2015

Mission Statement

Our goal is to deliver highly personalised banking and innovative investment solutions backed by experience, competence and robust support services. Sparkasse Bank Malta plc has built its reputation on understanding the needs of individuals, whatever their walk of life, developing relationships and responding to them effectively and discreetly. We believe in relationships – both with our clients as well as with our institutional partners.

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Annual Report 2015 Contents  Page  Directors' Report 

5 

Board of Directors 

11 

Heads of Departments 

13 

Statement of Directors’ responsibilities 

15 

Independent auditor's report 

17 

Statement of comprehensive income 

20 

Statement of financial position 

21 

Statement of changes in equity 

22

Statement of cash flows 

23 

Statutory information 

26 

Statement of accounting policies 

27 

Notes to the financial statements 

41 

Detailed income statement 

78 

Five Year summaries 

79 

Capital Risk Management Report 

83 

 

Registered Office:  101, Townsquare, Ix‐Xatt ta’ Qui‐si‐Sana, Sliema, SLM 3112 – Malta  Tel: 21335705    Fax: 21335710    E‐mail: info@sparkasse‐bank‐malta.com  3

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Directors' Report

Registered Office: 101, Townsquare, Ix-Xatt ta’ Qui-si-Sana, Sliema, SLM 3112 - Malta Tel: 21335705

Fax: 21335710

E-mail: [email protected]

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SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

DIRECTORS’ REPORT The Directors of Sparkasse Bank Malta present their report and audited financial statements for the  year ended 31st December 2015.  PRINCIPAL ACTIVITIES Sparkasse Bank Malta plc is licensed as a Credit Institution under the Banking Act 1994. In addition to  Banking Services, the Bank also provides Investment Services and Fund Custody Services, by virtue of  a  Category  2  and  Category  4a  Investment  Services  license  issued  by  the  Malta  Financial  Services  Authority.  FINANCIAL PERFORMANCE REVIEW 2015 was yet again a successful year for the bank registering a robust set of results as it has done in  previous years. These results are very encouraging  as it re‐affirms that  the  bank is well  positioned  within the growth phase of its business cycle. 2015 results further confirm that this growth is above  all, sustainable, reinforcing that the bank’s strategy in Malta is well aligned to the country’s economic  growth and that the bank is well positioned to benefit from this growth. The Directors are proud to  present these positive results all the more against a weak economic backdrop and negative interest  rates that still underpin the Euro zone.   Profit before taxation for the year rose to € 5,737,645.20 compared to the € 5,010,475.04 reported  in 2014, representing a healthy increase  of 14.5% when compared to the previous year bringing  the  bank’s earnings per share to € 173.02 (2014: € 178.67). This reduction was due to    the increase in  share capital by the bank’s holding company, effected in 2014 and begin of 2015.  Total Operating Income for the year stood at € 8,492,296.39 as compared with € 7,135,431.44 in 2014  representing an increase of nearly 19.0%. This was mainly due to the increase in fee revenue from the  bank’s business lines, mainly payments, foreign exchange and investment services related fees. Net  fee and commission income, increased to € 5,141,135.75 from € 3,918,935.00 resulting in an increase  of nearly 31.2% year on year.  As  a  result  of  the  bank’s  growth  across  all  its  business  lines,  the  bank’s  balance  sheet  has  also  significantly  increased  in  value  from  €  441.5  million  in  2014  to  €  604.2  million  in  2015  –  this  represented  a  further  increase  of  36.9%  over  the  previous  years.  Such  a  rise  was  mainly  due  to  increase  in  customer  deposits.  The  Bank’s  treasury  arm  strives  hard  at  efficiently  and  effectively  placing these funds in the market. Financial assets grew in 2015 from € 85.8 million to € 106.4 million  mainly by the accumulation of high quality liquid assets. The bank also increased its holding in Malta  Government Treasury Bills to a nominal of € 25 million.   Loans and advances to Banks and customers stood at a healthy € 427.4 million (2014: € 338.2 million),  net of any specific provisions, while amounts owed to customers and Banks stood at € 576.1 million  (2014: € 412.3 million). As result of this the Bank’s advances‐to‐deposits ratio stood at 74.2% as at  end of year (2014: 82.0%). 

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SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

DIRECTORS’ REPORT (continued) Total  customers  have  increased  to  2,721  from  2,520  in  2014.  Furthermore,  securities  held  by  customers with the bank rose by 24.8% to hit the € 1 billion target to a total of € 1,109.7 million from  the € 889.3 million recorded in 2014.   While the bank managed to grow its business substantially in 2015, it has managed to contain cost to  a favourable 32.4% of total income.  CAPITAL – Dividend and Reserves Following  the  increase  in  the  bank’s  share  capital  in  2014,  and  as  a  result  of  further  growth  experienced by the bank, the Bank found it prudent to further increase its authorized share capital in  2015 up to € 30 million from € 20 million in 2014 increasing its issued share capital by an additional €  2 million  to € 22 million from  € 20 million in 2014.  As a  consequence  of the positive results achieved by the bank and the remarkable sustainable growth   accomplished and in an effort to provide for further growth and expansionary plans  for the next 5  years, the board has found it necessary in addition to the capital increases, to recommend a possible  change in the bank’s current shareholding structure.    This new structure would cater for and facilitate the execution of the bank’s growth strategy.   Therefore,  for  this  purpose  and  so  as  not  to  restrict  the  business  possibilities  and  potential  for  Sparkasse Bank Malta plc, it is being proposed that the majority shareholding of the bank currently  held by Sparkasse Schwaz AG, through its holding company Sparkasse (Holdings) Malta Ltd., will move  one level up the ownership chain so that both banks, Sparkasse Bank Malta plc (through its holding  company)  as  well  as  Sparkasse  Schwaz  AG  will  be  directly  owned  by  their  common  shareholder  Anteilsverwaltungssparkasse  Schwaz.  Sparkasse  Schwaz  AG  shall  continue  to  retain  a  minority  shareholding in the bank, however, Sparkasse Bank Malta, shall cease to be a subsidiary of Sparkasse  Schwaz  AG  and  will  instead  be  held  as  an  equal.  The  bank  has  discussed  the  proposed  change  in  shareholding  with  its  regulator,  the  Malta  Financial  Services  Authority  (“MFSA”),  and  is  currently  awaiting the MFSA’s formal approval.  Due to the bank’s strong performance in 2015 and the current positive momentum, the Board has  recommended the payment of a dividend of € 3,014,000.  

LIQUIDITY AND OWN FUNDS Following  the  introduction  of  the  new  LCR  regulations  under  the  new  Basel  regime,  the  Liquidity  Coverage Ratio stood at 151.81% (2014: 110.94%), well over the 60% threshold require as at end of  2015. This represents the very high liquid nature of the Bank when taking all highly liquid assets the  Bank  holds  in  its  portfolio  together  with  all  inflows  and  outflows.  Furthermore,  when  taking  into  consideration a simple calculation of short term assets, which is characterised by assets maturing  within seven days, versus liabilities due within 3 months, the Bank holds a very respectable percentile  of 77.6%.  

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SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

DIRECTORS’ REPORT (continued) The Bank’s Own Funds, as at close of the year, and according to the new CRD IV regulations,  which in turn has introduced new capital buffers and thresholds stood at € 22,155,131.50. PROJECTS AND GOING FORWARD In 2015, the Bank continued its investment in improving its I.T. infrastructure as well as increasing its  Human resources across all departments within the bank. The head count as at Dec 2015 stood at 46  compared to 36 in 2014. As a result of this growth, the bank has had to increase its office space in  Sliema. This it has managed to do by the leasing of further office space that was available adjacent to  its current premises. This integration of office space was complete in October 2015 and the Bank now  boasts of the usage of both apartments blocks, namely 101 and 102 (acquired by the bank in 2009) as   well  as  201  and  202,  annexed  in  2014  and  2015  respectively,  offering  a  combined  office  space  of  approximately 1000 square metres.  The bank is currently also actively exploring emulating its product and strategy within the European  Union. The bank sees good opportunity in the provision of custody services in other reputable fund  jurisdictions within the European Union. This strategy shall be initiated upon the completion of the  shareholding restructuring.    CORPORATE GOVERNANCE The Bank applies the highest standards in its corporate governance and continues to develop this in  line with the bank’s growth.   In 2015 the bank introduced a new senior post to its operational structure. This post, Head of Legal,  was  created  to  assist  management  and  the  board  on  legal  and  compliance  related  matters.  Furthermore, an application for the appointment of an additional Director as an Independent Non‐ Executive Director is intended  to be filed with  the  MFSA, to further  enhance the Bank’s  corporate  governance framework.  The Board’s responsibility is to set the strategy, monitor risk and to provide the required leadership  to  the  Bank’s  executives.  As  at  year  end  2015  there  was  no  change  to  the  membership  and  composition of the Board and the convened four times during the year under review.  For 2015, the Board of Directors composition was as follows:   Mr. Harald Wanke – Chairman to the Board  Mr. Paul Mifsud – Managing Director  Mr. Bernhard Plattner – Director

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SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

DIRECTORS’ REPORT (continued) The  Board  also  delegates  specific  responsibilities  to  the  Executive  Committee  that  convenes  once  weekly to monitor:        

The day‐to‐day business Assess and control of the Bank’s risk Monitor competitive activities Implement the bank’s strategy, budgets and policies Monitor  the Bank’s performance Make recommendations to the Board

The Executive Committee is composed by the Managing Director, Head of Legal and the three Bank  Managers, all of which are responsible for their departments within the bank.   In line with the Principles of Good Corporate Governance and risk mitigation efforts, a new control  committee was established earlier in the year. The new committee called The Legal and Compliance  Committee was established to oversee the bank’s legal and compliance obligations as well as to make  the necessary recommendations to the board. The committee comprises of the Head of Legal, the  Compliance  Officer  and  the  Managing  Director,  while  the  MLRO  joins  the  committee  meetings  to  discuss AML related matters. The committee convenes once monthly.  Management further strengthened its internal communication and control functions by introducing  monthly departmental meetings led and chaired by each manager as the head of the department in  question. In total six departmental groups have been formed:       

Account Opening and On‐Boarding Group – chaired by Dr. Kari Pisani Wealth Management Group – chaired by Dr. Kari Pisani Middle and Back Office Securities – chaired by Ms. Anna Mironova Custody – chaired by Ms. Anna Mironova Payments – chaired by Ms. Pauline Cordina Anti‐Money Laundering and Monitoring – chaired by Ms. Pauline Cordina

HUMAN RESOURCES In 2015 the bank continued with its policy on training by organising several in‐house as well as out of  house training programmes with the aim of retaining knowledge and competence to a maximum. The  bank continues to recognise  human  resources  to   be  a   major asset  and the contributing  factor  in   achieving  its  competitive  advantage.  For  this  reason  in  2015,  the  Bank continued to  increase  its   staff    compliment    in    all  departments  and  make  further  investment  is  staff  wellbeing,  training  and  career development.  

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SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

DIRECTORS’ REPORT (continued) STANDARD LICENCE CONDITIONS In accordance with paragraph 7.35 of the Investment Services Guidelines issued by the Malta Financial  Services Authority, licence holders are required to disclose any regulatory breaches of standard licence  conditions in their annual report.  In this respect the Bank declares that there were no breaches reported to the Malta Financial Services  Authority and no other breach of regulatory requirements, which were subject to an administrative  penalty or regulatory sanction, were reported. 

AUDITORS A resolution will be submitted to the forthcoming Annual General Meeting to re‐appoint Messrs BDO  Malta as auditors to the company.  Approved by the Board of Directors on the 11th February 2016 and signed on its behalf by its Directors. 

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SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015

STATEMENT OF DIRECTORS’ RESPONSIBILITIES FOR FINANCIAL REPORT  The  Companies  Act  (Cap.  386)  (the  “Act”)  requires  the  directors  of  Sparkasse  Bank  Malta  plc  (the  “Bank”) to prepare financial statements for each financial year which give a true and fair view of the  financial position of the Bank as at the end of the financial year and of the profit or loss of the Bank  for that period. In preparing the financial statements, the Directors are responsible for:  

ensuring  that  the  financial  statements  have  been  drawn  up  in  accordance  with  International Financial Reporting Standards as adopted by the European Union;



selecting appropriate accounting policies and applying them consistently;



making accounting judgements and estimates that are reasonable in the circumstances;



ensuring  that  the  financial  statements  are  prepared  on  the  going  concern  basis  unless  it  is inappropriate to presume that the Bank will continue in business as a going concern.

The  Directors  are  also  responsible  for  designing,  implementing  and  maintaining  internal  controls  relevant to the preparation and the fair presentation of the financial statements that are free from  material misstatement, whether due to fraud or error, and that comply with the Companies Act (Cap.  386)  and  the  Banking  Act  (Cap.  371).  They  are  also  responsible  for  safeguarding  the  assets  of  the  company and hence for taking reasonable steps for the prevention and detection of fraud and other  irregularities.  The Directors are responsible for keeping proper accounting records which disclose with reasonable  accuracy, at any time, the financial position of the Bank and to enable them to ensure that the financial  statements have been properly prepared in accordance with the provisions of the Companies Act (Cap.  386) and the Banking Act (Cap. 371).   After reviewing the Bank’s plans for the coming financial years, the Directors are satisfied that at the  time of approving the financial statements, it is appropriate to continue adopting the going concern  basis in the financial statements.  The Directors, through oversight of management, are responsible to ensure that the Bank establishes  and maintains internal control to provide reasonable assurance with regard to reliability of financial  reporting,  effectiveness  and  efficiency  of  operations  and  compliance  with  applicable  laws  and  regulations.  Management is responsible, with oversight from the Directors, to establish a control environment and  maintain policies and procedures to assist in achieving the objective of ensuring, as far as possible, the  orderly and efficient conduct of the Bank’s business. This responsibility includes establishing and  

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SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

STATEMENT OF DIRECTORS’ RESPONSIBILITIES FOR FINANCIAL REPORT (continued)  maintaining controls pertaining to the Bank’s objective of preparing financial statements as required  by  the  Act  and  managing  risks  that  may  give  rise  to  material  misstatements  in  those  financial  statements.  In  determining  which  controls  to  implement  in  order  to  prevent  and  detect  fraud,  management considers the risks that the financial statements may be materially misstated as a result  of fraud. 

