figures facts BayernLB Group InterIm report first half of 2012

Transcription

1 Facts Figures BayernLB Group Interim Report first half of 212

2 2 Contents BayernLB. Group Interim Report for the first half of 212

3 Contents BayernLB Group the first half of 212 at a glance Selected business highlights in H1 212 Board of Management Foreword Board of Management and responsibilities Group Interim Management Report Overview Financial position and financial performance Segments Events after the end of the reporting period Outlook Risk report Consolidated Interim Financial Statements Statement of comprehensive income Income statement Statement of comprehensive income Other comprehensive income tax Balance sheet Statement of changes in equity Cash flow statement Notes Responsibility statement by the Board of Management Review Report The translation of consolidated interim financial statements comprising the statement of comprehensive income (including income statement), the balance sheet, statement of changes in equity, condensed statement of cash flows and selected explanatory notes and the interim group management report of the Bayerische Landesbank as well as the auditors review report is for convenience only; the German versions prevail. BayernLB. Group Interim Report for the first half of 212

4 4 BayernLB Group the first half of 212 at a glance BayernLB. Group Interim Report for the first half of 212

5 BayernLB. Group Interim Report for the first half of 212 BayernLB Group the first half of 212 at a glance 5

6 6 BayernLB Group the first half of 212 at a glance Income statement (IFRS) EUR million 1 Jan 3 Jun Jan 3 Jun 211 Change in %/pp Net interest income Risk provisions in the credit business Net interest income after risk provisions Net commission income Gains or losses on fair value measurement Gains or losses on hedge accounting Gains or losses on financial investments Income from interests in companies measured at equity 14 8 Administrative expenses Expenses for bank levies Other income and expenses 24 8 Gains or losses on restructuring 15 7 >1. Earnings before taxes Cost/income ratio (CIR) 64.% 56.8% 7.2 pp 1 Return on equity (RoE) 4.% 5.2% 1.2 pp 1 Quarterly comparison The table below compares performance in the first and second quarters of 212: EUR million Q2 212 Q1 212 Change in % Net interest income Risk provisions in the credit business >1. Net interest income after risk provisions Net commission income Gains or losses on fair value measurement >1. Gains or losses on hedge accounting 55 5 >1. Gains or losses on financial investments 24 4 Income from interests in companies measured at equity 13 1 >1. Administrative expenses Expenses for bank levies 1 54 >1. Other income and expenses Gains or losses on restructuring 12 3 >1. Earnings before taxes >1. Rounding differences may occur in the tables. BayernLB. Group Interim Report for the first half of 212

7 BayernLB Group the first half of 212 at a glance 7 Balance sheet (IFRS) EUR million 3 Jun Dec 211 Change in % Total assets 37,4 39,144.7 Business volume 355, ,536.7 Credit volume 216,86 22, Total deposits 159, , Securitised liabilities 66,66 74,75 1. Subordinated capital 6,949 6,964.2 Equity 14,64 14, Banking supervisory ratios under the German Banking Act (KWG) 3 Jun Dec 211 Change in %/pp Core capital (EUR billion) Own funds (EUR billion) Risk positions under the Solvency Ordinance (EUR billion) Core capital ratio 12.% 11.4% +.6 pp 1 Overall ratio 16.% 15.6% +.4 pp 1 Employees 3 Jun Dec 211 Change in % Number of employees 1,613 1, Current ratings Long-term Short-term Pfandbriefs 2 Fitch Ratings A+ F1+ AAA Moody s Investors Service Baa1 Prime-2 Aaa 3 1 Percentage points 2 Applies to public-sector and mortgage Pfandbriefs 3 On review for downgrade BayernLB. Group Interim Report for the first half of 212

8 8 Selected business highlights in H1 212 BayernLB. Group Interim Report for the first half of 212

9 BayernLB. Group Interim Report for the first half of 212 Selected business highlights in H

10 1 Winning together For us at BayernLB, partnership means working closely with the customer in a relationship based on trust, combining our expertise with their sector knowledge and experience. The combination proved successful once again in the first half of 212. Below are just a few examples of our most recent projects. But the same applies to all of them: We started out as a team and ended up winning together. Exclusive issues SSK München SK Nördlingen SK Rhein-Nahe SK KölnBonn SK Nürnberg EUR 95m EUR 15.5m EUR 3m EUR 37m EUR 5m EUR 1.5bn LÄNDER 4 EUR 6m Liability restructuring and syndicated financing Länder 4 Joint Lead Manager 1.75% June 222 Riemser Arzneimittel AG Mandated Lead Arranger & Bookrunner & Documentation, Facility and Collateral Agent Deutsche Hypo Joint Lead Manager 1.25% June 217 EUR 5m EUR 16m EUR 193m Schuldschein note loan Allgeier SE 3 / 5 / 7 -year tenor Schuldschein note loan Joint Bookrunner EUR 7m Rentenbank Joint Lead Manager 1.875% May 22 EUR 1bn Shiloh III Joint Lead Arranger and Co-documentation Agent 212 Wind Project USA Repower Wind Turbines Bureau Veritas SA 3.5 / 5/ 7-year tenor Sole Lead Arranger EUR 17m EUR 5m Corporate bond Fresenius Finance B. V. Joint Lead Manager 4.25% April 219 Kontron AG Syndication Mandated Lead Arranger & Bookrunner EUR 14m m fi Shopping centre Mönchengladbach Arcaden, Germany Syndicated financing transaction with Deutsche Hypothekenbank (Agent) BayernLB s share as Mandated Lead Arranger: EUR 7m April 212 EUR 17.3m greenfield development GmbH Logistikpark Markgröningen Markgröningen, Germany February 212 BayernLB. Group Interim Report for the first half of 212

