The information contained in this report is incorporated by reference into the registration statements on Form S-8 with Registration Nos. 333-81400, 333-84044, 333-74703, 333-140798, 333-145751 and 333-149577, the registration statements on Form F-3 with Registration Nos. 333-137691 and 333-104778 and the registration statement on Form F-4 with Registration No. 333-108304.

 

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CONTENTS

 

 

Section 1		General	2
		Chairman’s review	2
Section 2		Operating review	4
		Introduction	5
		Selected financial data	7
		Group organisation structure	10
		Operating and financial review and prospects	12
		Results of operations by BU	30
		Risk and Capital management	52
Section 3		Governance	77
		Boards and committees	78
		Corporate governance	86
		ABN AMRO’s employees	96
Section 4		Financial Statements	97
		Consolidated financial statements	98
		Company financial statements	225
		SEC Form 20-F cross reference and other information	231
Section 5		Other Information	232
		Report of independent registered public accounting firm	233
		Stipulations of the articles of association with respect to profit appropriation	234
		Proposed profit appropriation	235
		Stipulations of the articles of association of Holding and trust office with respect to shares and voting rights	235

Section 6		Additional Information	237

		Exchange rates	238
		Dividends	239
		ABN AMRO key figures	240
		Supervisory Board	242
		Managing Board	246
		Selected statistical information	254
		Trend information	290
		Off-balance sheet arrangements	291
		ABN AMRO shares	292
		Trust office	297
		Memorandum and Articles of Association	299
		Code of Ethics	304
		Stock Option Programs	305
		Taxation	306
		Central Works Council	310
		Abbreviations	312
		Documents on display	314

 

 

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SECTION 1  GENERAL

 

CHAIRMAN'S REVIEW

 

Chairman’s review of 2007

On 17 October 2007 the majority of ABN AMRO’s Holding share capital was acquired by the consortium of banks through RFS Holdings B.V. The consortium consists of The Royal Bank of Scotland Group plc (‘RBS’), Fortis N.V., Fortis SA/NV (‘Fortis’) and Banco Santander S.A. It was the outcome of a process under which ABN AMRO’s shareholders were able to choose between two competing offers for ABN AMRO one from Barclays and one from the consortium. In early November, the consortium announced that they had acquired 98.8% of the ordinary shares of ABN AMRO Holding, 86.1% of the formerly convertible preference shares and 98.8% of the convertible financing preference shares. A ‘squeeze-out’ procedure was started shortly after the acquisition to buy out the remaining shareholders and initiatives to delist ABN AMRO shares from Euronext Amsterdam and the New York Stock Exchange were taken. The delisting is expected to be effective 25 April 2008.

At the request of the Dutch Central Bank, RBS has assumed the lead responsibility for ensuring that ABN AMRO is managed in compliance with all applicable regulatory requirements.

Plans and proposals for ABN AMRO

Following the completion of the acquisition, the consortium banks have worked closely with the management of ABN AMRO to verify and expand the information received from, and assumptions made on the basis of, the limited due diligence access granted to them before announcement of the offers.

In December 2007, the consortium banks agreed and validated a base-line plan for achieving synergies and for separating and transferring of the ABN AMRO businesses to the respective banks. The businesses to be acquired by each of the banks of the consortium and in which each have an interest through their share holdings in RFS Holdings B.V. equal to the banks funding commitments, are:

·	RBS: Business Unit North America, Business Unit Global Clients (excluding Latin America) and Dutch wholesale clients and wholesale clients in Latin America (excluding Brazil), Business Unit Asia (excluding interest in Saudi Hollandi Bank) and Business Unit Europe (excluding Antonveneta).

·

Fortis: Business Unit Netherlands (excluding former Dutch wholesale clients), Business Unit Private Clients (excluding Latin America) and Business Unit Asset Management. The European Commission has cleared the acquisition of certain businesses of ABN AMRO by Fortis, on the condition that certain specified businesses were divested. The businesses identified for disposal are the Hollandsche Bank Unie N.V., 13 advisory branches and two Corporate Client Departments as well as the sale of the Dutch factoring company IFN Finance B.V. Fortis can only acquire control over ABN AMRO’s Business Unit Netherlands and Business Unit Private Clients after divesting these assets to a suitable purchaser.

·

Santander: Business Unit Latin America (excluding wholesale clients outside Brazil), Antonveneta, Asset Management Antonveneta and Private Clients business in Latin America. On 8 November Santander announced it had reached an agreement with Banco Monte dei Paschi di Siena with respect to the sale of Antonveneta.

Furthermore the consortium participate proportionally to their funding commitment in the shared assets which include: central functions including Head Office functions, the private equity portfolio, the Group’s investment in Saudi Hollandi Bank, the central investment portfolio and debt issuances. During the reorganisation, the consortium banks will retain a shared economic interest in all central functions (including Head Office functions) that provide support to the ABN AMRO businesses. The non-core assets are expected to be disposed of over a period of time with a view to maximising their value.

 

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This transition plan forms the basis for continued consultation with employee representative bodies and regulators. The plan for separating and transferring the ABN AMRO businesses to the respective banks was submitted to the Dutch Central Bank and Central Works Council for review in mid December and was neutrally advised by the Central Works Council on 14 February 2008 and approved by the Dutch Central Bank on 10 March 2008. Now that the approvals have been received, the implementation of the plan can begin.

Different parts of ABN AMRO will experience separation and integration at different speeds. The precise timing of the separation of the businesses will depend on a range of factors, including the complexity of the separation task. For more complex separation processes, where the businesses are closely interlinked with the ABN AMRO Group systems and platforms, (such as within the BU Netherlands), separation and integration is expected to take some time; in contrast other less complicated separations will move relatively quickly. In each case the pace of the separation process will aim to accommodate the need for clarity among employees while also maintaining the appropriate level of service to ABN AMRO’s clients.

For now the acquisition has no impact on the status of any debt and related securities currently issued and/or guaranteed by ABN AMRO Holding N.V. or any of its subsidiaries. In addition, the entire portfolio of ABN AMRO’s risk management transactions will be managed actively to ensure that all the risk management needs of the component ABN AMRO businesses are satisfied.

The operations in 2007

The net profit attributable to shareholders in 2007 amounted to EUR 9,848 million and included a gain on the sale of LaSalle of EUR 7,162 million. Adjusted* net profit attributable to shareholders was EUR 2,665 million.

The original earnings per share (EPS) target for 2007 of EUR 2.30 included the full-year profit of LaSalle. Following the sale of LaSalle, this target was revised for nine months contribution to EUR 2.16. The adjusted EPS was EUR 1.44, primarily due to the impact of the credit market related write-downs (EUR 0.62) and the continued disappointing performance of Antonveneta (EUR 0.23).

Mark Fisher

Chairman of the Managing Board of ABN AMRO

Amsterdam, 25 March 2008

 

*	The adjusted figures exclude the following items: gains on sale and disposals, gain on sale of Capitalia which was settled in exchange for shares of Unicredito, transaction-related expenses including a break fee paid to Barclays, transition and integration costs, a liability for the proposed US Department of Justice settlement, a provision for the Futures business which was sold in 2006, and restructuring expenses in 2006.
	The total impact of these adjustments in 2007 is EUR 868 million on operating income, EUR 1,151 million on operating expenses, negative EUR 275 million on tax, EUR 7,191 million on discontinued operations, and EUR 7,183 million on net profit attributable to shareholders.

 

 

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SECTION 2  OPERATING REVIEW

 

 

Introduction			5
		Certain definitions	5
		Presentation of information	5
		Cautionary statement on forward-looking statements	5
Selected financial data			7
Group organisation structure			10
		Organisational Structure	10
Operating and financial review and prospects			12
		Consolidation effects of controlled private equity investments	12
		Discontinued operations	12
		Constant foreign exchange rates	13
		Group results	14
		Impact of the current credit environment	24
		Group capital	27
		Credit ratings	28
		Capital ratios	29
		Offices and branches	29
Results of Operations by BU			30
		Changes to reporting structure and presentation	30
		Results of BU Netherlands	30
		Results of BU Europe	33
		Results of BU North America	36
		Results of BU Latin America	38
		Results of BU Asia	41
		Results of BU Private Clients	43
		Results of BU Asset Management	45
		Results of Group Functions	47
Risk and Capital Management			52
		Supervision and Regulation	52
		Risk Factors	60
		Capital Adequacy Framework & risk coverage	65

 

 

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INTRODUCTION

Filing

 

This document contains ABN AMRO’s Form 20-F, which will be filed with the United States Securities and Exchange Commission (“SEC”).

Certain definitions

 

Throughout this document, “Holding” means ABN AMRO Holding N.V. The terms “ABN AMRO,” and “the Group” refer to Holding and its consolidated subsidiaries. The “Bank” means ABN AMRO Bank N.V. and its consolidated subsidiaries. The term “BU” refers to Business Unit. “EUR” refers to euros, while “USD” refers to US dollars.

The terms “consortium” and “consortium banks” refer to the banks The Royal Bank of Scotland Group plc (“RBS”), Fortis N.V., Fortis SA/NV (“Fortis”) and Banco Santander S.A. (“Santander”) who jointly acquired ABN AMRO Holding N.V. on 17 October 2007.

Presentation of Information

 

Unless otherwise indicated, the financial information contained in this annual report has been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and issued by the International Accounting Standard Board (IASB) which vary in certain significant respects from accounting principles generally accepted in the United States, or “US GAAP”.

A body of generally accepted accounting principles such as IFRS is commonly referred to as “GAAP”. A “non-GAAP financial measure” is defined as one that measures historical or future financial performance, financial position or cash flows but which excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. This report presents certain non-GAAP financial measures as a result of excluding the consolidation effects of ABN AMRO’s private equity holdings. In accordance with applicable rules and regulations, ABN AMRO has presented definitions and reconciliations of non-GAAP financial measures to the most comparable GAAP measures in the paragraph “Operating and Financial Review and Prospects” in this report. The non-GAAP financial measures described in this report are not a substitute for GAAP measures, for which management has responsibility.

All annual averages in this report are based on month-end figures. Management does not believe that these month-end averages present trends materially different from those that would be presented by daily averages.

Certain figures in this document may not sum up exactly due to rounding. In addition, certain percentages in this document have been calculated using rounded figures.

 

Cautionary Statement on Forward-looking Statements

Certain statements included in this report are forward-looking statements. ABN AMRO also may make forward-looking statements in ABN AMRO’s other documents filed with its regulations and stock exchange, invitations to annual shareholders’ meetings and other information sent to shareholders, offering circulars and prospectuses, press releases and other written materials. In addition, ABN AMRO’s senior management may make forward-looking statements orally to investors, representatives of the media and others. Forward-looking statements can be identified by the use of forward-looking terminology such as “believe”, “expect”, “may”, “intend”, “will”, “should”, “anticipate”, “Value at Risk”, or by the use of similar expressions or variations on such expressions, or by the discussion of strategy or objectives. Forward-looking statements are based on current plans, estimates and projections, and are subject to inherent risks, uncertainties and other factors which could cause actual results to differ materially from the future results expressed or implied by such forward-looking statements.

 

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In particular, this report includes forward-looking statements relating but not limited to management objectives, implementation of ABN AMRO’s strategic initiatives, trends in results of operations, margins, costs, return on equity, and risk management, including ABN AMRO’s potential exposure to various types of risk such as market risk, which includes interest rate risk, currency risk and equity risk. For example, some of the market risk disclosures are dependent on choices about key model characteristics, assumptions and estimates, and are subject to various limitations. By their nature, certain market risk disclosures are only estimates and could differ materially from what actually occurs in the future.

 

ABN AMRO has identified some of the risks inherent in forward-looking statements in the paragraph “Risk factors” in this report. Factors that could cause actual results to differ materially from those estimated by the forward-looking statements in this report include, but are not limited to:

-	general economic and business conditions in the Netherlands, the European Union, the United States, Brazil and other countries or territories in which ABN AMRO operates;

-	changes in applicable laws and regulations, including taxes;

-	uncertainty on the capital consequences of the implementation of the Basel II framework;

-	regulations and monetary, interest rate and other policies of central banks, particularly the Dutch Central Bank, the Bank of Italy, the European Central Bank, the US Federal Reserve Board and the Brazilian Central Bank;

-	changes or volatility in interest rates, foreign exchange rates (including the Euro-US dollar rate), asset prices, equity markets, commodity prices, inflation or deflation;

-	volatility in the financial or credit markets;

-	the effects of competition and consolidation in the markets in which ABN AMRO operates, which may be influenced by regulation, deregulation or enforcement policies;

-	changes in consumer spending and savings habits, including changes in government policies which may influence investment decisions;

-	ABN AMRO’s ability to hedge certain risks economically;

-	ABN AMRO’s success in managing the risks, which depends, among other things, on the ability to anticipate events that cannot be captured by the statistical models ABN AMRO uses;

-	risks related to ABN AMRO’s transition and separation process following its acquisition by the consortium banks; and

-	force majeure and other events beyond ABN AMRO’s control.

Factors that could also adversely affect ABN AMRO’s results or the accuracy of forward-looking statements in this report, and the factors discussed here or in the paragraph “Risk factors” should not be regarded as a complete set of all potential risks or uncertainties. ABN AMRO has economic, financial market, credit, legal and other specialists who monitor economic and market conditions and government policies and actions. However, because it is difficult to predict with complete accuracy any changes in economic or market conditions or in governmental policies and actions, it is hard for ABN AMRO to anticipate the effects that such changes could have on ABN AMRO’s financial performance and business operations.

The forward-looking statements made in this report speak only as at the date of publication of this report. ABN AMRO does not intend to publicly update or revise these forward-looking statements to reflect events or circumstances after the date of this report, and ABN AMRO does not assume any responsibility to do so. The reader should, however, take into account any further disclosures of a forward-looking nature ABN AMRO may make in ABN AMRO’s interim reports. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.

 

 

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Selected financial data

The selected financial data set out below has been derived from ABN AMRO’s audited consolidated financial statements for the periods indicated. ABN AMRO’s consolidated financial statements for each of the years ended 31 December 2007, 2006 and 2005 have been audited by Ernst & Young Accountants, independent auditors. The selected financial data is only a summary and should be read in conjunction with and is qualified by reference to the consolidated financial statements and notes included elsewhere in this report and the information provided in this section.

Selected consolidated income statement

		As at 31 December
		2007 (1)				2007				2006				2005
		(in millions of USD)				(in millions of euros)
Net interest income			11,446				8,352				7,268				6,763
Net fee and commission income			5,859				4,275				4,049				3,432
Net trading income			1,749				1,276				2,849				2,514
Results from financial transactions			2,121				1,548				794				1,183
Share of result in equity accounted investments			371				271				241				245
Other operating income			1,886				1,376				914				808
Income of consolidated private equity holdings			5,257				3,836				5,313				3,637
Operating income			28,689				20,934				21,428				18,582
Operating expenses			23,956				17,480				16,945				13,913
Loan impairment and other credit risk provisions			2,335				1,704				1,411				614
Total expenses			26,291				19,184				18,356				14,527
Operating profit before tax			2,398				1,750				3,072				4,055
Income tax expense			(66	)			(48	)			366				735
Profit from continuing operations			2,464				1,798				2,706				3,320
Profit from discontinued operations net of tax			11,206				8,177				2,074				1,123
Profit for the year			13,670				9,975				4,780				4,443
Attributable to shareholders of the parent company			13,496				9,848				4,715				4,382
Dividends on ordinary shares			1,468				1,071				2,153				2,050
Per share financial data
Average number of ordinary shares outstanding (in millions)		­­–					1,851.3				1,882.5				1,804.1
Net profit per ordinary share (in EUR)			–				5.32				2.50				2.43
Fully diluted net profit per ordinary share (in EUR)		­–					5.32				2.49				2.42
Net profit per ordinary share from continuing operations (in EUR)			–				0.92				1.43				1.83
Fully diluted net profit per ordinary share from continuing operations (in EUR)			–				0.92				1.42				1.83
Dividend per ordinary share (in EUR)			–				0.58				1.15				1.10
Net profit per American Depositary Share (in USD) (2) (3)			–				7.29				3.16				3.01
Dividend per American Depositary Share (in USD) (2)			–				0.70				1.50				1.34

(1)	Solely for your convenience, euro amounts have been translated into US dollars at an exchange rate of 1 USD = EUR 0.7297, which is the rate equal to the average of the month-end rates for 2007.

