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Banco Macro SA — Audit Report / Information 2004
Apr 28, 2005
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Download source fileAUDITED FINANCIAL STATEMENTS
SUD BANK & TRUST COMPANY LIMITED
DECEMBER 31, 2004
SUD BANK & TRUST COMPANY LIMITED
AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2004
CONTENTS
Page
Independent Auditors’ Report 1
AUDITED FINANCIAL STATEMENTS
Balance Sheet 2
Statement of Income and Deficit 4
Statement of Cash Flows 5
Notes to Financial Statements 7
INDEPENDENT AUDITORS’ REPORT
The Board of Directors and Shareholder of
SUD BANK & TRUST COMPANY LIMITED
We have audited the accompanying balance sheet of Sud Bank & Trust Company Limited (the Bank) as of December 31, 2004 and the related statements of income and deficit and cash flows for the year then ended. These financial statements are the responsibility of the Bank’s management. 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 plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Bank as of December 31, 2004, and of the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards.
February 25, 2005
Ernst & Young
The accompanying notes form an integral part of the financial statements. 2
SUD BANK & TRUST COMPANY LIMITED
BALANCE SHEET
(Expressed in United States Dollars)
| December 31 | ||
| 2004 | 2003 | |
| ASSETS | ||
| Cash and due from banks – demand and call deposits (note 3) | $ 121,154,134 | $ 57.184,258 |
| Due from parent bank | ||
| Operating accounts | 33,746 | 9,760 |
| Loans | 555,000 | 555,000 |
| Accrued interest receivable | 1,511 | 660 |
| Loans | 5,178,031 | 2,528,031 |
| Provisions for loan losses | (51,780) | - |
| Investments (note 8) | 826,778 | 3,126,584 |
| Accrued interest receivable | 127,038 | 18,164 |
| Other assets | 216,351 | 94,486 |
| Receivable under upon forward contracts (note 9) | 28,701,698 | 4,703,363 |
| Investment property | 2,647,539 | 3,347,539 |
| Investment in non-consolidated subsidiaries | 78,954 | 46,464 |
| Total assets | $ 159,469,000 | $ 71,614,309 |
The accompanying notes form an integral part of the financial statements. 2
SUD BANK & TRUST COMPANY LIMITED
BALANCE SHEET (Continued)
(Expressed in United States Dollars)
| December 31 | ||
| 2004 | 2003 | |
| LIABILITIES AND SHAREHOLDER’S EQUITY LIABILITIES | ||
| Deposits (note 5) | ||
| Banks | $ 716,661 | $ 939,786 |
| Customers | 97,487,392 | 32,146,425 |
| Accrued interest payable | 402,671 | 142,840 |
| Payable under open forward contracts (note 9) | 10,227,319 | 16,086 |
| Forward sales of government securities under open forward contracts. | 19,796,125 | 6,090,054 |
| Other accounts payable | 119,103 | 128,561 |
| Total liabilities | 128,749,271 | 39,463,752 |
| SHAREHOLDER´S EQUITY | ||
| Share capital | ||
| Authorized, issued and fully paid | ||
| 9,816,900 shares at par value of $ 1 each | 9,816,900 | 9,816,900 |
| Irrevocable advances for future capitalization (note 13) | 30,000,000 | 30,000,000 |
| Share premium | 713,100 | 713,100 |
| Deficit | (9,810,271) | (8,379,443) |
| Total shareholder’s equity | 30,719,729 | 32,150,557 |
| Total liabilities and shareholder´s equity | $ 159,469,000 | $ 71,614,309 |
COMMITMENTS (note 9)
SUBSEQUENT EVENT (note 18)
Approved By The Board:
Guido Simeto Director Elías Szteren Director
The accompanying notes form an integral part of the financial statements. 3
SUD BANK & TRUST COMPANY LIMITED
STATEMENT OF INCOME AND DEFICIT
(Expressed in United States Dollars)
| Year ended December 31 | ||
| 2004 | 2003 | |
| INCOME | ||
| Interest on bank deposits, loans and overdrafts | $ 2,930,845 | $ 3,156,593 |
| Interest on investment | 10,787 | 337,074 |
| Interest expense | (1,847,135) | (830,233) |
| Net interest income | 1,094,497 | 2,663,434 |
| Income on forward contracts | 200,416 | - |
| Exchange income | 137,903 | - |
| Other income (note 14) | 127,492 | 620,392 |
| Services fees | 44,575 | 61,568 |
