Hypo Real Estate Bank International Aktiengesellschaft

Pursuant to article 16 para. 3 of the German Securities Prospectus Act investors who have already agreed to purchase or subscribe for Notes issued under the Programme (as defined herein) before this Supplement (as defined herein) has been published shall have the right, exercisable within a time limit which shall not be shorter than two working days after the publication of this Supplement, to withdraw their acceptances as far as the purchase is not completed yet.

Supplement pursuant to article 16 para. 1 of the German Securities Prospectus Act dated 12 May 2006

to the base prospectus dated 13 July 2005 and supplemented on 29 July 2005 and on 20 December 2005

relating to

Hypo Real Estate Bank International Aktiengesellschaft (formerly Württembergische Hypothekenbank Aktiengesellschaft) Stuttgart, Federal Republic of Germany as Issuer Euro 25,000,000,000 Debt Issuance Programme

This supplement (the “Third Supplement”, “this Supplement”) to the base prospectus dated 13 July 2005 is prepared in connection with the Euro 25,000,000,000 Debt Issuance Programme (the “Programme”) of Hypo Real Estate Bank International Aktiengesellschaft (formerly Württembergische Hypothekenbank Aktiengesellschaft) (the “Issuer”) and is supplemental to, and should be read in conjunction with, the base prospectus dated 13 July 2005 and supplemented on 29 July 2005 (the “First Supplement”) and on 20 December 2005 (the “Second Supplement”) (together the “Original Base Prospectus”) in respect of the Programme. Unless otherwise stated or the context otherwise requires, terms defined in the Original Base Prospectus shall have the same meaning when used in the Second Supplement. As used herein, the term “Base Prospectus” means the Original Base Prospectus and the Third Supplement. The Third Supplement is related to the fact that the Issuer has published its annual report including financial information for the year 2005 and to the fact that following the restructuring of Hypo Real Estate Group (“Hypo RE Group”) that has been described by the Second Supplement additional financial information is now available to investors. The Issuer accepts sole responsibility for the information contained in the Base Prospectus. To the best knowledge of the Issuer, information contained in, or incorporated into the Base Prospectus is in accordance with the facts and contains no omission of material information.

This Supplement has been filed with the Bundesanstalt für Finanzdienstleistungsaufsicht in its capacity as the Competent Authority and has been published together with the Original Base Prospectus on the website of the Issuer (http://www.hypointernational.com).

The Issuer announces the following new factors relating to the information included in the Original Base Prospectus.

In the following, amendments to the wording of the Original Base Prospectus are underlined.

Supplemental Information

OVERALL CHANGES

Pursuant to Article 16 of the German Securities Prospectus Act, this Supplement modifies and adjusts the base prospectus dated 13 July 2005 as supplemented by the First and the Second Supplement. If reference is made in the Original Base Prospectus to “Base Prospectus”, then the respective reference includes all changes made by the First, Second and Third Supplement. With respect to Section VII. (“FORM OF FINAL TERMS”) (page 121) of the Original Base Prospectus the reference made to “Base Prospectus” is changed into the “Base Prospectus as supplemented on 29 July 2005, on 20 December 2005 and on 12 May 2006 (together herein the “Base Prospectus”)”.

I. SUPPLEMENTAL INFORMATION RELATING TO THE SUMMARY

SUMMARY OF THE DESCRIPTION OF THE ISSUER (SECTION I.2 OF THE BASE PROSPECTUS)

Information contained in Section I.2 paragraph “Statutory Auditor’s” (page 6) of the Original Base Prospectus is hereby deleted and substituted by the following:

“Statutory Auditors For the financial year ended 31 December 2004, the independent auditors of the Issuer were Ernst & Young AG Wirtschaftsprüfungsgesellschaft, Mittlerer Pfad 15, 70499 Stuttgart, Germany. For the financial year ended 31 December 2005, the independent auditors of the Issuer were KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft, Wirtschaftsprüfungsgesell- schaft, Ganghoferstraße 29, 80339 München, Germany.”

Information contained in Section I.2 paragraphs “Historical Financial Information”, “Auditing of Historical Financial Information”, “Interim and other Financial Information”, “Legal and Arbitration Proceedings“ and “Significant Change in Financial Position” (page 7) of the Original Base Prospectus is hereby deleted and substituted by the following:

“Historical Financial Information An overview on historical financial information is given by the Management Accounts of the Issuer according to the German Commercial Code for the financial years ended 31 December 2005 and 31 December 2004 (in Euro millions)

2005 2004

Loan commitments 7,041.9 6,977.8 of which mortgage loans 4,487.5 3,452.6 of which municipal loans 2,554.4 3,525.2 including public-sector loans 2,015.5 2,761.0

Loan portfolio 18,840.6 19,896.4 of which mortgage loans 12,660.6 12,585.3 of which municipal loans 6,180.0 7,311.1 External public sector securities 8,654.7 7,694.6 Bond sales 15,614.5 7,789.0

Balance sheet total 36,233.9 32,320.4 Net interest income 135.5 117.4 Operating result 75.7 57.7 Transfer on account of profit transfer agreement 68.9 57.0

Compensation payment on account of profit transfer agreement per share (in Euro) - 2.68

Equity capital (balance sheet) 1,177.1 1,065.2 Equity capital ratios according to KWG (German Banking Act) Core capital quota (%) 6.6 7.5 Total capital quota (%) 10.0 11.5

Auditing of Historical Financial The auditors of the Issuer have prepared reports in respect of each set of statutory accounts Information for the two financial years ended 31 December 2005 and 31 December 2004 and issued in each such report an unqualified opinion.

Interim and other Financial The Issuer has not published interim financial information since the date of its last audited Information financial statements.

Legal and Arbitration Proceedings The Issuer is not involved in any court or arbitration proceedings which could have a significant impact on its economic position.

Significant Change in Issuer’s In the course of the restructuring of Hypo RE Group, the respective arrangements the Issuer Financial Position entered into (mentioned above under “Information about the Issuer”) significantly affect positions in the balance sheet of the Issuer. The volume of total assets and total liabilities has increased significantly and the core capital and risk-weighted assets have more than doubled.”

II. ERGÄNZENDE INFORMATIONEN ZUR DEUTSCHEN ÜBERSETZUNG DER ZUSAMMENFASSUNG

ZUSAMMENFASSUNG DER BESCHREIBUNG DER EMITTENTIN (ABSCHNITT II.2 DES BASISPROSPEKTS) Die im Abschnitt II.2 Absatz „Gesetzliche Wirtschaftsprüfer“ (Seite 14) des ursprünglichen Basisprospekts in der Fassung vom 13. Juli 2005 sowie geändert und ergänzt durch den Nachtrag vom 29. Juli 2005 und den Nachtrag vom 20. Dezember 2005 enthaltenen Angaben werden hiermit gestrichen und durch folgenden Wortlaut ersetzt:

„Gesetzliche Wirtschaftsprüfer Für das Geschäftsjahr, welches am 31. Dezember 2004 zu Ende ging, war Wirtschaftsprüfer Ernst & Young AG Wirtschaftsprüfungsgesellschaft, Mittlerer Pfad 15, 70499 Stuttgart, Deutschland. Für das Geschäftsjahr, welches am 31. Dezember 2005 zu Ende ging, war Wirtschaftsprüfer KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft, Wirtschaftsprüfungsgesell- schaft, Ganghoferstraße 29, 80339 München, Deutschland.“

Die im Abschnitt II.2 Absätze „Historische Finanzinformationen“, „Prüfung der historischen Finanzinformationen“, „Zwischenberichte und sonstige Finanzinformationen“, „Prozesse und Schiedsgerichtsverfahren“ und „Wesentliche Änderungen der Finanzlage der Emittentin“ (Seite 15 und 16) des ursprünglichen Basisprospekts in der Fassung vom 13. Juli 2005 sowie geändert und ergänzt durch den Nachtrag vom 29. Juli 2005 und den Nachtrag vom 20. Dezember 2005 enthaltenen Angaben werden hiermit gestrichen und durch folgenden Wortlaut ersetzt: „Historische Finanzinformationen Ein Überblick über die historischen Finanzinformationen bieten die HGB-Kennzahlen des Emittenten für die Geschäftsjahre, die am 31. Dezember 2005 bzw. am 31. Dezember 2004 endeten (in Millionen Euro):

2005 2004

Neugeschäft 7.041,9 6.977,8 davon Hypothekendarlehen 4.487,5 3.452,6 davon Kommunaldarlehen 2.554,4 3.525,2 einschließlich öffentlicher Darlehen 2.015,5 2.761,0

Darlehensbestand 18.840,6 19.896,4 davon Hypothekendarlehen 12.660,6 12.585,3 davon Kommunaldarlehen 6.180,0 7.311,1 Fremde Wertpapiere öffentlich-rechtlicher Emittenten 8.654,7 7.694,6 Absatz von Schuldverschreibungen 15.614,5 7.789,0

Bilanzsumme 36.233,9 32.320,4 Zinsüberschuss 135,5 117,4 Betriebsergebnis 75,7 57,7 Abführung aufgrund Gewinnabführungsvertrag 68,9 57,0 Ausgleichszahlung aufgrund Gewinnabführungsvertrag

je Aktie (in Euro) - 2,68

Eigenkapital (bilanziell) 1.177,1 1065,2

Eigenkapitalquoten KWG Kernkapitalquote (%) 6,6 7,5 Gesamtkapitalquote (%) 10,0 11,5

Prüfung der historischen Die Abschlussprüfer der Emittentin haben die Jahresabschlüsse für das am 31. Dezember Finanzinformationen 2004 und das am 31. Dezember 2005 beendete Geschäftsjahr geprüft und in jedem Fall einen uneingeschränkten Bestätigungsvermerk erteilt.

Zwischenberichte und sonstige Die Emittentin hat seit dem Datum ihres zuletzt geprüften Jahresabschlusses keine Finanzinformationen Zwischenberichte veröffentlicht.

Prozesse und Die Emittentin ist an keinen Prozessen oder Schiedsgerichtsverfahren beteiligt, die sich Schiedsgerichtsverfahren wesentlich auf ihre wirtschaftliche Position auswirken könnten.

Wesentliche Änderung der Im Zuge der Umstrukturierung der Hypo RE Group wirken sich die jeweiligen von der Finanzlage der Emittentin Emittentin geschlossenen Verträge (siehe oben unter „Informationen über die Emittentin“) wesentlich auf Positionen in der Bilanz der Emittentin aus. Das Gesamtvolumen der Aktivseite und Passivseite hat sich deutlich erhöht und das Kernkapital sowie die gewichteten Risikoaktiva haben sich mehr als verdoppelt.“

III. SUPPLEMENTAL INFORMATION RELATING TO THE DESCRIPTION OF THE ISSUER

1. STATUTORY AUDITORS (SECTION IV.1 OF THE BASE PROSPECTUS)

Section IV.1 (“STATUTORY AUDITORS”) (page 26) of the Original Base Prospectus is herby deleted and substituted by the following: “For the financal year ended 31 December 2004, the independent auditors of the Issuer were Ernst & Young Wirtschaftsprüfungsgesellschaft AG, Mittlerer Pfad 15, 70499 Stuttgart, Germany (“Ernst & Young”). They have audited the financial statements of the Issuer for the year ended 31 December 2004, and have issued an unqualified opinion. Ernst & Young is a member of the German certified public accountants association (Wirtschaftsprüfungskammer). For the financial year ended 31 December 2005, the independent auditors of the Issuer were KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft, Wirtschaftsprüfungsgesellschaft, Ganghoferstraße 29, 80339 München, Germany (“KPMG”). KPMG have audited the financial statements of the Issuer for the year ended 31 December 2005. KPMG is a member of the German certified public accountants association (Wirtschaftsprüfungskammer).”

2. HISTORICAL FINANCIAL INFORMATION (SECTION IV.8 OF THE BASE PROSPECTUS)

Historical Financial Information

In Section IV.8 (“HISTORICAL FINANCIAL INFORMATION”) of the Original Base Prospectus the Subsections entitled “Historical Financial Information”, “Auditing of Historical Financial Information”, “Interim and other Financial Information”, “Legal and Arbitration Proceedings” and “Significant change in the Issuer’s financial position (page 33 to 40 as partially amended by the Second Supplement) are hereby deleted and substituted by the following (“HI Dublin” refers to “Hypo Real Estate Bank International puc, Dublin” (in the meanwhile renamed into “Hypo Public Finance Bank puc” and with the effectiveness of the so called “Contribution Agreement” (as defined in the Second Supplement) a subsidiary of the Issuer) and “Hypo RE Holding” refers to “Hypo Real Estate Holding AG” the sole shareholder of the Issuer):

“The Issuer’s Annual Reports for the year ended 31 December 2004 including the financial statements and the auditor’s report thereon have been incorporated by reference in this Base Prospectus.

The Issuer’s Annual Report for the year ended 31 December 2005, including the financial statements and the auditor’s report thereon, is contained in the Annex to the Third Supplement.

The financial information, set out in this Base Prospectus gives, when read in conjunction with the financial statements incorporated herein, a true and fair view of the financial position of the Issuer in conformity with applicable accounting policies. The financial statements of the Issuer have been prepared on the basis of the German generally accepted accounting principles (“German GAAP”).

The summary financial information relating to the Issuer set out in this Base Prospectus for each of the two years ended 31 December 2004 and 31 December 2005, does not constitute the full statutory accounts prepared by the Issuer as required by German law, but has been extracted (except for the cash flow statement) without material adjustment from the audited financial statements of the Issuer for those years.

ANNUAL BALANCE SHEET AT 31 DECEMBER 2005 AND 31 DECEMBER 2004

The following table is taken from the Issuer’s Annual Report for the financial year ended on 31 December 2005 and shows the balance sheet of the Issuer for the financial years ended on 31 December 2005 and 31 December 2004, respectively.

Assets 31.12.2005 31.12.2004 EUR EUR EUR Prev. year TEUR 1. Cash reserve a) Cash on hand 23,922 21 b) Cash at central banks 18,788,422 18,812,344 29,808 including at the Deutsche Bundesbank EUR 18,788,422 (29,808) 2. Receivables from credit institutes a) Mortgage loans 49,062,530 39,595 b) Municipal loans 2,760,158,032 3,119,197 c) Other receivables 6,280,720,229 9,089,940,791 2,935,404 including EUR 1,353,921,161 due daily (1,001,384) EUR – in loans secured against securities (-) 3. Receivables from customers a) Mortgage loans 12,630,373,393 12,622,805 b) Municipal loans 3,583,445,368 4,386,374 c) Other receivables 452,886,392 16,666,705,153 9,790 including EUR – in loans secured against securities (-) 4. Bonds and other fixed-interest securities a) Bonds and debentures aa) due from public-sector issuers 4,552,542,832 3,843,237 including EUR 4,552,542,832 eligible as collateral at the Deutsche Bundesbank (3,843,237) ab) due from other issuers 5,295,967,477 9,848,510,309 4,778,764 including EUR 4,578,546,039 eligible as collateral at the Deutsche Bundesbank (4,278,764) b) Own debentures 264,020,932 10,112,531,241 99,259 nominal value EUR 262,261,040 (98,058) 5. Investments/participations 14,212,810 514 including in other credit institutions EUR 178,850 (179) including EUR – in other financial service institutions (-) 6. Shares in affiliated companies 119,970,073 132,758 including EUR – in other credit institutions (-) including EUR – in other financial service institutions (-) 7. Fiduciary assets 93,579 128 including EUR 93,579 in fiduciary loans (128) 8. Intangible assets 7,218,054 2,079 9. Fixed assets 2,774,216 1,595 10. Other assets 107,985,861 224,625 11. Deferred items a) from issuing and lending business 84,014,454 88,745 b) from other sources 9,657,006 93,671,460 5,752 Total assets 36,233,915,582 32,320,450

LIABILITIES 31.12.2005 31.12.2004 EUR EUR EUR Prev. year TEUR 1. Payables to credit institutions a) Registered mortgage bonds issued 365,492,486 145,011 b) Registered public mortgage bonds issued 283,398,512 370,624 c) Other liabilities 3,517,570,488 4,166,461,486 4,738,869 including EUR 50,546,136 due daily (213,360) EUR – in registered mortgage bonds issued to the lender as security for loans taken up (-) and EUR 0,00 - as registered public mortgage bonds (-) 2. Payables to customers a) Registered mortgage bonds issued 877,509,637 667,884 b) Registered public mortgage bonds issued 1,603,503,266 1,680,284 c) Other liabilities 2,357,301,450 4,838,314,353 1,933,288 including EUR 24,178,770 due daily (22,586) EUR 5,112,919 in registered mortgage bonds issued to the lender as security for loans taken up (5,113) and EUR 0.00 - as registered public mortgage bonds (12,782) 3. Secured liabilities a) Bonds issued aa) mortgage Pfandbriefe 4,553,706,648 4,464,984 ab) public Pfandbriefe 12,614,164,071 11,900,310 ac) other bonds 8,579,247,391 25,747,118,110 5,132,089 4. Liabilities from fiduciary contracts 93,579 128 including EUR 93,579 in loans from fiduciary contracts (128) 5. Other liabilities 174,149,368 101,655 6. Deferred income a) from issuing and lending business 20,874,805 29,824 b) other 43,768,693 64,643,498 34,020 7. Provisions Pension provisions and similar obligations 21,952,531 21,098 b) Tax provisions 13,063,765 12,064 c) Other provisions 24,218,125 59,234,421 17,165 8. Subordinated liabilities 206,209,820 173,464 9. Profit participation certificates 202,258,376 202,258 including EUR - due within 2 years (-) 10. Funds for general banking risks 40,903,351 40,903 11. Equity capital a) Subscribed capital 45,811,449 45,811 b) Capital reserves 472,426,719 392,427 c) Revenue reserves ca) legal reserves 22,860,473 22,860 cb) reserves for own shares - - cc) statutory reserves - - cd) other revenue reserves 193,404,365 216,264,838 734,503,006 193,404 d) Retained income/accumulated losses 26,214 26 Total liabilities 36,233,915,582 32,320,450

1. Contingent liabilities a) Contingent liabilities from guarantees and indemnity agreements 262,986,818 21,158 2. Other obligations a) Irrevocable credit commitments 674,157,837 376,360

PROFIT AND LOSS ACCOUNT FOR THE PERIOD FROM 1 JANUARY TO 31 DECEMBER 2005 AND 2004

The following table is taken from the Issuer’s Annual Report for the financial year ended on 31 December 2005 and shows the profit and loss account of the Issuer for the financial years ended 31 December 2005 and 31 December 2004, respectively.

