Bayernlb | 2010 Annual Report and Accounts Separate Financial Statements

Facts | Figures

BayernLB | 2010 Annual Report and Accounts Separate Financial Statements

BayernLB’s financial statements at a glance

Income statement (HGB)

1 Jan – 31 Dec 1 Jan – 31 Dec EUR million 2010 2009 Change in % Net interest income 1,423 1,410 1.0 Net commission income 158 146 8.3 Net income/losses from the trading portfolio 157 612 – 74.3 Administrative expenses – 765 – 751 1.9 Operating profit/loss 455 – 1,803

Balance sheet (HGB)

EUR million 31 Dec 2010 31 Dec 2009 Change in % Total assets 279,346 267,653 4.4 Credit volume 175,660 199,605 – 12.0 Total deposits 129,159 135,766 – 4.9 Securitised liabilities 87,215 98,388 – 11.4 Reported equity 20,441 20,655 – 1.0

Banking supervisory ratios under the German Banking Act (KWG)

EUR billion 31 Dec 2010 31 Dec 2009 Change in % Risk positions under the Solvency Ordinance 94.0 99.3 – 5.3 Own funds 18.8 20.1 – 6.5 Core capital ratio 13.9 % 13.3 % 0.6 Pp1 Own funds ratio (overall ratio) 20.0 % 20.3 % – 0.3 Pp1

1 Percentage points

Number of employees

31 Dec 2010 31 Dec 2009 Change in % BayernLB 4,184 4,472 – 6.4 Contents

BayernLB . 2010 Annual Report and Accounts ›› Contents

4 1. Report by the Board of Administration

12 2. Management report 2|3 14 Overview 22 Financial position and financial performance 29 Events after the end of the reporting period 31 Outlook 35 Risk report

62 3. Financial statements

64 Balance sheet 68 Income statement 70 Notes 118 Responsibility statement by the Board of Management 119 Auditor’s Report

120 4. Committees and advisory boards

122 General Meeting 123 Board of Administration 124 Audit Committee 124 Risk Committee 125 Trustees 125 Savings Bank Advisory Council 126 Economic Advisory Council

130 5. Locations and addresses

BayernLB . 2010 Annual Report and Accounts 1. Report by the Board of Administration

BayernLB . 2010 Annual Report and Accounts ›› Report by the Board of Administration 4|5

BayernLB . 2010 Annual Report and Accounts Report by the Board of Administration

During the past financial year, the Board of Administration regularly monitored the Board of Management and advised it on the management of the business. The Board of Management provided the Board of Administration with regular, up-to-date and comprehensive verbal and written reports on the Bank’s business policy and general issues related to corporate planning, particularly financial, investment and human resource planning. The Board of Management also provided the Board of Administration with regular, comprehensive and up-to-date information on the Bank’s performance, focusing especially on income, expenses, risks, liquidity and capital status, legal and business relations with affiliated companies, and material events and business transactions, particularly in the case of affiliated companies. To support the Board of Administra- tion, two committees – the Audit Committee and the Risk Committee – were formed from its members.

The principal duty of the Audit Committee is to monitor the accounting process and the effectiveness of the internal control system, the internal auditing system and the risk management system, the audit of the annual financial statements and of the consolidated financial statements, and to review and monitor the independence of the auditors, particularly the additional services performed by the auditors for the Bank. The Board of Administration assigned additional duties to the Audit Committee. For example, the Audit Committee receives regular reports on the work of Internal Audit and Compliance. The chairman of the committee, Dr. von Lindeiner-Wildau reports regularly to the Board of Administration on the work of the committee.

Since it was formed on 20 October 2010, the Risk Committee has been involved in all major issues related to the risk strategy established by the Board of Management and to BayernLB’s risk situation at both the Group and Bank level. It discusses and decides on the risk and sub-portfolio strategies defined by the Board of Management Group-wide, discusses the reports by the Board of Management on BayernLB’s performance in relation to changes in risk (particularly risk-bearing capacity), and decides on all loans that come under the responsibility of the Board of Administra- tion. The chairman of the committee, Alexander Mettenheimer, also reports regularly to the Board of Administration on the work of the committee.

Before the Risk Committee came into effect, the Board of Management provided the Board of Administration with regular updates on the Bank’s risk situation and risk management. The Board of Administration observed the performance of the credit portfolio through a risk and portfolio reporting system that is constantly refined so that it can take account of partial modifications in risk monitoring and evaluation. The Board of Administration continues at regular intervals to receive reports on the international financial crisis, and the new crisis unfolding in Europe and its impact on the Bank and its subsidiaries.

The chairman of the Board of Management immediately informed the chairman and deputy chairman of the Board of Administration about any events that were of material significance in assessing the Bank’s situation and performance. The regulatory requirements governing the reporting by the Board of Management of irregularities identified by Internal Audit were met.

BayernLB . 2010 Annual Report and Accounts ›› Report by the Board of Administration

In the 14 meetings of the Board of Administration, five meetings of the Audit Committee and two meetings of the Risk Committee held last year, the resolutions required in law, and in accordance with the Statutes and the Rules of Procedure of the respective boards and committees, were passed.

Crisis in the European financial sector and bank levy

During 2010 the situation in the European financial sector, especially in Greece, Ireland, Portugal and Spain, became increasingly tense and recently culminated in a rescue package for Greece and Ireland from the European Union. The Board of Administration is given comprehensive updates by the Board of Management on the exposure of the Bank to these countries and on the measures taken to limit risks.

Talks are also being held in Europe over a bank levy. For BayernLB, decisions taken on the structure of the bank levy in Germany have not yet had any impact on the 2010 annual financial statements, but the Hungarian government went ahead in 2010 with a levy on banks based in the 6|7 country. This, combined with the change in the risk situation resulting from the less investor- friendly policy of the Hungarian government, has meant that MKB Bank Zrt. has had to increase its capital base to comply with the equity ratios stipulated by the Hungarian supervisory authorities. The Board of Administration agreed to structure the capital base of MKB Bank Zrt. to comply with the requirements of the Hungarian supervisory authorities at the end of the year.

Restructuring with a focus on the Mittelstand and review of potential strategic options

In 2010, the Board of Management continued to successfully implement the restructuring and resizing programme at BayernLB. The focus was on further refining the approved business model built upon four pillars: Large Corporates, Real Estate, Mittelstand, and Retail Customers/DKB. The main goal in 2010 was to expand the Mittelstand business. In 2010, the Bank also achieved its reduction targets in relation to risk positions, headcount, and administrative expenses through systematic implementation of the measures identified.

BayernLB also looked into the merits of a possible merger with WestLB, but the examination was discontinued when it showed that the resulting economic benefits would not be satisfactory from BayernLB’s perspective. BayernLB’s earnings at the time already demonstrated the success of its new strategy.

The top priority for the Board of Management and the Board of Administration continues to be on systematically implementing the focused business model.

BayernLB . 2010 Annual Report and Accounts Hypo Group Alpe Adria and asset-backed securities

Issues relating to the acquisition of Hypo Group Alpe Adria by BayernLB were still in focus.

The Board of Administration closely followed the findings of the investigation by the law firm Hengeler Mueller which had been appointed by the General Meeting; the report found that all of the former members of the Board of Management were liable. In its meeting on 25 October 2010, the Board of Administration decided to bring claims for damages against all members of the Board of Management involved in the acquisition of a majority stake in HGAA.

In a subsequent meeting on 15 December 2010, following a close and detailed examination of the findings of the reports by the law firms Hengeler Mueller and Flick Gocke Schaumburg, and an opinion from Clifford Chance on the ABS investments, the Board of Administration also decided to bring claims for damages against former members of the Board of Management for alleged breach of duty in relation to ABS investments.

To safeguard its legal interests, the Board of Administration decided in January 2011 to bring a claim for damages against Dr. Gribkowsky. The damages relate to the issues of HGAA, ABS trans actions and Formula One. At the start of the year, it was revealed that Dr. Gribkowsky is under strong suspicion of receiving a kickback of USD 50 million from a third party in relation to the sale of the Formula One stake.

Corporate governance

The BayernLB Corporate Governance Principles set out the regulations on corporate management and supervision that apply to BayernLB on the basis of binding and in-house regulations.

In its meeting of 31 January 2011, the Board of Administration discussed compliance with these corporate governance principles in 2010. It came to the same conclusion as the Board of Manage- ment that it was aware of no evidence that these principles had not been observed. The General Meeting passed a resolution to the same effect.

In moving from the old Landesbank model to a customer-focused commercial bank, BayernLB has opted to make changes so that its corporate governance is more commercially orientated. The stated aim of the Bavarian state government is to restructure BayernLB’s governing bodies to extensively depoliticise them.

BayernLB . 2010 Annual Report and Accounts ›› Report by the Board of Administration

Board members

Various changes were made to the composition of the Board of Administration in 2010.

Klaus Weigert, Deputy Secretary, stepped down from the Board of Administration on 14 January 2010. He was succeeded on the Board by Dr. Michael Bauer.

Gerd Haeusler’s term as the First Deputy Chairman of the Board of Administration and Chairman of the Risk Committee ended on 31 March 2010 when he was appointed Chief Executive Officer of BayernLB.

On 30 June 2010, Siegmund Schiminski resigned his seat on the Board of Administration. He was replaced by Walter Strohmaier on 1 August 2010.

The Board of Administration would like to thank the mandate holders who are stepping down for their constructive contribution and services to the Bank.

Gerd Haeusler was succeeded on the Board of Administration by Alexander Mettenheimer on 8|9 1 August 2010. At the meeting of the Board of Administration on 16 September 2010, he was appointed First Deputy Chairman of the Board and Chairman of the Risk Committee. At the same time, Walter Strohmaier was elected Second Deputy Chairman of the Board of Administration and a member of the Audit Committee.

Changes also took place to the Board of Management in 2010.

Effective 15 April 2010, the Board of Administration succeeded in gaining the services of Gerd Haeusler as Chief Executive Officer of BayernLB. The Board of Management was further strengthened by the appointment of Marcus Kramer as Chief Risk Officer (CRO) on 1 May and of Stephan Winkelmeier as Chief Restructuring Officer (CRU) on 1 July 2010. Nils Niermann became a member of the Board of Management on 1 December 2010 and took over responsibility for the Markets Business Area.

Dr. Ralph Schmidt and Stefan W. Ropers stepped down from the Board on 1 April 2010 and 25 October 2010 respectively.

2010 annual accounts audited and approved

PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft conducted the audit of the Bank’s annual accounts, consolidated accounts, management report and group management report. KPMG Aktiengesellschaft Wirtschaftsprüfungsgesellschaft conducted the audit of the annual accounts and management reports of BayernLabo and LBS Bayern, the legally depen dent institutions of the Bank. BayernLB’s Board of Administration duly verified the independence of the auditors before recommending their approval by the General Meeting.

BayernLB . 2010 Annual Report and Accounts Unqualified opinions were granted upon completion of the audit in all cases. The auditors’ reports were discussed in great depth by the Audit Committee in its meeting on 26 April 2011 and by the Board of Administration in its meeting on 29 April 2011. These meetings were attended by the auditors, who explained the principal findings of the audit and were available to answer questions. Following its own final examination of the audit and on the recommendation of the Audit Committee, the Board of Administration approved the findings of the external audit.

In its meeting on 29 April 2011, the Board of Administration adopted the Bank’s annual accounts submitted by the Board of Management and approved the management report. It also approved the consolidated accounts and consolidated management report.

The Board of Administration also proposed to the General Meeting that the Board of Manage- ment be discharged. The General Meeting approved this proposal in its meeting on 29 April 2011.

A thank you to the Board of Management and the staff

The Board of Administration would like to thank the members of the Board of Management and all of BayernLB’s staff for their work over the past turbulent and eventful year and for their commitment under extremely challenging conditions.

It would also like to wish them every success in tackling the key tasks for 2011, particularly the challenges resulting from continuing to implement the restructuring of the Group. The Board of Administration is confident that BayernLB will be able to consolidate and expand its presence in a fiercely competitive and tough market environment.

Munich, 29 April 2011 The Board of Administration

Georg Fahrenschon Chairman

BayernLB . 2010 Annual Report and Accounts ›› Report by the Board of Administration 10|11

BayernLB . 2010 Annual Report and Accounts 2. Management report

BayernLB . 2010 Annual Report and Accounts ›› Management report 12|13

14 Overview 22 Financial position and financial performance 29 Events after the end of the reporting period 31 Outlook 35 Risk report

BayernLB . 2010 Annual Report and Accounts Overview

Economy – recovery after a deep slump

Germany’s economy recovered in 2010 more quickly than expected from the deep recession in the October 2008 to March 2009 period. Following a 4.7 percent contraction the year before, the country’s real gross domestic product rose by 3.6 percent. Overall economic output in 2010 was nonetheless still 1.3 percent down on pre-downturn levels (2008). The principal driver behind the buoyant recovery was the marked pick-up in global trade in which Germany’s industrial sector participated fully thanks to being highly competitive and its leadership in many areas of technology. Exports of goods and services rose by 14.1 percent having contracted by almost the same amount in 2009. By the last quarter of 2010, exports had recovered to pre-slump levels. Capital expenditure on plant and equipment jumped by 10.9 percent in real terms in 2010. However, having fallen by at least one fifth in the recession-plagued year of 2009, this is still far below 2008 levels. Not only did the strength of the upturn probably catch many companies by surprise, but uncertainty over whether the upswing would continue into 2011 and beyond also persisted throughout the year. Overall capacity utilisation in the industrial sector did not touch the long- term average until the end of 2010 so companies did not appear to be in any great hurry to pour money into expanding. Private consumption rose by only 0.4 percent in real terms and was just 4 percent higher in 2010 than a decade ago. Conditions on the labour market were, however, favourable. Compared with the previous year, there were 212,000 more people in work, helping to boost consumers’ disposable income by 2.7 percent. Despite the favourable environment, the household savings ratio rose by 0.3 percent to 11.4 percent; this was linked to the measures taken the year before to support the economy (car scrappage scheme). The higher cost of living had very little impact on the purchasing power of households in 2010.

Germany’s heavy reliance once again on exports for the upturn in 2010 drew criticism in Europe and around the world. In fact, imports of goods and services actually rose by 12.6 percent, almost as much as exports. Germany’s large trade surpluses are also virtually on par with the deficits of other eurozone countries, so this may be an issue within Europe itself, but not in a transatlantic or global context. Nonetheless, surpluses on the scale of the EUR 130 billion posted in 2010 would not be in the best interests of the economy over the long term. Not only would more people need to be in work to create a solid basis for consumer spending, but conditions for investment within Germany would also have to be improved as a matter of urgency and public investment stepped up.

Public debt spiralled in the wake of the measures taken to stabilise the financial system and buttress the economy, plunging the eurozone into turmoil in 2010. Starting with Greece, several economies came under pressure and were forced to ratchet up interest rates on new debt over the course of the year. At the beginning of May, a EUR 110 billion rescue package was put together for Greece by the European Union and International Monetary Fund (IMF), followed up just a few days later by a EUR 750 billion safety net for other eurozone members in difficulties. At the end of November, Ireland became the first country to take advantage of this facility. But the widescale efforts by governments failed to stabilise financial markets. As the sovereign debt crisis unfolded, the credit default swap index for European sovereigns soared by 130 basis points (bp) to 200 bp. In the banking and financial sector too, the corresponding index jumped by 105 bp to 180 bp. The principal cause of the sovereign debt crisis was ballooning private and public debt in those

BayernLB . 2010 Annual Report and Accounts ›› Management report Overview

countries within the currency union that saw interest rates nosedive when they joined. Then as wage and price increases outpaced those in countries more focused on stability, their competitive edge was eroded little by little, resulting in ever higher trade deficits. When governments ran high and ultimately ever higher deficits in an attempt to provide stimulus to compensate for the dwindling competitiveness of their economies, financial markets lost faith in the ability of these countries to sustain their public finances. On top of the extensive support measures, including bond purchases by the European Central Bank, there are now calls for fundamental changes in economic governance to prevent adverse developments like those in the crisis-hit countries from occurring in the future and thereby ensure the stability of the euro.

On the bond market, yields on German government bonds remained very low in 2010. At 2 ¾ percent for long-dated bonds, the average for the year was 1/2 a percentage point below even the previous year’s low figure. The year saw some significant changes. Up to late summer, yields marched downwards against a backdrop of minimal inflation, very low central bank rates, and a sovereign debt crisis in the eurozone that drove scores of investors to take refuge in the issuer considered the safest there: the Federal Republic of Germany. Reinforcing this trend, the coun- 14|15 try’s public deficit in 2010 was equivalent to 3.3 percent of gross domestic product, only marginally above the Maastricht threshold of 3 percent, and the government announced a vigorous programme of consolidation for the following years.

As the year drew to a close, however, yields crept back up to just below 3 percent due to rising yields on US Treasuries and increasing concerns that the solidity of Germany’s public finances might be weakened by bailouts for other euro countries. 2010 was a heady year for the German stock market. The DAX finished the year 16 percent higher on 6,900 points. As corporate earnings growth has been strong, it would be quite wrong to talk of an overreaction or even an asset bubble. Key valuation indicators are in fact comparatively low. The DAX significantly outper- formed the EURO STOXX 50 (– 6 percent), its counterpart in the eurozone, which was dragged down by the high weighting of financial stocks shunned by investors during the financial crisis and sovereign debt crisis.

With the financial crisis rumbling on into 2010, comprehensive changes to banking supervision now emerging, and a bank levy in the offing, banks have altered their lending behaviour. At the same time, demand for credit in an economy in the early stages of an upturn has been subdued. Consequently, lending by banks in Germany to companies and individuals at the end of 2010 had stagnated compared to the previous year. Larger companies on the other hand have found the financial markets to be an attractive alternative to bank loans.

In July 2010 the Committee of European Banking Advisors (CEBS) carried out stress tests at 91 European banks to determine their capital adequacy and resilience in a crisis. BayernLB passed the test in all three scenarios as it was very highly capitalised. Under the toughest scenario – where European sovereign risks in the trading book, including the Federal Republic of Germany, were included in the stress test – BayernLB achieved a core capital ratio of 8.8 percent. An additional internal simulation conducted by the Bank looked at the effects of stress on exposures to these countries carried in the banking book as well. The core capital ratio in this case was 8.4 percent.

BayernLB . 2010 Annual Report and Accounts Business model and strategy

The Hercules restructuring project is the tool used by BayernLB to implement its refocused business model. The Bank’s restructuring plan was submitted on time to the EU Commission on 29 April 2009. Particularly due to the disposal of Hypo Group Alpe Adria, Klagenfurt, (HGAA), the underlying business planning was updated in the first quarter of 2010 to reflect the new realities and resubmitted. In 2010, the constructive talks with the EU were continued, while the focus remained on implementing the restructuring measures under Project Hercules. The main ele- ments of BayernLB’s new strategic direction are:

• Narrowing the focus to clearly defined customer groups, regions and products • Strengthening the defined core by focusing and tapping potential • Making greater use of comprehensive product expertise through cross-selling • Downsizing the Bank significantly and improving efficiency • Permanently reducing risks • Significantly expanding Group-wide management

BayernLB is positioning itself overall as a customer bank focused on German and handpicked international customers. This limits risks accordingly. In future, the pillars of the business model will be the Mittelstand (mid-market), large corporates, and commercial real estate segments plus the retail customer business. Another key component in the business mix is the business with the savings banks, the public sector and financial institutions.

Implementation successes

The strategy of narrowing the strategic core to clearly defined customer groups, regions and products and rapidly winding down non-strategic business was successfully continued in 2010. Swift and steady progress has been made by the Restructuring Unit (RU) in winding down portfolios. Adjusted for transfers, portfolios were scaled down over the first 18 months after the RU was founded by around EUR 28.2 billion (around 42 percent) to EUR 39.5 billion as at 31 December 2010. This significant reduction was also achieved by active management of the portfolios.

The restructuring plan was also systematically implemented in other areas of focus. Following on from Tokyo, Beijing, Mumbai and Montreal in 2009, the Kiev representative office and Shanghai and Hong Kong branches were closed down in 2010. The London, New York, Paris and Luxem- bourg branches will remain open. Originally scheduled for the end of 2011, the closure of the Milan Branch is being reviewed in the light of BayernLB’s market position in the corporate customer business.

The measures aimed at cutting operating expenditure and headcount are on track. Workforce reduction targets in Germany were contractually agreed in full in 2010. The changes in the organisational structure of the Bank as part of the restructuring continue apace. The goal of halving the number of management positions by reducing the number of management levels and increasing spans of control is being systematically implemented. As at the end of 2010, a solid 80 percent of this aim had been implemented.

BayernLB . 2010 Annual Report and Accounts ›› Management report Overview

The competitiveness of the strategic core was strengthened in a number of projects in the business areas and subsidiaries. Examples of this include projects in the Real Estate, Public Sector & Savings Banks Business Area and in the Mittelstand & Retail Customers Business Area. In the Savings Banks Division, besides improving savings banks support, the whole product line was reviewed and optimised in accordance with business criteria and the needs of savings banks. With a sharp increase in customer relationships and market share, the Mittelstand Division positioned itself as an integrated corporate finance bank and defined its strategy for serving its market both directly and indirectly in partnerships.

In the run-up to 2013, further work on reaching the target will be carried out. The positive track record in the core business and continuation of the winding down of non-core activities will be top priorities.

Participations portfolio

The significant downsizing and repositioning of the Bank as a customer bank focused on German 16|17 and selected international companies includes cutting back on BayernLB’s participations portfolio. As an aid to actively managing its participations, the Bank carried out a review of its portfolio in 2010 and classified holdings as either core or non-core. Through the systematic reduction of participations, the number of direct participations was reduced to 108 (2009: 122) in the reporting year.

Begun in 2009, the process of disposing of the majority stake in Landesbank Saar (SaarLB) was completed on 21 June 2010. By selling a 25.2 percent holding to the German state of Saarland, BayernLB reduced its shareholding in SaarLB to 49.9 percent.

Expiry of the letter of comfort for Landesbank Saar on 21 June 2010

Under the share purchase and transfer agreement of 18/21 December 2009, BayernLB sold a 25.2 percent holding in the share capital of Landesbank Saar (SaarLB) to the Saarland. When the transaction was completed on 21 June 2010, SaarLB ceased to be an affiliated company of BayernLB in accordance with Section 271 para. 2 HGB. On this date, the reasons for a letter of comfort from BayernLB for SaarLB ceased to apply. As was already mentioned in the 2009 Annual Report and in the BayernLB press release on 21 June 2010, all liabilities of SaarLB created after 21 June 2010 are therefore no longer covered by BayernLB’s letter of comfort for SaarLB. As it did in the 2009 Annual Report and the BayernLB press release on 21 June 2010, BayernLB rescinds once again the letter of comfort in relation to all SaarLB’s liabilities created after 21 June 2010 and accordingly revokes once again all earlier declarations.

Human resources

As at 31 December 2010, a total of 4,184 staff were employed at BayernLB. Headcount fell by 288 over the year. Of these, 227 were based in Germany and 61 abroad.

BayernLB . 2010 Annual Report and Accounts Headcount at BayernLB

Change 2010 2009 absolute in % Year-end headcount at BayernLB in Germany and abroad 4,184 4,472 – 288 – 6.4 of which • Germany 3,821 4,048 – 227 – 5.6 • Abroad 363 424 – 61 – 14.4 of which • BayernLB excluding BayernLabo and LBS Bayern 3,243 3,509 – 266 – 7.6 • BayernLabo 234 248 – 14 – 5.6 • LBS Bayern 707 715 – 8 – 1.1 of which • Male 2,150 2,287 – 137 – 6.0 • Female 2,034 2,185 – 151 – 6.9 of which • Full-time employees 3,338 3,568 – 230 – 6.4 • Part-time employees 846 904 – 58 – 6.4 Average length of service in the Bank (in years)* 14.0 14.2 – 0.2 – 1.3 Average age (in years)* 42.2 42.1 0.1 0.1

* The averaged figures relate to all active members of BayernLB staff in Germany and abroad (2010: 4,184; 2009: 4,472).

As at 31 December 2010, 100 members of staff had a vocational training contract: 29 were banking apprentices, 44 students at a vocational academy (job-integrated studies) and 27 were trainees.

Junior staff headcount

Change 2010 2009 absolute in % Year-end junior staff headcount at BayernLB in Germany and abroad 100 101 – 1 – 1.0 of which • Banking apprentices 29 39 – 10 – 25.6 • Students on a vocationally integrated course at a vocational academy 44 40 4 – 10.0 • Trainees 27 22 5 22.7

As at 31 December 2010, 846 staff (20.2 percent) were employed part time. The increase in numbers of part-time workers over nearly the past ten years is clear evidence that many now have a healthy balance between family and work thanks to the flexible working-hour models.

Staff turnover as a percentage of the workforce in Germany and abroad fell to 1.8 percent (2009: 2.4 percent). The steady fall underlines the level of commitment by staff towards BayernLB.

BayernLB . 2010 Annual Report and Accounts ›› Management report Overview

Corporate responsibility

Businesses have responsibilities towards the society they operate in. BayernLB takes these seri- ously and supports a number of projects ranging from community work, education and science, through to sustainability management.

Community work

BayernLB supports and sponsors people to give them the chance of a better future. A key area of this commitment is the “We help children” campaign run by the charity Sternstunden. Children in need benefit from every single cent donated as the sponsors foot all the administrative costs.

Besides sponsorship, BayernLB also helps the charity in additional ways such as providing it with office space and equipment, subsidising printing costs and carrying out administrative work. The sponsors – BayernLB, the Bavarian savings banks and Versicherungskammer Bayern – and the Bavarian radio station Bayerischer Rundfunk assist the work of the children’s charity by encourag- ing staff members to do volunteer work. For example, staff at BayernLB, BayernLabo and LBS 18|19 collected donations on the day of the Sternstunden gala. At the Sternstunden gala, last year’s record EUR 4.58 million was reached once again. LBS donated the second prize in the 2010 Sternstunden prize draw: a home loan savings account credited with EUR 10,000.

In the financial year 2009/2010, Sternstunden sponsored more than 197 projects in Germany and abroad to the tune of EUR 9.5 million under the stewardship of handpicked and reputable charitable organisations based in Germany. Thanks to their work, aid went straight to sick, disabled and disadvantaged children around the world, bypassing bureaucratic hurdles.

Special recognition must go to the work of staff who give their time to charitable and community-focused organisations. They perform a valuable service in rescue teams, the Federal Agency for Technical Relief, the fire brigade and crisis intervention teams (CIT). BayernLB supports these activities by granting staff volunteers paid leave.

Education and science

A key component of BayernLB’s work in promoting education and science is to help ease young people into the working world. In one project, LBS helps children and young people find non-vio- lent ways of dealing with conflicts. In partnership with the “Alliance for children. Fighting violence” project, it donated EUR 200,000 to the “United we are strong” anti-violence programme run by the Bavarian branch of the German national association for the protection of children (DKSB). The practical programme is built around volunteer trainers of teams of children and young people in sports clubs. With the financial assistance given by LBS, “United we are strong” training sessions are now held throughout Bavaria. Thanks to LBS’s help, 1,000 sports associations also receive sponsorships as a “starter kit”, so that three youth trainers or leaders can be given appropriate training free of charge and further trainers or leader can attend the course at a discounted rate.

The financial managers of the future get practical training and financial support thanks to the combined efforts of BayernLB and BayernInvest. They sponsor the elite programme Finance & Informa- tion Management (FIM) run by the University of Augsburg and the Technical University of Munich.

BayernLB . 2010 Annual Report and Accounts Support for the “Munich Financial Center Initiative” (fmpi)

The primary objective of the “Munich Financial Center Initiative” (fpmi) is to boost the financial center of Bavaria, especially Munich, and to improve the area’s standing outside the region. Regular discussions are held with representatives of the European Commission and the European Parliament in Brussels for this purpose.

The “Munich Financial Center Initiative” furthers the interests of all players within Bavaria’s financial sector. Participants are companies from the banking and insurance sectors, venture capital and leasing companies, the Bundesbank, Munich’s stock exchange, professional bodies, business and trade associations and research institutions linked to universities.

As a member of the “Bavarian Center of Finance”, BayernLB helps promote its activities, particularly collaborative projects between Bavarian universities and financial service providers with a practical focus, a careers centre for newly qualified talent and the exchange of knowledge and experience at specially organised events. The fourth Bavarian Finance Summit in Munich brought together major names from the worlds of academia, business and politics once again. The event owed much of its success to the topic “On the path towards a new financial architecture”.

BayernLB continued to actively support the “Germany as a financial center” campaign (Initiative Finanzstandort Deutschland (IFD)), the most extensive campaign by the German financial sector. For example it also took part in the debate on restructuring the financial supervisory regime.

Environmental protection at BayernLB

BayernLB has a long tradition of managing precious resources responsibly. Since the early 1990s it has looked at ways of becoming greener. The goal of avoiding or minimising the direct or indirect negative impact of banking business on the environment is encapsulated in a Group-wide environmental policy that governs all measures directed at improving environmental performance. Implementation of these measures, which comply with the standards of the Environmental Management and Audit Scheme (EMAS) Regulation, began at the Munich head office as early as 1999. The associated external audits of the environmental management system underscores the high value placed inside the company on protecting the environment.

Aware that combating the negative effects of man-made climate change is one of the greatest challenges of the 21st century facing society today, BayernLB is strongly committed to protecting the climate. Reducing direct and indirect emissions of the greenhouse gas CO2 is the principal focus of the range of measures aimed at improving the environmental performance of the Bank and Group. To reach this goal in the best possible way, BayernLB has devised a three-pronged climate protection strategy – each element building on the other – which it has rigorously implemented since 2007.

The first and foremost element is to continually prevent the emission of CO2 by the company through active energy and resource management. To achieve this, a wide range of measures have been developed and successfully implemented in past years. For example, water and paper consumption has been drastically cut at BayernLB and energy consumption in buildings reduced. To make steady progress in this area in the future, three buildings at the Munich head office were renovated in 2009 with a view to making them more energy efficient.

BayernLB . 2010 Annual Report and Accounts ›› Management report Overview

The second element is to replace conventional sources of energy wherever possible. For example, BayernLB has covered its entire energy needs at its offices in Munich with electricity from certified hydro-electric power. Moreover, the offices in Munich have also been generating power from a solar energy facility owned by the Bank since 1998.

The final element is to offset CO2 emissions resulting from the unavoidable use of resources. For this purpose, BayernLB purchases and cancels emission certificates from various externally verified climate protection projects. Following the successful implementation of this measure, BayernLB has been climate-neutral in Munich since 2008.

