Merkanti Holding PLC

Company Registration Number: C 70823

MERKANTI HOLDING p.l.c.

Annual Financial Report and

Consolidated Financial Statements

31 December 2022

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Pages

Directors’ report

1 - 7

Statement of Compliance with Corporate Governance Code

8 - 10

Statements of financial position

11 - 12

Income statements

Statements of comprehensive income

Statements of changes in equity

15 - 17

Statements of cash flows

18 - 19

Notes to the financial statements

20 - 112

Independent auditor’s report

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

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 2022. The subsidiaries include Merkanti Bank Limited (the “Bank”), Merkanti (A) International

Limited (“Merkanti A”), Merkanti (D) International Limited (“Merkanti D”), (“Merkanti A”, toge

ther 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

2022:

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

Merkanti

Bank Ltd

Merkanti (A)

International

Ltd

Merkanti (D)

International

Ltd

Merkanti

Diesel Ltd

100.00%

100%

94.9%

Altmark Industrie

Management

GmbH

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

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 Compa

ny amounted to €809,414 (2021: €464,801), whilst the Group

achieved a profit after tax of €1,582,346 (2021: €648,395). The profits of the Group in 2022 mainly

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

for the year was approximately €1,740,000 (2021: €471,000). During the year, the Company made the

third full annual coupon payment to its bond holders of €1,000,000 (2021: €1,000,000).

Total assets for the Company and the Group stood at €

79,632,852

and €

109,511,385 respectively (2021:

€82,741,406 and €89,968,210).

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 €

41.7 million, yielding a combined rental income of

approximately €

1.8 million per annum. During both 2022 and 2021, the Company held 94.9% of the

Ordinary shares of both Merkanti (A) International Limited and Merkanti (D) International Limited.

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 2022, 94.8% (2021: 95.4

%) of the combined rental income of €

1.8 million

(2021: €

1.8 million) was generated from areas leased out to third party tenants, with the remaining 5.2%

(2021: 4.6%) generated from leases to related parties.

On 16 December 2019, Merkanti Diesel Limited was incorporated as a fully owned subsidiary of the

Company. To date, Merkanti Diesel Limited has financed various dispute resolution claims in Germany.

During 2020, the Company entered into an agreement in which it granted an option to a third party to

acquire 435 shares (36.25%) in Merkanti Diesel Limited exercisable upon settlement of specific dispute

resolution claims at an exercise price of €1.00.

As discussed further in Note 9, during 2022, the third party

exercised its option. As at 31 December 2022, the Company held 63.75% (2021: 100%) in Merkanti

Diesel Limited. The 435 shares held by the third party does not have any voting rights and the Company

retained 100% of the voting rights in Merkanti Diesel Limited as at 31 December 2022.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Directors’ report

- continued

Review of the business

- continued

As from the end of the second quarter of 2021, the ability to include tier 2 capital in the

Bank’s large

exposure limits were restricted with the introduction of the amendments to the Capital Requirement

Regulations (known as CRR II). One of the uses of proceeds from the bond issuance in 2019 was to

advance a subordinated loan to the Bank which w

ould be included as Tier 2 capital in the Bank’s own

funds and thus increase the large exposure limits for each customer or groups of connected customers.

Due to the changes that were published in the CRR II, the Group is considering potential ways to amend

the funding structure, including the return of this deposit to utilize in other opportunities. Regulatory

approval has been received for this change, and it is expected to occur in 2023.

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 earn

ings 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 determined by general global

macro-economic activ

ities, 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 raise 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 conflict in

Ukraine and the recent failure of banks in the United States and Switzerland.

The Russian invasion of Ukraine one year ago has not only threatened the stability of Europe but it has

also impacted food and energy security globally, creating additional stresses to economies just recovering

from the COVID-19 pandemic. The Group is not directly exposed to Russian or Ukrainian risks but is

impacted by the inflation and interest rate rises being experienced globally.

The recent failure of banks in both the United States and Switzerland raises concerns of a potential

recession in several geographies, Governments have intervened to stabilise the banking system and

reduce the volatility driven by investor uncertainty. With increasing lending rates and banks being

reluctant to lend, businesses and households are delaying capital investments and major expenditure.

Confidence in the banking system needs to be restored before depositors and borrowers alike will commit

to placing and borrowing money.

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.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Directors’ report

- continued

Principal risks and uncertainties

- continued

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.

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 IV,

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.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Directors’ report

- continued

Principal risks and uncertainties

- continued

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.

Future business developments

In March 2022, the Company announced that it had entered into an agreement to acquire Sparkasse

(Holdings) Malta Ltd. a company registered in Malta (C 35408) (“Sparkasse Holdings”), the parent of

Sparkasse Bank Malta plc (“Sparkasse Bank”).

Upon closing of this transaction, and subject to regulatory

approval, it is the intention to merge Sparkasse Bank and Merkanti Bank, in order to form a larger

independent institution with projected combined Own Funds based upon 31st December 2021 figures of

circa Euro 60 Million, Total Assets of Euro 1.1 Billion, Assets under custody of Euro 8.1 Billion and

Revenues of Euro 17 Million.

The combined entity will be renamed and rebranded to reflect its focus and market footprint in corporate

banking, custody, depositary and investments services in Malta and Ireland. The combination of the existing

market presence and product offerings of Sparkasse Bank with the investment in resources and capital from

Merkanti Bank creates a strong foundation for growth and development in the Bank’s core markets.

The business model of Sparkasse Bank will remain unchanged and will be supplemented with the additional

resources and banking activities of the Bank. Mr. Paul Mifsud will be named the Chief Executive Officer of

the merged entity and a director of the Company upon closing, subject to regulatory approval.

The

counterparty

the

Purchase

Agreement

Sparkasse

Holdings

from

Anteilsverwaltungssparkasse Schwaz. The total consideration payable by the Company for Sparkasse

Holdings is approximately equal to the net tangible asset value of Sparkasse Holdings, less certain

adjustments, and includes (i) a cash payment at closing of the transaction, (ii) three consecutive annual

payments of EUR 2.5 million; and (iii) a contingent payment, payable upon the recovery of an asset of

Sparkasse Bank which was previously written off in its entirety. The consideration is expected to be satisfied

through cash on hand, available liquidity within the Company’s group, or other means.

The transaction is conditional upon regulatory approval from various regulators, including the European

Central Bank, the Malta Financial Services Authority and the Central Bank of Ireland. The long-stop date in

the Share Purchase Agreement is in the first half of 2023. Absent an extension, we expect the transaction to

be closed or terminated by this time.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Directors’ report

- continued

Risk management

In addition, 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 consistent 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 financ

ial 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 13. No dividend is being recommended by the Board. The

accumulated profits of the Group amounting to €

1,031,865 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

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.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Directors’ report

- continued

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 specified 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 d

irectors, as required by Listing Rule 5.62, have considered the Company’s operational performance,

the statement of Financial Position as at 31 December 2022, 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 22 April 2023 by Mario P Galea

(Director) and

Benjamin Muscat (Director) as per the Directors’ Declaration on ESEF Annual Financial Report submitted

in conjunction with the Annual Report and Consolidated Financial Statements 2022.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

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 obl

igatory, 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 company’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 t

he Company. In particular, 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 d

irectors), 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 2022

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 2022

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 directors received €110,500 in aggregate for services rendered duri

ng 2022 in their

capacity as directors of the company. No part of the remuneration paid to the directors is performance

based. None of the 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 22 April 2023 by Mario P Galea

(Director) and

Benjamin Muscat (Director) as per the Directors’ Declaration on ESEF Annual Financial Report submitted

in conjunction with the Annual Report and Consolidated Financial Statements 2022.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Statements of financial position

Group

Company

As at 31 December

Notes

2022

2021

2022

2021

€

ASSETS

Balances with Central Bank of Malta

and cash

14,573,977

9,960,604

Loans and advances to banks and

other financial institutions

9,057,017

4,607,617

2,781,441

5,870,387

Loans and advances to customers

12,824,595

11,386,671

Financial assets mandatorily

measured at fair value

through profit or loss

5,672,787

6,263,244

802,395

Financial assets measured at fair

value through other

comprehensive income

18,153,403

7,495,000

Investments in subsidiaries

50,530,850

50,582,087

Investment property

30,965,000

32,866,000

Property, plant and equipment

149,319

208,784

51,767

72,321

Intangible assets

956,932

646,937

Right-of-use assets

283,526

428,965

283,526

428,304

Other receivables

12,673,522

13,474,764

22,439,853

22,862,318

Deferred tax assets

168,630

379,948

71,935

Accrued income and other assets

4,032,677

2,249,676

2,743,020

2,051,659

Total assets

109,511,385

89,968,210

79,632,852

82,741,406

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Statements of financial position

- continued

Group

Company

As at 31 December

Notes

2022

2021

2022

2021

€

EQUITY AND LIABILITIES

Capital and reserves attributable

to owners of the parent

Share capital

1,667,333

50,020,002

1,667,333

50,020,002

Contribution reserve

50,892,669

2,540,000

50,892,669

2,540,000

Fair value reserve

(587,930)

48,706

Translation reserve

971

Retained earnings/(Accumulated

losses)

1,031,865

(664,865)

1,605,804

796,390

53,003,937

51,944,814

54,165,806

53,356,392

Non-controlling interests

1,666,575

1,784,600

Total equity

54,670,512

53,729,414

54,165,806

53,356,392

Liabilities

Borrowings

24,580,198

24,478,188

24,580,198

28,078,188

Derivative liability

309,183

Lease liabilities

330,589

478,411

330,589

478,017

Amounts owed to banks

4,966,000

Amounts owed to customers

21,149,517

7,024,106

Deferred tax liabilities

2,226,127

2,214,882

Current tax liabilities

300,595

351,926

1,626

Other liabilities

1,287,847

1,382,100

554,633

519,626

Total liabilities

54,840,873

36,238,796

25,467,046

29,385,014

Total equity and liabilities

109,511,385

89,968,210

79,632,852

82,741,406

The notes on pages 20 to 112 are an integral part of these consolidated financial statements.

