Annual Report for the financial year ended March 31st 2012

Annual Report for the financial year ended March 31st 2012 August 2012 Board of Directors Mr. Eric STILMANT 9A, rue Robert Stümper, L-2557 Luxembou...
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Annual Report for the financial year ended March 31st 2012

August 2012

Board of Directors Mr. Eric STILMANT 9A, rue Robert Stümper, L-2557 Luxembourg

Managing Director

Mr. Masashi KAMO 9A, rue Robert Stümper, L-2557 Luxembourg

Deputy Managing Director

Mr. Shigeru TSURU Director 6-5, Nihonbashi Kabuto-cho, Chuo-ku, Tokyo 103-8225, Japan --Approved statutory auditor KPMG Audit S.à.r.l. 9, allée Scheffer L-2520 Luxembourg --Use and allocation of the net profits During the annual general meeting of shareholders of SMBC Nikko Bank (Luxembourg) S.A. held on July 30, 2012, the following allocation of results as at March 31, 2012 as submitted by the Board of Directors has been approved Result and reserves available for allocation: Net result of the financial year ended March 31, 2012 Result brought forward Free reserve Special tax reserve (*)

6,067,095.84 879.69 13,607,760.26 2,225,000.00 21,900,735.79

Allocation of the result and available reserves: Legal reserve 5% of the profit Result brought forward Free reserve Special reserve 5 times net worth tax 2012 Adjustment special reserve 2011 Adjustment special reserve 2009 Distribution of dividend to SMBC Nikko Securities Inc.

(*) Available amount resulting from the recovery of the special tax reserve for the year 2007 (EUR 1,310,000.-) and for the year 2010 (EUR 915,000.-)

303,500.00 400.53 19,622,760.26 1,912,000.00 62,000.00 75.00 0.00 21,900,735.79

SMBC Nikko Bank (Luxembourg) S.A.

Annual accounts for the financial year ended March 31, 2012 (with the report of the Réviseur d’Entreprises agréé thereon)

9A, rue Robert Stümper L-2557 Luxembourg R.C.S.: Luxembourg B 11 809

List of contents

Page(s)

Management report

1-2

Report of the Independent Auditor

3-4

Balance Sheet

5-6

Off-balance sheet

7

Profit and loss account

8

Notes to the annual accounts

9 - 33

i

BOARD OF DIRECTORS’ MANAGEMENT REPORT SMBC NIKKO BANK (LUXEMBOURG) S.A. Financial year 01.04.2011 to 31.03.2012 Since the integration of SMBC Nikko Bank (Luxembourg) S.A. (the “Bank”) within the group Sumitomo Mitsui Banking Corporation, Tokyo (“SMBC Group” or the “Group”) on October 1, 2009, the Bank’s core business of funds administration and custody services is driven and continues to be driven by the Group’s Japanese offshore investment fund product offering. During the year ended March 31, 2012, SMBC Group has been engaging continuous efforts in developing its investment funds business, including offshore funds, in reaction to a standing demand by Japanese investors for diversified investment possibilities. Over this financial year, SMBC Group and the Bank’s clients initiated the launch of six investment sub-funds representing initial subscriptions of EUR 472 million. At the same time, the Group maintained its strong distribution contribution for providing new assets under administration for the Bank. In spite of these Group’s efforts and because of the volatile financial context, the Bank experienced a decrease of 4.36% of the total net assets of the funds under administration, after having achieved an increase of 24.10% over the previous year. This decrease from EUR 11,329 million as at March 31, 2011 to EUR 10,833 million as at March 31, 2012 includes a net subscriptions and redemptions amount of EUR 736 million. Consequently, the net income from custodian and fund administration services commissions for the financial year dropped to EUR 10.89 million. This represents a decrease of 17.13% compared to the previous financial year increase of 6.85% (EUR 13.14 million as at end of March 2011). General expenses amounted to EUR 11.93 million and increased by 15.15% compared to the previous financial year. Staff costs were increased by 18.93%, representing 80.44% of the increase of the general expenses. The net result after taxes amounts to EUR 6,067,096 (EUR 10,349,473 for the previous financial year) and represents an important decrease of 41.38% compared to the previous financial year. This reduced financial year net result asserts nevertheless the commitment of the Bank to maintain a high level of quality for the services provided to its clients in the framework of the difficult financial environment impacting negatively the interest results and the net commissions of the Bank. For the coming financial year, the Bank is confirmed by its Parent Company, SMBC Nikko Securities Inc., Tokyo, in its traditional business line of fund administration and global custody activity and will benefit from the unconditional support of SMBC Group. During this financial year, the commitment to Luxembourg as a fund centre and to the Bank has been demonstrated by the decision taken by the Parent Company on April 27, 2011 to increase the corporate capital of the Bank by EUR 49,999,776 from EUR 40,154,672 to EUR 90,154,448. In this continuity, the Board of Directors is proposing to the Bank’s general meeting of shareholders to be held on July 30, 2012, to allocate the profits available for distribution to retained earnings. 1

As the Bank’s activities will continue to be concentrated on its core businesses of fund administration and global custody, the Bank has extremely low exposure to market, credit, and liquidity risks. Credit risk is limited to temporary overdrafts of funds under custody and to assets the Bank deposits with banking institutions for which limits are approved and reviewed periodically by the Board of Directors of the Bank and reviewed on a regular basis by the Risk Management department of the Parent Company. The Bank has obtained the ISAE 3402 / SSAE16 certification (previously SAS 70 (type II) certification) delivered since 2003 by the accounting and auditing firm Deloitte S.A., Luxembourg. This report represents that the Bank’s fund services and related activities (including information technology processes) operate with adequate processes, controls and safeguards, and that the controls are suitably designed to achieve the Bank’s control objectives. The Bank’s exposure to risk is described in notes 3 and 4 to the annual accounts as at March, 31, 2012. The Bank has not engaged in any activities in the field of research and development, and has not acquired any of its own shares during the financial year. As of the date of this report, no technical, financial or other events likely to raise issues which could materially affect the financial position of the Bank as at March 31, 2012 occurred after the balance sheet date. The Board of Directors thanks all the employees for their commitment and their contribution to the satisfactory operating results. Special thanks are addressed to Mr. John Pierre Hettinger, the Bank’s managing director until December 31, 2011 and director until March 31, 2012, and to Mr. Hiroshi Kobayashi, director until May 21, 2012, who have worked with great commitment to bring about the Bank’s sustained development over the last few years. Luxembourg, June 29, 2012