| Equity in earnings of subsidiaries | 2,490 | - |
| Total other income | 512,876 | 681,960 |
| 1,607,373 | 3,345,394 | |
| EXPENSES | ||
| Administration and general expenses (note 16) | 769,780 | 646,581 |
| Loan losses | 91,680 | - |
| Services charges | 51,133 | 2,256 |
| Commissions | 38,523 | 39,833 |
| Depreciation | 7,585 | 3,742 |
| Loss on forward contracts | - | 1,677,434 |
| Exchange loss | - | 127,384 |
| Equity in losses of subsidiaries | - | 25,737 |
| Total expenses | 958,701 | 2,522,967 |
| Net operating income | 648,672 | 822,427 |
| Net income (loss) on investments (note 15) | (2,079,500) | 1,363,118 |
| NET INCOME (LOSS) | (1,430,828) | 2,185,545 |
| Deficit at beginning of year | (8,379,443) | (10,564,988) |
| DEFICIT AT END OF YEAR | $ (9,810,271) | $ (8,379,443) |
The accompanying notes form an integral part of the financial statements. 4
SUD BANK & TRUST COMPANY LIMITED
STATEMENT OF CASH FLOWS
(Expressed in United States Dollars)
| Year ended December 31 | ||
| 2004 | 2003 | |
| Cash and cash equivalents provided by (used for): | ||
| OPERATING ACTIVITIES | ||
| Net income (loss) for the year | $ (1,430,828) | $ 2,185,545 |
| Adjustment for items not involving cash: | ||
| Depreciation | 7,585 | 3,742 |
| Loss on forward contracts | 305,434 | 1,677,434 |
| Other income | (73,600) | (551,876) |
| Equity in (earnings) loss of subsidiaries | (2,490) | 25,737 |
| Loss (income) on investments | 760,982 | (1,363,118) |
| Loan losses | 91,680 | - |
| Changes in operating assets and liabilities: | ||
| Accrued interest receivable | (138,774) | (984) |
| Accrued interest payable | 259,831 | 88,016 |
| Other assets | (124,662) | (48,005) |
| Other accounts payable | (9,458) | 63,103 |
| Net cash provided by (used for) operating activities | (354,300) | 2,079,594 |
| INVESTING ACTIVITIES | ||
| Purchase of equipment | (12,098) | (34,346) |
| Sale of equipment | 7,310 | - |
| Purchase of investment property | - | (1,533,558) |
| Sale of investments property | 773,600 | - |
| Sale of current investments | 1,538,824 | 783,114 |
| Increase in investment in non-consolidates subsidiaries | (30,000) | (66,621) |
| Net increase in loans | (2,660,000) | (93,896) |
| Net (increase) decrease in due from parent bank | (24,837) | 2,872,340 |
| Net increase in receivable under open forward contracts | (23,912,587) | (4,703,363) |
| Net cash used for investing activities | (24,319,788) | (2,776,330) |
The accompanying notes form an integral part of the financial statements. 5
SUD BANK & TRUST COMPANY LIMITED
STATEMENT OF CASH FLOWS (Continued)
(Expressed in United States Dollars)
| Year ended December 31 | ||
| 2004 | 2003 | |
| FINANCING ACTIVITIES | ||
| Net increase in deposits | $ 65,117,842 | $ 18,222,474 |
| Net increase in payable under open forward contract | 23,526,122 | 4,428,706 |
| Net cash provided by financing activities | 88,643,964 | 22,651,180 |
| Net increase in cash and cash equivalents | 63,969,876 | 21,954,444 |
| Cash and cash equivalents at beginning of year | 57,184,258 | 35,229,814 |
| CASH AND CASH EQUIVALENTS AT END OF YEAR | $ 121,154,134 | $ 57,184,258 |
| Supplemental cash flow information: | ||
| Interest received | $ 2,803,518 | $ 3,501,817 |
| Interest paid | $ 1,587,304 | $ 742,217 |
The accompanying notes form an integral part of the financial statements. 6
SUD BANK & TRUST COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
(Expressed in United States Dollars)
1. CORPORATE INFORMATION
Sud Bank & Trust Company Limited (the Bank) was incorporated in 1991 under the laws of the Commonwealth of The Bahamas and is licensed under the Banks and Trust Companies Regulation Act 1965, as amended, to carry on banking and trust business from within The Bahamas. The address of its registered office is Norfolk House, Frederick Street Ground Floor, Nassau, Bahamas. The principal activities of the Bank consist of providing banking and investment management services.