Sustainable financial solutions

In looking at the impact on society, the products of financial service providers can play a pivotal role. For example, in serving the needs of companies in the environmental technology sector, but even more by taking environmental and social factors into account in their lending decisions,

banks can make a major contribution to creating a sustainable society. 20|21

BayernLB is facing up to these challenges and is heavily committed to the highly dynamic and increasingly important environmental technology sector which is creating both green and economic opportunities. Environmental technology, one of the key sectors of the 21st century, is creating jobs, helping to protect the environment and making a major contribution to a sustain able world. In view of this fact, BayernLB is further expanding its activities in the cutting edge markets of environmentally friendly energy generation, energy efficiency, commodity and material efficiency, life-cycle engineering, sustainable water management and sustainable mobility. The goal is to deliver an extensive product line tailored to customer needs – ranging from financing growth and export and project financing, right through to consulting and the incorporation of subsidised loans. Successfully developing the environmental technology market requires close cooperation between the private and financial sectors. In particular, companies in environmental technology need customised financial solutions to compete on the global market. BayernLB will therefore remain a specialised and reliable partner to the environmental technology industry so that together with its customers it can capitalise on the opportunities that exist to the maximum degree.

As a lender, BayernLB has undertaken to comply with the World Bank’s environmental and social standards. These regulate, for example, how a population affected by a project must be involved. Labour standards must also be observed. These generally applicable qualitative requirements are supplemented by sector-specific quantitative rules designed to effectively prevent environmental, health and safety risks from arising. The aim of the standards is to ensure that all projects adhere to environmental, social and economic principles and are therefore conducive to sustainable development.

To comply with requirements of investors and investor groups, BayernLB’s sustainability performance is evaluated regularly by specialised, independent rating agencies. As in previous years, the Bank obtained very good scores in the latest round of assessments: oekom research, for example, classed it as „above-average“ and awarded it „PRIME“ investment status.

BayernLB . 2010 Annual Report and Accounts Financial position and financial performance

After two years of high losses, BayernLB returned to profit in 2010, performing better than expected in the financial year. The positive result shows that the Bank, with its new, more customer-focused business model, is on the right path.

Financial year 2010 was marked by stable earnings from the customer business and low risk provisions in the credit business resulting from the improved economic environment in BayernLB’s core markets. There was also a positive one-off item from the first-time adoption of the German Modernisation of Accounting Rules Act (Bilanzrechtsmodernisierungsgesetz (BilMoG)). Net profit was weighed down by the payment in full of unpaid interest on profit participation certificates totalling EUR 144 million for financial years 2008 and 2009. A net profit of EUR 544 million (2009: net loss of EUR 2,595 million) was generated, from which EUR 174 million was used to replenish in full the nominal value of profit participation certificates written down in the previous year to absorb the losses suffered. Thanks to the positive result, the silent partner contributions, whose value had likewise been written down, were also partially replenished (EUR 370 million) by around 51 percent.

The credit business once again had a major impact on the Bank’s financial position. While the interbank business decreased further, the credit business with customers grew in the core areas. The Bank’s issuing activity was significantly less than in previous years due to lower funding needs and the financing already raised in 2009.

The financial situation was solid throughout the reporting year and sufficient liquidity was on hand at all times. Overall, BayernLB’s financial situation improved significantly.

The ongoing EU state aid proceedings could not be concluded in 2010; a decision is expected in the first half of 2011. Irrespective of this, the resizing of BayernLB continued apace in 2010. The slight 4.4 percent increase in total assets to EUR 279.3 billion resulted from changes in the accounting treatment of trading portfolio required under the new German accounting law, BilMoG. Adjusting for this, total assets as at 31 December 2010 would have been significantly lower. The effects of business policy, in particular, on financial performance and financial position are discussed below. The effects from the first-time adoption of BilMoG are explained where extensive changes have occurred. For the other effects, we refer you in particular to the information provided under “Accounting policies” in the notes.

Enjoying an own funds ratio of 19.2 percent, the Bank continues to have a very solid capital base.

BayernLB . 2010 Annual Report and Accounts ›› Management report Financial position and financial performance

Earnings

BayernLB 1 Jan – 31 Dec 1 Jan – 31 Dec EUR million 2010 2009 Change in % Net interest income 1,423 1,410 1.0 Net commission income 158 146 8.3 Gross profit 1,581 1,556 1.6 Personnel expenses – 369 – 380 – 2.8 Operating expenses – 396 – 371 6.7 Administrative expenses – 765 – 751 1.9 Net income from the trading portfolio 157 612 – 74.3 Net of other operating expenses and income 9 185 – 95.1 Risk provisions – 233 – 849 – 72.6 Gains or losses on measurement – 294 – 2,555 – 88.5 Operating profit/loss (operating result) 455 – 1,803 22|23 Gains or losses from extraordinary items 240 – 347 Income taxes – 151 – 445 – 66.0 Partial profit transfer – – – Net profit/net loss for the financial year 544 – 2,595 Withdrawals from reserves – 1,661 Withdrawals from profit participation certificates – 187 Withdrawals from silent partner contributions – 747 Replenishment of profit participation certificates – 174 – Replenishment of contributions of silent partners – 370 – Net retained profits – –

Rounding differences may occur in the tables.

Net interest income was marginally higher than in 2009, rising 1.0 percent to EUR 1,423 million. Net interest income was weighed down by the payment in full of unpaid back interest on profit participation certificates totalling EUR 144 million for financial years 2008 and 2009. Income from participations and affiliated companies (including income from profit transfers) fell on balance by EUR 101 million on the previous year. That net interest income was higher nonetheless, was mainly due to the improved funding situation and corresponding decrease in refinancing costs. Net interest income in the previous year was negatively impacted by the high costs of ensuring sufficient liquidity was on hand during the financial market crisis.

Net commission income rose to EUR 158 million, an 8.3 percent increase on the previous year. The increase is primarily due to the rise in net commission income from the securities business, which was partly boosted by changes in the way commission generated from trading is reported: from 2010, BilMoG requires it to be recognised in net income from the trading portfolio. There was also a fall in fees payable to the German Financial Market Stabilisation Fund (SoFFin). This was due to the premature return in October 2009 of the unused portion of the guarantee facility in the amount of EUR 10 billion that was no longer needed, and to the premature partial repayment of the guaranteed bond in the amount of EUR 0.3 billion.

BayernLB . 2010 Annual Report and Accounts Administrative expenses rose slightly by 1.9 percent to EUR 765 million due to an increase in operating expenses, while personnel expenses fell further.

Personnel expenses were cut by 2.8 percent to EUR 369 million as a result of the reductions in the workforce in connection with the Hercules restructuring project. Operating expenses increased by EUR 25 million to EUR 396 million, largely due to a EUR 11 million rise in total of expenditure on legal and consulting fees. This includes costs arising from legal investigations aimed at establishing the causes and responsibilities for the high losses in the preceding years.

Net income from the trading portfolio was EUR 157 million (2009: net income from financial transactions of EUR 612 million). Due to the changes required by BilMoG, all financial instruments in the trading portfolio, including executory contracts concluded for trading, are measured at fair value less a risk deduction. All realised and unrealised amounts from trading portfolios, including their refinancing costs, is shown under this income statement item. Interest rate-related transactions were the main contributors to net income from the trading portfolio, generating EUR 132 million of the total, with around EUR 111 million of this from fixed-interest securities. A further EUR 34 million came from currency-related transactions. The transfer to the fund for general banking risks required under BilMoG was EUR 17 million.

The net of other operating expenses and income was EUR 9 million, 95.1 percent lower than the year before (2009: EUR 185 million). The previous year’s figure was impacted by the one-off gains of EUR 129 million from the dissolution of the Bavarian Reserve Fund.

The cost-income ratio (CIR)1 for financial year 2010 was a healthy 43.8 percent (2009: 31.9 percent). The previous year’s figure was unusually low due to the very high net income from financial transactions.

Net allocations to risk provisions were EUR – 233 million (2009: EUR – 849 million). Of this, EUR – 234 million (2009: EUR – 1,334 million) arose from risk provisions in the credit business. In 2010, risk provisioning requirements were smaller than expected largely as a result of lower specific loan loss provisions. In the previous year, risk provisions in the credit business were significantly impacted by the waiver of receivables in conjunction with the disposal of HGAA. The positive amount of EUR 82 million (2009: EUR 435 million) arising from the liquidity securities portfolio was largely due to reversals of written-down securities.

Losses on measurement were EUR – 294 million (2009: EUR – 2,555 million), of which EUR – 282 million was from writedowns of affiliated companies/participations. The measurement loss for 2009 was also impacted by the disposal of HGAA and consequent writedown of the carrying amount of the stake.

As a result of the much better business performance in 2010 compared to 2009 operating profit (after risk provisions/revaluations) amounted to EUR 455 million (2009: operating loss of EUR – 1,803 million).

1 CIR = administrative expenses/gross profit + net income/losses from the trading portfolio + net of other operating expenses and income

BayernLB . 2010 Annual Report and Accounts ›› Management report Financial position and financial performance

Return on equity (RoE)2 in financial year 2010 was 5.4 percent (2009: negative). Economic value added (EVA) is utilised as a key management indicator at Group level. It is calculated by deducting the cost of capital from the consolidated net profit excluding gains or losses on restructuring and expenses for the bank levy.

The gains from extraordinary items in the amount of EUR 240 million in financial year 2010 were largely due to the first-time adoption of BilMoG (EUR 271 million) which included the dissolving of hidden reserves from trading derivatives and securities. Restructuring expenses for specified workforce reduction measures fell to EUR 31 million (2009: EUR 347 million) as Project Hercules entered an advanced stage of implementation in the past financial year.

Income taxes include corporate income tax, municipal trade tax, the solidarity surcharge and income taxes levied abroad. Most taxes on income and earnings are based on earnings from ordinary activities.

Besides replenishing the profit participation certificates (EUR 174 million) up to their full nominal value, the silent partner contributions, which had been written down the previous year, were 24|25 replenished in the amount of EUR 370 million or to around 92.6 percent of their nominal value. As interest is not paid on silent partner contributions until a replenishment up to the nominal amount is made, the partial profit transfer is reported as zero (2009: EUR 0). The outstanding amount to be replenished is EUR 354 million, while the contractually payable unpaid interest on silent partner contributions is EUR 109 million. Replenishments and retrospective payments are only made during the term of the silent partner contributions if they do not result in an increase or net accumulated loss for the year.

Financial position

The 4.4 percent increase in total assets is largely due to changes in the accounting treatment of trading portfolios required by BilMoG. More information is given in the notes. The movement in the other balance sheet items reflects the new, refocused business model whose aim is to significantly downsize the Bank.

BayernLB EUR billion 31 Dec 2010 31 Dec 2009 Change in % Total assets 279.3 267.7 4.4 Business volumes 319.0 315.0 1.3

2 RoE = operating profit – partial profit transfer – + change in fund for general bank risks / average, relevant reported equity – profit available for distribution + average fund for general bank risks.

BayernLB . 2010 Annual Report and Accounts The change in accounting treatment of trading portfolios is also reflected in the 1.3 percent increase in reported business volumes (total assets plus contingent liabilities from guarantees, indemnity agreements and irrevocable credit commitments). Contingent liabilities from guarantees, indemnity agreements and irrevocable credit commitments fell by 16 percent compared with the previous year.

Credit operations

BayernLB EUR billion 31 Dec 2010 31 Dec 2009 Change in % Due from banks 70.7 94.4 – 25.1 Due from customers 90.2 88.9 1.5 Securities 63.7 68.4 – 6.9 Trading portfolio 41.7 – – Credit volumes* 175.7 199.6 – 12.0

* Due from banks and customers plus contingent liabilities from guarantees and indemnity agreements

The changes in the due from banks and due from customers items underscores the strategic realignment of the Bank as a customer bank focused on German and selected international companies.

Like the previous year, the sharpest fall was in the due from banks item, which contracted by 25.1 percent to EUR 70.7 billion. The fall was mostly due to the decrease in business with international banks. The main fall was in the maturities of up to one year segment.

After a decrease in the previous year, satisfactory growth was posted in the customer business in 2010. Amounts due from customers rose by 1.5 percent or EUR 1.3 billion to EUR 90.2 billion. In particular, amounts due from domestic borrowers rose by around 10 percent, while amounts due from foreign borrowers fell.

In financial year 2010, the securities portfolio was reduced by EUR 4.8 billion or 6.9 percent to EUR 63.7 billion. Bonds and other fixed-income securities fell by EUR 4.8 billion, while equities and other non-fixed income securities rose slightly by EUR 0.1 billion to EUR 0.7 billion. The previous year’s figures included trading portfolios of bonds and other fixed-income securities totalling EUR 7.2 billion and trading portfolios of equities and other non-fixed income securities totalling EUR 0.2 billion. In the reporting year these transactions were reported in the trading portfolio in accordance with BilMoG.

Holdings in affiliated companies decreased 4.1 percent to EUR 3.5 billion largely due to the reduction in the holding in SaarLB and the related reclassification to the balance sheet item investments. Writedowns on affiliated companies also needed to be made. Capital measures in 2010 were mainly carried out at the MKB Bank Zrt. and Deutsche Kreditbank Aktiengesellschaft (DKB) subsidiaries.

BayernLB . 2010 Annual Report and Accounts ›› Management report Financial position and financial performance

Due to the introduction of BilMoG, all financial instruments in the trading portfolio, including executory contracts concluded for trading, have been measured since 2010 at fair value less a risk deduction. More information can be found in the notes. As at 31 December 2010, the trading portfolio was valued at EUR 41.7 billion. Around 76 percent of these are derivative financial instruments with a positive market value, and around 20 percent are bonds and other fixed- income securities in the trading portfolio. Virtually all liabilities held for trading comprise derivative financial instruments with a negative market value.

Refinancing

BayernLB EUR billion 31 Dec 2010 31 Dec 2009 Change in % Due to banks 75.0 80.7 – 7.0 Due to customers 54.1 55.1 – 1.7 Securitised liabilities 87.2 98.4 – 11.4 26|27 Trading portfolio 31.8 – –

Amounts due to banks fell by 7.0 percent to EUR 75.0 billion as a result of the reduction in business with foreign banks.

As at the reporting date, amounts due to customers had fallen slightly by 1.7 percent to EUR 54.1 billion.

In 2010, due to its very comfortable liquidity, BayernLB’s refinancing needs were low compared with the previous years. The target in the liquidity planning for 2010 was achieved through the issue of a EUR 1.5 billion benchmark bond and by obtaining more retail funds from the domestic market through DKB. To protect its presence on the capital markets, BayernLB successfully augmented its public Pfandbrief curve by issuing a four-year EUR 1 billion jumbo Pfandbrief on 22 June 2010. Driven by high demand, it was topped up twice over the course of the year by EUR 125 million and then by EUR 375 million. As a result of the planned decrease in business on the assets side and fewer maturing instruments on the liabilities side, securitised liabilities at BayernLB fell in line with strategy by 11.4 percent to 87.2 billion in 2010.

Capital adequacy

Following the net loss in the previous year, profit participation certificates and silent partner contributions absorbed the losses in 2009 in proportion to their share of the liable capital. Thanks to the earnings generated in financial year 2010, the approximate 15.1 percent reduction in the nominal value of the profit participation certificates was reversed in full and back interest on the profit participation certificates due from financial years 2008 and 2009 paid. The silent partner contributions were also partly replenished in the amount of EUR 370 million.

The replenishment of the silent partner contributions had a positive impact on BayernLB’s capital base. Equity increased slightly, rising by 1.9 percent to EUR 13.3 billion.

BayernLB . 2010 Annual Report and Accounts Banking supervisory ratios under the German Banking Act (KWG)

Risk positions were calculated on the basis of the German Solvency Ordinance (SolvV). As reported on 31 December 2010, the core capital ratio – which looks at risk assets, operational risk and market risk positions – was a solid 13.5 percent (2009: 15.7 percent), while the own funds ratio was 19.2 percent (2009: 22.2 percent).

EUR billion 31 Dec 2010 31 Dec 2009 Risk positions under the Solvency Ordinance 94.0 99.3 Own funds 18.0 22.0 • of which core capital 12.7 15.6 Own funds ratio (overall ratio) as reported 19.2 % 22.2 % Core capital ratio as reported 13.5 % 15.7 %

The fall in own funds and equity ratios is primarily due to the impact of making good the net loss for financial year 2009 in 2010. Adjusting for the results of financial year 2009 and 2010, the core capital ratio improved, rising from 13.3 percent as at 31 December 2009 to 13.9 percent at the end of 2010.

BayernLB . 2010 Annual Report and Accounts ›› Management report Financial position and financial performance · Events after the end of the reporting period

Events after the end of the reporting period

The following events of major significance to BayernLB occurred after the close of the 2010 financial year.

In 2011, BayernLB will continue to pursue the legal investigations aimed at establishing the causes and responsibilities for the high losses in the past originating from ABS investments and the acquisition of HGAA. In 2010, based on a variety of expert reports and weighing up all legal and economic considerations, the Board of Management of BayernLB came to the conclusion that an action for liability against the former members of the Board of Administration in relation to the ABS investments would have no chance of success. The same applies to the “ordinary” members of the Board of Administration in relation to the acquisition of HGAA. On 15 March 2011, the Board of Management decided to bring claims for damages against the former chairman and former deputy chairman of the Board of Administration for alleged breach of duty in relation to the acquisition of HGAA.

At its meeting on 25 October 2010, the Board of Administration of BayernLB decided to bring

claims for damages against all Board of Management members involved in the acquisition of 28|29 the majority stake in HGAA. Claims for damages in relation to the ABS investments will also be brought against the board members involved. A claim for damages of EUR 200 million against Dr. Gerhard Gribkowsky, the former chief risk officer, in relation to the acquisition of HGAA, the ABS Investments and the Formula One affair was brought before the regional court of Munich in January 2011.

BayernLB intends to sell its entire indirect holding in DekaBank Deutsche Girozentrale, Frankfurt, (DekaBank) to the association of savings banks. Negotiations on the sale have continued into the first quarter of 2011. The sale of the holding in DekaBank should be concluded by the end of July 2011, subject to the necessary Board resolutions.

Depending on the outcome of the state aid proceedings brought by the EU in relation to WestLB AG, Düsseldorf, the guarantee fund of the Landesbanks and giro centres may be utilised. BayernLB is a member of this guarantee fund and its financial performance may be negatively impacted by obligations to make an additional contribution if existing funds are fully utilised.

On current estimates, the dramatic earthquake in Japan and the disaster it triggered at the Fuku- shima nuclear plant will not have a significant negative impact on BayernLB’s earnings. BayernLB has a credit exposure to Japanese customers of around EUR 0.3 billion: 57 percent to large banks with top ratings, 29 percent to corporate customers and 14 percent in the form of asset-backed securities. On current forecasts and provided that the significant damage in the region affected in the north of the country is contained, the creditworthiness of the banks and companies affected will not be materially impacted. With regard to asset-backed securities (exclusively commercial mortgage backed securities (CMBSs)), it is expected that the functioning of the market for CMBSs will be severely affected. These securities, however, come under the guarantee agreement with the Free State of Bavaria. The assessment of the impact on our German customers with business interests in Japan has found there to be no acute threat provided that the events in Japan do not significantly weigh on the global economy. It is assumed in virtually all cases that the impact on our business partners will be minimal.

BayernLB . 2010 Annual Report and Accounts Between 3 May 2010 and 15 February 2011, the German Financial Reporting Enforcement Panel (DPR) conducted audit sampling in accordance with Section 342b para. 2 sentence 3 no. 3 HGB on the annual and consolidated financial statements including the (consolidated) management report as at 31 December 2009 of BayernLB. No accounting errors were detected for financial year 2009.

No other business events of major significance occurred after the close of financial year 2010.

BayernLB . 2010 Annual Report and Accounts ›› Management report Events after the end of the reporting period · Outlook

Outlook

These forecasts of BayernLB’s performance in 2011 and 2012 may deviate substantially from the actual outcome if any of the uncertainties described below or other uncertainties occur or the assumptions underlying our forecasts prove to be false. BayernLB is under no obligation to update its forecasts in light of new information or future events taking place in the forecast period.

Economic environment

The global upturn will continue in 2011. However, it will still be a two-speed process as emerging markets have been recovering much more quickly and have reached the growth path they were on before the financial crisis and recession occurred, leaving developed countries trailing far behind. Consequently, monetary policy and trading policy are giving rise to tensions, in particular because the United States has announced its intention to start cutting its high current account deficit. Commodities prices are expected to soar once again, probably driven by financial inves-

tors. In the eurozone, the sovereign debt crisis remains high on the agenda. Government heads 30|31 are, however, trying to contain the situation.

The upturn in Germany will continue into 2011 and 2012, but will be less dynamic than in 2010. Exports are likely to increase “only” half as fast as they did in 2010 as global trade slows and the rest of the eurozone experiences moderate growth (sovereign debt crisis). But private consumption, a second support to the economy, will be boosted by falling unemployment and rising disposable income. Overall we expect to see growth of 2.6 percent in 2011 and 1.8 percent in 2012. We forecast that the euro will have strengthened to USD 1.43 by the end of 2011, and that this will be followed by further moderate appreciation by the end of 2012. The dollar is being weakened because the European Central Bank raised interest rates before the Federal Reserve and the US is running large budget deficit. Despite rising energy prices, inflation will remain moderate. Higher tax receipts and belt tightening will push the budget deficit below the threshold of 3 percent of gross domestic product. We are likely to see rising yields on the financial markets, while equity markets should continue to recover, but at a slower rate.

Based on the current outlook, there is a good likelihood that the upswing in industrialised nations will continue into 2012. Given the spare capacity in human and material resources, cost and pricing pressures should remain within bounds. Central banks, however, will gradually normalise interest rates and governments will continue their budget consolidation efforts.

The severe earthquake in Japan and subsequent tsunami on 11 March 2011 claimed numerous lives and reaped immense destruction in many parts of the country. Particularly worrying are the events at a nuclear power plant which could result in a meltdown and the escape of large quanti- ties of radioactive material. The repercussions for the Japanese economy and global economy cannot be assessed at present. But it must be assumed that overall economic output in Japan will be significantly affected at least temporarily by the destruction, damage to the power supply, and on a global scale, disruptions in the supply chain. Experience from previous natural disasters has shown, however, that growth is not affected in the medium to long term.

BayernLB . 2010 Annual Report and Accounts Financial performance and liquidity

Earnings in 2011 and 2012 will depend on the performance of international financial markets. The economic recovery should continue into 2011, but uncertainties remain as the financial crisis is not yet over. Funding needs on the market are likely to be high and this will be bolstered by the sovereign debt crisis that ignited in 2010. Despite an uncertain outlook for capital markets, BayernLB is confident that, with its new business model and the resulting changes, it has created the conditions needed to further improve its financial performance and financial position in 2011 and 2012.

In 2010 there was a very pronounced variation in the way asset classes performed. All major central banks maintained expansionary monetary policies and this helped drive the pattern of strong rallies on commodity and equity markets. In marked contrast, there was very limited growth in the price of German Bunds as fears of inflation surfaced in the fourth quarter of 2010 and yields rose.

The picture on the credit market was also very mixed. The key story here was the growth in sovereign risks in Europe. Fresh uncertainty as to how countries would deal with their debts led spreads to widen sharply, particularly on debt from the peripheral nations of the EU. For example, the credit default swap index for European sovereigns soared from 70 bp to 200 bp. The rip- ples inevitably reached the banking and financial sector, while the credit indices for corporates bucked the trend and was stable or narrowed slightly. The search for yields, growth in corporate earnings and relative immunity from sovereign debt issues led to an outperformance by the corporate bond sector, particularly in the high-yield segment.

Corporate credit risks will continue to diverge from banking and country risks in 2011. Accord- ingly, credit spreads will continue to be very volatile in 2011, particularly on sovereign risk.

The refinancing markets in 2010 were shaped by heavy market volatility that accompanied the European sovereign financing crisis. In 2010, BayernLB’s funding needs were low, partly as funding raised in the previous year could be utilised. In this relatively unfavourable market environment, BayernLB was able to refinance as planned and at comparatively attractive rates.

In 2011, BayernLB forecasts its funding needs will be around EUR 3 – 4 billion higher than the very low amounts in 2010, although this will still be significantly below its refinancing needs in 2009 and earlier years. If one also takes into account the fact that the solid liquidity reserves further improved in 2010, it can be assumed that the impact on BayernLB of any short-term market turmoil in 2011 will once again be minimal. Due to narrowing spreads on secured and unsecured issues, we expect refinancing costs in 2011 to be slightly above those in 2010. BayernLB does not believe the earthquake and nuclear plant disaster in Japan will have any significant impact on its liquidity and funding situation.

Regulatory requirements on banks are being further tightened under a series of new regulations known as “Basel III”. Although these regulations have not yet been implemented in European and national law and certain details are therefore still unclear or unknown, BayernLB assumes on the basis of current information that its capital base will remain solid in the years ahead under Basel III and additional capital will not be needed. The resources of risk assets and capital are managed to achieve a stable core capital ratio over the long term.

BayernLB . 2010 Annual Report and Accounts ›› Management report Outlook

In 2011, BayernLB is one of 88 banks selected by the European Banking Authority (EBA) to take part in the European banking stress tests. The outcome of these stress tests is due to be released in June 2011. Although parameters have been tightened, we still expect BayernLB to perform well in these tests, as it did in 2010.

On 26 November 2010, the German Bundesrat approved legislation passed by the Bundestag in October 2010 to set up a restructuring fund for banks (Restrukturierungsfondsgesetz). The regulation governing contributions to the restructuring fund for banks (Restrukturierungsfonds- Verordnung) still needs final approval. Based on the current draft legislation, BayernLB’s liability under the German banking levy in 2011 is expected to be around EUR 70 million. Given the comparatively low business volumes in the London branch, we currently believe that BayernLB will not have to pay the bank levy that has been introduced in the United Kingdom.

BayernLB’s future performance

Based on the environment in the forecast period, BayernLB expects to see positive business 32|33 growth in its core businesses. The economic recovery will continue in 2011. Events of special significance that could have an impact on financial performance and financial position continue to exist in the form of the still unresolved financial crisis, which has also now assumed the dimen- sions of a sovereign debt crisis. Negative effects could arise in particular from additional risk provisioning that may be needed as a delayed effect of the recession or the imposition of haircuts in rescue packages for certain countries. The crisis affecting some countries could also increase demand for refinancing on the market, pushing up refinancing costs. Overall BayernLB is expect- ing to post positive pre-tax earnings in financial year 2011. Consequently the Bank anticipates that it can utilise the net profit for financial year 2011 to further replenish the silent partner contributions. A further improvement is expected for financial year 2012.

With the EU proceedings not yet concluded, there are of course still uncertainties. The statements made in this outlook are based on the assumption that the restructuring plan (“Hercules”) submitted to the Commission in 2009 essentially remains in its current form. From BayernLB’s perspective, it is the quality not the timing of the Commission’s decision that matters. In view of this, BayernLB remains in constructive talks with the Commission and continues to systematically and successfully implement the changes to the business model that it has already discussed with the Commission. The positive performance in financial year 2010 is proof that the new course it has chosen is the right one.

Initially the focus in 2011 will be on reaping the benefits of the changes implemented under the Hercules restructuring programme and on pressing ahead with “normalising” business operations. At the same time, it will have to deal with new challenges and issues. Now that the Mittel- stand strategy has been defined and selectively expanded, the Corporates strategy is being adapted to the changing market conditions. The Markets Business Area is focusing primarily on its role as provider of products to the customer business areas.

BayernLB . 2010 Annual Report and Accounts Despite the uncertain outlook for the capital markets, BayernLB is confident overall that, with its new business model and the resulting changes, it has created the conditions needed to further improve its financial performance and financial position in 2011 and 2012. It is assumed that the core capital ratio will remain stable and above 10 percent. Any changes in the general situation could have an impact on BayernLB.

BayernLB . 2010 Annual Report and Accounts ›› Management report Outlook · Risk report

Risk report

Basis

This Risk report is prepared in accordance with the German Commercial Code (Handelsgesetz- buch (HGB)) and the provisions of the German Modernisation of Accounting Rules Act (Bilanz rechtsmodernisierungsgesetz (BilMoG)) on risk reporting.

Rounding differences may occur in the tables below in the last digit to the right.

Key developments in 2010

The resizing of BayernLB, which continued in 2010 on the basis of the new business model of the year before, was key to achieving the goals defined in the risk strategy.

Nominal volumes in the credit business – BayernLB’s biggest business segment – were decreased by 6 percent in the reporting period. Although the non-performing loan ratio rose to 2.3 percent from 1.9 percent in the wake of the financial crisis and recession, the economic recovery was reflected in the improvement of the portfolio quality in the investment grade category, which 34|35 makes up around 75 percent of the total nominal volume.

The increase in risk capital requirements for market price risks compared to the year before resulting from higher credit-spread volatility on European sovereign debt could be partially offset by the continued winding down of non-core activities.

Adequate liquidity was on hand throughout the reporting period. The stable supply of surplus liquidity resulted from both the above-mentioned steady winding down of the portfolios in line with strategy and the ability to successfully refinance on the capital markets.

In accordance with the strategic refocusing, the shareholding in Landesbank Saar (SaarLB) was reduced to less than 50 percent in June 2010.

The exceptional risk situation at the MKB Bank Zrt. (MKB) holding is being addressed through a comprehensive package of measures. In the risk management sphere, these measures included examining the risks in the credit portfolio, implementing Group-wide standards and strengthening the management team through the appointment of additional BayernLB staff. To improve MKB’s equity on a stand-alone basis – which had deteriorated in 2010 as a result of higher risk provisions and the bank levy – BayernLB injected EUR 226 million of capital into MKB and covered its credit risks with a guarantee of around EUR 573 million at the end of 2010.

BayernLB has a solid capital base. This was demonstrated by the results of the stress tests by the Committee of European Banking Supervisors (CEBS) in July of the previous year. At Group level, in the strictest stress scenario defined and assessed by the CEBS, BayernLB achieved a score that was significantly above the regulatory minimum core capital ratio and therefore above the average of its German competitors.

Besides meeting regulatory capital adequacy requirements, BayernLB’s risk-bearing capacity, which is calculated for internal management of capital resources (Internal Capital Adequacy Assessment Process (ICAAP)), was also adequate throughout the reporting period. The Bank’s available capital backing covers both the 2010 risk capital requirement for all risk types and the risk capital requirement calculated for stress scenarios.

BayernLB . 2010 Annual Report and Accounts Outlook for the risk situation in 2011 and 2012

The following statements on future events constitute forecasts that are subject to uncertainty and are based on the assumptions shown in each case. The quality of the forecasts depends particularly on whether the European Commission confirms the business model BayernLB submitted to it. Other difficult-to-estimate risks that could affect the quality of the forecast statements include the potential fallout from the financial crisis and the crisis affecting some of financially weaker EMU countries.

For the next two years the risk situation will continue to be dictated by the potential impact of the global financial crisis and recession. A close eye in particular will be kept on commercial real estate markets in Europe and North America, developments in the highly indebted nations of the European Monetary Union, and the impact of political turmoil in several oil exporting nations on the German and global economies.

