The Specialist in International Transport Finance

The specialist in international transport finance

GROUP ANNUAL REPORT 2017 DVB in key figures at a glance

€ mn 2017 2016 % Earnings data Net interest income 174.8 209.0 –16.4 Allowance for credit losses –727.9 –381.4 90.8 Net interest income after allowance for credit losses –553.1 –172.4 – Net fee and commission income 92.7 119.2 –22.2 Results from investments in companies accounted for using the equity method –11.5 9.6 – Net other operating income/expenses –77.8 99.6 – Total income –549.7 56.0 – General administrative expenses –162.3 –177.5 –8.6 Net result from financial instruments in accordance with IAS 39 –138.7 –2.7 – Consolidated net income/loss before bank levy, BVR1 Deposit Guarantee Scheme and taxes –850.7 –124.2 – Consolidated net income/loss before taxes –863.7 –135.3 – Consolidated net income/loss –903.6 –138.7 –

Key financial indicators Return on equity (before taxes, %) –55.1 –10.8 –44.3 pp Cost/income ratio (%) 152.8 44.3 108.5 pp Economic Value Added (€ million) –901.7 –249.0 –

Total capital in accordance with the Capital Requirements Regulation Common equity tier 1 1,157.5 1,012.0 14.4 Tier 2 capital 508.4 584.0 –12.9 Modified available capital 1,665.9 1,596.0 4.4

Capital ratios – Basel III (%) Common equity tier 1 ratio 22.8 13.2 9.6 pp Total capital ratio 32.8 20.7 12.1 pp

Staff by business division Transport Finance/Investment Management 318 324 –1.9 Service areas 245 242 1.2 LogPay Financial Services 50 58 –13.8 Total active staff 613 624 –1.8

Rating

2017 2016 2015 Standard & Poor’s Long-term counterparty credit rating BBB A+ A+ Short-term credit rating A-2 A-1 A-1 Outlook negative negative stable

Fitch Ratings2 Long-term issuer default rating AA- AA- AA- Short-term issuer default rating F1+ F1+ F1+

1 National Association of German Cooperative Banks 2 Within the scope of the German Cooperative Financial Services Network's rating DVB in key figures at a glance

€ mn 2017 2016 % Earnings data

Net interest income 174.8 209.0 –16.4 ABOUT US Allowance for credit losses –727.9 –381.4 90.8 Net interest income after allowance for credit losses –553.1 –172.4 – Net fee and commission income 92.7 119.2 –22.2 Results from investments in companies accounted for using the equity method –11.5 9.6 – Net other operating income/expenses –77.8 99.6 – Total income –549.7 56.0 – General administrative expenses –162.3 –177.5 –8.6 Net result from financial instruments in accordance with IAS 39 –138.7 –2.7 – Consolidated net income/loss before bank levy, BVR1 Deposit Guarantee Scheme and taxes –850.7 –124.2 – Consolidated net income/loss before taxes –863.7 –135.3 – Consolidated net income/loss –903.6 –138.7 –

Key financial indicators Return on equity (before taxes, %) –55.1 –10.8 –44.3 pp Cost/income ratio (%) 152.8 44.3 108.5 pp

Economic Value Added (€ million) –901.7 –249.0 – GROUP MANAGEMENT REPORT

Key items from the statement of financial position Business volume 24,100.6 29,187.0 –17.4 Customer lending volume 19,388.0 25,876.4 –25.1 Total assets 23,344.3 27,713.3 –15.8 Loans and advances to customers 18,115.1 23,686.7 –23.5 Deposits from customers 7,588.3 7,839.6 –3.2 Securitised liabilities 10,493.2 12,722.3 –17.5 Subordinated liabilities 736.6 951.2 –22.6 The specialist Equity 1,203.1 1,275.7 –5.7 in international Total capital in accordance with the Capital Requirements Regulation transport finance Common equity tier 1 1,157.5 1,012.0 14.4 Tier 2 capital 508.4 584.0 –12.9 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED Modified available capital 1,665.9 1,596.0 4.4

Capital ratios – Basel III (%) Common equity tier 1 ratio 22.8 13.2 9.6 pp Total capital ratio 32.8 20.7 12.1 pp

Staff by business division Transport Finance/Investment Management 318 324 –1.9 Service areas 245 242 1.2

LogPay Financial Services 50 58 –13.8 AUDIT OPINION Total active staff 613 624 –1.8

Rating

2017 2016 2015 Standard & Poor’s Long-term counterparty credit rating BBB A+ A+ Short-term credit rating A-2 A-1 A-1 Outlook negative negative stable

Fitch Ratings2 Long-term issuer default rating AA- AA- AA- Short-term issuer default rating F1+ F1+ F1+

1 National Association of German Cooperative Banks

2 Within the scope of the German Cooperative Financial Services Network's rating FURTHER INFORMATION ABOUT US GROUP MANAGEMENT REPORT

TheDer specialistSpezialist in derin international internationalen Transportfinanzierungtransport finance CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED AUDIT OPINION FURTHER INFORMATION

CONTENTS DVB BANK SE GROUP ANNUAL REPORT 2017 CONTENTS

02 ABOUT US 140 CONSOLIDATED

04 BOARD OF FINANCIAL MANAGING DIRECTORS STATEMENTS

08 LETTER TO OUR CLIENTS, 141 INCOME STATEMENT INVESTORS, AND BUSINESS PARTNERS 141 APPROPRIATION OF PROFITS

12 HIGHLIGHTS 2017 142 STATEMENT OF COMPREHENSIVE INCOME 14 SUPERVISORY BOARD 143 STATEMENT OF FINANCIAL POSITION 18 REPORT OF THE SUPERVISORY BOARD 144 STATEMENT OF CHANGES IN EQUITY

144 CASH FLOW STATEMENT 24 GROUP MANAGE- MENT REPORT 146 SEGMENT REPORT

25 FUNDAMENTAL INFORMATION 148 NOTES ABOUT THE GROUP 25 Business model 210 RESPONSIBILITY STATEMENT 28 Competitive strengths setting DVB apart 29 Strengthening DVB’s brand profile 29 Strategic agenda and business 211 AUDIT OPINION objectives for 2018 30 Commercial planning and management system 216 FURTHER 33 REPORT ON THE ECONOMIC POSITION 33 Economic environment INFORMATION 36 Financial position and performance 50 Remuneration report 218 DVB WORLDWIDE Der Spezialist 56 Employees 220 ABBREVIATIONS in der internationalen 58 DEVELOPMENT OF THE BUSINESS Transportfinanzierung DIVISIONS 222 IMPRINT 58 Shipping Finance 66 Aviation Finance 74 Land Transport Finance 82 Important deals 2017 84 Offshore Finance 88 Financial Institutions and Syndications 92 DVB Corporate Finance 96 Investment Management

102 REPORT ON EXPECTED DEVELOP- MENTS, OPPORTUNITIES AND RISKS 102 Report on expected developments 106 Report on opportunities and risks

138 REPORT OF THE BOARD OF MANAG- ING DIRECTORS ON RELATIONS WITH AFFILIATED COMPANIES

139 CORPORATE GOVERNANCE STATEMENT PURSUANT TO SECTION 289a OF THE HGB ABOUT US

04 BOARD OF MANAGING DIRECTORS

08 LETTER TO OUR CLIENTS, INVESTORS, AND BUSINESS PARTNERS

12 HIGHLIGHTS 2017

14 SUPERVISORY BOARD

18 REPORT OF THE SUPERVISORY BOARD FURTHER INFORMATION AUDIT OPINION CONSOLIDATED FINANCIAL STATEMENTS GROUP MANAGEMENT REPORT ABOUT US DVB BANK SE GROUP ANNUAL REPORT 2017

BOARD OF MANAGING DIRECTORS

From left to right

DAVID GORING-THOMAS Member of the Board of Managing Directors

RALF BEDRANOWSKY CEO and Chairman of the Board of Managing Directors

CHRISTIAN HAGEMEYER Member of the Board of Managing Directors

04 DIRECTORS MANAGING BOARD OF ABOUT US

GROUP MANAGEMENTREPORT CONSOLIDATED FINANCIALSTATEMENTS AUDIT OPINION FURTHER INFORMATION 05

FURTHER INFORMATION AUDIT OPINION CONSOLIDATED FINANCIAL STATEMENTS GROUP MANAGEMENT REPORT ABOUT US DVB BANK SE GROUP ANNUAL REPORT 2017

BOARD OF MANAGING DIRECTORS since 1 January 2018

Ralf Bedranowsky

CEO and Chairman of the Board of Managing Directors and bank director Born 1958 in Berlin, Germany

PRODUCT/SERVICE AREAS CHAIRMAN OF THE SUPERVISORY BOARD Business Process Support DVB Bank America N.V., Willemstad, Curaçao Group Audit Group Compliance Office CHAIRMAN OF THE BOARD OF DIRECTORS Group Controlling DVB Group Merchant Bank (Asia) Ltd, Singapore Group Corporate Communications DVB Holding (US) Inc., New York, USA Group Finance ITF International Transport Finance Suisse AG, Group Human Resources Zurich, Switzerland Group Legal Information Technology MEMBER OF THE BOARD OF DIRECTORS DVB Capital Markets LLC, New York, USA CLIENT AREAS IN AFFILIATES ITF International Transport Finance Suisse AG LogPay Financial Services GmbH

David Goring-Thomas

Member of the Board of Managing Directors and bank director Born 1965 in Sunbury-on-Thames, United Kingdom

PRODUCT/SERVICE AREAS CHAIRMAN OF THE BOARD OF DIRECTORS Group Treasury DVB Transport Finance Ltd, London, United Kingdom Transaction and Loan Services MEMBER OF THE BOARD OF DIRECTORS CLIENT AREAS IN BUSINESS DIVISIONS DVB Capital Markets LLC, New York, USA Aviation Finance Aviation Financial Consultancy DVB Corporate Finance Financial Institutions and Syndications Investment Management Land Transport Finance Shipping Finance

CLIENT AREAS IN AFFILIATES DVB Capital Markets LLC DVB Transport Finance Ltd

06 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

BOARD OF MANAGING DIRECTORS ABOUT US

Christian Hagemeyer

Member of the Board of Managing Directors and bank director Born 1960 in Hamburg, Germany GROUP MANAGEMENT REPORT PRODUCT/SERVICE AREAS Aviation Credit Aviation Research Credit and Asset Solution Group Group Risk Management Land Transport Credit Land Transport Research Shipping Credit Shipping Research CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED AUDIT OPINION FURTHER INFORMATION

07 DVB BANK SE GROUP ANNUAL REPORT 2017

LETTER TO OUR CLIENTS, INVESTORS, AND BUSINESS PARTNERS

Ladies and Gentlemen, financial year 2017: for DVB, this led to impairments of performance and, as a consequence, to increased DVB worked hard throughout 2017 to keep sufficient allowance for credit losses. The Bank successfully – water under the keel. The financial year under review and appropriately – selected new Shipping Finance presented DVB with the biggest challenge yet in its cor- business from amongst the market opportunities porate history of almost 95 years. Due to significant available, in a targeted manner. At the same time we allowance for credit losses required for legacy exposures continued to focus, in great detail, on managing in the Shipping Finance and Offshore Finance businesses, exposures subject to higher risks. the Bank had to post a net consolidated loss before taxes of €863.7 million (previous year: a loss of €135.3 million). // Developments on the offshore market are driven by Thanks to determined and forward-looking action from oil price trends, which are both erratic and unpredict- the Bank's owner DZ BANK AG, DVB's capitalisation – able, as well as by existing overcapacity. Whilst rising which had become thin due to the losses recognised – crude oil prices during the course of 2017 raised the was sufficiently underpinned. readiness of international oil and gas majors to increasingly consider investment decisions for explora- Challenging industry-specific market environment tion projects, very high volatility in crude oil price Whilst the macroeconomic environment – especially developments triggered extensive cost-cutting meas- global trade, which is a key parameter for DVB – devel- ures by global oil majors. The existing overcapacity oped favourably throughout 2017, some different factors for offshore vessels puts pressure on charter rates. affected industry-specific developments in particular, These factors do not provide any indication for a burdening the Bank's business during 2017. short-term improvement of market conditions for suppliers to oil companies. Faced with these clear // In our view, 2017 was a year during which a turna- market developments, the Bank decided to cease round materialised on shipping markets. Although extending any new financings for offshore vessels the excess tonnage accumulated over recent years and platforms during the 2017 financial year. In was still present, with charter rates (which form the particular, the difficult employment situation of basis for vessel valuations, and hence, for collateral highly-specialised offshore supply vessels required values) still depressed, 2017 did see the beginning of DVB to recognise additional allowance for credit losses. an upward trend with slight improvements in some market segments, during the course of the year. Yet the shipping crisis over the past years brought higher liquidity constraints for many shipowners during the

08 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

LETTER TO OUR CLIENTS, INVESTORS, AND BUSINESS PARTNERS ABOUT US // The aviation and land transport finance markets in // On a positive note, we were able to reduce general 2017 were shaped by significant levels of liquidity administrative expenses by 8.6%, to €162.3 million seeking investment, and by intensified competition (previous year: €177.5 million). between banks and other institutional investors. This persistent, sharp competition led to lower new // The net result from financial instruments in accord- business volumes and put pressure upon interest ance with IAS 39 – which is generally volatile – margins. Nonetheless, both divisions contributed a amounted to €–138.7 million (previous year: €–2.7 positive result. million). Here, narrowing US dollar/euro basis spreads led to higher measurement losses from cross-currency Business development in detail swaps. Moreover, significant impairments on invest- The market developments outlined above had a material ments accounted for using the equity method lowered impact upon numerous items of our income statement – the result from investment securities. and therefore shaped the Bank's operating performance: // Consolidated net loss before taxes fell from €135.3 // Net interest income was €174.8 million (previous million to €863.7 million. year: €209.0 million), reflecting lower new business

volumes and declining interest margins. Changes in our external profile GROUP MANAGEMENT REPORT Almost 30 years after DVB shares were listed at the // The persistently challenging conditions in the Frankfurt Stock Exchange in March 1988, DZ BANK car- shipping and offshore markets triggered increased ried out a squeeze-out of DVB's minority shareholders and allowance for credit losses of €727.9 million (previous a delisting of DVB shares, having held a stake of more year: €381.4 million). than 95% since 2008. After the squeeze-out was adopted by the Bank's last public Annual General Meeting on // In line with lower new business volumes, net fee and 22 June 2017, all shares held by DVB’s minority share- commission income of €92.7 million was also down holders were transferred to DZ BANK, against appropriate year-on-year (previous year: €119.2 million). cash compensation. Following the entry of the share transfer in the Commercial Register, trading in DVB shares // Net other operating income/expenses totalled at the Frankfurt Stock Exchange ceased on 17 August €–77.8 million (previous year: €99.6 million). Write- 2017. The cash compensation was paid out to former downs of goodwill of €59.2 million and €23.3 million shareholders on 22 August 2017. in expenses recognised in connection with the fur-

ther development of DVB's business model had a A control and profit and loss transfer agreement was FINANCIAL STATEMENTS CONSOLIDATED major impact on expenditure. concluded between DVB Bank SE and DZ BANK AG, with retroactive effect from 1 January 2017. AUDIT OPINION FURTHER INFORMATION

09 DVB BANK SE GROUP ANNUAL REPORT 2017

Enhancing efficiency and profitability Outlook and business objectives for 2018 Right at the outset of 2017, we developed a strategic Due to the continuing challenging market environment in agenda designed to enhance productivity and efficiency, certain shipping segments which will prevail in 2018, we and to create the prerequisites for returning the Bank's will maintain a selective new business focus in this in- business model to an adequate level of profitability. Spe- dustry, pursuing those opportunities which present the cific measures include structural adjustments as well as right risk/reward mix. With competition at a low point, ongoing development of products and services – existing we expect good opportunities to materialise. For different as well as new. reasons – notably some irrational competition in the market – there is also a need for some patience in order During the course of 2017, this strategic agenda evolved to select the right new business to pursue in Aviation into an updated business plan which was presented to, Finance and Land Transport Finance. DVB’s customers and adopted by, the respective board and committees. know well what we represent, and know well what we By way of example, the plan comprises the following can deliver through different industry and market cycles. elements for implementation: This DVB brand also sets us up well to further develop our complementary investment and asset management as // discontinuation of the Offshore Finance division, with well as corporate finance and advisory activities. effect from 1 January 2018; For the rest, we will continue with implementation of the // realignment of our portfolio structure – with a more various elements of the mentioned strategic agenda, balanced distribution of the portfolio amongst the which will provide the foundation for a prompt return to remaining Transport Finance divisions, focusing on sustainable profitability. the Aviation Finance and Land Transport Finance businesses to a stronger extent; Our business objectives are summarised as follows:

// sustainably strengthening the expert team in charge // We plan to sustain a positive business development of managing problem loan exposures (CASG – Credit in each of our Aviation Finance and Land Transport and Asset Solution Group); Finance industry segments, and strengthen the earnings power of these businesses. In Shipping Finance, // devising a new strategy for non-core assets; we also strive for a better performance than in the two previous years. // growing the non-risk fee and commission income across our businesses, including through an enhanced focus on an originate-to-distribute model, complementing and enhancing earnings from use of the Bank’s own balance sheet; and

// reviewing the cost structures of the business model.

10 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

LETTER TO OUR CLIENTS, INVESTORS, AND BUSINESS PARTNERS ABOUT US // We expect risk costs in our maritime portfolio to // We will continue to analyse the business environ- remain above the long-term average throughout the ment in the markets we cover, in great detail – to financial year 2018 – albeit at a much lower level focus on business opportunities which will enable a than in 2017 – due to the persistent crisis particu- return to profitability, and a sustainable future for larly in the offshore sector. Accordingly, risk man- the Bank. agement in this sector will continue to command particular attention, as well as proactive restructur- We are cautiously optimistic that we will succeed in ing measures. generating results for 2018 which will satisfy our stakeholders in general and especially our owners, based on // We strive to achieve positive core operational earn- selective and appropriate new business, and continued ings before risk costs. This means that, in addition to smart risk management. our lending business, we will focus on value-added services for clients in our Transport Finance business, We thank you for the trust you have placed in us, and notably investment and asset management, corpo- hope for continued good cooperation. rate finance and advisory services. Yours sincerely,

// We will continue keeping our focus on structural GROUP MANAGEMENT REPORT changes with differing characteristics in the Frankfurt/Main, April 2018 sub-markets of the global transport sector. Whilst DVB Bank SE aviation and land transport markets are predominantly shaped by high excess liquidity together with strong margin and competitive pressures, the shipping industry has yet to see the end of the ongoing consolidation phase.

Ralf David Christian

Bedranowsky Goring-Thomas Hagemeyer FINANCIAL STATEMENTS CONSOLIDATED CEO and Chairman of the Board of Member of the Board of Managing Member of the Board of Managing Managing Directors Directors Directors AUDIT OPINION FURTHER INFORMATION

11 DVB BANK SE GROUP ANNUAL REPORT 2017

HIGHLIGHTS 2017

2017 has been an extremely eventful year and one of the most challenging in the Bank’s history. Nonetheless, the year also presented itself with 5 FEBRUARY a number of highlights demonstrating the strength of DVB’s business Land Transport Finance won Transport model, brand profile and stakeholder relationships. News award The industry magazine Transport News honoured DVB’s Land Transport Finance with Best International Transport Finance Provider – Germany”. 1 JANUARY The journal thus recognised our efforts for the industry in 2016. Christian Hagemeyer joined Board of Managing Directors 31 MARCH Christian Hagemeyer joined as new Mem- ber of the Board of Managing Directors Annual Report 2016 with a new look-and-feel and assumed responsibility for the risk Change, improvement, and advancement with a view to stakeholders management, credit and research teams. have always been important for DVB. The relaunch of the Annual Report Christian Hagemeyer has a successful in March presented DVB’s annual results with a new content-related track record, with many years of global concept and with a fresh and modern design, thus setting a new standard management experience in traditional for all other DVB publications. banking and lending business.

Greek representative office became branch DVB’s Athens office became a branch, succeeding its representative office status. The office originates new transactions and manages the exposure of the Greek shipping community.

17–19 JANUARY Promoting aviation expertise at the Global Airfinance Conference in Dublin As the largest gathering of its kind in the air finance industry, the Global Airfinance Conference was a favourable occasion for DVB to network and promote its expertise. In his opening speech, Bert van Leeuwen, Head of DVB’s Aviation Research, gave an outlook on the air transport market in 1 MAY 2017. Other DVB representatives like Guido Schmitz (Head of Aviation Credit), Stephan Sayre (Head of Aviation Investment Management), and Wolfgang Köhler new Chairman of DVB’s Simon Finn (Aviation Research) participated in industry panels. Supervisory Board Wolfgang Köhler took over chairmanship of DVB’s Supervisory Board from Frank Westhoff who resigned from office as at 30 April 2017. Wolfgang Köhler is a Member of the Board of Managing Directors of DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main, and has been a shareholder representative at DVB’s Supervisory Board since 2009.

DVB at the Global Airfinance Conference 2017

12 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

HIGHLIGHTS 2017 ABOUT US

22 JUNE 7/8 NOVEMBER Last Annual General Meeting Tokyo client reception brought industry held in Frankfurt representatives together DVB’s last shareholders’ meeting took place 70 guests from the aviation and shipping industries met at DVB’s annual at Deutsche Nationalbibliothek in Frankfurt/ reception in Tokyo which brought together representatives from leasing Main. In the general debate, shareholder and companies, airlines, manufacturers, shipping companies, trading houses shareholder representatives asked in-depth and banks in Japan. The event was opened by David Goring-Thomas questions about agenda items and specific who introduced Eelco van de Stadt as new Global Head of Aviation. On topics relating to the situation on the transport markets and the Bank’s the following day, Financial Institutions and Syndications (FIS) held its business development. With 96.09% of capital represented at the meet- inaugural “DVB FIS Tokyo Dinner” with 35 guests from financial institu- GROUP MANAGEMENT REPORT ing, shareholders approved all proposed resolutions with a majority close tions in Japan. to 100% – including a resolution to transfer the DVB shares held by minority shareholders to DZ BANK AG against appropriate cash compensation, a so-called squeeze-out.

AUGUST Squeeze-out and delisting from Frankfurt Stock Exchange On 17 August 2017, the squeeze-out resolution was entered into the 30 NOVEMBER Commercial Register at the Frankfurt/Main District Court. As a result, all DVB shares previously held by minority shareholders were transferred to Participation in expert panel in Hamburg DZ BANK. Within the scope of this squeeze-out, trading in DVB shares at Henriette Brent-Petersen, Head of Shipping Research, presented a market the Frankfurt Stock Exchange was suspended on 17 August 2017. The analysis on “World trade & shipping trends – setting the right course in cash compensation was paid to minority shareholders on 22 August 2017. today’s markets” at the HANSA-Forum “Shipping/Financing“. FINANCIAL STATEMENTS CONSOLIDATED

31 OCTOBER 1 DECEMBER Aviation Finance division awarded David Goring-Thomas assumed responsibility by Airline Economics for Shipping Finance DVB’s Aviation Finance won the “Asia-Pacific Bank of the Year” award at With Bart Veldhuizen leaving DVB, David the Airline Economics Aviation 100 awards ceremony. The awards recog- Goring-Thomas, Member of DVB’s Board of nise excellence amongst industry players in the Asia-Pacific aviation Managing Directors in charge of Aviation sector. The winners are chosen via an industry survey. Finance and Land Transport Finance, assumed responsibility for Shipping Finance AUDIT OPINION and DVB Corporate Finance businesses.

DVB representatives at award ceremony FURTHER INFORMATION

13 DVB BANK SE GROUP ANNUAL REPORT 2017

SUPERVISORY BOARD

WOLFGANG KÖHLER FRANK WESTHOFF Chairman Deputy Chairman

ULRIKE DONATH ANDERS INGEBRIGTSEN Shareholder representative Shareholder representative

DR PETER JANSEN MICHAEL SPETH Shareholder representative Shareholder representative

14 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

SUPERVISORY BOARD ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED

ADNAN MOHAMMED IVO MONHEMIUS Employee representative Employee representative AUDIT OPINION

MARTIN WOLFERT Employee representative FURTHER INFORMATION

15 DVB BANK SE GROUP ANNUAL REPORT 2017

SUPERVISORY BOARD since 1 January 2018

Supervisory Board

Shareholder representatives

WOLFGANG KÖHLER FRANK WESTHOFF ULRIKE DONATH Chairman Deputy Chairman Member since 25 June 2015 Member since 21 September 2009 Member since 30 June 2006

ANDERS INGEBRIGTSEN DR PETER JANSEN MICHAEL SPETH Member since 12 June 2014 Member since 25 June 2015 Member since 1 January 2018

Employee representatives

ADNAN MOHAMMED IVO MONHEMIUS MARTIN WOLFERT Member since 13 February 2013 Member since 12 June 2014 Member since 7 October 2008

16 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

SUPERVISORY BOARD ABOUT US

Supervisory Board Committees

Credit and Risk Committee

FRANK WESTHOFF ANDERS INGEBRIGTSEN Chairman

DR PETER JANSEN MARTIN WOLFERT GROUP MANAGEMENT REPORT

Audit Committee

MICHAEL SPETH ULRIKE DONATH Chairman since 1 February 2018 Deputy Chairwoman

WOLFGANG KÖHLER IVO MONHEMIUS

Nomination Committee FINANCIAL STATEMENTS CONSOLIDATED

WOLFGANG KÖHLER FRANK WESTHOFF ADNAN MOHAMMED Chairman Deputy Chairman

Remuneration Control Committee

WOLFGANG KÖHLER FRANK WESTHOFF ADNAN MOHAMMED AUDIT OPINION Chairman Deputy Chairman FURTHER INFORMATION

17 DVB BANK SE GROUP ANNUAL REPORT 2017

REPORT OF THE SUPERVISORY BOARD

Ladies and Gentlemen, upon the owners of special offshore vessels through lower charter rates and a lack of follow-on employ- The financial year 2017 presented DVB’s management and ment. Faced with these clear market developments, staff with the biggest challenges yet in the Bank’s corpo- the Bank decided to cease extending any new rate history. Due to significant allowance for credit losses financings for offshore vessels and platforms during required for legacy exposures in the Shipping Finance and the financial year 2017. Offshore Finance businesses, the Bank had to post a net consolidated loss before taxes of €863.7 million (previous // Both the aviation and land transport finance mar- year: a loss of €135.3 million). Thanks to determined and kets in 2017 were shaped by significant levels of forward-looking action from the Bank's owner DZ BANK liquidity seeking investment, and by intensified AG, DVB's capitalisation – which had become thin due to competition between banks and institutional inves- the losses recognised – was sufficiently underpinned. tors. This persistent, sharp competition led to lower new business volumes and put pressure upon inter- DVB's business development was burdened by a difficult est margins. environment in all four areas of the transport industry: Right at the outset of 2017, the Board of Managing Direc- // The persistent shipping crisis over the past years tors developed a strategic agenda designed to enhance brought higher liquidity constraints for many ship- the efficiency of the Bank's structural organisation and owners during 2017: this led to impairments of workflows, and to create the prerequisites for returning performance in DVB's Shipping Finance business the Bank's business model to an adequate level of profita- and, as a consequence, to increased allowance for bility. The realignment of our portfolio structure – with a credit losses. more balanced distribution of the portfolio amongst the remaining Transport Finance divisions, focusing on the // The Offshore Finance division was discontinued Aviation Finance and Land Transport Finance businesses effective 1 January 2018. Developments in this to a stronger extent – will play a key role in this context. market segment are almost exclusively driven by oil price trends, which are both erratic and unpredicta- Especially in recognition of this challenging environment, ble. Very high volatility in crude oil price develop- we would like to express our sincere thanks and apprecia- ments, together with sizeable overcapacity for spe- tion to the Board of Managing Directors and all members cialised offshore vessels, have triggered extensive of staff for their significant commitment throughout 2017. cost-cutting measures by the global oil majors. These cost-cutting measures have a long-term effect

18 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

REPORT OF THE SUPERVISORY BOARD ABOUT US The Supervisory Board and The Supervisory Board carried out its annual self-evalua- its Committees tion in March 2017. The purpose of this exercise was We fulfilled the obligations imposed on us by law, the to systematically observe, analyse, and evaluate our Memorandum and Articles of Association, and the Bank’s professional conduct, and the results achieved. The evalu- Internal Regulations throughout the financial year 2017. ation showed that the structure, size, composition and Besides supervising the Company's management by the performance of the Supervisory Board, as well as the Board of Managing Directors, on an ongoing basis, and knowledge, skills and experience of individual Superviso- decisions on transactions and issues requiring approval, ry Board members, fulfil the requirements under the law our focus was on giving detailed advice to the Board of and the Articles and Memorandum of Association. Managing Directors. As in the previous years, the Bank provided us with The focus of such advice was on: adequate human and financial resources and offered training and continuous professional development meas- // the macroeconomic environment, ures on various topical areas, thus supporting us in fulfilling our duties. // the development of the shipping and offshore markets,

and Dr Kirsten Siersleben retired from the Supervisory Board GROUP MANAGEMENT REPORT on 31 December 2017. The extraordinary Annual General // the consequences of these exogenous factors on: Meeting on 19 December 2017 elected Mr Michael Speth • risk management, as pursued for each of the as a new Supervisory Board member, with effect from Transport Finance portfolios; 1 January 2018. • the Bank and its economic situation; as well as • the Bank's strategic direction, including the Ms Ulrike Donath holds the position of financial expert. operative corporate planning thereby derived, and its implementation. Two members of the Supervisory Board were female during the financial year 2017, both of them shareholder The most important issue in this context was credit representatives. risk – especially the review of the appropriateness of allowance for credit losses, and the Bank's capitalisation, resulting from the ECB's on-site inspection of the credit and counterparty risk management, focusing on the shipping business. FINANCIAL STATEMENTS CONSOLIDATED

The legal, regulatory and compliance-related requirements for banks and securities firms remain high. We were informed comprehensively, on a regular basis, concerning the status of, and progress made with, projects launched to comply with these regulations. AUDIT OPINION FURTHER INFORMATION

19 DVB BANK SE GROUP ANNUAL REPORT 2017

Cooperation with the Meetings of the Supervisory Board Board of Managing Directors The Supervisory Board met during seven plenary meetings Cooperation between the Supervisory Board and the in 2017; during these meetings, we regularly discussed Board of Managing Directors was, once again, character- the Bank's business development in great detail. The ised by mutual trust, and by open and constructive discus- Board of Managing Directors gave a detailed account of sions throughout 2017. We regard this cooperation as the sector-specific and macroeconomic environment on being of particular importance in these ongoing difficult the international transport markets, as well as on the times for the shipping and offshore markets. specific risk situation concerning ships, aircraft, offshore support vessels and platforms, as well as rolling stock. Bart Veldhuizen, who was responsible for the Shipping Finance, Offshore Finance and Corporate Finance divi- Main issues during the meeting on 2 March 2016 were a sions, retired from the Board of Managing Directors of review of the accounting and financial reporting of DVB DVB Bank SE on 30 November 2017. David Goring-Thom- Bank SE as part of the single-entity financial reporting as assumed Mr Veldhuizen's tasks, and is now responsi- pursuant to the German Commercial Code (HGB), a de- ble for all of the Bank's front-office activities. The Super- tailed discussion of business developments during the visory Board expresses sincere thanks to Mr Veldhuizen first months of 2017, and an outlook on the current year. for his contributions, and wishes Mr Goring-Thomas Furthermore, the Supervisory Board was informed on the every success in his new, expanded function. timing and sequence of the squeeze-out of minority shareholders of DVB under company law, initiated by the The Board of Managing Directors has informed us regu- main shareholder. larly, without delay and comprehensively, orally and in writing, about the financial position and economic perfor- At the meeting on 31 March 2017, the Supervisory Board mance of the Bank and its subsidiaries, on developments discussed matters specific to the Board of Managing on international transport markets, as well as on the Directors. It also discussed the consolidated financial Bank's management of risks, liquidity and capital and statements 2016 in accordance with IFRS with the audi- general business performance. tors, and approved the consolidated financial statements, as recommended by the Audit Committee. Repre- During Supervisory Board meetings, the Board of Man- sentatives of the banking supervisory authority were aging Directors comprehensively informed us on DVB's present at this agenda item. Moreover, the Chairman of corporate governance, as well as on events, results and the Audit Committee reported on the tender process for transactions that were (and still are) important to the the appointment of the external auditors for the finan- Bank. We discussed developments concerning strategic cial statements and consolidated financial statements parameters of DVB's business model, resulting adjust- for the financial year 2018. He recommended that BDO ments to future business policy, as well as on corporate AG Wirtschaftsprüfungsgesellschaft, Hamburg, should governance and planning (including financial and human be appointed. The Head of Group Audit presented her resources planning, budgeted results, and liquidity comprehensive annual report. In addition, Mr Gor- planning) with the Board of Managing Directors, in ing-Thomas gave a report on the current and expected great detail. business developments, the risk situation of the aviation industry, as well as on the current business develop- The CEO and Chairman of the Board of Managing Direc- ment of the Land Transport Finance division. The Super- tors and the Chairman of the Supervisory Board met on a visory Board was also informed of impending regulatory monthly basis to discuss specific issues related to the requirements and audits; in particular, about the ECB's Bank, as well as imminent decisions both timely and on-site audit. Finally, the Supervisory Board addressed comprehensively. The Board of Managing Directors in- the topic of female quotas, setting target quotas for the formed us instantaneously about important developments Supervisory Board, the Board of Managing Directors, between Supervisory Board meetings, thus permitting the and the management levels. Supervisory Board members to exercise their control function at any time. We adopted any resolutions that were necessary between Supervisory Board meetings by way of circulation.

20 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

REPORT OF THE SUPERVISORY BOARD ABOUT US The meeting on 8 May 2017 was dedicated to prepara- Supervisory Board Committees tions for the Ordinary Annual General Meeting on 22 June Both the Credit and Risk Committee and the Audit Com- 2017. The Supervisory Board reviewed KPMG's report on mittee discussed, reviewed and monitored in detail DVB's the company valuation of DVB Bank SE, which had been risk situation, risk management, and the respective con- prepared to determine the appropriateness of the cash trol mechanisms within the Bank during its meetings. The compensation within the scope of the squeeze-out proce- Supervisory Board was informed about current events and dure, in great detail. In this context, the Supervisory transactions of fundamental importance without undue Board discussed the forecasts on the Bank's future busi- delay; subsequent decisions were taken after intense ness development with the Board of Managing Directors consultation and discussion. and with representatives from KPMG. The Supervisory Board also concerned itself with the results of the evalua- During its five meetings, theCredit and Risk Committee tion of efficiency of the Board of Managing Directors and fulfilled all duties incumbent upon it by law, and the the Supervisory Board. Internal Regulations without undue delay. This included a continuous and careful analysis of all exposures subject Members of the Supervisory Board convened for two to reporting requirements. In addition, the Credit and Risk extraordinary meetings, on 26 June 2017 and 1 August Committee was involved in approving loan exposures,

2017. The focal aspect of the June meeting was an where such approval was required, by way of circulation. GROUP MANAGEMENT REPORT intensive exchange of views with the Board of Manag- During the meetings, detailed portfolio and other risk ing Directors, on the Bank's future strategic orientation, analyses (business and reputational risks, equity invest- based on the strategy paper submitted by the Board of ment, market price, liquidity, as well as operational risks) Managing Directors. This discussion concentrated on were used to discuss the structure and performance of the topics of portfolio development, allowance for credit the loan portfolio as well as risk issues. Regarding the losses, expanding commission-based business, and loan portfolio, the performance of financed transport potential for cost-cutting. During the meeting in August, assets, risk management measures taken, and the specif- the Supervisory Board concerned itself, in great detail, ic analysis of individual non-performing exposures, were with the anticipated results of ECB's on-site audit, the particularly important. resulting potential impact upon the Bank's allowance for credit losses, profitability, and capital ratios, as well as In addition, the Committee members intensively dis- with the required €500.0 million capital contribution cussed the Bank's overall risk appetite, as well as DVB's from DZ BANK. sub-risk strategies, and supported the Supervisory Board in monitoring these strategies. Discussions on the credit

The focus of the meeting on 18 September 2017 was risk strategy formed a focal point of deliberations. Fur- FINANCIAL STATEMENTS CONSOLIDATED once again on the Bank's strategic development – with thermore, the members of the Supervisory Board ex- particular attention on the continued deterioration of changed their views on the strategies adopted by the business developments in individual market segments, Board of Managing Directors, for managing equity invest- and on the Bank’s risk situation. The Supervisory Board ment, market, liquidity, business, reputational and opera- approved the conclusion of the control and profit and loss tional risks, as well as on the outsourcing strategy pur- transfer agreement with DZ BANK AG Deutsche Zen- sued by the Board of Managing Directors. After intensive tralgenossenschaftsbank, Frankfurt am Main. The Super- discussions, the Committee decided to amend the exist- visory Board was informed about measures contemplated ing lending policies. by the Bank in the context of Brexit. During one scheduled as well as one extraordinary meet- AUDIT OPINION During its meeting on 22 November 2017, which was ing, the Credit and Risk Committee discussed the process continued on 4 Dezember 2017, the Supervisory Board and calculation method for recognising allowance for comprehensively discussed the Bank’s Investment Man- credit losses, in detail. This included an in-depth discus- agement activities and the development of allowance for sion of the ECB on-site audit. credit losses. The Board of Managing Directors also reported on results from the strategy project, and the project's impact on the medium-term planning. Further- more, the designated Head of Group Compliance presented the Compliance Report 2017 to the plenary meeting. FURTHER INFORMATION

21 DVB BANK SE GROUP ANNUAL REPORT 2017

Over and above this, the Board of Managing Directors The Nomination Committee held two meetings during kept the members of the Committee informed about the period under review. Besides the obligations incum- non-performing exposures and those subject to particular bent upon it by law and the Bank’s Internal Regulations, risks, and also about unusual events in the lending busi- during 2017 the Committee concerned itself intensively ness. It informed the Committee, without delay, about with personnel matters regarding the Board of Managing transport assets controlled by DVB. Directors, and made recommendations to the plenary meeting of the Supervisory Board in this context. The Audit Committee held four meetings during the year under review. With the external auditors present, it dis- The Remuneration Control Committee held two meet- cussed the financial statements and consolidated finan- ings during the period under review. The Committee’s cial statements of DVB Bank SE for the financial year members discussed the legal and regulatory require- 2016. The members of the Committee also discussed the ments regarding the remuneration of members of the audit reports and the audit findings, whilst monitoring the Board of Managing Directors and other employees in corresponding measures taken by the Board of Managing great detail, and monitored their implementation. Both Directors. In addition, the Committee intensively dis- DVB's remuneration strategy and remuneration princi- cussed the so-called SAD lists (summary of unadjusted ples were extensively discussed with the Bank's Remu- audit differences identified by the external auditors) in neration Officer. Furthermore, the Committee was kept connection with the different financial statements, and informed by the Board of Managing Directors, always in made corresponding recommendations to the Board of good time, of the conclusion of employment contracts Managing Directors. with executive staff, where the annual remuneration was in excess of a set threshold. Furthermore, meetings held during the first quarter of 2017 continued to focus on the implementation of audit The Chairmen of the Committees kept the entire Supervi- reforms on a national and European level, and on the sory Board of DVB Bank SE informed on topics dealt with 2018 – Preparation requirement – pursuant to the EU reform – to conduct a by the Committees, to the extent that such issues were of tender process for external auditor rotation tender process when the audit form is rotated for the fundamentally important, or were also discussed in the financial year 2018. In this context, tender specifications plenary meetings of the Supervisory Board. were analysed, and discussions held with potential providers; based on catalogues of criteria, the Committee There were no conflicts of interest which would have prepared recommendations regarding the appointment of required disclosure during the year under review. the external auditors. The Head of Group Audit and the heads of units responsible for monitoring credit, market and operational risk, regularly informed the Audit Com- mittee of the structure of the Bank’s risk monitoring mechanisms as well as of the results of internal and external audits. In particular, the Committee duly noted the results of the ECB on-site audit, and the results of an audit by the Financial Conduct Authority in London, discussing the respective action plans.

22 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

REPORT OF THE SUPERVISORY BOARD ABOUT US DVB's Corporate Governance The consolidated financial statements and group manage- DVB has ceased to be a listed company since 17 August ment report for the financial year 2017 were reviewed 2017. Since this date, DVB's Board of Managing Directors and discussed by the Supervisory Board. No objections and Supervisory Board have no longer been subject to the were raised, and the consolidated financial statements duties under the German Corporate Governance Code; prepared by the Board of Managing Directors were ap- therefore, they no longer publish a Declaration of Compli- proved. The Supervisory Board had no objections regard- ance pursuant to section 161 of the AktG. ing the results of the audit, especially with the declaration made by the Board of Managing Directors pursuant to section 312 (3) of the AktG. Cooperation with external auditors for the consolidated financial statements 2017 The consolidated financial statements and the group Frankfurt/Main, 25 April 2018 management report for the financial year 2017 have been examined, following an audit of the accounting For the Supervisory Board records, and certified without qualification, by Ernst &

Young GmbH Wirtschaftsprüfungsgesellschaft, Stutt- GROUP MANAGEMENT REPORT gart, the external auditors appointed by the Ordinary Annual General Meeting. The Chairman of the Supervi- sory Board obtained information on the scope of the audit in advance, and discussed focal points with the auditors, in detail. The auditors' reports were distributed to the Supervisory Board in good time before the meet- Wolfgang ing held on 25 April 2018, during which the consolidated Köhler, CFA financial statements were discussed. The auditors who Chairman of the Supervisory Board certified the consolidated financial statements took part in this meeting. During this meeting, they gave a detailed account of their audit and provided detailed an- swers to the Supervisory Board’s questions regarding focal points of the audit. CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED AUDIT OPINION FURTHER INFORMATION

23 GROUP MANAGEMENT REPORT

25 FUNDAMENTAL INFORMATION ABOUT THE GROUP 25 Business model 28 Competitive strengths setting DVB apart 29 Strengthening DVB’s brand profile 29 Strategic agenda and business objectives for 2018 30 Commercial planning and management system

33 REPORT ON THE ECONOMIC POSITION 33 Economic environment 36 Financial position and performance 50 Remuneration 56 Employees

58 DEVELOPMENT OF THE BUSINESS DIVISIONS 58 Shipping Finance 66 Aviation Finance 74 Land Transport Finance 82 Important deals 2017 84 Offshore Finance 88 Financial Institutions and Syndications 92 DVB Corporate Finance 96 Investment Management

102 REPORT ON EXPECTED DEVELOPMENTS, OPPORTUNITIES AND RISKS 102 Report on expected developments 106 Report on opportunities and risks

138 REPORT OF THE BOARD OF MANAGING DIRECTORS ON RELATIONS WITH AFFILIATED COMPANIES

139 CORPORATE GOVERNANCE STATEMENT PURSUANT TO SECTION 289a OF THE HGB ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

FUNDAMENTAL INFORMATION ABOUT THE GROUP

Business model Specialisation As a specialised niche provider, the Bank offers its The DVB Bank Group is DVB is the specialist in international transport finance – approximately 600 clients and client groups from the referred to in this report according to this claim, the Bank’s business model is international transport sector financial services in seven either as “DVB”, the “Bank” or the “DVB Bank Group”, focused, specialised, diversified and international in scope. value-adding areas: whereas the parent Europe- an public limited-liability company (Societas Europaea) DVB’s Asset & Market Research prepares in-depth analy- is referred to by its registered Focus ses of transport assets and markets. Leveraging this name ”DVB Bank SE”.