(2)	Adjusted for increases in share capital, as applicable. See Note 12 to ABN AMRO’s consolidated financial statements for a description of the computation of earnings per ordinary share.

(3)	This item has been translated into US dollars at the rate equal to the average of the month-end rates for the applicable year.

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Selected consolidated balance sheet

		As at 31 December
		2007 (1)				2007				2006				2005
		(in millions of USD)				(in millions of euros)
Assets
Financial assets held for trading			356,511				242,277				205,736				202,055
Financial investments			141,904				96,435				125,381				123,774
Loans and receivables – banks			258,537				175,696				134,819				108,635
Loans and receivables – customers			583,835				396,762				443,255				380,248
Total assets			1,508,601				1,025,213				987,064				880,804
Liabilities
Financial liabilities held for trading			228,783				155,476				145,364				148,588
Due to banks			352,180				239,334				187,989				167,821
Due to customers			486,113				330,352				362,383				317,083
Issued debt securities			257,505				174,995				202,046				170,619
Capitalisation
Equity attributable to shareholders of the parent company			43,520				29,575				23,597				22,221
Equity attributable to minority interests			1,669				1,134				2,298				1,931
Subordinated liabilities			22,979				15,616				19,213				19,072
Group capital			68,168				46,325				45,108				43,224
Per share financial data
Ordinary shares outstanding (in millions)			–				1,844.1				1,853.8				1,877.9
Equity attributable to shareholders of the parent company per ordinary share (in EUR)			–				16.04				12.73				11.83
Equity attributable to shareholders of the parent company per American Depositary Share (in USD) (2)			–				23.60				16.78				14.00

(1)	Solely for your convenience, euro amounts have been translated into US dollars at an exchange rate of 1 USD = EUR 0.6796, which is the year-end rate for 2007.

(2)	This item has been translated into US dollars at the applicable year-end rate.

 

 

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Selected ratios (1)

		At or for the year ended 31 December
		2007				2006				2005
		(in percentages)
Profitability ratios
Net interest margin (2)			0.9				0.9				0.9
Non-interest income to total operating income			60.1				66.1				63.6
Efficiency ratio (3)			83.5				79.1				74.9
Return on average total assets (4)			1.04				0.58				0.61
Return on average ordinary shareholders equity (5)			38.4				20.7				23.5
Capital ratios
Average ordinary shareholders equity on average total assets			2.68				2.75				2.47
Dividend payout ratio (6)			10.9				46.0				45.3
Tier 1 Capital ratio (7)			12.42				8.45				10.62
Total Capital ratio (7)			14.61				11.14				13.14
Credit quality ratios
Provision for loan losses to private sector loans (8)			0.64				0.45				0.22
Provision for loan losses to private and public sector loans (8)			0.63				0.43				0.22
Non-performing loans to private sector loans (gross) (8) (9)			1.44				2.31				1.72
Non-performing loans to private and public sector loans (gross) (8) (9)			1.41				2.23				1.68
Allowance for loan loss to private sector loans (8)			1.13				1.15				1.09
Allowance for loan loss to private and public sector loans (8)			1.10				1.11				1.06
Allowance for loan losses to non-performing loans (gross) (9)			78.16				50.03				63.07
Write-offs to private sector loans (gross) (8)			0.52				0.36				0.39
Write-offs to private and public sector loans (gross) (8)			0.51				0.35				0.38
Consolidated ratio of earnings to fixed charges
Excluding interest on deposits (10)			1.23				1.44				1.85
Including interest on deposits (10)			1.08				1.17				1.27

(1)	According to IFRS the income statement figures of 2006 and 2005 are restated for the qualifying discontinued operations. The 2007  balance sheet  figures of 2006 and 2005 are not restated. As a result the applicable ratios throughout the years are therefore not comparable.

(2)	Net interest income as a percentage of average total assets.

(3)	Operating expenses as a percentage of total operating income.

(4)	Profit for the year as a percentage of average total assets.

(5)	Net profit attributable to Ordinary shares as a percentage of average ordinary shareholders’ equity excluding the reserves with respect to cash flow hedges and available for sale securities.

(6)	Dividend per Ordinary share as a percentage of net profit per Ordinary share.

(7)

Tier 1 capital and total capital as a percentage of risk-weighted assets under Bank for International Settlements guidelines. For more information on ABN AMRO’s capital ratios, see page 29.

(8)

Excludes professional transactions (2007: EUR 98 billion; 2006: EUR 94 billion; 2005: EUR 75 billion) because these primarily consist of reverse repurchase agreements with limited credit risk and balances held by  multi seller conduits (2007: EUR 29 billion; 2006: EUR 26 billion; 2005: EUR 26 billion).

(9)	Non-performing loans are doubtful loans for which there is objective evidence that not all contractually agreed amounts will be collected and for which an allowance for loan losses has been established. For more information on non-performing loans see pages 274 and further.

(10)	Deposits include banks and total customer accounts.

 

 

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GROUP ORGANIZATION STRUCTURE

 

Organisational structure

 

The following organisational structure was adopted in January 2006. This structure was used by the Consortium Banks to divide the activities amongst each other:

 

-	seven client BUs

-	three global product BUs

-	two cross-BU segments

-	Group Functions

-

Services

The seven client BUs consist of five regional BUs (Netherlands, Europe, North America, Latin America and Asia) and two global client BUs, Private Clients and Global Clients. BU Global Clients overlaps the regional BUs in the segment reporting adopted in 2007.

The three global product BUs (Global Markets, Transaction Banking and Asset Management) support the client BUs by developing and delivering products for all of ABN AMRO’s clients globally.

The client BUs are bound together through a cross-BU Consumer Client Segment and a cross-BU Commercial Client Segment.

The Consumer Client Segment comprises the Consumer Banking heads of all ABN AMRO’s Client BU’s and aims to leverage ABN AMRO’s global capabilities by replicating successes, driving synergies, and identifying global consumer initiatives with the ambition for growth as guiding principle.

The Commercial Client Segment encompasses all of ABN AMRO’s commercial clients. The Commercial Client Segment coordinates activities across the Client and Product Bus, sharing best practice and the overall strategic framework supporting this essential component of the bank’s portfolio.

Group Functions delivers support across the Group in areas ranging from Risk to Finance and from Human Resources to Sustainability.

Services focuses on increasing the operational efficiency through Group-wide consolidation and standardisation.

 

Please note for the financial results of the Group and each individual BU that the financial results of BU Global Clients, BU Global Markets and BU Transaction Banking are reported in the regional BUs. To align with the management of the business the results of BU Global Clients are reported in the regional BUs as from January 2007. The comparative segment figures of 2006 and 2005 have been restated.

 

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As from 2008, ABN AMRO will be organised into three units each containing the businesses that will ultimately be transferred to the respective Consortium Banks. A fourth unit will contain central functions including the Head Office functions and businesses which are regarded as non-strategic.

 

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Operating and financial review and prospects

 

For critical accounting policies and changes in accounting rules, refer to the accounting policies section in section 4 (the financial statements).

The following discussion of operating results is based on, and should be read in conjunction with, ABN AMRO’s consolidated financial statements. The financial information contained in this review has been prepared in accordance with IFRS as adopted by the EU and issued by the IASB.

This operating and financial review and prospects examines the Group results under IFRS by comparing the results of operations for the years 2007 to 2006 and for 2006 to 2005, highlighting key notes by Business Unit (BU) for each line item. This is followed by a more detailed analysis of the results of operations for each BU, which explains significant variances in profit or losses for the year with reference to the relevant line items.

Consolidation effects of controlled private equity investments

 

IFRS requires consolidating private equity investments over which ABN AMRO has control, including non-financial investments managed as private equity investments. However, as a practical matter, ABN AMRO’s private equity business is managed separately from the rest of the banking business and management does not measure the performance of banking business based on the consolidated results of operations. Private equity business involves buying equity stakes in unlisted companies over which ABN AMRO can establish influence or control, and managing these share-holdings as an investor for a number of years with a view to selling these at a profit. The companies in which ABN AMRO has these temporary holdings are active in business sectors outside the financial industry. ABN AMRO believes that combining these temporary holdings with the core banking business does not provide a meaningful basis for discussion of the financial condition and results of operations. Therefore, in the presentation of ABN AMRO’s ‘Group results’, the effects of a line-by-line consolidation in the income statement of the private equity holdings of Private Equity and BU Europe are removed. The results excluding the consolidation effect include the ‘de-consolidated’ holdings based on the equity method. The measures excluding the effects of consolidation of ABN AMRO’s private equity holdings are non-GAAP financial measures. Management refers to these non-GAAP financial measures when making operating decisions because the measures provide meaningful supplementary information about ABN AMRO’s operational performance. In accordance with applicable rules and regulations, ABN AMRO has presented, and investors are encouraged to review, reconciliations of non-GAAP financial measures to the most comparable IFRS measures, i.e., reconciliations of results excluding the consolidation effects private equity holdings to results including those effects.

Discontinued operations

 

Antonveneta, BU Asset Management, ABN AMRO North America Holdings (“LaSalle”), ABN AMRO Mortgage Group and Bouwfonds are reported as discontinued operations. BU Asset Management is reported as discontinued operations as of December 2007 due to the planned sale of ABN AMRO’s Asset Management activities to Fortis expected to be completed in April 2008. Antonveneta is reported as discontinued operations as of December 2007 due to the sale of Antonveneta which is expected to be effective in the second quarter of 2008. Profits from discontinued operations include the related operating results and if applicable the gain on sale (see note 45 to the financial statements). The comparative income statement figures for the years 2006 and 2005 have been restated in accordance with IFRS. The related assets and liabilities of the discontinued operations are presented as assets/liabilities of businesses held for sale as at 31 December 2007. The comparative figures have not been restated in accordance with IFRS. As at 31 December 2007 also the Private

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Equity business is presented as assets/liabilities held for sale. The presentation in the income statement has not been changed compared to previous periods.

Constant foreign exchange rates

 

Throughout the discussion of the operating and financial review and prospects, the financial results and performance compared with the prior period, both in euros and percentage terms, are given in euros. ABN AMRO may also, where deemed significant, explain variances in terms of ‘constant foreign exchange rates’ or ‘local currency’. Both ‘constant foreign exchange rates’ and ‘local currency’ exclude the effect of currency translation differences and are GAAP financial measures which, unlike actual growth, cannot be derived directly from the information in the financial statements. ‘Local currency’ performance is measured for single currency volume differences. Management assesses, in part, the underlying performance of individual businesses by separating foreign exchange translation effects throughout the income statement so as to understand the underlying trend of the business performance. The adjustments relate in particular to the impact of fluctuations in exchange rates used in translating results reported by the BU Latin America in Brazilian real into euros.

 

Management believes that the exclusion of these items provides a better understanding of the underlying operational performance of businesses during such periods of exchange rate volatility. Fluctuations in exchange rates are outside of the control or influence of management and may distort the analysis of underlying operating performance of ABN AMRO’s businesses during the periods under review. External stakeholders, such as business analysts, also use these measures. However, ABN AMRO recognises that these measures should not be used in isolation and, accordingly, begins the analysis on the performance of the Group and of the BUs with the comparable GAAP actual growth measures that reflect all the factors affecting the business.

ABN AMRO calculates the comparable constant foreign exchange rate performance by multiplying the local currency volumes over the period to be compared with the average monthly exchange rates during the previous period being compared. For example, the volumes for the year ended 31 December 2007 have been multiplied with the average monthly exchange rates prevailing during 2006 in order to enable comparison with the 2006 results on a constant currency basis.

 

 

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Group results

The following table sets out selected information relating to the Group for the years ended 31 December 2007, 2006 and 2005 showing the results both under IFRS and excluding the consolidation effect of ABN AMRO’s private equity investments.

(in millions of euros)		IFRS												Consolidation effect (1)												Excluding consolidation effect
																										(non-GAAP measure)
		2007				2006				2005				2007				2006				2005				2007				2006				2005
Net interest income			8,352				7,268				6,763				(220	)			(342	)			(280	)			8,572				7,610				7,043
Net fee and commission income			4,275				4,049				3,432				–				–				–				4,275				4,049				3,432
Net trading income			1,276				2,849				2,514				3				(3	)			2				1,273				2,852				2,512
Results from financial transactions			1,548				794				1,183				46				15				35				1,502				779				1,148
Share of results in equity accounted investments			271				241				245				1				–				–				270				241				245
Other operating income			1,376				914				808				–				–				(6	)			1,376				914				814
Income of consolidated private equity holdings			3,836				5,313				3,637				3,836				5,313				3,637				–				–				–
Operating income			20,934				21,428				18,582				3,666				4,983				3,388				17,268				16,445				15,194
Operating expenses			17,480				16,945				13,913				3,634				4,939				3,366				13,846				12,006				10,547
Operating result			3,454				4,483				4,669				32				44				22				3,422				4,439				4,647
Loan impairment and other credit risk provisions			1,704				1,411				614				–				–				–				1,704				1,411				614
Operating profit before tax			1,750				3,072				4,055				32				44				22				1,718				3,028				4,033
Income tax expense			(48	)			366				735				32				44				22				(80	)			322				713
Net operating profit			1,798				2,706				3,320				–				–				–				1,798				2,706				3,320
Profit from discontinued operations net of tax			8,177				2,074				1,123				–				–				–				8,177				2,074				1,123
Profit for the year			9,975				4,780				4,443				–				–				–				9,975				4,780				4,443
Total assets			1,025,213				987,064				880,804				1,698				4,537				3,477				1,023,515				982,527				877,327
Risk-weighted assets			232,312				280,704				257,854				–				–				–				232,312				280,704				257,854
Full-time equivalent staff (4)			114,423				124,437				106,689				13,168				30,881				27,775				101,255				93,556				78,914
Number of branches and offices (2)(4)			4,296				4,634				3,681				–				–				–				4,296				4,634				3,681
Efficiency ratio (3)			83.5%				79.1%				74.9%				99.1%				99.1%				99.4%				80.2%				73.0%				69.4%

 

(1)	This is the impact per line item of the private equity investments which are required to be consolidated under IFRS. See ‘financial statements 2007, Accounting policies’.

(2)	This number includes double counting of branches and offices that serve more than one BU. Adjusted for this double counting, the actual number of branches and offices amounts to 4,254 (2006: 4,532; 2005: 3,557).

(3)	Efficiency ratio (in %) is the operating expenses divided by the operating income.

(4)	Including numbers from discontinued operations

 

 

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Results of operations for the years ended 31 December 2007 and 2006

 

Profit for the year 2007 increased by EUR 5,195 million, or 108.7% to EUR 9,975 million. Profit from continuing operations decreased by EUR 908 million, or 33.6%, to EUR 1,798 million. The major variances year-on-year are: BU Europe (decrease EUR 1,008 million), BU Group Functions (decrease EUR 511 million), BU North America (decrease EUR 90 million), partly offset by BU Netherlands (increase EUR 343 million), Latin America (increase EUR 107 million), BU Asia (increase EUR 146 million), and BU Private Clients (increase EUR 105 million). Profit from discontinued operations net of tax amounted to EUR 8,177 million, up 294.3% reflecting the divestment of ABN AMRO North America Holding Company, which principally consists of the retail and commercial activities of LaSalle Cooperation (LaSalle), the divestment of ABN AMRO Mortgage Group, Inc., the divestment of Bouwfonds’ property management and development activities, the classification of Antonveneta and the classification of BU Asset Management as discontinued operations. Profits from discontinued operations include the related operating results and if applicable the gain on sale.

Operating income

 

Operating income decreased by EUR 494 million, or 2.3%, to EUR 20,934 million (non-GAAP: operating income increased by EUR 823 million or 5.0%). This relates primarily to the increases of operating income in BU Latin America (EUR 1,114 million), BU Asia ( EUR 559 million), and BU Netherlands (EUR 350 million), partly offset by decreases in BU Europe (EUR 1,340 million) and Group Functions (EUR 1,386 million, excluding the consolidation effect (non-GAAP measure: decrease EUR 69 million)) the individual lines that make up operating income are discussed below.