The financial statements on pages 11 to 112 were approved and authorised for issue by the Board of

Directors on 22 April 2023. The financial statements

were signed on behalf on behalf of the Company’s

Board of Directors by Mario P Galea (Director) and Benjamin Muscat (Director)

as per the Directors’

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

Financial Statements 2022.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Income statements

Group

Company

Year ended 31 December

Notes

2022

2021

2022

2021

€

Interest income

2,894,100

2,248,273

1,332,479

1,334,868

Interest expense

(1,230,380)

(1,199,616)

(1,162,716)

(1,209,894)

Net interest income

1,663,720

1,048,657

169,763

124,974

Net fee and commission income

2,933,082

2,212,355

537,442

428,617

Rental income from investment property

1,697,887

1,696,302

79,381

76,334

Changes in the fair value of

investment property

28,887

284,000

Realised gains/(losses) on disposal of

investment property and property,

plant and equipment

96,509

(51,709)

Net trading income/(losses)

631,044

401,921

(615,352)

58,966

Realised losses on disposal investments

of financial assets measured at fair value

through other comprehensive income

(216)

(423)

Revenue from customer contracts

1,835,461

Dividend income

1,805,500

668,256

Other operating income

957,578

875,612

665,140

531,134

Total operating income

8,008,491

8,302,176

2,641,874

1,888,281

Cost of sales in respect of revenue

from customer contracts

(1,518,897)

Changes in expected credit losses

(26,005)

92,881

14,880

(1,412)

Net operating income

7,982,486

6,876,160

2,656,754

1,886,869

Gains/(losses) on disposal of investments

in subsidiaries

265,124

(51,234)

Administrative expenses

(6,195,849)

(6,143,893)

(1,134,617)

(1,444,575)

Profit before tax

2,051,761

732,267

1,470,903

442,294

Tax (expense)/income

(469,415)

(83,872)

(661,489)

22,507

Profit for the year

1,582,346

648,395

809,414

464,801

Profit attributable to:

Owners of the parent

1,696,730

656,357

Non-controlling interests

(114,384)

(7,962)

1,582,346

648,395

The notes on pages 20 to 112 are an integral part of these consolidated financial statements.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Statements of comprehensive income

Group

Company

Year ended 31 December

Notes

2022

2021

2022

2021

€

Profit for the year

1,582,346

648,395

809,414

464,801

Other comprehensive income:

Items that may be subsequently

reclassified to profit or loss

Translation differences

(971)

10,570

Fair valuation of financial assets

measured at fair value through

other comprehensive income:

Net changes in fair value arising

during the year

(636,800)

(43,216)

Reclassification adjustments - net

amounts reclassified to profit or

loss upon disposal

216

423

Changes in expected credit losses

attributable to debt instruments

measured at fair value through

other comprehensive income

(52)

1,472

Other comprehensive income

for the year, net of tax

(637,607)

(30,751)

Total comprehensive income

for the year

944,739

617,644

809,414

464,801

Total comprehensive income

attributable to:

Owners of the parent

1,059,123

625,606

Non-controlling interests

(114,384)

(7,962)

944,739

617,644

The notes on pages 20 to 112 are an integral part of these consolidated financial statements.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Statements of changes in equity

The notes on pages 20 to 112 are an integral part of these consolidated financial statements.

Group

Attributable to owners of the parent

Non-

Contribution

Fair value

Translation

Accumulated

controlling

Total

Notes

capital

reserve

losses

Total

interests

equity

€

Balance at 1 January 2021

50,020,000

2,540,000

90,027

(9,599)

(1,321,222)

51,319,206

1,828,475

53,147,681

Comprehensive income

Profit for the year

656,357

(7,962)

648,395

Other comprehensive income:

Translation differences

10,570

Fair valuation of financial assets measured at fair

value through other comprehensive income

Net changes in fair value arising during the

year

(43,216)

Reclassification adjustments - net amounts

reclassified to profit or loss upon disposal

423

Changes in expected credit losses attributable

to debt instruments measured at fair value

through other comprehensive income

1,472

Total comprehensive income

(41,321)

10,570

656,357

625,606

(7,962)

617,644

Transactions with owners in their capacity

as owners:

Issue of ordinary shares

Dividends paid to non-controlling interests in

subsidiaries

(35,913)

Transactions with owners in their capacity

as owners

(35,913)

(35,911)

Balance at 31 December 2021

50,020,002

2,540,000

48,706

971

(664,865)

51,944,814

1,784,600

53,729,414

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Statements of changes in equity

- continued

The notes on pages 20 to 112 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

(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 2022

Statements of changes in equity

- continued

Company

Note

capital

Contribution

reserve

Retained

earnings

Total

€

Balance at 1 January 2021

50,020,000

2,540,000

331,589

52,891,589

Comprehensive income

Profit for the year

464,801

Transactions with owners in their

capacity as owners

Issue of ordinary shares

Balance at 31 December 2021

50,020,002

2,540,000

796,390

53,356,392

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

The notes on pages 20 to 112 are an integral part of these consolidated financial statements.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Statements of cash flows

Group

As at 31 December

2022

2021

Notes

€

Interest, commission, rental and other income received

7,643,890

5,736,611

Cash receipts from customers

1,835,665

Interest and commission expense paid

(1,124,576)

(1,100,701)

Cash payments to employees and suppliers

(5,740,195)

(7,417,130)

Income taxes paid

(350,228)

Cash flows from operating activities before

changes in operating assets and liabilities

428,891

(945,555)

Changes in operating assets and liabilities:

(Increase)/decrease in Reserve Deposit with Central Bank

(153,841)

13,418

Net increase in loans and advances to banks and

other financial institutions

(4,971,919)

Net (increase)/ decrease in loans and advances to customers

(1,184,900)

521,805

Net decrease in dispute resolution funding assets

measured at fair value through profit or loss

220,183

969,351

Net decrease/(increase) in other receivables

2,137,655

(990,567)

Net increase in other assets

(1,165,655)

(275,838)

Net increase in amounts owed to banks

4,966,000

Net increase in amounts owed to customers

13,651,995

38,377

Net (decrease)/increase in other liabilities

(100,218)

221,518

Net cash generated from/(used in) operating activities

13,828,191

(447,491)

Cash flows from investing activities

Purchase of investments measured as at fair value through

other comprehensive income

(11,454,000)

(1,119,300)

Proceeds from disposal of investments measured at

fair value through profit or loss

52,455

Proceeds from disposal of investments measured at fair

value through other comprehensive income

132,900

600,423

Proceeds from disposal of investment properties

2,026,396

7,406

Proceeds from disposal of property, plant and equipment

5,573

Purchase of property, plant and equipment

(26,838)

(36,860)

Purchase of intangible assets

(312,190)

(629,235)

Net cash used in investing activities

(9,633,732)

(1,119,538)

Cash flows from financing activities

Principal element of lease payments

(147,822)

(145,357)

Paid-up share capital during the year

15,000

Net cash used in financing activities

(132,822)

(145,355)

Net movement in cash and cash equivalents

4,061,637

(1,712,384)

Effect of exchange rate changes on cash and cash equivalents

(116,594)

9,942

Cash and cash equivalents at beginning of year

14,507,208

16,209,650

Cash and cash equivalents at end of year

18,452,251

14,507,208

The notes on pages 20 to 112 are an integral part of these consolidated financial statements.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Statements of cash flows

- continued

Company

As at 31 December

2022

2021

Notes

€

Interest, commission, rental and other income received

2,525,080

1,323,419

Interest and commission expense paid

(1,054,292)

(1,110,853)

Cash payments to suppliers

(982,043)

(1,274,811)

Cash flows from operating activities before

changes in operating assets and liabilities

488,745

(1,062,245)

Changes in operating assets and liabilities:

Net decrease in other receivables

437,345

10,291

Net (increase)/decrease in other assets

(308,297)

4,942

Net increase in other liabilities

30,219

91,450

Net cash generated from/(used in) operating activities

648,012

(955,562)

Cash flows from investing activities

Purchase of investments measured at fair value through

profit or loss

(535,215)

Proceeds from disposal of a subsidiary

Purchase of property, plant and equipment

(4,532)

Net cash used in investing activities

(4,530)

(535,215)

Cash flows from financing activities

Principal element of lease payments

(147,428)

(134,019)

Repayment of borrowings

(3,600,000)

Paid-up share capital during the year

15,000

Net cash used in financing activities

(3,732,428)

(134,017)

Net movement in cash and cash equivalents

(3,088,946)

(1,624,794)

Cash and cash equivalents at beginning of year

5,870,387

7,495,181

Cash and cash equivalents at end of year

2,781,441

5,870,387

The notes on pages 20 to 112 are an integral part of these consolidated financial statements.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Notes to the consolidated financial statements

Summary of significant accounting policies

The principal 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).

Potential acquisition and merger

On 7 March 2022, the Company entered into an agreement to acquire Sparkasse (Holdings) Malta

Ltd (“Sparkasse Holdings”), the parent of Sparkasse Bank Malta plc (“Sparkasse Bank”). It is

intended that the Company’s subsidiary

bank will be merged with Sparkasse Bank to form a larger

independent institution. Should the merger take place, certain assets of the subsidiary bank,

including intangible assets and items of property, plant and equipment, may need to be written off.

The acquisition transaction and the eventual merger is precedent upon satisfaction of certain

standard conditions, including approval by various regulatory authorities, which decision is still

outstanding as at the date of issuance of these financial statements and which will be taken

subsequent to the date of signing of these financial statements.

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 impact of the geopolitical developments as

a result of the escalation of the military conflict between Russia and Ukraine in February 2022, as

well as the effect of the recent failure of banks in the United States and Switzerland. The Group has

reacted to these new economic conditions and 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 2022, the Group has

continued to show its resilience to the impact of the current economic events as it reported higher

operating income and profits.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Summary of significant accounting policies

- continued

1.1 Basis of preparation

- continued

Assessment of going concern assumption - continued

Accordingly, the directors

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 2022

In 2022, 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 2022. 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.

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

Certain new standards, interpretations and 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 2023. 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.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Summary of significant accounting policies

- continued

1.2 Consolidation

- continued

(a) Subsidiaries - continued

In the Company’s separate financial statements, investments in subs

idiaries 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.

(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 operates (‘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.