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Tel: +356 2131 3060 Fax: +356 2131 3064 [email protected] www.bdo.com.mt

Tower Gate Place Tal-Qroqq Street Msida MSD 1703 Malta

INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF SPARKASSE BANK MALTA PLC Report on the financial statements We have audited the accompanying financial statements of Sparkasse Bank Malta plc (“the Bank”) set out on pages 20 to 70 which comprise the statement of financial position as at 31 December 2015, the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended and a summary of significant accounting policies and other explanatory notes. Directors’ responsibility for the financial statements As described in page 15, the directors are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards as adopted by the European Union and in accordance with the requirements of the Companies Act (Cap. 386) and the Banking Act (Cap. 371), and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal controls relevant to the Bank’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the director, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, these financial statements give a true and fair view of the state of financial position of the Bank as at 31 December 2015 and of its financial performance and its statement of cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU and in accordance with the requirements of the Companies Act (Cap. 386) and the Banking Act (Cap. 371).

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Tel: +356 2131 3060 Fax: +356 2131 3064 [email protected] www.bdo.com.mt

Tower Gate Place Tal-Qroqq Street Msida MSD 1703 Malta

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF SPARKASSE BANK MALTA PLC  Report on other legal and regulatory requirements  We also have responsibilities under the Companies Act, 1995 to report to you if, in our opinion: •

The information given in the directors’ report is not consistent with the financial statements.

•

Adequate accounting records have not been kept, or that returns adequate for our audit have not been received from branches not visited by us.

•

The financial statements are not in agreement with the accounting records and returns.

•

We have not received all the information and explanations we require for our audit.

•

Certain disclosures of directors’ remuneration specified by law are not made in the financial statements, giving the required particulars in our report.

We have nothing to report to you in respect of these responsibilities.

BDO Malta Certified Public Accountants Tower Gate Place Tal-Qroqq Street Msida MSD 1703 Malta 11th February 2016

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Financial Statements

Registered Office: 101, Townsquare, Ix-Xatt ta’ Qui-si-Sana, Sliema, SLM 3112 - Malta Tel: 21335705

Fax: 21335710

E-mail: [email protected]

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SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

STATEMENT OF COMPREHENSIVE INCOME 2015 Notes

2014

EUR

EUR

Interest receivable and similar income

1

523,187.36

828,987.18

Income from investments

2

1,427,819.74

1,429,091.24

Interest payable and similar charges

3

(42,144.14)

(121,634.81)

Net interest income

1,908,862.96

2,136,443.61

Fees and commissions income

6,078,874.05

4,593,318.58

Fees and commissions expense

(937,738.30)

(674,383.58)

5,141,135.75

3,918,935.00

1,442,297.68

1,080,052.83

1,442,297.68

1,080,052.83

8,492,296.39

7,135,431.44

(1,289,509.24)

(987,108.93)

(433,010.19)

(366,261.07)

Net fee and commission income

4

Profit on foreign exchange activities

Results from operating activities Staff costs Depreciation and amortisation Bad debts reversal

43,881.62

Bad debts written off

1,071.08

(43,881.62)

Other administrative expenses

-

(1,032,131.76)

(772,657.48)

(2,754,651.19)

(2,124,956.40)

Profit before income tax

5

5,737,645.20

5,010,475.04

Income tax expense

6

(2,027,910.00)

(1,782,789.00)

3,709,735.20

3,227,686.04

Profit for the year Other comprehensive income Revaluation reserve - change in fair value

(1,201,463.58)

705,692.36

420,512.38

(246,992.33)

Other comprehensive income/(loss) (net of income tax)

(780,951.20)

458,700.03

Total comprehensive income for the year

2,928,784.00

3,686,386.07

173.02

178.67

- income taxes

Earnings per share

7

All amounts relate to continuing activities.

The accounting policies from pages 26 to 40 and the notes from pages 42 to 75 are an integral part of these financial statements. 20

SPARKASSE BANK MALTA P.L.C.  Financial Statements for the year ended 31 December 2015 

STATEMENT OF FINANCIAL POSITION

Notes

2015

2014

EUR

EUR

Assets Balance held with Central Bank of Malta and cash

9

67,087,061.88

14,349,081.19

Loans and advances to banks

10

424,245,816.68

335,973,927.52

Loans and advances to customers

11

3,110,077.20

2,202,873.57

Financial assets

12

106,352,902.53

85,830,430.51

Property, plant and equipment

13

1,269,152.33

1,176,237.63

Intangible assets

15

920,564.61

727,941.99

Prepayments and accrued income

16

1,097,200.44

1,059,087.03

Deferred tax Asset

17

132,380.00

-

Other assets

18

-

184,172.61

604,215,155.67

441,503,752.05

Total Assets Liabilities Amount owed to banks

19

3,894,356.14

3,308,327.97

Amount owed to customers

20

572,206,079.56

408,998,581.53

Other liabilities

21

3,182,300.31

6,249,669.21

Accruals and deferred income

22

167,625.18

135,332.93

Deferred tax Liability

17

-

95,071.93

1,834,851.00

1,701,609.00

581,285,212.19

420,488,592.57

22,000,000.00

20,000,000.00

1,130,081.83

434,346.63

Current tax Total liabilities Equity Called up share capital

23

Retained earnings Revaluation reserve

24

Total Equity Total liabilities and equity

(200,138.35)

580,812.85

22,929,943.48

21,015,159.48

604,215,155.67

441,503,752.05

Memorandum items Contingent Liabilties

30

5,000,000.00

3,000,000.00

Commitments

31

6,954,613.68

6,241,598.26

The accounting policies from pages 26 to 40 and the notes from pages 42 to 75 are an integral part of these financial statements. The financial statements from pages 20 to 75 were approved and authorised for issue by the Board of Directors on 11th February 2016 and signed on its behalf by:

21

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

STATEMENT OF CHANGES IN EQUITY

At 1 January 2014

Share

Revaluation

Retained

Capital

Reserve

Income

EUR

EUR

EUR

18,000,000.00

122,112.82

Total EUR

3,416,660.59

21,538,773.41

Transactions with owners Increase in Share Capital

2,000,000.00

-

-

-

(6,210,000.00)

(6,210,000.00)

Profit for the year

-

-

3,227,686.04

3,227,686.04

Other comprehensive income, net of income tax: Net Fair Value change (Note 24)

-

458,700.03

-

458,700.03

At 31 December 2014

20,000,000.00

580,812.85

434,346.63

21,015,159.48

At 1 January 2015

20,000,000.00

580,812.85

434,346.63

21,015,159.48

2,000,000.00

-

-

2,000,000.00

-

-

(3,014,000.00)

(3,014,000.00)

Profit for the year

-

-

3,709,735.20

3,709,735.20

Other comprehensive loss, net of income tax: Net Fair Value change (Note 24)

-

(780,951.20)

-

22,000,000.00

(200,138.35)

1,130,081.83

Dividend distribution

-

2,000,000.00

Total comprehensive income for the year

Transactions with owners Increase in Share Capital Dividend distribution Total comprehensive income for the year

At 31 December 2015

(780,951.20) 22,929,943.48

The accounting policies from pages 26 to 40 and the notes from pages 42 to 75 are an integral part of these financial statements.

22

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

STATEMENT OF CASH FLOWS 2015

2014

EUR

EUR

Cash flows from operating activities: Profit on ordinary activities before tax

5,737,645.20

5,010,475.04

145,533.34

45,502.08

Adjustment for: - Loss on disposal of securities - Gain on disposal of securities

(12,338.61)

(75,830.14)

(577,480.75)

(75,756.45)

- Reduction in Provision on loans and advances to customers

1,355.74 (43,881.62)

(1,071.08)

- Prepayments and accrued income

(38,113.41)

(69,965.03)

32,292.25

(73,171.07)

- Unrealised forex differences on securities - Loss on fixed assets written off

- Interest payable and accrued liabilities - Depreciation Ordinary profit before working capital changes

-

433,010.19

366,261.07

5,678,022.33

5,126,444.42

Movement in operating assets and liabilities - Amounts owed to banks

586,028.17

(310,768.03)

- Amounts owed to customers

163,207,498.03

- Deposit held with Central Bank of Malta

(38,721,959.50)

- Loans and advances to banks

(73,005,410.98)

(111,997,751.66)

(863,322.01)

(13,810.19)

- Loans and advances to customers - Other assets - Other liabilities

184,172.61

202,812,721.53 3,069,405.20

(183,922.61)

(3,067,368.90)

4,512,406.21

48,319,637.42

97,888,280.45

Cash flow from operating activities before tax

53,997,659.75

103,014,724.87

Taxation paid

(1,701,608.00)

Net cash generated from operating activities

52,926,051.75

(1,429,959.00) 101,584,765.87

23

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

STATEMENT OF CASH FLOWS (continued) 2015

2014

EUR

EUR

Net cash generated from operating activities

52,926,051.75

101,584,765.87

Cash flows from investing activities: - Disposal of securities

69,341,397.07

26,036,365.73

- Disposal of tangible fixed assets - Purchase of securities - Purchase of tangible fixed assets - Purchase of intangible assets

-

(107,132,148.59)

(41,162,881.34)

(299,025.96)

(278,296.56)

(420,877.29)

(403,674.18)

(38,510,654.77)

(15,808,486.35)

Issue of shares

2,000,000.00

2,000,000.00

Dividends paid

(3,014,000.00)

(6,210,000.00)

Net cash used in financing activities Movement in

(1,014,000.00)

(4,210,000.00)

cash and cash equivalents

12,771,396.98

81,566,279.52

Cash and cash equivalents at beginning of year

196,221,240.25

114,654,960.73

Cash and cash equivalents at 31 December (Note 26)

208,992,637.23

196,221,240.25

Net cash used in investing activities Cash flows from financing activities:

The accounting policies from pages 26 to 40 and the notes from pages 42 to 75 are an integral part of these financial statements.

24

Statutory Information and Statement of Accounting Policies

Registered Office:  101, Townsquare, Ix‐Xatt ta’ Qui‐si‐Sana, Sliema, SLM 3112 – Malta  Tel: 21335705    Fax: 21335710    E‐mail: info@sparkasse‐bank‐malta.com 

25

SPARKASSE BANK MALTA plc Financial Statements for the year ended 31 December 2015 

STATUTORY INFORMATION AND BASIS OF PREPARATION  1.

Reporting entity Sparkasse Bank Malta plc (the “Bank”) is a public limited company incorporated and domiciled in  Malta, whose shares are not publicly listed. The principal activities of the Bank are disclosed on  the Directors’ Report on page 6. 

2.

Parent and ultimate parent company Sparkasse Holdings (Malta) Limited, a company registered in Malta (C 35408), owns 99.99% of  the issued share capital of this Bank.  The ultimate parent company is Sparkasse Schwaz AG, a banking institution incorporated in the  Republic  of  Austria.  Financial  statements  of  Sparkasse  Schwaz  AG  can  be  obtained  from  http://www.sparkasse.at  or  from  registered  office  of  Sparkasse  Schwaz  AG  at  Franz‐Josef‐ Straße 8–10, Postfach 45, A‐6130 Schwaz, Austria. 

3.

Basis of preparation of financial statements The financial statements have been prepared on the historical cost basis except that available‐ for‐sale financial assets are measured at their fair value. 

3.1. Statement of Compliance   The  financial  statements  have  been  prepared  and  presented  in  accordance  with  International  Financial Reporting Standards as adopted by the EU (“the applicable framework”). All references  in these financial statements to IAS, IFRS or SIC / IFRIC interpretations refer to those adopted by  the EU. The financial statements have also been drawn up in accordance with the provisions of  the Banking Act (Cap. 371) and the Companies Act (Cap. 386), to the extent that such provisions  do not conflict with the applicable framework.  The Act specifies that in the event that any one of its provisions is in conflict or not compatible  with  IFRS  as  adopted  by  the  EU,  or  its  application  is  incompatible  with  the  obligation  for  the  financial statements to give a true and fair view, that provision shall be departed from in order  to give a true and fair view.  The  preparation  of  financial  statements  in  conformity  with  IFRS  requires  the  use  of  certain  accounting estimates. It also requires the directors to exercise their judgement in the process of  applying the Bank’s accounting policies. The areas where significant judgements and estimates  have been made in preparing the financial statements and their effect are disclosed in note 2.17.  

26

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

STATEMENT OF ACCOUNTING POLICIES  1.

