Sparkassen-Finanzgruppe Bayern 13 Board of Administration 14 Financial Statements Audit Committee 15 General Meeting 16

Annual Report and Accounts  Organisation Chart of the Bank*

Corporate Center Financial Institutions & Real Estate Bayerische Landes- Savings Banks and LBS Bayern Corporates Global Markets Risk Office Corporate Services Support Operations Sovereigns Business Area bodenkreditanstalt Bavarian Market Business Area Business Area Support Operations Support Operations Business Area Business Area

Werner Schmidt Dr. Rudolf Hanisch Dr. Rudolf Hanisch Dr. Rudolf Hanisch Theo Harnischmacher Theo Harnischmacher Stefan W. Ropers Dieter Burgmer Dr. Gerhard Dr. Ralph Schmidt Chairman of the Board Deputy of the Chairman Deputy of the Chairman Deputy of the Chairman Deputy of the Chairman Deputy of the Chairman Member of the Board Member of the Board Gribkowsky Senior Executive of Management of Management of Management Member of the Board Vice President, of Management entrusted with Board of Management tasks

Legal Services, Financial Institutions & Bayerische Landesbank Bayerische Savings Banks, Bayerische Global Investor Relations Credit Consulting Financial Market Compliance Center and Sovereigns Real Estate Landesboden- Bavarian Municipals/ Landesbausparkasse Corporate Banking • Hans Christoph • Andreas Dörhöfer Services Prevention of Money • Michael Graf • Ernst Holland kreditanstalt Corporates • Dr. Franz Wirnhier • Dr. Detlev Gröne Groscurth • Peter Greppmair Laundering von Hallwyl • Georg Jewgrafow • Gerhard Flaig • Karlheinz Müller (BA Spokesman) Risk Office Corporates/ • Dr. Dietrich Keymer • Walther (BA Spokesman) (BA Spokesman) • Thomas Neher • Wolfgang Kube Global Global Financial Institutions Schmidt-Lademann • Dr. Theodor Klotz • Dr. Ulrich Kühn • Helmut Straubinger Structured Finance Treasury & Funding • Thomas Hierholzer International Corporate • Heinrich Rinderle Private Banking • Frank Hahn • Ernst-Albrecht Services (CS) Corporate Develop- • Otto Schwendner Brockhaus Credit & Collateral • Dieter Seipt ment/BoM Support Services (CCS) • Dr. Benedikt Haas Equities • Michaela Aumann Corporate • Karl Filbert Organisation & IT Press & Media Relations Risk Controlling & • Robert Berhof • Peter Kulmburg Global Trading & Sales II Procedures • Michael Ludwig • Jürgen Adamitza • Ullrich Ströhlein Financial Accounting, Shared Services Tax & Controlling Global Trading & Sales I Risk Office Real Estate/ • Christian Seidel • Günther Kopf • Florian Drexler Structured Finance • Peter Weidemann Personnel • Dr. Wolfram Peitzsch

Audit • Peter Vökt

Economics and Research Division • Dr. Jürgen Pﬁster

* global responsibility, as per 01.03.2005 Corporate Center Financial Institutions & Real Estate Bayerische Landes- Savings Banks and LBS Bayern Corporates Global Markets Risk Office Corporate Services Support Operations Sovereigns Business Area bodenkreditanstalt Bavarian Market Business Area Business Area Support Operations Support Operations Business Area Business Area

Audit • Peter Vökt

Economics and Research Division • Dr. Jürgen Pﬁster BayernLB Group at a glance

Performance

EUR million 01.01.–31.12.2004 01.01.–31.12.2003 Change in %

Net interest income 2,030 2,169 – 6.4 Net commission income 340 343 – 0.7 Administrative expenses – 1,208 – 1,185 1.9 Net result from financial transactions 126 105 19.7 Operating result 950 547 73.7

Cost-income ratio* 44.4 % 43.3 % 2.5 (1.1 Pp**) Return on equity 9.5 % 4.9 % 93.9 (4.6 Pp**)

Balance sheet figures

EUR million 31. 12. 2004 31. 12. 2003 Change in %

Total assets 333,102 313,431 6.3 Credit volume 241,952 223,960 8.0 Total deposits 197,410 185,233 6.6 Securitised liabilities 103,833 95,597 8.6 Equity disclosed 16,671 17,177 – 2.9

Derivatives transactions

EUR million 31. 12. 2004 31. 12. 2003 Change in %

Nominal volume 1,017,131 934,243 8.9 Credit risk equivalent (after netting) 3,841 4,528 – 15.2

Key banking regulatory data under the German Banking Act (balance sheet figures)

EUR million 31. 12. 2004 31. 12. 2003 Change in %

Own funds 15,957 15,468 3.2

Core capital ratio 8.3 % 7.8 % 6.4 (0.5 Pp**) Own funds ratio (Group level) 12.5 % 11.3 % 10.6 (1.2 Pp**)

Number of employees

31. 12. 2004 31. 12. 2003 Change in %

BayernLB 5,047 5,543 – 8.9 Group 8,940 9,061 – 1.3

* Administrative expenses/income from operational banking business (previous year‘s figure adjusted) ** Percentage points Clear figures. Clear objectives.

The Annual Report and Accounts 2004 reflect BayernLB’s reorientation. And in more ways than one. Because just as the figures prove the success of our new business model, so our new marketing image illustrates how we want to continue to build on this success: with confidence, in proximity to our customers and markets and with Bavarian élan.

Tailor-made financial services are the focal point of our activities – unique solutions matching the individual needs of our customers. This means having a keen eye and designing our products with great care – just like a tailor who practises his art with precision. With all of those whose personal commitment leads to new perspectives and results, we are united in a common goal: creating unique solutions. Contents 1 Board of Management and executive bodies

2 Economic situation

3 BayernLB – our company

4 Report on the Bank and the Group

5 Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts

6 Advisory Boards and addresses Foreword by the Board of Management 8 Profile 12 Sparkassen-Finanzgruppe Bayern 13 Board of Administration 14 Financial Statements Audit Committee 15 General Meeting 16

Economy: no stable uptrend yet 22

Strategy 30 Business area activities 34 LBS Bayern and Landesbodenkreditanstalt 54 Group retail activities 58 Support operations activities 62 Our staff 78 Public sector mandate 82

Overview 90 Management report 93 Outlook 103 Risk report 106

Report by the Board of Administration 124 Balance sheet and profit and loss account 128 Consolidated balance sheet and profit and loss account 134 Consolidated statement of changes in shareholders’ equity 140 Cash flow statement for the Group 141 Segment report for the Group 144 Notes to the accounts and consolidated accounts 148

Trustees 184 Economic Advisory Council 185 Savings Bank Advisory Council 187 BayernLB’s network 188

Design requires absolute accuracy. Wherever things are produced, values are created and a new course is chartered, a millimetre here or there can make a huge difference. An important concept to keep in mind, because there really is only one goal worth pursuing: a superior result.

Producing something unique means recognising a fundamental principle: precision.

 Board of Management and executive bodies

Foreword by the Board of Management 8 Profile 12 Sparkassen-Finanzgruppe Bayern 13 Board of Administration 14 Financial Statements Audit Committee 15 General Meeting 16 8 Board of Management and executive bodies

Werner Schmidt

born in 1943, Chairman of the Board of Management since 2001, Support Operations Corporate Center (worldwide), Corporate Services (worldwide)

Foreword by the Board of Management

Ladies and Gentlemen, Dear Friends,

The year 2004 was a period of change and preparation for BayernLB. On 18 July 2005, the guarantee mechanisms are set to change for all of the landesbanks. Over the last year, BayernLB has consistently pushed on with the implementation of its new business model, and is thus prepared for the coming challenges. We, the Board of Manage- ment, would like to thank the staff of BayernLB for their exceptional motivation and willingness to face change. The successful realignment of the Bank is essentially thanks to them. To our customers, we would like to express our gratitude for their many years of trust in BayernLB. We are also grateful to our owners for their sustained support. Together, we can face the future with confidence.

Our new marketing image is a visual expression of change. The new trademark represents our values, and the link between tradition and the present day. The diamond motif is a clear reference to our Bavarian roots. The arrow communicates the dynamic and modern nature of Bavarian thinking. It points to our brand name, which follows the arrow, and acts as the ambassador of this message.

The satisfying annual result posted in 2004 is a reflection of change. Group operating profit before risk provisions was EUR 1.532 billion, thus matching the previous year’s level. Particularly pleasing is the improvement of operating profit by 73.7 percent from Board of Management and executive bodies 9

Dr. Rudolf Hanisch Theo Harnischmacher born in 1946, born in 1946, Deputy of the Chairman, Deputy of the Chairman, Member of the Board of Management Member of the Board of Management since 2000, Business Areas since 2002, Business Areas Financial Institutions & Sovereigns (worldwide), Savings Banks and Bavarian Market, Real Estate (worldwide), LBS Bayern Bayerische Landesbodenkreditanstalt

EUR 547 million to EUR 950 million. The consistent streamlining of the credit and participations portfolios in recent years has clearly borne fruit. During 2004 as well, the credit portfolio continued to be purged of risk clusters and concentration risks, within reasonable legal and economic bounds. Our strategic realignment, increasing volumes of new business with our customers and cooperative market development with the savings banks are already reflected to a degree in our 2004 annual accounts.

In the future, the EU state aid proceedings regarding housing construction funds will no longer affect our annual results. On 20 October 2004, the European Commission reached a decision in respect of the interest accrued on the housing construction funds transferred by the Free State of Bavaria to BayernLB. Pursuant to this decision, BayernLB was to pay an absolute restitution claim of EUR 320 million. This amount was charged as an extraordinary expense in the 2004 annual accounts and provisioned for.

We have continued in our strategic development of BayernLB as a wholesale bank that focuses on certain core regions and collaborates closely with the Bavarian savings banks and partners of the Sparkassen-Finanzgruppe. Market development activities are supplemented by subsidiaries with strategic significance for the BayernLB Group, namely DKB, SaarLB, MKB, LBLux and LBSwiss. These companies are entrusted with a considerable share of the Group’s retail activities. Building on our core competences, we aim to grow in our target markets: primarily Bavaria and its bordering regions. The credit portfolio is consistently oriented toward profit and risk aspects. We intend to make greater efforts to convey our brand values, namely Bavarian élan, confidence and proximity, to our customers. 10 Board of Management and executive bodies

Stefan W. Ropers Dr. Ralph Schmidt Dieter Burgmer born in 1955, born in 1962, born in 1960, Member of the Board of Management Senior Executive Vice President, Member of the Board of Management since 2002, Business Area entrusted with Board since 2001, Business Area Corporates (worldwide) of Management tasks Global Markets (worldwide) since 2002, Support Operations Corporates Services (worldwide) since 2004

In 2004, we continued to expand our cooperative market development with the Bavarian savings banks. Ninety-four percent of the savings banks have signed individual agreements as a framework for closer collaboration with BayernLB.

In the context of the newly drawn-up strategy for Eastern Europe, we as a Group are exploiting the opportunities offered by the growth markets of Central and Eastern Europe. We support the savings banks by offering superior processing competences, and can boast a network of local cooperative partners in the core markets. We are continuing to develop this network.

We have consistently pursued our aim of realigning the participations portfolio, by dis- posing of our 46.4 percent participation in the Bank für Arbeit und Wirtschaft (BAWAG) and 10 percent participation in the Südtiroler Sparkasse. We also sold the Austrian travel agency chain Ruefa.

In order to fund our planned growth, as well as securing our A + target rating, we intend to carry out a nominal capital increase in two tranches (2005 and 2006). The total volume of the transaction will be EUR 640 million. The Free State of Bavaria and the Association of Bavarian Savings Banks (SVB) will contribute 50 percent each. The planned capital increase is a clear demonstration of the owners’ loyalty to the Bank. As another major factor supporting the Bank’s competitiveness, dated capital contributions held by the Bank’s owners are to be converted to undated ones without accompanying calling rights.

Moreover, the Bavarian savings banks and BayernLB are planning to set up a regional guarantee fund. This fund will be an integral element of the close cooperation between the two partners. Board of Management and executive bodies 11

Dr. Gerhard Gribkowsky

born in 1958, Member of the Board of Management since 2003, Support Operations Risk Office (worldwide)

In transforming its business model, BayernLB is right on track for being awarded the A + target rating by all major rating agencies once the guarantee mechanisms have ceased to apply. We will continue to focus on the market – together with the Bavarian savings banks – and to implement our new strategy in a consistent manner. We are confident that, together with our staff and owners, we can achieve our goals.

Sincerely,

Bayerische Landesbank (BayernLB) Board of Management

Werner Schmidt Dr. Rudolf Hanisch Theo Harnischmacher Chairman of the Board Deputy of the Chairman Deputy of the Chairman of Management

Dieter Burgmer Stefan W. Ropers

Dr. Gerhard Gribkowsky Dr. Ralph Schmidt Senior Executive Vice President, entrusted with Board of Management tasks 12 Board of Management and executive bodies

Profile

BayernLB was founded in 1972 with the merger of Landesbodenkreditanstalt and Bayerische Gemeindebank. It is one of the largest banks in Germany and has the legal status “corporation established under public law”. BayernLB is (indirectly) owned by the Free State of Bavaria and the Association of Bavarian Savings Banks, each with a 50 percent stake. This follows the transfer in 2002 of their shares in BayernLB to BayernLB Holding AG, in exchange for which the Free State of Bavaria and the Associa- tion of Bavarian Savings Banks each took a 50 percent holding in BayernLB Holding AG. BayernLB Holding AG is entrusted with the duties of the sole shareholder of BayernLB and is not a bank itself (see diagram of the holding structure). BayernLB is subject to legal supervision by the Bavarian State Ministries of Finance and the Interior as well as financial supervision by the German Financial Supervisory Authority (BaFin) and the Deutsche Bundesbank.

BayernLB is the central bank to the Bavarian savings banks and an important member of the Sparkassen-Finanzgruppe Bayern. It is a service provider for the partner insti- tutes of the Sparkassen-Finanzgruppe, acting as their network bank and enabling them, with its support and product policies, to exploit existing market potential in the Bavarian market together with the savings banks. In addition, BayernLB functions as a principal bank to the Free State of Bavaria and actively supports national and local governments, financial institutions, medium and large companies and real estate customers. BayernLB is one of the leading issuers of bonds in Germany. Bayerische Landesbodenkreditanstalt (Labo) and Bayerische Landesbausparkasse (LBS), both legally dependent institutions, are integral parts of the Bank. BayernLB is a financial service provider with a presence in selected global financial centres. It focuses on the core market of Bavaria and the neighbouring regions.

Expansion of the Savings Bank Central Bank function, and with it the further intensifi- cation of joint marketing activities with the Bavarian savings banks, is an important pillar of BayernLB’s business model. For this purpose a number of agreements were signed by the individual savings banks and BayernLB which will increase their economic efficiency by providing for jointly-developed solutions while strengthening the market position of the Sparkassen-Finanzgruppe Bayern. Board of Management and executive bodies 13

Sparkassen-Finanzgruppe Bayern

Sparkassen-Finanzgruppe Market leader in Bavaria

• Aggregated total assets in banking business: EUR 486 billion • Aggregated premium volume of insurance business: EUR 5.2 billion • Staff: 65,741

BayernLB 82 savings banks Versicherungskammer Bayern

Consolidated total assets: Total assets: EUR 153 billion Premium volume: EUR 5.2 billion EUR 333 billion Staff: 50,451 Staff: 6,350 Staff: Bank: 5,047 Group: 8,940 • Branches: 2,799 Investment portfolio: EUR 26.6 billion • Self-service branches: 242 • Advisory centres: 287 Germany’s largest public-sector Operating profit: EUR 1.6 billion insurance provider Tax burden: EUR 0.4 billion Customer advances: EUR 95 billion Bayerische Market leader in Bavaria and the Customer deposits: EUR 115 billion Landesbausparkasse Palatinate

Financing potential Portfolio of 2 million building-saving Part of the VKB Group • Approx. 40% of SMEs contracts with a volume of • Bayerische Landesbrandversicherung • Two thirds of trade businesses EUR 44 billion • Bayerischer Versicherungsverband • Every second start-up • Bayern-Versicherung Bayerische • Bayerische Beamtenkrankenkasse Sparkassen-Immobilien Landesbodenkreditanstalt • Union Krankenversicherung Vermittlungs GmbH & Co. KG • Saarland Feuerversicherung Volume of business brokered: Loan volume: EUR 15 billion • Saarland Lebensversicherung EUR 1 billion Subsidised contracts: 15,438 homes • Feuersozietät Berlin Brandenburg • Öffentliche Lebensversicherung DekaBank Berlin Brandenburg Part of the BayernLB Group Share of Bavarian savings bank • Deutsche Kreditbank organisation: 9.6% including share Aktiengesellschaft of BayernLB. • Landesbank Saar Consolidated total assets: • Banque LBLux S. A. EUR 115 billion • MKB, Hungary • LB(Swiss) Deutsche Sparkassen Leasing Share of Bavarian savings banks: 13 %

Sparkassenverband Bayern

• Association members: 82 Bavarian savings banks and their guarantors • Joint owners and guarantors of BayernLB together with the Free State of Bavaria • Owners and guarantors of Versicherungskammer Bayern 14 Board of Management and executive bodies

Board of Administration*

Prof. Dr. Kurt Faltlhauser Alois Hagl Chairman Savings Bank Director State Minister Chairman of the Board of Directors Bavarian State Ministry of Finance of Sparkasse im Landkreis Schwandorf Munich Chief Representative of the Bavarian savings banks Dr. Siegfried Naser Schwandorf First Vice Chairman Executive President of the Association Georg Schmid of Bavarian Savings Banks Permanent Secretary Munich Bavarian State Ministry of the Interior Munich Dr. Günther Beckstein Second Vice Chairman Klaus Weigert State Minister Deputy Secretary Bavarian State Ministry of the Interior Bavarian State Ministry of Finance Munich Munich

Hansjörg Christmann Professor Hubert Weiler Third Vice Chairman Savings Bank Director Chief District Administrator Chairman of the Board of Directors First President of the Association of Sparkasse Nürnberg of Bavarian Savings Banks Nuremberg Dachau Dr. Otto Wiesheu Josef Deimer State Minister Lord Mayor Bavarian State Ministry President of the Bayerische Städtetag of Economic Affairs, Landshut Infrastructure, Transport and Technology Munich

* For the period from  January to  December  Board of Management and executive bodies 15

Financial Statements Audit Committee*

Prof. Dr. Kurt Faltlhauser Professor Hubert Weiler Chairman Savings Bank Director State Minister Chairman of the Board of Directors Bavarian State Ministry of Finance of Sparkasse Nürnberg Munich Nuremberg

Dr. Siegfried Naser Dr. Otto Wiesheu Deputy Chairman State Minister Executive President of the Association Bavarian State Ministry of Economic of Bavarian Savings Banks Affairs, Infrastructure, Transport and Munich Technology Munich Alois Hagl Savings Bank Director Chairman of the Board of Directors of Sparkasse im Landkreis Schwandorf Chief Representative of the Bavarian savings banks Schwandorf

Georg Schmid Permanent Secretary Bavarian State Ministry of the Interior Munich

* For the period from  January to  December  16 Board of Management and executive bodies

General Meeting*

Dr. Siegfried Naser Heinrich Frey Chairman Chief District Administrator Executive President of the Association of the District of Starnberg of Bavarian Savings Banks Munich Martin Haf Savings Bank Director Prof. Dr. Kurt Faltlhauser Chairman of the Board of Directors Deputy Chairman of Sparkasse Allgäu State Minister Kempten Bavarian State Ministry of Finance Munich Alois Hagl Savings Bank Director Wolfgang Bayerl Chairman of the Board of Directors (with effect from 1 November 2004) of Sparkasse im Landkreis Schwandorf First Lord Mayor of the City Chief Representative of the Bavarian of Neunburg v. Wald savings banks Schwandorf Dr. Günther Beckstein State Minister Rudolf Heiler Bavarian State Ministry First Lord Mayor of the Interior of the City of Grafing Munich Dr. Erhard Hübener Ludwig Bronold Savings Bank Director Savings Bank Director Chairman of the Board of Directors Chairman of the Board of Directors of Sparkasse Miltenberg-Obernburg of Kreissparkasse Mühldorf Miltenberg Mühldorf Dr. Jörg Jung Hansjörg Christmann Under-secretary Chief District Administrator Bavarian State Ministry First President of the Association of the Interior of Bavarian Savings Banks Munich Dachau Gebhard Kaiser Wolfgang Dandorfer Chief District Administrator Lord Mayor of the District of Sonthofen of the City of Amberg Board of Management and executive bodies 17

Norbert Kastner Helmut Reich Lord Mayor Chief District Administrator of the City of Coburg of the District of Lauf a.d. Pegnitz

Wolfgang Kelsch Dr. Klaus-Jürgen Scherr First Lord Mayor Savings Bank Director of the City of Wendelstein Chairman of the Board of Directors of Sparkasse Kronach-Ludwigsstadt Andreas Knie Kronach (until 31 October 2004) Lord Mayor Dr. Werner Schnappauf of the City of Kaufbeuren State Minister Bavarian State Ministry Dr. Joachim Kormann for Environment, Health and Deputy Secretary Consumer Protection Bavarian State Ministry Munich of Economic Affairs, Infrastructure, Transport and Technology Dr. Walter Schön Munich Deputy Secretary Bavarian State Chancellery Harald Leitherer Munich Chief District Administrator of the District of Schweinfurt Christa Stewens State Minister Franz Meyer Bavarian State Ministry of Employment Permanent Secretary and Social Order, the Family and Women Bavarian State Ministry Munich of Finance Munich Dr. Reinhard Wieczorek Councillor Josef Miller of the City of Munich State Minister Munich Bavarian State Ministry of Agriculture and Forestry Friedrich Wimberger Munich Savings Bank Director Chairman of the Board of Directors Matthias Nester of Sparkasse Landshut Savings Bank Director Landshut Chairman of the Board of Directors of Sparkasse Mittelfranken-Süd Roth

* For the period from  January to  December  Responsibility is the foundation of every action. Assuming responsibility means meeting challenges, making the right decisions and paying attention to detail. Whoever does this with élan and joy knows how to appreciate the great feeling of knowing what he is doing.

You truly have to seek it in order to find it: responsibility.

 Economic situation 22 Economic situation

Economy: No stable uptrend yet

In 2004, the German economy finally transcended an unremitting three-year slump. Real gross domestic product increased by 1.6 percent. The economy was characterised by two opposing trends: exports experienced a brisk upswing (+ 8.2 percent), while domestic demand was sluggish (+ 0.5 percent). Household consumption stagnated, the rise in corporate investment fell far short of estimates, while the construction industry experienced a recession for the ninth successive year. The still lacklustre economic trend was reflected in the high number of corporate failures. In 2004, there were almost 40,000 corporate insolvencies, with losses totalling more than EUR 30 billion. Experience shows that a surge of corporate failures only tends to recede during the early stages of an upturn. This means that brighter prospects can only be anticipated from 2005.

} Strong demand In 2004, for the first time in several years, Germany was able to close ranks with its from abroad boosts neighbours in the euro area in terms of economic growth. This was only achievable, economic growth however, thanks to strong demand from abroad. It was also partly due to the higher number of working days. All in all, the pace of recovery in 2004 remained slack in comparison to previous rebound phases. In particular, it was insufficient to mitigate the serious problems evident in the labour market and the public sector.

The revival of the global economy was not least attributable to strong growth in the United States. With a growth rate of 4.4. percent, the US economy once again began to gather momentum. Besides the USA, the South East Asian economies were another driving force of global trade, with China in the lead. The Western European economy also experienced a rebound during 2004. However, at 2.0 percent, the pace was significantly slower than that of the global economy. The global economic upswing was particularly remarkable given the fact that economic activity was curbed by the increase in the price of crude oil. High prices can also be expected in the medium-term due to the strong upswing in demand for crude oil, as well as bottlenecks in its production and processing.

} Hike in oil prices In Germany, the fall in purchasing power caused by increased oil prices acted as a curbs private brake on private consumption. Household consumption, the most significant constitu- consumption ent of the domestic product, was therefore disappointing once again. An extremely unfavourable labour market was a further strain on the economy. Although the labour force actually increased by 271,000 members over the course of the year, this was countered by a fall of 337,000 in the number of positions subject to social security contributions. The average unemployment level for 2004 remained very high, totalling 4.38 million.

Low growth rates in consumer income are principally reflected in the subdued private consumption of recent years. In addition, concerns relating to job and pension security have increased. The spirited debate surrounding the reform of the labour market Economic situation 23

(Hartz IV) contributed to an overall feeling of despondency. For this reason, it was no great surprise that 2004 again saw the private households tightening their belts. Stag- nating consumer demand generated by private households remains a considerable barrier to sustained economic recovery in Germany. In order for the economy to perk up, the labour market situation will have to improve significantly, with a concomitant increase in the level of employment.

The precarious situation of Germany’s public finances saw no improvement in 2004. } Maastricht criteria The public deficit stood at 3.7 percent in relation to gross domestic product, thereby breached again clearly breaching the upper limit as stipulated by the Maastricht Agreement for the third time in a row. The fact that the government deficit remained unchanged despite an improved economic situation in 2004 was primarily due to two factors. Firstly, if there had been a stronger upswing driven by domestic demand, the export-driven rebound in the economy would probably have had a more perceptible effect on the public coffers. Secondly, the continuing difficulties of the public budget reflect the extremely high unemployment level. On top of this, income tax was reduced at the beginning of 2004.

On the capital markets, the year was marked by continued – albeit somewhat leisurely – recovery of the equity markets, a surprising decline in interest rates in the second half, and not least by a weak dollar.

The sharp rise in share prices perceptible from spring 2003 stalled at the beginning } Moods lift on the of 2004, despite the fact that corporate earnings were on the up, exceeding the origi- equity market nal expectations of market participants. A series of factors contributing to uncertainty took centre stage, among them the terrorist attacks in Madrid and heightened fears for the economy due to the hike in oil prices. This resulted in an increased risk premium. Towards year-end, the sentiment among investors began to brighten once more: DAX, the German index of blue chip companies, closed 2004 with a good 7 percent growth.

From summer 2004, the bond markets too were affected by fears for the economy arising from the massive increase in the price of crude oil. Investors did not interpret the surge in oil prices as a risk factor for monetary stability, as they had in the past, but rather as a threat to economic growth.

While the US Federal Reserve had already instigated a turnaround in interest rates on the money market in summer 2004, and raised the Fed Funds Rate by 1 percent to 2.25 percent at year-end, the European Central Bank maintained a key lending rate of 2 percent over the whole of 2004. It has indicated, however, that its next move is likely to be an interest rate increase. Moderate interest rate increases are expected from mid-2005. 24 Economic situation

Outlook for 2005

} Growth to remain The global and domestic economic situations do not betoken a more sprightly rate of restrained in 2005 recovery for Germany in 2005. Nor, however, is a slowdown anticipated, as forecasts might at first seem to indicate. Adjusted by the lower number of working days in 2005, the growth rate will remain more or less stable, at an expected 1.2 percent. This is still too low to effect lasting improvement in the labour market or in the public sector.

In 2005, the global economy will no longer experience such a heady growth pace. This applies equally to North America and Asia. Furthermore, appreciation of the euro damages the price competitiveness of German suppliers. The outlook for domestic demand remains mediocre, unless employment levels take off and companies restore confidence in Germany’s industrial competitiveness. Thus, a self-sustaining upward trend is not yet in store for Germany. 25 An open mind. Clarity. Inspiration. Individual solutions begin with a good idea. Followed by many more – because thinking through everything means thinking ahead. What will happen tomorrow? And the day after that? The blueprints of today create the foundation of tomorrow.

The source of incomparable solutions: a wealth of ideas

 BayernLB – our company

Strategy 30 Business area activities 34 LBS Bayern and Landesbodenkreditanstalt 54 Group retail activities 58 Support operations activities 62 Our staff 78 Public sector mandate 82 30 BayernLB – our company

Strategy

In 2004, BayernLB consolidated its potential for successful market operation, while laying the groundwork for the development of new strengths. The Bank is thus well equipped to deal with the withdrawal of Gewährträgerhaftung (guarantee obligation) and Anstaltslast (maintenance obligation) for new liabilities, effective as of 19 July 2005.

BayernLB’s business model

BayernLB is a wholesale bank that focuses on core regions and collaborates closely with the Bavarian savings banks and other partners of the Sparkassen-Finanzgruppe. Preliminary indications of the Bank’s future rating published in 2004 have confirmed the wisdom of BayernLB’s strategic decisions. Fitch indicated an A+ rating; Standard & Poor’s an A–. Moreover, Moody’s published an estimated A1 floor rating for the Ger- man Savings Bank Organisation.

Banking sector still faces daunting challenges

} BayernLB reinforces Withdrawal of the guarantee mechanisms entails changes in the competitive environ- product-related ment for landesbanks. However, this does not constitute the sole basis for BayernLB’s and advisory com- decision to transform its business model. Rather, the market and competitive condi- petence in cooperation with Bavarian tions for all banks in Germany have undergone a sea change. Germany’s sluggish savings banks economy inspires only a limited degree of confidence. In addition, regulatory requirements (such as Basel II) and new accounting standards (IAS) must be implemented. The increasing efficiency of information processing systems represents one of the driving factors behind competitive dynamics throughout the entire banking sector. Market transparency is increasing, as is our customers’ demand for product-related and advisory competence. This, in turn, has serious repercussions for the management and controlling of the institutions. Small organisations with a large variety of customer groups and products run the risk of excessive costs. Larger organisations with several customer groups and products, on the other hand, may be jeopardised by excessive complexity. Against this backdrop, BayernLB, together with the Bavarian savings banks, can gain competitive advantages by focusing on customer relationships and products, while optimising the routine processes of the savings banks and generating economies of scale. BayernLB – our company 31

Key elements of the Bank’s strategy

BayernLB’s strategy is based on the following pillars, which, in turn, form the foundation for the specific strategies of the individual business areas: • Clear commitment of the owners to their Bank • Focus and efficiency • Network of the Sparkassen-Finanzgruppe Bayern • Performance of the participations portfolio

The overall strategy of the Bank is constantly revised and adapted to evolving market and competitive conditions, so that BayernLB is ready to meet new challenges in good time. In this way, the Bank safeguards its competitiveness and market position in the long term.

Clear commitment of the owners to their Bank

On 31 December 2004, the Bank reported a core capital ratio of 8.3 percent and a total equity ratio of 12.5 percent, in accordance with the German Banking Act (KWG). At Group level, BayernLB thus has excellent capital resources. When valuing the (equity) capital resources of a bank, rating agencies do not tend to concentrate on those elements central to the regulatory definition. The quality of a bank’s equity capital is crucial to the rating agencies’ assessment. In view of the Bank’s target rating of A+, the Free State of Bavaria and the Association of Bavarian Savings Banks intend to carry out a capital increase of EUR 640 million in two tranches (2005 and 2006). This clearly demonstrates the commitment of the owners of BayernLB.

In addition to the Sparkassen-Finanzgruppe’s national cross-guarantee system, there } Capital increase are plans to set up a regional guarantee fund to reinforce cooperation within the Spar- planned for 2005 and 2006 kassen-Finanzgruppe in Bavaria. Amounting to EUR 1 billion, this fund will be endowed by the Bavarian savings banks and by BayernLB in accordance with the respective risk- weighted assets.

The national cross-guarantee system represents the unequivocal commitment of both landesbanks and savings banks to the Sparkassen-Finanzgruppe. In 2004, the joint liability mechanisms were fully revised. In the future, call commitments will be more strongly oriented toward the risk profile of each individual institute. Furthermore, agreements have been reached regarding the introduction of early detection and risk monitoring systems. The Bank will implement these measures in 2005 as planned.

Focus and efficiency

In its business model, BayernLB has focused on particular customer groups. The Bank’s activities are primarily centred on its core markets of Bavaria and bordering regions. In 2004, the planned optimisation of the network of foreign entities was concluded. BayernLB will continue to serve its customers in selected economic and financial centres around the world (London, Paris, Milan, New York, Hong Kong and Shanghai). In autumn 2004, BayernLB resolved a new strategy for Eastern Europe. Opportunities 32 BayernLB – our company

offered by the growth region of Eastern Europe are to be selectively exploited. Market development is to be carried out primarily from Munich. Moreover, the Bank plans to expand its subsidiary MKB into attractive neighbouring markets.

} Restructuring Essential measures aimed at focusing and boosting efficiency were implemented in measures largely 2004. Far-reaching changes to the Bank’s structural and procedural organisation last implemented ahead year led to staff restructuring measures, resulting in the termination of around 1,000 of plan during 2004 jobs in 2003 and 2004. However, target figures were reached early, meaning that restructuring could be brought to a close in 2004. Other personnel-specific measures aimed at training and recruiting junior staff and rewarding top performers were pursued.

Landesbausparkasse (LBS) and Landesbodenkreditanstalt (Labo), the Bank’s legally dependent institutions, continue to conform their resources and costs to the market and to the earnings situation. This also applies for subsidiaries of strategic significance to the Group, namely DKB, MKB, SaarLB, Banque LBLux and LB (Swiss) Privatbank.

Network of the Sparkassen-Finanzgruppe Bayern

In December 2003 a master contract between the Association of Bavarian Savings Banks and BayernLB was signed. This agreement regulates the framework conditions for market development in cooperation with the savings banks as well as the establish- ment and use of joint centres of competence. On 1 February 2005, 76 of the 80 Bavarian savings banks signed individual agreements governing cooperative market development and collaboration with the centres of competence. This shows that the development and expansion of the Sparkassen-Finanzgruppe Bayern network is on the right track.

The 2004 joint “IT Bayern” project represents another important step in the cooperation of Bavarian savings banks and BayernLB with its dependent institutions Bayerische Landesbausparkasse (LBS) and Bayerische Landesbodenkreditanstalt. The aim is to bundle the information technology of the companies involved into IZB SOFT in order to create a shared system house. The necessary legal and organisational requirements for IT bundling will have been met by mid-2005. The next stage involves the step-by- step transfer of systems and applications. This process takes into consideration the needs of day-to-day business and projects to be implemented.

Performance of the participations portfolio

The Bank’s participations are oriented towards and measured against clearly defined strategic objectives. While the strategic participations serve primarily to support and round off the Bank’s core activities, financial participations are acquired with the aim of achieving a specific return on investment. BayernLB – our company 33

New marketing image

In the future, BayernLB’s strategic realignment will be reflected by its overall appear- ance, both within the Bank and on the market. The objective of the new marketing image is to convey both BayernLB’s new values and its long-established strengths. Three core values describe the Bank’s clear position: • Bavarian élan: The powerful combination of innovation and tradition has not only helped create Bavaria’s strong business climate, but is also the driving force behind BayernLB. • Confidence: This value expresses certainty, experience and reliability in dealings with customers and business partners. • Proximity: Together with the Bavarian savings banks, BayernLB’s proximity to the market at a regional level is clear. Proximity also characterises the trust placed by customers worldwide in BayernLB which has been created and maintained by long- standing relationships.

The Bank will communicate its position using the core message “Customised financial solutions – made in Bayern”.