Key notes:

-

The increase in BU Latin America was driven by continued strong growth in the Brazil loan portfolio and gains in the ALM portfolio, as well as gains on the sale of stakes in Brazilian credit analysis provider Serasa, Brazilian stock exchange Bovespa, and Brazilian futures exchange Bolsa de Mercados & Futuros (in total EUR 382 million).

-

Operating income in BU Asia increased due to further growth in the consumer clients business as the Preferred Banking activities and credit card business continued to expand, especially in India, China, Hong Kong and Taiwan. In addition, commercial client revenues increased as a result of higher Merger & Acquisition advisory fees, a rise in client transactions executed and higher Global Markets revenues.

-

Operating income in BU Netherlands increased due to tax-exempt gains on the sale of Interbank/DMC (EUR 56 million) and ABN AMRO Mellon (EUR 139 million), an increase in net interest income due to volume and margin growth in savings products and higher Global Markets revenues, especially in the areas Financial Markets and Structured Finance.

-

Operating income in BU Europe decreased due to negative fair value adjustments (EUR 1,561 million) on portfolios related to the credit crisis that developed from the conditions of the sub-prime mortgage market in the United States. BU Europe includes the global hub for Global Markets and therefore the impact of value adjustments is concentrated in BU Europe. The fair value adjustments were partly offset by EUR 435 million of fair value adjustments from changes in own credit risk of which EUR 267 million is recorded in trading income and EUR 168 millions in results from financial transactions.

 

Net interest income

 

Net interest income increased by EUR 1,084 million, or 14.9%, to EUR 8,352 million (non-GAAP: net interest income increased by EU 962 million or 12.6%). This was mainly due to increases in BU Latin America (EUR 750 million), BU Netherlands (EUR 278 million), BU Europe (EUR 233 million) and BU Asia (EUR 219 million), partly offset by a decrease in Group Functions (EUR 336 million; non-GAAP measure: EUR 458 million).

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Key notes:

-	Net interest income in BU Latin America increased mainly due to continued growth in the Brazil credit portfolio, the appreciation of the Brazilian real against the Euro, and higher interest-related treasury revenues.

-	The increase in BU Netherlands reflects the growth in volumes and margins of commercial and consumer savings products.

-	The increase in BU Asia resulted from continued growth in the consumer lending business and credit card business, higher ALM income and the consolidation of Prime Bank and Taitung Business Bank.

-	Net interest income in Group Functions decreased due to higher funding costs and lower investment income following sales of AFS bonds.

Net fee and commission income

 

The following table sets out the net fee and commission income for the Group for the years ended 31 December 2007, 2006 and 2005.

(in millions of euros)		2007				2006				2005
Fee and commission income
Securities brokerage fees			1,445				1,692				1,529
Payment and transaction services fees			1,602				1,376				1,237
Asset management and trust fees			485				414				243
Fees generated on financing arrangements			279				162				170
Advisory fees			594				484				333
Insurance-related commissions			133				130				136
Guarantee fees			192				159				164
Other fees and commissions			492				454				369
Subtotal			5,222				4,871				4,181
Fee and commission expense
Securities brokerage expense			86				322				321
Payment and transaction services expense			267				200				165
Other fee and commission expense			594				300				263
Subtotal			947				822				749
Total			4,275				4,049				3,432

Net fee and commission income increased by EUR 226 million, or 5.6%, to EUR 4,275 million, mainly due to an increase in BU Asia (EUR 286 million), and Group Functions (EUR 121 million), partly offset by decreases in BU Netherlands (EUR 121 million) and BU Europe (EUR 121 million).

 

Key notes:

-	The increase in BU Asia reflected the higher Merger & Acquisition advisory fees following the successful closing of client transactions, higher transaction banking revenues, and further growth in the sale of investment products to the Van Gogh Preferred Banking client base.

-	The decrease in BU Netherlands is due to a decline in securities commissions and commissions related to large corporate clients, partly offset by higher payment and asset management commissions (decrease  EUR 121 million).

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Net trading income

 

The following table sets out the net trading income for the Group for the years ended 31 December 2007, 2006 and 2005.

(in millions of euros)		2007				2006				2005
Interest instruments trading			(1,222	)			1,103				1,360
Foreign exchange trading			976				706				393
Equity and commodity trading			1,462				1,054				612
Other			60				(14	)			149
Total			1,276				2,849				2,514

Net trading income decreased by EUR 1,573 million, or 55.2%, to EUR 1,276 million (non-GAAP: EUR 1,579 million to EUR 1,273 million), mainly due to a decrease in BU Europe (EUR 1,565 million) and in Group Functions (EUR 204 million; non-GAAP measure: EUR 210 million).

Key notes:

-

The decrease in BU Europe was due to negative fair value adjustments (EUR 1,561 million) relating to the credit crisis that developed from the conditions of the sub-prime mortgage market in the United States (partially offset by EUR 267 million of income recorded related to changes in own credit risk.) BU Europe includes the global hub for Global Markets and therefore the impact of adjustments was concentrated in BU Europe offsets agains own credit risk of EUR 267 million. .

-	The decrease of net trading income in Group Functions is mainly due to lower proprietary trading income in the Global Market business.

 

Results from financial transactions

 

The following table sets out the results from financial transactions for the Group for the years ended 31 December 2007, 2006 and 2005.

(in millions of euros)		2007				2006				2005
Net gain from the disposal of available-for-sale debt securities			278				485				431
Net gain from the sale of available-for-sale equity investments			321				70				49
Net gain on fair value changes in own credit risk			168				–				–
Dividend on available-for-sale equity investments			16				32				19
Net gain on other equity investments			669				435				468
Hedging ineffectiveness			(4	)			65				30
Fair value change of credit default swaps			116				(280	)			(51	)
Other			(16	)			(13	)			237
Total			1,548				794				1,183

Results from financial transactions increased by EUR 754 million, or 95.0%, to EUR 1,548 million (non-GAAP measure: by EUR 723 million or 92.8%). The increase was mainly due to increases in Group Functions (EUR 262 million; non-GAAP measure: EUR 231 million) and BU Latin America (EUR 382 million).

Key notes:

 

-

BU Latin America benefited from gains in the ALM portfolio and gains on sale of stakes in Serasa, a credit analysis provider, the Brazilian stock exchange Bovespa, and the Brazilian futures exchange Bolsa de Mercadorias & Futuros in total a EUR 382 million increase.

 

 

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-

The results from financial transactions of Group Functions increased in total EUR 262 million due to market-to-market gains on capital and risk hedging (credit default swap portfolio) that benefited from the general widening of the credit spreads that occurred throughout the year and gains from changes in fair value related to own credit risk of EUR 115 million, partly offset by decreased gains on sales of AFS bonds.

Share of result in equity accounted investments

 

Share of result in equity accounted investments increased by EUR 30 million to EUR 271 million (non-GAAP measure: EUR 29 million), mainly due to the increase at Group Functions (EUR 22 million; non-GAAP measure: EUR 21 million).

Other operating income

 

The following table sets out the Group’s results from other operating income for the years ended 31 December 2007, 2006 and 2005.

(in millions of euros)		2007				2006				2005
Insurance activities			95				90				153
Leasing activities			82				61				60
Disposal of operating activities and equity accounted investments			951				453				348
Other			248				310				247
Total			1,376				914				808

 

Other operating income increased by EUR 462 million, or 50.5%, to EUR 1,376 million, mainly due to increases at Group Functions (EUR 226 million), BU Netherlands (EUR 153 million) and BU Private Clients (EUR 93 million).

Key notes:

-	The increase in Group Functions was mainly due to the sale of Capitalia whose shares were settled in exchange for shares in Unicredit, resulting in a gain of EUR 624 million.

-	The increase in BU Netherlands was due to the gains on sale of Interbank/DMC (EUR 56 million) and ABN AMRO Mellon (EUR 139 million) realised in 2007.

-	The increase in Private Clients was due to the gain on sale of the Latin American Private Banking operations in Miami and Uruguay, including the Latin American portfolios in Switzerland and Luxembourg (EUR 77 million).

Income of consolidated private equity holdings

 

Income from consolidated private equity holdings decreased by EUR 1,477 million, or 27.8%, to EUR 3,836 million, due to the transfer of the management of most of the businesses from Private Equity to an independent management company. As a result of the structural change in control, the results from the portfolio of investments managed by the independent management company are no longer consolidated as of 1 July 2007 but instead changes in fair value are shown within results from financial transactions as a net gain on other equity investments.

Operating expenses

 

Operating expenses increased by EUR 535 million, or 3.2%, to EUR 17,480 million (non-GAAP measure: increase of expenses of EUR 1,840 million, or 15.3%, to EUR 13,846 million), due to the increases in operating expenses in BU Latin America (EUR 496 million), BU Asia (EUR 384 million). The increases were partly offset by Group Functions (decrease of operating expenses of EUR 370 million; non-GAAP measure: increase of EUR 935 million).

 

 

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In 2007, EUR 24 million of restructuring costs were released, compared with a charge of EUR 207 million in 2006 (of which EUR 174 million in continuing operations and EUR 25 million net in discontinuing operations). In 2007, EUR 272 million (of which EUR 249 million in continuing operations and EUR 17 million net in discontinuing operations) of accelerated vesting of share-based payment plans were recorded. The accelerated vesting of share-based payment plans was a result of the acquisition of ABN AMRO by the consortium banks.

Key notes:

-

The decrease in Group Functions was caused by a decline in the operating expenses of consolidated private equity investments due to the change in control. On a non-GAAP basis the increase (EUR 935 million) was due to the break-up fee paid to Barclays (EUR 200 million), transaction-related advisory fees (EUR 211 million), transition and integration costs due to the takeover by the Consortium (EUR 95 million), the provision for the US Department of Justice investigation (EUR 365 million), and the costs of accelerated vesting of share-based payments (EUR 117 million) recorded in Group Functions.

-	Operating expenses in BU Latin America were impacted by a new collective labour agreement that came into effect in September 2007, higher bonus accruals, strong growth in business activities, and investments in the expansion of the distribution infrastructure in Brazil.

-	The expenses in BU Asia increased due to the acquisition of Prime Bank and Taitung Business Bank, continued investments in new branches and higher staff levels.

Loan impairment and other credit risk provisions

 

Loan impairment and other credit provisions increased by EUR 293 million to EUR 1,704 million. The provisioning level increased in BU Latin America (EUR 244 million), BU North America (EUR 66 million), BU Europe (EUR 64 million), BU Netherlands (EUR 54 million), partly offset by lower provisions in Group Functions (decrease EUR 144 million).

Key notes:

-

Continued strong loan growth in BU Latin America resulted in higher loan impairment and other credit risk provisions (increase EUR 244 million).

-

Loan impairment and other credit risk provisions increased in BU North America (EUR 66 million) and BU Europe (EUR 64 million) following the lower level of releases than in the prior year and a change in the credit cycle.

-

Provisions in BU Netherlands increased (EUR 54 million) as a result of impairment of facilities to a selected number of corporate clients.

-

Provisions in Group Functions decreased (EUR 144 million) as 2006 included an impairment for the Futures business which was sold to UBS.

Effective tax rate

 

The overall (continued and discontinued businesses) effective tax rate for 2007 was 2.7% versus 11.9% in 2006 (non-GAAP: for 2007 was 4.7% versus 10.6% in 2006). Included in 2007 were significant tax-exempt gains on disposals, including the gain of sale on Capitalia (EUR 624 million, net 617 million), a lower corporate tax rate in the Netherlands, tax credits in some countries as well as substantial releases of tax liabilities resulting from the finalisation of prior-year tax returns and conclusions on a number of additional items.

 

 

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Profit from discontinued operations net of tax

 

Profit from discontinued operations net of tax increased EUR 6,103 million to EUR 8,177 million and included the following:

 

-

The sale of ABN AMRO Mortgage Group, Inc., the US-based residential mortgage broker origination platform and residential mortgage servicing business, recording a result of EUR 110 million (net of tax results for the first two months and a gain on sale) in BU North America. This sale was announced by the Group on 22 January 2007. The settlement took place on 28 February 2007.

-

The sale of ABN AMRO North America Holding Company, which principally consists of the retail and commercial activities of LaSalle Bank Cooperation (LaSalle) in BU North America. The net of tax results for the first nine months were EUR 777 million, and the gain on sale amounted to EUR 7,163 million, of which EUR 7,196 million was booked in the results of the BU North America and minus EUR 33 million in Group Functions. This sale was announced by the Group on 22 April 2007. The settlement took place on 1 October 2007.

-

The classification as discontinued operations of Antonveneta (EUR 111 million losses).

-

The classification as discontinued operations of BU Asset Management (EUR 186 million profit).

-

The release of part of a provision recorded in connection with the sale of Bouwfonds in 2006 (EUR 52 million).

Results of operations for the years ended 31 December 2006 and 2005

 

Profit for the year 2006 increased by EUR 337 million, or 7.6%, to EUR 4,780 million. Profit from continuing operations decreased by EUR 614 million, or 18.5%, to EUR 2,706 million. This decrease reflected a mixed performance across the BUs. The major variances year-on-year were increases of results of operations in BU Latin America (EUR 66 million), BU Netherlands (EUR 82 million) and decreases of results of operations in BU North America (EUR 290 million), BU Asia (EUR 190 million), BU Europe excluding Antonveneta (EUR 151 million) and BU Group Functions (EUR 147 million). Profit from discontinued operations net of tax amounted to EUR 2,074 million, reflecting the divestment of the property development and management activities of Bouwfonds, the classification of Antonveneta and BU Asset Management as businesses held for sale, the disposal of ABN AMRO Mortgage Group, Inc. and the disposal of ABN AMRO North America Holding Company, which principally consists of the retail and commercial activities of LaSalle Cooperation (LaSalle). Profits from discontinued operations include the related operating results and applicable gain on the sale.

Operating income

 

Operating income increased by EUR 2,846 million, or 15.3%, to EUR 21,428 million (non-GAAP: operating income increased by EUR 1,251 million or 8.2%). This mainly relates to the increases of operating income of BU Group Functions (EUR 1,688 million, non-GAAP measure: decrease EUR 9 million), BU Europe (EUR 192 million; excluding the consolidation effect (non-GAAP): EUR 294 million), BU Latin America (EUR 714 million) and BU Asia (EUR 283 million).

Key notes:

-	The increase in Group Functions was caused by higher operating income from consolidated private equity investments.

-	Excluding the consolidation effect (non-GAAP measure), operating income in BU Europe increased primarily on the back of higher Global Markets income, as client income grew strongly.

-	The increase in BU Latin America was mainly due to the continued growth in the retail and consumer finance loan portfolio, partly offset by the inclusion in 2005 of the book profit on the sale of Real Seguros (EUR 229 million).

-	BU Asia grew its revenue as its Preferred Banking activities and credit card business continued to expand, especially in India, China, Hong Kong and Taiwan.

 

 

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Net interest income

 

Net interest income increased by EUR 505 million, or 7.5%, to EUR 7,268 million, mainly due to increases in BU Latin America (EUR 725 million) and BU Europe (EUR 480 million; non-GAAP: EUR 408 million), partly offset by decreases in BU Netherlands (EUR 443 million) and BU Group Functions (EUR 201 million; non-GAAP: EUR 67 million).

Key notes:

-	Net interest income in BU Latin America increased mainly due to the continued growth of the Brazil credit portfolio.

-	The decrease in BU Netherlands reflected the fact that mortgage prepayment penalty income was affected by higher offsetting transactions in 2006.

-	Net interest income in Group Functions decreased due to higher interest expenses from consolidated private equity investments. Excluding the consolidation effect (non-GAAP measure), net interest income decreased by EUR 67 million.

Net fee and commission income

 

Net fee and commission income increased by EUR 617 million, or 18.0%, to EUR 4,049 million, mainly due to an increase in BU Asia (EUR 267 million), BU Latin America (EUR 119 million), BU Netherlands (EUR 97 million) and BU Private Clients (EUR 83 million).