THE BOARD OF DIRECTORS

2

To the Board of Directors of SMBC Nikko Bank (Luxembourg) S.A. 9A Rue Robert Stümper, L-2557, Luxembourg REPORT OF THE REVISEUR D’ENTREPRISES AGREE Report on the annual accounts We have audited the accompanying annual accounts of SMBC Nikko Bank (Luxembourg) S.A., which comprise the balance sheet as at March 31, 2012 and the profit and loss account for the year then ended, and a summary of significant accounting policies and other explanatory financial information. Board of Directors’ responsibility for the annual accounts The Board of Directors is responsible for the preparation and fair presentation of these annual accounts in accordance with Luxembourg legal and regulatory requirements relating to the preparation of the annual accounts, and for such internal control as the Board of Directors determines is necessary to enable the preparation of annual accounts that are free from material misstatement, whether due to fraud or error. Responsibility of the Réviseur d’Entreprises agréé Our responsibility is to express an opinion on these annual accounts based on our audit. We conducted our audit in accordance with International Standards on Auditing as adopted for Luxembourg by the Commission de Surveillance du Secteur Financier. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the annual accounts are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the annual accounts. The procedures selected depend on the judgement of the Réviseur d’Entreprises agréé, including the assessment of the risks of material misstatement of the annual accounts, whether due to fraud or error. In making those risk assessments, the Réviseur d’Entreprises agréé considers internal control relevant to the entity’s preparation and fair presentation of the annual accounts in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Board of Directors, as well as evaluating the overall presentation of the annual accounts. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion, the annual accounts give a true and fair view of the financial position of SMBC Nikko Bank (Luxembourg) S.A. as of March 31, 2012, and of the results of its operations for the year then ended in accordance with Luxembourg legal and regulatory requirements relating to the preparation of the annual accounts. Report on other legal and regulatory requirements The management report, which is the responsibility of the Board of Directors, is consistent with the annual accounts.

Luxembourg, June 29, 2012

KPMG Luxembourg S.à r.l. Cabinet de révision agréé

S. Chambourdon

SMBC Nikko Bank (Luxembourg) S.A. Balance sheet as at March 31, 2012 (expressed in EUR)

Notes

31/03/2012

31/03/2011

5

9,491,538

12,988,092

223,914,092 642,412,980 866,327,072

55,549,159 815,019,202 870,568,361

1,005,575

479,094

67,524,201 10,637,301 78,161,502

15,796,256 15,796,256

7

30,192

30,191

6.1, 6.2, 7, 8

445,948

445,933

Intangible assets

8

363,242

545,235

Tangible assets

8

162,873

139,738

Other assets

9

1,123,276

21,585

7,077,970

4,337,705

964,189,188

905,352,190

ASSETS Cash in hand, balances with central banks and post office banks Loans and advances to credit institutions - repayable on demand - other loans and advances

6.2

Loans and advances to customers

6.2

Debt securities and other fixed-income transferable securities - issued by public bodies - issued by other borrowers

Shares and other variable-yield securities Shares in affiliated undertakings

3.2, 7, 8

Prepayments and accrued income TOTAL ASSETS

The accompanying notes form an integral part of these annual accounts

5

SMBC Nikko Bank (Luxembourg) S.A. Balance sheet as at March 31, 2012 (expressed in EUR) (continued)

Notes

31/03/2012

31/03/2011

-

550,703

814,040,575 44,237 814,084,812

818,139,870 42,231 818,182,101

18,599,323

9,641,521

Accruals and deferred income

1,930,275

807,296

Provisions - provisions for taxation - other provisions

12

3,684,181 4,002,086

6,599,561 3,749,369

Subscribed capital

13

90,154,448

40,154,672

Reserves

14

25,666,087

15,317,062

880

432

6,067,096

10,349,473

964,189,188

905,352,190

LIABILITIES Amounts owed to credit institutions - repayable on demand Amounts owed to customers - other debts .repayable on demand .with agreed maturity dates or periods of notice

6.2

Other liabilities

11

Profit brought forward

Profit for the financial year TOTAL LIABILITIES

The accompanying notes form an integral part of these annual accounts.

6

SMBC Nikko Bank (Luxembourg) S.A. Off-balance sheet as at March 31, 2012 (expressed in EUR)

Off-balance sheet information as at March 31, 2012

Fiduciary transactions

Note

31/03/2012

31/03/2011

17

256,112,514

340,816,732

The accompanying note forms an integral part of these annual accounts.

7

SMBC Nikko Bank (Luxembourg) S.A. Profit and loss account for the year ended March 31, 2012 (expressed in EUR) 2012

2011

22,045,069

14,285,072

2,676,870

606,250

(19,596,225)

(12,895,586)

450,000

450,000

Commissions receivable

13,905,781

20,698,684

Commission payable

(3,013,466)

(7,554,900)

6,037,569

7,229,803

19

493,044

1,202,825

21

(11,934,387) (7,932,264)

(10,364,603) (6,669,512)

(6,503,604) (767,446) (447,817) (4,002,123)

(5,481,936) (654,418) (413,187) (3,695,091)

(315,137)

(360,494)

(460,092)

(202,440)

(211,766)

-

-

212,000

(1,333,294)

(2,350,888)

6,067,096

10,349,473

Notes Interest receivable and similar income - of which arising from debt securities and other fixed-income transferable securities Interest payable and similar charges Interest from transferable securities - income from shares in affiliated undertakings

Net profit on financial operations Other operating income General administrative expenses - Staff costs of which: .wages and salaries .social security costs of which : social security costs relating to pensions - Other administrative expenses Value adjustments in respect of tangible and intangible assets Other operating charges

20

Value adjustments in respect of loans and advances, and provisions for contingent liabilities and commitments Value re-adjustments in respect of loans and advances, and provisions for contingent liabilities and commitments: Lump sum provision Tax on profit on ordinary activities Profit for the financial year The accompanying notes form an integral part of these annual accounts. 8

