A A A/R A A
BM12
RCM
Compliance
Legal
SZ
R
R R S R R
R C/S
R C/S
R C/S
C/S
C/S
C/S
R R
First line: process owners First-line risk management consists of the management measures which have been taken in the course of activities to provide services. This risk management takes place in AEGON Bank’s operational processes and is organised by the process owners. The way in which the risk management is organised depends on the risk appetite, as defined by the Executive Board and the Supervisory Board. In first-line risk management: all the process owners are responsible for managing the activities of their process or business unit; the process owners are responsible for identifying and monitoring all risks; the process owners provide effective management measures to reduce risks, so that the management is in line with the risk that the department intends to incur; management is responsible for ensuring that the design and implementation of management measures comply with AEGON Bank’s specified policies and, where applicable, with policies of AEGON Nederland and the AEGON Group.
12
BM stands for Business Manager in his/her role as process owner.
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2.1.2.
Second line: supporting functions Second-line risk management is performed by departments independent of the process owners. The functions are as follows: Operational and Financial Risk Management; Compliance, Legal Affairs and Special Affairs; Finance & Control; Security Management. They set policy and provide standards that process owners can use. The second line provides training and supervision and is responsible for monitoring processes and issuing regular risk reports. It also has a supporting role in ensuring that policy and standards are implemented. The Operational and Financial Risk Management activities are handled by AEGON Bank’s Risk & Capital Management department. In terms of hierarchy, this RCM department reports to AEGON Bank’s CFO and functionally to AEGON Nederland’s CRO. Operational Risk Management (ORM) is responsible for facilitating, coordinating and communicating risk management strategy within AEGON Bank. ORM mainly focuses on helping process owners to identify and manage operational risks. This is done by facilitating Risk Self-Assessments and helping to implement management measures, providing assistance with drawing up Key Risk Indicators (KRIs) and providing accurate management information on risks that AEGON Bank has to face. One of ORM’s main objectives is to create and raise risk awareness within AEGON Bank. Financial Risk Management has a policymaking and monitoring role with regard to financial risks. It provides ALCO (Asset & Liability Committee) with management information with regard to financial KRIs. The Finance & Control department is responsible for financial reporting and has a management control role. In the latter role, it focuses on developing Key Performance Indicators (KPIs) with the process owners and reports on this to all parts of the organisation. The Security Officer is responsible for monitoring, analysing and managing physical security and data security in the IT department. AEGON Bank’s compliance function is performed by the centralised Legal Affairs, Compliance and Special Affairs departments. In operational terms, Legal Affairs and Compliance report to AEGON Bank’s Executive Board.
2.1.3.
Third line: internal audit Third-line risk management is provided by AEGON Nederland’ internal auditors (IAN). IAN investigates the effectiveness and efficiency of business processes, the quality of information supplied and risk management within AEGON Bank, as part of AEGON Nederland N.V. It combines operational, financial and ICT aspects of business processes in order to meet management’s requirements in terms of process and risk management. In order to fulfil this responsibility, IAN is authorised to conduct an audit at any time to establish whether ICAAP is in place and operating, even if this is outside the predetermined audit scope. The results of this audit will be presented to the chairman of AEGON Nederland N.V., the Risk & Audit Committee, the chairman of AEGON Bank and the Risk & Capital Manager.
2.1.4.
Committee structure It is AEGON Bank’s policy to manage its operational risks in an integrated manner. In order to do so efficiently, AEGON Bank has divided risks into financial risks and non-financial risks and established a separate committee structure for each type of risk. The Asset & Liability Committee (ALCO) at AEGON Bank NV plays a key part in the management of financial risks. ALCO’s tasks and responsibilities are explained in a subsequent section. For non-financial risks, it has been decided to treat the two business lines separately. In operational terms, these committees report to AEGON Bank NV’s Risk & Audit Committee. Both the ALCO and the RAC have an operational link to similar bodies at AEGON Nederland. This structure can be shown as follows:
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Figure 4 Relationships between AEGON Bank committees
AEGON Nederland
Risk Governance structuur – AEGON Bank NV
Risk & Capital Committee
Risk & Audit Committee DN
Business Units
AEGON Bank NV
Risk & Audit Committee RvC
2.1.5.
Asset & Liability Committee (ALCO)
Pricing Committee AEGON Bank
Pricing Committee Knab
Risk & Audit Committee
Operational Risk Committee AEGON Bank
ISCO Stuurgroep
Operational Risk Committee Knab
Asset & Liability Committee at AEGON Bank NV The AEGON Bank Executive Board is responsible for Risk & Capital Management at AEGON Bank, and must take account of the guidelines issued by the RCC 13 if and insofar as they go beyond AEGON Bank. AEGON Bank’s Executive Board has delegated Asset & Liability Management, as part of Risk & Capital Management, to ALCO. Responsibilities AEGON Bank’s ALCO is responsible for: The implementation of AEGON Bank’s Risk & Capital Management within the RCC framework The implementation of Asset & Liability Management (ALM) policy, the strategic and operational process of balance sheet control: giving direction to and controlling (1) financial risks (interest rate, credit and liquidity risks), (2) internal capital and (3) solvency, within the specified framework. Stress testing is an important management tool The optimisation of the return on AEGON Bank’s equity within the specified framework. Frameworks First and foremost, the ALM policy is governed by the legal frameworks such as the Dutch Financial Supervision Act (especially the Basel II framework) and the internal framework of Enterprise Risk Management of AEGON NV. Frameworks for the ALM policy were determined in cooperation with the Executive Board of AEGON Nederland N.V. and the Risk and Capital Committee (RCC). These frameworks result in restrictions, as set out in the AEGON Nederland N.V. Policy Directive on investment guidelines for AEGON Bank NV. Finally, the risk appetite and solvency requirement determined by AEGON Bank’s Executive Board are considered as frameworks. AEGON Bank’s Executive Board targets a rate of return of 11% after tax on equity on an IFRS basis, at a suitable level of capitalisation.
2.1.6.
