Management Report 2011 Investitionsbank des Landes Brandenburg

Transcription

1 Management Report 2011 Investitionsbank des Landes Brandenburg

2 Management Report ILB Management Report 2011 Investitionsbank des Landes Brandenburg I Economic conditions 1. Economic conditions in Germany Germany s economy recorded strong growth in Despite the increasing deceleration of the global economy at the end of last year, despite the European debt crisis and comprehensive austerity measures in many countries, preliminary calculations by the German Statistical Office suggest that price-adjusted GDP grew by 3.0 % against the previous year. All in all, 2011 was one of the most successful years for the German economy since German reunification with the economic recovery process continuing for the second year after the recession in 2009 (GDP: -5.1 %). The sound economic growth had a positive impact on developments on the German labour market. In 2011, the number of gainfully employed persons exceeded the 41.0-million mark for the first time, mainly due to more jobs subject to social security contributions and a parallel decline in the number of mini jobs. Furthermore, an average of 3.0 million people were registered as unemployed with the job centres amidst the European debt crisis. At 7.1 %, Germany s unemployment rate fell to the lowest level in 20 years. The last year when fewer job-seekers were registered was GDP in 2011 was marked by catch-up effects in almost all sectors of the economy. Growth was particularly strong in the Production sector (excluding construction industry) segment which was still struggling with a double-digit decline in output in Price-adjusted gross added value here increased by 6 % in The construction sector too recorded robust growth of 3.5 %, representing the highest growth in around 17 years. Whilst domestic demand in Germany was mostly very weak in recent years with exports accounting for most positive economic growth impulses, the domestic market took over as the most important economic driver in Germans invested and consumed more than in the year before. Price-adjusted gross investment increased by 5.8 % against the previous year, with investment in the construction sector up by 5.4 %. Price-adjusted consumer spending also increased by a total of 1.4 %, with private consumer spending showing a clearly positive trend (+1.5 %). German foreign trade was also very dynamic in Exports increased by a price-adjusted 8.2 % against the previous year. The 3.0 % increase in GDP growth is hence made up as follows in 2011 Consumer spending totalling around 1.1 % accounted for the largest contribution towards economic development Gross investment accounted for around 1.0 % of economic growth. Foreign trade contributed 0.8 % towards growth. A pleasant change was also seen in the balance sheet of public budgets in The German budget deficit was reduced significantly thanks to the good economic situation. Preliminary calculations by the German Statistical Office suggest that the German deficit rate in 2011 was as low as 1.0 % and thus clearly below the 3 % Maastricht criterion. In 2011, the public sector recorded a total financing deficit of 26.7 billion euro. Government revenue grew by a strong 6.1 % whilst expenditure fell slightly by -1.1 %. 2. Economic conditions in the federal state of Brandenburg Employment in Brandenburg also benefited from the surprisingly dynamic upswing in the German economy. Although the number of people in jobs grew by just 0.5 % on average and was hence below the German average (1.3 %) in 2011, it was nevertheless possible to temporarily bring unemployment down to the lowest level in 20 years. In December, the unemployment rate totalled 10.2 %. Economic development was positive in Compared to 2010, Brandenburg s industry recorded annual revenue of 22.8 billion euro corresponding to a 14.3 % increase in turnover. Domestic turnover increased by 11.4 % to 16.2 billion euro, export turnover was even 21.8 % up to 6.6 billion euro. The trend for jobs in the processing industry was also positive, increasing by 7.5 % to 78,616 jobs on an annual average.