5. Other operating expenses 1,017,326 1,728

22,329,338 25,203 7. Extraordinary expenses 5,150,000 - 8. Taxes on income 1,702,299 696 9. Other taxes not included in item 6 4,101 -28 10. Profits transferred due to a profit pooling, profit transfer or partial profit transfer agreement 68,882,118 57,003

Total expenses 3,193,093,957 2,296,936

INCOME 2005 2004 EUR EUR Prev. year TEUR 1. Interest income from a) Lending and money market transactions 2,921,479,964 2,061,685 b) Fixed-interest securities and registered debts 241,311,381 3,162,791,345 204,638 2. Current income from a) Investments/participations 4,842 5 b) Shares in affiliated companies 4,305,740 4,310,582 6,754 3. Commission income 8,833,790 11,009 4. Income from appreciation of shares and participations in affiliated companies and from securities treated as fixed assets 14,436,525 11,461 5. Other operating income 2,721,715 1,384 Total income 3,193,093,957 2,296,936

1. Net income for the year/net loss for the year - - 2. Profit brought forward from the previous year 26,214 26 26,214 26 3. Transfers from capital reserves - - 26,214 26 4. Transfers from revenue reserves a) from legal reserves b) from the reserve for own shares c) from statutory reserves d) from other reserves 26,214 26 5. Withdrawals from profit-sharing certificates 26,214 26 6. Transfers to revenue reserves a) to legal reserves b) to the reserve for own shares c) to statutory reserves d) to other reserves 26,214 26 7. Replenishment of profit-sharing certificates

8. Retained income/accumulated losses 26,214 26

CASH FLOW STATEMENT FOR THE FINANCIAL YEARS ENDED 31 DECEMBER 2005 AND 2004

The following table shows the cash flow statement of the Issuer for the financial years ended 31 December 2005 and 31 December 2004, respectively. Please note that the cash flow statement does not form part of the audited historical financial information.

Cash flow statement (per thousand EUR) year 2005 year 2004 1. Net income before tax 70,584 57,699 Adjustments to reconcile net income to net cash used in operating activities:

2. Write-downs and write-ups of investments, property, plant and 18,437 25,392 equipment 3. Results from the allocation/write-off of provisions 5,402 736 4. Change in other non-cash positions 5,784 875 5. Results from the sale of investments, property, plant and equipment -14,647 -11,485 6. Other adjustments -118,960 -104,500 7. Subtotal -33,400 -31,283

Changes in assets and liabilities from operating-activities after correction for non-cash components

8. Receivables from credit institutions -2,843,787 -612,328 9. Receivables from customers 297,698 -514,725 10. Bonds and other fixed-interest securities -1,752,788 -3,190,033 11. Other assets from operating activities 116,305 -120,822 12. Payables to credit institutions -1,204,693 2,617,106 13. Payables to customers 561,465 259,607 14. Secured liabilities 4,239,520 367,308 15. Other liabilities from operating activities 63,087 -29,418 16. Interest received 4,453,023 3,484,309 17. Interest paid -4,302,131 -3,372,544 18. Commission received 8,852 11,009 19. Commission paid -25,109 -23,822 20. Taxes on income paid -702 21,307 21. Cash flow from operating activities -422,660 -1,134,329

Proceeds from the reduction of 22. investments 633,999 1,271,919 23. property, plant and equipment 83 82 Payments for the acquisition of 24. investments -259,796 -52,301 25. property, plant and equipment -1,968 -976 26. Cash flow from other investing activities -5,854 -1,298 27. Cash flow from investing activities 366,464 1,217,426

28. Proceeds from capital increases 80,000 60,000 29. Payments to shareholders -57,003 -53,460 30. Net changes from subordinated capital 31,879 -82,829 31. Cash flow from financing activities 54,876 -76,289

32. Cash and cash equivalents at the end of the previous year 29,461 22,745 21. Cash flow from operating activities -422,660 -1,134,329 27. Cash flow from investing activities 366,464 1,217,426 31. Cash flow from financing activities 54,876 -76,289 33. Effects of exchange rate changes on cash and cash equivalents 17 -92 34. Cash and cash equivalents at the end of the year 28,158 29,461

Auditing of Historical Financial Information

The auditors of the Issuer have audited the historical financial statements (except for the cash flow statement) of the Issuer for the two financial years ended 31 December 2004 and 31 December 2005 and has issued an unqualified opinion (uneingeschränkter Bestätigungsvermerk) in each case.

As regards the cash flow statement for the financial year ended 31 December 2004, Ernst & Young issued the following attestation report to the Issuer (therein “Company” refers to the Issuer):

“ATTESTATION REPORT To Württembergische Hypothekenbank Aktiengesellschaft, Stuttgart

We have audited the statement of cash flows prepared by the company for the fiscal year from January 1, 2004 to December 31, 2004 excluding the preceding period from January 1, 2003 to December 31, 2003. The statement of cash flows supplements to the financial statements of Württembergische Hypothekenbank Aktiengesellschaft, Stuttgart, for the fiscal year from January 1, 2004 to December 31, 2004 prepared on the basis of the German generally accepted accounting principles.

The preparation of the statement of cash flows for the fiscal year from January 1, 2004 to December 31, 2004 excluding the preceding period from January 1, 2003 to December 31, 2003 is the responsibility of the Company’s management.

Our responsibility is to express an opinion based on our audit whether the statement of cash flows for the fiscal year from January 1, 2004 to December 31, 2004 excluding the preceding period from January 1, 2003 to December 31, 2003 has been properly prepared based on the financial statements for the fiscal year from January 1, 2004 to December 31, 2004 in accordance with the German generally accepted accounting principles. An audit of the underlying financial statements is not subject of this engagement.

We planned and performed our audit correspondingly to the generally accepted German standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer in Deutschland (IDW) such that material misstatements in the preparation of the statement of cash flows based on the underlying financial statements are detected with reasonable assurance.

In our opinion, the statement of cash flows for the fiscal year from January 1, 2004 to December 31, 2004 excluding the preceding period from January 1, 2003 to December 31, 2003 has been properly prepared based on the financial statements for the fiscal year from January 1, 2004 to December 31, 2004 in accordance with the German generally accepted accounting principles.

Stuttgart, July 13, 2005 Ernst & Young AG Wirtschaftsprüfungsgesellschaft

Prof. Dr. Caduff Schnitzerling Auditor Auditor”

As regards the cash flow statement for the financial year ended 31 December 2005, KPMG issued the following report to the Issuer (therein “Company” refers to the Issuer):

“AUDITOR’S REPORT To Hypo Real Estate Bank International Aktiengesellschaft, Stuttgart

We have audited the cash flow statement derived by the Company for the business year 2005 from the financial statements for the business year 2005 and from the underlying accounting records. The cash flow statement supplements the annual financial statements of the Company for the business year 2005 prepared on the basis of the German generally accepted accounting principles.

The preparation of the cash flow statement for the business year 2005 is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audit, whether the cash flow statement for the business year 2005 has been properly derived from the financial statements for the business year 2005 and the underlying accounting records in accordance with German generally accepted accounting principles. The audit of the underlying annual financial statements and the underlying accounting records is not subject of this engagement.

We planned and performed our audit in accordance with the IDW Prüfungshinweis: Prüfung von zusätzlichen Abschlusselementen (IDW PH 9.960.2) [IDW Auditing Practice Statement: Audit of Additional Elements (IDW AuPS 9.950.1)] promulgated by the Institut der Wirtschaftsprüfer in Deutschland e.V. (IDW) such that material misstatements in the derivation of the cash flow statement from the underlying financial statements and from the underlying accounting records are detected with reasonable assurance.

In our opinion based on the findings of our audit the cash flow statement for the business year 2005 has been properly derived from the financial statements and from the underlying accounting records for the business year 2005 in accordance with German generally accepted accounting principles.

München, April 25, 2006

KPMG Deutsche Treuhand-Gesellschaft 13

Aktiengesellschaft Wirtschaftsprüfungsgesellschaft

Paskert Multrus Wirtschaftsprüfer Wirtschaftsprüfer”

Interim and other Financial Information

The Issuer has not published interim financial information since the date of its last audited financial statements.

Legal and Arbitration Proceedings

The Issuer is not involved in any court or arbitration proceedings which could have a significant impact on its economic position.

Significant change in the Issuer’s financial position

In the course of the restructuring of Hypo RE Group, the respective arrangements the Issuer entered into affect significantly positions in the balance sheet of the Issuer. A way to quantify these changes is to rely on the relevant segment information included in the annual report as of 31 December 2005 and the interim report as of 31 March 2006 of Hypo RE Holding.

The annual report as of 31 December 2005 and the interim report as of 31 March 2006 of Hypo RE Holding are filed with the Frankfurt Stock Exchange and incorporated by reference into the Base Prospectus (see also Section XI.8 of the Base Prospectus).

In the beginning of 2006, the reorganisation of Hypo Real Estate Group came into effect (for a description of the group structure see also Section IV.4 of the Base Prospectus). The international real estate financing business was pooled under the umbrella of the Issuer (then “Württembergische Hypothekenbank Aktiengesellschaft”). Pursuant to the Contribution Agreement, the entire international real estate financing portfolio of HI Dublin (then “Hypo Real Estate Bank International, Dublin”), has been transferred to the Issuer, which was then renamed into “Hypo Real Estate Bank International Aktiengesellschaft”. Pursuant to the Transfer Agreement, the German financing arrangements of the Issuer were transferred to Hypo Real Estate Bank AG, Munich. Following the transfer of the international real estate financing portfolio from HI Dublin to the Issuer, HI Dublin, now renamed into “Hypo Public Finance Bank” continues to operate Capital Markets and extended business activities to include Public Sector Finance, which focuses on infrastructure and local authority project financing.

To carry out a feasible quantitative description of the transfers it is necessary to describe the following business segments: 1. Württembergische Hypothekenbank (“WuerttHyp”) until 31 December 2005 2. Hypo Real Estate International (“HREI new”) from 1 January 2006 as successor to WuerttHyp 3. Hypo Real Estate International (“HREI old”) until 31 December 2005 4. Hypo Public Finance Bank (“HPFB”) from 1 January 2006 as successor to HREI old

The extensions “old” and “new” for the specification of segments are added to facilitate the differentiation in the Base Prospectus, but are not used in the annual or interim report of Hypo RE Holding.

Segment Württembergische Hypothekenbank

The annual report as of 31 December 2005, the segment Württembergische Hypothekenbank comprises the Issuer and its subsidiary Hypo Real Estate Capital Hong Kong Corporation Limited, Hong Kong which was established as a subsidiary of the Issuer on 13 October 2005.

Segment Hypo Real Estate International (HREI new)

As a result of the reorganisation of the Group into the new structure which has been applicable since the beginning of 2006, in the interim report as of 31 March 2006, the new segment “Hypo Real Estate International” pools the international business with large volume and structured real estate financing. The segment reflects the contributions to earnings made by the following fully consolidated companies:

Hypo Real Estate Bank International Aktiengesellschaft, Stuttgart (formerly Württembergische Hypothekenbank Aktiengesellschaft) Hypo Real Estate Capital Corp., New York (sub-group) - Isar East 60th Street LLC, New York - Isar Gotham West 38th Street LLC, New York - Isar RP Member LLC, New York - Isar Two Columbus LLC, New York - Liffey 451 LLC, New York Hypo Real Estate Capital Hongkong Corp. Ltd., Hongkong 14

Hypo Real Estate Capital Japan Corp., Tokyo Hypo Real Estate Capital Ltd., London (sub-group) - Hypo Property Investment (1992) Ltd., London - Hypo Property Investment Ltd., London - The Greater Manchester Property Enterprise Fund Ltd., London - Hypo Property Participation Ltd., London - Hypo Property Services Ltd., London - Hypo Real Estate Investment Banking Ltd., London - Zamara Investments Ltd., Gibraltar Hypo Real Estate Transactions S.A.S., Paris

Segment Hypo Real Estate International (HREI old)

This segment pools the international business in large-volume structured real estate financing. It includes the earnings contributions of the following fully consolidated companies:

Hypo Capital Markets Inc., New York Hypo Pfandbrief Bank International S.A., Luxembourg Hypo Public Finance USA Inc., New York Hypo Real Estate Bank International, Dublin Hypo Real Estate Capital Corp., New York (sub-group) o Isar East 60th Street LLC, New York o Isar Gotham West 38th Street LLC, New York o Isar RP Member LLC, New York o Isar Two Columbus LLC, New York o Liffey 451 LLC, New York Hypo Real Estate Capital Japan Corp., Tokyo Hypo Real Estate Capital Ltd., London (sub-group) o Hypo Property Investment (1992) Ltd., London o Hypo Property Investment Ltd., London o The Greater Manchester Property Enterprise Fund Ltd., London o Hypo Property Participation Ltd., London o Hypo Property Services Ltd., London o Hypo Real Estate Investment Banking Ltd., London o Zamara Investments Ltd., Gibraltar Hypo Real Estate Transactions S.A.S., Paris Pallas Capital Corporation, Delaware

Segment Hypo Public Finance Bank (HPFB)

Segment reporting includes the contributions to earnings made by the following fully consolidated companies:

Hypo Public Finance Bank, Dublin Hypo Public Finance USA Inc., New York (sub-group) o Collineo Asset Management USA Inc., New York o Hypo Capital Markets Inc., New York Hypo Pfandbrief Bank International S.A., Luxembourg Pallas Capital Corporation, Delaware

Based on the segment reporting of Hypo RE Holding, with respect to balance sheet figures the above mentioned asset transfers can be shown by comparing the old structure with the new structure as follows:

Changes in Stuttgart Entity 31 December 2005 31 December 2005 Segment WuerttHyp Segment HREI new Deviations

Source Annual Report as of Interim Report as of 31 December 2005 31 March 2006

Total assets (in million Euros) 38,376 (Note 23) 52,695 (Note 6) + 14,319 Total liabilities (in million Euros) 37,680 (Note 23) 50,268 (Note 6) + 12,588 Risk weighted assets acc. BIS (in billion 12.4 (Note 26) 31.6 (Note 9) + 19.2 Euros) Core Capital (in million Euros) 779 (Note 26) 2,360 (Note 9) + 1,581

Changes in Dublin Entity 31 December 2005 31 December 2005 Segment HREI old Segment HPFB Deviations

Source Annual Report as of Interim Report as of 31 December 2005 31 March 2006

Total assets (in million Euros) 33,338 (Note 23) 19,139 (Note 6) - 14,199 Total liabilities (in million Euros) 31,392 (Note 23) 18,920 (Note 6) - 12,472 Risk weighted assets acc. BIS (in billion 21.2 (Note 26) 2.0 (Note 9) - 19.2 Euros) Core Capital (in million Euros) 1,881 (Note 26) 300 (Note 9) - 1,581

Overall, the transfer led to an increase/decrease in total assets by around 14.3 billion Euros, an increase/decrease in total liabilities by around 12.5 billion Euros, an increase/decrease in risk weighted assets according to BIS by around 19.2 billion Euros and an increase/decrease in Core Capital by 1,581 million Euros.

Based on the segment reporting of Hypo RE Holding, with respect to key financials of the business segment “Hypo Real Estate International” the above mentioned asset transfers led to the following key financials:

Key Financials HREI new 1.1.–31.3.2006 1.1.–31.3.2005

Operating performance Operating revenues in Euros million 157 123 Net interest income in Euros million 114 89 Net commission income in Euros million 31 27 Net trading income in Euros million — 1 Net income from investments in Euros million 11 5 Balance of other operating income/expenses in Euros million 1 1 Provisions for losses on loans and advances in Euros million 14 5 General administrative expenses in Euros million 41 35 Balance of other income/expenses in Euros million — — Net income/loss before taxes in Euros million 102 83 Net income/loss1) in Euros million 76 65 Key ratios 1.1.–31.3.2006 1.1.–31.12.2005 Return on equity after taxes1) in per cent. 12.7 12.92) Cost-income ratio (based on operating revenues) in per cent. 26.1 29.3 Key indicators 31.3.2006 31.12.2005 Total volume of lending in Euros billion 38.4 37.7 Risk assets compliant with BIS rules in Euros billion 31.4 31.6 Core capital ratio compliant with BIS rules in per cent. 7.7 7.52)

1) Excluding the effects from capitalised losses carried forward 2) Based on allocated capital

Financials for HPFB are not consolidated in the segment “Hypo Real Estate International”. Existing structures in the Group were utilised for setting up Hypo Public Finance Bank. This segment was created as a result of the renaming of the former Hypo Real Estate Bank International in Dublin, and combines state financing and capital market business. As the third major base within the Group, the aim of the segment is to achieve further product diversification and innovation as well as utilise profitable opportunities with a favourable risk profile.

Based on the segment reporting of Hypo RE Holding, with respect to key financials of the business segment “Hypo Public Finance Bank” the above mentioned asset transfers led to the following key financials:

Key Financials HPFB 1.1.–31.3.2006 1.1.–31.3.2005

Operating performance Operating revenues in Euros million 21 11 Net interest income in Euros million 7 6 Net commission income in Euros million 2 - Net trading income in Euros million 11 6 Net income from investments in Euros million 1 -1 Balance of other operating income/expenses in Euros million - - Provisions for losses on loans and advances in Euros million - - General administrative expenses in Euros million 11 10 16

Balance of other income/expenses in Euros million - - Net income/loss before taxes in Euros million 10 1 Net income/loss1) in Euros million 8 1 Key ratios 1.1.–31.3.2006 1.1.–31.12.2005 Return on equity after taxes1) in per cent. 10.2 7.9 Cost-income ratio (based on operating revenues) in per cent. 52.4 70.0 Key indicators 31.3.2006 31.12.2005 Total volume of lending in Euros billion 2.5 1.6 Risk assets compliant with BIS rules in Euros billion 2.1 2.0 Core capital ratio compliant with BIS rules in per cent. 14.7 15.01)

1) Based on allocated capital

In addition, the annual report for the financial year 2005 of HI Dublin as filed with the Commission de Surveillance du Secteur Financier, the competent authority for prospectus approval in Luxembourg, is incorporated by reference into the Base Prospectus (see also Section XI.8).”

