Investors Day Prudent risk management across the economic cycle

Transcription

1 Investors Day 2007 Prudent risk management across the economic cycle Wolfgang Hartmann Chief Risk Officer Frankfurt, September 20th, 2007

2 Agenda 1. Promised and delivered (LLPs, Basel II, Economic Capital) Operational Risk Credit Risk Market Risk / 23

3 Promised and delivered Loan loss provisions Run rate figures at an all-time low in 2007, slight increase expected for 2008 due to a more difficult economic environment and lower intensive care results, but lower charge for general provisions Net loan loss provisions 2007: - 350m 2008: ± 0m Run rate (new defaults) : ± 0m 2008: ± 0m 930 ~ 550* < 700 < 900 < 700 ~ 850 ~ 850 < Forecast 2007 Forecast (Inv. Day 2006) 2006 Forecast Forecast 2007/ (Inv. Day 2006) General provisions 2007: - 100m 2008: ± 0m Intensive care result (LLPs on old cases - releases) 2007: - 250m 2008: ± 0m Breakdown of forecast 2007: G-LLPs based on LIP-factors and IFRS management adjustment for special items** -16 ~ 100 ~ 0 < ~ - 400*** better than ~ Forecast Forecast (Inv. Day 2006) Forecast 2007 Forecast 2007/ (Inv. Day 2006) * target 2007 according to Annual Report: 637m, consensus estimates for m and m ** LIP = loss identification period; group wide standards for LIP-factors will be established year end 2007 (Retail & Business Customers = 1, Corporates and CRE = 0.75); management adjustment for further charges in 2008 due to the subprime crisis (buffer) 3/ 23 *** in addition ~ 50m result of the intensive care function for property management (not included in LLPs) 2006

4 Promised and delivered Basel II certification for the advanced approaches AIRB and AMA approach on track, as planned 4-phased approach of 2006 adapted to account for reorganization of Retail and now in implementation; key targets unchanged 1 EAD Coverage 1 Oct 06 56% Corporates, Banks, Commercial Real Estate 2 4 Retail 3 70% 2 86% 3 4 Regulatory minimum AIRB coverage 50% 94% Public Finance and special portfolios Rest of CB Group (e.g. BRE Bank) AIRB Coverage of EAD Corporates Banks CRE Public Finance Retail 75% Certification of: Other Retail (e.g. consumer loans), Shipping, CISAL, EEPK 87% 94% Certification of: BRE Bank SA, Non- Bank FIs, Renewable Energies, Airplane Financing Certification targets will be met in 2007 despite the significant reorganization of Retail AIRB Coverage of more than the required 92% to be achieved by end of 2009 (regulatory requirement: 2013) In the context of the AIRB certification, BRE Bank Group will be fully integrated in the group wide Risk Management function in / 23

5 Promised and delivered Basel II: advanced approaches to credit risk (AIRB) and OpRisk (AMA) generate significant RWA reduction in bn Private & Business Customers Mittelstand (incl. BRE) Corporates & Markets Commercial Real Estate Public Finance & Treasury Equity holdings** Others Total RWA (GS I) 06/ Investors Day 2006 RWA decrease / increase*) latest estimate per 06/2007 realistic case best case -38% +5% -9% -17% +8% 0% -10% -11% -43% +3% -20% -22% 0% 0% -10% -17% Drop in RWA reflects the high quality of the portfolio and has a positive impact on capital ratios. Resulting additional capacity for risktaking is limited by floors of 10% (for 2008) and 20% (for 2009) by 339 SolvV. * incl. OpRisk 780m ** Grandfathering Investors Day 2006 expectation for positive Basel II impact on RWA has been exceeded. Our ambitious target is to reach the regulatory floors in 2008 and / 23

6 Promised and delivered Economic Capital Sufficient buffer for all scenarios; strong limitation of bulk risks Risk taking capability in bn buffer 40% min. 20% buffer 53% min. 20% buffer > 20% Stress scenarios in bn as of June 07 buffer 53% min. 20% 8.9 buffer 40% min. 10% 11.5 buffer 27% min. 0% /06 Economic Capital 06/ Capital for Risk Coverage Economic Capital downside case worst case capital for risk coverage Economic Capital - breakdown in bn Number of bulk risks ECap > 20m limit 11bn limit 11bn < *) 06/06 06/ /06 06/ Credit Risk Market Risk Operational Risk Business Risk *) Harmonisation of correlation parameters for Internal Model and Basel II planned for yearend 2008 with a significant increase of CVaR within our Economic Capital model. 6/ 23

7 Agenda 1. Promised and delivered (LLPs, Basel II, Economic Capital) Operational Risk Credit Risk Market Risk / 23

8 Operational Risk Operational Risk - Certification of AMA approach on track AMA approach saves m of regulatory capital compared to Standardized approach. OpRisk Focus: Optimisation of processes and documentation, risk-oriented controls to limit fraud, legal risk (including documentation risk) and Unexpected Loss (UL) Expected Loss - breakdown on segments m Regulatory Capital: Standardized vs. AMA approach ca 1,050 standardized approach /. 25% Private & Business Customers Mittelstand Corporates & Markets Commercial Real Estate Public Finance & Treasury Others & Consolidation 779 overall limit 2008: 70m ca /2007 end of 2008 AMA approach Limit 27m 19m 18m 4m 2m Expected Loss - breakdown on loss events m Actual OpRisk losses H1/ execution, delivery & process management clients, products & business practices external fraud business disruptions and system failure Others H1/ m 3.9m 1.4m 0.3m 1.1m total losses H1/ m legal risk provision (net position) OpRisk losses H2/ H1/2006 H2/2006 H1/2007 8/ 23