Risk Committee The Risk Committee focuses on managing operational risks. In accordance with the document “Governance of AEGON Bank N.V.”, the Risk Committee is tasked with assessing, monitoring and valuing all the operational risks and findings that could possibly affect AEGON Bank. The RC is 13
The Executive Board of AEGON Nederland NV (DN) is responsible for the Risk & Capital Management activities of AEGON Nederland NV, for which the guidelines as issued by the Global Risk & Capital Committee (GRCC) are the deciding factor. DN has delegated the performance of this function to the Risk and Capital Committee. The Risk & Capital Committee (RCC) is responsible for giving direction to and controlling AEGON Nederland NV’s risk exposure, capital and returns.
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governed by a set of rules set out by the Executive Board as described in the articles of association. The actual risk treatment takes place at MT level. Possible treatments include: Avoid – End the activity to avoid the risk Reduce – Reduce the risk by taking mitigating measures Transfer – Transfer the risk by arranging insurance or outsourcing Accept – Accept the risk remaining after any mitigating measures Frequency The frequency of Risk Committee meetings is initially once per month. This frequency can be varied: If a meeting of the Risk & Audit Committee is held in the relevant month On the instructions of the Executive Board. Each process owner is invited to the committee meetings. In this way, each representative has the opportunity to report to the Risk Committee the risks currently affecting the processes concerned.
2.2.
Risk Appetite at AEGON Bank The appetite for risk is an inherent part of entrepreneurship. As a result of its general business operations, AEGON Bank endorses and accepts a certain degree of risk. AEGON Bank endeavours to minimise operational risk and has developed clear frameworks for the financial risks that it runs. AEGON Bank makes all reasonable efforts to ensure that it observes legislation and regulations at all times and has sufficient liquidity and solvency to live up to promises or undertakings made to its customers, shareholder, regulatory body, staff and business partners. AEGON Bank endeavours to minimise operational risk events to an acceptable level and does not tolerate any individual risk events that exceed these limits. A good understanding of risk appetite and risk tolerance helps the Executive Board to set and implement its strategic objectives. Risk appetite can be described as the desired risk exposure and risk tolerance as the maximum exposure to any of the risk categories identified within the AEGON Group. These risk categories are presented below.
2.2.1.
Risk universe AEGON adopts a holistic approach to its risk management. The risks encountered by AEGON can be divided into four main categories, as shown in the diagram below. Figure 5 Summary of risks defined within AEGON Group.
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For AEGON Bank, the Underwriting Risk is not material, as AEGON Bank does not sell insurance under its own name. 2.2.2.
Risk appetite For each of the identified risks, the Executive Board and Supervisory Board have commented on AEGON Bank’s appetite for taking a risk. This appetite was scored in a 5 by 5 matrix, covering impact and frequency, where 1 means that AEGON Bank has a very small appetite for taking a risk and 25 means that it has a very large appetite. Of course, it is also possible that AEGON Bank has no appetite for taking a risk.
2.2.3.
Risk tolerance With this risk appetite and the strategy in mind, it is possible to set out risk tolerances for each of the risk categories identified. The tolerances were chosen so that it can be reasonably stated that AEGON Bank can fulfil its obligations and promises to its stakeholders (customers, shareholder, regulatory bodies, staff and business partners). Risk tolerance and the associated limits and standards are established by AEGON Bank’s Executive Board as described in the articles of association, but are also partly dependent on standards and bandwidths imposed by the regulatory body and the shareholder AEGON NL/Group. Risk tolerance is divided into four areas. The first area, “Financial condition”, describes the financial position that AEGON Bank is aiming for. The second area, “Continuity”, delves more deeply into the measures taken by AEGON Bank to continue its financial condition in different scenarios. The third area, “Risk culture”, describes the risk culture at AEGON Bank. The fourth and final area, “Risk balance sheet”, contains details of the standards and bandwidths used by AEGON Bank in its risk management system. The Key Risk Indicators which have been drawn up mainly relate to financial risks. They are continuously monitored by RCM and periodically reported to the ALCO. When an indicator exceeds the warning threshold, RCM informs the risk owner involved immediately. The risk tolerance is updated annually by RCM and signed by the Executive Board and Supervisory Board.
2.2.4.
Financial condition As described above, AEGON Bank is aiming to create a risk profile in which it is possible to have sufficient liquidity and solvency available at all times for all of its stakeholders. AEGON Bank focuses on a number of measures by means of which to guarantee its financial condition:
14
S&P: A rating objective of an Ax long-term issuer rating from Standard & Poor’s . BIS ratio: An internal BIS ratio standard of 15.4% Core Tier 1 ratio: An internal standard of 10.5% Economic Capital Model: Market value of equity is higher than Economic Required Capital 15 Leverage ratio: A leverage ratio greater than or equal to 3.6%. Net Stable Funding Ratio: A ratio greater than 100% Liquidity Coverage Ratio: A ratio greater than 130%
Continuity AEGON Bank has defined a number of extreme scenarios to establish whether AEGON Bank can continue to keep its promises to its stakeholders in these circumstances16. These scenarios are 14
An Ax rating means an A+, A or A- rating. This ratio (regulatory capital : total assets) does not become mandatory until 2018. In advance of the final implementation, regular monitoring has been taking place since the second half of 2011. 15
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(among others) “Extreme credit spread widening”, “Long-term economic recession” and a “Nightmare liquidity scenario”. These scenarios are based on the four stress scenarios used by AEGON Group. Where necessary, the scenarios are adjusted slightly so that they also comply with the guidelines that the regulatory body imposes on stress scenarios for banks.
