International Bank for Reconstruction and Development Management’s Discussion & Analysis and Condensed Quarterly Financial Statements December 31, 2018 (Unaudited) Management’s Discussion and Analysis International Bank for Reconstruction and Development (IBRD) Management’s Discussion and Analysis December 31, 2018 Contents Section I: Executive Summary Goals and the 2030 Development Agenda 3 Financial Results and Portfolio Performance 3 Key Performance Indicators 5 Section II: Overview Financial Business Model 6 Basis of Reporting 8 Section III: Financial Results Summary of Financial Results 9 Net Income and Allocable Income 10 Section IV: Risk Management Risk Governance 14 Summary & Management of IBRD’s Specific Risks 14 Section V: Fair Value Analysis Fair Value Results 20 Section VI: Governance External Auditors 24 Senior Management Changes 24 List of Tables, Figures and Boxes Tables 25 Figures 25 Boxes 25 IBRD Management’s Discussion and Analysis: December 31, 2018 1 Management’s Discussion and Analysis Section I: Executive Summary This Management’s Discussion & Analysis (MD&A) reflects the results of the International Bank for Reconstruction and Development’s (IBRD’s) financial performance for the six-month period ended December 31, 2018. This document should be read together with IBRD’s Financial Statements and MD&A for the fiscal year ended June 30, 2018 (FY18). IBRD undertakes no obligation to update any forward-looking statements. IBRD produces publicly available information relating to its development operations’ results and corporate performance, which can be found in the World Bank Corporate Scorecard and Sustainability Review. Box 1 provides IBRD’s selected financial data as of, and for the six months ended, December 31, 2018 and 2017, as well as for the fiscal years ended June 30, 2015-2018. Box 1: Selected Financial Data In millions of U.S. dollars, except ratios which are in percentages As of and for the six months ended December 31, As of and for the fiscal years ended June 30, 2018 2017 2018 2017 2016 2015 Lending Highlights (Section III) Commitments a $ 5,467 $ 7,576 $ 23,002 $ 22,611 $ 29,729 $ 23,528 Gross disbursements b 8,755 8,868 17,389 17,861 22,532 19,012 Net disbursements b 3,579 2,333 5,638 8,731 13,197 9,999 Reported Basis (Section III) Income Statement Board of Governors-approved and other transfers $ (338) $ (178) $ (178) $ (497) $ (705) $ (715) Net income (loss) 359 228 698 (237) 495 (786) Balance Sheet Total assets $ 413,268 $ 418,887 $ 403,056 $405,898 $ 371,260 $ 343,225 Net investment portfolio 74,602 77,560 73,492 71,667 51,760 45,105 Net loans outstanding 186,371 181,554 183,588 177,422 167,643 155,040 Borrowing portfolio 217,032 215,707 213,652 207,144 178,231 158,853 Key Management Indicators Allocable Income (Section III) $ 557 $ 419 $ 1,161 $ 795 $ 593 $ 686 Usable Equity c (Section IV) $ 43,372 $ 42,200 $ 43,518 $ 41,720 $ 39,424 $ 40,195 Equity-to-loans Ratio d (Section IV) 22.7% 22.5% 22.9% 22.8% 22.7% 25.1% a. Commitments include guarantee commitments and guarantee facilities that have been approved by the Executive Directors. b. Amounts include transactions with the International Finance Corporation (IFC), and loan origination fees. c. Excluding amounts associated with unrealized mark-to-market gains/losses on non-trading portfolios, net and related cumulative translation adjustments. d. Ratio is computed using usable equity and excludes the respective periods’ income. Full fiscal year usable equity includes proposed transfer to the General Reserve. 2 IBRD Management’s Discussion and Analysis: December 31, 2018 Management’s Discussion and Analysis Section I: Executive Summary Section I: Executive Summary Goals and the 2030 Development Agenda At IBRD’s Spring Meetings in April 2018, the Board of Governors (Governors) endorsed a package that includes a With its many years of experience and its depth of knowledge in General Capital Increase (GCI) and a Selective Capital Increase the international development arena, IBRD plays a key role in (SCI), as well as institutional and financial reforms designed to achieving the World Bank Group’s (WBG1) overarching goals of ensure long-term financial sustainability. The package provides ending extreme poverty by 2030 and promoting shared support for the priorities identified under the Forward Look prosperity in a sustainable manner2. The WBG has identified strategy. On October 1, 2018, the Governors approved the capital three key priorities to achieve this: sustainable and inclusive increase, which will result in additional subscribed capital of up to growth, investment in human capital, and strengthening $60.1 billion, with $7.5 billion of paid-in capital and $52.6 billion resilience. These goals and priorities reflect and support the of callable capital, over the next five years. international community’s development agenda set for 2030, which include the Sustainable Development Goals (SDGs). Financial Results and Portfolio Performance The financial performance of IBRD reflects the impact from the The Forward Look: A Vision for the WBG in 2030, describes measures put in place in previous years to increase its financial how the WBG will deliver on its twin goals and its three capacity and ensure its long-term financial sustainability. priorities. The Forward Look rests on four pillars: serving all clients; leading on global issues; mobilizing resources for development; and improving the business model. 1 The other WBG institutions are the International Development Association (IDA), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and the International Centre for Settlement of Investment Disputes (ICSID). 2 By decreasing the percentage of people living on less than $1.90 a day to no more than 3% by 2030 and improving the income growth of the bottom 40% in each country. IBRD Management’s Discussion and Analysis: December 31, 2018 3 Management’s Discussion and Analysis Section I: Executive Summary Net Income and Allocable Income IBRD had net income of $359 million on a reported basis for the first six months of FY19, compared with net income of $228 million during the same period in FY18. The higher net income during the first six months of FY19 is primarily due to unrealized mark-to-market gains experienced on the non-trading portfolios compared with unrealized mark-to-market losses in the same period last year, as well as the higher net interest revenue and lower loan loss provision. The unrealized mark-to-market gains and losses on the non-trading portfolios introduce volatility into IBRD’s reported net income. Given IBRD’s intention to maintain its non-trading portfolio positions, unrealized mark-to-market gains and losses are not included in IBRD’s allocable income, which is the income measure used as the basis for making net income allocation decisions. IBRD’s allocable income during the first six months of FY19 was $557 million, an increase of $138 million from the same period in FY18. The higher allocable income was primarily due to an increase in IBRD’s net interest revenue and a decrease in the loan loss provision in FY19 as compared to FY18 (See Section III). Loans IBRD’s lending operations during the first six months of FY19 resulted in $5.5 billion of new loan commitments and $3.6 billion of net loan disbursements. The latter was the key driver in the increase in net loans outstanding, from $184 billion as of June 30, 2018 to $186 billion as of December 31, 2018. Investments IBRD’s investment portfolio increased by $1.1 billion, from $73.5 billion as of June 30, 2018 to $74.6 billion as of December 31, 2018. The investments remain concentrated in the upper end of the credit spectrum, with 62% rated AA or above (see Table 8), reflecting IBRD’s objective of principal protection and resulting preference for high quality investments. Borrowings As of December 31, 2018, the borrowing portfolio totaled $217 billion, $3 billion above June 30, 2018. This increase was mainly due to net new issuances of $3.8 billion. The debt issuances were highly diversified; 21 currencies ranging in size from $0.5 million to $5 billion, with an average maturity of 4.6 years. The funds raised financed development lending operations and satisfied the increase in liquidity requirements. Usable Equity IBRD’s usable equity has remained stable compared with June 30, 2018. The Governors’ approval of the GCI and SCI resolutions, on October 1, 2018, will enhance IBRD’s financial capacity and allow IBRD to better support the development priorities of its client countries. 4 IBRD Management’s Discussion and Analysis: December 31, 2018 Management’s Discussion and Analysis Section I: Executive Summary Key Performance Indicators Lending – Lending commitments (including guarantees) were 28% lower compared with the same period in FY18 (Table 4). During the first six months of FY19, IBRD committed $5.5 billion to help its borrowing member countries finance their development needs. The region with the largest share of commitments was Latin America and the Caribbean with 29% in FY19 YTD. As of December 31, 2018, IBRD’s net loans outstanding amounted to $186 billion, an increase of $2.8 billion from June 30, 2018. In billions of U.S dollars Capital Adequacy and Liquidity – The Equity-to-Loans ratio was 22.7% as of December 31, 2018, marginally lower than the 22.9% as of June 30, 2018. The net investment portfolio reached $75 billion as of December 31, 2018. In addition to pre-funding activities during the period, IBRD maintains high levels of liquidity in its investment portfolio to ensure it can meet its liquidity needs, even under potential scenarios of severe market disruptions. The borrowing portfolio was $217 billion as of December 31, 2018, an increase of $3 billion compared with June 30, 2018. In billions of U.S dollars (except for ratio) Financial Results – On a reported basis, IBRD had net income of $359 million for the first six months of FY19 compared with net income of $228 million during the same period in FY18. This primarily reflects unrealized mark-to-market gains experienced on the non-trading portfolios, compared with unrealized mark-to-market losses in the first six months of FY18 (See Table 1). After the standard adjustments to arrive at allocable income, IBRD had allocable income of $557 million for the first six months of FY19, higher by $138 million compared with the same period in FY18. In millions of U.S dollars IBRD Management’s Discussion and Analysis: December 31, 2018 5 Management’s Discussion and Analysis Section: II Overview Section: II Overview IBRD, an international organization owned by its for IBRD is reflected in the capital backing it continues to receive 189-member-countries, is one of the five institutions of the from its members, and in the record of its borrowing member WBG. Each of these institutions is legally and financially countries in meeting their debt service obligations to IBRD. Sound independent, with separate assets and liabilities. IBRD is not financial and risk management policies and practices have enabled liable for the obligations of the other institutions. IBRD to maintain its capital adequacy, diversify its funding sources, hold a portfolio of liquid investments to meet its financial IBRD is one of the largest Multilateral Development Banks commitments, and limit its risks, including credit and market (MDB) in the world and is able to combine knowledge services risks. and financing with global reach. While its main business activity is extending loans to its eligible member countries, by operating IBRD pursues its development goals primarily by providing loans, globally, IBRD maintains a depth of development knowledge, guarantees, and knowledge services for development-focused uses its convening power to advance the global public goods projects and programs to governments of middle-income and agenda, and coordinates responses to regional and global creditworthy low-income countries. challenges. IBRD offers its borrowers long-term loans that can have a final Financial Business Model maturity of up to 35 years. Borrowers may customize their repayment terms to meet their debt management or project needs. IBRD’s objective is not to maximize profits, but to earn adequate Loans are offered on both fixed and variable terms, and in income to ensure its financial strength to fulfill its sustainable multiple currencies; though borrowers have generally preferred development activities. IBRD seeks to generate sufficient loans denominated in U.S dollars and euros. IBRD also supports revenue to conduct its operations, and to set aside funds in its borrowers by providing access to risk management tools such reserves to strengthen its financial sustainability. It also seeks to as derivative instruments, including currency and interest rate provide support to IDA and trust funds via income transfers for swaps and interest rate caps and collars. other developmental purposes. Figure 1 illustrates IBRD’s financial business model. The financial strength of IBRD is based on the support it receives from its shareholders, and on its array of financial policies and practices. Shareholder support Figure 1: IBRD’s Financial Business Model 6 IBRD Management’s Discussion and Analysis: December 31, 2018 Management’s Discussion and Analysis Section: II Overview In order to meet its development goals, it is important for IBRD Surplus, and for other development purposes including transfers to to intermediate funds for lending from the international capital IDA. markets. IBRD’s loans are financed through its equity, and from In addition to the revenue generated from activities as shown in borrowings raised in the capital markets. IBRD is rated triple-A Figure 2, IBRD earns revenue from other development activities, by the major rating agencies, and its bonds are viewed as high in the form of non-interest revenue from externally funded quality securities by investors. IBRD’s funding strategy is aimed activities. Mobilization of external funds from third-party partners at achieving the best long-term value on a sustainable basis for includes trust funds, reimbursable funds and fee-based services its borrowing members. This strategy has enabled IBRD to from member countries, such as Reimbursable Advisory Services borrow at favorable market terms and pass the savings on to its (RAS), Externally Financed Outputs (EFO), and the Reserves borrowing members. IBRD issues its securities both through Advisory Management Program (RAMP). The growth of global offerings and bond issues tailored to the needs of specific non-interest revenue from externally funded activities provides an markets or investor types. This is done by offering bonds to additional means to expand capacity to support the development investors in various currencies, maturities, markets, and with needs of client countries. Management continues to strengthen and fixed and variable terms, often opening new markets for align this revenue source with the overall WBG strategy and international investors by offering new products or bonds in priorities. emerging-market currencies. IBRD’s annual funding volumes vary from year to year. Funds not deployed for lending are At IBRD’s Spring Meetings in April 2018, the Governors maintained in IBRD’s investment portfolio to supply liquidity endorsed a package of measures and a capital increase designed to for its operations. enhance IBRD’s financial capacity on a sustainable basis. That package includes: IBRD makes extensive use of derivatives to manage its exposure to various market risks from the above activities. These are used • A General and Selective Capital increase that will provide to align the interest rate and currency composition of its assets up to $7.5 billion in additional paid-in capital. This includes (loan and investment trading portfolios) with that of its liabilities the allocation of shares from the current pool of unallocated (borrowing portfolio), and to stabilize the earnings on its equity. shares; See Section IV: Risk Management for additional details on how IBRD uses derivatives. • New loan pricing measures approved by the Executive Directors at the end of FY18, and implemented in FY19; Management believes that its risk management strategies, taken together, effectively manage market risk in IBRD’s operations • An increase in the Single Borrower Limit (SBL) with from an economic perspective. However, these strategies differentiation based on per capita income; approved by the introduce volatility through unrealized mark-to-market gains and Executive Directors at the end of FY18; losses on the reported basis income statement (particularly given • Continued efficiency measures and administrative the long-term nature of some of IBRD’s assets and liabilities). simplification; and Accordingly, Management makes decisions on income allocation without reference to unrealized mark-to-market gains and losses • A financial sustainability framework, which was approved on risk management instruments in the non-trading portfolios – by the Executive Directors on December 11, 2018. Under see Basis of Reporting – Allocable Income. this framework, Management will provide an update of the sustainable annual lending limit and the Executive Financial Performance Directors will approve a crisis buffer on an annual basis, IBRD’s primary sources of revenue are from loans and starting with the limit and buffer for FY20. investments (both net of funding costs), and equity contribution. These revenues cover administrative expenses, provisions for losses on loans and other exposures3 (LLP), as well as transfers to Reserves, 3 Other exposures include deferred drawdown options (DDO), irrevocable commitments, exposures to member countries’ derivatives and guarantees. IBRD Management’s Discussion and Analysis: December 31, 2018 7 Management’s Discussion and Analysis Section: II Overview Figure 2: Sources and Uses of Revenue Basis of Reporting is a non-GAAP financial measure, is an internal management measure that reflects income available for allocation. IBRD’s Financial Statements definition of allocable income starts with the net income on a IBRD’s financial statements conform with accounting principles reported basis, and includes certain adjustments, which are generally accepted in the United States of America (U.S. approved by the Board at the end of every fiscal year. These GAAP), referred to in this document as the “reported basis”. All adjustments primarily relate to unrealized mark-to-market instruments in the investment and borrowing portfolios and all gains/losses associated with its non-trading portfolios, as well as other derivatives are reported at fair value, with changes in fair the expenses associated with the Board of Governors-approved value reported in the Condensed Statement of Income, except for and other transfers, which primarily relate to the allocation of the changes in IBRD’s own credit, which effective July 1, 2018, are prior year’s net income. reflected in Other Comprehensive Income. IBRD’s loans are reported at amortized cost, except for loans with embedded IBRD uses derivatives to manage its exposure to various market derivatives, if any, which are reported at fair value. Management risks inherent in its trading and non-trading portfolios. These uses reported net income as the basis for deriving allocable derivatives are primarily used to economically align the interest income. rate and currency bases of its assets and liabilities. Fair Value Results In line with its financial risk management policies, IBRD intends IBRD reflects all financial instruments at fair value in Section V to maintain its positions in the non-trading portfolios (loans, of this document. The fair value of these instruments is affected borrowings, and derivative instruments in the Equity Management by changes in market variables such as interest rates, exchange Framework). As a result, Management has consistently followed rates, and credit risk. Management uses fair value to assess the the practice of excluding unrealized mark-to-market gains and performance of the Investment-Trading portfolio; and to manage losses on its non-trading portfolios to arrive at allocable income, various market risks, including interest rate risk and commercial since derivatives are carried at fair value with changes going counterparty credit risk. through the income statement. Allocable Income IBRD’s Articles of Agreement (Articles) require that the Governors determine the allocation of income at the end of every fiscal year. Allocable income, which 8 IBRD Management’s Discussion and Analysis: December 31, 2018 Management’s Discussion and Analysis Section III: Financial Results Section III: Summary of Financial Results The following is a discussion of the key drivers of IBRD’s financial performance, including a reconciliation between IBRD’s reported