11 Selected business highlights in H Corporate bond EUR 4m Schuldschein note loan EUR 41m EUR 1.25m Gewofag Munich, Germany Corporate loans for residential property with sub-participation of SSK München January 212 SONEPAR S.A. 3/5/7-year tenor Joint Lead Arranger EUR 26m EUR 125m Schuldschein note loan EUR 25m Corporate bond EUR 254m Schuldschein note loan SIXT AG 5/7-year tenor Sole Lead Arranger SIXT AG 6-year tenor Joint Lead Manager Metro Group AG 4/6-year tenor Joint Bookrunner GROB-WERKE GmbH & Co. KG Credit facility raised to EUR 55m Mandated Lead Arranger EUR 3m MHM Holding GmbH (hubergroup) Syndication Mandated Lead Arranger & Coordinating Bookrunner EUR 75m Corporate bond Sparkassen-Plafond loans SK Niederbayern Mitte Agricultural machinery sector SK Wasserburg Food & beverages sector General credit limit of EUR 5m EUR 6m in existing loans Bayerische Hausbau Joseph Pschorr Haus Munich, Germany VAG Verkehrsaktiengesellschaft Nürnberg Financing Joint Bookrunner EUR 5m USD 9.8bn (bond) USD 1bn (equities) United Technologies Corp Senior Participant in USD corporate bond and in equity issues BayernLB. Group Interim Report for the first half of 212

12 12 Board of Management BayernLB. Group Interim Report for the first half of 212

13 Board of Management Foreword Board of Management and responsibilities BayernLB. Group Interim Report for the first half of 212

14 14 Foreword Ladies and gentlemen, Dear customers, In the first half of 212, the BayernLB Group s earnings before taxes amounted to a very respectable EUR 174 million. Business strictly with and on behalf of customers was even significantly better than in the year-before period and thus could be considered as very good. As an example, earnings in the Corporates, Mittelstand & Retail Customers segment were much higher than in the year-before period. And earnings in the Real Estate & Savings Banks/Association segment, while lower year-on-year, were still in line with expectations after adjusting for extraordinary items. Especially pleasing is the fact that almost all of the earnings in the first half came from core activities. As such, BayernLB has taken another big step to becoming a sustainably profitable and competitive corporate and real estate financier focused on Bavaria and Germany as well as a strong partner for the savings banks. This shows we are moving in the right direction. In the first six months of 212 BayernLB s earnings were again overshadowed as is unfortunately almost unavoidable for banks in the process of change by one-time items and charges from the non-core businesses. BayernLB was forced to take a massive charge in the amount of EUR 133 million for additions to its pension provisions as a result of a ruling by the German Federal Employment Court (FEC). Following the recapitalisation of BayernLB by the Free State of Bavaria in 29, the Bank had introduced a new pension plan to better align its cost base with the changed market conditions and ceased providing employees with retirement benefits modelled on civil servant pensions. The FEC, the court of last instance, ruled in favour of the plaintiffs in the law suit filed against this move, thus making the provision necessary. Without this massive onetime charge, BayernLB would have exceeded by far its earnings before taxes of EUR 244 million in the first half of 211. Moreover, mark-to-market writedowns on the value of assets, in accordance with IFRS, taken at the end of the first quarter and discussed in detail in the reports for that period, continued to weigh on results as at 3 June. Mark-to-market valuations on cross-currency swaps, own credit spreads and the strategic liquidity reserve established as a precautionary measure resulted in an expense item totalling EUR 23 million (Q1 212: EUR 232 million). The impact weighed heavily on the earnings of the Markets segment, which conducts the Bank s capital market operations, and which reported a loss of EUR 2 million despite positive earnings from transactions for customers. BayernLB is continuing to work on reducing the widely-swinging impact of market movements on earnings. BayernLB. Group Interim Report for the first half of 212

15 Board of Management Foreword 15 The situation at the Hungarian subsidiary MKB, which is not part of the core business, remained difficult. Due to the disproportionately high banking levy in Hungary (EUR 46 million) and the drop in business volume resulting from the Hungarian law allowing the conversion of mortgages denominated in foreign currencies to Forint, MKB s loss in the first half of 212 was more than eight percent higher than in the year-before period, rising to EUR 66 million. Even though restructuring at MKB is progressing steadily as a high priority, additional charges may still be necessary in Hungary due to the extremely negative political and economic environments there. Good progress was made in the reduction of non-core business that was initiated in 29. The lending and securities portfolios pooled in the internal Restructuring Unit shrank further. The nominal value of exposures dropped sharply by over EUR five billion compared to year-end 211 to just under EUR 22 billion. After selling off the last of its remaining Greek government bonds at the beginning of January, BayernLB further scaled back its exposures to other EMU countries particularly affected by the debt crisis. Further disposals from BayernLB s investment portfolio also took place. In the first quarter, Deutsche Kreditbank AG (DKB) sold off its DKB Immobilien AG subsidiary, while MKB signed an agreement in April to sell its Romanian subsidiary Nextebank. As a result, the Group s total assets fell slightly from year-end 211 to EUR 37 million. The core tier one ratio as defined by the European Banking Authority (EBA) correspondingly rose by.5 percentage points to 1.3 percent. After the close of the first half of the year, the European Commission completed its state aid proceedings against BayernLB on 25 July 212 and approved, with conditions, the support provided by the Free State of Bavaria in the wake of the financial crisis. The Commission s decision was based on the Bank s business forecast and business model which already incorporate BayernLB s commitments under the decision. It thereby offers official testimony to the viability of BayernLB and its new business strategy going forward. Under that strategy, business activities in future will be sharply focused on serving customers and financing the German economy. BayernLB. Group Interim Report for the first half of 212

