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IFRS Analyst & Investor Meeting
Introduction
Tom de Swaan
CFO & Member of the Managing Board
London, 18 November 2004
Schedule and presenters

14.00 hrs
Introduction

14.15 hrs
IFRS impact on Balance Sheet Maurice Oostendorp
and Income Statement
Head of Group Finance

15.00 hrs
IFRS impact on BU NA
Tom Goldstein
CFO BU NA

15.20 hrs
IFRS impact on Group ALM
Rolf Smit
Head of Group ALM

15.40 hrs
Concluding remarks
Maurice Oostendorp

15.45 hrs
Q&A
Tom de Swaan
Other delegates present: Gerhard Zeilmaker (Head of Group Financial &
Management Accounting), Tijmen Bout (Head of Group Accounting Policy),
Sarah Russell (CFO WCS) & Richard Bruens (Head of Investor Relations)
2
Introduction
Tom de Swaan
Main goal is to provide clarity w.r.t.
IFRS impact on ABN AMRO
We will discuss many things that will change as a result of the
introduction of IFRS, but:

IFRS will not change the underlying performance of our business.
Accounting should continue to reflect business decisions and not drive
business decisions

Underlying income streams unchanged as differences are mainly due to
transition impact and timing differences (especially IER, Pensions and
Hedge ineffectiveness)

IFRS transition will not have an impact on dividend

Transparency and disclosure remain at a high level

Our choice w.r.t. Pensions leads to a lower Tier 1 ratio now and higher net
profit in the future, which simply reflects a timing difference (taking pension
costs now, instead of future).
4
IFRS and ABN AMRO - Background

December 2000, the European Commission announced that all EU listed
companies must prepare consolidated accounts in accordance with IFRS

ABN AMRO adopted IFRS as of 1 January 2004 for comparison purposes.
Dutch GAAP and IFRS accounting have run in parallel through 2004

Opening 2004 Balance Sheet prepared on IFRS basis

Dutch GAAP leading external reporting in 2004. Dual internal reporting
5
IFRS and ABN AMRO – Looking
Forward

IASB’s version of IAS 39 fully adopted, except fair value option for liabilities
which is not allowed by EU

18 November 2004 indicative HY 2004 IFRS figures are presented

FY 2004 IFRS figures will be published by 31 March 2005

Q1 2005 results on IFRS basis (and Q1 2004 IFRS figures) will be
published on 27 April 2005

All IFRS figures in this presentation are indicative only and should be
treated as such
6
Impact of IFRS on Performance
Management

Management, hedging strategies, etc in 2004 are still based on Dutch
GAAP

Full commitment to an IFRS Performance Contract Cycle (PFC) will take
place as of 2005 PFC cycle

Milestones PFC 2003 and 2004 for IFRS related Implementation Initiative
include:
- adjust systems and processes
- meet the monthly dual reporting requirements
- fulfil the disclosure reporting requirements

Hedge effectiveness the responsibility of management of the (S)BU
7
IFRS impact on ABN AMRO

Volatility – Will increased P&L volatility lead to different business
decisions?

Hedging – Is hedging ineffectiveness avoidable?

Provisioning – Will loan provisioning methodology change significantly?

Disclosure – Will disclosure and transparency increase?

US GAAP – Can US GAAP be used as a proxy for IFRS?
8
IFRS impact on ABN AMRO
Volatility –
Will increased P&L volatility lead to different business
decisions?

IER

Fair value adjustments (AFS, MSR’s, Other)

Derivatives

Private Equity

Share based payments
Conclusion: Increased volatility will not lead to different business decisions
9
IFRS impact on ABN AMRO
Hedging –
Is hedging ineffectiveness avoidable?
Causes of ineffectiveness:

Operational processes around externalisation, documentation and testing

Mortgage Servicing Rights characteristics

Mortgage Backed Securities characteristics
Conclusion: Hedging ineffectiveness is not avoidable
10
IFRS impact on ABN AMRO
Provisioning –
Will loan provisioning methodology
change significantly?

