FOUR STRATEGIC BUSINESS LINES SUCCESSFUL TOGETHER

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1 19 FOUR STRATEGIC SUCCESSFUL TOGETHER The DZ BANK Group companies continued to systematically focus on the needs of the local cooperative banks in 2010 and, in all four business lines, made substantial progress in consolidating the competitive position of the Volksbanken Raiffeisenbanken cooperative financial network. Our achievements in 2010 can be attributed to the combined efforts of everyone involved. These efforts also enabled us to lay the right foundations for the future success of our cooperative organ ization in retail banking, corporate banking, capital markets, and transaction banking.

2 20 DZ BANK RETAIL BANKING Customized products and a comprehensive range of services continued to be the cornerstones of retail banking in the DZ BANK Group in RETAIL BANKING OVERVIEW In conventional retail banking, DZ BANK and the other companies in the group continued to focus in 2010 on the significant customer need for protection and gave new emphasis to related features in their products and services. This was a major contributing factor in helping the Volksbanken Raiffeisenbanken cooperative financial network further consolidate its well-established and very strong position in this area of business. In conjunction with WGZ BANK, DZ BANK also launched its private banking market initiative aimed at high-net-worth individuals in order to achieve a gradual increase in the cooperative sector s share of this market. PRIVATE CUSTOMERS SECURITIES BUSINESS In the year under review, private customers securities business continued to be heavily influenced by the effects of the international financial and economic crisis, as had also been the case in DZ BANK carried out sample surveys on a quarterly basis showing that, despite growing optimism among private investors and increasing interest in exposure to equity markets, investor priorities nevertheless remained the security, simplicity, and transparency of their investments. Investment certificates These investor priorities have been a particular focus for DZ BANK in the area of structured products for many years. In 2010, this enabled the Bank to slightly enhance the market leading position of its high-quality AKZENT Invest certificate brand in the capital protection certificates segment. Market share rose from 44.5 percent to 45.3 percent. DZ BANK also focused its sales activities on partial protection certificates. Investor interest in these products picked up noticeably. DZ BANK s share of the overall German structured products market which has returned to growth was 15.9 percent and the Bank therefore remained one of the 5 largest issuers. Fully-integrated approach The certificates business is an example of the consistent fully-integrated approach that DZ BANK adopts across all of its product areas in collaboration with the local cooperative banks. This approach is applied to the entire value chain and also includes, in particular, services that DZ BANK performs on behalf of the local cooperative banks. In 2010, these services were expanded considerably. For example, DZ BANK supported the local cooperative banks certificates business by producing product information sheets of uniform design to be attached to the advisory documents. The sheets already satisfy future statutory requirements, make it easier for customers to compare individual certificates, and help the local cooperative banks achieve a greater degree of process security at a local level. Support from the DZ BANK Research division was also expanded. This division now prepares comprehensive analyses for the underlying value of new certificates and this information can be accessed free of charge during the subscription phase. As part of its other activities in this area of the business, DZ BANK also stepped up the training provided for specialist advisers. In the year under review, it ran a total of just under 800 training sessions,

3 RETAIL BANKING 21 which were attended by some 14,500 advisers. In October 2010, the Bank initiated weekly web-based conference calls. By the end of the year, around 1,000 advisers had registered for these conference calls. This illustrates the extent of interest in the service. Finally, to meet the needs of private investors for information, DZ BANK organized a large number of customer events, which were held locally in conjunction with the cooperative banks. Some 7,500 visitors came to these events in the year under review. The success of DZ BANK s quality strategy for structured investment products was once again highlighted by the numerous awards attracted by the certificates in Among other awards, the Bank was for the 8th year running voted Investment Certificates House of the Year by the general public, an accolade jointly awarded by the German newspapers Die Welt and Welt am Sonntag and the research house, Scoach. Eniteo.de Feedback on the Eniteo.de derivatives portal launched by DZ BANK in August 2009 was very encouraging. This portal is targeted at internet-savvy independent private investors and therefore aims to access customers not currently reached by the Volksbanken Raiffeisenbanken cooperative financial network. Eniteo.de has also received awards from various institutions and was given a top 5-star rating in a survey of the main certificate providers conducted by the German business magazine Capital. GenoSys WP The GenoSys WP project was successfully completed in the summer of The project, which took more than three years to complete, significantly improves the competitiveness of the Volksbanken Raiffeisenbanken cooperative financial network in the securities business (see page 32 for more information). Investment funds In the year under review, Union Investment also launched several products in response to the significant investor focus on the security of investments. This included products to strengthen its range of guarantee funds. In 2010, Union Investment s Uni Garant-Fonds generated net inflows of 2.4 billion, making this product family the top source of net inflows among all of Union Investment s fund categories. These strong sales confirmed Union Investment s excellent reputation as a provider of capital-preservation funds and reinforced its position as market leader in this investment segment. Fund assets in this investment segment at the end of 2010 stood at 14.3 billion, which equates to a market share of around 50 percent. On July 1, 2010, Union Investment launched the new product family of PrivatFonds that take into account both the changes in capital market conditions and the desire of investors for safe investments while at the same time actively exploiting opportunities. Within this product family, Union Investment launched three different fund concepts each with two risk/return profiles. These funds attracted a huge amount of interest from investors with net sales amounting to more than 350 million. Continuity was also a feature of Union Investment s open-ended real-estate funds. In what proved to be a very difficult period in the market, Union Investment reaped the benefits derived from its strategy of systematically keeping the monies of private investors separate from the monies of institutional investors in these funds, a strategy that it has pursued since As a result, Union Investment s open-ended real-estate funds continued to be active and stable market players in 2010, achieving substantial net inflows of 1.5 billion and making the most of the position in commercial real-estate markets to purchase new properties. PERSONAL PENSIONS The DZ BANK Group s personal pension products also attracted a great deal of interest from customers. With its Riester and other pension products, the Group is among the market leaders in Germany. Personal pension products will continue to gain in importance over the next few years owing to demographic change and a forecast deterioration in state pension provision. A survey conducted by Union Investment highlights not only the extent of the potential but also the fact that there is a need for advice and explanation in this area of the business. According to this survey, at the end of the third quarter of 2010, only two thirds of German citizens considered personal pension provision to be important.