9 Agenda 1. Promised and delivered (LLPs, Basel II, Economic Capital) Operational Risk Credit Risk Market Risk / 23

10 Credit Risk Market developments: Economic environment Retail Germany still challenging (increasing private insolvencies, 3m households over-indebted), but improved for affluent and business customers (higher available income, lower jobless rates); stabilized collateral values Private insolvencies * 110,000 Available income ** (private households) in Change of insolvency law in 1999 lead to a significant increase of private insolvencies 49,100 68,900 92,300 1,429 1,455 1,478 1,508 1,540 33, E Jobless rate *** m as of June 2007 (minus 1m within one year) Price trend one-family houses Düsseldorf Frankfurt Germany (total) Germany (East) Germany (West) Germany (total) Leipzig Chemnitz /06 06/06 09/06 12/06 03/07 06/ * Destatis ** Bundesbank statistics *** Bundesagentur für Arbeit 10 / 23

11 Credit Risk Market developments: Economic environment Corporates Relaxed international environment (excl. corporates with high leverages mostly based on private equity financing), good performance of German Mittelstand, increasing investments on cash flow basis, unfortunatey only low credit demand International Corporate insolvencies * 2006 vs % -16.8% -8.5% -7.3% 2.3% 18.3% Market default rates for German corporates * (in %) % USA Germany Japan France Poland UK Hungary Loans to non MFIs in the eurozone ** (2002 = 100) Spain France Germany m m 25-50m Loans to German corporates and self-employed ** (in bn) 1,300 1,275 1,250 1,225 1,200 1,175 1, Source: * Creditreform ** Bundesbank-Statistik 11 / 23

12 Credit Risk Market developments: Economic environment Commercial Real Estate Up to now good performance with regional trend towards overheating (especially London, Madrid, New York), in the light of low property yields and high rents increased danger of setbacks especially for new financings if based on market-oriented high loan-to-value ratios (LTV >80%) and weak covenants (exit risk) or collateralized portfolio deals based on external evaluation Office market Frankfurt prime rents (in / m 2 / year) top yields (in %) yield 10y government bond (in %) Office market London prime rents (in / m 2 / year) top yields (in %) yield 10y government bond (in %) ,000 in % E in / m 2 / year in % ,600 1, E in / m 2 / year Office market New York Class A Rent (in / m 2 / year) Cap Rate office (in %) yield 10y government bond (in %) Office vacancies in % Frankfurt New York London 10 1, in % E in / m 2 / year E 12 / 23

13 Credit Risk Portfolio quality Commerzbank Group (bank book) Risk density (EL vs. EaD) stable for total portfolio; overall low volume growth in 2007, trend in 2008: EaD growth focussed in Mittelstandsbank, quality- and risk/return-oriented reduction in PBC Exposure at Default (EaD) - breakdown in bn (as of June 2007) bn Private & Business Customers Mittelstandsbank Corporates & Markets Commercial Real Estate Public Finance & Treasury Others & Consolidation Exposure at Default - trend 12/08E based on risk density limit; in bn ** EaD in trading book 57bn (2/3 C&M, 1/3 PF&T) with low risk density (5bp) < 500 < /06 12/06 06/07 12/07E 12/08E Risk density (EL vs. EaD) - breakdown in bp (as of June 2007, June 2006 in brackets) 43 (46) 37 (35) 32 (32) Minor increase through targeted growth within BRE Bank and SME portfolio 24 (27) 11 (12) 3 (3) EL vs. EaD - trend in bp 18* 21** 21 EL-Limit ,000m EL = 1,021m /06 12/06 06/07 12/07E preliminary EL-Limit ,040m 21 12/08E *EL ratio including trading book **figures recalculated based on current Basel II parameters, e.g. adjusted EaD calculation for undrawn lines 13 / 23

14 Credit Risk Portfolio quality Commerzbank Group (bank book) In the light of increasing EL exposures and current market turmoil in special segments (infection risk), we have set a very ambitious target for the run rate LLPs in 2008 of 200m below expected loss (based on good economic environment in Germany and continental Europe). Challenges are especially coming from the US markets and from overheated Real Estate markets (e.g. Spain, UK) Run Rate/EaD vs. EL/EaD in bp Run Rate/EaD EL/EaD EaD allocation based on ratings* in bn, vs. March `07 in brackets (+2) Portfolio improvement through positive migration and high quality of new business 8 (-2) 111 (+4) 27 (-1) 4 (±0) 1 (±0) E 2008E not rated R R R R R Run Rate LLPs + 109m 1,121 1, m Run Rate EL - 190m 1,021 1, Net LLPs 19 bp bp 14 bp 700 Net-LLPs/EaD E 2008E E 2008E * figures excluding Essenhyp and BRE 14 / 23

15 Credit Risk Country Risk Management (all countries with rating 2.0) Basel II compliant country risk system based on our master scale implemented. Close monitoring and EL limitation of exposures with ratings of 2.0 or below. Focussed growth in selected Emerging Markets: Eastern Europe (economically linked to EU), winners of globalisation (e.g. BRICs) and countries with natural resources (oil, gas, metals etc.- e.g. Arabian countries) Exposure at Default (EaD) in bn bn 17.9 Central / Eastern Europe (incl. Russia) Asia (incl. Middle East) Africa* Central / South America Approx. 5% of Group EaD and 8% of Group EL Exposure at Default (EaD) in bn * thereof more than 87% South Africa 12/06 06/07 12/07E 12/08E EL vs. EaD: breakdown in bp 53 (53) 45 (58) overall risk density: 34 bp General LLPs near zero in 2006 and (32) 24 (27) Rating structure: regional breakdown in bn 19.7 EL: 81m EL limit: 151m 3.3 mainly short term trade finance, counterparts not in default, weaker ratings due to country rating Central / South America Asia Central / Eastern Europe Africa R R R R R / 23

