Merkanti Holding PLC

Company Registration Number: C 70823

MERKANTI HOLDING p.l.c.

Annual Financial Report and

Consolidated Financial Statements

31 December 2023

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Pages

Directors’ report

1 - 6

Statement of Compliance with Corporate Governance Code

7 - 9

Statements of financial position

10 - 11

Income statements

Statements of comprehensive income

Statements of changes in equity

14 - 16

Statements of cash flows

17 - 18

Notes to the financial statements

19 - 103

Independent auditor’s report

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Directors’ report

The board of directors (“the Board”) present their report and the audited financial statements of Merkanti

Holding p.l.c. (the “Company”) and Merkanti Holding p.l.c. Group (the “Group”), for the year ended 31

December 2023

. The subsidiaries include Merkanti Bank Limited (the “Bank”), Merkanti (A) International

d (“Merkanti A”), Merkanti (D) International L

d (“Merkanti D”), (“Merkanti A”, together with “Merkanti D”,

the “Property Companies”), Altmark Industrie Management GmbH (“A.I.M.”) the “Property Management

Company”, and Merkanti Diesel Limited (“Merkanti Diesel”).

Subsidiaries

The following diagram illustrates the corporate structure (voting shares) of the Group as at 31 December

2023:

Principal activities

Merkanti Holding p.l.c. is a holding and finance company that does not carry on any trading activities apart

from the raising of capital and advancing the same to the Group. Accordingly, the Company is

economically dependent on the Group. The principal activities of the Group are comprised of the activities

of the Bank, the Property Companies and their management Company, explained further in the ‘Review of

the business’ section below.

On 12 August 2019, the Company issued €25,000,000 secured bonds carried at a t

enor of 7 years with a

coupon of 4%. The proceeds of the issuance were utilised to support the expansion of the business of the

Bank and the Property Companies. The bond issuance was listed on the Malta Stock Exchange.

Merkanti

Holding Plc

100%

94.9%

Merkanti

Bank Ltd

Merkanti (A)

International

Ltd

Merkanti (D)

International

Ltd

Merkanti

Diesel Ltd

Altmark Industrie

Management

GmbH

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Directors’ report

- continued

Review of the business

During the second half of the year, the Group managed to achieve its targets with additional merchant

banking transactions that expanded the balance sheet.

Profit after tax for the year for the Company amounted to €471,825 (2022: €809,414), whilst the Group

achieved a profit after tax of €1,8

79,972

(2022: €1,582,346). The profits of the Group in 2023 mainly

emanated from the improved fee and interest income at the Bank. The profit contribution from the Bank

for the year was approximately

€

2,708,000

(2022: €1,740,000). During

the year, the Company made the

third full annual coupon payment to its bond holders of €1,000,000 (2022: €1,000,000).

Total assets for the Company and the Group stood at €80,094,529 and €109,

641,602

(2022: €79,632,852

and €109,511,385).

The Bank is a credit institution licensed by the MFSA under the Banking Act (Chapter 371) of the laws of

Malta, in accordance with the credit institution licence granted by the Malta Financial Services Authority.

The Bank does not engage in general retail banking, but provides speciality banking services, focused on

merchant banking, to customers and group members located in both domestic and non-domestic markets.

The Property Companies are property holding companies that operate in the industrial real estate sector

in Germany, together holding assets recently valued at €39.1 million, yielding a combined rental income of

approximately €1.7 million per annum (2022 1.8 million), the Company held 94.9% of the Ordinary s

hares

of both Merkanti (A) International Ltd and Merkanti (D) International Ltd.

The real estate owned by the Property Companies is currently leased out to a number of tenants. Lease

agreements in place between the Property Companies and the respective tenants are either open-ended

indefinite term contracts or definite term contracts (with a number of definite term rental agreements

catering for the automatic renewal of the lease, and with renewal periods ranging from one to six years).

In most cases the lessee has the option to terminate the contract by giving written notice a number of

months prior the expiration of the contract, which notice period ranges between 3 to 18 months. For the

year ending 31 December 2023, 95.1% (2022: 94.8%) of the combined

rental income of €1.7 million

(2022: €1.8 million) was generated from areas leased out to third party tenants, with the remaining 4.9%

(2022: 5.2%) generated from leases to related parties.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Directors’ report

- continued

Principal risks and uncertainties

A weakening of the global economy, including capital and credit markets, could adversely affect the

Group’s business and financial results and have a material adverse effect on its liquidity and capital

resources.

The Group’s business, by its

nature, does not produce predictable earnings and it may be materially

affected by conditions in the global financial markets and economic conditions generally. As demand for

the Group’s products and merchant banking services has historically been determin

ed by general global

macro-

economic activities, demand and prices for the Group’s products and services have historically

decreased substantially during economic slowdowns. A significant economic downturn may affect sales

and profitability and may adversely affect suppliers and customers. Depending on their severity and

duration, the effects and consequences of a global economic downturn could have a material adverse

effect on the Group’s liquidity and capital resources, including the Group’s ability to rai

se capital, if

needed, and otherwise negatively impact our business and financial results.

The Group is subject to global economic, market and business risks with respect to the current conflicts

between Israel and Hamas, Russia and Ukraine and the rise of Houthi rebel attacks disrupting shipping

and material flows.

The Houthi attacks have impacted shipping that normally flows through the Suez Canal with vessels

taking alternative routes leading to longer delivery times and additional costs, the two main conflicts not

only threatened the stability of Europe but they have as also impacted food and energy security globally,

creating additional stresses to economies, price inflation is being felt globally.

Given the dynamic nature of these circumstances and

the worldwide nature of the Group’s business and

operations, the duration of any business disruption and the related financial impact cannot be reasonably

estimated at this time but could materially affect the Group’s businesses, results of operations and

financial condition.

The Group is subject to strategic and business risk.

Improper strategic choices or the actual implementation of strategic decisions, as well as lack of

responsiveness to changes in the economic environment, can have a serious and significant impact on

prospective financial results.

As the Group is engaged in German property business, this risk category is intimately connected with the

overall performance of the global and German economy. In addition, the Group is engaged in the trade

finance and merchant banking business, which is intimately connected with the level of cross-border trade

between countries and in markets that are typically in the developing stages of their economic

development and political stability.

The Group may increase its debt in the future.

The Group may continue to fund its operations and future growth by incurring additional debt. A

substantial deterioration in operating cash flows and profitability could make it difficult for the Group to

service interest payments and principal repayments on its borrowings. The Group could be at risk of

default on the occurrence of certain unexpected events. Any failure to satisfy debt obligations could result

in a default under the terms of current and future financing arrangements.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Directors’ report

- continued

Principal risks and uncertainties

- continued

The Group’s bank subsidiary is subject to regulatory risk.

The Bank is subject to a number of prudential and regulatory controls, including but not limited to CRD V,

CRR and BRRD, that are designed to maintain the safety and soundness of banks, ensure their

compliance with economic and other objectives and limit their exposure to risk. Merkanti Bank therefore

faces risks associated with an uncertain and rapidly evolving prudential regulatory environment pursuant

to which it is required, amongst other things, to maintain adequate capital resources and capital ratios at

all times. Any legislative or regulatory actions and any resulting changes required to be made to Merkanti

Bank’s operations could adversely affect its business

Merchant banking as a business is competitive, volatile and subject to various risks.

The Bank’s merchant banking

business could experience significant periodic variations in revenues and

results of operations in the future. The merchant banking business is also highly competitive and certain

competitors have substantially greater capital and resources, including access to supply, than the Bank. If

the Bank is unable to compete effectively, its business and results of operations will be adversely affected.

The Group is subject to systematic risk in the global financial system.

The Group is exposed to systemic risk caused by the pandemic, which eventually resulted in a recession

effecting corporations and financial instructions worldwide. Due to the high level of interdependence

between financial institutions, the Bank is and will continue to be subject to the risk of deterioration of the

(actual or perceived) commercial and financial soundness of other financial services institutions, which is

also often referred to as systemic risk. Even the perceived lack of creditworthiness of about a single

counterparty may lead to market wide liquidity problems and losses or defaults by other institutions,

including the Bank.

The Group is exposed to litigation risks in its business that are often difficult to assess or quantify.

The Group is exposed to various forms of legal risk arising from its trade finance, merchant banking and

other activities. Legal risks arise from the possibility that unenforceable contracts, lawsuits, or adverse

judgements can disrupt or otherwise negatively affect the operations or condition of the Group. The Group

carries on business in various parts of the world and under different legal systems.

The Group is particularly susceptible to legal risks when entering into structured transactions in emerging

markets, where its legal rights might be susceptible to non-enforcement because of uncertainties of the

local legal and judicial system.

The Group is exposed to the industrial real estate and property market in Germany

The industrial real estate market in Germany is, among other things, affected by shifts in demand and

supply, changes in general economic conditions, changing supply within a particular area of competing

space and attractiveness of real estate relative to other investment choices. Changes in regulatory

requirements and applicable laws (such as taxation and planning permits), political conditions, conditions

of the financial markets, inflation, interest rate fluctuations, the availability of financing, yields of alternative

investments and other factors may also have an adverse effect on the property market and, in turn, the

capital values and income streams of the Group.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Directors’ report

- continued

Future business developments

The Company continues to execute its business plan whilst diligently adhering to its risk management

principles. In 2023, incremental business development contributed to revenues and profits, and the

Company is committed to continuing profitable growth into the future.

The Company continues to explore various business opportunities ~ both organic and inorganic ~ with the

goal of maximizing profits for its shareholders and prudently safeguarding the interests of its key

stakeholders.

Risk management

The Group is considering various additional strategic transactions to further expand its product profile and

geographical scope, while at the same time maintaining a strong liquidity profile to be able to capitalize on

any opportunities which may arise.

The Group faces a range of business, financial and operational risks. The Group adopts a robust

corporate governance framework with a risk management approach to understand what its risks are, how

much risk is acceptable, and to be able to manage it to create value for shareholders while meeting

regulatory requirements ensuring integrity, ethical and transparent behaviour.

At a strategic level, the Group’s financial risk management objectives are:

to ensure appropriate identification of the Group’s significant risks;

ii.

to ensure that the Group’s plans are consist

ent with its risk appetite;

iii. to optimise risk/return decisions by taking them as closely as possible to the business, while

establishing strong and independent review and challenge structures; and

iv.

to help the Group’s Management improve the control and co

-ordination of risk taking across the

business.

A detailed review of the Group’s use of financial instruments, its exposure to liquidity risk, credit risk and

market risk, and the respective financial risk management objectives and policies is included in Note 2 to

the financial statements.

Results and dividends

The income statement is set out on page 12. No dividend is being recommended by the Board. The

accumulated profits of the Group

amounting to €

3,426,778 will be carried forward to the next financial year.

Directors

The directors of the Company who held the office during the year were:

Samuel Morrow (Chief Executive Officer)

Mario P Galea (Chairman)

Benjamin Muscat

Silke Stenger

Martin Ware

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Directors’ report

- continued

In accordance with the Company’s articles of association, directors are appointed during the Company’s

annual general meeting until the next following annual general meeting (unless elected for a longer or

shorter period or unless they resign or are removed), at the end of which term they may stand again for

re-election. No election may be made for a period exceeding three (3) years. The Articles of Association

of the Company clearly set out the procedures to be followed in the appointment of directors.

Responsibilities of Directors for the Financial Statements

The directors are required by the Maltese Companies Act (Cap.386) to prepare financial statements which

give a true and fair view of the state of affairs of the Group and the Company as at the end of each

reporting period and of the profit or loss for that period.

In preparing the financial statements, the directors are responsible for:

•

ensuring that the financial statements have been drawn up in accordance with International

Financial Reporting Standards as adopted by the EU;

•

selecting and applying appropriate accounting policies;

•

making accounting estimates that are reasonable in the circumstances;

•

ensuring that the financial statements are prepared on the going concern basis unless it is

inappropriate to presume that the Group and the Company will continue in business as a going

concern.

Material contracts

Other than the contracts spe

cified for and within the Company’s prospectus dated July 18, 2019, for the

issuance of €25 million of 4% seven year secured bonds, there are no material contracts outstanding.

Going concern

The directors, as required by Listing Rule 5.62, have consider

ed the Company’s operational performance,

the statement of Financial Position as at 31 December 2023, as well as the business plans for the coming

year, and that they have a reasonable expectation that the Company has adequate resources to continue

in operational existence for the foreseeable future. For this reason, they continue to adopt the going

concern basis in preparing the financial statements.

Auditors

PricewaterhouseCoopers have indicated their willingness to continue in office and a resolution for their re-

appointment will be proposed at the Annual General Meeting.

Statement of Responsibility pursuant to the Listing rules issued by the Listing Authority

The Board declares that to the best of their knowledge, the financial statements included in the Annual

Report are prepared in accordance with the requirements of International Financial Reporting Standards

as adopted by the EU and give a true and fair view of the assets, liabilities, financial position and profit of

the Company and the undertakings

included in the consolidation taken as a whole, and that this director’s

report includes a fair review of the development and performance of the business and position of the

Company, together with a description of the principal risks and uncertainties that it faces.

Signed on behalf of the Company’s Board of Directors on 30 April 2024 by Mario P Galea

(Director) and

Martin Ware (Director) as per the Directors’ Declaration on ESEF Annual Financial Report submitted in

conjunction with the Annual Report and Consolidated Financial Statements 2023.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Statement of Compliance with Corporate Governance Code

The Listing Rules issued by the Listing Authority of the Malta Financial Services Authority, require listed

companies to observe The Code of Principles of Good Corporate Governance (the “Code”). Although the

adoption of the Code is not obligatory, companies

with securities that are listed on a ‘regulated market’

(and that are subject to the Listing Rules and the Code) are required to include, among other things, in

their annual report, a corporate governance statement and a statement by the directors on a com

pany’s

compliance with the Code, accompanied by a report of the auditors thereon. Companies that do not have

any listed equity securities, including the Company, are exempt from certain requirements relating to the

contents of this corporate governance statement.

Compliance

The Company’s Board believes in the principles espoused by and the adoption of the Code and the

Company has endorsed them to the extent that they are considered complementary to the size, nature,

and operations of the Company. In part

icular, the Board believes that, due to the Company’s size,

operations and particular circumstances

–

including the fact that it is a holding and finance company and

does not have any employees or officers other than the directors and the company secretary

–

it is not

necessary for the Board to establish the remuneration, nomination and board performance evaluation

committees (and the related supporting principles and Code Provisions) that are suggested in the Code,

and that the function of these committees can efficiently be undertaken by the board itself as necessary. It

should also be noted that the Board’s performance is subject to ongoing evaluation and scrutiny of the

Board itself (the majority of which is composed by independent non-executive director

s), the Company’s

shareholder and the market. The shareholders approve the remuneration paid to the directors at the

annual general meeting.

The Board

The Board is responsible for devising a strategy, setting policies and the management of the Company. It

is also responsible for reviewing internal control procedures, financial performance and business risks

facing the Company. The Board is also responsible for ensuring that its operations are in conformity with

all relevant rules and regulations. Directors meet regularly, mainly to review the operational and financial

performance of the Company, any significant matters arising, and to review internal control processes.

Board members are notified of forthcoming meetings by the Company Secretary with the issue of an

agenda and supporting documents, which are circulated in advance of the meeting. All the directors have

access to independent professional advice at the Company’s expense should they so require and

frequently make use of this facility on various issues.

The Company has in place systems whereby the directors obtain timely information from the executive

management teams of its subsidiaries, not only at meetings of the Board but at regular intervals or when

the need arises.

The Board is currently composed of two executive and three independent non-executive directors, as

listed below.

Mario P Galea (Chairman and Independent Non-Executive Director)

Benjamin Muscat (Independent Non-Executive Director)

Silke Stenger (Independent Non-Executive Director)

Samuel Morrow (Executive Director)

Martin Ware (Executive Director)

The Company Secretary of the Company is Ganado Services Limited (C 10785)

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Statement of Compliance with Corporate Governance Code

- continued

Internal Controls & Risk Management Systems in relation to Financial Reporting

The Board is responsible for designing, implementing and maintaining internal controls and risk

management systems that it deems necessary to enable the preparation of financial statements that are

free from material misstatement, whether due to fraud or error, and for reviewing their effectiveness. They

are also responsible for safeguarding the assets of the Group and the Company and hence for taking

reasonable steps for the prevention and detection of fraud and other irregularities.

In particular, systems and procedures are in place for the Company to control, report, monitor and assess

risks and their financial implications, and to take timely corrective actions where necessary, and for the

Board to be kept informed in a structured and systematic manner on the operational and financial

performance of the Company. Regular financial budgets and strategic plans are prepared, and

performance against these plans is actively monitored and reported to the directors on a regular basis. All

financial information and forecasts are reviewed by multiple parties as well as the Board to ensure

accuracy.

The monitoring of these controls and systems has been delegated to the Audit Committee (as described

below). The Board and Audit Committee are satisfied with the effectiveness of the Company’s system of

internal controls and risk management systems.

Audit Committee

The

Board established an Audit Committee (the “Committee”) in 2019 to assist the Board in fulfilling its

supervisory and monitoring responsibilities. The Committee operates according to detailed terms of

reference established by the Board that reflect the requirements of the Listing Rules as well as current

good corporate governance best practices. These terms of reference establish its composition, role,

responsibilities and function, the parameters of its remit, as well as the basis for the processes that it is

required to comply with. The Committee, which is required to meet at least four times a year, is a sub-

committee of the Board and is directly responsible and accountable to the Board.

The primary purpose of the Committee is to assist the directors in conducting their role effectively so that

the Company’s decision

-making capability and the accuracy of its reporting and financial results are

maintained at a high level at all times. Among other responsibilities, the Committee is responsible for

monitoring

the financial reporting process and monitoring of the effectiveness of the Company’s internal

controls and risk management systems in relation to the financial reporting of the Company.

The Audit Committee is composed entirely of independent non-executive directors (each of which satisfies

the independence criteria set out in the Listing Rules). All of the members of the Audit Committee are

designated as competent in auditing and/or accounting. Mario Galea has been appointed as the Chairman

of the Audit Committee.

The Members of the Audit Committee are:

Mario Galea (Chairman)

Benjamin Muscat (Member)

Silke Stenger (Member)

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Statement of Compliance with Corporate Governance Code

- continued

Remuneration Statement

In terms of the Company’s Memorandum and Articles of Association, it is the shareholders of the

Company in the General Meeting who determine the maximum annual aggregate remuneration of the

directors. The independent directors received €110,500 in aggregat

e for services rendered during 2023 in

their capacity as directors of the company. No part of the remuneration paid to the independent directors

is performance based. None of the independent directors, in their capacity as a director of the Company,

is entitled to profit sharing, share options or pension benefits.