 

Key notes:

 

-	The increase in BU Asia reflected the higher asset under administration levels, the higher fee levels on existing products and a further shift in the asset mix towards more profitable products.
-	Net fees and commission income in BU Netherlands increased by EUR 97 million, resulting from higher commission on banking transactions, securities and asset management.

Net trading income

 

Net trading income increased by EUR 335 million, or 13.3%, to EUR 2,849 million, mainly due to increases in BU Latin America (EUR 163 million), BU Asia (EUR 144 million) and BU Netherlands (EUR 88 million), partly offset by a decrease in BU North America (EUR 90 million).

Key notes:

-	The increase of net trading income in BU Latin America (EUR 163 million) was mainly due to the growth of commercial banking in Brazil of client-related trading income.

-	Net trading income increased in BU Asia resulting from higher equity finance income in Hong Kong and Taiwan.

-	The increase in BU Netherlands was mainly due to higher results on the sale of derivatives.

-	The decrease in BU North America (EUR 90 million) was mainly due to lower trading results Global Markets.

Results from financial transactions

 

Results from financial transactions decreased by EUR 389 million, or 32.9%, to EUR 794 million, mainly due to decreases of results from financial transactions in Group Functions (EUR 353 million; non-GAAP: EUR 379 million) and BU Asia (EUR 85 million), partly offset by the increase of results from financial transactions in BU Netherlands (EUR 167 million).

 

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Key notes:

-	Decrease in Group Functions is mainly due to lower results on the sale of bonds and losses on credit default swaps due to tightening spreads, while 2005 included results on option position on Antonveneta.

-	Results from financial transactions in BU Asia decreased mainly because of lower Global Client results from financial transactions.

Share of result in equity accounted investments

 

Share of result in equity accounted investments decreased by EUR 4 million to EUR 241 million, mainly due to Group Functions (EUR 47 million) because of lower results from ABN AMRO’s interest in Antonveneta, which was consolidated in 2006, and Kereskedelmi és Hitelbank Rt., which was sold in 2006, partly offset by a higher contribution from ABN AMRO’s investment in Capitalia.

Other operating income

 

Other operating income increased by EUR 106 million, or 13.1%, to EUR 914 million, mainly due to the Group Functions (increase EUR 445 million; non-GAAP: increase EUR 439 million), partly offset by BU Latin America (decrease EUR 320 million).

Key notes:

-	The increase in Group Functions was due to the gain on sale of Kereskedelmi és Hitelbank Rt. (EUR 208 million) and the gain on sale of the Futures business (EUR 229 million).

-	The decrease in BU Latin America was mainly due to the inclusion of the gain (EUR 229 million) on the sale of Real Seguros in 2005.

Income from consolidated private equity holdings

 

Income from consolidated private equity holdings increased by EUR 1,676 million, or 46.1%, to EUR 5,313 million, due to the increase in the number and in size of the consolidated investments in private equity.

 

Operating expenses

 

Operating expenses increased by EUR 3,032 million, or 21.8%, to EUR 16,945 million (non-GAAP: plus EUR 1,459 million, or 13.8%, to EUR 12,006 million), mainly due to increase of operating expenses Group Functions (EUR 2,004 million; non-GAAP: EUR 327 million), BU Europe (EUR 263 million; non-GAAP: EUR 367 million), BU Latin America (EUR 396 million), BU Asia (EUR 290 million) and BU North America (EUR 138 million), partly offset by lower operating expenses in BU Netherlands (EUR 92 million). In 2006, EUR 137 million restructuring charge was recorded for in relation to the services and IT alignment initiatives and reflected in BU Netherlands, BU North America, BU Latin America and BU Europe.

Key notes:

 

-	The increase in Group Functions was caused by higher operating expenses of consolidated private equity investments and due to the inclusion of a release of post-retirement healthcare benefit provision (EUR 392 million) in 2005.

-

Excluding the consolidation effect (non-GAAP measure) operating expenses in BU Europe increased mainly due to restructuring charges of EUR 68 million restructuring from Global Markets and Services, an increase in expenses linked to the growth in operating income, higher bonus expenses and higher costs for compliance related to Sarbanes-Oxley Act and other regulations.

-	Operating expenses increased in growth markets in BU Latin America and BU Asia including branch openings and marketing campaigns. Operating expenses in BU Latin America were also impacted by a stronger

 

22

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Brazilian real and the collective labour agreements that came into effect in September 2005 and September 2006.

-	BU Netherlands continued to benefit from strict cost control measures, resulting in lower staff costs.

Loan impairment and other credit risk provisions

 

Loan impairment and other credit provisions increased by EUR 797 million to EUR 1,411 million. The provisioning level was substantially higher as provisioning for consumer loan portfolios went up in the BU Latin America (increase EUR 372 million) and the BU Asia (increase EUR 178 million).

Key notes:

-	Higher loan impairment and other credit risk provisions in BU Latin America were due to the increase in absolute consumer loan volumes and higher delinquencies.

-	The increase in BU Asia mainly reflects higher provisioning for credit card receivables in Taiwan, where the banking industry was significantly impacted by an increase in credit card defaults.

 

Effective tax rate

 

The overall effective tax rate for 2006 was 11.9% versus 18.1% in 2005. Included in 2006 are tax credits, tax charges due to changes in the tax law and tax-exempt gains which exceeded the 2005 tax rate levels, as well as changes in tax rates.

 

Profit from discontinued operations net of tax

 

Profit from discontinued operations net of tax increased to EUR 2,074 million in 2006 from EUR 1,123 million in 2005.

Profit from discontinued operations net of tax of EUR 2,074 million in 2006 included:

 

-	On 1 December 2006, the Group disposed of the property development and management activities of Bouwfonds, resulting in profits of EUR 505 million in BU Netherlands, EUR 338 million of which related to the net gain on the sale and EUR 167 million of which related results of operations.

-

On 22 January 2007, the Group announced the sale of ABN AMRO Mortgage Group, Inc., ABN AMRO’s US-based residential mortgage broker origination platform and residential mortgage servicing business recording a result of EUR 104 million in BU North America. The settlement took place on 28 February 2007.

-

On 22 April 2007, the Group announced the sale of ABN AMRO North America Holding Company which principally consists of the retail and commercial activities of LaSalle Bank Cooperation (LaSalle) which recorded (EUR 1,104 million) in results of operations in BU North America and minus EUR 85 million in Group Functions. The settlement took place on 1 October 2007.

-	The classification as discontinued operations of Antonveneta (EUR 192 million).

-	The classification as discontinued operations of BU Asset Management (EUR 254 million).

 

Profit from discontinued operations net of tax of EUR 1,123 million in 2005 was due to the classification as discontinued operations of Bouwfonds (EUR 136 million) in BU Netherlands: the ABN AMRO Mortgage Group, Inc. (EUR 51 million) in BU North America: the ABN AMRO North America Holding Company which principally consists of the retail and commercial activities of LaSalle Bank Cooperation in BU North America (EUR 811 million) and in BU Group Functions (minus EUR 64 million); and the asset management business (EUR 189 million) in BU Asset Management.

 

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Impact of the Current Credit Environment on the Group’s Financial Position and Results of Operations

 

US residential mortgage related exposures

The Group is involved in investing in financial instruments, including asset-backed securities (ABSs) and other structured investments, backed by US residential mortgages and other collateral with exposure to the current US credit environment. Please refer to paragraph ‘Risk factors’ on page 60.

The following table provides an overview of the main US residential mortgage related exposures at 31 December 2007 in the trading book:

(in millions of euros)		Exposure				Fair Value adjustment through income				Net exposure
Retained Asset-Backed Securities CDOs:
Super Senior Tranches			2,487				499				1,988
Equity / Mezzanine Tranches			290				290				-
Asset-Backed Securities Trading Inventory:
Prime RMBS			280				56				224
Sub-Prime RMBS			98				48				50
ABS CDOs			68				62				6
Total			3,223				955				2,268

Wherever possible, the Group values all ABS positions using market prices.  However, following rising mortgage delinquencies and expectations of declining house prices in the US, illiquidity in the market has meant that market data in this area has been increasingly difficult to source.

In line with our policy on fair value determination, where quoted market prices and recent market transactions are not available, valuation techniques are employed that involve benchmarking against market prices for similar instruments or the use of valuation models, giving priority to observable market inputs where available.

Retained Asset-Backed Securities CDOs

The Group is involved in buying mortgage-backed securities; including securities backed by US mortgages, and repackaging them into collateralised debt obligations (CDOs) for subsequent sale to investors.  As a result of worsening credit conditions, the Group has retained the exposure to the super senior tranches of US related ABS CDOs.

 

At 31 December 2007, the Group’s net exposure to unsold tranches of US related ABS CDOs totalled EUR 1,988 million to high grade CDOs, which include commercial loan collateral as well as prime and sub-prime mortgage collateral.

 

Throughout the second half of 2007, significant subjectivity arose in the valuation of US related CDOs due to growing illiquidity in the market and as a result, ABN AMRO moved to a model-based valuation approach.  The balance sheet valuations of the super senior tranches of ABS CDOs take into consideration outputs from a proprietary model and market data.  The model forecasts the expected cash flows of the underlying mortgages using assumptions about future macroeconomic conditions (including house price appreciation and depreciation) and delinquencies on these underlying mortgages derived from publicly available data.  

 

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The resulting cash flows are discounted using a risk adjusted rate.  Additionally, prices implied by the model have been evaluated against observable market data, such as the ABX index, a series of credit default swaps based upon bonds that consist of sub-prime mortgages.

Mezzanine and equity tranches of the US ABS CDOs have been written down to zero.

Further analysis of the Group’s super senior tranche exposure is provided below:

Exposure (in millions of euros)			2,487
Weighted average attachment point			28	%
% underlying RMBS sub-prime assets			77	%
Collateral by rating:
- investment grade			99	%
- non-investment grade			1	%
Net exposure (in millions of euros)			1,988
Effective weighted average attachment point post fair value movement			42	%

Approximately 5% of ABN AMRO’s positions in high grade ABS CDOs refer to mortgage loans of vintage 2005 and earlier, whilst 95% refer to 2006 and 2007 vintages.  At 31 December 2007, 99% of these securities were investment grade.

Asset-Backed Securities Trading Inventory

There is a further net exposure of EUR 280 million to US residential mortgages through a trading inventory of residential mortgage-backed securities (RMBS) and ABS CDOs.  The majority of this exposure relates to prime RMBS.  Trading book exposures are marked to market using individual market prices, where available, or against market benchmarks.

Available-For-Sale Asset-Backed Securities

 

Within our available-for-sale assets are prime RMBS and high grade ABS CDOs with gross exposure to the US market in the amounts of EUR 159 million and EUR 1,988 million respectively.  Since these assets are classified as available-for-sale, fair value movements of EUR 165 million are recognised directly in equity within unrealised gains and losses.  If there are impairments to these assets, the cumulative gain or loss is transferred to income.  At 31 December 2007, none of these assets were considered to be impaired.

 

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Exposure to financial guarantors

 

Towards the end of 2007, monoline financial guarantors were adversely affected by their exposure to the US sub-prime mortgage market. At 31 December 2007 the Group had a gross direct exposure of EUR 1,632 million mainly relating to credit default swaps (CDSs) and high grade ABS CDOs. Against this amount a credit valuation adjustment of EUR 606 million has been taken of which EUR 379 million relates to non-investment grade financial guarantors.

Additionally, ABN AMRO has an indirect exposure to financial guarantors through financial guarantees (or ‘wraps’), purchased or embedded within various securities in the trading and available-for-sale portfolios. The valuation of these securities at 31 December 2007 was largely dependant on the underlying asset quality, rather than the enhancement offered by the embedded guarantee.

Other Portfolios Affected by the Current Credit Environment

The Group’s leveraged finance inventory, which is held at amortised cost, totalled EUR 2,457 million at 31 December 2007.  Under normal market circumstances, these positions would have been syndicated, but are being retained in the loan book until market conditions become more favourable.  These exposures have been assessed as not impaired.

 

The Group also originates commercial mortgages, predominately in the UK, Germany and France that in normal market circumstances would be considered for distribution. The holding of such mortgages totalled EUR 5,878 million at 31 December 2007. These exposures have been assessed as not impaired.

The Group also purchases portfolios of UK residential mortgages that are held at fair value.  These mortgages are generally purchased at a discount and consist of non-conforming loans. Under normal market conditions, these loans would be subject to onward distribution.  The holding of such mortgages totalled EUR 1,569 million at December 2007.

 

Movements in Own Credit

For the year ended 31 December 2007, ABN AMRO recorded a gain of EUR 435 million including EUR 267 million in net trading income and EUR 168 million in results on financial transactions from changes in the fair value of financial liabilities designated at fair value attributable to changes in ABN AMRO’s own credit risk.  The change in fair value applies to those financial liabilities designated at fair value where ABN AMRO’s own credit risk would be considered by market participants and excludes instruments for which it is established market practice not to include an entity-specific adjustment for own credit.  The fair value change was calculated based on a yield curve generated from observed external pricing for funding and quoted CDS spreads.

 

 

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Group capital

The following table shows ABN AMRO’s capital at 31 December 2007, 2006 and 2005.

(in millions of euros)		2007				2006				2005
Ordinary share capital			1,085				1,085				1,069
Ordinary share premium reserves			5,332				5,245				5,269
Treasury shares			(2,640	)			(1,829	)			(600	)
Retained earnings			25,650				18,599				15,237
Net gains/(losses) not recognised in the income statement			148				497				1,246
Equity attributable to shareholders of the parent company			29,575				23,597				22,221
Minority interests			1,134				2,298				1,931
Equity			30,709				25,895				24,152
Subordinated liabilities			15,616				19,213				19,072
Group capital			46,325				45,108				43,224

Group capital at year-end 2007 was EUR 46,325 million, an increase of EUR 1,217 or 2.7%, compared with

 

2006. The increase of EUR 5,978 million, or 25.3% in equity attributable to shareholders of the parent company is mainly due to an increase in retained earnings and partially offset by an increase in treasury shares.

Group capital at year-end 2006 was EUR 45,108 million, an increase of EUR 1,884 million, or 4.4%, compared with 2005. The increase of EUR 1,376 million, or 6.2%, in equity attributable to shareholders of the parent company was mainly due to an increase in retained earnings, partly offset by movements in special components of equity relating to cash flow hedges and available-for-sale securities, currency translation differences and purchase of treasury shares.

The 2007 full-year addition to reserves resulting from profit attributable to the shareholders of the parent company less dividends paid was EUR 7,722 million (2006: EUR 3,252 million).

The movements in net gains/(losses) not recognised in the income statement include the net movement in the reserve for available-for-sale assets consisting of net unrealised losses in available-for-sale assets of EUR 392 million (2006: EUR 233 million) and net realised gains reclassified to the income statement of EUR 515 million (2006: EUR 602 million). The net movement in the cash flow hedge reserve consisted of the net unrealised gains on cash flow hedges of EUR 315 million (2006: EUR 735 million) and the realised losses reclassified to the income statement of EUR 54 million (2006: losses of EUR 215 million). Share-based payments grants resulted in a credit to equity of EUR 145 million including taxes (2006: EUR 111 million) .. The exercise of staff options resulted in a credit to equity of EUR 624 million (2006: EUR 143 million). The settlement of share options and awards in cash, as a result of the acquisition of ABN AMRO by the consortium banks, resulted in a debit to equity of EUR 743 million.

The number of ordinary shares outstanding, minus treasury shares, at the end of 2007 decreased by 9.7 million to 1,844.1 million. This decrease was the result of 55.5 million ordinary shares acquired from share buy backs, offset 27.6 million ordinary shares issued resulting from exercise of staff options offset and 18.2 million ordinary shares final stock dividend 2006 issued at an average price of EUR 35.61.

The number of ordinary shares outstanding, minus treasury shares, at the end of 2006 decreased by 24.1 million to 1,853.8 million. This decrease was the result of a 32.8 million ordinary shares final stock dividend 2005 issued at an average price of EUR 21.30, a 30.5 million ordinary shares 2006 interim dividend at an

 

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average price of EUR 23.40, 8.5 million shares issued due to the exercise of staff options during 2006 and share buy-backs of 95.9 million ordinary shares.