Although the scope for taking active, preventative steps to protect the current portfolio remains limited in this time of crisis, the planning for the next two years provides for further reductions in the scale of business in all key risk types. Continued success in winding down the credit portfolios in the non-core business depends in large measure on a further recovery in the secondary market for transactions with elevated risk profiles, as well as the euro-dollar exchange rate, since a large proportion of this portfolio is denominated in US dollars. An expansion of business is planned in the core real estate segment and in the Mittelstand segment of the corporate customers business.

If the stress scenario of a marked downturn in the German and global economy materialises, concentration risks in BayernLB’s credit portfolio could result in higher risk provisions, reducing the available economic capital. For this reason, a focus over the next couple of years will be on reducing these risks in the Financial Institutions segment in particular.

The MKB package of measures should stabilise the risk situation there in 2011. But not only is there uncertainty over the future direction of the economy, it is also difficult to judge how the political situation in Hungary will unfold (see Bank Levy).

Obtaining liquidity will not be a problem given BayernLB’s current rating. The ongoing debate over the state of the entire Landesbank sector coupled with the repercussions of an unexpected decision by the European Commission on BayernLB’s business model could have negative conse- quences on the rating and therefore the costs of refinancing. Nevertheless, the planned economic capital for the next two years should comfortably cover the risk capital requirement in the business plan for the various risk types, even under stress scenario conditions.

Internal monitoring and risk management system

The following information relates to the provision in Section 289 para. 5 HGB, which requires joint stock companies within the meaning of Section 264d HGB in conjunction with Section 340a HGB to describe the key characteristics of the internal monitoring and risk management system they use for the accounting process.

BayernLB . 2010 Annual Report and Accounts ›› Management report Risk report

Tasks and objectives

BayernLB has established an internal control system (ICS) to ensure the accounts are properly prepared and reliable. This includes principles, procedures and measures for ensuring the accounts are produced in an efficient and cost-effective manner. Consequently, the internal control system helps to limit risks in the accounting process and plays a key role in providing a true and fair view of BayernLB’s net assets, financial position and operating results.

The primary aim of the internal control system is to ensure that all transactions are fully and properly entered, processed and documented in accordance with the legal requirements and standards, the Bank’s statutes and other internal directives. This also ensures that risks are disclosed in line with supervisory requirements.

Organisation

Besides functionally separating Sales and Risk Office units, and Trading and Settlement units, a business organisation must have adequate internal control procedures and mechanisms for 36|37 managing and monitoring key risks. The Board of Management is supported in this task primarily by the Risk Office Central Area and the Financial Office, IT & Operations Central Area and by Internal Audit. The IT systems used by the Central Areas are suitable for this purpose and the staff have been given adequate training in the legal and internal standards and in how to use the IT systems.

Risk Office

The Risk Office comprises the Group Risk Control and Credit Analysis divisions.

The Group Risk Control Division independently identifies, values, analyses, communicates, docu- ments and monitors all risk types at aggregated level. In addition to periodic and ad-hoc reporting on the risk situation to internal decision-makers, communication also includes external risk reports filed in accordance with legal and supervisory requirements. The Division therefore serves as a central registry for BayernLB’s risk situation. The Group Risk Control Division develops and updates the methods and processes needed for the purposes of management and operational monitoring. Another key task is coordinating the product launching process as part of the new product design process.

Decisions on managing risks are taken on the basis of BayernLB’s coordinated risk and business strategies set by the Board of Management. The strategies are detailed in the form of business policy targets and guidelines for each type of transaction. The business and risk strategies are regularly reviewed and adapted.

The key aims of the risk strategy are: • To set and limit the amount of risk to be assumed in order to ensure BayernLB’s long-term future is not put in jeopardy. • To preserve economic capital and risk-bearing capacity. • To derive a suitable risk structure from the business model, for example, by defining a target risk profile and by setting rules for dealing appropriately with material concentration risks.

BayernLB . 2010 Annual Report and Accounts The management and monitoring instruments used to achieve business and risk strategy goals have been constantly refined in recent years. Earnings targets and risk management goals are harmonised by the Asset Liability Committee (ALCO). Risk reporting and earnings reporting are summarised in the ALCO report. This includes recommendations for action by the Board of Management on the strategic and operational management of BayernLB. The Risk Office ensures that the Board of Management and other bodies and committees receive independent, risk-sensi- tive reports so that all risk types can be operationally managed and risk-bearing capacity maintained.

Risk management is carried out jointly by the units in Sales and the Risk Office. In the management process, the Credit Analysis Division analyses and assesses the risks of all risk-relevant exposures of BayernLB in the core business (Risk Office function). It participates in setting credit risk strategy for individual customers, sectors and countries, carries out ongoing credit analysis and votes on behalf of the Risk Office in the credit decision process.

Restructuring Unit

The Restructuring Unit manages BayernLB’s non-core business activities with the aim of progres- sively winding them down. Group Risk Control is responsible for independently identifying, valuing, analysing, communicating, documenting and monitoring all risk types in the Restructur- ing Unit, just as it is for the risks in the core business. The BayernLB portfolios to be wound down contain credit substitute transactions, parts of the credit portfolio with banks and the public sector outside Germany, structured financing (including ship financing, aircraft financing, US commercial real estate financing), and leveraged buyout financing in Europe, the US and Asia. The goal is to free up the capital and liquidity resources in the non-core business as efficiently as possible. The Restructuring Unit must not be seen as an “internal bad bank” as its mandate to wind down assets is primarily derived from the focusing on future business activities.

The Restructuring Unit is also involved in all BayernLB transactions being restructured or liquidated worldwide.

Financial Office, IT & Operations

The Financial Office, IT & Operations Central Area in BayernLB ensures the accounts are properly prepared and sets up and ensures the effectiveness of the accounting process. Its key tasks include preparing the annual financial statements and management report, establishing accounting policies, initiating accounting-related projects, and providing guidance on national and international developments in accounting.

The Financial Office Central Area is also responsible for implementing the accounting standards and legal requirements on accounting that apply to BayernLB. These are detailed in directives for preparing the accounts. These directives, which are an important component of the accounting-related internal control system, are summarised and documented for BayernLB in the annual accounts handbook, various accounting manuals, and in organisational and procedural instructions.

BayernLB . 2010 Annual Report and Accounts ›› Management report Risk report

The annual financial statements and management report are prepared in accordance with the directives for preparing the annual accounts, produced by directive of the Board of Management, checked by the auditors and submitted to the Board of Administration for approval. The Board of Administration has also set up an Audit Committee, whose duties include discussing the audit report and preparing the resolution for the Board of Administration’s approval of the annual financial statements and the management report prepared under the German Commercial Code. The Audit Committee also monitors the accounting process and the efficacy of internal monitoring, auditing and risk management systems. The auditor is invited to take part in the discussions of the Audit Committee and Board of Administration on the annual financial statements and report on the key findings of its audit.

Group Compliance

The Group Compliance Division monitors and ensures compliance with legal and supervisory requirements. It is directly accountable to the Chief Risk Officer on the Board of Management. It also coordinates compliance activities in the subsidiaries. 38|39

Internal Audit

The Internal Audit Division audits BayernLB’s business operations and reports directly to the CEO. Taking a risk-oriented auditing approach, its auditing activities embrace basically all activities and processes within BayernLB, even those that have been outsourced. It also examines the efficacy and adequacy of the internal control system and risk management.

It carries out the tasks assigned to it independently of the activities, processes and functions to be audited, taking account of applicable legal and supervisory requirements (e.g. KWG and MaRisk).

Scope of monitoring and monitoring procedures

The internal control system is based on the “Written organisational rules of Bayerische Landesbank” (sfO).

The rules governing the accounting-related internal control system are set out in the directives for preparing the annual accounts. These directives are principally based on the annual accounts handbook, which sets out the key requirements for ensuring accounting policies are uniformly applied within BayernLB in accordance with the requirements of the German Commercial Code. BayernLB has also prepared accounting manuals and organisational and procedural instructions containing mandatory regulations on accounting-related issues and processes.

For risk management, there are also rules on the treatment of material risks at BayernLB level, which are derived from the Group Risk Management Principles and Group Risk Guidelines. These rules on risk management govern the risk management and monitoring processes used to detect early on, fully document and then appropriately disclose all major risks.

The annual accounts handbook, accounting manuals, accounting-related instructions and risk management rules are regularly reviewed, updated and published on BayernLB’s intranet.

BayernLB . 2010 Annual Report and Accounts The purpose of the internal control system is to ensure that transactions are fully and correctly processed and that bookings, data entry and documentation are in compliance with all applicable rules. Measures include the segregation of functions, a differentiated access authorisation system to prevent unauthorised intruders, ongoing checks integrated into the workflow process based on the dual control principle, and checks programmed into the IT systems.

The internal control process reconciles ledgers and sub-ledgers, monitors manual bookings in the main ledgers and conducts posting runs. Additional checks and reconciliations are also conducted to ensure data is correctly transferred between IT systems. When preparing the accounts, checks are carried out to determine if underlying data are properly presented, and quality of the data in the accounts is assessed.

BayernLB has outsourced some of its services (principally IT services, payment services and securities processing) to external companies. Outsourced areas are integrated into BayernLB’s internal monitoring system mainly through an outsourcing officer who monitors the external companies on an ongoing basis. Outsourced companies are also regularly checked by BayernLB’s Internal Audit.

In BayernLB, the accounting process is checked regularly for inherent risks, so that measures can be taken when necessary to refine the internal monitoring system.

The following sections describe in detail the risk management objectives, formulated in agreement with risk tolerance, and the methods for managing each type of risk.

Capital management

Capital management at BayernLB is based on a planning process that incorporates strategic, risk- based and supervisory factors into a long-term operational plan.

The starting point of the planning process is to review BayernLB’s coordinated business and risk strategies at regular intervals and modify them where necessary. The Board of Management either confirms or modifies these strategies if necessary and submits them in turn to the Board of Administration for its approval.

In addition to the regulatory capital allocated to the business areas and central areas by the Inter- nal Capital Adequacy Assessment Process (ICAAP), available economic capital is also allocated to them. These processes are described in the “Regulatory capital adequacy” and “Risk-bearing capacity” sections below.

Regulatory capital adequacy

To ensure it has the proper amount of capital, BayernLB has defined the objectives, methods and processes below.

The starting point for the allocation of regulatory capital is BayernLB Group’s own funds planning. The own funds consist of liable capital – the sum of core capital and supplementary capital – plus tier 3 capital. The principal component of core capital is subscribed capital plus reserves

BayernLB . 2010 Annual Report and Accounts ›› Management report Risk report

and other capital. Supplementary capital includes participation rights and long-term subordinated liabilities. The own funds planning is based largely on the internal target core capital ratio (ratio of core capital to risk positions) and an internally set target ratio (ratio of own funds to risk positions) for the BayernLB Group’s overall ratio. For each planning period upper limits are set for risk assets, market risk positions and operational risks arising from the BayernLB Group’s business activities. The potential impact of extreme market movements – simulated in stress tests – is taken into account by means of capital buffers to ensure solvency criteria are continually met, should they occur.

Regulatory capital is allocated during the Group planning to the individual planning units (Group units). The planning units at BayernLB are BayernLB’s defined business segments, Bayerische Landesbodenkreditanstalt and LBS Bayern.

Regulatory capital is allocated to the planning units through a top-down distribution of limits on risk assets and market risk positions approved by the Board of Management, comprising, in addi-

tion to segment-specific targets, a regulatory minimum core capital ratio in excess of 8 percent 40|41 for the Group.

Compliance with the limits on risk asset and market risk positions for each planning unit is constantly monitored. The Board of Management receives monthly reports on current limit utilisations.

Information on the changes in supervisory ratios can be found in this management report in the section “Banking supervisory ratios under the German Banking Act (KWG)”.

Risk-bearing capacity

Risk-bearing capacity is monitored at both BayernLB and Group level using ICAAP. ICAAP is used to assess whether there is sufficient economic capital for the risks assumed and planned.

On 31 December 2010, the risk-bearing capacity calculation was redefined. The basic changes illustrated below represent the systematic application of ICAAP to ensure senior creditors would be protected if BayernLB were liquidated.

The calculation of risk-bearing capacity based on planned business activity is supplemented by stress scenarios. A distinction needs to be made between stress scenarios and sensitivity analysis, which takes account of events (such as the impact of changes in interest rates) that might occur in the course of business and are used in the risk-bearing capacity calculation to monitor whether planned risk capital requirements are being observed.

The risk strategy sets the proportion of available economic capital that can be allocated to risk types in the course of business activities. This is currently 75 percent (2009: 70 percent) of available economic capital. The remainder is available as a buffer for stress scenarios.

The available economic capital is calculated by deducting from the sum of equity and subordinated capital the items that are not available in the event of liquidation (e.g. intangible assets), less a buffer for risk types that is quantified in scenario calculations rather than by value-at-risk

BayernLB . 2010 Annual Report and Accounts methodology or supervisory approaches. The economic risk planning for the risk-bearing capacity calculation and the planning of the available economic capital are integral parts of the own funds planning described under “Regulatory capital adequacy”.

The method for calculating risk-bearing capacity is assessed and refined on a regular basis to ensure it takes adequate account of external factors and internal strategic goals. The confidence level used to calculate economic risk in ICAAP is derived from the strategic target rating. Since 2009, economic risk has accordingly been calculated on the basis of a confidence level of 99.95 percent (corresponding to an A2 rating on Moody’s ratings scale).

BayernLB’s risk capital requirements for business activities as at 31 December 2010/2009

EUR million 31 Dec 2010 31 Dec 2009 Risk capital requirements 6,385 5,396 • from capital provided to customers and other investments 4,682 3,879 credit risk and country risk (counterparty risk) 2,451 1,832 credit risk (specific interest-rate risk) 1,307 1,298 market risk 568 356 operational risk 197 169 participation risk 127 113 other risks 32 111 • from capital provided to institutions of the BayernLB Group 1,703 1,517

The increase in risk capital requirements for counterparty risk is due to methodological changes in the way it is quantified (see “Measuring counterparty risks and internal rating systems”).

The increase in risk capital requirements for market risk is partly due to changes in the way market risks are calculated in equity items.

A stress scenario based on a potential severe economic downturn (ICAAP stress scenario) is constantly calculated. Based on the assumption of an unlikely, but theoretically possible severe recession, the risk capital requirements for the various risk types total EUR 12,058 million, compared with EUR 6,385 million under the non-stress scenario.

BayernLB holds adequate available economic capital to cover risk capital requirements, even in the event of a severe economic downturn (ICAAP stress scenario). BayernLB had adequate risk- bearing capacity as at 31 December 2010.

Credit risk

The following figures for the credit portfolio are based on the internal risk reporting used by management as a basis for managing credit risks.

Credit risks are the biggest risk for BayernLB in terms of size and are divided into counterparty risk and credit rating risk.

BayernLB . 2010 Annual Report and Accounts ›› Management report Risk report

Counterparty risks arise if a transaction results in a claim against a borrower, issuer of securities or counterparty. If they fail to meet their obligations, the Bank suffers a loss equal to the unpaid amount less the value of any realised collateral plus the related settlement costs. This definition covers both debtor and guarantee risks from the credit business, and issuer and counterparty risks from trading activities.

The credit rating risks of securities are handled primarily through the management of interest- rate risks. When managing interest-rate risks, a distinction is made between market-related and credit rating-related interest-rate risks; this is also reflected in the separate presentation of the risk capital requirements for counterparty risks, specific interest-rate risks and market risks.

Country risks, which are another type of counterparty risk, are also measured, managed and monitored. Country risk is defined in the narrow sense as the risk of a country or business partner, whose registered office is located in another country, failing to meet its obligations on time or at all due to sovereign acts or economic or political problems (transfer and conversion risks).

Country ratings are a key tool for measuring individual country risk. At BayernLB, when measur 42|43 ing and limiting risks, both the country risk in the narrow sense and the sum of the assumed counterparty risks of individual customers in the respective countries (domicile principle) are considered.

Credit risk strategy and approval process

The credit risk strategy – which is part of the risk strategy covering all types of risk – is set on the basis of the Bank’s risk and business strategy and takes account of risk-bearing capacity considerations. A detailed credit policy is drawn up from the credit risk strategy and used as a basis for operational implementation.

BayernLB has a multi-stage credit approval process. The Competence Regulations define the responsibilities of the different types of competence holders based on the loan volume to be approved and rating classification. All credit decisions that ultimately require approval by the Board of Management or Risk Committee of the Board of Administration must first go through the responsible subordinate credit committee which are themselves also competence holders. Credit decisions on the portfolios to be wound down are taken by a separate credit committee.

In October 2010, the Board of Administration created a Risk Committee to take the credit decisions of the Board of Administration and handle the risk reporting.

Measuring counterparty risks and internal rating systems

Risk measurement at portfolio level is conducted by means of an analytical system. For risk analysis purposes, the impact of an unexpected loss by an individual business partner on the whole portfolio is also calculated.

Risk measurement at portfolio level is conducted using a variation of CreditRisk+, an analytical software system for quantifying default risks. After that, the impact of an unexpected loss by an individual business partner on the whole portfolio is also calculated for risk analysis purposes. In the second half of 2010, the method for measuring risks at portfolio level was adapted and an

BayernLB . 2010 Annual Report and Accounts expanded correlation model for estimating dependencies between borrowers in the portfolio was effectively put to use. In addition, the expanded system also takes into account the effects of rating migrations and uncertainties in calculating loss ratios.

In accordance with the Internal Ratings Based Approach (IRBA), BayernLB uses rating procedures that are approved by the supervisory authorities. These assign borrowers to rating categories in a 25-tier master rating scale based on the probability of default.

To maintain and refine the rating procedures, BayernLB works mainly with RSU Rating Service Unit GmbH & Co. KG and Sparkassen Rating und Risikosysteme GmbH. All rating procedures are subject to an ongoing validation process to ensure they are able to correctly determine the default probabilities in each customer and financing segment. This process draws on quantitative and qualitative analyses. These assess the rating factors, the accuracy and calibration of the procedure, the data quality and the design of the model using statistical and qualitative analyses, and users’ feedback. Further information can be found under “Solvency Ordinance” on BayernLB’s website.

The rating procedures demonstrated their robustness and accuracy during the recession. New insights during the crisis were integrated in the rating system.

In 2010, the pricing methods and the early warning system were also extensively refined. The goal is to create sufficient leeway to implement risk avoidance/minimisation measures through the early detection of negative changes in the risk profile using suitable early warning indicators of risk. For example, a large number of risk indicators were added to the market data-based early warning system. Individual factors include prices (shares and CDSs), volatility, market capi- talisation and other factors from peer group comparisons. The pricing methods have been fundamentally revised and now allow for an even more detailed mapping of different business characteristics.

Limiting counterparty risks at business partner and portfolio level

In accordance with the Group Risk Management Principles, counterparty risks at individual customer level are monitored daily by the Risk Office using a Bank-wide limitation system. The limitation process also takes account of the timing structure of default risks by subdividing limits into maturity bands.

To limit large credit risks Group-wide, the maximum gross exposure for each borrower unit is capped in accordance with Section 19 para. 2 of the German Banking Act (Kreditwesengesetz (KWG)) at EUR 500 million. Justified exemptions can be approved in accordance with the Competence Regulations.

To prevent risk concentrations in individual sub-portfolios, risk-based upper limits are set and monitored. Examples include country or sector-specific risk limits.

BayernLB . 2010 Annual Report and Accounts ›› Management report Risk report

Collateral

Another key way in which risks are limited is accepting the usual types of bank collateral and valuing it on an ongoing basis.

When deciding what collateral is needed, a close look is taken at the type of financing, the borrower’s available assets, their value and liquidity and whether the relative costs are reason able (costs of acceptance and ongoing valuation).

Collateral is processed and valued in accordance with the relevant directives which set out the procedures for valuing the collateral, any discounts to be applied, and how often the valuation must be reviewed. Net risk positions are calculated on the basis of the liquidation value of the collateral.

In derivatives trading, the usual practice is to conclude master agreements for the purposes of close-out netting. Collateral agreements exist with certain business partners restricting the

default risk associated with certain trading partners to an agreed maximum and authorising a 44|45 call for additional collateral should this limit be exceeded.

The German Federal Financial Supervisory Authority (BaFin) has granted BayernLB approval to lower its regulatory capital requirements through the use of real estate liens, ship mortgages, registered liens on aircraft, guarantees, financial collateral in the form of securities, and cash deposits and credit derivatives under its IRBA approval.

Early warning and problem loan handling

A reporting system is used to constantly monitor all credit exposures in terms of their financial status and collateral, compliance with limits, fulfilment of the terms of agreements, and com pliance with external and internal requirements. The monitoring process is supported by an escalation procedure. Exposures with elevated risk are detected early on in the early risk detection process using defined early warning indicators. Early warning indicators are regularly tested for adequacy.

Problem exposures are classified in accordance with the standard international categories (“special mention”, “substandard”, “doubtful” and “loss”) in terms of their level of risk and a special restructuring and risk monitoring process is implemented if warranted.

By initiating suitable measures as part of an intensive support or problem loan handling process at an early stage, BayernLB aims to minimise or completely prevent defaults from occurring.

Credit portfolio

In the reporting year, the credit exposure of BayernLB and its dependent institutions, BayernLabo and LBS Bayern, decreased again as planned by around 6 percent from EUR 268 billion to EUR 252 billion.

BayernLB . 2010 Annual Report and Accounts BayernLB’s gross credit exposure by rating category

EUR million

200,000 154,221 150,000 147,928

100,000 58,517 54,130 44,838

50,000 39,182 5,080 5,302 5,901 4,837 0 0 – 7 8 – 11 12 – 17 18 – 21 Default classes

 2009  2010

Measured in terms of total volume, portfolio quality improved in the investment-grade portfolio (master ratings MR 0 – 11) at the end of 2010 while exposures in the non-performing loan category (default categories MR 22 – 24) increased.

The non-performing loan ratio rose by 0.4 percent to 2.3 percent due to the effects of the financial crisis and recession. Sufficient specific loan loss provisions have been made for the losses that are expected.

In the portfolio of the core business, portfolio quality improved as shown by the increase in the share of the investment-grade portfolio from 79.4 percent to 80.2 percent. This was due to the improvement in customers’ ratings now that the recession is largely over, and the systematic winding down of customers in the non-investment grade portfolio.

BayernLB’s gross credit exposure by sub-portfolio

EUR million 200,000 163,738 152,416 150,000

100,000 63,765 57,653 50,000 25,402 23,731 16,724 16,508 0 Financial institutions Real estate Corporate customers Other (incl. private incl. ABS, insurance customers) companies and sovereigns

 2009  2010

BayernLB . 2010 Annual Report and Accounts ›› Management report Risk report

In line with strategy, exposures in the financial institutions and corporate customer segments were reduced in 2010. The focus in 2011 will continue to be on further reducing exposures in the financial institutions segment.

In the corporate customer segment, the exposure, particularly to large customers, was reduced to further lower concentration risks in respect of both individual companies and individual sectors. The largest reduction was in the utilities sector, the largest sector in BayernLB’s corporates portfolio. At the same time, business in the Mittelstand customer segment was expanded in line with plans.

The real estate segment posted significant growth of 7 percent. The highest levels of investment were in Western Europe, particularly Germany, France and the United Kingdom. Further expansion in the exposure in the core real estate business area and in the Mittelstand business segment of the corporate customer business is planned for 2011. At the same time, the exposure to financial institutions and large corporate customer segments is expected to decline further.

The credit volume in the financially weak EMU countries of Greece and Ireland – where the mar- 46|47 kets have already discounted in the credit spreads the expected write-offs by creditors exposed to the governments and banks – was as shown below (in EUR billion as at 31 December 2010).

Gross credit exposure to Greece and Ireland as at 31 December 2010

Country EUR billion Total volume To central govt. Greece 0.3 < 0.1 Ireland 1.0 < 0.1

The risk provisions as at 31 December 2010 take this market situation into account.

BayernLB’s ABS portfolio

The securitisation transactions portfolio has two components: transactions structured by the BayernLB for customers, and investments in asset-backed securities (ABSs).

Asset-backed securities

The nominal value of asset-backed securities fell mainly through payments and redemptions from EUR 17.5 billion as at 31 December 2009 to EUR 14.6 billion as at 31 December 2010. On 19 December 2008, a guarantee agreement was concluded between the Free State of Bavaria and BayernLB. The guarantee covers actual losses in the ABS portfolio, above a first loss of EUR 1.2 billion. The guarantee is capped at EUR 4.8 billion.

Under the terms of the agreement, the Free State of Bavaria hedges as a protection seller BayernLB’s ABS portfolio in return for a premium. The hedging covers insolvency, non-payment of capital and interest, capital writedowns, and losses incurred from any sales before maturity.

BayernLB . 2010 Annual Report and Accounts Since 1 July 2009, the entire ABS portfolio has been managed by the Restructuring Unit, which has been systematically reducing the portfolio, while ensuring losses are kept to a minimum.

The chart below presents BayernLB’s ABS securities covered by the guarantee agreement with the Free State of Bavaria amounting to EUR 14.2 billion. The remaining amount of around EUR 0.4 billion is hedged outside this guarantee agreement.

ABS portfolio by asset and rating class as at 31 December 2010

in %

0 AAA AA A BBB BB < BB

 Non-prime RMBS  Prime RMBS  CDO  CLO/CBO  CMBS  Consumer ABS  Commercial ABS

ABS portfolio by asset and rating class as at 31 December 2009

in %

0 AAA AA A BBB BB < BB

 Non-prime RMBS  Prime RMBS  CDO  CLO/CBO  CMBS  Consumer ABS  Commercial ABS

The chart is based on the nominal values in euros and the lowest rating of each asset-backed security by the rating agencies Standard & Poor’s, Moody’s or Fitch. On this basis, 52.8 percent (2009: 61 percent) of the portfolio had an investment grade rating (rating categories AAA to BBB) and 47.2 percent (2009: 39 percent) a sub-investment grade rating (rating categories BB and lower) as at 31 December 2010.

BayernLB . 2010 Annual Report and Accounts ›› Management report Risk report

The shift on the previous year was mainly due to repayments in the investment-grade segment. The rating migration in the sub-investment grade segment took place principally in the asset classes non-prime RMBS and prime RMBS linked to the US market, and CDOs. 93 percent (unchanged on the previous year) of the holdings in the sub-investment grade segment are allocated to these asset classes. Most of these securities were rated AAA on issue. Since the start of the financial crisis in 2007, the original credit enhancements that were provided have not been large enough to absorb in full the losses originally anticipated from the underlying securitised portfolios, particularly in these segments.

The losses have (in respect of RMBSs) been the result of the turmoil on the US mortgage and real estate markets and (in respect of CDOs) the high number of credit events related largely to banks in the US and Iceland.

Based on current perspectives, the credit enhancement for ABS securities in other asset classes should, however, be large enough in most cases to cover rising losses in the portfolios underlying

our ABS securities. A welcome development worth highlighting was the stabilisation in arrears 48|49 and defaults in the securitised portfolios in 2010 due to government rescue packages, prudent monetary policies by central banks and an increasingly bright economic environment around the globe.

The size of realised losses to date from defaults and sales of ABSs was EUR 450 million as at 31 December 2010 (EUR 153 million as at 31 December 2009). Under all scenarios currently applied, the losses projected by both BayernLB and the external portfolio advisers appointed under the guarantee agreement are within guarantee limits over the full remaining term of the portfolio.

Structured customer transactions

Over the course of the year, the nominal volume of transactions structured for customers fell from EUR 2.6 billion as at 31 December 2009 to EUR 1.2 billion as at 31 December 2010. EUR 0.6 billion was in non-core customer transactions due to be wound down and therefore allocated to the Restructuring Unit. EUR 0.6 billion of transactions for financing receivables portfolios for core customers was continued.

The fall on 2009 was due to the active termination of transactions and repayments. The EUR 0.6 billion within the Restructuring Unit still to be wound down relates mainly to medium and long-term transactions. These are being managed in such a way as to achieve a rapid and value-preserving winding down in accordance with individual winding down strategies and under close observation. In 2010, new financing of receivables portfolios has been structured for core customers in accordance with strict risk-strategic parameters.

Default and risk provisions

In the early risk detection process, if risk signals are triggered, an exposure is classified according to its riskiness and transferred to the Credit Consulting unit. They are classified on the basis of objective indications such as interest and principal arrears of more than 30 days or a rating of 19 or worse on a 25-tier scale.

BayernLB . 2010 Annual Report and Accounts If any exposure is classified as “substandard”, “doubtful” or “loss” on the basis of these criteria, the impact on future cash flows is assessed on occurrence, but at least once a quarter. If the assessment indicates permanent impairment, a specific loan loss provision is made, taking into account credit and country risks. Loan loss provisions are calculated for each business partner or financing project. The amount is calculated by deducting the carrying value of the receivable from the net present value of the expected cash flow calculated on the basis of the original effective interest rate.

Risk provisioning distinguishes between specific loan loss provisions for existing loans, utilisations of financial guarantees, irrevocable credit commitments and other off-balance sheet liabilities. If on impairment it is found that there is no outlook for recovery, the receivable is written down. The main criteria for writedowns are rating-related cessation of business operations, and non-payment of interest and/or principal.

Default criteria are stored in the rating system as part of the rating process. These default criteria take account of the definitions in the Solvency Ordinance. Receivables in rating categories 22 to 24 are accordingly given a “doubtful” or “loss” classification.

An individual borrower of BayernLB is also given a “doubtful” or “loss” classification if it meets any default criteria in any subsidiary within the BayernLB Group.

Proper account has been taken of all known risks in the credit business through risk provisions. General loan loss provisions were established for potential risks.

Specific loan loss provisions for counterparty and country risks of BayernLB

EUR million 2010 2009 2008 2007 2006 As at 1 Jan 1,696 1,458 692 1,054 1,874 – Releases 263 134 171 219 289 – Utilisations 359 520 175 236 674 + Additions 619 1,083 1,106 102 155 + Other changes – 3 191 7 9 12 As at 31 Dec 1,690 1,696 1,458 692 1,054

Due to the economic recovery, additions fell by around 43 percent, while writedowns fell by 31 percent. Risk provisions in 2011 are expected to be lower than in 2010 if the situation in the financially weak EMU countries does not significantly deteriorate.

BayernLB . 2010 Annual Report and Accounts ›› Management report Risk report

Participation risk

Participation risk (shareholding risk) comprises the BayernLB Group’s counterparty (default) risk arising from its shareholdings. This risk is of a potential loss (in value) arising from the following: • The provision of equity or equity-type financing (e.g. silent partner contributions). For example, suspensions of dividends, partial writedowns, losses from sales, or reductions in the hidden reserves. • Liability risks (e.g. letters of comfort) and profit and loss transfer agreements (e.g. loss transfers). • Capital contribution commitments.

To achieve its corporate aims, BayernLB has selected participations, primarily to broaden its range of business, provide services for the Bank, or purely as a financial investment.

