Deutsche Postbank 2006 Group Annual Report Postbank. More Bank

Home , BHW, Deutsche Postbank, Deutsche Post (brand), Wulf von Schimmelmann

678 107 017

Deutsche Postbank AG 2006 Group Annual Report 2006 GroupAnnualReport Deutsche Postbank Postbank. Morebank. nomto nPsbn hrsDc 1 06Dec.31,2005 Dec. 31,2006 2 1 shares Postbank on Information Long-term ratings Headcount Tier 1ratioinaccordancewithBaselII BIS regulatoryindicators Consolidated balancesheet Earnings pershare Return onequity Cost/income ratiointraditionalbankingbusiness Total cost/incomeratio Consolidated incomestatement Postbank Groupinfigures2006 Kreditwesengesetz (KWG –GermanBankingAct) Internal calculationinaccordancewiththe Prior-period figuresrestated ubro hrs ilo 6. 164.0 164.0 million 8,036 50.84 49.00 A 10,491 65.45 A 63.97 ¤m high¤ A A1 ¤ A Number ofshares Market capitalizationonDecember,31 A1 10.7 8.3 Share price(Jan.1–Dec.31) Share priceatthebalancesheetdate 8.1 5.5 Fitch % % Standard &Poor's 44,134 140,280 68,418 Moody's 79,388 184,887 87,663 ¤m 10.3 ¤m ¤m 15.0 5,061 14.0 Capital ratio Tier 1ratio 18.9 5,207 % Equity ¤m % Allowance forlossesonloansandadvances Customer loans Customer deposits 719 492 Total assets 2,831 941 695 –1,886 4,117 ¤m –2,812 ¤m ¤m 2,132 after tax before tax ¤m 2,710 ¤m Consolidated netprofit Profit beforetax Administrative expenses Total income Balance sheet-relatedrevenues 1 Solvabilitätsverordnung (SolvV–Solvency 2 huad2.99.24 21.49 thousand ulo tbestable stable negative stable negative Outlook stable Outlook Outlook o 82 32.16 48.21 low ¤ m115776 1,155 ¤m 6763.7 66.6 66.7 68.3 % % . – 6.6 % .43.00 4.24 ¤ e.3,20 e.3,2005 Dec.31, 2006 Dec. 31, Ordinance) 062005 2006 Jan. 1–Dec.31 and the *including selected subsidiaries *including Group Structure* ■ ■ ■ Milestones 2006 oprt eeomn conig&SlsMntrn rdtMngmn oe,FrxadCptl prtosCnrlStrategic Projec OperationsControl Money,ForexandCapital CreditManagement SalesMonitoring& Accounting& Corporate Development ufvnShmemn Hen Wulf vonSchimmelmann among Germanbanks With 14.6millioncustomers,largest singleinstitution lending, withportfolioamountingto¤62.3billion Postbank nowno.1inGermanyprivatemortgage thepurchaseofBHWHoldingAG,Hamelin – theacquisitionof850DeutschePostretailoutlets – Multi-channel salesdecisivelystrengthenedthrough ru aaeetFnnePoutMreigBac ae edn iaca akt evcsI/prtosResources IT/Operations Services FinancialMarkets Lending BranchSales Product Marketing Finance Group Management netrRltos& otoln aktn R rdtMngmn rauyCsoes&SlsAcutMngmn HROperations AccountManagement Customers&Sales Treasury CreditManagement Marketing&CRM Controlling Investor Relations& BVrihrn GBWPostbank BHW PB VersicherungAG Finance Ltd.,India H odn GPsbn otakPBCapital Postbank Postbank BHW HoldingAG omnctosIvsmn nuac edn ydct uiesOperations SyndicateBusiness Lending Investment&Insurance Communications esceugA GmbH versicherung AG versicherung AG nenlAdtCallCenters, Internal Audit H ees H moiinPBFirmenkundenAG BHWImmobilien BHW Lebens- Investments BHW Home BLbn-BWBn GPBFactoringGmbH BHWBankAG PB Lebens- oprt ikCnrligPoutMngmn pca susIse n Pyet uoFnnilMres Coordination FinancialMarkets PaymentsEuro Issuesand SpecialIssues Product Management RiskControlling Corporate taei Third-PartySales Strategic Research igR nmn ofagKenHn-ee cmdSea üt oksRzsMroDbro ikBrnmn RalfStemmer DirkBerensmann MarioDaberkow LoukasRizos StefanJütte Hans-PeterSchmid WolfgangKlein ning R.Engmann ae rdtMngmn oetcMarkets Domestic CreditManagement Taxes ■ ■ ■ Direct SalesChannels iazeaugA iiletibA Corporation,NewYork FilialvertriebAG Finanzberatung AG companies index ofthe30mostimportantlisted stock of themobilesalesforcesBHW andPostbank Finanzberatung AGand,withit,theintegration September 18,2006:Admission totheDAX July 17,2006:EstablishmentofPostbank Postbank Int.S.A.(PBI) In May2006,inclusionofbranchinDeutsche Consolidation ofactivitiesinLuxembourg: asakseA LeasingGmbH Bausparkasse AG Sales Support Loans in Germany

Deutsche ® Postbank AG ■ ■ – BHWRückversicherung,Luxembourg – ModráPyramidahomeloan and savingsbank, Focus onthecoremarkets:Fourth quartersaleof % over 20 2007: Marketshareintransactionbankingnow HypoVereinsbank AG,Munich,startingonJanuary1, of paymenttransactionsettlementfor November 22,2006:Announcementoftheacquisition International Czech Republic Vermögensmanagement Kapitalanlage GmbH Deutsche Postbank Deutsche Postbank Deutsche Postbank etcePsbn Betriebs-Centerfür Deutsche Postbank nentoa .. BankenDeutschland International S.A., S.A., Luxembourg Privat Investment Financial Services uebugGmbH&Co.KG Luxembourg GmbH cons&Srie ietSls LegalAffairs DirectSales Accounts &Services amnsGoa rnhSls HRManagement BranchSales Payments Global rdtSrie RealEstateManagement Credit Services Postbank SystemsAG Service Field Service Field sHRStrategy ts Employees andTrustee Customers

Milestones 2006 Group Structure to makechangesatshortnotice. No responsibilityistakenforthecorrectnessofthisinformation–rightreserved 2007 Fiscal year Financial Calendar The English versionoftheGroup AnnualReport constitutesatranslation oftheoriginal Germanversion. Only theGermanversio ments. date ofthisAnnual Report.DeutschePostbankAGdoesnot intendanddoesnotundertakeany obligationtorevisetheseforward- Readers ofthisAnnual Reportareexpresslycautionednot toplaceunduerelianceontheseforward-looking statements,whichap from thedevelopment,resultsorperformance expresslyorimplicitlyassumedintheseforward-lookingstatements. casts andarethereforesubjecttorisks anduncertaintiesthatcouldcauseactualdevelopmentortheresults orperform are nothistoricalfactsandinsome instancesindicatedbywordssuchas“believe”,“anticipate”,“predict”,“plan”, “esti “expect”, “assume”andsimilarexpressions. Forward-lookingstatementsarebasedontheCompany’scurrentplans, estimates,pro capital marketrates),thebusinessand thenetassets,financialpositionandresultsofoperationsPostbank Group. For This AnnualReportcontainsforward-lookingstatementsthatrelatetomacroeconomic developments(inparticularthedevelopment www.postbank.com/ir E-mail: [email protected] 03 20-180 228-9 (0) Phone: +49 Investor Relations 20-0 228-9 (0) +49 Phone: 53105 Bonn,Germany 00 Postfach 40 53113 Bonn,Germany Friedrich-Ebert-Allee 114–126 Investor Relations Head Office Deutsche PostbankAG Published by Contacts oebr7 07InterimReportforthethirdquarter,analystconferencecall InterimReportforthefirsthalf-year,analystconferencecall November 7,2007 InterimReportforthefirstquarter, analystconferencecall August 2,2007 AnnualGeneralMeeting May 14,2007 Financialspressconferenceandanalysts’onfiscalyear2006 May 10,2007 March 19,2007 Service etal. Deutsche PostForeignLanguage Translation Investor Relations Postbank Coordination/editing Bielefeld Grafischer BetriebGieseking, Printing Kurt Steinhausen(p.3) Aleksander Perkovic(p.4/5) Frank Schemmann Photography EGGERT GROUP,Düsseldorf Design andlayout recycled paper. % This AnnualReportisprintedon100 ward-looking statements ance todiffermaterially mate”, “aim”, n islegally binding. ply onlyasofthe looking state- ofmoneyand jections andfore- *including selected subsidiaries *including ■ ■ ■ Milestones 2006 Group Structure* oprt eeomn conig&SlsMntrn rdtMngmn oe,FrxadCptl prtosCnrlStrategic Projec OperationsControl Money,ForexandCapital CreditManagement SalesMonitoring& Accounting& Corporate Development ufvnShmemn Hen Wulf vonSchimmelmann among Germanbanks With 14.6millioncustomers,largest singleinstitution lending, withportfolioamountingto¤62.3billion Postbank nowno.1inGermanyprivatemortgage thepurchaseofBHWHoldingAG,Hamelin – theacquisitionof850DeutschePostretailoutlets – Multi-channel salesdecisivelystrengthenedthrough ru aaeetFnnePoutMreigBac ae edn iaca akt evcsI/prtosResources IT/Operations Services FinancialMarkets Lending BranchSales Product Marketing Finance Group Management netrRltos& otoln aktn R rdtMngmn rauyCsoes&SlsAcutMngmn HROperations AccountManagement Customers&Sales Treasury CreditManagement Marketing&CRM Controlling Investor Relations& BVrihrn GBWPostbank BHW PB VersicherungAG Finance Ltd.,India H odn GPsbn otakPBCapital Postbank Postbank BHW HoldingAG omnctosIvsmn nuac edn ydct uiesOperations SyndicateBusiness Lending Investment&Insurance Communications esceugA GmbH versicherung AG versicherung AG nenlAdtCallCenters, Internal Audit H ees H moiinPBFirmenkundenAG BHWImmobilien BHW Lebens- Investments BHW Home BLbn-BWBn GPBFactoringGmbH BHWBankAG PB Lebens- oprt ikCnrligPoutMngmn pca susIse n Pyet uoFnnilMres Coordination FinancialMarkets PaymentsEuro Issuesand SpecialIssues Product Management RiskControlling Corporate taei Third-PartySales Strategic Research igR nmn ofagKenHn-ee cmdSea üt oksRzsMroDbro ikBrnmn RalfStemmer DirkBerensmann MarioDaberkow LoukasRizos StefanJütte Hans-PeterSchmid WolfgangKlein ning R.Engmann ae rdtMngmn oetcMarkets Domestic CreditManagement Taxes ■ ■ ■ Direct SalesChannels iazeaugA iiletibA Corporation,NewYork FilialvertriebAG Finanzberatung AG companies index ofthe30mostimportantlisted stock of themobilesalesforcesBHW andPostbank Finanzberatung AGand,withit,theintegration September 18,2006:Admission totheDAX July 17,2006:EstablishmentofPostbank Postbank Int.S.A.(PBI) In May2006,inclusionofbranchinDeutsche Consolidation ofactivitiesinLuxembourg: asakseA LeasingGmbH Bausparkasse AG Sales Support Loans in Germany Deutsche ® Postbank AG ■ ■ – BHWRückversicherung,Luxembourg – ModráPyramidahomeloan and savingsbank, Focus onthecoremarkets:Fourth quartersaleof % over 20 2007: Marketshareintransactionbankingnow HypoVereinsbank AG,Munich,startingonJanuary1, of paymenttransactionsettlementfor November 22,2006:Announcementoftheacquisition International Czech Republic Vermögensmanagement Kapitalanlage GmbH Deutsche Postbank Deutsche Postbank Deutsche Postbank etcePsbn Betriebs-Centerfür Deutsche Postbank nentoa .. BankenDeutschland International S.A., S.A., Luxembourg Privat Investment Financial Services uebugGmbH&Co.KG Luxembourg GmbH cons&Srie ietSls LegalAffairs DirectSales Accounts &Services amnsGoa rnhSls HRManagement BranchSales Payments Global rdtSrie RealEstateManagement Credit Services Postbank SystemsAG Service Field Service Field sHRStrategy ts Employees andTrustee Customers

Milestones 2006 Group Structure to makechangesatshortnotice. No responsibilityistakenforthecorrectnessofthisinformation–rightreserved 2007 Fiscal year Financial Calendar casts andarethereforesubjecttorisks anduncertaintiesthatcouldcauseactualdevelopmentortheresults orperform “expect”, “assume”andsimilarexpressions. Forward-lookingstatementsarebasedontheCompany’scurrentplans, estimates,pro are nothistoricalfactsandinsome instancesindicatedbywordssuchas“believe”,“anticipate”,“predict”,“plan”, “esti capital marketrates),thebusinessand thenetassets,financialpositionandresultsofoperationsPostbank Group. For This AnnualReportcontainsforward-lookingstatementsthatrelatetomacroeconomic developments(inparticularthedevelopment www.postbank.com/ir E-mail: [email protected] 03 20-180 228-9 (0) Phone: +49 Investor Relations 20-0 228-9 (0) +49 Phone: 53105 Bonn,Germany 00 Postfach 40 53113 Bonn,Germany Friedrich-Ebert-Allee 114–126 Investor Relations Head Office Deutsche PostbankAG Published by Contacts The English versionoftheGroup AnnualReport constitutesatranslation oftheoriginal Germanversion. Only theGermanversio ments. date ofthisAnnual Report.DeutschePostbankAGdoesnot intendanddoesnotundertakeany obligationtorevisetheseforward- Readers ofthisAnnual Reportareexpresslycautionednot toplaceunduerelianceontheseforward-looking statements,whichap from thedevelopment,resultsorperformance expresslyorimplicitlyassumedintheseforward-lookingstatements. oebr7 07InterimReportforthethirdquarter,analystconferencecall InterimReportforthefirsthalf-year,analystconferencecall November 7,2007 InterimReportforthefirstquarter, analystconferencecall August 2,2007 AnnualGeneralMeeting May 14,2007 Financialspressconferenceandanalysts’onfiscalyear2006 May 10,2007 March 19,2007 Service etal. Deutsche PostForeignLanguage Translation Investor Relations Postbank Coordination/editing Bielefeld Grafischer BetriebGieseking, Printing Kurt Steinhausen(p.3) Aleksander Perkovic(p.4/5) Frank Schemmann Photography EGGERT GROUP,Düsseldorf Design andlayout recycled paper. % This AnnualReportisprintedon100 ward-looking statements ance todiffermaterially mate”, “aim”, n islegally binding. ply onlyasofthe looking state- ofmoneyand jections andfore- Deutsche Postbank 2006 Group Annual Report

Postbank Group Fiscal Year 2006

Letter to our Shareholders 2 Group Management Report Shareholders and Stock 6 Business and Environment 78 Net Assets, Financial Position Executive Bodies 14 and Results of Operations 82 Strategy 20 Report on Post-Balance Sheet Business Divisions Date Events 87 Retail Banking 26 Risk Report 88 Corporate Banking 36 Report on Expected Transaction Banking 40 Developments 112 Financial Markets 44 Consolidated Financial IT/Operations 48 Statements Consolidated Income Statement 117 Employees 52 Consolidated Balance Sheet 118 Sustainability 56 Statement of Changes in Equity 119 Corporate Governance 62 Consolidated Cash Flow Report of the Statement 120 Supervisory Board 72 Notes 124 Segment Reporting (Note 40) 170 Auditors’ Report 205 Consolidated Income Statement Quarterly Overview 206 Consolidated Income Statement Multi-Year Overview 208 Annex 209 Glossary 212 Contact Details 216 2006 was one of the most important years in Postbank’s history. Our acquisitions of BHW and 850 Deutsche Post retail outlets have created a sales organization that is unparalleled in Germany. The result is a financial institution that offers a unique combination of size and local customer focus.

The early sales successes of Postbank Finanzberatung AG, which was established in July and brings together the entire mobile sales organization of BHW and Postbank, and our retail outlets already prove that we are moving in the right strategic direction. The acquisition of over 900,000 new customers was a great achievement, particularly in view of the fact that our resources were heavily tied up with integration activities over the past year. Our goal for 2007 is to break the barrier of acquiring more than one million new customers in a year.

We reaped immediate benefits in 2006 from the outstanding expertise and market position of BHW – one of Germany’s leading lender of private mortgages. With total mortgage lending amounting to ¤62.3 billion, the extended Postbank is now Germany’s number one provider in this important segment. And Postbank was already the market leader for checking and savings products. However, we also achieved significant growth in the other areas of our service offer, including consumer loans, investment funds and private pension provision. I am all the more delighted about this in view of the exceptional effort required to join together with two other companies, each of which employed almost as many people as Postbank used to on its own.

In the Transaction Banking segment, our assumption of HypoVereinsbank’s payment transactions at the beginning of the current year again demonstrated the outstanding role we are playing in the increasing consolidation of back-office processes in the banking sector. With a market share of over 20 %, we have already achieved a leading position in this field.

The Corporate Banking segment again exceeded the strong results it recorded in the previous year. The positive contributions made by the two mainstays of this business division, Payment Solutions and Selective Finance, strengthened consolidated earnings.

The positive development of our operating business is reflected in extremely strong earnings growth in the year under review: despite the additional costs of integration, we were able to boost pre-tax profit to ¤941 million, an increase of 31.6 % on last year’s pro forma figure. We also recorded significant improvements in our two most important performance targets: in the year under review, there was a substantial rise in return on equity (RoE) before taxes, which climbed 4.0 percentage points to 18.9 %, while the cost/income ratio in the traditional banking business (excluding Transaction Banking) fell an encouraging 6.8 percentage points to 66.7%. This success is due both to the continuation of strict cost management on the basis of highly efficient, IT-assisted processes, as well as to the constant income growth in our customer business. I firmly believe that this will allow us to achieve above- average earnings growth in the long term, even in the face of intensified competition and a challenging interest rate environment for a bank with a high volume of deposits.

2 Letter to our Shareholders Postbank Group

Postbank’s successful performance has also been reflected in its share price, which again increased substantially in the year under review, reaching ¤63.97 by the end of the year – a rise of 31%.

On September 18, Postbank shares were included in the DAX® index of Germany’s 30 most important listed companies. We view this as a lasting endorsement of our business model and, at the same time, an incentive to push ahead with our strategy.

I would like to take this opportunity to thank all our staff, who have achieved the extraordinary in combining our day-to-day business with the work of integration. Their hard work was crucial to our success.

In the current fiscal year, we will concentrate fully on infusing our new strength into customer business. Once we have completed our key integration measures, we intend to turn all our attention to customers and markets and ensure that the Postbank “sales machine” is running at full capacity.

I want to thank you, our shareholders, for your confidence. I would be delighted for your continued support on our path to becoming Germany’s No.1 financial services provider for private customers and a service partner for corporate customers.

Wulf von Schimmelmann Chairman of the Management Board

3 4 Executive Bodies Postbank Group

Management Board of Deutsche Postbank AG from left: Stefan Jütte Hans-Peter Schmid Wulf von Schimmelmann

Ralf Stemmer Dirk Berensmann Wolfgang Klein

Loukas Rizos Mario Daberkow Henning R. Engmann

5 Shareholders and Stock: Postbank included in the DAX® in its third year on the stock exchange

■ Dynamic increase in share price ■ Postbank in the DAX® since September 18, 2006 ■ Postbank Group offers strong growth prospects

Postbank stock significantly outperforms the market

We can look back on another successful year on the stock exchange: the upturn in the growth of European economies and the substantial increase in corporate earnings resulted in double-digit share price gains for investors on the stock markets. The EURO STOXX® 50 share index rose by 15 % and the DAX® (including dividends) by 22 %.

With an annual performance of +30.6 % (+33.1% including the dividend), Postbank shares far outperformed the extremely strong trend recorded by these share indices. The strength of Postbank’s performance becomes even more apparent when compared with our peer group of leading European retail banks: Postbank beat the average performance of these banks by 11.2 percentage points – an achievement that we believe vindicates our successful business model.

The rise in Postbank’s share price also led to a substantial increase in our market capitalization of ¤2.5 billion year-on-year to ¤10.5 billion at the end of the year under review.

Good growth prospects for the new Postbank Group…

The impressive increase in our share price reflects not only Postbank’s positive performance in the year under review, but also the good growth prospects of the Postbank Group. Following the acquisition of 850 Deutsche Post retail outlets and a majority interest in BHW, we published new medium-term 2008 targets in March of the year under review. These specify a return on equity of at least 20 % before taxes and a cost/income ratio of less than 63 % in the traditional banking business (excluding Transaction Banking); this will mean a sustainable improvement in our profitability and efficiency. The targets will enable Postbank to generate substantially more than its cost of capital of around 8.5 %. According to the concept of shareholder value, this threshold – which is different for every company depending on the level of risk involved – is considered to be the minimum level of return for a business wishing to create value. In the case of Postbank, we calculate this parameter on the basis of a long- term risk-free interest rate of 4 % and a risk premium for the stock market of 5 %. The latter, weighted by a beta factor of 0.9 since the IPO, is incorporated into the calculation (4 % + 5 % * 0.9 = 8.5 %).

6 LetterShareholders to our Shareholders and Stock Postbank Group

Performance of Postbank stock since the initial public offering (June 23, 2004 to December 29, 2006) ■ Postbank ■ Moving average of 200 days Values linked to index, Postbank IPO price on June 23, 2004 of 28,50 ¤ = 100 ■ DAX® ■ 240 Peer group*

220

200

180

160

140

120

100

06/23/0408/03/0409/14/0410/26/0412/07/0401/20/0503/01/0504/12/0505/24/0507/05/0508/16/0509/27/0511/08/0512/20/0501/31/0603/14/0604/25/0606/06/0607/18/0608/29/0610/10/0611/21/0612/29/06 Source: Bloomberg

Performance of Postbank stock versus the DAX® and peer group (December 30, 2005 to December 29, 2006) ■ Postbank ■ DAX® Values linked to index, price of Postbank stock on December 30, 2005 of ¤49,00 = 100 ■ Peer group*

135

130

120

115

110

105

100

12/30 01/20 02/10 03/03 03/24 04/14 05/05 05/26 06/16 07/07 07/28 08/18 09/08 09/29 10/20 11/10 12/01 12/22 12/29 *Banco Popular, Banco Popolare di Verona e Novara, Swedbank, Svenska Handelsbanken, Alliance & Leicester, Banco Espirito Santo, Erste Bank, Unicredito, Royal Bank of Scotland

7 … as confirmed by analysts

Equity analysts are also forecasting higher profits and lower expense ratios for Postbank. As we completed our acquisitions without a capital increase, our earnings per share forecasts rose at the same time. As a result, many analysts raised their share price targets and some also improved their recommendations. Equity analysts from more than 30 banks and securities houses currently track and comment on Postbank’s business development and prospects. They are in contact with our Investor Relations team and Management Board on an ongoing basis, and published more than 90 studies on our Company in 2006. You can find an overview of their current recommendations on our Investor Relations pages at www.postbank.com/ir.

Inclusion in the DAX®

On September 18, 2006, Deutsche Postbank’s stock was included in the DAX® – the most important index for listed companies in Germany. Postbank’s strong share price performance had already made it one of the country’s largest listed stock corporations, with an overall market capitalization of ¤9.8 billion at the end of March 2006. However, Deutsche Börse only considers a company’s free float when selecting DAX members, which meant that only 33 % of Postbank’s market capitalization was initially taken into account. This proportion increased in July, when Deutsche Post called the exchangeable bond on Postbank stock prior to maturity because of the increase in our share price. At this point, the free float rose to 50 % less one share. Postbank was therefore ranked 28th out of all listed German companies by this DAX® criterion at the end of August 2006. Postbank also achieved a strong position with regard to the second DAX® criterion, stock exchange turnover, at the end of August 2006, finishing in 35th place. The Company was included in the DAX® during the annual index adjustment in September. Postbank replaced Schering, which lost its place in the DAX® due to the low free float following its takeover by Bayer.

Our inclusion in the DAX® will make Postbank stock an even more attractive investment than before, for both national and international investors. This is also proved by the increase in our stock exchange turnover: in December 2006, we ranked 34th out of all German listed companies by this criterion, and 29th by market capitalization. This ensures us a stable position in the DAX®.

8 Shareholders and Stock Postbank Group

Our stock data 2004 2005 2006 +/– % 2006 Year-end closing price ¤ 32.50 49.00 63.97 30.6 % High* ¤ 34.18 50.84 65.45 28.7 % Low* ¤ 27.73 32.16 48.21 49.9 % Earnings per share ¤ 2.65 3.00 4.24 41.3 % Price/earnings ratio** 12.3 16.3 15.1 –7.4 % Number of shares millions 164.0 164.0 164.0 unchanged Market capitalization** ¤m 5,330 8,036 10,491 30.6 % Beta factor (relative to the DAX) 0.60 0.73 0.90 Equity ¤m 4,766 5,061 5,207 2.9 % Return on equity before taxes 14.0 % 15.0 % 18.9 % Total dividend (2006: proposal) ¤m 205 205 unchanged Dividend per share (2006: proposal) ¤ 1.25 1.25 unchanged Dividend yield** 2.6 % 2.0 % Annual performance* excluding dividend 14.0 % 50.8 % 30.6 % Annual performance* including dividend 14.0 % 54.6 % 33.1%

* 2004: June 23 to December 31 ** based on the year-end closing price

Shareholder structure

After calling the exchangeable bond, the free float, i.e. shares that are freely tradable, increased to 50 % less one share while Deutsche Post continues to hold a majority interest of 50 % plus one share. Private investors own 11% and institutional investors 89% of the free-float. Postbank is particularly popular with international investors, as an analysis of the shareholder structure shows. Interest in Postbank continues to grow among institutional investors particularly in the UK and North America; together, these two groups now account for 57.0 % of this category. Institutional investors in Germany and France account for a further 27.5 %, while there is also a broad spread of interests held by other European investors.

9 Shareholder structure of Deutsche Postbank AG as of December 31, 2006

Shareholder structure (in %) Institutional investors by country (in %)

44.5 %, institutional investors 3.4 %, other 5.5 %, private investors 1.5 %, Italy 1.5 %, Switzerland 36.9 %, UK 4.4 %, Denmark 4.7 %, Luxembourg 11.8 %, France

50 % + 1 share, Deutsche Post 15.7 %, Germany 20.1 %, USA and Canada

Success factor: Intensive dialog with our investors

We pursue a policy of open communication to attract the interest of investors and analysts, in the first instance by holding regular press and analyst conferences to present our annual and quarterly results. In addition, the Investor Relations team – often supported by members of Postbank’s Management Board – organized 46 roadshows in Germany and abroad, and attended twelve conferences held by key investment banks. We gave extensive answers to questions about the new Group and our business model in more than 300 one-on-one meetings. In addition to current earnings and business developments, the focus of attention in 2006 was on the initial consolidation and integration of BHW and the Deutsche Post retail outlets.

A range of international surveys further testify to our good working relationship with investors and analysts. Included in the Rematch® investor relations survey for the first time, the Postbank Investor Relations team was ranked immediately 9 out of 33 European financial services providers in 2006. This was the second best result of any German financial services provider. And in the annual survey conducted by the Institutional Investor Research Group, the respondents rated us one of the top ten teams of investor relations professionals, out of a pool of 68 IR teams from leading European financial services providers.

10 Shareholders and Stock Postbank Group

We offer institutional and private investors access to a shareholder hotline in addition to our website, which contains information and allows investors to make inquiries and place orders. Our Investor Relations team answers all your questions about Postbank stock on our Internet pages. We also used three events held by German shareholder protection associations as a supplementary platform for presentations and direct dialog with private investors. We intend to expand this approach in 2007.

Extremely positive echo at Postbank’s second public Annual General Meeting

A large number of private investors again used our second Annual General Meeting on May 11, 2006 to communicate with their company: As in the previous year, over 78 % of the voting capital was represented. All agenda items were adopted by a majority of at least 97.3 % – a clear endorsement by the shareholders of our business strategy.

We would like to take this opportunity to invite you to our next Annual General Meeting on May 10, 2007 in the Kölnarena in Cologne. Despite the pressure on equity due to our acquisitions, the Management Board will propose an unchanged high dividend of ¤1.25 per share for 2006.

A list of other important dates can be found in the Financial Calendar at the end of this Annual Report. You can also visit our Investor Relations website at www.postbank.com/ir for additional information, or you can call our shareholder hotline on +49 (0)228 - 920 18003.

Postbank as a mobile bank

“I am now part of a team of 4,400 mobile financial advisers. This makes Postbank the leader among German banks. And personally I think it’s the best bank in the world.”

Stephan Holzinger, mobile financial adviser at Postbank Finanzberatung AG

If you want to succeed with your customers, you have to anticipate their needs. By giving them compelling services, whenever and wherever it is convenient to them. This is why the merger of Postbank and BHW is simply ideal: they complement each other perfectly in terms of products and services as well as multi-channel sales. Executive Bodies

Management Board

Wulf von Schimmelmann, Bonn, Chairman

Dirk Berensmann, Unkel

Mario Daberkow, Bonn from November 1, 2006

Henning R. Engmann, Bonn from March 10, 2006

Stefan Jütte, Bonn

Wolfgang Klein, Bonn

Loukas Rizos, Bonn

Hans-Peter Schmid, Baldham

Ralf Stemmer, Königswinter

14 Executive Bodies Postbank Group

Supervisory Board

Klaus Zumwinkel, Cologne, Hans-Dieter Petram, Bonn, Chairman, Member of the Board of Management Chairman of the Board of Management of Deutsche Post World Net of Deutsche Post World Net Bernd Pfaffenbach, Wachtberg-Pech, Michael Sommer*, Berlin, State Secretary, Federal Ministry of Economics and Technology Deputy Chairman, Chairman of the German Trade Union Federation Klaus Schlede, Cologne, previously Deputy Chairman of the Management Board Jörg Asmussen, Berlin, of Deutsche Lufthansa AG Head of Department, Federal Ministry of Finance Elmo von Schorlemer, Aachen, Marietta Auer*, Unterhaching, Lawyer Head of Department, Deutsche Postbank AG, Head Office Sabine Schwarz*, Berlin, Rosemarie Bolte*, Stuttgart, Chair of Deutsche Postbank AG’s Works Council, Berlin Branch Regional Head of Department, Financial Services, at ver.di Trade Union Gerd Tausendfreund*, Nidderau, Trade union secretary of the ver.di Trade Union Wilfried Boysen, Hamburg Christine Weiler*, Kreiling, Edgar Ernst, Bonn, Chair of Deutsche Postbank AG’s Works Council, Member of the Board of Management Munich Branch of Deutsche Post World Net

Annette Harms*, Hamburg, Deputy Chair of Deutsche Postbank AG’s Works Council, Hamburg Branch

Peter Hoch, Munich

Ralf Höhmann*, Korntal-Münchingen, Chairman of Deutsche Postbank AG’s Works Council, Stuttgart Branch

Elmar Kallfelz*, Wachtberg, Member of Deutsche Post AG’s Group Works Council

Ralf Krüger, Kronberg, Management consultant, Professor at the Fachhochschule Wiesbaden

Harald Kuhlow*, Weingarten, Appointed expert to the General Works Council of Deutsche Postbank AG

* Employee representatives

15 Executive Manager Directors

Mario Daberkow, Bonn Branch Sales until October 31, 2006 Helmuth Pawletta, Delmenhorst until May 31, 2006

Norbert Roth, Berlin until May 31, 2006

Rainer Thews, Hamburg until May 31, 2006

Andrea Wiegand, Bochum until May 31, 2006

Finance

Marcus Chromik, Bonn since January 1, 2006

Ulrich Geuss, Bonn since January 1, 2006

Werner Hille, Weinstadt-Endersbach until May 31, 2006

Christian Schramm, Bonn since January 1, 2006

Financial Markets

Horst Küpker, Königswinter-Thomasberg

Group Management

Manfred Harnischfeger, Bonn

Marc Heß, Bonn

Ralf Kauther, Bonn since June 1, 2006

Dieter Richter, Troisdorf

Heike Weden, Bonn

16 Executive Bodies Postbank Group

IT/Operations Resources

Ludger Dörr, Oststeinbeck Holger Giese, Alfter

Heiko Fischer, Gütersloh Claus Kleine, Bonn

Thea Kutzscher, Berlin Rainer Konder, Rheinbrohl since June 1, 2006 Andreas Nix, Kandel Uwe Körner, Bad Münder Klaus Werner, Munich since June 1, 2006

Wolfgang Lyding, Hanover Lending since June 1, 2006

Werner Grünewald, Essen Andreas Martin, Rheinbreitbach until May 31, 2006 Marc Heß, Bonn since November 13, 2006 Anja Marzuillo, Bornheim since June 1, 2006 Ingo Husemeyer, Remagen-Oberwinter Hans-Joachim Neumann, Neu-Isenburg Rainald Schomburg, Cologne

Horst Willemse, Meckenheim Services since June 1, 2006 Mario Daberkow, Bonn until October 31, 2006 Product Marketing Hans Joachim Gasda, Coppenbrügge Gerhard Borchers, Kirchberg since June 1, 2006 until May 31, 2006 Willi Kiebler, Rodenbach Andreas Buck, Wachtberg Albert Lechner, Mering Jürgen Gausepohl, Bonn Bernd Oletzky, Bonn Joachim O. Kühnemund, Bonn since June 1, 2006

Michael Meyer, Bonn Volker Stadler, Bonn until May 31, 2006 since June 1, 2006

Dieter Pfeiffenberger, Barsbüttel Heinz Wachter, Marl

Werner Wessinghage, Schwerte

Jörg Wittenberg, Bonn

Postbank as a branch bank

“A lot happened in my life in 2006: A move from Deutsche Post to Postbank, new challenges, new things to learn. As an adviser, I can now proudly offer an even more extensive service for all financial issues.”