16 Credit Risk Default Portfolio Full Basel II compliant definition of default portfolio end of 2007, in future coverages are based on validated Basel II LGDs; sustainable positive intensive care results with peak in 2007 based on conservative evaluations Default volume * in bn Coverage 89% (96%) /06 06/ Coverage 87 % (94%) End of 2007 full Basel II compliant definition incl. 90 dpd 12.0 Coverage > 84% 12/07E 11.0 Coverage > 82% 12/08E Default exposure June Breakdown in bn Coverage 92% (101%) Retail Coverage 73% (82%) Corporates & Investment Banking Coverage 93% (98%) CRE, Public Finance & Treasury Default exposure 90 dpd exposure collateral General LLPs LLPs collateral 90dpd xx% (xx%) Coverage Ratio excl. (incl.) G-LLPs Intensive care result > 400 Intensive care project will improve the effectiveness by optimising cash flows, time lines and LGDs. Intensive care result Breakdown Forecast ~ > 150 > 150 ~ 100** ~ Forecast Forecast /2008 (Inv. Day 2006) Retail Corporates & Investment Banking CRE, Public Finance & Treasury * Group figures now including all entities, 90 dpd figures for 12/06 recalculated based on new group wide systems ** In addition ~ 50m result of the intensive care function for property management (not included in LLPs) 16 / 23

17 Credit Risk Special portfolios in focus Use of opportunities - limitation of risks Leveraged acquisition finance (Corporates & Markets) exposure (in bn) /06 06/07 below 1% of Group EaD Development Financing (CRE) EaD (in bn) /06 06/07 mitigated by tight covenants, pre-lets and/ or adequate recourse (incl. cost overruns) LLPs (run rate ) /06 06/07 EL vs. EaD (in bp) /06 06/07 granular portfolio with average final takes of ca. 30m; focus on senior loans EWB** (Run Rate ) /06 06/07 EL vs. EaD (in bp) /06 06/07 Risk density improved Hedge Funds (Corporates & Markets) Only exposure in trading positions (in bn) /06 06/07 LLPs (run rate ) /06 06/07 Credit exposure fully collateralised with liquid collateral and daily margining EL vs. EaD (in bp) /06 06/07 Gap-Risk exposure (incl. investments)* (in bn) /06 06/07 Losses on Gap exposure only if the value of all investments falls simultaneously and significantly in short time. Multi Family Properties (CRE) EaD (in bn) EU + US /06 06/07 EWB** (Run Rate ) GER 13.1 GER /06 06/ EU + US EL vs. EaD (in bp) /06 Over 90% in Germany / positive macro-economic framework; focus on completed homes 06/07 Risk density improved, comparably high baseline due to legacy book in Germany * incl. investments of 0.7bn with 0.5bn being capital guaranteed ** specific valuation allowances 17 / 23

18 Credit Risk Syndication and securitisation pipelines Small utilisations within LBO financings and normal corporate syndications, higher pipeline for CRE due to business strategy based on lead roles in structuring of major projects Syndication pipeline Leveraged acquisition finance in bn Syndication-Pipeline Commercial Real Estate in bn pipeline per Out In pipeline per pipeline per Out In pipeline per Syndication pipeline normal corporate loans in bn CMBS-Pipeline Commercial Real Estate in bn US: US: Europe: 1.9 Europe 2.6 pipeline per Out In pipeline per pipeline per pipeline per / 23

19 Agenda 1. Promised and delivered (LLPs, Basel II, Economic Capital) Operational Risk Credit Risk Market Risk / 23

20 Market Risk Economic environment Market Risk Outlook: increasing volatilities for equity investments, flight-to-quality scenario for Credit Spreads, interest rates stable (Euro) or even decreasing (US-$) due to subprime crisis, weak US-$ vs. Euro, Yen driven by carry trades, liquidity squeeze for conduits and Asset Backed Commercial Papers (ABCP) Equity 9,000 8,500 8,000 7,500 7,000 6,500 6,000 01/07 02/0703/07 04/07 05/07 06/07 07/07 08/07 DAX DAX-Vola Interest Rates USD: EUR: 1Y Swap 1Y Swap 10Y Swap 10Y Swap 01/07 02/07 03/07 04/07 05/07 06/07 07/07 08/07 Credit Spreads in bp 75 BBB A AA FX 1.5 EUR-JPY EUR-USD /07 02/07 03/07 04/07 05/07 06/07 07/07 08/ /07 02/07 03/07 04/07 05/07 06/07 07/07 08/ / 23

21 Market Risk Portfolio overview Market Risk (trading and banking book) Public Finance & Treasury (bank book): active VaR consumer (50:50 credit spreads and interest rates) Corporates & Markets (trading book): low VaR utilisation (50% equity, 25% interest rates and credit spreads Participation Risk: two third of overall VaR concentrated in two investments, affecting revaluation reserves Value at Risk (excl. participations) VaR overnight Risk allocation VaR overnight m* Private & Business Customers Mittelstandsbank Corporates & Markets Commercial Real Estate Public Finance & Treasury Others & Consolidation 31% 1% 2% 35m 53% Interest Rates Credit Spreads Equity FX Precious metals 1.2 Public Finance & Treasury: Eurohypo, Essenhyp and Treasury each with one third of VaR, thereof trading book below 10%. 13% Regulatory capital charge based on advanced internal model with low surcharge factor Participation Risk VaR overnight; top 1 and 2 top 3 to 5 rest of the portfolio./. 26% 15% more volatile environment increased trading book activities extension of business 23% 63m 62% 06/06 12/06 06/ * VaR overnight, confidence level 97.5% for trading and bank book (excl. participations and incl. diversification) VaR according to Internal Model (trading book and only fx risk in the bank book): 25.8m (confidence level 99%, holding period 10 days) 21 / 23