net income and allocable income. Table 1: Condensed Statement of Income In millions of U.S. dollars For the six months ended December 31, 2018 2017 Variance Interest revenue, net of funding costs Interest margin $ 647 $ 590 $ 57 Equity contribution, (including EMF) 410 350 60 Investments 47 108 (61) Net interest revenue $ 1,104 $ 1,048 $ 56 Provision for losses on loans and other exposures, net (50) (92) 42 Net non-interest expenses (Table 6) (561) (606) 45 Net other revenue (Table 5) 20 81 (61) Board of Governors-approved and other transfers (338) (178) (160) Unrealized mark-to-market gains/ (losses) on non-trading portfolios, net a 184 (25) 209 Net income $ 359 $ 228 $ 131 Adjustments to reconcile net income to allocable income: Pension and other adjustments 44 (12) 56 Board of Governors-approved and other transfers 338 178 160 Unrealized mark-to-market (gains)/ losses on non-trading portfolios, net a (184) 25 (209) Allocable income $ 557 $ 419 $ 138 a. Adjusted to exclude amounts reclassified to realized gains (losses). See Table 15. IBRD’s principal assets are its loans to member countries. These are financed by IBRD’s equity and borrowings from the capital markets. As of December 31, 2018, total assets increased by 3% from June 30, 2018. The asset growth was primarily driven by an increase in net loans outstanding and an increase in investments. In line with IBRD’s risk management strategies and consistent with the increase in investments, the receivable and payable from derivatives increased during the period compared with June 30, 2018. As of December 31, 2018, IBRD’s net derivative exposure, after master netting agreements and collateral received, was $1,338 million, of which $92 million related to commercial credit exposure (See Table 8 and Notes to Condensed Quarterly Financial Statements, Note F: Derivative Instruments). Table 2: Condensed Balance Sheet In millions of U.S. dollars As of December 31, 2018 June 30, 2018 Variance Investments and due from banks $ 74,747 $ 73,188 $ 1,559 Net loans outstanding 186,371 183,588 2,783 Receivable from derivatives 147,494 141,716 5,778 Other assets 4,656 4,564 92 Total Assets $ 413,268 $ 403,056 $ 10,212 Borrowings 212,227 208,009 4,218 Payable for derivatives 152,295 147,096 5,199 Other liabilities 6,138 6,107 31 Equity 42,608 41,844 764 Total Liabilities and Equity $ 413,268 $ 403,056 $ 10,212 IBRD Management’s Discussion and Analysis: December 31, 2018 9 Management’s Discussion and Analysis Section III: Financial Results Net Income and Allocable Income Loan Portfolio On a reported basis, IBRD had net income of $359 million for As of December 31, 2018, IBRD’s net loans outstanding the first six months of FY19, an increase of $131 million amounted to $186 billion (Table 2), 1.5% higher compared with compared with net income of $228 million during the same June 30, 2018 (Figure 4). The increase was mainly attributable to period in FY18. The higher net income during the first six positive net disbursements of $3.6 billion during the period, months of FY19 is primarily due to the unrealized partially offset by $0.7 billion of currency translation losses, mark-to-market gains experienced on the non-trading portfolios, resulting from the 1.6% depreciation of the euro against the U.S. compared with unrealized mark-to-market losses in the same dollar during the period. period last year, as well as the higher net interest revenue and a Figure 4: Net Loans Outstanding lower loan loss provision in FY19 (See Table 1). In billions of U.S. dollars For the first six months of FY19, IBRD’s allocable income was $557 million, an increase of $138 million from the same period in FY18. The higher allocable income was primarily due to an increase in IBRD’s net interest revenue and lower loan loss provision in FY19 as compared to FY18. Results from Lending activities Interest Margin Net interest margin is the spread earned (revenue less associated funding costs) on loans funded by borrowings and IBRD’s equity. For the first six months of FY19, IBRD’s net interest margin was $647 million, an increase of $57 million compared Gross disbursements during the first six months of FY19 were with the same period in FY18 (Figure 3). The higher net interest $8.8 billion, marginally lower than the same period in FY18 margin was driven by the gradual impact of the pricing measures (Table 3). The current period’s activity includes $5.1 billion of adopted in FY14, evidenced by the higher proportion of loans disbursements supporting Investment Projects, of which subject to the new pricing, as well as the increase in lending $1.7 billion was in the Latin America and the Caribbean region, volume during the period. and $1.1 billion each was in the East Asia & Pacific, and Figure 3: Net Interest Margin Europe & Central Asia regions. In millions of U.S. dollars, YTD In the first six months of FY19, IBRD had new loan commitments totaling $5.5 billion, which were 28% lower than the same period in FY18 (Table 4). These new loan commitments primarily supported operations in the Equitable Growth, Finance & Institutions and Sustainable Development clusters and were largely concentrated in Macroeconomics, Trade & Investment and Finance Competitiveness & Innovation related projects. 10 IBRD Management’s Discussion and Analysis: December 31, 2018 Management’s Discussion and Analysis Section III: Financial Results Table 3 : Gross Disbursements by Region In millions of U.S. dollars 2018 2017 For the six months ended December 31, Amount % of total Amount % of total Variance Africa $ 128 1% $ 573 6% $ (445) East Asia and Pacific 2,255 26 1,675 19 580 Europe and Central Asia 1,166 13 2,889 33 (1,723) Latin America and the Caribbean 3,017 35 1,953 22 1,064 Middle East and North Africa 1,626 19 1,332 15 294 South Asia 563 6 446 5 117 Total $ 8,755 100% $ 8,868 100% $ (113) Table 4: Commitments by Region In millions of U.S. dollars 2018 2017 For the six months ended December 31, Amount % of total Amount % of total Variance Africa $ 325 6% $ 480 6% $ (155) East Asia and Pacific 400 7 878 12 (478) Europe and Central Asia 1,000 18 825 11 175 Latin America and the Caribbean 1,563 29 1,521 20 42 Middle East and North Africa 1,300 24 2,158 28 (858) South Asia 879 16 1,714 23 (835) Total $ 5,467 100% $ 7,576 100% $ (2,109) Results from Investing Activities Figure 5: Net Investment Revenue In millions of U.S. dollars, YTD Net Investment Revenue During the first six months of FY19, IBRD’s net investment revenue amounted to $47 million. This compares with $108 million during the same period in FY18. The $61 million decrease was primarily due to limited investment opportunities as a result of compressed credit and term premia during the period. Investment Portfolio IBRD’s investment portfolio consists mainly of the liquid asset Figure 6: Net Investment Portfolio In billions of U.S. dollars portfolio. As of December 31, 2018, the net investment portfolio totaled $75 billion, with $73 billion representing the liquid asset portfolio. This compares with an investment portfolio valued at $74 billion as of June 30, 2018, with $72 billion representing the liquid asset portfolio (See Notes to Condensed Quarterly Financial Statements, Note C: Investments). The increased level of liquidity reflects higher projected debt service, as well as anticipation of loan disbursements during the coming months. IBRD Management’s Discussion and Analysis: December 31, 2018 11 Management’s Discussion and Analysis Section III: Financial Results Results from Borrowing Activities Figure 7: Borrowing Portfolio In billions of U.S. dollars As of December 31, 2018, the borrowing portfolio totaled $217 billion, a $3 billion increase compared with June 30, 2018 (See Notes to Condensed Quarterly Financial Statements, Note E: Borrowings). This increase was due to net new issuances of $3.8 billion in anticipation of higher projected debt service and loan disbursements during the coming months. The debt issuances during the period were highly diversified in 21 currencies, with an average maturity of 4.6 years. As of December 31, 2018, the borrowing portfolio included short-term borrowings of $10.9 billion, $0.3 billion higher compared with June 30, 2018. Equity Contribution Equity contribution is comprised of interest revenue earned from Figure 8: Equity Contribution In millions of U.S. dollars, YTD the Equity Management Framework (EMF), and any gains which have been realized during the period as a result of the termination of certain EMF positions. It also includes equity savings (revenue from the proportion of loans funded by equity), and certain minor adjustments including those relating to discontinued loan products. For the first six months of FY19, equity contribution increased by $60 million compared to the prior year, mainly as a result of higher equity savings. The increase in equity savings was partially offset by the net decrease in interest revenue from the EMF swaps (where IBRD receives fixed interest rates and pays floating interest rates), consistent with the increase in short-term interest rates during the period. Table 5: Net Other Revenue In millions of U.S. dollars For the six months ended December 31, 2018 2017 Variance Loan commitment fees $ 53 $ 42 $ 11 Guarantee fees 8 5 3 Net earnings from Post-Employment Benefit Plan (PEBP) (15) 31 (46) Pilot Auction Facility (PAF) and Pandemic Emergency Facility (PEF) a (28) 2 (30) Others 2 1 1 Net other revenue (Table 1) $ 20 $ 81 $ (61) a. Amount is fully offset by fair value changes in trades (facing counterparties) related to PEF and PAF, which are included in Unrealized mark-to market gains/(losses) on non-trading portfolios, net (Table 1). Net Other Revenue Pandemic Emergency Financing Facility (PEF). This was partially offset by an increase in loan commitment fees compared with Net Other Revenue represents non-interest sources of revenue. FY18, as a result of the higher proportion of undisbursed loan Table 5 provides details on the composition of net other revenue, balances, which are subject to the 25 basis-point commitment fee which was lower in the first six months of FY19, compared with charge re-introduced as part of the FY14 pricing measures. the same period in FY18. The decrease was mainly due to lower investment returns from PEBP assets during the period, and also Net Non-Interest Expenses due to expenses for transactions associated with the Pilot As shown in Table 6, IBRD’s net non-interest expenses primarily Auction Facility for Methane and Climate Change Mitigation comprise administrative expenses, (PAF), and the 12 IBRD Management’s Discussion and Analysis: December 31, 2018 Management’s Discussion and Analysis Section III: Financial Results net of revenue from externally funded activities. IBRD/IDA’s allocation of administrative expenses to IBRD in accordance with administrative budget is a single resource envelope that funds the the IBRD/IDA cost sharing methodology, lower pension costs, as combined work programs of IBRD and IDA. The allocation of well as the increase in revenue from externally funded activities. net administrative expenses between IBRD and IDA is based on Figure 9: Net Non-Interest Expenses an agreed cost sharing methodology, approved by their Boards, In millions of U.S. dollars, YTD which is primarily driven by the relative level of activities relating to lending, knowledge services, and other services between these two institutions. The staff costs and consultant and contractual services shown in Table 6 include costs related to IBRD executed trust funds, which are recovered through revenue from externally funded activities. Net non-interest expenses for the first six months of FY19 decreased as a result of the impact of the lower Table 6: Net Non-Interest Expenses In millions of U.S. dollars For the six months ended December 31, 2018 2017 Variance Administrative and pension expenses Staff costs $ 478 $ 475 $ 3 Travel 77 76 1 Consultant and contractual services 166 163 3 Pension and other post-retirement benefits 120 136 (16) Communications and technology 24 24 - Equipment and buildings 58 58 - Other expenses 14 18 (4) Total administrative and pension expenses $ 937 $ 950 $ (13) Grant making facilities 16 15 1 Revenue from externally funded activities Reimbursable revenue – IBRD executed trust funds (267) (245) (22) Other revenue (125) (114) (11) Total revenue from externally funded activities $ (392) $ (359) $ (33) Net non-interest expenses (Table 1) $ 561 $ 606 $ (45) Unrealized Mark-to-market Gains/Losses on Non- rates, this is not reflected in reported net income. In order to show trading Portfolios the effect of its risk management policies, IBRD reflects its loans at fair value in the MD&A. See Section V for more details. These mainly comprise unrealized mark-to-market gains and losses on IBRD’s loan, borrowing, and EMF portfolios. Since Borrowing Portfolio IBRD intends to maintain its positions in the non-trading On a reported basis, all of IBRD’s borrowings and the related portfolios, unrealized mark-to-market gains and losses associated derivatives are at fair value, and, therefore, unrealized with these positions, are excluded from reported net income to mark-to-market gains and losses on the borrowing related arrive at allocable income. As a result, from a long-term derivatives are correspondingly offset by unrealized financial sustainability perspective, income allocations are mark-to-market gains and losses on the underlying borrowings, generally made on the basis of amounts which have been except for changes in IBRD’s own credit. realized. See Section V for details on the unrealized mark-to-market gains/losses on the EMF portfolio. Effective July 1, 2018, the impact of the change in IBRD’s own credit is reflected as a Debit Valuation Adjustment on Fair Value Loan Portfolio Option Elected Liabilities in Other Comprehensive Income (OCI). All loans are reported at amortized cost, while the derivatives These amounts were previously recognized in IBRD’s unrealized which convert IBRD’s loans to variable rate instruments are mark-to-market gains/losses on non-trading portfolios in net reported at fair value. As a result, while from an economic income. See Section V for more details. perspective all of IBRD’s loans, after the effect of derivatives, carry variable rates, and, therefore, have a low sensitivity to interest IBRD Management’s Discussion and Analysis: December 31, 2018 13 Management’s Discussion and Analysis Section IV: Risk Management Section IV: Risk Management Risk Governance and systems. In addition, the CRO works closely with IFC, MIGA, and IDA’s Management, to review, measure, aggregate, IBRD’s risk management processes and practices continually and report on risks, and share best practices across the WBG. The evolve to reflect changes in activities in response to market, CRO also helps enhance cooperation between the entities and credit, product, operational, and other developments. IBRD’s facilitates knowledge sharing in the risk management function. Board of Executive Directors (Board), particularly Audit Committee (AC) members, periodically review trends in IBRD’s The risk in operations in IBRD’s lending activities is monitored, at risk profiles and performance, and any major developments in the corporate level, by Operations Policy and Country Services risk management policies and controls. (OPCS). Where fraud and corruption risks may impact IBRD- financed projects, OPCS and the Integrity Vice Presidency jointly Management believes that effective risk management is critical address such issues. for its overall operations. Accordingly, the risk management governance structure is designed to manage the principal risks Summary and Management of IBRD’s Risks IBRD assumes in its activities. It also supports Management in IBRD assumes financial risks in order to achieve its development its oversight function, particularly in coordinating different and strategic objectives. IBRD’s financial risk management aspects of risk management, and in connection with risks that are framework is designed to enable and support the institution in common across functional areas. achieving its goals in a financially sustainable manner. IBRD IBRD’s financial and operational risk governance structure is manages credit, market and operational risks for its financial built on the “three lines of defense” principle where: activities, which include lending, borrowing and investing. The primary financial risk to IBRD is the country credit risk inherent i. Business units are responsible for directly managing risks in its loan portfolio. IBRD is also exposed to risks in its liquid in their respective functional areas, asset and derivative portfolios, where the major risks are interest ii. The Vice President and WBG Chief Risk Officer (CRO) rate, exchange rate, commercial counterparty, and liquidity risks. provides direction, challenge, and oversight over IBRD’s operational risk management framework is based on a financial and operational risk activities, and structured and uniform approach to identify, assess and monitor key operational risks across business units. iii. Internal Audit provides independent oversight. In an effort to maximize IBRD’s capacity to lend to member IBRD’s risk management process comprises: risk identification, countries for development purposes, IBRD limits its exposure to assessment, response and risk monitoring and reporting. IBRD market and counterparty credit risks. In addition, to ensure that the has policies and procedures under which risk owners and financial risks associated with its loans and other exposures do not corporate functions are responsible for identifying, assessing, exceed its risk-bearing capacity, IBRD uses a strategic capital responding to, monitoring and reporting risks. adequacy framework as a key medium-term capital planning tool. Risk Oversight and Coverage Capital Adequacy The CRO has an overview of both financial and operational IBRD holds capital to cover the credit, market and operational risks. These risks include (i) country credit risks in the core risks inherent in its operating activities and financial assets. sovereign lending business, (ii) market and counterparty risks, Country credit risk is the most substantive risk covered by IBRD’s including liquidity risk, and (iii) operational risks relating to equity. people, processes 14 IBRD Management’s Discussion and Analysis: December 31, 2018 Management’s Discussion and Analysis Section IV: Risk Management Table 7: Equity-to-Loans Ratio In millions of U.S. dollars Variance June 30, Due to December 31, Due to 2018 Total Translation 2018 Activities As of Adjustment Usable paid-in capital $ 15,715 $ 15,732 $ (17) $ 8 $ (25) Special reserve 293 293 - - - General reserve a 28,606 28,606 - - - Cumulative translation adjustment b (594) (465) (129) - (129) Other adjustments c (648) (648) - - - Equity (usable equity) $ 43,372 $ 43,518 $ (146) $ 8 $ (154) Loans exposure $ 188,419 $ 185,589 $ 2,830 $ 3,578 $ (748) Present value of guarantees 2,733 2,540 193 212 (19) Effective but undisbursed DDOs 3,103 4,548 (1,445) (1,445) - Related accumulated provisions (1,652) (1,607) (45) (50) 5 Deferred loan income (458) (448) (10) (11) 1 Other exposures (705) (692) (13) (13) - Loans (total exposure) $ 191,440 $ 189,930 $ 1,510 $ 2,271 $ (761) Equity-to-Loans Ratio 22.7% 22.9% a. June 30, 2018 amount includes proposed transfer of $913 million to the General Reserve, which was subsequently approved by IBRD’s Executive Directors on August 9, 2018. b. Excluding cumulative translation amounts associated with the unrealized mark-to-market gains/losses on non-trading portfolios, net. c. Other adjustments primarily relate to the net underfunded status of IBRD’s pension plans. IBRD’s capital adequacy is the degree to which its equity is Credit Risk sufficient to withstand unexpected shocks. IBRD’s Board monitors IBRD’s capital adequacy within a strategic capital IBRD faces two types of credit risk: country credit risk and adequacy framework and uses the equity-to-loans ratio as a key counterparty credit risk. Country credit risk is the risk of loss due indicator of capital adequacy. The framework seeks to ensure to a country not meeting its contractual obligations, and that IBRD’s equity is aligned with the financial risk associated counterparty credit risk is the risk of loss attributable to a with its loan portfolio as well as other exposures over a medium- counterparty not honoring its contractual obligations. IBRD is term capital-planning horizon. exposed to commercial as well as non-commercial counterparty credit risk. As shown in Table 7, IBRD’s equity-to-loans ratio marginally decreased to 22.7% as of December 31, 2018, from 22.9 % as of Country Credit Risk June 30, 2018, and remained above the 20% minimum ratio IBRD manages country credit risk by using individual