The EUR 1,164 million decrease of minority interests in 2007 is explained by net reductions and disposals of EUR 1,026 million, EUR 38 million currency translation losses and profit attributable to minority interest of EUR 127 million.

The EUR 367 million increase of minority interests in 2006 is explained by the currency translation loss of EUR 46 million, of which EUR 37 million relates to tier-1 capital ratio and a net addition of EUR 413 million.

 

In 2007, subordinated liabilities decreased by EUR 3,597 million (2006: increase EUR 141 million) to EUR 15,616 million (2006: EUR 19,213 million). The decrease in 2007 is a result of the sale of LaSalle (EUR 1,487 million), currency translation losses (EUR 848 million), reclassifications to liabilities of businesses held for sale (EUR 1,090 million), issuances (EUR 1,496 million) and redemptions (EUR 1,537 million). Issuances in 2007 include: USD 1 billion (EUR 768 million) floating rate lower tier-2 due 2017, non callable before 2012; BRL 550 million (EUR 197 million) floating rate lower tier-2 due 2013 and 2014; and BRL 885 million (EUR 329 million) floating rate lower tier-2 due 2014. Redemptions were EUR 1,537 million and include a USD 750 million (EUR 555 million) 7.125% note issued in 1977, a NLG 750 million (EUR 340 million) 6% note issued in 1997, a NLG 500 million (EUR 227 million) 8.25% note issued in 1992 and a EUR 200 million note issued in 1997.

Issuances in 2006 amount to EUR 4,044 million and include GBP 750 million perpetual subordinated upper tier-2 notes issued on 17 February 2006 paying 5% fixed with a step-up from 17 February 2016, EUR 1.0 billion perpetual preference notes issued on 10 March 2006 and EUR 1.0 billion lower tier-2 Floating Rate Notes (three months Euribor) with a step-up on 14 September 2011 issued on 31 August 2006. Redemptions were EUR 4,430 million and include EUR 2.0 billion 6.5% perpetual subordinated upper tier-2 issued in 2001. The effect of foreign exchange rates reduced the total subordinated liabilities by EUR 980 million. The cost and availability of subordinated liabilities finance are influenced by credit ratings. A reduction in these ratings could increase the cost and reduce market access.

Credit ratings

At 31 December the credit ratings of ABN AMRO were as follows:

	2007		2006
	Long term	Short term	Long term	Short term
Standard & Poor’s	AA-	A-1+	AA–	A–1+
Moody’s	AA2	P-1	Aa3	P–1
Fitch	AA-	F1+	AA–	F1+
DBRS	AA	R-1	AA	R–1

 

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Capital ratios

 

ABN AMRO applies capital adequacy ratios based on the Bank for International Settlements’ guidelines and Dutch Central Bank directives. These ratios compare ABN AMRO’s capital with its assets and off-balance sheet exposure, weighted according to the relative risk involved. Capital is also set aside for market risk associated with ABN AMRO’s trading activities. The minimum tier-1 ratio required is 4% and the minimum total capital ratio is 8%. ABN AMRO comfortably meets these standards with a tier-1 ratio of 12.42% (2006: 8.45%), of which the core tier-1 ratio is 10.59% (2006: 6.18%), and a Bank for International Settlements total capital ratio of 14.61% (2006:11.14%) as at 31 December 2007.

The total capital base increased by 8.5% (2006: decreased by 7.7%) to EUR 33.9 billion at 31 December 2007

 

(2006: EUR 31.3 billion). Risk-weighted assets amounted to EUR 232.3 billion at year-end 2007 (2006: EUR 280.7 billion), a decrease of EUR 48.4 billion (2006: EUR 22.9 billion), or 17.2%, (2006: 11.3%) from the end of the previous year. Securitisation programs in 2007 increased by EUR 35.5 billion (2006: EUR 23.6 billion) to a total of EUR 124.6 billion (2006: EUR 89.1 billion).

The following table analyses ABN AMRO’s capital ratios at 31 December 2007, 2006 and 2005.

(in millions of euros)		2007				2006				2005
Tier 1 capital			28,850				23,720				27,382
Tier 2 capital			9,383				9,372				9,851
Tier 3 capital			272				272				272
Supervisory deductions			(4,567	)			(2,089	)			(3,631	)
Total capital base			33,938				31,275				33,874
Risk-weighted assets on balance			172,059				208,948				192,735
Off-balance			53,611				67,675				59,107
Market risks			6,642				4,081				6,012
Total risk-weighted assets			232,312				280,704				257,854
Tier 1 capital ratio			12.42%				8.45%				10.62%
Total capital ratio			14.61%				11.14%				13.14%

 

Offices and branches

 

At 31 December 2007, the Group operated 665 offices and branches in the Netherlands (2006: 664) and 3,631 offices and branches (2006: 3,868) in 55 other countries and territories (2006: 55). Of these offices and branches, 17 (2006: 449) were in North America, 2,212 (2006: 2,154) in Latin America and the Caribbean, 1,155 (2006: 1,144) were in Europe, 10 (2006: 8) were in the Middle East and Africa and 237 (2006:113) were in the Asia Pacific Region. Approximately 50% (2006: 48%) of the offices and branches are owned (based on square metres) and the remainders are under lease agreements.

 

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RESULTS OF OPERATIONS BY BU

 

Changes to reporting structure and presentation

The results of operations for the years ended 31 December 2006 and 2005 reflect the reconstructed results of operations for the years ended 31 December 2006 and 2005 of the BUs assuming the reporting structure applicable in 2007 had been in place during 2006 and 2005.

As of 2007 the results of BU Global Clients are reported in the regional BUs. This approach has been taken to emphasise close cooperation and synergies between BU Global Clients and the regions. The results of Private Equity are included in Group Functions (previously Private Equity was reported separately).The results of International Diamond & Jewelry group are included in Group Functions (previously included in BU Private Clients). The results of Asset Management France are included in BU Asset Management (previously included in BU Private Clients). These changes are a reflection of the way the business was managed in 2007. The comparative figures of 2006 and 2005 have been restated to reflect these changes.

BU Netherlands

BU Netherlands employs approximately 21,900 full time equivalents and serves its consumer and commercial clients through a network of bankshops, advisory branches, dedicated mid-market corporate client units and large-corporate client units. BU Netherlands also operates via ATMs, integrated call centres, and internet and mobile channels.

 

Selected information

 

The table sets out selected information relating to BU Netherlands, for the years ended 31 December 2007, 2006 and 2005.

(in millions of euros)		2007				2006				2005
Net interest income			3,399				3,121				3,564
Net fee and commission income			885				1,006				909
Net trading income			704				539				451
Results from financial transactions			33				167				0
Share of result in equity accounted investments			60				51				13
Other operating income			399				246				187
Operating income			5,480				5,130				5,124
Operating expenses			3,525				3,540				3,632
Operating result			1,955				1,590				1,492
Loan impairment and other credit risk provisions			406				352				268
Operating profit before tax			1,549				1,238				1,224
Income tax expense			249				281				349
Net operating profit			1,300				957				875
Profit from discontinued operations net of tax			52				505				136
Profit for the year			1,352				1,462				1,011
Total assets			223,067				206,295				201,641
Risk-weighted assets			95,990				81,227				83,675
Full-time equivalent staff			21,932				22,213				22,769
Number of branches and offices			643				643				683
Efficiency ratio (in %)			64.3%				69.0%				70.9%

 

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Results of operations for the years ended 31 December 2007 and 2006

 

Profit for the year decreased by EUR 110 million, or 7.5%, to EUR 1,352 million. Net operating profit from continuing operations increased by EUR 343 million, or 35.8%, to EUR 1,300 million, as the result of an increase of EUR 350 million in operating income, a decrease of EUR 15 million in operating expenses and a decrease of EUR 31 million in income tax expenses, partly offset by an increase of EUR 53 million in loan impairment and other credit risk provisions. Profit from discontinued operations net of tax declined by EUR 453 million, or 89.7%, to EUR 52 million.

Operating income

 

Operating income grew by EUR 350 million or 6.8% to EUR 5,480 million. This mainly increase was due to the gains on sale of Interbank/DMC and ABN AMRO Mellon, an increase in net interest income and higher revenues in Global Markets products, partly offset by lower commissions related to large corporate clients.

 

-

Net interest income increased by EUR 278 million, or 8.9%, driven by healthy loan growth, increases in savings volumes, and improved margins on savings products, partly offset by pressure on loan margins in an increasingly competitive market. Lower prepayment penalties were offset by lower losses on unwinding transactions.

-

Net fee and commission income decreased by EUR 121 million, or 12.0%, due to a decline in securities commissions and commissions related to large corporate clients, partly offset by higher payment and asset management commissions. Net trading income and results from financial transactions increased by EUR 31 million, or 4.4%, reflecting favourable market circumstances.

-	Other operating income increased by EUR 153 million, or 62.2%, mainly due to the tax-exempt gains on the sales of Interbank N.V., DMC Groep N.V. (total EUR 56 million) and ABN AMRO’s 50% share in ABN AMRO Mellon Global Securities Services B.V. (EUR 139 million).

Operating expenses

 

Operating expenses decreased by EUR 15 million, or 0.4%, to EUR 3,525 million reflecting lower administrative expenses (EUR 72 million) as well as lower internal settlement  costs for automation, consultancy and commercial expenses (EUR 70 million) partly offset by higher performance-related bonuses (EUR 68 million). In 2007, a remaining restructuring allowance of EUR 58 million was released; whilst the 2006 operating expenses included a restructuring charge of EUR 48 million.

Loan impairment and other credit risk provisions

 

Loan impairment and other credit risk provision increased by EUR 54 million, or 15.3%, to EUR 406 million. This increase was mainly due to additions in the corporate clients portfolio, partly offset by improvements in the small and medium-sized enterprises and consumer credit portfolios.

Profit from discontinued operations net of tax

 

Profit from discontinued operations net of tax decreased by EUR 453 million, or 89.7%, to EUR 52 million as 2006 included the results from and the gain on the sale of Bouwfonds, whereas 2007 contained the release of part of a provision related to the 2006 sale of Bouwfonds.

 

 

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Results of operations for the years ended 31 December 2006 and 2005

 

Profit for the year increased by EUR 451 million, or 44.6%, to EUR 1,462 million. Profit from continuing operations increased by EUR 82 million, or 9.4%, to EUR 957 million, mainly as the result of a decrease of EUR 92 million in operating expenses, partly offset by an increase of loan impairment and other credit risk provisions of EUR 84 million. Profit from discontinued operations net of tax increased by EUR 369 million, reflecting a EUR 338 million net gain on the sale of the Bouwfonds property development and management activities and a EUR 31 million increase in results from operations (EUR 167 million in 2006 compared with EUR 136 million in 2005).

 

Operating income

 

Operating income was almost flat at EUR 5,130 million. Excluding a EUR 201 million year-on-year difference in net mortgage prepayment penalties, operating income increased by 4.2% to EUR 5,116 million, mainly driven by the consumer and commercial clients business, which increased revenues.

-

Net interest income decreased by EUR 443 million, or 12.4%, which was affected by lower Global Client results and EUR 215 million of mortgage prepayment penalties in 2005, compared with only EUR 14 million in 2006 after neutralisation transactions. This negatively affected the year-on-year growth in net interest income by EUR 201 million.

-	Net fee and commission income increased by EUR 97 million, or 10.7%, as a result of higher commission on banking transactions, securities and asset management.

-	Net trading income increased by EUR 88 million, or 19.5%, mainly due to higher income on the sale of derivatives.

-	Other operating income increased by EUR 59 million, or 31.6%, mainly due to gains on the disposal of real estate.

Operating expenses

 

Operating expenses decreased by EUR 92 million, or 2.5%, to EUR 3,540 million, mainly due to lower personnel costs as a result of a reduction in full-time equivalents (from 22,769 in 2005 to 22,213 in 2006), partly offset by EUR 48 million restructuring charges for the Services, Risk and Global Markets and higher Global Clients expenses.

Loan impairment and other credit risk provisions

 

Loan impairment and other credit risk provisions increased by EUR 84 million, or 31.3%, to EUR 352 million, mainly due to higher provisions for the consumer credit portfolio and the small and medium-sized enterprises (SME) portfolio. The increase in provisioning was related to the overall loan growth and a shift in business mix, due to strong growth of consumer and SME credits, which is fully in line with the BU Netherlands’ strategy.

Profit from discontinued operations net of tax

 

Profit from discontinued operations net of tax increased by EUR 369 million, or 271.3% reflecting the EUR 338 million gain on the sale of the Bouwfonds property development and management activities and the EUR  31 million increase in results from operations (EUR 167 million in 2006 compared with EUR 136 million in 2005).

 

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BU Europe

BU Europe covers 27 countries: 23 countries in Europe (excluding the Netherlands) along with Kazakhstan, Uzbekistan, Egypt and South Africa. BU Europe employs approximately 18,900 fte’s, including support functions serving all BUs operating in the region.

BU Europe provides its consumer and commercial clients with a focused range of financial products and services.

Selected information

 

The table below sets out selected information pertaining to BU Europe including Antonveneta for the years ended 31 December 2007, 2006 and 2005.

 

(in millions of euros)		BU Europe												Consolidation effect												BU Europe (excluding consolidation effect)
																										(non-GAAP measure)
		2007				2006				2005				2007				2006				2005				2007				2006				2005
Net interest income/(expense)			608				375				(105	)			–				–				(72	)			608				375				(33	)
Net fee and commission income			577				698				701				–				–				–				577				698				701
Net trading income/(loss)			(160	)			1,405				1,451				–				–				–				(160	)			1,405				1,451
Results from financial transactions			159				13				62				–				–				46				159				13				16
Share of results in equity accounted investments			4				–				3				–				–				–				4				–				3
Other operating income/(loss)			(23	)			14				73				–				–				–				(23	)			14				73
Income of consolidated private equity holdings			–				–				128				–				–				128				–				–				–
Operating income			1,165				2,505				2,313				–				–				102				1,165				2,505				2,211
Operating expenses			2,512				2,479				2,216				–				–				104				2,512				2,479				2,112
Operating result			(1,347	)			26				97				–				–				(2	)			(1,347	)			26				99
Loan impairment and other credit risk provisions			75				11				(35	)			–				–				–				75				11				(35	)
Operating profit/(loss) before tax			(1,422	)			15				132				–				–				(2	)			(1,422	)			15				134
Income tax expense			(364	)			65				31				–				–				(2	)			(364	)			65				33
Net operating profit/ (loss)			(1,058	)			(50	)			101				–				–				–				(1,058	)			(50	)			101
Profit from discontinued operations net of tax			(111	)			192				–				–				–								(111	)			192				-
Profit/(loss) for the year			(1,169	)			142				101				–				–				–				(1,169	)			142				101
Total assets			500,391				407,174				320,244				–				–				–				500,391				407,174				320,244
Risk-weighted assets			75,026				73,792				34,610				–				–				–				75,026				73,792				34,610
Full-time equivalent staff			18,862				18,067				6,650				–				–				–				18,862				18,067				6,650
Number of branches and offices			1,083				1,090				63				–				–				–				1,083				1,090				63
Efficiency ratio (in %)			215.6%				99.0%				95.8%				–				–				–				215.6%				99.0%				95.5%

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Results of operations for the years ended 31 December 2007 and 2006

 

Profit for the year 2007 decreased by EUR 1,311 million to a loss of EUR 1,169 million. This reflects a decrease in operating income of EUR 1,340 million, an increase in operating expenses of EUR 33 million, an increase in loan impairment and other credit risk provisions of EUR 64 million, and a decrease in discontinued operations (Antonveneta) of EUR 303 million.

Operating income

 

Total operating income decreased by EUR 1,340 million to EUR 1,165 million mainly due to negative fair value adjustments taken in the second half year, related to the credit crisis that developed from the adverse conditions in the sub-prime mortgage market in the United States. BU Europe includes the global hub for Global Markets and therefore the impact of the adjustments has been realised in BU Europe. The negative value adjustments of EUR 1,561 million (EUR 1,139 million after tax) were comprised of a negative valuation adjustment on mono-line insurers of EUR 606 million (EUR 440 million after tax); and a negative valuation adjustment of EUR 955 million on Asset Backed Securities and CDO exposures (EUR 699 million after tax) offset by gains on own credit risk of EUR 267 million recorded in the trading portfolio and EUR 53 million recorded in result from financial transactions.
 