4 22 DZ BANK RETAIL BANKING Riester products Among the companies in the DZ BANK Group, customized Riester savings products are offered by Bausparkasse Schwäbisch Hall (with the Fuchs WohnRente product), R+V (with the R+V-RiesterRente product), and Union Investment (with the UniProfiRente product). Union Investment is by some way the leading investment company in the area of fund-linked Riester savings plans with a market share of approximately 65 percent. In 2010, it increased the number of Uni ProfiRente contracts under management by 120,000 to 1.8 million. Performance of the Schwäbisch Hall Riester savings products business was very strong. More than 112,000 new Fuchs WohnRente contracts were signed in the year under review, up by around 14 percent on In 2010, the Fuchs WohnRente product also received a number of awards; for example, it was selected as the best Riester credit product in Germany by the Finanztest magazine. In mid-2010, R+V for its part launched a new Riester pension savings product in the form of the R+V- RiesterRente. With this product, R+V guarantees that the policyholder will receive up to 150 percent of the amount paid in rather than the total value of the premiums, the amount specified under statutory requirements. Furthermore, it shortens the minimum period between the start of the insurance and the start of the pension to two years. This opens up the Riester subsidy to older persons. A new feature for R+V is a loyalty bonus. Under these arrangements, Riester savers who are looking for finance for real estate that they will use themselves are offered special terms for R+V home finance. Franke & Bornberg, the independent rating agency, gave the new R+V-RiesterRente its top FFF rating. Life insurance For many years, one of the mainstays of the personal pensions business has been funded life insurance. R+V is also very well-positioned in this market and is the second-ranking German life insurance provider. In a solvency test carried out by the map-report industry information service, R+V was ranked top among the 20 largest insurance companies. This confirms the financial strength of the company. R+V is traditionally one of the companies that offers its life insurance customers an interest rate in excess of the market average. For 2011, it announced that its customers could expect an overall interest rate of at least 4.65 percent on life insurance contracts despite the low interest rates prevailing in the market. This attractive level of interest is made possible primarily by an investment strategy with a long investment horizon and by R+V s low administrative costs ratio. At 1.8 percent, this ratio is well below the industry average. Building society operations Home ownership is one of the pillars of personal pen sion provision. Many private customers therefore consider home savings to be an important part of their personal pension arrangements. In this segment, Bausparkasse Schwäbisch Hall achieved above-average growth in the year under review, confirming in emphatic fashion its position as the leading German home savings provider. In 2010, it entered into a total of 902,000 new home savings contracts and total target amounts under these savings contracts rose by some 14 percent to 28.7 billion. Schwäbisch Hall also attaches particular importance to the quality of its advisory services. In the middle of the year, it became the first German building society to publish a product information sheet although under no obligation to do so by law and thereby increased transparency. The product information sheet is widely regarded as a model for the entire industry. On November 1, 2010, Bausparkasse Schwäbisch Hall launched a new home savings product in the form of FuchsBau. This product is specially tailored for customers who are close to realizing their plans for their own home and who wish to lock into the very low level of interest rates. This product complements the existing Fuchs product and the Fuchs WohnRente Riester savings product. CONSUMER FINANCE In 2010, TeamBank, and its easycredit brand, continued to make a considerable contribution to ensuring that the cooperative sector was one of the leading consumer finance providers. TeamBank increased the size of its customer base to 521,000 customers, an increase of five percent. The efficiency of easycredit was put to the test in an evaluation carried out by DFSI,

5 RETAIL BANKING 23 a German financial services institute, on behalf of Focus-Money magazine. In the results of the evaluation, easycredit came out top in the consumer finance rankings. In this evaluation, DFSI examined the 10 most widely available consumer finance options in Germany. During the year under review, TeamBank established an easycredit customer advisory council to continue to consolidate the customer-friendly nature of its consumer finance operations. This council comprises 11 customers and a consumer protection representative. PRIVATE BANKING The financial crisis led to a rethink, even among highnet-worth individuals. Once again, these individuals are now attaching increasing importance to traditional cooperative values, such as security, reliability, sustainability, and a partnership approach. This has presented the cooperative sector with opportunities to increase its market share of the business available from