Annual Financial Statements and Management Report Of

Ef ficiency Experience Partnership INPUT Innovation Integrity Longevity Cooperation Proximity Marke tability S ME partner Fairness Openness Focus Optimization Unity Reciprocity Quality Safety Guidance Solidar ity E xperts Stability Strategy Subsidiarity Synergy Continuity Drive Tradition Competence Transparenc y Su stainability Responsibility Reliability Network Trust Competitiveness Growth Foresight Targets Str e ngth E xperience Partnership INPUT Innovation Integrity Cooperation Efficiency SME partner Coordination Lo ngevity Openness Focus Optimization Unity Reciprocity Marketability Quality Safety Guidance Soli darity Ex perts Synergy Continuity Fairness Strategy Subsidiarity Drive Tradition Competence Growth Trans p arency Pe rspective Sustainability Responsibility Reliability Stability Network Foresight Competitiveness Proxi m ity T argets Trust Strength Unity Reciprocity Guidance Solidarity Quality Safety Experts Optimization Ef ficiency Experience Partnership INPUT Innovation Integrity Longevity Cooperation Proximity Marke tability S ME partner Fairness Openness Focus Optimization Unity Reciprocity Quality Safety Guidance Solidar ity E xperts Stability Strategy Subsidiarity Synergy Continuity Drive Tradition Competence Transparenc y Su stainability Responsibility Reliability Network Trust Foresight Competitiveness Growth Targets Stre ngth ship Subsidiarity Longevity Cooperation Coordination Proximity Fairness Openness Integrity Efficien cy Im petus Marketability SME partner Innovation Optimization Sustainability Reciprocity Quality Safety gets Strength Guidance Solidarity Experience Experts Competitiveness Stability Continuity Strateg y Synergy Drive Tradition Competence Transparency Perspective Responsibility Reliability Network Trust Fore s ight th Efficiency Experience Partnership INPUT Innovation Integrity Longevity Cooperation Coordinatio n Pr oximity Marketability SME partner Fairness Openness Focus Optimization Unity Reciprocity Orientat i on Ex perts Stability Subsidiarity Drive Synergy Continuity Tradition Competence Transparency Perspecti ve Su stainability Responsibility Reliability Network Strength Competitiveness Trust Foresight Growth Ta r gets E xperience Partnership INPUT Innovation Integrity Cooperation Efficiency SME partner Coordination Lo ngevity Openness Focus Optimization Unity Reciprocity Safety Guidance Solidarity Marketability Qu ality Ex perts Synergy Continuity Fairness Strategy Subsidiarity Drive Tradition Competence Growth Transp arency Pe rspective Sustainability Responsibility Reliability Stability Network Foresight Competitiveness Proxi m ity T argets Trust Strength Unity Reciprocity Guidance Solidarity Quality Safety Optimization Experts Ef ficiency Experience Partnership INPUT Innovation Integrity Longevity Cooperation Proximity Marke tability S ME partner Fairness Openness Focus Optimization Unity Reciprocity Quality Safety Guidance Solidar ity E xperts Stability Strategy Subsidiarity Synergy Continuity Drive Tradition Competence Transparenc y Su stainability Responsibility Reliability Network Trust Competitiveness Growth Foresight Targets Stre ngth E xperience Partnership INPUT Innovation Integrity Cooperation Efficiency SME partner Coordination Lo ngevity Openness Focus Optimization Unity Reciprocity Marketability Quality Safety Guidance Solid arity Ex perts Synergy Continuity Fairness Strategy Subsidiarity Drive Tradition Competence Growth Trans p arency Pe rspective Sustainability Responsibility Reliability Stability Network Foresight Competitiveness Proxi m ity T argets Trust Strength Unity Reciprocity Guidance Solidarity Quality Safety Experts Optimization Ef ficiency Experience Partnership INPUT Innovation Integrity Longevity Cooperation Proximity Marke tability S ME partner Fairness Openness Focus Optimization Unity Reciprocity Quality Safety Guidance Solidar ity E xperts Stability Strategy Subsidiarity Synergy Continuity Drive Tradition Competence Transparenc y Su stainability Responsibility Reliability Network Trust Foresight Competitiveness Growth Targets Stre ngth ship Subsidiarity Longevity Cooperation Coordination Proximity Fairness Openness Integrity Efficien cy Im petus Marketability SME partner Innovation Optimization Sustainability Reciprocity Quality Safety gets Strength Guidance Solidarity Experience Experts Competitiveness Stability Continuity Strate gy Synergy Drive Tradition Competence Transparency Perspective Responsibility Reliability Network Trust Fore s ight th EfficiAnnuency Experiencae Plartn finership INPaUT Incinnovationa Intlegrity st Longaevitytements Cooperation Coordina t ion Pr oximitya Mndarketabi lmity SMaE partnnera Fairngementess Openness Focus Optimization report Unity Reciprocity of Ori entat i on DZ BANK AG Key figures

DZ BANK AG

€ million 2010 2009 Results of operations

Operating profit before allowances for losses on loans and advances 771 1,100

Allowances for losses on loans and advances 177 197 Operating profit 948 1,297 Net income for the year 156 302 Cost / income ratio1 (percent) 47.1 53.5

Net assets Assets Loans and advances to banks 84,798 100,667 Loans and advances to customers 22,720 28,097 Bonds, shares, and other securities 38,501 74,681 Trading assets 66,302 – Other assets 15,016 20,651

Equity and liabilities Deposits from banks 96,011 110,808 Amounts owed to other depositors 24,502 31,902 Debt certificates including bonds 39,778 56,996 Trading liabilities 50,077 – Other liabilities 10,533 18,071 Equity 6,436 6,319 Total assets / total equity and liabilities 227,337 224,096 Volume of business2 251,010 250,719

Regulatory capital ratios under Solvency Regulation (SolvV)

Total capital ratio (percent) 26.7 24.7 Tier 1 capital ratio (percent) 15.6 13.9

Derivatives Notional amount (€ million) 979,721 1,007,916 Positive fair values (€ million) 23,625 23,118

Average number of employees during the year 3,934 4,089

1 2010 and 2009: adjusted for one-off items 2 Total equity and liabilities including contingent liabilities and other obligations DZ BANK AG 01 2010 annual financial statements and management report CONTENTS

CONTENTS

02 mAnagement report of DZ BANK AG 04 Business performance 17 Human resources report and sustainability 20 Risk report 49 Outlook

52 Annual financial statements of DZ BANK AG 54 Balance sheet as at December 31, 2010 56 Income statement for the period January 1 to December 31, 2010 57 Notes

118 responsibility statement

119 Audit opinion (translation)

120 Advisory councils

130 principal shareholdings 02 DZ BANK AG 2010 annual financial statements and management report Management report of DZ BANK AG Contents

Management report of DZ BANK AG

04 Business performance 20 risk report

04 Economic conditions 20 Risk management system 20 Objective and limitations 04 The banking industry in the midst of efforts 20 risk types to contain the sovereign debt crisis and 21 minimum Requirements for Risk stabilize financial markets management (MaRisk) 21 separation of functions 06 Network-oriented central institution 21 Committees and financial services group 22 risk reporting and risk manual 06 Central institution 22 internal control system for the financial reporting process 06 Corporate bank 06 Holding company 06 strategic business lines 24 Action taken to mitigate market crises 08 Corporate governance 24 from financial crisis to sovereign debt crisis 24 sophisticated risk management system 08 Earnings performance 24 Targeted management action 24 Comprehensive transparency 13 Number of branches 24 Risk capital management 13 Volume growth 24 strategy, organization, and responsibility 25 risk-adjusted profitability management 25 management of economic capital adequacy 17 human resources report 26 management of regulatory capital adequacy and sustainability 27 Credit risk 17 Human resources report 27 risk strategy 17 sounding board acts on employee survey 27 Organization, responsibility, and risk reporting 17 Professional development 28 risk management 18 Training and management of young talent 32 Credit portfolio analysis 18 Health management 38 summary and outlook 18 Work and family life 19 Employer awards 38 Equity risk

19 Sustainability DZ BANK AG 03 2010 annual financial statements and management report Management report of DZ BANK AG Contents

39 Market risk 39 risk strategy 39 Organization, responsibility, and risk reporting 39 risk management 40 risk analysis 41 market liquidity risk 41 summary and outlook

41 Liquidity risk 41 risk strategy 42 Organization, responsibility, and risk reporting 42 risk management 44 risk analysis 45 summary and outlook

45 Operational risk 45 risk strategy 45 Organization, responsibility, and risk reporting 45 risk management 46 risk analysis 46 summary and outlook

46 Business and strategic risk 46 Organization and responsibility 47 risk management 47 strategic position and performance 47 risk measurement and risk analysis

48 Summary and outlook

49 outlook 04 DZ BANK AG 2010 annual financial statements and management report Management report of DZ Bank AG Business performance

I. Business performance international markets persuaded companies to sharply increase their spending on capital equipment.

1. Economic conditions With the benefit of encouraging steady growth in the job market, inflation-adjusted consumer demand saw a Over the year under review, average inflation-adjusted marked recovery compared with 2009, although this gross domestic product in Germany increased by demand was no longer supported in the year under re- 3.6 percent year on year, the highest growth rate achieved view by the vehicle scrappage scheme that had provided since reunification. However, this growth needs to be a boost for the economy in 2009. considered against the decidedly low starting level in 2009 caused by the recession. The renewed momentum The rise in tax revenues accompanying the marked from key economic drivers that had appeared in the general improvement in economic conditions could second half of 2009 gathered pace in the first two not prevent a further increase in Germany’s net gov quarters of 2010 and was then sustained in the second ernment borrowing in the reporting year. However, half of the year, albeit at a slightly lower level. the deficit, which equates to 3.3 percent of gross domestic product (GDP), is still significantly below Economic growth varied significantly from one Euro- the level that was being forecast just one year ago. pean country to another. Overall, economic output picked up across all member countries of the European Monetary Union (EMU), although this was compara- 2. THE BANKING INDUSTRY IN THE MIDST tively muted given the sharp contraction in previous OF EFFORTS TO CONTAIN THE SOVEREIGN years. The competitiveness of the countries on the DEBT CRISIS AND STABILIZE FINANCIAL fringes of the euro zone that have been hit particularly MARKETS hard by the sovereign debt crisis has been seriously im- paired. Moreover, the high level of debt in these coun- Events in the financial markets during 2010 revolved tries is severely curbing public-sector and consumer around the weakness of the US economy and concerns demand and will continue to require wide-ranging about government finances in Greece. In turn, these spending cuts for some time to come. concerns cast a spotlight on the high levels of debt run up by the other countries on the outer edges of the Economic activity in the United States also started to euro zone. The measures taken to shore up Ireland’s increase again on the back of an expansionary mone- economy at the end of November 2010 marked the tary and fiscal stimulus policy. However, the persist- latest high point in efforts to address the sovereign ently stagnant job market and the continued weakness debt crisis. of the real-estate market are holding back the pace of growth. In addition to the action taken to contain the damaging effects of the significant levels of debt incurred in some The emerging economies of Asia and Latin America western countries, other priorities in 2010 included were among the first to pull out of recession, with initiatives at national and international levels to sta countries such as China and India resuming substantial bilize financial markets. growth rates. The loss of investor confidence in the euro persisted, The increased demand, particularly from the emerging even after a decision on May 2, 2010 to provide Greece economies, provided a significant stimulus for growth with bilateral loans worth € 80 billion from EU mem- and a boost for German exports. Germany’s above-aver- ber states and similar loans worth € 30 billion from the age rise in economic growth compared with the other International Monetary Fund (IMF). In response, the EMU countries was also driven by an increase in gov- EU member states decided in mid-May 2010 to launch ernment spending following the fiscal stimulus pack a far-reaching rescue package for the euro zone with a ages launched by the German government in 2009. value of € 750 billion. Of this total, € 440 billion is pro- A further factor was that the brighter sales prospects in vided in the form of guarantees and loans from euro- DZ BANK AG 05 2010 annual financial statements and management report Management report of DZ Bank AG Business performance

zone countries; € 60 billion will be made available by Back in mid-September 2010, the European Parlia- the EU Commission, and up to € 250 billion will be ment approved the structure for European financial contributed by the IMF. At the EU summit held in regulation, a significant milestone in the process to- mid-December 2010, this rescue package – which was ward an EU-wide reform of financial markets. The originally put in place until 2013 – was extended in- structure provides for the introduction of a European definitely as a crisis mechanism. However, the EFSF Systemic Risk Board responsible for the early identifi- (European Financial Stability Facility) referred to above, cation of systemic risk and for the establishment of which is scheduled to be wound up on June 30, 2013, three new EU supervisory authorities: the European will be replaced by the European Stability Mechanism Banking Authority based in London, the European (ESM). The EU summit to be held in March 2011 Securities and Markets Authority based in Paris, and plans to approve a crisis package that includes a more the European Insurance and Occupational Pensions effective use of the lending capacity within the current Authority based in Frankfurt. The three new super rescue package and specific details on the crisis mecha- visory authorities started work on January 1, 2011. nism to be used in the years after 2013. These changes have brought about a far-reaching har- monization of financial regulation at EU level, partic Against the backdrop of this crisis, the industrialized ularly with the aim of covering any severe crises that nations attending the summit of leading developed may arise. and emerging countries (G-20) in Toronto at the end of June 2010 promised to halve their budget deficits The US financial market reforms that came into force by 2013. However, subsequent EU Commission pro- in July 2010 provide for even greater centralization of posals for a stricter sanctions mechanism in the event financial regulation. The expertise from different regu- of failure to comply with EU stability requirements latory authorities has been brought together in the new did not meet with unanimous approval, particularly in Financial Stability Oversight Council (FSOC) headed Germany and France, the two largest EU member by the US Treasury Secretary. states. The compromise worked out by these countries in October 2010 included a submission to be made by The meeting of the 20 leading industrialized and the President of the European Council by March 2011 emerging countries held on November 11 and 12, regarding specific proposals for changes to the EU Sta- 2010 in Seoul approved the increase in capital ade bility and Growth Pact. The aim is to provide a basis quacy requirements in accordance with Basel III. The on which rules for sanctions can be agreed. new requirements had been agreed in principle in mid- September 2010 by the Basel Committee on Banking The G-20 summit in Toronto was not able to reach Supervision. It is envisaged that the stricter require- agreement on the introduction of a financial transac- ments for regulatory capital will be implemented grad- tions tax or a banking levy. At EU level, opinions on ually between 2013 and 2019. For the time being, the this proposal also vary from country to country. The key liquidity and equity figures with which banks must European Commission prefers an EU-wide tax on comply in the future simply need to be published for the activities of financial institutions and intends observation purposes. Until compliance becomes man- to publish proposals for this tax during the summer datory in 2015 or 2018, the detailed content of these of 2011. The Commission has also voted in favor of key figures may be subject to modification. a banking levy. The G-20 meeting in Seoul was unable to reach a con- Among EU member states, Germany has now joined sensus regarding the issue of imposing even stricter the countries that have enshrined the idea of a banking capital adequacy requirements on banks critical to the levy in law, following similar action in the United King system. It is planned to draft a complete regulatory dom. The German Restructuring Act provides for the framework by the end of 2011. establishment of a fund with a target volume of € 70 billion to be financed gradually by the banking industry Following consideration of a number of items, but pri- via a banking levy. A two-stage process for winding up marily discussion of the involvement of private govern- ailing banks also forms an integral part of this act. ment bond holders in bailouts for European countries 06 DZ BANK AG 2010 annual financial statements and management report Management report of DZ Bank AG Business performance