DVB maintains a strategic focus on the international business intelligence in its three Transport Finance divi- Unless indicated otherwise, GROUP MANAGEMENT REPORT transport market – with the submarkets of shipping, sions the Bank supports clients in the key product areas all amounts are stated in mil- lions of euros (€ mn or € mil- aviation, and land transport. The Bank’s business model is of Structured Asset Lending, Asset Management, Client lion). Figures are rounded built to reflect the segmentation of the transport market, Account, Risk Distribution & Loan Participations, Corpo- pursuant to standard business principles. This may comprising the business divisions of Shipping Finance, rate Finance Solutions and Private Equity Sourcing & result in slight differences Aviation Finance and Land Transport Finance. Investments. CHART 01 when aggregating figures and calculating percentages. The sums presented general- The Bank no longer offered any new financings of off- ly are rounded figures of exact amounts. shore vessels and platforms during 2017, and discontinued the Offshore Finance division with effect from 1 January 2018. Therefore, investment management activities in the shipping and offshore sectors were also discontinued during the year under review.

Specialisation C 01 FINANCIAL STATEMENTS CONSOLIDATED

Land Transport Shipping Finance Aviation Finance Finance

Structured Asset Lending

Asset Management

Client Account

Risk Distribution & Loan Participations

Corporate Finance Solutions

Private Equity Sourcing & Investments AUDIT OPINION

Asset & Market Research FURTHER INFORMATION

25 DVB BANK SE GROUP ANNUAL REPORT 2017

Structured Asset Lending Risk Distribution & Loan Participations Drawing on its Structured Asset Lending core service, DVB usually employs its own capital when financing the the Bank’s Shipping Finance, Aviation Finance and Land assets of Transport Finance clients. Notwithstanding this Transport Finance divisions offer financing solutions commitment, the Bank syndicates portions of this lending relating to transport assets. In addition to traditional volume – which can be substantial – to other financial asset-backed finance, we offer our clients tailor-made institutions in the international banking market. Both for structured solutions for complex financing projects, often DVB and its clients, this placement of credit risks is im- covering multiple jurisdictions. portant to ensure sufficient liquidity, adequate risk transfer, and balance sheet optimisation. Asset Management Throughout 2017, as in the years before, DVB was not Corporate Finance Solutions only active as a specialist providing finance and advisory DVB Corporate Finance supports Transport Finance clients services – in particular, it supported its aviation clients in mergers and acquisitions (M&A), with advisory servic- with services covering their transport assets which go far es, and in private and public placements of debt and beyond traditional banking. Thus, the Bank offers far more equity instruments. Specifically, it offers solutions in the than the traditional range of banking services: its as- following areas: set-focused services – “close to the metal” – are available not only to operators and investors, but also to com- // Advisory and M&A petitors. Based in London, DVB’s Aviation Asset Strategic dialogues with international transportation Management provides aviation clients with a broad spec- clients include balance sheet optimisation, corporate trum of services ranging from lease management, lease strategy and value maximisation, restructuring ad- advisory, technical management and analysis, vice, liquidation management, and deal negotiation to remarketing. support. In addition, we provide sell-side and buy- side advisory services with a focus on traditional Client Account mergers, divestitures, spin-offs, joint ventures, man- We offer our borrowing clients the opportunity to open agement buy-outs/leveraged buy-outs, privatisations, project-related accounts, which are required in conjunc- and fairness opinions. In both strong and weak mar- tion with loan accounts. The service comprises a broad ket phases there is demand for M&A-related services. and flexible range of account types, such as income accounts, retained earnings accounts, or accounts for main- // Capital Markets tenance reserves. Term deposits complement the pro- Our Equity & Debt Capital Markets services include gramme. The Bank has established a dedicated service primary and follow-on equity offerings, traditional centre for its clients to manage their project and term private equity plus equity-linked products, mezzanine deposit accounts. Alongside loan accounts management, capital, preferred shares, convertible bonds, and DVB thus offers its customers a comprehensive, “one- high-yield bonds via public issues as well as private stop” service and a central point of contact. The product placements via the Private Placement Group (PPG). is supplemented by a special online banking portal which Structured Asset Finance products are comprised of is accessible via the internet, 24 hours a day, every day. asset-backed securities, charter monetisation, pro- DVB’s clients may use this portal to inquire account bal- ject bonds, and receivables securitisation (including ances and movements, download account statements, or aircraft finance securitisation). send messages to our Frankfurt-based service team. All accounts are opened under German law, and are thus covered by the legally required and voluntary Deposit Guarantee Scheme of the National Association of German Cooperative Banks.

26 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

FUNDAMENTAL INFORMATION ABOUT THE GROUP

Private Equity Sourcing & Investments Diversification Thanks to the extensive analytic output provided by DVB’s DVB’s business model is well-diversified in more than Asset & Market Research unit, and the resultant superior one way: expertise regarding transport markets, the Bank is an ideal partner for clients requiring equity capital and inves- 1. DVB has an international presence. tors seeking suitable investment projects in the relevant 2. The Bank’s clients are based all over the world; most sectors. Our Investment Management division comprised of them operate internationally and do business with two teams in 2017: Aviation Investment Management the Bank over a medium- to long-term horizon. (AIM) and Shipping & Intermodal Investment Manage- 3. DVB has been promoting broad diversity in the com- ment (SIIM). position of its workforce and management team for many years. AIM manages the aircraft and aviation investments of the 4. The Bank maintains granular and matched-maturity Deucalion Aviation Funds. SIIM unites the Bank’s invest- funding. ment management activities in the shipping, intermodal 5. DVB manages a credit portfolio that is diversified over transport and rail transport sectors. various criteria and categories,

As of November 2017, AIM has been expanded by the Our key diversification criteria are: GROUP MANAGEMENT REPORT aviation debt funds launched by Aviation Finance in Sep- tember 2016. As part of this strategic initiative, DVB // assets – means of transport such as ships, sources new aircraft lending transactions for one or more aircraft and rolling stock, investors (pension funds/insurance companies) looking to deploy funds in the sector. DVB currently co-lends in all // sectors and sub-sectors of the asset to be transactions, thus ensuring an appropriate alignment of financed, interest and loan monitoring of the fund. DVB intends to grow the scale of this activity, potentially into other sec- // borrowers and clients, tors, besides aviation, in the future. // types of financing, Asset & Market Research DVB’s Asset & Market Research unit provides the basis // asset users, for the activities of the Bank’s business divisions, leveraging the team’s long-standing research know-how to pro- // asset manufacturers, vide financing products and advisory services, as well as FINANCIAL STATEMENTS CONSOLIDATED optimising the raising of equity finance. // asset employment,

// asset vintage, and

// geographic exposure. AUDIT OPINION FURTHER INFORMATION

27 DVB BANK SE GROUP ANNUAL REPORT 2017

International scope Competitive strengths setting With offices in ten locations – Frankfurt/Main, Amster- DVB apart dam, Athens, Hamburg, London and Oslo (Europe), New York and Curaçao (Americas), as well as in Singapore and There are a number of competitive strengths arising from Tokyo (Asia) – DVB’s business divisions (Shipping Finance, the strategic fundamentals of DVB’s business model. Aviation Finance, Land Transport Finance, Financial Insti- These strengths set the Bank apart from other market tutions and Syndications, DVB Corporate Finance and participants: Investment Management) have a worldwide presence in the transport markets and their various segments. This // Business model – focused and international in global presence in key transport locations enables the scope Bank to take into account the international dimension as well as the local specifics of the markets in which its // Business policy – conservative clients operate. // Organisation – transparent structures and swift The following overview illustrates the legal structure of decision-making the DVB Bank Group, including the parent company DVB Bank SE, with its registered office in Frankfurt/Main, the // Human resources – qualified and experienced Group’s material, fully consolidated subsidiaries (shown in yellow shading), and its branches and representative // Services – intensive, industry-specific client service offices (shown in blue shading). CHART 02 // Asset & Market Research – extensive and award-winning

// Credit portfolio – diversified by multiple criteria and categories

// Refinancing – granular and maturity-matched

// Own funds – sound capital base

DVB’s legal structure C 02

Subsidiaries of DVB (each 100%) Branches and representative offices of DVB

DVB Holding (US) Inc. (New York, USA) DVB Bank SE Amsterdam Branch (The Netherlands) // DVB Capital Markets LLC (New York, USA) DVB Bank SE Athens Branch (Greece) DVB Bank America N.V. (Willemstad, Curaçao) DVB Bank SE London Branch (United Kingdom) DVB Group Merchant Bank (Asia) Ltd (Singapore) DVB Bank SE Nordic Branch (Oslo, Norway) DVB Transport Finance Ltd (London, United Kingdom) DVB Bank SE Singapore Branch (Singapore) // DVB Transport Finance Ltd, Tokyo Branch (Japan) DVB Bank SE Representative Office New York (USA) DVB Holding GmbH (Frankfurt/Main, Germany) DVB Bank SE Hamburg Office (Germany) ITF International Transport Finance Suisse AG (Zurich, Switzerland)

LogPay Financial Services GmbH (Eschborn, Germany)

28 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

FUNDAMENTAL INFORMATION ABOUT THE GROUP

Strengthening DVB’s brand Strategic agenda and profile business objectives for 2018

DVB has taken the following steps to strengthen its Right at the outset of 2017, DVB’s Management Board brand profile: developed a strategic agenda, designed to enhance productivity and efficiency, and to create the prerequisites for // We are consistent and systematic in our exchange of returning the Bank’s business model to an adequate level views and opinions with clients. During 2017, we of profitability. This is to be achieved through strategic held a total of seven client events attended by some adjustments and by developing existing and introducing 840 participants, at our offices around the world and new products and services. within the scope of international industry conferences. During the course of 2017, this strategic agenda evolved // We are part of the global transport industry and into an updated business plan presented to the Bank’s maintain contacts with all market participants. corporate bodies and adopted. By way of example, the plan comprises the following elements for implementation: // We showcase our profile at relevant conferences

pertaining to the international transport industry, // discontinuation of the Offshore Finance division, with GROUP MANAGEMENT REPORT where we share market assessments and discuss effect from 1 January 2018; market developments. // realignment of our portfolio structure – with a // We publish editorial articles, in a targeted manner, in balanced distribution of the portfolio amongst the transport industry magazines and yearbooks. remaining Transport Finance divisions, focusing on the Aviation Finance and Land Transport Finance // We win renowned prizes recognising our commit- businesses to a stronger extent; ment to the transport markets. // sustainably strengthening the expert team in charge // We present transparent and stakeholder-oriented of managing problem loan exposures (CASG – Credit information on our website in a well-structured and Asset Solution Group); manner. // devising a new strategy for non-core assets;

// growing the non-risk fee and commission income FINANCIAL STATEMENTS CONSOLIDATED across our businesses, including through an enhanced focus on an originate-to-distribute model, complementing and enhancing earnings from use of the Bank’s own balance sheet; and

// reviewing the cost structures of the business model. AUDIT OPINION FURTHER INFORMATION

29 DVB BANK SE GROUP ANNUAL REPORT 2017

Based on this agenda, the Bank has formulated the fol- Commercial planning and lowing business objectives for 2018: This section describes DVB’s commercial planning and management system management system, as well // We plan to sustain a positive business development In 2017, the Board of Managing Directors managed the as its risk-adjusted performance measurement system. in each of our Aviation Finance and Land Transport Bank by focusing on the globally active business divisions Finance industry segments, and strengthen the earn- Shipping Finance, Aviation Finance, Land Transport Fi- ings power of these businesses. In Shipping Finance, nance, Investment Management and as well as on other we also strive for a better performance than in the service functions. Logically, management hierarchy and two previous years. the structure of the entire internal reporting system are geared towards this divisional business model. In view of // We expect risk costs in our maritime portfolio to growing international regulatory requirements, the Bank remain above the long-term average throughout the has also deployed this divisional management model on a financial year 2018 – albeit at a much lower level than regional basis, for its sales offices. in 2017 – due to the persistent crisis particularly in the offshore sector. Accordingly, risk management in this sector will continue to command particular atten- Strategy and planning process tion, as well as proactive restructuring measures. DVB carries out a revolving annual strategy and planning process, which includes a revision of the following // We strive to achieve positive core operational earn- components: ings before risk costs. This means that, in addition to our lending business, we will focus on value-added // Strategic planning is geared towards a five-year services for clients in our Transport Finance business, horizon. It consists of an analysis of the economic notably investment and asset management, corpo- environment, of market and competitive trends, the rate finance and advisory services. Bank’s strengths and weaknesses, and of a medium-term financial and capital planning derived from // We will continue keeping our focus on structural these input factors. changes with differing characteristics in the sub-markets of the global transport sector. Whilst aviation // Against the background of this multi-year planning, and land transport markets are predominantly shaped a more detailed operative one-year plan is worked by high excess liquidity together with strong margin out, which is one of the contributing factors to the and competitive pressures, the shipping industry has Bank’s individual target-setting system (manage- yet to see the end of the ongoing consolidation phase. ment by objectives).

// We will continue to analyse the business environment // The monthly internal reporting compares one-year in the markets we cover, in great detail – to focus on projections to actual results, analysing any deviations. business opportunities which will enable a return to profitability, and a sustainable future for the Bank. // In addition, full-year projections are implemented during the second half of each year; these may be used for fine-tuning and as a basis for the planning of future periods.

30 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

FUNDAMENTAL INFORMATION ABOUT THE GROUP

The Bank’s business strategy forms the fundamental basis Operative planning for the subsequent year takes place in for its risk strategies (in particular, the credit risk strategy), the autumn, based on a projection and incorporating the which refer to the business strategy in numerous respects. strategic planning. A “counter-current” method is employed for the purposes of operative planning. DVB’s strategy process is fully integrated into the strategic planning process of the DZ BANK Group, and coordi- Targets set by the Board of Managing Directors can be nated with that process in terms of timing. The annual derived from the medium-term planning (which has been strategy and planning process commences in late spring; revised by the time operative planning takes place) and it concludes in November of each year, with the submis- used by the business units for their individual projections. sion of all strategies and planning documents to the These are consolidated and assessed; a second round of Supervisory Board. planning may be required to revise such individual plans. This process is supported by a web-based planning tool. If During the months of April and May, the Bank compiles required, medium-term planning will be readjusted using current information concerning the economic environment, the results of the operative planning process. competitors’ behaviour, price and market trends, as well as the Bank’s strengths, weaknesses and market share – also comprising its own targets and planned measures. Key financial indicators GROUP MANAGEMENT REPORT DVB’s objective is to achieve a sustained increase in the A review of the medium-term five-year financial and capital Company’s value. To this end, we consistently develop planning is carried out in parallel, on the basis of the infor- and fine-tune our management and control systems. mation described, using a comprehensive and integrated Having implemented our EVA™ concept back in 2008, we planning model which provides a full set of projections have a toolbox at our disposal that permits a comprehen- based on numerous input parameters. This process incorpo- sive, value-driven management of the Group and of all rates the deliberations and requirements of the Board of divisions. This system supports the creation of enterprise Managing Directors, as well as the expectations and as- value and ensures Group-wide transparency on all levels. sumptions of the top management level below the Board of Managing Directors. The Bank employs key financial indicators to assess and manage its business: return on equity (ROE) before taxes, In addition, a macroeconomic model is applied, which helps cost/income ratio (CIR) and risk-adjusted Economic Value to estimate the impact of any changes in economic condi- Added (EVA™). ROE, the traditional profitability indicator, tions on the Bank’s key planning parameters and success shows net income before taxes in relation to equity. The factors. This macroeconomic model is also used to estimate CIR is used to assess efficiency. It compares general FINANCIAL STATEMENTS CONSOLIDATED the effect of such changes in the Bank’s environment upon administrative expenses to the income generated before its risk positions. Moreover, DVB needs to assess the im- allowance for credit losses. EVA™ represents residual pact of macroeconomic scenarios (as defined by regulatory profit; it expresses net profit (as an absolute amount) after authorities, for example), and to apply such scenarios to the deduction of costs for risk capital employed. specific characteristics of its business.

Key determining factors for DVB’s growth and success are the volume of originated new business, the interest margins generated on new business, the amount of commissions generated on new transactions, and the changes in AUDIT OPINION the risk profile. These parameters are in the focus of any planning deliberations. FURTHER INFORMATION

31 DVB BANK SE GROUP ANNUAL REPORT 2017

In order to harmonise the calculation methodology and Regular reporting/ enhance transparency thereof, the Bank includes management reporting expenses for the bank levy and the BVR Deposit Guaran- Company management is evident in the regular reporting tee Scheme, as well as the operative component of the system. DVB has a monthly reporting system in place, IAS 39 result (the result from investment securities) in its which applies uniform structures to the Group and its calculation methodology for all three management indica- divisions. The technical platform employed for this pur- tors. Expenses for the bank levy and the BVR Deposit pose permits separate reports to be generated at every Guarantee Scheme must be recognised at the beginning level and for each unit. The reports are published on a of each financial year, for the full year, and are then no monthly basis and used by senior management to focus longer amortised over the course of the year. However, in on the Group, its strategic business divisions and – in DVB’s view, amortising these charges over the periods some cases – on individual departments and teams. The within a financial year is commercially reasonable for reports generally have the same structure; they incorpo- calculating key financial indicators, since this allows for a rate a uniform profit contribution analysis scheme and the more realistic reflection of business performance. same key financial indicators. As a rule, the reports include year-on-year and target/actual comparisons. The On this basis, the financial indicators are calculated top management reporting package (the Management as follows: Report) also contains comments, analyses and assessments of current developments, deviations from projec- For the ROE (before taxes), consolidated net loss before tions, and the degree of target achievement. The report is IAS 39 and taxes (but including result from investment addressed to the Board of Managing Directors, but is securities) is divided by the pro rata temporis total of made available – simultaneously and in full – to the weighted capital (issued share capital, capital reserve, entire management team. In addition, regular reports are retained earnings excluding the fund for general banking prepared which cover individual business divisions in risks, non-controlling interests and deferred taxes, as well greater detail; ad-hoc analyses are carried out frequently as before appropriation of consolidated net loss). in order to analyse specific issues. Based on this internal reporting system, the Board of Managing Directors gives To calculate the CIR, the aggregate of general administra- a report on the Group’s current economic development to tive expenses and pro rata temporis expenses for the the Supervisory Board during each meeting. bank levy and the BVR Deposit Guarantee Scheme is divided by the total of net interest income (before allowance for credit losses), net fee and commission income, Precalculations result from investments in companies accounted for using DVB has defined minimum requirements for the profitability the equity method, net other operating income/expenses of new business; these are based on the same principles and result from investment securities. as those applied to measuring performance (minimum EVA™). The Bank uses a special tool to calculate profitabil- For EVATM, pro rata temporis risk capital costs are deduct- ity prior to entering into an exposure; the results of this ed from consolidated net loss before IAS 39 and taxes precalculation are a key basis for decisions and must be (but including result from investment securities). presented for each lending decision.

Except for ROE, the indicators described apply uniformly to all company divisions, and are calculated on the Technical infrastructure same basis. DVB employs uniform, Group-wide SAP systems for accounting, valuation, consolidation and financial reporting, Furthermore, DVB complies with regulatory capital ratios as well as for data inventory and reporting. Smaller online and, where applicable, capital limits within DZ BANK Group. analytical processing databases are used for the planning process and its presentation. At present, DVB does not employ non-financial indicators for managing the Company.

32 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

FUNDAMENTAL INFORMATION ABOUT THE GROUP, REPORT ON THE ECONOMIC POSITION

REPORT ON THE ECONOMIC POSITION

Economic environment Prices for the main crude oil benchmarks developed as follows: The cyclical upswing underway since mid-2016 has continued to strengthen. Some economies, accounting for // The spot price for the key European Brent (London) three quarters of world GDP, have seen a pickup in growth grade closed the year at US$66.82 per barrel on in year-on-year terms in 2017, the broadest synchronised 29 December 2017 – a 17.8% increase from the end global growth upsurge since 2010. of the previous year (US$56.71 per barrel). Also on a yearly average, prices for this key grade were a

marked 21.1% higher than in the previous year. GROUP MANAGEMENT REPORT

// The spot price for the US-traded West Texas Inter- Among advanced economies, growth in the third quarter of mediate grade also rose significantly during the year, 2017 was higher than projected, notably in Germany, Japan, by 12.6% to close at US$60.39 on 29 December 2017 Korea, and the United States. Key emerging markets and (previous year: US$53.65 per barrel). On a yearly developing economies, including Brazil, China, and South average, prices for this key grade were up 16.8% Africa, also posted third-quarter growth stronger than the year-on-year. forecasts. World trade has grown strongly in recent months, supported by a pickup in investment, particularly among advanced economies, and increased manufacturing output Sector-specific environment in Asia. The following subsequent sector-specific factors affected the Bank’s business activity during 2017:

Macroeconomic environment // In our view, 2017 was a year during which a turna-

Accordingly, the macroeconomic environment developed round materialised on shipping markets. Although FINANCIAL STATEMENTS CONSOLIDATED favourably throughout. Besides global trade, which is a the excess tonnage accumulated over recent years key parameter for DVB’s business growth, oil prices are was still present, with charter rates (which form the an important factor influencing our business model: they basis for vessel valuations, and hence, for collateral have a major influence on operating costs for transport values) still depressed, 2017 did see the beginning of sector companies around the globe. Oil price trends sig- an upward trend with slight improvements in some nificantly strengthen or weaken the profitability of trans- market segments, during the course of the year. Yet port enterprises. the shipping crisis over the past years brought higher liquidity constraints for many shipowners during Oil prices rose by about 20% between August 2017 and financial year 2017: for DVB, this led to impairments mid-December 2017, to over US$60 per barrel, supported of performance and, as a consequence, to increased AUDIT OPINION by the following influencing factors: an improving global allowance for credit losses. The Bank successfully – growth outlook, weather events in the US (like hurricanes and appropriately – selected new Shipping Finance About 20% – Oil price and wildfires), the extension of the OPEC+ agreement to business from amongst the market opportunities rose in the second half of the year limit oil production, and geopolitical tensions in the Mid- available, in a targeted manner. At the same time we dle East. continued to focus, in great detail, on managing exposures subject to higher risks. FURTHER INFORMATION

33 DVB BANK SE GROUP ANNUAL REPORT 2017

// Developments on the offshore market are driven by Developments on the financial markets oil price trends, which are both erratic and unpredict- DVB conducts its funding activities on the international able, as well as by existing overcapacity. Whilst rising financial markets through a multitude of instruments. In crude oil prices during the course of 2017 raised the this context, the Bank focuses on Germany, the other readiness of international oil and gas majors to in- German-speaking countries, and Northern Europe. That is creasingly consider investment decisions for explora- why developments on the international financial markets tion projects, very high volatility in crude oil price are important for DVB’s liabilities. developments triggered extensive cost-cutting measures by global oil majors. The existing overcapacity Key developments on the financial markets during 2017 for offshore vessels puts pressure on charter rates. can be summarised as follows: These factors do not provide any indication for a short-term improvement of market conditions for Following several years of political as well as economic suppliers to oil companies. Faced with these clear uncertainty, there was a marked improvement in financial market developments, the Bank decided to cease market sentiment during 2017, primarily thanks to the extending any new financings for offshore vessels and return of robust economic growth both in the euro area platforms during the 2017 financial year. In particular, and in the USA. Growth in the euro area in particular the difficult employment situation of highly-special- contributed to growing optimism. During 2017, expansion ised offshore supply vessels required DVB to recog- was not limited to the core economies, but also to coun- nise additional allowance for credit losses. tries at the euro periphery. Neither the Trump presidency, nor the difficult negotiations regarding Brexit, provided // The aviation and land transport finance markets in much in the way of uncertainty. Likewise, conflicts in the 2017 were shaped by significant levels of liquidity Middle East and the tense situation between North Korea seeking investment, and by intensified competition and its neighbours failed to significantly burden financial between banks and other institutional investors. This markets sentiment. persistent, sharp competition led to lower new business volumes and put pressure upon interest mar- The European Central Bank (ECB) maintained its policy gins. Nonetheless, both divisions contributed a posi- of monetary easing throughout 2017, leaving key interest tive result. rates for the euro area at historically low levels. Specifi- –0.4% – ECB's cally, the ECB’s main refinancing rate for euro area finan- rate for the deposite facility We analyse developments on DVB’s core markets, in cial institutions remained at zero per cent, and the rate remained negative detail, in the market analyses provided by Shipping for the deposit facility remained negative, at –0.4%. Finance (pages 60–61), Aviation Finance (pages 68–69), Moreover, the ECB continued its bond-purchasing pro- Land Transport Finance (pages 76–77), Offshore Finance gramme, buying securities worth €80 billion each month (pages 84), as well as in the chapters on Financial Institu- until March 2017, within the scope of its Asset Purchase tions and Syndications (pages 88–89), DVB Corporate Programme. As resolved at its meeting in December 2016, Finance (pages 92–93) and Investment Management the ECB Council extended the purchasing programme until (pages 97 and 100). Reference is made to these explana- the end of 2017, albeit with a reduced monthly buying tions, in addition to the comments provided here. volume of €60 billion. Giving reasons for its continued expansive monetary policy, the ECB cited the persistently weak momentum in consumer prices, and still-lacklustre economic performance in the euro area. Against the background of an accelerating recovery in the euro area during the course of the year, the ECB Council resolved in October 2017 to once again extend the programme until at least September 2018, but subject to another reduction in monthly buying volumes, to €30 billion, effective from January 2018.

34 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

REPORT ON THE ECONOMIC POSITION

The US Federal Reserve (Fed) continued to pursue its Euro/US dollar exchange rate policy of a turnaround in interest rates throughout 2017. developments Over the course of the past year, the Fed successively The development of the euro/US dollar exchange rate plays raised its target Fed Funds range in three steps, by a major role for DVB’s international Transport Finance 25 basis points each time, to 1.25%–1.5%. In addition, business, given that financings are predominantly denomi- the US central bank cautiously started to reduce the size nated in US dollars whilst the Bank’s funding is primarily of its balance sheet, which had grown to US$4.5 trillion denominated in euros. as a result of bond purchases. Starting from October 2017, the Fed cut back the volume of reinvested proceeds Key trends during 2017 can be summarised as follows: from its asset-buying programmes by US$10 billion a month. Giving reasons for these further steps to normal- The euro appreciated significantly vis-à-vis the US dollar ise US monetary policy, the Fed’s Open Market Commit- during 2017, reaching an exchange rate of US$1.19 at the tee, which is responsible for monetary policy decisions, end of the year – up 14 US cents compared to the end of cited the good economic situation in the United States: 2016. This increase materialised during the second and for instance, the unemployment rate continued to fall third quarters in particular, whilst the Euro/US dollar ex- during 2017, down by more than half a percentage point change rate showed a more or less sideways trend during year-on-year, to 4.1% at the end of the year – a level last the first and fourth quarters. The single European currency GROUP MANAGEMENT REPORT seen in 2000. However, the US inflation rate remained benefited from the robust economic upswing and changed below average, at less than 2%, explaining why the Fed’s monetary policy expectations for the euro area: firstly, an normalisation measures were not more pronounced. economic recovery that clearly outperformed expectations became evident during the spring. Secondly, there were more specific expectations on the foreign exchange mar- Last Annual General Meeting of DVB kets that the ECB would not further expand its (already) BANK SE; squeeze-out of minority ultra-loose monetary policy, but would instead begin nor- shareholders; control and profit and malising it – albeit at a very slow pace. Additional support loss transfer agreement for the euro was provided through the stabilisation of the Almost 30 years after DVB shares were listed at the political situation in France, where non-partisan Emmanuel Frankfurt Stock Exchange, at the Bank’s last public Ordi- Macron won the presidential elections against the candi- nary Annual General Meeting on 22 June 2017, the share- date of the Front National. Macron’s clear commitment to holders of DVB Bank SE resolved the transfer of shares the euro strengthened the confidence of investors in the held by minority shareholders of DVB Bank SE to euro area. The euro also benefited from US dollar weak-

DZ BANK AG Deutsche Zentral-Genossenschaftsbank, ness emanating from political uncertainty related to the FINANCIAL STATEMENTS CONSOLIDATED Frankfurt am Main, in return for appropriate cash compen- Trump presidency. In contrast, the tightening of US mone- sation. This squeeze-out under company law (pursuant to tary policy was a less important factor during the year sections 327a et seqq. of the AktG) was entered into the under review, since this had already largely been factored Commercial Register at the Frankfurt/Main district court in during the previous year. on 17 August 2017; accordingly, all shares previously held by minority shareholders were transferred to DZ BANK. 17 Aug Trading in DVB Bank SE shares at the Frankfurt Stock Development of DVB’s ratings Trading in DVB shares was ceased Exchange subsequently ceased on the same day, and the On 15 December 2017, rating agency Standard & Poor’s cash compensation was disbursed to minority sharehold- downgraded DVB’s ratings, citing DVB’s “weakened stra- ers on 22 August 2017, via their custodian banks. tegic importance” to DZ BANK Group. Specifically, S&P AUDIT OPINION lowered DVB’s ratings by several notches, to BBB/A-2/ A control and profit and loss transfer agreement was negative outlook (previously, since October 2016: A+/A-1/ entered into between DVB Bank SE and DZ BANK AG, negative outlook). The ratings assigned by FitchRatings with retroactive effect from 1 January 2017, and entered to the German Cooperative Financial Services Network into the Commercial Register at the Frankfurt/Main were unchanged, at “AA-/F1+”. district court. FURTHER INFORMATION

35 DVB BANK SE GROUP ANNUAL REPORT 2017

Financial position and // General administrative expenses declined by 8.6%, to €162.3 million (previous year: €177.5 million). Figures in the Group Man- performance agement Report, and in the consolidated financial state- Business performance of DVB Bank Group lagged behind // The net result from financial instruments in accord- ments (including notes) are rounded pursuant to stand- targets; 2017 proved to be the most challenging year in ance with IAS 39 – which is generally volatile – ard business principles. This DVB’s corporate history, which goes back almost 95 years. amounted to €–138.7 million (previous year: may result in slight differences when aggregating figures €–2.7 million). Here, narrowing US dollar/euro basis and calculating percentages. spreads led to higher measurement losses from cross-currency swaps. Moreover, significant impairments on investments accounted for using the equity Financial assessment of business method lowered the result from investment securities. performance in 2017 Transport market developments outlined as sector-specific // Consolidated net loss before taxes fell from factors in the description of the business environment, €135.3 million to €863.7 million. and in the market analyses provided by the individual Transport Finance divisions, had a significant impact on At €24.1 billion, the business volume in 2017 was 17.5% the Bank’s operating performance during the year under lower than the previous year (€29.2 billion). Besides total review. In particular, these developments thus influenced assets of €23.3 billion (previous year: €27.7 billion), the the development of new business (and consequently, of business volume includes contingent liabilities from net interest income), allowance for credit losses, and net irrevocable loan commitments of €0.8 billion (previous fee and commission income. year: €1.5 billion).

This can be summarised as follows: The key financial indicators which DVB Bank Group uses to manage its business developed as follows: A control and profit and loss transfer agreement was // Net interest income was €174.8 million (previous entered into between DVB year: €209.0 million), reflecting lower new business The return on equity (before taxes) stood at –55.1% (pre- Bank SE and DZ BANK AG Deutsche Zentral-Genossen- volumes and declining interest margins. vious year: –10.8%), whilst the cost/income ratio was schaftsbank, Frankfurt am 152.8% (previous year: 44.3%) and the risk-adjusted Main, with retroactive effect from 1 January 2017, and // Persistently challenging conditions on the shipping Economic Value Added totalled €–901.7 million (previous entered into the Commercial and offshore markets triggered increased allowance year: €–249.0 million). Register at the Frankfurt/ Main district court. In ac- for credit losses of €727.9 million (previous year: cordance with IFRS, any €381.4 million). Right at the outset of 2017, the Board of Managing Direc- receivables from or liabilities vis-à-vis DZ BANK must be tors developed a strategic agenda designed to enhance recognised directly in equity, // In line with lower new business volumes, net fee and productivity and efficiency, and to create the prerequisites and have no impact on the income statement. commission income of €92.7 million was also down for returning the Bank’s business model to an adequate year-on-year (previous year: €119.2 million). level of profitability (Details can be found in the chapter “Fundamental information about the Group” on page 29). // Net other operating income/expenses totalled €–77.8 million (previous year: €99.6 million). Write- downs of goodwill of €59.2 million and €23.3 million in expenses recognised in connection with the further development of DVB’s business model had a major impact on expenditure.

36 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

REPORT ON THE ECONOMIC POSITION

Financial performance Total income (after IAS 39) amounted to €–688.4 million (previous year: €53.3 million). TABLE 01

Financial performance T 01

€ mn 2017 2016 %

Interest income 1,057.8 1,025.0 3.2

Interest expenses –883.0 –816.0 8.2

Net interest income 174.8 209.0 –16.4

Allowance for credit losses –727.9 –381.4 90.8

Net interest income after allowance for credit losses –553.1 –172.4 –

Fee and commission income 102.5 126.6 –19.0

Fee and commission expenses –9.8 –7.4 32.4

Net fee and commission income 92.7 119.2 –22.2

Results from investments in companies accounted for using the equity method –11.5 9.6 – GROUP MANAGEMENT REPORT

Net other operating income/expenses –77.8 99.6 –

Net result from financial instruments in accordance with IAS 39 –138.7 –2.7 –

Total income (after IAS 39) –688.4 53.3 –

Net interest income after allowance Allowance for credit losses for credit losses Allowance for credit losses increased from €381.4 million Net interest income after allowance for credit losses to €727.9 million. Additions to allowance for credit losses declined from €–172.4 million to €–553.1 million. totalled €871.7 million, of which €405.0 million was attributable to Shipping Finance and €427.7 million to Net interest income Offshore Finance. Conversely, allowance for credit losses Net interest income decreased by 16.4%, from €209.0 mil- of €141.9 million was reversed, of which €87.5 million lion to €174.8 million. This was mainly due to the lower was in Shipping Finance and €32.7 million in Offshore volume of new Transport Finance business, lower net Finance. TABLE 03 FINANCIAL STATEMENTS CONSOLIDATED interest income from operating leases, as well as higher interest expenses on deposits and subordinated debt. Allowance for credit losses T 03 Hence, interest income increased by 3.2% to €1,057.8 million (previous year: €1,025.0 million), while interest ex- € mn 2017 2016 % penses were up 8.2%, to €883.0 million (previous year: Additions –871.7 –523.7 66.5 €816.0 million). Reversals 141.9 139.1 2.0

Direct write-offs –4.7 –0.5 –

Average gross interest margins on new business were Recoveries on loans and ad- slightly higher overall, and developed as follows: TABLE 02 vances previously written off 6.6 3.7 78.4 AUDIT OPINION Total –727.9 –381.4 90.8 Development of average interest margin on new Transport Finance business, as at 31 December T 02 Allowance for credit losses comprised specific as well as portfolio-based allowance for credit losses, and provi- Basis points 2017 2016 2015 2014 2013 sions. Specific allowance for credit losses, which is rec- Shipping Finance 283 271 250 269 316 ognised in income, was up year-on-year, to €735.0 million Aviation Finance 222 223 218 250 284 (previous year: €370.1 million). Portfolio-based allowance Offshore Finance1 n/a 259 247 271 330 for credit losses of €19.9 million were released, and Land Transport €12.8 million in provisions was recognised (previous year: Finance 203 217 232 238 250 portfolio-based allowance for credit losses of €13.3 mil- ITF Suisse2 n/a n/a 237 228 292 lion recognised, and €2.0 million in provisions released).

1 No new business was generated in Offshore Finance during the year under review; taking effect 1 January 2018, all Offshore Finance activities were ceased. 2 DVB decided to cease marketing activities in this field. Accordingly, no new business was originated since 2016. FURTHER INFORMATION

37 DVB BANK SE GROUP ANNUAL REPORT 2017

The following tables show the development, broken down by business division, for 2017 and 2016: TABLES 04/05

Allowance for credit losses by business division 2017 T 04

Recoveries on loans and advances Direct previously € mn Additions Reversals write-offs written off Total

Shipping Finance –393.9 68.4 –2.8 3.1 –325.2

Aviation Finance –16.5 2.3 – 0.2 –14.0

Offshore Finance –411.1 19.6 – – –391.5

Land Transport Finance –1.0 – – 0.4 –0.6

Investment Management –8.3 3.6 0.0 – –4.7

ITF Suisse –10.7 9.1 –1.4 2.6 –0.4

Business no longer in line with DVB’s strategy –0.1 2.4 – 0.2 2.5

Other –0.7 – –0.5 0.1 –1.1

Total specific allowance for credit losses –842.3 105.4 –4.7 6.6 –735.0

Shipping Finance –11.1 19.1 – – 8.0

Aviation Finance –1.5 3.0 – – 1.5

Offshore Finance –3.8 13.1 – – 9.3

Land Transport Finance –0.2 0.3 – – 0.1

Investment Management – – – – –

ITF Suisse 0.0 0.1 – – 0.1

Business no longer in line with DVB’s strategy – 0.9 – – 0.9

Other 0.0 0.0 – – 0.0

Total portfolio-based allowance for credit losses –16.6 36.5 0.0 0.0 19.9

Offshore Finance –12.8 – – – –12.8

Total provisions –12.8 – – – –12.8

Total –871.7 141.9 –4.7 6.6 –727.9

38 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

REPORT ON THE ECONOMIC POSITION

Allowance for credit losses by business division 2016 T 05

Recoveries on loans and advances Direct previously € mn Additions Reversals write-offs written off Total

Shipping Finance –325.0 96.4 –0.1 2.9 –225.8

Aviation Finance –23.7 4.4 – 0.5 –18.8

Offshore Finance –57.3 0.1 0.0 – –57.2

Land Transport Finance –1.4 – – – –1.4

Investment Management –22.7 1.9 – – –20.8

ITF Suisse –56.6 10.7 0.0 – –45.9

Business no longer in line with DVB’s strategy –1.0 0.9 – 0.2 0.1 GROUP MANAGEMENT REPORT

Other – 0.0 –0.4 0.1 –0.3

Total specific allowance for credit losses –487.7 114.4 –0.5 3.7 –370.1

Shipping Finance –19.6 15.5 – – –4.1

Aviation Finance –3.3 2.9 – – –0.4

Offshore Finance –12.4 1.3 – – –11.1

Land Transport Finance –0.1 0.5 – – 0.4

Investment Management – – – – –

ITF Suisse –0.1 1.5 – – 1.3

Business no longer in line with DVB’s strategy – 0.6 – – 0.6

Other 0.0 – – – 0.0

Total portfolio-based allowance for credit losses –35.5 22.3 – – –13.3

Aviation Finance – 2.3 – – 2.3 FINANCIAL STATEMENTS CONSOLIDATED

Offshore Finance –0.4 – – – –0.4

Business no longer in line with DVB’s strategy – 0.1 – – 0.1

Total provisions –0.4 2.4 – – 2.0

Total –523.7 139.1 –0.5 3.7 –381.4 AUDIT OPINION FURTHER INFORMATION

39 DVB BANK SE GROUP ANNUAL REPORT 2017

The following developments were recorded for the // ITF Suisse subsidiary individual portfolios in 2017: €0.3 million in new allowance for credit losses, For details on the development of allowance for credit comprising losses, please see the report // Shipping Finance €12.1 million in new specific and portfolio-based on opportunities and risks (pages 126–128). It portrays €317.2 million in new allowance for credit losses, allowance for credit losses, as well as the changes by business comprising direct write-offs, and division and region, among other things. €407.8 million in new specific and portfolio-based €11.8 million in amounts released (comprising allowance for credit losses, as well specific and portfolio-based allow- as direct write-offs, and ance for credit losses), or recovered €90.6 million in amounts released (comprising on loans and advances previously specific and portfolio-based allow- written off. ance for credit losses), or recovered on loans and advances previously Total allowance for credit losses written off. Total allowance for credit losses (composed of specific and portfolio-based allowance for credit losses, and // Aviation Finance provisions) increased from €633.1 million to €1,081.9 mil- €12.5 million in new allowance for credit losses, lion as at 31 December 2017, comprising mainly the comprising following items: TABLE 06 €18.0 million in new specific and portfolio-based allowance for credit losses, and Total allowance for credit losses T 06 €5.5 million in amounts released (comprising specific and portfolio-based allow- € mn 2017 ance for credit losses, as well as Shipping Finance portfolio 567.5 provisions), or recovered on loans Offshore Finance portfolio 408.2

and advances previously written off. Aviation Finance portfolio 67.2

Investment Management portfolio 33.6 // Offshore Finance Land Transport Finance portfolio 3.1 €395.0 million in new allowance for credit losses, Business that is no longer in line with comprising DVB’s strategy 1.3 €427.7 million in new specific and portfolio-based Portfolio comprising other items 0.9 allowance for credit losses, as well as provisions and direct write-offs, and €32.7 million in amounts released (comprising Country risk provisions specific and portfolio-based allow- As in the previous year, no country risk provisions were ance for credit losses). required. The Structured Asset Lending credit exposures of DVB’s Shipping Finance, Aviation Finance, Offshore // Land Transport Finance Finance and Land Transport Finance business divisions are €0.5 million in new allowance for credit losses, almost exclusively collateralised by the transport assets we comprising finance; thus, at only 1.3% (previous year: 1.2%) in terms of €1.2 million in new specific and portfolio-based net risk exposure, the share of commitments that involve allowance for credit losses, and a high degree of country risk was once again very low. €0.7 million in amounts released (comprising portfolio-based allowance for credit Net fee and commission income losses), or recovered on loans and Net fee and commission income, which primarily includes advances previously written off. fees and commissions from lending business, asset management and Corporate Finance advisory fees, amounted to // Investment Management €92.7 million (previous year: €119.2 million – down 22.2%). €4.7 million in new allowance for credit losses, comprising Fee and commission income declined by 19.0%, to €8.3 million in new specific allowance for credit €102.5 million (previous year: €126.6 million), whilst fee losses, as well as direct write-offs, and commission expense rose by 32.4%, from €7.4 million and to €9.8 million. €3.6 million in specific allowance for credit losses released.

40 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

REPORT ON THE ECONOMIC POSITION

Results from investments in companies Depreciation, amortisation, impairment and accounted for using the equity method write-ups The result from investments accounted for using the Depreciation, amortisation, impairment and write-ups equity method declined from €9.6 million to €–11.5 mil- declined by 14.5%, from €5.5 million to €4.7 million. lion, largely due to the negative operating performance of individual investments. Consolidated net loss before taxes Consolidated net loss before taxes fell from €135.3 mil- Net other operating income/expenses lion to €863.7 million. TABLE 07 Net other operating income and expenses stood at €–77.8 million (previous year: €99.6 million). Other operating Consolidated net loss before taxes T 07 income decreased from €198.8 million to €64.5 million. The previous year’s figure included a €150.0 million € mn 2017 2016 % contribution to income by DZ BANK AG Deutsche Zen- Consolidated net loss before IAS 39, bank levy, BVR Deposit tral-Genossenschaftsbank, Frankfurt am Main. Other Guarantee Scheme and taxes –712.0 –121.5 – operating expenses amounted to €142.3 million (previous Trading result –27.6 4.9 – year: €92.2 million), mainly attributable to write-downs of Hedge result –10.0 –6.5 53.8 goodwill in Shipping Finance and expenses recognised in GROUP MANAGEMENT REPORT connection with the further development of DVB’s busi- Result from derivatives entered into without intention to trade –37.6 10.9 – ness model. Result from investment securities –63.5 –12.0 –

General administrative expenses Net result from financial General administrative expenses declined by 8.6%, to instruments in accordance €162.3 million (previous year: €177.5 million). with IAS 39 –138.7 –2.7 – Consolidated net loss before bank levy, BVR Deposit Staff expenses Guarantee Scheme and taxes –850.7 –124.2 –

Given the tight business conditions, staff expenses de- Expenses for the bank levy and clined by 12.3%, from €103.5 million to €90.8 million, the BVR Deposit Guarantee Scheme –13.0 –11.1 17.1 reflecting the fact that no provisions were recognised for bonus payments. Wages and salaries were 14.2% lower, Consolidated net loss before taxes –863.7 –135.3 – at €76.9 million (previous year: €89.6 million).