SMBC Nikko Bank (Luxembourg) S.A. Notes to the annual accounts as at March 31, 2012

1

General SMBC Nikko Bank (Luxembourg) S.A. (the “Bank”) was incorporated as a limited liability company (“Société Anonyme”) in the Grand Duchy of Luxembourg on February 14, 1974 in accordance with Luxembourg law. Nikko Bank (Luxembourg) S.A. changed, with effect from April 1, 2011, its name to SMBC Nikko Bank (Luxembourg) S.A. upon approval of an extraordinary general meeting of the Bank’s shareholders held on March 17, 2011. The object of the Bank is the undertaking for its own account as well as for the account of third parties, either within or outside the Grand Duchy of Luxembourg, of any banking or financial operations as well as other operations, whether industrial or commercial or in real estate, which directly or indirectly relate to the main object described above. The principle activities of the Bank are fund administration and custody business. The Bank is a wholly-owned subsidiary of SMBC Nikko Securities, Inc. (the “Parent Company”), whose registered address is at 3-1, Marunouchi 3-chome, Chiyoda-ku, Tokyo 100-8325, Japan. The Bank’s annual accounts are included in the consolidated accounts of the Parent Company. Sumitomo Mitsui Banking Corporation, Tokyo, an entity supervised by the Japanese FSA, prepares consolidated annual accounts for the largest body of undertakings which includes the Bank as a subsidiary company. An extraordinary general meeting of shareholders of the Bank, decided on April 27, 2011 to increase the capital by issuing 201,612 new nominative shares wholly-owned by SMBC Nikko Securities Inc.

2

Summary of significant accounting policies

2.1

Basis of presentation These annual accounts are prepared in conformity with accounting principles generally accepted in the banking sector in the Grand Duchy of Luxembourg. The accounting policies and the valuation principles are determined and applied by the Board of Directors, except those which are defined by law and by the regulations in Luxembourg. Where necessary, certain prior year figures have been reclassified to conform with the current financial year’s presentation for comparative purposes. On the basis of the criteria set out by the Luxembourg law, the Bank is exempted from establishing consolidated accounts and a consolidated management report for the year ended March 31, 2012. In accordance with the law of June 17, 1992, as amended, the said accounts were consequently presented on an unconsolidated basis for approval by the annual general meeting of shareholders of the Bank.

9

SMBC Nikko Bank (Luxembourg) S.A. Notes to the annual accounts as at March 31, 2012 (continued)

2.2

Foreign currencies The Bank uses a multi-currency accounting system, as a result of which assets and liabilities are recorded in the currencies in which they were created. For the preparation of the annual accounts, amounts in foreign currencies are translated into Euro (EUR), the base currency of the Bank, on the following bases:

2.2.1

Spot rate transactions Monetary assets and liabilities in foreign currencies are translated into EUR at the exchange rate applicable at the balance sheet date. Non-monetary assets are recorded in EUR and are maintained at their historical exchange rates. Exchange gains and losses arising from the Bank’s net open currency positions are taken to the profit and loss account in the current period.

2.2.2

Forward transactions Unsettled forward foreign exchange transactions are translated into EUR at the forward rate prevailing at the balance sheet date for the remaining term of the contract. Forward foreign exchange contracts are entered into on a back-to-back basis. Net unrealised exchange losses are recognised in the profit and loss account. Net unrealised exchange gains on forward foreign exchange contracts are recognised upon their realisation.

2.2.3

Swap transactions Gains and losses on currency swap transactions are accrued on a straight-line basis over the period of the swap contract and are included in interest receivable or payable in the profit and loss account, as appropriate.

2.3

Loans and advances Loans and advances are stated at disbursement value less repayments made and any value adjustments required. Accrued interest is recorded in the balance sheet caption “Prepayments and accrued income”. The policy of the Bank is to establish specific value adjustments for doubtful debts in accordance with the circumstances and for amounts specified by the Management Committee. These value adjustments are deducted from the appropriate asset account balances.

10

SMBC Nikko Bank (Luxembourg) S.A. Notes to the annual accounts as at March 31, 2012 (continued)

2.4

Securities portfolio The Bank has recorded its securities portfolio in the investment portfolio. This portfolio comprises fixed-income securities with a maximum maturity or remaining maturity of 5 years or below, intended to be held on a long-term basis, term to be understood as buy and hold investment strategy. It may also include participating interests and shares in affiliated undertakings of a fixed asset nature. The Bank values the securities included in the investment portfolio at the lower of amortised cost or market value or net realisable value determined by the Board of Directors in good faith in the absence of a market value. The value adjustment corresponding to the negative difference between the market value and the acquisition cost is not maintained if the reasons for which it was recorded no longer exist. If no official quotation is available, valuation is made at the probable realizable value or at a price which most closely corresponds to the intrinsic value of the securities. In cases where fixed-income securities are acquired at a premium, the difference between acquisition cost and redemption value is written off in instalments to profit and loss and recorded as “interest payable and similar charges”. Instalments are charged pro rata temporis over the life of the security. The cumulative amortisation from the date of acquisition is included in “Accruals and deferred income” on the liability side of the balance sheet. In cases where fixed-income securities are acquired at a discount and cost is used as the basis of valuation, the difference between acquisition cost and redemption value is taken to the profit and loss account at the date of maturity or date of disposal, if earlier.

2.5

Shares and other variable-yield securities At the balance sheet date, shares and other variable-yield securities are stated at the lower of cost or market value. If the valuation is lower than the purchase price, value adjustments are recorded to account for the unrealised loss.

2.6

Shares in affiliated undertakings Shares in affiliated undertakings held as fixed assets are valued at purchase price. Value adjustments are made where there is considered to be a permanent diminution in value.