affluent clients. In 2010, DZ BANK and WGZ BANK put in place the prerequisites for this expansion with their joint initiative in the private banking market. The two key elements of this initiative are a differentiated market presence for the local cooperative banks under the high-quality VR-PrivateBanking brand and the reorganization of private banking activities at DZ BANK and WGZ BANK under the umbrella of the DZ PRI VATBANK Group. This business unit now brings together the private banking expertise of the cooperative central institutions. The core task of the DZ PRIVATBANK Group is to provide comprehensive support for the local cooperative banks in their business with high-net-worth individuals. VR-PrivateBanking VR-PrivateBanking is based on the principle of strict decentralization. Under this brand, the local cooperative banks will in practice continue their local relationship with their high-net-worth clients but they will also be able to call on the specialist expertise of the DZ PRIVATBANK Group, if required. This extends well beyond pure asset management and includes, for example, forward-looking services such as financial planning, inheritance planning, and real estate management. It therefore includes services that are of particular importance for wealthy owners of SMEs that are corporate customers of the Bank. These owners account for a substantial proportion of private banking customers. The primary target group of this market initiative comprises corporate customers and affluent private customers who currently use services from competitors for personal asset management despite having long-standing business relationships with cooperative banks. There are therefore also significant synergy and cross-selling opportunities between private banking and SME business. DZ PRIVATBANK Group The second pillar of the private banking market initiative is the reorganization of private banking activities in the two cooperative central institutions. There were several stages to this reorganization. In mid-2010, DZ BANK brought together its international branches in Luxembourg, Zurich, and Singapore under the umbrella of the DZ PRIVATBANK Group. In addition, separate offices were opened in Hannover, Munich, and Stuttgart on September 1. At these offices, central contacts in the DZ PRIVATBANK Group provide support for the local cooperative banks in the implementation of the private banking strategy. In a second stage at the beginning of 2011, Luxembourg-based DZ PRIVATBANK S.A. acquired parts of the private customer business from UniCredit Luxembourg S.A. As a result, the DZ PRIVATBANK Group acquired around 8,600 new customers. In addition, just under 70 employees moved from UniCredit to the DZ PRIVATBANK Group. DZ BANK and WGZ BANK also agreed to bring together at the Luxembourg offices their entire private banking business, together with additional services such as fund services and foreign currency loans. Completion of this process is scheduled for mid Private banking will then be another area in which the increasingly intensive collaboration between the two cooperative central institutions will be clear to see. The DZ PRIVATBANK Group will then have assets of more than 14 billion under its management.

6 24 DZ BANK CORPORATE BANKING Huge potential is available to the cooperative financial network from corporate banking. This was again confirmed in CORPORATE BANKING SME BUSINESS Support for small and medium-sized enterprises (SMEs) is traditionally one of the core businesses of the Volksbanken Raiffeisenbanken cooperative financial network. The network was able to demonstrate this support, particularly during the financial and economic crisis, and position itself as a strong partner for SMEs. At the beginning of 2010, DZ BANK launched an SME market initiative in order to exploit the considerable growth potential still available to the cooperative financial network from this sector and to improve competitiveness. The initiative comprised the new ProFi DZ BANK customer relationship management concept and further development of the joint credit business. Both of these elements were critical factors in the highly encouraging performance during 2010 of the SME business, which DZ BANK runs in conjunction with the cooperative banks. Significant demand was again generated, among others, by the agriculture, nature, and energy initiative that had been launched in ProFi DZ BANK Credit will continue to be the fundamental product in the relationship between the banks and their cor porate customers in the future. However, at the same time, the resulting business relationships will increasingly grow into a strategic partnership with a fully-integrated approach to the provision of services. In the future, the Bank will play a role that extends beyond that of a lender to a much greater degree than it has done until now. Back in 2008, the Volksbanken Raiffeisenbanken cooperative financial network launched its ProFi initiative, an initiative aimed at professionalizing corporate banking, in order to target and strengthen its SME business and specifically attract business from potential new customers. DZ BANK itself launched the implementation of the ProFi DZ BANK customer relationship management concept at the start of 2010 as part of the initiative. The key objective of this customer