in financial difficulty, the spotlight returned in particu- Frankfurt am Main, (DZ BANK) and is the foundation lar to economic stability in Ireland, and also the situa- for one of Germany’s largest financial services groups: tion in Portugal and Spain. During the course of No- the Volksbanken Raiffeisenbanken cooperative financial vember 2010, this resulted in a significant widening network. of spreads in the market for sovereign credit risk related to these countries, with the costs of hedging Ireland’s DZ BANK’s business policy is closely geared to the in- sovereign credit risk rising substantially, in particular. terests of the local cooperative banks, which are both its owners and its most important customers. Using a Uncertainty on capital markets still persisted, even after customized product portfolio and customer-focused Ireland had been bailed out by the EU and IMF on marketing, DZ BANK aims to ensure that the local November 21, 2010 with a loan facility worth some cooperative banks continually improve their competi- € 68 billion from the above-mentioned rescue package tiveness. of € 750 billion, and even after EU political leaders had reached agreement on the basic principles for a perma- DZ BANK performs three functions in its role as a nent legal framework to resolve the sovereign debt crisis. network-oriented central institution and financial It was only when the ECB’s program to buy sovereign services group: central institution, corporate bank, debt from financially weak countries in the euro zone – and holding company for the cooperative financial a program that had been launched initially to cope with network. the crisis in Greece – was expanded at the beginning of December 2010 that there was a noticeable reduction in 3.1. CENTRAL INSTITUTION yields on Irish, Portuguese and Spanish government As the central institution for more than 900 coopera- bonds. tive banks in Germany, DZ BANK pursues a decentralized business policy aimed at promoting the local In this environment, global equity markets remained cooperative banks on the ground. The services that it distinctly volatile in the year under review. Particularly offers as the central institution include, among others, in the last few months of 2010, the DAX was up mark- providing liquidity and funding and performing cen- edly on its level at the beginning of the year, driven by tral processing services related to payments processing, the steady and strong upward trends in the German securities and lending. domestic economy. 3.2. CORPORATE BANK Overall, the major German banks reported steady DZ BANK positions itself in its core German market year-on-year performance in their operating income as a leading and customer-focused bank for corporate for 2010. Given low interest rates in general and the customers as well as capital market institutions. In par- resulting significant reduction in funding costs, net in- ticular it serves to large and medium-sized enterprises terest income exceeded or came very close to the levels by offering a broad range of competitive products. achieved in 2009. The encouraging economic environment led to a noticeable reduction in allowances for 3.3. HOLDING COMPANY losses on loans and advances. Administrative expenses As part of its role as a holding company, DZ BANK rose moderately in relation to the growth in operating coordinates the activities of the group and manages all income. the subsidiaries with the aim of generating further synergies between the entities and creating added value within the group. 3. NETWORK-ORIENTED CENTRAL INSTITU- TION AND FINANCIAL SERVICES GROUP 3.4. STRATEGIC BUSINESS LINES The activities of DZ BANK are divided into four The 1,156 cooperative banks with their 13,600 branches strategic business lines: retail banking, corporate bank- serve 30 million customers and 16.4 million members in ing, capital markets and transaction banking. Germany. This structure forms the basis for the success of DZ BANK AG Deutsche Zentral-Genossenschaftsbank, DZ BANK AG 07 2010 annual financial statements and management report Management report of DZ Bank AG Business performance

Retail Banking local cooperative banks. It also uses complementary DZ BANK’s business with private customers con revenue-earning opportunities outside the cooperative centrates on developing customized solutions for the financial network that accord with the principles of local cooperative banks’ customers. sustainability and profitability.

The quality leadership strategy for structured invest- Business with interest-rate products was characterized ment products under the AKZENT Invest brand, by historically low rates of interest in 2010. The struc- which is firmly focused on the overriding investor ex- tures preferred by customers were floating-rate notes pectations of guaranteed and secure investments, has with a minimum coupon and callable bonds. Investors continued to prove its worth. Commanding a market were also especially interested in equity-linked bonds, share of 43.4 percent, DZ BANK is the market leader whereas demand for credit-linked structures such as by a long way in capital protection investment certifi- COBOLD bonds declined as a result of the signifi- cates – the strongest segment in the overall market – cantly narrower credit spreads. according to the market share statistics published by the Deutscher Derivate Verband (DDV) [German In 2010, DZ BANK was also able to expand its market Derivatives Association] as at September 30, 2010. share of business with institutional customers in Ger- many and Austria. Expertise in asset liability manage- Corporate Banking ment expertise for insurers was increasingly in demand. In its business with corporate customers, DZ BANK For example, DZ BANK created tailored hedges for focuses on serving small and medium-sized enterprises German life insurers so that their customers are pro- in cooperation with the local cooperative banks and tected against low interest rates in the long term. on large companies based in Germany. The very encouraging growth in new business is proof positive of Transaction Banking the successful way in which DZ BANK supports and The transaction banking services offered by DZ BANK partners with the local cooperative banks. There was a comprise payments processing, cards, cash services, in- 17 percent rise in the traditional joint credit business. ternational documentary business, securities processing, custodian bank services, the processing of capital As part of the Reverse Meta, the cooperative banks are market products and credit processing for develop- given the chance to share in the larger lending volumes ment loans. of DZ BANK’s corporate customers. This enables the cooperative banks to forge new customer relationships. DZ BANK is responding to the comprehensive chang- Special emphasis is placed on potential for payments es related to the supply of cash, which were imposed processing with corporate customers. by Deutsche Bundesbank at the start of 2011, by expanding its range of services for the supply and dis The growth in new business resulting from develop- posal of cash. ment-lending activities was mainly driven by subsidies in the renewable energies product area. To accom- The project concerning the development plan for the pany the Agriculture, Nature and Energy initiative, network’s IT processes aims to generate considerable DZ BANK invested in the Deutsche Energie-Agentur, potential for cost savings from the cooperative finan- Berlin, (dena) [German Energy Agency]. This enabled cial network for DZ BANK, plus the local cooperative various alliances in the field of renewable energies to banks and the Bundesverband der Deutschen Volks- be launched in the cooperative financial network. banken und Raiffeisenbanken e.V., Berlin, (BVR) [National Association of German Cooperative Banks]. Capital Markets This project focuses on the requirements of the indi- In its capital markets business, DZ BANK offers a vidual cooperative banks and will result in demand- wide spectrum of products (such as the top-quality driven IT that ensures standardized processes from AKZENT Invest brand, the Eniteo.de derivatives the point of sale to the companies in the cooperative portal, and interest-rate market and fixed-income financial network right through to the procurement products) with high-quality advice and service for markets. 08 DZ BANK AG 2010 annual financial statements and management report Management report of DZ Bank AG Business performance

3.5. CORPORATE GOVERNANCE The following table showing earnings performance in Corporate governance at DZ BANK is continually 2010 is based on the amended version of the German enhanced with the aim of integrating the local coop- Commercial Code (HGB) as amended on May 25, erative banks even more closely into the process for 2009 in accordance with the German Accounting Law developing services and products. An example in this Modernization Act (BilMoG). area is the establishment of the Financial Services Ad visory Council, in which representatives of the local Against this background and taking account of the cooperative banks, group companies, BVR, and the material effects, the year-on-year changes in the key DZ BANK Board of Managing Directors together sup- figures that make up the operating profit generated by port the DZ BANK Group’s market activities by pro- DZ BANK in 2010 were as described below. viding advice. The council’s task is to develop joint products and services as well as promote collaboration Operating income amounted to €1,557 million, with the cooperative banks. Groupwide initiatives are a year-on-year decrease of € 391 million (2009: therefore taking place to unlock marketing potential. €1,948 million). To this end, new and innovative products and sales approaches for individual customer groups have been Against the backdrop of stabilization of the financial created, which the local cooperative banks can use to markets in the wake of narrowing credit spreads on further optimize sales activities. This is resulting in more bonds, operating income for 2009 had included gains efficient cooperation within the cooperative financial network and enhanced customer relationship man agement. Fig. 1 – INCOME STATEMENT

At the same time, DZ BANK is stepping up its 2010 2009 Change collaboration with WGZ BANK AG Westdeut- € million (%) 1 sche Genossenschafts-Zentralbank, Düsseldorf, Net interest income 934 807 15.7 (WGZ BANK) in order to improve the range of Net fee and commission income 259 304 -14.8 products and services on offer and to leverage synergies for the entire cooperative financial net- Net trading income 383 844 -54.6 work. For example, the M&A activities of DZ BANK and WGZ BANK have been pooled in VR Unter Administrative expenses -786 -848 -7.3 nehmerberatung GmbH. This new company prima- Staff expenses -437 -491 -11.0 2 rily offers its products and services to customers Other administrative expenses -349 -357 -2.2 of the cooperative financial network. Other net operating income/ expenses -19 -7 >100.0

The success of DZ BANK’s focus on being a network- Operating profit before oriented central institution and financial services group allowances for losses on loans and advances 771 1,100 -29.9 is highlighted by the regular customer satisfaction surveys carried out among the local cooperative banks. Allowances for losses on loans and advances 177 197 -10.2 According to the surveys, overall satisfaction has risen to 94 percent. Operating profit 948 1,297 -26.9 Other net income/expense3 -881 -1,057 -16.7

of which: amounts added to 4. EARNINGS PERFORMANCE reserve required by sec. 340g HGB -374 -340 10.0 Profit before taxes 67 240 -72.1 DZ BANK successfully overcame the tough market Income taxes 89 62 43.5 conditions and the significant number of challenges Net income for the year 156 302 -48.3 to its performance in 2010. 1 Including current income and income from profit transfer agreements 2 Other administrative expenses, and amortization and write-downs on intangible assets, and depreciation and write-downs on property, plant and equipment 3 Gains and losses on investments, extraordinary income/expense, and other items DZ BANK AG 09 2010 annual financial statements and management report Management report of DZ Bank AG Business performance

of € 791 million on trading securities. In 2009, these included the reversal of a write-down of € 24 million gains had been offset above all by charges on the bank’s on equities held in NATIXIS S.A., Paris, by DZ BANK, trading securities portfolios related to asset backed se- which are no longer intended to be retained perma- curities (ABS) of € 249 million. These charges amount- nently. Other net income and expense from long-term ed to €113 million in 2010. equity investments also included the reversal of a write- down of € 26 million on NATIXIS S.A. equities report- The net trading income for 2009 had also included a ed under this item. trading expense of €141 million arising from the reclassification of the value-at-risk adjustment in con- Adjusted for one-off items in 2010 (€ 24 million) nection with the reorganization in accordance with and 2009 (€ 254 million), allowances for losses on the BilMoG. In addition, revised estimates of achiev- loans and advances in the year under review were able recovery rates had led to a net reduction in oper € 210 million higher than in 2009 at €153 million ating income of € 38 million in 2009 in relation to (2009: minus € 57 million). DZ BANK’s exposures in respect of Lehman Brothers (write-down of € 42 million) and Iceland (gain of The operating profit amounted to € 948 million € 4 million). (2009: €1,297 million), a decline of € 349 million. After the aforementioned adjustments, the operating Adjusted for the above-mentioned one-off items, profit climbed by € 357 million or 52.5 percent to which amounted to a total expense of €113 million €1,037 million (2009: € 680 million). in 2010 and a total gain of € 363 million in 2009, operating income rose by € 85 million or 5.4 percent The changes in individual items on the DZ BANK to €1,670 million (2009: €1,585 million). income statement in 2010 are described in detail below. Administrative expenses decreased by € 62 million or 7.3 percent to € 786 million (2009: € 848 million). Net interest income grew by 15.7 percent to € 934 million. Net interest income from operating business The cost/income ratio for 2010 was 50.5 percent (excluding income from long-term equity investments) (2009: 43.5 percent). Adjusted for the above-men- rose by 20.7 percent to € 559 million. At the same tioned one-off items in operating income, this ratio time, positive factors in 2010 more than compensated becomes 47.1 percent (2009 adjusted: 53.5 percent). for the reclassification effects resulting from the transition to accounting in accordance with the amended The operating profit before allowances for losses on version of the HGB, which had a negative impact on loans and advances amounted to € 771 million (2009: net operating interest income. Under the amended 1,100 million), a year-on-year decrease of € 329 mil- provisions of the HGB, in 2010, DZ BANK reported lion. Adjusted for the above-mentioned one-off items its own structured issues as ‘trading liabilities’ rather in operating income in 2010 (expense of €113 mil- than as ‘investment liabilities’ and reported interest in- lion) and 2009 (gain of € 363 million), operating come from the CTA fund under ‘other net operating profit rose to € 884 million in 2010, a year-on-year income/expenses’ instead of under ‘net interest income’ increase of €147 million or 19.9 percent (2009: as before. € 737 million). The year-on-year rise in net interest income was Allowances for losses on loans and advances amoun- largely attributable to a reduction in debt certificates ted to net reversals of €177 million compared with including bonds with long maturities being offset €197 million in 2009. Allowances for losses on loans and by an increase in short-term funding based on low advances in 2009 had included reversals of € 267 million interest rates; it was also attributable to increased net on securities in the liquidity reserve and another write- interest income from lending and securities portfolios. down of €13 million in respect of the Iceland expo- The marked improvement in economic conditions in sure. Allowances for losses on loans and advances in Germany during 2010 boosted demand for credit 2010 related to securities in the liquidity reserve products. 10 DZ BANK AG 2010 annual financial statements and management report Management report of DZ Bank AG Business performance

