REPORT ON THE ANNUAL FINANCIAL STATEMENTS
We have audited the annual financial statements of DZ PRIVATBANK S.A. (the "Bank"), which comprise the balance sheet as at 31 December 2018 and the profit and loss statement for the financial year ending on this date, as well as the notes containing a summary of the significant accounting methods.
According to our assessment, the enclosed annual financial statements provide a realistic picture of the finances and assets of DZ PRIVATBANK S.A. as at 31 December 2018, as well as of its profits and growth for the financial year ending on this date, in accordance with the legal requirements and stipulations that are applicable in Luxembourg with regard to the preparation and presentation of annual financial statements.
BASIS OF THE AUDIT OPINION
We performed our audit in accordance with Regulation (EU) No 537/2014, the Audit Law (Law of 23 July 2016), and the International Standards on Auditing (ISA) that have been accepted for Luxembourg by the Commission de Surveillance du Secteur Financier (CSSF). Our responsibility in accordance with this regulation, this law and these standards is described in more detail in the section entitled “Responsibility of the réviseur d’entreprises agréé for the annual audit". We are independent of DZ PRIVATBANK S.A. as is required for conformity with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (the IESBA Code), that is accepted by the CSSF for Luxembourg, as well as the professional rules of conduct that are to be adhered to for auditing, and we have fulfilled all other professional duties in accordance with these rules of conduct. In our opinion, adequate and appropriate evidence has been provided to arrive at an auditor's opinion.
ESPECIALLY IMPORTANT AUDIT ISSUES
Especially important audit issues are those, which in our proper professional judgement, were the most significant in relation to the audit of the annual financial statements for the current reporting period. These issues were taken into account in connection with the audit of the annual financial statements as a whole and the forming of the audit opinion; we do not provide a separate audit opinion in relation to these issues.
Below we set out audit issues which relate to the valuation of the shares in affiliated companies, and which are in our opinion particularly important for the audit of the annual financial statements as at 31 December 2018.
a) Description of the issues involved:
DZ PRIVATBANK S.A. has shares in affiliated companies with a book value of EUR 159.7 million (previous year: EUR 180.6 million). Information provided by the Bank about the valuation of the shares in affiliated companies is contained in the notes in the individual explanations relating to the balance sheet under the heading "Shareholdings in affiliated companies", and in the individual explanations under the heading "Valuation principles", Point D "Financial assets".
The valuation of the shareholding is at historic acquisition costs or the fair value, whichever is lower. The fair value calculated for the valuation was determined by the Board of Management based on the expected net payment flows which were derived from the affiliated companies' budgets and were discounted using a risk-free interest rate adapted to reflect a risk premium. The values contained in these plans are based on assumptions, the determination of which the Bank's Board of Management has discretionary leeway, or which require the use of estimates. In particular, current uncertainties regarding future economic development in the light of the continuing low level of interest rates affect these assumptions. In addition, assumptions have to be made when determining the capitalised earning value, in particular in terms of establishing the yield of an alternative investment with an appropriate level of risk and an appropriate duration based on the use of capital market models, in order to derive the capitalisation interest rate to be applied to the net payment flows for the budget.
We have defined this issue as a particularly important onr within the audit, since the valuation of the shares in affiliated companies is largely based on assumptions made by the legal representatives, which assumptions contain estimates or discretionary judgements. In this regard, our focus was on the valuation of the shares held in DZ PRIVATBANK (Schweiz) AG, which was written down with effect from 31 December 2018 by EUR 20.8 million, from EUR 177.5 million to EUR 156.7 million. The reasons for doing so were lower than expected commission surpluses owing to reduced Private Banking net margins.
b) Our audit procedure:
We have reviewed the methodical approach and the mathematical accuracy of the valuation model that is used. We have assessed the appropriateness of the net payment flows and the capitalisation interest rate, as well as other factors which affect values and on which the valuation is based.
To assess the appropriateness of the forecast net payment flows, we undertook a retrospective assessment of the performance and financial development of DZ PRIVATBANK (Schweiz) AG. We also used further supplementary information to evaluate the other parameters and planning assumptions that formed the basis of forecast planning. In this connection, we assessed the reliability of adherence to budget by undertaking a retrospective plan/actual analysis. We assessed the data used for forecast planning purposes based on our knowledge of the business activities and developments in the sector. We checked the plausibility of individual items of data and assumptions by comparing them with publicly available information about expected trends affecting volumes and margins in the Swiss private banking market, and we assessed how the long-term results were derived.
In order to assess the appropriateness of the capitalisation interest rate used, we investigated whether it was in accordance with external sources, such as the average interest rate of long-term Swiss government bonds and studies of market risk premiums in Switzerland.
In order to assess the appropriateness of the distributable capital incorporated into the budget, we tracked how the capital planning modelling was undertaken and we compared the resulting rate of target capital with the requirements set by the Swiss Financial Market Supervisory Authority.
In addition, we analysed the appropriateness of the resulting fair value as a benchmark of corporate value by comparing it with the market multipliers observed in the market.
In order to assess the recoverability of the book values of the shareholdings, we used specialists in the audit team who possess expertise in the area of company valuation.
The Board of Management is responsible for the drawing-up and correct overall presentation of the annual financial statements, in accordance with the legal requirements and stipulations that are applicable in Luxembourg to the drawing up of annual financial statements, and for any internal checks which it deems necessary in order to enable the annual financial statements to be drawn up in a manner free from significant intentional or unintentional misrepresentations.