relationship management concept which is based on needs and customer potential is to provide more comprehensive and efficient support than hitherto for the cooperative banks in their SME business. The core elements of the concept are a systematic customer relationship management process, targeted and coordinated expansion of the range of services, and a coordinated market presence. The role of DZ BANK is to act as a subsidiary partner for the cooperative banks operating at a local level. Since the start of the implementation, the local cooperative banks have had a central point of contact for all SME customer issues, this role being fulfilled by each bank s relevant relationship manager in the VR-Mittelstand division. During the course of the year under review, DZ BANK significantly increased its customer relationship management capacity in corporate banking in order to facilitate successful implementation of the concept. The entire package of measures in connection with ProFi DZ BANK was very positively received by the local cooperative banks. Joint credit business Joint credit business with the local cooperative banks is one of the key services operated by the cooperative financial network for SME corporate customers. As part of the SME market initiative, DZ BANK also reorgan

7 CORPORATE BANKING 25 ized its joint credit business activities. A key feature of the reorganization was that the processing of lending business was regionalized. To achieve this, DZ BANK set up regional competence centers at the branches in Hannover, Frankfurt, Munich, and Stuttgart at the start of This change means that the local cooperative banks now also have regional points of contact for their credit back-office. These contact persons are available to the local cooperative banks as central points of contact in the region and are responsible for credit analysis and processing in connection with jointly extended loans. Within a short space of time, the implementation of these measures has led to significantly better results in the latest banking satisfaction survey. In 2010, the number of new applications in joint credit business was up by around 17 percent compared with 2009, while the volume of new applications increased by approximately 35 percent. Development lending and the agriculture, nature, and energy initiative Growth in the joint credit business was exceeded by growth in the local cooperative banks development lending, which performed even better than in DZ BANK supports development lending by the local SME market initiative Strong position. The Volksbanken Raiffeisenbanken cooperative financial network is one of the leading lenders to small and medium-size enterprises. Potential. The objective is further consolidation of this strong position. The exceptional performance in the development lending business confirms the potential available from SME business. Support. With projects such as ProFi DZ BANK, VR Cross Selling SME Customers, and the agriculture, nature, and energy initiative, DZ BANK provides long-term support for the local cooperative banks SME business. cooperative banks over the long term by providing consultancy expertise and by undertaking sales activities directed at specific target groups. Total new business volume in this area rose by 46.9 percent. Both the volume of new business and the market share achieved by the cooperative financial network in relation to the development programs run by Germany s KfW development bank (KfW) underline the extent of DZ BANK s expertise and advisory capabilities in this sector. VR Kreditwerk AG, which has been responsible for processing since 2007, made a sizeable contribution to this positive business performance. In 2010, Kreditwerk processed around 105,000 new development loans with a total volume of more than 8 billion on behalf of DZ BANK. The growth in business was driven in par ticular by development support in the area of renewable energies. In a joint project with group partners R+V Versicherung and VR LEASING, DZ BANK had launched the agriculture, nature, and energy initiative in 2009 in the highly promising area of renewable energies. Based on the huge level of demand, DZ BANK developed its technical and advisory expertise in this area in 2010 and increased its front-office customer support capacity. The initiative is aimed at firms that want to tap new sources of income by using wind power, biomass, or solar energy. Corporate finance: complex investments and strategic finance issues In the year under review, the DZ BANK Group also consolidated its position as a highly competent partner for complex investments and strategic finance issues, including for major corporate customers. In this regard, DZ BANK offers its customers comprehensive problem-solving expertise and corresponding product expertise across the range of financial services provided by the entire DZ BANK Group. A key objective of DZ BANK is to use these services to strengthen its relationship as the principal banker to the company concerned. With the active involvement of the local cooperative banks, the Corporate Finance division of DZ BANK focused in the year under review, in particular, on the agriculture & food, healthcare, energy, engineering, and media sectors and was able to generate a significant volume of business in these sectors.