16 16 The EU s decision now affords BayernLB the planning certainty it needs to move forward with confidence. It enables the Bank to achieve targeted growth in its core business while exercising prudence and closely weighing risks and rewards. The EU s decision imposes no restrictions whatsoever on BayernLB s ability to serve its customers in the segments Corporates, Mittelstand & Retail Customers, Real Estate & Savings Banks/Association and Markets with its full range of product expertise. This includes serving its German customers in their business activities abroad and conversely financing the activities of foreign customers in Germany. BayernLB will thus concentrate on business that has a clear connection to Germany. The partnership and business cooperation with the savings banks will continue to be one of the cornerstones of the business model going forward. The Group subsidiary Deutsche Kreditbank (DKB), which has been successful for years, particularly in internet-based retail banking and has developed into your bank on the web, will also remain an integral component of the new BayernLB. The repayment of EUR 5 billion in hard core capital to the Free State of Bavaria by 219, as required by the EU Commission, poses an ambitious but achievable challenge. The BayernLB Board of Management, however, bases this on the assumption that there won t be any macroeconomic disruptions or additional regulatory requirements. In order to fulfil this condition, BayernLB will have to shrink further over the next seven years by following the restructuring path it began in 29, as laid out in the agreement with the EU Commission. For this purpose, the remaining non-core activities are being wound down and non-strategic holdings are being divested in order to free up more capital. For instance, the spin-off of LBS Bayern by the end of the year is already set and the holding in GBW AG is to be sold in a non-discriminatory tender process by the end of next year. Next year s capital increase agreed to by the Bavarian savings banks is another key element in fulfilling the capital repayment condition set by the EU Commission. As a result, the savings banks stake in BayernLB will substantially increase. The Free State of Bavaria will nonetheless remain the Bank s stable and reliable majority shareholder. The stability of BayernLB has the highest priority. For this reason, the EU Commission imposed a condition that all capital distributions must be approved by the German Federal Financial Supervisory Authority (BaFin). This ensures that BayernLB will always have an adequate core tier one ratio that complies with German and European supervisory requirements even in stress situations whether actual or simulated. With the ending of the state aid proceedings, BayernLB s Board of Management and employees have passed a major and critical milestone. But the restructuring of the Bank will continue apace. The ongoing change process can thus be likened to a long-distance race rather than a sprint. Over the coming months and years, BayernLB will have to energetically continue its transformation into a smaller, lower-risk Landesbank. In the process, all activities will be measured in terms of whether and to what degree they consume the scarce resource of capital in order to comply with the conditions set by the EU Commission. Moreover, it is indispensable that the Bank BayernLB. Group Interim Report for the first half of 212

17 Board of Management Foreword 17 become more profitable so that it can both raise and pay back capital from its own resources. For this reason, the business forecast calls for tight cost discipline in order to stabilise and increase earnings. Administrative expenses must shrink in step with the smaller business volume. At the same time, business processes will be continuously reviewed to identify further potential cost savings savings. This is an area the Bank must and will work on even more intensively in the future. For the remainder of the current year, the BayernLB Group expects a moderate performance in its core business operations, as the business environment enters a cyclical downturn also in the core German market. Despite negative one-time items, earnings are expected to stabilise. This trend is expected to continue and strengthen going into 213. For full-year 212, BayernLB s Board of Management continues to forecast that earnings before taxes in its core activities will be positive. Funding needs for the rest of the year are already covered and the requirement for the first quarter of 213 is also largely met. Because the German economy is deeply integrated into the global economy, short and mediumterm developments in the euro area will play a major role in BayernLB s business with customers. The duration of the extremely low interest rate phase imposed by the ECB, with substantially negative real interest rates, will be a major factor in the earnings outlook of almost every financial service provider. This also applies to BayernLB. We would like to sincerely thank all of our employees for their dedication and our customers for their trust in us the basis for everything we have achieved so far. Going forward, we hope to and will continue to increase the value of the new BayernLB for our customers as well as the Bavarian and German economies. Sincerely, The Board of Management Gerd Haeusler, CEO Dr Edgar Zoller, Deputy CEO Jan-Christian Dreesen, Member of the Board of Management Marcus Kramer, Member of the Board of Management Stephan Winkelmeier, Member of the Board of Management Nils Niermann, Member of the Board of Management BayernLB. Group Interim Report for the first half of 212

18 18 Board of Management Gerd Haeusler CEO Corporate Center Legal Services Group Strategy & Group Communications Internal Communication Human Resources Audit Dr Edgar Zoller Deputy CEO Real Estate & Savings Banks/Association Savings Banks & Association Real Estate Bayerische Landesbausparkasse Bayerische Landesbodenkreditanstalt Jan-Christian Dreesen Member of the Board of Management Corporates, Mittelstand & Retail Customers Marketing Mittelstand Corporates Structured Finance Product Solutions Client & Business Management BayernLB. Group Interim Report for the first half of 212