country under the strategic capital adequacy framework. In line with exposure limits and takes into account factors such as population IBRD’s currency management policy, exchange rate movements size and the economic situation of the country. In addition, IBRD during the period did not have an impact on IBRD’s equity-to- conducts stress tests of the effects of changes in market variables loans ratio. Under the currency management policy, to minimize and of potential geopolitical events on its portfolio to complement exchange rate risk in a multicurrency environment, IBRD its capital adequacy framework. matches its borrowing obligations in any one currency (after derivative activities) with assets in the same currency. In addition, IBRD’s policy is to minimize the exchange rate sensitivity of its capital adequacy as measured by the equity-to- loans ratio. It implements this policy by periodically undertaking currency conversions to align the currency composition of its equity with that of its outstanding loans, across major currencies. IBRD Management’s Discussion and Analysis: December 31, 2018 15 Management’s Discussion and Analysis Section IV: Risk Management Figure 10: Country Exposures as of December 31, 2018 Accumulated Provision on Loans and Other Exposures In billions of U.S. dollars IBRD records a provision to reflect the probable losses inherent in its loan portfolio and other exposures, including protection provided under the Exposure Exchange Agreement (EEA). For the first six months of FY19, IBRD had a provision for losses on loans and other exposures of $50 million, reflecting the impact of the increase in exposure during the period. As of December 31, 2018, IBRD had an accumulated provision for losses on loans and other exposures of $1,690 million, which was less than 1% of these exposures, ($1,645 million as of June 30, 2018, less than 1% of total exposures). As of December 31, 2018, only 0.2% of IBRD’s loans were in nonaccrual status, and all were related to Zimbabwe (See Notes to Condensed Quarterly Financial Statements, Note D: Loans and Other Exposures). Portfolio Concentration Risk Portfolio concentration risk, which arises when a small group of Counterparty Credit Risk borrowers account for a large share of loans outstanding, is a key IBRD is exposed to commercial and non-commercial counterparty concern for IBRD. The ten countries with the highest exposures credit risk. accounted for about 62% of IBRD’s total exposure, as of December 31, 2018. Commercial Counterparty Credit Risk Concentration risk is carefully managed, in part, by applying an Commercial counterparty credit risk is managed by applying exposure limit to a single borrowing country for the aggregate eligibility criteria, volume limits for transactions with individual balance of loans outstanding, the present value of guarantees, the counterparties, and using mark-to-market collateral arrangements undisbursed portion of Deferred Drawdown Options (DDOs), for swap transactions. The effective management of this risk is and other eligible exposures that have become effective. Under vital to the success of IBRD’s funding, investment, and the current guidelines, IBRD’s exposure to a single borrowing asset/liability management. The monitoring and managing of this country is restricted to the lower of an Equitable Access Limit risk is continuous, given the changing market environment. (EAL) and the Single Borrower Limit (SBL). The Executive As a result of IBRD’s use of mark-to-market collateral Directors approved a new SBL framework on June 28, 2018, arrangements for swap transactions, its residual commercial which became effective July 1, 2018. The new framework counterparty credit risk is concentrated in the investment portfolio, reflects a dual-SBL system, which differentiates between in instruments issued by sovereign governments and countries below the Graduation Discussion Income (GDI) non-sovereign holdings (including Agencies, Asset Backed threshold and those above it. Under the new system, the SBL is Securities, Corporates, and Time Deposits). IBRD’s overall $21 billion for highly creditworthy countries below the GDI, and commercial counterparty credit exposure increased by $1.5 billion $19.5 billion for highly creditworthy countries above the GDI. In during the first six months of FY19, to $73.4 billion as of the event that a borrowing country eligible for one of the limits December 31, 2018, consistent with the increase in the investment set under the new SBL framework is downgraded to the high- portfolio. As shown in Table 8, the credit quality of IBRD’s risk category, management may determine that the borrowing portfolio remains concentrated in the upper end of the credit country continue to be eligible for borrowing at the currently spectrum, with 62% of the portfolio rated AA or above and the applicable limit, but the borrowing country would not be eligible remainder primarily rated A. The exposures with the AAA and for any future increases in the SBL approved by the Executive AA rated counterparties primarily related to sovereign debt and Directors. Currently, there are two countries below- GDI and two time deposits. The A rated counterparties primarily consisted of countries above-GDI, which have their exposure limits set at the financial institutions (limited to short-term deposits and swaps) applicable SBLs. For all other countries, the individual country and sovereign debt. exposure limits are set below the relevant SBL. 16 IBRD Management’s Discussion and Analysis: December 31, 2018 Management’s Discussion and Analysis Section IV: Risk Management Table 8: Commercial Credit Exposure, Net of Collateral Held, by Counterparty Ratinga In millions of U.S. dollars As of December 31, 2018 Investments Net Derivative Counterparty Rating a Sovereigns Non-Sovereigns Exposure Total Exposure % of Total AAA $ 3,268 $ 13,677 $ - $ 16,945 23% AA 5,934 22,653 49 28,636 39 A 17,223 10,469 28 27,720 38 BBB 1 31 15 47 * BB or lower/unrated - 8 * 8 * Total $ 26,426 $ 46,838 $ 92 $ 73,356 100% As of June 30, 2018 Investments Net Derivative Counterparty Rating a Sovereigns Non-Sovereigns Exposure Total Exposure % of Total AAA $ 5,127 $ 13,319 $ - $ 18,446 26% AA 3,388 28,208 177 31,773 44 A 13,045 8,365 66 21,476 30 BBB 118 33 11 162 * BB or lower/unrated - 9 - 9 * Total $ 21,678 $ 49,934 $ 254 $ 71,866 100% a.  Average rating is calculated using available ratings from the three major rating agencies; however, if ratings are not available from each of the three rating agencies, IBRD uses the average of the ratings available from any of such rating agencies or a single rating if an instrument or issuer (as applicable) is rated by only one rating agency. *  Indicates amount less than $0.5 million or percentage less than 0.5%. Table 9: Non-Commercial Counterparty Credit Risk In millions of U.S. dollars Exposures as of December 31, 2018 Non-Commercial Counterparty Instrument used Purpose of derivative transaction Notional Net Exposure Assist borrowing member countries $ 11,908 $ 727 Borrowing Member Countries Derivatives with managing risks Affiliated Organization Derivatives Intermediation on behalf of IDA 5,393 - Non-Affiliated Organization Derivatives Assist IFFIm with managing risks 2,409 527 19,710 1,254 Non-Commercial Counterparty Credit Risk gearing ratio limit. The gearing ratio limit represents the maximum amount of net financial obligations of IFFIm less cash In addition to the derivative transactions with commercial and liquid assets, as a percentage of the net present value of counterparties, IBRD also offers derivative-intermediation IFFIm’s financial assets. services to borrowing member countries, as well as to affiliated and non-affiliated organizations, to help meet their development Market Risk needs or to carry out their development mandates (See Table 9). Exchange Rate Risk IBRD has a master derivatives agreement with the International Finance Facility for Immunization (IFFIm), under which several IBRD holds its assets and liabilities mainly in U.S. dollars and transactions have been executed. IBRD has the right to call for euros. However, the reported levels of its assets, liabilities, collateral above an agreed specified threshold. As of December income, and expenses in the financial statements are affected by 31, 2018, IBRD had not exercised this right, but it reserves the exchange rate movements in all the currencies in which IBRD right under the existing terms of the agreement. Rather than transacts, relative to its reporting currency, the U.S. dollar. These calling for collateral, IBRD and IFFIm have agreed to manage movements are shown as currency translation adjustments in other IBRD’s exposure by applying a risk management buffer to the comprehensive income, in equity, given IBRD’s multifunctional currency paradigm. While IBRD’s equity could be affected by IBRD Management’s Discussion and Analysis: December 31, 2018 17 Management’s Discussion and Analysis Section IV: Risk Management exchange rate movements, IBRD’s risk management policies Derivatives are also used to manage market risk in the liquidity work to minimize the exchange rate risk in its capital adequacy, portfolio. In line with its development mandate, IBRD maintains a by immunizing the equity-to-loans ratio against exchange rate large liquidity balance to ensure that it can make payments on its movements. borrowing obligations and loan disbursements, even in the event of severe market disruptions. Pending disbursement, the liquidity To minimize exchange risk, IBRD matches its borrowing portfolio is invested on a global basis in multiple currencies and obligations in any one currency (after derivative activities) with interest rates. Derivatives are also used to align the currency and assets in the same currency. In addition, IBRD undertakes duration of investments with the debt funding the liquidity periodic currency conversions to align the currency composition portfolio. Figure 12 below illustrates the use of derivatives in the of its equity with that of its outstanding loans across major liquidity portfolio: currencies. Together, these polices are designed to minimize the impact of exchange rate fluctuations on the equity-to-loans ratio; Figure 12: Use of Derivatives for Investments thereby preserving IBRD’s ability to better absorb unexpected losses from arrears on loan repayments, regardless of exchange movements. As a result, exchange rate movements during the period generally do not have an impact on the overall equity-to-loans ratio. Interest Rate Risk IBRD faces three main sources of interest rate risk: the interest rate sensitivity of the income earned in a low interest rate environment, fixed-spread loans refinancing risk, and interest rate risk on the liquid asset portfolio. Under its current interest rate risk management strategy, IBRD Revenue from loans funded by IBRD’s equity is sensitive to seeks to match the interest rate sensitivity of its assets (loan and changes in short-term interest rates, as IBRD’s loans, net of investment trading portfolios) with its liabilities (borrowing derivatives, predominantly earn variable interest linked to variable portfolio) by using derivatives, such as interest rate swaps. These rate indices (e.g., LIBOR). Approximately 23% of IBRD’s net derivatives effectively convert IBRD’s financial assets and loans and other exposures are funded by equity, as indicated by liabilities into variable-rate instruments. After considering the the equity-to-loans ratio of 22.7%. The interest revenue on the effects of these derivatives, virtually the entire loan and loans funded by equity, if left unmanaged, would be highly borrowing portfolios are carried at variable interest rates. Figure sensitive to fluctuations in short-term interest rates. To manage 11 below illustrates the use of derivatives for loans and this exposure, IBRD uses the EMF, which allows the flexibility of borrowings: managing the duration of IBRD’s equity within a range of zero to five years based on market and macroeconomic conditions. Figure Figure 11: Use of Derivatives for Loans and Borrowings 13 illustrates the use of derivatives for EMF: Figure 13: Use of Derivatives for EMF 18 IBRD Management’s Discussion and Analysis: December 31, 2018 Management’s Discussion and Analysis Section IV: Risk Management Liquidity Risk Table 10: Liquidity Levels Liquidity risk arises in the general funding of IBRD’s activities and in managing its financial position. It includes the risk of % Of Target IBRD being unable to fund its portfolio of assets at appropriate In billions of Liquidity Effective for FY19 U.S. dollars Level maturities and rates, and the risk of being unable to liquidate a position in a timely manner at a reasonable price. Target Liquidity Level 56.0 Guideline Maximum Liquidity Level 84.0 150% Under IBRD’s liquidity management guidelines, aggregate liquid asset holdings are kept at or above a specified Prudential Prudential Minimum Liquidity Level 44.8 80% Minimum to safeguard against cash flow interruptions. Liquid Asset Portfolio-as of December 31, 2018 72.7 130% Historically, IBRD has operated at liquidity levels ranging between 100% and 150% of the Prudential Minimum. From June 2017 the Prudential Minimum is defined as 80% of the Target Operational Risk Liquidity Level. The 150% maximum guideline now applies to Operational risk is defined as the risk of financial loss or damage the Target Liquidity Level rather than the Prudential Minimum, to IBRD’s reputation resulting from inadequate or failed internal and continues to function as a guideline rather than a hard processes, people and systems, or from external events. ceiling. See Table 10. IBRD recognizes the importance of operational risks which are inherent in its activities. IBRD is exposed to a range of operational risks including physical security, staff health and safety, business continuity, external vendor risks and data and cyber security. IBRD’s approach to managing operational risk includes assessing, monitoring and reporting risks; identifying emerging risks through research and analysis of internal and external events; and developing appropriate risk response and mitigating actions. IBRD Management’s Discussion and Analysis: December 31, 2018 19 Management’s Discussion and Analysis Section V: Fair Value Analysis Section V: Fair Value Analysis An important element in achieving IBRD’s financial goals is its Through FY18, all fair value adjustments were recognized through ability to minimize the cost of borrowing from capital markets the Statement of Income. Under new guidance issued by the for lending to member countries by using financial instruments, FASB, effective July 1, 2018, fair value adjustments relating to including derivatives. The fair value of these financial changes in IBRD’s own credit for financial liabilities measured instruments is affected by changes in the market environment under the fair value option are reported in Other Comprehensive such as interest rates, exchange rates and credit risk. Fair value is Income (OCI) (see Notes to Financial Statements, Note A: used mainly to assess the performance of the investment trading Summary of Significant Accounting and Related Policies). portfolio, and to manage certain market risks, including interest As of December 31, 2018, IBRD’s Condensed Balance Sheet rate and commercial credit risk for derivative counterparties. included a DVA of $649 million in AOCL, associated with the Fair Value Results changes in its own credit for financial liabilities measured under the fair value option (borrowings). This includes $493 million Fair value results on a comprehensive basis include the fair value resulting from the widening of IBRD’s credit spreads during the changes reflected in the reported basis results relating to first six months of FY19. instruments at fair value in the investment and borrowing portfolios, and all other derivatives. The results also include The CVA is calculated using the fair value of the derivative changes in the fair value of loans carried at amortized cost, and contracts, net of collateral received under credit support changes in Accumulated Other Comprehensive Loss (AOCL). agreements, and the probability of counterparty default based on As non-financial assets and liabilities are not reflected at fair the Credit Default Swaps (CDS) spread and, where applicable, value, IBRD’s equity is not intended to reflect fair value. proxy CDS spreads. IBRD does not currently hedge this exposure. The DVA calculation is generally consistent with the CVA Credit and Debit Valuation Adjustments methodology and incorporates IBRD’s own credit spread as Most outstanding derivative positions are transacted observed through the CDS market. As of December 31, 2018, over-the-counter and therefore valued using internally developed IBRD’s Condensed Balance Sheet included a CVA and a DVA, valuation models. For commercial and non-commercial on outstanding derivatives, of $9 million and $19 million, counterparties where IBRD has a net exposure (net receivable respectively. position), IBRD calculates a Credit Valuation Adjustment Effect of Interest and Credit (CVA) to reflect credit risk (IBRD’s non-commercial counterparty exposure mainly arises from derivative- After the effect of derivatives, virtually the entire loan and intermediation activities on behalf of IFFIm, as discussed borrowing portfolios for IBRD carry variable interest rates. The earlier). For net derivative positions with commercial and sensitivity of these portfolios to interest rate movements, after the non-commercial counterparties where IBRD is in a net payable effect of derivatives, is, therefore low, resulting in relatively small position, IBRD calculates a Debit Valuation Adjustment (DVA) interest rate-related unrealized mark-to-market gains/losses in to reflect its own credit risk. income (Table 12). IBRD also calculates a DVA for changes in the fair value of The changes in fair value for financial instruments in IBRD’s financial liabilities measured under the fair value option that are non-trading portfolios resulted in net unrealized mark-to-market attributable to instrument-specific credit risk (own credit). gains of $784 million for the first six months of FY19. See Table 11 for details. Table 11: Summary of Fair Value Adjustments on Non-Trading Portfoliosa In millions of U.S. dollars Gains / (losses) for the six months ended December 31, 2018 2017 Borrowing portfolio $ 588 $ 28 Loan portfolio (118) 512 EMF 314 (267) Total $ 784 $ 273 a.  See Table 14 for reconciliation to the fair value comprehensive basis net income. 