13 – Amendments to IAS 39 and IFRS 7, “Reclassification of Financial Assets”

Under the amendments to IAS 39 and IFRS 7, issued in October 2008, certain financial assets were reclassified in the second half of 2008 and the first quarter 2009 from the financial assets at fair value through profit or loss and the available for sale classifications into the loans classification. No reclassifications have been made since the first quarter 2009.

The Group identified assets, eligible under the amendments, for which at the reclassification date it had a clear change of intent and ability to hold for the foreseeable future rather than to exit or trade in the short term. The reclassifications were made at the fair value of the assets at the reclassification date.

Reclassified Financial Assets

in € bn. (unless stated otherwise)

Trading assets reclassified to loans

Financial assets available for sale reclassified to loans

Carrying value at reclassification date

26.6

11.4

Unrealized fair value losses in accumulated other comprehensive income

0.0

(1.1)

Effective interest rates at reclassification date:

 

 

upper range

13.1 %

9.9 %

lower range

2.8 %

3.9 %

Expected recoverable cash flows at reclassification date

39.6

17.6

Carrying values and fair values by asset type of assets reclassified in 2008 and 2009

 

Dec 31, 2013

Dec 31, 2012

in € m.

Carrying value

Fair value

Carrying value

Fair Value

1

€ 1.9 billion of US municipal bonds carrying value were incorrectly presented as loans in prior year.

2

During 2013 the Group sold assets that were previously classified as trading with a carrying value of € 2.9 billion, including € 1.6 billion of loans, € 0.9 billion of asset-backed securities and € 0.2 billion of mortgage-backed securities.

3

During 2013 the Group sold assets that were previously classified as available for sale with a carrying value of € 1.4 billion, including € 1.3 billion of asset-backed securities.

4

There is an associated effect on the carrying value from effective fair value hedge accounting for interest rate risk to the carrying value of the reclassified assets shown in the table above. This effect increases carrying value by € 34 million and € 209 million as at December 31, 2013 and December 31, 2012 respectively.

Trading assets reclassified to loans:

 

 

 

 

Securitization assets

1,985

1,872

3,599

2,783

Debt securities1

1,062

1,068

1,372

1,393

Loans

2,367

2,064

6,233

5,591

Total trading assets reclassified to loans

5,4152

5,004

11,204

9,766

Financial assets available for sale reclassified to loans:

 

 

 

 

Securitization assets

1,972

1,955

4,501

4,218

Debt securities1

1,220

1,284

1,293

1,446

Total financial assets available for sale reclassified to loans

3,1923

3,239

5,794

5,664

Total financial assets reclassified to loans

8,6064

8,243

16,998

15,430

All reclassified assets are managed by NCOU and disposal decisions across this portfolio are made by NCOU in accordance with their remit to take de-risking decisions. For the year ended December 31, 2013, the Group sold reclassified assets with a carrying value of € 4.4 billion, resulting in net losses of € 206 million and a further € 130 million relating to impairment losses on positions sold.

In addition to sales, the decrease in the carrying value of assets previously classified as trading includes redemptions and maturities of € 1.0 billion. A further € 1.4 billion reduction relates to commercial real estate loans where the structured entity borrower has been consolidated under IFRS 10 due to the Group obtaining control during the second and third quarters of 2013. The reduction in the carrying value of assets previously classified as available for sale includes redemptions and maturities of € 1.1 billion.

Unrealized fair value gains (losses) that would have been recognized in profit or loss and net gains (losses) that would have been recognized in other comprehensive income if the reclassifications had not been made

in € m.

2013

2012

2011

Unrealized fair value gains (losses) on the reclassified trading assets, gross of provisions for credit losses

245

38

(11)

Impairment (losses)/Reversal on the reclassified financial assets available for sale which were impaired

9

(29)

(16)

Net gains (losses) recognized in other comprehensive income representing additional unrealized fair value gains (losses) on the reclassified financial assets available for sale which were not impaired

130

415

133

Pre-tax contribution of all reclassified assets to the income statement

in € m.

2013

2012

2011

1

Increase in 2013 driven by impairments of € 113 million on a single Commercial Real Estate position which was sold in the period where the expectation of full recovery had reduced during the year.

2

Relates to gains and losses from the sale of reclassified assets.

3

Significant impairments taken in 2012 on two securitization positions; one due to financial difficulty trigger event in 2012 and another driven by downward revision in cash flows on a previously impaired position.

Interest income

272

578

691

Provision for credit losses1

(348)

(186)

(186)

Other income2

(141)

(35)

34

Income before income taxes on reclassified trading assets

(217)

357

539

Interest income

96

139

153

Provision for credit losses3

(25)

(228)

(1)

Other income2

(66)

(58)

0

Income before income taxes on reclassified financial assets available for sale

5

(147)

152

Reclassified Financial Assets: Carrying values and fair values by asset class

All IAS 39 reclassified assets were transferred into NCOU upon creation of the new division in the fourth quarter of 2012. NCOU has been tasked to accelerate de-risking to reduce total capital demand and total adjusted assets. A number of factors are considered in determining whether and when to sell assets including the income statement, regulatory capital and leverage impacts. The movements in carrying value and fair value are illustrated in the following table:

Carrying values and fair values by asset class reclassified in 2008 and 2009

 

Dec 31, 2013

Dec 31, 2012

in € m.