IV. SUPPLEMENTAL INFORMATION RELATING TO THE GENERAL DESCRIPTION OF THE PROGRAMME

1. DISPLAY DOCUMENTS (SECTION XI.7 OF THE BASE PROSPECTUS)

Section XI.7 (“DISPLAY DOCUMENTS”) (page 152) of the Original Base Prospectus is hereby deleted and substituted by the following:

“Throughout the duration of the Programme and from the date hereof, copies of the following documents (together with English translations) may be inspected at the registered office of the Issuer and at the specified office of the Listing and Paying Agent in Luxembourg, in each case during usual business hours, on any weekday (Saturday and public holidays excepted) at any time whilst any Note is outstanding: (i) the Articles of Association (Satzung) of the Issuer; (ii) the most recent Annual Report and Accounts of the Issuer together with any subsequent published interim financial statement; (iii) the Annual Report and Accounts of the Issuer for the period ended 31 December 2004 and 31 December 2005; (iv) the Amended and Restated Dealer Agreement; (v) the Amended and Restated Fiscal Agency Agreement (containing the forms of the Notes, Coupons, Talons and Final Terms); (vi) this Base Prospectus and any Final Terms or supplements hereto (excluding the Final Terms in connection with Notes not listed on any stock exchange); (vii) the Annual Report of Hypo Public Finance Bank puc, Dublin (formerly Hypo Real Estate Bank International puc) for the financial year ended 31 December 2005; (viii) the Annual Report for the financial year ended 31 December 2005 and the Interim Report as of 31 March 2006 of Hypo Real Estate Holding AG, Munich.”

2. INCORPORATION BY REFERENCE (SECTION XI.8 OF THE BASE PROSPECTUS)

Section XI.8 (“INCORPORATION BY REFERENCE”) (page 152) of the Original Base Prospectus is hereby deleted and substituted by the following:

“The following documents shall be deemed to be incorporated in, and to form part of, this Base Prospectus:

Document Page Reference

Württemberger Hypo Annual Report 2004 at 31 December 2004 (page references refer to the English version) Description of markets 17 through 24 Risk report 33 through 37 Balance sheet 46 through 47 Profit and loss account 48 through 49 Accounting and valuation principles 50 through 51 Explanatory notes to the balance sheet 52 through 53 Explanatory notes to the profit and loss account 54 Auditor’s opinion 64

This Document has been published on the website of the Issuer (http://www.hypointernational.com).

Hypo Real Estate Holding AG, Annual Report as of 31 December 2005 (page references refer to the English version) Business segment Württembergische Hypothekenbank 54 through 57 Business segment Hypo Real Estate International 50 through 53 Financials on business segment (notes 23 and 26) 96 through 99

This Document has been published on the website of Hypo Real Estate Holding AG (http://www.hyporealestate.com).

Hypo Real Estate Holding AG, Interim Report

as of 31 March 2006 (page references refer to the English version) Business segment Hypo Real Estate International 10 through 13 Business segment Hypo Public Finance Bank 18 through 20 Financials on business segment (notes 6 and 9) 29 through 30

This Document has been published on the website of Hypo Real Estate Holding AG (http://www.hyporealestate.com).

Hypo Public Finance Bank puc Annual Report 2005 (formerly Hypo Real Estate Bank International puc) at 31 December 2005 Balance sheets 35 through 36 Group income statement 34 Notes to the financial statements 43 through 112 Auditor’s opinion 113 through 114

This Document has been published on the website of Hypo Public Finance Bank, Dublin (http://www.hpfb.com).”

Annex: Annual Report of Hypo Real Estate Bank International Aktiengesellschaft (formerly Württembergische Hypothekenbank Aktiengesellschaft) for the financial year ended 31 December 2005

A member of Hypo Real Estate Group

formerly

Annual Report 2005 Management ratios of Hypo Real Estate Bank International according to the German Commercial Code (HGB) in EUR mio.

Change 2005 2004 Absolute % Loan commitments 7,041.9 6,977.8 64.1 0.9 of which mortgage loans 4,487.5 3,452.6 1,034.9 30.0 of which municipal loans 2,554.4 3,525.2 -970.8 -27.5 – including public-sector bonds 2,015.5 2,761.0 -745.5 -27.0

Loan portfolio 18,840.6 19,896.4 -1,055.8 -5.3 of which mortgage loans 12,660.6 12,585.3 75.3 0.6 of which municipal loans 6,180.0 7,311.1 -1,131.1 -15.5 External public-sector securities 8,654.7 7,694.6 960.1 12.5 Bond sales 15,614.5 7,789.0 7,825.5 100.5

Balance sheet total 36,233.9 32,320.4 3,913.5 12.1 Net interest income 135.5 117.4 18.1 15.4 Operating result 75.7 57.7 18.0 31.2 Transfer on account of profit transfer agreement 68.9 57.0 11.9 20.9

Compensation payment on account of profit transfer agreement Per share (in EUR) - 2.68 2.68 100.0

Equity capital (balance sheet) 1,177.1 1,065.2 111.9 10.5 Equity capital ratios according to KWG Core capital quota (%) 6.6 7.5 Total capital quota (%) 10.0 11.5 Cost-income ratio (%) 31.3 31.3 Return on equity before tax (%) 10.2 9.2 Return on equity after tax (%) 9.9 9.1

Staff 198 182 16.0 8.8

Management ratios of Hypo Real Estate Bank International according to International Financial Reporting Standards (IFRS) in EUR mio.

According to the segment statement in the Group Annual Report of Hypo Real Estate Holding AG Change 2005 2004 Absolute % Operating income 129 116 13 11.2 Profit before tax 76 60 16 26.7 Profit after tax 75 59 15 27.1

Cost-income ratio (%) 27.1 28.4 Return on equity before tax (%) 11.2 9.2 Return on equity after tax (%) 11 9.0

BIZ core capital 779 710 69 9.7 BIZ equity capital 1,242 1,071 171 16.0

Core capital quota (%) 6.3 7.1 Equity capital quota (%) 10.0 10.6 This Annual Report has been redesigned as a result of the decision taken in 2005 to transfer the international real estate financing business of Hypo Real Estate Bank International (Dublin) to Württembergische Hypothekenbank AG and to change the name of the latter to Hypo Real Estate Bank International Aktiengesellschaft (Stuttgart). The objective of this forward-thinking decision was to combine the worldwide foreign business activities of Hypo Real Estate Group in order to operate even more efficiently and more dynamically in international real estate markets.

This Annual Report therefore contains information for the last time on a financial year of Württemberger Hypo. In terms of its content and volume, it still follows the tradition of annual reports for previous financial years. We have, however, chosen a layout design which reflects the new corporate design of Hypo Real Estate Group.

By systematically focusing on international aspects, we are also remaining true to our maxim of acting as a competent, innovative and reliable partner for each of our customers. This formed the basis for the success of Württemberger Hypo in the past and will continue to be a ongoing obligation for Hypo Real Estate Bank International AG in the future.

Contents

6 I Foreword by the Board of Directors 8 I Committees and Supervisory Board 12 I Management Report 14 I Business conditions and general economic background 16 I Business report 23 I Financial report 26 I Relationships with affiliated companies 26 I Supplementary report 26 I Forecast report 28 I Risk report 34 I Annual Financial Statements for the 2005 Financial Year 36 I Balance sheet at 31 December 2005 38 I Profit and loss account for the period from 1 January to 31 December 2005 40 I Notes to the Annual Financial Statements 42 I Accounting and valuation principles 44 I Explanatory notes to the balance sheet 47 I Explanatory notes to the profit and loss account 48 I Derivative transactions 49 I Group affiliation 50 I Coverage 51 I Statements according to § 28 of the German Act 56 I Staff 57 I Share ownership 58 I Information on the company’s Statutory Bodies 59 I Corporate Governance Code 59 I Profit transfer 60 I Auditor’s Opinion 62 I Report of the Supervisory Board I Branch Addresses

I I Dear Sir/Madam,

Württemberger Hypo achieved very satisfactory results in 2005. Records were set both in terms of new mortgage business and net interest income. However, 2005 will go down as a very special year in the history of the Bank not only on account of the good operating result. Particular mention must also be made of the forward- looking strategic decision to transfer the international real estate financing business of Hypo Real Estate Bank International (Dublin) to Württembergische Hypothekenbank AG within the framework of an increase in non-cash capital and to change the name of Württembergische Hypothekenbank AG to Hypo Real Estate Bank International Aktiengesellschaft (Stuttgart). This resulted in the pooling of the entire foreign business activities of the Hypo Real Estate Group. This decision was also regarded as very positive by the rating agencies Standard & Poors and Moody’s. As soon as the merger was announced, they independently confirmed the current good rating of the Bank of one another.

New constellation in the Board of Directors

Dr. Robert Grassinger from the Supervisory Board was appointed an ordinary member and Deputy CEO of the Board of Directors with effect from 1 April 2005. Mr. Manfred Weil was also appointed an ordinary member of the Board of Directors with effect from 1 April 2005.

Mr. Jürgen Fenk and Mrs. Bettina von Oesterreich were appointed ordinary members of the Board of Directors with effect from 1 October 2005.

The size of the Board of Directors was increased on account of the decision taken in 2005 to transfer the international real estate financing business of Hypo Real Estate Bank International (Dublin) to Württembergische Hypothekenbank AG, the resulting expansion of the product range and the associated substantial rise in the volume of business.

FOREWORD BY THE BOARD OF DIRECTORS I I Successful business activities

Württemberger Hypo recorded the highest volume of new mortgage business in its history in the 2005 financial year. As was the case in previous years, most of the new mortgage business was acquired in Western Europe and the USA. It was especially pleasing to note that this level of new business was attained without deviating from the Bank’s high risk and profit requirements.

The Bank is now well-established in capital markets as a reliable and permanent issuing house. Two Jumbo issues were very successfully placed in the last financial year in April and October. The emission volume of both these public Pfandbriefe was EUR 1.5 billion. The successful sale of Pfandbriefe is backed up mainly by continuous marketing and investor relations.

In the 2005 financial year, the Bank once again managed to increase its profit before tax and restructuring expenses to EUR 75.7 million, i.e. the highest total in its history. We regard this result as confirmation of our systematic profit orientation.

Thanks

The Board of Directors would like to thank all our customers, shareholders and business partners for the confidence which they placed in our Bank in 2005. We hope that the results from the last financial year, which are shown in this Annual Report, live up to their expectations.

Dr. Paul Eisele Jürgen Fenk Dr. Robert Grassinger

Friedrich-Wilhelm Ladda Bettina von Oesterreich Manfred Weil

I I Statutory Bodies

NOTES TO THE ANNUAL FINANCIAL STATEMENTS I I I I Supervisory Board

Georg Funke Munich, Chairman of the Board of Directors of Hypo Real Estate Holding AG Chairman

Dr. Markus Fell Munich, member of the Board of Directors of Hypo Real Estate Holding AG 1st Deputy Chairman

Rudi Schühle Stuttgart, Deputy Chairman of the Board of Directors of GZ-Bank AG, Frankfurt/Stuttgart, retired 2nd Deputy Chairman

Jörg Menno Harms Stuttgart, Managing Director of Menno Harms GmbH

Dr. Frank Heintzeler Stuttgart, Chairman of the Board of Directors of Baden-Württembergische Bank AG, retired

Horst Hofmann Waiblingen, bank employee

Gerhard Huber Waiblingen, bank employee

Dr. Karl-Hermann Lowe Munich, member of the Board of Directors of Allianz Deutschland AG

Martina Peterhofen Munich, General Manager, Hypo Real Estate Holding AG

Dr. Manfred Scholz Augsburg, Managing Director

Wolfgang Schopf Schorndorf, bank employee

Nicole Seiz Stuttgart, bank employee

Committees and Supervisory Board I 10 I Board of Directors

Dr. Paul Eisele Jürgen Fenk Since 1 October 2005 Dr. Robert Grassinger Friedrich-Wilhelm Ladda Up to 31 March 2006 Bettina von Oesterreich Since 1 October 2005 Manfred Weil

General Managers

Dr. Leonard Meyer zu Brickwedde Since 1 April 2006 Harin Thaker Since 1 April 2006 Volker Walz Since 1 January 2006

Head Office Managers

Dieter Ansel Thomas Barthelmes Reiner Barthuber Since 1 October 2005 Bernd Dambacher Erich Elser Dr. Klaus Peter Follak Kurt Gertner Georg Herr Ehrenfried Hippe Since 1 October 2005 Carsten Petersen Up to 30 June 2005 Pascal Roth Andreas Schenk Peter Schubert Udo Sondermann Rolf Staudenmayer Brigith Terry Victor van Bergen Dr. Stephan Wuttke

State supervision

Federal Financial Supervisory Authority (BaFin), Bonn

Trustees

Dr. Rolf Schmidt-Diemitz Notary, Stuttgart Hans G. Hervol Notary, Stuttgart (Deputy)

I 11 I Management Report

NOTES TO THE ANNUAL FINANCIAL STATEMENTS I 12 I I 13 I BUSINESS CONDITIONS AND GENERAL ECONOMIC out to be a heavy burden. The main reason for the BACKGROUND rise in gross domestic product was an increase of 5.5% in the volume of exports. By contrast, domes- Overall economic situation tic demand was also still weak in 2005. In the light of the continuing precarious situation on the la- INTERNATIONAL ENVIRONMENT bour market – the average unemployment figure over the year was just under 4.9 million (11.6%) – Although the world economy was robust in 2005, private consumer expenditure continued to fall. global gross domestic product (GDP) only increased by 4.3% and therefore failed to match the high The level of investment in plant and machinery dynamic growth rate in 2004 (5.1%). The heteroge- was not very dynamic either. Low capital spending neity of economic momentum is still having a on new construction, an impediment to economic decisive influence on the world economy because development over the last few years, declined still expansion has largely been the result of very further (- 3.6%). strong economic activity in China and the United States. INFLATION

Gross domestic product in the United States in- Prices rose by 2.0% in Germany in 2005, i.e. 0.4% creased by 3.6% in spite of the gradual tightening higher than in the previous year. The average rate up of monetary policy. The driving-force behind of inflation in Euroland was 2.2%. An inflation this dynamic growth was a substantial increase rate of 2%, the medium-term target of the both in private consumer expenditure and private European Central Bank (ECB), was therefore not at- gross fixed capital formation. Gross domestic prod- tained for the sixth year in a row. The main reason uct in Japan rose by 2.2% in 2005. why this target figure was exceeded was the considerable increase in the price of energy. The core After the depression in the second half of 2004, the inflation rate, which does not include energy and upturn primarily came about due to the start of a food prices, only amounted to 1.5% (2004: 2.0%). recovery in consumption and increased propensity to invest among companies. The remarkable speed DEVELOPMENT OF THE EURO of expansion in the Chinese economy continued unabated with an increase of 9.2% in gross domes- The Euro appreciation trend seen between 2002 tic product. and 2004 came to an end in 2005. Starting at an annual high of 1.3465 against the dollar on 3 January The Euroland economy was more subdued. Gross 2005, the Euro had lost ground considerably by the domestic product increased by 1.4% compared middle of the year after an interim high in March. with the previous year (2004: 2.0%). The reasons Accompanied by strong exchange rate movements, were the very high oil price, low propensity to the Euro stood at 1.20 against the dollar during the consume of private households and the reluctance summer months. A slight recovery in late summer on the part of companies to make investments. was followed, from October, by a further deprecia- The large national economies, in particular, came tion which hit a low on 16 November 2005 when bottom of the growth league table. The new EU the Euro exchange rate against the dollar was member states on the other hand enjoyed an aver- 1.1670. At the end of the year, the Euro had rallied age growth rate of 4.2% (2004: 5%). At the end of slightly to 1.1797 against the dollar. The Euro was 2005, the economy in Euroland started to show primarily hampered in 2005 by the interest rate some signs of positive growth. difference in favour of the dollar.

Gross domestic product in Germany rose by 0.9% MONETARY POLICY FRAMEWORK on average in 2005, i.e. much lower than in the previous year (1.6%). A marked improvement in the For the first time since it was established, the ECB economic climate indicators was also noticeable in raised the key lending rate at the end of 2005. This Germany at the end of the year. Looking back over tightening up of monetary policy by the ECB also the year, the enormous increase in the price of oil signalled the end of its expansionary monetary as a result of the depreciation of the Euro turned policy in order to prevent inflation from being

M anagement Report I 14 I fuelled by continuing high oil prices and resulting Credit Institutions (ÖPG) was replaced by a new wage increases. At the end of 2005, the minimum uniform Pfandbrief Act. bidding rate for main refinancing business was 2.25%, the top refinancing rate 3.25% and the de- The main reason for this change was the agree- posit rate 1.25%. ment between the Federal Republic of Germany and the European Commission dated 17 July 2001 The Federal Reserve, the American Central Bank, on the abolition of state guarantees (abolition increased its key lending rate in 8 steps in 2005 of the guarantee and maintenance obligation) for from 2.25% to 4.25%. public credit institutions after 18 July 2005.

General industry conditions The new Pfandbrief Act (PfandBG) came into force on 19 July 2005. Under the terms of this Act, covered INTERBANK MARKET bonds can now be issued by all credit institutions which satisfy the necessary conditions and have ob- The consolidation process characterised by take- tained a corresponding licence from the Federal overs and job cuts accelerated in the German bank- Financial Supervisory Authority (BaFin). In the past ing industry in 2005. The interbank market was this was a privilege reserved under private law for also further strengthened. Euroland and Germany special credit institutions. Pfandbriefe will also con- in particular are expecting an economic recovery tinue to remain a very important refinancing instru- from which banks will also reap benefits. More ment for the Bank under the new Pfandbrief Act. favourable general conditions will lead to an in- Corresponding notification according to § 42 (1) crease in profitability and a reduction in non-pay- Sentence 2 of the Pfandbrief Act (PfandBG) was sent ment risks in cyclical loan business. to the Federal Financial Supervisory Authority (BaFin) in a letter dated 31 August 2005. The restric- A large number of banks have successfully profited tion imposed on the Bank’s business operations from the introduction of processes to reduce costs, under the provisions of § 1 of the Mortgage Bank Act minimise risks and focus on core business areas. (HBG) was abolished after the introduction of the Improvements can be seen primarily in the areas Pfandbrief Act. This means that the Bank is now of administrative costs and risk prevention. permitted to carry out business transactions accord- However, leading German banks are now also edg- ing to § 1 (1) Sentence 2 Nos. 1 to 5 and 7 to 10 ing slowly closer to their international competitors of the German Banking Law (KWG). The Bank will in terms of profit. This is due to the, at times, sub- use this new framework to develop its product and stantial reduction in risk assets, an average rise in service portfolio in a practical manner. credit quality and improved risk management. The Federal Financial Supervisory Authority Pfandbrief banks which only operated until recently (BaFin) published the final version of its Minimum in the German market are tending to have profita- Requirements for Risk Management (MaRisk) on bility problems. Net interest revenue of these 20 December 2005. MaRisk implements some im- banks has declined still further on account of portant qualitative elements of the Basel II Accords shrinking margins. Lower income is contrasted by in national law. The focal points are risk manage- higher risks with a corresponding need to make ment by banks and financial service providers, and value adjustments. Pfandbrief banks with an inter- their monitoring by the supervisory authorities nationally diversified portfolio, however, have (“Supervisory Review Process“). remained largely immune to the weakness in the MaRisk is based on the previously applicable domestic market and to low margins. Minimum Requirements for Credit Business of Credit Institutes (MaK), the Minimum Requirements LEGAL AND SUPERVISORY CHANGES for the Performance of Trading Transactions (MaH) and the Minimum Requirements for Internal German Pfandbrief law was thoroughly revised in Auditing (MaIR), which have been modernised and July 2005. The Mortgage Bank Act (HBG), the Ship incorporated in the new Requirements. Mortgage Bank Act (SchBG) and the Act Concern Groups inside the Bank are taking steps to imple- ing Pfandbriefe and Related Bonds of Public ment these new Requirements.