20 IBRD Management’s Discussion and Analysis: December 31, 2018 Management’s Discussion and Analysis Section V: Fair Value Analysis Table 12: Effect of Interest Rates and Credit on IBRD’s Fair Value Income In millions of U.S. dollars Interest Rate Effect on Fair Value Income Credit Effect on Fair Value Income As of December 31, 2018 Sensitivity a c Sensitivity b c Borrowing portfolio $ 5 $ 63 Loan portfolio (13) (29) EMF (9) * Investment portfolio (1) (2) Total (losses)/gains $ (18) $ 32 a. After the effects of derivatives b. Excludes CVA and DVA on swaps. c. Amount represents dollar change in fair value corresponding to a one basis-point parallel upward shift in interest rates /credit spreads. * Sensitivity is marginal. Loan Portfolio Borrowing Portfolio For the first six months of FY19, IBRD experienced For the first six months of FY19, IBRD experienced $588 million $118 million of unrealized mark-to-market losses on the loan of unrealized mark-to-market gains on the borrowing portfolio, of portfolio. This was mainly driven by unrealized mark-to-market which $95 million was reflected on the statement of income, and losses of $209 million on the loan related derivatives, resulting $493 million was reflected in OCI. The $95 million of net mainly from the downward movement in U.S. dollar interest unrealized mark-to-market gains are mainly due to the impact on rates during the period. As shown in Table 12, the dollar value borrowing-related derivatives of the decrease in interest rates change corresponding to a one-basis-point upward parallel shift during the period. The $493 million of unrealized mark-to-market in CDS rates on the loan portfolio is about $29 million of gains, reflects the changes in IBRD’s own credit during the unrealized mark-to-market losses. See the June 30, 2018 MD&A period. As shown in Table 12, the dollar value change for a detailed discussion on how the credit risk of each portfolio corresponding to a one basis-point upward parallel shift in interest is managed. rates on IBRD’s own credit relative to LIBOR is about $63 million of unrealized mark-to-market gains. EMF Figure 14 provides a breakdown of the overall sensitivity to For the first six months of FY19, IBRD experienced interest rates of the borrowing, loan, EMF, and investment $314 million of unrealized mark-to-market gains on the EMF portfolios. The sensitivity of these portfolios to interest rate portfolio, mainly driven by the impact of the downward movements, after the effect of derivatives, is low, resulting in movement in U.S. dollar interest rates during the period. As relatively small interest rate-related unrealized mark-to-market measured by duration, the interest rate sensitivity of IBRD’s gains/losses in reported net income. For example, for the equity was approximately 2.4 years as of December 31, 2018. borrowing portfolio, a one basis-point increase in interest rates As shown in Table 12, on a fair value basis, if interest rates would result in net unrealized mark-to-market gains of $63 million increased by one basis-point across markets, IBRD would on the bonds. These would be offset by net unrealized experience a net unrealized mark-to-market loss of mark-to-market losses of $58 million on the related swaps, approximately $9 million for the EMF portfolio as of resulting in net unrealized mark-to-market gains of $5 million for December 31, 2018. the portfolio. Tables 13 to 15 provide a reconciliation from the reported basis to the fair value basis for both the Condensed Balance Sheet and Condensed Statement of Income. IBRD Management’s Discussion and Analysis: December 31, 2018 21 Management’s Discussion and Analysis Section V: Fair Value Analysis Figure 14: Sensitivity to Interest Rates as of December 31, 2018 (Dollar change in fair value corresponding to a one-basis-point upward parallel shift in interest rates) In millions of U.S. dollars Table 13: Condensed Balance Sheet on a Fair Value Basis In millions U.S. dollars As of December 31, 2018 As of June 30, 2018 Reported Fair Value Reported Fair Value Basis Adjustments Basis Basis Adjustments Basis Due from banks $ 597 $ - $ 597 $ 619 $ - $ 619 Investments 74,150 - 74,150 72,569 - 72,569 Net loans outstanding 186,371 3,169 189,540 183,588 3,062 186,650 Receivable from derivatives 147,494 - 147,494 141,716 - 141,716 Other assets 4,656 - 4,656 4,564 - 4,564 Total assets $ 413,268 3,169 416,437 $ 403,056 $ 3,062 $ 406,118 Borrowings $ 212,227 9 212,236 $ 208,009 $ 10 $ 208,019 Payable for derivatives 152,295 - 152,295 147,096 - 147,096 Other liabilities 6,138 - 6,138 6,107 - 6,107 Total liabilities 370,660 9 370,669 361,212 10 361,222 Paid-in capital stock 16,456 - 16,456 16,456 - 16,456 Retained earnings and other equity 26,152 3,160 29,312 25,388 3,052 28,440 Total equity 42,608 3,160 45,768 41,844 3,052 44,896 Total liabilities and equity $ 413,268 3,169 416,437 $ 403,056 $ 3,062 $ 406,118 Table 14: Reconciliation from Net Income to Income on a Fair Value Comprehensive Basis In millions of U.S. dollars For the six months ended December 31, 2018 2017 Variance Net income from Table 1 $ 359 $ 228 $ 131 Fair value adjustment on loans 113 286 (173) Changes to AOCL: Currency translation adjustments (128) 350 (478) Others 57 87 (30) Net Change in DVA on Fair Value option elected liabilities 494 - 494 Net income on fair value comprehensive basis $ 895 $ 951 $ (56) 22 IBRD Management’s Discussion and Analysis: December 31, 2018 Management’s Discussion and Analysis Section V: Fair Value Analysis Table 15: Fair Value Adjustments, net on non-trading portfolios In millions of U.S. dollars For the six months ended December 31, 2018 Unrealized Fair Value Realized Other Total from gains Adjustment from losses Adjustments Table 11 (losses) a Table 14 Borrowing portfolio c $ 89 $ 3 $ - $ 496b $ 588 Loan portfolio c (232) 1 113 - (118) EMF d 314 - - - 314 Asset-liability management portfolio d - - - - - Client operations portfolio 13 - - (13) - Total $ 184 $ 4 $ 113 $ 483 $ 784 For the six months ended December 31, 2017 Unrealized Fair Value Realized Other Total from gains Adjustment from gains Adjustments Table 11 (losses) a Table 14 Borrowing portfolio c $ 19 $ 1 $ - $ 8 $ 28 Loan portfolio c 226 - 286 - 512 EMF d (267) - - - (267) Asset-liability management portfolio d (1) - - 1 - Client operations portfolio (2) - - 2 - Total $ (25) $ 1 $ 286 $ 11 $ 273 a. Excludes amounts reclassified to realized mark-to-market gains (losses). b. Amount primarily represents change in fair value due to the change in IBRD’s own credit risk for financial liabilities measured under the fair value option, included in the Condensed Statement of Other Comprehensive Income. c. Includes related derivatives. d. Included in other derivatives on the Condensed Balance Sheet. IBRD Management’s Discussion and Analysis: December 31, 2018 23 Management’s Discussion and Analysis Section VI: Governance Section VI: Governance External Auditors Effective February 1, 2019: • Jim Yong Kim resigned as the President of the World Bank The external auditor is appointed to a five-year term, with a limit Group. The Executive Directors have started the process for of two consecutive terms, and is subject to annual reappointment selecting the next President and appointed based on the recommendation of the Audit Committee and Kristalina Georgieva, Chief Executive Officer, as the approval of a resolution by the Board. FY18 was the final year of interim World Bank Group President. KPMG LLP’s second term as IBRD’s external auditor. Deloitte has been appointed as IBRD’s external auditor for a five-year • Bernard Lauwers accepted a special assignment with the office term commencing FY19. of the Chief Executive Officer, and Jorge Familiar was appointed as the new Vice President and World Bank Group Senior Management Changes Controller. Bernard Lauwers will also be the acting MDCFO until the selection of a new MDCFO is concluded. Effective December 1, 2018 Arunma Oteh retired as Vice President and Treasurer of IBRD. Jingdong Hua was appointed • Akihiko Nishio has been appointed as Vice President, as Vice President and Treasurer of IBRD, effective January 1, Development Finance (DFi), succeeding Axel Van Trotsenburg 2019. who has been appointed as the new Vice President for Latin America & Caribbean region. Effective December 3, 2018, Joaquim Levy retired as Managing Director and WBG Chief Financial Officer (MDCFO). 24 IBRD Management’s Discussion and Analysis: December 31, 2018 List of Tables, Figures and Boxes Tables Table 1: Condensed Statement of Income 9 Table 2: Condensed Balance Sheet 9 Table 3 : Gross Disbursements by Region 11 Table 4: Commitments by Region 11 Table 5: Net Other Revenue 12 Table 6: Net Non-Interest Expenses 13 Table 7: Equity-to-Loans Ratio 15 Table 8: Commercial Credit Exposure, Net of Collateral Held, by Counterparty Ratinga 17 Table 9: Non-Commercial Counterparty Credit Risk 17 Table 10: Liquidity Levels 19 Table 11: Summary of Fair Value Adjustments on Non-Trading Portfoliosa 20 Table 12: Effect of Interest Rates and Credit on IBRD’s Fair Value Income 21 Table 13: Condensed Balance Sheet on a Fair Value Basis 22 Table 14: Reconciliation from Net Income to Income on a Fair Value Comprehensive Basis 22 Table 15: Fair Value Adjustments, net on non-trading portfolios 23 Figures Figure 1: IBRD’s Financial Business Model 6 Figure 2: Sources and Uses of Revenue 8 Figure 3: Net Interest Margin 10 Figure 4: Net Loans Outstanding 10 Figure 5: Net Investment Revenue 11 Figure 6: Net Investment Portfolio 11 Figure 7: Borrowing Portfolio 12 Figure 8: Equity Contribution 12 Figure 9: Net Non-Interest Expenses 13 Figure 10: Country Exposures as of December 31, 2018 16 Figure 11: Use of Derivatives for Loans and Borrowings 18 Figure 12: Use of Derivatives for Investments 18 Figure 13: Use of Derivatives for EMF 18 Figure 14: Sensitivity to Interest Rates as of December 31, 2018 22 Boxes Box 1: Selected Financial Data 2 IBRD Management’s Discussion and Analysis: December 31, 2018 25 This page left intentionally blank INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (IBRD) CONTENTS December 31, 2018 CONDENSED QUARTERLY FINANCIAL STATEMENTS CONDENSED BALANCE SHEET 28 CONDENSED STATEMENT OF INCOME 30 CONDENSED STATEMENT OF COMPREHENSIVE INCOME 31 CONDENSED STATEMENT OF CHANGES IN RETAINED EARNINGS 31 CONDENSED STATEMENT OF CASH FLOWS 32 NOTES TO THE CONDENSED QUARTERLY FINANCIAL STATEMENTS 33 INDEPENDENT AUDITORS’ REVIEW REPORT 64 IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) 27 CONDENSED BALANCE SHEET Expressed in millions of U.S. dollars December 31, 2018 June 30, 2018 (Unaudited) (Unaudited) Assets Due from banks—Notes C and K Unrestricted cash $ 504 $ 542 Restricted cash 93 77 597 619 Investments-Trading (including securities transferred under repurchase agreements or securities lending agreements of $26 million—December 31, 2018; $29 million—June 30, 2018)—Notes C and K 73,926 72,352 Securities purchased under resale agreements—Notes C and K 224 217 Derivative assets Investments—Notes C, F and K 45,085 38,015 Loans—Notes D, F and K 4,913 4,999 Client operations—Notes D, F, I and K 16,521 17,042 Borrowings—Notes E, F and K 80,132 80,518 Others—Notes F and K 843 1,142 147,494 141,716 Loans outstanding—Notes D, I and K Total loans 251,621 254,011 Less undisbursed balance (63,202) (68,422) Loans outstanding 188,419 185,589 Less: Accumulated provision for loan losses (1,590) (1,553) Deferred loan income (458) (448) Net loans outstanding 186,371 183,588 Other assets—Notes C, D, E and I 4,656 4,564 Total assets $ 413,268 $ 403,056 28 IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) December 31, 2018 June 30, 2018 (Unaudited) (Unaudited) Liabilities Borrowings—Notes E and K $ 212,227 $ 208,009 Securities sold under repurchase agreements, securities lent under securities lending agreements, and payable for cash collateral received—Notes C and K 36 122 Derivative liabilities Investments—Notes C, F and K 44,872 37,298 Loans—Notes D, F and K 4,999 5,007 Client operations—Notes D, F, I and K 16,527 17,069 Borrowings—Notes E, F and K 84,937 86,161 Others—Notes F and K 960 1,561 152,295 147,096 Other liabilities—Notes C, D and I 6,102 5,985 Total liabilities 370,660 361,212 Equity Capital stock—Note B Authorized (2,783,873 shares—December 31, 2018, and 2,307,600 shares—June 30, 2018) Subscribed (2,277,364 shares—December 31, 2018, and June 30, 2018) 274,730 274,730 Less uncalled portion of subscriptions (258,274) (258,274) Paid-in capital 16,456 16,456 Nonnegotiable, noninterest-bearing demand obligations on account of subscribed capital (353) (361) Receivable amounts to maintain value of currency holdings (218) (313) Deferred amounts to maintain value of currency holdings (99) 27 Retained earnings (see Condensed Statement of Changes in Retained Earnings; Note G) 28,661 28,457 Accumulated other comprehensive loss—Note J (1,839) (2,422) Total equity 42,608 41,844 Total liabilities and equity $ 413,268 $ 403,056 The Notes to Condensed Quarterly Financial Statements are an integral part of these Statements. IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) 29 CONDENSED STATEMENT OF INCOME Expressed in millions of U.S. dollars Three Months Ended Six Months Ended December 31, December 31, (Unaudited) (Unaudited) 2018 2017 2018 2017 Net Interest revenue Interest revenue Loans, net—Note D $ 1,284 $ 804 $ 2,483 $ 1,588 Equity management, net (16) 63 (20) 126 Investments—Trading, net 344 198 669 394 Other, net (23) 3 (13) 13 Borrowings, net—Note E (1,184) (640) (2,272) (1,240) Interest revenue, net of borrowing expenses 405 428 847 881 Provision for losses on loans and other exposures—Note D (30) (71) (50) (94) Non interest revenue Revenue from externally funded activities—Note I 236 206 392 359 Commitment charges—Note D 28 22 53 42 Other 10 9 19 17 Total 274 237 464 418 Non interest expenses Administrative—Notes A, H and I (503) (419) (967) (814) Pension—Notes A and H 14 (65) 30 (136) Contributions to special programs (15) 1 (16) (15) Other (5) (5) (11) (11) Total (509) (488) (964) (976) Board of Governors-approved and other transfers—Note G (248) (123) (338) (178) Unrealized mark-to-market gains on Investments-Trading portfolio, net—Notes F and K 139 117 212 201 Unrealized mark-to-market (losses) gains on non-trading portfolios, net—Notes D, E, F and K (76) 104 188 (24) Net (loss) income $ (45) $ 204 $ 359 $ 228 The Notes to Condensed Quarterly Financial Statements are an integral part of these Statements. 30 IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) CONDENSED STATEMENT OF COMPREHENSIVE INCOME Expressed in millions of U.S. dollars Three Months Ended Six Months Ended December 31, December 31, (Unaudited) (Unaudited) 2018 2017 2018 2017 Net (loss) income $ (45) $ 204 $ 359 $ 228 Other comprehensive income—Note J Reclassification to net income: Amortization of unrecognized net actuarial losses 21 34 43 67 Amortization of unrecognized prior service costs 6 6 12 12 Other - 1 1 2 Net Change in Debit Valuation Adjustment (DVA) on Fair Value option elected liabilities 442 - 494 - Currency translation adjustment (110) 99 (122) 331 Total other comprehensive income 359 140 428 412 Comprehensive income $ 314 $ 344 $ 787 $ 640 CONDENSED STATEMENT OF CHANGES IN RETAINED EARNINGS Expressed in millions of U.S. dollars Six Months Ended December 31, (Unaudited) 2018 2017 Retained earnings at beginning of the fiscal year $ 28,457 $ 27,759 Cumulative effect of change in accounting principle—Notes A, G and J (155) - Net income for the period 359 228 Retained earnings at end of the period $ 28,661 $ 27,987 The Notes to Condensed Quarterly Financial Statements are an integral part of these Statements. IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) 31 CONDENSED STATEMENT OF CASH FLOWS Expressed in millions of U.S. dollars Six Months Ended December 31, (Unaudited) 2018 2017 Cash flows from investing activities Loans Disbursements $ (8,731) $ (8,855) Principal repayments 4,852 5,195 Principal prepayments 324 1,340 Loan origination fees received 6 8 Net derivatives-loans 25 26 Other investing activities, net (64) (94) Net cash used in investing activities (3,588) (2,380) Cash flows from financing activities Medium and long-term borrowings New issues 20,145 20,697 Retirements (15,614) (16,066) Net short-term borrowings 255 3,187 Net derivatives-borrowings (657) (526) Capital subscriptions - 46 Other capital transactions, net 3 (10) Net cash provided by financing activities 4,132 7,328 Cash flows from operating activities Net income 359 228 Adjustments to reconcile net income to net cash used in operating activities Unrealized mark-to-market (gains) losses on non-trading portfolios,net (188) 24 Depreciation and amortization 429 392 Provision for losses on loans and other exposures 50 94 Changes in: Investments-Trading, net (1,154) (5,591) Other assets and liabilities (56) 94 Net cash used in operating activities (560) (4,759) Effect of exchange rate changes on unrestricted and restricted cash (6) 11 Net (decrease) increase in unrestricted and restricted cash—Note A (22) 200 Unrestricted and restricted cash at beginning of the fiscal year 619 613 Unrestricted and restricted cash at end of the period $ 597 $ 813 Supplemental disclosure (Decrease) increase in ending balances resulting from exchange rate fluctuations Loans outstanding $ (748) $ 1,895 Investment portfolio 6 - Borrowing portfolio (455) 1,358 Capitalized loan origination fees included in total loans 24 13 Interest paid on borrowing portfolio 1,971 1,110 The Notes to Condensed Quarterly Financial Statements are an integral part of these Statements. 32 IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) NOTES TO CONDENSED QUARTERLY FINANCIAL STATEMENTS NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING AND RELATED POLICIES Basis of Preparation These unaudited condensed quarterly financial statements should be read in conjunction with the June 30, 2018, audited financial statements and notes included therein. The condensed comparative information that has been derived from the June 30, 2018, audited financial statements has not been audited. In the opinion of management, the condensed quarterly financial statements reflect all adjustments necessary for a fair presentation of IBRD’s financial position and results of operations in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). Management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed quarterly financial statements and the reported amounts of income and expenses during the reporting periods. Due to the inherent uncertainty involved in making those estimates, actual results could differ from those estimates. Areas in which significant estimates have been made include, but are not limited to, the provision for losses on loans and other exposures, valuation of certain instruments carried at fair value, and valuation of pension and other postretirement plan-related liabilities. The results of operations for the first six months of the current fiscal year are not necessarily indicative of results that may be expected for the full year. Certain reclassifications of the prior year’s information have been made to conform with the current year’s presentation. Accounting and Reporting Developments Evaluated accounting standards: In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU and its subsequent amendments provide a common framework for revenue recognition for U.S. GAAP, and supersede most of the existing revenue recognition guidance in US GAAP. For IBRD, the revenue streams within the scope largely relate to the provision of technical assistance and knowledge under Reimbursable Advisory Services (RAS), asset management, and trustee services to clients and donors. The impact of adopting this standard is immaterial as less than 1% of IBRD’s revenue is affected by the new requirements. IBRD adopted the ASUs in the quarter ended September 30, 2018, using a modified retrospective approach under which all changes in revenue recognition are reflected in the period of adoption. The adoption of the ASU also resulted in additional disclosures reflected in Note I – Transactions with Affiliated Organizations. In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU makes targeted amendments to existing guidance on recognition and measurement of financial instruments that primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The new guidance requires that changes in the fair value of financial liabilities measured under the fair value option that are attributable to instrument-specific credit risk are recognized in Other Comprehensive Income (OCI). For IBRD, the ASU became effective from the quarter ended September 30, 2018. Upon adoption, IBRD recorded a cumulative effect adjustment of $155 million attributable to changes in instrument-specific credit risk (DVA) for financial liabilities measured under the fair value option. The adjustment was a reclassification from retained earnings to accumulated OCI. The adoption of the ASU also required changes to the Condensed Statement of Comprehensive Income, the Condensed Statement of Changes in Retained Earnings, as well as to Note D – Loans and other exposures, Note E – Borrowings, Note G – Retained Earnings, Allocations and Transfers, Note J – Accumulated Other Comprehensive Loss and Note K – Other Fair Value Disclosures. In June 2018, the FASB issued ASU 2018-8, Not-For-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. The ASU, which applies to all entities that receive or make contributions, clarifies and improves current guidance about whether a transfer of assets should be accounted for as a contribution or an exchange transaction, and provides additional guidance about how to determine whether a contribution is conditional. For contributions received, the ASU became effective from the quarter ended September 30, 2018. IBRD has evaluated the ASU and determined that the guidance on contributions received has no impact on its financial statements. IBRD is currently evaluating the impact of the portion of the ASU applicable to contributions made which will be effective from the quarter ending September 30, 2019. IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) 33 Given the immateriality of the amounts subject to reclassification under the following ASUs, IBRD has applied their requirements prospectively from the quarter ended September 30, 2018: In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The ASU provides classification guidance on eight specific cash flow classification issues for which US GAAP did not provide guidance. For IBRD, the ASU became effective from the quarter ended September 30, 2018. In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The ASU requires that the amounts of restricted cash and cash equivalents are included in the total of cash and cash equivalents at the beginning and end of the period in the Statement of Cash Flows. For IBRD, the ASU became effective from the quarter ended September 30, 2018. In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The ASU requires that an employer reports the service cost component of net benefit cost in the same line item as other compensation costs. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and are not eligible for capitalization. For IBRD, this ASU became effective from the quarter ended September 30, 2018. It also resulted in additional disclosures reflected in Note H – Pension and Other Postretirement Benefits. Accounting standards under evaluation: In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The ASU and its subsequent amendments require that a lessee recognizes on the balance sheet the assets and liabilities that arise from all leases with a lease term of more than twelve months. The recognition, measurement, and presentation of expenses and cash flows by the lessee will primarily depend on the classification of the lease as finance or operating. The accounting applied by a lessor remains largely unchanged from the current guidance, with some targeted improvements. For IBRD, the ASUs are effective from the quarter ending September 30, 2019. IBRD is currently evaluating the impact of these ASUs on its financial statements. In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU and its subsequent amendments introduce a new model for the accounting of credit losses of loans and other financial assets measured at amortized cost. Current U.S. GAAP requires an “incurred loss” methodology for recognizing credit losses. The new model, referred to as the current expected credit loss (CECL) model, requires an entity to estimate the credit losses expected over the life of an exposure, considering historical information, current information, and reasonable and supportable forecasts. Additionally, the ASUs require enhanced disclosures about credit quality and significant estimates and judgments used in estimating credit losses. For IBRD, the ASUs will be effective from the quarter ending September 30, 2020. IBRD is currently evaluating the impact of these ASUs on its financial statements. In August 2018, the FASB issued the following three ASUs. IBRD is currently evaluating the impact of these ASUs on its financial statements. ASU 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which amends certain disclosure requirements of ASC 820. The guidance will be effective for IBRD from the quarter ending September 30, 2020, with early adoption permitted. ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans, which amends ASC 715 disclosure requirements related to defined benefit pension and other postretirement plans for annual periods. The guidance will be effective for IBRD from the fiscal year ending June 30, 2021, with early adoption permitted. ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which amends ASC 350-40 to address a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The guidance will be effective for IBRD from the quarter ending September 30, 2020, with early adoption permitted. 34 IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) NOTE B—CAPITAL STOCK The following table provides a summary of changes in IBRD’s authorized and subscribed shares due to the General Capital Increase (GCI) and Selective Capital Increase (SCI): Authorized shares Subscribed shares As of June 30, 2017 2,307,600 2,229,344 GCI - 48,020 As of June 30, 2018 2,307,600 2,277,364 GCI/ SCI 476,273 - As of December 31, 2018 2,783,873 2,277,364 The subscription period for the GCI agreed by shareholders in 2010 ended on March 16, 2018. On October 1, 2018, IBRD’s Board of Governors approved two resolutions that increase IBRD’s authorized capital. The total increase in authorized capital was $57.5 billion, of which, $27.8 billion and $29.7 billion relate to the GCI and SCI, respectively. In addition, shares that were previously unallocated after the 2010 GCI and SCI will be made available for subscription under the 2018 SCI. Under the terms of the 2018 GCI and SCI, paid-in capital is expected to increase by up to $7.5 billion over the next five years. The following table provides a summary of the changes in subscribed capital, uncalled portion of subscriptions and paid-in capital: In millions of U.S. dollars Uncalled portion Subscribed capital of subscriptions Paid-in capital As of June 30, 2017 $ 268,937 $ (252,828) $ 16,109 GCI 5,793 (5,446) 347 As of June 30, 2018 274,730 (258,274) 16,456 GCI/SCI - - - As of December 31, 2018 $ 274,730 $ (258,274) $ 16,456 The uncalled portion of subscriptions is subject to call only when required to meet the obligations incurred by IBRD as a result of borrowings, or guaranteeing loans. NOTE C—INVESTMENTS As of December 31, 2018, IBRD’s investments included the liquid asset portfolio and holdings relating to the Advance Market Commitment for Pneumococcal Vaccines Initiative (AMC), Post Employment Benefit Plan (PEBP), and the Post Retirement Contribution Reserve Fund (PCRF) which is used to stabilize IBRD’s contributions to the pension plan. The composition of IBRD’s net investment portfolio was as follows: In millions of U.S. dollars December 31, 2018 June 30, 2018 Liquid asset portfolio $ 72,660 $ 71,579 PEBP holdings 1,405 1,393 AMC holdings 217 250 PCRF holdings 320 270 Total $ 74,602 $ 73,492 Investments held by IBRD are designated as trading and are carried and reported at fair value, or at face value which approximates fair value. As of December 31, 2018, the majority of Investments was mainly comprised of government and agency obligations, and time deposits (48% and 45%, respectively), with all the instruments classified as Level 1 or Level 2 within the fair value hierarchy. As of December 31, 2018, Japanese Government Instruments represented the largest holding of a single counterparty, and amounted to 20% of the Investments–Trading portfolio. Over 99% of IBRD’s investments as of December 31, 2018 were rated A and above, by a major rating agency. IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) 35 A summary of IBRD’s Investments-Trading is as follows: In millions of U.S. dollars December 31, 2018 June 30, 2018 Equity securities a $ 588 $ 672 Government and agency obligations 35,853 29,610 Time deposits 33,253 37,763 Asset-backed securities (ABS) 3,848 3,962 Alternative investments b 384 345 Total $ 73,926 $ 72,352 a.  Includes $284 million of investments in commingled funds at net asset value per share (NAV), related to PEBP holdings ($295 million—June 30, 2018). b.  Includes investments in hedge funds, private equity funds and real estate funds, related to PEBP holdings, at NAV. IBRD manages its investments on a net portfolio basis. The following table summarizes IBRD’s net portfolio position: In millions of U.S. dollars December 31, 2018 June 30, 2018 Investments—Trading $ 73,926 $ 72,352 Securities purchased under resale agreements 224 217 Securities sold under repurchase agreements, securities lent under securities lending agreements, and payable for cash collateral received (36) (122) Derivative assets Currency forward contracts 18,736 18,647 Currency swaps 26,298 19,308 Interest rate swaps 50 60 Swaptions, exchange traded options and futures contracts 1 * Other - - Total 45,085 38,015 Derivative liabilities Currency forward contracts (18,768) (18,358) Currency swaps (26,060) (18,894) Interest rate swaps (40) (43) Swaptions, exchange traded options and futures contracts (4) (3) Other - - Total (44,872) (37,298) Cash held in investment portfolio a 375 407 Receivable from investment securities traded b 46 83 Payable for investment securities purchased c (146) (162) Net investment portfolio $ 74,602 $ 73,492 a. This amount is included in Unrestricted cash under Due from banks on the Condensed Balance Sheet. b. This amount is included in Other assets on the Condensed Balance Sheet. c. This amount includes $97 million of liabilities related to PCRF payable and is included in Other liabilities on the Condensed Balance Sheet ($80 million—June 30, 2018). * Indicates amount less than $0.5 million. IBRD uses derivative instruments to manage currency and interest rate risks in the investment portfolio. For details regarding these instruments, see Note F—Derivative Instruments. As of December 31, 2018, there were $38 million of short sales included in Other liabilities on the Condensed Balance Sheet ($37 million—June 30, 2018). 36 IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) Fair Value Disclosures The following tables present IBRD’s fair value hierarchy for investment assets and liabilities measured at fair value on a recurring basis. Note that the fair value of Alternative investments and certain equities is calculated using NAV. As a result, these amounts are included in the respective asset class totals and not in the fair value hierarchy, in accordance with the permitted practical expedient under U.S. GAAP. In millions of U.S. dollars Fair Value Measurements on a Recurring Basis As of December 31, 2018 Level 1 Level 2 Level 3 Total Assets: Investments – Trading Equity securities $ 304 $ - $ - $ 588 a Government and agency obligations 19,997 15,856 - 35,853 Time deposits 1,634 31,619 - 33,253 ABS - 3,848 - 3,848 Alternative investments b - - - 384 Total Investments – Trading $ 21,935 $ 51,323 $ - $ 73,926 Securities purchased under resale agreements 44 180 - 224 Derivative assets-Investments Currency forward contracts - 18,736 - 18,736 Currency swaps - 26,298 - 26,298 Interest rate swaps - 50 - 50 Swaptions, exchange traded options and futures contracts 1* - 1 Other - - - - Total Derivative assets-Investments 1 45,084 - 45,085 Total $ 21,980 $ 96,587 $ - $ 119,235 Liabilities: Securities sold under repurchase agreements and securities lent under securities lending agreements c $ - $ 27 $ - $ 27 Derivative liabilities-Investments Currency forward contracts - 18,768 - 18,768 Currency swaps - 26,060 - 26,060 Interest rate swaps - 40 - 40 Swaptions, exchange traded options and futures contracts 4 * - 4 Other - - - - Total Derivative liabilities-Investments 4 44,868 - 44,872 Total $ 4 $ 44,895 $ - $ 44,899 a. Includes $284 million of commingled funds at NAV, related to PEBP holdings and not included in the fair value hierarchy. b. Investments at NAV related to PEBP holdings, not included in the fair value hierarchy. c. Excludes $9 million relating to payable for cash collateral received. * Indicates amount less than $0.5 million. IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) 37 In millions of U.S. dollars Fair Value Measurements on a Recurring Basis As of June 30, 2018 Level 1 Level 2 Level 3 Total Assets: Investments – Trading Equity securities $ 377 $ - $ - $ 672 a Government and agency obligations 14,403 15,207 - 29,610 Time deposits 2,147 35,616 - 37,763 ABS - 3,962 - 3,962 Alternative investments b - - - 345 Total Investments – Trading $ 16,927 $ 54,785 $ - $ 72,352 Securities purchased under resale agreements 41 176 - 217 Derivative assets-Investments Currency forward contracts - 18,647 - 18,647 Currency swaps - 19,308 - 19,308 Interest rate swaps - 60 - 60 Swaptions, exchange traded options and futures contracts * * - * Other - - - - Total Derivative assets-Investments * 38,015 - 38,015 Total $ 16,968 $ 92,976 $ - $ 110,584 Liabilities: Securities sold under repurchase agreements and securities lent under securities lending agreements c $ - $ 30 $ - $ 30 Derivative liabilities-Investments Currency forward contracts - 18,358 - 18,358 Currency swaps - 18,894 - 18,894 Interest rate swaps - 43 - 43 Swaptions, exchange traded options and futures contracts 3 - - 3 Other - - - - Total Derivative liabilities-Investments 3 37,295 - 37,298 Total $ 3 $ 37,325 $ - $ 37,328 a. Includes $295 million of commingled funds at NAV, related to PEBP holdings and not included in the fair value hierarchy. b. Investments at NAV related to PEBP holdings, not included in the fair value hierarchy. c. Excludes $92 million relating to payable for cash collateral received. * Indicates amount less than $0.5 million. During the six months ended December 31, 2018, and for the fiscal year ended June 30, 2018 there were no transfers between Level 1 and Level 2, within the fair value hierarchy. 38 IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) Valuation Methods and Assumptions Summarized below are the techniques applied in determining the fair values of investments. Investment securities Investment securities are classified based on management’s intention on the date of purchase, their nature, and IBRD’s policies governing the level and use of such investments. These securities are carried and reported at fair value, or at face value or NAV, which approximates fair value. Where available, quoted market prices are used to determine the fair value of trading securities. Examples include most government and agency securities, mutual funds, futures contracts, exchange-traded equity securities, ABS and To-Be-Announced (TBA) securities. For instruments for which market quotations are not available, fair values are determined using model-based valuation techniques, whether internally-generated or vendor-supplied, that include the standard discounted cash flow method using market observable inputs such as yield curves, credit spreads, and constant prepayment rates.Where applicable, unobservable inputs such as constant prepayment rates, probability of default and loss severity are used. Unless quoted prices are available, time deposits are reported at face value which, approximates fair value, as they are short term in nature. Securities purchased under resale agreements, Securities sold under repurchase agreements, and Securities lent under securities lending agreements These securities are of a short-term nature and reported at face value which approximates fair value. Commercial Credit Risk For the purpose of risk management, IBRD is party to a variety of financial transactions, certain of which involve elements of credit risk. Credit risk exposure represents the maximum potential loss due to possible non-performance by obligors and counterparties under the terms of the contracts. For all securities, IBRD limits trading to a list of authorized dealers and counterparties. In addition, IBRD receives collateral in connection with resale agreements as well as swap agreements. This collateral serves to mitigate IBRD’s exposure to credit risk. Swap Agreements: Credit risk is mitigated through the application of eligibility criteria and volume limits for transactions with individual counterparties and through the use of mark-to-market collateral arrangements for swap transactions. IBRD may require collateral in the form of cash or other approved liquid securities from individual counterparties in order to mitigate its credit exposure. IBRD has entered into master derivatives agreements, which contain legally enforceable close-out netting provisions. These agreements may further reduce the gross credit risk exposure related to the swaps. Credit risk with financial assets subject to a master derivatives arrangement is further reduced under these agreements to the extent that payments and receipts with the counterparty are netted at settlement. The reduction in exposure as a result of these netting provisions can vary due to the impact of changes in market conditions on existing and new transactions. The extent of the reduction in exposure may, therefore, change substantially within a short period of time following the balance sheet date. For more information on netting and offsetting provisions see Note F—Derivative Instruments. The following is a summary of the collateral received by IBRD in relation to swap transactions: In millions of U.S. dollars December 31, 2018 June 30, 2018 Collateral received Cash $ 9 $ 92 Securities 1,305 1,365 Total collateral received $ 1,314 $ 1,457 Collateral permitted to be repledged $ 1,314 $ 1,457 Amount of collateral repledged - - As of December 31, 2018, IBRD had received total cash collateral of $9 million ($92 million—June 30, 2018), none of which was invested in highly liquid instruments ($31 million—June 30, 2018). IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) 39 Securities Lending: IBRD may engage in securities lending and repurchases, against adequate collateral, as well as securities borrowing and reverse repurchases (resales) of government and agency obligations, corporate bonds and ABS. These transactions have been conducted under legally enforceable master netting arrangements, which allow IBRD to reduce its gross credit exposure related to these transactions. For balance sheet presentation purposes, IBRD presents its securities lending and repurchases, as well as resales, on a gross basis. As of December 31, 2018, there were no amounts that could potentially be offset as a result of legally enforceable master netting arrangements (Nil—June 30, 2018). Securities lending and repurchase agreements expose IBRD to several risks, including counterparty risk, reinvestment risk, and risk of a collateral gap (increase or decrease in the fair value of collateral pledged). IBRD has procedures in place to ensure that trading activity and balances under these agreements are below predefined counterparty and maturity limits, and to actively manage net counterparty exposure, after collateral, through daily mark-to-market. Whenever the collateral pledged by IBRD related to its borrowings under repurchase agreements and securities lending agreements declines in value, the transaction is re-priced as appropriate by returning cash or pledging additional collateral. The following is a summary of the carrying amount of the securities transferred under repurchase or securities lending agreements, and the related liabilities: In millions of U.S. dollars December 31, 2018 June 30, 2018 Financial Statement Presentation Securities transferred under Included under Investments-Trading on the Condensed repurchase or securities $ 26 $ 29 Balance Sheet. lending agreements Liabilities relating to securities Included under Securities sold under repurchase agreements, transferred under repurchase securities lent under securities lending agreements, and $ 27 $ 30 or securities lending payable for cash collateral received, on the Condensed agreements Balance Sheet. Transfers of securities by IBRD to counterparties are not accounted for as sales as the accounting criteria for the treatment as a sale have not been met. Counterparties are permitted to repledge these securities until the repurchase date. As of December 31, 2018 and June 30, 2018 there were no liabilities relating to securities transferred under repurchase or securities lending agreements that had not settled. The following tables present the disaggregation of the gross obligation by class of collateral pledged, and the remaining contractual maturities for repurchase or securities lending agreements that are accounted for as secured borrowings: In millions of U.S. dollars As of December 31, 2018 Remaining contractual maturity of the agreements Overnight and continuous Up to 30 days Total Repurchase or securities lending agreements Government and agency obligations $ 12 $ - $ 12 Equity securities 15 - 15 Total liabilities relating to securities transferred under repurchase or securities lending agreements $ 27 $ - $ 27 In millions of U.S. dollars As of June 30, 2018 Remaining contractual maturity of the agreements Overnight and continuous Up to 30 days Total Repurchase or securities lending agreements Government and agency obligations $ 14 $ - $ 14 Equity securities 16 - 16 Total liabilities relating to securities transferred under repurchase or securities lending agreements $ 30 $ - $ 30 40 IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) In the case of resale agreements, IBRD receives collateral in the form of liquid securities and is permitted to repledge these securities. While these transactions are legally considered to be true purchases and sales, the securities received are not recorded on IBRD’s Condensed Balance Sheet as the accounting criteria for treatment as a sale have not been met. As of December 31, 2018 and June 30, 2018, there were no securities purchased under resale agreements which had not settled at these dates. For resale agreements, IBRD received securities with a fair value of $226 million ($218 million—June 30, 2018). None of these securities had been transferred under repurchase or security lending agreements as of these dates. NOTE D—LOANS AND OTHER EXPOSURES IBRD’s loans and other exposures (exposures) are generally made to, or guaranteed by, member countries of IBRD (Sovereign Exposures). In addition, IBRD may make loans to the International Finance Corporation (IFC), an affiliated organization, without any guarantee. Other exposures include: Deferred Drawdown Options (DDOs), Irrevocable Commitments, Exposures to Member Countries’ Derivatives, and Guarantees. As of December 31, 2018, all IBRD’s loans were reported at amortized cost. IBRD uses derivatives to manage the currency risk as well