Operating expenses

 

Total operating expenses increased by EUR 33 million to EUR 2,512 million. The operating expenses included a restructuring release of EUR 34 million in 2007, and a restructuring charge of EUR 64 million in 2006 (total decrease of EUR 98 million). Non-staff costs were lower than in 2006 as the benefits from the savings initiatives announced in 2006 came through. The expenses related to bonusses increased with EUR 207 million following the guaranteed amounts and true-ups for Global Markets and Global Clients.

Loan impairment and other credit risk provisions

 

Loan impairment and other credit risk provisions increased by EUR 64 million to EUR 75 million reflecting the change in the credit cycle.

Profit from discontinued operations net of tax

 

Loss from discontinued operations of Antonveneta was EUR 111 million net of purchase accounting from the valuation of intangible assets (amounting to EUR 1,194 million) and fair value adjustments of financial assets and liabilities. The intangible assets are amortised over a period of approximately eight years within operating expenses, however, amortisation of intangible assets ceased when Antonveneta was reported as discontinued operations. The fair value adjustments are substantially amortised through net interest income over a period ranging from one to eight years dependent on the duration of the respective assets and liabilities and adjusted realised gains on sales of related assets and liabilities.

Revenues of Antonveneta decreased due to negative revaluations of the investment portfolios of Antonveneta and Interbanca, and higher than average capital gains realised in 2006. Commercial client revenue growth was lower than targeted. Operating expenses increased due to a restructuring charge for early retirement (EUR 77 million), higher staff costs and additional investments as a result of the integration and the need to bring the compliance function up to ABN AMRO levels. Provisioning increased due to further impairments in the corporate client portfolio. The tax level was impacted by a new Italian budget law and non-tax deductible losses on participations. Profit for the period on a stand-alone basis was a negative EUR 24 million.

 

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Results of operations for the years ended 31 December 2006 and 2005

 

Profit for the year 2006 increased by EUR 41 million to EUR 142 million. This reflects an increase of EUR 192 million in operating income (non-GAAP: plus EUR 294 million), an increase of EUR 263 million in operating expenses (non-GAAP: plus EUR 367 million), and an increase of EUR 46 million in loan impairment and other credit risk provisions and the first time consolidation of Antonveneta (EUR 192 million) reported in discontinued operations.

 

Operating income

 

Operating income increased by EUR 192 million, or 8.3%, to EUR 2,505 million. Excluding the consolidation effect (non-GAAP measure) operating income increased by EUR 294 million, or 13.3%, predominantly on the back of higher Global Markets income, as client income grew strongly.

Equity revenues benefited from increased client activity, particularly in derivative and structured products. Fixed Income Capital Markets had a strong year as it was able to successfully execute a number of deals for regional clients. Financial Markets also had a good year due to the introduction of a number of innovative new products.

The Private Investor Product offering, focused on Germany, Switzerland and Italy grew during the year. Mergers & Acquisitions and Equity Capital Markets revenues were up on the back of strong deal volumes.

Transaction Banking revenues increased due to a strong performance from Central and Eastern Europe, particularly cash flow advisory for Russian and Kazakh energy sector clients.

Other operating income in 2005 included the gain on the sale of the Bishopsgate office in London (EUR 43 million).

Operating expenses

 

Operating expenses increased by EUR 263 million, or 11.9%, to EUR 2,479 million. Excluding the consolidation effect (non-GAAP measure) operating expenses increased by EUR 367 million, or 17.4%, mainly due to EUR 64 million restructuring charges for Global Markets and Services, an increase in expenses linked to the growth in operating income, such as higher bonus accruals and higher costs for compliance with the Sarbanes-Oxley Act and other regulations.

Loan impairment and other credit risk provisions

 

Loan impairment and other credit risk provisions increased by EUR 46 million to a charge of EUR 11 million due to lower releases.

Profit from discontinued operations net of tax

 

As ABN AMRO only took control of Antonveneta on 2 January 2006, ABN AMRO has not made a comparison between the profit for the years ended 31 December 2006 and 2005 for this entity. Profit for the year 2006 was EUR 192 million net of purchase accounting from the valuation of intangible assets (amounting to EUR 1,194 million) and fair value adjustments of financial assets and liabilities.

 

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BU North America

On 22 January 2007, the Group announced the sale of the ABN AMRO Mortgage Group, Inc., ABN AMRO’s US-based residential mortgage broker originating platform and the residential mortgage servicing business, to Citigroup. The closing of this transaction was 28 February 2007, and the results of the divested business are reported as discontinued operations net of tax.

 

On 23 April 2007, the Group announced the sale of ABN AMRO North America Holding Company (AANAHC), which principally consists of the retail and commercial activities of LaSalle Bank Cooperation (LaSalle) to Bank of America for USD 21 billion in cash. The results of the divested business are reported as discontinued operations net of tax. The sale of LaSalle closed on 1 October 2007.

Due to the sale of LaSalle and AAMG, the continuing operations of BU North America now essentially comprise the North America Global Markets and Global Clients operations.

Selected information

 

The table sets out selected information relating to BU North America for the years ended 31 December 2007, 2006 and 2005.

(in millions of euros)		2007				2006				2005
Net interest income			117				143				179
Net fee and commission income			263				291				220
Net trading income			206				150				240
Results from financial transactions			5				(36	)			35
Other operating income			43				21				18
Operating income			634				569				692
Operating expenses			776				801				663
Operating result			(142	)			(232	)			29
Loan impairment and other credit risk provisions			33				(33	)			(148	)
Operating profit/(loss) before tax			(175	)			(199	)			177
Income tax benfit			(85	)			(199	)			(113	)
Net operating profit/(loss)			(90	)			0				290
Profit from discontinued operations net of tax			8,077				1,208				862
Profit for the year			7,987				1,208				1,152
Total assets			79,241				166,590				151,532
Risk-weighted assets			4,905				74,066				80,531
Full-time equivalent staff			1,594				1,585				1,561
Number of branches and offices			7				441				442
Efficiency ratio (in %)			122.4%				140.8%				95.8%

 

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Results of operations for the years ended 31 December 2007 and 2006

 

Profit for the year increased by EUR 6,779 million to EUR 7,987 million. This is the result of an increase in operating income of EUR 65 million, a decrease in operating expenses of EUR 25 million, an increase in loan impairment and other credit risk provisions of EUR 66 million, an increase in income tax expense of EUR 114 million and an increase in profit from discontinued operations of EUR 6,869 million mainly due to the gain on sale of LaSalle. The US dollar depreciated 8.2% on average compared with the euro in 2007 (comparing the average rate in 2007 with the average rate in 2006).

Operating income

 

Operating income increased by 11.4% to EUR 634 million, mainly as a result of the positive impact on the Global Markets activities of the decline in interest rates and the weakening US dollar, despite the difficult market environment created by the sub-prime and credit crises in the second half of the year.

 

Operating expenses

 

Operating expenses decreased by 3.1% to EUR 776 million, with the successful drive for further improved cost management being partly offset by higher bonuses. The operating expenses included a restructuring charge of EUR 9 million in 2007 and “stranded” costs of EUR 122 million. The continuing operations include the global overhead costs allocated to LaSalle that continued to be incurred by ABN AMRO during 2007.

Loan impairment and other credit risk provisions

 

Provisions changed from a net release of EUR 33 million to a net charge of EUR 33 million due to developments related to a small number of corporate credits.

Income tax expense

 

Net tax credits decreased by EUR 114 million to a net tax credit of EUR 85 million.

Profit from discontinued operations net of tax

 

Profit from discontinued operations net of tax increased by EUR 6,869 million to EUR 8,077 million mainly due to the gain on the sale of LaSalle (EUR 7,162 million, of which EUR 7,195 million was booked in the results of the BU North America and a negative amount of EUR 33 million in Group Functions), and the gain on the sale of ABN AMRO Mortgage Group (EUR 147 million).

Results of operations for the years ended 31 December 2006 and 2005

 

Profit for the year 2006 increased by EUR 56 million, or 4.9%, to EUR 1,208 million. Profit from continuing operations decreased by EUR 290 million to EUR 0 million, mainly as a result of a decrease in operating income of EUR 123 million, an increase in operating expenses of EUR 138 million, an increase in loan impairment and other credit risk provisions of EUR 115 million an a decrease in income tax expense of EUR 86 million. Profit from discontinued operations net of tax increased by EUR 346 million. The US dollar depreciated by 2.1% on average compared with the euro in 2006(comparing the average rate in 2006 with the average rate in 2005).

Operating income

 

Operating income decreased by EUR 123 million to EUR 569 million, which is mainly caused by a decrease of the net trading income.

Operating expenses

 

Operating expenses increased by EUR 138 million, or 20.8%, to EUR 801 million, partly due to restructuring charges.

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Loan impairment and other credit risk provisions

 

Loan impairment and other credit risk provisions increased by EUR 115 million, to EUR minus 33 million due to lower releases.

Profit from discontinued operations net of tax

 

Profit from discontinued operations net of tax increased by EUR 346 million, or 40.1%, to EUR 1,208 million.

 

Operating income from discontinued operations increased, mainly due to an improved contribution from all business lines despite challenges in the yield curve. Furthermore, operating income increased due to the impact of the Talman settlement (EUR 110 million). In December 2006, BU North America, through LaSalle, received a favourable judgement in its claim against the US Government related to the 1992 acquisition of the Talman Home Federal Savings and Loan Association.

Operating expenses from discontinued operations increased, mainly due to restructuring charges and higher expenses related to investments in Group Service IT action tracks and increased compliance expenses.

Loan impairment and other credit risk provisions increased, from a net release to a charge, mainly as a result of lower recoveries and releases.

BU Latin America

ABN AMRO has had a presence in Brazil since 1917. In recent years it has consolidated its already strong position in the top tier of Brazilian banks by acquiring Banco Real and Bandepe in 1998, Paraiban in 2001 and Banco Sudameris in 2003. ABN AMRO operates in the Brazilian market as Banco Real.

 

Banco Real functions as a fully integrated consumer and commercial bank on a nationwide basis through stand-alone and in-company branches, points-of-sale and ATMs. At year-end 2007, Banco Real is the third-largest privately owned bank in Brazil.

Since 1 January 2006, ABN AMRO’s Caribbean and Latin American operations outside of Brazil have been reported and managed together with Banco Real to form BU Latin America. Outside of Brazil, BU Latin America focuses primarily on the commercial client segment, although in Paraguay and Uruguay it also focuses on the consumer client segment. Currently, BU Latin America has approximately 31,000 fte’s. The Brazilian operations are BU Latin America’s largest in the region by a substantial margin.

 

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Selected information

 

The table sets out selected information relating to BU Latin America for the years ended 31 December 2007, 2006 and 2005.

(in millions of euros)		2007				2006				2005
Net interest income			3,756				3,006				2,282
Net fee and commission income			560				538				419
Net trading income			157				231				68
Results from financial transactions			415				33				24
Share of result in equity accounted investments			48				55				37
Other operating income			90				49				369
Operating income			5,026				3,912				3,199
Operating expenses			2,829				2,333				1,937
Operating result			2,197				1,579				1,262
Loan impairment and other credit risk provisions			964				720				348
Operating profit before tax			1,233				859				914
Income tax expense			425				158				278
Net operating profit			808				701				636
Profit from discontinued operations net of tax			–				–				–
Profit for the year			808				701				636
Total assets			52,659				39,404				31,951
Risk-weighted assets			34,635				24,242				22,689
Full-time equivalent staff			31,015				28,205				26,501
Number of branches and offices			2,209				2,151				2,153
Efficiency ratio (in %)			56.3%				59.6%				60.6%

Results of operations for the years ended 31 December 2007 and 2006

 

Profit for the year 2007 increased by EUR 107 million, or 15.3%, to EUR 808 million. This is mainly the result of an increase in operating income of EUR 1,114 million, partly offset by an increase of EUR 496 million in operating expenses, an increase of EUR 244 million in loan impairment and other credit risk provisions and an increase of EUR 267 million in income tax expense. The Brazilian Real appreciated by 3.2% on average compared with the Euro in 2007 (comparing the average rate in 2007 with the average rate in 2006).

Operating income

 

Operating income increased by EUR 1,114 million, or 28.5%, driven by the continued strong growth of the Brazil loan portfolio, gains in the local investment portfolio, as well as gains on the sale of stakes in Brazilian credit analysis provider Serasa, Brazilian stock exchange Bovespa, and Brazilian futures exchange Bolsa de Mercados & Futuros.

At constant foreign exchange rates, the Brazilian retail banking business grew operating income by 24%, fuelled by a 31% increase in the retail loan portfolio at interest spreads that on balance declined mainly due to the fact that growth in the SME portfolio was higher than in the higher-margin households portfolio.

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Total operating income of the Aymoré consumer finance activities increased by 18% at constant foreign exchange rates on the back of continued strong loan growth that was partly offset by a decline in net interest margins. Commercial banking realised an increase in operating income of 49% at constant foreign exchange rates, mainly on the back of accelerated loan growth and investment banking activities.

 

Operating expenses

 

Operating expenses increased by EUR 496 million, or 21.3%, to EUR 2,829 million, reflecting the impact of a new collective labour agreement that came into effect in September 2007, higher bonus accruals, strong growth in business activities, and investments in the expansion of the distribution infrastructure in Brazil, with Banco Real opening 47 new branches, 13 mini-branches and 735 new ATMs during 2007.

Loan impairment and other credit risk provisions

 

Loan impairment and other credit risk provisions increased by EUR 244 million, or 33.9%, reflecting continued strong loan growth.

Income tax expense

 

Income tax expense increased by EUR 267 million to EUR 425 million, as 2006 tax credits did not recur.

Results of operations for the years ended 31 December 2006 and 2005

 

Profit for the year 2006 increased by EUR 66 million, or 10.4%, to EUR 701 million. This was mainly the result of an increase of EUR 714 million in operating income, an increase of EUR 396 million in operating expenses and an increase of EUR 372 million in loan impairment and other credit risk provisions. The Brazilian real appreciated by 8.3% on average compared with the Euro in 2006 (comparing the average rate in 2006 with the average rate in 2005).

Operating income

 

Operating income increased by EUR 714 million, or 22.3%, to EUR 3,912 million, mainly due to the continued strong growth of the Brazil credit portfolio and a further improvement in non-interest income, partly offset by the inclusion in 2005 of the book profit on the sale of Real Seguros (EUR 229 million in other operating income).

At constant foreign exchange rates, the Brazilian retail banking business grew by 19.7%, fuelled by a 31.8% increase in the retail loan portfolio at slightly lower net interest margins.

 

For the Aymoré consumer finance activities, operating income was up by 34.4% due to strong loan growth. Average balances grew by 32.1%. Commercial banking, which contributed 6.2% to the operating income from Brazil, increased its operating income by 18.8% on the back of loan growth, higher client-related trading income and increased net fee and commission income.

Operating expenses

 

Operating expenses increased by EUR 396 million, or 20.4%, to EUR 2,333 million, mainly due to higher investments related to Group Services IT outsourcing projects, the impact of the successive new collective labour agreements (collective labour agreements that came into effect in September 2005 and September 2006) and an increase in performance-related bonuses. The operating expense growth should also be seen in the context of an 8% increase in the number of customers in Brazil to 13.1 million at year-end 2006, as well as further expansion in the network of sales outlets.

 

 

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Loan impairment and other credit risk provisions

 

Loan impairments and other credit risk provisions increased by EUR 372 million, or 106.9%, to EUR 720 million, reflecting an increase in delinquencies in Brazil, mainly in the first half of the year 2006, as a result of the strong increase in credit availability in Brazil that started in 2005 and the high growth in the loan portfolio.

Income tax expense

 

The overall effective tax rate for the year 2006 declined by 12.0 percentage points to 18.4% as a result of tax credits related to the acquisition of Banca Intesa’s minority holding in Banco ABN AMRO Real.

BU Asia

ABN AMRO has been operating for well over 100 years in several Asian countries including Indonesia, China, Singapore and Japan. BU Asia now covers 16 countries and territories, operating through branches and offices. BU Asia’s client base includes commercial as well as consumer and private banking clients. It employs approximately 20,000 fte’s, including support functions serving all BUs operating in the region.