Participation risks are handled in accordance with the risk strategy and participation policy, among others. A classification procedure for assessing and monitoring risk with clear guidelines on the early detection of risks has been implemented for all participations. 50|51

Market risk

Market risk comprises potential losses from changes in market prices. BayernLB classifies market risks by risk factor into general and specific interest rate risk, currency risk, share price risk, commodity risk, volatility risk, and risks from alternative investments. Market risks may arise from securities, money market or foreign-exchange products, commodities, derivatives, currency or earnings hedging, quasi-equity funding or mismatches between the assets and liabilities sides.

The risk strategy sets out the strategic principles for handling market risks and prescribes the level of economic capital to be made available for each risk type from the available economic capital. Market risks may only be assumed within approved limits and are permanently measured and monitored. New products and products for new markets are subjected to an appropriate review and development process before being launched.

Measuring market risks

In BayernLB, several instruments are used to monitor and set limits, including value-at-risk (VaR), risk sensitivity, stress tests and ratios for calculating risk-bearing capacity. Within the daily monitoring process, market risks are measured as a rule using the value-at-risk method based on a one-day holding period and confidence level of 99 percent. The main value-at-risk method used at BayernLB is historical simulation, which takes account of correlations.

The reliability of market risk measurement methods is regularly assessed for efficacy and quality. In the backtesting process, the risk forecast is compared with actual outcomes (profit or loss). In accordance with Basel II, the forecasting quality of the risk model is classified as good if the forecast risk was exceeded by a negative daily performance on no more than four days per year. At the end of 2010, the forecasting quality of the market risk measurement methods was classified as good.

BayernLB . 2010 Annual Report and Accounts The outcomes of value-at-risk based measurement must always be looked at in the context of the parameters used in the model (mainly: the confidence level selected, a one-day holding period, and the use of historical data over a period of around one year to forecast future events). For this reason, risk positions are subjected to monthly stress tests based on historical crisis situations and hypothetical changes in market prices and then the potential risks are analysed. All market risk types are considered as appropriate in these stress tests. The stress tests take into account all relevant market risk factors, are regularly reviewed, and their parameters modified if necessary.

Within BayernLB, no in-house risk model is currently used for regulatory purposes. The standardised method is used instead.

The interest rate risk of the investment books is calculated as a net present value risk and included in the daily market risk monitoring that is part of overall market risk monitoring. Contractual or legal termination rights are modelled as options and incorporated into the risk calculation.

Additionally, an interest-rate shock scenario of +130/– 190 basis points is calculated for the interest rate risk in the investment book. The calculated change in the ratio of net present value to liable capital in BayernLB was considerably below the outlier criterion of 20 percent. If a bank’s net present value falls below this figure of 20 percent of capital in this stress test, the supervisory authorities assume that the interest-rate risk is disproportionately high and are required to implement measures against this.

Limiting market risks

Market risks are limited through the allocation of economic capital. This is computed in the risk- bearing capacity calculation on the basis of the available economic capital. VaR limits for various market risk factors and portfolio levels are calculated on the basis of this market risk capital. To create a reserve that can be drawn on in the event of unforeseen market events, stringent limits are placed on allocations to units responsible for risk.

In 2010, the available economic capital provided for market risks was increased on the previous year in line with changes to the methodology for calculating market risks in equity items. The available economic capital provided for market risks was reduced by a small margin once again for 2011. Following further disposals of non-core business, market risks, particularly specific interest-rate risk, are expected to fall in 2012, along with risk capital requirements.

Monitoring market risks

All market risks are monitored and reported on a daily basis. This is performed independently of Trading. An escalation procedure is used to ensure market risks are strictly monitored. The Board of Management is given detailed updates in risk reports on the risk situation in respect of market risks.

In 2010, the average market risk in BayernLB was EUR 138.7 million in the trading and investment books (value-at-risk with a one-day holding period and 99 percent confidence level). Compared with the previous year’s figure, the risk was 30 percent lower on average and fluctuated within a range of EUR 104.6 million to EUR 210.7 million over the course of the year.

BayernLB . 2010 Annual Report and Accounts ›› Management report Risk report

Change in market risk at BayernLB over the course of the year

12-month comparison 12-month comparison as at 31 Dec 2010 as at 31 Dec 2009 EUR million Average Maximum Minimum Average Maximum Minimum Specific interest-rate VaR 52.60 86.10 38.60 119.50 209.80 58.60 General interest-rate VaR 77.20 110.80 53.40 66.10 95.30 52.00 Currency VaR 12.30 27.90 4.80 56.00 143.20 7.30 Alternative investments VaR 1.00 2.80 0.40 2.40 5.50 1.20 Equities VaR 1.70 2.30 0.70 5.90 9.00 2.50 Volatility VaR 1.20 2.20 0.50 4.70 6.80 0.80 Commodities VaR 2.30 4.30 1.30 1.90 3.70 1.30 Total VaR 138.7 210.7 104.6 199.3 323.1 121.2

Comparability between the total VaR values in 2009 and 2010 is limited. This is because a separate VaR has been calculated since 30 September 2009 for BayernLB’s specific interest rate risk 52|53 from the other risks to permit a charge for illiquid credit spread positions to be included in the calculation of risk-bearing capacity by means of different scaling factors.

BayernLB’s value-at-risk was mainly affected by specific and general interest rate risks, followed by currency risks. Commodity risks, risks from alternative investments, equity risks and volatility risks are of secondary importance in relation to overall market risk.

The main reasons for the markedly lower VaR values in reporting year 2010 were the further winding down of non-core activities and the easing of credit spread volatilities, which led to a significant fall in specific interest rate risks and currency risks since the end of 2009. Methodo logical improvements to the risk calculations at BayernLB (for instance, the expansion of the correlated VaR calculation at the end of 2009) also reduced risks.

Value-at-risk (VaR) over the course of 2010

EUR million

250 A 200

150 B

100

0 1 Jan 1 Feb 1 Mar 1 Apr 1 May 1 Jun 1 Jul 1 Aug 1 Sep 1 Oct 1 Nov 1 Dec

BayernLB . 2010 Annual Report and Accounts The increase in April 2010 was due to a change in the modelling of undated capital, which is no longer recognised as funding for risk purposes following an amendment of MaRisk. Market risk peaked in the second quarter, triggered by the crisis in Greece and the concomitant deterioration in the ratings of European government bonds in particular (risk spike (A) in May was technical in origin). The fall at the end of July (B) is due to methodological changes: the fluctuations in BayernLB’s own credit spreads (and its refinancing costs) are no longer included in the daily market risk calculation. Instead, they are directly incorporated into the risk-bearing capacity calculation.

Derivative trades

BayernLB uses derivative instruments to reduce market risk and counterparty risk. The main counterparties in the derivatives business are banks and the public sector.

Limits are imposed using the generally applicable limitation process for counterparty risk. Regulatory and internal management methods for large credit risks also apply.

BayernLB opens both protection seller and protection buyer positions in credit default swaps (CDSs). The focus is not on active derivatives trading. CDSs are valued at individual transaction level on a daily basis and monitored. Gains and losses on these positions are calculated daily on the basis of these valuations.

Liquidity risk

BayernLB defines liquidity risk as the risk of being unable to meet payment obligations due either in full or on time, or, in the event of a liquidity crisis, of obtaining refinancing only at higher market rates, or of selling assets only at a discount to market rates.

Liquidity risk strategy

The strategic principles for BayernLB and the BayernLB Group for dealing with liquidity risk are set out in the Group risk strategy. The overriding priority of liquidity risk management and monitoring is to ensure that the payment obligations of the Bank and the Group can be met and refinancing obtained at all times. In addition to maintaining solvency, BayernLB’s prime goal in liquidity management is to prevent damage to the Bank’s reputation. BayernLB acts as lender of last resort for the Group if needed.

These strategic goals are detailed in the rules in the Group Treasury Principles, and the Group- wide Group Liquidity Guideline in conjunction with the emergency plan for safeguarding liquidity for daily management. These define the processes, management tools and hedging instruments needed to avert or address potential acute crises. This also contains an escalation mechanism, which comes into operation when early warning signals are triggered.

In the reporting year, the limitation methodology used in BayernLB was expanded in both range and depth, so that for the central liquidity risk management scenario each risk-bearing unit can now – as with market risk – directly monitor and manage the limitation process in a transparent manner. This has improved the efficiency of the ongoing process used to manage and monitor the BayernLB Group’s liquidity.

BayernLB . 2010 Annual Report and Accounts ›› Management report Risk report

In the reporting year, strategic liquidity management in BayernLB was the responsibility of the Group Treasury Division within the Markets Business Area. Operational management by the “Asset/Liability Management (ALM)” and “Money Markets (MM)” units is also conducted within this business area. This is also where operational liquidity is managed on the market and ample liquidity counterbalancing capacity is ensured at all times. The creation of liquidity overviews (e.g. liquidity maturity balance sheets), limitation indicators and Group-wide risk monitoring of liquidity risks take place in the Group Risk Control Division within the Risk Office Central Area.

Measurement

BayernLB regularly creates liquidity overviews to measure, analyse, monitor and report on liquidity risk. These compare the liquidity gaps, i.e. the netted deterministic and non-deterministic future payment inflows and outflows, and the realisable potential liquidity coverage in defined maturity bands (starting with daily maturity bands for at least the next 180 days).

The liquidity counterbalancing capacity estimates in terms of volumes and timing the Bank’s 54|55 ability to obtain cash at the earliest opportunity at market rates. It indicates the ability to cover liquidity gaps and therefore all payment-flow based liquidity risks. The most important components of the liquidity counterbalancing capacity are access to central bank funds, additional available securities eligible as collateral at the central bank, and the issue potential in the register of cover.

Liquidity risks from off-balance sheet conduits are fully incorporated. Expected financial cash flows from non-deterministic products are taken into account using model assumptions. The model assumptions used for positions in conduits are based on historical data of utilisations and default rates or on contractual claims against BayernLB based on conservative assumptions. When forecasting future cash flows, unplanned events are also taken into account. For example, payment defaults in the lending business are incorporated in the liquidity overview through the integration of specific and general loan loss provisions.

Model assumptions are regularly tested using backtesting and adjusted.

The starting point for the refined risk measurement of liquidity risks in the reporting year is a conservative management scenario. To be adequately prepared for escalated risk situations, BayernLB also calculated its liquidity on the basis of several stress scenarios (systematic and idiosyncratic stress scenarios, and a combination of both of them).

Using extreme scenarios, the sensitivities of the liquidity risk profiles are calculated in a range of hypothetical extreme scenarios and appropriate adjustments to the risk profile are made based on the outcomes.

Diversification in the refinancing structure is also analysed and monitored on an ongoing basis. In the reporting year, there were no significant concentrations.

For the public Pfandbrief register and the mortgage register, a specific cash-flow balance for the next 180 days is calculated on a daily basis. In accordance with Section 27 of the Pfandbrief Act (Pfandbriefgesetz), the results and other indicators with respect to the register of cover are reported quarterly to the Board of Management. The balance of cumulative cash flows and available liquidity indicated there was surplus liquidity coverage throughout 2010.

BayernLB . 2010 Annual Report and Accounts Managing liquidity risk

To ensure it can meet its payment obligations even in the event of a crisis, BayernLB has an adequate portfolio of securities that are eligible for refinancing at central banks. Available liquidity counterbalancing capacity – such as central bank facilities or available economic capital in the registers of cover – ensure there are ample liquid funds to cover any unplanned payment obligations on the same day if needed, even in a stress scenario.

The medium to long-term structure of the liquidity is managed over the full observation horizon. To safeguard the solvency of BayernLB and the BayernLB Group and their ability to refinance, suitable tools are used to create a funding structure that is balanced in terms of maturity, instruments and currencies. The key management tool is the Group-wide funding planning, which is regularly adjusted in line with the current liquidity situation. Collateral Management ensures there is an ongoing capability to issue bonds in the Pfandbrief segment and that the quality of the registers of cover is high. The asset quality in the register of cover prescribed by law, and the matching of currencies and maturities, combine to ensure that the Pfandbriefs on the market are of high standards.

For management purposes, coverage ratios are also regularly calculated, indicating the relationship between liquidity reserves and cash to short-term callable payment obligations for BayernLB and the Group.

Operational liquidity management (observation period of up to one year) also ensures compliance with the supervisory requirements of the Liquidity Ordinance (Liquiditätsverordnung (LiqV)). A special forecast and management system ensures internal and supervisory minimum limits are complied with at all times. In the reporting year, BayernLB had a liquidity ratio of between 1.47 and 1.84 (2009: between 1.27 and 1.65). The supervisory requirement that there is always sufficient available cash to cover callable payment obligations over the same period (ratio always in excess of 1.0) was therefore observed at all times.

Monitoring liquidity risk

Group Risk Control independently monitors liquidity risks primarily by means of limits on ratios derived from the liquidity overviews. These are the maximum utilisation of the liquidity counterbalancing potential as a limit on liquidity gaps both in the short term (up to 180 days) and long term (up to 10 years); and the “time to wall” as the earliest point at which the forecast liquidity need is no longer covered by the liquidity cover potential.

Limits ensure that the time to wall is at least 60 days under heightened stress conditions. In 2010, BayernLB implemented daily limiting and monitoring of the liquidity risk-bearing units at currency level.

Monitoring by Group Risk Control covers all currencies and, separately, the most important individual currencies. Besides normal situations, the assessments also include management-relevant and stress scenarios. BayernLB’s Asset Liability Committee (ALCO) determines whether a scenario is relevant and the related risk tolerance. Based on an escalation procedure, measures are introduced to reduce liquidity risks as soon as certain thresholds are reached (early warning signals). In 2010, the defined risk tolerances across all currencies were not exceeded in any of the scenarios.

BayernLB . 2010 Annual Report and Accounts ›› Management report Risk report

The processes used to monitor liquidity risk are therefore effective. They are, however, constantly refined. Additional liquidity risk-bearing units within the BayernLB Group and other scenarios will be incorporated into the monitoring process in 2011.

The liquidity overviews, limit utilisations and other relevant ratios form part of the risk reports submitted regularly to the Board of Management and the relevant management units.

BayernLB follows recent supervisory developments on monitoring liquidity risks – such as the third amendment of MaRisk and the “International Framework for Liquidity Risk Measurement, Standards and Monitoring” from Basel III – and will integrate all relevant rules into the monitoring and management processes in 2011.

Current liquidity situation

The table below compares BayernLB’s liquidity situation as at 31 December 2010 with the previous year. 56|57

2010 up to one up to three up to one up to five Cumulative figures in EUR million month months year years Liquidity counterbalancing capacity 36,376 31,849 34,007 4,228 less • liquidity gap from balance sheet items 14,497 3,748 3,555 – 5,190 • liquidity gap from commitments and guarantees 4,058 7,852 8,272 2,718 • liquidity gap from termination rights – 1,575 – 1,345 – 1,805 – 740 • liquidity gap from derivatives 272 354 642 226 Liquidity surplus 19,124 21,240 23,343 7,215

2009 up to one up to three up to one up to five Cumulative figures in EUR million month months year years Liquidity counterbalancing capacity 32,556 31,626 24,898 12,534 less • liquidity gap from balance sheet items 11,061 8,823 189 – 10,043 • liquidity gap from commitments and guarantees 4,509 6,408 5,788 1,611 • liquidity gap from termination rights – 1,062 – 834 – 1,775 – 981 • liquidity gap from derivatives – 207 – 101 19 437 Liquidity surplus 18,256 17,331 20,676 21,509

The main reasons for the changes in the liquidity overviews from 31 December 2009 to 31 December 2010 were the focus on the core business fields coupled with the resizing of BayernLB. The impact was particularly acute in the figures for the medium to long-term maturities. In the maturity band of up to five years, the liquidity counterbalancing capacity was significantly reduced by state-guaranteed securities maturing in 2015.

As is evident from the liquidity surpluses, BayernLB had sufficient liquidity resources in all maturities. Adequate liquidity was on hand at all times throughout 2010. The stable supply of surplus liquidity resulted from the steady winding down of the lending business and the successful refinancing operations.

BayernLB . 2010 Annual Report and Accounts BayernLB was also not restricted by limited money market liquidity in maturities of over one month in 2010. Overall, the money and capital markets were considerably more relaxed than the years before. In the reporting year, secured issues (EUR 5.0 billion) and unsecured issues (EUR 3.1 billion) with maturities of up to more than 10 years were placed on the capital market, allowing the planned refinancing, based on the downsizing of the Bank, to be implemented without problem.

Over the next few financial years, liquidity management and monitoring in BayernLB will once again focus on the various refinancing options available and on ensuring liquidity reserves are always adequate, even under a stress scenario. In 2011 and 2012, BayernLB will steadily improve the newly introduced liquidity risk monitoring. Given the Bank’s ability to refinance through domestic investors and the retail customer deposits of its DKB subsidiary, coupled with an efficient and risk-aware liquidity management, BayernLB considers itself to be well equipped to meet future supervisory requirements.

Operational risk

The BayernLB Group defines operational risk (OpRisk) in line with the regulatory definition as the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Legal risks fall within this definition.

Legal risk is the risk of loss resulting from non-compliance with laws and legal rulings due to R

i s

ignorance (even if unintentional or unavoidable), insufficient diligence in applying the law or o

failure to respond to legal changes within a reasonable period of time. u

u n Risk strategy g

Rules and procedures for dealing with operational risk are set out in the risk strategy, operating instructions and an OpRisk manual.

Operational risks are identified and evaluated as fully as possible with the aim of taking appro priate measures to prevent, mitigate, transfer or intentionally accept the risks, and to determine their priority.

BayernLB has undertaken to manage operational risk efficiently to protect the company, employees and customers from financial loss, loss of confidence or damage to its public reputation.

The Legal Division takes account of legal risks by recording losses and regularly assessing potential damage from OpRisk arising from legal risks. The Division also identifies and centrally manages legal risks.

Risk measurement

For the purposes of disclosure under the Solvency Ordinance (Solvabilitätsverordnung (SolvV)) and Basel II, BayernLB has applied the Standardised Approach (STA) since 1 January 2007 to calculate capital requirements for operational risk at individual bank level.

BayernLB . 2010 Annual Report and Accounts ›› Management report Risk report

To compute the OpRisk risk capital requirement in the Bank’s internal risk-bearing capacity requirement calculation (ICAAP), BayernLB also uses the Standardised Approach (STA) in accor dance with SolvV disclosure.

Through the data consortium OpRisk (DakOR), which is operated jointly with eight other banks, and the loss database for publicly known OpRisk loss events (ÖffSchOR), primarily from German- speaking countries, BayernLB has access to loss data that it can use for comparison purposes.

Risk monitoring

The central OpRisk controlling unit issues guidelines for all methods, processes and systems related to OpRisk monitoring and management. The local OpRisk management units of the business areas, central areas and institutions manage these risks.

Within an institutionalised reporting system, the business areas, central areas and institutions compile on an ongoing basis data on operational loss events (loss database). Further information is obtained through risk inventories. 58|59

Processes, systems, projects, agreements, outsourced process and other items with generally higher operational risk are identified and examined by systematically monitoring the risk inventories used.

Business Continuity Management (BCM) R

i s

i k

t Business Continuity Management (BCM) refers to all measures and processes used to maintain e

r business activities in operation. BCM ranges from preventative measures to ensure availability

u n

g so as to prevent or limit losses from undesired events, to measures to restore business processes, applications and infrastructure within a reasonable period of time should an undesired event occur.

Threat scenarios resulting, for example, in the non-availability of staff, loss of usability of buildings, outages of support systems or restrictions on other resources are taken into account. To ensure business operations are properly maintained in an emergency (business continuity), failure scenarios relevant to time-critical business processes are examined and suitable protective measures calculated.

The BCM standard applicable in BayernLB and its associated process steps, controls and responsibilities are incorporated into the “Written organisational rules of Bayerische Landesbank” (sfO) and the risk strategy. The foreign branches are responsible for setting their own protective strategies.

BCM is not a one-off event and should be viewed as an ongoing process. In 2010, besides updating the emergency plans on a regular basis and certain other actions, the defined protective mea sures were tested more rigorously.

BayernLB . 2010 Annual Report and Accounts Reporting and status

Reports on the BayernLB Group’s operational risk and the OpRisk management activities are submitted to the Board of Management on a quarterly and ad-hoc basis. The risk reports cover various themes including OpRisk loss situations and major events. The risk report also indicates on a half-yearly basis the relevant OpRisk potential and describes the status of BayernLB’s BCM activities.

OpRisk capital requirements under the Standardised Approach in accordance with the Solvency Ordinance (SolvV) were EUR 197 million on the disclosure date 31 March 2010, thus exceeding the disclosure on 31 March 2009 due to the improved earnings situation. To calculate the Standardised Approach the earnings situation for the previous three years is taken into account. This will increasingly reduce the impact of the low earnings years (financial crisis 2007 and 2008), which will result in a higher value for the OpRisk capital requirements over the next few years.

The following chart shows the total size of OpRisk loss events recorded.

Net losses from OpRisk in 2010 and 2009

EUR million 2010 2009 Labo 0.00 0.10 LBS 0.70 0.10 BayernLB 9.70 16.50 Total VaR 10.4 16.7

As at the end of the reporting year, there were EUR 96 million in quantifiable process risks arising from legal action against the Bank, which should be settled in BayernLB’s favour in virtually all cases.

BayernLB . 2010 Annual Report and Accounts ›› Management report Risk report 60|61

BayernLB . 2010 Annual Report and Accounts 3. Financial statements

BayernLB . 2010 Annual Report and Accounts ›› Financial statements 62|63 64 Balance sheet 68 Income statement 70 Notes 118 Responsibility statement by the Board of Management 119 Auditor’s Report

BayernLB . 2010 Annual Report and Accounts Balance sheet and income statement

Balance sheet – Bayerische Landesbank as at 31 December 2010

2010 2009

Assets EUR ’000 EUR ’000 EUR ’000 EUR ’000 EUR ’000

Cash reserves a) Cash 12,201 9,936 b) Deposits with central banks 1,003,258 1,931,986 of which: at Deutsche Bundesbank 513,698 417,138 1,015,459 1,941,922

Debt certificates issued by public entities and bills of exchange eligible for refinancing at central banks a) Treasury bills and Treasury discount paper and similar debt certificates issued by public entities 176,842 148,076 of which: eligible for refinancing at Deutsche Bundesbank — — b) Bills of exchange — — 176,842 148,076

Due from banks a) Payable on demand 8,911,662 8,456,168 b) Other receivables 61,761,868 85,950,376 of which: • mortgage loans 153,054 187,693 • municipal loans 10,432,060 12,846,468 of which Bausparkasse building loans: • building-saving loans 2,459 4,068 • preliminary and interim financing loans — — • other building loans — — 70,673,530 94,406,544

Due from customers 90,182,393 88,863,038 of which: • mortgage loans 19,933,106 17,943,343 • municipal loans 31,598,826 26,298,181 of which Bausparkasse building loans: • from allotments (building-saving loans) 1,911,331 2,026,232 • for preliminary and interim financing 2,854,988 2,753,980 • other building loans 451 848 of which: secured by charge on property 3,763,020 3,822,653

Carried forward 162,048,224 185,359,580

BayernLB . 2010 Annual Report and Accounts ›› Financial statements Balance sheet and income statement

2010 2009

Liabilities EUR ’000 EUR ’000 EUR ’000 EUR ’000 EUR ’000 Due to banks a) Payable on demand 5,487,838 8,523,479 b) With agreed maturity or period of notice 69,455,221 72,091,603 of which: • registered mortgage Pfandbriefs 719,291 676,500 • registered public Pfandbriefs 2,958,659 3,367,256 • issued to the lender to secure loans raised: • registered mortgage Pfandbriefs — — • and registered public Pfandbriefs — — c) Building-saving deposits 82,546 61,731 of which: • on terminated contracts — — • on allotted contracts 9,089 1,922 75,025,605 80,676,813

Due to customers 64|65 a) Savings deposits aa) with agreed period of notice of three months — — ab) with agreed period of notice of more than three months — — ac) building-saving deposits 9,163,231 8,594,487 of which: • on terminated contracts 71,744 62,662 • on allotted contracts 243,225 238,979 ad) New contract deposits — — 9,163,231 8,594,487 b) Other liabilities ba) payable on demand 3,664,209 3,597,620 bb) with agreed maturity or period of notice 41,306,359 42,897,231 of which: • registered mortgage Pfandbriefs 1,958,476 2,061,995 • registered public Pfandbriefs 9,167,979 10,479,271 • issued to the lender to secure loans raised: • registered mortgage Pfandbriefs — — • and registered public Pfandbriefs 10,737 11,226 44,970,568 46,494,851 54,133,799 55,089,338 Securitised liabilities a) Bonds issued aa) mortgage Pfandbriefs 5,116,896 4,887,537 ab) public Pfandbriefs 19,933,934 24,638,809 ac) other bonds 59,625,824 64,998,906 84,676,654 94,525,252

b) Other securitised liabilities 2,538,740 3,863,073 of which: • money market instruments 2,511,300 3,610,188 • own acceptances and promissory notes outstanding — — 87,215,394 98,388,325 Trading portfolio 31,790,735 — Liabilities held in trust 6,327,704 6,621,809 of which: loans on a trust basis 6,327,704 6,621,809 Other liabilities 763,296 1,853,968 Carried forward 255,256,533 242,630,253

BayernLB . 2010 Annual Report and Accounts Balance sheet – Bayerische Landesbank as at 31 December 2010 (continued)

2010 2009

Assets EUR ’000 EUR ’000 EUR ’000 EUR ’000 EUR ’000

Carried forward 162,048,224 185,359,580

Bonds and other fixed-income securities a) Money market instruments aa) issued by public-sector borrowers 1,067,130 54,207 of which: eligible as collateral at Deutsche Bundesbank 1,067,130 — ab) issued by other borrowers 934,090 2,677,144 of which: eligible as collateral at Deutsche Bundesbank — 1,583,907 2,001,220 2,731,351 b) Bonds and other debt securities ba) issued by public-sector borrowers 7,594,029 5,031,142 of which: eligible as collateral at Deutsche Bundesbank 5,469,461 2,612,915 bb) issued by other borrowers 42,385,046 48,355,246 of which: eligible as collateral at Deutsche Bundesbank 25,946,463 26,919,933 49,979,075 53,386,388 c) Own debt securities 11,002,153 11,695,948 Nominal value 11,034,540 11,747,921 62,982,448 67,813,687

Equities and other non-fixed income securities 692,657 616,799

Trading portfolio 41,749,159 –

Investments 516,839 386,756 of which: • in banks 140,023 150,065 • in financial service providers 11 —

Shares in affiliated companies 3,504,598 3,654,721 of which: • in banks 2,682,769 2,682,513 • in financial service providers — —

Assets held in trust 6,327,704 6,621,809 of which: loans on a trust basis 6,327,704 6,621,809

Intangible assets a) Internally generated industrial property rights and similar rights and assets 5,635 — b) Purchased licences, industrial property rights and similar rights and assets as well as licences to such rights and assets 17,977 19,825 c) Goodwill — — d) Down payments effected — — 23,612 19,825

Tangible assets 460,614 479,378

Other assets 597,143 1,974,392

Deferred expenses a) From the new issues and loans business 213,387 292,801 b) Others 229,263 395,785 442,650 688,586

Deferred tax assets — 36,974

Total assets 279,345,648 267,652,507

BayernLB . 2010 Annual Report and Accounts ›› Financial statements Balance sheet and income statement

2010 2009

Liabilities EUR ’000 EUR ’000 EUR ’000 EUR ’000 EUR ’000

Carried forward 255,256,533 242,630,253

Deferred income a) From the new issues and loans business 137,948 143,270 b) Other 239,155 551,881 377,103 695,151

Provisions a) For pensions and similar obligations 1,853,287 1,924,657 b) For taxes 162,717 329,969 c) Other provisions 1,210,344 1,383,673 3,226,348 3,638,299

Reserve fund for Bausparkasse 45,093 33,473

Subordinated liabilities 5,479,153 6,062,787

Profit participation certificates 1,153,083 1,049,371 of which: due in less than two years 653,083 584,957 66|67 Fund for general bank risks 490,472 473,000 of which: allocations pursuant to Section 340e (4) HGB 17,472 —

Equity a) Subscribed capital aa) statutory nominal capital 2,300,000 2,300,000 uncalled nominal capital — — called nominal capital 2,300,000 2,300,000

ab) capital contributions of silent partners 4,450,305 4,202,123 6,750,305 6,502,123 b) Specific-purpose capital 612,016 612,016 c) Capital reserve 4,688,034 4,688,034 d) Retained earnings da) statutory reserves 1,267,508 1,268,000 db) other retained earnings — — 1,267,508 1,268,000 e) Net retained profits/net accumulated losses — — 13,317,863 13,070,173

Total liabilities 279,345,648 267,652,507

Contingent liabilities a) Contingent liabilities from the endorsement of bills rediscounted — — b) Liabilities from guarantees and indemnity agreements (see also the Notes) 14,804,039 16,334,950 c) Liabilities from collateral furnished for third-party obligations — — 14,804,039 16,334,950

Other liabilities a) Repurchase obligations from non-genuine sale and repurchase agreements — — b) Placement and underwriting commitments — — c) Irrevocable loan commitments 24,811,669 30,977,464 24,811,669 30,977,464

BayernLB . 2010 Annual Report and Accounts Income statement – Bayerische Landesbank for the period from 1 January to 31 December 2010

2010 2009

EUR ’000 EUR ’000 EUR ’000 EUR ’000 EUR ’000

Interest income from a) Credit and money market transactions 4,568,996 6,143,190 of which Bausparkasse interest income: • from building-saving loans 84,734 86,495 • from preliminary and interim financing 122,221 124,410 • from other building loans 28 56 b) Fixed-income securities and debt-register claims 908,602 1,587,972 5,477,598 7,731,162 Interest expenses 4,165,560 6,538,498 of which Bausparkasse interest expenses: for building-saving deposits 222,097 189,684 1,312,038 1,192,664

Current income from a) Equities and other non-fixed income securities 17,903 22,533 b) Investments 5,658 8,878 c) Shares in affiliated companies 26,643 40,462 50,204 71,873

Income from profit-pooling agreements, profit transfer agreements and partial profit transfer agreements 61,132 145,373

Commission income 396,771 442,480 of which Bausparkasse commission income: • from concluding and procuring contracts 56,159 45,003 • from loan administration after allotment 4,736 5,140 • from providing and processing preliminary and interim financing — — Commission expenses 239,134 296,871 of which Bausparkasse commission expenses: for concluding and procuring contracts on behalf of Bausparkasse 96,275 83,701 157,637 145,609

Net income/net expenses of the trading portfolio 157,245 611,501 of which: allocation to the fund for general bank risks pursuant to Section 340e (4) HGB 17,472 —

Other operating income 113,841 228,753

General administrative expenses a) Personnel expenses aa) salaries and wages 316,847 306,794 ab) social security contributions, pensions and other employee benefits 52,647 73,337 369,494 380,131 of which: for pensions 15,371 18,898 b) Other administrative expenses 367,261 341,561 736,755 721,692

Amortisation, depreciation and writedowns on intangible assets and tangible assets 28,485 29,234

Other operating expenses 103,323 36,011

Carried forward 983,534 1,608,836

BayernLB . 2010 Annual Report and Accounts ›› Financial statements Balance sheet and income statement

2010 2009

EUR ’000 EUR ’000 EUR ’000 EUR ’000 EUR ’000

Carried forward 983,534 1,608,836

Amortisation, depreciation and writedowns on receivables and certain securities and additions to provisions for the credit business 232,996 849,391 of which: • withdrawal from the fund for general bank risks — — • allocation to the fund for general bank risks — — Income from reversals of writedowns on receivables and certain securities as well as from the release of provisions in the credit business — — 232,996 849,391

Amortisation, depreciation and writedowns on investments, shares in affiliated companies and securities classified as fixed assets 288,278 2,549,005 Income from reversals of writedowns on investments, shares in affiliated companies and securities classified as fixed assets — — 68|69 288,278 2,549,005

Expenses from loss transfers 5,526 6,045

Gains or losses on ordinary activities 456,734 – 1,795,605

Extraordinary income 303,978 — Extraordinary expenses 64,323 347,248 Net extraordinary income/loss 239,655 – 347,248

Taxes on income and earnings 151,226 444,813 of which: deferred taxes 51,517 204,588

Other taxes, unless disclosed under „Other operating expenses“ 1,342 7,297 152,568 452,110

Net income/loss for the financial year 543,821 – 2,594,963

Withdrawals from capital reserve — 788,100

Withdrawals from revenue reserves a) From the statutory reserve — — b) From other retained earnings — 873,000 — 873,000

Withdrawals from profit participation certificates — 186,608

Withdrawals from the capital contributions of silent partners — 747,255

Replenishment of profit participation certificates 174,092 —

Replenishment of capital 369,729 —

Net retained profits — —

BayernLB . 2010 Annual Report and Accounts Notes

The annual financial statements of Bayerische Landesbank (BayernLB), Munich, have been prepared in accordance with the provisions of the German Commercial Code (HGB), the Ordinance Regulating the Accounting Requirements for Financial Institutions and Financial Service Providers (RechKredV), the provisions of the Pfandbrief Act (PfandBG), the supplementing regulations of the Bayerische Landesbank Act, and the Bank’s Statutes.