Non-staff expenses Net result from financial instruments in accordance with FINANCIAL STATEMENTS CONSOLIDATED Likewise, non-staff expenses were lower than in the IAS 39 (comprising the trading result, the hedge result, previous year, down 2.5% to €66.8 million (previous year: the result from derivatives entered into without intention €68.5 million), mainly comprising the following items: to trade, and the result from investment securities) – which is generally volatile – amounted to €–138.7 million // advisory expenses of €21.4 million (previous year: (previous year: €–2.7 million). Here, narrowing US dollar/ €25.5 million), which break down as follows: euro basis spreads led to higher measurement losses €5.7 million (previous year: €10.7 million) for legal and from cross-currency swaps. Moreover, significant impair- audit expenses (including €2.5 million (previous year: ments on investments accounted for using the equity €2.6 million) for the audit of the financial statements method lowered the result from investment securities. and other audit and advisory services); as well as AUDIT OPINION €15.7 million (previous year: €14.8 million) for other Persistently strong volatility on the interest rate and advisory services (including IT consultancy expenses); foreign exchange markets throughout 2017 was reflected in the following items: // ancillary labour costs of €14.6 million (previous year: €16.1 million); // The trading result declined from €4.9 million to €–27.6 million, including standalone derivatives in // occupancy expenses of €10.0 million (previous year: the trading portfolio. €9.6 million); // Conversely, the hedge result comprised underlying // expenses for temporary staff of €2.2 million (previous transactions and derivatives with effective hedge year: €2.5 million); and relationships, and stood at €–10.0 million, after €–6.5 million in the previous year. // contributions and fees of €4.6 million (previous year: €1.9 million). FURTHER INFORMATION

41 DVB BANK SE GROUP ANNUAL REPORT 2017

// The result from derivatives entered into without Consolidated net loss before taxes (€863.7 million) was intention to trade was €–37.6 million (previous year: subject to income taxes of €39.9 million, including current €10.9 million). tax refunds in the amount of €0.7 million (previous year: €7.2 million) and expenses from deferred income taxes of // The result from investment securities amounted to €40.6 million (previous year: €3.8 million). €–63.5 million (previous year: €–12.0 million). Consolidated net loss thus fell to €903.6 million (previous Consolidated net loss before bank levy, BVR Deposit year: €138.7 million). Consolidated net loss attributable to Guarantee Scheme and taxes totalled €850.7 million non-controlling interests decreased to €0.1 million (previ- (previous year: €124.2 million). Bank levy charges of ous year: €0.6 million). This reflects the share of results €8.3 million for the financial year 2017 (previous year: economically attributable to non-controlling shareholders €6.4 million) as well as €4.7 million in expenses for the in consolidated entities. Consolidated net loss attributa- Deposit Guarantee Scheme of the National Association of ble to the shareholder of DVB Bank SE therefore amount- German Cooperative Banks (BVR; previous year: €4.7 mil- ed to €903.7 million. CHART 03 lion) needed to be deducted from this figure. Distributable profit and appropriation Development of consolidated net loss of profits Consolidated net loss after taxes amounted to €903.6 mil- Distributable profit was € nil (previous year: € nil). lion (previous year: €138.7 million). TABLE 08 €903.7 million was withdrawn from retained earnings (previous year: €139.3 million). TABLE 09

Consolidated net loss T 08 Distributable profit T 09 € mn 2017 2016 % € mn 2017 2016 % Consolidated net loss before taxes –863.7 –135.3 – Consolidated net loss –903.6 –138.7 – Income taxes –39.9 –3.4 – Consolidated net loss attributable Consolidated net loss (after taxes) –903.6 –138.7 – to non-controlling interests –0.1 –0.6 –83.3 thereof: consolidated net loss Withdrawal from retained earnings 903.7 139.3 – attributable to non-controlling interests 0.1 0.6 –83.3 Distributable profit 0.0 0.0 – thereof: consolidated net loss attributable to the shareholder of DVB Bank SE –903.7 –139.3 –

Development of consolidated net loss 2017 C 03

€ mn

–549.7

–162.3

–138.7 –13.0 –39.9 –903.6

Total income1 General Net result from Expenses for the bank Income taxes Consolidated administrative financial instruments levy and the BVR2 net loss expenses in accordance Deposit Guarantee with IAS 39 Scheme (financial year)

1 Composing net interest income after allowance for credit losses, net fee and commission income, result from investments in companies accounted for using the equity method and net other operating income/expenses; 2 National Assosiation of German Cooperative Banks

42 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

REPORT ON THE ECONOMIC POSITION

Financial position Common equity tier 1 capital totalled €1,157.5 million DVB’s total assets declined by a total of 15.9%, to (previous year: 1,012.0 million). Reserves amounted to €23.3 billion (previous year: €27.7 billion). €1,061.0 million (previous year: €1,122.1 million). Subordi- nated liabilities totalled €487.7 million (previous year: Liabilities on the statement of €619.3 million); tier 2 capital amounted to €508.4 million financial position (previous year: €584.0 million). Deposits from other banks declined by 18.2%, from €3.3 billion to €2.7 billion. Deposits from customers de- The Bank had adequate own funds – as defined by the creased by 2.6%, from €7.8 billion to €7.6 billion. Securi- CRR – available throughout 2017. Moreover, it complied tised liabilities declined by 17.3%, from €12.7 billion to with regulatory capital requirements pursuant to Article 72 €10.5 billion as at the reporting date, whilst subordinated in conjunction with Article 25 of Regulation 575/2013/EU liabilities decreased by 30.0%, to €0.7 billion (previous (CRR) at all times during the year under review. TABLE 12 year: €1.0 billion).

Capital ratios – Basel III T 12 Total liabilities were denominated in the following currencies: TABLE 10 31 Dec 31 Dec % 2017 2016 pp GROUP MANAGEMENT REPORT Common equity tier 1 ratio 22.8 13.2 9.6 Breakdown of liabilities by currency T 10 Additional tier 1 ratio 22.8 13.2 9.6

€ bn 2017 2016 % Total capital ratio 32.8 20.7 12.1

Swiss franc 0.1 0.1 –

Euro 16.4 16.5 –0.6 DVB discloses capital ratios determined in accordance Norwegian krone 0.1 0.1 – with the Basel III framework (Advanced Approach), and US dollar 4.9 8.0 –38.8 after appropriation of profits: on this basis, the common Total 21.5 24.7 –13.0 equity tier 1 ratio amounted to 22.8% (previous year: 13.2%), whilst the total capital ratio was 32.8% (previous year: 20.7%). Development of own funds Own funds as defined by the Capital Requirements DVB’s capitalisation remained above the minimum require- Regulation (CRR) totalled €1,665.9 million (previous ments stipulated by the CRR at all times during the year year: €1,596.0 million). TABLE 11 under review. Its capital ratios were always significantly FINANCIAL STATEMENTS CONSOLIDATED higher than the requirements set out in Article 92 (1) of the CRR, as well as Article 465 (1) of the CRR in conjunction with section 23 of the German Solvency Regulation.

Own funds as defined by the CRR T 11

€ mn 31 Dec 2017 31 Dec 2016 %

Paid-up capital instruments1 118.7 118.7 0.0

Capital reserve plus other reserves eligible for inclusion1 1,061.0 1,122.1 –5.4 AUDIT OPINION

Deduction from common equity tier 1 capital –100.2 –388.8 –74.2

Transitional provisions regarding common equity tier 1 capital 78.0 160.0 –51.3

Common equity tier 1 capital 1,157.5 1,012.0 14.4

Transitional provisions regarding additional tier 1 capital –76.4 –112.6 –32.1

Transfer of shortfall to common equity tier 1 capital 76.4 112.6 –32.1

Additional tier 1 capital 0.0 0.0 –

Subordinated liabilities 487.7 619.3 –21.2

Eligible portion of valuation adjustment excess 21.4 – –

Transitional provisions regarding tier 2 capital –0.7 –35.3 –98.0

Tier 2 capital 508.4 584.0 –12.9

Modified available equity2 1,665.9 1,596.0 4.4

1 Excluding treasury shares 2 Taking into consideration reserves and transfers to reserves from net income FURTHER INFORMATION

43 DVB BANK SE GROUP ANNUAL REPORT 2017

Key management indicators The CIR of 152.8% (previous year: 44.3%) was calcu The Bank employs key financial indicators to assess and lated in the following manner: the aggregate of general manage its business: return on equity (ROE) before taxes, administrative expenses and pro rata temporis expenses cost/income ratio (CIR) and risk-adjusted Economic Value for the bank levy and the BVR Deposit Guarantee Added (EVA™). Scheme (€175.3 million) was divided by the total of net interest income before allowance for credit losses, net In order to harmonise the calculation methodology and fee and commission income, results from investments in enhance transparency thereof, the Bank has included companies accounted for using the equity method, net expenses for the bank levy and the BVR Deposit Guaran- other operating income/expenses, and the result from tee Scheme, as well as the operative component of the investment securities (€114.7 million). IAS 39 result (the result from investment securities) in its calculation methodology for all three management indica- Risk-adjusted EVATM stood at €–901.7 million (previous tors. Expenses for the bank levy and the BVR Deposit year: €–249.0 million). It was calculated by deducting pro Guarantee Scheme must be recognised at the beginning rata temporis risk capital costs of €113.2 million from of each financial year, for the full year, and are then no consolidated net loss before IAS 39 and before taxes, but longer amortised over the course of the year. However, in including the result from investment securities of DVB’s view, amortising these charges over the periods €788.5 million. TABLE 13 within a financial year is commercially sensible for calculating key financial indicators, since this allows for a more realistic reflection of business performance. Refinancing The Frankfurt-based Group Treasury is responsible for On this basis, the financial indicators are calculated as securing refinancing throughout the Group. The unit also follows: manages DVB’s trading activities at a centralised level, and hedges the market risk exposure of direct and indirect ROE (before taxes) of –55.1% (previous year: –10.8%) subsidiaries, thus indemnifying these entities against was calculated as follows: consolidated net loss before market risks. DVB conducts trading activities in risk man- IAS 39 and taxes (but including the result from investment agement products for its own positions and on behalf of its securities) of €788.5 million was divided by the pro rata clients. It does so in order to hedge against market risk temporis total of the weighted capital (issued share capi- exposure from the customer lending business, and to hedge tal, capital reserve and retained earnings, excluding the profit contributions – which are predominantly generated in fund for general banking risks, non-controlling interests currencies other than the euro – against exchange rate and deferred taxes, and before appropriation of consoli- fluctuations. Based on our diversified funding structure, dated net loss) of €1,429.9 million. we maintain business relationships with a large number of national and international investors.

Financial indicators T 13

2017 2016 2015 2014 2013

ROE (before taxes)1 –55.1% –10.8% 0.8% 9.2% 8.9%

CIR1 152.8% 44.3% 55.3% 51.5% 47.8%

EVA™ €–901.7 million €–249.0 million €–86.8 million €27.3 million €22.8 million

1 The figures for the years 2013 to 2015 diverge from those originally stated, due to the fact that the calculation method was changed in 2016. Comparative figures were adjusted accordingly.

44 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

REPORT ON THE ECONOMIC POSITION

Funding activities: DVB extended its Refinancing volume – euro benchmark curve, broadening the maturity breakdown investor base As in the previous years, we adhered to our principle of DVB has emphasised granular and matched-maturity granular and matched-maturity funding in 2017. CHART 04 funding for many years – a goal the Bank adhered to in 2017 as well. At year-end, the funding base included 93.1% long-term funds (previous year: 91.8%). The structure of the funding DVB again broadened its investor base throughout 2017, mix is analysed as follows (in terms of nominal volumes): through the placement of promissory note loans and bearer bonds outside the Volksbanken Raiffeisenbanken coopera- // 45.8% unsecured bearer debt securities tive financial network. In detail, funding consisted of the (previous year: 49.4%) following amounts and instruments: // 40.6% promissory note loans/long-term deposits // issue of senior unsecured bearer bonds totalling (previous year: 35.8%) €1.1 billion under the Debt Issuance Programme. This included two euro benchmark issues of // 3.3% subordinated liabilities (previous year: 3.5%)

€0.5 billion each; GROUP MANAGEMENT REPORT // 3.2% ship covered bonds (previous year: 3.1%) // placement of promissory note loans in an aggregate amount of €0.7 billion. // 0.2% long-term deposits (previous year: 0.0%)

Short-term funding only accounts for 6.9% (previous year: 8.2%) and mainly comprises short-term deposits from clients as well as cash collateral received for interest rate and foreign exchange derivatives entered into for hedging purposes.

Liquidity profile C 04

€ bn

9.0 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED

7.5

6.0

4.5

3.0 AUDIT OPINION

1.5

0 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 > 2028 ∞

Assets Liabilities FURTHER INFORMATION

45 DVB BANK SE GROUP ANNUAL REPORT 2017

Refinancing volume – structure of Net assets refinancing vehicles Nominal interest-bearing liabilities decreased by 17.4% Business volume overall, to €21.3 billion (previous year: €25.8 billion). At €24.1 billion, the volume of business in 2017 was 17.5% lower than the previous year (€29.2 billion). The structural comparison of the individual refinancing Besides total assets of €23.3 billion (previous year: vehicles portrays the following scenario: €27.7 billion), the business volume includes contingent liabilities from irrevocable loan commitments of €0.8 bil- Unsecured bearer debt securities (senior long-term issues lion (previous year: €1.5 billion) under the medium-term note programme) were down, by 22.8%, to €9.8 billion (previous year: €12.7 billion), whilst Lending volume over time the aggregate of senior long-term promissory note loans Lending volume of €21.5 billion was down 25.3% on the and term deposits decreased by 6.5%, to €8.6 billion previous year. TABLE 14 (previous year: €9.2 billion). The volume of outstanding ship covered bonds was €0.7 billion, almost unchanged Lending volume T 14 from the previous year’s figure of €0.8 billion. Outstanding subordinated liabilities decreased by 30.0%, to €0.7 bil- € bn 2017 2016 % lion (previous year: €1.0 billion). Aggregate short-term Loans and advances to banks 0.6 1.6 –62.5 liabilities, comprising cash collateral and customer depos- Loans and advances to its, decreased by 28.6%, to €1.5 billion (previous year: customers 18.1 23.7 –23.6 €2.1 billion). CHART 05 Securities (including equity investments) 0.4 0.6 –33.3

Financial guarantee contracts from guarantees 0.2 0.3 –33.3

Contingent liabilities from irrevocable loan commitments 0.8 1.5 –46.7

Derivatives 1.4 1.1 27.3

Lending volume 21.5 28.8 –25.3

Structure of refinancing vehicles C 05

€ bn

15.0 –22.8%

12.5 12.7

–6.5%

10.0 9.8 9.2 8.6

7.5

5.0 –28.6%

– 30.0% –12.5%

2.5 2.1 1.5

1.0 0.7 0.8 0.7 0

Subordinated Short-term deposits from Ship covered bonds Promissory note Uncovered liabilities banks/clients and cash loans/long-term depostis bearer debt securities collateral

2016 2017

46 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

REPORT ON THE ECONOMIC POSITION

Loans and advances to banks were down 62.5%, from Nominal volume of customer lending €1.6 billion to €0.6 billion. Loans and advances to cus- by business division tomers decreased by 23.6%, to €18.1 billion (previous DVB’s nominal volume of customer lending (comprising year: €23.7 billion). The securities portfolio (including loans and advances to customers, guarantees and indem- equity investments) totalled €0.4 billion (previous year: nities, irrevocable loan commitments and derivatives) €0.6 billion). Financial guarantee contracts from guaran- includes structured asset lending in Transport Finance, tees were at €0.2 billion, thus slightly below the level of the investment consulting and asset management activi- the previous year (€0.3 billion). Contingent liabilities ties in Investment Management, existing interbank expo- from irrevocable loan commitments declined by 46.7%, sures of our subsidiary ITF Suisse, and the exposures no to €0.8 billion (previous year: €1.5 billion). As in previous longer in line with DVB’s strategy held by Transport Infra- years, DVB employed derivative instruments for hedging structure and D-Marketing. Customer lending declined by purposes, offering them (to a limited extent) to its cli- 25.1%, to €19.4 billion (previous year: €25.9 billion). This ents as well. The volume of these derivatives stood at was distributed across the business divisions as follows: €1.4 billion (previous year: €1.1 billion). CHART 06

Customer lending by business division C 06 GROUP MANAGEMENT REPORT

0.6% (+0.2 pp) 48.9% (+3.0 pp) 9.3% (0.0 pp) Business no longer in line with Shipping Finance Offshore Finance DVB’s strategy

31.4% (–2.2 pp) 7.2% (+1.0 pp) 2.6% (+0.3 pp) 0.0% (–2.3 pp) Aviation Finance Land Transport Finance Investment Management ITF Suisse CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED AUDIT OPINION FURTHER INFORMATION

47 DVB BANK SE GROUP ANNUAL REPORT 2017

Portfolio analysis New business DVB concluded 113 new Transport Finance transactions, Volume trends representing an (underwritten) new business volume of In order to detail the effects of the exchange rate on the €3.1 billion (previous year: 157 new transactions with portfolios, we have analysed the development of custum- a volume of €6.5 billion). New business volumes in the er lending volume by segment over a five-year period, Transport Finance divisions developed as follows: both in euro and US dollar terms. // new business in Shipping Finance decreased from While the Shipping Finance portfolio declined by 9.5% in €2.4 billion to €1.2 billion; US dollar terms, to US$11.4 billion (previous year: US$12.6 billion), it declined by 20.2% in euro terms, to // new business in Aviation Finance decreased from €9.5 billion (previous year: €11.9 billion). The Aviation €3.4 billion to €1.5 billion; Finance portfolio decreased by 19.8% in US dollar terms, to US$7.3 billion (previous year: US$9.1 billion). In euro // new business in Offshore Finance1 decreased from terms, it was down by 29.9%, to €6.1 billion, thus below €0.2 billion to €0.0 billion; and the level of the previous year (€8.7 billion). TABLE 15 // new business in Land Transport Finance declined Earnings analysis from €0.5 billion to €0.3 billion. Earnings were analysed by comparing the development of the Transport Finance portfolios in the years 2016 and DVB played a leading role in 87.3% of new deals in the 2017, breaking down the portfolio into total and new four Transport Finance divisions, up from 85.0% the year exposures, and then differentiating data further by key before. At 244 basis points, the gross average interest ratios and indicators. margin for the new Transport Finance business increased compared with the previous year (241 basis points).

Lending volume over time 2013–2017 T 15

2017 2016 2015 2014 2013

€ bn % % % % %

Shipping Finance 9.5 48.9 11.9 45.9 11.8 46.6 10.1 43.3 9.2 44.3

Aviation Finance 6.1 31.4 8.7 33.6 7.7 30.4 7.1 30.5 6.4 30.8

Offshore Finance 1.8 9.3 2.4 9.3 2.4 9.5 2.3 9.9 2.0 9.6

Land Transport Finance 1.4 7.2 1.6 6.2 1.7 6.7 2.0 8.6 1.6 7.7

Investment Management 0.5 2.6 0.6 2.3 0.5 2.0 0.6 2.6 0.5 2.4

ITF Suisse 0.0 0.0 0.6 2.3 1.0 4.0 1.0 4.3 0.8 3.8

Business no longer in line with DVB’s strategy 0.1 0.6 0.1 0.4 0.2 0.8 0.2 0.8 0.3 1.4

Total 19.4 100.0 25.9 100.0 25.3 100.0 23.3 100.0 20.8 100.0

2017 2016 2015 2014 2013

US$ bn % % % % %

Shipping Finance 11.4 49.0 12.6 46.2 12.8 46.5 12.3 43.5 12.7 44.4

Aviation Finance 7.3 31.4 9.1 33.3 8.3 30.2 8.6 30.4 8.9 31.1

Offshore Finance 2.2 9.3 2.5 9.2 2.7 9.8 2.8 9.9 2.8 9.8

Land Transport Finance 1.7 7.2 1.7 6.2 1.8 6.5 2.4 8.5 2.2 7.7

Investment Management 0.6 2.6 0.6 2.2 0.6 2.2 0.7 2.5 0.6 2.1

ITF Suisse 0.0 0.0 0.6 2.2 1.1 4.0 1.2 4.2 1.1 3.8

Business no longer in line with DVB’s strategy 0.1 0.5 0.2 0.7 0.2 0.7 0.3 1.0 0.3 1.0

Total 23.3 100.0 27.3 100.0 27.5 100.0 28.3 100.0 28.6 100.0

1 No new business was generated in Offshore Finance during the year under review; taking effect 1 January 2018, all Offshore Finance activities were ceased.

48 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

REPORT ON THE ECONOMIC POSITION

Looking at DVB’s aggregate new business volume, includ- The development of the cost/income ratio (CIR) in the ing Investment Management, 122 new transactions were four Transport Finance divisions also showed a mixed concluded, with a total volume of €3.2 billion (previous picture. It deteriorated by 2.8 percentage points in Ship- year: 224 new deals with a volume of €7.0 billion), generat- ping Finance, to 14.7%, and by 74.4 percentage points in ing an average margin of 235 basis points (previous year: Offshore Finance, to –63.1%. However, it improved by 6.3 242 basis points). percentage points in Aviation Finance, to 23.0%, and by 1.3 percentage points in Land Transport Finance, to Total portfolio 12.4%. The CIR in Investment Management stood at The LTV ratio (loan-to-value ratio) expresses the relation –9.1% (previous year: –414.1%). between loans granted and the market value of the financed transport assets. It represents the ratio of the The return on equity (ROE) developed as follows: it loan amount to the market value of the financed asset, dropped significantly in Shipping Finance, to –73.2% and is quoted as a percentage. The lower the LTV ratio (previous year: –35.8%), stood at 38.0% in Aviation Fi- percentage, the lower the Bank’s potential risk exposure nance (previous year: 61.7%), and at –354.4% in Offshore in the event of the borrower’s default (in which case the Finance (previous year: –23.7%), but it rose by 29.8 per- lender would need to realise collateral). The LTV ratio for centage points in Land Transport Finance, to 127.8%. ROE the overall portfolio stood at 74.8% (previous year: in Investment Management declined to –39.7% (previous GROUP MANAGEMENT REPORT 77.8%). LTV ratios in the Transport Finance portfolios also year: –12.0%). improved: down by 5.5 percentage points in Shipping Finance, to 74.7%, by 0.5 percentage points in Aviation It should be noted that the ROE and CIR indicators are Finance, to 70.8%, and by 2.7 percentage points in Land determined excluding overheads; hence, the figures for Transport Finance, to 67.9%. Offshore Finance, however, the individual business divisions are not comparable to saw a increase in the LTV ratio, by 19.0 percentage points the ratios for the entire Bank. TABLE 16 to 94.3%.

Earnings contributions T 16

Shipping Aviation Offshore Land Transport Investment Finance Finance Finance1 Finance Management2 ITF Suisse Total

€ mn 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 %

Total portfolio CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED Customer lending volume 9,523.1 11,948.4 6,111.1 8,663.2 1,766.9 2,357.6 1,368.6 1,646.2 554.2 573.7 − 594.5 19,323.9 25,783.6 –25.1

Loans and advances to customers 9,429.5 11,404.5 5,782.1 8,203.9 1,556.6 2,056.2 1,064.5 1,365.7 554.2 573.7 − 561.5 18,386.9 24,165.5 –23.9

Loan commitments, guarantees and indemnities 93.6 543.9 329.0 459.3 210.3 301.4 304.1 280.5 − − − 33.0 937.0 1,618.1 –42.1

Number of customers (primary obligor groups) 301.0 299.0 145.0 153.0 60.0 59.0 42.0 43.0 57.0 12.0 − 29.0 605.0 595.0 1.7

Leading role (%) 86.6 87.4 90.3 87.9 68.4 73.3 86.8 68.2 n/a 96.0 − 6.6 86.1 83.4 2.7 pp AUDIT OPINION Average loan-to- value ratio (%) 74.7 80.2 70.8 71.3 94.3 75.3 67.9 70.6 94.4 n/a n/a 154.2 74.8 77.8 –3.0 pp

CIR (%) 14.7 17.5 23.0 16.7 –63.1 11.3 12.4 11.1 –9.1 –414.1 − − 152.8 44.3 108.5 pp

ROE (%) –73.2 –35.8 38.0 61.7 –354.4 –23.7 127.8 98.0 –39.7 –12.0 − − –55.1 –10.8 –44.3 pp

New business

Number of new transactions 55.0 73.0 45.0 65.0 − 7.0 13.0 12.0 9.0 67.0 − − 122.0 224.0 –45.5

Underwritten 1,231.9 2,438.0 1,486.2 3,442.1 − 183.1 339.4 480.3 142.9 479.4 − − 3,200.4 7,022.9 –54.4

Leading role (%) 81.6 85.8 89.2 95.2 − 87.1 100.0 59.6 46.0 29.0 − − 85.5 84.8 0.7 pp

Average margin (bp) 283 271 222 223 − 259 203 217 133 133 − − 235 242 –7 bp

1 No new business was generated in Offshore Finance during the year under review; taking effect 1 January 2018, all Offshore Finance activities were ceased. 2 As from 2017, financial reporting was based on IFRS consolidation. In previous years, DVB’s assessment of the Investment Management portfolio volume was based on the loans extended by DVB to the funds; from 2017 onwards, this assessment is based on a look-through review of the underlying portfolio investments. Therefore, comparability of the 2017 figures with previous year’s figures is limited. FURTHER INFORMATION

49 DVB BANK SE GROUP ANNUAL REPORT 2017

Remuneration report Frameworks and principles The remuneration of employees is a key staff management tool for DVB. The objectives of DVB Bank Group’s Regulatory requirements for remuneration structure are: remuneration systems With the revised German Regulation on Remuneration in // to motivate each member of staff to sustainably Financial Institutions (InstVergV, referred to in this section implement the targets derived from company strate- as the “Regulation”) which came into effect on 16 Decem- gy (and, therefore, the individual targets pertaining to ber 2013, and was amended effective 25 July 2017, the divisions, departments and teams), and thus to make German Federal Ministry of Finance has detailed the a personal contribution towards achieving the Com- requirements for remuneration systems implemented by pany’s strategic objectives; financial institutions, in the context of the German Bank- ing Act. The Regulation applies to all employees of DVB, // to reward staff performance without giving incen- at all locations. tives for taking on undesired risk;

In particular, the Board of Managing Directors is responsi- // to attract, motivate and retain talented employees ble for compliance with the requirements pursuant to the for the Bank. Regulation by subordinated enterprises, to which neither section 64b of the German Act on the Supervision of To achieve these objectives, DVB offers a fixed salary, Insurance Companies is applicable, in conjunction with plus – if applicable – a variable remuneration component, the Regulation on Remuneration in Insurance Companies, which is in a reasonable proportion to the fixed remunera- nor section 37 of the German Capital Investment Act in tion, and must not exceed it. (For specific employee conjunction with Annex II to Directive 2011/61/EU of the groups, the variable remuneration must not exceed twice European Parliament and of the Council of 8 June 2011 on the fixed remuneration.) Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations During the course of regular management discussions 1060/2009/EC and 1095/2010/EU (O.J. EC No. L 174; with employees, managers discuss individual perfor- 1 July 2011, p. 1). mance (covering all aspects of skills and performance). They assess any need for development derived from this DVB Bank SE and its affiliated companies together consti- analysis, and agree upon suitable support measures such tute the companies of the DVB Bank Group. Intermediary as professional or personal training. companies without any operational activities of their own serve merely to optimise the Group’s organisational or Depending on national customs, DVB grants non-cash economic structure. ancillary payments in addition to the salary.

The Company’s remuneration systems are based on a remuneration strategy that sets out uniform guidelines for Group-wide remuneration management. Subordinated enterprises compliance with the requirements of the Regulation is ascertained through uniform, Group-wide regulations governing the remuneration strategy, remuneration systems, and annual targets.

50 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

REPORT ON THE ECONOMIC POSITION

General requirements of the // Determining the total amount of the variable remu- Regulation neration must The following legal requirements apply, and have been • take into account the institution’s and the incorporated in DVB Bank Group’s remuneration systems: Group’s risk-bearing capacity, multi-year capital planning and financial performance; // Senior management is responsible for the appropri- • ensure the institution’s and the Group’s ability to ate structure of employees’ remuneration systems. maintain or restore adequate capitalisation and liquidity; and // The supervisory body is responsible for the appropri- • guarantee that the institution’s ability to main- ate structure of senior management’s remuneration tain or restore the combined capital buffer re- systems. quirements in accordance with section 10i of the German Banking Act is not compromised. // The structure of the remuneration systems – and the remuneration strategy – must be aligned with the // The risk orientation of the remuneration must not be company’s strategic objectives. restricted or neutralised by way of hedging or other counter-measures. Appropriate compliance structures

// Remuneration must be appropriate. are mandatory. GROUP MANAGEMENT REPORT • There must be no incentive to enter into excessive risks. // The control units’ staff receives an appropriate • There must be no significant dependence on remuneration, whereby the emphasis lies on fixed variable remuneration. remuneration. • Variable remuneration must provide an effective behavioural incentive. // Remuneration of members of Boards of Managing • Negative contributions to success must impact Directors must be in line with performance and du- on the amount of remuneration. ties, and may not exceed a normal level unless there • Severance payments must not remain un- are special reasons. The assessment basis for varia- changed in the event of negative individual ble remuneration components must extend over contributions to success, or misconduct. several years. • The remuneration of control units and organisational units under control must not be materially // Sufficient information must be made available about measured using the same parameters if there is the remuneration systems.

any risk of a conflict of interest. FINANCIAL STATEMENTS CONSOLIDATED // The institution shall set out principles governing the // A guaranteed variable remuneration is only permissi- remuneration systems in its organisational guidelines. ble upon commencement of employment, and for a maximum of one year. A corresponding guarantee is // Certain disclosure requirements must be observed. restricted in the event that regulatory requirements governing capital and liquidity cannot be met. // The Supervisory Board must be informed at least once a year about the remuneration systems and has a right // In principle, variable remuneration is capped at 100% to obtain information from senior management. (or 200%) of the respective fixed remuneration. AUDIT OPINION // A Remuneration Control Committee must be established. FURTHER INFORMATION

51 DVB BANK SE GROUP ANNUAL REPORT 2017

Specific requirements of the Regulation Group Compliance Office and Group Risk Management). Since DVB is a significant institution, as defined by the The remuneration strategy will then be adopted by DVB’s Risk takers are employees whose professional activity Regulation, the following principles also apply: Board of Managing Directors, in its capacity as the has a material impact on the Group’s management body; finally, it will be submitted to Bank’s risk profile. // For the purposes of determining variable remuneration, the Supervisory Board’s Remuneration Control Committee • targets set for risk takers must incorporate the for information, and discussed if necessary. overall performance of the institution, the organisational unit and the individual; • individual performance for risk takers must also DVB’s remuneration systems be measured on the basis of non-financial DVB applies a consistent remuneration system. parameters; • remuneration parameters have to be used to The remuneration of tariff employees in Germany is gov- determine the overall performance; these take erned by the collective wage agreements for private and into account the objective of long-term success, public-sector banks. As a rule, the remuneration of em- in particular the risks incurred, their duration, ployees covered by collective wage agreements compris- and capital and liquidity costs; es 13 fixed monthly salaries (including special payments • at least 40% of the variable remuneration for in accordance with section 10 of the collective wage risk-takers must be spread over a minimum three- agreements for private banks) and a variable share. Out- year period where remuneration must not be side Germany, employees in similar functions and posi- vested faster than on a pro rata temporis basis; tions receive a discretionary bonus, which is based on the • at least 60% of the variable remuneration for same rules. members of the Board of Managing Directors and risk takers among first-level management Non-tariff employees in Germany and comparable staff must be deferred; outside Germany receive a fixed, contractually agreed • at least 50% of the cash bonus and at least 60% annual salary. In addition, a variable remuneration is grant- of the deferral at least must depend on the ed on the basis of defined criteria. The variable remunera- institution’s sustainable performance, and fea- tion is paid in April of each year for the previous year. ture a withholding period; • negative contributions to results must reduce This structure and the corresponding bonus regulations the amount of the variable remuneration. apply to all entities within the DVB Bank Group. The objective of the remuneration systems is to adequately // Extended disclosure obligations must be observed. honour employee performance and to provide effective incentives. They are structured so as to fulfil the applica- // Special provisions apply for discretionary pension ble regulatory requirements. benefits. The Remuneration Control Committee of the Supervisory Board, in cooperation with the Remuneration Officer, Organisation and responsibilities reviews whether DVB’s remuneration systems are appro- DVB’s Remuneration Strategy is reviewed (and adjusted if priate, on an annual basis. necessary) at least once a year. Especially in the case of any change to the business or risk strategy, the remunera- The variable remuneration component for members of the tion strategy and the structure of the remuneration sys- Board of Managing Directors is determined by the Super- tems must be reviewed and adjusted if necessary. visory Board; it is partly disbursed immediately and partly deferred, with retention and withholding periods applica- On the basis of the revised Regulation, the consistency of ble as well. DVB’s remuneration system thus ensures that the remuneration strategy with the Bank’s business strat- legal requirements regarding sustainability are fulfilled, egy will henceforth be ascertained in coordination with and that negative performance contributions are taken the control units (such as Group Audit, Group Controlling, into account.

52 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

REPORT ON THE ECONOMIC POSITION

Remuneration system for risk takers The Remuneration Representative constantly monitors the The definition of the term “risk takers” was updated on appropriateness of the remuneration systems for employ- the basis of the valid Regulation and the technical stand- ees. For this purpose, the Remuneration Representative is ards defined by the European Banking Authority. involved in all current processes concerning remuneration systems; this applies to both the conceptual design (and Within the identified business divisions, all divisional further development) and ongoing implementation of heads are defined as risk takers. Further employees have remuneration systems. The Remuneration Representative been identified as risk takers below the (functional) level closely cooperates with the Chairman of the Remunera- of divisional heads, in particular the heads of regional tion Control Committee. business units with a significant business volume. Moreover, the Remuneration Representative supports the The disbursement of bonus payments has been modified Supervisory Board and its Remuneration Control Commit- in accordance with the Regulation: only 20% of the bonus tee in performing the monitoring and structuring duties achieved will be paid out directly in the following year, relating to all remuneration systems. The Remuneration the remaining 80% of the bonus will be deferred over a Representative submits his reports to the Chairman of the period of up to four years, taking into account the defer- Remuneration Control Committee. rals and retention periods. All amounts deferred are GROUP MANAGEMENT REPORT linked to the long-term performance of DVB and, where The Remuneration Representative has the necessary applicable, the relevant business unit. Negative perfor- skills and experience for his role, especially in the areas mance contributions are also taken into account when of remuneration systems and risk control. determining the bonus as well as the pro-rata deferral – which may lead to the variable remuneration being re- A deputy Remuneration Representative has been appoint- duced or refused. ed who also holds the necessary skills and experience.

The revised Regulation will require modifications to the The Representative’s detailed duties and the procedures disbursement of bonus payments for risk takers. These are documented in the organisational guidelines. modifications will be implemented for all bonus claims acquired from 2018 onwards. Remuneration Control Committee In the event of any material changes to the organisational Pursuant to section 15 of the Regulation, DVB has estab- structure (such as the creation or merger of divisions), lished a Remuneration Control Committee. The Commit-

DVB will review whether the number and definition of risk tee’s duties and procedures are documented in its internal FINANCIAL STATEMENTS CONSOLIDATED takers need to be changed. regulations.

Remuneration Representative Remuneration of the Board of Managing Pursuant to section 23 of the Regulation, DVB has Directors and the Supervisory Board appointed a Remuneration Representative. Total expenses for the remuneration of the Board of Man- aging Directors, former members of the Board of Manag- ing Directors and their surviving dependants, as well as the Supervisory Board, amounted to €4.0 million in 2017 AUDIT OPINION (previous year: €3.8 million). TABLE 17

Remuneration of the Board of Managing Directors and the Supervisory Board T 17

€ 000’s 2017 2016 %

Board of Managing Directors 2,801.8 2,619.2 7.0

Supervisory Board 440.3 428.4 2.8

Former members of the Board of Managing Directors and their surviving dependants 777.1 735.8 5.6

Total 4,019.2 3,783.4 6.2 FURTHER INFORMATION

53 DVB BANK SE GROUP ANNUAL REPORT 2017

Remuneration of the Board of In 2017, the total remuneration of the Board of Managing Managing Directors Directors was comprised of a fixed component of 97.0% In accordance with section 285 (9) of the German Com- The Supervisory Board has determined the structure of and a variable bonus of 3.0% (previous year: 87.3% fixed mercial Code (HGB), remu- remuneration for the Board of Managing Directors. and 12.7% variable component). TABLE 18 neration paid to members of the Board of Managing Directors and remuneration components are not disclosed individually in the Remuneration of the Board of Managing Directors and the Supervisory Board T 18 financial statements or the consolidated financial € 2017 2016 % statements. Monetary remuneration components 2,180,000.00 1,807,500.00 20.6

Pension commitments including contributions to pension provisions 249,833.28 182,782.71 36.7

Special benefits 286,995.85 295,721.74 –3.0

thereof: allowances for company car or monetary equivalent 58,044.49 45,272.01 28.2

thereof: rent subsidies – 34,893.84 –

thereof: insurance cover and employer contributions to foreign social security schemes 228,951.36 215,555.89 6.2

Fixed remuneration component 2,716,829.13 2,286,004.45 18.8

Variable remuneration component 85,023.99 333,153.54 –74.5

Total 2,801,853.12 2,619,157.99 7.0

Fixed remuneration component year (referring to financial indicators such as Economic The fixed remuneration component of DVB Bank SE’s Value Added and consolidated net income before taxes) Board of Managing Directors comprises monetary remu- as well as to the personal performance of each individual neration components, pension commitments and special Managing Director. benefits; it totalled €2,716,829.13 (previous year: €2,286,004.45). Until 30 November 2017, DVB Bank SE’s The amount of the bonus depends on the (measurable) Board of Managing Directors consisted of four members; extent to which the targets were achieved. The cash bonus since 1 December 2017 it has comprised three members, is awarded in four tranches: 40% in the year following as in 2016. the assessment period, and three tranches of 20% each, awarded during the following three years. Variable remuneration component Since the year 2016, the variable remuneration component Each deferred bonus tranche is subject to a malus process of DVB Bank SE’s Board of Managing Directors has only prior to disbursement, whereby the relevant risk situation comprised a cash bonus. In the year under review, the and profitability at the respective point in time, compliance Board of Managing Directors received variable remunera- with internal guidelines (such as compliance guidelines or tion payments in the amount of €85,023.99 (previous year: lending guidelines), as well as the member’s personal €333,153.54). conduct, are taken into account. For any deferred bonus tranche, this malus process cannot lead to an increase; These comprised retained bonus portions for 2013–2015 however, it may reduce the amount and may even lead to which were disbursed in 2017. No bonus was paid for 2016. the tranche being cancelled altogether.

The bonus payments paid to members of the Board of In addition, for all award tranches, 50% of each tranche is Managing Directors are determined on the basis of subject to an additional one-year retention period. This agreements on operational targets. These objectives, means that these parts will not be disbursed immediately. which are agreed upon between the Supervisory Board During the retention period, the value of the retained and the respective member of the Board of Managing amounts is replaced by a remuneration instrument linked to Directors, are related to objective criteria for the relevant the Bank’s performance.

54 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

REPORT ON THE ECONOMIC POSITION

The revised Regulation requires modifications to the bonus Remuneration of the Supervisory Board arrangement for members of the Board of Managing Direc- The annual remuneration of Supervisory Board members tors, such as: is governed by Article 19 (1) and (2) of DVB Bank SE’s Memorandum and Articles of Association. Accordingly, // an assessment basis covering multiple years, // the Chairman of the Supervisory Board receives // longer retention periods, and €40,000.00;

// the option to reclaim variable remuneration compo- // members of the Supervisory Board receive €30,000.00; nents already disbursed, subject to certain conditions (clawback). // the members of Supervisory Board committees receive the following additional amounts: These modifications will be implemented for all bonus • members of the Credit and Risk Committee claims acquired from 2018 onwards. receive €10,000.00; • members of the Audit Committee The prerequisite for payment of the two variable remunera- receive €7,500.00; tion components is, in each case, that no notice of termina- • members of the Nomination Committee GROUP MANAGEMENT REPORT tion has been given with regard to the employment rela- receive €3,750.00; and tionship with the member of the Board of Managing • members of the Remuneration Control Committee Directors concerned as at the time of payment. The sole receive €3,750.00. exception would be where a Board member retires from office for reasons of age, or due to non-renewal of The remuneration is paid on 1 July of each year. Where a contract. said remuneration is subject to value-added tax, this tax shall be paid in addition to the remuneration (Article 19 In the event of measures taken by the German Federal (3) of the Memorandum and Articles of Association). Financial Supervisory Authority or any other competent Further details, such as the reimbursement of travelling bank supervisory authority – especially under the Single expenses and other cash expenses, daily allowances and Supervisory Mechanism of the European Central Bank – no similar matters, are governed by Article 19 (4) of the claims can be asserted under contractual stipulations Memorandum and Articles of Association. which would contradict the measures taken by supervisors. Total remuneration expenses paid in 2017 by DVB Bank SE

Examples for such supervisory measures include the for members of the supervisory bodies amounted to FINANCIAL STATEMENTS CONSOLIDATED following: €440,300.00 (previous year: €428,400.00). Taxes amounting to €58,247.50 (previous year: €58,247.50) were trans- // The supervisory authority restricts the aggregate ferred directly to the tax authorities for the Supervisory amount of variable remuneration components (e.g. Board members domiciled abroad. The members of the pursuant to section 45 (2) sentence 1 no. 5a of the Supervisory Board therefore received remuneration of KWG) or voids them in their entirety, or issues a €382,052.50 (previous year: €370,152.50) for their actions corresponding instruction to this effect. as Supervisory Board and committee members.