Significant increases in unit sales and lending volumes maintained in the key financial centers of London, were achieved in 2010, particularly in traditional syn- New York, Hong Kong, and Singapore. Despite a dicated loan business, but also in Agrar-Meta standard- planned decrease in business volume, the business was ized risk transfer products business transacted with the able to sustain net operating interest income at a sig- local cooperative banks. Net operating interest income nificant level. from lending in VR-Mittelstand rose substantially year on year. This underlines the successful support New acquisition finance business saw an encouraging provided by DZ BANK as a partner to the local coop- recovery compared with 2009 with a large number of erative banks. new brokering mandates. In the year under review, the funding of business acquisitions focused on German The development lending business conducted by the small and medium-sized enterprises (SMEs), primarily local cooperative banks, which DZ BANK supports by in connection with succession planning. As planned, effectively deploying regionally responsible experts and net operating interest income was below the level initiating target-group-specific sales activities, also de- achieved in 2009, the result of a deliberate reduction livered new business volume growth of about 47 per- in volume. cent in 2010. A significant proportion of this exceed- ingly strong growth in new business was accounted for The upturn in German exports was the reason behind by financing commitments in the area of renewable increased demand for international trade finance prod- energies. This future-oriented market segment is also ucts. Net operating interest income in 2010 signifi- at the heart of the initiative in the agriculture, nature, cantly exceeded the level achieved in 2009, driven by and energy sector, which was further reinforced in the product solutions such as documentary business and reporting year by the expansion of customer support structured trade and export finance. The new ‘Ankauf capacity. The initiative had been launched in 2010 to- Euler Hermes-gedeckter Ausfuhrforderungen’ product gether with network partners R+V Versicherung and was also well received. This product has been developed VR-LEASING. specially to support exports by SME customers of the local cooperative banks. DZ BANK further consolidated its successful market positioning in its corporate finance business in 2010 The challenging level of net operating interest income against a backdrop of relentless stiff competition and achieved from project finance in 2009 was again ex- brighter economic conditions. Net operating interest ceeded in 2010. The reason behind this increase was income was maintained at a level close to the challeng- principally successful financing activity in close coop- ing target set by the figure achieved in 2009. eration with the local cooperative banks in the product areas of infrastructure and renewable energies. One of the highlights of the operating activities in Corporate Finance in 2010 was the further increase in DZ BANK’s reported income from long-term equity sales of the DZ BANK Group’s financial services and investments amounted to € 375 million, an increase products and the intensified marketing in collabora- of 9.0 percent on the comparable figure in 2009 tion with the entities in the Volksbanken Raiffeisen- (€ 344 million). The higher dividend distributed by banken cooperative financial network. The business both Union Asset Management Holding AG, Frank- model of adopting a customer-focused advisory ap- furt am Main, and DZ Equity Partner GmbH, Frank- proach paid dividends here. This model effectively furt am Main, in line with improved business per combines sectoral and product-related expertise with formance was offset by the DZ PRIVATBANK Group’s a capital markets capability in a single package. reduced income from long-term equity investments.

The broad, competitive product range in the struc- DZ BANK’s net fee and commission income declined tured finance business is primarily aimed at offering by 14.8 percent to € 259 million (2009: € 304 million). financing solutions in favor of and in the interests of German customers. Most of the operations in this This change largely resulted from the smaller contribu- business are based in Frankfurt, but a network is also tion to profits from the securities business. In 2009, DZ BANK AG 11 2010 annual financial statements and management report Management report of DZ Bank AG Business performance

this contribution to profits had included the income Net trading income amounted to € 383 million in from investment certificates with capital protection, 2010. This was in contrast to net trading income in which was designated as ‘net trading income’ in 2010 2009 of € 844 million, which had been boosted by a in accordance with the amended version of the HGB. sharp rise in the value of the securities portfolio un- In addition, 2009 had benefited from extraordinarily der HGB. high fee and commission income from bond issues. This also led to a year-on-year decrease in the net Net trading income in 2010, reported in accordance fee and commission income from the securities busi- with the amended version of the HGB, includes con- ness in 2010. The net income generated from pay- tributions to profits from investment certificates with ments processing (including card processing) fell capital protection (reported as ‘net fee and commission just short of the figure achieved in 2009. In lending income’ under the previous version of the HGB) and and trust activities, and in international business, from DZ BANK’s own structured issues (reported as the profit contribution in each case rose compared ‘net interest income’ under the previous version of the with 2009. HGB). By contrast, an amount pursuant to section 340e HGB of € 44 million was added to the special The net fee and commission income from corporate ‘fund for general banking risks’ pursuant to section finance, which during the reporting year largely 340g HGB for the first time in 2010 in line with the stemmed from lending fees, almost matched the very transition to accounting under the amended version significant figure achieved in 2009. of the HGB.

In 2010, the SME M&A business relevant to As in previous years, the strong net trading income in DZ BANK continued to be affected by uncertainty 2010 stemmed mainly from DZ BANK’s customer- on the part of market players as a result of the financial related business in investment and risk management crisis. However, initial tentative signs of a recovery in products involving the asset classes of equities, interest the market are discernible. rates, and foreign exchange. DZ BANK continued to perform well in meeting client needs in terms of struc- The merger of in-house M&A activities with those tured products for business with private clients and for of WGZ BANK already mentioned aims to expand the risk management activities of banks, corporates, business activities in the following market segments: and institutional clients. healthcare, agriculture and food, trade, renewable energies, automotive, and engineering. The capital markets faced difficult condition throughout the year under review due to continuing Despite a planned reduction in business volume, the uncertainty resulting from the weakness of the structured finance business registered a noticeable in- US economy and, in particular, from concerns about crease in net fee and commission income, driven by sovereign debt in countries on the outer edges of renewed momentum in the German economy. the euro zone.

As a result, the loan syndication business, for example, Against this background, the priority for private enjoyed its most successful year to date. DZ BANK investors in 2010 was the security and transparency was able to attract seven German corporate customer of investments. Consequently, business in investment portfolios in 2010. certificates performed well in 2010. DZ BANK worked closely with the local cooperative banks to Based on its comprehensive range of products for provide its investors with promising and high-qual- corporate customers, DZ BANK was once again able ity structured investment products under its sophis to successfully demonstrate its expertise in primary ticated ‘AKZENT Invest’ brand name, although markets for equities, in particular on behalf of enter- capital preservation certificates continued to be prises advised by the cooperative banks. In this regard, especially popular in view of the uncertainties in DZ BANK benefited from the overall recovery in pri- the market. mary markets business. 12 DZ BANK AG 2010 annual financial statements and management report Management report of DZ Bank AG Business performance

The continued market turmoil boosted customers’ earned from plan assets in 2010 of €26 million (report- demand for investment-grade covered bonds and first- ed as ‘net interest income’ under the previous version class government bonds in the reporting year. The of the HGB). Moreover, the addition of a larger amount focus of investment for institutional clients was on sim- to provisions than in 2009 was offset by proceeds from ply structured products. There was also some demand the unwinding of derivative hedging transactions in for customized products, in particular from pension connection with the sale of a non-performing lending providers and insurers. Corporate customers used de- exposure. rivatives to lock in the historically low interest rates. The recent growth in new orders received by corporate Allowances for losses on loans and advances came to customers also led to greater use of currency hedges. net reversals of €177 million in 2010, compared to net reversals of €197 million in 2009. In the primary market for new bond issues, DZ BANK again demonstrated its significant placing power in the A net addition to specific loan loss allowances was Volksbanken Raiffeisenbanken cooperative financial offset in 2010 by net reversals in portfolio loan loss network and with institutional customers around the allowances and in country allowances. At DZ BANK, world. It was able to maintain its competitive position the additions to specific loan loss allowances were sub- and continue to satisfy the interests of investors as it stantially below the corresponding additions in 2009 had in 2009. and the trend was better than expected. This reflects the recovery in the economy and the implementation Administrative expenses at DZ BANK amounted to of a rigorous risk policy by the bank. € 786 million, a decrease of 7.3 percent on the comparable figure in 2009 (€ 848 million). Gains and losses on securities in the liquidity reserve amounted to a gain of €107 million in the year under Other administrative expenses were almost at the same review (2009: gain of € 370 million). level as in the previous year at € 349 million (2009: € 357 million). The main factor was the €10 million Further detailed disclosures regarding the risk situation reduction in consultancy costs, which in 2009 had in- at DZ BANK can be found in the risk report starting cluded the one-off costs incurred in the run-up to the on page 20 of the management report. merger with WGZ BANK, which was cancelled on April 1, 2009. In the year under review, DZ BANK’s other net income and expense amounted to an expense of Staff expenses fell by € 54 million to € 437 million € 881 million (2009: expense of €1,057 million). (2009: € 491 million), largely because the interest cost of € 57 million in connection with the recognition of Within this figure, losses on investments of €145 mil- pension obligations was reported under ‘other net lion (2009: losses of € 251 million) take into account operating income/expenses’ in 2010 in accordance both losses from long-term equity investments of with the amended version of the HGB instead of € 36 million (2009: losses of € 20 million) and write- under ‘staff expenses’ as before. downs of €109 million on long-term securities (2009: write-downs of 231 million). Other net operating income and expenses at DZ BANK amounted to minus €19 million in 2010 (2009: minus In the year under review, income and expense from € 7 million). The 2010 amount includes the aforemen- long-term equity investments included write-downs of tioned effects resulting from the amended version of € 32 million (2009: € 0 million) and €15 million (2009: the HGB: The net income and expenses from occupa- € 24 million) respectively on the carrying amounts of tional pensions business were primarily affected by the DZ BANK’s direct investments in DZ PB S.A., Lux- interest cost of € 57 million recognized in 2010 as a embourg-Strassen, and DG Funding LLC, New York. consequence of the recognition of pension obligations There were also write-downs of €10 million (2009: (reported as ‘administrative expenses’ under the previ- € 0 million) and € 5 million (2009: € 5 million) respec- ous version of the HGB) and by the interest income tively on the carrying amounts of DZ BANK’s direct DZ BANK AG 13 2010 annual financial statements and management report Management report of DZ Bank AG Business performance

investments in DZ BANK Polska S.A., Warsaw, and figure for the year under review arose from the aggrega- Deutsche Genossenschafts-Hypothekenbank AG, tion of income from group tax levies of €107 million Hamburg, (DG HYP). The reversal of a write-down (2009: €125 million), a deferred tax expense of of € 26 million on NATIXIS S.A. equities was also € 36 million (2009: income of € 65 million), and tax reported under this item. Another reversal of a write- income of €18 million (2009: expense of €128 mil- down of € 24 million on equities held in NATIXIS lion). S.A. by DZ BANK is included in the securities in the liquidity reserve, reported under ‘allowances for losses As a result of the net income for the year of €156 mil- on loans and advances’. lion, DZ BANK is able to distribute a dividend of €146 million. A dividend payment of € 0.12 per share for In 2009, it had been necessary to recognize write- 2010 will be proposed to the Annual General Meeting. downs on long-term securities totaling € 54 million in respect of securities related to the Iceland and Lehman Brothers exposures in addition to ABS-related write- 5. NUMBER OF BRANCHES downs of €187 million (after reversals of write-downs amounting to € 31 million). In 2010, ABS-related As at December 31, 2010, DZ BANK had 4 German write-downs came to € 64 million. branches in Berlin, Hannover, Stuttgart, and Munich as well as 4 foreign branches situated in London, New The expense in respect of the transfer of losses in 2010 York, Hong Kong, and Singapore. amounted to €189 million (2009: € 264 million) and largely resulted from the transfer of a loss amounting The Hannover and Munich branches oversee two to €183 million relating to DZ PB-Beteiligungsgesells- sub-offices in Hamburg and Nuremberg. chaft mbH, Frankfurt am Main, (DZ PB). In turn, this loss of €183 million is attributable to write-downs of €100 million (2009: €170 million) and € 95 million 6. Volume growth (2009: € 95 million) respectively on the carrying amounts of DZ PB’s direct investments in Österreich- As at December 31, 2010, DZ BANK’s total assets ische Volksbanken AG, Vienna, and DG HYP, which had increased by € 3.2 billion to € 227.3 billion, a rise were partly offset in 2010 by DZ PB’s income of of 1.4 percent. €12 million from its long-term equity investment in R+V Versicherung AG, Wiesbaden. Fig. 2 – Total assets In 2010, net extraordinary income/expense for the year amounted to an expense of €173 million (2009: € billion expense of € 202 million). These expenses largely arose in connection with an income subsidy of €119 million Dec. 31, 2010 227.3 (+1.4%) (2009: €150 million) paid by DZ BANK to DG HYP, extraordinary expenses of € 47 million related to transi- Dec. 31, 2009 224.1 tion effects in the context of the first-time adoption of the BilMoG, and restructuring expenses of € 7 million (2009: € 52 million) for ‘Programm 2011 – network- oriented central institution’. Under the amended version of the HGB following Other net income and expense for the year also includ- the transition to accounting in accordance with the ed an addition of € 374 million (2009: € 340 million) BilMoG, adjusted total assets stood at € 232.1 billion to the reserve required by section 340 g HGB. as at January 1, 2010, an increase of € 8.0 billion on the figure as at December 31, 2009 (€ 224.1 billion) With tax income of € 89 million, net income for the reported under the previous version of the HGB. year was €156 million (2009: € 302 million). The tax As at December 31, 2010, total assets had declined to 14 DZ BANK AG 2010 annual financial statements and management report Management report of DZ Bank AG Business performance

€ 227.3 billion, down € 4.8 billion on the comparable As at January 1, 2010, loans and advances to banks figure as at January 1, 2010. had stood at € 92.8 billion, which was € 7.9 billion lower than at December 31, 2009. This change in- The € 8.0 billion increase in total assets between De- cludes accrued interest on derivatives held for trading cember 31, 2009 (previous version of the HGB) and purposes, deferral of option premiums, and parts of January 1, 2010 (amended version of the HGB) was portfolios of promissory notes and registered bonds. largely a result of the new ‘trading assets’ and ‘trading These line items were recognized as ‘trading assets’ in liabilities’ line items shown on either side of the balance their full amount of € 7.9 billion due to the intention sheet in accordance with the amended version of the to trade with these financial instruments. HGB, which include the derivatives held for trading purposes and their corresponding positive and negative Moreover, loans and advances to banks as at December fair values. However, it must be noted that these new 31, 2010 (€ 84.8 billion) had declined by € 8.0 billion line items did not cause the total assets to rise by their compared to the figure reported as at January 1, 2010 full value. This was because the vast majority of these (€ 92.8 billion). The main reason for this was that new derivative instruments had already been recognized un- business from repurchase agreements in 2010 was re- der the previous version of the HGB, in particular due ported as ‘trading assets’ from the start of the year. Ris- to the recognition of accrued interest and option pre- es of € 2.8 billion in development program loans and miums, which meant they only had to be reclassified of € 0.8 billion in loans were also reported under ‘loans as either ‘trading assets’ or ‘trading liabilities’. and advances to affiliated banks’.