Changes in accounting policies a)) New

andards, interpretations and amendments effective from 1 January 2015

The following new standards, amendments and interpretations are effective for the first time in these financial statements but none have had a material effect on the company: -

Improvements to IFRSs 2010-2012 (dated 12/12/2013, effective from year beginning on 01/01/2015) Improvements to IFRSs 2011-2013 (dated 12/12/2013, effective from year beginning on 01/01/2015) Amendments to IAS 19: Defined Benefits Plans: Employee Contributions (Issued on 21 November 2013, effective from the year beginning on 01/01/2015)

b)) New

andards, interpretations and amendments not yet effective

The following new standards, interpretations and amendments, which have not been applied in these financial statements, will or may have an effect on the company’s future financial statements: -

Improvements to IFRSs 2012-2014 (dated 25/09/2014, effective from year beginning on 01/01/2016) IFRS 9 Financial Instruments (issued on 24 July 2014, effective from year beginning on 01/01/2018) Amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets between Investor and its Associate or Joint Venture (issued on 11 September 2014, effective from the year beginning 01/01/2016) – postponed for IFRS as adopted by EU Amendments to IFRS 10, IFRS 12 and IAS 28: Investment Entities – Applying the Consolidation Exemption (issued on 18 December 2014, effective from year beginning on 01/01/2016) Amendments to IFRS 11: Accounting for Acquisition of Interests in Joint Operations (issued on 6 May 2014, effective from the year beginning on 01/01/2016) IFRS 14 Regulatory Deferral Accounts (issued 30 January 2014, effective from the year beginning 01/01/2016) – was not endorsed for IFRS as adopted by EU IFRS 15 Revenue from Contracts with Customers (issued on 28 May 2014, effective from the year beginning 01/01/2018) Amendments to IAS 1: Disclosure Initiative (Issued on 18 December 2014, effective from the year beginning on 01/01/2016) Amendments to IAS 16 and IAS 38: Clarification of Acceptable Method of Depreciation and Amortisation (issued on 12 May 2014, effective from the year beginning 01/01/2016) Amendments to IAS 16 and IAS 41: Bearer Plants (issued on 30 June 2014, effective from the year beginning on 01/01/2016) Amendments to IAS 27: Equity Method in Separate Financial Statements (issued on 12 August 2014, effective from the year beginning on 01/01/2016)

The Bank has not early adopted all these revisions to the requirements of IFRSs and the Bank’s directors are of the opinion that there are no requirements that will have a possible significant impact on the company’s financial statements in the period of initial application, except of the following: On 24 July 2014, the IASB issued the final version of IFRS 9, which brings together the classification and measurement, impairment and hedge accounting phases of the IASB’s project to replace IAS 39 Financial Instruments: Recognition and Measurement. The Standard supersedes all previous versions of IFRS 9. IFRS 9 introduces a logical approach for the classification of financial assets, which is driven by cash flow characteristics and the business model in which an asset is held. This single, principle-based approach replaces existing rule 27

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

STATEMENT OF ACCOUNTING POLICIES (continued)  based requirements that are generally considered to be overly complex and difficult to apply. The new model also results in a single, forward-looking ‘expected loss’ impairment model that will require more timely recognition of expected credit losses. IFRS 9 introduces a substantially reformed model for hedge accounting, with enhanced disclosures about risk management activity. The new model represents a significant overhaul of hedge accounting that aligns the accounting treatment with risk management activities, enabling entities to better reflect these activities in their financial statements. IFRS 9 also removes the volatility in profit or loss that was caused by changes in the credit risk of liabilities elected to be measured at fair value. IFRS 9 is applicable for annual periods beginning on or after 1 January 2018, with earlier application being permitted. This Standard had not yet been endorsed by the EU at the date of authorisation of these financial statements. The adoption of IFRS 9 may have a material impact on the Bank’s financial statements.

28

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015  STATEMENT OF ACCOUNTING POLICIES (continued)  2.

Principal accounting policies The accounting policies set out below have been applied consistently to all periods presented  in these financial statements. 

2.1.

Functional and presentational currency  The financial statements are presented in Euros, which is the Bank's functional currency.  Transactions in foreign currencies are translated to the functional currency at exchange rates  at  the  dates  of  the  transactions.  Monetary  assets  and  liabilities  denominated  in  foreign  currencies at the reporting date are retranslated to the functional currency at the exchange  rate  at  that  date.  The  foreign  currency  gain  or  loss  on  monetary  items  is  the  difference  between amortised cost in the functional currency at the beginning of the period, adjusted  for  effective  interest  and  payments  during  the  period,  and  the  amortised  cost  in  foreign  currency translated at the exchange rate at the end of the period. Foreign currency differences   arising on retranslation are recognised in profit or loss. 

2.2.

Property, plant and equipment  Tangible fixed assets are stated at cost less accumulated depreciation, with the exception of  the cost of land which is not depreciated. In line with the policy adopted by the parent bank,  additions costing less than € 400 are not capitalised.  These are treated as current expenditure  and written off to the profit and loss account. Depreciation is calculated on a straight line basis  so as to write off the cost of the asset over its estimated useful life as follows:  -

Freehold Premises   Furniture, fixtures & fittings Air‐conditioning  Office equipment  Computer equipment    Motor vehicles 

25 years (4% per annum)  10 years (10% per annum)  5 years (20% per annum)  5 years (20% per annum)  4 years (25% per annum)  5 years (20% per annum) 

In the year of acquisition the charge is calculated on a six monthly basis if purchased after 30  June.  The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each  balance  sheet  date.  Where  the  carrying  amount  of  an  asset  is  greater  than  its  estimated  recoverable amount, it is written down immediately to its recoverable amount. On disposal  of a tangible asset, the difference between the net disposal proceeds and the carrying amount  of the asset, is charged or credited to the other administrative expenses in the statement of  comprehensive income. 

29

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015  STATEMENT OF ACCOUNTING POLICIES (continued)  2.3.

Intangible assets  Externally  acquired  intangible  assets  are  initially  recognised  at  cost  and  subsequently  amortised on a straight‐line basis over their useful economic lives.   Intangible  assets  are  recognised  on  business  combinations  if  they  are  separable  from  the  acquired entity or give rise to other contractual/legal rights. The amounts ascribed to such  intangibles are arrived at by using appropriate valuation techniques (see section related to  critical estimates and judgements below).  The  significant  intangibles  recognised  by  the  Bank  and  their  useful  economic  lives  are  as  follows:  -

Bavaria Banken Software    Self developed software    Other software

6 years (17% per annum) 10 years ( 10% per annum) 4 years (25% per annum)

In the year of acquisition the charge is calculated on a six monthly basis if purchased after 30  June. On disposal of an intangible asset, the difference between the net disposal proceeds  and  the  carrying  amount  of  the  asset,  is  charged  or  credited  to  the  other  administrative  expenses in the statement of comprehensive income.  As from 2013, the Bank decided to commence a project entailing the creation of a core banking software built in-house by specially hired I.T. employees. Such a software is intended to be ready for use within three years. The Board of Directors determined in accordance with IAS 38 that all assets bought by the Bank and any expenses incurred for the generation of such a Banking software are to be capitalized and added to the value of the Intangible Asset itself. This will also include the depreciation of any fixed assets acquired. Immediately for the sole purpose of the generation of the said software. Such a rationale was discussed in-depth with the Bank’s audit company. Such fixed assets will not be depreciated immediately due to the fact that the Bank is not generating any income as yet from such an investment. Once such a Banking software goes live and is up and running depreciation will commence in-line with the Bank’s accounting policies underlined above. From then on, any expenses incurred by the Bank due to maintenance and up-keep of the software will not be capitalized any further but incurred to the Bank’s profit and loss. Towards the end of 2014, the Board of Directors launched the new on-line banking software and is now in fact live and being used by the bank's customers.

30

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015  STATEMENT OF ACCOUNTING POLICIES (continued)  2.4.

Financial instruments  The  Bank  classifies  its  financial  instruments  into  one  of  the  categories  discussed  below,  depending on the purpose for which the asset was acquired. The company has not classified  any of its financial assets as held to maturity.  a) Loans and advances Loans and advances are non‐derivative financial assets with fixed or determinable payments  that are not quoted in an active market and that the Bank does not intend to sell immediately  or in the near term.  When the Bank purchases a financial asset and simultaneously enters into an agreement to  resell  the  asset  (or  a  substantially  similar  asset)  at  a  fixed  price  on  a  future  date  (“reverse  repo” or “stock borrowing”), the arrangement is accounted for as a loan or advance, and the  underlying asset is not recognised in the Bank’s financial statements.  Loans and advances are initially  measured at fair value  plus incremental direct transaction  costs, and subsequently measured at their amortised cost using the effective interest method.  b) Investment securities Investment securities are initially measured at fair value plus, in case of investment securities  not at fair value through profit or loss, incremental direct transaction costs and subsequently  accounted  for  depending  on  their  classification  as  either  held‐to‐maturity,  at  fair  value  through profit or loss, or available‐for‐sale.  Recognition  The Bank initially recognises loans and advances, deposits, and subordinated liabilities on the  date  that  they  are  originated.  Regular  way  purchases  and  sales  of  financial  assets  are  recognised on the trade date at which the Bank commits to purchase or sell the asset. All other   financial  assets  and  liabilities  are  initially  recognised  on  the  trade  date  at  which  the  Bank  becomes a party to the contractual provisions of the instrument.  A financial asset or financial liability is initially measured at fair value plus, for an item not at  fair  value  through  profit  or  loss,  transaction  costs  that  are  directly  attributable  to  its  acquisition or issue.  Investment  securities  are  classified  all  as  available‐for‐sale  financial  assets.  They  are  recognised on the settlement date, and are initially measured at the cost directly attributable  to their acquisition.  Such securities are subsequently revalued at fair value based on quoted  bid prices in an active market. Unrealised gains and losses, arising from changes in the fair  value of securities are recognised in equity as a Revaluation Reserve.  

31

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015  STATEMENT OF ACCOUNTING POLICIES (continued)  2.4

Financial instruments (continued)  Derecognition  The Bank derecognises a financial asset when the contractual rights to the cash flows from  the financial  asset expire,  or when it  transfers the financial asset in a  transaction in which  substantially all the risks and rewards of ownership of the financial asset are transferred or in  which the Bank neither transfers nor retains substantially all risks and rewards of ownership  and it does not retain control of the financial asset. Any interest in transferred financial assets  that  qualify  for  derecognition  that  is  created  or  retained  by  the  Bank  is  recognised  as  a  separate asset or liability in the statement of financial position. On derecognition of a financial  asset,  the  difference  between  the  carrying  amount  of  the  asset  (of  the  carrying  amount  allocated to the portion of the asset transferred), and the sum of:  -

the  consideration  received  (including  any  new  asset  obtained  less  any  new  liability  assumed); and   any cumulative gain or loss that had been recognised in other comprehensive income,  is recognised in profit or loss. 

The Bank enters into transactions whereby it transfers assets recognised on its statement of  financial  position,  but  retains  either  all  or  substantially  all  of  the  risks  and  rewards  of  the  transferred assets or a portion of them. If all or substantially all of the risks and rewards are  retained, then the transferred assets are not derecognised. Transfers of assets with retention  of  all  or  substantially  all  risks  and  rewards  include,  for  example,  securities  lending  and  repurchase transactions.  In transactions in which the Bank neither retains nor transfers substantially all the risks and  rewards  of  ownership  of  a  financial  asset  and  it  retains  control  over  the  asset,  the  Bank  continues to recognise the asset to the extent of its continuing involvement, determined by  the extent to which it is exposed to changes in the value of the transferred asset.  In certain transactions the Bank retains the obligation to service the transferred financial asset  for a fee. The transferred asset is derecognised if it meets the recognition criteria. An asset or   liability  is  recognised  for  the  servicing  contract,  depending  on  whether  the  servicing  fee  is  more than adequate (asset) or is less than adequate (liability) for performing the servicing.   The Bank derecognises a financial liability when its contractual obligations are discharged or  are cancelled or expire. 

32

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015  STATEMENT OF ACCOUNTING POLICIES (continued)  2.4

  Financial instruments (continued)  Fair value measurement   Assets  and  long  positions  are  measured  at  a  bid  price;  liabilities  and  short  positions  are  measured at an asking price. Where the Bank has positions with offsetting risk, mid‐market  prices are used to measure the offsetting risk positions and a bid or asking price adjustment  is  applied  only  to  the  net  position  as  appropriate.  Fair  values  reflect  the  credit  risk  of  the  instrument  and  include  adjustments  to  take  account  of  the  credit  risk  of  the  Bank  and  counterparty where appropriate. Fair value estimates obtained from models are adjusted for  any other factors, such as liquidity risk or model uncertainties, to the extent that the Bank  believes  a  third‐party  market  participant  would  take  them  into  account  in  pricing  a  transaction.  Identification and measurement of impairment  At each reporting date the Bank assesses whether there is objective evidence that financial  assets  not  carried  at  fair  value  through  profit  or  loss  are  impaired.  Financial  assets  are  impaired when objective evidence demonstrates that a loss event has occurred after the initial  recognition of the asset, and that the loss event has an impact on the future cash flows of the  asset that can be estimated reliably.  Objective evidence that financial assets (including equity securities) are impaired can include  significant financial difficulty of the borrower or issuer, default or delinquency by a borrower,  restructuring of a loan or advance by the Bank on terms that the Bank would not otherwise  consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an  active market for a security, or other observable data relating to a group of assets such as  adverse  changes  in  the  payment  status  of  borrowers  or  issuers  in  the  group,  or  economic  conditions that correlate with defaults in the group. In addition, for an investment in an equity  security, a significant or prolonged decline in its fair value below its cost is objective evidence  of impairment.  The Bank considers evidence of impairment for loans and advances at both a specific and a  collective  level.  All  individually  significant  loans  and  advances  are  assessed  for  specific  impairment.  All  individually  significant  loans  and  advances  found  not  to  be  specifically  impaired are then collectively assessed for any impairment that has been incurred but not yet  identified. Loans and advances that are not individually significant are collectively assessed  for impairment by grouping together loans and advances with similar risk characteristics. 

33

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015  STATEMENT OF ACCOUNTING POLICIES (continued)  2.4

  Financial instruments (continued)  In assessing collective impairment the Bank uses historical trends of the probability of default,  timing of recoveries and the amount of loss incurred, adjusted for management’s judgement  as to whether current economic and credit conditions are such that the actual losses are likely  to be greater or less than suggested by historical modelling. Default rates, loss rates and the  expected timing of future recoveries are regularly benchmarked against actual outcomes to  ensure that they remain appropriate.  Impairment  losses  on  assets  carried  at  amortised  cost  are  measured  as  the  difference  between the carrying amount of the financial assets and the present value of estimated cash  flows  discounted  at  the  assets’  original  effective  interest  rate.  Impairment  losses  are  recognised in profit or loss and reflected in an allowance account against loans and advances.  Interest on impaired asset continues to be recognised through the unwinding of the discount.  When a subsequent event causes the amount of impairment loss to decrease, the decrease in  impairment loss is reversed through profit or loss.  Impairment losses on available‐for‐sale investment securities are recognised by transferring  the cumulative loss that has been recognised in other comprehensive income to profit or loss  as  a  reclassification  adjustment.  The  cumulative  loss  that  is  reclassified  from  other  comprehensive income to profit or loss is the difference between the acquisition costs, net of  any principal repayment and amortisation, and the current fair value, less any impairment loss  previously recognised in profit or loss. Changes in impairment provisions attributable to time  value are reflected as a component of interest income.  If,  in  a  subsequent  period,  the  fair  value  of  an  impaired  available‐for‐sale  debt  security  increases  and  the  increase  can  be  objectively  related  to  an  event  occurring  after  the  impairment loss was recognised in profit or loss, the impairment loss is reversed, with the  amount of the reversal recognised in profit or loss. However, any subsequent recovery in the  fair  value  of  an  impaired  available‐for‐sale  equity  security  is  recognised  directly  in  other  comprehensive  income.  The  Bank  writes  off  certain  loans  and  advances  and  investment  securities when they are determined to be uncollectible. 