The results and financial position of foreign operations of the Group (none of which has the

currency of a hyperinflationary economy) that have a functional currency different from the

presentation currency are translated into the presentation currency as follow:

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Summary of significant accounting policies

- continued

1.3 Foreign currency translation

- continued

•

assets and liabilities for each balance sheet presented are translated at the closing rate at the

date of that balance sheet;

•

income and expenses for each statement of profit or loss and statement of comprehensive

income are translated at average exchange rates (unless this is not a reasonable

approximation of the cumulative effect of the rates prevailing on the transaction dates, in which

case income and expenses are translated at the dates of the transactions); and

•

all resulting exchange differences are recognised in other comprehensive income.

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 amortised 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 2022

Summary of significant 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.

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.

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 financial assets,

including those that are mandatorily measured at FVPL, is included in

‘Interest income’ using the

effective interest rate method.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Summary of significant 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 mode

l 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 2022

Summary of significant 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 instru

ments 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 agr

eement. ‘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 2022

Summary of significant 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 2022

Summary of significant 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 2022

Summary of significant accounting policies

- continued

1.8 Derivative financial instruments

The Group deploys no hedging strategies that achieve hedge accounting in terms of IFRS 9.

Derivative financial instruments, including currency forward swaps, are initially recognised at fair

value on the date on which a derivative contract is entered into, and are subsequently re-measured

at their fair value. Fair values for currency swaps are determined using forward exchange market

rates at the end of the reporting period. Discounting techniques, reflecting the fact that the

respective exchange or settlement will not occur until a future date, are used when the time value of

money has a significant effect on the fair valuation of these instruments.

The Group principally uses currency swaps as a hedge of foreign exchange risk thereby entering

into commitments to exchange one set of cash flows for another. These derivative transactions

provide effective economic hedges under the Group’s risk management policies.

Changes in the fair value of any derivative instrument that does not qualify for hedge accounting

are recognised immediately in profit or loss under ‘Net trading income’.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Summary of significant accounting policies

- continued

1.9 Investment property

Investment property, principally comprising freehold office buildings, is held for long-term rental

yields or for capital appreciation or both and is not occupied by the Group. Investment property also

includes property that is being constructed or developed for future use as investment property,

when such identification is made.

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 carrying 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.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Summary of significant accounting policies

- continued

1.9 Investment property

- continued

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.

If an item of property, plant and equipment becomes an investment property because its use has

changed, any difference resulting between the carrying amount and the fair value of this item at the

date of transfer is treated in the same way as a revaluation under IAS 16

‘

Property, Plant and

Equipment

’

. Any resulting increase in the carrying amount of the property is recognised in profit or

loss to the extent that it reverses a previous impairment loss; with any remaining increase

recognised in other comprehensive income, directly to revaluation surplus within equity. Any

resulting decrease in the carrying amount of the property is initially charged to other comprehensive

income against any previously recognised revaluation surplus, with any remaining decrease

charged to profit or loss. Upon the disposal of such investment property, any surplus previously

recorded in equity is transferred to retained earnings; the transfer is not made through profit or loss.

Where an investment property undergoes a change in use, evidenced by commencement of

development with a view to

sale, the property is transferred to inventories. A property’s deemed

cost for subsequent accounting as inventories is its fair value at the date of change in use.

1.10 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

Office improvements and equipment

10-25

Others

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.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Summary of significant accounting policies

- continued

1.11 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).

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 r

ecoverable amount.

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

1.13 Other receivables

Other receivables comprise amounts due from customers for services performed in the ordinary

course of business. If collection is expected in one year or less (or in the normal operating cycle of

the business if longer), they are classified as current assets. If not, they are presented as non-

current assets.

Other receivables are recognised initially at fair value and subsequently measured at amortised

cost using the effective interest method, less provision for expected credit losses (Note 1.5). The

carrying amount of the asset is reduced through the use of an allowance account, and the amount

of the loss is recognised in profit or loss. When a receivable is uncollectible, it is written off against

the allowance account for other receivables. Subsequent recoveries of amounts previously written

off are credited against profit or loss.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Summary of significant accounting policies

- continued

1.14 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.

1.15 Share capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new

ordinary shares are shown in equity as a deduction, net of tax, from the proceeds.

1.16 Financial liabilities

1.16.1 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.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Summary of significant accounting policies

- continued

1.16 Financial liabilities

- continued

1.16.2 Classification and subsequent measurement

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 (see Note 1.18).

Financial liabilities measured at amortised cost comprise principally borrowings, derivative

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

1.16.3 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.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Summary of significant accounting policies

- continued

1.17 Other payables

Other payables comprise obligations to pay for goods or services that have been acquired in the

ordinary course of business from suppliers. Accounts payable are classified as current liabilities if

payment is due within one year or less (or in the normal operating cycle of the business if longer). If

not, they are presented as non-current liabilities.

Other payables are recognised initially at fair value and subsequently measured at amortised cost

using the effective interest method.

1.18 Financial guarantee contracts and loan commitments

Financial guarantee contracts are contracts that require the issuer to make specified payments to

reimburse the holder for a loss it incurs because a specified debtor fails to make payments when

due, in accordance with the terms of a debt instrument. Such financial guarantees are issued by the

Group to financial institutions and other entities on behalf of customers to secure micro-loans and

other credit related products.

Financial guarantee contracts are initially measured at fair value and subsequently measured at

higher of:

•

the amount of the loss allowance (calculated as described in Note 1.5); and

•

the premium received on initial recognition less income recognised in accordance with the

principles of IFRS 15

‘

Revenue from Contracts with Customers

’

For loan commitments and financial guarantee contracts, the loss allowance is recognised as a

provision. However, for contracts that include both a loan and an undrawn commitment and the

Group cannot separately identify the expected credit losses on the undrawn commitment

component from those on the loan component, the expected credit losses on the undrawn

commitment are recognised together with the loss allowance for the loan. To the extent that the

combined expected credit losses exceed the gross carrying amount of the loan, the expected credit

losses are recognised as a provision (Note 1.5).

1.19 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.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Summary of significant accounting policies

- continued

1.20 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.

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.

Interest income is calculated by applying the effective interest rate to the gross carrying amount of

financial assets, except for:

•

POCI financial assets, for which the original credit-adjusted effective interest rate is applied to

the amortised cost of the financial asset;

•

financial assets that are not 'POCI' but have subsequently become credit-impaired (or 'stage

3'), for which interest revenue is calculated by applying the effective interest rate to their

amortised cost (i.e. net of the expected credit loss provision).

1.21 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 investment 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.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Summary of significant accounting policies

- continued

1.22 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.

1.23 Sales of goods and services

Revenue from customer contracts comprises the fair value of the consideration received or

receivable for the sale of goods in the ordinary course of the Group’s activities. Revenue is shown

net of value-added tax, returns, rebates and discounts.

Revenues are recognised in accordance with the provision of goods or services, provided that

collectability of the consideration is probable.

IFRS 15 requires that at contract inception the goods or services promised in a contract with a

customer are assessed and each promise to transfer to the customer the good or service is

identified as a performance obligation. Promises in a contract can be explicit or implicit if the

promises create a valid expectation to provide a good or service based on the customary business

practices, published policies, or specific statements.

The timing of revenue recognition may differ from customer invoicing. Trade receivables presented

in the statements of financial position represent an unconditional right to receive consideration

(primarily cash), i.e. the services and goods promised to the customer have been transferred.

By contrast, contract assets mainly refer to amounts allocated per IFRS 15 as compensation for

goods or services provided to customers for which the right to collect payment is subject to

providing other services or goods under that same contract. Contract assets, like trade receivables,

are subject to impairment for credit risk. The recoverability of contract assets is also verified,

especially to cover the risk of impairment should the contract be interrupted.

Contract liabilities represent amounts paid by customers before receiving the goods and/or services

promised in the contract. This is typically the case for advances received from customers or

amounts invoiced and paid for goods or services not transferred yet, such as contracts payable in

advance or prepaid packages (previously recognised in deferred income).

The Group measures revenue on a basis that reflects the amount of consideration that it expects to

be entitled to. This measurement of revenue is however limited to amounts to which the Group has

enforceable rights, and it excludes amounts collected on behalf of third parties.

Revenue is recognised when the Group satisfies a performance obligation, which occurs when it

transfers control of a promised good or service to a customer. Control of a promised good or

service is transferred to a customer when the customer is able to direct the use of the promised

good or service. A performance obligation is satisfied at a point in time unless it meets certain

criteria that indicate that it is satisfied over time.

Management has determi

ned that none of the Group’s contracts with customers contain a

significant financing component as the period between the recognition of revenue and the payment

due date is of less than one year.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Summary of significant accounting policies

- continued

1.24 Dividend income

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

1.25 Other operating income

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

1.26 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.

1.27 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 2022

Summary of significant accounting policies

- continued

1.28 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 Group’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 risk 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 p

olicies 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 Limited or entities within the Scully Royalty Group, through

the Group’s transactions with correspondent banks, and through its investments in debt securities

and other exposures arising from its investing activities.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Financial risk management

- continued

2.2 Credit Risk

- continued

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 (

‘

’

), 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. These published grades are continuously monitored and updated.

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.

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 inst

ruments 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 2022

Financial risk management

- continued

2.2 Credit risk

- continued

2.2.3 Expected credit loss 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 fr

om 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 financia

l 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 G

roup’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.

In the case of certain of its portfolios of financial assets (specifically loans and advances to banks

and other financial institutions and investments in debt securities), the Group applies the low credit

risk simplification to

all its exposures considered ‘investment

grade’, thus they are not subject to the

SICR

assessment.

Moving

from

‘investment

grade’

‘non

investment

grade’

does

not

automatically mean that there has been a SICR.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

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, investments in debt securities and other receivables respectively, to be in

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

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.

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.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

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 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

Group’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.

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 expectation 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.

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 Group

’s exposures is set at levels

based on market available data for similar exposure classes.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

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 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.

There have been no significant changes in estimation techniques or significant assumptions made

during the reporting period.

2.2.3.4 Forward-looking information incorporated in the ECL model

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, loans and

advances to customers, including loans and advances to group companies and investment

securities) and, using an analysis of historical data, has analysed relationships between macro-

economic variables, credit risk and credit losses. The key drivers, for both 2022 and 2021, are

predominantly 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.

Three possible scenarios are considered to capture non-

linearity across credit portfolios. The ‘base

line’ 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 line’ scenario, the

Group considers two other macro-economic scenarios

–

Upside and Downside scenarios

–

which respectively represent a more optimistic and a more

pessimistic outcome. The more optimistic and more pessimistic scenarios are economically

plausible and will not necessarily be as severe as scenarios used in stress testing.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

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

Each scenario is weighted by a probability of occurrence, determined by a combination of

macroeconomic research and expert credit judgement, taking account the range of possible

outcomes each chosen scenario represents. 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).