Andrea Rautenberg, employee at a Postbank branch in Cologne

The takeover of 850 retail outlets from Deutsche Post, including their employees, not only made economic sense, it was also an important strategic milestone: Postbank aims to become the leading financial services provider for private customers in Germany. This requires skilled, highly motivated employees. Intensive training on our products and on customer orientation has produced just that. Strategy: Foundation laid for further growth

■ Integration completed successfully ■ Establishment of sales organization completed ■ Target: To be Germany’s number 1 financial services provider for private customers and positioned as service provider for companies

Integration program completed ahead of schedule

Our activities in 2006 were dominated by the integration of BHW and the acquired branches. The central integration project was completed by September 30, 2006, one quarter ahead of schedule. A major reason for early completion was that Postbank, BHW and the acquired retail outlets had very similar corporate cultures, which significantly facilitated the design of the new structures and the implementation of the measures. The most important milestones to integration were as follows:

■ First quarter: Definition of the new organizational structure, including appointment of all future managers and definition of their areas of responsibility. This gave managers and employees a clear idea of the future structure of the new Postbank Group.

■ May 24: Reconcilement of interests A reconcilement of interests was finalized with the employee representatives at a very early stage during the integration process. The agreement provided for socially responsible workforce adjustments affecting around 1,200 employees in the Postbank Group. The size of the workforce is being reduced through early retirement and termination agreements, without redundancies. The high degree of workforce acceptance facilitated the contractual agreement of 80 % of the job-reduction- related termination agreements by mutual consent to have already taken place by 2006.

20 Strategy Postbank Group

■ End of second quarter: Standardization of the regional structure of mobile and over-the-counter sales for senior management levels.

■ July 17: Formation of Postbank Finanzberatung AG Following extensive technical and legal preparations, we merged BHW and Postbank’s mobile sales organizations into a single entity, Postbank Finanzberatung AG, again ahead of schedule. The 4,350 mobile advisers, brought together under the umbrella of Postbank Finanzberatung, sell customers products of BHW, Postbank and selected third-party providers on behalf of the Postbank Group. This serves to realize the requirement of leveraging the enormous sales potential present in Postbank’s customer base.

■ July 20/21: BHW Holding AG resolves squeeze-out The ordinary Annual General Meeting of BHW Holding held on July 20 and 21, 2006 resolved to squeeze out the remaining minority shareholders. On completion of the procedure, Postbank will be the sole shareholder of BHW Holding AG.

■ November 1: Merger of Postbank’s and BHW’s IT units The corporate IT department at BHW Bausparkasse AG was transferred to Postbank Systems AG, thus creating the conditions for greater synergies, especially with regard to the joint procurement of hardware and software.

Following a strategic analysis of its investment portfolio, BHW Holding AG sold its subsidiaries Modrá Pyramida in the Czech Republic and BHW Rückversicherung.

21 Establishment of sales organization completed

The acquisition of BHW and 850 Deutsche Post retail outlets at the beginning of 2006 was a quantum leap for Postbank’s sales organization and gave a considerable boost to our multichannel strategy. With a total of 4,350 mobile advisers in the new Postbank Finanzberatung AG and 850 own branches, we are now able to offer considerably more comprehensive support to our customers. On the one hand, the objective is to achieve even greater customer satisfaction through an expanded advisory and service offer. Our other aim is to increase the product penetration throughout our customer base. This is how we will systematically boost the great earnings potential that, at our customer level of 14.6 million, is a given.

In order that branch sales run in a more proactive and customer-oriented way, we launched a large- scale training campaign in the year under review. The sales figures already mirror the success of the measures. We also profit from the competence gain through BHW: by deploying specially selected, mobile mortgage lending specialists at the branches, Postbank customers now also have direct access to the long-standing expertise of BHW in matters of home savings and mortgage lending.

Also in 2006, we launched the “Filiale im Wandel“ (Changing Branches) project, aimed at improving the look and feel and service quality of the branches and to increase awareness of the banking services on offer. This project will continue in 2007. More information on this may be found in the Retail Banking chapter. Activities in direct sales channels were coordinated with one another.

Growth in Corporate Banking continues unabated

In Corporate Banking, Postbank continues to focus on selected products and services, which are currently being sold to around 35,000 corporate customers.

In addition to its consolidated market position in the area of payment solutions, the Corporate Banking division lays great emphasis on expanding existing customer relations from a value creation perspective. For this reason, it added products such as capital expenditure and development loans as well as balance-sheet management instruments to its offering in 2006, which will make an impact from 2007. It is also our intention to pursue risk-conscious growth in commercial real estate finance, in particular in the United Kingdom and selected regions of the USA.

22 Strategy Postbank Group

External growth in Transaction Banking

Another strategically important step was taken in Transaction Banking: in the fourth quarter 0f 2006, we concluded negotiations with HypoVereinsbank AG, for whom we took over the processing of payment transactions starting on January 1, 2007.

With this deal, Postbank has expanded its leading position in the transaction banking market and now processes the payment transactions of four out of Germany’s five major banks. A volume of more than 7.2 billion transactions a year means that its market share in this segment will rise to around 20 %.

2007 – focus on generating greater synergies

In Retail Banking, we will concentrate our activities squarely on organic growth in 2007, i.e. on extending our sales performance.

In Transaction Banking, we will focus on the strategically important introduction of the Single Euro Payments Area (SEPA) between 2008 and 2010. Building on our strong position in Germany, we also want to take a leading role in payment transaction processing at a European level.

We will expand our Corporate Banking business using the measures described earlier, while main- taining our absolute focus on a good credit-risk profile.

We are holding firm to our goals of achieving earnings synergies of ¤100 million and cost synergies of ¤42 million by 2009 consequent to the BHW acquisition.

Postbank as a direct bank

“All day I go from one appointment to the next. But I am completely flexible when it comes to my banking. I can perform transactions whenever and wherever it suits me, simply by going online or using the phone.”

Tanja B., Postbank customer for two years

We have a particular passion at Postbank: to develop simple and affordable solutions for our customers. Ease of use is the key criterion. This is why we make sure customers can reach us in any way imaginable. And why they can decide for themselves when and where to check their account balances and securities accounts, transfer money, buy and sell securities, subscribe for new issues and much, much more. For us, ease of use also means maximum flexibility combined with maximum security. Retail Banking: Decisive boost to customer access

■ Integration challenges mastered ■ Branches geared toward active sales ■ Quantum leap in mobile sales

Integration proceeding more rapidly than planned

The Retail Banking segment played the largest role in integrating BHW and the transferred Deutsche Post retail outlets. The challenges were mastered extremely carefully and rapidly.

The first half of the year was dominated by the implementation of new structures and the introduction of a training initiative at all branches and at BHW’s sales organization. As one might expect, our employees were not fully available to serve customers in the time required for these projects, which temporarily led to a slight reduction in sales performance and new customer business. However, these initiatives started to pay off in the second half of the year and customer business increased perceptibly, enabling us to record positive to excellent results in almost all product areas for full-year 2006.

Sales network of Deutsche Postbank AG

■ Postbank ■ BHW ■ DPAG with Postbank services

26 Business Divisions Postbank Group

Unique sales channel mix ensures comprehensive customer access

The acquisition of BHW and 850 Deutsche Post AG retail outlets at the beginning of the year under review further strengthened Postbank’s unique multichannel sales strategy. Our mix of branches, mobile sales, Postbank’s call centers, the Internet and third-party sales enables us to meet different customer needs expertly and cost-effectively.

Branches geared toward active sales

We rapidly and smoothly integrated the 850 retail outlets acquired from Deutsche Post AG in the year under review. The “Leadership and Sales” training initiative launched in early 2006 made a key contribution to this: in a top-down process, branch managers were trained by Postbank executives, including Management Board members. The content of these sessions switches between theory and practical simulations so as to ensure a passing down of knowledge to all those engaged in customer advisory activities.

Participants are taught a uniform, systematic sales process, which is supported by an electronic advisory system and is easy to learn, ensuring high-quality customer advice. The quality of our advisory process is regularly reviewed by internal and external auditors and certified by TÜV Rheinland, the independent testing and assessment service.

Our service quality is also regularly tested by TNS Infratest and MSM Germany, which are independent of each other. We use the results to continuously improve our services – and thus create the basis for increasing customer satisfaction and strengthening customer loyalty.

In addition to our own branches, Deutsche Post AG continues to sell and broker Postbank’s standard financial services, with focus on checking and savings products, at its remaining retail outlets and at its partner retail outlets.

Retail Banking1 Variety of products and services in our branches guarantees success Segment result 2006 2005 ¤m ¤m The focus of our offer in the branches will be Postbank’s banking products and services. The offering Balance sheet-related comprises a wide variety of other products. For example, postal services will continue to be sold on revenues 2,396 2,219 behalf of and for the account of Deutsche Post AG. In return, Postbank is remunerated in line with Net fee and contractual agreement. In addition, Postbank Filialvertrieb AG, into which the branches are consolidat- commission income 1,061 1,081 ed, sells “New Services” on behalf of and for the account of third parties, such as Deutsche Telekom AG and Faber Lotto. It also sells products on its own behalf and for its own account, in particular Administrative expenses –2,178 –2,301 stationery. Profit before tax 924 806

This variety of products and services is a key factor in the success of Postbank’s branches. More than Cost/income ratio 63.0 % 69.7 %

80% of the customers who visit our branches every day have yet to open a bank account with us. This Return on equity represents enormous potential that we must exploit. This is why we launched the “Filiale im Wandel” before taxes 32.7 % 29.2 % (Changing Branches) project, which is outlined in the outlook section of this chapter. 1see Note 2

27 Quantum leap in mobile sales by BHW advisers Postbank’s mobile sales organization was significantly strengthened by the acquisition of BHW: we had 3,800 mobile BHW financial advisers under contract at the end of 2006, after streamlining the force of 4,200 advisers we took over at the beginning of the year using strict selection criteria. BHW’s sales organization and Postbank Vermögensberatung AG’s 450 advisers were combined under the umbrella of Postbank Finanzberatung AG, together with an additional 100 mortgage loan advisers, who support the branches as specialists in this area. This enables customers of Postbank to join the ranks of those already benefiting from the powerful tool represented by extended mobile sales. The newly formed company is the largest bank-based mobile financial sales organization in Germany.

Mobile sales allow us to comprehensively leverage our substantial customer potential by offering home savings, private real estate finance, investment and retirement provision products, and is a key guarantee that we will exploit the synergies from the acquisition of BHW.

Third-party sales – moving from strength to strength in private mortgage lending and private loans We were able to further extend our market position using the DSL Bank brand, one of the leading mortgage lenders in the brokerage and cooperation business. In addition to a sophisticated product and price structure that meets the high demands placed on a specialist provider, our efficient service and support concept made a key contribution to our success. For further details, see the corresponding product sections in this chapter.

Internet and call center popularity continues to grow Direct channels have gained further significance for Postbank: recording more than 2.5 million visitors per month, www.postbank.de remained the most successful website of all single institutions in Germany in 2006. 3.21 million accounts, 9.6 % more than in the previous year, were used for online banking. Among these were 2.44 million online checking accounts, 480,000 online securities accounts and 290,000 SparcardDirekt accounts. The number of checking accounts registered for telephone banking rose from 3.2 million in 2005 to 3.4 million. These two direct sales channels again significantly contributed to our sales success in 2006: more than 55% of new private loan business and nearly 20 % of new savings deposit business was generated via the telephone or online.

Our direct sales channels focused on promoting business both through targeted marketing campaigns, and through a large number of improvements in terms of customer comfort and security. Postbank underpinned its role as a pioneer and its reputation for online security by introducing the iTAN and mTAN, as well as by providing comprehensive, interactive customer information. We also further optimized our voice portal and aligned it even more closely with the wishes and needs of our customers.

28 Business Divisions Postbank Group

New customer target exceeded

962,000 people became Postbank customers in 2006. Of these, 711,000 are attributable to Postbank and 251,000 to BHW. The previous year pointed to a total of 978,000 newcomers, of which 698,000 could be allocated to Postbank and 280,000 to BHW. Consequently, we greatly exceeded our target of attracting 900,000 new customers in the year of integration. At ¤2,498, the added customers had ¤296 more in net household income than in the previous year. By the end of 2006, our customer base rose to 14.6 million. We were also successful with our key entry-level product, the private checking account: 469,000 new accounts were opened – almost the same number as in the previous year (482,000). This means that we manage a total of 4.7 million private checking accounts, compared with just under 4.6 million in the previous year.

New customer support concept for customers with greater advisory needs We launched the Postbank SELECT program, a new customer service and support concept, in response to the wishes of Postbank customers who have a greater need for support or advice due to their product use behavior. Overall, the Postbank SELECT program is aimed at 1.5 million customers who already make particularly heavy use of our offering. In the first stage, we systematically contact around 300,000 customers with the aim of extending and intensively managing our relationship with them for the long term, and of exploiting increased cross-selling potential. Every customer can actively opt to join the SELECT program by choosing a particular product (Gold-Doppel credit cards, extra plus checking account, or savings products or securities accounts starting at ¤50,000).

Standing our ground in competition for savings According to statistics generated by the Bundesbank, in a year-on-year comparison, the volume of savings deposits in the overall market again declined in the year under review, by ¤19.7 billion or 2.8 %.

Postbank’s total savings deposits slightly outperformed the market and decreased only by around 2.5 % to ¤58.8 billion. While savings deposits (including call money deposit accounts) were down by ¤1.6 billion to ¤42.1 billion, home savings deposits rose from ¤16.5 billion to ¤16.7 billion.

Our new business focused on savings products with attractive returns. These include, for example, Postbank’s “Quartal-Sparen” savings product, launched nine months ago, in which a basic amount invested in a savings account earns an attractive rate of interest each quarter. The volume of funds invested in this product amounted to ¤3.87 billion by the end of the year. We expanded our product range in November 2006 to include another savings product, the “Postbank BörsenSieger” (“Stock Exchange Winner”). This allows savers to profit, on top of the basic interest rate, from weekly rises in selected international stock market indices without the risk of losses.

We are actively responding to the trend toward investing in call and term money by offering our checking account holders an attractive rate of interest on their balances in a separate call money deposit account. Since its introduction in July 2006, our customers have placed ¤837 million in this product; the ¤1 billion margin was exceeded in February 2007.

29 Stable market share in home savings According to preliminary estimates, Germany’s home savings market shrank by 8.4 % in 2006, with 3.9 million new contracts signed. At around ¤102 billion, however, total home savings fell only slightly, by 3.6 %. The increase in average home savings shows that building societies have managed to attract customers who are more financing-oriented.

BHW has responded to the continuing period of low interest rates and now offers a home savings rate with a choice of loan interest of 1.9 %, 2.9 %, or 3.75 %. For new business, this entails refocusing sales efforts away from an emphasis on favorable savings rates and back toward underscoring attractive home savings loans. In addition, home savings contracts play an important role as a product linked to mortgage lending. They provide customers with security against increasing interest rates, and the additional contribution margins make it easier for BHW Bausparkasse to set mortgage lending conditions in a competitive environment.

BHW Bausparkasse’s new business was down from the previous year due to integration work and the slight decline in new mortgage lending business, with total principal disbursed of ¤10.9 billion (previous year: ¤11.4 billion) and 434,000 contracts (-4.5 %).

These results allowed BHW to keep its market shares stable at around 11.6 %, as measured by the number of contracts, and 11.3 % by total volume.

Largest mortgage provider in Germany The market for private mortgage lending was dominated by extraordinary factors in 2006. On the one hand, the first few months of the year under review saw follow-on effects from the abolition of the home owners’ allowance at year-end 2005. On the other, the VAT increase also led to a slight upturn in the construction industry due to pull-forward effects. Nevertheless, the market volume of residential construction loans only rose by a moderate 2.1 %.

The market also witnessed fierce competition for conditions, which reduced average new business margins as against the previous year.

Through the acquisition of BHW, Postbank was able to make a quantum leap in market position for its mortgage lending business and is now a market leader in this activity. The mortgage loan portfolio doubled to ¤62.3 billion compared with the ¤29 billion recorded by Postbank at the end of 2005. On a pro forma basis, this amounts to an encouraging 14.9% increase for full-year 2006. The growth rate achieved by our portfolio is thus well above the volume growth of the overall market, which amounted to 2.1 %.

Self-brokered new business totaled ¤10.8 billion, compared with ¤11.4 billion in the previous year. The DSL and Postbank brands contributed ¤5.4 billion to this (previous year: ¤5.1 billion), while new business of ¤5.4 billion (previous year: ¤6.3 billion) was generated by mobile sales.

30 Business Divisions Postbank Group

The DSL and Postbank brands’ volume of new business thus increased by around ¤300 million, while earnings from BHW were down ¤900 million as against the prior-year figure. This is due to our intensive integration work in the area of mobile sales, which affected new business in the second quarter in particular. Once this integration work was completed, our mobile mortgage loan specialists substantially increased new business. We again acquired mortgage lending portfolios in 2006, with a total volume of ¤3.2 billion compared with ¤3.3 billion in the previous year. These relate mainly to the repurchase of mortgage lending portfolios sold by BHW in prior years. Kreditanstalt für Wiederaufbau has issued guarantees for ¤2.3 billion of the portfolios acquired, which means that this amount is not counted toward the Bank’s risk-weighted assets.

Strong growth in private loans In a private loans market that recorded only muted growth, Postbank increased its new business by 31% to ¤1.354 billion exclusively through organic growth, far exceeding our target of ¤1.2 billion. In the process, we increased our volume of installment loans by ¤2.4 billion, for a 14.3 % increase year-on-year, thereby gaining a market share of the installment loan volume of 1.8 %, as compared to 1.6 % in the prior year. In this area, we focus our sales efforts on the three brands: Postbank, DSL and BHW. The Postbank Privatkredit (private loan) is sold via our branches, the Internet and our call centers, while the DSL Privatkredit is sold by third-party sales teams. The BHW Privatkredit is offered by BHW’s former financial advisers. Here, Stiftung Warentest consumer agency certified us with a “good“ quality of advisory services (“Finanztest“, issue 2/2007).

Securities business successfully expanded to include certificates Gross cash inflows in new funds and certificates business rose by 20 % year-on-year to ¤2.2 billion. The sales successes achieved by the mobile sales financial managers added ¤390 million to this amount, taking total new business to ¤2.6 billion. Around 55 % of fund products sold originated from third-party companies. Selected BHW funds were included in Postbank’s product range.

At the end of the year under review, we managed 918,000 securities accounts, including BHW (previous year: 948,300); the decline is due to an adjustment for 48,900 inactive accounts; in reality, the number of active accounts rose by 18,600. Securities account holdings increased by 18.8 % in 2006 to ¤10.5 billion, while the number of securities accounts managed online rose from 460,000 in 2005 to 480,000.

Strong insurance business thanks to Riester pension Following our acquisition of BHW, Postbank’s insurance business now comprises three product providers: on the one hand, PB Versicherung AG and PB Lebensversicherung AG, which we operate as a joint venture with Talanx AG and which primarily provide products for over-the-counter sales; and on the other hand, BHW Lebensversicherung AG, which offers its products via Postbank Finanzberatung AG’s mobile sales organization. The challenge in the coming years will be to bundle the capacities in the Group and to integrate them even more closely with our sales channels, so as to offer customers an optimum product portfolio tailored to our sales channels.

31 In new life insurance business across all sales channels, we increased the insurance amount by 21.3 % year-on-year to ¤3.13 billion. This was driven particularly by the Riester pension, the contribution amount of which climbed by 157 %, moving it from ¤440 million to ¤1.13 billion. Mobile sales accounted for ¤376 million, as compared to ¤206 million in the previous year. As to sales of the remaining sales channels, there a spurt in growth could be boasted of more than triple year-on-year, moving from ¤235 million to ¤759 million.

Increased share of contested credit card market Postbank was able to expand its position in the fiercely competitive credit card market: our market share increased from 4.3 % in the previous year to 4.6 % at the end of the year under review, in each case including BHW. This success is due among other things to the fact that we increased our sales efforts, launched new products such as the VISA photo card and drove forward the partial payment function, i.e. the repayment of credit card bills in installments. A total of 1.03 million Postbank credit cards are in circulation, compared to 963,000 in the prior year.

Sponsorship of the soccer world cup an unqualified success Postbank had already turned to soccer as a way of heightening public awareness three years before becoming national sponsor of the FIFA World Cup 2006 in Germany. This found expression through advertising and soccer balls colored of Postbank Yellow, designed by adidas and used as give-aways for various banking transactions. The positive effect became rapidly apparent, as evidenced in the market research which we commissioned: in March 2003, 38 % of Germans surveyed knew that Postbank was a sponsor of German soccer. By March 2004, that number had risen to 45 % and by September 2005 awareness had hit a high of 60 %.

After the awesome World Cup, Germany’s “summer fairy tale“, Postbank arrived at its own soccer summit: in the ranking of World Cup sponsors, Postbank took first place as “National Sponsor“, with a 78 % level of supported awareness, and fifth place among all 21 companies in the official setting of the FIFA World Cup. This served to significantly improve supported and unsupported awareness and to heighten Postbank’s profile as a bank.

32 Business Divisions Postbank Group

Outlook

Postbank’s goal for 2007 is to gain 1 million new customers (Postbank and BHW) and therefore to again exceed the extremely high figure from the year under review. We intend to achieve this ambitious goal through the combination of our attractive products and conditions on the one hand, and our unique sales platform on the other. At the same time, we will intensify our efforts to strengthen customer loyalty, and to further increase our customer base and exploit cross-selling potential.

In our branch business, we launched the “Filiale im Wandel” (Changing Branches) project in 2006, which aims to analyze and optimize our existing branch network with regard to service, look and feel and regional focus. In addition, we are continuously reviewing and expanding our product portfolio. We also aim to further enhance the efficiency of our processes so as to gain time for sales activities and to improve service quality. Most of the effects of this project will be felt in 2007 and we will be occupied with it in the years that follow as well.

Another of our goals is to stabilize savings and checking account deposits at a high level. We plan to lift securities accounts holdings by at least 10 % in the securities business. In the consumer loan business, we aim to again exceed the high level of new business from the previous year by at least 10 %, despite the VAT increase.

In mobile sales, we want to gain a further 1,000 advisers in the coming years. In doing so, we are drawing upon Postbank‘s strong attraction for mobile advisers due to the unique link of customer access to product portfolio. On the one hand, we aim to replace advisers leaving the Company and hence to continue driving forward the qualification process for this sales channel, and on the other we want to increase the total number of advisers so as to rapidly leverage the income potential inherent in our customer base.

We aim to achieve further growth in the mortgage financing and home savings market by better leveraging the potential offered by our sizeable customer base through our substantially expanded multichannel sales activities. Overall, competition in private mortgage lending will continue to gain ground in Germany. Consequently, pressure on margins will remain firm. Nevertheless, thanks to our new sales strength, we are confident that we will achieve our 2007 target of organically increasing our private mortgage lending portfolio by some 10 %.

In the insurance business, the position on the pensions market of the Riester pension will continue its expansion course in 2007; this is something from which Postbank should also strongly profit. Through the changes laid out in the Jahressteuergesetz 2007 (Tax Amendment Act), the attractive- ness of the tax-supported Rürup pension is also enhanced. A boost in sales can be expected here, particularly from the target group of the self-employed who cannot benefit from the advantages of the Riester pension.

Postbank as a home-savings bank

“We had enough space when there were only four of us. But now that our little girl is here, we need somewhere bigger – and someone who can help us get our own place.”

Till K., father of three; Postbank customer for eight years

The employees of BHW, Germany’s second- largest building society, have contributed a wealth of private mortgage lending experience to Postbank. Know-how that perfectly com- plements Postbank’s expertise. Allowing us to offer our customers top-rate service in this area as well. Corporate Banking: Continuous enhancement of strategy of selective growth

■ High-performance partner in payment transactions ■ Role as core bank for SMEs stabilized ■ Risk-conscious lending policy maintained

In 2006, Postbank continued as a high-performance partner for its approximately 35,000 corporate customers in matters of payment transaction solutions, investment financing specially intended for SMEs, domestic and international commercial real estate finance, as well as leasing and factoring. We also offer attractive investment opportunities as well as hands-on advisory services, aimed at the best structuring possible of customer balance sheets. This takes on particular relevance in light of greater regulatory requirements in the wake of Basel II.

Corporate Banking business 2006: earnings and lending volume

Allocation of earnings in % Allocation of lending volume in % Total: ¤372 million Total: ¤13.6 billion

3 %, credit lines 17 %, medium-term/long-term 1%, other corporate finance 25 %, corporate finance

11%, credit lines

9 %, factoring

34 %, commercial real estate finance 63 %, commercial 37 %, payment services real estate finance

36 Business Divisions Postbank Group

Forward-looking payment transaction solutions

Now and in the past, a sophisticated level of intelligent payment transaction solutions form part of our core competencies in the Corporate Banking division. We continue to number among our customers 90 % of DAX® companies and some 70 % of companies listed on the MDAX®. Together with the related credit lines, around 40 % of earnings are generated from this segment. To further enhance performance, Postbank invested heavily in promising technologies in the year under review. For example, we introduced a new cash management system, the giropay online payment service, and solutions for cross-border payment transactions. This allows us to ensure that we will in the future still not only process bulk payment transactions smoothly, but also offer tailored solutions in the quality people have come to expect.

Greatly expanded spectrum in investment and risk management

We offer our customers a broad range of investment and capital market products and advise them during the selection process, with a view to the optimal use of earnings opportunities while mini- mizing potential risks.

Derivative hedging instruments are growing in importance for our corporate customers as part of interest rate and currency management. Our tailor-made product solutions help control risk positions and render borrowing costs more calculable for our customers, thus optimizing financial management.

Focus on corporate finance for SMEs

We want to keep improving for our corporate customers, too, which is why we are continuously expanding our service portfolio. In 2006, for example, we introduced the capital investment loan, a highly successful product specially tailored to the needs of the upper SME segment. The capital investment loan gives our customers flexible financing options for working capital and capital assets, as an alternative to overdrafts and commercial real estate finance. We draw upon our experience in movable 1 assets leasing in assessing the risk. Guarantee credits as well as interest rate and currency hedging Corporate Banking are also part of our service spectrum for SMEs. Segment result 2006 20051 ¤m ¤m Stable growth in commercial real estate finance Balance sheet-related revenues 267 247

Net fee and Commercial real estate finance at both the national and the international level is the second impor- commission income 105 108 tant pillar of the Corporate Banking segment. It accounts for 63 % of the total credit volume in the Corporate Banking business and 34 % of income. Our proven expertise and strong market position Administrative expenses –171 –165 form the basis for sustained growth in domestic, but most particularly in international business. The focus of the business, managed from Postbank headquarters, remains providing finance for interna- Profit before tax 165 149 tional investments by domestic customers and special real estate funds, particularly in Western Europe. Cost/income ratio 46.0 % 46.5 %

In addition, Postbank is expanding its activities in the area of international syndicated real estate Return on equity finance together with partner banks. Other entities making a significant contribution to the success before taxes 46.7 % 43.2 % of international real estate finance are PB Capital, New York, and the London Branch, to be further 1see Note 2 described in the two sections that follow. The lending volume in commercial real estate finance totaled ¤8.5 billion, after ¤7.1 billion in the previous year.

37 PB Capital logs very dynamic growth

PB Capital Corporation, New York, was very successful in 2006 in pursuing its business activities in the US target market and achieved its best results since becoming part of Postbank. This expansion was achieved in a risk-oriented fashion, and forms a solid basis for further sustainable results.

At the foundation of this success are three business segments: Real Estate Lending, Corporate Invest- ments and the so-called Tender Option Bonds, a form of public sector financing. In commercial real estate finance, PB Capital further expanded its position as a provider of comprehensive credit solutions, including syndicated loans. Although the first signs of an economic slowdown and a slight correction in real estate prices in some regions of the United States appeared in 2006, PB Capital’s main markets of New York, Washington, D.C. and California were virtually unaffected by these trends. These markets remain extremely robust and characterized by strong competition.

Corporate Investments entails the management of a diversified portfolio of corporate bonds, corporate loans and structured credit products. The division performed over and above our expectations and today contributes some 20 % to the earnings of PB Capital. Also to be mentioned is that in 2006, PB Capital was successful in establishing the segment of Tender Option Bonds. This represents a public sector-like financing, encompassing the purchase and management of municipal and public sector bonds. The division is already making a significant contribution to earnings.

Overall, PB Capital’s credit volume, including irrevocable loan commitments, increased from $3.5 billion in 2005 to the current $4.4 billion.

Postbank London Branch continues its road to success

In fiscal year 2006, the London Branch was again able to maintain and expand its position as an established provider of structured commercial real estate finance in the United Kingdom, with the focus on office buildings, shopping centers and condominiums. In addition to leased portfolio properties, it also provides finance for new construction and renovation projects. The properties are dispersed throughout the United Kingdom, although most are in Greater London. PB London Branch also advises international customers on investments in other European countries.

In the still growing, highly competitive UK market, the favorable market position of PB London Branch must be credited with the expansion of its loan book in customer business from ¤1.3 billion to ¤2.6 billion in the year under review. The risk profile was kept at almost the same level as in the previous year, thanks to the continued strong emphasis on credit quality.

The financing of public sector investments by private investors (public private partnerships) was piloted in 2006. We believe that this low-risk market offers attractive business opportunities in which, working together with strong partners, we can leverage our many years’ experience in real estate finance.

38 Business Divisions Postbank Group

PB Factoring again increases revenue substantially

Demand for alternative forms of finance persisted in 2006, spurring a continuation of the growth trend in the German factoring market. Despite increasing competitive pressure, PB Factoring increased its revenue by 32.5 % to ¤5.6 billion, primarily due to new agreements with a financing volume of over ¤5 million. A comparison of factoring revenue in Germany with that of other European countries reveals additional growth potential for the coming years as well.

Postbank Leasing records strong new business

Postbank Leasing offers a compelling proposition due to its logistics systems expertise and comprehensive knowledge in the area of plant and equipment. In 2006, it again succeeded in expanding its volume of new business, thanks among other things to the company’s market- and customer-oriented sales organization. Postbank Leasing will continue its organic growth path in the future.

Outlook

We will pursue our path of selective growth in Corporate Banking in the current year.