2.5       Cash and cash equivalents  Cash and cash equivalents include notes and coins on hand, unrestricted balances held with  any  bank  or  financial  institution  and  highly  liquid  financial  assets,  which  are  subject  to  insignificant risk of changes in their fair value, and are used by the Bank in the management  of its short‐term commitments.

34

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015  STATEMENT OF ACCOUNTING POLICIES (continued)  2.5   Cash and cash equivalents (continued)  Cash and cash equivalents are carried at amortised cost in the statement of financial position  and comprise:  -

-

cash in hand and deposits repayable on demand or with a contractual period to maturity  of less than  ninety days, with any bank or financial institution;  short term highly liquid investments which are readily convertible into known amounts  of cash without notice, subject to an insignificant risk of changes in value and with a  contractual period to maturity of less than three months, such as Treasury Bills; and  advances from banks repayable within three months from the date of the advance. 

2.6    Provisions  A  provision  is  recognised  if,  as  a  result  of  a  past  event,  the  Bank  has  a  present  legal  or  constructive obligation that can be estimated reliably, and it is probable that an outflow of  economic  benefits  will  be  required  to  settle  the  obligation.  Provisions  are  determined  by  discounting  the  expected  future  cash  flows  at  a  pre‐tax  rate  that  reflects  current  market  assessments  of  the  time  value  of  money  and,  where  appropriate,  the  risks  specific  to  the  liability.  A provision for onerous contracts is recognised when the expected benefits to be derived by  the Bank from a contract are lower than the unavoidable cost of meeting its obligations under  the contract. The provision is measured at the present value of the lower of the expected cost  of terminating the contract and the expected net cost of continuing with the contract. Before  a provision is established, the Bank recognises any impairment loss on the assets associated  with that contract.  2.7

Share capital and dividends  Financial instruments issued by the Bank are classified as equity only to the extent that they do  not meet the definition of a financial liability or financial asset.  The  Bank  ordinary  shares  are  classified  as  equity  instruments.  Incremental  costs  directly  attributable to issue of ordinary shares are recognised as a deduction from equity.  Dividend distribution to the Bank’s shareholders is recognised as liability in the Bank’s financial  statements in the period in which the dividends are approved by the Bank’s shareholders. 

2.8

Revaluation reserve   Revaluations  of  fixed  assets  are  performed  by  a  professionally  qualified  architect  with  sufficient regularity such that the carrying amount does not differ materially from that which  would be determined using fair values at the balance sheet date. Any surpluses arising on such  revaluation are credited to a revaluation reserve unless they reverse a revaluation decrease  for the same asset previously recognised in profit or loss, in which case the increase is credited  

35

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015  STATEMENT OF ACCOUNTING POLICIES (continued)  2.8

  Revaluation reserve (continued)  to profit or loss to the extent of the decrease previously charged. Any deficiencies resulting  from  decreases  in  value  are  deducted  from  this  revaluation  reserve  to  the  extent  that  the  balance  held  in  this  reserve  relating  to  a  previous  revaluation  of  that  asset  is  sufficient  to  absorb these, and charged to profit or loss thereafter.  Investment securities are subsequently revalued at fair value based on quoted bid prices in an  active market. Unrealised gains and losses, arising from changes in the fair value of securities  are recognised in equity as a Revaluation Reserve. 

2.9

Interest income and expenses  Interest  income  and  expense  are  recognised  in  profit  or  loss  using  the  effective  interest  method. The effective interest rate is the rate that exactly discounts the estimated future cash  payments and receipts through the expected life of the financial asset or liability (or, where  appropriate, a shorter period) to the carrying amount of the financial asset or liability. When  calculating  the  effective  interest  rate,  the  Bank  estimates  future  cash  flows  considering  all  contractual terms of the financial instrument but not future credit losses.  The calculation of the effective interest rate includes all fees and points paid or received that  are an integral part of the effective interest rate. Transaction costs include incremental costs  that are directly attributable to the acquisition or issue of a financial asset or liability. Interest  income and expense presented in the statement of comprehensive income include:  -

interest on financial assets and liabilities at amortised cost calculated on an effective  interest basis; and  interest on available‐for‐sale investment securities calculated on an effective interest  basis. 

Fair value changes on derivatives held for risk management purposes, are presented in net  income on other financial instruments carried at fair value in the statement of comprehensive  income.  2.10

Fees and commission income and expenses  Fees and commission income and expense that are integral to the effective interest rate on a  financial asset or liability are included in the measurement of the effective interest rate. Other  fees  and  commission  income,  including  account  servicing  fees,  placement  fees  and  syndication  fees,  are  recognised  as  the  related  services  are  performed.  When  a  loan  commitment  is  not  expected  to  result  in  the  draw‐down  of  a  loan,  the  related  loan  commitment fees are recognised on a straight‐line basis over the commitment period. Other  fees  and  commission  expense  relates  mainly  to  transaction  and  service  fees,  which  are  expensed as the services are received.

36

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015  STATEMENT OF ACCOUNTING POLICIES (continued)  2.11

Net trading income  Net trading income comprises all realised and unrealised foreign exchange differences. 

2.12

Dividend income  Dividend income is recognised when the right to receive income is established. Usually this is  the ex‐dividend date for equity securities. 

2.13

Income tax expense  Income  tax  expense  comprises  current  and  deferred  tax.  Current  and  deferred  tax  are  recognised in profit or loss except to the extent that it relates to items recognised directly in  equity, or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the  year,  using  tax  rates  enacted  or  substantively  enacted  at  the  reporting  date,  and  any  adjustment to tax payable in respect of previous years.  Deferred tax is provided for temporary differences between the carrying amounts of assets  and liabilities for financial reporting purposes and the amounts used for taxation purposes.  Deferred tax is measured at the tax rates that are expected to be applied to the temporary  differences when they reverse, based on the laws that have been enacted or substantively  enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally  enforceable right to offset current tax liabilities and assets, and they relate to income taxes  levied by the same tax authority on the same taxable entity, or on different tax entities, but  they intend to settle current tax liabilities and assets on a net basis or their tax assets and  liabilities will be realised simultaneously.  A deferred tax asset is recognised only to the extent  that it is probable that future taxable profits will be available against which the asset can be  utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent  that it is no longer probable that the related tax benefit will be realised. 

2.14

Employee benefits  The Bank contributes towards the state pension defined contribution plan in accordance with  local  legislation  and  to  which  it  has  no  commitment  beyond  the  payment  of  fixed  contributions. Obligations for contributions to the defined contribution plan are recognised  as an expense during the year in which these are incurred. 

2.15

Earnings per share  The  Bank  presents  basic  earnings  per  share  (EPS)  data  for  its  ordinary  shares.  Basic  EPS  is  calculated by dividing the profit or loss attributable to ordinary shareholders of the Bank by  the weighted average number of ordinary shares outstanding during the period. 

37

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015  STATEMENT OF ACCOUNTING POLICIES (continued)  2.16

Regulatory capital  Following the introduction of the new CRR regime, the European Union set out standards which all Banks have to abide with. Through the Malta Financial Services Authority, the EU monitors all members to make sure the such standards are abided with. The new regulations , in essence are still a measure of Own Funds versus Risk-Weighted Assets. Nevertheless, the newly adopted risk weights are more stringent but yet a safer measure of the Bank's assets. Such new adopted measures where a direct consequence of the 2007 2008 financial crisis. The aim of such measures was to require institutions to hold more high quality capital. The standard 8% Capital Adequacy thresholds can be increased through the introduction of capital buffer requirements. Nevertheless, such requirements depend of the type of the institution and the jurisdiction in which such an institution holds its Head Office. As before, the Bank adopted the Standardised Approach for when it comes to risk weighting the Bank's exposures. Such exposures are classified into different exposure classes, namely, Sovereigns, Multilateral Developments Banks, International Organisations, Institutions, Corporates, Collective Investment Schemes and Other Assets. A multitude of preassigned risk weights are given to the exposure, which are mainly based on credit rating, maturities, underlying assets being the prime factors. The Bank’s capital base is divided in two categories, as defined in the new CRD IV Banking Rule. The Bank's main Capital base is the Share Capital invested by the shareholder. Following the introduction of the new regime, the capital base of the Bank fell into two categories which replaced the old BR03 rule: - Tier 1 Capital: This is made up of the Share Capital of the Bank and its Retained Earnings. From such a capital base, prudential filters and deductions are subtracted to give a better true and fair value of the Bank's Own Funds. - Tier 2 Capital: Mainly made up of any other Capital instruments and subordinated loans, as was the case in 2014 with the gradual phasing out of the revaluation reserve reported in 2012. The Bank’s policy is to maintain a strong capital base so as to maintain investor, creditor and  market confidence and to sustain future development of the business. The impact of the level  of  capital  on  shareholders’  return  is  also  recognised  and  the  Bank  recognises  the  need  to  maintain a balance between the higher returns that might be possible with greater gearing  and the advantages and security afforded by a sound capital position.  Capital allocation  The allocation of capital between specific operations and activities is, to a large extent, driven  by  optimisation  of  the  return  achieved  on  the  capital  allocated.  The  amount  of  capital  allocated to each operation or activity is based primarily upon the regulatory capital, but in  some  cases  the  regulatory  requirements  do  not  reflect  fully  the  varying  degree  of  risk  associated with different activities. In such cases the capital requirements may be flexed to  reflect  differing  risk  profiles,  subject  to  the  overall  level  of  capital  to  support  a  particular  operation or activity not falling below the minimum required for regulatory purposes. The  

38

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015  STATEMENT OF ACCOUNTING POLICIES (continued)  2.16

Regulatory capital (continued)  process of allocating capital to specific operations and activities is undertaken independently  of  those  responsible  for  the  operation,  by  the  Bank’s  Risk  Management  and  Credit  Administration and is subject to review by the Board of Directors or ALCO as appropriate.  Although  maximisation  of  the  return  on  risk‐adjusted  capital  is  the  principal  basis  used  in  determining how capital is allocated within the Bank to particular operations or activities, it is  not  the  sole  basis  used  for  decision  making.  Account  is  also  taken  of  synergies  with  other  operations and activities, the availability of management and other resources, and the fit of  the activity with the Bank’s longer term strategic objectives. The Bank’s policies in respect of  capital management and allocation are reviewed regularly by the Board of Directors. 

2.17

Judgements in applying accounting policies and key sources of estimation uncertainty  The amounts recognised in the financial statements are sensitive to the accounting policies,  assumptions  and  estimates  that  underlie  the  preparation  of  financial  statements.  The  judgements made by management in applying the Bank’s accounting policies that have the  most significant effect on the amounts recognised in the financial statements, together with  information  about  the  key  assumptions  concerning  the  future,  and  other  key  sources  of  estimation  uncertainty  at  the  balance  sheet  date,  that  have  a  significant  risk  of  causing  a  material adjustment to the carrying amounts of assets and liabilities within the next financial  year are:  Impairment losses on available‐for‐sale investments  In the case of financial assets classified as available‐for‐sale investments, objective evidence  of  impairment  includes  observable  data  about  the  following  loss  events,  as  applicable;  significant financial difficulty of the issuer, a breach of contract, it becoming probable that the  borrower  will  enter  bankruptcy  or  other  financial  reorganisation,  the  disappearance  of  an  active  market  for  the  financial  asset  because  of  financial  difficulties  or  observable  data  indicating that there is a measurable decrease in the estimated future cash flows from a group  of financial assets since the initial recognition of those assets. In addition to these loss events,  objective  evidence  of impairment  for  an  investment  includes  information  about  significant  changes with an adverse effect that have taken place in the technological, market, economic  or legal environment in which the issuer operates or a significant or prolonged decline in the  fair value of an investment below its cost. The determination of these loss events requires  judgement.  

2.18

Financial risk management  The Bank's activities expose it to a variety of financial risks: market risk (including currency  risk, fair value interest rate risk and price risk), credit risk, liquidity risk and cash flow interest  rate risk. The Bank's overall risk management programme focuses on the unpredictability of  financial  markets  and  seeks  to  minimise  potential  adverse  effects  on  the  Bank's  financial performance.  

39

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015  STATEMENT OF ACCOUNTING POLICIES (continued)  2.18     Financial risk management  (continued) A detailed report of the Bank’s Financial risk Management and how it operates to mitigate  such  risks  is  to  be  found  in  the  Additional  Regulatory  Requirements  section  at  the  back  of  this Annual Report. 

40

Notes to the Financial Statements Note 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34

Page Interest receivable and similar income  Income from investments  Interest payable  Net fee and commission income  Profit before taxation  Taxation  Earnings per share  Dividends per share  Balances held with Central Bank of Malta and cash Loans and advances to banks  Loans and advances to customers  Financial assets and Derivative Financial Instruments  Property, plant and equipment  Operating Leases  Intangible assets  Prepayments and accrued income  Deferred taxation  Other assets  Amounts owed to banks  Amounts owed to customers  Other Liabilities  Accruals and deferred income  Called‐up share capital  Revaluation Reserve  Ordinary Profit before changes  Cash and cash equivalents  Investor compensation scheme  Investment services license related income Related  party transactions  Contingent Liabilities  Commitments  Registered Office  Ultimate parent company  Financial Risk Management 

42 42  43  43 44  45  46 46  46 48  49 50  52  53  54 55  55  55  56  57 58  58  59  59  60  60  61  61  61  62  62 63  63  64 

Registered Office:  101, Townsquare, Ix‐Xatt ta’ Qui‐si‐Sana, Sliema, SLM 3112 – Malta  Tel: 21335705    Fax: 21335710    E‐mail: info@sparkasse‐bank‐malta.com 

41

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

NOTES TO THE FINANCIAL STATEMENTS 1.