11

SMBC Nikko Bank (Luxembourg) S.A. Notes to the annual accounts as at March 31, 2012 (continued)

2.7

Tangible and intangible fixed assets Tangible and intangible fixed assets are valued at cost less accumulated depreciation/amortisation. Depreciation/amortisation is calculated on a straight-line basis over the estimated useful life of individual assets. The depreciation/amortisation rates used for this purpose are: Rate Furniture, fixtures and fittings Computer equipment Software

2.8

Derivative instruments

2.8.1

Currency options

20% 20 - 25% 20 - 25%

Gains or losses on matched positions on currency options which are traded on an organised market are directly credited or charged to the profit and loss account. Unrealised losses on matched positions on over the counter transactions are accrued for and the unrealised gains are not accounted for until the exercise or expiration date of the option. In cases where currency options are contracted for hedging purposes, they are neutral with respect to currency fluctuations and hence not revalued at the period end.

2.8.2

Options on securities Options written by the Bank are recorded as off-balance sheet items. Related premiums received are recorded in the balance sheet until the exercise or expiration date of the options.

2.9

Lump-sum provision A general reserve for potential risks on balance sheet and off balance sheet items has been recorded. This tax deductible provision is deducted from the relevant assets. The lump-sum provision relating to off balance sheet items is included in “Provisions: other provisions” in the balance sheet.

2.10

Income taxes Income taxes are recorded on an accruals basis based on the profit and loss account of the current financial period.

12

SMBC Nikko Bank (Luxembourg) S.A. Notes to the annual accounts as at March 31, 2012 (continued)

3

Risk management objectives, strategies and policies The Bank is not involved in private banking operations. Its activities are principally concentrated on investment fund administration and custody. The risk management system of the Bank comprises a comprehensive framework of risk monitoring principles. Organisational structure and risk monitoring processes are aligned with the activities. The main risks are subject to limits which are approved by the Management and monitored on a regular basis.

3.1

Credit risk Credit risk represents the risk that the counterparty will be unable to pay amounts due to the Bank in full when the debts fall due. Exposure to banks is subject to bank limits. These bank limits are reviewed, updated and approved. Interbank credit lines are monitored on a daily basis and a monthly utilization list is submitted to the Parent Company. Credit exposure to banks is governed by the limits approved by the Board of Directors and will be reviewed on a regular basis by the Risk Management division of the Parent Company. The limits to monitor the Bank’s credit exposures are reviewed and updated at least annually by the Bank, including counterparty limits for deposits and foreign exchange transactions.

3.2

Market risk Market risk represents the exposure arising from the movements in market prices of financial assets in which the Bank invested. The Bank has no trading portfolio and is not involved in short sales. The portfolio of the Bank is mainly represented by medium-term investments in debt securities (mainly fixed income securities issued by government, supranational bodies and private companies within zone A) for interest yield purposes.

3.3

Liquidity risk The liquidity risk is defined as the risk that the Bank will not be able to meet its obligations as they fall due. The Bank’s policy does not authorise significant asset and liability mismatches. The liquidity of the Bank is reviewed and monitored regularly by the Management. Furthermore, the Management ensures that the Bank’s liquidity ratio complies with the locally required minimum level of 30%. During the financial year ended March 31, 2012, the minimum liquidity ratio was fully complied with.

3.4

Interest rate risk Interest rate risk exists in case of funding mismatches between assets and liabilities. The income and operating cash flows of financial operations are dependent on changes in market interest rates and the Bank’s profitability could be affected by adverse interest rate movements. 13

SMBC Nikko Bank (Luxembourg) S.A. Notes to the annual accounts as at March 31, 2012 (continued)

The policy of the Bank is to make short term matched placements and deposits to minimise the potential exposure to adverse movements in interest rates. As at March 31, 2012, approximately 91% of the Bank’s total assets were represented by short-term interbank placements and 84% of the Bank’s total liabilities by short-term interbank and customer deposits, thus not giving rise to a major funding mismatch. The interest margin is reviewed on a monthly basis by the Management. Hedging instruments will be considered by the Management for any significant long-term fixed rate commitments, such as the portfolio investments of the Bank.

3.5

Foreign exchange risk Foreign exchange risk is the risk of losses arising from adverse movements in exchange rates affecting assets, liabilities and off balance sheet transactions of the Bank which are denominated in foreign currencies. The Bank’s foreign currency positions are subject to a global limit authorized by the Parent Company and the Bank’s internal control function monitors compliance with the limits on a daily basis. In this regard, the Management’s underlying principle is to minimize significant foreign exchange exposures.

3.6

Administrative risk The administrative risk refers to the complexity of transactions processed by the Bank in the normal course of business. As the Bank operates mainly in the investment funds industry, the administrative risk appears to be the major risk the Bank faces. In order to optimize the control over this risk, among other measures, the Bank has set up an overall organizational process that includes chief officers for each department, procedures applicable to each department, and a data processing system aimed at ensuring proper segregation of duties.

4

Use of financial instruments

4.1

Analysis of financial instruments

4.1.1

Information on primary financial instruments The tables below analyse the level of primary financial instruments (non-trading instruments) of the Bank, in terms of carrying amounts and maturity groups based on their remaining lives at balance sheet date. Aggregate fair values of financial instruments are disclosed where they differ materially from the carrying values in the balance sheet. Fair value is understood to be the amount at which an asset could be exchanged or a liability settled as an ordinary transaction entered into under normal terms and conditions between independent, informed and willing parties, other than in a forced or liquidation sale.

14

SMBC Nikko Bank (Luxembourg) S.A. Notes to the annual accounts as at March 31, 2012 (continued)

4.1.2 Analysis of financial instruments - Primary non-trading instruments Primary non-trading instruments As at March 31, 2012 Instrument class (financial assets) Cash in hand, balances with central banks and post office banks Loans and advances to credit institutions Loans and advances to customers Debt securities and other fixed-income transferable securities Shares and other variable-yield securities Shares in affiliated undertakings Total financial assets Non financial assets Total assets Instrument class (financial liabilities) Amounts owed to credit institutions - repayable on demand Amounts owed to customers - other debts - repayable on demand - with agreed maturity dates or periods of notice Total financial liabilities Non financial liabilities Total liabilities

Less than 3 months EUR

Total EUR

> 3 months to 1 year EUR

> 1 year to 5 years EUR

No maturity EUR

9,491,538 866,327,072 977 875,819,587

23,075 5,319,400 5,342,475

28,859 72,842,102 72,870,961

952,664 30,192 445,948 1,428,804

9,491,538 866,327,072 1,005,575 78,161,502 30,192 445,948 955,461,827 8,727,361 964,189,188

-

-

-

-

-

814,040,575 44,237 814,084,812

-

-

-

814,040,575 44,237 814,084,812 150,104,376 964,189,188

As at March 31, 2012, the Bank had not engaged in primary trading instruments.