Under Dutch GAAP, nominal value of expected cash flows on impaired
loans

Under IFRS, discounting of expected cash flows on impaired loans

Under IFRS a loan loss provision is only permitted for incurred loan losses
Conclusion: Loan provisioning methodology will not change
significantly (excluding one-off impact)
11
IFRS impact on ABN AMRO
Disclosure
–
Will disclosure and transparency increase?

IFRS has increased level of footnote disclosure

New exposure draft 7 (risk disclosure of financial instruments) will further
increase level of disclosure

IFRS increases complexity of financial statements, which requires more in
depth accounting knowledge of the reader
Conclusion: Disclosure will increase and transparency might increase
12
IFRS impact on ABN AMRO
US GAAP
–
Can US GAAP be used as a proxy for IFRS?

In many respects IFRS is similar to US GAAP

There are, however, some major differences, like macro cash flow hedging
and consolidation of Private Equity

Also transition impact causes ongoing different results under IFRS and US
GAAP (Goodwill, Pensions and hedge accounting)
Conclusion: US GAAP can not be used as a proxy for IFRS
13
Conclusions

IASB’s version of IAS 39 fully adopted, except fair value option for liabilities
which is not allowed by EU

IFRS will not change the underlying performance of our business.
Accounting should continue to reflect business decisions and not drive
business decisions

Underlying income streams unchanged as differences are mainly due to
transition impact and timing differences

Volatility of results could increase

IFRS transition will not have an impact on dividend

Most impact on BU NA and Group ALM. WCS modestly impacted. Other
(S)BU’s are hardly impacted
14
IFRS impact on Balance Sheet and
Income Statement
Maurice Oostendorp
SEVP & Head of Group Finance
London, 18 November 2004
Presentation agenda

