VOLKSWAGEN FINANCIAL SERVICES AG ANNUAL REPORT 2017 Key Figures VOLKSWAGEN FINANCIAL SERVICES AG 1 In € million (as of December 31) 2017 2016 Total assets 68,953 130,248 Loans to and receivables from customers attributable to Retail financing 16,269 41,726 Dealer financing 3,584 14,638 Leasing business 18,809 34,344 Lease assets 11,571 14,696 Equity 7,624 16,951 Operating profit2 609 609 Profit before tax2 643 615 In % (as of December 31) 2017 2016 Cost/income ratio3 73 89 Equity ratio4 11.1 13.0 Return on equity5 8.4 8.1 Number (as of December 31) 2017 2016 Employees 8,555 11,819 Germany 5,198 6,145 International 3,357 5,674 1 Previous year restated as explained in the disclosures on the leasing business in the United Kingdom and Irish markets and in the disclosures on the separately recognized derivatives in the United Kingdom market in the section entitled “Restated Prior-Year Figures” in the notes. 2 Previous year restated as explained in the disclosures relating to the discontinued operations in the section entitled “Restated Prior-Year Figures” in the notes. 3 General and administrative expenses, adjusted for expenses passed on to other entities in the Volkswagen Group / net income from lending, leasing and insurance transactions (after provision for credit risks) and net fee and commission income. 4 Equity / total assets. 5 Profit before tax / average equity. Due to the reorganization of the legal entities, return on equity for 2017 and 2016 is determined using only the equity as of December 31, 2017. RATING (AS OF DECEMBER 31) STANDARD & POOR’S MOODY’S INVESTORS SERVICE Commercial Paper Senior Unsecured Outlook Commercial Paper Senior Unsecured Outlook Volkswagen Financial Services AG A-2 BBB+ Stable P-2 A3 Negative All figures shown in the report are rounded, so minor discrepancies may arise from addition of these amounts. The figures from the previous fiscal year are shown in parentheses directly after the figures for the current reporting period. COMBINED MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS ADDITIONAL INFORMATION 03 Fundamental Information about 39 Income Statement 138 Independent Auditor’s Report the Group 40 Statement of Comprehensive Income 144 Report of the Supervisory Board 06 Report on Economic Position 41 Balance Sheet 16 Volkswagen Financial Services AG 43 Statement of Changes in Equity (Condensed, in accordance with the 44 Cash Flow Statement HGB) 45 Notes 19 Report on Opportunities and Risks 137 Responsibility Statement 28 Human Resources Report 32 Report on Expected Developments COMBINED MANAGEMENT REPORT 03 Fundamental Information about the Group 06 Report on Economic Position 16 Volkswagen Financial Services AG (Condensed, in accordance with the HGB) 19 Report on Opportunities and Risks 28 Human Resources Report 32 Report on Expected Developments Combined Management Report Fundamental Information about the Group 3 Fundamental Information about the Group Steady international growth confirms the business model of Volkswagen Financial Services AG. BUSINESS MODEL was transferred by way of spin-off to Volkswagen AG and Over the years, the companies in the Volkswagen Financial became a direct subsidiary thereof. The aim of the restructur- Services AG Group have evolved increasingly dynamically ing was to segregate the European lending and deposits busi- into providers of comprehensive mobility services. The key ness from the other financial services activities and to pool objectives of Volkswagen Financial Services AG include: this business under Volkswagen Bank GmbH, structured as a direct subsidiary of Volkswagen AG. The intention of the > to promote Group product sales for the benefit of the restructuring is to increase transparency and clarity for su- Volkswagen Group brands and the partners appointed to pervisory authorities, optimize the use of equity and reduce distribute these products; complexity. A new company, Volkswagen Financial Services > to strengthen customer loyalty to Volkswagen Financial Digital Solutions GmbH, develops and provides system-based Services AG and the Volkswagen Group brands along the services for its parent companies Volkswagen Bank GmbH automotive value chain (among other things, by targeted and Volkswagen Financial Services AG. The other activities use of digital products and mobility solutions); remain in Volkswagen Financial Services AG, which is still a > to create synergies for the Group by pooling Group and direct subsidiary of Volkswagen AG. brand requirements in relation to finance and mobility The next few years will see further changes in the interna- services; tional subsidiaries within the European Economic Area as > to generate and sustain a high level of return on equity for part of the progress toward the target structure. the