EUROHYPO GROUP ANNUAL REPORT 2007 DIVISIONS

corporate banking corporate banking reib and corporate germany core continental europe and banking usa latin america

As market leader in commercial real estate In continental Europe and Latin America In the USA we continued to strenghten our finance we benefit from our size, our we are represented by established teams market position. Our positive performance structuring expertise and our reputation in the most important real estate locations in commercial real estate , however, does as banking partner. and offer customized solutions to our not compensate for the required valuation customers. adjustments.

in € million 2007 2006 in € million 2007 2006 in € million 2007 2006 New business 10,139 9,820 New business 12,782 13,015 New business 7,120 7,322

in € billion in € billion in € billion Segment assets 32.0 33.1 Segment assets 23.9 20.8 Segment assets 4.4 4.7

in € million in € million in € million Net interest income 396 393 Net interest income 287 249 Net interest income 87 84 Provisions for Provisions for Provisions for loan losses 8 9 loan losses –16 –2 loan losses –3 –1 Commission income 70 71 Commission income 103 71 Commission income 29 34 Profit before tax 368 365 Profit before tax 279 248 Profit before tax –115 74

in % in % in % Cost/income ratio 23.0 22.8 Cost/income ratio 23.9 21.5 Cost/income ratio –198.9 52.3 Return on equity1) 18.0 16.6 Return on equity1) 16.0 17.0 Return on equity1) –26.7 19.2

1) Profit before tax/average tied-up equity (7.0% of average risk-weighted assets (RWA) according to BIS). DIVISIONS

european reib and retail banking public finance / treasury corporate banking uk

In the UK we benefit from our multifaceted In retail banking we succeeded in con- Next to commercial real estate finance, and further developed range of services in solidating the efficient loan processing public finance is the second core business commercial real estate and rely on estab- of Eurohypo with the established sales area of Eurohypo, and, in company with lished customer relationships. network of Commerzbank. Treasury activities, forms the basis for the segment Public Finance/Treasury (PFT).

in € million 2007 2006 in € million 2007 2006 in € million 2007 2006 New business 5,857 4,672 New business 288 620 New business 20,249 15,651 Inland 11,185 7,075 in € billion in € billion Ausland 9,064 8,576 Segment assets 7.6 7.0 Segment assets 21.7 24.5

in € billion in € million in € million Segment assets 112.1 123.2 Net interest income 90 80 Net interest income 205 244 Public Finance 100.5 109.3 Provisions for Provisions for 0% weighting 74.8 81.3 loan losses –11 –2 loan losses –81 –160 20% weighting 25.3 27.9 Commission income 60 49 Commission income –9 –10 Germany 57.0 64.8 Profit before tax 93 77 Profit before tax 42 –52 Abroad 43.5 44.5

in % in % in € million Cost/income ratio 30.8 38.9 Cost/income ratio 35.2 50.1 Net interest income 89 154 Return on equity1) 15.1 18.2 Return on equity1) 4.4 –4.8 Result from financial assets 179 63 Profit before tax 187 205

in % Cost/income ratio 26.0 23.8 overview – eurohypo group

2007 2006 Change € million € million (%) New commitments – commercial real estate finance 36,831 34,887 5.6 Corporate Banking Germany Core 10,139 9,820 3.2 Corporate Banking Continental Europe and Latin America 12,782 13,015 –1.8

European REIB and Corporate Banking UK 5,857 4,672 25.4

REIB and Corporate Banking USA 7,120 7,322 –2.8

REIB and Corporate Banking Asia/Pacific 933 58 >100 Public Finance/Treasury 20,249 15,651 29.4 Funding taken up in the capital market 20,338 23,711 –14.2 Pfandbriefe 14,865 17,507 –15.1 Other funding 5,274 6,004 –12.2 Subordinated debt 200 200 0 Figures from the income statement Net interest income 1,179 1,249 –5.6 Provisions for loan losses –259 –360 –28.1 Net commission income 227 177 28.2 Net trading income –11 98 >–100.0 Administrative expenses 542 547 –0.9 Operating income 588 668 –12.0 Profit before tax 588 653 –10.0 Profit after tax 355 434 –18.2 Balance sheet figures Real estate finance Germany 59,790 64,841 –7.8 Real estate finance international 36,453 32,591 11.8 Public finance 100,518 109,252 –8.0 Funding volume 193,405 204,065 –5.2 Subordinated debt 4,086 4,017 1.7 Capital and reserves 5,572 6,168 –9.7 Total assets 214,215 224,332 –4.5 Key ratios (in %) %-Points Return on equity before tax 10.1 11.5 –1.4 Return on equity after tax 6.1 7.7 –1.6 Cost income ratio 39.0 34.7 4.3 Capital ratios (in %)

Tier 1 capital ratio BIS1) 7.4 7.2 0.2

Total capital ratio BIS1) 10.7 10.4 0.3 Staff 2,034 2,404 –15.4%

1) Eurohypo is not participating in the official procedure for the implementation of the Basel agreements. Contents 1 Letter to Shareholders

2 letter to shareholders

6 the board of managing directors

8 report of the supervisory board

12 capital market communication of Managing Directors Board (cmc)

14 the pfandbrief

16 management report Supervisory Board Supervisory 16 Overall economic performance in 2007

18 Business development and strategy CMC 24 Business development in the divisions 24 Corporate Banking Germany (CBG Core/CBG Non-Core) Pfandbrief 27 Corporate Banking Continental Europe and Latin America (CIB-I-CELA) 29 European REIB and Corporate Banking UK (CIB-I-REIB & UK)

31 REIB and Corporate Management Report Banking USA (CIB-I-US) 33 Public Finance/Treasury (PFT) 35 Funding 38 Retail Banking (RB) 39 Development of income and financial position Remuneration Report Remuneration 39 Income 43 Financial position and net assets 44 Disclosures in accordance with sections 289 (4) and 315 (4), German Commercial Code (HGB) 83 consolidated financial 46 Our Employees statements – eurohypo group 49 Group Structure and Corporate Investments Governance Corporate 84 Income Statement 52 Risk Report 85 Appropriation of profit/earnings per share 65 Supplementary Report and Forecast 86 Balance sheet 65 Supplementary report 88 Statement of changes in capital 65 Report of our forecasts and reserves 66 Earnings outlook

90 Cash flow statement Management Bodies 68 remuneration report 92 Notes 166 Mandates – Supervisory Board, 74 corporate governance Management Board, Staff 171 Management bodies 77 management bodies and boards 172 List of affiliated companies, Participating

Interests and special purpose vehicles Statements Financial 77 Supervisory Board 175 Responsibility Statement by the 77 Board of Managing Directors Management Board 78 Supervisory Board Committees 79 Trustees 176 auditors’ report 80 Advisory Board Germany Auditors’ Report Report Auditors’ 82 Advisory Board International 177 information under section 28 of the pfandbrief act GS

195 at a glance

195 Glossary § 28 Pfandbrief 200 Editorial information At a glance 2 Letter to Shareholders

In financial year 2007, we successfully reaffirmed our leadership role as a specialist bank in the two areas that form the pillars of our business: Commercial Real Estate and Public Finance. Thanks to our international positioning, our diverse range of products and our active portfolio management, we rank among the top providers worldwide. The planned merger with the public-sector finance institution Hypo- thekenbank in Essen AG (Essen Hyp), which is a subsidiary of Commerzbank, with Eurohypo represents a further milestone in the development of the bank to a valu- able key component of Commerzbank Group. Looking ahead, the entire public finance business in Commerzbank Group will be marketed under the Eurohypo brand. Consequently, this pillar of our business will be placed on an even broader international footing, with an expansion of our financing and market strength. In addition, Eurohypo will be the sole issuer of Pfandbrief securities in Commerzbank Group, a fact that will serve to further strengthen our already prominent position in the capital market.

new business remains strong For the vast majority of the real estate sector, 2007 was a trying, but ultimately successful business year. Real estate investment markets saw historically high trans- action volumes, although activity did slow noticeably towards the end of last year. The reporting year was marked chiefly by the subprime crisis in the United States, which spread to global financial markets in the second half of the year, and still has a lingering effect on the capital market. As a result, liquidity is in shorter supply and has become more expensive. Conditions for successful exit management are now more difficult. In addition, many market players remain wary. Despite the ongoing weakness of the international financial markets, Eurohypo has again set records in new business volume: new commitments in the area of commercial real estate were more than 5% higher, at € 36.8 billion. Our outstanding position in real estate financing has been highlighted once again by the magazine “Euromoney”, which awarded Eurohypo the title of “Best Global Commercial Bank in Real Estate”. At the same time, the bank has been recognized – for the third consecutive year – as the no. 1 mortgage bank in Germany. Letter to Shareholders 3 Letter to Shareholders Board of Managing Directors of Managing Directors Board

In line with the success of commercial real estate business, our Public Finance segment recorded a 29% rise in new business, to € 20.2 billion. We have expanded

our range of derivative financial instruments. In the area of credit derivatives, busi- Board Supervisory ness with public-sector clients was up 33%, to € 3.2 billion. CMC solid results Given the developments on the subprime market in the US, our earnings for finan- Pfandbrief cial year 2007 are satisfactory. The bank’s pre-tax profit totalled € 588 million. Eurohypo holds an investment portfolio containing securities backed by subprime retail mortgage assets. Valuation adjustments totalling € 188 million on the value of this portfolio were performed over the course of the third and fourth quarter

of 2007. The total volume of the portfolio at the end of 2007 was approximately Management Report € 819 million. Adjusted to account for these revaluations, pre-tax profit increased 19% to € 776 million. Interest income in commercial real estate is right on track, amounting to € 885 million, topping prior-year levels by € 34 million. The 28% increase in commission income to € 227 million is also in line with our operational strategy. Furthermore, Report Remuneration continual loan portfolio optimization led to a 28% improvement in the result from provisions for loan losses, which contributed € 259 million. And, we were successful in our efforts to couple growth with cost discipline: administrative expenses were reduced, as planned, by € 5 million to € 542 million, despite the fact that new repre-

sentative offices were established and others expanded in the year under review, Governance Corporate as part of our internationalization strategy. After the opening of our second Asian branch in Hong Kong, Eurohypo opened offices in Bucharest and Mexico. At the beginning of 2008, the bank launched joint operations with Commerzbank in Dubai.

modern exit management Management Bodies Eurohypo took advantage of its expertise in exit management and its standing as a quality issuer to assert itself on the capital markets in a year characterized by extremely nervous capital markets, especially in the second half. Particularly suc- cessful was the fourth-quarter launch of a CMBS transaction in the United States, 4 Letter to Shareholders

with a total volume of € 336 million. Total syndication and securitization volume in financial year 2007 amounted to roughly € 12.7 billion. Eurohypo also has a first- class reputation in the area of refinancing. In 2007, the volume of Pfandbrief secu- rities placed by the bank totalled € 11.5 billion. We are the leading German issuer of Jumbo Pfandbriefe, and command a 5.5% share of the global jumbo covered bond market.

cooperation with commerzbank On 29 August 2007, the Annual General Meeting of Eurohypo resolved to transfer the shares of our outside shareholders to majority shareholder Commerzbank Inlandsbanken Holding GmbH (squeeze-out). At the same time, conclusion of a controlling and profit transfer agreement was approved. Recording of this agreement in the commercial register on 4 September 2007 provided the basis for realisation of commercial, legal and tax-related benefits within Commerzbank Group. In cooperation with Commerzbank, we have greater power to push ahead with the expansion of our market activities and grow our range of innovative financial instruments, so that we can offer our business partners real value. Our key aims for the current financial year are:

to further strengthen our public finance business through the integration of Essen Hyp and provide an even broader basis for the business model through the expansion of our own origination activities, ongoing internationalization of our business and the enlargement of our PPP business, to maintain our leading position in commercial real estate finance, in line with the motto “Margin before Volume”, through regional diversification and the use of capital market-oriented products, to increase our presence in established markets and strengthen our position in new strategic markets, to take full advantage of our role as the sole issuer of Pfandbrief securities within Commerzbank Group, making use of our outstanding capital market reputation. Letter to Shareholders 5 Letter to Shareholders Board of Managing Directors of Managing Directors Board

Eurohypo is well-positioned to move forward in a difficult market environment. Unfavourable capital market conditions, especially in the second half of 2007,

pushed our pre-tax return on equity (RoE) down to 10.1%, after 11.5% in the pre- Board Supervisory vious year. Adjusted for the effects of the subprime crisis, our RoE was 13.3%. We see the continuing financial market difficulties, and resulting market consolidation, CMC as an opportunity to strengthen our position as an expert in real estate and public finance and quality issuer of securities. Consequently, we will make use of all the Pfandbrief possibilities available to us on our markets at home and abroad, to consistently improve our earnings position. thanks to our employees

My colleagues and I extend our sincere thanks to all of the employees of the Euro- Management Report hypo Group. It is their hard work and outstanding performance that have made not only 2007, but the entire five-year history of the bank, a success story. On behalf of the entire Board of Managing Directors, I would also like to thank our partners and business associates for the confidence they have placed in us. Remuneration Report Remuneration Corporate Governance Corporate

Yours sincerely, Management Bodies

Bernd Knobloch Chairman of the Board of Managing Directors 6 The Board of Managing Directors

THE BOARD OF MANAGING DIRECTORS

bernd knobloch thomas köntgen and dirk wilhelm schuh dr. frank pörschke

joachim plesser martin zielke henning rasche The Board of Managing Directors 7 Letter to Shareholders Board of Managing Directors of Managing Directors Board

bernd knobloch dirk wilhelm schuh henning rasche Chairman of the Board Deputy Chairman of the Board born 1953 in hanover of Managing Directors of Managing Directors appointed to the board Board Supervisory of managing directors in 2001 born 1951 in munich born 1956 in soest/westphalia appointed to the board appointed to the board responsibilities CMC of managing directors in 20021) of managing directors in 2000 until december 31, 2007 Public Finance responsibilities Head Office Group Treasury responsibilities Corporate and Investment (ZGT EH) Pfandbrief Banking International Risk Management Interest-Rate and Debt Capital Markets Resource Management Currency Management Corporate Communication Legal Management Report Management Report joachim plesser martin zielke thomas köntgen born 1947 in arnsberg/westphalia born 1963 in hofgeismar born 1967 in düsseldorf appointed to the board appointed to the board member of the board of managing directors in 20021) of managing directors in 2006 of managing directors since january 1, 2008

responsibilities responsibilities Report Remuneration responsibilities Corporate Banking Germany Finance/Controlling/Tax Retail Banking2) IT/Operations Risik Management Resource Management 3) Operations Global Markets Audit Corporate Governance Corporate dr. frank pörschke born 1965 in hamburg generally authorized agent since september 1, 2007 4)

responsibilities Management Bodies

Corporate and Investment Banking Continental Europe/Latin America, UK Legal

1) Previously Member of the Board of Managing Directors of Eurohypo AG Europäische Hypothekenbank der Deutschen Bank. 2) Since 1 March, 2007; Until 28 February, 2007, Jochen Klösges was the Member of the Board of Managing Directors responsible for Retail Banking. 3) Since 1 January, 2008 4) Will become Member of the Board of Managing Directors in the course of the first six months of 2008. 8 Report of the Supervisory Board

REPORT OF THE SUPERVISORY BOARD

In the financial year 2007, the Supervisory Board performed the duties incumbent upon it by law and under the Articles of Association. It advised, monitored and super- vised the Board of Managing Directors in its management of the bank. The Board of Managing Directors provided the full Supervisory Board and the committees with regular and comprehensive information in meetings as well as written reports on general economic conditions, current business developments, key financial indica- tors and fundamental issues relating to company policy, as well as the risk situa- tion and control and management thereof. In addition, the Board addressed short- term and medium-term operational and strategic corporate planning, and discus- Klaus-Peter Müller sed in detail the discrepancies between actual developments and earlier reported Chairman of the targets and forecasts. The agenda also included conclusion of a CPL agreement Supervisory Board with Commerzbank Inlandsbanken Holding GmbH, initiation of a squeeze-out and implementation of the necessary changes in the rules of procedure for the Super- visory Board and Audit Committee. Furthermore, important individual processes were presented and resolutions made on transactions submitted for approval in accord- ance with legal provisions, the articles of association and the rules of procedure. Current topics, individual strategic projects and significant events were discussed in regular meetings with the Chairman of the Supervisory Board. This ensured that the Supervisory Board was kept consistently up-to-date with information.

meetings of the supervisory board and committees Five ordinary meetings of the Supervisory Board took place in financial year 2007: on 21 March, 26 June, 29 August before the Annual General Meeting, as well as the constituent session and subsequent meeting on 5 December. The review and approval of the audited financial statements took place at the financial results meeting on 21 March. Reports on the squeeze-out and the CPL agreement were the topics of the meeting on 26 June. During this meeting, and in a subsequent written resolution, proposals for the agenda of the Annual General Meeting on 29 August 2007 were finalized. At all of the meetings, the business developments of the bank were covered, the reports of the Board of Managing Directors were discussed and reviewed and reports were given about the work of the Supervisory Board committees. The Board of Managing Directors answered all questions raised by the Supervisory Board in full, and, as requested, promptly prepared reports on the strategy issues addressed. The Standing Committee convened three times in the year under review and addressed the matters falling within its sphere of responsibility. In addition to par- ticulars relating to the duties of the Board of Managing Directors, the main topics were nomination of new Supervisory Board members, as well as the CPL agree- ment and the squeeze-out. In some cases, business matters subject to approval were decided by the members by way of a written resolution. The Risk Committee (also the Credit Committee) convened four times to deal with the risk situation in lending business, as well as existing interest, currency, liquidity and operational risks, and to discuss the improvement of methods and Report of the Supervisory Board 9 Letter to Shareholders Board of Managing Directors of Managing Directors Board instruments for risk assessment as well as the risk strategy. In addition, the com- mittee addressed in detail the effects of the subprime crisis on the business of the

bank, and made decisions on the matters falling within its sphere of responsibility. Board Supervisory Resolutions on loans and business matters subject by law, the Articles of Association or the rules of procedure to approval requirements were made by the members at CMC the meetings or by way of a written resolution. A portfolio-oriented risk analysis has proven to be important for the work of the Supervisory Board. The Audit Committee convened five times in the reporting year. In the meeting Pfandbrief on 31 January, it discussed matters including the proposal to the Annual General Meeting to elect PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungs- gesellschaft to audit the financial statements for financial year 2007. On 20 March 2007, one day before the financial results meeting of the Supervisory Board, the Management Report Management Report committee conducted a detailed discussion on the annual report and consolidated financial statements as at 31 December 2007, as well as the audit report. Further meetings were held on 1 June, 28 August and 3 December. These focussed on topics such as the subprime crisis, the activities of the auditor in connection with the interim report, current business developments and the rules of procedure for the Audit Committee. Also on the agenda were the tasks for the Internal Audit Report Remuneration department in 2007. Every meeting was attended by representatives of the audit firm. The Audit Committee was declared independent by the auditor. There were no grounds for convening the Mediation Committee, established in accordance with the German Co-determination Act and in place until 29 August 2007. No other

committees were formed. The composition of the respective committees is shown Governance Corporate on page 78 of the annual report. further development of corporate governance The Supervisory Board continued to heed the ongoing debate in Germany relating

to the improvement of corporate management and governance. Taking account of Management Bodies bank-specific issues, the bank complies with all the recommendations of the Ger- man Corporate Governance Code. In light of its new composition, the Supervisory Board has not yet reviewed the efficiency of its activities. Such a review is planned for 2008. Explanations of the corporate governance policies can be found in the joint corporate governance report of the Board of Managing Directors and Super- visory Board (page 74 ff) and in the remuneration report (page 68 ff). review and approval of the 2007 annual financial statements The accounts, the annual financial statements as at 31 December 2007 and the management report of the company in accordance with the German Commercial Code (Handelsgesetzbuch – HGB), as well as the accounts, consolidated financial statements in accordance with IAS/IFRS (comprising balance sheet, income state- ment, statement of changes in capital and reserves, cash flow statement and the notes) and Group management report have been audited and awarded an unquali- 10 Report of the Supervisory Board

fied opinion by the audit firm, PricewaterhouseCoopers Aktiengesellschaft Wirt- schaftsprüfungsgesellschaft, Frankfurt am Main, elected as auditor by the Annual General Meeting and commissioned by the Supervisory Board. The Supervisory Board endorses the result of this audit. The annual financial statements and the management report of the company in accordance with the German Commercial Code (HGB), the consolidated financial statements in accordance with IAS/IFRS, the Group management report and the proposal of the Board of Managing Directors regarding the appropriation of distributable income, as well as the audit report of the auditors and the report on the relationships with associated companies were received by all the Supervisory Board members in time for discussion and voting on resolutions. The Audit Committee also addressed these documents at its prepa- ratory meeting, at which the auditors reported in detail on the audit findings and the audit result for financial year 2007. At the financial results meeting on 17 March 2007, the Chairman of the Audit Committee informed the Supervisory Board about all significant results of the meeting. The auditors also took part in this meeting, presented a report on the main findings of the audit and were available to provide additional information. The annual financial statements and the management report of the company in accordance with the German Commercial Code (HGB) as well as the consolidated financial statements in accordance with IAS/IFRS, the Group manage- ment report, the proposal of the Board of Managing Directors regarding the appro- priation of the distributable income and the audit report were discussed and exa- mined in detail by the Supervisory Board. There were no objections to be raised based on to the final result of the audit. The Supervisory Board approved the finan- cial statements of the company prepared by the Board of Managing Directors in accordance with the German Commercial Code (HGB), the consolidated financial statements in accordance with IAS/IFRS and the Group management report. The annual financial statements of the company in accordance with the German Com- mercial Code (HGB) are thereby adopted. The Supervisory Board concurs with the proposal regarding the appropriation of distributable income. Publication of a dependent company report in accordance with section 312 of the Stock Corporation Act (Aktiengesetz – AktG) was no longer required following the taking effect of the control and profit and loss (CPL) agreement of 4 September 2007.

composition of the supervisory board and the board of managing directors Following Commerzbank’s assumption of major parts of the processing function for Eurohypo’s retail business, the number of employees at Eurohypo in Germany has fallen permanently below 2000. Consequently, since the end of the Annual General Meeting on 29 August 2007, two-thirds of the Supervisory Board has been composed of shareholders and one-third of employee representatives; the Board now has only six members. As of the end of the Annual General Meeting on 29 August 2007, the Report of the Supervisory Board 11 Letter to Shareholders Board of Managing Directors of Managing Directors Board following members left the Supervisory Board: (on the part of the shareholders) Dr. Achim Kassow, Prof. Dr. Hans-Peter Keitel, and Dr. h.c. Hans Reischl, as well

as (from among the employees) Wolfgang Barth, Herbert Bayer, Peter Birkenfeld, Board Supervisory Cornelia Pielenz, Brigitte Siebert and Christian Weber. We would like to thank these ladies and gentlemen for their constructive role and dedicated service. The Annual CMC General Meeting on 29 August 2007 re-elected Klaus-Peter Müller, Wolfgang Hart- mann and Klaus Müller-Gebel, and newly elected Michael Reuther to the Super- visory Board; the elected employee representatives are Eva-Maria Jäger and Ingo Pfandbrief Felka. Additionally, the size of the committees was changed, due to the reduction in size of the Supervisory Board. Since 29 August 2007, the Standing Committee and Risk Committee have comprised Klaus-Peter Müller, Wolfgang Hartmann and Klaus Müller-Gebel. Members of the Audit Committee since that date are Klaus Management Report Management Report Müller-Gebel, Eva-Maria Jäger and Michael Reuther. On 28 February 2007, Jochen Klösges resigned from the Board of Managing Directors, in order to take over a management position with Commerzbank AG. The Supervisory Board would like to thank Mr. Klösges for his dedication and successful work with the company. With effect from 1 September 2007, Dr. Frank Pörschke joined the company, Report Remuneration initially as generally authorized agent. His formal appointment to the Board of Managing Directors, as resolved by the Supervisory Board, is expected in the third quarter of 2008. On 31 December 2007, Dirk Wilhelm Schuh resigned from the Board of Mana-

ging Directors, in order to take over a management position with Commerzbank Governance Corporate Group. The Supervisory Board would like to thank Mr. Schuh for his outstanding contribution as a member of the Board of Managing Directors of Eurohypo. As his successor, Thomas Köntgen was appointed effective 1 January 2008. acknowledgements Management Bodies The Supervisory Board would like to express its thanks and appreciation to the Board of Managing Directors, the staff councils, the committee representing senior executives and to all of the bank’s employees for their excellent work and out- standing commitment.

Eschborn, 17 March 2008

The Supervisory Board Klaus-Peter Müller Chairman 12 Capital Market Communication (CMC)

CAPITAL MARKET COMMUNICATION (CMC)

shareholder structure market information services Bloomberg (abbrevi- and share data ation EHY GR), Reuters (abbreviation EHYG.DE) and Since 1 April 2006, Eurohypo AG has been fully Thomson Financial (abbreviation EHY-XE). consolidated into Commerzbank Group. Currently, Commerzbank Inlandsbanken Holding GmbH, a controlling and wholly owned subsidiary of Commerzbank AG, profit transfer agreement directly and indirectly holds 98.76% of the shares On 29 August 2007, the Annual General Meet- in Eurohypo. The remaining 1.24% are in free ing of Eurohypo AG approved the controlling and float. The bank’s share capital of the bank as at profit transfer agreement between Commerzbank 31 December 2007 totalled € 913,688,919, divid- Inlandsbanken Holding GmbH and Eurohypo AG. ed into 351,418,815 no-par value bearer shares, This agreement entered into effect upon record- each representing € 2.60 of share capital. ing in the commercial register on 4 September Based on the final closing price for the year 2007. During the term of the agreement, Euro- of € 27.05, the share price at year’s end was hypo AG is obliged to transfer its profits to its 24% higher than the price at the start of the majority shareholder. No dividends will be paid year (€ 21.80). The highest price recorded for a on the shares; outside shareholders receive a share of Eurohypo in the year under review was gross annual compensation payment of € 1.24. € 31.22 on 19 June 2007. On 8 January 2007, the Additionally, the Annual General Meeting lowest share price was recorded at € 21.19. On approved the transfer of shares belonging to the whole, price development was influenced outside shareholders to the majority shareholder by the ongoing financial market crisis. In light (squeeze-out). For the transfer of the Eurohypo of the volatile market environment, the Prime shares, Commerzbank Inlandsbanken Holding Banks Performance Index fell by 10% over the GmbH offered these shareholders a cash con- course of the year, to 550.43 points. sideration of € 24.32. Legal actions were filed Due to its minimal free float, there is no con- by outside shareholders against both resolu- siderable interest in the Eurohypo share on the tions, and the squeeze-out process is thus still part of institutional investors or equity analysts. pending and has not yet been entered into the After announcement of the squeeze-out, interest commercial register. The bank is confident of a in the share diminished even further. successful conclusion of the upcoming legal The main trading platform for our share was proceedings. Frankfurt, where it was listed on the General Standard; the share is also traded on Xetra. The eurohypo ratings share is listed under Wertpapierkennnummer After our annual ratings meetings in summer, (WKN) 807600 and International Securities Identi- the three major rating agencies Fitch, Moody’s fication Number (ISIN) DE 0008076001. Further Investor Service and Standard & Poor’s affirmed data on the Eurohypo share is available from the their ratings. Since 14 May 2007, Eurohypo Pfand- Capital Market Communication (CMC) 13 Letter to Shareholders Board of Managing Directors of Managing Directors Board briefe were on review for upgrade by Moody’s. ratings In November, the agency changed the rating Standard of these securities from “Aa1” to the top rating & Poor’s Moody’s Fitch Board Supervisory

“Aaa”. The reasons given for the move were the Eurohypo AG CMC high quality of the cover pool and the overall Public-sector Pfandbriefe AAA Aaa AAA strength and solidity of the banks lending busi- Mortgage Pfandbriefe AAA Aaa AAA ness. The rating agencies Standard & Poor’s and Senior unsecured A A1 A Pfandbrief Fitch have maintained their top ratings of Euro- Subordinated debt A– A2 A– hypo’s mortgage Pfandbrief securities since 2002 Commercial Paper A–1 P–1 F1 and 2004, respectively. For our public-sector Financial strength – C+ – Pfandbriefe, the three major rating agencies Individual Rating – – B/C have also issued their top grades. Support Rating – – 1 Management Report Rating Outlook stable stable stable eurohypo jumbo pfandbriefe Eurohypo Luxemburg S.A. In the jumbo covered bond market, we main- Lettres de Gage AAA – AAA tained our excellent capital market standing, with Senior unsecured issues A – A a market share of 5.5%. In January of the report- Short term debt A–1 – F1 Report Remuneration ing year, Eurohypo launched a public-sector Support Rating – – 1 global jumbo Pfandbrief, the volume of which Rating Outlook stable – stable was increased to € 2.5 billion in response to the As at November 20, 2007 high demand. The Pfandbrief has a maturity of

three years, and was issued at very good condi- Governance Corporate tions, with a spread of 6 basis points under the swap rate. Approximately 36% of the issue was capital market communication purchased by central banks, again reflecting the As a quality issuer, Eurohypo places emphasis sound reputation of this refinancing instrument. on clear and targeted capital market communi-

In April, we issued a second public-sector jumbo cation. On our website, www.eurohypo.com, we Management Bodies Pfandbrief, with a volume of € 1.0 billion and a provide detailed information about our company, maturity of two and a half years. our products and services, our issues and our In the second half of 2007, the capital market share. Additionally, our website contains our was in the thrall of the US subprime crisis. Never- most recent investor presentations and selected theless, Eurohypo placed a jumbo mortgage issue prospectuses. Our Capital Market Commu- Pfandbrief with a volume of € 2.5 billion. This nication team is on hand to answer any further benchmark issue, with a maturity of five years, questions. More information about our refinanc- carries a coupon of 4.25%. 47% of the issue ing instruments is available under the heading was taken up by German investors. “Funding” on pages 35 ff. 14 The Pfandbrief – a reliable funding source and a sought-after investment

THE PFANDBRIEF – A RELIABLE FUNDING SOURCE AND A SOUGHT-AFTER INVESTMENT

The loss in confidence on the capital market fol- brief banks raised a total of € 50 billion on the lowing the subprime crisis has proven that the market with traditional bearer and registered refinancing conditions among Pfandbrief securi- Pfandbriefe. Including Jumbo issues and add-ons, ties issuers fundamentally differ from those of the amount aggregated to € 58 billion. other banks. Thanks to the Pfandbrief, the former It is remarkable that during this period, have capital market access at favorable condi- funding costs barely rose compared with the tions at all times. This is because the Pfandbrief’s first seven months of the year 2007. Pfandbriefe special level of safety and high market penetra- continued to trade 10 basis points below Euribor tion make it a safe haven for investors, even when as the mean for all maturities, whereas securiti- times get rough. zations and a number of foreign Pfandbrief-sim- ilar products (Covered Bonds) saw spreads widen pfandbrief shores up banks’ liquidity by between 40 and 80 basis points. The credit history of Pfandbriefe is impeccable. Not one case of Pfandbrief default has been pfandbrief act protects investors recorded since the Mortgage Bank Act, the The Pfandbrief Act offers Pfandbrief investors predecessor of the Pfandbrief Act, entered into a tight-knit safety net. The principle of investor force over 100 years ago. Because the Pfand- protection lies at the heart of the legal frame- brief’s credit quality is recognized at home and work for the issuance of Pfandbriefe. Financial abroad, issuers are also able to raise liquidity in institutions must satisfy stringent requirements in more difficult times; not so with Mortgage Backed order to receive a license to issue Pfandbriefe. Securities. The Pfandbrief market as a “market The Mortgage, Ship and Public Pfandbriefe out- of last resort” mobilizes liquidity in situations in standing must be covered by mortgage, ship which it is otherwise not available, or available mortgage or public-sector loans of at least an only at appreciably less favorable conditions. equal amount. These so-called cover assets are In addition to the benchmark issues of EUR entered into separate cover registers. In the event one billion upwards (Jumbo Pfandbriefe), Pfand- of an issuer’s insolvency, the claims of the Pfand- brief banks issue large volumes of traditional brief creditors are privileged by a preferential bearer and registered Pfandbriefe, which are in right in respect of the cover assets in the regis- constant and high demand from investors. This ters. Pfandbrief business is subject to special is due to the deep-rooted and long-standing surveillance by the Federal Financial Supervisory tradition the Pfandbrief has among its buyers, Authority (BaFin). In addition to the ongoing which include insurers, banks as well as pension supervision on the basis of the German Banking and investment funds, on the German market. Act, a Pfandbrief department monitors fulfillment In the months of August to December 2007 only of the provisions set down in the Pfandbrief Act. – after the subprime crisis flared up – the Pfand- The obligation to disclose key data concerning The Pfandbrief – a reliable funding source and a sought-after investment 15 Letter to Shareholders swap spreads jumbo pfandbrief vs. covered bonds july 2007 – january 2008

in bps

42 36 30 24

18 of Managing Directors Board 12 6 0 –6 –12 –18 –24 Supervisory Board Supervisory CMC 17.11.07 03.11.07 01.12.07 14.07.07 28.07.07 11.08.07 26.01.08 12.01.08 06.10.07 20.10.07 15.12.07 29.12.07 30.06.07 25.08.07 08.09.07 22.09.07

Pfandbriefe UK Structured Covered Bonds Spanish Cédulas Irish ACS Total market French Covered Bonds Pfandbrief

the cover pools on a quarterly basis makes the Where public-sector lendings are concerned,

composition of the cover pools transparent and strict selection criteria ensure that the value of Management Report comparable over time. The standardization as a the cover assets remains stable on a long-term result of the Pfandbrief Act gives the Pfandbrief basis. In this way, only claims on public-sector market, which weighed in at approx. € 890 bn debtors from the European Union, the EEA states as at 31 December 2007, a depth that is exceed- as well as the USA, Canada, Japan and Switzer-

ed only by the market for public-sector bonds. land may be included in cover if the existence Report Remuneration of state liability is beyond doubt. subprime ruled out by conservative credit standards summary When the subprime crisis became evident, hold- Even when the credit and capital markets are in

ings of residential property cover assets in the a state of general turmoil, the Pfandbrief market Governance Corporate USA totalled € 200 million or approx. 0.01% of is open to issuers at all times. The rigorous credit all Mortgage Pfandbrief cover assets. The rigor- standards under the Pfandbrief Act ensure to ous credit standards that apply under the Pfand- keep subprime out of Pfandbrief issuers’ cover brief Act prevent inferior credit qualities from pools.

finding their way into the Pfandbrief issuers’ Due to its legally stipulated standards of Management Bodies cover pools. With Mortgage Pfandbriefe, only quality, its transparency and its well-developed 60% of the prudently calculated mortgage market infrastructure, the Pfandbrief has matured lending value of financed properties is eligible to become a capital market product that is in as cover and refinanceable through the Pfand- international demand. With a volume outstand- brief. When there is a risk of falling prices, the ing close to € 900 billion, the Pfandbrief is today issuers are required to examine whether the the benchmark of a European Covered Bond value of the properties and ships lent against market in its own right that boasts a volume is affected. outstanding of nearly € 2 trillion. 16 Management Report

MANAGEMENT REPORT OVERALL ECONOMIC PERFORMANCE IN 2007

situation in the commercial a marked slowing of what had been very dynamic real estate markets investment activity. With the adjustment of risk premiums, yields have begun to rise and yield general developments spreads are widening again, so far most visibly International real estate markets were charac- in the UK. How this situation continues to develop terized by strongly fluctuating expectations and should depend largely on the state of financial realities in 2007. Following a continuation of the markets. recovery in investment and a good deal of posi- tive news from the office markets in the first germany half of 2007, the second half saw the situation Bolstered by positive fundamental economic alter – and expectations even more so. data, the office market performed well last year. The broad attention paid to the crisis Take up was up from the already historically high obscured the favourable results in most real estate level of the previous year. Together with gener- markets in 2007 as a whole. Transaction volumes ally subdued construction activity, vacancies in investment markets everywhere were high declined on the whole. In particular, the supply from a historic perspective, and some even set of premium office space was down, pushing records. Likewise, the majority of office markets prime rents higher in the major markets. The recorded pleasing performance, with higher outlook for 2008 remains more-or-less positive, rents and declining vacancy rates. although risks still remain for the office markets The positive full-year results, however, can- based on financial market conditions and the not be used as grounds for ignoring the negative lower forecasts for growth. developments in the second half of 2007. Based The German retail sector failed to meet on the difficulties arising from the US subprime expectations stemming from the improved eco- mortgage market, risk aversion on the credit nomic situation and generally favourable con- and capital markets has increased, putting credit sumer climate in 2007. Retail sales were down in shorter supply, and raising the price of bor- in real terms from prior year levels. Nonetheless, rowing. Coupled with the rapid rise of the oil demand from chains for premium retail space in price, this has increased risk potential for the German cities was very strong, which has led global economy. Growth forecasts for some major to shortened turnover periods and rising prime economies, including the UK and US, have been rents in some places. lowered. The changed environment has led to uncer- europe tainty on commercial real estate markets. The Declining vacancy rates, rising rents and rising outlook for 2008 is being viewed with caution. construction activity were the key trends on Whereas the impact on rental markets generally the European office markets in 2007. However, remains unclear, investment markets have seen uncertainty has replaced the promising outlook Management Report >>> Overall economic performance in 2007 17 Letter to Shareholders office property

Office market Office market Office market Office market (still) in decline finding its bottom in recovery/growth full valuation

Moscow Mexico London

Washington DC of Managing Directors Board New York

Paris Los Angeles Madrid Munich Tokyo Istanbul

Frankfurt Hamburg Board Supervisory Berlin

Chicago CMC Pfandbrief

of just one year ago. In addition to the doubts activity, however, vacancies in some office mar- stemming from the credit crisis, an increase in kets have been on the rise from what had gen-

new supply in many locations will impact rental erally been low rates. Furthermore, the altered Management Report growth going forward. economic environment will weigh on the mar- Retail markets in most European countries kets in 2008. had a good year in 2007, with rising revenues The US retail sector proved to be very and stable or increasing rents. Supply has con- robust in 2007, with growing sales despite slower tinued to expand, and much of the development growth. Consumption is suffering increasingly Report Remuneration has been focussed on southern and eastern from the situation in the US housing market. Europe. The retail markets in the East have Consequently, greater retail competition can be profited, as in Turkey, from a consistent growth expected in 2008, which – together with high in consumption. High rates of construction in rates of construction – will impact retail rents,

these markets, however, have fuelled competition. which have been on an upward trend thus far. Governance Corporate In 2008, it is likely that economic conditions The US housing market cooled considerably will cause consumption to wane in most markets, over the course of last year. There has been a especially the UK and Spain. significant decline in the number of building permits issued, as well as the number of houses usa sold. This has manifested itself in falling prices. Management Bodies The office markets in the US saw positive growth This slowdown will continue in 2008. Perform- in 2007, and were generally characterized by ance on the market for rental housing, however, declining vacancy rates and rising rents. The has been much more favourable. Demand for good performance of regional economies has rentals is benefiting from the slowdown in home led to the current favourable state of most office sales. Rents are increasing and vacancy rates markets. Due to the high rate of construction are down. 18 Management Report

BUSINESS DEVELOPMENT AND STRATEGY

commercial real estate our US investment portfolio backed by subprime Eurohypo held its position well in commercial retail mortgages. Following this € 188 million real estate finance – a core business – in 2007. valuation adjustment, profit before tax in com- This recently established business grew by 5.6% mercial real estate finance reduced by 18% to to € 36.8 billion in the period from January to € 478 million (€ 583 million). Excluding this December 2007 compared to the same period in adjustment, earnings would have improved by 2006. In Germany new commitments increased some 14% to € 666 million. by 3.2% to € 10.1 billion. We also enjoyed strong In view of the charges on income, pre-tax new business in Europe, where individual mar- return on equity (RoE) in commercial real estate kets posted very varying rates of growth. UK finance declined to 9.2% (12.1%). The cost/ new business was particularly buoyant, surging income ratio, which was also affected by this 25% or € 1.2 billion to € 5.9 billion. Continental development, increased to 35.6% (29.6%). European markets had varying rates of growth, the overall total just 1.8% down at € 12.8 bil- further international expansion lion. In the United States, new business edged The international diversification of our property down by € 0.2 billion to € 7.1 billion, largely business is a key element of our strategy, allow- due to exchange rate changes. ing us to offer local financing solutions based In our recently entered markets in the Asia- on demand, while remaining independent of Pacific region, new business increased to € 0.9 economic fluctuations on regional markets. billion. In Germany, our domestic market, we strive 2007 net commission income in commercial to consolidate and build on our leading compet- real estate finance rose by 19% to € 268 million itive position in commercial real estate finance. (€ 225 million), boosted by successful acqui- When granting new loans and prolongations, sition efforts. Net interest income edged up by the key criteria for decision-making purposes is 4% to € 885 million (€ 851 million). Consistent risk versus return, assuming an acceptable risk with ongoing improvements in the quality of our profile. The volume-based strategy sometimes credit portfolio, the risk provision in commer- followed in the past is now less important. Prof- cial real estate finance was down 12% at € 174 itability improvements will be supported by tar- million (€ 199 million). geted portfolio management procedures such as We did not manage to repeat our strong 2006 syndication, securitization and expansion of results in 2007, as a result of the continuing cri- commission business. sis on international financial markets largely due In international real estate finance business to the valuation adjustments set aside against we are looking to grow our positions in estab- Management Report >>> Business development and strategy 19 Letter to Shareholders new real estate finance new real estate finance by segment by country

CIB-I-A/P RB Other 3% 1% 14% Sweden CIB-I-REIB & UK 2% Germany 16% CIB-I-CELA Turkey 28% Total: 34% 2% Total: of Managing Directors Board € 36.8 billion € 36.8 billion CIB-I-US Japan 19% 3% USA CBG France 19% 27% 5% Spain UK

12% 15% Board Supervisory CMC Pfandbrief

lished markets. In the US, the market for tradi- lenders. We aim to focus on office buildings, tional credit providers has significantly improved retail centres, warehouses and business hotels. following the negative impact of the financial In central and eastern Europe we are con-

market crisis on securitization markets, which tinuing our international expansion strategy by Management Report should provide a boost for our business. We opening a Bucharest office in January this year. are also looking for new markets and to offer Given that Romania has joined the EU, we plan investment products in addition to conventional to rapidly establish a presence in this market, loans. Our focus continues to be Asia-Pacific, which is benefiting from the sustainable growth

Latin America and south-eastern Europe. This of the Romanian economy. In the long term we Report Remuneration year we expect to set up our first branch offices seek to be one of the top-5 players on each in Bulgaria and Brazil. market where we have a presence. Corporate and Investment-Banking Asia- Pacific is still in its built-up phase and is there- public finance

fore not reported as a stand-alone segment. Over New business in the area of public finance grew Governance Corporate the next two years, this business will open fur- by € 4.6 billion or 29.4% to € 20.2 billion in ther offices in China and other southeast Asian 2007. Our international expansion strategy also countries, to build a complete network in the applies to this business and nearly 45% of region. We began this process last year by open- new business comes from abroad. We have also

ing a representative office in Hong Kong, and a expanded our presence in derivatives, given that Management Bodies new office is planned in Singapore this year. trading in structured risk products on behalf of Mexico, where we opened a representative public-sector entities is gaining in importance. office in September 2007, is a key country in Off-balance sheet business in credit derivatives our expansion strategy. In view of buoyant eco- with public-sector clients grew by € 0.8 billion nomic growth and purchasing power, Mexico or 32.7% to € 3.2 billion underpinned by our offers major potential for commercial real estate successful international risk diversification strat- 20 Management Report

new business public finance new business public finance by country by rating

Other 14% CB 2.2 – 2.8 2% Japan 2% CB 1.8 – 2.0 Switzerland 3% 9% CB 1.0 – 1.2 UK 3% Total: Total: 37% Greece 4% € 20.2 billion € 20.2 billion Germany 55% Spain 5% CB 1.4 – 1.6 52% Italy 6%

USA 8%

1.0 –1.2: AAA 1.4 – 1.6: AA 1.8 –2.0: A 2.2 –2.8: BBB

egy and our ability to win new high-margin busi- serviced by Commerzbank. Pfandbriefe will ness in 2007. To implement this strategy we rely exclusively be issued under the Eurohypo name on Public Private Partnerships (PPP) to finance in the future. This will ensure uniform funding infrastructure projects, thereby combining our in Commerzbank Group and will further boost knowledge in the area of public finance with our Eurohypo’s already excellent reputation on the expertise in real estate, as well as the constantly financial markets. rising volume of structured financing and our growing business with regional and local enti- cooperation with commerzbank ties abroad. When expanding into foreign markets we rely as far as possible on Commerzbank’s existing merger with essen hyp branch network and its established local infra- Following our planned merger with Hypotheken- structure. At the same time, the Group parent bank in Essen AG (Essen Hyp) all of Commerz- company can take advantage of Eurohypo’s broad bank Group’s public finance business will be product range when opening foreign branches. marketed under the Eurohypo brand. The con- The best example of this was the joint opening centration of all public finance activities will of a representative office in Dubai early in 2008, enable us to further develop our successful busi- allowing Commerzbank to offer local companies ness model and bolster our competitive position and institutional investors Eurohypo’s real estate as a leading European player. True to our motto solutions in addition to a broad range of bank- “Margin before volume” we will focus on high- ing services. margin business and international expansion There were also additional synergies in while fostering development of structured finance consumer housing finance. In line with the solutions. new strategy for this business, with effect from Essen Hyp’s commercial real estate busi- 1 February 2007 we transferred sales and cus- ness will also be managed by Eurohypo in the tomer service, including the relevant employ- future, while the retail lending business will be ees, to our parent company Commerzbank. The Management Report >>> Business development and strategy 21 Letter to Shareholders syndication and placement volumes in 2007 without guarantees in € million

Continental Europe 5,887 Germany 2,420 UK 5,367 USA 3,295 of Managing Directors Board Syndication volume 16,969 Final Take 9,271 Placing volume 7,698 Commercial banks 3,462

State banks (Landesbanken) 2,281 Board Supervisory Mortgage banks, building societies 1,560

Insurance companies 302 CMC Other investors 93

Syndicated volume Pfandbrief Placement volume

business remaining with Eurohypo will be grad- (on-balance sheet refinancing),and including Management Report ually run off by scheduled redemptions and syndication and securitization activities (off-bal- other repayments. Among other measures taken ance sheet financing). As a leading Pfandbrief in this consolidation we have combined several issuer in Germany, we back over 50% of our processing centres together and now use an refinancing volume with covered bonds. The

integrated IT platform within Commerzbank Pfandbrief market remained largely untouched by Report Remuneration Group. the turbulence on the financial markets, and in 2007 we managed to successfully place a volume successful refinancing of € 11.5 billion. Further details are given under and exit management the heading “Funding“ on pages 35 ff.

