ANNUAL REPORT Annual Report DG HYP

Transcription

1 ANNUAL REPORT 2012

2 OVERVIEW mn Development of originated new business Commercial Real Estate Finance 5,256 4,014 4,613 Domestic* 5,060 3,808 3,125 International* ,488 Treasury Originated loans to local authorities Pfandbrief sales and other refinancing sources 3,631 4,360 7,353 Portfolio development Total assets 54,368 58,017 63,443 Mortgage loans 20,340 20,098 21,437 Mortgage Backed Securities (MBS) 2,387 2,838 3,261 Public-sector and local authority loans 23,737 28,636 33,297 Pfandbriefe and other debt securities 34,084 39,122 44,602 Own funds for solvency purposes 1,445 1,472 1,630 Total capital ratio (%) Core capital ratio (%) Profit and loss account Net interest income Net commission result Administrative expenses Net other operating income/expenses 1 4 Provisions for loan losses Securities and investment result Operating profit/loss Addition to the fund for general banking risks 60 Net extraordinary income/expenses Tax expense Partial profit transfer Profit transfer 15 Number of employees Annual average *Location of property

3 ANNUAL REPORT 2012 Deutsche Genossenschafts-Hypothekenbank AG

4 2 DG HYP Annual Report 2012

5 CONTENTS DG HYP Letter from the Management Board 4 Our business model 6 The commercial real estate bank in the cooperative financial network 8 Management Report Economic environment 12 Commercial Real Estate Finance market development 14 Business development 20 Refinancing 24 Net Assets, Financial Position, and Results of Operations 28 Report on Opportunities and Risks 36 Report on Events After the Balance Sheet Date, and Forecast 48 Employees 54 Financial Statements Balance Sheet 58 Profit and Loss Account 60 Notes to the Financial Statements 61 General notes 61 Notes to the Balance Sheet 63 Notes to the Profit and Loss Account 75 Coverage 76 Other information on the annual financial statements 82 Statement of Changes in Equity 85 Cash Flow Statement 86 Responsibility Statement 87 Audit Opinion 88 Report of the Supervisory Board 89 Service Corporate Bodies And Committees; Executives 92 DG HYP Offices 96 DG HYP Annual Report

6 DG HYP Letter from the Management Board Our business model The commercial real estate bank in the cooperative financial network The Management Board of DG HYP: Dr Carsten Meyer-Raven, Dr Georg Reutter (Chairman) and Manfred Salber Ladies and Gentlemen, dear business associates, Another eventful year is behind us, during which the banking sector again faced major challenges arising from the European government debt crisis. Against this background, DG HYP continued to develop positively and consolidated its long-term market position as one of Germany s leading commercial real estate banks. We are focusing on traditional real estate lending and doing so with a clearly-defined strategy. Our volume of new business in 2012 exceeded our expectations. We therefore provided consistent proof of our status and capabilities as a reliable financing partner and successfully held our own against our competitors. As a subsidiary of DZ BANK, we are a member of the Volksbanken Raiffeisenbanken cooperative financial network, comprising more than 1,100 individual cooperative banks. This financial network is characterised by a high degree of solidity, strong credit quality and a good liquidity base. These qualities were once again confirmed during the 2012 fiscal year by rating agency Standard & Poor s (S&P) during its rating process. Together with the German cooperative banks, we work to implement financing concepts. As part of this process, each party contributes its respective strengths, implementing these in the best interests of the customer. Through our cooperation based on partnerships, we are in a position to offer commercial real estate finance throughout Germany, and have strong roots in the regions. DG HYP s extensive integration within the cooperative financial network and on its market, coupled with the issuance of Pfandbriefe, provides the basis of our funding power and is a key cornerstone of our business model. The policy being pursued by the euro zone countries is increasingly aimed at containing government debt by means of consolidation. The markets were temporarily soothed by the entry into force of the European Stability Mechanism (ESM), by the European Central Bank s decision to buy up unlimited quantities of government bonds from ailing euro zone countries (under certain conditions) and to defend the common European currency at any price, as well as by the evident political will to keep all of the member states within the EU. Against this background, the capital markets stabilised initially. Euro zone countries have created the necessary framework within which the government debt crisis can be tackled, and trust in the stability of the euro rebuilt. Now, reform efforts to overcome the crisis must continue to be driven forward and levels of government debt must be reduced. 4 DG HYP Annual Report 2012

7 Whilst the European economy grew weaker and weaker in this environment, the domestic economy proved robust. The stability inherent in the German economy means that demand for real estate is also stable. German companies high level of competitiveness, intensive demand for German export goods, and good economic development on the domestic market in 2012, coupled with low interest rates, all contributed to the German real estate market being viewed by investors, including foreign investors, as a safe haven. The continued positive state of the real estate sector will also be crucial in the current year. We originated some 5.3 billion in new commercial real estate finance during the year under review, thereby exceeding by around 31% what had already been a good result in Of this new business, around 5.1 billion related to the German market. The reporting year also featured the successful continuation of our cooperation within the Volksbanken Raiffeisenbanken cooperative financial network. Following above-average growth in 2011, we once again increased joint lending with the German cooperative banks by approximately 19%, to 2.2 billion. This means that business with the cooperative banks has more than doubled over the past two years. We maintained the positive trend in our target business. There was a gratifying increase in net interest income and the net commission result, whilst all areas of expenditure demonstrated consistently improved cost structures. Measured in accordance with the German Commercial Code (HGB), our results were the best in the bank s 91-year history. We have made further progress with regard to the development of our internal structures, which we are also aiming to strengthen in Following on from the creation of a mission statement, prepared jointly by DG HYP employees and which is now enshrined in the bank s actions, management guidelines were also developed during the year under review. These are being introduced as part of the executive staff development programme and turned into everyday reality. Additionally, for some time now we have been focusing on the issue of sustainability and reviewing how we can reconcile our economic actions more effectively with social and ecological aims. We will be documenting the results in a sustainability report to be published this year. A further aim for the current year lies in the continued progression of our cooperation, based on mutual trust, with the Volksbanken Raiffeisenbanken cooperative financial network. The German economy looks to be in robust shape, while the real estate market offers good opportunities and prospects given its size and stability. The positive market environment in the real estate sector, the growing interest of the cooperative banks in cooperation with DG HYP, and both the stability and funding power of the Volksbanken Raiffeisenbanken cooperative financial network give us confidence that we can face up successfully to the competition once again in the coming year. Yours sincerely, The Management Board Hamburg, March 2013 DG HYP Annual Report

8 DG HYP Letter from the Management Board Our business model The commercial real estate bank in the cooperative financial network OUR BUSINESS MODEL Success in the German market DG HYP is the real estate bank within the Volksbanken Raiffeisenbanken cooperative financial network and one of Germany s leading issuers of Pfandbriefe, German assetcovered bonds. Our core business segment is Commercial Real Estate Finance, where we support real estate investors as well as more than 1,100 cooperative banks in Germany. The focus of our business is on financing properties in the German market. In addition, we finance our German clients investment projects in selected international markets. Our new business origination is supported by our successful collaboration with German cooperative banks, to which we offer a very attractive range of products and services. Thanks to its size and stability, the German real estate market provides particular potential for successful business. We offer our clients an extensive range of tailor-made financing solutions, which we continuously expand and adapt to client needs and prevailing market developments. We consistently exploit the resulting opportunities, together with the German cooperative banks. Close to our customers, flexible and effective With our six Real Estate Centres in Germany s major cities, namely Hamburg, Berlin, Dusseldorf, Frankfurt, Stuttgart and Munich, DG HYP has a good presence throughout the country, which we leverage to finance suitable properties for our commercial real estate clients. Local client coverage, with both front office and back office functionality located in each Real Estate Centre, helps to ensure flexible and efficient lending processes. Our success factors include client proximity, professionalism and expertise, funding power, and a high degree of market penetration thanks to our strong network. Focus on traditional lending business As the real estate bank within the Volksbanken Raiffeisenbanken cooperative financial network, we focus on traditional lending business, whereby the loans we extend build the foundation for long-term partnerships. The bank s Commercial Real Estate Finance activities are focused on the core segments of office, residential and retail properties. We are also involved in the specialist segments of hotels, logistics and real estate for social purposes, within the scope of our credit risk strategy. Target clients are private and institutional investors, housing companies, as well as commercial and residential real estate developers. When selecting exposures, our priorities are the quality of the customer relationship, the third-party usability of the financed property and collateralisation through first-ranking mortgages. The right strategy counts A sustainable business approach, with a clearly-defined focus and risk strategy, is key to long-term market success. As a subsidiary of Deutsche Zentral-Genossenschaftsbank, Frankfurt/Main DZ BANK we are a member of the Volksbanken Raiffeisenbanken cooperative financial network a network characterised by a high degree of solidity, strong credit quality, and high liquidity through customer deposits. The broadly diversified market position of the cooperative banking sector, and our Pfandbrief issuance, provide us with a strong funding base, which in turn gives us the room for manoeuvre that we need to finance good business with adequate return for the risk involved. Going forward we will continue to build on this market position, together with the German cooperative banks. Our objective is to be the first point of contact for our clients with regard to any sizeable financing request in the German market. 6 DG HYP Annual Report 2012

9 DG HYP S REAL ESTATE CENTRES Axel Jordan Steffen Günther Head of Real Estate Financing Cooperative Banks and Corporates Head of Real Estate Financing Institutional Clients and Syndication Hamburg Hans Henrik Dige Mark Meissner Berlin Head of Real Estate Centre Hamburg Head of Real Estate Centre Berlin Dusseldorf Matthias Weimer Matthias Till Frankfurt Head of Real Estate Centre Dusseldorf Harald Alber Head of Real Estate Centre Frankfurt Dr. René Beckert Stuttgart Head of Real Estate Centre Stuttgart Head of Real Estate Centre Munich Munich Janine Huffer Head of Syndication Thomas Neumann- Vieweg Head of Institutional Clients DG HYP Annual Report

10 DG HYP Letter from the Management Board Our business model The commercial real estate bank in the cooperative financial network THE COMMERCIAL REAL ESTATE BANK IN THE COOPERATIVE FINANCIAL NETWORK The Commercial Real Estate Finance specialist within the cooperative financial network Real estate is a key economic factor in Germany, with major significance for society as a whole. That is why Commercial Real Estate Finance is an indispensable core business segment of the Volksbanken Raiffeisenbanken cooperative financial network a segment in which we are the key point of contact for all aspects of financing commercial real estate projects. As a specialist and centre of competence, we are thus the first port of call for all German cooperative banks in this business. The core element of our business policy is to firmly establish the importance and opportunities of this business segment throughout the cooperative financial network, and to act jointly to realise these. Joining forces to successfully acquire financing business The business principles of the cooperative sector are a solid foundation especially so when times are challenging. The combined market presence of a strong cooperative financial network is the key to exploring additional potential in the attractive Commercial Real Estate Finance business. DG HYP offers German cooperative banks a high-performance range of products and services that matches their needs. Thanks to our product range, cooperative banks have the opportunity to provide their clients with larger-sized financings. They are thus in a position to successfully generate lending business with medium-sized commercial real estate investors a key target group for these banks. In this way, they profit from the work done by our experts in exploring markets in that they gain new clients with high development potential, generating cross-selling opportunities and strengthening their competitive position. This extensive collaboration includes various advisory and other services such as ratings for real estate lending or the valuation of properties by our VR WERT subsidiary, as well as the joint market coverage and the development of market and risk strategies. Long-term rating confirmed The rating agency Standard & Poor s reviewed DG HYP in 2012 and confirmed the bank s good rating. S&P paid tribute to DG HYP s successful business model as a real estate bank deeply integrated in the strongly capitalised, highly profitable Volksbanken Raiffeisenbanken cooperative financial network. DG HYP s Pfandbrief issues have retained their top triple-a rating, thanks to the high quality of our cover assets pools coupled with low excess coverage requirements by normal market standards. Rating overview Long-term/short-term liabilities/outlook A+/A-1/stable Issuer credit rating Public Pfandbriefe AAA Public Pfandbriefe (Senior Secured) Mortgage Pfandbriefe AAA Mortgage Pfandbriefe (Senior Secured) Bearer bonds A+ Senior Notes (Senior Unsecured) 8 DG HYP Annual Report 2012

11 DG HYP PART OF A POWERFUL GROUP DG HYP is a member of the DZ BANK Group, which also comprises home loan savings specialist Bausparkasse Schwäbisch Hall, DZ PRIVATBANK, R+V Insurance, retail lender TeamBank, Union Investment Group, VR LEASING, as well as various other specialist financial services providers. The various DZ BANK Group entities are the cornerstones of a comprehensive range of bancassurance products and services offered by the Volksbanken Raiffeisenbanken cooperative financial network. Within this strong network, DZ BANK Group entities work together to optimise the products and services delivered to cooperative banks and their roughly 30 million customers. DZ BANK Group is itself a part of the Volksbanken Raiffeisenbanken cooperative financial network (Genossenschaftliche FinanzGruppe), which comprises more than 1,100 individual cooperative banks. In terms of aggregate total assets, the cooperative banking sector ranks among the largest private-sector financial services organisations in Germany. Within the cooperative financial network, DZ BANK AG acts as the central institution for around 900 cooperative banks with a total of 12,000 branches, and as a commercial bank. Combining banking services with insurance products, home loan savings, real estate finance and a range of investment services has a long tradition within the German cooperative banking sector. The specialist institutions within the DZ BANK Group each offer highly competitive and reasonably-priced products in their respective area of expertise. This allows Germany s cooperative banks to offer their customers an end-to-end range of first-rate financial services. DG HYP Annual Report

12 DG HYP PART OF A POWERFUL GROUP Successful together As a subsidiary of DZ BANK and a partner of more than 1,100 German cooperative banks, DG HYP is part of a powerful financial services network. We cooperate closely with the cooperative banks, and arrange and implement financing concepts for medium-sized companies. DG HYP s integration in the Volksbanken Raiffeisenbanken cooperative financial network is a stable foundation that allows us to offer high-performance products to our real estate clients. 10 DG HYP Annual Report 2012

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14 Management Report Economic environment Commercial Real Estate Finance market development Business development Refinancing Net Assets, Financial Position, and Results ECONOMIC ENVIRONMENT Robust economic development in Germany The domestic economy got off to a dynamic start in 2012 but became increasingly sluggish over the course of the year as a result of the euro crisis. Nevertheless, it proved to be comparatively stable when faced with the weighty problems posed by the European sovereign debt crisis. German gross domestic product rose by 0.7% during the year under review, proving to be robust by European standards. The capital markets calmed down again, with the DAX climbing by 29% during 2012 its strongest performance for nine years. Economy supported by the domestic market Developments on the domestic market had a stabilising effect. The key pillars of growth were private consumption and the construction industry. Households purchasing power was strengthened during the reporting year thanks to the labour market remaining in a good state, the easing in consumer price rises, and higher wage and capital incomes. Additionally, pensions were increased in the middle of the year. The export sector also put in a stable performance, with growing demand from third countries for German products. Meanwhile, exports to European Union countries barely increased. Employment figures reach new high One reason for the positive mood among households is the situation on the German labour market, which is proving to be a reliable source of economic stability. In spring 2012 unemployment fell to its lowest level since German GROSS DOMESTIC PRODUCT 2012 EURO ZONE AND SELECTED COUNTRIES GDP change vs (%) Euro zone DE FR IT ES NL BE AT GR FI IE PT Euro zone -0.4 Germany 0.7 France 0.1 Italy -2.5 Spain -1.4 Netherlands -1.1 Belgium -0.4 Austria 0.6 Greece -6.4 Finland 0.2 Ireland 0.5 Portugal -3.0 The graphs do not form part of the Management Report. Source: DZ BANK Research 12 DG HYP Annual Report 2012

15 of Operations Report on Opportunities and Risks Report on Events After the Balance Sheet Date, and Forecast Employees reunification. As at the year-end, the jobless figures had dipped below the 7% mark for the first time in more than 20 years. At the same time, the number of those in employment in Germany, at more than 41 million, reached a new all-time high. Germany to remain Europe s safe haven in 2013 Looking to 2013, the signs are that the German economy will slow down, despite positive factors such as the stable labour market and a highly competitive economy. The construction industry and private consumption should continue to take care of growth during the current year. Similarly high wage increases can be expected in 2013, coupled with a rise in disposable incomes supported by the good labour market situation. With rising demand for German goods from Eastern Europe, Asia and Africa, the export sector can also be expected to continue to grow. Overall, despite a gloomier situation in some of its European neighbours, Germany is set to remain Europe s safe haven. For the current year, the Federal Government expects the economy to grow by 0.4%. Sovereign debt crisis set to continue The crisis of confidence continued to affect Europe s financial markets in At the beginning of the year the fiscal pact was adopted by all of the EU member states with the exception of the United Kingdom and the Czech Republic, before being signed in March. The participating countries have undertaken to enshrine the upper limit on debt levels in their respective bodies of national law. In autumn the ESM (European Stability Mechanism) adopted back in 2011 replaced the temporary rescue package EFSF (European Financial Stabilisation Facility). Under the terms of the ESM, euro zone member countries that become insolvent will be supported with loans, subject to their adherence to economic policy conditions. Furthermore, the European Central Bank (ECB) has introduced a programme under which it will buy up unlimited quantities of government bonds with a maturity of between one and three years from ailing euro zone countries, subject to individually agreed conditions. These measures, combined with the announcement by the ECB that it would defend the euro, helped to ease the tension on the capital markets. Aid measures expanded Following on from Greece, Ireland and Portugal, by the summer Spain and Cyprus had also applied for financial help, to be used in the first instance to stabilise their respective banking systems. Spain s banks were promised financial aid of up to 100 billion, subject to conditions, with the first tranche of 40 billion being paid out in December. At the end of the year the 17 euro zone finance ministers agreed, on the basis of the Troika report confirming progress made in Greece, to release further aid in the amount of 34.4 billion. Depending on how reform progresses from here, an additional 14.8 billion has been earmarked for Greece between now and the end of March A single European banking supervisor The heads of government and of state of the euro zone countries agreed during the reporting year that they would set up a single European banking supervisor, based at the ECB. The aim of having a single European supervisor is to ensure that banks within the euro area are being regulated by means of a uniform system. The new system will apply to all major, systemically important banks. Smaller institutions, among them the German cooperative banks, will not be affected. Where necessary, the banks concerned will be recapitalised directly out of the ESM rescue fund. The new supervisory body is scheduled to be in place by Key interest rate fall to record low At the beginning of July, the ECB, with a view to bolstering Europe s stricken economies, cut its key interest rate from 1.0% to 0.75%, its lowest level since the creation of the monetary union. Interest rates were left unchanged at the last ECB meeting in December. DG HYP Annual Report