The following table presents these macro-economic variables referred to above for the following

three forecasted years and the probabilities assigned to each of the Base, Upside and Downside

scenarios.

As at 31 December 2022:

Macro-economic

variables

ECL

Scenario

Probability

2022

(actual)

2023

2024

2025

EEA-average gross

domestic product

(GDP) at constant

prices

Base

50%

3.60%

1.00%

1.60%

Upside

25%

1.50%

2.10%

Downside

25%

0.50%

1.10%

World-average gross

domestic product

(GDP) at constant

prices

Base

50%

3.19%

2.65%

3.18%

3.35%

Upside

25%

3.16%

3.68%

3.86%

Downside

25%

2.16%

2.68%

2.86%

EEA-average terms

of trade of goods and

services (ToD)

Base

50%

4.29%

2.51%

3.66%

3.74%

Upside

25%

3.01%

4.16%

4.24%

Downside

25%

2.01%

3.16%

3.24%

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

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 2021:

Macro-economic

variables

ECL

Scenario

Proba

bility

2021

(actual)

2022

2023

2024

EEA-average gross

domestic product

(GDP) at constant

prices

Base

50%

5.04%

4.43%

1.98%

1.58%

Upside

25%

4.93%

2.48%

2.08%

Downside

25%

3.93%

1.48%

1.08%

World-average

gross domestic

product (GDP) at

constant prices

Base

50%

5.88%

4.89%

3.62%

3.37%

Upside

25%

5.39%

4.12%

3.87%

Downside

25%

4.39%

3.12%

2.87%

EEA-average terms

of trade of goods

and services (ToD)

Base

50%

-1.49%

0.43%

0.36%

0.21%

Upside

25%

0.93%

0.86%

0.71%

Downside

25%

-0.07%

-0.14%

-0.29%

•

The base scenario reflects the current economic condition;

•

The downside scenario is based on subdued economic activity and consequently GDP and the

EEA’s average terms of trade ratio will decline by 50 basis points (2021: 50 basis points) from

the base scenario; and

•

The upside scenario is based on the assumption that economic recovery will be better than

anticipated leading to a 50 basis point (2021: 50 basis points) improvement in forecasted GDP

and the EEA’s average terms of trade ratio from the base case.

The weightings assigned to each

economic scenario were 50% for the ‘Base’ scenario, 25% for the

‘Downside’ scenario and 25% for the ‘Upside’ scenario, for both 202

2 and 2021. The number of

scenarios used is based on the analysis of each major product type to ensure that non-linearities

are captured. The number of scenarios and their attributes are reassessed at each reporting date.

The economic scenarios were simulated over a full economic cycle.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

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

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.

As at 31 December 2022, the sensitivity of the ECL outcome to the economic forecasts was

assessed by recalculating the ECL under the baseline and downside scenarios described above for

the loan portfolio, 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

receivables

would amount to €

138,775 (2021:

€

132,507)

and €

146,778 (2021

: €

126,457),

compared to a weighted average credit loss allowances estimated at year end amounting to

€

133,903 (2021

: €

115,176). In view of this, as at 31 December 2022, 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

shee

t 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 and loans and advances to banks and other financial institutions, customers and

group companies. 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 2022

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

2022

2021

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

535,215

Dispute resolution funding

assets

1,327,792

1,918,249

Loans and advances to

customers

792,600

Subject to IFRS 9 impairment

allowances

Financial assets measured at

FVOCI:

Debt securities

Stage 1

18,153,403

(1,843)

Stage 1

7,495,000

(1,895)

Financial assets measured at

amortised cost:

Balances with Central Bank of

Malta

Stage 1

14,571,689

Stage 1

9,958,793

Loans and advances to banks

and other financial institutions

Stage 1

9,102,628

(45,611)

Stage 1

4,645,198

(37,581)

Loans and advances to

customers

Stage 1

2,650,000

(24,463)

Stage 1

11,452,366

(65,695)

Loans and advances to

customers

Stage 2

10,269,164

(70,106)

Stage 2

Other receivables

Stage 1

12,712,856

(39,334)

Stage 1

13,524,245

(49,481)

Accrued income and other

assets

Stage 1

3,188,725

Stage 1

1,678,411

Credit risk exposure

73,304,072

(181,357)

52,000,077

(154,652)

Company

2022

2021

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

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

2,781,441

Stage 1

5,870,387

Other receivables

Stage 1

22,524,650

(84,797)

Stage 1

22,961,995

(99,677)

Accrued income and other

assets

Stage 1

2,035,340

Stage 1

1,945,978

Credit risk exposure

27,876,646

(84,797)

31,313,575

(99,677)

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

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 2022 and 31 December 2021, 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 Grou

p’s credit risk mitigation techniques, the Group holds collateral against loans and

advances to customers, 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 includes cash collateral. As at 31 December 2022,

the Group had cash collateral amounting to €

1,100,000 (2021: nil) securing the receivables

purchased from a related party amounting

to €

10,269,164

(2021: €8,802,365)

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 2022

Financial risk management

- continued

2.2 Credit risk

- continued

2.2.6 Credit concentration risk

- continued

Group

Company

Other EU

Rest of

Other EU

Rest of

Malta

countries

world

Total

Malta

countries

world

Total

€

As at 31 December 2022

Financial assets mandatorily measured at FVPL

2,120,392

535,215

2,655,607

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

Loans and advances to banks and

other financial institutions

6,995,794

2,061,223

9,057,017

2,781,441

Loans and advances to customers

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

As at 31 December 2021

Financial assets mandatorily measured at FVPL

2,710,849

535,215

3,246,064

535,215

Financial assets measured at FVOCI

7,495,000

Balances with Central Bank of Malta

9,958,793

Loans and advances to banks and

other financial institutions

3,855,547

752,070

4,607,617

5,870,387

Loans and advances to customers

11,386,671

Other receivables

107,479

13,367,285

13,474,764

14,877,303

7,985,015

22,862,318

Accrued income and other assets

7,846

295,261

1,375,304

1,678,411

601,486

1,344,492

1,945,978

21,317,186

3,865,659

26,664,475

51,847,320

21,349,176

9,864,722

31,213,898

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

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 2022 and 2021, 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

2022

2021

€

Financial service activities

2,650,000

Activities related to mining activities

10,269,164

8,802,366

12,919,164

11,452,366

Other receivables, gross of allowances, are analysed by industry concentration as follows:

Group

Company

2022

2021

2022

2021

€

Financial service activities

12,601,641

12,196,109

22,522,050

11,314,203

Industrial, commercial and service

companies

111,215

1,328,136

2,600

11,647,792

12,712,856

13,524,245

22,524,650

22,961,995

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 2022, 59.50

% (2021: 64.27%) 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 40.50% (2021: 37.73%) 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 2022 and 2021, its exposures are fully performing and do not show any signs of

increased credit risk. As at 31 December 2022, 67.36% (2021: 65.05%) of the

Company’s other

receivables relate to receivables from subsidiaries while 32.63% (2021: 34.94%) 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 2022

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 financial 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:

At 31 December 2022

Central

Government

Institutions

Total

€

A1 to A3

17,934,403

Not rated

219,000

Total

17,934,403

219,000

18,153,403

At 31 December 2021

Central

Government

Institutions

Total

€

A1 to A3

7,269,452

Not rated

225,548

Total

7,269,452

225,548

7,495,000

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

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.

The ‘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 advance

s 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 2022

2. Financial risk management

- continued

2.2 Credit risk

- continued

2.2.8 Loss allowances

- continued

Group

Stage 1

Stage 2

Total

Gross

carrying

amount

Allowance

for ECL

Gross

carrying

amount

Allowance

for ECL

Gross

carrying

amount

Allowance

for ECL

€

At 31 December 2021

26,356,287

115,176

26,356,287

115,176

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

Changes in risk parameters

355

Net new and further lending/(repayments)

60,250

(42)

1,466,798

2,928

1,527,048

2,886

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 2022

Financial risk management

- continued

2.2 Credit risk

- continued

2.2.8 Loss allowances

- continued

Group

Stage 1

Gross

carrying

amount

Allowance

for ECL

€

At 31 December 2020

24,774,322

240,927

Changes in risk parameters

(110,431)

Net new and further lending/(repayments)

1,581,965

(16,618)

Changes due to foreign exchange movements

1,298

At 31 December 2021

26,356,287

115,176

Change in expected credit losses on loans and advances to customers

and other receivables

(127,049)

Change in expected credit losses attributable to:

Loans and advances to banks and other financial institutions

31,996

Financial assets measured at fair value through other comprehensive

income

1,472

Undrawn commitments

700

Total expected credit loss charge for the year

(92,881)

There were no stage transfers during 2021.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Financial risk management

- continued

2.2 Credit risk

- continued

2.2.8 Loss allowances

- continued

Company

Stage 1

Gross

carrying

amount

Allowance

for ECL

€

At 31 December 2021

24,907,973

99,677

Changes in risk parameters

(14,815)

Net new and further lending/(repayments)

(347,983)

(65)

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)

At 31 December 2020

23,202,474

98,265

Changes in risk parameters

1,130

Net new and further lending/(repayments)

1,705,499

282

At 31 December 2021

24,907,973

99,677

Change in expected credit losses on other receivables

1,412

Total expected credit loss charge for the year

1,412

There were no stage transfers during 2022 and 2021.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

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.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Financial risk management

- continued

2.3 Market risk

- continued

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 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

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

Accrued income and other assets

3,187,703

955

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

Lease liabilities

330,589

Amounts owed to banks

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

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

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Financial risk management

- continued

2.3 Market risk

- continued

(a) Foreign exchange risk

- continued

Group

EUR

USD

CAD

GBP

Total

€

As at 31 December 2021

Financial assets

Financial assets measured at FVPL

2,710,849

3,017,180

535,215

6,263,244

Financial assets measured at FVOCI

7,495,000

Balances with Central Bank of Malta

9,958,793

Loans and advances to banks and

other financial institutions

2,900,506

330,392

1,319,539

57,180

4,607,617

Loans and advances to customers

2,584,306

8,802,365

11,386,671

Other receivables

13,342,325

132,439

13,474,764

Accrued income and other assets

1,674,937

3,474

1,678,411

Total financial assets

40,666,716

3,480,011

10,125,378

592,395

54,864,500

Financial liabilities

Borrowings

24,478,188

Lease liabilities

478,411

Amounts owed to customers

410,312

5,673,973

777,660

162,161

7,024,106

Other liabilities

1,182,031

200,069

1,382,100

Derivative liabilities

309,183

Total financial liabilities

26,858,125

5,874,042

777,660

162,161

33,671,988

Net on-balance sheet position

13,808,591

(2,394,031)

9,347,718

430,234

As at 31 December 2022 and 2021, the net exposure to foreign exchange rates arises 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 is however liable to settle any

shortfalls from foreign exchange currency movements between CAD and EUR, effectively

eliminatin

g the Group’s foreign exchange risk on such transaction. The residual net exposure in

CAD is not deemed material.