IFRS versus Dutch GAAP

IFRS impact on Balance Sheet

IFRS impact on Income Statement

IFRS impact on Tier 1 Capital

IFRS versus US GAAP

IFRS impact on (S)BU’s
16

IFRS versus Dutch GAAP

IFRS impact on Balance Sheet

IFRS impact on Income Statement

IFRS impact on Tier 1 Capital

IFRS versus US GAAP

IFRS impact on (S)BU’s
17
IFRS versus Dutch GAAP

Hedging Philosophy

Share Based Payments

Debt/Equity

Loan loss provisioning

Goodwill

Pensions

Mortgage Banking activities

Investment Portfolio/IER

Hedge Accounting

Fair Value

IAS 39
18
IFRS versus Dutch GAAP: Main
differences for ABN AMRO
Hedging Philosophy
-
Dutch GAAP: Accounting of the hedge follows the accounting of the hedged item
-
IFRS: Accounting of hedged item follows the accounting of the hedge – strict
conditions apply
Share Based Payments
-
Dutch GAAP: Stock options not expensed
-
IFRS: Stock options expensed at fair value
Debt/Equity
-
A more strict definition of Equity is applicable under IFRS. An instrument only qualifies
as equity if the payment of a dividend is at the discretion of the issuer
19
IFRS versus Dutch GAAP: Main
differences for ABN AMRO (2)
Loan loss provisioning
-
Dutch GAAP: value based on nominal cash flows
-
IFRS: value based on discounted cash flows. Only specific loan losses are allowed
Goodwill
-
Dutch GAAP: Goodwill immediately charged to Equity
-
IFRS: goodwill has to be capitalised including an annual impairment test
Pensions
-
ABN AMRO has decided to charge all cumulative actuarial differences against
Shareholders’ Equity at transition date (Fresh Start approach). IFRS method as such
does not differ significantly from US GAAP, which we used before
20
IFRS versus Dutch GAAP: Main
differences for ABN AMRO (3)
Mortgage banking activities
-
Dutch GAAP: only the realised results of terminated hedges are accounted for in the
book value of the MSRs
-
IFRS: Hedge accounting requires unrealised fair value changes to be accounted for in
the book value of the MSRs. In addition ineffectiveness is booked through the income
statement immediately
Investment portfolio/Interest Equalisation Reserve (IER)
-
Dutch GAAP: the portfolio is stated at amortised cost, results on sales are booked in
the IER and amortised over the average life of the investment portfolio
-
IFRS: the AFS-part of the portfolio has to be fair valued through Equity. Realised
results on sales have to be booked immediately through the income statement
21
IFRS versus Dutch GAAP : IAS 39
Hedge Accounting
-
Effectiveness: in practice many hedges are less than 100% perfect
Every difference in the change of the fair value of the hedge and the hedged item has
to be booked immediately in the Income Statement. If ineffectiveness exceeds a
certain level (80% - 125%) only the fair value change of the hedge can be booked in
the Income Statement
-
Externalisation: clear demonstration of external hedge relationship
Every internal hedged risk has to be laid off through an external transaction
-
Documentation: required by IAS 39 rules
To qualify as a hedge, the relation between a hedge and a hedged item has to be
documented thoroughly
22
IFRS versus Dutch GAAP : IAS 39
Fair Value
-
Broader scope: IFRS forces more instruments to be fair valued, for example all
derivatives and the AFS portfolio
-
Deeper impact: the fair value should be based on objective (market) data
-
Bifurcation: if an instrument includes an embedded derivative with a nature that
differs from the host instrument, that derivative has to be separated from the host
instrument and marked-to-market through the Income Statement
23
IFRS versus Dutch GAAP : IAS 39

Endorsement of IAS 39 by EU:
a) Macro fair value hedging: Removes obstacles for macro fair value
hedging of core deposits - will not be utilised by ABN AMRO
b) Fair value options will only be used for Assets as it is prohibited for Liabilities
–
Impact largely quantified
–
Operational burden of increased use of bifurcation
–
IASB and EU may yet resolve this ‘disagreement’ arising from ECB concerns
prior to our issuance of IFRS data
24

IFRS versus Dutch GAAP

IFRS impact on Balance Sheet

IFRS impact on Income Statement

IFRS impact on Tier 1 Capital

IFRS versus US GAAP

IFRS impact on (S)BU’s
25
IFRS impact on Balance Sheet

Time Table

Reclassification issues – Equity

Presentation impacts

Transition impact on Equity

Other impacts on Equity (SCE)

Impact on Shareholders’ Equity (estimates)

Transition impact on Shareholders’ Equity
26
IFRS impact on Balance Sheet:
Time Table

Opening IFRS balance sheet prepared at January 1, 2004

Dual reporting through 2004

External IFRS developments tracked and included in dual reporting data

Review by management and audit is an ongoing process
27
IFRS impact on Balance Sheet:
Reclassification issues - Equity

IAS 32: a number of items reclassified from equity to debt
–
Preferred securities issued by ABN AMRO Holding
–
Trust preferred reclassified from minority interest to liabilities. Cost of
servicing these funds will be classified as interest expense under IFRS

Fund for General Banking Risks (FAR). This reserve is not permitted under
IFRS and will be reclassified to Shareholders’ Equity

As such, reclassification issues have no impact on Tier 1 Capital
28
IFRS impact on Balance Sheet:
Presentation impacts

Offsetting derivative contracts is more difficult under IFRS - estimated
grossing up of balance sheet EUR 60 bln (No impact on RWA)

Consolidation of Private Equity investments in which the Bank has a
controlling stake - impact on gross asset and gross liabilities - estimated at
EUR 1 bln

No increase of securitised assets because of new consolidation criteria.
ABN AMRO does already consolidate these Special Purpose Vehicles since
2001. For synthetic securitisations there is no impact at all
29
IFRS impact on Balance Sheet:
Transition impact on Equity
Impact arises from choices made by ABN AMRO under IFRS:

ABN AMRO has decided, w.r.t. pensions, to charge all cumulative actuarial
differences against Shareholders’ Equity at transition date. It should be
noted that IFRS would have had a positive impact on Shareholders’ Equity if
we had not chosen to use this fresh start approach for pensions