Interest rate risk: Decrease in market value accompanied by a parallel shift of 200bp in the yield curve amounts to a maximum of 40% of equity at market value. Credit risk: Decrease in market value in the event of extreme credit spreads and macroeconomic shock amounts to a maximum of 50% of equity at market value. Liquidity risk: o Coverage ratio for period of 1 week > 1.25 o Coverage ratio for period of 1 month > 1.15 o Coverage ratio for period exceeding 1 month > 1
Risk Culture A strong risk culture is an essential element in achieving a situation in which risks are in proportion to benefits. Specific risk appetite statements concerning operational risk (see above) have been included to support AEGON’s ERM framework. A positive risk and control culture does not restrict the development of new business, even where it involves an increased initial risk. However, the organisation must be aware of the risk and treat it in a controlled way, in view of the risk appetite as established by the Executive Board and Supervisory Board. A key method of raising risk awareness is to carry out Risk and Control Self-Assessments (RCSAs). The purpose of an RCSA is to identify and assess risks at strategic level or within individual processes, to identify the controls put in place to mitigate these risks and to assess the effectiveness of the controls. The input for the RCSAs is supplied by staff and management. An RCSA consists of four steps: desk research, interviews, workshops and reporting. The first line of defence at AEGON Bank are process owners. A process owner is responsible for organising a process, identifying the inherent risks and developing (jointly with ORM) controls and reports. It is important that this responsibility does not stop at the boundaries of a department but continues through the rest of the organisation. Because it is specified who is responsible for what, it is immediately clear who can be contacted if there are any questions. Working together with ORM, the process owners have an important task in improving the risk culture and in translating risk appetite into everyday policy: they must get the message across to everyone within a process that they are the first line of defence against undesirable risks. Everyone is encouraged to suggest improvements to the process and ban undesirable risks. The Executive Board also plays an important part. Staff meetings are held to provide an insight into the risks that AEGON Bank faces and the risk treatment formulated to control the risk.
3.
Capital planning
3.1.
Introduction The capital planning process lies at the heart of the ICAAP. It links the company’s mission statement, strategy and risk profile to operational capital management. AEGON Bank’s mission statement and strategy are key factors in defining its risk profile (Section 3.2). The mission statement, strategy and risk profile together make up the input for operational capital management (Section 3.3), which sets the requirements, risk limits and risk bandwidths. As part of its operational capital management, AEGON Bank identifies, assesses and, where possible, quantifies material risks. Stress testing plays an important role in the process (Section 3.3.8). In accordance with internal requirements, AEGON Bank determines the amount of capital to be held to cover material risks relative to its risk profile, both for the current situation and for the years ahead, again by reference to its mission statement and strategy. Taking the company’s
16
For a detailed description of the stress test framework, see Section 4.3.8 “Stress testing”. Page 127 of 141
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mission statement, strategy and risk profile as a basis, the capital planning process annually produces a target-linked capital planning document (Section 3.3.4) for the medium term (five years). The assumptions underlying capital planning are regularly reviewed and adjusted throughout the year. Capital planning is also updated monthly on the basis of actual outcomes, and reported to the Executive Board and ALCO to allow continuous monitoring (Section 3.3.5). Adjustments may be made on the basis of expected developments relative to actual outcomes (Section 3.3.6), where necessary in accordance with existing contingency plans (Section 3.3.7).
3.2.
Risk profile The exceptionally turbulent developments on the financial markets in the past few years have shown that ‘trust’, or rather the ‘erosion of trust’ due to cash shortages or poor solvency, can play a dominant role. This has strengthened the belief of AEGON Bank’s Executive Board that it is of vital importance that we must regain, retain and bolster the trust of our customers and other stakeholders at all times. This belief is reflected in the company’s mission statement, core values, strategy, risk profile and targets. In terms of our risk profile, this means that we seek to maintain our rating target, which is an Ax long-term issuer rating from Standard & Poor’s. 17 Aside from the rating target, this is also reflected in the company’s investment policy, more specifically the mandate that imposes limitations on the asset categories that can be invested in. Given its Ax rating from Standard and Poor’s, AEGON Bank uses a confidence interval of 99.90% and one-year horizon in determining its internal capital for specific risks. This means that only in the event of a shock of the type occurring once every 1000 years is there likely to be an insufficient capital cushion to absorb a specified risk. AEGON Bank also applies add-ons (also known as prudential filters) to its internal capital requirements for unquantified risks in its Economic Capital Model.
3.3.
Operational capital management This section explains how we have organised the operational side of the capital planning process and how the various roles have been assigned. It also sets out the targets and bandwidths in terms of our solvency objective and provides details of our contingency policy. Finally, we take a closer look at stress testing, which is fundamental to proper operational capital management.
3.3.1.
Capital planning process The figure below shows the annual capital planning process.
Figure 7 Annual capital planning process
17
An Ax rating means an A+, A or A- rating.
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The figure below shows the capital planning process on a monthly basis.
Figure 8 Monthly capital planning process
In addition to monthly monitoring, solvency fluctuations are also monitored on a weekly basis. If any deviations are identified, ALCO will meet, urgently if necessary, to discuss appropriate measures. The guiding principles and assumptions are assessed and adjusted on a quarterly basis after consulting Bank’s Executive Board. 3.3.2.
Role division The table below shows the responsibilities for the capital planning process of the various company bodies. Table 11 Responsibilities for capital planning process, by company body Body
Responsibilities
Executive Board of AEGON Bank N.V
Ultimately responsible for ICAAP and Capital Planning Defines strategic goals Page 129 of 141
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Body
Responsibilities
Defines risk profile in partnership with ALCO AEGON Bank’s Executive Board has delegated Asset & Liability ALCO (Asset & Liability Committee)
RCC (Risk & Capital Committee) GAM (AEGON Global Asset Management)
Risk & Capital Management
3.3.3.
Management to ALCO Responsible for ALM policy within the limits of its mandate Responsible for strategic and operational processes involved in balance sheet control Responsible for maximising return on equity ALCO monitors solvency fluctuations on a monthly basis and carries out balance sheet management on the basis of reports drawn up by RCM Reviews risks against tactical and strategic bandwidths If set bandwidths are exceeded, ALCO instructs GAM to sell or purchase securities to bring solvency to required level Defines strategic portfolio Adopts strategic risk budget Establishes investment mandate for AAM Defines strategic bandwidths for all types of risk RCC is responsible for giving direction to and controlling AEGON Nederland NV’s risk exposure, capital and returns. In that capacity, RCC defines frameworks for AEGON Bank in a Policy Directive GAM manages AEGON Bank’s investment portfolios by pursuing an active investment policy based on a clear vision of markets. In so doing, GAM operates within the limits of the investment mandates set out in the asset management agreement between AEGON Bank AIM18.