Eurohypo operates modern refinancing and exit We are also a leading player in the syndi- Governance Corporate management, focussing on Pfandbrief securities cation and securitization business. While the

syndication and securitzation activity 2007 Management Bodies figures without guarantees

Total thereof

Germany Continental UK USA in € million Europe Syndication volume (Placement volume) 7,697.8 1,159.6 1,866.2 2,477.6 2,194.4 Securitization volume 5,025.0 1,551.9 – 580.0 2,893.1 Total 12,722.8 2,711.5 1,866.2 3,057.6 5,087.5 22 Management Report

outstanding business: real estate financing outstanding business: public finance by segment by rating

CIB-I-US CIB-I-A/P CB 2.2 – 2.8 CB 3.0 – 3.6 5% 1% 4% 0%

CIB-I-REIB & UK CB 1.8 – 2.0 7% 8% CB 1.0 – 1.2 CBG 42% Total: 39% Total: RB € 96.2 billion € 100.5 billion 23% CB 1.4 – 1.6 CIB-I-CELA 47% 24%

1.0 –1.2: AAA 1.4 – 1.6: AA 1.8 –2.0: A 2.2 –2.8: BBB

planned exit strategy could not be implemented In June 2007 Eurohypo placed € 1 billion of due to the credit crunch on the financial markets, risks from a package of German commercial we managed to strengthen our top position in real estate loans onto the market, assisted by this business. The total volume placed in 2007 “Semper Finance 2007 – 1 GmbH“. This trans- was € 12.7 billion, including € 7.7 billion in syn- action involves a synthetic securitization selling dications and € 5 billion in securitizations. This only the risks, without the loans themselves, to total breaks down between 21 % in Germany, institutional investors via commercial mortgage 15 % in the rest of continental Europe, 24 % backed securities (CMBS). The special purpose in the UK and 40% in USA. Of the total syndi- vehicle, among whose founding members Euro- cated volume arranged of some € 17 billion, we hypo is the only mortgage bank, was launched retained € 9.3 billion on our own books (Final under the “True Sale Initiative” (TSI, an initia- Take) and placed € 7.7 billion with banking tive of the German banking industry). partners in Germany and abroad. In April 2007 we successfully concluded the value-added approach securitization of the so-called “Leo II Portfolio” As an asset-based financing company, our man- on our European Opera platform. This transac- agement structure reflects the geographic break- tion based on commercial mortgage backed down of our activities. We measure the success securities (CMBS) related to financing of real of an operational unit based on pre-tax profit, estate valued at € 550 million, owned by Austri- pre-tax return on equity and the cost/income an-based CA Immobilien Anlagen AG and leased ratio. Further details are given in the segment on a long-term basis by the German state of reporting on pages 118 ff. Hesse. The state’s high credit rating and the Eurohypo Group is managed as part of an long-term lease contract coupled with a trans- integrated standard cycle on the basis of a value- parent CMBS structure prompted enormous added approach. This approach is in line with interest from investors in a total of 15 countries. the underlying principle that a company which Management Report >>> Business development and strategy 23 Letter to Shareholders Board of Managing Directors of Managing Directors Board earns in excess of its capital costs, i.e. the return transaction in the operational units must gener- that an investor could expect from an invest- ate at least enough income to cover cost of cap-

ment in a similar risk class, creates value. The ital, which is calculated depending on different Board Supervisory model used at Eurohypo is a cycle consisting of risk parameters for individual products and/or four phases: transformation of the value driver countries. A corresponding pre-calculation and CMC into quantifiable targets/figures, pre-calculation, post-calculation forms the basis for the bank’s post-calculation and regular target-actual com- strategy to maximize value in all operational Pfandbrief parison. units. The regular target-actual comparison brings New and prolonged business is managed together data at Group level and provides the on a value-added basis. This means that every basis for following year’s planning. Management Report Management Report Remuneration Report Remuneration Corporate Governance Corporate Management Bodies 24 Management Report

CORPORATE BANKING GERMANY CORE (CBG CORE)

separating the segments Despite increasing syndication and securitization creates transparency activities, net interest income was up slightly For the first time in financial year 2007, Eurohypo over the previous year, at € 396 million (€ 393 differentiated in the CBG segment between the million). The higher quality of our loan portfolio core portfolio (CBG Core) and loans deemed is reflected in a renewed positive result from non-performing or sub-standard as at 31 Decem- provisions for loan losses totalling € 8 million ber 2006 (cut-off date). This separate portfolio (€ 9 million). It must be noted, however, that makes up the segment CBG Non-Core. The loans specific adjustments are not evident in the CBG were almost exclusively granted by the predeces- Core portfolio, due to the cut off on 1 January sor institutions of Eurohypo (legacy portfolio) 2007. As planned, lending volume was reduced and are in the hands of specialised restructur- from € 33.1 billion to € 32.0 billion; the contri- ing and workout teams. The aim is to eliminate bution to the overall Eurohypo real estate port- this portfolio rapidly, while assuring the great- folio was 33% (34%). est possible restructuring or realisation success. Thanks to the strength of new business, as The transparency that this creates facilitates well as income from ancillary services – primarily evaluation of the CBG business model and makes interest rate and currency management – com- visible the profitability of our real estate busi- mission income neared the record levels of the ness in Germany. previous year, at € 70 million (€ 71 million). Administrative expenses totalled € 107 million, a large contribution to earnings rise of 3% (€ 106 million). The improvement in Our business with professional German real return on equity (RoE) to 18.0% (16.6%), a 1.4 estate clients is focussed on the segment Corpo- percentage point rise, was particularly pleasing. rate Banking Germany (CBG) Core, which saw The cost/income ratio rose minimally to 23.0% a successful year in 2007. This success was (22.8%), leaving it again at a comparatively attributable to our client -orientation, careful favourable level in the real estate financing fine-tuning of our portfolios as well as continuing industry. process adjustments. In the year under review, pre-tax profit was up slightly year-on-year, at market leadership reaffirmed € 368 million (€ 365 million). The improvement We reaffirmed our leadership role in the financ- is attributable to the constant level of profita- ing of Germany commercial real estate in the bility from new business and the positive result reporting year, setting a new record in new from provisions for loan losses due to ongoing business volume, which grew by 3% to € 10.1 optimization of the portfolio. billion. This puts the percentage of the bank’s Management Report >>> Business development in the divisions >>> Corporate Banking Germany 25 Letter to Shareholders Board of Managing Directors of Managing Directors Board new real estate financing business represented by key financials cbg core this segment at 27% (28%). Financing focused 1.1. – 1.1. – on office buildings, retail properties and major 31.12.07 31.12.06 Change Board Supervisory residential complexes in metropolitan areas. The New commitments (€ million) 10,139 9,820 3.2% CMC trend towards investment in existing properties Segment assets (€ billion) 32.0 33.1 –3.3% seen over the past several years continued. Such Total income (€ million) 467 462 1.1% investments comprise 59% of our new business

Profit before tax (€ million) 368 365 0.8% Pfandbrief in Germany. In terms of regional distribution, the Return on equity before tax (%) 18.0 16.6 1.4 ppt majority of loans were provided by our offices in Berlin (€ 2.6 billion) and Munich (€ 2.3 bil- lion). markets. Demand on the real estate investment

We are reacting to the growing nexus market has changed based on the state of the Management Report between the lending market and the capital financial markets. In particular, the likelihood market with innovative products. As market that the majority of speculative investors will leader, we benefit from our size, our structuring avoid the market could lead to a reduction in expertise and our reputation as a banking part- real estate investment activity in Germany over ner. Syndications and securitizations in the year 2007, although the market will remain at histori- Report Remuneration under review totalled roughly € 2.7 billion. cally high levels. Our long-standing client relationships, advi- outlook sory know-how and high processing speed will Based on the sound fundamental data on the allow us to continue to acquire attractive new

economy, the German real estate market bene- business, even in a more difficult environment. Governance Corporate fited last year from favourable conditions and The further improvement of our portfolio quality stable growth. The outlook for 2008 remains and our consistent risk and cost consciousness guardedly optimistic, due to the effects of weaker will also have a positive impact on new business growth in Germany on the domestic real estate and prolongations. Management Bodies 26 Management Report

CORPORATE BANKING GERMANY NON-CORE (CBG NON-CORE)

Our clear strategic focus on the workout of the The bank’s aim is to eliminate the bulk of the Non-Core Portfolio aims at successive elimina- portfolio over the next three years, while signifi- tion of the negative earnings impact from these cantly improving its quality. Via lower revaluation loans. In 2007, we were able to reduce the vol- reserves and improved interest income, these ume of the portfolio by € 1.2 billion (16%). measures will significantly reduce the negative Even given that the portfolio – as a result of impact. revaluations in the amount of € 152 million – Further information on the Core and continued to represent a pre-tax loss € 145 mil- Non-Core portfolios is available in the notes lion, the negative impact on profits was greatly on 118 ff. reduced over the previous year. Management Report >>> Business development in the divisions >>> Corporate and Investment Banking Continental Europe and Latin America 27

CORPORATE AND INVESTMENT BANKING CONTINENTAL EUROPE Letter to Shareholders AND LATIN AMERICA (CIB-I-CELA) Board of Managing Directors of Managing Directors Board internationalization moves forward key financials cib-i-cela The segment Continental Europe and Latin 1.1. – 1.1. –

America includes both established real estate 31.12.07 31.12.06 Change Board Supervisory markets, with a focus on western Europe, and New commitments (€ million) 12,782 13,016 –1.8% CMC emerging markets, e.g. in eastern Europe. The Segment assets (€ billion) 23.9 20.8 15.0% segment also includes the still young Latin Ameri- Total income (€ million) 388 318 22.0% can market, which we entered in September

Profit before tax (€ million) 279 248 13.0% Pfandbrief 2007 with the opening of our representative Return on equity before tax (%) 16.0 17.0 –1.0 ppt office in Mexico City. In line with the regional diversification, these real estate markets have very different structures and are at various stages

of development. Management Report Pre-tax profit for the segment as a whole pleasing performance in new markets increased by 13% to € 279 million (€ 248 mil- New business volume was on a high level, simi- lion), with favourable earnings in southern and lar with last year at € 12.8 billion (€ 13.0 billion), eastern Europe overcompensating for the slow with regional variations in the number of new growth in northern and western Europe. Buoyed contracts. With a volume close to € 7 billion, our Report Remuneration by higher margins and a higher financing volume, financing activities were focussed on our estab- net interest income was up 15% to € 287 mil- lished markets in southern Europe, where we lion (€ 249 million). High commissions on new compete primarily with German mortgage banks, business and increased fees for advisory services local financing providers and international

pushed net commission income up 45% to investment banks. Governance Corporate € 103 million (€ 71 million). Particularly pleasing were the developments This is set against a € 25 million upturn in in our new markets in Mexico and Romania, administrative expenses, which totalled € 93 where transaction volumes were as high as million (€ 68 million), attributable primarily to € 367 million and € 384 million respectively in the expansion of operations in eastern Europe our first year of local market development. In Management Bodies and higher numbers of employees. The average the Ukraine, we successfully entered the market number of employees increased by 26 as com- with new business volumes of € 76 million. In pared to the previous year, to 186 (160). Turkey, we were able to expand our new busi- At 16.0%, return on equity (RoE) remained ness volume by more than half, to € 878 million. nearly constant (17.0%). The cost/income ratio Roughly € 1.9 billion of our financing vol- was up slightly on the previous reporting year, ume went to banking partners in Germany and at 23.9% (21.5%). abroad via syndication. 28 Management Report

outlook The competitive situation in our new markets The financial market turbulence originating in the has become more favourable, prompting us to US led to uncertainty in commercial real estate increase our expansion activities. For this rea- markets in Europe and a slowing of activity on son, new business in regions including Asia- the investment market. Our broad regional Pacific, Mexico, Turkey and Romania is likely to diversification, however, has put us in a position increase in importance over the coming years. to meet the needs of our business partners with Bearing in mind our newly developed business customised financing solutions. opportunities, we continue to expect positive earnings growth in the current year. Management Report >>> Business development in the divisions >>> Corporate and Investment Banking Continental Europe and Latin America / Corporate Banking UK 29

EUROPEAN REAL ESTATE INVESTMENT BANKING Letter to Shareholders AND CORPORATE BANKING UK (CIB-I-REIB & UK) Board of Managing Directors of Managing Directors Board

positive earnings situation continues key financials cib-i-reib & uk The Real Estate Investment Banking and Corpo- 1.1. – 1.1. –

rate Banking UK segment was very successful 31.12.07 31.12.06 Change Board Supervisory in 2007. Pre-tax profit on the whole was very New commitments (€ million) 5,857 4,672 25.4% CMC pleasing, up 21% year-on-year at € 93 million Segment assets (€ billion) 7.6 7.0 9.0% (€ 77 million). Based on the strength of new Total income (€ million) 150 129 16.3% business and high margins, net interest income

Profit before tax (€ million) 93 77 20.8% Pfandbrief increased 13% to € 90 million (€ 80 million); Return on equity before tax (%) 15.1 18.2 –3.1 ppt net commission income was up 22% to total € 60 million (€ 49 million). At the same time, provisions for loan losses increased by roughly In addition to the gratifying rise in new busi-

€ 9 million, to € 11 million (€ 2 million), which ness, a major contribution came from our tradi- Management Report is solely attributable to the general loan loss tional lending business, which was 34% higher provision (GLLP). year-on-year, at € 5.7 billion. Of particular note Due to the increase in financing capital is the large number of new clients, among those requirements, return on equity (RoE) was down locally and internationally oriented real estate

by 15.1% (18.2%). As a result of the more effi- professionals, real estate companies and institu- Report Remuneration cient structure of our business units, the cost tional investors. The greatest demand for real income ratio improved to 30.8% (38.9%). estate loans was recorded in the first half of Although the number of employees increased 2007 from London. In the second half, new busi- from 57 to 64, administrative expenses were ness volume fell off, as demand declined in the

reduced by € 4 million, as planned, from € 50 wake of the subprime crisis originating in the Governance Corporate million to € 46 million. United States and due to other factors, such as the impact of inflation on the construction senior lending industry in the UK. Through the expansion of our lending business,

the development of new business was pleasing, structured financing Management Bodies growing 25% to 5.9 billion (€ 4.7 billion), despite The European Structured Finance unit is in heavy competition. The segment thus contributed charge of business with transactions marked for 16% of new business volume in the area of real securitization and other structured products for estate financing and represented 8% of the placement on European capital markets, includ- overall real estate portfolio. Roughly € 2.5 bil- ing mezzanine syndications. Following a strong lion of the financing was carried by banking start in the first half of the year, new business partners in Germany and abroad via syndication. volume declined in the second half, in reaction 30 Management Report

to the problems on the financial markets and the outlook related drying up of the market for securitiza- The UK real estate market is characterized by tions. Our clients and banking partners initially many years of rent increases and an active mar- also responded with caution to the shorter liq- ket for office and retail space. In the reporting uidity supply and rise in the price of borrowing. year, this initially had a positive impact on the Despite the more difficult conditions, we were development of our business. After dynamic able to conclude several major transactions dur- activity in the first nine months of last year, the ing the year under review. market slowed considerably in the fourth quar- ter. Experts are expecting the slowdown of the advisory economy to continue. The real estate market is Last year, our Global Advisory Team succeeded currently undergoing a slight decline in trans- in further developing our business relationships, action volumes. On the real estate investment expanding our advisory services and, conse- market, the situation on credit markets is bur- quently, gaining new clients throughout Europe. dening demand, which is likely to have an effect Our range of services in the real estate sector on returns over the course of 2008. comprises transaction consulting for mergers Due to the continued demand from long- and acquisition, strategic support and optimiza- standing clients for innovative financing solutions tion of business concepts, including the pur- and advisory services in the first nine months chase and sale of real estate portfolios as well of the year, we remain optimistic going forward as the development and implementation of an this year. We are also reaping the benefits of optimum capital structure. In addition, we offer our diverse and further expanded range of real advisory services relating to raising equity for estate financing solutions. We also see addition- real estate funds and non-listed companies. al opportunities to broaden our client base and step up our capital market activities in our coop- eration with Commerzbank Group. Management Report >>> Business development in the divisions >>> Corporate Banking UK / REIB and Corporate Banking USA 31

REAL ESTATE INVESTMENT BANKING Letter to Shareholders AND CORPORATE BANKING USA (CIB-I-US) Board of Managing Directors of Managing Directors Board core business on course key financials cib-i-us The segment Corporate and Investment Banking 1.1. – 1.1. –

USA looks back on some successful years in its 31.12.07 31.12.06 Change Board Supervisory core business, commercial real estate finance. New commitments (€ million) 7,120 7,322 –2.8% CMC In financial year 2007, the segment generated Segment assets (€ billion) 4.4 4.7 –6.4% its best result in commercial real estate since Total income (€ million) –38 156 >–100% 2003, when it commenced business in the US.

Profit before tax (€ million) –115 74 >–100% Pfandbrief The positive performance in financing of com- Return on equity before tax (%) –26.7 19.2 –45.9 ppt mercial real estate, however, does not compen- sate for the required valuation adjustments. In financial year 2007, the total value of such adjust- Despite the transfer of employees from Commerz-

ments to the value of Eurohypo’s US investment bank real estate financing to Eurohypo in 2006, Management Report portfolio, which contains subprime retail mort- administrative expenses in 2007 were reduced gage-backed securities, was € 188 million. As by € 7 million, as planned, to € 74 million (€ 81 a result, return on equity (RoE) sank to –26.7% million). (19.2%), the cost/income ratio was –198.9%

(52.3%). Pre-tax profit was € –115 million new commitments remain strong Report Remuneration (€ 74 million); adjusted for the valuation adjust- We were nearly able to match the high level of ments, pre-tax profit in the segment would have new business achieved in 2006 – even given the been € 73 million. turbulence on the US real estate market. New Net interest income increased 4% year-on- business volume in the United States was only

year, to € 87 million (€ 84 million). Net commis- marginally lower (3%), at € 7.1 billion as com- Governance Corporate sion income, on the other hand, decreased by pared to € 7.3 billion last year. When acquiring € 5 million to € 29 million (€ 34 million), due to new clients, we maintained the same standard factors including the lower number of transactions of return and risk-orientation, allowing us to concluded as lead manager. Trading income, further optimize our commercial real estate port- at € 33 million, approached the previous-year folio. The proportion of the bank’s new commit- Management Bodies level of € 36 million. The negative contribution ments in commercial real estate represented by (€ –188 million) of the result from financial US business is 19%; the proportion of overall assets is solely attributable to the valuation real estate financing business is roughly 5%. adjustments on our US investment portfolio, and In the area of syndications and securitiza- follows a positive result (€ 1 million) in 2006. tions, we were able to hold our ground in a 32 Management Report

volatile market environment. Approximately outlook € 2.2 billion in loans were syndicated to bank- The current volatility on the financial markets ing partners in Germany and abroad. A volume and the forecasts of recession in the USA have of around € 3.0 billion was placed on the capital affected the commercial real estate sector and market. Our performance in the area of securiti- all related industries over the past several months. zation was particularly noteworthy in the fourth However, we are well-positioned in the market, quarter. Although the markets for securitizations and the good performance of our commercial had largely dried up, we successfully placed a real estate business has proved the future viabil- CMBS portfolio with a volume of € 366 million. ity of our strategy. A limited volume of further In the third quarter as well, we concluded suc- valuation adjustments cannot be ruled out, but cessful capital market transactions including the we are optimistic that we will be able to suc- securitization of a loan totalling roughly $ 520 cessfully take advantage of the business oppor- million and placement of a floating rate tranche tunities available to us in an extremely difficult with a volume of $ 339 million. market environment. Management Report >>> Business development in the divisions >>> REIB and Corporate Banking USA / Public Finance / Treasury 33

PUBLIC FINANCE /TREASURY (PFT) Letter to Shareholders Board of Managing Directors of Managing Directors Board high volume of new business ties are also offered by public-private partner- Next to real estate finance, public finance is the ships (PPPs).

second core business area of Eurohypo, and, In our lending portfolio, we use modern Board Supervisory in company with Treasury activities, forms the financial instruments that allow transparent basis for the segment Public Finance/Treasury management of credit, market price and liquidity CMC (PFT). These two business areas made differing risks. Detailed information on the excellent risk contributions to the financial result in the year structure of our cover pool is available in the Pfandbrief under review. risk report on pages 52 ff. New business in public finance was particu- larly strong. Supported by continued high financ- minimal decline in earnings ing demand in the public sector, our broad Pre-tax profit in the PFT segment was down 9%

geographical coverage and our diverse product in 2007, to € 187 million (€ 205 million). This Management Report range, new loan commitments increased 29% was due in part to the 42% fall in net interest to € 20.2 billion (€ 15.7 billion). Of this, € 15.2 income to € 89 million (€ 154 million), in the billion were attributable to Eurohypo AG (€ 10.7 area of Treasury. The decrease here was attrib- billion) and € 5.0 billion (€ 4.9 billion) to Euro- utable to the decline in early prepayment penal- hypo Luxembourg S.A. As at 31 December 2007, ties, which were cut in half by the rise in inter- Report Remuneration outstanding loan volume in this segment totalled est rates during the reporting year. A further roughly € 101 billion. burden on profit came in the form of higher The systematic implementation of the inter- short-term refinancing costs in connection with nationalization strategy begun in 2004 has made a flat yield curve, resulting in decreased income

its mark on the regional distribution of our com- from maturity transformations. Governance Corporate mitments: approximately 45% of transactions In order to prevent a future deterioration were concluded with business partners abroad, of interest income, we applied a new method primarily in Italy, Spain and the USA, but also in 2007, cancelling higher-yielding refinancing in Switzerland and Greece. Our clients include instruments when loans were repaid early. national governments, as well as many local and Although the reversal of refinancing transac- Management Bodies regional governments (LRGs). tions will have a negative impact on trading income for the moment, interest income in this innovative financing solutions area will improve in the subsequent years. In addition to traditional lending business and Trading income was also affected by the debt issues, our product range includes struc- result from derivatives not used for hedge tured finance solutions and derivatives. To an accounting, which was just barely positive at increasing degree, further business opportuni- € 2 million, after € 57 million in 2006. This 34 Management Report

decline was overcompensated by the result key financials pft from financial assets, which includes gains from 1.1. – 1.1. – the disposal of available for sale assets. Taking 31.12.07 31.12.06 Change advantage of market opportunities here resulted New commitments (€ million) 20,249 15,651 29.4% in an increase from € 63 million in 2006, to Segment assets (€ billion) 112.1 123.2 –9.0% € 179 million in the reporting year. Total income (€ million) 253 269 –5.9% There was a minimal rise in administrative Profit before tax (€ million) 187 205 –8.9% expenses, to € 66 million (€ 64 million). Mea- Return on equity before tax (%) – – – sured on the basis of full-time staff, the average number of employees was 92 (90). Europe are bright as well. One of the strengths outlook in Eurohypo’s public financing business is our In 2008, less favourable economic expectations range of structured products and PPP financing will lead to growing demand for financing of solutions. In both areas, we derive benefits from public budgets worldwide. At the same time, our size as well as the availability of expertise the spreads to be achieved in many of our mar- within Commerzbank and Eurohypo’s Real kets have improved considerably, in particular in Estate segment. the area of LRGs in the United States. Together As part of the planned merger, we will with a stable array of favourable refinancing transfer the public finance business of Essen Hyp alternatives via public-sector Pfandbrief securi- to the PFT segment. The integration process will ties and Lettres de Gage, the current year thus negatively impact earnings this year. For 2010, we holds out very good possibilities for the contin- expect a significant increase in operating profit. uation of strategic expansion in our US busi- Our aim is to achieve a ranking among the top ness. Market prospects for new business in two public finance institutions in Europe. Management Report >>> Business development in the divisions >>> Public Finance / Treasury / Funding 35

FUNDING Letter to Shareholders Board of Managing Directors of Managing Directors Board leading jumbo pfandbrief issuer billion) and Lettres de Gage Publiques – which With a volume of roughly € 890 billion out- are covered bonds under Luxembourg law – at

standing, the German Pfandbrief market main- € 16.4 billion (€ 15.8 billion). The outstanding Board Supervisory tains its top position in the covered bond mar- volume of mortgage Pfandbriefe totalled € 38.9 ket, which has a total volume of approximately billion (€ 43.4 billion); other funding sources, CMC € 2,000 billion. In jumbo covered bonds with including subordinated debt, amounted to a volume of at least € 1 billion, worldwide out- € 95.0 billion (€ 95.4 billion). Pfandbrief standing volume in 2007 climbed from € 746 Funding transactions within Eurohypo Group billion to € 821 billion. The growing internation- was reduced to € 20.3 billion (€ 23.7 billion). In alization of this segment continued with new addition, Eurohypo Europäische Hypotheken- issues from Finland (€ 3 billion) and Canada bank S.A., Luxembourg, raised funds totalling

(€ 2 billion). In the year under review, jumbo € 3.3 billion (€ 4.9 billion) on the capital market. Management Report covered bonds were issued in 15 countries. In all, Eurohypo AG raised roughly € 17.0 billion With a volume of € 44.8 billion, Eurohypo AG (€ 18.8 billion) in new funding. We issued Pfand- had a 5.5% share of this market. This makes us brief securities totalling € 11.5 billion (€ 12.6 one of the leading issuers of this liquid asset- billion), of which € 6.4 billion were attributable class worldwide. In Germany, Eurohypo is the to public-sector Pfandbriefe and € 5.1 billion to Report Remuneration leading issuer of jumbo Pfandbriefe, with a mar- mortgage Pfandbriefe. Other issued debt totalled ket share of around 14.5%. € 5.5 billion (€ 6.2 billion). The high demand for other funding resulted primarily from our lower funding volume real estate business elsewhere in Europe and in

In the second half of the year, financing condi- the USA, which was previously ineligible for Governance Corporate tions on the capital markets were determined in inclusion as cover assets. large part by the effects of the US subprime cri- New subordinated liabilities totalling € 200 sis and the resulting liquidity crunch. Whereas million (€ 200 million) were also a factor. this led to a drastic widening of spreads for Internal Group funding comprised a sub- unsecured funding, Pfandbriefe remained largely stantial proportion of the unsecured share of Management Bodies unaffected. funding. In total, Eurohypo utilised € 36.9 billion Outstanding funding transactions, including (28.6 billion) of internally available funding, of subordinated debt, for Eurohypo Group was which € 15.7 billion (€ 15.5 billion) from money 5% lower year-on-year at € 197.5 billion (€ 208.1 market transactions, € 14.5 billion (€ 12.9 bil- billion). The largest proportion of this remained lion) from repo transactions and € 6.7 billion in public-sector covered bonds at € 63.6 billion (€ 0.2 billion) in borrowed funds. (€ 69.3 billion), of which € 47.2 billion were Funding of Eurohypo Europäische Hypothe- attributable to public-sector Pfandbriefe (€ 53.6 kenbank S.A., Luxembourg, was accomplished 36 Management Report

funding volume in year-on-year comparison

in € billion

2007 38.9 47.2 16.4 95.0 197.5

2006 43.4 53.6 15.8 95.4 208.1

2005 45.7 69.0 13.6 85.5 213.8 0 50 250 100 150 200

Mortgage Pfandbriefe Public Sector Pfandbriefe Lettres de Gage Publiques Other funding

through the issue of Lettres de Gage Publiques, sis. Its success once again highlights the attrac- denominated primarily in US dollars and British tiveness of Pfandbrief securities as a product pounds. This reflects our subsidiary’s focus on and our standing as a quality issuer. public finance business. benchmark commitment funding activities 2007 A core statement of our funding strategy is our In 2007, we launched three benchmark issues in benchmark commitment. We have committed the form of jumbo Pfandbriefe on excellent terms: ourselves to launching highly liquid jumbo Pfand- the year started with the launch of a three-year brief issues with volumes up to € 3 billion at public-sector global jumbo Pfandbrief in Janu- regular intervals. Due to an intensive preparation ary, which originally was to have a volume of phase we can ensure a broad and successful € 2.0 billion, but was increased to € 2.5 billion placement of the respective issue. By involving in response to the overwhelming demand. A full investors in the pricing process (pot system), 36% of the demand for this security was attrib- we guarantee a positive reception in the primary utable to central banks alone, particularly from market and – in conjunction with a market maker Europe and Asia. In April, another public-sector commitment – create the basis for positive per- jumbo Pfandbrief issue followed with a volume formance in the secondary market. of € 1.0 billion and a maturity of two and a half In addition, we provide our investors and years, in an environment of historically low analysts with detailed information, exceeding spreads. the legally required conditions, on the quality Particularly pleasing was the successful and composition of our cover assets. This infor- placement of a jumbo mortgage Pfandbrief in mation is available in the Notes to our Annual November 2007. This benchmark issue, with a Report on pages 176 ff., and is continually up- volume of € 2.5 billion and a maturity of five dated on our websites: www.eurohypo.com in the years, was launched into a capital market marked Investor Relations section, and www.eurohypo.lu by uncertainties following the US mortgage cri- for Eurohypo Luxembourg. Management Report >>> Business development in the divisions >>> Funding 37 Letter to Shareholders funding mix new funding

Subordinated issues 1% Promissory note loans 9% Bearer bonds Lettres de Gage 17%

Total: of Managing Directors Board 16% € 20.3 billion

Mortgage Pfandbriefe Public Sector 25% 32% Supervisory Board Supervisory CMC Pfandbrief

outlook this role, we will not only raise funding for The ongoing financial market crisis will dimin- Commerzbank’s first-ranking retail mortgage

ish liquidity supply as well as the confidence of business. Following the merger with Essen Hyp, Management Report the capital markets over the coming months. Up we will become the largest issuer of covered to now, the Pfandbrief market has proven stable bonds. for the most part. In 2008, two new benchmark Pfandbrief In our function as the sole Pfandbrief issuer issues are planned. The bank’s further funding

within Commerzbank Group, we also expect an demand will be based on new business in the Report Remuneration increase of activity in the Pfandbrief market. In individual segments. Corporate Governance Corporate Management Bodies 38 Management Report

RETAIL BANKING (RB)

successful transfer to commerzbank key financials retail banking In February 2007, Commerzbank took over the 1.1. – 1.1. – functions of distribution and servicing for Retail 31.12.07 31.12.06 Change Banking, one of the core business areas of our New commitments (€ million) 288 620 –53.6% parent company. The existing loan portfolio Segment assets (€ billion) 21.7 24.5 –11.4% remained with Eurohypo; the related service Total income (€ million) 190 217 –12.4% functions were assumed by Commerzbank. We Profit before tax (€ million) 42 –52 >100% are very pleased with the results of the integra- Return on equity before tax (%) 4.4 –4.8 +9.2 ppt tion, which has generated synergies in terms of both costs and income. Pre-tax profit was up year-on-year to € 42 recognisable expense for new business generated million (€ –52 million). This can be attributed by our sales partners. to the absence of € 18 million write-down of an investment as well as the non-recurring charge outlook of € 99 million taken last year. At € 81 million After merging the efficient loan processing of (€ 160 million), provisions for loan losses in the Eurohypo and the established sales channels of year under review were down by nearly half. Commerzbank in Retail Banking, we aim to make Furthermore, administrative expenses were 39% better use of Eurohypo’s refinancing expertise lower, at € 67 million (€ 109 million), resulting for the benefit of Commerzbank in the future. from the transfer in the first quarter of almost The refinancing of private first-ranking property all employees of the segment to Commerzbank. financing business of Commerzbank via Eurohypo With the transfer of sales to Commerzbank, and mortgage covered bonds is in development. In the planned reduction of the asset volume in the the context of the merger with Essen Hyp, the portfolio retained by Eurohypo, net interest in- volume of our real estate financing portfolio will come contracted by 16%, as planned, to € 205 initially increase. Scheduled redemptions and million (€ 244 million). Commission income re- other repayments, however, will successively mained at a similar level at € –9 million (€ –10 reduce the volume of existing business over the million), resulting primarily from the immediately course of the year. Management Report >>> Business development in the divisions >>> Retail Banking >>> Development of income and financial position >>> Income 39

INCOME Letter to Shareholders Board of Managing Directors of Managing Directors Board summary figures from the While our core businesses posted strong operat- income statement

ing results in 2007, pre-tax profit of € 588 million Board Supervisory in € million 2007 2006 2005 was down compared to last year’s high level Net interest income 1,179 1,249 1,340 (€ 653 million), due to valuation adjustments CMC Provisions for loan losses –259 –360 –291 of € 188 million on our US subprime mortgage Net interest income portfolio in the third and fourth quarters. Exclud-

after provisions 920 889 1,049 Pfandbrief ing these valuation adjustments, pre-tax profit Net commission income 227 177 145 would have amounted to € 776 million. Net inter- Result from hedge accounting –8 –5 –9 est income, which was hit by lower interest Net trading income –11 98 –28 income in retail banking and Public Finance/Trea- Result from financial assets –9 64 42 sury – also caused by sharply lower prepayment Management Report Result from at-equity penalties – fell to € 1,179 million down from € investments –2 –17 –31 1,249 million. Charges of € 39 million from the Result from investment redemption of high-interest bearing funding, property 16 2 0 which are included under the net trading result, Administrative expenses 542 547 513 were also taken. Report Remuneration Net other operating However, net commission income rose and income/expenses –3 7 2 the ratio of net commission income to net inter- Operating income 588 668 657 est income stood at 1:5 compared to 1:38 five Amortization of goodwill – – – years ago. This reflects our efforts to generate Restructuring expenses – 15 53

additional income through targeted expansion Governance Corporate Profit before tax 588 653 604 of our product range. The result from financial Income taxes 233 219 186 assets – excluding the impairment provision on Profit after tax 355 434 418 our US subprime portfolio – of € 179 million Key figures (in %) (€ 64 million) had a positive impact on earnings, RoE before tax 10.1 11.5 10.9 which were also increased by an improvement Management Bodies RoE before tax, without in the ‘result from investment property’, lower restructuring expenses and provisions for loan losses and a reduction in special risk provisioning 10.1 13.5 11.9 administrative expenses. RoE after tax 6.1 7.7 7.6 Due to the charge of valuation adjustments RoE after tax, without described above, pre-tax return on equity (RoE) restructuring expenses and declined to 10.1% (11.5%). The cost/income special risk provisioning 6.1 8.9 8.2 ratio, which measures the ratio of administrative CIR 39.0 34.7 35.1 expenses to income, was also affected – rising Earnings per share (in €) 1.01 1.24 1.19 from 34.7% to 39.0%. 40 Management Report

operating result by segment

in € million

2007 –115 –145 368 279 93 187 42 2006 –181 365 248 77 74 205 –52 2005 211 203 76 72 143 14 0 400 800 200 600 –400 –200 1,000

CBG CBG Non-Core CIB-I-REIB & UK RB CBG Core CIB-I-CELA CIB-I-US PFT

Further details of the individual lines of income reduction in loan loss provisions and expenses are given in the income statement The profitability of our business is significantly of the individual businesses in the segment report affected by changes in the value of the portfolio. on pages 118 ff. and in the Notes to the income We therefore pay special attention to optimising statement. The results per quarter are listed on the portfolio. The risk provision reduced by 28% page 117 of the Notes. to € 259 million compared to € 360 million in 2006. In commercial real estate finance the risk net interest income in expense was down 13% at € 174 million (€ 199 core businesses million), but the results of the individual segments While gross interest income declined, net inter- within this result varied. In Germany, provisions est in our core businesses, namely commercial for loan losses improved by around 35% through real estate finance and public finance, increased. targeted improvements in the portfolio. On the Following buoyant new business, our commer- other hand, the risk provision on our continental cial real estate finance business, for example, European, UK and US loan business, which is came in with a € 34 million increase to € 885 largely attributable to the general loan loss pro- million. For the Eurohypo Group as a whole, how- vision (GLLP), was increased but remains at a ever, net interest income was down to € 1,179 low level. In Retail Banking, risk expense fell million, from € 1,249 million in 2006. This was by around 50% from a very high level in 2006, due, for one, to a sharp decline in net interest caused by an additional risk provision of € 99 income from Treasury to a loss of € 21 million million. (€ 66 million). This, in turn, was caused by a Further details about our risk structure and € 44 million reduction in prepayment penalties, risk procedures adopted in Commerzbank Group lower maturity transformation income and inter- are given in the Notes on page 102. est rate trends making short-term finance more expensive. Secondly, the scheduled reduction high net commission income in our retail banking business and the resulting A major highlight of the year is the sharp increase decrease in interest income to € 205 million in net commission income, up again by 28%, (€ 244 million) contributed to the diminished at € 227 million (€ 177 million). We posted the result. fastest growth in corporate banking in Central Management Report >>> Development of income and financial position >>> Income 41 Letter to Shareholders income by segment1) administrative expenses by segment

in € million in € million

2007 466 390 150 149 196 85 2007 107 30 93 46 74 67 66 24 2006 464 320 129 154 234 149 2006 106 23 68 50 81 109 64 45

2005 528 265 120 143 260 243 2005 131 52 41 70 114 58 of Managing Directors Board 0 0 300 400 600 250 500 750 100 200 500 1,750 1,000 1,250 1,500 Supervisory Board Supervisory CBG CBG Non-Core CIB-I-REIB & UK RB CBG CBG Non-Core CIB-I-REIB & UK RB CBG Core CIB-I-CELA CIB-I-US PFT CBG Core CIB-I-CELA CIB-I-US PFT CMC

1) Zinsüberschuss, Provisionsüberschuss und Handelsergebnis USA Pfandbrief

Europe and UK, boosted by loan commissions The result from financial assets was diminished in our new markets and in our syndication and by valuation adjustments on our US investment securitization business. We have also developed portfolio in the third and fourth quarters, totalling

our advisory services as an independent busi- € 188 million. This portfolio is used exclusively Management Report ness, and offer them in addition to financing. for investment purposes; the assets in the port- folio are secured by subprime mortgages with lower trading income private customers. After a high 2006 result of Our New York branch’s results from CMBS busi- € 64 million, the 2007 result from financial

ness was a very welcome development. Despite assets came in as a loss of € 9 million. Report Remuneration the nervousness of investors in the second half and the weak US dollar, the € 31 million result lower administrative expenses from this business was only marginally lower than Despite high costs for the development and in 2006 (€ 36 million). Lower trading income is expansion of recent offices abroad, there was a

largely due to a less favourable result on non- small € 5 million reduction in our 2007 adminis- Governance Corporate hedge derivates trading of € 1 million (€ 57 mil- trative expenses, to € 542 million (€ 547 million). lion) and charges on the redemption of high- Our continuing cost reduction and efficiency interest payables of € 39 million. This will benefit improvement strategy in the individual business net interest income in subsequent years. lines coupled with synergies with Commerzbank

Our result from investment property surged more than offset the high set-up costs abroad. Management Bodies € 14 million, from € 2 million to € 16 million, Following the successful transfer of the sales and boosted principally by repossessed properties customer service functions in Retail Banking to that we subsequently sold when the market the Group parent company, our staff costs in this improved. The outstanding increase is largely business plunged to around € 2 million (€ 30 due to valuation gains on the properties in million), while other costs rose to € 38 million accordance with valuation at fair value. (€ 19 million) due to customer service costs. The result from financial assets includes The increase in staff costs due to our expan- income of € 179 million (€ 63 million) from sion abroad was offset by the transfer of virtually Public Finance/Treasury, which was fuelled by all retail banking staff to Commerzbank in the the active management of our public finance first quarter 2007. The staff cost ratio – i.e. staff portfolio. costs as a proportion of total expenses – stood 42 Management Report

at 57% (61%). Other costs rose by some 10% (squeeze-out). For the transfer of the Eurohypo to € 211 million (€ 191 million). shares, Commerzbank Inlandsbanken Holding GmbH offered these shareholders a cash con- controlling and profit sideration of € 24.32. Legal actions were filed by transfer agreement outside shareholders against both resolutions, On 29 August 2007, the Annual General Meet- and the squeeze-out process is thus still pending ing of Eurohypo AG approved the controlling and and has not been entered into the commercial profit transfer agreement between Commerz- register. The bank is confident of a successful bank Inlandsbanken Holding GmbH and Euro- conclusion of the upcoming legal proceedings. hypo AG. This agreement entered into force upon recording in the commercial register on 4 Sep- impairment tests confirm tember 2007. During the term of the agreement, book values Eurohypo AG is obliged to transfer its profits to The impairment tests carried out on goodwill its majority shareholder. No dividends will be confirm the book values; consequently no pro- paid on the shares; outside shareholders receive visions were recognized. a gross annual compensation payment of € 1.24. Following the successful integration of our Additionally, the Annual General Meeting new businesses into Commerzbank Group, we approved the transfer of shares belonging to out- did not incur any restructuring costs in 2007, side shareholders to the majority shareholder compared to € 15 million in 2006. Management Report >>> Development of income and financial position >>> Income / Financial position and net assets 43

FINANCIAL POSITION AND NET ASSETS Letter to Shareholders Board of Managing Directors of Managing Directors Board

For investment volumes, please refer to the state- customer service to Commerzbank AG, from ment of changes in fixed assets in the Notes. In € 24.5 to € 21.7 billion, through scheduled

2008, besides the acquisition of Essen Hyp and redemptions and other repayments. This is Board Supervisory its merger into Eurohypo, no major investments exclusively a German portfolio. Retail Banking are planned. In 2007, liquidity was maintained comprises 23% (25%) of the bank’s overall CMC at all times. Details of our liquidity management real estate financing volume. tools and limitation of liquidity risks can be found Volume in Public Finance was down by 8.1% Pfandbrief in the risk report on pages 52 ff. The cash flow year-on-year as the result of portfolio optimiza- statement and associated notes can be found on tion, from € 109.3 billion to € 100.5 billion. pages 90 ff. of the Notes. The minimum reserve Here as well, we maintain broad geographical commitments of the Bundesbank and the princi- distribution. The proportion attributable to Ger-

ples laid down by the German Financial Super- many is 57% (59%). This reduction is partially Management Report visory Authority (BaFin) were met during the compensated by the diversification of the Public year under review. Finance portfolio relating to the expansion of off-balance sheet business via credit derivatives portfolio expanded in business with public-sector clients.

commercial real estate As a result of the volume reduction in pub- Report Remuneration The real estate financing portfolio in Commer- lic finance business, the total group assets were cial Real Estate grew by € 1.5 billion in the year down € 10.1 billion or 4.5%, from € 224.3 bil- under review despite the utilisation of capital lion to € 214.2 billion. market-oriented products like syndications and On the liability side, funding volume

securitizations, from € 73.0 to € 74.5 billion, decreased as a result of the overall lower volume Governance Corporate with increasing regional and client group diver- of financing transactions. Securitised liabilities sification. The portfolio is now distributed almost declined by € 8.5 billion or 7.9%, to € 98.6 bil- evenly between Germany, € 38.1 billion or 51% lion. Of this amount, € 51.0 billion was attribut- (€ 40.1 billion or 55%) and other countries, able to public-sector Pfandbriefe, € 29.6 billion