Selected information

 

The table sets out selected information pertaining to BU Asia for the years ended 31 December 2007, 2006 and 2005.

(in millions of euros)		2007				2006				2005
Net interest income			831				612				647
Net fee and commission income			1,083				797				530
Net trading income			389				358				214
Results from financial transactions			48				(7	)			78
Share of result in equity accounted investments			66				62				73
Other operating income			11				47				44
Operating income			2,428				1,869				1,586
Operating expenses			1,803				1,419				1,129
Operating result			625				450				457
Loan impairment and other credit risk provisions			228				213				35
Operating profit before tax			397				237				422
Income tax expense			121				107				102
Net operating profit			276				130				320
Profit from discontinued operations net of tax			–				–				–
Profit for the year			276				130				320
Total assets			76,278				69,800				64,482
Risk-weighted assets			17,556				16,552				16,358
Full-time equivalent staff			19,834				14,141				11,827
Number of branches and offices			213				114				144
Efficiency ratio (in %)			74.3%				75.9%				71.2%

 

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Results of operations for the years ended 31 December 2007 and 2006

 

Profit for the year increased by EUR 146 million, or 112.3%, to EUR 276 million. This reflects an increase of EUR 559 million in operating income, an increase of EUR 384 million in operating expenses and an increase of EUR 15 million in loan impairment and other credit risk provisions.

Operating income

 

Operating income increased by EUR 559 million, or 29.9%, to EUR 2,428 million, driven by strong growth in

 

consumer banking and higher operating income in the commercial segment.

Client growth in the consumer banking segment was mainly driven by the Van Gogh Preferred Banking business a relationship banking approach to mass affluent clients serviced through a dedicated point of contact. The number of clients in Asia increased by 12.3% to 3.7 million and the number of credit cards in Asia increased by 18.1% to 3.3 million. In addition, commercial client revenues increased as a result of higher Merger & Acquisition advisory fees, clients transactions executed and higher Global Markets revenues.

-	Net fee and commission income increased by EUR 286 million, mainly due to growth in Mergers & Acquisition advisory fees, execution of Equity Capital Markets transactions, and higher transaction banking revenues.

-	Net trading income increased by EUR 31 million to EUR 389 million, mainly as a result of Global Markets activities.

Operating expenses

 

Operating expenses increased by EUR 384 million, or 27.1% to EUR 1,803 million, due to higher staff costs and bonus accruals as a result of increased revenues, continued investments in the expansion of the branch network and the consolidation of Prime Bank and Taitung Business Bank. Since the end of 2006, 16 branches across China, India, Indonesia, Hong Kong and Malaysia have been opened, bringing the total number of branches in Asia to 186, including 91 branches from recent acquisitions. In 2007, operating expenses included a restructuring release of EUR 2 million, compared with a restructuring charge of EUR 14 million booked in 2006.

Loan impairment and other credit risk provisions

 

Loan impairment and other credit risk provisions increased by EUR 15 million to EUR 228 million, reflecting strong growth in the consumer finance businesses, particularly in India and Indonesia. The provisioning level in Taiwan was significantly lower than in the previous year.

Results of operations for the years ended 31 December 2006 and 2005

 

Profit for the year decreased by EUR 190 million, or 59.4%, to EUR 130 million. This reflected an increase of EUR 283 million in operating income, an increase of EUR 290 million in operating expenses and an increase of EUR 178 million in loan impairment and other credit risk provisions.

Operating income

 

Operating income increased by EUR 283 million, or 17.8%, to EUR 1,869 million, mainly driven by strong client growth in consumer banking and higher operating income in the commercial segment.

 

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Client growth in the consumer banking segment was mainly driven by the Van Gogh Preferred Banking business, a relationship banking approach to mass affluent clients serviced through a dedicated point of contact. The number of clients in Asia increased by 18% to 3.3 million and the number of credit cards in Asia increased by 19% to 2.8 million. The strongest-performing regions from a consumer banking perspective were India, China,

 

Hong Kong and Taiwan, United Arab Emirates and Indonesia. The higher operating income in the commercial business segment was mainly driven by growth in Hong Kong, United Arab Emirates, Pakistan and China. Australia grew by 59%, driven by strong growth in its infrastructure capital business.

-	Net fee and commission income increased by EUR 267 million, or 50.4%, mainly due to payment services following the growth in the credit card business, as a result of large infrastructure and capital deals in Australia and due to higher Global Client results.

-	Net trading income increased by EUR 144 million to EUR 358 million, mainly as a result of higher equity finance income in Hong Kong and Taiwan.

-	Results from financial transactions decreased by EUR 85 million, or 109.0%, mainly due to lower Global Client results.

Operating expenses

 

Operating expenses increased by EUR 290 million, or 25.7%, to EUR 1,419 million, which was mainly fuelled by staff hirings (from 11,827 full-time equivalents in 2005 to 14,141 full-time equivalents in 2006), continued investments in the expansion of the branch network in support of ABN AMRO’s Van Gogh Preferred Banking growth ambitions, continued growth in the consumer and credit card business and EUR 14 million restructuring charges for Global Markets, Risk and Services.

Loan impairment and other credit risk provisions

 

Loan impairment and other credit risk provisions increased by EUR 178 million to EUR 213 million, mainly reflecting higher provisions for the credit card receivables in Taiwan.

BU Private Clients

BU Private Clients offers private banking services to wealthy individuals and institutions with EUR 1 million or more in net investable assets. With Assets under Administration of EUR 140 billion in 2007, BU Private Clients is one of the top five private banks in Europe. BU Private Clients has more than 3,000 fte’s and operates in 16 countries.

BU Private Clients’ products are based on an open architecture model, enabling the BU to offer its clients the best available products regardless of the actual provider.

As of 1 January 2007, the International Diamond & Jewelry Group and Asset Management France are included in Group Functions and BU Asset Management respectively (both were previously included in BU Private Clients) to align with the way the business is managed. In the fourth quarter of 2007, BU Private Clients completed the sale of the UK Private banking unit to SG Hambros and the sale of Vermogensgroep back to its former shareholders.

 

 

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Selected information

 

The table sets out selected information relating to BU Private Clients for the years ended 31 December 2007, 2006 and 2005.

(in millions of euros)		2007				2006				2005
Net interest income			461				495				480
Net fee and commission income			677				610				527
Net trading income			75				57				38
Results from financial transactions			6				4				11
Share of result in equity accounted investments			–				2				1
Other operating income			168				75				100
Operating income			1,387				1,243				1,157
Operating expenses			915				883				850
Operating result			472				360				307
Loan impairment and other credit risk provisions			–				6				6
Operating profit before tax			472				354				301
Income tax expense			116				103				66
Profit for the year			356				251				235
Total assets			19,623				18,550				16,593
Risk-weighted assets			8,075				7,671				7,339
Assets under Administration (in billions of EUR)			140				142				131
Full-time equivalent staff			3,064				3,212				3,942
Number of branches and offices			95				96				85
Efficiency ratio (in %)			66.0%				71.0%				73.5%

Results of operations for the years ended 31 December 2007 and 2006

 

Profit for the year increased by EUR 105 million, or 41.8%, to EUR 356 million. This reflected an increase in operating income of EUR 144 million, an increase in operating expenses of EUR 32 million and an increase in income tax expense of EUR 13 million. The 2007 results included the gain on the sale of its Latin American Private Banking operations in Miami and Montevideo, including the Latin American portfolios in Switzerland and Luxembourg (EUR 72 million net).

Operating income

 

Operating income increased by EUR 144 million, or 11.6%, to EUR 1,387 million primarily driven by increases in the Netherlands and Asia, as well as the gain on the sale of the Latin American Private Banking operations in Miami and Uruguay, including the Latin American portfolios in Switzerland and Luxembourg (EUR 77 million).

-	Net interest income decreased by EUR 34 million, or 6.9%, mainly due to strong pressure on margins resulting from the flat yield curve over 2007. This specifically impacted margins on savings accounts.

-

Non-interest income increased by 14.3% or EUR 178 million mainly driven by higher net fee and commission income, reflecting higher volumes in non-interest related products such as stocks, investment funds and structured products. Assets under Administration decreased by EUR 5.7 billion to EUR 140.4 billion, reflecting the sale of the Miami, Uruguay, Vermogensgroep and UK Private Banking operations. Financial market conditions, especially in the fourth quarter of 2007, resulted in portfolio value reduction which was offset by a net inflow of new money in 2007.

 

-	Other operating income in 2007 included the gain on the sale of the Latin American Private Banking operations in Miami and Uruguay, including the Latin American portfolios in Switzerland and Luxembourg (EUR 77 million).

 

 

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Operating expenses

 

Operating expenses increased by EUR 32 million, or 3.6%, to EUR 915 million, reflecting better cost management across all regions.

Results of operations for the years ended 31 December 2006 and 2005

 

Profit for the year increased by EUR 16 million, or 6.8%, to EUR 251 million. This reflected an increase in operating income of EUR 86 million, an increase in operating expenses of EUR 33 million and an increase in income tax expense of EUR 37 million.

Operating income

 

Operating income increased by EUR 86 million, or 7.4%, to EUR 1,243 million driven by increases across all regions (especially the Netherlands, France and Germany) and the successful integration of Bank Corluy into Private Clients Belgium.

 

-	Net interest income grew by EUR 15 million, or 3.1%, on the back of higher volumes of client deposits.

-

The increase in non-interest income was driven by net fee and commission income, which grew by EUR 83 million, or 15.7%, reflecting the client appetite for equity products and Private Investor Products. Assets under Administration increased by EUR 11 billion to EUR 142 billion, reflect an increase in net new assets and higher net asset values due to an improved performance by the financial markets and the inclusion of Vermogensgroep in 2006. The asset mix remained relatively stable with 69% in securities and 31% in cash.

-	Other operating income in 2005 included the gain on the sale of Nachenius, Tjeenk & Co during 2005 (EUR 38 million).

Operating expenses

 

Operating expenses increased by EUR 33 million, or 3.9%, to EUR 883 million as a consequence of the merger of Banque Neuflize and Banque OBC in France, higher value-added tax in France following a change in legislation, higher expenses in Asia and Latin America to fund future growth and higher compliance costs. The 2005 results included EUR 45 million restructuring charges related to the merger of Banque Neuflize and OBC in France.

BU Asset Management

BU Asset Management is ABN AMRO’s global asset management business, managing approximately EUR 199 billion in specialist mandates and mutual funds. BU Asset Management has more than 1,800 fte’s and operates in 26 countries worldwide, offering investment products in all major regions and asset classes. Its products are distributed directly to institutional clients such as central banks, pension funds, insurance companies and leading charities. Funds for private investors are distributed through ABN AMRO’s consumer and private banking arms, as well as via third-party distributors such as insurance companies and other banks. The business from institutional clients represents just over half of the assets managed by BU Asset Management. Consumer and third-party clients account for a further 30%, and the remainder is in discretionary portfolios managed for BU Private Clients.

 

 

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Selected information

 

The table sets out selected information relating to BU Asset Management for the years ended 31 December 2007, 2006 and 2005.

As from December 2007 the results of BU Asset Management are classified under discontinued operations due the transfer of ABN AMRO Asset Management to Fortis, which is expected to be effective in the second quarter of 2008.

(in millions of euros)		2007				2006				2005
Profit from discontinued operations net of tax			186				254				189
Profit for the year			186				254				189
Total assets			1,419				1,402				1,199
Risk-weighted assets			876				870				823
Assets under Management (in billions of EUR)			199				193				176
Full-time equivalent staff			1,874				1,630				1,722
Number of branches and offices			24				22				33

As of 1 January 2007, Asset Management France has been transferred from BU Private Clients to BU Asset Management. The comparative segment figures for 2006 and 2005 have been restated.

 

Profit from discontinued operations net of tax for the years ended 31 December 2007 and 2006

 

Profit from discontinued operations net of tax decreased by EUR 68 million, or 26.8%, to EUR 186 million. This was mainly the result of an increase in operating income (EUR 86 million), an increase in operating expenses (EUR 123 million) and an increase in income tax expense (EUR 31 million).

The 2006 results included the gain on the sale of the Asset Management operations in Curacao (EUR 28 million), the gain on the sale of the domestic asset management operations in Taiwan (EUR 38 million) and the gain on the sale of the US mutual fund business (EUR 17 million). There were no divestments in 2007.

Operating expenses increased by EUR 123 million, mainly due to EUR 50 million transition and integration costs as well as higher bonus costs following improved performance.

The overall effective tax rate for the year increased from 22.3% in 2006 to 35.9% in 2007, mainly due to an impairment of a deferred tax asset (DTA) taken in 2007. The income tax rate was also influenced in 2006 by the tax-exempt gain on the sale of the asset management operations in Curacao, Taiwan and the United States.

Profit from discontinued operations net of tax for the years ended 31 December 2006 and 2005

 

Profit from discontinued operations net of tax increased by EUR 65 million, or 34.4%, to EUR 254 million. This was mainly the result of an increase in operating income (EUR 123 million), an increase in operating expenses (EUR 32 million) and an increase in income tax expense (EUR 26 million).

 

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Operating income increased by EUR 123 million, reflecting the higher Assets under Management levels, the higher fee levels on existing products, a further shift in the asset mix towards more profitable products and the impact of divestments. The 2006 results included the gain on the sale of the Asset Management operations in Curacao (EUR 28 million), the gain on the sale of the domestic asset management operations in Taiwan (EUR 38 million) and the gain on the sale of the US mutual fund business (EUR 17 million). The 2005 results included the sale of operations in Kazakhstan (EUR 13 million).

Operating expenses increased by EUR 32 million. Lower expenses due to the sale of the trust business were more than offset by higher bonus accruals and the inclusion of International Asset Management Limited.

The overall effective tax rate for the year increased mainly due to lower levels of tax-exempt seed capital gains. The income tax expense was also influenced in 2006 by the tax-exempt gain on the sale of the asset management operations in Curacao, Taiwan and the United States. The income tax expense in 2005 was influenced by the inclusion of the tax-exempt gain on the sale of the trust business.

Group Functions

 

Group Functions delivers value-added support across the Group in areas from Risk to Finance and from Human Resources to Sustainability, while balancing global control with local flexibility and expertise. Group Functions includes the operating results of Group Services, Private Equity and International Diamonds & Jewelry Group (ID&JG) and the proprietary trading and futures results from Global Markets.

Group Functions including Private Equity and Services has approximately 3,000 employees.

 

Private Equity

 

The business model of ABN AMRO’s Private Equity unit – branded as ABN AMRO Capital – involves providing capital and expertise to non-listed companies in a variety of sectors. By obtaining, in most cases, a majority stake, Private Equity has the ability to influence the company’s growth strategy and increase its profitability. It then aims to sell its shareholding at a profit after a number of years. Private Equity specialises in European mid-market buyouts, but also manages a portfolio of investments in Australian buyouts, non-controlling and controlling shareholdings in small to medium-sized Dutch companies (‘participaties’), and dedicated media and telecom sector investments. It operates from seven offices across Europe and Australia and has 43 employees. Due to the change in management control, the portfolio of investments managed by the independent management company will no longer be consolidated, but instead will be carried at fair value with value changes directly impacting the profit and loss account. The results from Private Equity are consolidated into Group Functions. The comparative segment figures for 2006 and 2005 have been restated.

 

Services

 

ABN AMRO’s Services organisation is responsible for delivering internal support services across ABN AMRO’s global, regional and product BUs worldwide. Its core areas are IT, Operations, and Corporate Services. The Services organisation was created in 2006, bringing together all services units within ABN AMRO and building on the experience of the Group Shared Services (GSS) programme, which was initiated in 2004. It currently has approximately 1,000 employees.

 

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Selected information

 

The table sets out selected information pertaining to Group Functions, for the years ended 31 December 2007, 2006 and 2005.