Debate on banking structures

BayernLB takes a definite standpoint on the ongoing debate over banking structures: dismantling the “three-pillar model” would restrain competition. Economically and sociopolitically harmful oligopolistic structures would materialise in the long term. These would ultimately have a negative impact on Germany’s industrial competitiveness. An integral element of BayernLB’s business model involves ensuring that corporate and private customers in the Free State of Bavaria are provided with a full range of national and international financial services. This is achieved in tandem with the Bavarian savings banks. This procedure not only safeguards the clear commitment of the Bank’s owners, but also constitutes a sociopolitical task. Cross-pillar mergers are simply not an option for BayernLB. However, cross-pillar cooperation is conceivable, as long as this involves non-competitive back office activities.

The debate over mergers between landesbanks, often picked up by the media, is not } Definite “no” to expedient from the Bank’s point of view. This is due to implicit problems such as vary- mergers between landesbanks ing ownership structures, coupled with insufficient synergy potential as well as newly incurred concentration risks. The parent-subsidiary model undertaken with SaarLB is an exception to this rule. Synergy potential from large-scale bundling can be gleaned equally from similar cooperative agreements.

In this environment, BayernLB will continue to revise its business model on an ongoing basis. In this way, it will be able to continue on its successful trajectory in cooperation with the savings banks, even against a backdrop of changing market and competitive conditions. 34 BayernLB – our company

Business area activities

Corporates

The Corporates Business Area manages business on a global scale, with large SME customers in Germany as well as multinationals in the Bank’s core regions of Europe, North America and Asia. The minimum sales volume of these customers is EUR 500 million in Germany, while our customers abroad generate EUR 2 billion and more in revenues. This business is based on long-standing customer relationships characterised by trust, and is propelled by our wide range of products. In collaboration with customers and product specialists at the Bank, our relationship managers design solutions for traditional credit financing, special financing (export, project and trade financing, leasing), payment transactions and all capital market and Treasury products.

New structure

} Cross-business Strategic and organisational restructuring measures within the business area began to area cooperation bear fruit at the start of the second half of 2004. Sales activities were bolstered by the carried out implementation of the newly created Global Head positions, entrusted with international responsibility for the Corporate Banking and Structured Finance Divisions.

Collaboration with the Global Markets Business Area was further intensified. We offer our customers financing solutions tailored to their specific needs, comprising everything from interest rate and currency instruments to hand-picked products from the debt and equity markets.

During 2004, in the context of cooperation with the Financial Institutions & Sovereigns Business Area, the Munich and London syndications desks were merged under joint management. Thus, all of BayernLB’s expertise in this segment is brought together and used to the benefit of the customer. Bundling European syndication activities has allowed the Bank to gain more lead arranger mandates.

Development of the portfolio represented a key focus throughout 2004. This was due to the strategic objective of streamlining the portfolio to the greatest degree possible by year-end, as well as realigning BayernLB’s target portfolio. In addition to considerable enhancement of risk and profit profiles, expansion of the portfolio by acquiring new business represented a focal point. As part of the consistent implementation of the business area’s strategic objectives, enhancing the profitability of existing business continued to be of major importance. The exit portfolio, created at the end of 2003, was scaled down considerably, thereby exceeding target figures. BayernLB – our company 35

Key ratios of the business area

Gross income was generated in equal measures domestically and abroad. This illustrates the strong international orientation of the business area and the great importance attached to activities in the foreign markets. Great Britain, America and France are among the strongest. In these markets, the Corporate Banking and Structured Finance Divisions generated roughly 50 percent each of total income.

At around EUR 33 billion, risk positions were down by 14 percent in comparison to 2003. Net interest income also fell against 2003 as a consequence of this reduction in risk assets. Net commission income remained more or less unchanged in comparison to the previous year’s level.

Qualitative / structural enhancement of earnings, evident from the transactions carried out in 2004, was a decisive factor in the success of the business area.

Specific examples

The following transactions exemplify the success in the corporate financing business in 2004:

DaimlerChrysler Slovenské Elektrárne Edeka Zentrale AG & Co. KG Hafslund North America Corporation 350,000,000 Euro 600,000,000 Euro 400,000,000 Euro 1,000,000,000 Euro Revolving Credit and Term Term Loan and Revolving Dual Currency Revolving Benchmark Bond Loan Facility Credit Facility Credit Facility Joint Bookrunner Mandated Lead Arranger Mandated Lead Arranger Mandated Lead Arranger

Bayerische Landesbank Bayerische Landesbank Bayerische Landesbank Bayerische Landesbank January 2004 April 2004 June 2004 June 2004

Corporate Banking

In 2004, margins in credit business experienced increased pressure. In cases where a } Cross-selling margin commensurate with risk would have been impossible to achieve, the transac- activities reinforced tion was simply not pursued. Complex structured loans offered as part of all-in-one financing solutions represented a core focus, while using the credit product as a strategic facility (or anchor) was also important. All in all, cross-selling potential arising from customer relationships was crucial in the activities of the business area, particularly with regard to capital market products or the range of structured special financing instruments.

In 2004, the business area successfully transformed itself from being a simple lender to a prominent provider of structured and arranged syndicated loans. Thus, on the domestic market, BayernLB was mandated lead arranger for Wacker Chemie GmbH’s EUR 200 million syndicated credit facility, while it acted as arranger / syndicated agent for a revolving credit facility with a volume of USD 200 million completed by the US-based Calpine Generating Co., LLC. 36 BayernLB – our company

Structured Finance

} Lead arranger BayernLB offers structured finance solutions from almost all product lines at a national position expanded and international level.

In 2004, project financing operations were particularly successful. Income increased by approximately 28 percent in comparison to 2003, clearly illustrating our market penetration and acceptance. The success of the project credit facilities totalling USD 950 million arranged with Egyptian LNG El Behera Natural Gas Liquefaction Company, S.A.E., is further evidence of our strong market position. The Bank was international mandated lead arranger for this transaction. Project financing operations in Munich also demonstrated the Bank’s competence in expanding its position as mandated lead arranger.

Of particularly benefit for export financing was 2004’s positive development of the important supply markets of Western European machinery and equipment manufac- turers. Demand increased in countries such as Russia, Iran, Bulgaria and Romania. The steel and energy industries experienced what could almost be described as a boom. These positive trends meant that record volumes of new business were achieved. Three advisory agreements reached in Russia and Azerbaijan raised the Bank’s profile.

Leasing and factoring business picked up in 2004, despite challenging conditions caused by sharp declines in real estate leasing and the discontinuation of US cross- border leasing. This revival was due to the renewed vigour applied to the acquisition of leasing customers, as well as the Bank’s strong position in municipal leasing and factoring. New business was increased by 51 percent year on year. Total disbursements increased by 45 percent over the same period, while follow-up financing rose by 26 percent.

In 2004, asset-backed aircraft financing operations were marked by subdued demand due to adverse market conditions. In addition to a new transaction aimed towards market positioning, restructuring of difficult exposures was also a key focus. The out- placement of 29 aircraft financing transactions in Asia, totalling around USD 190 million, was one of the success stories of the year.

Outlook

Reaching our ambitious earnings targets while maintaining an acceptable risk profile represents our top priority. With the launch of a consistent sales initiative, both at home and abroad, our objective is to gain new customers, while offering a product range that is specifically geared to their needs. Solution-oriented all-in-one approaches remain a core focus. The opening of the German Centre and concomitant raising of the Shanghai branch’s profile will lead to a significant reinforcement of our involvement in China in 2005. In this market, we offer both German SMEs and multinationals solutions that are tailored to their needs, by virtue of a customised product range. BayernLB – our company 37

Financial Institutions & Sovereigns

BayernLB’s Financial Institutions and Sovereigns Business Area manages business relations worldwide with banks, insurance companies and other institutional customers, as well as government and non-Bavarian municipal customers. This low-risk customer group accounts for approximately half of BayernLB’s total portfolio. The lending business handled by this business area achieves a comparatively good return on capital employed because low risk assets are required. These customers are also key partners in our syndication, securities, refinancing and transaction businesses.

Earnings from new business were again increased in spite of unfavourable development of the market. Given the considerable pressure on interest margins, this was only possible thanks to improved net commission income, strengthened cross-selling of services and strong growth in the volume of new credit business.

Interbank business / loan syndication

Internationally syndicated loans reached new record volumes in the year under review. High liquidity in the credit markets stimulated investment. This market environment meant that margins and credit commissions came under considerable pressure. For competitive reasons, the banks were also more prepared than previously to meet their customers’ requests with regard to extended durations due to the low interest rate level.

Against this backdrop, the Bank succeeded in maintaining the position held in previous years in the syndication markets. Net commission income improved slightly due to increased total volume. The number of lead management positions rose by more than a third to 44 mandates.

Central and Eastern European borrowers were a key regional focus. Following EU } Syndication accession in May, some government and bank customers in this region were able to business focuses on financial exploit the relaxed regulatory equity requirements in order to procure new loans with institutions improved terms. Once again, financial service providers constituted the main sector focus in both number and volume for the Bank’s syndication business. The well-known trade magazine “EUROWeek” awarded BayernLB one of the two first places in the category “Best arranger for loans for financial institutions” for the third time.

Moreover, more lead management positions for corporate financing were gained thanks to the joint market development (centre of competence) of BayernLB’s syndication units in Munich and London.

In 2004, the Bank further extended its network of correspondent banks. The main focus was on public-sector banking groups and foreign savings bank organisations. In particular, the cooperation agreement that the Bank has held with the Swiss can- tonal banks for over a decade continues to be revitalised in several product sectors. Following termination of its equity participation, the Bank nonetheless continued its collaboration with the Austrian Bank für Arbeit und Wirtschaft (BAWAG) with a cooperation agreement. A further cooperation agreement was made with the Spanish savings 38 BayernLB – our company

} Cooperation banks in order to reinforce collaboration. As with other agreements, the aim of the agreement with agreement with the Spanish savings bank association CECA (Confederación Española the Spanish savings de Cajas de Ahorro) is to expand the market for the Bank’s own financing products by banks exploiting its partners’ placement and sales facilities. Commercial products that had previously been little used internationally, even within the EU, (e.g. direct debiting systems) are to be made accessible to the institutions’ customers by means of system networking. Furthermore, the agreement aims to assist customers of the savings banks and of BayernLB in their business activities in the relevant partner country by creating contacts there with trading partners, authorities, development institutions and advisors.

Links with correspondent banks were further exploited to support primarily the savings banks’ SME customers in setting up business relationships with international partners. In addition, the EuropaService of the Sparkassen-Finanzgruppe Bayern (EIC), coordinated by the Bank, ensures that customer wishes are entered into the electronic network of the European Commission, the Business Cooperation Database.

Sovereigns business / support programmes

In 2004, the German public sector deficit again exceeded the previous year’s figure, reaching approx. EUR 80 billion. This was primarily due to the still sluggish economy. Financing instruments, also at länder level, were increasingly shifted from schuld- schein notes to securities in order to expand the international investor base.

BayernLB used its expertise as a lead player in the placement of securities issues for various different länder bonds. In government credit business, the Bank acted in a conservative manner due to the difficult market environment, particularly noticeable in the second half of 2004. For this reason, the volume of new business was halved in comparison with the previous year.

Demand for loans from municipal institutions outside Bavaria remained at a high level in spite of the investor restraint displayed by the central, regional and local authorities. This particularly affected the need for cash advances. Customers continued to take advantage of interest rates staying low to lock into interest rates long-term and to take early interest rate hedging measures. The Bank maintained the previous year’s high volume of new business and renewals.

Abroad, and particularly in New York, the Bank reinforced its strong market position in the area of business with central, regional and local authorities. Due to enhanced funding opportunities through public-sector covered bonds (pfandbriefe), there were staff increases in this sector at branch level . BayernLB – our company 39

Subsidised loan programmes were again issued with the aim of developing the Bavar- ian economy, using the Free State of Bavaria’s share of the Bank’s profits and the State’s budget. The majority of the subsidised development funds was used for municipal water and sewage measures; just under a third was used for the purchase of existing housing stock and student residences. The Bank also distributed subsidies for public- sector development measures under the agricultural investment development programme, and allocated interest subsidies in the context of the agricultural credit programme.

Institutional customers

BayernLB is one of the core banks for leading institutional investors. Insurers and foun- dations are among the Bank’s major investors. In addition to traditional fixed interest products, structured products enjoyed increased favour due to the fact that interest rates remained low on the capital markets. However, credit business with this customer group was also extended considerably in the period under review, particularly through the further expansion of letter-of-credit business.

Outlook

This business area is well equipped to deal with the challenges arising from the withdrawal of the Gewährträgerhaftung (guarantee obligation). In credit business with financial institutions, the Bank remains in a strong competitive position thanks to its wide variety of funding options. The leading global position gained in recent years in syndicated underwriting business with these customers is to be further reinforced. New competitors will enter the market for business with central, regional and local authorities due to the planned legislation to extend the scope of covered bond (pfandbrief) funding. It will therefore require particular effort to expand this segment further. 40 BayernLB – our company

Real Estate

The Real Estate Business Area serves private and institutional investors, project developers, residential property developers, retail customers and housing companies. The product range spans everything from traditional, long-term loans to the various types of structured financing instruments. Germany, Western and Eastern Europe and North America are the target regions. Together with its specialised subsidiaries, the business area offers comprehensive expertise in practically all areas of real estate business. Real Estate’s prime objective is to make its customers’ ideas reality using innovative solutions. In doing this, the business area makes a solid contribution to the Bank’s overall performance.

Commercial real estate financing

With a view to ensuring a sound level of earnings, the business area has focused on expanding low-risk, high-yield long-term commercial real estate financing both at home and abroad, in line with the target portfolio. Overall, real estate financing continued to be marked by a difficult, fiercely competitive market environment. As in the previous year, the unfavourable market environment meant that relatively few large construction projects were launched by investors in Germany, while some existent large-scale plans were actually shelved. Pleasingly, though, new business volumes in domestic commercial real estate financing matched those of the previous year. Financ- ing activities were mainly focused on office, retail and special real estate, with consistently risk-oriented margins. In the context of cooperation with the savings banks, in commercial business there was increased demand for expertise with regard to special real estate, as well as qualified advisory services such as property valuation and real estate rating.

New business: domestic and foreign

48 % 52 %

Portfolio structure: domestic and foreign

70 % 30 %

Domestic Foreign BayernLB – our company 41

In the year under review, the business area further reinforced its real estate activities } International real abroad, in line with the target portfolio. Here, the key focus was providing both Ger- estate activities reinforced man and internationally operating real estate companies with support in foreign markets. The foreign entities also made a major contribution to the success of the business area, thanks to targeted regional market development.

All in all, there was a perceptible market trend towards high-volume transactions involving international real estate funds. The Real Estate Business Area, for instance, concluded a transaction with a volume of EUR 230 million, involving a fund structured according to the capital investment act. This fund invests in the European and Ameri- can real estate markets on behalf of an institutional investor. This type of investment and financing structure is also enjoying increased demand.

In addition to its core countries for international business (USA, Great Britain, France, Switzerland and Spain), financing activities were pursued for the first time in Sweden and Canada in the year under review. Scandinavia is also set to become a target market for sales activities. Moreover, as part of the Bank’s Eastern European strategy, the Real Estate Business Area will extend the scope of its business activities to include the EU accession countries, including the Hungarian subsidiary bank MKB.

In order to meet our customers’ diverse needs, the business area, in tandem with the Global Markets Division, is turning increasingly toward innovative financing products. These include hedging instruments to secure exchange and interest rates, structures incorporating mezzanine elements, or B-notes serving as participations in real estate financing tranches secured by lower-ranking collateral. In 2004, the business area was involved in B-note transactions both at the New York foreign entity and in Munich. Thus, as a member of an international banking syndicate, BayernLB was involved in funding the acquisition of a large well-known property in New York with a total transaction volume of more than USD 1 billion. This was achieved by interlinking senior and junior tranches with varying structures.

Residential real estate financing

In residential real estate, sentiment in 2004 was clouded by the weak overall economic } Tax and rent trend. In financing to completion, pricing became the main factor in cut-throat competi- legislation thwarts investment tion, while the overall financing volume was lower. The unpredictability of legislation governing tax and rent continues to represent an obstacle to capital investment. Debate surrounding the abolition of the home ownership subsidy, on the other hand, did not have any perceptible impact on demand. All in all, the Real Estate Business Area achieved its goals in residential real estate financing. 42 BayernLB – our company

Activities of the Bank’s subsidiaries

LBImmowert, a real estate valuation subsidiary owned jointly with Helaba, enjoyed positive development in its second year of existence, and continued on its course of moderate growth. For the first time, the subsidiary reported considerable demand for its services from companies outside the BayernLB and Helaba groups.

REAL I.S. AG is an investment company which is wholly owned by BayernLB. In collaboration with partner companies, it offers a comprehensive range of products including well-established funds, as well as managing international institutional real estate portfolios. In 2004, equity trading was almost doubled in comparison to the previous year, reaching a volume of EUR 307 million. In 2004, REAL I.S. was once again able to offer attractive products to savings banks and security-oriented institutional investors for their own investment activities, namely with its BGV Bayerische Grundvermögen II product, as well as LB ImmoInvest’s special funds (REAL I.S.-Beteiligungsgesellschaft).

Property development and real estate value creation (real estate management consulting) for savings banks and municipalities complete the range of services offered by the company. Amongst other initiatives, REAL I.S.’s real estate benchmarking projects for savings banks (involving 70 savings banks) and municipalities (69 participants) created a unique data basis covering the whole of Germany.

In 2005, REAL I.S. will continue to expand its separate product range targeting the Spar- kassen-Finanzgruppe, and expects its placement volume to increase significantly.

Outlook

In 2005, the Real Estate Business Area anticipates a slight rebound of the domestic real estate market, while steady development is expected for the foreign real estate markets. Key focuses for 2005 include the use of innovative financing products, securing arranger positions for large financing transactions, as well as further reinforcement of cross-selling activities. The Real Estate Business Area thus considers real estate portfolio financing an attractive market segment in which it can display to advantage its advisory and financing expertise. Financing products enjoy increasing demand, for example, from large national housing construction companies, while large international investors are showing ever more interest in residential property portfolios within Germany. In 2005, the business area also intends to reinforce cooperation with the savings banks in the domain of real estate. The cultivation of specific target customers will represent a joint focus, while the continuing expansion of advisory services throughout the entire range of the Bank’s services will represent another key priority. BayernLB – our company 43

Global Markets

The Global Markets Business Area bundles all primary and secondary money and capital market products: bonds, equities, money market instruments, foreign exchange and energy and commodity derivatives. Global business activity is focused on Europe, North America and Asia. In these markets, Global Markets advises and supports its target customers, which include savings banks, insurers, capital investment companies, multinationals and corporate customers, as well as real estate customers.

Business development

Global Markets posted a satisfying result for 2004. The business area achieved this largely by accurately predicting the trajectory of interest rates, exploiting the credit margin trend, successfully managing the Bank’s position and marketing high-margin products.

By developing new structured products, BayernLB was once again able to offer its } Sparkassen-Finanz- investors and customers high-yield solutions tailored to each particular risk profile. gruppe places tailored structured The Bank reported high demand in the areas of financial engineering, structured share products success- issues for retail business and customer solutions for bond issues denominated in euro. fully BayernLB’s strong reputation as a competent partner proved a key factor in the success of client-driven business, with its twin offer of market-oriented prices combined with high quality advice. BayernLB’s partners, the savings banks, were also able to use this competence to their benefit for their own marketing activities.

Cross-selling potential was exploited to the full with multinational and SME customers. This was also a result of the corporate franchise project carried out in tandem with the Corporates Business Area.

In terms of organisation, the year continued to be marked by the restructuring of the business area and the imminent withdrawal of the Gewährträgerhaftung (guarantee obligation). London and Paris were fully integrated into Head Office structures, while harmonisation of the technical platforms is right on target. The Toronto, Singapore and Tokyo locations and the subsidiary Asia Pacific Ltd. were closed as planned. In 2004, BayernLB carried out a series of funding measures and steps aimed at preserving liquidity. Thanks to these, the Bank will be in a strong position once the guarantee obligation has ceased to apply for new liabilities.

Treasury

In order to guard against future liquidity risks and increased funding costs after the withdrawal of the guarantee obligation and Anstaltslast (maintenance obligation), a portfolio strategy was implemented for long-term funds on the liabilities side. In this way, the Bank is ensuring that once the guarantee mechanisms no longer apply from July 2005, it will still have access to sufficient liquidity for planned business activities at all times. 44 BayernLB – our company

Demand for long-term investment products remained buoyant among domestic and international investors. This gave the Bank access to funding on favourable terms. As in the previous year, BayernLB continued to offer attractive structured interest rate and equity products alongside tap issues.

} BayernLB prepared In order to guarantee a funding source independent of issuer rating, the Bank set up for introduction the technical parameters necessary to issue a greater number of AAA covered bonds of new pfandbrief (pfandbriefe) following the introduction of the new pfandbrief legislation, expected to legislation come into force in mid-2005. This means that the requirements of the new legislation, which are expected to be more stringent, are already being met today through the successful implementation of new software for managing and controlling the register of cover.

New issues

Against the backdrop of a generally favourable market environment, BayernLB was one of the leading tap issuers on the German and international capital markets in 2004, as in earlier years. New issues totalling over EUR 16 billion were placed under the international issue programme. The 184 individual transactions were spread over ten currencies. Besides the euro (11 billion in 2004), BayernLB once again conducted transactions in other major currencies including the US dollar, Japanese yen, Swiss franc and British pound. Bonds denominated in Canadian and Australian dollars, Swedish krona, Norwegian krone and Hong Kong dollars represented another attractive alternative for investors.

2004 new issues volume by currency (in percent)

Other 1.5 % CAD 2.0 % JPY 2.2 % CHF 2.4 % GBP 10.3 %

EUR 56.6 %

USD 25.1 % BayernLB – our company 45

In January, the Bank started out in the jumbo benchmark bonds segment, issuing a } BayernLB also ten-year EUR 1.5 billion bond. This was followed by a seven-year issue with a total vol- reports success in foreign currency ume of EUR 1 billion in May. Both transactions were underwritten by an international markets banking syndicate and placed in domestic and foreign markets. BayernLB increased one of its outstanding jumbo pfandbriefe by EUR 250 million. The Bank was also active in the foreign currency markets, issuing a number of jumbo bonds. These included a seven-year CHF 500 million fixed-rate bond and a three-year “kangaroo bond” with a total volume of AUD 325 million in the Australian domestic market. The Bank was once again active in the Japanese domestic market, issuing a Uridashi bond totalling AUD 414 million. Two extendible notes were issued for the first time in the US market, representing a total volume of USD 3 billion.

Short-term interest rate products, foreign exchange, interest rate, energy and commodity derivatives

In the face of volatile markets with dramatic interest rate fluctuations in the long-term segment, coupled with erratic oil prices and the increased price of gold, our target customers were increasingly in need of comprehensive solutions. This demand was met by concepts designed to fulfil our customers’ need for high yields, while attending to financial, balance sheet structure and energy price management.

The increased volatility of exchange rates boosted business activity considerably. In client-driven business, especially with corporate customers, there was increased demand for currency risk hedging. This was particularly the case for shorter durations. Eastern European currencies are becoming increasingly important. In interbank foreign exchange trading, BayernLB maintained a strong position in spite of changed market conditions.

The shift from unsecured to secured short-term interest rate products was continued } Collateral use successfully in 2004. The use of collateral for short-term interest rate products was optimised optimised by means of targeted collateral trading, special repo instruments (e.g. tri- party repos) and bank-wide participation in the general collateral pooling project.

Corporate customers have a strong liquidity base. For this reason, they are increasingly turning to CP investment, and show particular interest in ABS CP-programmes.

Equity markets

Consolidation in the international equity markets was the hot topic of 2004. Following an encouraging start, growth expectations were brought to a sudden halt by turmoil in the commodity markets. Growth was curbed especially by the increase in oil prices. In the second half of the year, major fluctuations on the foreign exchange markets led investors to flee to the bond markets. It was only in mid-November that the markets began to rebound. 46 BayernLB – our company

New issue business fell far short of estimates in 2004. Instead, the focus was on other types of capital market transaction. These included complex squeeze-outs (such as the squeeze-out of EON Bayern AG) and capital increases (such as those carried out by Lufthansa AG and SGL Carbon AG). Here, the Bank succeeded in positioning itself well. In order to strengthen our competitive position and to benefit European issuers and German private customers, a cooperative agreement was reached with five leading landesbanks. In addition to an additive underwriting commitment, the agreement facilitates the offer of European share issues to German private customers in line with European prospectus guidelines.

Following their record performance in 2003, the success of structured retail products continued in 2004. BayernLB’s status as product developer for the Bavarian savings banks was further enhanced by 12 jumbo retail issues and various individual issues. The Bank showed real innovation in expanding the product range, from pure equities right up to interest rate and hybrid products. This trend is set to continue with the issue of a family of certificates in 2005. Customer demand for plain vanilla options showed healthy growth in 2004, with a concomitant increase in traded premium volumes.

Retail issues Period from June 2002

Name Date Volume (in EUR) Current coupon

Golden-Goal-Bond June 2002 92,092,000 5.00 %

Magic 10-Bond November 2002 150,000,000 10.00 % 1

Catch-up-Bond March 2003 250,000,000 10.00 %

Power Bond May 2003 53,541,000 9.00 %

Catch-up-Bond w. Kick July 2003 200,000,000 15.00 % 2

Oktoberfest-Bond November 2003 427,692,000 1.00 % 3

smart-Bond March 2004 200,000,000 0.66 %

Espresso-Bond May 2004 200,000,000 1.00 %

smartXL June 2004 62,000,000 4.80 %

Feuer & Flamme-Bond August 2004 50,000,000 8.00 %

Genuss-Bond October 2004 50,000,000 3.00 % 4

Sparfein-Bond November 2004 100,000,000 4.50 %

Swiss Value-Bond December 2004 25,000,000 5

Polar-Bond March 2005 150,000,000 6.00 %

1 First determination date in third year of duration on 8 December 2004 2 “Catch-up-function”: interest income lost in the first year (7 %) can be caught up in the second year (7 % + 8 % = 15 %) 3 First determination date in second year of duration on 7 February 2005 4 Minimum interest rate of 3 % upon matrity 5 No current return BayernLB – our company 47

Bond market

Issuers on the Euro capital market enjoyed a good year, ending with a boom in the fourth quarter, triggered by the weakness of the US dollar. The low interest rate policy favoured by the central banks had promoted a general surge of liquidity. Against the backdrop of a sometimes considerable scarcity of offers, this meant that spreads narrowed to historical lows. While burgeoning budget deficits resulted in unabated issuing activity from public-sector issuers, there was a 40 percent decrease in new corporate issues in comparison with 2003. The offer of corporate bonds shrank further due to diminished activity in the M&A sector, the existence of alternative sources of funding and measures aimed at consolidating or improving corporate rating. Given the low nominal interest rate level, investors either looked to the BBB sector for yield opportunities, held, or turned increasingly toward durations of up to 30 years (corporates: 20 years). Corporate investors, on the other hand, exploited the capital market situation in order to buy back outstanding high-coupon bonds.

BayernLB was lead manager for 40 customer issues in 2004. This allowed the Bank to } BayernLB places both preserve and gain market share in public-sector issues as well as in the area of first Hungarian- issued covered arranging and drawing under MTN and CP programmes. Considerable headway was bond and first made in expanding the pfandbrief / covered bond product at a national and interna- Bavarian savings tional level. This included the issue and successful placement of the first covered bond bank pfandbrief from a Hungarian issuer – placed in HUF and EUR – as well as the first Bavarian savings bank pfandbrief (Stadtsparkasse München, with a volume of EUR 150 million), for which BayernLB was lead manager.

Particularly worthy of note was EUROweek’s decision to award both first and second place in the category “Best sub-sovereign municipal bond – 2003” to BayernLB-managed issues: namely of a EUR 750 million 3 3/4 percent treasury note by the Free State of Bavaria and a EUR 1 billion 4 1/4 percent bond by the Province of Quebec under BayernLB’s lead management.

BayernLB’s lead management of a EUR 1 billion 4 1/8 percent bond with a duration from 2004 to 2009 for DaimlerChrysler represented another important milestone in 2004 in terms of corporate bond issues. This placement was also completed successfully.

Business with asset backed securities (ABS) continued to be highly satisfactory for BayernLB in 2004. The Bank is currently sponsoring five asset backed commercial paper programmes (ABCPs) in Europe and the USA, whose activities include the purchase of receivables from customers. The programmes are funded on the capital market. At year-end, the Special Purpose Entities had a total of around of EUR 11.6 billion outstanding ABCPs.

As one of the instigators of the true sale initiative (TSI) and one of the founding mem- } As founding bers of True Sale International GmbH, founded in May 2004, BayernLB, along with 12 member of TSI, BayernLB develops other banks, contributes significantly to the expansion of the securitisation market in German securitisa- Germany. The objective of the TSI is to create favourable conditions for true sale securi- tion market tisation transactions. These conditions are already in place in other European countries 48 BayernLB – our company

and the USA. The first asset backed securities transaction in November 2004, certified by TSI GmbH, represented a major step for the German securitisation market.

In client-driven securities and money market business, BayernLB was once again able to support the Bavarian savings banks in the area of own securities. Structured securities products in particular enjoyed a pleasing pick-up in turnover. These products are becoming increasingly important for the derivatives business of the savings banks.

In business with national investors, the focus shifted towards prime borrowers and yield curves. Underwriting competence in this segment was considerably enhanced, particularly in the areas of MTN drawings, euro investments and corporate bonds.

Bayern-Invest KAG

In 2004, there was a perceptible wait-and-see attitude in new special funds business, due not least to lack of regulatory clarity. With assets totalling around EUR 15 billion under its management, Bayern-Invest was more than capable of maintaining its position in a challenging market environment. This was the case for both special funds business and institutional asset management.

The increased demands of institutional investors were met thanks to enhanced strategic focus in the areas of products and services. New mandates were gained in particular through the asset allocation advisory service for savings banks and other institutional investors.

The product range was expanded thanks to cooperation with external partners and enhancement of the Bank’s own core competencies in the field of asset management.

In institutional asset management, Bayern-Invest expects the “Master-KAG” concept to capture two thirds of the overall special funds market in the medium term. With its “Service-KAG” solutions, Bayern-Invest has identified and reacted to changes in the market. The investment modernisation legislation which came into force on 1 January 2004 incorporates a certain degree of facilitation and improvement for capital investment companies when it comes to securing meaningful solutions for investors.

Bayern LB International Fund Management S.A.

Bayern LB International Fund Management S.A. is a Luxembourg-based capital investment company that issues and manages publicly offered funds in line with UCITS guidelines. As at 31 December 2004, Bayern LB International Fund Management S.A. managed a total of 23 publicly offered funds under three structures, with assets totalling EUR 828 million. During the calendar year, the volume of funds managed by the company rose by EUR 79 million (an increase of 11 %). BayernLB – our company 49

Outlook

The objectives for 2005 are, firstly, a significant expansion of client-driven business, to be achieved by exploiting existing customer potential, and, secondly, the acquisition of new customers and mandates. The focus will be on structured products, interest rate, energy and commodity derivatives and credit derivatives, as well as the implementation of capital measures in primary market business.

BayernLB will tackle strong competition in the area of client-driven business by launch- ing new products onto the market (e.g. structured equity products), adopting the advisory approaches developed during 2004 (e.g. value research products) and implementing new funding concepts (e.g. ABS). The Bank will continue to exploit cross-selling potential in a consistent manner, namely by transferring its successful franchise approach to other customer groups such as savings banks, institutional investors and real estate customers.

The market development strategies resolved for Asia and North America due to the transformation of the Global Markets Business Area will continue to be pursued consistently in 2005, as will the harmonisation of technical platforms.

Global Markets Asia will focus more strongly on customers in this region, while accompanying its customers in their expansion on the Chinese market. In order to offset earnings shortfalls following the withdrawal of the guarantee obligation for new liabilities, Global Markets will expand client-driven business (e.g. ABS) in North America. 50 BayernLB – our company

Savings Banks and Bavarian Market

One of the integral strategy principles of BayernLB’s new business model is an even stronger positioning as a network bank within the Sparkassen-Finanzgruppe Bayern. The Savings Banks and Bavarian Market Business Area drives and coordinates collaboration within this cooperative framework throughout the Group. The business area serves and supports the Bavarian savings banks in their various roles as customers, sales partners and service partners. It also works in harmony with the Bavarian savings banks to serve and support their customers in turn. Further tasks include jointly advising and supporting the Bavarian local governments customer group. The business area assumes a sales function for all business with Bavarian SME customers. From 2005, retail business and card business are to be added to this scope of responsibility. In 2004, cooperation with the Bavarian savings banks was optimised as planned, with a view to safeguarding and further developing the market and brand positions of the Sparkassen-Finanzgruppe Bayern. Strengthening promising product segments and customer groups has been a prime objective of the business area in the past, and continues to be a top priority today, as does the provision of a comprehensive range of national and international financial services to the benefit of the Bavarian economy, municipalities and private customers. In addition to the framework agreement between the Association of Bavarian Savings Banks (SVB) and BayernLB, a series of individual bilateral agreements with the Bavarian savings banks form the basis of close and binding cooperation.

Optimisation of cooperation within the Sparkassen-Finanzgruppe

The development of strategies, services and processes conjointly with specialists from the Bavarian savings banks and the Association of Bavarian Savings Banks (SVB) constitutes an important means of optimising cooperation within the Sparkassen-Finanz- gruppe Bayern. This development is carried out in the Bank’s various centres of competence dedicated to municipal business, international business, corporate finance, real estate, investment business and credit risk management. In line with the Bank’s expectations, solutions developed jointly in this way have indeed considerably enhanced quality, swiftness and customer acceptance. The asset allocation coordination centre has also proved to be of great value. Here, knowledge and practical experience from the Sparkassen-Finanzgruppe Bayern is pooled, while existing concepts and technolo- gies are bundled together and refined.

Cooperative market development is the principal focus of the business area. In this process, market potential in investment, municipal, real estate and corporate customer business (including international business) is identified and exploited jointly with the Bavarian savings banks. This systematic cooperative market development is already beginning to bear fruit. Active exploitation of potential is to be further stepped up by involvement with the “Verkaufsoffensive Bayern” sales initiative launched by the Asso- ciation of Bavarian Savings Banks. This move is planned for 2005. BayernLB – our company 51

Overview of overall project

“Optimisation of cooperation“

Centres of competence Cooperative market Credit risk New issues development management / Credit risk trading

Asset allocation coordination centre

Pool knowledge Enhance earnings Improve risk Secure funding on Avoid duplication Increase customer identification favourable terms of work loyalty Reduce risks Boost competitiveness Promote joint Gain new Avoid burdens on Expand market solutions customers earnings position

International business Corporate customers

Investment business Real estate customers

Real estate business Local government

Corporate finance Investment management

Numicipal business

Credit risk management Credit risk trading 52 BayernLB – our company

} BayernLB helps In 2004, BayernLB positioned itself as risk clearing house for the Bavarian savings savings banks banks for the first time. Thus, in the context of a transaction called “S-Bayern-Basket I”, to control credit the individual credit risks of the Bavarian savings banks involved were transferred to risks with “S-Bayern-Basket-I” a Special Purpose Vehicle by means of a credit default swap (CDS). There, they were transaction pooled and then sold back to these savings banks via the issue of a credit linked note (CLN). BayernLB acted as arranger and administrator for this deal. An “S-Basket” transaction to be carried out at national level is currently in the pipeline. Savings banks can use products of this kind to control risks and discharge economic capital, in the context of sound portfolio management. This creates enhanced opportunities for SME financing that is not suitable for trading on the capital markets.