The Bank had 5 (2003: 4) employees at year-end.
The Bank is a wholly-owned subsidiary of Banco Macro Bansud S.A. (the Parent), a bank organized under the laws of Argentina. A significant part of the Bank’s business is transacted with related parties.
The financial statements of the Bank were authorized for issue by the Board of Directors on
February 25, 2005.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of accounting
These financial statements are prepared in accordance with International Financial Reporting Standards, which comprise standards and interpretations approved by the International Accounting Standards Board and interpretations issued by its Standing Interpretations Committee. The financial statements are expressed in United States (U.S.) dollars. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. The financial statements are prepared under the historical cost convention, except for investments, forward contracts and loans which are measured at fair value.
Revenue recognition
Interest income, interest expense, services fees and services charges are recorded on the
accrual basis.
7
SUD BANK & TRUST COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
(Expressed in United States Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Trade date accounting
All “regular way” purchases and sales of financial assets are recognized on the “trade date”, i.e., the date that the Bank commits to purchase or sell the asset. Regular way purchases and sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place.
Impairment and uncollectibility of financial assets
An assessment is made at each balance sheet date to determine whether there is objective evidence that a financial asset or group of financial assets may be impaired. If such evidence exists, the estimated recoverable amount of that asset is determined and any impairment loss recognized for the difference between the recoverable amount and the carrying amount is included in the statement of income.
Forward contracts
The Bank enters into forward contracts, which are stated at fair value. The fair value of a forward contract is the equivalent of the unrealized gain or loss from marking to market the forward contract using prevailing market prices.
Loans
Loans are stated at the principal amount less any specific provisions for losses which management consider necessary. Management’s periodic evaluation of the adequacy of the provision is based on the Bank’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions. Effective January 1, 2004, the Bank maintains a general provision that is required to meet the Bank’s statutory requirement. Changes to this amount are reflected within net income for the year.
8
SUD BANK & TRUST COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
(Expressed in United States Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and cash equivalents
Cash and cash equivalents include demand and call balances due from banks.
Investments
Investments are held for short-term investment purposes and are classified as held for trading and are carried at fair value. Bonds are carried at estimated market value as reported by stock exchanges based on the most recent trades.
Securities are recorded on the trade date. Dividend income is recorded on the ex-dividend date, or when known, and interest is recorded on the accrual basis as earned.
Investment in non-consolidated subsidiaries
The Bank does not prepare consolidated financial statements since it is itself a wholly-owned subsidiary. The Parent Bank issues consolidated financial statements.
The investment in non-consolidated subsidiaries is accounted for based on the equity method of accounting. As of year-end, the Bank had investments in the following wholly-owned nonconsolidated subsidiaries:
| Company name | Country of incorporation |
| Sud Asesores S.A.F.I. Uruguay | Uruguay |
| Sud Asesores (R.O.U.) S.A. Uruguay | Uruguay |
9
SUD BANK & TRUST COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
(Expressed in United States Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment property
Investment property represents undeveloped land acquired for capital appreciation and is carried at cost less impairment losses. The Bank’s management estimates that no impairment losses have occurred as of December 31, 2004 (2003 - nil).
Foreign currency translation
Monetary assets and liabilities in foreign currencies are translated into U.S. dollars using yearend rates of exchange. Statement of income items in foreign currencies are recorded in U.S. dollars by applying the exchange rates existing at the dates of the transactions. All exchange differences are included in the statement of income for the year.
Assets under administration
Assets under administration have not been included in these financial statements. Total assets under administration as at December 31, 2004 approximated $3.8 million (2003: $3.5 million).
Taxation
There are no income taxes imposed on the Bank in the Commonwealth of The Bahamas.