€ 36.5 billion or 49% (45%). At 87% (86%), to mortgage Pfandbriefe and € 18.0 billion to Management Bodies the financing volume outside Germany remains other issued debt. Liabilities to banks and clients concentrated in Europe, whereas 12% (14%) were down € 2.2 billion to € 94.8 billion. Liabil- are attributable to the USA. ities to banks include liabilities from repo trans- In Retail Banking, the volume of private real actions totalling € 33.7 billion (€ 34.7 billion). estate financing transactions was reduced by € 2.8 billion following the transfer of sales and comfortable capital base Total capital in accordance with BIS remain capital ratios according to bis unchanged at € 9.3 billion, and comprises tier 1 in % 2007 2006 2005 core capital of € 6.5 billion (€ 6.5 billion) and Tier I capital ratio 7.4 7.2 7.5 tier 2 additional capital of € 2.8 billion (€ 2.8 Total capital ratio 10.7 10.4 10.7 billion). Core capital includes hybrid capital, the 44 Management Report

volume of which remained constant at € 0.9 bil- is largely attributable to valuation changes within lion. the subprime portfolio and to temporary valua- The proportion of additional capital compris- tion changes in the case of long-dated investment- ing capital represented by profit-sharing rights grade public finance securities. increased by € 0.2 billion to € 0.6 billion, whereas subordinated liabilities declined by € 0.2 billion disclosures in accordance with to € 2.0 billion. The general provisions credited sections 289 (4) and 315 (4) hgb to tier 2 capital remain unchanged at € 0.2 bil- As at 31 December 2007, the subscribed capital lion. of Eurohypo AG amounted to € 913,688,919.00; Risk-weighted assets decreased by € 1.1 bil- divided into 351,418,815 no-par value bearer lion year-on-year, to € 88.4 billion. This is due shares. The shares are fully paid up. Each share in particular to portfolio measures taken in Credit entitles the holder to one vote. There are no Portfolio Management, such as endorsements restrictions with regard to voting rights or the and synthetic securitizations using credit default assignment of shares; there are no shares carry- swaps (CDS), which transfer credit risks to ing special rights. Commerzbank AG, Frankfurt investors. Portfolio rebalancing in public finance am Main, holds 93.63575% of the shares in business, as well as higher payout obligations, Eurohypo AG via Commerzbank Inlandsbanken on the other hand, resulted in a higher BIS risk Holding GmbH, Frankfurt am Main, and weighting. 5.12209% via AFÖG GmbH & Co. KG, a subsidiary As at 31 December 2007, this resulted in a of Commerzbank Inlandsbanken Holding GmbH, 0.2% improvement in the BIS tier 1 capital ratio amounting to a total of 98.76% of Eurohypo AG to 7.4% (7.2%), and an improved total BIS ratio shares. of 10.7% (10.4%). With a view as well to the The Board of Managing Directors, with the future regulatory requirements under Basel II, consent of the Supervisory Board, is authorized which will result in a reduction in risk assets for until 16 May 2009 to increase the share capital Eurohypo, a comfortable capital base is available of the bank by up to € 182,728,000.00 in a sin- to permit further dynamic growth. gle action or in partial amounts, through the The bank’s equity totals € 5.6 billion (€ 6.2 issue of new non-par value bearer shares against billion). An addition of € 0.2 billion was made cash contribution or contribution in kind. It may to retained earnings. A distribution of net profit exclude shareholders’ subscription rights if the totalling € 0.4 billion in 2006 resulted in a cor- capital increase against contributions in kind is responding reduction of equity. Based on the carried out for the purposes of acquiring com- profit transfer agreement concluded with Com- panies, company divisions or corporate invest- merzbank Inlandsbanken Holding GmbH in ments. If shareholders’ subscription rights are 2007, no net profit was recognized by the bank not excluded, shareholders must be offered sub- as at 31 December 2007. The revaluation reserve scription rights with the provision that the new relating to AfS securities (Available for Sale) was shares be underwritten by a banking syndicate € 0.5 billion lower at – € 0.4 billion. The decline that undertakes to offer the shares to sharehold- Management Report >>> Development of income and financial position >>> Financial position and net assets 45 Letter to Shareholders Board of Managing Directors of Managing Directors Board

risk-weighted assets in accordance with bis as at december 31, 20071) in € million Supervisory Board Supervisory Risk-weighted assets 100% 50% 25% 20% 10% Total On balance sheet transactions 59,851 11,080 – 6,458 – 77,389 CMC Off balance sheet transactions 831 6,547 41 340 3 7,762 Derivatives – 331 – 362 – 693

Total 60,682 17,957 41 7,160 3 85,843 Pfandbrief Amount of market risk position included multiplied by 12.5 161 Amount of securitization positions 2,425 Total – positions that must be included 88,429

1) Eurohypo is not participating in the official procedure concerning the implementation of the Basel agreements on new capital accord issues. Management Report Management Report

ers for subscription. In addition, the Board of more persons; the Supervisory Board determines Managing Directors is authorized, with the con- the number of members. The Supervisory Board

sent of the Supervisory Board, to exclude share may appoint a member of the Board of Manag- Report Remuneration fractions from shareholders’ subscription rights. ing Directors as Chairman and members of the The Board of Managing Directors may only Board of Managing Directors as Deputy Chair- acquire shares of the bank in accordance with men. section 71 of the German Stock Corporation Act The compensation agreement which the

(Aktiengesetz – AktG) and requires authorisa- bank has concluded with the members of the Governance Corporate tion from the Annual General Meeting under Board of Managing Directors in case of a take- certain conditions described therein. There are over, is explained in the remuneration report on currently no such cases. pages 68 ff. In accordance with section 179 (2) AktG, The bank is party to no agreements subject

amendments to the Articles of Association require to the condition of a change of control as a result Management Bodies a majority of at least three-quarters of the share of a takeover bid. To the extent that employees capital represented at the time of the resolution. hold shares in the bank, they exercise the related In accordance with section 84 AktG, the Super- voting rights directly. visory Board appoints the members of the Board Given the entry into force of the controlling of Managing Directors for a maximum of 5 and profit transfer agreement between the bank years. The dismissal of members of the Board and Commerzbank Inlandsbanken Holding GmbH of Managing Directors by the Supervisory Board on 4 September 2007, the publication of a report is subject to the same provision. In accordance on relationships with affiliated companies is no with section 6 of the Articles of Association, the longer required, since the said agreement has a Board of Managing Directors comprises two or retroactive effect from the beginning of 2007. 46 Management Report

OUR EMPLOYEES

successful integration In 2007, Eurohypo once again hired nine uni- into commerzbank versity graduates with permanent contracts of In the financial year 2007, the integration of employment. The graduate traineeship program Eurohypo into Commerzbank Group continued to spans one year, and the eventual field of activity dominate all issues relating to human resources. The employees of levels A and B at Eurohypo now have access to the Commerzbank long international employee structure term incentive plan, as well as the Commerzbank Change employee share program, which has replaced 20071) 20061) in % the scheme previously offered by Eurohypo. Germany 1,345 1,768 –23.9 Mutual access to the internal job markets – based Outside Germany 400 381 5.0 on a uniform equal opportunities policy for all Amsterdam 12 12 0.0 employees – also opens up new career prospects. Athens 5 5 0.0 Budapest 3 4 –25.0 from initial professional training Helsinki 2 3 –33.3 to graduate trainee programs Copenhagen 4 4 0.0 Eurohypo remains committed to promoting Lisbon 9 8 12.5 qualified young talent. In the year under review, London 100 94 6.4 twelve young people successfully completed their Madrid, Barcelona 31 25 24.0 bank training and, like those who completed the Milan 17 14 21.4 training last year, were offered career opportu- Moscow 6 3 100.0

nities in the form of permanent employment New York, Chicago, L.A. 147 155 –5.2 contracts. In August, twelve young men and Paris 29 26 11.5 women began their professional training at the Prague 3 3 0.0 bank, of which were the first students of the dual Stockholm 8 11 –27.3 studies program. This three-year integrated Warsaw 4 3 33.3 course of studies with the Hessische Berufs- Zurich 4 3 33.3 akademie Frankfurt (Hesse State Professional Other locations 16 8 100.0

Academy Frankfurt) provides trainees with the Total Eurohypo AG 1,745 2,149 –18.8 opportunity to gain a Bachelor of Arts, while at

the same time completing the Chamber of Com- Consolidated companies merce bank traineeship program in the first two Germany 245 215 14.0 years. Initial professional training at Eurohypo Outside Germany 44 35 25.7 is carried out in cooperation with Commerzbank. Total 289 250 15.6 At the end of the reporting year, a total of 20

young people were in some form of training at Total Group 2,034 2,399 –15.2 our bank. 1) As at December 31 Management Report >>> Our Employees 47 Letter to Shareholders Board of Managing Directors of Managing Directors Board

in which the participants will work is decided at corporate structure the beginning of the term. of eurohypo ag

Recruitment at universities is conducted in Change Board Supervisory 2007 2006 in % cooperation with Commerzbank. Joint exhibits

Operational units 885 1,313 –32.6 CMC at job fairs, such as the Hobsons Graduate Con- CIB1) Continental Europe 195 170 14.7 ference in Cologne (300 companies and 12,000 CIB USA/UK/Asia-Pacific 196 195 0.5 career starters), offer a platform for broad-based Corporate Banking Pfandbrief marketing and targeted selection of suitable Germany 413 435 –5.1 candidates. Retail Banking 3 4542) –99.3 qualification and development Public Finance/Treasury 61 59 3.4 Corporate Center 860 836 2.9 programs Management Report Total 1,745 2,149 –18.8 Integration of the QNet, the online qualification catalogue of the Commerzbank Group, has now 1) Corporate and Investment Banking 2) Thereof 97 with temporary contracts. been firmly established and makes the range programs offered transparent; seminars can be booked directly via the joint platform. The Report Remuneration management seminars aimed at anchoring the exchange of knowledge and expertise between employee shares with high the two companies were very popular. After the participation rate successful harmonisation of segment-specific As in 2006, we once again rewarded the commit-

and IT seminars, overall participant numbers ment and performance of Eurohypo employees Governance Corporate were consolidated. Demand for qualification in the year under review with the offer of shares programs offered by internal and external at preferential terms. With a participation rate providers, however, remained very high, with that was 66.6% (57.2%) higher year-on-year, more than 1,000 registrations. the offer to subscribe Commerzbank shares met

Those who completed our professional with a very positive response. Management Bodies development programs have benefited from the available opportunities. More than half moved systematic restructuring continued to a different employment level or a different The process and structural improvements in field of work promptly at the end of the program. Retail Banking under our cost and earnings Based on the continued strong demand for high- optimization program were finalized in 2007. ly qualified and multi-functional employees, we The transfer of operations of CORECD Commerz renewed the Performance Program in 2007. This Real Estate Consulting and Development GmbH is also in line with the goal of the bank, to develop was also completed successfully. In 2007, the potential management talent and create a com- job reduction target at Eurohypo AG was only prehensive understanding of the complex world approximately 2%, which was achieved as of the Group. planned. 48 Management Report

For financial year 2008, planned measures in- tures during the year) amounted to 11.4% in clude integration of Eurohypo’s human resources 2007 (9.0%) and the absentee rate was 2.9% activities into the central Human Resources (3.3%). The proportion of part-time employees department at Commerzbank. The focus of this was 9.9% (11.3%). is on harmonisation of human resources activi- ties, to allow the use of the best personnel man- thanks for your commitment agement systems, processes and products on and outlook platforms throughout the Group, in the context Eurohypo has successfully continued to position of harmonised and centralised management of itself within Commerzbank Group, while at the HR functions. same time proving its own ability to perform. The staff changes which took place at Euro- The bank is well-prepared for continued inte- hypo AG in 2007 reflect a shift from the Corpo- gration into Commerzbank Group. A new chal- rate Centers and Corporate Banking Germany lenge in the current year will be the integration towards the expanding international units and of the 203 employees of Essen Hyp into Com- the Public Finance/Treasury segments. In addi- merzbank Group, which will be one of the main tion, it is also clear that the growing and finan- human resources tasks within Eurohypo. cially successful international units continued We would like to take this opportunity to to recruit staff in 2007, with Germany gradually express our thanks to all employees for their implementing its planned restructuring meas- commitment. We would also like to give special ures. thanks to the members of the Staff Council and In 2007, the average number of years of its committees, as well as the committee repre- service at Eurohypo AG in Germany was 14.07 senting senior executives. Their constructive and years (13.0 years) and the average age was 41.29 diligent work has contributed to the success of years (41.0 years). The staff turnover rate (depar- our bank. Management Report >>> Our Employees / Group structure and corporate investments 49

GROUP STRUCTURE AND CORPORATE INVESTMENTS Letter to Shareholders Board of Managing Directors of Managing Directors Board group structure eurohypo europäische Eurohypo is Europe’s leading specialist provider hypothekenbank s.a.

of real estate and public finance, developing The activities of Eurohypo Europäische Hypo- Board Supervisory markets in Europe and, increasingly, major and thekenbank S.A. focus exclusively on public-sec- emerging real estate markets worldwide. Our tor financing in OECD countries. Its acquisition CMC business activities cover the seven segments activities in France, Belgium, Luxembourg and described in detail on pages 118 ff. All opera- Switzerland, coupled with a major role as the Pfandbrief tional units are consistently managed as profit second issuing entity in the Eurohypo subgroup centres. To achieve this, we use an integrated underline the company’s strategic importance control system, which ensures targeted man- for the Public Finance division. The year under agement and leadership in the business units. review saw a 1.5% increase in total assets at

Eurohypo Europäische Hypothekenbank S.A., Management Report corporate investments from € 25.8 billion to € 26.2 billion, with equity Once again in financial year 2007, the scope of of € 330.6 million, after € 291.7 million in the Eurohypo’s strategic investments was expanded. previous year. In addition to Eurohypo Europäische Hypothe- New lending business remained practically kenbank S.A., Luxembourg, Eurohypo Systems constant at € 5.0 billion (€ 4.9 billion), and net Report Remuneration GmbH, EH Estate Management GmbH (formerly interest and commission income declined from Casia Immobilien Management GmbH), Servic- € 42.7 million to € 40.4 million. After net income ing Advisors Deutschland GmbH and Eurohypo from financial transactions and expenses, the (Japan) Corp., Tokyo, the following two com- operating result before provisions for loan losses

panies were added to the portfolio: KENSTONE totalled € 85.3 million (€ 49.0 million). This Governance Corporate GmbH and Eurohypo Representacoes Ltda. In resulted in an 87% increase in after tax profit, accordance with their importance for the Group, which reached € 58.9 (€ 31.4 million) and easily strategic corporate investments are assigned tops the record result of the previous year. This directly to the appropriate operational unit or is the best result in the 18-year history of Euro-

Corporate Center for the purposes of organisation hypo Europäische Hypothekenbank S.A. The Management Bodies and reporting. All other corporate investments figures for the company are reported in the of the bank are handled by CC Legal, whose tasks segment report under Public Finance/Treasury include monitoring regulatory requirements and (further information from page 118 onwards). optimising the investment portfolio. Further explanations on the corporate investments and eurohypo systems gmbh an overview of Eurohypo’s shareholdings as at At Eurohypo Systems GmbH, a wholly owned 31 December 2007 are available in the notes on subsidiary of Eurohypo, issues relevant to IT are pages 172 ff. planned on the basis of the overall bank strategy, 50 Management Report

and developed up to the production stage in Japanese market last year, its first full financial line with the highest quality standards. The Chief year of business. Lending business amounted Information Officer of Eurohypo is in charge of to € 933 million. Net interest and commission the company as part of his duties within Com- income totalled € 5.1 million. merzbank Group. The company’s nominal capi- Japan features the second largest national tal totalled € 550,000 as at 31 December 2007, real estate market in the world, and is currently with total assets of € 19.2 million (€ 23.0 mil- showing positive signs, after years of price lion). The profit of € 3.2 million (€ 5.8 million) declines. Metropolitan Tokyo, in particular, is was transferred in full to Eurohypo on the basis in the midst of a construction boom, while the of the existing control and profit and loss trans- heavily populated regions around Nagoya and fer agreement. Osaka are experiencing rising property prices, with office supply barely able to keep pace with eh estate management gmbh demand. Share capital at Eurohypo (Japan) Corp. (formerly casia immobilien totals approximately € 17.6 million, in Euro terms. management gmbh) Total assets (in Euro terms) as at 31 December EH Estate Management GmbH is a wholly owned 2007 amounted to approximately € 492 million subsidiary of Eurohypo and linked to it through (€ 43 million); net profit was roughly € 655,000. a controlling and profit transfer agreement. The company provides various real estate-related serv- kenstone gmbh ices to the Group. In particular, it manages the Since the beginning of 2007, KENSTONE GmbH development and marketing of properties, which has been active on the market as a specialist for the bank has acquired as a result of restructur- real estate appraisal and consulting. The com- ing by relevant special purpose companies. EH pany’s focus is on calculation of market and Estate Management GmbH is equipped with mortgage lending values of real estate, and the nominal capital of € 26,000. Total assets totalled issuing of corresponding appraisals. Other serv- € 3.9 million as at 31 December 2007 (€ 5.8 ices include portfolio valuation, due diligence, million), and the profit of € 0.26 million (€ 0.17 construction cost monitoring, market and prop- million) was transferred to Eurohypo based on erty rating, consulting. From six offices through- the existing profit transfer agreement. out Germany, a total of 31 employees serve clients, including Eurohypo and Commerzbank, eurohypo (japan) corp. other national and international banks, insurers, Tokyo-based Eurohypo (Japan) Corp., opened institutional investors and national and interna- in June 2006, and its staff of 12 employees suc- tional small and medium sized enterprises, as ceeded in establishing a good position in the well as tax consultants and audit firms. Management Report >>> Group structure and corporate investments 51 Letter to Shareholders Board of Managing Directors of Managing Directors Board

The company is equipped with nominal capital tained positive impact on the state of national of € 26,000. As at 31 December 2007, total real estate markets. Initially, the company is

assets amounted to € 3.4 million; net profit was targeting international market participants, with Board Supervisory € 1.2 million, which was transferred to Eurohypo whom Eurohypo is already working in other under profit transfer agreements. markets. CMC eurohypo representacoes ltda. servicing advisors deutschland gmbh Pfandbrief The most recent addition to the group of strate- Servicing Advisors Deutschland GmbH – a joint- gic corporate investments is Eurohypo Represen- venture with Citigroup and Capmark Financial tacoes Ltda., headquartered in Sao Paolo, Brazil, Group Inc. – is a specialist for non-performing which was founded in December 2007. The consumer real estate loans. From six Germany-

company is equipped with € 0.20 million in based offices, Servicing Advisors Deutschland Management Report share capital, and as a representative office of provides market-oriented management of NPLs. Eurohypo, aims at providing an optimum entry In light of the uncertainties among financial point to the Latin American subcontinent, and and, in particular, lending institutions triggered especially Brazil. In recent years, the real estate by the subprime crisis, the market for services markets of Latin America in general have seen relating to non-performing loans has not per- Report Remuneration growing interest among investors – especially formed as expected. Consequently, no new port- internationally – coupled with greater profes- folios were acquired in the year under review. sionalisation of local property players. The boom- As at 31 December 2007, the nominal capital of ing commodities sector for raw materials make the company totalled € 3.0 million, with total

Brazil, along with China, India and Russia, assets of € 7.5 million (€ 18.8 million) and a net Governance Corporate potentially one of the fastest growing emerging result of € –4.2 million (€ 1.2 million). markets, a development that will have a sus- Management Bodies 52 Management Report

RISK REPORT

highlights 2007

The integration of Eurohypo into the risk management system of Commerzbank proved to be a practical success; uniform risk management throughout the Group was further expanded.

The aims for 2007 relating to the Basel II project have been achieved following completion of the first IRBA audits.

In 2007, Eurohypo implemented the ICAAP (Internal Capital Adequacy Process), whereby it measures and communicates risk-bearing capacity on a quarterly basis.

A capital adequacy assessment was carried out for Eurohypo in 2007 in accordance with section 3 of the Pfandbrief Act (Pfandbriefgesetz – PfandBG) in conjunction with section 44 of the German Banking Act (Kreditwesengesetz – KWG). Its findings confirmed compliance of our processes in the Pfandbrief business with regulatory requirements.

Moodys Rating Agency raised the rating for our Mortgage Pfandbrief securities to the best grade “Aaa”.

Integration into the Commerzbank Group and the strong position of Eurohypo as one of the leading Pfandbrief issuers meant that the subprime crisis had only a limited impact on the liquidity situation of the bank. Management Report >>> Risk Report 53 Letter to Shareholders Board of Managing Directors of Managing Directors Board introduction principles Our risk management encompasses all process- foundations of risk management es of risk control and monitoring (controlling). Board Supervisory aims All risk management methods and processes Risk management is a core competency of Euro- undergo continuous systematic development. CMC hypo. The aim of risk management is to guaran- The basis of our risk policy is the risk strat- tee that all assumed risks are identified at an egy. Building on generally applicable principles Pfandbrief early stage and held within limits by way of for a common understanding of risk among all effective risk monitoring. Ensuring a balanced units of the bank, overall guidelines are defined relationship between risk and return is our on how to deal with credit risks, market and liq- overriding goal. uidity risks, reputational risks, legal, investment

portfolio and operational risks. In addition to Management Report integration into the group strategic statements, specific action-based The new group structure has led to staffing and statements are made on material types of risk. organisational changes in Risk Management. The risk strategy forms an integral part of With Eurohypo’s integration into Commerzbank the comprehensive bank management.

Group, responsibility for risk methodology has It is revised every year, approved by the Report Remuneration been placed with the Group parent company. Board of Managing Directors and adopted by The continued development of a uniform system the Risk Committee of the Supervisory Board. of risk management will thus be realised at Group As a supplement to the risk strategy, risk level in the future. Additionally, some functions policies define the further implementation of

of operational risk controlling have been out- the statutory and internal bank requirements. Governance Corporate sourced to Commerzbank. In return, Eurohypo’s Board of Managing Directors and managers organisation of risk management were integrated into the committees at Group As a comprehensive bank function, risk manage- level. ment is anchored within all organisational and

Integration of Eurohypo also entailed Group- process levels. There is a strict organisational Management Bodies wide harmonisation of the lending approval struc- separation between risk management and the ture. Based on rating and credit exposure, all business units – extending to the responsibilities important lending decisions are made according for these areas at Board of Managing Directors to uniform principles. level. The roles and responsibilities of the busi- 54 Management Report

corporate center risk management

credit risk intensive care real estate eurohypo risk management department/special appraisal & consulting controlling loan management

operative risk manage- managing higher risk neutral assessment introduction, validation ment and credit risk engagements of real estate and further development control restructuring development of processes of models and methods independent credit processing and systems for risk controlling assessment and decision real estate research monitoring and reporting in case of lendings of credit, market, liquidity development of credit and operational risks processes and guidances portfolio analysis and assessment

* Will be realised in cooperation with Commerzbank.

ness units and the Corporate Centers are clearly Credit risks are managed by the bank’s Credit defined and documented, and there is no over- Committee, which is established as the “CRE lap in terms of competencies. Structural organi- Subcommittee” of the Group Credit Committee. sation is in line with the risk structures of the bank. As a part of the Corporate Center, CC Risk Audit Management is independent, and reports directly The Audit department reviews the internal con- to the responsible Board member, the Chief trol system, risk management and controlling, Risk Officer (CRO). The CRO is responsible for as well as operational and business processes. It implementation of the risk policy guidelines is commissioned by the full Board of Managing defined by the Board of Managing Directors. Directors to work autonomously and independ- The above graphic depicts the structural organi- ently, and reports directly to the Board of Man- sation and the duties of CC Risk Management. aging Directors. The Board of Managing Directors is also The work of the Audit department is based supported by specific committees within Euro- primarily on the Minimum Requirements for hypo. Risk Management (MaRisk) issued by the Ger- The Risk Management Committee (RiMCo) man Federal Financial Supervisory Authority regularly assesses the bank‘s overall risk situa- (BaFin). tion, and discusses and resolves any fundamen- tal issues. Basel II The local Asset Liability Committee (ALCo) Eurohypo launched preparations for the new is central body for management of market and regulatory regime at an early stage and com- liquidity risks within Eurohypo. pleted implementation of the Basel II require- Management Report >>> Risk Report 55 Letter to Shareholders assessment of risk bearing capacity

Available cover assets 9,760 Going concern capital 6,000 Risk capital 3,760 Available cover assets and risk capital Board of Managing Directors of Managing Directors Board

Overall risk Overall risk 2,660 Credit- & market risk 1,920 Risk capital 3,760 Operational risk 110 Overall risk 2,660 Business risk 100 Surplus cover capital 1,100

Risk buffer 530 Economic risk bearing capacity 142% Board Supervisory CMC Pfandbrief

ments throughout the bank in the year under of Eurohypo. To this end, the aggregated risk of review. As of 1 January 2008, Eurohypo will the subgroup is matched against the available begin to apply the Advanced Internal Ratings covering assets. The available covering assets

Based Approach (IRBA), as this is the only way are calculated very conservatively in accordance Management Report to ensure optimum capital management. with the going concern principle. The results Due to the Group application submitted by indicate that the bank had the capacity to bear Commerzbank in March 2006 for admission to its risks at all times during 2007. the IRBA, Eurohypo is integrated into the IRBA

process of the Group parent company. risk management Report Remuneration The supervisory review for admission to the risk control IRBA took place in three separate stages, during Eurohypo and Commerzbank have a uniform which the portfolios of the Group were combined. Group concept for comprehensive bank manage- The Commercial Real Estate and the Financial ment.

Institutions portfolios were audited as scheduled The individual quantitative risks are con- Governance Corporate in the fourth quarter of 2006, as part of the first trolled through the setting of targets or limits. stage of the supervisory review. The second stage The central management parameter for credit (public finance) and third stage (retail banking) and operational risk is expected loss (EL). This audits were carried out as planned in the year is based on the risk parameters under Basel II.

under review. All stages of the supervisory review Market price risks are controlled and monitored Management Bodies process were completed successfully, meaning daily by calculating Value-at-Risk (VaR). that Eurohypo will be able to apply the Advanced At Group level, Eurohypo is integrated into IRBA as planned at the soonest possible point in the economic capital concept. The primary result time. is a loss distribution, which permits definition of probabilities of possible losses (unexpected Risk bearing capacity loss, UL) in lending business. Risk is measured In the context of the ICAAP (Internal Capital at a confidence level of 99.95%, with an obser- Adequacy Assessment Process) a bank-specific vation period of one year. assessment is made as to the risk bearing capacity 56 Management Report

rating structure commercial real estate1) rating structure retail scoring of existing business1)

cb 4.0 – 5.8 cb 1.0 – 1.2 cb 3.0 – 3.8 4% cb 4.0 – 5.8 1% 9% cb 2.8 1% 2% cb 3.0 – 3.8 cb 1.4 cb 2.6 2% 5% 11% cb 2.8 cb 1.6 cb 2.4 3% 5% 8% cb 2.2 3% cb 1.2 54% cb 2.6 cb 1.8 cb 2.0 5% 7% 14% cb 1.8 7% cb 2.4 cb 2.0 cb 1.6 10% 10% 14% cb 2.2 cb 1.4 9% 16%

1) Rating structure without credits in default 1) Rating structure without credits in default according to Commerzbank Master Scale according to Commerzbank Master Scale < cb 2.8 = investment grade < cb 2.8 = investment grade

risk reporting accordance with recognized and reliable methods The Board of Managing Directors and the Risk and where quantitative information is material Committee of the Supervisory Board are kept in- to the decision-making process. Non-quantifiable formed of all material risks by means of estab- risks are integrated in a qualitative risk manage- lished reports, the principal of which is the Quar- ment process. terly Risk Report. These reports provide informa- For the quantification and control of signifi- tion on the risk situation in all operational units cant individual risks, Eurohypo draws a distinc- and portfolios, as well as on the real estate mar- tion between credit, market, liquidity and opera- kets, early risk identification, the largest NPLs tional risks. and risk provisioning and risk bearing capacity. Supplementary information on the risk report In “batches”, information is also provided on has been included in the Notes. specific sectors or country types. Furthermore, regular risk reports are prepared on separate credit risk sub-portfolios and market price risk, as well as Credit risk, or counterparty default risk, is the ad hoc reports on relevant occurrences. risk of loss due to default by a business partner or the downgrading of a business partner’s credit types of risk rating. Credit risk also includes replacement Risk is defined as unexpected events and possi- risks and settlement risks. ble developments, which are detrimental to the achievement of defined targets and expectations. Corporate and investment Banking Relevant risks are those which impact materially The operational unit, Corporate and Investment on net assets, financial position and operating Banking, is mainly responsible for financing result. It is sensible to group together similar, commercial real estate, covering a full range from organisationally or functionally related risks into traditional fixed-interest loans, to structured types of risk. Risks are assessed quantitatively, to financing to real estate investment banking; loans the extent possible and commercially viable, in are generally secured through land charges or similar rights. Management Report >>> Risk Report 57 Letter to Shareholders commercial real estate commercial real estate by country by property type

Remaining EU countries Others Industry 1% Others 11% 6% 11% Management Italy property 1% 4% Construction site 3% Office France Germany of Managing Directors Board 36% 6% 46% Market/fair/warehouse facility 4% USA 7% Hotel 5% Retail Space Spain UK Residences 23% 10% 10% 16% Supervisory Board Supervisory CMC Pfandbrief

Risk assessment is performed using our Group- In order to limit concentration risks, the granu- wide rating system known as RS-CRE (Rating larity of the portfolio is generally controlled via specialized Commercial Real Estate). geographic and product-specific sub-limits.

This rating procedure involves both valua- Country risks in the CRE portfolio are addi- Management Report tion of the property and assessment of the bor- tionally limited through nominal country limits, rower’s creditworthiness. The two figures are of which only 60% (approx. € 6 billion) were then aggregated into an overall rating. A Group- utilised. wide master scale is used to classify the ratings

based on expected loss. The rating system is an Retail Banking Report Remuneration integral component of risk assessment and con- In February 2007, Commerzbank assumed the trol within the Group, and provides the basis for functions for sales and service in the Retail calculating risk costs and limitations. Banking unit. The risks remained with Eurohypo Our credit risks are controlled using bor- and, thus, so did inclusion in results and risk

rower-specific limits. Additionally, risk-adjusted provisioning. Governance Corporate portfolio limits are in place. The system of limits As before, our focus is on the land charge- is based on expected loss, and thus takes into secured financing of low-risk real estate (pri- account the different levels of risk entailed by vately-owned flats, one and two-family homes, individual exposures. completed multi-unit buildings) in Germany;

The total limit for our commercial real estate here as well, more than 90% of the exposures Management Bodies (CRE) portfolio is € 222 million, of which € 213 are investment grade. million had been utilised as at the reporting date. Of this amount, € 132 million is attributable High-risk exposures to regions in Germany, and € 81 million to Any exposures that indicate elevate levels of Europe, USA and Asia. risk are subject to risk-adequate measures by Over 90% of the loans in our CRE portfolio our specialists in the Intensive Care Department/ are investment grade, so that the high quality of Special Loan Management (ICD/SLM). the portfolio remains unchanged. 58 Management Report

development of risk provisions net risk provisions by sector

CIBI UK Others 4% 1% Interest specific loan CIBI CE loss allowance 7% 11% CBG Direct writedowns Retail 57% less inflows 31% 19% Capital specific loan loss allowance 70%

In addition to active management, with the aim than 90 days, impaired loans or those against of minimising the risks and preventing bad debt which legal recourse has been taken, as well as write offs, the portfolio is subject to regular moni- loans with a rating of cb 6.0 or lower. As at the toring, checks and adjustments in the event of end of December 2007, the exposures in default impairments, as well as a final “post mortem” portfolio totalled € 5.371 million, for which col- analysis. lateral in the amount of roughly € 3.090 million For information on the realisation of collat- is available as well as specific provisions of eral, please refer to the Notes. € 2.077 million. Past-due interest and principal payments on Development credit risk provisioning loans not yet officially in default, at the report- In the context of integration into the Group, steps ing date amounted to € 744 million; € 580 mil- were taken to ensure the application of uniform lion of this amount had been received by the valuation metrics. Risk provisioning is deter- end of January 2008. mined in accordance with IFRS. For the calcula- tion of the GLLP (General Loan Loss Provision), Subprime mortgages we used the parameters under Basel II. Our bank does not finance private real estate in Risk provisions totalled € 259 million, down the United States, but holds investments in secu- from last year’s level of € 360 million. For 2008, rities (primarily Residential Mortgage Backed we expect net risk provisions to be no higher Securities – RMBS), with subprime mortgages than the 2007 level. In light of the prevailing as underlyings. In 2007, Eurohypo realised an uncertainties on the capital markets and the real impairment provision totalling € 188 million for estate crisis in the United States, however, a these receivables, the total volume of which was revision of plan figures cannot be ruled out, if approximately € 800 million. the general situation deteriorates further. The basis for this was the dramatic deterio- The definition of the default portfolio was ration of the market, due to a rate of defaults on also harmonised between Commerzbank and the underlying subprime mortgages therefore Eurohypo. In line with Basel II, we define unseen. This led to massive downgrades of the “default” as loans exhibiting delinquency of more securities by the rating agencies. Management Report >>> Risk Report 59 Letter to Shareholders abx he 06-02

in %

100 90 80 70 Board of Managing Directors of Managing Directors Board 60 50 40 30 20 10 Supervisory Board Supervisory 07.11 17.11 27.11 07.12 17.12 27.12 07.03 17.03 27.03 01.04 11.04 21.04 01.05 11.05 21.05 31.05 03.10 08.10 13.10 18.10 23.10 28.10 02.11 12.11 22.11 02.12 12.12 22.12 02.03 12.03 22.03 06.04 16.04 26.04 06.05 16.05 26.05 05.06 10.06 15.06 20.06 25.06 30.06 05.07 10.07 15.07 20.07 25.07 30.07 04.08 09.08 14.08 19.08 24.08 29.08 03.09 08.09 13.09 18.09 23.09 28.09 CMC

AAA AA A BBB BBB– Pfandbrief

The dramatic nature of the deterioration is doc- Cover portfolio

umented most transparently by the loss in value Eurohypo is a major bond issuer and market Management Report of the subprime indices. For example, the ABX leader in the Pfandbrief segment. Real Estate index for BBB-rated subprime mortgage deriva- Financing and Public-sector lending provide the tives issued in the first half of 2006 sank in the cover pool for mortgage and public-sector Pfand- period from 1 March to 31 December 2007, brief issues. Eurohypo has a risk management

from 77.50 to 20.49 (–74%). system in place, which complies with the require- Report Remuneration In the second half of 2007, this led to liquidity ments of section 27 PfandBG. Both mortgage shortages in the bond market, and later in inter- Pfandbrief and with public-sector Pfandbrief bank trading. Due to the bank’s integration into businesses are fully integrated into Eurohypo’s Commerzbank, as well as its position as a lead- risk management system. All business is regu-

ing issuer of Pfandbrief securities – in Novem- larly subject to comprehensive internal and Governance Corporate ber, the latest issue of a jumbo Pfandbrief was external reviews. Special attention is given to markedly oversubscribed with a volume of € 2.5 high asset quality and a balanced portfolio billion – the subprime crisis has had a minimal structure. impact on Eurohypo. The quality of our cover portfolios was con-

In the wake of the financial market crisis, firmed last year by all of the agencies with the Management Bodies the bank transferred responsibility for the US top rating of “AAA” for our Pfandbrief securities. ABS portfolio to a central Group portfolio man- Moodys Rating Agency upgraded the rating agement unit in the third quarter. Limits and for our Mortgage Pfandbriefe from “Aa1" to analysis criteria were made significantly more the best grade “Aaa”. The reason given for the stringent. higher rating was the excess cover available and Due to the continued volatility of the market, the first-rate quality of the cover pool, as well as limited write-downs of this portfolio are also not the strength and soundness of Eurohypo’s lend- to be ruled out in 2008. ing business overall. 60 Management Report

eurohypo ag cover pool

mortgage pfandbriefe public sector pfandbriefe

Capital cover – nominal € billion Capital cover – nominal € billion – Mortgage assets 43.6 – Public sector assets 49.6 – Mortgage Pfandbriefe outstanding 38.9 – Public sector Pfandbriefe outstanding 47.1 – Surplus cover 4.7 – Surplus cover 2.5 Market value Market value – Market value of mortgage assets 44.9 – Market value of public sector assets 51.9 – Market value of Mortgage – Market value of public sector Pfandbriefe outstanding 39.0 Pfandbriefe outstanding 48.0 – Surplus cover 5.9 – Surplus cover 3.9 – Surplus cover in % 15.19% – Surplus cover in % 8.20% Sensitivity* Sensitivity + Yield curve – shift upwards in % 15.20% + Yield curve shift upwards in % 7.84% – Yield curve – shift downwards in % 14.57% – Yield curve shift downwards in % 7.70% Substitute cover 1.6 Substitute cover 0.05

* Calculation conducted according to § 5 (1), 2 PfandBarwert V

The year under review also saw the continua- Appropriate risk limiting measures are in place tion of a project, together with Commerzbank, for the area of Public Sector and Financial Insti- aimed at making the favourable funding oppor- tutions as a whole. Risk monitoring is based on tunities Eurohypo has in the capital market specific risk indicators. Risks are quantified for available for the whole Group. Both the existing derivatives on the basis of their mark-to-mar- business that is eligible for the cover pool as ket and add-on values. An electronic limit sys- well as eligible new business in Retail Banking tem is used for daily monitoring to ensure that are entered into a funding register, after which utilisation remains within the defined limits. it can be used for Eurohypo’s Pfandbrief issues. To avoid cluster risks, a rating-based expo- This facilitates repayment of unsecured funding sure limit has been defined for each borrower due and cost-optimized funding of new business unit. throughout the Group. Only fungible assets that can be tracked Comprehensive information on the Eurohypo with the systems of Eurohypo are included in cover portfolios is available on the Eurohypo the portfolio. website under the information provided on trans- Credit derivatives, such as credit default parency rules in accordance with section 28 swaps and total return swaps, are used for loan PfandBG, as well as in the Notes, page 176 ff. substitution and diversification of the portfolio. All transactions are in line with the risk strategy Public Finance/Financial Institutions and are concluded only with top-quality counter- Public Finance business focuses on German parties. state and regional governments, municipal gov- Eurohypo is a trading book institution (Han- ernments as well as supranational organisations delsbuchinstitut as defined in the KWG), giving and other publicly backed loans. the bank greater latitude in its trading activities Management Report >>> Risk Report 61 Letter to Shareholders public sector by rating according public finance by country to commerzbank master scale 2007 Germany 57%

USA/Canada 9% cb 2.0 > cb 2.0 1% 3% Italy 6% cb 1.8 Spain/Portugal 6%

6% cb 1.0 – 1.2 of Managing Directors Board 46% Austria 3% cb 1.6 27% France/Benelux 3% UK 3% cb 1.4 17% Greece 3%

Switzerland 2% Board Supervisory Japan 1% CMC 1.0 –1.2: AAA 1.4 –1.6: AA 1.8 –2.0: A 2.2 –2.8: BBB Others 7% Pfandbrief Management Report Management Report with products. Due to the potentially higher Since January 2007, in order to comply with the risk, trading book activities are subject to addi- requirement of uniform risk measurement with tional limits compared with buy-and-hold trans- Commerzbank Group, a “credit spread value at actions. risk” is calculated for securities held outside of

the cover pool, in addition to the determination Report Remuneration market and liquidity risks of interest rate risk. Eurohypo has been integrated into Commerz- As at 31 December, this VaR figure for the bank’s control and monitoring system for market Eurohypo subgroup totalled € 15 million, at a and liquidity risks. The Capital Markets Commit- confidence of 97.5% and an assumed holding

tee and Market Risk Committee of Commerz- period of one day. This figure contains interest Governance Corporate bank are also responsible for Eurohypo. rate risk totalling € 1 million. The lowest value Also during the year under review, method- in the reporting period was € 11 million. The ological and organisational changes were imple- highest was € 15 million and the average € 13 mented, in particular with respect to the calcu- million. The internal VaR limit of the Eurohypo

lation of Value-at-Risk (VaR). subgroup is € 33 million. Management Bodies In addition, Eurohypo performs back testing Market risk and stress tests based on pre-defined scenarios, Market risk generally describes the threat of which are harmonised with those of the Group losses as a result of changes in market parame- parent. ters. Interest rate risk is measured daily using a Information on the types and scope of risks market value method. In addition to a calcula- is available in the Notes. tion of sensitivities, a VaR model is used for quantification. 62 Management Report

value-at-risk development of which: value-at-risk development asset and trading book of trading book

in € million in € million

35 Limit 5

30 Min: € 11 million Limit Max: € 15 million 4 25 Average: € 13 million Min: € 0 million 3 Max: € 0.6 million 20 Average: € 0.2 million

15 2 10 1 5 0 0 07.07 07.07 01.07 11.07 01.07 11.07 12.06 02.07 03.07 04.07 06.07 08.07 09.07 10.07 12.07 05.07 12.06 03.07 04.07 05.07 06.07 08.07 09.07 10.07 12.07 02.07

Eurohypo subgroup: figures as at the month end Eurohypo subgroup: figures as at the month end Calculation of average, min and max resulted from all figures Calculation of average, min and max resulted from all figures

Liquidity risk operational risks Liquidity risk, in the narrow sense, is the risk of Definition not being able to meet current or future payment Operational risk is the risk of losses arising as obligations, or only being able to do so under a result of shortcomings or errors in business unfavourable conditions. In order to quantify processes, controls or projects, caused by per- liquidity risk, we calculate a cash flow figure sonnel, organisation, technology or external fac- daily. Liquidity risk is controlled by a “maxi- tors. This definition includes legal risks, but mum cash outflow” limit. does not encompass strategic or reputational Additionally, systematic stress tests are per- risks. formed for management of market liquidity risk, in order to allow assessment of the effects of Management rare or extraordinary market conditions. Eurohypo has commissioned Commerzbank to Information on the liquidity effects of the carry out the tasks relating to operational risks, subprime crisis is available on page 100. Quan- in order to fulfil Group and banking supervisory titative information on liquidity risk is available requirements in line with the Group guidelines. in the Notes, item 77 “Breakdown of residual The common aim is to achieve accreditation of maturities” on page 153. For details on deriva- the internal model for measurement of capital tives, see page 147. in accordance with Basel II (advanced measure- A joint project is underway with Commerz- ment approach) for the Group as a whole. bank to successively develop of an internal Eurohypo has been integrated into the Group- model to establish “sound practices for manag- wide systems and bodies. The Head of CC ERC ing liquidity in banking organisation”. has been appointed as the central interface between the two companies. Management Report >>> Risk Report 63 Letter to Shareholders Board of Managing Directors of Managing Directors Board

Legal risks Reputational risks We use the term “legal risk” to describe poten- The risk of deterioration to the bank’s reputation

tial losses arising from changes to legislation, among shareholders, clients, employees, busi- Board Supervisory court rulings as well as contractual agreements. ness partners and the public is described as This also encompasses the risk that contractual- reputational risk. Risks to the bank’s reputation CMC ly agreed provisions are not legally valid or that are usually the consequence of other types of a court will apply provisions other than those risk, e.g. compliance risks. The management’s Pfandbrief agreed, with adverse consequences for the bank. aim is early identification and monitoring of these The Corporate Center (CC) Legal is respon- risks, as well as raising awareness of them among sible for the management and, especially, the employees. The Corporate Center Corporate limitation of these risks. Communications is responsible for managing

Legal risks are quantified along with opera- such risks. The central tasks are analysis of rep- Management Report tional risks, with the same methods and proce- utational risks and coordinating PR and opera- dures. tional management of day-to-day business in the event of a crisis. non-quantifiable risks

Compliance risks Investment portfolio risks Report Remuneration Compliance risks are potential losses and lost Eurohypo holds numerous direct and/or indirect profits, which may arise as a result of non-com- stakes in companies, and distinguishes between pliance with laws, regulatory requirements, strategic and non-strategic investments. internal standards and procedural rules. Under In organisational and financial terms, strate-

this heading, we include breaches relating to gic participations are attributed directly to the Governance Corporate confidentiality, embargos, money laundering, relevant operational unit or Corporate Center insider trading and market manipulation. The based on their importance for corporate policy. department responsible for central management Financial risks at Eurohypo Luxembourg are of these risks is part of CC Legal. Throughout fully integrated into the risk measurement and the bank, training and regular risk analyses are management of Eurohypo AG. Management Bodies carried out in cooperation with CC Legal, on the Non-strategic investments are of secondary prevention money laundering, terrorism financ- importance to net assets, the financial position ing and fraud. and operating result of the bank. 64 Management Report

summary outlook for 2008 We have reported comprehensively on risks, The bank will again face major challenges from which are relevant to the overall assessment of competition in 2008. Growing internationaliza- the Eurohypo subgroup. No further risk criteria tion means that we will continue to push ahead or facts that could jeopardize the bank’s exis- with our strategy aimed at international busi- tence are discernible. From today’s point of ness. The effects of the subprime crisis will view, there is also no indication of future risks linger into the 2008 financial year. For the time that may jeopardize the continued existence of being, the lack of refinancing options will limit the company or impact materially on the net new business, making it necessary for us to be assets, financial position and operating result. It very selective in our policies. But, this develop- has been ensured that Eurohypo’s aggregated ment is not without positive aspects: it will allow risk is in line with the bank’s risk bearing us to conclude new business at markedly higher capacity. margins. Where applicable, we have taken appropri- The experiences during the crisis over the ate measures with respect to discernible risks, past several months has shown that we are well through write-downs or recognition of provisions prepared for arising challenges, and our strate- in the annual financial statements. gic risk management will play an important role in this process. Management Report >>> Risk Report / Supplementary Report and Forecast 65

SUPPLEMENTARY REPORT AND FORECAST Letter to Shareholders Board of Managing Directors of Managing Directors Board events after 31 december 2007 risks, some of which are presented in more detail On 31 January 2008, Commerzbank and Euro- in the risk report, have an influence on the bank’s

hypo announced the intention to merge Hypo- results. Board Supervisory thekenbank in Essen AG (Essen Hyp) with Euro- This year also includes the planned merger hypo, which was to occur retroactively to 1 Jan- with Essen Hyp. The integration will have effects CMC uary 2008. This announcement had no effect on on our financial figures and business activities. our 2007 business result. Pfandbrief No other events occurred in the period from overall economic conditions 1 January to 25 February 2008, which would Given the less promising outlook for the economy have significantly influenced the 2007 business at large, aggregate economic performance in the results. countries relevant for Eurohypo has declined.