TABLE 19/SEE PAGE 56

// The supervisory authority restricts or prohibits the disbursement of variable remuneration components AUDIT OPINION (e.g. pursuant to section 45 (2) sentence 1 no. 6 of Disclosure the KWG). Pursuant to section 16 of the Regulation, DVB is obliged to We will comply with this disclose information regarding its remuneration policy and disclosure duty in a separate report, which will be // The supervisory authority orders that claims to varia- practice. DVB’s disclosure duties, as an institution subject made available on our ble remuneration components are to be voided, in to Regulation 575/2013/EU (Capital Requirements Regula- website www.dvbbank.com whole or in part (e.g. pursuant to section 45 (5) sen- tion – “CRR”), as defined in section 1 of the KWG, are > Investors > Publications > Disclosure reports during tences 5 et seq. of the KWG). based on both section 16 of the Regulation and Art. 450 of the second quarter of 2018. the CRR which require that the Bank discloses certain Here you can also find the Disclosure Reports pub- quantitative and qualitative details. lished since 2014. FURTHER INFORMATION

55 DVB BANK SE GROUP ANNUAL REPORT 2017

Supervisory Board remuneration 2017 T 19

Credit Remunera- Supervisory and Risk Audit Nomination tion Control Value- Board Committee Committee Committee Committee added € remuneration remuneration remuneration remuneration remuneration tax 19% Total

Shareholder representatives

Wolfgang Köhler, Chairman (since 1 May 2017) 26,666.67 Deputy Chairman (until 30 April 2017) 10,000.00

36,666.67 – 7,500.00 3,750.00 3,750.00 9,816.67 61,483.34

Frank Westhoff, Deputy Chairman (since 1 May 2017) 20,000.00 Chairman (until 30 April 2017) 13,333.33

33,333.33 10,000.00 – 3,750.00 3,750.00 9,658.33 60,491.66

Ulrike Donath 30,000.00 – 7,500.00 – – 7,125.00 44,625.00

Anders Ingebrigsten, resident in Norway 30,000.00 10,000.00 – – – 7,600.00 47,600.00

Dr Peter Jansen 30,000.00 10,000.00 – – – 7,600.00 47,600.00

Dr Kirsten Siersleben 30,000.00 – 5,000.00 – – 6,650.00 41,650.00

Employee representatives

Adnan Mohammed, resident in the United Kingdom 30,000.00 – – 3,750.00 3,750.00 7,125.00 44,625.00

Ivo Monhemius, resident in the Netherlands 30,000.00 – 7,500.00 – – 7,125.00 44,625.00

Martin Wolfert 30,000.00 10,000.00 – – – 7,600.00 47,600.00

Total remuneration 280,000.00 40,000.00 27,500.00 11,250.00 11,250.00 70,300.00 440,300.00

Tax deduction for Supervisory Board members resident outside Germany (paid directly to the responsible tax office)

VAT 19% 21,850.00

Taxes for membership of a Supervisory Board 30% 34,500.00

Solidarity surcharge 5.5% 1,897.50

Total tax deductions 58,247.50

Remuneration less tax deductions for Supervisory Board members resident outside Germany 382,052.50

Employees related to the discontinuation of operations at ITF Suisse. The number of staff at our LogPay Financial Services Further details on the female quota in accordance with subsidiary also declined in 2017, from 58 to 50 employees section 289f of the HGB can Development of staffing levels (13.8%), due to the partial sale of LogPay Transport Services. be found in DVB Bank Group’s Corporate Responsibility DVB employed a total of 613 staff (in active employment) Report, which is available on in 2017, a decrease of eleven (–1.8%) compared to 2016. In addition, 21 employees had an inactive employment the website www.dvbbank. com > About us > Corporate relationship – meaning that they had entered the passive responsibility > Reports. DVB’s staffing level has been rising over recent years, in phase of partial retirement, were on maternity leave, or line with the increasing legal and regulatory requirements had taken parental leave. CHART 07 applicable to international banking business: additional staff was required to cope with the markedly increased DVB’s business model is international, which is also workload. In 2017, this need only prevailed in the service reflected in the composition of its workforce, and in the units, where the headcount of 245 employees was up flexibility of employees. 1.2% over the previous year (242 employees). Conversely, the number of staff in the Transport Finance/Investment DVB employed people with 37 different nationalities in Management divisions declined by six (1.9%), largely 2017. Staff with 28 different nationalities were employed in the core Transport Finance business alone. TABLE 20

56 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

REPORT ON THE ECONOMIC POSITION

Staff levels 2013–2017 C 07

Number of staff

640 21

620 14

600 20

580 7

560 624 609 613

540 581

567 GROUP MANAGEMENT REPORT 520

500

2013 2014 2015 2016 2017

Staff members in the active phase of employment Staff members in the passive phase of employment

Nationalities 2017 T 20

DVB Bank Group Transport Finance/ (incl. LogPay) Investment Management

Number % Number %

German 266 43.4 56 17.6

British 83 13.5 60 18.9

Dutch 69 11.3 53 16.7 FINANCIAL STATEMENTS CONSOLIDATED

Norwegian 39 6.4 30 9.4

Greek 29 4.7 22 6.9

US-American 19 3.1 16 5.0

Singaporean 22 3.6 19 6.0 37 nationalities are 30 additional nationalities (DVB Bank SE) 86 14.0 – – represented within DVB 21 additional nationalities (Transport Finance/Investment Management) – – 62 19.5

Total 613 100.0 318 100.0 AUDIT OPINION

More than half of DVB’s employees work at international Voluntary resignations resulted in a 6.4% fluctuation locations outside the Federal Republic of Germany. (previous year: 5.3%).

TABLE 21

Distribution of staff members in active employment by location T 21

DVB Bank Group Transport Finance/ (incl. LogPay) Investment Management

2017 2016 % 2017 2016 %

Germany (Frankfurt/Main and Hamburg) 283 284 –0.4 51 51 –

International locations (Amsterdam, Athens, London, New York, Oslo and Singapore) 330 340 –2.9 267 273 –2.2

Total 613 624 –1.8 318 324 –1.9 FURTHER INFORMATION

57 DVB BANK SE GROUP ANNUAL REPORT 2017

SHIPPING FINANCE

€1,231.9 MN €9,523.1 MN NEW BUSINESS CUSTOMER VOLUME LENDING VOLUME

58 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

DEVELOPMENT OF THE BUSINESS DIVISIONS GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED AUDIT OPINION FURTHER INFORMATION

59 DVB BANK SE GROUP ANNUAL REPORT 2017

DEVELOPMENT OF THE BUSINESS DIVISIONS

Business areas Shipping Finance with charter rates (which form the basis for vessel valu- //Tankers ations, and hence, for collateral values) still depressed, //Dry bulk carriers In 2017 the global shipping industry was still struggling 2017 did see the beginning of an upward trend with / /Container vessels with overcapacity in most ship segments. Second-hand slight improvements in some market segments, during / Car carriers / values and freight rates were low across the board. At the course of the year – amongst others also due to //Container boxes €1.2 billion, our new business origination was still on a strong trade demand and growth in raw material imports substantial, yet lower level than in 2016. This reflects from China. For example, dry bulk carriers saw a steep Products //Structured Asset Lending generally reduced demand for financing in the market increase in earnings, albeit from low levels. The con- //Risk Distribution & place and – to a greater extent – our selective approach tainer shipping market also witnessed improvements. Loan Participations to new business. Our focus was to strengthen the market Meanwhile, the crude tanker market continued to dete- / /Corporate Finance Solutions recognition and valuation of our service platform by con- riorate and earnings remained at a low level for the //Private Equity Sourcing & Investments tinuing to enhance our risk management and monitoring whole year. These sectors are the three most important //Asset & Market Research procedures. Yet performance was still heavily impacted for the maritime industry, in terms of transport volumes by increased allowance for credit losses. and services. Clients //Small to large public Although ordering activity picked up in 2017 compared to and private companies (shipowners, shipping the previous year, the total number of orders placed companies, trading across all shipping segments was low from a historical houses and charterers) Shipping Finance – Market review perspective. Competition between shipyards kept new- Core regions In our view, 2017 was a year during which a turnaround building prices on the low side. During 2017 scrap prices //Europe materialised on shipping markets. Although the excess have increased sharply, creating an incentive to demolish //The Americas tonnage accumulated over recent years was still present, older units. //Asia

Container subsector charter rates C 08

(US$/day) Time charter rate Index (points)

40,000 140

35,000 120

30,000 100

25,000 80

15,000 60

10,000 40

5,000 20

0 0

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Feedermax 725 TEU Handymax 1,700 TEU Sub-Panamax 2,750 TEU Panamax 4,400 TEU Time Charter Rate Index Source: Clarkson Research Services Ltd, December 2017

60 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

DEVELOPMENT OF THE BUSINESS DIVISIONS

The dry bulk market continued to recover throughout Shipping Finance – Strategy 2017. The Baltic Dry Index (BDI), the freight rate index for DVB’s shipping client base consists of both public and the transportation of dry bulk goods, was quoted at an private companies, from large multinational enterprises to average of 1,145 index points for the full year 2017 – up smaller family-run businesses – with well-established track 70.1% – On average 70.1% year-on-year. The BDI reached 1,619 index points records within the shipping sphere. To these clients, our Baltic Dry Index was significantly higher year-on-year in December 2017, which is the highest level in four Shipping Finance division offers financing solutions based years, albeit staying far away from the historical peak of on our in-depth knowledge of the assets, shipping sub-sec- more than 10,000 points in 2007/2008. Freight rates were tors and industry drivers as well as our sound understand- supported by continued Chinese demand for iron ore and ing of the corporate and project credit risks involved. coal as well as relatively subdued fleet growth. In 2017, global seaborne dry cargo volumes increased by 4.3% The business division’s key strategic objectives are: (previous year: approximately 2.7%), while the fleet expanded by 2.9%. // Continuing to be perceived as the “partner of choice” for shipping clients and to be a reliable provider and/ The containership market has seen some improvement, or advisor on diverse capital sources (i.e. senior, Further details on 2017 shipping market develop- after the challenges of 2016. The Clarksons Time Charter junior, mezzanine, and equity/quasi-equity investments are available on our

Rate Index for container carriers, which has been calcu- ments), structured finance, advisory, asset manage- website www.dvbbank.com GROUP MANAGEMENT REPORT > Business & Expertise > lated since 1993, averaged 47 index points in 2017 – this ment and market research; Shipping Finance > Markets. is a growth of 14.7% compared to the average index level in 2016 (CHART 08). During the year, global sea container // Allowing the Shipping platform to be the sounding transport volumes increased by ca. 4.7% (previous year: board for our shipping clients thanks to our knowl- ca. 3.1%). The fleet expanded by 3.6% in 2017 as a result edge and extensive networks in the industry; and of subdued deliveries and firm demolition activity. At the end of 2017, the order book stood at 370 vessels or // Maintaining a Shipping Finance portfolio which is 2.7 million TEU, representing 13.0% of fleet capacity. It is strongly diversified across sectors and geographic concentrated in the Very Large Container Ship (VLCS) regions. segment, which presently accounts for 82.5% of the total order book measured in TEU. This approach has enabled Shipping Finance to continue to offer its clients a seamless one-stop shop and maintain Seaborne trade for crude oil grew by 2.8% during 2017. sustainable revenue diversification, despite the challenging The increase in demand for crude oil originated from the market conditions overall.

Far East, especially China, as well as India and Brazil, and FINANCIAL STATEMENTS CONSOLIDATED was primarily met by exports out of the Middle East. De- spite an increase in tanker demolition rates, crude oil tanker fleet growth outpaced demand growth by 3.9% year-on- year in deadweight terms. This resulted in low fleet utilisation across all tanker segments, leading to continued downward pressure on earnings and asset values. AUDIT OPINION FURTHER INFORMATION

61 DVB BANK SE GROUP ANNUAL REPORT 2017

DVB’s risk management is at the core of Shipping Finance’s Shipping Finance – Portfolio analysis client selection strategy and extension of loans. Risks are DVB is active as an arranger, underwriter and provider of constantly monitored and proactively managed. DVB also asset-based capital in shipping finance. Despite 2017 has significant expertise with restructuring and work-out being characterised by market-wide subdued lending situations, centralised in the Credit and Asset Solution activity due to the challenging market conditions and Group (CASG). For further information on CASG, please refer limited newbuilding orders, Shipping Finance achieved to the report on opportunities and risks (page 128–129). noteworthy loan production. The division closed transactions with existing clients and established new lending Beyond that, our Shipping platform also benefits from its relationships with highly regarded counterparties. team of professionals with multi-disciplined backgrounds, ranging from seasoned banking and structured finance Total loan portfolio careers to specific shipping industry expertise gathered In 2017, the Shipping Finance customer lending volume from a variety of experiences in shipping companies, decreased by 20.2% to €9.5 billion due to a more select lessors, ship management companies, sale and purchase/ approach to new business and a high level of pre- and chartering brokers, manufacturers and export credit agen- repayments (previous year: €11.9 billion). As 96.2% of the cies. Our asset-based focus and market knowledge, cou- portfolio was US dollar-based, the portfolio development pled with our commitment to long-term relationships, is more adequately reflected in US dollar terms, where bring us closer to our clients and solidify our reputation as the decline is less pronounced – 9.5%, from US$12.6 bil- a partner within shipping finance. lion down to US$11.4 billion. In line with DVB’s business model, the Shipping Finance portfolio is 99.9% collateral- The Shipping Research team enhances our platform with ised. The granularity of the portfolio was good, with the in-depth industry, market and asset knowledge. It pro- average lending exposure per client standing at €32.0 mil- vides valuable, up-to-date market intelligence, and pro- lion (previous year: €40.0 million). The number of clients duces high-quality, independent research – all of which where exposure exceeded €50 million totalled 59 in 2017 enable DVB to anticipate market changes and adjust the (previous year: 83 clients). business segment and portfolio strategy in a flexible and timely fashion. On the basis of research analyses, our Diversification in the portfolio is a key pillar of Shipping relationship managers form an even more profound un- Finance’s risk management philosophy, and the portfolio derstanding of specific assets, industry drivers and value has thus remained well diversified across the shipping chains as well as our clients’ strategic financing needs. spectrum in terms of sector/subsector, asset type, geo- Shipping Research maintains a sector-oriented approach graphic exposure, client concentration and types of to research in order to ensure that our key asset expertise financing. Additionally, based on the input of Shipping and region-oriented client coverage remain at a high Research, the portfolio continues to be strategically level. This is integral to all activities pursued by Shipping managed according to perceived risk areas, including Finance, since it assists us in targeting the right transac- current and anticipated future market trends. tions throughout the shipping cycles.

62 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

DEVELOPMENT OF THE BUSINESS DIVISIONS

The variety of financed vessel types demonstrates the Geographically, the portfolio is also well diversified: high degree of diversification: CHART 09 CHART 10

Shipping Finance portfolio by vessel type C 09

4.8% (+0.5 pp) Others

3.0% (+0.2 pp) Container boxes thereof: 1.9% (+0.2 pp) Cruise ships 3.2% (–0.3 pp) Car carriers 1.4% (+0.2 pp) Ferries/passenger vessels 1.5% (+0.1 pp) Miscellaneous

14.0% (–2.8 pp) Container carriers 48.7% (+0.7 pp) Tankers thereof:

14.6% (–0.4 pp) Crude oil tankers 12.5% (+2.0 pp) Product tankers 12.0% (+0.3 pp) Gas tankers GROUP MANAGEMENT REPORT 9.6% (–1.2 pp) Chemical tankers 26.3% (+1.7 pp) Bulk carriers

Shipping Finance portfolio by country risk C 10

1.2% (+0.3 pp) South an Central America/ 3.2% (–0.5 pp) Offshore Carribean

4.0% (–1.1 pp) Middle East/Africa

13.5% (–3.2 pp) Asia/Australia CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED

57.3% (+5.4 pp) Europe

20.8% (–0.9 pp) North America AUDIT OPINION FURTHER INFORMATION

63 DVB BANK SE GROUP ANNUAL REPORT 2017

New business Earnings analysis During 2017, Shipping Finance realised 55 new transac- In 2017 many shipping market segments bottomed out but For information on 2017 tions with shipping clients, representing a volume of this has not yet put financing markets at ease. Caused by transaction highlights, please visit our website: €1.2 billion at an average new business margin of 283 the shipping crisis, many shipowners faced liquidity prob- www.dvbbank.com > Busi- basis points (previous year: 73 new transactions, volume lems which grew further during the year. ness & expertise > Shipping Finance > Important deals. of €2.4 billion, average margin of 271 basis points). New financings in 2017 were well diversified by client, obligor, In this environment, DVB originated new business on a and vessel type. In terms of new business volume, 51.9% selective stance and at risk-adequate and increased of our lending was for the financing of tankers (previous interest margins – this resulted in higher net interest year: 67.9%), of which 20.1% was for product tankers, income of €99.0 million (previous year: €95.4 million). 12.8% for crude oil tankers, and 9.5% each for chemical and gas carriers. In comparison to 2016, the relative Despite this positive earnings trend, the increasingly weighting towards tankers came down significantly due difficult liquidity situation of shipowners continued to to our more cautious outlook for this segment, the limited severely burden our legacy portfolio in 2017 resulting in number of newbuilding orders placed and the lower increased impairments. Thus, allowance for credit losses freight rate environment. amounted to €315.6 million (previous year: €223.9 million) bringing net interest income after allowance for credit By contrast, the dry bulk market witnessed a remarkable losses down to €–216.6 million (previous year: recovery in both asset values and earnings during the €–128.5 million). Total allowance for credit losses in year. In this more positive environment, we closed 33.9% Shipping Finance stood at €567.5 million, compared to (previous year: 15.6%) of new business in this sector, €377.9 million at the end of 2016. following our counter-cyclical approach and aiming to strengthen and protect the clients’ balance sheet with Net fee and commission income decreased, to €27.2 mil- conservatively structured transactions. lion (previous year: €35.4 million).

Also the container carrier market improved in late 2016, General administrative expenses were reduced by 6.8% and this continued into 2017. Nevertheless, more testing to €19.2 million (previous year: €20.6 million). conditions are expected to come, at least in certain sub-sectors. There is a clear distinction between the Overall, both income and net segment income/loss before improved results witnessed by the operators (as a result of bank levy, BVR Deposit Guarantee Scheme and taxes the recent consolidation in the liner industry) and the chal- declined to €–181.4 million and €–199.8 million, respec- lenging circumstances for the tonnage providers (mainly tively. TABLE 22 due to oversupply). New transactions, 6.3% of new business compared to 7.1% in the previous year, represented Extract from the segment report for choices of prudent structures on the back of modern assets, Shipping Finance T 22 cash flow visibility and excellent credit standing. € mn 2017 2016 %

The share of new container box transactions increased Net interest income 99.0 95.4 3.8 slightly to 6.7%, compared to 6.4% the previous year, Allowance for credit losses –315.6 –223.9 41.0 reflecting the rebound in the container box industry, a Net interest income after rapid increase in box prices and improved per diem rates. allowance for credit losses –216.6 –128.5 68.6 Net fee and commission income 27.2 35.4 –23.2

Income (excluding the IAS 39 result) –181.4 –106.3 70.6

General administrative expenses1 –19.2 –20.6 –6.8

Net segment income/loss before bank levy, BVR2 Deposit Guarantee Scheme and taxes –199.8 –128.0 56.1

1 Only those costs are allocated to DVB’s operating business divisions for which they are directly responsible. General costs of operations, overheads, or, for example IT costs, are not allocated to the operating business divisions. 2 National Association of German Cooperative Banks

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DEVELOPMENT OF THE BUSINESS DIVISIONS

Ship orders – ratio of order backlog to existing fleet capacity C 11

Ratio of order backlog to existing fleet capacity

Dry bulk carriers Current 795,973 9.7% (capacity in 000's dwt) (2016: 10.1%) Ordered 76,846

Container vessels Current 20,900 13.0% (capacity in 000's TEU) (2016: 16.1%) Ordered 2,722

Crude oil tankers Current 388,360 12.3% (capacity in 000's dwt) (2016: 14.9%) Ordered 47,866

Source: DVB Shipping Research, December 2017

Shipping Finance – Outlook 2018 The container market also saw some improvement in

The macroeconomic environment is expected to further 2017 after difficult market conditions in 2016. However, GROUP MANAGEMENT REPORT improve in 2018. This will have a positive impact on trade the outlook is challenged by slowing container trade, demand for most shipping sectors. However, overcapacity continued excess capacity and the deployment of even in the existing fleets will continue to represent a chal- larger container vessels. Demand growth in 2018 is pro- lenge for the shipping industry, and it is expected to take jected to be positive; however, it will be much lower than a few years before demand growth absorbs surplus ves- the double-digit growth rates the industry has seen in the sels. The difficult environment in shipping sectors is past. Further, consolidation of shipping lines is set to putting pressure on shipyards, who in turn keep proposing intensify competition amongst shipowners chartering attractive prices. However, further ordering is a major risk their vessels to line operators. At the end of 2017, the to continued recovery. ratio of capacity on order to aggregate existing fleet capacity, measured in Twenty-foot Equivalent Units (TEU), Nonetheless, several sectors such as dry bulk and con- was 13.0% (CHART 11). The order book is dominated by tainer shipping have initiated a recovery path in 2017 larger vessels, with 82.5% stemming from Very Large which is expected to continue into 2018. Fundamentals of Container Ships, and cascading of larger vessels will put the dry bulk market are likely to improve in 2018 as pressure on the smaller container sectors. Furthermore, demand growth is projected to outpace supply growth. 62% of the aggregate TEU capacity is younger than ten FINANCIAL STATEMENTS CONSOLIDATED The order-book-to-fleet ratio has declined to 9.7% years, which limits the potential for scrapping. (CHART 11) per the end of 2017 and new deliveries are expected to slow in 2018, which will limit fleet growth. Vessel demand for crude oil tankers in 2018 is forecast The risk to the demand outlook remains that traditional to continue growing at a moderate level for all segments. demand drivers are changing with the Chinese economy Although European imports are expected to remain at low rebalancing and shifting towards a more consump- levels, imports to Asian countries are likely to witness tion-driven growth. Demand growth from emerging mar- sustained growth and provide employment opportunities kets is expected to support dry bulk trade, albeit at a for all segments of the fleet. The order-book-to-fleet ratio lower level, since demand for dry bulk commodities is for crude oil tankers declined to 12.3% per the end of 2017 AUDIT OPINION projected to be moderate in the coming years. (CHART 11) but, based on the current delivery schedule, fleet growth is expected to continue outpacing demand growth in 2018. As a consequence, crude tanker fleet utilisation is likely to remain at low levels, which will keep earnings and values at a low level for all tanker segments. FURTHER INFORMATION

65 DVB BANK SE GROUP ANNUAL REPORT 2017

66 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

DEVELOPMENT OF THE BUSINESS DIVISIONS

AVIATION

FINANCE GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED

€1,486.2 MN NEW BUSINESS VOLUME AUDIT OPINION

€6,111.1 MN CUSTOMER LENDING VOLUME FURTHER INFORMATION

67 DVB BANK SE GROUP ANNUAL REPORT 2017

Business areas Aviation Finance After the peak years 2013 and 2014 when annual new //Passenger aircraft jets orders exceeded 3,500, sales slowed down in 2015 //Freighter aircraft Market liquidity remained abundant in 2017, sustaining and 2016 (ca. 2,150 new orders). The introduction of a //Aircraft engines the heightened competition witnessed in preceding years. new aircraft type generally stimulates sales volumes, and Aviation Finance, nevertheless, delivered a sound financial apart from Boeing’s launch of the 737 MAX 10 no signifi- Products result, albeit at a much lower level, in a year in which it cant product introductions took place during 2017. So //Structured Asset Lending has adapted to this challenge through optimisation of its during the first eleven months it looked like this would be //Aviation Asset Management loan origination and distribution capability, underwriting a lacklustre year for aircraft sales. It also looked as //Advisory Services //Risk Distribution & €1.5 billion of new structured lending business. Our aircraft though Boeing would win the prestigious “order race” Loan Participations asset management and advisory business again provided between the American company and its European rival, //Corporate Finance Solutions notable contributions to the performance of the division. Airbus. However, the picture changed completely in De- / /Private Equity Sourcing & cember. While aircraft sales traditionally peak during Investments major air shows and at year-end, Airbus unexpectedly //Asset & Market Research booked an almost unprecedented number of new orders Clients during the last days of 2017 (almost two-thirds compared //Airlines Aviation Finance – Market review to only about 26% of Boeing orders). The Airbus orders //Operating lessors The “good times” in commercial aviation continued in included a few very big sales. The reason for this order / /Logistic companies 2017. After an already solid 7.4% increase in demand (in explosion has been the subject of industry speculation revenue passenger kilometres; RPK) for air travel during and some discounting is suspected. At the end of the Core regions the year 2016, preliminary figures for the year 2017 indi- year, the total gross orders totalled just over 2,520; after //Europe cate a further acceleration to 7.7% (CHART 12) for the first cancellations, net orders of about 2,240 remained. //North and South America eleven months according to the International Air Transport //Asia //Middle East/Africa Association (IATA). With a 6.4% increase in capacity (in Despite the lower order volumes compared to 2013 and available seat kilometres; ASK), the global airlines saw 2014, the commercial jet market is definitely not in a Awards 2017 their passenger load factor further improve to 81.5% downturn. The current order backlog still equals almost //Aircraft Finance Portfolio during that period – a level that was deemed impossible 58% of the current in-service fleet, or almost nine years Acquisition (Global Transport Finance) to reach only a few years ago. Not only does a high load of production (at 2017 production levels). New deliveries //Aircraft Securisation Deal of factor benefit the airlines’ bottom line, it also helps to of western-built commercial jets counted 1,643, achieving the Year – US (Global improve the fuel burn per RPK as less empty seats are a fresh record level during 2017, slightly up from the Transport Finance) flown around the world. Except for North America (4.2%), 1,613 delivered during 2016. Deliveries peaked in the //Asia-Pacific Bank of the Year (Airline Economics) all regions enjoyed international RPK growth of well over fourth quarter, when no less than 511 aircraft were deliv- 6.5%. According to IATA, passenger yields had dropped ered. Engine supply remains a bottleneck, holding back by 11.9% in 2015 and 8.8% in 2016 whilst preliminary new aircraft deliveries. Apart from the challenge of ramp- 2017 figures indicate a decline of only 1.5%.Industry ing up production of new technology engines, such as the profits have been at relatively high levels during 2015 Pratt & Whitney PW1000G, CFMI LEAP and Rolls Royce and 2016, at least by historic standards, and preliminary Trent 1000, the manufacturers were confronted with figures for 2017 suggest a similar net profit level quality issues in certain engine parts, slowing down (US$34.5 billion), despite significantly higher jet kerosene assembly and requiring production of replacement parts. prices and an upward trend in labour cost. This translates Unfortunately, reliability issues of the assembled engines into a net profit per departing passenger of US$8.50. meant that in addition many newly produced engines had to be used to replace malfunctioning in-service engines, One of the biggest surprises in 2016 was the increasingly instead of being sent to the assembly lines for installation strong recovery of the air freight market (+3.8%). This on new aircraft. trend continued during 2017: from January to November the industry booked a spectacular 9.7% increase in freight tonne kilometres (FTK; CHART 12). European and African carriers showed remarkably strong increases with 12.7% and 25.6% more revenue tonne kilometres (RTK). It now seems that the fear for de-globalisation – resulting from increasing protectionism – did not become reality, at least for the time being.

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DEVELOPMENT OF THE BUSINESS DIVISIONS

As a result of the long lead times for new aircraft, relia- Aviation Finance – Strategy bility issues with the new generation aero engines and DVB is a leading arranger and provider of commercial Further details on 2017 stimulated by still-low fuel prices, the used equipment debt to passenger and cargo airlines, as well as to air- aviation market develop- market continued to prosper during 2017. The number of craft lessors, with a total loan exposure standing at €6.1 ments are available on our website www.dvbbank.com transactions involving aircraft with leases attached signif- billion, financing 988 aircraft and eight spare engines. The > Business & Expertise > icantly exceeded the number of transactions involving Bank features a unique Aviation Finance platform, meticu- Aviation Finance > Markets. aircraft without lease. Aircraft lessors control just under lously constructed with a view to being a constant provid- 40% of the global commercial jet fleet. The major source er of aviation capital and services during different eco- of lessor fleet growth is sale-and-lease-back transactions, nomic cycles. rather than speculative direct orders. Consolidation continues amongst the top 10 of the league. The biggest differentiator between DVB and its competitors is the fact that Aviation Finance offers far more Indicators for the used equipment market overall re- than the traditional range of banking services. Through mained favourable. The storage percentage (stored fleet/ our lending, advisory and asset management teams, we in-service fleet) for western-built jet aircraft has dropped provide select structures and services at the crossroads of further, to 9.2% or 2,244 units. Close to 1,000 of these money and metal, supported by a strong research team. aircraft are completely obsolete types; around 700 are Specifically, we consider our willingness to finance used GROUP MANAGEMENT REPORT older-generation jets, and from the remaining ca. 550 equipment, and to assume residual value risk on the sales planes the vast majority is either in transit between les- proceeds of aircraft, as a competitive advantage. Aviation sees or undergoing modifications. The annual number of Finance does not provide export credit loans, and, as aircraft retirements dropped further to just over 400, from such, we consider that each dollar we loan is “in-demand” close to 700 only a few years ago. About half the retire- commercial finance. ments were completely obsolete types.

Overall, 2017 turned out much stronger than expected for commercial aviation, and it now seems the industry is on a high-level plateau rather than at a peak in the cycle. We still believe aviation is a cyclical industry, with a high risk of pressure on values for older aircraft types, should the cycle turn south. CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED

Worldwide traffic growth C 12

16 RPK Ø: 6.3% RPK Ø: 9.7% 14 FTK Ø: 3.8% FTK Ø: 7.7% 12

6 AUDIT OPINION 4

– 2

– 4

– 6

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

2016 2017

Revenue passenger kilometres (RPK) Freight tonne kilometres (FTK) Source: IATA Air Passenger und Freight Analysis, February 2018 FURTHER INFORMATION

69 DVB BANK SE GROUP ANNUAL REPORT 2017

In order to build on this core business, Aviation Finance Aviation Finance – Portfolio analysis maintains a strong network of relationships with clients, The air finance market in 2017 remained flooded with industry partners and financial institutions who perceive bank and capital market liquidity in most segments. Com- DVB as a bank that understands the aviation market and petition was strongest for tier 1 airline and lessor trans- associated assets, whilst possessing the expertise to actions, which remain largely corporate credit-based develop value-added financial solutions. whilst DVB is more asset-focused. The financing of new equipment remained comparably easy, given the healthy Aviation Finance has consistently demonstrated the appetite for such assets from all providers. The stellar achievement of its goal of a cycle-neutral business model: credits among the airline and leasing companies had one which enables DVB to be equally active (and therefore plentiful options to secure their funding requirements, be profitable) in a market downturn as in an upturn, thereby it for new or used equipment. Further borrowers/issuers proving to be a partner for its clients in both good and were able to take advantage of the capital markets, both difficult times. More challenging markets, which see public and private. For other market participants though, it less-specialised banks exit the sector, provide greater was harder work to secure their aircraft (re-)financing opportunities across the division. It is in times of greater needs, in particular for used equipment, or to raise financ- volatility or uncertainty that Aviation Finance expects to ing for pre-delivery payments. record its most significant portfolio growth. DVB’s Aviation Finance division was active across the A prerequisite for DVB’s success is cooperation amongst a board. The focus of our origination activity was, as al- team of professionals with a multi-disciplined background. ways, to identify those situations where our lending was As well as staff experienced in banking and structured deemed relatively scarce, and hence more valuable to our finance, Aviation Finance employs individuals with very clients, and/or where we could bring a specific structure specific aviation industry expertise, gathered from prior or solution to enhance our offering, finding value where backgrounds with airlines, manufacturers, aircraft/engine other banks might not. lessors and asset managers. Total loan portfolio We view the continuing development of our asset-based At the end of 2017, the Aviation Finance loan portfolio lending activity, including the arrangement, underwriting stood at €6.1 billion, representing a 29.9% decrease from and syndication of transactions, as a way of further (and the level of €8.7 billion at the end of 2016. The portfolio profitably) expanding our business in the sector. As such, was, however, 97.8% US dollar-denominated and in US DVB will continue to adopt a proactive and disciplined dollar terms the reduction was less pronounced, with the approach to loan origination and maintaining its Aviation portfolio size decreasing by 19.8% during the year, from Finance portfolio, in line with well-established lending US$9.1 billion at the end of 2016 to US$7.3 billion at the guidelines and principles. end of 2017. This reduction was mainly driven by the impact of significant loan prepayments during the year Into 2018, and indeed beyond, Aviation Finance will contin- and a lower new lending volume compared to previous ue to optimise its resources, for the mutual benefit of the years. In line with DVB’s business model, the portfolio is Bank and its clients. A reputation as one of the leading 99.9% collateralised. arrangers and commercial lenders is enabling the business division to embrace investor appetite in the sector and work with, rather than against, that competition. It will also continue to monitor its risk positions relentlessly, remaining disciplined and prudent in lending activity despite very competitive market conditions. It has available capital for new business, now supplemented by two debt funds and supported by a growing distribution capability.

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DEVELOPMENT OF THE BUSINESS DIVISIONS

The portfolio is well diversified among aircraft types and and indeed this is often a competitive edge, younger manufacturers: CHART 13 aircraft (as well as narrowbody aircraft) are more readily sold or leased in case of need (i.e. a client default). So this Geographically, the portfolio is also well diversified: age profile of the portfolio represents a very solid base.

CHART 14 The Aviation Finance portfolio is also well diversified by In terms of the vintage of aircraft financed, 36.5% of the client, with 52.6% being operating lessors, 46.6% being portfolio is three years old or less, and 62.0% of the port- airlines, and 0.8% being logistics companies. A total of folio is less than six years old (previous year: 41.4% and 145 aviation clients equates to an average lending expo- 63.8%, respectively). Whilst Aviation Finance is experi- sure of €42.1 million per client. There are 50 clients to enced in financing aircraft across the full age spectrum, whom our committed exposure is in excess of €50 million.

Aviation Finance portfolio by aircraft type C 13

3.7% (–1.5 pp) Freighter GROUP MANAGEMENT REPORT thereof: 1.7% (–0.5 pp) Turboprops 3.3% (–1.4 pp) Boeing 0.4% (–0.1 pp) Airbus thereof:

1.5% (–0.2 pp) ATR 0.2% (–0.3 pp) Bombardier 3.7% (–2.9 pp) Regional jets thereof:

3.5% (–2.8 pp) Embraer 0.2% (–0.1 pp) Bombardier

53.6% (+2.5 pp) Narrowbody pax thereof:

29.1% (+3.4 pp) Airbus 37.3% (+2.4 pp) Widebody pax 24.5% (–0.9 pp) Boeing thereof:

22.9% (+2.1 pp) Boeing 14.4% (+0.3 pp) Airbus

CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED

Aviation Finance portfolio by country risk C 14

2.1% (–0.2 pp) South and 3.5% (–0.5 pp) Offshore Central America

9.6% (–1.6 pp) Middle East/Africa AUDIT OPINION 33.1% (–1.8 pp) Europe

25.4% (+2.7 pp) Asia/Australia

26.3% (+1.4 pp) North America FURTHER INFORMATION

71 DVB BANK SE GROUP ANNUAL REPORT 2017

New business The financial year saw allowance for credit losses decreas- During 2017, Aviation Finance realised 45 new lending ing to €13.9 million (from €16.0 million in 2016). Total For information on 2017 transactions with aviation clients with a total underwrit- allowance for credit losses held in Aviation Finance stood transaction highlights, please visit our website: ing volume of €1.5 billion. While new business production at €67.2 million in 2017, compared to €66.6 million at the www.dvbbank.com > Busi- reduced year on year (previous year: €3.4 billion), the end of 2016. We believe that this level of allowance pro- ness & expertise > Aviation Finance > Important deals. level of new lending reflects our disciplined approach to vides a necessary and adequate cushion against possible origination and an unwillingness to match terms we losses which may arise from the loan portfolio. consider too aggressive, particularly at a point in time we believe to represent a high-level plateau of the business Net fee and commission income decreased to €37.8 million cycle. The average new business margin remained rela- in 2017 (previous year: €51.5 million), reflecting the reduced tively stable at 222 basis points (previous year: 223 basis level of new business generation which was partially offset points). The mix of new and used aircraft financings was by significant contributions from both the Advisory and good, and on behalf of a creditworthy and geographically Aviation Asset Management teams. diversified group of clients. DVB acted as arranger and/or agent bank (i.e. leading role) in the vast majority of its Total income stood at €74.9 million and was 34.8% lower newly acquired business transactions. New financings in than the previous year’s level (€114.8 million). 2017 were well diversified by client and obligor, as well as by manufacturer and aircraft type. In line with the General administrative expenses were reduced by 6.8% to overall portfolio, 56.5% of our lending was for narrow- €20.4 million (previous year: €21.9 million). body aircraft, 40.2% for widebody aircraft, 1.9% for freighters and 1.3% for turboprops. Overall, these developments resulted in a 40.9% decline in net segment income/loss before bank levy, BVR Deposit The success of Aviation Finance in 2017 also contained Guarantee Scheme and taxes, to €54.8 million. TABLE 23 strong contributions from our “aviation services” activities, i.e. those which do not require use of the balance sheet. The Aviation Asset Management and Advisory Extract from the segment report for Aviation Finance T 23 teams have continued to enhance the reputation of DVB’s aviation business as the leading aviation bank. € mn 2017 2016 %

These teams were engaged in a wide range of man- Net interest income 48.7 78.8 –38.2 dates, each leading to healthy “non-risk” fee earnings. Allowance for credit losses –13.9 –16.0 –13.1

Net interest income after DVB’s commitment to develop its service capability and allowance for credit losses 34.8 62.8 –44.6

resources is expected to yield further rewards in the Net fee and commission income 37.8 51.5 –26.6 coming period, as a key component of our cycle-neutral Income business approach. (excluding the IAS 39 result) 74.9 114.8 –34.8

General administrative expenses1 –20.4 –21.9 –6.8 Earnings analysis Net segment income/loss In 2017, Aviation Finance posted a sound financial result, before bank levy, BVR2 Deposit albeit at a much lower level than the previous year. We Guarantee Scheme and taxes 54.8 92.8 –40.9 1 Only those costs are allocated to DVB’s operating business divisions for which they experienced another year of heightened liquidity, and there- are directly responsible. General costs of operations, overheads or, for example, IT costs, are not allocated to the operating business divisions. fore intense competition, in the aviation finance market. 2 National Association of German Cooperative Banks This resulted in a high level of loan prepayments, and a reduced level of new lending business, with continued downward pressure on our interest margin level. These factors contributed to a 38.2% year-on-year reduction in net interest income, which stood at €48.7 million (previous year: €78.8 million).

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Aviation Finance – Outlook 2018 has been fairly limited. Routes were taken over by other Last year’s fears of a softening in the global air transport airlines and most of the aircraft found new homes within market as a result of changes in the political climate proved a short period. Also in 2018 a number of carriers – unfounded. Apart from a few individual airline defaults, amongst others in Europe and Asia – are “on the watch- 2017 turned out to be another strong year for the industry. list” but the industry is now robust enough to absorb the The outlook for 2018 is also generally positive: traffic impact of a hypothetical default, unless such an event growth was, and remains, strong; airline profitability is at a would trigger a wider loss of market confidence, similar high level and the market for commercial jets is robust. to the “sub-prime” crisis a few years ago.

Against the macro-economic background outlined in the The commercial jet market is in a strong position and report on expected developments, IATA projects passen- expected to remain so during 2018. With record airline ger traffic (RPK) growth of 6.0% for 2018, and a 4.5% load factors, demand for additional capacity is strong. At cargo growth. Based on the January to November 2017 the end of 2017, the ratio of capacity on order to aggre- figures of 7.7% and 9.7% respectively, the IATA projection gate existing fleet was 57.7% CHART 15( ). The fuel price is looks rather conservative. Airline revenues are expected at an almost ideal level, as both new technology aircraft €38.4 billion – to increase by 9.4% as a result of volume growth accom- as well as mature types remain viable. Significantly high- IATA projects net industry profit for 2018 panied by increasing passenger (+3.0%) and cargo (+4.0%) er fuel prices could trigger an accelerated replacement of GROUP MANAGEMENT REPORT yields. Despite the expected increase in fuel prices and older jets, while a further drop in fuel cost could under- labour costs, IATA projects a record net industry profitof mine the premium prices and lease rates required by the US$38.4 billion for 2018. RPK growth in 2018 is expected new technology planes. New aircraft ordering exceeded to be highest for African (+8.0%) and Latin American expectations during 2017, and the outlook for 2018 is for (+8.0%) carriers. Both however are relatively small mar- more modest sales numbers, unless the eternal competi- kets. With +7.0%, the huge Asia/Pacific region as well as tion between the major original equipment manufacturers the Middle Eastern carriers are expected to show above results in extreme price discounting. The used equipment average growth. Average growth is projected for the large market for mainstream single-aisles will remain robust, European region (+6.0%) whilst likely to be less pronounced but there are concerns about demand for select regional in the large but mature North American region (+3.5%). aircraft types as well as certain mature twin-aisle jets.

While North America displays the slowest growth, it In conclusion, the outlook for commercial aviation as well remains the most profitable region with an expected 2018 as the commercial aircraft market is positive. Macro-eco- net post-tax profit of US$16.4 billion. Europe is in second nomic projections as well as market expectations for the position with US$11.5 billion expected net profit followed oil price are supporting this. Only “black swan” events, FINANCIAL STATEMENTS CONSOLIDATED by Asia/Pacific with US$9.0 billion. Lagging behind are such as a significant correction in the financial market, Latin America with US$0.9 billion and the Middle East terrorism or severe government measures could push the with US$0.6 billion net profit, as well as Africa with a industry off its current plateau. However, this does not US$0.1 billion net loss. Apart from different performances guarantee success for every airline or each aircraft type. between the regions, individual airlines will also produce As aviation remains a cyclical industry, selectivity and a different results within regions. For those involved in the prudent approach remain essential, especially during the defaults of Air Berlin, Monarch or VIM Avia, the experi- present almost euphoric market circumstances. ence may have been painful; however, the industry impact AUDIT OPINION

Aircraft orders – ratio of order backlog to existing fleet capacity C 15

Ratio of order backlog to existing fleet capacity

In storage 2,244 Aircrafts On order 13,953 (western-built jets) 57.7% (2016: 56.8%) In service 24,171

Source: Ascend, February 2018 FURTHER INFORMATION

73 DVB BANK SE GROUP ANNUAL REPORT 2017

LAND TRANSPORT FINANCE

€339.4 MN €1,368.6 MN NEW BUSINESS CUSTOMER VOLUME LENDING VOLUME

74 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

DEVELOPMENT OF THE BUSINESS DIVISIONS GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED AUDIT OPINION FURTHER INFORMATION

75 DVB BANK SE GROUP ANNUAL REPORT 2017

Business areas Land Transport Finance Although full-year statistics are still lacking for rail // Rail-based: freight in Europe, country results from France, Germany, freight cars, locomotives, Our Land Transport Finance division was again active the United Kingdom and Poland (52.6% of the total per- passenger train sets // Rail-related: across its three target markets during 2017. However, formance in Europe) do suggest that 2017 brought a container chassis there was no escaping what was in parts a challenging moderate growth of 1.4% of rail freight measured in economic environment, with divergent developments on tonne-kilometres (tonne-km) after modest growth of 0.5% Products the commodities markets and increasing regulation. in 2016. In total, rail freight business was still about 5.2% / Structured Asset Lending / The land transport market still appreciates our sustained below its 2007 peak. The amount of new locomotives //Risk Distribution & Loan Participations specialisation and focus. Thus, our Land Transport delivered in 2017 reached 63.2% of the replacement //Corporate Finance Solutions Finance team was able to generate a new business need. 47.2% of them were destined for leasing compa- //Private Equity Sourcing & volume of €339.4 million and achieve quite satisfactory nies. For standard-gauge freight cars the figure was Investments financial results. 55.0%, with a clear trend toward relatively light inter- //Asset & Market Research modal flat cars (and corresponding containers) to replace traditional vehicles such as tank cars and open top hop- Clients //Equipment lessors pers. Leasing companies bought 52.2% of them. //Railway companies //Operators and industrial Land Transport Finance – Market review In 2017, the rail freight market in North America was clients with own rail Our three core land transport markets developed at differ- characterised by a major jump in carloads, mainly result- equipment fleets ent speeds during 2017. The most recent – preliminary – ing from a transport increase in four areas: non-metallic

Core regions rail freight market statistics indicate significant growth in minerals were up 13.8%, metallic ores and metals rose //Europe the North American market, modest growth in Europe, 11.6%, coal increased by 7.7% year-on-year despite //North America and declining volumes in Australia. Despite low fuel relatively low natural gas prices, and chemicals increased //Australia prices, stagnating road tolls, the increasing move away by 2.0%. The only two significant downward factors were from coal-fired power plants and the cooling of the Chi- a decrease in transport of motor vehicles and parts Awards since 2017 nese economy, rail freight volumes seem to have bot- (–5.0%) due to lower sales and inventory volumes, to- //Best International Transport Finance Provider – Germany tomed out. The European rail passenger business contin- gether with a decline in transport of petroleum products (Transport News) ued its growth path and the order book is filled for the (–3.1%) as a result of growing crude oil pipeline capacity. //Rail Capital Markets Deal of next 2.5 years. Freight rolling stock owners are however the Year – Americas (Global Transport Finance) at ease: order books (except for freight cars in North //Rail Finance Deal America) are far below the yearly replacement levels – of the Year – Americas a normality we have been observing for many years just (Global Transport Finance) after a weaker economic period. Leasing companies //Rail Finance Deal of the Year – Europe experienced higher utilisation rates in all three geogra- (Global Transport Finance) phies, but the lease rates themselves remained rather flat, which indicates a stronger competitive environment. Asset prices are stable or increasing outside energy sectors (coal, oil and sand).

