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 2019 and the profit and loss account for the financial year that ended on this date, as well as the notes to the financial statements, which summarise significant accounting policies.
According to our assessment, the annual financial statements attached are a true and fair reflection of the assets and financial position of DZ PRIVATBANK S.A. as at 31 December 2019, and of its earnings for the financial year that ended on this date, in accordance with the legal requirements and stipulations applicable in Luxembourg with regard to the preparation of the 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 from DZ PRIVATBANK S.A. in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (“IESBA Code”) adopted for Luxembourg by the CSSF, together with the professional code of conduct which we are required to adhere to in the course of the audit of the annual financial statements. We have also complied with all other professional duties in accordance with those standards. 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.
The audit findings that we consider to be of particular importance for the audit of the annual financial statements as at 31 December 2019 are outlined below; these relate to the valuation of shares in affiliated companies.
a) Description of the issues involved:
DZ PRIVATBANK S.A. holds shares in affiliated companies with a book value of EUR 164.7 million (previous year: EUR 159.7 million). Information provided by the Bank on the valuation of shares in affiliated companies is enclosed in the notes on individual items on the balance sheet under the item “Shares in affiliated companies” and in the notes on individual items under the item “Valuation principles”, item D “Financial assets”.
In this context, the shareholding in DZ PRIVATBANK (Schweiz) AG is measured at historical cost or at the lower fair value. 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 is subject to discretionary powers of the Bank's Board of Management, 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 particularly important within the audit, since the valuation of the shares in affiliated companies is largely based on assumptions, made by the legal representatives, which contain estimates or discretionary judgements. Our focus was on the valuation of the shares in DZ PRIVATBANK (Schweiz) AG, which has a book value of EUR 156.7 million as at 31 December 2019.
b) Our audit procedure:
We reviewed the methodical approach and the mathematical accuracy of the valuation model that is used. We assessed the net cash flows on which the valuation methods are based, the capitalisation interest rate and other factors influencing the value, while maintaining a critical stance towards their appropriateness and mathematical accuracy.
In order to assess the appropriateness of the forecast net cash flows, we made an historical assessment of the performance and financial trends at DZ PRIVATBANK (Schweiz) AG. We also took into account further supplementary information to assess the other parameters and planning premises that formed the basis for the 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. Where individual data and assumptions were available, their plausibility was checked by comparing them with publicly available information on expected volume and margin trends in the Swiss private banking market; we acknowledged the derivation of the result over the long term.
So as to assess the appropriateness of the capitalisation interest rate used, we examined whether it was consistent 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 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.
The Board of Management is responsible for the other information. This includes information which can be found in the operations report, but does not include the annual financial statements or our auditor’s report for these annual financial statements.
Our audit opinion in relation to the annual financial statements does not cover the other information, and we offer no guarantee of any kind in relation to this information.
Our responsibility in relation to the audit of the annual financial statements is to read the other information and assess whether there are any material inconsistencies between it and the annual financial statements or in relation to the audit findings, or whether the other information appears to be otherwise presented in a fundamentally incorrect manner. If, based on the scope of our work, we come to the conclusion that other information includes fundamentally incorrect statements, we are obliged to report this fact. We have nothing to report in this regard.
RESPONSIBILITY OF THE BOARD OF MANAGEMENT, AND OF THOSE WITH SUPERVISORY RESPONSIBILITIES, FOR THE FINANCIAL STATEMENTS
The Board of Management is responsible for preparing and properly presenting the annual financial statements in their entirety, in accordance with the legal provisions and stipulations applicable in Luxembourg regarding the preparation of annual financial statements, and for any internal checks it deems necessary to ensure that the annual financial statements are free of material misstatement, whether due to fraud or error.
In preparing the annual financial statements, the Board of Management is responsible for making an assessment of the Bank's ability to continue as a going concern and, when relevant, for providing information about matters relating to the Bank's ability to continue as a going concern, and for making a going concern assumption as a basis for accounting unless the Board of Management intends to liquidate the Bank, cease trading or has no realistic alternative but to do so.
RESPONSIBILITY OF THE AUDITOR FOR THE ANNUAL AUDIT
The objective of our audit is to obtain reasonable assurance as to whether the annual financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue a report on these misstatements by the Réviseur d'entreprises agréé, which includes 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 accounting policies used by the Board of Management, the reasonableness of accounting estimates made and of the related disclosures in the notes.
- We draw conclusions on the appropriateness of the Board of Management’s application of the going concern principle and, on the basis of the audit evidence obtained, whether there is any material uncertainty related to events or circumstances that may cast significant doubt on the Bank's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to refer to the accompanying notes to the annual financial statements in the report of the Réviseur d'entreprises agréé or, if the disclosures are not appropriate, 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 have assessed the overall presentation, structure and content of the annual financial statements, including the notes, and assessed whether they convey a realistic picture of the underlying transactions 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 have made a declaration to the persons responsible for monitoring that we have complied with the relevant independence requirements and have discussed with them all relationships and other matters that could reasonably be expected to affect our independence and, where relevant, the safeguards put in place to protect it.
Among the issues discussed with the people responsible for supervision, we identified 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 described these issues in our report, unless laws or other legal regulations prohibited the public disclosure of the issue concerned.
REPORT ON OTHER LEGAL AND REGULATORY OBLIGATIONS
We were appointed as Réviseur d'entreprises agréé by the Board of Management on 4 November 2019. The uninterrupted term of office, including prior extensions and reappointments, is nine years.
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.
Ernst & Young
Cabinet de révision agréé
Luxembourg, 6 March 2020