Risk & Capital Management draws up reports for use by ALCO. RCM also monitors on a daily basis movements in solvency, economic capital and risk exposure. If the minimum requirement is exceeded, this is reported and ALCO will convene urgently.
Requirements AEGON Bank’s Executive Board and ALCO annually define the medium-term requirements for liquidity, solvency and the composition of capital. AEGON Bank also sets requirements in terms of its dividend policy, investment policy, interest rate risk exposure and the potential impact of hypothetical stress scenarios. Liquidity The internal liquidity requirement is based on stress testing. The current internal requirement stipulates that there must be sufficient cash available, or that sufficient assets can be liquidated in the short term to withstand a nightmare scenario (Section 3.3.8). Solvency The regulator reviews the ICAAP, including the capital planning process, and sets the amount of Pillar 2 capital, also known as SREP capital. Although the SREP capital may equal the economic capital (internal capital) that is based on the entity’s ICAAP, the regulator may find this to be inadequate and require additional capital (prudential filter). The Dutch Financial Supervision Act imposes solvency requirements that are based on the ratio between the SREP capital on the one hand, and risk-weighted assets on the other. The regulatory available capital comprises Tier 1 and Tier 2 capital and must be at least 8% of Pillar 1 risk-weighted assets. AEGON Bank is using a limit of 15.4%. Below this limit, measures must be taken in accordance with the contingency policy (Section 3.3.7). The Financial Supervision Act also sets requirements for the capital cushion to be carried under Pillar 2 (Section Error! Reference source not found.).
18
The arrangements made between AEGON Bank NV and GAM are set out in an SLA.
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Composition of capital The Financial Supervision Act sets requirements for the composition of regulatory capital, which comprises core capital (Tier 1) and supplementary capital (Tier 2). Supplementary capital is only included in the regulatory capital to the extent that it does not exceed core capital. A capital structure comprising 4% core capital and 4% supplementary capital is the absolute minimum statutory requirement under Basel II. AEGON Bank’s internal requirement is for its capital to consist of 100% Tier 1 capital, barring special circumstances. Within Tier 1 Capital, Aegon Bank mainly has core Tier 1 capital, and a marginal amount of Additional Tier 1 Capital: the Knab client participations. Combined with its BIS ratio requirement, this means that AEGON Bank intends to hold at least 15.4% Tier 1 capital. Based on the current stricter internal Tier 1 requirement, AEGON Bank already conforms to the stricter composition of capital requirements under Basel III. Dividend policy AEGON Bank and its operating companies are subject to statutory restrictions on dividend payouts. The amount available for the payment of dividends comprises shareholders’ equity less the issued capital and less the statutory reserves as reported in AEGON Bank’s financial statements. Regulatory requirements must also be considered. Each year, in consultation with its shareholder, AEGON Bank determines whether there is space for a dividend payment, taking into account future growth expectations. Investment policy AEGON Bank’s strategic ALCO annually determines the target balance sheet composition. In 2013, it was decided to add consumer loans to the asset mix, next to mortgages, a treasury portfolio and a bond portfolio. GAM’s mandate for the medium-term strategic bond portfolio, including targets for authorised asset categories. A high-quality rating class distribution is encouraged at the same time. The investment policy for 2014 and beyond will increasingly focus on ‘responsible investment’. Risk control As part of its integrated risk control, AEGON Bank sets requirements for a variety of risks, including interest rate, credit and concentration risks. See Section 3.3.8 (stress testing) and Section 4 (internal capital). 3.3.4.
Capital planning Capital planning at AEGON Bank is the consolidated aggregate of the capital planning of all banking activities under the AEGON Bank Knab labels. AEGON Bank’s capital planning document provides details of performances and five-year projections for: movements in profit and equity under IFRS; capital requirements under Pillar 1 and the BIS ratio internal capital requirements under Pillar 2 for the various risks and total internal capital after diversification movements in own funds at market value; the capital surplus: the difference between own funds at market value and the higher of the internal and external capital requirements a variety of ratios, such as return on equity (ROE). Capital planning allows an assessment to be made of historic, current and future capital adequacy levels. Capital planning is underpinned by the company’s mission statement, strategy and risk profile. These are the driving forces behind the revenue model. In practical terms, this is reflected in the adoption of guiding principles, assumptions and projections for: Expected volumes of savings deposits, investments and service fees; Asset mix and expected premium for credit risk; Expected shifts in the yield curve and premium for interest rate risk; Expected movements in margins and cost base; Expected movements in specific risk exposures. The assumptions underlying capital planning are regularly reviewed and adjusted throughout the year, partly on the basis of actual outcomes (Section 3.3.5 Monitoring). Page 131 of 141
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3.3.5.
Monitoring Capital planning is also updated monthly on the basis of actual outcomes, and reported to the Executive Board and ALCO. Other reports prepared for operational capital management purposes and which contribute to the ongoing monitoring of liquidity, capital base, risks and capital adequacy include: daily interest rate risk reports weekly reports on ratios and market value movements monthly reports on consumer loans and mortgages monthly stress testing reports monthly concentration risk reports COREP reports FINREP reports DNB monthly and quarterly filings. Adjustments may be made on the basis of expected developments relative to actual outcomes (Section 3.3.6), where necessary in accordance with existing contingency plans (Section 3.3.7).
3.3.6.
Control Control involves taking action when the cash position, risk exposure or capital adequacy threatens to exceed signaling levels. This may range from - alert – limits being exceeded to statutory requirements threatening to be breached. Possible actions include:
Intensifying the monitoring process through more wide-ranging, in-depth or more frequent reporting;
Improving the cash position by selling securities, obtaining cash under repurchase agreements, etc.;
Selling assets to reduce – credit risk – exposures and capital requirements; Buying or selling derivatives to reduce interest rate or currency risk; If the above-mentioned activities do not have the desired effect, AEGON Bank can use the cash facilities provided by the ECB. 3.3.7.