3 Management Report ILB 2011 Preliminary calculations by the Federal Statistical Office suggest that the order volume of enterprises also increased by 22.3 % on an annual average against Domestic demand grew by 15.5 % whilst foreign demand showed particularly strong growth of 38.3 %. GDP for the federal state of Brandenburg in the first half of 2011 was up 3 % against the previous year, but below the federal trend of 3.9 %. II Income situation, net worth and financial position With balance sheet growth at a high level, ILB once again recorded a good result for the year. 1. Earnings position Net income for the year totals EUR 11.2m. A very positive development was recorded for net interest income amounting to EUR 62.9m and hence EUR 6.1m above the 2010 figure which was already very high. This item also includes income from interest-bearing investment and development activities which is higher than in the previous year. Net fee and commission income largely results from fees for the management of subsidy/support programmes. This is made up of administrative cost contributions in conjunction with the granting of loans from trust funds, the processing of subsidy programmes and the management of guarantees. All in all, net income from fees and commission totals EUR 34.7m and is higher than the previous year s figure (EUR 35.1m). Other operating income includes, in particular, rent income resulting from the leasing of parts of the bank building and revenue from services performed for subsidiaries and other companies. A total of EUR 2.6m was recorded here, i.e., the same level as in the previous year (EUR 2.4m). Personnel expenses rose by EUR 1.9m to EUR 30.3m. Besides the effects of the pay increases according to the collective agreement and the hiring of new personnel, this increase is mainly due to ILB s takeover of the employees of BC Brandenburg Capital GmbH during the second half of The resultant wage costs had an effect on the entire year for the first time in At the end of the year, ILB employed 518 people, 10 more than in the previous year. Furthermore, 6 employees were on parenteral leave. The number of bachelor-of-arts students in business administration in the dual vocational education and training scheme totals 14. Female employees currently account for 67.9 % of the workforce. The average age of all employees totalled 44.7 years. In 2011, ILB once again provided comprehensive support for its employees further professional development. External professional development events: 249 participants In-house training: 788 participants On 31 December 2011, around 18.7 % of ILB s employees worked part-time. Other administrative expenses, including depreciation, amortisation and write-downs on intangible assets and tangible assets rose slightly by EUR 0.2m to EUR 14.3m.

4 Management Report ILB 2011 There were no significant investments in facilities and equipment in 2011 so that the EUR 1.1m recorded for depreciation on tangible assets is on the same level as the previous year (EUR 1.1m). Operating costs total EUR 13.2m and are hence only slightly below the previous year s level (EUR 13.0m). In 2011, ILB recorded an outstanding result of EUR 55.7m before risk provisions and the formation of reserves. All identifiable banking risks were taken into account through corresponding valuation and risk measures. Itemised allowances for bad debts were formed taking into account existing provisions for lending risks that were identified and quantified during the financial year. These risks are stable and at a low level, largely reflecting the success of credit risk management. In line with the development of the latent credit risk, a pro-rata reduction of the general allowances for bad debts was possible pursuant to commercial law. Fixed-asset securities are valued according to the less strict lower of cost or market principle. ILB wrote off its commitment in Greek government bonds by two thirds of their nominal volume. Thanks to the high quality of ILB s securities portfolio and the increase in support measures (EFSF, ESM), no further lasting value impairment is expected within the scope of the public debt crisis. In order to ensure compliance with future regulatory requirements, ILB has dissolved a sum of EUR 100m from dormant provident funds pursuant to section 340f of the German Commercial Code [ 340f HGB] and allocated this to the fund for general banking risks. Furthermore, another EUR 20m will be allocated from the result of the current year. This item will hence increase by EUR 120m to EUR 157.0m. The fund for general banking risks pursuant to section 340g of the German Commercial Code ( 340g HGB) forms part of the bank s core capital. Thanks to the successful 2011 financial year, ILB is allocating EUR 10m (previous year: EUR 10.0m) to the ILB Förderfonds. This means that since 2006, a total of EUR 47.5m of the bank s own funds has been made available for interest relief within the scope of the ILB Brandenburg loan product family. As part of the annual planning process, income and expenditure items are steered with defined budget variables. The planning variables are updated during the year and reviewed with a view to the goals set. The targets set for 2011 were reached and often even surpassed. The overall result recorded is much higher than planned. 2. Net worth In the 2011 financial year, short-term funds were primarily taken out through reverse transactions, time deposits and call money transactions, mostly with domestic banks. Long-term refinancing was primarily taken out through bonded loans from domestic banks and global loans from the European Investment Bank (EIB), KfW Bankengruppe, Landwirtschaftliche Rentenbank and the Council of Europe Development Bank, as well as bond placements with domestic banks. Compared to the previous year, liabilities due to banks rose by EUR 834.1m. The bank s liabilities are secured by statutory public-sector responsibility, guarantor s liability and the liability guarantee of the federal state of Brandenburg. The bank s liquidity was secured at all times. The regulatory liquidity ratio in 2011 ranged from a minimum of 3.74 to a maximum of The fund for general banking risks according to section 340g of the German Commercial Code ( 340 g HGB) was increased to EUR 157.0m.