19 Board of Management 19 Marcus Kramer Member of the Board of Management Risk Office Group Compliance Credit Analysis RO Group Risk Control Restructuring Unit Restructuring Unit Stephan Winkelmeier Member of the Board of Management Financial Office & Operations Group Accounting & Tax Group Controlling Operations & Services Rating & Investor Relations Nils Niermann Member of the Board of Management Markets Treasury Products Capital Markets Financial Institutions Economics & Research Group Treasury Group IT BayernLB. Group Interim Report for the first half of 212

20 2 Group Interim Management report BayernLB. Group Interim Report for the first half of 212

21 Group Interim Management Report Overview Financial position and financial performance Segments Events after the end of the reporting period Outlook Risk report BayernLB. Group Interim Report for the first half of 212

22 22 Overview Germany s economy continued to recover at a modest pace in the first half of 212. Real gross domestic product was higher than it was in the second half of 211, rising at an annualised rate of 1 percent. The steady improvement in the labour market and significantly higher wage settlements in many sectors boosted consumer spending. Very low interest rates were a shot in the arm for the construction industry. But capital expenditure and exports, which led the strong upturn in 21 and 211, are sluggish. The key drag continues to be the unresolved sovereign debt crisis in the euro area which has broadened into a crisis of confidence in the ability of some euro area countries to enact reform. Despite frenetic efforts from euro area governments and massive support from the ECB, no sustainable stabilisation had been achieved by the middle of 212. For one the crisis-struck countries while there are large differences among them all still lag behind their publically announced budget cutting and structural reform targets. This is due in part to the unexpected depth of the recession which now has larger countries like Spain and Italy in its grasp. But many observers are now started to question the will and ability of these countries to structurally reform their economies, especially their labour makets. For another, little convincing progress has been made by either the individual EMU countries or at the EU level on economic governance rules to prevent countries from going on the wrong fiscal track in the future. Proposals to take a large step towards closer integration of fiscal policy and financial systems are on the agenda. But negotiations are likely to be protracted and ratification is years away. No quick fixes to the crisis are therefore in view. Moreover, some countries, such as France, have made it clear that they have little interest in this. The uncertainty unleashed by the sovereign debt crisis in the euro area is also depressing economic activity outside Europe. In addition to the direct impact from weak demand for imports in the euro area, other, indirect effects also play an important role. These are reflected in increased volatility on financial markets and greater risk aversion by financial investors. Moreover, there are independent factors at play in other parts of the world causing a slowdown in expansion. For example, in the US, both private households and the national government are highly indebted. And in the period to mid 211 China s central bank applied the brakes for fear the economy would overheat. Financial markets were heavily influenced by the sovereign debt crisis in the first half of 212. In the first three months the German stock market (DAX) turned bullish in the wake of improved corporate sentiment and good quarterly results. The main driver, however, was the historically unprecedented amount of liquidity pumped into the markets by the European Central Bank (ECB). In spring the DAX headed south when it became apparent the sovereign debt crisis was increasingly throwing the real economy off course. Bond yields plunged to record lows and even turned negative at the short end of the curve. Many investors viewed Bunds as a safe haven during the crisis. Despite huge unresolved budgetary problems in the US also, the greenback benefited from the uncertainty in the euro area and made moderate gains in the first half of the year. Please refer to the Group management report and financial statements for 211 for information on BayernLB s business model and strategy and also its organisation and structure. BayernLB. Group Interim Report for the first half of 212

23 Group Interim Management Report Overview Financial position and financial performance 23 Financial position and financial performance Consolidated net income before taxes in the first half of 212 amounted to EUR 174 million (H1 211: EUR 244 million). Business with customers continued to perform well. For example, earnings before taxes in the Corporates, Mittelstand & Retail Customers segment rose significantly. In addition, earnings in the Real Estate & Savings Banks/Association segment, although lower year-on-year, were in line with forecasts after adjusting for one-time items. It was also encouraging that earnings before taxes for the first half of 212 were generated almost entirely from the Group s core business once more. Compared with 3 June 211, risk assets in the core business were slightly higher (+2. percent), but 15.7 percent lower in the non-core business. The resulting fall in risk positions led to a further improvement in supervisory capital ratios. The core tier one ratio as at 3 June 212 was 12. percent (11.4 percent as at 31 December 211), and the own funds ratio was 16. percent (15.6 percent as at 31 December 211). Income statement Net interest income was EUR 858 million (H1 211: EUR 976 million) and slightly over half of the full-year forecast figure. This expected decrease was due in part to lower earnings from operations at the Hungarian subsidiary MKB, Budapest, but primarily resulted from negative items which were offset against positive entries in the gains or losses on fair value measurement item. Risk provisions in the credit business were EUR 24 million. The lower figure in the year-before period of EUR 112 million was due to the positive impact of net releases at BayernLB. Net commission income rose EUR 15 million to EUR 14 million due to stable overall commission earnings. As the bond guaranteed by the Special Fund for Financial Stabilisation (SoFFin) matured in January 212, the fees for the bond were no longer due for most of the period. Gains or losses on fair value measurement (including gains or losses on hedge accounting) were EUR 38 million altogether and thus significantly higher than the figure of EUR 197 million in the year-before period. On closer analysis, however, it must be noted that this positive figure is offset against negative items in the net interest income, gains or losses on financial investments and other income and expenses items totalling EUR 31 million, thereby reducing the net figure for the gains or losses on fair value measurement item (including gains or losses on hedge accounting) to EUR 2 million. The high reported figure is due to the fact that the income and expenses from certain transactions are not reported as net amounts under one income statement item but must be reported as gross amounts under various different items. The gains or losses on fair value measurement item was reduced in the first half of 212 by a EUR 93 million charge from the measurement of and current income from cross-currency swaps and also a EUR 74 million charge from the measurement of own credit spreads. Customer margins contributed EUR 89 million to total earnings. Fair value adjustments accounted for a further EUR 85 million. BayernLB. Group Interim Report for the first half of 212