The withdrawal of the state guarantees in July 2005 will increase the price of uncovered funding for public-sector credit institutions. For this reason, BayernLB, in collaboration with the Association of Bavarian Savings Banks and the Bavarian savings banks themselves, is currently developing models dedicated to new issue business. These models involve using covering assets from the balance sheets of the savings banks in order to exploit favourable funding options. This is expected to generate considerable value added for the Sparkassen-Finanzgruppe Bayern. Some of these models envisage the transfer of covering assets from Bavarian savings banks to BayernLB’s registers of cover. BayernLB then issues covered bonds (pfandbriefe) based on this cover, and can thus transfer the liquidity generated to the Bavarian savings banks as required.

Business development

Performance in 2004 was characterised by even closer cooperation within the Spar- kassen-Finanzgruppe Bayern. Bavarian savings banks and their customers take advantage of virtually all of BayernLB’s broad range of products and services. A pleasing increase in cooperation is evident in all of the Bank’s core businesses.

Portfolios in the savings banks’ proprietary securities trading were up slightly, despite an unfavourable investment environment. Significant portfolio increases were achieved in structured products and equity investments, thanks to the exploitation of diversification opportunities and alternative investments.

In securities business with customers of the Bavarian savings banks, BayernLB’s private asset management activities developed particularly well. Furthermore, in collaboration with the centre of competence for asset management, two new price information systems were selected to bolster Sales Support, while increased usage of a portfolio management system was promoted.

} Cooperation in In corporate customer and real estate business, a strategy coordinated with the Bavar- Sparkassen-Finanz- ian savings banks helped to increase transparency and successfully implement coop- gruppe intensified erative market development. In the corporate customer segment, demand from the Bavarian savings banks for BayernLB’s services as a syndicating partner picked up significantly from mid-2004. This segment was marked by both the general cyclical trend and the individual risk profiles of the Bank’s SME corporate customers. Requests for syndicated loan business from the Real Estate Business Area once again increased BayernLB – our company 53

significantly. This meant that interesting transactions could be concluded in residential real estate development and commercial property financing.

The product range offered to Bavarian SME customers in the corporate finance segment was further expanded. Innovative financing solutions and advisory services were designed to suit the needs of the Bank’s SME customers, and offered as product packages matching the life cycle of the particular company, for example combined with traditional financial products. The range of existing equity and quasi-equity products was enhanced by the addition of the “Bayern Fonds Mezzaninekapital”, a fund placed by the Sparkassen-Finanzgruppe Bayern with a total volume of EUR 100 million. As anchor investor, BayernLB holds 40 percent of the fund. This represents a further financing alternative for Bavarian SMEs in particular.

In state-subsidised business, BayernLB acts as an advisor and transmits loans to Bavarian savings banks. The Sparkassen-Finanzgruppe Bayern has the biggest share of the market for programmes set up by LfA Förderbank Bayern, the Bavarian Development Insti- tute. Alongside traditional programme loans, BayernLB has offered the Bavarian savings banks global loans from the LfA Förderbank Bayern since 2004. In this way, funding advantages gleaned are passed on to SME customers.

With a view to enhancing the market position of the Sparkassen-Finanzgruppe Bayern in the growth market of international business, the Sparkassen-Finanzgruppe has developed a strategy for international business with corporate customers. SME customers can thus choose from a comprehensive range of products in international business.

Bavarian local governments are supported with innovative, individually tailored financ- } Bavarian local ing alternatives. The Sparkassen-Finanzgruppe Bayern’s share of the market for munici- governments offered individual pal lendings could be further expanded, also taking the company Bayerngrund Grund- support with stücksbeschaffungs- und -erschließungs-GmbH into consideration. A municipal real innovative products estate benchmarking project for the Sparkassen-Finanzgruppe Bayern was carried out successfully in collaboration with the Bank’s subsidiary Real I.S. AG in 2004. Coopera- tion with Real I.S. AG also provides an opportunity to offer customised models for municipal building construction in the context of Public Private Partnerships.

Outlook

The first experiences and results of the centres of competence, as well as the cooperative market development carried out in 2004, form an excellent starting point for further enhancement of cooperation within the Sparkassen-Finanzgruppe Bayern. The way is thus paved for even more successful outcomes for all those involved. Based on the measures taken in connection with cooperative market development, the business volume will develop positively in our joint activities with the savings banks. 54 BayernLB – our company

LBS Bayern and Landesbodenkreditanstalt

LBS Bayern

} LBS Bayern In the year of its 75th anniversary, LBS Bayerische Landesbausparkasse, the Bank’s Home celebrates its 75th Loan Division, achieved the third best volume of new business in its history. With anniversary 223,406 contracts totalling EUR 5.65 billion, the sales result was actually significantly below that of the peak year 2003 (by 27.2 percent in terms of contract amounts). This result was considerably influenced by the long-running debate over the abolition of building-saving premiums and the home ownership subsidy. However, it significantly exceeded the long-term average, amounting to EUR 4.5 billion achieved between 1993 and 2002, by more than EUR 1 billion.

Broad swathes of the population see building saving primarily as a secure and flexible investment and financing instrument. The building saving trend thus tends to be stable. Building saving products offer clear advantages, including the fact that building saving loans are unaffected by fluctuations in the capital market, the benefit of a guaranteed interest rate over the entire duration, the freedom the saver enjoys during the savings phase, and the possibility of unscheduled repayment during the term of the loan. Such products are particularly attractive in the context of the current market environment. Building saving has a more positive image than other forms of financial investment. Today, security is the most crucial investment criterion. In the 2004 investment barometer conducted by Emnid for the German Savings Bank Association (DSGV), 97 percent of German citizens assert that security is either “very important” or “important” for their investment decisions. Moreover, building saving is a tried and trusted way of preparing for and backing up retirement provisions with property. Building saving fees earmarked for financing accounted for 75 percent of LBS’s new business.

Since 1948, LBS Bayern has taken on around 4.5 million building saving contracts with a total volume of more than EUR 60 billion. These contracts have helped to finance some 1.5 million homes predominantly detached and semidetached. From monetary reform in 1948 to the present day, 7.4 million building saving contracts have been arranged, representing a total volume of EUR 120 billion. Some 1.5 million savers currently hold more than two million building saving contracts with LBS: Given this customer base, in addition to new business, LBS is market leader in Bavaria as “the savings banks’ building and loan association”.

Slump in housing construction

} Investor confidence In line with the overall market trend, LBS’s financing business is at a relatively low level. dented by There was no respite from the slump in housing construction, as continuing economic deterioration of stagnation and high unemployment levels curbed the propensity to invest. The gradual housing policy deterioration of housing policy in general, as well as the never-ending debate over the curtailing or abolition of the home ownership subsidy meant that the tax situation for house construction became more and more unpredictable. This leads to a climate of BayernLB – our company 55

uncertainty and thus faltering investor confidence. For this reason, demand remains meagre – in spite of favourable investment conditions due to historically low interest rates and reasonable construction and purchase prices.

Stable earnings situation

LBS reports a consistent upside profit trend in its 2004 profit and loss statement. Net interest income was up EUR 3.2 million compared with the previous year. This was primarily due to the fact that the decline in building savings loans due to low interest rates was more than offset by the expansion of financial investments and non-collec- tive credit business. Administrative costs were further reduced. Bottom-line operating profit before risk provisions was EUR 72.3 million (EUR +4.9 million). This clearly illustrates LBS’s earning power, given the pressure on earnings caused by low capital market rates.

Outlook

Since motives for building saving tend to be long lasting, LBS expects that in the current capital market environment and with an unchanged state housing subsidy, building saving business in 2005 will level off above the long-term average. LBS also expects a stable operating profit thanks to its market-oriented products and strict cost management.

Details on LBS’s business performance can be found in its annual report or online (www.lbs-bayern.de).

Stabilisation at high level EUR thousand

9,000,000

8,000,000 7,761,938

7,000,000 6,056,279

6,000,000 5,650,000 4,848,501 5,000,000 4,725,197 4,472,938 4,465,920 4,350,980 4,290,991 4,175,691 4,145,952 4,023,892 4,000,000

3,000,000

2,000,000

1,000,000

0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Average gross new business 1993–2002: EUR 4,555,634,000

Source: Press briefing on annual results – 8 December 2004 56 BayernLB – our company

Landesbodenkreditanstalt

Bayerische Landesbodenkreditanstalt (Labo) operates in the area of housing as part of its public-sector mandate as development bank of the Free State of Bavaria. This sphere of activity includes the construction, modernisation and purchase of homes and rooms in homes for the elderly, as well as infrastructural measures such as promoting urban planning. Labo helped the Free State of Thuringia in the area of construction in the nineties, and manages the subsidies then granted in this State.

State-subsidised activities in 2004

Labo’s fiduciary operations are supported by federal funds and funds from the Free State of Bavaria. These activities comprise the financing of rented apartments, rooms in homes for the elderly and also owner-occupied homes. Labo’s proprietary business consists of programmes based on development guidelines issued by the Free State of Bavaria. As part of these programmes, low-interest funds from the Kreditanstalt für Wiederaufbau (KfW) receive a further interest subsidy from Labo’s own funds and funds from the Free State of Bavaria. Focal points of Labo’s proprietary business include the modernisation of rented apartments as part of the Bavarian modernisation programme, owner-occupied homes and the promotion of sport facilities.

During 2004, Labo’s new business was marked by the challenging economic environment. In contrast to previous years, it thus proved impossible to use proprietary business in order to compensate for the reduction of government subsidies in the fiduciary operations sector, a move perceptible in all segments. In the KfW-funded programmes for the construction and purchase of owner-occupied homes, the loan volume in Labo’s proprietary business fell by a third in comparison to the previous year. This was primarily due to the general economic situation and the restraint of potential investors.

} Modernisation of Contrary to the general trend, encouraging growth was achieved compared to 2003 in rented apartments fiduciary operations funding the construction of rented apartments, as well as in the increasingly modernisation of these apartments in the context of the 2004 Bavarian modernisation important programme. This area, namely the modernisation of rented apartments, represents an important future business area for Labo. If they are to remain viable in the future, older apartments have to be adapted to meet today’s requirements with regard to ecology and comfort. This poses a great challenge for housing companies. For the construction industry, on the other hand, it represents a chance to compensate for the decline in new business.

Labo’s fiduciary operations helped finance a total of 4,116 owner-occupied homes and rented apartments as well as 1,541 rooms in homes for the elderly via loans worth EUR 205.15 million. In Labo’s proprietary state-subsidised business, loans in the amount of EUR 301.53 million were allocated for the construction and purchase of 4,592 homes while EUR 114.17 million in loans went to the modernisation of another 5,189 homes. A credit total of EUR 23.28 million was approved under the special sports facility funding programme. Compared with the previous year, this represents a decrease of around 19 percent in lending in fiduciary business and around 30 percent in proprietary business. BayernLB – our company 57

Labo’s loan programmes in 2004

Modernisation and reconstruction of Creation and acquisition residential space: of residential space: EUR 193.8 million EUR 427 million Sports facilities funding EUR 23.3 million

Outlook

In 2005, Labo will continue its furtherance of residential space, as in 2004, through trust loans and through its own interest-subsidised funds. It is encouraging that the trust loan quotas were increased in the Free State of Bavaria’s 2005 budget. The successful Bavarian modernisation programme for rented apartments is also certain to continue at the previous year’s level.

The construction of rented apartments in conurbations with the aim of creating afford- able residential space remains a key focus for 2005, as does the modernisation of rented apartments in the context of the Bavarian modernisation programme.

In 2005, the new Bavarian interest subsidy programme will be used to fund owner- occupied residential property in proprietary business. This programme comprises two previous programmes for the construction and purchase of existing residential space. It should also help to increase the German residential property ratio, which is lower than that of its European neighbours. If the overall economic situation improves, as hoped, the result for state-subsidised business in owner-occupied homes will also recover once more.

Details on Labo’s business performance can be found in Landesbodenkreditanstalt’s report on its state-subsidised business or online (www.labo-bayern.de). 58 BayernLB – our company

Group retail activities

In the BayernLB Group, retail activities play an important role in diversifying risks and generating solid earnings. Of key importance here are the dependent institutions LBS Bayern and Landesbodenkreditanstalt, as well as the subsidiaries of strategic significance to the Group. The Group’s objective is to continue its targeted expansion of retail activities both at home and abroad, working in harmony with and supplementing the activities of the members of the Sparkassen-Finanzgruppe Bayern.

The following segment report by customer group, drawn up as per 31.12.2004, supple- ments the segment report published in the Report on the Bank and the Group:

EUR million Retail customers Corporate customers Financial institutions and sovereigns Financial markets / Other consolidation BayernLB Group

Net interest income 736 727 185 429 – 46 2,030

Net commission income 126 162 59 17 – 25 340

Administrative expenses – 357 – 268 – 108 – 317 – 158 – 1,208

Result from financial transaction 13 2 6 109 – 4 126

Other operating result 9 1 0 – 1 213 223

Result before risk provisioning/ revaluation result 528 624 142 237 – 20 1,511

Risk provisions/ revaluation result – 174 – 18 10 – 34 – 344 – 561

Operating result 354 606 152 203 – 364 950

Cost-income ratio (%) 40.4 30.0 43.1 57.1 – 44.4 BayernLB – our company 59

The retail customer segment comprises all of BayernLB’s activities with private cus- } Retail customer tomers, credit card business, as well as LBS Bayern and Landesbodenkreditanstalt. segment This segment also includes SME corporate customers of the subsidiaries of strategic significance to the Group, with a maximum annual sales volume of EUR 50 million.

BayernLB’s retail customer business contributes EUR 354 million to the operating result, representing a share of 37 percent. Alongside the corporate customer sector, this segment is thus one of the cornerstones of the Group.

The corporate customer segment encompasses savings bank syndicate business } Corporate customer as well as business with large corporate customers of the consolidated subsidiaries, segment sharing these areas with BayernLB’s corporate and commercial real estate customer business. With a contribution of EUR 606 million to the operating result, the corporate customer segment dominates the segment report by customer group.

The financial institutions and sovereigns segment comprises the Group’s dealings } Financial with savings banks and financial institutions, as well as government and municipal institutions and sovereigns business. segment The financial markets segment encompasses BayernLB’s operations in the Global } Financial markets Markets Business Area, the trading business of the consolidated subsidiaries and the segment contribution from maturity transformation.

The other / consolidation segment bundles all activities not directly allocable to a customer segment, as well as their contributions to the operating result. It also includes consolidation effects. The distinctly negative operating result is largely due to value adjustments and assumptions of losses in participations that cannot be allocated to a particular segment.

Contributions to the retail segment’s operating result

LBS 20 % Other 4 % LB(Swiss) 2 % LBLux 2 % Labo 11 %

DKB 28 % Credit cards 3 % Real Estate BA MKB 20 % 10 % 60 BayernLB – our company

In 2004, LBS Bayern succeeded in maintaining market leadership, in close cooperation with the Bavarian saving banks. During the year under review, Landesbodenkreditan- stalt, in line with the tasks under its remit, continued to promote residential construction and urban development in Bavaria through trust loans and subsidies as well interest-subsidised programmes funded by state monies and LBS’s own funds. Proprietary business accounted for 70 percent of the overall result for state-subsidised business, thus remaining virtually unchanged year on year.

Deutsche Kreditbank Aktiengesellschaft (DKB), an internet-based retail bank, focuses on selected target customer groups as part of its business model. In the year under review, the core focus was on expansion of the bank’s private customer business. The number of customers was significantly increased in 2004. In addition to gaining new customers, also targeting private customers in granular credit business, customer retention represented another key priority of the bank’s activities. Streamlined, rapid workflows incorporating quality assurance consolidated DKB’s position as an internet- based retail bank. For the coming years, the bank intends to further increase contribution margins by exploiting savings potential and expanding the customer base by means of innovative customer acquisition initiatives.

Magyar Külkereskedelmi Bank RT. (Hungarian Foreign Trade Bank / MKB) succeeded in significantly increasing its market share of private customer business through the acquisition of Konzumbank at the end of 2003, and incorporation of the acquired company in July 2004. This allowed MKB to boost its retail base. The network of branches in Hungary was expanded by 22 further foreign entities, reaching a new total of 52 branches. Over 35,000 new customers were gained. MKB’s strategic objective for 2005 is to exploit the earnings potential of existing customer relationships, as well as acquiring new customers. It aims to considerably expand its market position vis-à-vis SMEs. MKB focuses on customers and sectors that require tailored solutions and a broad product range due to their economic orientation, thus opening up potential for cross-selling activities in particular – also at Group level.

In residential real estate financing (excluding property developers) under the Real Estate Business Area, the bank succeeded in meeting its targets for 2004 in spite of a generally difficult environment. For 2005, the business area anticipates slight recovery of the real estate markets, and a concomitant upward trend in the financing-to-completion market.

BayernLB’s credit card business has been making solid contributions to the Bank’s net commission income for many years. In 2004, the Bank continued to build on its strong position. Thus, the average number of credit cards issued at the end of 2004 stood at 830,000 units (representing an increase of 3.5 percent against 2003), while 2004’s transaction volume amounted to EUR 4.17 billion. BayernLB’s share of the German credit card market, measured in terms of transaction volume, is thus 12.1 percent. BayernLB – our company 61

The target retail customers of LB(Swiss) and LBLux are HNW private customers. These banks focus on asset management, investment consulting and fund business. LB(Swiss) and LBLux complement the business model of the Bavarian savings banks perfectly.

Landesbank Saar (SaarLB) generates around 10 percent of its revenues with retail customers. This is largely attributable to its private residential construction financing business over internet platforms, which has been proving successful for many years, as well as to SaarLB’s subsidiary, Landesbausparkasse Saarbrücken. SaarLB’s retail activities are supplemented by services in investment consulting, including the active marketing of BayernLB’s products (such as structured bonds and credit cards), also in tandem with the Saarland savings banks. 62 BayernLB – our company

Support operations activities

Corporate Center

The Corporate Center bundles together all of the central support units of BayernLB. In this way, it nurtures a central, consistent strategy for the Bank, and manages the areas under its remit at a global level.

The divisions of the Corporate Center serve internal customers such as the Board of Management, the business areas, support operations, and subsidiaries of BayernLB, as well as the Bank’s owners and outside parties such as auditors, authorities, rating agencies and members of the press / public.

Participations

In the participations business, as in all of BayernLB’s other business activities, the objective is to generate adequate long-term profitability after risk. BayernLB’s participations portfolio is subdivided into strategic, financial and other participations (for more information on significant changes to the participations portfolio during 2004, see Section 4: Report on the Bank and the Group).

Participations in German and foreign banks comprise a major component of BayernLB’s strategic participations portfolio. These help the Bank to both broaden customer potential and expand market share. The Bank also has participations in the real estate and housing construction sector. Here, BayernLB has a tradition of high-level expertise in financing, and can offer a broad range of products. Rounding off our range of strategic participations are various service companies specialising in securities settlement and computer services. The Bank’s financial holdings consist of investments in other companies. These are acquired with the expectation that the companies will significantly increase in value over the coming years.

The following are the main participations that are of strategic significance to the Group. For many years, BayernLB has been active in its enlarged core European market through these companies. They are managed in part by the Bank (for the retail activities of these companies, see “Group retail activities”, Section 3).

Deutsche Kreditbank Aktiengesellschaft, Berlin (DKB)

DKB has been wholly owned by BayernLB since 1 February 1995.

As a retail bank operating within the BayernLB Group, DKB focuses on target customer groups hand-picked from the private, public-sector and corporate customer segments. Its business activities are centred on the new federal states, where the bank has an extremely high market share of public-sector customers. BayernLB – our company 63

One particularly salient feature of the 2004 financial year was the ever greater expansion of private customer business over the Internet. Remarkable growth rates were achieved in this sector. The number of customers was increased from 90,000 to approximately 150,000 over the course of the year. Process optimisation over the Internet played a significant role in the successful expansion of direct banking activities.

Extension of the core public-sector customer segment was another key element in 2004. Particularly within the scope of Public Private Partnerships, a number of different projects were carried out in tandem with the government (including sewage plants, health resorts, multipurpose halls, police stations, school facilities, sports and leisure pools and theatres). At the same time, the bank succeeded in acquiring substantial deposits from customers. Within this target customer segment, DKB also pressed ahead with gaining customers from the old federal states.

As part of the consistent implementation of its corporate strategy, DKB reined in business activities in the corporate customer segment, concentrating instead on specific segments where it has a high level of expertise, such as agriculture. Targeted risk management was also rigorously applied during the year, using focused portfolio structuring.

Deutsche Kreditbank Aktiengesellschaft, Berlin (DKB)

Core business activities Retail bank with a geographical focus on the new federal states. Three market areas: Corporate Customers, Public- Sector Customers and Private Customers

Size of participation BayernLB 100 percent

Total assets EUR 28.3372 billion

Equity EUR 1.2403 billion (after proposed distribution)

Number of employees 1,258 (2004 average)

Operating profit before and after EUR 364.7 million risk provisions EUR 232.5 million

Net income for the year and profit EUR 139.4 million available for distribution EUR 120.0 million

Number of customers 160,435 31. 12. 2004

Key ratios • Cost-income ratio 27.7 percent • Return on equity 18.0 percent

Strategic objectives for the Further expansion of direct banking business with participation in 2005 – 2006 private customers over the Internet 64 BayernLB – our company

Landesbank Saar, Saarbrücken (SaarLB)

Since 1 January 2002, BayernLB has held a stake of 75.1 percent in the partner’s capital of Landesbank Saar, Saarbrücken (SaarLB), with which it has been in ever-closer partnership since 1993.

With total assets of around EUR 17.5 billion and working in close conjunction with BayernLB, SaarLB conducts universal banking operations in its region with an emphasis on lending to the commercial sector. Together with the Saarland savings banks, it holds over 60 percent of all loans by regional institutions to non-banks and was able to consolidate its market position further during 2004. SaarLB’s regional remit comprises not only the core Saarland market, but also its neighbouring regions, and in particular those beyond national borders. In business with France, double-digit growth rates were again achieved during the past year. In addition to SaarLB’s cooperation with French partners, the representative office opened in Metz on 1 January 2004 was a major factor in this growth.

SaarLB’s activities are supplemented by a medium-sized real estate business operating at both national and international level (underwriting business and direct business) and by a real estate retail business exploiting the sales opportunities offered by the Internet.

SaarLB cultivates a close cooperative relationship with the Saarland savings banks. This cooperation was further affirmed by an agreement signed by the members of the Saar- land Savings Bank Organisation in the first half of 2004. Ongoing cooperation in the back office units is now complemented by reinforced joint development of market potential, particularly in the fields of corporate finance and international commercial business. Here, the entire Saarland savings bank sector benefits from BayernLB’s product range and international connections.

In the context of a still unfavourable economic environment, SaarLB succeeded in increasing its credit volume further in both corporate and private segments. This is also reflected in the bank’s increased net interest and commission income. Costs rose only moderately, and in spite of a significantly lower trading income, it was possible to hold the cost-income ratio at the lower end of the target range, namely at 50 percent, while operating profit was again increased. This gave SaarLB the necessary scope to carry out appropriate risk provisioning and to build up reserves. The bank was thus able to increase its net income for the year by EUR 1 million to EUR 14 million.

Another key focus, outside of business activities in the strict sense, was the continued orientation of asset / liability management towards the phasing out of the guarantee mechanisms in July 2005. One measure with this objective was the expansion of the investor base – achieved not least by issuing a commercial paper programme. Compre- hensive provisioning initiatives helped to offset the negative effects of the anticipated rise in funding costs. Another measure involved significantly improving the core capital base through retention of earnings and allocation of permanent silent capital contributions. This meant that, at year-end, SaarLB’s core capital ratio exceeded its long-term target of 7.5 percent. BayernLB – our company 65

Landesbank Saar, Saarbrücken (SaarLB)

Core business activities SaarLB is a credit bank with a regional focus, and with an independent corporate identity within the BayernLB Group. Its main business focuses are corporate customer business in the region (including cross-border areas in France) based on many years of experience with most of its customers (market leader in Saarland) as well as a nationally oriented real estate financing business. It pursues a niche policy in its other business in the rest of Germany and abroad, via participation in syndicated financing.

Size of participation BayernLB 75.1 percent; Sparkassen- und Giroverband Saar 14.9 percent; Saarland 10.0 percent

Total assets EUR 17.526 billion

Equity EUR 504.3 million

Number of employees 637

Operating profit before and after risk EUR 65.5 million provisions EUR 37.6 million

Net income for the year and profit EUR 14 million each available for distribution

Number of customers 67,813 31. 12. 2004

Key ratios • Cost-income ratio 49.8 percent • Return on equity 10.4 percent

Strategic objectives for the The following are to be expanded: the bank’s market participation in 2005 – 2006 position in neighbouring areas of France, not least via the new Metz representative office set up in 2004, SME corporate customer business (principal bank function) in the local Saarland / western Palatinate / Eifel / Mosel / Rhine-Neckar market, and national and international real estate financing (retail business, serving high-calibre private investors). Focus on international business and trading / treasury, both as a supplement to the core areas and as a centre of competence for the Saarland savings banks. 66 BayernLB – our company

Magyar Külkereskedelmi Bank Rt. (MKB) – Hungarian Foreign Trade Bank, Budapest

The Budapest-based Magyar Külkereskedelmi Bank Rt. (MKB) represents BayernLB’s bridgehead in Eastern Europe, and forms an integral part of the strategy for Eastern Europe approved by the BayernLB Board of Management at the end of 2004. Hungary’s accession to EU on 1 May 2004 constitutes an important milestone which will enhance the already close trade relations between Hungary and Germany.

Business with corporate customers is one of the traditional strengths of MKB, which operates as a universal bank. Its customers include leading large Hungarian corporates as well as SMEs. MKB represents a reliable and competent partner for these firms. MKB is market leader in project financing in Hungary. The bank’s retail business has achieved considerable importance. The incorporation of Konzumbank, acquired at the end of 2003 and legally merged with MKB as per 1 July 2004, has allowed MKB to expand its market position further. As at year-end 2004, the bank reported a market share of 5.7 percent in deposits and 3.5 percent in loans in the private customer segment. The current network of branches, comprising 52 retail outlets, is to be expanded to around 80 locations by 2007. With a view to reinforcing sales activities, MKB is continuing to focus on close cooperation with strategic partners such as Allianz Hungária and T-Mobile. MKB offers private customers an exceptionally broad range of services. Unique, innovative products on the Hungarian market, such as home and consumer loans as well as bank cards denominated in euro, put the finishing touches to the range on offer.

MKB and BayernLB operate in close cooperation on the market. Thus, for example, a Public Private Partnership funding transaction with great significance in Hungary was concluded, as was a debt issuance programme with a volume of EUR 1 billion for MKB. BayernLB acted as lead manager for the latter transaction.

MKB is the partner of choice for German saving banks in Hungary. A cooperative agreement with the largest German savings banks (known as the “G25” group) supports this market strategy. Competent contact partners now staff a “Bayern Desk” dedicated to serving the Bavarian savings banks and their customers.

In 2004, MKB’s total assets – including those stemming from the acquisition of Konzum- bank – increased by 27.7 percent to reach EUR 5.9353 billion. At EUR 74.0 million, pre- tax profit was 10.0 percent up on the previous year’s figure.

For 2005, MKB anticipates increased demand in a number of areas, namely corporate credit in the areas of import and export, state Public Private Partnership projects and EU infrastructural funding. The principal objective for 2005, besides the acquisition of new retail customers, is increasing the profitability of existing customer relationships. BayernLB – our company 67

Magyar Külkereskedelmi Bank Rt. (MKB) – Hungarian Foreign Trade Bank, Budapest

Core business activities MKB is a universal bank, operating in all areas of corporate and private customer business. It is the third-largest bank in Hungary. MKB further expanded its retail base by acquiring Konzumbank in 2003, a merger which was officially concluded in 2004. For the Group and the savings banks, MKB is a foothold and bridgehead in eastern Europe (German Desk).

Size of participation BayernLB 89.61 percent; BAWAG, Vienna, 10.38 percent; independently held 0.01 percent

Total assets EUR 5.9353 billion

Equity EUR 462.7 million

Number of employees 1,482

Operating profit before and after risk EUR 95.2 million provisions EUR 74.0 million

Net income for the year and profit EUR 64.9 million available for distribution EUR 55.5 million

Number of customers Private customers: 149,094 31. 12. 2004 Corporate customers: 33,037

Key ratios • Cost-income ratio 56.3 percent • Return on equity 16.8 percent

Strategic objectives for the Maintaining the strong market position in corporate participation in 2005 – 2006 customer business. Further improving market position in SME and private customer segments. 68 BayernLB – our company

Banque LB Lux S.A., Luxembourg

Banque LBLux S.A. is a European bank with an international focus. It is held jointly by BayernLB (75 percent minus one share) and Helaba (25 percent plus one share). The bank concentrates on corporate banking in the Benelux region and international private banking. These areas are supported by the Trading / Treasury Division, which actively conducts proprietary trading. The bank is also an IT service provider serving, amongst other customers, a number of entities of the BayernLB Group.

In corporate banking, the target customers are listed companies, large local companies with a minimum sales volume of EUR 250 million, as well as real estate customers, institutions and financial service providers in the Benelux region. Banque LBLux S.A. offers its customers tailored financing and trading products, supplementing this range with various products from its parent companies. In the 2004 financial year, the credit volume in Benelux business increased slightly. The key focal points of the period under review were reinforced acquisition activities in the Benelux region and the implementation of the Minimum Requirements for the Credit Business of Credit Institutions (MaK). At the moment, the spotlight is on selective expansion of bilateral credit business, as well as cross-selling activities.

In private banking, Banque LBLux S.A. actively advises and serves high net worth customers. It focuses on international customers in the medium to high net worth segment. The bank places a key emphasis on the individuality and quality of its services, which are tailored to each particular customer profile. It offers products in the areas of investment consulting, portfolio management and financing / provisioning solutions. In 2004, the main priorities were expansion of the range of products and services, increasing the quality of service provided, and acquisition of new partners. To this end, extensive training measures were taken in the area of financial planning. Further- more, acquisition activities were increased, initiatives aimed at informing customers were intensified, the range of languages offered was enhanced and Internet content was completely reworked. In 2005, key focuses will include expansion of sales channels and activities with a view to enhancing service quality even further. This, in turn, is aimed at promoting customer loyalty as well as cultivating the acquisition of new customers.

At Banque LBLux, risk control and monitoring is incorporated into the system employed by both of its parent companies. Locally, it is carried out on the basis of fully coordinated, uniform procedures and methods. BayernLB – our company 69

Banque LB Lux S.A., Luxembourg

Core business activities International financing / corporate customer business (with Group responsibility for the Benelux countries), trading / treasury, private banking and IT hub function for foreign entities of the BayernLB Group.

Size of participation BayernLB 75 percent minus one share Helaba 25 percent plus one share

Total assets EUR 12.649 billion

Equity EUR 470.6 million

Number of employees 191

Operating profit before and after risk EUR 34.1 million provisions EUR 37.8 million

Net income for the year and profit EUR 30.0 million, EUR 0 available for distribution (due to advance dividend on 29. 12. 2004)

Number of customers 9,752 (private banking) 31. 12. 2004 EUR 4.7 billion Assets under management (private banking) 31. 12. 2004

Key ratios* • Cost-income ratio 35.5 percent • Return on equity 11.7 percent

Strategic objectives for the LBLux is pursuing a strategy of individual support, participation in 2005 – 2006 tailored to each customer profile: • in private banking, active and systematic target- customer oriented support • in corporate banking, focus on listed companies and large local companies in the Benelux region; relationship management • in trading, short-term markets / products requiring high levels of trading expertise; credit trading

* Applies to the operating profit as adjusted for special factors 70 BayernLB – our company

LB(Swiss) Privatbank AG, Zurich

LB(Swiss) Privatbank AG concentrates primarily on international private banking. It is held jointly by BayernLB and Landesbank Hessen-Thüringen (Helaba), who own 50 percent of its capital each. Its core business activities are asset management, investment consulting and funds. Furthermore, it offers credit business services.

The bank’s prime objective is to offer HNW private customers of the Sparkassen-Finanz- verbund an attractive range of private banking services, operating from a Swiss base. This is intended to reinforce the market position of the savings banks in the highly competitive segment of HNW private customers.

Cooperation with BayernLB in the area of securities was further enhanced, particularly in the sale of structured products.

Over the last year, further reduction of proprietary trading activities led to a slight drop in total assets. LB(Swiss) Privatbank AG’s key earnings ratios are roughly the same as the previous year’s figures.

LB(Swiss) Privatbank AG pursues a conservative risk policy. Credit, currency and market price risks are measured in good time, and controlled within fixed parameters.

Due to the general economic situation, LB(Swiss) Privatbank AG expects the 2005 result to be similar to that of the previous year, if there are no extraordinary influences thereupon. BayernLB – our company 71

LB(Swiss) Privatbank AG, Zurich

Core business activities Private bank; takes advantage of operating environment in Swiss financial centre; asset management, investment consulting and fund business for HNW private clients and all associated banking business; credit and treasury business to a lesser extent. These core business activities are to be further pursued over the coming years in a consistent manner.

Size of participation BayernLB 50 percent Helaba 50 percent

Total assets EUR 1.4242 billion

Equity EUR 74.6 million

Number of employees 80.1 (adjusted by part-time positions)

Operating profit before and after risk EUR 15.6 million provisions EUR 15.6 million

Net income for the year and profit EUR 11.8 million available for distribution EUR 12.4 million

Number of customers 6,014 31. 12. 2004 Assets under management EUR 463.7 million 31. 12. 2004

Total customer volume EUR 2.1996 billion 31. 12. 2004

Key ratios • Cost-income ratio 48.8 percent • Return on equity 21.0 percent

Strategic objectives for the Increased cooperation with savings banks, particularly participation in 2005 – 2006 in Bavaria, Hesse and Thuringia, reflecting the strategic focus on the German market. Credit business will continue to be operated either as an add-on to private banking or in highly profitable niches. 72 BayernLB – our company

Corporate governance

While BayernLB is an unlisted, public-sector company, it nonetheless places great importance on effective and responsible corporate management and control. In November 2003, the bodies of BayernLB approved its own Corporate Governance Prin- ciples, which came into effect on 1 January 2004. The Corporate Governance Principles are largely based on the provisions of the German Corporate Governance Code drawn up by the federal government’s dedicated commission. They comprise those regulations governing corporate management and control which apply to BayernLB pursuant to binding or self-imposed stipulations.

The bodies of BayernLB adhere to these principles in fulfilling their mandates, thus ensuring that the Bank is managed and controlled in a responsible manner that is geared towards value creation. The Board of Management, Board of Administration and General Meeting have established that there is nothing to indicate that the Bank did not comply with the Corporate Governance Principles during the 2004 financial year.

BayernLB interprets Corporate Governance as a continuous process. For this reason, the Corporate Governance Principles are constantly checked and, if necessary, adjusted in line with fresh experiences and new legal requirements, and in harmony with the evolution of national and international standards. In this way, the further development of Corporate Governance is safeguarded. BayernLB – our company 73

Corporate Services

The Corporate Services Support Operations are BayernLB’s central unit responsible for all internal services worldwide. It comprises the Financial Market Services, Interna- tional Corporate Services, and Corporate Organisation & IT Divisions, as well as the Shared Services Division. Corporate Services uses its expertise and resources to offer a wide range of service and support functions to BayernLB’s business areas and other support operations.