5 Management Report ILB 2011 Published capital and reserves total EUR 346.0m. This increase is due to the addition to statutory reserves and the fund for general banking risks as well as an increase in balance sheet profit. Due to the resolution regarding the appropriation of profits from the year 2010 adopted at the shareholders meeting on 26 May 2011, dividends of EUR 5.5m were distributed and EUR 0.5m was allocated to profit carried forward. The equity requirements of the regulatory German Solvency Regulation were fulfilled at all times. In 2011, ILB s equity ratio or total ratio according to the German Solvency Regulation ranged between 19.2 and 21.8 percent. 3. Financial position ILB s balance sheet sum in the 2011 financial year rose by EUR 955.8m to EUR 13,042.3m. The business volume, comprising business recorded in the balance sheet with current customers, contingent liabilities, administrative loans, as well as administrative guarantees, rose to EUR 13.6bn at the end of the 2011 financial year. The increase of more than 16 percent in loans and advances to banks to EUR 1,691.2m is due to the Brandenburg loan as well as business with customer banks and channelling loans of the bank in its capacity as a leading institute for savings banks in the federal state of Brandenburg. Despite the continuous decline in EU, federal-government and federal-state funds for support measures in the federal state of Brandenburg, the bank s loans and advances to customers rose by EUR 827.0m to EUR 5,459.3m. Relevant factors for this trend included continued growth of the Brandenburg loan business, financing of the BER airport as well as loan business with the federal state of Brandenburg and refinancing of the federal state s housing assets. Trust loans as part of trust assets totalled EUR 3,274.2m. This decline of EUR 96.4m was due to higher scheduled and extraordinary repayments and a low level of new business. Bonds and other fixed-income securities total EUR 2,399.5m and are on the same level as last year. Other assets of EUR 24.6m are, just like in the previous year, due to the difference recorded in the balance sheet resulting from currency conversion as per 31 December 2011 for loans taken out in US dollars (USD) which were fully secured by active crosscurrency interest rate swaps in USD. Liabilities to banks total EUR 8,926.6m. This marks an increase of EUR 834.2m for the financial year which is largely due to the taking out of long-term refinancing loans. The increase in the special item for fixed-asset investment grants is due to the settlement of the participation fund of the federal state of Brandenburg and the resultant conversion of the conditionally redeemable loans originally extended by the participation fund into allowances of EUR 4.4m for the participation in the KBB subsidiary. The fund for general banking risks was increased by EUR 120.0m to EUR 157.0m with a view to the equity requirements according to Basel III (CRD IV). The bank also took out interest swaps and cross-currency interest rate swaps as well as forward interest swaps and FRA transactions in order to steer interest rate risks through a macro and micro hedge totalling EUR 7,866.8m as per the balance sheet date. The bank s income situation, net worth and financial position are satisfactory and stable.

6 Management Report ILB 2011 III Events after the balance-sheet date No events of significant importance for the management report took place after the conclusion of the 2011 financial year. IV Risk report 1. Risk situation ILB pursues business as a special lending institute. The bank s risk structure results from the promotional and structure-policy tasks assigned to it by the federal state of Brandenburg. Risks are taken on to a very limited extent only. All identifiable risks were taken into account through appropriate evaluation and formation of risk provisions. 2. Risk management The risk monitoring system in place is geared towards the existing risk of default, market price risks and operational risks. Risk monitoring and risk taking are separate functions throughout all levels of the organisation. Risks are identified, evaluated, controlled and steered for the bank as a whole by the controlling unit or in the loan unit while the specialist departments steer risks on operational level. Risk controlling includes the regular monitoring of adherence to the limits set by the Board as well as reporting based on risk content and supervisory requirements. The risk monitoring tools for steering the subsidiaries are adapted to the needs of the group and enable timely monitoring and assessment of the risk situation. The subsidiaries are integrated into ILB s planning process. The shareholdings management and controlling units are responsible for controlling in-year developments at the subsidiaries. Quarterly reports on the economic conditions as well as target/actual deviation analyses of the result and risk structure serve to inform the Board of developments in shareholdings. As soon as the assessment of the risk situation shows the need for action, the reports are supplemented by proposals for further action. The Board bears the overall responsibility for the bank s risks. In accordance with the minimum requirements for risk management, the Board informs the Risk Committee, a committee of the Administrative Board, every quarter in writing of the bank s risk situation. Furthermore, ILB s risk situation is also explained during regular committee meetings to the Administrative Board as the control body of the Management Board. 3. Risk assessment methods The risk strategy is the central guideline and is based on ILB s business strategy. ILB generally pursues a conservative risk policy. The aim of this policy is to diversify between the different types of risks, i.e., knowingly accepting risks but avoiding them in areas outside the bank s core expertise. The principles concerning the attitude to risks laid down in the risk strategy form the general framework for the bank s business operations. In addition to defining the risk management process and responsibilities, the basic instruments that are used to measure and steer risks are also documented. The aim is to secure the bank s business and future success through efficient risk management. With this in mind, risks are limited according to ILB s willingness to take and ability to bear risks.