By way of extensive investments and project activities, we set the stage in 2006 for presenting a more solid contact point for our core market in Germany, the SMEs. We aspire to be their point of reference for financial services and their core banking partner, with the aim of bringing about a distinct rise in market share. In 2007, we began offering SMEs selected development loan programs as a supple- ment to capital expenditure loans.

In the German corporate banking business, we will work out solutions to rating optimization together with our customers, in consideration of the lending guidelines under Basel II.

We will also review our product portfolio and tailor it to the needs of the market. Our medium-term goal in this instance is to generate palpable increases in the German SME segment and, related to this, to achieve risk-oriented growth in the lending business. In parallel, we will further enhance and refine our management instruments in line with our risk-conscious lending policy.

In commercial real estate finance, we are expecting a continuation of positive business development, in keeping with economic trends. Target markets remain England, with the focus on London, and the US regions of New York, Washington, D.C. and California. Our business will be supplemented through our support of the financing projects of domestic corporate customers in other European countries. In accordance with our risk-oriented strategy, we will continue to keep a close eye on credit quality.

39 Transaction Banking: Efficient processing of payment transactions and lending

■ Leading market position in payment transaction processing extended ■ Continued industrialization ■ New organizational structure for Postbank’s credit service ■ New SAP software for mortgage financing

The market for transaction banking is divided into three areas: accounts, loans and securities accounts. Postbank focuses on account and lending services.

Payment transactions

Full-service payment transactions The Transaction Banking business division, formed in 2004, consolidates all Postbank’s payment transaction activities. Structured into the “Euro Transactions”, “Global Transactions” and “Accounts and Services” functions, we provide full-service payment transactions to both Postbank customers and external customers.

Payment transactions for external customers are handled by our subsidiary, Betriebs-Center für Banken Deutschland GmbH & Co. KG (BCB): we process Deutsche Bank’s domestic payment transactions as well as Dresdner Bank’s domestic and cross-border payment transactions. We also provide tracing and internal account services.

In the year under review, we gained HypoVereinsbank as another external transaction banking customer; the agreement to process its payment transactions was signed at the end of 2006. HypoVereinsbank’s subsidiary HVB Payments & Services GmbH (PAS GmbH) was acquired by BCB as of January 1, 2007. This will increase the number of transactions per year by around 1 billion, which means that we expect to process a total of 7.2 billion transactions in 2007; this corresponds to a market share of approx. 20 %.

40 Business Divisions Postbank Group

Insourcing delivers economies of scale Including BCB, Postbank processed a total of around 6.2 billion payment transactions in 2006, compared with 6.0 billion in 2005. Of the 2006 figure, 6.05 billion (97.6 %) represent electronic and 0.15 billion (2.4 %) paper-based payment transactions. Its market share was 16 %, as in the previous year. These large transaction volumes generate economies of scale that we pass on to our customers, so as to offer them, as well as prospects, attractive and stable conditions for our high-quality services.

Structures further streamlined The Postbank Group continually reviews and further optimizes its organizational structures. Within BCB, for example, the formerly legally independent companies BCB Berlin GmbH and BCB Frankfurt GmbH were merged with BCB KG effective January 1, 2006. We removed the IT department from BCB ZVS GmbH and transferred it to Postbank Systems AG, which is generally responsible for IT issues, as of January 1, 2006.

Industrialization of Transaction Banking Postbank made further progress with the industrialization of its banking services. By concentrating on a few processing locations and deploying efficient, integrative IT systems, Transaction Banking has achieved a high level of industrialization with a good cost/income ratio.

Taking manufacturing industry as a model, a control station office was installed to monitor and control all payment transaction processing activities. This control station – in Frankfurt am Main with a back-up office in Munich – is unique among financial services providers in Germany. This is where all nationwide information, such as failures and document volumes, is collected and summarized on an ongoing basis. The control station manages the daily document volumes, allocating them to the individual locations for state-of-the-art and efficient processing. The station thus ensures optimum, flexible and cost-effective resource management in all payment transaction processes.

As part of our risk management strategy, we introduced a loss database in 2006 that allows us to record the frequency and level of losses; the findings are reflected in the BCB Group’s quality control and planning for the fiscal year, among other things. To counter operational risks, we have contractu- 1 ally agreed standby concepts with the respective IT service providers. In the course of 2006, we Transaction Banking completed development of a Business Recovery Center at our Essen location. The new center further Segment result 2006 2005 optimizes our existing solutions in the event of a malfunction. We are convinced that, with this, we ¤m ¤m have instituted a leading back-up solution in Germany. Balance sheet-related revenues 4 5 With its single-minded implementation of industrialized banking services, Postbank has carved out an Net fee and outstanding and unique strategic niche in the German banking market, giving it an excellent starting commission income 263 278 position for further business expansion. Administrative expenses –245 –263

Profit before tax 27 23

Cost/income ratio 91.8 % 92.9 %

Return on equity before taxes – –

1see Note 2

41 Credit Services

Credit Services is the Postbank competence center for credit processing. Broken down into “Commitments”, “Payments”, “Administration” and “Workouts”, we are a full-service provider in this field.

Integration continues apace As part of our integration work, loan processing at BHW Bausparkasse was harmonized with Postbank practices and concentrated at our Hamelin location. This entailed revising our organizational structure. The Credit Center has positioned itself as a service provider for internal and external customers and is continually working to further optimize industrialized, standardized and highly efficient processing of mortgage loans.

Successful introduction of SAP credit software for mortgage financing The Credit Center already has one of the most advanced and powerful document management systems in the European financial services market. In a permanent cooperation with our partner SAP, we are continually developing IT innovations that will help us further expand our leading position in processing. In the year under review and under the aegis of our NeuBau project, the introduction of our new, client-enabled IT platform with standard software for processing mortgage financing lent a significant boost to productivity. Now, full mortgage financing applications can be processed and completed within forty-eight hours.

Centralizing loan processing itself and the development of a powerful, multiclient-enabled IT system allows us to achieve a high level of industrialization, which is reflected in low unit costs. This gives us a strong basis to further expand our activities.

42 Business Divisions Postbank Group

Outlook

Payment transactions The decline in paper-based payment transactions should continue in 2007. This will impact earnings since lower unit prices apply to electronic payment transactions. However, these losses will be offset by increasing transaction volumes and the substantially lower cost of electronic payment transactions. We also plan to implement additional measures to cut costs and increase efficiency.

2007 will also be dominated by the preparations for the Single Euro Payments Area (SEPA): Between 2008 and 2010, a single European payment transactions area will be created in which there are no differences between national and cross-border payments. These new conditions, together with fierce competition, increasing production requirements as well as changed regulatory demands under Basel II, represent the challenges facing banks in Europe. More than ever, many competitors are debating whether to outsource back-office activities to a third party that can ensure both cost-effective and high-quality production thanks to large transaction volumes and the resulting economies of scale. Thanks to its subsidiary BCB, Postbank is superbly positioned to play a leading role in payment transaction processing at European level, too.

Credit Services The market for assuming loan processing services is only in its development phase in Germany. However, we expect demand for mortgage financing services to grow enormously in the coming years, on the one hand because the pressure of consolidation is continuing in the German financial services market, and on the other because the need for investment is growing due to increasing regulatory and compliance requirements. This means that inefficient or obsolete IT systems must be replaced, or alternative solutions must be found.

Our highly industrialized loan processing gives us an excellent basis to expand our market position in loan processing for third parties and to attract new customers once we have completed our integration work.

43 Financial Markets: Diversified investment strategy optimizes risk/return ratio

■ Efficient risk management ■ Earnings from loan portfolio investments increased ■ New structures in Luxembourg

The Financial Markets division is responsible for Postbank’s money market and capital market activities in line with the following management parameters:

■ Safeguarding of the net interest margin contribution from customer business and hence minimization of the market price risk from such business (see Risk Report) ■ Safeguarding of liquidity ■ Optimization of the risk/return ratio and generation of income from the conscious, controlled assumption of market risk within predefined limits

The following subsidiaries are assigned to the division for organizational purposes:

■ Postbank Financial Services GmbH, Frankfurt am Main ■ Postbank Privat Investment KaG, Bonn ■ Luxembourg units

Treasury – success in management of market risks

The Treasury department, housed in the Financial Markets division, supports the market areas by safeguarding the net interest margin contributions from customer business. Postbank’s deposit surplus, which amounted to ¤8.3 billion in the year under review (previous year: ¤16.7 billion), is transferred to a “GAP structure” by risk control, using generally recognized techniques (presentation of positive and negative gaps; see Risk Report). Imbalances in the maturity bands are managed by Treasury. As well as traditional securities such as bunds and public-sector mortgage bonds, derivative financial instruments are employed here, the absence of which would be inconceivable in today’s overall bank management strategy.

44 Business Divisions Postbank Group

Treasury enters into market and credit spread risks based on its market assessment and in accordance with limits defined by the Management Board. Diversification effects, which account for a large proportion of Treasury‘s risk management activities, again made an impact in 2006. In addition to equali- zation effects between interest rate markets and equity markets, various trading strategies, such as euro bonds v. US bonds, long-short strategies and credit spread trading, are used to optimize the risk/ return structure. As a separate profit center, the Treasury department thus also makes a contribution to Postbank‘s overall earnings.

To continue to fulfill these functions and manage the market price risk to which Postbank has been exposed from the acquisition of the BHW Group (in particular interest rate risk at BHW Bausparkasse), Treasury has been readapted and realigned at the levels of both organization and content. Going forward, this new structure will allow the market price risk from customer business to be managed even more efficiently from the Group’s perspective and facilitate the assumption of risks in the capital markets.

Although the integration of the BHW Group into the Postbank Group came with its share of special pressures, and the market environment in 2006 proved difficult, Treasury was again able to safeguard and further expand balance sheet-related revenues.

Money, Forex and Capital Markets – good market positioning

The Money, Forex and Capital Markets department executes transactions on the financial markets for all departments charged with managing positions. It therefore acts in the first instance as a service provider for the Group, but also as a competence center for all relevant markets in which it conducts proprietary trading within the parameters of strict risk limits. Money, Forex and Capital Markets is also responsible for the Bank’s short-term liquidity management. The integration of BHW posed particular challenges in this context in 2006, but these were mastered successfully. Financial Markets1 In the year under review, we were again able to expand our market position in interest rate and forex Segment result 2006 2005 products at both national and international levels. The revenue from collateralized money market ¤m ¤m alone rose by approximately 50 % year-on-year to more than ¤1 trillion. Balance sheet-related revenues 144 138 In the capital markets business, trading in exchange traded funds was significantly expanded. Net fee and commission income 63 62 As to the retail area, for the first time we implemented an issuance and distribution process for structured products (certificates). The resulting two initial large issues, the “Postbank Weltmeister Administrative expenses –78 –80 Zertifikat” (World Cup Certificate) and the “Postbank ZinsSammler Zertifikat” (Interest Collector Certificate) were very well received by retail customers. Profit before tax 132 120 Cost/income ratio 37.7 % 40.0 %

Return on equity before taxes 23.8 % 22.0 %

1see Note 2

45 Issues and syndicate business – stronger Tier 2 capital

As part of its investment policy, Postbank was involved in the syndicated issues business, primarily relating to covered bonds from German issuers.

Postbank’s Tier 2 capital was strengthened by approximately ¤690 million in 2006 by the issue of profit sharing rights and a subordinated yen bond, the foreign exchange risk of which is hedged.

Structured credit products – a growing market

Financial Markets invests in globally diversified credit portfolios, primarily using structured credit products. This allows for credit risk to be broadly diversified over various customer groups, rating classes and geographic regions. This tends to reduce dependence on economic developments in the home market and gives Postbank the opportunity to profit from positive trends in other markets.

Asset management – gross cash inflows significantly above previous year

One of the core tasks of Deutsche Postbank Financial Services GmbH (PFS) is to manage special funds under outsourcing contracts with a variety of German and foreign investment companies. Together with Deutsche Postbank Privat Investment Kapitalanlagegesellschaft mbH (PPI), PFS was able to secure new clients in this sector in 2006 as well as increase volumes among existing ones.

PFS employs an end-to-end advisory approach vis-à-vis its institutional customers. For example, it provides advice to customers on optimizing asset/liability structures and developing new retail products, among other things. Deutsche Postbank Luxemburg S.A. (PBI) was advised by PFS on the restructuring and realignment of its existing fund portfolio.

Deutsche Postbank Privat Investment Kapitalanlagegesellschaft mbH (PPI) was able to significantly increase assets under management by ¤1 billion to ¤11.7 billion. ¤9.8 billion of this is attributable to special funds and ¤1.9 billion to retail funds.

The sharp growth in own retail funds merits particular mention. These recorded a good 20 % increase in assets under management, and at ¤710 million, gross cash inflows were markedly higher than in the previous year (2005: approx. ¤600 million).

46 Business Divisions Postbank Group

Luxembourg – new structures, new success

The business activities of Deutsche Postbank AG’s Luxembourg branch were contributed to Deutsche Postbank Int. S.A. (PBI) in May 2006. This was an important strategic move: not only did it improve PBI’s earnings power, it also further diversified its business divisions. The new structures see to an enhanced market presence and enable efficiency gains. This has created the conditions for continued successful operation in the financial center of Luxembourg.

This step was accompanied by a substantial capital increase at PBI. PBI now has issued capital of ¤600 million, and its total assets of ¤17.4 billion make it one of the largest banks in Luxembourg (previous year: ¤13.7 billion). Profit after tax of the new entity amounted to ¤61.5 million in 2006 (previous year: ¤22.6 million).

PBI’s core business is to advise private and corporate customers. PBI used 2006 to further extend its services and advisory capacity for private customers and to develop innovative interest rate and currency management products for corporate customers. PBI met the growing challenges it faces, in particular in the management of credit risk, by establishing a central risk management function in its Treasury department.

The launch of two new retail funds (Postbank Garant 2013 for private customers and Postbank Konzept LiquiPlus for institutional customers) increased assets under management by more than ¤200 million to ¤1.83 billion.

PBI publishes its own annual report, which provides further details. Copies of the annual report may also be obtained in pdf format via e-mail to deutsche.postbank@postbank-lu.

Outlook

Going forward, the central activity of the Financial Markets division will continue to be to ensure effective risk management for the entire Postbank Group. Structural changes and employee training in 2006 enabled us to further improve the conditions for our successful work. This is important, as the organic growth of the credit business allows for a further slimming of the surplus of liabilities from the private customer business. Effective liquidity management will be an important factor in 2007 and Postbank’s retail banking operations and its customers will be among its beneficiaries. Since we anticipate difficult capital markets in 2007, first and foremost bond markets, our diversified investment strategy will remain an important element of risk management and ensure our contribution to the Group’s success. Following the successful integration of Postbank and the BHW Group, the current challenge is to ensure that BHW can tap Postbank’s superior terms, which ensue from favorable market positioning and size.

47 IT/Operations: Powerful IT meets exacting requirements

■ Integration tasks resolved speedily and effectively ■ IT transaction banking platform makes progress ■ Requirements met for Basel II

Integration a success

All Postbank’s IT activities are bundled in Postbank Systems AG, which was responsible for a large part of the work to integrate BHW and the acquired retail outlets. The focus was initially on controlling IT costs throughout the Group as quickly as possible and using the potential for optimization on hand. To this end, uniform management processes and tools for Postbank and BHW were introduced very quickly. On this basis, reciprocal technical connectivity was established and the first applications integrated in just a few weeks. The mobile advisers thus have direct access to the IT systems of Postbank over the central sales platform (multi-channel banking), and the branches of Postbank Filialvertrieb AG, Deutsche Post AG as well as the call centers were connected to sales functions around the theme of home savings.

With the January 1, 2007 reorganization of Postbank Systems AG – implemented with the involvement of employee representatives – BHW’s IT staff were incorporated in Postbank’s organizational structures and flows and the integration process completed.

New software products introduced

As part of payment transaction processing, two major software products were introduced for Betriebs- Center für Banken Deutschland GmbH & Co. KG: a new MARS client-enabled archiving and search system as well as a program which significantly simplifies processing in paperless payment transactions. In loans processing, a new SAP-based system (TB2) was introduced for BHW, representing a further important milestone in the modernization of our IT platforms.

Additionally, in the framework of a quality campaign, structures and production processes were put to the test and many improvements introduced.

Development of a payment transaction platform for Transaction Banking

The development of a state-of-the-art, standard payment transaction platform for the Transaction Banking division was a key element of our activities. All technical preparations for the development of our

48 IT/Operations Postbank Group

standard Payment Solution software were completed in the year under review. At the end of the year, SAP AG shipped the core of the standard software, so that the implementation work could be started.

IT requirements met for introducing Basel II

With the national implementation of Basel II, the regulatory capital requirements for lending operations now focus more heavily on economic risks. In this regard, Deutsche Postbank AG has opted for the sophisticated internal ratings-based approach (IRBA), which uses internally-developed rating models for spreading capital adequacy requirements for risks.

In 2006, the first stage of the Basel II IT program focused on the IT integration of risk portfolios and the SAP application support for calculating capital adequacy requirements. In order to ensure approval of Deutsche Postbank AG for the IRBA (Internal Ratings-Based Approach), in computing the risk- weighted assets it was necessary to calculate at least 50% (entrance threshold) of the credit volume on the basis of internal rating models and to integrate this into systems. We were successful in doing so, and were therefore approved on December 22, 2006 by Bundesanstalt für Finanzdienstleistungs- aufsicht (BaFin – German Federal Financial Supervisory Authority). Postbank will commence disclosures in accordance with Basel II in the first quarter of 2007.

Top marks for the Bank’s online security

Over the past few years, Postbank’s IT security management has reached a level of maturity enabling it to receive ISO 27001 certification at the beginning of 2006. The mobile transaction number system (mTAN) was introduced to increase on-line security and awarded the seal of approval from TÜV, the independent testing and assessment service. In contrast to the generally-accepted paper-based TAN system, the mTAN is sent to customers exclusively by SMS on their cell phones and can be used to authorize just one online transaction.

In addition, the traditional TAN system has been replaced in all Internet areas by the indexed TAN (iTAN), in which the software asks the user to enter a specific TAN. This measure also increases data security and protection against Internet fraud. Fraunhofer Institut, the leading German research institute, rated Postbank’s overall online security as “good”, which is the best rating awarded among a large number of banks tested.

The strategic importance of mobile banking, or banking via cell phone, is increasing, and it could become a standard product in the medium term. IT/Operations is involved in the development and lends a special focus to eliminating possible security risks.

Outlook

Preparations for the go-live of our Payment Solution software for the payment transaction business in Transaction Banking will be a major focus in 2007. Preparations will also be made of the IT func- tionalities for the Single European Payments Area (SEPA). In addition, we will take the project steps that are still needed for meeting the next level of Basel II requirements. Flanking this, Postbank IT will take on a number of tasks in connection with the cooperation on payment transactions agreed with Bayerische Hypo- und Vereinsbank AG.

Postbank as a retirement provision bank

“At last I have time for the things I value in life, like playing with my grandchildren. And thanks to my good retirement provision, I also have the funds for the good things in life.”

Ernst W., Postbank customer for 18 years

Postbank’s tailored retirement provision products offer the right solution for everyone: old and young, trainees and students, salaried employees, civil servants and the self-employed. So dreams can come true after retirement, too. Employees: Encouraging and promoting in a much larger team

■ Workforce adjusted to requirements ■ Employee development standardized throughout the Group ■ Remuneration linked more strongly to performance

Personnel challenges posed by integration successfully met

The integration of BHW and 850 Deutsche Post retail outlets required many personnel changes in all parts of the Company. In line with the new Group structure, many employees changed jobs within the Postbank Group; in part, this entailed moving to a different location. In addition, the centralization of certain functions led to synergy effects, key among which was the avoidance of duplication. In this way, staff requirements were reduced by around 1,200 jobs for 2006 and 2007.

As part of the integration process, it also became necessary to fill the new or changed management positions quickly in line with need. Within just eight weeks from the purchase of BHW, the appointments to the first two management levels below the Management Board were made and communi- cated, with the bulk of the recruitment being conducted internally. Another focus of the integration activities was to standardize the employment terms and conditions for managers throughout the Group.

Socially-responsible workforce reduction ensured through reconcilement of interests and social plan

In the spring of 2006, negotiations were undertaken with the social partner for the reconcilement of interests and the social plan, as well as the supporting regulations under the collective agreement. The aim was to put in place socially-responsible provisions for implementing the integration measures and making the necessary workforce adjustments. Key points of the agreements reached include the waiver of dismissals for operational reasons in the BHW companies in the period up to December 31, 2008, provisions for job relocation, agreements for preservation of vested rights as well as attractive severance and early retirement provisions.

Mobility incentives were also agreed, i.e., measures intended to promote employees’ readiness to move to different locations as well as companies.

52 Employees Postbank Group

The early retirement and severance program launched in the spring and concluded on December 31, 2006 enjoyed a very good response. Starting from a base of over 1,000 expressions of interest, we were able to conclude agreements with some 870 employees in the period under review. To date, headcount has been decreased by around 390 through severance and around 480 due to early retirement. Expressed as full-time equivalents, this means a reduction of some 770 positions.

Due to Postbank’s link-up with BHW and the former Deutsche Post retail outlets, the Group’s headcount, expressed as full-time equivalents, rose from 9,235 as of December 31, 2005 to around 23,000 at the beginning of 2006. The restructuring measures outlined and the tapping of additional reduction potential reduced the headcount to 21,696 as of December 31, 2006.

Motivational compensation models expanded

The Postbank Group also focuses on performance aspects when determining the remuneration of its employees; variable remuneration systems have been put in place for almost all employee categories.

Individual variable compensation at the management level can be up to 40 % of annual compensation. Under a long-term incentive program (LTI), executives of the senior management levels have been able to profit since 2005 from an annual cash premium on their salaries, linked to the performance of the Postbank stock.

The variable pay of Postbank employees is made up of a performance bonus which honors individual and team performance, as well as a corporate performance bonus that is a function of the success of the Group.

In the future, the fixed special payment in accordance with the Federal Special Payment Law (Bundes- sonderzahlungsgesetz) for civil servants will be replaced with performance-related variable remuneration in accordance with Postbank’s regulations on remuneration for work performed laid down in collective agreements. As an interim arrangement in 2006, civil servants still received fixed remuneration amounting to 60 % of their basic salary. In 2007 and 2008, a portion of this remuneration will be disbursed subject to individual performance, and from 2009, all of it will be performance-based. Overall, this will achieve harmonization between salaried employees’ and civil servants’ pay, thus implementing performance-based compensation models for civil servants as well.

Planning security through long-term wage settlement for collectively-agreed salaries

An increase of 3.0 % in collectively-agreed salaries, depending on the section of the Company, is written into the wage settlements that have been re-negotiated in 2006. This is to be differently scaled and implemented between September 1, 2006 and January 1, 2007, with term set at 25 to 28 months. Depending on the section of the Company, a further increase will be paid out in the amount of 1.5 % or 2.5 % in the period from December 1, 2007 to April 1, 2008. There is planning security in regard to staff costs due to the multi-year term of this wage settlement.

53 Individual employee development is corporate strategy

We regard the ongoing training and encouragement of the individual development of our employees as an indispensable investment in the future of our Company. Development measures are based on corporate strategy, individuals’ skills and expertise and the specific requirements placed on employees.

Our training measures are primarily implemented through blended-learning concepts, in which attendance-based measures alternate with self-learning phases. In the spirit of corporate identity, the training strategies at Postbank, BHW and Filialvertrieb were harmonized in 2006.

All in all, the Postbank Group invested more than 41,500 advanced training days in employee development in the year under review (not including mobile sales). A considerable proportion of this investment came from Postbank Filialvertrieb AG, which systematically enhanced the sales expertise of its employees in 2006. Above and beyond the days already mentioned, there was a particularly strong investment through the application of on-the-job training and coaching measures.

Commitment to vocational training and recruitment of personnel

We concluded over 260 new training contracts in 2006, bringing the number of young people employed in a training capacity by the Postbank Group to around 700 at the end of the year under review. During the year, 325 young people successfully completed their training by passing their final examinations.

Postbank conducts its vocational training in cooperation with the Frankfurt School of Finance & Management (formerly Bankakademie e.V.); starting in 2007, this cooperation will be expanded to include BHW and Filialvertrieb AG. We will use the related cost savings to increase our trainee ratio by more than 20% in 2007.

Together with the Frankfurt School of Finance & Management, Postbank offers a highly regarded Bachelor of Science program that integrates training.

With regard to furthering talent and recruitment of personnel, we also pursue partnerships with student initiatives and study foundations.

The Postbank Finance Award, which we presented for the fourth time in 2006, remains another important component of our activities for recruitment of personnel. It is Germany’s highest-endowed university award. To date, 750 young scientists have competed in teams for this distinction.

54 Employees Postbank Group

Work-family balance

In order to promote the compatibility of family and profession, in cooperation with PME Familien- service GmbH (the German acronym ‘PME’ stands for “employee-efficiency partner”) we offer various childcare options, e.g., kindergarten and nursery places, as well as care in emergencies.

For the same reason, employees also have the option to work part time, an offer that is availed of by some 25 % of the total workforce.

Binding corporate values and code of conduct introduced for all employees

Since 2005, all of Deutsche Post World Net, and therefore Postbank as well, has been subject to a uniform set of corporate values applicable to all employees. The seven basic values comprise statements on service quality, customer orientation and principles for action, as well as on integrity, social responsibility and dealings with one another. These values are supplemented by a code of conduct, which applies uniformly throughout the Group and concretizes the corporate values (see “Sustain- ability” chapter). The Code describes and explains goals and rules in business operations that reflect our obligation to conduct ourselves in responsible, ethically-impeccable and legal fashions.

Outlook

Following the reorientation of the Group, we now have to strengthen its personnel structures and continue to improve the quality of the services we provide our customers through targeted qualification measures for our employees. Another urgent goal for the Resources division in 2007 will be to further optimize the Group’s internal processes as well as its cost structure.

Workforce adjustments in line with need will continue as planned in 2007, on the basis of the reconcilement of interests agreed with the employee representatives. In parallel, there will be an increase in the number of staff consequent to the assumption of the payment transactions for HypoVereinsbank and the integration of an IT subsidiary early in 2007.

55 Sustainability: Accepting responsibility – Setting priorities

■ Corporate citizenship under the spotlight ■ Extension of sustainability reporting ■ Helping to protect the environment and the climate

Postbank is committed to the principle of sustainable development. As a responsible company, we believe that this is crucial if we are to operate successfully on the market and in society in the long term.

The signature of the UN Global Compact by our parent, Deutsche Post World Net, in 2006 also committed Postbank to respecting human rights and eliminating workplace discrimination. Our actions are also governed by the corporate values, the code of conduct and the environmental guidelines established by Deutsche Post World Net.

Since 2005, Postbank has been a member of the Verein für Umweltmanagement in Banken, Sparkassen und Versicherungen e.V. (VfU – Association for Environmental Management by Banks, Savings Banks and Insurance Companies). This membership offers us an ideal platform for sharing experiences in the field of sustainability management with other financial service providers. Furthermore, by signing the Carbon Disclosure Project (CDP4) in 2006, we are acting on our conviction that banks should pay more attention to climate protection in their investment decisions.

Postbank believes that this strategy has been endorsed by the wider public – this is also reflected in the fact that Postbank continues to be listed in the globally recognized FTSE4Good sustainability index, following our initial inclusion in 2005.

56 Sustainability Postbank Group

Corporate citizenship under the spotlight

Supporting soccer Postbank’s links with soccer are very close: one of the aspects we share with the sport is the under- standing that team spirit is central to the success of the team as a whole. This is one of the reasons why Postbank has been involved in German soccer for many years, for example as a premium partner of the German Soccer Association (DFB) in the financial services sector and as an “Official Partner of the DFB Qualification Campaign”, which focuses on basic and advanced training and the further development needs of promising young soccer players.

Our continuous support for German soccer means that we were predestined to assume the role of national sponsor for the financial services sector during the FIFA World Cup 2006TM. We are pleased to have been able to support the FIFA World Cup 2006™, which was the sporting and social high- light of 2006 in Germany. And we are delighted that both the German national team and its fans used this opportunity to present Germany to the rest of the world as a nation that is cosmopolitan, friendly and fair.

Social partnership with Aktion Mensch Since 2004, Postbank has been the exclusive social partner for Aktion Mensch in its integration projects and child and youth welfare projects.

We launched the "Postbank Gewinn-Sparen" financial product as part of our social partnership. This savings account offers bonus interest on top of the basic rate depending on the winning number in the monthly Aktion Mensch main draw. For every euro of the bonus payment that investors receive at the end of the year, we donate one cent to Aktion Mensch. In 2006, we accumulated a total of approximately ¤130,000.

From July to September 2006, ten soccer afternoons were held across the country for the third time under the motto "Cool down, kick off – street soccer for tolerance". The games in these soccer tournaments are governed by special rules that promote fairness, dialog and civic courage. The tournaments are organized jointly by Aktion Mensch, Postbank and local partners from the child and youth work sector. Some 680 children and young people took part in the tournaments in 2006.

University development To help secure the future of Germany as a business location, Postbank has been sponsoring academ- ic research and university teaching since 2003; please refer to the “Employees” chapter for more information.

Supporting schoolchildren We currently have eight partnerships with schools in the Hamelin region. The objective of our involvement is to improve the pupils’ suitability for entering vocational training and to help them choose the right career.

Postbank has also entered into a partnership with Schulen ans Netz e.V., a not-for-profit organization that promotes the use of electronic media in schools; our objective is to impart basic business knowledge to pupils with the aid of a business game.

57 In addition, at the end of 2006 we started working with the City of Bonn, with the goal of offering pupils a modern learning environment. So far, Postbank has already donated some 80 computers and monitors to schools in Bonn.

Idea management Postbank’s idea management system actively involves our employees in our business environment. Around 900 suggestions for improvement with a savings potential totaling over ¤2.5 million were implemented in 2006, and bonuses in excess of ¤235,000 were paid out. In the latest annual statistics (for 2005) produced by the Deutsches Institut für Betriebswirtschaft (dib – German Institute for Business Management), Postbank’s system of idea management moved up one place compared with the previous year: we now rank an outstanding third place among 23 banks.

Supporting UNICEF Our parent company, Deutsche Post World Net, entered into a long-term strategic partnership in 2006 with UNICEF, the United Nations Children’s Fund. In October 2006, the Group’s employees – including representatives from Postbank – had the opportunity to work as volunteers in Africa. Postbank employees also take part in fundraising campaigns in order to support the partnership with UNICEF.

Extension of sustainability reporting

Postbank used 2006 to extend its system of sustainability reporting. June 2006 saw the publication of the first sustainability report by Deutsche Post World Net, our parent company. The report includes a selection of sustainability measures adopted by Postbank.

At the same time, we launched our own sustainability website at www.postbank.com/sustainability. This platform brings together all Postbank activities relating to sustainability. The final element in our system of reporting is a brochure.

These measures are flanked by specific information targeted at our employees using both our employee newsletter and the Intranet.

Helping to protect the environment and the climate

The Postbank “Dynamik Vision” investment fund that we launched as far back as 2001 invests primarily in companies that are listed in the Dow Jones Sustainability Index (DJSI), the leading global sustainability index, meaning that they are also among the best in their sectors when it comes to environmentally friendly corporate management. Today, this fund totals over ¤350 million, making it one of Germany’s largest sustainability funds.

Once a year, we run a special promotional campaign at our Postbank finance centers for environmentally friendly paper products under the slogan “Safeguarding nature”. At larger Postbank finance centers, we additionally offer our customers a wide range of environmentally friendly paper products as well as green electricity. Finally, Deutsche Post World Net’s procurement guidelines for paper products (Paper Policy) also apply to Postbank. They stipulate that paper products procured should comply with international standards (FSC, PEFC). Reflecting this concept, we decided to switch to FSC-certified photocopying paper at our headquarters in Bonn in 2006. This Annual Report and our sustainability brochure are both printed on 100 % recycled paper.

58 Sustainability Postbank Group

Outlook

Postbank intends to continue the sustainability activities outlined here in 2007. We will take various steps to anchor the corporate values and the code of conduct of our parent company Deutsche Post World Net even more firmly in our daily activities and business processes, and thereby continue to help make them a reality.