In preparing the annual financial statements, the management is responsible for assessing the Bank's ability to continue to operate and, if relevant, for providing information on matters relating to the continuation of company operations. It also has a responsibility to use the assumption of a continuation of the business as a going concern as the basis for the accounting, unless the Board of Management intends to liquidate the Bank or to cease its operations, or unless it no longer has any realistic alternative other than to do so.
RESPONSIBILITY OF THE BOARD OF MANAGEMENT, AND OF THOSE WITH SUPERVISORY RESPONSIBILITIES, FOR THE FINANCIAL STATEMENTS
The Board of Management is responsible for the drafting and correct overall presentation of the annual financial statements in accordance with the legal requirements and stipulations that are applicable in Luxembourg and the standards for the preparation of annual financial statements, and for any internal checks which it deems necessary in order to ensure that the annual financial statements are free from significant intentional or unintentional misrepresentations.
In preparing the annual financial statements, the Board of Management is responsible for assessing the Bank's ability to continue to operate and, if relevant, for providing information on matters relating to the continuation of company operations. It also has a responsibility to use the assumption of a continuation of the business as a thriving concern as the basis for the accounting, unless the Board of Management intends to liquidate the Bank or cease its operations, or no longer has any realistic alternative other than to do so. Those responsible for supervision are accountable for overseeing the process of drawing up the annual financial statements.
RESPONSIBILITY OF THE AUDITOR FOR THE ANNUAL AUDIT
The aim of our audit is to obtain reasonable assurance as to whether the annual financial statements, as a whole, are free of significant intentional or unintentional misrepresentations, and also to issue an audit certificate containing our audit opinion. Reasonable assurance equates to a high level of certainty, but does not represent a guarantee that an audit conducted in accordance with Regulation (EU) No 537/2014, the Law of 23 July 2016 and the ISAs accepted for Luxembourg by the CSSF, will always reveal any materially incorrect information that may be present. Incorrect information may result from errors or violations, and it is viewed as material if it can reasonably be assumed that it could, either individually or overall, influence any economic decisions made on the basis of these annual financial statements.
In accordance with Regulation (EU) No 537/2014, the Law of 23 July 2016 and the ISAs accepted for Luxembourg by the CSSF, we apply due discretion and maintain a critical attitude during the performance of any audit. In addition:
- We identify and assess the risk of material inaccuracies in the annual financial statements resulting from errors or violations, and we plan and execute audit operations in response to these risks, resulting in our obtaining audit evidence which is adequate and appropriate to serve as the basis for the audit assessment. The risk of material misrepresentations not being disclosed is greater in the case of violations than inaccuracies, since violations may involve fraudulent collaboration, falsification, intentionally incomplete information, misleading information and/or the disabling of internal controls.
- We gain an understanding of the relevant internal control system used for the audit, in order to plan audit operations which are appropriate under the given circumstances, but not with the aim of delivering an audit opinion as to the efficacy of the Bank's internal control system.
- We assess the appropriateness of the accounting policies applied by the Board of Management, of the accounting estimates made, and of the corresponding information provided in the notes to the accounts.
- We draw conclusions as to the appropriateness of the application of the going concern accounting policy by the Board of Management and, on the basis of the audit evidence obtained, as to whether there is material uncertainty in connection with events or circumstances which could give rise to serious doubts regarding the Bank's ability to continue its business operations. Should we conclude that there is any material uncertainty, we are obliged to make reference within the report of the Réviseur d'Entreprises Agréé to the relevant details contained in the notes to the annual financial statements or, if the information is inappropriate, to modify the audit opinion. These conclusions are set out on the basis of the audit evidence obtained up to the date of the report. Future events or circumstances may, however, mean that the bank can no longer continue its operations.
- We assess the overall presentation, structure and content of the annual financial statements, including the notes to the accounts, and we assess whether they accurately describe the underlying business operations and events.
We communicate with those responsible for supervision in relation to such matters as the planned scope of the audit and the period covered by it, as well as any material audit conclusions, including significant weaknesses of the internal control system that we identify during the audit. We must provide a declaration to those responsible for supervision, confirming that we have satisfied the relevant independence requirements, and that we have discussed with them all the relationships and other issues that may reasonably be assumed to affect our independence, as well as the safeguards adopted in this regard, where relevant.
Among the issues discussed with the people responsible for supervision, we identify the especially important audit issues which were the most significant in relation to the audit of the annual financial statements for the current reporting period. We describe these issues in our report, unless laws or other legal regulations prohibit the public disclosure of the issue concerned.
REPORT ON OTHER LEGAL AND REGULATORY OBLIGATIONS
We were appointed as the auditor (Réviseur d'entreprises agréé) by the Board of Management on 6 May 2018. The uninterrupted duration of our mandate is a period of eight years, including previous extensions and re-appointments.
The operations report is consistent with the annual financial statements and meets the applicable legal requirements.
We confirm that we have not carried out any non-auditing services which are prohibited for auditors according to Regulation (EU) No 537/2014, and that we remain independent of DZ PRIVATBANK S.A. as regards the undertaking of our audit.
Luxembourg, 19 February 2019
ERNST & YOUNG
Approved audit firm (Cabinet de révision agréé)