7 Management Report ILB 2011 In order to identify the ability to bear risks, the capital available to cover risks (risk cover capital) is compared to the risk capital tied up in different types of risks. Risk cover capital includes components of liable equity capital as well as net income after provisions for risks expected for the current year. A loss cap is set to limit the overall risk borne by ILB. This limit was fixed in accordance with the risk policy. In order to limit the risk potential, this loss cap is distributed to the risk types which are relevant for ILB. The risk stock-taking showed the following types of risks: default, market price, liquidity and operations, with the liquidity risk cap being excepted from the overall loss cap. A limit system broken down by products/areas serves to steer risks within the different types of risks. Risk is controlled by mapping actual risk exposure of the individual risk types against the respective caps. Besides monitoring individual limits for each type of risk, the overall risk situation is also examined with a view to the bank s overall exposure and hence its risk-bearing capacity. The quarterly figures serve as an additional in-year steering indicator that should not fall below a set minimum level. Quarterly reports drawn up by the controlling function are a control instrument which also informs the Board of the bank s overall risk situation. Risk-bearing capacity analyses are supplemented by examining the impact of shaky market developments. For this purpose, scenarios are developed to simulate the effects of unusual, yet plausible, events on the bank s overall risk situation (stress tests). The stress tests are also used to analyse the effects of a major economic downturn. The aim is to identify both possible events or future changes that would have a negative effect on the bank s risk situation, and ensure its ability to bear risks in extreme situations. The analysis of the stress tests helps to warrant the bank s stability beyond the regular course of business. With the implementation of the third revision of the risk management requirements (MaRisk) in 2011, the stress tests were developed further to reflect the relevant regulatory requirements. Besides the simulation of the repercussions of a major economic downturn on ILB s risk bearing capability, this also includes the development of so-called inverse stress tests. Taking the result of the impossibility to continue ILB s current business model as the basis, this stress test is used to model events which can cause such a condition. The aim is to identify strategically difficult situations which could threaten the institute s existence on a standalone basis, i.e., without the statutory public-sector responsibility, guarantor s liability and the liability guarantee of the federal state of Brandenburg. 4. Different types of risks 4.1 Default risk The risk of default is the risk that a bank s debtor becomes insolvent and consequently fails to fulfil his contractual obligations. The risk of default covers lending, country, counterparty and shareholder risks. The bank s risk-bearing capacity in relation to default is assessed by calculating the equity capital tied up according to the offsetting method laid down in the Solvency Regulation (standard loan risk approach) and comparing this with the limit set for default risks. Steering of default risk is based on the minimum requirements for risk management. A limit system has been set up for individual product groups (securities, derivatives, money market paper, customer banks) in order to steer default risks. Volume caps (partly on the basis of loan equivalence amounts) at borrower level have been set in order to limit risks from these types of business. The limit system is supplemented by regulatory requirements regarding caps for large loans. The default risk cap was adhered to at all times during the year under review. Additional information regarding nominal and market values can be found in the notes under the heading Derivative transactions as per 31 December 2011.