16 Management Report Economic environment Commercial Real Estate Finance market development Business development Refinancing Net Assets, Financial Position, and Results COMMERCIAL REAL ESTATE FINANCE MARKET DEVELOPMENT Transaction volume exceeds previous year s level The German commercial real estate market is held in high regard by both domestic and foreign investors. This good reputation is based on Germany s stable economic and political situation compared with its European neighbours, the size of the real estate market, the country s federalist structures and the positive performance of the German labour market. Demand for real estate remains stable, with the result that the German commercial real estate market performed well by European standards in The transaction volume in 2012 totalled 25.3 billion (source: Jones Lang LaSalle), which equates to a yearon-year increase of 8%. This covers the segments of retail, offices, logistics and industry, hotels, land and special prop- erties. Residential properties are not included in the figure. The good result reflects the confidence of German investors in the real estate market, as well as that of foreign investors, who stepped up their commitment during 2012 compared with the previous year. Overall, they accounted for some 42% of the transaction volume during the reporting year, compared with 34% in Large-volume deals attracted particular interest. During the reporting year investors were focused on office real estate, which consequently recaptured its leading position. Retail properties, which proved the most popular in 2011, lagged behind during the year under review. This was not due to waning demand but to a lack of suitable properties. COMMERCIAL REAL ESTATE FINANCES VOLUMES IN GERMANY bn Source: Jones Lang LaSalle 14 DG HYP Annual Report 2012

17 of Operations Report on Opportunities and Risks Report on Events After the Balance Sheet Date, and Forecast Employees Growing demand for office space thanks to favourable employment situation More than 40% of investments made related to office properties during the year under review. The equivalent figure in 2011 was just 30%. The rise in demand for office premises can be attributed to the employment situation, which remains favourable. Against this background, the good development in rent levels in evidence in 2011 was maintained in Thanks to the growing demand, top rents returned to close to 2008 levels, thereby making up most of the fall triggered by the financial market crisis. This is also a consequence of a reduced amount of new builds on the office property market in the wake of the financial market crisis, resulting in a reduced supply of attractive premises at a time of growing demand. Nevertheless, the proportion of vacant premises remained high during the reporting year, albeit with relatively unattractive and outdated premises making up most of these empty properties. The comparatively low share of more modern office buildings and resulting shortage of attractive premises pushed the top rents at prime locations up by almost 3%. Meanwhile, the increase in Dusseldorf and Stuttgart was even more marked, with a rise of around 7%. Rents during the period under review ranged from just under 19 per square metre in Stuttgart up to 33 per square metre in Frankfurt, followed by Munich with a rate of around 30 per square metre. The top rents elsewhere ranged between 20 and 24 per square metre. In contrast, secondary locations only experienced a slight increase in office rents. OFFICES: MAXIMUM RENTS AT TOP LOCATIONS 2012 /sq m Berlin Dusseldorf Frankfurt Hamburg Cologne Munich Stuttgart Top 7 Berlin 22.0 Dusseldorf 23.5 Frankfurt 33.0 Hamburg 24.1 Cologne 20.5 Munich 30.5 Stuttgart 18.8 Top Source: BulwienGesa DG HYP Annual Report

18 Management Report Economic environment Commercial Real Estate Finance market development Business development Refinancing Net Assets, Financial Position, and Results Retail rents rise continuously As a result of the good employment situation and resulting rise in incomes, German consumers propensity to spend was maintained during the reporting year, generating key impetus for growth. City-centre shopping streets and attractive shopping centres were the particular beneficiaries of this. The correspondingly high level of interest in first-rate retail premises including from international chains pushed rents up further in Given what was only a weak increase in retail trade over the past decade as a whole, the positive development in top rents was therefore to the detriment of less attractive retail spaces. The gap between the rents payable for prime locations and for secondary locations is therefore growing ever wider. During the year under review, rents for prime retail premises in the seven top locations rose by significantly more than 4% on average. The strongest growth was recorded in Berlin, with top rents rising by around 7%. At the other locations, increases of between 1.4% and 4.4% were recorded, with the exception of Stuttgart, where there was no rise in the top rents in At 305 per square metre, Munich has by far the highest rents, followed by Frankfurt with a rate of 265 per square metre. Elsewhere, at other top locations, the rate per square metre ranged between 220 and 245 for prime sites. The positive development is limited to very good locations, with secondary locations unable to benefit. RETAIL: MAXIMUM RENTS AT TOP LOCATIONS 2012 /sq m Berlin Dusseldorf Frankfurt Hamburg Cologne Munich Stuttgart Top 7 Berlin Dusseldorf Frankfurt Hamburg Cologne Munich Stuttgart Top Source: BulwienGesa 16 DG HYP Annual Report 2012

19 of Operations Report on Opportunities and Risks Report on Events After the Balance Sheet Date, and Forecast Employees Rents high in residential sector Private house-building again expanded in 2012 compared with the previous year. The number of new projects being completed has been failing to keep pace with demand for years, as increasing populations in the cities and a disproportionate rise in the number of households have an impact. Low interest rates and higher incomes are also contributing to this imbalance. At the same time, real estate has grown more attractive as a safe and inflationproof form of investment. In this context, rents for housing at the seven top locations continued to rise during the period under review. This development was particularly marked in Berlin, with an increase of around 9% in the price per square metre. The smallest rise, of just under 3%, was recorded in Munich. The highest rents during the reporting year ranged from 14 in Stuttgart, to 15 in Dusseldorf and Berlin, and as high as 19 in Munich, closely followed by Hamburg at and Frankfurt at almost 18. Rates of per square metre were payable for very good areas of Cologne. Rents in average locations also increased in 2012, up by around 1.5% in Munich and by as much as 10% in Berlin. Munich and Hamburg s rent levels were and 13 per square metre respectively in 2012, with 12 per square metre payable in Frankfurt. Despite a 25% rent increase within three years, Berlin continues to lag behind the other top locations with a rate per square metre of 10. RESIDENTIAL: MAXIMUM RENTS AT TOP LOCATIONS 2012 /sq m Berlin Dusseldorf Frankfurt Hamburg Cologne Munich Stuttgart Top 7 Berlin 15.3 Dusseldorf 15.2 Frankfurt 17.8 Hamburg 18.5 Cologne 14.5 Munich 19.0 Stuttgart 14.0 Top Source: BulwienGesa DG HYP Annual Report

20 18 DG HYP Annual Report 2012 WHAT MOTIVATES US

21 Real estate is our passion Commercial Real Estate Financing is a core business segment for the Volksbanken Raiffeisenbanken cooperative financial network the cornerstone of the German financial services sector. DG HYP is the specialist, the centre of competence, and the driving force for Commercial Real Estate Financing within the Volksbanken Raiffeisenbanken cooperative financial network; the bank supports German cooperative banks in their respective regional markets. Preamble to DG HYP s mission statement DG HYP Annual Report

22 Management Report Economic environment Commercial Real Estate Finance market development Business development Refinancing Net Assets, Financial Position, and Results BUSINESS DEVELOPMENT High levels of new business The year under review saw DG HYP further consolidate its good position on the German market, establishing itself as one of the leading providers of commercial real estate finance. DG HYP bases its financing decisions on its assessment of the property from a risk and return perspective. New business worth 5,256 million was recorded in 2012, compared with 4,014 million in the previous year. Of this total volume, 5,060 million related to the core market of Germany, which equates to a year-on-year rise of around 33% (2011: 3,808 million). New business generated abroad, totalling 196 million, was on a par with the previous year s figure (2011: 206 million). Sustained positive performance in the cooperative financial network Cooperation with our partners in the Volksbanken Raiffeisenbanken cooperative financial network is proving successful over the long term. Joint lending operations with cooperative banks performed at a consistently high level during 2012, rising by 19% to 2,198 million (2011: 1,847 million). This demonstrates the extent to which commercial real estate finance is an attractive and increasingly important area of business for the cooperative banks. The aim, through issuing loans on the basis of a partnership with the cooperative banks, is to work on the ongoing further expansion of business. The positive development COMMERCIAL REAL ESTATE FINANCE NEW BUSINESS mn 6,000 5,000 4,000 3,000 2,000 1, Total 3,766 4,174 4,613 4,014 5,256 of which: domestic 2,576 2,626 3,125 3,808 5,060 of which: 1,190 1,548 1, international 20 DG HYP Annual Report 2012

23 of Operations Report on Opportunities and Risks Report on Events After the Balance Sheet Date, and Forecast Employees on the commercial real estate markets in Germany provides the network with good prospects. Economic stability and moderate price increases equate to long-term demand and ensure that investor demand for financing is maintained. In this environment, the Volksbanken Raiffeisenbanken cooperative financial network, with its stability and refinancing power, has many promising opportunities ahead of it. IMMO META products underpinning cooperation With its IMMO META range of products, DG HYP has developed a product family with which cooperative banks can meet the needs of their medium-sized commercial real estate customers and participate in commercial real estate financings with DG HYP s customers. The core product is IMMO META REVERSE +, introduced in 2010, through which many cooperative banks can acquire individual tranches of a financing concluded by DG HYP as a silent participant. To simplify the process and ensure efficient distribution, DG HYP has developed a web-based platform by means of which cooperative banks, having entered into a framework agreement, can find out about current finance deals, including those beyond their own region, and acquire individual tranches. IMMO META REVERSE + has met with a good response within the Volksbanken Raiffeisenbanken cooperative financial network. To date, up to 60 cooperative banks have co-invested in individual financings. Overall, DG HYP has concluded approximately 350 framework agreements to date. During the reporting year just under 500 million was placed with cooperative banks. Looking to 2013, DG HYP s aim is to increase the placement volume of IMMO META REVERSE + even further. Joint lending in the regions Further examples of the cooperation in place between DG HYP and cooperative banks in their capacity as partners include the IMMO META REVERSE and IMMO META product offerings. Using IMMO META REVERSE, the cooperative banks can get involved in selected large-volume projects in their regions from as early as the origination phase. The cooperative banks themselves decide on the level of their involvement, participating on a pari-passu basis. Via IMMO META, DG HYP participates on a paripassu basis in commercial real estate finance exposures originated by cooperative banks with medium-sized real estate clients in their region. The cooperative banks retain their lead manager role with such financings. This product is particularly suited to banks with regional potential in commercial real estate financing. DG HYP Annual Report

24 Management Report Economic environment Commercial Real Estate Finance market development Business development Refinancing Net Assets, Financial Position, and Results Successfully managing real estate risks In the form of IMMO VR RATING, DG HYP has developed a web-based rating procedure to complement its product range. This enables the cooperative banks to measure the default risks associated with commercial real estate uniformly across the network. IMMO VR RATING is aimed at cooperative banks that focus on commercial real estate finance, and at those for whom commercial real estate accounts for a significant proportion of their overall portfolio. The rating application provides an important foundation for joint lending business within the Volksbanken Raiffeisenbanken cooperative financial network. Real estate valuation using VR WERT Additionally, cooperative banks also have access to the VR WERT product offerings. For more than 13 years now, VR WERT has been an expert provider of real estate valuations and a central partner to the cooperative banks. Its focus lies on the valuation of commercial property using the best available knowledge. In its capacity as a whollyowned subsidiary, VR WERT prepares all of the expert valuations commissioned by DG HYP. Once again during the 2012 fiscal year, VR WERT performed well and increased the number of expert valuations compared with the previous year by 5% to around 2,430. Over the same period, revenue also increased by 15% to total 8.3 million. BUSINESS ORIGINATED JOINTLY WITH COOPERATIVE BANKS mn 2,400 2,000 1,600 1, ,085 1,847 2, DG HYP Annual Report 2012

25 of Operations Report on Opportunities and Risks Report on Events After the Balance Sheet Date, and Forecast Employees Local authority lending to support the cooperative banks In the interests of the Volksbanken Raiffeisenbanken cooperative financial network, DG HYP supports the cooperative banks as they respond to financing enquiries from the public sector. In this way, the cooperative banks are able to reinforce their presence on the market and build up further business relationships with local authorities. This is a field in which DG HYP is a competent point of contact within the network. Taking into account the borrowers credit ratings, finance offers are prepared and submitted to the local authorities via the cooperative banks. During the 2012 fiscal year, DG HYP generated new business with a volume of 327 million in the area of local authority lending (2011: 354 million). Public finance activities halted in 2008 Within the framework of DG HYP s strategic realignment, the Bank suspended its public finance and interbank lending activities back in 2008, a decision taken well in advance of the government debt crisis affecting euro zone peripheral states. The related portfolio of sovereign and bank loans has been reduced as planned, from 38.5 billion at the end of 2007 to 17.1 billion as at 31 December DG HYP will continue to adhere to this strategy implementing the scheduled portfolio reduction in the years to come. Reduction of the private home loan financing portfolio DG HYP is also consistently working to reduce its existing portfolio of private home loan financing in the context of the strategic realignment of the bank, as launched on 1 January As at 31 December 2012, DG HYP s portfolio included some 83,000 retail customers accounting for a volume of approximately 5.6 billion. The bank is also continuing to work through non-strategic commercial real estate lending exposures (approximately 1.1 billion). This section of the portfolio comprises small-scale commercial lending and subordinated finance that is reaching its maturity date, as well as residual portfolios from the agricultural lending business, an area which DG HYP has not been actively pursuing since DG HYP Annual Report

26 Management Report Economic environment Commercial Real Estate Finance market development Business development Refinancing Net Assets, Financial Position, and Results REFINANCING Sovereign debt crisis keeps financial markets on edge The implementation of the special monetary policy measures agreed back in December 2011 by the Governing Council of the ECB initially created a positive mood on the financial markets in early Banks availed themselves of the second three-year ECB tender in particular, with close to 530 billion being taken up primarily by those banks that had faced higher spreads on the capital markets. After months of uncertainty it was the actions of private creditors to help Greece in March that paved the way for the biggest debt reduction ever offered to a state. As part of a first stage, almost 86% of banks, insurers and funds signalled their willingness to write off a large portion of their claims. The major involvement of private creditors in the debt reduction measures was also a condition of the aid package for Greece worth 130 billion. This had been agreed in early March but was only then finally approved. During the second quarter, confidence levels on the bond markets were hit by growing uncertainty. The precarious budgetary position and the situation facing the banks in Spain, as well as the outcome of the elections in France and Greece, revived fears that the government debt crisis was about to take another turn for the worse. It was only when the European Central Bank announced monetary policy measures in response to concerns about the sluggish nature of global economic growth that the interest rate markets settled down again over the course of the year. The expectation that central bank rates would remain low the ECB had cut its base rate from 1.0% to a new historic low of 0.75% in July and the cen- tral banks willingness to buy up government bonds made investors less risk averse again. The newly created European Stability Mechanism (ESM) in particular proved to be a positive factor, especially as this financial institution, as part of the overall European rescue package, is able to purchase bonds directly from ailing states that have applied for assistance. Once again during the past year German government bonds confirmed their status as a safe haven in their segment. Whilst 10-year German government bonds had briefly hit a new all-time low with a yield of just under 1.2% in the summer, investors were even faced with negative yields when purchasing short-term paper. Pfandbriefe Falling sales as spreads shrink The flooding of the market with cheap central bank money as part of the two three-year ECB tenders amounting to over a trillion euros in total had a major impact on the Pfandbrief market during the year under review. Many Pfandbrief banks took advantage of the long-term tenders as a source of funding, particularly with a view to replacing expiring bonds on favourable terms. The ECB s entry on the capital market reduced the available issuing volume of new Pfandbrief products for investors interested in this category. Consequently, Pfandbrief sales (as reported by vdp member institutions) dropped from 64.2 billion in 2011 to 49.7 billion in Given the shortage of new Pfandbrief issues and growing demand among investors for covered bonds with a good credit rating, Pfandbrief spreads shrank dramatically, in some cases returning to their pre-crisis levels. 24 DG HYP Annual Report 2012

27 of Operations Report on Opportunities and Risks Report on Events After the Balance Sheet Date, and Forecast Employees Broad investor base secures stable refinancing Against the background of a favourable market environment and in cooperation with a loyal and broadly diversified investor base, DG HYP was able to raise funding of 3.6 billion in billion of secured refinancing was realised exclusively through the issuance of Mortgage Pfandbriefe. With the liquidity situation within the Volksbanken Raiffeisenbanken cooperative financial network and the DZ BANK Group remaining good, additional unsecured funds of 1.6 billion were raised exclusively via this source. VDP PFANDBRIEF SPREAD CURVE Yield (%) / / / / years 5 years 2 years Source: Reuters DG HYP Annual Report