DZ BANK’s foreign branches accounted for Loans and advances to customers had reduced by € 34.1 billion or around 15 percent of the total assets € 5.4 billion to € 22.7 billion as at December 31, 2010 of DZ BANK as at December 31, 2010. New York (December 31, 2009: € 28.1 billion). (€19.1 billion) and London (€ 7.6 billion) together accounted for around 78 percent of the € 34.1 billion. As at January 1, 2010, loans and advances to custom- The remaining € 7.4 billion was attributable to the ers had stood at € 27.2 billion, which was € 0.9 billion branches in Singapore (€ 5.3 billion) and Hong Kong lower than at December 31, 2009. This total change (€ 2.1 billion). of € 0.9 billion includes accrued interest on derivatives held for trading purposes, deferral of option premi- As at December 31, 2010, total volume amounted to ums, and parts of portfolios of promissory notes and € 251.0 billion (December 31, 2009: € 250.7 billion). registered bonds, which had to be fully recognized as This figure comprises total equity and liabilities, con- ‘trading assets’ due to the intention to trade with these tingent liabilities, and other DZ BANK obligations. financial instruments.

The derivatives recognized at fair value (€ 934.4 bil- In addition, loans and advances to customers as at lion) and the derivatives not recognized at fair December 31, 2010 (€ 22.7 billion) had declined by value (€ 45.3 billion) came to a notional amount of € 4.5 billion compared to the figure reported as at € 979.7 billion as at December 31, 2010. Of this total January 1, 2010 (€ 27.2 billion). This change can amount, € 23.6 billion was accounted for by positive be largely attributed to the reclassification as ‘trading fair values. assets’ of loans and advances under repurchase agreements, which had still been recognized under The nominal volume of off-balance-sheet forward ‘loans and advances to customers’ at the start of the transactions had amounted to €1,007.9 billion as year. Loans and advances to customers also contract- at the end of 2009. The positive fair values totaled ed in view of the reduction in risk-weighted assets € 23.1 billion. and the focus on network-oriented business activities as part of ‘Programm 2011’. Loans and advances to banks had reduced by €15.9 billion to € 84.8 billion as at December 31, As at December 31, 2010, the value of bonds, 2010 (December 31, 2009: €100.7 billion). shares, and other securities had fallen significantly DZ BANK AG 15 2010 annual financial statements and management report Management report of DZ Bank AG Business performance

year on year to € 38.5 billion (December 31, 2009: reduced by € 7.4 billion year on year (December 31, € 74.7 billion). 2009: € 31.9 billion).

This figure had stood at € 41.9 billion as at January 1, As at January 1, 2010, amounts owed to other deposi- 2010, a decline of € 32.8 billion compared to Decem- tors had stood at € 31.3 billion under the amended ber 31, 2009. The decrease was almost entirely attrib- version of the HGB, which was € 0.6 billion lower utable to portfolios that had been reclassified as ‘trad- than at December 31, 2009. This total change in- ing assets’ under the amended version of the HGB cludes accrued interest on derivatives held for trading due to the intention to trade with these financial in- purposes, deferral of option premiums, and parts of struments. portfolios of promissory notes, which had to be fully recognized as ‘trading liabilities’ due to the intention The trading assets line item was € 66.3 billion as at to trade with these financial instruments. December 31, 2010, an increase of €11.2 billion compared to January 1, 2010 (€ 55.1 billion). Moreover, amounts owed to other depositors as at December 31, 2010 (€ 24.5 billion) had contracted The portfolios, which, based on the defined trading by € 6.8 billion compared to the figure reported as at strategy, were reported under this line item for the first January 1, 2010 (€ 31.3 billion). This change can be time from January 1, 2010 in accordance with the attributed in particular to lower overnight money and amended version of the HGB, consisted largely of time deposits on the balance sheet date as well as to the bonds and other securities categorized as trading assets reclassification as ‘trading liabilities’ under repurchase as well as derivatives. The repurchase agreements still agreements, which had still been reported as ‘amounts recognized as ‘loans and advances to banks’ or ‘loans owed to other depositors’ at the start of the year. and advances to customers’ as at January 1, 2010 amounted to €17.1 billion as at December 31, 2010. At the end of the year under review, the carrying amount of debt certificates including bonds Deposits from banks had reduced by €14.8 billion to had reached € 39.8 billion (December 31, 2009: € 96.0 billion as at December 31, 2010 (December 31, € 57.0 billion). 2009: €110.8 billion). The figure for this line item on the balance sheet had As at January 1, 2010, deposits from banks had stood stood at € 38.9 billion as at January 1, 2010, a decline at € 99.6 billion, which was €11.2 billion lower than at of €18.1 billion compared to December 31, 2009. The December 31, 2009. This change includes accrued in- decrease was attributable to portfolios of DZ BANK’s terest on derivatives held for trading purposes, delivery own structured issues, which had been reclassified as commitments arising from short sales of securities, ‘trading liabilities’ under the amended version of the option premiums still to be paid, structured time de- HGB due to the intention to trade with these financial posits, and parts of portfolios of promissory notes instruments. together totaling €11.2 billion. This amount had to be fully recognized under ‘trading liabilities’ due to the The € 0.9 billion increase in debt certificates includ- intention to trade with these financial instruments. ing bonds as at December 31, 2010 (€ 39.8 billion) compared to the figure reported at January 1, 2010 Furthermore, deposits from banks as at December 31, (€ 38.9 billion) was largely due to a rise in other 2010 (€ 96.0 billion) were € 3.6 billion lower than at debt certificates including bonds resulting from the January 1, 2010 (€ 99.6 billion). This was largely due € 4.5 billion increase in money market instruments, to the reclassification as ‘trading liabilities’ under re- in contrast to a reduction in bonds of € 3.5 billion. purchase agreements, which had still been reported as ‘deposits from banks’ at the start of the year. The trading liabilities line item was € 50.1 billion as at December 31, 2010, a rise of € 4.8 billion compared to Amounts owed to other depositors came to € 24.5 bil- January 1, 2010 (€ 45.3 billion). lion as at December 31, 2010. They had therefore 16 DZ BANK AG 2010 annual financial statements and management report Management report of DZ Bank AG Business performance

The portfolios, which, based on the defined trading Fig. 3 – Shareholders

strategy, were reported under this line item for the first 4.2% time from January 1, 2010 in accordance with the 7.0% amended version of the HGB, largely contain deriva- 6.7% tives and DZ BANK’s own structured issues categorized as trading liabilities. The repurchase agreements had still been recognized as ‘deposits from banks’ or ‘amounts owed to other depositors’ as at January 1, 2010 and, as at December 31, 2010, amounted to € 5.3 billion. Excluding this amount, trading liabilities stood at € 44.8 billion as at December 31, 2010, al- 82.1% most unchanged on the figure at the start of 2010.

The total equity in accordance with HGB of € 6.4 bil- Total subscribed capital: € 3,160 million lion reported on the balance sheet as at December 31, Local cooperative banks*: € 2,596 million 2010 was € 0.1 billion up on the equivalent figure as at WGZ BANK AG Westdeutsche Genossenschafts- December 31, 2009 (€ 6.3 billion). As at December 31, Zentralbank*: € 211 million 2010, distributable profit amounted to €150 million Other cooperatives: € 221 million (December 31, 2009: €123 million). Other: € 132 million

DZ BANK’s regulatory capital ratios are set out start- * Directly and indirectly ing on page 26 of this management report. Risk capital management and liquidity risk management at DZ BANK are described in detail in this management report starting on pages 24 and 41 respectively. DZ BANK AG 17 2010 annual financial statements and management report Management report of DZ Bank AG Human resources report and sustainability

II. Human resources customers and success) into practice in their everyday work at DZ BANK. A survey was conducted at the report and sustainability end of 2010 in which employees were invited to help shape the bank’s corporate culture. Other areas in the focus of the sounding board include activities 1. HUMAN RESOURCES REPORT on trainee development for the future and the establishment of interdepartmental job shadowing and job The main features of the year under review in human rotation. resources were the activities to implement DZ BANK’s strategic realignment and the steps taken in response to 1.2. PROFESSIONAL DEVELOPMENT the employee survey in 2009. In 2010, DZ BANK’s professional development program comprised approximately 150 different topics, 1.1. SOUNDING BOARD ACTS ON EMPLOYEE of which more than 30 training topics were new to SURVEY the program. This represented a total of 233 training A sounding board was set up in late 2009 to enable the events held during the year. The new topics focused Board of Managing Directors to sidestep hierarchies on IT, banking and business administration, and ex- and enter into direct discussions with employees on the ecutive management development. The professional opportunities and action steps derived from the results development department also designs customized of the employee survey. It consists of 23 employees professional development activities for both indi representing each of DZ BANK’s specialist divisions, vidual and division-specific skills development plus two trainee representatives. requirements.

The sounding board can look back positively on what Back in 2007, DZ BANK established a standardized it achieved in 2010. Its work to implement the results system of executive management development with a of the ‘DZ MeinungsSpiegel’ employee survey focused common management philosophy. Targeted programs on two areas. First, the members discussed the activi- provide executive managers with the support they ties undertaken by the individual specialist divisions so need, for example based on previous analyses of poten- that they could establish best practice. This enabled tial or management audits. To enable executive manag- the specialist divisions to provide inspiration for each ers to continually build on their skills for the future, other’s work and cooperate more closely. The topics it is essential that the management development pro- discussed included internal matters such as communi- grams take account of the bank’s strategic objectives. cation and culture as well as approaches to boost the In 2010, DZ BANK again used the Navigator Program bank’s competitiveness. for senior managers and helped them implement topics related to the bank’s strategic realignment in their area In the second area of focus, 16 activities approved by of responsibility. As a result, good management is play- the Board of Managing Directors were and are being ing a significant role in the success of DZ BANK’s coordinated and implemented in communications and business. marketing, central services, and human resources. Some of the activities were completed in 2010. These In addition, the DZ BANK Group launched its Cor- included steps taken to improve communications, in- porate Campus for Management & Strategy at the start cluding the communications guidelines. Cultural top- of 2010. It has therefore established a development and ics were also a priority, and the sounding board reflect- dialog platform for senior managers that is geared to its ed on values and the ‘Our Values’ mission statement, vision of positioning itself and the cooperative banks as for example. The working group that was responsible a leading financial services provider in Germany. The for looking at ‘Our Values’ put together a list of behav- Corporate Campus for Management & Strategy has ioral anchors. These anchors are specific examples of two pillars: managerial development for members of the behavior that demonstrate how employees can put the Board of Managing Directors and divisional managers three ethical values of the mission statement (Drive, of the DZ BANK Group as well as work on strategic Integrity, and Trust) and the functional value (focus on initiatives. 18 DZ BANK AG 2010 annual financial statements and management report Management report of DZ Bank AG Human resources report and sustainability

1.3. TRAINING AND MANAGEMENT 1.5. WORK AND FAMILY LIFE OF YOUNG TALENT The non-profit-making Hertie Foundation awarded In 2010, 53 young talents began their professional DZ BANK the berufundfamilie® work and family basic career at DZ BANK by joining the vocational appren- certificate in 2007. In 2010, DZ BANK was awarded ticeship scheme, one of the bachelor-degree programs, the certificate again in recognition of its comprehensive or the management young talent program. documentation of its achievement of the objectives.

A distinctive feature of young talent development at There are many aspects to being a family-friendly place DZ BANK is that it encourages individual responsi of work. One of the HR policy’s core objectives is bility among the newcomers in order to prepare them therefore to raise the profile of the family within the as fully as possible for taking on suitable roles in the bank and enable employees to be there for their chil- bank. Besides equipping young talents with specialist dren and relatives requiring care. DZ BANK supports knowledge, the development programs focus on parents and carers by offering flexible working hours, expanding their methodological, social, and personal teleworking, and parent-and-child offices. Three exter- skills. nal service providers have been contracted to ensure regular daycare places are available for employees’ chil- The challenge in the future will be to continue to dren and to offer a service that finds au-pairs and car- attract young candidates to work at the bank and, ers. This service is free of charge for bank employees. once they have been hired, to make sure they want ‘Family periods’ have been introduced to ensure that to stay. Demographic change in Germany and the mandatory meetings related to day-to-day work are not needs of new generations of young talents call for fresh scheduled at times that would conflict with employees’ ideas and strategies for the recruitment and develop- parental responsibilities. ment of young people. That is why DZ BANK is already bringing in advanced learning methods, devel- DZ BANK’s carer network meets once a month, oping a social media strategy, opting for more online giving affected employees the opportunity to discuss than print advertisements, and opening up new matters surrounding relatives who require care. communications channels. Other activities offer highly practical support. The 1.4. HEALTH MANAGEMENT bank offers daycare on Saturdays during Advent, The structures, procedures, and processes of day-to-day thereby helping relieve parents in the run-up to work are constantly changing, thereby affecting em- Christmas. Employees’ children can also attend art ployees’ performance and working conditions. In 2010, workshops on a number of weekends and during DZ BANK therefore continued to provide a number school holidays. Another highlight is an event at of services aimed at promoting the health of employees, which children can make Christmas tree decorations, such as attractive sporting opportunities within the which has taken place at the end of each year since bank, free health checks, and anti-stress programs. As 2008. The idea for this emerged from an audit and part of an alliance with healthcare centers at various is yet another way in which the bank is striving to locations, the bank gives its employees the chance to be child-friendly and raising the profile of the fam- attend lectures and seminars on medical topics. If em- ily. This activity requires little investment and is ployees have problems at work or at home, they can always very popular with children of all ages and turn to our social counseling service. their parents. DZ BANK AG 19 2010 annual financial statements and management report Management report of DZ Bank AG Human resources report and sustainability