15

SMBC Nikko Bank (Luxembourg) S.A. Notes to the annual accounts as at March 31, 2012 (continued)

4.1.3 Analysis of financial instruments - Primary non-trading instruments Primary non-trading instruments As at March 31, 2011 Instrument class (financial assets) Cash in hand, balances with central banks and post office banks Loans and advances to credit institutions Loans and advances to customers Debt securities and other fixed-income transferable securities Shares and other variable-yield securities Shares in affiliated undertakings Total financial assets Non financial assets Total assets Instrument class (financial liabilities) Amounts owed to credit institutions - repayable on demand Amounts owed to customers - other debts - repayable on demand - with agreed maturity dates or periods of notice Total financial liabilities Non financial liabilities Total liabilities

Less than 3 months EUR

Total EUR

> 3 months to 1 year EUR

> 1 year to 5 years EUR

No maturity EUR

12,988,092 870,568,361 6,684 883,563,137

11,656 11,656

2,221 15,796,256 15,798,477

458,533 30,191 445,933 934,657

12,988,092 870,568,361 479,094 15,796,256 30,191 445,933 900,307,927 5,044,263 905,352,190

550,703

-

-

-

550,703

818,139,870 42,231 818,732,804

-

-

-

818,139,870 42,231 818,732,804 86,619,386 905,352,190

As at March 31, 2011, the Bank had not engaged in primary trading instruments.

16

SMBC Nikko Bank (Luxembourg) S.A. Notes to the annual accounts as at March 31, 2012 (continued)

4.1.4

Information on derivative financial instruments

4.1.4.1

Description of derivative financial instruments used The Bank enters into currency spot and forward transactions for hedging purposes. Currency forwards represent commitments to purchase foreign and domestic currencies at predetermined rates and on future dates. Options on securities are contractual agreements under which the seller (writer) grants the purchaser (holder) the right, but not the obligation, either to buy (a call option) or sell (a put option) at or by a set date or during a set period, a specific amount of a financial instrument at a predetermined price. The seller receives a premium from the purchaser. Options are negotiated between the Bank and a customer (OTC: Over The Counter). Treasury Swaps represent commitments to exchange one set of cash flows for another and result in an economic exchange of currencies.

4.1.4.2

Analysis of derivative financial instruments The tables below analyse the level of derivative financial instruments (non-trading) within the Bank, in terms of notional amount and maturity groups based on their remaining lives at the balance sheet dates. The notional amounts of certain financial instruments in which the Bank engages provide a basis for pricing and do not necessarily indicate the amounts of future cash flows involved or the current fair value of the instruments and, therefore, do not indicate the Bank's exposure to credit or price risks. The changes in the fair values of derivative instruments are caused by the fluctuations in market interest rates or foreign exchange rates relative to their contractual terms. The contractual or notional amount of derivative financial instruments and the fair values of derivative financial assets and liabilities can fluctuate significantly from time to time.

17

SMBC Nikko Bank (Luxembourg) S.A. Notes to the annual accounts as at March 31, 2012 (continued)

4.1.4.2

Analysis of derivative financial instruments (continued) The Bank does not have trading positions in derivative financial instruments as at March 31, 2012 (March 31, 2011: no trading positions in derivative financial instruments). As at March 31, 2012, the Bank had the following off balance sheet commitments:

Operations linked to exchange rates - forward foreign exchange transactions - other operations linked to exchange

31/03/2012 EUR

31/03/2011 EUR

5,295,822,003 506,794,626

5,748,054,074 139,075,026

5,802,616,629

5,887,129,100

The above operations are engaged for the purposes of hedging the adverse fluctuations of exchange rates and interest/market rates arising on transactions entered into with customers.

As at March 31, 2012 (expressed in Euro): less than 3 months Operations linked to exchange rates

> 3 months to 1 year

5,802,616,629

-

> 1 year to 5 years -

Total

Fair value Assets

Fair value Liabilities

5,802,616,629

94,970,397

94,824,420

5,802,616,629

-

-

5,802,616,629

94,970,397

94,824,420

> 3 months to 1 year

Total

Fair value Assets

Fair value Liabilities

5,887,129,100

59,232,914

58,851,387

5,887,129,100

59,232,914

58,851,387

As at March 31, 2011 (expressed in Euro): less than 3 months Operations linked to exchange rates

5,887,129,100

-

> 1 year to 5 years -

5,887,129,100

-

-

18

SMBC Nikko Bank (Luxembourg) S.A. Notes to the annual accounts as at March 31, 2012 (continued)

4.2

Credit risk

4.2.1

Description of credit risk The credit policy of the Bank mainly permits interbank lending and foreign exchange transactions. Exposures to banks are subject to limits approved by the Board of Directors. In respect of interest rate and foreign exchange transactions, commitments are made only with counterparties meeting the following criteria: •

The counterparties must be rated by (at least) one recognized rating agency and rated within investment grades not lower than “BBB-” by Standard & Poors and Fitch or not lower than “Baa3” by Moody’s.



Furthermore, it is required by said credit policy to consider in each of the following cases the lowest rating: -

of the ratings applicable to the counterparty and to its parent company (for counterparties); and

-

of the ratings applicable to the country in which the counterparty is located and the country of its parent company (for countries).