24 24 Gains or losses on financial investments (including income from interests in companies measured at equity) were EUR 34 million. Included in this figure is a EUR 8 million decrease in the value of the Umbrella guarantee agreement that, in turn, was offset by a positive amount of EUR 91 million in the gains or losses on fair value measurement item. The aim of the Umbrella is to offset losses and valuation changes in the ABS portfolio, whereby for measurement reasons, earnings are reported in different periods and reporting correlations with the gains or losses on fair value measurement item arise. With effect from the end of the first quarter of 29, BayernLB discontinued the retirement scheme covering its longer-term employees, which included benefits modelled on the pension system for civil servants, and switched these employees to a different plan. The lawsuit brought against this move was settled in favour of the employees in a ruling by the Federal Employment Court (FEC) on 15 May 212. The ruling by the FEC required an addition of EUR 133 million to pension provisions as at the reporting date of 3 June 212. Consequently administrative expenses increased by 16.1 percent to EUR 85 million. Adjusted for this one-off item, administrative expenses would have been 2.2 percent lower than the previous year s figure of EUR 733 million. Other income and expenses covers both the activities of the real estate subsidiaries and the gains or losses from buying back own issues, and amounted to EUR 24 million in the first half of 212 (H1 211: EUR 8 million). Expenses for bank levies were EUR 53 million (H1 211: EUR 88 million): of this, EUR 46 million was levied on MKB, EUR 4 million on Deutsche Kreditbank AG, Berlin (DKB) and EUR 3 million on BayernLB. Due to the net loss in BayernLB s 211 separate financial statements, it only had to pay the minimum contribution of 5 percent of the calculated amount. Partly on account of the sale of DKB Immobilien AG, restructuring expenses at the BayernLB Group rose to EUR 15 million (H1 211: EUR 7 million). Return on equity (RoE) 1 was 4. percent (H1 211: 5.2 percent). The cost/income ratio (CIR) 2 was 64. percent (H1 211: 56.8 percent). Both figures were negatively impacted by the one-off costs related to the FEC verdict. For the financial position please refer to the risk report. 1 Earnings before taxes excluding non-controlling interests, bank levy expenses and gains or losses on restructuring/ subscribed capital + hybrid capital instruments + capital surplus and retained earnings. Excludes the share of earnings and equity from BayernLabo which is a non-competitive business. 2 CIR = administrative expenses/net interest income + net commission income + gains or losses on fair value measurement + gains or losses on hedge accounting + other income and expenses. BayernLB. Group Interim Report for the first half of 212

25 Group Interim Management Report Financial position and financial performance 25 Balance sheet items Total assets fell slightly to EUR 37. billion as at 3 June 212, a fall of.7 percent on the end of 211. The reported fall in loans and advances to customers and liabilities to customers was primarily due to the reclassification of LBS Bayern s asset and liabilities items to non-current assets and disposal groups held for sale and liabilities from disposal groups in accordance with IFRS 5. This is due to the planned sale of LBS Bayern at the end of 212 to the Bavarian savings banks as one of the measures in connection with the closing of the European Commission s state aid proceedings. The Bavarian savings banks formally approved the purchase of LBS Bayern at an assembly of the Association of Bavarian Savings Banks on 14 June 212. To aid comparison, the previous year s figures were adjusted for this effect in the following two paragraphs. The Group will continue to press ahead with downsizing business abroad while simultaneously expanding domestic activities. Loans and advances to customers dipped slightly by EUR.2 billion to EUR 152. billion. The fall in loans and advances to foreign customers by EUR 2.1 billion to EUR 39.8 billion was offset by a rise in loans and advances to domestic customers of EUR 1.9 billion to EUR billion. The three major pillars of the BayernLB Group s funding are: liabilities to customers, liabilities to banks and securitised liabilities; liabilities to customers rose by 3. percent to EUR 85.4 billion. Securitised liabilities fell significantly, by EUR 7.5 billion to EUR 66.6 billion. Much of this fall resulted from the maturing of the SoFFin-guaranteed bond in January 212 that was originally EUR 5 billion. Subordinated capital remained unchanged at EUR 7. billion. Equity rose slightly to EUR 14.6 billion (up EUR.4 billion). Banking supervisory ratios and capital In the first half of 212, risk positions pursuant to the Solvency Ordinance, consisting of credit and market risk positions and operational risks, fell by a further 5.6 percent to EUR billion. Own funds also saw a slight drop to EUR 17.8 billion as at 3 June 212 (EUR 18.4 billion as at 31 December 211). Core capital under the Solvency Ordinance was EUR 13.4 billion (EUR.1 billion less than 31 December 211). As a result of the sharp drop in risk positions in the non-core business, capital ratios improved further. The core capital ratio is a solid 12. percent (11.4 percent as at 31 December 211), while the own funds ratio is 16. percent (15.6 percent as at 31 December 211). The BayernLB Group s financial position and financial performance is sound. BayernLB. Group Interim Report for the first half of 212