Interest receivable and similar income

On loans and advances to banks and financial institutions On loans to customers On balances held with Central Banks

2015 EUR 399,863.49 122,629.55 694.32

2014 EUR 746,372.45 79,745.11 2,869.62

523,187.36

828,987.18

2,701.67 520,485.69

619,285.46 209,701.72

523,187.36

828,987.18

2015 EUR 1,543,637.39 17,377.08 12,338.61 (145,533.34)

2014 EUR 1,388,657.64 10,105.54 75,830.14 (45,502.08)

1,427,819.74

1,429,091.24

991,000.00

991,000.00

570,014.47 (133,194.73)

407,763.18 30,328.06

Related parties: - Interest income from parent bank - Other interest income

2.

Income from investments

Interest from quoted investments Dividend from quoted investments Profit on disposal of investments Loss on disposal of investments

Related parties: - Interest income from parent bank - Other interest income - Other Profit/ (Loss) on disposal

1,427,819.74

42

1,429,091.24

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

NOTES TO THE FINANCIAL STATEMENTS (continued) 3.

Interest payable

On customer deposits On bank deposits On balance held with Central Bank of Malta

2015 EUR 18,823.32 18,077.78 5,243.04

2014 EUR 108,999.84 12,100.03 534.94

42,144.14

121,634.81

1,207.69 40,936.45

1,864.61 119,770.20

42,144.14

121,634.81

Related parties: - Interest expense to parent bank - Other interest expenses

4.

Net fee and commission income 2015 EUR Fee and commission income Portfolio and management fees Credit related fees and commission retail banking

Fee and commission expenses Portfolio and management fees Other fees paid

Net fee and commission income

2014 EUR

3,801,884.44 2,276,989.61

2,782,243.33 1,811,075.25

6,078,874.05

4,593,318.58

(752,984.71) (184,753.59)

(502,492.82) (171,890.76)

(937,738.30)

(674,383.58)

5,141,135.75

3,918,935.00

(177,533.96) 5,318,669.71

(168,429.44) 4,087,364.44

5,141,135.75

3,918,935.00

Related parties: Fee expense to parent bank Other net fee income

43

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

NOTES TO THE FINANCIAL STATEMENTS (continued) 5.

Profit before taxation 2015 EUR

2014 EUR

Is stated after charging: Auditors' remuneration IT Expenses Other administrative expenses Depreciation Bad debts provision Bad debts written off Directors' remuneration Staff costs: - salaries and bonuses - social security costs - defined contribution plan - other staff costs

19,470.00 334,709.86 677,951.90 433,010.19 (43,881.62) 43,881.62 211,891.53

23,000.00 278,475.11 471,182.37 366,261.07 (1,071.08) 145,849.04

908,553.01 64,001.01 29,980.33 75,083.36

710,590.80 45,560.41 27,518.10 57,590.58

The weekly average number of persons employed by the Bank during the year amounted to  40 (2014: 31)  as follows: Executive and senior managerial Other managerial and clerical Others

1 38 1

2 28 1

40

31

The headcount, including persons employed as part-time, as at end of year is as follows: Executive and senior managerial Other managerial and clerical Others

44

1 43 2

2 32 2

46

36

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

NOTES TO THE FINANCIAL STATEMENTS (continued) 6.

Taxation 2015 EUR Current tax Prior year adjustment for current tax Deferred tax

2014 EUR

1,834,851.00 (1.00) 193,060.45

1,701,609.40 22,491.00 58,688.60

2,027,910.00

1,782,789.00

The provision for taxation differs from the theoretical amount that would arise using the basic tax  rate of 35% as follows:   2015 EUR 5,737,645.20

2014 EUR 5,010,475.04

Tax thereon at 35% Tax effect of: Reversal of temporary differences Prior year adjustment Permanent differences

2,008,176.00

1,753,666.00

Tax charge for the year

2,027,910.00

Profit on ordinary activities before tax

(1.00) 19,735.00

(17.00) 22,491.00 6,649.00 1,782,789.00

By means of an extraordinary resolution dated 29th December 2009, the shareholders of the Bank opted with effect from 1st January 2009 to be treated as a company which was registered in Malta on or after 1st January 2007 but was not resident in Malta before that date in accordance with Article 48(4A)(b)(i)(2) of the Income Tax Management Act. This resolution was notified to the Commissioner of Inland Revenue.

45

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

NOTES TO THE FINANCIAL STATEMENTS (continued) 7.

Earnings per share The calculation of basic earnings per share at 31 December 2015 was based on the profit attributable to ordinary shareholders of EUR 3,709,735.20 (2014: EUR 3,227,686.04) and a weighted average number of  ordinary shares outstanding of 21,419 (2014: 18,065).

8.

Dividends per share 2015 EUR Dividend per share declared and paid for the year covered by the Financial Statements

2014 EUR

137.00

345.00

The calculation of dividend per share at 31 December 2015 was based on the initial ordinary shares outstanding of 22,000. 9.

Balance held with Central Bank of Malta and cash The balance held with Central Bank of Malta includes an amount of EUR 4,672,558.09 (2014: EUR 3,268,199.87) for reserve deposits in terms of Article 37 of the Central Bank of Malta Act. An amount of EUR 148,736.05 (2014: EUR 81,146.77) has been pledged under the "Depositor Compensation Scheme". A further balance at Central Bank of Malta is left for liquidity purposes. The balances with Central Bank of Malta and cash comprises: 2015 EUR Minimum reserve deposit

2014 EUR

4,672,558.09

3,268,199.87

148,736.05

81,146.77

Malta government treasury bills

25,009,153.39

10,997,773.50

Other deposit

37,250,014.16

2.16

6,600.19

1,958.89

67,087,061.88

14,349,081.19

Depositor Compensation Scheme

Cash

Balances held with the Central Bank of Malta for Minimum Reserve Requirement bear an interest rate equal to the minimum bid rate set by the European Central Bank (ECB) on its main refinancing operations as per Regulation (EC) No 1745/2003 of the ECB of 12 September 2003.

46

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

NOTES TO THE FINANCIAL STATEMENTS (continued) 9.

Balance held with Central Bank of Malta and cash (continued) As part of its Liquidity strategy, Sparkasse Bank Malta plc, invests in Malta Government Treasury Bills which bear a maturity of between 1 month to 1 year. The composition of the end of year position is as follows:

Treasury bills acquisitions at cost: 2015 EUR

2014 EUR

At 1 January 2015

10,989,361.80

2,992,026.73

Additions at cost

77,261,914.41

32,958,972.74

Disposals at cost

(63,239,436.80)

(24,961,637.67)

25,011,839.41

10,989,361.80

At 31 December 2015 Provision for fluctuation in market value Provision for fluctuation in foreign exchange rate

(2,686.02)

8,411.70

-

-

25,009,153.39

10,997,773.50

47

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

NOTES TO THE FINANCIAL STATEMENTS (continued)

10.

Loans and advances to banks 2015 EUR Repayable at call and short notice Current term loans and advances

2014 EUR

207,986,055.04 216,259,761.64

192,719,576.86 143,254,350.66

424,245,816.68

335,973,927.52

3,783,022.24 212,476,739.40

3,651,275.05 700,000.00 138,903,075.61

216,259,761.64

143,254,350.66

246,866,813.87 110,809,538.33 45,673,746.47 5,118,532.89 3,306,947.27 12,470,237.85

174,706,997.89 74,418,913.86 68,077,200.43 4,725,215.96 6,703,571.45 7,342,027.93

424,245,816.68

335,973,927.52

413,093,194.47 2,500,280.82 2,397,078.37 2,585,558.44 3,669,704.58

329,298,195.88 1,644,836.79 3,996,097.18 552,530.00 482,267.67

424,245,816.68

335,973,927.52

305,510,051.07 118,735,765.61

302,043,284.81 33,930,642.71

424,245,816.68

335,973,927.52

Remaining maturity of term advances: -

more than 5 years from 1 to 5 years 1 year or less but over 3 months 3 months or less but not payable on demand

By currency: -

EU Currency United States Dollar UK Pound Hong Kong Dollar Swiss Franc Other currencies

By country: -

Austria Malta Luxembourg Denmark Other countries

Related parties: - Loans and advances to the parent bank - Loans and advances to other banks

48

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

NOTES TO THE FINANCIAL STATEMENTS (continued)

11.

Loans and advances to customers 2015 EUR Repayable at call and short notice Current term loans and advances Provision for bad debts

2014 EUR

1,218,085.32 1,891,991.88 -

194,097.08 2,052,658.11 (43,881.62)

3,110,077.20

2,202,873.57

919,398.94 972,592.94 -

1,070,404.50 836,640.92 145,612.69

1,891,991.88

2,052,658.11

1,755,124.96 958,477.88 392,759.59 3,714.77

1,538,990.75 648,604.25 11,885.74 3,392.83

3,110,077.20

2,202,873.57

121.18 2,485,778.79 538,626.99 85,550.24

121.67 1,010,782.28 665,479.18 526,490.44

3,110,077.20

2,202,873.57

Remaining maturity of term advances: - more than 5 years - from 1 to 5 years - 1 year or less but over 3 months - 3 months or less but not payable on demand

By currency: -

EU Currency United States Dollar UK Pound Other currencies

By country: -

Austria Malta France Other countries

At 31st December 2015 there was no General provision (2014: Nil) on these loans and advances. However, the Specific provision which was present as at end of December 2014 of EUR 43,881.62, created in 2012 for one overdraft  account, was reversed and completely in the reporting year and written off as it was deemed irrecoverable.

49

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

NOTES TO THE FINANCIAL STATEMENTS (continued) 12. Financial assets 2015 EUR

2014 EUR

Acquisitions at cost: Bonds Investment Funds Certificates

84,125,157.08 1,744,370.38

74,464,992.98 1,744,370.38

Additions at cost Disposals at cost

85,869,527.46 27,370,511.68 (6,235,155.00)

76,209,363.36 10,704,564.10 (1,044,400.00)

107,004,884.14 (999,999.93) (305,219.33) 653,237.65

85,869,527.46

106,352,902.53

85,830,430.51

88,512,511.49 11,724,859.96 6,115,531.08

81,664,151.65 2,872,497.54 1,293,781.32

106,352,902.53

85,830,430.51

64,499,336.75 7,297,875.76 6,685,466.80 6,417,503.05 21,452,720.17

65,595,777.75 3,975,202.00 4,517,430.00 2,246,611.90 9,495,408.86

106,352,902.53

85,830,430.51

64,000,000.00 42,352,902.53

65,051,000.00 20,779,430.51

106,352,902.53

85,830,430.51

Impairment provision Provision for fluctuation in market value Provision for fluctuation in foreign exchange rate

(999,999.93) 885,146.53 75,756.45

By currency: - EU Currency - United States Dollar - UK Pound

By country -

Austria Malta Germany Luxembourg Other Countries

Related parties: Bonds issued by the parent bank Other investments

50

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

NOTES TO THE FINANCIAL STATEMENTS (continued) 12. Financial assets (continued) 2015 EUR Issued by Public Bodies: - Local Government - Foreign Sovereigns

Issued by Public Issuers: - Local Banks - Foreign Banks - Foreign Corporates - Collective Investment Schemes

Total available‐for‐sale assets held

2014 EUR

6,778,625.76 22,712,302.05

3,453,052.00 12,014,697.54

29,490,927.81

15,467,749.54

519,250.00 68,800,098.73 6,552,365.26 990,260.73

522,150.00 66,931,891.32 2,111,800.00 796,839.65

76,861,974.72

70,362,680.97

  106,352,902.53

      85,830,430.51

The Specific impairment was created for an Investment Fund Certificate in 2008.

51

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

NOTES TO THE FINANCIAL STATEMENTS (continued)

13. Property, plant and equipment

Freehold Premises EUR

Computer Hardware EUR

Furniture Fittings & Equipment EUR

Motor Vehicle EUR

Total EUR

Cost At 1 January 2014 Additions Written off

998,105.45 -

169,098.00 172,558.43 (6,778.68)

309,538.70 46,238.13 (13,087.24)

23,500.00 59,500.00 -

1,500,242.15 278,296.56 (19,865.92)

At 31 December 2014

998,105.45

334,877.75

342,689.59

83,000.00

1,758,672.79

At 1 January 2015 Additions Written Off

998,105.45 -

334,877.75 148,310.59 -

342,689.59 150,715.37 (2,085.77)

83,000.00 -

1,758,672.79 299,025.96 (2,085.77)

At 31 December 2015

998,105.45

483,188.34

491,319.19

83,000.00

2,055,612.98

166,257.56 29,055.75 (13,087.24)

16,450.00 16,600.00 -

444,580.39 157,720.69 (19,865.92)

Depreciation At 1 January 2014 Charge for the year Released

199,182.44 39,946.15 -

62,690.39 72,118.79 (6,778.68)

At 31 December 2014

239,128.59

128,030.50

182,226.07

33,050.00

582,435.16

At 1 January 2015 Charge for the year Released

239,128.59 39,946.15 -

128,030.50 109,651.52 -

182,226.07 40,907.85 (730.03)

33,050.00 14,250.00 -

582,435.16 204,755.52 (730.03)

At 31 December 2015

279,074.74

237,682.02

222,403.89

47,300.00

786,460.65

At 31 December 2013

798,923.01

106,407.61

143,281.14

7,050.00

1,055,661.76

At 31 December 2014

758,976.86

206,847.25

160,463.52

49,950.00

1,176,237.63

At 31 December 2015

719,030.71

245,506.32

268,915.30

35,700.00

1,269,152.33

Net book value

52

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

NOTES TO THE FINANCIAL STATEMENTS (continued)

14. Operational Leases At the end of 2015, the Bank had the following outstanding commitments under operating leases, which fall due as follows: 2015 EUR Less than 1 year Between 1 and 2 years More than 2 years

2014 EUR

114,142.06 413,115.45 214,682.66

56,794.71 292,145.23 128,581.16

741,940.17

477,521.10

The Bank leases the office premises under an operating lease agreement spanning 9 years, 3 years of which are on a di fermo basis, while having the option to extend for a further 2 periods of 3 years each. Lease payments, recognised as an expense and posted to the Profit and Loss account of Sparkasse Bank Malta plc for the year ended amounted to EUR 63,471.47.