We will step up our involvement in the Verein für Umweltmanagement in Banken, Sparkassen und Versicherungen e.V. in 2007. We also have plans to analyze core Postbank rules that are of relevance to the environment. The results will serve as the starting point for the phased optimization of our existing environmental management activities.

Postbank as a DAX® bank

“When I have finished studying, I hope to be able to write success stories like this one: after two years on the stock exchange, the share price has more than doubled and the stock has been admitted to the DAX®.”

Moritz H., editorial intern

Postbank went public in 2004, and just over two years later, it was admitted to the DAX®. For us, this is both a source of motivation and an obligation. There is still a lot to do, because we want to become Germany’s number 1 financial services provider for private customers and Germany’s number 1 service partner for companies. Corporate Governance

Central idea

Deutsche Postbank defines good corporate governance as responsible, values-based corporate management.

Corporate governance encompasses the entire management and supervisory system of a company, and in particular the efficient cooperation between the Management Board and the Supervisory Board, the transparency of corporate activity and the regard for shareholders’ interests. Good corporate governance promotes the trust of all parties involved or interested in a company, and of all its investors, customers and employees.

It is not just about complying with or following standards – but living a corporate culture. This is why Deutsche Postbank AG complies with all the recommendations of the German Corporate Governance Code.

Management and control structure

Deutsche Postbank AG is structured in accordance with the dual board system, under which the Management Board is responsible for management tasks and the Supervisory Board for supervisory and advisory duties. The Management Board and Supervisory Board are in regular close communication as required by good corporate management.

Management Board The Management Board of Deutsche Postbank AG currently consists of nine members, who share joint responsibility for managing the Company’s business in line with uniform objectives, plans and guidelines. The Bank is divided into board departments, with the members of the Management Board acting on their own responsibility but always in the collective interest of the Company. The Management Board defines the Company’s business goals, its basic strategic focus, corporate policy and the Group’s organizational structure.

Supervisory Board The Supervisory Board monitors the Management Board’s management activities. It consists of 20 members, ten of whom are elected by the Annual General Meeting in individual elections or appointed by the courts as replacements until the next election, in accordance with the provisions of the Aktien- gesetz (AktG – German Stock Corporation Act). Ten further members are elected by employees in accordance with the Mitbestimmungsgesetz (German Codetermination Act) of 1976. Seven of these Supervisory Board members must be employees of the Company, including one executive employee. The other three members must be representatives of unions represented at the Company. The Super- visory Board has formed five committees to support its tasks.

62 Corporate Governance Postbank Group

The cooperation of the executive bodies is governed by the Company's Articles of Association, which are resolved by the Annual General Meeting, the Bylaws of the Supervisory Board and Management Board, and the resolutions of the executive bodies in line with the corresponding legal regulations. These lay down how the Supervisory Board should perform its supervisory and advisory duties. The Management Board requires the prior approval of the Supervisory Board for transactions or measures that fundamentally change the Company’s net assets, financial position, or results of operations. To this end, the Bylaws of the Supervisory Board contain a non-exhaustive list of transactions requiring approval.

Annual General Meeting The shareholders exercise their rights in the Annual General Meeting; this is called as a rule once a year by the Management Board, which also circulates the agenda and publishes the required reports and documents at the same time. Every no-par value share entitles its holder to one vote. Shareholders may exercise their voting rights themselves, via a proxy of their choice, or via a Company proxy acting on their instructions. The resolutions by the Annual General Meeting are passed by a simple majority of the votes cast, in the absence of binding legal requirements to the contrary. Where the law prescribes a capital majority in addition to a voting majority, votes are passed by a simple majority of the share capital represented.

Transparency Deutsche Postbank AG strives to provide its customers, owners, employees and the public with comprehensive and up-to-date information. It does this on a regular basis using appropriate communication channels. To this end, Deutsche Postbank publishes its annual and quarterly reports and commu- nicates via press releases and conferences, IR reports, ad hoc disclosures, disclosures in accordance with section 15a of the Wertpapierhandelsgesetz (WpHG – German Securities Trading Act), Company reports, or the Company’s website (www.postbank.com). The dates of the principal recurring publica- tions are disclosed sufficiently in advance in the Financial Calendar on our website and in the annual and interim reports.

The members of the Management Board and Supervisory Board are obliged to act in the Company’s interests and must disclose any conflicts of interest to the Supervisory Board without delay. The Super- visory Board submits a report to the Annual General Meeting on any conflicts of interest that have arisen and how they were addressed. There were no conflicts of interest involving members of either the Management Board or the Supervisory Board in fiscal year 2006. Outside activities pursued by the members of the Management Board have to be approved by the Supervisory Board.

Accounting and auditing

The Postbank Group prepares its accounts in accordance with International Financial Reporting Standards (IFRSs). Deutsche Postbank AG’s annual financial statements are prepared in accordance with the Handelsgesetzbuch (HGB – German Commercial Code). PricewaterhouseCoopers Aktien- gesellschaft Wirtschaftsprüfungsgesellschaft was elected as the auditors for fiscal year 2006 by last year’s Annual General Meeting. The auditors’ independence is reviewed and ensured. The auditors are required to inform the Company's executive bodies directly of any anomalies, and to document any errors in their audit.

63 Risk management The principles of responsible corporate action are also applied at Deutsche Postbank AG in dealing with risks. Deutsche Postbank AG has institutionalized an extensive risk management system in line with the requirements of company and banking supervision law, in order to recognize, analyze, measure, control and manage risks arising from its business activities in a timely manner. Risk management takes place on three different levels: through the Management Board, risk committees and operational risk management units. In accordance with MaRisk (Minimum Requirements for Risk Management), reports and strategies on different risk types are also presented to and discussed by the Supervisory Board. Both specific and portfolio risks are managed. Postbank compares the risks with the expected income from the business activities, to judge whether they are in proportion to each other given its strategic business goals. Risk management is continuously adapted, updated and improved in line with new developments.

Remuneration report for 2006

Preliminary remark Deutsche Postbank AG hereby publishes the principles used to determine the remuneration of the Management Board and the Supervisory Board. Pursuant to statutory provisions and the recommendations of the Corporate Governance Code, the report further explains the level of remuneration and structure of the remuneration systems.

Remuneration is displayed for each individual in a way that is generally understandable. It is divided into fixed and performance-related components.

Also shown is monetary remuneration received by members of the Management Board for outside activities, provision for the termination of their employment as a member of the Management Board and pension commitments. Details of shareholdings, loans, disclosure requirements pursuant to the Wertpapierhandelsgesetz (WpHG – German Securities Trading Act), and D&O insurance policies are also included.

Remuneration of the Management Board The overall structure of the remuneration of the Management Board is stipulated by the Executive Committee of the Supervisory Board of Deutsche Postbank AG.

The Executive Committee of the Supervisory Board discusses the appropriateness of the remuneration of the members of the Management Board of Deutsche Postbank AG, taking into account the Company’s performance, the sector and the prospects for the future. Remuneration is reviewed on a regular basis.

The level of remuneration for members of the Management Board is determined on the basis of the size and activity of the Company, its economic and financial situation and the tasks of the Board member in question. Remuneration is calculated so that it is competitive in the national and international job market and thereby offers an incentive for dedicated and successful work. It therefore complies with the requirements of section 87 of the Aktiengesetz (AktG – German Stock Corporation Act).

The level of remuneration is linked to performance; overall remuneration consists of a fixed and a performance-related component.

64 Corporate Governance Postbank Group

The fixed component (base pay), other compensation and pension commitments are not linked to performance. The fixed component is paid as a monthly salary in 12 equal installments.

The performance-related (variable) component consists of the annual bonus. So far, there exists no long-term incentive plan or similar form of remuneration for members of the Management Board. Deutsche Postbank AG has neither launched a stock option program, nor does it currently intend to do so.

The annual bonus awarded to the Chairman of the Management Board is determined by the Executive Committee of the Supervisory Board on the basis of the Company’s business development after due assessment of the circumstances.

The annual bonuses awarded to the other members of the Management Board are paid according to the achievement of quantitative and/or qualitative targets. These targets form part of a target agreement established at the start of each fiscal year. Half of them are corporate targets for Deutsche Postbank AG, and half are personal targets. The individual level of variable remuneration depends on the extent to which the Company-specific and personal targets are reached.

The size of the bonus is capped on the basis of individual agreements. In the case of the Chairman of the Management Board, the bonus may not exceed the amount of the fixed annual remuneration. Otherwise, in order to create an incentive, the ratio of potential variable remuneration to fixed remuneration is calculated so that variable remuneration can exceed fixed remuneration.

The Executive Committee has the right to award members of the Management Board an appropriate special bonus for exceptional performance.

The active members of the Management Board received remuneration totaling ¤10,571.4 thousand in fiscal year 2006. Of this amount, ¤4,489.2 thousand related to fixed components (previous year: ¤3,070.8 thousand), and ¤6,082.2 thousand to bonuses (previous year: ¤3,643.9 thousand).

The fixed component includes “other compensation” worth ¤162.1 thousand in total. This additional remuneration relates primarily to the use of management cars, the reimbursement of travel costs and contributions to insurance schemes. In two instances, the Company subsidized members’ rental costs. The members of the Management Board paid tax on other compensation. In principle, it is available to all members of the Management Board equally; the amount varies depending on different personal circumstances.

65 The following table provides an individual breakdown:

Management Board remuneration in 2006

Fixed remuneration Other Performance-related Total component compensation component ¤ thousand ¤ thousand ¤ thousand ¤ thousand

Wulf von Schimmelmann, Chairman 1,047.5 26.6 1,047.5 2,121.6 Dirk Berensmann 500.0 21.3 800.0 1,321.3 Henning R. Engmann (since March 10, 2006) 404.6 16.2 576.4 997.2 Stefan Jütte 500.0 16.1 800.0 1,316.1 Wolfgang Klein 500.0 20.2 800.0 1,320.2 Loukas Rizos 500.0 19.3 1,000.0 1,519.3 Hans-Peter Schmid 433.3 23.6 500.0 956.9 Ralf Stemmer 400.0 15.9 500.0 915.9 Mario Daberkow (since November 1, 2006) 41.7 2.9 58.3 102.9 Total 4,327.1 162.1 6,082.2 10,571.4

The figure for the performance-related component is the amount paid to individual members of the Management Board in 2007 for fiscal year 2006. The remuneration disclosed covers all activities performed by members of the Management Board within the Postbank Group. This means, for instance, that Management Board remuneration also includes payment for exercising supervisory board mandates.

Pension commitments The members of the Management Board benefit from individually agreed direct pension commitments. Because each board member has a different career history, the precise arrangements can differ greatly.

A pension shall be paid if the member of the Management Board leaves the Company as a result of disability, death or old age.

Pension rights generally accrue after at least five years of service. In the case of disability, this minimum waiting period may be waived in part. Furthermore, Loukas Rizos is entitled to receive a pension if another company acquires a majority holding in the Company or if there is a change in his agreed duties without an important reason for which Loukas Rizos is responsible. In this case, the waiting period shall be waived.

As a rule, old-age pensions are paid from the age of 62. The Chairman of the Management Board has the right to choose between regular pension payments and a lump-sum capital payment.

The size of the pension depends on the length of service and the amount of pensionable remuneration.

66 Corporate Governance Postbank Group

Only the fixed component of remuneration (base pay) is pensionable. The basic rule is that pension benefits of 50 % relating to the percentage of final salary accrue to members of the Management Board after five years of service. Benefits accrue at a constant rate of 2 % for each eligible year of service. The maximum level of pension benefits (60 %) relating to the percentage of final salary is generally reached after ten years of service. The arrangements in the case of the Chairman of the Management Board and the Board Members Stefan Jütte and Loukas Rizos are different, however. The maximum level of pension benefits for Wulf von Schimmelmann and Loukas Rizos is 75 %, while the pension benefits for Stefan Jütte amount to a maximum of 50 % of pensionable income.

The standard pension commitments further include rules for the payment of a transitional allowance for board members who leave the Company upon reaching the age limit or for reasons of disability.

As to termination of the contract of employment by a board member before the end of the contractual term, in the case of Wulf von Schimmelmann the pension benefits shall be calculated as if the term of the contract had been served.

According to the latest pension rules, future pension payments will be adjusted in line with the percentage growth in the highest pay group of the collective agreement for the Verband öffentlicher Banken (Association of German Public Sector Banks). Otherwise, payments are adjusted in line with Germany’s consumer price index.

Pension commitments for individual members of the Management Board

Pension commitments

Percentage Maximum of final percentage Service cost for salary as of of final salary pension obligations Dec. 31, 2006 (in %) (in %) (in ¤)

Wulf von Schimmelmann Chairman 66 75 1,288,973 Dirk Berensmann 54 60 171,885 Henning R. Engmann 44.69 60 146,386 Stefan Jütte 33 50 190,585 Wolfgang Klein 60 60 156,020 Loukas Rizos 63 75 384,578 Hans-Peter Schmid 0.00 60 338,225 Ralf Stemmer 0.00 60 50,717 Mario Daberkow 0.00 60 135,779 13.109,59 8.652,33 21.762 3.408,00

67 Hans-Peter Schmid, Ralf Stemmer and Mario Daberkow have not yet completed their respective waiting periods. As of the end of fiscal year 2006, they therefore have no pension expectancies under these arrangements. Ralf Stemmer’s previous pension arrangements will take effect before the expiry of the waiting period.

In the case of Henning R. Engmann, the service cost refers to the figure as of December 31, 2006.

Members of the Management Board have the opportunity to take part in a deferred compensation program, whereby they accept a lower level of remuneration in return for higher pension benefits. The size of the final pension depends on the amount by which the salary has been reduced and on the age of the individual. In fiscal year 2006, no member of the Management Board opted to take part in the deferred compensation program.

The remuneration of approximately ¤2.10 million disclosed for former members of the Management Board in the 2006 Postbank Group Annual Report is distributed across a total of 12 pensioners and 10 surviving dependants.

The defined benefit obligation (DBO) for current pensions, calculated in line with international accounting principles, totals ¤32.73 million.

Other disclosures In the year under review, the members of the Management Board have received no benefits from third parties that were either promised or granted in view of their position as a member of the Management Board.

Apart from the benefits specified above, no member of the Management Board has been promised any further benefits upon termination of employment.

Remuneration of the Supervisory Board Deutsche Postbank AG’s Annual General Meeting last changed the remuneration of the Supervisory Board in 2004, adjusting it in line with the Corporate Governance Code. Article 15 of the Articles of Association of Deutsche Postbank AG establishes the system of remuneration. In accordance with this article, the annual remuneration of Supervisory Board members comprises a fixed component, a performance-related component, and a performance-related component with a long-term incentive effect. It takes into account the responsibility and scope of Supervisory Board activity as well as the financial success of Deutsche Postbank AG. The roles of chair and deputy chair as well as membership of a committee are reflected in the remuneration.

The fixed component amounts to ¤15,000, while the variable component amounts to ¤300 for each ¤0.03 by which the consolidated net profit per share for the respective fiscal year exceeds the amount of ¤2.00. Short-term performance-related remuneration accounted for 28.9 % (previous year: 34.4 %) of the total remuneration paid to the members of the Supervisory Board in fiscal year 2006.

Members of the Supervisory Board will be entitled to performance-related remuneration with a long- term incentive effect for fiscal year 2006 amounting to ¤300 for each 1% by which the consolidated net profit per share for fiscal year 2008 exceeds the consolidated net profit per share for fiscal year 2005. The remuneration is payable following the end of the 2009 Annual General Meeting.

Neither of the variable components may exceed ¤15,000.

68 Corporate Governance Postbank Group

The Chairman of the Supervisory Board receives double the remuneration specified above, while the Deputy Chairman receives one and a half times the remuneration specified above. The chairmanship of a Supervisory Board committee is remunerated by an additional amount, the same as that specified above, while members of Supervisory Board committees additionally receive half this amount for each such position held. This does not apply to the committee formed in accordance with section 27 (3) of the Mitbestimmungsgesetz (MitbestG – German Codetermination Act). Persons who are members of the Supervisory Board for only part of a fiscal year receive the corresponding remuneration ratably.

The members of the Supervisory Board are entitled to claim out-of-pocket expenses incurred in the exercise of their office. Any value-added tax on the Supervisory Board remuneration and on any out- of-pocket expenses is reimbursed. In addition, each member of the Supervisory Board attending a meeting receives an attendance allowance of ¤250 for each meeting of the full Supervisory Board or of one of the committees.

The total remuneration paid to members of the Supervisory Board for fiscal year 2006 amounted to ¤962 thousand (previous year: ¤790 thousand). The increase in the variable remuneration is largely due to the distinctly improved and sustainably positive net profit of the Deutsche Postbank Group.

The total remuneration paid to the individual members of the Supervisory Board was as follows:

Fixed Variable Total Entitlement to remuneration remuneration* remuneration with long-term incentive effect**

Klaus Zumwinkel 52,500.00 47,500.00 100,000.00 45,000.00 Michael Sommer 45,000.00 39,500.00 84,500.00 37,500.00 Jörg Asmussen 15,000.00 16,000.00 31,000.00 15,000.00 Marietta Auer 22,500.00 24,250.00 46,750.00 22,500.00 Rosemarie Bolte 15,000.00 16,000.00 31,000.00 15,000.00 Wilfried Boysen 15,000.00 16,000.00 31,000.00 15,000.00 Edgar Ernst 30,000.00 32,250.00 62,250.00 30,000.00 Annette Harms 15,000.00 16,000.00 31,000.00 15,000.00 Peter Hoch 37,500.00 32,750.00 70,250.00 30,000.00 Ralf Höhmann 15,000.00 16,000.00 31,000.00 15,000.00 Elmar Kallfelz 45,000.00 34,250.00 79,250.00 30,000.00 Ralf Krüger 37,500.00 33,000.00 70,500.00 30,000.00 Harald Kuhlow 22,500.00 24,000.00 46,500.00 22,500.00 Hans-Dieter Petram 15,000.00 16,000.00 31,000.00 15,000.00 Bernd Pfaffenbach 15,000.00 15,500.00 30,500.00 15,000.00 Klaus Schlede 22,500.00 24,000.00 46,500.00 22,500.00 Elmo von Schorlemer 15,000.00 16,000.00 31,000.00 15,000.00 Sabine Schwarz 15,000.00 16,000.00 31,000.00 15,000.00 Gerd Tausendfreund 22,500.00 24,250.00 46,750.00 22,500.00 Christine Weiler 15,000.00 16,000.00 31,000.00 15,000.00 Total 487,500.00 475,250.00 962,750.00 442,500.00

* incl. attendance allowance ** The basis for the measurement of the entitlement to remuneration with long-term incentive effect is the provision which must be recognized.

69 For his work on the Supervisory Board of the BHW Group, Peter Hoch received remuneration of ¤12.4 thousand.

No further payments or benefits were granted to members of the Supervisory Board in return for services provided individually in addition to members’ Supervisory Board activities, especially consulting and arrangement services. This does not apply to the remuneration of employee representatives as set out in their respective employment contracts.

Notifiable transactions In accordance with section 15a of the Wertpapierhandelsgesetz (WpHG – German Securities Trading Act), members of the Supervisory Board and the Management Board are required to disclose the purchase or sale of shares of Deutsche Postbank AG or rights to these shares, to the extent that they exceed the stipulated lower limit or were not acquired as a component of remuneration. For transactions notified, pursuant to section 15a of the WpHG, to Deutsche Postbank AG by members of the Management Board and the Supervisory Board involving securities of the Company, please see the website of the Company at http://ir.postbank.com.

Shareholdings of members of the Management Board and Supervisory Board In fiscal year 2006, the aggregate shareholdings of all members of the Management Board and Supervisory Board amount to less than 1% of the shares issued by the Company.

At the balance sheet date, loans of ¤924.7 thousand (previous year: ¤386.6 thousand) had been granted to members of the Management Board and Supervisory Board; no loans were granted to Management Board members who retired in 2006. No other contingent liabilities had been entered into.

D&O insurance The members of the Management Board are covered by D&O insurance in line with international standards. In accordance with the requirements of the Corporate Governance Code, individual Management Board members are required to contribute own funds to costs if a claim is made. This contribution shall be between some 10% and 40% of the fixed annual salary.

Changes to the Code Deutsche Postbank AG’s executive bodies revisited the issues and provisions of the German Corporate Governance Code on several occasions in the past fiscal year. Deutsche Postbank AG has responded to the new recommendations of the Corporate Governance Code in the version dated June 12, 2006 by revising the individualized remuneration of the Management Board and Supervisory Board as well as the entire remuneration report, adjusting these to reflect the new requirements of the Gesetz über die Offenlegung der Vorstandsvergütungen (VorstOG – German Act on Disclosure of Management Board Remuneration) and of the Corporate Governance Code, and publishing them in this Report. The Supervisory Board again reviewed and confirmed the efficiency of its activities as part of a self- evaluation process. To further systematically increase the efficiency of the Supervisory Board’s work, additional discussions on improving the efficiency of the Board’s activities were held by Board members entrusted with this topic. Concrete proposals for improvement were developed in cooperation with the office of the Supervisory Board, and will be implemented in fiscal year 2007.

70 Corporate Governance Postbank Group

Declaration of Compliance in accordance with section 161 AktG The Management Board and Supervisory Board issued the following Declaration of Compliance in accordance with section 161 of the AktG (German Stock Corporation Act) on November 30, 2006:

“The Management Board and the Supervisory Board of Deutsche Postbank AG state that since the last declaration of compliance dated March 10, 2006 all the recommendations of the ‘Government Commission of the German Corporate Governance Code‘ in the versions dated June 2, 2005 and June 12, 2006 have been complied with and that they intend to continue to comply with all the Code’s recommendations in the version dated June 12, 2006.”

In addition, Deutsche Postbank AG has implemented almost all suggestions of the Code.

The Declaration of Compliance is available on Deutsche Postbank AG’s website, along with the declarations for recent years.

71 Report of the Supervisory Board

In the past year, the Supervisory Board performed the duties assigned to it by law and the Articles of Association. In addition to regularly advising and monitoring the Management Board, the Supervisory Board was involved in important Company decisions. In fiscal year 2006, the Management Board regularly informed the Supervisory Board in a timely and comprehensive manner of all issues concerning the Company’s planning, business development, risks, risk management, strategic measures, as well as important business transactions and projects. Deviations between the course of business and the plans and targets prepared were explained to the Supervisory Board and reasons given. All measures requiring the approval of the Supervisory Board were discussed at length, as was the Company’s strategic focus. Where required by law, the Articles of Association and the Bylaws, the Supervisory Board passed resolutions after thorough examination and discussion. The Chairman of the Supervisory Board was also informed about important business transactions and forthcoming decisions between meetings of the Supervisory Board, and kept in constant contact with the Chairman of the Management Board.

Main subjects for discussion by the Supervisory Board

In fiscal year 2006, the Supervisory Board obtained information at four meetings and through the regular submission of documents concerning the Bank’s current financial and strategic situation, business developments in the individual divisions, risk development and active risk management, as well as new products. Individual topics were intensively scrutinized and discussed. All Supervisory Board members attended more than half of the meetings of the Supervisory Board during the fiscal year.

In its first meeting on March 10, 2006, the Supervisory Board, after extensive discussions, approved the annual and consolidated financial statements of Deutsche Postbank AG. This followed a prior consultation with the Audit Committee, which recommended approval. The intensive discussions focused in particular on the integration of BHW Holding AG and the 850 Deutsche Post AG retail outlets acquired on January 1, 2006. The Supervisory Board approved the new business plan – modified to take account of these acquisitions – and medium-term planning, and discussed the new strategic direction. Other subjects that formed the basis for discussions and decisions by the Supervisory Board included the joint report on Corporate Governance and the associated review of Supervisory Board efficiency and Management Board remuneration. The agenda and proposed resolutions for the 2006 Annual General Meeting as well as the control and profit transfer agreement with Deutsche Post Retail GmbH and the transformation of this company into a stock corporation were also addressed by the Supervisory Board.

The Supervisory Board reformed at its second meeting, following the Annual General Meeting on May 11, 2006. Klaus Zumwinkel was reelected Chairman of the Supervisory Board and the composition of the committees was confirmed.

The Supervisory Board used its meeting on September 8, 2006, to discuss the impact of Postbank’s inclusion in the DAX® and to find out more from the Management Board about the Transaction Banking division as well as the current situation with regard to traineeships in the Postbank Group.

Discussions on November 30, 2006, focused on investment planning for fiscal year 2007 and what this means for the strategic direction of the Group. The Supervisory Board also devoted considerable attention to innovations in MaRisk (Minimum Requirements for Risk Management), as well as to risk management and risk monitoring. It obtained information about IT projects within BHW and the

72 Report of the Supervisory Board Postbank Group

takeover of payment transaction activities on behalf of Bayerische Hypo- und Vereinsbank AG. The Supervisory Board also revisited the topic of Corporate Governance.

Work of the committees

The Supervisory Board established five committees to enable it to work in greater detail. Their task is to prepare the resolutions on subjects that are relevant for the Supervisory Board. In addition, for reasons of efficiency, individual specific decision-making powers were transferred – as far as legally possible – to committees. The committee chairs report regularly and at length to the full Supervisory Board about the work and the results of their committees.

Members of the Deutsche Postbank AG Supervisory Board and its committees:

Supervisory Board

Klaus Zumwinkel (chair) Wilfried Boysen Elmar Kallfelz Klaus Schlede Michael Sommer (deputy chair) Edgar Ernst Ralf Krüger Elmo von Schorlemer Jörg Asmussen Annette Harms Harald Kuhlow Sabine Schwarz Marietta Auer Peter Hoch Hans-Dieter Petram Gerd Tausendfreund Rosemarie Bolte Ralf Höhmann Bernd Pfaffenbach Christine Weiler

Executive Committee (§ 9 GO AR) Audit Committee (§ 11 GO AR)

Klaus Zumwinkel (chair) Peter Hoch (chair) Elmar Kallfelz Michael Sommer (deputy chair) Edgar Ernst (deputy chair) Gerd Tausendfreund Elmar Kallfelz Ralf Krüger Human Resources Committee (§ 12 GO AR)

Loan and Equity Investments Committee (§ 10 GO AR) Michael Sommer (chair) Elmar Kallfelz Klaus Zumwinkel (deputy chair) Klaus Schlede Ralf Krüger (chair) Edgar Ernst (deputy chair) Marietta Auer Mediation Committee (§ 13 GO AR) Peter Hoch Klaus Zumwinkel (chair) Elmar Kallfelz Elmar Kallfelz Michael Sommer (deputy chair) Ralf Krüger Harald Kuhlow

The duties of the Executive Committee include agreeing, amending and terminating contracts of employment for members of the Management Board, offering advice on individual investments and addressing specific topics of general importance as well as fundamental questions about the Company’s strategic direction. The committee met four times last year. The meetings focused in particular on discussing and preparing appointments to the Management Board, and reviewing the efficiency of the Supervisory Board.

The Loan and Equity Investments Committee is responsible for credit decisions, fundamental questions about the granting of loans and certain investment decisions. It met a total of four times and, in line with its remit, discussed the approval of new loans, the extension of existing loans and increases in the lending limit for various individual loans and credit facilities. In addition, the Loan and Equity Invest- ments Committee received reports on credit risk and regularly discussed the credit risk strategy. The subjects under discussion included the merging of the mobile sales organizations of BHW Bausparkasse AG and Postbank Vermögensberatung AG into Postbank Finanzberatung AG, as well as the sale of Modrá Pyramida stavební sporitelna, a.s. in Prague and BHW Rückversicherung S.A..

73 The Human Resources Committee addressed Postbank’s human resources structures and human resources development policies. At two meetings, the reports on human resources given by the Management Board focused on human resources development in the Group’s newly integrated companies – BHW and Postbank Filialvertrieb AG – as well as future plans for traineeships.

The Audit Committee is assigned the issues of accounting, risk management and auditing. The Audit Committee met three times. The meetings – at which the auditors were present – focused on providing extensive support to the examination of the annual financial statements, as well as discussions of accounting and risk monitoring.

The Mediation Committee did not meet in the year under review.

Audit of the annual and consolidated financial statements

The auditors elected by the previous year’s Annual General Meeting, PricewaterhouseCoopers Aktien- gesellschaft Wirtschaftsprüfungsgesellschaft, Düsseldorf, audited the annual financial statements of Deutsche Postbank AG and the consolidated financial statements, including the respective management reports, for fiscal year 2006 and issued an unqualified audit opinion.

They also examined the Management Board’s report on relations with affiliated companies (dependent company report) prepared in accordance with section 312 of the Aktiengesetz (German Stock Corporation Act). The auditors reported on the results of this audit and issued the following audit opinion:

“On completion of our audit in accordance with professional standards, we confirm that

1. the factual statements made in the report are correct, 2. the compensation paid by the Company for the transactions listed in the report was not inappropriately high, or any disadvantages were compensated, 3. there are no circumstances that would indicate a materially different assessment of the measures listed in the report to that given by the Management Board.”

Deutsche Postbank AG’s annual financial statements, the consolidated financial statements, the management reports, the proposal for the appropriation of the net retained profit, the Management Board’s dependent company report and the auditors’ reports were made available to all Supervisory Board members and were examined by the Supervisory Board. In its summary management report for the Company and the Group, the Management Board disclosed information in accordance with section 289(4) and section 315(4) of the HGB (German Commercial Code), particularly the rules concerning the appointment and dismissal of members of the Management Board and amendments to the Articles of Association, the powers of the Management Board, notably in respect of the ability to issue or buy back stock, and the composition of issued capital.

The information disclosed in the management report concerns rules that are commonly found in com- parable listed companies; they are not intended to obstruct an attempted takeover. The Supervisory Board would further like to draw the reader’s attention to the statements made by the Management Board in the management report and the report by the Management Board on information pursuant to section 289(4) and section 315(4) of the HGB. The Supervisory Board has examined the statements and the report by the Management Board. The results of our examination have shown the statements to be accurate. The Supervisory Board therefore endorses the statements made by the Management Board in the report on information pursuant to section 289(4) and section 315(4) of the HGB.

74 Report of the Supervisory Board Postbank Group

The Supervisory Board discussed these documents in the presence of the auditors, who reported on the key findings of their audit in the Supervisory Board meeting and answered questions. The Super- visory Board took note of and concurred with the results of the audit of the annual financial statements and the dependent company report. The final results of the Supervisory Board’s examination did not give rise to any objections to Deutsche Postbank AG’s annual financial statements or the consolidated financial statements, which were both approved. Deutsche Postbank AG’s annual financial statements are thus adopted. The Supervisory Board endorses the Management Board’s proposal for the appropriation of the net retained profit. Furthermore, the final results of the Supervisory Board’s examination did not give rise to any objections to the declaration made by the Management Board at the close of the dependent company report.

Changes in the Management Board and Supervisory Board

The following changes took place in the Deutsche Postbank AG Management Board. The Supervisory Board appointed Henning R. Engmann as the new CFO of Deutsche Postbank AG as of March 10, 2006. In addition, the appointment of Mario Daberkow as a member of the Management Board took effect as of November 1, 2006. He is now responsible for the Services board department.

There were no changes in the composition of the Supervisory Board in fiscal year 2006. Jörg Asmussen, Edgar Ernst, Ralf Krüger, Hans-Dieter Petram, Bernd Pfaffenbach, Klaus Schlede and Klaus Zumwinkel were confirmed as members of the Supervisory Board in elections held on an individual basis at the Annual General Meeting of Deutsche Postbank AG on May 11, 2006.

Corporate governance

The requirements of the German Corporate Governance Code were also important for the Supervisory Board. Back in 2003, the Management Board and Supervisory Board decided to follow all the recommendations of the Corporate Governance Code. We will continue to implement all the recommendations of the Corporate Governance Code in the version dated June 12, 2006. The Declaration of Compliance in accordance with section 161 of the Aktiengesetz was last issued by the Management Board and Supervisory Board on November 30, 2006, and subsequently made permanently available to shareholders on the Company’s website. Further details on the topic of corporate governance, including the wording of the declaration, are presented in the corporate governance report (see p. 62).

The Supervisory Board wishes to thank the Management Board, employee representatives and all Group employees for their successful work.