28 JOINT FINANCINGS WITH COOPERATIVE BANKS Tübinger Carré shopping centre, Stuttgart Jointly financed with Volksbank Stuttgart eg Fleming s Deluxe Hotel Frankfurt-City Jointly financed with Mainzer Volksbank eg and vr bank Untertaunus eg Joint financing projects, for joint benefits To us, the close collaboration within the Volksbanken Raiffeisenbanken cooperative financial network is not mere lip service it is enshrined in our everyday work. Our employees in the regions are competent contacts for the local cooperative banks. Combining the detailed market knowledge commanded by the cooperative banks with the regional industry and the financing expertise of our specialist teams represents an optimum basis for joint market development and a successful commercial real estate finance. 26 DG HYP Annual Report 2012

29 Seitz Adler Quartier, Wangen Jointly financed with Volksbank Allgäu-West eg Marktplatzgalerie Bramfeld, Hamburg Jointly financed with 40 German cooperative banks Hollandhaus, Bonn Jointly financed with 8 German cooperative banks Commercial real estate portfolio comprising properties in Dresden, Berlin and Rostock Jointly financed with 22 German cooperative banks

30 Management Report Economic environment Commercial Real Estate Finance market development Business development Refinancing Net Assets, Financial Position, and Results NET ASSETS DG HYP s total assets in the 2012 fiscal year were reduced by a further 3.6 billion (-6.2%), as planned, to 54.4 billion. As the commercial real estate finance portfolio constantly grows, the non-strategic portfolio is consistently being cut back. Against this background, the portfolio of real estate loans grew by 0.2 billion to 20.3 billion. A key contributory factor in this regard was the continuing increase in commercial real estate exposures, which offset the reduction in the non-strategic real estate lending portfolio, and retail home loan financing in particular. There have been no new investments in Mortgage Backed Securities (MBS) since mid The portfolio in this business area, which is being phased out, was reduced by 0.4 billion to 2.4 billion during the first six months of 2012 as a result of ongoing repayments, individual sales, necessary write-downs and variations in exchange rates. MBS holdings are intensively monitored by means of a detailed risk management system, regular analyses of individual exposures, and comprehensive stress testing. The development of material risk factors continues to indicate stabilisation at the current low levels. Hidden burdens on this exposure, in the imputed amount of 687 million, reflect to a lesser extent the default risk of the securities. Illiquidity of the markets and stricter regulatory capital requirements are more significant factors. In this respect, DG HYP anticipates a write-back over the remaining term of the MBS portfolio. At the same time, the public finance and local authority lending portfolio was cut by a further 4.9 billion to 23.7 billion in the first six months of 2012, as a result of maturities and repayments. The bank s investment strategy continues to focus, as before, on supporting the cooperative banks in local authority lending business. DG HYP participated in 2012 in the exchange programme for selected Greek government bonds, subsequently disposing of all such holdings. As at 31 December 2012, the portfolio contained only one corporate bond guaranteed by the Greek government with a nominal value of 240 million. Given the expected default risk, this is carried on the balance sheet in the amount of 60 million. Whilst Greece was able to stabilise somewhat on the whole during the period under review, further efforts will still be required to achieve long-term competitiveness. As far as the stabilisation of the remaining euro zone countries was concerned in 2012, progress was made not least through the launch of the long-term ESM rescue package. Those states that have been hit the hardest by the crisis must now adopt convincing reforms and show political courage in a bid to become more competitive and put their finances in order, thereby restoring investor confidence. DG HYP holdings in countries (besides Greece) that are particularly affected by the debt crisis performed as follows during the reporting year (details excluding MBS): 28 DG HYP Annual Report 2012

31 of Operations Report on Opportunities and Risks Report on Events After the Balance Sheet Date, and Forecast Employees Sovereign states* Banks Total Nominal values covered uncovered mn 31 Dec Dec Dec Dec Dec Dec Dec Dec 2011 Spain 2,716 3,214 1,085 1, ,801 4,427 Italy 1,568 1, ,748 1,798 Portugal Ireland Total 5,154 5,682 1,085 1, ,419 7,095 * including state-guaranteed corporate bonds and sub-sovereign issuers During the 2012 fiscal year, a portfolio of uncovered receivables from Spanish banks was reduced by 128 million in particular. All bonds were repaid in full at maturity. At the same time, the portfolio of Spanish government bonds fell by 498 million. In addition to scheduled repayments, securities with a nominal value of 65 million were sold in advance of their maturity date, resulting in realised losses of 6.7 million. The yields for the bonds of the countries listed above stabilised during the year under review. The hidden burden for DG HYP s securities (excluding MBS) that are carried as fixed assets totalled million (2011: 1,195.9 million) as at the balance sheet date. This contrasts with undisclosed reserves in the amount of million (2011: million). At several EU summits, the most recent being 13 and 14 December 2012, all participating leading politicians expressed their mutual determination to keep the European Monetary Union (EMU) intact. They stated that the haircut agreed upon for Greece in 2011 should be an isolated case. Given the expected write-backs on these assets, DG HYP s net asset situation is sound. Overall, there was an 9.9% reduction in DG HYP s loan portfolio during DEVELOPMENT OF LENDING VOLUME Change from the previous year mn 31 Dec Dec 2011 mn % Real estate lending 20,340 20, Public-sector and local authority loans 23,737 28,636 4, MBS 2,387 2, Total 46,465 51,572 5, DG HYP Annual Report

32 Management Report Economic environment Commercial Real Estate Finance market development Business development Refinancing Net Assets, Financial Position, and Results Regulatory capital DG HYP decided during the period under review to make use of the waiver option provided under section 2a of the German Banking Act (KWG) with effect from the reporting date of 31 December In accordance with section 2a (2) sentence 1 of the KWG, DG HYP wrote to Deutsche Bundesbank and the German Federal Financial Supervisory Authority (BaFin) on 22 November 2012 confirming its compliance with the conditions for the waiver. Consequently, the provisions of sections 10, 13 and 25a of the KWG (as codified in section 2a (1) of the KWG) no longer need to be applied by DG HYP on an individual basis but will be covered at Group level instead. However, DG HYP will continue to make use of the regulatory capital requirements for internal management purposes. The key financial indicators stabilised at a sufficiently high level during the year under review, as set out below: 31 Dec Dec 2011 Own funds for solvency purposes ( million) 1,445 1,472 Total capital ratio (%) Core capital ratio (%) FINANCIAL POSITION DG HYP s liquidity situation is adequate. The cash flow statement published as part of the annual financial statements shows the development of the financial position during the fiscal year under review. 30 DG HYP Annual Report 2012

33 of Operations Report on Opportunities and Risks Report on Events After the Balance Sheet Date, and Forecast Employees RESULTS OF OPERATIONS DG HYP s results of operations for the fiscal year 2012 were significantly influenced by the operating income of the well-established Commercial Real Estate Financing business division. In contrast, the temporary write-downs of European government bonds, which stabilised during the reporting year, did not impact on the result under commercial law. The other non-strategic portfolios MBS, subordinated debt, private construction financing business developed without major incident. Overall, the gratifying results situation in 2012, coupled with a higher than expected profit transfer to DZ BANK, also meant that a substantial transfer could be made to the contingency reserves. For the purposes of analysing the results of operations, DG HYP s profit and loss account is provided in condensed form below using key performance indicators. OVERVIEW OF THE PROFIT AND LOSS ACCOUNT Change from the previous year mn mn % Net interest income Net commission result Administrative expenses Net other operating income/expenses > Provisions for loan losses Securities and investment result Operating profit > A llocation to the fund for general banking risks Net extraordinary income/expenses Tax expense Partial profit transfer Profit transfer DG HYP Annual Report

34 Management Report Economic environment Commercial Real Estate Finance market development Business development Refinancing Net Assets, Financial Position, and Results Net interest income DG HYP s net interest income, which is still earned without structural measures contributing to profit, increased by 3.6% in 2012 compared with the previous year, up from million to million. A key factor was the scheduled expansion of the Commercial Real Estate Finance portfolio. The volume of new business generated is unchanged, reflecting what is a balanced risk/return profile. Net commission result The net commission result amounted to 37.2 million, exceeding the 24.1 million recorded during the previous year by a clear 54.4%, primarily as a result of the gratifying volume of new business. The commission income for servicing fees, which is positive in our business model over the long term, is accompanied by a fall in commission expenses for hedging credit risk. Administrative expenses Coupled with rising levels of new business, the rapidly changing regulatory requirements and planned changes to international accounting are creating challenges of a personnel and technical nature for DG HYP. Mainly as a result of these statutory obligations, project costs during the period under review were 3.3 million higher than during the previous year. Additionally, at 6.3 million, the amount of the bank levy paid in 2012 was 1.8 million more than in Consequently, the total amount paid by DG HYP during 2012 for supervisory and deposit-protection purposes was 16.0 million, or 15.0% of its total administrative expenses. Taking into account the necessary allocation to pension provisions in the amount of 2.5 million, administrative expenses during the 2012 fiscal year, at million, were 6.7% up on the previous year s figure of million. Net other operating income/expenses Net other operating income/expenses fell by 1.0 million compared with the previous year, down from 0.3 million to 0.7 million. A key factor in the stability of this item was the almost balanced profit from foreign currency conversion, in line with DG HYP s strategy. Provisions for loan losses At 44.8 million, provisions for loan losses were less than expected, down 8.7 million from the 2011 reporting year ( 53.5 million), reflecting the performance of our target business, which was without major incident. This fall is also the result of a marked stabilisation in the non-strategic portfolio of subordinated debt (B notes), with regard to which there were once again no unscheduled new allocations to provisions for loan losses during DG HYP Annual Report 2012

35 of Operations Report on Opportunities and Risks Report on Events After the Balance Sheet Date, and Forecast Employees Securities and investment result During the reporting period, net expenses (sales proceeds and necessary write-downs) of 24.2 million were incurred in relation to the MBS portfolio. The fact that these net expenses were 15.3 million lower than in the previous year ( 39.5 million) supports the expectation that DG HYP will be able to shoulder the default risks from this wind-down portfolio itself. Furthermore, Spanish government bonds with a volume of 65 million were sold ahead of their maturity date, resulting in realised losses of 6.7 million. Other valuation and realisation gains included in the result from securities and investments resulted in net income of 3.3 million. Operating profit/loss DG HYP s operating profit in 2012 was predominantly free of any extraordinary burdens from the non-strategic business divisions and thus reached an appropriate level for the business model of 98.0 million earlier than forecast. This gratifying result expressly confirms the appropriateness of the financial and strategic measures introduced since 2007 in order to bring economic stability to DG HYP. Change in the fund for general banking risks DG HYP s forecast long-term profitability is still being affected by uncertainties, particularly as a result of the ongoing government debt crisis. For this reason, once again in the 2012 fiscal year, on the basis of a reasonable commercial assessment, 60.0 million was allocated to the fund for general banking risks pursuant to Section 340g of the German Commercial Code (HGB) to take account of particular risks facing the business area. Net extraordinary income/expenses The restructuring process in progress at DG HYP has been positively supported by DZ BANK since 2007 in the form of extraordinary contributions to income (2011: million). In the 2012 fiscal year, the burdens from the non-strategic portfolios fell significantly and no longer had a material impact on DG HYP s operating income, with the result that no such contribution to income was required during the reporting year from DZ BANK. Net income In 2012 DG HYP allocated a partial profit of 22.9 million, reduced by 4.2 million due to interest rate levels, to its silent investors after making an appropriate allocation from its operating income to the contingency reserves. After taxes, an additional profit of 15.0 million is to be transferred to the owner DZ BANK. DG HYP s economic situation significantly improved during the 2012 fiscal year. The adequate situation in relation to net assets and financial position is accompanied by a viable business model. DG HYP Annual Report

36 JOINT FINANCINGS WITH COOPERATIVE BANKS Handelshof Leipzig Jointly financed with 30 German cooperative banks THE m.pire, Munich Jointly financed with 40 German cooperative banks Hotel zum Löwen, Duderstadt Jointly financed with Volksbank Mitte eg

37 Rheinwerk3, Bonn Jointly financed with VR-Bank Bonn eg Wohnpark am Strausberger Platz, Berlin Jointly financed with 5 German cooperative banks Designer Outlet Neumünster Jointly financed with Norderstedter Bank eg and VR Bank Neumünster eg Financing business built on partnerships Lending activities built on a spirit of partnership are the prerequisite for a successful cooperation. We are committed to the principle of give and take a principle that we put into practice within the framework of syndicated loans. In this way, cooperative banks have the ability to enter into larger-sized financings, strengthening their regional market position through this local presence across the whole of Germany, DG HYP has a nationwide presence in commercial real estate financing. DG HYP Annual Report

38 Management Report Economic environment Commercial Real Estate Finance market development Business development Refinancing Net Assets, Financial Position, and Results REPORT ON OPPORTUNITIES AND RISKS I) Risk management objectives and organisation a) Objectives of risk management As an integral part of DG HYP s strategic and operative management of the bank as a whole, the bank s risk management is closely integrated into the risk management and risk control systems of DZ BANK Group. Assuming risks in a targeted and controlled manner, observing target returns, is an element of enterprise management within the DZ BANK Group. The activities driven by the Group s business model require the ability to identify, measure, assess, manage, monitor and communicate risks. In addition, maintaining an adequate level of equity backing for risk exposure is fundamentally important as a prerequisite for the bank s continued operation. As a guiding principle for all business activities within the DZ BANK Group and hence, for DG HYP the bank assumes risk only to the extent required to achieve the objectives of its business policy. In this context, DG HYP is integrated into Group management processes, both through DZ BANK Group s committee structure and IRKS, the Group s integrated risk and capital management system which defines Groupwide standards for risk measurement and risk reporting. DG HYP decided to make use of the waiver option provided under section 2a of the German Banking Act (KWG) with effect from the reporting date of 31 December In accordance with Article 2a, paragraph 2, sentence 1 of KWG, DG HYP wrote to Deutsche Bundesbank and the German Federal Financial Supervisory Authority (BaFin) on 22 November 2012 confirming its compliance with the conditions for the waiver. Consequently, the provisions of sections 10, 13 and 25a of the KWG (as codified in section 2a (1) of the KWG) no longer need to be applied by DG HYP on an individual basis but will be covered at Group level instead. b) Responsibilities The regulatory organisational requirements and the allocation of risk management responsibilities are set out, in particular, in the Minimum Requirements for Risk Management (Mindestanforderungen an das Risikomanagement MaRisk). DG HYP meets these requirements, adapting its relevant processes to the specific needs of its business model. DG HYP has also developed and implemented risk management and risk control systems that fulfil the needs arising in the market and competitive environment, as well as the requirements arising from the bank s integration in the DZ BANK Group. This forms the basis that ensures the proper operation and efficiency of the risk management process. At Group level, the relevant tasks have been assigned to the following committees: Group Coordination Committee (CoCo). This committee is responsible for coordinating material DZ BANK Group entities, to ensure consistent management of business activities and risk exposure, capital allocation, strategic issues and the realisation of synergies. In 36 DG HYP Annual Report 2012

39 of Operations Report on Opportunities and Risks Report on Events After the Balance Sheet Date, and Forecast Employees addition to the entire Board of Managing Directors of DZ BANK, CoCo members include the Chairmen of the Management Boards of Bausparkasse Schwäbisch Hall, DG HYP, DZ PRIVATBANK, R+V Insurance, TeamBank, Union Asset Management Holding and VR LEASING. Group Risk Committee (GRC). The GRC is DZ BANK Group s central body for Group management and risk management pursuant to section 25a (1a) of the KWG. The committee s scope of responsibilities includes Groupwide risk capital management, as well as supporting the Group Coordination Committee with issues of fundamental importance. The GRC, which meets every quarter, consists of the members of the Board of Managing Directors of DZ BANK who are responsible for enterprise management, risk management, and Investment Banking, plus Management Board members of those Group entities that have a material influence on the Group s risk profile. The Group Risk Committee has established sub-committees entrusted with the preparation of GRC decisions, and the implementation of management measures. DG HYP is represented on the GRC as well as on its various sub-committees. DG HYP has established the following corporate bodies and committees: Risk/Return Management Committee. The Risk/Return Management Committee is responsible for managing the risks facing the entire bank at portfolio level and for allocation of risk capital. The Committee also decides upon the strategy to be adopted for asset/liability management, and determines the bank s liquidity costs to be taken into account for its lending business. As well as including the members of the Management Board, the Committee also comprises the heads of Finance and Treasury. Credit Committee. The Credit Committee is responsible for managing and monitoring all of DG HYP s credit risks. It comprises the entire Management Board and the heads of Front Office Credit and Back Office Credit. The Credit Committee decides on individual credit risk exposures, within the scope of authority granted to it. It also deals with strategic issues regarding the bank s lending business: in particular, these include the credit risk strategy, current risk events and risk provisioning, credit portfolio management as well as credit workflow optimisation. Risks and Participations Committee of the Supervisory Board. This Committee is responsible for decisionmaking regarding those loan exposures, portfolio transactions and participating interests that in line with the Internal Rules of Procedure do not fall within the remit of the Management Board. The Risks and Participations Committee also oversees risk management and the bank s overall strategy within the framework of the MaRisk. It receives the reports to be submitted to the supervisory body in the event of ad-hoc reporting that may be required pursuant to MaRisk. DG HYP Annual Report