Signed on behalf of the Company’s Board of Directors on 30 April 2024 by Mario P Galea

(Director) and

Martin Ware (Director) as per the Directors’ Declaration on ESEF Annual Financial Report s

ubmitted in

conjunction with the Annual Report and Consolidated Financial Statements 2023.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Statements of financial position

Group

Company

As at 31 December

Notes

2023

2022

2023

2022

€

ASSETS

Balances with Central Bank of Malta

and cash

27,980,471

14,573,977

Loans and advances to banks and

other financial institutions

7,713,654

9,057,017

7,325,442

2,781,441

Loans and advances to customers

13,374,699

12,824,595

Financial assets mandatorily

measured at fair value

through profit or loss

1,059,782

5,672,787

267,181

802,395

Financial assets measured at fair

value through other

comprehensive income

6,946,560

18,153,403

Investments in subsidiaries

50,530,850

Investment property

30,081,000

30,965,000

Property, plant and equipment

126,464

137,258

28,506

51,767

Intangible assets

932,744

968,993

Right-of-use assets

138,747

283,526

138,747

283,526

Other receivables

16,513,815

12,673,522

19,169,845

22,439,853

Deferred tax assets

150,174

168,630

Accrued income and other assets

4,623,492

4,032,677

2,633,958

2,743,020

Total assets

109,641,602

109,511,385

80,094,529

79,632,852

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Statements of financial position

- continued

Group

Company

As at 31 December

Notes

2023

2022

2023

2022

€

EQUITY AND LIABILITIES

Capital and reserves attributable

to owners of the parent

Share capital

1,667,333

Contribution reserve

50,892,669

Fair value reserve

(314,698)

(587,930)

Retained earnings

3,426,778

1,031,865

2,077,629

1,605,804

55,672,082

53,003,937

54,637,631

54,165,806

Non-controlling interests

1,085,334

1,666,575

Total equity

56,757,416

54,670,512

54,637,631

54,165,806

Liabilities

Borrowings

24,686,800

24,580,198

24,686,800

24,580,198

Lease liabilities

168,809

330,589

168,809

330,589

Amounts owed to banks

4,965,600

4,966,000

Amounts owed to customers

19,430,761

21,149,517

Deferred tax liabilities

2,153,622

2,226,127

Current tax liabilities

308,294

300,595

10,756

1,626

Other liabilities

1,170,300

1,287,847

590,533

554,633

Total liabilities

52,884,186

54,840,873

25,456,898

25,467,046

Total equity and liabilities

109,641,602

109,511,385

80,094,529

79,632,852

The notes on pages 19 to 103 are an integral part of these consolidated financial statements.

The financial statements on pages 10 to 103 were approved and authorised for issue by the Board of

Directors on 30 April 2024. The financial statements

were signed on behalf on behalf of the Company’s

Board of Directors by Mario P Galea (Director) and Martin Ware (Director)

as per the Directors’

Declaration on ESEF Annual Financial Report submitted in conjunction with the Annual Report and

Financial Statements 2023.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Income statements

Group

Company

Year ended 31 December

Notes

2023

2022

2023

2022

€

Interest income

4,284,001

2,894,100

1,258,363

1,332,479

Interest expense

(1,326,975)

(1,230,380)

(1,115,762)

(1,162,716)

Net interest income

2,957,026

1,663,720

142,601

169,763

Net fee and commission income

1,676,609

2,933,082

137,794

537,442

Rental income from investment property

1,546,048

1,697,887

101,657

79,381

Changes in the fair value of

investment property

(40,080)

28,887

Realised (losses)/gains on disposal of

investment property and property,

plant and equipment

(28,496)

96,509

(545)

Net trading income

506,184

631,044

(537,045)

(615,352)

Realised losses on disposal investments

of financial assets measured at fair value

through other comprehensive income

(216)

Dividend income

1,233,700

1,805,500

Other operating income

2,227,332

957,578

918,910

665,140

Total operating income

8,844,623

8,008,491

1,997,072

2,641,874

Changes in expected credit losses

(91,061)

(26,005)

38,607

14,880

Net operating income

8,753,562

7,982,486

2,035,679

2,656,754

Gains/(losses) on disposal of investments

in subsidiaries

265,124

(51,234)

Administrative expenses

(6,658,604)

(6,195,849)

(1,553,098)

(1,134,617)

Profit before tax

2,094,958

2,051,761

482,581

1,470,903

Tax expense

(214,986)

(469,415)

(10,756)

(661,489)

Profit for the year

1,879,972

1,582,346

471,825

809,414

Profit attributable to:

Owners of the parent

2,394,913

1,696,730

Non-controlling interests

(514,941)

(114,384)

1,879,972

1,582,346

The notes on pages 19 to 103 are an integral part of these consolidated financial statements.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Statements of comprehensive income

Group

Company

Year ended 31 December

Notes

2023

2022

2023

2022

€

Profit for the year

1,879,972

1,582,346

471,825

809,414

Other comprehensive income:

Items that may be subsequently

reclassified to profit or loss

Translation differences

(971)

Fair valuation of financial assets

measured at fair value through

other comprehensive income:

Net changes in fair value arising

during the year

273,088

(636,800)

Reclassification adjustments - net

amounts reclassified to profit or

loss upon disposal

216

Changes in expected credit losses

attributable to debt instruments

measured at fair value through

other comprehensive income

144

(52)

Other comprehensive income

for the year, net of tax

273,232

(637,607)

Total comprehensive income

for the year

2,153,204

944,739

471,825

809,414

Total comprehensive income

attributable to:

Owners of the parent

2,668,145

1,059,123

Non-controlling interests

(514,941)

(114,384)

2,153,204

944,739

The notes on pages 19 to 103 are an integral part of these consolidated financial statements.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Statements of changes in equity

The notes on pages 19 to 103 are an integral part of these consolidated financial statements.

Group

Attributable to owners of the parent

Non-

Contribution

Fair value

Translation

Retained

controlling

Total

Notes

capital

reserve

earnings

Total

interests

equity

€

Balance at 1 January 2022

50,020,002

2,540,000

48,706

971

(664,865)

51,944,814

1,784,600

53,729,414

Comprehensive income

Profit for the year

1,696,730

(114,384)

1,582,346

Other comprehensive income:

Translation differences

(971)

Fair valuation of financial assets measured at fair

value through other comprehensive income

Net changes in fair value arising during the year

(636,800)

Reclassification adjustments - net amounts

reclassified to profit or loss upon disposal

216

Changes in expected credit losses attributable

to debt instruments measured at fair value

through other comprehensive income

(52)

Total comprehensive income

(636,636)

(971)

1,696,730

1,059,123

(114,384)

944,739

Transactions with owners in their capacity as owners:

Effect of share capital restructuring

17/18

(48,352,669)

48,352,669

Non-controlling interest arising on disposal of stakes in a

subsidiary

272,784

Dividends paid to non-controlling interests in subsidiaries

(276,425)

Transactions with owners in their capacity as owners

(48,352,669)

48,352,669

(3,641)

Balance at 31 December 2022

1,667,333

50,892,669

(587,930)

1,031,865

53,003,937

1,666,575

54,670,512

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Statements of changes in equity

- continued

The notes on pages 19 to 103 are an integral part of these consolidated financial statements.

Group

Attributable to owners of the parent

Non-

Contribution

Fair value

Translation

Retained

controlling

Total

Notes

capital

reserve

earnings

Total

interests

equity

€

Balance at 1 January 2023

1,667,333

50,892,669

(587,930)

1,031,865

53,003,937

1,666,575

54,670,512

Comprehensive income

Profit for the year

2,394,913

(514,941)

1,879,972

Other comprehensive income:

Fair valuation of financial assets measured at fair

value through other comprehensive income

Net changes in fair value arising during the year

273,088

Changes in expected credit losses attributable

to debt instruments measured at fair value

through other comprehensive income

144

Total comprehensive income

273,232

2,394,913

2,668,145

(514,941)

2,153,204

Transactions with owners in their capacity as owners:

Dividends paid to non-controlling interests in subsidiaries

(66,300)

Transactions with owners in their capacity as owners

(66,300)

Balance at 31 December 2023

1,667,333

50,892,669

(314,698)

3,426,778

55,672,082

1,085,334

56,757,416

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Statements of changes in equity

- continued

Company

Note

capital

Contribution

reserve

Retained

earnings

Total

€

Balance at 1 January 2022

50,020,002

2,540,000

796,390

53,356,392

Comprehensive income

Profit for the year

809,414

Transactions with owners in their

capacity as owners

Effect of share capital restructuring

(48,352,669)

48,352,669

Balance at 31 December 2022

1,667,333

50,892,669

1,605,804

54,165,806

Balance at 1 January 2023

1,667,333

50,892,669

1,605,804

54,165,806

Comprehensive income

Profit for the year

471,825

Balance at 31 December 2023

1,667,333

50,892,669

2,077,629

54,637,631

The notes on pages 19 to 103 are an integral part of these consolidated financial statements.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Statements of cash flows

Group

As at 31 December

2023

2022

Notes

€

Interest, commission, rental and other income received

8,133,238

7,643,890

Interest and commission expense paid

(1,210,928)

(1,124,576)

Cash payments to employees and suppliers

(6,300,870)

(5,737,155)

Income taxes paid

(261,336)

(350,228)

Cash flows from operating activities before

changes in operating assets and liabilities

360,104

431,931

Changes in operating assets and liabilities:

Net increase in Reserve Deposit with Central Bank

(19,011)

(153,841)

Net increase in loans and advances to banks

and other financial institutions

(22,666)

(4,971,919)

Net increase in loans and advances to customers

(458,830)

(1,184,900)

Net decrease in dispute resolution funding assets

measured at fair value through profit or loss

18,303

220,183

Net decrease in other receivables

1,770,690

2,137,655

Net decrease/(increase) in other assets

275,963

(1,165,655)

Net (decrease)/increase in amounts owed to banks

(400)

4,966,000

Net (decrease)/increase in amounts owed to customers

(1,718,756)

13,651,995

Net decrease in other liabilities

(117,832)

(100,218)

Net cash generated from operating activities

87,565

13,831,231

Cash flows from investing activities

Purchase of investments measured as at fair value through

other comprehensive income

(11,454,000)

Proceeds from disposal of investments measured at fair

value through other comprehensive income

11,500,000

132,900

Proceeds from disposal of investment properties

815,971

2,026,396

Proceeds from disposal of property, plant and equipment

531

Purchase of property, plant and equipment

(66,450)

(23,170)

Purchase of intangible assets

(50,466)

(318,898)

Net cash generated from/(used in) investing activities

12,199,586

(9,636,772)

Cash flows from financing activities

Principal element of lease payments

(170,940)

(147,822)

Paid-up share capital during the year

15,000

Net cash used in financing activities

(170,940)

(132,822)

Net movement in cash and cash equivalents

12,116,211

4,061,637

Effect of exchange rate changes on cash and cash equivalents

(117,282)

(116,594)

Cash and cash equivalents at beginning of year

18,452,251

14,507,208

Cash and cash equivalents at end of year

30,451,180

18,452,251

The notes on pages 19 to 103 are an integral part of these consolidated financial statements.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Statements of cash flows

- continued

Company

As at 31 December

2023

2022

Notes

€

Interest, commission, rental and other income received

1,190,505

2,525,080

Interest and commission expense paid

(999,715)

(1,054,292)

Cash payments to suppliers

(1,383,406)

(982,043)

Income taxes paid

(1,626)

Cash flows (used in)/generated from operating activities

before changes in operating assets and liabilities

(1,194,242)

488,745

Changes in operating assets and liabilities:

Net increase in loans and advances to banks

and other financial institutions

(1,800,000)

Net decrease in other receivables

4,421,289

437,345

Net decrease/(increase) in other assets

404,576

(308,297)

Net increase in other liabilities

35,615

30,219

Net cash generated from operating activities

1,867,238

648,012

Cash flows from investing activities

Proceeds from disposal of a subsidiary

Purchase of property, plant and equipment

(3,104)

(4,532)

Dividends received

1,050,807

Net cash generated from/(used in) investing activities

1,047,703

(4,530)

Cash flows from financing activities

Principal element of lease payments

(170,940)

(147,428)

Repayment of borrowings

(3,600,000)

Paid-up share capital during the year

15,000

Net cash used in financing activities

(170,940)

(3,732,428)

Net movement in cash and cash equivalents

2,744,001

(3,088,946)

Cash and cash equivalents at beginning of year

2,781,441

5,870,387

Cash and cash equivalents at end of year

5,525,442

2,781,441

The notes on pages 19 to 103 are an integral part of these consolidated financial statements.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Notes to the consolidated financial statements

Summary of material accounting policies

The material accounting policies applied in the preparation of these consolidated financial

statements are set out below. These policies have been consistently applied to all the years

presented, unless otherwise stated.

1.1 Basis of preparation

The consolidated financial statements include the financial statements of Merkanti Holding p.l.c.

(“the

Company

”) and its subsidiary undertakings (together referred to as “the Group”). These

financial statements have been prepared in accordance with International Financial Reporting

Standards (

‘

IFRSs

’

) as adopted by the EU and with the requirements of the Companies Act (Cap.

386) and the Banking Act (Cap. 371) enacted in Malta. They have been prepared under the

historical cost convention, as modified by the fair valuation of financial assets and financial liabilities

measured at fair value through profit or loss including derivative financial instruments, financial

assets measured at fair value through other comprehensive income, and investment property.

The preparation of financial statements in conformity with IFRSs as adopted by the EU requires the

use of certain accounting estimates. It also requires directors to exercise their judgement in the

process of applying the Group

’s

accounting policies (see Note 3

–

Critical accounting estimates and

judgements).

Assessment of going concern assumption

Having satisfied themselves on the financial position and performance of the Group, the directors

have a reasonable expectation that the Company and the Group will continue in operational

existence for the foreseeable future.

In determining the appropriateness of the going concern assumption in the preparation of the

financial statements, the directors have considered the effects of the global macroeconomic

uncertainties driven by the ongoing geo-political conflicts in eastern Europe and Middle East,

infla

tionary pressures, turbulence in the financial markets and interest rate hikes to the Group’s

operations. The Group is actively monitoring the situation and has taken necessary measures to

ensure that negative impacts on overall business is mitigated to the extent possible. As a result, the

Group did not experience any delays in repayments from increased credit risk. During 2023, the

Group has continued to show its resilience to the impact of the current economic events as it

reported higher operating income and profits.

Accordingly, the d

irectors consider the going concern assumption in the preparation of the Group’s

financial statements as appropriate as at the date of authorisation for issue of these financial

statements.

Standards, interpretations and amendments to published standards effective in 2023

In 2023, the Group adopted a number of interpretations and amendments to existing standards that

are mandatory for the Group’s accounting period beginning on 1 January 202

3. These changes did

not have a significant impact on the Group's accounting policies and on the financial performance

and financial position. There were no new standards adopted during the year.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Summary of material accounting policies

- continued

1.1 Basis of preparation

- continued

Standards, interpretations and amendments to published standards that are not yet effective

Certain new amendments to existing standards have been published by the date of authorisation

for issue of these financial statements, that are mandatory for the Group's accounting periods

beginning on or after 1 January 2024. The Group has not early adopted these revisions to the

requirements of IFRSs as adopted by the EU and the Group's directors are of the opinion that there

are no requirements that will have possible significant impacts on the Group's financial statements

in the period of initial application.

1.2 Consolidation

(a) Subsidiaries

Subsidiaries are all entities (including structured entities) over which the Group has control. The

Group controls an entity when the Group is exposed to, or has rights to, variable returns from its

involvement with the entity and has the ability to affect those returns through its power over the

entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group.

They are de-consolidated from the date that control ceases.

The Group uses the acquisition method of accounting to account for business combinations. The

consideration transferred for the acquisition of a subsidiary is the fair values of the assets

transferred, the liabilities incurred and the equity interests issued by the Group. The consideration

transferred includes the fair value of any asset or liability resulting from a contingent consideration

arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and

liabilities and contingent liabilities assumed in a business combination are measured initially at their

fair values at the acquisition date. On an acquisition-by-acquisition basis, the Group recognises any

non-controlling interest in the acquiree either at fair value or at the non-

controlling interest’s

proportionate share of the acquiree’s net assets.

The excess of the consideration transferred, the amount of any non-controlling interest in the

acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the

fair value of identifiable net assets acquired is recorded as goodwill. If this is less than the fair value

of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is

recognised directly in profit or loss.

Inter-company transactions, balances and unrealised gains on transactions between group

companies are eliminated. Unrealised losses are also eliminated. The accounting policies of the

subsidiaries are consistent with the policies adopted by the Group.

In the Co

mpany’s separate financial statements, investments in subsidiaries are accounted for by

the cost method of accounting, i.e. at cost less impairment. Provisions are recorded where, in the

opinion of the directors, there is an impairment in value. Where there has been an impairment in the

value of an investment, it is recognised as an expense in the period in which the diminution is

identified. The results of subsidiaries are reflected in the Company’s separate financial statements

only to the extent of dividends receivable. On disposal of an investment, the difference between the

net disposal proceeds and the carrying amount is charged or credited to profit or loss.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Summary of material accounting policies

- continued

1.2 Consolidation

- continued

(b) Transactions with non-controlling interests

The Group treats transactions with non-controlling interests, where the acquisition or disposal of

partial interests in a subsidiary has no impact on the Group’s ability to govern the subsidiary’s

financial and operating policies, as transactions with equity owners of the Group. For purchases

from non-controlling interests, the difference between any consideration paid and the relevant share

acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses

on disposals to non-controlling interests are also recorded in equity.

When the Group ceases to have control or significant influence, any retained interest in the entity is

remeasured to its fair value, with the change in carrying amount recognised in profit or loss. The fair

value is the initial carrying amount for the purposes of subsequently accounting for the retained

interest as an associate, joint venture or financial asset. In addition, any amounts previously

recognised in other comprehensive income in respect of that entity are accounted for as if the

Group had directly disposed of the related assets or liabilities. This may mean that amounts

previously recognised in other comprehensive income are reclassified to profit or loss.

1.3 Foreign currency translation

(a) Functional and presentation currency

Items included in the financial statements of each of the Group’s entities are measured using the

currency of the primary economic environment in which the entity opera

tes (‘the functional

currency’). The consolidated financial statements are presented in euro, which is the Company’s

functional currency and the Group’s presentation currency.

(b) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates

prevailing at the dates of the transactions or valuation where items are remeasured. Foreign

exchange gains and losses resulting from the settlement of such transactions and from the

translation at year-end exchange rates of monetary assets and liabilities denominated in foreign

currencies are recognised in profit or loss.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Summary of material accounting policies

- continued

1.4 Financial assets

1.4.1 Initial recognition and measurement

The Group recognises a financial asset in its consolidated statement of financial position when it

becomes a party to the contractual provisions of the instrument.

Regular way purchases and sales of financial assets are recognised on the trade date, which is the

date on which the Group commits to purchase or sell the asset. Accordingly, the Group uses trade

date accounting for regular way contracts when recording financial asset transactions.