The net exposure to foreign exchange rates as at 31 December 2022 also includes exposures

denominated in USD which arises principally due to securities which are denominated in USD

which are not hedged. Although these securities are principally equity in nature, they have still been

included within the above tables, since movements in the foreign currency component of these

financial instruments is presented in profit or loss as part of any fair value movements. Under the

scenario that the euro appreciates against the USD from 1.0666 to 1.2666 the impact recognised in

profit or loss would amount to a loss

of €

719,028. If on the other hand, the euro depreciates against

the USD to 1.0000 the impact recognised in profit or loss would amount to a profit of €

239,436.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

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 2022 the Company

’s

exposure to foreign currencies comprises investment in securities

of a related party denominated in USD amounting to

€267,180

(2021:

€267,180) and

non-fixed

income securities issued by a third party denominated in GBP

amounting to €535,215

(2021:

€535,215)

which were acquired by the Company from its subsidiary at the end of 2021. In view of

this, as at 31 December 2022 and 2021, 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 floating nature

as at 31 December are shown below:

Group

Floating

Fixed

rates

Total

€

At 31 December 2022

Interest-bearing assets

Financial assets measured at FVPL:

Loans and advances to customers

792,600

Financial assets measured at FVOCI:

Debt securities

18,153,403

Financial assets measured at amortised cost:

Balances with Central Bank of Malta and cash

5,825,647

8,746,042

14,571,689

Loans and advances to banks and other financial

institutions

4,930,069

Loans and advances to customers

12,824,595

Other receivables

10,514,702

10,755,716

51,031,342

61,787,058

Interest-bearing liabilities

Borrowings

24,580,198

Lease liabilities

330,589

24,910,787

Net exposure

10,755,716

26,120,555

36,876,271

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Financial risk management

- continued

2.3 Market risk

- continued

(b) Interest rate risk

- continued

Group

Floating

Fixed

rates

Total

€

At 31 December 2021

Interest-bearing assets

Financial assets measured at FVPL:

Loans and advances to customers

792,600

Financial assets measured at FVOCI:

Debt securities

7,495,000

Financial assets measured at amortised cost:

Balances with Central Bank of Malta and cash

9,860,199

Loans and advances to banks and other financial

institutions

1,053,537

Loans and advances to customers

2,635,998

8,750,673

11,386,671

Other receivables

10,552,727

13,549,734

27,591,000

41,140,734

Interest-bearing liabilities

Borrowings

24,478,188

Lease liabilities

478,411

24,956,599

Net exposure

13,549,734

2,634,401

16,184,135

As at 31 December 2022 and 2021, the remaining balance in respect of financial asset measured at

FVPL, loans and advances to banks and other financial institutions, other receivables and amounts

owed to customers are non-interest bearing and accordingly are not included in the above tables.

Amounts owed to banks as at 31 December 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. Loans and advances to 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 Bank’s inv

estments in non-fixed income instruments and debt securities. This exposes the

Group to the risk of losses arising from fair value interest rate risk.

The estimated impact of an immediate 200 basis point increase in yields as at 31 December 2022

on the fair valuation of its investments in non-fixed income instruments and debt securities amounts

to a loss of €0.45m (2021: €0.15m).

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

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 €0.30m (2021: €0.13m).

The Company’s exposures analysed by their fixed or floating nature as at 31 December

are shown

below:

Company

Floating

Fixed

rates

Total

€

At 31 December 2022

Interest-bearing assets

Loans and advances to banks and other financial

institutions

2,000,000

Amounts due from the ultimate parent company

5,854,702

Amounts due from subsidiaries

13,953,228

21,807,930

Interest-bearing liabilities

Borrowings

24,580,198

Lease liabilities

330,589

24,910,787

Net exposure

(3,102,857)

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Financial risk management

- continued

2.3 Market risk

- continued

(b) Interest rate risk

- continued

Company

Floating

Fixed

rates

Total

€

At 31 December 2021

Interest-bearing assets

Loans and advances to banks and other financial

institutions

76,185

5,600,000

5,676,185

Amounts due from the ultimate parent company

5,892,727

Amounts due from subsidiaries

14,000,000

76,185

25,492,727

25,568,912

Interest-bearing liabilities

Borrowings

28,078,188

Lease liabilities

478,017

28,556,205

Net exposure

76,185

(3,063,478)

(2,987,293)

As at 31 December 2022 and

2021, ‘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 2022 and 2021, ‘Amounts due from subsidiaries’ consis

t of subordinated loans

amounting to €14,000,000 bearing interest at fixed rates. As at 31 December 2022 and 2021, the

Company’s ‘Borrowings’ include €25 million Secured Bonds which are subject to 4% fixed interest

rate and as at 31 December 2021, the Comp

any’s borrowings include borrowings from the

subsidiary bank amounting to €3,600,000 subject to fixed interest of 2.5%. These instruments are

carried at amortised cost.

In the context of the above, the Company’s exposure to interest rate risk as at 31 Dec

ember 2022

and 2021 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 2022

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 the 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

months

one year

Total

€

As at 31 December 2022

Financial assets

Financial assets measured at

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

Loans and advances to customers

5,296,063

7,528,532

12,824,595

Other receivables

10,514,702

24,833,956

10,478,567

18,969,710

7,504,825

61,787,058

Financial liabilities

Borrowings

24,580,198

Lease liabilities

39,162

122,618

168,809

330,589

39,162

122,618

24,749,007

26,226,007

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

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Financial risk management

- continued

2.3 Market risk

- continued

(b) Interest rate risk - continued

Group

Within

three

Within one

Within

months but

year but

one

over one

over three

More than

month

months

one year

Total

€

As at 31 December 2021

Financial assets

Financial assets measured at

FVPL

792,600

Financial assets measured at

FVOCI

135,492

7,359,508

7,495,000

Balances with Central Bank of Malta

9,860,199

Loans and advances to banks

and other financial institutions

1,053,537

Loans and advances to

customers

4,375,337

4,375,336

2,635,998

11,386,671

Other receivables

10,552,727

21,466,463

4,375,337

5,303,428

9,995,506

41,140,734

Financial liabilities

Borrowings

24,478,188

Lease liabilities

36,904

110,692

330,721

478,411

36,904

110,692

24,808,909

24,956,599

Interest rate gap

21,429,559

4,375,243

5,192,736

(14,813,403)

Cumulative gap

21,429,559

25,804,802

30,997,538

16,184,135

As at 31 December 2022 and 2021

, all of the Group’s ‘Other receivables’ are repayable on

demand.

The Group’s and Company’s

exposure to equity securities price risk arises from investments held

by the Group measured at FVPL, which as at 31 December 2022 predominantly included equity

securities issued by

a related party valued at €

3,017,180 (2021

: €

3,017,180) for the Group and

€267,180

(2021

: €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 2022

Financial risk management

- continued

2.4 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 fixed income loan that has a profit participation feature enabling the Group to participate in

any profit earned as a result of the activity being financed;

•

Debt-like instruments issued by special purpose vehicles set up specifically to finance certain

dispute resolution claims; and

•

Direct dispute resolution funding assets.

The Group’s equity investment is exposed to equity price risk, as referred to within part (c) of

section 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.

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 2022

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 with other banks; and

•

unencumbered Malta Government stocks amounting to €6,712,225 (2021: €7,269,452) and

German treasury bills amounting to €11,441,178 (2021: nil) 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 2022

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

month

months

one year

Maturity

Total

€

As at 31 December 2022

Financial assets

Financial assets measured

at FVPL

1,327,815

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

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

13,401,754

252,435

71,796,766

Financial liabilities

Borrowings

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

Other liabilities

946,026

341,821

1,287,847

20,819,485

4,966,000

1,564,439

24,964,227

52,314,150

Maturity gap

12,494,674

827,563

17,470,416

(11,562,473)

Cumulative gap

12,494,674

13,322,237

30,792,653

19,230,180

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Financial risk management

- continued

2.5 Liquidity risk

- continued

Group

Within

three

Within one

Within

months

year but

one

but over

over three

More than

month

one month

months

one year

Maturity

Total

€

As at 31 December 2021

Financial assets

Financial assets measured

at FVPL

792,600

535,215

1,327,815

Financial assets measured

at FVOCI

135,492

7,359,508

7,495,000

Balances with Central

Bank of Malta

9,860,199

98,594

9,958,793

Loans and advances to

banks and other financial

institutions

4,607,617

Loans and advances to

customers

4,375,337

4,375,336

2,635,998

11,386,671

Other receivables

13,474,764

Accrued interest income

and other assets

1,367,286

15,864

295,261

1,678,411

29,309,866

4,391,201

5,598,689

10,530,721

98,594

49,929,071

Financial liabilities

Borrowings

24,478,188

Lease liabilities

36,904

110,692

330,721

478,411

Amounts owed to

customers

7,024,106

Other liabilities

752,927

294,016

335,157

1,382,100

7,813,937

294,110

445,849

24,808,909

33,362,805

Maturity gap

21,495,929

4,097,091

5,152,840

(14,278,188)

Cumulative gap

21,495,929

25,593,020

30,745,860

16,467,672

As at 31 December 2022 and 2021, 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.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