In the 2010 Annual Report, the Bank applied in full for the first time the provisions of the German Modernisation of Accounting Rules Act (Bilanzrechtsmodernisierungsgesetzes (BilMoG)). This resulted in changes to the structure of the balance sheet, certain values recognised on the balance sheet and therefore contributions to earnings.

The following material changes arose:

• The entire trading portfolio of the Bank (including trading derivatives) is presented in a separate item on the balance sheet. As a result, reallocations have been made from the items “due from banks”, “due from customers”, “other assets”, “pre-paid expenses”, “due to banks”, “due to customers”, ”securitised liabilities”, “other liabilities”, and “pre-paid income” to the trading portfolio items (assets and liabilities). The amounts reallocated are described in the notes to the respective items. The Bank also measures all trading portfolios at fair value less a risk discount.

• Deferred taxes are calculated on the temporary differences between the accounting value and the fiscal value of assets, liabilities and deferred/pre-paid items. Calculation is now based on the temporary concept instead of the timing concept.

• Provisions are recognised at the settlement value adjusted for future increases in prices and costs. Material provisions with a residual term of more than one year are discounted at the corresponding average market rate published by the German Bundesbank.

• Valuation adjustments recognised through profit or loss from the first-time application of BilMoG are recognised separately in the income statement under extraordinary income, while effects not recognised through profit or loss from deferred taxes and provisions are recognised directly in the revenue reserves. If on first-time application an option is exercised, this is referred to in the notes.

Due to the changes in the RechKredV resulting from the German Modernisation of Accounting Rules Act (Bilanzrechtsmodernisierungsgesetz (BilMoG)), the Bank has used the layout for Pfand- brief banks for the annual financial statements as at 31 December 2010. The layout of the balance sheet and income statement complies with RechKredV and includes the items required for home loan and savings banks (Bausparkassen).

Figures are normally given in millions of euros.

BayernLB . 2010 Annual Report and Accounts ›› Financial statements Notes

Accounting policies

The accounting policies used for the annual financial statements as at 31 December 2010 are fundamentally the same as those used for the annual financial statements as at 31 December 2009. Differences are mainly due to the changes in HGB required by BilMoG.

As permitted under Section 67 para. 8 sentence 2 of the Introductory Act to the German Commer- cial Code (Einführungsgesetz zum Handelsgesetzbuch (EGHGB)), the figures for the previous year have not been adjusted.

Assets and liabilities are measured in accordance with the general measurement provisions of Sections 252 et seq. HGB, taking account of the special provisions applicable to banks (Sections 340 et seq. HGB).

Receivables and liabilities (non-trading portfolio)

Receivables in the non-trading portfolio are reported at nominal amount or at cost. Low-interest 70|71 or non-interest bearing receivables are discounted if necessary.

All identifiable risks are taken into account through specific loan loss provisions. Risk provisions are calculated in accordance with the methods used in the IFRS consolidated accounts. If there are indications of impairment, for instance, specific loan loss provisions are calculated by deducting from the carrying amount of the receivable the present value of future expected cash receipts discounted by the original effective interest rate. Risk provisions are raised or lowered if expected cash flows change. Cash payments on impaired receivables reduce the principal amount. Changes in the present value of future expected cash receipts over the period are shown under interest income.

General loan loss provisions are also established for potential credit risks. The method for calculating them was changed on the balance sheet date. These are no longer calculated in accor dance with the Federal Ministry of Finance circular of 10 January 1994, but in conformity with the calculation methodology applied in the IFRS consolidated financial statements in respect of portfolio provisions for credit risks. Historical probabilities of default, loss ratios and current ratings are taken into account. Besides receivables from customers, general loan loss provisions are also applied to receivables from banks and off-balance sheet transactions.

General loan loss provisions specifically for country risks are established to cover country risks not already included in specific loan loss provisions. These are calculated based on the probabilities of default and loss rates specific to each country.

Reserves have been established to meet general bank risks in accordance with Sections 340f and 340g HGB. The contingency reserves were deducted from assets in accordance with Section 340f HGB.

Liabilities in the non-trading portfolio are recognised at their settlement value. Discounted bonds and similar liabilities are reported at their net present value.

Premiums and discounts on receivables and liabilities are reported under deferred/pre-paid expenses and deferred/pre-paid income and amortised on a pro-rata basis.

BayernLB . 2010 Annual Report and Accounts Securities (non-trading portfolio)

The securities portfolios in the liquidity reserve are valued according to the strict principle of lower of cost or market value observing the requirement to reverse writedowns. Securities in the “securities valued as investments” portfolio (investment portfolio) are valued according to the less strict principle of lower of cost or market value. Securities allocated to the investment port folio are regularly tested for indications of permanent impairment.

As there is still no active market for asset-backed securities in BayernLB’s portfolio, they are measured on the basis of indicative counterparty prices, indicative broker prices or indicative prices from market data providers. These prices are checked for plausibility by using several price sources aided by statistical methodology. If a security has a wide range of prices compared with similar securities, it is assessed separately and implausible prices eliminated. In certain cases, credit quality is also rated.

ABS investments are analysed and any permanent impairments identified regardless of whether they have been guaranteed by a monoline insurer. If the monoline guarantee is considered sound on account of the fact that the bond guarantor has an adequate credit rating, the ABS investment is not subsequently written down to the lower fair value. If the credit rating of the monoline insurer deteriorates substantially, the monoline guarantee is disregarded and the ABS investment valued as though there was no monoline guarantee.

Trading portfolio

All financial instruments in the trading portfolio, including executory contracts concluded for trading, are measured at fair value less a risk deduction. The requirements of IDW accounting statement BFA 2 were observed.

The methodology used to calculate the risk discount is based on the supervisory regulations of the Minimum Requirements for Risk Management (Mindestanforderungen an das Risikomanage- ment (MaRisk)) and the requirements of Section 315 of the Solvency Ordinance (Solvabilitäts- verordnung (SolvV)). The risk discount is calculated in the form of a value-at risk (VaR) with a confidence level of 99 percent, a holding period of 10 days and observation period of one year. The risk discount for the whole trading portfolio was recognised under the trading portfolio.

All income and expenses from the trading portfolios, including their refinancing costs, are shown under “net income or net expenses from the trading portfolio”. In accordance with Section 340e para. 4 HGB, the allocation to the “fund for general bank risks” required by Section 340g HGB comes from the net earnings from the trading portfolio.

The bank-internal criteria for including financial instruments in the trading portfolio were left unchanged in the financial year.

BayernLB . 2010 Annual Report and Accounts ›› Financial statements Notes

Fair value

The fair value of a financial instrument is the amount for which it could be exchanged between knowledgeable, willing parties in an arm’s length transaction.

The fair value is calculated where possible by reference to a quoted price on an active market (e.g. stock market price). A market is considered active for a financial instrument if quoted prices are readily and regularly available from an exchange, dealer or similar, and these prices represent actual and regularly occurring market transactions between knowledgeable, willing parties in an arm’s length transaction.

If no active market exists, the fair value is calculated using a range of measurement methods including measurement models based on the present value method and indicative valuation prices. The goal is to establish what the transaction price would have been in an arm’s length exchange between knowledgeable, willing parties on the valuation date. An inactive market is characterised by very limited trading volumes, very wide bid/offer spreads and wide swings in indicative prices. 72|73

Other measurement models

Fair values are also calculated using recognised measurement models based largely on market data. Measurement models include the present value method, option price models and other methods.

When a market price is not available, the present value method is used for interest-bearing financial instruments. Measurement is based on cash flow structures and takes account of nominal values, residual maturities and the agreed day-count convention. To calculate the cash flow structure, the agreed cash flows are used in the case of financial instruments with contractually agreed fixed cash flows. In the case of variable rate instruments, cash flows are determined using forward curves. Discounting is conducted using matching currency and maturity yield curves, and a risk-adjusted spread. Market data is used where spreads are publicly available. In the case of OTC derivatives, consideration is given to counterparty risk at portfolio level, not individual transaction level.

Options and other derivative financial instruments with option characteristics are measured largely on the basis of the Black Scholes option pricing model. The following valuation parameters are used in the measurement process: cumulative probability distribution function for standard normal distribution, option strike prices, continuously compounding risk-free interest rates (for different currencies and maturities), price volatility, option time to expiry, estimated dividends, interest rate and pricing barriers, discounts, increments and probability of occurrence.

For options with several possible exercise dates, a binomial model is used. Publicly accessible market data is also used here in the measurement.

Credit derivatives are measured using the hazard rate model based on current credit spreads.

BayernLB . 2010 Annual Report and Accounts Summary of the key measurement models by derivative product group

Product group Principal valuation model Interest-rate swaps Present value method Forward rate agreements Present value method Interest-rate options Black 76 Forward exchange transactions Present value method Currency swaps/cross-currency swaps Present value method Foreign exchange options Black 76, Barone-Adesi-Whaley Equity/index options Black-Scholes, Roll-Geske-Whaley Commodity caps/floors Vorst Credit derivatives Hazard rate model

Derivative financial instruments

Derivative financial transactions (mainly forward transactions, swaps, options, credit derivatives) are allocated to a hedging or trading portfolio depending on their intended use. As executory contracts, they are not disclosed in the balance sheet if the intended use is as a hedging transaction. Option premiums paid or received, premiums that are not yet due for credit derivatives, and offsetting payments for price changes from total return swaps over the term are reported under other assets or under other liabilities. Premiums from credit default swaps (non-trading portfolio) are recognised under net interest income on a pro-rata basis. Premium payments for interest rate caps, floors and collars, and upfront payments for interest rate and (cross) currency swaps (non- trading portfolio) are disclosed under the deferred/pre-paid items.

Derivative financial instruments in the trading portfolio are measured at fair value less a risk discount and shown in the respective “trading portfolio” item (under assets if the fair value is positive and under liabilities if the fair value is negative). Provisions for expected losses from executory contracts are made for derivative financial instruments in the non-trading portfolio that are not part of a valuation unit.

Structured products

Structured products in the trading portfolio and the liquidity reserve are reported as a uniform financial instrument as they are measured at fair value less a risk discount (trading portfolio) or at the strict principle of lower of cost or market value (liquidity reserve). Embedded credit default swaps from securitised ABS instruments that are measured as investment assets are shown as guarantees under contingent liabilities. Structured liabilities are recognised at the settlement value.

BayernLB . 2010 Annual Report and Accounts ›› Financial statements Notes

Valuation units

BayernLB utilises valuation units in accordance with Section 254 HGB. Only micro fair-value valuation units are established. They are therefore reported in accordance with the risk management approach of the corresponding non-trading books. Interest rate risk is normally hedged. If the product is structured, other market risks (equity, currency and commodity risks) may also be hedged. In a few exceptional cases, credit risk may also be hedged.

In accordance with the risk strategy, valuation units are normally created on inception and end when the underlying and hedging transactions mature. The total volumes of the transactions are hedged in each case. Underlying transactions in a valuation unit may be assets, liabilities or derivative financial instruments. The prospective effectiveness in perfect 1:1 hedges is tested using the critical term match method. The amount of ineffectiveness is calculated using the cumulative changes in value of the underlying and hedging transaction. If the net value is negative, a provision for expected losses is shown. For imperfect hedges, the dollar-offset method and

the risk reduction method are used to test the effectiveness. As with perfect hedges, net negative 74|75 amounts are shown as provisions for expected losses. The effective portions of the valuation units shown are shown in the accounts in accordance with the so-called “freezing” method. These are shown in the income statement as the measurement gains or losses from the underlying transactions.

Participations and shares in affiliated companies

Participations and shares in affiliated companies are valued at historical cost in accordance with the rules for investment assets or – if an impairment is expected to be permanent – at the lower of cost or market value as at the balance sheet date, taking account of IDW accounting statement HFA 10. Where there is no further reason for impairment, a reversal is made.

Intangible and tangible assets

Intangible and tangible assets have been valued at historical cost or cost of production, less depreciation where applicable. The period of depreciation is equivalent to their economic life. Software developed internally is capitalised. Low value items are fully depreciated in the year acquired.

Deferred taxes

Deferred taxes are calculated on the temporary differences between the accounting value and the fiscal value of assets, liabilities and deferred/pre-paid items. At BayernLB this includes not only the differences from its own balance sheet items, but also those existing at the tax group subsidiaries in which BayernLB is a shareholder. In addition to the temporary differences in the accounts, tax loss carryforwards are recognised. Deferred taxes are measured on the basis of the combined income tax rate of BayernLB’s tax group in Germany of 32.01 percent. The combined income tax rate comprises corporate income tax, municipal trade tax and the solidarity surcharge. Deferred taxes from temporary differences for participations in entities with the legal form of a

BayernLB . 2010 Annual Report and Accounts partnership are, however, calculated on the basis of the combined income tax rate, comprising only corporate income tax and the solidarity surcharge; this is currently 15.83 percent. Deferred taxes on corporate income tax loss carryforwards are measured at the same tax rate. Deferred taxes on municipal trade tax loss carryforwards are measured at the municipal trade tax rate of 16.18 percent. For BayernLB’s foreign branches, deferred taxes are measured on the basis of the statutory tax rates applicable in the country concerned; the range is between 27.00 percent and 45.32 percent.

If there is net tax due, this is recognised in the balance sheet as a deferred tax liability. In accor dance with the recognition option under Section 274 para. 1 HGB, deferred taxes are not recognised if there is a net tax credit. An unrecognised deferred tax asset arose overall in the financial year.

Provisions

Provisions are recognised in accordance with Section 253 HGB at the settlement amount dictated by prudent business judgement, taking into account future rises in prices and costs. Provisions with a residual term of more than one year are discounted at the average market rate for the past seven financial years published by the Deutsche Bundesbank. Provisions with a remaining term of less than one year are not discounted.

Pension provisions for direct retirement benefit obligations are calculated in accordance with the Projected Unit Credit Method, whereby an actuarial report is drawn up using biometric assump tions (Richttafeln 2005 G (actuarial tables) by Klaus Heubeck) and future expected salary and pension increases. Discounting is carried out in accordance with Section 253 para. 2 sentence 2 HGB on a simplified basis using an average market rate published by the Deutsche Bundesbank calculated on the assumption of a remaining term of 15 years. This method meets the requirements of IDW accounting statement HFA 30; the fiscal net present value as calculated using the entry age normal method in accordance with Section 6a EStG is exceeded. As the provision amount would be lower due to the change in the measurement of pension provisions in accordance with the German Modernisation of Accounting Rules Act than it would under the previous methodology used, BayernLB has in accordance with Art. 67 para. 1 sentence 2 EGHGB retained the higher provision amount, taking into account the benefits paid in 2010. As at 31 December 2010 there was a surplus of EUR 147 million as a result.

BayernLB . 2010 Annual Report and Accounts ›› Financial statements Notes

To measure the pension provisions in accordance with the German Modernisation of Accounting Rules Act in order to arrive at a value for calculating the surplus, the following actuarial assump tions as at 31 December 2010 were used:

in percent 2010 2009 Actuarial interest rate 5.16 6.00 Changes in salary 3.20 3.20 Adjustments to pensions 2.50 2.46

In addition to the pension system, which gives rise to the pension provisions, BayernLB has two legally independent pension funds for indirect retirement benefits payable to employees within Germany. Where permissible under tax law, the Bank makes regular contributions to the fund assets of these support funds. Pension provisions are not made for indirect retirement benefits in accordance with Art. 28 para. 1 sentence 2 EGHGB. As at 31 December 2010, there was a shortfall of EUR 279 million (2009: EUR 80 million), but this was offset by reinsurance at BayernLB in the amount of EUR 219 million (2009: EUR 0 million) to finance these retirement benefit obligations. 76|77

Currency translation

Currencies are translated in accordance with the principles of Sections 256a and 340h HGB and IDW accounting statement BFA 3/95. Assets, liabilities and spot transactions that are not yet settled are translated at the mid-market spot rate. In event of special coverage, balance sheet assets and executory contracts denominated in a foreign currency are treated in accordance with Section 340h HGB. Accordingly income and expenses from currency translation are recognised under “net income or net expenses from the trading portfolio”.

BayernLB . 2010 Annual Report and Accounts Notes to the balance sheet

Unless otherwise stated, the information in the tables is reported as at the balance sheet date 31 December 2010 including interest accruals, while no accrued interest was recognised in the previous year’s values.

Assets

Due from banks

EUR million 2010 2009 This item includes: Other receivables with a residual maturity of • up to three months (including accrued interest) 14,553 18,426 • over three months up to one year 11,333 27,819 • over one year up to five years 25,871 27,152 • over five years 10,004 12,553 Due from affiliated companies 9,940 12,852 Due from companies in which investments are held 2,759 114 Due from affiliated savings banks 16,214 14,299 Subordinated receivables 666 853 Committed but not yet disbursed building loans of the home loan and savings banks • from allotment 132 124

The previous year’s figures include EUR 9,640 million from the trading portfolios. In the reporting year the effects on the balance sheet from these types of transactions are reported under the trading portfolio.

Due from customers

EUR million 2010 2009 This item includes: Receivables with a residual maturity of • up to three months (including accrued interest) 15,127 10,638 • over three months up to one year 8,108 9,614 • over one year up to five years 31,183 31,983 • over five years 34,668 35,733 Receivables without a fixed date of maturity 1,097 895 Due from affiliated companies 528 589 Due from companies in which investments are held 562 576 Subordinated receivables 43 36 Overdue interest and redemption payments from building loans of the home loan and savings banks 4 4 Committed but not yet disbursed building loans of the home loan and savings banks • from allotment 479 457 • for preliminary and interim financing 257 100

BayernLB . 2010 Annual Report and Accounts ›› Financial statements Notes

The previous year’s figures include EUR 632 million from the trading portfolios. In the reporting year the effects on the balance sheet from these types of transactions are reported under the trading portfolio.

Bonds and other fixed-income securities

EUR million 2010 2009 This item includes: Amounts falling due in the following year (including accrued interest) 6,502 8,866 Securitised receivables from affiliated companies 1,788 4,140 Securitised receivables from companies in which investments are held 2,354 – Subordinated securities 2,854 229 Marketable securities, of which • listed 55,234 55,190 • unlisted 7,555 12,355 78|79

The previous year’s figures include EUR 7,207 million from the trading portfolios. In the reporting year the effects on the balance sheet from these types of transactions are reported under the trading portfolio.

Securities reallocated from the liquidity reserve to the investment portfolio in 2010 had a carrying value in the investment portfolio of EUR 2,986 million. BayernLB has the intention and ability to hold these securities for the long term. These reallocated portfolios are measured at the less strict principle of lower of cost or market value as current fluctuations in value are not rated as long term and it is assumed that the securities will be repaid in full when they mature.

In the whole investment portfolio, bonds and other fixed-interest securities had a carrying value of EUR 41,862 million (2009: EUR 45,432 million) based on the less strict principle of lower of cost or market value. Their fair value was EUR 39,755 million (2009: EUR 42,096 million). If the current fluctuations in value are not considered long term and it is assumed that securities will be repaid in full when they mature, they are not written down.

Part of the investment portfolio comprises asset-backed securities with a carrying value of EUR 11,867 million (2009: EUR 14,495 million) and a fair value of EUR 10,274 million (2009: EUR 11,630 million). In return for a premium paid by the Bank, the Free State of Bavaria guar anteed losses from the ABS portfolio of up to EUR 4.8 billion in the guarantee agreement concluded in 2008. The guarantee covers losses above a first loss of EUR 1.2 billion which is borne by BayernLB. Since the guarantee agreement was concluded, EUR 1.9 billion in writedowns above the first loss have thus been avoided.

BayernLB . 2010 Annual Report and Accounts Equities and other non-fixed income securities

EUR million 2010 2009 This item includes: Subordinated securities – 5 Marketable securities, of which • listed 36 114 • unlisted 37 111

The previous year’s figures include EUR 157 million from the trading portfolios. In the reporting year the effects on the balance sheet from these types of transactions are reported under the trading portfolio.

As at the balance sheet date, shares and other non-fixed-interest securities were carried at EUR 618 million (2009: EUR 387 million) based on the less strict principle of lower of cost or market value. The fair value of these holdings was EUR 611 million (2009: EUR 387 million). If the current fluctuations in value are not considered long term and it is assumed that securities will be written up in full, they are not written down.

Trading portfolio

EUR million 2010 2009 This item includes: Positive fair values of derivative financial instruments 31,857 – Receivables 1,181 – Bonds and other fixed-income securities 8,484 – Equities and other non-fixed income securities 206 – Other assets 38 – Risk discount for the entire trading portfolio – 18 – Subordinated securities 28 –

Investments

EUR million 2010 2009 This item includes: Marketable securities, of which • listed 117 117 • unlisted – 5

BayernLB . 2010 Annual Report and Accounts ›› Financial statements Notes

Shares in affiliated companies

EUR million 2010 2009 This item includes: Marketable securities, of which • listed1 – – • unlisted1 3,367 3,308

1 Previous year’s figure adjusted due to a reallocation from “listed” to “unlisted”.

Assets held in trust

EUR million 2010 2009 This item mainly includes housing loans granted by Bayerische Landesbodenkreditanstalt and breaks down as follows: Due from banks 120 139

Due from customers 6,208 6,483 80|81

Intangible assets

Research and development costs for the reporting year totalled EUR 33 million. Of this, EUR 4 million in development costs resulted from internally produced intangible fixed assets under fixed assets, specifically internally developed software.

Tangible assets

EUR million 2010 2009 This item includes: Land and buildings used for own operations 371 382 Furniture and office equipment 24 30

Other assets

EUR million 2010 2009 This item includes: Claims from reinsurance 219 – Accrued income from investments 96 175 Premium claims from credit derivatives (protection buyer positions) 83 623 Claims on the German tax authorities 60 128 Option premiums paid 58 446 Shares in companies 10 14 Premiums from credit derivatives not yet received (protection seller positions) – 147

BayernLB . 2010 Annual Report and Accounts The previous year’s figures include EUR 221 million from the trading portfolios. In the reporting year the effects on the balance sheet from these types of transactions are reported under the trading portfolio.

Deferred expenses

EUR million 2010 2009 This item includes: Discount on liabilities 176 249 Upfront payments from swaps 157 155 Premium on receivables 38 43 Premiums from caps and floors 2 124

The previous year’s figures include EUR 295 million from the trading portfolios. In the reporting year the effects on the balance sheet from these types of transactions are reported under the trading portfolio.

Changes in fixed assets

EUR million Purchase/ manufacturing costs A dditions Disposals Transfers A ppreciation Depreciation/ write-downs (cumulative) N et book value 31 December 2010 N et book value 31 December 2009 Depreciation/ write-downs for the financial year Changes +/ – 1 Investments + 130 517 387 Shares in affiliated companies – 150 3,505 3,655 Investment securities – 3,339 42,480 45,819 Intangible assets2 121 16 2 – – 111 24 20 10 Tangible assets 712 8 43 4 – 220 461 479 18 Other fixed assets 16 – – – – 3 13 13 –

1 The aggregation option under Section 34 para. 3 RechKredV was applied. 2 Additions include capitalised development costs plus licence costs

BayernLB . 2010 Annual Report and Accounts ›› Financial statements Notes

Genuine sale and repurchase agreements

EUR million 2010 2009 Book values of assets transferred under sale and repurchase agreements 3,416 6,349

Assets in foreign currencies

EUR million 2010 2009 Total amount of assets denominated in foreign currency 60,460 61,717

Assets held as cover

EUR million 2010 2009 82|83 Mortgage Pfandbriefs and Landesbodenbriefs 7,762 7,597 Cover assets contained in: • Due from banks 66 59 • Due from customers 9,907 9,752 • Bonds and other fixed-income securities 400 400 • Additional cover – – Excess cover 2,611 2,614 Public Pfandbriefs 31,733 38,024 Cover assets contained in: • Due from banks 12,143 14,536 • Due from customers 23,089 20,496 • Bonds and other fixed-income securities 7,582 10,120 • Additional cover 2,549 3,091 Excess cover 13,629 10,219

Shares in investment assets in the fixed assets that are greater than 10 percent of the shares

Difference in fair value/ Distribution Fair value Book value book value of earnings Daily return Investment Objective EUR million EUR million EUR million EUR million possible Bond funds LBMUE 142 143 – 11 5 Yes LBMUE II 141 142 – 11 5 Yes LBMUE III 163 163 – 5 Yes LBMUE V 141 145 – 41 1 Yes BayernInvest Short Term ABS-Fonds 29 29 – 1 Yes BayernInvest Renten Europa-Fonds 9 8 – – Yes Balanced funds Assenagon Trading Risk Conversion 25 25 – 1 – No2

1 No permanent impairment as a full reversal is assumed. 2 Surrender option on first bank working day of the month.

BayernLB . 2010 Annual Report and Accounts Liabilities

Due to banks

EUR million 2010 2009 This item includes: Term liabilities with a residual maturity of • up to three months (including accrued interest) 26,101 14,232 • over three months up to one year 8,378 21,836 • over one year up to five years 18,533 17,731 • over five years 16,443 18,293 Due to affiliated companies 2,429 2,088 Due to companies in which investments are held 813 43 Due to affiliated savings banks 9,093 9,550

The previous year’s figures include EUR 8,087 million from the trading portfolios. In the reporting year the effects on the balance sheet from these types of transactions are reported under the trading portfolio.

Due to customers

EUR million 2010 2009 This item includes: Other term liabilities with a residual maturity of • up to three months (including accrued interest) 16,558 15,520 • over three months up to one year 2,804 2,656 • over one year up to five years 8,941 7,958 • over five years 13,003 16,763 Due to affiliated companies 111 92 Due to companies in which investments are held 295 249

The previous year’s figures include EUR 338 million from the trading portfolios. In the reporting year the effects on the balance sheet from these types of transactions are reported under the trading portfolio.

BayernLB . 2010 Annual Report and Accounts ›› Financial statements Notes

Securitised liabilities

EUR million 2010 2009 This item includes: Bonds and notes issued • amounts falling due in the following year 15,222 14,554 Other securitised liabilities with a residual maturity of • up to three months (including accrued interest) 2,147 2,933 • over three months up to one year 372 836 • over one year up to five years 20 46 • over five years – 48 Due to affiliated companies 265 665 Due to companies in which investments are held 418 15

The previous year’s figures include EUR 114 million from the trading portfolios. In the reporting

year the effects on the balance sheet from these types of transactions are reported under the 84|85 trading portfolio.

Trading portfolio

EUR million 2010 2009 This item includes: Negative fair values of derivative financial instruments1 31,592 – Liabilities 199 –

1 incl. counterparty-specific credit rating effects with respect to OTC derivatives

Liabilities held in trust

EUR million 2010 2009 This item breaks down as follows: Due to banks 12 17 Due to customers 6,316 6,605

BayernLB . 2010 Annual Report and Accounts Other liabilities

EUR million 2010 2009 This item includes: Premium liabilities from credit derivatives (protection seller positions) 210 335 Offsetting item for foreign currency translation 106 118 Covering obligation resulting from the sale of securities borrowed 54 162 Option premiums received 10 488 Premiums from credit derivatives not yet paid (protection buyer positions) 2 403

The previous year’s figures include EUR 1,166 million from the trading portfolios. In the reporting year the effects on the balance sheet from these types of transactions are reported under the trading portfolio.

Deferred income

EUR million 2010 2009 This item includes: Upfront payments from swaps 114 213 Premium on liabilities 82 81 Discount on receivables 56 62 Premiums from caps and floors 3 184

The previous year’s figures include EUR 390 million from the trading portfolios. In the reporting year the effects on the balance sheet from these types of transactions are reported under the trading portfolio.

Provisions

The previous year’s figures include EUR 238 million from the trading portfolios. In the reporting year the effects on the balance sheet from these types of transactions are reported under the trading portfolio.

Subordinated liabilities

EUR million 2010 2009 This item includes: Subordinated liabilities to affiliated companies1 659 590 1 Previous year’s value amended

In the reporting year, interest expenses for subordinated liabilities were EUR 259 million (2009: EUR 285 million).

BayernLB . 2010 Annual Report and Accounts ›› Financial statements Notes

Subordinated liabilities are structured so that they cannot be repaid in the event of BayernLB’s insolvency or liquidation until all non-subordinate creditors have been satisfied. Creditors have no right to demand repayment prior to maturity. These meet the requirements for inclusion as liable capital pursuant to Section 10 para. 5a KWG and Section 10 para. 7 KWG.