At initial recognition, the Group measures a financial asset at its fair value plus or minus, in the

case of a financial asset not at fair value through profit or loss, transaction costs that are

incremental and directly attributable to the acquisition or issue of the financial asset, such as fees

and commissions. Transaction costs of financial assets carried at fair value through profit or loss

are expensed in profit or loss. Immediately after initial recognition, an expected credit loss

allowance (‘ECL’) is recognised for financial assets measured at a

mortised cost and investments in

debt instruments measured at FVOCI, which results in an accounting loss being recognised in profit

or loss when an asset is newly originated.

When the fair value of financial assets differs from the transaction price on initial recognition, the

Group recognises the difference as follows:

•

When the fair value is evidenced by a quoted price in an active market for an identical asset

(i.e. a Level 1 input) or based on a valuation technique that uses only data from observable

markets, the difference is recognised as a gain or loss.

•

In all other cases, the difference is deferred and the timing of recognition of deferred day one

profit or loss is determined individually. It is either amortised over the life of the instrument,

deferred until the instrument's fair value can be determined using market observable inputs, or

realised through settlement.

1.4.2 Classification and subsequent measurement

The Group has applied IFRS 9 and classifies its financial assets in the following measurement

categories:

•

Fair value through profit or loss (FVPL);

•

Fair value through other comprehensive income (FVOCI); or

•

Amortised cost.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Summary of material accounting policies

- continued

1.4 Financial assets

- continued

1.4.2 Classification and subsequent measurement

- continued

Debt instruments

Debt instruments are those instruments that meet the definition of a financial liability from the

issuer's perspective, such as loans, government and corporate bonds and trade receivables

purchased from clients in factoring arrangements without recourse.

Classification and subsequent measurement of debt instruments depend on:

•

the Group's business model for managing the asset; and

•

the cash flow characteristics of the asset.

Based on these factors the Group classifies its debt instruments into one of the following three

measurement categories:

Amortised cost:

Assets that are held for collection of contractual cash flows where those cash flows

represent solely payments of principal and interest ('SPPI'), and that are not designated at FVPL,

are measured at amortised cost. The carrying amount of these assets is adjusted by any expected

credit loss allowance recognised and measured as described in Note 1.5. Interest income from

these financial assets is included in 'Interest income' using the effective interest rate method. The

Group’s financial assets measured at amortised cost include ‘Balances with Central Bank of Malta

and cash’, ‘Loans and advances to banks and other financial institutions’, ‘Loans and advances to

customers’ and ‘Other receivables.

FVOCI

: Financial assets that are held for collection of contractual cash flows and for selling the

assets, where the assets' cash flows represent solely payments of principal and interest, and that

are not designated at FVPL, are measured at FVOCI. Movements in the carrying amount are taken

through OCI, except for the recognition of impairment gains or losses, interest revenue and foreign

exchange gains and losses on the instrument's amortised cost which are recognised in profit or

loss. When the financial asset is derecognised, the cumulative gain or loss previously recognised in

OCI is reclassified from equity to profit or loss and recognised in 'Net trading income'. Interest

income from these financial assets is included in 'Interest income' using the effective interest rate

method.

The Group’s financial assets measured at FVOCI comprise of treasury bills and debt and

other fixed income instruments (Note 8).

FVPL

: Assets that do not meet the criteria for amortised cost or FVOCI are measured at fair value

through profit or loss. A gain or loss on a debt investment that is subsequently measured at fair

value through profit or loss and is not part of a hedging relationship is recognised in profit or loss

and presented in the profit or loss statement within 'Net trading income' in the period in which it

arises, unless it arises from debt instruments that were designated at fair value or which are not

held for trading, in which case they are presented separately in 'Net trading income’. Debt

instruments that contain contractual terms that give rise on specified dates to cash flows that are

not consistent with a basic lending arrangement and thus fail the solely payments of principal and

interest test are ‘mandatorily’ measured at FVPL. Interest income from these fin

ancial assets,

including those that are mandatorily measured at FVPL, is included in ‘Interest income’ using the

effective interest rate method.

The Group’s financial assets

that are mandatorily measured at FVPL

include non-fixed income securities, investments in resolution funding assets, unlisted equity

securities issued by a related party and a fixed interest loan that has a profit participation feature

(Note 7).

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Summary of material accounting policies

- continued

1.4 Financial assets

- continued

1.4.2 Classification and subsequent measurement

–

continued

Debt instruments

- continued

The amortised cost is the amount at which the financial asset or financial liability is measured at

initial recognition minus the principal repayments, plus or minus the cumulative amortisation (using

the effective interest method) of any difference between that initial amount and the maturity amount

and, for financial assets, adjusted for any loss allowance.

The effective interest rate is the rate that exactly discounts estimated future cash payments or

receipts through the expected life of the financial asset or financial liability to the gross carrying

amount of a financial asset (i.e., its amortised cost before any impairment allowance) or to the

amortised cost of a financial liability.

The calculation does not consider expected credit losses and includes transaction costs, premiums

or discounts and fees and points paid or received that are integral to the effective interest rate, such

as origination fees. For purchased or originated credit-impaired ('POCI') financial assets - assets

that are credit-impaired at initial recognition - the Group calculates the credit-adjusted effective

interest rate, which is calculated based on the amortised cost of the financial asset instead of its

gross carrying amount and incorporates the impact of expected credit losses in estimated future

cash flows.

When the Group revises the estimates of future cash flows, the carrying amount of the respective

financial assets or financial liability is adjusted to reflect the new estimate discounted using the

original effective interest rate. Any changes are recognised in profit or loss.

The Group reclassifies debt instruments when and only when its business model for managing

those assets changes. The reclassification takes place from the start of the first reporting period

following the change. Such changes are expected to be very infrequent and none occurred during

the period.

(a) Business model assessment

Key management personnel determine the Group’s business model by considering the way

financial instruments are managed in order to generate cash flows. That is, whether the Group's

objective is solely to collect the contractual cash flows from the assets or is to collect both the

contractual cash flows and cash flows arising from the sale of assets. If neither of these is

applicable (e.g., financial assets are held for trading purposes), then the financial assets are

classified as part of 'other' business model and measured at FVPL. Such assessment is performed

at a ‘portfolio level' as it best reflects the way the business is managed

and information is provided

to management.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Summary of material accounting policies

- continued

1.4 Financial assets

- continued

1.4.2 Classification and subsequent measurement

–

continued

Debt instruments

- continued

(a) Business model assessment

- continued

The information that will be considered in such assessment includes:

•

the objectives for the portfolio including whether management’s strategy focuses on earning

contractual interest revenue, maintaining a particular interest rate profile, matching the

duration of the financial assets to the duration of the liabilities that are funding those assets or

realising cash flows through the sale of assets;

•

the method for the evaluation of the performance of the portfolio and how such performance is

reported to the Group’s management;

•

the risks that affect the performance of the business model (and the financial assets held

within that business model) and how those risks are managed; and

•

the frequency, volume and timing of sales in prior periods, the reasons for such sales and

expectations about future sales activity. However, information about sales activity is not

considered in isolation, but as part of an overall assessment of how the Group’s stated

objective for managing the financial assets is achieved and how cash flows are realised.

Debt securities that are held for trading and those that are managed and whose performance is

evaluated on a fair value basis will be measured at FVPL because they are neither held to collect

contractual cash flows nor held both to collect contractual cash flows and to sell financial assets.

Securities held for trading are held principally for the purpose of selling in the near term or are part

of a portfolio of financial instruments that are managed together and for which there is evidence of a

recent actual pattern of short-term profit-taking. Such debt securities are disclosed within these

financial statements as ‘Financial instruments mandatorily measured at fair value through profit or

loss’.

(b)

Cash flows that represent solely payment of principal and interest (SPPI)

In respect of assets where the intention of the business model is to hold the financial assets to

collect the contractual cash flows or to hold to collect and to sell, the Group assesses whether the

financial instruments’ cash flows represent SPPI. In making this assessment, the Group

considers

whether the contractual cash flows are consistent with a basic lending agreement. ‘Principal’ is the

fair value of the financial asset at initial recognition. It is not the amount that is due under the

contractual terms of an instrument. ‘Interest’ is the compensation for time value of money and credit

risk of a basic lending-type return. A basic lending-type return could also include consideration for

other basic lending risks (for example, liquidity risk) and consideration for costs associated with

holding the financial asset for a particular period of time (for example, servicing or administrative

costs) and/or a profit margin. Where the contractual terms introduce exposure to risk or volatility

that are inconsistent with a basic lending arrangement, the related financial asset is classified and

measured at fair value through profit or loss.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Summary of material accounting policies

- continued

1.4 Financial assets

- continued

1.4.2 Classification and subsequent measurement

- continued

Debt instruments

- continued

(b) Cash flows that represent solely payment of principal and interest (SPPI)

- continued

Unlike the business model assessment, the SPPI assessment is performed for each individual

product or portfolio of products. The following considerations are made when assessing

consistency with SPPI:

•

contingent events that would change the amount and timing of cash flows such as contractual

term resetting interest to a higher amount in the event of a missed payment;

•

leverage features, being contractual cash flow characteristics that increase the variability of

the contractual cash flows with the result that they do not have economic characteristics of

interest;

•

contractual terms that allow the issuer to prepay (or the holder to put a debt instrument back to

the issuer) before maturity and whether the prepayment amount substantially represents

unpaid amounts of principal and interest, which may include reasonable compensation for

early termination of the contract;

•

contractual terms that allow the issuer or holder to extend the contractual term and the terms

of the extension option result in contractual cash flows during the extension period that are

solely payments of principal and interest, which may include reasonable compensation for the

extension of the contract; and

•

features that modify consideration for the time value of money (for example, periodic reset of

interest rates).

Financial assets with embedded derivatives are considered in their entirety when determining

whether their cash flows are solely payment of principal and interest.

Equity instruments

Equity instruments are instruments that meet the definition of equity from the issuer's perspective,

that is, instruments that do not contain a contractual obligation to pay and that evidence a residual

interest in the issuer's net assets. Examples of equity instruments include basic ordinary shares.

The Group subsequently measures all equity investments at fair value through profit or loss, except

where the Group's management has elected, at initial recognition, to irrevocably designate an

equity investment at fair value through other comprehensive income. The Group's policy is to

designate equity investments as FVOCI when those investments are held for purposes other than

to generate investment returns. When this election is used, fair value gains and losses are

recognised in OCI and are not subsequently reclassified to profit or loss, including on disposal.

Impairment losses (and reversal of impairment losses) are not reported separately from other

changes in fair value. Dividends, when representing a return on such investments, are recognised

in profit or loss as other income when the Group's right to receive payments is established.

Gains and losses on equity investments at FVPL are included in the 'Net trading income’ line in the

income statement.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Summary of material accounting policies

- continued

1.5 Impairment of financial assets

The Group assesses on a forward-

looking basis the expected credit losses (‘ECLs’) associated

with its debt instruments carried at amortised cost and FVOCI and with the exposure arising from

loan commitments and financial guarantee contracts. The Group recognises a loss allowances for

such losses at each reporting date. The measurement of ECLs reflects:

i. an unbiased and probability-weighted amount that is determined by evaluating a range of

possible outcomes;

ii.

the time value of money; and

iii. reasonable and supportable information that is available without undue cost or effort at the

reporting date about past events, current conditions and forecasts of future economic

conditions.

Note 2.2.3 provides more detail of how the expected credit loss allowance is measured.

Expected credit loss allowances are presented in the statements of financial position as follows:

•

financial assets measured at amortised cost: as a deduction from the gross carrying amount of

the assets;

•

loan commitments and financial guarantee contracts: generally, as a provision;

•

financial instrument with both a drawn and undrawn component, whereby the Group cannot

identify the ECL on the loan commitment component separately from those on the drawn

component: the Group presents a combined loss allowance for both components, as a

deduction from the gross carrying amount of the drawn component; and

•

debt instruments measured at FVOCI: no loss allowance is recognised in the statements of

financial position against the carrying amount of the asset because the carrying amount of

these assets is their fair value. However, the loss allowance is disclosed and is recognised in

the fair value reserve, i.e., presented within other comprehensive income.

1.6 Write-off policy

The Group writes off financial assets when it determines that these are uncollectible, it has

exhausted all practical recovery efforts and has concluded there is no reasonable expectation of

recovery. This is generally the case when the Group determines that the counterparty does not

have assets or sources of income that could generate sufficient cash flows to repay the amounts

subject to the write-offs.

1.7 Offsetting financial instruments

Financial assets and liabilities are offset and the net amount is reported in the statements of

financial position when there is a legally enforceable right to set off the recognised amounts and

there is an intention to settle on a net basis, or realise the asset and settle the liability

simultaneously.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Summary of material accounting policies

- continued

1.8 Investment property

Investment property, principally comprising freehold office and warehouse buildings and parcels of

land (both developed and undeveloped) held mainly for long-term rental yields and capital

appreciation and which is not occupied by the Group.

Investment property is measured initially at its historical cost, including related transaction costs

and borrowing costs. Historical cost includes expenditure that is directly attributable to the

acquisition of the items. Borrowing costs which are incurred for the purpose of acquiring or

constructing a qualifying investment property are capitalised as part of its cost. Borrowing costs are

capitalised while acquisition or construction is actively underway. Capitalisation of borrowing costs

is ceased once the asset is substantially complete and is suspended if the development of the

asset is suspended. After initial recognition, investment property is carried at fair value,

representing open market value determined annually. Fair value is based on active market prices,

adjusted, if necessary, for any difference in the nature, location or condition of the specific asset. If

the information is not available, the Group uses alternative valuation methods such as recent prices

on less active markets or discounted cash flow projections.

These valuations are reviewed annually by professional valuers. Investment property that is being

redeveloped for continuing use as investment property or for which the market has become less

active continues to be measured at fair value. Fair value measurement on property under

construction is only applied if the fair value is considered to be reliably measurable. The fair value

of investment property reflects, among other things, rental income from current leases and

assumptions about rental income from future leases in the light of current market conditions.

The fair value also reflects, on a similar basis, any cash outflows that could be expected in respect

of the property.

Subsequent expenditure is capitalised to the asset’s ca

rrying amount only when it is probable that

future economic benefits associated with the expenditure will flow to the Group and the cost of the

item can be measured reliably. All other repairs and maintenance costs are charged to profit or loss

during the financial period in which they are incurred. When part of an investment property is

replaced, the carrying amount of the replaced part is derecognised.

The fair value of investment property does not reflect future capital expenditure that will improve or

enhance the property and does not reflect the related future benefits from this future expenditure

other than those a rational market participant would take into account when determining the value

of the property.

Changes in fair values are recognised in profit or loss. Investment properties are derecognised

either when they have been disposed of or when the investment property is permanently withdrawn

from use and no future economic benefit is expected from its disposal.

If an investment property becomes owner-occupied, it is reclassified as property, plant and

equipment. Its fair value at the date of the reclassification becomes its cost for subsequent

accounting purposes. When the Group decides to dispose of an investment property without

development, the Group continues to treat the property as an investment property. Similarly, if the

Group begins to redevelop an existing investment property for continued future use as investment

property, it remains an investment property during the redevelopment.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Summary of material accounting policies

- continued

1.9 Property, plant and equipment

All property, plant and equipment are stated at historical cost less depreciation. Historical cost

includes expenditure that is directly attributable to the acquisition of the items.

Subsequent costs are included in the asset’s carrying amount or are recognised as a separate

asset, as appropriate, only when it is probable that future economic benefits associated with the

item will flow to the Group and the cost of the item can be measured reliably. The carrying amount

of the replaced part is derecognised. All other repairs and maintenance are charged to profit or loss

during the financial period in which they are incurred.

Depreciation is calculated using the straight-line method to allocate the cost of the assets to their

residual values over their estimated useful lives, as follows:

	%
Computer equipment	25
Office improvements and equipment	10-25
Others	25

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of

each reporting period. An asset’s carrying amount is written down immediately to its recoverable

amount if the asset’s carrying amount is greater than its

estimated recoverable amount (Note 1.11).

Gains and losses on disposals are determined by comparing the proceeds with the carrying amount

and are recognised in profit or loss.

1.10 Intangible assets

Acquired computer software licences are capitalised on the basis of the costs incurred to acquire

and bring to use the specific software. These costs are amortised over their estimated useful lives

of ten years. Costs associated with maintaining computer software programmes are recognised as

an expense as incurred.

Development costs that are directly attributable to the design and testing of identifiable and unique

software products controlled by the Group are recognised as intangible assets when the following

criteria are met:

•

it is technically feasible to complete the software product so that it will be available for use;

•

management intends to complete the software product and use it;

•

there is an ability to use the software product;

•

it can be demonstrated how the software product will generate probable future economic

benefits;

•

adequate technical, financial and other resources to complete the development and to use the

software product are available; and

•

the expenditure attributable to the software product during its development can be reliably

measured.

At the end of each reporting period, intangible assets are reviewed for indications of impairment or

changes in estimated future economic benefits. If such indications exist, the intangible assets are

analysed to assess whether their carrying amount is fully recoverable (Note 1.12).

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Summary of material accounting policies

- continued

1.11 Leases

The Group is the lessee

The Group has lease agreements in place related to the leases of property used as office space. At

the inception of a contract, the Group assesses if the contract is or contains a lease and hence

conveys the right to control the use of an identified asset for a period of time in exchange for

consideration. For leases of property, the Group has elected not to separate lease and non-lease

components and instead accounts for these as a single lease component.

Lease liabilities arising from such contracts are measured at the present value of the remaining

lease payments, discounted using the incremental borrowing rate, which is the rate that the Group

would have to pay to borrow the funds necessary to obtain an asset of a similar value in a similar

economic environment with similar terms and conditions. Lease payments to be made under

reasonably certain extension options are also included in the measurement of the liability.

Lease payments are allocated between the liability and finance cost. The finance cost is charged to

profit or loss over the lease term so as to produce a constant period rate of interest on the

remaining balance of the liability.

The Group measures the associated right-of-use assets at an amount equal to the lease liability at

the date at which the leased asset is made available for use. The right-of-use assets are

subsequently depreciated using the straight-line method from the commencement date to the

earlier of the end of the useful life of the right-of-use asset or the end of the lease term.

The Group elects not to recognise right-of-use assets and lease liabilities for low value leases or

leases with a term shorter than 12 months. Lease payments relating to these leases are expensed

to profit or loss on a straight-line basis over the lease term.

1.12 Impairment of non-financial assets

Assets that are subject to amortisation are reviewed for impairment whenever events or changes in

circumstances indicate that the carrying amount may not be recoverable. An impairment loss is

recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount.

The recoverable amount is the higher of an asset’s fair value less costs to sell and v

alue in use. For

the purposes of assessing impairment, assets are grouped at the lowest levels for which there are

separately identifiable cash flows (cash-generating units). The impairment test can also be

performed on a single asset when the fair value less cost to sell or the value in use can be

determined reliably.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Summary of material accounting policies

- continued

1.13 Current and deferred tax

The tax expense for the period comprises current and deferred tax. Tax is recognised in profit or

loss, except to the extent that it relates to items recognised in other comprehensive income or

directly in equity. In this case, the tax is also recognised in other comprehensive income or directly

in equity, respectively.