Goodwill will be capitalised prospectively and therefore no impact at 1
January 2004

Property in own use will be restated at cost less depreciation
30
IFRS impact on Balance Sheet: Other
impacts on Equity (SCE)

The Bank will utilise a number of cash flow hedging programs/strategies

The fair value of swaps in an effective cash flow program will be recorded in
equity, until the hedged cash flow occurs

The majority of the bank’s investment portfolio will be classified as Available
For Sale (‘AFS’)

IFRS requires AFS assets to be held at fair value
–
Unrealised gains and losses are recorded through equity in the special
component of Equity
–
A limited portion (10%-20%) of the investment portfolio will be classified as held
to maturity, which will continue to be booked at cost
31
IFRS impact on Balance Sheet: Impact
on Shareholders’ Equity (estimates)
Dutch GAAP equity (In EUR mln)
13.050
Impact on equity (net of tax)
Release of FAR
+1.150
Reclassification of preference shares
-800
Reversal of property revaluation
-150
Transition items impacting Tier 1 (excluding pensions)
-100
Impact on special components of equity
Impact of AFS reserve
+300
Impact of cash flow hedging
-100
Total impact on IFRS equity
+300
Pensions
-1.000
Total equity
12.350
32
IFRS impact on Balance Sheet:
Transition impact on Shareholders’ Equity
Transition items impacting Tier 1 Capital (in EUR mln)
Impact of derivatives and hedging
Release of IER
-250
+1.550
Loan impairment
-600
Private Equity impact
-100
Fair value adjustments
-200
Property
-50
LeasePlan
-150
Bouwfonds
-100
Other
-200
Equity accounted investees
-100
IFRS Impact before tax
-200
Pensions
-1.500
Taxation
+600
Total net of taxation
-1.100
33

IFRS versus Dutch GAAP

IFRS impact on Balance Sheet

IFRS impact on Income Statement

IFRS impact on Tier 1 Capital

IFRS versus US GAAP

IFRS impact on (S)BU’s
34
IFRS impact on Income Statement

Fair Value adjustments; derivatives, inefficiencies, AFS

Private Equity

IER

MSR Hedge ineffectiveness

Pension costs and impact of fresh start approach

Reconciliation net profit under IFRS
35
IFRS impact on Income Statement

Impacts arising from greater use of fair values
–
Fair value effects on derivatives are limited as most items involved are covered
by hedge accounting
–
Ineffectiveness in IFRS hedge relationships, for example Mortgage Servicing
Rights
–
Realised gains and losses on AFS assets are booked directly to income (not via
IER)
–
Fair value changes in Private Equity portfolio
36
IFRS impact on Income Statement (2)

As a consequence of the consolidation of controlled Private Equity entities,
both gross revenues and gross costs of these entities have to be included in
the consolidated income statement of ABN AMRO. To improve transparency
we have decided to present Private Equity separately, with its own P&L

Impact of IFRS on Income Statement basically due to two transition items
which will run off within a limited number of years and one item which has
been our own choice (Pensions):
–
Interest Equalisation Reserve (IER)
–
MSR Hedge ineffectiveness
–
Pension costs
37
IFRS impact on Income Statement:
Impact of Pension fresh start approach
DUTCH GAAP
IFRS
1500
400
Pension costs
200
0
-200
Interest
equalisation
reserve
-400
-600
2003 2004 2005 2006 2007 2008
600
400
200
0
-200
-400
-600
2003
2004
2005 2006
2007
2008
The negative impact of the loss of the IER contribution in the coming
years
will be more than offset by the lower pension costs (EUR 120 mln) as from
2007
*please note that IER under IFRS goes directly to Equity
38
IFRS impact on Income Statement:
Reconciliation net profit under IFRS
Net profit under Dutch GAAP (per 30/6/2004 in EUR mln)
1.921
Reconciling items:
IER amortisation investment portfolio
-175
MSR’s
-450
AFS other
+175
Fair value adjustments
-75
Derivatives (including unwinding of Trust Preferred swap)
+25
Private equity
-75
Pension costs
+60
Employee stock based compensation
-25
Other IFRS impacts
+20
Impacts before taxation
-525
Tax effect
+200
Net profit under IFRS
1.600
39