Contingency procedure Actions of the kind referred to in the previous section generally require a decision by ALCO adopted at a regular meeting. However, certain shortfalls may potentially be so serious that ALCO needs to convene urgently and the method for making adjustments and escalating the matter needs to be known beforehand. All of this is described in the AEGON Bank Recovery Plan, which shows the contingency procedure in place at AEGON Bank and lists a set of potential management actions and their expected impact on various ratios.
3.3.8.
Stress testing AEGON Bank has a comprehensive stress testing framework in place. The framework gives a description of AEGON Bank’s policy on stress testing, provides details of the stress scenarios applied and defines stress limits. Once every month, ALCO reviews the outcomes of the stress tests against limits that are set annually. To allow timely intervention and prevent limits from being exceeded, ALCO has adopted – stricter – early warning limits for stress test outcomes. If these early warning limits are exceeded, ALCO will review the situation and take appropriate measures, where necessary. The framework provides guidance for stress testing and reporting on the following risks: Interest rate risk Two approaches are followed to stress test interest rate risk: the earnings at risk approach and market value approach. Earnings at risk captures the impact of the stress scenarios on interest margins in the first and second years after an interest rate shock. The market value approach calculates the impact on the market value of investment portfolios, derivatives and equity. The stress Page 132 of 141
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testing framework provides for a total of six interest rate stress scenarios, simulating both parallel and non-parallel shifts in yield curves. Credit risk Stress testing for credit risk involves calculating the market value of investments in the event of extreme credit spread widening. For each asset class, and depending on the quality (rating) of the investments, AEGON Bank will decide on and record a spread add-on for stress. Riskier investments and investments with a lower rating have a larger spread add-on and therefore a greater impact on the market value under the stress test. AEGON Bank checks each year to establish whether the add-on percentages are up to date and reviews them if necessary. Liquidity risk Key liquidity risk components for AEGON Bank are the liquidity of its investments and the fact that a very large portion of savings deposits are on-demand deposits. The imagined stress scenarios may be described as follows: (1) Aegon Bank is not able to refinance maturing capital market transactions (2) an unexpected and sudden loss of trust in AEGON Bank among customers leading to an unexpected and very rapid drawdown of savings deposits; and (3) an unexpected and extreme decline in the liquidity of assets, combined with a blanket default rate of 10% applied to all assets, meaning that the investment portfolio can be liquidated less quickly and at considerably lower market values. AEGON Bank holds sufficient liquid assets and securities to withstand this hypothetical ‘nightmare’ scenario at all times. AEGON Bank’s specified stress scenarios and associated parameters are currently in line with Basel III. What this means is that the stress scenarios are partly based on the Liquidity Coverage Ratio (LCR), as specified in the Basel III framework, within a horizon of one month. Where the horizon is three months or more, the Net Stable Funding Ratio (NSFR) approach is adopted for the stress scenarios. Historical bank runs are also being taken into account in the recalibration of the liquidity stress scenarios. Macro-economic downturn In addition to applying defined stress test scenarios to individual risk categories, AEGON Bank also conducts simultaneous macroeconomic shocks on a variety of risk components. The stress scenario chosen is one in which the global economy slides into a severe and prolonged recession.
4.
Internal capital
4.1.
Methodology chosen AEGON Bank calculates its Pillar 2 internal capital in accordance with the ‘Pillar 1 Plus’ method. This method involves calculating the internal capital required for each type of material risk, with the amount of capital required to cover credit risk and operational risk being based, in principle, on the Pillar 1 requirements (regulatory capital), as supplemented by additional internal capital to reflect circumstances and risks that are specific to AEGON Bank. Accordingly, no internal models have been developed for credit risk or operational risk. AEGON Bank has chosen the ‘Pillar 1 Plus’ method, based on the following criteria: Small size and complexity of the institution Compliance with regulatory requirements Consistency and possibility of reconciling regulatory and economic capital Common practice within the banking industry. The types of risk for which capital must be maintained according to internal requirements are identified on the basis of an ongoing process of risk identification, assessment and quantification. ALCO takes centre stage throughout this process. Risk identification and risk assessment cover at least the following material types of risk: 1. Credit risk 2. Concentration risk 3. Incomplete NHG-payout risk 4. Country risk Page 133 of 141
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5. 6. 7. 8. 9. 10. 11.
Operational risk Modelling risk Conglomerate risk Special litigation risk Strategic enterprise risk Interest rate risk in the banking book Hedging risk
These types of risk are discussed in the following sections. Other residual risks are deemed to be insignificant for AEGON Bank NV. Once the internal capital required for each type of risk has been calculated, the capital requirements are aggregated, allowing to some extent for diversification effects.
4.1.1.