Financial Market Services

The Financial Market Services Division performs traditional transaction banking serv- } BayernLB reinforces ices for the sales business areas and support operations. These tasks are allocated to clearing function for Bavarian the trading, account, securities and payment transactions product segments. Securities Sparkassen-Finanz- services are carried out in close cooperation with the subsidiary TxB Transaktionsbank gruppe GmbH, which has carved out a position for itself in the transaction banking market since mid-2002. Collaboration with the Bavarian savings banks was further reinforced in 2004 with the consolidation of the previously separate clearing operations of Infor- matik-Zentrum Bayern — Software Gesellschaft der bayerischen Sparkassen GmbH & Co. KG (IZB SOFT) and BayernLB. BayernLB is now the clearing bank for the Bavarian Sparkassen-Finanzgruppe.

In 2004, trading and securities transaction volumes remained stable in comparison to 2003. In payment transactions, volumes continued to rise due to the additional clearing volumes taken over from IZB SOFT. More than 1.3 billion transactions were thus processed in 2004 in tandem with the Bavarian savings banks.

In e-banking, the Internet-based solutions BayernLB e:Web and BayernLB Online:Bank- ing were developed further. BayernLB e:Web offers flexible electronic banking with multiple bank compatibility for rapid data transfer over the Internet. BayernLB Online: Banking, on the other hand, allows customers to carry out global cash and securities transactions online 24 hours a day, with direct access to their accounts.

Credit card business, an integral part of the Corporate Services Division since the end of 2004, and BayernLB’s private customer business, were transferred to the business area “Savings Banks and Bavarian Market” at the beginning of 2005. This move empha- sises the importance of close cooperation with the savings banks for BayernLB.

Credit card business

In 2004, the Bank further reinforced its strong position in the credit card business. As part of its co-branding business, BayernLB issues jointly-designed card products under its partners’ brands. The BayernCard-Services GmbH subsidiary is the product manager. In 2004, successful product changes were made to the most important card programmes. For the Corporate Card, for example, online settlement facilities, improved insurance packages, and frequent flyer miles and transferral of travel expenses were introduced. Such newly designed product features enhance the attractiveness and profitability of these credit cards. In 2004, the average number of credit cards issued rose 74 BayernLB – our company

by 3.5 percent to almost 830,000 cards. The 2004 transaction volume was EUR 4.17 billion. BayernLB has a 4.2 percent market share of the German credit card business in terms of number of cards, while its share is 12.1 percent when measured in terms of transaction volume.

Information technology

} Shared system The 2004 joint “IT Bayern” project represents another important step in the coopera- house for Bavarian tion of Bavarian savings banks and BayernLB with its dependent institutions Bayerische Sparkassen-Finanz- Landesbausparkasse (LBS) and Bayerische Landesbodenkreditanstalt. The aim is to gruppe to be implemented step bundle the information technology of the companies involved into IZB SOFT in order to by step create a shared system house. The necessary legal and organisational requirements for IT bundling will have been met by mid-2005. The next stage involves the step-by-step transfer of systems and applications. This process takes into consideration the needs of day-to-day business and projects to be implemented.

As computer services provider, Informatik-Zentrum München-Frankfurt am Main GmbH & Co. KG is responsible for the provision and operation of large computer systems, client / server systems and telecommunications technology. The company was founded in 1993 by the Bavarian savings banks and BayernLB with the aim of sharing computer resources. Since 2001 Landesbank Hessen-Thüringen (Helaba) also holds a stake.

Foreign entities

The optimisation of BayernLB’s foreign entities, initiated in 2003, is being further pursued.

At the beginning of 2004, as part of the restructuring of the Corporate Services Divi- sion, the back office and IT units of the foreign entities were subsumed into the Inter- national Corporate Services Division under joint management.

This allowed efficient control and coordination of day-to-day operations. Furthermore, it created the necessary processes for implementing change.

The structures and sizes of the Corporate Services units abroad are rapidly being harmonised with the new business model. Here, the focus is on the standardisation and extensive centralisation of processes and IT systems in line with BayernLB’s strategic orientation.

General services

The Shared Services Division provides general administrative and operational services. This division initiates, carries out and manages outsourcing plans within its sphere of responsibility. This, together with the identification of potential outsourcing targets, aims to create lasting positive economic effects for BayernLB. So far, the companies BLB Bankett Gastronomie GmbH, LB Corporate Services GmbH and Bayern Facility Manage- ment GmbH (BayernFM) have been launched onto the market. BayernLB – our company 75

BLB Bankett Gastronomie GmbH performs a broad range of catering services for BayernLB and other customers. These services include corporate catering, vending machines, and catering for conferences, parties and events, as well as leisure facilities.

Bayern LB’s operative marketing was outsourced to LB Corporate Services GmbH in 2004. This move allowed LB Corporate Services GmbH to enhance its function as a multiple service provider. In addition to the product areas of payroll, postal services, office management and security services, the company now also offers BayernLB and others services in the areas of event marketing, public relations and services, as well as concomitant consulting services.

The company BayernFM was founded in mid-2004 as part of the restructuring of } BayernLB and Facility Management. BayernFM is held jointly by Flughafen München GmbH and Flughafen München GmbH BayernLB. Technical and infrastructural building management duties were transferred create joint facility to this company. BayernFM has taken over management of all of BayernLB’s domestic management office buildings, and performs facility management services at Munich Airport. There company are plans to expand business with third parties in Southern Germany.

Outlook

Future core tasks of the Corporate Services Division will include offering services tailored to demand and the market situation, as well as the expansion of all essential services for BayernLB’s business areas and support operations.

A key focus for 2005 will be the continuation of intensive cooperation in the Sparkassen- Finanzgruppe within the scope of the “IT Bayern” project. To this end, IZB SOFT has been established as the central IT service provider for the Sparkassen-Finanzgruppe Bayern. The aim is twofold: to enhance the performance of Bavarian savings banks and BayernLB and to achieve long-term cost advantages. The project is to be implemented in a series of practicable steps, and is currently expected to be rolled out in 2008. 76 BayernLB – our company

Risk Office

The Risk Office bundles together activities for the analysis of single borrowers, credit administration, management of loans in need of restructuring, risk management and risk controlling.

It is divided up as follows. The Corporates / Financial Institutions Division and the Real Estate / Structured Financing Division are responsible for analysis. The systematic sector-oriented approach employed in these divisions has proved successful. The main tasks of the Credit & Collateral Services Division comprise the drafting of agreements, uniform monitoring of risk-relevant credit business as well as transaction- and service- oriented portfolio management. In Credit Consulting, the chief feature is a greater focus on workouts. The Risk Controlling & Procedures Division is entrusted with the design, implementation and monitoring of management systems, in addition to the implementation of more accurate methods for risk measurement and reporting.

The Credit Committee, delegated the highest level of responsibility below the Board of Management, is the Bank’s central credit competence unit. It also provides the Board with support on all issues of credit risk management. The comprehensive credit policy, on which all credit-related decisions are based, provides a solid framework for this.

Risk management

Refining and elaborating risk management processes and methods represented a key focus of the Risk Office’s activities in the 2004 financial year. As part of reorganisation, credit administration activities were brought together under the Credit and Collateral Services unit of the Risk Office. Meanwhile, Risk Offices abroad – in New York, London and Hong Kong – were annexed to the Corporates / Financial Institutions Division. Thus, their organisation is now in harmony with the structures and task allocation of the Munich Risk Office.

} Target portfolio For capital controlling purposes, the target portfolio was defined as part of the ongo- defined as part of ing development of the bank-wide credit risk strategy. Consistent implementation of credit risk strategy cluster management led to a further improved diversification.

The rating system developed jointly with nine other landesbanks has already proved to be of value. Using the DSGV (German Savings Bank Association) corporate customer rating and establishing a shared credit process with the savings banks reinforces cooperation with the Bavarian savings banks in the area of underwriting business. More- over, it supports the ongoing development of a uniform approach to risk, as well as boosting the efficiency of collaborative work.

In covering the portfolio to the greatest degree possible by powerful, cutting-edge rating procedures, the Bank has achieved a further milestone on the way to meeting the requirements of Basel II. BayernLB – our company 77

Outlook

For 2005, the focus is on developing the groundwork necessary for implementing the requirements of Basel II. This involves weighting credit collateral in a way that eases the burden on equity, defining specific criteria for transaction ratings and recording the portfolio in line with IRB criteria. Further objectives include ongoing software development for the early detection system to be used throughout the Bank, as well as the refinement of risk-optimised procedures for the valuation, analysis and controlling of individual credit exposures. 78 BayernLB – our company

Our staff

Downsizing measures brought to an early close

“Implementing the new business model in 2004 demanded a great deal of flexibility and willingness to make sacrifices from BayernLB’s staff.” The above is a core message from the Board of Management, taken from the latest of the “Shaping our future together” series of talks. In this internal forum, members of the Board of Management periodically tackle questions from the Bank’s staff.

Personnel communication measures are of particular importance at this time of strategic realignment. Management forums and staff events of this type afford the Board of Management the opportunity of explaining the background behind current decisions. They are also a good way of gathering direct feedback on staff morale. Immediate internal communication has helped to ensure that all staff members understand the necessity of the measures taken, as well as their importance for assuring job security. It has helped to bring the staff fully on board for the Bank’s strategic realignment.

The strong performance in 2004 is essentially thanks to the staff of BayernLB, who have shown exceptional commitment in implementing the new business model in their day- to-day work.

Far-reaching changes to the Bank’s structural and procedural organisation last year led to staff restructuring measures, resulting in the termination of around 1000 jobs in 2003 and 2004. However, target figures were reached early, meaning that restructuring could be brought to a close in 2004.

Optimisation of personnel management systems

BayernLB’s staff policy aims to create an environment in which employees can perform well. To this end, personnel management systems also had to be revised and adjusted.

The remuneration systems were optimised and tied more closely to BayernLB’s business performance. Employees under the Bank’s own pay scale have long had a performance- oriented and earnings-related bonus system. Now, a similar bonus system has also been designed for employees with salaries based on the standard pay scale. This will help to achieve BayernLB’s goal of rewarding individual performance and fostering the commitment and motivation of each employee in an individual and targeted manner.

Optimisation of “management by objectives” was initiated, with the aim of achieving a target-oriented global management of BayernLB to safeguard business performance. Both management and staff are to be given even fuller support in achieving not only overall Bank objectives, but also the concomitant individual objectives of each employee. A performance appraisal system is currently being developed to support this aim. It will be used to identify employees with potential and will be accompanied by continuous successorship planning. BayernLB – our company 79

Change in staff capacity For the period 1 January 2004 to 31 December 2004

Change

2004 2003 absolute in %

Number of employees at year-end in the Group1 of which 8,940 9,061 – 121 – 1.3 • top management2 • apprentices 36 34 + 2 + 5.9 • temporary trainees 146 164 – 18 – 11.0 in the Bank in Germany and 24 22 + 2 + 9.1 abroad3 5,047 5,543 – 496 – 8.9 of which • abroad 563 699 – 136 – 19.5 • apprentices 120 138 – 18 – 13.0 • graduate trainees 32 24 + 8 + 33.3 • temporary trainees 16 19 – 3 – 15.8 • part-time staff 778 768 + 10 + 1.3 In the core Bank4 4,104 4,581 – 477 – 10.4

Average length of service in the Bank (in years) 13.45 12.61 + 0.84 + 6.7

Average age in the Bank (in years) 40.13 39.60 + 0.53 + 1.3

Personnel expenses in the Group (EUR thousand) 688,720 656,481 + 32,239 + 4.9 of which • wages and salaries 499,803 493,485 + 6,318 + 1.3 • social security contributions and employee benefits 76,439 81,192 – 4,753 – 5.9 • pension scheme 112,478 81,804 + 30,674 + 37.5

Average number of staff in the Group 8,742 9,029 – 287 – 3.2

1 The Group includes BayernLB. 2 Board of management, managing directors, board of directors and supervisory board 3 BayernLB in Germany and abroad, including Landesbodenkreditanstalt and Landesbausparkasse 4 BayernLB in Germany and abroad, excluding Landesbodenkreditanstalt and Landesbausparkasse

The Bank’s social commitment stretches beyond the active working life of its employees. For this reason, the pension scheme introduced in 2002 was revised and reori- ented. It was replaced by a new pension scheme at the beginning of 2005. The main features of the new scheme have changed little, but processing is now carried out by a reinsured group support fund called ÖBAV Unterstützungskasse e.V. – S-Verbund Versicherungskammer Bayern. This pension scheme is accessible to all employees taken on since 1 January 2002. Employees who started with the Bank before 31 Decem- ber 2001 are still covered by the old system, which is similar to the civil servant pension scheme. 80 BayernLB – our company

Fostering talent and increasing qualification levels

Young, highly-qualified new employees represent an important investment in the future of any company. BayernLB is therefore committed to training young, talented and motivated people. The bank hired 50 trainees during the 2004 financial year. A total of 31 graduates were taken on as part of the trainee programme. The increasing demand for temporary traineeships clearly shows that BayernLB, as a training company, is seen as a trusted and attractive option. Investment in cultivating fresh talent is worthwhile. This is illustrated by the fact that in 2004, the majority of apprentices and trainees who completed their training successfully were hired on a permanent basis.

In addition to proximity to the customers, further staff training and qualification remains crucial for the Bank’s market success and optimum implementation of its business strategy. For this reason, development of the professional and product-related competence of our staff was a key focus in 2004. A special series of seminars entitled “Customer and Credit Analysis”, aimed at risk analysts and relationship managers, was developed and successfully carried out jointly with the business areas. This special series will be continued both at home and abroad during 2005.

Internal communication

A shared corporate identity that is truly felt by the employees is essential in order to weather challenging economic conditions. The Board of Management and employees of BayernLB can rely on a broad range of customer-tailored internal communication instruments. Ensuring that all employees are equally well-informed means meeting information needs as they arise. This is achieved thanks to fine-tuned interaction between staff communication measures and print and online media.

Backing up staff communication with online and print media enhances the quality, scope and transparency of internal messages. The Intranet has a key role in online communication, providing staff with a communications and work platform. All employees worldwide have instant access to up-to-date information in English and German. In addition, a bimonthly staff magazine offers employees their own forum, devoted mainly to background reports, interviews and in-depth information.

Outlook for 2005

“We are one Bank, one team, and only together can we achieve our overall goals – each in his or her own function.” This clarion call to the staff came from the Board of Management at the end of 2004, expressing the importance of renewed future efforts to breathe life into the Bank’s new structure. The day-to-day implementation of this shared corporate culture, largely crafted by the Board of Management and executives, will be one of the core tasks for 2005. BayernLB – our company 81

The introduction of a performance-oriented and earnings-related bonus system for standard pay scale employees and the revised objectives agreement and evaluation system represent a challenge for both employees and management, and one that they are fully prepared to meet.

The most important objectives of any staff qualification initiative consist of reinforcing the Bank’s market position, enhancing competitiveness and improving BayernLB’s earnings situation.

Our thanks to our staff and the Staff Council

Without the commitment of each and every employee to our Bank, it would not have been possible to put an end to job cuts earlier than scheduled. Nor would we have been able to consolidate the business areas and support operations by the second half of 2004.

The Staff Council has once again helped create a climate of trust, cooperation and mutual respect. We would like to express our special thanks to these staff representatives for their loyal and responsible cooperation on all operational and social matters during these difficult times. Especially in times of upheaval, the Board of Management and all other managers are highly aware of the importance of staff representation that is committed to the interests of the Bank as a whole, and of the necessity of cooperating in an atmosphere of trust. 82 BayernLB – our company

Public sector mandate

BayernLB acknowledges its corporate responsibility in a variety of ways, whether by promoting culture, the arts, education and science, or by furthering social causes and protecting the environment.

Culture and the arts

“Arts and culture reflect an important basis of the social life of man. Our Gallery at BayernLB is a means of bringing people together and supporting artists. Our numerous loans of works of art open up the way for the public to participate in cultural life.”

BayernLB’s promotion of culture and the arts adds to Munich’s renown as a city of culture. BayernLB’s Gallery at 20, Briennerstrasse in Munich gives contemporary artists the opportunity to exhibit their work in a well-known forum that has gained wide- spread recognition in artistic and cultural milieus. Our exhibition marking the 100th anniversary of Salvador Dali’s birth was one of the highlights of 2004. This project was carried out jointly with Literaturhaus München. The Gallery’s participation in Munich’s “Evening of Museums and Galleries” has become a tradition for BayernLB. This event offers members of the public access to a wide range of museums and exhibitions at a greatly reduced overall fee.

BayernLB also supports Munich’s famed Pinakothek art galleries and various other Bavarian cultural establishments by donating valuable items on permanent loan.

In a press conference held on November 2004, the Palais Dürckheim, a building belonging to BayernLB, was presented to the State Art Collections for cultural use from 2005. The mid-19th century building is to become a venue for lectures, workshops and seminars organised by the Pinakothek der Moderne in the interest of disseminating arts and culture. This cooperative initiative, set up as a Public Private Partnership, enriches not only the three Pinakothek galleries, but also Munich as a cultural venue.

A particular highlight of BayernLB’s promotion of culture during 2004 was the presentation of a violin made by Antonio Stradivari to the first violinist of the Munich State Orchestra. The violin was made by Stradivari in 1722, at the apogee of his career as a creator of instruments. Its has been owned by BayernLB since 1976, but is always lent to professional musicians. In this way, the instrument is made accessible to the public.

Deutsche Kreditbank AG (DKB), of which BayernLB holds 100 percent, has created its own foundation under the name “DKB Stiftung für gesellschaftliches Engagement”. The main objective of the foundation is to promote sports and the arts, as well as the protection of historic buildings and monuments. The Hungarian company Magyar BayernLB – our company 83

Külkereskedelmi Bank Rt. (MKB), also held by the Bank, has been a major sponsor of the Franz Liszt Chamber Orchestra, Budapest, for more than 15 years. Over the last years it has also built up a collection of Hungarian art which has enjoyed a great deal of attention.

Education and science

“The competitive potential of a nation is the education, knowledge and innovative power of its people. By promoting education and science, we are taking full cognisance of this fact.”

Since 1992, BayernLB’s commitment to education and science has been crystallised in its yearly Academic Prize. In this area too, BayernLB is particularly involved in the promotion of regional education facilities. All eleven of Bavaria’s universities are invited to submit pieces of research. The winners are selected by a specialist jury based on dissertations and post-doctoral theses dealing with banking topics. In 2004, the main prizes were awarded to Dr. Jutta Schmidt of Otto-Friedrich University in Bamberg for her piece on “Investment decisions in the equity market – an experimental analysis of the information and decision-making processes of individual investors”, and to Dr. Klaus Wolf of the University of Bayreuth, whose dissertation was entitled “Risk management in the context of value-based company management”. Ten sponsoring prizes were also awarded.

A further academic prize is conferred by the Landesbank Saar Girozentrale Saarbrücken (SaarLB), of which BayernLB holds 75.1 percent. At EUR 25,000, this prize is one of the most generous in the Saarland. In 2004, it was awarded to the bioanalyst Dr. Joachim Jose for his post-doctoral thesis entitled “Made-to-measure molecules”.

For seven years, BayernLB has been recognising and promoting innovative solutions in the health care sector with its Clinic Sponsoring Prize. This award is not just limited to Bavaria, but rather welcomes candidates from all over Germany. Particularly in these increasingly difficult times for the health care sector, we feel it is important to support structural change in the clinics. BayernLB thus sees its Clinic Sponsoring Prize as providing a stimulus for the development of future-oriented concepts. In 2004, the tinnitus centre of the Berlin-based Campus Charité Mitte received first prize in the competition. Using innovative new treatment solutions, and by virtue of an integrated concept with a dedicated day clinic, this project greatly enhances the quality of life of tinnitus sufferers. Moreover, it suggest treatment options to patients for everyday use and self- help.

Together with Schörghuber Stiftung & Co. Holding AG, BayernLB sponsors an endowment professorship for housing construction and development at the Architecture Department of the University of Technology in Munich. 84 BayernLB – our company

DKB and SaarLB are also actively involved in the area of university sponsorship, the former with a student education fund, and the latter with an endowment fund for a professorship in biotechnology, funded by the Saarland’s Sparkassen-Finanzgruppe. Seven years ago, the Hungarian company MKB set up a scholarship to open the hori- zons of gifted children and young people from extremely poor backgrounds. To date, MKB has funded more than 100 winners of this scholarship right up to degree level.

BayernLB has been building up a historical archive since mid-2003. This project involves collecting and preserving all documents and materials relevant to BayernLB’s history. All sources are verified and analysed. By charting its corporate history, BayernLB, founded in 1972 with the merger of its predecessor Bayerische Gemeindebank (founded in 1914) and Königliche Landeskulturrentenanstalt (founded in 1884), is thus taking responsibility for recording its development as a company. BayernLB’s 25-year-old collection of historical Bavarian securities continues to be expanded and documented, as an integral part of Bavarian corporate history.

Social commitment

“People experiencing social hardship deserve our support. After all, any one of us could find ourselves in a similar situation. We, BayernLB and staff, see ourselves as an integral part of civil society. By making our mark at a regional level, through selected, particularly beneficial projects, we are acknowledging our social responsibility.”

BayernLB has shown its commitment to furthering social causes in its environment for several years. In this way, the Bank is helping to support people experiencing hardship. Helping children is of particular importance to BayernLB. For over 10 years, the Bank, together with the entire Sparkassen-Finanzgruppe Bayern, has been a partner of the “Sternstunden – We help children” initiative. This programme offers medical, educa- tional and social support to a great number of children. As partner, BayernLB bears Sternstunden’s administrative costs and settles its payment transactions. It also provides office and communications facilities, thus ensuring that all contributions to the programme go directly to the children without any deductions being made. Over 11 years, 950 projects in Bavaria, Germany and all over the world have been funded by contributions totalling EUR 52 million.

The biennial exhibition of pictures by students at the Bavarian State School for Disa- bled People, which the BayernLB Gallery has hosted since 1999, is becoming a regular event for the Bank. At the end of each exhibition, the pictures are auctioned off, and the proceeds divided equally between the school and the Sternstunden project.

BayernLB also collects money and takes on the sponsorship of certain projects as part of the Christmas initiative “Giving instead of Gift-giving”. Last but by no means least, the personal commitment of numerous BayernLB employees is vital for the success of the Sternstunden initiative. BayernLB – our company 85

Banque LBLux S.A., a majority holding of BayernLB and Helaba, has long been involved in furthering social causes, in addition to promoting art, culture and sport. Amongst other projects, it sponsors the foundation “Helping Children with Cancer”.

As part of the “Socially Responsible Purchasing” pilot project, suppliers of Bayerische Landesbausparkasse (LBS) are obliged to disclose details of any child labour in sweat- shops used throughout their manufacturing and trade chains. LBS then uses this information as a selection criterion in its purchasing decisions.

BayernLB donated EUR 250,000 to a Sternstunden project in Sri Lanka as a first response to the tsunami that devastated South East Asia at the end of 2004. This money is being used to rebuild two destroyed outstations belonging to a children’s home in this region. BayernLB is also involved in setting up and financing a Spar- kassen-Finanzgruppe reconstruction fund for the countries affected by the disaster.

Environmental management

“Without an ecologically sound environment, neither business nor individuals could flour- ish. We strive to be the leaders in product ecology and corporate environmental protection.”

BayernLB’s environmental management system, certified by EMAS II, continued to be further developed and revalidated during 2004.

Here, the key focus was indirect impact on the environment. BayernLB has explicitly anchored ethical responsibility into its Group-wide credit risk strategy. The Bank observes the World Bank’s ecological and social standards.

BayernLB is also reinforcing its commitment to climate protection. Together with its subsidiary Energy & Commodity Services GmbH, BayernLB offers advisory services for handling climate protection projects in line with the Kyoto protocol. Furthermore, the Bank has pressed on with its product launch for trading with emission allowances in Europe.

Scoris GmbH’s rating testifies to the fact that BayernLB is on the right track with regard to its understanding of ecological and sustainable commitment. Forty-four financial service providers were ranked as part of the company’s sustainability rating of European bond issuers. BayernLB was the best German institution ranking second.

Outlook

In the future, corporate responsibility will remain an important factor for BayernLB. We will thus continue along our established course of corporate responsibility, while keeping an eye on new developments and adjusting our measures and objectives accordingly. BayernLB will publish full details of this progress in a dedicated report on sustainability. By incorporating topics of corporate responsibility, this new document will go far beyond the previous environmental report, giving a full account of Bayern- LB’s performance in the area of sustainability. A product is only as good as the tool that shapes it. Experience is the key to it all – from customised planning to successful implementation to the unique result. And the process is all but a routine one: every new project signiﬁ es a new beginning. You can’t buy the most valuable tool in the world: experience.

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 Report on the Bank and the Group

Overview 90 Management report 93 Outlook 103 Risk report 106 90 Report on the Bank and the Group

Overview

Economy

After three years of stagnation, 2004 brought moderate economic recovery, with Germany’s gross domestic product growing by 1.6 percent in real terms. Companies with a large share of export business in particular were able to benefit from the ebul- lient rebound of the global economy. Nonetheless, private household consumption was sluggish due to meagre income growth. This limited the potential of the economic upswing. The fact that Germany was able to tap into Europe’s economic growth was purely thanks to strong demand from abroad. Both global and domestic situations do not point towards an economic revival for Germany in 2005. On the financial markets, the year was marked by continued – albeit somewhat leisurely – recovery of the equity markets, a surprising decline in interest rates in the second half, and not least by a weak dollar.

New business model

The transformation of BayernLB’s business model, begun in 2002 and pursued with vigour throughout 2003 and 2004, is already proving successful. The turnaround has been achieved.

In the year under review, BayernLB’s business model was consistently on – if not ahead of – schedule. This allowed around 1,000 job cuts in the core Bank (BayernLB excluding Bayerische Landesbausparkasse (LBS) and Bayerische Landesbodenkreditanstalt (Labo)) to be achieved before schedule. This personnel reduction measure had been approved in 2003 and was originally planned for wrap-up by 2005 / 2006. BayernLB’s Board of Management was reduced from nine members in 2003 to seven in 2005.

Optimisation of BayernLB’s foreign entities, begun in 2003, is right on schedule. The Singapore-based BLB Asia Pacific Ltd., as well as the Singapore, Tokyo and Toronto branches have been closed. Winding-up of the Labuan branch is also running according to plan. The London, Paris, Milan, New York, Hong Kong and Shanghai locations together form an optimum network of foreign entities, which BayernLB can exploit to support both its own customers and those of the Bavarian savings banks in their international business. It can also take advantage of selected business opportunities arising on these particular financial markets.

} BayernLB Group As part of its business model, the BayernLB Group is pressing on with its strategy for seizes opportuni- Eastern Europe, as well as continuing to expand its retail capability. A major aspect of ties in Eastern this is the support the Bank provides for the savings banks and their customers in the Europe Central and Eastern European (CEE) markets through high-quality consultation services and a local network of cooperating partners. This network is currently being expanded. The Budapest-based Hungarian Foreign Trade Bank (MKB), which enjoys an excellent Report on the Bank and the Group 91

position and serves as a bridgehead in Hungary, is playing a decisive role in this process. Moreover, operating from its Munich head office outwards, BayernLB is seizing its opportunities in the growing CEE and Russian markets. In addition to joint market development with the savings banks in Bavaria, retail capability is also being further expanded through LBS, Labo and the subsidiaries Deutsche Kreditbank AG, Berlin, (DKB), Landesbank Saar, Saarbrücken, (SaarLB), MKB, Banque LBLux S.A., Luxembourg, and LB(Swiss) Privatbank AG, Zurich, as well as through our extensive credit card business.

BayernLB is now directing its full attention to the task of stabilising and raising profits. Concomitant measures have been taken in the individual business areas. The Bank is continuing to focus consistently on the market – together with the Bavarian savings banks – and to pursue the implementation of strategic realignment in a target-oriented manner.

Participations portfolio

In 2004, BayernLB continued with the streamlining of its participations portfolio.

Further realignment in Austria and Italy

At the beginning of July 2004, BayernLB sold its 46.4 percent participation in the Vienna-based Bank für Arbeit und Wirtschaft AG (BAWAG) to the Austrian trade union federation (ÖGB). In November 2004, the Bank sold its 100 percent participation in the Austrian company Ruefa Reisen AG to Österreichische Verkehrsbüro AG. In July, it concluded the sale of its 10 percent participation in Südtiroler Sparkasse to Stiftung Süd- tiroler Sparkassen, Bolzano.

TxB Transaktionsbank GmbH

LB Transaktionsbank GmbH Frankfurt (Main) – München, a subsidiary founded jointly } Merger between LB with Helaba in 2002, has successfully established itself on the market. During 2004, Transaktionsbank and PLUS Bank it managed to further consolidate its market position by merging with the Hamburg- completed based PLUS Bank AG, a wholly-owned subsidiary of HSH Nordbank. successfully

Since 1 October 2004, the newly formed company has traded under the name TxB Transaktionsbank GmbH (TxB). TxB, of which BayernLB holds 37.5 percent, boasted around 210 mandates from the savings bank and private bank sector at year-end 2004. It is the third-largest transaction bank in Germany for securities services. TxB’s shareholders are constantly exploring new practical strategic options in order to achieve greater economies of scale in securities settlement. 92 Report on the Bank and the Group

Our staff

Personnel reduction measures resolved in 2003 as part of the implementation of BayernLB’s new business model, and originally planned for wrap-up by 2006, were completed ahead of schedule in 2004.

BayernLB’s workforce at home and abroad was reduced by 496 positions year on year, standing at 5,047 employees as at 31 December 2004. At Group level, the headcount was down by only 121 staff to 8,940. This is largely due to the incorporation of Konzumbank (+ 260 employees) into the Hungarian MKB.

In order to stabilise personnel expenses, the personnel management systems were revised. Thus, agreements governing the remuneration system for employees working under the Bank’s own pay scale were revised, and the new versions brought into effect at year-end. A new performance-oriented and earnings-related bonus system was designed for standard pay scale employees.

The number of new junior staff remained stable in comparison to the previous year: 80 new apprentices and trainees were taken on. The majority were welcomed to BayernLB on a permanent basis following successful completion of their training.

Environmental protection

} BayernLB takes As a financial institution, BayernLB is affected by climate change: both directly, through active responsi- its use of resources, and indirectly, through its customers. For this reason, BayernLB’s bility for environ- environmental management system, certified by EMAS II (Eco-Management and Audit mental protection Scheme), continued to be further developed and revalidated during the year under review. With regard to indirect impact on the environment, BayernLB has explicitly anchored ethical responsibility into its Group-wide credit risk strategy.

The EU Emissions Trading Scheme has been in force since 1 January 2005. In view of the new scheme, BayernLB stepped up its consulting services in this domain in the year under review. Together with its subsidiary Energy & Commodity Services GmbH, the Bank also launched its product introduction process for trading with emission allowances. The European directive governing emissions trading entails a twofold risk for companies affected. Firstly, there is a quantitative risk in connection with gaining sufficient emissions trading allowances; secondly, these allowances entail a price risk. BayernLB will assess these risks within the framework of credit standing assessment. Report on the Bank and the Group 93

Management report

Assets, liabilities and earnings position

The annual accounts for 2004 were considerably influenced by BayernLB’s business } Annual accounts model. While the retail-oriented subsidiaries tended to be acquisition-oriented in their marked by BayernLB’s market activities, the Bank itself continued to phase out large, higher-risk segments of business model its customer credit business. At the same time, the Bank took comprehensive measures aimed at safeguarding and stockpiling liquidity for the time following the withdrawal of the state guarantee mechanisms on 18 July 2005.

The balance sheet total for BayernLB (including LBS and Labo) increased by 4.7 percent } Balance sheet total to EUR 285.6 billion. Once again, a weak US dollar tempered this amount in the equivalent of EUR 3.1 billion (1.1 percent). In Germany, the Bank’s business volume grew by 12.3 percent (to reach EUR 245.3 billion). International business, in contrast, reported continuing decline (down 25.7 percent to EUR 40.3 billion).

The increase in the consolidated balance sheet total was more marked: up 6.3 percent to EUR 333.1 billion. The largest subsidiaries were again DKB, posting a balance sheet total of EUR 28.3 billion, followed by SaarLB (EUR 17.5 billion), Banque LBLux (EUR 12.6 billion) and MKB (equivalent to EUR 5.9 billion). LB(Swiss) reported a customer volume of CHF 3.4 billion at year-end.

BayernLB Group

Change Change EUR billion 31.12.2004 31.12.2003 in % 31.12.2004 31.12.2003 in %

Total assets 285.6 272.8 4.7 333.1 313.4 6.3

Business volume 300.6 289.9 3.7 349.8 331.9 5.4

The business volume, largely consisting of the balance sheet total plus liabilities from guarantees and indemnity agreements, was EUR 349.8 billion at Group level (up EUR 17.9 billion) and EUR 300.6 billion for BayernLB (up EUR 10.7 billion). 94 Report on the Bank and the Group

Credit operations

BayernLB Group

Change Change EUR billion 31.12.2004 31.12.2003 in % 31.12.2004 31.12.2003 in %

Due from banks 128.5 110.8 15.9 124.7 105.7 18.0 – of which savings banks 17.8 19.3 – 7.7 18.5 20.0 – 7.6

Due from customers 87.4 91.9 – 4.8 127.8 128.8 – 0.8

Securities 52.8 51.4 2.8 64.7 60.9 6.2

Credit volume* 205.8 192.2 7.1 242.0 224.0 8.0

* Due from customers and banks (without amounts due upon demand) excluding accrued interest plus discount credits

} Strong increase Amounts due from banks increased sharply (by 18 percent to EUR 124.7 billion in the in amounts due Group; by 15.9 percent to EUR 128.5 billion at BayernLB) due to the temporary invest- from banks; ment of borrowed funds. Amounts due from savings banks, however, were down customer receivables EUR 1.5 billion at both Group and Bank level, totalling EUR 18.5 billion in the Group unchanged and EUR 17.8 billion at BayernLB.

Customer receivables remained virtually unchanged at Group level (down EUR 1.0 billion to EUR 127.8 billion). Although BayernLB’s customer receivables declined once again (down EUR 4.5 billion to EUR 87.4 billion), this was compensated by an increase in the latter amongst the subsidiaries.

Due to the surge in amounts due from banks, the credit volume increased by EUR 18.0 billion to EUR 242.0 billion in the Group and by EUR 13.6 billion to EUR 205.8 billion at BayernLB.

The overall securities portfolio was slightly up on the previous year. The Group’s securities portfolio increased by 6.2 percent (to EUR 64.7 billion), while BayernLB’s security holdings were up by 2.8 percent (to EUR 52.8 billion). As in previous years, the entire securities portfolio is valued in accordance with the strict principle of the lower of cost or market.