The property markets in Germany and abroad Management Report forecast are characterized by low liquidity and decreas- important note ing willingness to enter into risks. The ongoing The forecast report and other parts of this report crisis on the financial markets has generally led incorporate expectations and predictions. These to a greater degree of risk awareness. Despite forward-looking statements are based on plan- this difficult environment, Eurohypo looks for- Report Remuneration ning assumptions and estimates made on the ward to favourable business opportunities this basis of the information that is currently avail- year – due primarily to our excellent reputation able to us. We do not bear any obligation to up- as a trustworthy business partner and quality date such statements based on new information issuer of securities.

or future events. Statements concerning the future Governance Corporate are always subject to risks and uncertainties. commercial real estate Actual results and developments may there- In the Commercial Real Estate segment, we fore deviate substantially from what is currently expect new business to be down from the levels predicted. Such deviations can result primarily seen over the last two years. The pressure on mar- from changes in the competitive situation and gins seen over the past few years has decreased Management Bodies the general economy and developments on the as a result of a shorter liquidity supply; we there- international property and capital markets. In fore expect moderately higher margins in the addition, possible defaults by borrowers or current year. counterparties in trading transactions, changes The development of new commitments can- in national and international legislation, particu- not be viewed in isolation from our exit manage- larly those concerning taxation, as well as other ment, which is a component of our business 66 Management Report

model. Should the conditions for our syndica- This and a uniform market presence will put the tion and securitization activities remain difficult proven Eurohypo business model on an even as a result of the tense situation on the capital broader basis. Growing internationalization, markets, this will impact our new business. penetration of new target groups and the range The Pfandbrief market, on the other hand, of custom-made financing solutions will allow has remained predominantly untouched by the us to manage our expanded Public Financing uncertainties resulting from the financial market segment in a way that targets further income crisis. Consequently, we anticipate good possi- generation. As last year, the area of public pri- bilities for Pfandbrief placements in the coming vate partnerships will continue to gain impor- months. tance. Our new markets Latin America and the The merger of the two banks will create Asia-Pacific region are important contributors to one of the Europe’s leading platforms for public our growth. After the opening of our office in finance. The integration of Essen Hyp into our Hong Kong at the beginning of 2007, we intend bank will weigh on earnings in 2008. For the to strengthen our presence on the Chinese mar- current financial year, we expect a balanced ket with a further base in Shanghai. By jointly result in the Public Finance segment. In the opening an office in Dubai with Commerzbank context of the expansion of this segment, we in early 2008, we plan to establish ourselves in expect new business to be dynamic. the high-potential Middle Eastern Market. We will embark in these new markets with a con- earnings outlook servative risk approach, making use of the exist- Earnings in the current year will be influenced ing Commerzbank network and supporting our greatly, not only by the situation on the financial international clients with their investments in markets, but also by the planned integration of the region. Essen Hyp. From today’s perspective, income for the full year will be characterized by an increase public finance of net interest income in our core business areas. Given that public-sector financing demand will The proportion of net interest income attributa- remain high, we expect growth on the public ble to public finance business will grow over the finance market. At the same time, the importance course of the coming year, due to the new struc- to the bank of the Public Finance segment will ture. Our expansion course will lead to a con- once again increase: In the context of the planned siderable rise in net interest income generated by merger of Essen Hyp with Eurohypo, all of real estate and public finance business abroad. Commerzbank Group’s public finance business Valuation effects, e.g. from derivatives, will be will be marketed under the Eurohypo brand. impacted by interest rate developments, which Management Report >>> Supplementary Report and Forecast 67 Letter to Shareholders Board of Managing Directors of Managing Directors Board cannot be reliably forecasted. The successively been balanced by cost optimization of internal improved structure of our real estate financing processes. This will continue in the coming year

portfolio has gone some way to reducing our as well. The integration of Essen Hyp will increase Board Supervisory sensitivity to risk, but an increase in risk provi- administrative expenses in the current year, but sioning cannot be ruled out, due to the weaker the increase and integration costs will be more CMC state of the global economy and the planned than offset for by our growth and synergies merger with Essen Hyp. within Commerzbank Group over the long term. Pfandbrief Our commission business has developed Last year produced good results in our core into a constant source of high earnings. In addi- business areas. The ongoing financial crisis and tion to commissions on new loans, our advisory costs associated with the planned integration of services and complex financing solutions will Essen Hyp make a forecast for the current year

contribute to the result this year. difficult. We will continue on our growth path Management Report The bank will react to the prevailing market in Commercial Real Estate, with positive effects situation within the scope of our possibilities, for operating profits. In light of the aspects with flexible cost management. The establish- mentioned above, we expect overall results to ment and expansion of new offices abroad has be satisfactory. Remuneration Report Remuneration Corporate Governance Corporate Management Bodies 68 Remuneration Report

REMUNERATION REPORT

Eurohypo’s remuneration report explains the after the Annual General Meeting of the rele- main features of the system of remuneration for vant financial year. In addition, members of the the Board of Managing Directors taking into Board of Managing Directors receive customary account the recommendations of the German benefits in kind. The current remuneration struc- Corporate Governance Code. It complies with ture for members of the Board of Managing the requirements of the German Commercial Directors was established in the summer of 2006. Code (Handelsgesetzbuch – HGB), IFRS and the The fixed salary component, which is paid German Management Board Remuneration Dis- in twelve monthly instalments, is based on the closure Act (Vorstandsvergütungsoffenlegungs- responsibilities of the respective Board member. gesetz – VorstOG) of 3 August 2005. It also The amount of variable pay is dependent on the describes the structure and amount of Super- achievement of specific targets agreed at the visory Board remuneration. In addition, details beginning of the financial year between the Board covering share-based remuneration for members of Managing Directors and the Standing Com- of the Board of Managing Directors, shares mittee of the Supervisory Board. One of the held by of the Board of Managing Directors and benchmarks used is the projected results of the Supervisory Board members and transactions bank as a whole, measured on the basis of return in Eurohypo shares requiring disclosure under on equity (RoE), as well as the personal per- the Securities Trading Act (Wertpapierhandels- formance of the individual Board member in his gesetz – WpHG) are also included. area of responsibility. In addition to regular remuneration, the information concerning the bank provides pension benefits in the form of board of managing directors individual pension agreements to members of main features of the the Board of Managing Directors or their surviv- remuneration system ing dependants. The remuneration of members of the Board of In the event of a change of control, i.e. if Managing Directors is governed by individual more than 50% of the bank’s voting rights are employment contracts. It is established by the no longer held by Commerzbank Group, each Standing Committee of the Supervisory Board member of the Board of Managing Directors is and includes fixed and variable components: a entitled to resign within three months. In this fixed salary and variable pay based on perform- case, severance pay equivalent to the value of ance and success-related criteria (bonus). The the remaining period of the employment con- fixed salary proportion is 40% while the annual tract, but no longer than one year, can be claimed bonus accounts for 60% of total annual remu- at the remuneration level (including fixed salary neration. Up to 50% of the bonus may, at the and bonus) at the time of resignation. Should discretion of the bank, be paid as a long-term the buyer not wish to continue employing a incentive in the form of Commerzbank shares, member of the Board within six months of the or in cash within a maximum of three years change of control without cause based on the Remuneration Report 69 Letter to Shareholders Board of Managing Directors of Managing Directors Board member’s conduct, the company pays the remu- breakdown for individual members of the Board neration (including fixed salary and bonus) for of Managing Directors is presented in the table

the remaining term of the member’s employ- on page 159. Board Supervisory ment contract. Members of the Board of Managing Direc- pension plans CMC tors also have entitlements to shares from Euro- In addition to regular remuneration, members hypo’s long-frist incentive plans (LFI) from 2004 of the Board of Managing Directors received Pfandbrief and 2005. The original plans based on Eurohy- individually negotiated pension plans. Mr Schuh, po AG shares were amended in 2006 so that Klösges, Plesser and Rasche are each benefici- Commerzbank shares could be issued in place aries of a defined contribution plan. Each contri- of the same number of Eurohypo AG shares. bution is converted into capital units and credit-

Entitlements from 2004 and 2005 are paid upon ed to a pension account. Once employees have Management Report expiry of the agreed three-year period either in retired, the balance on the pension account Commerzbank shares or in cash (at the discre- (pension capital) is paid to the pensioner or his tion of the bank). Payment of entitlements from surviving dependants, as a choice of either a LFI 2004 occurs following approval by the Annual lump sum payment or a monthly pension.

General Meeting of the 2007 financial statements. Mr Knobloch was also the beneficiary under Report Remuneration Entitlements from LFI 2005 are paid following the aforementioned pension plan until 31 March approval by the Annual General Meeting of the 2006. His pension plan agreed with the bank 2008 financial statements. Since 2006, there expired on 31 March 2006. The closing balance have been no new entitlements granted under on his pension account at this date was € 3,729

the Eurohypo long-frist incentive plans (LFI). thousand. Since 1 April 2006, Bernd Knobloch Governance Corporate Since financial year 2006, members of the has been the recipient of a pension commitment Eurohypo Board of Managing Directors are enti- from Commerzbank as a member of the Board tled to participate in the Commerzbank AG long- of Managing Directors of Commerzbank AG. term performance plan (LTP). For financial year For Mr Zielke, the bank has committed to a

2007 a total of 7,300 shares were added to the retirement, invalidity and dependant benefits Management Bodies Commerzbank LTP. plan under the Commerzbank modular occupa- tional pension plan in the form of a monthly fixed and variable remuneration pension. The bank also provides Mr Zielke with For financial year 2007, the remuneration of the a supplementary defined contribution scheme active members of the Board of Managing Direc- for executives. tors totalled € 3,462 thousand, of which € 1,373 In 2007, provisions totalling € 850 thousand thousand related to fixed salary, € 1,863 thousand were set aside for pension obligations towards to the annual bonus, € 120 thousand to payment active members of the Eurohypo AG Board of of LTP 2006 and € 106 thousand to other non- Managing Directors. A pension provision of cash emoluments. The remuneration component € 702 thousand was transferred during the year to 70 Remuneration Report

Commerzbank AG for Mr Klösges, who resigned LFI Cash value of Cash value of from the Eurohypo AG Board of Managing Direc- Number Commerzbank- share entitle- tors effective 28 February 2007 to assume an of share shares at ments as at in € thousand entitlements granting 31.12.2007 executive position with Commerzbank AG. As Bernd Knobloch 70,393 1,802 1,769 at 31 December 2007, the pension provision for Dirk Wilhelm Schuh 55,918 1,433 1,407 active Eurohypo AG Board members totalled Jochen Klösges 52,230 1,340 1,316 € 6,939 thousand. Henning Rasche 52,230 1,340 1,316 Total payments to former members of the Joachim Plesser 52,230 1,340 1,316 Board of Managing Directors and their depen- Martin Zielke – – – dants amounted to € 5,465 thousand. Pension Total 283,001 7,255 7,124 provisions of € 56,229 thousand were set aside for pension obligation for this group.

long frist incentive plan (eurohypo long term performance plans ag lfi) from 2004 and 2005 (commerzbank ag ltp) Members of the Board of Managing Director Since financial year 2006, members of Eurohypo’s also have an entitlement to a total of 283,001 Board of Managing Directors have been entitled Commerzbank AG shares from the LFI from 2004 to participate in the Commerzbank AG long-term and 2005. The entitlements of individual Board performance plan (LTP) in accordance with the members were earned in 2004 and 2005 and current regulations for Commerzbank AG. Mr originally related to Eurohypo AG shares. In Knobloch may participate in the Commerzbank 2006, these entitlements were converted to enti- AG LTP pursuant to the regulations for members tlements to the same number of Commerzbank of the Commerzbank AG Board of Managing AG shares. There have been no new entitlements Directors. granted since 2006. At that time, Mr Zielke was These virtual share option programs, to not yet a member of the Eurohypo AG Board of date offered annually by Commerzbank AG, Managing Directors. incorporate a guaranteed payment in the event The number of entitlements of each Board that the Commerzbank share price exceeds the member and their cash value when granted and Dow Jones Euro Stoxx® Bank index after three, at the reporting date are detailed in the follow- four or five years, and/or an absolute increase ing table: in the Commerzbank share price reaches or exceeds 25%. If these thresholds are not reached after five years, the payment guarantee lapses. Participation in the LTP requires those enti- tled to invest their own funds in Commerzbank shares. For members of the Eurohypo Manage- ment Board, the regulations for Commerzbank Remuneration Report 71 Letter to Shareholders Board of Managing Directors of Managing Directors Board

apply and they may participate in the LTP pro- LTP 2007 Cash value gram with up to 1,200 shares. Mr Knobloch, Number of Pro rata

Chairman of the Eurohypo AG Board of Manag- shares At as at as at Board Supervisory ing Directors, is entitled to participate in the in € thousand contributed granting 31.12.07 31.12.071) LTP program with up to 2,500 shares as a member Bernd Knobloch 2,500 79 51 12 CMC of the Commerzbank AG Board of Managing Dirk Wilhelm Schuh 1,200 38 25 6 Directors. Payment from these plans is contin- Jochen Klösges 1,200 38 25 6 Pfandbrief gent on meeting one of the following exercise Henning Rasche 1,200 38 25 6 hurdles: Joachim Plesser –––– For 50% of the shares purchased with the Martin Zielke 1,200 38 25 6 participant’s own funds: the Commerzbank Total 7,300 231 151 36

share price exceeding the Dow Jones Euro 1) Corresponds to the value of the provisions for LTP 2007 as at 31 December 2007; Management Report Stoxx® Bank index (outperformance of at the provisions for Mr Knobloch, Klösges and Schuh were accrued at Commerz- bank AG. least 1 percentage point is rewarded with € 10, and each further percentage point of outperformance garners an additional € 10 The actual remuneration of participation in the

per share, up to a maximum of € 100 per LTP 2007 may deviate significantly from the Report Remuneration share). amounts stated in the table above, given that For 50% of the shares purchased with the the actual amount paid cannot be determined participant’s own funds: absolute price until the end of the respective LTP term. increase of Commerzbank shares (a price Based on the changes in the Commerzbank

increase of at least 25% is rewarded with share price, the LTP 2004 was paid out during Governance Corporate € 10, and each further 3 percentage points the year under review. With payment of € 100 of outperformance garner an additional per share contributed, the plan was terminated. € 10 per share, up to a maximum of € 100 The table below sets out payments to current per share). Board members, who participated in the LTP

2004: Management Bodies The participant thus receives up to € 100 per share paid in cash. Payment from the LTP is also LTP 20041) contingent on a dividend being issued for the Number of shares financial year by Commerzbank AG. in € thousand contributed Total In the year under review, the members of Martin Zielke 1,200 120 the Management Board participated with their Total 1,200 120 own shares in the Commerzbank LTP 2007 as 1) The other Management Board members were not entitled to participate in the follows: Commerzbank LTP 2004 at the time. 72 Remuneration Report

summary A comparison of the cash remuneration paid to individual members of the Board of Managing Directors in 2007 and 2006 is presented in the following table:

Cash remuneration

Fixed Variable LTP 2004 Total in € thousand Year remuneration remuneration payment5) Other6) remuneration Bernd Knobloch1) 2006 120 525 – 14 659 2007––––– Dirk Wilhelm Schuh2) 2006 360 750 – 28 1,138 2007 360 410 – 28 798 Jochen Klösges3) 2006 320 620 – 20 960 2007 53 103 – 5 161 Joachim Plesser 2006 320 520 – 18 858 2007 320 450 – 18 788 Henning Rasche 2006 320 520 – 31 871 2007 320 450 – 23 793 Martin Zielke4) 2006 240 520 – 22 782 2007 320 450 120 32 922 Total 2006 1,680 3,455 – 133 5,268 2007 1,373 1,863 120 106 3,462

1) Until 31 March 2006, Eurohypo paid the remuneration stated above; since 1 April 2006, Commerzbank AG has paid the remuneration in respect of all activities within Commerzbank Group (relevant disclosure in the Commerzbank AG remuneration report). 2) Remuneration paid by Eurohypo covering all activities within Commerzbank Group for financial years 2006 and 2007 3) Eurohypo paid remuneration for financial year 2006 covering all activities within Commerzbank Group; the 2007 remuneration relates to the period until Mr Klösges’ resignation from the Eurohypo AG Management Board effective 28 February 2007. 4) The 2006 base salary relates to the period from appointment effective 1 April 2006. 5) At the relevant date, no other members of the Board, apart from Mr Zielke, were entitled to participate in the Commerzbank AG LTP 2004 6) The item ‘Other’ relates to non-cash benefits largely comprising expense reimbursements, insurance premiums and payment of costs for a company car

supervisory board reasonably established for members of super- Remuneration for members of the Supervisory visory boards are still ongoing in the public Board is governed by the bank’s Articles of Asso- domain. ciation. Their remuneration includes variable as well as fixed components. The remuneration structure of remuneration has not thus far included any pay component The fixed remuneration paid to each member of based on long-term business performance. Dis- the Supervisory Board during 2007 amounted cussions on how such remuneration might be to € 15,000.00. The posts of Supervisory Board Remuneration Report 73 Letter to Shareholders Board of Managing Directors of Managing Directors Board

Chairman and Vice-Chairman and membership shares held by members of the in a Supervisory Board committee are compen- board of managing directors and supervisory board sated individually. In addition, each member Board Supervisory receives a variable payment based on return on Under section 15a WpHG, persons who perform equity. The expenses incurred by members of management responsibilities or other parties CMC the Supervisory Board and the value added tax on who are closely associated with such persons Supervisory Board activities are also refunded. are obliged to disclose transactions in Eurohypo Pfandbrief These amounted to a total of € 85,597.42. AG shares or financial instruments based on Members of the Supervisory Board who Eurohypo AG shares, if they total at least € 5,000 only served on the Supervisory Board during per calendar year. Transactions subject to disclo- part of the financial year received remuneration sure are listed on our website. The aforemen-

in proportion to the time served during the year. tioned rules apply to the Board of Managing Management Report In the reporting year, remuneration of the Directors as well as the Supervisory Board. Supervisory Board amounted to € 382,603.45, During the reporting year, no notifications of which € 249,523.99 was attributable to the of transactions subject to this disclosure require- fixed component and € 133,079.46 the variable ment were made on the part of Board of Man-

component. The remuneration of individual aging Directors or the Supervisory Board. Report Remuneration members of the Supervisory Board is shown in the table: loans to members of the board of managing directors and

Fixed Variable supervisory board in € remuneration remuneration

Loans to members of the Board of Managing Governance Corporate Klaus-Peter Müller 56,250.00 30,000.00 Directors totalled € 188,232.66 and loans to Brigitte Siebert 24,760.27 13,205.48 members of the Supervisory Board amounted to Prof. Dr. Hans-Peter Keitel 12,380.14 6,602.74 € 780,555.31. Further information can be found Wolfgang Barth 9,904.11 5,282.19 in the Notes on page 158. Herbert Bayer 9,904.11 5,282.19 Management Bodies Peter Birkenfeld 12,380.14 6,602.74 Klaus Müller-Gebel 35,136.99 18,739.73 Cornelia Pielenz 9,904.11 5,282.19 Hans Reischl 12,380.14 6,602.74 Wolfgang Hartmann 23,784.25 12,684.93 Dr. Achim Kassow 12,380.14 6,602.74 Eva-Maria Jäger 6,421.23 3,424.66 Ingo Felka 5,136.99 2,739.73 Michael Reuther 6,421.23 3,424.66 Christian Weber 12,380.14 6,602.74 Total 249,523.99 133,079.46 74 Corporate Governance

CORPORATE GOVERNANCE

communication Governance Code. The remuneration report is a Comprehensive details on Corporate Governance component of this corporate governance report. are available on the bank’s website under Com- pany/Corporate culture. Information concerning supervisory board the remuneration of members of the Board of Eurohypo AG considers the election or re-election Managing Directors and the Supervisory Board of members of the Supervisory Board on differ- as well as all previous declarations of compli- ent dates for differing periods of office to be ances by Eurohypo AG are published in the same appropriate only in exceptional cases, because section. Eurohypo AG complies with the recom- of concerns that constantly having to induct mendations in the German Corporate Governance new members due to a lack of synchronisation Code, including those in the version of 14 June in the terms of office would impair the quality 2007 published in the online version of the Fed- of the work of the Supervisory Board. eral Gazette (Bundesanzeiger) on 20 July 2007, In accordance with section 96 (1), fourth taking into account bank-specific issues. To the alternative, section 101 (1) of the German Stock extent that Eurohypo AG deviates from individ- Corporation Act (Aktiengesetz – AktG), as well as ual recommendations of the Code, this is due to section 1 (1) sentence 1 no. 1 and section 4 (1) of the fact that compliance does not appear sensi- the One-third Representation Act (Drittelbeteili- ble for Eurohypo AG under its current structure. gungsgesetz), two-thirds of the Supervisory Board With regard to financial year 2007, the following now comprises shareholder representatives and points are highlighted. one-third employee representatives. The Annual General Meeting on 29 August 2007 – based on remuneration the Code recommendation under item 5.4.3 sen- As previously, Eurohypo AG describes the main tence 1 – individually elected Klaus-Peter Müller, features of the remuneration system and pub- Wolfgang Hartmann, Klaus Müller-Gebel and lishes individual details concerning the remu- Michael Reuther as members of the Supervisory neration of the members of the Board of Man- Board until the conclusion of the General Meet- aging Directors and the Supervisory Board. ing, which voted to discharge the Supervisory The individual details on pages 68 ff. of the Board in financial year 2011. In the future as Consolidated Management Report concerning well, the members of the Supervisory Board are the remuneration of the members of the Board to be elected on an individual basis, although of Managing Directors and the Supervisory section 8 (2) sentence 3 of the Articles of Asso- Board, as well as the details referred to in the ciation of Eurohypo AG permits the Annual Gen- Notes constitute the remuneration report in line eral Meeting to elect shareholders as members with the intention of the German Corporate of the Supervisory Board by means of lists. Corporate Governance 75 Letter to Shareholders Board of Managing Directors of Managing Directors Board

In accordance with item 5.3.2 of the Code, the directors’ dealings/ Audit Committee should deal with matters of risk conflicts of interest

management for the bank in addition to matters With regard to the details required in connection Board Supervisory of accounting and auditing. The Supervisory with directors’ dealings pursuant to item 6.6 of Board of Eurohypo AG has not assigned matters the Code, there were no transactions by mem- CMC of risk management to its Audit Committee but bers of the Board of Managing Directors or the to its Risk Committee, which addresses the bank’s Supervisory Board subject to reporting require- Pfandbrief credit, market and operational risks. The mem- ments during the period under review, nor were bership of the Chairman of the Audit Committee there any conflicts of interest known to the Super- in the Risk Committee ensures that the Audit visory Board among members of the Board of Committee has comprehensive information on Managing Directors or the Supervisory Board.

matters of risk management. There were also no transactions by directors Management Report According to item 5.3.3 of the Code, the to report in accordance with section 15a of the Supervisory Board should establish a Nomina- Securities Trading Act (Wertpapierhandelsge- tion Committee, comprising shareholders only, setz – WpHG). which proposes suitable candidates for the Super- visory Board to nominate at the General Meet- annual general meeting Report Remuneration ing. The Supervisory Board has assigned this The bank again offered its shareholders the duty to its Standing Committee, as it comprises opportunity to be represented by a proxy at the shareholders only and can just as efficiently per- 2007 Annual General Meeting. During the meet- form the functions of a Nomination Committee. ing itself, however, no new instructions could

The employee representatives carry out be communicated to the proxies. The speech Governance Corporate separate preparations for the Supervisory Board delivered at the 2007 Annual General Meeting meetings. In the case of shareholder represen- by Bernd Knobloch, Chairman of the Board of tatives, these preparations are carried out as Managing Directors, was again broadcast live required. Due to its new composition, the Super- via the Internet. visory Board did not review its efficiency in Management Bodies 2007. It shall, however, continue to carry out the board of managing directors regular efficiency reviews. the supervisory board 76 Corporate Governance

declaration of compliance of 17 march 2008 The Board of Managing Directors and the Supervisory Board of Eurohypo AG hereby declare pursuant to section 161 of the Stock Corporation Act (Aktiengesetz – AktG): since the last declaration of compliance of 21 March 2007, Eurohypo AG has been in compliance with the recommendations of the “Government Commission German Corporate Governance Code” announced by the Federal Ministry of Justice in the official section of the electronic Federal Gazette, in the version dated 12 June 2006, and is currently in compliance with and will continue to comply with the recommendations of the “Government Commission German Corporate Gover- nance Code” in the version dated 14 June 2007, each subject to the following proviso:

In accordance with item 5.3.2 of the Code, the Audit Committee should deal with matters of risk management in addition to matters of accounting and auditing. The Supervisory Board of Eurohypo AG has not assigned matters of risk management to its Audit Committee but to its Risk Committee, which addresses the bank’s credit, market and operational risks. The membership of the Chairman of the Audit Committee in the Risk Committee ensures that the Audit Committee has comprehensive information on matters of risk management.

The remuneration report in accordance with item 4.2.5 of the Code is included in the cor- porate governance report. It features content identical to reporting on remuneration in the consolidated and individual company Annual Reports and notes in accordance with sections 285, 289, 314 and 315 of the German Commercial Code (Handelsgesetzbuch – HGB). The corporate governance report is published on the company’s website and included in the Annual Report, which contains the above details. To avoid redundancy, therefore, the printed corporate governance report makes reference to the information on remuneration in the Annual Report and notes.

The duties of a Nomination Committee in accordance with item 5.3.3 of the Code are perfor- med by the Presiding Committee, which comprises only shareholders.

The lack of information on company stock options, stock option programs and comparable securities-based incentive schemes in the Annual Report is due to the fact that Eurohypo AG does not issue such stock options.

the board of managing directors the supervisory board

Bernd Knobloch Klaus-Peter Müller Management Bodies and Boards >>> Management Bodies >>> Supervisory Board / Board of Managing Directors 77

MANAGEMENT BODIES Letter to Shareholders Board of Managing Directors of Managing Directors Board

supervisory board board of managing directors Supervisory Board Supervisory

2) Klaus-Peter Müller Eva-Maria Jäger Bernd Knobloch CMC Chairman since august 29, 2007 Chairman Pfandbrief

Klaus Müller-Gebel Dr. Achim Kassow Dirk Wilhelm Schuh Deputy Chairman1) until august 29, 2007 Deputy Chairman since august 29, 2007 until december 31, 2007 Management Report Management Report

Brigitte Siebert2) Prof. Dr.-Ing. Jochen Klösges Deputy Chairman Hans-Peter Keitel until feburary 28, 2007 until august 29, 2007 until august 29, 2007 Remuneration Report Remuneration Wolfgang Barth2) Cornelia Pielenz2) Joachim Plesser until august 29, 2007 until august 29, 2007

Herbert Bayer2) Dr. h.c. Hans Reischl Henning Rasche Governance Corporate until august 29, 2007 until august 29, 2007

2) 1)

Peter Birkenfeld Michael Reuther Martin Zielke Management Bodies until august 29, 2007 since august 29, 2007

Ingo Felka2) Christian Weber2) since august 29, 2007 until august 29, 2007

Wolfgang Hartmann Dr. Frank Pörschke Generally authorized agent since september 1, 2007

1) Appointed on the Annual General Meeting on August 29, 2007. 2) Employee representative 78 Management Bodies and Boards

SUPERVISORY BOARD COMMITTEES

standing committee audit committee mediation committee

Klaus-Peter Müller Klaus Müller-Gebel Klaus-Peter Müller Chairman Chairman Chairman until august 29, 2007

Peter Birkenfeld Eva-Maria Jäger Wolfgang Barth until august 29, 2007 since august 29, 2007 until august 29, 2007

Wolfgang Hartmann Dr. Achim Kassow Klaus Müller-Gebel since august 29, 2007 until august 29, 2007 until august 29, 2007

Prof. Dr.-Ing. Dr. h.c. Hans Reischl Brigitte Siebert Hans-Peter Keitel until august 29, 2007 until august 29, 2007 until august 29, 2007

Klaus Müller-Gebel Michael Reuther since august 29, 2007

Brigitte Siebert Brigitte Siebert until august 29, 2007 until august 29, 2007

Christian Weber until august 29, 2007

risk committee

Wolfgang Hartmann Chairman

Klaus-Peter Müller

Klaus Müller-Gebel Management Bodies and Boards >>> Supervisory Board Committees / Trustees 79 Letter to Shareholders Board of Managing Directors of Managing Directors Board

trustees deputy trustees Supervisory Board Supervisory

Jost Keiner Dr. Jürgen Daniels Gunthard Hansen CMC Counsellor at the Hessen Presiding Judge at the Hanse- Senior Counsellor at the Tax Government Audit Office atic Higher Regional Court Authorities in Hamburg (retired) in Darmstadt Hamburg Hamburg Pfandbrief Frankfurt/Main

Bernd Dürr Dr. Hans-Joachim Schmidt Accountant, Counsellor at the Hessen Tax Consultant Ministry of Finance Frankfurt/Main Wiesbaden Management Report

Hartmut Graf Thomas Schwenkreis Accountant, Accountant, Tax Consultant Tax Consultant Remuneration Report Remuneration Lübeck Frankfurt/Main Corporate Governance Corporate Management Bodies 80 Management Bodies and Boards

ADVISORY BOARD

germany

Dr. Patrick Adenauer Alfons Doblinger Dr. Ralph Ulrich Knist Managing Partner Chairman of the Member of the Management Bauwens GmbH & Co. KG Management Board Board Greve Bau- und Boden- Cologne DIBAG Industriebau AG Aktiengesellschaft Munich Hamburg

Dr. Hans-Jürgen Ahlbrecht Dirk Große-Wördemann Michael A. Kremer Managing Director Chairman of the Board Managing Director Deutsche Real Corp (DRC) of Directors Strategie Value Partners GmbH & Co. KG Allianz Immobilien GmbH (Deutschland) GmbH Berlin Stuttgart Frankfurt/Main

Dieter Becken Bernhard H. Hansen Hermann Marth Managing Director BECKEN Managing Director Chairman of the Board Investitionen & Vermögens- VIVICO Real Estate GmbH of Directors verwaltung Frankfurt/Main RAG Immobilien AG Hamburg Essen

Dr. Jürgen Bersuch Dr. Nikolaus Hensel Friedrich von Metzler Independent gentleman Lawyer and Notary Personally liable partner Hamburg Bögner Hensel Gerns & Bankhaus Metzler seel. Schreier Sohn & Co. KGaA Frankfurt/Main Frankfurt/Main

Caspar-Florens Karsten Hinrichs Dr. Job von Nell von Consbruch Member of the Management Managing Director BEOS Lawyer Board and CEO Projektentwicklung GmbH Hiddenhausen Greve Bau-und Boden-Aktien- Berlin gesellschaft, Hamburg since december 7, 2007 Management Bodies and Boards >>> Advisory Board Germany 81 Letter to Shareholders Board of Managing Directors of Managing Directors Board Supervisory Board Supervisory

Dr. Peter Noé Dr. Udo Scheffel Prof. Dr. Hans Sommer CMC Board Member Independent gentleman Chairman of the HOCHTIEF Aktiengesellschaft Munich Management Board Essen Drees & Sommer AG Pfandbrief Stuttgart

Dr. Matthias Ottmann Stefan Schörghuber Hubert Spechtenhauser Managing Director Chairman of the Board Board spokesman Ottmann GmbH & Co. Schörghuber Stiftung & Co. Commerz Real AG Management Report Management Report Munich Holding KG Düsseldorf Munich since december 7, 2007

Dr. Frank Pörschke Prof. Dr. Karl-Werner Schulte Michael Zimmer Generally authorized agent IREBS Institut für Immobilien- Cairman of the Board Eurohypo AG wirtschaft International of Directors Remuneration Report Remuneration Eschborn Real Estate Business School Corpus Sireo Holding until august 31, 2007 Wiesbaden GmbH & Co. KG Düsseldorf Dr. Knut Riesmeier Jürgen Schulte-Laggenbeck Managing Director Member of the MEAG Munich ERGO Asset Management Board Corporate Governance Corporate Management GmbH Otto (GmbH & Co. KG) Munich Hamburg

Dr. Helmut Röschinger Horst-Günther Schulz Managing Partner Independent gentleman Argenta Unternehmensgruppe Egling Management Bodies Munich 82 Management Bodies and Boards

ADVISORY BOARD

international

Léon Bressler Volker Kurr Álvaro C.C. Portela Partner Managing Director Chairman Perella Weinberg Partners LP COMINVEST Asset Sonae Sierra SGPS, SA London Management GmbH Maia Frankfurt/Main

Alice M. Connell William L. Mack Joseph E. Robert, Jr. New York Apollo Real Estate Chairman & CEO Advisors LP J.E. Robert Companies New York McLean

Sebastián Escarrer Jaume Dan Neidich Stuart M. Rothenberg Vice-Chairman and CEO Chairman & CO-CEO Managing Director Grupo Sol Meliá Dune Capital Management LP Goldman Sachs Palma de Mallorca New York New York

Mike Fascitelli Mark Newman Barry Sternlicht President Managing Director Chairman and CEO Vornado Realty Trust Lehman Brothers Europe Ltd. Starwood Capital Group New York London Greenwich

Heinz-Wilhelm Fesser Jeremy Newsum Birger Strom Member of the Board Group Chief Executive Chairman of Directors Grosvenor Group Société des DWS Investment GmbH Holdings Ltd. Centres Commerciaux Frankfurt/Main London Paris

Michael Hallacker Eyal Ofer Georg von Werz Chairman of the Board President CEO of Managing Directors Carlyle M.G. Ltd. Pramerica Real Estate Investors VCH Investment Group AG London (Europe) Frankfurt/Main Munich until december 31, 2007 Luis José Pereda Samuel Zell Gerald Hines Advisor Chicago Chairman Grupo Lar Hines Europe Madrid London

Dr. Michael Korn Dr. Karl Petrikovics Managing Director Chairman of the Board Allianz Global Investors of Managing Directors Kapitalanlagegesellschaft mbH Anlagen AG Frankfurt/Main Vienna Management Bodies and Boards >>> Advisory Board International / Consolidated Financial Statements – Eurohypo Group 83

CONSOLIDATED FINANCIAL STATEMENTS EUROHYPO GROUP

83 consolidated financial statements – eurohypo group

84 Income Statement 85 Appropriation of profit/earnings per share 86 Balance sheet 88 Statement of changes in capital and reserves 90 Cash flow statement 92 Notes 166 Mandates – Supervisory Board, Management Board, Staff 171 Management bodies 172 List of affiliated companies, Participating

Interests and special purpose vehicles Statements Financial 175 Responsibility Statement by the Management Board

176 auditors’ report Auditors’ Report Report Auditors’ 177 information under section 28 of the pfandbrief act GS

195 at a glance

195 Glossary § 28 Pfandbrief 200 Editorial information At a glance 84 Consolidated Financial Statements

the eurohypo group

INCOME STATEMENT

income statement 1.1.– 31.12.2007 1.1.– 31.12.2006 Change

Notes € million € million € million % Interest income 10,621 10,362 259 2.5% Interest expenses 9,442 9,113 329 3.6% Net interest income 26 1,179 1,249 –70 –5.6% Provisions for loan losses 27 –259 –360 –101 –28.1% Net interest income after provisions 920 889 31 3.5% Commission income 298 250 48 19.2% Commission expenses 71 73 –2 –2.7% Net commission income 28 227 177 50 28.2% Result from hedge accounting 29 –8 –5 –3 –60.0% Net trading income 30 –11 98 –109 >–100% Result from financial assets 31 –9 64 –73 >–100% Result from at-equity investments 32 –2 –17 15 >100% Result from investment property 33 16 2 14 >100% Administrative expenses 34 542 547 –5 –0.9% Net other operating income/expenses 35 –3 7 –10 –100% Operating income 588 668 –80 –12.0% Restructuring expenses 37 – 15 –15 –100% Profit before tax 588 653 –65 –10.0% Income taxes 38 233 219 14 6.4% Profit after tax 355 434 –79 –18.2% Minority interests 0 0 0 – Net income attributable to the

shareholders of Eurohypo AG 355 434 –79 –18.2% Consolidated Financial Statements >>> Income Statement / Appropriation of profit / Earnings per share 85

APPROPRIATION OF PROFIT / EARNINGS PER SHARE

appropriation of profit in € million 2007 2006

Net income attributable to the shareholders of Eurohypo AG 355 434 Transfer of profits 103 0 Allocation to retained earnings 252 47

Distributable profit of Eurohypo AG – 387

€ 103.0 million will be transferred to Commerzbank Inlandsbanken Holding GmbH for the financial year 2007 as a result of the profit transfer agreement between Commerzbank Inlandsbanken Holding GmbH and Eurohypo AG.

earnings per share

Notes 2007 2006 Earnings per share in € 39 1.01 1.24 Financial Statements Financial Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 86 Consolidated Financial Statements

BALANCE SHEET

assets 31.12.2007 31.12.2006 Change

Notes € million € million € million % Cash reserve 6, 42 128 123 5 4.1% Assets held for trading purposes 7, 43 4,747 3,330 1,417 42.6% Claims on banks 8, 44 21,034 24,964 –3,930 –15.7% Claims on customers 8, 45 131,242 138,448 –7,206 –5.2% Provisions for loan losses 9, 46 –2,282 –2,633 351 13.3% Financial assets 11, 47 55,820 56,328 –508 –0.9% At equity investments 12, 48 1 3 –2 –66.7% Investment property 13, 49 110 146 –36 –24.7% Intangible assets 14, 50 159 161 –2 –1.2% Fixed assets 15, 51 162 164 –2 –1.2% Deferred tax assets 16, 59 330 424 –94 –22.2% Other assets 53 2,764 2,874 –110 –3.8% Total 214,215 224,332 –10,117 –4.5% Consolidated Financial Statements >>> Balance sheet 87

liabilities 31.12.2007 31.12.2006 Change

Notes € million € million € million % Liabilities from trading activities 17, 54 4,525 2,504 2,021 80.7% Liabilities to banks 18, 55 64,327 62,045 2,282 3.7% Liabilities to customers 18, 56 30,446 34,937 –4,491 –12.9% Securitized liabilities 18, 57 98,633 107,083 –8,450 –7.9% Provisions 19, 20, 58 518 511 7 1.4% Deferred tax liabilities 16, 59 150 166 –16 –9.6% Other liabilities 60 5,958 6,901 –943 –13.7% Subordinated liabilities 21, 61 2,454 2,585 –131 –5.1% Profit participation certificates 22, 62 732 532 200 37.6% Hybrid capital 23, 63 900 900 0 0 Capital and reserves 24, 64, 65 5,572 6,168 –596 –9.7% Subscribed capital 64 914 914 0 0 Capital reserve 64 3,992 3,992 0 0 Retained earnings 64 1,037 785 252 32.1% Revaluation reserve 64 –365 95 –460 >–100.0% Reserve for cash flow hedges 64 0 –4 4 100.0% Reserve for currency translation –2 –1 –1 –100.0%

Distributable profit of Eurohypo AG – 387 –387 –100.0% Minority interests –4 0 –4 – Total 214,215 224,332 –10,117 –4.5% Financial Statements Financial Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 88 Consolidated Financial Statements

STATEMENT OF CHANGES IN CAPITAL AND RESERVES

Subscribed Capital Revenue in € million capital reserve reserve Balance as at January 1, 2006 (after correction for previous years in accordance with IAS 8.7 ff.) 914 3,992 724 Distributable profit Allocation to retained earnings1) 471) Revaluation reserve Change in revaluation reserve Reserve for cash flow hedges Change in reserve for cash flow hedges Gains from currency translation Net result of items recognized directly in equity 2006 47 Capital increase Allocation to retained earnings 2) 15 Dividend for financial year 2005 Changes in consolidated entities and other changes –1 Balance as at December 31, 2006 914 3,992 785

1) from group net income 2006 2) in accordance with the resolution of the AGM in May 2006

Subscribed Capital Revenue in € million capital reserve reserve Balance as at January 1, 2007 914 3,992 785 Distributable profit Allocation to retained earnings1) 252 Revaluation reserve Change in revaluation reserve Reserve for cash flow hedges Change in reserve for cash flow hedges Gains from currency translation Net result of items recognized directly in equity 2007 252 Capital increase Allocation to retained earnings Dividend for financial year 2006 Changes in consolidated entities and other changes Balance as at December 31, 2007 914 3,992 1,037

1) from group net income 2007 Consolidated Financial Statements >>> Statement of changes in capital and reserves 89

Reserve for Reserve for Minority interests Revaluation cash flow currency Distributable Minority Revaluation reserve hedges translation profit/loss interests reserve Total

195 –20 0 243 0 0 6,048 434 0 434 –47 –

–100 –100

16 16

–100 16 0 387 0 0 350

–15 – –228 –228 –1 –2 95 –4 –1 387 0 0 6,168

Reserve for Reserve for Minority interests Revaluation cash flow currency Distributable Minority Revaluation reserve hedges translation profit/loss interests reserve Total 95 –4 –1 387 0 0 6,168 0 252

–460 –4 –464

4 4 –1 –1 –460 4 –1 0 –4 –209

–387 –387

–365 0 –2 0 0 –4 5,572 Financial Statements Financial Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 90 Consolidated Financial Statements

CASH FLOW STATEMENT

information concerning the cash flow statement The cash flow statement shows the change in cash and cash equivalents at the Eurohypo Group as a result of cash flow from operating activity, investment activity and financing activity. The analysis is carried out in accordance with IAS 7 and the German Accounting Standard, DRS 2, supplemented by the specific German accounting standard for banks, DRS 2-10.

The allocation of the cash flows from operational business activity takes place in accordance with the definition of the operating result. The cash flows (inflows and outflows) from claims on banks and customers as well as other assets are reported here. Inflows and outflows from liabilities to banks and customers, securitized liabilities and other liabilities also form part of the operating activity. The interest and dividend payments resulting from the operating activity are also reflected in the cash flow statement.

The cash flow from investment activity results from incoming and outgoing payments in connection with the sale or acquisition of financial assets or tangible assets. Cash flows from financial assets result primarily from payment flows from transactions with public sector securities. The effects of changes in the entities included in the consolidated financial statements are also taken into account in the cash flow from investment activity.

All cash flows from transactions involving share capital, subordinated capital or profit participation certificates are reported under cash flow from financing activity.

In accordance with the strict definition, the cash and cash equivalents shown include only the cash reserve (see Note 42), which comprises the cash at bank and credit balances with central banks.

Cash flow statements are not very meaningful for credit institutions and replace neither our liquidity nor financial planning, nor are they used as a management tool. Consolidated Financial Statements >>> Cash flow statement 91

cash flow statement in € million 31.12.2007 31.12.2006 Net income for the year 355 434 Non-cash items included in net income and adjustments to reconcile net profit with net cash provided by operating activities Depreciation, write-downs and write-ups of claims, fixed assets and financial assets 379 415 Change in provisions 74 120 Change in other non-cash items 103 143 Net gain on the sale of financial and fixed assets –184 –75 Other adjustments –1,015 –1,515 Sub-total –288 –478 Change in assets and liabilities from operating activities after correction for non-cash items Claims – on banks 3,741 373 – on customers 6,690 8,292 Securities held for trading purposes 00 Other assets from operating activity –1,458 –143 Liabilities – to banks 2,921 16,986 – to customers –3,887 –1,670 Securitized liabilities –7,905 –16,752 Other liabilities from operating activities –123 –44 Interest and dividends received 11,114 10,344 Interest paid –9,158 –9,042 Extraordinary incoming payments –– Extraordinary outgoing payments –– Income-tax payments 82 –176 Net cash provided by operating activities 1,729 7,690 Proceeds from the disposal of: – Financial assets 15,290 7,430 – Fixed assets 210 Disbursements for investment in – Financial assets –16,710 –14,876 – Fixed assets –12 –9 Effects of changes in the entities included in the consolidation – – Proceeds from the sale of subsidiaries –– Disbursements for the acquisition of subsidiaries – 0 Changes in funds from other investing activities – – Cash flow from investing activities –1,430 –7,455 Proceeds from capital increases 00 Dividend payments –387 –228 Changes in funds from Statements Financial – subordinated capital 93 1 – other financing activities –– Cash flow from financing activities –294 –227 Cash and cash equivalents at the end of the previous period 123 105

+/– Net cash provided by operating activities 1,729 7,690 Report Auditors’ +/– Cash flow from investing activities –1,430 –7,445

+/– Cash flow from financing activities –294 –227 GS +/– Effects of exchange-rate changes on cash and cash equivalents 0 0 Cash and cash equivalents at the end of the reporting period 128 123 § 28 Pfandbrief At a glance 92 Consolidated Financial Statements

NOTES

Page Page Basis of consolidation and significant Information concerning accounting policies 94 the income statement 108 Accounting and valuation policies 94 (26) Net interest income 108 (1) Basic principles 94 (27) Provisions for loan losses 109 (2) Consolidated entities and (28) Net commission income 109 principles of consolidation 95 (29) Result from hedge accounting 110 (3) Financial instruments: (30) Net trading income 110

recognition and measurement (IAS 39) 96 (31) Result from financial assets 111 (4) Currency translation 101 (32) Result from at-equity investments 111 (5) Netting 101 (33) Result from investment property 112 (6) Cash reserve 101 (34) Administrative expenses 112 (7) Assets held for trading purposes 101 (35) Net other operating income/expenses 113 (8) Claims 101 (36) Amortization of goodwill 113 (9) Provisions for loan losses 101 (37) Restructuring expenses 114 (10) Genuine repurchase agreements 102 (38) Income taxes 114 (11) Financial assets 102 (39) Earnings per share 116 (12) At-equity investments 103 (40) Quarterly results 117 (13) Investment property 103 (41) Segment reporting 118 (14) Intangible assets 104 (15) Fixed assets 104 (16) Income taxes 105 (17) Liabilities from trading activities 105 (18) Liabilities to banks and customers and securitized liabilities 105 (19) Provisions for pensions and similar obligations 105 (20) Other provisions 106 (21) Subordinated liabilities 106 (22) Profit participation certificates 106 (23) Hybrid capital 107 (24) Capital and reserves and minority interests 107 (25) Trust transactions 107 Consolidated Financial Statements >>> Notes 93

Page Page Information concerning Information concerning the balance sheet (assets) 124 financial instruments 147 (42) Cash reserve 124 (67) Derivative transactions 147 (43) Assets held for trading purposes 124 (68) Cash flow hedges 149 (44) Claims on banks 125 (69) Market price risks 149 (45) Claims on customers 125 (70) Interest-rate risks 149 (46) Provisions for loan losses 126 (71) Credit spread risks 150 (47) Financial assets 128 (72) Currency risks 150

(48) At-equity investments 129 (73) Information in accordance with IFRS 7.31-42 150 (49) Investment property 129 (74) Information on management of capital 150 (50) Intangible assets 129 (75) Fair value of financial instruments 151 (51) Fixed assets 129 (76) Assets assigned as collateral 152 (52) Statement of changes in fixed assets (77) Maturity breakdown according and investments 130 to residual terms 153 (53) Other assets 134

Page Page Information concerning Other information 154 the balance sheet (liabilities) 134 (78) Subordinated assets 154 (54) Liabilities from trading activities 134 (79) Off-balance sheet obligations 154 (55) Liabilities to banks 134 (80) Trust transactions 154 (56) Liabilities to customers 135 (81) Auditors’ fees 155 (57) Securitized liabilities 135 (82) Employees (average) 155 (58) Provisions 135 (83) Related party disclosures 155 (59) Income taxes 138 (84) Securitization of loans 165 (60) Other liabilities 141 (85) Other obligations 165 (61) Subordinated liabilities 141 (86) Date of release for publication 165 (62) Profit participating certificates 142 (87) Corporate Governance – Declaration Financial Statements Financial (63) Hybrid capital 144 of conformity (§ 161 AktG) 165 (64) Information regarding capital and reserves 144 (65) Authorized capital 146 (66) Foreign currency positions 147 Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 94 Consolidated Financial Statements

ANHANG (NOTES)

basis of consolidation and significant accounting policies The present consolidated financial statements as at 31 December 2007 were prepared in accordance with section 315a clause 1 HGB and the Directive (EC) No. 1606/2002 (IAS directive) of the European parliament and the European Council of July 19, 2002 as well as other Directives on the adoption of certain international accounting standards on the basis of the International Accounting Standards (IAS) defined and published by the International Accounting Standards Board (IASB) and the Interna- tional Financial Reporting Standards (IFRS) and their interpretations by the Standing Interpretations Committee (SIC) and the International Financial Reporting Committee (IFRIC). All mandatory stan- dards and interpretations applicable to the financial year 2007 have been applied.