22 Market Risk ABS portfolio (bank book) Investments based on portfolio limits for different asset classes, for the time being no exposure increase intended, Kaiserplatz conduit will be partly closed over the next months, exposures will be significantly reduced, Four Winds Funding, Time Square Funding in wind down, all three conduits are consolidated in Group figures ABS portfolio - breakdown of products in bn bn (**) Kaiserplatz conduit Government guaranteed (AAA) CDO Corporates European RMBS US RMBS CDO US RMBS European CMBS others Positions in trading book Corporates & Markets 2.5bn total: 2.1bn thereof: 1.4 bn subprime underlyings (details next page) Kaiserplatz conduit** (receivables, securitisations originated by Commerzbank); in bn Receivables with haircuts for customer relationship Avalon: AAA tranche of commercial real estate CDO of Eurohypo Cosmo Finance: Super senior tranche (AAA) of a securitisation of corporate customer loans generated by Commerzbank (focus on Germany). Semper Finance: Super senior tranche (AAA) of a securitisation of mortgage loans (CRE) generated by Eurohypo CoCo: Super senior Tranche (AAA) of a securitisation of corporate customer loans generated by Commerzbank (multi nationals, focus on Europe) ABS portfolio - breakdown of entities in bn bn* 4.7 Eurohypo Public Finance Commerzbank New York C&M London CB Europe Eurohypo New York others Rating structure in % per mid of August* 68 99% of the exposure investment grade AAA AA A 5 1 * excl. Kaiserplatz ( 7.8bn) ** The two other Commerzbank conduits (Four Winds Funding, Time Square Funding) with exposure of 2bn are included in the breakdown of products. Liquidity backup lines for three external conduits with a total of 0.2bn. BBB BB 22 / 23

23 Market Risk Subprime Residential Mortgage USA portfolio Deterioration of fundamentals (delinquency rates, severity) for vintages lead to a massive increase of the cumulative EL (16-18% discussed in the markets). Several rating downgrades for RMBS and CDOs by rating agencies, total balance sheet clean-up in 2007 based on prudent evaluation of intrinsic values Portfolio breakdown bn affected by the subprime crisis = 0.25% of overall EaD Rating structure in % Eurohypo Commerzbank AG 217 CB Europe AAA Rating for 99% of the exposure AAA AA A BBB BB B CCC Vintages in % 62 business stopped mid of 2006 Loss scenarios Hold to Maturity* (intrinsic value) RMBS - Eurohypo NY CDO - Commerzbank NY Mark-to-Market (RMBS) / Mark-to-Model (CDO)** 27 impairment: final evaluation in progress RMBS: MtM based on FT-ID indices due to large bid/offer spreads CDO: model valuation under review < /07 06/07 * direct P&L effect due to writedowns of AfS positions ** effecting the revaluation reserves (after tax, minus impaired value) 23 / 23

24 Appendix 1. Risk management organisation A1 - A3 2. Credit Risk details A4 - A11 3. Market Risk details A12 - A16 4. Management by anticipation A17 - A23 5. How to make Risk Management successful A24 - A26 A1 / 24 A26 / 23

25 Risk management organisation Risk management organisation Commerzbank Risk Management staff: ~ 2,200* / costs: ~ 400m* (7% of overall staff and costs) Commerzbank Group Management - Strategy and Controlling - Group Communications - Human Resources - Legal Services - Risk Management/ Risk Control - Accounting and Taxes - Financial Controlling - Group Compliance - Internal Auditing Private and Business Customers Risk Strategy, Market Risk, OpRisk Mrs. Birkholz Risk Control Corporate and Investment Banking Market areas Credit Risk, Economic Capital Mr. Erlebach Commercial Real Estate, Public Finance & Treasury Chief Risk Officer (CRO) Mr. Hartmann Private & Business Customers* Mr. Windheuser Global Credit Risk Management Corporates & Markets (incl. FI)* Mr. Schmid *incl. intensive care departments but excl. BRE (~ 320 FTE) Services CRE & Public Finance* Mr. Schuh Concentration of all risk functions in Group Management Division underlines the significance of Risk Management for Commerzbank Group A2 / 25 A26 / 23

26 Risk management organisation Risk management organisation Organisational trends and targets End-to-end credit project (etec) for Corporate & Investment Banking Q Full integration of Eurohypo risk management in Commerzbank Q Concentration of all risk functions in Group Management Division Split of Risk Control in two separate units for Risk Strategy, Market and Operational Risk and Credit Risk and Economic Capital A project for Retail Credit including the implementation of a new management platform has been successfully finished in the 3rd quarter Intensive Care: Kick-off for a group wide efficiency project (target: one group wide intensive care department) Full integration of BRE risk management in Commerzbank Q Q Q Q Q Q Q Overall budget for all risk functions (including BRE Bank) is planned to remain stable over the next three years. Steady improvement of the IT-platform is a requirement for an effective and efficient state-of-the-art Risk Management and reduction of administration costs A3 / 26 A26 / 23

27 Appendix 1. Risk management organisation A1 - A3 2. Credit Risk details A4 - A11 3. Market Risk details A12 - A16 4. Management by anticipation A17 - A23 5. How to make Risk Management successful A24 - A26 A4 / 27 A26 / 23

28 Credit Risk details Portfolio quality Private and Business Customers consequent risk-adjusted pricing based on selective scoring systems and positive Basel II effects increase the profitability of the credit book Exposure at Default (EaD) - breakdown in bn (as of June 2007) bn 38.8 residential mortgage loans income property loans individual and business loans consumer finance* consumer instalment loans comdirect Exposure at Default - trend 12/08E based on EL limit and risk density limit; in bn 77 68** < /06 12/06 06/07 12/07E 12/08E EL vs. EaD - breakdown in bp as of June 2007 (June 2006 in brackets) 133 (113) EL vs. EaD - trend in bp EL limit m EL = 278m Preliminary EL limit m consumer instalment loans (68) (89) income property loans individual & business loans 41 (44) consumer finance* 30 (37) residential mortgage loans 10 (32) comdirect 46** /06 12/06 06/07 12/07E 40 12/08E *credit line current accounts, credit cards **figures recalculated based on current parameters; International Asset Management of 9bn which is now part of Others and Consolidation A5 / 28 A26 / 23