40 Management Report Economic environment Commercial Real Estate Finance market development Business development Refinancing Net Assets, Financial Position, and Results Audit Committee of the Supervisory Board. The Audit Committee is responsible for supervisory issues in relation to accounting, the internal monitoring system and the requisite independence of the auditor of the financial statements. Supervisory Board. The entire Supervisory Board decides on the acquisition or disposal of participating interests in the event of changes exceeding 500,000 in the carrying amount of such interests, as well as on the establishment or disposal of business lines, establishing branches and representative offices, the internal rules of procedure of the Management Board, the business distribution plan, and on material issues related to loans or participations that are not explicitly assigned to the Risks and Participations Committee of the Supervisory Board. The Supervisory Board also discusses the bank s overall strategy, the risk strategies derived from it, as well as strategic and operational planning: these issues are presented to the Supervisory Board on a regular basis, where necessary. c) Functions Risk Planning. Planning, as a bank-wide exercise, comprises the planning of income and costs, as well as the risks associated with DG HYP s individual business activities. Based on the strategic business orientation as part of a 5-year plan, the bank derives its operative planning on an annual basis. Within this planning process, risk limits and earnings projections are determined, taking into consideration the risk-bearing capacity of DZ BANK Group. Risk Management. As part of the credit risk strategy defined by the committees detailed above, the back office together with Credit Risk Controlling is responsible for managing counterparty risk at an individual exposure level, and controlling risks at a portfolio level. The early identification of risk potential in lending business and the intensive handling, restructuring and settlement of loan commitments are governed by strictly defined processes and control systems. The management of market and liquidity risks is the responsibility of Treasury, within the scope of asset/liability management. Managing operational risk is the duty of the relevant organisational units, within the scope of their respective area of responsibility. The Management Board office is responsible for managing risks emanating from the bank s portfolio of participating interests. Internal control and risk management system related to the financial reporting process. As an issuer of publicly-traded securities (as defined in section 264d of the HGB), DG HYP is obliged, pursuant to section 289 (5) of the HGB, to outline the key features of the internal control and risk management system it has implemented with regard to the financial reporting process. DG HYP defines its internal control system as the principles, procedures and measures established by management for the purpose of ensuring that internal and external accounting and reporting systems are orderly and reliable. 38 DG HYP Annual Report 2012

41 of Operations Report on Opportunities and Risks Report on Events After the Balance Sheet Date, and Forecast Employees The risk management system encompasses all organisational rules and measures in place for the detection of risks, and for dealing with the risks that arise in association with our commercial activity. DG HYP has implemented a control and risk management system with regard to the financial reporting process. This system comprises measures to identify and assess material risks (and related risk mitigation measures) to ensure the proper preparation of the financial statements. Specifically, this includes: measures to ensure proper IT support for the processing of facts and data related to financial reporting; control mechanisms embedded in the accounting and financial reporting system and in operative business processes which generate material information required to prepare the financial statements, including the management report; adequate substitution regulations, control/release functions, the division of functions, and pre-defined authorisation processes. Risk Controlling. The Controlling units are responsible for current reporting and together with the respective risk management unit for monitoring risk on a portfolio level. For this purpose, Credit Risk Controlling prepares a MaRisk-compliant credit risk report on a quarterly basis outlining the key structural features of the lending business. To highlight concentrations of credit risk, portfolio exposure is broken down by geographical region, type of property, loan-to-value ratio, remaining term and rating class. In addition, portfolio evaluations form the basis for the annual review of the credit risk strategy. The report also includes a presentation of the bank s overall risk situation and of other material types of risk. A risk report for the bank as a whole is drafted monthly, illustrating credit risks as well as market price risks, operational risk, equity investment risk, as well as business and strategic risks. The measured risks are standardised for each risk type on the basis of a confidence level of 99.90% and a holding period of one year. The risk capital requirement calculated in this way for the bank as a whole is then contrasted against economic risk capital limits (maximum loss threshold). DG HYP s total risk capital requirements is determined by aggregating the risk capital requirements for the different types of risk, taking diversification effects into account. The diversified risk capital requirement reflects cross-relationships amongst the various risk types, which are mapped in a uniform, Group-wide correlation matrix. DG HYP reviews this matrix (as required in accordance with the MaRisk) as part of its annual adequacy checks. The maximum loss threshold is determined during the course of the planning process; besides the necessities emanating from DG HYP s portfolio structure and planned DG HYP Annual Report

42 Management Report Economic environment Commercial Real Estate Finance market development Business development Refinancing Net Assets, Financial Position, and Results volumes, it also reflects the risk-bearing capacity on a Group level, based on DZ BANK Group s ability to bear risk as determined in accordance with IFRS. This also incorporates DG HYP s hidden burdens resulting from DG HYP s securities holdings. Within the framework of DG HYP s integration in the DZ BANK Group, DG HYP s Controlling units calculate the effects that would result from the application of Groupwide scenarios for individual risk parameters across all material types of risk; this quarterly analysis is performed in line with uniform methods prescribed across the Group (economic stress testing). These calculations are supplemented by inverse stress tests and cross-risk-factor analyses which are also conducted on a Group-wide basis. The results subsequently submitted by all Group management units which are aggregated by DZ BANK Group Controlling provide the database foundation for DZ BANK Group s economic stress tests. Furthermore, Risk Controlling also carries out daily risk reporting and limit monitoring on the market risks and existing liquidity risks to which DG HYP is exposed, in accordance with MaRisk. The key findings are regularly reported to the Supervisory Board, or to the Risks and Participations Committee of the Supervisory Board. Risks arising from investments in other companies are only of minor significance to DG HYP. Internal Audit. As an independent unit, Internal Audit examines whether the demands on the internal controlling systems, the risk management and risk controlling systems, and the necessary reporting, are adequately met. d) Ongoing regulatory developments In close cooperation with DZ BANK, DG HYP analyses and evaluates the requirements resulting from ongoing regulatory developments. During 2012, a large part of DG HYP s activities in this context related to preparations for the introduction of the changed capital requirements known as Basel III, and of the liquidity indicators LCR and NSFR. Material project expenditure also arose through activities for adapting and developing Group-wide procedures to ensure DZ BANK Group s compliance with ICAAP standards. e) Requirements pursuant to section 27 of the German Pfandbrief Act The risk management system, which DG HYP had already implemented prior to the German Pfandbrief Act (Pfandbriefgesetz PfandBG ) coming into force, fulfils all requirements under section 27 of the PfandBG. The TXS-Pfandbrief application is used to determine the market risk exposure of cover assets pools, based on a coverage concept using present values, as set out in the Present Value Cover Regulation ( PfandBarwertV ) promulgated by BaFin. Stress scenarios simulating the impact of standardised interest rate shocks on the present value of cover assets pools are used to quantify the market risk exposure. 40 DG HYP Annual Report 2012

43 of Operations Report on Opportunities and Risks Report on Events After the Balance Sheet Date, and Forecast Employees BaFin has prescribed some structural parameters for these interest rate shock scenarios, as well as for the maximum impact these scenarios may have on the present value of the cover assets pools. A report on the present values and liquidity status of the cover assets pools is prepared on a daily basis and submitted to Treasury. In addition, a quarterly report is submitted to the Risk/Return Management Committee, which covers the more extensive PfandBG requirements regarding historical and future performance and credit risk exposure of the cover assets pools. In addition, the Committee receives a monthly report detailing the existing backlog for inclusion in cover, together with an analysis of reasons, on a case-bycase basis. The purpose of this supplementary report is to expedite inclusion in cover and thus to avoid unnecessary funding costs. Internal rules regarding the commencement of business in new products or markets comply with the requirements of the MaRisk as well as with those under section 27 of the PfandBG. II) Counterparty risk Risk management in the real estate lending sector focuses on the risk of counterparty default. Counterparty risk denotes the risk that a business partner has defaulted on a major liability for more than 90 days, and/or it is deemed unlikely that the business partner is able to honour his liabilities without the bank realising the pledged collateral. a) Lending process The front and back offices for commercial real estate finance in Germany are located in DG HYP s Real Estate Centres; for certain sub-markets, these functions are at DG HYP s head office. Key workflow stages include the credit rating, which is identified using rating procedures that comply with Basel II, and also property and project assessments. In the latter case, DG HYP benefits from the proximity of its Real Estate Centres and surveyors who are also decentralised to its clients. The loan application is authorised on the basis of lending volume and risk classification, observing the separation of functions prescribed by MaRisk. Market coverage, credit analysis and the processing of foreign mortgage loans, domestic secondary market transactions in the banking market and small-scale commercial real estate loans are dealt with centrally in Hamburg by specialist front-office and back-office departments. With regard to capital market products, the existing portfolio of Mortgage Backed Securities (MBS) is also looked after centrally in Hamburg by a specialist backoffice department. The bank no longer enters into new business in this type of product. b) Limit system DG HYP has a limit system in place to manage and monitor counterparty and country risks. This system calculates the utilisation of external limits (country risk limits in DG HYP Annual Report

44 Management Report Economic environment Commercial Real Estate Finance market development Business development Refinancing Net Assets, Financial Position, and Results the DZ BANK Group, and default risk limits in accordance with section 13 of the KWG), setting internal limits for country and default risks simultaneously and independently of one another. The respective limits can be viewed at any time via an online system. Back office units monitor the utilisation of individual limits on a daily basis, and initiate escalation procedures in the event of any limit transgressions. These procedures are designed to restore limit compliance. Group risk management incorporates an agreed traffic light system for the early detection of risks. c) Credit rating In order to take the particular demands on the commercial real estate lending business into account, DG HYP has developed (in cooperation with the central institutions of the Volksbanken Raiffeisenbanken cooperative financial network and BVR) and implemented a special Basel-II compliant rating system for specialised lending (SLRE Specialised Lending Real Estate). These rating procedures apply to the following customer groups: real estate developers, residential property developers, development companies, closed-end funds, project developers and commercial real estate investors. The procedures underwent comprehensive end-to-end validation, updates and optimisation processes during the period under review. Leveraging the high quality of its rating processes, DG HYP has been offering a web-based rating application to German cooperative banks since mid IMMO VR RATING provides member banks with a uniform measurement tool for default risk exposure of commercial real estate projects a feature that did not exist previously. Cooperative banks can apply the results for their internal risk management system (VR-Control). DG HYP has applied a new IRB rating procedure for the SLRE International rating segment since 2011, which has been approved by the regulatory authorities. For local authority lending, credit ratings are also estimated based on a rating method that complies with Basel II. DG HYP played a major role in developing the municipal rating system, particularly within the scope of a project where vdp joined forces with S&P Risk Solutions. DG HYP uses the VR rating procedures implemented in DZ BANK within the framework of a rating desk solution for the rating of sovereigns, banks and key accounts. As part of the implementation of Basel II, the review of loan exposures required under section 18 of the KWG which must be carried out at least once a year, and includes a rating update has been expanded to include all customer categories registered for IRBA. In addition, monitoring documents are prepared regularly for exposures exceeding 2.5 million per primary obligor group. The monitoring comprises the rating analysis and other customer records, an assessment of the current rental situation, and the tenant rating(s). The property or other collateral is revalued if deemed necessary. 42 DG HYP Annual Report 2012

45 of Operations Report on Opportunities and Risks Report on Events After the Balance Sheet Date, and Forecast Employees d) Management of problem loans DG HYP uses what is known as an individual risk management system for the purposes of early warning and the management of problem loans, this being used in a similar way at the parent company DZ BANK. Cases with early warning indicators are assigned to a so-called yellow list. Loans with regard to which a subsequent loss cannot be excluded are kept on a watch list. Where there is a clear negative trend, coupled with an existing requirement for risk provisioning in the form of individual value adjustments, the cases are included on the list of individual write-downs. The processing rules and requirements on the transfer from one ERM list to another are subject to defined criteria. Problem loans that are judged to have a favourable outlook are passed on to the Restructuring department for further processing. As a basis for a restructuring decision, a concept is submitted that must comprise a differentiated analysis and assessment of the overall situation of the exposure and a cost-benefit analysis, as well as a comprehensive restructuring plan. Loan exposures are transferred to workout if restructuring has failed or if this is deemed to be fruitless from the outset. Detailed reporting on ailing exposures is carried out quarterly. III) Market risks For DG HYP, the concept of market risks comprises the risks associated with fluctuations in market prices (market risks in the narrower sense), and liquidity risk. Market price risk is the impact of interest rate fluctuations on the money and capital markets, and changes in exchange rates. Liquidity risk comprises the threat that DG HYP is unable to borrow the funds required to maintain payments, or the risk of only being able to do so at considerably less favourable terms. a) Risks associated with market price fluctuations DG HYP uses various hedging tools in its dynamic management of interest rate risk and currency risk for the bank as a whole. This consists mainly of interest-rate swaps, cross-currency swaps and caps; options on interest-rate swaps (so-called swaptions) are also entered into, albeit to a limited extent. Each derivative hedge forms part of the overall management of the banking book; no segregated sub-portfolios are managed on an individual basis. In order to quantify the bank s market price risk exposure, DG HYP calculates VaR figures daily using a variance/co-variance procedure for all positions in each of the portfolios. This is done with due account being taken of the provisions of section 315 of the SolvV with regard to internal risk models. The forecasting quality of our internal VaR model is checked daily. We apply the requirements of section 318 of the SolvV for this back-testing. Market Risk Controlling compares the projected changes in present value that are DG HYP Annual Report

46 Management Report Economic environment Commercial Real Estate Finance market development Business development Refinancing Net Assets, Financial Position, and Results calculated according to these parameters, with the negative changes in present value that actually occur the following day. On this basis, we determine how often the actual negative changes in the present value exceeded the VaR figures in the risk model. The results from back-testing in 2012 confirm the quality of our calculations. Market Risk Controlling informs the Management Board (as well as the Treasury) on the day-to-day performance of the Treasury and the bank as a whole, and on the utilisation of the VaR limit and the sensitivity limits implemented. A multi-level escalation plan, comprising escalation paths and measures to be taken, has been implemented to deal with the breach of defined thresholds. The crisis scenarios used for this purpose are calculated monthly, also including those defined by BaFin (in Circular 11/2011) for the purposes of monitoring interest rate risk exposures of investments. The defined escalation plan provides for the monitoring of these calculation results. No escalation was required in the business year under review. DG HYP already brought its Treasury management into line with its new business model back in This involved a stronger focus on managing profit and loss, taking into account the intent to hold investment securities permanently. Following this realignment, the Treasury unit was no longer regarded as an independent profit centre. Daily calculations include a report on present-value contributions to results, as well as on the preceding day s contributions realised in income. This analysis also contains a breakdown of contributions into the share of interest income that is attributable to credit units of the business divisions, and the structural contribution generated by the Treasury. This approach also facilitates the management of profitability clusters within the bank. b) Liquidity risks The bank s liquidity situation is determined daily in line with the regulatory and daily business requirements. For this purpose, Market Risk Controlling provides Treasury with a differentiated overview on a daily basis, indicating future liquidity flows (comprising cash flows as well as a gap analysis of principal repayments and fixed interest mismatches) resulting from the individual positions in the portfolio. Additionally, at its meetings the Risk/Return Management Committee is provided with an overview of the short- and long-term liquidity projection. Liquidity is managed on the basis of this overview, with the dual objectives of securing the bank s long-term liquidity and achieving compliance with the Liquidity Regulation. A suitable liquidity controlling system is already in place in line with the requirements of MaRisk for measuring and reporting on liquidity risk (BTR 3.1 and 3.2). On the basis of the short- and long-term liquidity projection, a limit system is implemented on a daily basis and integrated into the risk monitoring process. The results from the scenario analyses which comply with the requirements set out in the relevant sections of MaRisk are fed into the risk analysis process. 44 DG HYP Annual Report 2012

47 of Operations Report on Opportunities and Risks Report on Events After the Balance Sheet Date, and Forecast Employees IV) Operational risks The Basel Committee defines operational risk as the risk of direct or indirect losses resulting from inadequate or failed internal processes, people and systems, or from external events. The DZ BANK Group has adopted this definition, albeit with marginal changes to detail in order to adjust it to the Group s own requirements. DG HYP has had a system for collecting and recording loss data in place since Incoming loss reports are collected systematically in a database arranged according to predefined categories: they are subsequently used as indicators for further improving the operating processes, and hence for reducing operational risks. In addition, all of DG HYP s organisational units have regularly conducted self-assessments since Current risks are estimated using a standardised electronic questionnaire. In addition, Risk Controlling carries out continuous plausibility and consistency checks. Self-assessments are supplemented by an annual risk potential assessment designed to quantify potential losses within DG HYP. In order to be able to identify operational risks in good time, an early warning system regularly records a total of 30 risk indicators (aligned with the Basel II risk factors, including system failures, fraud, staff fluctuation) and analyses results by way of a traffic light system. The current operational risk situation, agreed risk indicators and the collated loss reports are submitted anonymously within the scope of group-wide reporting to DZ BANK. In this way they are incorporated into DZ BANK Group s assessment of the operational risk situation. From an organisational perspective, DG HYP s Controlling unit is responsible for measuring operational risks. It reports regularly on operational risk issues to DG HYP s Management Board, and on the activities for further developing the quantification approach, within the scope of the Risk/Return Management Committee meetings. V) Business risks and strategic risks DG HYP defines business risk as the threat of losses arising from unexpected fluctuations in the bank s results which cannot be offset by cutting costs; assuming an unchanged business strategy, such fluctuations usually materialise on a short-term horizon (within a one-year period) due to changed external circumstances (e.g. in the business or product environment, or due to customer behaviour). Since 2010 DG HYP has modelled this risk using a so-called earnings volatility approach. In contrast, strategic risk is defined as the risk of future (erroneous) strategic management decisions, which are taken in response to developments concerning other types of risk. DG HYP manages this risk generally via investment calculations and projections, business plans including scenario-based simulations, cost/benefit analyses, and risk analyses. The regular review of business unit strategies is also a core element of the continuous process of business unit planning and control. The results of this review are regularly discussed with the Supervisory Board of DG HYP. DG HYP Annual Report

48 46 DG HYP Annual Report 2012 MARKET PRESENCE, CLOSE TO OUR CLIENTS

49 Knowing each other well In today s age of modern communications, personal contacts are ever more important. Over the years, we initiated numerous series of events, designed to keep the culture of personal contacts alive. To us, this also means establishing contacts between our real estate clients and Management Board members of German cooperative banks. In this way, we use our events to continuously expand our network, both at economic metropolis and across the regions. DG HYP Annual Report