26 26 Segments Core and non-core business of the BayernLB Group Under Project Hercules, BayernLB defined business as either core or non-core. Non-core activities are being systematically scaled back to free up liquidity and capital while keeping losses to a minimum. Non-core activities are pooled within the Restructuring Unit. They comprise the Eastern Europe segment and selected loan portfolios in the business segments and selected subsidiaries. As a result of the conditions imposed by the EU Commission in its decision on BayernLB s state aid proceedings at the end of July 212, additional portfolios are expected to be transferred to the non-core category by the end of 212. This will slightly raise the share of non-core business once more. Earnings before taxes in the first half of 212 once again came mainly from the Group s core business. 1 Jan 3 Jun 212 Core business (EUR million) Percent Non-core business (EUR million) Total revenues Risk provisions Administrative expenses Expenses for bank levies Earnings before taxes Risk assets (reporting date) 69, ,37 Segments The segment report is based on the monthly internal management report to the Board of Management and reflects the BayernLB Group s six segments. The business segments Corporates, Mittelstand & Retail Customers ; Markets ; Real Estate & Savings Banks/Association and Eastern Europe incorporate BayernLB s operating business areas, the legally dependent institutions Bayerische Landesbodenkreditanstalt (BayernLabo) and Bayerische Landesbausparkasse (LBS Bayern) and consolidated subsidiaries. In addition, details are reported on the two additional segments: Restructuring Unit (RU), and Central Areas & Others. The contributions of the individual segments to earnings before taxes of EUR 174 million (H1 211: EUR 244 million) in the first half of 212 are shown below: EUR million 1 Jan 3 Jun Jan 3 Jun 211 Corporates, Mittelstand & Retail Customers Real Estate & Savings Banks/Association 1 21 Markets 2 86 Eastern Europe Restructuring Unit 5 8 Central Areas & Others/Consolidation BayernLB. Group Interim Report for the first half of 212

27 Group Interim Management Report Segments 27 Corporates, Mittelstand & Retail Customers segment Earnings from customers at Corporates and Mittelstand stable, in line with year-before period DKB consolidates its position as your bank on the web customer numbers and deposits are up In the first half of 212, the segment produced earnings before taxes of EUR 36 million (H1 211: EUR 222 million), a significant year-on-year increase. Net interest income shrank 13 percent to EUR 398 billion (H1 211: EUR 46 million). However, this fall was mainly due to the impact of interest rate hedging, and was largely offset by similarly high gains in the gains or losses on fair value measurement item. Taking this into account, net interest income from business with customers was thus stable and in line with the year-before period. Pleasing growth in new business led to a 14 percent rise in net commission income to EUR 88 million (H1 211: EUR 77 million). The increase in segment earnings was driven in large part by a jump in the gains or losses on fair value measurement item to EUR 229 million (H1 211: EUR 113 million) and the sale of DKB Immobilien AG which significantly improved the gains or losses on financial investments item to EUR 4 million (H1 211: EUR 8 million). Earnings in the year-before period were pushed down by impairment writedowns on Greek government bonds held by Banque LBLux S.A. and Deutsche Kreditbank AG (DKB). Also weighing on earnings were risk provisions of EUR 113 million (H1 211: EUR 77 million) and administrative expenses of EUR 33 million (H1 211: EUR 31 million), which were driven up significantly by an increase in pension provisions for the first half of the year. Return on equity rose to 1.5 percent (H1 211: 7.3 percent), while the cost/income ratio was in line with the yearbefore period at 45.4 percent (H1 211: 43.7 percent). In the first half of 212 the Corporates and Mittelstand divisions produced earnings before taxes of EUR 11 million (H1 211: EUR 175 million). Total revenues rose slightly by EUR 7 million from the year-before period to EUR 35 million. BayernLB further consolidated its strong position as a corporate financier in its defined core markets, particularly in Bavaria and Germany, by strengthening long-standing relationships, expanding the customer base among Mittelstand companies and achieving good growth in capital market products and the subsidised loans business. The fall in pre-tax earnings was largely due to higher administrative expenses of EUR 153 million (H1 211: EUR 125 million), caused by an increase in first-half pension provisions, and the creation of risk provisions of EUR 5 million (compared with net reversals of EUR 3 million in the same period in the previous year). DKB appreciably increased its earnings before taxes by EUR 117 million to EUR 186 million. As well as being the result of buoyant customer business, this was also due to the proceeds from the sale of DKB Immobilien AG, measurement effects in the fair value gains or losses item and impairments taken on Greek government bonds in the previous year. Thanks to its efficient service and range of products suited to customers needs, which has won multiple awards, DKB further increased its position as your bank on the web in the retail customer market and now serves 2.4 million people. It also continued to grow in the infrastructure and corporate customer segments by focusing on selected sectors. Altogether, customer deposits at this banking subsidiary grew by EUR 3.5 billion which contributed substantially to BayernLB s funding. BayernLB. Group Interim Report for the first half of 212