8 26 DZ BANK CORPORATE BANKING During 2010, corporate customers also made considerable use of DZ BANK s capital markets expertise. Many companies used derivatives to lock in the historically low interest rates. Major corporate customers increasingly entered into currency and commodity hedges (see page 30). Within the Corporate Finance division, there was also encouraging growth in reverse investment business in which the local cooperative banks are offered the opportunity to participate directly in DZ BANK funding. Almost 100 local cooperative banks were involved in this business. OTHER SERVICES The provision of a complete range of support for corporate customers by the local cooperative banks is becoming increasingly important. The DZ BANK Group helps the cooperative banks provide this support by offering a comprehensive range of services within the framework of its financial services concept. The services may include, for example, leasing or customized insurance policies. Leasing The priorities for VR LEASING in the year under review included the transformation of the business portfolio under the focus of income-oriented growth. Collaboration with the local cooperative banks proved to be a strategic success factor in this regard. Overall, VR LEASING purposefully accepted a decrease in new business volume in order to emerge from the crisis with sound finances and a healthy net asset value. The sales capability of VR LEASING on behalf of the cooperative financial network was highlighted primarily in the development of innovative products, such as the successful Energie vom Land program in collaboration with Landwirtschaftliche Rentenbank (LRB). Under this program, the leasing concept was accompanied by development subsidies from LRB and extended to cover agricultural equipment and machinery that required capital investment of at least 125,000. In its online business, VR LEASING focused on using the VR LeasyOnline lease processing tool to exploit opportunities for additional revenuegenerating products such as insurance. In addition, VR LEASING opened up automotive business for the local cooperative banks and worked to bring about a closer relationship between these banks and local automotive dealers. As a result of these activities, promising new sources of income are created for the local cooperative banks, SME customers remain in the cooperative financial network, and the local bank benefits from any additional business. Risk minimization Despite the economic upturn, the number of business failures in 2010 remained very high in Germany at around 32,000, prompting many SMEs to give priority to the issue of minimizing risk on receivables. In this regard, R+V consolidated its position as the country s second-largest credit insurer, its credit insurance business growing by 17.4 percent. In 2010, R+V also refunded a proportion of premiums to credit insurance customers that had not submitted any claims in This resulted in total refunds of 7.3 million to some 5,000 SMEs. R+V has also integrated credit insurance into its overall UnternehmensPolice business insurance policy, with the result that this policy now covers almost the entire needs of a corporate customer. Moreover, the customer is offered a better rate for premiums if several products are included under the umbrella of the UnternehmensPolice. As far as occupational pension schemes are concerned, R+V has established an excellent starting position over the last few years in the rapidly growing sector of industry-specific pension schemes by setting up a dedicated pension scheme for the German chemicals industry (ChemieVersorgungswerk). R+V is now the market leader in the chemicals industry with over 100,000 policies in the ChemieVersorgungswerk scheme. Overall, 35 percent of employers and 20 percent of employees in this industry have opted for the ChemieVersorgungswerk scheme. A unique product in the insurance market is R+V s innovative supplementary incapacity insurance for the chemicals industry, which was specially developed for employers and employees in this industry. In addition, R+V has considerably simplified the process of joining an occupational pension scheme with its Direktversicherung mit Privileg product. Under this scheme, the employer authorizes each individual employee to take out a pension policy directly with R+V. This saves time, effort, and money.

9 CORPORATE BANKING 27 Commercial real-estate finance In the last three years, DG HYP has established itself as an increasingly important partner for the local cooperative banks in commercial real-estate finance business and has almost tripled its cooperative network business. In 2010 alone, the volume of business jointly generated with the local cooperative banks rose by around 54 percent to 1.09 billion. At the start of 2010, DG HYP launched its new IMMO META REVERSE + product following completion of a successful pilot phase. This product allows the local cooperative banks to acquire portions of an existing DG HYP commercial real-estate finance deal and thereby take low risk lending onto their books. A collaboration via the IMMO META REVERSE + product thereby facilitates optimum use of the funding potential available from the Volksbanken Raiffeisenbanken cooperative financial network. The new product generated an exceptional level of interest: within one year, some 170 local cooperative banks entered into a master agreement with DG HYP covering collaborative arrangements via the IMMO META REVERSE + product. This included participation by up to 30 local cooperative banks in individual DG HYP finance deals. The collaboration between the local cooperative banks and DG HYP in SME commercial real-estate finance business also strengthened. Through the vehicle of its IMMO META product, DG HYP participated on the basis of equal ranking in a large number of commercial real-estate finance deals signed by local cooperative bank customers. This allowed the local cooperative banks to offer larger tranches of finance and strengthen their position in the regional market. When this product is used, the local cooperative bank remains the lead bank in the syndicate. that the market potential in the local cooperative banks corporate customer business was exploited even more comprehensively and efficiently than in the past. At the end of 2010, DZEP held 63 long-term equity investments and the invested capital amounted to approximately 450 million. Three successful exits in 2010 bear testimony to DZEP s commitment to SMEs. In these exits, the shares in the businesses concerned were sold back to the previous shareholders or to the management. VR UNTERNEHMERBERATUNG In order to be able to offer SME customers a one-stop professional and comprehensive range of consultancy services, the two cooperative central institutions merged the M&A department of DZ BANK and WGZ Corporate Finance Beratung GmbH into an entity known as VR Unternehmerberatung GmbH with effect from September 1, This is another area in which the two cooperative central institutions are stepping up their level of cooperation. The core business in the new company includes consultancy services in connection with successions, and services related to the disposal or purchase of SME business units. VR Unternehmerberatung will also have a particular sector focus on agriculture and food, engineering, automotive and industry, healthcare, and renewable energies. Private equity In the year under review, DZ Equity Partner GmbH (DZEP) again confirmed its position as one of the leading equity finance providers for SMEs in Germany, Austria, and Switzerland. Particular features of DZEP s business were the close cooperation within the Volksbanken Raiffeisenbanken cooperative financial network, an unusually long-term investment focus compared with the industry as a whole, and the willingness of the company to take minority stakes in medium-size family enterprises. In addition, clear and effective organizational rules and processes helped to ensure