The current income tax charge is calculated on the basis of the tax laws enacted or substantively

enacted at the end of the reporting period.

Deferred tax is recognised, using the liability method, on temporary differences arising between the

tax bases of assets and liabilities and their carrying amounts in the financial statements. However,

deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill;

deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a

transaction other than a business combination that at the time of the transaction affects neither

accounting nor taxable profit or loss. Deferred tax is determined using tax rates (and laws) that

have been enacted or substantially enacted by the end of the reporting period and are expected to

apply when the related deferred tax asset is realised or the deferred tax liability is settled.

Deferred tax assets are recognised only to the extent that it is probable that future taxable profit will

be available against which the temporary differences can be utilised.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset

current tax assets against current tax liabilities and when the deferred tax assets and liabilities

relate to income taxes levied by the same taxation authority on either the same taxable entity or

different taxable entities where there is an intention to settle the balances on a net basis.

1.14 Financial liabilities

1.14.1 Initial recognition and measurement

The Group recognises a financial liability on its consolidated statement of financial position when it

becomes a party to the contractual provisions of the instrument. Financial liabilities not at fair value

through profit or loss are recognised initially at fair value, being the fair value of consideration

received, net of transaction costs that are directly attributable to the acquisition or the issue of the

financial liability.

Financial liabilities are classified as subsequently measured at amortised cost, except for:

•

financial liabilities at fair value through profit or loss: this classification is applied to derivatives,

financial liabilities held for trading (e.g. short positions in the trading booking) and other

financial liabilities designated as such at initial recognition. Gains or losses on financial

liabilities designated at fair value through profit or loss are presented partially in other

comprehensive income (the amount of change in the fair value of the financial liability that is

attributable to changes in the credit risk of that liability, which is determined as the amount that

is not attributable to changes in market conditions that give rise to market risk) and partially

profit or loss (the remaining amount of change in the fair value of the liability). This is unless

such a presentation would create, or enlarge, an accounting mismatch, in which case the

gains and losses attributable to changes in the credit risk of the liability are also presented in

profit or loss; and

•

financial guarantee contracts and loan commitments.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Summary of material accounting policies

- continued

1.14.2 Classification and subsequent measurement

Financial liabilities measured at amortised cost comprise principally borrowings, derivative

liabilities, amounts owed to banks, amounts owed to customers, and other liabilities.

1.14.3 Derecognition

The Group derecognises a financial liability from its consolidated statement of financial position

when the obligation specified in the contract or arrangement is discharged, is cancelled or expires.

The exchange between the Group and its original lenders of debt instruments with substantially

different terms, as well as substantial modifications of the terms of existing financial liabilities, are

accounted for as an extinguishment of the original financial liability and the recognition of a new

financial liability. The terms are substantially different if the discounted present value of the cash

flows under the new terms, including any fees paid net of any fees received and discounted using

the original effective interest rate, is at least 10% different from the discounted present value of the

remaining cash flows of the original financial liability.

In addition, other qualitative factors, such as the currency that the instrument is denominated in,

changes in the type of interest rate, new conversion features attached to the instrument and change

in covenants are also taken into consideration. If an exchange of debt instruments or modification of

terms is accounted for as an extinguishment, any costs or fees incurred are recognised as part of

the gain or loss on the extinguishment. If the exchange or modification is not accounted for as an

extinguishment, any costs or fees incurred adjust the carrying amount of the liability and are

amortised over the remaining term of the modified liability.

1.15 Contingent liabilities

A contingent liability is:

(a) a possible obligation that arises from past events and whose existence will be confirmed only

by the occurrence or non-occurrence of one or more uncertain future events not wholly within

the control of the entity; or

(b) a present obligation that arises from past events but is not recognised because: (i) it is not

probable that an outflow of resources embodying economic benefits will be required to settle

the obligation; or is not probable that an outflow of resources embodying economic benefits will

be required to settle the obligation; or (ii) the amount of the obligation cannot be measured with

sufficient reliability.

Contingent liabilities are not recognised but are disclosed unless the possibility of an outflow of

resources embodying economic benefits is remote.

1.16 Interest income and expense

Interest income and expense for all interest-bearing financial instruments are recognised within

‘Interest income’ and ‘Interest expense’ in the profit or loss using the effective interest method. The

effective interest method is a method of calculating the amortised cost of a financial asset or a

financial liability and of allocating the interest income or interest expense over the relevant period.

The effective interest rate is the rate that exactly discounts estimated future cash payments or

receipts through the expected life of the financial asset or financial liability to the gross carrying

amount of a financial asset (i.e. its amortised cost before any impairment allowance) or to the

amortised cost of a financial liability.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Summary of material accounting policies

- continued

1.16 Interest income and expense

- continued

The calculation does not consider expected credit losses and includes transaction costs, premiums

or discounts and fees and points paid or received that are integral to the effective interest rate,

such as origination fees.

1.17 Fee and commission income and expense

Fees and commission income and expenses that are integral to the effective interest rate on a

financial asset or liability are included in the measurement of the effective interest rate.

Other fees and commission income, including account servicing fees and property management

fees are recognised in the accounting period in which the services are rendered. For fixed-price

contracts, revenue is recognised based on the actual service provided to the end of the reporting

period as a proportion of the total services to be provided because the customer receives and uses

the benefits simultaneously.

Where the contracts include multiple performance obligations, the transaction price will be allocated

to each performance obligation based on the stand-alone selling prices. Where these are not

directly observable, they are estimated based on expected cost-plus margin.

Estimates of revenues, costs or extent of progress toward completion are revised if circumstances

change. Any resulting increases or decreases in estimated revenues or costs are reflected in profit

or loss in the period in which the circumstances that give rise to the revision become known by

management.

In case of fixed-price contracts, the customer pays the fixed amount based on a payment schedule.

If the services rendered exceed the payment, a contract asset is recognised. If the payments

exceed the services rendered, a contract liability is recognised.

1.18 Rental income

Rental income from investment property

Rental income from investment property is recognised in profit or loss on a straight-line basis over

the term of the lease.

1.19 Dividend income

Dividend income is recognised when the right to receive payment is established.

1.20 Other operating income

Other operating income is recognised on an accrual basis unless collectability is in doubt.

1.21 Cash and cash equivalents

Cash and cash equivalents are carried in the statements of financial position at face value less

expected credit loss allowances. In the statements of cash flows, cash and cash equivalents

include cash in hand, deposits held at call with banks and other financial institutions and other

short-term highly liquid investments with original maturities of three months or less.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Summary of material accounting policies

- continued

1.22 Segment reporting

The Group determines and presents operating segments based on the information that internally is

provided to the Board of Directors of the parent company, which is the Grou

p’s chief operating

decision-maker in accordance with the requirements of IFRS 8, Operating Segments.

An operating segment is a component of the Group that engages in business activities from which it

may earn revenues and incur expenses, including revenues and expenses that relate to transactions

with any of the Group’s other components, and for which discrete financial information is available.

Financial risk management

2.1 Introduction

The Group’s activities expose it to a variety of financial risks and these activities involve the

analysis, evaluation, acceptance and management of some degree of risk or combination of risks.

The Group’s aim is to achieve an appropriate balance between r

isk and return and minimise

potential adverse effects on the entity’s financial performance.

The Board of Directors oversees credit, market, funding and liquidity, operational and strategic

business risks. The Group has developed an integrated risk management framework to identify,

assess, manage and report risks and risk adjusted returns.

The Group

’s risk management policies are designed to identify and analyse risks, to set appropriate

risk limits and controls, and to monitor the risks and adherence to limits by means of reliable and

up-to-date information systems. The Board is responsible for the overall effectiveness of the risk

management function, which function is however carried out by all the members of the Group

’s

management.

2.2 Credit Risk

2.2.1 Introduction

The Group takes on exposure to credit risk, which is the risk that a counterparty will cause a

financial loss for the Group by failing to discharge an obligation. Credit risk is the most important

risk for the Group’s business

, accordingly, management carefully manages its exposure to this risk.

Credit exposures arise principally through the Group’s participation in credit loan

and receivables

transactions, mainly with Scully Royalty Group and also with third parties

, through the Group’s

transactions with correspondent banks, and through its investments in debt securities and other

exposures arising from its investing activities.

2.2.2 Credit risk measurement

The measurement of credit exposure for risk management purposes considers that an exposure

varies with changes in market conditions, expected cash flows and the passage of time. The

assessment of credit risk of a portfolio of assets entails further estimations as to the likelihood of

defaults occurring, of the associated loss ratios and of default correlations between counterparties.

The Group measures credit risk using Probability of Default (‘PD’), Exposure at Default (‘EAD’) and

Loss Given Default (‘LGD’).

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.2 Credit Risk

- continued

2.2.2 Credit risk measurement

- continued

The measurement of credit exposure for risk management purposes considers that an exposure

varies with changes in market conditions, expected cash flows and the passage of time. The

assessment of credit risk of a portfolio of assets entails further estimations as to the likelihood of

defaults occurring, of the associated loss ratios and of default correlations between counterparties.

The Group measures credit risk using Probability of Default (

‘

’

), Exposure at Default (

‘

EAD

’

) and

Loss Given Default (

‘

LGD

’

The Group’s financial assets primarily comprise

the following three portfolios upon which credit risk

is assessed: investments in debt securities, loans and advances to banks and other financial

institutions, loans and advances to customers and receivables from related parties. Where

published ratings are issued by external rating agencies, such as Standard & Poor’s, Fitch and

Moody’s,

the Group refers to such ratings to determine the probability of default of individual

counterparties. Where published ratings are not available, a credit risk modelling solution

developed by an external vendor, is used to determine implied credit ratings. Implied credit ratings

are determined on the basis of exposure-specific characteristics, including financial performance

and qualitative characteristics captured through a scorecard. The implied ratings are calibrated with

the rating scales as defined by the recognised external rating agencies, which in turn allow for the

determination of the probability of default attributable to each individual unrated counterparty.

In determining the probability of default of individual counterparties, the Group distinguishes

between exposures considered ‘investment

grade’ defined by recognised external rating agencies

as a rating between AAA to BBB-

(Standard & Poor’s, Fitch) and Aaa to Baa3 (Moody’s), and ‘non

investment grade’ exposures.

2.2.3 Expected credit loss (ECL) measurement

IFRS 9 outlines a 'three-stage' model for impairment based on changes in credit quality since initial

recognition as summarised below:

A financial instrument that is not credit-impaired on initial recognition is classified in 'Stage

1' and has its credit risk continuously monitored by the Group.

ii.

If a significant increase in credit risk ('SICR') since initial recognition is identified, the

financial instrument is moved to 'Stage 2' but is not yet deemed to be credit - impaired.

Please refer to Note 2.2.3.1 for a description of how the Group determines when a

significant increase in credit risk has occurred.

iii.

If the financial instrument is credit-impaired, the financial instrument is then moved to

'Stage 3'. Please refer to Note 2.2.3.2 for a description of how the Group defines credit-

impaired and default.

iv.

Financial instruments in ‘Stage 1’ have their ECL measured at an amount equal to the

portion of lifetime expected credit losses that result from default events possible within the

next 12 months. Instruments in ‘Stage 2’ or ‘Stage 3’ have their ECL measured based on

expected credit losses on a lifetime basis. Please refer to Note 2.2.3.3 for a description of

inputs, assumptions and estimation techniques used in measuring the ECL.

A pervasive concept in measuring ECL in accordance with IFRS 9 is that it should consider

forward looking information. Note 2.2.3.4 includes an explanation of how the Group has

incorporated this in its ECL models.

vi.

Purchased or originated credit-impaired financial assets are those financial assets that are

credit-impaired on initial recognition. Their ECL is always measured on a lifetime basis

(‘Stage 3’).

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.2 Credit Risk

- continued

2.2.3 Expected credit loss (ECL) measurement

- continued

The expected credit loss requirements apply to financial assets measured at amortised cost and

FVOCI, and certain loan commitments and financial guarantee contracts. At initial recognition, an

impairment allowance (or provision in the case of commitments and guarantees) is required for ECL

resulting from default events that are possible within the next 12 months (“12

month ECL”). In the

event of a significant increase in credit risk, an allowance (or provision) is required for ECL resulting

from all possible default events over the expected life of the financial instrument (“lifetime ECL”).

Financial assets where 12-

month ECL is recognised are considered ‘Stage 1’. Financial assets

which are considered to have experienced a significant increase in credit risk would be classified as

‘Stage 2’ and financial assets for which there is objective evidence of impairment, thus considered

to be in default or otherwise credit-

impaired, would be classified as ‘Stage 3’

The Group recognises loss allowances at an amount equal to 12-month ECL for debt securities

measured at amortised cost and FVOCI and counterparty banks that are determined to have low

credit risk at the reporting date. The Group considers a debt security to have low credit risk when it

is considered ‘investment

grade’, defined by recognised external rating agencies as a rating

between AAA to BBB-

(Standard & Poor’s and Fitch) and Aaa

Baa3 (Moody’s).

2.2.3.1 Significant increase in credit risk

The Group

’s assessment to determine the extent of increase in credit risk of a financial instrument

since initial recognition is performed by considering the change in the risk of default occurring over

the remaining life of the financial instrument.

To determine whether the credit risk (i.e. risk of default) on a financial instrument has increased

significantly since initial recognition, the Group considers reasonable and supportable information

that is relevant and available without undue cost or effort, including both quantitative and qualitative

information. Such analysis is based on the Group

’s historical experience, credit assessment and

forward-looking information.

A backstop is applied and the financial instrument considered to have experienced a significant

increase in credit risk if the counterparty is more than 30 days past due on its contractual

repayments.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.2 Credit risk

- continued

2.2.3 Expected credit loss measurement

- continued

2.2.3.2 Definition of default and credit-impaired assets

The Group applies the definition of default in a consistent manner with internal credit risk

management practices for the relevant instruments and the definition considers qualitative and

quantitative factors where appropriate.

The Group defines a financial instrument as in default, which is fully aligned with the definition of

credit-impaired, when it meets one or more of the criteria below.

The Group determines that a financial instrument is credit-impaired (in default and in Stage 3 for

IFRS 9 purposes) by considering relevant objective evidence, when it meets one or more of the

below criteria:

•

contractual payments of either principal or interest are past due for more than 90 days for any

material credit obligations to the Group;

•

there are other indications that the borrower is unlikely to pay such as that a concession has

been granted to the borrower for economic or legal reasons of an enduring nature relating to

the borrower’s financial condition, which indicates the borrower is in

significant financial

difficulty (unlikeliness to pay criteria); and

•

the loan is otherwise considered to be in default. If unlikeliness to pay is not identified at an

earlier stage, it is deemed to occur when an exposure is more than 90 days past due.

Therefore, the definitions of credit-impaired and default are aligned so that Stage 3 represents all

loans which are considered defaulted or credit-impaired.

The default definition has been applied consistently to model the PD, EAD and LGD throughout the

Group's expected loss calculations.

The Group considers certain financial assets, mainly loans and advances to banks and other

financial institutions and investments in debt securities respectively, to be in default when a

payment due (including a coupon payment) is not effected.

In the case of certain portfolio of financial assets (specially loans and advances to banks and other

financial institutions and investment in debt securities), the Group applies the low credit risk

simplification to all its exposur

es considered ‘investment grade’, thus they are not subject to the

SICR assessment. Moving from investment grade does not automatically mean that there is SICR.

2.2.3.3 Measuring ECL

–

Explanation of inputs, assumptions and estimation techniques

The ECL is measured on either a 12-month (12M) or on a lifetime basis depending on whether a

significant increase in credit risk has occurred since initial recognition or whether an asset is

considered to be credit-impaired. Expected credit losses are the discounted product of the PD,

EAD, and LGD. These three components are multiplied together effectively calculating the forward-

looking ECL, which is then discounted back to the reporting date. The discount rate used in the

ECL calculation is the original effective interest rate or an approximation thereof.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.2 Credit risk

- continued

2.2.3 Expected credit loss measurement

- continued

2.2.3.3 Measuring ECL

–

Explanation of inputs, assumptions and estimation techniques

continued

The 12-month ECL is calculated by multiplying the 12-month PD, LGD, and EAD. Lifetime ECL is

calculated on a similar basis for the residual life of the exposure.

The PD, EAD and LGD parameters are estimated through the use of internally developed statistical

models on the basis of market available data, adjusted to reflect forward-looking information as

described below.

The PD represents the likelihood of a borrower defaulting on its financial obligation (as per

"definition of default and credit-impaired" above), either over the next 12 months (

‘

12M PD

’

), or over

the remaining lifetime (

‘

Lifetime PD

’

) of the obligation. Accordingly, the 12-month and lifetime PDs

represent the probability of default occurring over the next 12 months and the remaining maturity of

the instrument, respectively.

Market data is used in order to develop the PDs in respect

of the Bank’s portfolios of financial

assets, including loans and advances to banks and other financial institutions, loans and advances

to customers and investment securities. If a counterparty or exposure migrates between internal

rating grades or external credit ratings, then this will lead to a change in the associated PD. During

the year, the Group has updated its ECL model to use more recent available market data to

develop the PDs in respect of the Group

’s portfolio of financial assets.

The conditional PD is adjusted to consider forward-looking information through macroeconomic

modelling. In this respect, and as described in further detail in section 2.2.3.4., during the year, PDs

used in the calculation of expected credit loss adjustments were re-aligned to reflect the change in

macro-economic variables.

EAD is based on the amounts the Group expects to be owed at the time of default, over the next 12

months (

‘

12M EAD

’

) or over the remaining lifetime (

‘

Lifetime EAD

’

EAD represents the expected exposure in the event of a default (including any expected

drawdowns of committed facilities). The Group derives the EAD from the current exposure to the

counterparty and potential changes to the current amount allowed under the contract. The EAD of a

financial asset is the gross carrying amount at default.

The 12-month and lifetime EADs are determined based on the expected payment profile, which

varies by product type:

•

for amortising products and bullet repayment loans, this is based on the contractual

repayments owed by the borrower over a 12 month or lifetime basis;

•

for revolving products, the exposure at default is predicted by taking current drawn balance

and adding a

“

credit conversion factor

”

which allows for the expected drawdown of the

remaining limit by the time of default. These assumptions vary by product type and current limit

utilisation band, based on analysis of the Group

‘

s recent default data.

The LGD represents the Group

’s expecta

tion of the extent of loss on a defaulted exposure. Hence,

the LGD represents expected credit losses on the EAD given the event of default, taking into

account, among other attributes, the mitigating effect of collateral values (if any) at the time it is

expected to be realised and the time value of money. The LGD is determined based on the factors

which impact the recoveries made post default.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.2 Credit risk

- continued

2.2.3 Expected credit loss measurement

- continued

2.2.3.3 Measuring ECL - Explanation of inputs, assumptions and estimation techniques

continued

Given that its portfolio of loans and advances to banks and other financial institutions and

investments in debt securities is generally unsecured, and in respect of loans and advances to

customers, the Group has no history of defaults, the LGD for the Gro

up’s exposures is set at levels

based on market available data for similar exposure classes.