76 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

DEVELOPMENT OF THE BUSINESS DIVISIONS

The number of carloads in North America increased sig- 30 June 2017 Australia’s iron ore production had in- nificantly by 4.2% year-on-year according to the Associa- creased by 4.3% and coal production by 0.1%. Due to tion of American Railroads. For Canada and the US, this large deliveries of iron ore, coal and intermodal cars, the Further details on 2017 land transport market develop- level was still 17.8% down from the 2006 record. Inter- number of cars built was 26.1% above the replacement ments can be found on our modal transport by rail rose 5.3%. In Canada and the US, need in 2017. However, new locomotive deliveries only website www.dvbbank.com > Business & Expertise > this segment registered 19.3% more shipments compared satisfied 46.4% of the replacement need. Land Transport Finance > to the pre-recession record of 2006. In the wake of rising Markets. transport volumes, the average train speed went down Preliminary and extrapolated statistics from Germany, while terminal dwell times went up during 2017, which France, Poland and the United Kingdom (accounting for led to more freight cars being needed. Since about 19.0% 59.5% of the total performance in Europe) show that of the freight car fleet and about 13% of the locomotive passenger transport by rail measured in passenger-kilo- fleet were idle, equipment owners first sought employ- metres registered total growth of 3.6% year-on-year in ment for existing rail rolling stock before ordering new 2017. This was achieved against headwinds from low fuel equipment. So total rolling stock orders remained far prices and the further development of low-cost airlines, below replacement levels. CHART 16 long-distance bus services, car sharing and digitalisation of other transport modes. 31.2% more train sets were

For the Australian rail freight market, the Department of delivered than needed for replacement, partly reflecting GROUP MANAGEMENT REPORT Industry, Innovation and Science in Australia stated in the need to cover increasing passenger transport demand. December 2017 that between 1 July 2016 and

US freight car deliveries C 16

Units

100,000

82,335 80,000

67,027 62,000 60,000 60,145 58,902 52,879 47,346 40,000 42,000 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED

22,004 20,000 16,628

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017p1

1 2017 figure is preliminary Source: Rail Theory Forecasts/FTR Transportation Intelligence, January 2018 AUDIT OPINION FURTHER INFORMATION

77 DVB BANK SE GROUP ANNUAL REPORT 2017

Land Transport Finance – Strategy Our relationship managers in Frankfurt/Main and New Our international Land Transport Finance platform provides York work with our clients to originate financing solutions. a sound base for our market position. Our business model Clients and our financing partners continue to appreciate encompasses research, advisory and financing activities our specialist focus on asset finance, our know-how and on the international transport markets – specifically in the related services. Our Land Transport Research supports three developed core regions of Europe, North America every loan approval and risk decision with strategic and and Australia. Once again, during 2017 we were one of operational intelligence. In the context of key projects, it the few financiers that consistently supported market also provides market analysis directly to clients. participants across all market regions. Collaboration with the Bank's other service teams is Our strategic focus is on our strengths, and on the key increasingly important, especially with DVB Corporate principles of asset finance. The following aspects repre- Finance and Financial Institutions and Syndications. We sent key success factors, both individually and in combi- won Corporate Finance mandates – in the M&A business nation with each other: TABLE 24 and for capital markets transactions – in Europe and North America during the year under review and we T 24 successfully executed several capital markets transac- Internal factors Market factors tions. Moreover, we took on board various new business

The flat hierarchy within DVB, The flexibility and ability to ideas and projects that will be further developed for new which allows for short and quickly act on the markets we business origination in the years ahead. direct decision-making cover; processes; Since 2016, DVB has also structured meta financings as the conservative risk approach, the detailed and profound which benefits us considerably knowledge of markets, part of its current operations. This means arranging and for credit assessment and in financed assets, clients, underwriting complex financings for rolling stock, with the managing our exposures; trends, as well as current and expected transport asset objective of syndicating parts of these financings within performance; the German cooperative financial network, providing the consistent and reliable the commitment and creativi- cooperative banks with access to a specialised, yet rela- responsibility taken by the ty in structuring transactions Land Transport Finance team for clients; tively safe market – with the benefit of (and depending for transaction execution; upon) our sector expertise and experience. With this our cost discipline and the close integration with initiative, we deepen our cooperation with the Volksbanken careful consideration of the DVB Corporate Finance and Raiffeisenbanken cooperative financial network. We were risk-return ratio. the Stephenson Capital Fund, to optimise the range of able to thus conclude three meta financing transactions products and services we during 2017. offer to our clients.

We see the markedly enhanced maturity of the markets Thanks to the factors outlined above and to the consistent we cover as a positive aspect. We recognise the growing dialogue and close cooperation with our clients, we once cyclicality of the market segments: thanks to our Re- again successfully originated new business throughout search, we are able to better identify new business op- 2017. We aim to further expand the Bank's market pres- portunities. Our clearly defined positioning in the asset ence in our three mature target regions over the next few finance world and our cycle-neutral strategy have both years. This also encompasses options to expand our yielded good results over the past years. The continuity of business focus to include other rail-related assets; we our market approach and our proven competence keep have taken preparatory steps in this direction during the paying off. Despite various challenges, we see good year under review. In a rail sector that is increasingly opportunities in the markets we cover: we will master global, we are in a position to offer synergy effects to our future developments with flexibility and broad-based clients. At the same time, the diverging momentum in the know-how. We strive to continue to command a promi- three regions further helps to diversify our portfolio. nent position in the Land Transport Finance markets, to the benefit of our clients, the diversification of our portfolio – and ultimately, for the Bank's profitability.

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DEVELOPMENT OF THE BUSINESS DIVISIONS

Land Transport Finance – The high percentage share of transactions involving Portfolio analysis freight cars is in fact desired: thanks to their granularity, freight cars are an asset class with an excellent risk Total loan portfolio profile and one that is diversified in many ways (especial- Total customer lending amounted to €1.4 billion at the ly by borrower, lessee, rail car type, vintage and region). end of 2017 (previous year: €1.6 billion). As in the previ- Moreover, while being a rather “low-tech” vehicle – hav- ous year, there were signs of a plateau forming in the rail ing no self-propulsion or signalling equipment – the transport segment as a whole. However, developments on freight car as equipment and collateral has the extra the North American market required a more differentiated benefit of high operational and technical efficiency. This approach, since value increases in some asset sectors makes the asset class attractive, even in the event of failed to fully offset value losses in others. As at year-end potential collateral recovery if fleets are repossessed or 2017, the overall portfolio – which is 99.8% collateral- remarketed/redeployed. ised – reflected these market developments, and remained well diversified in terms of asset type, with only minor The portfolio was also well diversified overall in terms of changes. CHART 17 geographic exposure. CHART 18 GROUP MANAGEMENT REPORT

Land Transport Finance portfolio by asset type C 17

8.9% (+0.4 pp) Rail-related thereof:

8.9% (+0.5 pp) Container chassis

91.1% (–0.4 pp) Rail-based thereof:

61.1% (–1.6 pp) Freight cars 19.7% (–0.3 pp) Locomotives 8.9% (+1.6 pp) Regional passenger train sets 1.4% (–0.1 pp) Passenger coaches CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED

Land Transport Finance portfolio by country risk C 18

3.0% (+0.3 pp) Australia AUDIT OPINION

36.5% (–7.3 pp) North America 60.5% (+7.0 pp) Europe FURTHER INFORMATION

79 DVB BANK SE GROUP ANNUAL REPORT 2017

Given a mixture of some smaller-sized and various financed rolling stock. Together with Financial Institutions big-ticket transactions, the average lending exposure per and Syndications, we syndicated tranches of one transac- client was €32.6 million in 2017 (previous year: €38.3 mil- tion into the banking market, while keeping a significant lion). The number of clients with an exposure exceeding share of the business on our books. Another syndicated €50 million showed only a minor change (2017: nine transaction was in the pipeline. clients; 2016: ten clients). We do not perceive any indications for elevated cluster risk. New business originated in 2017 exclusively comprised transactions for rail assets; therefore, financings of new New business or used freight cars and of new locomotives continued to During 2017, our Land Transport Finance business devel- constitute the backbone of rail asset finance. At 61.6%, Information on transaction oped in a satisfactory manner, in spite of a challenging this segment continued to account for the largest share of highlights 2017 is available on our website: www.dvb- environment. Land Transport Finance was able to close new Land Transport Finance business, in line with the bank.com > Business & 13 new transactions in Europe, North America and Aus- Bank's strategy, followed by transactions involving loco- Expertise > Land Transport Finance > Important deals tralia with a total volume of €339.4 million and an aver- motives (24.6%). We succeeded in realising a high-profile age interest margin of 203 basis points (previous year: transaction involving passenger train sets; the portfolio twelve transactions with a total volume of €480.3 million share of this segment amounted to 8.1%. Overall, the and an average interest margin of 217 basis points). division successfully increased diversification of the Land Essentially, our new business volume was based on three Transport Finance portfolio. economic factors: Earnings analysis // especially, the need to refinance existing loans for The land transport finance markets in 2017 were shaped rolling stock; by significant levels of liquidity seeking investment, and by intensified competition. In this challenging market // a mildly increased propensity to invest in the North environment, Land Transport Finance generated quite American and European rail markets (especially in satisfactory results for 2017, with new business volumes niche segments); and and average interest margins declining. Accordingly, net interest income declined by 12.3%, to €17.9 million (pre- // replacement investments of fleet owners in their vious year: €20.4 million). rolling stock. On a positive note, €1.5 million in allowance for credit In spite of the solid level of new business originated, losses was reversed: net interest income after allowance Land Transport Finance was unable to maintain the size for credit losses was thus only slightly lower year-on-year, of its portfolio during the year under review. The portfolio down 0.5% to €19.4 million (previous year: €19.5 million). declined both due to contractual repayments as well as Given the relatively low market cyclicality of rail assets, due to early repayment of several large exposures. transactions in Land Transport Finance are generally less During 2017, new rolling stock investments in the three prone to risks than financings in other transport sectors. core regions were once again below the levels seen prior Total allowance for credit losses in Land Transport Finance to the economic crisis. During the course of the year, as at 31 December 2017 amounted to €3.1 million (previ- strategic realignments among lessors led to fleet and ous year: €2.6 million). We believe that this represents a company sales. Against this background, we continued good provisioning level. to concentrate on financings in the primary markets, with transactions for new clients being a strategic objective. Net commission income halved in the highly competitive Conversely, we did not close any secondary market trans- environment, to €4.8 million (previous year: €9.7 million). actions during the year under review. We successfully restructured an existing exposure, securing its viability The business division's total income declined by 17.7%, for the future. to €24.2 million (previous year: €29.4 million).

As in the previous year, the lending transactions we closed successfully were all secured by first-ranked collateral. Specifically, we arranged and participated in bilateral loans and larger-sized credit facilities on the basis of club deals. We also entered into (non-recourse) transactions with special purpose entities, and closed two operating lease projects where the Bank assumed residual value risks. Within the scope of non-recourse transactions, we also took implied asset risk in the

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DEVELOPMENT OF THE BUSINESS DIVISIONS

General administrative expenses declined by 17.6%, to For North America, Moody’s projects a 1.25% to 2.0% €2.8 million (previous year: €3.4 million). rail freight carload volume growth scenario in 2018 and 2.7% – FTR Intel FTR Intel forecasts a general rail freight growth of 2.7% forecasts a general rail freight growth for North America At €21.4 million, the net segment income/loss before in 2018. Stephens Inc.’s commodity outlook is positive for bank levy, BVR Deposit Guarantee Scheme, and taxes 46% of the carload volumes (formed of chemicals, was 17.7% lower than the previous year’s figure of metallic ores & metals, forest products and petroleum), €26.0 million. TABLE 25 neutral for 22% (non-metallic minerals) and negative for 32% of volumes (grain, motor vehicles and parts as well as farm and food). However, the still pending outcome of Extract from the segment report for the continuing North American Free Trade Agreement Land Transport Finance T 25 renegotiations is a source of uncertainty. Manufacturing € mn 2017 2016 % in Mexico, Canada, or outside the US in general could Net interest income 17.9 20.4 –12.3 come under pressure, meaning on the one hand, less Allowance for credit losses 1.5 –0.9 – transport of components and finished goods across the

ZNet interest income after US borders, but on the other hand, an increase of domes- allowance for credit losses 19.4 19.5 –0.5 tic transport of components and raw materials. For inter-

Net fee and commission income 4.8 9.7 –50.5 modal transport volumes, Stephens Inc. forecasts an GROUP MANAGEMENT REPORT

Income increase of 5.4% in 2018 in the US. (excluding the IAS 39 result) 24.2 29.4 –17.7 General administrative For rail freight in Europe, the European Steel Association 1 expenses –2.8 –3.4 –17.6 (Eurofer) expects the European steel industry to increase Net segment income/loss by 1.9% in 2018 year-on-year and the European Chemical before bank levy, BVR2 Deposit Guarantee Scheme, and taxes 21.4 26.0 –17.7 Industry Council (Cefic) projects EU chemicals production

1 Only those costs are allocated to DVB’s operating business divisions for which they to grow by 2%. LMC Automotive forecasts a plateauing are directly responsible. General costs of operations, overheads or, for example, IT costs, are not allocated to the operating business divisions. level of new passenger cars to be produced in stand- 2 National Association of German Cooperative Banks ard-gauge European countries. Intermodal transport is expected to develop slightly positive in the period 1 Octo - Land Transport Finance – Outlook 2018 ber 2017 to 30 September 2018 according to the Inter- With the International Monetary Fund forecasting gross modal Union for Road-Rail Combined Transport (UIRR). In domestic product growth above 2.0% in Australia, Europe July 2017, SSP Consult (commissioned by the German and North America, it is relatively certain to predict a Ministry for Transport and Digital Infrastructure) forecast- growth in the rail freight and rail passenger businesses ed a 0.4% year-on-year rail freight growth for Germany in FINANCIAL STATEMENTS CONSOLIDATED in 2018. Transport price, lease rate and utilisation rate 2018, with intermodal transport to grow by 2.6%. increases can be expected across the board in the rail freight sector, also because the volume of new rolling By far the majority of rail freight transported in Australia stock deliveries is considerably lower than the is coal and iron ore. The Australian Bureau of Resource & required replacements. Energy Economics forecasts iron ore production to increase by 4.3% and coal production by 1.0% in the busi- Tailwinds are provided through a lack of truck drivers in ness year ending on 30 June 2018. Grain transports will Europe and North America, the almost fully utilised truck- most likely reduce significantly. Rabobank forecasts a ing capacity and stricter hours-of-service recording rules 35 million tonne national grain crop in 2017/2018, 24 mil- for truckers in the US. The stabilisation of oil prices fol- lion tonnes below the record level in 2016/2017 and AUDIT OPINION lowing the agreement among OPEC members and several 8 million tonnes shy of the five-year average. Some other major producers to limit supply will be favourable planned short-haul intermodal projects and positive gross for the competitiveness of the relatively fuel-efficient rail domestic product development will likely contribute to market. In Europe some headwind is expected due to a growth in intermodal transport. lack of train drivers. The rail industry will therefore follow the road industry and intensify its research, development For rail passenger transport in Germany, SSP Consult and tests in the field of autonomous driving. forecasts +2.2%. Long-distance trains will profit from air passengers switching to rail in the wake of rising airline 2.2% – Forecast for rail ticket prices. passenger transport in Germany FURTHER INFORMATION

81 DVB BANK SE GROUP ANNUAL REPORT 2017 DVB BANK SE GROUP ANNUAL REPORT 2017

IMPORTANT DEALS 20171

Alaska Airlines/Horizon Air CMA CGM Solvang Goshawk Senior Secured Term Loan Facility Aircraft remarketing Japanese Operating Lease with PDP Financing 4 x 2007/2008 built 17,000 cbm LPG carriers 9 x B737 aircraft Call Option (JOLCO) 3 x B737-800 2 x 21,000 cbm LPG newbuilds Q400 turboprop aircraft Fleet of container boxes Agent & Arranger US$158 million Remarketing Agent JOLCO Arranger Mandated Lead Arranger

AMA Capital Partners and Värde Partners Senior Secured Term Loan Facility DAE Capital Iolcos Hellenic Maritime SunExpress 2 x 1,700 TEU PDP Financing Fleet refinancing Full Recourse Financing 3 x 2,500 TEU containerships 15 x A320-200 US$37 million 2 x B737-800 US$48 million Co-Arranger & Security Agent Bilateral Agent & Arranger Co-Arranger & Facility Agent

Tankerska plovidba Apollo Aviation Group DVB's Aviation Asset Management NETINERA (Die Länderbahn) Senior Secured Term Loan Facility Operating Lease Financing Refinancing of 2 x Suezmax tankers and Limited Recourse Warehouse Financing 44 commercial aircraft sold/leased, Fleet of 4 x E-locos and 2 x Aframax tankers Large portfolio of aircraft 126 aircraft under lease management 7 x double-deck coaches Financing of 2 x newbuild Aframax tankers Lender in 2017 Arranger & Co-Lender US$130 million Co-Arranger

DVB's Aviation Investment Management ARS Altmann ORIX Aviation/Merx Aviation TORM Investment Advisor to equity funds owning Fleet financing Senior Secured Term Loan Limited Recourse Financing 121 commercial aircraft 9 x Medium Range tankers Fleet of 277 open car carriers Portfolio of 17 aircraft 1 engine US$130 million Arranger & Co-Lender Debt Arranger & Underwriter 2 airline equity investments Co-Arranger

Avianca Enkay Leasing Pacific International Lines Trip Rail Master Funding Senior Secured Term Loan Facility for Full Recourse Financing Lease Co. Initial Warehousing Railcar ABS Offering Japanese Operating Lease (JOLCO) 2 x A320-200 National Steel Car produced rail cars 17,587 railcars 2,000 TEU container vessel 1 x A319-100 US$75 million US$238 million US$15 million Agent & Arranger Arranger & Sole Lender Co-Manager & Liquidity Facility Structuring Agent Bilateral

Bentheimer Eisenbahn Eton Park Ping An Leasing VTG Senior Secured Term Loan Operating Lease M&A Sell-side Advisory Senior Debt Financing Fleet of 6,167 freight cars 5 x Lint41 18 x Airframe Joint Venture 1 x A350-900 on lease to Vietnam Airlines US$172 million Arranger & Co-Lender Joint Arranger & Placement Agent Agent & Arranger Arranger & Underwriter

Canada Steamship Lines GasLog Samos Steamship Winning International Group Refinancing 8.875% Senior Unsecured Notes Refinancing Senior Secured Term Loan Facility 4 x self-unloading dry bulk vessels LNG carriers 1 x 2008 Very Large Crude Carrier 1 x 2014 built Capesize bulker US$20 million US$250 million US$30 million US$18 million Bilateral Co-Manager Bilateral Bilateral

1 Unaudited information (not included in the audit opinion)

82 DVB BANK SE GROUP ANNUAL REPORT 2017 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

DEVELOPMENT OF THE BUSINESS DIVISIONS

IMPORTANT DEALS 20171

AMA Capital Partners and Värde Partners Senior Secured Term Loan Facility DAE Capital Iolcos Hellenic Maritime SunExpress 2 x 1,700 TEU PDP Financing Fleet refinancing Full Recourse Financing

3 x 2,500 TEU containerships 15 x A320-200 US$37 million 2 x B737-800 GROUP MANAGEMENT REPORT US$48 million Co-Arranger & Security Agent Bilateral Agent & Arranger Co-Arranger & Facility Agent

1 engine US$130 million FINANCIAL STATEMENTS CONSOLIDATED Arranger & Co-Lender Debt Arranger & Underwriter 2 airline equity investments Co-Arranger

83 DVB BANK SE GROUP ANNUAL REPORT 2017

Offshore Finance Offshore Finance – Strategy Faced with these market developments, the Bank decid- At the outset of 2017, DVB’s Board of Managing Directors ed to cease extending any new financings for offshore developed a strategic agenda designed to enhance pro- vessels and platforms during the 2017 financial year. In ductivity and efficiency, and to create the prerequisites for particular, the difficult employment situation of high- returning the Bank's business model to an adequate level ly-specialised offshore supply vessels and platforms of profitability. The market developments in offshore led required DVB to recognise additional allowance for credit the Bank to cease extending any new financings for losses. Thus, the Bank’s Offshore Finance business was offshore vessels and platforms during the 2017 financial discontinued as at 1 January 2018. year and to discontinue the business division as at 1 January 2018. Offshore Finance – Portfolio analysis

Total loan portfolio The situation in the offshore markets outlined above and Offshore Finance – Market analysis the Bank’s decision to cease offering new financings in Developments on the offshore market are almost exclu- this area determined the Offshore Finance portfolio sively driven by oil price trends, which are both erratic development in the year under review. Accordingly, the and unpredictable. Rising crude oil prices during the volume of customer lending was down 25.0%, to course of 2017 raised the readiness of international oil €1.8 billion at year-end 2017 (previous year: €2.4 billion). and gas majors to increasingly consider investment deci- The portfolio comprised 60 clients and 275 assets and sions for exploration projects. Given the scope of excess was 99.9% secured as at the balance sheet date (previ- capacity in the offshore markets, however, it remains to ous year: 275 assets, volume of €2.4 billion, 99.3% se- be seen whether a significant recovery of these markets cured). The average lending exposure per client stood at will materialise. The first step will be to cut back the high €29.4 million which marks a 25.2% decline from number of laid-up vessels, which will occur with a very €39.3 million in 2016. The number of clients whose low level of charter rates. These factors do not provide exposure exceeded €50 million was twelve at year-end any indication for a short-term improvement of market 2017 (previous year: 18 clients). conditions for suppliers to oil companies. Against the background of vast overcapacity in special offshore ves- The Offshore Finance customer lending volume is not only sels, it will take at least one to two years before invest- diversified from an exposure amount perspective but also ments in new exploration projects translate into rising diversified across the offshore asset spectrum itself: charter rates on the offshore market. CHART 19

Very high volatility in crude oil price developments, to- The portfolio is adequately diversified by country risk: gether with sizeable overcapacity for specialised offshore CHART 20 vessels, have triggered extensive cost-cutting measures by the global oil majors. These cost-cutting measures have a long-term effect upon suppliers – the owners of special offshore vessels – through lower charter rates and a lack of follow-on employment.

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Offshore Finance portfolio by asset type C 19

8.8% (+0.6 pp) Floating Production – F(P)SO 2.5% (+2.5 pp) Others

17.9% (–3.3 pp) Drilling thereof: 45.7% (–0.9 pp) Offshore support 15.8% (–1.3 pp) Rigs thereof: 2.1% (–2.0 pp) Drillships 22.9% (–1.2 pp) Platform supply vessels 20.2% (–0.1 pp) Anchor handlers 25.1% (+1.1 pp) Subsea 2.6% (+0.4 pp) Oil well thereof: service vessels

10.5% (+0.4 pp) Offshore construction vessels 5.8% (+0.7 pp) Seismic survey vessels 4.8% (+0.2 pp) Multi-function service vessels GROUP MANAGEMENT REPORT 1.5% (0.0 pp) Standby rescue vessels 2.5% (–0.2 pp) Others

Offshore Finance portfolio by country risk C 20

7.1% (–4.5 pp) Offshore 0.5% (–0.2 pp) Middle East/Africa

8.3% (+0,9 pp) North America

12.4% (–3.1 pp) Asia/Australia 54.0% (+2.7 pp) Europe CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED

17,7% (+4.2 pp) South and Central American/Carribian AUDIT OPINION FURTHER INFORMATION

85 DVB BANK SE GROUP ANNUAL REPORT 2017

Earnings analysis Total income stood at €–379.5 million and was, thus, The difficult market conditions indicated above also markedly lower than the previous year’s level of shaped the financial results of Offshore Finance. €–37.5 million.

Accordingly, net interest income was down to €–5.7 million General administrative expenses were reduced by 3.2%, (previous year: €20.4 million) and net interest income after to €3.0 million (previous year: €3.1 million). allowance for credit losses decreased to €–380.3 million (previous year: €–44.6 million). This significant decline Overall, net segment loss before bank levy, BVR Deposit resulted from higher allowance for credit losses recog- Guarantee Scheme and taxes amounted to €–381.8 mil- nised in response to the difficult employment situation of lion (previous year: €–40.4 million). TABLE 26 particularly highly-specialised offshore supply vessels. Allowance for credit losses increased to €374.6 million Extract from the segment report (previous year: €65.0 million), while total allowance for for Offshore Finance T 26 credit losses stood at €408.2 million (previous year: € mn 2017 2016 % €75.7 million). Net interest income –5.7 20.4 –

Net fee and commission income reduced to €4.5 million Allowance for credit losses –374.6 –65.0 – (previous year: €7.6 million), as the Bank no longer of- Net interest income after allowance for credit losses –380.3 –44.6 – fered any new financings. Net fee and commission income 4.5 7.6 –40.8

Income (excluding the IAS 39 result) –379.5 –37.5 –

General administrative expenses1 –3.0 –3.1 –3.2

Net segment income/loss before bank levy, BVR2 Deposit Guarantee Scheme, and taxes –381.8 –40.4 –

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Offshore Finance – Outlook 2018 On the supply side, the backlog for units on order remains The industry-specific environment for the special offshore large for most asset types as order books are well filled. vessels and drilling rigs is expected to remain challenging Rig owners and shipowners are expected to continue to in 2018. take measures to reduce supply growth as much as possible, by delaying deliveries and scrapping older units. Continued oil price uncertainty is leading to conservative offshore exploration and production (E&P) spending pro- In the short term, the initiatives for supply adjustment grammes, where oil and gas producers will continue measures will not be sufficient to make up for the lost focusing on cost-cutting measures and prioritising pro- demand. Hence, fleet utilisation is still expected to re- jects with low oil price breakevens. It is expected that main low. As a consequence, the number of stacked units offshore E&P spending will decrease marginally by 0.5% is likely to remain at the current level as shipowners and in 2018, with capital expenditures being more affected rig owners strive to preserve cash. than operational expenditures. As the market continues to remain difficult, cash reserves Demand for most offshore asset types is expected to amongst rig owners and shipowners are becoming deplet- stabilise at a low level overall. In regions with compara- ed. Hence, we expect restructurings, distressed sales and tively higher oil price breakevens – such as the North bankruptcies to continue into 2018. GROUP MANAGEMENT REPORT Sea, West Africa or Brazil – demand continues to be more affected than lower-cost production regions such as the Middle East. CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED AUDIT OPINION FURTHER INFORMATION

87 DVB BANK SE GROUP ANNUAL REPORT 2017

Financial Institutions and In 2017, the banking industry faced a number of issues, including the US Federal Reserve’s interest rate increases, Business area Syndications the ‘partial’ resolution of the Basel IV reforms regarding //Financial institutions DVB’s knowledge and expertise as an arranger and syndi- risk-weighted assets as well as the deregulatory agenda Product cator means that clients can rely on the Bank to arrange of a new US government and the continuation of Brexit //Risk Distribution & Loan their funding needs and place their financing require- negotiations. Transport industry trends included the grow- Participations ments. The Financial Institutions and Syndications team is ing popularity of aviation investment in a year which responsible for all financial institution relationships as delivered several high-profile lessor acquisitions as well Partners well as loan distribution. During 2017, it continued to as bankruptcies of several airlines. In shipping-related //Financial institutions and non-bank financial institu- successfully raise significant secured debt for transac- transactions, general market conditions continued to tions able to participate in tions across DVB’s Transport Finance divisions. remain challenged but with signals of improvement for loan transactions parts of the industry.

Core regions //Global coverage With respect to aviation, general optimism prevailed although financial institutions were wary in the light of Financial Institutions and airline bankruptcies (Air Berlin, Alitalia, Monarch and Syndications – Market review Niki) through the year. Aviation clients continued to enjoy Global syndicated loan volume declined to €3.9 trillion in liquidity from a myriad of sources including commercial 2017 compared to the previous year’s €4.1 trillion, partly debt, capital markets and institutional lenders seeking as the result of a strengthening euro currency relative to yield in a prevailing low interest-rate environment. Finan- the US dollar. By region, syndicated loan volume in the cial institutions continued to be highly competitive for top North and South America region decreased 4.0% to credit airlines and lessor transactions. Some financial €2.4 trillion (previous year: €2.5 trillion), whilst in Europe/ institutions also sought higher yield further down the risk Middle East/Africa loan volume remained at the same curve, targeting mixed lessor/lessee credit combinations level as the previous year, at €0.9 trillion. In the Asia/ (bilateral as well as portfolios) with shorter tenor struc Pacific region, loan volume shrank 14.3% to €0.6 trillion (previous year: €0.7 trillion). CHART 21

Global syndicated loan volume per year C 21

€ trillion

5.0

4.0

0.9 1.2 0.9 3.0 1.1 0.7 0.7 0.6 0.7 0.6 2.0 0.6

1.0 2.5 2.4 2.1 2.2 1.8

0.0

2013 2014 2015 2016 2017

North and South America Asia/Pacific Europe/Middle East/Africa Source: Dealogic, January 2018

88 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

DEVELOPMENT OF THE BUSINESS DIVISIONS

tures, non-recourse elements and balloons. 2017 also Financial Institutions and saw innovative financing solutions (including the Aircraft Syndications – Strategy Finance Insurance Consortium insurance structure) which Our skills and expertise as an arranger and syndicator involved a handful of new entrant financiers and guaran- mean that our clients can rely on DVB to place their tors, as well as the reappearance of lenders which had financing requirements. We support DVB’s Transport previously exited the industry in 2008. Finance divisions in raising non-public mezzanine and market debt globally. Shipping markets remained muted; however, specific sectors did present some level of recovery, namely dry The key drivers of Financial Institutions and Syndications’ bulk. With limited deals available and the majority of strategy are to: those being smaller volume transactions, traditional shipping lenders tended to keep their focus on credit // Centralise coverage, and coordinate existing and quality and relationship lending, predominantly in their new relationships with global financial institutions home markets. There were few new entrants into the (including institutional investors); market apart from alternative lenders typically seeking higher yields; however, the actual volume transacted was // Develop and maintain a good understanding of each minimal. Of note, Chinese leasing companies remained financial institution’s risk appetite and requirements; GROUP MANAGEMENT REPORT very active in ship financing and have continued to take up some of the slack that has been created by financial // Ensure close cooperation with DVB’s global transport institutions exiting or scaling down their activities. finance network, research and advisory teams;

For rail, financing opportunities were limited. Appetite // Provide competitive pricing structures based on from the bank debt market (outside of competitive sover- up-to-date information; access to global networks eign-backed projects) was directed towards newer equip- and ad-hoc analysis; ment, portfolio/warehouse deals, larger leasing companies and/or publicly-owned borrowers. The majority of // Empower effective management of the syndication market appetite originated from North America and Eu- process, and provide a personalised approach to- rope, whilst interest was also observed to enter the rail wards financial institutions partners; space from the Asia/Pacific region. // Understand the wider economic conditions, and how they affect transportation financing; CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED

// Take global responsibility for ECA (primarily maritime) arranging and coordination;

// Act as a central point of contact for all secondary deal/portfolio opportunities, covering all transport markets. AUDIT OPINION FURTHER INFORMATION

89 DVB BANK SE GROUP ANNUAL REPORT 2017

Financial Institutions and 2016, but more so to the popularity of aviation investment Syndications – Portfolio analysis in 2017. Rail transactions accounted for the remaining During 2017, the Financial Institutions and Syndications 0.7% (previous year: 20.6%). The team continued to team collaborated with existing international financial remain active, working on 22 transactions (previous year: institution partners and also established new relation- 19 deals). CHART 22 ships. Overall, a volume of €929.9 million was sold in 2017, a 32.7% increase from €700.8 million in 2016. With 84.1% in 2017, Aviation Finance transactions made up a large portion of the total sell-down volume (previous year: 47.9%). Shipping Finance activity declined to 15.2% (previous year: 31.5%). This development in percentage of total sell-down can be attributed not only to the continuing challenging shipping market environment set in early

Total sell-down volume by business division C 22

0.7% (–19.9 pp) Land Transport Finance

15.2% (–16.3 pp) Shipping Finance

84.1% (+36.2 pp) Aviation Finance

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DEVELOPMENT OF THE BUSINESS DIVISIONS

Financial Institutions and The trend amongst financial institutions to exit/scale Syndications – Outlook 2018 down maritime portfolios is likely to continue in 2018 as Macroeconomic themes expected to affect the transpor- some banks deem these global activities to be ‘non-core’ tation market in 2018 include the near-conclusion of Basel investments with an expectation for a more regionalised IV reforms which sets a clearer course for banks to adjust focus for some. For those remaining established lenders, internal risk policy on capital efficiency, rising US interest capacity is expected to remain restricted to core clients, rates coupled with ECB tapering of its quantitative easing or focus upon credit quality and vessel employment. programme (thereby diminishing the ability to access Consolidation will also likely continue as companies seek ‘cheap money’) and the continuation of China’s interna- ways to reduce costs, or the opportunity arises for stronger tional acquisition appetite. Uncertainty caused by the shipping companies to acquire their weaker competitors. above factors – among others – is pressuring long-term costs of liquidity, and is expected to contribute to shorter For rail, activity is still expected to remain focused in loan tenors being preferred across all industries. North America and Europe with a limited number of potential opportunities. As with 2017, liquidity is likely to Buoyed by robust passenger and cargo demand, the mar- increase for rail projects including from the Asia/Pacific ket expects the global aviation industry to continue its region where a growing number of financial institutions strong performance in 2018. This will therefore keep are gaining interest for this asset class. In 2018, appetite GROUP MANAGEMENT REPORT fueling liquidity for aviation financing across the capital is expected to continue for diversified railcar fleets, structure. More innovative financing structures may be younger equipment, leasing companies with strong finan- inspired to accommodate aviation clients’ changing de- cial track records, and publicly-owned entities. mands in the wake of IFRS 16, a greater scrutiny on tax avoidance, and financiers with a new-found interest in the industry. A greater inflow of capital into the industry will likely intensify competition in an already heated aviation market. The desire to exploit opportunistic deals as well as to effectively utilise the balance sheet (noting increased capital costs) is therefore expected to remain a top priority for financial institutions. CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED AUDIT OPINION FURTHER INFORMATION

91 DVB BANK SE GROUP ANNUAL REPORT 2017

Business area DVB Corporate Finance Notwithstanding sporadic volatility in the corporate bond

//Investment banking market during March, August and November, investor risk DVB Corporate Finance (DVBCF) is an established invest- appetite remained strong and continued to improve in 2017. Products ment banking franchise within DVB. As an independent Credit spreads in the high-yield market compressed by //Corporate Finance Solutions financial advisor, the DVBCF team offers a complete range nearly 100 basis points to levels not seen since before the (Advisory and Mergers & Acquisitions, Capital of financial products and services in Advisory and global financial crisis of 2007, leading to the overall yield Markets) Mergers & Acquisitions, as well as Capital Markets. tightening by about 40 basis points. Institutional investors continued to grow market share in 2017 as bank lending Clients appetite remained cautious. While leveraged loan volume //International corporations across all transportation overall grew by 40.0% from 2016, the increase was driv- sectors as well as institu- en entirely by the doubling of institutional volume while tional investors DVB Corporate Finance – Market review pro rata remained relatively flat. Global M&A activity exceeded €2.5 trillion for the fourth Core regions consecutive year in 2017, led by solid momentum in Global volume across non-bank debt capital markets //Global coverage deal-making as the improved economic outlook and stra- (DCM) products in transportation in 2017 totalled tegic shifts in many industries responding to technologi- €62.8 billion, nearly doubling from €35.2 billion in 2016. cal changes prompted companies to pursue unsolicited Resurgence in maritime DCM activity continued in 2017 transactions. Actual M&A volume in 2017 was €2.9 tril- with 68 new issues reported (€13.4 billion) compared to lion, falling 1.0% year-on-year, with the US and Europe 33 (€9.2 billion) in 2016 led by trend-setting deals that accounting for €1.1 trillion and €710.7 billion, respectively. included Norwegian-documentation US dollar bonds by non-Scandinavian borrowers. In addition, the US SEC-reg- Global transportation M&A activity remained buoyant in istered “baby bond” market reopened in 2017. Conversely, 2017, driven by expectations of growth in all major econo- strong lending appetite, especially from Asian banks, and mies and continued expansion of global e-commerce, deleveraging among airlines dampened DCM volumes in renewed deal-making in Asia, and expanding participa- the aviation sector. Primary debt activity for Class 1 oper- tion of financial investors in the sector. Large-scale M&A ators in the land transport sector was sluggish in 2017 was a significant theme as mergers in aviation and shipping with €5.3 billion in total volume on eleven separate issues, reshaped industries – from supply-chain/manufacturing in a 34.0% year-on-year drop from total volume in 2016. aviation to intermodal allegiances in container shipping. CHART 23

US Leveraged Debt New Issuance Volume C 23

US$ mn

1,000 918.5

800

600

494.7 460.8 483.7 400 414.5

252.6 288.6 281.4 200 226.7

2015 2016 2017

US high yield bonds Institutional leveraged loans Pro leveraged loans Source: Thomson Reuters, January 2018

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DEVELOPMENT OF THE BUSINESS DIVISIONS

For asset owners, the asset-backed securities (ABS) DVB Corporate Finance – Strategy market can provide an efficient and low-cost funding DVBCF offers integrated financial solutions to internation- alternative to other credit products, whilst expanding al corporations across all transportation sectors as well liquidity and enhancing asset-liability and portfolio risk as institutional investors, utilising its core products and management strategies. Led by a resurgence in intermodal services including advisory and M&A, as well as capital container-backed deals, which came back strong after a markets. These services are based on long-term relation- two-year hiatus, big-ticket transport-related ABS set an ships with clients, in-depth industry expertise across all all-time record in 2017, both in terms of issuance transportation sectors, and strong professional skills. The volume (€8.4 billion) and in the number of issues (22), team is comprised of seasoned professionals, with com- exceeding the previous record set in 2014 by 40.0% and prehensive experience gained from a wide variety of 16.0%, respectively. backgrounds at bulge-bracket investment banks and boutique banks. Team members are located in New York, DVB Capital Markets, the US broker-dealer arm of DVBCF, London, and Oslo, where proximity to key industry players was tied among three banks as most active in this sector provides a significant advantage. issue-wise and was second most active as measured by issuance volume, having featured as either bookrunner or As a Bank-wide resource, the team also renders its ser- co-manager on an aggregate €2.9 billion in deals backed vices in order to increase non-capital binding revenue, GROUP MANAGEMENT REPORT by aircraft, railcars or containers in 2017. enhance cross-selling of DVB’s products and services, and contribute to top and bottom-line growth of the DVB Looking at equity capital markets, the S&P 500 index franchise. By leveraging DVB’s specialised industry focus finished strong in 2017, up 19.8% on a year-on-year basis, and deep knowledge of transportation assets and as- fuelled by a strong worldwide economy, US President set-based lending, the team coordinates closely with Donald Trump’s tax cuts and central banks’ go-slow ap- relationship managers to proach to tapering financial support, and despite political concerns about war with North Korea and upheaval in the // identify attractive and profitable corporate finance Middle East. Volatility was at historical lows; continued opportunities; low interest rates and low inflation meanwhile contributed to faster-than-expected growth in corporate earnings. // develop trusted strategic dialogues at the C-level; and After a long period of limited market access since 2013, maritime sector access to capital markets showed signs // facilitate cross-selling of corporate finance products. of recovery during 2017. Total maritime public equity FINANCIAL STATEMENTS CONSOLIDATED proceeds closed at €9.6 billion, more than double the This strategy enables DVBCF to provide proficient strate- €4.5 billion raised in 2016. Initial public offerings (IPO) gic advice and successful transaction execution. activity in 2017 for the shipping sector was up 178.0% year-on-year, totalling €686.5 million globally. The majori- The team’s Private Placement Group (PPG) was formed ty of shipping equity capital market volumes were related in January 2016 in response to weak public capital mar- to dry bulk and containership segments, accounting for kets and increasing dependency on alternative financing, 29.0% and 27.0%, respectively, followed by tankers particularly in shipping where companies have turned to (17.0%) and LNG/LPG (18.0%). In aviation, overall indus- smaller and targeted private placements. PPG focuses on try demand was driven by a strong global economy and establishing and strengthening relationships with institu- improved conditions in emerging markets, especially India tional investors including private equity, hedge funds, and AUDIT OPINION and Brazil. Increased jet fuel costs were mitigated and mutual funds, and developing a niche expertise in arrang- less impactful as many existing hedges expired in 2016, ing transportation private placements. PPG maintains a although 2017 did not come without pain as several wide and comprehensive coverage of global investors, notable airlines failed. Land transport had a strong year. supporting DVBCF’s live deals as well as providing ongoing cooperation with other teams within the Bank. FURTHER INFORMATION

93 DVB BANK SE GROUP ANNUAL REPORT 2017

DVBCF continues to cooperate with Norwegian investment €41.6 million sale-and-lease-back transaction involving bank Arctic Securities on transactions, on a non-exclusive crude tankers for a South American state-owned shipping and selective basis. Such cooperation is typically focused company on an exclusive advisor basis, and separately on shipping, sale-and-lease-back transactions and Nordic advised (as joint advisor) a European diversified invest- capital markets. The team also opportunistically collabo- ment company on the sale of 14 dry bulk vessels. On the rates with other third-party investment banks/brokerage aviation side, DVBCF was a joint advisor on the sale of a houses on certain deals to enhance DVBCF’s in-house 70.0% interest in a joint venture by a large US hedge capabilities and complement each firm’s strengths. fund, while offering strategic advice to several of the Bank’s key land transport clients on structuring and Looking ahead, DVBCF will continue to focus on its strategy supporting ABS transactions. of proactively developing and pitching creative ideas to deliver integrated financial solutions to its clients, working In the US, DVBCF, acting through its broker-dealer DVB across all segments of DVB’s core transportation expertise Capital Markets, continued to solidify its presence in the and product groups. The 2018 transaction pipeline is well- ABS market by advising and co-leading several deals in stocked and diversified in terms of both region and sector, the aviation and railcar sector, and participated in equity and the team fully intends to build on its momentum from and debt securities issuances in the shipping sector as the previous year, taking advantage of the improved global a co-manager. economic outlook and subsequent increase in inquiries from clients regarding strategic transactions. In terms of revenue breakdown in 2017, 53.3% of revenue was generated from Capital Markets while 46.7% came DVB Corporate Finance – from Advisory and M&A, in line with the team’s historic Portfolio analysis revenue distribution by product, although this combination fluctuates yearly depending on market conditions and In 2017, DVBCF was mandated on a number of high-pro- deal flow. In 2016, 41.0% of revenue originated from file transactions in the shipping, aviation and land trans- Capital Markets and 59.0% from Advisory and M&A. port sectors in both advisory and M&A, and capital markets, representing the culmination of ongoing cooperation with relationship managers and development of strategic dialogue with the Bank’s key clients. The team closed a