53

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

NOTES TO THE FINANCIAL STATEMENTS (continued)

15. Intangible assets Bavaria Banken Software

Self Developed Software

Software Under Development

Other Software

Total

EUR

EUR

EUR

EUR

EUR

Cost At 1 January 2014 Additions

692,202.09 24,835.20

33,351.42 326,054.93

-

184,411.79 62,174.75

909,965.30 413,064.88

At 31 December 2014

717,037.29

359,406.35

-

246,586.54

1,323,030.18

At 1 January 2015 Additions

717,037.29 43,916.40

359,406.35 -

351,798.62

246,586.54 35,662.16

1,323,030.18 431,377.18

At 31 December 2015

760,953.69

359,406.35

351,798.62

282,248.70

1,754,407.36

Depreciation At 1 January 2014 Charge for the year

273,696.80 148,211.55

17,970.32

-

103,460.31 51,749.21

377,157.11 217,931.08

At 31 December 2014

421,908.35

17,970.32

-

155,209.52

595,088.19

At 1 January 2015 Charge for the year

421,908.35 157,029.10

17,970.32 35,940.64

-

155,209.52 45,784.82

595,088.19 238,754.56

At 31 December 2015

578,937.45

53,910.96

-

200,994.34

833,842.75

At 31 December 2013

418,505.29

33,351.42

-

80,951.48

532,808.19

At 31 December 2014

295,128.94

341,436.03

-

91,377.02

727,941.99

At 31 December 2015

182,016.24

305,495.39

351,798.62

81,254.36

920,564.61

Net book value

The Bank has continued to invest heavily in its I.T. infrastructure and just like in previous years, software being under development and still under creation has not been depreciated in accordance with the Bank's accounting policies. Self-developed software which went live in 2014, has been depreciated following its launch during the prior year.

54

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

NOTES TO THE FINANCIAL STATEMENTS (continued)

Prepayments and accrued income

16.

Accrued income Prepayments

2015 EUR 1,046,955.62 50,244.82

2014 EUR 1,041,429.19 17,657.84

1,097,200.44

1,059,087.03

750,063.89 347,136.55

708,880.00 350,207.03

1,097,200.44

1,059,087.03

Related parties: - Accrued income and prepayments from the parent bank - Other accrued income and prepayments

17.

Deferred tax The balance on the deferred taxation account arises as a consequence of temporary differences arising on:

Capital allowances Fair value adjustment for Financial Assets and T-Bills Securities foreign exchange adjustment

2015

2014

EUR

EUR

276,438.00

346,200.95

(307,905.35)

893,558.23

653,237.65

75,756.45

Provision for bad debts Impairment provision

Deferred tax asset / (liability) thereon @ 35%

18.

-

(43,881.62)

(999,999.93)

(999,999.93)

(378,229.63)

271,634.08

132,380.00

(95,071.93)

Other assets 2015

2014

EUR

EUR

Up-Front Payments

-

4,000.00

Items in course of collection

-

180,172.61

-

184,172.61

55

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

NOTES TO THE FINANCIAL STATEMENTS (continued)

19.

Amount owed to banks 2015 EUR

Repayable at call and short notice Current term deposits

2014 EUR

3,894,356.14 -

3,308,327.97 -

3,894,356.14

3,308,327.97

2,545,476.92 760,560.53 588,318.37 0.32

899,677.02 1,749,274.39 583,595.46 75,781.10

3,894,356.14

3,308,327.97

740,929.29 46,150.87 1,566,251.58 791,114.78 749,909.62

732,409.69 271,548.65 231,953.29 1,453,859.43 618,556.91

3,894,356.14

3,308,327.97

3,894,356.14

3,308,327.97

3,894,356.14

3,308,327.97

Analysed by currency: -

EU currency United States Dollar Canadian Dollar Other currencies

Analysed by country: - Austria - Malta - Italy - Canada - Other countries

Related parties: - Loans and advances to the parent bank - Loans and advances to other banks

56

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

NOTES TO THE FINANCIAL STATEMENTS (continued)

20.

Amount owed to customers 2015 EUR

Repayable at call and short notice Current term deposits

2014 EUR

559,440,422.96 12,765,656.60

366,103,209.07 42,895,372.46

572,206,079.56

408,998,581.53

63,397.72 12,702,258.88

1,047,702.44 41,847,670.02

12,765,656.60

42,895,372.46

377,052,951.83 122,648,441.75 52,197,321.77 5,116,939.18 4,898,291.34 10,292,133.69

245,608,640.47 76,122,503.96 69,295,374.74 4,726,325.54 3,033,841.82 10,211,895.00

572,206,079.56

408,998,581.53

2,189,947.02 389,318,025.03 23,890,331.79 26,934,667.08 129,873,108.64

124,143.27 250,627,411.90 14,273,734.59 24,639,298.65 119,333,993.12

572,206,079.56

408,998,581.53

With agreed maturity dates or periods of notice, by remaining maturity: - more than 5 years - more than 1 to 5 years - 1 year or less but over 3 months - 3 months or less but not payable on demand

Analysed by currency: -

EU currency United States Dollar UK Pound Hong Kong Dollar Canadian Dollar Other currencies

Analysed by country: -

Austria Malta Cayman Islands British Virgin Islands Other countries

57

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

NOTES TO THE FINANCIAL STATEMENTS (continued)

Other liabilities

21.

Amount due to shareholders

2015

2014

EUR

EUR

3,014,000.00

6,210,000.00

Withholding tax

34,264.48

28,734.81

Items in course of collection

41,448.26

-

Other creditors

92,587.57

10,934.40

3,182,300.31

6,249,669.21

The shareholders' current account for 2015 of EUR 3,014,000 (2014: EUR 6,210,000) is unsecured,  interest free and does not have any fixed date of repayment.

Accruals and deferred income

22.

Accrued interest payable Accrued liabilities

2015 EUR 791.68 166,833.50

2014 EUR 1,437.37 133,895.56

167,625.18

135,332.93

167,625.18

135,332.93

167,625.18

135,332.93

Related parties: - Accrued expenses and liabilities to the parent bank - Other accrued expenses and liabilities

58

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

NOTES TO THE FINANCIAL STATEMENTS (continued)

23.

Called-up Share Capital 2015 EUR

2014 EUR

Authorised: 15,000 Ordinary 'A' voting shares of €1,000 each 15,000 (2014: 5,000) Ordinary 'B' non-voting shares of €1,000 each

15,000,000 15,000,000

15,000,000 5,000,000

30,000,000

20,000,000

15,000,000 7,000,000

15,000,000 5,000,000

22,000,000

20,000,000

Issued and fully paid: 15,000 (2014: 15,000) Ordinary 'A' voting shares of €1,000 each 7,000 (2014: 5,000) Ordinary 'B' non-voting shares of €1,000 each

24.

Revaluation reserve The revaluation reserve comprising the cumulative net change in fair value of available-for-sale assets held by the Bank, net of tax represents: 2015

2014

EUR

EUR

On available for sale investments (Note 12) Balance at 1 January 2015 Fair value movement for the year Deferred tax Balance at 31 December 2015

580,812.85 (1,201,463.58)

122,112.82 705,692.36

420,512.38

(246,992.33)

(200,138.35)

580,812.85

59

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

NOTES TO THE FINANCIAL STATEMENTS (continued)

25.

Ordinary profit before changes in operating assets and liabilities 2015 EUR

Profit on ordinary activities before tax

2014 EUR

5,737,645.20

5,010,475.04

145,533.34

45,502.08

(12,338.61)

(75,830.14)

(577,480.75)

(75,756.45)

Adjustment for: - Loss on disposal of securities - Gains on disposal of securities - Unrealised foreign exchange fluctuation on securities - Loss on fixed assets and investments written off - Reduction in Provision on loans and advances to customers - Prepayments and accrued income - Interest payable and accrued liabilities - Depreciation

26.

1,355.74

(1,071.08)

(43,881.62) (38,113.41)

(69,965.03)

32,292.25

(73,171.07)

433,010.19

366,261.07

5,678,022.33

5,126,444.42

2015 EUR 6,600.19 999,982.00 207,986,055.04

2014 EUR 1,958.89 3,499,704.50 192,719,576.86

208,992,637.23

196,221,240.25

Cash and cash equivalents

Cash in hand (note 9) Malta Government treasury bills (note 9) Money on call and at short notice (note 10)

Malta Government treasury bills included within the above note are treasury bills bearing an original maturity of less than 3 months.

60

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

NOTES TO THE FINANCIAL STATEMENTS (continued) 27.

Investor Compensation Scheme In accordance with the provisions of the Investor Compensation Scheme Regulations issued under the Investment Services Act, licence holders are required to transfer a variable contribution to an Investor Compensation Scheme Reserve and place the equivalent amount with a bank, pledged in favour  of  the  Scheme.  This  amounted  to  EUR  876.68  during  the  year  under  review  (2014:  EUR  873.66).  

28.

Investment Services Licence Related Income Net Income derived during the current year from activities for which an Investment Services Licence  has  been  issued  to  the  Bank  amounted  to  EUR  3,048,899.73  (2014: EUR 2,279,750.51).

29.

Related party transactions

In the normal course of its operations, the bank conducts business on an arm's length basis with its ultimate parent bank ‐ Sparkasse Schwaz AG. Transactions during the year consisted of the following:

Interest receivable and similar income (note 1) Interest from quoted investments (note 2) Interest payable on deposits (note 3) Commission payable (note 4)

2015 EUR

2014 EUR

2,701.67 991,000.00 (1,207.69)

619,285.46 991,000.00 (1,864.61)

(177,533.96)

(168,429.44)

2015 EUR

2014 EUR

Year end balances with the ultimate parent bank are as follows:

Loans and advances to banks (note 10) Bonds issued by the parent bank (note 12) Prepayments and accrued income (note 16)

305,510,051.07 64,000,000.00 750,063.89

302,043,284.81 65,051,000.00 708,880.00

61

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

NOTES TO THE FINANCIAL STATEMENTS (continued)

29.

Related party transactions (continued) Key management personnel compensation: Key management personnel are those persons having authority and responsibility for the planning, directing and controlling the activities of the company. Key management personnel compensation is disclosed below:

Salary and Bonuses Defined Contribution Plan Social Security Contribution

30.

2015

2014

EUR

EUR

197,716.37

135,015.00

12,000.00

8,691.04

2,175.16

2,143.00

211,891.53

145,849.04

Contingent Liabilities In 2014, the Bank had entered into a guarantee agreement with Sparkasse Schwaz AG valued at EUR 5,000,000 (2014: EUR 3,000,000) guaranteeing part of a loan that the Bank's Ultimate Parent Company -Sparkasse Schwaz AG lent to Vienna Insurance Group. The Board of Directors believe that it is extremely remote that such a Contingent Liability will materialise. Such a guarantee expires in 2016.

31.

Commitments

Credit Facilities and other commitments to lend

62

2015 EUR 6,954,613.68

2014 EUR 6,241,598.26

6,954,613.68

6,241,598.26

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

NOTES TO THE FINANCIAL STATEMENTS (continued)

32.

Registered Office Sparkasse Bank Malta plc is a public limited company domiciled and incorporated in Malta. Its registered office is 101, Townsquare, Qui-Si-Sana Seafront, Sliema, SLM 3112 - Malta.

33.

Ultimate parent company The parent company is Sparkasse Holdings (Malta) Limited, registered in Malta which acts as a holding company for the ultimate parent Bank -   Sparkasse  Schwaz  AG,  a  savings  bank  established in the Republic of Austria. Its registered office is Franz-Josef-Straße 8–10, Postfach 45, A-6130 Schwaz, Austria. Such a Bank forms part of Erste Group, which has its shares listed on the Austrian Stock Exchange.

63

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

NOTES TO THE FINANCIAL STATEMENTS (continued) 34.

Financial Risk Management

Introduction   Sparkasse Bank Malta plc is a fully owned subsidiary of Sparkasse Schwaz AG, which in turn forms part  of  a  much  larger  banking  group,  Erste Group Bank  AG,  with  its  head  office  in  Vienna,  Austria.  The  bank  commenced  business  in  Malta  in  2001  as  a  licenced  credit  institution  and  also  enjoys  MFSA  Investment Services Category 2 and 4a licences.  At Sparkasse Bank Malta plc the risk management function falls under the responsibility of the Board  of  Directors,  which  in  turn  relies  on  recommendations  and  information  provided  inter  alia  by  the  Executive  Committee,  the  local  director,  the  parent  bank’s  Accounting  and  Regulatory  Reporting  Division and the Group’s ALCO.   The main categories of risk which the Bank faces, and thus are given importance in this report are the  following:      

Credit Risk Market Risk Reputational Risk Operational Risk Liquidity Risk

Apart from the above, within this report, one will find the reference to the Bank’s Own Funds  and  Capital Risk Management Report.   a) Credit Risk Credit Risk can be simply defined as the risk of suffering financial loss, due to the failure of the Bank’s customers or counterparties being unable to meet and fulfil their obligations to the Bank. Usually these can be in form of loans and advances to customers and the investment in debt securities. As a general rule, in the course of its business, the Bank does not incur credit risk by lending funds to its customers. In the rare occasions that it does, it is almost invariably against full cash collateral and for short terms. The potential credit risk arising from loans and advances to customers as at 31 December 2015 was at €10,064,690.88 in comparison to the €8,444,471.83 reported at the end of the previous financial year.

64

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

NOTES TO THE FINANCIAL STATEMENTS (continued) 34.