I 15 I BUSINESS REPORT The rate of economic growth slowed down again in the Netherlands last year. Very high vacancy rates The most important international real estate markets – around 20% in Amsterdam –, lower rents and greater use of rental incentives (e.g. rent-free In the light of a slightly discernible recovery in the periods) are signs of a deferred market recovery European economy since the second half of 2005 and highly constrained space absorption. Top rents and the continuing pleasing growth in the USA, in prime locations in Amsterdam are around EUR the most important foreign markets for the Bank 29/m2 a month, and the trend is still downwards. had a very heterogeneous appearance in the last Restrained consumer demand is also reflected in financial year. retail properties where floor space turnover provides little impetus for rents. Largely unchanged Although the rate of economic growth slowed vacancy rates and rent levels can also be seen in down in the United Kingdom, the office real estate the warehouse and logistics building sectors. market continued its recovery in the year under review. Rising demand led to a rapid decrease in the Demand for office space continued to increase in the vacancy rate, which now stands at 7.5% in London. US on account of sustained growth in the economy Top rents in the British capital now amount to and a further rise in employment levels, primarily around EUR 98/m2 a month. The demand for logis- in the service and finance sector. The fall in the tics buildings has also increased while the market completion rates of new office buildings in New for retail properties is generally expanding at a York led to much lower vacancy rates and higher slower rate on account of weaker consumer rents last year. At the end of 2005, the vacancy dynamism. rates in office buildings in Manhattan fell to less than 10% for the first time in three years. By contrast, real estate markets in France benefited The corresponding figure in the coveted Midtown from higher consumption-led economic growth. West area was less than 6%. The attractive market Paris remained, after London, the office location resulted in a rise in average rents to around EUR with the highest turnover in Western Europe. 60/m2 per month for prime locations in Midtown. Top rents showed a tendency to rise last year. They However, they are still much lower than the record stand at around EUR 54/m2 a month for prime loca- figures shown at the end of the year 2000. tions while the vacancy rates dropped to less than 6%. The recovery in the market was also facilitat- ed in this case by good growth in turnover and low speculative building activity. The French market for retail properties also grew, in particular, in the metropolises of Paris and Lyons with a trend to- wards higher rents. In the warehouse and logistics sector, demand for space increased in Greater Paris. Since, the supply situation in this sector is still high, however, rent prospects are stable.

The market in Sweden managed to recover rela- tively early thanks to positive general economic data. The continuing high vacancy rate in office buildings in Stockholm – 12.0% in 2005 – is still showing a downward trend coupled with recover- ing top rents and slightly decreasing initial yields. The top rents for prime locations in Stockholm are around EUR 33/m2 a month. The Swedish markets for retail properties, warehouses and logistics buildings are showing a stable to slightly upwards trend with continuing high consumption.

MANAGEMENT REPORT I 16 I Strong growth in new mortgage business NEW MORTGAGE LOAN COMMITMENTS ACCORDING TO TYPES OF PROPERTY in EUR mio.

In the year under review, the total volume of new 5,000 mortgage business of Württemberger Hypo was 4,000 EUR 4,487.5 million, i.e. an increase of 30% compared with the previous year. 98.7% of this busi- 3,000 ness originated from countries outside Germany. 81.7% of new foreign business related to mortgage 2,000 loans in Western European countries while the US accounted for almost all of the remaining 18.3%. 1,000 With less than 0.5% of new foreign mortgage busi- 0 ness, the markets in Central and Eastern Europe 01 02 03 04 05 played a very minor role. TOTAL Commercial, industrial and other Housing construction The United Kingdom again occupied the leading position among Western European markets with an acquisition volume of EUR 1,482.9 million (33.5% of new mortgage commitments outside Germany), Adjustment quota followed by France with EUR 1,030.2 million (23.3%), Sweden with EUR 659.4 million (14.9%) In adjustment business, the same high profitability and the Netherlands with EUR 211.7 million requirements are applied as in new business. The (4.8%). Since some individual loans had already Bank again succeeded in maintaining its adjust- been created in the US in the past, these activities ment quota at a very high level in the year under became much more important last year. The USA review. 92.9% (2004: 78.7%) of all loans awaiting became the Bank’s third largest foreign market in an interest rate adjustment were extended and re- 2005 with a new mortgage business volume of EUR tained in the portfolio. 794.2 million, i.e. a thirteen-fold increase compared with 2004. We primarily financed office Municipal loan business buildings in New York, but also in California and Washington D.C. In the year under review, new municipal transactions amounted to EUR 2,554.4 million, a decrease Differentiated according to property types, EUR of 27.5% compared with 2004. Securities sub- 4,043.9 million (90.1%) of the total volume of new sumed under municipal loans accounted for EUR mortgage business were accounted for by commer- 2,015.5 million (78.9%) of these commitments. cial buildings and EUR 443.6 million (9.9%) by Commitments were primarily booked in order to residential buildings. The focal points of commer- optimise the cover portfolio and for the purpose of cial property loans were still office and adminis- liquidity management. trative buildings (47.4% of commercial loans), as well as retail buildings and warehouses (37.2%). Growth in the mortgage and municipal loan Over 90% of new commercial loans related to com- portfolios pleted buildings. In the 2005 financial year, the mortgage loan portfolio remained almost the same even after the sale of mortgage loans with a value of EUR 222.0 million. It amounted to EUR 12,660.6 million, an increase of 0.6% compared with the previous year. The loan portfolio in municipal business dropped by 1.1% compared with 2004 and amounted to EUR 14,834.7 million at the end of the year. Of this figure, EUR 8,654.7 million (58.3%) represented securities subsumed under municipal loans (2004: EUR 7,694.6 million).

I 17 I NEW LOAN COMMITMENTS in EUR mio. DEVELOPMENT OF PORTFOLIO in EUR mio.

7,500 30,000

6,000 24,000

4,500 18,000

3,000 12,000

1,500 6,000

0 0 01 02 03 04 05 01 02 03 04 05

TOTAL TOTAL Municipal loans Mortgage loans Mortgage loans Municipal loans Public-sector securities

Doubling of new emission business (EUR 7,789.0 million). New emissions business was broken down as follows: EUR 1,727.4 million – In the year under review, the Bank sold bonds mortgage Pfandbriefe; EUR 3,319.3 million – public with a value of EUR 15,614.5 million, an increase Pfandbriefe; and EUR 10,567.8 million – unsecured of 100.5% compared with the previous year bonds.

BOND SALES in EUR mio.

2005 2004 2003 2002 2001 Total 15,614.5 7,789.0 6,314.3 5,217.5 8,042.6 Mortgage Pfandbriefe 1,727.4 1,083.0 1,843.2 2,191.1 104.3 Public Pfandbriefe 3,319.3 2,428.1 2,497.2 1,149.6 3,281.5 Unsecured bonds 10,567.8 4,277.9 1,973.9 1,876.8 4,656.8

The portfolio of issued bonds increased in the year under review by 18.7% and amounted to EUR 28,576.4 million at the end of the year (2004: EUR 24,068.7 million).

PORTFOLIO OF ISSUED BONDS in EUR mio.

2005 2004 2003 2002 2001 Issued bonds 28,576.4 24,068.7 23,912.4 23,475.5 27,135.5

DEVELOPMENT OF BOND PORTFOLIO in EUR mio.

2005 2004 2003 2002 2001 Total 4,507.7 156.3 436.9 -3,660.0 773.5 Mortgage Pfandbriefe 516.2 413.2 605.5 1,458.1 -908.7 Public Pfandbriefe 561.4 -1,135.0 -139.5 -4,670.7 475.0 Unsecured bonds 3,430.1 878.1 -29.1 -447.4 1,207.2

MANAGEMENT REPORT I 18 I Movements in the balance sheet total and equity capital in EUR mio. Balance sheet total and equity capital 40,000 1,250 The balance sheet total increased by EUR 3,913.5 32,000 1,000 million to EUR 36,233.9 million (+12.1%).

The equity capital on the balance sheet rose by 24,000 750 EUR 111.9 million to EUR 1,177.1 million (+10.5%).

16,000 500

8,000 250

0 0 01 02 03 04 05

Balance sheet Equity capital

PROFIT AND LOSS ACCOUNT IN VERTICAL FORM in TEUR

Change 2005 2004 TEUR %

Net interest income 135,455 117,411 18,044 15.4 Net commission income -16,258 -12,813 -3,445 26.9 Staff costs 19,483 17,661 1,822 10.3 Other administrative expenses 16,332 14,263 2,069 14.5 Ordinary depreciation on fixed assets 1,456 918 538 58.6 Total administrative expenses 37,271 32,842 4,429 13.5 Balance of other operating income/expenses 1,704 -344 2,048 595.3

Operating result (before risk provisions) 83,630 71,412 12,218 17.1 Risk provisions 22,329 25,203 -2,874 -11.4 Operating result from financial transactions 14,437 11,461 2,976 26.0

Operating result 75,738 57,670 18,068 31.3 Balance of other business - - - - Balance of extraordinary income/expenses -5,150 - -5,150 -

Profit before tax 70,588 57,670 12,918 22.4 Tax 1,706 667 1,039 155.8 Profit transferred on account of a profit transfer agreement 68,882 57,003 11,879 20.8 Net income - - - -

I 19 I Much higher annual profit employees of the Bank, reimbursed administrative costs from the previous year and lower interest on Net interest income rose by a pleasing 15.4% to tax repayments. EUR 135.5 million. The net commission loss (- EUR 16.3 million) was largely due to expenditure in- The operating result before risk provisions was curred in increasing the Bank’s equity capital, as EUR 83.6 million, i.e. an increase of EUR 12.2 mil- required under banking supervision law, during lion (+17.1%) compared with 2004 (EUR 71.4 mil- the expansion of new business. The change com- lion). The drop of EUR 2.9 million in risk provi- pared with the previous year was primarily attrib- sions compared with the previous year and the utable to special effects in commission income positive result of EUR 14.4 million (+EUR 3.0 mil- contained in the previous year. lion) from financial assets produced an operating result of EUR 75.7 million, i.e. EUR 18.0 million Administrative expenses rose by EUR 4.4 million (+31.3%) above the previous year’s figure. After to EUR 37.3 million (+13.5%). Whereas the rise in taking account of costs incurred in connection staff costs by EUR 1.8 million to EUR 19.5 million with the restructuring of the Bank (EUR 5.1 mil- largely came about due to the recruitment of new lion), the profit before tax was EUR 70.6 million. employees, the increase of EUR 2.1 million in other This represents an increase of EUR 12.9 million administrative expenses to EUR 16.3 million was (+22.4%) compared with 2004. primarily the result of higher costs in our lending business. Depreciation on fixed assets increased by Risk provisions EUR 0.5 million to EUR 1.5 million on account of new acquisitions during our expansion. Risk provisions in the year under review amounted to EUR 22.3 million (2004: EUR 25.2 million) In the year under review, the balance of other oper- after taking account of expenses from the sale of ating income and other operating expenses was mortgage loans and compensation through income EUR 1.7 million (2004: - EUR 0.3 million). The in- from general provisions. crease in this figure was largely due to income from the premium reserve of an employer’s pension lia- The following table shows the net transfer and loss bility insurance policy taken out in the year under ratios both in mortgage business and total loan review in respect of the pension commitments for business.

RISK PROVISION RATIOS IN LOAN BUSINESS in %

2005 2004 2003 2002 2001 Net rate of transfer provisions In mortgage business 0.18*) 0.19 0.22 0.24 0.24 In loan business (incl. municipal loans) 0.12*) 0.12 0.13 0.13 0.12

Loss ratio In mortgage business 0.21*) 0.20 0.10 0.12 0.17 In loan business (incl. municipal loans) 0.14*) 0.12 0.06 0.06 0.09

*) Excluding sales of loans

MANAGEMENT REPORT I 20 I Provisions for losses on loan accounts decreased One special challenge was the decision to transfer in the year under review from EUR 177.5 million to the international real estate financing business of EUR 127.0 million on account of higher consump- Hypo Real Estate Bank International (Dublin) to tion during loan sales. The assets ratio in mortgage Württembergische Hypothekenbank AG in order to business is 1.0% (provision for losses on loan ac- combine the entire foreign business counts in relation to mortgage assets) and 0.7% in of the Hypo Real Estate Group under one roof. This total lending business (provision for losses in rela- led to another significant increase in the number of tion to the entire loan portfolio including munici- tasks which have to be performed. The fact that we pal loans – 2004: 1.4% and 0.9% respectively). again managed to increase our profit despite this additional workload is a clear indication that the Operating result after tax and profit transfer Bank has first-rate employees

The tax expenses of EUR 1.7 million (2004: EUR EMPLOYEE QUALIFICATION/ 0.7 million) relate to taxes on income and earnings PERSONNEL DEVELOPMENT from previous years. Due to the profit transfer agreement that came into force in 2003 and the as- In view of the increasing internationalisation of sociated income tax integration relationship, it was our banking business, we attached even more im- not necessary to show taxes on income and earn- portance to advanced training and language train- ings for the 2005 financial year. ing of our employees in 2005 than in the past. The costs of this advanced training rose accordingly to The profit after tax rose by 20.8% to EUR 68.9 mil- around EUR 160,000. The number of seminar days lion (2004: EUR 57.0 million). used for staff training was also higher than in 2004. The cost proportion for language lessons, In accordance with the profit transfer agreement which employees take with great dedication out- (PTA), the net income amounting to EUR 68.9 mil- side their working hours, is 40% of the total ad- lion before profit transfer must be transferred to vanced training costs. Hypo Real Estate Holding AG, Munich. Due to the PTA, the annual general meeting will not distrib- Our training and implementation controlling sys- ute any profits. tem has proved its worth over many years. In 2005 it again played a major role in ensuring the success Our employees of our strictly demand-oriented advanced training measures. GENERAL INFORMATION The Bank’s management principles increase the The banking sector has been characterised for motivation and achievement disposition of the em- many years by rapidly changing markets and glo- ployees and help them to attain all our corporate bal competition. This places great demands on goals. These principles include the annual per- the expertise, motivation and flexibility of our em- formance appraisal and the target-setting process. ployees. The success in the 2005 financial year Using individual personnel development plans, clearly proves that they were fully able to cope employees are systematically trained to take on with these demands. new positions and areas of responsibility.

I 21 I PERSONNEL MOVEMENTS

2005 2004 New staff 27 8 Salaried employees and members of the Board of Directors 22 6 Trainees 2 - Apprentices 3 2 Resignations 11 8 Fluctuations due to terminations 8 4 (in %) 4 2.2 Retirement/early retirement - - Transfer to group companies or subsidiaries - 1 End of temporary contracts of employment - - Termination agreement - - Resignation after partial retirement 3 1 Resignation after parental leave - 1 Death - 1

PERSONNEL STRUCTURE at 31 December 2005 in years

Length of service Age Men 13.4 44.6 Women 11.7 38.4 Total 12.7 42.0

KEY PERSONNEL FIGURES

Including Board of Directors, employees on parental leave and partially retired employees 2005 2004 Total number of employees (31 December) 198 182 of whom men 114 107 of whom women 84 75 Employees outside agreed scale rate 80 72 Employees paid according to agreed scale rate 113 108 Apprentices 5 2 In 2005, 7 employees celebrated 20 years of service with the Bank, 1 employee 25 years, 2 employees 30 years and 2 employees 35 years.

WAGES AND INCIDENTAL WAGE COSTS

2005 2004 Change EUR mio. EUR mio. EUR mio. % Wages and salaries 14.74 13.55 1.19 8.8 Social security contributions 1.83 1.73 0.10 6.0 Total staff costs 16.57 15.28 1.29 8.5

MANAGEMENT REPORT I 22 I FINANCIAL REPORT of the Bank, both bonds were successfully placed with German and foreign investors according to rea- Principles and goals of financial management sonable terms and conditions.