The following borrowings exceed 10 percent of the total amount of subordinated liabilities:

EUR million Volume Interest rate Maturity Bond 1,000 5.75 % 23 Oct 2017 Bond 680 4.50 % 07 Feb 2019 Bond 636 6.21 % 31 May 2037

The terms and conditions for subordinated bonds apply. There are no provisions providing for a conversion into equity or another debt instrument.

Liabilities in foreign currency

EUR million 2010 2009 86|87 Total amount of liabilities denominated in foreign currency 46,756 35,064

Contingent liabilities and other liabilities

Reported off the balance sheet are potential payment obligations from guarantees and warranties, letters of credit, and irrevocable credit commitments assumed by the Bank in the course of its ordinary business with customers.

There are also small volumes of guarantees to an affiliated company and irrevocable loan commitments to three special purpose entities from ABS customer transactions and in conjunction with the sale of an affiliated company.

No individual amounts are material in relation to the overall activities.

The risk from drawdowns is assessed on the basis of the creditworthiness of the principal/ borrower. If creditworthiness deteriorates to the extent that it is no longer expected that the drawdown will be repaid in full or in part, provisions are made. The process is described in detail in the credit risk management section of the risk report.

Assignment of collateral for the Bank’s own liabilities

EUR million 2010 2009 Assets have been assigned as collateral in the case of the following own liabilities in the amounts shown below: Due to banks 18,756 16,517 Due to customers 457 7 Contingent liabilities 13 28

BayernLB . 2010 Annual Report and Accounts Collateral for own liabilities primarily relates to assigned receivables from pass-through loans to banks (EUR 11,727 million) and open market transactions with the European System of Central Banks (EUR 4,010 million).

Securities with a nominal value of EUR 3,279 million have also been deposited as collateral for transactions on futures and options exchanges and other stock exchange and clearing systems.

Valuation units

Opposing changes in values and cash flows were almost fully offset as at the balance sheet date and it is expected they will continue to be offset. By the time the valuation units are expected to end (when the underlying and hedging transactions mature), the changes in value from the hedged risks will have completely offset each other.

Underlying transaction Hedged amount in EUR million Assets 4,925 Liabilities 15,581 Derivative financial instruments 115 Total 20,621

Notes to the income statement

Interest income/ interest expenses

Due to the exercise of the retention option in accordance with Art. 67 para. 1 sentence 2 EGHGB, no interest expenses from the compounding of interest on pension provisions was recognised (2009: EUR 80 million).

An expense of EUR 215 million (2009: EUR 0 million) has been recognised in the reporting year resulting from the payment of amounts in arrears and current amounts due on profit participation certificates.

Commission income and commission expenses

The commission expenses item includes EUR 47 million for utilising guarantees from the Financial Market Stabilisation Fund (SoFFin) (2009: EUR 53 million for provision and utilisation).

Other operating income/other operating expenses

In the reporting year, changes in the net negative values of valuation units related to liabilities resulted in other operating income of EUR 41 million from writebacks of provisions for contingent losses, and other operating expenses of EUR 35 million from additions to provisions for contingent losses.

In other operating expenses, EUR 22 million (2009: EUR 0 million) for payments to tax authorities and EUR 12 million (2009: EUR 8 million) in additions to the reserve fund for Bausparkasse is recognised.

BayernLB . 2010 Annual Report and Accounts ›› Financial statements Notes

In the previous year, earnings from the closure of the Bavarian Reserve Fund in the amount of EUR 129 million were recognised.

Writeoffs of receivables

In the previous year, following the disposal of the stake in Hypo Alpe-Adria Bank International AG, A - Klagenfurt (HGAA), loan receivables of EUR 525 million were written off.

Writedowns of shares in affiliated companies and securities treated as investment assets

Writedowns of affiliated companies and participations in the amount of EUR 282 million are recognised in this item. In the previous year, book losses from the disposal of HGAA in the amount of EUR 2,282 million and a writedown on profit participation rights of EUR 300 million in accordance with the waiver agreement were recognised.

In addition, premium expenses for the guarantee agreement by the Free State of Bavaria for hedging actual losses in the ABS portfolio were recognised. 88|89

Extraordinary income/extraordinary expenses

In extraordinary income, income from the first-time application of BilMoG in the amount of EUR 271 million was recognised. This resulted mainly from the measurement of trading portfolios. There were also effects from the recognition of valuation units and the discounting of provisions.

Extraordinary restructuring expenses of EUR 31 million (2009: EUR 347 million) are recognised under extraordinary expenses.

Taxes on income and earnings

Corporate income tax, municipal trade tax, the solidarity surcharge and income taxes levied abroad are reported as income tax expenses. Most taxes on income and earnings are based on earnings from ordinary activities.

Deferred tax liabilities mainly relate to the different methods used for valuing real estate. A deferred tax asset arose from the item due from customers. Additional deferred tax assets arose for provisions not recognisable for tax purposes, and differences in values relating to pension provisions, and bonds and notes.

The value of deferred tax assets is offset against deferred tax liabilities. Exercising the option under Section 274 para. 1, sentence 2 HGB, deferred tax assets left after offsetting are not capitalised.

Payments on silent partner contributions and profit participation certificates/capital reduction

In financial year 2009, BayernLB utilised silent partner contributions and profit participation certificates to absorb losses. In accordance with the terms of the investor agreements, the holders of silent partner contributions contributed EUR 747 million and the holders of profit participation rights contributed EUR 187 million in proportion to their share of the total liable capital to meet the losses. This represents around 15.1 percent of the nominal amount of the silent partner contributions and profit participation rights.

BayernLB . 2010 Annual Report and Accounts The earnings generated in financial year 2010 are to be used in the following order defined in the contractual agreements, taking into account any profit participation rights and silent partner contributions that have since become due: • Profit participation rights liabilities are to be fully replenished (EUR 174 million). • All back distributions due on profit participation rights liabilities for 2008 and 2009 are to be paid (EUR 144 million). • All currently due distributions on the profit participation rights are to be fully paid (EUR 72 million). • The nominal value of silent partnership contributions are to be partially replenished (EUR 370 million).

An additional EUR 354 million replenishment requirement remains for the silent partnership contributions.

Amount not available for distribution

In accordance with Section 268 para. 8 HGB, the overall amount that cannot be distributed is limited to EUR 4 million in the financial year for BayernLB. It is composed as follows:

EUR million 2010 Amount from the recognition of • internally generated intangible assets within fixed assets 4 • deferred taxes – • assets at fair value – Total 4

Free reserves are available to cover the overall amount that may not be distributed in accordance with Section 268 para. 8 HGB.

Services rendered to third parties

Services rendered to third parties largely include the management of custody accounts, asset management and administration of trust loans, and insurance and real estate brokerage.

Geographical markets

EUR million 2010 2009 The total amount of income disclosed in items 1, 3, 5, 7 and 8 of the income statement breaks down into the following geographical markets: Germany 5,223 7,951 Europe (ex Germany) 516 460 America 433 578 Asia 24 97

BayernLB . 2010 Annual Report and Accounts ›› Financial statements Notes

Derivatives transactions

The tables below show interest rate, foreign currency-related and other external forward trans actions and credit derivatives not yet settled as at the balance sheet date. The transactions are primarily for hedging changes in interest rates, exchange rates or market prices and conducting trades for customers. They also include derivatives that form part of a hedging relationship.

Derivatives transactions – volumes

Positive Negative Nominal value market values1 market values1 EUR million 2010 2009 2010 2010 Interest-rate risks • Interest-rate swaps 1,108,421 1,002,019 29,488 25,814 • FRAs 306,732 230,605 86 84 • Interest-rate options 26,115 30,748 493 926 – call options 11,550 12,879 493 – 90|91 – put options 14,565 17,869 – 926 • Caps, floors 40,359 35,831 350 261 • Exchange-traded contracts 69,350 72,420 4 4 • Other interest-based forward transactions 592 5,188 4 1 Total interest-rate risks 1,551,569 1,376,811 30,426 27,090 Currency risks • Forward exchange transactions 63,663 49,698 1,392 1,317 • Currency/cross-currency swaps 64,358 64,241 2,103 2,213 • Foreign exchange options 5,826 5,536 114 111 – call options 3,033 3,108 114 – – put options 2,793 2,428 – 111 • Exchange-traded contracts – – – – • Other currency-based forward transactions 1 – – 7 Total currency risks 133,848 119,475 3,610 3,648

Equity and other price risks • Equity forward transactions 113 60 – 1 • Equity/index options 294 100 56 42 – call options 237 56 56 – – put options 56 44 – 42 • Exchange-traded contracts 1,046 74 3 208 • Other forward transactions2 944 524 265 239 Total equity and other price risks 2,396 758 324 490 Credit derivative risks • Protection buyer 9,435 21,452 2,183 29 • Protection seller 2,642 23,051 1 680 Total credit derivative risks 12,076 44,503 2,184 709 Total 1,699,890 1,541,547 36,543 31,937

1 Calculation of market values: see accounting methods – derivative financial instruments 2 Exclusively energy and commodities-related transactions.

BayernLB . 2010 Annual Report and Accounts Derivatives transactions – maturities

Nominal value Equity and other Risks from Interest-rate risks Currency risks price risks credit derivatives EUR million 2010 2009 2010 2009 2010 2009 2010 2009 Residual maturities • up to three months 188,905 171,787 66,404 25,304 511 247 39 2,168 • up to one year 479,013 418,563 18,949 28,066 1,265 277 700 11,516 • up to five years 562,726 469,441 34,300 51,370 398 231 4,303 19,982 • more than five years 320,924 317,020 14,195 14,735 222 3 7,034 10,837 Total 1,551,569 1,376,811 133,848 119,475 2,396 758 12,076 44,503

Derivatives transactions – counterparties

Positive Negative Nominal value market values1 market values1 EUR million 2010 2009 2010 2010 OECD banks2 1,572,082 1,435,739 30,233 29,461 Non-OECD banks2 1,820 1,268 65 29 Public-sector entities within the OECD 13,588 10,608 2,298 184 Other counterparties3 112,400 93,932 3,947 2,263 Total 1,699,890 1,541,547 36,543 31,937

Derivatives transactions – trading portfolios

Positive Negative Nominal value market values1 market values1 EUR million 2010 2009 2010 2010 Interest-rate derivatives 1,519,494 1,272,920 27,717 25,545 Currency derivatives 132,599 118,354 3,499 3,587 Equity derivatives 2,009 586 304 484 Credit derivatives 4,151 11,523 86 83 Total 1,658,252 1,403,383 31,606 29,699

Derivatives transactions – non-trading portfolios

Positive Negative Nominal value market values1 market values1 EUR million 2010 2009 2010 2010 Interest-rate derivatives 32,075 103,891 2,709 1,545 Currency derivatives 1,249 1,121 110 61 Equity derivatives 387 172 19 6 Credit derivatives 7,926 32,980 2,098 626 Total 41,637 138,164 4,937 2,238

1 Calculation of market values: see accounting methods – derivative financial instruments 2 Previous year’s figure adjusted due to a reallocation from “banks outside the OECD” to “banks within the OECD” 3 Including exchange-traded contracts

BayernLB . 2010 Annual Report and Accounts ›› Financial statements Notes

Notes pursuant to Section 35 (1) no. 8 RechKredV

Changes in the portfolio of home loan savings contracts and contract amounts of Bayerische Landesbausparkasse (LBS Bayern).

Not allotted Allotted Total Contract Contract Contract No. of amounts No. of amounts No. of amounts contracts EUR million contracts EUR million contracts EUR million A. Portfolio as at 31 December 2009 1,742,637 45,060 276,027 7,370 2,018,664 52,430 B. Additions in the financial year through • New contracts (effective) 209,572 7,114 – – 209,572 7,114 • Transfers 12,812 305 1,703 41 14,515 347 • Waivers and revocations of allotment 9,438 179 – – 9,438 179

• Splits 1,693 – 66 – 1,759 – 92|93 • Allotments – – 81,384 2,141 81,384 2,141 • Other 12,875 465 570 16 13,445 480 Total 246,390 8,063 83,723 2,198 330,113 10,261 C. Reductions in the financial year through • Allotments 81,384 2,141 – – 81,384 2,141 • Reductions – 804 – 8 – 813 • Terminations 111,526 1,963 36,196 646 147,722 2,609 • Transfers 12,812 305 1,703 41 14,515 347 • Consolidations – – 2,319 – 2,319 – • Contract expiries 13,902 129 56,597 1,572 70,499 1,700 • Waivers and revocations of allotment – – 9,438 179 9,438 179 • Other 7,854 291 1,794 31 9,648 321 Total 227,478 5,632 108,047 2,477 335,525 8,109 D. Net additions/reductions 18,912 2,431 – 24,324 – 279 – 5,412 2,152 E. Portfolio as at 31 December 2010 1,761,549 47,491 251,703 7,091 2,013,252 54,582 of which: building-savers outside the Federal Republic of Germany 5,764 170,281 554 19,319 6,318 189,600

Contract amounts No. of contracts EUR million

Portfolio of contracts not yet effective • Concluded prior to 1 January 2010 14,273 562 • Concluded in financial year 2010 59,173 2,190

Information on changes within the individual tariff categories can be found in LBS Bayern’s annual report.

BayernLB . 2010 Annual Report and Accounts LBS Bayern allotment fund volumes

EUR million 2010 A. Additions Brought forward from previous year (surplus): Amounts not yet disbursed 6,639 Additions in financial year • Home loan savings (incl. residential property subsidies) 1,974 • Redemption amounts1 (incl. residential property subsidies) 757 • Interest on home loan savings 222 • Reserve fund for home loan and savings banks 12 Total additions 9,603 B. Reductions Reductions in the financial year • Allotted amounts, if disbursed 1,013 a) Home loan savings 640 b) Building loans 593 • Repayment of building-saving deposits on building-saving contracts not yet allotted Additions surplus (amount not yet disbursed) at end of financial year 2 7,357 Total reductions 9,603

1 Redemption amounts are the principal portion of the total repayment. 2 The additions surplus includes: a) building-savers’ deposits not yet disbursed under allotted building-saving contracts: EUR 252 million b) building loans not yet disbursed from allotments: EUR 610 million

Data pursuant to Section 35 para. 1 no. 7 RechKredV in connection with Section 28 of the Pfandbrief Act (PfandBG)

Outstanding Pfandbriefs and cover pools

Risk-related present Nominal value Present value value EUR million 2010 2009 2010 2009 2010 2009 Mortgage-backed Pfandbriefs 7,760 7,596 8,153 7,977 8,303 8,223 • Cover pools 1 10,370 10,208 11,004 10,832 10,981 10,840 • of which: derivatives – – – – – – Excess cover 2,609 2,612 2,850 2,855 2,678 2,617 Public Pfandbriefs 31,733 38,024 33,831 40,381 32,457 39,172 • Cover pools 1,2 46,407 49,368 47,361 50,562 45,281 48,964 • of which: derivatives – – 18 18 2 1 Excess cover 14,674 11,344 13,530 10,181 12,825 9,792

1 Including additional cover assets pursuant to Sections 19 (1) and 20 (2) PfandBG 2 Including discount for BayernLabo’s receivables at below-market interest rates

BayernLB . 2010 Annual Report and Accounts ›› Financial statements Notes

Maturities structure of outstanding Pfandbriefs and interest rate lock-in periods of cover pools

Mortgage Public Pfandbriefs Cover pools 1 Pfandbriefs Cover pools 1,2 EUR million 2010 2009 2010 2009 2010 2009 2010 2009 Residual maturities and interest-rate lock-in periods • up to one year 1,180 1,103 1,868 1,693 6,963 8,790 9,426 10,148 • over one year up to two years 1,847 918 1,351 829 5,784 6,646 5,161 4,044 • over two years up to three years 1,383 1,704 1,498 1,240 3,620 5,587 5,292 4,929 • over three years up to four years 708 1,223 1,213 1,564 3,247 3,448 4,260 4,739 • over four years up to five years 543 597 1,742 1,105 4,753 1,621 10,217 4,119

• over five years up to 94|95 ten years 2,034 1,924 2,405 3,294 4,860 9,224 7,941 18,105 • over ten years 65 127 293 483 2,507 2,708 4,111 3,284 Total 7,760 7,596 10,370 10,208 31,733 38,024 46,407 49,368

1 Including additional cover assets pursuant to Sections 19 (1) and 20 (2) PfandBG 2 Including discount for BayernLabo’s receivables at below-market interest rates

Composition of other cover assets used to cover Pfandbriefs

EUR million 2010 2009 Cover assets in accordance with • Section 19 (1) No. 2 of the Pfandbrief Act (PfandBG) – – • Section 19 (1) No. 3 of the Pfandbrief Act (PfandBG) 400 400 • Section 20 (2) No. 2 of the Pfandbrief Act (PfandBG) 2,549 3,091 Total 2,949 3,491

Receivables used to cover mortgage Pfandbriefs by size

Mortgages serving as cover EUR million 2010 2009 up to EUR 300,000 1,501 1,667 over EUR 300,000 up to EUR 5 million 1,250 1,341 more than EUR 5 million 7,219 6,800 additional cover 400 400 Total 10,370 10,208

BayernLB . 2010 Annual Report and Accounts Receivables used to cover mortgage Pfandbriefs by country where the real estate collateral is located and by type of use

Mortgages serving as cover commercial residential EUR million 2010 2009 2010 2009 Germany 4,486 4,249 2,811 3,004 • flats – – 847 943 • single-family homes – – 632 700 • multi-family homes – – 1,286 1,324 • office buildings 1,627 1,524 – – • retail buildings 1,625 1,597 – – • industrial buildings 61 42 – – • other commercial buildings 642 597 – – • unfinished new buildings not yet generating income 102 38 13 19 • plots of land 29 51 32 18 • additional cover 400 400 – – Austria 25 26 – – • retail buildings 9 10 – – • plots of land 1 1 – – • office buildings 15 15 – – Belgium 14 – – – • office buildings 14 – – – Czech Republic 68 68 – – • office buildings 68 68 – – France 504 468 – – • office buildings 497 461 – – • industrial buildings 7 7 – – Great Britain and Northern Ireland 955 1,054 – – • office buildings 510 619 – – • retail buildings 364 353 – – • other commercial buildings 81 82 – – Hungary 62 62 – – • retail buildings 62 62 – – Italy 583 535 – – • office buildings 359 359 – – • retail buildings 224 176 – – Netherlands 199 147 – – • office buildings 151 98 – – • retail buildings 47 49 – – Poland 16 16 – – • office buildings 11 11 – – • retail buildings 2 3 – – • unfinished new buildings not yet generating income 2 2 – – Spain 68 64 – – • office buildings 64 64 – – • retail buildings 4 – – –

BayernLB . 2010 Annual Report and Accounts ›› Financial statements Notes

Mortgages serving as cover commercial residential EUR million 2010 2009 2010 2009 Sweden 32 13 – – • retail buildings 32 13 – – Switzerland 201 175 – – • office buildings 48 40 – – • retail buildings 122 108 – – • other commercial buildings 30 27 – – US 346 327 – – • office buildings 336 316 – – • other commercial buildings 11 11 – – Total 7,559 7,204 2,811 3,004

Total number of mortgage receivables overdue for at least 90 days by country where the real 96|97 estate collateral is located

EUR million 2010 2009 Germany 1 1 Total 1 1

Additional information on mortgage receivables pursuant to Section 28 (2) No. 3 PfandBG

As at the balance sheet date, 1 (2009: 1) commercial and 67 (2009: 93) residential properties were subject to foreclosure sale proceedings, and no (2009: 0) commercial and 45 (2009: 68) residential properties were subject to administrative receivership.

No (2009: 0) commercial property and 33 (2009: 37) residential properties were foreclosed on in the year under review.

No properties were repossessed in financial years 2010 or 2009 to avoid losses on mortgages.

Type of use commercial residential EUR million 2010 2009 2010 2009 Overdue interest payments on mortgage debt – – – 1

BayernLB . 2010 Annual Report and Accounts Receivables used to cover public-sector Pfandbriefs by debtor, guarantor and its domicile

Cover assets EUR million 2010 2009 Germany 42,043 45,028 • National government 935 1,112 • Regional authorities 12,064 11,483 • Local authorities 8,505 6,559 • Other debtors 18,774 23,788 • Additional cover 1,765 2,086 Austria 15 15 • National government 15 15 Canada 150 132 • Regional authorities 75 66 • Local authorities 75 66 Cyprus 1 2 • National government 1 2 Czech Republic 4 5 • National government 4 5 Denmark – 25 • Additional cover – 25 European Union 103 103 • Other debtors 103 103 Great Britain and Northern Ireland 737 646 • National government 77 4 • Regional authorities 660 642 Greece – 27 • Additional cover – 27 Hungary – 1 • National government – 1 Italy 95 105 • Additional cover 95 105 Luxembourg 703 700 • National government 3 – • Other debtors 200 200 • Additional cover 500 500 Netherlands 10 60 • Additional cover 10 60 Norway 15 15 • Additional cover 15 15 Poland 20 20 • National government 20 20 Romania 1 4 • National government 1 4

BayernLB . 2010 Annual Report and Accounts ›› Financial statements Notes

Cover assets EUR million 2010 2009 Spain 394 424 • Regional authorities 394 424 Slovenia 20 – • National government 20 – Sweden – 9 • National government – 9 Switzerland 2,092 2,041 • Regional authorities 1,065 975 • Other debtors 863 793 • Additional cover 164 273 US 3 6 • National government 3 6 Total 46,407 49,368 98|99

Total number of public-sector receivables overdue for at least 90 days and their regional distribution

EUR million 2010 2009 Germany • National government 1 1 • Regional authorities 2 2 Total 3 3

The overdue public-sector receivables due from sovereigns relate to receivables from the country of Argentina which the Federal Republic of Germany has guaranteed. The overdue public-sector receivables due from regional authorities largely relate to receivables from private individuals which regional authorities have guaranteed.

BayernLB . 2010 Annual Report and Accounts Supplementary information

Shareholdings

Equity/ Type of fund Earnings/ share- Percentage assets net income Name and location of the investee holding held in EUR ’000 in EUR ’000 Subsidiaries included in the consolidated financial accounts Banque LBLux S.A., L - Luxembourg Direct 100.0 406,156 16,808 BayernInvest Kapitalanlagegesellschaft mbH, Munich Direct 100.0 10,014 –1 Direct and BayernLB Capital LLC I, USA - Wilmington indirect 100.0 46 11 BayernLB Capital Trust I, USA - Wilmington Direct 0.0 636,133 – Deutsche Kreditbank Aktiengesellschaft, Berlin Direct 100.0 1,855,912 –1 Subsidiaries included in the Deutsche Kreditbank Aktiengesellschaft sub-group: • DKB Finance GmbH, Berlin Indirect 100.0 5,686 1,255 • DKB Grundbesitzvermittlung GmbH, Berlin Indirect 100.0 100 – • DKB Immobilien AG, Berlin Indirect 100.0 102,015 250 • DKB PROGES GmbH, Berlin Indirect 100.0 70 – 43 • DKB Wohnungsgesellschaft Berlin-Brandenburg mbH, Potsdam Indirect 100.0 2,208 – 1,643 • DKB Wohnungsgesellschaft Blankenhain GmbH & Co. KG, Gera Indirect 100.0 1,530 29 • DKB Wohnungsgesellschaft Mecklenburg-Vorpommern mbH, Schwerin Indirect 100.0 5,025 – • DKB Wohnungsgesellschaft Sachsen mbH, Döbeln Indirect 100.0 5,025 – • DKB Wohnungsgesellschaft Thüringen Lusan Brüte GmbH & Co. KG, Gera Indirect 100.0 3,493 24 • DKB Wohnungsgesellschaft Thüringen Lusan Zentrum GmbH & Co. KG, Gera Indirect 100.0 11,798 567 • DKB Wohnungsgesellschaft Thüringen mbH, Gera Indirect 94.0 55,480 1,497 • FMP Forderungsmanagement Potsdam GmbH, Potsdam Indirect 100.0 1,000 – • Gewo Gera GmbH & Co. KG, Berlin Indirect 100.0 25,831 406 • MVC Unternehmensbeteiligungsgesellschaft mbH, Berlin Indirect 100.0 3,616 – 1,820 • SKG BANK AG, Saarbrücken Indirect 100.0 81,519 – • Stadtwerke Cottbus GmbH, Cottbus Indirect 74.9 27,659 17,881 Direct and GBW AG, Munich indirect 93.5 375,860 22,116 Subsidiaries included in the GBW AG sub-group: • GBW Asset GmbH, Munich Indirect 100.0 1,272 242 • GBW Franken GmbH, Würzburg Indirect 73.6 29,619 6,839 • GBW Gebäudemanagement GmbH, Munich Indirect 100.0 1,424 594 • GBW Management GmbH, Munich Indirect 100.0 153 – • GBW Niederbayern und Oberpfalz GmbH, Regensburg Indirect 94.9 14,111 2,034 • GBW Oberbayern und Schwaben GmbH, Munich Indirect 89.0 14,521 – 1,095 • GBW Wohnungs GmbH, Munich Indirect 100.0 9,797 91 MKB Bank Zrt., H - Budapest Direct 89.9 505,127 – 341,626 Subsidiaries included in the MKB Bank Zrt. sub-group: • Exter-Bérlet Kft., H - Budapest Indirect 100.0 465 – 61 • Exter-Immo Zrt., H - Budapest Indirect 100.0 949 – 2,106 • MKB Befektetési Alapkezelõ Zrt., H - Budapest Indirect 100.0 397 568

BayernLB . 2010 Annual Report and Accounts ›› Financial statements Notes

Equity/ Type of fund Earnings/ share- Percentage assets net income Name and location of the investee holding held in EUR ’000 in EUR ’000 • MKB - Euroleasing Autóhitel Zrt., H - Budapest Indirect 47.9 23,031 892 • MKB - Euroleasing Autólízing Szolgáltató Zrt., H - Budapest Indirect 100.0 3,358 – 460 • MKB Romexterra Bank S.A., RO - Targu Mures Indirect 90.8 42,457 – 9,524 • MKB - Unionbank AD, BG - Sofia Indirect 94.0 68,168 2,566 • MKB Üzemeltetési Kft., H - Budapest Indirect 100.0 245,026 – 969 • Resideal Zrt., H - Budapest Indirect 100.0 1,976 – 259 • Romexterra Leasing S.A., RO - Bucharest Indirect 94.8 7,742 – 1,788 • S.C. Corporate Recovery Management S.R.L., RO - Bucharest Indirect 100.0 – 8,224 – 8,141

Real I.S. AG Gesellschaft für Immobilien Assetmanagement, 100|101 Munich Direct 100.0 43,470 –1 Special-purpose entities and special funds included in the consolidated financial statements Giro Balanced Funding Corporation, USA - Delaware 11 433 Giro Lion Funding Limited, GB - Jersey – 14 9 LBMUE I, Munich 141,578 4,917 LBMUE II, Munich 141,126 4,907 LBMUE III, Munich 163,081 5,396 LBMUE V, Munich 140,815 1,219 Joint ventures valued at equity included in the consolidated financial statements Joint ventures included in the MKB Bank Zrt. sub-group: • Ercorner Kft., H - Budapest Indirect 50.0 8,670 – 699 • MKB - Euroleasing Autópark Zrt., H - Budapest Indirect 50.0 2,137 618 • MKB - Euroleasing Zrt., H - Budapest Indirect 50.0 30,491 – 3,231 Affiliated companies valued at equity included in the consolidated financial statements KGAL GmbH & Co. KG, Grünwald Direct 27.0 97,648 3,684 Landesbank Saar, Saarbrücken Direct 49.9 757,576 – Affiliated companies included in the MKB Bank Zrt. sub-group: • Giro Elszámolásforgalmi Zrt., H - Budapest Indirect 22.2 22,543 8,466 • MKB Általános Biztosító Zrt., H - Budapest Indirect 37.5 5,037 – 2,462 • MKB Életbiztosító Zrt., H - Budapest Indirect 37.5 3,274 – 1,560 • Pannonhalmi Borház Kft., H - Pannonhalma Indirect 45.5 2,704 – 208 Subsidiaries not included in the consolidated financial statements ADEM Allgemeine Dienstleistungen für Engineering und Management GmbH, Karlsruhe Indirect 100.0 45 117 AMC Imoti EOOD, BG - Sofia Indirect 100.0 2 Asset Lease Beteiligungsgesellschaft mbH, Munich Direct 100.0 24 – Aufbaugesellschaft Bayern GmbH, Munich Indirect 100.0 2,910 – Bauland 3. Immobilien Verwaltungsgesellschaft mbH, Munich Indirect 100.0 39 – 2

BayernLB . 2010 Annual Report and Accounts Equity/ Type of fund Earnings/ share- Percentage assets net income Name and location of the investee holding held in EUR ’000 in EUR ’000 Bauland GmbH, Baulandbeschaffungs-, Erschließungs- und Wohnbaugesellschaft, Munich Indirect 94.5 – 10,106 – Bavaria Equity Solutions GmbH, Munich Direct 100.0 2,253 –1 Bavaria Immobilien-Beteiligungs-Gesellschaft mbH & Co. Objekt Fürth KG, Munich Indirect 100.0 – 7,133 509 Bavaria Immobilien-Beteiligungs-Gesellschaft mbH, Munich Indirect 100.0 26 1 Bayerische Landesbank Europa-Immobilien-Beteiligungs- GmbH, Munich Indirect 100.0 89 – Bayerische Landesbank Immobilien-Beteiligungs- Gesellschaft mbH & Co. KG, Munich Direct 100.0 16,071 337 Bayerische Landesbank Immobilien-Beteiligungs- Verwaltungsgesellschaft mbH, Munich Direct 100.0 40 2 Bayern Bankett Gastronomie GmbH, Munich Direct 100.0 626 –1 Bayern Card-Services GmbH - S-Finanzgruppe, Munich Direct 50.1 9,501 1,355 Bayern Corporate Services GmbH, Munich Direct 100.0 1,171 229 Bayern Facility Management GmbH, Munich Direct 51.0 2,457 – BayernFinanz Gesellschaft für Finanzmanagement und Beteiligungen mbH, Munich Direct 100.0 511 –1 Bayernfonds Australien 4 GmbH, Munich Indirect 100.0 25 – Bayernfonds Immobilien Concept GmbH, Munich Indirect 100.0 89 – 5 Direct and Bayernfonds Immobiliengesellschaft mbH, Munich indirect 100.0 9,784 1,102 Bayernfonds Kambera GmbH, Munich Indirect 100.0 25 – Bayernfonds Opalus GmbH, Munich Indirect 100.0 25 – Bayernfonds Solar1 GmbH & Co. KG, Oberhaching Indirect 100.0 6,009 – 678 BayernInvest Luxembourg S.A., L - Luxembourg Direct 100.0 1,392 69 BayernLB Mittelstandsfonds GmbH & Co. KG Unternehmensbeteiligungs KG, Munich Direct 100.0 2 BayernLB Private Equity GmbH, Munich Direct 100.0 28,662 – 4,820 BayernLB Private Equity Management GmbH, Munich Direct 100.0 549 49 BayTech Venture Capital Beratungs-GmbH, Munich Direct 100.0 3,369 481 BayTech Venture Capital GmbH & Co. KG, Munich Direct 50.1 10,197 – 4,616 Direct and BayTech Venture Capital II GmbH & Co. KG, Munich indirect 46.7 18,693 – 12,824 BayTech Venture Capital Verwaltungs-GmbH, Munich Direct 100.0 20 1 Berchtesgaden International Resort Betriebs GmbH, Munich Direct 100.0 12,868 –1 Berthier Participations SARL, F - Paris Direct 100.0 6,152 4,339 BF Services GmbH, Munich Indirect 100.0 201 2 BF - US Real Estate Inc., USA - Charlottesville, Virginia Indirect 100.0 211 97 BGFM Bayerische Gebäude- und Facilitymanagement AG & Co. KG, Munich Indirect 100.0 4 78 BGV IV Rotterdam 1 GmbH & Co. KG, Munich Indirect 100.0 2 BGV IV Verwaltungs GmbH, Munich Indirect 100.0 2 BLB-Beteiligungsgesellschaft Sigma mbH, Munich Direct 100.0 971 –1 BLB-VG22-Beteiligungsgesellschaft mbH, Munich Direct 100.0 5,273 – 66 Cottbuser Energieverwaltungsgesellschaft mbH, Cottbus Indirect 100.0 23 – CountryDesk Beteiligungs GmbH, Munich Direct 100.0 24 – 1 Degg`s Immobilienprojektentwicklung GmbH & Co. Einkaufspassage KG, Essen Indirect 99.1 2,789 – 964 DKB Hotelbetrieb Liebenberg GmbH & Co. KG, Liebenberg Indirect 100.0 1 – 699