We have not applied any standards and interpretations which are only mandatory from January 1, 2008 or later (IFRS 8, revised IAS 1 as well as the changes to IAS 23 and IFRIC 11, 12, 13, 14) as per- mitted. However, we do not expect these new standards to lead to any material changes in account- ing or valuation.

Apart from the first-time application of IFRS 7, the standards and interpretations applied for the first time in the financial year 2007 (IFRS 7, changes to IAS 1 and IFRIC 7, 8, 9, 10) had no material impact on the consolidated financial statements. The disclosure of the classes of financial instruments man- dated by IFRS 7.6 is carried out on the basis of the balance sheet and income statement positions. Information on the type and scale of risks arising from financial instruments in accordance with IFRS 7 are set out in the notes and in the risk report within the management report.

In addition to the consolidated balance sheet and the consolidated income statement, the consolidat- ed financial statements also include the statement of changes in capital and reserves, the cash flow statement and the notes. The segment report is in the Notes section on pages 118 to 123.

The management report including the separate report on future risks and opportunities pursuant to Art. 315 HGB (risk report) is on pages 52 to 64 of the Annual Report.

All amounts are shown in millions of euros unless otherwise stated.

accounting and valuation policies (1) basic principles The financial statements are based on the going concern principle. Income and expenses are treated on an accruals basis and are recognized through profit or loss in the period in which they apply financially.

The financial statements are drawn up on the basis of the classification and valuation principles laid down by IAS 39. For derivative hedging instruments the hedge accounting rules apply (see note 3d for further explanation).

Uniform accounting policies are used throughout the Eurohypo Group in preparing the financial statements. All material fully consolidated companies have prepared their financial statements for the year-end December 31, 2007.

The consolidated financial statements contain figures which are determined on the basis of estimates and assumptions, as permitted by IAS. The estimates and assumptions used are based on past expe- rience and other factors such as planning figures and forecasts currently considered probable. Esti- Consolidated Financial Statements >>> Notes 95

mates are subject to uncertainties, in particular with respect to the determination of provisions for loan losses, pension obligations, goodwill, deferred taxes and fair value measurement, particularly in the valuation of CDO/RMBS (see page 101).

An asset is recognized in the balance sheet if it is likely that it will produce future economic benefits for the company and it is possible to produce a reliable figure for its acquisition or production cost or some other value.

A liability is recognized in the balance sheet if it is probable that there will be a direct outflow of resources with economic benefit as a result of the fulfilment of a present obligation and the amount to be paid can be reliably assigned a value.

(2) consolidated entities and principles of consolidation The consolidated financial statements of Eurohypo include all material subsidiaries in which the bank has a direct or indirect holding of 50% or more or over which the bank can exert a controlling influence. Subsidiaries are included in the group of consolidated companies as of the date on which the group obtains de facto control and are excluded from the consolidated group on disposal or in the event that Eurohypo ceases to exert a controlling influence.

Consolidated companies As at 31 December 2007 the group of consolidated companies consists – in addition to Eurohypo AG – of 36 fully consolidated German and international subsidiaries (2006: 32). In addition to the 36 subsidiaries we incorporated 4 special-purpose vehicles in our consolidated financial statements during the financial year in accordance with IAS 27 and SIC 12. Three associated or joint-venture companies were again consolidated using the equity method. A complete list of the subsidiaries and special purpose vehicles included in the consolidated financial statements can be found from page 172 onwards.

In 2007 the following entities were consolidated for the first time:

BACUL Beteiligungsgesellschaft mbH, Eschborn EHY Real Estate Fund I LLC, New York, USA Eurohypo Sub-Asset LLC, Wilmington, Delaware, USA Kenstone GmbH, Eschborn as well as the special purpose vehicles

Semper Finance 2007-1 GmbH, Frankfurt am Main Glastonbury Finance 2007-01 Ltd., Ireland

No companies were taken out of the consolidated group in 2007. Statements Financial

Affiliated companies which are only of minor significance in terms of a true and fair view of the assets, liabilities, financial position and profit or loss of the Group are not included in the consolidat- ed financial statements. The total assets of the 10 (2006: 11) companies and 6 (2006: 4) special-pur- Auditors’ Report Report Auditors’ pose vehicles which are not consolidated for materiality reasons amount to less than 0.1% of the total assets of the Eurohypo Group. As at 31 December 2007 BACUL Beteiligungsgesellschaft mbH, GS Eschborn, Eurohypo Sub-Asset LLC, Wilmington, Delaware, USA, and Kenstone GmbH, Eschborn, were consolidated for the first time. § 28 Pfandbrief At a glance 96 Consolidated Financial Statements

In 2007 the following newly established subsidiaries joined the group of companies not included in the consolidated financial statements:

Proudreed Investment Fund S.a.r.l., Paris, France Fonds d’Investissements Proudreed SCI, Paris, France

as did the newly established special-purpose vehicle

Opera Germany (No.3) GmbH, Frankfurt am Main

Principles of consolidation Consolidation is carried out by offsetting the cost of purchasing the affiliate against the Group’s share of the revalued equity as at the acquisition date. This equity is the difference between the assets and liabilities of the company acquired measured at fair value. Any difference between the higher acquisition costs and the Group’s share of the revalued equity is reported as goodwill under intangible assets and is subject to an impairment test at least once a year or as required.

Associated and joint-venture companies are valued using the equity method and are reported as at- equity investments. The acquisition costs of these investments and the goodwill are determined at the date of first inclusion in the consolidated financial statements. The same rules are applied as for subsidiaries.

All claims and liabilities, income and expenses and inter-company profits deriving from intra-Group transactions with consolidated companies are eliminated.

Holdings in subsidiaries which are not consolidated because of their low significance and invest- ments are reported at cost in the holdings of securities and participating interests.

(3) financial instruments: recognition and measurement (ias 39) In accordance with IAS 39 all financial assets and liabilities – which also include derivative financial instruments – have to be recognized in the balance sheet and valued in accordance with the category to which they are assigned. A financial instrument is a contract which simultaneously creates a financial asset for one company and a financial liability or equity instrument for the other company.

The following notes provide an overview of how the rules of IAS 39 in their current version have been applied within our Group:

a) Categorization of financial assets and liabilities and their valuation Loans and Receivables: Non-derivative financial instruments with fixed or determinable payment claims for which no active market exists are assigned to this category. This applies irrespective of whether the financial instru- ments were originated by the Bank or acquired in the secondary market. An active market exists if quoted prices are regularly made available, for example by an exchange or a broker, and these prices are representative of current transactions between unconnected third parties. Valuation is at amor- tized cost, which must be adjusted through profit and loss in the event of an impairment. Premiums and discounts are recognized in net interest income over the lifetime of the loan or receivable. Consolidated Financial Statements >>> Notes 97

Financial assets held to maturity Non-derivative financial assets with fixed or determinable payments and a fixed maturity may be included in this category if an active market exists for them and there is both the intention and the ability to hold them to maturity. Valuation is at amortized cost, which must be adjusted through profit and loss in the event of an impairment. Premiums and discounts are recognized in net interest income over the lifetime of the asset. In the financial year 2007 the Eurohypo Group has again made no use of the category of held-to-maturity financial assets.

Financial assets or liabilities at fair value through profit or loss: this category consists of two sub-categories:

Financial assets or liabilities held for trading: This category includes all financial assets and liabilities held for trading purposes. Financial assets held for trading purposes include original financial instruments (especially interest-bearing securities, equities and promissory notes), precious metals and derivatives with a positive fair value. Financial liabilities from trading include derivative financial instruments with a negative fair value.

Derivative financial instruments used as hedging instruments are only recognized as assets held for trading purposes or liabilities from trading activities insofar as they do not meet the conditions for the application of the hedge accounting rules (see below in this note). Otherwise they are shown as fair values attributable to hedging instruments.

Assets held for trading purposes and liabilities from trading activities are valued at their fair value at the year-end. Gains or losses on these valuations are included in net trading income in the income statement.

Designated at fair value through profit or loss: In accordance with the fair value option it is possible to value every financial instrument at fair value and record the net result of this valuation in the income statement. The decision whether or not to use the fair value option must be made irreversibly at the inception of the financial instrument.

The fair value option may be applied for a financial instrument provided that:

an accounting mismatch will be prevented or significantly reduced, or

a portfolio of financial instruments is managed, and its performance measured, on a fair value basis, or

the financial instrument has one or more embedded derivatives that must be separated.

Financial instruments for which a fair value option is used are shown at their fair value in the appro- Statements Financial priate balance-sheet item for their respective category. Gains or losses on these valuations are included in net trading income in the income statement.

The Eurohypo Group does not currently make use of the fair value option sub-category. Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 98 Consolidated Financial Statements

Financial assets available for sale: All non-derivative financial assets not assignable to one of the above categories have to be included in this category. These are primarily interest-bearing securities, equities and investments. They are valued at fair value. If the fair value for equity instruments cannot be reliably determined, valuation is at amortized cost. Gains and losses on valuation are recognized net of deferred taxes directly in equity in a separate item under capital and reserves (the revaluation reserve). Premiums and discounts are recognized in net interest income over the lifetime of the asset. If the financial asset is sold, the cumulative valuation previously recognized in the revaluation reserve is released and appears in the income statement. In the event of impairment the revaluation reserve has to be adjusted for the impairment and the amount charged to the income statement.

Other financial liabilities: This category includes liabilities to banks and customers and securitized liabilities. Valuation is at amortized cost. Premiums and discounts are recognized in net interest income over the lifetime of the asset.

The net gains and losses include impairments, write-ups, realized gains and losses on disposal and amounts recovered on written-down financial instruments from the IAS 39 category described above.

b) Financial Guarantee contracts IAS 39 defines a financial guarantee as a contract under which the guarantor is obliged to make certain payments that compensate the party to whom the guarantee is issued for a loss arising in the event that a particular debtor does not meet payment obligations on time as stipulated in the original or amended terms of a debt instrument. If the guarantee is issued to the Eurohypo Group the guarantee is not recognized in the balance sheet and is only taken into account if the impairment of a secured asset is being determined. When the Eurohypo Group is the guarantor the liability arising from a financial guarantee is recognized when the contract is signed. Initial measurement is at fair value at the date of recognition. The fair value of a financial guarantee is zero at the date of concluding the guarantee, because for fair market contracts the value of the premium agreed generally corresponds to the value of the guarantee obligation. On subsequent measurement a check is performed to deter- mine whether a provision is necessary.

If a financial guarantee is held for trading purposes it will, in contrast to the foregoing description, be dealt with in accordance with the regulations for the held-for-trading category (cf. Note 3a).

c) Embedded Derivatives IAS 39 also regulates the treatment of derivatives embedded in original financial instruments. Such financial instruments are also referred to as hybrid financial instruments. They include, for example, reverse convertible bonds (bonds with a right to repayment in the form of equities) or bonds with index-related interest payments. According to IAS 39, under certain conditions the embedded deriva- tive must be shown separately from the original host contract as a standalone derivative.

Such separation has to be carried out if the characteristics and risks of the embedded derivative are not closely related to those of the original host contract. In this case the embedded derivative has to Consolidated Financial Statements >>> Notes 99

be regarded as part of the trading portfolio and recognized at its fair value. Changes on revaluation have to be shown in profit and loss. The host contract is accounted for and valued by applying the rules of the category to which the financial instrument is assigned.

However, if the characteristics and risks of the embedded derivative are closely linked to those of the original host contract, the embedded derivative is not shown separately and the hybrid financial instru- ment is valued as a whole in accordance with the general provisions of the category to which the finan- cial instrument is assigned.

d) Hedge accounting IAS 39 contains extensive hedge accounting regulations, i.e. accounting for hedging instruments – espe- cially derivatives – and the underlying hedged transactions.

In line with the general regulations, derivatives are classified as trading transactions (assets held for trading purposes or liabilities from trading activities) and are valued at their fair value. The result of such valuation is shown under net trading income.

If it can be demonstrated that derivatives are used to hedge risks from non-trading transactions, IAS 39 permits the application of hedge accounting rules under certain conditions. For the most part, two forms of hedge accounting are distinguished:

Fair Value Hedge Accounting: IAS 39 prescribes the use of hedge accounting for derivatives which are employed to hedge the fair value of recognized assets or liabilities. It is primarily the Group’s issuing and lending business and the securities portfolio for liquidity management, insofar as these are fixed-income securities, that are subject to this fair value risk. Interest-rate and interest-rate/currency swaps are the primary instruments used to hedge these risks.

In line with the regulations for fair value hedge accounting the derivative financial instruments used for hedging purposes are shown at fair value as fair values attributable to derivative hedging instru- ments. Changes on revaluation appear as profit or loss in the income statement under result from hedge accounting. Any changes in the fair value of the hedged asset or hedged liability resulting from the hedged risk have to be recognized and similarly shown in the income statement under result from hedge accounting. In the case of a perfect hedge, the changes on revaluation recognized in the income statement for the hedge and the hedged transaction will balance each other out.

Cash Flow Hedge Accounting: IAS 39 prescribes the use of cash flow hedge accounting for derivatives which are employed to hedge the risk of a change in future cash flows. A cash-flow risk exists in particular for floating-rate loans, securities and liabilities and for forecast transactions (for example, forecast fund-raising or Statements Financial financial investments). Within the Eurohypo Group the interest rate risks in asset/liability manage- ment are mainly hedged through cash flow hedges. Primarily interest-rate and interest-rate/currency swaps are used for hedging purposes. Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 100 Consolidated Financial Statements

Derivative financial instruments used in cash flow hedge accounting are carried at fair value as fair values attributable to derivative hedging instruments. Changes in value are divided into effective and ineffective portions. The effective valuation result is that part of the change in the hedging derivative that represents an effective hedge against the cash flow risk from the hedged underlying transaction and, after deferred taxes have been taken into consideration, valuation gains and losses are recognized directly in equity in a separate item (reserve for cash flow hedges). By contrast, the ineffective portion is shown in the income statement. There is no change in the general accounting rules described above for the transactions underlying cash flow hedges.

The application of hedge accounting rules is tied to a number of conditions. These relate above all to the documentation of the hedge and also to its effectiveness.

The hedge has to be documented at the time it is established. Documentation must include, in par- ticular, the identification of the hedging instrument and the underlying hedged transaction and also the details of the hedged risk and the method employed to determine the effectiveness of the hedge. Documentation for an underlying transaction hedged with a derivative may relate either to an indi- vidual asset or assets, liability, pending business or forecast transaction(s) or to a portfolio of such items. It is not sufficient, however, to document a net risk position to be hedged.

In addition to documentation, IAS 39 calls for evidence of an effective hedge in order for hedge accounting rules to be applied. Effectiveness in this context means the relationship between the change in fair value or the cash flow resulting from the hedged underlying transaction and the change in fair value or the cash flow resulting from the hedge. If these changes almost entirely balance one another, a high degree of effectiveness exists. Proof of effectiveness requires, firstly, that a high degree of effectiveness can be expected from a hedge in the future (prospective effectiveness); sec- ondly, when a hedge exists, it must be regularly demonstrated that this was highly effective during the period under review (retrospective effectiveness). A high degree of retrospective effectiveness exists if the ratio of changes in the fair values or the cash flow lies between 0.8 and 1.25. The meth- ods used for determining effectiveness must be disclosed.

Valuation of subprime portfolios The CDO and RMBS portfolios are included in the financial assets and are allocated to the IAS 39 cat- egory “Available for Sale”. As there is no active market in these financial instruments, we have, as prescribed by IAS 39, applied a valuation methodology and derived the fair values from the available market price indices. We examined whether an RMBS is impaired by applying a bottom-up analysis to individual tranches based on trustee reports and other information. The expected losses resulting from this analysis were transferred to the underlyings of the CDO on the basis of the ratings and the issue years. If assets are impaired, the differential is charged to the income statement as an impair- ment loss. This analysis led to a pre-tax impairment charge of € 188 million in the income statement for the subprime-related CDO and RMBS portfolios in the financial year 2007. Consolidated Financial Statements >>> Notes 101

(4) currency translation Assets and liabilities denominated in foreign currencies and outstanding spot foreign–exchange transactions are translated at the spot rates, and foreign-exchange forward contracts at the forward rate, on the balance-sheet date. Expenses and income are translated at market rates. Currency trans- lation for investments and holdings in subsidiaries denominated in foreign currencies is effected with historical rates at historical cost. Translation gains and losses from the consolidation of capital is recognized directly in equity.

(5) netting Liabilities are netted against claims if they relate to the same counterparty, are due on demand, and it has been agreed with the counterparty that the interest and commission calculation is carried out as if only a single account existed.

(6) cash reserve The cash reserve of the Eurohypo Group comprises cash at hand and balances with central banks. These are reported at nominal value.

(7) assets held for trading purposes All claims which are held for trading purposes are included in this category. They are valued at fair value in the balance sheet at the balance sheet date. Also shown at fair value are all derivative finan- cial instruments which are not used as hedging instruments under hedge accounting rules and have a positive fair value. For listed products exchange-based prices are used; non-listed products are measured via the net present-value method or other suitable measurement models (for instance, option-price models). All realized gains and losses as well as unrealized valuation changes are reported in net trading income in the income statement.

(8) claims The Eurohypo Group’s claims on banks and customers which are not held for trading purposes and are not quoted on an active market are shown at amortized cost. Premiums and discounts are recog- nized in net interest income over the lifetime of the claim. The book values of claims which qualify for hedge accounting are adjusted for the changes in fair value attributable to the hedged risk.

(9) provisions for loan losses We fully provide for the special risks associated with the banking business by forming specific valua- tion allowances and portfolio valuation allowances.

In order to account for the lending risks represented by claims on customers and banks, we have

formed specific valuation allowances based on uniform standards across the Group. Valuation Statements Financial allowances have to be formed for a loan if it is probable that not all the interest payments and repay- ments of principal will be performed as agreed. The level of the valuation allowance corresponds to the difference between the book value of the loan less the cash value of the expected future cash

flow. Report Auditors’ GS § 28 Pfandbrief At a glance 102 Consolidated Financial Statements

In addition we also account for credit risks by means of portfolio valuation allowances. The level of the portfolio valuation allowances to be formed is determined by an approach derived from the Basel II system.

Insofar as it relates to claims in the balance sheet, the aggregate provision for loan losses is deducted directly from claims on banks and claims on customers. However, provisions for the off-balance- sheet business (guarantees, endorsement liabilities, lending commitments) are shown under provi- sions for lending risks (under other provisions) in the liabilities.

Unrecoverable amounts for which no specific valuation allowance has been formed are written down immediately. Amounts recovered on written-down claims are booked to the income statement. Writ- ten-down claims are (partly) written off utilizing any existing specific allowances if the claim proves to be partly or wholly unrecoverable. Parts of written-down claims which exceed the existing provi- sions are also directly written off in the event that they are unrecoverable.

(10) genuine repurchase agreements and securities-lending transactions Repo transactions combine the spot purchase or sale of securities with their forward sale or repur- chase, the counterparty being identical in both cases. The securities sold under repurchase agree- ments (spot sale) still appear, and are valued, in the consolidated balance sheet as part of the securities portfolio. According to counterparty, the inflow of liquidity from the repo transaction is shown in the balance sheet as a liability either to banks or customers. The agreed interest payments are booked as interest paid, reflecting the respective maturities.

The outflows of liquidity as a result of reverse repos appear as claims on banks or customers and are recognized and valued accordingly. The securities bought under repurchase agreements and on which the financial transaction is based (spot purchase) are not carried in the balance sheet, nor are they valued. The agreed interest payments from reverse repos, if they are not the result of trading transactions, are treated as interest income, reflecting the respective maturities. Claims arising from reverse repos are not netted against liabilities from repos involving the same counterparty.

(11) financial assets Bonds and other fixed-income securities, shares and other non fixed-income securities,which are not part of the trading portfolio, are reported under financial assets, as are shares in affiliated com- panies and participating interests not included in the consolidated financial statements.

In the Eurohypo consolidated financial statements the financial assets are assigned to the available for sale category. These assets are measured at fair value. If the fair value cannot be reliably deter- mined for available-for-sale instruments, debt instruments are recognized in the balance sheet at amortized cost and equity instruments are recognized at acquisition cost less extraordinary depreci- ation. This applies to unlisted assets in particular.

Net changes are reflected – net of deferred taxes – under the revaluation reserve in equity. Realized gains and losses only affect the income statement when the holdings are sold. Premiums and dis- counts are recognized in net interest income over the lifetime of the investment or security. If, how- Consolidated Financial Statements >>> Notes 103

ever, an effective hedge with a derivative financial instrument exists, that part of the change in fair value attributable to the hedged risk is shown as part of the trading profit under the result from hedge accounting. In the case of permanent impairment, the required write-down is charged to the income statement.

Value is impaired if the value falls either significantly or persistently below acquisition cost. No write-ups through profit or loss may be made for available-for-sale equity instruments. Changes in the fair value of listed equity instruments during subsequent reporting periods are shown in the revaluation reserve. This means that the profit or loss is affected only in the case of impaired value and disposals. Write-ups of unlisted equity instruments whose value cannot be reliably determined on a regular basis may not be recognized. If the reasons for an impairment of debt instruments cease to apply, the debt instrument is written up, at a maximum to its amortized cost, and the differ- ence is reflected in profit or loss. The amount in excess of the amortized cost has to be shown in the revaluation reserve.

(12) at-equity investments Shares in associated companies and joint ventures are reported using the equity method in the avail- able-for-sale portfolio. In the financial year 2007, as in 2006, Delphi I LLC, Wilmington, Delaware, USA, Urbanitas Grundbesitzgesellschaft mbH, Berlin, and Servicing Advisors Deutschland GmbH, Frankfurt/Main were reported here. The at-equity valuations are based on the financial statements for 2007.

The shareholding in Delphi I LLC, Wilmington, Delaware, USA was 33.3% as at December 31, 2007. The shareholding in the other two companies indicated above was 50% at the reporting date.

The total assets of the associated companies amounted to € 0.4 billion and revenues stood at € 73 million. Income for the financial year 2007 was a loss of € 78 million.

The assets of approximately € 0.4 billion relate mainly to claims under loan agreements.

(13) investment property Investment properties are defined as land and buildings held for the purpose of earning rental income or because they are expected to increase in value. The Eurohypo Group mainly reports property acquired during collateral realization under investment property.

Investment property is valued at the date of acquisition at cost in accordance with IAS 40, taking into account the directly attributable transaction costs. The fair value model is used for the subsequent valuation of property held as a financial investment. Fair value is determined on the basis of annually updated valuations by surveyors as well as on the market values achievable in the current market.

Commercial properties are usually valued based on capitalized earnings; individual apartment build- Statements Financial ings are generally valued on an asset or comparative value basis. Gains and losses arising from changes in fair value are recognized in the income statement for the period. Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 104 Consolidated Financial Statements

(14) intangible assets We report software and goodwill under intangible assets. Valuation is normally at amortized cost. On each balance-sheet date, all goodwill is examined with a view to its future economic utility on the basis of cash-generating units. The book value of the cash-generating unit (including any attributable goodwill) is compared with the value in use of this unit. The value in use is based on the expected cash flows of the relevant unit in accordance with the business plan, discounted by a risk-adjusted interest rate. If it appears that the expected utility will not materialize (impairment), an extraordinary write-down is carried out. Any additional writing-down requirement will be distributed proportion- ately over the remaining assets of the unit.

When valuing purchased and proprietary software the cost is distributed over the useful economic life and amortized on a straight-line basis over a period of 3 to 5 years.

If the reason for an extraordinary write-off carried out in a previous financial year no longer applies, the assets are written up at a maximum to cost. Write-ups of goodwill are not permitted.

(15) fixed assets Fixed assets are reported at cost less scheduled straight-line depreciation in line with the expected useful life during which the assets are depreciable. Extraordinary depreciation is carried out if a per- manent impairment is likely. If the grounds for the extraordinary depreciation no longer apply, the asset is written up at a maximum to amortized cost. Fixed assets are depreciated on a straight-line basis in line with their expected economic useful life over the following timescales:

useful life

Jahre Office buildings 40 Residential buildings up to 50 Operating and office equipment 3 to 23

Acquisitions of minor-value assets in the financial year are recorded directly as an expense in the reporting period for reasons of materiality. Interest on borrowings to finance fixed assets is not capi- talized. Measures to maintain fixed assets are recorded as an expense in the year in which they arise.

Depreciation is reported under administrative expenses. Gains on the disposal of fixed assets are recorded under other operating income and losses under other operating expenses. Consolidated Financial Statements >>> Notes 105

(16) income taxes Current tax assets and liabilities were calculated by applying the current tax rates at which a refund from, or a payment to, the relevant fiscal authorities is made.

Deferred tax assets and liabilities derive from differences between the value of an asset or liability as shown in the balance sheet and its taxable value. These are expected to reduce or increase taxes on income in future. They are valued at the specific income-tax rates which apply in the country where the company in question has its registered office and which can be expected to apply for the period in which they are realized. Deferred taxes, for example on as yet unused losses carried forward, are only shown on the balance sheet if taxable profits are likely to be generated by the same unit in future. Tax assets and liabilities may not be discounted. Deferred tax assets and liabilities are formed and carried such that – depending on the reason for the deferral – they are recognized either under taxes on income in the income statement or directly in the relevant equity item.

Income-tax expenses or income are reported under income taxes in the consolidated income state- ment and divided in the notes into current and deferred tax assets and liabilities for the financial year. Other taxes which are not related to profits appear under other operating income. Current and deferred tax assets and tax liabilities appear as separate asset or liability items in the balance sheet.

(17) liabilities from trading activities Derivative financial instruments with negative fair values, which are not used for hedge accounting purposes under IAS 39, are reported under liabilities from trading activities.

(18) liabilities to banks and customers and securitized liabilities Financial liabilities are reported at amortized cost. The derivatives embedded in liabilities have been separated from their host debt instrument, valued at fair value and shown either under assets held for trading purposes or liabilities from trading activities. As part of hedge accounting, hedged liabilities are adjusted for the fair value attributable to the hedged risk.

(19) provisions for pensions and similar obligations Both defined-benefit and defined-contribution plans are in place for company pensions, which are financed entirely via the provisions for pensions and similar obligations. These correspond to the net present value of the accrued pension rights as at the reporting date, taking into account anticipated rises in wages and salaries as well as the forecast trend in pensions. The pension provisions and similar obligations (provision for age-related short-time working, early retirement provision, anniver- sary provisions) are determined in accordance with IAS 19 on the basis of actuarial reports in line with the projected unit credit method. Changes in the calculation parameters (interest rate, staff turn- over, career trends, index-linking of vesting rights and pensions) expected in the future and actuarial gains and losses are taken into account. Statements Financial Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 106 Consolidated Financial Statements

Eurohypo has opted to use the corridor approach. Actuarial gains and losses are treated in line with the corridor approach, which means that they are only recognized in the income Statement in sub- sequent years if the total amount of gains or losses accruing as at the balance sheet date exceeds the higher of 10% of the net present value of the total obligations or 10% of the fair value of the plan’s assets.

(20) other provisions We form other provisions on the scale deemed necessary for liabilities of uncertain amount towards third parties and for anticipated losses related to uncompleted transactions.

(21) subordinated liabilities Capital amounts assigned to the bank which qualify as a financial obligation in accordance with IAS 32.11 and IAS 32.15 as a result of the repayment claim of the relevant investor and are categorized as subordinated are reported under subordinated liabilities.

Under securitized and unsecuritized subordinated liabilities we report subordinated bearer bonds, subordinated registered paper and subordinated loans raised. They are reported at amortized cost.

For subordinated funds raised, there is no early repayment obligation on the part of Eurohypo under any circumstances. In the event of liquidation, bankruptcy, composition or any other proceedings to avoid bankruptcy, the principal claims and interest claims arising from these liabilities are serviced after the claims of all creditors of Eurohypo which are not also subordinated.

(22) profit participation certificates The profit participation certificates reported on the balance sheet are capital amounts assigned to the bank, which qualify as a financial obligation in accordance with IAS 32.11 and IAS 32.15 as a result of the claim to repayment on the part of the relevant investor and are categorized as subordi- nated.

The participation certificates grant an annual distribution which ranks ahead of the profit share of the shareholders; they are subordinate to other creditors unless these too are subordinated. Subject to the provisions on participation in a loss, the certificates are repaid at the nominal amount.

The characteristics of the profit participation certificates comply with the provisions of the German Banking Act (section 10 par. 5 KWG) and are therefore considered to be part of the liable capital.

For profit participation certificates there is no early repayment obligation on the part of Eurohypo under any circumstances. In the event of liquidation, bankruptcy, composition or any other procee- dings to avoid bankruptcy, the principal claims and interest claims arising from these liabilities are serviced after the claims of all creditors of Eurohypo which are not also subordinated. Consolidated Financial Statements >>> Notes 107

(23) hybrid capital For hybrid capital there is no early repayment obligation on the part of Eurohypo under any circum- stances. In the event of liquidation, bankruptcy, composition or any other proceedings to avoid bankruptcy, the principal claims and interest claims arising from these liabilities are serviced after the claims of all creditors of Eurohypo which are not also subordinated.

(24) capital and reserves and minority interests In accordance with IFRS, the capital and reserves give rise to a residual claim on the assets of a company after deduction of all its liabilities or claims for which the investor has no termination option.

In accordance with IAS 39, changes in the value of available-for-sale assets and effective portions of the changes from cash-flow hedges are reported directly in capital and reserves.

Buybacks of own equity instruments are deducted from capital and reserves in accordance with IFRS and the resultant gains or losses recognized directly in equity. Under IAS 1 minority holdings are accounted for within capital and reserves.

(25) trust transactions Trust business involving the management or placement of assets for the account of others is not shown on the balance sheet. Commissions received from such business are included under net com- mission income in the income statement. Financial Statements Financial Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 108 Consolidated Financial Statements

information concerning the income statement (26) net interest income

in € million 2007 2006 Interest income from Real-estate finance 4,797 4,571 Public finance 2,387 2,817 Other lending and money-market business 853 524 Fixed-income securities and book entry-securities 2,541 2,418 Current income from participating interests and from non-consolidated affiliated companies 16 Profits on the sale of loans and receivables 42 26 Total interest income 10,621 10,362 Interest expenses for Securitized liabilities 4,462 4,688 Registered Pfandbriefe 1,182 1,436 Loans taken up 810 712 Other borrowings and money-market business 2,190 1,246 Subordinated liabilities 134 138 Profit participation certificates 38 24 Hybrid Capital 53 59 Current result from swap transactions (Net of interest income and interest expense) 572 810 Losses on the sale of loans and receivables 1 – Total interest expenses 9,442 9,113 Total 1,179 1,249

The net interest income includes € 10,562 million interest income and € 8,870 million interest expense for financial assets and liabilities which are not measured at fair value through profit or loss. The interest income from real-estate finance includes € 76 million in early redemption penalties.

Netting payments in relation to interest-rate swaps with off-market coupons are amortized on a straight-line basis in interest income over the maturity of the swap. Consolidated Financial Statements >>> Notes 109

(27) provisions for loan losses Provisions for loan losses consist of valuation allowances and provisions for off-balance-sheet com- mitments in relation to the lending business and are reported in the income statement as follows:

Retail Commercial Eurohypo lending business real estate Public finance Group € million € million € million € million 2007 2006 2007 2006 2007 2006 2007 2006 Additions to loan loss provisions 140 199 397 383 0 0 537 582 Releases of loan loss provisions 96 49 276 197 0 0 372 246 Direct write-downs 44 29 57 14 – – 101 43 Recoveries on loans previously written down 7 19––––719 Total 81 160 178 200 00259 360

(28) net commission income in € million 2007 2006 Commission income Securities transactions 00 Lending and guarantee business 208 184 Services 90 66 Total commission received 298 250 Commission paid Securities transactions 44 Lending and guarantee business 59 63 Services 86 Total commission paid 71 73 Total 227 177

The commission received and commission paid derive from transactions with financial instruments which are not measured at fair value through profit or loss. Financial Statements Financial Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 110 Consolidated Financial Statements

(29) result from hedge accounting

in € million 2007 2006 Result from hedge accounting from fair-value hedges –8 –5 from cash flow hedges 00 Total –8–5

The result from hedge accounting includes the valuation gains and losses on effective hedges under the hedge accounting rules.

The result from fair value hedges of € –8 million (2006: € –5 million) comprises a gain of € 734 million (2006: € 339 million gain) on derivatives used for hedging purposes and a loss of € 742 million (2006: € 344 million loss) on the valuation of hedged items.

(30) net trading income

in € million 2007 2006

CMBS transactions New York including associated derivatives 31 36 Result from other derivative financial instruments (no hedge accounting) 1 57 Result from own trading –1 3 Other trading result –42 2 Total –11 98

The financial instruments in the trading portfolio are measured at fair value. Unlisted transactions are based on recognized net present value or option price models. The net trading income is produced by offsetting trading income against the corresponding expenses. The results from fair-value measu- rement are included in the portfolios, i.e. unrealized price gains and losses are included in the result reported.

The net trading income comprises € –35 million on realizations, € 24 million on valuations and € 0 million of net interest income.

The other trading income comprises the realized gain on the redemption of liabilities of € –37 million (2006: € 1 million). Consolidated Financial Statements >>> Notes 111

(31) result from financial assets Result from financial assets includes net gains on valuation and disposal of available-for-sale secu- rities and of participating interests, stakes in associated companies and stakes in unconsolidated subsidiaries.

€ million 2007 2006 Gains on disposal of available-for-sale securities –21 64

Gains on disposal (Transfer from the revaluation reserve)1) 168 71

Losses on disposal (Transfer from the revaluation reserve)1) 17 Net valuation gains –188 – Net result from available-for-sale participating interests and non-consolidated affiliated companies valued at amortized cost 12 0 Gains on disposal 13 1 Losses on disposal 11 Net valuation gains –– Total –964

1) In the current financial year this item contains transfers of € 25 million from the revaluation reserve.

The available-for-sale portfolio is measured at fair value. However, if there is no liquid market price or no reliable relevant factors can be determined for the valuation model, shares in affiliated companies and participating interests are carried at amortized cost.

(32) result from at-equity investments The results from disposal and valuation of the associated companies and joint ventures carried at-equity are reported under investments in companies accounted for using the equity method. in € million 2007 2006 Result from at-equity investments Gains on disposal –– Result from at-equity valuation – 1 Expenses for at-equity investments Losses on disposal –– Expenses from at-equity valuation –2 –18 Total –2–17

The expenses from at equity investments in 2007 derive from Servicing Advisors Deutschland GmbH and in 2006 from Delphi I LLC, Wilmington, Delaware, USA. Statements Financial Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 112 Consolidated Financial Statements

(33) result from investment property

in € million 2007 2006 Result from investment property Rental income 37 Income from disposals 74 Write-ups 11 0 Other income 50 Expenses for investment property Building occupancy and office costs 3 3 of which: rented property 2 2 of which: vacant property 1 1 Expenses for disposals 00 Depreciation and impairment 1 5 Other expenses 61 Total 16 2

(34) administrative expenses

in € million 2007 2006 Wages and salaries 239 270 Social-security contributions 30 29 Expenses for pensions and other employee benefits 43 37

Including dues to BVV 45 Total staff expenses 312 336

Other administrative expenses 211 191 Depreciation, amortization and impairments on fixed and intangible assets and office equipment Intangible assets 99 Fixed assets 10 11 Total depreciation and amortization 19 20

Total administrative expenses 542 547

With regard to depreciation, amortization and impairments on intangible assets, fixed assets and operating and office equipment, Eurohypo reviews the previous method of depreciation or amortiza- tion and residual useful life at each balance-sheet date. If there are signs of impairment, an impair- ment test is carried out. Subsequent valuation in the financial year did not lead to any extraordinary write-downs (2006: – €). Consolidated Financial Statements >>> Notes 113

(35) net other operating income/expenses in € million 2007 2006 Net other operating income/expenses Rental income 01 Realization gains from the disposal of fixed assets 1 8 Income from the release of provisions 8 6 Sundry other operating income 61 37 Total net other operating income 70 52

Other net operating expenses Realization losses on the disposal of fixed assets 1 1 Allocation to provisions 36 Sundry other operating expenses 69 38 Total net other operating expenses 73 45

Net other operating income/expenses –37

Other net operating income and expenses comprise items which cannot be allocated to other items in the income statement.

The main items in sundry other operating income and sundry other operating expenses are sales revenue and the associated expenses of Eurohypo Systems GmbH from third-party client business. Sundry other operating expenses also includes non profit-related taxes of € 5 million (2006: € 5 million).

(36) amortization of goodwill Under IFRS, goodwill may no longer be amortized on a scheduled basis and must be subject to an impairment test at least once a year or as required and adjusted accordingly.

As in 2006 no amortization of goodwill was required during the reporting year. Financial Statements Financial Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 114 Consolidated Financial Statements

(37) restructuring expenses

in € million 2007 2006 Expenses for restructuring measures introduced – 15 Total –15

The restructuring expenses in 2006 related to € 15 million of restructuring expenses incurred by Eurohypo in connection with the integration of the bank in the Commerzbank Group.

(38) income taxes The breakdown of the Group’s income tax expense is as follows:

in € million 2007 2006 Current tax expense/income Germany –15 –15 Abroad –107 –99 Total current tax expense/income –122 –114 Deferred tax expense/income Germany –159 –88 Abroad 48 –17 Total deferred tax expense/income –111 –105 Total –233 –219

Current tax expense/income for the current year –116 –123 for previous years –6 9 Total –122 –114

Deferred tax expense/income from changes in temporary differences and loss carryforwards –75 –107 from new evaluation of temporary differences, loss carryforwards –36 2 Total –111 –105

In addition to current income taxes, deferred tax income or expenses and the tax transfer to the par- ent company are reported under income taxes. The deferred tax income or expense results from the recognition in profit or loss of deferred taxes on the basis of changes in temporary differences, the creation or utilization of loss carryforwards and adjustments to the value of deferred tax assets and changes in tax rates.

The current income tax payable on the Group’s net income for the year is reported in the relevant period as an expense in line with the tax legislation in the relevant jurisdictions.

With the registration of the controlling and profit transfer agreement between Eurohypo AG, Eschborn and Commerzbank Inlandsbanken Holding GmbH, Frankfurt am Main, in the Commercial Register on 4 September 2007 the requirements for fiscal unity for corporation tax and trade tax purposes as defined by Section 14 of the Corporation Tax Act and Section 2 (2) of the Trade Tax Act were met Consolidated Financial Statements >>> Notes 115

with effect from January 1, 2007. Eurohypo AG, Eschborn, stands in a relationship of fiscal unity with Commerzbank AG, Frankfurt am Main through Commerzbank Inlandsbanken Holding AG, Frankfurt, which itself is in a relationship of fiscal unity with Commerzbank AG.

The taxable income of Eurohypo AG Inlandsbank in Germany in 2007 has been added to that of Commerzbank AG, Frankfurt/Main via Commerzbank Inlandsbanken Holding AG, Frankfurt/Main, for the purposes of corporation tax and trade tax.

The tax expense in Germany of Eurohypo AG, Eschborn as parent company was transferred to Eurohypo AG Inlandsbank, Eschborn, on the basis of a transfer agreement. The transfer of € 11 mil- lion is reported in the current tax expense in Germany.

At the level of Eurohypo AG, Eschborn, only the compensation payments to outside shareholders are taxable in accordance with Section 16 of the Corporation Tax Act. The corporation tax charge is € 2 million and is contained in the current tax expense in Germany.

With the enactment of the 2008 Corporation Tax Reform Act the deferred taxes of Eurohypo AG Inlandsbank and its subsidiaries are calculated at the expected nominal average tax rate of Com- merzbank AG, Frankfurt/Main of 30.85% applicable from January 1, 2008. This is made up of a corporation tax rate including solidarity surcharge of 15.83% and an effective trade tax rate of 15.02%.

The current and deferred taxes for Europäische Hypothekenbank S.A., Luxembourg, Eurohypo Japan Corp., J-Tokyo and the foreign branches were calculated using the tax rates applicable in the countries concerned.

The following table shows the reconciliation of the expected income-tax expense (income) in the relevant financial year with the reported income-tax expense (income).

The expected income-tax expense (income) is calculated by multiplying the income before tax by the overall tax rate for the financial year of 39.38%. in € million 2007 2006

Income from normal operating activity under IFRS: 588 653 Group income-tax rate 39.38% 37.70% Expected tax expense (income) –231 –246 Tax effects arising from previous years and tax-rate changes –5 –8 differing tax rates in Germany and abroad 38 8 changes in recognition and adjustments to deferred tax assets –46 35 other tax-free income 44 Financial Statements Financial non-deductible expenses –9 –15 permanent account differences 0 1 other 22

Tax transfer 14 – Report Auditors’ Reported tax expenses (income) –233 –219 GS § 28 Pfandbrief At a glance 116 Consolidated Financial Statements

With the establishment of fiscal unity for income tax purposes with effect from January 1, 2007 the taxable income of Eurohypo AG, Eschborn is added to that of the parent company Commerzbank AG, Frankfurt/Main via the intermediate parent company Commerzbank Inlandsbanken Holding GmbH, Frankfurt/Main. As a result, for the duration of the fiscal unity, Eurohypo AG Inlandsbank, Eschborn cannot offset the tax loss carryforwards existing at 31 December 2006 against current German taxa- ble income. The resulting write-down of deferred tax assets on the German tax loss carryforwards leads to an impact of € 46 million on the reconciliation.

On the basis of the transfer agreement Eurohypo AG, Eschborn has made a tax transfer via the inter- mediate parent company to the ultimate parent company of € 11 million, which is € 13 million less than the current tax expense on a stand-alone basis. In relation to the pre-tax profit from German operations this gives rise to a reconciliation effect of € 13 million.

The revaluation of deferred taxes due to the reduction in corporation tax rates from January 1, 2008 produces a reconciliation effect of € 8 million.

The retrospective taxation prescribed by the 2008 Annual Tax Act of the previously tax-free EK 02 capital, as per Section 38 (4) to (10) of the Corporation Tax Act, will be paid by Eurohypo AG, Esch- born on request in one sum on September 30, 2008. The increase in the corporation tax of € 5 mil- lion, which represents 3% of the last EK 02 figure as calculated on December 31, 2006 and confir- med in a tax assessment notice, has been recognized as a current tax liability and is included in the domestic tax expense.

Other reconciliation effects derive from tax-free dividends of € 4 million under local tax law. Other reconciliation effects derive from reductions in the trade tax of € 2 million and an effect of € 9 million due to the non-deductibility of operating expenses under local tax law.