8 Management Report ILB Loan risk ILB s core business is the promotion of public and private investment projects, mainly using funds from the budget of the federal state of Brandenburg or through customer banks. The loan risk is hence of only minor significance for ILB s promotional business. The bank does not bear any loan risks for the assets managed on a trust basis for the federal state, such as the State Housing Construction Fund (LWV), a special-purpose federal-state fund managed by the bank on the basis of approved budgets and management principles on behalf of the Brandenburg Ministry for Infrastructure and Agriculture. The loan risks result mainly from lending for housing construction and commercial lending/syndicate business. Whilst housing construction loan business is marked by demographic developments and the resultant high proportion of vacancies which are still causing liquidity and profitability problems for some borrowers, the risks resulting from commercial lending are a function of general economic development. In order to limit these risks, precisely defined criteria are in place for syndicate business, especially with a view to borrowers creditworthiness and maximum loan amounts. Sufficient provision in the form of itemised allowances for bad debts was made in the annual accounts to cover known risks. The strategy for default risk is updated each year and forms the basis for lending. On tranche loan level, this strategy contains both qualitative and quantitative requirements for lending. Quarterly reports according to the applicable minimum requirements for risk management are drawn up and serve to inform the Board and the bank s Risk Committee. Besides presenting the loan portfolio, the risk report also assesses the default risk and, if applicable, recommends risk steering measures. In keeping with ILB s conservative risk policy, the structure of the bank s loan portfolio can be classified as low-risk. ILB s entire portfolio of its own lendings totals EUR 11,295m as per the balance-sheet date percent of this represents creditworthiness class 1 whilst 82.9 percent is classified as credit rating 1. This means that these commitments have impeccable creditworthiness and/or risk-free collateral (usually public guarantees or collateral in rem). In order to steer the risk of default, ILB has developed an internal risk classification method for all main groups of customers and products. It includes a simplified method for municipal loans, banks and borrowers with an own involvement of less than EUR 250,000. Credit ratings are identified in addition to creditworthiness ratings which reflect a borrower s creditworthiness and ability to repay the loan. The credit rating considers not just the customer s creditworthiness, but also analyses the location and condition of rented housing and collateral. Against the background of the continuing financial market crisis and the public debt crisis in the eurozone, the business and investment strategy in the treasury is subject to an ongoing, risk-orientated examination and adaptation process which ensures ILB s conservative investment policy. Investment decisions are made after an independent risk analysis. Purchases are contingent upon a minimum A rating by an external rating agency (Moody s, Standard & Poor s or Fitch) or class 1 in an internal rating. Unsecured bank bonds must generally have an external rating of AA or better in order to be purchased. The loan risks were widely spread. Risk Controlling checks publications on a daily basis for changes in the standing of securities or issuers. In addition to these measures, the development of yield markups for securities on a watchlist is monitored and compared with risk-free investments in order to utilise the market s assessment as an early indicator of any change in risk. As well as limiting the purchase of securities, money market paper and derivatives from individual institutes, upper limits exist for each bank for loans channelled through customer banks and global loans. The limits are set for each bank separately, based on an evaluation of its financial position, its external rating and other qualitative data. If the standing and/or external rating changes, appropriate adjustment of the limit is considered. Internal limits are generally reviewed once a year. Risk Controlling and the specialist unit regularly check adherence to the limits.

9 Management Report ILB Counterparty risk The counterparty risk is the risk that a party to a contract defaults when claims are due to be settled (fulfilment risk) or that a party fails to meet a payment deadline (performance risk). In order to counter this risk, ILB generally conducts commercial business with selected market partners only who have a minimum external A rating and for whom counterparty limits exist Country risk The country risk is the transfer risk of cross-border payments which can result from a country s refusal to pay (political risk) or its inability to pay (commercial risk). In accordance with its promotional task, ILB s business is conducted almost entirely in Germany and more specifically in the federal state of Brandenburg. Foreign activities are chiefly investments in securities, and most of these in countries of the euro zone. In line with ILB s default risk strategy, only selected debtors are generally accepted. To this effect, the group of debtors was subjected to examination and adjustment as part of the adaptation of the default risk strategy and on a case-to-case basis during the year. German issuers should account for at least 40 % Shareholder risk The shareholder risk is the risk that losses may be incurred due to the provision of equity for third parties. In the performance of its statutory obligations, ILB holds strategic shareholdings only. It acquires shareholdings primarily in order to pursue important interests of the bank or to assume tasks resulting from federal state structure policy. The key preconditions are that no other economically feasible solution is available, that payments are limited, that appropriate influence can be exerted on the company s management and that approval has been granted by the federal state. ILB holds shareholdings in three areas: Equity investment companies provision of equity for companies in the federal state of Brandenburg Property companies property development in the federal state of Brandenburg Others supporting other ILB activities As per 31 December 2011, ILB held shares in companies with a book value of EUR 58.5m. Large parts of ILB s equity investments are secured by guarantees or grants from the federal state of Brandenburg, so that ILB is not exposed to any potential loss from these commitments. Sufficient risk provision has been made for the risks attached to the remaining shareholdings. 4.2 Market risk The market risk is the risk which negative developments on a market can pose to the bank. Market risks include the risk of changes in interest rates as well as the exchange rate risk, the currency risk and other price risks. Market risks are steered by Risk Management based on the minimum requirements for risk management. ILB is classified as a non-trading-book institute.