The ECL is measured from the initial recognition of the financial asset. The maximum period

considered when measuring ECL (be it 12-month or lifetime ECL) is the maximum contractual period

over which the Group is exposed to credit risk. In the case of revolving credit facilities, provided that

such facilities do not have a fixed term or repayment structure, the Group defines the lifetime of such

exposures as 12 months, in case the next substantive credit review is within the next 12 months.

Forward-looking economic information is also included in determining the 12-month and lifetime PD

and LGD. Refer to Note 2.2.3.4 for an explanation of forward-looking information and its inclusion in

ECL calculations.

The calculation of ECL incorporates forward-looking information. The Group performs a historical

analysis to identify the key economic variables affecting credit risk and expected credit losses for

each portfolio. These economic variables and their associated impact on the PD, EAD and LGD

may vary by portfolio.

In this respect, as part of its methodology for the application of forward looking economic

information into the calculation of ECL, the Group has identified key drivers of credit risk and credit

losses for each portfolio of financial instruments (namely, loans and advances to banks and other

financial institutions, loans and advances to customers and investment securities) and, using an

analysis of historical data, has analysed relationships between macro-economic variables, credit

risk and credit losses.

In addition to the updates made by the Group to its model in relation to the market data used in

developing PDs, the Group has also updated its model to factor in updates to macro-economic

variables that consider the current economic environment and forecasts that are based on such

macro-economic variables, including the respective ECL weights to each scenario applied. The key

drivers for 2023 are predominantly real GDP growth rate in the Euro Area and real GDP growth rate

in the US, while for 2022, these were the EEA-average gross domestic product (GDP) at constant

prices, world-average gross domestic product (GDP) at constant prices, and EEA-average terms of

trade of goods and services (ToD).

The impact of these economic variables on the PD, EAD and LGD has been determined by

performing statistical regression analyses to understand the impact changes in these variables

have had historically on default rates and on the components of LGD and EAD.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.2 Credit risk

- continued

2.2.3 Expected credit loss measurement

- continued

2.2.3.4 Forward-looking information incorporated in the ECL model

As at 31 December 2023, two possible are considered to capture non-linearity across credit

portfolios. The ‘Base’ scenario represents the most

-likely outcome. It is based on authoritative

sources forecasting these economic variables referred to above and providing the best estimate

view of the economy. Apart from the base scenario, the Group considers one other macro-

economic scenario

–

‘Downside’ scenario –

which represent a more pessimistic outcome.

The

downside scenario is economically plausible and will not necessarily be as severe as scenarios

used in stress testing.

As at 31 December

2022, three possible scenarios were considered. Apart from the ‘Base’ and

‘Downside’ scenarios, the

Group

also considered an ‘Upside’ scenario which represent a more

optimistic outcome. The upside and downside scenarios are economically plausible and will not

necessarily be as severe as scenarios used in stress testing.

Each scenario is weighted by a probability of occurrence, determined on the basis of expert

judgment. The Group measures ECL as either a probability weighted 12-month ECL (Stage 1), or a

probability weighted lifetime ECL (Stages 2 and 3). These probability-weighted ECLs are

determined by running each scenario through the relevant ECL model and multiplying it by the

appropriate scenario weighting (as opposed to weighting the inputs).

As at 31 December 2023:

Macro-economic	ECL		2023	2024	2025	2026
		Probability
variables	Scenario		(actual)
Real GDP growth	Base	60%	2.01%	1.48%	1.82%	2.06%
rate in the Euro area	Downside	40%		-0.43%	-0.01%	0.16%
Real GDP growth	Base	60%	0.66%	1.23%	1.81%	1.72%
rate in the US	Downside	40%		-1.42%	-0.84%	-0.92%

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.2 Credit risk

- continued

2.2.3 Expected credit loss measurement

- continued

2.2.3.4 Forward-looking information incorporated in the ECL model

- continued

As at 31 December 2022:

Macro-economic	ECL		2022	2023	2024	2025
		Probability
variables	Scenario		(actual)
EEA-average gross	Base	50%	3.60%	1.00%	1.60%	1.60%
domestic product	Upside	25%		1.50%	2.10%	2.10%
(GDP) at constant	Downside	25%		0.50%	1.10%	1.10%
prices
World-average gross	Base	50%	3.19%	2.65%	3.18%	3.35%
domestic product	Upside	25%		3.16%	3.68%	3.86%
(GDP) at constant	Downside	25%		2.16%	2.68%	2.86%
prices
EEA-average terms	Base	50%	4.29%	2.51%	3.66%	3.74%
of trade of goods and	Upside	25%		3.01%	4.16%	4.24%
services (ToD)	Downside	25%		2.01%	3.16%	3.24%

•

The base scenario reflects the current economic condition;

•

The downside scenario is based on subdued economic activity and consequently GDP will

decline by the standard deviation in historical GDP and the forecasts (2022: 50 basis points)

from the base scenario; and

•

As at 31 December 2022, the upside scenario is based on the assumption that economic

recovery will be better than anticipated leading to a 50 basis points improvement in forecasted

GDP and the EEA’s average terms of trade ratio from the base

case.

As at 31 December 2023, the weightings assigned to each economic scenario were 60% for the

base scenario and 40% for the downside scenario while as at 31 December 2022, the weightings

assigned were 50% for the base scenario, 25% for the downside scenario and 25% for the upside

scenario. The number of scenarios and their attributes are reassessed at each reporting date to

ensure that non-linearities are captured.

The Board considers that the above probability weightings assigned to the respective scenarios

reflect an unbiased evaluation of a range of possible outcomes.

As with any macro-economic forecasts, the projections and the likelihood of their occurrence are

subject to a high degree of uncertainty and therefore, the actual outcomes may be significantly

different to those projected. The Group considers these forecasts to represent its best estimate of

the possible outcomes.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.2 Credit risk

- continued

2.2.3.4 Forward-looking information incorporated in the ECL model

- continued

As at 31 December 2023, the sensitivity of the ECL outcome to the economic forecasts were

assessed by recalculating the ECL under the baseline and downside scenarios described above for

the loan portfolios and other receivables, applying a 100% weighting to each scenario.

In this respect, if the ECL outcome was estimated solely on the basis of the base and downside

scenarios respectively, the credit loss allowances in respect of the loan portfolios and other

recei

vables would amount to €

206,256 (2022

: €138,775) and €

308,978 (2022

: €146,778),

compared to a weighted average credit loss allowances estimated at year end amounting to

€

247,345 (2022

: €133,903). In view of this, as at 31 December 202

3, the sensitivity impact was not

considered to be significant.

Other forward-looking considerations not otherwise incorporated within the above scenarios, such

as the impact of any regulatory, legislative or political changes, have also been considered, but are

not deemed to have a material impact and therefore no adjustment has been made to the ECL for

such factors. This is reviewed and monitored for appropriateness on an ongoing basis.

2.2.4 Maximum exposure to credit risk

An ‘exposure’ is defined as the amount at risk arising from the Group’s assets and off

-balance

sheet items. The Group’s maximum credit risk with respect to on

- and off-balance sheet items can

be classified into the following categories:

•

Financial assets recognised on-balance sheet comprising principally investments in debt

securities, loans and advances to banks and other financial institutions and customers and

other receivables. The maximum exposure to credit risk of these financial assets equals their

gross carrying amounts.

•

Loan commitments and other credit related commitments that are irrevocable over the life of

the respective facilities. The maximum exposure to credit risk is the full amount of the

committed facilities. However, the likely amount of loss is less than the total unused

commitments as most commitments to extend credit are contingent upon customers

maintaining specific credit standards. These exposures are monitored in the same manner in

respect of loans and advances.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.2 Credit risk

- continued

2.2.4 Maximum exposure to credit risk

- continued

The following tables set out the Group

’s and Company’s credit risk exposures, reflecting the

maximum exposure to credit risk before collateral held or other credit enhancements, as well as an

analysis by staging classification:

	Group
		2023			2022
	Stage	Gross	ECL	Stage	Gross	ECL
	classification	exposure	allowance	classification	exposure	allowance
		€	€		€	€
Credit risk exposures relating
to on-balance sheet assets:
Financial assets measured as
FVPL:
Non-fixed income securities		1	-		535,215	-
Dispute resolution funding
assets		1	-		1,327,792	-
Loans and advances to
customers		792,600	-		792,600	-
Subject to IFRS 9 impairment
allowances
Financial assets measured at
FVOCI:
Debt securities	Stage 1	6,946,560	(1,987)	Stage 1	18,153,403	(1,843)
Financial assets measured at
amortised cost:
Balances with Central Bank of
Malta	Stage 1	27,978,416	-	Stage 1	14,571,689	-
Loans and advances to banks
and other financial institutions	Stage 1	7,736,740	(23,086)	Stage 1	9,102,628	(45,611)
Loans and advances to
customers	Stage 1	8,675,000	(20,459)	Stage 1	2,650,000	(24,463)
Loans and advances to
customers	Stage 2	4,918,751	(198,593)	Stage 2	10,269,164	(70,106)
Other receivables	Stage 1	16,542,108	(28,293)	Stage 1	12,712,856	(39,334)
Accrued income and other
assets	Stage 1	4,055,503	-	Stage 1	3,188,725	-
Credit risk exposure		77,645,680	(272,418)		73,304,072	(181,357)

	Company
		2023			2022
	Stage	Gross	ECL	Stage	Gross	ECL
	classification	exposure	allowance	classification	exposure	allowance
		€	€		€	€
Credit risk exposures relating
to on-balance sheet assets:
Financial assets measured as
FVPL:
Non-fixed income securities		1	-		535,215	-
Subject to IFRS 9 impairment
allowances
Financial assets measured at
amortised cost:
Loans and advances to banks
and other financial institutions	Stage 1	7,325,442	-	Stage 1	2,781,441	-
Other receivables	Stage 1	19,216,035	(46,190)	Stage 1	22,524,650	(84,797)
Accrued income and other
assets	Stage 1	2,330,854	-	Stage 1	2,035,340	-
Credit risk exposure		28,872,332	(46,190)		27,876,646	(84,797)

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.2 Credit risk

- continued

2.2.4 Maximum exposure to credit risk

- continued

As part of its dispute resolution funding activities, the Group could be a creditor of, and subject to

direct or indirect credit risk from, a claimant, a defendant, both or other parties. Accordingly, dispute

resolution funding assets are considered by the Group to be subject to credit risk.

As at 31 December 2023 and 31 December 2022, there were no purchased or originated credit-

impaired assets which are subject to the IFRS 9 impairment requirements.

2.2.5 Credit risk mitigation techniques

The Group’s approach when granting credit facilities is based on the customer’s capacity to repay

rather than placing primary reliance on credit risk mitigants. Notwithstanding, in certain cases, as

part of the Group’s credit risk mitigation techniques, the Group holds collateral against lo

ans and

advances to customers and other receivables, the nature and level of which generally depends on

the amount of the exposure, the type of facility provided, the term of the facility and the level of

credit risk involved. Collateral utilised to secure loans and advances to customers includes cash

collateral and/or pledged financial instrument in the form of shares. As at 31 December 2023, the

amounts due from the ultimate parent company are secured by a pledge of the common shares of

another related party. As at 31 December 2022, the Group had cash collateral amounting to

€1,100,000 securing receivables purchased from a related party amounting to €

10,269,164.

2.2.6 Credit concentration risk

Within the Group, concentration risk of losses results from inadequate diversification of the credit

exposures. This risk is managed by actively measuring, reporting and monitoring on a regular and

ongoing basis risk concentration levels against reasonable thresholds for counterparties, products,

and territories.

In order to manage its principal risk exposures arising from its financial assets, primarily its loans

and advances to customers, the Group compiles and updates credit review reports in respect of

these financial assets. Where available, reference is also made to external reviews of primary

borrowers.

Credit concentration risk by geographical region

The geographical concentration of the Group

’s

and Company’s

financial assets as at the end of the

reporting period is analysed below. For the purposes of the table below, the Group has allocated

exposures to regions based on the country of domicile of the respective counterparties or

customers.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.2 Credit risk

- continued

2.2.6 Credit concentration risk

- continued

	Group				Company
		Other EU	Rest of			Rest of
	Malta	countries	world	Total	Malta	world	Total
	€	€	€	€	€	€	€
As at 31 December 2023
Financial assets mandatorily measured at FVPL	-	792,601	1	792,602	-	1	1
Financial assets measured at FVOCI	6,946,560	-	-	6,946,560	-	-	-
Balances with Central Bank of Malta	27,978,416	-	-	27,978,416	-	-	-
Loans and advances to banks and
other financial institutions	6,617,620	1,096,034	-	7,713,654	7,325,442	-	7,325,442
Loans and advances to customers	4,720,158	-	8,654,541	13,374,699	-	-	-
Other receivables	2,600	344,266	16,166,949	16,513,815	10,482,685	8,687,160	19,169,845
Accrued income and other assets	212,633	1,035,341	2,807,529	4,055,503	14,063	2,316,791	2,330,854
	46,477,987	3,268,242	27,629,020	77,375,249	17,822,190	11,003,952	28,826,142
As at 31 December 2022
Financial assets mandatorily measured at FVPL	-	2,120,392	535,215	2,655,607	-	535,215	535,215
Financial assets measured at FVOCI	6,712,225	11,441,178	-	18,153,403	-	-	-
Balances with Central Bank of Malta	14,571,689	-	-	14,571,689	-	-	-
Loans and advances to banks and
other financial institutions	6,995,794	2,061,223	-	9,057,017	2,781,441	-	2,781,441
Loans and advances to customers	-	-	12,824,595	12,824,595	-	-	-
Other receivables	2,600	107,306	12,563,616	12,673,522	15,127,702	7,312,151	22,439,853
Accrued income and other assets	99,657	389,911	2,699,157	3,188,725	204,698	1,830,642	2,035,340
	28,381,965	16,120,010	28,622,583	73,124,558	18,113,841	9,678,008	27,791,849

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.2 Credit risk

- continued

2.2.6 Credit concentration risk

- continued

Credit concentration risk by geographical region - continued

As at 31 December 2023 and 2022, the rest of the world exposures mainly consist of exposures in

the Cayman Islands and Canada.

Credit concentration risk by industry sector

Loans and advances to customers, gross of allowances, are analysed by industry concentration as

follows:

	Group
	2023	2022
	€	€
Financial service activities	-	2,650,000
Real estate activities	4,918,751	-
Activities related to mining	8,675,000	10,269,164
	13,593,751	12,919,164

Other receivables, gross of allowances, are analysed by industry concentration as follows:

	Group		Company
	2023	2022	2023	2022
	€	€	€	€
Financial service activities	16,192,945	12,601,641	19,213,435	22,522,050
Management consultancy	224,848	-	-	-
Industrial, commercial and service
companies	124,315	111,215	2,600	2,600
	16,542,108	12,712,856	19,216,035	22,524,650

Credit concentration risk by name

The majority of Group’s and Company’s lending exposures comprised of exposures to entities within

the Scully Royalty Group. As at 31 December 2023, 83.27% (2022: 59.50%) of the Group’s loans

and advances to customers and other receivables is attributable to Scully Royalty Ltd or entities

within the Scully Royalty Group, while 16.73% (2022: 40.50%) is attributable to third parties. Despite,

the high level of exposure towards the Scully Royalty Group, the Group has determined that as at 31

December 2023 and 2022, its exposures are fully performing and do not show any signs of increased

credit risk. As at 31 December 2023, 54.65% (2022: 67.36%) of the Company’s other receivables

relate to receivables from subsidiaries while 45.34% (2022: 32.63%) is attributable to Scully Royalty

Ltd or entities within the Scully Royalty Group.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.2 Credit risk

- continued

2.2.7 Information on credit quality of other financial assets

As part of its treasury management activities, the Group invests in listed sovereign bonds issued by

local and foreign governments, in listed debt securities issued by foreign and local credit institutions

and in other debt securities. These transactions are monitored through the practical use of

exposure limits.

External ratings such as Moody’s ratings or their equivalents are used for monitoring these credit

risk exposures.

At the end of the reporting period, none of the Group’s f

inancial assets which are subject to the

IFRS 9 impairment requirements were past due or impaired.

The following table shows the total carrying amount of debt securities held by the Group analysed

by credit rating based on Moody’s equivalent ratings:

	Central
At 31 December 2023	Government	Institutions	Total
	€	€	€
A1 to A3	6,729,750	-	6,729,750
Not rated	-	216,810	216,810
Total	6,729,750	216,810	6,946,560

	Central
At 31 December 2022	Government	Institutions	Total
	€	€	€
A1 to A3	17,934,403	-	17,934,403
Not rated	-	219,000	219,000
Total	17,934,403	219,000	18,153,403

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.2 Credit risk

- continued

2.2.8 Loss allowances

Reconciliation of 12-month and lifetime ECL provision

The following disclosure provides a reconciliation by stage of the Group’s gross carrying/nominal

amount, including accrued interest receivable and allowances for loans and advances to customers

and other receivables.

Transfers across stages represent the impact of stage transfers upon the gross carrying/nominal

amount and associated allowance for ECL of the financial instruments that are outstanding at the

beginning of the year.

he ‘Net remeasurement of ECL arising from stage transfers’ represents the increase or decrease

in ECL due to moving, for example, from a 12-month (Stage 1) to a lifetime (Stage 2) ECL

measurement basis or vice versa. Net remeasurement excludes the movements resulting from

changes in risk parameters such as changes in PDs and LGDs when compared to those used for

the previous reporting period. This is captured, along with other credit quality movements in the

‘Changes in risk parameters’ line item which shows

the impact of changes in risk parameters in

respect of the allowances specifically for loans and advances to customers outstanding at the

beginning of the year.

The ‘Net new and further lending/repayments’ represent the gross carrying/nominal amount and

associated ECL impact from volume movements within the Group’s lending portfolio, i.e.

originations and repayments during the financial reporting period. Accordingly, loans originated

during the year are classified in the table below using the respective stage classification as at the

end of the reporting period, without the effect of stage transfers from origination. The allowance in

respect of these is included using the current year’s risk parameters, and therefore no such impact

is included within the

‘Changes in risk parameters’ line item. Similarly, stage transfers in respect of

loans and advances originated or repaid during the year are also included within the ‘Net new and

further lending/repayments’ line item.