29 Credit Risk details Portfolio quality Mittelstandsbank The targeted volume growth for the core target groups German Mittelstand and Central/Eastern Europe (in particular BRE) leads to an increase of risk density in Mittelstandsbank. The good economic situation partly compensates this effect by further reduction of the risk density for BRE and the domestic Mittelstand business. Exposure at Default (EaD) - breakdown in bn (as of June 2007) bn 50 Germany Central and Eastern Europe BRE Financial Institutions Asia Exposure at Default - trend 12/08E based on EL limit and risk density limit; in bn 89 < * 11 4 Breakdown of Germany Mittelstand 14bn Large Corporates and others 36bn 06/06 12/06 06/07 12/07E 12/08E EL vs. EaD - breakdown in bp as of June 2007 (June 2006 in brackets) 70 (64) 67 (87) Breakdown of Germany Mittelstand 52 bp Large Corporates and others 23 bp EL vs. EaD - trend in bp EL limit m EL = 298m Preliminary EL limit m 31 (31) 28 (21) 23 (26) 30 35* /06 12/06 06/07 12/07E 12/08E *figures recalculated based on current Basel II parameters, e.g. adjusted EaD calculation for undrawn lines A6 / 29 A26 / 23

30 Credit Risk details Portfolio quality Corporates & Markets Improvement of risk density by shifting the portfolio towards capital markets and liquid counterparts. In 2008 increase of risk density expected in the US due to the difficult market environment Exposure at Default (EaD) - breakdown in bn (as of June 2007) 3 11 North America Western Europe Multinationals Markets Exposure at Default - trend 12/08E based on EL limit and risk density limit; in bn 57 44** < bn 15 06/06 12/06 06/07 12/07E 12/08E EL vs. EaD - breakdown in bp as of June 2007 (June 2006 in brackets) 36 (38) Western Europe 30 (40) North America 10 (13) Multinationals 3 (2) Markets EL vs. EaD - trend in bp 14* 27** 21 EL limit m EL = 102m /06 12/06 06/07 12/07E 12/08E *EL ratio including trading book ** figures recalculated based on current Basel II parameters, e.g. adjusted EaD calculation for undrawn lines Preliminary EL limit m 24 A7 / 30 A26 / 23

31 Credit Risk details Portfolio quality Commercial Real Estate by regions Exposure reduction by cutback of domestic legacy portfolios, consequent limitation of securitisation and syndication pipeline and lower final takes Exposure at Default (EaD) - breakdown in bn (as of June 2007) bn 39.6 Germany UK France Spain Italy other EU countries USA other countries Exposure at Default - trend in bn new commitments 2006: 34.9bn H1/2007: 22.5bn < 81 79** /06 12/06 06/07 12/07E 12/08E EL vs. EaD - breakdown in bp as of June 2007 (June 2006 in brackets) 40 (47) EL vs. EaD - trend in bp EL limit m EL = 277m Preliminary EL limit m 24 (17) 23 (29) 21 (21) 20 (17) 19 (19) 18 (23) 18 (17) 29 32** /06 12/06 06/07 12/07E 12/08E **figures recalculated based on current Basel II parameters, e.g. adjusted EaD calculation for undrawn lines; Essenhyp CRE is now part of Public Finance and Treasury A8 / 31 A26 / 23

32 Credit Risk details Portfolioqualität Commercial Real Estate by products risk/return oriented monitoring for portfolio structure based on products Exposure at Default (EaD) - breakdown in bn (as of June 2007) bn office buildings shopping centres multi family properties hotels logistic ground mixed portfolio deals (secured and unsecured) Exposure at Default - trend in bn new commitments 2006: 34.9bn H1/2007: 22.5bn < 81 79** 06/06 12/06 06/07 12/07E 12/08E EL vs. EaD - breakdown in bp as of June 2007 (June 2006 in brackets) 49 (42) (52) (47) 35 (38) EL vs. EaD - trend in bp EL limit m EL = 277m 30 (48) 26 (28) ** (24) Preliminary EL limit m 32 06/06 12/06 06/07 12/07E 12/08E **figures recalculated based on current Basel II parameters, e.g. adjusted EaD calculation for undrawn lines; Essenhyp CRE is now part of Public Finance and Treasury A9 / 32 A26 / 23

33 Credit Risk details Portfolio quality Public Finance & Treasury Risk density mainly affected by exposure of Essenhyp Exposure at Default (EaD) - breakdown in bn (as of June 2007) bn EL vs. EaD - breakdown in bp as of June 2007 (June 2006 in brackets) Eurohypo Public Finance Essenhyp EEPK Treasury Breakdown of Essenhyp Public Finance 84bn Real Estate 8bn Exposure at Default - trend 12/08E based on EL limit and risk density limit; in bn < /06 12/06 06/07 12/07E 12/08E EL vs. EaD - trend in bp Breakdown of Essenhyp Public Finance 5 bp Real Estate 21 bp EL limit m Preliminary EL limit m EL = 55m 7 (6) 5 (6) 1 (1) 0 (0) EEPK Essenhyp Treasury Eurohypo 06/06 12/06 06/07 12/07E 12/08E A10 / 33 A26 / 23