IFRS versus Dutch GAAP

IFRS impact on Balance Sheet

IFRS impact on Income Statement

IFRS impact on Tier 1 Capital

IFRS versus US GAAP

IFRS impact on (S)BU’s
40
IFRS impact on Tier 1 Capital
Ratio
Tier 1 capital under Dutch GAAP (in EUR mln)
20.050
Transition items impacting Tier 1
-100
YTD result (per 30/6/2004, Dutch GAAP vs IFRS)
-325
Total impact on Tier 1 Capital
-425
Pensions
-1.000
Tier 1 capital under IFRS
18.625
8,33%
8.15%
7,74%
*Tier 1 ratio at 30 June 2004
41

IFRS versus Dutch GAAP

IFRS impact on Balance Sheet

IFRS impact on Income Statement

IFRS impact on Tier 1 Capital

IFRS versus US GAAP

IFRS impact on (S)BU’s
42
IFRS versus US GAAP

In principle ongoing difference between IFRS and US GAAP should be less
than between Dutch GAAP and US GAAP. However in the short term this
may not be achieved, for the following reasons
–
Standard setters are still not in agreement on a number of key issues:
- IFRS requires consolidation of controlled PE investments
- IFRS permits additional macro cash flow hedging possibilities
- IFRS is less stringent in the forming of restructuring/onerous lease
provisions

Difference in transition ‘moment’ - ‘transition’ to US GAAP took place in
2001. This impacts:
–
Held to maturity/AFS designation
–
Hedge accounting
–
Capitalisation of goodwill
43

IFRS versus Dutch GAAP

IFRS impact on Balance Sheet

IFRS impact on Income Statement

IFRS impact on Tier 1 Capital

IFRS versus US GAAP

IFRS impact on (S)BU’s
44
IFRS impact on (S)BU’s

Greatest impact on BU North America and Corporate Centre/Group ALM

Modest impact on WCS

Other (S)BU’s relatively little impacted
45
IFRS impact on BU NA
Thomas Goldstein
EVP & CFO BU NA
London, 18 November 2004
BU North America: IFRS Impacts
 IFRS Hedge Accounting
 Hedging mortgage assets result in ineffectiveness
– Dutch GAAP smoothes hedge results over time
– IFRS requires immediate recognition of hedge results
 Economics of hedging unchanged
 IFRS adds complexity to MSR accounting
 Transition Effects
 An accounting “catch-up” of past hedge economics
 Going Forward
47
Hedge Accounting: A Simplified
Example
Perfectly Matched Hedge

Effect –a “perfect” hedge
6%
locks in value over 5
5%
periods
Asset
4%
3%

2%
Income impact for a
“perfect hedge” is the same
Hedge
1%
under both accounting
methods regardless of
0%
Period 1
Period 2
Period 3
Period 4
Period 5
interest rates
P1
P2
P3
P4
P5
Total
Dutch GAAP
$20
$20
$20
$20
$20
$100
IFRS
$20
$20
$20
$20
$20
$100
48
Hedge Accounting: Mortgage Assets
With mortgage assets:
 “perfect” hedging nearly impossible due to convexity
Result:
 Economic ineffectiveness
Accounting for economic ineffectiveness?
 Dutch GAAP – smoothed over the life of the asset
 IFRS – recognized immediately in earnings
49
Hedge Accounting: Ineffectiveness
Interest Rates Rise

6%
borrowers less likely to
Asset
5%
100 bps
4%
Mortgage assets lengthen –
prepay
New Hedge
200 bps
Ineffectiveness