as the repricing risk between its loans and borrowings. For details regarding derivatives used in the loan portfolio, see Note F—Derivative Instruments. Of the total loans outstanding as of December 31, 2018, 77% were to the Latin America and the Caribbean, Europe and Central Asia, and East Asia and Pacific regions, combined. As of December 31, 2018, only less than 1% of IBRD’s loans were in nonaccrual status and were all related to one borrower. The total provision for losses on accrual and nonaccrual loans accounted for less than 1% of the total loan portfolio. Based on IBRD’s internal credit quality indicators, the majority of loans outstanding are in the medium risk and high risk classes. Credit Quality of Sovereign Exposures Based on an evaluation of IBRD’s exposures, management has determined that IBRD has one portfolio segment – Sovereign Exposures. IBRD’s loans constitute substantially all of the Sovereign Exposures portfolio segment. IBRD’s country risk ratings are an assessment of its borrowers’ ability and willingness to repay IBRD on time and in full. These ratings are internal credit quality indicators. Individual country risk ratings are derived on the basis of both quantitative and qualitative analyses. The components considered in the analysis can be grouped broadly into eight categories: political risk, external debt and liquidity, fiscal policy and public debt burden, balance of payments risks, economic structure and growth prospects, monetary and exchange rate policy, financial sector risks, and corporate sector debt and vulnerabilities. For the purpose of analyzing the risk characteristics of IBRD’s exposures, these exposures are grouped into three classes in accordance with assigned borrower risk ratings, which relate to the likelihood of loss: Low, Medium and High risk classes, as well as exposures in nonaccrual status. IBRD considers all exposures in nonaccrual status to be impaired. IBRD’s borrower country risk ratings are key determinants in the provision for losses. Country risk ratings are determined in review meetings that take place several times a year. All countries are reviewed at least once a year, or more frequently if circumstances warrant, to determine the appropriate ratings. IBRD considers loans to be past due when a borrower fails to make payment on any principal, interest or other charges due to IBRD on the dates provided in the contractual loan agreement. IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) 41 The following tables provide an aging analysis of the loans outstanding: In millions of U.S. dollars As of December 31, 2018 Days past due Up to 45 46-60 61-90 91-180 Over 180 Total Past Due Current Total Risk Class Low $ - $ - $ - $ - $ - $ - $ 23,558 $ 23,558 Medium - - - - - - 82,313 82,313 High - - - - - - 82,113 82,113 Loans in accrual status - - - - - - 187,984 187,984 Loans in nonaccrual status - - - - 435 435 - 435 Total $ - $ - $ - $ - $ 435 $ 435 $ 187,984 $ 188,419 In millions of U.S. dollars As of June 30, 2018 Days past due Up to 45 46-60 61-90 91-180 Over 180 Total Past Due Current Total Risk Class Low $ - $ - $ - $ - $ - $ - $ 23,606 $ 23,606 Medium - - - - - - 76,153 76,153 High - - - - - - 85,395 85,395 Loans in accrual status - - - - - - 185,154 185,154 Loans in nonaccrual status - - - - 435 435 - 435 Total $ - $ - $ - $ - $ 435 $ 435 $ 185,154 $ 185,589 Accumulated Provision for Losses on Loans and Other Exposures Management determines the appropriate level of accumulated provisions for losses, which reflects the probable losses inherent in IBRD’s exposures. Probable losses comprise estimates of potential losses arising from default and nonpayment of principal amounts due, as well as present value losses. Delays in receiving loan payments result in present value losses to IBRD since it does not charge fees or additional interest on any overdue interest or charges. These present value losses are equal to the difference between the present value of payments of interest and charges, made according to the related instrument’s contractual terms and the present value of its expected future cash flows. It is IBRD’s practice not to write off its loans. All contractual obligations associated with exposures in nonaccrual status have eventually been cleared, thereby allowing borrowers to eventually emerge from nonaccrual status. To date, no loans have been written off. Notwithstanding IBRD’s historical experience, the risk of losses associated with nonpayment of principal amounts due is included in the accumulated provision for losses on loans and other exposures. 42 IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) Changes to the Accumulated provision for losses on loans and other exposures are summarized below: In millions of U.S. dollars December 31, 2018 June 30, 2018 Loans Other a Total Loans Other a Total Accumulated provision, beginning of the fiscal year $ 1,553 $ 92 $ 1,645 $ 1,582 $ 89 $ 1,671 Provision - charge (release) 42 8 50 (34) 3 (31) Translation adjustment (5) * (5) 5* 5 Accumulated provision, end of the period/fiscal year $ 1,590 $ 100 $ 1,690 $ 1,553 $ 92 $ 1,645 Composed of accumulated provision for losses on: Loans in accrual status $ 1,373 $ 1,336 Loans in nonaccrual status 217 217 Total $ 1,590 $ 1,553 Loans, end of the period/fiscal year: Loans at amortized cost in accrual status $ 187,984 $ 185,154 Loans at amortized cost in nonaccrual status 435 435 Total $ 188,419 $ 185,589 a. Provision does not include recoverable asset received under the Exposure Exchange Agreements (EEA) for guarantees received (for more details see Guarantees section). * Indicates amount less than $0.5 million. Reported as Follows Condensed Balance Sheet Condensed Statement of Income Accumulated Provision for Losses on: Loans Accumulated provision for loan losses Provision for losses on loans and other exposures Other exposures (excluding exposures to Other liabilities Provision for losses on loans and other member countries’ derivatives) exposures Exposures to member countries’ Derivative assets – Client operations Unrealized mark-to-market gains/ (losses) on derivatives non-trading portfolios Overdue Amounts At December 31, 2018, there were no principal or interest amounts on loans in accrual status, which were overdue by more than three months. The following tables provide a summary of selected financial information related to loans in nonaccrual status: In millions of U.S. dollars December 31, 2018 June 30, 2018 Recorded investment in nonaccrual loans a $ 435 $ 435 Accumulated provision for loan losses on nonaccrual loans 217 217 Average recorded investment in nonaccrual loans for the period/fiscal year 435 435 Overdue amounts of nonaccrual loans: 972 954 Principal 435 435 Interest and charges 537 519 a. A loan loss provision has been recorded against each of the loans in nonaccrual status. In millions of U.S. dollars Three Months Ended December 31, Six Months Ended December 31, 2018 2017 2018 2017 Interest revenue not recognized as a result of loans being in nonaccrual status $ 9 $ 9 $ 18 $ 18 IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) 43 During the six months ended December 31, 2018 and December 31, 2017, no loans were placed in nonaccrual status or restored to accrual status. In addition, during the six months ended December 31, 2018, and December 31, 2017, no interest income was recognized on loans in nonaccrual status. Information relating to the sole borrowing member with loans or guarantees in nonaccrual status at December 31, 2018: In millions of U.S. dollars Principal Principal, Interest and Nonaccrual Borrower Outstanding Charges Overdue Since Zimbabwe $ 435 $ 972 October 2000 Guarantees Guarantees of $6,540 million were outstanding as of December 31, 2018 ($6,357 million—June 30, 2018). This amount represents the maximum potential amount of undiscounted future payments that IBRD could be required to make under these guarantees, and is not included in the Condensed Balance Sheet. These guarantees have original maturities ranging between 5 and 20 years, and expire in decreasing amounts through 2038. As of December 31, 2018, liabilities related to IBRD’s obligations under guarantees of $426 million ($427 million—June 30, 2018), have been included in Other liabilities on the Condensed Balance Sheet. These include the accumulated provision for guarantee losses of $94 million ($86 million—June 30, 2018). During the six months ended December 31, 2018 and December 31, 2017, no guarantees provided by IBRD were called. IBRD executed Exposure Exchange Agreements (EEA) with the Multilateral Investment Guarantee Agency (MIGA) for $120 million, the African Development Bank for $1,588 million and the Inter-American Development Bank for $2,021 million. While these agreements are not legally considered guarantees, they meet the accounting criteria for financial guarantees and are, therefore, recognized as financial guarantees in IBRD’s financial statements. Information on the location and amounts associated with the EEAs included in the Condensed Balance Sheet and Condensed Statement of Income is presented in the following table: In millions of U.S. dollars December 31, 2018 June 30, 2018 (Stand (Stand ready (Provision) ready (Provision) Location on Notional obligation) Recoverable Notional obligation) Recoverable Condensed amount Asset asset amount Asset asset Balance Sheet Guarantee provided a,c $ 3,666 $ (241) $ (36) $ 3,671 $ (251) $ (36) Other liabilities Guarantee received b (3,667) 241 37 (3,672) 251 37 Other assets $ (1) $ - $ 1 $ (1) $ — $ 1 a. For the six months ended December 31, 2018, Provisions for losses on loans and other exposures, line on the Condensed Statement of Income includes no provisions relating to Guarantee provided (Less than $1 million—six months ended December 31, 2017). b. For the six months ended December 31, 2018, Other, net, line on the Condensed Statement of Income includes less than $1 million of reduction in Recoverable asset relating to Guarantee received ($2 million—six months ended December 31, 2017). c. Notional amount, Stand ready obligation and Provision for the guarantee provided are included in guarantees outstanding of $6,540 million, obligations under guarantees of $426 million and accumulated provision for guarantee losses of $94 million, respectively ($6,357 million, $427 million and $86 million, respectively—June 30, 2018). Waivers of Loan Charges IBRD provides waivers on eligible loans, which include a portion of interest on loans, a portion of the commitment charge on undisbursed balances and a portion of the front-end fee charged on all eligible loans. Waivers are approved annually by the Executive Directors of IBRD. 44 IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) The reduction in net income resulting from waivers of loan charges is summarized below: In millions of U.S. dollars Three Months Ended December 31, Six Months Ended December 31, 2018 2017 2018 2017 Interest waivers $ 10 $ 14 $ 22 $ 29 Commitment charge waivers * * * * Front-end fee waivers 2 2 4 5 Total $ 12 $ 16 $ 26 $ 34 * Indicates amount less than $0.5 million. Segment Reporting Based on an evaluation of IBRD’s operations, management has determined that IBRD has only one reportable segment since financial results are reviewed, and resource allocation decisions are made, at the entity level. Loan income comprises interest, commitment fees, loan origination fees and prepayment premia, net of waivers. For the six months ended December 31, 2018, one country contributed in excess of 10 percent of total loan revenue; this amounted to $300 million. Information about IBRD’s loans outstanding and associated loan revenue by geographic region is presented in the following table: In millions of U.S. dollars December 31, 2018 December 31, 2017 Region Loans Outstanding Loan Revenue b Loans Outstanding Loan Revenue b Africa $ 4,523 $ 132 $ 4,801 $ 127 East Asia and Pacific 40,650 668 38,583 445 Europe and Central Asia 45,889 417 47,397 307 Latin America and the Caribbean 58,008 972 56,627 748 Middle East and North Africa 24,384 321 21,923 200 South Asia 14,965 240 14,353 148 Other a - - - * Total $ 188,419 $ 2,750 $ 183,684 $ 1,975 a. Represents loans to IFC, an affiliated organization. b. Does not include interest expenses, net of $214 million from loan related derivatives ($345 million—six months ended December 31, 2017). Includes commitment charges of $53 million ($42 million—six months ended December 31, 2017). * Indicates amount less than $0.5 million. Fair Value Disclosures There were no loans carried at fair value as of December 31, 2018 and June 30, 2018. The table below presents the fair value of all IBRD’s loans for disclosure purposes, along with their carrying values: In millions of U.S. dollars December 31, 2018 June 30, 2018 Carrying Value Fair Value Carrying Value Fair Value Net loans outstanding $ 186,371 $189,540 $ 183,588 $ 186,650 IBRD’s loans would be classified as Level 3 within the fair value hierarchy. IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) 45 NOTE E—BORROWINGS IBRD issues unsubordinated and unsecured fixed and variable rate debt in a variety of currencies. Some of these debt instruments are callable. Variable rates may be based on, for example, exchange rates, interest rates or equity indices. Borrowings issued by IBRD are carried and reported at fair value. As of December 31, 2018, 98% of the instruments in the portfolio were classified as Level 2, within the fair value hierarchy. IBRD uses derivative contracts to manage the currency risk as well as the repricing risk between its loans and borrowings. For details regarding the derivatives used in the borrowing portfolio, see Note F—Derivative Instruments. The following table summarizes IBRD’s borrowing portfolio after derivatives: In millions of U.S. dollars December 31, 2018 June 30, 2018 Borrowings a $ 212,227 $ 208,009 Currency swaps, net 4,282 3,737 Interest rate swaps, net 523 1,906 $ 217,032 $ 213,652 a.  Includes $33 million of unsettled borrowings, representing a non-cash financing activity, for which there is a related receivable included in Other assets on the Condensed Balance Sheet ($126 million—June 30, 2018). Interest expenses, net for Borrowings on the Condensed Statement of Income of $2,272 million ($1,240 million—six months ended December 31, 2017) includes $281 million of interest revenue, net related to derivatives associated with the Borrowing portfolio ($974 million—six months ended December 31, 2017). Net short-term borrowings on the Condensed Statement of Cash Flows include new issues and retirements for instruments with maturities longer than 90 days and up to 1 year, amounting to $4,113 million and $4,094 million, respectively ($5,947 million and $4,510 million, respectively—six months ended December 31, 2017). For the six months ended December 31, 2018, the amount of interest paid on zero-coupon bonds and bonds with insignificant coupon interest rates was $190 milllion ($118 million—six months ended December 31, 2017). Fair Value Disclosures IBRD’s fair value hierarchy for borrowings measured at fair value on a recurring basis is as follows: In millions of U.S. dollars December 31, 2018 June 30, 2018 Level 1 $ - $ - Level 2 207,795 203,603 Level 3 4,432 4,406 $ 212,227 $ 208,009 The following table provides a summary of changes in the fair value of IBRD’s Level 3 borrowings: In millions of U.S. dollars Three Months Ended December 31, Six Months Ended December 31, 2018 2017 2018 2017 Beginning of the period/fiscal year $ 4,375 $ 2,872 $ 4,406 $ 2,278 Total realized/unrealized mark-to-market losses (gains) in: Net income (23) 48 (11) (48) Other comprehensive income (OCI) a 6 (4) (27) (16) Issuances 153 151 230 643 Settlements (79) (52) (166) (164) Transfers into (out of), net - * - 322 End of the period $ 4,432 $ 3,015 $ 4,432 $ 3,015 a. Starting with the period ended September 30, 2018, OCI includes the DVA on Fair Value Option Elected Liabilities. * Indicates amount less than $0.5 million. 46 IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) Valuation adjustments on fair value option elected liabilities Starting July 1, 2018, changes in the fair value of IBRD’s financial liabilities, for which the fair value option has been elected, and that relate to IBRD’s own credit risk are recognized in OCI as a Debit Valuation Adjustment (DVA). The DVA on fair value option elected liabilities is measured by revaluing each liability to determine the changes in fair value of that liability arising from changes in IBRD’s cost of funding relative to LIBOR. The following table provides information on the changes in fair value due to the change in IBRD’s own credit risk for financial liabilities measured under the fair value option, included in the Condensed Statement of Other Comprehensive Income: In millions of U.S. dollars Three Months Ended Six Months Ended Unrealized mark-to-market gains/(losses) due to DVA on fair value option elected liabilities December 31, 2018 December 31, 2018 DVA on Fair Value Option Elected Liabilities $ 442 $ 493 Amounts reclassified to net income upon derecognition of a liabiity (*) 1 Net change in DVA on Fair Value Option Elected Liabilities $ 442 $ 494 * Indicates amount less than $0.5 million. The following table provides information on the cumulative changes in fair value due to the change in IBRD’s own- credit risk for financial liabilities measured under fair value option, as well as where those amounts are included in the Condensed Balance Sheet: In millions of U.S. dollars DVA on fair value option elected liabilities As of December 31, 2018 Reported as follows: Accumulated other comprehensive loss $ 649 Information on the unrealized mark-to-market gains or losses included in the Condensed Statement of Income for the three and six months ended December 31, 2018 and December 31, 2017, relating to IBRD’s Level 3 borrowings still held at the reporting dates, as well as where those amounts are included in the Condensed Statement of Income, is presented in the following table: In millions of U.S. dollars Three Months Ended Six Months Ended December 31, December 31, Unrealized mark to market gains (losses) 2018 2017 2018 2017 Reported as follows: Unrealized mark-to-market (losses) gains on non-trading portfolios, net $ 56 $ (15) $ 94 $ 118 The following table provides information on the unrealized mark-to-market gains or losses included in the Condensed Statement of Income, relating to IBRD’s total borrowings held at the reporting dates, as well as where those amounts are included in the Condensed Statement of Income: In millions of U.S. dollars Three Months Ended Six Months Ended December 31, December 31, Unrealized mark to market (losses) gains 2018 2017 2018 2017 Reported as follows: Unrealized mark-to-market (losses) gains on non-trading portfolios, net $(1,888) $ 834 $(1,134) $ 1,067 IBRD’s Level 3 borrowings primarily relate to structured bonds. The fair value of these bonds is estimated using discounted cash flow valuation models that incorporate model parameters, observable market inputs, and unobservable inputs. The significant unobservable inputs used in the fair value measurement of structured bonds are correlations and long-dated interest rate volatilities. Generally, the movements in correlations are considered to be independent from the movements in long-dated interest rate volatilities. Correlation is the statistical measurement of the relationship between two variables. For contracts where the holder benefits from the convergence of the underlying index prices (e.g. interest rates and foreign exchange rates), an IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) 47 increase in correlation generally results in an increase in the fair value of the instrument. The magnitude and direction of the fair value adjustment will depend on whether the holder is short or long the option. Interest rate volatility is the extent to which the level of interest rates change over time. For purchased options, an increase in volatility will generally result in an increase in the fair value. In general, the volatility used to price the option depends on the maturity of the underlying instrument and the option strike price. During the six months ended December 31, 2018, and for the fiscal year ended June 30, 2018, the interest rate volatilities for certain currencies were extrapolated for certain tenors and thus are considered an unobservable input. There were no transfers between Level 2 and Level 3 during the three and six months ended December 31, 2018. The table below provides the details of all gross inter-level transfers during three and six months ended December 31, 2017: In millions of U.S. dollars Three Months Ended December 31, 2017 Six Months Ended December 31, 2017 Level 2 Level 3 Level 2 Level 3 Borrowings Transfer into (out of) $ 3 $ (3) $ 3 $ (3) Transfer (out of) into (3) 3 (325) 325 $ (*) $ * $ (322) $ 322 * Indicates amount less than $0.5 million. Transfers between Level 2 and Level 3 are due to changes in price transparency. Presented below is the difference between the aggregate fair value and aggregate contractual principal balance of borrowings: In millions of U.S. dollars Principal Amount Due Fair Value Upon Maturity Difference December 31, 2018 $ 212,227 $ 219,625 $ (7,398) June 30, 2018 $ 208,009 $ 216,458 $ (8,449) Valuation Methods and Assumptions Techniques applied in determining the fair values of debt instruments are summarized as follows: Discount notes and vanilla bonds Discount notes and vanilla bonds are valued using the standard discounted cash flow method, which relies on market observable inputs such as yield curves, foreign exchange rates, basis spreads and funding spreads. Where available, quoted market prices are used to determine the fair value of short-term notes. Structured bonds Structured bonds issued by IBRD have coupon or repayment terms linked to the level or the performance of interest rates, foreign exchange rates, equity indices or commodities. The fair value of the structured bonds is derived using the discounted cash flow method based on estimated future pay-offs determined by applicable models and computation of embedded optionality such as caps, floors and calls. A wide range of industry standard models such as one factor Hull-White, LIBOR Market Model and Black-Scholes are used depending on the specific structure. These models incorporate market observable inputs, such as yield curves, foreign exchange rates, basis spreads, funding spreads, interest rates volatilities, equity index volatilities and equity indices. Where applicable, the models also incorporate significant unobservable inputs such as correlations and long-dated interest rate volatilities. 