(39) earnings per share To calculate the earnings per share, the net income for the year is divided by the average number of shares outstanding during the financial year, deducting the average number of treasury shares.

in € million 2007 2006

Net income attributable to the shareholders of Eurohypo AG 355 434 Average number of shares outstanding (in million) 351 351 Earnings per share in € 1.01 1.24

In principle, the diluted earnings per share are calculated using the same method, but taking into account the dilution effects from the exercise of outstanding rights for the subscription of Eurohypo shares. As in the previous year, no such rights were in place as at the end of 2007. As a result, diluted earnings per share at Eurohypo are equivalent to the earnings per share. Consolidated Financial Statements >>> Notes 117

(40) quarterly results

Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 in € million 2007 2007 2007 2007 2006 2006 2006 2006 Interest income 2,785 2,669 2,560 2,607 2,615 2,534 2,620 2,593 Interest expense 2,462 2,394 2,258 2,328 2,333 2,238 2,290 2,252 Net interest income 323 275 302 279 282 296 330 341 Provisions for loan losses –66 –78 –57 –58 –104 –138 –66 –52 Net interest income after provisions 257 197 245 221 178 158 264 289 Commission received 86 73 72 67 80 65 49 56 Commission paid 17 19 15 20 19 19 17 18 Net commission income 69 54 57 47 61 46 32 38 Result from hedge accounting 12 20 –19 –21 5 12 –9 –13 Net trading income –72 –11 28 44 50 –7 44 11 Result from financial assets 9 –98 30 50 23 1 21 19 Result from at-equity investments –1 –100010–18 Result from investment property –34 46 0 4 –5511 Administrative expenses 144 128 131 139 150 126 141 130 Net other operating income/expenses –1 –3100–5111 Net operating income 95 76 211 206 162 85 223 198 Amortization of goodwill – – – – – – – – Restructuring expenses – 00000150 Profit before tax 95 76 211 206 162 85 208 198 Income taxes 20 63 74 76 36 30 74 79 Profit after tax 75 13 137 130 126 55 134 119 Minority interest 00000000 Net income attributable to the shareholders of Eurohypo AG 75 13 137 130 126 55 134 119 Financial Statements Financial Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 118 Consolidated Financial Statements

(41) segment reporting

income statement by segment

CBG CBG CIB-I- Core Non-Core CIB-I-CELA REIB & UK CIB-I-US € million € million € million € million € million 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 Net interest income 396 393 20 45 287 249 90 80 87 84 Provisions for loan losses 8 9 –152 –203 –16 –2 –11 –2 –3 –1 Net interest income after provisions 404 402 –132 –158 271 247 79 78 84 83 Net commission income 70 71 4 0 103 71 60 49 29 34 Result from hedge accounting 0000000000 Net trading income 110000003336 Result from financial assets 00000000–1881 Result from at-equity investments 0001000000 Result from investment property 0 0 16 2000000 Administrative expenses 107 106 30 23 93 68 46 50 74 81 Net other operating income/expenses 0 –3 –3 –3 –2 –20011 Operating income 368 365 –145 –181 279 248 93 77 –115 74 Restructuring expenses 0000000000 Profit before tax 368 365 –145 –181 279 248 93 77 –115 74

Volume Segment assets (in € bn) 32.0 33.1 6.1 7.3 23.9 20.8 7.6 7.0 4.4 4.7

Average RWA (in € bn) 29.1 31.4 4.6 5.1 24.8 20.8 8.8 6.0 6.2 5.5 Average allocated equity capital (in € bn) 2.1 2.2 0.3 0.4 1.7 1.5 0.6 0.4 0.4 0.4

Key ratios RoE before tax (in %) 18.0 16.6 –45.3 –51.3 16.0 17.0 15.1 18.2 –26.7 19.2

CIR (in %) 23.0 22.8 80.7 51.9 23.9 21.5 30.8 38.9 –198.9 52.3

Average full-time equivalent (FTE) 402 430 0 0 186 160 64 57 129 116 Consolidated Financial Statements >>> Notes 119

income statement by segment

Cross-divisional Eurohypo PFT RB positions Group € million € million € million € million 2007 2006 2007 2006 2007 2006 2007 2006 Net interest income 89 154 205 244 5 0 1,179 1,249 Provisions for loan losses 0 0 –81 –160 –4 –1 –259 –360 Net interest income after provisions 89 154 124 84 1 –1 920 889 Net commission income –4 –5 –9 –10 –26 –33 227 177 Result from hedge accounting –8 –50000–8–5 Net trading income –44 61 0 0 –1 0 –11 98 Result from financial assets 179 63 0000–964 Result from at-equity investments 0 0 –2 –18 0 0 –2 –17 Result from investment property 000000162 Administrative expenses 66 64 67 109 59 46 542 547 Other operating income 41 1 –4 1 –36 12 –3 7 Operating income 187 205 42 –52 –121 –68 588 668 Restructuring expenses 0000015–15 Profit before tax 187 205 42 –52 –121 –83 588 653

Volume Segment assets (in € bn) 112.1 123.2 21.7 24.5 0.5 0.0 208.3 220.6

Average RWA (in € bn) 8.5 7.2 13.7 15.4 –4.8 –4.2 90.9 87.2 Average allocated equity capital (in € bn) 0.6 0.5 1.0 1.1 –0.8 –0.4 5.9 6.1

Key ratios RoE before tax (in %) – – 4.4 –4.8 – – 10.1 11.5

CIR (in %) 26.0 23.8 35.2 50.1 – – 39.0 34.7

Average full-time equivalent (FTE) 92 90 39 424 1,088 1,037 2,000 2,314 Financial Statements Financial Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 120 Consolidated Financial Statements

income statement by geographic region

Rest Eurohypo Germany of Europe America Group € million € million € million € million 2007 2006 2007 2006 2007 2006 2007 2006 Net interest income 660 742 426 419 93 88 1,179 1,249 Provisions for loan losses –229 –355 –27 –4 –3 –1 –259 –360 Net interest income after provisions 431 387 399 415 90 87 920 889 Net commission income 36 24 162 119 29 34 227 177 Result from hedge accounting –2 –50 –6 45 0 0 –8 –5 Net trading income –41 49 –3 13 33 36 –11 98 Result from financial assets 135 53 44 10 –188 1 –9 64 Result from at-equity investments –2 –17 0000–2–17 Result from investment property 16 20000162 Administrative expenses 321 336 146 125 75 86 542 547 Net other operating income/expenses 0 8 –4 –2 1 1 –3 7 Operating income 252 120 446 475 –110 73 588 668 Restructuring expenses 0 15 0000015 Profit before tax 252 105 446 475 –110 73 588 653

€ billion € billion € billion € billion € billion € billion € billion € billion Segment assets 147.8 163.1 56.1 52.8 4.4 4.7 208.3 220.6

Average full-time equivalent (FTE) 1,586 1,943 282 249 132 122 2,000 2,314 Consolidated Financial Statements >>> Notes 121

Segment reporting by group units The above segment reporting was prepared in accordance with the provisions of IAS 14. It is based on the internal management, information and planning systems of the Eurohypo Group and analyzes the relevant results and portfolios first by operating division (primary reporting format) and then by geographic region (secondary reporting format).

On the sales side, the segment reporting by operating division is based on the different customer responsibilities. The divisions Corporate Banking Germany (CBG), Corporate and Investment Banking International Continental Europe and Latin America (CIB-I-CELA), European Real Estate Investment Banking and Corporate Banking UK (CIB-I-REIB & UK), Real Estate Investment Banking and Corporate Banking USA (CIB-I-US) as well as Public Finance/Treasury (PFT) and Retail Banking (RB) are each headed by a member of the Board of Managing Directors as an independent division with its own profit centre.

The CBG division is broken down into CBG Core and CBG Non-Core, with separate figures being reported for each of these segments.

The regular expenses and income of EH-Estate Management GmbH and the other property realiza- tion companies are – as is the case for income and expenses arising from the valuation of properties – allocated to the segments in which they originate.

Public Finance and Treasury fall under PFT together with the money and capital market business. This segment also includes the results of EUROHYPO Europäische Hypothekenbank S.A., Luxembourg. The splitting of the previous PFT segment into two new segments PF Public Finance and ZGT Group Treasury EH is currently in the process of implementation.

The cross-divisional item shows all results components that cannot be directly allocated to one of the above segments or only by imposing arbitrary ratios on them. This item also reflects all the balance sheet structural measures carried out as part of the overall management of the bank. The cross-divisional positions also includes income from the third party business of Eurohypo Systems GmbH, Eschborn as well as restructuring expenses. This item also contains some smaller results components from the expansion of the Asian business.

The secondary reporting format shows the results and key figures by geographic region. Eurohypo shows its core regions of Germany, Rest of Europe and America.

The criterion used for segmentation is the registered office of the group company or foreign branch. For centralized organizational units, the regional responsibility of the unit is used for segmentation purposes. Otherwise segmentation is carried out using the same methods as for reporting by operat- ing unit. Financial Statements Financial Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 122 Consolidated Financial Statements

The regional segments are also shown on a consolidated basis, with unallocated overheads generally reported under Germany.

The Germany segment therefore comprises the operating units CBG (CBG Core, CBG Non-Core), RB, the German portion of PFT and the unallocated overheads. The Europe segment includes CIB-I-CELA and CIB-I-REIB & UK as well as Eurohypo Luxembourg. The America segment shows the activities of CIB-I-US and the Treasury Desk in New York.

The principles of segment reporting The aim of segment reporting is to allocate the pre-tax income from the income statement of the Eurohypo Group and the segment assets to the segments in which they originate.

As a first step, net interest income is split on the basis of the market interest-rate method into the two components of the interest contribution and the maturity transformation contribution. The inter- est contribution is calculated separately for each individual client transaction and subsequently allo- cated to the customer segment in which it originates. The maturity transformation contribution is allocated to PFT.

In addition to the interest contribution, the net interest income for the relevant segment also includes imputed income from interest on the non-interest-bearing balance-sheet positions (capital and reserves, provisions, fixed assets). The imputed interest rate corresponds to the risk-free rate on the capital market.

This capital benefit is allocated to the segments in proportion to the risk-weighted assets associated with the segment on the BIS methodology. In addition, PFT receives an imputed compensation pay- ment from the customer segments for increased spreads that have to be paid for the procurement of subordinated capital, profit participation certificates and hybrid capital.

When prepayment penalties for prepaid loans are allocated, the margin loss is allocated to the cus- tomer segments and the funding loss to Treasury.

The provisions for loan losses reported in the segments comprise both new provisions and the release of specific allowances, direct write-downs of claims and recoveries on written-down loans and port- folio allowances. Provisions for loan losses in the cross-divisional positions relate to portfolio allowances for loans intended for short-term syndication which have arisen at the year-end. This temporary charge will disappear after the syndication of the loan.

Net commission income is allocated directly to the segments. The expenses for balance-sheet and structural measures (securitization measures, global guarantees etc.) are generally shown in the cross-divisional item.

The result from hedge accounting is allocated to PFT. Consolidated Financial Statements >>> Notes 123

In the trading result, the result from derivatives not included in hedge accounting as well as the result from the redemption of liabilities is allocated to PFT. Only the portion of the derivative result attributable to CMBS transactions is shown in CIB-I-US together with changes in valuation of the CMBS loans.

Delphi I LLC, Wilmington, Delaware, USA and Servicing Advisors Deutschland GmbH, Frankfurt/Main are reported in the RB segment under the result from at-equity investments.

Income and expenses from investment property are reported in the segment in which they originate.

Administrative expenses include personnel costs and operating expenses as well as depreciation and amortization of fixed assets and other intangible assets (excluding goodwill). Restructuring expens- es are shown below the operating result in pre-tax profit. Administrative expenses are allocated to the segment in which they originate and in addition to direct expenses also include indirect expenses from internal charges for services. This results in a corresponding credit entry for the service provider. Results from transactions between segments are allocated on the basis of bilateral agreements. Intra- group service providers (corporate centres, Eurohypo Systems, CASIA) allocate their operating expenses to the relevant service recipient. The allocation criteria are stipulated by central Control- ling in co-ordination with the business divisions and the service providers.

The segment profit is measured on the basis of pre-tax profit and the return on equity before tax and CIR.

The return-on-equity ratio shows the relevant segment result in relation to the average capital tied up in the segment.

This is calculated on the basis that risk-weighted assets (RWA) are backed by 7.0% core capital under BIS definitions.

The cost-income ratio (CIR) shows the ratio of administrative expenses to the total of all other profit- and-loss items in operating income with the exception of loan loss provisions.

Given the special funding practices in the mortgage business (macro funding by PFT with no seg- ment relationship), we have only shown an analysis of the segment assets and have not provided a detailed presentation of segment balance sheets, as the resultant information would not have been meaningful.

In addition to public sector finance the segment assets of PFT also comprise deposits invested with other credit institutions. The segment assets of the real estate divisions also comprise securities portfolios backed by real estate. Financial Statements Financial Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 124 Consolidated Financial Statements

notes to the balance sheet (assets) (42) cash reserve

in € million 2007 2006 Cash at bank 00 Credit balances with central banks At Deutsche Bundesbank 125 120 At other central banks 33 Bills –– Total 128 123

Credit balances at Deutsche Bundesbank also serve to meet the minimum reserve requirements. The minimum credit reserve as at December 2007 amounted to € 90.0 million (2006: € 111 million). As at the reporting date, there were no holdings of public-sector debt securities or bills eligible for refi- nancing at central banks.

(43) assets held for trading purposes Claims assigned to the held-for-trading category are reported under assets held for trading purpo- ses, as are derivatives not used for hedging purposes.

All trading assets are recognized at fair value.

in € million 2007 2006 Claims 264 920 Positive fair values from derivatives (no hedge accounting) Interest rate-related transactions 4,015 2,148 Currency-related transactions Cross-currency swaps 224 227 Currency futures transactions 242 30 Credit derivatives 25 Other derivatives –– Total derivative financial instruments 4,483 2,410 Total 4,747 3,330 Consolidated Financial Statements >>> Notes 125

(44) claims on banks in € million 2007 2006 Due on demand 3,021 4,540 Other claims Real-estate finance 198 65 Loans to public-sector entities 10,655 12,089 Other claims 7,160 8,270 Total 21,034 24,964

Germany 17,620 20,488 Abroad 3,414 4,476 Total 21,034 24,964

The claims on banks fall into the category loans and receivables.

(45) claims on customers in € million 2007 2006 Real estate finance 94,598 94,925 Loans to public-sector entities 36,445 43,473 Other claims 199 50 Total 131,242 138,448

Germany 85,206 97,797 Abroad 46,036 40,651 Total 131,242 138,448

The claims on customers fall into the category loans and receivables. Financial Statements Financial Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 126 Consolidated Financial Statements

(46) provisions for loan losses The loan loss provisions are recognized in accordance with group-wide standards and cover all iden- tifiable credit and country risks. For on-balance sheet items portfolio allowances are recognized for risks which have been identified but for which no losses have yet been incurred and are recorded in the loan loss provisions. No provisions for country risks were required.

Specific allowances Portfolio allowances Total in € million 2007 2006 2007 2006 2007 2006 Balance as at 1.1. 2,384 2,210 249 290 2,633 2,500 Additions 529 572 – – 529 572 Reductions 852 397 48 41 900 438 of which amounts utilised 531 194 – – 531 194 of which amounts released 321 203 48 41 369 244 Other adjustments with no impact on income 21 0 – – 21 0 Adjustments due to currency translation –1 –1 – – –1 –1 Balance as at 31.12. 2,081 2,384 201 249 2,282 2,633

The loan loss provisions break down as follows:

Retail Commercial Eurohypo lending Real Estate Public Finance Group in € million 2007 2006 2007 2006 2007 2006 2007 2006 Balance as at 1.1. 648 554 1,984 1,945 1 1 2,633 2,500 Additions 140 199 389 373 0 0 529 572 Reductions 206 105 694 333 0 0 900 438 thereof amounts used 111 56 420 138 – – 531 194 thereof amounts released 95 49 274 195 0 0 369 244 Other adjustments with no impact on income – – 21–––210 Adjustments due to currency translation – – –1 –1 – – –1 –1 Balance as at 31.12. 582 648 1,699 1,984 1 1 2,282 2,633 Consolidated Financial Statements >>> Notes 127

Taking into account direct write-downs, recoveries on written-down receivables, utilization of gua- rantees and additions to and releases of provisions, the additions and releases incorporated into the income statement produce provisions for loan losses of € 259 million (2006: € 360 million).

Provisions for loan losses were formed for: in € million 31.12.2007 31.12.2006 Claims on banks 11 Claims on customers 2,281 2,632 Total 2,282 2,633

In addition to the loan loss provisions of € 2,282 million (2006: € 2,633 million) deducted from the assets side of the balance sheet, provisions of € 53 million (2006: € 49 million) were created on the liabilities side, of which € 39 million (2006: € 37 million) relate to portfolio allowances.

Total non-accrual loans amounted to € 3.6 billion (2006: € 4.3 billion). As a result, an amount of € 129 million (2006: € 131 million) was not recognized as interest income. Financial Statements Financial Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 128 Consolidated Financial Statements

(47) financial assets Financial assets comprise bonds, other fixed-income securities and shares and other non fixed-income securities as well as shareholdings in affiliated companies and participating interests not included in the consolidated financial statements. At-equity investments are reported separately.

in € million 2007 2006 Bonds and other fixed-income securities 55,801 56,314 Money-market paper –0 from public issuers –0 from other issuers –– of which: at fair value –– of which: at cost –– Bonds and notes 55,801 56,314 of public issuers 32,617 36,930 of other issuers 23,184 19,384 of which: at fair value 55,801 56,314 of which: at cost Participating interests 15 10 of which: at fair value –– of which: at cost 15 10 Shares in other non-consolidated affiliated companies 4 4 of which: measured at fair value – – of which: measured at cost 4 4 Total 55,820 56,328

Fair value of financial assets eligible for stock-market listing listed unlisted in € million 2007 2006 2007 2006 Bonds and other fixed-income securities 49,321 50,148 6,480 6,166 Shares and other non fixed-income securities – – – – Participating interests – – – – Shares in non-consolidated affiliated companies – – – – Total 49,321 50,148 6,480 6,166

The financial assets are categorized as “available for sale” assets. Consolidated Financial Statements >>> Notes 129

(48) at-equity investments Investments in associated companies and joint ventures are reported in the available-for-sale port- folio as investments in companies accounted for using the equity method. In financial year 2007, this item again included Delphi I LLC, Wilmington, Delaware, USA, Urbanitas Grundbesitzgesell- schaft mbH, Berlin and Servicing Advisors Deutschland GmbH, Frankfurt/Main.

The at-equity valuation was based on the most recent financial statements for the financial year 2007 prepared under national regulations and analysed in accordance with IAS/IFRS. in € million 2007 2006 At-equity investments 13 Total 13

listed unlisted 2007 2006 2007 2006 At-equity investments – – 1 3 Total – –13

(49) investment property This item essentially comprises foreclosed assets acquired as part of collateral realization. For details see Note (52).

(50) intangible assets in € million 2007 2006 Goodwill 135 135 Software Purchased software 69 Own software 18 17 Total 159 161

(51) fixed assets in € million 2007 2006 Advance payments on buildings under construction – – Land and buildings 135 132 Advance payments on operating and office equipment – – Financial Statements Financial Operating and office equipment 27 32 Total 162 164

The amount reported under land and buildings relates mainly to the bank’s offices in Eschborn. Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 130 Consolidated Financial Statements

(52) statement of changes in fixed assets and investments Amortization of goodwill is reported under a separate line item in the income statement. Amorti- zation of software, other intangible assets and depreciation of land and buildings and operating and office equipment are shown in the item depreciation, amortization and impairments of intangible and fixed assets under administrative expenses.

Goodwill is the amount by which the Group’s share of the fair value of the acquired net assets of a company exceeds the cost of acquisition as at the acquisition date.

Goodwill is recorded as an asset and is subject to an impairment test at least once a year. A perma- nent impairment of goodwill exists when the book value of a reporting unit exceeds its estimated fair value. All permanent impairments are recognized immediately through the income statement.

All the goodwill has been allocated to the cash-generating units. The cash-generating units of the Group correspond to the Group’s business divisions or a level below.

After the first-time adoption, the Group carries out an impairment review at least once a year or as required.

As in the previous year, the annual impairment review as at December 31, 2007 did not indicate any permanent impairment of goodwill.

The cash-generating unit European Real Estate Investment Banking and Corporate Banking UK (CIB-I-REIB & UK) was allocated goodwill of € 34 million resulting from the acquisition of REIB London from Deutsche Bank in 2002.

The cash-generating unit Real Estate Investment Banking and Corporate Banking USA (CIBI-US) was allocated goodwill of € 36 million resulting from the acquisition of REIB US from Dresdner Bank in 2003.

The cash-generating unit Corporate Banking Germany (CBG) was allocated goodwill of € 58 million from the acquisition of the Real Estate Finance division of Deutsche Bank in 2003.

The cash-generating unit Public Finance/Treasury (PGT) was allocated goodwill of € 7 million resul- ting from the acquisition of a minority interest of 10% in Eurohypo Europäische Hypothekenbank S.A., Luxembourg.

The impairment tests are based on enterprise value calculations for the relevant cash-generating units carried out using the discounted cash-flow method to determine the value-in-use according to the income method.

The recoverable amount of the assets of a cash-generating unit is determined as the higher of its fair value less costs of sale and its value-in-use. Consolidated Financial Statements >>> Notes 131

The cash-flow projections are based on multi-year financial planning approved by the Board of Managing Directors and the Supervisory Board, prepared on the basis of the past performance of the individual cash-generating units and the expectations of the Board of Managing Directors with regard to market trends.

The basis for determining the value of the basic assumptions for the cash-generating unit Corporate Banking Germany is as follows:

Active portfolio management and targeted reduction of value-eroding portfolios Reduction of risk costs and administrative expenses Stabilization of new business margins and commissions at the current level

The basis for determining the value of the basic assumptions for the cash-generating unit Corporate CIB-I-REIB & UK is as follows:

Increase in new business Acquisition of new advisory mandates Expansion of CMBS business without cannibalizing the lending business

The basis for determining the value of the basic assumptions for the cash-generating unit CIB-I-US is as follows:

Expansion of syndicated loans business Expansion of mezzanine business

The basis for determining the value of the basic assumptions for the cash-generating unit PFT is as follows:

Optimize portfolio results through targeted restructuring Generate additional income through product-related customer business

Today’s Eurohypo was formed in 2002 from the merger of three institutions: “old” Eurohypo, Deut- sche Hyp and Rheinhyp. To be able to provide a suitably long monitoring period, the planning for all cash-generating units was extended to include an outline budget phase for the period 2011 to 2014. The growth rate in terminal value was assumed to be 1.9%. Financial Statements Financial Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 132 Consolidated Financial Statements

The movements in non-current financial assets, at-equity investments, investment property, intangi- ble assets and tangible assets in financial year 2007 was as follows:

statement of changes in fixed assets and investments At-equity investments Non-current financial assets (companies)

Shares in non-consolidated At-equity Participating affiliated investments in € million interests companies (joint ventures) Cost Balance as at 1.1.2007 11 7 20 Additions 9 – – Disposals 4 – – Reclassifications – 0 – Adjustments due to currency translation – – – Balance as at 31.12.2007 16 7 20 Depreciation Balance as at 1.1.2007 1 3 – Unscheduled depreciation in financial year – – – Balance as at 31.12.2007 15 – – Accumulated changes from fair value or at-equity measurement – – –19 Book values Balance as at 31.12.2007 15 4 1 Previous year 10 4 3

statement of changes in fixed assets and investments

Investment property

in € million Rescue acquisitions Investment property Cost Balance as at 1.1.2007 145 1 Additions 3– Disposals 49 – Reclassifications –– Balance as at 31.12.2007 99 1 Depreciation Balance as at 1.1.2007 –– Unscheduled depreciation in financial year – – Extraordinary amortization in financial year – – Write-ups in financial year –– Reclassifications –– Disposals –– Balance as at 31.12.2007 –– Accumulated changes from fair value 10 0 Book values Balance as at 31.12.2007 109 1 Previous year 145 1 Consolidated Financial Statements >>> Notes 133

statement of changes in fixed assets and investments

Intangible Assets

in € million Goodwill Acquired software Own software Cost Balance as at 1.1.2007 135 199 22 Additions – 2 5 Disposals – 3 – Reclassifications – – – Balance as at 31.12.2007 135 198 27 Depreciation Balance as at 1.1.2007 0 190 5 Unscheduled depreciation in financial year – 5 4 Extraordinary amortization in financial year – – – Write-ups in financial year – – – Reclassifications 0 – – Disposals – 3 – Balance as at 31.12.2007 0 192 9 Accumulated changes from fair value – – – Book values Balance as at 31.12.2007 135 6 18 Previous year 135 9 17

statement of changes in fixed assets and investments

Fixed assets

Advance payments on assets under Operating and office in € million construction Land and buildings equipment Cost Balance as at 1.1.2007 – 145 81 Additions – 7 4 Disposals – 1 12 Reclassifications – – – Balance as at 31.12.2007 – 151 73 Depreciation Balance as at 1.1.2007 – 14 49 Scheduled depreciation in financial year – 3 7 Unscheduled depreciation in financial year – – – Write-ups in financial year – – – Reclassifications – – – Disposals – – 11 Balance as at 31.12.2007 – 17 45

Accumulated changes from fair value – – – Statements Financial Book values Balance as at 31.12.2007 – 134 28 Previous year – 132 32 Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 134 Consolidated Financial Statements

(53) other assets The other assets comprise the following:

in € million 2007 2006 Positive fair value from hedges Fair value hedges 2,304 2,457 Cash flow hedges 00 Collection documents 434 393 Deferred items 22 20 Sundry other assets 44 Total 2,764 2,874

The positive fair value attributable to hedging instruments includes derivatives used to hedge interest and exchange rate risks under hedge accounting.

information concerning the balance sheet (liabilities) (54) liabilities from trading activities Liabilities from trading activities comprise negative fair values from derivative financial instruments not used as hedges under hedge accounting.

in € million 2007 2006 Negative fair values from derivatives (not hedge accounting) Interest rate-related transactions 4,401 2,368 Currency-related transactions Cross-currency swaps 26 69 Currency futures transactions 26 64 Credit derivatives 71 3 Other derivatives 1– Total 4,525 2,504

(55) liabilities to banks The breakdown of the liabilities to banks is as follows:

in € million 2007 2006 Due on demand 1,113 900 Term liabilities Loans taken up 11,335 5,627 Registered Pfandbriefe 3,451 4,679 Other liabilities 48,428 50,839 Total 64,327 62,045

Germany 49,689 46,115 Abroad 14,638 15,930 Total 64,327 62,045

The liabilities to banks are categorized under liabilities measured at cost. Consolidated Financial Statements >>> Notes 135

(56) liabilities to customers The breakdown of liabilities to customers is as follows: in € million 2007 2006 Due on demand 1,666 2,361 Time-limited liabilities Loans taken up 10,023 10,065 Registered Pfandbriefe 18,416 22,158 Other liabilities 341 353 Total 30,446 34,937

Germany 28,727 32,772 Abroad 1,719 2,165 Total 30,446 34,937

The liabilities to customers are categorized as liabilities measured at cost.

(57) securitized liabilities in € million 2007 2006 Bonds issued 98,633 106,481 Hypothekenpfandbriefe 29,584 30,716 Öffentliche Pfandbriefe 51,018 55,156 Other bonds 18,031 20,609 Other securitized liabilities – 602 Total 98,633 107,083

The securitized liabilities are categorized under liabilities measured at cost.

(58) provisions in € million 2007 2006 Provisions for pensions and similar obligations 276 274 Other provisions 242 237 Total 518 511

Provisions for pensions and similar obligations Financial Statements Financial Provisions for pensions and similar obligations are based on defined-benefit and defined-contribu- tion pension obligations.

The pension arrangements are based both on contracts predating the merger of the predecessor institutions and on Eurohypo commitments. Report Auditors’ GS § 28 Pfandbrief At a glance 136 Consolidated Financial Statements

Statement of changes in pension obligations:

in € million 2007 2006

Net present value of pension obligations as at January 1 (DBO) 341 342 Unrecognized actuarial gain/loss –67 –78 Unrecognized prior service cost – – Pension provisions as at January 1 274 264 Additions Service cost 87 Prior service cost 1– Interest expenses 15 13 Impact of planned reductions and settlements – – Amortization of actuarial gains/losses 3 3 Utilisation Pensions paid 15 14 Business transfers 10 –1 Pension provisions as at December 31 276 274

Anticipated net present value of pension obligations as at December 31 340 349 Unrecorded actuarial gain/loss –25 –67 Unrecorded service cost to be allocated subsequently – –

In the financial year 2007, Eurohypo reported additions to pension provisions and similar obligations of € 27 million (2006: € 23 million), which are reported under administrative expenses.

Due to changes in actuarial assumptions the actuarial losses fell to € 25 million. As at January 1, 2008 the unrecognized actuarial losses were less than 10% of the net present value of the defined benefit obligation of € 301 million. Therefore the actuarial losses are not amortized.

The market value of pension obligations during the current and the four preceeding quarters is as follows:

in € million 2007 2006 2005 2004 2003 Market value of pension obligations 301 341 342 279 255 Consolidated Financial Statements >>> Notes 137

The pensions provisions are determined on the basis of the following actuarial assumptions:

2007 2006 Projected Projected Calculation method unit credit unit credit 2005 K. Heubeck 2005 K. Heubeck Calculation base guideline tables guideline tables Interest rate 5.50% 4.50% Salaries – rate of increase 2.50% 2.50% Pensions trend 1.60% 1.60% Income threshold – rate of increase 2.00% 2.00%

Statement of changes in other provisions:

Provisions Loan loss for personnel Restructuring Provisions for Sundry other in € million provisions matters provisions litigation risksprovisions Total Balance as at 1.1.2007 49 13 139 15 21 237 Addition 7 3 10 3 40 63 Utilisation 0 2 26 4 12 44 Release 3 1 3 4 2 13 Reclassification – 0 –1 0 – –1 Changes in consolidation group – 0 – – 0 0 Adjustments due to currency translation – 0 0 – 0 0 Balance as at 31.12.2007 53 13 119 10 47 242

The loan loss provisions consist mainly of the portfolio allowances for off-balance-sheet transactions amounting to € 39 million.

Provisions for personnel matters largely comprise anniversary provisions as well as provisions for obligations relating to age-related short-time working and early retirement.

Restructuring provisions relate primarily to the cost-cutting and efficiency project and the amalga- mation of locations as well as merger-related restructuring expenses arising from the merger of the

three predecessor institutions The existing provisions cover future personnel obligations for early Statements Financial retirement and age-related short-time working arrangements as well as rental agreements.

Due to the passage of time, a further € 5 million was added to the restructuring provisions and charged to the interest expenses. Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 138 Consolidated Financial Statements

The additions to sundry other provisions mainly relate to claims by third parties to interest for tax rebates and advisory and audit costs.

Other provisions are mainly of short dated maturity. The provisions for restructuring include payments for early retirements due until 2016 and obligations from tenancies due until 2017.

(59) income taxes The current income tax assets largely result from the tax loss in the USA. Due to this we expect a tax rebate of € 34 million from the loss carryback for previous years and a rebate of advance tax pay- ments of € 10 million for the current year. The corporation tax credit deriving from the imputation procedure which was recognized in profit or loss at December 31, 2006 and revalued for accrued interest at December 31, 2007, leads to an current tax asset of € 15 million.

Due to the fiscal unity for corporation tax purposes applying from January 1, 2007, there is a domestic tax rebate claim of € 9 million in 2007 for advance trade tax payments.

€ 5 million of the current tax assets relate to tax rebates for previous years from the foreign branches and subsidiaries.

€ 50 million of the current tax liabilities result from ongoing tax liabilities, of which € 10 million derive from tax liabilities for previous years for foreign branches and subsidiaries.

Tax liabilities of € 40 million for previous years were created for Germany. This includes the corpo- ration tax surcharge of € 5 million.

in € million 2007 2006 Actual tax claims 74 173 Deferred tax claims 256 251 Actual tax liabilities –101 –68 Deferred tax liabilities –49 –98 Total 180 258 Consolidated Financial Statements >>> Notes 139

Deferred tax assets and deferred tax liabilities were recognized for the following items on differences between the tax base and the base under IFRS: in € million 2007 2006 Tax claims Claims on banks and customers 8 54 Loan loss provisions 45 86 Assets held for trading purposes 1 2 Financial assets 117 0 Derivatives with positive fair value 0 0 Investment property 14 Fixed assets 00 Other assets 52

Liabilities to banks and customers 1 13 Securitized liabilities 90 Derivatives with negative fair value 1,819 2,493 Provisions 38 49 Subordinated liabilities and profit participation certificates 0 5 Other liabilities 00 Tax-loss carryforwards and tax-credit balances 55 43 Tax liabilities Claims on banks and customers 239 586 Loan loss provisions 16 10 Assets held for trading purposes 0 – Financial assets 379 672 Derivatives with positive fair value 708 964 Investment property 13 Fixed assets 29 35 Other assets 22 28

Liabilities to banks and customers 187 27 Securitized liabilities 287 254 Trading liabilities 0– Derivatives with negative fair value 0 0 Provisions 02 Subordinated liabilities and profit participation certificates 4 0

Other liabilities 20 17 Statements Financial Total 207 153 Deferred income tax assets (+)/liabilities (–) Revaluation 125 –42 Auditors’ Report Report Auditors’ Cash flow hedge 03

Total 125 –39 GS § 28 Pfandbrief At a glance 140 Consolidated Financial Statements

At December 31, 2007 deferred income tax liabilities of € 125 million as well as current income tax liabilities of € 42 million were recognized directly in equity in the revaluation reserve. The recogni- tion of current income tax liabilities in equity is in line with IAS 12.61 and is a feature of US tax law.

The deferred tax assets on temporary differences are only recorded when their future realization is sufficiently likely.

As at December 31, 2007 the Group had domestic corporation tax loss carryforwards of € 133 million (2006: € 132 million) and trade tax loss carryforwards of € 204 million (2006: € 198 million), which can be carried forward without any restrictions.

These relate mostly to domestic loss carryforwards of Eurohypo AG. As a result of the fiscal unity existing with Commerzbank Inlandsbanken Holding GmbH, Frankfurt am Main since January 1, 2007, the deferred tax claims on these loss carryforwards of € 39 million have been written down in full.

No deferred tax assets were created on corporation tax loss carryforwards of € 33 million (2006: € 35 million) and trade tax loss carryforwards of € 49 million (2006: € 44 million) relating to fore- closures by subsidiaries (property realization companies), as their likely future profitability does not permit these carryforwards to be utilized and/or the carryforwards cannot be used due to the existence of fiscal unity.

Based on local tax regulations in the USA realized and unrealized gains and losses on market valua- tion can be recognized for tax purposes. This leads to a higher loss for tax purposes in the current year than the loss reported under IFRS. The tax loss carryforward is € 198 million for the USA.

Eurohypo AG expects a tax rebate of € 34 million from the carryback of the tax loss. A deferred income tax claim was capitalized for the portion that can be carried forward. A deferred tax asset of € 56 million has been created on the portion of the tax loss that can be carried forward. Eurohypo expects that the residual tax loss carryforward of € 124 million will be fully utilized in the near future.

No deferred taxes were recognized for reinvested profits and valuation differences carried at con- solidated subsidiaries, as no distributions or disposals are expected. Consolidated Financial Statements >>> Notes 141

(60) other liabilities The other liabilities comprise the following: in € million 2007 2006 Negative fair values from hedging instruments Fair-value hedges 5,659 6,588 Cash flow hedges 31 38 Deferred items 26 46 Other liabilities 242 229 Total 5,958 6,901

The negative fair value attributable to hedging instruments includes derivatives used to hedge interest and exchange rate risks under hedge accounting.

(61) subordinated liabilities Subordinated liabilities are own funds within the meaning of section 10 par. 5 a of the German Banking Act (KWG). In the event of insolvency proceedings on the assets of the bank or the liquidation of the bank, the subordinated liabilities are not repayable until all non-subordinated creditors have been satisfied. There can be no obligation for early repayment on the part of the issuer. in € million 2007 2006 Bearer bonds 566 567 Loans taken out 1,888 2,018 Total 2,454 2,585

The securitized liabilities are categorized as “liabilities measured at cost”.

As at the balance sheet date there were no individual items which exceeded 10% of the total sub- ordinated liabilities.

Interest expenses of € 134 million (2006: € 138 million) arose for subordinated liabilities. Financial Statements Financial Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 142 Consolidated Financial Statements

(62) profit participation certificates

in € million 2007 2006 Profit participation certificates 732 532 Total 732 532

List of main profit participation certificate issues:

Nominal amount Date of Special Year of issue in € m Interest rate maturity Repayment conditions1) 1997 133 6.875% 31.12.2007 30.06.2008 Call right on 31.12.2002 at the earliest 20002) 200 Euribor twelve-month 31.12.2012 01.07.2013 deposits plus 150 basis points on 2nd working day prior to start of interest period 2006 200 Euribor twelve-month 31.12.2016 01.07.2017 deposits plus 110 basis points on 2nd working day prior to start of interest period 2007 200 Euribor twelve-month 31.12.2017 01.07.2018 deposits plus 85 basis points on 2nd working day prior to start of interest period

1) The bank may call the profit participation certificates by giving at least 2 years' notice at the end of any calendar year if a legal regulation is adopted, amended or applied in the Federal Republic of Germany such that the bank would incur a tax charge on the interest payment in the form of trade or corporation tax, or the profit participation capital can no longer be deducted as debt items for wealth tax purposes.

2) When the Eurohypo AG merger came into force, the holders of participation certificates in the former Rheinhyp were granted participation rights of equal value with the same payment commitment to the holders, which are subordinate to all liabilities due to other creditors, but rank equally with profit participation certificates already issued.

Interest payable on the profit participation certificates for financial year 2007 amounts to € 38 million (2006: € 24 million). € 24 million (2006: € 21 million) of interest was reported under other liabilities.

The participation certificates grant a profit share to the shareholders which ranks ahead of the annual dividend distribution; they are subordinate to other creditors unless these too are subordinated. Subject to the provisions on participation in a loss, repayment takes place at the nominal amount. Consolidated Financial Statements >>> Notes 143

authorization for the issue of profit participation certificates At the Annual General Meeting of May 19, 2003, the Board was authorized to issue profit participation certificates on one or more occasions up to a total of € 1,500,000,000 by May 17, 2008.

The profit participation certificates must comply with the conditions of section 10 para. 5 of the German Banking Act, according to which the capital obtained in return for the granting of profit participation certificates can be allocated to the liable capital. The term of the participation rights can be up to fif- teen years. When utilizing the authorization, the Board of Managing Directors can exclude residual amounts from the shareholders' subscription rights.

In addition, the Board of Managing Directors was authorized to exclude shareholders’ subscription rights for an amount totalling € 750,000,000. This authorization can only be used, however, if the profit participation certificates are structured in the same way as bonds, i.e. they do not convey any rights of membership or subscription or conversion rights to shares, or grant participation in liqui- dation proceeds, and if the level of interest is not linked to the net income for the year, the distribu- table profit or the dividend.

In addition, the interest and amount issued for the profit participation certificates in this instance must correspond to current market conditions for comparable borrowings at the date of the issue. The Board of Managing Directors was authorized to determine the details and terms and conditions of the issues, particularly the time of issue, type, level and maturity of the distribution and repay- ment claim, the issue price and the term of the profit participation certificates.

If the subscription right is not excluded, issues of profit participation certificates will be underwritten by a consortium of banks, with the obligation of offering them to the shareholders.

The Board of Managing Directors has made partial use of the authorization to issue profit participation certificates during the reporting year, issuing certificates with a nominal value of € 200,000,000. The shareholders' subscription rights were therefore excluded by authorization of the Board of Managing Directors in accordance with the resolution of the Annual General Meeting on May 19, 2003. Financial Statements Financial Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 144 Consolidated Financial Statements

(63) hybrid capital

in € million 2007 2006 Hybrid capital 900 900 Total 900 900

Eurohypo AG issued hybrid capital with a nominal amount of € 600 million in 2003 at an interest rate of 6.445 % via Eurohypo Capital Funding LLC I, Delaware, USA and Eurohypo Capital Funding Trust I, Delaware, USA. There is a call option as at May 23, 2013.

In financial year 2005, hybrid capital of a further € 300 million was issued via Eurohypo Capital Funding LLC II, Delaware, USA and Eurohypo Capital Funding Trust II, Delaware, USA, at an interest rate of 6.75%. There is an annual call option, the first being on March 8, 2011.

Interest expenses of € 53 million (2006: € 59 million) have arisen relating to the hybrid capital.

The hybrid capital is categorized under “liabilities measured at cost”.

(64) information regarding capital and reserves Composition of capital and reserves

in € million 31.12.2007 31.12.2006 Subscribed capital 914 914 Capital reserve 3,992 3,992 Retained earnings 1,037 785 Revaluation reserve –365 95 Reserve for cash flow hedges 0 –4 Reserve for currency translation –2 –1 Distributable profit/loss 0 387 Minority interests –4 0 Total 5,572 6,168

Subscribed capital The subscribed capital of Eurohypo AG as at December 31, 2006 was € 913,688,919.00 divided into 351,418,815 no par value shares. The shares are fully paid up.

No. in thousands Number of outstanding shares as at 31.12.2006 351,419 Number of shares issued as at 31.12.2006 351,419 Less: treasury shares on reporting date – Number of outstanding shares as at 31.12.2007 351,419 Consolidated Financial Statements >>> Notes 145

The value of the shares issued, outstanding and approved is as follows:

31.12.2007 31.12.2006

€ million No. in thousands € million No. in thousands Issued shares 914 351,419 914 351,419 Outstanding shares (subscribed capital) 914 351,419 914 351,419 Plus: shares not yet issued from authorized capital 183 70,280 183 70,280 Total 1,097 421,699 1,097 421,685

Commerzbank AG, Frankfurt am Main, holds a majority stake of 98.76% of the shares in the bank. It prepares consolidated financial statements under the International Financial Reporting Standards (IFRS), which incorporate the consolidated financial statements of the Eurohypo sub-group within the Commerzbank Group. The Commerzbank consolidated financial statements are published in the electronic Federal Gazette. The remaining 1.24% of the shares are free-floating. On August 29, 2007 the AGM of Eurohypo AG approved the controlling and profit transfer agreement between Commerz- bank Inlandsbanken Holding GmbH and Eurohypo AG. This took effect on its registration in the Commercial Register on September 4, 2007. Eurohypo AG is obliged to transfer its profit to its main shareholder for the duration of the contract. Dividends will no longer be paid and the external share- holders will receive an annual compensation payment of € 1.24 gross per share.

In addition, the AGM approved the transfer of the shares of the external shareholders to the main shareholder (squeeze-out). Commerzbank Inlandsbanken Holding GmbH offered these shareholders a cash settlement of € 24.32 for the transfer of the Eurohypo shares.

Capital reserve The capital reserve shows the premium from the issue of shares including subscription rights in excess of the nominal or arithmetical value.

Retained earnings The retained earnings comprise the statutory reserves and other revenue reserves.

The statutory reserves amounted to € 4 million as at December 31, 2007 and are subject to a restriction on distribution. Other retained earnings include reinvested consolidated profit including accumulated amounts from consolidation effects recognized through profit or loss as well as the effects of first- time adoption of IFRS from the conversion date of January 1, 2003.

in Mio.€ 31.12.2007 31.12.2006 Statements Financial Statutory reserves 44 Other revenue reserves Reinvested revenue reserves 1,033 781 Auditors’ Report Report Auditors’ Total 1,037 7851) GS 1) For further details see the statement of changes in capital and reserves, page 88. § 28 Pfandbrief At a glance 146 Consolidated Financial Statements

As at December 31, 2007 the Group has not issued any convertible bonds or bonds with warrants. There is therefore no requirement to split the financial instruments into equity and debt compo- nents.

Revaluation reserve The revaluation reserve comprises the unrealized gains and losses on the revaluation of available- for-sale financial instruments amounting to € –531 million as at December 31, 2007 (2006: € 138 million).

Deferred taxes arising on the revaluations of € 166 million are included in this figure (2006: € –43 million).

Reserve for cash flow hedges Changes in fair value of the effective portion of hedges amounting to € 0 million were recognized for cash-flow hedges (2006: € –7 million).

This includes deferred taxes arising on the hedges of € 0 million (2006: € 3 million).

Reserve for currency conversion The reserve for currency translation comprises the translation gains and losses arising on capital consolidation.

(65) authorized capital On May 17, 2004, the General Meeting authorized the bank to increase the share capital of the bank in one amount or several smaller amounts by May 16, 2009, subject to the approval of the Supervisory Board, by a total of up to € 182,728,000.00 by issuing new no-par value bearer shares against cash or non-cash contributions. The Board of Managing Directors was authorized to exclude shareholders’ subscription rights with the approval of the Supervisory Board, provided that the capital increase takes place on the basis of contributions in kind for the purpose of the acquisition of companies, company divisions or units, or participating interests in companies. If the shareholders' subscription rights are not excluded, they are granted a subscription right, subject to the condition that the new shares are underwritten by a consortium of banks with the obligation of offering them to the share- holders. In addition, the Board of Managing Directors was authorized to exclude share fractions from the shareholders’ subscription rights, with the approval of the supervisory board.