New hedge required to
protect lengthened asset
3%
Old Hedge
2%

Net hedged value creates
ineffectiveness in period 1 of
1%
$20 (economic loss)
0%
Period 1
Period 2
Period 3
Period 4
Period 5

Dutch GAAP spreads hedge
loss; IFRS accelerates
P1
P2
P3
P4
P5
Total
Dutch GAAP
$20
$20
$20
$10
$10
$80
IFRS
$0
$25
$25
$15
$15
$80

Dutch & IFRS totals equal
over hedge life
50
Hedge Accounting: Ineffectiveness (2)
Interest Rates Decline

borrowers more likely to
6%
Asset
5%
4%
Mortgage assets shorten –
prepay

200 bps
2%
asset – close part of hedge
100 bps
3%
Overhedged for shortened
Ineffectiveness
Old Hedge
Closed Hedge 
Net hedged value creates
ineffectiveness in period 1 of
1%
$10 (economic loss)
0%
Period 1
Period 2
Period 3
Period 4

Dutch GAAP spreads hedge
loss; IFRS accelerates
P1
P2
P3
Total
Dutch GAAP
$20
$20
($10)
$30
IFRS
$10
$30
($10)
$30

Dutch & IFRS totals equal
over hedge life
51
Hedge Accounting: Ineffectiveness (3)
Summary

When hedging mortgage assets, convexity is inevitable

Dutch GAAP smoothes earnings
–

Economic ineffectiveness spread over the asset’s life
IFRS increases volatility in earnings
–
IFRS accelerates economic ineffectiveness into P&L immediately
52
MSR Accounting Differences
Dutch GAAP to IFRS differences for MSR Assets:

Timing related hedge accounting differences
Both Dutch GAAP and IFRS require:

Capitalisation of the Mortgage Servicing Right asset at the time the
underlying loan is sold

Amortisation of the MSR asset in proportion to and over the life of the
expected servicing income

Periodic assessments of the MSR asset for impairment

Recognition of MSR impairment, if any, immediately in earnings

Recovery of temporary MSR impairment charges in earnings

Recognition of servicing fee income as earned
53
Accounting: MSR Hedge Accounting

Declining interest
rates shorten
mortgage assets,
Simplified Example
Rates fall and the MSR asset declines in value while the
derivatives gain in value
because borrowers
exercise their right
Beginning
Ending
MSR book value:
1,000
1,000
mortgage asset
MSR fair value:
1,000
500
declines in value in
MSR “hedged risk”
0
(450)
a non-linear
(90%):
0
400
to prepay

The shortened
manner (e.g.,
convexity)
Derivative fair value:
All illustrations are hypothetical and do not consider other hedge accounting
requirements such as proof of effectiveness, adequate documentation, etc.
54
Accounting: MSR Hedge Accounting (2)
Dutch GAAP
 Under Dutch GAAP
IFRS (& US GAAP)
Derivatives are closed resulting in
Accounting:
hedge performance
the receipt of cash
Balance Sheet
is deferred as a
Accounting:
MSR
reduction of the
Balance Sheet
IFRS basis adjust
mortgage asset
MSR
resulting in a
Derivative gain
smooth earnings
Adjusted MSR Basis
MSR Fair Value
impact.
 Under IFRS income
is recognised
immediately on the
Impairment, if any
Net MSR Basis
1,000
(450)
Adjusted MSR Basis
550
MSR Fair Value
500
600
Impairment, if any
(50)
500
Net MSR Basis
500
(400)
(100)
500
hedge and the
offsetting
1,000
Net Earnings Effect
0
Net Earnings Effect
Derivative Gain
400
MSR Basis Loss
(450)
Impairment is
Derivative Gain (deferred)
recognised on the
MSR Impairment
(100)
Impairment
asset.
Net Earnings Impact
(100)
Net Earnings Impact
Net Ineffectiveness
(50)
(50)
(100)
55
Transition Effects: Initial Impact and
Ongoing
IFRS Transition Date Impacts:

IFRS vs. Dutch GAAP differences are timing differences

Transition to IFRS required “catch up” of timing differences

Hedge gains occurred in prior years – deferred reflected in Dutch GAAP
–

Hedges significantly outperformed in 2002 and 2003
Result of transition: Mortgage assets increased in value
–
Economic and accounting increase
56
Transition Effects: Initial Impact and
Ongoing (2)
IFRS Ongoing Transition Effects:


Increased asset values must be amortised to earnings
–
Mortgage assets are convex = higher amortisation in earlier years
–
Amortisation causes decline in P&L
–
Reversal of transition impact weighted to first 4 years
Increased asset values diminish gains on sale in future periods
57
Expectations for the Future
When hedging mortgage assets, convexity is inevitable

Economic hedge ineffectiveness always has existed
–
Dutch GAAP smoothed the effect
–
IFRS accounting accelerates the effect and is more volatile

Over time, both economics and P&L are the same

Hedge outperformance of 2002 and 2003 not indicative of expected
performance
58
IFRS impact on Group ALM
Rolf Smit
EVP & Head of Group ALM
London, 18 November 2004
Guiding principles for Group ALM

Objectives of Group ALM:
–
Preserve long term value
–
Protect interest margin

Risk / reward is driver, risks are hedged whenever economically sensible

Accounting standard should not change economic behaviour

Either align accounting impact with economic impact
or explain in a transparent way
60
IFRS issues for Group ALM

Capital
 Classification and hedge accounting
(Net investments)

FX Risk
 Hedging of Profits

Liquidity Risk
 Hedge accounting of hedged debt

Interest Rate Risk
 Classification of Investment Portfolio
(Hedge accounting IRS)
 Discretionary portfolios, No IFRS issues
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Capital Management
Dutch GAAP
IFRS
Trust Preferred
Capital
Minority interest
Debt
Interest
Hedging Capital
Abroad
All value change of
hedge in equity
Changes in spot rate in Equity
Changes in fwd points via P/L
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Capital Management (2)

Applicable hedge accounting:
–
Capital investments: IAS 39 on Net Investments

Revaluation of effective hedge is stored in Equity until disposal of
investment

Due to chosen separation of interest component of the FX forwards, hedges
are fully effective

Consequently, change in fair value of forwards due to interest rate changes
is directly booked in P&L

Minority interest related to Trust preferred disappears, no impact on
regulatory capital

IFRS has no major impact
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FX Risk Management


Corporate FX risk: Large international business exposes the bank to
currency translation risk. Bank’s strategy is to hedge capital abroad and
hedge future profit (USD & BRL)
Dutch GAAP
IFRS
Hedged Item Profit
Hedged Item Interest Revenue
Off-balance
SCE
Financial Transaction
Interest Income
Economic hedging of profits qualifies for Hedge Accounting due to
appropriate documentation
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FX Risk Management (2)

FX risk of profits: Cash Flow Hedge of a forecast transaction

Designated hedging relationship: FX risk from USD denominated Future
Cash Flows

Hedge Item: Expected Future Interest Revenue of BU NA Assets

Hedged amounts are small compared to gross interest revenue
High probability of Cash Flows

Effective part of hedge stored in Special Component of Equity, recycled in
Interest Income upon realisation of Cash Flow

FX Forwards: no difference with Dutch GAAP

FX options: change in intrinsic value stored in SCE, change in time value
directly via P&L. Cumulative effect equal to premium/discount at inception of
FX forwards

Change to IFRS has no major P&L impact.
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Liquidity Risk Management

Liquidity is the economic driver for issuing Debt securities and Structured
notes

Swapping Fixed to Floating Rate prevents change of our interest rate risk
position/ embedded derivative is hedged

Both types of hedges qualify for (Micro) Fair Value hedging
Dutch GAAP
IFRS
Hedged item
Amortised Costs
Carrying amount adjusted
Derivative
Off-balance
Fair value

Change to IFRS has no impact on P&L, change in value of hedge is equal
to change in value of the hedged item attributable to the hedged risk.

