Report of the Managing Board

INTRODUCTION

The Managing Board is pleased with the 2005 results and confident that initiatives taken during the year will support and secure future growth. It was also an extraordinary year of change and major challenges. Not only did we have the changeover to IFRS accounting and preparations for Basel II, we also had a change of ownership, and we had to wind down our equity derivatives joint venture NPD. Against this background, we managed to increase operating profit, maintain net profit in line with our record net profit in 2004 and raise our market share in several business lines, edging further towards our long-term ambition to be a leading independent private Merchant Bank in Northwest Europe. The year provided ample proof that NIBC is an important financial partner to a growing number of clients. And our partnership with those clients grew and deepened in 2005, for we did more and larger transactions with many of them. We read this as an endorsement of our business model, which is based on leveraging the knowledge and skills of our product lines, while extending deal flow and client relationships. Our comprehensive strategic review also confirmed the validity of our approach and helped us chart a more clearly defined route to accelerate our strategy.

Partnership in 2005 meant building new bridges towards our new shareholders. We view the acquisition by a consortium organised by J.C. Flowers & Co. LLC as a very positive development and look forward to being part of a larger professional network. The new shareholders are high quality investors that understand our business. Th ey offer a host of business opportunities from which NIBC can benefi t. The transaction itself was financed 100% through equity. The change of ownership therefore placed no additional burden on our balance sheet. However, a lowering of our credit ratings to A3/A-/A followed the change of ownership of NIBC. As a result, our overall funding cost will rise over time. This underscores the importance of our consistent strategy to further accelerate asset velocity and to manage risk weighted assets by way of securitisation and fundification. We plan in due course to pursue a partial IPO to raise additional capital and facilitate further growth.

NIBC CHOICE

Our people are our firm. The success of our business depends on our ability to maintain a challenging and rewarding environment for our people. In this regard, we made an important step in bonding as a partnership by linking our Bank’s success to our people’s future. In December 2005 we announced the new employee benefi ts program NIBC Choice which gives every employee the chance to own shares in NIBC, creating a long term incentive to grow with us. As a result, almost all NIBC employees have become shareholder of our firm.

NON-FINANCIAL TARGETS AND PERFORMANCE 2005

TARGETS 2005PERFORMANCE 2005
  • Diversify and improve quality of income
  • Advisory mandates for a number of landmark transactions, increase of client related income.
  • Increase non-interest income component of total income
  • Growth of non-interest income component from 38% in 2004 to 43% in 2005.
  • Increase investment management activities by establishing new investment funds
  • Dutch MBS XII and XIV, Sound, Distinct and Belle Haven II.
  • Evaluate and execute a number of new business initiatives
  • Set up of new SBU Real Estate Markets, opening of Frankfurt Offi ce, completion of adapted MTAP 20062010, sale of Harcourt.
  • Continue to invest in human capital and information technology
  • Improved performance evaluation and talent development system, enhanced analyst program and upgrade of staff by new hiring across the firm. Substantial technology investments for improving market and credit risk systems, anticipating on Basel II.
  • Improve efficiency and effectiveness of cost structure
  • Increase of direct allocations of expenses to commercial business lines.
    Efficiency ratio improved from 34% to 32%, if one-off expenses related to the change of ownership are excluded.
  • STRATEGY

    While the change of ownership of NIBC has helped sharpen our strategic focus, the existing strategy of an independent private Merchant Bank remains largely unchanged. That is to focus on regional client-driven origination and on global distribution.We strive for leading positions in specialized product/market combinations based on strong multi-product client franchises. Important growth initiatives include expansion of our business in Germany, building a fi nancial institutions franchise and further growth of our investment management activities through securitisation and fundification. Our strategy and related targets and action plan are laid down in our adapted Medium Term Action Plan 2006-2010, which has been approved by our Supervisory Board.

    We will continue to increase our role as intermediary between corporate clients and institutional investors, thus accelerating asset velocity. We will also continue to further diversify and grow our revenue base while managing with discipline costs and capital.