34 Credit Risk details Portfolio quality Commerzbank Group (trading book) Significantly increase of the EL limit to support a more active use of the trading book with a closer risk monitoring and a timely P&L calculation Exposure at Default (EaD) - breakdown in bn (as of June 2007) m 39 Private & Business Customers Mittelstandsbank Corporates & Markets Public Finance & Treasury EL 06/ EL limit 2008 Preliminary overall limit 2008: 40m Exposure at Default - trend 12/08E based on EL limit and risk density limit; in bn c. 60 < 80 06/06 12/06 06/07 12/07E 12/08E EL vs. EaD - breakdown in bp as of June EL vs. EaD - trend in bp Preliminary EL limit 2008: 40m EL = 28m /06 06/07 12/07E 12/08E A11 / 34 A26 / 23

35 Appendix 1. Risk management organisation A1 - A3 2. Credit Risk details A4 - A11 3. Market Risk details A12 - A16 4. Management by anticipation A17 - A23 5. How to make Risk Management successful A24 - A26 A12 / 35 A26 / 23

36 Market Risk details Trading book risks Corporates & Markets (ZCM) Using the opportunities in a more volatile environment, improving calculation methods (mark-to-model) for different asset classes and for illiquid products Value at Risk (VaR overnight) /06 09/06 12/06 03/07 06/ Limit VaR Risk allocation (VaR) 2% 5% 25% 44% 7m 24% Interest Rates Credit Spreads Equity FX Precious metals Regulatory capital charge 133./. 35% /06 12/06 06/07 more volatile environment increased trading book activities extension of business 2008 Risk/Return Analysis trading result Economic Capital Market Risk C&M H1/05H2/05H1/06H2/06H1/07H2/ A13 / 36 A26 / 23

37 Market Risk details Bank book risk Public Finance & Treasury Limitation of credit spread and interest rate risks in the bank book (incl. spread risks of cover fund) and sensitivity limits for interest rates. Challenging environment limits the upside potential for the operating profit Value at Risk (overnight) no overall limit for Public Finance and Treasury Essenhyp Treasury Public Finance Eurohypo 06/06 09/06 12/06 03/07 06/ Limit 20m 40m 25m Risk allocation (VaR) 3% 42% 29m 55% Credit Spreads Interest Rates FX Regulatory capital charge /06 12/06 06/ Risk/Return analysis interest rate result H1/05H2/05H1/06H2/06H1/07H2/ Economic Capital Market Risk A14 / 37 A26 / 23

38 Market Risk details Participation Risk Good economic performance based on fundamental analysis, increasing downside risk in a more volatile environment. Value at Risk (overnight) /06 09/06 12/06 03/07 06/ Limit VaR Risk allocation (VaR) 15% 23% 62.2m 62.2m 62% Top 1 and 2 Top 3 to 5 Rest of the portfolio Revaluation reserves (listed participations) 842 1,370 1,663? 06/06 12/06 06/07 12/07 Risk/Return analysis participation result H1/05H2/05H1/06H2/06H1/07H2/ Economic Capital Participations A15 / 38 A26 / 23

39 Market Risk details Delinquencies for subprime loans 40% Delinquencies 60dpd+ (% of current volumes) 35% 30% 25% 20% 15% 10% 5% 0% age in months vintages Cumulative losses are the result of delinquencies, loans in foreclosure and Real Estate owned multiplied with severities (LGD) Severities are linked to the quality of the underlying credit pool: influenced by collateral quality (depending e.g. on regions and diversity), coverage ratios, first or second lien financings, documentation risk etc. The severities have significantly increased for vintages to 50% or even more. The expected loss for RMBS and CDO tranches on residential mortgages is the result of prepayment rates, cumulative losses, the credit enhancements for the single ABS-tranches and other structural factors (e.g. trigger events, allocation of cash flows to the single tranches of the collateral pool). source: Merrill Lynch ( ) Barclays (2006) A16 / 39 A26 / 23

40 Appendix 1. Risk management organisation A1 - A3 2. Credit Risk details A4 - A11 3. Market Risk details A12 - A16 4. Management by anticipation A17 - A23 5. How to make Risk Management successful A24 - A26 A17 / 40 A26 / 23

41 Management by anticipation Anticipative steering of risk in cyclical markets is based on expert knowledge and model estimation Expert knowlegde Model estimation Market developments (position-fixing in the cycle) negative 1 positive Phase of cycle Model (risk appetite) Max under negative conditions Actual-EL Min under positive conditions Actual provisioning Migration Business strategy (planned changes in portfolio) Risk increases Risk decreases Impact of portfolio changes A B C D E Risk increases (A) decreases (E) Model (planning process) Required sustainable rate of return Revenue planning (profit before LLP) Econ. Capital Risk appetite Level of Expected Loss Risk strategy Risk taking capability and bulk risk limitation based on Economic Capital Setting of key risk limit: Expected Loss (based on the specific risk distributions of the segments) Planning the cost of risk: Run Rate LLPs, General-LLPs, Intensive Care result Steering the business Cut-offs Risk-adjusted pricing Authorities / guidelines bulk risk limitation limitation of concentration / correlation risk additional limits based on EaD for special portfolios with higher risk Managing the portfolio Targeted sub-limits Strategic planning Monitoring risk appetite and capacity for risk Controlling / Corporate Governance All quantitative risks are reported by the CRO on Board level and in the Risk Committee of the Supervisory Board based on the quarterly risk report, batch reports and special analysis on a case-by-case basis Target of the risk strategy is to optimise the risk positioning (portfolio migration and new business) by combining the results of model estimations based on historical parameters with forward-looking expert knowledge. A18 / 41 A26 / 23