The Board of Managing Directors did not make use of the authorization to increase the capital during the reporting period. Consolidated Financial Statements >>> Notes 147

(66) foreign-currency positions As at December 31, 2007 the Group reported the following assets and liabilities (excluding fair values from derivatives) in foreign currencies:

31.12.2007 31.12.2006 in € million USD CHF GBP JPY Other Total Total Cash reserve 0 – 2 – 0 2 1 Assets held for trading purposes 263 ––––263920 Claims on banks 103 920 100 763 31 1,917 1,031 Provisions for loan losses 5,007 3,610 8,129 302 884 17,932 16,711 Risk provisions 0 –21 0 – 0 –21 –39 Financial assets 10,005 135 1,630 1,454 988 14,212 14,849 Other assets 191 0 42 2 1 236 142 Total assets in foreign currencies 15,569 4,644 9,903 2,521 1,904 34,541 33,615 Liabilities to banks 6,975 51 226 1,860 159 9,271 8,584 Liabilities to customers 52 12 36 1 90 191 1,392 Securitized liabilities 6,835 2,860 3,585 78 835 14,193 16,930 Other liabilities –133 2 –24 –4 –1 –160 120 Total liabilities in foreign currencies 13,729 2,925 3,823 1,935 1,083 23,495 27,026

Incoming and outgoing payments were made in these currencies in financial year 2007.

The balance sheet items open are set against corresponding forward exchange deals or currency swaps at matching maturities.

information concerning financial instruments (67) derivatives The value of derivatives used to transfer market and credit risks between various parties is derived from interest rates and indices as well as share prices and exchange rates. The main derivative pro- duct types used by Eurohypo are interest-rate swaps, cross-currency swaps, currency forwards, and credit derivatives. As at December 31 we reported a small number of derivatives with separation requirement on our books with a fair value of € 1 million (2006: € 1 million).

Derivatives are used predominantly to hedge and manage interest-rate and exchange-rate risks. They are used to hedge interest-rate and currency risks on available-for-sale securities, real estate finance, note loans and liabilities in the form of fair-value and cash-flow hedges. In addition, the bank has been actively trading derivatives to a limited extent.

When derivatives do not form part of a hedge relationship and therefore part of hedge accounting, Statements Financial they are reported as trading assets and liabilities. Derivatives to hedge underlying transactions in hedge accounting are reported under other assets and liabilities. Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 148 Consolidated Financial Statements

If the market value does not reflect the fair value accurately or there are no market prices (e.g. for OTC derivatives), recognized measurement procedures (e.g. net present value method, option price models) are applied. The fair value of an unstructured derivative corresponds to the sum of all future cash flows discounted to the valuation date. Option price models (e.g. “Black-Scholes” and “Hull White”) are used for derivatives containing options.

The fair values of interest-rate swaps and other interest-rate contracts are determined on a net pre- sent value basis in the light of the applicable swap curve. Similarly, forward currency transactions are measured via the relevant swap curve for the respective currency, taking account of the relevant spot exchange rate as at the reporting date.

For cross-currency swaps the “basis-swap effects” are used as spreads along with the relevant swap curve to determine the relevant fair values on a net present value basis.

If listed, interest rate options are measured using the market price; unlisted interest rate options are measured using the above option price models. Interest rate futures are measured using market prices taking account of daily margining requirements.

The following overview shows the notional value and residual life as well as the positive and negative fair values of derivative transactions carried out by the bank. The notional amounts do not represent balance-sheet claims or liabilities.

Swaps and swaptions in Eurohypo’s hedge portfolio are essentially used to hedge interest-rate and currency risks and premature terminations.

Breakdown of derivative transactions:

breakdown by term

Notional amount/term Fair value Fair value Over Total Total Positive Negative Positive Negative in € million Up to 1 year 1–5 years 5 years 31.12.2007 31.12.2006 31.12.2007 31.12.2007 31.12.2006 31.12.2006 Interest rate-related transactions Forward-rate Agreements 11,342 – – 11,342 453–––– Interest-rate swaps 75,544 198,030 126,125 399,699 296,269 6,151 9,776 4,163 8,523 Interest-rate futures 3 – – 3 31–––– Interest-rate options 466 1,470 1,387 3,323 4,310 11 122 7 265 Other interest-rate contracts 1,489 8,402 4,145 14,036 12,987 81 111 43 129 Total interest-rate-related transactions 88,844 207,902 131,657 428,403 314,050 6,243 10,009 4,213 8,917 Currency-related transactions Currency forwards 10,736 242 13 10,991 10,526 224 26 30 64 Cross currency swaps 647 722 2,161 3,530 5,674 318 108 619 146 Total currency-related deals 11,383 964 2,174 14,521 16,200 542 134 649 210 Credit derivatives 403 416 3,094 3,913 3,191 2 71 5 3 Other derivatives 5 7 – 12 – – 1 – – Total 100,635 209,289 136,925 446,849 333,441 6,787 10,215 4,867 9,130 Consolidated Financial Statements >>> Notes 149

derivatives breakdown Notional Notional Fair value Fair value

Positive Negative Positive Negative 31.12.2007 31.12.2006 31.12.2007 31.12.2007 31.12.2006 31.12.2006

OECD banks 408,310 304,085 6,529 9,724 4,664 8,749 Other companies, private individuals 38,539 29,356 258 491 202 381 Total 446,849 333,441 6,787 10,215 4,866 9,130

(68) cash flow hedges At December 31, 2007 there were 9 interest-rate swaps with a notional value of € 792 million which are used to hedge future payment flows subject to the cashflow hedge accounting rules. Future interest payments of € 2 million on a floating-rate loan due in the 2nd quarter of 2009 and future interest payments of € 11 million on floating-rate liabilities which will fall due in the first half of 2008 have been hedged.

The change in the fair value of hedging instruments recognized in the reserve for cash flow hedges in equity was € 7 million (2006: € 26 million). This included deferred taxes of € –3 million (2006: € –10 million), which were also recognized in the reserve for cash flow hedges.

(69) market price risks Market risks means the danger of sustaining losses due to changes in market parameters. During the financial year methodological and organizational changes were implemented relating primarily to the calculation of value at risk (VaR).

The concentration of default risks is described in the risk report.

(70) interest-rate risks The interest-rate risk is taken to mean the risk of loss arising when the benchmark interest-rate curve changes. Eurohypo uses the swap curve of the relevant currency as the benchmark interest- rate curve.

The interest-rate risk is quantified daily via the present value concept using the factors of delta (interest- rate sensitivity), net directional and yield curve. In order to ascertain these indicators, the net present values of all assets and liabilities on the balance sheet and of all derivatives are calculated. The inte- rest rates of the underlying benchmark interest-rate curve are then raised by one basis point in certain maturity ranges. The delta for a specific maturity band is the cash equivalent loss – or gain – incurred if the benchmark interest-rate curve rises. The net directional is the total of the deltas ranging across all maturity bands. At Eurohypo, a limit is set on this measurement of interest-rate sensitivity. The

utilization rate of the limit was 5% at the year-end, compared with 3% in 2006. Statements Financial Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 150 Consolidated Financial Statements

(71) credit spread risks Since January 2007 we calculate a credit spread value at risk in addition to the interest rate risk for the securities holdings outside our cover pool.

In both cases the measure used to quantify these risks is the Value at Risk (VaR). The VaR quantifies the risk as a negative deviation from the current value of all financial transactions carried out by the bank. The VaR is calculated daily on the basis of a historical simulation.

A confidence level of 97.5% is used throughout the Group. The holding period is set at one day. To limit the market risks the VaR is limited to € 33 million. The VaR amounted to € 15 million at the year-end. This figure includes interest rate risk of € 1 million (2006: € 2 million).

(72) currency risks The currency risk is the risk of incurring losses due to exchange rate movements. This risk is determined by means of net exposure summaries, in compliance with the provisions of the German Banking Act (KWG). This risk is restricted by means of a volume restriction which sets a limit on the net level of open foreign-currency positions. The utilization rate of the limit at the year-end was 24% (2006: 19%).

(73) information in accordance with ifrs 7.31 – 42 We have provided further information on the nature and scale of risks arising from financial instruments in the risk report.

(74) information on management of capital We refer to the risk report with respect to the information on capital management. Consolidated Financial Statements >>> Notes 151

(75) fair value of financial instruments A financial instrument is a contract which establishes an asset for one counterparty and a liability or equity instrument for the other. The fair value is the amount at which a financial instrument can be traded between competent and willing contractual parties at market conditions.

The table below shows the fair values of the financial instruments compared with the book values.

Fair Value Book value Fair Value Book value in € billion 31.12.2007 31.12.2007 31.12.2006 31.12.2006 Assets Cash reserve 0.1 0.1 0.1 0.1 Assets held for trading purposes 4.8 4.8 3.3 3.3 Claims on banks 21.1 21.0 25.1 25.0 Claims on customers 131.5 131.2 140.0 138.5 Financial assets 55.8 55.8 56.3 56.3 Other assets1) 2.3 2.3 2.5 2.5 Liabilities Liabilities from trading activities 4.5 4.5 2.5 2.5 Liabilities to banks 64.3 64.3 62.1 62.1 Liabilities to customers 30.3 30.5 35.4 34.9 Securitized liabilities 99.0 98.6 108.0 107.1 Other liabilities1) 5.7 5.7 6.6 6.6 Subordinated liabilities 2.4 2.5 2.7 2.6 Profit participation certificates 0.7 0.7 0.6 0.5 Hybrid capital 0.8 0.9 0.9 0.9

1) Derivative financial instruments under hedge accounting only

With financial instruments measured at fair value – such as the financial assets – fair value is gene- rally determined by exchange-quoted prices. When no exchange-quoted prices are available for a financial instrument, the instrument is valued using valuation methods typical for the specific market based on market parameters specific to the instrument.

In these cases fair value is determined using the “discounted cashflow” method, with the individual credit ratings and other market features being incorporated in the discounted cash flow calculation in the form of credit and liquidity spreads typical for a particular market. Financial Statements Financial Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 152 Consolidated Financial Statements

For derivative financial instruments, for example currency forwards, swaps and options, the market values are calculated with discounted cash flow and option price models. The market prices, interest rates and volatilities observed at the year-end, which are obtained from recognized external sources, are used as the starting parameters for these models.

There are usually no liquid markets for loans and deposits valued at amortized cost. For short-term loans and deposits with original maturities under one year, for example cash deposits, money market transactions, term deposits, settlement accounts and other claims and liabilities, the market value is assumed to be equal to the book value. For all other loans and deposits the market value is determined by discounting the expected future cash flows (“discounted cash flow” method). For loans the interest rates at which new loans with the same risk structure (credit rating), origin and maturity would be issued are used for discounting (“discounted cash flow” method). For deposits the market inter-bank interest rates are used, taking account of any instrument-specific parameters (for example for subor- dinated liabilities).

For shares in partnerships and unlisted companies the book value is assumed to be equal to fair value. The fair value could only be determined conclusively by means of an actual sale of the shares.

(76) assets assigned as collateral Assets were assigned at the values indicated below as collateral for the following liabilities:

in € million 31.12.2007 31.12.2006 Liabilities to banks 33,738 34,680 Securitized liabilities 432 – Total 34,170 34,680

The following assets have been assigned as collateral for the abovementioned liabilities:

in € million 31.12.2007 31.12.2006 Claims on banks 2,239 2,087 Financial assets 31,162 32,656 Total 33,401 34,743

The collateral was provided for funds raised as part of repo transactions. The transactions were carried out under standard conditions for securities repurchase transactions. In addition collateral of € 432 million was assigned for securitized liabilities. Consolidated Financial Statements >>> Notes 153

(77) maturity breakdown according to residual terms The residual term is the time between the balance-sheet date and the date of contractual maturity of the claim or liability. For claims and liabilities due in instalments, the residual term for each individual tranche is shown.

2007 Term Term Due on demand up to 3 3 months – 1 year – Term in € million and unlimited months 1 year 5 years over 5 years Total Claims on banks 3,021 8,018 2,853 5,656 1,486 21,034 Claims on customers 6,211 16,324 14,469 50,429 43,809 131,242 Bonds and other fixed-income securities (financial assets) – 2,659 2,715 14,819 35,608 55,801 Total 2007 9,232 27,001 20,037 70,904 80,903 208,077 Liabilities to banks 1,113 45,188 5,187 9,872 2,967 64,327 Liabilities to customers 1,666 1,641 2,104 10,557 14,478 30,446 Securitized liabilities – 8,882 16,043 53,733 19,975 98,633 Subordinated liabilities – 57 41 1,005 1,351 2,454 Profit participation certificates – – 132 – 600 732 Hybrid capital ––––900900 Total 2007 2,779 55,768 23,507 75,167 40,271 197,492

2006 Term Term Due on demand up to 3 3 months – 1 year – Term in € million and unlimited months 1 year 5 years over 5 years Total Claims on banks 4,540 8,956 1,727 8,158 1,583 24,964 Claims on customers 5,990 15,393 15,582 57,708 43,775 138,448 Bonds and other fixed-income securities (financial assets) 0 2,093 2,254 15,011 36,956 56,314 Total 2006 10,530 26,442 19,563 80,877 82,314 219,726 Liabilities to banks 900 44,108 8,581 4,943 3,513 62,045 Liabilities to customers 2,361 1,955 2,298 11,766 16,557 34,937 Securitized liabilities – 10,681 14,944 62,027 19,431 107,083 Subordinated liabilities – 104 66 192 2,223 2,585 Profit participation certificates – – – 133 399 532 Hybrid capital ––––900900 Total 2006 3,261 56,848 25,889 79,061 43,022 208,082 Financial Statements Financial Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 154 Consolidated Financial Statements

other information (78) subordinated assets In the event of the bankruptcy or liquidation of the issuer, the subordinated assets rank after the claims of all other creditors.

in € million 31.12.2007 31.12.2006 Claims on banks 103 105 Financial assets –– Total 103 105

(79) off-balance sheet obligations

in € million 31.12.2007 31.12.2006 Liabilities under indemnities and guarantees 1,010 1,043 of which: credit guarantees 332 377 of which: other guarantees 678 666 of which: letters of credit –– Other contingent liabilities –– Other obligations Irrevocable credit commitments 14,758 12,611 of which: book credits 1,990 1,821 of which: mortgage loans/public finance 12,768 10,790 Sundry obligations –– Total 15,768 13,654

For reasons of practicality we have not disclosed the information required by IAS 37.86 and IAS 37.89.

(80) trust transactions Trust transactions amounted to the following on the balance sheet date:

in € million 31.12.2007 31.12.2006 Claims on customers 88 99 Trust assets 88 99 of which liabilities to banks 14 15 of which liabilities to customers 74 84 Trust liabilities 88 99 Consolidated Financial Statements >>> Notes 155

(81) auditors’ fees (Excluding VAT) in € ’000 2007 2006 Audit 2,637 2,100 Other audit and valuation services 52 543 Tax advisory services 78 697 Other services 280 597 Total 3,047 3,937

(82) employees (average)

2007 2006

Average for the year Female Male Total Female Male Total Full time 697 1,116 1,813 842 1,283 2,125 Part time 175 22 197 229 25 254 Trainees 4 6 10 1 1 2 School leavers 7 13 20 9 13 22 Total 883 1,157 2,040 1,081 1,322 2,403

(83) related-party disclosures Eurohypo AG is ultimately a subsidiary of Commerzbank AG, Frankfurt. Various service and price agreements have been concluded with Commerzbank AG on the basis of a master agreement of 2006 on the mutual performance of services.

In retail banking the servicing of the mortgage lending booked by Eurohypo was transferred to Commerzbank AG as at February 1, 2007. At the same time the retail banking staff were transferred to Commerzbank. This did not lead to any significant impact on Eurohypo’s balance sheet and pro- fitability.

Eurohypo carried out both secured and unsecured money market transactions with Commerzbank AG during the reporting period. In capital markets Eurohypo bearer paper and promissory notes were sold to Commerzbank AG. In the derivatives field all transactions with the exception of asset swap packages are carried out with Commerzbank AG. These transactions are concluded at standard market terms and conditions. Financial Statements Financial Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 156 Consolidated Financial Statements

The following table shows the claims on and liabilities to related companies and persons. For these purposes it is immaterial whether a company is included in the Eurohypo consolidated financial statements as a subsidiary or associate company.

in € million 2007 2006 Trading assets 2,926 485 Parent company 2,926 485 Subsidiary –– Joint venture –– Claims on banks 6,645 6,432 Parent company 5,852 6,042 Subsidiary 793 390 Joint venture –– Claims on customers 636 370 Parent company 396 128 Subsidiary 240 213 Joint venture –29 Financial assets – 275 Parent company –– Subsidiary – 275 Joint venture –– Other assets 990 296 Parent company 990 296 Subsidiary –– Joint venture –– Total claims 11,197 7,858 Consolidated Financial Statements >>> Notes 157

in € million 2007 2006 Trading liabilities 1,389 233 Parent company 1,389 233 Subsidiary –– Joint venture –– Liabilities to banks 37,232 25,734 Parent company 37,228 25,733 Subsidiary 41 Joint venture –– Liabilities to customers 127 25 Parent company 114 – Subsidiary 13 19 Joint venture –6 Securitized liabilities 1,718 1,429 Parent company 1,703 1,414 Subsidiary 15 15 Joint venture –– Other liabilities 2,220 811 Parent company 2,220 811 Subsidiary –– Joint venture –– Subordinated liabilities 1,042 947 Parent company 77 Subsidiary 1,035 940 Joint venture –– Profit participation certificates – – Parent company –– Subsidiary –– Joint venture –– Hybrid capital –– Parent company –– Subsidiary –– Joint venture –– Total liabilities 43,728 29,179

As in 2006, there were no provisions for doubtful claims on subsidiaries. Financial Statements Financial Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 158 Consolidated Financial Statements

remuneration of the board of managing directors and the supervisory board of eurohypo ag board of managing directors The remuneration of members of the Board of Managing Directors is set out in the respective employ- ment contracts. Remuneration is determined by the standing committee of the Supervisory Board and includes fixed and variable components: a basic salary plus variable remuneration with performance and success-related components (bonus). The basic salary accounts for 40% of annual remuneration and the bonus for 60%. Up to 50% of the bonus may, at the discretion of the bank, be paid as a long- term incentive payment in the form of Commerzbank shares or cash within a maximum of three years of the annual general meeting of the relevant financial year. In addition, the members of the Board of Managing Directors receive the usual benefits as well as a pension commitment. The current remu- neration structure for the members of the Management Board was established in the summer of 2006.

The fixed remuneration, which is paid in twelve monthly instalments, is based on the scope of responsibilities of each Board member.

The variable remuneration is dependent on the achievement of specific targets which are set by the Board of Managing Directors and the Supervisory Board Standing Committee at the beginning of the financial year. The benchmark used is the profitability target for the bank as a whole, measured on the basis of the return on equity, as well as the personal performance of the individual Board member in his area of responsibility.

For financial year 2007, the emoluments of the active members of the Board of Managing Directors amounted to € 3,462,000, of which € 1,373,000 related to fixed salary, € 1,863,000 to the annual bonus, € 120,000 to payments under the LTP 2004 and € 106,000 to other non-cash emoluments. The emoluments paid to the individual members of the Management Board are detailed in the follo- wing table, with a comparison to the last financial year:

Cash remuneration

Basic Variable LTP 2004 Total remu- in € ’000 salary remuneration payment5) Other6) neration Bernd Knobloch1) 2006 120 525 – 14 659 2007 – – – – – Dirk Wilhelm Schuh2) 2006 360 750 – 28 1.138 2007 360 410 – 28 798 Jochen Klösges3) 2006 320 620 – 20 960 2007 53 103 – 5 161 Joachim Plesser 2006 320 520 – 18 858 2007 320 450 – 18 788 Henning Rasche 2006 320 520 – 31 871 2007 320 450 – 23 793 Martin Zielke4) 2006 240 520 – 22 782 2007 320 450 120 32 922 Total 2006 1,680 3,455 – 133 5,268 2007 1,373 1,863 120 106 3,462

1) Until 31.03.06 the remuneration reported was paid by Eurohypo AG; since 01.04.2006 the remuneration for all activities in the Commerzbank Group is paid by Commerzbank AG and is published in the remuneration report of Commerzbank AG. 2) The remuneration was paid by Eurohypo AG and includes all activities in the Commerzbank Group for the financial years 2006 and 2007. 3) In 2006 the remuneration was paid by Eurohypo AG and included all activities in the Commerzbank Group. The remuneration in 2007 relates to the period up to the departure of Mr Klösges from the Board of Eurohypo AG on 28 February 2007. 4) The fixed salary in 2006 relates to the period from appointment on April 1, 2006. 5) At the date in question no other board member apart from Mr Zielke was entitled to participate in the LTP 2004 program of Commerzbank AG. 6) The “other” category includes benefits paid during the reporting year, which mainly comprise expense allowances, insurance premia as well as motoring expenses. Consolidated Financial Statements >>> Notes 159

In addition the members of the Board have an entitlement to shares under the long-term incentive plan (LFI) of Eurohypo from 2004 and 2005. The plan originally involved the shares of Eurohypo AG and has been amended by replacing the Eurohypo shares with an equal number of Commerzbank shares. The payment of entitlements from 2004 and 2005 is made on expiry of the agreed period of three years either in Commerzbank shares or cash at the bank’s discretion. The entitlements from the LFI 2004 will be paid out after the completion of the AGM which decides on the appropriation of profit for the financial year 2007 and the payment of the LFI 2005 after the completion of the AGM which decides on the appropriation of profit for the financial year 2008. There are no further entitle- ments under this Eurohypo LFI after 2005.

The entitlements of each Board member and the current cash value on exercise as well as at year- end of these entitlements are shown in the following table; Mr Zielke was not yet a member of the Board of Eurohypo AG at this point:

Share Cash value at date Cash value of entitlement of granting of share entitlements LFI 2004 and 2005 in € ’000 (no. of shares) Commerzbank shares 31.12.2007 Bernd Knobloch 70,393 1,802 1,769 Dirk Wilhelm Schuh 55,918 1,433 1,407 Jochen Klösges 52,230 1,340 1,316 Henning Rasche 52,230 1,340 1,316 Joachim Plesser 52,230 1,340 1,316 Total 283,001 7,255 7,124

The cash value was calculated on the basis of a discounted cash flow of the relevant year-end figures.

From the financial year 2006 onwards the Eurohypo Board members are entitled to participate in the Commerzbank AG long-term performance plan (LTP) in accordance with the regulations for Commerz- bank group 1 employees under the terms applicable at the time. Mr Knobloch can participate in the LTP of Commerzbank AG in accordance with the regulations for members of the Board of Managing Directors of Commerzbank AG.

These virtual share option programs which have to date been offered annually by Commerzbank AG incorporate a guaranteed payment in the event that the Commerzbank share outperforms the Dow Jones Euro Stoxx banks index over three, four or five years and/or the absolute increase in the Com- merzbank share price is 25% or more. If these thresholds have not been met after five years, the progamme expires.

Participation in the LTP requires those entitled to invest their own funds into Commerzbank shares. For members of the Board of Managing Directors of Eurohypo, the regulations for Commerzbank Statements Financial group 1 employees apply. The latter may participate in the LTP programme with up to 1,200 shares. The Chairman of the Board of Managing Directors of Eurohypo AG, Mr Knobloch, may, as a member of the Board of Managing Directors of Commerzbank AG, participate in the LTP program with up Auditors’ Report Report Auditors’ to 2,500 shares. Payment from these plans is contingent on reaching at least one of the following

milestones: GS § 28 Pfandbrief At a glance 160 Consolidated Financial Statements

For 50 % of the shares purchased by the participant’s own funds: The Commerzbank share price performance exceeding that of the Dow Jones Euro Stoxx® Banks index (outperformance of at least 1 percentage point is rewarded with EUR 10, and each additional percentage point of outperformance attracts an additional EUR 10 per share, up to a maximum of EUR 100 per share).

For 50% of the shares purchased by the participant's own funds: Absolute price increase in Commerzbank shares (a price increase of 25% or more is rewarded with EUR 10, and each additional 3 percentage points of outperformance attracts an additional EUR 10 per share, up to a maximum of EUR 100 per share).

The participant thus receives a maximum of EUR 100 per share paid in cash. Payment from the LTP is also contingent on a dividend being issued for the financial year by Commerzbank Aktiengesell- schaft. The active members of the Board of Managing Directors have participated in the Commerz- bank LTPs, which represent a share-based form of payment. During the financial year 2007 a total of 7,300 shares were contributed to the Commerzbank LTP 2007.

The following table shows the number of shares (corresponding to a “virtual” option per share) per individual active member of the Board and per respective current LTP, as well as the fair values at the time the share-based payment was granted and the fair values as of the valuation date, December 31, 2007. Provisions have been formed for potential future payment liabilities to members of the Board on the basis of the fair values as of December 31, 2007. The additions to provisions recognized in profit or loss of Eurohypo AG during the financial year 2007 was € 112,000 for all plans. Consolidated Financial Statements >>> Notes 161

long term performance plans (current)

Fair value in € ’000

No. of participating when the shares pro rata LTP shares were granted on 31.12.2007 on 31.12.2007 Bernd Knobloch 2005 – – – – 2006 2,500 87 46 26 2007 2,500 79 51 12 Dirk Wilhelm Schuh 2005 – – – – 2006 – – – – 2007 1,200 38 25 6 Jochen Klösges 2005 – – – – 2006 1,200 42 22 12 2007 1,200 38 25 6 Joachim Plesser 2005 – – – – 2006 – – – – 2007 – – – – Henning Rasche 2005 – – – – 2006 – – – – 2007 1,200 38 25 6 Martin Zielke1) 2005 1,200 33 97 88 2006 1,200 42 22 12 2007 1,200 38 25 6 Total 2005 1,200 33 97 88 2006 4,900 171 90 50 2007 7,300 231 151 36 Sum total 13,400 435 338 174

1) The share contribution of Mr Zielke from 2005 derives from his activities at Commerzbank AG before he joined the Board of Eurohypo.

The potential remuneration stemming from participation in the LTPs 2005 to 2007 could deviate con- siderably from the figures shown in the table or could even be zero, because the final pay-outs are not determined until the end of the term of each LTP.

Due to the performance of the Commerzbank share the LTP 2004 paid out in the reporting year. This plan ended with a payment of Euro 100 per contributed share. The table below lists the payments to the current board members who participated in the LTP 2004 (irrespective of their current executive

positions). These payments are included in the above figures for total remuneration. Statements Financial

No. of participating LTP 20041) shares Amount in € ’000 Auditors’ Report Report Auditors’ Martin Zielke 1,200 120 GS Total 1,200 120

1) The other Board members were not entitled to participate in the Commerzbank LTP 2004 at the date in question. § 28 Pfandbrief At a glance 162 Consolidated Financial Statements

A Monte Carlo model is used to simulate changes which would boost future share prices in order to value the awards granted under LTPs. The model is based on the assumption that stock returns are statistically normally distributed around a mean corresponding to a risk-free investment in an inte- rest-bearing security.

In accordance with IFRS 2 these plans are recognized on the balance sheet as cash-settled share- based payment transactions. The estimated fair value for the LTP 2007 was € 20.55 per share as at December 31, 2007. The following data was used to calculate the fair values:

in € million 31.12.2007 31.12.2006 Volatility of the Commerzbank share price 31% – 47% 13.0% – 30.0%

Volatility of the DJ Euro Stoxx® Bank Index 17% – 30% 8.0% – 15.0% Correlation of the Commerzbank share price with the Index 80% – 88% 39% – 80% Dividend yield of the Commerzbank share 2.9% – 3,5% 2.6% – 3.2%

Dividend yield of the DJ Euro Stoxx® Bank Index 3.3% 2.4% Risk-free interest 4.0% – 4.6% 2.8% – 3.9%

The volatility and correlation are based on the historical volatility of the Commerzbank share price and the Dow Jones (DJ) Euro Stoxx® Banks index and their correlation over the period up to the valuation date, taking into account the expected remaining life of the plan. A rate of 4.5% p.a. was assumed for staff turnover.

The estimated market values of LTP 2004 until 2007 at the day of granting as well as at the balance sheet date are detailed in the following table:

Market value in € per option right

LTP at the day of granting at granting as at 31.12.2007 as at 31.12.2006 2004 1 April 2004 24.18 – 92.47 2005 1 April 2005 27.46 81.12 67.59 2006 1 April 2006 34.91 18.53 21.76 2007 1 April 2007 31.58 20.55 –

In addition to the regular remuneration the bank pays the members of the Board of Managing Directors or their dependants an old age pension in the form of individually agreed pension payments.

A defined contribution plan applies to Messrs. Schuh, Klösges, Plesser and Rasche. Each contribution is converted into a capital payment and credited to a pension account. At retirement the accumulated capital on the retirement account is paid out to the pensioner or his dependants either as a lump-sum or a monthly pension at the choice of the recipient.

This pension plan also applied to Mr Knobloch up to March 31, 2006. The pension arrangements agreed between him and the bank ended on this date. The closing level of the retirement account at this date was € 3,729,000. From 1 April 2006 Mr Knobloch receives a pension from Commerzbank as a Board member of Commerzbank AG.

For Mr Zielke the bank has provided an old age, invalidity and survivors’ pension in accordance with the Commerzbank occupational pension plan in the form of monthly pension payments. The bank has also committed to pay Mr. Zielke a contributions-based supplementary pension designed for management staff. Consolidated Financial Statements >>> Notes 163

In 2007 provisions of € 850,000 were set aside for the pension obligations to the active members of the Eurohypo AG Board of Managing Directors A provision of € 702,000 was transferred to Commerz- bank AG for Mr Klösges, who left the Board of Eurohypo AG on February 28, 2007, to take up a man- agement function in Commerzbank AG. Provisions for pension commitments of active members of the Eurohypo AG Board of Managing Directors amounted to € 6,939,000 at year-end 2007. The pen- sion rights of the active members of the Board of Managing Directors and the respective provisions are detailed in the following table.

IFRS pro-rata provisions as at Pensions in € ’000 Pension rights DBO3) 31.12.2007 Bernd Knobloch 3,7291) 3,048 2,798 Dirk Wilhelm Schuh 1,7711) 1,249 1,146 Jochen Klösges4) – – – Henning Rasche 8261) 415 381 Joachim Plesser 2,6411) 2,605 2,391 Martin Zielke 1282) 243 223

1) Current balance on the pension account (capital account) 2) Current pension entitlements p.a. projected to 62 years of age assuming unchanged emoluments 3) DBO = defined benefit obligation 4) During the year a provision of € 702,000 for Mr Klösges was transferred to Commerzbank AG.

The total emoluments of former members of the Board of Managing Directors and their dependants amounted to € 5,465,000. Provisions of € 56,229,000 have been set aside for the pension obligations to this group.

the supervisory board of eurohypo ag The remuneration of the Supervisory Board is regulated in the bank's Articles of Association. Each member of the Supervisory Board receives an annual fixed emolument of € 15,000 plus a variable emolument which amounts to € 1,000 per 0.25 percentage points by which the return on equity before tax as reported in the relevant consolidated financial statements exceeds 8% for the financial year. This remuneration rises by 25% for each membership of a committee which was active in the financial year. For the chairman of such a committee, the rate of increase is 50% in each case. The Deputy Chairman of the Supervisory Board receives double the emolument and the Chairman triple the emolument. If a member of the Supervisory Board is active on several committees, the overall emolument for a full member of the Supervisory Board is limited to double the amount described above, for the Deputy Chairman of the Supervisory Board triple the amount and for the Chairman of the Supervisory Board quadruple the amount. In addition, the expenses incurred by the Supervisory Board members and VAT arising on Supervisory Board duties are refunded. This sum amounted to Statements Financial € 85,597.42 during the reporting period. Members of the Supervisory Board who did not sit on the Board for a full year received the emoluments on a pro-rata basis. Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 164 Consolidated Financial Statements

In the reporting year, remuneration of the Supervisory Board amounted to € 382,603.45, of which € 249,523.99 related to fixed remuneration and € 133,079.46 to variable remuneration. The remune- ration of the individual members of the supervisory board is shown in the following table:

Cash remuneration

Fixed Variable Amounts in € remuneration remuneration Klaus-Peter Müller 56,250,00 30,000,00 Brigitte Siebert 24,760,27 13,205,48 Prof. Dr. Hans-Peter Keitel 12,380,14 6,602,74 Wolfgang Barth 9,904,11 5,282,19 Herbert Bayer 9,904,11 5,282,19 Peter Birkenfeld 12,380,14 6,602,74 Klaus Müller-Gebel 35,136,99 18,739,73 Cornelia Pielenz 9,904,11 5,282,19 Hans Reischl 12,380,14 6,602,74 Wolfgang Hartmann 23,784,25 12,684,93 Dr. Achim Kassow 12,380,14 6,602,74 Eva-Maria Jäger 6,421,23 3,424,66 Ingo Felka 5,136,99 2,739,73 Michael Reuther 6,421,23 3,424,66 Christian Weber 12,380,14 6,602,74 Total 249,523,99 133,079,46

loans granted to management bodies One loan of € 188,232.66 with a maturity date of 2041 and an interest rate of 4.53% was granted to a board member.

Loans were granted to members of the Supervisory Board, including employees’ representatives, totalling € 780,555.31 with terms ending between 2022 and 2032 and at nominal interest rates of between 3.95% and 5.5%. All loans are secured on land charges. Consolidated Financial Statements >>> Notes 165

(84) securitization of loans Securitization is an important core element of our equity and risk management. The aim is to reduce the bank’s risk-weighted assets, free up the capital base and create scope for new business with higher margins and thereby achieve a higher return on equity. Through securitization, we sell claims in the form of loan portfolios to the capital market. The assets assigned are securitized by the special-pur- pose vehicles acquiring the loans and sold to third parties.

(85) other obligations The Eurohypo Group is a lessee under operating leases. As at December 31, 2006 a variety of non- terminable operating leases were in place for properties and other fixed assets (vehicles, photo- copiers) which are used to carry out the bank’s operating activities. The main leases include extension options and exit clauses, which are in line with market conditions for business properties and which link adjustments in the lease payments to the price index. The minimum obligations under non-ter- minable leases for properties and other fixed assets will lead to expenses of € 26 million in financial year 2007, € 78 million for financial years 2008 to 2011 and € 48 million for the period from 2012 onwards.

(86) date of release for publication The present consolidated financial statements were approved for submission to the Supervisory Board by the Board of Managing Directors on February 26, 2008. The Supervisory Board has to examine the consolidated financial statements and declare its approval or otherwise. The Board of Managing Directors approved the preliminary figures of the financial statements for publication on February 14, 2008.

(87) corporate governance – declaration of conformity (§ 161 aktg) On March 21, 2007 the Board of Managing Directors and the Supervisory Board of Eurohypo AG issued the annual declaration of conformity pursuant to section 161 AktG (Stock Corporation Act) which our shareholders can access on the Internet at www.eurohypo.com (Investor Relations). The next declaration of conformity will be issued by our Board of Managing Directors and the Super- visory Board on March 17, 2008. Financial Statements Financial Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 166 Consolidated Financial Statements

SUPERVISORY BOARD MANDATES

mandates in supervisory boards or comparable german and international supervisory bodies pursuant to section 285 no.10 of the german commercial code (hgb)

Mandates in other Supervisory Membership of comparable Boards (of German companies) German and international to be established under law supervisory bodies of com- Name, Profession mercial companies

Klaus-Peter Müller Linde AG, Munich Assicurazioni Generali S.p.A., Triest Frankfurt/Main Steigenberger Hotels AG, Frankfurt a.M. Kreditanstalt für Wiederaufbau, Chairman Frankfurt a.M. Speaker of the Board Liquiditäts-Konsortialbank GmbH, of Commerzbank AG Frankfurt a.M. Parker Hannifin Corporation, Cleveland, Ohio Commerzbank International S.A., Luxemburg*

Klaus Müller-Gebel comdirect bank AG, Quickborn – Bad Soden (Deputy Chairman) Deputy Chairman Commerzbank AG, Frankfurt a.M. since august 29, 2007 Deutsche Schiffsbank AG, Bremen/Hamburg Lawyer

Brigitte Siebert – – Eschborn Deputy Chairwoman until august 29, 2007 Bank employee

Wolfgang Barth – – Frankenthal Bank employee until august 29, 2007

Herbert Bayer Deutsche Wertpapierservice Bank AG, – Frankfurt/Main Frankfurt a.M./Düsseldorf Union Secretary ver.di Deutsche Börse AG, Frankfurt a.M. until august 29, 2007

Peter Birkenfeld – – Bad Homburg Bank employee until august 29, 2007

Ingo Felka – – Maintal Bank employee since august 29, 2007

Wolfgang Hartmann Hypothekenbank in Essen AG, Essen* – Kelkheim Member of the Board of Managing Directors of Commerzbank AG

* Internal Group mandate Consolidated Financial Statements >>> Supervisory Board Mandates 167

Mandates in other Supervisory Membership of comparable Boards (of German companies) German and international to be established under law supervisory bodies of com- Name, Profession mercial companies

Eva-Maria Jäger – – Schmitten im Taunus Bank employee since august 29, 2007

Dr. Achim Kassow ThyssenKrupp Steel AG, Duisburg BRE Bank S.A., Warschau* Frankfurt/Main Volksfürsorge Deutsche Sachversicherung Commerz Grundbesitzgesellschaft mbH, Member of the Board of Managing AG, Hamburg Wiesbaden (Chairman)* Directors of Commerzbank AG comdirect bank AG, Quickborn COMMERZ PARTNER Beratungsgesellschaft until august 29, 2007 (Chairman)* für Vorsorge- und Finanzprodukte mbH, COMINVEST Asset Management GmbH, Frankfurt a.M. (Chairman)* Frankfurt a.M. (Chairman)* Commerzbank (Schweiz) AG, Zürich Commerz Grundbesitz-Investmentgesell- (President of the Administrative Board)* schaft mbH, Wiesbaden (Chairman)*

Prof. Dr.-Ing. Hans-Peter Keitel HOCHTIEF Construction AG (Chairman)*, HOCHTIEF AUSTRALIA Ltd.* Essen Essen Leighton Holdings Limited, St. Leonards Chairman of the Board of Managing National-Bank AG, Essen Australien, Deptuy Chairman Directors of HOCHTIEF Aktiengesellschaft SGS SA, Geneva until august 29, 2007

Cornelia Pielenz AGIS Allianz-Dresdner Informationssysteme – Berlin GmbH, Munich Lawyer until august 29, 2007

Dr. h.c. Hans Reischl Alte Leipziger Versicherungs-aG, Oberursel – Cologne Alte Leipziger Holding AG, Oberursel Chairman of the Board of Managing KarstadtQuelle AG, Essen Directors of REWE Zentral AG (retired) Maxdata AG, Marl until august 29, 2007

Michael Reuther Hypothekenbank in Essen AG, Essen Commerzbank Capital Markets Corp., New Bad Nauheim (Chairman)* York, Member of the Board of Directors* Statements Financial Member of the Board of Managing Erste Europäische Pfandbrief- und Kommu- Directors of Commerzbank AG nalkreditbank AG, Luxemburg, Chairman of since august 29, 2007 the Administrative Board*

Christian Weber Report Auditors’ – Service-Center Inkasso GmbH, Düsseldorf

Steinbach/Taunus GS Bank employee until august 29, 2007

* Internal Group mandate § 28 Pfandbrief At a glance 168 Consolidated Financial Statements

MANAGEMENT BOARD MANDATES

mandates in supervisory boards or comparable german and inter- national supervisory bodies pursuant to section 285 no.10 of the german commercial code (hgb), including mandates pursuant to section 340 a paragraph 4 no.1 hgb

Mandates in other Supervisory Membership of comparable Boards (of German companies) German and international to be established under law supervisory bodies of com- Name, Profession mercial companies

Bernd Knobloch Commerz Grundbesitzgesellschaft mbH, Eurohypo Investment Banking Ltd., Chairman Wiesbaden (Chairman)2) London1) from February 1 until September 25, 2007 Commerz Grundbesitz-Investmentgesell- schaft mbH, Wiesbaden (Chairman)2) since April 1, 2007 Commerz Real AG, Düsseldorf (Chairman)3)

Dirk Wilhelm Schuh GEWOBA Wohnen und Bauen AG2) EUROHYPO Europäische Deputy Chairman Commerz Real AG, Düsseldorf3) Hypothekenbank S.A., Luxemburg, until december 31, 2007 since September 17, 2007 Deputy Chairman Commerz Grundbesitz-Investmentgesell- of the Administrative Board1) 2) schaft mbH, Wiesbaden (Deputy Chairman)2) until December 31, 2007 since September 1, 2007 EH Estate Management GmbH, Eschborn, (Chairman of the Supervisory Board)4) until December 31, 2007 CORECD Commerz Real Estate Consulting und Development mbH, Berlin (Chairman of the Supervisory Board) until December 31, 2007 Service-Center Inkasso GmbH, Düsseldorf (Chairman of the Supervisory Board) until February 28, 2007 KENSTONE GmbH, Eschborn (Chairman of the Board of Advisors)1) until December 31, 2007 Servicing Advisors Deutschland GmbH, Frankfurt (Chairman of the Board of Advisors) since June 4, 2007

Jochen Klösges – – until february 28, 2007

1) Internal Group mandate 2) Mandate in large corporations pursuant to Section 340a Paragraph 4 No.1 HGB 3) formerly CommerzLeasing und Immobilien AG, Düsseldorf 4) formerly CASIA Immobilien-Management GmbH, Eschborn Consolidated Financial Statements >>> Management Board Mandates 169

Mandates in other Supervisory Membership of comparable Boards (of German companies) German and international to be established under law supervisory bodies of com- Name, Profession mercial companies

Joachim Plesser – HypZert Gesellschaft zur Zertifizierung von Immobiliensachverständigen für Beleihungs- wertermittlungen GmbH, Berlin (Member of the Supervisory Board) EH Estate Management GmbH, Eschborn (Member of the Supervisory Board)4) since March 29, 2007 CORECD Commerz Real Estate Consulting und Development GmbH, Berlin (Member of the Supervisory Board)

Henning Rasche – EUROHYPO Europäische Hypothekenbank S.A., Luxemburg (Chairman of the Administrative Board)1) 2)

Martin Zielke Commerz Real AG, Düsseldorf 3) – until September 17, 2007

Dr. Frank Pörschke Commerz Grundbesitz-Spezialfondsgesell- CeGeREAL S.A. (Member of the Generally authorized agent schaft mbH (Chairman)2) Supervisory Board) since september 1, 2007 until September 24, 2007 until October 30, 2007

1) Internal Group mandate 2) Mandate in large corporations pursuant to Section 340a Paragraph 4 No.1 HGB 3) formerly CommerzLeasing und Immobilien AG, Düsseldorf 4) formerly CASIA Immobilien-Management GmbH, Eschborn Financial Statements Financial Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 170 Consolidated Financial Statements

STAFF MANDATES

mandates pursuant to section 340 a paragraph 4 no. 1 of the german commercial code (hgb) in supervisory bodies to be established under law of large corporations (section 267 paragraph 3 hgb)

Mandates in other Supervisory Membership of comparable Boards (of German companies) German and international to be established under law supervisory bodies of com- Name, Profession mercial companies

Wolfgang Groth – EUROHYPO Europäische until march 31, 2007 Hypothekenbank S.A., Luxemburg** (Member of the Administrative Board)*

Rupert Hackl Ratgeber AG, Munich Alba BAUPROJEKT MANAGEMENT GmbH, Bürgerliches Brauhaus Immobilien Munich Ingolstadt (BBI) AG

Robert Lange – ABG Frankfurt Holding Wohnungsbau- und Beteiligungs mbH, Frankfurt a.M.

Dr. Peter Otto – VBW Bauen und Wohnen GmbH, Bochum

Ralf Pechter Pentasys AG, Munich –

Christian Schaarschmidt Agaplesion gemeinnützige AG, – Frankfurt a.M.

Dirk Schuster – Servicing Advisors Deutschland GmbH, Frankfurt a.M.