48 IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) NOTE F—DERIVATIVE INSTRUMENTS IBRD uses derivative instruments in its investment, loan and borrowing portfolios, and for asset/liability management purposes (including equity management). It also offers derivative intermediation services to clients and, concurrently, enters into offsetting transactions with market counterparties. The following table summarizes IBRD’s use of derivatives in its various financial portfolios: Portfolio Derivative instruments used Purpose / Risk being managed Risk management purposes: Currency swaps, currency forward contracts, Manage currency and interest rate risks in the Investments interest rate swaps, options, swaptions and portfolio futures contracts, TBA securities Manage currency risk as well as repricing risks Loans Currency swaps, and interest rate swaps between loans and borrowings Manage currency risk as well as repricing risks Borrowings Currency swaps, and interest rate swaps between loans and borrowings Other Manage currency risk and the duration of Currency swaps, and interest rate swaps assets/liabilities IBRD’s equity (equity management) Other purposes: Currency swaps, currency forward contracts, and Client operations Assist clients in managing risks interest rate swaps The presentation of IBRD’s derivatives is based on the manner in which they are settled. Interest rate swaps are settled on a net basis and are, therefore, presented on a net basis. Currency swaps are settled on a gross basis and are therefore, presented on a gross basis. The following tables provide information on the fair value amounts and the location of the derivative instruments on the Condensed Balance Sheet, as well as notional amounts and credit risk exposures of those derivative instruments: In millions of U.S. dollars Balance Sheet Location Derivative Assets Derivative Liabilities December 31, 2018 June 30, 2018 December 31, 2018 June 30, 2018 Derivatives not designated as hedging instruments Swaptions, exchange traded options and futures contracts – Investment-Trading $ 1 $ * $ 4 $ 3 Interest rate swaps 4,656 4,691 6,322 7,852 Currency swaps a 142,837 137,025 145,969 139,241 Other - - - - Total Derivatives $ 147,494 $ 141,716 $ 152,295 $ 147,096 a. Includes currency forward contracts and structured swaps. * Indicates amount less than $0.5 million. Offsetting assets and liabilities IBRD enters into International Swaps and Derivatives Association, Inc. (ISDA) master netting agreements with substantially all of its derivative counterparties. These legally enforceable master netting agreements give IBRD the right to liquidate securities held as collateral and to offset receivables and payables with the same counterparty, in the event of default by the counterparty. The presentation of derivative instruments is consistent with the manner in which these instruments are settled. Interest rate swaps are settled on a net basis, while currency swaps are settled on a gross basis. IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) 49 The following table summarizes information on derivative assets and liabilities (before and after netting adjustments) that are reflected on IBRD’s Condensed Balance Sheet. Total derivative assets and liabilities are adjusted on an aggregate basis to take into consideration the effects of legally enforceable master netting agreements. The net derivative asset positions have been further reduced by the cash and securities collateral received. In millions of U.S. dollars As of December 31, 2018 Located on the Condensed Balance Sheet Derivative Assets Derivative Liabilities Gross Gross Gross Gross Amounts Amounts Net Amounts Amounts Amounts Net Amounts Recognized Offset Presented Recognized Offset Presented Interest rate swaps $ 18,798 $ (14,142) $ 4,656 $ 32,528 $ (26,206) $ 6,322 Currency swaps a 142,837 - 142,837 145,969 - 145,969 Other b 1 - 1 4 - 4 Total $ 161,636 $ (14,142) $ 147,494 $ 178,501 $ (26,206) $ 152,295 Amounts subject to legally enforceable master netting (145,191) (145,191) agreements c Net derivative positions at counterparty level before 2,303 7,104 collateral Less: Cash collateral received d 9 Securities collateral received d 956 Net derivative exposure after collateral $ 1,338 a. Includes currency forward contracts and structured swaps. b. These relate to swaptions, exchange traded options, futures contracts and TBA securities. c. Not offset on the Condensed Balance Sheet. d. Does not include excess collateral received. In millions of U.S. dollars As of June 30, 2018 Located on the Condensed Balance Sheet Derivative Assets Derivative Liabilities Gross Gross Gross Gross Amounts Amounts Net Amounts Amounts Amounts Net Amounts Recognized Offset Presented Recognized Offset Presented Interest rate swaps $ 18,665 $ (13,974) $ 4,691 $ 37,482 $ (29,630) $ 7,852 Currency swaps a 137,025 - 137,025 139,241 - 139,241 Other b * - * 3 - 3 Total $ 155,690 $ (13,974) $ 141,716 $ 176,726 $ (29,630) $ 147,096 Amounts subject to legally enforceable master netting agreements c (139,164) (139,164) Net derivative positions at counterparty level before collateral 2,552 7,932 Less: Cash collateral received d 92 Securities collateral received d 1,006 Net derivative exposure after collateral $ 1,454 a. Includes currency forward contracts and structured swaps. b. These relate to swaptions, exchange traded options, futures contracts and TBA securities. c. Not offset on the Condensed Balance Sheet. d. Does not include excess collateral received. * Indicates amount less than $0.5 million. 50 IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) Notional amounts and credit risk exposure of the derivative instruments: In millions of U.S. dollars December 31, 2018 June 30, 2018 Type of contract Investments - Trading Interest rate swaps Notional principal $ 3,679 $ 3,723 Credit exposure 50 60 Currency swaps (including currency forward contracts) Credit exposure 587 823 Swaptions, exchange traded options and futures contracts a Notional long position 855 998 Notional short position 58 42 Credit exposure 1 * Other derivatives Notional long position - - Notional short position - - Credit exposure - - Loans Interest rate swaps Notional principal 23,622 23,410 Credit exposure 208 305 Currency swaps Credit exposure 945 837 Client operations Interest rate swaps Notional principal 19,848 19,029 Credit exposure 761 673 Currency swaps Credit exposure 1,049 1,065 Borrowings Interest rate swaps Notional principal 234,886 237,174 Credit exposure 2,794 2,511 Currency swaps Credit exposure 3,924 4,002 Other derivatives Interest rate swaps Notional principal 150,244 157,234 Credit exposure 843 1,142 Currency swaps Credit exposure - - Total credit exposure Interest rate swaps 4,656 4,691 Currency swaps (including currency forward contracts) 6,505 6,727 Swaptions, exchange traded options and futures contracts a 1 * Other Derivaties - - Total exposure 11,162 11,418 a.  Exchange traded instruments are generally subject to daily margin requirements and are deemed to have no material credit risk. All swaptions, options, and futures contracts are interest rate contracts. *  Indicates amount less than $0.5 million. IBRD is not required to post collateral under its derivative agreements as long as it maintains a triple-A credit rating. The aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a liability position on December 31, 2018 was $6,963 million ($7,791 million—June 30, 2018). IBRD did not post any collateral with these counterparties due to its triple-A credit rating. IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) 51 If the credit-risk related contingent features underlying these agreements were triggered to the extent that IBRD would be required to post collateral on December 31, 2018, the amount of collateral that would need to be posted would be $3,548 million ($3,986 million—June 30, 2018). Subsequent triggers of contingent features would require posting of additional collateral, up to a maximum of $6,963 million ($7,791 million—June 30, 2018). In contrast, IBRD received collateral totaling $1,314 million as of December 31, 2018 ($1,457 million—June 30, 2018), in relation to swap transactions (see Note C—Investments). The following table provides information on the location and amount of unrealized mark-to-market gains and losses on the non-trading derivatives and their location on the Condensed Statement of Income: In millions of U.S. dollars Unrealized mark-to-market gains (losses) Derivatives not designated as hedging Three Months Ended Six Months Ended instruments, and not held in a trading December 31, December 31, portfolio a Reported as: 2018 2017 2018 2017 Interest rate swaps $ 1,625 $ (610) $ 1,363 $ (820) Currency swaps (including currency Unrealized mark-to-market forward contracts and structured (losses) gains on non-trading swaps) portfolios, net 187 (120) (41) (271) Total $ 1,812 $ (730) $ 1,322 $ (1,091) a. For alternative disclosures about trading derivatives, see the following table. All of the instruments in IBRD’s investment portfolio are held for trading purposes. Within the investment portfolio, IBRD holds highly rated fixed income instruments, equity securities as well as derivatives. The trading portfolio is primarily held to ensure the availability of funds to meet future cash flow requirements and for liquidity management purposes. The following table provides information on the location and amount of unrealized mark-to-market gains and losses on the net Investment–Trading portfolio and their location on the Condensed Statement of Income: In millions of U.S. dollars Condensed Statement of Income line Unrealized mark-to-market gains (losses) a Three Months Ended Six Months Ended December 31, December 31, 2018 2017 2018 2017 Type of instrument Fixed income (including associated derivatives) $ 164 $ 99 $ 231 $ 171 Equity (25) 18 (19) 30 Total $ 139 $ 117 $ 212 $ 201 a.  Amounts associated with each type of instrument include gains and losses on both derivative instruments and non-derivative instruments. 52 IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) Fair Value Disclosures IBRD’s fair value hierarchy for derivative assets and liabilities measured at fair value on a recurring basis was as follows: In millions of U.S. dollars Fair Value Measurements on a Recurring Basis As of December 31, 2018 Level 1 Level 2 Level 3 Total Derivative Assets: Investments Currency forward contracts $ - $ 18,736 $ - $ 18,736 Currency swaps - 26,298 - 26,298 Interest rate swaps - 50 - 50 Swaptions, exchange traded options and futures contracts 1 * - 1 Other - - - - 1 45,084 - 45,085 Loans Currency swaps - 4,458 247 4,705 Interest rate swaps - 208 - 208 - 4,666 247 4,913 Client operations Currency swaps - 15,760 - 15,760 Interest rate swaps - 751 10 761 - 16,511 10 16,521 Borrowings Currency swaps - 75,987 1,351 77,338 Interest rate swaps - 2,757 37 2,794 - 78,744 1,388 80,132 Others Currency swaps - - - - Interest rate swaps - 843 - 843 - 843 - 843 Total derivative assets $ 1 $ 145,848 $ 1,645 $ 147,494 Derivative Liabilities: Investments Currency forward contracts $ - $ 18,768 $ - $ 18,768 Currency swaps - 26,060 - 26,060 Interest rate swaps - 40 - 40 Swaptions, exchange traded options and futures contracts 4* - 4 Other - - - - 4 44,868 - 44,872 Loans Currency swaps - 3,533 234 3,767 Interest rate swaps - 1,232 - 1,232 - 4,765 234 4,999 Client operations Currency swaps - 15,754 - 15,754 Interest rate swaps - 753 20 773 - 16,507 20 16,527 Borrowings Currency swaps - 80,110 1,510 81,620 Interest rate swaps - 3,117 200 3,317 - 83,227 1,710 84,937 Others Currency swaps - - - - Interest rate swaps - 960 - 960 - 960 - 960 Total derivative liabilities $ 4 $ 150,327 $ 1,964 $ 152,295 * Indicates amount less than $0.5 million. IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) 53 In millions of U.S. dollars Fair Value Measurements on a Recurring Basis As of June 30, 2018 Level 1 Level 2 Level 3 Total Derivative Assets: Investments Currency forward contracts $ - $ 18,647 $ - $ 18,647 Currency swaps - 19,308 - 19,308 Interest rate swaps - 60 - 60 Swaptions, exchange traded options and futures contracts * * - * Other - - - - * 38,015 - 38,015 Loans Currency swaps - 4,461 233 4,694 Interest rate swaps - 305 - 305 - 4,766 233 4,999 Client operations Currency swaps - 16,369 - 16,369 Interest rate swaps - 672 1 673 - 17,041 1 17,042 Borrowings Currency swaps - 76,643 1,364 78,007 Interest rate swaps - 2,469 42 2,511 - 79,112 1,406 80,518 Others Currency swaps - - - - Interest rate swaps - 1,142 - 1,142 - 1,142 - 1,142 Total derivative assets $ * $ 140,076 $ 1,640 $ 141,716 Derivative Liabilities: Investments Currency forward contracts $ - $ 18,358 $ - $ 18,358 Currency swaps - 18,894 - 18,894 Interest rate swaps - 43 - 43 Swaptions, exchange traded options and futures contracts 3 - - 3 Other - - - - 3 37,295 - 37,298 Loans Currency swaps - 3,642 239 3,881 Interest rate swaps - 1,126 - 1,126 - 4,768 239 5,007 Client operations Currency swaps - 16,364 - 16,364 Interest rate swaps - 674 31 705 - 17,038 31 17,069 Borrowings Currency swaps - 80,280 1,464 81,744 Interest rate swaps - 4,207 210 4,417 - 84,487 1,674 86,161 Others Currency swaps - - - - Interest rate swaps - 1,561 - 1,561 - 1,561 - 1,561 Total derivative liabilities $ 3 $ 145,149 $ 1,944 $ 147,096 * Indicates amount less than $0.5 million. 54 IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) The following tables provide a summary of changes in the fair value of IBRD’s Level 3 derivative assets (liabilities), net: In millions of U.S. dollars Three Months Ended December 31, 2018 Six Months Ended December 31, 2018 Currency Interest Rate Currency Interest Rate Swaps Swaps Total Swaps Swaps Total Beginning of the period/fiscal year $ (185) $ (173) $ (358) $ (106) $ (198) $ (304) Total realized/unrealized mark-to-market (losses) gains in: Net income (15) (35) (50) (62) (9) (71) Other comprehensive income 49 (*) 49 17 (*) 17 Issuances 1 * 1 (*) * (*) Settlements 5 35 40 6 34 40 Transfers, net (1) - (1) (1) - (1) End of the period $ (146) $ (173) $ (319) $ (146) $ (173) $ (319) In millions of U.S. dollars Three Months Ended December 31, 2017 Six Months Ended December 31, 2017 Currency Interest Rate Currency Interest Rate Swaps Swaps Total Swaps Swaps Total Beginning of the period/fiscal year $ 23 $ (310) $ (287) $ 33 $ (108) $ (75) Total realized/unrealized mark-to-market (losses) gains in: Net income (3) 30 27 (17) (88) (105) Other comprehensive income (4) (*) (4) (1) 1 (*) Issuances (10) (*) (10) (11) (73) (84) Settlements 5 174 179 7 163 170 Transfers, net (4) - (4) (4) (1) (5) End of the period $ 7 $ (106) $ (99) $ 7 $ (106) $ (99) * Indicates amount less than $0.5 million. Unrealized mark-to-market gains or losses included in the Condensed Statement of Income relating to IBRD’s Level 3 derivatives, net still held at the reporting dates as well as where those amounts are included in the Condensed Statement of Income, are presented in the following table: In millions of U.S. dollars Three Months Ended Six Months Ended December 31, December 31, Unrealized mark-to-market (losses) gains 2018 2017 2018 2017 Reported as follows: Unrealized mark-to-market (losses) gains on non-trading portfolios, net $ (48) $ 17 $ (80) $ (116) IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) 55 The following table provides details of all inter-level transfers. In millions of U.S. dollars Three Months Ended December 31, 2018 Six Months Ended December 31, 2018 Level 2 Level 3 Level 2 Level 3 Derivative assets, net Transfer into (out of) $ 18 $ (18) $ 18 $ (18) Transfer (out of) into - - - - 18 (18) 18 (18) Derivative liabilities, net Transfer (into) out of $ (17) $ 17 $ (17) $ 17 Transfer out of (into) - - - - (17) 17 (17) 17 Transfers, net $ 1 $ (1) $ 1 $ (1) In millions of U.S. dollars Three Months Ended December 31, 2017 Six Months Ended December 31, 2017 Level 2 Level 3 Level 2 Level 3 Derivative assets, net Transfer into (out of) $ 35 $ (35) $ 35 $ (35) Transfer (out of) into (4) 4 (5) 5 31 (31) 30 (30) Derivative liabilities, net Transfer (into) out of $ (31) $ 31 $ (31) $ 31 Transfer out of (into) 4 (4) 6 (6) (27) 27 (25) 25 Transfers, net $ 4 $ (4) $ 5 $ (5) Transfers between Level 2 and Level 3 are due to changes in price transparency. The fair value of IBRD’s Level 3 borrowings related derivatives is estimated using valuation models that incorporate model parameters, observable market inputs and unobservable inputs. The significant unobservable inputs used in the fair value measurement of these derivatives are correlations and long dated interest rate volatilities. See Note E-Borrowings for details on these unobservable inputs. The following table provides a summary of the valuation technique applied in determining fair values of these Level 3 instruments and quantitative information regarding the significant unobservable inputs used. In millions of U.S. dollars Fair Value at December 31, Fair Value at Valuation Unobservable Range (average), Range (average), Portfolio 2018 June 30, 2018 Technique input December 31, 2018 June 30, 2018 Currency swaps, Interest rate swaps Discounted Correlations -38% to 76% (10%) -34% to 73% (10%) ($319) ($304) Cash Flow Interest rate volatilities 18% to 45% (33%) 18% to 34% (29%) Valuation Methods and Assumptions Derivative contracts include currency forward contracts, TBAs, swaptions, exchange traded options and futures contracts, currency swaps and interest rate swaps. Where available, quoted market prices are used to determine the fair value of trading securities. Examples include exchange traded options and futures contracts. Currency swaps and interest rate swaps are either plain vanilla or structured. Currency forward contracts and plain vanilla currency and interest rate swaps are valued using the standard discounted cash flow methods using market observable inputs such as yield curves, foreign exchange rates, credit spreads, basis spreads and funding spreads. For structured currency and interest rate swaps, which primarily consist of callable swaps linked to interest rates, foreign exchange rates, and equity indices, valuation models and inputs similar to the ones applicable to structured bonds valuation are used. Where applicable, the models also incorporate significant unobservable inputs such as correlations and long-dated interest rate volatilities. 