1.6. EMPLOYER AWARDS Fig. 4 – EMPLOYEE DATA In recent years DZ BANK has competed successfully (average number of employees in the year) for the following awards: Personalwirtschaft magazine German HR prize (second place, 2010), PerstPers Employees (excluding junior employees) 2010 2009 Award (first place, family-friendly business, 2009), Total 3,934 4,089 BestPersZertifikat (2009), Top German Employer Germany 3,649 3,763 (CRF Institute) (2009 and 2010, third place, compen- ROW 285 326 sation, 2009), Germany’s 100 Top Employers (trend- Staff turnover (%) 6.1 5.1 ence, since 2008), and the berufundfamilie® work and Years of service (as at Dec. 31) 12.4 11.7 family certificate (audit in 2007, re-audited in 2010). Junior employees Total 85 112 2. SUSTAINABILITY Male 43 58 Female 42 52 DZ BANK feels bound by a long tradition that combines banking activities with social responsibility. Full-time/part-time This means that the bank uses its financial products Total full-time 3,282 3,516 and services to generate added social value and to Total part-time 652 573 achieve commercial success on a sustainable basis. Proportion of part-time (%) 16.6 14 This approach includes the provision of comprehen- Germany, full-time 3,010 3,205 sive support for employees and the best possible level Germany, part-time 639 559 of protection for the environment. As part of society, ROW, full-time 272 311 DZ BANK is also committed to assisting educational, ROW, part-time 13 14 cultural, and social causes. DZ BANK AG’s Sustainabil- ity Report and more detailed information can be ac- Gender cessed on the internet at www.sustainability.dzbank.com. Total male 2,302 2,393 Total female 1,632 1,696

Proportion of women (%, Germany & ROW) 41.5 41.5

Proportion of female managers (%) 14.4 14.7 Germany, male 2,134 2,200 Germany, female 1,515 1,564 ROW, male 168 193 ROW, female 117 132

Professional development * Total professional development days 9,125 12,375

Professional development days per employee 2.5 3.3

(* excluding junior employees and ROW) 20 DZ BANK AG 2010 annual financial statements and management report Management report of DZ Bank AG Risk report

III. Risk report risk management system. The results produced from risk models are suitable for DZ BANK’s management and control purposes. Despite careful development of The figures in this risk report are rounded to the models and regular reviews, situations may arise in nearest whole number. This may give rise to small which actual losses or liquidity requirements are high- discrepancies between the totals shown in the tables er than those forecast in the risk models and stress and totals calculated from the individual values scenarios. shown. 1.2. Risk types Credit risk, market risk, and liquidity risk are the 1. Risk management system most important types of risk for DZ BANK. Credit risk is a particular feature of corporate banking and 1.1. Objective and limitations investment banking activities. Market risk arises prima- The systematic controlled assumption of risk in rela- rily from trading business. Equity risk results from tion to target returns is an integral part of corporate DZ BANK’s equity stakes in companies held in pursuit control at DZ BANK. The operating activities result- of the bank’s business strategy. Liquidity risk, opera- ing from DZ BANK’s business model require the abil- tional risk, and business and strategic risk arise in ity to identify, measure, assess, manage, monitor, and connection with any kind of business activity and are communicate risks. The backing of risks with adequate therefore also important at DZ BANK. capital is also recognized as an essential prerequisite for the operation of the business and is of fundamental Reputational risk means the risk of events that damage importance. In all its activities, DZ BANK abides by the confidence of customers, investors, the labor mar- the principle of only taking on risk to the extent neces- ket, or the general public in DZ BANK or in the prod- sary to achieve business objectives. ucts and services it offers. Reputational risk may arise following the crystallization of other risks, but also Against this background, the Board of Managing as a result of other, publicly available negative infor- Directors of DZ BANK has established an appropriate mation about DZ BANK and the DZ BANK Group and fully functioning risk management system that companies or the Volksbanken Raiffeisenbanken coop- meets both the group’s own business management re- erative financial network. quirements and statutory requirements. DZ BANK AG’s risk management system is an integral part of the Reputational risk is covered by the risk strategy, which risk management system in the DZ BANK Group as a specifies a requirement for fair behavior with all busi- whole. Given the methods that it has implemented ness partners, for example, and precludes transactions and the organizational arrangements and IT systems with doubtful counterparties. Aspects of reputational that it has put in place, DZ BANK is in a position to risk are also to be taken into account in the new product identify material risks at an early stage and initiate development process and as part of a systematic com- appropriate control measures. The risk management plaints management system in the future. In response system is subject to regular review by risk control and to potential critical events, crisis communications aimed internal audit. In addition, the Supervisory Board at mitigating reputational risk will be undertaken to of DZ BANK satisfies itself at regular intervals that prevent greater damage to DZ BANK. This therefore the risk management system is appropriate and func- takes into account the sustainability concept embraced tioning properly. by the bank. The risk that obtaining funding may become more difficult as a consequence of damage to the Regardless of the fundamental suitability of the risk group’s reputation is specifically taken into account in management system, it is conceivable that there may liquidity risk management. be circumstances in which risks cannot be identified in good time or in which a comprehensive, appropri- Credit risk, equity risk, market risk, and liquidity risk ate response to risks is not possible. The methods used in particular are directly associated with financial infor the measurement of risk are integrated into the struments. DZ BANK takes a holistic, integrated DZ BANK AG 21 2010 annual financial statements and management report Management report of DZ Bank AG Risk report

view of all these risks when using risk management Risk management refers to the local operational im- tools and when assessing the risk position. This in- plementation of the risk strategies in the risk-bearing cludes considering all other relevant types of risk in business units. The business units responsible for risk addition to risks directly associated with financial management make conscious decisions on whether instruments. This integrated approach is reflected in to assume or avoid risks. They observe guidelines and this risk report. risk limits specified by the head office. The divisions responsible for risk management are separated both in As an integral part of its risk management strategy, terms of organization and function from downstream DZ BANK hedges against risks arising in connection divisions. with financial instruments. Hedging methods include the use of derivatives. Some of the existing hedging Central risk control, which forms part of the Group transactions where the hedged item and the hedge are Controlling division of DZ BANK, is responsible designated as investments under the German Commer- for identifying, measuring, and assessing risk and for cial Code (HGB) are subject to hedge accounting. monitoring limits. This is accompanied by the plan- Hedged items are recognized on DZ BANK’s balance ning of upper loss limits. Risk control also reports risks sheet in accordance with section 254 HGB and are to the Supervisory Board, the Board of Managing Di- shown in section 41 in the notes to the annual financial rectors, and the risk management units. This function statements. is responsible for the transparency of all risks assumed by DZ BANK across all risk types and for ensuring 1.3. MINIMUM REQUIREMENTS FOR RISK that risk measurement methodology is up to date. MANAGEMENT (MARISK) In December 2010, the Bundesanstalt für Finanz In the internal control system, organizational struc- dienstleistungsaufsicht (BaFin) [Federal Financial tures and precautions built into work processes ensure Supervisory Authority] published amendments to that monitoring is integrated into processes. In addi- the Minimum Requirements for Risk Management tion, IT systems are systematically protected by au- for the banking sector (MaRisk BA). This third thority-dependent management of authorizations and amendment to the requirements implements a series by technical precautions against unauthorized access of risk management themes that have been put for- both within and outside DZ BANK. ward at a European level since the last amendment in August 2009. The changes and additions mainly DZ BANK’s internal audit division is also responsible affect the risk-bearing capacity concept and strategy for monitoring and control tasks that are independent process (planning, implementation, analysis, and of processes, as a further element of the internal con- adjustment of strategies). 1Further requirements are trol system. It carries out systematic, regular risk-based being developed for stress tests, the need to take into audits focusing on compliance with statutory and reg- account concentrations of risk and the management ulatory requirements. Internal audit also monitors the of liquidity risk. Implementation is required by risk management system to ensure that it has a fully December 31, 2011. A working group consisting operational capability and follows up audit findings of members from several divisions is analyzing to ensure that identified problems have been rectified. the impact of the amended MaRisk for banks and Internal audit reports directly to the Chief Executive financial services institutions. Officer of DZ BANK. DZ BANK also satisfies the special requirements for the structure of the internal 1.4. Separation of functions audit function specified by MaRisk BA. DZ BANK’s risk management system is constructed on the basis of the risk strategies implemented by 1.5. COMMITTEES the Board of Managing Directors and comprises risk The Group Coordination Committee ensures coordi- management, risk control, and the internal control nation between the key companies in the DZ BANK system. Group to achieve consistent business and risk management, allocate capital, deal with strategic issues, and leverage synergies. 22 DZ BANK AG 2010 annual financial statements and management report Management report of DZ Bank AG Risk report

Working groups whose members comprise representa- tors. The Treasury Committee is also responsible tives from all divisions and group functions are respon- for implementing measures relating to capital man- sible for the following functional tasks and report to agement, risk capital allocation, balance sheet man- the Group Coordination Committee: agement (including own-account investing), and liquidity management. – product and sales/marketing coordination for private customers, corporate customers, and insti 1.6. Risk reporting and risk manual tutional clients; DZ BANK’s risk reporting forms an integral part – international coordination; of the risk reporting system throughout the group. – finance and liquidity management and capital The quarterly group risk report is the main chan- management; nel by which risks at group and company levels are – IT, operations, and resources strategies; communicated to the Supervisory Board, Board of – human resources management. Managing Directors, and the Group Risk Committee. In addition, the Board of Managing Directors and The Group Risk Committee is the central committee Supervisory Board receive portfolio and exposure- in the DZ BANK Group responsible for business related management information in the DZ BANK management and risk management in accordance with Group credit risk report, which is also produced on section 25a (1a) of the German Banking Act (KWG). a quarterly basis. Among other things, it manages risk capital throughout the group and assists the Group Coordination DZ BANK also has further reporting systems for Committee in matters of principle. The Group Risk all relevant types of risk. Depending on the degree Committee has set up working groups to prepare proof materiality of the risk positions concerned, these posals for decision-making and to implement manage- systems ensure that decision-makers and supervisory ment action plans. bodies receive transparent information at all times on the risk profile of the risk units for which they The committees described below have risk manage- are responsible. ment responsibilities within DZ BANK. The DZ BANK Group’s risk manual is available to – The Risk Committee provides support to the entire all employees and includes the general parameters Board of Managing Directors in the monitoring and for risk capital management and the management of control of overall banking risks. The committee risk types as well as a comprehensive description of meets on a quarterly basis. methods, processes, and responsibilities at group level. – The Board of Managing Directors has formed a The details in the group’s risk manual also apply to Credit Committee from among its own members. DZ BANK. This committee is tasked with the monitoring and control of DZ BANK’s entire credit portfolio. This 1.7. INTERNAL CONTROL SYSTEM FOR committee meets every two weeks and takes deci- THE FINANCIAL REPORTING PROCESS sions on material lending exposures in DZ BANK, taking into account the credit risk strategy of both Objective and responsibilities the bank and the group. The Credit Committee The primary objective of external financial reporting is also responsible for managing DZ BANK’s credit at DZ BANK, in addition to calculating the distribu- risk and country risk throughout the DZ BANK tion of dividends, is to provide appropriate, timely Group. information for the users of the annual financial – The Treasury Committee is responsible for market- statements and management report. This includes all risk and liquidity-risk issues. This committee nor- activities to ensure that external financial reporting is mally meets on a fortnightly basis to discuss basic properly prepared and that violations of accounting principles and action plans related to the manage- standards – which could result in the provision of in- ment and limitation of risk and submits appropriate accurate information to users or in mismanagement – proposals to the entire Board of Managing Direc- are avoided. DZ BANK AG 23 2010 annual financial statements and management report Management report of DZ Bank AG Risk report

The management, monitoring, and control of finan- Financial reporting is chiefly the responsibility of em- cial reporting is an integral part of DZ BANK’s gen- ployees of DZ BANK. If required, external experts are eral risk management system. The objective of risk brought in for certain cost calculations as part of the management in respect of financial reporting is to financial reporting process, such as for determining the mitigate the operational risks identified and assessed defined benefit obligation and valuing collateral. in connection with the annual financial statements and management report in line with the significance DZ BANK’s financial reporting procedures are subject of the risk. In this context, the activities of employees, to mandatory workflow plans. These govern the collat- the implemented controls, the technologies used, and ing and generating of quantitative and qualitative infor- the design of work processes are structured to ensure mation required for the preparation of statutory reports that the objective associated with financial reporting and necessary for internal management. is achieved. Generally accepted measurement methods are used in Responsibility for external financial reporting lies in the preparation of the annual financial statements and the first instance with Group Finance and Group Con- management report and these methods are regularly trolling at DZ BANK. Internal audit provides active reviewed to ensure they remain appropriate. support for the work processes as part of its auditing function. In order to ensure the efficiency of accounting systems, the processing of the underlying data is extensively auto- Instructions and rules mated using suitable IT systems. Comprehensive con- The methods to be applied at DZ BANK in the prepa- trol mechanisms are in place with the aim of ensuring ration of the annual financial statements are set out in the quality of processing and are one of the elements writing in organization manuals, which are constantly used to limit operational risk. Accounting input and updated. The basis for external risk reporting is the output data undergoes a number of automated and disclosure policy approved by the Board of Managing manual validation stages. Directors. This policy sets out the principles and fundamental decisions for the methods, organizational Suitable contingency plans have also been put in place structure, and IT systems to be used in risk disclosure, that ensure the availability of HR and technical re- for the integration of risk disclosure into general fi sources required for the accounting and financial re- nancial disclosure, and for the interconnection be porting processes. The contingency plans are regularly tween risk disclosure and internal risk reporting at checked using appropriate tests and fine tuned as re- DZ BANK. By adopting this disclosure policy, the quired. Board of Managing Directors has put in place the necessary risk-related disclosure procedures and has com- Refining and ensuring effectiveness municated them throughout the bank. The instructions The processes used are reviewed on a continuous basis and rules are audited annually to assess whether they to ensure they remain appropriate and fit for purpose; remain appropriate and are amended in line with inter- they are adapted in line with new products, situations, nal and external requirements. or changes in statutory requirements. To guarantee and increase the quality of accounting at DZ BANK, Resources and methods the employees charged with responsibility for financial Taking into account the rules in the organization manu- reporting receive training in the legal requirements and als, the risk manual, and the disclosure policy on risk, the IT systems used, in accordance with their needs. DZ BANK has installed processes that – using suitable When statutory changes are implemented, external IT systems – permit efficient risk management in re- advisers and auditors are brought in at an early stage spect of financial reporting. to provide quality assurance for financial reporting. 24 DZ BANK AG 2010 annual financial statements and management report Management report of DZ Bank AG Risk report