50 Management Report Economic environment Commercial Real Estate Finance market development Business development Refinancing Net Assets, Financial Position, and Results REPORT ON EVENTS AFTER THE BALANCE SHEET DATE, AND FORECAST Report on material events after the reporting date Events after 31 December 2012 No events occurred between 1 January and 8 February 2013 that would have had a material impact on our 2012 results. Report on expected developments Cautionary forward-looking statement The forecast and other parts of the Annual Report include expectations and forecasts that relate to the future. These forward-looking statements, in particular those regarding DG HYP s business and earnings growth, are based on forecasts and assumptions, and are subject to risks and uncertainties. As a result, the actual results may differ materially from those currently forecast. There are many factors that impact on DG HYP s business and that are beyond its control. These factors primarily include changes to the general economic situation and the competitive arena, and developments on the national and international real estate and capital markets. In addition, results can be impacted by borrowers defaulting or by other risks, some of which are discussed in detail in the risk report. In this regard it should be noted that the global problem of high levels of government debt, and with it the waning trust in some countries long-term ability to remain solvent, are issues that have yet to be resolved despite tangible progress. Nevertheless, it can be assumed, on the basis of the decisions reached at the most recent EU summits, that the involvement of some private bondholders in the deal to write off Greek debt will remain a one-off case within the euro zone. Correspondingly, DG HYP has not included any further permanent impairments in its forecasts for the bank s public finance portfolio. Anticipated business development As the specialist for commercial real estate finance within the Volksbanken Raiffeisenbanken cooperative financial network, DG HYP has maintained its position as one of the leading German real estate banks, and will continue to strengthen this sound market position in the 48 DG HYP Annual Report 2012

51 of Operations Report on Opportunities and Risks Report on Events After the Balance Sheet Date, and Forecast Employees future. Activities relating to new business are increasingly being carried out on the basis of successful cooperation with the cooperative financial network. The development of the German investment market during the reporting year confirms the good prospects for successful operations. DG HYP consistently exploits these opportunities in order to affirm its higher market share, adopting a professional approach at all stages from the origination of business through to risk management. The bank s business model now has a proven track record, given the constantly rising operating profit in the target business. This gratifying development has been recorded at a time when the macroeconomic setting remains difficult for banks. Certainly, the policies pursued by the Central Bank, national governments and at European level last year have enabled visible progress to be made in tackling the government debt crisis. Similarly, there has been a fundamental improvement in the situation on the financial markets. The stricken countries can once again obtain funding at more favourable terms on the fixed-income market, capital is flowing back into the euro zone, and banks dependency on central bank money has been markedly reduced. However, the full force of these improvements is yet to filter through to the real economy. Not least because of this delay, further reform efforts will be needed to overcome the crisis, to restore order to public finances and to enable the banks to withstand crisis. Assuming this happens, DG HYP will once again engage in a sufficient level of new commercial real estate finance business in 2013, to ensure that the bank s results are stabilised for the long term on the basis of a balanced risk/return profile. The aim is to strike a good balance between profitability targets and elevated equity requirements, whilst closely adhering to the relevant regulatory requirements. At the same time, DG HYP will strive to secure its joint lending operations with German cooperative banks, with such business having risen to a total volume of 2.2 billion during the year under review. Earnings forecast During the 2012 fiscal year, DG HYP was able to raise the performance contributions from its operating business, DG HYP Annual Report

52 Management Report Economic environment Commercial Real Estate Finance market development Business development Refinancing Net Assets, Financial Position, and Results generating increased net interest income and net commission results in exchange for a disproportionately small increase in the cost base. This development will stabilise DG HYP over the years to come, enabling the bank to generate adequate net income, as the risk costs of the wind-down portfolios are reduced according to schedule. Net interest income is expected to continue to contribute 240 million. Non-strategic private real estate lending will continue to be successively replaced with commercial real estate lending, an area of business with higher margins. Both net commission result and administrative expenses have already reached the target level contained in the business model. Net commission income will remain a long-term component of DG HYP s income over the coming years based on the respective levels of new business recorded. General administrative expenses feature appropriate cost struc tures and have reached their long-term target, at 107 million. The bank levy introduced in 2011 will push expenses up, however, and result in a wider fluctuation range. DG HYP expects provisions for loan losses to be below the 50 million mark. This forecast conservatively accounts for the default risks that it is feared could occur during the 2013 fiscal year. Following its extensive portfolio adjustments of the recent past, the bank is now able to shoulder any discernible default risks in the Mortgage Backed Securities (MBS) and subordinated debt portfolios on its own. Non-strategic investments are intensively monitored using a detailed risk management system, regular analyses of individual exposures, and comprehensive stress testing. The development of material risk factors indicates stabilisation at the current low levels. 50 DG HYP Annual Report 2012

53 of Operations Report on Opportunities and Risks Report on Events After the Balance Sheet Date, and Forecast Employees Given the ongoing concerted efforts of the European Union (EU), International Monetary Fund (IMF) and European Central Bank (ECB), which remain as focused as ever, DG HYP expects to be able to refrain from further writedowns in its public finance portfolio. This will require no letting up in the reform efforts and political will to make the euro area countries more competitive and to ensure that they have solid state finances. A sustained solution to the government debt crisis will ultimately depend on the progress made in stabilising the crisis countries actually filtering through to the real economy. The predicted stabilisation of future operating results at 2012 levels could be influenced in the 2013 fiscal year by, in particular, a corporate bond guaranteed by the Greek state and due to mature in March with a nominal volume of 240 million. The ability of the issuer to meet its repayment obligations in relation to this illiquid bond cannot be definitively assessed as at the 2012 balance sheet date. In its forecasts for this security, DG HYP has assumed a permanent impairment of 75%. Given a current carrying amount for the bond of 60 million, full repayment on the due date would result in unscheduled realisation gains of 180 million. In contrast, were the issuer to default completely, the annual result for 2013 would be adversely affected by an unscheduled write-down of 60 million. Overall, DG HYP is pursuing a successful path. New business, geared towards our customers requirements, is helping to ensure that the bank s value added is permanently increasing. This is combined with a move away from capital market transactions that do not form part of our core business. At the same time, the process of building up the contingency reserves pursuant to Section 340g of the HGB, a process begun in 2012, has also strengthened DG HYP s ability to withstand crisis. DG HYP Annual Report

54 52 DG HYP Annual Report 2012 OUR EMPLOYEES

55 Being reliable, a good partner, and motivated Our employees are the foundation of our success. Without their performance, skills and strong commitment, we would not rank amongst the leading real estate banks on the German market. The individuals working for DG HYP turn the bank s strategy into reality, each and every day. Fairness, respect and trust these are the fundamental principles for the spirit of partnership within DG HYP. DG HYP Annual Report

56 Management Report Economic environment Commercial Real Estate Finance market development Business development Refinancing Net Assets, Financial Position, and Results EMPLOYEES An attractive employer The expertise and dedication of DG HYP s employees are the foundation on which the bank can successfully compete with its rivals on a long-term basis. The bank s success hinges on the performance of the people who work on its behalf. This is why it is so important that our employees demonstrate a sense of responsibility, team spirit and focus as they work together on a daily basis. DG HYP offers its employees an attractive position with good career opportunities, individual training and support. It is a highly regarded employer in its capacity as a bank and part of the Volksbanken Raiffeisenbanken cooperative financial network. Staffing levels The decision made in 2010 to focus business activities on German commercial real estate financing also dominated events during the 2012 calendar year. The associated expansion of joint activities resulted in the filling of the first positions in Kassel and Leipzig, and in an increase to the size of the credit risk management team. It is gratifying to note that the employee turnover rate in the 2012 fiscal year was 2.8%, down from 8% for the previous year. At 2.1%, the proportion of employees choosing to leave the bank was down on the previous year s figure of 2.6%. As at the end of the reporting year, DG HYP employed a total of 418 active members of employees (corresponding to DG HYP S MANAGEMENT GUIDELINES RESPECT builds connections Commitment to PROMOTION AND CHALLENGE ensures qualification TRANSPARENCY creates clarity TRUST provides strength CHANGE is what moves us M ANAGEMENT GUIDELINES RESPONSIBILITY motivates 54 DG HYP Annual Report 2012

57 of Operations Report on Opportunities and Risks Report on Events After the Balance Sheet Date, and Forecast Employees FTE), which was slightly below the 2012 approved planned staffing level (409 FTE). This slight discrepancy in the numbers was mainly due to newly created positions in 2012 that have not yet been filled. Management guidelines drawn up DG HYP has dealt intensively with questions relating to its own identity and its understanding of its role. The result has been the DG HYP mission statement setting out the bank s vision and core values. This was also used as an opportunity to consider binding quality benchmarks for good management, cooperation and communication. In addition to its mission statement, DG HYP has also drawn up management guidelines. These are an integral part of the mission statement and describe the type of management and cooperation culture that the bank is striving to achieve. The task for all of DG HYP s employees is to take these guidelines and turn them into everyday reality. Managers in particular have a duty to set an example as they go about their day-to-day work. A development programme has been devised to provide managers with the best possible support when implementing the management guidelines. As a first stage in this process, workshops were staged to analyse needs and to investigate what managers wanted from the programme. Based on the workshop findings, a specifically tailored management development programme was subsequently produced. Individual discussions between representatives from the HR department and every manager ensure that the correct measures are selected from the available range and that each individual manager gains the best possible benefit from the programme. The range on offer extends from in-house seminars to workshops dedicated to cooperation issues and a Leadership expert forum with case-by-case advice through to individual coaching. Implementation of this programme has enabled DG HYP to develop a uniform understanding of the concept of good management and has optimised the bank s management culture as a whole. CPD measures intensified DG HYP pursues a needs-based HR development concept, which is strategically designed and market-based. In this way the bank is firmly focused on its vision: 100% market coverage always the first port of call. Its clear focus on this vision is also combined with ongoing adjustments as the market environment changes. Ensuring that every individual is qualified to meet the requirements of their job is one of the essential factors in the bank s longterm success. This is why DG HYP makes targeted investments in CPD measures for its employees. The measures available range from the bank s own in-house seminars to departmental training, team-building exercises, workshops, language courses and IT training sessions. DG HYP employees also attend a variety of external training seminars. The range of CPD is completed by the DG HYP Training Academy, which has firmly established itself since its launch in The aim of the Training Academy is to offer employees a high level of broadly based specialist training. The bank s cooperation partner in this venture is the International Real Estate Business School IRE BS Immobilienakademie, one of the most renowned providers of CPD in the real estate sector. The second year of the Training Academy was successfully concluded in 2012, and the third year is due to start in May Company health management scheme introduced One of the key priorities in 2012, alongside training for employees, was the issue of health at the workplace. Increasing demands, psychological stress and chronic illnesses are becoming an ever greater focus of HR policy in order to ensure that the bank can rely on a good employee base over the long term. By introducing an all-encompass- DG HYP Annual Report

58 Management Report Economic environment Commercial Real Estate Finance market development Business development Refinancing Net Assets, Financial Position, and Results ing company health management scheme, DG HYP is looking to counter the risks that can emerge and to create further opportunities for the bank. The first elements in the company health management system have already been put in place with measures to improve workstation ergonomics, company sport, reintegration measures and HR development measures. With further preventive actions covering exercise, nutrition, relaxation and work/life balance, the scheme covers all aspects of health at work. The aim is to promote employees health and well-being, to support them in the creation of healthpromoting resources and also to identify and reduce working conditions and stresses that can have an adverse impact on workers health. Strengthening the employer brand As one of Germany s leading real estate banks and an expert in commercial real estate finance, DG HYP is reliant on exceptionally well trained and dedicated employees. With this in mind, HR activities are geared around making ongoing improvements to DG HYP s attractiveness as an employer, both internally and externally. By actively marketing the benefits of working for DG HYP, the bank ensures that it has a permanent supply of suitably qualified employees. During the 2012 fiscal year the bank actively began to position the DG HYP employer brand on the market in a targeted manner. This takes place using a balanced HR marketing mix, encompassing online, print and face-toface measures, and is also being consistently developed further. Particularly important in this regard is the design of a state-of-the-art careers website, which is due to come online during the first half of Activities in the DZ BANK Group Within the DZ BANK Group efforts are being made for closer integration in the area of HR. The Group s management boards have entered into joint undertakings on issues that will form the milestones of their HR work. These include, for example, successful participation in Logib-D, a comparison of pay levels with regard to equal wages for men and women, and the signing of the Diversity Charter, according to which all employees are to be valued regardless of gender, nationality, ethnic origin, religion or belief, disability, age, sexual orientation and identity. Reconciling family and working life Employees motivation levels are heavily dependent on the extent to which DG HYP, in its capacity as an employer, can react flexibly to their needs. Enabling employees to reconcile the demands of family and working is increasingly becoming a key aspect. With this in mind, selected employees are involved in the creation of measures that enable DG HYP to meet its employees needs even more effectively and to generate added value for everyone involved. Plans are in place for certification through the Hertie Foundation in Cooperation with the Works Council Cooperation with the Works Council continued to be constructive and based on mutual trust during the year under review, with various joint projects being successfully initiated. These include the company health management scheme and measures to help employees reconcile the demands of family and working life. DG HYP would like to thank the Works Council for the good working relationship enjoyed over the past year. 56 DG HYP Annual Report 2012

59 Financial Statements Balance Sheet Profit and Loss Account Notes to the Financial Statements Statement of changes in equity Cash flow statement FINANCIAL STATEMENTS Financial Statements Page Balance Sheet 58 Profit and Loss Account 60 Notes to the Financial Statements General Notes 61 Notes to the Balance Sheet 63 Notes to the Profit and Loss Account 75 Coverage 76 Other information on the annual financial statements 82 Statement of changes in equity 85 Cash flow statement 86 DG HYP Annual Report

60 Financial Statements Balance Sheet Profit and Loss Account Notes to the Financial Statements Statement of changes in equity Cash flow statement BALANCE SHEET AS AT 31 DECEMBER 2012 ASSETS 31 Dec Dec s Note # 000 s 000 s 000 s Cash funds 4,495 a) Cash on hand b) Balances with central banks 4,495 of which: with Deutsche Bundesbank 4,495 ( ) Loans and advances to banks (4) 3,254,814 3,130,335 a) Mortgage loans 26,938 52,975 b) Loans to local authorities 1,347,079 1,378,833 c) Other loans and advances 1,880,797 1,698,527 of which: Payable on demand 97,037 (163,183) Loans and advances to customers (4) 32,894,660 33,345,186 a) Mortgage loans 20,313,454 20,045,117 b) Loans to local authorities 11,460,425 12,201,990 c) Other loans and advances 1,120,781 1,098,079 Debt securities and other fixed-income securities (7) 14,828,490 19,335,949 a) Bonds and debt securities (14,756,057) (18,350,308) aa) Public-sector issuers 7,436,755 8,500,068 of which: Securities eligible as collateral with Deutsche Bundesbank 6,694,674 (7,987,742) ab) Other issuers 7,319,302 9,850,240 of which: Securities eligible as collateral with Deutsche Bundesbank 5,141,531 (7,358,998) b) Own bonds issued 72, ,641 Nominal amount 70,071 (985,290) Equities and other non-fixed-income securities (7) 1,316 1,316 Participations (7) 49 Investments in affiliated companies (7) 1,566 1,566 Trust assets (6) 2,949,950 1,673,801 of which: Trustee loans 2,917,240 (1,641,091) Intangible fixed assets (7) Concessions, industrial property rights and similar rights and assets as well as licences in such rights and assets Tangible fixed assets (7) 149, ,760 Other assets (23) 3, ,250 Prepaid expenses (9) 278, ,212 a) From new issues and lending 277, ,493 b) Other 1,421 1,719 Total assets 54,367,873 58,016, DG HYP Annual Report 2012

61 BALANCE SHEET AS AT 31 DECEMBER 2012 LIABILITIES AND EQUITY 31 Dec Dec s Note # 000 s 000 s 000 s Liabilities to banks (11) 16,479,463 16,520,860 a) Outstanding Registered Mortgage Pfandbriefe (Hypotheken-Namenspfandbriefe) 1,740,913 1,498,353 b) Outstanding Registered Public Pfandbriefe (öffentliche Namenspfandbriefe) 1,531,256 1,866,115 c) Other liabilities 13,207,294 13,156,392 of which: Payable on demand 469,063 (228,606) Registered Mortgage Pfandbriefe 436 (827) and Registered Public Pfandbriefe surrendered to lenders as collateral for borrowings Liabilities to customers (11) 12,860,429 13,878,394 a) Outstanding Registered Mortgage Pfandbriefe (Hypotheken-Namenspfandbriefe) 2,574,246 2,602,881 b) Outstanding Registered Public Pfandbriefe (öffentliche Namenspfandbriefe) 8,745,939 9,649,388 c) Other liabilities 1,540,244 1,626,125 of which: Payable on demand 351,402 (173,737) Registered Mortgage Pfandbriefe 5,113 (5,113) and Registered Public Pfandbriefe surrendered to lenders as collateral for borrowings Securitised liabilities (11) 19,491,815 23,505,458 Bonds issued a) Mortgage Pfandbriefe (Hypothekenpfandbriefe) 9,001,597 9,567,945 b) Public Pfandbriefe (öffentliche Pfandbriefe) 9,931,764 12,431,048 c) Other debt securities 558,454 1,506,465 Trust liabilities (6) 2,949,950 1,673,801 of which: Trustee loans 2,917,240 (1,641,091) Other liabilities (24) 51,960 42,329 Deferred income (9) 257, ,940 a) From new issues and lending 257, ,909 b) Other Provisions 114, ,122 a) Provisions for pensions and similar obligations 98,284 95,357 b) Other provisions 16,498 15,765 Subordinated liabilities (12) 643, ,331 Profit-participation certificates (13) 51,129 51,129 of which: Due within two years 51,129 ( ) Fund for general banking risks 60,000 Equity (14) 1,407,258 1,407,258 a) Subscribed capital (725,000) (725,000) aa) Share capital 90,000 90,000 ab) Silent partnership contributions 635, ,000 b) Capital reserves 589, ,113 c) Retained earnings (93,145) (93,145) ca) Legal reserves cb) Other retained earnings 92,200 92,200 Total equity and liabilities 54,367,873 58,016,622 Contingent liabilities (15) Liabilities from guarantees and indemnity agreements 540, ,352 Other commitments (16) Irrevocable loan commitments 2,595,470 2,376,396 DG HYP Annual Report