10
SUD BANK & TRUST COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
(Expressed in United States Dollars)
3. CASH AND DUE FROM BANKS
Cash and due from banks comprise the following:
| 2004 | 2003 | |
| Cash | $ 16,872 | 49,975 |
| Due from banks | ||
| Standard Chartered Bank N.Y. | 96,407,215 | 42,440,294 |
| American Express N.Y. | 18,382,808 | 13,442,286 |
| Morgan Guaranty Brussels Euroclear | 5,781,771 | 1,013,085 |
| Standard Chartered Bank London | 468,086 | - |
| Wachovia Securities | 47,271 | 226,341 |
| Nuevo Banco Comercial | 30,456 | - |
| Sud Valores S.A. Soc. de Bolsa | 10,682 | 12,277 |
| Pershing LLC | 5,000 | - |
| The Winterbotham Merchant Bank | 3,968 | - |
| Bulltick LLC | 5 | - |
| $121,154,134 | $57,184,258 |
4. PARENT COMPANY AND AFFILIATES
Balances with the Parent Bank and companies controlled by it at the balance sheet date are as follows:
| ASSETS | ||
| Cash and due from banks – demand and call deposits | $ 10,682 | $ 12,277 |
| Due from parent bank | ||
| Operating accounts | 33,746 | 9,760 |
| Loans | 555,000 | 555,000 |
| Accrued interest receivable | 1,511 | 660 |
| $ 600,939 | $ 577,697 | |
| LIABILITIES | ||
| Deposits | $ 939,006 | $ 1,162,456 |
11
SUD BANK & TRUST COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
(Expressed in United States Dollars)
4. PARENT COMPANY AND AFFILIATES (Continued)
Transactions with the Parent and companies controlled by it in the statement of income for the year ended December 31 are as follows:
| 2004 | 2003 | |
| Interest on bank deposits, loans and overdrafts | $ 1,828,605 | $ 2,904,339 |
| Interest expensive | (7,465) | (33,602) |
| Services fees | 4,400 | - |
| $ 1,825,540 | $ 2,870,737 |
5. DEPOSITS
Deposits comprise the following:
| 2004 | 2003 | |||
| Banks | Customers | Banks | Customers | |
| Demand | $ 716,661 | $ 17,574,895 | $ 939,786 | $ 9,516,989 |
| Time | - | 79,912,497 | - | 22,629,436 |
| $ 716,661 | $ 97,487,392 | $ 939,786 | $32,146,425 |
12
SUD BANK & TRUST COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
(Expressed in United States Dollars)
6. MATURITIES OF ASSETS AND LIABILITIES
Banking monetary assets and liabilities can be classified based on the period remaining to
maturity from the balance sheet date, as follows:
December 31, 2004:
| Due on demand | Less than 3 months | 3-12 months | More than 12 months | Total | |
| MONETARY ASSETS | |||||
| Cash and due from banks | $ 121,154,134 | $ - | $ - | $ - | $ 121,154,134 |
| Due from parent bank | |||||
| Operating accounts | 33,746 | - | - | - | 33,746 |
| Loans | - | - | - | 555,000 | 555,000 |
| Loans | - | - | - | 5,178,031 | 5,178.031 |
| Forward contracts | - | 27.771.198 | - | 930,500 | 28,701,698 |
| MONETARY LIABILITIES | |||||
| Due to banks | 716,661 | - | - | - | 716,661 |
| Due to customers | 17,574,895 | 72,859,610 | 7,052,887 | - | 97,487,392 |
| Forward contracts | - | 28,446,432 | - | 1,577,012 | 30,023,444 |
13
SUD BANK & TRUST COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
(Expressed in United States Dollars)
6. MATURITIES OF ASSETS AND LIABILITIES (Continued)
December 31, 2003:
| Due on demand | Less than 3 months | 3-12 months | More than 12 months | Total | |
| MONETARY ASSETS | |||||
| Cash and due from banks | $ 57,184,258 | $ - | $ - | $ - | $ 57,184,258 |