The nominal volume of derivative transactions increased by EUR 82.9 billion to EUR 1,017.1 billion during the year under review. This growth was wholly due to the EUR 110.7 billion increase in interest rate-related transactions, which reached a total volume of EUR 804.4 billion. Currency-related transactions stood at EUR 168.2 billion at year-end, down EUR 37.7 billion against the previous year. The credit risk equivalent of the derivative transactions dropped 15.2 percent to EUR 3.8 billion. Report on the Bank and the Group 95

Funding

BayernLB Group

Change Change EUR billion 31.12.2004 31.12.2003 in % 31.12.2004 31.12.2003 in %

Due to banks 105.7 100.1 5.6 127.0 119.9 5.9 – of which savings banks 8.3 7.5 10.6 8.8 7.8 11.7

Due to customers 54.1 52.2 3.7 70.4 65.3 7.8

Securitised liabilities 95.8 90.4 6.0 103.8 95.6 8.6

The liabilities side, particularly longer-term items, was affected by liquidity-safeguard- } Liquidity-safe- ing measures undertaken by BayernLB. guarding measures affect funding Amounts due to banks increased by 5.9 percent to EUR 127.0 billion in the Group and by 5.6 percent year on year to EUR 105.7 billion at BayernLB. There was a particularly marked climb in amounts due to savings banks, which were up 11.7 percent to EUR 8.8 billion at Group level and up 10.6 percent to EUR 8.3 billion at BayernLB.

The Bank posted pleasing increases in amounts due to customers and securitised liabilities. Amounts due to customers rose by 7.8 percent to EUR 70.4 billion in the Group, and by 3.7 percent to EUR 54.1 billion at BayernLB. Securitised liabilities, meanwhile, were up 8.6 percent to EUR 103.8 billion at Group level, while BayernLB’s position increased by 6.0 percent (to EUR 95.8 billion). BayernLB thus continues to be among the leading tap issuers on both the national and international capital markets. New issues totalling over EUR 16 billion were placed under the international issue programme. In January 2004, BayernLB started out in the jumbo benchmark bonds segment, issuing a ten-year EUR 1.5 billion bond. This was followed by a seven-year issue with a total volume of EUR 1 billion in May. BayernLB continued to offer attractive investment products in the form of structured bonds.

Due to the continuing decline in risk positions in accordance with Principle I (down } Equity ratios 6.9 percent to EUR 127.7 billion), key banking regulatory figures continued on their improve further upward trend within the BayernLB Group. The core capital ratio was enhanced by 0.5 percentage points to reach 8.3 percent, while the own funds ratio was up 1.2 percentage points to 12.5 percent. 96 Report on the Bank and the Group

Key banking regulatory figures in accordance with the German Banking Act (KWG)*

BayernLB Group

EUR billion 31.12.2004 31.12.2003

Risk positions as per Principle I 127.7 137.2

Own funds 16.0 15.5 – of which core capital 9.4 9.6

Own funds ratio (at Group level) 12.5 % 11.3 %

Core capital ratio 8.3 % 7.8 %

* Based on the approved accounts

Earnings position

} Return to satis- Following three difficult years – measured in terms of operating profit – marked by the factory operating realignment of the credit and participations portfolios, the BayernLB Group once again result after difficult succeeded in achieving a satisfactory performance in 2004. This was due not least to years the Bank’s fundamental transformation of its business model.

Factors contributing to this encouraging performance included dramatically decreased risk expenditure in credit business and, given the reduction of risk assets, consistently high revenues and low administrative expenses. As part of the Group’s strategic reorientation, the participations portfolio was realigned and essential value adjustments carried out. Net income for the year was affected by an extraordinary expense of EUR 320 million. This amount represented a payment to the Free State of Bavaria upon conclusion of the EU state aid proceedings regarding housing construction funds.

} Improved return In 2004, return on equity was further enhanced both in the Group and at BayernLB. on equity The Group’s return on equity was 9.5 percent (up from 4.9 percent in the previous year), while BayernLB’s was 8.0 percent (compared to 4.5 percent). Report on the Bank and the Group 97

BayernLB Group

1.1. – 1.1. – Change 1.1. – 1.1. – Change EUR million 31.12.2004 31.12.2003 in % 31.12.2004 31.12.2003 in %

Net interest income 1,398 1,608 – 13.1 2,030 2,169 – 6.4

Net commission income 240 253 – 5.0 340 343 – 0.7

Net result from financial transactions 92 105 – 12.9 126 105 19.7

Personnel expenditure – 475 – 472 0.6 – 689 – 656 4.9

Operating expenditure – 355 – 389 – 8.9 – 519 – 529 – 1.9

Balance of other operating income and expenditure 142 123 15.4 223 120 84.3

Operating profit before risk provisions 1,042 1,228 – 15.1 1,511 1,552 – 2.6

Risk provisions 76 – 697 – – 157 – 953 – 83.5

Revaluation result – 303 – 42 > 100 – 404 – 52 > 100

Operating profit 815 489 66.7 950 547 73.7

Extraordinary expenses – 357 – 127 > 100 – 358 – 127 > 100

Corporate income tax – 175 – 80 > 100 – 252 – 104 > 100

Partial profit transfer – 220 – 219 0.6 – 242 – 237 1.9

Net income for the year 63 63 0 98 79 23.3

Allocations to revenue reserves / profit share of minority shareholders 0 0 0 35 16 > 100

Profit available for distribution 63 63 0 63 63 0 98 Report on the Bank and the Group

} Net interest income Net interest income was affected by both general economic conditions and company- specific factors. Income from the investment of own funds shrank as a result of the sustained, historically low interest rate level. Currency-based interest income also suffered under the still weak US dollar. Net interest income was also negatively affected by the continuing reduction of risk assets, as well as by the fact that additional loans were put on a non-accrual basis. The average margin dropped, due in part to the expansion of low-margin interbank business with a view to stockpiling liquidity for the following the abolition of the state guarantee mechanisms on 18 July 2005. On the other hand, the Bank reported an enhanced margin in new customer credit business in 2004. Cer- tain expenditure was incurred for closing liquidity gaps and stockpiling liquidity. These future-oriented measures are designed to enhance performance in the coming years. Net interest income at Group level totalled EUR 2.03 billion, down 6.4 percent on the previous year’s figure of EUR 2.169 billion. At BayernLB, this position fell by 13.1 percent from EUR 1.608 billion to EUR 1.398 billion.

} Net commission At EUR 340 million, the Group’s net commission income was virtually unchanged income (against the previous year’s EUR 343 million). BayernLB, on the other hand, reported a 5 percent reduction to EUR 240 million. This was due to the further downsizing of customer credit business as well as lower commissions from securities transactions.

} Financial result In 2004, the financial markets were characterised by volatile interest markets that ral- lied strongly in the second half, buoyant and volatile equity markets and dynamic foreign exchange markets. Against this backdrop, BayernLB succeeded in generating EUR 92 million in net income from financial transactions, compared to EUR 105 million in the previous year. The Group’s financial result rose by 19.7 percent (up EUR 21 million) to EUR 126 million.

} Administrative The varying performances of BayernLB and the Group are also reflected by administra- expenses tive expenses. Group figures are affected, amongst other factors, by the merger of the Hungarian Konzumbank into MKB, concluded on 1 July 2004. The slight increase in administrative expenditure at Group level, by 1.9 percent to EUR 1.208 billion, con- trasts with BayernLB’s further reduction of this position, namely by 3.7 percent to EUR 830 million.

Group personnel expenses increased by 4.9 percent to EUR 689 million. In addition to the acquisition-oriented activities of the subsidiaries, this can also be attributed to the aforementioned merger of the newly acquired Konzumbank with MKB, which added 260 employees to the BayernLB Group headcount. At year-end 2004, the Group subsidiaries together had 375 employees more than at the end of the previous year. Per- sonnel expenses at BayernLB were maintained at the previous year’s modest level (EUR 475 million compared to EUR 472 million in the previous year). Remuneration levels for both standard pay scale employees and those under the Bank’s own pay scale were increased commensurately with the significantly improved earnings position. As per reference day, the headcount was down by 496 employees. Report on the Bank and the Group 99

Group operating expenses were down slightly (by 1.9 percent), falling by EUR 10 million to EUR 519 million. Savings, achieved by measures such as the downsizing of BayernLB’s network of foreign and domestic entities, helped to offset the upward trend in operating expenses amongst the Group’s subsidiaries. In BayernLB, operating expenses were down 8.9 percent to EUR 355 million. Compared to 2002, this represents a 25 percent reduction.

In 2004, the target cost-income ratio (CIR) of 45 percent was once again achieved. The } Cost-income ratio Group’s ratio was 44.4 percent (up 1.1 percentage points), while BayernLB achieved a ratio of 44.3 percent (up 3.1 percentage points). As per the calculation formula currently used, the balance of other operating expenses and income was incorporated into calculation of the CIR. The previous year’s figures were adjusted accordingly.

The balance of other operating expenses and income was up 84.3 percent to EUR 223 million in the Group, and 15.4 percent to EUR 142 million at BayernLB. This was largely due to tax refunds in BayernLB’s favour, as well as one-off income posted by DKB. This income was attributable to the revaluation of risks due to the early termination of payment obligations pursuant to the D-Mark-Bilanzgesetz (legislation created in connection with German reunification).

The low risk provisioning requirements in 2004 are attributable to the realignment of } Risk provisioning the credit portfolio, essentially carried out in the preceding years, the new risk policy and revaluation result and the thence lower risk costs arising from risk clusters. Risk provisioning expenditure amounted to EUR 157 million in the Group, compared to EUR 953 million in the previous year. BayernLB, meanwhile, posted an income of EUR 76 million, compared to the previous year’s expenditure of EUR 697 million. Claims in respect of EUR 846 million at Group level and EUR 720 million at BayernLB were charged off from provisions for counterparty and country risks. As per 31 December 2004, provisions thus amounted to EUR 4.382 billion at Group level, compared to EUR 5.038 billion in the previous year, and EUR 3.384 billion at BayernLB, compared to EUR 4.249 billion in the previous year.

For the first time in three years, both BayernLB and the Group were in a position to bolster reserves.

Following comprehensive realignment of credit risks over recent years, in 2004, the participations portfolio was subjected to stringent assessment of its profitability. Value adjustments and assumptions of losses led to a negative revaluation result of EUR –404 million at Group level (compared to EUR –52 million in the previous year), and EUR –303 million at BayernLB (EUR –42 million in the previous year).

After reinforcement of hidden reserves, the operating profit (after risk provisioning / } Operating profit revaluation) was one of the highest ever posted in BayernLB’s history. Compared with considerably improved the previous year, there was an increase of around two thirds both at Group level and in BayernLB. At EUR 950 million, the Group figure is 73.7 percent up on the previous year, while BayernLB, with EUR 815 million, can report a 66.7 percent increase. 100 Report on the Bank and the Group

} Payment settles The operating result does not include extraordinary expenses amounting to EUR 358 EU state aid million in the Group, and EUR 357 million at BayernLB. Of these figures, EUR 320 mil- proceedings lion relates to the payment to the Free State of Bavaria as part of the conclusion of the EU state aid proceedings.

Due to the improvement of the result, tax expenses more than doubled both in the Group and at BayernLB. The former incurred tax expenses of EUR 252 million compared with EUR 104 million in the previous year; the latter EUR 175 million compared with EUR 80 million in the previous year.

} Net income After partial profit transfer, which includes interest expenses for capital contributions for the year of silent partners, and, standing at EUR 242 million in the Group and EUR 220 million at BayernLB, is comparable to the previous year’s levels of EUR 237 million and EUR 219 million respectively, net income for the year is EUR 98 million for the Group (compared with EUR 79 million in the previous year) and an unchanged EUR 63 million for BayernLB. This enables a distribution of 4 percent on the nominal capital for 2004.

Segment results

In 2004, the individual segments contributed to the EUR 950 million consolidated operating profit as follows:

EUR million 31.12.2004 31.12.2003*

Corporates 485 133

Real Estate 62 – 250

Global Markets 76 279

Financial Institutions & Sovereigns 99 116

Savings Banks, Bavarian Municipals / Corporates 86 – 11

Labo / LBS 109 173

Group’s strategic subsidiaries 421 127

Other – 388 – 20

* Previous year figures adjusted based on the controlling system used in the year under review.

} Corporates The Corporates segment reported a year-on-year increase of EUR 352 million in its segment result 2004 operating profit. This increase is largely attributable to the net write-back of risk provisions. The segment reported a very pleasing return on equity of 33 percent, compared to the previous year’s 10.9 percent, thus exceeding our targets. The cost-income ratio increased year on year from 23.4 percent to 27.2 percent. The marked reduction in average staff capacities from 377 to 228 positions is largely due to the outsourcing of employees to the Risk Office Support Operations in conformity with the Minimum Requirements for the Credit Business of Credit Institutions, as well as the closure of both foreign and domestic entities. Report on the Bank and the Group 101

In the 2004 financial year, the operating profit of the Real Estate segment totalled } Real Estate EUR 62 million, compared to an operating loss in the previous year of EUR 250 million segment result because of high risk provisioning requirements due to conservative assessments. In addition to the reduction of risk provisions, this encouraging development was the result of increased income thanks to a slight fall in administrative expenses. Return on the average equity in 2004 stands at 13.8 percent and thus within the target range, compared to the previous year’s –55.1 percent. The cost-income ratio improved year on year from 29.9 percent to 26.7 percent. The considerable fall in average staff capacity from 234 positions in 2003 to 140 positions in 2004 is largely attributable to the outsourcing of employees to the Risk Office Support Operations, in accordance with the Minimum Requirements for the Credit Business of Credit Institutions.

With a 2004 operating profit of EUR 76 million, the Global Markets segment generated } Global Markets a more modest contribution to the Group operating result than in the previous year segment result (EUR 279 million). This downward trend was primarily due to the segment’s lower net interest income. The result was also affected by expenditure on measures aimed at preserving liquidity. The segment’s cost-income ratio stands at 70.3 percent, representing a significant increase on the previous year’s ratio of 44.7 percent. The return on equity posted in 2004 was 12.5 percent, compared to 28 percent in 2003. The year-on- year decline in staff capacity, falling from 546 to 474 positions, was due to the closure of foreign entities as well as to personnel fluctuations at home.

The Financial Institutions & Sovereigns segment reported a 2004 operating profit of } Financial EUR 99 million, compared with the previous year’s EUR 116 million. This decline is Institutions & Sovereigns attributable to increased administrative expenses and a slight reduction in the net segment result interest income. Due to these factors, the cost-income ratio rose from 18.8 percent to 31 percent. At 29 percent, the rate of return on the equity capital disclosed was below that of the previous year (42.8 percent). Nonetheless, it still clearly exceeded the Group target.

The segment Savings Banks, Bavarian Municipals / Corporates posted a much improved } Savings Banks, operating profit of EUR 86 million, compared with the previous year’s result of EUR – 11 Bavarian Munici- pals / Corporates million. This was predominantly the result of the write-back of loan loss provisions segment result built up in previous years in credit business. Comparison with the previous year is only possible to a limited degree due to portfolio realignment. The segment’s return on equity of 24.1 percent, compared with the previous year’s – 4.1 percent, is a clear illus- tration of its successful business performance. Likewise, the cost-income ratio improved significantly year on year from 77.3 percent to 65.3 percent.

The exclusively retail-oriented Labo / LBS segment generated a contribution of EUR 109 } Labo / LBS million to the consolidated operating profit in 2004, compared to EUR 173 million in segment result 2003. While Labo posted a decline in its result due to increased expenditure on funding, LBS, on the other hand, reported yet another increase. The return on equity of the segment as a whole was thus maintained at the level of the previous year, standing at 8.6 percent compared to 8.7 percent in 2003. At 49 percent, the cost-income ratio posted represents an increase against 2003’s ratio of 44.5 percent. 102 Report on the Bank and the Group

} The Group’s The segment consisting of the Group’s strategic subsidiaries encompasses the activities strategic subsidi- of the BayernLB Group in the national and international banking sectors. These opera- aries are strongly tions are divided up among the following majority holdings of the Bank: retail-oriented • Deutsche Kreditbank AG, Berlin • Landesbank Saar, Saarbrücken • Banque LBLux S.A., Luxembourg • Magyar Külkereskedelmi Bank Rt. (MKB), Budapest • LB(Swiss) Privatbank AG, Zurich • Bayern-Invest Kapitalanlagegesellschaft mbH, Munich • BLB Asia Pacific Ltd., Singapore

In the 2004 financial year, the segment contributed roughly 44 percent of the Group’s operating profit, compared with 23 percent in the previous year. The resulting return on equity, standing at 14.1 percent, represents a significant increase compared to the 2003 figure of 4.3 percent. The enhanced ROE, coupled with a cost-income ratio for 2004 of 38.6 percent (47.1 percent in 2003), are a clear indication that the Group’s strategic subsidiaries enjoyed a successful financial year, especially in view of the strongly retail-oriented nature of the segment. The year-on-year increase in average staff capacity from 3,411 to 3,610 employees is primarily due to the merger of MKB and the Hun- garian Konzumbank.

The clearly negative operating result of EUR – 388 million posted by the Other / Consol- idation segment, compared to EUR – 20 million in the previous year, is largely due to value adjustments and assumptions of losses in participations that are not assigned to any operational business area. Report on the Bank and the Group 103

Outlook

The forecasts relating to the future performance of the BayernLB Group are estimates that BayernLB arrived at using all the information available at the time when the report on the Bank and the Group was drawn up. If the assumptions underlying our forecasts prove incorrect, the actual results may differ from those currently anticipated.

Global economic forecast

The economic outlook for 2005 inspires only a limited degree of confidence. A self-sustaining upward trend is not yet in sight for Germany. During 2005, oil prices must gra- dually come back down if expansionary global trade is to continue: acceptable economic growth in Germany depends not least on the latter. Only if this happens will the depressing factors afflicting the global economy be held in check. This applies equally to the development of the euro exchange rate. Another strong revaluation of the euro would take a serious toll, especially on the German economy, which is heavily dependent on foreign trade. Furthermore, volatile currency markets necessarily affect the development of the capital markets. If oil prices remain high, there would be negative repercussions for both bond and equity markets.

The following factors are also likely to affect BayernLB’s performance in the 2005 financial year:

Legal outlook

US veterans of the first Gulf War (in 1991) filed a lawsuit in September 2003 in the Uni- } Gulf War veterans’ ted States against a dozen industrial corporations (mostly from the chemicals sector) class action as well as about 30 European and Asian banks, among them BayernLB. The plaintiffs claim they have suffered bodily damage from chemicals illegally supplied to the former Iraqi regime by these industrial corporations and that the delivery was financed – also illegally – by the banks in question. Together with various other banks, BayernLB has commissioned a renowned American law firm to protect its interests. In concurrence with this firm, BayernLB continues to consider this charge unfounded. The Bank, together with all of the other banks in question has thus filed a motion to dismiss, with a view to obtaining a summary judgement in favour of the banks. This would avoid a long-drawn-out case. At the moment we are not in a position to make a statement regarding the decision on this motion. 104 Report on the Bank and the Group

Liquidity

} Access to adequate The liquidity of both BayernLB and the Group were secured in 2004 at all times. liquidity secured During the period under review, a new IT system was introduced to manage liquidity at all times in BayernLB. A follow-up project was rolled out with the objective of achieving more timely liquidity management, as well as refining methods to this end.

In order to guard against future liquidity risks and increased funding costs after the withdrawal of Gewährträgerhaftung (guarantee obligation) and Anstaltslast (maintenance obligation), a portfolio strategy was implemented for long-term funding. Reali- sation of this strategy will continue in 2005.

In this way, BayernLB is ensuring that once the guarantee mechanisms no longer apply from July 2005, it will still have access to sufficient liquidity for planned business activities at all times.

Planned capital increase

} Owners firmly Further reinforcement of the capital base represents one of BayernLB’s key objectives. behind BayernLB The Free State of Bavaria and the Association of Bavarian Savings Banks will make a 50 percent contribution each to a cash capital increase carried out through BayernLB Holding AG. The transaction, totalling EUR 640 million, will be completed in two tranches (2005 and 2006). This move will not affect BayernLB’s ownership structure. The planned capital increase is a clear demonstration of the owners’ loyalty to BayernLB. This, together with the planned conversion of the dated silent capital contributions into undated ones, is another major factor in ensuring BayernLB’s long-term earnings after the abolition of the guarantee mechanisms in July 2005.

Regional guarantee fund

In addition to the cross-guarantee system of the Sparkassen-Finanzgruppe, which spans the whole of Germany, a regional guarantee fund is to be created in order to further underpin the cooperation of the Sparkassen-Finanzgruppe within Bavaria. The Bavarian guarantee fund, with a total volume of EUR 1 billion, will be endowed by the Bavarian savings banks and BayernLB, according to a ratio based on the respective risk- weighted assets. Report on the Bank and the Group 105

Strategy / rating

Upon withdrawal of the state guarantee instruments for new liabilities on 18 July 2005, } BayernLB well BayernLB will receive valuations from the rating agencies for unguaranteed and uncov- prepared for rating agencies’ ered liabilities for the first time. Both the results of the 2004 financial year and assess- valuations of ment of BayernLB’s business outlook are crucial to the rating agencies’ valuation. unguaranteed and uncovered Various indications of the future unguaranteed ratings were published in 2004 by liabilities agencies such as Fitch Ratings (A +), Moody’s (A1 floor rating of the German Savings Bank Organisation) and Standard & Poor’s (A –). In view of these indications, BayernLB is confident that it can achieve its target rating of at least A flat or A + from all major rating agencies, all the more so given its performance in 2004.

As part of the new business model, the consistent implementation of measures aimed at enhancing sustainable earnings, while taking into account the Bank’s risk and participations strategy, remains the single most important element of BayernLB’s target framework. These measures include: • targeted exploitation of market opportunities, particularly those aimed at generating higher commission income, by strengthening customer relationships while con- tinually adapting the product range • expansion of retail capability, together with the Bavarian savings banks and through the Group’s subsidiaries at home and abroad • stepping up collaboration with the savings banks based on the cooperation agreements signed with the latter; intensifying cooperative market development in the core market of Bavaria is a key priority here • enhancing global support for the savings banks in serving and assisting their customers in the Eastern European and Asian markets, particularly through the German Centre in Shanghai • seizing the opportunities offered by EU enlargement in CEE • targeted exploitation of market opportunities in selected economic locations around the world, while taking into account risk, return and costs

In addition, BayernLB will step up core internal projects aimed at optimising manage- } BayernLB’s ment and timely implementation of the Basel II and IAS / IFRS requirements. reorientation visually reflected The progress BayernLB has made in its strategic reorientation is flanked by its new in new marketing marketing image, through which the Bank informs both customers and the general image public about its competencies and range of services.

BayernLB anticipates a stabilisation of the operating result in 2005. Factors contribut- } Stabilisation of ing to this will include an expected significant improvement of the revaluation result, operating result expected as well as normalised risk costs in the Bank’s credit business. Extraordinary charges such as those experienced in the 2004 financial year are not anticipated, leading BayernLB to expect a stabilisation of the overall performance. 106 Report on the Bank and the Group

Risk report

Risk monitoring and control

} Bank-wide BayernLB employs uniform procedures to control and monitor its risks throughout all controlling concept of its business areas. The global objective is to optimise the Bank’s risk / return profile for all of the various types of risk. Responsibility for risk identification, analysis and assessment lies with the Risk Office Support Operations, which is also charged with attending to, processing, monitoring and controlling risks on an ongoing basis.

} Organisational The organisational framework underlying the Bank’s risk controlling system takes into basis of risk account the Minimum Requirements for the Credit Business of Credit Institutions (MaK) management and and the Minimum Requirements for the Trading Activities of Banks (MaH). During the controlling period under review, this framework was developed further. Thus, in 2004, responsibility for credit and collateral administration was delegated to the Risk Office Support Operations.

Risk management principles are defined by the enhanced credit policy. This is supplemented by the credit risk strategy and specific policies governing items such as risk provisioning.

The credit risk strategy defines standards for credit business as well as regulations governing the Bank’s handling of credit and counterparty risks, on the basis of general legal and supervisory terms and conditions. In particular, it sets key parameters for the credit portfolio, and defines the Bank’s principles for risk capital controlling (focusing on risk / return aspects). The Board of Management reviews the credit risk strategy on a yearly basis.

Economic capital, which is measured using economic benchmarks, is becoming increasingly important for controlling and limitation purposes, as is the Value at Risk (VaR) model. VaR is a method used for quantifying the risk potential that is offset by the capital allocated for risk hedging in the risk capacity calculation.

The risk potential arising from country, market and operational risks is calculated, limited and controlled using the VaR method. Up to now, counterparty risks were controlled by limiting the risk assets provided and using the expected losses as a basis. At the same time, important experience was gathered within the context of pilot VaR calculation projects. In the future, the Bank will also employ the CreditRisk+ method to control counterparty risks. For this method, in line with its target rating, BayernLB assumes a confidence level of 99.96 percent (with a one-year holding period).

From the beginning of 2005, the economically assessed risk capital requirement has been offset by the cover funds available as part of an ongoing monitoring process. This is initially being carried out as a test phase. A buffer determined by the Board of Man- agement helps to cover unusual market fluctuations (stress tests) and further risks that fall outside the scope of the concept. Report on the Bank and the Group 107

BayernLB’s subsidiaries (Hungarian Foreign Trade Bank, Budapest; Banque LBLux S.A., Luxembourg; Landesbank Saar, Saarbrücken; Deutsche Kreditbank AG, Berlin) implement risk controlling processes, strategies and procedures as well as risk management in accordance with their own individual purposes.

The Group Audit Division supports the Board of Management in its capacity as a proc- } Group Audit ess-independent unit within the internal monitoring system. Its activities are defined Division by the Minimum Requirements for the Structure of Internal Audits at Banking Institu- tions (MaIR) issued by the BaFin.

Monitoring and controlling the various risk types

Counterparty risk

BayernLB defines counterparty risk as the potential loss resulting from a counterparty’s } Definition default or from a decreased value owing to an unforeseeable deterioration in a counterparty’s credit standing. Counterparty risks may be broken down into risks arising from traditional credit business, issuer risks resulting from securities transactions and counterparty risks from trading transactions.

BayernLB bases every credit extension on an individual analysis and assessment of the } Credit rating borrower’s credit standing, using certain rating methods. In 2004, introduction of a new 24-tier rating method was continued according to plan. This procedure is designed to comply with the requirements of Basel II. The rated gross exposure of the Group may be broken down as follows:

Gross exposure of the Group by rating category

[%]

80 63 68 60

40 27 22 20 6 7 2 1 2 2 0 0 to 7 8 to 11 12 to 17 18 to 21 Default categories

2003 2004 108 Report on the Bank and the Group

} Bank-wide balance With a view to improving credit rating assessment, a uniform balance sheet analysis sheet analysis and system was introduced throughout the Bank, comprising all of the major accounting early detection standards (HGB, IAS, US-GAAP etc.). This system is being enhanced by the addition of systems budgeted balance sheets and forecasts of future balance sheet changes. Furthermore, the early detection procedure was revised and harmonised. The “intensive care” and “handling of problem loans” sub-processes were also redesigned and adjusted to meet these requirements.

} Customer and BayernLB limits potential losses depending on the risk profile of each product group portfolio limits using approaches guided by book value or market value. As well as setting limits at business partner level, the Bank carries out risk controlling at portfolio level with the help of a target portfolio. Portfolio structure limits are thus defined, e.g. for sector, country or rating category. Concentration risks in particular are taken into considera- } Limiting risk tion. A cluster limit is determined for each borrower or liability relationship. The target clusters portfolio is projected over several years, subjected to continual revision and, if necessary, changed in line with evolving business environments.

} Collateral Losses resulting from a counterparty’s default are fundamentally limited by the assumption and risk-oriented structuring of collateral customary in banking business. In derivatives trading, master agreements are usually concluded for the purpose of close-out netting. Some collateral agreements restrict the default risk associated with individual trading partners to an agreed maximum and authorise the call for (additional) collateral should this maximum be exceeded.

} Credit risk model In 2004, the framework for calculating expected loss was significantly enhanced by the introduction of new scorecard and simulation rating methods. Furthermore, “loss given default” values (statistical loss amount in a given case of default), calculated as part of the project undertaken jointly by several German landesbanks, significantly enhance the calculation of expected losses arising from specific transactions. In order to cover unexpected loss, risks are backed by an appropriate amount of capital.

} RORAC In 2004, with a view to safeguarding the Bank’s return / performance, the RORAC (return on risk adjusted capital) ratio was introduced. In the current year, it was adopted for overall portfolio management. Thus, the income from a transaction, customer relationship or business area is now determined relative to the risk capital utilised.

In the year under review, credit exposure in the Group was decreased by around EUR 0.9 billion (by EUR 7.2 billion at Bank level). In addition to the lacklustre economic trend and concomitantly lower demand for credit, this was attributable to initiatives aimed at decreasing clusters and concentrations in the credit portfolio. Report on the Bank and the Group 109

Gross exposure by Group entity

[%] 85 83 80

20 8 8 4 4 2 3 1 2 0 BayernLB Deutsche SaarLB Banque LBLux MKB Kreditbank

2003 2004

Efficient and targeted portfolio management is based on reporting that is guided by } Reporting the Bank’s strategy and observes uniform standards while taking into account risk and return aspects. In BayernLB, reports are prepared on credit and country risk, sector portfolios, and problem exposures.

In the interest of economic controlling and strategic alignment of sector exposure, } Sector portfolio BayernLB uses a grouping code based on risk and added value, which breaks down exposure into 30 sector groups. Based on this system, exposure for the main sector groups is classified as follows:

Gross exposure of the Group by sector

[%]

60 48 53

20 14 13 16 13 10 10 6 6 4 3 2 2 0 Banks Non-profit Real estate Utilities Automotive, Other Private organisations inc. suppliers customers and sovereigns

2003 2004 110 Report on the Bank and the Group

} Derivatives BayernLB uses derivative instruments in order to reduce price and / or interest rate risks business in 2004 associated with the conclusion of customer transactions, as well as those arising from asset / liability management and the issuance of structured bonds. After these instruments have been used, any residual risks are subject to the risk limit and risk capital controlling. Derivatives are principally used to diversify credit risks or as hedging instruments. In addition to the use of derivatives, risk hedging is also carried out by the active syndication of loans, or with the help of structured products such as asset backed securities (ABS).

At Group level, the credit equivalent amount from derivative transactions, taking account of netting agreements, totalled EUR 3.8 billion at year-end, which corresponds to 0.38 percent of the nominal contract volumes (for detailed information on the entire scope of derivatives business, see “Notes to the Accounts” in Section V).

} Risk provisioning All counterparty risks identified in this period were covered appropriately through risk in 2004 provisions. In 2004 on balance, EUR 222 million was allocated to provisions for counterparty and country risks at Group level (write-backs totalling EUR 92 million at Bank level). Allocations were thus reduced by 83.5 percent year on year. In relation to the average credit volume, the default rate in the credit business at Group level was 0.36 percent (0.38 percent at BayernLB alone). Direct write-offs on claims came to EUR 87 million at Group level and EUR 58 million at Bank level.

Provisions for counterparty and country risks*

Group

EUR million 2004 2003 2002 2001

As at 1 January 5,038 4,625 2,784 2,178

Write-backs – 525 – 420 – 398 – 220

Utilisation – 846 – 692 – 346 – 377

Allocations 748 1,766 2,659 1,166

Other changes** – 33 – 241 – 74 37

As at 31 December 4,382 5,038 4,625 2,784

* excluding general loan loss provisions, other loan loss provisions, change in reserve pursuant to Sections 340f and 340g German Commercial Code and credit standing-related write-downs on securities

** Change in group of consolidated companies, exchange rate changes and account transfers Report on the Bank and the Group 111

Investment risk

Similarly to counterparty risk, investment risks (shareholder risks) represent potential } Definition losses arising from the provision of equity capital and related collateral to third parties.

BayernLB exerts an influence on the business and risk policies of its subsidiaries in par- } Controlling ticular through its representation on their shareholder committees and supervisory bodies. Especially for its strategic participations, BayernLB aims to gain corporate control of these companies with a participation of more than 50 percent, or, alternatively, by means of voting commitment agreements.

With regard to investment risk, the Bank has implemented clear functional segregation } Outlook between responsibility for profit contribution at Group level, or “making”, and responsibility for “monitoring” the profits. In terms of this functional segregation, major subsidiaries with strategic significance for the Group are defined as participations that are responsible for their contribution to the consolidated results. All other participations come under the responsibility of individual business areas / support operations. This functional segregation is accompanied by individual monitoring of portfolio performance in each unit. Strategic and return-oriented realignment of the overall participations portfolio, a measure introduced in previous years, continues to be pursued.

Country risk

A country risk is the risk that, due to } Definition • a possible worsening of macro-economic conditions • political or social upheaval • the nationalisation or expropriation of assets • the non-recognition by a government of cross-border liabilities • foreign exchange control measures or • currency depreciations or devaluations in the country concerned, a borrower or the country itself is unable to fulfil its obligations at all or in due time.

In 2004, the country portfolio was influenced by the situation in Central and South } Influential factors America as well as events in the Near and Middle East.

For the purpose of assessing the country risk, the economic situation of the respective country and, more importantly, the ability to effect debt service payments are analysed on an ongoing basis with the help of both quantitative and qualitative information. 112 Report on the Bank and the Group

} Controlling Country risks are controlled with the help of country limits derived from a model portfolio on the basis of the country risk capital provided. The limit structure is determined by various factors, including country ratings, resulting default probabilities and LGDs (loss given default values), as well as international trade flows. Concentrations in individual countries lead to increased drawings on risk capital. In the year under review, a Value at Risk of EUR 670 million was calculated for BayernLB in terms of country risk, based on a risk capital of EUR 881 million.

} Monitoring and Central risk controlling monitors compliance with country limits on an ongoing basis. reporting Exceeded limits are reported directly to the Board of Management.

} Risk structure Ninety-two percent of BayernLB’s foreign exposures are in countries that do not have limits (usually countries in the top two rating categories). Countries with limits account for 8 percent of the Bank’s exposures abroad. Thus, exposures in countries without limits increased relatively to those with limits against the previous year.

Exposures in countries with limits at Group level increased by 5 percent to EUR 15 billion, while falling by 7 percent to EUR 12 billion in the Bank. Of foreign exposures, 85 percent at Group level and 84 percent in the Bank are classed in the good rating categories 0 – 11, of which 42 percent (53 percent in the Bank) are rated in the very good categories 0 – 7. Only 15 percent (16 percent in the Bank) are classified in the rating categories 12 – 24.

} Situation and In Central and South American emerging markets, the economic rebound continued outlook for the in 2004. This has triggered a risk of inflation in some countries. Exposure in countries regions with limits in this region remained roughly unchanged year on year (down 5 percent at Group level, down 6 percent in the Bank).

In the Near and Middle East, the economic outlooks of the oil-producing countries have brightened. Nonetheless, political risks linger in some parts.

Exposure in Asia was down 12 percent in 2004 (down 23 percent at Bank level). This was due primarily to the closure of Asian branches.

The eight new EU members from Central and Eastern Europe continued to catch up in terms of economic development during the year. The upward trend in these countries is carried by both export activities and domestic economic activity. Central and Eastern Europe and the CIS countries gained in importance in the country portfolio, increasing by 39 percent in absolute terms at Group level, and 37 percent in the Bank alone. Report on the Bank and the Group 113

Net exposure of the Group by countries with limits

[%] 31 41 40 35 29

20 19 15

10 8 7 7 8

0 CEE / CIS Asia Latin America Near and Other Middle East

2003 2004

All discernible country risks were accounted for by risk provisioning in the balance } Country risk sheet. Due to the broad stabilisation of the global economy, BayernLB was able to provisioning reduce country risk provisions to EUR 51 million in 2004. Neither at Group nor at Bank level were there direct write-offs on claims.