10 28 DZ BANK CAPITAL MARKETS All market players were faced with huge challenges in international capital markets in DZ BANK, with its broad range of network-oriented services, was highly successful however. CAPITAL MARKETS OVERVIEW Tough international bond and currency market con ditions and rising share prices in many equities markets during the second half of the year were significant features of the market environment in The debt crisis in Greece and in other countries on the periphery of the European Union also resulted in highly volatile markets and, in some cases, very difficult trading conditions. The debt crisis came to a head in May 2010 when the EU was forced to agree on a rescue package. However, this only brought a limited measure of calm to bond and currency markets, which were also being unsettled by the uncertain prospects for economic growth in the US. Equities markets were also adversely impacted in the first half of the year by the debt crisis and by worries about the economy, but in the second half of 2010 they benefited by the very significant growth achieved in many emerging markets as well as in Germany. To a certain extent, historically low yields on bond markets also played a role in this upturn. However, there was significant volatility in equities markets too. Given this level of uncertainty, both corporate and institutional customers again turned predominantly to investments that offered security and transparency. The same could also be said of pri vate clients. In these market conditions, the performance of DZ BANK s capital markets business was encouraging. This was attributable to the fact that DZ BANK focused in particular on continuing to consolidate its comprehensive services for the local cooperative banks, providing these banks with the investment and risk minimization products that customers wanted, and thereby also providing long-term support for the private customer securities business and for corporate banking in the Volksbanken Raiffeisenbanken cooperative financial network. COOPERATIVE NETWORK BUSINESS Private customer securities business Private customer securities business is one of the main stays of DZ BANK s capital markets business. In 2010, DZ BANK continued to help the local cooperative banks maintain and consolidate their excellent position in the German private clients market by offering them fully-integrated, multiple-process securities services. In addition to securities products, DZ BANK services include information, advisory, and trading platforms, each of these platforms being subject to substantial quality requirements. Own-account business Own-account investing operations with the local cooperative banks form one of the cornerstones of the network-oriented strategy in DZ BANK s capital markets business. As in 2009, these operations performed well in the year under review, although there was a significant shift in emphasis. Whereas the focus of own-account business in 2009 had been on investment in bank and corporate bonds and on demand for DZ BANK issues, 2010 saw growth, in particular, in the number of transactions involving covered bonds. Demand for long-term interbank funding also picked up sub-

11 CAPITAL MARKETS 29 stantially. The cooperative banks used the opportunity afforded by the low level of capital market yields to take on long-term liquidity at favorable rates, at the same time reducing the maturity transformation risk in their overall interest-rate portfolios. In addition to demand for traditional long-term funding, there was significant demand for alternatives, such as funding via repos with short maturities. DZ BANK also offered the cooperative banks a range of services to help them in their own-account investing activities and risk management operations. This included the refined ADREI (Adressrisiken im Eigengeschäft) tool, which measures counterparty risk in own-account investing activities and takes into account the more stringent requirements under the Minimum Requirements for Risk Management for banks and financial services institutions (MaRisk). The number of banks in the Volksbanken Raiffeisenbanken cooperative financial network that use this tool rose to 950 in 2010, an increase of more than one third. DZ BANK also completely revised the key figures for risk control in the cooperative banks, which are made available free of charge as part of VR-Control, and adjusted them in line with the standard issued by the Deutscher Genossenschafts- und Raiffeisensverband (DGRV) [German Cooperative and Raiffeisen Confederation]. In addition, DZ BANK provided a high level of detailed support for the start of the VR-EUROS project initiated by the Bundesverband der Deutschen Volksbanken und Raiffeisenbanken (BVR) [National Association of German Cooperative Banks]. The project deals with strategic asset allocation at overall bank level. It focuses on determining appropriate target ratios for different asset classes in order to facilitate decisionmaking at overall bank level based on an optimum balance of risk and return. The objective is to highlight upside potential for the cooperative banks taking into account various risk diversification perspectives and, in general, help the local cooperative banks achieve more stable earnings. In connection with the VR-EUROS project, DZ BANK supported nine pilot banks with the introduction of appropriate processes and with the interpretation of the project results. Acceptance of the results by the BVR and the regional banking associations, and rollout throughout the Volksbanken Raiffeisenbanken cooperative financial network, is scheduled for 2011 and will also be supported by DZ BANK. During the second half of 2010, DZ BANK and Union Investment together organized a number of specialist forums and training sessions on the subject of own-account investment management and treasury operations with the aim of adding to the specialist expertise of the local cooperative banks. These events were very well received. PRIMARY MARKET BUSINESS New bond issues business Despite the tough market conditions, the performance of DZ BANK s new bond issues business was again very encouraging in the year under review. Although income was a little below the level achieved in 2009 (in line with overall market trends), it remained considerably above the level in the years prior to the crisis. DZ BANK continued to consolidate its market share in euro-denominated new issues, improving its ranking to number 2 among the German banks in this area of business. One of the factors behind this improvement is that its involvement as part of the Volksbanken Raiff eisenbanken cooperative financial network is increasingly viewed as a strength, even by international investors. Compared with 2009, the business itself experienced a shift of emphasis. Government-guaranteed bank bonds became less important as the guarantee phase came to an end, whereas the corporate new issues business saw a significant upturn as a consequence of an exceptional level of pre-funding in Furthermore, some clients from peripheral European countries were denied access to the market as a result of the euro crisis. The reduction in risk-weighted assets that took place throughout almost the entire industry and the accompanying slimming down of balance sheets in the banking sector, which impacted on issue and buying behavior, also filtered through to affect market activity. In this generally challenging environment, DZ BANK managed to consolidate its relative position with issuers in Germany, and increase its business with foreign issuers in both absolute and relative terms. In addition, the volume of issues from publicsector issuers and development banks remained at a high level and DZ BANK s primary market business also benefited in this regard.