28 28 Banque LBLux S.A. posted earnings before taxes of EUR 19 million (H1 211: EUR 22 million), making a solid contribution to the segment s earnings despite the replenishment of profit participation certificates. Real Estate & Savings Banks/Association segment Real Estate stabilises market position in Germany Total revenues rise in the Savings Banks & Association division New business continues to grow at LBS Bayern The segment posted earnings before taxes of EUR 1 million (H1 211: EUR 21 million). Net interest income rose by 4 percent to EUR 252 million due to healthy new business margins and the successful increase in Association business with the savings banks. Net commission income fell to EUR 12 million (H1 211: EUR 22 million) due to the increase in Association business with the savings banks and the resulting increase in commission fees paid to them. Risk provisions remained low in the first half of 212 at EUR 1 million (H1 211: EUR +18 million). In addition to a EUR 22 million fall in the gains or losses on fair value measurement item to EUR 16 million, a EUR 56 million increase in administrative expenses to EUR 194 million caused by a rise in first-half pension provisions also weighed on the segment s earnings. Return on equity was 14.2 percent (211: 25.8 percent). The cost/income ratio was 65.9 percent (211: 43.5 percent). Business performance was stable in the Real Estate division in the first half of 212. This is illustrated by the fact that total revenues were virtually unchanged at EUR 15 million (H1 211: EUR 17 million) despite a selective pull back from business abroad that had no connection to Germany. Earnings decreased to EUR 5 million (H1 211: EUR 87 million) due to a EUR 16 million increase in administrative expenses to EUR 54 million (higher first-half pension provisions) and to a turnaround in risk provisions to EUR 1 million from a positive figure of EUR 18 million in the year-before period resulting from net releases. The successful collaboration with the savings banks and public sector, which was further intensified, boosted total revenues in the Savings Banks & Association division by 35 percent to EUR 48 million (H1 211: EUR 35 million). The division s earnings were also lifted by business in capital market products and continued strong demand for foreign notes, coins and precious metals. However, this was counterbalanced by a one-off charge in administrative expenses (increased first-half pension provisions), so that earnings before taxes amounted to EUR 6 million and were therefore on a par with the previous year (H1 211: EUR 8 million). Although BayernLabo s total volume of commitments was EUR 984 million in the first half of 212, and therefore about 17 percent lower, total revenues were in line with the previous year period. Earnings before taxes fell to EUR 23 million (H1 211: EUR 65 million), partly due to the negative impact of interest rate hedges on gains or losses on fair value measurement (EUR 14 million; H1 211: EUR 16 million) and an increase in administrative expenses of EUR 7 million to EUR 22 million caused mainly by higher pension provisions. BayernLB. Group Interim Report for the first half of 212

29 Group Interim Management Report Segments 29 LBS Bayern continued to post good growth in new business with home loan savings volumes of EUR 4.7 billion. Contract numbers were up by 22 percent, while home loan savings volumes were 4 percent higher than the year-before period. Despite low interest rates, total revenues was unchanged from the year-before period at EUR 77 million (H1 211: EUR 77 million). One-off charges from higher pension provisions resulted in an increase in administrative expenses of EUR 19 million to EUR 64 million and lower earnings before taxes of EUR 13 million (H1 211: EUR 31 million). Markets segment Valuation effects, particularly from cross-currency swaps, own credit spreads and the strategic liquidity reserve, weigh on earnings Business with customers continues to perform well Earnings before taxes of EUR 2 million in the first half of 212 were sharply lower than the year-before period (H1 211: EUR 86 million) due primarily to valuation effects. Changes in the market values of cross-currency swaps (EUR 93 million), own issues (EUR 74 million own credit spread) and securities held in the strategic liquidity reserve (EUR 36 million) were largely responsible for this. Also weighing on the Markets segment was an increase in administrative expenses to EUR 147 million (H1 211: EUR 99 million) caused by higher first-half pension provisions. In contrast, earnings with financial institutions and institutional customers and business with customers from the Corporates, Mittelstand, Savings Banks and Real Estate businesses were buoyant in the first half of 212. These activities produced earnings of EUR 147 million (H1 211: EUR 139 million), of which EUR 85 million (H1 211: EUR 69 million) was transferred to and reported in the earnings of other customer business areas. Eastern Europe segment Tough economic and political environment continues to weigh on earnings Focus on restructuring and repositioning MKB Earnings before taxes were EUR 66 million, almost unchanged on the year-before period (H1 211: EUR 61 million). Total revenues decreased by EUR 31 million to EUR 166 million. A key factor in the decrease was a significant reduction in MKB s loan portfolio. The Foreign Currency Loan Repayment law which came into effect in 211 played a major role in this. As a result of the law, over one-third of the retail mortgage loans covered by the law were paid off ahead of schedule. The wind-down of selected project financings and real estate financings also had a negative impact on earnings. The weak economic environment in south-eastern Europe also played a part in keeping transaction volumes down and made it difficult to acquire new business with risk profiles that comply with strategy. The downturn in earnings was offset to a large extent by a slight decrease in risk provisions of EUR 7 million to EUR 69 million, a decrease in the bank levy (EUR 46 million; H1 211: EUR 51 million) and a fall in administrative expenses to EUR 117 million (H1 211: EUR 131 million) which was largely due to the exchange rate. BayernLB. Group Interim Report for the first half of 212