The movement in ECL is illustrated in the following tables:

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

2. Financial risk management

- continued

2.2 Credit risk

- continued

2.2.8 Loss allowances

- continued

	Group
	Stage 1		Stage 2		Total
	Gross	Allowance	Gross	Allowance	Gross	Allowance
	carrying	for ECL	carrying	for ECL	carrying	for ECL
	amount		amount		amount
	€	€	€	€	€	€
At 31 December 2022	17,614,171	63,797	10,269,164	70,106	27,883,335	133,903
Net new and further lending/(repayments)	9,954,583	39,220	(5,350,413)	(15,623)	4,604,170	23,597
Changes in risk parameters	-	(54,265)	-	144,110	-	89,845
At 31 December 2023	27,568,754	48,752	4,918,751	198,593	32,487,505	247,345
Change in expected credit losses on loans and advances to
customers and other receivables						113,442
Change in expected credit losses attributable to:
Loans and advances to banks and other financial institutions						(22,525)
Financial assets measured at fair value through other
comprehensive income						144
Total expected credit loss charge for the year						91,061

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.2 Credit risk

- continued

2.2.8 Loss allowances

- continued

	Group
	Stage 1		Stage 2		Total
	Gross	Allowance	Gross	Allowance	Gross	Allowance for
	carrying	for ECL	carrying	for ECL	carrying	ECL
	amount		amount		amount
	€	€	€	€	€	€
At 31 December 2021	26,356,287	115,176	-	-	26,356,287	115,176
Net new and further lending/(repayments)	60,250	90	1,466,798	2,928	1,527,048	3,018
Transfers from Stage 1 to Stage 2	(8,802,366)	(51,692)	8,802,366	51,692	-	-
Net remeasurement of ECL arising from stage transfer	-	-	-	15,486	-	15,486
Changes in risk parameters	-	223	-	-	-	223
At 31 December 2022	17,614,171	63,797	10,269,164	70,106	27,883,335	133,903
Change in expected credit losses on loans and advances to
customers and other receivables						18,727
Change in expected credit losses attributable to:
Loans and advances to banks and other financial institutions						8,030
Financial assets measured at fair value through other
comprehensive income						(52)
Undrawn commitments						(700)
Total expected credit loss charge for the year						26,005

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.2 Credit risk

- continued

2.2.8 Loss allowances

- continued

	Company
	Stage 1
	Gross	Allowance
	carrying	for ECL
	amount
	€	€
At 31 December 2022	24,559,990	84,797
Net new and further lending/(repayments)	(3,013,101)	(11,343)
Changes in risk parameters	-	(27,264)
At 31 December 2023	21,546,889	46,190
Change in expected credit losses on other receivables		(38,607)
Total expected credit loss charge for the year		(38,607)
At 31 December 2021	24,907,973	99,677
Net new and further lending/(repayments)	(347,983)	(65)
Changes in risk parameters	-	(14,815)
At 31 December 2022	24,559,990	84,797
Change in expected credit losses on other receivables		(14,880)
Total expected credit loss charge for the year		(14,880)

There were no stage transfers during 2023 and 2022.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.3 Market risk

The Group takes on exposure to market risk, which is the risk that the fair value or future cash flows

of a financial instrument will fluctuate because of changes in market prices. Market risks arise from

open positions in interest rate and currency products, all of which are exposed to general and

specific market movements and changes in the level of volatility of market rates or prices such as

interest rates, credit spreads, foreign exchange rates and equity prices.

(a) Foreign exchange risk

The Group takes on exposure to the effects of fluctuations in the prevailing foreign currency

exchange rates on its financial position and cash flows. Foreign exchange risk is the risk to

earnings and value caused by a change in foreign exchange rates. Foreign exchange risk arises

when financial assets or liabilities are denominated in currencies which are different from the

respective group entity

’s functional currency.

The Group manages its currency risk on an ongoing basis by ensuring that foreign currency

liabilities are utilised to fund assets denominated in the same foreign currency thereby matching

asset and liability positions as much as is practicable. To the extent that such matching is not

possible, the Group hedges its open foreign exchange exposures by entering into foreign exchange

forward contracts with terms matching those of the hedged items.

The following tables summarise the Group

’s exposure to foreign currency

risk at 31 December.

Included in the tables are the Group

’s financial instruments at carrying amounts, categorised by

currency.

	Group
	EUR	USD	CAD	GBP	Total
	€	€	€	€	€
As at 31 December 2023
Financial assets
Financial assets measured at FVPL	792,601	267,180	-	1	1,059,782
Financial assets measured at FVOCI	6,946,560	-	-	-	6,946,560
Balances with Central Bank of Malta	17,878,869	9,405,845	693,702	-	27,978,416
Loans and advances to banks and
other financial institutions	7,245,436	422,884	44,629	705	7,713,654
Loans and advances to customers	13,374,699	-	-	-	13,374,699
Other receivables	13,703,522	2,810,293	-	-	16,513,815
Accrued income and other assets	4,035,750	18,490	1,263	-	4,055,503
Total financial assets	63,977,437	12,924,692	739,594	706	77,642,429
Financial liabilities
Borrowings	24,686,800	-	-	-	24,686,800
Lease liabilities	168,809	-	-	-	168,809
Amounts owed to banks	4,965,600	-	-	-	4,965,600
Amounts owed to customers	8,997,267	9,630,493	711,357	91,644	19,430,761
Other liabilities	1,170,300	-	-	-	1,170,300
Total financial liabilities	39,988,776	9,630,493	711,357	91,644	50,422,270
Net on-balance sheet position	23,988,661	3,294,199	28,237	(90,938)

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.3 Market risk

- continued

(a) Foreign exchange risk

- continued

	Group
	EUR	USD	CAD	GBP	Total
	€	€	€	€	€
As at 31 December 2022
Financial assets
Financial assets measured at FVPL	2,120,392	3,017,180	-	535,215	5,672,787
Financial assets measured at FVOCI	18,153,403	-	-	-	18,153,403
Balances with Central Bank of Malta	5,825,647	8,107,416	638,626	-	14,571,689
Loans and advances to banks and
other financial institutions	8,181,740	604,977	268,208	2,092	9,057,017
Loans and advances to customers	2,625,537	-	10,199,058	-	12,824,595
Other receivables	12,673,522	-	-	-	12,673,522
Accrued income and other assets	3,187,703	955	67	-	3,188,725
Total financial assets	52,767,944	11,730,528	11,105,959	537,307	76,141,738
Financial liabilities
Borrowings	24,580,198	-	-	-	24,580,198
Lease liabilities	330,589	-	-	-	330,589
Amounts owed to banks	4,966,000	-	-	-	4,966,000
Amounts owed to customers	12,805,290	8,135,388	83,565	125,273	21,149,517
Other liabilities	1,287,847	-	-	-	1,287,847
Total financial liabilities	43,969,924	8,135,388	83,565	125,273	52,314,151
Net on-balance sheet position	8,798,020	3,595,140	11,022,394	412,034

As at 31 December 2022, the net exposure to foreign exchange rates arose principally in respect of

loans and advances to customers attributable to receivables purchased from a related party which

are denominated in CAD. The seller of the receivables was however liable to settle any shortfalls

from foreign exchange currency movements between CAD and EUR, effectively eliminating the

Group’s foreign exchange risk on such transaction. The residual net exposure in CAD

was not

deemed material.

In addition, the net unhedged on-balance sheet exposure to other currencies such as the USD, as

at 31 December 2023 and 2022, is not considered significant taking into account the amounts

reported in the statement of financial position. Accordingly, a sensitivity analysis for foreign

exchange risk disclosing how profit or loss and equity would have been affected by changes in

foreign exchange rates that were reasonably possible at the end of the reporting period is not

deemed necessary since the directors are of the opinion that the net impact would be insignificant.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.3 Market risk

- continued

(a) Foreign exchange risk

- continued

Typically, the Company does not take on any exposure to foreign currency transactions. As at 31

December 2023, the Company

’s

exposure to foreign currencies comprises investment in securities

of a related party denominated in USD amounting to

€267,180

(2022

: €267,180)

. As at 31

December 2022

, the Company’s exposure to foreign currencies also include

non-fixed income

securities issued by a third party denominated in GBP

amounting to €535,215

. In view of this, as at

31 December 2023 and 2022, the impact of changes in foreign exchange rates was not considered

to be significant in the

context of the size of the Company’s assets

(b) Interest rate risk

Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will

fluctuate because of changes in market interest rates either through the re-pricing of floating rate

instruments or through the maturity and replacement of fixed rate instruments. Fair value interest

rate risk is the risk that the value of a fixed rate financial instrument will fluctuate because of

changes in market interest rates.

The Group’s exposures analysed by their fixed or f

loating nature

as at 31 December at carrying amounts are shown below:

		Group
	Floating	Fixed
	rates	rates	Total
	€	€	€
At 31 December 2023
Interest-bearing assets
Financial assets measured at FVPL:
Loans and advances to customers	-	792,600	792,600
Financial assets measured at FVOCI:
Debt securities	-	6,946,560	6,946,560
Financial assets measured at amortised cost:
Balances with Central Bank of Malta	17,878,869	10,099,547	27,978,416
Loans and advances to banks and other financial
institutions	4,976,860	-	4,976,860
Loans and advances to customers	13,374,699	-	13,374,699
Other receivables	-	13,337,023	13,337,023
	36,230,428	31,175,730	67,406,158
Interest-bearing liabilities
Borrowings	-	24,686,800	24,686,800
Lease liabilities	-	168,809	168,809
	-	24,855,609	24,855,609
Net exposure	36,230,428	6,320,121	42,550,549

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.3 Market risk

- continued

(b) Interest rate risk

- continued

	Group
	Floating	Fixed
	Rates	rates	Total
	€	€	€
At 31 December 2022
Interest-bearing assets
Financial assets measured at FVPL:
Loans and advances to customers	-	792,600	792,600
Financial assets measured at FVOCI:
Debt securities	-	18,153,403	18,153,403
Financial assets measured at amortised cost:
Balances with Central Bank of Malta	5,825,647	8,746,042	14,571,689
Loans and advances to banks and other financial
institutions	4,930,069	-	4,930,069
Loans and advances to customers	-	12,824,595	12,824,595
Other receivables	-	10,514,702	10,514,702
	10,755,716	51,031,342	61,787,058
Interest-bearing liabilities
Borrowings	-	24,580,198	24,580,198
Lease liabilities	-	330,589	330,589
	-	24,910,787	24,910,787
Net exposure	10,755,716	26,120,555	36,876,271

As at 31 December 2023 and 2022, the remaining balance in respect of financial asset measured at

FVPL, loans and advances to banks and other financial institutions, other receivables, amounts

owed to customers and other liabilities are non-interest bearing and accordingly are not included in

the above tables. Amounts owed to banks as at 31 December 2023 and 2022 are non-interest

bearing and are not included in the above.

Financial instruments issued at fixed rates potentially expose the Group to fair value interest rate

risk. Balances with Central Bank of Malta, loans and advances to banks and customers, other

receivables, and borrowings are measured at amortised cost and are therefore not subject to fair

value interest rate risk, even though a substantial part of these instruments are subject to fixed

interest rates.

The Group’s instruments which are subject to fixed interest rates

and that are fair valued comprise

the

Group’s

investments in debt securities

amounting to €

6,946,560

(2022: €18,153,403)

. This

exposes the Group to the risk of losses arising from fair value interest rate risk.

Using sensitivity analyses, by performing a full revaluation of the portfolio using an instantaneous

shock which measures the potential loss in market value arising from a 200 basis-point upward

parallel shift in yields, the estimated impact as at 31 December 2023 on the fair valuation of its debt

securities measured at FVOCI

amounts to a loss of €0.23m (2022: €0.45m).

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.3 Market risk

- continued

(b) Interest rate risk

- continued

Financial assets and liabilities issued at variable rates expose the Group to cash flow interest rate

risk. The Group is exposed to cash flow interest rate risk principally in respect of financial assets

that were subject to floating interest rates as well as those fixed rate financial instruments that

mature in the short-term.

In this respect, at the end of the reporting period, if interest rates had increased/decreased by 1%

(assuming a parallel shift of 100 basis points in yields) with all other variables held constant, in

particular foreign currency rates, the pre-tax result for the following one year, excluding changes in

fair values, would decrease/increase by

€0.

m (2022: €0.30m).

The Company’s

gross exposures analysed by their fixed or floating nature as at 31 December at

carrying amounts are shown below:

	Company
	Floating	Fixed
	Rates	rates	Total
	€	€	€
At 31 December 2023
Interest-bearing assets
Loans and advances to banks and other financial
institutions	-	1,800,000	1,800,000
Amounts due from the ultimate parent company	-	5,866,730	5,866,730
Amounts due from subsidiaries	-	9,479,807	9,479,807
	-	17,146,537	17,146,537
Interest-bearing liabilities
Borrowings	-	24,686,800	24,686,800
Lease liabilities	-	168,809	168,809
	-	24,855,609	24,855,609
Net exposure	-	(7,709,072)	(7,709,072)

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.3 Market risk

- continued

(b) Interest rate risk

- continued

	Company
	Floating	Fixed
	rates	rates	Total
	€	€	€
At 31 December 2022
Interest-bearing assets
Loans and advances to banks and other financial
institutions	-	2,000,000	2,000,000
Amounts due from the ultimate parent company	-	5,854,702	5,854,702
Amounts due from subsidiaries	-	13,953,228	13,953,228
	-	21,807,930	21,807,930
Interest-bearing liabilities
Borrowings	-	24,580,198	24,580,198
Lease liabilities	-	330,589	330,589
	-	24,910,787	24,910,787
Net exposure	-	(3,102,857)	(3,102,857)

As at 31 December 2023 and 2022

, ‘Loans and advances to banks and other financial institutions’

of the Company consist of term deposits held with its subsidiary which are subject to a 0.10% fixed

interest rate.

As at 31 December 2023

, ‘Amounts due from subsidiaries’ consist of subordinated loans

with a

gross amount of

€9,500,000 (2022: €

14,000,000) bearing interest at fixed rates. As at 31 December

2023 and 2022,

‘Amounts due from the ultimate parent company’ include

a revolving credit facility

granted by the Company amounting to €5,892,727 which is subject to a fixed interest rate.

As at 31

December 2023 and 2022

, the Company’s ‘Borrowings’ include €25 million Secured Bonds which

are subject to 4% fixed interest rate. These instruments are carried at amortised cost.

In the context of the above, the Company’s exposure to interest rate risk as at 31 December 202

and 2022 is not considered significant. Accordingly, a sensitivity analysis disclosing how profit or

loss and equity would have been affected by changes in interest rates that were reasonably

possible at the end of the reporting period is not deemed necessary.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

–

continued

2.3 Market risk

–

continued

(b) Interest rate risk

–

continued

The following tables

includes the Group’s principal financial instruments at carrying amounts,

categorised by re-

pricing dates, taking cognisance of the instruments’ interest rate terms.

The re-

pricing period in respect of t

he Group’s interest

-bearing assets and liabilities subject to fixed interest

rates is equivalent to the remaining period to maturity.

	Group
		Within
		three	Within one
	Within	months but	year but
	one	over one	over three	More than
	month	month	Months	one year	Total
	€	€	€	€	€
As at 31 December 2023
Financial assets
Financial assets measured at
FVPL	-	-	792,600	-	792,600
Financial assets measured at
FVOCI	-	-	1,964,600	4,981,960	6,946,560
Balances with Central Bank of Malta	27,978,416	-	-	-	27,978,416
Loans and advances to banks
and other financial institutions	-	4,976,860	-	-	4,976,860
Loans and advances to customers	3,851,581	868,577	8,654,541	-	13,374,699
Other receivables	10,526,730	-	-	2,810,293	13,337,023
	42,356,727	5,845,437	11,411,741	7,792,253	67,406,158
Financial liabilities
Borrowings	-	-	-	24,686,800	24,686,800
Lease liabilities	43,745	-	125,064	-	168,809
	43,745	-	125,064	24,686,800	24,855,609
Interest rate gap	42,312,982	5,845,437	11,286,677	(16,894,547)
Cumulative gap	42,312,982	48,158,419	59,445,096	42,550,549

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

–

continued

2.3 Market risk

–

continued

2.4

Interest rate risk

–

continued

	Group
		Within
		three	Within one
	Within	months but	year but
	one	over one	over three	More than
	month	month	months	one year	Total
	€	€	€	€	€
As at 31 December 2022
Financial assets
Financial assets measured at	-	-	-	792,600	792,600
FVPL
Financial assets measured at
FVOCI	-	-	11,441,178	6,712,225	18,153,403
Balances with Central Bank of Malta	14,319,254	252,435	-	-	14,571,689
Loans and advances to banks
and other financial institutions	-	4,930,069	-	-	4,930,069
Loans and advances to customers	-	5,296,063	7,528,532	-	12,824,595
Other receivables	10,514,702	-	-	-	10,514,702
	24,833,956	10,478,567	18,969,710	7,504,825	61,787,058
Financial liabilities
Borrowings	-	-	-	24,580,198	24,580,198
Lease liabilities	39,162	-	122,618	168,809	330,589
	39,162	-	122,618	24,749,007	24,910,787
Interest rate gap	24,794,794	10,478,567	18,847,092	(17,244,182)
Cumulative gap	24,794,794	35,273,361	54,120,453	36,876,271

The Group’s and the Company’s

exposure to equity securities price risk arises from investments

held by the Group measured at FVPL, which as at 31 December 2023 included equity securities

issued by

a related party valued at €

267,180 (2022

: €

3,017,180)

for the Group and €

267,180

(2022

: €

267,180) for the Company. In view of the carrying amount of these investments in the

context

of the Group’s and Company’s

total assets, the directors have determined that the

exposure to price risk from these investments is not considered significant. Accordingly, a

sensitivity analysis for equity price risk disclosing how profit or loss and equity would have been

affected by changes in variables that would impact the value of these instruments at the end of the

reporting period is not deemed necessary, as the directors are of the opinion that the net impact

would be insignificant.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

–

continued

2.5 Other risk attributable to financial assets that are mandatorily measured at FVPL

The

Group’s

financial instruments that are mandatorily measured at fair value through profit or loss

comprise of:

•

The Group’s equity investment in the ordinary shares issued by a related party;

•

A loan that has a profit participation feature enabling the Group to participate in any profit

earned as a result of the activity being financed;

•

Direct dispute resolution funding assets; and

•

Debt-like instruments issued by special purpose vehicles set up specifically to finance certain

dispute resolution claims.

The Group’s equity investment is exposed to equity price risk, as referred to within part

2.3 Market risk.

The loan with a profit participation feature is exposed to both credit risk as well as interest rate risk,

by virtue of a fixed interest rate element within the contractual agreement. These risks are

assessed as part of the

Group’s

credit risk and interest rate risk management frameworks and

considered within the respective disclosures in sections 2.2 and 2.3 respectively. In addition, the

Group is also exposed to model risk, which is the potential for adverse consequences from

business decisions informed by models.

Funding of legal claims is undertaken by the Group both directly, in which the Group, through its

subsidiary Merkanti Diesel Limited, provides financing to a portfolio of clients to fund costs

associated with opening legal claims against defendants, and indirectly, in which the Group

subscribes to securities issued by special purpose vehicles set up specifically to finance certain

dispute resolution claims. In order to manage this risk, the Group typically seeks to provide

financing for groups of homogenous cases thereby ensuring that its risk is adequately diversified,

leading to a lower risk of loss generally associated with multi-case portfolios. In addition, the Group

seeks to finance cases that have relatively short tenors, which are typically are settled within one or

two years.