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

months

one year

Total

As at 31 December 2022

€

Financial assets

Financial assets measured at FVPL

535,215

Loans and advances to banks

and other financial institutions

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

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

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

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

months

one year

Total

As at 31 December 2021

€

Financial assets

Financial assets measured at FVPL

535,215

Loans and advances to banks

and other financial institutions

5,870,387

Other receivables

8,912,514

13,949,804

22,862,318

Accrued interest income and other

assets

1,344,492

601,486

1,945,978

16,127,393

601,486

14,485,019

31,213,898

Financial liabilities

Borrowings

3,600,000

24,478,188

28,078,188

Lease liabilities

36,604

110,692

330,721

478,017

Other liabilities

184,469

335,157

519,626

221,073

4,045,849

24,808,909

29,075,831

Maturity gap

15,906,320

601,486

(4,045,849)

(10,323,890)

Cumulative gap

15,906,320

16,507,806

12,461,957

2,138,067

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

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

three

one

Within

months but

year but

one

over one

over three

More than

Carrying

month

Months

one year

Total

amount

€

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

Amounts owed to banks

4,966,000

Other liabilities

637,375

308,650

341,821

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 2021

Borrowings

664,843

29,000,000

29,664,843

24,478,188

Lease liabilities

40,105

100

123,195

342,586

505,986

478,411

Amounts owed to

customers

7,024,106

Other liabilities

752,927

294,016

335,157

1,382,100

752,927

7,817,138

294,116

1,123,195

29,342,586

38,577,035

33,362,805

As at 31 December 2022 and 2021

, 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 payables, lease liabilities and accruals 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 2022

Financial risk management

- continued

2.6 Operational risk

Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated

with the Group

’s processes, personnel, technology and infrastructure, and from external

factors

other than credit, market and liquidity risks such as those arising from legal and regulatory

requirements and generally accepted standards of corporate behaviour. The

Company’s

Board of

Directors is primarily responsible for the development and implementation of policies and

procedures to ensure that operational risks are managed effectively.

The Group mitigates the possibility of impact risk events through the implementation of a business

continuity plan, which encompasses risk mitigation achieved through back-up information security

infrastructures, back-up disaster recovery sites and insurance covers over particular business risks.

Such systems enable the Group to operate on an ongoing basis and limit losses in the event of

severe business disruption.

2.7 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

2022 and 2021

, the Group’s total borrowings amounted to €25 million

and its total capital amounted

€

79 million

, consisting of total equity and borrowings. Hence the Group’s borrowings/capital ratio

at 31 December 2022 and 2021 amounted to 32%.

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 obligati

ons

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-we

ighted assets (“Capital requirements ratio”) above the prescribed minimum level at all times.

During the year ended 31 December 2022, 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 2022

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 2022

Assets

Financial assets measured at FVPL:

Non-fixed income instruments

535,215

Dispute resolution funding assets

1,327,792

Equity instruments

3,017,180

Loans and advances to customers

792,600

Financial assets measured at FVOCI:

Debt securities

18,153,403

Total financial assets at fair value

18,153,403

5,672,787

23,826,190

As at 31 December 2021

Assets

Financial assets measured at FVPL:

Non-fixed income instruments

535,215

Dispute resolution funding assets

1,918,249

Equity instruments

3,017,180

Loans and advances to customers

792,600

Financial assets measured at FVOCI:

Debt securities

7,495,000

Total financial assets at fair value

7,495,000

6,263,244

13,758,244

Liabilities

Derivative financial instruments

309,183

Total financial liabilities at fair value

309,183

As at 31 December 2022, there were no financial liabilities measured at fair value.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Financial risk management

- continued

2.8 Fair value of financial instruments and non-financial instruments

- continued

Financial instruments measured at fair value - continued

There were no transfers between levels 1, 2 and 3 during the year.

(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 those 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 2022, instruments included in level 1 comprise debt instruments issued by the

Government of Malta, foreign sovereign treasury bills and debt instruments issued by local credit

institutions which are listed on the Malta Stock Exchange. As at 31 December 2021, 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 2022 and 31 December 2021, 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 unlisted

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, and as at 31 December 2021, a derivative

liability which entitled the holder of an option written by the Company to buy 36.25% of the shares

of Merkanti Diesel Limited (Note 22).

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.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Financial risk management

- continued

2.8 Fair value of financial instruments and non-financial instruments

- continued

Financial instruments measured at fair value - continued

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.

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 2021

559,518

2,624,550

3,017,180

792,600

6,993,848

Additions/Acquisitions

480,965

Disposals

(57,130)

Repayments

(1,450,316)

Net movement in fair value

263,050

Foreign exchange

adjustments

32,827

At 31 December 2021

535,215

1,918,249

3,017,180

792,600

6,263,244

At 1 January 2022

535,215

1,918,249

3,017,180

792,600

6,263,244

Additions/Acquisitions

961,131

Repayments

(1,181,314)

Net movement in fair value

(370,274)

At 31 December 2022

535,215

1,327,792

3,017,180

792,600

5,672,787

There were no transfers between different levels of the fair value hierarchy during the years ended

31 December 2022 and 2021.

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

Loans and advances to banks and customers as well as other receivables are carried at amortised

cost in the statements of financial position. The directors consider the carrying amounts of loans

and advances to customers and banks

and of the Group’s and Company’s other receivables

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 2022

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 amounts owed to customers and amounts owed to banks are estimated by

reference to discounted cash flows, applying current interest rates offered for deposits of similar

remaining maturities. The fair value of the amounts owed to customers and amounts owed to banks

at 31 December 2022 and 31 December 2021 are 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 2022

was €

24,500,000

(2021

: €

25,002,500). 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

2022

and 2021 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 2022 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 2022 and 2021

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 leased out as offices and industrial premises to

third parties including

the Group’s related parties (Note

39). All the recurring property fair value

measurements at 31 December 2022 and 2021 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 2022 and

2021.

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 2022

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 independent and qualified valuers. 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 valuers, together with the assumptions and the valuation models

used by the valuers, 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 valuations have been performed using the unobservable inputs described

below:

(i)

Comparative value approach for developed and undeveloped land

Comparable land values

per sqm

derived

from

the

Regional

Authorities

for

Survey

and

Geoinformation covering Saxony-Anhalt as at 1 January 2022

(2021: 31 December 2020).

Other 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.

(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 less an appropriate level of management costs,

including: administrative costs, maintenance expenses and rental

failure costs, deemed necessary for the operation of the buildings.

Capitalisation rate

based on average real estate rental yield rates observed by the

valuer for comparable properties in the respective regions. Since

the properties comprise a mixture of uses, a weighted rental yield

was applied by the valuer.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

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)

life

based on the valuer

’

s best estimate of the remaining useful life of

the buildings, after taking into consideration the location, the state

of construction and possible economic utilisation of the buildings.

Other building specific

adjustments

object-specific costs and income affecting the ultimate value of the

real estate at hand, including repairs and maintenance costs and

vacancy costs.

At 31 December 2022

Significant

Range of

Fair value

Valuation

unobservable

€’000

technique

input

inputs

Description by class

Land

19,096

Comparative

value

approach

Comparable

land values

per sqm

€10

€20 per

sqm

Buildings - current use as

third

party offices, production and

storage facilities

13,405

Capitalised

maintainable

income

approach

Maintainable

income

€679,000

€985,000 p.a.

Capitalisation

rate

6.75%-7%

Expected

service

(useful) life

15-30 years

Land and building specific

adjustments

(1,536)

Total fair value

30,965

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Financial risk management

- continued

2.8

Fair value of financial instruments and non-financial instruments

- continued

Non-financial instruments measured at fair value - continued

At 31 December 2021

Significant

Range of

Fair value

Valuation

unobservable

€’000

technique

input

inputs

Description by class

Land

20,905

Comparative

value

approach

Comparable

land values

per sqm

€10

€20 per

sqm

Buildings - current use as

third

party offices, production and

storage facilities

13,354

Capitalised

maintainable

income

approach

Maintainable

income

€555,000

€696,000 p.a.

Capitalisation

rate

6.75%-7%

Expected

service

(useful) life

15-30 years

Land and building specific

adjustments

(1,393)

Total fair value

32,866

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, subjective or complex judgments.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Balances with Central Bank of Malta and cash

Group

2022

2021

€

Cash in hand

2,288

1,811

Balances held with Central Bank of Malta

14,571,689

9,958,793

14,573,977

9,960,604

As at 31 December 2022, 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 amounting to €252,435 (2021: €98,594) bearing interest at 2% (2021: 0%). Deposits with

the

Central Bank amou

nting to €5,573,212 (2021: €3,497,303) are withdrawable on demand and were

subject to an interest rate of 2% (2021: negative interest of 0.5%) per annum. The remaining

deposits of €8,746,042 (2021: €6,362,896) consisted of money market placements with a

contractual maturity of less than seven days and with interest rates of up to 4.24%. per annum.

Loans and advances to banks and other financial institutions

Group

Company

2022

2021

2022

2021

€

Repayable on call and at short notice

4,130,709

4,645,198

781,441

270,387

Term loans and advances

4,971,919

2,000,000

5,600,000

Allowances for expected credit losses

(45,611)

(37,581)

9,057,017

4,607,617

2,781,441

5,870,387

Term loans and advances are unsecured, have been granted for a period of 18 months with a

maturity date of 26 March 2024 and bear interest at a rate equal to the ECB deposit facility rate plus

margin of 2.38% per annum. As at 31 December 2022, the interest rate was 3.13%. 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 2022, the

Group’s

amounts repayable on call and at short notice due from other

financial institutions amount

to €1,560,053 (2021: €2,089,481) and

those from other banks amount

to €2,570,656 (2021: €

2,555,717)

. All the Company’s amounts repayable on call and at short notice

are due solely from banks.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Loans and advances to customers

Group

2022

2021

€

Gross loans and advances

12,919,164

11,452,366

Allowance for credit losses

(94,569)

(65,695)

Carrying amount as at 31 December

12,824,595

11,386,671

Gross loans and advances to customers at 31 December 2022 include credit exposures with related

parties amounting to €

2,650,000 (2021:

€

2,650,000) as well as

€10,269,164 (2021: €8,802,366)

which is 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 2022 and 2021 were as follows:

Group

2022

2021

€

At beginning of year

65,695

142,662

Change in expected credit losses (Note 35)

28,874

(78,265)