BayernLB . 2010 Annual Report and Accounts ›› Financial statements Notes

Equity/ Type of fund Earnings/ share- Percentage assets net income Name and location of the investee holding held in EUR ’000 in EUR ’000 DKB Hotelbetrieb Liebenberg Verwaltungs GmbH, Liebenberg Indirect 100.0 21 – 4 DKB Immobilien Beteiligungs GmbH, Potsdam Indirect 100.0 1,819 101 DKB Immobilien Infrastruktur GmbH, Potsdam Indirect 100.0 24 – DKB Immobilien Service GmbH, Potsdam Indirect 100.0 487 – 513 DKB Immobilien Wohn-Invest GmbH, Potsdam Indirect 100.0 1,035 – DKB IT-Services GmbH, Potsdam Indirect 100.0 50 – DKB PROGES ZWEI GmbH, Berlin Indirect 100.0 861 – 11 DKB Service GmbH, Potsdam Indirect 100.0 50 – DKB Wohnen GmbH, Berlin Indirect 94.5 – 1,832 – DKB Wohnungsbau- und Stadtentwicklung GmbH, Berlin Indirect 100.0 2,500 – DKB Wohnungsgesellschaft Altenburg mbH, Gera Indirect 100.0 90 62 DKB Wohnungsgesellschaft Gera-Bieblach Ost mbH, Gera Indirect 100.0 293 – 61 DKB Wohnungsgesellschaft Gera-Debschwitz mbH, Gera Indirect 100.0 149 – 215 DKB Wohnungsgesellschaft Mecklenburg-Vorpommern 102|103 Alpha dritte mbH, Schwerin Indirect 100.0 26 1 DKB Wohnungsgesellschaft Mecklenburg-Vorpommern Alpha fünfzehnte mbH, Schwerin Indirect 100.0 26 1 DKB Wohnungsgesellschaft Mecklenburg-Vorpommern Alpha sechste mbH, Schwerin Indirect 100.0 26 1 DKB Wohnungsgesellschaft Mecklenburg-Vorpommern Alpha sechzehnte mbH, Schwerin Indirect 100.0 25 – DKB Wohnungsgesellschaft Nord-West GmbH & Co. KG, Berlin Indirect 100.0 1,668 143 DKB Wohnungsgesellschaft Sachsen Alpha erste mbH, Döbeln Indirect 100.0 24 – DKB Wohnungsgesellschaft Sachsen Alpha zweite mbH, Berlin Indirect 100.0 24 – DKB Wohnungsgesellschaft Sachsen-Anhalt Alpha erste mbH, Magdeburg Indirect 100.0 25 – DKB Wohnungsgesellschaft Sachsen-Anhalt Alpha zweite mbH, Magdeburg Indirect 100.0 25 – DKB Wohnungsgesellschaft Sachsen-Anhalt mbH, Halle/ Saale Indirect 100.0 525 – DKB Wohnungsgesellschaft Thüringen Alpha fünfte mbH, Gera Indirect 100.0 25 – DKB Wohnungsgesellschaft Thüringen Alpha sechste mbH, Gera Indirect 100.0 25 – DKB Wohnungsgesellschaft Thüringen Alpha siebte mbH, Gera Indirect 100.0 25 – DKB Wohnungsgesellschaft Thüringen Alpha vierte mbH, Gera Indirect 100.0 25 – DKB Wohnungsgesellschaft Thüringen Beteiligung mbH, Gera Indirect 100.0 29 4 DKB Wohnungsverwaltungsgesellschaft Nord-West GmbH, Berlin Indirect 100.0 34 9 Elektroenergieversorgung Cottbus GmbH, Cottbus Indirect 100.0 12,106 – Euro Ingatlan Center Kft., H - Budapest Indirect 100.0 947 2 Euroingatlan Kft., H - Budapest Indirect 60.0 – 1,557 – 1,938 Euro Park Házak Kft., H - Budapest Indirect 100.0 – 9 – 3 Extercom Vagyonkezelõ Kft., H - Budapest Indirect 100.0 – 142 – 331

BayernLB . 2010 Annual Report and Accounts Equity/ Type of fund Earnings/ share- Percentage assets net income Name and location of the investee holding held in EUR ’000 in EUR ’000 Exter-Reál Ingatlanforgalmazási Korlátolt Felelõsségü Társaság, H - Budapest Indirect 100.0 175 – 9 Fischer & Funke Gesellschaft für Personaldienst- leistungen mbH, Coburg Indirect 87.1 76 – FMP Erste Objektgesellschaft mbH, Potsdam Indirect 100.0 26 1 FMP Zweite Objektgesellschaft mbH, Potsdam Indirect 100.0 25 – Füred Service Üzemeltetési Kft., H - Balatonfüred Indirect 100.0 53 18 Gas-Versorgungsbetriebe Cottbus GmbH, Cottbus Indirect 63.0 5,615 – GbR Bauland GmbH Baulandbeschaffungs- Erschließungs- und Wohnbaugesellschaft, München + Areal Immobilien GmbH Grundstücksverwertungs Erding KG, Passau (Erding), Munich Indirect 94.5 – – 414 GbR Bauland GmbH Baulandbeschaffungs- Erschließungs- und Wohnbaugesellschaft, München + Bayernareal Immobilien GmbH & Co. Bauträger KG (partnership under civil law, Boschetsrieder Strasse), Munich Indirect 51.0 – – 8 GbR Bauland GmbH Baulandbeschaffungs- Erschließungs- und Wohnbaugesellschaft, München + Bayernareal Immobilien GmbH Grundstücksverwaltungs- KG, Passau (GbR München-Sendling), Munich Indirect 51.0 – – 599 GbR Bauland GmbH Baulandbeschaffungs- Erschließungs- und Wohnbaugesellschaft, München + Bayernareal Immobilien GmbH Grundstücksverwertungs-KG, Passau (Am Forstweg, Oberhaching), Munich Indirect 94.5 – – 189 GbR Olympisches Dorf, Potsdam Indirect 100.0 – – 208 GBW Regerhof GmbH, Munich Indirect 100.0 24 – GDF Gesellschaft für dentale Forschung und Innovationen GmbH, Rosbach Indirect 100.0 1,485 – German Centre for Industry and Trade Shanghai Co. Ltd., VRC - Shanghai, PRC Indirect 100.0 21,281 416 German Centre Limited, BVI - Tortola Direct 100.0 18,264 10 gewerbegrund Airport GmbH & Co. Hallbergmoos KG, Munich Indirect 100.0 3,430 – 2,811 gewerbegrund Bauträger GmbH & Co. Objekt IGG KG, Munich Indirect 100.0 – 14 Global Format GmbH & Co. KG, Munich Direct 52.4 775 – 99 Global Format Verwaltungsgesellschaft mbH, Munich Indirect 100.0 23 – 2 Grundstücksgesellschaft Potsdam GbR, Berlin Indirect 100.0 – – 112 Grundstücksgesellschaft Stralsund b.R., Berlin Indirect 100.0 – 300 Grundstücksgesellschaft Stralsund b.R. II, Berlin Indirect 100.0 2,741 327 Habitat Alpha Beteiligungs GmbH & Co. KG, Berlin Indirect 100.0 2 Habitat Beta Beteiligungs GmbH & Co. KG, Berlin Indirect 100.0 2 Habitat Delta Beteiligungs GmbH, Berlin Indirect 100.0 2 Habitat Gamma Beteiligungs GmbH & Co. KG, Berlin Indirect 100.0 2 Hausbau Dresden GmbH, Munich Indirect 100.0 32 – 82 HKW Heizkraftwerksgesellschaft Cottbus mbH, Cottbus Indirect 100.0 26 – Hörmannshofer Fassaden GmbH & Co. Halle KG, Halle/Saale Indirect 80.0 156 486 Hörmannshofer Fassaden GmbH & Co. Niederdorf KG, Niederdorf bei Chemnitz Indirect 80.0 156 65 Hörmannshofer Fassaden Süd GmbH & Co. KG, Marktoberdorf Indirect 100.0 144 4,441

BayernLB . 2010 Annual Report and Accounts ›› Financial statements Notes

Equity/ Type of fund Earnings/ share- Percentage assets net income Name and location of the investee holding held in EUR ’000 in EUR ’000 Hörmannshofer Unternehmensgruppe GmbH, Marktoberdorf Indirect 52.6 10,588 2,775 Hörmannshofer Verwaltungs GmbH, Pöttmes/Augsburg Indirect 100.0 53 15 Hotelbetriebsgesellschaft Zwickau GmbH, Zwickau Indirect 100.0 442 224 ISU Group GmbH, Karlsruhe Indirect 54.4 11,804 513 ISU Personaldienstleistungen GmbH, Karlsruhe Indirect 100.0 51 – JATRA Grundstücksgesellschaft mbh, Grünwald Indirect 94.9 1,386 – 6 KGE Kommunalgrund Grundstücksbeschaffungs- und Erschließungsgesellschaft mit beschränkter Haftung, Munich Indirect 75.0 619 184 Klostergarten Gatterburg GbR, Munich Indirect 99.0 – – Koch - Betontechnik GmbH & Co. KG, Pöttmes/Augsburg Indirect 100.0 30 63 Kun Street Kft., H - Budapest Indirect 100.0 1,501 328 LBG Liebenberger Betriebsgesellschaft mbH, Löwenberger

Land OT Liebenberg Indirect 100.0 22 – 104|105 LB Immobilienbewertungsgesellschaft mbH, Frankfurt/Main Direct 100.0 1,401 – 154 LBLux SICAV-FIS TR Global, L - Luxembourg Indirect 100.0 27 2,069 LB-RE S.A., L - Luxembourg Indirect 100.0 5,082 – Mediport Venture Fonds Zwei GmbH, Berlin Indirect 53.8 267 – 1,687 Medister Egészségügyi Beruházó és Üzemeltetõ Kft., H - Budapest Indirect 100.0 2 MKB Nyugdíjpénztárt és Egészségpénztárt Kiszolgáló Kft., H - Budapest Indirect 100.0 588 36 MKB Pénzügyi Zrt., H - Budapest Indirect 100.0 1,865 133 MKB Romexterra Broker de Asigurare SRL, RO - Bucharest Indirect 100.0 130 283 MKB Romexterra Fleet Management SRL, RO - Bucharest Indirect 100.0 176 – 19 MRG Maßnahmeträger München-Riem GmbH, Munich Indirect 100.0 462 – 162 North American Realty LLC, USA - New York Direct 100.0 4,859 65 Oberhachinger Bauland GmbH, Wohnbau- und Erschließungsgesellschaft, Munich Indirect 91.0 – 2,418 – 454 Park- und Gewerbehaus Bestensee GmbH, Bestensee Indirect 100.0 26 – PROGES DREI GmbH, Berlin Indirect 100.0 25 – 5 PROGES Oranienburger Strasse Gesellschaft mbH, Berlin Indirect 100.0 27 2 PROGES Sparingberg GmbH, Berlin Indirect 100.0 129 76 Rathenau-Passage Verwaltungs-Gesellschaft mbH, Bad Homburg Indirect 50.0 20 2 Rathenau Passage Verwaltungs-GmbH & Co. Grundstücks KG, Bad Homburg Indirect 50.0 – 11,051 – 715 Real I.S. Beteiligungs GmbH, Munich Indirect 100.0 22 1 Real I.S. Fund Management GmbH, Munich Indirect 100.0 10 2 Real I.S. Gesellschaft für Immobilienentwicklung mbH, Munich Indirect 100.0 1,055 – 89 Real I.S. Gesellschaft für Immobilien Entwicklung und Projektrealisierung mbH & Co. KG, Munich Indirect 100.0 1,162 566 Real I.S. Investment GmbH, Munich Indirect 100.0 – 185 – 210 Real I.S. Management SA, L - Luxembourg Indirect 100.0 118 28 Real I.S. Objekt Bruchsal Verwaltungsgesellschaft mbH, Oberhaching Indirect 100.0 14 – REAL I.S. Project GmbH, Munich Indirect 50.5 715 – 58 RSA Capak alma ve kesme Sistemlerim San. Ve. Tic. Ltd. Sti., TR - Izmit KOCAELI Indirect 100.0 – 64 – 6

BayernLB . 2010 Annual Report and Accounts Equity/ Type of fund Earnings/ share- Percentage assets net income Name and location of the investee holding held in EUR ’000 in EUR ’000 RSA Entgrat- u. Trenn-Systeme GmbH & Co. KG, Lüdenscheid Indirect 100.0 1,026 2,179 RSA Entgrat- u. Trenn-Systeme Verwaltungs-GmbH, Lüdenscheid Indirect 100.0 62 4 RSA Systémes Ebavurage et Tronconnage S.A.R.L., F - Sarreguemines Cedex Indirect 100.0 26 – 54 Schütz Dental GmbH, Rosbach Indirect 100.0 2,461 – Schütz Group GmbH & Co. KG, Rosbach Indirect 54.4 4,699 779 Schütz Group Verwaltungsgesellschaft mbH, Rosbach Indirect 100.0 39 3 SEPA Objekt Bruchsal GmbH & Co. KG, Oberhaching Indirect 100.0 150 – 9 STOP AND BUY HOLDING Kft., H - Budapest Indirect 100.0 – 14 – 23 Süd-Fassaden GmbH, Königsbrunn Indirect 100.0 24 – TEGES Grundstücks-Vermietungsgesellschaft mbH, Berlin Indirect 50.0 18 – TEGES Grundstücks-Vermietungsgesellschaft mbH & Co. Objekt Berlin KG, Berlin Indirect 47.0 – 2,824 60 WBL Holding GmbH, Laichingen Indirect 63.8 5,008 944 Werkzeugbau Laichingen GmbH, Laichingen Indirect 100.0 3,351 – Werkzeugbau Leipzig GmbH, Leipzig Indirect 100.0 1,033 377 WKP Beteiligungsgesellschaft mbH & Co. O-Tel KG, Berlin Indirect 94.9 – 1,781 1,820 Wohnungsgesellschaft Werderau mbH, Nuremberg Indirect 100.0 25 – Other joint ventures ABG Allgemeine Bauträger- und Gewerbeimmobilien gesellschaft & Co. Holding KG, Munich Indirect 50.0 8,000 5,684 ABG Allgemeine Bauträger- und Gewerbeimmobilien gesellschaft mbH, Munich Indirect 50.0 262 31 CommuniGate Kommunikations-Service GmbH, Passau Indirect 50.0 3,606 1,121 EDE Duna Kft., H - Budapest Indirect 50.0 – 612 – 343 Einkaufs-Center Györ Verwaltungs G.m.b.H., Hamburg Indirect 50.0 32 2 Fay & Real I.S. IE Regensburg GmbH & Co. KG, Oberhaching Indirect 50.0 89 – 11 Fay & Real I.S. IE Regensburg Verwaltungs GmbH, Oberhaching Indirect 50.0 23 – 2 GbR Baywobau Bauträger AG, München Aufbaugesellschaft Bayern GmbH (GbR Südtiroler Straße), Munich Indirect 50.0 – – 13 German Centre for Industry and Trade India Holding-GmbH, Munich Direct 50.0 111 – 2,520 mfi Projektbeteiligungsgesellschaft mbH, Essen Indirect 50.0 61 7 Mogyoróskert Kft., H - Budapest Indirect 50.0 11 – 2 MOM-Bajor Beruházó és Szolgáltató Korlátolt Felelösségü Társaság, H - Budapest Indirect 50.0 49 – 11 MOM-Park Lakásépitö Ingatlanforgalmazó és Beruházó Betéti Társaság, H - Budapest Indirect 49.9 – 348 1,432 MTI Holding GmbH, Bad Homburg Indirect 50.0 21 – MTI Main-Taunus Immobilien GmbH & Co. Holding KG, Bad Homburg Indirect 50.0 4,579 29 MTI Ost GmbH, Bad Homburg Indirect 50.0 21 – MTI Süd GmbH, Bad Homburg Indirect 50.0 21 – Objektgesellschaft Bad Rappenau GmbH & Co. KG, Stuttgart Indirect 50.0 2 Objektgesellschaft Bad Rappenau Verwaltungs-GmbH, Stuttgart Indirect 49.0 2 PWG - Bau Pfersee Wohn- und Gewerbebauträger GmbH & Co. KG, Munich Indirect 50.0 – 18,222 – 9

BayernLB . 2010 Annual Report and Accounts ›› Financial statements Notes

Equity/ Type of fund Earnings/ share- Percentage assets net income Name and location of the investee holding held in EUR ’000 in EUR ’000 PWG - Bau Pfersee Wohn- und Gewerbebauträger Verwaltungs - GmbH, Munich Indirect 50.0 8 – SEPA/Real I.S. Investorengemeinschaft Berlin-Tempelhof Verwaltungs-GmbH, Stuttgart Indirect 50.0 27 – SEPA/Real I.S. Objekt Bruchsal Rathausgalerie GmbH & Co. KG, Oberhaching Indirect 50.0 29 – 6 SEPA/Real I.S. Objekt Bruchsal Rathausgalerie Verwaltungs-GmbH, Oberhaching Indirect 50.0 12 1 SEPA/Real I.S. Objekt Solingen Verwaltungs-GmbH, Munich Indirect 50.0 31 3 SKAF Ingatlanforgalmazó és Befektetési Kft., H - Budapest Indirect 50.0 – 2,296 – 1,812 S-Karten-Service-Management GmbH - Saarbrücken - München, Munich Indirect 50.0 102 – Ten Towers GbR, Munich Indirect 50.0 121 9 Other affiliated companies

BAYERN CONSULT Unternehmensberatung GmbH, Munich Direct 40.0 789 46 106|107 Bayerngrund Grundstücksbeschaffungs- und -erschließungs-Gesellschaft mit beschränkter Haftung, Munich Direct 50.0 9,305 116 Bayern Mezzaninekapital GmbH & Co. KG - Unternehmensbeteiligungsgesellschaft, Munich Direct 25.5 32,808 893 Bayern Mezzaninekapital Verwaltungs GmbH, Munich Direct 49.0 36 3 BayTech Venture Capital Initiatoren GmbH & Co. KG, Munich Indirect 30.0 656 – 186 BioM Venture Capital GmbH & Co. Fonds KG, Martinsried Indirect 23.5 2,177 – 8 Film und Video Untertitelung Gerhard Lehmann AG, Potsdam Indirect 33.3 – 1,501 – 541 Garchinger Technologie- und Gründerzentrum GmbH, Garching Direct 20.0 89 20 Gemeinnützige Landkreiswohnungsbau Unterallgäu GmbH Memmingen, Memmingen Indirect 40.0 4,920 944 GESO Gesellschaft für Sensorik, Geotechnischen Umwelt- schutz und mathematische Modellierung mbH, Jena Indirect 43.1 – 303 2 G.I.E. Max Hymans, F - Paris Indirect 33.3 – 28,217 1,527 GZ-Verwaltungsgesellschaft für Transportmittel mbH i.L., Munich Indirect 50.0 26 – 1 IZB SOFT - Beteiligungs-GmbH, Munich Direct 25.1 35 – KGAL Verwaltungs-GmbH, Grünwald Direct 30.0 7,966 537 LBS-Paul Hupp-Vertriebs GmbH, Würzburg Direct 33.0 286 152 Liquid Air Lab GmbH, Stuttgart Indirect 32.3 1,216 – 992 LSL Bibliothekenservice AG, Leipzig Indirect 20.0 – 1 – 605 Mandala Internet, EDV Services GmbH, Braunschweig Indirect 20.0 890 112 Neue Novel Ferm Verwaltungs GmbH, Dettmannsdorf- Kölzow Indirect 49.0 27 2 Novel Ferm Brennerei Dettmannsdorf Besitz GmbH & Co. KG, Dettmannsdorf-Kölzow Indirect 49.0 – 5,934 – 2,747 RSU Rating Service Unit GmbH & Co. KG, Munich Direct 20.0 14,274 38 SAI Globinvest SA, RO - Cluj Napoca Indirect 20.0 2,539 362 SEPA/Real I.S. Investorengemeinschaft Berlin-Tempelhof GmbH & Co. KG, Stuttgart Indirect 49.9 24 6 SEPA/Real I.S. Objekt Solingen GmbH & Co. KG, Munich Indirect 49.9 436 – 155

BayernLB . 2010 Annual Report and Accounts Equity/ Type of fund Earnings/ share- Percentage assets net income Name and location of the investee holding held in EUR ’000 in EUR ’000 Other significant shareholdings of 20 % or more 560 Lexco L.P., USA - New York Indirect 25.0 3,054 3,166 Abacus Eight Limited, GBC - George Town, Grand Cayman Direct 48.5 7,614 5,379 Abacus Nine Limited, GBC - George Town, Grand Cayman Direct 48.5 7,625 5,390 Abacus Seven Limited, GBC - George Town, Grand Cayman Direct 48.5 4,158 1,923 Abacus Ten Limited, GBC - George Town, Grand Cayman Direct 43.9 5,208 2,953 ADS-click S.A., CH - Geneva Indirect 49.5 2,593 – 1,097 ae group AG i.I., Gerstungen Indirect 49.9 – 27,211 29,389 Aero Flight GmbH & Co. Luftverkehrs-KG, Oberursel Indirect 45.5 21,661 – 339 Aero Lloyd Erste Beteiligungsgesellschaft GmbH, Kelsterbach Indirect 100.0 24 – 1 Aero Lloyd Flugreisen GmbH & Co. Luftverkehrs-KG, Oberursel Indirect 66.3 – 266,942 – 229,564 Aero Lloyd Flugreisen GmbH, Oberursel Indirect 94.0 77 7 Aero Lloyd ReiseCenter GmbH, Oberursel Indirect 100.0 65 – 17 Bau-Partner GmbH, Halle/Saale Indirect 49.6 – – 1,475 BLB-Grundbesitz-Verwaltungsgesellschaft mbH i.L., Munich Direct 100.0 225 1 Corporate Computer Lease Limited, CCL.Limited, GB - Camberley, Surrey Indirect 33.3 3,951 86 DELTA Asigurari S.A. i.L., RO - Bucharest Indirect 35.1 11,268 – Fondations Capital I S.C.A., L - Luxembourg Direct 23.1 46,038 – 3,602 GBW Asset Beta GmbH, Munich Indirect 100.0 24 – 1 GBW Asset Gamma GmbH, Munich Indirect 100.0 24 – 1 German Centre (Shanghai) Limited i.L., VRC - Hong Kong Direct 100.0 4,667 – 7 gewerbegrund AIRPORT GmbH Beteiligungsgesellschaft, Munich Indirect 100.0 25 1 gewerbegrund Airport GmbH & Co. Schwaig KG, Munich Indirect 100.0 2,913 – 259 gewerbegrund Bauträger GmbH & Co. Objekt Magdeburg KG, Munich Indirect 100.0 3,344 194 gewerbegrund Bauträger GmbH & Co. Objekt Radeburg KG, Munich Indirect 100.0 2,167 – 66 gewerbegrund Projektentwicklungsgesellschaft (gpe) mbH, Munich Direct 100.0 11,595 –1 HEYM AG, Gleichamberg Indirect 38.0 – 746 – 96 Indexa Proinvest Immobiliaria, S.A., E - Las Rozas, Madrid Indirect 25.0 – 1,114 – 4,084 Iotronics GmbH i.L., Munich Indirect 40.0 71 – 150 Isarauenpark Freising Süd Grundbesitzgesellschaft mbH & Co. Entwicklungsgesellschaft KG, Munich Indirect 100.0 1,503 1,171 KADIMA Grundstücksgesellschaft mbH & Co. KG, Grünwald Indirect 50.0 – – 18 KSP Unternehmensverwaltungsgesellschaft mbH i.L., Munich Direct 43.0 135 – 12 MB Holding GmbH, Lüdenscheid Indirect 54.6 3,025 1,488 mfi Grundstück GmbH & Co. Harburg Arcaden KG, Essen Indirect 42.1 – 10,880 – 1,465 Münchner Grund Management GmbH i.L., Munich Indirect 50.0 1 – 4 Neumarkt-Galerie Immobilienverwaltungsgesellschaft mbH, Cologne Indirect 49.0 65 10 Pasing Arcaden GmbH & Co. KG, Essen Indirect 47.0 24,872 – 2,970 Pasing Arcaden Verwaltungs GmbH, Essen Indirect 49.0 46 6 Quescom S.A., F - Sophia Antipolis Cedex Indirect 22.1 1,264 – 1,697

BayernLB . 2010 Annual Report and Accounts ›› Financial statements Notes

Equity/ Type of fund Earnings/ share- Percentage assets net income Name and location of the investee holding held in EUR ’000 in EUR ’000 SIACON GmbH i.L., Frankfurt am Main Direct 50.0 22 – 2 SIAG Schaaf Industrie Aktiengesellschaft, Dernbach Indirect 23.4 29,939 4,276 Smaltit Anlagen Vermietungs GmbH & Co. Mobilien gesellschafts KG, Oberursel Indirect 100.0 – 105 – 3 Smaltit Anlagen-Vermietungs GmbH, Oberursel Indirect 100.0 14 – 1 Sophia Euro Lab S.A.S., F - Sophia Antipolis Cedex Indirect 32.3 5,860 – 1,588 SSC Sky Shop Catering GmbH & Co. KG, Kelsterbach Indirect 100.0 1,279 825 Stratos AG, Zwenkau Indirect 23.0 128 1,400 Tauberpark GmbH, Munich Indirect 100.0 19 – 5 Tauberpark Verwaltungs-GmbH, Munich Indirect 100.0 23 – 1 TRMF Gewerbeimmobilien GmbH, Essen Indirect 50.0 – 116 UDCast S.A., F - Valbonne Sophia Antipolis Cedex Indirect 34.3 321 – 1,045 Versorgungskasse I BayernLB Gesellschaft mit beschränkter Haftung, Munich Direct 100.0 36,942 – 2,820 Versorgungskasse II BayernLB Gesellschaft mit beschränkter 108|109 Haftung, Munich Direct 100.0 2 Yigg GmbH, Munich Indirect 30.5 – 14 222 Foreign currency amounts were converted to euros at the respective spot exchange rate at the end of the year. 1 A profit and loss transfer agreement has been concluded with the company. 2 Approved annual accounts are not available yet.

BayernLB . 2010 Annual Report and Accounts Investments in large limited companies (including banks) exceeding 5 percent of the voting rights

Name and location of the investee AKA Ausfuhrkredit GmbH, Frankfurt am Main Banque LBLux S.A., L - Luxembourg BayBG Bayerische Beteiligungsgesellschaft mbH, Munich Bayerische Garantiegesellschaft mbH für mittelständische Beteiligungen, Munich Bayern Card-Services GmbH - S-Finanzgruppe, Munich B+S Card Service GmbH, Frankfurt/Main Deutsche Factoring Bank Deutsche Factoring GmbH & Co., Bremen Deutsche Kreditbank Aktiengesellschaft, Berlin DKB Service GmbH, Potsdam GBW AG, Munich GEWOFAG Wohnen GmbH, Munich ISU Group GmbH, Karlsruhe Landesbank Saar, Saarbrücken MKB Bank Zrt., H - Budapest MKB - Euroleasing Autópark Zrt., H - Budapest MKB Romexterra Bank SA , RO - Targu Mures MKB Unionbank AD, BG - Sofia MKB Üzemeltetési Kft., H - Budapest Real I. S. AG Gesellschaft für Immobilien Assetmanagement, Munich SKG BANK AG, Saarbrücken

As at the balance sheet date, BayernLB was an unlimited partner in the following companies: • GbR Datenkonsortium OpRisk, Bonn • GbR der Altgesellschafter der Deutsche Leasing AG, Bad Homburg • GLB GmbH & Co. OHG, Frankfurt am Main • Groupement d’Intérêt Economique (GIE) Spring Rain, Paris

Letter of comfort

BayernLB provides its subsidiaries with significant benefits in the form of improved business terms and better financing conditions by issuing them and their creditors with letters of comfort. The Bank benefits in turn as this has a positive impact on the enterprise value of the subsidiaries, but BayernLB may also be negatively impacted.

Proportionate to the size of its equity interest and with the exception of cases of political risk, BayernLB ensures that the companies listed below are in a position to fulfil their contractual obligations: • Banque LBLux S.A., Luxembourg • Deutsche Kreditbank Aktiengesellschaft, Berlin

BayernLB . 2010 Annual Report and Accounts ›› Financial statements Notes

Expiry of the letter of comfort for Landesbank Saar on 21 June 2010

Under the share purchase and transfer agreement of 18/21 December 2009, BayernLB sold a 25.2 percent equity interest in the share capital of Landesbank Saar, Saarbrücken (SaarLB) to the Saarland.

When the transaction was completed on 21 June 2010, SaarLB ceased to be an affiliated company of BayernLB in accordance with Section 271 para. 2 HGB. On this date, the reasons for a letter of comfort from BayernLB for SaarLB ceased to apply.