The prime goal of financial management is to The Bank also issued an unsecured bond to the comply with all the Bank’s payment obligations on value of EUR 1 billion and with a term of 3.5 years time. This goal was fully attained at all times for the first time in November 2005, and therefore during the last financial year. The Bank’s strategic established itself in this market segment as an goals are the expansion and diversification of its issuer. This bond was issued on account of the refinancing basis in relation to terms, currencies, changes within the Hypo Real Estate Group, which structures, regions and investors, improvements in will take effect from the 2006 financial year on- refinancing conditions and the optimisation and ex- wards and will lead to a considerable increase in tension of the capital structure. This also includes the Bank’s refinancing requirements. continuous expansion of the range of refinancing products, a further increase in the already very In addition to large-volume bonds, the Bank issues a intensive contacts with leading international insti large number of medium-sized and small bonds on a tutional investors and permanent improvement in covered and uncovered basis. An important role is our rating by rating agencies. The Bank also contin- also played in this respect by structured products, ued to pursue these goals in the 2005 financial year. which are tailored especially to the needs of individual investors, since they enable the Bank to acquire Württemberger Hypo has sufficient access to short- access to new investors and reduce its refinancing term liquidity in the money market for our daily li- costs. quidity management thanks to our association with a large number of banks of good financial standing The Bank can look back on a pleasing development and our involvement in the money supply control in the area of short-term refinancing. The “Certificats measures implemented by the European Central de Dépôts (CD)“ programme, which was introduced Bank. Time- and content-differentiated liquidity according to French law at the end of 2004, made a plans form the basis for liquidity management. The valuable contribution to refinancing and regional risk of liquidity incongruences is countered by effi- diversification in its first full year with total sales of cient liquidity management subdivided according to EUR 2.1 billion. Sales of securities from the Euro different maturities (precise daily cash flow forecast “Commercial Paper (CP)“ Programme also increased through to long-term liquidity planning) and subdi- compared with the previous year. vision according to types of refinancing (public Pfandbriefe, mortgage Pfandbriefe and uncovered The positive assessment of the Bank and its future bonds). The objective is to prevent funding require- prospects in the capital market, general market ments that can no longer be realised in future. trends and further diversification of refinancing activities meant that the Bank’s refinancing costs Refinancing decreased once again compared with the previous year. MAIN ISSUES IN 2005 The Bank does not take any open market price risks Two public Pfandbriefe (EUR 1.5 billion with a term with its issuing activities. Interest rate risks or other of 10 years and EUR 1.5 million with a term of 7 risks from structured products were therefore years) were issued in 2005. Both issues were pre- hedged via derivative transactions in the same way pared during road shows in a number of countries at as foreign currency risks stemming from foreign- where direct discussions were held with a large currency issues. number of important investors. In addition to marketing of the public Pfandbrief, the main objective of the discussions with investors in autumn 2005 was to provide information on the structural changes within the Hypo Real Estate Group that were to take effect from 1 January 2006. Due to the intensive preparations and the current good issuing reputation

I 23 I

ISSUE FIGURES IN DETAIL The transactions of Württemberger Hypo are characterised by the fact that the Bank, unlike com- In order to refinance its lending operations, par-able transactions of other institutes, acts as Württemberger Hypo raised external funds total- both issuer and arranger. The complex technology ling EUR 16.7 billion in the 2005 financial year. required to plan, implement and structure these This figure was broken down as follows: public innovative products is already widely available at Pfandbriefe – EUR 3.3 billion, mortgage Pfand Württemberger Hypo. The Bank is also briefe – EUR 1.7 billion and unsecured bonds and intending to use this know-how in future, under note loans (including EUR 1 billion Slimbos) – the new Group structure, to optimise the loan port EUR 11.6 billion. folio and profitability of Hypo Real Estate Bank Structured products amounted to 8% of the refi- International AG. nancing volume, i.e. EUR 1.3 billion. The European CP programme was utilised with EUR 1.2 billion at IMPROVED GENERAL CONDITIONS PROMOTE the end of the 2005 financial year. The issue volu- TRUE SALE SECURITISATIONS me in 2005 was EUR 4.6 billion. French CDs with a value of EUR 900 million were Whereas the German securitisation market is outstanding at the end of the year. A total of EUR mainly a synthetic market, true sale structures 2.1 billion were issued in 2005. predominate outside Germany. By contrast with a At the end of the 2005 financial year, the Bank’s synthetic securitisation, mortgage loans are actually volume of outstanding bonds amounted to EUR sold in a true sale securitisation. This means that 28.6 billion. the Bank receives the corresponding purchase price. The purchaser is normally a special-purpose Securitisation of mortgage loans company which has been set up to handle true sale securitisations and refinances the purchase of the Since its first securitisation transaction in the 2000 debts by issuing securities (so-called Mortgage financial year, Württemberger Hypo has estab- Backed Securities, MBS). The investors in these lished itself as one of the few regular German issu- MBS assume the risk of the securitised transaction ers in the securitisation market. The transactions portfolio when they make the purchase. carried out by the Bank to date have involved synthetic securitisations because it is not the mortgage The reasons for the dominance of synthetic transac- loans themselves that are sold, but rather credit tions in Germany were legal and tax obstacles which derivatives are issued to hedge against credit risks meant that true sales transactions could only be in the transaction portfolio. The loss risk from the transacted with severe restrictions and high structu- securitised loans is therefore transferred, mainly, ral expenditure. The government gradually reduced to a large number of investors. The improved risk these obstacles by introducing various measures, for position resulting from this risk transfer also eases example the Refinancing Register. Thanks to the the burden on the necessary equity capital basis changed general conditions, Hypo Real Estate Bank for the securitised loans. International AG can now use true sale securitisations as an alternative instrument for active management of the loan portfolio under yield risk aspects.

THE TRANSACTIONS OF WÜRTTEMBERGER HYPO

Transaction Volume Transaction portfolio 09/2000 RMBS WuerttHyp 2000-1 502 mio. EUR 3,573 private housing loans 08/2001 CMBS WuerttHyp 2001-1 630 mio. GBP 26 commercial property loans in the UK 12/2002 CMBS WuerttHyp EU-1 1,004 mio. EUR Pan-European portfolio with 60 commercial property loans in 7 countries 12/2003 CMBS WuerttHyp F-1 600 mio. EUR 106 commercial property loans in France 10/2004 CMBS WuerttHyp UK-2 682 mio. GBP 13 commercial property loans in the United Kingdom

MANAGEMENT REPORT I 24 I Rating The Bank regards this as confirmation of its cons- tructive and transparent cooperation with 2005 was undoubtedly one of the most successful, Standard & Poor’s and Moody’s over many years. but also most eventful financial years in the history of Württemberger Hypo. The reactions by the Compared with the previous year, the rating of Standard & Poor’s and Moody’s rating agencies to Württemberger Hypo by Standard & Poor’s re- the fundamental changes in the Bank’s strategy mained good in all areas in 2005. In the first six were totally positive. After both rating agencies months of 2005, Moody’s upgraded the rating in were informed in July 2005 about the transfer of the “long term” from A3 to A2 and in the “short the international real estate financing business of term” from P-2 to P-1. Hypo Real Estate Bank International (Dublin) to Württembergische Hypothekenbank AG with ef- The ratings of the public Pfandbriefe and mortgage fect from 1 January 2006 and the change of name Pfandbriefe did not change in 2005. Standard & of the latter institution to Hypo Real Estate Bank Poor’s again awarded the top rating AAA. The pu- International Aktiengesellschaft (Stuttgart), they blic Pfandbriefe and mortgage Pfandbriefe are still stated immediately that the good rating would shown by Moody’s as “Review for possible upgrade“. remain unchanged.

STANDARD & POOR’S MOODY‘S

Position at 31.12.2005

Public-Sector Pfandbriefe AAA Public-Sector Pfandbriefe Aa1* Mortgage Pfandbriefe AAA Mortgage Pfandbriefe Aa2* Counterparty Rating / Senior Unsecured Debt A- Long Term Bank Deposit Rating A2 Short-Term Counterparty Rating / Short-Term Debt A-2 Short Term Bank Deposit Rating P-1 Senior Subordinated Debt BBB+ Financial Strength Rating** C+

* Review for possible upgrade ** Scale is divided into classes A to E

I 25 I RELATIONSHIPS WITH AFFILIATED COMPANIES International (Dublin) was therefore transferred to Hypo Real Estate Holding AG, Munich, in January The equity stake of Hypo Real Estate Holding AG, 2006. Munich, in Württemberger Hypo increased to 100% as a result of the entry of the transfer resolution in A number of changes to the Articles of Association the Commercial Register on 21 July 2005. were also made; they concern the change in the name of the company, the purpose of the company There is no control agreement between Hypo Real (adaptation to the Pfandbrief Act), the share capital Estate Holding AG and Württemberger Hypo. and new subscribed capital, convening of meetings The rights and obligations arising from the profit of the Supervisory Board, adoption of resolutions transfer agreement originally concluded with DIA by the Supervisory Board and participation in the Vermögensverwaltungs GmbH were transferred to annual general meeting. Hypo Real Estate Holding AG. FORECAST REPORT Our business relations with Hypo Real Estate Holding AG and its affiliated companies are in the General economic situation normal range of business of a mortgage bank. On account of the profit transfer agreement, a depend- The slight slowdown in growth in the world econo- ence report in accordance with § 312 of the my during the last few months of 2005 was only German Stock Corporation Law is not required temporary. The latest economic indicators point to (§ 316 of the German Stock Corporation Law). an improvement in the world economy and show favourable trends in Western Europe and Asia in NEW BRANCH OFFICE particular. In North America, however, there are signs of a slight downturn. Both the Bank and the A new branch office was set up in Lisbon in the ifo Institute are expecting a growth of around 2% year under review. This office started operating on in the economy in Euroland in 2006. 1 August 2005. The purpose of this company is to acquire commercial real estate loans. The new The upturn that was already in the offing in branch has two employees who transacted new Germany at the end of 2005 is predicted to gather business in the amount of EUR 45.2 million in 2005. momentum in 2006. It will probably be supported for the most part in the first half of the year by the SUPPLEMENTARY REPORT continuing strong level of foreign demand and also by domestic investments. Private consumption due Two resolutions adopted during the extraordinary to purchases in advance of the intended increase annual general meeting of the Bank on 16 December in VAT in 2007 should also revive slightly in the 2005 were entered in the Commercial Register of second half of the year. Both the Bank and the ifo Stuttgart Local Court on 2 January 2006. Institute are predicting growth of around 1.7% in the German economy in 2006. It was decided to increase the share capital of the company by EUR 94.2 million from EUR 45.8 mil- Based on the forecasts for 2006, the growth pros- lion to EUR 140.0 million by issuing new individu- pects are generally regarded as positive. al shares in return for cash contributions. The increase in the share capital was fully implemented. Due to the predictions of a slightly higher rate of All new shares were subscribed at the fixed total inflation, interest increases are primarily expected issue price of EUR 94.2 million by Hypo Real Estate in Western Europe and Asia, but also in North Bank International (Dublin). In return for accept- America. ing the shares, this bank gave an undertaking to transfer its international real estate financing business shown in the capital increase resolution to Württembergische Hypothekenbank Aktiengesell schaft. The transfer of the international real estate financing business took place officially on 1 January 2006. The equity stake of Hypo Real Estate Bank

MANAGEMENT REPORT I 26 I The increase in the price of raw materials, espe- difference between the dollar area and Euroland cially energy prices, continues to be regarded as will be reduced in the short and medium term. the biggest danger to price stability. Energy prices react sensitively to world economic demand and The current plan of Hypo Real Estate Bank the still existence of latent political trouble spots. International AG for the period between 2006 and Excessive rises in energy prices may be responsible 2008 reflects the transfer of the business area of through the above-mentioned transmission mecha- real estate financing from Hypo Real Estate Bank nism for the fact that the actual rate of economic International (Dublin) to Württemberger Hypo development is lagging behind growth expecta- whose name was changed to Hypo Real Estate tions. In terms of monetary policy, it is anticipated Bank International AG in January 2006. It is there- that the US Federal Reserve will abandon its re- fore very difficult to compare older plans of the strictive course in the middle of the year and adopt former Württemberger Hypo against older plans of a neutral standpoint. The prevailing opinion is the former Hypo Real Estate Bank International that the ECB is at the start of a cycle with higher (Dublin), but also against figures relating to new interest rates. The Euro is expected to rise against business, the portfolio and profit that are publish the dollar and sterling. ed in this annual report.

Industry-specific situation The objective of the transfer of the real estate financing line of business was to combine the inter- It is anticipated that the consolidation process national real estate financing business of the Hypo within the banking sector will continue. Real Estate Group under the umbrella of the new company Hypo Real Estate Bank International AG, For the forecast period up to 2007, the Bank is ex- Stuttgart. The new structure helps to reduce dual pecting a faster recovery in real estate markets in functions and speed up processes in business op- continental Europe with the majority of markets erations. Domestic and foreign business are there- coming out off their cyclical troughs. An upward fore separated more clearly within the Group. This trend is generally being seen in global markets, step means, for example, that the entire range of although the chances in Asia are rated more posi- products and services can be supplied to interna tively than in Anglo-Saxon countries. tional customers from a single source. The Bank regards the new structure as an opportunity to sys- Company-specific situation tematically continue its development as one of the world’s leading real estate financing companies. The forecasts relating to the future development of Hypo Real Estate Bank International AG represent The transferred loan portfolios are the main differ- estimates which were made on the basis of all the ence between the financial situation of the new information that is available at the present moment company Hypo Real Estate Bank International AG in time. If the forecasts based on the assumptions and that of Hypo Real Estate Bank International do not come true or risks arise that differ from the (Dublin). expected value, the actual results may not corre- The pro forma combined portfolio of the new Hypo spond to the planned results. International contained “closed commitments” of around EUR 32 billion at 31 December 2005. The The increase in profit in the last financial year (op- three largest markets were the United Kingdom erating profit: EUR 75.7 million) exceeded the ex- (round EUR 8 billion), the US (around EUR 7 bil- pectations of the Board of Directors (target figure: lion) and France (around EUR 5 billion). The Bank EUR 63.4 million). The plan for future financial is expecting continuous growth in this portfolio in years is based on the following premises: the Bank 2006 and 2007. expects macroeconomic development as described in the forecast report sections on the general eco- The financial situation of the new company Hypo nomic situation and industry-specific situation. Real Estate Bank International AG is strengthened, The plan is based on a rate of inflation which will for example, by the fact that outstanding bonds continue to be slightly above the level aspired to were also transferred when the real estate financ- by the ECB. The Euro is expected to rise slightly ing line of business of Hypo Real Estate Bank against the dollar and sterling. The interest rate International (Dublin) was moved over to

I 27 I Württemberger Hypo. Refinancing of the trans- RISK REPORT ferred loan portfolio will therefore not lead to any specific liquidity risks for the Bank in 2006. The Objectives of risk management as part of a risk-con- much larger volume of business in general can be scious corporate policy refinanced by the already established funding instruments. In 2006 and 2007, the Bank is anticipat- One of the tasks in overall management of the ing refinancing requirements which are based on Bank within the framework of Group management the growth in new business and will result in a is to achieve the new business, margin and profit continuing solid liquidity situation. targets laid down in the Bank’s plan and therefore also implement the business policy so that these Following restructuring, the sales structure of the targets can be obtained. In line with its basic strat- new Hypo Real Estate Bank International AG com- egy within the Hypo Real Estate Group, Württem prises the European, US and Asian platforms, as berger Hypo concentrated on lower-risk business well as the Senior Lending Platform. The latter areas (“low risk approach”) in the past. The focal platform represents the continuation of the former points of this strategy are foreign mortgage financ- business of Württemberger Hypo. In 2006 the ing and capital market activities. In accordance Senior Lending Platform is expected to generate a with the guiding principle of our business and risk new business volume which will be slightly above policy, both business areas and the related prod- the volume attained in 2005 (EUR 4.5 billion). The ucts have the best possible yield-risk ratios with a new Hypo Real Estate Bank International AG is comparatively low risk. planning a new business volume of around EUR 18 billion across all four sales platforms in 2006. It is In lending business, for example, ex ante risk di- anticipated that the volume of new business will versification is carried out by spreading new -fi increase again in 2007. nancing activities across several countries and sectors. Risks are also minimised ex post by means of If the volume of new business differs from the active portfolio management including syndica- planned figure due to market developments which tions and securitisations. In the case of market cannot be predicted with any real certainty or risks, we take action continuously to ensure that margins change on account of the competition situ they do not produce dependencies for the Bank. ation, plan variances will occur in net interest income and net commission income and may affect In order to attain defined targets, a profit-oriented the Bank’s profit. Irrespective of these market organisation must take calculable risks as part of changes, the Bank will maintain its strict risk and its chosen business policy. The organisation’s risk yield criteria. policy forms the basis for this action. In principle, strategic risks and business risks are of overriding The rise in the Euro exchange rate against leading importance for all market participants. Strategic international currencies should not have any major risks may occur if significant continuous changes effect on the profit and loss account in 2006 since take place relating to the classification of the corresponding currency hedging transactions will Bank’s organisational structure or its positioning be concluded. in real estate and capital markets. The dynamic growth in some subsegments in Anglo-Saxon real Based on the above-mentioned premises, the Board estate market – some market analysts are seeing of Directors is expecting a good level of growth in signs of the start of a real estate bubble – and the business in 2006 and 2007 with positive effects on associated risk of falling real estate prices on a the Bank’s profitability. In view of the good results wide scale would represent such a risk. achieved by Württemberger Hypo and the real es- The Bank keeps a close watch on market develop- tate financing division of Hypo Real Estate ments and manages its portfolio by means of suita- International (Dublin) in 2005, the Bank is antici- ble measures. pating continuing good results in 2006 and 2007. A business risk is regarded as a situation in which business opportunities and the associated revenues of the Bank decline so substantially and so quickly that the Bank’s existence is threatened.