Changes due to foreign exchange movements

1,298

At end of year

94,569

65,695

Financial assets mandatorily measured at fair value through profit or loss

Group

Company

2022

2021

2022

2021

€

Non-fixed income securities

535,215

Dispute resolution funding assets

1,327,792

1,918,249

Equity instruments

3,017,180

267,180

Loans and advances to customers

792,600

5,672,787

6,263,244

802,395

As at 31 December 2022 and 2021

, the Group’s financial instruments that are mandatorily

measured at fair value through profit or loss comprise unlisted non-fixed income securities issued

by a special purpose vehicle set up specifically to finance certain dispute resolution claims, 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. 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 2022

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

2022

2021

2022

2021

€

At 1 January

6,263,244

6,993,848

802,395

267,180

Additions/Acquisitions

961,131

480,965

535,215

Disposals of non-fixed income

securities

(57,130)

Repayments of dispute resolution

funding assets

(1,181,314)

(1,450,316)

Net movement in fair value of

dispute resolution funding assets

(370,274)

263,050

Foreign exchange adjustments

32,827

At 31 December

5,672,787

6,263,244

802,395

Financial assets measured at fair value through other comprehensive income

Group

2022

2021

€

Treasury bills

11,441,178

Debt and other fixed income instruments

6,712,225

7,495,000

18,153,403

7,495,000

Analysed by issuer:

- foreign general government

11,441,178

- local general government

6,493,225

7,269,452

- local credit institutions

219,000

225,548

18,153,403

7,495,000

Listing status:

- listed on foreign stock exchanges

11,441,178

- listed on Malta Stock Exchange

6,712,225

7,495,000

18,153,403

7,495,000

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

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

2022

2021

€

At 1 January

7,495,000

7,059,549

Acquisitions

11,454,000

1,119,300

Disposals/redemptions

(132,900)

(600,000)

Amortisation

(25,897)

(40,633)

Net fair value movements

(636,800)

(43,216)

At 31 December

18,153,403

7,495,000

As at 31 December 2022, an expected credit loss allowance amounting to €1,843 was accounted

for in terms of IFRS 9 (2021: €1,895).

Investments in subsidiaries

Company

2022

2021

€

At 1 January

50,582,087

Disposal of investments in subsidiaries

(51,237)

At 31 December

50,530,850

50,582,087

The subsidiaries at 31 December 2022, 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 Limited

Julian’s, STJ 3140, Malta

Merkanti (D)

Aragon House Business Centre, Dragonara Road

International Limited

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

As at 31 December 2021, the results and financial position of MFCR Oriental S.A., with a registered

office at Juncal 1378 (1301), Montevideo, Uruguay also affected the figures of the Group.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

Investments in subsidiaries

- continued

On 1 July 2020, the Company had acquired 100% of the issued share capital of MFCR Oriental S.A.,

which is a trading company incorporated under the Laws of Uruguay. On 31 July 2022, the Company

disposed the 100% shares in MFCR Oriental S.A. to a third-party at US$1. At Company level, the

disposal resulted in a loss

of €50,800 which is the difference between the carrying amount of the

investment MFCR Oriental of €50,801 and the consideration received.

At Group level, the disposal

resulted in

a gain of €265,124 which is the diffe

rence between the net liabilities of MFCR Oriental at

the time of disposal

of €265,123

and the consideration received.

As at 31 December 2021, the Company held 100% of the Ordinary shares of Merkanti Diesel

Limited. During 2020, the Company entered into an agreement in which it granted an option to a

third party to acquire 435 shares (36.25%) in Merkanti Diesel Limited exercisable upon settlement

of specific dispute resolution claims at an exercise price of €1.00. Simultaneously, upon the

exercise of the option, the Company retained the right to re-acquire these shares at the net tangible

asset value of Merkanti Diesel Limited. As at 31 December 2021, this contract had given rise to a

derivative liability with a fair value of €309,183. During 2022

, the third party exercised its option.

The transaction resulted in a fair value

gain of €36,

399 (Note 31), which is the difference between

the fair value of the derivative liability

previously recognised amounting to €30

9,183 and the amount

attributable to the non-

controlling interest amounting to €272,

784 representing its pro-rata share in

the net assets of Merkanti Diesel with respect to the 435 shares. Upon exercise of the option, the

Company retained the right to re-acquire these shares at the net tangible asset value of Merkanti

Diesel Limited until all the assets are realised and all profits are distributed by Merkanti Diesel

Limited. As at 31 December 2022, the Company held 63.75% (2021: 100%) in Merkanti Diesel. The

435 shares held by the third party does not have any voting rights and the Company retained 100%

of the voting rights in Merkanti Diesel Limited as at 31 December 2022.

During both 2022 and 2021, 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 Limited and Merkanti (D) International Limited.

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.

On 7 March 2022, the Company entered into an agreement to acquire Sparkasse (Holdings) Malta

Ltd (“Sparkasse Holdings”), the parent of Sparkasse Bank Malta plc (“Sparkasse Bank”)

. It is

intended that the Company’s subsidiary Bank will be merged with Sparkasse Bank to fo

rm a larger

independent institution. Should the merger take place, certain assets of the subsidiary Bank,

including intangible assets and items of property, plant and equipment with a carrying amount of

approximately €1 million as at 31 December 2022, may

need to be written off.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

10.

Investment property

Group

2022

2021

€

At 1 January

32,866,000

32,587,000

Disposals

(1,929,887)

(5,000)

Changes in fair value

28,887

284,000

At 31 December

30,965,000

32,866,000

During 2022, the Group disposed of a part of its investment property, in respect of which a profit of

€96,

509

(2021: €2,406) was realised.

The Group’s investment property is measured at fair value. The fair value as at 31 December 2022

and 2021 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 2022

11.

Property, plant and equipment

Group

Office

improvements

Computer

and

equipment

Total

€

At 1 January 2021

Cost

423,764

357,651

781,415

Accumulated depreciation

(338,621)

(125,861)

(464,482)

Net book amount

85,143

231,790

316,933

Year ended 31 December 2021

Opening net book amount

85,143

231,790

316,933

Additions

22,962

13,898

36,860

Disposals

(1,904)

(79,412)

(81,316)

Depreciation charge

(36,995)

(48,327)

(85,322)

Depreciation released on disposals

833

20,796

21,629

Closing net book amount

70,039

138,745

208,784

At 31 December 2021

Cost

444,822

292,137

736,959

Accumulated depreciation

(374,783)

(153,392)

(528,175)

Net book amount

70,039

138,745

208,784

Year ended 31 December 2022

Opening net book amount

70,039

138,745

208,784

Additions

11,131

15,707

26,838

Disposals

(83,768)

(13,451)

(97,219)

Depreciation charge

(35,713)

(50,590)

(86,303)

Depreciation released on disposals

83,768

13,451

97,219

Closing net book amount

45,457

103,862

149,319

At 31 December 2022

Cost

372,185

294,393

666,578

Accumulated depreciation

(326,728)

(190,531)

(517,259)

Net book amount

45,457

103,862

149,319

During 2021, the Group disposed of a part of its property, plant and equipment, in respect of which

a loss

of €

54,115 was realised.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

11.

Property, plant and equipment

- continued

Company

Office

improvements

and

equipment

€

At 1 January 2021

Cost

124,629

Accumulated depreciation

(27,323)

Net book amount

97,306

Year ended 31 December 2021

Opening net book amount

97,306

Depreciation charge

(24,985)

Closing net book amount

72,321

At 31 December 2021

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

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

12.

Intangible assets

Group

Computer

software

€

At 1 January 2021

Cost

263,238

Accumulated amortisation

(245,355)

Net book amount

17,883

Year ended 31 December 2021

Opening net book amount

17,883

Additions

629,235

Amortisation charge

(181)

Closing net book amount

646,937

At 31 December 2021

Cost

892,473

Accumulated amortisation

(245,536)

Net book amount

646,937

Year ended 31 December 2022

Opening net book amount

646,937

Additions

312,190

Amortisation charge

(2,195)

Closing net book amount

956,932

At 31 December 2022

Cost

1,204,663

Accumulated amortisation

(247,731)

Net book amount

956,932

As at 31 December 2022

, computer software amounting to €

942,660 (2021:

€629,235

) 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 2022, fully amortised computer software with an

original cost of €245,538 is still in use.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

13.

Right-of-use assets and lease liabilities

The Group and the Company lease office space. The lease contracts are for fixed periods with no

extension periods but can be preterminated subject to six months advance notice.

Leases are recognised as a right-of-use

(‘ROU’)

asset and a corresponding liability at the date at

which the leased asset is available for use by the Group. The right-of-use asset is recognised at an

amount equal to the lease liability at the date at which the leased asset is made available for use,

and subsequently depreciated till the earlier of the end of the useful life of the ROU asset or the end

of the lease term.

As at 31 December 2022, the Group does not have leases with contract terms shorter than one

year and leases of low-value items for which the Group has elected not to recognise right-of-use

assets.

Right-of-use-assets

Group

Company

2022

2021

2022

2021

€

At 1 January

428,965

583,595

428,304

573,083

Depreciation

(145,439)

(154,630)

(144,778)

(144,779)

At 31 December

283,526

428,965

283,526

428,304

The lease liabilities were initially measured at the present value of the remaining lease payments,

discounted using the

Group’s incremental borrowing rate, which represents the rate that the

Company or its subsidiaries would have to pay to borrow the funds necessary to obtain an asset of

similar value to the right-of-use asset in a similar economic environment with similar terms, security

and conditions. The movement in lease liabilities is analysed below:

Group

Company

2022

2021

2022

2021

€

At 1 January

478,411

623,768

478,017

612,036

Interest expense on lease liabilities

15,377

21,162

15,371

21,027

Repayment of lease liabilities

(163,199)

(166,519)

(162,799)

(155,046)

At 31 December

330,589

478,411

330,589

478,017

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

13.

Right-of-use assets and lease liabilities

- continued

Lease liabilities are split into maturity groupings as follows:

Group

Company

2022

2021

2022

2021

€

Current

161,780

147,822

161,780

147,428

Non-current

168,809

330,589

168,809

330,589

At 31 December

330,589

478,411

330,589

478,017

The income statement reflects the following amounts relating to leases:

Group

Company

2022

2021

2022

2021

€

Depreciation charge of right-of-use-assets

145,439

154,630

144,779

Interest expense

15,377

21,162

15,371

21,027

Total cash payments for leases of the Group in 2022 was

€

147,822 (2021

: €

145,357).

14.