62 Financial Statements Balance Sheet Profit and Loss Account Notes to the Financial Statements Statement of changes in equity Cash flow statement PROFIT AND LOSS ACCOUNT FOR THE PERIOD FROM 1 JANUARY TO 31 DECEMBER s Note # 000 s 000 s 000 s Interest income from a) Lending and money market transactions 1,455,667 1,620,637 b) Fixed-income securities and debt register claims 537, ,004 1,993,552 2,303,641 Interest expense 1,755,847 2,071, , ,170 Current income from equities and other non-fixed-income securities 9 41 Income from profit-pooling, profit transfer, and partial profit transfer agreements 3, Commission income 47,057 35,458 Commission expenses 9,871 11,316 Net commission result 37,186 24,142 Other operating income (27) 9,631 11,519 General administrative expenses a) Personnel expenses aa) Wages and salaries 35,331 33,137 ab) Compulsory social security contributions and expenses for pensions and other employee benefits 7,376 7,346 42,707 40,483 of which: Pension expenses 2,921 (2,901) b) Other administrative expenses 61,826 57, ,533 97,868 Amortisation/depreciation and write-downs of intangible and tangible fixed assets 2,661 2,688 Other operating expenses (28) 10,350 11,177 Amortisation and write-downs of loans and advances and specific securities, as well as additions to loan loss provisions 43, ,485 Amortisation and write-downs on participations, interests in affiliated companies, and investment securities 29, ,047 Addition to the fund for general banking risks 60,000 Result from ordinary activities 38, ,802 Extraordinary income 173,000 Extraordinary expenses Net extraordinary income/expenses 173,000 Income taxes Other taxes not disclosed under Other operating expenses Profits transferred under profit transfer agreements 15,000 Profits transferred under partial profit transfer agreements 22,871 27,053 Net income 60 DG HYP Annual Report 2012

63 Financial Statements Balance Sheet Profit and Loss Account Notes to the Financial Statements Statement of changes in equity Cash flow statement NOTES TO THE FINANCIAL STATEMENTS General notes (1) General information on the preparation of financial statements The financial statements of DG HYP for the financial year 2012 have been prepared in accordance with the provisions of the German Commercial Code (Handels - gesetzbuch HGB ). Furthermore, the financial statements are prepared in accordance with the Regulation on the Accounting of Credit Institutions and Financial Services Institutions (Verordnung über die Rechnungslegung der Kreditinstitute und Finanzdienstleistungsinstitute RechKredV ); they fulfil the requirements of the German Stock Corporation Act (Aktiengesetz AktG ) and the German Pfandbrief Act (Pfandbriefgesetz PfandBG ). Given the non-materiality of all subsidiaries in accordance with section 290 subsection 5 of the HGB in conjunction with section 296 subsection 2 of the HGB, the company has not prepared consolidated financial statements. All amounts are stated in euros, in accordance with section 244 of the HGB. (2) Accounting policies The present financial statements are generally based on the same accounting policies as were applied in the financial statements as at 31 December Loans and advances to banks/to customers Loans and advances to banks and customers are recognised at nominal value, in accordance with section 340e (2) of the HGB. Where their stated value differs from the amount disbursed, or cost, the amount of the difference is reported under prepaid expenses or deferred income, and amortised in interest income over the term of the transaction. Loans and advances which are fully classified as current assets are valued strictly at the lower of cost or market. All existing individual lending risks are covered by specific loan loss provisions. As prescribed by international accounting standards, changes over time in the value of real estate collateral recognised for the purposes determining the value of Commercial Real Estate Finance receivables are reported in net interest income. This so-called unwinding effect amounted to 5.5 million in Besides this policy, no income received on commercial real estate financings for which a specific provision has been recognised is reported in net interest income: receipts for such exposures are set off against the provision for loan losses. In case of settlement of a private real estate financing, interest income is no longer recognised where it becomes obvious during execution proceedings that the realisable proceeds will fall short of the carrying amount. Existing risks of default in the retail lending business are covered by recognising specific provisions at a flat rate. Taxdeductible general loan loss provisions are formed to cover expected loan losses which have been incurred (but not identified as such) at the balance sheet date. Specific provisions for possible loan losses related to country risk exposure under claims to foreign borrowers are recognised in the form of a lump-sum allowance. Prepayment damages claimed for loan repayments or extensions during the fixed-interest term of a loan are fully recognised in interest income. Debt securities and other fixed-income securities At the balance sheet date, all debt securities and other fixed-income securities are carried as fixed assets (investment securities), at amortised cost, except repurchased own issues which are valued strictly at the lower of cost or market. These items are recognised at amortised cost. Premiums and discounts are amortised in net interest income over the term of the transactions. The fair value of debt securities and other fixed-income securities is determined on the basis of market prices provided by external sources or close-to-market valuation parameters. If market prices are not available, the fair value is determined using the discounted cash flow method based on close-to-market parameters. Equities and other non-fixed-income securities Equities and other non-fixed-income securities are carried at amortised cost. Participations and interests in affiliated companies Participations and interests in affiliated companies are carried at amortised cost. Intangible and tangible fixed assets Tangible fixed assets are carried at cost less regular depreciation, where applicable. Where necessary, extraordinary write-downs were taken into account in accordance with section 253 (3) sentence 3 of the HGB. Moveable fixed assets are depreciated on a straight-line basis, or degressively with a subsequent transfer to straight-line depreciation. Low-value assets are written off in full during their year of purchase. Standard software is reported under intangible assets, as prescribed by accounting standard DG HYP Annual Report

64 Financial Statements Balance Sheet Profit and Loss Account Notes to the Financial Statements Statement of changes in equity Cash flow statement HFA 11 issued by the Main Committee of the IDW (IDW RS HFA 11). Liabilities Liabilities are shown on the balance sheet at the amount due for repayment. The difference between the nominal value and the initial carrying amount of liabilities is recognised under prepaid expenses or deferred income, and amortised over the term of the transaction. Liabilities classified as structured products (as defined in Accounting Standard 22 issued by the Auditing and Accounting Board of the IDW) are accounted for as uniform liabilities, since they only contain embedded interest rate derivatives. Provisions Contingent liabilities are covered by provisions equalling the anticipated amount of the liability, on the basis of prudent business judgement. Provisions for pensions are recognised in accordance with actuarial principles and determined on the basis of the projected unit credit method, using Dr Klaus Heubeck s 2005 G actuarial tables. The calculation of the provisions takes into account future salary increases of 2.5% p.a. as well as pension increases of 2.0% p.a. The discount rate of 5.05% as determined by Deutsche Bundesbank was used. The addition to provisions for pensions due to interest rate effects is recognised in other operating expenses. Derivative financial instruments Financial derivatives are accounted for separately in auxiliary ledgers. These instruments are generally used to hedge against the interest rate and currency risk exposure of on-balance sheet transactions. Each derivative transaction forms part of the overall management of the banking book; segregated sub-portfolios (valuation units) are not managed on an individual basis. Accordingly, section 254 of the HGB (as amended) is not applicable. In accordance with Statement IDW RS BFA 3 issued by the Banking Committee of the Institute of Public Auditors in Germany (IDW), the fair value measurement (verlustfreie Bewertung) of the banking book is based on the present value. As at the balance sheet date, DG HYP is not obliged to recognise a provision pursuant to section 340a in conjunction with section 249 (1) sentence 1 alternative 2 of the HGB since the carrying amount of the banking book is larger than the present value of the banking book. Current interest payments are amortised and recorded in net interest income. In connection with the early redemption of hedged items recognised on the balance sheet, DG HYP also generally sells interest rate-based derivative financial instruments. Any resulting gains are reported in net interest income. Premiums paid or received for credit default swaps are amortised in commission income over the terms of the transactions. Compensation payments received under Credit Default Swaps are offset against provisions for loan losses. (3) Currency translation Assets and liabilities from foreign exchange transactions are translated in line with section 340h in conjunction with section 256a of the HGB and the Statement IDW RS BFA 4 issued by the Banking Committee of the Institute of Public Auditors in Germany (IDW). Book receivables, securities, liabilities and unsettled spot transactions denominated in foreign currencies are translated into euro using the ECB reference rate. Due to the specific coverage of all existing foreign currency items, all currency translation effects have been recognised in income. Currency translation effects are reported in net other operating income/expenses. 62 DG HYP Annual Report 2012

65 Notes to the Balance Sheet (4) Lending business Principal Carrying amount Mortgage loans mn mn to banks to customers 20,072 20,313 Total 20,100 20,340 Portfolio development (principal) mn mn Balance at 31 Dec ,939 Additions during the financial year ,292 through Disbursements 4,265 Reclassifications Other additions 27 Disposals during the financial year ,131 through Scheduled repayments 2,987 Unscheduled repayments 598 Reclassifications 546 Other disposals Balance at 31 Dec ,100 Principal Carrying amount Loans to local authorities mn mn to banks 1,328 1,347 to customers 11,372 11,460 Total 12,700 12,807 Portfolio development (principal) mn mn Balance at 31 Dec ,471 Additions during the financial year ,267 through Disbursements 1,265 Reclassifications Other additions 2 Disposals during the financial year ,038 through Scheduled repayments 2,010 Unscheduled repayments 28 Reclassifications Other disposals Balance at 31 Dec ,700 Within the scope of cover pool management for Public Pfandbriefe bonds and promissory note loans of German Federal states (Bundesländer) were purchased maturing in the years 2016 and The required cash funds were provided through the sale of securities (Landesbanken subject to state guarantees) maturing in the years 2013 and DG HYP Annual Report

66 Financial Statements Balance Sheet Profit and Loss Account Notes to the Financial Statements Statement of changes in equity Cash flow statement (5 ) Negotiable securities Balance sheet item Listed Unlisted Carrying amount of negotiable securities not valued at the lower of cost or market 31 Dec Dec Dec Dec Dec Dec s 000 s 000 s 000 s 000 s 000 s Debt securities and other fixedincome securities 13,347,735 17,732,165 1,480,755 1,603,784 8,004,818 11,877,690 Equities and other non-fixed income securities 1,316 1,316 As at 31 December 2012, we did not recognise an extraordinary write-down in the aggregate amount of 1,600.8 million for negotiable securities with a fair value of 6,404.0 million not measured at the lower of cost or market, due to the expected temporary nature of the impairment, pursuant to section 253 (3) sentence 4 of the HGB. This assumption is based on the decisions reached at the most recent EU summits, according to which the involvement of some private bondholders in the deal to write-off Greek debt will remain a one-off case within the euro zone. The appropriateness of write-downs in the MBS portfolio is being verified through regular credit analyses of individual exposures, and default simulations using stress testing. Taking into account the compensating effects from hedges within the context of the overall management of the bank, these hidden burdens in relation to the entire non-trading portfolio increased to 3,006.1 million. 2,276.4 million of which relate to securities attributable to the so-called PIIGS countries. Since impairments of interest and principal payments are not expected to occur in our view with respect to the securities concerned and the hedges, no write-downs pursuant to section 253 (3) sentence 4 of the HGB were recognised based on such a high-level portfolio view. We had to recognise extraordinary write-downs on Mortgage Backed Securities (MBS) in the amount of 19.4 million, pursuant to section 253 (3) sentence 3 of the HGB, because we expected the impairment of the securities to be of a permanent nature. The carrying amount of securities held as liquidity reserve, valued strictly at the lower of cost or market, amounted to 70.7 million. 64 DG HYP Annual Report 2012

67 (6) Trust business 31 Dec Dec s 000 s Assets held in trust comprise: Loans and advances to customers 2,917,240 1,641,091 Participations 32,710 32,710 2,949,950 1,673,801 Trust liabilities are carried vis-à-vis: Banks 2,888,210 1,609,868 Customers 61,740 63,933 2,949,950 1,673,801 (7) Breakdown of, and statement of changes in fixed assets Purchase or production cost Depreciation and amortisation Carrying amounts 1 Jan 2012 Additions Reclassi- Disposals in the Reclassi- Disposals Total 31 Dec Jan 2012 fications financial fications year 000 s 000 s 000 s 000 s 000 s 000 s 000 s 000 s 000 s 000 s I. Intangible fixed assets 1. Software 32, , ,568 30, II. Tangible fixed assets 1. Land and buildings 178, ,078 30, ,224 1 ) 149, Office furniture and equipment 2 ) 6, , ,418 3,511 1, , ,421 2,394 2,418 34, , ,760 Additions Disposals III. Financial assets 1. Participations Investments in affiliated companies 1,566 1,566 1, Equities and other non-fixed income securities 1,316 1,316 1, Investment securities 18,586, ,083 4,902,707 14,568,016 18,069,731 18,589, ,132 4,902,707 14,570,947 18,072,613 1) Owner-occupied properties: 60.5 million; used by third parties: 87.7 million. 2) Fully used for the bank s own operations. DG HYP Annual Report

68 Financial Statements Balance Sheet Profit and Loss Account Notes to the Financial Statements Statement of changes in equity Cash flow statement (8) List of investments pursuant to sections 285 no. 11 and 340a of the HGB Minimum stake of 20% Equity interest Equity Result 2012 Name/registered office % 000 s 000 s VR WERT Gesellschaft für Immobilienbewertungen mbh, Hamburg ,016 *) VR HYP GmbH, Hamburg **) VR REAL ESTATE GmbH, Hamburg **) TXS GmbH, Ellerau **) *) Profit and loss transfer agreement with DG HYP **) Result for the financial year 2011 (9) Prepaid expenses and deferred income Prepaid expenses Sub-item a) From new issues and lending comprises: 31 Dec Dec s 000 s Difference between the nominal amount and the higher disbursement amount of receivables 109,096 2,780 Difference between the nominal amount and the lower issuing amount of liabilities 31,750 37,780 Deferred income Sub-item a) From new issues and lending comprises: Difference between the nominal amount and the lower disbursement amount and receivables 47,154 47,933 (10) Securities repurchase agreements 31 Dec Dec s 000 s Carrying amount of securities pledged under repo agreements 1,596,822 2,369,262 Repurchase amount 1,597,482 2,377, DG HYP Annual Report 2012

69 (11) Breakdown of, and statement of changes in debt securities and borrowed funds Carrying Principal amount mn mn Registered Mortgage Pfandbriefe to banks 1,717 1,741 to customers 2,524 2,574 Mortgage Pfandbriefe 8,929 9,002 13,170 13,317 Registered Public Pfandbriefe to banks 1,502 1,531 to customers 8,546 8,746 Public Pfandbriefe 9,723 9,932 19,771 20,209 Other debt securities Borrowed funds from banks 9,014 9,025 from customers 1,153 1,185 10,167 10,210 Total 43,657 44,294 Development (principal) Balance on Additions Disposals Reclassifications Balance on 31 Dec 2011 and other 31 Dec 2012 adjustments mn mn mn mn mn Mortgage Pfandbriefe and Registered Mortgage Pfandbriefe 13,512 1,973 2, ,170 Public Pfandbriefe and Registered Public Pfandbriefe 23,416 3, ,771 Other debt securities 1, Borrowed funds 9,158 1, ,167 Total 47,573 3,631 7, ,657 DG HYP Annual Report

70 Financial Statements Balance Sheet Profit and Loss Account Notes to the Financial Statements Statement of changes in equity Cash flow statement (12) Subordinated liabilities 31 Dec Dec s 000 s Subordinated other debt securities 145, ,000 borrowed funds 498, , , ,331 Expenses incurred 22,780 26,199 On the basis of the requirements of section 10 (5a) of the German Banking Act (Kreditwesengesetz KWG ), an amount of 529,050 thousand is included as modified available capital for solvency purposes. Early repayment obligations are excluded in all cases. There are no provisions or plans for a conversion of such funds to capital, or into another form of debt. Subordinated liabilities carry an average interest of 3.1%, and have original maturities of between 5 and 20 years. Statement of subordinated liabilities amounting to 10.0% or more of the aggregate amount of subordinated liabilities: Amount Currency Coupon Maturity mn % EUR Dec EUR Nov EUR Jan EUR Nov 2015 (13) Profit-participation certificates Issuer Year of issue Amount Coupon Repayment* mn % DG HYP Jun 2014 * The term ends on 31 December of the preceding year. Profit-participation certificates no longer qualify as supplementary capital pursuant to section 10 (5) of the KWG. The holders of profit-participation certificates receive an annual distribution in the amount of the respective coupon, which takes precedence over the profit entitlements of shareholders. 68 DG HYP Annual Report 2012

71 (14) Equity The share capital amounts to 90 million and is divided into 3,500,000 notional no-par value shares ( unit shares ). The 3,500,000 shares (100%), are held by DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt/Main, Germany. 1,131,320 shares are held in trust on behalf of DZ BANK AG Deutsche Zentral-Genossenschaftsbank AG, Frankfurt/Main, Germany, by other entities. Pursuant to a resolution adopted by the Supervisory Board of 6 December 2012, DZ BANK AG issued an unrestricted letter of comfort for DG HYP. The silent partnership contributions are unlimited and comply with the provisions of section 10 (4) of the KWG on the balance sheet date. These contributions represent partial profit transfer agreements within the meaning of section 292 (1) no. 2 of the AktG. (15) Contingent liabilities Contingent liabilities comprise mainly guarantees for commercial real estate loans, million of which extended to DZ BANK AG. The bank s credit risk management is responsible for monitoring contingent liabilities. (16) Other commitments Irrevocable loan commitments of 2,595.5 million are related primarily to mortgage financing. (17) Obligations DG HYP is a member of the deposit insurance scheme of the National Association of German Cooperative Banks (Bundesverband der Deutschen Volksbanken und Raiffeisenbanken BVR ). In this context, DG HYP has issued a letter of indemnity to BVR. As a result, DG HYP is liable to contingent liabilities in the amount of 25.9 million. (18) Revaluation reserves No revaluation reserves pursuant to section 10 (2b) sentence 1 no. 6 of the KWG were included in liable capital. DG HYP Annual Report