During last financial year, the Parent Company introduced new Rules for Managing Overseas Offices and as a result, the Bank’s credit policies and procedures have been modified. Prior to entering into a commitment with a new counterparty, the Bank requests a pre-approval from the Risk Management division of the Parent Company. The Bank may manage credit risk by obtaining collateral in the form of cash or listed securities. The Bank restricts its exposure to credit risk losses by entering into master netting arrangements with counterparties with which it undertakes significant volumes of transactions. Master netting arrangements do not generally result in offset of balance sheet assets and liabilities as transactions are usually settled on a gross basis. However, the credit risk associated with the settlements of favourable contracts is reduced by a master netting arrangement to the extent that if an event of default occurs, all amounts with the counterparty are terminated and settled on a net basis. The Bank’s overall exposures are driven by its daily financial operations and fluctuate substantially from time to time. At the request of the Bank, the Commission de Surveillance du Secteur Financier (“CSSF”) approved the full exemption of risks taken on its ultimate parent company Sumitomo Mitsui Banking Corporation and its subsidiary Sumitomo Mitsui Banking Corporation Europe Limited in relation to the large exposure limits, in accordance with part XVI, point 24 of the CSSF circular 06/273, as subsequently amended.

19

SMBC Nikko Bank (Luxembourg) S.A. Notes to the annual accounts as at March 31, 2012 (continued)

4.2.2

Measures of credit risk exposure Credit risk relating to financial instruments is disclosed on the basis of the carrying amount that best represents the maximum credit risk exposure at the balance sheet date. With respect to derivative instruments dealt in other than on a recognised, regulated market (OTC), the maximum exposure to credit risk is arrived at as described below. The tables below disclose the level of credit exposure in terms of notional amounts, risk-equivalent amount calculated in accordance with CSSF circular 06/273, as amended, and net risk exposure adjusted for any collateral and credit worthiness of the counterparty based on internal or external ratings.

Primary financial assets as at March 31, 2012 (expressed in EUR) Notional amount

Collateral

Net risk exposure

(2)

(3) = (1) – (2)

(1) Loans and advances to credit institutions and balances with central banks Loans and advances to customers Debt securities and other fixed-income transferable securities Shares and other variable-yield securities Others Total

876,367,576

-

876,367,576

1,111,428

-

1,111,428

80,072,738

-

80,072,738

13,200 7,318,028 964,882,970

-

13,200 7,318,028 964,882,970

Credit risk on OTC derivative instruments (use of the original exposure method) as at March 31, 2012 (expressed in EUR) Notional RiskCollateral Net risk amount equivalent exposure amount

Forward exchange contracts - weighted at 2%

(1)

(2)

5,130,672,447

102,613,449

20

(3)

(4) = (2) – (3) -

102,613,449

SMBC Nikko Bank (Luxembourg) S.A. Notes to the annual accounts as at March 31, 2012 (continued)

4.2.2

Measures of credit risk exposure (continued) Primary financial assets as at March 31, 2011 (expressed in EUR) Notional amount

Collateral

Net risk exposure

(2)

(3) = (1) – (2)

(1) Loans and advances to credit institutions and balances with central banks Loans and advances to customers Debt securities and other fixed-income transferable securities Shares and other variable-yield securities Others Total

884,121,297

-

884,121,297

479,393

-

479,393

15,840,451

-

15,840,451

37,440 5,095,516 905,574,097

-

37,440 5,095,516 905,574,097

Credit risk on OTC derivative instruments (use of the original exposure method) as at March 31, 2011 (expressed in EUR) Notional RiskCollateral Net risk amount equivalent exposure amount

Forward exchange contracts - weighted at 2%

(1)

(2)

4,680,035,874

93,600,717

21

(3)

(4) = (2) – (3) -

93,600,717

SMBC Nikko Bank (Luxembourg) S.A. Notes to the annual accounts as at March 31, 2012 (continued)

4.2.3

Concentration of credit risk The tables below show credit risk concentration arising from financial instruments from on- and offbalance sheet exposures by geographic location and economic sector. Geographical concentration of credit risk (expressed in Euro) Loans and other balance sheet items March 31, 2012 E.U. Japan United States New Zealand Others Total

461,521,550 420,351,153 1,475,210 72,714,681 8,820,376 964,882,970

Loans and other balance sheet items March 31, 2011 E.U. Japan United States New Zealand Others Total

720,890,179 22,418,347 615,963 132,838,381 28,811,227 905,574,097

Derivative instruments March 31, 2012 50,539,949 52,073,500 102,613,449

Derivative instruments March 31, 2011 47,313,957 46,286,760 93,600,717

Economical concentration of credit risk (expressed in Euro) Loans and other balance sheet items March 31, 2012

4.2.4

Derivative instruments March 31, 2012

Financial Private Others Total

889,121,810 52,955 75,708,205 964,882,970

102,613,449 102,613,449

Financial Private Others Total

Loans and other balance sheet items March 31, 2011 895,183,906 20,578 10,369,613 905,574,097

Derivative instruments March 31, 2011 93,600,717 93,600,717

Market risk During the financial year ended March 31, 2012, the Bank had no trading portfolio and was not involved in short sales of securities. The Bank’s exposure to market risks mainly arises from its securities portfolio, which is valued at the lower of amortised cost or market value. 22

SMBC Nikko Bank (Luxembourg) S.A. Notes to the annual accounts as at March 31, 2012 (continued)

5

Cash in hand, balances with central banks and post office banks In accordance with the requirements of the European Central Bank, the Luxembourg Central Bank implemented effective January 1, 1999, a system of mandatory minimum reserves, which applies to all Luxembourg credit institutions. The minimum reserve balance as at March 31, 2012 held by the Bank with the Luxembourg Central Bank amounted to EUR 9,492,498 (March 31, 2011: EUR 12,993,691).

6

Affiliated undertakings and participating interests

6.1

Summary of affiliated undertakings At March 31, 2012 the Bank held at least 20% of the capital of the following companies:

SMBC Nikko Investment Fund Management Company S.A. Lump sum version Allocation

Acquisition Cost

Proportion of capital held

Capital and reserves at 31/03/12*

Profit at 31/03/12

EUR

%

EUR

EUR

446,208

100

1,859,957

370,350

(260) 445,948

* As per the audited annual accounts of SMBC Nikko Investment Fund Management Company S.A. as at March 31, 2012 (including the profit for the year).

SMBC Nikko Investment Fund Management Company S.A. has its registered office at 9A, rue Robert Stümper, L-2557 Luxembourg. The annual accounts of this management company are not consolidated by the Bank and its shares are not quoted.