| Due from parent bank | |||||
| Operating accounts | 9,760 | - | - | - | 9,760 |
| Loans | - | - | - | 555,000 | 555,000 |
| Loans | - | - | 200,000 | 2,328,031 | 2,528,031 |
| Forward contracts | - | 1,496,086 | - | 3,207,277 | 4,703,363 |
| MONETARY LIABILITIES | |||||
| Due to banks | 939,786 | - | - | - | 939,786 |
| Due to customers | 9,516,989 | 19,546,463 | 3,082,973 | - | 32,146,425 |
| Forward contracts | - | 1,526,485 | - | 4,579,655 | 6,106,140 |
14
SUD BANK & TRUST COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
(Expressed in United States Dollars)
7. CONCENTRATIONS OF ASSETS AND LIABILITIES
The following is an analysis of significant concentrations of monetary assets and liabilities:
December 31, 2004:
| United States of América | Argentina | Bahamas | Other | Total | |
| MONETARY ASSETS | |||||
| Cash and due from banks | $ 114,846,267 | $ 15,558 | $ 11,996 | $ 6,280,313 | $ 121,154,134 |
| Due from parent bank | |||||
| Operating accounts | - | 33,746 | - | - | 33,746 |
| Loans | - | 555,000 | - | - | 555,000 |
| Loans | - | 2,328,031 | - | 2,850,000 | 5,178,031 |
| Forward contracts | - | 6,243,567 | - | 22,458,131 | 28,701,698 |
| MONETARY LIABILITIES | |||||
| Due to banks | - | 716,661 | - | - | 716,661 |
| Due to customers | 4,477,238 | 88,472,559 | 45,600 | 4,491,995 | 97,487,392 |
| Forward contracts | - | 6,577,012 | - | 23,446,432 | 30,023,444 |
15
SUD BANK & TRUST COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
(Expressed in United States Dollars)
7. CONCENTRATIONS OF ASSETS AND LIABILITIES (Continued)
December 31, 2003:
| United States of América | Argentina | Bahamas | Other | Total | |
| MONETARY ASSETS | |||||
| Cash and due from banks | $ 56,108,921 | $ 55,543 | $ 6,710 | $ 1,013,084 | $ 57,184,258 |
| Due from parent bank | |||||
| Operating accounts | - | 9,760 | - | - | 9,760 |
| Loans | - | 555,000 | - | - | 555,000 |
| Loans | - | 2,328,01 | - | 200,000 | 2,528,031 |
| Forward contracts | - | 4,703,363 | - | - | 4,703,363 |
| MONETARY LIABILITIES | |||||
| Due to banks | - | 939,786 | - | - | 939,786 |
| Due to customers | - | 23,292,835 | 8,778,911 | 74,679 | 32,146,425 |
| Forward contracts | - | 6,106,140 | - | - | 6,106,140 |
16
SUD BANK & TRUST COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
(Expressed in United States Dollars)
8. INVESTMENTS
Investments comprise the following:
| 2004 | 2003 | |
| Argentine Government Bonds | $ 815,039 | $ 3,109,945 |
| Other | 11,739 | 16,639 |
| $ 826,778 | $ 3,126,584 |
The Argentine Government Bonds represent:
| Nominal Value | Market Value | |
| “Bonos del Gobierno Argentino US$ Libor 2012” | $ 782,300 | $ 662,923 |
| “Bonos Externos Globales 2027” | 300,000 | 98,863 |
| “Bonos Externos Globales 2009” | 21,000 | 7,132 |
| “Bonos Externos Globales 2008” | 17,790 | 5,907 |
| “Bonos Externos Globales 2003” | 96,000 | 31,304 |
| “Bonos del Tesoro 2002” | 28,000 | 8,709 |
| “Bocon Prev. $ 3á. serie” | 400 | 201 |
| $ 815,039 |
9. COMMITMENTS
Derivative financial instruments
Forward contracts are contracts to purchase and to sell securities and currencies at specific prices on specific dates in the future. Risk arises from the potential inability of counterparties to perform under the terms of the contracts (credit risk) and from fluctuations in prices (market risk).