72 Financial Statements Balance Sheet Profit and Loss Account Notes to the Financial Statements Statement of changes in equity Cash flow statement (19) Relationships with affiliated enterprises and subsidiaries Affiliated enterprises 31 Dec Dec s 000 s Loans and advances to banks 1,039, ,755 customers 26,946 29,954 Debt securities and other fixed-income securities Liabilities to banks 14,013,283 13,902,989 customers 698, ,827 Securitised liabilities 3,858,920 4,790,752 Subordinated liabilities 406, ,000 Subsidiaries Loans and advances to subsidiaries amounted to 16 thousand as at the balance sheet date; there were no liabilities to subsidiaries. (20) Related-party transactions There were no related-party transactions entered into at terms not in line with prevailing market terms which would give rise to a disclosure duty pursuant to section 285 no. 21 of the HGB. 70 DG HYP Annual Report 2012

73 (21) Breakdown of maturities for loans and advances, and liabilities 31 Dec Dec s 000 s Assets Loans and advances to banks Remaining term payable on demand 97, ,183 up to three months 1,326,354 1,098,135 between three months and one year 603,391 34,280 between one year and five years 1,105,155 1,603,296 more than five years 122, ,441 3,254,814 3,130,335 Loans and advances to customers Remaining term payable on demand 266, ,819 up to three months 1,353,253 1,241,801 between three months and one year 2,834,796 2,941,149 between one year and five years 11,505,184 10,608,668 more than five years 16,934,594 18,374,749 32,894,660 33,345,186 Bonds and other fixed-income securities maturing in the following year 2,205,915 2,462,398 Liabilities Liabilities to banks Remaining term payable on demand 469, ,606 up to three months 3,007,575 3,957,781 between three months and one year 1,818,102 1,737,908 between one year and five years 7,055,305 6,183,925 more than five years 4,129,418 4,412,640 16,479,463 16,520,860 Liabilities to customers Remaining term payable on demand 351, ,737 up to three months 596, ,575 between three months and one year 913, ,144 between one year and five years 3,985,739 4,469,932 more than five years 7,012,938 8,062,006 12,860,429 13,878,394 Certificated liabilities maturing in the following year 5,545,637 4,799,850 DG HYP Annual Report

74 Financial Statements Balance Sheet Profit and Loss Account Notes to the Financial Statements Statement of changes in equity Cash flow statement (22) Assets and liabilities in foreign currencies 31 Dec Dec s 000 s Assets include foreign-currency receivables in the total amount of 4,534,076 4,905,561 Liabilities and equity include foreign-currency liabilities in the total amount of 1,219,768 1,096,600 (23) Other assets Other assets include receivables from fiscal entity subsidiaries in the amount of 2.0 million as well as receivables from maturing securities of 1.1 million. (24) Other liabilities This item consists mainly of 22.8 million in profits to be transferred under partial profit transfer agreements in relation with silent partnership contributions, liabilities from profit transfers amounting to 15.0 million as well as interest for subordinated liabilities in the amount of 7.9 million. 72 DG HYP Annual Report 2012

75 (25) Forward contracts not reflected in the balance sheet The following types of forward transactions based on foreign currencies, interest rates or other underlying instruments were outstanding as at the balance sheet date: Nominal amounts by Fair value residual term Total mn _< 1 year > 1 5 yrs > 5 yrs positive negative positive negative Interest rate instruments 16,144 66,210 25, , ,729 6,510 8,060 5,349 6,726 OTC products Interest rate swaps*) 16,144 66,210 25, , ,717 6,510 8,060 5,349 6,726 including: Forward swaps including: With embedded caps/floors including: With embedded puts/calls Interest rate options 12 including: Swaptions bought 12 including: Swaptions sold Exchange-traded products Currency-related instruments 661 2,391 1,154 4,206 4, Cross-currency swaps 661 2,391 1,154 4,206 4, Foreign exchange forwards Foreign exchange swaps Credit-related transactions Credit default swaps including: Protection seller including: Protection buyer Total Return Swaps including: Protection seller including: Protection buyer Forward transactions exposed to other price risks Total 16,820 68,607 27, , ,299 6,616 8,383 5,453 7,012 including: Contracts used to hedge investment securities within the framework of overall bank management.**) 1,959 1,595 *) Including interest rate swaps with identical foreign currency. **) The negative market value of 1,959 million is included in the write-downs which were not recognised in accordance with section 253 (3) sentence 4 of the HGB (as mentioned in Note (5)). DG HYP Annual Report

76 Financial Statements Balance Sheet Profit and Loss Account Notes to the Financial Statements Statement of changes in equity Cash flow statement The breakdown of the carrying amounts of forward contracts not reflected on the balance sheet by balance sheet items pursuant to section 285 no. 19 of the HGB is as follows: Carrying Carrying Balance sheet item Carrying Carrying Balance sheet item amount amount amount amount Assets Liabilities mn mn mn mn Interest rate swaps Loans and advances to banks, Liabilities to banks, loans and advances to customers, Liabilities to customers, prepaid expenses deferred income Interest rate options Other assets Other liabilities Cross-currency swaps 1 Loans and advances to banks Liabilities to banks, deferred income Foreign exchange Other assets Other liabilities forwards Credit default swaps Other assets, prepaid expenses 1 1 Other liabilities Total return swaps Loans and advances to banks, prepaid expenses The forward transactions identified above are used to manage interest rate, currency and counterparty risk exposure. As a rule, counterparties are OECD banks, OECD financial services institutions or OECD central governments. In addition, borrowers also appear as counterparties (market value 31.4 million) in connection with loan agreements. Interest rate and currency swaps are valued using present values, determined by discounting cash flows using market interest rates in line with the credit risk and maturities concerned, as indicated by individual yield curves prevailing on the balance sheet date. In addition, the credit quality of the relevant counterparty is taken into account in the valuation process. Options are valued using option pricing models. These are applied on the basis of generally recognised assumptions regarding valuation parameters; in particular, the value and volatility of the underlying instrument, the agreed exercise price (interest rate), the remaining lifetime of the contract, as well as the risk-free interest rate for that lifetime. Credit derivatives are valued on an individual basis, predominantly on the basis of the default probability of the reference obligations concerned. Market values are determined without consideration of netting agreements, i.e. no add-ons or credit quality weightings as defined pursuant to methodology of the German Solvency Ordinance (Solvabilitätsverordnung) are taken into account. Negative market values of derivatives are offset by positive market values of the related hedged balance sheet items at overall bank level. 74 DG HYP Annual Report 2012

77 Notes to the Profit and Loss Account (26) Breakdown of income by geographic markets within the meaning of section 34 (2) no. 1 of the RechKredV The breakdown of interest income, current income from equities and other non-fixed-income securities, commission income and other operating income is as follows: in % Germany International (27) Other operating income Other operating income totalling 9.6 million includes rental income of 6.6 million. This item also includes service income amounting to 1.7 million. (28) Other operating expenses Other operating expenses totalling 10.4 million include expenses of 6.0 million for the discounting of provisions for pensions and similar obligations, and expenses for buildings not directly used for bank business of 2.7 million. In addition, the item includes 0.8 million in expenses from currency translation as well as purchases of goods of 0.8 million. DG HYP Annual Report

78 Financial Statements Balance Sheet Profit and Loss Account Notes to the Financial Statements Statement of changes in equity Cash flow statement Coverage (29) Coverage by balance sheet item Mortgage Mortgage Public Public Pfandbriefe Pfandbriefe Pfandbriefe Pfandbriefe 31 Dec Dec Dec Dec 2011 mn mn mn mn Ordinary cover 14,675 14,933 21,455 24,140 Loans and advances to customers 14,576 14,906 11,785 12,672 Mortgage loans to customers 14,576 14, *) 699 *) Loans to local authorities, to customers 11,144 11,973 Loans and advances to banks ,341 1,427 Mortgage loans to banks Loans to local authorities, to banks 1,341 1,427 Own bonds issued 8,329 10,041 Bank buildings**) 85 Extended cover 1, ,739 Loans and advances to banks 644 1,809 Monetary claims 644 1,809 Own bonds issued 1, Bank buildings in cover 85 Total 15,872 15,413 22,099 26,879 *) under a municipal guarantee **) in contrast to the previous year, the bank building is allocated to ordinary cover 76 DG HYP Annual Report 2012

79 (30) Details pursuant to section 28 of the German Pfandbrief Act Outstanding Pfandbriefe and related cover assets Nominal amount Present value Risk-adjusted present value*) a) Total amount 31 Dec Dec Dec Dec Dec Dec 2011 of outstanding mn mn mn mn mn mn Mortgage Pfandbriefe 13,169 13,266 14,062 13,917 13,657 13,530 Cover assets pool 15,872 15,413 17,650 16,879 17,032 16,183 of which: Derivatives Excess cover 2,703 2,147 3,588 2,962 3,375 2,653 Excess cover in % *) When calculating stress scenarios, the static method is used for currencies and the dynamic method for interest rates. ad a) Maturity structure Mortgage Pfandbriefe Cover assets pool 31 Dec Dec Dec Dec 2011 mn mn mn mn up to 1 year 3,355 1,401 3,661 1,942 > 1 year 5 years 6,705 9,127 7,568 8,730 of which > 1 year 2 years 1,909 3,606 2,582 2,822 > 2 years 3 years 1,955 2,110 2,001 2,444 > 3 years 4 years 1,680 2,105 1,592 2,040 > 4 years 5 years 1,161 1,306 1,393 1,424 > 5 years 10 years 2,616 2,398 4,250 4,247 > 10 years Total 13,169 13,266 15,872 15,413 Nominal amount Present value Risk-adjusted present value*) b) Total amount 31 Dec Dec Dec Dec Dec Dec 2011 of outstanding mn mn mn mn mn mn Public Pfandbriefe 19,756 23,380 23,167 26,265 21,949 24,827 Cover assets pool 22,099 26,879 26,077 30,263 24,541 28,549 of which: Derivatives Excess cover 2,343 3,499 2,910 3,998 2,592 3,723 Excess cover % *) When calculating stress scenarios, the static method is used for currencies and the dynamic method for interest rates. ad b) Maturity structure Public Pfandbriefe Cover assets pool 31 Dec Dec Dec Dec 2011 mn mn mn mn up to 1 year 2,937 3,136 2,791 3,827 > 1 year 5 years 9,533 11,832 10,342 12,559 of which > 1 year 2 years 2,859 2,911 3,595 3,361 > 2 years 3 years 2,005 2,859 1,924 5,020 > 3 years 4 years 3,784 2,005 2,340 1,895 > 4 years 5 years 885 4,057 2,483 2,283 > 5 years 10 years 2,996 3,754 3,638 4,636 > 10 years 4,290 4,658 5,328 5,857 Total 19,756 23,380 22,099 26,879 DG HYP Annual Report

80 Financial Statements Balance Sheet Profit and Loss Account Notes to the Financial Statements Statement of changes in equity Cash flow statement Assets included in cover for Mortgage Pfandbriefe, by loan amount Mortgages serving as cover 31 Dec Dec 2011 mn mn up to 300,000 5,352 6,596 > 300,000 to 5 million 2,188 2,078 > 5 million 7,136 6,344 Total 14,676 15, DG HYP Annual Report 2012

81 Assets included in cover for Mortgage Pfandbriefe, by country where real property collateral is located, and by type of property mn Fiscal Year Belgium Federal Republic of Germany Denmark Finland France United Kingdom Luxembourg Netherlands Norway Austria Poland Sweden Hungary USA Total Commercial properties Residential properties Single-family homes Multi-family homes Office buildings Commercial buildings Industrial buildings Other commercial properties Unfinished new buildings not yet yielding returns Building plots Total , , , , , , , , , , , , , , , , , , , , , , , , , ,018 DG HYP Annual Report

82 Financial Statements Balance Sheet Profit and Loss Account Notes to the Financial Statements Statement of changes in equity Cash flow statement Aggregate payments in arrears by at least 90 days on cover assets for Mortgage Pfandbriefe 31 Dec Dec 2011 mn mn Germany France United Kingdom Total Assets included in cover for Mortgage Pfandbriefe Forced sales/forced administration pending No. 3a Commercial properties Housing properties Number Number Number Number Forced sales pending Forced administrations pending of which: Included in forced sales pending Forced sales executed No. 3b Number Number Number Number Purchases of properties to prevent losses (foreclosed assets) 1 of which: Still part of cover assets mn mn mn mn No. 3c Total arrears of which: on interest due DG HYP Annual Report 2012

83 Assets included in cover for Public Pfandbriefe, by country of domicile of the borrower and, in the case of full guarantee, of the guarantor Regional Local Sovereign public-sector public-sector mn borrowers entities entities Other Total Belgium Federal Republic of Germany ,861 7,265 7,576 8,184 1,990 1,233 13,535 16,753 France United Kingdom Italy ,573 1,579 Canada Luxembourg Netherlands Austria Poland Portugal Switzerland Slovakia Slovenia Spain 2,243 2, ,716 3,749 Czech Republic USA Cyprus 7 7 Total 2,171 2,161 7,858 11,506 8,273 8,888 3,797 4,324 22,099 26,879 Aggregate payments in arrears by at least 90 days on cover assets for Public Pfandbriefe Germany 31 Dec Dec 2011 mn mn Sovereign states Regional public-sector entities Local public-sector entities Other Total DG HYP Annual Report

84 Financial Statements Balance Sheet Profit and Loss Account Notes to the Financial Statements Statement of changes in equity Cash flow statement Other information on the annual financial statements (31) Audit and consulting fees within the meaning of section 285 no. 17 of the HGB Auditors fees are recognised in the consolidated financial statements of DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt/Main. (32) Executive bodies of DG HYP Supervisory Board Frank Westhoff Member of the Management Board, DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt/Main Chairman Dagmar Mines Bank employee, Deutsche Genossenschafts- Hypothekenbank AG Deputy Chairwoman Peter Bade Bank director (ret d.) Deputy Chairman Carl-Christian Ehlers Bank director (ret d.) (until 2 Mar 2012) Ralph Gruber Bank employee, Deutsche Genossenschafts- Hypothekenbank AG Jürgen Handke Chairman of the Management Board, VR Bank Hof eg Dr. Holger Hatje Chairman of the Management Board, Berliner Volksbank eg (since 2 Mar 2012) Peter Heinrich Chairman of the Management Board, Münchner Bank eg Olaf Johnert Bank employee, Deutsche Genossenschafts- Hypothekenbank AG Rainer Kattinger Spokesman of the Management Board, Volksbank Stuttgart eg Dr Reinhard Kutscher Chairman of the Management Board, Union Investment Real Estate GmbH Ulrike Marcusson Bank employee, Deutsche Genossenschafts- Hypothekenbank AG Thomas Müller Spokesman of the Management Board, Dresdner Volksbank Raiffeisenbank eg Manfred Nüssel President, Deutscher Raiffeisenverband e.v. Herbert Schindler Association director (ret d.) (until 2 Mar 2012) Martin Schmitt Chairman of the Management Board, Kasseler Bank eg Volksbank Raiffeisenbank Werner Thomann Chairman of the Management Board, Volksbank Rhein-Wehra eg (since 2 Mar 2012) Thomas Ullrich Member of the Management Board, DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt/Main Thorsten Wenck Bank employee, Deutsche Genossenschafts- Hypothekenbank AG Gerd Wittkop Bank employee, Deutsche Genossenschafts- Hypothekenbank AG Management Board Dr Georg Reutter Spokesman Dr Carsten Meyer-Raven Manfred Salber 82 DG HYP Annual Report 2012

85 (33) Remuneration of the executive bodies s 000 s Supervisory Board Management Board 1,324 1,308 Former members of the Management Board or their surviving dependants 1,945 1,944 Provisions for current pensions and pension commitments for former members of the Management Board or their surviving dependants 25,637 25,526 (34) Loans to members of executive bodies 31 Dec Dec s 000 s Management Board Supervisory Board Advisory Council (35) Offices held by members of the Management Board or members of employees in supervisory bodies of large limited companies As at 31 December 2012, the members of the Management Board or members of employees held no offices in supervisory bodies of large limited companies. DG HYP Annual Report

86 Financial Statements Balance Sheet Profit and Loss Account Notes to the Financial Statements Statement of changes in equity Cash flow statement (36) Average number of employees Male Female Total Male Female Total Total number of employees of which: Full-time employees Part-time employees Number weighted (4) (28) (32) (4) (25) (29) (37) Information about the parent company pursuant to section 285 no. 14 of the HGB DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt/Main, prepares consolidated financial statements which incorporate the financial statements of DG HYP. The consolidated financial statements of DZ BANK AG are published in the electronic German Federal Gazette (elektronischer Bundesanzeiger). Hamburg, 8 February 2013 Deutsche Genossenschafts-Hypothekenbank Aktiengesellschaft Dr Georg Reutter Dr Carsten Meyer-Raven Manfred Salber 84 DG HYP Annual Report 2012