    Sale of hedge fund manager Harcourt

    For strategic reasons NIBC decided to sell its share of 56% in the Swiss based hedge fund manager Harcourt Investment Consulting. A share purchase agreement for the sale of Harcourt was signed on December 14, 2005. The transaction has been closed on February 2, 2006. The net profit on this transaction will be approximately € 35 million, which will be recognised in the first quarter of 2006.

    CORPORATE GOVERNANCE

    A transparent and coherent corporate governance structure is important to NIBC as a professional organisation and given our reliance on wholesale funding markets. Our corporate governance model is based on constructive and transparent cooperation between our Shareholders, our Supervisory Board with its three committees, our Managing Board with its several functional committees, and the Employees´ Council. This cooperation is laid down in a governance framework of charters, with clear guidelines for the assignment of duties and responsibilities, fi nancial and regulatory reporting, risk management and internal control, compliance, and remuneration policy. NIBC has adopted a policy towards the Dutch Corporate Governance Code which was laid down in a detailed Policy Paper, which is published on our website. Th is policy was based on NIBC N.V. as holding company. In December 2005, NIBC Holding N.V. acquired all shares in NIBC N.V. NIBC Holding N.V. will adopt a new Policy Paper which will be in line with the current one of NIBC and taking into account the changes mentioned hereafter. NIBC Holding N.V. has changed the structure of sub-committees of the Supervisory Board. Currently, the relevant rules and regulations are under revision.

    NIBC will continue to apply all principles and best practices of the Code, with the exception of the following best practices:

    As of November 5, 2005, Mr. A.L.V. Dijkstra (Antoine) resigned for personal reasons. Mr. Dijkstra was responsible for the successful development of the Financial Markets and Investment Management activities, for which we are grateful. Mr. C. van Dijkhuizen joined NIBC as of December 1, 2005 to become Chief Financial Officer and head of the SBU Corporate Center. Mr. Van Dijkhuizen was formerly Treasurer-General of the Dutch Ministry of Finance. We are confi dent that he will make an important contribution to strengthening NIBC.

    Shareholders of NIBC Holding N.V. include, among others, Banco Santander, ABN Amro, Delta Lloyd, GIC, and Shinsei Bank. The average rating of the rated investors is AA-. The commitment of these first class international fi nancial institutions is an illustration of their confidence in the strategy and business model of NIBC. Th e remaining shares are held by a large number of investors, of which the names are not disclosed to the market.

    NON-FINANCIAL TARGETS 2006

    FINANCIAL TARGETS

    As a result of the sharper strategic focus, we have raised our financial targets for the period 2006 -2010.

     20052010
    SUSTAINABLE NET PROFITEUR 185 million> EUR 300 million
    RETURN ON NET ASSET VALUE14.0%> 15%
    EFFICIENCY RATIO37%< 40%

    These targets show a higher ambition level compared to the financial targets in our previous MTAP 2005-2007 (as shown in our Annual Report 2004). Th e previous targets aimed, through the cycle, at a sustainable net profit of at least € 200 million and a return on net asset value in excess of 12%.

    OUTLOOK 2006

    NIBC will continue to diversify its income sources, by increasing fee income and asset velocity. Growth initiatives include the expansion of the German business, building a financial institutions franchise, growth of the real estate finance activities and increase of investment management of credit fixed income and private equity. This growth will be underpinned by continuing investment in human capital and technology.

    Market conditions are meanwhile uncertain. Economic prospects for the euro area for 2006 seem better than in recent years. However, a rise in domestic demand will be crucial for the strength of the recovery. A possible slowdown of economic growth in the US, further rises in commodity prices (and energy prices in particular), exchange rate volatility and geopolitical problems may pose risks to this recovery. Also, spread developments in credit markets are uncertain and more volatility may develop this year, potentially combined with an inverse yield curve environment. Bank lending will remain very competitive. In this environment, NIBC will sustain its disciplined risk-return policy. NIBC revenues will be influenced by actual developments in these markets, as well as the overall development of the economy. Given these uncertain circumstances, we refrain from making any predictions about income and profi t developments for 2006.

    The Hague, March 2, 2006

    Managing Board

    Michael Enthoven, Chairman
    Jurgen B.J. Stegmann, Vice-Chairman, Chief Risk Officer
    Kees van Dijkhuizen, Chief Financial Officer
    Jan L. van Nieuwenhuizen