17
SUD BANK & TRUST COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
(Expressed in United States Dollars)
9. COMMITMENTS (Continued)
The contract amounts of open forward contracts were as follows:
December 31, 2004:
| Commitments under Forward contracts | Assets | Liabilities |
| Commitments to purchase | $ 10,313,067 | $ 10,227,319 |
| Commitments to sell | 18,388,631 | 19,796,125 |
| $ 28,701,698 | $ 30,023,444 |
December 31, 2003:
| Commitments under Forward contracts | Assets | Liabilities |
| Commitments to purchase | $ 7,971 | $ 8,115 |
| Commitments to sell | 4,695,392 | 6,098,025 |
| $ 4,703,363 | $ 6,106,140 |
The contract amounts of these instruments reflect the extent of the Bank’s involvement in forward contracts and do not represent the Bank’s risk of loss due to counterparty nonperformance. The credit risk is limited to the amounts with a positive value reflected in the Bank’s balance sheet.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments utilized by the Bank include recorded assets and liabilities, as well as items that principally involve off-balance sheet risk. The majority of the Bank’s financial instruments are either short-term in nature or have interest rates that automatically reset to market on a periodic basis. Accordingly, the estimated fair value is not significantly different from the carrying value for each major category of the Bank’s recorded assets and liabilities.
18
SUD BANK & TRUST COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
(Expressed in United States Dollars)
11. FINANCIAL RISK MANAGEMENT
The Bank’s financial instruments, other than derivatives, comprise deposits, money market
assets and liabilities, some cash and liquid resources, and other various items that arise directly from its operations. The main risks arising from the Bank’s financial instruments are credit, liquidity interest rate, market and foreign currency risk. The Board reviews and agrees policies managing each of these risks and they are summarized below.
Credit risk
Credit risk is the risk that a customer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Bank. The Bank manages counter-party credit risk centrally to optimize the use of credit availability and to avoid excessive risk concentration. Customer credit risk is monitored on a daily basis by management. The Bank’s Board of Directors receives regular reports on credit exposures, levels of bad debt provisioning and bank exposure limits.
Credit risk exposure
The Bank’s maximum exposure to credit risk (not taking into account the value of any collateral or other security held) in the event the counterparties fail to perform their obligations as at December 31, 2004 in relation to each class of recognized financial assets other than derivatives, is the carrying amount of those assets as indicated in the balance sheet.
With respect to derivative financial instruments, credit risk arises from the potential failure of counterparties to meet their obligations under the contract.
Liquidity risk
Liquidity risk is the risk that the Bank will encounter difficultly in realizing assets or otherwise raising funds to meet commitments. The Bank monitors expected cash outflow on a daily basis. Its policy throughout the year has been to ensure liquidity by maintaining at all times sufficient high quality liquid assets to cover expected net cash outflow. The maturity analysis of the assets and liabilities are disclosed in note 6 above.
19
SUD BANK & TRUST COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
(Expressed in United States Dollars)
11. FINANCIAL RISK MANAGEMENT (Continued)
Interest rate risk
Exposure to interest rate risk is the risk that arises where there is an imbalance between rate and non-rate sensitive assets and liabilities. The Bank’s policy is to maintain the interest rate risk at a minimal level except that management may invest shareholders’ funds in fixed or floating rate instruments in response to market conditions.
The table in note 12 shows the Bank’s exposure to interest rates for the U.S. dollar at December 31, 2004.
Market risk
Market risk is the risk that significant fluctuations will occur in the market value of investments due to changes in market prices, currency rates and other market factors. Market risk embodies not only the potential for loss but also the potential for gain. Market risk is primarily concentrated in investments. This risk is managed by the treasury department of the Parent.
Foreign currency risk
Foreign currency risk is the risk that the value of a financial instrument will fluctuate because of changes in foreign exchange rates. The Bank’s foreign exchange exposure arises from providing services to customers. The Bank’s policy is to hedge against foreign exchange risks by matching currency liabilities with currency assets. Currency exposure is monitored on a daily basis and reviewed by management.