Credit risk
Nature of risk Credit risk is the risk that a counterparty is unable to meet its obligations on time. As far as AEGON Bank is concerned, credit risk mainly affects the investment portfolio. Method to determine internal capital AEGON Bank calculates credit risk under Pillar 2 in accordance with the ‘Pillar 1 Plus’ method. The Pillar 2 capital requirement for credit risk is calculated, in principle, according to what is known as the standard approach adopted by AEGON Bank under Pillar 1, as supplemented by additional internal capital to reflect circumstances and risks that are specific to AEGON Bank. The standard approach uses a standard classification of the investment portfolio by asset category and rating grades. For each combination, standard add-on capital is required. Consideration is given to credit risk mitigating circumstances, such as collateral or guarantees. Credit risk mainly consists of the risk resulting from the consumer loans, mortgages and the investment portfolio (banking book). Credit risk mitigation under Pillar 1 In 2013, AEGON Bank used credit risk mitigation for its mortgage portfolio. A large portion (>90%) of the mortgage portfolio is backed by a National Mortgage Guarantee Scheme [Nationale Hypotheek Garantie] (NHG). Because of the guarantee, a net credit risk weighting of 0% is applied to the guaranteed part of these mortgage loans under Pillar 1. Furthermore, credit risk mitigation was used for bonds which carry an explicit guarantee from a sovereign. In those instances, the credit quality of the sovereign was used to determine the risk weighting. As per December 31, 2013, AEGON Bank NV held EUR 140 million in capital to cover credit risks. 4.1.2. Concentration risk Nature of risk The call for awareness of concentration risk stems from the fact that, being designed to meet the portfolio variance principle, the Basel II model is calibrated for large international and well-diversified banks. If AEGON Bank’s credit portfolios are less diversified or include concentrations of exposures to countries, sectors or types of assets or portfolios, the standard risk weighting under Pillar 1 will lead to an underestimation of credit risk. Method to determine internal capital AEGON Bank’s concentration risk policy is designed to encourage diversified investment portfolios and mitigate concentration risk using concentration risk limits. AEGON Bank also holds internal capital to cover concentration risk. In its policy, AEGON Bank distinguishes between three types of concentration risk: 1. Exposure to single names 2. Exposure to sectors and regions 3. Exposure to consumer without collateral Page 134 of 141
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Re 1: Exposure to single names AEGON Bank seeks to maintain a diversified portfolio to limit its exposure to a single counterparty or a group of related counterparties so as to prevent excessive potential losses. To manage its exposure to single names, AEGON Bank sets limits. It also holds capital to absorb potential losses on single names. Excessive exposure to single names is prevented by internal limits and by external limits introduced under the Financial Supervision Act and detailed in the Prudential Rules Decree [Besluit prudentiële regels] and the Regulation on Solvency Requirements for Credit Risk [Regeling solvabiliteitseisen voor het kredietrisico], Chapter 7: Large exposures. Internal limits The table below shows the internal limits at market value: Table 16 Internal limits on single names by rating class (AEGON Nederland N.V. Policy Directive on investment guidelines for AEGON Bank) CNLP Rating
Limit
AAA Aax Ax BBBx BBx Bx CCC-Cx / Unrated
135.0 mln. 135.0 mln. 90.0 mln. 60.0 mln. 37.5 mln. 19.0 mln. 7.5 mln.
An additional internal limit of 20% of regulatory capital is set for single names at market value to prevent the external limit on large exposures from being exceeded. Internal limits applied The policy covers all credit exposures, with the exception of Dutch government bonds and sovereign debt securities with an AAA rating. The limits apply per single counterparty or group and depend on the Credit Name Limit Policy (CNLP) rating to be used. The CNLP rating is modelled on external ratings available from S&P, Moody's and/or Fitch using rather conservative decision rules. This is done as follows: 1. If three different external ratings are available, the middle one is used. 2. If two different external ratings are available, the lowest of the two is used. 3. If only one external rating is available, that one is used. If an internal rating happens to be available, the lower of the internal rating and the rating calculated according to the above rules is used. If no rating is available, the CCC-C limit applies. External limits on large exposures The Financial Supervision Act sets limits on large exposures (formerly the Credit System Supervision Act 4081: large holdings): Limit on the balance sheet value (market value) of a large exposure equal to 25% of regulatory capital Limit on the total sum of large exposures equal to 800% of regulatory capital Supplementary capital to cover exposure to single names In addition to the limits set to prevent potential losses, AEGON Bank holds supplementary capital to absorb all or part of any losses arising from the concentration of exposures to single names. This involves add-on capital on top of the capital to be held to cover credit risk under Pillar 1. In light of its activities and investments, AEGON Bank has set the capital to be held for concentration risk arising from single names at 2%. Re 2: Exposure to sectors and regions Page 135 of 141
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AEGON Bank has set limits to mitigate exposures to sectors. These limits ensure a certain diversification in the activities of AEGON Bank, as a result it is not considered necessary to maintain additional capital. AEGON Bank has set limits for the following sectors mortgage financing, other exposures to investments with real estate as collateral (covered bonds, RMBS, CMBS), the financial sector. Also exposure to PIIGS is limited (country risk). As a result of the review of the strategic investment portfolio in 2010, the exposure to real estate continued to increase. This was reason enough for AEGON Bank to set a limit for 2013 of 70.00% of the total capital requirement for credit risk under Pillar 2. AEGON Bank has set a limit that 30% of the investments may be invested in investments with real estate as collateral. It is important to note that the exposure to real estate largely consists of most senior European RMBS notes that, also according to internal models, carry only very limited risk of credit losses occurring as a result of large numbers of defaults coinciding with an extreme reduction in the value of the collateral. The capital requirements under Pillar 1 are therefore considered to be adequate. On that basis, the decision was taken not to maintain internal capital to cover excessive exposures to real estate. In addition to mortgages and other ‘real estate’ investments a limit has been set for 'financials' of 25% of the total capital requirement for credit risk. Re 3: Exposure to consumers without collateral By adding consumer loans to the asset mix, AEGON Bank introduced exposure to consumers without receiving some collateral. Other limits and procedures have been introduced to mitigate this risk. The most important elements are compliance with the XXXXXXXXXXX and a limit to the maximum credit exposure to individuals to EUR 25.000. A comparative study of peer banks conducted by KPMG UK has shown that AEGON Bank’s investment portfolio has a moderately concentrated exposure to sectors and regions. The table below shows indicative add-on percentages by type of bank to cover excessive exposure to sectors and regions. Table 17 Indicative risk premiums by type of bank (sectors and regions) Type of bank
1. Well-diversified national portfolio 2. Reasonably diversified regional portfolio 3. Moderately diversified local portfolio
Indicative premium
2-3% 3-4% 5-6%
In light of its activities and the market in which it operates, AEGON Bank has set the capital to be held for concentration risk arising from sectors and regions at 3%. As per December 31, 2013, AEGON Bank NV held EUR 7 million in capital to cover concentration risks. 4.1.3.
Incomplete NHG-payout risk
Nature of risk This is the risk that not all claims under the Nationale Hypotheek Garantie (NHG) are paid in full. This might be related to incomplete files or a difference of opinion on the process of mortgage origination. Method to determine internal capital The capital requirement for AEGON Bank’s exposure to this risk is calculated based on the characteristics of the mortgages. Of each NHG-mortgage the amount of the NHG-guarantee is determined (declining over time). Based on historic analysis, AEGON Bank assumes that 6% of these claims are expected to be declined by NHG. Based on the LTFV of the mortgage, either 35% or a 75% risk weight is used to calculate the required capital. As per December 31, 2013, AEGON Bank NV held EUR 14 million in capital to cover the risk of incomplete NHG-pay-outs.