23

SMBC Nikko Bank (Luxembourg) S.A. Notes to the annual accounts as at March 31, 2012 (continued)

6.2

Transactions with other Group companies These may be summarised as follows:

Assets Loans and advances to credit institutions Loans and advances to customers Shares in affiliated undertakings

Liabilities Amounts owed to customers

24

31/03/2012 EUR

31/03/2011 EUR

424,852,783 43 445,948

331,069,742 257 445,933

425,298,774

331,515,932

2,232,625

2,421,625

SMBC Nikko Bank (Luxembourg) S.A. Notes to the annual accounts as at March 31, 2012 (continued)

7

Transferable securities Listed securities

31/03/2012 EUR

31/03/2011 EUR

Debt securities and other fixed-income transferable securities

78,161,502

15,796,256

Unlisted securities

31/03/2012 EUR

31/03/2011 EUR

30,192 445,948

30,191 445,933

476,140

476,124

Shares and other variable-yield securities Shares in affiliated undertakings

As of March 31, 2012, the fair value of debt securities shown under “Listed securities” amounts to EUR 78,282,250 (2011: EUR 15,477,335). The amortization of premiums on these securities amounted to EUR 1,516,110 (2011: EUR 349,388) and was recorded under “Accruals and deferred income” on the liabilities side of the Balance Sheet. As of March 31, 2012, the fair value of shares shown under “Unlisted securities” amounts to EUR 1,873,157 (2011: EUR 1,977,047). One security is due to be repaid within one year (2011: EUR nil).

25

SMBC Nikko Bank (Luxembourg) S.A. Notes to the annual accounts as at March 31, 2012 (continued)

8

Movements in fixed assets Gross value at the beginning of the financial year EUR Debt securities and other fixed Income transferable securities Shares in affiliated undertakings Intangible assets (software) Tangible assets of which: -computer equipment -furniture, fixture and fittings -others

Cost Reclassification Additions

EUR

Disposals

EUR

Gross value at the end of the financial year EUR

Value adjustments Cumulative Lump-sum Net value at value the end of provision adjustments the financial year EUR EUR EUR

15,806,000

-

62,401,050

-

78,207,050

-

(45,548)

78,161,502

446,208

-

-

-

446,208

-

(260)

445,948

2,746,248

-

55,997

(225,864)

2,576,381

(2,212,927)

(212)

363,242

277,198 360,863 36,343

-

23,591 36,860 39,715

(16,559) -

284,230 397,723 76,058

(235,793) (334,521) (24,729)

(28) (37) (30)

48,409 63,165 51,299

674,404

-

100,166

(16,559)

758,011

(595,043)

(95)

162,873

26

SMBC Nikko Bank (Luxembourg) S.A. Notes to the annual accounts as at March 31, 2012 (continued)

9

Other assets Other assets consist of the following:

Short term receivables Other

Lump-sum provision

31/03/2012 EUR

31/03/2011 EUR

1,123,331 600 1,123,931

20,998 600 21,598

(655)

(13)

1,123,276

21,585

The short term receivables balance is mainly composed as at March 31, 2012 and March 31, 2011 of short term transitory accounts linked to the custodian activity of the Bank.

10

Assets pledged by the Bank as security for its own liabilities. The Bank has pledged bonds and other fixed-income transferable securities (the Bank’s own proprietary investments) for a total amount of EUR 78,207,050 (March 31, 2011: EUR 15,806,000) as collateral for permitted secured borrowings on an intra-day basis as a participant in an international clearing institution. As at March 31, 2012 and March 31, 2011, the Bank has not made any borrowings under the facility. Besides this pledge, the Bank may sign general terms and conditions for account opening with financial banking depositary counterparties that include a general lien clause entitling the counterpart, until satisfaction of any liabilities or obligations the Bank may have with the counterpart, to any cash balances the Bank has deposited with these counterparties.

27

SMBC Nikko Bank (Luxembourg) S.A. Notes to the annual accounts as at March 31, 2012 (continued)

11

Other liabilities Other liabilities consist of the following:

Short term payables Preferential creditors

31/03/2012 EUR

31/03/2011 EUR

18,330,933 268,390

9,474,150 167,371

18,599,323

9,641,521

As at March 31, 2012 and March 31, 2011, the short term payables balance was mainly composed of redemption fees related to the activity of the funds under the Bank’s administration and custody.

12

Other provisions Other provisions consist of the following:

Lump sum-provision related to off balance sheet items Other provisions

31/03/2012 EUR

31/03/2011 EUR

2,988,125 1,013,961

2,885,036 864,333

4,002,086

3,749,369

The other provisions balance is mainly composed as at March 31, 2012 and March 31, 2011 of the provision for bonus, and the provision for general expenses.

13

Subscribed capital As at March 31, 2012, the authorized, issued and fully paid-up subscribed capital of the Bank is EUR 90,154,448 made up of 363,526 nominative shares each with a par value of EUR 248 (March 31, 2011: EUR 40,154,672). An extraordinary general meeting of shareholders of the Bank, decided on April 27, 2011 to increase the capital by issuing 201,612 new nominative shares wholly-owned by SMBC Nikko Securities Inc.

28

SMBC Nikko Bank (Luxembourg) S.A. Notes to the annual accounts as at March 31, 2012 (continued)

14

Reserves Reserves include:

14.1

Legal reserve In accordance with Luxembourg law, the Bank must transfer at least 5% of its annual profit to the legal reserve until this equals 10% of the subscribed capital. The legal reserve is not distributable.

14.2

Free reserve The free reserve represents profits of prior financial years which have been appropriated by Annual General Meetings of Shareholders to a special reserve referred to as “free reserve”. This reserve may be distributed after approval by the Annual General Meeting of Shareholders.

14.3

Other reserves In accordance with the tax law in force since January 1, 2002, the Bank reduced its Net Wealth Tax (“NWT”) burden by crediting it against the amount of the Corporate Income Tax (“CIT”). In order to comply with the law, the Bank decided to allocate to non-distributable reserves (item “special reserve”) an amount that corresponds to five times the amount of reduced Net Wealth Tax. This reserve is non-distributable for a period of five years from the year following the one during which the Net Wealth Tax was credited.