The currency exposure is stated below in U.S. dollars:
20
SUD BANK & TRUST COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
(Expressed in United States Dollars)
11. FINANCIAL RISK MANAGEMENT (Continued)
December 31, 2004:
| United States dollars | Argentina Pesos | Euros | Uruguay Pesos | Total | |
| Assets | |||||
| Cash and due from banks | |||||
| - demand and call deposits | $ 121,132,405 | $ 3,447 | $ 17,591 | $ 691 | $ 121,154,134 |
| Due from parent bank | |||||
| Operating accounts | 8,673 | 25,073 | - | - | 33,746 |
| Loans | 555,000 | - | - | - | 555.000 |
| Accrued interest receivable | 1,511 | - | - | - | 1,511 |
| Loans | 5,178,031 | - | - | - | 5,178,031 |
| Provisions for loan losses | (51,780) | - | - | - | (51,780) |
| Investment | 826,778 | - | - | - | 826,778 |
| Accrued interest receivable | 127,038 | - | - | - | 127,038 |
| Other assets | 216,351 | - | - | - | 216,351 |
| Receivable under open forward contracts | 28,701,698 | - | - | - | 28,701,698 |
| Investment property | 2,647,539 | - | - | - | 2,647,539 |
| Investment in non-consolidated subsidiaries | 78,954 | - | - | - | 78,954 |
| Total assets | $ 159,422,198 | $ 28,520 | $ 17,591 | $ 691 | $ 159,469,00 |
| Liabilities | |||||
| Deposits | |||||
| Bank | $ 716,661 | $ - | $ - | $ - | $ 716,661 |
| Customers | 97,471,600 | 8,400 | 7,332 | - | 97,487,392 |
| Accrued interest payable | 402,671 | - | - | - | 402,671 |
| Payable under open forward contracts | 10,227,319 | - | - | - | 10,227,319 |
| Forward sales of government securities under open forward contracts | 19,796,125 | - | - | - | 19,796,125 |
| Other accounts payable | 119,103 | - | - | - | 119,103 |
| Total liabilities | $128,733,539 | $ 8,400 | $ 7,332 | $ - | $ 128,749,271 |
21
SUD BANK & TRUST COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
(Expressed in United States Dollars)
11. FINANCIAL RISK MANAGEMENT (Continued)
December 31, 2003:
| United States dollars | Argentina Pesos | Euros | Total | |
| Assets | ||||
| Cash and due from banks | ||||
| - demand and call deposits | $ 57,160,720 | $ 12,277 | $ 11,261 | $ 57,184,258 |
| Due from parent bank | ||||
| Operating accounts | 180 | 9,580 | - | 9,760 |
| Loans | 555,000 | - | - | 555.000 |
| Accrued interest receivable | 660 | - | - | 660 |
| Loans | 2,528,031 | - | - | 2,528,031 |
| Investment | 3,126,584 | - | - | 3,126,584 |
| Accrued interest receivable | 18,164 | - | - | 18,164 |
| Other assets | 94,486 | - | - | 94,486 |
| Receivable under open forward contracts | 4,695,248 | 8,115 | - | 4,703,363 |
| Investment property | 3,347,539 | - | - | 3,347,539 |
| Investment in non-consolidated subsidiaries | 46,464 | - | - | 46,464 |
| Total assets | $ 71,573,076 | $ 29,972 | $ 11,261 | $ 71,614,309 |
| Liabilities | ||||
| Deposits | ||||
| Bank | $ 939,786 | $ - | $ - | $ 939,786 |
| Customers | 32,126,101 | 18,353 | 1,971 | 32,146,425 |
| Accrued interest payable | 142,840 | - | - | 142,840 |
| Payable under open forward contracts | 7,971 | 8,115 | - | 16,086 |
| Forward sales of government securities under open forward contracts | 6,090,054 | - | - | 6,090,054 |
| Other accounts payable | 113,007 | 15,554 | - | 128,561 |
| Total liabilities | $39,419,759 | $ 42,022 | $ 1,971 | $ 39,463,752 |
22
SUD BANK & TRUST COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
(Expressed in United States Dollars)
12. INTEREST RATE EXPOSURE
The Bank’s exposure to interest rates for significant interest-bearing monetary assets and liabilities for the U.S. dollar is as follows:
| 2004 | 2003 | |
| Assets | ||
| Due from banks | 1.906% - 2.015% | 0.65% - 0.7% |
| Loans | 2.58% - 10% | 1.2588% - 18% |
| Liabilities | ||
| Due to customers | 1.25% - 5% | 3% - 5% |
13. IRREVOCABLE ADVANCES FOR FUTURE CAPITALIZATION
On January 25, 2002 and April 25, 2002, the Parent made cash contributions of $10,000,000 and $20,000,000 respectively. These contributions have been recorded as “Irrevocable advances for future capitalization” in the shareholder’s equity section of the balance sheet.