2. ACTION TAKEN TO MITIGATE MARKET The limits set for financial institutions and countries CRISES are kept under constant review with regard to selected facilities, geographical areas, and risk factors. In 2.1. From financial crisis to 2010 this led to a further reduction in country limits. sovereign debt crisis Credit substitution business and the volume of securi- The financial crisis continued to abate in 2010, with ties in the trading book determined in accordance unrealized impairment losses being partly offset by the with internal management procedures were scaled reversal of such losses. For some time now, substantial back during the reporting period. New non-network budget deficits have been a feature of the euro-zone business was also restricted. By contrast, lending economies of Portugal, Ireland, Italy, Greece, and within the cooperative financial network increased Spain, and these deficits are accompanied by govern- significantly as economic conditions improved no- ment debt levels that are high in relation to gross ticeably during the reporting period. Overall, lend- domestic product. The debt crisis in these European ing in 2010 declined by 3 percent compared with the countries intensified over 2010. The national budgets end of 2009. of Greece and Ireland, in particular, are heavily in deficit. The Greek budget deficit is a result of the country’s 2.4. Comprehensive transparency high level of indebtedness, whereas the cause of Ire- The consequences of the financial crisis for DZ BANK’s land’s precarious position has been attributed to the risk position are mirrored in the figures disclosed in problems of a struggling banking sector. Consequently, this risk report in accordance with statutory require- DZ BANK’s loans and advances to customers in these ments. With the detailed disclosures on securitizations countries are being especially closely monitored. and leveraged finance in accordance with the standards in the ‘Report of the Financial Stability Forum 2.2. SOPHISTICATED RISK MANAGEMENT SYSTEM on Enhancing Market and Institutional Resilience’ DZ BANK has a range of sophisticated risk manage- dated April 7, 2008, which are published on a volun- ment tools at its disposal that have also allowed it to tary basis in DZ BANK’s regulatory risk report (which respond appropriately to market turmoil. Changes in can be found on DZ BANK’s website), DZ BANK risk factors, such as a deterioration in the credit rating meets the requirements of the capital markets for of counterparties or the widening of spreads on secu- additional transparency regarding DZ BANK’s ex- rities, are reflected in adjusted risk parameters in the posure in business particularly affected by the fi- mark-to-model measurement of credit risks and mar- nancial crisis. In addition, the external risk reporting ket risks. Conservative crisis scenarios for short-term of DZ BANK complies for the most part with the liquidity ensure that liquidity risk management also recommended ‘principles for disclosures in times of takes adequate account of market crises. A risk limit stress’ set out in April 2010 by the Committee of system based on risk-bearing capacity, stress testing European Bank-ing Supervisors (CEBS), which was encompassing all risk types, and a flexible internal re- renamed the European Banking Authority (EBA) porting system ensure that the management is always on January 1, 2011. in a position to initiate targeted corrective action if required. 3. Risk capital management 2.3. TARGETED MANAGEMENT ACTION Since the start of the financial crisis, DZ BANK has 3.1. Strategy, organization, and stepped up the monitoring of its credit portfolio, with responsibility attention focused on exposure to the financial sector Risk capital management is an integral component of and to selected countries and regions of the world. business management at DZ BANK. Active manage- Individual exposures are subject to intensified loan ment of economic capital adequacy on the basis of both management using standard processes within the work- internal risk measurement methods and regulatory capi- out management system. The risks in subportfolios tal requirements ensures that the assumption of risk is are monitored and analyzed with regular reports. at all times in line with capital resources. DZ BANK AG 25 2010 annual financial statements and management report Management report of DZ Bank AG Risk report

The Board of Managing Directors of DZ BANK de- Fig. 5 – UPPER LOSS LIMITS AND RISK CAPITAL REQUIREMENT fines the corporate objectives and the capital requirement Risk capital Upper loss limit requirement in terms of both risks and returns. The Board ensures the risk profile is appropriate relative to aggregate risk cover. Dec. 31, Dec. 31, Dec. 31, Dec. 31, € million 2010 2009 2010 2009 The management of economic and regulatory capital Credit risk 1,733 1,800 1,565 1,686 adequacy is based on internal target values. To avoid Equity risk 750 890 518 701 any unexpected adverse impact on target values and Market risk 1,950 1,950 1,738 1,797 capital ratios and to ensure that any changes in risk are Operational risk 96 65 96 65 consistent with corporate strategy, risk-weighted assets Business and strategic risk 189 191 170 177 and economic upper loss limits are planned as limits for the risk capital requirement on an annual basis as Total after diversification 4,349 4,546 3,751 4,100 part of the strategic planning process. This process ends in a requirements budget for the economic and regulatory capital needed by the group. DZ BANK Treasury coordinates the action needed to cover this The risk capital requirement is determined by aggre- requirement and the implementation of any corre- gating the relevant risk types. This then incorporates sponding measures to raise capital. the effects of diversification between the different risk types. A confidence level of 99.95 percent – which is 3.2. RISK-ADJUSTED PROFITABILITY appropriate to the rating of DZ BANK – is assumed MANAGEMENT for the most part in the internal models; this is the The costs of tying up economic risk capital are an inte- same as the confidence level used in 2009. gral part of the performance management system. The key figures used for this purpose are the risk-adjusted Risk-bearing capacity performance measures, economic value added (EVA) When analyzing risk-bearing-capacity, the risk capital and return on risk-adjusted capital (RORAC), which requirement at the DZ BANK Group level is com- are determined and reported on the basis of the eco- pared against the aggregate risk cover in order to deter- nomic risk capital requirement. mine the economic capital adequacy. At the end of the year, the Board of Managing Directors determines the 3.3. Management of economic capital upper loss limit for the following year on the basis of adequacy the aggregate risk cover. Aggregate risk cover as set out in the IFRS consolidated financial statements compris- Measurement methods es the equity reported on the balance sheet and hidden Economic capital management at DZ BANK is based reserves. It is reviewed in full on a quarterly basis on internal risk measurement methods, which take and also partly updated on a monthly basis. Its value into account all key types of risk (with the exception fluctuates during the year. The DZ BANK Group’s of liquidity risk). available aggregate risk cover for 2010 was set at €11,758 million with effect from December 31, 2009 Credit risk, market risk, and equity risk are measured (December 31, 2008 (for 2009): €11,303 million). using internal models based on a value-at-risk approach, stress scenarios, or to a lesser extent other Figure 5 shows the breakdown of the upper loss limit approaches that express a comparable potential loss. by type of risk and the capital requirement for each Potential loss from operational risk is estimated using type of risk compared with 2009 for DZ BANK in the the Standardized Approach specified by the German context of the DZ BANK Group. As at December 31, Solvency Regulation. Quantification of business risk 2010, the total upper loss limit for DZ BANK amount- and strategic risk is based on an empirical benchmark ed to € 4,349 million (December 31, 2009: € 4,546 mil- analysis. lion). The total risk capital requirement was determined at € 3,751 million (December 31, 2009: € 4,100 mil- 26 DZ BANK AG 2010 annual financial statements and management report Management report of DZ Bank AG Risk report

lion). A reduction in equity risk, resulting from lower requirements for credit risk and the Standardized carrying amounts and volatility levels, was mainly re- Approach to calculate these requirements for opera- sponsible for the decline in required risk capital. tional risk in accordance with KWG and the Solvency Levels of credit risk and market risk also declined. Regulation.

From the current perspective, DZ BANK’s economic DZ BANK continued to support the further develop- capital adequacy will not be at risk in 2011. ment of banking supervision through its collaboration in the relevant committees. Risk capital requirement stress tests DZ BANK is integrated into the standard risk capital Regulatory capital ratios requirement stress tests conducted at the DZ BANK DZ BANK’s regulatory capital as at December 31, Group level. Separate stress tests are carried out for 2010, amounted to a total of €12,799 million (De- each risk type included in risk capital management – cember 31, 2009: €13,353 million). There was a re- credit risk, equity risk, market risk, operational risk, duction of € 554 million in capital as at December 31, as well as business and strategic risk. The risk type 2010, compared to the end of 2009. This net reduc- stress tests are supplemented by a stress scenario that tion resulted, in particular, from the € 661 million models the correlations between different types of increase in the deduction for securitization exposure risk. Internal risk measurement methods are used (half of which was deducted from Tier 1 capital and in the implementation of the stress tests. The initial half from Tier 2 capital) and a strengthening of Tier parameters for measuring risk are scaled in such a 1 capital totaling € 317 million as set out in the annual way as to reflect extremely negative economic sit accounts for 2009 and the interim financial statements uations. for 2010. The increased deductions for securitization exposure mainly resulted from the complete return The stress tests for market price risk focus on risk of the guarantee received in 2009 from the Bundes factors. The internal risk measurement method is sup- verband der Deutschen Volksbanken und Raiffeisen- plemented by a calculation of specific losses from the banken (BVR) [National Association of German hypothetical crisis scenarios. In addition to the stand- Cooperative Banks]. The €193 million reduction ard stress test procedures at group level, DZ BANK in Tier 3 capital set aside for capital charges led to a creates crisis scenarios based on the internal market further adverse impact on equity capital. price risk model and adjusts the scenarios on an ongoing basis to take into account current market data. As at December 31, 2010, regulatory capital adequacy This is particularly important when critical situations requirements were calculated at € 3,842 million prevail. (December 31, 2009: € 4,326 million). The significant year-on-year decrease was attributable to the action 3.4. MANAGEMENT OF REGULATORY CAPITAL taken to contain the negative effects of the financial ADEQUACY crisis and sovereign debt crisis.

Regulatory framework The improvement in capital ratios in 2010 compared In addition to economic capital management – which to 2009 is the result of active capital management and provides the targets for the management of operating risk management, which enabled an efficient use of activities – regulatory solvency requirements are also capital. The total capital ratio increased from 24.7 strictly observed at DZ BANK. DZ BANK’s regula- percent (as at December 31, 2009) to 26.7 percent tory capital management is thus integrated into the at the balance sheet date. As at December 31, 2010, regulatory capital management of the DZ BANK the Tier 1 capital ratio amounted to 15.6 percent, a banking group as a whole. significant increase on the 2009 ratio of 13.9 percent. The following ratios were determined for the Since 2007, DZ BANK has mainly been using the DZ BANK banking group as at December 31, 2010: foundation internal ratings-based approach (founda- a total capital ratio of 12.7 percent (December 31, tion IRB approach) to calculate the regulatory capital 2009: 12.4 percent) and a Tier 1 capital ratio of 10.6 DZ BANK AG 27 2010 annual financial statements and management report Management report of DZ Bank AG Risk report

percent (December 31, 2009: 9.9 percent). The key rating procedure developed by DZ BANK in collabora- ratios therefore exceeded the regulatory minimum of tion with the BVR and WGZ BANK. DZ BANK seeks 8.0 percent for the total capital ratio and 4.0 percent to maintain a good rating structure in its lending portfo- for the Tier 1 capital ratio. lio at all times. In the future, the portfolio will continue to be characterized by a high degree of diversification. In Figure 6 provides an overview of DZ BANK’s regula- the case of an individual lending transaction, risk-adjust- tory capital ratios ed pricing of the financing taking into account adequate standard risk costs and risk-adjusted economic capital Regulatory stress test costs is of critical importance. DZ BANK and its material group companies took part in the EU-wide stress test conducted by the Commit- Where required, the Board of Managing Directors of tee of European Banking Supervisors (CEBS). The DZ BANK makes decisions during the course of the stress test used the specified scenarios, methods, and year to ensure that the rules for the medium-term and key assumptions and focused on the Tier 1 capital ra- long-term credit risk strategy are adjusted in line with tio, which in the case of the DZ BANK banking group changing circumstances and current developments. In amounted to 8.7 percent, which was well above the 2010, the credit risk strategy was adjusted in line with benchmark of 6 percent set by the regulator for this the prevailing market requirements. Credit rating re- test. This result is proof positive of the DZ BANK quirements were lowered in joint credit business and banking group’s robust capital resources, which are the role of the Volksbanken Raiffeisenbanken coop- supported by positive revenue growth. erative financial network was also recognized more comprehensively within the strategic parameters. There was also a strategic realignment in the structured Fig. 6 – REGULATORY CAPITAL RATIOS finance business, with a stronger focus on the coop- Dec. 31, Dec. 31, erative network business and the discontinuation of € million 2010 2009 some business activities. In terms of the banking Capital book, a purchase ban was imposed on subordinated Tier 1 capital 7,503 7,538 bonds. Total Tier 2 capital after capital deductions 5,110 5,436 4.2. Organization, responsibility, and risk Eligible Tier 3 capital 186 379 reporting Total 12,799 13,353 As required by MaRisk BA, responsibilities in the lend- Capital requirements ing process have been defined and are documented in Credit risk (including equity risk) 3,485 3,319 a written set of procedural rules. These responsibilities Market risk 261 942 cover loan applications, approvals, and processing, in- Operational risk 96 65 cluding periodic credit control with regular analysis of Total 3,842 4,326 ratings. Decision-making authority levels are specified Capital ratios in appropriate rules based on the risk content of lend- Total capital ratio 26.7% 24.7% ing transactions. The authority of committees to ap- Tier 1 capital ratio 15.6% 13.9% prove lending to financial institutions was adjusted in line with the risk as a response to the turmoil in the markets in the year under review. 4. Credit risk Established reporting and monitoring processes help 4.1. Risk strategy provide information for decision-makers on changes in DZ BANK pursues a strictly decentralized business poli- the risk structure of credit portfolios and form the basis cy aimed at promoting the cooperative banks and is for the active management of credit risks. bound by the core strategic guiding principle of a ‘network-oriented central institution and financial services As part of the reporting system, the Group Risk Com- group’. Lending is based on the ‘VR rating’ system, a mittee is kept informed of the economic capital re- 28 DZ BANK AG 2010 annual financial statements and management report Management report of DZ Bank AG Risk report

quired to cover credit risks. Internal reporting also in- system for large and medium-sized companies, which cludes an in-depth analysis of the portfolio structure had been further developed within the cooperative fi- in regard to concentration risk based on key risk char- nancial network in conjunction with WGZ BANK and acteristics such as country, industry, and credit rating the BVR, and has already received approval from the classes and the lending volume to individual custom- banking regulators. At the start of the year under re- ers. In addition, the reports include details on specific view, a fully revised version of the rating system for exposures and specific loan loss allowances. acquisition financing was put into operation.