10 Management Report ILB Interest rate risk Interest rate risks exist with a view to different fixed-interest rate periods in lending and borrowing business. ILB steers the interest rate risk by evaluating payment flows of all transactions where changes in interest rates are relevant. ILB uses software that enables integrated interest ledger management for this purpose. Besides measuring the cash value of the risk of changes in interest rates, the software permits period-based interest ledger management on the basis of the profit and loss account. The transfer of the cash earned into a profit and loss type presentation as well as planning of surplus interest and balance-sheet forecasts on the basis of a fully automated supply of data from SAP are now possible with a single steering system. The amount of the maximum risk of a change in interest rates to be taken is limited via the value at risk (VAR) based on the modern historical simulation method. This is based on the impact which real changes in interest rates observed in the past have on the bank s interest ledger cash value by reference to around 6,000 historical interest rate curves since 1 January The bank has set the parameter of a 99-percent confidence level with a one-month holding period. In order to assess the impact of extraordinary market changes on the risk of changes in interest rates, hypothetical extreme or worst case interest rate scenarios are additionally simulated. ILB determines the forecast quality of the model applied to measure risk by back-testing as of the report dates. To this effect, the value losses (VAR) are compared to the value losses actually incurred. The cash value changes were found to be below VAR on all the relevant dates tested. The back-testing results show that ILB s risk model sufficiently considers the risk of changes in interest rates. Besides limiting the risk of changes in interest rates, the efficiency of the open positions entered through matching maturities is measured and steered by reference to a benchmark. The aim is to optimise ILB s opportunities-to-risk ratio in accordance with this benchmark and by observing a specified tolerance band. Cash value risk steering is supplemented by a period-based analysis of the impact of the risk of changes in interest rates on interest income for the current and future years. Furthermore, a maturity balance supplies additional information concerning the risk situation. The risk of changes in interest rates is monitored by Risk Controlling. A monthly risk report informs the Board of the risks of changes in interest rates taken. Decisions concerning the bank s position with a view to the risk of changes in interest rates are made at Board meetings on the basis of these reports. Possible measures are presented and their impact on the risk of changes in interest rates and cash flow efficiency is analysed. Risk measurement was expanded further in The monthly monitoring of the risk of changes in interest rates was upgraded to a daily risk determination process. The maximum value at risk measured during the year under survey totalled EUR 15.9m. This means that the limits determined by the Board in order to limit the risk of changes in interest rates were adhered to at all times during the 2011 financial year. The report on the risk of changes in interest rates also contains the regulatory indicator concerning the impact of a standardised interest rate shock. During the 2011 financial year, the results of the standardized interest rate shock were at all times below the ad-hoc announcement limits even considering the more demanding criteria imposed by the bank regulators in November Market price risk ILB generally buys securities with the intention of holding them until final maturity (long-term portfolio). This means that as long as full redemption is secured, market price fluctuations will not lead to lasting losses. The market price risk is hence not one of ILB s major risks.

11 Management Report ILB Currency risk Transactions in foreign currencies are fully secured immediately on closing through foreign currency interest swaps so that ILB does not incur any currency risks in conjunction with these transactions Other price risks During the period under review, ILB did not hold any shares and was hence not exposed to any share price and other price risks. 4.3 Liquidity risk The liquidity risk typically means the risk that the bank may not be able to meet payment obligations in full when they become due. ILB s Treasury steers the bank s liquidity through its daily transactions. Funds are raised and invested on the basis of expected incoming and outgoing payments in order to meet the bank s contractual obligations and in accordance with the reports by the specialised departments. In line with its operations, ILB has a high share of payment flows that are fixed and can therefore be planned. The liquidity risk is supervised by Finance and Accounting. Monthly evaluations inform the Board about compliance with the regulatory liquidity ratios. Furthermore, a dedicated management group limits the liquidity risk by a comparison of the bank s refinancing requirement with its refinancing potential, taking a reasonable liquidity reserve over a one-year forecast period into account. The liquidity reserve is also designed to cover the liquidity requirement even under stress conditions over this one-year forecast period. Moreover, the effects of potential liquidity bottlenecks are examined in various scenarios, taking into account internal and external factors that influence ILB s ability to meet its payments obligations. If fixed limits are exceeded, appropriate measures are introduced in order to improve the liquidity situation depending on the severity of the situation. The results are presented to the Board each month. Reporting on the short-term liquidity situation is supplemented by a long-term forecast over a 10-year period. A liquidity risk measurement software was introduced in 2011 in order to enable integrated interest rate and liquidity risk management. Effects of changes in business can hence be evaluated on a budget and actual basis from a revenue, interest risk and liquidity risk perspective. Following successful completion of the trial phase, the software is to go live at the beginning of Liquidity risk in the narrower sense In order to ensure that ILB can meet its payment obligations at all times, the bank has money market lines available with commercial banks and a portfolio of securities, loans and advances that can be used in open-market transactions for short-term funding through Deutsche Bundesbank. ILB also has a sufficient, sustainable liquidity reserve in the form of securities eligible as collateral at the central bank. This liquidity reserve enables the bank to cover additional liquidity requirements which may arise under stress conditions. This means that ILB has extensive refinancing potential that enables it to generate sufficient liquidity, even in extreme situations and largely independent of the general market situation. The shortage of funds on the money market caused by the debt crisis did not have any negative impact on ILB s liquidity supply. In the year under review, ILB was always able to provide itself with sufficient liquidity, both on the interbank market and through open-market transactions. The bank has also signed contracts with German and European development banks to secure longterm refinancing.