Provisions for country risks:*

Group

EUR million 2004 2003 2002 2001

Net exposure* 67 167 182 292

Country risk provisions 51 97 112 198

Provision ratio 76.2 % 58.3 % 61.6 % 67.9 %

* Total of individual country-related exposures for which provisions were made

Liquidity risk

BayernLB defines liquidity risk as the risk of being unable to meet current or future } Deﬁnition payment obligations either fully or on time. Liquidity risk also encompasses the risk that, in the event of a liquidity crisis, funding is only available at higher market rates than anticipated; or that assets can only be sold below market rates.

Due to the impending withdrawal of the AAA rating as per 18 July 2005, availability of } Risk situation liquidity at acceptable market rates was a prime focus for BayernLB in 2004. In order to hedge against the possibility of higher funding costs in the future, BayernLB drew up a portfolio strategy for long-term funds on the liabilities side. 114 Report on the Bank and the Group

} Controlling Management of the liquidity position and strategic liquidity management are the responsibility of the Global Markets Business Area. The former task ranges from management of intraday cash flows to measures aimed at compliance with the supervisory Principle II ratio. Strategic liquidity management, on the other hand, ensures medium- to long-term solvency, projected over a forecast period of up to 20 years.

In terms of safeguarding the liquidity position, according to supervisory requirements, a bank’s liquidity is deemed sufficient if the weighted liquid funds available within 30 days cover the weighted payment obligations that are callable during this period. In the year under review, the ratio was always between 1.18 and 1.36. The minimum supervisory requirement of 1.0 was thus guaranteed at all times.

The Global Markets Business Area comprises management tasks relating to Principle Il, all funding activities, as well as collateral management. The Bank ensures access to the main international money and capital markets by placing certificates of deposit, medium-term notes, bearer bonds, covered bonds (pfandbriefe) and local government bonds or other funding instruments. Of particular importance here is collateral management, which both covers the necessary lines for trading partners and ensures the superlative quality of BayernLB’s registers of cover.

Each subsidiary of the BayernLB Group balances its liquidity independently. Although it is not stipulated under national law, each subsidiary reports its Principle II ratio to the parent company. To disclose their structural liquidity positions, the subsidiaries submit cash-flow redemption reports to the Bank’s Global Treasury and Funding Division.

To safeguard solvency even in times of crisis (worst case scenarios), the Bank has an appropriate portfolio of highly liquid securities that can be disposed of. This means that, even when markets are tight, BayernLB can procure sufficient liquidity by way of repo and central bank tender deals. As a rule, intraday and overnight net liabilities must be covered by access to central bank funds. The Bank has developed a special scenario simulating a liquidity crisis, which reproduces the implications of such a crisis for future cash flows.

} Reporting During the regular Board meetings, the Global Treasury and Funding Division keeps BayernLB’s Board of Management continuously informed of the current liquidity position. Report on the Bank and the Group 115

Market price risk

Market risk comprises interest rate, currency, share price and commodity risks. The } Deﬁnition source of these market risks may be securities (or similar products), money market or foreign exchange products, commodities, derivatives, currency or performance hedging, equity or quasi-equity or the Group Treasury.

Market risks at BayernLB are monitored by Market Risk Controlling, which is independ- } Controlling ent of Trading. The maximum loss permitted for the assumption of market risks is limited by a fixed amount of risk capital covering this risk type. Market risks are actively managed and monitored using a limit system.

For market risks, BayernLB employs a Value-at-Risk method, which calculates all market } Measuring market risks on the basis of historic market fluctuations (volatilities) and market correlations. price risk They are determined anew on every day of trading. Moreover, the impact of extraordinary market price changes and extreme market situations or disturbances to normal market situations are also analysed. Therefore, stress tests in the form of crisis scenarios and worst-case analyses are also carried out in addition to the traditional risk scenarios.

By means of backtesting, the soundness and quality of the individual risk methods are } Backtesting verified. This entails a comparison of the risk forecast with the actual results (profit or loss).

The forecasting quality of the risk model has been pronounced good under the Basel I traffic light approach and Principle I: on no trading day was the prognosis for the overall risk exceeded as the result of a negative daily performance.

The responsible Board Member is informed daily on the Bank’s market risk and resulting performance situation. The whole Board of Management receives a monthly report in which any peculiar developments are explained.

In the 2004 financial year, BayernLB’s market risk capital was set at EUR 709 million at Bank level. EUR 554 million of this amount was allotted to the individual portfolios. The remaining reserves amounted to EUR 155 million.

During 2004, the Bank’s market risk averaged EUR 42.2 million in the trading and investment books (VaR with a holding period of one day). Over the course of the year, it fluctuated between EUR 30.9 million and EUR 55.6 million. 116 Report on the Bank and the Group

VaR in EUR million

2. 1. 2004 2. 2. 2004 2. 3. 2004 2. 4. 2004 2. 5. 2004 2. 6. 2004 2. 7. 2004 2. 8. 2004 2. 9. 2004

(Figures for the Bank; VaR with a holding period of one day)

The following table shows the Bank’s VaR for the various different risk factors:

VaR bank-wide for different risk factors

2004 2003

VaR VaR VaR VaR VaR End of End of EUR million Average Minimum Maximum period period

Interest rate risk 36.15 23.67 50.38 29.60 40.94

Share price risk 4.45 0.10 8.47 3.83 7.76

Currency risk 5.58 2.15 15.15 12.47 4.91

Commodity risk 0.31 0.09 0.77 0.68 0.24

Volatility risk 0.35 0.19 0.97 0.89 0.27

(Figures for the Bank; VaR with a holding period of one day)

The “market liquidity shortfall” scenario (simulation of a liquidity shortfall in the market) captures the risk at a 20-day holding period. At year-end, the Bank’s VaR for this scenario stood at EUR 144.5 million. BayernLB’s risk capital of EUR 709 million was sufficient to cover potential losses at all times.

Test scenarios were created for MaH-relevant portfolios, based on situations such as a rise in interest rates of up to 110 basis points, a 15 percent appreciation / depreciation of the euro, or a 30 percent fall in share prices. These scenarios are based on the IMF’s FSAP study conducted in 2003. For all of these scenarios, the Bank’s liable capital was sufficient to cover all possible losses. Report on the Bank and the Group 117

Operational risk

BayernLB defines operational risk (OpRisk) as the risk of an unexpected loss occurring } Definition as a result of human error, a process or control deficiency, a technical failure, a disaster or any negative external factor. OpRisk also encompasses legal risks.

BayernLB has a central, independent OpRisk controlling unit which is entrusted with } Controlling the task of guiding the Group on all methods, processes and systems relating to OpRisk controlling and management. Management of operational risks is the responsibility of the individual local OpRisk management units of the business areas and support operations.

The OpRisk controlling unit compiles operational loss data on a continuous basis as } Reporting part of an institutionalised reporting system. It also conducts qualitative assessments in the business areas and support operations, calculates the operational Value at Risk (OpVaR) using a special simulation technique known as Monte Carlo simulation, based on historical internal and external loss data, and reports to the Board of Management and the business areas and support operations. The report encompasses data on the loss situations of major subsidiaries / participations.

During 2004, in the interest of early detection, risk indicators for operational risk were introduced. These are known as key risk indicators, and are allocated to the core areas of personnel (e.g. overtime factors, fluctuations), risk management (e.g. exceeded limits), IT (e.g. number of virus alerts) and transactions (e.g. cancellations / queries).

In 2004, the expected operational loss amounted to EUR 5.8 million at Bank level, com- } Development pared to EUR 7.6 million in the previous year. The OpVar peaked at EUR 262 million, of risks compared to the previous year’s value of EUR 440 million, but had fallen to EUR 182 million by year-end. This decline can be attributed to the significant downward trend in losses. Thus, in 2004, losses were down 49 percent to EUR 1.29 million. Losses of EUR 2.09 million were reported at Group level.

In the area of legal risk, the EU state aid proceedings in relation to the transfer of capi- } Legal risk tal through the Free State of Bavaria in the form of special housing construction funds has been resolved.

Major developments in 2005 will include a data consortium aimed at improving the } Outlook data basis for calculating OpVaR, and offering the opportunity of loss benchmarking together with members of the Association of German Public Sector Banks, as well as ongoing development of business continuity planning and reduction of the required OpRisk capital by targeted use of insurances. 118 Report on the Bank and the Group

Summary and outlook

Efforts undertaken during 2004 and previous years in the area of risk controlling and management also contributed to the Bank’s overall positive performance in the year under review. Thanks to these efforts, risks threatening the portfolio, or jeopardising performance at BayernLB, were identified in good time, assessed and controlled.

Other milestones were: • optimisation of structural and procedural organisation for credit transactions, particularly the processes for handling problem loans • enhancement of the risk policy and strategy (e.g. by the introduction of a loan loss provisioning policy) • improvement of the methods and tools used for risk analysis and assessment, particularly balance sheet analysis software and rating methods • enhancement of the supervisory risk capacity calculation (in accordance with Princi- ple I) by the introduction of economic controlling (using Value at Risk) • reduction of risk clusters and concentration risks

BayernLB considers risk controlling and management, both internally at the Bank and in cooperation with the savings banks associations, to be a crucial competitive factor in the long term. Both the economic demands of competition and supervisory provisions will necessitate the further strengthening and refinement of risk controlling and management procedures over the next years.

The fine-tuned assessment and adequate pricing of counterparty risks will remain the main tasks. In addition, economic capital controlling will be pursued for all measurable risks and at all controlling levels. Early detection of risks, coupled with targeted risk reduction measures, will be developed further. The regulations and instruments necessary for these objectives are being developed on an ongoing basis. 119

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 Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts

Report by the Board of Administration

In addition to a difficult banking environment and still weak economic situation, the 2004 financial year was marked by high levels of insolvency as well as intense debate on banking structures. The Board of Administration’s task of advising and supporting the Board of Management on various issues, including the consistent implementation of the Bank’s strategic realignment, was also marked by this challenging backdrop. All of the Board’s efforts were particularly aimed towards strengthening the Bank’s capital resources and increasing its profitability in view of the withdrawal of Anstalts- last (maintenance obligation) and Gewährträgerhaftung (guarantee obligation) in July 2005.

We advised and supervised the Bank’s management on an ongoing basis in accordance with our mandate as governed by law and the Bank’s statutes.

Engaging in open dialogue with the Board of Management, we discussed the planned business policy, debated the Bank’s strategy and addressed fundamental questions of corporate planning.

The Board of Management provided us with regular, comprehensive and up-to-date information on the Bank’s performance, in both written and oral format. Particularly important aspects included the Bank’s position with regard to earnings and expenditure, portfolio performance, the risk situation and risk management, significant findings of the internal auditors’ reports and important events and transactions. During the Board of Administration’s eleven meetings, formal resolutions were passed where prescribed by law or the Bank’s statutes. Procedures requiring the approval of the Board of Administration were submitted and decided upon. Representatives of the German Financial Supervisory Authority (BaFin) and of the Deutsche Bundesbank also attended these meetings on a regular basis, thereby ensuring direct contact and cooperation.

Furthermore, the Chairman and Deputy Chairman of the Board of Administration regu- larly discussed current developments and decisions of the Board of Management, working particularly closely with the Chairman of the Board. Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts 125

New strategy for BayernLB

As mentioned above, a key focus of our work was the consistent implementation of the Bank’s new strategy and concomitant consolidation or improvement of July 2004’s nominal shadow rating in the A category.

Measures initiated by the Bank were extensively conferred upon with the Board of Administration. Furthermore, the Board of Management provided information on the status of implementation of the new strategy on an ongoing basis.

Numerous aspects of the new business model were elaborated and refined. Key examples of this were the streamlining of the foreign entities network, further intensifica- tion and optimisation of the market development being carried out by the Bank in conjunction with the Bavarian savings banks, and BayernLB’s concomitant development as network bank of the association. The Eastern European strategy was also re-examined and revised.

The Board of Administration devoted considerable effort to continuing the enhancement of the earnings and cost situation. Thus, for example, the Bank was able to termi- nate personnel reduction plans before schedule.

We also worked intensively on optimising both the credit and participations portfolios. Presentations explaining the most important of the Bank’s strategic participations gave the Board of Administration a more in-depth insight into the participations portfolio. Further reduction of concentration risks was the principal objective in terms of realigning the credit portfolio.

Different measures aimed at reinforcing the Bank’s capital base represented another key focus. This could be achieved by converting dated capital contributions of silent partners subject to call into undated ones without accompanying calling rights. Another option would be preparing the way for a capital increase.

Statutory and supervisory requirements

We continued to address the statutory and supervisory requirements incumbent on the Bank on a regular basis. Thus, regarding the implementation of the Minimum Requirements for the Credit Business of Credit Institutions (MAK), the Board of Management provided us with comprehensive information in good time on the credit risk strategy adopted, its implementation and further development, as well as on the introduction, realisation and updating of the standardised, bank-wide credit policy.

EU proceedings regarding state aid

In addition, the Board of Administration was involved with the EU proceedings instigated against BayernLB on charges of illegal state aid, in conjunction with the recovery of special-purpose assets belonging to the Free State of Bavaria. In October 2004, an agreement was reached in respect of the level of interest to be levied on the special- 126 Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts

purpose assets. The restitution claim arising from the case was charged to expense and deferred in 2004, and the repayment to the Free State of Bavaria effected in January 2005.

This concluded the proceedings. In the first half of 2005, the Bank aims to come to an amicable solution with the European Commission relating to the planned EUR 640 million capital increase. The capital increase, to which the Bank’s two owners are to contribute 50 percent each, is to be carried out in two tranches in 2005 and 2006. It will help considerably to reinforce the Bank’s capital base.

Corporate Governance

BayernLB’s Corporate Governance Principles, which entered into force on 1 January 2004, serve as guidelines for collaboration between the Board of Management, Board of Administration and General Meeting. They ensure responsible and transparent administration and controlling, oriented towards sustained enhancement of the Bank’s enterprise value.

In their meetings of 7 December 2004, the Board of Administration and the General Meeting discussed compliance with BayernLB’s Corporate Governance Principles. Both bodies, in harmony with the Board of Management, established that there is nothing to suggest that the Bank does not comply with these principles.

Changes to the Board of Management

Certain changes were made to the Board of Management in the 2004 financial year. With effect from 1 July 2004, we consented to Mr. Werner Strohmayr’s request to be discharged from his duties as Member of the Board of Management. Dr. Ralph Schmidt took on Mr. Strohmayr’s position from 1 July 2004. For the time being, his role is that of Senior Executive Vice President entrusted with Board of Management tasks.

Having served nineteen years on the Bank’s Board of Management, Dr. Peter Kahn also left the Board for personal reasons. He retired at year-end 2004. The Board has one less member following Dr. Kahn’s retirement. His responsibilities have been taken over by Dr. Rudolf Hanisch and Mr. Theo Harnischmacher.

We would like to thank both Mr. Strohmayr and Dr. Kahn for their excellent contribution to the Bank, and wish Dr. Ralph Schmidt all the best and every success in his new role.

Auditing and approval of the 2004 annual accounts

The Bank’s annual accounts and consolidated accounts, as well as its summarised report on the Bank and the Group, have been audited by KPMG Deutsche Treuhand- Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft. The audit of the annual accounts and reports of Bayerische Landesbodenkreditanstalt and Bayerische Landesbausparkasse, both of which are institutions of the Bank, has been conducted Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts 127

by PwC Deutsche Revision Aktiengesellschaft Wirtschaftsprüfungsgesellschaft. The independence of the auditors was duly verified before we requested their approval by the General Meeting. Unqualified audit certificates were granted upon completion of the auditing process. The auditors’ reports were discussed thoroughly in today’s meeting of the Board of Administration, and by the derivative Financial Statements Audit Committee in its meeting of 25 April 2005. Both meetings were attended in person by the auditors, who explained the important findings of the audit and answered questions thereupon.

We approve the outcome of the external audits following the final outcome of our internal audits, and upon the recommendation of the Financial Statements Audit Committee. In today’s meeting, we adopted the annual accounts of the Bank as submitted by the Board of Management. We further approved the Board of Management’s report on the Bank and the Group as well as the consolidated accounts. We then rec- ommended to the General Meeting that the disclosed profit available for distribution in the amount of EUR 63,400,193.28 be transferred to BayernLB Holding AG, which holds 100 percent of the nominal capital of the Bank. This represents a return of 4 percent on the paid-in capital of the Bank.

This result reinforces our opinion that the Bank has successfully completed its turnaround, and that the transformation of its business model is right on track. We are confident that once the guarantee mechanisms have been abolished, the Bank will achieve its targeted rating of at least A+ in the medium term.

We also proposed to the General Meeting that the Board of Management be discharged. The General Meeting today gave its approval to these proposals.

Our thanks to the Board of Management and staff

We would like to express our appreciation of the immense commitment of the Board of Management and the employees of BayernLB, particularly in these challenging times. This applies both to the day-to-day business of the Bank and to the implementation of strategic realignment, which has demanded a great deal of all those involved. In the future, the Board of Administration will continue to be heavily involved in the sustained enhancement of the earnings profile, and will do its utmost to support the Bank in this aim. We wish the Board of Management and all of the Bank’s employees continued success in the future.

Munich, 2 May 2005

The Board of Administration

Prof. Dr. Kurt Faltlhauser Chairman 128 Report by the Board of Administration, accounts and notes to the accounts

Balance sheet and profit and loss account

Balance sheet – Bayerische Landesbank as at 31 December 2004

2004 2003

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

1. Cash reserves a) Cash 10,695 12,172 b) Balance with central banks 326,855 744,521 of which: with Bundesbank 318,398 285,672 c) Balances in postal giro accounts — — 337,550 756,693

2. Debt certificates issued by public entities and bills of exchange eligible for refinancing with central banks a) Treasury bills and Treasury discount- paper and similar debt certificates issued by public entities 258,500 472,592 of which: eligible for refinancing at Bundesbank 149,548 472,592 b) Bills of exchange 476 20,695 of which: eligible for refinancing at Bundesbank 476 20,695 258,976 493,287

3. Due from banks a) Payable on demand 8,613,607 9,196,850 b) Other receivables 119,858,243 101,639,690 of which building loans of Home Loan division: • building-saving loans 12,409 14,767 • preliminary and interim financing loans — — • other building loans — — 128,471,850 110,836,540

4. Due from customers 87,427,039 91,862,521 of which: • secured by mortgage 19,158,401 19,166,290 • public-debt loans 28,411,905 29,458,024 • building loans of Home Loan division: – building-saving loans 2,347,507 2,573,780 – preliminary and interim financing 2,380,576 2,218,900 – other building loans 6,995 8,611 of which: secured by mortgages 3,823,052 3,879,950

carried forward 216,495,415 203,949,041

carried forward 216,495,415 203,949,041 Report by the Board of Administration, accounts and notes to the accounts 129

2004 2003

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

1. Due to banks a) Payable on demand 9,355,183 7,990,370 b) With agreed maturities or periods of notice 96,296,028 92,069,381 c) Building-savers’ deposits with Home Loan division 22,063 23,756 of which: • on terminated contracts — — • on advanced contracts 6,475 5,166 105,673,274 100,083,507

2. Due to customers a) Savings deposits aa) with periods of notice of three months — — ab) with periods of notice of more than three months — — ac) Building-savers’ deposits with Home Loan division 6,853,881 6,463,369 of which: • on terminated contracts 59,454 72,273 • on advanced contracts 210,691 208,515 6,853,881 6,463,369 b) Other liabilities ba) payable on demand 6,882,050 8,514,934 bb) with agreed maturities or periods of notice 40,397,006 37,228,226 47,279,056 45,743,160 54,132,937 52,206,529

3. Securitised liabilities a) Bonds issued 88,729,478 81,391,518 b) Other securitised liabilities 7,075,016 8,966,897 of which: • money market instruments 6,877,845 6,748,524 • own acceptances and promissory notes outstanding — 73,044 95,804,494 90,358,415

4. Liabilities administered on behalf of third parties 8,079,498 8,428,769 of which: loans for third-party account 8,029,607 8,372,013

5. Other liabilities 3,086,080 2,490,638

6. Deferred income 1,057,440 984,920 carried forward 267,833,723 254,552,778 130 Report by the Board of Administration, accounts and notes to the accounts

Balance sheet – Bayerische Landesbank as at 31 December 2004 (continued)

2004 2003

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

5. Bonds and other fixed-interest securities a) Money market instruments aa) issued by public-sector borrowers 398,585 24,642 of which: eligible as collateral at Bundesbank 398,585 — ab) issued by other borrowers 324,859 475,514 of which: eligible as collateral at Bundesbank 36,099 — 723,444 500,156 b) Bonds and other debt securities ba) issued by public-sector borrowers 10,019,296 13,918,343 of which: eligible as collateral at Bundesbank 3,466,260 3,674,387 bb) issued by other borrowers 35,877,401 33,171,086 of which: eligible as collateral at Bundesbank 19,578,373 13,425,677 45,896,697 47,089,429 c) Own debt securities 3,479,454 1,338,665 nominal value 3,438,507 1,306,975 50,099,595 48,928,250

6. Shares and other non fixed-interest securities 2,687,939 2,422,602

7. Investments 998,744 2,069,959 of which: • in financial institutions 225,553 739,288 • in financial service providers — —

8. Shares in affiliated companies 3,416,864 3,210,910 of which: • in financial institutions 2,261,068 2,409,162 • in financial service providers — —

9. Assets administered on behalf of third parties 8,079,498 8,428,769 of which: loans for third-party account 8,029,607 8,372,013

10. Equalisation claims on public authorities including bonds originating from the conversion of such claims 17,945 35,889

11. Intangible assets 26,404 —

12. Tangible assets 150,822 203,265

13. Other assets 2,382,724 2,050,146

14. Deferred taxes 262,605 418,993

15. Deferred charges 964,901 1,053,881

Total assets 285,583,456 272,771,705 Report by the Board of Administration, accounts and notes to the accounts 131

2004 2003

Liabilities EUR ’000 EUR ’000 EUR ’000 EUR ’000 EUR ’000 carried forward 267,833,723 254,552,778

7. Provisions for liabilities and charges a) For pensions and similar obligations 805,548 748,625 b) For taxes 168,917 214,288 c) Other provisions 1,062,929 1,087,134 2,037,394 2,050,047

7a. Reserve fund for Home Loan division 17,780 17,780

8. Special reserve — —

9. Subordinated liabilities 4,245,667 4,459,909

10. Profit-participation certificates 2,598,587 2,675,281 of which: due in less than two years 380,912 434,598

11. Fund for general banking risks 220,154 385,759

12. Capital and reserves a) Subscribed capital aa) nominal capital 1,738,500 1,738,500 uncalled nominal capital – 153,495 – 153,495 1,585,005 1,585,005 ab) capital contributions of silent partners 2,894,172 2,894,172 4,479,177 4,479,177 b) Capital reserve 663,146 663,146 of which: specific-purpose reserve 612,016 612,016 c) Revenue reserves ca) statutory reserves 1,268,000 1,268,000 cb) other reserves 2,156,428 2,156,428 3,424,428 3,424,428 d) Profit available for distribution 63,400 63,400 8,630,151 8,630,151

Total liabilities 285,583,456 272,771,705

1. Contingent liabilities a) Contingent liabilities from the endorsement of bills rediscounted — 4,522 b) Contingent liabilities from guarantees and indemnity agreements 14,967,541 17,145,150 (for further reference, please see the Notes) c) Contingent liabilities from collateral furnished for third-party obligations — — 14,967,541 17,149,672

2. Other obligations a) Contingent obligations from non-genuine sale and repurchase agreements — — b) Underwriting and issuance facilities — — c) Irrevocable loan commitments 49,734,117 50,475,618 49,734,117 50,475,618 132 Report by the Board of Administration, accounts and notes to the accounts

Profit and Loss Account – Bayerische Landesbank for the period from 1 January to 31 December 2004

2004 2003

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

1. Interest income from

a) Credit and money market transactions 7,860,556 8,499,440 of which interest income of Home Loan division: • from building-saving loans 116,540 129,070 • from preliminary and interim financing loans 121,355 114,976 • from other building loans 424 557 b) Fixed-interest securities and debt-register claims 1,649,791 1,961,175 9,510,347 10,460,615 2. Interest expenses 8,504,977 9,088,219 of which: for building-savers’ deposits 173,090 169,335 1,005,370 1,372,396

3. Current income from a) Shares and other non-fixed interest securities 128,947 101,922 b) Investments 78,567 69,812 c) Shares in affiliated companies 179,441 58,806 386,955 230,540

4. Income from profit-pooling agreements, profit transfer agreements and partial profit transfer agreements 5,867 5,311

5. Commission income 556,121 592,605 of which commission income of the Home Loan Division: • from concluding and procuring contracts 45,106 62,828 • from advanced contracts 13,736 16,491 • from providing and processing preliminary and interim financing loans — — 6. Commission expenses 315,967 339,890 of which: for concluding and procuring contracts by the Home Loan division 68,699 90,957 240,154 252,715

7. Net income or net expenses from financial operations 91,716 105,346

8. Other operating income 193,926 210,192

9. Income from write-back of special reserve — 3,151

10. General administrative expenses a) Personnel expenses aa) salaries and wages 331,953 346,419 ab) social security contributions, pensions and other employee benefits 143,316 125,950 475,269 472,369 of which: pensions 94,928 72,822 b) Other administrative expenses 313,549 338,878 788,818 811,247

carried forward 1,135,170 1,368,404 Report by the Board of Administration, accounts and notes to the accounts 133

2004 2003

EUR ’000 EUR ’000 EUR ’000 EUR ’000 EUR ’000 carried forward 1,135,170 1,368,404

11. Depreciation and valuation adjustments on intangible assets and tangible assets 41,058 50,485

12. Other operating expenses 47,901 77,290

13. Write-downs of and valuation adjustments on receivables and certain securities and additions to provisions in credit business — 696,879 of which: allocation to the fund for general banking risks — — 14. Income from reversals of write-downs of receivables and certain securities and from write-backs of provisions in credit business 75,951 — of which: withdrawals from the fund for general banking risks 165,605 — 75,951 696,879

15. Write-downs of and valuation adjustments on investments, shares in affiliated companies and securities treated as fixed assets 205,272 40,245 16. Income from reversals of write-downs of investments, shares in affiliated companies and securities treated as fixed assets — — 205,272 40,245

17. Expenses from loss transfers 97,906 4,724

18. Allocation to special reserve — —

19. Result from ordinary activities 818,984 498,781

20. Extraordinary income — — 21. Extraordinary expenses 356,529 127,129 22. Extraordinary result 356,529 127,129

23. Taxes on income 175,233 79,804 24. Other taxes, unless disclosed under position 12 3,645 9,545 178,878 89,349

25. Profits transferred under partial profit transfer agreement 220,177 218,903

26. Net income for the year 63,400 63,400

27. Allocation from net income for the year to revenue reserves a) To the statutory reserve — — b) To other reserves — — — —

28. Profit available for distribution 63,400 63,400 134 Report by the Board of Administration, accounts and notes to the accounts

Consolidated balance sheet and profit and loss account

Consolidated balance sheet – Bayerische Landesbank Group as at 31 December 2004

2004 2003

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

1. Cash reserves a) Cash 45,745 48,803 b) Balance with central banks 772,361 1,025,328 of which: with Bundesbank 572,118 459,719 c) Balances in postal giro accounts — 2,729 818,106 1,076,860

2. Debt certificates issued by public entities and bills of exchange eligible for refinancing with central banks a) Treasury bills and Treasury discount- paper and similar debt certificates issued by public entities 330,018 481,419 of which: eligible for refinancing at Bundesbank 149,548 472,592 b) Bills of exchange 13,174 26,201 of which: eligible for refinancing at Bundesbank 13,135 24,769 343,192 507,620

3. Due from banks a) Payable on demand 9,060,855 9,228,685 b) Other receivables 115,620,482 96,466,497 of which building loans of Home Loan division: • building-saving loans 12,409 14,790 • preliminary and interim financing loans — — • other building loans — — 124,681,337 105,695,182

4. Due from customers 127,830,734 128,836,563 of which: • secured by mortgage 29,375,153 27,672,073 • public-debt loans 38,502,048 39,108,466 • building loans of Home Loan division: – building-saving loans 2,483,381 2,718,091 – preliminary and interim financing 2,591,204 2,426,082 – other building loans 241,135 225,383 of which: secured by mortgages 4,332,585 4,372,959

carried forward 253,673,369 236,116,225 Report by the Board of Administration, accounts and notes to the accounts 135

2004 2003

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

1. Due to banks a) Payable on demand 10,472,318 8,543,810 b) With agreed maturities or periods of notice 116,517,739 111,338,353 c) Building-savers’ deposits with Home Loan division 22,063 23,756 of which: • on terminated contracts — — • on advanced contracts 6,475 5,166 127,012,120 119,905,919

2. Due to customers a) Savings deposits aa) with periods of notice of three months 8,266 7,781 ab) with periods of notice of more than three months 2,120 1,441 ac) building-savers’ deposits with Home Loan division 7,249,782 6,839,304 of which: • on terminated contracts 59,959 72,946 • on advanced contracts 224,304 222,158 7,260,168 6,848,526 b) Other liabilities ba) payable on demand 13,554,297 13,236,403 bb) with agreed maturities or periods of notice 49,583,646 45,242,449 63,137,943 58,478,852 70,398,111 65,327,378

3. Securitised liabilities a) Bonds issued 96,252,100 86,630,258 b) Other securitised liabilities 7,581,321 8,966,897 of which: • money market instruments 7,384,151 6,748,524 • own acceptances and promissory notes outstanding — 73,044 103,833,421 95,597,155

4. Liabilities administered on behalf of third parties 8,267,329 8,632,267 of which: loans for third-party account 8,124,006 8,472,501

5. Other liabilities 3,240,775 2,696,954

6. Deferred income 1,149,851 1,071,412 carried forward 313,901,607 293,231,085 136 Report by the Board of Administration, accounts and notes to the accounts

Consolidated balance sheet – Bayerische Landesbank Group as at 31 December 2004 (continued)

2004 2003

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

carried forward 253,673,369 236,116,225

5. Bonds and other fixed-interest securities a) Money market instruments aa) issued by public-sector borrowers 398,586 24,643 of which: eligible as collateral at Bundesbank 398,586 — ab) issued by other borrowers 424,672 479,216 of which: eligible as collateral at Bundesbank 36,099 — 823,258 503,859 b) Bonds and other debt securities ba) issued by public-sector borrowers 10,990,272 14,543,801 of which: eligible as collateral at Bundesbank 4,050,117 3,872,188 bb) issued by other borrowers 41,039,568 38,408,669 of which: eligible as collateral at Bundesbank 24,720,272 17,255,988 52,029,840 52,952,470 c) Own debt securities 8,153,186 4,105,304 nominal value 8,069,634 4,022,259 61,006,284 57,561,633

6. Shares and other non fixed-interest securities 3,680,583 3,350,965

7. Investments 1,328,786 1,671,566 of which: • in financial institutions 207,102 253,513 • in financial service providers 15,334 14,108

7a. Shares in associated companies 25,383 586,867 of which: • in financial institutions 25,383 586,867 • in financial service providers — —

8. Shares in affiliated companies 1,084,824 1,326,336 of which: • in financial institutions 44,574 79,105 • in financial service providers 17,678 16,204

9. Assets administered on behalf of third parties 8,267,329 8,632,267 of which: loans for third-party account 8,124,006 8,472,501

10. Equalisation claims on public authorities including bonds originating from the conversion of such claims 17,945 118,803

11. Intangible assets 29,721 —

12. Tangible assets 223,268 280,796

13. Other assets 2,432,677 2,251,318

14. Deferred taxes 324,165 431,408

15. Deferred charges 1,007,277 1,102,816

Total assets 333,101,611 313,431,000 Report by the Board of Administration, accounts and notes to the accounts 137

2004 2003

Liabilities EUR ’000 EUR ’000 EUR ’000 EUR ’000 EUR ’000 carried forward 313,901,607 293,231,085

7. Provisions for liabilities and charges a) For pensions and similar obligations 829,210 769,186 b) For taxes 250,382 245,875 c) Other provisions 1,368,326 1,926,782 2,447,918 2,941,843

7a. Reserve fund for Home Loan division 17,780 17,780

8. Special reserve — —

9. Subordinated liabilities 4,462,220 4,676,232

10. Profit-participation certificates 2,746,211 2,838,588 of which: due in less than two years 380,912 451,749

11. Fund for general banking risks 385,367 550,962

12. Capital and reserves a) Subscribed capital aa) nominal capital 1,738,500 1,738,500 uncalled nominal capital – 153,495 – 153,495 1,585,005 1,585,005 ab) capital contributions of silent partners 3,229,078 3,129,059 4,814,083 4,714,064 b) Capital reserve 663,146 663,146 of which: specific-purpose reserve 612,016 612,016 c) Revenue reserves ca) statutory reserves 1,268,000 1,268,000 cb) other reserves 2,101,340 2,253,910 3,369,340 3,521,910 d) Minority shareholders 230,539 211,990 e) Profit available for distribution 63,400 63,400 9,140,508 9,174,510

Total liabilities 333,101,611 313,431,000

1. Contingent liabilities a) Contingent liabilities from the endorsement of bills rediscounted — 4,522 b) Contingent liabilities from guarantees and indemnity agreements 16,655,432 18,510,496 (for further reference, please see the Notes) c) Contingent liabilities from collateral furnished for third-party obligations — — 16,655,432 18,515,018

3. 152 special assets managed on behalf of shareholders (2003: 165) 11,985,439 13,338,978 138 Report by the Board of Administration, accounts and notes to the accounts

Consolidated profit and loss account – Bayerische Landesbank Group for the period from 1 January to 31 December 2004

2004 2003

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

1. Interest income from a) Credit and money market transactions 9,709,182 10,096,266 of which interest income of Home Loan division: • from building-saving loans 123,513 136,521 • from preliminary and interim financing loans 132,959 126,631 • from other building loans 13,195 11,607 b) Fixed-interest securities and debt-register claims 2,023,793 2,294,754 11,732,975 12,391,020 2. Interest expenses 10,012,817 10,511,809 of which: for building-savers’ deposits 183,929 179,739 1,720,158 1,879,211

3. Current income from a) Shares and other non-fixed interest securities 159,667 144,441 b) Investments 57,308 65,651 c) Shares in affiliated companies 12,870 9,683 d) Shares in associated companies 69,196 24,883 299,041 244,658

4. Income from profit-pooling agreements, profit transfer agreements and partial profit transfer agreements 10,916 45,400

5. Commission income 706,200 723,666 of which commission income of the Home Loan division: • from concluding and procuring contracts 47,643 66,643 • from advanced contracts 14,776 17,585 • from providing and processing preliminary and interim financing loans — 32 6. Commission expenses 366,364 381,402 of which: for concluding and procuring contracts by the Home Loan division 71,583 95,594 339,836 342,264

7. Net income or net expenses from financial operations 125,695 104,990

8. Other operating income 339,193 229,316

9. Write-back of special reserve — —

10. General administrative expenses a) Personnel expenses aa) salaries and wages 499,803 493,485 ab) social security contributions, pensions and other employee benefits 188,917 162,996 688,720 656,481 of which: pensions 112,478 81,804 b) Other administrative expenses 464,137 466,080 1,152,857 1,122,561

carried forward 1,681,982 1,723,278 Report by the Board of Administration, accounts and notes to the accounts 139