14.4

Movements in reserves and profit brought forward

Balance at the beginning of the period Net profit for the period ended March 2011 Appropriation of prior result Dividend payment Balance at the end of the period

Legal reserve

Free reserve

Other reserves

Total reserves

Profit brought forward

EUR

EUR

EUR

EUR

EUR

3,411,976

6,544,760

5,360,326

15,317,062

432

-

-

-

-

10,349,473

518,000

7,063,000

2,768,025

10,349,025

(10,349,025)

-

-

-

-

-

3,929,976

13,607,760

8,128,351

25,666,087

880

The Annual General Meeting of Shareholders dated July 25, 2011 approved the appropriation of the result of the Bank as at March 31, 2011.

29

SMBC Nikko Bank (Luxembourg) S.A. Notes to the annual accounts as at March 31, 2012 (continued)

15

Assets and liabilities denominated in foreign currencies As at March 31, 2012, assets denominated in foreign currencies amounted to EUR 772,220,970 (March 31, 2011: EUR 704,111,992) and liabilities amounted to EUR 772,488,959 (March 31, 2011: EUR 704,244,569).

16

Commitments Deposit guarantee and investor compensation scheme All credit institutions in Luxembourg are a member of the non-profit making "Association pour la Garantie des Dépôts, Luxembourg" (AGDL). The exclusive objective of the AGDL is the establishment of a system of mutual guarantee of cash deposits and of receivables arising from investment operations made by individuals with members of the AGDL, without distinction of their nationality or residence, by corporations incorporated under Luxembourg or another European Union member state law, which are authorised, because of their size, to prepare an abridged balance sheet in conformity with the applicable law, as well as by those corporations of a similar size as defined by law of another European Union member state. The AGDL reimburses to the deposit holder the amount of his guaranteed cash deposits and to the investor the amount of his guaranteed receivable with a maximum foreign currency equivalent limit of EUR 100,000 per guaranteed cash deposit and EUR 20,000 per guaranteed receivable arising from investment operations other than that relating to a cash deposit. If the guarantee is called, the annual payment to be made by each member is limited to 5% of shareholders’ equity. Following three Icelandic banks incorporated in Luxembourg going into administration, the Bank was called by the AGDL to pay two tranches in 2008 for EUR 799 and three tranches in 2009 for the following amounts: EUR 379; EUR 379; EUR 376. The first two tranches have been expensed as at December 31, 2008 within other operating charges in the profit and loss account. As at March 31, 2012, eight amounts have been reimbursed by the AGDL for the total amount of EUR 1,017. These amounts have been recorded in other operating income in the profit and loss account. As at March 31, 2012, the Bank has no provision in connection with this deposit guarantee and investor compensation scheme. The Bank has entered into certain commitments which are not disclosed either in the balance sheet or in the off-balance sheet but which are relevant for the purposes of assessing the financial situation of the Bank. In particular, the Bank’s commitments in respect of fixed rental payments for premises and assets under leasing contracts are:

Amounts committed to be paid within 12 months Amounts committed to be paid between one and five years

30

31/03/2012 EUR

31/03/2011 EUR

973,103 2,027,936

1,021,674 3,007,770

3,001,039

4,029,444

SMBC Nikko Bank (Luxembourg) S.A. Notes to the annual accounts as at March 31, 2012 (continued)

17

Fiduciary transactions As at March 31, 2012 and March 31, 2011, there are no assets and liabilities resulting from fiduciary transactions, which are not expressively governed by the law of July 27, 2003, as amended.

18

Management and representative services The Bank provides the following management and representative services to third parties during the financial period: • • • •

19

Custody services for investment funds; Accounting and other administrative services for investment funds; and Fiduciary representations for funds From time to time, management activities for funds.

Other operating income Other operating income consists of the following:

Tax reimbursement VAT reimbursement Tax adjustment on previous financial years Custody settlement differences Other income/reversal of provisions

20

2012

2011

EUR

EUR

175,280 238,302 1,713 77,749

1,612 439,559 718,911 11,569 31,174

493,044

1,202,825

Other operating charges As at March 31, 2012, other operating charges mainly includes an adjustment of EUR 378,490 in respect of additional net worth tax in respect of an earlier financial period following receipt of the final assessment, as well as provisions against accrued fees receivable which may be irrecoverable of EUR 74,330.

31

SMBC Nikko Bank (Luxembourg) S.A. Notes to the annual accounts as at March 31, 2012 (continued)

21

Staff and directors

21.1

Directors The average number of directors having been mandated during the financial year was as follows: 2012 EUR 4

Board of Directors’ members

2011 EUR 3

There was no remuneration, pension, loans, advances or guarantees given to directors for the years ended March 31, 2012 and March 31, 2011 as regards to their mandate of director.

21.2

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

Category Senior management (*) Middle management Employees

2012 EUR

2011 EUR

3 24 53 80

2 22 52 76

* Only members of the management committee are considered as senior management – this category includes the managing director and the deputy managing director.

The remuneration of the Senior management was as follows:

Remuneration Pension Loans, advances, guarantees given as at March 31

2012 EUR

2011 EUR

887,690 22,830 -

556,172 -

910,520

556,172

Since 2009, the Bank introduced to the staff a supplementary pension scheme with definite contributions as defined by the legal Act of 8 June 1999. This scheme is managed by an external insurance company under Luxembourg regulation.

32

SMBC Nikko Bank (Luxembourg) S.A. Notes to the annual accounts as at March 31, 2012 (continued)

22

Tax charge The Bank is liable to taxes on income and net assets. The Luxembourg tax authorities have issued assessments for the financial years up to 2010. Tax liabilities are recorded under “Provisions for taxation” in the balance sheet.

23

Breakdown of income by geographic markets The Bank’s income is derived mainly from Luxembourg, Cayman, Australia, New Zealand, UK and Japan.

24

Audit fees Audit fees billed (excluding VAT) to the Bank by KPMG Luxembourg S.à r.l. and other member firms of the KPMG network for the period are as follows:

Audit fees Audit related fees

2012 EUR

2011 EUR

162,007 112,396

144,628 108,469

274,403

253,097

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

33

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