As was already mentioned in the 2009 Annual Report and in the BayernLB press release on 21 June 2010, all liabilities of SaarLB created after 21 June 2010 are therefore no longer covered by BayernLB’s letter of comfort for SaarLB. As it did in the 2009 Annual Report and the BayernLB press release on 21 June 2010, BayernLB rescinds once again the letter of comfort in relation to all SaarLB’s liabilities created after 21 June 2010 and accordingly revokes once again all earlier declarations. 110|111

Revocation of the letter of comfort for LB(Swiss) Privatbank AG as at 21 December 2009

A letter of comfort issued by BayernLB was previously in effect for LB(Swiss) Privatbank AG, Zurich (LB(Swiss)). At the end of 21 December 2009, BayernLB transferred its equity interest in LB(Swiss) to Landesbank Hessen-Thüringen, Frankfurt/Main. Consequently, the letter of comfort for LB(Swiss) lapsed, and liabilities of LB(Swiss) created after the end of 21 December 2009 ceased to be covered by the letter of comfort and previous declarations have therefore been revoked.

Other financial obligations

Other financial obligations arise largely from rental, usage, service and maintenance agreements, and consulting and marketing agreements.

As at the balance sheet date, there were call commitments for capital not fully paid up of EUR 74 million and uncalled liabilities from limited partnership shares of EUR 31 million. More over, there were additional funding obligations amounting to EUR 36 million, as well as a directly enforceable guarantee for the funding obligation of shareholders of the Frankfurt am Main-based Liquiditäts-Konsortialbank GmbH, who are members of the German Savings Bank Association. Amounts due to affiliated companies totalled EUR 48 million.

As at the balance sheet date, BayernLB’s liability as a member of the guarantee fund of the Landesbanks and central giro institutions was EUR 310 million.

Under the terms of the statutes of the deposit insurance fund run by the Association of German Public-Law Banks (VÖB), BayernLB has undertaken to exempt the VÖB from any losses which may be suffered due to measures taken on behalf of private credit institutions in which it has a majority stake.

BayernLB . 2010 Annual Report and Accounts Transactions with related parties pursuant to Section 285 No. 21 HGB

BayernLB maintains commercial relationships with related parties. Related companies are primarily subsidiaries, joint ventures, associated companies and the Free State of Bavaria (indirect holding of 94 percent in BayernLB). Related persons include the members of BayernLB’s Board of Manage- ment and Board of Administration as well as close members of their families.

A guarantee agreement was concluded between BayernLB and the Free State of Bavaria covering actual losses in the ABS portfolio above a first loss of EUR 1.2 billion. The guarantee covers a maximum amount of EUR 4.8 billion. Under the terms of the agreement, the Free State of Bavaria hedges as a protection seller BayernLB’s ABS portfolio in return for a premium. The amount payable by BayernLB to the Free State of Bavaria in 2010 for this protection is EUR 24 million. BayernLB and the Free State of Bavaria are currently in negotiations with the EU Commission on the guarantee premium, which is highly likely to increase significantly.

The other transactions with related parties were concluded at standard market terms and conditions.

BayernLB . 2010 Annual Report and Accounts ›› Financial statements Notes

Administrative bodies

Board of Administration

Georg Fahrenschon Professor Dr. Georg Crezelius Chairman Professor State Minister University of Bamberg Bavarian State Ministry of Finance Bamberg Munich Dr. Dr. Axel Diekmann Alexander Mettenheimer Shareholder of since 1 August 2010 Verlagsgruppe Passau GmbH First Deputy Chairman Passau since 16 September 2010 Former banker Joachim Herrmann Munich State Minister 112|113 Bavarian State Ministry of the Interior Gerd Haeusler Munich until 31 March 2010 First Deputy Chairman Diethard Irrgang until 31 March 2010 Chairman of the General Staff Council Director BayernLB RHJ International Munich Zurich Dr. Klaus von Lindeiner-Wildau Walter Strohmaier Member of the Executive Board (retired) since 1 August 2010 Wacker Chemie GmbH Second Deputy Chairman Independent Consultant since 16 September 2010 Munich Chairman of the Board of Directors Sparkasse Niederbayern-Mitte Hans Schaidinger Straubing Lord Mayor Regensburg Siegmund Schiminski until 30 June 2010 Klaus Weigert Second Deputy Chairman until 14 January 2010 until 30 June 2010 Deputy Secretary Chairman of the Board of Directors Bavarian State Ministry of Finance Sparkasse Bayreuth Munich Bayreuth Martin Zeil Dr. Michael Bauer State Minister since 15 January 2010 Bavarian State Ministry of Economic Affairs, Deputy Secretary Infrastructure, Transport and Technology Bavarian State Ministry of Finance Munich Munich

BayernLB . 2010 Annual Report and Accounts Board of Management (including allocation of responsibilities from 1 December 2010)

Gerd Haeusler Marcus Kramer since 15 April 2010 since 1 May 2010 Chief Executive Officer Risk Office Central Area since 15 April 2010 Group Compliance Corporate Center Central Area (excluding Group Compliance) Stephan Winkelmeier since 1 July 2010 Stefan Ermisch Restructuring Unit Central Area Deputy Chief Executive Officer Eastern Europe segment Interim Chief Executive Officer until 14 April 2010 Nils Niermann Financial Office Central Area since 1 December 2010 IT & Operations Central Area Markets Business Area

Dr. Edgar Zoller Dr. Ralph Schmidt Real Estate, Public Sector & until 31 March 2010 Savings Banks (Savings Banks Central Bank) Business Area Stefan W. Ropers Bayerische Landesbodenkreditanstalt1 until 25 October 2010 Bayerische Landesbausparkasse1

Jan-Christian Dreesen Mittelstand & Retail Customers Business Area Corporates Business Area

1 Dependent institution of the Bank.

BayernLB . 2010 Annual Report and Accounts ›› Financial statements Notes

Remuneration of the administrative bodies

EUR ’000 2010 2010 2009 2009 Total remuneration for the financial year: Members of the Board of Management 3,248 4,151 • CEO 356 740 – Fixed salary 356 740 – Variable compensation (incl. compensation for previous years) – – • Deputy CEOs (combined) 500 701 – Fixed salary 500 701 – Variable compensation – – • Full members of the Board of Management 2,117 2,515 – Fixed salary 2,117 2,515 – Variable compensation – – • Ancillary remuneration (non-cash compensation) 276 195

Members of the Board of Administration 323 335 114|115 Former members of the Board of Manage- ment and their surviving dependants 5,734 9,246 Pension provisions established for former members of the Board of Management and their surviving dependants 56,434 53,759

With effect from 1 May 2009, the annual fixed salaries of the members of the Board of Manage- ment were reduced to EUR 500,000 in accordance with the Financial Market Stabilisation Act and Financial Market Stabilisation Fund Ordinance. The remunerations shown in the table are for full year 2010.

Loans to the administrative bodies

EUR ’000 2010 2009 Total amount of advances, loans and guarantees granted to members of the Board of Management and the Board of Administration: Members of the Board of Management 92 240 Members of the Board of Administration 1,285 293

BayernLB . 2010 Annual Report and Accounts Mandates held by legal representatives or by other employees1

Mandates held in supervisory bodies constituted under German law for major Name incorporated companies (including all credit institutions)

Board of Management Gerd Haeusler DekaBank Deutsche Girozentrale, Frankfurt am Main Deutsche Kreditbank Aktiengesellschaft, Berlin Kleinwort Benson Group Limited, GB - London Liquiditäts-Konsortialbank GmbH, Frankfurt am Main MKB Bank Zrt., H - Budapest Stefan Ermisch Banque LBLux S.A., L - Luxembourg Deutsche Kreditbank Aktiengesellschaft, Berlin GBW AG, Munich MKB Bank Zrt., H - Budapest Dr. Edgar Zoller Deutsche Kreditbank Aktiengesellschaft, Berlin GBW AG, Munich Real I.S. AG Gesellschaft für Immobilien Assetmanagement, Munich Jan-Christian Dreesen Banque LBLux S.A., L - Luxembourg Deutsche Factoring Bank Deutsche Factoring GmbH & Co., Bremen Deutsche Kreditbank Aktiengesellschaft, Berlin Landesbank Saar, Saarbrücken Marcus Kramer Banque LBLux S.A., L - Luxembourg Deutsche Kreditbank Aktiengesellschaft, Berlin Landesbank Saar, Saarbrücken MKB Bank Zrt., H - Budapest Stephan Winkelmeier Deutsche Kreditbank Aktiengesellschaft, Berlin MKB Bank Zrt., H - Budapest Nils Niermann Banque LBLux S.A., L - Luxembourg

Employees Dr. Winfried Freygang Landesbank Saar, Saarbrücken Dr. Detlev Gröne Banque LBLux S.A., L - Luxembourg Diethard Irrgang BayernLB, Munich Georg Jewgrafow GBW AG, Munich Real I.S. AG Gesellschaft für Immobilien Assetmanagement, Munich Dr. Sebastian Klein Fürstlich Castell’sche Bank, Credit Casse AG, Würzburg Roland Michaud MKB Bank Zrt., H - Budapest

1 This information is valid as at 31 December 2010.

BayernLB . 2010 Annual Report and Accounts ›› Financial statements Notes

External auditors’ fees

EUR ’000 2010 2009 Fees recorded as expenses in the financial year for • the financial statements audit 5,631 7,510 • other certification services 787 1,532 • tax consultancy services 108 150 • other services 1,587 1,523 Total 8,114 10,715

Number of employees (annual average)

2010 2009 Female 2,013 2,224 Male 2,118 2,309 116|117 Total 4,131 4,533

The total includes 847 (2009: 930) part-time employees, whose numbers correspond to 540 (2009: 587) full-time equivalents. The 69 (2009: 95) trainees and students on a vocationally integrated course at a vocational academy are not included.

BayernLB . 2010 Annual Report and Accounts Responsibility statement by the Board of Management

To the best of our knowledge, and in accordance with the applicable reporting principles for the preparation of the annual financial statements, the Bank’s financial statements give a true and fair view of the net assets, financial position and results of operations of Bayerische Landesbank, Munich, and the management report includes a fair review of the development and performance of the business and the position of Bayerische Landesbank, together with a description of the principal opportunities and risks associated with the expected performance of Bayerische Landes- bank.

Munich, 29 March 2011

Bayerische Landesbank The Board of Management

Gerd Haeusler Stefan Ermisch

Dr. Edgar Zoller Jan-Christian Dreesen Marcus Kramer

Stephan Winkelmeier Nils Niermann

BayernLB . 2010 Annual Report and Accounts ›› Financial statements Responsibility statement by the Board of Management · Auditor’s Report

Auditor’s Report

We have audited the annual financial statements, comprising the balance sheet, the income statement and the notes to the financial statements, together with the bookkeeping system, and the management report of Bayerische Landesbank, Anstalt des öffentlichen Rechts, München (BayernLB), for the business year from January 1 to December 31, 2010. The maintenance of the books and records and the preparation of the annual financial statements and management report in accordance with German commercial law and supplementary provisions of the Bayerische Landesbank Act (“Gesetz über die Bayerische Landesbank”) and the articles of incorporation are the responsibility of the Company`s Board of Managing Directors. Our responsibility is to express an opinion on the annual financial statements, together with the bookkeeping system, and the management report based on our audit.

We conducted our audit of the annual financial statements in accordance with § (Article) 317 HGB (“Handelsgesetzbuch”: “German Commercial Code”) and German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer (Institute of Public Auditors in Germany) (IDW). Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation of the net assets, financial 118|119 position and results of operations in the annual financial statements in accordance with (German) principles of proper accounting and in the management report are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the Company and expectations as to possible misstatements are taken into account in the determina- tion of audit procedures. The effectiveness of the accounting-related internal control system and the evidence supporting the disclosures in the books and records, the annual financial statements and the management report are examined primarily on a test basis within the framework of the audit. The audit includes assessing the accounting principles used and significant estimates made by BayernLB Board of Managing Directors, as well as evaluating the overall presentation of the annual financial statements and management report. We believe that our audit provides a reasonable basis for our opinion.

Our audit has not led to any reservations.

In our opinion based on the findings of our audit, the annual financial statements comply with the legal requirements and supplementary provisions of the Bayerische Landesbank Act and the articles of incorporation and give a true and fair view of the net assets, financial position and results of operations of the Company in accordance with (German) principles of proper account ing. The management report is consistent with the annual financial statements and as a whole provides a suitable view of the Company’s position and suitably presents the opportunities and risks of future development.

Munich, March 29, 2011

PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft

Burkhard Eckes Eberhard Feil Wirtschaftsprüfer Wirtschaftsprüfer (German Public Auditor) (German Public Auditor)

BayernLB . 2010 Annual Report and Accounts 4. Committees and advisory boards

BayernLB . 2010 Annual Report and Accounts ›› Committees and advisory boards 120|121 122 General Meeting 123 Board of Administration 124 Audit Committee 124 Risk Committee 125 Trustees 125 Savings Bank Advisory Council 126 Economic Advisory Council

BayernLB . 2010 Annual Report and Accounts General Meeting

Free State of Bavaria Association of Bavarian Savings Banks

Harald Hübner Theo Zellner Principal since 24 May 2010 since 7 May 2010 Principal First Deputy Principal since 24 May 2010 until 6 May 2010 President of the Association of Under Secretary Bavarian Savings Banks Bavarian State Ministry of Finance Munich Munich Dr. Siegfried Naser Dr. Michael Bauer until 28 February 2010 until 6 May 2010 Principal Principal until 28 February 2010 in his until 6 May 2010 function as Executive President of Deputy Secretary the Association of Bavarian Savings Banks Bavarian State Ministry of Finance Munich Munich Dr. Ivo Holzinger Frieder Jooß First Deputy Principal First Deputy Principal Lord Mayor since 7 May 2010 Memmingen Assistant Secretary Bavarian State Ministry of Finance Walter Pache Munich since 8 November 2010 Second Deputy Principal Dominik Kazmaier since 8 November 2010 until 6 May 2010 Chairman of the Board of Directors Second Deputy Principal Sparkasse Günzburg-Krumbach until 6 May 2010 Senior government official Walter Strohmaier Bavarian State Ministry of Finance until 7 November 2010 Munich Second Deputy Principal until 7 November 2010 Chairman of the Board of Directors Sparkasse Niederbayern-Mitte Straubing

The General Meeting is chaired by the Chairman of the Board of Administration.

BayernLB . 2010 Annual Report and Accounts ›› Committees and advisory boards General Meeting · Board of Administration

Board of Administration

Georg Fahrenschon Professor Dr. Georg Crezelius Chairman Professor State Minister University of Bamberg Bavarian State Ministry of Finance Bamberg Munich Dr. Dr. Axel Diekmann Alexander Mettenheimer Partner of the Verlagsgruppe Passau GmbH since 1 August 2010 Passau First Deputy Principal since 16 September 2010 Joachim Herrmann Former banker State Minister Munich Bavarian State Ministry of the Interior Munich Gerd Haeusler Diethard Irrgang until 31 March 2010 122|123 First Deputy Chairman Chairman of the General Staff Council until 31 March 2010 BayernLB Director Munich RHJ International Zurich Dr. Klaus von Lindeiner-Wildau Member of the Executive Board (retired) Walter Strohmaier Wacker Chemie GmbH since 1 August 2010 Independent Consultant Second Deputy Chairman Munich since 16 September 2010 Chairman of the Board of Directors Hans Schaidinger Sparkasse Niederbayern-Mitte Lord Mayor Straubing Regensburg

Siegmund Schiminski Klaus Weigert until 30 June 2010 until 14 January 2010 Second Deputy Chairman Deputy Secretary until 30 June 2010 Bavarian State Ministry of Finance Chairman of the Board of Directors Munich Sparkasse Bayreuth Bayreuth Martin Zeil State Minister Dr. Michael Bauer Bavarian State Ministry of Economic Affairs, since 15 January 2010 Infrastructure, Transport and Technology Deputy Secretary Munich Bavarian State Ministry of Finance Munich

BayernLB . 2010 Annual Report and Accounts Audit Committee

Dr. Klaus von Lindeiner-Wildau Diethard Irrgang Chairman Chairman of the General Staff Council Member of the Executive Board (retired) BayernLB Wacker Chemie GmbH Munich Independent Consultant Munich Siegmund Schiminski until 30 June 2010 Professor Dr. Georg Crezelius Chairman of the Board of Directors Deputy Chairman Sparkasse Bayreuth since 25 November 2010 Bayreuth Professor University of Bamberg Walter Strohmaier Bamberg since 16 September 2010 Chairman of the Board of Directors Joachim Herrmann Sparkasse Niederbayern-Mitte State Minister Straubing Bavarian State Ministry of the Interior Munich

Risk Committee (constituted on 20 October 2010)

Alexander Mettenheimer Hans Schaidinger Chairman Lord Mayor Former banker Regensburg

Dr. Dr. Axel Diekmann Martin Zeil Deputy Chairman State Minister since 25 November 2010 Bavarian State Ministry of Economic Affairs, Partner of Verlagsgruppe Passau GmbH Infrastructure, Transport and Technology Passau Munich

Dr. Michael Bauer Deputy Secretary Bavarian State Ministry of Finance Munich

BayernLB . 2010 Annual Report and Accounts ›› Committees and advisory boards Audit Committee · Risk Committee · Trustees · Savings Bank Advisory Council

Trustees

Herbert Scheidel Second Deputy since 1 January 2009 Klaus Puhr-Westerheide Vice President of the State Office for Taxes since 1 July 2009 (retired) Senior Assistant Secretary (retired)

First Deputy Norbert Schulz since 1 November 1991 Senior Assistant Secretary (retired)

Savings Bank Advisory Council 124|125

Renate Braun Hans Schmittner Savings Bank Director Savings Bank Director Chairwoman of the Board of Directors Member of the Board of Directors Sparkasse Passau Sparkasse Miltenberg-Obernburg Passau Miltenberg

Dr. Rudolf Gingele Hans Wölfel Savings Bank Director Savings Bank Director Member of the Board of Directors Chairman of the Board of Directors Sparkasse Regensburg Sparkasse Fürth Regensburg Fürth

Anton Osterauer Dr. Klaus-Jürgen Scherr Savings Bank Director Savings Bank Director Chairman of the Board of Directors Chairman of the Board of Directors Sparkasse Dachau Sparkasse Kulmbach-Kronach Dachau Kulmbach

Walter Pache Professor Rudolf Faltermeier Savings Bank Director Vice President of the Association of Chairman of the Board of Directors Bavarian Savings Banks Sparkasse Günzburg-Krumbach Munich Günzburg

Johann Reiter Savings Bank Director Chairman of the Board of Directors Sparkasse Landsberg-Dießen Landsberg

BayernLB . 2010 Annual Report and Accounts Economic Advisory Council

Willi Berchtold Stephan Gemkow until 30 September 2010 until 30 April 2010 Member of the Board of Management Member of the Executive Board ZF Friedrichshafen AG Deutsche Lufthansa AG Friedrichshafen Cologne

Dr. Manfred Bode Dipl.-Ing. Peter Hamberger Managing Partner Managing Partner Wegmann & Co Hamberger Industriewerke GmbH Unternehmens-Holding KG Rosenheim Munich Dr.-Ing. E.h. Martin Herrenknecht Dr. Dr. Axel Diekmann Chairman of the Board of Directors Partner of Verlagsgruppe Passau Herrenknecht AG Passau Schwanau-Allmannsweier

Klaus Dittrich Erwin Horak since 1 February 2010 President Chairman of the Management Staatliche Lotterieverwaltung Messe München GmbH Munich Munich Dr. Dirk Ippen Dr. Georg Fahrenschon Managing Director State Minister Münchener Zeitungs-Verlag GmbH & Co. KG Bavarian State Ministry of Finance Munich Munich (Curator) Hanswilli Jenke Managing Director Klaus Peter Franzl Haslberger Finanzdienstleistungs- und Canon Beteiligungs GmbH Archepiscopal Financial Director Freising Archdiocese Munich and Freising Archepiscopal Diocesan Authorities Dr. Hermann Jung Financial Department Member of the Group Board of Directors Munich Voith AG Heidenheim Werner Frischholz Member of the Board of Directors Dr. Michael Kerkloh KRONES AG Chief Executive Officer Neutraubling Flughafen München GmbH Munich

BayernLB . 2010 Annual Report and Accounts ›› Committees and advisory boards Economic Advisory Council

Dr.-Ing. Martin Komischke Prof. Dr. Matthias Ottmann Chairman of the Group’s Management since 1 December 2010 HOERBIGER HOLDING AG Managing Partner Munich Ottmann GmbH & Co. Südhausbau KG Munich Dipl.-Kfm. Xaver Kroner Director Rainer Otto Verband bayerischer Wohnungs- Managing Director unternehmen e.V. Wirtgen Beteiligungs GmbH Munich Windhagen

Arnulf Lode Lothar Panzer Vice President Chairman of the Board of Directors ADAC Allgemeiner Deutscher Bayerische Versorgungskammer Munich

Automobil-Club e. V. 126|127 Munich Dr. Helmut Platzer Frank H. Lutz Chairman of the Board of Directors since 1 April 2010 AOK Bayern – Die Gesundheitskasse Member of the Board of Directors Munich MAN SE Munich Dr. Wolfgang Plischke Member of the Board of Directors Klaus Lutz Bayer AG Chairman of the Board of Directors Leverkusen BayWa AG Munich Prof. Dr. Klaus Rauscher Berlin Prof. Dr. Klaus-Dieter Maubach Chairman of the Board of Directors Heinz-Reiner Reiff E.ON Energie AG until 31 October 2010 Munich Managing Director Stahlgruber Otto Gruber GmbH & Co. KG Alexander Mettenheimer Poing since 1 November 2010 Munich Angelique Renkhoff-Mücke Chairwoman of the Board of Directors Dr. Klaus N. Naeve WAREMA Renkhoff Holding AG Chairman of the Board of Directors Marktheidenfeld Schörghuber Stiftung & Co. Holding KG Munich

BayernLB . 2010 Annual Report and Accounts Andreas Renschler Manfred F. R. Schmidt Member of the Board of Directors until 30 June 2010 Daimler AG Chairman of the Board of Directors Stuttgart Stuttgarter Lebensversicherung a. G. Stuttgart Hans Peter Ring Chief Financial Officer Dr. Jörg Schneider EADS N.V. Member of the Board of Directors Ottobrunn Münchener Rückversicherungs-Gesellschaft Munich Randolf Rodenstock President Michael Schneider Vereinigung der Bayerischen Chairman of the Board of Directors Wirtschaft e.V. LfA Förderbank Bayern Munich Munich

Dr. Christian Rödl Dipl.- Kfm. Dieter Schön Managing Partner Managing Director Rödl & Partner Schön-Klinik Verwaltung GmbH Nuremberg Prien

Prof. Dr. Bernd Rudolph Friedrich Schubring-Giese Institute of Capital Market Research Chairman of the Board of Directors and Financing Versicherungskammer Bayern Ludwig-Maximilians-Universität München Munich Munich Dr.-Ing. Dieter Soltmann Maria-Elisabeth Schaeffler until 31 January 2010 Partner Honorary President INA-HOLDING SCHAEFFLER KG Chamber of Industry and Commerce Herzogenaurach for Munich and Upper Bavaria Munich Dipl.-Kfm. Peter Scherkamp General Manager Prof. Dr. Manfred Steiner Wittelsbacher Ausgleichsfonds until 31 October 2010 Munich Professor for Business Management, Finance and Banking at the Siegmund Schiminski University of Augsburg Chairman of the Board of Directors Augsburg Sparkasse Bayreuth Bayreuth

BayernLB . 2010 Annual Report and Accounts ›› Committees and advisory boards Economic Advisory Council

Axel Strotbek Alexander Wiegand Member of the Board of Directors Managing Partner AUDI AG WIKA Alexander Wiegand GmbH & Co. KG Ingolstadt Klingenberg

Christoph Thomas Dr. Lorenz Zwingmann Managing Partner since 1 April 2010 HAMA GmbH & Co. KG Member of the Board of Directors Monheim Knorr-Bremse AG Munich Dr. Wolfgang Weiler Spokesman of the Board of Directors HUK-Coburg Coburg 128|129

BayernLB . 2010 Annual Report and Accounts 5. Locations and addresses

BayernLB . 2010 Annual Report and Accounts ›› Locations and addresses 130|131

BayernLB . 2010 Annual Report and Accounts Locations and addresses

Germany LBS Bayerische Landesbausparkasse Head Office: Munich Arnulfstrasse 50 BayernLB 80335 Munich Brienner Strasse 18 Tel +49 1803 114477* 80333 Munich Fax +49 89 2171-47000 Tel +49 89 2171-01 [email protected] Fax +49 89 2171-23579 www.lbs-bayern.de SWIFT BIC: BYLA DE MM [email protected] 14 sales offices of LBS Bayern www.bayernlb.de and 111 advisory centres in Bavaria

Nuremberg BayernLB Foreign entities/branches Lorenzer Platz 27 90402 Nuremberg London Tel +49 911 2359-0 BayernLB Fax +49 911 2359-212 Bavaria House SWIFT BIC: BYLA DE MM 77 13/14 Appold Street [email protected] London EC2A 2NB www.bayernlb.de United Kingdom Tel +44 20 72 47 00 56 Düsseldorf Fax +44 20 79 55 51 73 BayernLB SWIFT BIC: BYLA GB 22 Cecilienpalais [email protected] Cecilienallee 10 40474 Düsseldorf Luxembourg Tel +49 211 92966-0 BayernLB Fax +49 211 92966-190 3, rue Jean Monnet www.bayernlb.de 2180 Luxembourg Luxembourg BayernLabo Tel +352 43 3122-1 Brienner Strasse 22 Fax +352 43 3122-4599 80333 Munich SWIFT BIC: BYLA LU LB Tel +49 89 2171-08 [email protected] Fax +49 89 2171-28015 [email protected] Milan www.bayernlabo.de BayernLB Via Cordusio, 2 20123 Milano Italy Tel +39 02 86 39 01 Fax +39 02 86 42 16

* EUR 0.09/min. from German fixed-line phones SWIFT BIC: BYLA IT MM max. EUR 0.42/min. from German mobile phones [email protected]

BayernLB . 2010 Annual Report and Accounts ›› Locations and addresses

New York Subsidiaries BayernLB 560 Lexington Avenue, 22nd Floor Banque LBLux New York, N.Y. 10022 3, rue Jean Monnet USA 2180 Luxembourg Tel +1 212 3 10 -9800 Luxembourg Fax +1 212 3 10 -9822 Tel +352 42 434-1 SWIFT BIC: BYLA US 33 Fax +352 42 434-5099 SWIFT BIC: BYLA LU LL Paris [email protected] BayernLB www.lblux.lu Succursale de Paris 203, rue du Faubourg Saint-Honoré Deutsche Kreditbank 75380 Paris Cedex 08 Aktiengesellschaft Taubenstraße 7–9 France 132|133 Tel +33 1 44 21 14 00 10117 Berlin Fax +33 1 44 21 14 44 Germany Tel +49 1803 120 300* SWIFT BIC: BYLADEM 1001 Representative offices [email protected] www.dkb.de Moscow BayernLB MKB Bank Zrt. CJSC Legion Development Váci útcá 38 Bolshaya Ordynka 40, Building 4 1056 Budapest Moscow 119017 Hungary Russia Tel +36 1 327-8600 Tel +7 495 544 54 33 Fax +36 1 327-8700 Fax +7 495 544 54 34 SWIFT BIC: MKKB HU HB [email protected] [email protected] www.mkb.hu

* EUR 0.09/min. from German fixed-line phones max. EUR 0.42/min. from German mobile phones

BayernLB . 2010 Annual Report and Accounts BayernLB 2010 Annual Report and Accounts

Publisher Bayerische Landesbank Brienner Strasse 18 80333 Munich, Germany Tel: +49 89 2171-27738 Fax: +49 89 2171-627738 Reuters Dealing BLAM, BLAS, BLAX BIC/SWIFT code: BYLA DE MM [email protected] www.bayernlb.de

Text/editorial staff/production BayernLB Corporate Center Central Area Marketing & Internal Communication Department

Concept and layout dassel & schumacher werbeagentur gmbh, Munich

Printed by Lipp GmbH, Graphische Betriebe, Munich

Closing date for submissions: 29 April 2011

The Annual Report is printed on environmentally compatible elemental chlorine-free bleached paper.

The CO2 emissions which resulted from paper consumption at BayernLB in 2010 have been offset by the purchase and invalidation of emission certificates from a certified climate protection project.

The Annual Report can be downloaded as a pdf file from www.ar10.bayernlb.com. It is also available in German.

BayernLB . 2010 Annual Report and Accounts Sparkassen-Finanzgruppe in Bavaria

Sparkassen-Finanzgruppe Market leader in Bavaria

• Aggregate total assets (bank business): EUR 489 billion • Aggregate regulatory capital (excl. BayernLB): EUR 15.0 billion • Aggregate premium volume (insurance business): EUR 7.1 billion • Staff: Approx. 65,000

BayernLB 73 savings banks Versicherungskammer Bayern

Consolidated total assets: Total assets: EUR 171 billion Premium volume: EUR 7.1 billion EUR 316.4 billion Staff: 45,831 Staff: 8,613* Staff: • Branches: 2,465 Investment portfolio: EUR 37.7 billion Bank: 4,083 • Self-service branches: 358 Group: 10,853 • Advisory centres: 471 Germany’s largest public-sector insurance provider Customer loans: EUR 102 billion Customer deposits: EUR 133 billion Market leader in Bavaria and the Palatinate Market share Bayerische Landesbausparkasse • Approx. 40% of SMEs Entities within the • Two-thirds of trade businesses Versicherungskammer Bayern Group Portfolio of 2.1 million home loan • 50% of company start-ups (VKB) savings contracts with a volume • Composite insurers Sparkassen-Immobilien of EUR 57.3 billion • Life insurers Vermittlungs GmbH & Co. KG • Health insurers Volume of business brokered: Bayerische Landesbodenkreditanstalt • Re-insurers EUR 1.63 billion

Lending volume (proprietary and DekaBank fiduciary business): EUR 20.5 billion** Share of Bavarian savings banks State-subsidised business (number of organisation incl. BayernLB share: 9.3 % apartments and residences): 10,506** Consolidated total assets: EUR 137 billion*** BayernLB Group companies include Landesbank Berlin • Deutsche Kreditbank AG, Berlin Share of Bavarian savings banks • Banque LBLux S. A., Luxembourg organisation incl. VKB share: 13.6 % • MKB Bank Zrt., Budapest as well as many other subsidiaries Deutsche Leasing which offer special services to savings Share of Bavarian savings banks: 12.49 % banks New business volume: EUR 7.8 billion

Sparkassenverband Bayern

• Association members: 73 Bavarian savings banks and their owners • (Indirect) owner of Versicherungskammer Bayern • (Indirect) owner of BayernLB together with the Free State of Bavaria

* Incl. external sales force ** Preliminary results *** As at: 30 September 2010 Bayerische Landesbank Brienner Strasse 18 80333 Munich Germany www.bayernlb.de