Bonn, March 16, 2007 The Supervisory Board

Klaus Zumwinkel Chairman

Fiscal Year 2006

Group Management Report Business and Environment 78 Net Assets, Financial Position and Results of Operations 82 Report on Post-Balance Sheet Date Events 87 Risk Report 88 Report on Expected Developments 112 Consolidated Financial Statements Consolidated Income Statement 117 Consolidated Balance Sheet 118 Statement of Changes in Equity 119 Consolidated Cash Flow Statement 120 Notes 124 Segment Reporting (Note 40) 170 Auditors’ Report 205 Consolidated Income Statement Quarterly Overview 206 Consolidated Income Statement Multi-Year Overview 208 Annex 209 Glossary 212 Contact Details 216 The US economy began 2006 with substantial momentum, Group Management Report which waned considerably during the course of the year. The main dampener was a sharp decline in investments in Business and Environment residential construction. In contrast, corporate investment and consumer spending remained on the upswing. On the Significant events in the year under review whole, gross domestic product (GDP) rose by 3.3% in 2006, ■ January 1: Acquisition of 850 retail outlets from up somewhat from the previous year. The main reason was Deutsche Post AG. that exports no longer impacted growth to such a great extent, in contrast to previous years. ■ January 2: We acquire an 82.9% interest in the share capital of BHW Holding AG, Hamelin. This figure is The economic upturn in Asia showed no signs of letting up. adjusted for the capital reduction by BHW Holding as of At nearly 9%, the emerging markets in Asia again reported December 31, 2005 by means of retiring treasury shares. by far the highest economic growth in the world in 2006. This means that, including the shares acquired in 2005, Japan’s economy remained robust with GDP growth of 2.2%. Postbank now holds a 91.0% stake in BHW Holding AG. The country benefited from the positive global environment in the form of a strong increase in exports. However, the ■ May 12: The business activities of the Luxembourg branch Japanese economy was also driven by domestic demand, of Deutsche Postbank AG are transferred to Deutsche which saw further growth, particularly in investments. Postbank Int. S.A. (PBI). Growth in the euro zone accelerated noticeably in 2006. At ■ May 24: A reconciliation of interests is concluded with +2.7%, GDP growth was nearly double that of the previous the Bank’s negotiating partners with the purpose of year. Growth thus reached its highest level since the boom implementing a socially responsible headcount reduction year of 2000. Although the economy in the euro zone also of 1,200 employees by the end of 2007 as part of the benefited from the positive global economic situation, integration of BHW and the acquired retail outlets. the significant revival in domestic demand was the decisive reason for the acceleration in growth. Investments and ■ July 17: The mobile sales activities of Postbank and consumer spending rose much more sharply than in previous BHW are bundled in the newly formed Postbank Finanz- years. beratung AG. Growth accelerates in Germany ■ September 18: Postbank stock is included in the DAX® for The German economy recorded a marked upturn in the pace the first time. of growth. GDP climbed by 2.7%, exceeding all expectations. With a more than 12% increase in exports, Germany bene- ■ October 10: BHW Holding AG sells its 50% stake in the fited more than the euro zone from the excellent internation- Czech home loan and savings bank Modrá Pyramida to al economic situation. However, the decisive boost for Komercni Banka. growth came from investments, which were up by more than 5%. In the case of investments in residential construc- ■ November 22: Postbank announces that it will take over tion in particular, clear growth was seen for the first time in payment transaction activities for HypoVereinsbank, years, increasing by 4.0% year-on-year. It should be noted Munich, with effect from January 1, 2007. here that this figure also reflects the abolition of the home owners’ allowance (Eigenheimzulage) in early 2006 and the Global economy on growth path pull-forward effects associated with the VAT increase. The global economy continued to grow in 2006. In the first half of the year in particular, all regions of the globe saw The sharp rise in corporate investment had a positive impact rapid economic growth. In the second half of the year, this on the labor market. By the end of the year, the number of trend lost some steam, starting in the United States. None- unemployed had declined to 4.1 million in seasonally adjust- theless, global economic output grew somewhat more ed terms, a decrease of 590,000 compared with the same robustly than in the previous year, rising a good 5% in the month in the previous year. In the same period, the unem- year under review.

78 Group Management Report Fiscal Year 2006

ployment rate dropped by 1.5 percentage points to 9.8%. end of the rate increases by the Fed and a sharp economic Consumer spending could not keep pace with the perfor- slowdown in the United States, the trend reversed from mance of the economy in general, however, although the mid-year onwards, driven by the US bond market. At the increase of 0.6% was the first significant rise in five years. end of 2006, the yield on 10-year US government bonds Even if a portion of the growth in consumer spending is was around 0.3 percentage points up on the starting level probably attributable to the pull-forward effects of the VAT for the year. In the euro zone, the yield on 10-year German increase, the trend in overall domestic demand indicates bunds rose by a good 0.6 percentage points in the year that the economic upswing has become increasingly self- under review. Short-term interest rates increased more sustaining. sharply due to the key interest rate increases by the ECB, with the rise totaling 1.25 percentage points, meaning that At Postbank, the above-mentioned pull-forward effects of the yield curve flattened dramatically in the euro zone. the VAT increase, the improvement in consumer spending and the follow-on effects from the abolition of the home As with all banks, the flattening of the yield curve limits owners’ allowance in Germany had a slightly positive effect Postbank’s opportunities to generate additional earnings by on retail lending in particular. For example, the volume of refinancing longer-term loans, which are more expensive in new consumer loans increased by 30.8% to ¤1,350 million. a normal interest rate environment, through lower-interest, shorter-term deposits (maturity transformation). However, Market developments Postbank is in a more comfortable situation here than the The strong economy and corporate earnings growth again majority of its competitors. Due to Postbank’s strong cus- led to sharp price increases on the stock exchanges in 2006. tomer business, we are less dependent on the volatile capital However, this trend was not uniform. Sustained stock price market for funding than many other institutions. Because growth in the first four months was followed by a clear eas- deposits generally exhibit less interest rate elasticity, the ing from May onwards, due to the forecast of sharp hikes flattening of the yield curve does not impact directly and in in key interest rates in the United States. However, these full on funding costs. fears lost traction after the US Federal Reserve (Fed) aban- doned its interest rate increase policy, particularly as corpo- Sector situation rate earnings continued to rise substantially, thus creating The earnings situation of German banks improved further. the conditions for stock price increases. The performance of In the first nine months of the year under review, the eight the German DAX® 30 index was particularly positive, rack- banks listed on Deutsche Börse's Prime Standard segment ing up a gain of 22% over the course of the year. The DAX® reported an average return on equity after taxes of 16.9%, 30 significantly outperformed the EURO STOXX 50® and following 12.9% for 2005 as a whole. During the same the S&P 500, which grew by 15% and 14% respectively. period, their cost/income ratio declined from an average of Postbank stock again outperformed the German DAX® index 56.4% to 51.6%. Earnings improvements were the result of and its peer group of nine similarly structured banks in considerable growth in net fee and commission income and Europe. For further details, please see the “Shareholders proprietary trading. No significant changes were observed and Stock” section. in net interest income or allowances for losses on loans and advances year-on-year. During the year under review, major In the course of 2006, the euro appreciated substantially on German banks were able to close the gap to major European the foreign exchange markets, closing the year at US$1.32, banks in terms of earnings. There was a significant upsurge up 11.4% for the year as a whole. The driving forces behind to be seen in the German lending sector in the year under the slide in the dollar are the diverging economic trends and review. This reflects increased corporate investment; the the key interest rate policies of the central banks in the euro volume of loans to corporate customers grew by 2.0% or zone and the United States. ¤15.5 billion to ¤807.6 billion. In the same period, the market volume of private mortgage lending rose by 2.1% or ¤16.1 Strong economic performance and the continued interest billion to ¤795 billion. Postbank was even able to grow its rate increases by the Fed and the European Central Bank portfolio by 14.9% or ¤8.1 billion to ¤62.3 billion, and there- (ECB) led to sharp increases in international capital market fore significantly outperformed the market despite the rates in the first half of the year. However, following the financial pressures of the integration. A similar scenario can

79 be observed in the case of installment loans: in the market credit institution. Within the individual pillars, consolidation as a whole, the volume increased by 0.4% or ¤0.5 billion to proceeded at a relatively sluggish pace in 2006. ¤130.6 billion. However, Postbank was able to generate significantly higher growth of 14.3% or ¤0.3 billion to ¤2.4 After the acquisitions of BHW and the Deutsche Post retail billion. To ensure comparability, the comments relate exclu- outlets, Postbank is now focusing on organic growth. Thanks sively to the pro forma figures for 2005, i.e. including BHW to our increased selling power due to the acquisitions, we and the acquired retail outlets. have created excellent conditions for growth.

In 2006, Germany’s unexpectedly good economic perfor- On the whole, competition among banks grew, particularly mance also resulted in a qualitative improvement in the with regard to loan terms. It was only in the deposit business loan portfolios of German banks. Corporate and private that the flat yield curve forced most institutions to hold borrowers both continued paying down their overall debt back on proactive pricing. Postbank, too, saw a decrease in levels, which reduced default risks for the banks. The corpo- margins especially in private mortgage lending as the result rate insolvency trend reflects this as well: the number of of aggressive pricing policies, particularly by the direct banks. corporate insolvencies decreased by approx. 15% to around 31,000 in 2006. The last time this figure was lower was in Postbank’s investment focuses in 2006 2000. The number of consumer insolvencies rose by 30% Postbank’s investments focused mainly on integrating BHW to nearly 90,000, but it should be noted in this regard that and the 850 retail outlets acquired from Deutsche Post. At the opportunity for private individuals to file for bankruptcy the same time, the Bank expanded its state-of-the-art multi- has only existed in Germany since 1999, and this figure is channel architecture to further strengthen sales. Other therefore still impacted by a backlog of unprocessed cases major capital expenditure related to the implementation of from the past. In addition to the improved situation for the Transaction Banking division’s new multiclient-enabled borrowers, many banks experienced positive effects from payment transaction platform, known as Payment Solution, the optimization of internal workflows. Investments in risk and the expansion of the loan factory. We also established management systems and the transfer of risk helped them the IT framework to allow us to achieve the technical to realign their loan portfolios to a substantial extent. implementation of the new regulatory guidelines on capital adequacy for risk business (Basel II) that took effect from The share of total loans and advances to customers account- January 1, 2007. ed for by non-performing loans amounted to 1.30% at the end of 2006, compared with 1.16% as of December 31, Organization and management 2005. This puts Postbank well above the market average The Deutsche Postbank Group (“Postbank”) offers financial and is primarily due to the fact that the Bank pursues a services to private and corporate customers, with Germany comparatively restrictive risk policy in lending and as a as its primary focus. matter of principle has a low-risk loan structure due to its strong retail customer business, particularly given its highly Postbank’s share capital amounts to ¤410,000,000 and is collateralized mortgage financing (the average loan-to-value composed of 164,000,000 no-par value registered shares. ratio is approximately 70%). The German Federal Government holds an 80% equity inte- The German banking market continues to be typified by a rest in KfW Bankengruppe. As of December 31, 2006, KfW three-pillar structure of private banks, savings banks and Bankengruppe held a 34.1% interest in Deutsche Post AG cooperative banks, and a large number of credit institutions which, in turn, has an interest in Postbank of 50% plus one compared with other European countries (August 31, 2006: share. Accordingly, the free float traded on the stock 2,062 institutions). The past year saw two interesting trans- exchanges amounts to 50% less one share of Postbank’s actions combining different pillars of the German banking share capital. industry. In one case, a private equity consortium invested in a Landesbank (German state bank), which was a first The Management Board is authorized, with the approval of in Landesbank history. In another case, a German private the Supervisory Board, to increase the Bank’s share capital commercial bank acquired a public-sector and a cooperative by up to a total of ¤41,000,000 up to March 24, 2009 by

80 Group Management Report Fiscal Year 2006

issuing new, non-voting registered shares (preference shares) Management Board is determined on the basis of the size against non-cash contributions (authorized capital I). and activity of the Company, its economic and financial Shareholders’ pre-emptive subscription rights are disapplied. situation and the tasks of the Board member in question. Remuneration is calculated so that it is competitive in the The Management Board is further authorized, with the national and international job market and thereby offers approval of the Supervisory Board, to issue new no-par an incentive for dedicated and successful work. It therefore value registered shares from authorized capital II up to a complies with the requirements of section 87 of the Aktien- total of ¤137,000,000 up to May 10, 2011. Shareholders gesetz (AktG – German Stock Corporation Act). will be granted pre-emptive subscription rights in the event of any such issue. The specific provisions governing this The level of remuneration is linked to performance; overall authorized capital I and II are contained in our Articles of remuneration consists of a fixed and a performance-related Association, which can also be accessed via our website. component.

The Annual General Meeting of Postbank on May 11, 2006 The fixed component (base pay), other compensation and renewed the Management Board’s global authorization to pension commitments are not linked to performance. The purchase own shares. Accordingly, the Management Board fixed component is paid as a monthly salary in 12 equal is authorized to purchase own shares up to a total of 10% installments. of the share capital. The performance-related (variable) component consists of As a German stock corporation, Deutsche Postbank AG has the annual bonus. So far, there exists no long-term incentive a dual management and control structure. Postbank is plan or similar form of remuneration for members of the managed by the Group Management Board, whose members Management Board. Deutsche Postbank AG has neither are appointed by the Supervisory Board for a maximum term launched a stock option program, nor does it currently of five years. Members may be reappointed or their term intend to do so. extended, in each case for a maximum of five years, insofar as this is permitted by the relevant statutory provisions. The annual bonus awarded to the Chairman of the Manage- The Supervisory Board advises the Management Board and ment Board is determined by the Executive Committee of monitors its management activities. The appointment and the Supervisory Board on the basis of the Company’s business dismissal of members of the Management Board is govern- development after due assessment of the circumstances. ed by the statutory provisions set out in sections 84 and 85 of the Aktiengesetz (German Stock Corporation Act). In The annual bonuses awarded to the other members of the addition, Article 5 of Postbank’s Articles of Association states Management Board are paid according to the achievement that the Supervisory Board is responsible for determining of quantitative and/or qualitative targets. These targets form the number of members of the Management Board, and part of a target agreement established at the start of each that it may appoint a Chairman of the Management Board fiscal year. Half of them are corporate targets for Deutsche and one or more substitute members. Postbank AG, and half are personal targets. The individual level of variable remuneration depends on the extent to The overall structure of the remuneration of the Manage- which the Company-specific and personal targets are reached. ment Board is stipulated by the Executive Committee of the Supervisory Board of Deutsche Postbank AG. The size of the bonus is capped on the basis of individual agreements. In the case of the Chairman of the Manage- The Executive Committee of the Supervisory Board discusses ment Board, the bonus may not exceed the amount of the the appropriateness of the remuneration of the members of fixed annual remuneration. Otherwise, in order to create an the Management Board of Deutsche Postbank AG, taking incentive, the ratio of potential variable remuneration to into account the Company’s performance, the sector and the fixed remuneration is calculated so that variable remunera- prospects for the future. Remuneration is reviewed on a tion can exceed fixed remuneration. regular basis. The level of remuneration for members of the

81 The Executive Committee has the right to award members The members of the Supervisory Board are entitled to claim of the Management Board an appropriate special bonus for out-of-pocket expenses incurred in the exercise of their exceptional performance. office. Any value-added tax on the Supervisory Board remuneration and on any out-of-pocket expenses is reimbursed. Deutsche Postbank AG’s Annual General Meeting last In addition, each member of the Supervisory Board attend- changed the remuneration of the Supervisory Board in 2004, ing a meeting receives an attendance allowance of ¤250 adjusting it in line with the Corporate Governance Code. for each meeting of the full Supervisory Board or of one of Article 15 of the Articles of Association of Deutsche the committees. Postbank AG establishes the system of remuneration. In accordance with this article, the annual remuneration of Postbank’s Articles of Association may be amended in Supervisory Board members comprises a fixed component, a accordance with the provisions of section 119 (1) no. 5 and performance-related component, and a performance-related 179 of the Aktiengesetz. Under these provisions, amend- component with a long-term incentive effect. It takes into ments to the Articles of Association require a resolution account the responsibility and scope of Supervisory Board by the Annual General Meeting. In accordance with Article activity as well as the financial success of Deutsche Postbank 19 (3) of the Articles of Association, the Supervisory Board AG. The roles of chair and deputy chair as well as member- is also permitted to make amendments to the Articles of ship of a committee are reflected in the remuneration. Association that relate exclusively to their wording.

The fixed component amounts to ¤15,000, while the variable component amounts to ¤300 for each ¤0.03 by which the Net Assets, Financial Position and Results of consolidated net profit per share for the respective fiscal Operations year exceeds the amount of ¤2.00. Short-term performance- related remuneration accounted for 28.9% (previous year: Income statement 34.4%) of the total remuneration paid to the members of In 2006, Postbank significantly exceeded its 2005 profit the Supervisory Board in fiscal year 2006. before tax by 30.9%, generating a figure of ¤941 million. If the acquisition of BHW and the Deutsche Post retail out- Members of the Supervisory Board will be entitled to perfor- lets are included as of 2005 and imputed funding costs are mance-related remuneration with a long-term incentive added, the pro forma increase over the previous year‘s profit effect for fiscal year 2006 amounting to ¤300 for each 1% before tax is 31.6%. To ensure comparability, all of the by which the consolidated net profit per share for fiscal year comments below relate exclusively to the pro forma figures 2008 exceeds the consolidated net profit per share for fiscal for 2005, i.e. including BHW and the acquired retail outlets. year 2005. The remuneration is payable following the end of the 2009 Annual General Meeting. In 2006, Postbank also recorded a number of extraordinary factors; however, these largely offset each other. For exam- Neither of the variable components may exceed ¤15,000. ple, net integration costs after utilization of the provision recognized in the previous year amounted to ¤85 million, The Chairman of the Supervisory Board receives double the which was primarily charged to the balance of other income remuneration specified above, while the Deputy Chairman and expenses. However, the sale of non-strategic invest- receives one and a half times the remuneration specified ments in the fourth quarter contributed book gains of ¤84 above. The chairmanship of a Supervisory Board committee million, which were recognized fully in net income from is remunerated by an additional amount, the same as that investment securities. specified above, while members of Supervisory Board committees additionally receive half this amount for each such The cost/income ratio was reduced from 75.0% to 68.3%. position held. This does not apply to the committee formed This was due not only to an increase in earnings, but also in accordance with section 27 (3) of the Mitbestimmungs- to strict cost management. Return on equity before taxes gesetz (MitbestG – German Codetermination Act). Persons increased from 14.9% in 2005 to 18.9% in the year under who are members of the Supervisory Board for only part of review, based on average equity of ¤4,799 million in 2005 a fiscal year receive the corresponding remuneration ratably. and ¤4,985 million in 2006.

82 Group Management Report Fiscal Year 2006

The following is a closer look at the individual items: Net income from investment securities Net income from investment securities climbed by 8.1% to Balance sheet-related revenues ¤292 million. This includes the book gains from the sale of In the course of its ordinary activities, Postbank continually non-strategic investments amounting to ¤84 million. The invests its large deposit surplus on the capital markets and decline in net income from investment securities of 23.0% manages interest rate risk using state-of-the-art financial to ¤208 million after adjustment for these items reflects instruments. Since the results of the investments are recog- the developments on the interest rate market. nized in all three balance sheet-related revenue items – net interest income, net trading income and net income from Net fee and commission income investment securities – Postbank manages these at the Net fee and commission income grew by 2.0% to ¤1,407 aggregate level. This item rose by 10.7% year-on-year to million. In contrast to other banks, Postbank’s net fee and ¤2,710 million in 2006. commission income contains earnings from Transaction Banking and the sale of non-banking services at the branches Net interest income that have declined as expected. The interest rate environment provided only limited positive impetus for Postbank’s net interest income. On the one hand, The steady reduction in paper-based payment transactions increased interest rates have a positive effect on the inter- in Transaction Banking led to a drop in fee and commission est rate margin, following a certain delay, due to Postbank’s income as well as to lower administrative expenses. In the strong deposit business. On the other hand, the yield curve, branches, we are concentrating more and more strongly on which flattened almost completely toward the year-end, the sale of banking services, thus enabling us to offset the proves to be a challenge. Net interest income nonetheless expected decrease in fee and commission income from non- continued to drive earnings growth: compared with the pre- banking services. Adjusted net fee and commission income vious year, we increased this figure by 11.6% to ¤2,173 in the traditional banking business reflects our successful million. We substantially expanded the volume of customer sales of services and products that require extensive advice. loans by 13.6% to ¤79.4 billion, mostly due to the 14.9% This figure rose by 10.6% to ¤669 million. growth in our low-risk mortgage lending portfolio to ¤62.3 billion. Against the backdrop of the flattening yield curve, Total income our deposit business focused primarily on safeguarding Total income rose by 7.5% as against the previous year to margins rather than on volume growth. Our net interest ¤4,117 million. income declined by around ¤20 million in 2006 due to ppa effects. This was offset by income from the unwinding Allowance for losses on loans and advances required under IFRSs since 2006, which amounted to ¤29 The allowance for losses on loans and advances increased by million. Under unwinding, the discount on expected returns 17.8% to ¤337 million. However, it experienced a substantial from impaired loans is reversed over time. Adjusted for upward bias of around ¤34 million due to the unwinding these effects, net interest income has grown by 11.1%. effects described in the disclosure on net interest income. After adjustment for these effects, the increase amounted to Net trading income a moderate ¤17 million or 5.9% – again below the growth rate The composition of Postbank’s net trading income, which is recorded by our customer loan volume (13.6%). influenced to a substantial extent by asset/liability management and less by the proprietary trading activities reported Administrative expenses in the Financial Markets segment, was affected by changes We were able to cut administrative expenses by 2.0% to on the interest rate market. Due to the slight increase in long- ¤2,812 million thanks to Postbank’s continued strict cost term interest rates, net income from interest rate products – management. Synergy effects from the integration of BHW mostly bonds in which we invest part of our deposit surplus have already been generated in the amount of ¤18 million. – declined moderately. In contrast, there was an increase in Staff costs fell by 1.6% to ¤1,381 million, while non-staff the earnings contributed by derivatives, which are used pri- operating expenses were down 2.5% to ¤1,431 million. This marily for hedging purposes. At ¤245 million (+6.1%), net development is all the more encouraging because we were trading income was slightly up on the previous year’s level. able to achieve this result despite the integration expenses

83 incurred and continued dynamic growth in the customer income still increased by 7.0%. Balance sheet-related business. We regard this as further proof that our business revenues improved by a total of 8.0% to ¤2,396 million. model, which combines a standardized, yet needs-driven product range with a highly efficient IT platform, gives us Net fee and commission income in the Retail Banking seg- a considerable edge over the competition, enabling us to ment fell by 1.9% to ¤1,061 million. This reflects the decline grow while keeping marginal costs low. in fee and commission income from the non-banking services offered at the branches. In addition, commissions paid to Other income and expenses independent mortgage brokers increased by ¤17 million as Net other income and expenses dropped from ¤43 million in against the previous year. 2005 to ¤–27 million in 2006. As in the previous year, this item was again affected by extraordinary factors. At ¤83 The encouraging growth in total income by 4.8% to ¤3,457 million, it included the majority of our net integration costs, million was reinforced by the significant decrease in admin- particularly the costs associated with the reduction in our istrative expenses, which fell by 5.3% to ¤2,178 million. In workforce. this instance, the strict control of expenditure at Postbank, BHW and the branches has a positive impact. The initial Profit before tax synergies from the integration of BHW in the amount of ¤18 Our profit before tax rose by 31.6% year-on-year to ¤941 million also contributed to the positive cost development. million. The allowance for losses on loans and advances increased Net profit for the period by 21.0% to ¤277 million, primarily as a result of the Based on a tax rate of 26.0%, which is below our usual rate unwinding effects described above. Adjusted for these of around 35% due to the largely tax-free gains on the effects, the increase amounted to only 6.1%, meaning that disposal of investments in particular (see the disclosure on it was significantly below the growth in the volume of loans net income from investment securities), net profit for 2006 to retail customers; this amounted to 14.7% or ¤8.5 billion was ¤695 million, compared with ¤489 million in 2005. for a total lending volume of ¤65.8 billion. The volume of low-risk private mortgages alone, including portfolio Segment Reporting acquisitions, rose by 14.9% to ¤62.3 billion.

To ensure comparability, the comments on segment report- The cost/income ratio improved perceptibly, from 69.7% ing relate to the pro forma figures for 2005 in the same way to 63.0%, while the return on equity before taxes broke the as the comments on the income statement, i.e. including 30% barrier to increase from 29.2% to 32.7%. BHW and the acquired retail outlets.

Retail Banking The two major acquisitions, BHW and the retail outlets, were allocated to the Retail Banking segment. As a result, the corresponding integration costs in the amount of ¤85 million (net, after utilization of provisions) were charged to this segment in full as other expenses.

Despite this, profit before tax in the Retail Banking segment improved by 14.6% to ¤924 million. On the income side, this was primarily due to the encouraging development of net interest income, which increased by 8.3% to ¤2,358 million. However, this figure includes the unwinding effects described in the disclosures on the consolidated income statement. After adjustment for these effects, net interest

84 Group Management Report Fiscal Year 2006

Corporate Banking net income from investment securities totaled ¤52 million Our Corporate Banking business recorded a 10.7% increase and net fee and commission income amounted to ¤63 in profit before tax to ¤165 million. In this segment, too, million, meaning that both items remained essentially growth in net interest income of 9.2% to ¤260 million helped unchanged as against the previous year. balance sheet-related revenues to increase by 8.1% to ¤267 million. Net fee and commission income fell slightly by 2.8% This segment, too, saw a slight reduction in costs, with to ¤105 million. Total income improved by 4.8% to ¤372 administrative expenses falling by 2.5% to ¤78 million. million. As a result, the cost/income ratio improved from 40.0% to 37.7%, while the return on equity before taxes rose from Administrative expenses rose slightly by 3.6% to ¤171 22.0% to 23.8%. million. The strong economic environment meant that the allowance for losses on loans and advances fell by 2.6% to Others ¤38 million despite the fact that the volume of loans to Profit before tax in the Others segment improved by ¤76 corporate customers increased by ¤1.0 billion to ¤13.6 billion. million to ¤–307 million. Negative net interest income As a result, the cost/income ratio improved slightly from decreased slightly by 2.3% to ¤–542 million, while net trad- 46.5% to 46.0%, while the return on equity before taxes ing income improved substantially by 20.7% to ¤181 million. increased from 43.2% to 46.7%. Net income from investment securities rose by 6.1% to ¤260 million; however, this includes the gains on the disposal of Transaction Banking the non-strategic investments, which totaled ¤84 million. Transaction Banking exceeded its 2006 pre-tax profit target Adjusted for this effect, net income from investment securi- of ¤25 million, which was set when the segment was estab- ties in the Others segment decreased by 28.2% to ¤176 mil- lished in 2004: its profit before tax rose by 17.4% to ¤27 lion as a result of developments in the interest rate market. million year-on-year. As noted on several occasions in pre- All in all, balance sheet-related revenues increased by 36.9% vious years, this result was achieved despite falling income to ¤–101 million. Net fee and commission income, the due to the steady reduction in paper-based transactions. negative structure of which is attributable in particular to Accordingly, total income, which was dominated by net the deconsolidation of internal commission payments from fee and commission income in the amount of ¤263 million Transaction Banking, improved by 43.3% to ¤–85 million, (down 5.4%), fell by 5.7% to ¤267 million in the year under with the result that total income grew by ¤124 million to review. ¤–186 million. This was offset by a ¤79 million increase in administrative expenses to ¤140 million, which was due in However, the further reduction in paper-based transactions part to the higher remaining expenses from the cost centers. provided potential for driving down costs and improving margins: in the year under review, we reduced administrative expenses in the Transaction Banking segment by 6.8% to ¤245 million.

As a result, the cost/income ratio of this highly industrialized business structure fell to 91.8%, compared with 92.9% in the previous year.

Financial Markets Profit before tax in the Financial Markets segment increased by 10.0% to ¤132 million. Total income grew by 3.5% to ¤207 million. In this segment, too, net interest income was the main growth driver (up 10.8% to ¤92 million), due primarily to the strong performance of our Luxembourg-based unit PBI. Meanwhile, the segment’s proprietary trading and

85 Total assets Amounts due to customers We were again able to increase amounts due to customers Postbank’s total assets increased moderately by 2.5% to by an encouraging ¤2.4 billion to ¤101.3 billion. While tradi- ¤184.9 billion on a pro forma basis, i.e. adjusting the prior- tional savings deposits fell by ¤2.0 billion to ¤36.0 billion year figures to include BHW and the acquired retail outlets. in line with market trends, home savings deposits were up On the asset side, this was largely due to the satisfactory from ¤16.1 billion to ¤17.0 billion. In the Corporate Banking growth in our customer loans business. In conjunction with segment, term deposits rose from ¤6.2 billion to ¤8.6 billion the reduction in expensive refinancing instruments on the due to technical closing date reasons. liabilities side, this led to further structural improvements. To ensure comparability, the comments below relate to the Money and capital market liabilities pro forma figures for 2005 in the same way as the comments Money and capital market liabilities – deposits from other on the income statement and segment reporting, i.e. includ- banks, securitized liabilities and trading liabilities – increased ing BHW and the acquired retail outlets. slightly by ¤2.0 billion to ¤66.8 billion. In the process we further optimized our funding structure. Securitized liabilities, Loans and advances to customers which are comparatively expensive, were decreased by ¤4.2 Loans and advances to customers grew by ¤6.7 billion to billion to ¤15.9 billion, and we also reduced trading liabili- ¤87.2 billion. In particular, this reflects our continued success ties by ¤0.5 billion to ¤3.6 billion. On the one hand, the rise in selling private mortgage loans. Our mortgage lending in deposits from other banks of ¤6.7 billion to ¤47.3 billion volume including home savings loans was up by 14.9% to reflects the reduction in securitized liabilities and in low- ¤62.3 billion. This figure also includes the purchases of margin deposits by corporate customers; on the other, it is securitized mortgage loan portfolios worth a total of ¤3.2 related to the growth in loans and advances to other banks. billion, most of which are guaranteed by KfW, compared with ¤3.3 billion in the previous year. The installment loan Equity and subordinated debt volume also increased comparatively strongly by 14.3% At the end of 2006, equity was up around ¤0.1 billion on to ¤2.4 billion. As in the previous years, we continued to the previous year at ¤5.2 billion. Retained earnings increased decrease our legacy portfolios of low-margin public-sector by ¤0.3 billion to ¤3.1 billion. However, revaluation reserve receivables by ¤3.3 billion in the year under review to also declined by ¤0.3 billion and has thus been offset. The ¤5.4 billion. interest rate securities contained in this item are measured at current fair values, which were down due to the rise in Money and capital market investments interest rate levels. Unappropriated surplus rose by around At ¤92.9 billion, money and capital market investments – ¤0.2 billion year-on-year to approximately ¤0.7 billion. loans and advances to other banks, trading assets and investment securities – fell only slightly by ¤0.7 billion year- The increase in subordinated debt by ¤0.6 billion to ¤5.0 on-year. Longer-term investment securities rose by a mode- billion is largely due to a bond issued at the beginning of rate ¤1.6 billion to ¤63.3 billion. Opposing trends were record- the year that replaces profit participation certificates out- ed in the changes in the two relatively short-term items “tra- standing that had almost reached their maturity date and ding assets” and “loans and advances to other banks”: tra- were therefore no longer eligible for regulatory purposes. ding assets rose by ¤2.8 billion to ¤13.3 billion, while loans and advances to other banks were reduced by ¤5.0 billion to ¤16.4 billion.