Carrying value (CV)

Fair value (FV)

CV – FV difference

Carrying value (CV)

Fair value (FV)

CV – FV difference

1

Includes asset backed securities related to the aviation industry and a mixture of other securitization assets and debt securities.

Securitization assets and debt securities reclassified:

 

 

 

 

 

 

US municipal bonds

2,155

2,232

(77)

2,431

2,647

(216)

Student loans ABS

1,263

1,305

(42)

1,939

1,693

246

CDO/CLO

979

938

41

3,083

2,765

318

Covered bond

885

788

97

994

722

272

Commercial mortgages securities

281

260

21

923

702

221

Residential mortgages ABS

74

71

3

151

120

31

Other1

602

585

17

1,244

1,190

54

Total securitization assets and debt securities reclassified

6,239

6,179

60

10,765

9,839

926

Loans reclassified:

 

 

 

 

 

 

Commercial mortgages

1,463

1,428

35

4,773

4,430

343

Residential mortgages

844

598

246

918

662

256

Other

61

38

22

542

499

43

Total loans reclassified

2,367

2,064

303

6,233

5,591

642

Total financial assets reclassified to loans

8,606

8,243

363

16,998

15,430

1,568

Securitized Assets and Debt Securities

Municipal Bonds: The US Municipal bonds have a fair value above carrying value due to being predominantly fixed rate instruments with interest rates falling since reclassification. Fair value is also impacted by liquidity and market expectation of credit risk. There was an impairment loss of € 19 million taken against a single obligor which is in default. There was small targeted de-risking in this portfolio of € 0.1 billion.

Covered Bonds: The majority of the exposure in the portfolio is to Spanish bank and government issuers. The fair value is below carrying value predominantly due to market expectations of credit risk although this has improved during the period. None of the portfolio is impaired. The carrying value has declined through minor de-risking activity, with a small gain recognized on sale.

CDO/CLO: A diverse portfolio with a variety of underlying assets and tranching levels in the capital structure. The difference between carrying value and fair value arises due to a number of factors including liquidity and the fair value model capturing market expectations of lifetime expected losses compared with the amortized cost impairment model largely based on incurred credit losses. The main movement in the carrying value to fair value difference is due to significant de-risking in the portfolio, with € 1.1 billion carrying value being sold with an associated € 92 million loss on sale. A further € 1.0 billion was redeemed in the year. No significant loan loss provisions were taken in the period, but where they occurred, this was due to incurred credit losses on the underlying assets, indicating a loss on the tranche held. Compared to prior year there was a decrease in loan loss provisions of € 85 million, largely driven by a single position sold at a loss of € 73 million in 2012 which was classified as impaired.

Student Loans ABS: An increased demand for higher yielding assets caused spreads to tighten and liquidity to improve, resulting in increased fair values in the period such that on some positions the fair value exceeded the carrying value. The carrying value movement is due to de-risking activity, realizing € 0.1 billion losses on sale. Loan loss provisions recognized in the period are small on this portfolio.

Commercial Mortgages Securities: The fair value to carrying value difference is due to a number of factors including liquidity and market expectations of credit losses compared with the incurred loss model. De-risking activity in the period reduced carrying value by € 0.2 billion with an associated loss of € 37 million on sale. A further € 0.3 billion was redeemed in the year. Additionally loan loss provisions have been taken in the period of € 77 million where the underlying collateral has deteriorated in value or realized losses on sales of the collateral have increased, resulting in it being likely that full cash flows will not be received on the security held. This represents a decrease in loan loss provisions of € 87 million compared to prior year, largely driven by a significant impairment of € 134 million taken in 2012 (€ 25 million in 2013) on a single position.

Other: Other comprises a variety of assets including securitizations with Aircraft and Commodity underlyings, Infrastructure Project Finance exposure and structured corporate bonds. There was € 0.5 billion de-risking in the year realizing a small gain across the portfolio. There was a € 34 million loan loss provision taken on a Project Finance exposure following underperformance of the asset.

Loans

Commercial Mortgages: The fair value to carrying value difference is due to a number of factors including liquidity and market expectations of credit losses compared with the incurred loss model. Significant de-risking across the portfolio of € 1.3 billion in carrying value produced small gains, however one UK Commercial Real Estate position was disposed with an associated loan loss provision of € 113 million. Additionally certain Special Purpose Vehicles containing Commercial Real Estate properties were consolidated under IFRS 10 reducing the carrying value by € 1.4 billion during the year. These properties were recognized on the balance sheet at fair value, incurring a loan loss provision of € 70 million. They are classified in Other assets and are held at cost less impairment. There was an additional € 115 million in loan loss provisions in the year compared to 2012.

Residential Mortgages: This category includes residential mortgages in the UK, Italy, Spain and Germany. The fair value to carrying value difference has remained consistent year on year predominantly due to a larger discount rate being applied to determine fair value which, whilst not observable in the market, reflects estimated market liquidity. There have been no sales or significant changes in loan loss provisions in the portfolio in the period.