12 Management Report ILB Refinancing risk The bank s liabilities are secured by statutory public-sector responsibility, guarantor s liability and the liability guarantee of the federal state of Brandenburg. ILB is hence at all times able to obtain liquidity on competitive terms because counterparties regard its creditworthiness to be comparable with that of the federal state of Brandenburg. The bank hence expects to be able to obtain refinancing on prime terms in the future. 4.4 Operational risk The operational risk is the risk of losses due to the unsuitability or failure of internal procedures, people and systems or due to external factors. Strategic risks and risks for the bank s reputation are not expected. ILB cannot rule out operational risks as part of its business. Major risks that would jeopardise the continued existence of the bank are generally avoided, or appropriate provision is made by passing on the risks (for example through insurance) or reducing the risks (through damage prevention measures). The method employed to manage operational risks is backed by transparent communication and documentation throughout the bank. Avoiding risks is always a top priority for ILB. ILB regularly compiles information on operational risks and damage. It records damage, for example, in a damage database, and analyses its operational risk using risk inventories, risk maps or risk indicators in order to identify potential damage at an early point in time. These instruments already consider stress test requirements in that they include scenarios describing the possible occurrence of operational damage. Every six months, ILB s management analyses and reports on the risk potential of their areas as part of operational risk management. This helps the bank in its efforts to better handle and identify operational risks. In 2009, the functions, business processes and relevant risks of fraud were classified throughout the bank. The results form part of the annual fraud risk assessment Commercial risk Minor risks are taken when justified from a commercial perspective. ILB counters these commercial risks with a suitable system of internal control. Furthermore, sufficient insurance has been taken out to cover any damage that may occur. A business impact analysis served as a basis for a contingency manual for all areas of ILB. This manual documents measures to maintain critical bank processes in extreme situations Legal risk Legal risks exist with a view to the material effect of agreements, decisions, powers of attorney/powers of representation as well as compliance with formal requirements, especially in regard to new legislation and court decisions. ILB counters these legal risks by using standardised documents which are approved by the legal department and continuously updated. Furthermore, the legal department is also involved at an early stage in any decisions that may commit or favour the bank.

13 Management Report ILB The risk situation in summary As per 31 December 2011, the bank s overall risk was distributed to the different types of risk according to their respective shares in the bank s overall risk exposure: The risk of default accounts for 81 percent and hence the greatest share. The market price risk reaches a share of 10 percent in ILB s overall risk. This reflects the risks of changes in interest rates resulting from matching maturities. The efficiency of the opportunity-to-risk ratio that results from matching maturities is optimised through benchmark steering. The potential loss from operational risks calculated as a whole using the base indicator method according to Basel II accounts for 9 percent of ILB s overall risk for the year The risks incurred were compared with the total risk cover capital, resulting in a risk coefficient of 37.0 percent at the end of This corresponds to the bank s willingness to takes risk as laid down in its risk strategy, and it also reflects responsible handling of the risk cover capital. The conservative risk assessment methods deliberately chosen by ILB not only neglect correlation effects between the various types of risks that could reduce risks, but in fact overstate the risk on an overall bank level. These factors and the risk cover capital which is not fully available for risk coverage due to the limitation of the bank s overall risk form a sufficient risk buffer even in extraordinary risk situations. The limit to ILB s risk positions laid down in the loss cap was adhered to at all times during the 2011 financial year. The risks taken were hence consistent with ILB s risk strategy. The results of the stress tests show that there is no threat to ILB s risk bearing capacity even in extreme situations. The bank s ability to bear risks is assured. 6. System of internal control for the accounting process The system of internal control for accounting includes, in particular, organisational rules for structures and processes with clear differentiation between areas of responsibility as well as processes, methods and measures to ensure the correctness and reliability of internal and external accounting. Accounting-related business transactions are mostly handled by the respective units and departments. ILB s Board is responsible for the design and effectiveness of a reasonable system of internal control for accounting. Finance and Accounting is responsible for implementation in cooperation with Bank Operations and Corporate Steering. The respective areas are responsible for complete and correct recording and for performing and documenting the related necessary controls. Finance and Accounting/ Balances is in charge of accounting rules, posting methods, balancing and definition of valuation rules. Finance and Accounting/ Controlling is responsible for transaction-independent valuation and result determination. ILB s accounting process has been laid down in writing in manuals and procedures which are updated on a regular basis. In addition to the minimum requirement of the four-eyes principle, the use of standard software, which is protected against unauthorised use by competence-related authorisations, is another key element of the system of internal control for accounting. The functions and organisation of the market areas are separate from the areas responsible for handling, supervision, control and accounting. The effectiveness of the system of internal control for accounting is regularly monitored by process-independent audits conducted by the bank s internal audit unit. ILB s systems of internal control for the accounting process are identical to those of its subsidiaries.