IFRS does have impact on Balance sheet
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Interest Rate Risk Management

Interest rate risk from 3 sources:
–
Investment Portfolio
–
Banking Book
–
Discretionary Portfolio

Group ALM manages on behalf of Group ALCO the residual interest rate
risk

Main goal is to protect Interest Margin of Banking Book (accrual) which
includes the investment portfolio

Main instrument used to hedge is an Interest Rate Swap

As IFRS Financial reporting has to be aligned with Economic impact. How to
classify the Investment portfolio? Hedge Accounting is required for swaps in
this book. How does it work under IFRS?
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Interest Rate Risk Management (2)
Dutch GAAP
Amortised Costs
Results of sale
amortised (IER)
IFRS
HTM: Amortised Costs
AFS: Fair Value, changes in value
stored in SCE
HTM: Not applicable
AFS: Sale direct in P/L

Structural part of investment portfolio in Held to Maturity

Consequence IFRS : even a duration neutral switch of Bonds will have
direct P&L effects
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Interest Rate Risk Management (3)

Swaps hedge the net interest rate risk position in the banking book.

Swaps are Hedge accounted as Cash flow hedge:
Dutch GAAP
IFRS
Off-balance
Fair Value
Not applicable
Effective part of hedge
stored in SCE

Designated hedging relationship: Risk of repricing cash flows

Hedged item: Future interest cash-flow from repricing Assets (or Liabilities).

Floating leg of swap hedges repricing risk of hedged item

Highly effective program leading to limited volatility in earnings due to
minimal basis risk

Allows hedging of repricing risk of demand deposits and saving accounts
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Interest rate risk management: How
to interpret SCE ?

Special Component of Equity of Cash Flow hedges

It is the accounting bridge for Cash Flow hedges to connect the inconsistent
approach of valuation of the Hedge (Swap at Fair Value) and the Hedged
Item (loan at Amortised Costs)

In economic terms the SCE measures the opportunity loss/gains

Example: Floating rate liabilities are hedged with pay fix swaps. Rates go
down, SCE becomes negative
Bank could have done better by not hedging the risk with swaps, however
as ALCO did not like the risk / reward profile, it decided to stabilise income
(lock-in of margin) by entering into a swap

Interest rate risk is managed at the cost of upward potential
(there is no free lunch)
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Summary of differences
IFRS
Dutch GAAP
Debt
Value change hedge via SCE
Interest Income
Equity
Not applicable
Financial Transaction
Carrying amount adjusted for
value change of hedged risk
Amortised costs
 Cash flow hedging
AFS: Value change via SCE
AFS: Sale directly via P/L
Value change hedge via SCE
Not applicable
Sale amortised
Not Applicable
Discretionary portfolio
Marked to Market
Marked to Market
Capital
 Trust Preferred
 Profit Hedges
Liquidity risk
 Fair value hedge of
Structured debt
Interest rate risk
 Investment Port.
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Conclusions

It takes discipline to ensure that
–
the economic risks continue to drive the hedging
–
the accounting & economic impact are aligned as much as possible
–
the explanation is transparent

Hedging is operationally feasible, at the cost of additional systems and
staffing. Scale of ABN AMRO warrants these investments

IFRS consequences should not lead banks to avoid hedging economic risks

The challenge for the market is to understand that hedging of economic
risks is desirable, even if it leads to accounting volatility
72
Conclusions
Maurice Oostendorp
SEVP & Head of Group Finance
London, 18 November 2004
Conclusions

IASB’s version of IAS 39 fully adopted, except fair value option for liabilities
which is not allowed by EU

IFRS will not change the underlying performance of our business.
Accounting should continue to reflect business decisions and not drive
business decisions

Underlying income streams unchanged as differences are mainly due to
transition impact and timing differences

Volatility of results could increase

IFRS transition will not have an impact on dividend

Most impact on BU NA and Group ALM. WCS modestly impacted. Other
(S)BU’s are hardly impacted
74