87 Jahresabschluss Balance Sheet Profit and Loss Account Notes to the Financial Statements Statement of changes in equity Cash flow statement STATEMENT OF CHANGES IN EQUITY 31 Dec 2011 Issue Dividends Net Transfers Other Balance of paid income/ to/from changes on shares loss retained 31 Dec 2012 earnings 000 s 000 s 000 s 000 s 000 s 000 s 000 s Subscribed capital (725,000) (725,000) Share capital 90,000 90,000 Silent partnership contributions 635, ,000 Capital reserves 589, ,113 Retained earnings (93,145) (93,145) Legal reserves Other retained earnings 92,200 92,200 Net retained profit 0 0 Equity 1,407,258 1,407,258 DG HYP Annual Report

88 Financial Statements Balance Sheet Profit and Loss Account Notes to the Financial Statements Statement of changes in equity Cash flow statement CASH FLOW STATEMENT mn Net income for the period (including minority interests) excluding extraordinary items Non-cash items included in net income and reconciliation to cash flow from operating activities 2. +/ Depreciation, write-downs and write-ups on loans and advances, tangible fixed assets and financial assets / Increase / decrease in provisions / Other non-cash expenses/income /+ Profits/losses from the disposal of tangible fixed assets and financial assets /+ Other adjustments (net balance) = Subtotal Net changes in assets and liabilities from operating activities 8. Loans and advances 8a. +/ to banks b. +/ to customers 378 2, / Securities (excluding financial assets) / Other assets from operating activities 1, Liabilities 11a. +/ to banks b. +/ to customers 988 1, / Securitised liabilities 3,926 5, / Other liabilities from operating activities 1, Interest and dividends received 2,099 2, Interest paid 1,894 2, Extraordinary cash receipts 17. Extraordinary cash payments 18. +/ Income tax payments 19. = Cash flow from operating activities 3,427 3, Receipts from the disposal of 20a. + financial assets 4,259 3,182 20b. + tangible fixed assets 21. Payments for investments in 21a. financial assets b. tangible fixed assets / Changes in cash funds due to other investing activities (net balance) = Cash flow from investing activities 3,475 3, Cash payments to owners and minority shareholders 24a. Dividends paid 24b. Other distributions/cash payments / Changes in cash funds due to other capital movements (net balance) = Cash flow from financing activities Cash funds at the beginning of the period / Cash flow from operating activities 3,427 3, / Cash flow from investing activities 3,475 3, / Cash flow from financing activities = Cash funds at the end of the period 4 Cash funds consist of the cash reserve, which includes cash on hand as well as balances with central banks. 86 DG HYP Annual Report 2012

89 Responsibility Statement RESPONSIBILITY STATEMENT To the best of our knowledge, and in accordance with the applicable reporting principles, the annual financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the company, and the management report of the company includes a fair review of the development and performance of the business and the position of the company, together with a description of the principal opportunities and risks associated with the expected development of the company. Hamburg, 8 February 2013 Deutsche Genossenschafts-Hypothekenbank Aktiengesellschaft Dr Georg Reutter Dr Carsten Meyer-Raven Manfred Salber DG HYP Annual Report

90 Audit Opinion The following is an English translation of the Audit Opinion, which has been prepared on the basis of the German language version of the Financial Statements and the Management Report. The translation of the Financial Statements, the Management Report, and the Audit Opinion are provided for convenience; the respective German versions shall be exclusively valid for all purposes. AUDIT OPINION We have audited the annual financial statements, comprising the balance sheet, the income statement, the statement of changes in equity, the statement of cash flows and the notes to the financial statements, together with the bookkeeping system, and the management report of Deutsche Genossenschafts-Hypothekenbank Aktien - gesellschaft, Hamburg, for the fiscal year from 1 January to 31 December The maintenance of the books and records and the preparation of the annual financial statements and management report in accordance with German commercial law [and the supplementary provisions of the partnership agreement/articles of incorporation and bylaws] are the responsibility of the Company s management. Our responsibility is to express an opinion on the annual financial statements, together with the bookkeeping system, and the management report based on our audit. We conducted our audit of the annual financial statements in accordance with Sec. 317 HGB [ Handelsgesetz - buch : German Commercial Code ] and German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer [Institute of Public Auditors in Germany] (IDW). Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation of the net assets, financial position and results of operations in the annual financial statements in accordance with [German] principles of proper accounting and in the management report are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the Company and expectations as to possible misstatements are taken into account in the determination of audit procedures. The effectiveness of the accountingrelated internal control system and the evidence supporting the disclosures in the books and records, the annual financial statements and the management report are examined primarily on a test basis within the framework of the audit. The audit includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the annual financial statements and management report. We believe that our audit provides a reasonable basis for our opinion. Our audit has not led to any reservations. In our opinion, based on the findings of our audit, the annual financial statements comply with the legal requirements and give a true and fair view of the net assets, financial position and results of operations of the Company in accordance with [German] principles of proper accounting. The management report is consistent with the annual financial statements and as a whole provides a suitable view of the Company s position and suitably presents the opportunities and risks of future development. Hamburg, 8 February 2013 Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft Dombek Wirtschaftsprüferin (German Public Auditor) Lösken Wirtschaftsprüfer (German Public Auditor) 88 DG HYP Annual Report 2012

91 Report of the Supervisory Board REPORT OF THE SUPERVISORY BOARD For DG HYP, the 2012 fiscal year was characterised by a challenging environment, with contrary developments. On the one hand, the positive trend in the real estate sector remained intact. DG HYP was able to benefit from this development, making further progress in its operative Commercial Real Estate Finance business and further enhancing its competitive position. Accordingly, the bank once again increased its joint business with German cooperative banks. On the other hand, DG HYP had to anticipate and envisage the impact of continued market volatility, reflecting amongst other issues uncertainty regarding the future development of the euro zone, as well as stricter and more extensive regulatory requirements during the period under review. DG HYP s strategic focus was once again affirmed by the bank s business performance during the 2012 fiscal year. At the same time, DG HYP intensified its integration within the Volksbanken Raiffeisenbanken cooperative financial network: for many cooperative banks, DG HYP has become the partner of choice in commercial real estate finance. Frank Westhoff Besides DG HYP s operating performance, the Supervisory Board Chairman of the Supervisory Board concerned itself with the development of the bank s risk exposure from non-strategic portfolios, which developed in line with projections during the year under review. The Supervisory Board also reviewed the increasingly demanding regulatory requirements, and their impact, in great detail, focusing on the key issues of equity requirements for the target business and the non-strategic segment, as well as the related management of risk-weighted assets. Another focal point was the development of hidden burdens and reserves in the bank s securities portfolio not only in the IFRS context but also from a regulatory perspective, since these burdens weighed more strongly on the bank s risk-bearing capacity during the period under review. During the year under review, the Supervisory Board also discussed the structure of remuneration for the Management Board, and of DG HYP s overall remuneration system. The Supervisory Board commissioned a market survey to determine whether Management Board remuneration is appropriate; the survey confirmed that it is. The Supervisory Board and its Committees During the 2012 fiscal year, the Supervisory Board of DG HYP and its committees monitored the Management Board s management of the bank according to statutory regulations and those set out in the bank s Articles of Association, and also took decisions on those transactions required to be presented to the Supervisory Board. To fulfil its tasks, the Supervisory Board formed a Human Resources Committee, an Audit Committee and a Risks and Participations Committee. DG HYP Annual Report

92 Report of the Supervisory Board Cooperation with the Management Board The Management Board reported to the Supervisory Board on the bank s situation and performance, general business developments and the risk exposure, regularly, in good time and comprehensively, both in writing and in verbal reports. The Management Board reported regularly to the Supervisory Board on ongoing business, the development of the bank s risk situation (including the MBS exposure, and risks from bank and sovereign issues, and the impact of such securities on the bank), on material credit exposures and participating interests, and on the implementation of the bank s strategic and organisational orientation. The Supervisory Board was also kept informed about the bank s profitability, regulatory capital and risk-bearing capacity on an ongoing basis. Discussions in the context of the bank s risk situation also dealt with its typical types of risk exposure. The Supervisory Board discussed these issues with the Management Board; it advised the Management Board and supervised the management of the Company. In this context, the Supervisory Board reviewed the bank s capitalisation in detail, including regulatory requirements as well as the decision to use the waiver pursuant to section 2a (1) of the KWG. The Supervisory Board was involved in all decisions that were of fundamental importance to the enterprise. Meetings of the Supervisory Board The Supervisory Board convened four times during the 2012 fiscal year. The Human Resources Committee, the Audit Committee and the Risks and Participations Committee also met on several occasions during The Chairmen of Supervisory Board committees regularly gave account of the work in the committees to the plenary meeting. Between meetings of the Supervisory Board, the Management Board informed it in writing of key events and transactions. In regular discussions with the Chairman of the Management Board outside the meetings, the Chairman of the Supervisory Board and the Chairman of the Audit Committee and the Risks and Participations Committee also discussed key decisions, particular transactions, and the development of the bank s business and risk exposure. In cases of urgency, the Supervisory Board committees approved key transactions outside of their meetings by passing written resolutions. All members of the Supervisory Board took part in the meetings and written resolutions of the Supervisory Board and its committees during the 2012 financial year, with very few exceptions. There were no members of the Supervisory Board who attended less than half of meetings during the period under review. No conflicts of interest arose during the period under review. Cooperation with the external auditors Ernst & Young AG Wirtschaftsprüfungsgesellschaft, Hamburg, presented a declaration of independence to the Supervisory Board and audited the annual financial statements as at 31 December 2012, including the accounting and management report of DG HYP for the fiscal year from 1 January 2012 to 31 December 2012 presented to it by the Management Board, and found these to be in line with statutory requirements. It issued an unqualified audit opinion. The audit 90 DG HYP Annual Report 2012

93 report was submitted to members of the Supervisory Board, and was discussed in detail during Supervisory Board meetings. Having critically reviewed the auditors report and discussed it in detail, the Supervisory Board agrees with the auditors findings; in line with a recommendation by the Audit Committee, the Supervisory Board raised no objections. Approval and confirmation of the Financial Statements The Supervisory Board, and the Audit Committee formed from amongst its number, reviewed in detail the annual financial statements of DG HYP and the management report of DG HYP in their meetings. The auditor s representatives participated in the Supervisory Board Meeting to adopt the annual financial statements and in the preparatory meetings of the Audit Committee and the Risks and Participations Committee, and reported on the key findings of their audit in detail. They were also available to answer questions by Supervisory Board members. The Supervisory Board raised no objections against the accounts. The Supervisory Board approved the financial statements of DG HYP as at 31 December 2012, prepared by the Management Board, in its meeting on 4 March The financial statements are thus confirmed. Personnel changes within the Supervisory Board and the Management Board Messrs Carl-Christian Ehlers and Herbert Schindler retired from their office as members of the Supervisory Board at the end of the Annual General Meeting of DG HYP on 2 March The meeting elected Dr Holger Hatje and Mr Werner Thomann to the Supervisory Board. The Supervisory Board elected Mr Thomas Müller as new Chairman of the Audit Committee. During its meeting on 21 November 2012, the Supervisory Board appointed Dr Georg Reutter, hitherto Speaker of the Management Board, as Chairman of the Management Board as of 1 January 2013, extending his term of office until 31 July The Supervisory Board would like to thank the Management Board and all of DG HYP s employees for their work during Hamburg, 4 March 2013 Deutsche Genossenschafts-Hypothekenbank Aktiengesellschaft The Supervisory Board Frank Westhoff Chairman of the Supervisory Board DG HYP Annual Report

94 Service Corporate Bodies and Committees; Executives DG HYP Offices CORPORATE BODIES AND COMMITTEES; EXECUTIVES Supervisory Board Frank Westhoff Member of the Management Board, DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt/Main Chairman Dagmar Mines Deutsche Genossenschafts- Hypothekenbank AG, Hamburg Deputy Chairwoman Thomas Müller Spokesman of the Management Board, Dresdner Volksbank Raiffeisenbank eg, Dresden Deputy Chairman Michael Bockelmann Vice-president, Deutscher Raiffeisenverband e.v., Berlin Ralph Gruber Deutsche Genossenschafts- Hypothekenbank AG, Hamburg Jürgen Handke Chairman of the Management Board, VR Bank Hof eg, Hof Dr Holger Hatje Chairman of the Management Board, Berliner Volksbank eg, Berlin Peter Heinrich Chairman of the Management Board, Münchner Bank eg, Munich Olaf Johnert Deutsche Genossenschafts- Hypothekenbank AG, Hamburg Dr Reinhard Kutscher Chairman of the Management Board, Union Investment Real Estate GmbH, Hamburg Ulrike Marcusson Deutsche Genossenschafts- Hypothekenbank AG, Hamburg Martin Schmitt Chairman of the Management Board, Kasseler Bank eg, Kassel Werner Thomann Chairman of the Management Board, Volksbank Rhein-Wehra eg, Bad Säckingen Thomas Ullrich Member of the Management Board, DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt/Main Thorsten Wenck Deutsche Genossenschafts- Hypothekenbank AG, Hamburg Holger Willuhn Spokesman of the Management Board, Volksbank Mitte eg, Duderstadt Gerd Wittkop Deutsche Genossenschafts- Hypothekenbank AG, Hamburg Hans Rudolf Zeisl Member of the Management Board, Volksbank Stuttgart eg, Stuttgart Updated: 28 March DG HYP Annual Report 2012

95 Management Board, Department Heads Management Board (and distribution of responsibilities) Dr Georg Reutter Chairman Real Estate Financing 1 Real Estate Financing 2 Human Resources Treasury Management Board Office / Legal / Communication Dr Carsten Meyer-Raven Finance Organisation and IT Manfred Salber Internal Audit Credit Risk Management Restructuring / Recovery Securities and Loan Processing Department Heads Heike Bausch Human Resources Steffen Günther Real Estate Financing 2 Thomas Mirow Restructuring / Recovery Peter Vögelein Internal Audit Patrick Ernst Treasury Jörg Hermes Finance Peter Ringbeck Organisation and IT Eckhard Wulff Management Board Office / Legal / Communication Norbert Grahl Credit Risk Management Axel Jordan Real Estate Financing 1 Siegfried Schneider Securities and Loan Processing Updated: 28 March 2013 DG HYP Annual Report

96 Service Corporate Bodies and Committees; Executives DG HYP Offices Trustees, Advisory Council Trustees Dr Michael Labe Judge at the Hamburg Higher Regional Court (Hanseatisches Oberlandesgericht Hamburg), Hamburg Florian Degenhardt Deputy Trustee Solicitor, Hamburg Volker Thilo Deputy Trustee Auditor, Hamburg Advisory Council Brigitte Baur Deputy Chairwoman of the Management Board, Volksbank Raiffeisenbank Nürnberg eg, Nuremberg Jürgen Beissner Member of the Management Board, Dortmunder Volksbank eg, Dortmund Armin Bork Member of the Management Board, Volksbank Alzey-Worms eg, Worms Dr Michael Brandt Member of the Management Board, Volksbank Lübeck eg, Lübeck Manfred Bub Chairman of the Management Board, Raiffeisenbank Kocher-Jagst eg, Ingelfingen Rolf Domikowsky Spokesman of the Management Board, Volksbank Münster eg, Münster Uwe Fabig Member of the Management Board, Volksbank Magdeburg eg, Magdeburg Walter Geser Member of the Management Board, VR Bank Rosenheim- Chiemsee eg, Rosenheim Günther Heck Chairman of the Management Board, Volksbank Dreiländereck eg, Lörrach Norbert Herten Member of the Management Board, Volksbank Straubing eg, Straubing Andreas Hof Chairman of the Management Board, VR Bank Main-Kinzig- Büdingen eg, Büdingen Armin Hornung Deputy Chairman of the Management Board, Volksbank Tübingen eg, Tübingen Thomas Janßen Member of the Management Board, Volksbank Braunlage eg, Braunlage Johann Kramer Chairman of the Management Board, Raiffeisen-Volksbank eg, Aurich Johann Luber Member of the Management Board, VR-Bank Erding eg, Erding Updated: 28 March DG HYP Annual Report 2012

97 Advisory Council Hubert Meier Member of the Management Board, Volksbank Karlsruhe eg, Karlsruhe Michael F. Müller Member of the Management Board, Volksbank eg Braunschweig Wolfsburg, Wolfsburg Astrid Piela Member of the Management Board, Volksbank Ulm-Biberach eg, Ulm Jürgen Pütz Spokesman of the Management Board, Volksbank Bonn Rhein-Sieg eg, Bonn Matthias Schröder Member of the Management Board, Hamburger Volksbank eg, Hamburg Uwe Schulze-Vorwiek Member of the Management Board, Volksbank Bochum-Witten eg, Bochum Rainer Staffa Member of the Management Board, Volksbank Mittelhessen eg, Giessen Updated: 28 March 2013 DG HYP Annual Report

98 Service Corporate Bodies and Committees; Executives DG HYP Offices DG HYP ADDRESSES Deutsche Genossenschafts-Hypothekenbank AG Rosenstrasse Hamburg, Germany PO Box Hamburg, Germany Telephone Fax Internet: Real Estate Centres DG HYP Real Estate Centre Berlin Pariser Platz Berlin, Germany Telephone Fax DG HYP Real Estate Centre Dusseldorf Steinstrasse Dusseldorf, Germany Telephone Fax DG HYP Real Estate Centre Frankfurt CITY-HAUS 1, Platz der Republik Frankfurt/Main, Germany Telephone Fax DG HYP Real Estate Centre Hamburg Rosenstrasse Hamburg, Germany Telephone Fax DG HYP Real Estate Centre Munich Türkenstrasse Munich, Germany Telephone Fax DG HYP Real Estate Centre Stuttgart Heilbronner Strasse Stuttgart, Germany Telephone Fax Institutional clients Hamburg Rosenstrasse Hamburg, Germany Telephone Fax DG HYP Annual Report 2012

99 Production This Annual Report is climate-neutral and was printed on PEFC-certified paper. The greenhouse gas emissions created by the production and distribution of this report were compensated by an investment in an additional climate-protection project.