42 Management by anticipation Model estimation: key steering parameters for overall risk strategy Business control for Credit and OpRisk by Expected Loss limits through-the-cycle Planning Cycle Credit and OpRisk Minimum return on equity based on market expectations Downturn RoRaC is derived by scaling the rate of return to economic capital. As a result, the minimum return requirements dictated by the stress scenarios correspond to the cost of capital. This defines and ensures a sustainable (preset) minimum rate of return. Minimum Return on Capital Risk Volatility Portfolio quality based on key risk parameters F1 F2 F1 F2 Earnings and costs EL RA EC Poor diversification EL RA EC Good diversification The segment-specific portfolio distribution is determined by the relationship between EL and risk appetite (RA; based on 80% confidence level) (= F1; diversification, granularity) and between risk appetite and EC (99.95% confidence level) (= F2; concentrations, fat tails). Planned earnings The planning figures for revenues and costs are taken into account through the projected contribution margin pre risk (optimising risk/return) The expected loss limits are determined considering the minimum return on equity based on internal targets and external expectations. They have to ensure that the portfolio (under current revenue projections and given portfolio quality) maintains a positive value added even in the weakest year in a 5-year horizon. A19 / 42 A26 / 23

43 Management by anticipation EL limits for segments (bank book credit) based on model estimation Planned increase of Group EL limits by 4% with risk/return oriented trends for segments underlines the quality-based approach; risk density planned is stable for overall portfolio, EL limit increase for Mittelstandsbank by 10% based on further growth targets for BRE Bank and domestic MidCap business, reduction for Retail based on the strict management target to optimise the return on equity Expected Loss (EL) - breakdown (as of June 2007) (*) 251** EL-Limit Group EL limits bank book: June 2007: 1,021m target 2007: 998m target 2008: 1,040m (preliminary) *** new limit based on current exposure no target 10 Jun 07 target 08 Jun 07 target 08 Jun 07 target 08 Jun 07 target 08 Jun 07 target 08 Jun 07 target 08 Private & Business Customers Mittelstandsbank Corporates & Markets Commercial Real Estate Public Finance & Treasury Others & Consolidation Risk density (EL vs. EaD) - breakdown in bp (as of June 2007) Group EL vs. EaD limits bank book: June 2007: 21 bp target 2007: 20 bp target end of 2008: 21 bp (preliminary) Jun 07 target 08 Jun 07 target 08 Jun 07 target 08 Jun 07 target 08 Jun 07 target 08 Jun 07 target 08 Private & Business Customers Mittelstandsbank Corporates & Markets Commercial Real Estate Public Finance & Treasury Others & Consolidation * tendencies based on model estimation and 2007 forecasts for earnings and costs. Final determination of EL in the budgeting process based on expert knowledge. ** target to be achieved yearend 2007, utilisation coming from 291m as per 06/06 A20 / 43 A26 / 23 *** limit including Real Estate business of Essenhyp

44 Management by anticipation Model estimation for Market Risk based on stress analysis Downside scenarios with limited effect on P&L but significant effect on revaluation reserves. The downside risk is monitored based on stress limits and loss review triggers Interest rates (strong inverse) overall: - 138m Controlled by VaR and sensitivity limits; effecting almost completely revaluation reserves 0-9 Equity (10% down) overall: - 460m 19 0 Investments based on fundamental analysis and monitoring of equity markets. P&L effect < 20%; revaluation reserves effected by more than 80% mainly participation risk Corp. & Markets Treasury Essenhyp Eurohypo Others Corp. & Markets Treasury Essenhyp Eurohypo Others Public Finance & Treasury Public Finance & Treasury Credit Spreads (risk weighted widening) FX (USD 10% up) overall: - 252m P&L effect < 20%; revaluation reserves effected by more than 80% VaR limits; steering based on economic performance overall: - 5m no major impact Corp. & Markets Treasury Essenhyp Eurohypo Public Finance & Treasury Others Corp. & Markets Treasury Essenhyp Eurohypo Public Finance & Treasury Others A21 / 44 A26 / 23

45 Management by anticipation Model estimation & expert knowledge: Anticipative steering of risk in cyclical markets Business and risk strategy Result of risk modelling and expert knowledge PBC 3 D run rate LLPs: EL/EaD: EL: reg. Capital: Based on a new management and IT platform (project finalised), improved environmental conditions, risk-return-oriented business policies and various optimisations on the risk management side (e.g. risk-adjusted processes, improvement of decision-quality, net-presentvalue orientation and focused processes concerning sub- and non-performing loans, improved scorings) we will significantly lower risk density and EL-levels. High impact on regulatory capital according to Basel II and hence the return on equity. MSB 4 B run rate LLPs: EL/EaD: EL: reg. Capital: Based on the positive economic development in the core markets Germany and Eastern Europe (esp. BRE) increase by numbers and exposures for SMEs and MidCaps. Nevertheless, risk management could keep the risk on a comparably low level. Further volume growth can be expected combined with significantly increased cross selling profits. The Mittelstandsbank is highly profitable, therefore an increase of the EL limit is supported by the risk function. C&M 5 C run rate LLPs: EL/EaD: EL: reg. Capital: Market Risk: Focus is to enhance liquidity of our assets also for complex products based on advanced markto-market valuation. For subprime exposure (RMBS, CDO) joint valuation as of yearend 2007 based on hold-to-maturity approach (no fire sale!). Increased use of our trading book especially for secondary market assets (e.g. ABS bonds). This allows more flexible and timely reactions to certain risk and market developments. Bulk risks are consequently limited and we maintain our restrictions on specialised portfolios like ABS, LBO financing and uncollateralized Hedge Fund exposures or investments (Gap Risk). Future oriented risk management is essential for US corporates due to possible stress situations in context of subprime crisis. A22 / 45 A26 / 23