56 IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) NOTE G—RETAINED EARNINGS, ALLOCATIONS AND TRANSFERS IBRD makes net income allocation decisions on the basis of reported net income, adjusted to exclude unrealized mark-to-market gains and losses on non-trading portfolios, net, restricted income and Board of Governors-approved transfers, and after considering the allocation to the pension reserve. On August 9, 2018, IBRD’s Executive Directors approved the following allocations relating to the net income earned in the fiscal year ended June 30, 2018; an increase in the General Reserve by $913 million and a decrease in the Pension Reserve by $22 million. On September 5, 2018, IBRD’s Board of Governors approved a transfer of $90 million from Surplus to the Trust Fund for Gaza and West Bank. The transfer was made on September 14, 2018. On October 12, 2018, IBRD’s Board of Governors approved a transfer to International Development Association (IDA) of $248 million out of the net income earned in the fiscal year ended June 30, 2018. The transfer to IDA was made on October 23, 2018. Retained earnings comprised the following components: In millions of U.S. dollars December 31, 2018 June 30, 2018 Special reserve $ 293 $ 293 General reserve 28,606 27,693 Pension reserve 787 810 Surplus 126 216 Cumulative fair value adjustments a (1,888) b (1,467) Unallocated net income 697 875 Restricted retained earnings 40 37 Total $ 28,661 $ 28,457 a.  Unrealized mark-to-market gains or losses, net applicable to non-trading portfolios reported at fair value. b. Includes cumulative effect of $155 million related to the change in accounting principle from the adoption of ASU 2016-01 on instrument specific credit risk for fair value option elected liabilities (DVA), on July 1, 2018. NOTE H—PENSION AND OTHER POSTRETIREMENT BENEFITS IBRD, IFC and Multilateral Investment Guarantee Agency (MIGA) participate in a defined benefit Staff Retirement Plan (SRP), a Retired Staff Benefits Plan (RSBP) and PEBP that cover substantially all of their staff members. All costs, assets and liabilities associated with these pension plans are allocated between IBRD, IFC and MIGA based upon their employees’ respective participation in the plans. Costs allocated to IBRD are then shared between IBRD and IDA based on an agreed cost-sharing methodology. The following table summarizes the benefit costs associated with the SRP, RSBP, and PEBP for IBRD and IDA. In millions of U.S. dollars Three Months Ended Six Months Ended December 31, 2018 December 31, 2018 SRP RSBP PEBP Total SRP RSBP PEBP Total Benefit Cost Service cost $ 117 $ 31 $ 22 $ 170 $ 235 $ 62 $ 43 $ 340 Interest cost 183 30 19 232 366 60 36 462 Expected return on plan assets (252) (41) - (293) (504) (81) - (585) Amortization of unrecognized prior service costs a 1 5 - 6 2 9 1 12 Amortization of unrecognized net actuarial losses a 6 - 15 21 11 - 32 43 Net periodic pension cost $ 55 $ 25 $ 56 $ 136 $ 110 $ 50 $ 112 $ 272 Of which: IBRD’s share $ 23 $ 11 $ 24 $ 58 $ 48 $ 22 $ 50 $ 120 IDA’s share $ 32 $ 14 $ 32 $ 78 $ 62 $ 28 $ 62 $ 152 a.  Included in Amounts reclassified into net income in Note J—Comprehensive Income. IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) 57 In millions of U.S. dollars Three Months Ended Six Months Ended December 31, 2017 December 31, 2017 SRP RSBP PEBP Total SRP RSBP PEBP Total Benefit Cost Service cost $ 114 $ 31 $ 19 $ 164 $ 228 $ 62 $ 39 $ 329 Interest cost 163 28 15 206 325 56 30 411 Expected return on plan assets (226) (35) - (261) (451) (71) - (522) Amortization of unrecognized prior service costs a 1 5 - 6 2 9 1 12 Amortization of unrecognized net actuarial losses a 19 - 15 34 38 - 29 67 Net periodic pension cost $ 71 $ 29 $ 49 $ 149 $ 142 $ 56 $ 99 $ 297 Of which: IBRD’s share $ 31 $ 13 $ 21 $ 65 $ 65 $ 26 $ 45 $ 136 IDA’s share $ 40 $ 16 $ 28 $ 84 $ 77 $ 30 $ 54 $ 161 a. Included in Amounts reclassified into net income in Note J—Comprehensive Income. The components of net periodic pension cost, other than the service cost component, are included in the line item Pension in the Condensed Statement of Income. From the quarter ended September 30, 2018, the service cost component is included in the line item Administrative expenses. The following table provides the amounts of IBRD’s pension service cost: In millions of U.S. dollars Three Months Ended Six Months Ended December 31, 2018 December 31, 2018 SRP RSBP PEBP Total SRP RSBP PEBP Total Service cost $ 117 $ 31 $ 22 $ 170 $ 235 $ 62 $ 43 $ 340 Of which: IBRD’s share a $ 50 $ 13 $ 9 $ 72 $ 104 $ 27 $ 19 $ 150 IDA’s share 67 18 13 98 131 35 24 190 a. Included in Administrative expenses in the Condensed Statement of Income. In millions of U.S. dollars Three Months Ended Six Months Ended December 31, 2017 December 31, 2017 SRP RSBP PEBP Total SRP RSBP PEBP Total Service cost $ 114 $ 31 $ 19 $ 164 $ 228 $ 62 $ 39 $ 329 Of which: IBRD’s share $ 52 $ 14 $ 9 $ 75 $ 105 $ 28 $ 18 $ 151 IDA’s share 62 17 10 89 123 34 21 178 58 IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) NOTE I—TRANSACTIONS WITH AFFILIATED ORGANIZATIONS IBRD transacts with affiliated organizations by providing loans, administrative and derivative intermediation services, as well as through its pension and other postretirement benefit plans. In addition, IBRD provides transfers to IDA out of its net income, upon approval by the Board of Governors (see Note G—Retained Earnings, Allocations and Transfers). IBRD had the following receivables from (payables to) its affiliated organizations: In millions of U.S. dollars December 31, 2018 June 30, 2018 IDA IFC MIGA Total IDA IFC MIGA Total Administrative Services 300 29 13 342 339 41 12 392 Derivative Transactions a Receivable 4,072 - - 4,072 4,284 - - 4,284 Payable (4,358) - - (4,358) (4,531) - - (4,531) Pension and Other Postretirement Benefits (641) (338) (12) (991) (676) (352) (13) (1,041) Investments - (97) - (97) - (80) - (80) $ (627) $ (406) $ 1 $ (1,032) $ (584) $ (391) $ (1) $ (976) a.  For details on derivative transactions relating to swap intermediation services provided by IBRD to IDA see Note F—Derivative Instruments. The receivables from (payables to) these affiliated organizations are reported in the Condensed Balance Sheet as follows: Receivables / Payables related to: Reported as: Loans Loans outstanding Receivable for administrative services a Other assets Receivables (payables) for derivative transactions Derivative assets/liabilities – Client operations Payable for pension and other postretirement benefits Other liabilities a. Includes amounts payable to IDA for its share of investments associated with PCRF. This payable is included in Other Liabilities on the Condensed Balance Sheet. Loans and Other Exposures IBRD has a Local Currency Loan Facility Agreement with IFC, which is capped at $300 million. As of December 31, 2018 and June 30, 2018 there were no loans outstanding under this facility. During the fiscal year ended June 30, 2014, IBRD entered into an exposure exchange agreement with MIGA under which IBRD and MIGA exchanged selected exposures, with each divesting exposure in countries where their lending capacities were limited, in return for exposure in countries where they had excess lending capacity. Under the agreement, IBRD and MIGA each had exchanged $120 million of notional exposure as follows: MIGA assumes IBRD’s loan principal and interest exposure in exchange for IBRD’s assumption of principal and interest exposure of MIGA under its Non-Honoring of Sovereign Financial Obligation agreement. As of December 31, 2018, assets related to IBRD’s right to be indemnified under this agreement amounted to $2 million ($2 million—June 30, 2018), while liabilities related to IBRD’s obligation under this agreement amounted to $2 million ($2 million—June 30, 2018). These include an accumulated provision for guarantee losses of $1 million ($1 million—June 30, 2018). Administrative Services Expenses jointly incurred by IBRD and IDA are allocated based on an agreed cost-sharing methodology, and amounts are settled quarterly. For the three and six months ended December 31, 2018, IBRD’s administrative expenses are net of the share of expenses allocated to IDA of $458 million and $870 million, respectively ($445 million and $858 million, respectively—three and six months ended December 31, 2017). IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) 59 Revenue Revenue jointly earned by IBRD and IDA is allocated based on an agreed revenue-sharing methodology. Amounts are settled quarterly. For the three and six months ended December 31, 2018, IBRD’s other revenue is net of revenue allocated to IDA of $91 million and $142 million ($71 million and $118 million—three and six months ended December 31, 2017), respectively, and is included in Revenue from externally funded activities on the Condensed Statement of Income. This revenue also includes revenue from contracts with customers as follows: In millions of U.S. dollars Three Months Ended December 31, Six Months Ended December 31, Description 2018 2017 2018 2017 Trust fund fees Administrative and trustee $ 33 $ 31 $ 51 $ 51 services for trust funds Other RAS and asset management 33 22 35 28 services $ 66 $ 53 $ 86 $ 79 Of which: IBRD’s share $ 30 $ 25 $ 40 $ 39 IDA’s share 36 28 46 40 Each revenue stream represents compensation for services provided and the related revenue is recognized over time. IBRD’s rights to consideration are deemed unconditional, and are classified as receivables. IBRD also has an obligation to transfer certain services for which it has received consideration in advance. Such considerations are presented as contract liabilities and are subsequently recognized as revenue, when the related performance obligation is satisfied. The following table shows IBRD’s receivables and contract liabilities related to revenue from contracts with customers: In millions of U.S. dollars December 31, 2018 June 30, 2018 Receivables $ 25 $ 57 Contract liabilities 155 132 The amount of fee revenue associated with services provided to affiliated organizations is included in Revenue from externally funded activities on the Condensed Statement of Income, as follows: In millions of U.S. dollars Three Months Ended December 31, Six Months Ended December 31, 2018 2017 2018 2017 Fees charged to IFC $ 16 $ 15 $ 33 $ 31 Fees charged to MIGA 1 1 2 2 Pension and Other Postretirement Benefits The payable to IDA represents IDA’s net share of prepaid costs for pension and other postretirement benefit plans and PEBP assets. These will be realized over the life of the plan participants. The payables to IFC and MIGA represent their respective share of PEBP assets. The PEBP assets are managed by IBRD and are part of the investment portfolio. For Pension and Other Postretirement Benefits related disclosure see Note H—Pension and Other Postretirement Benefits. 60 IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) Derivative Transactions These relate to currency forward contracts entered into by IDA with IBRD acting as the intermediary with the market. Investments These relate to investments that IBRD has made on behalf of IFC, associated with the PCRF and are included in Investments-Trading on IBRD’s Condensed Balance Sheet. The corresponding payable to IFC is included in the amount payable for investment securities purchased. As a result, there is no impact on IBRD’s investments net asset value from these transactions. NOTE J—ACCUMULATED OTHER COMPREHENSIVE LOSS Comprehensive income consists of net income and other gains and losses affecting equity that, under U.S. GAAP, are excluded from net income. Comprehensive income (loss) comprises currency translation adjustments, the cumulative effects of a change in accounting principle related to the implementation of guidance on FASB’s derivatives and hedging, pension-related items, and net income. These items are presented in the Condensed Statement of Comprehensive Income. Effective July 1, 2018, IBRD adopted ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities which affected the recognition and measurement of financial liabilities where the fair value option has been elected. The ASU requires the portion of the total change in fair value caused by changes in IBRD’s own credit risk (DVA on fair value option elected liabilities) to be presented separately in other comprehensive income. Previously these amounts were recognized in net income. Upon derecognition of a liability designated under the fair value option, the cumulative amount of DVA on fair value option elected liabilities will be reclassified from accumulated other comprehensive income to net income. Upon adoption of this ASU, a cumulative effect adjustment of $155 million was reclassified from retained earnings to accumulated other comprehensive loss, with no impact on the total equity. The following tables present the changes in Accumulated Other Comprehensive Loss (AOCL) balances: In millions of U.S. dollars Six Months Ended December 31, 2018 Amounts Net Balance, Adjusted Changes in reclassified Changes Balance, beginning of Cumulative beginning fair value in into net during the end of the the fiscal year adjustment balance AOCL income period period Cumulative Translation Adjustment $ 139 $ - $ 139 $ (122) $ - $ (122) $ 17 DVA on Fair Value option elected liabilities - 155 155 493 1 494 649 Unrecognized Net Actuarial (Losses) Gains on Benefit Plans (2,423) - (2,423) - 43 43 (2,380) Unrecognized Prior Service (Costs) Credits on Benefit Plans (136) - (136) - 12 12 (124) Other (2) - (2) - 1 1 (1) Total Accumulated Other Comprehensive Loss $ (2,422) $ 155 $ (2,267) $ 371 $ 57 $ 428 $ (1,839) IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) 61 In millions of U.S. dollars Six Months Ended December 31, 2017 Balance, Changes Amounts Net Changes beginning of the in fair value reclassified into during the Balance, end fiscal year in AOCL net income period of the period Cumulative Translation Adjustment $ 46 $ 331 $ - $ 331 $ 377 Unrecognized Net Actuarial (Losses) Gains on Benefit Plans (3,257) - 67 a 67 (3,190) Unrecognized Prior Service (Costs) Credits on Benefit Plans (160) - 12 a 12 (148) Other (5) - 2 2 (3) Total Accumulated Other Comprehensive Loss $ (3,376) $ 331 $ 81 $ 412 $ (2,964) a. See Note H—Pension and Other Post Retirement Benefits. NOTE K—OTHER FAIR VALUE DISCLOSURES The table below presents IBRD’s estimates of fair value of its financial assets and liabilities along with their respective carrying amounts: In millions of U.S. dollars December 31, 2018 June 30, 2018 Carrying Value Fair Value Carrying Value Fair Value Assets Due from banks $ 597 $ 597 $ 619 $ 619 Investments-Trading (including Securities purchased under resale agreements) 74,150 74,150 72,569 72,569 Net loans outstanding 186,371 189,540 183,588 186,650 Derivative assets Investments 45,085 45,085 38,015 38,015 Loans 4,913 4,913 4,999 4,999 Client operations 16,521 16,521 17,042 17,042 Borrowings 80,132 80,132 80,518 80,518 Others 843 843 1,142 1,142 Liabilities Borrowings 212,227 212,236 208,009 208,019 Securities sold/lent under repurchase agreements/securities lending agreements and payable for cash collateral received 36 36 122 122 Derivative liabilities Investments 44,872 44,872 37,298 37,298 Loans 4,999 4,999 5,007 5,007 Client operations 16,527 16,527 17,069 17,069 Borrowings 84,937 84,937 86,161 86,161 Others 960 960 1,561 1,561 62 IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) Valuation Methods and Assumptions As of December 31, 2018 and June 30, 2018, IBRD had no assets or liabilities measured at fair value on a non-recurring basis. For valuation methods and assumptions as well as additional fair value disclosures regarding Investments, Loans, Borrowings and Derivative assets and liabilities, refer to Note C—Investments, Note D—Loans and Other Exposures, Note E—Borrowings and Note F—Derivative Instruments, respectively. Due from Banks: The carrying amount of unrestricted and restricted currencies is considered a reasonable estimate of the fair value of these positions. Unrealized Mark-to-Market Gains or Losses on Investments-Trading and Non-Trading Portfolios, Net The following table reflects the components of the realized and unrealized gains or losses on Investments-Trading and non-trading portfolios, net: In millions of U.S. dollars Three Months Ended Six Months Ended December 31, 2018 December 31, 2018 Unrealized gains (losses) Realized excluding Unrealized Realized Unrealized gains Unrealized gains realized gains gains (losses) excluding gains (losses) amounts a (losses) (losses) realized amounts a (losses) Investments-Trading $402 $ (263) $ 139 $ 795 $ (583) $ 212 Non trading portfolios, net Loans derivatives—Notes D and F - (528) (528) 1 (232) (231) Equity management, net - 419 419 - 314 314 Borrowings, including derivatives — Notes E and F 3 17 20 b 3 89 92 b Other assets/liabilities derivatives - - - - - - Client operations derivatives - 13 13 - 13 13 Total $ 3 $ (79) $ (76) $ 4 $ 184 $ 188 In millions of U.S. dollars Three Months Ended Six Months Ended December 31, 2017 December 31, 2017 Unrealized gains (losses) Realized excluding Unrealized Realized Unrealized gains Unrealized gains realized gains gains (losses) excluding gains (losses) amounts a (losses) (losses) realized amounts a (losses) Investments-Trading $257 $ (140) $ 117 $(338) $ 539 $ 201 Non trading portfolios, net Loans derivatives—Notes D and F - 146 146 - 226 226 Equity management, net - (231) (231) - (267) (267) Borrowings, including derivatives — Notes E and F 1 187 188 b 1 19 20 b Other assets/liabilities derivatives - (1) (1) - (1) (1) Client operations derivatives - 2 2 - (2) (2) Total $ 1 $ 103 $ 104 $ 1 $ (25) $ (24) a.  Adjusted to exclude amounts reclassified to realized gains (losses). b.  Includes $1,908 million and $1,226 million of unrealized mark-to-market gains related to derivatives associated with borrowings for three and six months ended December 31, 2018, respectively (unrealized mark-to-market losses of $646 million and $1,047 million—three and six months ended December 31, 2017, respectively). NOTE L—CONTINGENCIES From time to time, IBRD may be named as a defendant or co-defendant in legal actions on different grounds in various jurisdictions. IBRD’s management does not believe the outcome of any existing legal action, in which IBRD has been named as a defendant or co-defendant, as of and for the three and six months ended December 31, 2018, will have a material adverse effect on IBRD’s financial position, results of operations or cash flows. IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2018 (UNAUDITED) 63 INDEPENDENT AUDITORS’ REVIEW REPORT Deloitte & Touche LLP 7900 Tysons One Place Suite 800 McLean, VA 22102 USA Tel: +1 703 251 1000 Fax: +1 703 251 3400 www.deloitte.com INDEPENDENT AUDITORS’ REVIEW REPORT President and Board of Executive Directors International Bank for Reconstruction and Development: We have reviewed the accompanying condensed balance sheet of the International Bank for Reconstruction and Development (“IBRD”) as of December 31, 2018, and the related condensed statements of income and comprehensive income for the three-month and six- month periods ended December 31, 2018, and of changes in retained earnings and cash flows for the six-month period ended December 31, 2018 (the “interim financial information”). The condensed statements of income, and of comprehensive income, for the three-month and six-month periods ended December 31, 2017, and condensed statements of changes in retained earnings, and cash flows for the six- month period ended December 31, 2017, were reviewed by other auditors whose report dated February 12, 2018, stated that based on their review, they were not aware of any material modifications that should be made to those statements in order for them to be in accordance with accounting principles generally accepted in the United States of America. The balance sheet of IBRD as of June 30, 2018, and the related statements of income, comprehensive income, changes in retained earnings, and cash flows, for the year then ended (not presented herein), were audited by other auditors whose report dated August 9, 2018, expressed an unmodified opinion on those statements. Management’s Responsibility for the Interim Financial Information IBRD’s management is responsible for the preparation and fair presentation of the interim financial information in accordance with accounting principles generally accepted in the United States of America; this responsibility includes the design, implementation, and maintenance of internal control sufficient to provide a reasonable basis for the preparation and fair presentation of interim financial information in accordance with accounting principles generally accepted in the United States of America. Auditors’ Responsibility Our responsibility is to conduct our review in accordance with auditing standards generally accepted in the United States of America applicable to reviews of interim financial information. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial information. Accordingly, we do not express such an opinion. Conclusion Based on our review, we are not aware of any material modifications that should be made to the interim financial information as of December 31, 2018 and for the three-month and six-month periods ended December 31, 2018, for it to be in accordance with accounting principles generally accepted in the United States of America. February 13, 2019 64