Global revenue breakdown by business division C 24

19.3% (–16.3 pp) Land Transport Finance

46.7% (+13.9 pp) Aviation Finance

34.0% (+17.5 pp) Shipping Finance

94 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

DEVELOPMENT OF THE BUSINESS DIVISIONS

In terms of revenue breakdown by business division, the products such as corporate bonds, transportation borrowers allocation included 46.7% from Aviation Finance, 34.0% will continue to explore bilateral direct funding with alter- from Shipping Finance, and 19.3% from Land Transport native investors both in investment grade and sub-invest- Finance. The Bank ceased to extend any new financings in ment grade categories. Private placements are likely to Offshore Finance during 2017. In line with this strategic increase as a competitive long-term financing source and decision, DVBCF did not originate any new business with way to diversify the capital structure. offshore clients. CHART 24 We expect to see a continuation of healthy issuance volume in both aircraft and container ABS, plus steady DVB Corporate Finance – volume in the railcar sector, including the introduction of Outlook 2018 new issuers to the market. Influential factors such as the Global M&A activity is expected to accelerate in 2018 as pace of global economic growth, Fed rate decisions, and deal-making picks up across sectors and geographies – an ever-changing regulatory environment will continue to reflecting a recovering global economy that is growing at dominate the rates market and provide uncertainty. a faster pace due to technological advances and changes in consumer behavioural patterns. In transportation, we With the economy on solid footing supported by low expect a similar trend to emerge as companies take ad- interest rates, low inflation, and improving corporate GROUP MANAGEMENT REPORT vantage of improved market sentiments and continue to profits, theequity capital markets outlook is cautiously raise public/private capital to execute strategic transac- positive. Market access by the shipping sector is expect- tions. Opportunistic institutional investors will continue to ed to continue improving in 2018, driven by subsiding focus on niche situations and work with management supply and demand imbalances, sector consolidation and teams to craft creative investment stories, while IPOs in a generally bullish investor risk appetite, especially in the certain segments may be on the cards given the improved hard-asset sectors. Railroads will continue to face weak- sentiments and reasonable valuations. ening shipments of coal, grain and petroleum products through 2018, but the effects will likely be mitigated by In the debt capital markets, we expect a continuing total freight growth. In 2018, global airline revenues and market recovery and return of confidence to benefit bor- revenue passenger kilometres (RPK) growth are expected rowers in 2018, broadly including the transportation sector. to increase. Additionally, strong public and private capital We expect an upturn in institutional aviation deal volume, flows are facilitating fleet growth and risk management. driven by asset growth and consolidation. In shipping, At the same time, economic growth and expansion of the continuing recovery is likely to produce higher DCM vol- middle-class in emerging market populations is driving air umes, further reducing historical reliance of the sector on travel growth to above-average levels – increasing de- FINANCIAL STATEMENTS CONSOLIDATED bank debt in 2018. In addition to tapping liquid debt market mand for new and mature aircraft. AUDIT OPINION FURTHER INFORMATION

95 DVB BANK SE GROUP ANNUAL REPORT 2017

Business area Investment Management parties – but where DVB aligns its interest with third

//Investment and asset parties, via a material equity risk participation. Above all, management: DVB’s Investment Management division is active as an DVB sees strong demand from institutional investors for Aviation Investment Management (AIM) investment consultant and asset manager for investment joint investment management projects. DVB’s motto thus Shipping and Intermodal vehicles in the international transport sector. The invest- remains unchanged: we are able and willing to assume Investment Management (SIIM) ment vehicles set up by DVB are geared towards profes- risks – provided that they are adequately priced. sional investors who recognise the value that DVB’s asset Product expertise brings in enhancing investment returns. We offer our market and asset expertise – gained through //Private Equity Sourcing & extensive research and the resultant business intelligence Investments to clients requiring equity capital with the requisite asset management expertise, and to investors seeking opportu- Co-investors nities to invest in assets in these transport sectors. Ac- //AIM: institutional investors (insurance companies, The fund market is a further option for financing assets. cordingly, DVB’s Investment Management division com- pension funds, hedge funds Transport companies frequently operate (but are no longer prises two teams of experts: and private equity firms) //SIIM: ship/rail car/ assumed to own) the transport assets to be financed, intermodal owners, leasing such as aircraft, ships, container boxes, and rail rolling // The Aviation Investment Management (AIM) team companies, and financial institutions stock. Operators are more willing to contemplate alterna- manages the aircraft and aviation investments of the tive financing structures, and third-party investment vehi- Deucalion Aviation Funds. Core regions cles in particular are increasingly being considered as an //Global coverage alternative to direct ownership, thanks to the increased // The Shipping and Intermodal Investment Management availability of investment capital for such entities. Moreo- (SIIM) team unites the Bank’s investment manage- ver, these vehicles can also provide transport companies ment activities in the shipping, intermodal transport with direct equity investments in a diverse range of and rail transport sectors. forms. Likewise, participation in investment companies has evolved as an alternative asset class for professional At year-end 2017, the aggregate investment volume of investors who wish to benefit from long-term, predictable the investment vehicles set up by DVB amounted to cash flows and returns whilst diversifying their risks. €1.0 billion (previous year: €1.2 billion), with AIM accounting for €738.0 million or 70.4% and SIIM for At the outset of the Investment Management division in €310.9 million or 29.6% (previous year: AIM accounted 2001, DVB predominantly committed its own equity when for €863.6 million or 71.3%; SIIM accounted for providing equity finance. This has developed and evolved €348.1 million or 28.7%). CHART 25 over the years, whereby today, DVB acts as an asset manager in originating and structuring the acquisition of assets on behalf of investment vehicles and of third

Breakdown of the investment volume C 25

29.6% (+0.9 pp) SIIM thereof:

26.4% (+1.0 pp) Shipping 1.9% (+0.1 pp) Stephenson Capital 1.3% (–0.2 pp) Container

70.4% (–0.9 pp) AIM

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DEVELOPMENT OF THE BUSINESS DIVISIONS

Aviation Investment Management AIM – Strategy Established in 2001, DVB’s Aviation Investment Manage- AIM has positioned itself as a value investor across the ment team acts as the investment consultant and manag- aviation sector, with an emphasis on the acquisition of er to the Deucalion Aviation Funds (Deucalion), which physical aircraft and engine assets, by leveraging DVB’s consist of a series of actively managed investment vehi- in-house market and asset research capabilities and deep cles. These are the investment vehicles through which knowledge of the aviation assets. The investment vehi- institutional investors and DVB invest together in avia- cles are generally opportunity-driven, with a focus on the tion-related assets. At the end of 2017, Deucalion had investment’s liquidity and management of residual values, more than €2.5 billion in assets under management, seeking to optimise returns throughout an asset’s eco- across a wide range of aviation investments, including nomic life. aircraft and engines on operating leases, airframe and engine piece part material, and airline equity invest- As of November 2017, AIM has been responsible for the ments. AIM’s senior investment managers (based in aviation debt funds launched by Aviation Finance in Sep- London, New York and Singapore) are responsible for tember 2016 to further broaden the scope of its activities. sourcing and managing aviation investments. Each of the As part of this strategic initiative, DVB sources new air- investment vehicles has an independent board of direc- craft lending transactions for one or more investors (pen- tors. DVB is not represented on any of these boards, and sion funds/insurance companies) looking to deploy funds GROUP MANAGEMENT REPORT does not control any of the entities. in the sector. DVB currently co-lends in all transactions, thus ensuring an appropriate alignment of interest and AIM – Market review loan monitoring of the fund. DVB intends to grow the Aircraft lessors had another year of consistently good scale of this activity, potentially into other sectors, be- operating results. Demand for aircraft was matched by sides aviation, in the future. The debt funds in aggregate the continued inflow of capital into the leasing sector. currently have a target investment volume of US$800 Leasing companies were able to raise low-cost liquidity million. through capital markets as investors are attracted to the geographical and asset diversification offered by leasing AIM – Portfolio analysis portfolios. The primary focus of the investment vehicles is the acquisition of aircraft and engine assets through direct equity The aircraft leasing market, in which Deucalion is most investments. The core target areas of Deucalion’s invest- active, proved robust during 2017. The new aircraft leas- ment strategy are aircraft on long-term operating lease, ing space remained highly competitive, largely as a result and aircraft on last operating leases which will be sold of easy access to low-cost financing and leasing, present- for part-out at lease expiry. The investment vehicles also FINANCIAL STATEMENTS CONSOLIDATED ing a challenging segment of the market in which to have current investments in aircraft engines and airline deploy capital on acceptable returns. During the year, equity – as well as from time to time investing in secured Deucalion has once again been most active in the mid-life aircraft bonds and mezzanine loan investments on an aircraft space, which remains attractive for platforms opportunistic basis. with expertise in the class. Whilst the used market requires a higher overall level of diligence and asset management expertise, it provides higher potential for return if aircraft are acquired at the right price, and if residual value risks are both carefully evaluated and fully priced in. AUDIT OPINION FURTHER INFORMATION

97 DVB BANK SE GROUP ANNUAL REPORT 2017

Deucalion remained active in the market during 2017, In December 2017, DVB closed its second aircraft asset- acquiring or entering into binding letters of agreement for backed securitisation. AIM, in its capacity as investment eight commercial jet aircraft, for a total transaction equity consultant to Deucalion Limited, completed the sale of 36 value of approximately €77.2 million (previous year: aircraft valued at approximately US$867 million to a 62 aircraft acquired or entered into binding letters of special-purpose company which issued US$722.5 million agreement for €381.6 million). All eight aircraft are on of Regulation S/Rule 144A DTC eligible notes. long-term operating leases (previous year: 56 on long- term operating leases and six are part of the last-lease One of the Deucalion investment vehicles remains a strategy). During the year, Deucalion also sold 13 leased shareholder in Malaysian low-cost airline operator AirAsia, aircraft, six engines, and five airframes (previous year: an equity investment made in 2003 prior to the initial seven leased aircraft, eight engines, and four airframes). public offering in 2004. The majority of the vehicle’s shareholding in AirAsia was sold in 2006 and the now- The aircraft acquired or entered into binding letters of modest holding closed 2017 at 3.35 Malaysian ringgit agreement on long-term operating leases consisted of (€0.69). In 2007, a Deucalion investment vehicles made a one A330-200, one B737-700, one B737-900ER, four profit-participating loan to the Hungarian low-cost carrier A320-200s and one A320neo. These aircraft, on lease Wizz Air. Wizz made an initial public offering in 2015 at with seven different airlines, form part of Deucalion’s £11.50 (€15.60) at which the majority of the Deucalion strategy to acquire attractive current technology aircraft holding was sold – with a modest amount retained. The with robust lease economics where AIM believes there shares closed 2017 at £36.80 (€41.47). could be upside in residual values or trading scenarios with leases attached. Two of these aircraft were acquired The year 2017 further exemplified Deucalion’s opportunis- with one US private equity investor into an existing port- tic investment approach, which seeks to achieve return by folio, while another two were purchased for the same way of active trading, extracting utility through manage- investor as a seed portfolio that is part of a second in- ment of the aircraft’s maintenance value and understand- vestment entity. Two of the aircraft have been acquired ing of the disassembly piece part market. into an existing portfolio with a US alternative investor, and a further two by a new investor that provides access As at year-end 2017, the overall equity invested across to the Chinese equity market. all Deucalion investment vehicles totaled €738.0 million, and was provided by seven institutional investors located In February 2015, DVB closed its first aircraft asset- in Europe, North America and Asia (previous year: backed securitisation. AIM, in its capacity as investment €863.6 million by seven institutional investors). The asset consultant to Deucalion Limited, completed the sale of portfolio continues to perform as expected. The return on 20 aircraft valued at approximately US$814 million to a equity on all realised investments in 2017 continued to special purpose company which issued US$667 million of develop positively. Regulation S/Rule 144A DTC eligible notes with concur- rent placement of more than 90% of the equity to a new investment partner for DVB. The ABS continued to perform well in 2017 with the sale of two A321-200 aircraft on long operating leases and the forward sale of a further two A330-300s in April 2018 and May 2019.

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DEVELOPMENT OF THE BUSINESS DIVISIONS

Portfolio by asset type C 26

0.9% (–3.0 pp) Freighter widebody 0.1% (–1.1 pp) Other

17.2% (–1.1 pp) Disassembly thereof:

14.9% (–1.0 pp) Widebody 2.2% (–0.1 pp) Engines 0.1% (0.0 pp) Narrowbody 49.5% (–1.1 pp) Passenger narrowbody

32.3% (+6.3 pp) Passenger widebody GROUP MANAGEMENT REPORT

At year-end 2017, the portfolio remained well diversified AIM – Outlook 2018 by lease maturity, aircraft/asset type, geography and For 2018, AIM expects the aviation market to remain counterparty. In the year under review, the aggregate stable as operators will likely benefit from a less volatile portfolio across all investment vehicles consisted of fuel price environment, relatively low interest rates, 52.3% Airbus aircraft (previous year: 49.3%), 45.0% reasonable access to liquidity and a high level of new Boeing aircraft (previous year: 47.2%), and 2.7% other aircraft deliveries. However, there will be challenges in investments (previous year: 3.5%). The greatest share certain regions where yields will be stressed by increased (49.5%) of Deucalion’s aircraft portfolio was made up of capacity and currency concerns. While the industry is at a passenger narrowbodies (previous year: 50.6%), followed high-level plateau in the cycle, there is no signal of a down- by 32.3% passenger widebodies (previous year: 26.0%) turn in the leasing sector as the still very significant flow of and 17.2% aircraft and engines in disassembly (previous capital into the market should help buoy asset prices. year: 18.3%). CHART 26 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED AUDIT OPINION FURTHER INFORMATION

99 DVB BANK SE GROUP ANNUAL REPORT 2017

Shipping and Intermodal Investment SIIM – Strategy Management The SIIM management activities combine to offer a so- Since 2009, Shipping and Intermodal Investment Manage- phisticated business approach, an experienced management has comprised all of DVB’s shipping, intermodal, and ment team and a wealth of market knowledge. This is rail investment vehicles. In total, SIIM has about €2.9 bil- further leveraged by DVB’s in-house market and asset lion in assets under management, across a wide range. research capabilities, and knowledge of the respective This range includes (among others) equity, equity bridge assets. Investments span the entire spectrum of blue-water loans and preferred equity, together with sale-and-lease-/ vessels, as well as floating equipment employed in the manage-back structures.The shipping investment man- offshore oil and gas exploration, standard maritime con- agement activity started as equity-related investments tainer boxes, offshore containers and railcars. with a joint venture partner in 1999, and was previously known as NFC Shipping Funds. The intermodal investment New business investment management activities in the management was set up by DVB at the end of 2006, and shipping and offshore sectors was discontinued during consists now of one investment vehicle through which the year under review. Additionally, the key focus is DVB and private investors jointly invest in intermodal management of existing investments in the shipping and equipment. The rail investment management activity has offshore segments as well as acceleration of exit oppor- been active since 2007 with the establishment of the tunities in order to enhance the risk profile of DVB’s Stephenson Capital Fund. It is set up as a joint venture equity portfolio by reducing exposure to the volatile with a leasing company and invests in railcars, which are maritime markets. managed by our joint venture partner. On the intermodal side, SIIM wants to use the existing SIIM – Market review container investments and its track record in this segment During 2017, several shipping markets showed first signs of to further grow its container portfolio. Renewed focus on recovery despite existing excess capacity and charter rates rail markets is expected to support the overall profitability still not being fully sufficient. Dry bulk carriers saw a steep of SIIM’s investment portfolio, asset diversification and increase in earnings, albeit from low levels. The container enhanced risk profile. shipping market also witnessed improvements. Meanwhile, the crude tanker market continued to deteriorate and earnings remained at a low level for the whole year.

The offshore support vessel segment continued to suffer from oversupply and currently low exploration and production activities. Vessel values and earnings have been under significant stress.

The container box leasing market was a bright spot in the SIIM portfolio. Container box values recovered from their low levels, and lease rates returned to profitable levels.

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DEVELOPMENT OF THE BUSINESS DIVISIONS

SIIM – Portfolio analysis SIIM –Outlook 2018 As at year-end 2017, the equity invested and committed New business investment management activities in the across all SIIM-managed investment vehicles totalled shipping and offshore sectors were discontinued in 2017; €310.9 million (previous year: €348.1 million). The ship- henceforth, there will be no new investments. ping portfolio had 24 investments totalling €277.4 million (previous year: 24 investments totalling €307.4 million). Expected weak market conditions in both the shipping It contained 202 vessels (previous year: 128), with a and offshore segments have been pressuring performance significant majority in co-ownership with other of the existing SIIM portfolio during 2017. Although over- investors. CHART 27 supply is likely to keep earnings and values low in 2018, there are early signs of a market recovery in most ship- On the intermodal side, we continued investing in finance ping segments. We expect to see improving performance leases at attractive terms. As at year-end 2017, the inter- of our existing shipping investment portfolio. Market modal investment vehicle had several investments conditions in the offshore segment are forecast to contin- amounting to €14.1 million (previous year: €18.6 million). ue to be challenging for at least one or two years. SIIM is It invests in standard maritime containers, employed in comfortable with the level of impairments taken on these both operational and finance lease portfolios, as well as investments. The main focus for shipping and offshore offshore containers. Please note that the figure indicated investments is to find exit opportunities and reduce the GROUP MANAGEMENT REPORT here largely underestimates the extent of our intermodal exposure to these segments. portfolio, the reason being that most of the equity exposure has been repaid over time. The intermodal portfolio Investments in the intermodal segment are likely to con- is valued at approximately €37.8 million. tinue their strong performance, whilst an increased focus on the less volatile rail segment is expected to enhance The rail investment entity consists of a joint venture, and the overall risk profile of the investment portfolio. currently owns several hundred railcars. The investment volume stood at a level of €19.4 million.

Shipping portfolio by asset type C 27

14.9% (+0.1 pp) Other investments CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED

54.1% (–1.9 pp) Tankers 4.8% (0.0 pp) Car carriers thereof:

18.1% (+1.0 pp) LPG tankers 6.9% (–0.2 pp) Bulk carriers 17.2% (–2.4 pp) Chemical tankers 7.5% (–0.5 pp) Product tankers 7.9% (–0.3 pp) Containerships 5.9% (–0.3 pp) Crude oil tankers 5.4% (+0.3 pp) LNG tankers

11.4% (+2.3 pp) Offshore vessels AUDIT OPINION

FURTHER INFORMATION

101 DVB BANK SE GROUP ANNUAL REPORT 2017

REPORT ON EXPECTED DEVELOPMENTS, OPPORTUNITIES AND RISKS

Report on expected // Buildup of financial vulnerabilities – In a protract- ed period of very low interest rates and low expected The report on expected developments developments contains volatility in asset prices, vulnerabilities could accu- forward-looking statements, Global economic activity continues to firm up. The cyclical mulate as yield-seeking investors increase exposure including statements concerning the future develop- upswing underway since mid-2016 has continued to to lower-rated corporate and sovereign borrowers ment of DVB Bank Group. We strengthen. The stronger momentum experienced in 2017 and less credit-worthy households would like to point out that the assessments and fore- is expected to carry into 2018. Global growth as forecast- casts contained herein will ed by the International Monetary Fund (IMF) is projected // Inward-looking policies – Important long-standing always be subject to the risk 1 of erroneous perception or to rise to a rate of 3.9% in 2018 – slightly above the commercial agreements are under renegotiation. judgement errors, and may previous year’s level (for 2017: 3.7%). For the forecast An increase in trade barriers and regulatory realign- thus turn out to be incorrect. By their very nature, any horizon, the upward revisions to the global outlook result ments, in the context of these negotiations or else- deliberations regarding mainly from advanced economies, where growth is now where, would weigh on global investment and reduce developments or events in the future are conjecture expected to exceed 2% in 2018. production efficiency, exerting a drag on potential rather than precise predic- growth in advanced, emerging market, and develop- tions. Future developments may indeed diverge from ing economies.. expectations, not least as a result of fluctuations in / capital market prices, ex- / Noneconomic factors – Global medium-term out- change rates or interest Macroeconomic outlook for 2018 look is clouded by geopolitical tensions, notably in rates; or due to fundamental changes in the economic This forecast reflects the expectation that favourable East Asia and the Middle East. Recent extreme environment. Although we global financial conditions and strong sentiment will help weather developments point to the risk of recurrent, believe the forward-looking statements to be realistic, maintain the recent acceleration in demand, especially in potent climate events that impose devastating due to the reasons discussed investment, with a noticeable impact on growth in econo- humanitarian costs and economic losses on the above DVB cannot accept any responsibility that they mies with large exports. In addition, the US tax reform affected regions. They may also add to migration will actually materialise. We and associated fiscal stimulus are expected to temporarily flows that could further destabilise already fragile do not intend to update any of the forward-looking state- raise US growth, with favourable demand spillovers for recipient countries. ments made in this report. US trading partners during this period. The growth forecast for the US has been revised up given According to the IMF, further economic growth could be stronger than expected activity in 2017, higher projected burdened by the following risk factors: external demand, and the expected macroeconomic impact of the tax reform, in particular the reduction in corpo- // Tightening of global financial conditions – Implica- rate tax rates and the temporary allowance for full ex- tions for global asset prices and capital flows, leav- pensing of investment. The forecast assumes that the ing economies with high gross debt refinancing decline in tax revenues will not be offset by spending cuts needs and unhedged dollar liabilities particularly in the near term. The tax reform is therefore anticipated exposed to financial distress to stimulate near-term activity in the US. As a by-product, stronger domestic demand is projected to increase imports and widen the current account deficit.

1 such as NAFTA (North American Free Trade Agreement) and the economic arrange- ments between the United Kingdom and rest of the European Union

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REPORT ON EXPECTED DEVELOPMENTS, OPPORTUNITIES AND RISKS

Growth is expected to moderate gradually in China. Right at the outset of 2017, DVB's Board of Managing Full-year growth projections have been revised slightly Directors developed a strategic agenda designed to en- upwards, reflecting stronger external demand. The IMF’s hance productivity and efficiency, and to create the pre- medium-term outlook, however, reflects an expectation requisites for returning the Bank’s business model to an that the Chinese authorities will maintain a sufficiently adequate level of profitability. Specific measures include expansionary policy mix (especially through high public structural adjustments as well as ongoing development of investment) to meet their target of doubling 2010 real products and services – existing as well as new. GDP by 2020. However, this delay comes at the cost of further large increases in debt, thus also increasing During the course of 2017, this strategic agenda evolved downside risk. into an updated business plan which was presented to, and adopted by, the respective boards and committees. Growth rates for many of the euro zone economies have By way of example, the plan comprises the following been marked up, especially for Germany, Italy, and the elements for implementation: Netherlands, reflecting the stronger momentum in domestic demand and higher external demand. Growth in Spain, // discontinuation of the Offshore Finance division, with which has been well above potential, has been marked effect from 1 January 2018; down slightly for 2018, reflecting the effects of increased GROUP MANAGEMENT REPORT political uncertainty on confidence and demand. // realignment of our portfolio structure – with a more balanced distribution of the portfolio amongst the Oil prices rose by about 20% between August 2017 and remaining Transport Finance divisions, focusing on mid-December 2017, to over US$60 per barrel, with some the Aviation Finance and Land Transport Finance further increase as of early January 2018. IMF states that businesses to a stronger extent; markets expect prices to gradually decline over the next 4–5 years – therefore, medium-term price futures stood // sustainably strengthening the expert team in charge at about US$54 per barrel. of managing problem loan exposures (CASG – Credit and Asset Solution Group); We offer detailed forecasts on developments of the international transport finance markets in the market // devising a new strategy for non-core assets; forecasts provided by Shipping Finance (pages 65), Aviation Finance (pages 73), Land Transport Finance (pages 81), // growing the non-risk fee income across our business- Offshore Finance (pages 87), as well as in the chapters on es, including through an enhanced focus on an origi-

Financial Institutions (pages 91), DVB Corporate Finance nate-to-distribute model, complementing and en- FINANCIAL STATEMENTS CONSOLIDATED (pages 95) and Investment Management (pages 99 and hancing earnings from use of the Bank’s own balance 101) Reference is made to these explanations, in addition sheet; and to the comments provided here. // reviewing the cost structures of the business model.

Financial outlook for 2018 In autumn 2017 DZ BANK AG informed DVB that it would DVB’s financial outlook is determined by the macroeco- examine and evaluate all strategic options in respect of nomic and sector-specific parameters outlined above – DVB, having mandated external advisors in this respect. this applies to portfolio management and allowance for credit losses in particular. AUDIT OPINION

Two additional influencing factors emerged during 2017 which are likely to have an sustainable impact on DVB’s business performance in 2018. FURTHER INFORMATION

103 DVB BANK SE GROUP ANNUAL REPORT 2017

Financial performance Financial position DVB aims to exploit the macroeconomic environment in As forecast in the Group Management Report 2016, DVB 2018 as an opportunity to continue offering its range of succeeded during 2017 in further broadening its diversified financing solutions, advisory and other services tailored to investor base and to mainly raise funding outside the Volks- transport assets, and will therefore support its transport banken Raiffeisenbanken cooperative financial network. sector clients with new business in the Shipping Finance, Aviation Finance, and Land Transport Finance divisions We expect to maintain a sufficient liquidity base through- during the forecast period. out the 2018 forecast period. DVB’s integration in the German Cooperative Financial Services Network will DVB will do everything in its power to prevent having to remain an important factor during 2018: the support of record another loss, as seen in 2016 and 2017. In particu- the liquid German cooperative banking sector would lar, the Bank thus intends to significantly reduce allow- allow us to cover our funding requirements, at prevailing ance for credit losses. Given the prevailing distortions on market terms, at all times. Moreover, DVB is generally some maritime shipping markets, the legacy portfolio in able to cover its liquidity requirements through the exist- Shipping Finance and Offshore Finance in particular may ing investor base in the capital markets. be subject to burdens. Even in the tenth year of shipping crisis, DVB believes that persistent tonnage overcapacity Summary trend forecast will continue to prevail in certain segments of the interna- The macroeconomic and sector-specific outlook, together tional shipping markets, and that this structural oversup- with the strategic initiatives mentioned above, provide ply will keep both charter rates and vessel values under the underlying assumptions for the following statements pressure. It is still unclear as to when this excess capacity regarding the three financial indicators DVB employs to will subside, so that supply and demand on the transport manage and assess its business: return on equity (before markets approach a state of equilibrium. taxes), the cost/income ratio, and the risk-adjusted Eco- nomic Value Added. Aviation and land transport financing markets are expected to experience a significant level of investment-seeking Against this background, DVB Bank Group anticipates the liquidity as well as intensified competition between banks following parameters for the forecast period 2018: and other finance providers throughout 2018 – which is likely to burden new business volumes as well as interest // a return on equity (before taxes) between –5.0% margins on new business. and +5.0%; and

// a cost/income ratio between 60.0% and 75.0%.

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REPORT ON EXPECTED DEVELOPMENTS, OPPORTUNITIES AND RISKS

Since Economic Value Added reflects both income and At the year-end 2017, the CIR of 152.8% was outside the the risk situation, this part of the forecast is also subject target range of 55.0% to 60.0% forecasted in the Group to uncertainty. Looking at the persistently difficult situa- Management Report 2016. Whilst the aggregate of gen- tion on the shipping markets, we anticipate a negative, eral administrative expenses and expenses for the bank low-triple-digit million euro amount for 2018. levy and the BVR Deposit Guarantee Scheme decreased by 7.1%, to €175.3 million, the income ratio (comprising In summary, DVB believes that transport and financial net interest income before allowance for credit losses, market developments are subject to a plethora of unpre- net fee and commission income, result from investment dictable factors that are beyond the control of market securities, result from investments in companies account- participants. Therefore, DVB is not in a position to make ed for using the equity method, and net other operating any further quantitative forecasts, or project other finan- income/expenses) decreased from €425.4 million to cial data beyond this trend indication. €114.7 million at the end of 2017.

Analysis of the forecast for 2017 At €–901.7 million, actual EVATM for 2017 was outside the The following table compares the forecast to actual de- target corridor of a “negative, low triple-digit million euro velopment of the three key financial indicators for 2017, amount”. This was due to the significant deterioration in and outlines forecast ranges for 2018. TABLE 27 consolidated net loss before IAS 39 and taxes (but includ- GROUP MANAGEMENT REPORT ing the result from investment securities) to €788.5 mil- At –55.1%, the actual ROE (before taxes) in 2017 was lion (previous year: €144.6 million), from which pro-rata outside the forecast target corridor of between +3.0% risk capital costs of €113.2 million (previous year: €104.4 and –3.0%. Consolidated net loss before IAS 39 and million) needed to be deducted. taxes (but including the result from investment securities) declined significantly to €788.5 million (previous year: €144.6 million) whilst the aggregate weighted capital was up by 9.3%, to €1,429.9 million (previous year: €1,307.6 million).

DVB’s key financial indicators T 27

2018 2017

Forecast for 2018, Forecast for 2017, at the end of 2017 Actual result 2017 at the end of 2016 FINANCIAL STATEMENTS CONSOLIDATED

ROE (before taxes) +5.0% to –5.0% –55.1% +3.0% to –3.0%

CIR 60.0% to 75.0% 152.8% 55.0% to 60.0%

Negative, Negative, low triple-digit million euro low triple-digit million euro EVA™ amount €–901.7 million amount AUDIT OPINION FURTHER INFORMATION

105 DVB BANK SE GROUP ANNUAL REPORT 2017

Report on opportunities and Moreover, DVB’s Board of Managing Directors – as the responsible body – has established an adequate and The report on opportunities risks and risks presented below viable risk management system that fulfils the Bank’s own provides a breakdown of Exploiting business opportunities whilst assuming risks in commercial needs and complies with legal requirements. DVB’s Transport Finance sub-portfolios by collaterali- a targeted and controlled manner, to generate returns DVB has continuously developed its risk management sation structure and loan-to- which are adequate in view of the risks taken – these are system; with the methods, models, organisational rules value (LTV) range on pages 118 to 120. Due to the fact key elements of DVB’s business policy. and IT systems implemented, DVB is able to recognise that all material subsidiaries material risks at an early stage, and to respond appropri- of the DVB Bank Group are integrated into DVB’s divi- ately by taking suitable measures. The suitability and sional risk management effectiveness of DVB’s risk management system are system, which incorporates the lending activities of regularly reviewed by internal and external auditors. affiliated enterprises, the Principles of risk management portfolio values analysed reflect nominal values of the DVB defines risks as unfavourable future developments Notwithstanding the fundamental suitability of the risk DVB Bank Group portfolio which may have a detrimental effect on the Bank’s finan- management system, circumstances are conceivable after consolidation (2017: consolidated in accordance cial position, financial performance, or liquidity. In this where risks are not identified in good time, or an ade- with IFRS – previously: context, the Bank differentiates between counterparty quate, comprehensive response is not possible. The meth- consolidated in accordance with FINREP). credit risk, operational risk, business risk and reputational ods and models used to measure risks are appropriate for risk, market price risk, as well as liquidity and equity managing DVB’s business. Despite due care taken in devel- investment risk. DVB’s business model requires the ability oping models, and regular reviews, however, there may be to identify, measure, assess, manage, monitor and com- scenarios where actual losses (or liquidity needs) exceed municate risks. As a guiding principle for all of its busi- the values forecasted by risk models and stress scenarios. ness activities, the Bank assumes risk only to the extent required to achieve the objectives of its business policy.

To implement these principles, the Board of Managing Directors has defined risk strategies – observing the business strategy – for the material risks the Bank is exposed to. Each of these sub-risk strategies comprises the key business activities exposed to risk, the risk management objectives (including guidelines for assuming and avoiding risks), and the measures designed to achieve these objectives. These are supplemented by the ‘Risk Appetite Statement’ approved by the Board of Man- aging Directors in 2017, which formulates risk policy guidance on the Bank’s risk appetite, which applies across all types of risk. Besides qualitative guiding principles, the Statement defines quantitative indicators, together with minimum target levels: these indicators constitute DVB’s risk-oriented performance indicators. Both the risk strategies and the Risk Appetite Statement are in line with the corresponding guidelines of DZ BANK Group.

106 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

REPORT ON EXPECTED DEVELOPMENTS, OPPORTUNITIES AND RISKS

Organisation of the risk management The risk control function – which is independent from risk process management in the narrower sense (i.e. operative risk management) – comprises the identification, quantifica- Structural organisation tion, limitation and monitoring of risks, plus risk reporting. DVB operates a Group-wide risk management system, The detailed quarterly “DVB Group Risk Report”, which is which complies with all statutory and regulatory require- submitted to the entire Board of Managing Directors, ments. This risk management system comprises adequate executive staff and the Supervisory Board and its commit- provisions and measures with respect to risk strategy, tees, provides a detailed view of the Bank’s risk situation. risk-bearing capacity, risk management, and risk monitor- Furthermore, the Bank has implemented reporting sys- ing, plus a multi-level framework for the early detection tems for all relevant types of risk. This ensures that the of risks. In addition to the structural and procedural or- risks are transparent at all times to the authorised per- ganisation, these measures also apply to the processes sons with responsibility for those risks. for identifying, assessing, managing, monitoring and communicating the risks. The chart below illustrates the functional separation of DVB’s risk management (in the narrower sense) and risk control processes. CHART 28 GROUP MANAGEMENT REPORT A distinction is made between ‘operative’ and ‘strategic’ risk management. DVB defines operative risk management as the implementation of the risk strategy by the various business divisions, as prescribed by the Board of Managing Directors. In addition to defining risk policy guidelines, strategic risk management also coordinates and supports operative risk management processes by cross-divisional committees.

Risk management and risk control C 28

Strategic level

Board of Managing Directors Risk & Governance Committee • Group Credit Committee • Watch List Committees • New Deal Committees FINANCIAL STATEMENTS CONSOLIDATED Asset Liability Committee • Audit Committee • OpRisk & RepRisk Committee • Steering Committees New Product Circle • IT Risk Committee

Operational level

Risk management Types of risk Risk controlling

Shipping Finance Credit risk Internal Audit Aviation Finance Operational risk Financial Controlling

Land Transport Finance Business and reputational risk Group Risk Management AUDIT OPINION Investment Mangement Market price risk Market Risk Control Treasury Liquidity risk Group Compliance Office Service Units Equity investment risk

Risk management principles FURTHER INFORMATION

107 DVB BANK SE GROUP ANNUAL REPORT 2017

Credit process Committee will move to the next stage, for presentation DVB has built a distinct risk culture over many years, to the division’s Credit Committee. Most transactions – which is firmly rooted in all of its activities. It starts with those exceeding predefined thresholds – will require our client-facing relationship management and continues further approval from the Board of Managing Directors through each stage of processing – specifically, the as- and (in certain cases) from the Supervisory Board’s Credit sessments of the credit and research departments, and in and Risk Committee. the Credit Committee – until a new commitment is granted. It continues thereafter throughout the term of the Once a transaction has been booked, it is monitored on an relevant exposure through constant vigilance, thorough ongoing basis by the respective relationship manager and loan management and continuous monitoring of overall credit officer, and through the review and stress test portfolio resilience. CHART 29 process. Frequent client meetings take place, with the involvement of credit officers, in order to maintain a At the heart of our considerations for each new lending continuous risk dialogue with our clients. The results of exposures is the New Deal Committee, which meets to quarterly stress testing (specifically, probability of default discuss each possible new transaction at an early stage, and valuation of collateral) feed into discussions with with a view to spotting risk and structural deficiencies – clients; any negative results lead to a more intensive finally arriving at a consensus, as to whether the business supervision of the exposure. In addition, ratings as well opportunity is to be pursued, and an application submit- as collateral values are updated regularly and on an ted. The committee, which exists in each of the three event-driven basis. The restructuring and work-out spe- Transport Finance divisions, always comprises the mem- cialists of the Credit and Asset Solution Group (CASG) are ber of the Board of Managing Directors responsible for involved in the stress testing of the portfolio. If necessary, front-office units, as well as the respective Heads of an exposure is taken on to the Early Warning List, Closely Credit and Research. The research department is fully Monitored List, Watch List, or Default List. Relationship involved in the credit process: besides providing market managers prepare client call reports, continuously and in research and verifying market intelligence, it comments a disciplined manner, in order to support risk manage- on all the technical aspects of the respective assets, in ment. The heads of Transport Finance divisions regularly order to flag any possible negative effects on the tradabil- review their entire portfolio, in order to identify any need ity and value of the assets under consideration for financ- for action specifically, and at an early stage. CHART 30 ing. Only those transactions authorised by the New Deal

Value-Added Chain – Credit Process C 29

IDENTIFIIES OPPORTUNITIES DISCUSSES RECOMMENDS REVIEWS

Group/ Relationship New Deal Divisional Credit- Client Manager Committee Credit approval Committee

PROVIDE INFORMATION: Treasury – Controlling – Syndications – Risk Management – Research – Legal

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REPORT ON EXPECTED DEVELOPMENTS, OPPORTUNITIES AND RISKS

CASG’s experts significantly enhance the management of Accounting/financial reporting problematic transactions, providing valuable support for DVB’s accounting department ensures that the Bank’s all stressed or non-performing loans. CASG has primary accounting and financial reporting comply with applicable responsibility for exposures on the Watch List and the rules, particularly with IFRS. For this reason, the Bank has Default List, as well as for Shipping Finance, Offshore established a risk management system that manages, Finance and Aviation Finance exposures on the Closely monitors and controls the accounting function. This inter- Monitored List where the Bank has made substantial nal control system is designed to counter operational concessions. In this capacity, the unit is closely monitored risks by ensuring that employees’ actions, the technolo- by the Watch List Committee, which also includes the gies deployed, and the design of workflows are geared members of the Board of Managing Directors. towards compliance with applicable legal rules. Based on legal rules for consolidated financial reporting, and taking All of these procedures are geared towards flagging into account the regulations set out in the Group Account- possible problems early, and allocating adequate resourc- ing Manual, DVB has implemented Group-wide processes es to assess, quantify, qualify and formulate an appropri- that provide for efficient risk management and effective ate and swift response. control of Group accounting and financial reporting. These processes access common data processing and database

systems. Within the scope of its audit function, internal GROUP MANAGEMENT REPORT audit is actively involved in these processes.

Instruments for sustainably dealing with credit risks C 30

Early Warning List Closely Monitored List Watch List Default List

//Identification of potentially // Early detection of increased // Close monitoring of trans // In general, all transactions are higher risks in case the market risks of potential problem actions that have to be placed on the Default List if environment continues to exposures restructured and/or of trans- risks have materialised, and deteriorate by quarterly port actions with a potential or the deal has been classified as folio stress tests already existing need to defaulted (Default Rating). //Basis: changing asset values recognise allowance for (specific haircuts) and counter- credit losses parties’ creditworthiness (increase of probability of default) CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED E C W D AUDIT OPINION

Intensive research and close client contact

Close monitoring of compliance with all lending agreements FURTHER INFORMATION

109 DVB BANK SE GROUP ANNUAL REPORT 2017

Accounting and financial reporting comprises qualitative Risk inventory and suitability check and quantitative details regarding DVB Bank Group enti- At the end of each financial year, DVB regularly carries ties and sub-groups: these details are not only required out a risk inventory. The purpose of this exercise is to for preparing statutory reports, but also provide the basis identify all types of risk that are relevant to the Bank, and for the internal management of DVB’s operating divisions. to assess their materiality. Where required, DVB also For this reason, binding procedures have been established performs a risk inventory during the course of a financial for the recording and controlling of data. To make sure year: the objective being to be able to recognise any that the financial reporting systems are commercially material changes to the Bank’s risk profile where neces- viable, the data are processed in an automated manner, sary. The Bank analyses the materiality of all types of risk using adequate IT systems. DVB has implemented exten- which may occur in principle, given DVB’s business activi- sive control mechanisms to ensure the quality of process- ties, and evaluates those types of risk classified as mate- ing, and thus to reduce operational risks. For instance, rial, to determine to what extent risk concentrations exist. input and output data used within accounting systems are subject to numerous manual and automatic checks. More- The Bank also conducts a suitability check at the DVB over, accounting and consolidation entries are duly re- Bank Group level, examining the suitability of all risk corded and checked. The availability of human and techni- measurement methods for all risk types classified as cal resources required for accounting and financial material. Where required, appropriate measures are reporting processes is ensured through adequate busi- taken to adapt the management toolbox. ness continuity concepts, which are continuously refined and regularly verified using appropriate tests. A Group Risk inventories and suitability checks are harmonised in Accounting Manual, continuously updated, documents the terms of content and timing. The results of the regular uniform application of accounting policies in writing. risk inventory and suitability check provide the basis for External audit firms examine the contents of this manual, managing risks during the subsequent business year. If and the related compliance of DVB staff involved in ac- the results of an event-driven risk inventory indicate that counting and financial reporting processes, within the risk management systems need to be adjusted immedi- scope of statutory audits. ately, such changes are implemented during the current financial year. The Bank uses external appraisers to assist in determining the amount of pension provisions. Moreover, appraisers are engaged to determine the collateral values of Capacity to carry and sustain risk/risk vessels, aircraft, offshore supply vessels and platforms, capital rail-related assets and rolling stock. The Bank’s operation- To determine DVB’s economic capital adequacy, the Bank al guidelines contain a list of eligible appraisers. Intro- analyses its risk-bearing capacity by comparing aggregate duced processes are continuously reviewed regarding risk cover (less a capital buffer) to the risk capital require- their appropriateness, and with respect to the impact of ment. Taking aggregate risk cover as a basis, and being new products or facts, or regulatory changes. To safeguard aware of the capital buffer, the Board of Managing Direc- the high level of quality of DVB’s accounting systems, the tors sets maximum loss thresholds for each type of risk, Bank properly trains those staff members entrusted with for the next financial year, at the end of the preceding financial reporting duties, in line with their individual year. These thresholds constitute limits for risk capital needs, regarding the legal framework and the IT systems requirements. Being a management unit within the DZ used. When implementing legal changes, external consult- BANK Group, DVB must observe an aggregate maximum ants and auditors are involved at an early stage, to enhance loss threshold determined by DZ BANK, in addition to its the quality and efficiency of financial reporting. internal maximum loss thresholds. The aggregate risk cover comprises the Bank’s equity and quasi-equity items; it is fully reviewed and updated each month. For this reason, aggregate risk cover is subject to fluctuations throughout the year.

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REPORT ON EXPECTED DEVELOPMENTS, OPPORTUNITIES AND RISKS

The purpose of the capital buffer is to account for impre- The €118 million decline in aggregate risk cover, compared cision in measuring risks, and to cover those risks that to the end of the previous year, was largely due to a lower are not measured within the framework of risk capital level of unrealsied gains (less unrealised losses), which requirements, and which are thus not managed via risk were included in determining aggregate risk cover for the limits (maximum loss thresholds). This applies to place- first time in the previous year. ment risks as well as to risks from pension obligations; the latter arise from interest rate and longevity risks from The Board of Managing Directors set the maximum risk direct pension commitments to active or former members threshold (risk capital) for 2018 at €1,588 million (previous of staff. DVB uses expert opinions, scenario analyses or year: €1,522 million), taking into account correlation models to quantify the various components of the capital effects. Risk capital is distributed across individual types buffer. As at 31 December 2017, the capital buffer of risk as follows: TABLE 28 amounted to €52 million (previous year: €132 million).