46 Management by anticipation Model estimation & expert knowledge: Anticipative steering of risk in cyclical markets Business and risk strategy Result of risk modelling and expert knowledge CRE 5 B run rate LLPs: EL/EaD: EL: reg. Capital: Perceivable trend towards overheating in particular markets (e.g. USA, UK, Spain). Growth subject to accelerated portfolio turnover and reduction of risk density. Single property financing based on first mortgages of pre-letted projects with acceptable LTV-covenants and strong documentation to limit our exit risk. Reduce unsecured portfolio deals, development financings and equity/mezzanine investments. Existing loan book benefits from moderate Loan-to-Values. Stringent syndication standards and diversified exit channels in place. Liquid syndication/ securitisation pipelines are essential for big ticket originations. Strong limitation of bulk risks. Growth focussed on Emerging Markets in prime locations. PF&T 4 C run rate LLPs: EL/EaD: EL: reg. Capital: Market Risk: Steering of portfolio risk is mainly focussed on interest rates (volatility, incongruity, sensitivities etc.) and credit spreads which are consequently monitored and limited (Value at Risk, correlations stress and scenario reviews etc.). Performance measurement based on economic performance (incl. revaluation reserves), next step comprehensive income. Focus on liquid assets and intelligent structured products (e.g. Public Private Partnership - PPP), limitation of bulk risks. Flight-to-quality scenario with challenge for selective exposures. Segment includes the complete portfolio of Essenhyp (incl. real estate and remarkable financial institutions investments) Others & Consolidation 4 B run rate LLPs: EL/EaD: EL: reg. Capital: Market Risk: Grandfathering of existing participation portfolio based on standardized approach (KSA). AIRB Participation Risk model in development for certification (2008/2009). The model is crucial for new investments. Targeted reduction of risk in the portfolio by selective sales and hedging activities where necessary. A23 / 46 A26 / 23

47 Appendix 1. Risk management organisation A1 - A3 2. Credit Risk details A4 - A11 3. Market Risk details A12 - A16 4. Management by anticipation A17 - A23 5. How to make Risk Management successful A24 - A26 A24 / 47 A26 / 23

48 How to make Risk Management successful How to make risk management successful Strong and independent risk function, joint approach using advanced methods and expert knowledge, effective and timely communication and information flow with business units, Board of Managing Directors, Supervisory Board and the regulator. Higher volatility and complexity reaffirms importance of understanding all underlying risks and taking action if things are developing negatively. Culture All quantitative risk functions are concentrated in the division group management under responsibility of the CRO The risk function is working service oriented, but is not subject to directives from the business units. Establishing risk transparency based on independent analysis tools Well-established risk culture in Commerzbank stands for continuity No business outside of limits approved by the risk function Competence Key staff of the risk function are working on the same level with sales and business. They can not be overruled in all credit and risk committees Performance key of the risk function depends largely on risk parameters and only partly on successful business activities Close interaction of expert knowledge and method expertise Specialized Risk Management recruiting/ training program based on divisional qualitative and quantitative staff requirements for mid- and long-term planning. Communication The CRO reports regularly in the Board of Managing Directors and the Risk Committee of the Supervisory Board on current risk situation and measures for optimising risk Constant dialogue with regulators and rating agencies about the current risk assessment intensive exchange of views in the Risk Committee of the German Banking Association and in Risk Management roundtables with other banks (esp. domestic: G8 and global: RMA). Regulation Consistent compliance with regulatory requirements (Basel II, MaRisk, Solvabilitätsverordnung etc.) and use of the most advanced approaches Close cooperation and communication with the regulator (BaFin, Bundesbank) A25 / 48 A26 / 23

49 How to make Risk Management successful Prudent risk management across the economic cycle Delivered as promised => Reliable forecasts high degree of transparency => trends for risks and chances loan loss provisions 2007 lower than promised at Investors Day 2006 Basel II implementation on track; reduction of regulatory capital up to 10% (Cap) expected for 2008 Business within risk taking capability and strong bulk risk limitation Risk Management by Anticipation comprehensive disclosure for all major portfolios based on the relevant risk parameters (e.g. EL, EaD, LLPs, VaR) Timely disclosure of important developments (Investors Day, Quarterly and Annual Report) e.g. early communication of subprime exposures (volume, rating structure) risk modelling across the economic cycle => state-of-the-art risk management Combination of model and expert knowledge for the determination of the position in the cycle and enhancement of forecast quality simulation and stress scenarios based on downturn events to learn your lessons and improve your systems Clear and consequent risk and business strategy => guidance Steering of risk/ return oriented growth for all segments based on market experience and risk limitation close monitoring and additional EaD limitation of risk sensitive portfolios (e.g. ABS, LBO, Hedge Fonds) and syndication/securitisation pipeline etc. based on VaR and economic performance efficient intensive care and workout function Alan Greenspan (American Bankers Association Annual Convention, 5. October 2004): It would be a mistake to conclude that the only way to succeed in banking is through ever-greater size and diversity. Indeed, better Risk Management may be the only truly necessary element of success in banking. A26 / 49 A26 / 23

50 Disclaimer All presentations shown at Investors Day based on new group reporting as published per H This presentation has been prepared and issued by Commerzbank AG. This publication is intended for professional and institutional investors only. Any information in this presentation is based on data obtained from sources considered to be reliable, but no representations or guarantees are made by Commerzbank AG and/or its subsidiaries and/or affiliates (herein described as Commerzbank Group) with regard to the accuracy of the data. This presentation also contains forward-looking statements that reflect our current views and expectations about future events. The words anticipate, assume, believe, estimate, expect, intend, may, plan, project, should and similar expressions are used to identify forward-looking statements. These statements are based on plans, estimates and projections as they are currently available to the management of Commerzbank AG. Forward-looking statements therefore speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events. By their very nature, forwardlooking statements involve risks and uncertainties. A number of important factors could therefore cause actual results to differ materially from those contained in any forward-looking statement. This presentation is for information purposes; it is not intended to be and should not be construed as an offer or solicitation to acquire, or dispose of any of the securities or issues mentioned in this presentation. Commerzbank Group accepts no responsibility or liability whatsoever for any expense, loss or damages arising out of, or in any way connected with, the use of all or any part of this presentation. Copies of this document are available upon request or can be downloaded from 50 / 23