86 Group Management Report Fiscal Year 2006

Postbank’s Tier 1 ratio according to Basel I was 5.5% at Report on Post-Balance Sheet Date Events the balance sheet date, following 8.3% at the end of 2005. The decline was primarily the result of the cash financing of Postbank assumes payment transaction processing the acquisitions of BHW and the Deutsche Post retail outlets, for HypoVereinsbank, Munich on January 1, 2007. without raising additional capital by issuing new shares. This was made possible in particular by the benefits for Postbank of the introduction of Basel II as of January 1, 2007. The decreased weighting of private mortgage loans in future will noticeably reduce Postbank’s risk-weighted assets. In December 2006, Postbank received Basel II approval from the regulator – one of the first banks in the world to do so. If the Tier 1 ratio is calculated according to the new standard (Postbank will be using the Basel II IRB foundation approach), the ratio is 6.6%, even taking into account the limitations on maximum capital reductions applicable initially. We plan to ensure that BHW is also Basel II-compliant as of 2008, which will result in further improvements.

Dividend As planned when we announced the acquisitions and presented the financing structures, the Management Board intends to propose to the Annual General Meeting that an unchanged dividend of ¤1.25 per share be paid for fiscal year 2006. This represents a total distribution of ¤205 million based on a total of 164 million shares.

87 Risk Report The Group Management Board is responsible for risk strategy, the risk-bearing capacity concept, the appropriate organiza- Organization of risk management tion of risk management, monitoring the risk content of all Taking risks in order to generate earnings is a core function transactions, and risk control. In conjunction with the Risk of the Postbank Group’s business activities. One of the Committees, the Group Management Board has defined the Postbank Group’s core competencies is to take on normal underlying strategies for activities on the financial markets banking risks within a strictly defined framework following and the other business sectors of the Group. The following precise classification and measurement, while at the same graphic illustrates the composition of the Committees and time maximizing the potential return arising from them. their areas of responsibility: To this end, the Postbank Group has established a risk management organization as the basis for risk- and earnings- oriented overall bank management.

Group Management Board

Credit Risk Committee Market Risk Committee Operational Risk Committee

■ Lending ■ Financial Markets ■ IT/Operations ■ Financial Markets ■ Lending ■ Resources Management ■ Product Marketing ■ Product Marketing ■ Services Board ■ Services ■ Finance ■ Branches

■ Allocate credit ■ Allocate market ■ Define operational Responsi- risk limits risk limits risk strategy bilities ■ Define limit system ■ Manage liquidity risk ■ Define minimum ■ Resolve amendments ■ Manage strategic requirements for to risk classification focus of the Group units procedures banking book ■ Define operational ■ Define standard ■ Monitor earnings risk parameters risk costs ■ Manage MRC portfolio ■ New products

88 Group Management Report Fiscal Year 2006

In accordance with the requirements of the Mindestanforde- Risk types rungen an das Risikomanagement (MaRisk – Minimum The Postbank Group distinguishes between the following Requirements for Risk Management), the risk strategy is risk types: consistent with the business strategy and takes into account ■ Market price risk all significant business divisions and types of risk. In addition Potential losses from financial transactions that may be to an overarching, Group-wide risk strategy, Postbank’s triggered by changes in interest rates, spreads, volatility, Management Board has resolved specific sub-risk strategies foreign exchange rates and equity prices. for market, credit, liquidity, and operational risks. ■ Credit risk Potential losses that may be caused by changes in the The nature and extent of the risks taken, as well as the creditworthiness of, or default by, a counterparty (e.g. strategy for managing such risks, depends on the individual as a result of insolvency). business divisions, whose actions are prescribed by the ■ Liquidity risk business strategy. Postbank is active in the Retail Banking, Default risk – the risk of being unable to meet current Corporate Banking, Transaction Banking and Financial and future payment obligations, either in the full amount Markets areas. due, or as they fall due. Liquidity maturity transformation risk – the risk of loss due to a change in our own Operational responsibility for risk management is spread refinancing curve (spread risk) resulting from an un- across several units in the Group, primarily the Financial balanced liquidity maturity structure within a given Markets division, Domestic/Foreign Credit Management and period for a certain confidence level. the credit functions of the private customer business and, ■ Operational risk at a decentralized level, the subsidiaries BHW Holding AG, The risk of loss resulting from inadequate or failed BHW Bausparkasse AG, BHW Bank AG, Deutsche Postbank processes and systems, people or external events. This International S.A. and PB Capital Corp., as well as also includes legal risk. Postbank’s London branch. ■ Real estate and investment risk The risk of loss of rental income, write-downs to the Risk Controlling, part of the Finance division, is the independ- going concern value, losses on sale, and the reduction of ent, Group-wide risk monitoring unit comprising the Credit hidden reserves relating to real estate portfolios. Risk, Market Price Risk, and Operational Risk departments. Investment risk comprises potential losses due to fluctua- Risk Controlling is responsible for determining the methods tions in the fair value of equity investments, to the extent and models to be applied in risk identification, measurement, that these are not already included in market price risk. and management. In cooperation with the Risk Controlling ■ Collective risk units at BHW Bausparkasse AG, BHW Bank AG, Deutsche A specific business risk in the home savings business, Postbank International S.A., and PB Capital Corp. subsidia- comprising the negative impact of (non interest-related) ries and the London branch, the department is responsible deviations in the actual behavior of home savings for operational risk controlling and reporting at Group level. customers from their forecast behavior. ■ Business risk The Internal Audit unit is a key element of the Postbank The risk of loss due to unexpected changes in business Group’s business and process-independent monitoring volumes and/or margins and corresponding costs. This system. In terms of the Bank’s organizational structure, it is term also includes model risk, which arises from model- assigned to the Chairman of the Management Board and ing customer products with unknown capital and interest reports independently to the Group Management Board. rate sensitivity (primarily savings and checking account products), as well as strategic and reputational risk.

89 Risk capital and risk limiting a portion of the risk cover amount for risk taking. This In spring 2006, the Postbank Group’s risk-bearing capacity amount is known as risk capital or economic capital and concept was thoroughly revised as part of a joint project represents a limit for the Postbank Group’s overall risk. Risk between Deutsche Postbank AG’s Risk Controlling and capital is determined and allocated to the risk categories BHW Bausparkasse AG. The risk-bearing capacity concept on at least an annual basis by the Group Management fulfills all regulatory requirements and provides input para- Board. The Risk Committees then allocate the funds further. meters for management. Since simply adding up the risk capital requirements for the The Bank’s risk-bearing capacity is assessed from the per- individual types of risk would lead to the overall risk being spective of investor protection and forms the foundation for overestimated, correlations between types of risk are taken the system used to limit material risks. The total funds into account as part of risk aggregation. In general, we available to the Bank to cover its risks is known as the risk assume high correlations between market, credit, and col- cover amount. The Postbank Group considers itself as lective risk. Business risk and real estate and investment having adequate risk-bearing capacity if the probability of risk generally exhibit medium to high correlations with the it servicing its prior-ranking liabilities is in line with its other risk factors. Only in the case of operational risk do target rating. The concept for determining the risk cover we assume a low correlation to all other risk types. amount is based on the IFRSs consolidated balance sheet, and not on the balance sheet of Postbank AG prepared in The following chart shows the percentage allocation of the accordance with the HGB (Handelsgesetzbuch – German Postbank Group’s risk cover amount by risk category in Commercial Code) as previously. fiscal year 2006 after factoring in correlation effects (calculated as of September 30, 2006): In order to ensure Postbank’s long-term risk-bearing capacity, Postbank’s Management Board only allocates

Percentage allocation of the Postbank Group’s risk cover amount by risk category

9 %, buffer for BHW collective risk 2 %, investment risk 45 %, unallocated risk cover amount 16 %, business risk

2 %, operational risk 9 %, credit risk

17 %, market price risk

90 Group Management Report Fiscal Year 2006

Taking of credit risk and market price risk is directly manage- Group-wide risk reporting able in daily business. This is why there is an operational Postbank’s risk reporting system provides an in-depth view limit for these areas in place. For credit risk, emphasis is of risk-bearing capacity and risk utilization. The risk-bearing placed on managing individual risks, taking into account capacity report provides information on the Group’s overall the target portfolio. Market price risk for both the core risk-bearing capacity on a quarterly basis. Risk utilization business and for own-account transactions is managed by for the individual risk types is presented in a large number allocating portfolio limits. of regular and specialized reports. The reports include all relevant subsidiaries of Postbank AG, and are prepared on Risks are therefore only assumed within limits that are in a daily, weekly, monthly, or quarterly basis, depending on line with the Bank’s risk-bearing capacity in order to gener- the relevance of the respective risk type. Group-wide reports ate yields, by taking risk/return aspects into account. This are usually addressed to the Group Management Board, ensures that risks that jeopardize the Bank’s existence the responsible members of the Risk Committees and the are avoided. In the fiscal year, the average risk capital operating units. The Supervisory Board receives excerpts of utilization was 45% for credit risk, and 41% for market these reports. Recipients are thus kept informed of changes price risk. in relevant parameters in a timely and comprehensive manner. The Risk Controlling department is responsible for the Operational limits are not used to manage the remaining methodology and content for Group-level risk reports. risk types, but rather the risk capital attributed to the risk types is deducted from the risk cover amount. Here too In addition to regular management reports, there is also an the adequacy of the deductible amount is calculated on early warning reporting system for individual risk types that an ongoing basis. focuses, on an event-driven basis, on significant risk-relevant aspects. The unexpected loss is quantified in order to calculate the utilization of the risk capital. The Postbank Group uses Regulatory requirements: Basel II and MaRisk uniform parameters to measure individual risks that have Basel II been classified as significant. These are oriented on the With the implementation of Basel II into national law, the value at risk approach, i.e., on the loss (less the expected regulatory capital requirements for credit operations now gain/loss) that will not be exceeded for a 99.93% level of focus more heavily on economic risks. In future, loans must probability within a given period (holding period: usually be backed by equity on a risk-weighted basis, i.e., generally one year). This confidence level is derived from the target depending on the debtor’s credit rating. Also, for the first A-grade rating. time, the New Capital Accord requires operational risks to be given equity backing. As long as the assigned limits are not exceeded and the aggregated limits and deductible amounts are lower than The final version of the legislation implementing Basel II the risk cover amount, risk-bearing capacity is assured. The into German law came into force on January 1, 2007. The regulatory capital requirements (in accordance with the amended Kreditwesengesetz (KWG – German Banking Act) Solvabilitätsverordnung (SolvV – Solvency Ordinance) and and the newly published Solvabilitätsverordnung (SolvV – the Groß- und Millionenkreditverordnung (GroMiKV – Solvency Ordinance) form the legal basis for differentiated German Large Exposures) are additional conditions that capital requirements. On December 21, 2006, the Postbank must be strictly observed when managing economic risk Group received approval from the Bundesanstalt für Finanz- capital. dienstleistungsaufsicht (BaFin – German Federal Financial Supervisory Authority) to adopt the internal ratings-based The risk factors for new products and product modifica- approach and will prepare a Basel II-compliant report tions are systematically identified in line with the MaRisk for the first time in the first quarter of 2007. The approval in using the New Products/New Markets (NPNM) process initially relates to Postbank AG’s most important ratings and documented in a product database. The resulting risks models: are included in the Postbank Group’s risk measurement and monitoring system.

91 ■ in the retail area : mortgage lending, installment credits, operational risk. The primary purpose of MaRisk in terms overdraft facilities for self-employed individuals and of its content is to establish adequate management and business customers, purchased receivables (retail) control processes based on a bank’s overall risk profile. ■ in the non-retail area: banks, governments, corporate customers (Germany) and commercial real estate finance. The Minimum Requirements for Risk Management took effect as of January 1, 2007 for requirements going beyond Postbank AG meets the retrospective requirements relating the previous regulations. to the use of internal rating models, the methods employed and data histories, because it has been using rating and The Postbank Group meets the requirements for managing scoring methods since 2004 or earlier in all core business interest risk in the banking book that have been incorporated areas; these methods have been continuously enhanced into German law via the MaRisk. In addition, a comprehen- and developed. In addition to the regulatory capital require- sive MaRisk project focusing on the calculation of risk- ments, the ratings and scorings generated are also factored bearing capacity and the risk strategy was successfully into individual transaction and overall bank management. implemented during the year under review.

The Postbank Group has qualified to use the standard Monitoring and managing market price risk approach for backing operational risk with capital. Internal Definition Audit has reviewed and confirmed full compliance with the Market price risk denotes the potential risk that may lead to regulatory requirements in accordance with the regulatory losses in financial transactions due to changes in interest standards. rates, spreads, volatilities, exchange rates, and equity prices. Changes in value are derived from daily marking to market, In the 2006 fiscal year, Postbank AG's comprehensive Basel II independently of their measurement for financial accounting project focused on developing an IT infrastructure for calcu- purposes. lating capital requirements based on the SAP Bankanalyzer. When including transactions in capital calculation under Organization and risk strategy Basel II, Postbank AG uses the regulatory limits relating to The Management Board is responsible for performing cen- the entry threshold, reference date and exit threshold to tralized risk management tasks at Postbank. The Management extend the cost of IT implementation. Board delegated market price risk management to the Market Risk Committee (MRC), which is monitored by the Postbank plans to implement the internal ratings-based Supervisory Board. approach at BHW Bausparkasse AG, the subsidiaries in Luxembourg and New York and its London branch as of Postbank has established clear rules with regard to responsi- January 1, 2008. bility for market price risk management. In general, Postbank AG’s Financial Markets business division manages this Minimum Requirements for Risk Management (MaRisk) centrally. Only BHW Holding AG and its subsidiaries, the The Mindestanforderungen an das Risikomanagement foreign subsidiaries in New York and Luxembourg, and the (MaRisk – Minimum Requirements for Risk Management) London branch manage their risks independently using published by the Bundesanstalt für Finanzdienstleistungsauf- separately defined risk limits. sicht in December 2005 replace the Mindestanforderungen an das Kreditgeschäft (MaK – Minimum Requirements for Risk Controlling functions as a Group-wide, independent Credit Transactions), the Mindestanforderungen an das monitoring unit. Risk Controlling is responsible for opera- Betreiben von Handelsgeschäften (MaH – Minimum Require- tional limit monitoring and reporting, in addition to the ments for the Trading Activities of Credit Institutions) methods and models used for risk identification, measure- and the Mindestanforderungen an die Ausgestaltung der ment, and management. Internen Revision (MaIR – Minimum Standards for Auditing Departments of Credit Institutions). The MaRisk extends these regulations to include in particular the issues of interest rate risk in the banking book, as well as liquidity and

92 Group Management Report Fiscal Year 2006

Postbank has laid down the basis for dealing with market method is applied consistently to all portfolios in the trading price risk, among other things, in its overarching risk strategy. and banking book, and transforms heterogeneous types The risk capital made available for taking of market price risk of market price risk into a single measure of risk, the VaR. limits the extent of the market price risk to be taken to an acceptable and desired scale for Postbank, creating an opti- Management of interest rate risk mized risk mix from a risk/return perspective. Interest rate risk is the term used to denote the changes in the fair value of interest-bearing financial instruments result- Market price risk is hedged where their actively taking it is ing from a change in market rates of interest. Interest rate not desired. When market price risk is intentionally taken, risks arise where there are differences in the amounts and this is done with the goal of generating income. Postbank interest rates of the interest-bearing assets and liabilities for thus enters into equity, interest, foreign exchange, and individual maturity bands. In addition to standard models spread risk in its banking and trading books as an additional of quantifying interest rate risk, Postbank also employs inter- source of income. nally developed statistical models. Deposit transactions bearing variable rates of interest are of particular significance Risk management and risk control to Postbank in this context. Special modeling rules and Postbank makes use of a combination of risk, earnings, deposit base definitions form the basis for a modern risk and regulatory parameters to manage its market risk. The management concept. management of market price risk positions from an earnings perspective focuses both on specific periods and on the The following chart presents the Postbank Group’s open present value. All market price risk is measured on a value interest rate positions in the form of a bpv graph. Positions at risk basis. Sensitivity indicators and gap structures are with a negative value represent an asset-side interest rate included as further management parameters. In addition, risk, which means that there is a surplus of assets. In the market price risk positions are subjected to regular stress same way, positive values indicate a surplus of liabilities. tests, which analyze the impact of unusual market move- The graph shows that the surplus of assets at December 31, ments on present values and on the income statement, and 2006 is primarily concentrated around the medium maturity balance sheet items. band (4–7 years). The surplus of liabilities in the “more than 10 years” band is largely attributable to the long-term To do justice to the relative significance of market price risk positions in BHW Bausparkasse’s home savings collective. to the Postbank Group and the volatility of market movements, Postbank has defined escalation mechanisms for critical management parameters and for exogenous events. These mechanisms make it possible to react in due time to situations in which limits are approached or exceeded, as well as to extreme market movements impacting the Postbank Group.

Monitoring market price risk using value at risk The Postbank Group quantifies market price risk for monitoring purposes using value at risk (VaR). VaR is generally calculated using the variance-covariance method. Risk capital allocation is based on a historical observation period of 250 trading days, a holding period of 90 trading days, and a confidence level of 99.93%. In contrast, operational limits and VaR are calculated based on a holding period of ten days and a confidence level of 99.0%. The VaR of a portfolio thus describes the potential decline in fair value that will not be exceeded in that portfolio in a period of ten trading days with a probability of 99.0%. The variance-covariance

93 The Postbank Group’s interest rate positions (bpv) at December 31, 2006

BPV in ¤m

2.50 2.00 2.00

1.50

1.00

0.50

0.00

–0.50 –0.11 –0.04 –0.22 –0.31 –1.00 –0.72 –0.77 –0.77

–1.50 –1.06 –1.46 –2.00 –1.92 –2.50

<=1y 2y 3y 4y 5y 6y 7y 8y 9y 10 y >10y

Backtesting Appropriate market terms The methods used to compute VaR are regularly tested for In addition to monitoring market price risk, the Postbank reliability. The predictive accuracy of the estimated VaR is Group also checks all trades at the trade date to ensure that tested by comparison with the gains and losses arising from market prices have been applied (market conformity verifica- actual market changes, but for the same portfolio (clean tion). This is supervised by internal units that are indepen- backtesting). Evaluation uses the “traffic light” color code dent of the trading functions. model published by the Bank for International Settlements (BIS). The Management Board is regularly informed of all Limiting backtesting carried out. The backtesting performed in 2006 In the Postbank Group, market price risk is monitored using reveals for the superordinate levels results within the statis- a system of risk limits based on the value at risk methodo- tically expected ranges for the relevant higher levels, thus logy. The aggregate limits are set by the Group Management confirming the fundamental appropriateness of the VaR Board and allocated by the Market Risk Committee to the methodology applied. individual operating units as sublimits. These are dynamic outcome-based limits; any losses incurred reduce the limit, Stress testing while gains replenish it, at maximum, to the originally defin- In addition to the VaR calculations, scenario analyses are ed level. Risk measurement and monitoring are end-of-day performed at regular intervals for the separate analysis of for the whole bank; additional intra-day monitoring is carried extreme market movements. These analyses quantify the out for the trading portfolios. effects of extraordinary events and extreme market conditions on the Postbank Group’s asset positions. The effects of the scenarios are compared with the limits allocated for each risk. The Management Board is kept regularly informed of the results of scenario analyses. The scenario analyses performed in the year under review indicated that the Postbank Group’s risk-bearing capacity was assured even in extreme market situations.

94 Group Management Report Fiscal Year 2006

Risk indicators The following figured at risk were calculated for Postbank’s trading portfolios for the period from January 1 to December 31, 2006:

Values at risk for the period January 1 to December 31, 2006 and the prior period

Trading book 2006 2005 ¤m ¤m

VaR at year-end 4.35 3.90 Minimum VaR 2.75 2.65 Maximum VaR 10.33 13.90 Annual average VaR 5.14 6.30

The following chart illustrates the development of value at risk for our trading portfolios over the course of 2006:

VaR trading portfolio January 1 to December 31, 2006

VaR in ¤m

12.00

10.00

8.00

6.00

4.00

2.00

0.00

Jan./06 Feb./06 Mar./06 Apr./06 May/06 Jun./06 Jul./06 Aug./06 Sep./06 Oct./06 Nov./06 Dec./06

VaR for the banking book was ¤156.01 million at December 31, 2006 (previous year: ¤123.49 million, excluding BHW). As with the trading portfolios, VaR is calculated for the banking book assuming a holding period of ten days and a confidence level of 99.0%. The calculation incorporates all risk-bearing holdings in the banking book, including modeled variable-interest customer transactions.

95 Risk reporting ■ Settlement risk The Postbank Group uses a variety of regular reporting The risk of possible losses during the settlement or netting instruments for market risk: of transactions. Settlement risk always exists where cash, securities, or other traded assets are not exchanged at the ■ The daily report serves to inform the Management Board same time. member responsible for risk supervision, the Management ■ Counterparty risk Board member responsible for Financial Markets, and the The risk of possible losses arising from potential default by position managers about the positions entered into, limit a counterparty, and hence the risk to unrealized profits on utilization and the economic profit/loss of the positions before executory contracts. This relates to replacement risk. the start of trading each day. ■ The weekly report is addressed to the position managers Organization and risk strategy and summarizes the significant changes in the market and The responsibility for performing centralized risk manage- in the positions. The daily and weekly reports are regularly ment tasks at Postbank lies with the Management Board. discussed with the position managers and provide the basis The Management Board has delegated the management of for operational management. credit risk to the Credit Risk Committee (CRC), which is ■ The monthly report provides a comprehensive overview of monitored by the Loan and Equity Investments Committee of developments in market price risk within the reporting period the Supervisory Board. and is addressed to the Group Management Board. In addition to current results and risk indicators, this report The Postbank Group manages its counterparty risk on the also contains the results of stress testing and backtesting. basis of the credit risk strategy approved annually by the ■ The MRC report presents risk figures in aggregated form Management Board. The credit risk strategy contains targets (VaR, basis point values, stress test results), and present for the risk profiles as well as target returns for individual value or periodical results by management unit and indicates credit products. their impact on the income statement. As another strategic risk management measure, the Monitoring and managing credit risk Postbank Group bases the aggregate composition of its loan portfolio for corporate customers, banks, and sovereigns on Definition of risk a target portfolio. This portfolio was constructed to reflect Postbank defines credit risk (or counterparty risk) as the a balanced risk/return profile. The current portfolio of receiv- potential loss that may be caused by changes in the credit- ables is compared quarterly with the target portfolio. Due worthiness of, or a default by, a counterparty (e.g. as a to its extremely high degree of granularity, the private result of insolvency). There are four types of credit risk: customer business is not part of the target portfolio, but is ■ Default risk (credit risk) managed instead via the expected net margin less the The risk of possible losses arising from the inability of a expected risk. counterparty to discharge its payment obligations, or from a deterioration in its credit rating. The management and monitoring of counterparty risk and ■ Country risk hence the implementation of the credit risk strategy are The risk of possible losses arising from political or social performed on the basis of individual risks on the one hand, upheaval, nationalization and expropriation, a government’s and the entire portfolio on the other. non-recognition of foreign debts, currency controls, and devaluation or depreciation of a national currency (transfer Risk management and risk control risk). Managing individual risks Credit approval procedures The Postbank Group´s credit guidelines contain detailed targets for all lending transactions. Credit approvals are subject to an established system of competencies, which act as a framework within which decision-making individuals or

96 Group Management Report Fiscal Year 2006

bodies are authorized to enter into lending transactions. be expected over a one-year period on the basis of Responsibility for the approval of loans is dependent on the previous loss experience. These are factored indirectly into loan size and, for corporate customers and transactions in margin calculations as standard risk costs, along with other the Financial Markets business division, additionally on the variables. credit rating of the specific borrower or debtor. An important feature of the credit approval procedure in the Corporate Risk/return key performance indicators Banking and Financial Markets areas is the separation of If loan losses are expected in the Postbank Group, the aver- sales/trading from risk management, in accordance with age default costs are factored into the advance calculation the regulatory requirements (MaRisk). One exception to this on an individual loan basis. This system allows all lending permitted by the banking regulations is the standardized transactions to be evaluated during the advance calculation. process for credit allocation in the Retail Banking and Corporate Banking business divisions for overdrafts of up to The standard risk costs are priced in as a premium for the ¤25,000, for which simplified standard procedures apply. expected loss and are included in the profitability calculation that is determined in the form of return on equity (RoE) Scoring and rating ratios. The profitability calculation aims to ensure an end-to- Regardless of the size and type of the loan, individual rating end assessment of customer relationships and is performed or scoring is performed during the credit approval process. at product or portfolio level for retail customers, and at an In Retail Banking, loans are approved, decisions to extend individual level for non-retail customers. them are made, and terms are defined using the results of statistical scoring models and approval guidelines. The Credit monitoring and problem loan procedures scoring models applied at Postbank use internal and exter- In the case of larger loans (individual business), credit risk nal information about the borrower and employ statistical is monitored by regular assessments of creditworthiness. methods to individually estimate the probability of loan or The risk level is limited by individual credit allocation or by borrower default. At the same time, the recovery rate in the limits for the borrower, and recorded and controlled using case of default is estimated either individually (for mortgage computer systems. In accordance with banking regulatory loans) or globally (in the small-scale uncollateralized retail requirements, controls are carried out by the operating lend- business). Since 2005, Postbank has used an internal ing units and, in the case of trading transactions, by Risk behavior scoring system for retail checking products; this Controlling in addition. system individually assesses default risk on the basis of historical account management data and additional external In accordance with banking regulatory requirements, the information. Postbank Group has implemented a credit monitoring process which applies to individual lending transactions with Rating models generally comprising a statistical core (statis- corporate customers, business customers with credit lines tical balance sheet rating or Monte Carlo simulations of over ¤25,000, and mortgage lending in excess of ¤500,000 expected cash flows) are used to make loan decisions and per borrower or borrowing entity. The process enables define terms for customers and loans in the areas of corpo- higher-risk loans to be identified using hard and soft risk rate customers, banks and governments; these incorporate indicators (e.g. sector information, management accounting qualitative and shorter-term information in the internal data, customer and account data, and rating changes), rating via a heuristic model. which are defined for the individual product. The use of risk indicators to enable the early identification of an increasing All internal ratings and scorings are presented using a uni- risk of default makes it easier to develop and implement form master scale, which assigns each rating or scoring loan restructuring plans with the debtor if necessary, or to result to a rating class on the master scale, as well as the arrange for settlement. default probability determined for that class. Postbank uses the terminology of the rating agency Standard & Poor’s. In addition, the Postbank Group conducts bi-weekly reviews In addition to supporting the loan decision process, among of its most substantial credit exposures to listed borrowers other things, these ratings and scores serve as a basis for in order to identify negative trends in their creditworthiness calculating the “expected loss,” i.e., the loss that can as early as possible and develop alternative strategies.

97 These reviews are supported by a software application that and advances are recorded together with their future cash estimates default probabilities on the basis of a large variety flows and discounted to the observation date, thus allowing of market data. the loan loss risk to be measured over a one-year observation period, as well as the effects on the present value of all If the credit monitoring process using risk indicators identi- changes in creditworthiness beyond the observation period. fies a loan to a corporate customer as a higher risk, the bor- Credit risk is measured using current internal and external rower in question is placed on a watch list. In the case of credit ratings as well as internally and externally calculated hard risk indicators, the loan is mandatorily transferred to assumptions relating to recovery rates. the watch list; if there are only soft risk indicators, a decision is made by the credit specialist. The watch list allows External input parameters for the calculation of CVaR include the timely recognition and analysis of changes in the quality constantly updated rating agency data, derived migration of these loans; it is constantly updated by the various lend- tables, sector/product default probabilities and correlations, ing departments and submitted quarterly to the member of credit spreads (risk premiums for various rating/creditworthi- the Management Board responsible for lending. Loans in ness categories), as well as the volatility of these parame- excess of ¤2 million and loans that were approved by the ters in a Monte Carlo simulation. Homogeneous, granular Group Management Board are reported to the Group products or business sectors are aggregated and are not Management Board, the Credit Risk Committee and the computed at individual transaction level. These relate in Loan and Equity Investments Committee of the Supervisory particular to private customer products. Board as part of the credit risk report. The updated portfolio and market data are used to compute Managing credit risk at portfolio level the credit value at risk of the Group loan portfolio every Portfolio management quarter, as well as the individual credit value at risk for In addition to monitoring individual risks, the Postbank Group particular products/business divisions. The credit value at calculates the credit value at risk (CVaR) for the Group loan risk in the Group loan portfolio is lower than the sum of portfolio. The credit value at risk is the potential negative the individual credit values at risk of the business divisions change in the present value of the Group loan portfolio that because of diversification effects. Credit value at risk is will not be exceeded within a one-year horizon with a compared with the limits made available to individual profit 99.93% probability. Within Postbank’s Group-wide risk- centers by the Credit Risk Committee and the aggregate bearing capacity concept, the credit value at risk, as a mea- credit risk limit. In addition to calculating credit value at sure of the unexpected loss, must be backed by risk capital. risk, the Group loan portfolio is subject to stress testing with the aim of quantifying losses that might arise from In contrast, the expected loss of a loan portfolio is the aver- extreme events. age default amount expected within a one-year period; this is calculated as the product of the default probability, the The following table shows the credit risks for the various size of exposure and the loss rate. The expected loss does profit centers: not contribute to the Bank’s overall risk, but is factored into margin calculations via the as standard risk costs.

Credit value at risk is measured using a credit risk model that allows the consistent capture of all credit risks. CVaR is calculated on the basis of the migration behavior of debtor- specific creditworthiness and correlation effects within the portfolio, so as to quantify risks arising from an adverse concentration of counterparties in terms of their sector, size category, creditworthiness and country. The probability of a rating change (migration) is continually updated and adjusted to reflect the changes observed in an economic environment that remains difficult. In calculating CVaR, all loans

98 Group Management Report Fiscal Year 2006

Credit risk in ¤m Volume Expected loss Credit VaR 2006 2005 2006 2005 2006* 2006** 2005** Corporate Banking 16,975 13,131 48 49 167 89 85 Retail Banking 35,638 30,595 134 117 111 76 63 Financial Markets 94,662 90,026 98 90 496 227 293 Others (banks/local authorities) 13,226 19,185 7 14 244 56 75 BHW 46,590 – 87 – 117 91 – Total (including portfolio effect) 207,091 152,937 374 270 544 315 364

* 99.93 % confidence level ** 99 % confidence level

The volume reported in the table for the Group loan portfo- Long-term comparisons show that the trend of slight lio deviates from the figure for total assets due to two factors: increases in the expected loss compared to the loan port- firstly, the deadline for preparing the credit matrix is the last folio continued in 2006 due to the slight shifts towards day of the previous month and secondly to the fact that car- lower creditworthiness categories in the companies, banks, rying amounts, fair values, or credit equivalent values are and governments portfolio. used to fully capture the credit risk, depending on the item. In contrast, the strong overall portfolio diversification and The rise in credit value at risk to ¤544 million in comparison low correlations between retail business and loans and to fiscal year 2005 is due to the increase in the confidence advances to companies, banks, and governments did not level from 99% to 99.93% as part of the revised risk-bear- lead to any notable rise in CVaR as a result of BHW ing capacity concept. The table also shows the CVaR for Bausparkasse and BHW Bank’s holdings. In addition, CVaR a 99% confidence level for comparative purposes. CVaR fell over time, since the coverage rate for loans with an was reduced year-on-year from ¤364 million to ¤315 mil- individual rating or scoring has risen, replacing successive lion, while the expected loss increased at almost the same conservative global estimates of debtor-specific credit- rate as the loan volume due to the integration of BHW worthiness. Bausparkasse and BHW Bank’s holdings.

99 Overall bank portfolio and risk development over time

Portfolio, ■ Portfolio Portfolio, ¤m ■ EL ¤m ■ CVaR 99 % ■ CVaR 99.93 %

250,000 550

200,000 450

350 150,000 250

100,000 150

Dec 01 Jun 02 Dec 02 Jun 03 Dec 03 Jun 04 Dec 04 Jun 05 Dec 05 Jun 06 Dec 06

The sector distribution by volume in the credit portfolio has almost all rated A or higher, as in the case of sovereign a balanced structure and presents a generally stable picture. borrowers. A target portfolio that has been optimized in The emphasis of the portfolio is on lending to banks, which terms of diversification serves as a guide in achieving this consists mainly of money market transactions and partially aim. The Postbank Group uses state-of-the-art active loan covered capital market transactions, such as Pfandbriefe portfolio management tools for this, both at portfolio level (public-sector mortgage bonds). The banks in question are and for individual transactions.