Peter Steinmetz – Conjekt AG, Munich

Theo Weyandt – MOMENI Projektentwicklung GmbH, Hamburg

* Internal Group mandate ** Mandate in large corporations pursuant to Section 340a Paragraph 4 No.1 HGB Consolidated Financial Statements >>> Staff Mandates / Management Bodies 171

MANAGEMENT BODIES

supervisory board board of managing directors

Klaus-Peter Müller Eva-Maria Jäger2) Bernd Knobloch Chairman since august 29, 2007 Chairman

Klaus Müller-Gebel Dr. Achim Kassow Dirk Wilhelm Schuh Deputy Chairman1) until august 29, 2007 Deputy Chairman since august 29, 2007 until december 31, 2007

Brigitte Siebert2) Prof. Dr.-Ing. Jochen Klösges Deputy Chairman Hans-Peter Keitel until feburary 28, 2007 until august 29, 2007 until august 29, 2007

Wolfgang Barth2) Cornelia Pielenz2) Joachim Plesser until august 29, 2007 until august 29, 2007

Herbert Bayer2) Dr. h.c. Hans Reischl Henning Rasche until august 29, 2007 until august 29, 2007

Peter Birkenfeld2) Michael Reuther1) Martin Zielke until august 29, 2007 since august 29, 2007

Ingo Felka2) Christian Weber2)

since august 29, 2007 until august 29, 2007 Statements Financial

Wolfgang Hartmann Dr. Frank Pörschke Report Auditors’ Generally authorized agent GS since september 1, 2007 § 28 Pfandbrief

1) Appointed further to the Annual General Meeting on August 29, 2007. 2) Employee representative At a glance 172 Consolidated Financial Statements

LIST OF AFFILIATED COMPANIES, PARTICIPATING INTERESTS AND SPECIAL PURPOSE VEHICLES

fully consolidated Eurohypo Capital Funding Trust II Kenstone GmbH companies Delaware, USA 65760 Eschborn Eurohypo (Japan) Corporation G-G-B Gebäude- und Grundbesitz AGV Allgemeine Grundstücks- Tokyo, Japan GmbH verwaltungs- und Verwertungs- Eurohypo Systems GmbH 65760 Eschborn gesellschaft mbH 65760 Eschborn gr Grundstücks GmbH Objekt 65760 Eschborn Frankfurter Gesellschaft Corvus & Co. Sossenheim KG GVG Gesellschaft zur Verwertung für Vermögensanlagen 65929 Frankfurt am Main von Grundbesitz mbH mit beschränkter Haftung gr Grundstücks GmbH Objekt 65760 Eschborn 65760 Eschborn Corvus IVV Immobilien-Verwaltungs- und FHB Immobilienprojekte GmbH 60489 Frankfurt am Main Verwertungsgesellschaft mbH 65760 Eschborn Property Invest GmbH 65760 Eschborn Fi Pro-City GmbH 65760 Eschborn BACUL Beteiligungs- 65760 Eschborn Wohnbau-Beteiligungsgesellschaft gesellschaft mbH GBG mbH 65760 Eschborn Verwaltungs- und Verwertungs- 65760 Eschborn EH Estate Management GmbH gesellschaft für Grundbesitz mbH 65760 Eschborn 65760 Eschborn Forum Immobiliengesellschaft fully consolidated Messestadt Riem mbH special purpose vehicles »Office am See I« GmbH 65760 Eschborn and funds further to 60760 Eschborn Futura Hochhausprojekt- ias 27/sic 12 Messestadt Riem gesellschaft mbH »Office am See II« GmbH Glastonbury Finance 2007-1 Ltd. 65760 Eschborn 65760 Eschborn Irland Unica Immobiliengesellschaft Messestadt Riem Semper Finance 2007-1 GmbH mbH »Office am See III« GmbH Frankfurt am Main 65760 Eschborn 65760 Eschborn KP Semper No. 1 Ltd. EHY Real Estate Fund I LLC Nordboden Immobilien- und Jersey New York, USA Handelsgesellschaft mbH Times Square Funding, LLC EHY Sub Assett LLC, 65760 Eschborn New York, USA Delaware, USA SB Bauträger GmbH & Co. EUROHYPO Europäische Urbis Hochhaus KG Hypothekenbank S.A. 60329 Frankfurt am Main at-equity investments 1736 Luxemburg – Senningerberg SB Bauträger GmbH & Co. Servicing Advisors Deutschland Eurohypo Capital Funding LLC I Urbis Verwaltungs KG GmbH Delaware, USA 60329 Frankfurt am Main 60323 Frankfurt am Main Eurohypo Capital Funding LLC II SB-Bauträger Gesellschaft Urbanitas Grundbesitz- Delaware, USA mit beschränkter Haftung gesellschaft mbH Eurohypo Capital Funding Trust I 65760 Eschborn 10785 Berlin Delaware, USA WESTBODEN-Bau- und Verwaltungsgesellschaft mbH 65760 Eschborn Westend Grundstücksgesellschaft mbH 65760 Eschborn Consolidated Financial Statements >>> List of Affiliated Companies, Participating Interests and special purpose vehicles 173

associated companies non-consolidated CETERA Vermietungsgesellschaft valued-at-equity special purpose vehicles mbH & Co. Objekt Weinheim KG 40227 Düsseldorf

Delphi I LLC Opera Germany (No.1) GmbH CHRISTA Grundstücks- Delaware, USA Frankfurt am Main Vermietungsgesellschaft Opera Germany (No.2) p.l.c. mbH & Co. Objekt Rottweil KG Dublin, Irland 40215 Düsseldorf non-consolidated Opera Germany (No.3) Delphi Immobilien I GmbH associated companies Frankfurt am Main Frankfurt am Main Delphi Immobilien II GmbH Eurohypo Asset Management Ltd. Opera Finance One FCC Frankfurt am Main London Paris, Frankreich Delphi Immobilien III GmbH Eurohypo Investment Banking Opera White Tower France FCC Frankfurt am Main Limited Paris, Frankreich London EC2N 2DB, Großbritannien Semper Finance 2006-1 Ltd. Delphi Immobilien IV GmbH Frankfurt am Main Ampton B .V. Frankfurt am Main Amsterdam, Niederlande Dr. Gubelt Grundstücks- Vermietungsgesellschaft Proudreed Investment Fund participating interests mbH & Co. Objekt Dortmund KG S.a.r.l. 40227 Düsseldorf Paris, Frankreich Apollo Real Estate Parallel Dr. Gubelt Grundstücks- Fonds d’Investissements Fund V-B-L.P. Vermietungsgesellschaft Proudreed SCI USA mbH & Co. Objekt Duisburg KG Paris, Frankreich BATOR Vermietungsgesellschaft 40227 Düsseldorf Eurohypo Nominees 1 mbH Dr. Gubelt Grundstücks- Limited 40215 Düsseldorf Vermietungsgesellschaft London, Großbritannien BATOR Vermietungsgesellschaft mbH & Co. Objekt Stuttgart KG EHY Securities LLC mbH Objekt Nürnberg KG 40227 Düsseldorf Delaware, USA 40215 Düsseldorf GAG Gemeinnützige Aktien- BELUS Immobilien- und Beteili- BGB-Gesellschaft Kornmarkt gesellschaft für Wohnungs-, gungsgesellschaft mbH Speyer mit Sitz in München, Gewerbe- und Städtebau 65760 Eschborn bestehend aus 67061 Ludwigshafen am Rhein Delphi I Eurohypo LLC – Bayerische Landesbank GEWOBA Aktiengesellschaft Delaware, USA Girozentrale, München und Wohnen und Bauen – GVG Gesellschaft zur Verwertung Goldkey – Investimentos 28195 Bremen von Grundbesitz mbH Imobiliários LDA, Eschborn Goldmann Sachs RE Partners LP Lissabon, Portugal New York, USA BONUS Vermietungsgesellschaft Financial Statements Financial mbH Hammerson 99 Bishopsgate 40215 Düsseldorf Unit Trust Jersey Bürgschaftsgemeinschaft Hamburg GmbH Hammerson 125 OBS Unit Trust

22305 Hamburg Jersey Report Auditors’ GS § 28 Pfandbrief At a glance 174 Consolidated Financial Statements

Hammerson Merthyr Unit Trust MANICA Grundstücks- Real Estate Top Tegel Sechs Jersey Vermietungsgesellschaft GmbH Hammerson Romford Unit Trust mbH & Co. Objekt Neustraubing KG 65760 Eschborn Jersey 40227 Düsseldorf Registra Securita Trust GmbH

Hammerson 60 TNS Unit Trust MARIUS Grundstücks- 60329 Frankfurt am Main Jersey Vermietungsgesellschaft SARIO Grundstücks- mbH & Co. Objekt Hannover KG Inter IKEA Center Grundbesitz Vermietungsgesellschaft 40227 Düsseldorf GmbH & Cie. KG mbH & Co. Objekt Nürnberg KG 80333 München MARTINA Grundstücks- 40215 Düsseldorf vermietungsgesellschaft ILLIT Grundstücks-Verwaltungs- Ski Leasing No. 1 mbH & Co. Objekt Hamburg KG gesellschaft mbH & Co. KG London, Großbritannien 40227 Düsseldorf 82031 Grünwald Ski Leasing No. 2 Merino Grundstücks- Interessengemeinschaft London, Großbritannien Verwaltungsgesellschaft Frankfurter Kreditinstitute GmbH Joparny S.L. mbH & Co.KG 60311 Frankfurt am Main Spanien 82031 Grünwald 121 KHS Limited SOREX Grundstücks- MIDAS Grundstücks- London, Großbritannien Vermietungsgesellschaft Vermietungsgesellschaft mbH & Co. Objekt Hamburg KG Newincco 308 Limited mbH & Co. Objekt Langenhagen KG 40215 Düsseldorf London, Großbritannien 40227 Düsseldorf TABA Grundstücks- Kingswood Unit Trust MINERVA Grundstücks- Vermietungsgesellschaft Jersey Vermietungsgesellschaft mbH & Co. Objekt München KG Korona Grundstücks-Verwaltungs- mbH & Co. Objekt Radolfzell KG 40215 Düsseldorf gesellschaft mbH & Co. KG 40215 Düsseldorf True Sale International GmbH 82031 Grünwald NESTOR Grundstücks- 60329 Frankfurt am Main LECTIO Grundstücks-Vermietungs- Vermietungsgesellschaft gesellschaft mbH & Co. Objekt mbH & Co. Objekt Landau KG TSI Services GmbH Essen KG 40227 Düsseldorf 60329 Frankfurt am Main 40227 Düsseldorf Nossia Grundstücks- VBW Bauen und Wohnen GmbH Liquiditäts-Konsortialbank GmbH Verwaltungsgesellschaft 44803 Bochum 60311 Frankfurt mbH & Co.KG WOHNSTADT Stadtent-

MAECENA Grundstücks- 82031 Grünwald wicklungs- und Wohnungsbau- Vermietungsgesellschaft Real Estate Top Tegel Eins GmbH gesellschaft mbH mbH & Co. Objekt Bremen KG 65760 Eschborn 34117 Kassel 40215 Düsseldorf Real Estate Top Tegel Zwei GmbH ZEPAS Beteiligungs GmbH & Co. MAECENA Grundstücks- 65760 Eschborn Vermietungs-KG 80538 München Vermietungsgesellschaft Real Estate Top Tegel Drei GmbH mbH & Co. Objekt Dortmund KG 65760 Eschborn 40227 Düsseldorf Real Estate Top Tegel Vier GmbH 65760 Eschborn Consolidated Financial Statements >>> Responsibility Statement by the Management Board 175

The list of the participations pursuant to the section 313 (2) HRB has been lodged with the electronic commercial register of the Municipal Court of Frankfurt/Main (HRB 45701). The key subsidiaries are included in this list. responsibility statement by the management board To the best of our knowledge, and in accordance with the applicable reporting principles, the conso- lidated financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group, and the management report of the Group includes a fair review of the development and performance of the business and the position of the Group, together with a des- cription of the principal opportunities and risks associated with the expected development of the Group for the remaining months of the financial year.

Eschborn, February 26, 2008 Eurohypo Aktiengesellschaft

The Board of Managing Directors

Bernd KnoblochThomas Köntgen Joachim Plesser

Henning Rasche Martin Zielke Financial Statements Financial Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 176 Auditors’ Report

AUDITORS’ REPORT

We have audited the consolidated financial state- report are examined primarily on a test basis ments prepared by the Eurohypo Aktiengesell- within the framework of the audit. The audit schaft, Eschborn, comprising the balance sheet, includes assessing the annual financial state- the income statement, statement of changes in ments of the companies included in consolida- equity, cash flow statement and the notes to the tion, the determination of the companies to be consolidated financial statements, together with included in consolidation, the accounting and the group management report for the business consolidation principles used and significant year from January 1 to December 31, 2007. The estimates made by the Company’s Board of preparation of the consolidated financial state- Managing Director, as well as evaluating the over- ments and the group management report in all presentation of the consolidated financial accordance with German commercial law is the statements and the group management report. responsibility of the parent Company’s Board We believe that our audit provides a reasonable of Managing Directors. Our responsibility is to basis for our opinion. express an opinion on the consolidated financial Our audit has not led to any reservations. statements and the group management report In our opinion based on the findings of our based on our audit. audit, the consolidated financial statements We conducted our audit of the consolidated comply with the legal requirements and give financial statements in accordance with § (Article) a true and fair view of the net assets, financial 317 HGB (“Handelsgesetzbuch”: “German Com- position and results of operations of the Group in mercial Code”) and German generally accepted accordance with (German) principles of proper standards for the audit of financial statements accounting. The group management report is promulgated by the Institut der Wirtschafts- consistent with the consolidated financial state- prüfer (Institute of Public Auditors in Germany) ments and as a whole provides a suitable view (IDW). Those standards require that we plan of the Group's position and suitably presents and perform the audit such that misstatements the opportunities and risks of future develop- materially affecting the presentation of the net ment. assets, financial position and results of opera- tions in the consolidated financial statements in Frankfurt am Main, February 26, 2008 accordance with (German) principles of proper accounting and in the group management report PricewaterhouseCoopers are detected with reasonable assurance. Knowl- Aktiengesellschaft edge of the business activities and the economic Wirtschaftsprüfungsgesellschaft and legal environment of the Group and expec- tations as to possible misstatements are taken into account in the determination of audit pro- cedures. The effectiveness of the accounting- related internal control system and the evidence Herbert Busch Andreas Hülsen supporting the disclosures in the consolidated (German Public (German Public financial statements and the group management Auditor) Auditor) Information under Section 28 of the Pfandbrief Act 177

INFORMATION UNDER SECTION 28 OF THE PFANDBRIEF ACT pfandbrief act section 28 (1) no.1

Net present value of risks Nominal value Net present value dynamic procedure in € million 31.12.2007 31.12.2006 31.12.2007 31.12.2006 31.12.2007 31.12.2006 Hypothekenpfandbriefe Outstanding 38,915 43,120 39,024 43,949 37,938 42,646 Cover pool 43,618 47,841 44,950 50,125 43,706 48,659 – Cover assets 41,981 44,991 43,287 47,274 42,083 45,808 – Further cover assets according to Section

19 No.1 PfandBG 1,637 2,850 1,663 2,851 1,623 2,851 Surplus cover 4,703 4,721 5,926 6,176 5,768 6,013

Öffentliche Pfandbriefe Outstanding 47,119 53,090 47,972 55,907 46,553 58,138 Cover pool 49,590 55,423 51,905 58,872 50,201 60,543 – cover assets according to

Section 20 No.1 PfandBG 49,540 55,423 51,855 58,872 50,151 60,543 – cover assets according to

Section 20 No. 2 PfandBG 50 – 50 – 50 – Surplus cover 2,471 2,333 3,933 2,965 3,648 2,405

pfandbrief act section 28 (1) no.2

Hypothekenpfandbriefe Öffentliche Pfandbriefe in € million 31.12.2007 31.12.2006 31.12.2007 31.12.2006 Maturity structure of outstanding Pfandbriefe: Term ≤ 1 year 7,408 8,095 10,157 11,207 Term > 1 year ≤ 5 years 24,446 24,839 23,518 27,449 Term > 5 years ≤ 10 years 6,526 9,596 7,463 7,408 Term > 10 years 535 590 5,981 7,026 Total result 38,915 43,120 47,119 53,090

Cover pool Cover pool Hypothekenpfandbriefe Öffentliche Pfandbriefe in € million 31.12.2007 31.12.2006 31.12.2007 31.12.2006 Fixed rate terms for cover pools:

Term ≤ 1 year 17,738 17,640 19,411 18,425 Statements Financial Term > 1 year ≤ 5 years 15,020 17,775 17,787 25,395 Term > 5 years ≤ 10 years 9,172 10,471 5,985 5,340 Term > 10 years 1,688 1,955 6,407 6,263

Total result 43,618 47,841 49,590 55,423 Report Auditors’ GS pfandbrief act section 28 (1) no.3 § 28 Pfandbrief As at December 31, 2007, there are no derivatives in the cover pool. At a glance 178 Information under Section 28 of the Pfandbrief Act

pfandbrief act section 28 (2) no.1

claims used as cover for hypothekenpfandbriefe by volume

in € million 31.12.2007 31.12.2006 Cover mortgages Up to and including € 300,000 14,822 16,762 Over € 300,000 up to and including € 5 million 9,655 11,237 Over € 5 million 17,504 16,992 Total 41,981 44,991

claims used as cover for hypothekenpfandbriefe by region in which mortgaged real estate is based and type of use

germany Cover assets 31.12.2007 Cover assets 31.12.2006

in € million Commercial Residential Commercial Residential Flats – 3,458 – 3,897 Single family homes – 8,880 – 9,965 Multi-dwellings – 8,311 – 9,321 Office buildings 5,881 – 6,222 – Retail buildings 4,128 – 4,471 – Industrial buildings 1,584 – 1,743 – Other commercially used real estate 1,430 – 1,624 – Unfinished new buildings not yet generating income 119 80 101 94 Building sites 15 16 23 11 Country total 13,157 20,745 14,184 23,288

belgium Cover assets 31.12.2007 Cover assets 31.12.2006

in € million Commercial Residential Commercial Residential Flats – – – – Single family homes – – – – Multi-dwellings – 1 – 1 Office buildings 40 – 64 – Retail buildings 61 – 40 – Industrial buildings – – – – Other commercially used real estate 5 – 5 – Unfinished new buildings not yet generating income – – – – Building sites – – – – Country total 106 1 109 1 Information under Section 28 of the Pfandbrief Act 179

denmark Cover assets 31.12.2007 Cover assets 31.12.2006 in € million Commercial Residential Commercial Residential Flats – – – – Single family homes – – – – Multi-dwellings – – – – Office buildings 8 – 116 – Retail buildings 2 – 9 – Industrial buildings 18 – 18 – Other commercially used real estate – – – – Unfinished new buildings not yet generating income – – – – Building sites – – – – Country total 28 – 143 –

finland Cover assets 31.12.2007 Cover assets 31.12.2006 in € million Commercial Residential Commercial Residential Flats –––– Single family homes –––– Multi-dwellings –––– Office buildings 103 – 97 – Retail buildings 30 – 23 – Industrial buildings 10 – 17 – Other commercially used real estate –––– Unfinished new buildings not yet generating income –––– Building sites –––– Country total 143 – 137 –

france Cover assets 31.12.2007 Cover assets 31.12.2006 in € million Commercial Residential Commercial Residential Flats – – – – Single family homes – – – 1 Multi-dwellings – 1 – 1 Office buildings 664 – 586 – Retail buildings 48 – 23 – Industrial buildings 80 – 52 – Financial Statements Financial Other commercially used real estate 49 – 66 – Unfinished new buildings not yet generating income 6 – 49 – Building sites – – – – Country total 847 1 776 2 Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 180 Information under Section 28 of the Pfandbrief Act

uk Cover assets 31.12.2007 Cover assets 31.12.2006

in € million Commercial Residential Commercial Residential Flats – – – – Single family homes – – – – Multi-dwellings – 14 – – Office buildings 480 – 663 – Retail buildings 318 – 237 – Industrial buildings 238 – 14 – Other commercially used real estate 200 – 56 – Unfinished new buildings not yet generating income 65 – 93 – Building sites 12 – – – Country total 1,313 14 1,063 –

ireland Cover assets 31.12.2007 Cover assets 31.12.2006

in € million Commercial Residential Commercial Residential Flats – – – – Single family homes – – – – Multi-dwellings – – – – Office buildings 61 – – – Retail buildings – – – – Industrial buildings – – – – Other commercially used real estate – – – – Unfinished new buildings not yet generating income – – – – Building sites – – – – Country total 61 – – –

iceland Cover assets 31.12.2007 Cover assets 31.12.2006

in € million Commercial Residential Commercial Residential Flats – – – – Single family homes – – – – Multi-dwellings – – – – Office buildings 9 – 9 – Retail buildings 43 – – – Industrial buildings – – – – Other commercially used real estate – – – – Unfinished new buildings not yet generating income – – – – Building sites – – – – Country total 52 – 9 – Information under Section 28 of the Pfandbrief Act 181

italy Cover assets 31.12.2007 Cover assets 31.12.2006 in € million Commercial Residential Commercial Residential Flats – – – – Single family homes – – – – Multi-dwellings – – – – Office buildings 448 – 456 – Retail buildings 348 – 70 – Industrial buildings 30 – 7 – Other commercially used real estate 56 – 39 – Unfinished new buildings not yet generating income – – – – Building sites – – – – Country total 882 – 572 –

lithuania Cover assets 31.12.2007 Cover assets 31.12.2006 in € million Commercial Residential Commercial Residential Flats – – – – Single family homes – – – – Multi-dwellings – – – – Office buildings – – – – Retail buildings 42 – – – Industrial buildings – – – – Other commercially used real estate – – – – Unfinished new buildings not yet generating income – – – – Building sites – – – – Country total 42 – – –

luxembourg Cover assets 31.12.2007 Cover assets 31.12.2006 in € million Commercial Residential Commercial Residential Flats – – – – Single family homes – – – – Multi-dwellings – – – – Office buildings 189 – 86 – Retail buildings – – – – Industrial buildings – – – – Financial Statements Financial Other commercially used real estate – – – – Unfinished new buildings not yet generating income – – – – Building sites – – – – Country total 189 – 86 – Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 182 Information under Section 28 of the Pfandbrief Act

netherlands Cover assets 31.12.2007 Cover assets 31.12.2006

in € million Commercial Residential Commercial Residential Flats – – – – Single family homes – – – – Multi-dwellings – – – – Office buildings 304 – 536 – Retail buildings 24 – 1 – Industrial buildings 54 – 27 – Other commercially used real estate 45 – 106 – Unfinished new buildings not yet generating income – – – – Building sites – – – – Country total 427 – 670 –

norway Cover assets 31.12.2007 Cover assets 31.12.2006

in € million Commercial Residential Commercial Residential Flats – – – – Single family homes – – – – Multi-dwellings – – – – Office buildings – – 16 – Retail buildings 36 – 34 – Industrial buildings – – – – Other commercially used real estate – – – – Unfinished new buildings not yet generating income – – – – Building sites – – – – Country total 36 – 50 –

austria Cover assets 31.12.2007 Cover assets 31.12.2006

in € million Commercial Residential Commercial Residential Flats – – – – Single family homes – – – – Multi-dwellings – – – – Office buildings 119 – 97 – Retail buildings 124 – 142 – Industrial buildings – – – – Other commercially used real estate 50 – 3 – Unfinished new buildings not yet generating income – – – – Building sites – – – – Country total 293 – 242 – Information under Section 28 of the Pfandbrief Act 183

poland Cover assets 31.12.2007 Cover assets 31.12.2006 in € million Commercial Residential Commercial Residential Flats – – – – Single family homes – – – – Multi-dwellings – – – – Office buildings 19 – 17 – Retail buildings 338 – 45 – Industrial buildings – – – – Other commercially used real estate – – – – Unfinished new buildings not yet generating income – – – – Building sites – – – – Country total 357 – 62 –

portugal Cover assets 31.12.2007 Cover assets 31.12.2006 in € million Commercial Residential Commercial Residential Flats – – – – Single family homes – – – – Multi-dwellings – – – – Office buildings 331 – 244 – Retail buildings 771 – 896 – Industrial buildings 4 – – – Other commercially used real estate 30 – 65 – Unfinished new buildings not yet generating income – – – – Building sites – – – – Country total 1,136 – 1,205 –

sweden Cover assets 31.12.2007 Cover assets 31.12.2006 in € million Commercial Residential Commercial Residential Flats – – – – Single family homes – – – – Multi-dwellings – 38 – 46 Office buildings 146 – 104 – Retail buildings 23 – 28 – Industrial buildings 14 – 24 – Financial Statements Financial Other commercially used real estate – – – – Unfinished new buildings not yet generating income – – – – Building sites – – – – Country total 183 38 156 46 Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 184 Information under Section 28 of the Pfandbrief Act

switzerland Cover assets 31.12.2007 Cover assets 31.12.2006

in € million Commercial Residential Commercial Residential Flats – – – – Single family homes – – – 2 Multi-dwellings – 12 – 21 Office buildings 143 – 109 – Retail buildings 45 – 47 – Industrial buildings 19 – 20 – Other commercially used real estate 86 – 92 – Unfinished new buildings not yet generating income – – – – Building sites – – – – Country total 293 12 268 23

slovakia Cover assets 31.12.2007 Cover assets 31.12.2006

in € million Commercial Residential Commercial Residential Flats – – – – Single family homes – – – – Multi-dwellings – – – – Office buildings – – – – Retail buildings 12 – – – Industrial buildings 12 – – – Other commercially used real estate – – – – Unfinished new buildings not yet generating income – – – – Building sites – – – – Country total 24 – – –

spain Cover assets 31.12.2007 Cover assets 31.12.2006

in € million Commercial Residential Commercial Residential Flats – – – – Single family homes – – – – Multi-dwellings – – – – Office buildings 597 – 811 – Retail buildings 515 – 629 – Industrial buildings 5 – 5 – Other commercially used real estate 230 – 273 – Unfinished new buildings not yet generating income – – – – Building sites – – – – Country total 1,347 – 1,718 – Information under Section 28 of the Pfandbrief Act 185

czech republic Cover assets 31.12.2007 Cover assets 31.12.2006 in € million Commercial Residential Commercial Residential Flats – – – – Single family homes – – – – Multi-dwellings – – – – Office buildings 57 – 33 – Retail buildings 57 – 57 – Industrial buildings – – – – Other commercially used real estate – – – – Unfinished new buildings not yet generating income – – – – Building sites – – – – Country total 114 – 90 –

hungary Cover assets 31.12.2007 Cover assets 31.12.2006 in € million Commercial Residential Commercial Residential Flats – – – – Single family homes – – – – Multi-dwellings – – – – Office buildings 66 – 50 – Retail buildings 62 – 29 – Industrial buildings 7 – 7 – Other commercially used real estate 5 – 5 – Unfinished new buildings not yet generating income – – – – Building sites – – – – Country total 140 – 91 –

totals Cover assets 31.12.2007 Cover assets 31.12.2006 in € million Commercial Residential Commercial Residential 21,170 20,811 21,631 23,360 Financial Statements Financial Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 186 Information under Section 28 of the Pfandbrief Act

pfandbrief act section 28 (2) no.2

arrears on mortgage claims

in € million 31.12.2007 31.12.2006 Total amount of payments in arrears by at least 90 days Germany 81.9 225.7 Belgium –– Denmark –– Finland –– France –0.1

UK –– Ireland –– Iceland –– Italy – 0.3 Lithuania –– Luxembourg –– Netherlands – 0.2 Norway –– Austria –– Poland –– Portugal –– Sweden –– Switzerland – 2.5 Slovakia –– Spain –– Czech Republic –– Hungary –– Total 81.9 228.8 Information under Section 28 of the Pfandbrief Act 187

pfandbrief act section 28 (2) no.3

enforcement measures of which attributable to

Commercial Residential Pending as of December 31, 2007: No. of cases real estate real estate Forced sales 2,810 400 2,410 Forced administration 1,3961) 388 1,008 Forced sales in 2007 679 85 594

1) For 1,051 of the total 1,396 cases of forced administration, forced auction was also pending.

No property was taken over to prevent losses. During the financial year eight properties were sold. Of the properties sold, two were commercially used. interest arrears from mortgage business where the receivable were used to cover hypothekenpfandbriefe Total interest arrears from mortgage debtors not already written off in earlier years was € 19.5 million. in € million 2007 2006 Interest arrears attributable to commercial real estate 6.7 10.9 residential real estate 12.8 18.8 Total 19.5 29.7 amortizations The following repayments were made on mortgages serving as cover for Hypothekenpfandbriefe:

Total Of which commercial Of which residential 2007 2006 2007 2006 2007 2006 Scheduled repayments 2,366 2,528 1,091 1,287 1,275 1,241 Extraordinary repayments 4,989 5,312 3,091 3,119 1,898 2,193 Total 7,355 7,840 4,182 4,406 3,173 3,434 Financial Statements Financial Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 188 Information under Section 28 of the Pfandbrief Act

pfandbrief act section 28 (3) no.1

claims used as cover for öffentliche pfandbriefe Cover assets Cover assets in € million 31.12.2007 31.12.2006 Substitute cover according to Section 20 no. 2 PfandBG 50 –

germany Cover assets Cover assets in € million 31.12.2007 31.12.2006 Central government 8.239 12.343 Regional bodies 28.491 32.713 Local bodies 1.241 1.357 Other 443 289 Country total 38,414 46,702

belgium Cover assets Cover assets in € million 31.12.2007 31.12.2006 Central government 190 345 Regional bodies 65 65 Local bodies –– Other –– Country total 255 410

bulgaria Cover assets Cover assets in € million 31.12.2007 31.12.2006 Central government 7 – Regional bodies – – Local bodies –– Other –– Country total 7–

denmark Cover assets Cover assets in € million 31.12.2007 31.12.2006 Central government –– Regional bodies 12 12 Local bodies –– Other –– Country total 12 12 Information under Section 28 of the Pfandbrief Act 189

estonia Cover assets Cover assets in € million 31.12.2007 31.12.2006 Central government –– Regional bodies –– Local bodies 19 21 Other –– Country total 19 21 finland Cover assets Cover assets in € million 31.12.2007 31.12.2006 Central government 153 153 Regional bodies –– Local bodies 134 87 Other –– Country total 287 240 france Cover assets Cover assets in € million 31.12.2007 31.12.2006 Central government 1.731 1.731 Regional bodies 123 8 Local bodies 36 21 Other –– Country total 1,890 1,760 greece Cover assets Cover assets in € million 31.12.2007 31.12.2006 Central government 877 1.353 Regional bodies –– Local bodies –– Other –– Country total 877 1,353 uk Financial Statements Financial Cover assets Cover assets in € million 31.12.2007 31.12.2006 Central government 866 403 Regional bodies 158 – Auditors’ Report Report Auditors’ Local bodies ––

Other –– GS Country total 1,024 403 § 28 Pfandbrief At a glance 190 Information under Section 28 of the Pfandbrief Act

iceland Cover assets Cover assets in € million 31.12.2007 31.12.2006 Central government 167 56 Regional bodies –– Local bodies –– Other 44 – Country total 211 56

italy Cover assets Cover assets in € million 31.12.2007 31.12.2006 Central government 102 114 Regional bodies 607 256 Local bodies 58 26 Other –– Country total 767 396

japan Cover assets Cover assets in € million 31.12.2007 31.12.2006 Central government –7 Regional bodies 50 – Local bodies –– Other –– Country total 50 7

canada Cover assets Cover assets in € million 31.12.2007 31.12.2006 Central government –– Regional bodies 137 77 Local bodies –– Other –– Country total 137 77

latvia Cover assets Cover assets in € million 31.12.2007 31.12.2006 Central government 40 – Regional bodies –– Local bodies –– Other –– Country total 40 – Information under Section 28 of the Pfandbrief Act 191

lithuania Cover assets Cover assets in € million 31.12.2007 31.12.2006 Central government 120 – Regional bodies –– Local bodies –– Other –– Country total 120 – netherlands Cover assets Cover assets in € million 31.12.2007 31.12.2006 Central government –– Regional bodies 40 – Local bodies –– Other –– Country total 40 – austria Cover assets Cover assets in € million 31.12.2007 31.12.2006 Central government 1.108 1.144 Regional bodies 571 358 Local bodies 40 45 Other –– Country total 1,719 1,547 poland Cover assets Cover assets in € million 31.12.2007 31.12.2006 Central government 153 137 Regional bodies –– Local bodies –– Sonstige –– Country total 153 137 portugal Financial Statements Financial Cover assets Cover assets in € million 31.12.2007 31.12.2006 Central government 51 77 Regional bodies –– Auditors’ Report Report Auditors’ Local bodies ––

Other 80 – GS Country total 131 77 § 28 Pfandbrief At a glance 192 Information under Section 28 of the Pfandbrief Act

sweden Cover assets Cover assets in € million 31.12.2007 31.12.2006 Central government 102 256 Regional bodies –– Local bodies –– Other –– Country total 102 256

switzerland Cover assets Cover assets in € million 31.12.2007 31.12.2006 Central government –– Regional bodies 617 615 Local bodies 15 16 Other –– Country total 632 631

slovakia Cover assets Cover assets in € million 31.12.2007 31.12.2006 Central government 100 – Regional bodies 50 – Local bodies –– Other –– Country total 150 –

slovenia Cover assets Cover assets in € million 31.12.2007 31.12.2006 Central government 20 – Regional bodies –30 Local bodies –– Other –– Country total 20 30

spain Cover assets Cover assets in € million 31.12.2007 31.12.2006 Central government 197 194 Regional bodies 582 408 Local bodies –– Other –– Country total 779 602 Information under Section 28 of the Pfandbrief Act 193

supranational Cover assets Cover assets in € million 31.12.2007 31.12.2006 Central government 68 96 Regional bodies 486 406 Local bodies –– Other –– Country total 554 502 czech republic Cover assets Cover assets in € million 31.12.2007 31.12.2006 Central government 95 – Regional bodies 40 – Local bodies 19 19 Other –– Country total 154 19 usa Cover assets Cover assets in € million 31.12.2007 31.12.2006 Central government –– Regional bodies 464 8 Local bodies 162 – Other –15 Country total 626 23 hungary Cover assets Cover assets in € million 31.12.2007 31.12.2006 Central government 320 162 Regional bodies –– Local bodies –– Sonstige –– Country total 320 162 cyprus Financial Statements Financial Cover assets Cover assets in € million 31.12.2007 31.12.2006 Central government 50 – Regional bodies –– Auditors’ Report Report Auditors’ Local bodies ––

Other –– GS Country total 50 – § 28 Pfandbrief At a glance 194 Information under Section 28 of the Pfandbrief Act

pfandbrief act section 28 (3) no.2

total amount outstanding by a minimum of 90 days

There are no payments outstanding on claims used as cover for Öffentliche Pfandbriefe. At a glance >>> Glossary 195

GLOSSARY

Accrual Basis point Corporate Governance The re-investment of interest income A basis point is one hundredth of a In general terms Corporate Gover- or other revenue from securities in percentage point (0.01%). nance refers to the totality of all new securities. national and international standards Benchmark bonds and values of good and responsible Asset Backed Security The major mortgage banks, which management applying to both com- Tradable notes which are collatera- regularly issue high volume Pfand- pany staff and management. The lized by claims. briefe (Jumbo Pfandbriefe), aim to attributes of good corporate gover- position these Pfandbriefe, which nance include effective management, Available for Sale feature high liquidity and credit protection of shareholder interests, A category defined by IAS 39 which ratings, as benchmark bonds. co-operation at management level, is applied to financial instruments monitoring of regulatory compliance, which are classified or designated Bonds transparency in communication and as available for sale. Collective term for fixed-interest a responsible approach to risk. In debt instruments. Germany these principles have been Backtesting laid down in the German Corporate Procedure for monitoring the quality Bonds and other fixed-income Governance Codex (see also “Decla- of value-at-risk (VaR) models. This securities ration of conformity”). involves checking over time how Claims owed to the bank by its bor- often the potential losses estimated rowers may be shown as bonds and Cover funds using the VaR approach have been other fixed-income securities on the The cover fund of a mortgage bank retrospectively exceeded. assets side of the balance sheet. is the total mortgage lending and public sector finance which is eligible Basel II Commercial mortgage backed as cover for Pfandbriefe or Öffent- Capital adequacy recommendations securities (CMBS) liche Pfandbriefe pursuant to the for internationally active banks pro- Bonds which are used to securitize requirements of the German Pfand- duced by the Basel Committee on credit risks arising from a commer- brief law. The cover funds are Banking Supervision. The Basel II cial property portfolio (see also mort- managed separately from other regulations are intended to increase gage backed securities). assets. Compliance with the provi- the risk-sensitivity of the capital sions of the German Pfandbrief law adequacy requirements compared Confidence level on cover is monitored by trustees with the previous regime. The Basel The confidence level defines the and regular checks by BaFin. II framework has been implemented probability of a potential loss arising in Germany through the transposition during the time specified by the Credit Default Swap (CDS) of the EU Capital Requirements value-at-risk. Financial instrument which transfers Directive into national law in the the credit risk of an underlying asset form of the Solvency Regulation, Core capital (e.g. a security or a loan). The buyer which is applicable at the latest The core capital of a bank, in the of protection pays the seller of pro- from 2008. form of a public limited company, tection a premium and in return Financial Statements Financial comprises essentially the paid up receives a compensation payment if share capital (without preference a specified credit event occurs. shares) and the reserves. Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 196 At a glance

Declaration of conformity Hedge accounting financial position and result of ope- Under Section 161 of the Stock Cor- Presentation of opposing perfor- rations of the company and changes poration Act (AktG), this must be mance of a hedging transaction in these over the course of time. In submitted annually by the Board of (e.g. an interest rate swap) and the contrast to this, the primary focus Managing Directors and the Super- underlying transaction (e.g. a loan). of annual financial statements in visory Board of a listed company. The aim of hedge accounting is to accordance with the HGB is the pro- It is a statement of the extent to minimize the impact of the valua- tection of creditors. which the company has complied tion affecting income and recording with the German Corporate Gover- of the valuation results of derivatives IFRS (International Financial nance Code (DCGK). transactions on the Income State- Reporting Standards) ment. Since 2002, IFRS has been the term Derivatives used for the overall concept of the Financial instruments whose value Hedging standards adopted by the Interna- depends on the value of another A strategy in which hedging trans- tional Standards Board. Standards financial instrument. The price of actions are agreed with the aim of already adopted are also cited as the derivative is derived from the protecting against the risk of unfa- International Accounting Standards price of an underlying value (i.e. vourable price trends (interest rates, (IAS). the interest rate). These instruments share prices). offer extensive opportunities for Issue of securities risk management and control. Hybrid capital Securities can either be issued Offerings in the form of assets of directly by an issuing entity itself or Fair value silent shareholders or preference by commissioning banks to do so. Amount at which financial instru- shares, which are issued under In the latter case the bank either ments are bought or sold at fair intervention of a group SPV and carries out the sale of the securities terms. Valuation is based on either recognized under banking regula- on behalf of the issuer on a com- market prices (stock exchange pri- tions as core capital. mission basis or buys the securities ces) or, where these are missing, at a fixed price and offers them to internal valuation models. Hypothekenpfandbrief the public at a higher price (market Bonds issued by mortgage banks. placement). Fair value hedge They enable the bank to finance Describes a fixed-interest balance mortgage loans. Jumbo Pfandbriefe sheet item (e.g. receivables or secu- Fixed-coupon, bullet repayment rities), where a swap is used to IAS (International Accounting Pfandbriefe with annual retrospective hedge against market risks. Valua- Standards) payment of interest and an issue tion is based on the fair value. Accounting regulations adopted by volume of at least € 1 billion, issued the International Accounting Stan- by a consortium of banks. dards Committee. Under IAS, the purpose of annual financial state- ments is to communicate informa- tion relevant to the decision-making of investors regarding the net assets, At a glance >>> Glossary 197

Liable equity Minimum requirements for risk Portfolio German banks must provide back- management (“MaRisk”) Part or all of one or all classes of ing for the risks from their lending Regulations issued by the German assets (i.e. securities, loans, holdings business (risk of counterparty default) banking regulators on the imple- or property). and from their market positions mentation of the requirements of (market price risks) with their own Section 25a of the German Banking Primary market resources, in accordance with inter- Act in risk management. The mini- The primary market covers all acti- national guidelines. The liable equity mum requirements for risk manage- vities in connection with the distri- is in turn structured into tier 1 and ment were published by the Federal bution of new issues. tier 2 capital. The liable equity is of Financial Supervisory Authority on particular importance to banks, as December 20, 2005. Public private partnership (PPP) it largely determines their business Partnerships between the public scope on the basis of the provisions Mortgage backed securities (MBS) sector and private companies for laid down by the Federal Banking MBS are a special form of asset the implementation of infrastructure Supervisory Authority. backed securities. In this process, a projects. bank sells or securitizes parts of its Mark-to-Market credit risks from property lending Rating A method of valuing positions at by issuing bonds. The main purpose Standardized assessment of the current market prices including of this kind of transaction is to ease credit standing of the issuer and its unrealized profits and losses and the burden of the risk assets, which debt paper by specialized agencies ignoring acquisition costs. have to be backed by equity. (e.g. Moody’s and Standard & Poor’s).

Maturity transformation Opera Real Estate Investment Banking The professional management of “Opera” is a documentation envelope Supports large real estate invest- different maturities and the associa- for securitizations which, with the ments and transactions with own ted varying interest rate implica- appropriate modifications, enables and external capital (structured tions for assets and liabilities on the different types of securitization trans- finance) together with services (real balance sheet. Current and anticipa- action to be carried out through estate M & A, financial advice), and ted future market interest rates are Special Purpose Vehicles under sells the property finance risks taken into account for this purpose. a single brand name and so via a generated by means of direct place- single platform. ment or securitization (see entry Mezzanine loans below) in the capital market. Mezzanine loans rank subordinate Participation certificates to bank loans and are often used in Certificates granting the right to Real Estate Investment Trust the financing of leveraged buy-outs. participate in the net profit and/or (REIT) The increased risk for the lender as proceeds of liquidation (particularly REITs are companies which own, a result of the subordinate status is for public limited companies and and usually also operate, real estate. compensated with a higher interest limited liability companies). The Shares in many REITs are freely rate and often with an option to right is vested in the participation traded, usually on major stock Financial Statements Financial participate in the equity of the certificate. exchanges. acquired company. Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 198 At a glance

Repo business ment for the equity ratio is 8% of Standard risk costs for credit risks (Repurchase agreement) this value. According to the applica- Ex ante calculated risk premiums Repurchase agreements for securi- ble regulations, the individual risk for the lending business. These ties transactions (true repo transac- weightings depend on the general indicate the loss anticipated, on the tions, whose object continues to risk weighting of the debtor (i.e. basis of historical experience, within accrue to the borrower). states, banks or commercial compa- one year as a result of defaulting nies). loans. Return on equity (RoE) The ratio of profit before or after Securitization Stress test tax to the average balance sheet The securitizing of assets. Tradable Stress tests are intended to model equity. The return on equity shows securities replace book credits. the effects of extreme market fluc- the yield generated by the capital Mortgage backed securities (see tuations in terms of losses. These employed in the business. entry above) are a form of securiti- effects cannot be adequately taken zation. into account using VaR models. VaR Risk Premium risk indicators are based on “nor- An interest premium which inves- Shareholder Value mal” market fluctuations and not on tors may demand when investing in This concept refers to raising the the very rare, extreme situations a risky asset. If an investment has a value of a company for the share- which are difficult to record statisti- high risk of loss or default, it nor- holder. The increase in value is cally. Stress tests therefore are a mally carries a high interest rate manifested in an improved perfor- meaningful supplement to the VaR premium. German federal govern- mance of the stock price and/or analyses; they are also promoted by ment bonds represent the base level an increase in the dividend. the supervisory authorities. and benchmark for interest rates. Spread Subprime Risk-weighted assets (RWA) The spread refers to the difference Subprime mortgages are mortgage The bank must allocate regulatory between the buying (bid/ask) and loans granted to borrowers with a risk weightings to all assets and off- selling (offer) price. poor standard of creditworthiness. balance sheet items and add up the risk-weighted values of the asset Squeeze-Out positions. A risk weighting of 100% Under the German “squeeze-out” means that the full value of the rules (Ss. 327 a ff. Stock Corporation asset has been taken into account Act, 39a German Securities Acquisi- in calculating the risk weighting. tion and Takeover Act) a majority The regulatory minimum require- shareholder who holds a stake of 95% or more in a company may buy out the minority shareholders in an Aktiengesellschaft (public limited company) in return for a cash indemnity. At a glance >>> Glossary 199

Swaps banking receivables are pooled, sold Value-at-risk A financial instrument in which cur- as a portfolio to a specialist company Method used to record interest rate rency and/or interest exposures are and – after division into tranches change risks. With the VaR method, swapped between two counterpar- with varying risk content – sold on the risk is defined as negative devi- ties (e.g. by swapping future liabili- to investors in the capital market. ation from the current value of all ties in US dollars for Euro liabilities In return for a risk premium, the financial transactions of the bank. or by swapping variable for fixed investors carry the possible risk In order to be meaningful, the hold- interest payments). which can arise following acquisi- ing period and the confidence level tion. By taking the loans off their (see above) must also be stated. The Syndication books, banks receive liquid funds VaR value indicates the upper loss This refers to the issue of securities and therefore reduce their regulatory limit, which will not be exceeded or lending (syndicated loans) by a capital burden. within the holding period, with a consortium. probability corresponding to the Underwriting guarantee confidence level. True Sale Initiative (TSI) When securities are issued a finan- A total of 13 banks are involved in cial institution may provide a guaran- Volatility the TSI of the KfW banking group. tee in the underwriting agreement Indicator of price fluctuations of The aim of the initiative is to carry to purchase a certain proportion of securities or currencies. Volatility is out true sale securitizations via which the issue. often calculated on the basis of the price history. The higher the volatility, Value Added the greater the risk, for example, in Valued Added is that portion of holding an asset. post-tax income remaining after deducting the cost of capital. The greater the Value Added the higher the intrinsic value of a company. Financial Statements Financial Auditors’ Report Report Auditors’ GS § 28 Pfandbrief At a glance 200 Editorial information

EDITORIAL INFORMATION

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Product coordination Hans-Joachim Dietz, Kelkheim

Lithographic print Koch Lichtsatz und Scan, Wiesbaden

Printers Volkhardt Caruna Medien, Kleinheubach financial calendar 2008

Press conference for financial year 2007 March 19, 2008 Publication of the financial figures for Q1 2008 mid May Q2 2008 mid August Q3 2008 mid November Annual General Meeting summer 2008

Contacts Publications for Orders If you have any questions about the our shareholders If you would like to obtain further Annual Report, please contact our Eurohypo Group Annual Report copies of the Annual Report or any Capital Market Communication (German/English) of the other publications mentioned department: here, please contact: Annual financial statements and Tel. +49(0)69. 2548-28208 management report of Eurohypo AG Eurohypo AG Fax +49(0)69. 2548-88208 (German) Capital Market Communication Helfmann-Park 5 Go to www.eurohypo.com to Interim reports D-65760 Eschborn call up important company news for the 1st, 2nd, 3rd quarters immediately after publication. (German/English) Fax +49(0)69. 2548-88208 ADDRESSES

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Eurohypo Systems GmbH 65760 Eschborn Helfmann-Park 5 Tel. +49 (0) 69. 25 48-0 Fax +49 (0) 69. 25 48-7 13 00

Registered Office Eschborn, HRB 45701 Amtsgericht Frankfurt/Main www.eurohypo.com