The development of DVB’s aggregate risk cover and risk capital over recent years is shown below: CHART 31 GROUP MANAGEMENT REPORT

Development of risk bearing potential C 31

€ mn %

2.500 95.2 100 93.0 2,221 2,164 2,103 2.000 1,927 80 70.3 72.4 1,396 79.0 1,707 1.500 62.9 1,522 1,598 1,522 1,522 1,522 1,588 60

1.000 40

500 20

0 0 FINANCIAL STATEMENTS CONSOLIDATED

2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 2018

Risk-bearing capacity (aggregate risk cover) Risk capital Risk capital/risk-bearing capacity (%)

Risk capital T 28

2018 2017

Amount utilised at Average € mn Risk capital limit Risk capital limit year-end utilisation

Counterparty credit risk 1,176.0 1,102.0 640.6 808.9 AUDIT OPINION

Market price risk 130.0 129.0 50.6 80.7

Operational risk 180.0 170.0 169.6 139.6

Business risk 75.0 70.0 55.2 53.4

Equity investment risk 200.0 220.0 151.9 156.9

Correlation effects –173.0 –169.0 –120.3 –123.5

Total 1,588.0 1,522.0 947.6 1,116.0 FURTHER INFORMATION

111 DVB BANK SE GROUP ANNUAL REPORT 2017

The increase in the overall capital risk limit, compared to The economic stress test scenarios translate potential the previous year, was largely due to the fact that the crises affecting macroeconomic parameters and market capital buffer for operational risk has been included in the prices into changes to the aggregate risk cover and risk utilisation of risk capital since 2017. Furthermore, the risk capital requirements. This facilitates a comprehensive capital limit for counterparty credit risk was raised in and consistent analysis of the chain of effects caused by order to account for the expected continuous deteriora- external economic developments on the Bank’s risk-bear- tion of collateral values in the Shipping Finance and ing capacity. Offshore Finance portfolios. When determining the level of risk capital, the Bank considers correlation effects DVB has implemented a threshold concept as an early deduced from empirical market data, taking into account warning mechanism for the economic stress test: thresh- correlations among the various types of risk. old values are being monitored, as part of ongoing reporting, for scenarios covering multiple types of risk as well Monitoring the Bank’s risk-bearing capacity, DVB also as for stress tests covering specific types of risk. These considered additional stress tests, to ensure the Bank’s early-warning signals trigger various risk management continued existence is not threatened, even in an ex- processes, in order to be able to respond to potential tremely unfavourable market environment. threats indicated at an early stage.

Stress tests are generally calculated against the back- The stress tests are reviewed on a quarterly basis, and ground of a scenario horizon between one and four years, adjusted if necessary – especially concerning the material taking into account both economic scenarios as well as risk driver of euro/US dollar exchange rate fluctuations – historical situations particularly relevant to DVB’s busi- and are adopted by the Risk & Governance Committee, or ness model and portfolios. In addition, the Bank conducts by DVB Bank SE’s entire Board of Managing Directors. an annual inverse stress test to analyse which extreme The Bank’s aggregate risk cover was not always sufficient changes in market conditions might threaten DVB’s to fully cover expected and unexpected losses under all risk-bearing capacity in the short term. stress scenarios throughout 2017. Given the increased requirement for allowance for credit losses during the The economic stress-testing concept covers all of DVB’s second quarter of 2017, as expected, there were tempo- material loss risks. In principle, stress tests are based on rary shortfalls for some macroeconomic stress scenarios – methods and procedures used to determine the Bank’s these were covered ex-post by a capital transaction with risk-bearing capacity. the shareholder. TABLE 29

Aggregate risk cover T 29

Macroeconomic Macroeconomic Macroeconomic Macroeconomic adverse adverse adverse adverse Historical stress scenario stress scenario stress scenario stress scenario € mn stress scenario (1 year) (2 year) (3 year) (4 year)

Aggregate risk cover 2017 2,103.0 2,103.0 2,103.0 2,103.0 2,103.0

Change in aggregate risk cover (ARC) under the respective stress scenario –29.4 –161.8 –139.4 –51.2 59.1

Stressed aggregate risk cover 2017 2,073.6 1,941.2 1,963.6 2,051.8 2,162.1

Unexpected loss (CVaR) 1,329.2 1,281.8 1,358.6 1,308.3 1,267.5

Unexpected loss/stressed ARC (%) 64.1 66.0 69.2 63.8 58.6

112 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

REPORT ON EXPECTED DEVELOPMENTS, OPPORTUNITIES AND RISKS

The Bank uses internal models to measure counterparty Internal rating model and credit portfolio model credit risks and market price risks. Loss exposure associ- Given the dominant position of counterparty credit risk in ated with operational risk is measured using the Basic its business, DVB has developed an internal statistical Indicator Approach under the CRR. DVB uses a value-at- and mathematical rating model (IRM) for its Transport risk (VaR) approach to measure business risk; an earnings- Finance portfolios. The model complies with the “Ad- at-risk (EaR) approach is used to measure equity invest- vanced Approach” requirements under the CRR. In addi- ment risk. Although liquidity risk is also monitored and tion to the probability of default (“PD”) associated with a checked continuously, it is not managed through risk given client, the Bank determines the expected loss given capital, but by means of plans for liquidity flows, cash default (“LGD”) for the unsecured portion of a loan and flow forecasts and stress scenarios. the anticipated extent of the claim at the time of default (exposure at default, “EAD”). The use of the Advanced Approach means that all types of collateral (such as ship Types of risk and aircraft mortgages, indemnities) are eligible to reduce exposures. For this purpose, DVB is in a position to pro- Counterparty credit risk vide evidence for expected realisation proceeds on the With respect to individual transactions and clients, coun- basis of proprietary time series. terparty credit risk is managed and limited by setting GROUP MANAGEMENT REPORT corresponding limits, on the basis of cautious lending The counterparty rating is based on a multi-level statisti- principles and sector-specific lending policies. In this cal system, developed from a pool of externally-rated context, DVB is integrated into DZ BANK Group’s manage- companies for which all relevant financial reporting data ment and limit process. was available. Assigning the internal rating to the external rating classes enables us to use external default Credit principles and lending standards specify, in particu- probabilities. The assessment of the future collateral lar, that each transaction must be collateralised by valua- value of financed assets is fundamental to determining ble assets (ships, aircraft, etc.). In the wake of the ongo- the potentially impaired proportion of a specific lending ing crisis on the shipping and offshore markets, both exposure (the LGD) in the Bank’s asset-based lending requirements were once again revised in 2017, in order to business. The method used for this purpose determines further enhance portfolio quality through stricter require- the future collateral value of an asset on the basis of ments for new business, in terms of clients’ credit quality simulation calculations. In addition to external valuations and collateralisation. (expert opinions) and market data, DVB also leverages the expertise of its in-house market specialists in assessing

Despite indications of a slight recovery and an increasing specific collateral. FINANCIAL STATEMENTS CONSOLIDATED propensity to invest into offshore markets by large oil companies, DVB ceased offering new financings for To ensure model adequacy, the Bank conducts an annual offshore supply vessels and drilling platforms in 2017. review of the IRM to validate the risk parameters PD and This segment is driven almost exclusively by oil price LGD both quantitatively and qualitatively. Due to the developments – a factor which cannot be reliably pre- prevailing high volatility that was evident on international dicted. Therefore, the Board of Managing Directors transport markets, DVB decided to maintain the more decided to discontinue the offshore finance business frequent update of the asset valuation model’s market altogether as at 1 January 2018. data (introduced in 2009) during 2017, and will continue to do so until international transport markets have sus- Determining and managing country risks is relevant given tainably stabilised. A pre-study was carried out in 2017 to AUDIT OPINION the international emphasis of our transport asset lending analyse new regulatory requirements, such as the more business. Hence, DVB plans and limits country risks with- detailed specifications for the definition of default, and the in the scope of the overall management of the Bank, and detailed requirements concerning PD and LGD estimates in accordance with the annual country limit planning (which will need to be implemented and approved by the system of DZ BANK Group. end of 2020). As a consequence, DVB will take further measures during 2018 in order to safeguard the regulatory adequacy of the approved rating model over the long term. FURTHER INFORMATION

113 DVB BANK SE GROUP ANNUAL REPORT 2017

In addition to determining regulatory capital adequacy, Portfolio management and control the Bank also uses IRM results as an integral instrument DVB has organised its portfolio management and control for management of the entire Bank. For example, the processes on two levels. Group Risk Management is results of the ratings are taken into consideration in responsible for developing and implementing portfolio determining lending authorities, and the standard risk management tools and methodology, and for preparing costs – which are also calculated using the model – are various analyses of the Group’s overall portfolio (reporting an integral part of the estimate with respect to individual pursuant to the requirements of MaRisk). On a divisional transactions, for calculating the minimum margin. level, each Transport Finance division is responsible for analysing and managing their respective portfolios within At the beginning of 2013, DVB introduced a credit portfo- the framework set by the Board of Managing Directors, lio model (CPM) tailored to the Transport Finance busi- and with a view to mitigating risk by way of diversifica- ness. Specifically, this model incorporates the as- tion. In doing so, they rely on the support provided by the set-based collateralisation of financing structures as well Bank’s in-house research teams. as potential risk concentration or diversification. To accommodate potential risk concentrations and risk diversi- The proprietary database application OASIS (Object Fi- fications between the banks, the CPM for the Treasury nance Administration and Security Information System) is portfolio was replaced by the portfolio model provided by a state-of-the-art management information system used DZ BANK at year-end 2015. This model is mainly geared for the analysis and management of DVB’s loan portfolios. to compute the potential risk exposure inherent in deriva- In addition to compiling all quantitative and qualitative tives, money-market and foreign exchange transactions data covering every Transport Finance exposure, OASIS entered into with other banks, and of sovereign securi- also captures the legal and economic risk structures: it ties. Both models compute a credit value-at-risk (CVaR) thus provides all the data required to manage the portfo- figure for the respective portfolio, incorporating default lio. Moreover, the database represents the core source of risk as well as migration risk, on the basis of a 99.9% information for the IRM and CPM. Data entry is subject to confidence interval and a one-year holding period. As part the principle of dual control throughout the system. Be- of credit portfolio management, the maximum risk thresh- cause it is integrated into the loan approval and loan old defined for credit risk sets the CVaR limit. The credit administration processes, OASIS helps significantly to portfolio models replaced the IRM previously used to minimise operational risks. The Bank continuously devel- determine economic capital. Calculations employ key ops the OASIS system, to keep it in line with constantly parameters used for the regulatory model (asset value/ growing requirements. LGD, PD, EAD). Various data sources – such as SAP, OASIS and IRM/ Given the dependency of the credit portfolio model upon CPM – are compiled in a data warehouse, where the data the IRM, besides adjustments to the credit portfolio mod- can be analysed quickly, via pre-defined reports or ad-hoc el to validation results, adjustments to the IRM are also analyses. In January 2013, the Basel Committee on Bank- anticipated for 2018, reflecting adapted modelling and ing Supervision (BCBS) published principles for effective parameter estimates. risk data aggregation and risk reporting (BCBS 239). DVB has launched a project in order to be able to comply with these reporting requirements.

114 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

REPORT ON EXPECTED DEVELOPMENTS, OPPORTUNITIES AND RISKS

Structural analysis of the credit portfolio volumes correspond to the nominal amount of loans, The lending volume is calculated in line with DVB’s inter- irrevocable loan commitments and financial guarantees, nal portfolio management criteria. Lending volumes are and to market values of banking book investment securi- broken down by nature of instruments exposed to credit ties. For derivatives, gross lending volume is reported on risk: traditional credit risk, securities business, as well as the basis of market values as at 31 December 2017, plus derivatives and money market business. The quantitative so-called ‘add-ons’ which reflect potential future changes credit portfolio details disclosed below for the overall in market value. Offsetting positions are taken into ac- credit portfolio show DVB’s maximum credit risk exposure. count, and collateral (netting agreements) included, for The risk exposure is disclosed on the basis of gross lend- this purpose. ing volumes – reflecting traditional lending risk as well as risks from the securities business, without taking into The following diagram maps gross lending volume – used account credit-risk mitigation techniques and also exclud- for Group-internal management purposes – to individual ing allowance for credit losses. Risk exposure from deriv- items on the statement of financial position. Any diver- atives and money-market transactions is also measured gence between data used for internal management pur- excluding allowance for credit losses; however, credit-risk poses and figures shown in external financial reporting is mitigation techniques (netting agreements) were taken largely attributable to differences in the amounts recog- into account as at 31 December 2017. Gross lending nised and/or carried. TABLES 30/31 GROUP MANAGEMENT REPORT

Gross lending volumes 2017 T 30

31 Dec 2017

Lending volume for internal reporting Recognition/ € mn purposes Consolidation measurement Other IFRS Group

Traditional lending business (loans, commitments and other non-derivative off-balance sheet assets) 24,435.9 – –58.9 72.5 24,449.5

Securities 204.1 – – 3.0 207.1

Derivative financial instruments and money-market trading 633.2 – 0.0 64.5 697.7

Total 25,273.2 – –58.9 140.0 25,354.3 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED

Gross lending volumes 2016 T 31

31 Dec 2016

Lending volume for internal reporting Recognition/ € mn purposes Consolidation measurement Other IFRS Group

Traditional lending business (loans, commitments and other non-derivative off-balance sheet assets) 28,104.1 111.7 –18.7 1,091.7 29,288.8 AUDIT OPINION Securities 280.7 5.1 – – 285.8

Derivative financial instruments and money-market trading 915.7 –0.6 –556.7 – 358.4

Total 29,300.6 116.2 –575.4 1,091.7 29,933.0 FURTHER INFORMATION

115 DVB BANK SE GROUP ANNUAL REPORT 2017

The lending volume, as shown in the internal reporting systems and reconciled to consolidated financial statements in accordance with IFRS, is reported in the following items on the statement of financial position: TABLE 32

Gross lending volumes (IFRS Group) T 32

€ mn 31 Dec 2017 31 Dec 2016 %

Cash and balances with the central bank; loans and advances to banks 4,942.9 3,085.8 60.2

Loans and advances to customers; leases 18,473.3 24,328.7 –24.1

thereof: loans and advances to customers carried at cost 18,115.1 23,662.6 –23.4

thereof: loans and advances to customers measured at fair value – – –

thereof: other credit equivalent transactions 358.2 666.1 –46.2

Non-derivative trading assets 7.3 56.7 –87.1

Financial guarantee contracts, contingent liabilities and other commitments 1,025.9 1,817.6 –43.6

thereof: financial guarantee contracts from guarantees 269.6 343.9 –21.6

thereof: contingent liabilities from irrevocable loan commitments 756.3 1,473.7 –48.7

Traditional lending business (loans, commitments and other non-derivative off-balance sheet assets) 24,449.4 29,288.8 –16.5

Equities and other non-fixed-income securities; bonds 207.1 285.8 –27.5

thereof: measured at fair value 202.6 280.7 –27.8

thereof: at cost 4.5 5.1 –11.8

Securities 207.1 285.8 –27.5

Derivative financial instruments with positive fair values 697.7 358.4 94.7

thereof: trading assets 484.5 56.3 –

thereof: hedging instruments 213.2 302.1 –29.4

Derivative financial instruments 697.7 358.4 94.7

Carrying amount (IFRS) 25,354.2 29,933.0 –15.3

The following three tables provide an overview of credit Lending volume, 70.3% of which is denominated in US risk concentration and maximum credit risk exposure, dollars (previous year: 82.4%), was down by 13.8%. A broken down by DVB’s business divisions, geographical 25.1% decline in customer lending was compensated for regions and residual terms. The ‘Other’ row aggregates by a higher lending volume to “Others” by 69.2% (driven Group Treasury, the business of LogPay Financial Services by higher liquidity placements with Deutsche Bundes- GmbH, and business that is not in line with DVB’s strategy. bank). Adjusted for exchange rate effects, lending volume TABLES 33–35 declined by 5.3%.

Credit risk concentration and maximum credit risk exposure by business division (lending volume) T 33

Loans, commitments and Derivative financial other non-derivative instruments and off-balance sheet assets Securities money-market trading

€ mn 2017 2016 2017 2016 2017 2016

Shipping Finance 9,520.6 11,939.4 – – 2.5 9.0

Aviation Finance 6,110.9 8,655.5 – – 0.1 7.7

Offshore Finance 1,766.4 2,352.4 0.3 – 0.2 5.2

Land Transport Finance 1,368.0 1,645.0 – – 0.6 1.2

Investment Management 553.1 573.7 1.2 – – –

ITF Suisse – 594.5 – – – –

Other 5,105.9 2,343.6 202.6 280.7 640.8 892.6

Total 24,424.9 28,104.1 204.1 280.7 644.2 915.7

116 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

REPORT ON EXPECTED DEVELOPMENTS, OPPORTUNITIES AND RISKS

Credit risk concentration and maximum credit risk exposure by region (lending volume) T 34

Loans, commitments and Derivative financial other non-derivative instruments and off-balance sheet assets Securities money-market trading

€ mn 2017 2016 2017 2016 2017 2016

Europe 14,571.0 14,229.6 203.8 280.7 641.4 906.9

North America 4,333.5 6,021.5 – – 1.2 3.4

Asia 3,214.5 4,400.2 0.3 – 1.6 4.1

Middle East/Africa 973.1 1,627.2 – – – –

South America 553.3 622.6 – – – 1.3

Offshore 717.8 1,081.1 – – – –

Australia/ New Zealand 61.7 121.9 – – – –

Total 24,424.9 28,104.1 204.1 280.7 644.2 915.7 GROUP MANAGEMENT REPORT

Credit risk concentration and maximum credit risk exposure by residual term (lending volume) T 35

Loans, commitments and Derivative financial other non-derivative instruments and off-balance sheet assets Securities money-market trading

€ mn 2017 2016 2017 2016 2017 2016

≤ 1 year 7,062.2 6,081.3 50.2 75.6 13.8 73.0

> 1 year ≤ 5 years 10,909.0 12,999.6 152.4 205.1 630.4 388.5

> 5 years 6,453.7 9,023.2 1.5 – – 454.2

Total 24,424.9 28,104.1 204.1 280.7 644.2 915.7

The following overview breaks down the volume of collat- based on market values, with a 40% haircut having been eral for the total portfolio by collateral type, and by the applied – except for financial collateral, which was in- type of instrument exposed to credit risk. Volumes shown cluded without deduction. TABLE 36 FINANCIAL STATEMENTS CONSOLIDATED for traditional lending and securities business exclude netting agreements; for derivatives and money-market The decline in collateral values reflects lower lending transactions, netting agreements were taken into account volume. as at 31 December 2017. Collateralisation details are

Collateral values for the entire portfolio, by collateral type1 T 36

Derivatives and Traditional lending business Securities business money-market business AUDIT OPINION € mn 2017 2016 2017 2016 2017 2016

Land charges, mortgages, registered liens 15,367.0 20,165.2 – – 2.3 15.8

Transfers of ownership, assignments, pledges of receivables 410.7 420.2 – – 0.5 1.0

Financial collateral – – – – – 6.4

Total 15,777.7 20,585.4 – – 2.8 23.2

1 The collateral values shown are based on market values (taking a 40% haircut into account) and were included up to the amount of the corresponding lending volume, except for financial collateral, which was included without deduction. FURTHER INFORMATION

117 DVB BANK SE GROUP ANNUAL REPORT 2017

The following section provides an overview of the struc- 99.9% of the portfolio (€9,511.5 million) is secured by ture of DVB’s loan portfolios, together with collateralisa- mortgages on ships. Lending volume of €8,238.9 million tion developments. has an LTV ratio not exceeding 60%. €1.6 million is secured by other forms of collateral, and exposures of €10.0 million DVB’s Shipping Finance portfolio, which is largely de- only are uncollateralised. nominated in US dollars (96.2%), declined by 20.2%, to €9.5 billion (previous year: €11.9 billion). The euro showed At the end of 2017, the overall Aviation Finance portfolio strength in a volatile development, appreciating 13.8% stood at €6.1 billion (previous year: €8.7 billion). This against the US dollar during the course of the year. portfolio is also predominantly denominated in US dollars Adjusting for exchange rate fluctuations, the Shipping (97.8%). Adjusting for exchange rate fluctuations, the Finance portfolio size decreased by 9.7%. portfolio size decreased by 20.0%.

The chart below provides a breakdown of exposures The Aviation Finance portfolio also reflects the strict secured by mortgages, by LTV range (where loan amounts enforcement of the Bank’s lending standards character- have been allocated to LTV classes proportionally), as ised by conservative collateralisation structures, as well as exposures covered by other forms of collateral, shown in the following chart: CHART 33 and unsecured exposures: CHART 32

Shipping Finance portfolio – LTV classes C 32

3.4% (–1.1 pp) in LTV > 100% 0.0% (–0.3 pp) Other collateral

2.3% (–0.8 pp) in LTV > 80 ≤ 100% 0.1% (+0.0 pp) Uncollateralised

7.7% (–2.4 pp) in LTV > 60 ≤ 80%

86.5% (+4.6 pp) in LTV ≤ 60%

Aviation Finance portfolio – LTV classes C 33

0.4% (+0.0 pp) in LTV > 100% 0.0% (–1.6 pp) Other collateral

1.5% (+0.3 pp) in LTV > 80 ≤ 100% 0.1% (+0.0 pp) Uncollateralised

15.0% (+0.3 pp) in LTV > 60 ≤ 80%

83.0% (+1,0 pp) in LTV ≤ 60%

118 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

REPORT ON EXPECTED DEVELOPMENTS, OPPORTUNITIES AND RISKS

99.9% of the lending volume (€6,105.1 million) is secured 98.9% of the lending volume (€1,748.4 million) is secured by mortgages on aircraft. Lending volume of €5,072.6 mil- by ship mortgages. Lending volume of €1,262.9 million lion has an LTV ratio not exceeding 60%. Exposures of has an LTV ratio not exceeding 60%. It is worth noting €1.0 million were covered by other forms of collateral, that in numerous segments of the Offshore Finance port- and only €5.0 million was uncollateralised. folio, LTV ratios have a significantly restricted meaning, due to a very limited number of observable market trans- Against the background of the persistent negative outlook actions. for the offshore markets, the Board of Managing Directors resolved to discontinue Offshore Finance activities with DVB’s Land Transport Finance portfolio, 56.2% of which is effect from 1 January 2018. No new business was origi- denominated in euros, and 36.5% in US dollars, shrank by nated during the year under review. 12.5% year-on-year, to €1.4 billion. Adjusting for exchange rate fluctuations, the portfolio size sank by 12.3%. The The Bank’s existing Offshore Finance portfolio as at LTV breakdown of the Land Transport Finance portfolio 31 December 2017, which is largely denominated in US developed as follows. CHART 35 dollars (87.9%), stood at €1.8 billion (previous year: €2.4 billion). Adjusting for exchange rate fluctuations, the 99.7% of the lending volume (€1,364.2 million) is secured portfolio size decreased by 15.3%. The chart below pro by mortgages, with €1,137.2 million having an LTV ratio GROUP MANAGEMENT REPORT vides a breakdown of exposures secured by mortgages, not exceeding 60%. Only €1.4 million of the portfolio is by LTV range (loan amounts have been allocated to LTV secured by other forms of collateral, and exposures of classes proportionately). CHART 34 €3.0 million are uncollateralised.

Offshore Finance portfolio – LTV classes C 34

1.0% (+1.0 pp) Other collateral

7.4% (+5.3 pp) in LTV > 100% 0.1% (–0.6 pp) Uncollateralised

6.3% (+2.7 pp) in LTV > 80 ≤ 100%

13.7% (+1.7 pp) in LTV > 60 ≤ 80% CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED

71.5% (–10.1 pp) in LTV ≤ 60%

Land Transport Finance portfolio – LTV classes C 35 AUDIT OPINION

0.1% (+0.0 pp) in LTV > 100% 0.1% (+0.0 pp) Other collateral

1.8% (+0.5 pp) in LTV > 80 ≤ 100% 0.2% (+0.0 pp) Uncollateralised

14.7% (–0.7 pp) in LTV > 60 ≤ 80%

83.1% (+0.1 pp) in LTV ≤ 60% FURTHER INFORMATION

119 DVB BANK SE GROUP ANNUAL REPORT 2017

DVB integrated Loan Participations as a new product into Country risk exposure within customer lending its business model in 2007, with ITF International Trans- The Bank mitigates more serious country risk exposure by port Finance Suisse AG (ITF Suisse), based in Zurich, applying a commensurate transaction structure (for exam- participating in non-complex transactions as part of bank ple, by a combination of measures such as collateralisa- syndicates. Marketing activities in this area of business tion through mobile assets, maintaining cash flows in were suspended at the end of 2015. fully-convertible currencies, etc.). DVB determines country risks on the basis of primary obligors. CHART 36 ITF Suisse’s residual credit portfolio, having a volume of €251 million, was transferred in full to the respective There were no significant changes to the breakdown of business divisions: €171 million to Shipping Finance, €64 country risks in DVB's portfolio compared to the previous million to Aviation Finance, and €16 million to Offshore year. DVB's Transport Finance exposure continues to be Finance. Hence, portfolio details concerning these three concentrated in Europe, North America and Asia. Country business divisions as at 31 December 2017 each include risks are managed, and related limits defined, on the lending volume comprising the exposures assumed from basis of net country risk exposure, with a 60% haircut ITF Suisse. applied to the market values of eligible financed assets. Net country risk exposure was down year-on-year, in line with the decline in customer lending. The net country risk exposure to countries subject to higher default risks (including Brazil, Greece, Turkey, Hungary, Cyprus and Vietnam) was only 1.3% (previous year: 1.2%) of customer lending.

Country risk exposure within customer lending volume C 36

0.3% (–0.2 pp) Australia/ 2.9% (+0.5 pp) South America New Zealand

3.7% (–0.5 pp) Offshore

5.0% (–1.3 pp) Middle East/Africa

16.1% (–0.5 pp) Asia 50.0% (+3.1 pp) Europe

22.0% (–1.1 pp) North America

120 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

REPORT ON EXPECTED DEVELOPMENTS, OPPORTUNITIES AND RISKS

Continued reduction of credit portfolios that are The Bank conducts stress tests at an overall portfolio no longer in line with DVB's strategy level (based on stress scenarios designed to ascertain a The Transport Infrastructure portfolio – which is not in line sufficient level of capital, and to verify the Bank's with the Bank's strategy – was reduced by a further 28.3% risk-bearing capacity), as well as for the Shipping during 2017, to €62.4 million. Collateral for all of the Finance, Aviation Finance, Offshore Finance and Land Bank's infrastructure finance projects included an assign- Transport Finance sub-portfolios. Within the scope of ment of operating concessions. DVB does not consider these tests, all individual exposures are subjected to any specific allowance for credit losses to be required for dramatic changes of multi-dimensional parameters (such the residual portfolio. as LTV ratio and rating class) as part of diverse stress scenarios. The purpose of these tests is to assess which Lending volume bundled in the so-called D-Marketing exposures might be susceptible to impairment in the unit, which is no longer in line with DVB's strategy, was event of certain negative developments implied by the reduced by 70.2% to €1.7 million during 2017. Likewise, stress scenarios. Any such individual exposures are clas- DVB does not consider any specific allowance for credit sified as “early warning” cases, and monitored closely. losses to be required for this residual portfolio. The Bank has defined the scope of non-performing loans

Early warning system, problem loans, allowance (NPL) in line with the new EBA guidelines. Besides expo- GROUP MANAGEMENT REPORT for credit losses sures that are more than 90 days overdue, the NPL portfo- DVB uses a diversified set of tools for the early recogni- lio comprises all exposures that are in default or impaired, tion, monitoring and management of sub-performing or regardless of whether interest and principal payments are non-performing loans. This multi-level early identification being made for such exposures. The EBA guidelines also procedure ensures that these loans are identified at an provide for a “good conduct” period of at least twelve early stage, and that such exposure is included in moni- months for renegotiated NPL exposures: NPL exposures to toring lists, for intensified handling. During regular meet- which none of these three criteria applies nonetheless ings of the Watch List Committees, chaired by the Mem- remain part of the NPL portfolio during this period. ber of the Board of Managing Directors responsible for risk management, decisions are taken regarding risk Due to the ongoing crisis on the shipping and offshore mitigation strategies and measures, as well as concern- markets, loan defaults continued to rise during 2017, ing any write-downs required. leading to increased allowance for credit losses. NPL in the Group rose to an aggregate nominal value of €2,997.1 million at the end of 2017 (previous year:

€2,737.7 million). This equates to an NPL ratio of 11.9% FINANCIAL STATEMENTS CONSOLIDATED (previous year: 9.3%) in relation to total lending volume. To consistently counter this development, the Board of Managing Directors adopted a strategy to reduce the NPL portfolio at the beginning of 2017, comprising suitable measures and specific targets. AUDIT OPINION FURTHER INFORMATION

121 DVB BANK SE GROUP ANNUAL REPORT 2017

The following table shows an analysis of NPL volumes by Total forborne exposure amounted to €2,820.3 million division, further broken down by the following aspects (previous year: €2,616.8 million). The following table (which overlap to some extent): (1) defaulted exposure; (2) provides an analysis of forborne exposure by division, impaired exposure; and (3) forborne exposure. TABLE 37 further broken down by (1) performing and (2) non-performing exposures. TABLE 38 Forborne exposures were also determined in line with EBA rules and regulations on "Forbearance and Non-Per- Moreover, both the NPL volume and the forborne expo- forming Exposures". This comprises exposures where sure can be broken down according to specific and portfo- contractually-agreed terms were restructured in favour of lio-based allowance for credit losses. borrowers, as a result of their financial difficulties. Parts of the forborne exposures are also classified as NPLs.

NPL exposure T 37

Specific allowance Portfolio-based for credit losses allowance for credit thereof: defaulted thereof: impaired thereof: forborne recognised on losses recognised NPL volume exposure exposure exposure NPL volume on NPL volume

€ mn 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016

Shipping Finance 1,476.5 1,513.5 1,444.2 1,272.4 1,215.5 928.2 1,225.0 1,007.0 551.9 350.2 6.4 12.7

Aviation Finance 137.5 138.9 137.5 95.7 137.5 129.1 6.0 14.7 63.2 60.3 – 0.1

Offshore Finance 1,134.8 641.5 1,134.8 536.9 1,118.1 392.2 769.5 262.6 392.4 61.0 1.2 7.5

Land Transport Finance 6.1 8.0 6.1 8.0 6.1 8.0 6.1 – 2.9 2.3 – –

Investment Management 216.2 125.9 216.2 81.4 147.3 87.0 53.5 81.4 33.5 33.2 – –

ITF Suisse – 261.6 – 261.6 – 136.5 – 170.2 – 70.2 – –

Other 26.0 48.3 26.0 18.7 0.8 18.7 25.2 29.6 0.8 4.2 0.5 0.9

Total 2,997.1 2,737.7 2,964.8 2,274.6 2,625.3 1,699.8 2,085.3 1,565.5 1,044.7 581.4 8.1 21.2

Forborne exposure T 38

Portfolio-based Specific allowance allowance for thereof: thereof: for credit losses credit losses performing non-performing recognised on recognised on Forborne exposure exposure exposure forborne exposure forborne exposure

€ mn 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016

Shipping Finance 1,865.6 1,609.1 640.5 602.1 1,225.0 1,007.0 481.0 319.7 9.6 7.2

Aviation Finance 29.1 35.9 23.1 21.3 6.0 14.7 5.0 6.1 – 0.1

Offshore Finance 818.5 605.2 49.0 342.7 769.5 262.6 246.9 18.5 1.8 8.1

Land Transport Finance 28.4 25.7 22.4 25.7 6.1 – 2.9 – 0.1 0.1

Investment Management 53.5 81.4 – – 53.5 81.4 7.7 7.0 – –

ITF Suisse – 229.8 – 59.6 – 170.2 – 52.6 – 0.1

Other 25.2 29.6 – – 25.2 29.6 – – 0.5 0.9

Total 2,820.3 2,616.8 735.0 1,051.4 2,085.3 1,565.5 743.5 403.9 12.0 16.5

122 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

REPORT ON EXPECTED DEVELOPMENTS, OPPORTUNITIES AND RISKS

The following tables indicate the non-impaired, non-overdue lending volume as a portion of the overall portfolio, broken down by division and region. TABLES 39/40

Non-impaired, non-overdue lending volume by business division T 39

Non-impaired, Total portfolio non-overdue portfolio

€ mn 2017 2016 2017 2016

Shipping Finance 9,523.1 11,948.4 8,190.8 10,522.3

Aviation Finance 6,111.1 8,663.2 5,867.0 8,393.7

Offshore Finance 1,766.9 2,357.6 643.8 1,760.8

Land Transport Finance 1,368.6 1,646.2 1,362.5 1,638.2

Investment Management 554.2 573.8 407.0 307.9

ITF Suisse – 594.5 – 457.9

Other 5,949.3 3,516.9 5,948.5 3,498.2 GROUP MANAGEMENT REPORT

Total 25,273.2 29,300.6 22,419.6 26,579.0

Non-impaired, non-overdue lending volume by region T 40

Non-impaired, Total portfolio non-overdue portfolio

€ mn 2017 2016 2017 2016

Europe 15,416.2 15,417.2 13,219.4 13,767.0

North America 4,334.6 6,024.9 4,166.4 5,633.3

Asia 3,216.5 4,404.3 2,972.5 3,969.0

Middle East/Africa 973.1 1,627.2 973.1 1,556.9

South America 553.3 624.0 423.0 600.4

Offshore 717.8 1,081.1 603.6 930.5 FINANCIAL STATEMENTS CONSOLIDATED

Australia/New Zealand 61.7 121.9 61.6 121.9

Total 25,273.2 29,300.6 22,419.6 26,579.0

Lending volume that is neither impaired nor past due continues to account for the dominant share of the portfolio, at 88.7% (previous year: 90.7%). AUDIT OPINION FURTHER INFORMATION

123 DVB BANK SE GROUP ANNUAL REPORT 2017

The collateralisation details disclosed below are based on which no specific allowance for credit losses has been market values, with a 40% haircut having been applied. recognised, together with the value of related collateral, The following table indicates overdue exposures for by business division. TABLE 41

Overdue exposures for which no specific allowance for credit losses has been recognised, together with the value of related collateral – by business division T 41

Fair value of Over 30, Over 60, collateral 30 days or less up to 60 days up to 90 days More than (60% of market past due past due past due 90 days past due value)

€ mn 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016

Shipping Finance 0.1 46.9 30.8 28.6 58.3 – 27.7 422.5 86.0 345.0

Aviation Finance 85.8 71.2 20.7 69.2 – – – – 89.1 110.3

Offshore Finance 0.3 28.6 – – – – 4.6 175.9 0.0 166.3

Land Transport Finance – – – – – – – – – –

Investment Management – 144.0 – – – – – 34.8 – –

ITF Suisse – – – – – – – – – –

Other – – – – – – – – – –

Total 86.2 290.7 51.5 97.8 58.3 – 32.3 633.2 175.1 621.6

The marked decline in overdue exposures for which no The following table indicates overdue exposures for specific allowance for credit losses has been recognised which no specific allowance for credit losses has been was due to restructured repayment agreements or the recognised, together with the value of related collateral, recognition of specific allowance for credit losses for by region. TABLE 42 overdue exposures. The latter factor was attributable to persistently difficult market conditions in some shipping segments, and to Offshore Finance.

Overdue exposures for which no specific allowance for credit losses has been recognised, together with the value of related collateral – by region T 42

Fair value of Over 30, Over 60, collateral 30 days or less up to 60 days up to 90 days More than (60% of market past due past due past due 90 days past due value)

€ mn 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016

Europe 7.2 146.7 51.5 5.0 58.3 – 31.9 192.6 114.0 250.6

Asia 0.1 – – 92.8 – – 0.4 226.9 0.0 216.1

Middle East/Africa – – – – – – – 65.8 – 53.5

South America – – – – – – – – – –

North America 78.9 144.0 – – – – – 74.2 61.1 31.1

Australia/ New Zealand – – – – – – – – – –

Offshore – – – – – – – 73.7 – 70.3

Total 86.2 290.7 51.5 97.8 58.3 – 32.3 633.2 175.1 621.6

124 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

REPORT ON EXPECTED DEVELOPMENTS, OPPORTUNITIES AND RISKS

The following two tables indicate the lending volume for recognised, together with related collateral, by business which specific allowance for credit losses has been division and region, respectively. TABLES 43/44

Lending volume for which specific allowance for credit losses has been recognised and related collateral – by business division T 43

Fair value of Amount before Amount after collateral specific Specific specific (60% of market allowance allowance allowance value)

€ mn 2017 2016 2017 2016 2017 2016 2017 2016

Shipping Finance 1,215.5 928.3 –552.0 –350.2 663.5 578.1 506.4 288.3

Aviation Finance 137.5 129.1 –63.1 –60.3 74.4 68.8 77.6 64.7

Offshore Finance 1,118.1 392.2 –392.4 –61.0 725.7 331.2 749.2 227.9

Land Transport Finance 6.1 8.0 –2.9 –2.3 3.2 5.7 2.7 7.7

Investment Management 147.3 87.0 –33.5 –33.2 113.8 53.8 0.1 –

ITF Suisse – 136.5 – –70.2 – 66.3 – 34.8 GROUP MANAGEMENT REPORT

Other 0.8 18.7 –0.8 –4.2 0.0 14.5 – 2.7

Total 2,625.3 1,699.8 –1,044.7 –581.4 1,580.6 1,118.4 1,336.0 626.1

Lending volume for which specific allowance for credit losses has been recognised and related collateral – by region T 44

Fair value of Amount before Amount after collateral specific Specific specific (60% of market allowance allowance allowance value)

€ mn 2017 2016 2017 2016 2017 2016 2017 2016

Europe 2,047.8 1,305.9 –773.7 –493.0 1,274.1 812.9 1,029.0 435.4

North America 89.4 173.4 –41.9 –41.9 47.5 131.5 68.9 75.0

Asia 243.5 115.6 –111.6 –24.0 131.9 91.6 122.1 71.8 FINANCIAL STATEMENTS CONSOLIDATED

South America 130.3 23.6 –40.7 –4.9 89.6 18.7 75.4 6.9

Australia/New Zealand – – – – – – – –

Offshore 114.3 76.9 –76.8 –15.3 37.5 61.6 40.6 37.0

Middle East/Africa – 4.5 – –2.3 – 2.2 – –

Total 2,625.3 1,699.8 –1,044.7 –581.4 1,580.6 1,118.4 1,336.0 626.1

Taking into account the fair value of collateral (60% of On the reporting date, DVB held €35.7 million (previous market value), 84.5% (previous year: 56.0%) of the year: €143.1 million) in property and equipment as a AUDIT OPINION impaired portfolio (based on the amount after specific result of restructuring measures. The Bank intends to sell allowance for credit losses) is duly collateralised. The or lease these assets, taking into consideration the rele- increase in the coverage ratio was due to a marked vant market situation and leveraging the know-how of increase in specific allowance for credit losses, to high- DVB's asset management and restructuring teams. As at er vessel values (in some cases), and to an improved 31 December 2017, DVB did not hold any "non-current overall collateralisation of the impaired portfolio as at assets held for sale" obtained from restructuring meas- 31 December 2017. ures (previous year: €0 million). FURTHER INFORMATION

125 DVB BANK SE GROUP ANNUAL REPORT 2017

The following four tables illustrate the development of In the breakdown by business division, the “Business no the allowance for credit losses for the financial years longer in line with DVB’s strategy” item comprises allow- 2016 and 2017, by business division and region. For this ance for credit losses in the portfolio of D-Marketing and purpose, allowance for credit losses – which is deter- the Transport Infrastructure portfolio. The “Other” item mined in accordance with IFRS – is broken down into contains allowance for credit losses in the LogPay Financial specific allowance for credit losses, portfolio-based al- Services portfolio. TABLES 45/46 lowance for credit losses, and provisions. The increase in allowance for credit losses was largely attributable to the Shipping Finance and Offshore Finance divisions.

Allowance for credit losses by business division – 2017 T 45

Changes Recoveries resulting from on loans and Balance exchange rate Balance advances as at fluctuations, and as at Direct previously € mn 1 Jan 2017 Additions Utilisation Reversals other adjustments 1 31 Dec 2017 write-offs written off

Shipping Finance 350.2 393.9 –80.9 –68.4 –42.8 552.0 2.8 3.1

Aviation Finance 60.3 16.5 –2.9 –2.3 –8.4 63.1 – 0.2

Offshore Finance 61.0 411.1 –39.8 –19.6 –20.3 392.4 – –

Land Transport Finance 2.3 1.0 – – –0.4 2.9 – 0.4

Investment Management 33.2 8.3 – –3.6 –4.4 33.5 0.0 –

ITF Suisse 70.2 10.7 –60.7 –9.1 –11.1 0.0 1.4 2.6

Business no longer in line with DVB's strategy 4.1 0.1 –1.9 –2.4 0.0 0.0 – 0.2

Other 0.1 0.7 – – – 0.8 0.5 0.1

Total specific allowance for credit losses 581.4 842.3 –186.2 –105.4 –87.3 1,044.7 4.7 6.6

Shipping Finance 27.7 11.1 – –19.1 –4.1 15.6 – –

Aviation Finance 6.2 1.5 – –3.0 –0.7 4.0 – –

Offshore Finance 14.4 3.8 – –13.1 –2.1 3.0 – –

Land Transport Finance 0.3 0.2 – –0.3 0.0 0.3 – –

Investment Management – – – – – – – –

ITF Suisse 0.5 0.0 – –0.1 –0.4 0.0 – –

Business no longer in line with DVB's strategy 2.2 – – –0.9 0.0 1.3 – –

Other 0.0 0.0 – 0.0 – 0.0 – –

Total portfolio-based allowance for credit losses 51.3 16.6 – –36.5 –7.1 24.3 – –

Total impairments and allowances 632.7 858.9 –186.2 –141.9 –94.4 1,069.0 4.7 6.6

Offshore Finance 0.4 12.8 – – –0.3 12.9 – –

Total provisions 0.4 12.8 – – –0.3 12.9 – –

Total allowance for credit losses 633.1 871.7 –186.2 –141.9 –94.7 1,081.9 4.7 6.6

1 Net interest income includes interest income in the amount of €21.3 million attributable to impaired loans and advances.