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4.1.4.
Country risk
Nature of risk Basel II requires an additional risk premium for amounts owed by – issuers or companies in – countries that carry elevated country risk. In light of the credit and sovereign crisis in Europe, AEGON Bank decided to hold additional capital against exposures to the European Periphery and put in place limits to the overall exposure. No investments in Greece are allowed, while investments in other countries are restricted to shorter maturities or to replacements of existing investments. Method to determine internal capital The capital requirement for AEGON Bank’s exposure to this risk is calculated based on the exposures to corporates and governments in the PIIGS countries. The total amount of additional capital is determined at 4% of these exposures at market value. An important point to note is that AEGON Bank shows its investments at market value in its accounts (available for sale under IFRS), which means that the fall in the market value of investments in the periphery is immediately apparent in the carrying amount and equity of AEGON Bank. AEGON Bank reduced its exposure to peripheral countries since 2010, but this has stabilized in 2013. As per December 31, 2013, AEGON Bank NV held EUR 8 million in capital to country risks.
4.1.5.
Operational risk
Nature of risk AEGON Bank defines operational risk as follows: “Operational risk is defined as the risk of losses arising from inadequate or failing internal processes and controls, people and systems, or external events”. As part of this definition, AEGON Bank identifies eight subcategories: Tax risk Legal & compliance risk Systemic risk Fraud risk Processing and administrative risk Enterprise risk Personnel risk Facilities risk Details of these subcategories are given in the ERM framework of AEGON NV. Reputational risk is not regarded as a separate risk category, but rather as a risk resulting from one of the eight subcategories listed above. Method to determine internal capital The capital requirement for AEGON Bank’s exposure to operational risk under Pillar 1 is calculated according to the basis indicator approach. On the basis of, amongst other things, the assessment of information contained in the operational loss database by AEGON Bank’s Risk & Audit Committee, the conclusion is that the current internal capital buffer for regular operational risk under Pillar 2, which is based on the outcomes of Pillar 1, is more than adequate. Supplementary capital for special operational risks Details of 'special operational' risks, such as special litigation risk (regarding the Sprintplan product) and ‘strategic enterprise risk’ are given in the following sections. As per December 31, 2013, AEGON Bank NV held EUR 8 million in capital to cover regular operational risks.
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4.1.6.
Modelling risk
Nature of risk This is the risk that the parameters in the model calculations and the assumptions are incorrect and would lead to inadequate investment decisions. An example would be that the duration of our internet savings account is much longer than modelled or that the prepayment rate in mortgages turns out to be lower than modelled. As a consequence, AEGON Bank would run an unintended interest rate risk, potentially impacting the capital base of the Bank. Method to determine internal capital The capital requirement for AEGON Bank’s exposure to this risk is calculated by looking at the potential impact on the interest rate risk exposure of significant changes in the duration of our assets and liabilities. This unintended exposure is than transformed into a monthly VaR figure, assuming that we can re-adjust the interest rate exposure back to desired levels on a monthly basis. As per December 31, 2013, AEGON Bank NV held EUR 3 million in capital to cover modelling risks. 4.1.7.
Conglomerate risk
Nature of risk Being part of a financial conglomerate has advantages as well as disadvantages. The disadvantage is that the parent company (AEGON NL or AEGON Group) could get into financial difficulties. In such circumstances, AEGON Bank might need to break the ties with the parent company in order to safeguard the financial stability of the Bank. Method to determine internal capital The capital requirement for AEGON Bank’s exposure to this risk is calculated based on an internal assessment of all activities which AEGON Bank has outsourced to the parent company. For each activity, an estimate has been made on the amount of time it might take to either insource the activity or outsource it to a third party. The results of this assessment have been discussed with the regulator. After these discussions, the total amount of internal capital was determined. As per December 31, 2013, AEGON Bank NV held EUR 28 million in capital to cover conglomerate risks.
4.1.8.
Special litigation risk
Nature of risk AEGON Bank is involved in litigation over its former ‘SprintPlan’ product. This product – the portfolio of which has since expired – is a type of securities lease, with the loan principal guaranteed on maturity by means of a built-in guarantee. This litigation has progressed to the Dutch Supreme Court, which is expecting additional information from both parties before issuing a ruling. Method to determine internal capital After consulting with Legal Affairs Netherlands, AEGON Bank performed a scenario analysis to determine the capital requirement for litigation risk. The scenario analysis is reviewed periodically. Litigation risk is expected to decline gradually over the next few years, as individual claims are settled regularly. If and when a final ruling by the Dutch Supreme Court is issued, the total liability to AEGON Bank will be known. The remaining special litigation risk in this case is likely to be minimal. As per December 31, 2013, AEGON Bank NV held EUR 6 million in capital to cover special litigation risks.
4.1.9.
Strategic enterprise risk
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In recent years, there have been major changes within AEGON Bank, most visible by the launch of Knab as a new online bank in the Netherlands. The strategic objectives can be summarized as 1. 2. 3.
4. 5.