2004 2003

EUR ’000 EUR ’000 EUR ’000 EUR ’000 EUR ’000 carried forward 1,681,982 1,723,278

11. Depreciation and valuation adjustments on intangible assets and tangible assets 54,694 62,817

12. Other operating expenses 111,651 98,005

13. Write-downs of and valuation adjustments on receivables and certain securities and additions to provisions in credit business 156,954 952,642 of which: • withdrawals from the fund for general banking risks 165,605 — • allocation to the fund for general banking risks — 13,003 14. Income from reversals of write-downs of receivables and certain securities and from write-backs of provisions in credit business — — 156,954 952,642

15. Write-downs of and valuation adjustments on investments, shares in affiliated companies and securities treated as fixed assets 305,014 47,113 16. Income from reversals of write-downs of investments, shares in affiliated companies and securities treated as fixed assets — — 305,014 47,113

17. Expenses from loss transfers 99,024 5,499

18. Allocation to special reserve — —

19. Result from ordinary activities 954,645 557,202

20. Extraordinary income — — 21. Extraordinary expenses 358,364 127,129 22. Extraordinary result 358,364 127,129

23. Taxes on income 252,386 103,219 24. Other taxes, unless disclosed under position 12 4,390 10,237 256,776 113,456

25. Profits transferred under partial profit transfer agreement 241,823 237,389

26. Net income for the year 97,682 79,228

27. Withdrawls from revenue reserves a) From the statutory reserve — — b) From other reserves — — — —

28. Allocation from net income for the year to revenue reserves a) To the statutory reserve — — b) To other reserves 18,039 4,522 18,039 4,522

29. Profit share of minority shareholders 16,243 11,306

30. Profit available for distribution 63,400 63,400 140 Report by the Board of Administration, accounts and notes to the accounts

Consolidated statement of changes in shareholders’ equity

Changes in shareholders’ equity

Parent company Minority shareholders

Aggregated other

consolidated result

EUR million Subscribed capital Uncalled outstanding capital Capital reserve Generated consolidated capital Offsetting item from foreign currency conversion Other neutral transactions Equity Minority capital Offsetting item from foreign currency conversion Equity Consolidated equity

As at 31. 12. 2002 4,866 – 307 663 3,708 26 – 128 8,828 224 0 224 9,052

Dividends paid – 57 – 57 – 57 Change in the group of consolidated companies 2 – 3 9 8 – 4 0 – 4 4 Other changes (currency conversion, consolidation effects and other capital changes) 2 154 0 72 – 37 – 7 184 – 6 – 2 – 8 176

Consolidated net profit / loss 68 68 11 11 79 Other consolidated result – 40 2 – 38 – 2 – 2 – 40

Total consolidated result 30 9 39

As at 31. 12. 2003 4,868 – 153 663 3,725 – 14 – 126 8,963 214 – 2 212 9,175

Dividends paid – 63 – 63 – 63 Change in the group of consolidated companies – 307 0 113 – 194 0 0 0 – 194 Other changes (currency conversion, consolidation effects and other capital changes) 100 0 0 131 – 29 2 204 22 – 3 19 223

Consolidated net profit / loss 82 82 16 16 98 Other consolidated result – 29 115 86 – 3 – 3 83

Total consolidated result 168 13 181

As at 31. 12. 2004 4,968 – 153 663 3,486 – 43 – 11 8,910 236 – 5 231 9,141

As at 31 December 2004, EUR 63 million is available for distribution to the owners. Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts 141

Cash flow statement for the Group

Cash flow statement

EUR million 2004 2003

Annual net income 98 79

Items under annual net income not affecting the cash flow and transition to the cash flow from operating activities write-downs, LLPs and write-ups on receivables, fixed and financial assets 602 1,438 changes to provisions – 494 25 changes to other items not affecting the cash flow 389 – 33 gains on the disposal of fixed and financial assets – 45 – 7 other adjustments (balance)* – 1,176 – 1,859

Sub-total* – 626 – 357

Changes to assets and liabilities from operating activities after revision for components not affecting the cash flow due from banks – 18,991 2,297 customers 1,080 8,795 securities (unless financial assets) – 7,518 8,065 other assets from operating activities – 251 1,137 due to banks 7,106 – 15,495 customers 5,098 1,210 securitised liabilities 8,236 – 12,577 other liabilities from operating activities 58 388

Interest and dividends received* 12,043 12,681

Interest paid* – 9,593 – 10,060

Extraordinary cash inflow 0 0

Extraordinary cash outflow – 38 0

Income tax payment – 252 – 103

Cash flow from operating activities – 3,648 – 4,019 142 Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts

Cash flow statement (continued)

EUR million 2004 2003

Cash inflow from the sale of financial assets 6,886 12,596 fixed assets 6 31

Cash outflow for the acquisition of financial assets – 2,675 – 6,700 fixed assets – 15 – 20

Effects resulting from the change in the group of consolidated companies cash inflow from the sale of consolidated companies and other business units 0 38 cash outflow resulting from the acquisition of consolidated companies and other business units 0 – 1

Change in financial resources resulting from other investment activities (balance) – 19 0

Cash flow from investment activities 4,183 5,943

Cash inflow from allocations to equity 0 77

Disbursements to company owners and minority shareholders dividend payments – 63 – 57 other disbursements – 689 – 770

Changes in financial resources resulting from subordinated capital and other hybrid capital (balance) – 206 – 923

Cash flow from financing activities – 958 – 1,673

Change in the financial resources affecting the cash flow – 423 252 Exchange-rate, consolidation-group and revaluation-related change in the financial resources fund – 168 – 19

Financial resources balance at end of previous period 1,572 1,339

Financial resources balance at end of period 981 1,572

* Previous year’s figures have been adjusted Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts 143

Comment on the cash flow statement

The DRS 2 – 10 standards (German Accounting Standards) issued by the DRCS (German Accounting Standards Committee) were duly observed when the cash flow statement was drawn up.

The cash flow statement shows the cash flows of the financial year classified into “operating activities”, “investment activities” and “financing activities”.

The financial resources balance disclosed comprises the cash balance and deposits with central banks, along with debt instruments issued by public-sector entities and bills of exchange eligible for funding at the Deutsche Bundesbank. Financial resources are not subject to any drawing restrictions. EUR 1 million of the financial resources are apportionable to consolidated companies on a pro rata basis.

The change in other items not affecting the cash flow includes also the net write-back of deferred taxes and the revaluation result of the trading and liquidity portfolio.

During the financial year, EUR 3 million was paid for the acquisition of participations and affiliated companies, with the whole amount being taken from financial resources. Sales proceeds of EUR 654 million were posted, of which EUR 282 million was allocated to financial resources. 144 Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts

Segment report for the Group

Principles of segmentation

Primary segmentation is based on BayernLB’s business model and represents the business areas, the dependent entities Labo and LBS, and the consolidated subsidiaries. Profit contributions are allocated to the segments according to the causation principle. The “Other / Consolidation” segment shows consolidation effects and profit contributions which are not attributable to the business areas. This includes in particular the profit contributions made by the support operations, unless these can be allocated to the operational units according to the causation principle.

Segment report as per 31 December 2003 1 / 2

EUR million Corporates Real Estate Global Markets Financial Institutions & Sovereigns Savings Banks, Bavarian/ Municipals Corporates LBS / Labo Subsidiaries strategic to the Group Other Consolidation Group

Net interest income 496 194 591 104 102 286 601 – 205 2,169

Net commission income 107 27 11 38 0 30 90 39 343

Administrative expenses – 139 – 65 – 304 – 27 – 83 – 144 – 325 – 99 – 1,185

Result from financial transactions 0 0 76 0 5 0 0 24 105

Other operating result – 10 – 2 0 0 0 7 0 124 120

Risk provisioning / revaluation result – 323 – 404 – 96 0 – 35 – 6 – 238 97 – 1,005

Operating result 133 – 250 279 116 – 11 173 127 – 20 547

Segment assets 38,130 18,379 116,709 38,804 31,654 23,055 61,527 – 14,829 313,431

Risk positions 38,115 14,238 31,209 8,472 8,459 4,307 28,214 4,227 137,242

Av. equity capital disclosed 1,217 455 997 271 270 1,979 2,912 – 1,771 6,328

Return on equity (RoE in %) 10.9 – 55.1 28.0 42.8 – 4.1 8.7 4.3 — 4.9

Cost-income ratio (%) 23.4 29.9 44.7 18.8 77.3 44.5 47.1 — 43.3

Av. staff capacity 377 234 546 111 222 877 3,411 3,020 8,797

1 In the previous year, the capital contributions of silent partners were also allocated to business areas / support operations. In 2004, in contrast, only the sum total of nominal capital, capital reserves (excluding appropriated reserves), revenue reserves and the amount governed by Section 340g of the German Commercial Code (defined as equity capital disclosed) was allocated. For ease of comparison, in the segment report of 31 December 2003, the return on equity is adjusted to the allocation method employed in the year under review.

2 In the year under review, in accordance with BayernLB’s control systems, Bayern-Invest Kapitalanlagegesellschaft mbH and BLB Asia Pacific Ltd. were included in the segment Subsidiaries strategic to the Group. In the previous year, these had been included under the Global Markets segment. For ease of comparison, the segment report of 31 December 2003 as presented here has been adjusted accordingly. Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts 145

Segment report as per 31 December 2004

Net interest income 413 215 330 95 109 262 763 – 156 2,030

Net commission income 112 26 8 38 21 29 100 5 340

Administrative expenses – 144 – 64 – 297 – 41 – 89 – 146 – 378 – 49 – 1,208

Result from financial transactions 0 0 86 0 6 0 34 0 126

Other operating result 3 – 3 – 2 0 0 8 83 133 223

Risk provisioning / revaluation result 101 – 113 – 49 7 39 – 43 – 180 – 323 –561

Operating result 485 62 76 99 86 109 421 – 388 950

Segment assets 31,910 16,858 125,047 38,878 32,444 22,583 65,488 – 106 333,102

Segment liabilities 30,340 16,296 124,575 38,514 32,049 21,100 62,626 2,211 327,711

Risk positions 32,751 13,616 28,356 7,789 8,726 3,841 36,284 – 3,673 127,689

Av. equity capital disclosed 1,471 527 830 341 370 1,389 2,711 – 2,089 5,550

Return on equity (RoE in %) 33.0 13.8 12.5 29.0 24.1 8.6 14.1 — 9.5

Cost-income ratio (%) 27.2 26.7 70.3 31.0 65.3 49.0 38.6 — 44.4

Av. staff capacity 228 140 474 100 231 857 3,610 2,852 8,493

For the purposes of internal controlling, an average equity capital disclosed is allocated to the business areas and support operations of each segment, in accordance with their risk positions, i.e. the risk assets and market risks to be covered according to the banking supervisory Principle I relating to Section 10 KWG.

The RoE and CIR ratios are used in the segment report to assess the business areas’ performance. The RoE reported is the quotient of the operating result and the allocated average equity capital disclosed. The CIR is the quotient of administrative expenses and the sum total of the net interest income, net commission income, result from financial transactions and other operating result. In the 2004 financial year, the other operating result was included in the CIR for the first time. For ease of comparison, given this change, the figures for the previous year have been adjusted accordingly in the segment report of 31 December 2003 as presented here. 146 Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts

Note on delimitation of segments in accordance with DRS 3.25 (German Accounting Standards)

The Corporates segment serves large SME corporate customers in Germany as well as multinationals in Germany and in the Bank’s core markets of Europe, North America and Asia.

The Real Estate segment comprises BayernLB’s commercial and residential real estate customers at both national and international levels.

The Global Markets segment bundles all trading and issuing activities as well as the BayernLB Treasury.

The Financial Institutions & Sovereigns segment encompasses worldwide business relations with banks, insurance companies and other institutional customers, as well as government and non-Bavarian municipal customers.

The Savings Banks, Bavarian Municipals / Corporates segment, acting as an interface, comprises all of BayernLB’s activities in supporting the Bavarian savings banks as well as Bavarian municipal and corporate customers.

The Labo / LBS segment is made up of BayernLB’s legally dependent institutions, Bayerische Landesbodenkreditanstalt (Labo) and Bayerische Landesbausparkasse (LBS).

The segment Subsidiaries strategic to the Group encompasses all consolidated subsidiaries of the BayernLB Group, including the capital investment company Bayern-Invest. The business activities of the Bank’s subsidiaries are focused on universal banking business, including retail / private banking and investment consulting.

The Other / Consolidation segment comprises, in addition to consolidation effects, the profit contributions of our Corporate Center, Risk Office and Corporate Services Sup- port Operations, which are not allocated to the business areas according to the causation principle. Primarily concerned here are the results of participations allocated to the support operations, as well as expenditure on the management of these participations. This segment also includes cross-divisional transactions whose contribution to the overall profit is allocable to neither business areas nor support operations. Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts 147

In order to provide a breakdown of BayernLB’s regional business activities, primary segmentation has been extended to include secondary segmentation by region. In regional segmentation, activities are broken down by the systematically formulated focal points of our business worldwide. The regional segments generated the following individual profit contributions:

Segment report by region as per 31 December 2003

EUR million Germany Europe (excl. Germany) America Pacific / Asia Consolidation Group

Result before risk provisioning / revaluation result 795 368 322 107 – 40 1,552

Risk provisioning / revaluation result – 803 13 – 147 – 40 – 28 – 1,005

Operating result – 8 381 175 68 – 68 547

Risk positions 106,832 26,887 10,658 5,650 – 12,784 137,242

Cost-income ratio (%) 53.3 33.2 14.6 19.0 — 43.3

Av. staff capacity 6,491 1,869 217 220 — 8,797

Segment report by region as per 31 December 2004

EUR million Germany Europe (excl. Germany) America Pacific / Asia Consolidation Group

Result before risk provisioning / revaluation result 915 427 244 61 – 136 1,511

Risk provisioning / revaluation result – 599 – 1 62 96 – 120 – 561

Operating result 317 426 306 157 – 256 950

Risk positions 97,191 27,091 8,938 2,879 – 8,410 127,689

Cost-income ratio (%) 50.4 34.0 15.0 17.7 — 44.4

Av. staff capacity 6,170 1,978 185 160 — 8,493

Within the framework of BayernLB’s control systems, equity is not allocated to regions, but rather exclusively to business areas and support operations. 148 Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts

Notes to the accounts and consolidated accounts

The notes below relate to both the annual accounts at Bank level and the consolidated annual accounts of Bayerische Landesbank (BayernLB) pursuant to Section 298, Sub- section 3 of the German Commercial Code (HGB). Unless otherwise stated the notes apply to both accounts. All figures are shown in millions of euros.

The annual accounts at Bank level and the consolidated annual accounts have been prepared in accordance with the provisions of HGB and the Ordinance Regulating the Accounting Requirements for Financial Institutions and Financial Service Providers (RechKredV). The layout of our balance sheets and our profit and loss accounts corresponds to the forms pursuant to the RechKredV Ordinance and also includes the items stipulated for building societies (Bausparkassen).

Accounting policies

The valuation of assets and liabilities adheres to the general valuation provisions of Section 252 ff. HGB, taking account of the special provisions applicable to banks (Sec- tion 340e ff. HGB).

Claims are reported at the nominal amount or at cost. Low-interest or non-interest bearing claims are discounted, if necessary. All recognisable risks have been taken into account through the setting up of specific loan loss provisions. Moreover, hidden credit risks are covered by general loan loss provisions. To provide for general banking risks, reserves have been built up pursuant to Section 340f HGB. All loan loss provisions and reserves have been netted against the corresponding items on the assets side. In addition, a fund for general banking risks exists pursuant to Section 340g HGB.

Liabilities are generally reported at their repayment amount. Bonds issued at a discount and similar liabilities are reported at their present values.

Premiums and discounts on claims and liabilities are included in deferred charges and income and amortised on a pro rata basis.

The securities portfolios have been valued according to the stringent principle of lower of cost or market by observing the requirement of reinstating original values. In some cases, securities have been combined with their hedging instruments to form sepa- rately documented valuation units.

Investments and shares in affiliated companies have been valued in accordance with the rules applying to fixed assets at historical cost or, in the case of an anticipated permanent decrease in value, at the lower of cost or market as per the balance sheet date. Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts 149

Intangible assets and fixed assets have been valued at historical cost or cost of production or, if subject to depreciation, reduced by scheduled depreciation reflecting their useful lives. Depreciation has been generally based on the permissible tax rates. Assets of low value are fully depreciated in the year of acquisition. From 2004, system and application software, previously included under tangible assets, is accounted for under intangible fixed assets.

Tax deferrals will be based on the temporary differences between the results under German commercial law and tax law in as much as these differences will probably con- verge in subsequent years. The volume of deferred taxes is geared to the probable tax liability / tax relief effective in the immediately subsequent business years. Deferred tax assets and liabilities are netted.

Provisions for pensions have been set up in line with actuarial principles, taking account of Section 6a EStG (German income tax law) and the 1998 guidelines (Richttafeln, i.e benchmark tables) and of comparable foreign regulations.

Derivative financial transactions (forward transactions, swaps, options, credit derivatives) are allocated to a hedging or trading portfolio depending on their intended use. As forward transactions, they are never disclosed in the balance sheet. Option premiums paid or received are shown under “Other assets” or “Other liabilities”.

Hedging transactions and hedged transactions are combined to form revaluation units and treated pursuant to the principles of the hedged transaction. The revaluation of trading transactions is performed individually by applying the imparity and realisation principle.

Unrealised profits and losses are netted within trading portfolios which have been combined to adequately reflect risks. Remaining profit balances are not taken into account, whereas provisions are established for loss balances.

As a rule, profits from trading transactions are disclosed under net income from financial transactions. Interest paid on securities of the trading portfolio is recorded in interest income.

Currency translation

Currency translation has been based on the principles of Section 340h HGB and the expert opinion of the BFA (banking committee) 3 / 95. Assets denominated in foreign currencies and treated as fixed assets, without hedging in the same currency, are translated at historical exchange rates. Other assets and liabilities denominated in foreign currencies and outstanding spot deals are translated at year-end spot rates, while outstanding forwards are translated at the year-end forward rates. When forward exchange transactions serve to hedge balance sheet items generating interest, the swap amounts are accrued pro rata temporis. The spot price differences resulting from 150 Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts

the translation of these balance sheet items are disclosed as a balance under “Other assets” or “Other liabilities”. Gains from the translation of other transactions hedged in the same currency are only taken into account in so far as they compensate for temporary losses from the translation of hedging transactions (Section 340h, sub-section 2, sentence 3 HGB), whereas translation losses are always taken into account as revenue expenditure.

The translation of currencies in the annual accounts of the subsidiaries and joint ventures included in the consolidated accounts is based on the same principles. In the consolidated accounts, the balance sheet items and the expenses and income of our foreign subsidiaries and joint ventures, unless their annual accounts have been prepared in euros, are translated at the spot exchange rates as per the balance sheet date. Translation gains and losses resulting from the consolidation of equity capital are set off within the revenue reserves.

Group of consolidated companies

The consolidated accounts include BayernLB and the nine companies shown under I in the inventory of shareholdings. In 2004, on the basis of new findings, the number of companies included in the group of consolidated companies was adjusted by three entities. The resulting adjustments of EUR 196 million were set off against the revenue reserves of the Group. LB(Swiss) Privatbank AG, Zurich, is included in proportion to its shares.

Pursuant to Section 296, Sub-section 1, No. 2 HGB, one affiliated company has not been included in the consolidated accounts due to substantial and persistent restrictions affecting long-term the exercising of rights with relation to assets and management. The remaining subsidiaries have neither been consolidated nor valued according to the equity method because they are of subordinate importance with respect to the financial position of the Group and the results of its operations. The non-consolidated combined balance sheet total of these subsidiaries comes to around 1.6 percent of the consolidated balance sheet total.

Consolidation principles

The consolidated accounts have been drawn up in accordance with the accounting and valuation methods applicable to the annual accounts of BayernLB. The balance sheet profit disclosed in the consolidated accounts is identical with that shown in the parent company’s individual accounts.

Capital consolidation has been effected according to the book value method, using the values at the time of acquisition or first consolidation of the subsidiary. Assets-side and liabilities-side balancing items remaining after the allocation procedure laid down in Section 301, Sub-section 1, Sentence 3 HGB are netted, the balance being transferred to revenue reserves. The asset-side balancing item resulting from first-time consolida- Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts 151

tions amounts to EUR 1 million for the year under review. Claims and liabilities as well as expenses and income among the integrated group companies have been consolidated. Intra-group results from transactions within the Group have been eliminated in so far as they are not of minor significance. Joint ventures, included on a pro-rata basis in the consolidated accounts, are treated according to the same principles.

Pursuant to Section 312, Sub-section 1 HGB, TxB Transaktionsbank GmbH, Aschheim- Dornach was valued in accordance with the book value method, on the basis of values stated at the time of first integration. The valuation method applied by the company has not been adjusted to the standard valuation provisions applicable to the Group.

Bank für Arbeit und Wirtschaft AG, Vienna, previously included in the consolidated accounts according to the equity method, was sold on 30 June 2004. An assets-side balancing item of EUR 113 million, charged during first-time consolidation with no impact on the operating result, was set off against revenue reserves at the time of final consolidation, also with no impact on the operating result.

Disclosures relating to the balance sheet and the consolidated balance sheet (excluding accrued interest, unless otherwise stated)

Assets

Due from banks

BayernLB Group

EUR million 2004 2003 2004 2003

This item includes: • Other receivables with a residual maturity of – up to three months (including accrued interest) 46,671 34,254 48,266 35,781 – over three months up to one year 27,280 22,224 25,926 19,612 – over one year up to five years 26,865 25,792 25,471 24,921 – over five years 19,042 19,370 15,957 16,152 • Due from affiliated companies 11,935 14,074 164 169 • Due from companies in which investments are held 188 290 202 263 • Due from affiliated savings banks 17,837 19,316 18,462 19,977 • Subordinated receivables 1,162 1,226 1,094 1,169

Committed but not yet disbursed building saving loans of Home Loan division • from allotment 110 104 113 109 152 Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts

Due from customers

BayernLB Group

EUR million 2004 2003 2004 2003

This item includes: • Receivables with a residual maturity of – up to three months (including accrued interest) 15,141 15,051 19,416 18,778 – over three months up to one year 7,801 10,061 10,527 12,712 – over one year up to five years 26,147 27,243 35,198 35,194 – over five years 36,472 37,708 59,194 58,812 • Receivables without a fixed date of maturity 1,866 1,800 3,496 3,341 • Due from affiliated companies 399 404 1,351 1,203 • Due from companies in which investments are held 586 628 674 691 • Subordinated receivables 46 29 112 86 • Overdue interest and redemption payments from building saving loans of home loan division 6 6 6 7

Committed but not yet disbursed building saving loans of home loan division • from allotment 396 395 424 425 • for preliminary and interim financing purposes 71 121 76 127 • other — — 8 10

Bonds and other fixed interest securities

BayernLB Group

EUR million 2004 2003 2004 2003

This item includes: • Amounts falling due in the following year (including accrued interest) 6,559 9,676 9,243 11,213 • Securitised receivables from associated Corporates 3,299 2,252 — — • Securitised receivables from companies in which investments are held — — 194 23 • Subordinated securities 9 10 54 10 • Marketable securities, of which – listed 34,780 28,515 44,688 35,394 – unlisted 14,669 19,403 15,530 21,024 Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts 153

Shares and other non-fixed interest securities

BayernLB Group

EUR million 2004 2003 2004 2003

This item includes: • Subordinated securities 7 10 14 16 • Marketable securities, of which – listed 226 262 247 304 – unlisted 8 22 646 634

Investments

BayernLB Group

EUR million 2004 2003 2004 2003

This item includes: • Marketable securities, of which – listed — — 29 1 – unlisted 55 606 39 644

Shares in affiliated Corporates

BayernLB Group

EUR million 2004 2003 2004 2003

This item includes: • Marketable securities, of which – listed 5 17 5 17 – unlisted 1,824 1,824 292 250

Assets administered on behalf of third parties

BayernLB Group

EUR million 2004 2003 2004 2003

This item mainly includes housing loans granted by Bayerische Landes- bodenkreditanstalt and breaks down as follows: • Due from banks 248 272 341 375 • Due from customers 7,781 8,101 7,876 8,201 • Bonds and other fixed interest securities 45 51 45 51 • Other assets 5 5 5 5 154 Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts

Tangible assets

BayernLB Group

EUR million 2004 2003 2004 2003

This item includes: • Land and buildings used for own operations 104 107 153 158 • Office furniture and equipment 47 94 64 115

Other assets

BayernLB Group

EUR million 2004 2003 2004 2003

This item includes: • Premium claims from credit derivatives 737 574 738 574 • Premium from credit derivatives not yet received 693 573 694 573 • Claims on the German Tax Authorities 176 433 160 450

Deferred taxes

BayernLB Group

EUR million 2004 2003 2004 2003

Deferred taxes 263 419 324 431

At BayernLB, deferred taxes have been disclosed pursuant to Section 274 HGB. At Group level, deferred taxes have been combined pursuant to Sections 274 and 306 HGB. The figures have been computed on the basis of the income tax rates which apply in the case of the respective consolidated companies.

The deferred taxes are largely due to the fact that the impact of the German Tax Relief Act 1999 / 2000 / 2002 and the non-recognition for tax purposes of provisions for anticipated unrealised losses have been taken into account.

Deferred income

BayernLB Group

EUR million 2004 2003 2004 2003

This item includes: • Premium on receivables 306 356 324 378 • Discount on liabilities 280 395 301 419 Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts 155

Changes in fixed assets and investments

EUR million / Purchase manufacturing costs Additions Disposals Transfers Appreciation / Depreciation write-downs (accumulated) Net book value 2004 12. 31. Net book value 2003 12. 31. / Depreciation write-downs for financial year

BayernLB Changes +/ – * Investments – 1,071 999 2,070

Shares in affiliated companies + 206 3,417 3,211

Investment securities – 3,807 10,157 13,964

Intangible assets — 17 5 102 — 88 26 — 14

Tangible assets 571 6 42 – 102 — 282 151 203 28

Other fixed assets 22 — — — — 5 17 17 —

Group Changes +/ – * Investments – 343 1,329 1,672

Investments in associated companies – 562 25 587

Shares in affiliated companies – 241 1,085 1,326

Investment securities – 4,114 11,911 16,025

Intangible assets — 20 8 118 — 100 30 — 17

Tangible assets 746 17 48 – 118 — 374 223 281 40

Other fixed assets 24 — — — — 5 19 19 —

* The aggregation option pursuant to Section 34, Sub-section 3 RechKredV was utilised. 156 Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts

Genuine sale and repurchase agreements

BayernLB Group

EUR million 2004 2003 2004 2003

Book values of assets transferred under sale and repurchase agreements 12,118 6,121 12,180 6,841

Assets in foreign currency

BayernLB Group

EUR million 2004 2003 2004 2003

Total amount of assets denominated in foreign currency 67,401 74,233 74,946 81,017

Assets held as cover

BayernLB Group

EUR million 2004 2003 2004 2003

For bonds to be covered pursuant to the law on covered bonds (pfandbriefe) and related bonds issued by public-law banks • Covered bonds and Landesboden- briefe 7,192 8,139 7,192 8,139 Cover contained in: – Due from banks 302 5 302 5 – Due from customers 9,673 10,836 9,673 10,836 Excess cover 2,783 2,702 2,783 2,702 • Public-debt bonds 47,038 50,152 47,038 50,152 Cover contained in: – Due from banks 32,895 29,035 32,895 29,035 – Due from customers 22,080 21,725 22,080 21,725 – Bonds and other fixed interest securities 100 — 100 — Excess cover 8,037 608 8,037 608 Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts 157

Shareholdings (extract)

The complete inventory of shareholdings pursuant to Section 285, No. 11, Section 313, Sub-section 2 and Section 340a, Sub-section 4, No. 2 HGB has been lodged with the Munich Register of Companies.

Name and legal domicile Letter of Percen- Equity 2 in Result in of the affiliated company comfort 1 tage held EUR ’000 EUR ’000

I. Subsidiaries included in the consolidated accounts • Banque LBLux S.A., Luxembourg Õ 75.0 470,627 30,000 • Bayern-Invest Kapitalanlage- gesellschaft mbH, Munich 100.0 15,641 842 • BLB Asia Pacific Ltd., Singapore Õ 100.0 118,746 7,630 • BLB-Beteiligungsgesellschaft Jota mbH & Co. KG Nr. 1, Munich 49.0 3 257,069 – 33,145 • BLB-Beteiligungsgesellschaft Jota mbH & Co. KG Nr. 3, Munich 49.0 3 37,056 737 • BLB-Beteiligungsgesellschaft Jota mbH & Co. KG Nr. 5, Munich 49.0 3 237,928 2,098 • Deutsche Kreditbank Aktiengesellschaft, Berlin Õ 100.0 1,240,342 139,432 • Landesbank Saar, Saarbrücken Õ 4 75.1 504,254 14,000 • MKB – Magyar Külkereskedelmi Bank Rt., Budapest 89.6 593,319 64,849

II. Joint Ventures • LB(Swiss) Privatbank AG, Zurich Õ 50.0 83,475 13,106

III. Associated companies • TxB Transaktionsbank GmbH, Aschheim-Dornach 37.5 67,779 – 9,260

Comments: Amounts in foreign currency were converted to euro at the respective spot exchange rate on 31 December 2004. 1 For the wording of the Letter of Comfort, please see “Contingent liabilities and other liabilities”. 2 Equity as defined in Sections 266 and 272 HGB. 3 Percentage held based on mandatory capital contribution 4 Valid for the period following withdrawal of Gewährträgerhaftung (guarantee obligation) as per 18 July 2005. 158 Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts

Liabilities

Due to banks

BayernLB Group

EUR million 2004 2003 2004 2003

This item includes: • Term liabilities with a residual maturity of – up to three months (including accrued interest) 46,539 46,081 58,146 56,659 – over three months up to one year 16,227 15,249 18,529 18,024 – over one year up to five years 19,286 17,083 22,336 19,737 – over five years 14,244 13,656 17,507 16,918 • Due to affiliated companies 957 1,703 52 47 • Liabilities to companies in which investments are held 71 51 155 213 • Due to affiliated savings banks 8,308 7,514 8,757 7,841

Due to customers

BayernLB Group

EUR million 2004 2003 2004 2003

This item includes: • Other term liabilities with a residual maturity of – up to three months (including accrued interest) 13,562 12,409 19,969 18,006 – over three months up to one year 3,654 2,642 4,152 3,113 – over one year up to five years 7,143 7,148 7,930 7,800 – over five years 16,038 15,029 17,533 16,323 • Due to affiliated companies 151 135 279 290 • Liabilities to companies in which investments are held 299 190 325 200 Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts 159

Securitised liabilities

BayernLB Group

EUR million 2004 2003 2004 2003

This item includes: • Bonds issued – amounts falling due in the following year 15,094 19,219 17,586 19,724 • Other securitised liabilities with a residual maturity of – up to three months (including accrued interest) 3,075 5,645 3,531 5,645 – over three months up to one year 3,968 3,262 4,018 3,262 – over one year up to five years 32 60 32 60 – over five years — — — — • Due to affiliated companies 469 446 — 3 • Liabilities to companies in which investments are held 6 17 1 10

Liabilities administered on behalf of third parties

BayernLB Group

EUR million 2004 2003 2004 2003

This item breaks down as follows: • Due to banks 73 92 81 101 • Due to customers 8,001 8,332 8,181 8,526 • Other liabilities 5 5 5 5

Other liabilities

BayernLB Group

EUR million 2004 2003 2004 2003

This item includes: • Premium liabilities from credit derivatives 797 645 803 650 • Covering obligation resulting from the sale of securities borrowed 788 791 788 791 • Premiums from credit derivatives not yet paid 645 515 646 515 • Payment to the Free State of Bavaria upon conclusion of the EU state aid proceedings 320 — 320 — 160 Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts

Deferred income

BayernLB Group

EUR million 2004 2003 2004 2003

This position includes: • Discount on receivables 139 150 167 182

Subordinated liabilities

BayernLB Group

EUR million 2004 2003 2004 2003

This item includes: • Due to affiliated companies 3 — — —

In the year under review interest expenses amounted to: 220 244 232 256

On the balance sheet date, funds exceeding 10 percent of the total amount of subordinated liabilities had not been raised.

All subordinated liabilities are issued under the following terms: In the case of the Bank’s insolvency or liquidation, repayment shall not take place until all non-subordinated cred- itors have been satisfied. An obligation to make premature repayment at the creditor’s request cannot arise. The prerequisites under which these subordinated liabilities can be counted as liable capital pursuant to Section 10, Sub-section 5a German Banking Act (KWG) are fulfilled.

Equity

Of the capital contributions of silent partners included in the consolidated capital, EUR 83 million are from minority shareholders.

Liable capital

BayernLB Group

EUR million 2004 2003 2004 2003

The following unrealised reserves count as part of the liable capital pursuant to Section 10, Sub-section 2b, Sentence 1, No. 7 KWG: 59 46 64 59 Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts 161

Liabilities in foreign currency

BayernLB Group

EUR million 2004 2003 2004 2003

Total amount of assets denominated in foreign currency 67,811 70,163 75,409 77,403

Contingent liabilities and other liabilities

Neither of these items, disclosed below the bottom line of the balance sheet, contains any elements which have a significant bearing on the Bank’s overall activities.

Letter of comfort

For all financial institutions and other companies which are stated to be covered by the letter of comfort in the inventory of Group shareholdings, we shall ensure, proportion- ate to the size of our respective equity interest, that – with the exception of cases of political risk – they will be in a position to fulfil their contractual obligations.

Assignment of collateral for the Bank’s own liabilities

BayernLB Group

EUR million 2004 2003 2004 2003

Assets have been assigned as collateral in the case of the following liabilities: • Due to banks 10,898 7,907 16,738 12,694 • Due to customers — — 451 401 • Contingent liabilities 26 30 30 33

The provision of collateral for the Bank’s own liabilities predominantly concerns open market transactions with the European System of Central Banks.

Additionally, securities with a nominal value of EUR 2.668 billion at BayernLB and EUR 2.731 billion at Group level have been deposited as collateral in connection with transactions on EUREX, EEX, Clearstream Banking Frankfurt / Main, Clearstream Bank- ing Luxembourg, Euroclear and other stock exchange and clearing systems. 162 Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts

Other financial obligations

Other financial obligations notably arise from rental, use, service and maintenance contracts, and from consulting and marketing agreements.

On the balance sheet date, there were call commitments for capital not fully paid up of EUR 45 million at BayernLB and EUR 47 million at Group level. There were uncalled liabilities from limited partnership relationships of EUR 51 million, and joint liabilities pursuant to Section 24 German Law on Limited Liability Companies (GmbHG) in respect of EUR 18 million. Moreover, there were additional funding obligations amounting to EUR 39 million at BayernLB and EUR 50 million at Group level, as well as a directly enforceable guarantee for the funding obligation of shareholders of the Frankfurt / Main-based Liquiditäts-Konsortialbank GmbH, who are members of Deutsche Spar- kassen- und Giroverband e. V. Amounts due to affiliated companies amounted to EUR 84 million at BayernLB and EUR 86 million for the Group.

Pursuant to Section 157 Conversion law, there is a secondary liability for the Berlin- based Deutsche Kreditbank Aktiengesellschaft in respect of liabilities.