MANAGEMENT REPORT I 28 I Since the main business activity of Württemberger continuous risk measurement and monitoring, as Hypo is long-term real estate financing, a large pro- well as monitoring of parameters used to measure portion of profit (unlike a commercial or industrial risks and results (e.g. interest rate curves or vola- enterprise) does not come from sales or new busi- tilities). Active management of risks through ex- ness, but primarily from interest on already exist- ante targets for control parameters such as risk ing loans. The risk of a rapid and surprising de- costs in individual transaction costing, but also crease in profit can therefore be regarded as very ad-hoc management on a case-by-case basis where low. All other risks to which the Bank is exposed required, e.g. through outsourcing of transactions, and which will be examined below are implicitly are also an integral part of risk control at the Bank. derived from the Bank’s chosen business model – In terms of regulation, the declared objective of real estate financing – and are therefore subordi- risk management is to fulfil the extensive require- nate to the above-mentioned risks. They include, in ments of the Federal Financial Supervisory principle, the risks involved in the real asset of Authority (BaFin). “property“ and the financial assets used for its funding. RISK CATEGORIES AND RISK INVENTORY

Risk management as part of overall bank The Bank divides risks into the following management categories: - Strategic risks INSTITUTIONALISED RISK MANAGEMENT - Business risks AND CONTROL - Credit, market and liquidity risks - Operational risks and In order to implement its risk policy – lower risk - Other risks commitments in foreign mortgage business and in capital market transactions – the Bank has devel- The risk management system concentrates primari- oped an extensive risk management system which ly on credit, market and liquidity risks to the also satisfies external requirements, for example Bank. However, other risks are also carefully mon- from the Law on Surveillance and Transparency in itored by continually observing, for example, polit- Companies (KonTraG), the Pfandbrief Act ical, legal and tax law developments and assessing (PfandBG), the Minimum Requirements for the their risk effects. Credit Business of Credit Institutes (MaK) or the Minimum Requirements for the Performance of The necessary precondition for a complete bank- Trading Transactions (MaH). The purpose of this oriented risk management system is knowledge of risk management system is to detect, analyse, moni- the bank’s overall risk situation. After thorough tor and control risks. The determination of the bottom-up risk inventories in 2002 and 2003, quali- Bank’s overall risk as the sum of the individual risks tative risk inventories were carried out throughout and its comparison with the risk capability of the Hypo Real Estate Group in 2004 and 2005 in or- Württemberger Hypo are risk control subtasks in re- der to obtain an overview of the Bank’s overall risk lation to the overall risk position of the Bank. position on a top-down basis. Regular stress and worst-case scenario analyses produce statements on the level of realistic worst case The risk categories and the related risk manage- results from risky positions. Potential risks can ment methods will now be discussed in detail. therefore be detected at an early stage so that suitable countermeasures can be implemented. The rapid Management of credit risks supply of up-to-date information to the Bank’s risk- bearing units “Trading” and “Back Office” is an im- Credit risks are losses from bad debts or from the de- portant factor in this respect. terioration of customers’ credit rating. They can be subdivided further into credit rating risks, country RISK MANAGEMENT AND CONTROL TASKS risks and counterparty risks. AND METHODS

The key aspects in risk management and control tasks are the identification and analysis of risks,

I 29 I CREDIT RATING RISKS In order to control the above-mentioned risks, two instruments – syndication based on individual Württemberger Hypo takes account of credit rating loans and placement at portfolio level – are used in risks in its new business planning by means of di- accordance with the stipulations of the Board of versification. We structure new business according Directors. Credit risks from derivatives are limited to markets and properties. When costing new busi- at a low level by means of insolvency-secure ness, credit rating risks are integrated by means collateralisation. of standard risk costs according to the country, risk category and other criteria. Management of market risks

The internal risk category for the debtor’s credit Market risks are the possible losses which may be rating on a scale of 1 to 10 is determined by means of incurred by the Bank for its positions as a result rating methods. This applies to all loans in the port- of changes in prices in financial markets. Market folio. The calculated ratings are reviewed continu- risks can basically be divided, into interest rate ously at defined times, for example during commit- risks, exchange rate risks, share price risks and ment checks, and are adapted to the current option price risks. situation. The rating process and the utilised instruments are also subject to regular review and updat- VALUE AT RISK APPROACH ing, not only on account of the stipulations in the Basel II Accords. A standard value at risk approach with a 99% confidence level and a carrying period of 10 days is In addition to the management of primary credit used to quantify market risks that are relevant to rating risks, secondary risks - for example credit Württemberger Hypo. The value at risk quantifies ratings of tenants - are also continuously analysed to the loss of value which will not be exceeded with assess security situations in rented buildings. a probability of 99%, when market prices change during a carrying period of 10 days in which the COUNTRY RISKS position stays the same. The reliability of the utilised methods is verified during back tests. Country risks are risks attributable to transfers via or from other countries or to the convertibility of INTEREST RATE RISKS other currencies. These risks are minimised in Württemberger Hypo because transactions are only The interest rate risk of Württemberger Hypo, i.e. concluded with countries which have a rating of the risk arising from the mismatch of maturities of Aa3 (according to the Moody’s Rating Scale) or bet- fixed-interest products (e.g. mortgage loans and ter. Irrespective of the low-risk approach, the Bank Pfandbriefe), is calculated daily from the overall also quantifies the country risk by means of a statis- position of the Bank as part of so-called asset and tical parameter when selecting the particular liability management and is compared with the set country. limits. The self-consuming limits must not be exceeded in this case. Every member of the Board of COUNTERPARTY RISKS Directors and the “Treasury” Division are informed daily about the interest rate risk situation Counterparty risks in capital market and derivative and limit utilisation. transactions are contained by limits at different hierarchical stages (global limits, individual limits The situation regarding interest rate risks is also for each counterparty, etc.). These limits are moni discussed in detail during the regular weekly tored daily. The limits of all derivatives, including meetings of the Board of Directors. The Board of those rated on a “mark-to-market” basis, are report- Directors also forms an opinion on anticipated in- ed daily to the Board of Directors. Every limit over- terest rate changes based on a report by the Head of run beyond the narrowest possible tolerance Treasury. This report is used to formulate a corres limits must also be approved immediately by the ponding strategy, the implementation of which is Board of Directors. notified to the member of the Board of Directors responsible for the Treasury Division.

MANAGEMENT REPORT I 30 I The average annual value at risk for the interest is the Bank’s limitation of the need for accumu rate risk of Württemberger Hypo amounted to lated refinancing via uncovered bonds. EUR 8.4 million in 2005; the maximum amount was EUR 27.2 million. FORWARD RISKS AND CALL RISKS

Interest swaps and forward rate agreements are Forward risks are another type of liquidity risk used primarily to control the interest rate risk and describe the danger that expected payments will not be received on time or will not be received EXCHANGE RATE RISKS, SHARE PRICE RISKS in full. This may be attributable, for example, to AND OPTION PRICE RISKS the unexpected insolvency of borrowers, problems in national or international payment transfer sys- Limits are also one of the risk management instru- tems or the introduction of capital movement con- ments used in the exchange rate risk category. trols in the home country of foreign customers. Share price risks and option price risks are unim- This shows that liquidity risks may be directly portant. related to credit rating risks. They are taken into In accordance with the stipulations of the Board account in the above-mentioned scenario analyses of Directors, every substantial exchange rate risk in an uncorrelated form. must be controlled by means of suitable hedging transactions. Currency swaps and FX swaps are A call risk basically involves unexpectedly high used primarily in this case. drawings on credit lines with variable terms and on agreed loans as well as loans that have not yet Management of liquidity risks been paid out (in full).

The prime objective of any liquidity management Operational risks system is to safeguard liquidity at all times. Württemberger Hypo therefore uses different Operational risks are risks from losses due to the mechanisms, for example, for the following forms unsuitability or failure of internal methods, per- of liquidity risks. sons and systems or as a result of external events. Legal risks are regarded as operational risks. REFINANCING RISKS The Bank has various extensive regulations relat Refinancing risks form part of liquidity risks and ing to operational risks in all areas, e.g. instruc- describe firstly the risk that intended refinancing tions on data protection and data security, guide- measures (borrowing on the money market, bond lines for fires and company accidents, compliance issues, etc.) cannot be carried out as planned and regulations and regulations on the new product de- that subsequently insufficient liquidity is availa- velopment process. The Bank’s Emergency Manual ble. This may be due, for example, to market dis- also contains clear regulations on the management turbances or a drop in the Bank’s credit rating. of emergencies, e.g. fire, power outages or destruc- This risk can be reduced by differentiated funding tion of buildings. planning with limitation of term and volume incongruences and by increasing and extending the If operational risks occur in the form of damage confidence of investors. cases despite extensive risk avoidance regulations, they are recorded in a damage case database. Secondly, refinancing risks make funding more expensive, for instance through an increase in the spread for borrowed money, e.g. due to downgrad- ing of the Bank’s credit rating. This has negative impacts on the Bank’s profitability.

In order to prevent these spread increases and, therefore, higher refinancing costs, purposeful attempts are made to improve the good institute rating. Another instrument used to reduce the spread risk

I 31 I Other significant risks

Other significant risks to which the Bank is poten- tially exposed include economic or industry risks, personnel risks and information technology risks.

Economic or industry risks denote the danger posed to the industry in which the Bank operates through negative developments caused by macro economic and structural changes. A crisis on the property market would have, for example, negative effects on the demand for mortgage loans. Even if some subsegments of worldwide property markets are currently showing signs of overheating, the Bank does not see any increased risk potential here due to its wide regional diversification and its business model based on lower-risk loans.

Personnel risks firstly represent the danger that qualified employees may leave the Bank. The loss of valuable human capital may lead to a deteriora- tion in process quality. Human resources managers in the Bank have therefore set themselves the goal of systematically providing development opportunities for employees in order to create incentives for permanent cooperation. Secondly, the Bank’s inability to attract new qualified employees may have negative impacts on the planned growth path. The Bank is therefore making continuous efforts to be perceived as an attractive employer. This is cer- tainly also demonstrated by the fact that the Group was listed on the DAX at the end of 2005.

Information technology risks occur when the IT infrastructure requirements from the Bank’s business model can no longer be fulfilled. It was de cided to introduce a new IT system during the restructuring of the Bank as Hypo Real Estate Bank International AG. Work on the implementation of this new IT system has already commenced.

Within the framework of restructuring as Hypo Real Estate Bank International AG, the Bank is currently working on the implementation of MaRisk- related processes and tools for risk management.

MANAGEMENT REPORT I 32 I I 33 I Annual Financial Statements for the 2005 Financial Year

I 34 I I 35 I ANNUAL BALANCE SHEET AT 31 DECEMBER 2005

ANNUAL FINANCIAL STATEMENTS FOR THE 2005 FINANCIAL YEAR I 36 I LIABILITIES 31.12.2005 31.12.2004 EUR EUR EUR Prev. year TEUR 1. Payables to credit institutions a) Registered mortgage bonds issued 365,492,486 145,011 b) Registered public mortgage bonds issued 283,398,512 370,624 c) Other liabilities 3,517,570,488 4,166,461,486 4,738,869 including EUR 50,546,136 due daily (213,360) EUR – in registered mortgage bonds issued to the lender as security for loans taken up (-) and EUR 0,00 - as registered public mortgage bonds (-) 2. Payables to customers a) Registered mortgage bonds issued 877,509,637 667,884 b) Registered public mortgage bonds issued 1,603,503,266 1,680,284 c) Other liabilities 2,357,301,450 4,838,314,353 1,933,288 including EUR 24,178,770 due daily (22,586) EUR 5,112,919 in registered mortgage bonds issued to the lender as security for loans taken up (5,113) and EUR 0.00 - as registered public mortgage bonds (12,782) 3. Secured liabilities a) Bonds issued aa) mortgage Pfandbriefe 4,553,706,648 4,464,984 ab) public Pfandbriefe 12,614,164,071 11,900,310 ac) other bonds 8,579,247,391 25,747,118,110 5,132,089 4. Liabilities from fiduciary contracts 93,579 128 including EUR 93,579 in loans from fiduciary contracts (128) 5. Other liabilities 174,149,368 101,655 6. Deferred income a) from issuing and lending business 20,874,805 29,824 b) other 43,768,693 64,643,498 34,020 7. Provisions a) Pension provisions and similar obligations 21,952,531 21,098 b) Tax provisions 13,063,765 12,064 c) Other provisions 24,218,125 59,234,421 17,165 8. Subordinated liabilities 206,209,820 173,464 9. Profit participation certificates 202,258,376 202,258 including EUR - due within 2 years (-) 10. Funds for general banking risks 40,903,351 40,903 11. Equity capital a) Subscribed capital 45,811,449 45,811 b) Capital reserves 472,426,719 392,427 c) Revenue reserves ca) legal reserves 22,860,473 22,860 cb) reserves for own shares - - cc) statutory reserves - - cd) other revenue reserves 193,404,365 216,264,838 734,503,006 193,404 d) Retained income/accumulated losses 26,214 26 Total liabilities 36,233,915,582 32,320,450

1. Contingent liabilities a) Contingent liabilities from guarantees and indemnity agreements 262,986,818 21,158 2. Other obligations a) Irrevocable credit commitments 674,157,837 376,360

I 37 I PROFIT AND LOSS ACCOUNT FOR THE PERIOD FROM 1 JANUARY to 31 DECEMBER 2005

EXPENSES 2005 2004 EUR EUR EUR Prev. year TEUR 1. Interest paid 3,031,646,427 2,155,671 2. Commissions paid 25,091,312 23,821 3. General administrative expenses a) Staff costs aa) Wages and salaries 14,741,950 13,546 ab) Social security contributions, pensions and other benefits 4,740,733 19,482,683 4,115 including EUR 1,936,492 for pensions (2,372) b) Other administrative expenses 16,332,527 35,815,210 14,263 4. Depreciation and value adjustments on intangible assets and fixed assets 1,455,826 918 5. Other operating expenses 1,017,326 1,728 6. Bad debt expenses and provisions against bad debts and certain securities, and additions to provisions for loan transactions 22,329,338 25,203 7. Extraordinary expenses 5,150,000 - 8. Taxes on income 1,702,299 696 9. Other taxes not included in item 6 4,101 -28 10. Profits transferred due to a profit pooling, profit transfer or partial profit transfer agreement 68,882,118 57,003 Total expenses 3,193,093,957 2,296,936

ANNUAL FINANCIAL STATEMENTS FOR THE 2005 FINANCIAL YEAR I 38 I INCOME 2005 2004 EUR EUR Prev. year TEUR 1. Interest income from a) Lending and money market transactions 2,921,479,964 2,061,685 b) Fixed-interest securities and registered debts 241,311,381 3,162,791,345 204,638 2. Current income from a) Investments/participations 4,842 5 b) Shares in affiliated companies 4,305,740 4,310,582 6,754 3. Commission income 8,833,790 11,009 4. Income from appreciation of shares and participations in affiliated companies and from securities treated as fixed assets 14,436,525 11,461

5. Other operating income 2,721,715 1,384 Total income 3,193,093,957 2,296,936

1. Net income for the year/net loss for the year - - 2. Profit brought forward from the previous year 26,214 26 26,214 26 3. Transfers from capital reserves - - 26,214 26 4. Transfers from revenue reserves a) from legal reserves - - b) from the reserve for own shares - - c) from statutory reserves - - d) from other reserves - - - 26,214 26 5. Withdrawals from profit-sharing certificates - - 26,214 26 6. Transfers to revenue reserves a) to legal reserves - - b) to the reserve for own shares - - c) to statutory reserves - - d) to other reserves - - - 26,214 26 7. Replenishment of profit-sharing certificates - - 8. Retained income/accumulated losses 26,214 26

I 39 I Notes to the Annual Financial Statements

I 40 I I 41 I ACCOUNTING AND VALUATION PRINCIPLES

Receivables are shown at their nominal value in accordance with § 340 e (2) of the German Commercial Code (HGB). The difference between net loan proceeds and nominal value is shown as a deferred item. Provision for identifiable acute individual risks in the Bank’s lending business has been made in the form of valuation reserves for losses on individual loan accounts and reserves. Other potential risks in our lending business are covered by overall provisions. In response to the enact- ment of the Third Law on the Promotion of the Finance Market, securities have partly been allocated to fixed assets and valued according to the difference between original costs, including time-weighted amounts released from reserves, and their nominal value. Securities allocated to the liquidity reserve have strictly been valued according to the minimum value principle with due consideration of hedging instruments. Fixed assets have been valued at original cost less scheduled depreciation. In addition to scheduled depreciation, the Bank has also charged depreciation allowances on low-cost assets (§ 6 (2) of the German Income Tax Law) to debts. Increased valuations have been made according to § 280 (1) of the German Commercial Code.

Liabilities are capitalised at the amount payable. The difference between the nominal value and amount payable of liabilities is shown under deferred income. Zero bonds are shown at the issue price plus pro rata interest based on the new issue rate. Provision has been made for contingent liabilities in the form of reserves in the anticipated amounts payable. Provisions for employee anniversary gifts and pension obligations have been determined according to actuarial principles using a discount rate of 5.5% and 6% respectively and a part value taken from Heubeck’s 2005 G tables. In accordance with tax regulations, we have taken account by one third of the adjustment amount arising in comparison with the previously utilised tables from 1998. The residual amount will be allocated in equal amounts in the next two years.

Amounts denominated in foreign currencies have been converted in accordance with § 340h (1) of the German Commercial Code. (HGB).

BREAKDOWN OF SECURITIES ELIGIBLE FOR STOCK EXCHANGE TRADING in TEUR

Listed Unlisted 2005 2004 2005 2004 Bonds and other fixed-interest securities (asset item 4) 9,513,661 8,018,662 421,201 529,826 Investments/participations (asset item 5) - - 179 179 Shares in affiliated companies (asset item 6) - - - -

NOTES TO THE ANNUAL FINANCIAL STATEMENTS I 42 I MATURITY CATEGORISATION ACCORDING TO RESIDUAL MATURITY PERIODS in TEUR

2005 2004

Receivables from credit institutions (asset item 2) 9,089,941 6,094,196 Residual maturity period: up to 3 months 5,639,811 2,472,334 3 months to 1 year 208,196 279,494 1 year to 5 years 2,105,601 2,211,856 more than 5 years 425,277 562,130 Including accrued interest 711,056 568,382

Receivables from customers (asset item 3) 16,666,705 17,018,969 Residual maturity period: up to 3 months 1,071,971 930,048 3 months to 1 year 766,044 1,011,617 1 year to 5 years 5,027,437 5,294,131 more than 5 years 9,620,477 9,566,434 indefinite maturity period 41 32 Including accrued interest 180,735 216,707

Bonds and debentures due from public-sector issuers (asset item 4 aa) 4,552,543 3,843,237 Due in the following year 155,510 1,141,994

Bonds and debentures due from other issuers (asset item 4 ab) 5,295,967 4,778,764 Due in the following year 834,119 1,644,340

Own debentures (asset item 4 b) 264,021 99,259 Due in the following year 33,084 20,805

Payables to credit institutions (liability item 1) 4,166,461 5,254,504 Residual maturity period: up to 3 months 2,129,353 3,296,960 3 months to 1 year 168,977 431,627 1 year to 5 years 519,983 632,212 more than 5 years 593,604 256,242 Including accrued interest 754,544 637,463

Payables to customers (liability item 2) 4,838,314 4,281,455 Residual maturity period: up to 3 months 108,366 278,889 3 months to 1 year 246,028 297,855 1 year to 5 years 1,125,176 1,294,364 more than 5 years 3,251,900 2,298,703 Including accrued interest 106,844 111,644

Secured liabilities (liability item 3) 25,747,118 21,497,383 Due in the following year 8,851,541 5,789,304

I 43 I RECEIVABLES FROM/PAYABLES TO AFFILIATED COMPANIES/PARTICIPATIONS in TEUR

Total Of which

To/from To/from affiliated associated companies companies

2005 2004 2005 2004 2005 2004 Receivables from Credit institutes (asset item 2) 9,089,941 6,094,196 2,850,722 - - - Customers (asset item 3) 16,666,705 17,018,969 86,580 29,500 10,317 11,106 Bonds and other fixed-interest securities (asset item 4) 10,112,531 8,721,260 705,236 499,656 - - Payables to Credit institutions (liability item 1) 4,166,461 5,254,504 808,402 335 - Customers (liability item 2) 4,838,314 4,281,455 155 116 - - Secured liabilities (liability item 3) 25,747,118 21,497,383 - 92,872 - - Subordinated liabilities (liability item 8) 206,210 173,463 - - - -

FIXED-ASSETS MOVEMENT SCHEDULE in TEUR

Costs of Additions Disposals Book Depreciation Book value acquisition/costs in the in the transfers allowances, value of production financial year financial year in the adjustments 31.12.2004 financial year Total Financial year1) 31.12.2005 Investments/ participations 534 - 28 13,880 173 175 14,213 Shares in affiliated companies 132,757 1,093 - -13,880 - - 119,970 Fixed-asset securities 2,564,557 258,703 619,381 58,803 - - 2,262,682 Intangible fixed assets 3,069 5,882 29 - 1,704 738 7,218 Fixed assets 8,487 1,968 583 - 7,098 718 2,774 Other fixed assets ------Total 2,709,404 267,646 620,021 58,803 8,975 1,631 2,406,857

1) Including depreciation on disposals

EXPLANATORY NOTES TO THE BALANCE SHEET

Investments/participations

The disposal involved a participation in BNL-Beteiligungsgesellschaft Neue Länder GmbH & Co. KG, Berlin. The participations in Projektentwicklung Schönefeld Verwaltungsgesellschaft mbH, Stuttgart, and SP Projektentwicklung Schönefeld GmbH & Co. KG, Stuttgart, were reallocated from the item “Shares in affiliated companies” to the item “Investments/participations”. Depreciation related to Vierte Airport Bureau-Center KG Airport Verwaltungs GmbH & Co., Berlin, Airport Bureau Verwaltungs GmbH, Berlin, and Aerodrom Bureau Verwaltungs GmbH, Berlin. On the balance sheet date there was no information available showing that the current market value of the investments/participations is below the book value.