12 30 DZ BANK CAPITAL MARKETS Share issues and equity finance DZ BANK was able to increase its share issue and equity finance business in This was attributable both to the increasing volume of transactions throughout Germany and to the Bank s comprehensive range of products for corporate customers. DZ BANK therefore took a leading role in various rights issues and secondary placements. It was a co-bookrunner in a 10.2 billion rights issue by Deutsche Bank AG, the largest German equity markets deal of the last few years. In its more SME-focused capital markets and equity finance business, DZ BANK was involved in a number of deals, including as bookrunner in the two rights issues from Deutsche EuroShop AG. DZ BANK also performed well with its mezzanine and equity-linked products. It advised a major German SME in connection with the issue of hybrid securities and organized the placement. It supported the issue of a convertible bond in the role of exclusive subscription agent. It also supported a large number of companies on an ongoing basis as designated sponsor. VR Cross Selling SME Customers In its VR Cross Selling SME Customers operations, DZ BANK supports the local cooperative banks corporate customer business by developing and supplying suitable capital market products and hedging strategies. Alongside the ProFi DZ BANK project, VR Cross Selling is therefore one of the key models aimed at exploiting the corporate customer potential available to the Volksbanken Raiffeisenbanken cooperative financial network. The two initiatives are mutually complementary (see page 24 for more information). By the end of 2010, a total of 425 local cooperative banks were offering their corporate customers a comprehensive range of interest-rate and currency management products under the VR Cross Selling business model, which equates to a year-on-year increase of 20 percent. The growth in VR Cross Selling volume was also very encouraging. Demand from SME customers focused primarily on currency hedging products as a result of the high level of volatility in the markets. Both simple and complex product variants proved to be appealing. Clients also demonstrated a significant level of interest in hedging products aimed at interest-rate management. This trend was attributable to the historically low level of interest rates. In this area of the business, demand was focused more on simple hedging instruments such as interest-rate caps and payer swaps. Major corporate customers Hedging requirements also dominated the business derived from major corporate customers. DZ BANK s excellent reputation as a reliable hedging partner led to an increasing volume of trading in interest-rate hedges. During the course of the year under review, long-term hedges and structured hedges proved to be particularly buoyant areas of the business. Large-volume currency hedges and hedges with exceptionally long maturities were also in particular demand from exportoriented companies. DZ BANK also expanded its securities business with corporate customers. Revenue from this business climbed by some 25 percent year-on-year. Demand was concentrated primarily on floating-rate securities and corporate bonds with short residual terms to maturity. In its commercial paper business, DZ BANK was able to achieve a further improvement on its position as an intermediary between issuers and institutional investors. Institutional customers In the year under review, DZ BANK continued to consolidate its position in institutional customer business in Germany and Austria. DZ BANK s consultancy expertise proved particularly attractive to companies operating in the retirement pension sector. These companies feel they are facing a problem with returns in view of the persistently low level of interest rates. Based on its expertise in asset-liability management, DZ BANK was able to structure customized hedging strategies for life insurance companies and thereby offer them an efficient level of protection against a low-interest-rate environment. Products aimed at optimizing returns also enjoyed great popularity. DZ BANK focused on customized products and products with deliberately simple structures. In 2010, there was steady demand from institutional customers for western European investment-grade corporate bonds. Even in the case of bonds with little

13 CAPITAL MARKETS 31 liquidity, DZ BANK was able to provide assistance for its customers in the form of reliable trading activities on the secondary market. There was also heavy demand from institutional customers for issues placed by DZ BANK as part of its primary market activities. In addition, DZ BANK again organized numerous events for institutional investors focusing on equities. These events included investor conferences, company roadshows, and the DZ DAX DINNER 50th FLOOR. The issue of sustainability, an issue very much to the fore at the moment, was also covered at these events. International institutional customers Business with international institutional customers in 2010 proved to be significantly more challenging than in DZ BANK benefited from the fact that the stability of the cooperative sector in Germany continued to have a positive impact on the image of the Bank. Despite the tough conditions, DZ BANK therefore still managed to further strengthen the funding base for the Volksbanken Raiffeisenbanken cooperative financial network, to diversify the sources of income, and to win new clients. The ability of DZ BANK to attract new clients was also attributable, in particular, to the strength of the Bank in new issues business. DZ BANK s international institutional customers include central banks and supranational institutions in addition to asset managers, pension funds, insurance companies, and banks. Demand from international customers focused on liquid, investment-grade products, such as sovereign bonds from countries in core Europe. Business involving covered bonds and corporate bonds was also especially brisk. Research and Economics DZ BANK s Research and Economics division provides long-term high quality services