30 3 Although the economic outlook for Hungary remains very modest, and competition continues to be very fierce in the country s domestic market, MKB continued to press ahead with its new strategy. The emphasis here is on rapidly implementing the new strategy in the core business, cutting administrative expenses and steadily winding down the non-core portfolios. Restructuring Unit segment Loan and investment portfolio further reduced Another positive contribution to earnings in the first half of 212 As in the previous year, BayernLB sharply reduced the credit volume and nominal volume in the investment portfolio by EUR 5.1 billion to EUR 21.8 billion. Since the end of 211, risk assets have fallen by another EUR 2 billion to EUR 9.5 billion. At the end of the first half of 212, the Restructuring Unit segment made a positive contribution of EUR 5 million (H1 211: EUR 8 million) to consolidated net income. Credit volumes were cut from EUR 1.8 billion to EUR 8.5 billion by means of active winding down and scheduled repayments. Risk assets in the lending business fell by a further EUR 1.1 billion to EUR 5. billion. Nominal volumes were also reduced in the investment portfolio. Principally as a result of repayments, the nominal volume of the structured securities portfolio was reduced in size by EUR 1.1 billion to EUR 1.8 billion in the first half of the year. The nominal volume of securities and credit derivatives of individual borrowers was also successfully reduced. Altogether there was a EUR 2.8 billion (17 percent) reduction in securities in the first half of 212. The residual nominal volume at the end of June 212 amounted to EUR 13.3 billion. In the first half of 212 risk assets therefore fell by a further EUR.9 billion to EUR 4.4 billion. Central Areas & Others/Consolidation segment Central areas and business transactions executed in the overall interests of the Bank or Group and therefore not allocated to the individual segments are assigned to this segment. Earnings before taxes in the first half of 212 were EUR 15 million (H1 211: EUR 113 million). BayernLB. Group Interim Report for the first half of 212

31 Group Interim Management Report Segments Events after the end of the reporting period 31 Events after the end of the reporting period After an agreement in principle was reached on 9 July 212, the European Commission formally closed the state aid proceedings for BayernLB on 25 July 212. The Commission s decision was based on a business forecast which already incorporates BayernLB s obligations under the decision. The main condition in the European Commission s decision is a requirement that BayernLB pay back a total of around EUR 5 billion by 219 to the Free State of Bavaria, which at the end of 28 provided the Bank with EUR 1 billion and a guarantee of EUR 4.8 billion covering losses in the ABS portfolio. Due in particular to the need to repay this challenging amount, the Bank must reduce its size further and trim its total assets down to nearly 5 percent of the figure posted at the end of 28. In anticipation of the decision, the Bank has in recent years switched its focus to its future core business, partly by spinning off key non-strategic holdings and selecting numerous business activities for winding down mainly in the internal Restructuring Unit (RU). These include ship and non-eca backed aircraft financing and transaction-related acquisition financing with no connection to Germany. The Bank will continue to focus on core activities over the coming years, spin off its other non-core business holdings and further wind down non-core activities. BayernLB has significantly reduced the number of its foreign branches since 29, but will continue to serve its target customers in London, Milan, Paris and New York. BayernLB. Group Interim Report for the first half of 212

32 32 Outlook Germany s economy will post marginal growth at best in the second half of 212. The unresolved problems in the euro area will weigh on the economy as companies and households put spending plans on hold. The Bank believes, however, that the risk of a sustained downturn is small as the global economic environment is robust and conditions are stable. The key assumption is that the politicians, with the support of the ECB, will prevent the sovereign debt crisis from becoming an existential crisis for the euro. Rapid growth in many emerging markets will be a stabilising factor. The US and Japan, the largest economies in the developed world, are expected to post higher growth in 212 than they did in 211. Financial markets though will continue to be rattled by high uncertainty and risk aversion. Interest rates in Germany will therefore remain very low. The upside potential for equity markets is very limited. The dollar will continue to benefit from the unresolved situation in the euro area. The final decision by the EU Commission leaves the way open for BayernLB to continue along its chosen path of becoming a corporate and real estate financier and dependable partner to the savings banks with a strong regional focus on Bavaria and Germany. The outcome of these negotiations presents the Bank with ambitious challenges. Although a large proportion of the restructuring measures required have already been implemented, the Bank will need to further focus on its core activities and become an even more efficient operation. The goal of the business model is to create a smaller bank that specifically targets clearly defined segments, regions and products. Given the capital repayment requirements set by the EU Commission, the Bank s stability has become top priority. Distributions and repayments of silent partner contributions to the Free State of Bavaria will need approval from the Federal Financial Supervisory Authority (BaFin). It must be ensured that BayernLB always has a solid core capital ratio (core tier 1). The repayment plan negotiated with the European Commission takes account of forthcoming regulatory changes (CRD IV/CRR), which have not yet received final approval. The Bavarian savings banks will make a big contribution through the purchase of LBS Bayern and a capital increase planned for 213, so the repayment plan can be met by 219. Further steps to strengthen capital are planned to come from future profits. Additional capital will also come from continuing to wind down risk positions and sales of holdings will release additional capital. Through the capital injection, the Bavarian savings banks will substantially increase their stakeholding in BayernLB again. The Free State of Bavaria will continue to be a stable and reliable partner as the majority shareholder in the Bank. The EU Commission has not set any conditions on a change in the ownership structure. BayernLB. Group Interim Report for the first half of 212