4.3. RISK MANAGEMENT Pricing in the lending business To ensure that lending business remains profitable, Rating systems standard risk costs are determined in the management The VR rating system used as standard throughout of individual transactions in many parts of the group. the Volksbanken Raiffeisenbanken cooperative finan- The purpose of these costs is to cover average expected cial network ensures that all the entities in the net- losses from borrower defaults. The aim is to ensure that work apply a sophisticated uniform methodology pro- the net allowances for losses on loans and advances ducing ratings that are comparable. The VR rating recognized in the financial statements are covered on system is differentiated by customer segment and is average over the long term in an actuarial-type ap- gradually being extended to cover all relevant custom- proach by the standard risk costs included in the er groups. pricing.

DZ BANK primarily uses VR rating systems as part of In addition to standard risk costs, an imputed cost of its credit risk management system to assess larger capital based on the economic capital requirement is SMEs, major customers, banks, and countries, as well integrated into the contribution margin costing. In as project finance and acquisition financing. The inter- this way, DZ BANK obtains a return on the economic nal assessment approach is also used to evaluate the li- capital tied up that is in line with the risk involved quidity lines and credit enhancements made available and that covers any unexpected losses arising from the by DZ BANK to programs for the issuance of asset- lending business. At the same time, pricing also in- backed commercial paper. These rating systems have cludes an appropriate amount to cover the costs of been approved by BaFin for the purposes of calculating risk concentration. regulatory capital using the foundation IRB approach. Economic credit-portfolio management For internal management purposes, further rating systems are used to assess SMEs, agricultural businesses, Portfolio models public-sector entities, and foreign SMEs. Although In economic credit-portfolio management, a distinc- these systems satisfy the requirements for the foundation is made between the expected loss and unexpected tion IRB approach in the opinion of DZ BANK, they loss arising from the credit portfolio as a whole. The are deemed to be of less significance and have not yet calculation of an expected loss for each individual been reviewed by the regulator. transaction prevents a creeping erosion of equity. To this end, DZ BANK determines standard risk costs In 2010, DZ BANK revised and enhanced the range that vary according to credit rating. of tools used in its internal rating systems. A rating system for shipping finance is currently being developed. A portfolio model is also used together with a value- In addition, DZ BANK and DZ PRIVATBANK S.A., at-risk approach to quantify unexpected losses that Luxembourg-Strassen, are currently designing a rating may arise from the credit portfolio. Credit value-at- system for investment funds that they will both use. risk describes the risk of unexpected losses arising The rating systems for the banking and country seg- from the failure of counterparties to meet their con- ments are also being fundamentally revised. In June tractually agreed payment obligations. Credit value- 2010, DZ BANK began using the revised VR rating at-risk is measured using a credit portfolio model that DZ BANK AG 29 2010 annual financial statements and management report Management report of DZ Bank AG Risk report

takes into account sectoral and counterparty concen- Management of exposure in the traditional trations and also reflects the rating structure of the lending business credit portfolio. The measurement includes credit risk The credit exposure or lending volume is the same as and liquidation risk from both lending and trading the nominal value of the total loan book. It is a gross businesses. value because risk-bearing financial instruments are measured before the application of any credit risk mit- In terms of economic capital management, the amount igation techniques and therefore before the recogni- to be recognized in the risk model to cover defaults on tion of any allowances for losses. In the case of loans trading transactions is normally calculated on the basis and undrawn loan commitments, the gross lending of fair values and takes into account the effect of hedg- volume is based on carrying amounts or, in the case of ing activities. Replacement risk arising from derivatives leases, on the minimum lease payments. The maxi- is measured in a similar way to limit setting and it is mum credit risk amount comprises the total lines of based on fair value plus an add-on that recognizes pos- credit committed to third parties. sible future changes in fair value. Unlike limit setting, the add-on here is calculated as an expected value and a General limits are set for individual counterparties and uniform 1-year time horizon is assumed for all transac- for single borrowers. Suitable early warning processes tions. Where legally enforceable, netting agreements have been established to ensure that limits are moni- and collateral agreements are recognized at counterpar- tored on a timely basis. Financial covenants are fre- ty level. The amount to be recognized in the risk mod- quently included in loan agreements that act as early el for secured money market transactions (e.g. repo warning indicators for changes in credit standing and transactions and securities lending) is determined from as a tool for proactive risk management. In addition, the securities being used as collateral after the deduc- processes are in place for handling instances in which tion of risk-sensitive ‘haircuts’. limits have been exceeded.

Asset securitization Country exposure is managed by the setting of limits DZ BANK uses asset securitization as a further tool for individual countries at the DZ BANK Group level. for managing its lending portfolio and to optimize the risk/return ratio. The overarching objective of securiti- The management and control system that has been zation activities is to release economic and regulatory implemented ensures that DZ BANK meets MaRisk capital. BA requirements.

DZ BANK’s aim in its role as an originator of long- Management of exposure in trading transactions term refinanced securitizations is to transfer risk, thereby relieving the burden on economic and regulatory Measurement of exposure in trading transactions capital. As a sponsor, DZ BANK also uses special-pur- Replacement risk, settlement risk, and issuer risk are pose entities (conduits), which are funded by issuing exposure-based measurements of the maximum po- money market-linked ABCP. Conduits are predomi- tential loss in trading transactions. These are deter- nantly made available for DZ BANK customers who mined without taking into account the likelihood of then securitize their own assets via these companies. a default. In order to determine the credit exposure, The CORAL securitizations are mainly financed via securities in the banking book and trading book are liquidity lines. There is no intention to expand financ- predominantly valued at fair value (loan equivalents ing via ABCP. are used for derivatives).

Further disclosures regarding the use of securitization Replacement risk, settlement risk, and issuer risk arise instruments are included in the DZ BANK banking largely in connection with DZ BANK’s trading activi- group’s regulatory risk report for 2010 (section 4.5 ties. Replacement risk arising from derivatives is ‘Management of asset securitization’). measured on the basis of fair value plus an add-on 30 DZ BANK AG 2010 annual financial statements and management report Management report of DZ Bank AG Risk report

that recognizes possible future changes in fair value. Minimizing credit risk The add-on takes into account specific risk factors and residual maturities. Where legally enforceable, Collateral strategy and secured transactions netting agreements and collateral agreements are used In accordance with DZ BANK’s credit risk strategy, at counterparty level to reduce exposure. The expo- customer credit quality forms the basis for any lend- sure of secured money market transactions (e.g. repo ing decision; collateral has no bearing on the borrow- transactions and securities lending) is determined er’s credit rating. However, depending on the structure from the securities being used as collateral after the of the transaction, collateral may be of material sig- deduction of risk-sensitive ‘haircuts’. nificance in the assessment of risk in a transaction. In the case of medium-term or long-term capital invest- As regards settlement risk, the amount to be set ment loans, it is generally expected that the invest- aside is deemed to be the amount owed, i.e. the ment asset will serve as collateral for the loan. As far amount actually due to be paid by the counterparty as export finance or structured trade finance is con- to DZ BANK. Settlement risk is recognized for cerned, DZ BANK requires minimum security in the the specified settlement period. form of government or private (export) credit insurance, the assignment of claims under export contracts, Issuer risk attached to securities exposures is deter- or the transfer of title to the goods. mined on the basis of fair value. Risks relating to the underlying instruments in derivative transactions Secured transactions in traditional lending business are also included in issuer risk. encompass commercial lending including financial guarantee contracts and loan commitments. Decisions Limit system for managing trading exposure to protect transactions against credit risk through ob- DZ BANK has established a volume-oriented limit taining traditional collateral (credit default swaps are system to limit the credit risk arising from trading also used in a minority of transactions) are taken on a business. Replacement risk is managed via a structure case-by-case basis. of limits broken down into maturity bands. A daily limit is set in order to manage settlement risk. A gen- Credit derivatives are used as and when needed to eral or specific limit related to rating is determined for hedge issuer risk attaching to securities and derivatives. each issuer as the basis for managing issuer risk. Sepa- Macrohedges are used dynamically to mitigate spread rate limits are specified for Pfandbriefs (covered bonds) risk and risks attaching to underlying assets. In isolated and asset-backed securities (ABSs). Exposure in con- cases, transactions are conducted on a back-to-back nection with trading business is measured and moni- basis. Replacement risk for OTC derivatives is reduced tored using a standard method and a central, IT-sup- by means of collateral and netting agreements. ported limit management system to which all relevant trading systems are connected. Types of collateral DZ BANK uses all forms of traditional loan collateral. As in the traditional lending business, appropriate Specifically, these include mortgages on residential and processes have also been established for the trading commercial real estate, guarantees (primarily in the business to provide early warnings and notification of form of sureties, indemnity agreements, credit insur- limit overruns. The member of the Board of Managing ance, and letters of comfort), financial security (cash Directors responsible for risk monitoring is sent a daily deposits, certain fixed-income securities, shares, and list of exceeded trading limits as part of the reporting investment fund units), assigned receivables (blanket system in accordance with MaRisk requirements. A and individual assignments of trade receivables), and monthly report is prepared for the total exposure from physical collateral. trading business on the basis of the individual exposures. DZ BANK AG 31 2010 annual financial statements and management report Management report of DZ Bank AG Risk report

Privileged mortgages, guarantees (including credit Workout units are responsible for processing collateral default swaps), and financial collateral are the main for non-performing loans including the recovery of sources of collateral recognized for regulatory purposes collateral. In the case of these exposures, the collateral under SolvV. Receivables and physical collateral are is measured on the basis of its likely recoverable only recognized for regulatory purposes to a limited amount and time of recovery, rather than on the basis extent. of the general measurement guidelines. In another de- parture from the general collateralization criteria, col- In accordance with DZ BANK’s collateral policy, only lateral involved in restructuring exposures can be meas- cash, investment-grade government bonds, and/or ured using market values or the estimated liquidation Pfandbriefs are normally accepted as collateral for proceeds. trading transactions required by the collateral agreements used to mitigate against the risk attaching to Collateral management OTC derivatives. In addition to netting agreements (ISDA Master Agreement and German Master Agreement for Finan- In order to hedge issuer risk attaching to loans and cial Futures), DZ BANK enters into collateral agree- derivatives, use is made of credit derivatives, credit ments (Credit Support Annex to the ISDA Master linked notes, credit default swaps and, to a lesser ex- Agreement and Collateralization Annex to the German tent, total return swaps. For risk management pur Master Agreement for Financial Futures) as instru- poses, the protection provided by credit derivatives is ments to reduce credit exposure in OTC transactions. set against the reference entity risk, thereby mitigating it. The main protection providers/counterparties in DZ BANK’s policy on collateral regulates the content credit derivatives are financial institutions, mostly of collateral agreements and the responsibilities and investment-grade banks in the VR rating classes 1A authorities for implementing the rights and obligations to 2C. they confer within the bank. This policy specifies contract parameters, such as the quality of collateral, fre- Management of traditional collateral quency of transfer, minimum transfer amounts, and Collateral management is the responsibility mainly thresholds. DZ BANK regularly uses bilateral collateral of specialist units outside the market divisions. The agreements. Exceptions apply to cover assets, as the core tasks of these units include providing, inspecting, special legal status of the counterparties means that measuring, recording, and managing collateral and only unilateral collateral agreements can be usefully providing advice to all divisions in matters concerning enforced, and to supranational or government entities. collateral. Any decision not to use a bilateral collateral agreement must be approved by a person with the relevant au- To a large extent, standardized contracts are used for thority. Netting and collateralization generally result in the provision of collateral and the associated declara- a significant reduction in the exposure from trading tions. Specialist departments are consulted in cases business. IT systems are used to measure exposures and where customized collateral agreements are required. collateral. Margining is carried out on a daily basis for Collateral is managed in separate IT systems. The the vast majority of collateral agreements in accordance measurement of collateral is the responsibility of back- with the collateral policy. office units. As a minimum, carrying amounts are reviewed on the monitoring dates specified by the back- As specified by the collateral policy, DZ BANK always office units – normally annually – or on the agreed enters into collateral agreements that include thresh- submission date for documents relevant to measure- olds independent of ratings and minimum transfer ment of the collateral. Shorter monitoring intervals amounts also independent of ratings. However, there may be specified for critical lending exposures. Re are also some agreements with rating-based triggers. In gardless of the specified intervals, collateral is tested these agreements, the unsecured part of an exposure is for impairment without delay if any indications of reduced in the event of a deterioration in credit quality. impairment become evident. In agreements with a threshold of zero, a deterioration 32 DZ BANK AG 2010 annual financial statements and management report Management report of DZ Bank AG Risk report