126 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

REPORT ON EXPECTED DEVELOPMENTS, OPPORTUNITIES AND RISKS

Allowance for credit losses by business division – 2016 T 46

Changes Recoveries resulting from on loans and Balance exchange rate Balance advances as at fluctuations, and as at Direct previously € mn 1 Jan 2016 Additions Utilisation Reversals other adjustments 1 31 Dec 2016 write-offs written off GROUP MANAGEMENT REPORT

Shipping Finance 143.1 325.0 –19.6 –96.4 –1.9 350.2 0.1 2.9

Aviation Finance 42.7 23.7 –3.5 –4.4 1.8 60.3 – 0.5

Offshore Finance 20.2 57.3 –14.8 –0.1 –1.6 61.0 0.0 –

Land Transport Finance 1.3 1.4 – – –0.4 2.3 – –

Investment Management 15.8 22.7 –4.3 –1.9 0.9 33.2 – –

ITF Suisse 25.5 56.6 –1.6 –10.7 0.4 70.2 0.0 –

Business no longer in line with DVB's strategy 4.2 1.0 – –0.9 –0.2 4.1 – 0.2

Other 0.1 – – 0.0 – 0.1 0.4 0.1

Total specific allowance for credit losses 252.9 487.7 –43.9 –114.4 –1.0 581.4 0.5 3.7

Shipping Finance 22.5 19.6 – –15.5 1.1 27.7 – –

Aviation Finance 5.7 3.3 – –2.9 0.1 6.2 – –

Offshore Finance 2.5 12.4 – –1.3 0.8 14.4 – – FINANCIAL STATEMENTS CONSOLIDATED

Land Transport Finance 0.7 0.1 – –0.5 0.0 0.3 – –

Investment Management – – – – – – – –

ITF Suisse 1.9 0.1 – –1.5 0.0 0.5 – –

Business no longer in line with DVB's strategy 2.8 – – –0.6 – 2.2 – –

Other – 0.0 – – – 0.0 – –

Total portfolio-based allowance for credit losses 36.1 35.5 – –22.3 2.0 51.3 – –

Total impairments and allowances 289.0 523.2 –43.9 –136.7 1.0 632.7 0.5 3.7 AUDIT OPINION Aviation Finance 2.7 – – –2.3 –0.3 0.0 – –

Offshore Finance – 0.4 – – –0.1 0.4 – –

Business no longer in line with DVB's strategy 0.1 – – –0.1 – 0.0 – –

Total provisions 2.8 0.4 – –2.4 –0.4 0.4 – –

Total allowance for credit losses 291.8 523.7 –43.9 –139.1 0.6 633.1 0.5 3.7

1 Net interest income includes interest income in the amount of €12.3 million attributable to impaired loans and advances. FURTHER INFORMATION

127 DVB BANK SE GROUP ANNUAL REPORT 2017

The following two tables illustrate the development of for credit losses and provisions since the amounts in- allowance for credit losses by region. No regional volved were not material overall during 2016 and 2017. breakdown is provided for portfolio-based allowance TABLES 47/48

Allowance for credit losses by region – 2017 T 47

Changes resulting Recoveries on from exchange loans and Balance rate fluctuations, Balance advances as at and other as at Direct previously € mn 1 Jan 2017 Additions Utilisation Reversals adjustments 31 Dec 2017 write-offs written off

Europe 493.0 547.1 –120.4 –70.2 –75.8 773.7 4.2 6.5

North America 41.9 78.9 –46.5 –23.1 –9.3 41.9 0.6 –

Asia 24.0 123.0 –18.6 –10.2 –6.6 111.6 – 0.1

South America 4.9 37.7 0.0 –0.4 –1.5 40.7 0.0 –

Australia/New Zealand – – – – – – – –

Middle East/Africa 2.3 – –0.7 –1.5 –0.1 0.0 – –

Offshore 15.3 55.5 – 0.0 6.0 76.8 – –

Total specific allowance for credit losses 581.4 842.3 –186.2 –105.4 –87.3 1,044.7 4.7 6.6

Total portfolio-based allowance for credit losses 51.3 16.6 – –36.5 –7.1 24.3 – –

Total impairments and allowances 632.7 858.9 –186.2 –141.9 –94.4 1,069.0 4.7 6.6

Total provisions 0.4 12.8 – – –0.3 12.9 – –

Total allowance for credit losses 633.1 871.7 –186.2 –141.9 –94.7 1,081.9 4.7 6.6

Allowance for credit losses by region – 2016 T 48

Changes resulting Recoveries on from exchange loans and Balance rate fluctuations, Balance advances as at and other as at Direct previously € mn 1 Jan 2016 Additions Utilisation Reversals adjustments 31 Dec 2016 write-offs written off

Europe 222.8 404.9 –33.6 –103.9 2.8 493.0 0.4 3.7

North America 13.7 39.3 –7.9 –4.7 1.5 41.9 0.0 –

Asia 5.0 18.7 – –0.1 0.4 24.0 – –

South America 4.9 4.9 – – –4.9 4.9 – –

Australia/New Zealand – – – – – – – –

Middle East/Africa 2.2 – – – 0.1 2.3 – –

Offshore 4.3 19.9 –2.4 –5.6 –0.9 15.3 – –

Total specific allowance for credit losses 252.9 487.7 –43.9 –114.4 –1.0 581.4 0.5 3.7

Total portfolio-based allowance for credit losses 36.1 35.5 – –22.3 2.0 51.3 – –

Total impairments and allowances 289.0 523.2 –43.9 –136.7 1.0 632.7 0.5 3.7

Total provisions 2.8 0.4 – –2.4 –0.4 0.4 – –

Total allowance for credit losses 291.8 523.7 –43.9 –139.1 0.6 633.1 0.5 3.7

Credit and Asset Solution Group (CASG) separated – risk function for Shipping Finance and Off- With effect from 1 January 2016, DVB centralised its shore Finance carried out by a specialised sub-team of workout capacities in Shipping Finance, Offshore Finance Shipping and Offshore Credit (SOC) was integrated into and Aviation Finance in one division, the Credit and CASG, and the unit was reorganised into two sub-teams, Asset Solution Group (CASG). In 2017, the – previously one concentrating on Shipping Finance cases (CASG

128 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

REPORT ON EXPECTED DEVELOPMENTS, OPPORTUNITIES AND RISKS

Shipping) and the other on Offshore Finance and Aviation // ensures full structural compliance with regulatory Finance cases (CASG Offshore/Aviation). At year-end, requirements through this platform. CASG Offshore/Aviation has also taken over the remaining Offshore Finance portfolio, which is no longer consid- 2017, financing projects with a total volume of €1.3 billion ered a core activity for the Bank. were successfully processed, enabling the Bank to remove €1.3 billion – Total them from the restructuring portfolio: volume of financing projects successfully processed CASG’s objective is to reduce problematic exposures as efficiently as possible, keeping realised losses to a mini- // CASG restructured exposures with an aggregate mum. The team combines the Bank's restructuring and volume of €0.2 billion (seven financing projects) in a risk experts, institutionalising the skills in DVB's opera- manner that they were no longer classified as prob- tional structure – to ensure that this expertise is perma- lem loans, and were returned to the respective busi- nently available to protect the Bank’s capital. ness divisions;

CASG: // exposures with an aggregate volume of €0.7 billion (46 financing projects) were run down completely; and // has institutionalised the Bank’s restructuring skills for

the Shipping Finance, Offshore Finance and Aviation // partial repayments of €0.4 billion on existing financing GROUP MANAGEMENT REPORT Finance divisions and industries in one team, across projecs further reduced the restructuring portfolio. a set of locations; Conversely, CASG included further 58 financing projects // has assumed primary responsibility for Watch List with an aggregate volume of €1.4 billion in its restructur- and Default List cases, as well as for Shipping ing portfolio. Finance, Offshore Finance and Aviation Finance exposures on the Closely Monitored List where the As at 31 December 2017, CASG managed a restructuring Bank has made substantial concessions. Further- portfolio comprising 135 finance projects (previous year: more, CASG Offshore/Aviation is responsible for all 130 finance projects) with an aggregate volume of €2.8 other Offshore Finance exposures as well; billion (previous year: €2.9 billion). This corresponds to 14.9% of the total customer lending volume of €19.4 billion. // has integrated the risk function for Shipping Finance and Offshore Finance and works closely with the The restructuring portfolio can be broken down as dedicated credit officers and front-office units from follows: CHART 37

the Aviation Finance division; FINANCIAL STATEMENTS CONSOLIDATED

// is designed as a dynamic, scalable platform whose resources can be adapted to meet the demands of the portfolio; and

CASG restructuring portfolio per sector C 37 AUDIT OPINION

0.1% Investment Management

5.0% Avation Finance

36.7% Offshore Finance 58.2% Shipping Finance

- FURTHER INFORMATION

129 DVB BANK SE GROUP ANNUAL REPORT 2017

Regulatory audit of operations DVB has devised and implemented business continuity The ECB conducted an on-site audit of the risk manage- plans to minimise such operational risks in particular which ment and risk control system for credit risk and counter- may be caused by external disruptions to business process- party credit risk with regard to the shipping finance port- es, and to the Bank's services. These plans are “risk-orient- folio of DZ BANK Group – and hence, of DVB Bank Group ed”; they provide for numerous measures designed to between April and July. The audit focused on the timely restore key workflows and services within a reasonable transfer to default status, and the appropriateness of amount of time, and with appropriate quality. The viability allowance for credit losses for 153 financing projects in of business continuity plans is revised periodically. the areas of Shipping Finance and Offshore Finance audit- ed by the ECB. The Bank received the finalised concluding Going forward, the OpRisk & RepRisk Committee will be report in December 2017; the report included findings dealing with the constantly-changing legal and regulatory concerning six process issues, of which one finding was requirements for operating a bank. From DVB's perspec- classified as a weakness with a very significant impact. tive, increasing regulatory requirements are a growing Specifically, this related to the process for determining source of risk. allowance for credit losses, which – in the ECB's view – had methodical weaknesses. In fact, the Bank had already Business and reputational risk changed material parameters of the allowance for credit DVB's business policy is defined by the entire Board of losses process prior to receiving the finalised concluding Managing Directors, within the scope of closed-door report. In conjunction with the ongoing crisis affecting the strategy meetings. The policy is then discussed and shipping and offshore markets, this triggered a significant agreed upon with the Supervisory Board, in accordance increase allowance for credit losses from the second with the Memorandum and Articles of Association and quarter of 2017 onwards. the respective internal regulations. DVB has allocated risk capital for business risk since 2011, measuring risk expo- Operational risk sure using a VaR approach with a 99.9% confidence level, Monitoring and managing operational risks largely com- based on the volatility of monthly profits. prises the development of a methodology for identifying, quantifying and managing risk, and maintaining an ade- As a matter of principle, reputational risk is incorporated quate risk reporting system. In view of DVB’s moderately into risk capital backing through business risk. Reputational complex – yet highly transparent – processes, the so- risk is defined as the risk of losses caused by events which called Basic Indicator Approach is deemed appropriate. A damage the confidence of, in particular, clients, sharehold- central OpRisk & RepRisk Committee was established for ers, labour market participants, members of staff, the this purpose, alongside the function of Subject Matter general public or regulatory authorities – in DVB, or the Experts (SMEs) for all divisions and departments, as well products and services it offers. as the function of a decentralised OpRisk Manager for each of DVB’s worldwide locations. Reputational risk may occur in isolation ('primary' reputational risk), or as a direct or indirect consequence of other The tools DVB has implemented to manage operational types of risk, such as business, liquidity, or operational risk are scenario-based self-assessments, carried out at risk ('secondary' reputational risk). least once a year in respect of each division, department and location, on a divisional or departmental level, plus The risk strategy deals with reputational risk through the the loss database – where losses incurred due to opera- following objectives: tional risks are recorded. DVB also compiles risk indicators within the specifications of DZ BANK Group on a // to avoid losses from reputational events, through monthly basis. A system-supported measures-manage- preventive measures; ment process is triggered as soon as defined criteria are // to mitigate reputational risks, through preventive as fulfilled concerning loss events or the risk indicators well as responsive measures; determined. Quarterly reports containing the results are // to strengthen awareness of reputational risk within submitted to the Board of Managing Directors and the the Bank – including by appointing persons responsi- OpRisk & RepRisk Committee; where appropriate, this is ble for this risk type, and by establishing a frame- supported by ad-hoc reporting. work and reporting structure for reputational risks.

Moreover, liquidity risk management explicitly covers the threat of funding problems as a result of potential reputational damage.

130 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

REPORT ON EXPECTED DEVELOPMENTS, OPPORTUNITIES AND RISKS

Crisis communication specifically designed to deal with basis, to review the market risk exposure for the entire reputational risk has been prepared in order to fend off any Bank and to reach fundamental agreements on risk orien- major reputational damage which the Bank might incur. tation. Market price risks are determined for both DVB's Accordingly, DVB pursues a stakeholder-oriented ap- trading book and the banking book on the basis of the proach, where reputational risk is identified and assessed, same VaR procedure. Using this VaR method, the maxi- in qualitative terms, from a stakeholders' perspective. mum loss that may arise due to market price risks during a holding period of one day is quantified at a confidence Negative reputation holds the risk of uncertainty on the level of 99.0% on the basis of a historical simulation. part of current or potential clients, which might prevent The effectiveness of the VaR method is assured by expected transactions from being concluded. Moreover, means of a back-testing procedure. During this back-test- the backing of shareholders or staff, which is required ing procedure, the gains and losses of the positions in for the execution of such transactions, might no longer the trading book and the banking book are calculated on be guaranteed. Reputational damage may also lead to a daily basis, using real market price changes, and are funding problems. compared with the values determined by the VaR method. Moreover, the Bank carries out an annual adequacy Market price risk check for liquidity risks, which includes an in-depth

Group Treasury is responsible for managing market price review of the risk model. Furthermore, DVB analyses GROUP MANAGEMENT REPORT risks in both the banking and the trading books. The whether and which risks are material within the scope of Asset and Liability Committee (ALCO) meets on a monthly an annual risk inventory. CHART 38/TABLE 49

Daily VaR 2017 C 38

€ mn

7.0

6.0

5.0

4.0 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED

3.0

2.0

1.0

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec AUDIT OPINION

VaR total VaR Equity (equity risk) VaR FX (currency risk) VaR IR (interest risk) VaR limit

VaR in the banking business T 49

Currency Interest Equity Offsetting € 000’s risk risk risk effect1 Total

31 Dec 2016 2,354.9 516.8 881.9 –1,983.6 1,770.0

Average 801.4 3,442.3 563.0 –719.2 4,087.5

Minimum 49.5 3,053.2 67.3 –144.0 3,026.0

Maximum 3,382.2 4,364.5 971.6 –2,620.1 6,098.1

31 Dec 2017 54.6 3,090.9 81.5 –99.1 3,127.9

1 Offsetting effects between currency, interest rate and equity risks FURTHER INFORMATION

131 DVB BANK SE GROUP ANNUAL REPORT 2017

In principle, DVB neutralises interest rate risks through Risk Control, which is responsible for monitoring market interest rate swaps, which are used to transform assets price risks, has direct access (reading rights) to the trad- and liabilities with fixed interest rates into variable-rate ing and settlement systems, allowing it to observe wheth- positions. DVB has no plans of changing this strategic er limits are being observed. The market price risks in- orientation. Accordingly, we envisage interest rate risk to curred are therefore subject to constant measurement remain largely constant. However, the introduction of a and limit monitoring through Risk Control, which reports multi-curve approach has added further risk factors to the to the Board of Managing Directors on a daily basis. The process of measuring interest rate risk; these factors risk positions are managed on the basis of limits ap- might increase volatility going forward – for example, in proved by the Board of Managing Directors, which are in the event of widening basis spreads. DVB endeavours to turn derived from the risk capital approved by the Board maintain a neutral currency position, and hence uses of Managing Directors. Besides daily VaR (based on a cross-currency swaps or foreign exchange swaps to one-day holding period and a 99.0% confidence level), the hedge against foreign exchange risks. Therefore, DVB’s Bank also determines VaR based on a one-year holding market price risk exposure tends to be insignificant. Mar- period and a confidence level of 99.9%; the results are ket risk developments were largely characterised during compared to risk capital and taken into account when 2017 by fluctuations in the Bank's present-value USD determining usage of aggregate risk capital. foreign exchange exposure: Group Treasury actively managed the exposure on the basis of ALCO resolutions, In addition, DVB determines market price risks using a notably by way of close-outs effected in March, plus monthly stress test, based on an entire interest rate cycle. additional close-outs in September 2017, following the The Bank regularly discusses the calculations applied to posting of write-downs. In this connection, the posting of such stress tests in the ALCO. This is designed to ensure write-downs at the end of September triggered a short a timely reaction to developments. The results of monthly position in US dollars, and hence, an increase in market stress testing are also used as a parameter when deter- risk; position and risk exposure were reduced again in mining market price risk limits. In addition to two stress early October, through a purchase of US dollars. A capital scenarios based on a historical simulation using a ten- buffer has been incorporated for interest rate risk for the year observation period and a ten-day holding period, a purposes of daily Value-at-Risk (VaR) calculations since separate scenario used specifically maps market price the beginning of 2017. This capital buffer was established developments during the most recent financial markets as part of the methodical development of the interest rate crisis. Moreover, an additional hypothetical scenario was risk model introduced at the end of 2017. In March, the developed. This is based on an extensive analysis of reclassification of a portion of the capital buffer to credit long-term market parameters, considering both potential risk exposure led to somewhat lower interest rate risk. changes in market parameters and DVB's specific expo- Concerning equity risk, the squeeze-out of DVB's minority sures. The scenario derived in this manner does not incor- shareholders and the associated reduction in holdings of porate any risk-offsetting effects; it thus represents a treasury shares led to markedly reduced risk figure. There worst-case scenario. was one outlier during the course of the year, which occurred in back-testing only. Hence, there was no need to scale up market risk throughout the year.

132 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

REPORT ON EXPECTED DEVELOPMENTS, OPPORTUNITIES AND RISKS

Liquidity risk event of an anticipated liquidity shortage, Risk Control DVB's liquidity risks are centrally analysed and managed triggers a defined escalation procedure, in coordination on the basis of Group Treasury guidelines laid down by with Group Treasury. Should the measures taken by Group the Board of Managing Directors. Group Treasury, which Treasury within the scope of the initial escalation level reports to both the ALCO and the entire Board of Manag- prove insufficient, the Risk & Governance Committee is ing Directors, assumes responsibility for this process. informed in a second escalation level, in order to take Decisions on major refinancing projects are made by the appropriate countermeasures. ALCO. Anticipated cash flows are calculated, aggregated and offset by transactions on the money and capital Against this background, DVB's integration into the Ger- markets, on the basis of continuously updated plans for man Cooperative Financial Services Network once again liquidity flows and cash flow forecasts. These are pre- proved to be a key factor during 2017, as the highly liquid pared using SAP data and state-of-the-art asset/liability German cooperative banking sector permitted the Bank to management software. The position limit system, de- cover funding requirements with these partners, at prevail- signed to match the ratio set out in the Liquidity Principle ing market terms, at all times. This enables DVB to main- in accordance with the German Banking Act, ensures that tain a comfortable funding basis in the stress of a crisis. timely and appropriate corrective measures can be taken.

The latest software generation provides us with a state- DVB has reflected this situation in its stress scenarios, GROUP MANAGEMENT REPORT of-the-art tool that fully complies with all requirements which are based on the Bank's integration in the German for a modern liquidity risk measurement environment. Cooperative Financial Services Network to a large extent. This application’s functionality fulfils both the require- Stress tests were defined in accordance with new regula- ments under the MaRisk and the Bank’s internal needs for tory requirements. Assuming a going concern, these managing and reporting on liquidity risks. require sufficient liquidity reserves for a one-month “sur- vival period”, even under stress conditions. If the liquidity Risk Control is responsible for monitoring liquidity risk; for run-off profile indicates a shortage of liquidity reserves, this purpose, it carries out analyses independently from counter-measures to improve liquidity must be taken Group Treasury. In addition to multiple base cases, the without delay. The Bank has implemented an escalation analyses include various stress scenarios including worst- procedure for this purpose, which is monitored by Risk case assumptions with regard to liquidity. All cash flows Control on a daily basis. In compliance with these require- from DVB's existing business are taken into account, plus ments, DVB maintains a liquidity reserve comprising €155 simulated cash flows from pending loan commitments million in highly liquid securities. and the Bank's budgeted new business. The results of these daily analyses are aggregated in a report, which is Besides conducting its own stress tests, DVB is integrat- FINANCIAL STATEMENTS CONSOLIDATED included in the daily reporting package to the entire Board ed into DZ BANK's liquidity risk measurement process. of Managing Directors. The stress tests applied include DVB obtains stress test results determined by DZ BANK specific stress factors which have a negative effect upon on a daily basis; these results are counted towards the the Bank's liquidity. Specifically, the Bank simulates a liquidity limit set by DZ BANK. Any shortfall below the short-term increase in liquidity needs resulting from an minimum limit will trigger an escalation process designed early drawdown of credit lines, as well as a reduction in to remedy such transgression at short notice. cash inflows, due to borrower defaults or lower repayments. In addition, DVB simulates market-induced chang- DVB carries out an annual adequacy check for liquidity es such as interest rate or exchange rate fluctuations. The risks, which includes an in-depth review of the risk model. Bank regularly review the underlying assumptions for the It also analyses whether and which risks are material AUDIT OPINION scenarios used, adjusting them if appropriate. In the within the scope of an annual risk inventory. FURTHER INFORMATION

133 DVB BANK SE GROUP ANNUAL REPORT 2017

DVB consistently adhered to regulatory liquidity principles Moreover, the Liquidity Coverage Ratio (LCR) – an indica- throughout 2017. Its liquidity indicator – the ratio of tor for short-term liquidity risk – showed an average value available cash and cash equivalents to payment obliga- of 291%, clearly above the minimum level of 80%. Like- 291% – Average LCR tions due – averaged 3.35 (previous year: 2.37) during the wise, the Bank thus also fulfilled the minimum ratio of clearly above the minimum level year, and was once again clearly above the minimum 100%, applicable from 2018 onwards, throughout 2017. regulatory level of 1.00. CHART 39 CHART 40

Liquidity ordinance 2017 C 39

5.0

4.0

3.0

2.0

1.0

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

Development of the liquidity indicator Regulatory minimum ratio

Liquidity Coverage Ratio 2017 C 40

500

400

300

200

100

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

Development of the liquidity indicator Regulatory minimum ratio

134 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

REPORT ON EXPECTED DEVELOPMENTS, OPPORTUNITIES AND RISKS

Equity investment risk // DVB diversified its Transport Finance portfolios – by DVB Bank SE's material subsidiaries, whose business various criteria, and according to different catego- activities are fully integrated in DVB Bank Group's risk ries. Exposures are diversified by multiple criteria management process, are included in the consolidated and diverse categories, including asset type, vintage, financial statements. Equity investments that do need not manufacturer, region of use, borrower, client, user, to be consolidated are shown under equity investment sector/sub-sector, and asset employment. Leveraging risk. Potential losses from such investments are quanti- the Bank's broadly diversified and collateralised port- fied using an earnings-at-risk approach (EaR) with a folios, DVB is generally in a position to seize profitable 99.9% confidence level and a one-year holding period. opportunities, even during downturn phases. Fluctuations in the value of assets financed through the investments and such assets' employment are taken as // DVB has the opportunity to further expand the adviso- risk drivers in this context. The EaR methodology applied ry and other services it offers, and to increasingly by DVB for this purpose incorporate leverage effects offer them to clients, banks, and investors. This pro- caused by any borrowings in the capital structure of vides the opportunity of exploring potential sources of investments, as well as all primary risk drivers and their income which are not linked to credit, and which are respective cross-relationships. virtually risk-neutral. GROUP MANAGEMENT REPORT

// DVB decided at an early stage to develop an internal Opportunities available to DVB rating model (IRM), which complies with the require- DVB has a focused and international business model: to ments of the Advanced Approach under Basel III, and arrange and provide structured finance, advisory services to implement this model in the Bank's three Transport and investment management services to the Bank's cli- Finance divisions. This enables the Bank to manage ents who are active in the international transport mar- its financing volume on a selective and risk-aware kets. Notwithstanding the cyclicality of these markets, basis. The credit portfolio model implemented ena- the transport business overall is benefiting from a long- bles the Bank to identify and measure concentration term growth trend. In a market environment which re- and migration risks, and thus to optimise the structure mains challenging in certain segments, DVB has particu- of its portfolios. lar opportunities as a specialist in financing and advising the international transport sector. CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED AUDIT OPINION FURTHER INFORMATION

135 DVB BANK SE GROUP ANNUAL REPORT 2017

Applying the structure of a SWOT analysis, DVB’s key strengths, weaknesses, opportunities, and threats are summarised as follows: CHART 41

SWOT analysis C 41

Strengths Weaknesses Opportunities Threats

//Focused business model and a // Higher liquidity costs, com- // Realisation of margins in line // High level of early repayments, global presence in key transport pared to most competitors with risks taken which have a negative impact markets // Relatively high sector exposure // Building new client on the net interest margin / / /Conservative business policy // Global presence requires high relationships / Rising number of insolvencies, //Transparent structures and staff resources // Broaden the product portfolio especially on the shipping and offshore markets swift decisions // No material client deposits and enhance cross-selling / Significant decline in trans- //Qualified and experienced staff / // Expanding the advisory and / / Exposure to the euro/US dollar port asset values, in various / other services offered to /Extensive and award-winning exchange rate, with an impact market segments market and asset expertise on growth and results clients, banks, and investors / Rising threat of recession, / / // Boosting our position as / /Intensive, industry specific / Dependence on geopolitical on a global scale client service developments specialist in international transport finance // Distortions on the global //Diversified credit portfolio / Reduced offer of traditional financial markets / / /Granular and matched-maturity ship financing // Indebtedness of certain funding industrial nations and //Sound capital base emerging economies // Rise of the US dollar against the euro // Further increasing regulatory requirements // Development of commodity prices, in particular oil prices // Rising liquidity costs, due to a weaker integration into DZ BANK Group

STRENGHTSS WWEAKNESSES OPPORTUNITIESO THREATST

136 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

REPORT ON EXPECTED DEVELOPMENTS, OPPORTUNITIES AND RISKS

Conclusion The results determined using risk models are used to DVB continued to improve its management of credit risk determine DVB's business policy. The powerful risk man- and counterparty credit risk, applying a more conservative agement instruments applied are continuously fine-tuned approach, during 2017. DVB therefore has an adequate and developed further. Considering the limit system and viable system for managing opportunities and risks geared toward the Bank's risk-bearing capacity, a mean- that fulfils the Bank's own commercial needs and com- ingful early warning system, extensive stress testing and plies with legal and regulatory requirements. Managing a swift, flexible internal reporting system, senior manage- opportunities and risks is an integral part of the Group- ment is in a position to take targeted counter-measures wide strategic planning process. Risk management is when needed, at any time. based on the risk strategies adopted by the Board of Managing Directors. DVB’s business remained within the Bank’s economic risk-bearing capacity throughout 2017. The overall risk Given its high importance for DVB's continued existence, capital limit was adhered to at all times during the finan- and the extensive legal and regulatory requirements the cial year under review. The Bank's ability to meet its Bank needs to comply with, risk management needs to be payment obligations was never compromised during the performed to a very high degree of detail and involving a period under review. wide scope of the Bank's organisation. Managing oppor- GROUP MANAGEMENT REPORT tunities is based on a qualitative approach, and is closely From today's perspective, DVB believes that: related to the strategic planning process. // it will continue to have access to sufficient liquidity Given the methods, models and organisational rules throughout the financial year 2018; implemented, DVB is able to recognise material opportunities and risks at an early stage, and to respond appro- // the Bank will comply with regulatory solvency priately by taking suitable measures. This applies in requirements; and particular to the early detection of risks that may threaten the Bank's existence. // the Bank's risk profile will continue to remain in line with its economic risk-bearing capacity.

Hence, there are no indications for any threats to DVB's continued existence. CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED AUDIT OPINION FURTHER INFORMATION

137 DVB BANK SE GROUP ANNUAL REPORT 2017

REPORT OF THE BOARD OF MANAGING DIRECTORS ON RELATIONS WITH AFFILIATED COMPANIES

Pursuant to sections 15 and 18 of the AktG, DVB Bank SE is affiliated to DZ BANK AG Deutsche Zentral-Genossen- schaftsbank, Frankfurt/Main, and its Group companies. As at 31 December 2017, DVB Bank SE has been included in the consolidated financial statements of DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main.

138 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

CORPORATE GOVERNANCE STATEMENT PURSUANT TO SECTION 289a OF THE HGB

DVB has ceased to be a listed company since 17 August Details on the female quota in accordance with section 2017. Since this date, DVB’s Board of Managing Directors 289f of the HGB can be found in DVB Bank Group’s The Corporate Responsibility and Supervisory Board have no longer been subject to the Corporate Responsibility Report. Report is available on the obligations resulting from the German Corporate Gover- website www.dvbbank.com > About us > Corporate nance Code; they do not publish a so-called Declaration Responsibility > Reports. of Compliance pursuant to section 161 of the German GROUP MANAGEMENT REPORT Public Limited Companies Act (AktG) either. CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED AUDIT OPINION FURTHER INFORMATION

139 CONSOLIDATED FINANCIAL STATEMENTS

141 INCOME STATEMENT

141 APPROPRIATION OF PROFITS 1

142 STATEMENT OF COMPREHENSIVE INCOME

143 STATEMENT OF FINANCIAL POSITION

144 STATEMENT OF CHANGES IN EQUITY

144 CASH FLOW STATEMENT

146 SEGMENT REPORT 1

148 NOTES

210 RESPONSIBILITY STATEMENT

1 These tables are part of the Notes ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

Income statement, APPROPRIATION OF PROFITS

Income statement T 50

1 Jan 2017– 1 Jan 2016– € mn Note 31 Dec 2017 31 Dec 2016 %

Interest income 1,057.8 1,025.0 3.2

Interest expenses –883.0 –816.0 8.2

Net interest income (15) 174.8 209.0 –16.4

Allowance for credit losses (16) –727.9 –381.4 90.8

Net interest income after allowance for credit losses –553.1 –172.4 –

Fee and commission income 102.5 126.6 –19.0

Fee and commission expenses –9.8 –7.4 32.4

Net fee and commission income (17) 92.7 119.2 –22.2

Results from investments in companies accounted for using the equity method (18) –11.5 9.6 –

General administrative expenses (19) –162.3 –177.5 –8.6

Net other operating income/expenses (20) –77.8 99.6 –

Consolidated net loss before IAS 39, bank levy, BVR1 Deposit Guarantee Scheme and taxes –712.0 –121.5 –

Trading result (21.1) –27.6 4.9 –

Hedge result (21.2) –10.0 –6.5 53.8

Result from derivatives entered into without intention to trade (21.3) –37.6 10.9 –

Result from investment securities (21.4) –63.5 –12.0 –

Net result from financial instruments in accordance with IAS 39 (21) –138.7 –2.7 –

Consolidated net loss before bank levy, BVR1 Deposit Guarantee Scheme and taxes –850.7 –124.2 –

Expenses for the bank levy and the BVR1 Deposit Guarantee Scheme –13.0 –11.1 17.1

Consolidated net loss before taxes –863.7 –135.3 –

Income taxes (22) –39.9 –3.4 –

Consolidated net loss –903.6 –138.7 – thereof: consolidated net income attributable to non-controlling interests 0.1 0.6 –83.3 thereof: consolidated net loss attributable to the shareholder of DVB Bank SE –903.7 –139.3 – CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED

Earnings per share

Average number of shares issued 45,534,332 45,452,782 0.2

Basic earnings per share (€) –19.85 –3.06 –

Diluted earnings per share (€) –19.85 –3.06 –

1 National Association of German Cooperative Banks

Appropriation of profits T 51

1 Jan 2017– 1 Jan 2016– AUDIT OPINION € mn 31 Dec 2017 31 Dec 2016 %

Consolidated net loss –903.6 –138.7 –

Consolidated net loss attributable to non-controlling interests –0.1 –0.6 –83.3

Withdrawal from/transfer to retained earnings 903.7 139.3 –

Distributable profit/accumulated loss 0.0 0.0 – FURTHER INFORMATION

141 DVB BANK SE GROUP ANNUAL REPORT 2017

Statement of comprehensive income T 52

1 Jan 2017– 1 Jan 2016– € mn Note 31 Dec 2017 31 Dec 2016 %

Consolidated net loss –903.5 –138.7 –

Other comprehensive income reclassified subsequently to profit or loss 6.8 4.5 51.1

Revaluation of AfS financial instruments –2.1 –1.9 10.5 thereof: changes in fair value –2.3 –2.0 15.0 thereof: reclassifications to the income statement 0.2 0.1 –

Cash flow hedges 19.8 –5.3 – thereof: changes in fair value 18.0 –14.9 – thereof: reclassifications to the income statement 1.8 9.6 –81.3

Net investment hedges 23.0 –1.0 – thereof: changes in fair value 28.0 –6.5 – thereof: reclassifications to the income statement –5.0 5.5 –

Currency translation –20.0 10.0 – thereof: changes in fair value –25.0 15.5 – thereof: reclassifications to the income statement 5.0 –5.5 –

Deferred taxes (22) –13.9 2.7 –

Other comprehensive income from associates and joint ventures reclassified subsequently to profit or loss 3.8 1.5 –

Revaluation of AfS financial instruments –2.3 1.8 – thereof: changes in fair value –2.3 1.8 – thereof: reclassifications to the income statement – – –

Cash flow hedges 1.3 –0.4 – thereof: changes in fair value 1.3 –0.4 – thereof: reclassifications to the income statement – – –

Currency translation 4.8 0.1 – thereof: changes in fair value 4.8 0.1 – thereof: reclassifications to the income statement – – –

Other comprehensive loss not reclassified subsequently to profit or loss –3.0 –0.5 –

Revaluation of defined benefit plans –0.6 –0.7 –14.3

Deferred taxes (22) –2.4 0.2 –

Total comprehensive income/loss –896.0 –133.2 – thereof: total comprehensive income/loss attributable to non-controlling interests 0.1 0.0 – thereof: total comprehensive income/loss attributable to the shareholder of DVB Bank SE –896.1 –133.2 –

142 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

Statement of comprehensive income, STATEMENT OF FINANCIAL POSITION

Statement of financial position T 53

Assets (€ mn) Note 31 Dec 2017 31 Dec 2016 %

Cash and balances with the central bank (24) 4,300.5 1,475.4 –

Loans and advances to banks (25) 642.4 1,610.4 –60.1

Loans and advances to customers (26) 18,115.1 23,686.7 –23.5

Allowance for credit losses (27) –1,069.0 –632.7 69.0

Positive fair values of derivative hedging instruments (28) 213.2 302.1 –29.4

Trading assets (29) 491.8 113.0 –

Investment securities (30) 210.6 288.8 –27.1

Investments in companies accounted for using the equity method (31) 217.9 285.1 –23.6

Intangible assets (32) 10.4 67.8 –84.7

Property and equipment (33) 143.0 337.5 –57.6

Income tax assets (35) 14.0 110.4 –87.3

Other assets (36) 54.4 42.6 27.7

Non-current assets held for sale (37) – 26.2 –

Total 23,344.3 27,713.3 –15.8

Liabilities and equity (€ mn) Note 31 Dec 2017 31 Dec 2016 %

Deposits from other banks (38) 2,742.8 3,273.6 –16.2

Deposits from customers (39) 7,588.3 7,839.6 –3.2

Securitised liabilities (40) 10,493.2 12,722.3 –17.5

Negative fair values of derivative hedging instruments (41) 83.4 133.2 –37.4

Trading liabilities (42) 306.3 1,306.5 –76.6

Provisions (43) 84.2 59.1 42.5

Income tax liabilities (44) 12.5 57.8 –78.4

Other liabilities (45) 93.9 69.1 35.9

Non-current liabilities held for sale (46) – 25.2 – FINANCIAL STATEMENTS CONSOLIDATED

Subordinated liabilities (47) 736.6 951.2 –22.6

Equity (48) 1,203.1 1,275.7 –5.7

Issued share capital (48.1) 118.8 115.6 2.8

Capital reserve (48.2) 333.5 312.7 6.7

Retained earnings (48.4) 729.3 835.9 –12.8 thereof: fund for general banking risks 0.0 0.0 –

Revaluation reserve (48.5) 4.7 6.8 –30.9

Reserve from cash flow hedges (48.6) 5.9 –10.7 – AUDIT OPINION Reserve from net investment hedges (48.7) –14.0 –25.2 –44.4

Currency translation reserve (48.8) 21.9 37.1 –41.0

Distributable profit/accumulated loss 0.0 0.0 –

Non-controlling interests (48.9) 3.0 3.5 –14.3

Total 23,344.3 27,713.3 –15.8 FURTHER INFORMATION

143 DVB BANK SE GROUP ANNUAL REPORT 2017

Statement of changes in equity T 54

Equity Reserve Reserve before from from net Distribut- non- Issued Revalu- cash invest- Currency able profit/ cont- Non-con- share Capital Retained ation flow ment translation accumu- rolling trolling € mn capital reserve earnings reserve hedges hedges reserve lated loss interests interests Equity

Equity as at 1 Jan 2016 116.7 321.3 975.5 6.2 –6.7 –24.5 26.9 13.9 1,429.3 0.2 1,429.5

Consolidated net loss attributable to shareholders of DVB Bank SE – – – – – – – –138.7 –138.7 – –138.7

Transfer to retained earnings – – –139.3 – – – – 139.3 0.0 – 0.0

Other comprehensive income2 – – –0.61 0.6 –4.0 –0.7 10.2 – 5.5 – 5.5

Dividend payment – – 0.3 – – – – –13.9 –13.6 – –13.6

Changes in treasury shares –1.1 –8.6 – – – – – – –9.7 – –9.7

Changes in consolidated group and other changes – – – – – – – –0.6 –0.6 3.3 2.7

Equity as at 31 Dec 2016 115.6 312.7 835.9 6.8 –10.7 –25.2 37.1 0.0 1,272.2 3.5 1,275.7

Consolidated net loss attributable to the shareholder of DVB Bank SE – – – – – – – –903.7 –903.7 – –903.7

Transfer to retained earnings – – –903.7 – – – – 903.7 0.0 – 0.0

Other comprehensive income2 – – –2.91 –2.1 16.6 11.2 –15.2 – 7.6 – 7.6

Dividend payment – – – – – – – – – – –

Changes in treasury shares 3.2 20.8 – – – – – – 24.0 – 24.0

Changes from capital transactions with the shareholder – – 800.0 – – – – – 800.0 – 800.0

Changes in consolidated group and other changes – – – – – – – – – –0.5 –0.5

Equity as at 31 Dec 2017 118.8 333.5 729.3 4.7 5.9 –14.0 21.9 0.0 1,200.1 3.0 1,203.1

1 This relates to actuarial gains and losses recognised in retained earnings, in accordance with IAS 19. 2 Taking into account deferred taxes

Cash flow statement The changes in the balance of cash and cash equivalents are presented in the cash flow statement, separately for Cash and cash equivalents correspond to the item “Cash operating, investing and financing activities. Cash flows and balances with the central bank” included in the state- from operating activities include cash flows resulting from ment of financial position. The changes in cash and cash revenue-generating and other activities of the Group that equivalents are presented in the cash flow statement. cannot be allocated to investing or financing activities. Cash and balances with the central bank do not include Cash inflows and outflows in connection with the acquisi- financial investments with a remaining maturity of more tion and the disposal of non-current assets are attributed than three months as at the date of acquisition. to investing activities. Cash flows from financing activities include cash flows from transactions with equity holders as well as from other borrowings to finance the Bank’s business operations. TABLE 55

144 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

Statement of changes in equity, CASH FLOW STATEMENT

Cash flow statement T 55

€ mn 31 Dec 2017 31 Dec 2016

Consolidated net loss before taxes –863.7 –135.4

Non-cash items included in the profit for the period and reconciliation to cash flow from operating activities

Depreciation, impairment and write-ups of loans and advances, property and equipment, and investment securities 780.8 492.1

Increase/decrease in provisions –20.2 2.7

Other non-cash income/expenses – – thereof: hedge accounting –90.3 84.6 thereof: other changes from the fair value measurement of financial instruments –1,426.9 369.4

Gains/losses on disposal of investment securities, and property and equipment 60.4 10.4

Other adjustments –163.2 –218.6

Subtotal –1,723.1 605.2

Changes in assets and liabilities from operating activities

Loans and advances to banks 962.0 –489.8

Loans and advances to customers 5,320.2 –862.9

Leased assets –31.3 –38.4

Other assets from operating activities 105.2 –59.5

Deposits from other banks –511.2 811.6

Deposits from customers –70.7 311.2

Securitised liabilities –2,222.7 –412.6

Other liabilities from operating activities 15.7 37.6

Interest and dividends received 1,057.8 1,025.0

Interest paid –883.0 –816.0

Income taxes paid 0.7 –7.1

Cash flow from operating activities 2,519.6 104.3

Changes from additions (–) and disposals (+) of property and equipment 141.2 27.2

Changes from additions (–) and disposals (+) of investment securities 44.6 8.1

Effects of changes in consolidated group FINANCIAL STATEMENTS CONSOLIDATED thereof: cash proceeds from the disposal of consolidated companies 4.0 0.0 thereof: cash payments to acquire consolidated companies 0.0 0.0

Net change resulting from other investing activities –1.9 –2.4

Cash flow from investing activities 187.9 32.0

Cash proceeds from additions to equity (capital increases, sale of treasury shares, etc.) 23.9 –9.6

Cash payments to owners and non-controlling shareholders (dividends) – –13.6

Net change resulting from other financing activities 593.8 198.3

Cash flow from financing activities 617.7 175.1 AUDIT OPINION Net change in cash and cash equivalents (total of the three cash flow items) 2,825.2 311.4

Cash and cash equivalents at beginning of period 1,475.4 1,164.1

Cash and cash equivalents at end of period 4,300.6 1,475.5

The €593.8 million change in cash flow from the change from changes in equity of €796.6 million. Changes in the in funds from other capital resulted from changes in scope of consolidated companies resulted in effects of subordinated liabilities (adjusted for effects from hedging €3.8 million. In this context, changes in equity are largely relationships) amounting to €–206.6 million, as well as driven by the consolidated net loss. FURTHER INFORMATION

145 DVB BANK SE GROUP ANNUAL REPORT 2017

Segment report T 56

Land Transport Investment Reconciliation/ Group Shipping Finance Aviation Finance Offshore Finance Finance Management Treasury Other consolidation

€ mn 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016

Net interest income 174.8 209.0 99.0 95.4 48.7 78.8 –5.7 20.4 17.9 20.4 –32.2 –7.8 –12.0 –28.3 2.7 8.2 56.3 21.9

Allowance for credit losses –727.9 –381.4 –315.6 –223.9 –13.9 –16.0 –374.6 –65.0 1.5 –0.9 –4.0 –18.2 0.0 0.0 –3.8 –41.7 –17.5 –15.7

Net interest income after allowance for credit losses –553.1 –172.4 –216.6 –128.5 34.8 62.8 –380.3 –44.6 19.4 19.5 –36.2 –26.0 –12.0 –28.3 –1.1 –33.5 38.8 6.2

Net fee and commission income 92.7 119.2 27.2 35.4 37.8 51.5 4.5 7.6 4.8 9.7 8.9 4.1 –0.4 –0.5 9.6 12.3 0.4 –1.1

Results from investments in companies accounted for using the equity method –11.5 9.6 – – – – – – – – –12.1 9.6 – – 0.6 0.0 0.0 0.0

Net other operating income/expenses –77.8 99.6 8.0 –13.2 2.3 0.5 –3.7 –0.5 –0.0 0.2 –10.7 3.1 0.0 0.0 5.1 2.0 –78.9 107.5

Total income –549.7 56.0 –181.4 –106.3 74.9 114.8 –379.5 –37.5 24.2 29.4 –50.1 –9.2 –12.4 –28.8 14.2 –19.2 –39.7 112.7

Staff expenses –90.8 –103.5 –14.6 –15.9 –14.0 –16.9 –1.7 –2.1 –2.3 –2.8 –5.5 –7.3 –1.0 –1.0 –40.4 –43.0 –11.2 –14.5

Non-staff expenses –66.8 –68.5 –4.6 –4.7 –6.4 –5.0 –1.3 –1.0 –0.5 –0.6 –3.7 –4.6 –0.4 –0.4 –38.5 –38.8 –11.4 –13.4

Depreciation, amortisation, impairment and write-ups –4.7 –5.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.0 –4.6 –5.4 0.0 –0.2

General administrative expenses –162.3 –177.5 –19.2 –20.6 –20.4 –21.9 –3.0 –3.1 –2.8 –3.4 –9.2 –11.8 –1.5 –1.4 –83.5 –87.2 –22.6 –28.1

Consolidated net income/loss before IAS 39, bank levy, BVR Deposit Guarantee Scheme and taxes –712.0 –121.5 –200.6 –126.9 54.5 92.9 –382.5 –40.6 21.4 26.0 –59.3 –21.0 –13.9 –30.2 –69.3 –106.4 –62.3 84.6

Net result from financial instruments in accordance with IAS 39 –138.7 –2.7 0.8 –1.1 0.3 –0.1 0.7 0.2 0.0 0.0 –53.3 –8.6 –81.2 6.9 –5.8 0.0 –0.2 0.1

Consolidated net income/loss before bank levy, BVR Deposit Guarantee Scheme and taxes –850.7 –124.2 –199.8 –128.0 54.8 92.8 –381.8 –40.4 21.4 26.0 –112.6 –29.6 –95.1 –23.3 –75.1 –106.4 –62.5 84.7

Cost/income ratio1 (%) 152.8 44.3 14.7 17.5 23.0 16.7 –63.1 11.3 12.4 11.1 –9.1 414.1 – – – – – –

Return on Equity2 (%) –55.1 –10.8 –73.2 –35.8 38.0 61.7 –354.4 –23.7 127.8 98.0 –39.7 –12.0 – – – – – –

Lending volume3 25,273.2 29,300.6 9,523.1 11,948.4 6,111.1 8,663.2 1,766.9 2,357.6 1,368.6 1,646.2 554.2 573.7 5,584.0 3,423.1 365.3 688.4 – –

1 Excluding allowance for credit losses 2 Before taxes 3 According to internal management

146 ABOUT US GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS AUDIT OPINION FURTHER INFORMATION

Segment report