Offering/investing in retail products on both sides of the balance sheet Increase off balance sheet products Reduce liquidity risk, market risk and leverage by a. Match interest rate risk (reduce derivatives portfolio) b. Match credit spread risk (reduce volatility in earnings) i. Shift from short term to long term liabilities ii. Shift from long term to short term assets c. Match cash flows (improve liquidity stress test results) d. Decrease wholesale financing Reduce costs by building scale and rationalize product offering Increase Net Interest Margin
On most items, AEGON Bank has made considerable progress, and the Executive Board continues to measure the success of the strategic transformation along the lines mentioned above Method to determine internal capital The Executive Board made a qualitative estimate of the internal capital requirement based on temporary less-than-expected operating results over a period of one to two years attributable to the strategic transformation. As the results of the strategic overhaul have become more clear, the qualitative estimate has been adjusted lower. This is a reflection of the fact that the revised strategy should position AEGON Bank in a good position going forward. As per December 31, 2013, AEGON Bank NV held EUR 5 million in capital to cover strategic enterprise risks. 4.1.10. Interest rate risk in the banking book Nature of risk AEGON Bank invests deposits from customers, such as on-demand savings accounts and deposits, in both floating and fixed-rated assets like mortgages, consumer loans and bonds. AEGON Bank incurs interest rate risk due to the mismatch between the interest rate-based maturities of fixed-rate securities on the one hand, and the maturities of deposits from customers on the other. Frequency of measurements and reporting AEGON Bank uses two methods to measure interest rate risk: The Value at Risk (historical VaR) and Price Value of a Basis Point measures are reported on a daily basis. Monthly stress testing according to (1) the market value approach (six stress scenarios) and (2) Earnings at Risk Interest rate risk measurements are based on the following main assumptions: A core of on-demand savings accounts are assumed to have a limited interest rate-based maturity depending on the interest reset frequency. The non-core part is modelled based on historical outflow patterns. All cash flows are assumed to take place in accordance with contractual obligations, allowing for the early prepayment of mortgage loans and consumer loans. Controlling interest rate risk in the banking book The interest rate risk in the banking book is currently controlled on the basis of the historical VaR method and the Price Value of a Basis Point (PV01) measure. The reasons for choosing the historical VaR method and the PV01 measure are explained briefly below. Historical VaR method: Limited complexity; The possibility of measuring risks in non-linear portfolios; The fact that no assumptions have to be made in terms of the stability of the VarianceCovariance matrix and the normality of interest rate fluctuations. Validation of the VaR model is done by means of back-testing. Page 139 of 141
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Price Value of a Basis Point measure: Sets out in a simple way the economic value impact of a specific interest rate change on assets and liabilities and, ultimately, the effect on equity; Forward-looking and based on a change in the current interest rate. Prepayment The market value and market risk exposure of the mortgage portfolio are measured allowing for early redemption (prepayment). The nominal cash flows of AEGON Bank’s mortgage portfolio are adjusted for prepayment using: 1. a constant percentage of the annual nominal cash flow 2. a mark-up on the rate applied to discount the cash flows These percentages are determined on the basis of expert judgement after careful analysis of historic behaviour in the AEGON Bank portfolio. The assumptions are validated periodically. Interest rate risk management The ALCO monthly sets the target interest rate VaR and the upper and lower limits for the interest rate VaR. Using interest rate derivatives such as interest rate swaps (IRS) and futures, the interest rate VaR is then brought back to the required level. This process is monitored on a daily basis. Stress test limits are also set (Section 3.3.8). Operating within these stress test limits ensures that even major shifts in the yield curve will have a limited impact on own funds at market value and interest margin. Method to determine internal capital AEGON Bank holds internal capital equivalent to the internal upper limit of interest rate VaR. As per December 31, 2013, AEGON Bank NV held EUR 12 million in capital to cover interest rate risk in the banking book.
4.1.11. Hedging risk Nature of risk In the past AEGON Bank granted guarantees to customers and issued depositary receipts that are hedged by GAM by means of derivatives in accordance with the mandate. Furthermore, the hedgeaccounting inefficiency of the floating leg in an interest rate swap introduces hedging risk as not all market value movements can be offset in the hedged items. As this part of the market value movement is part of the P&L of AEGON Bank, it is potentially impacting the capital base. Method to determine internal capital A small amount of add-on Economic Capital is maintained to cover limited basis risk (imperfections of a hedge caused by, for example, timing differences). Based on the interest rate sensitivity of the floating leg of all interest swaps, and the volatility in the money market rates, the potential impact of the hedge accounting inefficiency is determined. As per December 31, 2013, AEGON Bank NV held EUR 3 million in capital to cover hedging risks.
4.2.
Aggregation of internal capital AEGON Bank has chosen first to aggregate risks and internal capital requirements for portfolios and asset classes according to type of risk. The figures for the various types of risk are then aggregated. Diversification plays a role in aggregating internal capital. Diversification between types of risk The methods used for individual types of risk, such as credit risk, implicitly factor in any diversification within the types of risk concerned. The economic capital model applied by AEGON Page 140 of 141
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Bank operates on the assumption that there is a correlation between market value changes arising from interest rate, credit and operational risks. The correlation between interest rate risk and credit risk is lower than 1, causing a diversification effect. The perceived correlation between risk types is explained in greater detail below. Correlation between operational risk and interest rate risk Given the method used to calculate the capital requirement for operational risk (Basic Indicator Approach), there is a negative correlation between interest rate risk and operational risk. From a duration perspective, of course, a rise in interest rates will lead to lower operating results. Historical benchmark data, however, suggest a positive correlation between interest rate risk and operational risk. In light of current market conditions and in the absence of reliable data, AEGON Bank has adopted a prudent approach assuming a correlation of 0.8 between operational risk and interest rate risk. Correlation between interest rate risk and credit risk A number of studies (including Interaction of market and credit risk, Deutsche Bank, 2008; The Intersection of Market and Credit Risk, Journal of Banking & Finance, 2000; Findings on the interaction of market and credit risk, Bank of International Settlement, 2009) indicate a negative correlation between interest rate and credit risk. Since it is not possible to show this negative correlation for AEGON Bank’s portfolio, and it is probable that there is a positive correlation between interest rate risk and credit risk for portfolio assets with a good credit rating (investment grade bonds) in the long run, AEGON Bank has adopted a prudent approach. AEGON Bank assumes a correlation of 0.8 between interest rate risk and credit risk. Correlation between operational risk and credit risk Given the method used to measure operational risk (Basic Indicator Approach), there is a positive correlation between operational risk and credit risk. An increase in credit risk (credit spread) will lead to higher margins and hence produce higher operating results. Taking a prudent approach, AEGON Bank assumes a correlation of 1 between operational risk and credit risk inside the ECM model. No diversification benefits arise as a result. The correlations between risk types used to determine diversification benefits is shown schematically in the figure below. Figure 9 Risk diversification between types of risk
As per December 31, 2013, AEGON Bank NV benefitted from a EUR 2 million reduction in required capital as a result of diversification.
4.3.
Internal capital allocation AEGON Bank is not an international bank with different legal entities undertaking a variety of business activities in different countries. This means that allocating internal capital to legal entities other than AEGON Bank or to specific busi
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