NOTES TO THE ANNUAL FINANCIAL STATEMENTS I 44 I Shares in affiliated companies

The addition related to Hypo Real Estate Capital Hong Kong Corp. Limited, Hong Kong. The participations in Projektentwicklung Schönefeld Verwaltungs gesellschaft mbH, Stuttgart, and SP Projektentwicklung Schönefeld GmbH & Co. KG, Stuttgart, were reallocated from the item “Shares in affiliated companies” to the item “Investments/participations”. On the balance sheet date there was no information available showing that the current market value of the shares in affiliated companies is below the book value.

Fixed-asset securities

This balance sheet item contains securities with a book value of EUR 1,288.1 mil lion and a current market value of EUR 1,278.8 million. No non-scheduled depreciation was carried out because there were no indications of a possible permanent reduction in value on the balance sheet date.

Intangible fixed assets

This balance sheet item relates solely to software purchased for a consideration.

Fixed assets

This balance sheet item only contains the Bank’s equipment and fittings.

Fiduciary transactions

The fiduciary assets shown on the balance sheet (item 7 of assets) relate solely to receivables from customers from mortgage loans. All the fiduciary liabilities (item 4 of liabilities) were provided by credit institutes.

Other assets

Other assets mainly comprise tax refund claims, purchase price claims, the bal ancing items from the currency conversion of swaps, properties taken over in mortgage business and the premium reserve of an employer’s pension liability insurance policy taken out in respect of the pension commitments for employees of the Bank.

Other liabilities

Other liabilities primarily consist of amounts still to be paid, the balancing items from the currency conversion of swaps, distributions on profit-sharing certificates and the amount to be handed over according to the profit transfer agreement.

I 45 I Foreign currency items

Assets include EUR 6,376.7 million (2004: EUR 5,915.2 million) and liabilities EUR 1,947.0 million (2004: EUR 1,332.7 million) denominated in foreign currency.

Assets purchased under agreements to repurchase

Securities with a book value of EUR 1,087.1 million (2004: EUR 2,923.1 million) were purchased under agreements to repurchase.

Subordinated liabilities

This item involves 22 note loans and 3 bearer bonds with annual interest rates between 4.10% and 6.92%. Maturity dates range between 2006 and 2022. Prior repayment is not possible. Expenses for subordinated liabilities amounted to EUR 11.9 million (2004: EUR 11.3 million) during the year under review. Subordinated liabilities totalled EUR 199.4 million. No agreements were made in deviation from § 10 (5a) of the German Banking Law (KWG).

Profit participation capital

Following approval by the annual general meetings on 5 May 1994 and 2 May 2001, and in accordance with § 10 (5) of the German Banking Law (KWG), the Bank has issued profit participation certificates with a total nominal value of EUR 202.3 million. Annual interest rates range between 6.75% and 7.00%. EUR 102.3 million are due for repayment on 30 June 2008, EUR 50.0 million on 30 June 2012 and EUR 50.0 million on 2 July 2013.

Subscribed capital

The subscribed capital still amounts to EUR 45,811,448.80 and is divided into 17,619,788 individual shares. All our subscribed capital is held by Hypo Real Estate Holding AG, Munich.

Other obligations

The irrevocable loan commitments of EUR 674.2 million on the balance sheet are solely the result of mortgage loans to customers. EUR 25.4 million of this total are guaranteed by local authorities.

Other financial obligations

There are annual rent obligations of EUR 1.48 million to affiliated companies.

NOTES TO THE ANNUAL FINANCIAL STATEMENTS I 46 I EQUITY MOVEMENT SCHEDULE in EUR mio.

31.12.2005 31.12.2004 Change % Equity capital (excluding retained income) 734.5 654.5 80.0 12.2 Subscribed capital 45.8 45.8 0.0 0.0 Capital reserves 472.4 392.4 80.0 20.4 Revenue reserves 216.3 216.3 0.0 0.0 Funds for general bank risks 40.9 40.9 0.0 - Profit participation capital 202.3 202.3 0.0 0.0 Subordinated liabilities 199.4 167.5 31.9 19.0 1,177.1 1,065.2 111.9 10.5

RESERVES MOVEMENT SCHEDULE in TEUR

Capital reserves Revenue reserves Total reserves

Legal Other revenue reserves reserves As at 01.01.2005 392,427 22,860 193,405 608,692 Conversion into subscribed capital - - - - Transfer from retained income from previous year - - - - Transfer from net income - - - - Transfer from capital increase - - - - Additional payment acc. to § 272 (2) No. 4 / German Commercial Code 80,000 - - 80,000 As at 31.12.2005 472,427 22,860 193,405 688,692

EXPLANATORY NOTES TO THE PROFIT AND LOSS ACCOUNT

Interest income/interest paid

With effect from the year under review, releases of premiums in issuing business will be shown under “interest paid” and releases of premiums in lending business under “interest income”. This will not have any effect on net interest revenue.

Other operating expenses

This item mainly includes subsequent expenses for a former property of the Bank, other staff costs and expenses for properties taken over in mortgage business.

Extraordinary expenses

This item involves expenses incurred in connection with the restructuring of the Bank.

I 47 I Other operating income

This item mainly includes income from the dissolution of reserves no longer required, refunded administrative costs from the previous year and income from the premium reserve of the employer’s pension liability insurance policy taken out in respect of the pension commitments for employees of the Bank.

Auditor’s fee

The fee paid to the auditor in the 2005 financial year for auditing of the annual financial statements amounted to EUR 720,000.

DERIVATIVE TRANSACTIONS

The following table shows derivative transactions pending conclusion on the bal ance sheet date, as recommended by the Committee on Accounting of the Federal Association of German Banks in conjunction with § 285 Page 1 No. 18 of the German Commercial Code. Derivative financial instruments are used exclusively as cover against interest-rate and currency risks (OTC products only) as part of the Bank’s management of assets and liabilities. The negative balance from the market values of derivative financial instruments is therefore contrasted by positive market values from the corresponding balance sheet transactions. These transactions are only concluded with first-class OECD banks.

Two-page offsetting agreements are concluded to reduce both the economic and the regulatory credit risk (credit rating risk). The positive and negative market values of derivative contracts included in an offsetting agreement can therefore be offset against one another (netting) and the regulatory future risk surcharges for these products can be reduced. During the netting process, the credit risk is reduced to a single net claim against the contracting party.

These risk-reducing techniques are only used both for regulatory reports and internal measurement and monitoring of the credit commitment if they can also be implemented in the particular legal system in the event of insolvency of the business partner. Expert legal reports are used in this case to verify the possibility of implementation.

Württemberger Hypo also concludes security agreements with its business partners in order to hedge the net claim/liability arising after netting (retention or placement of securities). This security management system helps to reduce the credit risk through real-time (primarily daily) evaluation and adjustment of the unsecured credit risk for each counterparty.

NOTES TO THE ANNUAL FINANCIAL STATEMENTS I 48 I The nominal volume of off-balance sheet business amounted to EUR 129,010 mil lion at the end of 2005. The counterparty risk at this time was EUR 1,778 million (corresponds to 1.4% of the nominal value) according to the market valuation method (not netted) and EUR 122 million according to credit standing weighting (Principle 1 of the Banking Supervision Act).

The market value of derivatives is calculated on the basis of generally recognised mathematical finance models.

DERIVATIVE TRANSATIONS in EUR mio.

Nominal amount Market value maturity period Total Positive Negative Positive Negative <1 year 1-5 years >5 years 2005 2004 2005 2004 Interest-earning business 21,590 58,503 43,945 124,038 87,316 1,719 2,627 1,552 2,414 Forward rate agreements - - - - Interest rate swaps (same currency) 21,590 58,118 43,461 123,169 87,200 1,707 2,581 1,552 2,399 Interest options - purchases 197 151 348 23 12 - - - Interest options - sales 188 333 521 93 - 46 - 15 Other interest rate futures ------Foreign exchange business 2,573 2,255 144 4,972 4,798 59 78 213 20 Interest and currency swaps 2,573 2,255 144 4,972 4,798 59 78 213 20 Foreign exchange options - purchases ------Foreign exchange options - sales ------Total OECD banks 24,163 60,758 44,089 129,010 92,114 1,778 2,705 1,765 2,434

GROUP AFFILIATION

The majority of issued capital is held by Hypo Real Estate Holding AG, Munich (holding company). A profit transfer agreement within the meaning of § 291 of the German Stock Corporation Law (AktG) has been concluded between the holding company and our Bank. There is no control agreement. Our business relations with the holding company and its affiliated companies are in the normal range of business of a mortgage bank.

The annual financial statements for the Group-affiliated companies are prepared by Hypo Real Estate Holding AG, Munich, and can be obtained from that company.

I 49 I COVERAGE in TEUR

31 December 2005 2004 A. Mortgage Pfandbriefe Regular cover 1. Receivables from credit institutions - mortgage loans 40,204 39,293 2. Receivables from customers - mortgage loans 6,201,193 5,674,639 3. Fixed assets (land charges on properties owned by the Bank) - - 4. Equalisation claims against the state - - Subtotal – regular cover 6,241,397 5,713,932 Substitute cover 1. Other receivables from credit institutions 140,000 125,000 2. Bonds and other fixed-interest securities - - 3. Values according to § 6 (4) No.1 of the German Commercial Code - - 4. Equalisation claims against the state - - Subtotal - substitute cover 140,000 125,000 Total of mortgage cover (nominal values) 6,381,397 5,838,932 Total of mortgage cover (net present value) 6,811,581 6,275,196 Total of mortgage Pfandbriefe requiring cover (nominal values) 5,887,379 5,196,251 Total of mortgage Pfandbriefe requiring cover (net present value) 5,916,004 5,420,164 Derivative equalisation items -423 - Excess cover of mortgage Pfandbriefe (nominal values) 493,595 642,681 Excess cover of mortgage Pfandbriefe (net present value) 895,577 855,032 B. Public Pfandbriefe Regular cover 1. Receivables from credit institutions a) Mortgage loans - - b) Municipal loans 2,711,061 3,066,602 2. Receivables from customers a) Mortgage loans 1,319,302 2,578,278 b) Municipal loans 3,459,676 4,234,487 3. Bonds from public issuers 7,487,368 4,712,515 Subtotal – regular cover 14,977,407 14,591,882 Substitute cover 1. Other receivables from credit institutions 460,000 450,000 2. Bonds and other fixed-interest securities Subtotal – substitute cover 460,000 450,000 Total of public Pfandbrief cover (nominal values) 15,437,407 15,041,882 Total of public Pfandbrief cover (net present value) 16,756,764 16,264,016 Total of public Pfandbriefe requiring cover (nominal values) 14,807,890 14,311,433 Total of public Pfandbriefe requiring cover (net present value) 15,525,175 15,080,001 Derivative equalisation items -18,229 104,661 Excess cover of public Pfandbriefe (nominal values) 611,288 835,110 Excess cover of public Pfandbriefe (net present value) 1,231,589 1,184,015

NOTES TO THE ANNUAL FINANCIAL STATEMENTS I 50 I Statement according to § 28 of the German Mortgage Bank Act Outstanding mortgage Pfandbriefe and cover values used for this purpose in EUR mio. a) Total amount of outstanding Nominal value Net present value Risk-adjusted net present value 1) 2005 2005 2005 2) mortgage Pfandbriefe 5,887.8 5,916.0 6,154.0 of which derivatives 0.4 128.2 - Cover pools 6,381.4 6,811.6 6,979.0 of which derivatives - - - Excess cover 493.6 895.6 638.6 1) Excess cover of risk-adjusted net present value also takes account of currency stress tests 2) Includes derivative equalisation items

Re a) Maturity structure (residual maturity period) 2005 Up More than 1 year More than 5 years More to but not exceed- but not exceed- than 10 1 year ing 5 years ing 10 years years Mortgage Pfandbriefe (broken down according to liquidity) 643.5 2,981.5 1,661.1 601.7 Cover pools (broken down according to interest rates tied to fixed periods 2,713.8 2,599.6 912.1 155.9

Re a) Breakdown of cover pools according to size 2005 Up to EUR 300,000 989.9 More than EUR 300,000 but not exceeding EUR 5 million 1,359.3 More than EUR 5 million 4,032.2

Total 6,381.4

I 51 I Statement according to § 28 of the German Mortgage Bank Act Total amount of claims used as cover for mortgage Pfandbriefe, broken down according to the states in which the real property is located and according to the type of use

Cover values in EUR mio. 2005 States Type of real property Residential Commercial

Belgium d. Office buildings - 47.9 - 47.9 Denmark c. Houses in multiple occupation 4.0 - d. Office buildings - 6.8 e. Retail buildings - 84.5 4.0 91.3 Germany a. Flats 280.9 - b. One-family houses 553.4 - c. Houses in multiple occupation 849.5 - d. Office buildings - 358.7 e. Retail buildings - 369.5 f. Industrial buildings - 24.7 g. Other buildings used for commercial purposes - 178.8 h. Buildings under construction - 11.7 i. Building sites 4.6 1.4 1,688.4 944.8 Finland d. Office buildings - 27.7 e. Retail buildings - 44.3 - 72.0 France/Monaco b. One-family houses 0.1 - c. Houses in multiple occupation 23.1 - d. Office buildings - 557.4 e. Retail buildings - 43.8 g. Other buildings used for commercial purposes - 9.0 23.2 610.2 United Kingdom (excl. Channel Islands) a. Flats 37.3 - c. Houses in multiple occupation 129.5 - d. Office buildings - 360.2 e. Retail buildings - 347.7 g. Other buildings used for commercial purposes - 361.5 166.8 1,069.4 Luxembourg b. One-family houses 0.1 - 0.1 - Netherlands a. Flats 9.8 - c. Houses in multiple occupation 8.7 - d. Office buildings - 389.2 e. Retail buildings - 259.1 g. Other buildings used for commercial purposes - 40,3 18.5 688.6 Poland d. Office buildings - 17.2 - 17.2

NOTES TO THE ANNUAL FINANCIAL STATEMENTS I 52 I Cover values in EUR mio. 2005 States Type of real property Residential Commercial

Sweden c. Houses in multiple occupation 398.0 - d. Office buildings - 78.3 e. Retail buildings - 120.6 f. Industrial buildings - 4.9 g. Other buildings used for commercial purposes - - 398.0 203.8 Switzerland/Buesingen d. Office buildings - 35.5 e. Retail buildings - 8.7 - 44.2 Spain d. Office buildings - 44.8 e. Retail buildings - 86.7 - 131.5 Hungary d. Office buildings - 21.5 21.5 Total of cover values according to type of use 2,299.0 3,942.4 Total amount of cover values (excluding futures) 6,241.4

I 53 I Statement according to § 28 of the German Mortgage Bank Act Payments in arrears on claims used as cover for mortgage Pfandbriefe

2005 Total amount of payments at least 90 days in arrears in EUR mio. Germany 53.4 Other countries -

Compulsion measures Commercial Residential Number Number Pending compulsory sale proceedings 10 107 Pending mandatory administration proceedings 20 87 of which included in pending compulsory sale proceedings 6 58

Number of compulsory sale transactions effected 5 26

Number of cases in which real property was taken over to prevent losses on mortgages - -

Arrears in interest payments in EUR mio. Commercial Residential Total arrears in interest payments1) 1.8 4.5 1) Interest arrears of mortgage loans used as cover with maturities between 01.10.2004 and 30.09.2005

Repayments on mortgage loans used as cover in EUR mio. Commercial Residential Through amortisation 38.6 31.0 Through other methods of repayment 58.7 21.3

Statement according to § 28 of the German Mortgage Bank Act Outstanding public Pfandbriefe and cover values used for this purpose in EUR mio.

b) Total amount of outstanding Nominal value Net present value Risk-adjusted net present value 1) 2005 2005 2005 2) public Pfandbriefe 14,826.1 15,525.2 14,951.5 of which derivatives 18.2 21.2 - Cover pools 15,437.4 16,756.8 16,083.6 of which derivatives - 98.0 - Excess cover 611.3 1,231.6 1,005.9 1) Excess cover of risk-adjusted net present value also takes account of currency stress tests 2) Includes derivative equalisation items

Re b) Maturity structure (residual maturity period) 2005 Up More than 1 year More than 5 years More to but not exceed- but not exceed- than 10 1 year ing 5 years ing 10 years years Public Pfandbriefe (broken down according to liquidity) 3,591.1 5,834.0 3,826.0 1,575.0 Cover pools (broken down according to fixed periods) 5,785.5 5,515.0 2,606.8 1,530.1

NOTES TO THE ANNUAL FINANCIAL STATEMENTS I 54 I Statement according to § 28 of the German Mortgage Bank Act Claims used as cover for public Pfandbriefe in EUR mio.