Financial Risk Management (continued)

However, the Bank is exposed to credit risk through its activity in Investments, which include deposits with other banks, mainly with the Parent bank – Sparkasse Schwaz AG and through its own investment in Debt Securities. The Bank’s investment policy determines what level of risk can be undertaken for different asset classes, in relation to external ratings by major rating agencies, such as Standard and Poor’s, Fitch and Moody’s as well as length of time of such a debt security, what sector such a security is centred upon and various other contributing factors such as coupon rate, yield and others. Such investments are normally classified at available-for-sale. The  Board  of  Directors,  together  with  the  input  of  the  Executive  Committee  is  responsible  for  the  management of such credit risk. It is of the utmost importance that such a risk is well managed and  reviewed  on  a  frequent  basis,  apart  from  the  normality  and  mandatory  quarterly  reporting  to  the  Regulator.  Constant  on‐going  monitoring  and  updating  of  such  internal  calculation  is  considered  pivotal and vital for the optimum running of the Bank.   The  Bank’s  credit  risk  exposures  relating  to  on‐balance  sheet  assets  and  off‐balance  sheet  instruments,  reflecting  the  carrying  amount  of  the  same  exposure  and  as  reported  to  the  Malta  Financial Services Authority as at 31st December 2015 are as follows:  2015 €'000

2014 €'000

Balances with Central Bank of Malta Loans and Advances to Banks Loans and Advances to Customers Available-for-sale Financial Assets Other Assets

67,087 424,246 3,110 106,353 3,419

14,349 335,974 2,203 85,830 3,148

Total Credit Risk Exposures - On Balance Sheet Assets

604,215

441,504

5,000 6,955

3,000 6,242

11,955

9,242

Credit Risk Exposures - On Balance Sheet Assets

Credit Risk Exposures - On Balance Sheet Assets Contingent Liabilities Commitments Total Credit Risk Exposures - On Balance Sheet Assets

Apart  from  the  standard  cash  held  at  the  Central  Bank  of  Malta  for  Reserve  requirements,  the  Bank  places  its  cash  with  high  quality  financial  institutions.  The  Bank’s  Statement  of  Financial  Position, and the adjoining notes, show that a sizeable amount of cash is placed with the parent Bank  – Sparkasse Schwaz AG. With  respect  to  the  loans  and  advances  to  customers all the loans,  the one  doubtful loan  amounting to € 43,882 as at end of December 2014 was reversed written off. No new doubtful loans were classified as at end of the reporting period. All loans are classified as regular and their  activity is monitored on a frequent basis. 

65

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

NOTES TO THE FINANCIAL STATEMENTS (continued) 34.

Financial Risk Management (continued)

Apart from the normal factors that constitute credit risk, the Bank also closely monitors the location  from which such credit risk is being borne. This following is a table that shows the country of risk of  the Bank’s credit risk:  2015 Central Government or Central Banks Institutions Corporates Collective Investment Scheme Other Items

Carrying Amount €'000 96,578 493,565 9,663 990 3,419 604,215

2014 Central Government or Central Banks Institutions Corporates Collective Investment Scheme Other Items

Carrying Amount €'000 29,817 403,428 4,314 797 3,148 441,504

66

Malta €'000 73,866 3,019 2,486 2,372 81,743

Malta €'000 17,802 2,167 967 1,956 22,892

Austria €'000

Other

477,093 499 824

€'000 22,712 13,453 7,177 491 223

478,416

44,056

Austria €'000

Other

394,349 545 121

€'000 12,015 6,912 3,347 252 1,071

395,015

22,797

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

NOTES TO THE FINANCIAL STATEMENTS (continued) 34.

Financial Risk Management (continued)

Such credit risk is also analysed below in terms of residual maturity:  2015 Central Government or Central Banks Institutions Corporates Collective Investment Scheme Other Items

2014 Central Government or Central Banks Institutions Corporates Collective Investment Scheme Other Items

Carrying Amount €'000 96,578 493,565 9,663 990 3,419

Up to 1 Year €'000 42,078 420,463 2,192 1,229

Over 1 to 5 Years €'000 48,894 73,102 5,040 2,190

Over 5 Years €'000 5,606 2,431 990 -

604,215

465,962

129,226

9,027

Carrying Amount €'000 29,817 403,428 4,314 797 3,148

Up to 1 Year €'000 19,861 332,413 1,636 1,244

Over 1 to 5 Years €'000 9,692 71,015 2,678 1,904

Over 5 Years €'000 264 797 -

441,504

355,154

85,289

1,061

67

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015

NOTES TO THE FINANCIAL STATEMENTS (continued) 34.

Financial Risk Management (continued)

Following the ICAAP, the Bank also keeps a firm look out for the asset quality when it comes to the   debt  securities  the  Bank  invests  in.   It  is  on  very  rare  occasions  that  the  Bank  invests  in  a  debt  security  which  has  a  rating  lower  than  that  of  A‐.  Below  is  a  breakdown  of  the  credit  quality  of  the  Bank’s  debt  securities  and  treasury  bills  according to  the  rating  given  by  the  market  leading  credit  rating agencies, Standard and Poor’s, Fitch and Moody’s. 

€'000 62,820 3,552 64,990 64,000

Treasury Bills €'000 25,009 -

Other Securities €'000 37,811 3,552 64,990 64,000

131,362

25,009

106,353 Other Securities €'000 18,335 1,558 65,937 65,051 85,830

2015 015

Total

AAA to ALower than AUnrated of which Parent Bank

014 2014

Total

AAA to ALower than AUnrated of which Parent Bank

€'000 29,333 1,558 65,937 65,051

Treasury Bills €'000 10,998 -

96,828

10,998

The following table also provides an analysis of how the Bank values its Financial Assets at fair value. The Bank holds Level 1 and Level 2 financial assets, with Level 2 denoting Unrated and Unlisted bonds held as at end of year. Financial Assets not quoted in active markets are determined using valuation techniques. Such techniques are tested for validity and re-calibrated while factors normally used in setting a price and accepted as normal methodologies for pricing are always monitored and kept in line. 2015 AAA to ALower than AUnrated

2014 AAA to ALower than AUnrated

68

Total €'000 62,820 3,552 64,990

Level 1 €'000 62,820 3,552 -

131,362

66,372

Total €'000 29,333 1,558 65,937

Level 1 €'000 29,333 1,558 -

96,828

30,891

Level 2 €'000 64,990 64,990 Level 2 €'000 65,937 65,937

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

NOTES TO THE FINANCIAL STATEMENTS (continued) 34.

Financial Risk Management (continued)

b) Market Risk Market risk is the risk that the fair value, or future cash flows, of financial instruments will fluctuate due to changes in market variables such as interest rates, foreign exchange risk and share  prices. Consequently, Market Risk is made up of the following three foundations:    

Interest Rate risk, which is brought about by changes in interest rates Exchange Rate risk, which the risk brought about by change in exchange rates vis‐à‐vis foreign currency holdings Investments price risk,  which is the risk of incurring losses due to the changes in the prices of investments

The  Bank's   overall  risk  management  programme focuses  on  the   unpredictability   of  financial  markets and seeks to minimise potential adverse effects on the Bank's financial performance.   i) Interest Rate Risk Interest Rate risk is a risk that is brought about and incurred due to the changes in the market  interest  rates.  Given that the  Bank  accepts  both deposits  at  fixed  rates  of interest and also at variable rates of interest and for a variety of maturity periods, risk can  result from  the  cash  flow  mismatches  at  certain  periods  of  time.  Such risk  is monitored and managed through the ALCO which sees that interest rate gaps, resulting from  mismatches between  the  interest‐earning  assets  and  interest‐bearing  liabilities owned  and  owed  by the  Bank  will not have  an  adverse  effect  on  the  Bank  and  on  its daily operations.

69

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015

NOTES TO THE FINANCIAL STATEMENTS (continued) 34.

Financial Risk Management (continued) ii) Exchange Rate Risk The bank is exposed to foreign exchange risk arising from various currency exposures. The main exposures arise from four major currencies which are the USD, GBP, HKD and CHF. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities and net investments in foreign operations. As at 31 December 2015

USD to EUR

GBP to EUR

CHF to EUR

HKD to EUR

€'000

€'000

€'000

€'000

Assets denominated in foreign currencies Loans and advances to parent bank Loans and advances to other banks Loans and advances to customers Financial Assets

32,211 78,599 958 11,725

25,479 20,195 393 6,116

2,231 1,076 2 -

4,620 499 -

123,493

52,183

3,309

5,119

761 122,648

52,197

-

-

3,308

5,117

123,409

52,197

3,308

5,117 2

Liabilities denominated in foreign currencies Amounts owed to parent bank Amounts owed to other banks Amounts owed to customers

Net Exposure

As at 31 December 2014

84

(14)

1

USD to EUR

GBP to EUR

CHF to EUR

HKD to EUR

€'000

€'000

€'000

€'000 Assets denominated in foreign currencies Loans and advances to parent bank Loans and advances to other banks Loans and advances to customers Financial Assets

66,898 7,521 649 2,872

57,201 10,876 12 1,294

4,940 1,764 2 -

4,339 386 -

77,940

69,383

6,706

4,725

1,749 76,123

44 69,295

-

-

6,654

4,726

77,872

69,339

6,654

4,726

68

44

52

Liabilities denominated in foreign currencies Amounts owed to parent bank Amounts owed to other banks Amounts owed to customers

Net Exposure 70

(1)

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

NOTES TO THE FINANCIAL STATEMENTS (continued) 34.

Financial Risk Management (continued) The exchange rates used as at end of year are as follows: 2015 EUR USD to EUR GBP to EUR CHF to EUR HKD to EUR

1.0889 0.7353 1.0814 8.4500

2014 EUR 1.2148 0.7783 1.2023 9.4250

The Bank monitors frequently the effect of such a risk, and through the ALCO report the Group compiles for the Bank, it has a very good idea of how the bank stands with respect to the net exposures to foreign currencies. The table in the preceding page summarises the Bank’s exposure to the four main foreign currencies. iii) Investment Price Risk The Bank is exposed to securities price risk by virtue of the investments held by the Bank and classified on the balance sheet either as available-for-sale or at fair value through profit or loss. The Board of Directors together with the Executive Committee frequently monitor the positions that the bank has as Financial Assets and comes up with solutions and decisions were deemed fit should the Board decide on new investments or on disposing of any. Nevertheless, the Bank maintains its stance on investing in high quality financial assets with a health credit rating. It is important to note also that the Bank is not exposed to commodity price risk. c) Reputational Risk Reputational  Risk  is  the  risk  that  a  Bank  may  be  exposed  to  negative  publicity  about  its business practices leading to impairment in its liquidity or capital base. The Board of Directors, through  the Executive Committee, constantly reviews the bank’s activities from an ethical, trust, integrity and  honesty point of view to ensure that the bank’s reputation is always safeguarded.  d) Operational Risk Operational  Risk  is  the  non‐financial  risk  of  loss  arising  from  failed  internal  processes  or systems as well as from external events. The Board of Directors, through the Executive Committee,  regularly monitors operational risk by early identification and appropriate action. Operational risks  are  mitigated  by  a  system  of  controls,  policies,  procedures  and  random  checks.  In  addition  risk  is  mitigated  through  adequate  back  up  sites  and  systems  and  the  continuous  maintenance  of  the  business continuity plan.  With the use of the Basic Indicator Approach under the current Capital Regulatory Directive (CRD),  and based on the financial results in 2012, 2013 and 2014, given that a three year average needs to  be taken, the Bank calculated that the Operational Risk for the year 2015 is € 847K and for the year 2016 is € 1,066K.

71

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

NOTES TO THE FINANCIAL STATEMENTS (continued) 34.

Financial Risk Management (continued) 2015 €'000

2014 €'000

Net Interest Income less Interest payable and similar charges

2,084 (42) 2,042

2,228 (122) 2,106

Profit on foreign exchange activity Net fee and Commission Income Other Operating Income Operating Profit 3 Year Profit Average (2012: 4 238;2013: 5 587) 15% Haircut Application (for 2016 / for 2015)

1,442 5,141 8,625 7,106 1,066

1,080 3,919 7,105 5,644 847

e) Liquidity Risk Liquidity  Risk  is  the  risk  that  an  entity  will  encounter  difficulty  in  meeting  expected  or unexpected current and future cash flows needs without affecting daily operations or the financial  condition of the bank. Liquidity risk may also result from the inability to sell a financial asset quickly at  close  to  its  fair  value.  Prudent  liquidity  risk  management  implies  maintaining  sufficient  cash  and  marketable securities, the availability of funding through an adequate amount of committed credit  facilities and the ability to close out market positions.   Sparkasse  Bank  Malta  PLC  maintains  a  very  conservative  approach  to  the  ratio  of  liquid  assets  to  short term liabilities and its loan to deposit ratio and the regulatory liquidity ratios are very positive,  almost invariably  well  in  excess  of  the  statutory  minimum  of  30%. As at 31st December 2015, the Bank's loan to deposit ratio stood at 74.2%, while the proportion of liquid assets to short term liabilities maturing within three months was at 77.6%. Furthermore, the new LCR and NSFR ratios, introduced by way of the new CRD IV package, where constantly monitored throughout the year through exercises and studies carried out by the Group that Sparkasse Bank Malta plc falls under - Erste Group. The LCR threshold was enforced by 1st October 2015 and has a minimum requirement of 60% with periodical and equal increments up to 100%. The Bank is satisfied with the current position it is in, with LCR figure standing at 151.81%, well above the 60% threshold. Nevertheless, the Bank will continue to monitor such figures on a monthly basis. The Board of Directors, through the ALCO committee and Executive Committee, constantly monitors such ratios and figures and discusses ways of how to mitigate such a risk. The Bank's liquidity profile is generally made up of cash deposits and a sizeable portfolio of Financial Assets which are eligible as collateral against borrowing from the European Central Bank. Such Financial Assets are mainly government bonds of highly rated countries including Malta, Germany and Luxembourg amongst others.

72

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

NOTES TO THE FINANCIAL STATEMENTS (continued) 34.

Financial Risk Management (continued)

The following table analyses the Bank's principal assets and liabilities when grouped into maturity classes based on their remaining lifetime period as at the reporting date.