aimed at supporting the local cooperative banks in their ownaccount securities business and in their business with private clients and corporate customers. There was a considerable expansion in these services in Among other things, the division supplied customeroriented solutions that helped the local cooperative banks satisfy the new statutory requirements relating to documentation of advisory services. This applied particularly to structured products, where the division provided the necessary research coverage. Other expansion in the division included the addition of a large number of issuers to the coverage for bank bonds and the introduction of an associated master list light, a condensed overview with credit ratings and brief commentaries on individual issuers. This new serv ice from the Research division takes into account the enhanced diversification requirements of the local cooperative banks. The excellent reputation and quality of DZ BANK s research was acknowledged during the year under review by a number of sources, including Reuters, which found DZ BANK to have the best currency research in an evaluation of 60 financial institutions. This accolade for DZ BANK s Money and Foreign Exchange Markets Research team was based on the team s steady, sustained and reliable forecasts of movements in the 5 most important currencies, the euro, US dollar, yen, pound sterling, and franc. Institutional asset management Union Investment continued to occupy a strong position in institutional clients business. Following record net inflows from institutional business in 2009, Union Investment achieved yet another huge increase in 2010 when net inflows rose to 11.3 billion. This included a total of 48 new client portfolios derived not only from the Volksbanken Raiffeisenbanken cooperative financial network but also from external customers, both in Germany and abroad. The exceptional bid success rate of 61 percent demonstrates the level of expertise available from Union Investment. A considerable proportion of the portfolios was again accounted for by the IMMUNO asymmetric risk management concept owing to the low risk appetite among institutional investors. Based on IMMUNO, Union Investment is one of the leading risk managers for institutional investors. At the end of 2010, the total assets under management in institutional business amounted to 90 billion, which equated to a year-on-year increase of 18.4 percent.

14 32 DZ BANK TRANSACTION BANKING The local cooperative banks generate a major part of their fee and commission income from transaction banking. DZ BANK is investing heavily to support these activities in the local cooperative banks. TRANSACTION BANKING OVERVIEW More than ever before, the latest processing platforms and processing services are playing a key role in gaining a competitive edge in the banking market. They also offer a route to considerable potential returns from fee and commission business, especially for the Volksbanken Raiffeisenbanken cooperative financial network. The objective of DZ BANK as one of the leading transaction banking providers is therefore to offer the local cooperative banks a comprehensive and efficient range of products in this area, enabling these banks to successfully generate sales with as little effort and expense as possible. Following the completion of the GenoSys WP project in 2010, the competitiveness of the Volksbanken Raiffeisenbanken cooperative financial network has been substantially enhanced as far as securities business is concerned. In addition to securities processing, DZ BANK offers transaction banking services in the areas of payments processing & cards (including cash services) and credit processing. A number of DZ BANK partners play a leading role in their respective areas of business in the German market, such as Equens in payments processing, Deutsche WertpapierService Bank (dwp-bank) in securi ties processing, Kreditwerk in the large-scale processing of loans and home savings products, and CardProcess in the issue of credit cards and the processing of credit card payments. DZ BANK has significant equity investments in these companies, either directly or indirectly. GENOSYS WP COMPLETED In 2010, DZ BANK reached an important transaction banking milestone with the completion of the Geno Sys WP project, an IT project that has been in progress for a number of years. The final stage in the project was completed in June 2010 with the migration of all local cooperative banks in the business regions of the two central institutions and the migration of the own-account portfolios of the central institutions and other customers. As a result, both trading and back-office activities throughout the entire cooperative financial network are now being conducted using standardized, state-of-the-art securities platforms that are fit for the future. The use of these platforms also means that, for example, any necessary functional enhancements in the future can be made available to the local cooperative banks throughout the country and significantly faster than in the past. Joint project In addition to DZ BANK, WGZ BANK was one of the clients who ordered this project. Transaction banking is therefore another area in which the two cooperative central institutions are moving closer together. Other partners in the project were FIDUCIA IT and GAD (the two cooperative data processing centers), Union Investment, and dwpbank. The local cooperative banks were also closely involved in the implementation. GenoSys WP ran for more than three years overall. During this period, up to 1,000 employees from across all of the companies participating in the project worked on Geno-Sys WP, of which up to 400 were at DZ BANK. The project involved some 2.9 million investment accounts held with entities in the cooperative financial network. The investment in the project by the central institutions ran to more than one hundred million euros. DZ BANK contributed 81 million, accounting for the bulk of the investment. GenoSys WP was there fore one of the most extensive projects not only in the