Group. INTERNAL MANAGEMENT ORGANIZATION OF THE VOLKSWAGEN FINANCIAL SERVICES AG The Company’s key performance indicators are determined GROUP on the basis of IFRSs and are presented as part of the internal The companies of the Volkswagen Financial Services reporting system. The most important non-financial perfor- AG Group provide financial services to private, corporate mance indicators are penetration, current contracts and new customers and fleet customers. The close integration of mar- contracts. The financial key performance indicators are the keting, sales and customer service focused on customers’ volume of business, operating profit, return on equity and needs goes a long way towards keeping the processes lean the cost/income ratio. As a result of the above-mentioned and implementing the sales strategy efficient. reorganization of the legal entities, the volume of deposits is In 2016, Volkswagen Financial Services AG initiated a re- no longer defined as a key performance indicator at organization of its legal entities. A key milestone in the pro- Volkswagen Financial Services AG. ject was reached on September 1, 2017 when Volkswagen Financial Services AG’s subsidiary Volkswagen Bank GmbH Volkswagen Financial Services AG | Annual Report 2017 4 Fundamental Information about the Group Combined Management Report KEY PERFORMANCE INDICATORS Definition Nonfinancial performance indicators Ratio of new contracts for new Group vehicles under retail financing and leasing business to deliveries of Group Penetration vehicles, based on Volkswagen Financial Services AG’s consolidated entities. Current contracts Contracts recognized as of the reporting date New contracts Contracts recognized for the first time in the reporting period Financial performance indicators Loans to and receivables from customers arising from retail financing, dealer financing, leasing business and Volume of business lease assets. Net income from lending, leasing and insurance transactions after provision for credit risks, plus net fee and commission income, less general and administrative expenses, plus other operating income and less other operating expenses. As in the segment reporting, some amounts under net interest income, net other Operating profit operating income/expenses and general and administrative expenses are eliminated. Return on equity1 Return on equity before tax, which is calculated by dividing profit before tax by average equity. General and administrative expenses, adjusted for expenses passed on to other entities in the Volkswagen Group / net income from lending, leasing and insurance transactions (after provision for credit Cost/income ratio risks) and net fee and commission income. 1 Due to the reorganization of the legal entities, return on equity for 2017 and 2016 is determined using only the equity as of December 31, 2017. CHANGES IN EQUITY INVESTMENTS defined in the demerger and acquisition agreement, transfer- The transfers referred to below formed part of the implemen- ring this business to Volkswagen Financial Services Digital tation of the reorganization of the legal entities described in Solutions GmbH, Braunschweig, Germany. more detail in the section entitled “Organization of the On the same day, Volkswagen Financial Services AG Volkswagen Financial Services AG Group”. transferred 51% of the shares in Volkswagen Financial Volkswagen Pon Financial Services B.V., Amersfoort, Services Digital Solutions GmbH to Volkswagen Bank GmbH. Netherlands, spun-off all the shares in DFM N.V., Amersfoort, Netherlands to Volkswagen Pon Financial Services 2 B.V. Volkswagen Financial Services AG transferred the following Amersfoort, Netherlands, effective June 1, 2017. companies, including their subsidiaries, to Volkswagen Volkswagen Pon Financial Services 2 B.V. was established on Bank GmbH on September 1, 2017 by way of a side-step spin- June 1, 2017 as part of the spin-off, with 60% of the company off under German law (Seitwärtsabspaltung): held by Volkswagen Financial Services AG and 40% by Pon Holdings B.V., Almere, Netherlands. On July 1, 2017, > Volkswagen Financial Services (UK) Ltd., Milton Keynes, Volkswagen Financial Services AG transferred 60% of the United Kingdom, shares in Volkswagen Pon Financial Services 2 B.V. to > ŠkoFIN s.r.o., Prague, Czech Republic, and Volkswagen Bank GmbH. Volkswagen Pon Financial Services > Volkswagen Finans Sverige AB, Södertälje, Sweden. 2 B.V. was merged into DFM N.V., effective August 1, 2017. Of the total shares in DFM N.V., 60% are held by In addition, the following further material changes in equity Volkswagen Bank GmbH, Braunschweig, Germany, and 40% investments have occured: by Pon Holdings B.V. Effective January 1, 2017, Volkswagen Financial Services AG On July 1, 2017, Volkswagen