2015

Assets Balances with Central Bank of Malta Loans and advances to Banks Loans and Advances to Customers Available-for-sale Financial Assets

Liabilities Amounts owed to Banks Amounts owed to Customers

Over 3 Months and 1 Year €'000

Over 1 Year and 5 Years €'000

Total

Up to 3 Months

€'000

€'000

67,087 424,246 3,110 106,353

42,078 420,463 1,218 1

25,009

-

973 -

3,783 919 97,325

9,027

600,796

463,760

25,982

102,027

9,027

3,894 572,206

3,894 572,143

63

-

-

576,100

576,037

63

-

-

Over 5 Years €'000

Maturity Gap / (Deficit)

(112,277)

25,919

102,027

9,027

Cumulative Gap / (Deficit)

(112,277)

(86,358)

15,669

24,696

73

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015

NOTES TO THE FINANCIAL STATEMENTS (continued) 34. f)

Financial Risk Management (continued) Own Funds While the Bank’s capital management is based on the regulatory requirements established by the  regulations  modelled  on  the  European  Union  Directive  of  Capital  Requirements,  the Standardised Approach is used to calculate the Capital Requirement for the Bank. Sparkasse Bank Malta  plc  holds  a  very  simple  Capital  base  for  its  calculation  through  the  Capital Adequacy measure stipulated in the new CRD IV regime. Own Funds gives an indication of the Bank’s available capital and reserves while underlining  the strength of the Bank and keeping in line with the regulations stipulated within the above  mentioned rule. It must be mentioned that during the year ended 31st December 2015, the  Bank always kept in line with the limits set by the Banking Rule.  Below is a breakdown of how the Bank’s Capital Base is divided under the Banking Act.  

Total EUR Own Funds Tier 1 Capital Paid up Share Capital Retained Earnings (note i) Total Tier 1 Capital prior to prudential filters and deductions

22,000 1,130 23,130

Deductions Adjustment to CET1 due to prudential filters Intangible Assets Other transitional adjustments due to Article 3 in CRR Total prudential filters and deductions Total Tier 1 Capital after prudential filters and deductions

(54) (921) (975) 22,155

Tier 2 Capital Capital instruments and subordinated loans Total Tier 2 Capital Total Own Funds Own Funds Requirement

74

22,155 126,526

Tier 1 Capital Ratio

17.51%

Total Capital Ratio

17.51%

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

NOTES TO THE FINANCIAL STATEMENTS (continued) 34.

Financial Risk Management (continued) f)

Own Funds (continued) i) Paid Up Share Capital The Bank’s Share Capital as at 31st December 2015 is analysed and split up in note 23. ii) Eligible Retained Earnings This is the balance remaining from the retained earnings and represents the amount after eligibility of the annual profit less the dividend paid out to the shareholder. iii) Adjustment to CET1 due to prudential filters This adjustment represents the prudent valuation upon the Bank's available for sale assets. Such valuation is in accordance to the CRD IV. iv) Grandfathered Tier 2 Capital Instruments Such figure represents the amount that is being phased out with regards to the revaluation reserve brought forward from previous years.

75

76

Detailed Income Statement

Registered Office: 101, Townsquare, Ix-Xatt ta’ Qui-si-Sana, Sliema, SLM 3112 - Malta Tel: 21335705

Fax: 21335710

E-mail: [email protected]

77

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

DETAILED INCOME STATEMENT 2015 EUR

2014 EUR

523,187.36

828,987.18

1,543,637.39 17,377.08 12,338.61 (145,533.34)

1,388,657.64 10,105.54 75,830.14 (45,502.08)

1,427,819.74

1,429,091.24

1,951,007.10

2,258,078.42

Interest receivable and similar income Loans and advances to banks and financial institutions Income from investments Interest from quoted investments Dividend from quoted investments Gains from disposal of investments Loss from disposal of investments

Interest payable and similar charges Deposits from customers Deposits from banks

Net interest income

(18,823.32) (23,320.82)

(108,999.84) (12,635.97)

(42,144.14)

(121,634.81)

1,908,862.96

2,136,443.61

1,442,297.68

1,080,052.83

6,078,874.05 (937,738.30)

4,593,318.58 (674,383.58)

5,141,135.75

3,918,935.00

8,492,296.39

7,135,431.44

-

-

Trading profits Impairment provision reversal Profit on foreign exchange activities Commissions Receivable Payable

Operating profit Other income Administration expenses Bad debt reversal Bad debts written off Write off and disposal of fixed assets Depreciation

Profit on ordinary activities

78

(2,320,285.26) 43,881.62 (43,811.62) (1,355.74) (433,010.19)

(1,759,766.41) 1,071.08 (366,261.07)

(2,754,651.19)

(2,124,956.40)

5,737,645.20

5,010,475.04

5 Year Summaries

Registered Office: 101, Townsquare, Ix-Xatt ta’ Qui-si-Sana, Sliema, SLM 3112 - Malta Tel: 21335705

Fax: 21335710

E-mail: [email protected]

79

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

INCOME STATEMENT ‐ 5 YEAR SUMMARY 2015 €'000

2014 €'000

2013 €'000

2012 €'000

2011 €'000

Operating income Interest receivable and similar income Income from investments

523 1,428

829 1,429

813 1,210

1,573 939

1,127 (2,864)

Interest payable and similar charges

1,951 (42)

2,258 (122)

2,023 (81)

2,512 (288)

(1,737) (383)

Net interest income Impairment loss on securities Profit on foreign exchange activities Commissions (net)

1,909 1,442 5,141

2,136 1,080 3,919

1,942 888 2,764

2,224 767 1,674

(2,120) 995 443 1,474

Operating profit

8,492

7,135

5,594

4,665

792

-

-

64

8

9

Other income Operating expenses Administrative expenses Profit on ordinary activities before taxation Tax on ordinary activities Profit on ordinary activities after taxation Earnings per 1000 shares

80

(2,755)

(2,125)

(1,578)

(1,513)

(1,020)

5,737 (2,028)

5,010 (1,783)

4,080 (1,430)

3,160 (1,027)

(219) (26)

3,709

3,227

2,650

2,183

(245)

173.00

179.00

147.00

119.00

(16.00)

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

STATEMENT OF FINANCIAL POSITION ‐ 5 YEAR SUMMARY 2015 €'000

2014 €'000

2013 €'000

2012 €'000

2011 €'000

Loans and advances to banks Loans and advances to customers Financial assets Fixed assets Prepayments and accrued income Deferred tax asset Other assets

67,087 424,246 3,110 106,353 2,190 1,097 132 -

14,349 335,974 2,203 85,831 1,904 1,059 184

9,413 144,910 2,188 75,398 1,588 989 211 -

1,274 128,071 201 46,540 1,613 523 244 2

1,819 106,013 207 13,343 1,735 493 798 1,054

Total assets

604,215

441,504

234,697

178,467

125,463

Amount owed to banks Amount owed to customers Other liabilities Accruals and deferred income Deferred Tax Liability Current tax

3,894 572,206 3,182 168 1,835

3,308 408,999 6,250 135 95 1,702

3,619 206,186 1,737 209 1,407

8,400 146,983 1,519 331 657

9,067 96,597 39 164 -

Total liabilities

581,285

420,489

213,158

157,889

105,867

Assets Balance held with Central Bank of Malta and cash

Liabilities

Equity Called up share capital Retained earnings Revaluation reserve

22,000 1,130 (200)

20,000 434 581

18,000 3,417 122

18,000 2,476 102

18,000 1,837 (241)

Total Equity

22,930

21,015

21,539

20,578

19,596

604,215

441,504

234,697

178,467

125,463

Total liabilities and equity

81

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

STATEMENT OF CASH FLOWS ‐ 5 YEAR SUMMARY 2015 €'000 Net Cash from / (used in) operating activities

2014 €'000

2013 €'000

2012 €'000

2011 €'000

(18,573)

52,456

101,585

50,639

78,253

Disposal of securities Disposal of tangible assets Purchase of securities Purchase of tangible assets Purchase of intangible assets

69,341 1 (107,132) (299) (421)

26,036 (41,163) (278) (404)

9,420 (38,307) (164) (101)

(37,089) (15) (43)

Net Cash from / (used in) investing activities

(38,510)

(15,809)

(29,152)

(32,776)

13,923

Issue of shares Dividends paid

2,000 (3,014)

2,000 (6,210)

(1,710)

(1,494)

3,000 -

Net Cash from / (used in) financing activities

(1,014)

(4,210)

(1,710)

(1,494)

3,000

Movements in cash and cash equivalents

12,932

81,566

19,777

43,983

(1,650)

Cash and Cash Equivalents at beginning of the year

196,221

114,655

94,878

50,894

52,545

209,154

196,221

114,655

94,878

50,894

Cash Flows from investing activities 17,568 (2,877) (23) (746)

Cash Flows from financing activities

Cash and Cash Equivalents at close of the year

82

Capital Risk Management Report

Registered Office: 101, Townsquare, Ix-Xatt ta’ Qui-si-Sana, Sliema, SLM 3112 - Malta Tel: 21335705

Fax: 21335710

E-mail: [email protected]

83

SPARKASSE BANK MALTA plc  Financial Statements for the year ended 31 December 2015 

CAPITAL RISK MANAGEMENT REPORT This Capital and Risk Management Report is being issued in accordance with the requirements of Banking Rule BR/07 issued by the Malta Financial Services Authority which in turn follows from the additional disclosure requirements of the EU Directive 2006/48/EC. Also known as Basel II Pillar 3 disclosures, they seek to increase public disclosure relative to an institution’s capital structure and adequacy as well as its risk management policies and practices. Sparkasse Bank Malta plc’s capital management approach is to provide a sufficient level of capitalisation so as to manage all risk exposures, at the same time supporting new business. The Board of Directors has a central role in capital planning and processes in order to decide upon the levels of risk relative to capital, always subject to regulatory limits. The bank has decided to adopt the standardised approach in respect of Pillar I and welcomed the Internal Capital Adequacy Assessment Process (ICAAP) embedded in Pillar II. This will ensure a proper measurement of material risks and capital thus allowing for better capital management and an improvement in risk management. The Executive Committee formally measures material risks and capital and reports to the Board at quarterly intervals. The actual ICAAP capital document was formally approved by the Board on 12th May 2015. The Risk Bearing Capacity as at 31st December 2015 was as follows: Dec-15 EUR 000's

Sep-15 EUR 000's

Jun-15 EUR 000's

Mar-15 EUR 000's

Dec-14 EUR 000's

13,914

14,161

15,100

14,833

13,833

9,493 9,125 368

10,566 10,286 280

9,533 8,937 596

10,575 10,441 134

10,423 10,299 124

3,574 3,379 150 45 -

2,748 2,666 36 46 -

4,720 4,341 321 58 -

3,411 1,875 1,477 59 -

2,749 2,326 359 64 -

847 847

847 847

847 847

847 847

661 661

Total Coverage Potential

21,955

21,810

21,824

20,001

23,195

CP Pillar 1 (regulatory Own Funds) Common Equity Tier 1 Capital (CET 1) Additional Tier 1 Capital (AT 1) Tier 2 Capital (T2)

21,459 -

21,466 21,395 71

21,454 21,383 71

19,412 19,331 81

19,467 19,386 81

496 696 200

344 45 299

370 30 340

589 15 574

3,728 3,228 500

Total Risk Total Credit Risk Credit Risks Additional Requirement (Pillar 2) for Sovereigns Market Risk Market Risk calculated change in cash value Open Foreing currency position and gold Investment Risk (Equity Positions) Market risk Trading Book Operational Risk Operational Risk

CP Pillar 2 (additional coverage potential) Expected Net Income less dividend (pro rata) Net Silent Reserves from Securities (100%) Total Utilisation 84

-

63.4%

64.9%

69.2%

74.2%

59.6%

SPARKASSE BANK MALTA plc Financial Statements for the year ended 31 December 2015

CAPITAL RISK MANAGEMENT REPORT (continued)  Capital Adequacy  Sparkasse  Bank  Malta  plc, in line with the new regulations has now gone on to strengthen its Core  Equity Tier 1 by increasing its Issue Share Capital to EUR 22 million just as it did in 2014. The Bank has  continued to adopt the Standardised Approach for Credit risk and the Basic Indicator Approach for  operational risk in order to calculate the Pillar I minimum capital requirements.  For  credit  risk,  under  the  standardised  approach,  risk  weights  are  determined  according  to  cr edit  ratings  provided  by  Moody’s   or  by  using  the  applicable  regulatory risk weights for unrated  exposure.    The  Basic  Indicator  Approach  requires  that  the  Bank  allocates  capital  for  operational risk by taking 15% of the average gross income of the preceding three years. In addition  to the risks above, a minimum capital requirement is also determined for non‐credit obligation assets  (i.e. “other assets” on the balance sheet) in line with CRD IV 575/2013.  Stress Testing  While Sparkasse Bank Malta plc was not included in the recent Stress Test exercises by the European  Banking Authority, the Bank nevertheless conducts internal stress tests, all of which confirm that the  bank would very comfortably pass official stress tests. The latest stress test was done in early 2015.  Internal Capital Adequacy Assessment Process (ICAAP)  Under    Pillar  II    of    the    CRD,  the    Bank  is    required    to    enact    an    Internal    Capital    Adequacy   Assessment   Process  (ICAAP).  The  ICAAP  will  be  performed  annually  and  is  required  under  the  new  MFSA Banking Rule BR / 12.    The  Bank’s  ICAAP  is  based  upon  Pillar  I  Plus’  approach  whereby   the Pillar  I  capital under  Pillar  II  of  the  CRD, the  Bank is  required  to  enact  an  Internal  Capital  Adequacy  Assessment  Process  (ICAAP).  The  ICAAP  will  be  performed  annually  and  is  required  under  the  new  MFSA  Banking  Rule BR / 12.  The  Bank’s  ICAAP  is  based  upon  Pillar  I  Plus’  approach  whereby  the  Pillar  I  capital.   The Board via the Executive Committee has the overall responsibility of the design and details of the  ICAAP capital document. Apart from the responsibility of the design, the Board discussed, approved,  endorsed and delivers the yearly ICAAP submission.  The results of the ICAAP show that the Bank continues to maintain a very comfortable level of excess  capital and substantial liquidity that ensures the flexibility and resources needed to achieve its long  term strategic objectives even under market stress situations. 

85

86

88