On March 26, 2004, the Central Bank of The Bahamas approved the increase of the capital by $30,000,000.
14. OTHER INCOME
Other income comprise the following:
| 2004 | 2003 | |
| Income on investment property sale | $ 73,600 | $ - |
| Income on option sale | 29,000 | - |
| Income on acquisition of loans | 21,439 | 551,876 |
| Other | 3,453 | 68,516 |
| Total | $ 127,492 | $ 620,392 |
23
SUD BANK & TRUST COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
(Expressed in United States Dollars)
15. NET INCOME (LOSS) ON INVESTMENTS
Net income (loss) on investments represents the income (loss) that arose from changes in market price of securities.
16. ADMINISTRATION AND GENERAL EXPENSES
Administration and general expenses comprise the following:
| 2004 | 2003 | |
| Expenses of Bahamas office | $ 317,670 | $ 256,071 |
| Personnel costs | 218,000 | 166,360 |
| Professional fees | 106,351 | 93,347 |
| Other | 85,592 | 81,103 |
| Taxes | 42,167 | 49,700 |
| Total | $ 769,780 | $ 646,581 |
17. ECONOMIC SITUATION IN ARGENTINA
The Argentine economic and financial situation worsened during late 2001, when the government debt payments were suspended and a severe restriction was imposed on withdrawals of funds from financial institutions. In early 2002, the Argentine Congress enacted Public Emergency and Foreign Exchange System Reform Law No. 25,561 that introduced dramatic changes to the economic model implemented until that date and amended the Convertibility Law (the currency board that pegged the Argentine peso at parity with the U.S. dollar) effective since March 1991. After a period of an official foreign exchange market, a single foreign exchange market was established, subject to B.C.R.A. (Central Bank of Argentina) requirements and regulations.
24
SUD BANK & TRUST COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
(Expressed in United States Dollars)
17. ECONOMIC SITUATION IN ARGENTINA (Continued)
Such law and the subsequent administrative orders established, among others, measures that affected the financial system, namely: (a) the switch into pesos of payables (including payables to the financial sector), agreements rates originally denominated in U.S. dollars at the exchange rate of ARS 1 = U.S.$1; (b) the Federal Executive’s possibility of establishing compensatory measures intended to avoid financial institutions imbalance as a result of the impact caused by the measures related to the switch into pesos of certain loans, which then gave rise to the issuance of bonds to bear the financial system imbalance; (c) the switch into pesos of deposits denominated in U.S. dollars or other existing foreign currencies in the financial system at the exchange rate of ARS 1.40 = U.S.$1 or its equivalent in other currencies; and (d) the adjustment of receivables and payables switched into pesos by the C.E.R. (Benchmark Stabilization Coefficient). Law No. 25,972, which was passed on December 17, 2004, extended through December 31, 2005, the state of public emergency declared by Law No. 25,561.
Subsequently, there has been significant progress in overcoming the negative consequences mentioned above involving, among other measures, monetary re-unification, the relaxation of foreign-exchange controls, compensation to banks for the asymmetrical switch into pesos, the start of the government debt restructuring process, the signing of the Letter of Intent with the International Monetary Fund, the final swap phase of provincial debt instruments, restructuring of private-sector debts and the lifting of restrictions on bank deposits.
However, a number of issues remain pending resolution including closing the restructuring of government debt, the definitive resolution of constitutional rights protection related to the refund of deposits in the original currency, the financial institutions compensation process, as well as restructuring and fortifying the financial system.
The Bank’s management is permanently evaluating the significance of the effects that the above mentioned issues pending resolution may bring about. However, it believes that the effects resulting therefrom will not be material to the financial statements taken as a whole. These financial statements should be read in the light of the circumstances explained above.
25
SUD BANK & TRUST COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
(Expressed in United States Dollars)
18. SUBSEQUENT EVENT
During January 2005, the Bank sold one of its investment properties and realized a gain of $1.1 million.
26