As at 31 December 2023, the Group’s direct and indirect investments in dispute

resolution funding assets

have a fair value of €

(2022: €1,863,007)

In this respect, the directors have determined that in view of the immateriality of these assets

relative to the Group’s asset base, the risks described above are not significant. Accordingly, a

sensitivity analysis disclosing the effect of changes to key unobservable inputs is not deemed

necessary by the directors.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.5 Liquidity risk

Liquidity risk is the risk that the Group is unable to meet its payment obligations associated with its

financial liabilities when they fall due and to replace funds when they are withdrawn. The

consequence may be the failure to meet obligations to repay depositors and fulfil commitments.

The Group

manages this risk by maintaining a strong base of shareholders’ capital considering the

stage of its operations. The Group manages its asset base with liquidity in mind and monitors future

cash flows and changes in available liquidity on a regular basis.

The Group holds a diversified portfolio of cash and high-quality highly-liquid securities to support

payment obligations and contingent funding in a stressed market environment. The Group

’s assets

held for managing liquidity risk comprise:

•

short term placements with the Central Bank of Malta; and

•

unencumbered Malta Government stocks amounting to

€

6,946,560 (2022

: €

6,712,225) and as

at 31 December 2022 German treasury bills amounting to

€

11,441,178 that are readily

acceptable as collateral for open market operations with the European Central Bank.

Liquidity is managed by the management of each subsidiary respectively. In the case of Merkanti

Bank, it is managed

by the Bank’s

treasury function through processes which include:

•

day to day funding, managed by monitoring future cash flows to ensure that requirements can

be met including plans for replenishment of funds as they mature;

•

maintaining a portfolio of highly marketable assets that can easily be liquidated as protection

against any unforeseen interruption to cash flow;

•

monitoring the liquidity ratios underlying the statements of financial position against internal

and regulatory requirements as applicable; and

•

managing the concentration and profile of debt maturities.

Moreover, sources of liquidity are regularly reviewed by the treasury function to maintain a

diversification by provider, product and term. Monitoring takes the form of cash flow projections for

the next day, week and month respectively, as these are key periods for short-term liquidity

management.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.5 Liquidity risk

- continued

The following tables disclose financial assets and liabilities at the end of the reporting period by

remaining period to maturity.

	Group
		Within
		Three	Within one
	Within	months but	year but
	One	over one	over three	More than	No
	Month	Month	months	one year	Maturity	Total
	€	€	€	€	€	€
As at 31 December 2023
Financial assets
Financial assets measured
at FVPL	-	-	792,600	2	-	792,602
Financial assets measured
at FVOCI	-	-	1,964,600	4,981,960	-	6,946,560
Balances with Central
Bank of Malta	27,706,970	-	-	-	271,446	27,978,416
Loans and advances to
banks and other financial
institutions	2,736,794	-	-	4,976,860	-	7,713,654
Loans and advances to
customers	3,851,581	-	-	9,523,118	-	13,374,699
Other receivables	13,703,522	-	-	2,810,293	-	16,513,815
Accrued interest income
and other assets	3,413,070	95,091	547,342	-	-	4,055,503
	51,411,937	95,091	3,304,542	22,292,233	271,446	77,375,249
Financial liabilities
Borrowings	-	-	-	24,686,800	-	24,686,800
Lease liabilities	43,745	-	125,064	-	-	168,809
Amounts owed to
customers	19,215,541	-	215,220	-	-	19,430,761
Amounts owed to banks	-	4,965,600	-	-	-	4,965,600
Other liabilities	615,256	137,088	417,956	-	-	1,170,300
	19,874,542	5,102,688	758,240	24,686,800	-	50,422,270
Maturity gap	31,537,395	(5,007,597)	2,546,302	(2,394,567)
Cumulative gap	31,537,395	26,529,798	29,076,100	26,681,533

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

	Group
		Within
		three	Within one
	Within	months but	year but
	one	over one	over three	More than	No
	month	month	Months	one year	Maturity	Total
	€	€	€	€	€	€
As at 31 December 2022
Financial assets
Financial assets measured
at FVPL	-	-	-	2,655,607	-	2,655,607
Financial assets measured
at FVOCI	-	-	11,441,178	6,712,225	-	18,153,403
Balances with Central
Bank of Malta	14,319,254	-	-	-	252,435	14,571,689
Loans and advances to
banks and other financial
institutions	4,126,948	-	-	4,930,069	-	9,057,017
Loans and advances to
customers	-	5,296,063	7,528,532	-	-	12,824,595
Other receivables	12,673,522	-	-	-	-	12,673,522
Accrued interest income
and other assets	2,194,435	497,500	65,145	431,645	-	3,188,725
	33,314,159	5,793,563	19,034,855	14,729,546	252,435	73,124,558
Financial liabilities
Borrowings	-	-	-	24,580,198	-	24,580,198
Lease liabilities	39,162	-	122,618	168,809	-	330,589
Amounts owed to
customers	19,834,297	-	1,100,000	215,220	-	21,149,517
Amounts owed to banks	-	4,966,000	-	-	-	4,966,000
Other liabilities	946,026	-	341,821	-	-	1,287,847
	20,819,485	4,966,000	1,564,439	24,964,227	-	52,314,151
Maturity gap	12,494,674	827,563	17,470,416	(10,234,681)
Cumulative gap	12,494,674	13,322,237	30,792,653	20,557,972

As at 31 December 2023 and 2022, the remaining balance of financial assets measured at FVPL

relate to equity instruments that are unlisted and have no fixed date of repayment and are

accordingly not included in the tables above.

Financial risk management

- continued

2.5 Liquidity risk

- continued

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.5 Liquidity risk

- continued

	Company
		Within three	Within one
	Within	months but	year but
	one	over one	over three	More than
	month	month	months	one year	Total
As at 31 December 2023	€	€	€	€	€
Financial assets
Financial assets measured at FVPL	-	-	-	1	1
Loans and advances to banks
and other financial institutions	7,325,442	-	-	-	7,325,442
Other receivables	9,690,038	-	-	9,479,807	19,169,845
Accrued interest income and other
assets	2,316,791	14,063	-	-	2,330,854
	19,332,271	14,063	-	9,479,808	28,826,142
Financial liabilities
Borrowings	-	-	-	24,686,800	24,686,800
Lease liabilities	43,745	-	125,064	-	168,809
Other liabilities	248,427	-	342,106	-	590,533
	292,172	-	467,170	24,686,800	25,446,142
Maturity gap	19,040,099	14,063	(467,170)	(15,206,992)
Cumulative gap	19,040,099	19,054,162	18,586,992	3,380,000

	Company
		Within three	Within one
	Within	months but	year but
	one	over one	over three	More than
	month	month	months	one year	Total
As at 31 December 2022	€	€	€	€	€
Financial assets
Financial assets measured at FVPL	-	-	-	535,215	535,215
Loans and advances to banks
and other financial institutions	2,781,441	-	-	-	2,781,441
Other receivables	1,631,924	-	5,854,702	14,953,227	22,439,853
Accrued interest income and other
assets	1,830,642	204,698	-	-	2,035,340
	6,244,007	204,698	5,854,702	15,488,442	27,791,849
Financial liabilities
Borrowings	-	-	-	24,580,198	24,580,198
Lease liabilities	39,162	-	122,618	168,809	330,589
Other liabilities	212,812	-	341,821	-	554,633
	251,974	-	464,439	24,749,007	25,465,420
Maturity gap	5,992,033	204,698	5,390,263	(9,260,565)
Cumulative gap	5,992,033	6,196,731	11,586,994	2,326,429

As at 31 December 2023 and 2022, the

Company’s

financial assets measured at FVPL include

equity instruments that are unlisted and have no fixed date of repayment and are accordingly not

included in the tables above.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.5 Liquidity risk

- continued

The following table analyses the Group

’s principal undiscounted cash flows payable under non

derivative financial liabilities into relevant maturity groupings based on the remaining period at the

end of the reporting period to the contractual maturity date.

	Group
		Within	Within
		three	one
	Within	months but	year but
	one	over one	over three	More than		Carrying
	month	month	Months	one year	Total	amount
	€	€	€	€	€	€
As at 31 December 2023
Borrowings	-	-	657,894	27,000,000	27,657,894	24,686,800
Lease liabilities	44,161	-	127,085	-	171,246	168,809
Amounts owed to
customers	19,215,541	-	215,220	-	19,430,761	19,430,761
Amounts owed to banks	-	4,965,600	-	-	4,965,600	4,965,600
Other liabilities	828,194	-	342,106	-	1,170,300	1,170,300
	20,087,896	4,965,600	1,342,305	27,000,000	53,395,801	50,422,270
As at 31 December 2022
Borrowings	-	-	658,179	29,000,000	29,658,179	24,580,198
Lease liabilities	42,058	-	128,883	171,245	342,186	330,589
Amounts owed to
customers	19,834,297	-	1,100,000	215,220	21,149,517	21,149,517
Amounts owed to banks	-	4,966,000	-	-	4,966,000	4,966,000
Other liabilities	637,375	308,650	341,821	-	1,287,846	1,287,846
	20,513,730	5,274,650	2,228,883	29,386,465	57,403,728	52,314,150

As at 31 December 2023 and 2022

, all of the Group’s assets

, other than investment property which

is pledged in favour of bond holders (Note 21), are available to support potential future funding and

collateral needs.

The

Company’s

principal liabilities comprise borrowings as reflected within the tables above. The

differences between the Company’s lease liabilities and

other liabilities with respect to those of the

Group are deemed immaterial. Accordingly,

the Company’s

undiscounted cash flows payable under

non-derivative financial liabilities analysed into relevant maturity groupings based on the remaining

period at the end of the reporting period to the contractual maturity date are principally reflected in

the tables.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.6 Capital risk management

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a

going concern in order to provide returns for shareholders and benefits for other stakeholders, and

to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust

the capital structure, the Company may issue new shares or adjust the amounts of dividends paid

to shareholders.

The Group monitors the level of capital on the basis of the ratio of borrowings to total capital. Total

borrowings, as shown in the consolidated statement of financial position, consist of the listed bonds

issued to the general public (refer to Note 21). Total capital is the aggregate of total equity, as

reflected in the consolidated statement of financial position, and borrowings. As at 31 December

2023

, the Group’s total borrowings amounted to €25 million

(2022: €25 million)

and its total capital

amounted to

€

81 million

(2022: €7

9 million), consisting of total equity and borrowings. Hence the

Group

’s borrowings/capital ratio at 31 December

2023 to 30% (2022: 31%).

The Group manages the relationship between equity injections and borrowings, being the

constituent elements of capital as reflected above, with a view to managing the cost of capital. The

level of capital, computed by reference to amounts reported in the consolidated statement of

financial position, is maintained taking cognisance of the Group’s respective financial obligations

and commitments arising from operational requirements. In view

of the nature of the Group’s

activities and the extent of borrowings or debt, the capital level at the end of the reporting period

determined by reference to the consolidated financial statements is deemed adequate by the

directors.

One of the Company’s

principal subsidiaries is a credit institution, which is regulated by the Malta

Financial Services Authority. The bank is required to maintain a ratio of total regulatory capital to

risk-

weighted assets (“Capital requirements ratio”) above the prescribed

minimum level at all times.

During the year ended 31 December 2023, the bank has complied with all such externally imposed

regulatory capital requirements.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.8 Fair value of financial instruments and non-financial instruments

Financial instruments measured at fair value

The following table analyses financial instruments that are measured in the consolidated statement

of financial position at fair value, by level of the following fair value measurement hierarchy. The

different levels have been defined as follows:

•

Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).

•

Inputs other than quoted prices included within level 1 that are observable for the asset or

liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2).

•

Inputs for the asset or liability that are not based on observable market data (that is,

unobservable inputs) (level 3). If one or more of the significant inputs is not based on

observable market data, the instrument is included in level 3.

The following table presents the Group

’s financial instruments that are measured at fair value.

	Level 1	Level 2	Level 3	Total
	€	€	€	€
As at 31 December 2023
Assets
Financial assets measured at FVPL:
Non-fixed income instruments	-	-	1	1
Dispute resolution funding assets	-	-	1	1
Equity instruments	-	-	267,180	267,180
Loans and advances to customers	-	-	792,600	792,600
Financial assets measured at FVOCI:
Debt securities	6,946,560	-	-	6,946,560
Total financial assets at fair value	6,946,560	-	1,059,782	8,006,342
As at 31 December 2022
Assets
Financial assets measured at FVPL:
Non-fixed income instruments	-	-	535,215	535,215
Dispute resolution funding assets	-	-	1,327,792	1,327,792
Equity instruments	-	-	3,017,180	3,017,180
Loans and advances to customers	-	-	792,600	792,600
Financial assets measured at FVOCI:
Debt securities	18,153,403	-	-	18,153,403
Total financial assets at fair value	18,153,403	-	5,672,787	23,826,190

31 December 2023, the Company’s financial assets measured at fair value comprise of non

-fixed

income instruments amounting to €1 (2022: €

535,215) and equity instruments amounting to

€267,180 (2022: €267,180) which are

categorised as Level 3 instruments in the fair value hierarchy.

As at 31 December 2023 and 2022, the Group and the Company does not have financial liabilities

measured at fair value.

There were no transfers between levels 1, 2 and 3 during the year.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.8 Fair value of financial instruments and non-financial instruments

- continued

Financial instruments measured at fair value - continued

(a) Financial instruments in level 1

The fair value of financial instruments traded in active markets is based on quoted market prices at

the end of the reporting period. A market is regarded as active if quoted prices are readily and

regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory

agency, and th

ose prices represent actual and regularly occurring market transactions on an arm’s

length basis. The quoted market price used for financial assets held by the Group is the current bid

price.

As at 31 December 2023 and 2022, instruments included in level 1 comprise of debt instruments

issued by the Government of Malta and debt instruments issued by local credit institutions which

are listed on the Malta Stock Exchange.

(b) Financial instruments in level 2

Fair values of instruments included in level 2 are based on quoted prices but in markets that are not

active. As at 31 December 2023 and 31 December 2022, there were no instruments included under

this hierarchy.

Fair values of instruments included in level 3 consist of instruments for which a valuation technique

includes inputs not based on observable data and the unobservable inputs have a significant effect

on the instrument’s valuation. This category includes u

nlisted equity and loans to customers that

have failed the solely payments of principal and interest test and is therefore mandatorily measured

at fair value. They also include dispute resolution funding assets, which represent financing by the

Group to fund a portfolio of homogenous legal cases.

In view of the absence of quoted market prices or observable inputs for modelling value, the fair

value of the instruments held is derived using internal models. Unobservable inputs and

assumptions in respect of the loan and debt securities that have failed the SPPI test include cash

inflows under different scenarios, the timing of such cashflows, the probability outcomes under the

different scenarios and the discount rate.

The fair value of the equity securities held by the Group is derived using the residual income

method. The principal unobservable inputs and assumptions in this regard include the revenue

growth rate over the explicit period, the in-perpetuity growth rate and the discount rate.

The key unobservable inputs with respect to the dispute resolution funding assets and non-fixed

income securities relate to the assumptions in respect of the likelihood of a positive outcome and

the potential settlement value, while the unobservable inputs relating to loans and advances to

customers that are measured at fair value include the timing of cashflows, the probability outcomes

under different scenarios and the discount rate.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.8 Fair value of financial instruments and non-financial instruments

- continued

Financial instruments measured at fair value - continued

The following table presents the changes in level 3 items:

		Dispute
	Non-fixed	resolution		Loans and
	income	funding	Equity	advances to
	securities	assets	instruments	customers	Total
			€	€	€
At 1 January 2022	535,215	1,918,249	3,017,180	792,600	6,263,244
Additions	-	961,131	-	-	961,131
Repayments	-	(1,181,314)	-	-	(1,181,314)
Net movement in fair value	-	(370,274)	-	-	(370,274)
At 31 December 2022	535,215	1,327,792	3,017,180	792,600	5,672,787
At 1 January 2023	535,215	1,327,792	3,017,180	792,600	5,672,787
Additions	-	556,777	-	-	556,777
Disposals	-	-	(2,937,470)	-	(2,937,470)
Repayments	-	(575,080)	-	-	(575,080)
Net movement in fair value	(535,214)	(1,309,488)	187,470	-	(1,657,232)
At 31 December 2023	1	1	267,180	792,600	1,059,782

There were no transfers between different levels of the fair value hierarchy during the years ended

31 December 2023 and 2022.

In view of the immateriality of the Level 3 assets in the context of the Group

’s

and Company’s

balance sheet, the disclosures required in respect of key unobservable inputs to Level 3 financial

instruments and the sensitivity of Level 3 fair values to reasonably possible alternatives in respect

of significant unobservable assumptions was not deemed necessary by the directors.

Financial instruments not measured at fair value

Balances with Central Bank of Malta, loans and advances to banks and financial institutions and

loans and advances to customers as well as other receivables are carried at amortised cost in the

statements of financial position. The directors consider the carrying amounts of such financial

assets to be a reasonable estimate of their fair value principally in view of the relatively short

periods to repricing or maturity from the end of the reporting periods.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.8 Fair value of financial instruments and non-financial instruments

- continued

Financial instruments not measured at fair value - continued

The fair value of the amounts owed to customers and amounts owed to banks at 31 December

2023 and 2022 is also approximately equivalent to their carrying values in view of their short period

to maturity.

With regards to the €25 million 4% Secured

Bonds as disclosed under Note 21, the fair value of

these liabilities as at 31 December 2023

was €

24,725,000 (2022

: €

24,500,000). These estimates

are considered level 1 fair value estimates.

Non-financial instruments measured at fair value

The Group’

s land and buildings within investment property, were revalued on 31 December 2023

and 2022 by an external valuation expert having appropriate recognised professional qualifications

and experience in the location and category of the property being valued.

The directors have reviewed the carrying amounts of the properties as at 31 December 2023 on the

basis of the valuations carried out by the independent property valuers.

Valuations were made on the basis of open market value taking cognisance of the specific location

of the properties, the size of the sites together with their development potential, the availability of

similar properties in the area, and whenever possible, having regard to recent market transactions

for similar properties in the same location.

At 31 December 2023 and 2022

the carrying amounts of the Group’s investment property was

adjusted to reflect the properties’ estimated open market value on an individual asset level.

The Group is required to analyse non-financial assets carried at fair value by level of the fair value

hierarchy within which the recurring fair value measurements are categorised in their entirety (Level

1, 2 or 3). The different levels of the fair value hierarchy have been defined above as fair value

measurements using:

•

Quoted prices (unadjusted) in active markets for identical assets (Level 1);

•

Inputs other than quoted prices included within Level 1 that are observable for the asset, either

directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2); and

•

Inputs for the asset that are not based on observable market data (that is, unobservable inputs)

(Level 3).

Investment property comprises commercial property including offices and industrial premises

leased out to third parties, as well as other parcels of land (both developed and undeveloped). All

the recurring property fair value measurements at 31 December 2023 and 2022 use significant

unobservable inputs and are accordingly categorised within Level 3 of the fair valuation hierarchy.