in credit quality is of no relevance because the exposure ticular the prudence principle. Allowances are therefore is always fully secured. Liquidity risk stress tests take measured such that at least one of the probable default into account the liquidity effects for agreements with scenarios in each case is covered. This includes a pru- rating-based triggers. However, the risk related to li- dent measurement of existing collateral. quidity in this case is not material owing to the low volume involved. DZ BANK recognizes country risk loan loss allowances based on internal credit ratings from the VR rating Management of non-performing exposures system for countries, and ratings from external rating agencies. Rates for loan loss allowances are determined Management and monitoring of non-performing in accordance with the annual letter circulated by the exposures Bundesministerium der Finanzen (BMF) [German Identified non-performing loans are transferred to the Federal Ministry of Finance], the data in which is based workout units at an early stage. By providing intensi- on the published country ratings from three rating fied loan management for critical exposures and apply- agencies as at September 30 each year. Allowances ing customized solutions, these special units lay the ba- rates are classified according to internal country risk sis for securing and optimizing non-performing risk groupings. Allowances are calculated on the basis of positions. the gross loan net of recoverable collateral and after certain other deductions. In the traditional lending business, DZ BANK has a comprehensive range of tools at its disposal for the Latent credit risk is accounted for by portfolio loan early identification, close support, and high-quality loss allowances based on average actual defaults in the monitoring of non-performing exposures. The sub- 5 preceding financial years. The basic principles speci- portfolio of non-performing loans is reviewed, updat- fied by the German tax authorities for the recognition ed, and reported on a quarterly basis. The process is of portfolio loan loss allowances by banks for tax pur- also carried out at shorter intervals if required. This poses are applied in the calculation of these allowances. process is comprehensively supported by IT systems. A key element is the internal reporting system, which Trading transactions are recognized at fair value. Any is informative, target-group-oriented, and timely. Dur- impairments are therefore already taken into account, ing the year under review, the bank adjusted its early precluding the need for the recognition of any allow- warning processes as regards its exposures involving ances for losses on trading business. financial institutions. If necessary, the intensified loan management put in place for individual borrowers is 4.4. CREDIT PORTFOLIO ANALYSIS transferred to task forces specially set up for this purpose. The risks in subportfolios are monitored and Analysis of the economic capital requirement analyzed with regular reports. for credit risk As at December 31, 2010, the economic capital re- Guidelines and procedures for the recognition of quirement for credit risk at DZ BANK amounted to provisions, impairment losses, and allowances for €1,565 million (December 31, 2009: €1,686 million). losses on loans and advances DZ BANK also set an upper loss limit of €1,733 mil- DZ BANK’s internal guidelines provide for the recog- lion (December 31, 2009: €1,800 million). The upper nition of specific allowances for losses on loans and loss limit was not exceeded at any time during 2010. advances if there are reasonable grounds to suppose The reduced risk capital requirement was largely at that a receivable is not collectable because of a borrow- tributable to the reduction in the credit exposure as the er’s financial circumstances or inadequate collateral or result of a stronger focus on investment-grade ratings if there are indications that the borrower will not be and reduced single-borrower concentrations. able to service the loan over the long term. Contingent assets are treated in the same way. Specific allowances The amount of risk capital required is based on a for losses on loans and advances must be recognized in number of factors, including the size of single-borrow- accordance with the requirements of the HGB, in par- er exposures, individual ratings, and the industry DZ BANK AG 33 2010 annual financial statements and management report Management report of DZ Bank AG Risk report

sector of each exposure. The following section de- Figure 7 shows that the industry structure of the credit scribes these factors in detail and explains the changes portfolio has maintained the same focus on the financial in the factors during the course of 2010. sector as in 2009.

Analysis of credit exposure As at December 31, 2010, the lending volume was down compared to the end of the previous year, prima- Structure and changes in the total lending volume rily in the financial sector (down by € 2.8 billion), in The review of the credit portfolio conducted in the the larger and medium-sized corporate customer seg- wake of the financial crisis resulted in a reduction in ment (down by €1.0 billion), and the retail sector the lending volume up to the end of 2009. However, (down by € 0.9 billion). at the start of 2010, DZ BANK gradually began to increase traditional lending once more in selected In its role as the central institution for the Volksbanken customer segments. Over the second half of the year, Raiffeisenbanken cooperative financial network, though, there was a significant reduction in the lend- DZ BANK provides funding for the companies in the ing volume that primarily affected the trading busi- DZ BANK Group and for the local cooperative banks. ness, but also the traditional lending business. Com- For this reason, the local cooperative banks account pared with the position as at December 31, 2009, for one of the largest loans and advances items in the the lending volume declined by 3 percent and amount- DZ BANK Group’s credit portfolio. DZ BANK also ed to €157.0 billion as at December 31, 2010 (De- supports the local cooperative banks in the provision of cember 31, 2009: €161.6 billion). larger-scale funding to corporate customers. The result-

Fig. 7 – LENDING VOLUME BY INDUSTRY

Traditional lending Securities business Derivatives and Total business money market Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, € billion 2010 2009 2010 2009 2010 2009 2010 2009

Financial sector 65.5 60.1 24.7 31.5 8.7 10.0 98.9 101.7 Public sector 0.5 0.6 6.9 6.2 0.4 0.3 7.8 7.0 Corporates 33.0 33.8 4.3 4.7 1.1 1.0 38.4 39.5 Retail 0.1 0.2 5.6 6.5 – – 5.8 6.7 Industry conglomerates 3.5 3.8 2.4 2.6 0.2 0.3 6.1 6.7 Other – – – – – – – – Total 102.6 98.5 43.9 51.5 10.5 11.6 157.0 161.6

Fig. 8 – LENDING VOLUME BY COUNTRY GROUP

Traditional lending Securities business Derivatives and Total business money market

Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, € billion 2010 2009 2010 2009 2010 2009 2010 2009

Germany 83.2 75.4 16.7 17.5 6.5 7.7 106.4 100.7 Other industrialized nations 17.2 17.1 26.9 32.9 4.0 3.8 48.1 53.8 Non-industrialized nations 2.2 6.0 0.3 1.1 0.1 0.1 2.5 7.2 Total 102.6 98.5 43.9 51.5 10.5 11.6 157.0 161.6 34 DZ BANK AG 2010 annual financial statements and management report Management report of DZ Bank AG Risk report

ing syndicated business and DZ BANK’s direct busi- Fig. 9 – RATING STRUCTURE OF THE CREDIT PORTFOLIO ness with corporate customers in Germany and abroad determines the industry breakdown for the remainder Lending volume (€ billion) of the portfolio. 1A 18.7 17.0

DZ BANK continued its intensive monitoring of the 1B 1.9 banks portfolio, which it had already stepped up in re- 3.4 1C 73.6 sponse of the financial crisis. In 2010, DZ BANK also 65.8 carried out an ongoing review of the general and spe- 1D 2.3 cific limits for financial institutions in terms of selected 2.7

exposures, countries, and risk factors. This resulted in a 1E 3.9 5.2 substantial reduction in the general and specific limits 2A 5.8 for the largest exposures to financial institutions. In 5.7 addition, the total internal single-borrower limit for 2B 5.8 unsecured business with financial institutions is set at 8.7 2C 8.6 € 500 million. 12.1

2D 6.0 Figure 8 shows the geographical distribution of the 8.5

credit portfolio by country group. The country groups 2E 6.4 -master scale 7.3 differ from the country groups shown by the risk R 3A 6.6 report in the 2009 management report because of 5.8 changes to the group classifications made in the sec- 3B 3.7 ond half of 2010. As at December 31, 2010, an even 4.1 greater share of the total lending volume (98 percent) 3C 4.4 5.3 was concentrated in Germany and in other industrial- 3D 1.7 ized countries than at the end of the previous year 2.2 ating classes according to V

(96 percent). R 3E 1.2 1.4

4A 1.4 Figure 9 sets out DZ BANK’s lending volume accord- 1.2 ing to the VR-master scale. On this scale, rating class 4B 0.2 1A is the best and rating class 5E the worst credit 0.3

rating. ‘Not rated’ comprises counterparties for which 4C 0.4 0.4 a rating classification is not required. 4D 0.1 0.1 Despite the deterioration in the credit ratings of coun- 4E 1.2 terparties over the course of the year, the rating classes 0.9 Default 2.5 1A to 3A (investment grade) accounted for the greatest 2.9 proportion of lending, which was virtually unchanged Not 0.4 at 89 percent of the total volume as at the end of 2010 rated 0.7 (December 31, 2009: 88 percent). However, some

rating migration to lower ratings within investment Dec. 31, 2010 Dec. 31, 2009 grade was also noticeable.

The lending volume to investment-grade borrowers in the financial sector as a whole was down by 2 percent compared with 2009. The local cooperative banks’ December 31, 2009 to 65 percent as at December 31, share of total investment-grade lending to the financial 2010, due to a business focus on the Volksbanken sector increased significantly from 58 percent as at Raiffeisenbanken cooperative financial network. DZ BANK AG 35 2010 annual financial statements and management report Management report of DZ Bank AG Risk report

Fig. 10 – LOANS TO BORROWERS IN THE COUNTRIES PARTICULARLY AFFECTED BY THE SOVEREIGN DEBT CRISIS

Traditional lending Securities business Derivatives and Total business 1 money market

Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, € million 2010 2009 2010 2009 2010 2009 2010 2009

Portugal 150 160 732 1,092 21 27 904 1.279 of which: public sector – – – – – – – – of which: government – – – – – – – – of which: non-public sector 150 160 732 1,092 21 27 904 1.279 of which: financial sector 85 91 628 955 21 27 734 1.073 Italy 211 456 2,566 3,758 216 318 2,992 4.533 of which: public sector – – 450 553 – – 450 553 of which: government – – 151 238 – – 151 238 of which: non-public sector 211 456 2,116 3,205 216 318 2,542 3.980 of which: financial sector 108 304 1,821 2,549 216 318 2,145 3.170 Ireland 343 380 695 1,210 1,462 1.844 2,501 3.435 of which: public sector – – – 420 – – – 420 of which: government – – – 420 – – – 420 of which: non-public sector 343 380 695 790 1,462 1.844 2,501 3.015 of which: financial sector 278 291 597 594 1,462 1.843 2,337 2.728 Greece 67 123 384 851 – 59 451 1.033 of which: public sector – – – 23 – – – 23 of which: government – – – – – – – – of which: non-public sector 67 123 384 828 – 59 451 1.009 of which: financial sector 42 98 199 593 – 59 242 750 Spain 262 274 3,455 5,493 147 156 3,864 5.924 of which: public sector 68 77 388 466 – – 457 543 of which: government – – – – – – – – of which: non-public sector 194 197 3,067 5,027 147 156 3,407 5,380 of which: financial sector 52 42 2,007 3,440 146 153 2,204 3,635 Total 1,034 1,394 7,831 12,404 1,846 2,405 10,711 16,202 of which: public sector 68 77 838 1.462 – – 907 1.539 of which: government – – 151 658 – – 151 658 of which: non-public sector 965 1,317 6,993 10,942 1,846 2,405 9,805 14,663 of which: financial sector 564 826 5,252 8,130 1,845 2,399 7,661 11,355

1 including long-term equity investments and intercompany transactions

The proportion of DZ BANK’s total lending to coun- CREDIT PORTFOLIO AFFECTED BY THE SOVEREIGN DEBT CRISIS OF terparties in rating classes 3B to 4E (non-investment EU MEMBER STATES grade) as at December 31, 2010, remained relatively Loans and advances from DZ BANK to borrowers in small at 9 percent (December 31, 2009: 10 percent). countries that have been hit particularly hard by the Defaults in rating classes 5A to 5E as at December 31, current sovereign debt crisis – Portugal, Ireland, Italy, 2010, accounted for 2 percent of DZ BANK’s total Greece, and Spain – are shown in Figure 10. Loans credit portfolio and thus remained at the low level of and advances amounted to a total of €10,711 million the previous year. as at December 31, 2010 (December 31, 2009: €16,202 million), which equates to a year-on-year decline of approximately 34 percent. 36 DZ BANK AG 2010 annual financial statements and management report Management report of DZ Bank AG Risk report

Fig. 11 – RATING STRUCTURE OF THE SECURITIZATION PORTFOLIO

AAA AA+ to AA- A+ to A- BBB+ to B- CCC+ to C- Not rated Total

€ million Dec. 31, 2010 Dec. 31, 2009 Dec. 31, 2010 Dec. 31, 2009 Dec. 31, 2010 Dec. 31, 2009 Dec. 31, 2010 Dec. 31, 2009 Dec. 31, 2010 Dec. 31, 2009 Dec. 31, 2010 Dec. 31, 2009 Dec. 31, 2010 Dec. 31, 2009 Asset classes Receivables from retail loans 3,333 4,946 618 823 179 126 447 407 805 744 74 17 5,456 7,064

of which: residential mortgage- backed securities 3,250 4,704 594 755 176 109 439 385 805 744 74 17 5,337 6,714

of which: assets classified as subprime 44 57 169 260 52 34 256 254 567 509 50 8 1,138 1,121

of which: assets classified as Alt-A 5 5 13 39 11 13 58 56 224 226 22 8 333 348

Receivables from corporate loans1 236 371 56 45 32 76 76 53 – – – 13 401 557

Receivables from commercial mortgage-backed securities 978 1,249 146 155 153 148 108 121 – – – – 1,386 1,674

Receivables from collateralized debt obligations 598 595 339 367 21 57 37 70 10 30 1 4 1,005 1,124

Total exposure reported on the balance sheet 5,145 10,077 1,160 486 385 408 668 652 814 775 75 33 8,248 12,430

Exposure to conduits2 204 486 809 1,178 1,454 1,841 1,043 474 – 2 150 137 3,660 4,118 Total 5,349 7,648 1,970 2,567 1,838 2,249 1,711 1,126 815 776 225 171 11,908 14,536

1 Includes receivables from purchased leased assets amounting to €98 million (December 31, 2009: €174 million) 2 Includes receivables from conduits – especially ABCP conduits – reported on the balance sheet and liquidity facilities granted to ABCP conduits

Fig. 12 – ALLOWANCES FOR LOSSES ON LOANS AND ADVANCES

Specific loan loss Country risk loan Portfolio loan loss Total allowances allowances loss allowances allowances for losses on loans € million and advances

Balance as at Jan. 1, 2010 1,215 141 167 1,523 Change in 2010 -106 -52 -98 -256 Balance as at Dec. 31, 2010 1,109 89 69 1,267

In net terms there were no loans extended to the Greek at December 31, 2009. This equates to a reduction of government as at December 31, 2010. The securities 18 percent. The reduction in the fair value of the port- issued by the Greek financial sector with a nominal folios held by the group was largely the result of re- value of €191 million that are held by DZ BANK will demptions. During the year under review, this effect have reached maturity by the liquidation date of the was diminished by the appreciation of the US dollar. EU rescue package (June 30, 2013). As at December 31, 2010, 62 percent (December 31, Breakdown of securitization portfolio 2009: 69 percent) of the securitization exposure on the In 2010, DZ BANK was again able to continue the balance sheet consisted of AAA tranches rated by exter- significant reduction in securitization exposure that it nal credit agencies. A further 14 percent (December had already begun to achieve in 2008 and 2009. As at 31, 2009: 13 percent) was in the external rating classes December 31, 2010, the fair value of the entire securi- AA+ to AA-. Figure 11 provides an overview of the rat- tization exposure of DZ BANK amounted to €11.9 ing structure of DZ BANK’s securitization portfolio. billion, compared with a fair value of €14.5 billion as This is presented in each case using the lowest available DZ BANK AG 37 2010 annual financial statements and management report Management report of DZ Bank AG Risk report