14 Management Report ILB V Outlook 1. Economic factors Germany s economy recorded strong growth of 3.0 % in 2011, while the global economic downturn and the euro debt crisis increasingly affected growth towards the end of the year. Experts expect that the euro debt crisis, above all, will dampen the economic development in Germany during the current year. Latest forecasts nevertheless suggest slight GDP growth of around 0.5 % in This is, however, contingent upon the euro debt crisis being defused by far-reaching and credible budget consolidation efforts in the different European states. Robust development in China and other newly industrialized countries will probably stabilize exports in According to a GfK Group forecast, private consumer spending will continue to support the economy in 2012 in addition to the export sector. Despite the expected slight economic deceleration, the federal government does not expect any adverse effects on the German labour market in The number of gainfully employed citizens could even increase to 41.3 million in 2012, along with a drop in the unemployment rate to around 6.8 % and hence to a 20-year low. Many German economic research institutes expect that the German economy will already return to strong growth in In its latest forecast for 2013, the federal government expects economic growth of around 1.6 %. The IMF also expects 1.5 % growth again. Germany s strong economy, currently strong domestic demand and the fact that Brandenburg s economy is less export-orientated that the economy in other federal states all support the expectation of sound development of the regional economy in the current year. Moreover, the latest regional economic data and surveys as well as contacts with ILB customers currently show no sign of the crisis hitting the federal state of Brandenburg. 2. Major influences The economic downturn and the euro debt crisis have so far not had any significant adverse impact on ILB s investment and development business. The bank s support portfolio has once again met with a very positive response from Brandenburg s business community, municipal administrations and the housing sector. Furthermore, ILB is still recording strong demand for promotional loans from savings banks and finance institutes operating as customer banks in Brandenburg. In the 2011 financial year, ILB approved a total of more than EUR 1.14bn in loans and allowances. Adjusted by the special effects of the funds provided under stimulus package II (2009 and 2010) and the airport financing programme (2009), the commitment volume hence remains on a high level. For the current 2012 financial year, ILB expects the commitment volume to remain flat against Development of income situation and net worth Plans for the 2012 and 2013 financial years are optimistic. ILB is expecting a continued stable income situation and net worth for the next two years. ILB s liquidity is ensured thanks to its excellent refinancing possibilities. ILB has signed long-term contracts with German and European development banks to secure refinancing. ILB can also obtain additional liquidity at short notice from the ECB/Bundesbank. Interest income from promotional business is considered to be stable.

15 Management Report ILB The bank s existing business and its newly created products will contribute to this stability. Net interest income is also influenced by developments on money and capital markets. Net fee and commission income will remain at a high level. ILB, in its capacity as a central service provider, will enter into further management agreements with the federal state. It is currently difficult to assess how the debt crisis and its repercussions will develop. ILB addresses these uncertainties by including a reasonable risk provision in its budget. Net income for the year is planned at the same level as last year. ILB s result will continue to be stable and satisfactory, creating the basis for further successful business by the bank to the benefit of the federal state of Brandenburg. In light of this, ILB plans to step up the ILB Förderfonds in order to offer attractive loan products by drawing on its own revenues. In the years to come, the ILB Förderfonds is to be increased by at least the same amount as last year, i.e., by at least EUR 10.0m. Potsdam, this day, 29 March 2012 The Board of Investitionsbank des Landes Brandenburg Klaus-Dieter Licht Jacqueline Tag Tillmann Stenger Chairman of the Board Member of the Board Member of the Board