The Group’s policy is to recognise transfers into and out of fair value hierarchy levels on the date

the event or change in circumstances that causes the transfer occurs. There were no transfers

between different levels of the fair value hierarchy during the years ended 31 December 2023 and

2022.

A reconciliation from the opening balance to the closing balance of investment property for

recurring fair value measurements is reflected in the table in Note 10.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.8

Fair value of financial instruments and non-financial instruments

- continued

Non-financial instruments measured at fair value - continued

Valuation processes

The valuations of the properties are performed annually on the basis of valuation reports prepared

by an independent and qualified valuer. These reports are based on both:

•

information provided by the Group which is derived from the Group’s financial systems and is

subject to the Group’s overall control environment; and

•

assumptions and valuation models used by the valuers - the assumptions are typically market-

related. These are based on professional judgement and market observation.

The information provided to the valuer, together with the assumptions and the valuation models

used by the valuer, are reviewed by the Chief Executive Officer (CEO) of the Company. This

includes a review of fair value movements over the period.

Valuation techniques

The external valuations of the Level 3 investment property have been performed using the

comparative value approach for the purpose of valuing land and using the traditional investment

method of valuation based on the capitalised maintainable income approach for the purpose of

valuing the buildings. The land component of the building is valued using the comparative value

approach. The valuations have been performed using the unobservable inputs described below:

(i)

Comparative value approach for developed and undeveloped land

Comparable land values	derived from the Regional Authorities for Survey and
per sqm	Geoinformation covering Saxony-Anhalt as at 1 January 2022
	(2022: 1 January 2022).
Land specific adjustments	object-specific costs and income affecting the ultimate value of the
	real estate at hand, including decreases in market value of land
	area affected by any form of contamination less the value of the
	land component of the building, as applicable.

(ii)

Capitalised maintainable income approach for buildings

Maintainable income	the maintainable income is equivalent to the expected income
	which the valuer expects the property to generate in the
	foreseeable future, being the gross yield which the property is able
	to generate through contractual agreements less an appropriate
	level of management costs, including: administrative costs,
	maintenance expenses and rental failure costs, deemed necessary
	for the operation of the buildings and adjusted for the profitable
	value of the land. The expected income which the valuer expects
	the property to generate in the foreseeable future is based on the
	market averages attributable within the region of respective
	properties.
Discount rate	the discount rate is based on the property-specific adjusted
	property interest rate.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.8

Fair value of financial instruments and non-financial instruments

- continued

Non-financial instruments measured at fair value - continued

Expected service (useful)	based on the valuer ’ s best estimate of the remaining useful life of
life	the buildings, after taking into consideration the location, the state
	of construction and possible economic utilisation of the buildings.
Land component of the	the land component of the building is valued separately from the
building	building and follows the same valuation approach with the
	developed and undeveloped land.
Building specific	object-specific costs and income affecting the ultimate value of the
adjustments	real estate at hand, including repairs and maintenance costs and
	vacancy costs.

	At 31 December 2023
			Significant	Range of
	Fair value	Valuation	unobservable	unobservable
	€’000	technique	input	inputs
Description by class
Developed and	14,777	Comparative
undeveloped land		value	Comparable land	€10 - €20 per
(excluding land		approach	values per sqm	sqm
component of the building,
if any)
Land specific adjustments	(953)
	13,824
			Maintainable	€ 562,000 -
Buildings - current use as		Capitalised	income	€ 693,000 p.a.
third party offices,		maintainable	Discount rate	Approximately
production and storage	13,616	income		6.75%-7%
facilities		approach	Expected service	10-20 years
			(useful) life
		Comparative
Land component of the	4,098	value	Comparable land	€10 - €20 per
building		approach	values per sqm	sqm
Building specific
adjustments	(1,457)
	16,257
Total fair value	30,081

	At 31 December 2022
			Significant	Range of
	Fair value	Valuation	unobservable	unobservable
	€’000	technique	input	inputs
Description by class
Land (excluding land		Comparative	Comparable land
component of the building,	14,998	value	values per sqm	€10 - €20 per
if any)		approach		sqm
Land specific adjustments	(331)
	14,667
			Maintainable	€ 562,000 -
Buildings - current use as		Capitalised	income	€ 693,000 p.a.
third party offices,	13,689	maintainable	Discount rate	Approximately
production and storage		income		6.75%-7%
facilities		approach	Expected service	10-20 years
			(useful) life
Land component of the		Comparative	Comparable land	€10 - €20 per
building	4,098	value	values per sqm	sqm
		approach
Building specific
adjustments	(1,489)
	16,298
Total fair value	30,965

The higher the maintainable income per annum and the comparable land value per square metre,

the higher the resultant fair valuation. Conversely, the lower the capitalisation rate the higher the

fair value. The highest and best use of the properties reflected in the tables above is equivalent to

their current use.

Critical accounting estimates, and judgments in applying accounting policies

Estimates and judgments are continually evaluated and are based on historical experience and

other factors, including expectations of future events that are believed to be reasonable under the

circumstances.

In the opinion of the directors, the accounting estimates and judgments made in the course of

preparing these financial statements are not difficult, subjective or complex to a degree which would

warrant their description as critical in terms of the requirements of IAS 1.

The directors believe there are no areas involving a higher degree of judgment that have the most

significant effect on the amounts recognised in the financial statements; and there are no key

assumptions and other key sources of estimation uncertainty relating to estimates that require

directors’ most difficult, subjectiv

e or complex judgments.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial risk management

- continued

2.8

Fair value of financial instruments and non-financial instruments

- continued

Non-financial instruments measured at fair value - continued

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Balances with Central Bank of Malta and cash


	Group
	2023	2022
	€	€
Cash in hand	2,055	2,288
Balances held with Central Bank of Malta	27,978,416	14,571,689
	27,980,471	14,573,977

Balances held with Central Bank of Malta include reserve deposits relating to the Minimum Reserve

Requirement in terms of Regulation (EC) No 1745/2003 of the ECB. The average reserve deposit

held for the relevant maintenance period amounted to

€

271,446 (2022

: €

252,435). Deposits with

the Central Bank amounting to

€

17,607,423 (2022

: €

5,573,212) are withdrawable on demand and

were subject to an interest rate of 4% (2022: of 2%) per annum. The remaining deposits of

€10,099,54

(2022: €8,746,042) consisted of money market placements in USD and CAD with a

contractual maturity of less than seven days and with interest rates of up to 5.4% and 3.5% per

annum for USD and CAD respectively.

Loans and advances to banks and other financial institutions


	Group		Company
	2023	2022	2023	2022
	€	€	€	€
Repayable on call and at short notice	2,742,155	4,130,709	5,525,442	781,441
Term loans and advances	4,994,585	4,971,919	1,800,000	2,000,000
Allowances for expected credit losses	(23,086)	(45,611)	-	-
	7,713,654	9,057,017	7,325,442	2,781,441

Term loans and advances of the Group are unsecured, have been granted for an initial period of 18

months and subsequently rolled over for a further 12 months until 26 March 2025, and are subject

to floating interest rates. The loans are designated as lower ranking liabilities as referred to in

regulation 108(4) of the Recovery and Resolution Regulations (Subsidiary Legislation 330.09).

As at 31 December 2023

, the Group’s amounts repayable on call and at short notice

are due from

banks and other financial institutions. Placements with other financial institution amount to

€

1,159,218 (2022

: €1,560,053).

As at 31 December 2023 and 2022, a

ll the Company’s amounts

repayable on call and at short notice are due solely from banks

, of which €5,458,184 (2022:

€755,464) is held with the subsidiary bank. As at 31 December 2023 and 2022, the Company’s term

loans and advances is placed with the subsidiary bank with a contractual maturity of 5 months

(2022: 2 months) and is subject to a fixed interest rate.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Loans and advances to customers


	Group
	2023	2022
	€	€
Gross loans and advances	13,593,751	12,919,164
Allowance for credit losses	(219,052)	(94,569)
Carrying amount as at 31 December	13,374,699	12,824,595

Gross loans and advances to customers as at 31 December 2023 include credit exposures with

related parties amounting to €

8,900,000 (2022

: €

2,650,000). As at 31 December 2022, gross loans

and advances to customers also include credit exposures with related parties amounting to

€

10,269,164 which were attributable to receivables purchased from a related party exposing the

Group to credit risk with respect to a third party.

Movements in expected credit loss allowances during 2023 and 2022 were as follows:


	Group
	2023	2022
	€	€
At beginning of year	94,569	65,695
Change in expected credit losses (Note 33)	124,483	28,874
At end of year	219,052	94,569

Financial assets mandatorily measured at fair value through profit or loss


	Group		Company
	2023	2022	2023	2022
	€	€	€	€
Non-fixed income securities	1	535,215	1	535,215
Dispute resolution funding assets	1	1,327,792	-	-
Equity instruments	267,180	3,017,180	267,180	267,180
Loans and advances to customers	792,600	792,600	-	-
	1,059,782	5,672,787	267,181	802,395

As at 31 December 2023 and 2022,

the Group’s financial instruments that are mandatorily

measured at fair value through profit or loss comprise a fixed interest loan that also has a profit

participation feature that enables the Group to participate in any profit earned as a result of the

activity being financed, and loans advanced to fund dispute resolution claims. As at 31 December

2023 and 2022

, the Group’s financial instruments mandatorily measured at fair value through profit

or loss also included unlisted non-fixed income securities issued by a special purpose vehicle set up

specifically to finance certain dispute resolution claims. They are mandatorily measured at fair value

as they have failed the SPPI test. Financial instruments that are mandatorily measured at fair value

through profit or loss also comprise unlisted equity securities issued by a related party.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial assets mandatorily measured at fair value through profit or loss

- continued

The movement in financial assets measured at fair value through profit or loss is summarised as

follows:

	Group		Company
	2023	2022	2023	2022
	€	€	€	€
At 1 January	5,672,787	6,263,244	802,395	802,395
Additions	556,777	961,131	-	-
Disposal of equity instruments	(2,937,470)	-	-	-
Repayments of dispute resolution
funding assets	(575,080)	(1,181,314)	-	-
Net movement in fair value	(1,657,232)	(370,274)	(535,214)	-
At 31 December	1,059,782	5,672,787	267,181	802,395

During 2023, the Group sold the majority of its unlisted equity securities to the ultimate parent

company which were

valued at €2,750,000

for

$3,107,832 (or €

2,937,470), resulting in a gain of

€187,47

0 on the date of sale (Note 30). As at 31 December 2023, the consideration for the sale of

unlisted equity securities was still receivable and

is included under ‘Amounts due from ultimate parent

company (Note 14). The Group has also recognised fair value losses on its investments in non-fixed

income securities and dispute resolution funding assets amounting to €

1,657,232

(2022: €370,274).

As at 31 December 2023, the fair value losses arising from dispute resolution funding assets were

indemnified by the ultimate parent company as explained further in Note 30.

The indemnified amount

is included within ‘Other receivables’ as part of the amounts due from ultimate parent company in

Note 14.

At the level of the Company, the fair movement during the year relates to the fair value losses on its

investments in non-fixed income securities.

Financial assets measured at fair value through other comprehensive income

	Group
	2023	2022
	€	€
Treasury bills	-	11,441,178
Debt and other fixed income instruments	6,946,560	6,712,225
	6,946,560	18,153,403
Analysed by issuer:
- foreign general government	-	11,441,178
- local general government	6,836,670	6,493,225
- local credit institutions	109,890	219,000
	6,946,560	18,153,403
Listing status:
- listed on foreign stock exchanges	-	11,441,178
- listed on Malta Stock Exchange	6,946,560	6,712,225

6,946,560

18,153,403

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Financial assets measured at fair value through other comprehensive income

–

continued

The movement in financial assets measured at fair value through other comprehensive income may

be summarised as follows:

	Group
	2023	2022
	€	€
At 1 January	18,153,403	7,495,000
Acquisitions	-	11,454,000
Disposals/redemptions	(11,500,000)	(132,900)
Amortisation	20,069	(25,897)
Net fair value movements	273,088	(636,800)
At 31 December	6,946,560	18,153,403

As at 31 December 2023

, an expected credit loss allowance amounting to €

1,987 was accounted

for in terms of IFRS 9 (2022

: €1,8

43).

Investments in subsidiaries

	Company
	2023	2022
	€	€
At 1 January	50,530,850	50,582,087
Disposal of investments in subsidiaries	-	(51,237)
At 31 December	50,530,850	50,530,850

The subsidiaries at 31 December 2023, whose results and financial position affected the figures of

the Group, are shown below:

Name of company	Registered office
Merkanti Bank	Aragon House Business Centre, Dragonara Road
Limited	St Julian’s, STJ 3140, Malta
Merkanti (A)	Aragon House Business Centre, Dragonara Road
International Ltd	St Julian’s, STJ 3140, Malta
Merkanti (D)	Aragon House Business Centre, Dragonara Road
International Ltd	St Julian’s, STJ 3140, Malta
Merkanti Diesel	Aragon House Business Centre, Dragonara Road
Limited	St Julian’s, STJ 3140, Malta
Altmark Industrie	Sanner Strasse 2
Management GmbH	39596 Arneburg, Germany

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

Investments in subsidiaries

- continued

As at 31 December 2023 and 2022, the Company held 63.75% of the ordinary shares (2021: 100%)

of Merkanti Diesel. The remaining shares held by a third party do not have any voting rights.

Accordingly, the Company retained 100% of the voting rights in Merkanti Diesel Limited.

As at 31 December 2023 and 2022, the Company held 100% of the Ordinary shares of both Merkanti

Bank Limited and Altmark Industrie Management GmbH, and 94.9% of the Ordinary shares of both

Merkanti (A) International Ltd and Merkanti (D) International Ltd.

Disclosure of financial information related to non

controlling interests in the Group’s activities and

cash flows as required by IFRS 12 is not being made on the basis that

non-controlling interests are

not considered material to the Group.

10.

Investment property

	Group
	2023	2022
	€	€
At 1 January	30,965,000	32,866,000
Disposals	(843,920)	(1,929,887)
Changes in fair value	(40,080)	28,887
At 31 December	30,081,000	30,965,000

During 2023, the Group disposed of a part of its investment property, in respect of which a loss of

€

27,949 (2022: profit of

€

96,509) was realised.

The Group’s investment property is measured at fair value. The fair value as at 31 December 202

and 2022 was estimated by an external valuation expert reflecting the actual market state,

conditions and circumstances as at the reporting date.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

11.

Property, plant and equipment

Group


		Office
	Computer	improvements
	equipment	and equipment	Total
	€	€	€
At 1 January 2022
Cost	217,260	292,138	509,398
Accumulated depreciation	(160,730)	(153,393)	(314,123)
Net book amount	56,530	138,745	195,275
Year ended 31 December 2022
Opening net book amount	56,530	138,745	195,275
Additions	7,463	15,707	23,170
Disposals	(83,768)	(13,451)	(97,219)
Depreciation charge	(30,597)	(50,590)	(81,187)
Depreciation released on disposals	83,768	13,451	97,219
Closing net book amount	33,396	103,862	137,258
At 31 December 2022
Cost	140,955	294,394	435,349
Accumulated depreciation	(107,559)	(190,532)	(298,091)
Net book amount	33,396	103,862	137,258
Year ended 31 December 2023
Opening net book amount	33,396	103,862	137,258
Additions	14,508	51,942	66,450
Disposals	(8,033)	(2,310)	(10,343)
Depreciation charge	(23,640)	(52,527)	(76,167)
Depreciation released on disposals	7,502	1,764	9,266
Closing net book amount	23,733	102,731	126,464
At 31 December 2023
Cost	147,430	344,026	491,456
Accumulated depreciation	(123,697)	(241,295)	(364,992)
Net book amount	23,733	102,731	126,464

During 2023, the Group disposed of a part of its property, plant and equipment, in respect of which

a loss of

€

547 was realised.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

11.

Property, plant and equipment

- continued

Company

	Office
	improvements
	and
	equipment
	€
At 1 January 2022
Cost	124,629
Accumulated depreciation	(52,308)
Net book amount	72,321
Year ended 31 December 2022
Opening net book amount	72,321
Additions	4,532
Depreciation charge	(25,086)
Closing net book amount	51,767
At 31 December 2022
Cost	129,161
Accumulated depreciation	(77,394)
Net book amount	51,767
Year ended 31 December 2023
Opening net book amount	51,767
Additions	3,104
Disposals	(1,188)
Depreciation charge	(25,821)
Depreciation released on disposals	644
Closing net book amount	28,506
At 31 December 2023
Cost	131,077
Accumulated depreciation	(102,571)
Net book amount	28,506

During 2023, the Company disposed of a part of its property, plant and equipment, in respect of

which a loss of

€

545 was realised.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2023

12.

Intangible assets

Group
	Computer
	software
	€
At 1 January 2022
Cost	1,120,035
Accumulated amortisation	(459,591)
Net book amount	660,444
Year ended 31 December 2022
Opening net book amount	660,444
Additions	318,898
Amortisation charge	(10,349)
Closing net book amount	968,993
At 31 December 2022
Cost	1,438,933
Accumulated amortisation	(469,940)
Net book amount	968,993
Year ended 31 December 2023
Opening net book amount	968,993
Additions	50,466
Amortisation charge	(86,715)
Closing net book amount	932,744
At 31 December 2023
Cost	1,489,399
Accumulated amortisation	(556,655)
Net book amount	932,744

As at 31 December 2023

, computer software amounting to €

699,580 (2022:

€

942,660) relate to the

implementation of a new core banking system by Merkanti Bank Limited which was still in the

course of development. As at 31 December 2023 and 2022, the fully amortised computer software

with an original cost of €245,538 is still in use.

Our opinion is consistent with our additional report to the Audit Committee.

What we have audited

Independence

Overview

Materiality

Key audit matters

Responsibilities of the directors and those charged with governance for the financial statements

Right-of-use-assets	Group		Company
	2023	2022	2023	2022
	€	€	€	€
At 1 January	283,526	428,965	283,526	428,304
Depreciation	(144,779)	(145,439)	(144,779)	(144,778)
At 31 December	138,747	283,526	138,747	283,526


	2023	2022
	€	€
Authorised
1,000,000,020 Ordinary “A” shares of €0.10 each	100,000,002	100,000,002
1,000,000,020 Ordinary “B” shares of €0.10 each	100,000,002	100,000,002
	200,000,004	200,000,004
Issued
16,673,333 Ordinary “A” shares of €0.10 each	1,667,333	1,667,333
1 Ordinary “B” shares of €0.10 each	0	0
	1,667,333	1,667,333

	Group and Company
	2023	2022
	€	€
Original face value of bonds issued	25,000,000	25,000,000
Bond issue costs	738,196	738,196
Accumulated amortisation	(424,996)	(318,394)
Unamortised bond issue costs	313,200	419,802
Amortised cost and closing carrying amount of the bonds	24,686,800	24,580,198

	Group
	As at 31 December 2023
		Property
	Banking and	rental and
	financial	management
	services	activities	Total
	€	€	€
Segment total assets	70,511,350	39,130,252	109,641,602
Segment equity	20,027,052	36,748,820	56,775,872