Sector distribution as % of volume

36 %, retail portfolios 40 %, banks

8 %, other sectors 0 %, manufacturing industry 4 %, insurance/financial services 12 %, governments

100 Group Management Report Fiscal Year 2006

Loan portfolio: change in rating structure ■ Basel II-compl. pool rating ■ B ■ A

in % ■ D ■ BB ■ AA ■ CCC ■ BBB ■ AAA 100

0 Jun 00 Dec 00 Jun 01 Dec 01 Jun 02 Dec 02 Jun 03 Dec 03 Jun 04 Dec 04 Jun 05 Dec 05 Jun 06 Dec 06

The distribution of rating categories in the Group loan port- Allowances for losses on loans and advances folio demonstrates the conservative orientation of the The allowance for losses in the lending business comprises Postbank Group. The following chart shows the historical specific valuation allowances, collective valuation allow- development of the rating structure. The higher rating cate- ances and portfolio impairment. gories predominate: 95% of the rated portfolio is classified as investment quality. The remaining portfolio consists A specific valuation allowance is recognized if, taking into primarily of private mortgage lending by Postbank, entered account any collateral, the estimated recoverable amount of into before August 2004, as well as mortgage lending by loans and advances is lower than their carrying amount, i.e. BHW Bausparkasse. While the steady increase in rated new if a loan or advance is wholly or partly uncollectible and business and the expansion of the rating models in 2005 has therefore suffered permanent impairment. The Postbank resulted in a decrease in the proportion of unrated loans, Group determines the recoverable amount on the basis of this figure increased significantly following the integration the discounted present value of future payments on the loan of BHW. Basel II-compliant pool estimate procedures for or advance, or on the basis of the market value or fair value default probability and the expected loss rate were devel- of the loan or advance, taking into account any collateral. oped for homogeneous subportfolios of the vast majority of Loans in the corporate banking segment for which a specific these unrated loans in 2005 and 2006. valuation allowance has already been recognized, as well as all loans that have been placed on the watch list, are Managing country risk remeasured regularly, i.e., they are monitored continuously The Postbank Group has established country-specific limits on the basis of defined risk indicators, which may lead to for credit allocation in order to manage country risk. The the recognition or reversal of a specific valuation allowance. levels of country limits are substantially determined by inter- They are also tested for impairment each quarter. nal and external ratings, and by the economic strength of the particular country measured by gross domestic product. A Group-wide database keeps track of the limits established for each country and their current utilization, as well as the economic data used in allocating countries to risk categories.

101 A collective valuation allowance is recognized for a portfolio ■ The credit matrix provides detailed information on credit risk of loans with similar characteristics, to the extent that there at portfolio level (CVaR, rating distributions, sector distribu- is a need to recognize a valuation allowance within the tions, concentration risks, limit utilization, target/actual portfolio. General ratios based on historical experience of portfolios), some of which has already been factored into loss rates are applied in measuring collective specific valua- the credit risk report and the credit monitoring report in tion allowances. The Postbank Group recognizes collective aggregated form. The Credit Risk Committee also examines specific valuation allowances in the area of overdrafts and the credit matrix on a quarterly basis. installment credits, as well as credit card loans. ■ To monitor the performance of the risk classification procedures at the level of individual loans (rating and scoring Portfolio impairment is used to account for all loan losses models), model monitoring reports are prepared by business that have occurred but that Postbank has yet to identify; division on a monthly to quarterly basis. The aim of these this may be because the respective customer has yet to reports is to analyze and document the performance of the meet his payment obligations, for example. Postbank factors rating and scoring models using a brief validation process. in expected default probabilities, loss rates and the estimat- Compliance with the model, i.e., its proper application, is ed time between when the default occurs and when this is also examined. identified, depending on the type of product and customer ■ At the level of individual loans, the watch lists (see above) group. are another instrument for reporting larger exposures.

Risk reporting Environmental risk The Postbank Group uses a variety of reporting instruments Postbank also takes into account environmental risk when for counterparty risk: making credit decisions. The Postbank Group and its employees are aware of their social responsibility both in ■ The credit risk report, which is submitted quarterly to their lending policy and in individual credit decisions. the Group Management Board and the Loan and Equity Investments Committee of the Supervisory Board, provides Postbank understands that identifying and quantifying information on the default history of individual business environmental risk must form part of its standard risk areas, and on the composition and development of the assessment and management procedures in its domestic Group’s current loan portfolio. In addition to data on lend- and foreign business. With regard to our customers, we ing, credit risk and other matters, the report gives details of believe that fulfilling current environmental standards the largest exposures by individual debtor and the largest and acting responsibly towards the environment are key loans in default, as well as the utilization of risk limits. factors for assessing corporate governance. ■ The credit monitoring report is also prepared quarterly at the same time as the credit risk report and contains addi- As a result, Deutsche Postbank AG meets the requirements tional detailed information at business division and product for sustainable and future-oriented management and level, which is made available to the operating units to complies with international guidelines such as the enable them to manage credit risk. The credit monitoring UN Global Compact. report is resolved by the Credit Risk Committee.

102 Group Management Report Fiscal Year 2006

Monitoring and managing liquidity risk Risk management and control Definition Risk management is performed on the basis of funding The Postbank Group distinguishes between two types of matrices and cash flow forecasts, which are continually risk in liquidity risk management: illiquiditiy risk and liqui- reviewed. The future funding requirement is currently deter- dity maturity transformation risk. Illiquiditiy risk is defined mined using these analyses. Management measures are as the risk of being unable to meet its current or future based on the following principles: payment obligations, either in the full amount due, or as they fall due. Liquidity maturity transformation risk describes ■ A stable funding concept, i.e., long-term loans are predomi- the risk of a loss occurring due to a change in our own nantly funded on a long-term basis. refinancing curve (spread risk) resulting from an imbalance ■ The permanent maintenance of portfolios comprising prime- in the liquidity maturity structure within a given period for rated securities with first-class fungibility that can be sold a certain confidence level. at any time or pledged to central banks to rapidly obtain liquidity. Organization and risk strategy The Management Board of the Postbank Group is responsi- The following liquidity gap analysis of Postbank AG’s cash ble for managing liquidity risk. The structures and processes flow presents cash flows as of December 31, 2006 on a in liquidity risk management are being completely redesigned net basis. It shows that there are significant liquidity over- in a project against the background of Group structures that lays across all maturity bands, which underscores our strong have grown considerably and the imposition of more strin- cash position. gent supervisory requirements. The primary aim of this new approach is to focus the management and monitoring pro- Liquidity provisioning for the BHW subgroup, whose liquidity cess more strongly on the overall Group, to fully implement cash flow is not yet integrated into this presentation due to the separation of duties called for by MaRisk, to model the methodical differences, is primarily presented via Postbank. data necessary for management in a more detailed fashion, From the perspective of the BHW subgroup, this means and to establish appropriate system support. In addition, that the necessary refinancing of private mortgage loans the existing requirements for stress tests, contingency plan- results in payment gaps in the respective maturity bands ning, and liquidity risk strategy have been revised. The IT that serve to reduce Postbank’s liquidity overlay at Group aspects of the concepts developed will be successively level accordingly. implemented in fiscal year 2007.

The Postbank Group’s liquidity management options are tied to the capital commitment maturity pattern; liquidity management is done by Treasury. Short-term measures are handled as part of our money market activities, while medium- and long-term liquidity is ensured by way of capital market issues.

The goal of liquidity management is to ensure that Postbank is solvent at all times – not only under normal conditions, but also in stress situations. To this end, the Bank’s liquidity positions are subject to stress tests. These simulated calculations reflect external changes in a variety of market factors, plus structural changes in funding resources. An appropriate amount of the liquidity reserve serves to provide for these potential scenarios. In addition, liquidity management is responsible for managing Principle II in conjunction with section 11 of the Kreditwesengesetz (KWG – German Banking Act).

103 Postbank liquidity gap analysis as of December 31, 2006

Gap in ¤m

22,000 21,095

18,000 17,137

14,000

10,000 Customer deposits presented in the amount of their expected holding period 6,000 5,267 ■ up to 2 years ■ 2,000 826 > 2 up to < 6 years ■ > 6 up to < 10 years –2,000 ■ > 10 years

Principle II as defined in section 11 of the German Banking ■ A daily funding matrix Act (KWG), which is the regulatory assessment criterion, ■ Detailed liquidity risk analyses in the form of a monthly (coverage ratio of available cash to callable payment report obligations), was clearly complied with at all times. ■ Monthly stress test reports.

A separate project has been established to successively Monitoring and managing operational risk develop liquidity risk management with a view to achieving Definition compliance with the Bank for International Settlement’s Postbank defines operational risk in conformity with the “Sound Practices for Managing Liquidity in Banking Solvabilitätsverordnung (Solvency Ordinance), which imple- Organizations”. ments Basel II into national law as “the risk of losses resulting from inadequate or failed internal processes, people Risk reporting and systems, or external events.” This definition also The Postbank Group uses a variety of regular reporting includes risks from money laundering and fraud practiced instruments for liquidity risk: on the Bank. The legal risk associated with operational risk is managed centrally by Legal Affairs. Changes in legislation ■ The Treasury Strategy Committee (TSC) is informed on the and current rulings are implemented in the individual liquidity position via weekly reports. departments in a timely manner. The status of the imple- ■ Monthly information on the liquidity ratio in accordance mentation of legal requirements in the key operational units with Principle II is sent to the Group Management Board is evaluated in semi-annual self assessments. No major as part of the Management Board information system. defects were identified as a result during fiscal year 2006.

The current reporting structure and content will be expand- Postbank is beginning application of the standard approach ed in fiscal year 2007 to include the following content in to capital requirements for operational risk as of the entry accordance with the concepts defined in the liquidity risk into force of the new capital adequacy rules in 2007. project: All preparatory work to this end was implemented within the entire Group on schedule. This has been confirmed by Internal Audit and reported to the Banking Supervisory Authority. At the same time that the requirements for the standard approach were implemented, the foundations were

104 Group Management Report Fiscal Year 2006

laid for a subsequent switch to an advanced measurement Operational risk management and control approach (AMA). The Postbank Group actively manages operational risk. An example of this is the introduction of the mTAN Organization and risk strategy procedure in the reporting year. Managing operational The Management Board of the Postbank Group is respon- risk remains a key task of the individual units within sible for operational risk management. the Group.

A strategy was developed to deal with operational risk at A department has been specifically established within the the Postbank Group in 2005 and various risk management new Group unit, Postbank Filialvertrieb AG, to handle op- principles were established. They are composed of Group- erational risk management for branch sales and to gather wide standards that were defined by the Operational Risk and analyze data above and beyond the Group standard. Committee (ORC) and must be observed by all organizational units, as well as principles that are the responsibility Postbank is a founding member of “DakOR” (Datenkon- of the individual business divisions. sortium Operationelle Risiken), the operational risk data consortium. During the year under review, anonymized All risk management and monitoring operations are coor- data on losses arising from operational risk were exchanged dinated by Postbank's central Risk Controlling to ensure a for the first time. Other institutes’ losses will serve as a uniform approach throughout the Group. This applies to basis for scenario analyses in future. the methods used to collect losses, the definition of indicators as an early warning instrument, as well as self-assess- Risk reporting ment to identify and measure the current risk situation. In The Postbank Group uses a variety of regular reporting this context, Risk Controlling is also responsible for train- instruments for operational risk: ing local risk managers and upgrading the software solutions deployed. The “Manual for Operational Risk Control ■ The members of the ORC are informed on a monthly basis in the Postbank Group” describes both the methods used of losses incurred and on selected indicators that have and the primary responsibilities of those involved in the exceeded the defined tolerance threshold. risk control process. ■ Additionally, the ORC is informed on a semi-annual basis on the results of the self assessment. In 2006, Postbank focused on integrating the new Group ■ At a local level, individual managers at the various levels units - BHW Holding and the retail outlets that were acqui- receive reports tailored to meet their informational needs. red from Deutsche Post AG. In the case of BHW Holding AG, there was already an existing operational risk structu- ORC members receive ad hoc reports without delay in re to work with, which simply needed to be adapted to the case of material net losses expected to be in excess meet Postbank’s requirements. This made it possible to of ¤1 million. perform an initial risk inventory in line with Postbank standards as early as spring 2006. The risk inventory for the acquired retail outlets was successfully completed in the fourth quarter of 2006, despite their huge number. This means that all the Postbank Group’s key operating units have been included in the operational risk control process in good time for the entry into force of the Solvency Ordinance.

105 Monitoring and managing real estate and investment risk Deutsche Postbank AG currently has no further sharehold- Definition ings in other companies in the sense of a private equity or Real estate risk refers to Postbank AG’s real estate holdings an investment strategy. and describes the risk of loss of rental income, and from write-downs to the going concern value, losses on sale, and The properties in the Treasury portfolio are primarily those the reduction of hidden reserves relating to real estate. used by Postbank AG, BHW Bausparkasse AG, and BHW Bank AG. Investment risk comprises potential losses due to fluctuations in the fair value of strategic equity investments. The Postbank Group has established a procedure to ensure the adequate control and monitoring of key investment and Investments in this sense do not include shares in listed real estate risks at the Group level. Risk Controlling regularly companies held by the Trading or Treasury departments in monitors the limits of materiality defined for risks within the Bank’s trading or banking portfolios on the basis of an the equity investment and real estate portfolio and keeps existing equities limit, unless Postbank AG holds a majority the Management Board and the Risk Committees informed of the shares or a controlling interest in the company. Fair of this. value fluctuations in the equities portfolios fall under market price risk. Risk management and control Material risks (particularly market price and credit risk) Organization and risk strategy associated with strategic equity investments and subsidiaries The Bank’s Group Management Board is responsible for are integrated in the operational and strategic Group-wide managing the equity investment and real estate portfolio. risk management and monitoring systems. The operational risks associated with the majority interests are included The ongoing monitoring and control of risks from equity in Postbank’s corresponding management and monitoring investments within the Bank is performed by various central system. The residual real estate and investment risk is Group units. Investment management coordinates the super- deducted from the available risk capital. vision of the business activities of subsidiaries and other investees in keeping with the investment strategy, in parti- A continuing dialog between the companies and the appro- cular by providing support for the executive bodies. Postbank priate specialist areas of the Bank also contributes to the exercises influence on the business and risk policies of its timely identification of business and risk developments. To equity investments in particular through shareholder and this end, equity investments are allocated to the relevant supervisory bodies, where it is usually represented by board departments. Equity investments are subject to an members of the Management Board. impairment test at regular intervals. In accordance with the principles for valuing equity investments and shares in As of the reporting date of December 31, 2006, Deutsche companies laid down by the Institut der Wirtschaftsprüfer, Postbank AG held a total of 52 direct and a large number of this review is based on the application of the Ertragswert- indirect equity investments. The number of equity invest- verfahren (income capitalization approach) in most instances. ments increased during the current fiscal year, particularly as a result of the acquisition of the majority interest in BHW The large number of existing management and monitoring Holding AG on January 2, 2006. systems, which are continually being enhanced, guarantees that Deutsche Postbank AG is in a position to monitor, Postbank sees these holdings as strategic investments that manage, and minimize shareholding risks, including strategic reflect the Postbank Group’s product and service areas, and investment risks, at any time. as a source of internal services for the Postbank Group. A large number of these equity investments are managed as The real estate portfolio is monitored on the basis of the Postbank units. Overhead functions such as financial con- regular property valuations, which take risk aspects into trol, accounting, legal affairs, personnel, and auditing are account, as well as the analysis of changes in the real estate performed directly by the responsible organizational units at portfolio. Postbank in such instances.

106 Group Management Report Fiscal Year 2006

Risk reporting terminations, the financing of existing housing stock, home In the context of the control and monitoring systems for loan maturity dates, and principal repayments. The simula- market/counterparty risk as well as operational risk, regular tion model uses a broad range of behavioral parameters to reports are also prepared on the strategic equity investments calculate the statistically expected cash flow at the overall and subsidiaries included in these systems. In addition, the collective level; this calculation is updated on a quarterly Postbank Group uses a variety of regular reporting instru- basis. ments for investment risk: Risk management and control ■ The key earnings figures of all subsidiaries included in the Collective risk is systematically managed using a collective consolidated financial statements are reported to Deutsche management system at BHW Bausparkasse AG, whereas risk Postbank AG’s Management Board on a quarterly basis. monitoring is the responsibility of BHW Bausparkasse’s risk ■ As a shareholder, Deutsche Postbank AG is also continuously controlling unit. informed about the development of the risk situation at the respective subsidiaries at the meetings of their executive A portion of the behavioral assumptions for modeling – bodies (Supervisory Board, Administrative Board, Share- home loan maturity dates, loan waivers, and repayment holders’ Meetings, etc.). practices – is considered in the simulation to be interest- linked. Collective simulations are therefore performed based Monitoring and managing collective risk on different interest rate scenarios. Definition BHW Bausparkasse AG’s home savings business is subject This results in interest rate-sensitive option risks for the to a specific business risk, called “collective risk.” This is Bausparkasse, which are allocated to market price risk on defined by BHW Bausparkasse as the negative impact of an actuarial basis, but are currently still reported as part of (non interest-related) deviations in the actual behavior of the collective risk. Postbank plans to report these interest- home savings customers from their forecast behavior. linked option risks under market price risk in the future.

The general terms and conditions of home loan and savings The validity of the model has been confirmed by an auditing contracts provide customers with diverse options for the firm and accepted by the German Federal Financial Super- savings and loan phase. The collective trend is based on visory Authority (BaFin). BHW Bausparkasse also performs estimates of future behavioral patterns of home savings an additional deviation analysis to verify the results of the customers, derived from years of experience and detailed simulation. The model’s validity is regularly reviewed through structural analyses. Factors influencing customer behavior backtesting and continually enhanced. range from changes in the legal framework through general economic developments, to changes in the home savings The principle of collective home savings requires continuous customers’ personal situations. new inflows of funds on the basis of a home savings plan approved by the BaFin, in which the interest rate terms The negative impacts of collective risk due to (non interest- are largely fixed. Plan adjustments require approximately related) deviations in the home savings customers’ behavior six months to one year of preparation; there is only limited from the forecasts are quantified using a collective simula- market elasticity. Modeling a home savings collective using tion model. risk measurement concepts therefore not only requires the simulation of a collective portfolio, but also the inclusion of Organization and risk strategy future new home savings business. The Management Board is responsible for the strategic management of collective risk. The handling of collective risk is a component of the overarching Group risk strategy.

BHW Bausparkasse uses the collective simulation model to quantify risk. The model depicts new contracts and expected home savings customer behavior, such as savings habits,

107 The Postbank Group considers the specific business risks Monitoring and managing business risk arising from the home savings and loan business to be Definition significant and has therefore reserved a sufficiently large Business risk refers to unexpected declines in earnings that global risk buffer as part of its risk capital allocation. arise when expenses cannot be reduced in line with a decline in income (excess fixed costs) or when expenses increase Risk reporting unexpectedly. Such declines in earnings can be caused by The Postbank Group uses a variety of regular reporting both internal and external factors, such as unfavorable eco- instruments for collective risk: nomic changes or political decisions leading to a change in customer behavior. The following types of risk are covered ■ Monthly or, in some cases, quarterly reports providing an by business risk: overview of the development of the collective are prepared within BHW Bausparkasse on the basis of key indicators for ■ Model risk submission to the Management Board of the Bausparkasse. The risk from unexpected declines in volume or falling ■ The monthly Market Risk Committee report informs the margins, triggered by modeling customer products with MRC of specific business risks arising from the collective on unknown capital commitments and variable interest rate. a monthly basis. ■ Residual business risk ■ The collective risk currently estimated using a global risk Other unexpected earnings declines not covered by model buffer is reported to the Management Board in the quarterly risk. risk-bearing capacity report. ■ Strategic risk The risk that earnings targets will not be achieved because of the insufficient focus of the Group on the relevant business environment (which may have changed abruptly). Strategic risk may therefore result from an inadequate strategic decision-making process, from unforeseeable disconti- nuities on the market, or from the inadequate implementation of the chosen strategy. In the area of strategic risk, Postbank further distinguishes between internal risk, which arises from inadequate strategic procedures, and external risk, which is caused by unexpected market developments. ■ Reputational risk The risk that the Bank will lose its good reputation in the eyes of its business partners and customers due to inappro- priate actions on the part of individuals or groups.

Organization and risk strategy The Group Management Board is responsible for managing business risk as a component of the Group risk strategy. In the event of strategic risk, it has a duty to take appropriate measures to counteract undesirable developments as they occur. The approval of the Supervisory Board may also be required, depending on the scope of the strategic decision.

Risk Controlling calculates business risk on a quarterly basis at the least; the results are taken into account in the risk-bearing capacity report as a deductible item from risk capital. The risk capital requirements for model risk are measured monthly due to their potential volatility and are reported to the Group Management Board.

108 Group Management Report Fiscal Year 2006

Risk management and control ■ The Management Board is informed on the development Business risk is estimated by way of an earnings at risk of model risk in the monthly market risk report. model (EaR) with a confidence level established in the risk- ■ At Postbank, there are several forms of strategic risk report- bearing capacity concept and a one-year horizon. Business ing. For example, the Management Board receives regular risk calculation is based on historical variance analyses of reports on the results of the market and competition the periods. In contrast to VaR, which measures fluctuations analyses, quarterly reviews of business performance and in present value, the earnings at risk model is based on fluc- the monthly and quarterly Management Board information tuations in income from one period to another. In order system reports. Additionally, strategic risk and develop- to measure the effects caused by a fluctuation in income ments are presented and discussed in depth during the and expenses beyond the period in question, business risk planning process. is scaled using a sustainability factor. Internal Audit While model risk exists primarily for savings and checking The Internal Audit unit is a key element of the Postbank account products in Retail Banking, it also occurs in Corpo- Group’s business and process-independent monitoring rate Banking. Risks from modeling customer transactions system. In terms of the Bank’s organizational structure, it is with undetermined cash flows result in particular from the assigned to the Chairman of the Management Board and definition of theoretical scenarios for customer products reports independently to the Group Management Board. with unknown capital commitments and variable interest rates (primarily savings and checking accounts, overdrafts) As part of the Bank’s business monitoring system, Internal in order to manage interest rate risk. The cash flows for Audit audits all areas of Postbank at least once every three customer products bearing variable rates of interest are years in accordance with the MaRisk. Areas that are exposed modeled in the theoretical scenario in line with the com- to a particular risk are audited annually. Internal Audit’s monly used standard moving averages method. Assuming responsibilities also extend, in a scaled-down form, to the that a stable volume of customer deposits is available in the subsidiaries of the Postbank Group and the retail outlets long term, the mix of moving averages aims to model a acquired from Deutsche Post AG. Its activities in the subsidi- portfolio of money and capital market transactions such that aries range from control and advisory functions to full-scale the interest rate of this portfolio moves in parallel as far Internal Audit procedures. as possible with the interest rate of the variable customer product. Over time, volume and margin fluctuations can Audit planning and the determination of audit cycles employ occur as a result of changes in the interest rate adjustment appropriate tools based on a standardized procedure that policy – or as a result of a lack of opportunities for such has already been in operation for several years. A value at adjustments – which could endanger the ability to generate risk is calculated for each audit area, and this is used to stable net interest income in the long term. determine the audit cycle. Risk assessments are performed on the basis of audits carried out and current developments The remaining business risks are not separately quantified in in the relevant business division. This process produces a the risk-bearing capacity concept, but rather backed by risk multi-year audit plan and the annual program for the follow- capital in the aggregate. Market and competition analyses ing fiscal year, which Internal Audit is commissioned to are continually prepared in order to identify potential risks implement by the Management Board. and to develop appropriate countermeasures as part of an early warning system. Regularity audits and system examinations are conducted regularly as part of the annual program. Internal Audit also Risk reporting carries out special examinations under particular circum- The Postbank Group uses a variety of regular reporting stances, and performs audit and consulting activities for the instruments for business risk: introduction and implementation of important projects. Audit concepts are continuously adapted to reflect current ■ The Management Board is informed of the size of the changes in the Group and in the legal situation. business risk in the risk-bearing capacity report on a quarterly basis.

109 Presentation of risk position business divisions sufficient scope to achieve business Efficient risk control remains important against the back- growth in line with our strategy. No risks that could impair ground of volatile capital markets, low interest rates and the Postbank Group’s development or even jeopardize its continued intense competition in the markets for deposits continued existence have been identified among the above- and loans, as well as the resulting pressure on interest mentioned risk types. margins. An additional factor is the insolvency trend in the economy as a whole. In fiscal year 2006, the Postbank Group An allegation made by the Monopoly Commission is the significantly enhanced the structures, instruments, and pro- subject of a request for information submitted to the German cesses for risk management and controlling for the relevant federal government by the European Commission in response risk categories, and has at its disposal a modern set of to a complaint from a third party. The allegation is that instruments for managing the bank as a whole. The newly Deutsche Post AG is in violation of the prohibition on state acquired units of BHW Holding AG and the retail outlets aid contained in the EU Treaty because it allows Deutsche acquired from Deutsche Post AG at the beginning of the Postbank AG to use the retail outlets in return for compen- fiscal year were rapidly integrated into the overall bank sation that is not calculated on an arm’s length basis. management system. As a result, the Postbank Group is in Deutsche Post AG and Deutsche Postbank AG are of the a position to meet the challenges it faces in the market, and opinion that this allegation is unfounded, and that the fee to manage and limit all categories of risk across all business paid by Deutsche Postbank AG complies with the require- divisions in a way that minimizes risk while maximizing ments of EU law on competition and state aid. earnings. The methods and procedures employed meet the current statutory and regulatory requirements. The European Commission also asked the Federal Republic of Germany to comment on the sale of its entire interest in With respect to credit risk, we maintained the low risk profile Deutsche Postbank AG to Deutsche Post AG as of January 1, of our credit business during 2006, as well as the advantage 1999. However, the Commission has already investigated of having relatively low risk costs. Among other things, the acquisition of Postbank as part of the state aid legal the increasing credit risks in the retail segment in Germany proceedings concluded by the decision of June 19, 2002. were countered by a restrictive scoring-based lending policy At the time, it expressly concluded that the acquisition of as well as by more efficient and faster workout processes Postbank was achieved “without any state aid whatsoever”. for loans in default. The federal government has informed the European The absolute increase in risk costs is mainly the result of the Commission that it believes the allegations are unfounded. planned expansion of the private customer business over Nevertheless, for both of the allegations connected with the recent years. In fiscal year 2006, the Postbank Group dis- request for information, the possibility cannot be excluded closed the discount effects for the measurement of future cash that the European Commission will come to the conclusion flows from non-performing loans in the allowance for losses that state aid was provided. on loans and advances separately from the reversal of discount effects over time (unwinding) in interest income On January 21, 2004, the European Commission issued a for the first time. This recognition of discount effects and state aid ruling on the assumption by the Belgian govern- unwinding in separate income statement items results in a ment of pension entitlements of employees of the Belgian slightly higher year-on-year increase in additions to the telecommunications company Belgacom. According to iso- allowance for losses on loans and advances compared with lated press reports, the European Commission is planning to the lending volume; however, this increase is offset by the examine whether it can apply the state aid principles of this unwinding effects reported in interest income. The Postbank ruling to Deutsche Post AG should the European courts Group will continue to pursue its risk-sensitive business uphold Deutsche Post AG’s action against the European policy in the future. Commission's state aid ruling dated June 19, 2002. These press reports claim that this could result in a significant With regard to the allocation of risk capital, the Postbank financial burden for Deutsche Post AG. A similar situation Group has been, and continues to be able to allow the could exist for Deutsche Postbank AG.

110 Group Management Report Fiscal Year 2006

However, the European Commission has not confirmed these reports. In addition, it is our opinion that the facts of the case governing the ruling of January 21, 2004 differ from the statutory regulation of Deutsche Post AG’s and Deutsche Postbank AG’s pension obligations. We believe that the arrangements for financing pension obligations do not constitute state aid by the Federal Republic of Germany, based on the European Commission’s previous decisions. It should also be noted with regard to this case that the European Commission has already examined in detail the contributions made by the federal government to finance pensions as part of the state aid proceedings that have already been concluded, and did not find evidence of any illegal state aid in its decision regarding Deutsche Post AG of June 19, 2002. In this respect, Deutsche Post AG and Deutsche Postbank AG therefore claim protection under the principle of legitimate expectations. However, the possibility cannot be fully excluded that the European Commission will come to the conclusion that state aid was provided.

111 Report on Expected Developments competitiveness of German companies, exports are likely to continue to drive growth as in contrast to the euro zone as a Global economy whole. Investments are expected to rise briskly once again; the The conditions for continued strong global economic growth pull-forward effects of the corporate tax reform that provides in 2007 are favorable, particularly as the upswing continues for the discontinuation of the declining-balance method of to have a very broad regional base. Although economic depreciation should be a positive factor in this context. momentum slowed somewhat in the winter half-year of Investments in residential construction are anticipated to con- 2006/2007, starting in the United States, the upturn is anti- tinue their positive course at a moderate pace in 2007, cipated to pick up speed again during 2007. On the whole, although they will be impacted by the VAT increase. global economic output in 2007 is expected to grow at only slightly less than the rate recorded in the year under review, Consumer spending is expected to contribute positively to according to a forecast by the International Monetary Fund growth. Although the VAT increase will initially have an ad- (IMF). Risks that could affect global economic performance verse effect, the notable improvement in the labor market and could arise from unexpectedly sharp exchange rate changes the resulting increases in income should more than offset the or from a longer-lasting economic downturn in the United dampening tax effects. We expect GDP to continue to grow States. substantially at around 2%. The Council of Experts and a number of German economic research institutes come to similar The phase of economic weakness in the United States is conclusions. mainly the result of a significant drop in investments in residential construction and should soon be over. In contrast, Markets consumer spending, corporate investment and exports con- In our estimation, the US Federal Reserve has ended its tinue to see solid growth ahead. For this reason, the economy cycle of interest rate increases. We are in accord with the is expected to pick up speed again in 2007. Nevertheless, market in not anticipating any significant change in the US GDP growth could be considerably less than in the year key interest rate in the USA in the course of 2007. The under review, at 2.5%. US dollar should show some revaluation over the euro in that the US economy may regain some of its strength as The upswing in the euro zone will continue in 2007, with 2007 progresses. domestic demand as the main growth driver. Investment activity should continue to increase sharply, although not as In the euro zone, the robust upswing and continued inflation much as in 2006. Consumer spending in Germany is antici- risks make another increase in key rates to 4.00% by mid- pated to decline somewhat in the short term at the begin- 2007 likely. This leads us to expect that capital market inter- ning of the year due to the VAT hike. During the year as a est rates in the euro zone will rise moderately during 2007 whole, however, the further decline in the unemployment from their extremely low level at present. Structural factors, numbers points to solid growth in consumer spending. Due such as ample global liquidity and the strong demand by to the slowdown in global economic growth in the mean- Asian central banks for US and European government bonds time and the follow-on effects of the latest rise in the euro, will continue to counteract a sharper increase in yields. This exports will increase more slowly in the euro zone than in means that the yield curve will probably remain relatively 2006. For this reason, exports are not expected to provide flat in the euro zone in 2007. any further positive impetus for growth. GDP growth in the euro zone should amount to around 2% and will therefore be less pronounced than the strong level recorded in 2006.