(in millions of euros)		IFRS												Consolidation effect (1)												Excluding consolidation effect
																										(non-GAAP measure)
		2007				2006				2005				2007				2006				2005				2007				2006				2005
Net interest income/(expense)			(820	)			(484	)			(283	)			(220	)			(342	)			(208	)			(600	)			(142	)			(75	)
Net fee and commission income			230				109				126				–				–				–				230				109				126
Net trading income/(loss)			(95	)			109				52				3				(3	)			2				(98	)			112				50
Results from financial transactions			882				620				973				46				15				(11	)			836				605				984
Share of results in equity accounted investments			93				71				118				1				–				–				92				71				118
Other operating income			688				462				17				–				–				(6	)			688				462				23
Income of consolidated private equity holdings			3,836				5,313				3,509				3,836				5,313				3,509				–				–				–
Operating income			4,814				6,200				4,512				3,666				4,983				3,286				1,148				1,217				1,226
Operating expenses			5,120				5,490				3,486				3,634				4,939				3,262				1,486				551				224
Operating result			(306	)			710				1,026				32				44				24				(338	)			666				1,002
Loan impairment and other credit risk provisions			(2	)			142				140				–				–				–				(2	)			142				140
Operating profit/(loss) before tax			(304	)			568				886				32				44				24				(336	)			524				862
Income tax expense/(benefit)			(510	)			(149	)			22				32				44				24				(542	)			(193	)			(2	)
Net operating profit			206				717				864				–				–				–				206				717				864
Profit from discontinued operations net of tax			(27	)			(85	)			(64	)			–				–				–				(27	)			(85	)			(64	)
Profit for the year			179				632				800				–				–				–				179				632				800
Total assets			72,535				77,849				93,162				1,698				4,537				3,477				70,837				73,312				89,685
Risk-weighted assets			(4,751	)			2,284				11,829				–				–				–				(4,751	)			2,284				11,829
Full-time equivalent staff			16,248				35,384				31,717				13,168				30,881				27,775				3,080				4,503				3,942
Number of branches and offices			4				7				9				–				–				–				4				7				9
Efficiency ratio (in %)			106.4%				88.5%				77.3%				99.1%				99.1%				99.3%				129.4%				45.3%				18.3%

 

(1)	This is the impact per line item of the private equity investments which are required to be consolidated under IFRS. See the accounting policies section of the financial statements.

 

Private Equity made new investments totalling EUR 503 million in new investments in 2007. A total of EUR 1,227 million in proceeds was realised from divestments. As a result of investments, divestments and unrealised fair market value changes, currency and other effects, the value of the total portfolio under management by Private Equity decreased from EUR 2,309 million in 2006 to EUR 2,035 million in 2007.

The fair value of the unquoted buy-out portfolio at year-end 2006 amounted to EUR 1,729 million. The fair market value of the unquoted corporate investment portfolio amounted to EUR 533 million. The fair market value of the quoted portfolio was EUR 47 million.

 

 

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Results of operations for the years ended 31 December 2007 and 2006

 

Profit for the year decreased by EUR 453 million, or 71.7%, to EUR 179 million. This was the result of a decrease in operating income of EUR 1,386 million (non-GAAP: minus EUR 69 million), a decrease in operating expenses of EUR 370 million (non-GAAP: plus EUR 935 million) and an increase in tax benefit of EUR 361 million (non-GAAP: plus EUR 349 million).

Operating income

 

Operating income decreased by EUR 1,386 million, or 22.4%, to EUR 4,814 million. Non-GAAP: EUR 1,148 million, mainly due to lower proprietary trading results of the Global Markets activities reported in Group Functions and higher funding costs. This was partly offset by gains on the credit default swap portfolio that benefited due to the general widening of the credit spreads that occurred throughout the year (EUR 116 million), a gain on own credit risk (EUR 115 million), both recorded in result from financial transactions, and the gain on the sale of Capitalia whose shares were settled for Unicredit shares (EUR 624 million), recorded in other income.

-	Net interest income decreased by EUR 336 million (non-GAAP: minus EUR 458 million), mainly due to higher funding costs as a result of higher interest rates and credit spreads.

-	Net trading income decreased by EUR 204 million (non-GAAP: minus EUR 210 million) to a negative EUR 95 million (non-GAAP: minus EUR 98 million), mainly due to lower proprietary trading results.

-

Other operating income increased by EUR 226 million to EUR 688 million due to a revaluation gain on ABN AMRO’s stake in Capitalia (EUR 624 million) and due to the inclusion in 2006 of the gain on sale of the Futures business (EUR 229 million) and the gain on sale of Kereskedelmi és Hitelbank Rt. (EUR 208 million).

Operating expenses

 

Operating expenses decreased by EUR 370 million (non-GAAP: increase of EUR 935 million). Operating expenses in 2007 included a provision for the U.S. Department of Justice investigation (EUR 365 million), transaction- related advisory fees (EUR 211 million), the break-up fee paid to Barclays (EUR 200 million), costs of accelerated vesting of share-based payments (EUR 117 million) and transition and integration costs (EUR 95 million). The results in 2006 included a EUR 5 million restructuring charge, whereas 2007 included a restructuring release of EUR 14 million.

Loan impairment and other credit risk provisions

 

Loan impairment and other credit risk provisions decreased by EUR 144 million to a release of EUR 2 million. The 2006 results included a provision for the Futures business (EUR 72 million) and a loan impairment for the International Diamonds & Jewelry Group.

Income tax expense

 

Income tax expense declined by EUR 361 million (non-GAAP measure EUR 349 million) to a benefit of EUR 510 million (non-GAAP: EUR 542 million), mainly due to higher tax-exempt gains on disposals as well as a tax release.

 

Results of operations for the years ended 31 December 2006 and 2005

 

Profit for the year decreased by EUR 168 million, or 21.0%, to EUR 632 million. This was mainly the result of an increase of EUR 1,688 million in operating income, an increase of EUR 2,004 million in operating expenses, and a decrease of EUR 171 million in income tax expense.

 

 

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Operating income

 

Operating income increased by EUR 1,688 million, or 37.4% to EUR 6,200 million, mainly due to higher income from consolidated private equity investments and higher unrealised fair market value returns from unconsolidated investments partially offset by increased interest expenses. Excluding the consolidation effect (non-GAAP measure) operating income decreased by EUR 9 million to EUR 1,217 million, mainly due to lower asset and liability management results and a lower contribution from ABN AMRO’s share of result in equity accounted investments, partly offset by the gain on sale of Kereskedelmi és Hitelbank Rt. (EUR 208 million), the gain on sale of the Futures business (EUR 229 million), a provision for balance-sheet adjustments in 2005 (minus EUR 86 million in 2005) and higher operating income in Private Equity.

The lower asset and liability management income was due to higher funding costs as a result of higher Euro and US dollar interest rates, lower returns on the investment portfolio as a result of the flattening yield curve, and marked-to-market losses on capital and risk hedging (credit default swap portfolio) as a result of the tightening in credit spreads. The loss on capital and risk hedging (credit default swap portfolio) of EUR 261 million in 2006 will be recovered over time as the underlying asset mature.

-	Net interest income decreased by EUR 201 million, due to higher interest expenses from consolidated private equity investments. Excluding the consolidation effect (non-GAAP measure), net interest income decreased by EUR 67 million and includes the funding costs from preferred shares.

-	Results from financial transactions decreased by EUR 353 million to EUR 620 million. Excluding the consolidation effect (non-GAAP measure), results from financial transactions decreased by EUR 379 million, mainly due to lower results on sale of bonds and credit default swaps.

-

Share of result in equity accounted investments decreased by EUR 47 million, due to the absence of the contribution of ABN AMRO’s stake in Antonveneta, which was consolidated as from 2006, and Kereskedelmi és Hitelbank Rt., which was sold in 2006, partly offset by a higher contribution from ABN AMRO’s stake in Capitalia.

-

Other operating income increased by EUR 445 million to EUR 462 million. Excluding the consolidation effect (non-GAAP measure), other operating income increased by EUR 439 million, mainly due to the inclusion of the gain on sale of Kereskedelmi és Hitelbank Rt. (EUR 208 million) and the gain on sale of the Futures business (EUR 229 million).

Operating expenses

 

Operating expenses increased by EUR 2,004 million, or 57.5%, to EUR 5,490 million, mainly due to higher expenses from consolidated private equity investments. Excluding the consolidation effect (non-GAAP measure) operating expenses increased EUR 327 million to EUR 551 million. The results in 2006 included EUR 5 million restructuring charge, higher costs for compliance with the Sarbanes-Oxley Act, Basel II and other regulations. The results in 2005 included a release of the post-retirement healthcare benefit provision (EUR 392 million), a provision for compensating holidays not taken by staff (EUR 56 million) and the costs of the United States regulatory fine (EUR 67 million).

Loan impairment and other credit risk provisions

 

Loan impairment and other credit risk provisions increased by EUR 2 million to EUR 142 million, mainly due to higher provisions in the International Diamond & Jewelry Group, partly offset by lower provisions in Private Equity. The 2006 results included a provision for the Futures provisions (EUR 72 million) and the 2005 results included mainly provisions related to incurred-but-not-identified loan losses, which as from 2006 were allocated to the respective BUs.

 

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Income tax expense

 

Income tax expense decreased by EUR 171 million to minus EUR 149 million. Excluding the consolidation effect (non-GAAP measure) income tax expense decreased by EUR 191 million to minus EUR 193 million, mainly due to substantial tax credits in the Netherlands and some other countries, the impact on deferred taxes of the change in the Netherlands tax rate and the impact of the tax-exempt gain on the sale of Kereskedelmi és Hitelbank Rt. (EUR 208 million). The results in 2005 included a tax release of EUR 100 million and the impact of a tax-exempt United States regulatory fine (EUR 67 million).

Profit from discontinued operations net of tax

 

Profit from discontinued operations net of tax decreased EUR 21 million to minus EUR 85 million, due to certain operating income and operating expenses, largely stranded costs, related to the sale of LaSalle.

 

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RISK AND CAPITAL MANAGEMENT

Supervision and Regulation

Regulation in the Netherlands

 

General

 

Holding and its subsidiaries, on a worldwide basis, are regulated in the Netherlands by the Dutch Central Bank and the Netherlands Authority for the Financial Markets, or “AFM”.

ABN AMRO’s regulatory system in the Netherlands is a comprehensive system based on the provisions of the new Financial Supervision Act which came into effect on 1 January 2007. The Financial Supervision Act has replaced, among others, the Act on the Supervision of the Credit System 1992 without affecting the existing supervisory system. The Financial Supervision Act sets out rules regarding prudential supervision (by the Dutch Central Bank) and supervision of conduct (by the AFM). Prudential supervision focuses on the solidity of financial undertakings and contributes to the stability of the financial sector. Supervision of conduct focuses on orderly and transparent financial market processes, clear relations between market parties and due care in the treatment of clients (including supervision of the securities and investment businesses).

The Bank is a “universal bank” under the terms of the Financial Supervision Act because it is engaged in the banking business as well as the securities business. Some of the provisions of the Financial Supervision Act may restrict the Bank’s ability to make capital contributions or loans to its subsidiaries and to make dividends and distributions to Holding.

Supervision of credit institutions

 

In general, under the Financial Supervision Act, credit institutions are supervised by the Dutch Central Bank. No enterprise or institution established in the Netherlands may pursue the business of a credit institution unless it has obtained prior authorisation from the Dutch Central Bank. Its supervisory activities under the Financial Supervision Act focus on supervision of solvency, liquidity and administrative organisation, including internal control and risk management. If, in the opinion of the Dutch Central Bank, a credit institution fails to comply with the rules and regulations concerning solvency, liquidity or administrative organisation, the Dutch Central Bank will so notify the credit institution, and it may instruct the credit institution to behave in a certain manner. If the credit institution does not respond to any such instructions to the satisfaction of the Dutch Central Bank, the Dutch Central Bank may exercise additional supervisory measures, which may include the imposition of fines. The Financial Supervision Act provides that each supervised credit institution must submit periodic reports to the Dutch Central Bank. In accordance with this requirement the Bank files monthly reports with the Dutch Central Bank. At least one monthly report for each given year must be certified by an external auditor. The report to be certified is selected by an external auditor at his or her discretion.

 

Solvency supervision

 

The solvency rules require that ABN AMRO maintains a minimum level of total capital to support the risk-weighted total value of balance sheet assets and off-balance sheet items, the latter of which includes guarantees, documentary credits, certain interest and currency-related contracts, unused portions of committed credit facilities with an original maturity of over one year, note issuance facilities and revolving underwriting facilities, as well as the market risk for financial instruments in the trading book. This minimum level of total capital is the Capital Adequacy Ratio. The risk-weighting considers the debtor’s risk, which depends on the debtor’s classification, whether or not security is provided, and the country of origin of the debtor. The legally required minimum Capital Adequacy Ratio is currently 8% but in practice a minimum ratio of 10.5% is agreed with the Dutch Central Bank. The solvency rules are applied to the worldwide assets of Dutch credit institutions.

 

 

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For ABN AMRO total capital consists of core capital (also referred to as Tier 1 capital) and secondary capital (also referred to as Tier 2 capital). ABN AMRO also is permitted to maintain an additional form of regulatory capital, Tier 3 capital, to support the market risks of financial instruments in ABN AMRO’s trading book and foreign exchange risk of all business activities. Tier 1 capital consists of those parts of shareholders’ equity and minority interests that qualify as Tier 1 capital and subordinated liabilities that qualify as Tier 1 capital. Secondary or Tier 2 capital is divided into upper Tier 2 capital and lower Tier 2 capital. Upper Tier 2 capital consists of revaluation reserves and perpetual subordinated liabilities; lower Tier 2 capital consists mainly of long-term subordinated liabilities. Tier 3 capital consists of subordinated liabilities that have a minimum original maturity of at least two years, are not subject to redemption prior to maturity without the prior written consent of the Dutch Central Bank (other than in the event of a winding-up of the Bank) and are subject to a provision which provides that neither interest nor principal may be paid if, prior to or as a result of such payment, ABN AMRO’s Capital Adequacy Ratio would be less than the required minimum.

 

The amount of lower Tier 2 capital may not exceed 50% of the amount of Tier 1 capital, and the amount of Tier 2 capital included in total capital may not exceed the amount of Tier 1 capital. In addition, Tier 3 capital may not exceed 250% of the amount of Tier 1 capital that is necessary to support market and foreign exchange risks and the sum of Tier 2 and Tier 3 capital may not exceed Tier 1 capital. Goodwill and interests of more than 10% in non-consolidated banking and financial subsidiaries must be deducted from Tier 1 capital and total capital, respectively.

Capital adequacy framework (Basel II)

 

On 26 June 2004, the Basel Committee on Banking Supervision endorsed the publication of the ‘International Convergence of Capital Measurement and Capital Standards: a Revised Framework’, commonly referred to as Basel II. The Capital Requirements Directive (CRD), representing the translation of Basel II to EU legislation and replacing the Capital Adequacy Directive (CAD), was approved by the European Parliament in September 2005. This acceptance by the European Parliament cleared the way in Europe for the implementation of the CRD, with a published compliance date of 1 January 2008.

 

The implementation process of Basel II into Dutch legislation (Financial Supervision Act) and regulations was completed on 22 December 2006 when the Dutch Central Bank published its Supervisory rules.

ABN AMRO has implemented a combination of advanced and standarised approaches for Credit, Market and Operational risk as allowed under the regulatory framework, and is using these in the management of its business. ABN AMRO is in discussion with the Dutch Central Bank on transitional arrangement for it’s businesses.

At the heart of Basel II is a series of best practice risk and capital management techniques that are the embodiment of ABN AMRO’s existing approach to risk and capital management.

Exposure supervision

 

The Dutch Central Bank has issued specific rules with respect to large exposures to a single borrower or group of interconnected borrowers or in relation to certain other businesses that involve a concentration of risk. Large exposures generally include all assets and off-balance sheet items of a credit institution with respect to a single borrower or a group of connected borrowers which exceed 10% of a credit institution’s total capital. Large exposures must be reported once every quarter to the Dutch Central Bank. There is a limit of 25% of total capital for a single large exposure as part of the banking book. Trading book positions may exceed this limit subject to additional solvency requirements. The aggregate amount of all large exposures of a credit institution may not exceed 800% of its total capital. In 2007, there were no exposures exceeding these thresholds.

 

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