Other receivables

Group

Company

2022

2021

2022

2021

€

Trade receivables

111,215

107,479

2,600

Amounts due from ultimate

parent company

11,144,191

12,196,109

5,892,726

6,813,839

Amounts due from other related parties

1,457,450

1,205,657

1,457,450

1,205,657

Amounts due from subsidiaries

15,171,874

14,924,899

Amount due from a shareholder

15,000

12,712,856

13,524,245

22,524,650

22,961,995

Allowance for credit losses

(39,334)

(49,481)

(84,797)

(99,677)

12,673,522

13,474,764

22,439,853

22,862,318

Amounts due from the ultimate parent company consist of a revolving credit facility granted by the

Company amounting to €5,892,727 (2021: €5,892,727) which is subject to a fixed interest rate

and

as at 31 December 2021, a receivable amounting to €921,112 which is repayable on demand and

is not subject to interest. At Group level, amounts due from the ultimate parent also include a loan

amoun

ting to €4,660,000 (2021: €4,660,000) granted by a subsidiary which is repayable on

demand and subject to a fixed interest rate and receivables amounting to €591,464 (2021:

€722,270) which are repayable on demand and are not subject to interest.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

14.

Other receivables

- continued

Amounts due from subsidiaries include the provision of subordinated loans amounting to

€14,000,000

(2021: €14,000,000)

bearing interest at fixed rates and receivables amounting to

€1,171,873 (2021: €924,899)

, which are not subject to interest

, €1,171,431 of which relates to

dividends receivable.

As at 31 December 2022 and 2021, amounts due from other related parties are repayable on

demand and not subject to interest.

15.

Deferred taxes

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 income taxes relate to the

same fiscal authority.

The following amounts determined after appropriate offsetting are shown in the statements of

financial position:

Group

Company

2022

2021

2022

2021

€

Deferred tax assets

168,630

379,948

71,935

Deferred tax liabilities

(2,226,127)

(2,214,882)

(2,057,497)

(1,834,934)

71,935

Deferred taxes are calculated on all temporary differences under the liability method and are

measured at the tax rates that are expected to apply to the period when the asset is realised or the

liability is settled based on tax rates (and tax laws) that have been substantively enacted by the end

of the reporting period. The principal tax rates used are 35% (2021: 35%) in relation to the Maltese

jurisdiction, being the effective tax rate at Company level, and 15.825% (2021: 15.825%) in respect

of the German fiscal authority.

Under Maltese corporate income tax rules, refunds are available to shareholders of Maltese

compani

es following the distribution of profits to the shareholders. The ‘standard’ refund amounts to

six-sevenths of the tax paid in Malta, resulting in a net post-refund effective tax rate in Malta

typically amounting to 5%. This effective tax rate has been utilised for the purpose of the

consolidated financial information.

Deferred tax assets and liabilities are attributable to the following:

Group

Company

2022

2021

2022

2021

€

Unremitted earnings

168,630

294,662

Unabsorbed tax losses

85,286

71,935

Fair valuation of properties

(2,226,127)

(2,214,882)

(2,057,497)

(1,834,934)

71,935

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

15.

Deferred taxes

- continued

The deferred tax liabilities arise

on the investment properties of the Group’s subsidiaries Merkanti

(A) International Limited and Merkanti (D) International Limited.

The deferred tax liabilities are calculated on the difference between the balance sheet value of the

investment property, being the fair value as per the external valuation report, less the tax cost as

stipulated by the local German GAAP, which would be the capital gain recognised upon the sale of

these assets. This difference is multiplied by the German tax rate of 15.825%.

These two companies were redomiciled to Malta with effect from 8 July 2019, and as a result

became subject to Maltese income tax.

For Maltese income tax purposes, any unrealised fair value gains derived from the revaluation of

the investment properties of the Group’s subsidiaries Merkanti (A) International Limited and

Merkanti (D) International Limited should also result in a deferred tax liability. Such deferred tax

liability should be calculated by multiplying the fair value gains, being the difference between the

value of the immovable properties as at year end less their cost of acquisition, with the standard

corporate rate of tax in Malta of 35%.

However, for Maltese income tax purposes, in terms of Article 4A of the Maltese Income Tax Act

(Chapter 123, Laws of Malta), there is an election for immovable properties to be deemed to be

assets acquired by the companies on the date of their redomiciliation to Malta at a cost which is

deemed to be their market value as at that date.

Furthermore, when calculating the capital gain for Maltese income tax purposes derived upon the

future transfer of any of the immovable properties, the companies are able to claim relief from tax

suffered in Germany by way of a tax credit against the Maltese income tax liability, if any. As a

result, as at 31 December 2022 and 2021, no tax liability is expected to arise in Malta over the

foreseeable future and accordingly the German tax rate remains suitable for determining the

Group’s deferred tax liability in this respect.

The deferred tax asset in respect of unremitted earnings arises as a result of profits earned by

Merkanti Diesel Limited, and is calculated as the difference between the Maltese corporate income

tax rate of 35% to which the profits earned by Merkanti Diesel Limited are subject, and the effective

tax rate of 5% at consolidated level, which difference represents the amount of the Malta tax refund

available to Merkanti Holding p.l.c. following a dividend distribution by Merkanti Diesel Limited. This

tax asset has not been offset against current tax liabilities arising in respect of profits earned by

Merkanti Diesel Limited as the balances are not expected to be settled on a net basis.

The recognised deferred tax asset and liabilities are expected to be recovered or settled after more

than 12 months from the end of the reporting period.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

15.

Deferred tax

- continued

The movements in deferred tax assets and liabilities, which are all recognised in profit or loss, are

analysed below:

Group

Company

2022

2021

2022

2021

€

As at 1 January

(1,834,934)

(1,764,755)

71,935

49,428

Deferred tax asset arising in respect of

unremitted earnings

(126,032)

(24,559)

Deferred tax asset arising in respect of

unabsorbed tax losses

(85,286)

35,858

(71,935)

22,507

Deferred tax liabilities arising on the fair

valuation of properties

(11,245)

(81,478)

As at 31 December

(2,057,497)

(1,834,934)

71,935

At 31 December 2022

, the Group had unutilised tax losses amounting to €

60.7 million (2021

: €6

2.8

million) on which no deferred tax asset was recognised in the consolidated statement of financial

position in view of the uncertainty of realisation of these tax benefits. Similarly, as at 31 December

2022, the Company had unutilised tax losses amounting t

o €

359,880 (2021

: €

728,274) on which no

deferred tax asset was recognised. Tax losses have no expiry date and can be carried forward

indefinitely.

16.

Accrued income and other assets

Group

Company

2022

2021

2022

2021

€

Accrued interest receivable

2,641,225

1,624,937

2,035,340

1,945,978

Other fees receivable

547,500

53,474

Other assets

379,634

391,271

373,925

65,628

Prepayments

464,318

179,994

333,755

40,053

4,032,677

2,249,676

2,743,020

2,051,659

As at

31 December 2022,

the Group’s accrued interest receivable amounting to €2,201,657 (2021:

€1,371,830) is attributable to the ultimate parent company and other fee

s receivable amounting to

€497,500 (2021: €3,474)

are attributable to other related parties. At Company level, accrued

interest receivable amounting to €1,830,642 (2021: €1,344,492) is

attributable to the ultimate parent

company and

€204,698 (2021: 601,484)

is attributable to subsidiaries.

Merkanti Holding p.l.c.

Annual Financial Report and Consolidated Financial Statements - 31 December 2022

17.

Share capital

2022

2021

€

Authorised

1,000,000,020 (2021: 2021: 33,333,334) Ordinary “A” shares

€0.10 each (2021: €3)

100,000,002

1,000,000,020 (2021: 2021: 33,333,334) Ordinary “B” shares

of €0.10 each (2021: €3)

100,000,002

200,000,004

Issued and fully paid up shares

16,673,333 (2021: 16,666,666)

Ordinary “A” shares of

€0.10 each (2021: €3 each)

1,667,333

49,999,998

Ordinary “B” shares of €0.10 each (2021: €3

)

1,667,333

50,000,001

Issued but not fully paid up shares

(2021: 6,667

Ordinary “A” shares of €3 of which €0.25 is paid

)

20,001

Total shares issued

1,667,333

50,020,002

The holders of ordinary “A” shares and ordinary “B” shares are entitled to one vote per share at

general meetings of the Group for

each share held. The ordinary “A” shares and ordinary “B”

shares rank equally with regard to the Group’s residual assets.

By virtue of a resolution dated 10 September 2020 and with effect from 20 October 2020, the

Company’s shareholders approved the incre

ase in issued share capital by

€20,000 th

rough the

allotment of 20,000 shares at €1 per share to Merchants Employees Incentive Corp, a third party.

Out of these, as at 31 December 2021, 25% had been fully paid up and the remaining 75% had

been called and were

accordingly included under ‘Other receivables’ (Note 14).

As at 31 December

2022, these shares were fully paid-up.

By virtue of a

resolution dated 22 December 2021, the Company’s shareholders approved the

transfer of 1 ordinary “A” share held by

Scully Royalty Limited to Merchants Employee Incentive

Corp at a price of €1. Furthermore, the Company’s shareholders approved the increase of the

nominal value of all shares from €1 to €3 per share

, and simultaneously the reduction of each of the

authoris

ed ordinary “A” and “B” shares from 100,000,000 shares to 33,333,334 shares and the

reduction of the issued ordinary “A” shares from 49,999,999 shares to 16,666,666 shares

Following the increase in the nominal value of all shares, the 1 ordinary “

” share

previously held

by Gardaworld CN Ltd

carried at €1

was

valued at €3. This resulted

a payment of €2 for the 1

ordinary share previously held by Gardaworld CN Ltd and accordingly, an increase in share capital

of €2

as at 31 December 2021.

By virtue of a

resolution dated 24 June 2022, the Company’s shareholders approved the reduction

of the nominal value of all shares from €3 per share to €0.10 per share, and simultaneously the

increase of each of the authorised ordinary “A” and “B” shares from 33,333,334

shares to

1,000,000,020 shares. The shareholders also resolved to reduce the issued share capital from

€50,020,002 to €1,667,333, divided into 16,673,333 ordinary “A” shares with a nominal value of

€0.10 per share and 1 ordinary “B” share with a nominal value of €0.10

, and a corresponding

increase of €48,352,669 in the contribution reserve

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