Domestic 2005

Federal Republic Municipalities/ Public Loans guaranteed Public Non-profit- Other Total Percent- of Germany or other govern- credit by local authorities compa- making age federal states mental units institutions (from German nies organi- (domes- directly institutions) sations tic) Central Govt. 7.6 - 668.1 - - - - 675.7 5.10 Baden-Württemberg 306.4 14.7 827.0 208.5 1.1 - - 1,357.7 10.24 Bavaria 185.5 3.0 1,372.8 1.0 - - - 1,562.3 11.78 Berlin 199.4 - 58.7 27.8 - - - 285.9 2.16 Brandenburg 102.3 - - 0.5 - - - 102.8 0.78 Bremen 81.2 - 49.1 - - - - 130.3 0.98 Hamburg 305.8 - 177.2 13.8 - - - 496.8 3.75 Hesse 705.2 5.1 334.6 0.8 - - - 1,045.7 7.89 Mecklenburg-West. Pomerania 51.1 ------51.1 0.39 Lower Saxony 1,127.8 9.4 624,2 10.1 - 0.2 - 1,771.7 13.37 North Rhine-Westphalia 1,092.0 20.4 1,234.0 1,063.7 - - - 3,410.1 25.72 Rhineland-Palatinate 302.8 5.1 644,8 3.2 - - - 955.9 7.21 Saarland 45.4 1.9 15.1 0.1 - - - 62.5 0.47 Saxony 92.0 - 149.9 22.4 - - - 264.3 1.99 Saxony-Anhalt 127.3 - - 0.2 - - - 127.5 0.96 Schleswig Holstein 240.3 - 586.8 1.4 - - - 828.5 6.25 Thuringia 127.3 - - 0.1 - - - 127.4 0.96 Total 5,099.4 59.6 6,742.3 1,353.6 1.1 0.2 - 13,256.2 100.00 Percentage (domestic) 38.47 0.45 50.86 10.21 0.01 0.00 - 100.00

Abroad 2005

Central Other Public Loans guaranteed Total Percent- Govern- governmental credit by local authorities age ment units institutions (from foreign (abroad) institutions) European Union 37.4 - - - 37.4 2.17 France - 69.3 - - 69.3 4.03 United Kingdom - - - 13.9 13.9 0.81 Iceland - 39.0 - - 39.0 2.27 Italy 565.0 21.2 - - 586.2 34.06 Netherlands 55.6 67.3 - - 122,9 7.14 Austria 321.1 - - - 321.1 18.66 Portugal 196.2 - - - 196.2 11,40 Spain 125.5 179.7 30.0 - 335.2 19.47 Total 1,300.8 376.5 30.0 13.9 1,721.2 100.00 Percentage (abroad) 75.58 21.87 1.74 0.81 100.00

Total amount of payments at least 90 days in arrears in EUR mio.

2005

I 55 I STAFF

on 31.12. (including Board of Directors) 2005 2004 2003 198 employees 182 employees 182 employees

The 192 members of staff (excluding members of the Board of Directors) were divided into the following groups:

Male Female Total Full-time employees 102 61 163 Part-time employees 5 19 24 Trainees 2 3 5 Total 109 83 192

Quarterly average (31.3., 30.6., 30.9. and 31.12.) 104.5 82.5 187.00 Salaries of the members of the Board of Directors totalled TEUR 3,088 and were broken down as follows: (in TEUR) Fixed salary Profit-related Components with Total components a long-term incentive effect 1,228 2,090 - 3,318 Salaries of former members of the Board of Directors amounted to TEUR 691 and the reserves for these persons to TEUR 6,207. Dependants’ pensions of former members of the Board of Directors came to TEUR 105. Current pension reserves were established for the latter group of persons to the tune of TEUR 380. The total salaries of the members of the Supervisory Board amounted to TEUR 209.

Balance of advance payments, loans and liabilities for members of the following bodies (in TEUR) 2005 2004 a) Board of Directors 64 69 b) Supervisory Board - - Of whom shareholders’ representatives - - Of whom employees’ representatives - -

NOTES TO THE ANNUAL FINANCIAL STATEMENTS I 56 I SHARE OWNERSHIP

Declaration of share ownership according to § 285 No. 11 and § 340a (4) No. 2 of the German Commercial Code (HGB) Name Share capital Share Annual profit/loss TEUR % in TEUR Aerodrom Bureau Verwaltungs GmbH, Berlin - 32.00 22 Airport Bureau Verwaltungs GmbH, Berlin 151 32.00 169 GfA – Gesellschaft für Anwendungssoftware mbH, Stuttgart 1,703 33.33 962 GfI – Gesellschaft für Immobilienentwicklung und -verwaltung mbH, Stuttgart 151 100.00 49 GfR – Gesellschaft für Rechenzentrumsleistungen mbH, Stuttgart 2,173 100.00 1,004 PBI – Beteiligungsgesellschaft mbH i. L. , München* 51,529 16.67 65 SP Projektentwicklung Schönefeld GmbH & Co. KG, Stuttgart 29,406 50.00 192 Projektentwicklung Schönefeld Verwaltungsgesellschaft mbH, Stuttgart 28 50.00 2 Vierte Airport Bureau Center KG, Airport Bureau Verwaltungs GmbH & Co., Berlin 898 32.00 -158 WHI – Württemberger Hypo Immobilienbewertungs- und Beratungsgesellschaft mbH, Stuttgart 156 100.00 55 WH – Erste Grundstücks GmbH & Co. KG, Waltersdorf ** 130,072 94.00 3,304 WH – Erste Grundstücks Verwaltungs GmbH, Waltersdorf *** 217 100.00 117 Hypo Real Estate Capital Hong Kong Corp. Limited, Hong Kong 1,045 100.00 -48

* In liquidation

** WH–Erste Grundstücks GmbH & Co. KG, Waltersdorf, has a 100% stake in WH–Zweite Gründstücks GmbH & Co. KG, Waltersdorf.

*** WH–Erste Grundstücks Verwaltungs GmbH, Waltersdorf, has a 100% stake in WGS Stendal GmbH, Stendal, and WH-Zweite Gründstücks Verwaltungs GmbH, Waltersdorf.

I 57 I INFORMATION ON THE COMPANY’S STATUTORY BODIES

Supervisory Board

Georg Funke Chairman of the Board of Directors of Hypo Real Estate Holding AG, Munich

Dr. Markus Fell Member of the Board of Directors of Hypo Real Estate Holding AG, Munich

Rudi Schühle Deputy Chairman of the Board of Directors of GZ-Bank AG Frankfurt/Stuttgart, Stuttgart, retired

Jörg Menno Harms Managing Director of Menno Harms GmbH, Stuttgart

Dr. Frank Heintzeler Chairman of the Board of Management of Baden-Württembergische Bank AG, Stuttgart, retired

Horst Hofmann Bank employee, Waiblingen

Gerhard Huber Bank employee, Waiblingen

Dr. Karl-Hermann Lowe Member of the Board of Directors of Allianz Deutschland AG, Munich

Martina Peterhofen General Manager, Hypo Real Estate Holding AG, Munich

Dr. Manfred Scholz Managing Director, Augsburg

Wolfgang Schopf Bank employee, Schorndorf

Nicole Seiz Bank employee, Stuttgart

NOTES TO THE ANNUAL FINANCIAL STATEMENTS I 58 I Board of Directors

Dr. Paul Eisele Member of the Board of Directors of Württembergische Hypothekenbank AG, Stuttgart Member of the Board of Directors of Hypo Real Estate Holding AG, Munich

Jürgen Fenk Member of the Board of Directors of Württembergische Hypothekenbank AG, Stuttgart

Dr. Robert Grassinger Member of the Board of Directors of Württembergische Hypothekenbank AG, Stuttgart

Friedrich-Wilhelm Ladda Member of the Board of Directors of Württembergische Hypothekenbank AG, Stuttgart (up to 31 March 2006)

Bettina von Oesterreich Member of the Board of Directors of Württembergische Hypothekenbank AG, Stuttgart

Manfred Weil Member of the Board of Directors of Württembergische Hypothekenbank AG, Stuttgart

CORPORATE GOVERNANCE CODE

In accordance with § 161 of the German Stock Corporation Law (AktG), the Board of Directors and Supervisory Board made a Declaration of Compliance with the German Corporate Governance Code in March 2005 This Statement is also published on the Bank’s website: http://www.hypointernational.com/About Us/Board of Directors/ Supervisory Board/Declaration of Compliance

PROFIT TRANSFER

In accordance with § 1 (1) of the Profit Transfer Agreement dated 30 October 2003, the net income amounting to EUR 68,882,118.14 before profit transfer must be transferred to Hypo Real Estate Holding AG, Munich

Stuttgart, 22 February 2006

Board of Directors

Dr. Paul Eisele Jürgen Fenk Dr. Robert Grassinger Friedrich-Wilhelm Ladda Bettina von Oesterreich Manfred Weil

I 59 I AUDITOR’S OPINION

We have audited the annual financial statements – comprising the balance sheet, profit and loss account and notes - including the books and records, and the management report of Hypo Real Estate Bank International Aktiengesellschaft, Stuttgart (formerly Württembergische Hypothekenbank Aktiengesellschaft, Stuttgart), for the financial year from 1 January to 31 December 2005. The Board of Directors of the company is responsible for the accounts and the preparation of the annual financial statements and management report in accordance with German commercial law and the supplementary provisions in the Articles of Association. Our task is to express an opinion concerning the annual financial statements, including the books and records, and the management report on the basis of the audit which we performed.

We conducted our audit of the annual financial statements in accordance with § 317 of the German Commercial Code and with due consideration of the German principles for adequate and orderly auditing of annual financial statements laid down by the German Institute of Auditors (IWD). These principles require that audits be planned and performed in such a way that it is possible to detect, with sufficient certainty, irregularities and violations which have a significant impact on the presentation of the net worth, financial position and profitability in the annual financial statements drawn up in accordance with generally accepted accounting principles, and in the management report. Knowledge of the business activities and the legal and economic environment of the company, as well as expectations of possible errors are taken into account in the determination of audit procedures. The effectiveness of the internal controlling system and the evidence supporting the disclosures in the books, records, annual financial statements and the management report are primarily examined by means of spot checks during the audit. The audit includes an assessment of the applied accounting principles and the basic opinions of the Board of Directors, as well as an appraisal of the overall presentation of the annual financial statements and the management report. We believe that our audit provides a reasonable basis for our assessment.

NOTES TO THE ANNUAL FINANCIAL STATEMENTS I 60 I Our audit did not lead to any objections.

In our opinion and based on the information obtained during the audit, the annual financial statements give a true and fair picture of the net worth, financial position and profitability of the company with due consideration generally accepted accounting principles in accordance with German law and the supplementary provisions in the Articles of Association. The management report agrees with the annual financial statements, is generally an accurate representation of the company’s position and properly reflects the opportunities and risks entailed in its future development.”

Munich, 23 February 2006

KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Auditors

Paskert Multrus Auditor Auditor

I 61 I Report by the Supervisory Board

NOTES TO THE ANNUAL FINANCIAL STATEMENTS I 62 I I 63 I In the 2005 financial year, the Supervisory Board performed its tasks as laid down by law and in accordance with the Articles of Association, and also continuously monitored the Board of Directors. A total of 4 Supervisory Board meetings were held together with 2 meetings of the Credit Committee and 1 meeting of the General Committee. 1 member of the Supervisory Board was absent from a meeting three times and three members were absent from a meeting once.

Intensive monitoring by the Supervisory Board

In 2005, the Supervisory Board closely examined the strategic position of the Bank, basic questions relating to company management and planning, profitability and the risk situation, interest risks and the business development of Württem berger Hypo and its subsidiaries. In the area of company management and planning, most of the discussions concerned the repositioning of the Bank within the Group and, in particular, the transfer of the international commercial real estate financing portfolio of the Group subsidiary Hypo Real Estate Bank International, Dublin, to Württemberger Hypo. The Supervisory Board received continuous information from the Board of Directors regarding this matter. The Supervisory Board held intensive discussions concerning the Bank’s rating, refinancing activities, basic matters, new legislation and structural developments in markets and the banking industry. International financial innovations and their impact on the Bank were also analysed. The Supervisory Board examined the annual and long-term plans of Württemberger Hypo and the management and control mechanisms in the credit, securities and derivatives departments.

The Supervisory Board paid close attention to the measures for complying with the requirements of the Law on Surveillance and Transparency in Companies (KonTraG) and the risk identification and management processes described in the management report (risk report). Other topics included implementation of the “Basle II Accords”, verification of the required independence of the auditor, issuing of the audit order to the auditor and the auditor’s fee arrangement.

The Board of Directors informed the Supervisory Board about the results of the audit and provided an up-to-date report on the investments/participations of the Bank. The activities of the Credit Committee were discussed intensively.

The Credit Committee

The Credit Committee of the Supervisory Board acquired an overall picture of the Bank’s credit business and credit policy in 2005, and also examined selected country portfolios. Individual mortgage loans and municipal loans were also discussed in detail with the Board of Directors. These loans involved credit cases which reached the volume stipulated by the Supervisory Board for submission to the Credit Committee or were subject to reporting due to other (legal) reasons. The Bank’s risk commitment was also analysed in depth.

The General Committee

The General Committee examined the general management and coordination of the Supervisory Board’s activities and personnel matters.

Report by the Supervisory Board I 64 I Continuous exchange of information

In addition to the regular meetings of the Supervisory Board and the other committees, numerous meetings were held between the Chairman of the Supervisory Board and the Board of Directors. The situation and development of the Bank and important individual issues were discussed during these meetings. The Chairman of the Supervisory Board was informed immediately by the Board of Directors about all important events affecting the Bank. The Chairman of the Supervisory Board then informed the Supervisory Board accordingly.

Auditing and approval of the annual financial statements for the 2005 financial year

The balance sheet meeting for the purpose of adopting the annual financial statements for the 2005 financial year was held in the presence of the auditor who was also asked relevant questions. The annual financial statements for the 2005 financial year and the management report of the Board of Directors were audited by KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft, Wirtschaftsprüfungs gesellschaft (auditors), Munich, the auditor chosen during the annual general meeting on 22 September 2005, and were awarded an unqualified auditor’s opinion. The auditor also examined the Bank’s existing risk control system as part of its auditing obligations under § 317 (4) of the German Commercial Code. The auditor confirmed that the control systems were appropriate and fulfilled their tasks. The Supervisory Board also audited the annual financial statements and the management report.

The results of the Supervisory Board’s audit did not lead to any objections; it approved the annual financial statements prepared by the Board of Directors for the year ending 31 December 2005. The annual financial statements were therefore adopted in accordance with § 172 of the German Stock Corporation Law.

Personnel changes

Dr. Robert Grassinger was appointed an ordinary member and Deputy CEO of the Board of Directors on 1 April 2005. Mr. Manfred Weil was also appointed an ordinary member of the Board of Directors on the same date. On 1 October 2005, Mrs. Bettina von Oesterreich (née von Scheven) and Mr. Jurgen Fenk from the Supervisory Board were appointed ordinary members of the Board of Directors.

Mr. Ladda is leaving the Bank’s Board of Directors by mutual agreement on 31 March 2006. He has been a member of the Board of Director since 1 October 2003. The Supervisory Board would like to thank Mr. Ladda for his successful work over the years.

The Supervisory Board would like to thank the Board of Directors and all employees for their successful work and great commitment during the year under review.

Stuttgart, 27 March 2006

The Supervisory Board Georg Funke, Chairman

I 65 I Asian Platform Hypo Real Estate Bank International Paseo de la Castellana, 35 Hypo Real Estate Capital Japan Corporation 28046 Madrid Otemachi 1st Square West Tower 10F Spain Chiyoda-ku Phone: +34 91 349 3200 Tokyo 100-0004 Fax: +34 91 349 3300 Japan Email: [email protected] Phone: +81 3 5288 5860 Fax: +81 3 3201 5132 Hypo Real Estate Bank International Email: [email protected] Corso Vittorio Emanuele II, 37B 20122 Milano Hypo Real Estate Capital Italy Hong Kong Corporation Limited Phone: +39 02 76 3831 Suites 802-805 Fax: +39 02 76 383870 Two International Finance Centre Email: [email protected] No. 8 Finance Street Central Hong Kong Hypo Real Estate Bank International Phone: +852 3413 8300 Prinzregentenstr. 56 Fax: +852 3413 8500 80538 München Email: [email protected] Germany Phone: +49 89 2555 200 European Platform Fax: +49 89 2555 20209 Email: [email protected] Hypo Real Estate Bank International Rembrandt Tower/21Fl Hypo Real Estate Bank International Amstelplein 1 38, Avenue de l’Opéra 1096 HA Amsterdam 75002 Paris The Netherlands France Phone: +31 20 4627 800 Phone: +33 1 5305 7400 Fax: +31 20 4627 801 Fax: +33 1 5305 7409 Email: [email protected] Email: [email protected]

Hypo Real Estate Bank International Hypo Real Estate Bank International Avenida da Liberdade, 110 Regeringsgatan 38 1269-046 Lisboa 11156 Stockholm Portugal Sweden Phone: +351 21 340 4665 Phone: +46 8 53 4800 70 Fax: +351 21 340 4576 Fax: +46 8 21 4417 Email: [email protected] Email: [email protected]

Hypo Real Estate Bank International US Platform 21. Floor 30 St. Mary Axe Hypo Real Estate Capital Corporation London EC3A 8BF 622 Third Avenue UK New York, Ny 10017 Phone: +44 20 7743 7743 USA Fax: +44 20 7743 7700 Phone: +212 671 6300 Email: [email protected] Fax: +212 671 6402 Email: [email protected]

WuerttHyp Platform Madrid Office Calle Jándula, 16 Amsterdam Office Urb. El Bosque Villaviciosa de Odón Klaaskampen 26 28670 Madrid 1251 KP Laren Spain Postbus 476 Phone: +34 660 41 91 26 1250 AL Laren Fax: +34 91 604 48 42 The Netherlands Email: [email protected] Phone: +31 35 53 187 23 Fax: +31 35 53 802 59 Paris Office Email: [email protected] 121, Avenue des Champs Elysées 75008 Paris Geneva Office France Cours de Rive 3 Phone: +33 1 56 62 28 20 1204 Geneva Fax: +33 1 56 62 28 29 Switzerland Email: [email protected] Phone: +41 22 8 18 38 00 Fax: +41 22 8 18 38 50 Zurich Office Email: [email protected] Blümlisalpstr. 76 8006 Zürich Gothenburg Office Switzerland Kyrkogatan 22, 41115 Göteborg Phone: +41 44 3 64 36 16 Box 2365, 40316 Göteborg Fax: +41 44 3 64 13 06 Sweden Email: [email protected] Phone: +46 31 70 10 450 Fax: +46 31 70 10 467 [email protected]

Copenhagen Office Amaliegade 13 1256 Copenhagen Denmark Phone: +45 70 11 20 10 Fax: +45 70 11 20 12 Email: [email protected]

Lisbon Office Avenida da Liberdade, 110 P P-1269-046 Lisboa Portugal Email: [email protected]

London Office 73 Brook Street London W1K 4HX UK Phone: +44 20 74 93 50 26 Fax: +44 20 74 91 71 82 Email: [email protected]

Hypo Real Estate Bank International AG Büchsenstr. 26 70174 Stuttgart Phone: +49 711 20 96 0 Fax: +49 711 20 96 179 Email: [email protected] www.hypointernational.com

I 68 I

Signatories on behalf of the Issuer

Stuttgart, as of 12 May 2006

A-1