On the balance sheet date, BayernLB’s liability as a member of the guarantee fund of the landesbanks came to EUR 88 million and that of the Group to EUR 93 million. Under the terms of the statutes of the deposit insurance fund run by the Association of German Public-Law Banks (VÖB), the Bank has undertaken to exempt the VÖB from any losses which may be suffered due to measures taken in favour of two credit institutions which are majority-owned by the Bank. As members of deposit protection schemes, individual consolidated institutions are also liable under the provisions governing those schemes. Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts 163

Changes in the portfolio of building-saving contracts and contract amounts of our Home Loan Division (Landesbausparkasse)

Not allotted Allotted Total

Contract Contract Contract No. of amounts No. of amounts No. of amounts contracts EUR million contracts EUR million contracts EUR million

A. Portfolio at end of previous year 1,583,043 32,845 447,556 9,860 2,030,599 42,705

B. Additions in financial year through • New contracts (effective) 252,381 5,994 — — 252,381 5,994 • Transfers 14,865 303 2,789 59 17,654 362 • Waivers and revocations of allotment 10,976 180 — — 10,976 180 • Splits 1,684 — 56 — 1,740 — • Allotments — — 95,993 1,769 95,993 1,769 • Other 11,645 257 583 14 12,228 271 Total 291,551 6,734 99,421 1,842 390,972 8,576

C. Reductions in financial year through • Allotments 95,993 1,769 — — 95,993 1,769 • Reductions — 213 — 6 — 219 • Write-backs 117,527 1,928 38,232 661 155,759 2,589 • Transfers 14,865 303 2,789 59 17,654 362 • Consolidations — — 6,577 — 6,577 — • Contract expiries 3,668 33 79,940 1,718 83,608 1,751 • Waivers and revocations of allotment — — 10,976 180 10,976 180 • Other 12,056 374 510 9 12,566 383 Total 244,109 4,620 139,024 2,633 383,133 7,253

D. Net additions / reductions 47,442 2,114 – 39,603 – 791 7,839 1,323

E. Portfolio at end of financial year 1,630,485 34,959 407,953 9,069 2,038,438 44,028

Of which: building-savers outside the Federal Republic of Germany 4,514 96 722 18 5,236 114

Contract amounts No. of contracts EUR million

Portfolio of contracts not yet effective • Concluded prior to 01. 01. 2004 7,351 237 • Concluded in 2004 financial year 47,475 1,197

As far as changes in the individual tariffs are concerned, please refer to the annual report of our Home Loan division. 164 Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts

Changes in the volume of the allotment fund of our Home Loan division

EUR million

A. Additions Brought forward from previous year (surplus): Amounts not yet disbursed 3,874 Additions in financial year • Building-savers’ deposits (incl. building-saving premiums) 1,539 • Redemption amounts1 (incl. building-saving premiums) 754 • Interest on building-savers’ deposits 174 Total additions 6,341

B. Reductions Reductions in financial year • Allotted amounts, if disbursed a) Building-savers’ deposits 830 b) Building loans 521 • Repayment of building-savers’ deposits on building-saving contracts not yet allotted 500 Additions surplus (amounts not yet disbursed) at end of financial year 2 4,490 Total reductions 6,341

Comments: 1 Redemption amounts are the proportions of the redemption amounts which are purely used for redemptions. 2 The additions surplus includes, among other items: a) Building-savers’ deposits not yet disbursed relating to allotted building-saving contracts: EUR 217 million b) Building loans not yet disbursed relating to allotments: EUR 506 million Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts 165

Changes in the portfolio of building-saving contracts and contract amounts of our Home Loan division and of the Landesbausparkasse Saar

Not allotted Allotted Total

Contract Contract Contract No. of amounts No. of amounts No. of amounts contracts EUR million contracts EUR million contracts EUR million

A. Portfolio at end of previous year 1,682,387 34,733 480,658 10,465 2,163,045 45,198

B. Additions in financial year through • New contracts (effective) 269,318 6,322 — — 269,318 6,322 • Transfers 15,247 314 2,861 61 18,108 375 • Waivers and revocations of allotment 14,420 229 — — 14,420 229 • Splits 1,742 — 56 — 1,798 — • Allotments — — 105,968 1,927 105,968 1,927 • Other 12,412 272 1,200 15 13,612 287 Total 313,139 7,137 110,085 2,003 423,224 9,140

C. Reductions in financial year through • Allotments 105,968 1,927 — — 105,968 1,927 • Reductions — 218 — 6 — 224 • Write-backs 125,504 2,061 39,945 685 165,449 2,746 • Transfers 15,247 314 2,861 61 18,108 375 • Consolidations — — 7,749 — 7,749 — • Contract expiries 3,668 33 85,632 1,816 89,300 1,849 • Waivers and revocations of allotment — — 14,420 229 14,420 229 • Other 13,213 399 1,082 28 14,295 427 Total 263,600 4,952 151,689 2,825 415,289 7,777

D. Net additions / reductions 49,539 2,185 – 41,604 – 822 7,935 1,363

E. Portfolio at end of financial year 1,731,926 36,918 439,054 9,643 2,170,980 46,561

Of which: building-savers outside the Federal Republic of Germany 7,496 161 1,252 31 8,748 192

Contract amounts No. of contracts EUR million

Portfolio of contracts not yet effective • Concluded prior to 01. 01. 2004 8,351 260 • Concluded in 2004 financial year 50,203 1,258

As far as changes in the individual tariffs are concerned, please refer to our Home Loan division’s annual report and the annual report of Landesbausparkasse Saar. 166 Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts

Changes in the volume of the allotment fund of our Home Loan division and that of the Landesbausparkasse Saar

EUR million

A. Additions Brought forward from previous year (surplus): Amounts not yet disbursed 4,107 Additions in financial year • Building-savers’ deposits (incl. building-saving premiums) 1,636 • Redemption amounts1 (incl. building-saving premiums) 798 • Interest on building-savers’ deposits 184 Total additions 6,725

B. Reductions Reductions in financial year • Allotted amounts, if disbursed a) Building-savers’ deposits 885 b) Building loans 556 • Repayment of building-savers’ deposits on building-saving contracts not yet allotted 533 Additions surplus (amounts not yet disbursed) at end of financial year 2 4,751 Total reductions 6,725

Comments: 1 Redemption amounts are the proportions of the redemption amounts which are purely used for redemptions. 2 The additions surplus includes, among other items: a) Building-savers’ deposits not yet disbursed relating to allotted building-saving contracts: EUR 239 million b) Building loans not yet disbursed relating to allotments: EUR 539 million

Derivative transactions

The table below shows interest rate-related and foreign currency-related forward transactions as well as other forward transactions and credit derivatives not yet settled as per the balance sheet date. The majority of the deals was concluded to hedge fluctuations in interest rates, exchange rates or market prices and trading on behalf of customers. Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts 167

Derivatives transactions within BayernLB – presentation of volumes

Positive Negative market 1 market 1 Nominal values values values

EUR million 2004 2003 2004 2004

Interest rate risks • Interest rate swaps 582,540 532,923 15,602 14,582 • FRAs 9,959 28,061 629 104 • Interest rate options 21,804 12,456 180 704 – purchases 8,951 4,219 180 — – sales 12,853 8,237 — 704 • Caps, floors 19,062 20,886 104 103 • Exchange-traded contracts 155,567 86,160 60 58 • Other forward transactions 991 721 — 91 Interest rate risks – total – 789,923 681,207 16,575 15,642

Currency risks • Forward exchange transactions 124,753 158,341 2,646 2,813 • Currency swaps / cross currency swaps 38,760 40,474 3,125 3,300 • Foreign exchange options 2,626 5,204 73 46 – purchases 1,300 2,691 73 — – sales 1,326 2,513 — 46 • Exchange-traded contracts — — — — • Other forward transactions 251 215 21 — Currency risks – total – 166,390 204,234 5,865 6,159

Share and other price risks • Forward share transactions 24 — — — • Index options 710 464 12 13 – purchases 372 125 12 — – sales 338 339 — 13 • Share options 1,840 1,358 88 86 – purchases 939 743 88 — – sales 901 615 — 86 • Exchange-traded contracts 297 421 4 1 • Other forward transactions 388 217 6 5 Share and other price risks – total – 3,259 2,460 110 105

Risks from credit derivatives • Credit default swaps 38,579 30,642 142 138 – protection buyer 20,415 16,737 34 124 – protection seller 18,164 13,905 108 14 • Credit linked notes 899 586 — — – protection buyer 899 586 — — – protection seller — — — — • Total return swaps 1,294 474 2 — – protection buyer 647 237 1 — – protection seller 647 237 1 — • Credit spread options 365 392 — — – protection buyer — — — — – protection seller 365 392 — — Risks from credit derivatives – total – 41,137 32,094 144 138 168 Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts

Derivatives transactions within the BayernLB Group – presentation of volumes

Positive Negative market 1 market 1 Nominal values values values

EUR million 2004 2003 2004 2004

Interest rate risks • Interest rate swaps 595,735 544,716 15,761 14,961 • FRAs 10,026 28,119 629 104 • Interest rate options 21,809 12,461 180 704 – purchases 8,951 4,224 180 — – sales 12,858 8,237 — 704 • Caps, floors 19,692 21,486 112 104 • Exchange-traded contracts 156,122 86,160 60 58 • Other forward transactions 991 747 — 91 Interest rate risks – total – 804,375 693,689 16,742 16,022

Currency risks • Forward exchange transactions 126,241 159,728 2,666 2,855 • Currency swaps / cross currency swaps 39,000 40,704 3,125 3,348 • Foreign exchange options 2,674 5,226 73 46 – purchases 1,312 2,698 73 — – sales 1,362 2,528 — 46 • Exchange-traded contracts — — — — • Other forward transactions 251 215 21 — Currency risks – total – 168,166 205,873 5,885 6,249

Share and other price risks • Forward share transactions 71 94 — — • Index options 829 470 12 13 – purchases 428 128 12 — – sales 401 342 — 13 • Share options 1,842 1,384 88 86 – purchases 941 768 88 — – sales 901 616 — 86 • Exchange-traded contracts 297 421 4 1 • Other forward transactions 388 218 6 5 Share and other price risks – total – 3,427 2,587 110 105

Risks from credit derivatives • Credit default swaps 38,605 30,642 142 138 – protection buyer 20,421 16,737 34 124 – protection seller 18,184 13,905 108 14 • Credit linked notes 899 586 — — – protection buyer 899 586 — — – protection seller — — — — • Total return swaps 1,294 474 2 — – protection buyer 647 237 1 — – protection seller 647 237 1 — • Credit spread options 365 392 — — – protection buyer — — — — – protection seller 365 392 — — Risks from credit derivatives – total – 41,163 32,094 144 138 Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts 169

Derivatives transactions within BayernLB – maturities structure

Nominal values

Share and other Risks from credit Interest rate risks Currency risks price risks derivatives

EUR million 2004 2003 2004 2003 2004 2003 2004 2003

Residual terms • up to three months 74,769 78,344 66,650 79,087 1,317 1,169 112 5,304 • up to 1 year 234,501 175,721 57,253 68,716 844 506 833 403 • up to 5 years 287,937 248,753 24,049 32,672 843 407 21,381 14,749 • more than 5 years 192,716 178,389 18,438 23,759 255 378 18,811 11,638 Total 789,923 681,207 166,390 204,234 3,259 2,460 41,137 32,094

Derivatives transactions within the BayernLB Group – maturities structure

Nominal values

Share and other Risks from credit Interest rate risks Currency risks price risks derivatives

EUR million 2004 2003 2004 2003 2004 2003 2004 2003

Residual terms • up to three months 76,262 80,275 67,751 79,899 1,459 1,207 112 5,304 • up to 1 year 237,241 178,026 57,723 69,279 870 595 833 403 • up to 5 years 293,177 253,033 24,116 32,811 843 407 21,407 14,749 • more than 5 years 197,695 182,355 18,576 23,884 255 378 18,811 11,638 Total 804,375 693,689 168,166 205,873 3,427 2,587 41,163 32,094 170 Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts

Derivatives transactions within BayernLB – counterparty structure

Positive Negative market 1 market 1 Nominal values values values

EUR million 2004 2003 2004 2004

OECD banks 739,684 735,880 18,436 17,488 Non-OECD banks 4,779 4,895 25 18 Public-sector entities within the OECD 4,809 4,642 213 43 Other counterparties* 251,437 174,578 4,020 4,495 Total 1,000,709 919,995 22,694 22,044

Derivatives transactions within the BayernLB Group – counterparty structure

Positive Negative market 1 market 1 Nominal values values values

EUR million 2004 2003 2004 2004

OECD banks 755,027 749,622 18,623 17,958 Non-OECD banks 4,779 4,895 25 18 Public-sector entities within the OECD 4,909 4,642 213 43 Other counterparties* 252,416 175,084 4,020 4,495 Total 1,017,131 934,243 22,881 22,514

* including exchange-traded contracts Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts 171

Derivatives transactions within BayernLB – trading transactions2

Positive Negative market 1 market 1 Nominal values values values

EUR million 2004 2003 2004 2004

Interest rate-based contracts 649,565 537,145 11,899 11,697 Currency-based contracts 123,915 152,901 3,798 4,145 Share-based contracts 2,166 1,311 94 90 Credit derivatives contracts 27,805 20,132 125 115 Trading transactions – total 803,451 711,489 15,916 16,047

Derivatives transactions within the BayernLB Group – trading transactions 2

Positive Negative market 1 market 1 Nominal values values values

EUR million 2004 2003 2004 2004

Interest rate-based contracts 650,342 538,003 11,903 11,705 Currency-based contracts 124,133 153,924 3,811 4,160 Share-based contracts 2,214 1,344 94 90 Credit derivatives contracts 27,805 20,132 125 115 Trading transactions – total 804,494 713,403 15,933 16,070

Comments: 1 Market value is the amount at which derivatives may be bought or sold on the balance sheet date. Market value is calculated either on the basis of quoted market prices or using generally recognised valuation models (e. g. present value and option pricing models) based on current market parameters. 2 Trading transactions in derivative instruments include transactions carried out within the framework of the Bank’s business strategies and limits by the competent trading units with the aim of achieving own-trading gains. 172 Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts

Disclosures relating to the profit and loss statement of the BayernLB and the consolidated profit and loss statement

Other operating income and expenses

The main items included under Other operating income are earnings from tax refunds of EUR 140 million for BayernLB and EUR 145 million for the Group (EUR 142 million for the BayernLB and EUR 145 million for the Group in the previous year) as well as earnings from the write-back of other provisions worth EUR 23 million at BayernLB and EUR 26 million at Group level (EUR 27 million and EUR 30 million respectively in the previous year).

Other operating income also includes one-off earnings of EUR 123 million posted by Deutsche Kreditbank Aktiengesellschaft, Berlin. This amount resulted from the early termination of payment obligations under the D-Markbilanzgesetz (DMBilG – legislation created in connection with German reunification) and, consequently, the necessary review of reserves and valuation of residual risks at the Bank.

The main items included under Other operating expenses constitute expenditure on provisioning measures affecting holdings of the Deutsche Kreditbank Aktiengesell- schaft, Berlin.

Extraordinary expenses

This position includes in particular the payment of EUR 320 million to the Free State of Bavaria upon termination of the EU state aid proceedings.

Taxes on income and earnings

Taxes disclosed on income and earnings relate to the result from ordinary business. The tax position is also influenced by the writing back of tax deferrals.

Geographical markets

BayernLB Group

EUR million 2004 2003 2004 2003

The total amount of income disclosed in items 1, 3, 5, 7 and 8 breaks down into the following geographical markets: • Germany 8,766 9,058 10,233 10,351 • Europe (excluding Germany) 919 1,119 1,913 1,917 • Americas 818 1,095 818 1,094 • Asia 236 327 239 332 Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts 173

Supplementary information

The administrative bodies of BayernLB*

Board of Administration Board of Management

Prof. Dr. Kurt Faltlhauser Werner Schmidt Chairman Chairman State Minister, Bavarian State Ministry Dr. Peter Kahn of Finance (until 31. 12. 2004) Dr. Siegfried Naser Deputy Chairman First Vice Chairman Werner Strohmayr Executive President of the (until 30. 06. 2004) Association of Bavarian Savings Banks Dr. Rudolf Hanisch Dr. Günther Beckstein Second Vice Chairman Dieter Burgmer State Minister, Bavarian State Ministry Theo Harnischmacher of the Interior Stefan W. Ropers Hansjörg Christmann Third Vice Chairman Dr. Gerhard Gribkowsky Chief District Administrator of the District of Dachau

Josef Deimer Lord Mayor of the City of Landshut

Alois Hagl Chairman of the Board of Directors of Sparkasse im Landkreis Schwandorf

Georg Schmid Permanent Secretary, Bavarian State Ministry of the Interior

Klaus Weigert Deputy Secretary, Bavarian State Ministry of Finance

Prof. Hubert Weiler Chairman of the Board of Directors of Sparkasse Nürnberg

Dr. Otto Wiesheu State Minister, Bavarian State Ministry of Economic Affairs, Infrastructure, Transport and Technology

* Relevant for the period from 1 January to 31 December 2004. 174 Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts

Remunerations of the governing bodies of BayernLB

BayernLB Group

EUR thousand 2004 2003 2004 2003

Total remunerations of the financial year: • Members of the Board of Management of BayernLB 4,542 4,857 4,778 5,113 • Members of the Board of Administra- tion of BayernLB* 320 317 350 360 • Former members of the Board of Management of BayernLB and their surviving dependants 4,046 3,910 4,082 3,938 • Former members of the Board of Administration of BayernLB and their surviving dependants 5 — 14 — • Pension provisions set up for former members of the Board of Manage- ment of BayernLB and their surviving dependants 36,177 34,115 36,177 34,115

* Previous year’s figures have been adjusted.

Loans to the governing bodies of BayernLB

BayernLB Group

EUR thousand 2004 2003 2004 2003

Total amount of advances, loans and guarantees granted to members of the Board of Management and the Board of Administration: • Members of the Board of Management of BayernLB 2,189 1,600 2,234 1,645 • Members of the Board of Administration of BayernLB 488 419 488 419 Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts 175

Mandates held by legal representatives or by other employees of the BayernLB Group*

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

At BayernLB:

Board of Management Werner Schmidt DekaBank Deutsche Girozentrale, Frankfurt / Main Deutsche Kreditbank Aktiengesellschaft, Berlin Deutsche Lufthansa AG, Cologne Drees & Sommer AG, Stuttgart Herrenknecht AG, Schwanau Jenoptik AG, Jena Landesbank Saar, Saarbrücken LB(Swiss) Privatbank AG, Zurich Liquiditäts-Konsortialbank GmbH, Frankfurt / Main Wieland-Werke AG, Ulm

Dr. Peter Kahn Banque LBLux S.A., Luxembourg Bayern-Invest Kapitalanlagegesellschaft mbH, Munich Deutsche Kreditbank Aktiengesellschaft, Berlin Ed. Züblin AG, Stuttgart GBWAG Bayerische Wohnungs-AG, Munich GEWOFAG Gemeinnützige Wohnungsfürsorge AG, Munich Knaus AG, Jandelsbrunn Landesbank Saar, Saarbrücken LB(Swiss) Privatbank AG, Zurich Warema Renkhoff Holding AG, Marktheidenfeld

Dr. Rudolf Hanisch Banque LBLux S.A., Luxembourg Bayern-Invest Kapitalanlagegesellschaft mbH, Munich CDC IXIS S.A., Paris E.ON Energie AG, Munich GBWAG Bayerische Wohnungs-AG, Munich

Dieter Burgmer Banque LBLux S.A., Luxembourg Bayern-Invest Kapitalanlagegesellschaft mbH, Munich BayernLB International Fund Management S.A., Luxembourg BLB Asia Pacific Ltd., Singapore GBWAG Bayerische Wohnungs-AG, Munich

Theo Harnischmacher Bayern-Invest Kapitalanlagegesellschaft mbH, Munich Landesbank Saar, Saarbrücken Resba GmbH (until 31.0.2004 SchmidtBank AG), Hof

Stefan W. Ropers Bayern-Invest Kapitalanlagegesellschaft mbH, Munich Deutsche Factoring Bank Deutsche Factoring GmbH & Co., Bremen MKB – Magyar Külkereskedelmi Bank Rt., Budapest

Dr. Gerhard Gribkowsky debis Air Finance B.V., Amsterdam Formula One Administration Ltd., London Formula One Management Ltd., London

* This information is valid as per 31 December 2004. 176 Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts

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

entrusted with Board of Management tasks Dr. Ralph Schmidt TxB Transaktionsbank GmbH, Aschheim-Dornach

Employee Oliver Becker RUEFA Reisen AG, Vienna

Harald Glöckl Formula One Administration Ltd., London Formula One Management Ltd., London

Ernst Holland mfi Management für Immobilien AG, Essen

Georg Jewgrafow Bürgerliches Brauhaus Ingolstadt AG, Ingolstadt

Thomas Neher Bayern-Invest Kapitalanlagegesellschaft mbH, Munich

Andreas Nerantzakidis Bürgerliches Brauhaus Ingolstadt AG, Ingolstadt Haupt Pharma AG, Berlin

Dr. Bernhard Oswald Bürgerliches Brauhaus Ingolstadt AG, Ingolstadt TxB Transaktionsbank GmbH, Aschheim-Dornach

Michael Schmittlein trans-o-flex Schnell-Lieferdienst GmbH, Weinheim

Dr. Franz Wirnhier DKB Immobilien AG, Berlin-Charlottenburg

In the Group:

Board of Directors of Deutsche Kreditbank Aktiengesellschaft Günther Troppmann DKB Immobilien AG, Berlin-Charlottenburg GBWAG Bayerische Wohnungs-AG, Munich Hertha BSC KG mbH aA, Berlin MITEC Automotive AG, Eisenach

Rolf Mähliß DKB Immobilien AG, Berlin-Charlottenburg

Board of Directors of Landesbank Saar Dr. Max Häring Bayern-Invest Kapitalanlagegesellschaft mbH, Munich DekaBank Deutsche Girozentrale, Frankfurt / Main Deka Immobilien Investment GmbH, Frankfurt / Main Deutsche Factoring Bank Deutsche Factoring GmbH & Co., Bremen Höll AG, Saarbrücken Saarländische Investitionskreditbank AG, Saarbrücken Saarstahl AG, Völklingen SKG BANK GmbH, Saarbrücken

Werner Severin Eifelhöhen-Klinik AG, Bonn SKG BANK GmbH, Saarbrücken

Jürgen Müsch Deka Investment GmbH, Frankfurt / Main FinanzIT GmbH, Hannover

Frank Peter Eloy Société Alsacienne de Développement et d’Expansion S.A., Strasbourg Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts 177

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

Management of LB(Swiss) Privatbank AG Walter Nötzli Deka Swiss Privatbank AG, Zurich

Board of Directors of MKB – Magyar Külke- reskedelmi Bank Rt. Dr. Imre Balogh Giro Elszámolásforgalmi Rt., Budapest

Csilla Bolla Giro Elszámolásforgalmi Rt., Budapest

József Janik Dunaferr Lörinci Hengermü Kft., Budapest Extermetal Ltd., London

Dr. Sándor Patyi Hitelgarancia Rt., Budapest

Number of employees (annual average)

Women Men Total

BayernLB 2,460 2,607 5,067

Consolidated companies 2,241 1,434 3,675

Group 4,701 4,041 8,742

of which: consolidated companies on a pro rata basis (in proportion to participation) 16 24 40

The total includes 1,083 part-time employees, whose working hours correspond to those of 670 full-time employees. Our 141 trainees are not included.

Munich, 15 March 2005

Bayerische Landesbank The Board of Management

Schmidt Dr. Hanisch Harnischmacher

Burgmer Ropers Dr. Gribkowsky 178 Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts

Independent Auditor’s Report

We have audited the annual financial statements, together with the bookkeeping system, of Bayerische Landesbank (hereinafter called “Bank”), a corporation established under public law, Munich, as well as the consolidated financial statements consisting of the Balance Sheet, P / L statement, Statement of Changes in Shareholders’ Equity, Cash Flow Statement, Segment Reporting and Notes to the Accounts and its report on the position of the Bank and the Group prepared by the Bank for the financial year from 1 January to 31 December 2004. The preparation of these documents in accordance with German commercial law and supplementary provisions in the Law on Bayerische Landes- bank in the version officially published on 1 February 2003 and its Statutes is the responsibility of the Bank’s management. Our responsibility is to express an opinion on the annual financial statements, together with the bookkeeping system, as well as on the consolidated financial statements and the report on the position of the Bank and the Group based on our audit.

We conducted our audit of the annual and consolidated financial statements in accordance with Section 317 HGB (German Commercial Code) and the German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer (IDW). Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation of the net assets, financial position and results of operations in the annual and the consolidated financial statements as well as the cash flows within the Group in accordance with the principles of proper accounting and in the report on the position of the Bank and the Group are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the Bank and the Group and evaluations of possible misstatements are taken into account in the determination of audit procedures. The effectiveness of the internal control system relating to the accounting system and the evidence supporting the disclosures in the books and records, the annual and consolidated financial statements and the report on the position of the Bank and the Group are examined primarily on a test basis in line with the framework of the audit. The audit includes assessing the accounting and consolidation principles used and significant estimates made by management, as well as evaluating the overall presentation of the annual and the consolidated financial statements and the report on the position of the Bank and the Group. We believe that our audit provides a reasonable basis for our opinion.

Our audit has not led to any reservations. Report by the Board of Administration, accounts of BayernLB and the BayernLB Group and notes to the accounts 179

In our opinion, the annual and the consolidated financial statements give a true and fair view of the net assets, financial position and results of operations of the Bank and the Group respectively as well as the cash flows within the Group during the Group’s financial year, in accordance with the principles of proper accounting. On the whole the report on the position of the Bank and the Group provides a suitable understanding of the Bank’s and the Group’s position and suitably presents the risks of future development.

Munich, 29 March 2005

KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft

Wohlmannstetter Ufer Auditor Auditor Great things are made up of many small details. And the sum of the parts is greater than the whole. Security plays an essential role here: precise performance controls and modern technology are indispensable to the big picture. And to individual success. Complex enterprises demand reliability.

 Advisory Boards and addresses

Trustees 184 Economic Advisory Council 185 Savings Bank Advisory Council 187 BayernLB’s network 188 184 Advisory Boards and addresses

Trustees*

Dr. Werner Böhme First Deputy Senior Assistant Secretary (retired) Norbert Schulz Taxetstraße 41 Senior Assistant Secretary 85737 Ismaning Bavarian State Ministry of the Interior Odeonsplatz 3 80539 München

Second Deputy Dr. Manfred Seume Senior Assistant Secretary (retired) Mozartstraße 8 87740 Buxheim

* For the period from 1 January to 31 December 2004 Advisory Boards and addresses 185

Economic Advisory Council*

Dr. Ferdinand Graf von Ballestrem Erwin Horak Member of the Board of Directors President MAN Aktiengesellschaft Staatliche Lotterieverwaltung Munich Munich

Willi Berchtold Dr. Gerhard Jooss Member of the Board of Directors Essen ZF Friedrichshafen AG Friedrichshafen Dr. Eng. h.c. Volker Jung Chairman of the Supervisory Board Karl J. Dersch MAN Aktiengesellschaft Munich Munich

Dipl.-Kfm. Heinz-Werner Götz Daniel Just Auditor Member of the Board of Directors Director of the Verband Bayerischer Bayerische Versorgungskammer Wohnungsunternehmen e.V. Munich Munich Alfred H. Lehner Dipl.-Kfm. Fritz Haberl Utting am Ammersee Munich Dr. rer. pol. Dieter Nagel Dr. Max Häring Member of the Supervisory Board Chairman of the Board of Management Thüga Aktiengesellschaft Landesbank Saar Girozentrale Munich Saarbrücken Dr. Georg Graf von Schall-Riaucour Dipl.-Ing., Dipl.-Wirtsch.-Ing. Chief Executive Officer Peter Hamberger Wittelsbacher Ausgleichsfonds Manager Munich Hamberger Industriewerke GmbH Rosenheim Rudolf W. Schmitt Chairman of the Board of Directors Willi Hermsen LfA Förderbank Bayern Ottobrunn Munich

* For the period from 1 January to 31 December 2004 186 Advisory Boards and addresses

Dipl.-Kfm. Dieter Schön Dr. Wolfgang Weiler Managing Director Board Member Schön-Klinik Verwaltung GmbH HUK-Coburg Prien Coburg

Stefan Schörghuber Dr. rer. pol. Walter Wübben Proprietor of Managing Partner Unternehmensgruppe Schörghuber ABG Allgemeine Baubetreuungs- Munich gesellschaft Cologne Dr.-Ing. Dieter Soltmann Honorary President of the Chamber of Industry and Commerce for Munich and Upper Bavaria Munich

Dr. Péter Stotz Deputy Chief Executive Member of the Board of Directors Hungarian Foreign Trade Bank Ltd. Budapest

Dieter Teichmann Deputy Chairman of the Board of Directors Bayerische Versorgungskammer Munich

Karl-Heinz Trautmann President of the Association of Saar Savings Banks Saarbrücken

Prof. Dr. h.c. Ignaz Walter Walter Unternehmensgruppe Augsburg Advisory Boards and addresses 187

Savings Bank Advisory Council*

Dieter Bartke Johann Reiter Savings Bank Director Savings Bank Director Chairman of the Board of Directors Chairman of the Board of Directors Kreis- und Stadtsparkasse Erding Sparkasse Landsberg-Dießen Erding Landsberg

Rudolf Faltermeier Siegmund Schiminski Vice President Savings Bank Director Association of Bavarian Savings Banks Chairman of the Board of Directors Munich Sparkasse Bayreuth Bayreuth Günter Götz Savings Bank Director Hans Schmittner Chairman of the Board of Directors Savings Bank Director Stadtsparkasse Weiden Chairman of the Board of Directors Weiden i.d.Opf. Sparkasse Miltenberg-Obernburg Miltenberg Rainer Heller Savings Bank Director Josef Waschinger Chairman of the Board of Directors Savings Bank Director Sparkasse Fürth Chairman of the Board of Directors Fürth Sparkasse Freyung-Grafenau Freyung Alfons Maierthaler Savings Bank Director Chairman of the Board of Directors Kreissparkasse Augsburg Augsburg

Werner Netzel Vice President Association of Bavarian Savings Banks Munich

* For the period from 1 January to 31 December 2004 188 Advisory Boards and addresses

BayernLB’s network

Domestic Subsidiaries

Munich Berlin BayernLB (Head Office) Deutsche Kreditbank Aktiengesellschaft Brienner Straße 18 Kronenstraße 8 / 10 80333 München 10117 Berlin Tel +49 89 2171-01 Tel +49 30 20155-0 Fax +49 89 2171-23579 Fax +49 30 20155-465 SWIFT BIC: BYLA DE MM SWIFT BIC: BYLADEM 1001 [email protected] [email protected] www.bayernlb.de www.dkb.de

Nuremberg Saarbrücken BayernLB SaarLB Lorenzer Platz 27 Ursulinenstraße 2 90402 Nürnberg 66111 Saarbrücken Tel +49 911 2359-0 Tel +49 681 383-01 Fax +49 911 2359-383 Fax +49 681 383-1200 SWIFT BIC: BYLA DE 77 SWIFT BIC: SALADE 55 [email protected] [email protected] www.bayernlb.de www.saarlb.de

15 Sales Offices of LBS-Bayern with locations in: Ansbach, Bad Tölz, Bamberg, Bayreuth, Erding, Erlangen, Fürstenfeldbruck, Ingolstadt, Landshut, Munich, Neumarkt, Neu-Ulm, Nuremberg, Oberviechtach, Würzburg and

111 additional advisory centres in Ba- varia Advisory Boards and addresses 189

International New York BayernLB Branches 560 Lexington Avenue (as per 1 January 2005) New York, N. Y. 10022 / USA Tel +1 212 310-9800 Hong Kong Fax +1 212 310-9841 BayernLB SWIFT BIC: BYLA US 33 19 / F., Standard Chartered Bank Building Paris 4A Des Voeux Road Central BayernLB Hong Kong / Hong Kong 203, rue du Faubourg Saint-Honoré Tel +852 2978-8333 F-75380 Paris Cedex 08 Fax +852 2877-3817 Tel +33 1 442114-00 SWIFT BIC: BYLA HK HH Fax +33 1 442114-44 [email protected] SWIFT BIC: BYLA FR PP

London Shanghai BayernLB BayernLB Bavaria House · 13 / 14 Appold Street 17 / F., Hua Du Manison GB-London EC2A 2NB 828-838 Zhang Yang Road Tel +44 20 7247-0056 Pudong Fax +44 20 7955-5173 Shanghai 200122 / PR China SWIFT BIC: BYLA GB 22 Tel +86 21 6876-6600 [email protected] Fax +86 21 6876-7700 [email protected] Luxembourg BayernLB Labuan* 3, rue Jean Monnet BayernLB L-2180 Luxembourg Licensed Offshore Bank (940028C) Tel +352 43 3122-1 Unit 14-C, Level 14 Fax +352 43 3122-4599 Block 4, Ofﬁce Tower SWIFT BIC: BYLA LU LB Financial Park Labuan, Jalan Merdeka [email protected] 87000 Federal Territory of Labuan / Malaysia Milan Tel +60 87 591-000 BayernLB Fax +60 87 422-175 Via Cordusio, 2 SWIFT BIC: BYLA MY KA I-20123 Milano [email protected]

Tel +39 02 86390-1 * due to be closed in 2005 Fax +39 02 864216 SWIFT BIC: BYLA IT MM [email protected] 190 Advisory Boards and addresses

Subsidiaries Budapest Hungarian Foreign Trade Bank Luxembourg MKB – Magyar Külkereskedelmi Bank Rt. Banque LBLux S. A. Váci u. 38. 3, rue Jean Monnet 1056 Budapest L-2180 Luxembourg Tel +36 1 327-8600 Tel +352 42 434-1 Fax +36 1 269-0959 Fax +352 42 434-5099 Telex 22-6941 extr h SWIFT BIC: BYLA LU LL SWIFT BIC: MKKB HU HB [email protected] [email protected] www.lblux.lu www.mkb.hu

Zurich LB(Swiss) Privatbank AG Börsenstrasse 16 Postfach CH-8022 Zürich Tel +41 1 26544-44 Fax +41 1 26544-11 SWIFT BIC: BYLA CH ZZ [email protected] www.lbswiss.ch

Editorial details

Publisher Bayerische Landesbank Brienner Straße 18 80333 München Tel +49 89 2171-27176 Fax +49 89 2171-23579 Telegramm Bayernbank München Teletex +89 8827 GZMtex Reuters Monitor BLAX, BAYA-B SWIFT BIC: BYLA DE MM [email protected] www.bayernlb.de

Text / editorial staff / production BayernLB Corporate Center Support Operations Corporate Development / BoM Support division

Concept and Layout MetaDesign

Printed by Lipp GmbH, Graphische Betriebe

Photography Norbert Hüttermann Page 27: Jens Weber, Munich Architect: Stephan Braunfels

The annual report is printed on environ- mentally compatible non-chlorine bleached cellulose. The annual report is also available in German and can be downloaded as a pdf file from www.bayernlb.com under Press / Facts and Figures.

Editorial deadline: 22.03.2005

Bayerische Landesbank Brienner Strasse 18 80333 München www.bayernlb.de