Macroeconomic environment in Germany At the beginning of 2007, the German economy is expected to be impacted slightly as a result of the increase in VAT. However, we do not believe that this will put the brakes on GDP growth for the long term. Due to the strong international

112 Group Management Report Fiscal Year 2006

Sector situation The risk situation should continue to be advantageous due Following the significant improvement in the earnings and to the good economic outlook. We expect the increase in risk situations of all bank groups in recent years, it will the allowance for losses on loans and advances to be below probably become more difficult for these institutions as a growth in lending. whole to maintain their fast pace of growth in 2007. In the deposit business, we will continue to focus on stabiliz- In 2007, the lending business is expected to revive, although ing volume taking into account earnings contributions. We individual market segments should perform very differently. will be able to pass on the improved market conditions to Substantial growth is again expected in corporate lending, our savings customers successively in the form of products because the need for debt financing will remain high as the offering attractive interest rates. investment cycle advances and the importance of expansion increases. Only slight growth is anticipated for the consumer Despite the positive effect of the interest rate increase in lending business since the VAT increase will at least tempo- the short and medium maturity segments, the yield curve – rarily dampen consumers’ inclination to spend. The mortga- which is forecast to be relatively flat – will only provide a ge lending business will also see relatively moderate growth limited additional support to net interest income, and may in new business, with pressure on margins remaining high. actually even have a negative impact on some areas, such The temporary drivers behind residential construction invest- as the treasury business. However, we expect net interest ments – the abolition of the home owners’ allowance and income to remain a growth driver for balance sheet-related the increase in VAT – will come to an end. revenues. As in 2006, the continuous expansion of our customer loan business and the reduction of expensive The quality of the loan portfolios held by German banks refinancing instruments will form a good basis for this. should continue to improve in 2007. However, the decline in the number of corporate insolvencies is anticipated to Overall, we are forecasting a small year-on-year increase in slow somewhat. Consumer insolvencies are due to increase net fee and commission income – excluding the contribu- further because of the large backlog of cases. Nonetheless, tions from the integration of HypoVereinsbank’s transaction this increase is expected to be substantially lower than banking activities. This is because the structural decrease in in 2006. fee and commission income from non-banking business in our branches and from Transaction Banking will continue to Postbank: Goals for 2007 dilute growth in the traditional banking business. However, Postbank expects the positive development it recorded in the positive development of the year under review in the 2006 to continue in fiscal year 2007, both in terms of latter area – our core business – is likely to continue: for customer business and its earnings situation. We aim to example, we aim to lift the volume of securities accounts by gain more than 1 million new customers for the first time at least 10%. Our expanded sales platform will enable us in 2007. to offer customers more extensive advice in the securities business, for instance. We have thus created the precondi- However, the tailing off of the pull-forward effects mention- tions to increase product use by our customers in the area ed above and the dampening impact of the VAT increase of funds and retirement provision in particular. should lead to a slowdown in demand for loans in the retail customer business. This will be offset by Postbank’s greater We expect a moderate rise in administrative expenses in sales strength, which we expect to gradually build up as the 2007, although this will be due for the most part to extraor- intensity of our integration work declines. Overall, we are dinary factors. These will include the remaining integration forecasting a similarly strong increase in our lending volume work for BHW and the new branches, the integration of the as in 2006, although we expect competition in private mort- Transaction Banking units acquired from HypoVereinsbank, gage lending in particular to remain fierce, and therefore the expenses from the VAT increase, and the planned invest- margins to remain under pressure in this area. ments to achieve additional synergies as of 2008 with which we aim to offset the additional costs from the VAT hike.

113 Once these extraordinary factors have subsided, we aim to Financial Markets will continue to concentrate on managing reduce administrative expenses in 2008 to a maximum of interest rate risk for the entire Postbank Group. In 2006, we the pro forma level recorded in 2005. laid the foundations for further increasing efficiency in 2007.

The development of our profit before tax in 2007 will be Investment focuses for 2007 affected by the above-mentioned extraordinary expenses. As planned, additional capital expenditure will be required In addition, the sale of our interests in the Czech Modrá in 2007 to integrate the operations of the acquisitions we Pyramida home loan and savings bank and of BHW’s rein- made in the year under review. This will focus on expanding surance subsidiary, BHW Rückversicherung, will dilute the the IT systems that support our advisory and sales activities, comparison with fiscal year 2006. On an adjusted basis, including the CRM (customer relationship management) however, we are aiming for another substantial improvement system. We are continually improving the technical platform in our profit before tax. in this way, and hence to support our sales organization in leveraging the desired synergies. Goals for the segments In the segments, our Retail Banking business division will In 2007, we will continue to strengthen insourcing in the concentrate on successfully completing the integration of Transaction Banking segment through investment activities. BHW and the acquired retail outlets in 2007. We will focus Firstly, we will drive forward development of our Payment more strongly again on customer business and intensify Solution platform and begin to implement relevant payment customer penetration using our newly acquired sales transaction functions with a view to meeting the standards strength, in order to leverage synergy potential. We also of the Single European Payments Area. Secondly, we will aim to gain 1 million new customers in the current fiscal integrate processing of Bayerische Hypo- und Vereinsbank year and to stabilize savings and checking account depo- AG’s payment transactions with the BCB Group. sits at a high level. In private mortgage lending, our goal is to increase our portfolio by 10% to around ¤68 billion, Additional investment activities will relate to the further excluding additional portfolio acquisitions. We plan to lift expansion of our loan factory, which will be extended to the volume of securities accounts by at least 10%. In the include the collective home savings business, as well as to consumer loan business, we aim to again exceed the high the continued implementation of the regulatory requirements level of new business from the previous year by at least under Basel II. 10% despite the VAT increase. Staff strength will increase by just under 600 at the begin- The Corporate Banking segment is aiming for a single-digit ning of 2007. This can be largely attributed to the additional percentage increase in income. We want to continue to employees from PAS AG (payment transactions subsidiary selectively grow our commercial real estate finance opera- of HypoVereinsbank AG). As in past years, we will manage tions on the international markets in particular: in the our cost basis efficiently and further utilize the potential German business, we will further expand the investment inherent in the integration. That is why, overall, we are credit product and the brokerage of development loans, assuming a moderate reduction in staff for the following which were both launched in 2006, and increasingly offer years. We will also invest further in the quality of our staff our customers risk management products. and provide them with qualifications that are on-target.

Our activities in the Transaction Banking segment will focus Medium-term financial goals confirmed on integrating the units acquired from HypoVereinsbank as Our medium-term financial goals remain unchanged: in of January 1, 2007 (see page 40), as well as on the prepara- 2008, Postbank plans to achieve a return on equity before tions for the introduction of the Single European Payments taxes of more than 20% and a cost/income ratio in the Area. Supporting these projects will also be the main task traditional banking business of less than 63%. We also of our IT/Operations division, together with the technical aim to improve our Tier 1 ratio to 7.5% in 2009. integration of additional portfolios to ensure that Postbank complies with the next level of Basel II.

114 Group Management Report Fiscal Year 2006

We are holding to our goal of generating revenue synergies of ¤100 million and cost synergies of ¤42 million by 2009 from the acquisition of BHW.

In addition, the corporate tax reform in Germany schedul- ed for January 1, 2008 should have a substantial positive effect on Postbank. The high proportion of our income generated in Germany should lead to a significant reduction in our expected tax rate, from around 35% to approx. 30%. This would increase our net profit by around 8% per year from 2008 compared with previous assumptions. In 2007, we also expect one-time tax income of at least ¤100 million from the remeasurement of deferred tax assets and liabilities following the approval of the changes in tax law by the Bundesrat (the upper house of the German Parliament).

We believe that our business model, which is geared to offering needs-driven and largely standardized products on the basis of a highly efficient processing platform, puts us in a good position for the long term. We will therefore be able to continue growing with only minor cost increases, so that our improvements in income will have almost their full impact on profit. We will continue to focus our core activities on the German market. The successful integration of BHW and the 850 acquired branches, as well as the sales strength we have gained from this, provide us with excellent means to achieve organic growth. We have thus created all the preconditions to even better exploit the enormous potential offered by our 14.6 million customers in future.

115 Consolidated Financial Statements in accordance with International Financial Reporting Standards for the period ended December 31, 2006

Consolidated Income Statement 117 Consolidated Balance Sheet 118 Statement of Changes in Equity 119 Consolidated Cash Flow Statement 120 Notes 124 Segment Reporting (Note 40) 170 Auditors’ Report 205

116 Consolidated Financial Statements Fiscal Year 2006

Consolidated Income Statement for the period January 1 to December 31, 2006

Note 2006 2005 2005 pro forma1 ¤m ¤m ¤m

Interest income (7) 7,669 5,350 7,045 Interest expense (7) –5,496 –3,675 –5,097 Net interest income (7) 2,173 1,675 1,948 Allowance for losses on loans and advances (8) –337 –205 –286 Net interest income after allowance for losses on loans and advances 1,836 1,470 1,662 Fee and commission income (9) 1,623 801 1,560 Fee and commission expense (9) –216 –102 –181 Net fee and commission income (9) 1,407 699 1,379 Net trading income (10) 245 205 231 Net income from investment securities (11) 292 252 270 Administrative expenses (12) –2,812 –1,886 –2,870 Other income (13) 205 252 361 Other expenses (14) –232 –273 –318 Profit before tax 941 719 715 Income tax (15) –245 –226 –225 Profit from ordinary activities after tax 696 493 490 Minority interest –1 –1 –1 Net profit for the period 695 492 489

Earnings per share Earnings per share are calculated by dividing the net profit for the period by the weighted average number of shares outstanding during the fiscal year. The average number of shares outstanding in fiscal year 2006 was 164,000,000 (previous year: 164,000,000).

2006 2005 2005 pro forma1

Basic earnings per share (¤) 4.24 3.00 2.98 Diluted earnings per share (¤) 4.24 3.00 2.98

The diluted earnings per share are the same as the basic earnings per share because, as in the previous year, no conversion or option rights are outstanding, and hence there is no dilutive effect.

The Management Board will propose to the Annual General Meeting that a dividend of ¤1.25 per share be paid.

1 See note 2; the pro forma disclosures are unaudited

117 Consolidated Balance Sheet as of December 31, 2006

Assets Note Dec. 31, 2006 Dec. 31, 2005 Dec. 31, 2005 pro forma2 ¤m ¤m ¤m

Cash reserve (16) 1,015 968 1,184 Loans and advances to other banks (17) 16,350 17,801 21,306 Loans and advances to customers (18) 87,182 52,873 80,488 Allowance for losses on loans and advances (20) –1,155 –776 –1,043 Trading assets (21) 13,280 10,386 10,513 Hedging derivatives (22) 485 639 639 Investment securities (23) 63,299 55,423 61,748 Intangible assets (24) 2,505 223 1,871 Property and equipment (25) 1,015 825 1,130 Income tax assets (26) 244 434 818 Other assets (27) 667 1,484 1,644 Total assets 184,887 140,280 180,298

Equity and Liabilities Note Dec. 31, 2006 Dec. 31, 20051 Dec. 31, 2005 pro forma2 ¤m ¤m ¤m

Deposits from other banks (28) 47,319 30,778 40,582 Due to customers (29) 101,316 78,481 98,958 Securitized liabilities (30) 15,886 14,738 20,242 Trading liabilities (31) 3,618 3,345 4,103 Hedging derivatives (32) 958 1,668 1,668 Provisions (33) 3,691 969 3,064 a) Provisions for pensions and other employee benefits (34) 1,115 585 960 b) Other provisions (35) 2,576 384 2,104 Income tax liabilities (36) 1,058 1,030 1,413 Other liabilities (37) 786 427 784 Subordinated debt (38) 5,048 3,783 4,423 Equity (39) 5,207 5,0615,061 a) Issued capital 410 410 410 b) Share premium 1,160 1,160 1,160 c) Retained earnings 2,940 2,998 2,998 d) Consolidated net profit 695 492 492 Minority interest 2 1 1

Total equity and liabilities 184,887 140,280 180,298

1 Prior-period figures restated (see note 5); 2 see note 2

118 Consolidated Financial Statements Fiscal Year 2006

Statement of Changes in Equity

Issued Share Retained Currency Revaluation Consoli- EquityMinor- Total capital premium earnings translation reserve dated net before ity reserve profit minority interest interest ¤m ¤m ¤m ¤m ¤m ¤m ¤m ¤m ¤m

IAS restatement –125 –125 –125 Balance at January 1, 2005 410 1,159 2,534 –120 222 435 4,640 1 4,641 Dividend payment –205 –205 –205 Appropriation to retained earnings 230 –230 0 0 Currency translation differences 43 43 43 Changes in unrealized gains and losses, net of deferred taxes 89 89 89 Consolidated net profit January 1 – December 31, 2005 492 492 1 493 Treasury shares 1 1 1 Other changes 0 –1 –1 Balance at December 31, 2005 410 1,160 2,764 –77 311 492 5,060 1 5,061 For info.: Total of items in 2005 that change equity in accordance with IAS 1.96c – 43 89 492 624 1 625 Dividend payment –205 –205 –205 Appropriation to retained earnings 287 –287 00 Currency translation differences –40 –40 –40 Changes in unrealized gains and losses net of deferred taxes –305 –305 –305 Consolidated net profit January 1 – December 31, 2006 695 695 1 696 Treasury shares – – Other changes ––

Balance at December 31, 2006 410 1,160 3,051 –117 6 695 5,205 2 5,207 For info.: Total of items in 2006 that change equity in accordance with IAS 1.96c –40 –305 695 350 1 351

Changes in unrealized gains and losses, net of deferred taxes, includes measurement and disposal gains and losses on available-for-sale financial instruments. A more detailed disclosure of changes in the revaluation reserve may be found in note 39. Postbank did not hold any treasury shares as of December 31, 2006.

119 Consolidated Cash Flow Statement

2006 2005 ¤m ¤m

Net profit for the period 695 492 Non-cash items in net profit for the period and reconciliation to cash flow from operating activities Depreciation and write-downs of property and equipment, write-downs of investment securities, loans and advances, and reversals of impairment losses on these items 318 314 Changes in provisions 254 7 Changes in other non-cash items –89 –141 Gains on disposal of property and equipment and investment securities –269 –263 Other adjustments (net) –2,103 –1,544 Subtotal –1,194 –1,135 Changes in working capital after adjustment for non-cash components Loans and advances to other banks 7,605 5,710 Loans and advances to customers –6,997 –5,202 Trading assets –2,354 –669 Hedging derivatives with positive fair values 618 176 Other operating assets 1,734 –927 Deposits from other banks 6,649 14,397 Due to customers 2,400 –2,063 Securitized liabilities –3,834 –1,598 Trading liabilities –409 642 Hedging derivatives with negative fair values –857 –586 Other liabilities –5 –90 Other payments from operating activities 138 – Interest received 7,058 5,109 Interest paid –5,169 –3,496 Other income 163 132 Dividends received 79 58 Income taxes paid –85 –106 Net cash from operating activities 5,540 10,352

120 Consolidated Financial Statements Fiscal Year 2006

2006 2005 ¤m ¤m

Proceeds from the disposal of Investment securities 18,862 6,069 Investments in subsidiaries 131 18 Property and equipment 54 83 Intangible assets 3 3 Payments to acquire Investment securities –22,490 –17,250 Investments in subsidiaries –1,753 –29 Property and equipment –58 –65 Intangible assets –101 –66 Net cash used in investing activities –5,352 –11,237 Dividends paid –205 –205 Net change in cash and cash equivalents from other financing activities –220 943 Net cash used in/from financing activities –425 738 Cash and cash equivalents at start of period 968 1,125 Addition to basis of consolidation 217 – Net cash from operating activities 5,540 10,352 Net cash used in investing activities –5,352 –11,237 Net cash used in/from financing activities –425 738 Effects of exchange rate differences 67 –10 Cash and cash equivalents at end of period 1,015 968

Pro forma figures were used for the addition of the BHW subgroup and Postbank Filialvertrieb AG in the calculations of the consolidated cash flow statement.

Cash and cash equivalents include cash, balances with central banks, public-sector debt instruments and bills eligible for rediscounting with the central bank.

121 Table of contents Notes

Basis of preparation 124

(1) Basis of accounting 124 (2) Basis of consolidation 124 (3) Consolidation methods 128 (4) Accounting policies 128 (a) Loans and advances 128 (b) Leases 128 (c) Allowances and provisions for losses on loans and advances, write-downs and impairment 129 (d) Trading assets 129 (e) Securities lending and repurchase agreements 129 (f) Hedging derivatives 130 (g) Investment securities 130 (h) Intangible assets 131 (i) Property and equipment 131 (j) Other assets 132 (k) Liabilities 132 (l) Trading liabilities 132 (m) Provisions 132 (n) Currency translation 134 (o) Income tax 134 (5) New developments in international accounting under IFRSs and the restatement of prior-period figures 134 (6) Significant events after the balance sheet date 135

Income statement disclosures 135

(7) Net interest income 135 (8) Allowance for losses on loans and advances 136 (9) Net fee and commission income 136 (10) Net trading income 137 (11) Net income from investment securities 138 (12) Administrative expenses 139 (13) Other income 140 (14) Other expenses 140 (15) Income tax 141

122 Consolidated Financial Statements Fiscal Year 2006

Balance sheet disclosures 142

(16) Cash reserve 142 (17) Loans and advances to other banks 142 (18) Loans and advances to customers 143 (19) Total credit extended 144 (20) Allowance for losses on loans and advances 145 (21) Trading assets 146 (22) Hedging derivatives 147 (23) Investment securities 148 (24) Intangible assets 150 (25) Property and equipment 153 (26) Income tax assets 157 (27) Other assets 158 (28) Deposits from other banks 158 (29) Due to customers 159 (30) Securitized liabilities 159 (31) Trading liabilities 160 (32) Hedging derivatives 160 (33) Provisions 161 (34) Provisions for pensions and other employee benefits 162 (35) Other provisions 165 (36) Income tax liabilities 165 (37) Other liabilities 166 (38) Subordinated debt 167 (39) Equity 168

Other disclosures 170

(40) Segment reporting 170 (41) Contingencies and other obligations 172 (42) Fair value of financial instruments carried at amortized cost or hedge fair value 172 (43) Financial instruments in accordance with IAS 39 – Measurement categories 173 (44) Derivatives 174 (45) Bonds outstanding 178 (46) Cover for bonds outstanding 179 (47) Foreclosures and compulsory administration 180 (48) Foreign currency volume 180 (49) Disclosures on significant concentration of business 180 (50) Risk assets and capital ratio 181 (51) Maturity structure 182 (52) Subordinated assets 184 (53) Other financial obligations 184 (54) Trust activities 185 (55) Employees 186 (56) Related party disclosures 186 (57) Other disclosures 195 (58) Members of executive bodies 195 (59) Auditors’ fee in accordance with section 314 (1) no. 9 of the HGB 204 (60) Declaration of Compliance with the German Corporate Governance Code 204

123 The management of interest rate and counterparty risks is described in the Risk Report as part of the Group Manage- Notes ment Report.

The IFRSs do not require a specific format for the presentation of the income statement and the balance sheet. In accord- Basis of preparation ance with customary international practice, the income statement and the balance sheet are presented in a summary (1) Basis of accounting format complying with IAS 1 and 30, and supplemented by As a listed company, Postbank AG has prepared its consoli- additional disclosures in the notes. dated financial statements for the year ended December 31, 2006 in accordance with the International Financial Report- (2) Basis of consolidation ing Standards (IFRSs) as adopted by the EU and the additional In addition to the parent Deutsche Postbank AG, Bonn, requirements of German commercial law under section 40 (December 31, 2005: 34) subsidiaries and 2 (December 315a(1) of the HGB (German Commercial Code). 31, 2005: 2) joint ventures, all of which are presented in the “Consolidated companies” overview (note 56), are Annex A.1 to these consolidated financial statements pro- included in the consolidated financial statements as of vides an overview of the financial reporting standards applied December 31, 2006. (as of December 31, 2006). Following the acquisition of BHW Holding AG as of January 2, Accounting and measurement are based on the going concern 2006, the BHW subgroup was included for the first time in principle. Income and expenses are accrued. They are recog- the basis of consolidation with the following companies: nized and recorded in the period to which they relate. BHW Holding AG, Berlin/Hamelin The consolidated financial statements comprise the income statement, the balance sheet, the statement of changes in BHW Bausparkasse AG, Hamelin equity, the cash flow statement and the notes. BHW Bank AG, Hamelin Unless otherwise indicated, all amounts are shown in millions of euros (¤m). BHW Lebensversicherung AG, Hamelin

All assumptions, estimates and assessments required for BHW Gesellschaft für Wohnungswirtschaft mbH, Hamelin recognition and measurement in accordance with the IFRSs are in conformity with the respective Standards, are regul- BHW Gesellschaft für Wohnungswirtschaft mbH & Co. arly reassessed and based on past experience as well as Immobilienverwaltungs KG, Hamelin other factors, including expectations as to future events that appear reasonable under the given circumstances. The BHW Gesellschaft für Vorsorge mbH, Hamelin assumptions and estimates refer primarily to the purchase price allocation and measurement of goodwill in connection BHW Immobilien GmbH, Hamelin with the acquisition of the shares in BHW Holding AG and Deutsche Post Retail GmbH, the recognition and measure- MPSS Modrá Pyramida Vseobecna stavebni sporitelna ment of provisions, the ability to realize future tax benefits Komercni banky, a.s., Prague and the fair value estimate of certain financial instruments for disclosures in the Notes. Where significant estimates On entry into the commercial register on July 17, 2006, were required, the assumptions made are explained in detail the sales division of BHW Bausparkasse AG was hived off in the following notes to the corresponding item. In individ- to the newly formed Postbank Finanzberatung AG and ual cases, the actual values may differ from the assumptions Postbank Vermögensberatung AG merged into Postbank and estimates made. Finanzberatung AG. The Postbank Group’s mobile sales

124 Consolidated Financial Statements Fiscal Year 2006

forces are bundled at Postbank Finanzberatung AG. In accordance with Interpretation SIC-12 issued by the On entry of the squeeze out into the commercial register in International Financial Reporting Interpretations Committee October 2006, BHW Holding AG became the sole share- (IFRIC), which requires the consolidation of special purpose holder of BHW Bank AG. entities under certain circumstances, a total of 30 (December 31, 2005: 24) special funds were included as special purpose Effective January 1, 2006, Postbank acquired all equity entities in the consolidated financial statements. interests in Deutsche Post Retail GmbH, which was renamed “Postbank Filialvertrieb AG.” The new name took effect on Due to the significant change in the basis of consolidation, entry into the commercial register on July 26, 2006. the prior-period balance sheet, income statement and segment reporting figures were supplemented voluntarily by On entry into the commercial register on September 5, pro forma disclosures to enhance comparability. These con- 2006, Betriebs-Center für Banken Berlin GmbH and Betriebs- tain the companies of the BHW group, Deutsche Post Retail Center für Banken Frankfurt am Main GmbH were merged GmbH, simplified pro forma consolidation and pro forma into BCB Deutschland GmbH & Co. KG retroactively as from purchase price refinancing, in addition to the previous January 1, 2006. Postbank Group. The pro forma quarterly income statement disclosures contain ratable values for fiscal year 2005. With effect from October 10, 2006, BHW Holding AG sold The pro forma disclosures are not covered by the Auditors’ its 50 % interest in MPSS Modrá Pyramida Vseobecna sta- Report. vebni sporitelna Komercni banky, a.s., Prague. At the time of sale, the company’s pre-tax profit amounted to ¤5.8 Purchased companies million; its profit from ordinary activities after tax amounted (a) BHW Holding AG to ¤5.2 million. On completion of the purchase agreement entered into on October 25, 2005 with BHW Holding AG’s former main On November 1, 2006 BHW Birla Home Finance Limited, shareholders, BGAG Beteiligungsgesellschaft der Gewerk- New Delhi, India, was included in the consolidated financial schaften AG, BGAG Beteiligungsverwaltungsgesellschaft statements for the first time as of January 1, 2006. In July mbH, NH-Beteiligungsverwaltungsgesellschaft mbH and 2006, the company’s name was changed from “BHW Birla Deutscher Beamtenwirtschaftsbund (BWB) GmbH, Deutsche Home Finance Ltd.” to “BHW Home Finance Ltd.” BHW Postbank AG acquired 137,581,212 BHW shares on Home Finance, India, has a 100% interest in BHW Financial January 2, 2006. This is equivalent – taking into account the Consultants Ltd., which is not included in the consolidated capital reduction by BHW Holding AG as of December 31, financial statements. 2005 by means of retiring treasury shares – to 82.9% of BHW Holding AG’s share capital and voting rights. This By notarized resolutions dated November 22, 2006 and acquisition brought Deutsche Postbank AG's investment in December 27, 2006, Deutsche Postbank Asset Management BHW Holding AG up to 91.04% of its share capital and S.A. and Deutsche Postbank Capital Management S.A., both voting rights and, in accordance with IAS 27, gives it control in Luxembourg, were liquidated. over BHW Holding AG.

As part of the transfer of business activities from the In accordance with section 35(2) of the Wertpapiererwerbs- Luxembourg branch to Deutsche Postbank International und Übernahmegesetz (WpÜG – German Securities S.A., a capital increase was implemented that was sub- Acquisition and Takeover Act), Deutsche Postbank AG made scribed by Postbank. In addition, there were changes in the a mandatory offer on January 26; the offer stood until shareholders of DPBI Immobilien KGaA, Luxembourg, in the February 23, 2006. The mandatory offer was for the acquisi- course of the transfer. Deutsche Postbank International S.A. tion of all no-par value shares of BHW Holding AG. Since acquired the limited partner shares held by Deutsche the date of the mandatory offer Postbank holds an interest Postbank AG effective May 2, 2006. This means that of 98.43 %. Deutsche Postbank International S.A. now has a 10.01 % interest in DPBI Immobilien KGaA.

125 The purchase price for the 98.43 % amounts to ¤1,734 (b) Deutsche Post Retail GmbH million plus transaction costs of ¤19 million. The allocation (renamed Postbank Filialvertrieb AG) of the purchase price to the identifiable assets, liabilities By purchasing Deutsche Post Retail GmbH, Deutsche and contingent liabilities at fair value uses purchase price Postbank AG took over 850 of Deutsche Post AG’s retail allocation in accordance with IFRS 3 (see table on next page). outlets with around 9,600 employees as of January 1, 2006. For the services previously provided for Postbank in the The offer to minority shareholders to acquire the remaining retail outlets, Postbank paid a variable remuneration shares in BHW Holding AG amounted to ¤39 million. This amounting to ¤513 million in 2005 and ¤496 million in was reported as a liability at the balance sheet date in 2004. Since then, remuneration has only been paid for accordance with IAS 37.11 b. Accordingly, minority interests services provided in the remaining retail outlets of Deutsche in BHW Holding AG are no longer reported. Post. Deutsche Post pays remuneration to the Postbank Group for the postal services in the retail outlets that have As a result of a restatement in the BHW subgroup’s consoli- been taken over. dated financial statements, the carrying values and fair value of net assets acquired have been adjusted by ¤77 mil- The purchase price for the retail outlets amounts to ¤986 lion in the following presentation. This led to a correspond- million plus transaction costs of ¤7 million. The allocation of ing increase in goodwill. the purchase price to the identifiable assets, liabilities and contingent liabilities at fair value uses purchase price allocation in accordance with IFRS 3 as follows:

126 Consolidated Financial Statements Fiscal Year 2006

1. Goodwill

a) b) BHW group Deutsche Post Retail GmbH Dec. 31, 2005 Dec. 31, 2005 ¤m ¤m

Purchase price (including transaction costs) 1,753 993 Purchase price 1,734 986 Costs directly attributable to purchase 19 7 ./. Net assets acquired (at fair value) 1,199 0.1 = Goodwill 554 993

2. Net assets acquired

a) b) BHW group Deutsche Post Retail GmbH Dec. 31, 2005 Dec. 31, 2005 ¤m ¤m Fair value Carrying Fair value amount = Carrying amount

Assets Cash reserve 99 99 118 Loans and advances to other banks 5,895 5,871 n.r. Loans and advances to customers 28,305 27,615 n.r. Allowances for losses on loans and advances –267 –267 n.r. Trading assets 127 127 n.r. Investment securities 6,325 6,325 n.r. Property and equipment 208 245 60 Income tax assets 384 384 3 Other assets 800 250 58 Total assets 41,876 40,649 239 Equity and Liabilities Deposits from other banks 9,924 9,804 n.r. Due to customers 20,648 20,477 n.r. Securitized liabilities 5,533 5,504 n.r. Trading liabilities 758 758 n.r. Provisions 2,296 2,009 86 Income tax liabilities 594 383 – Other liabilities 204 204 153 Subordinated debt 699 640 n.r. Total equity and liabilities (excluding equity) 40,656 39,779 239 Net assets 1,220 870 0.1 less minority interest 21 n.r. n.r. Net assets acquired 1,199 0.1

n.r. = not relevant

127 (3) Consolidation methods The fair value option was used for the first time for fiscal Complying with IAS 27.28, the consolidated financial state- year 2006. In accordance with this, financial assets or finan- ments of Postbank have been prepared in accordance with cial liabilities may be (voluntarily) designated at fair value uniform Group accounting and measurement policies. through profit or loss, provided this leads – among other things – to the elimination or significant reduction of incon- Acquisition accounting uses the purchase method in accord- sistencies in measurement or recognition (accounting mis- ance with IAS 27.22 in conjunction with IFRS 3. Recognition matches). Postbank applies the fair value option exclusively of the investments in affiliated companies at their carrying to specific loan portfolios that are hedged by interest rate amount at the parent is replaced by the fair values of the derivatives. They are presented in the balance sheet under assets and liabilities of the companies included. the “Loans and advances to customers” item. Similar to the accounting treatment of fair value hedges, the “Net interest Any goodwill arising from initial consolidation is no longer income” item in the income statement contains interest amortized over its useful life. Instead, it is tested for impair- income and expense and changes in fair value (“Net gains/ ment once a year and written down if required. losses on remeasurement of hedges and fair value option” under net interest income) for both the loan portfolio and Investments in the equity of subsidiaries not attributable to the interest rate derivatives. the parent are reported in consolidated equity as “minority interest”. The value of such minority interest is determined Loans and advances are recognized at the settlement date. on the basis of the carrying amounts of the assets and liabilities attributable to them. Impairments of loans and advances due to changes in credit risk are recognized separately in the allowance for losses on Joint ventures are proportionately consolidated in accord- loans and advances, and deducted from assets. ance with IAS 31.30. The carrying amount of collateralized loans that qualify for Intercompany receivables and liabilities, as well as income hedge accounting is adjusted for the gains and losses from and expenses from intercompany transactions, were elimi- changes in fair value attributable to the hedged risk. nated in accordance with IAS 27.24 f. Intercompany profits within the Group were eliminated in accordance with IAS Premiums, discounts and transaction costs are recognized in 27.25 f.. net interest income. Deferred interest on loans and advances, as well as premiums and discounts, are carried together In accordance with Interpretation SIC-12 issued by the under the relevant items of loans and advances. Premiums International Financial Reporting Interpretations Committee and discounts are deferred using the effective interest (IFRIC), special purpose entities must be consolidated under method. certain circumstances. At Postbank, this applies in particular to special funds. (b) Leases In accordance with IAS 17, leased assets are allocated to The consolidation principles are unchanged as against the and recognized at the lessor or the lessee on the basis of previous year. the risks and rewards incidental to ownership.

(4) Accounting policies Where Postbank is the lessor of a finance lease, it discloses (a) Loans and advances the receivable at its net investment value under loans and As a rule loans and advances to other banks and customers advances to other banks or loans and advances to cus- are reported at amortized cost (“loans and receivables” tomers. The lease installments due are recognized as interest category). These also include all money market lendings. income (interest component; recognized in income) and deducted from the receivables reported (principal redemption component; recognized in equity).

128 Consolidated Financial Statements Fiscal Year 2006

Where Postbank is the lessor of an operating lease, it carries In accordance with IAS 39.AG 84 ff., the recoverable the leased asset at amortized cost under property and equip- amount is determined using the following methods: ment. The lease installments received during the respective period are reported in other operating income; write-downs – discounted present value of estimated future cash flows on the leased asset are carried under administrative expenses. (interest and principal payments as well as incoming payment amounts from the liquidation of collaterals) from Where Postbank is the lessee of an operating lease, it the financial asset; reports the lease installments paid in full as rental expense – the market price, where there is an observable market under other expenses. price for the financial instrument, because marking-to- market reflects the greater counterparty risk. IFRIC 4 contains guidance and illustrative examples for determining whether a company's arrangements should be Uncollectable loans and advances are written off directly classified and accounted for as lease agreements under against income in the appropriate amount; recoveries on IAS 17. loans previously written off are recognized in income. The provisions of IFRIC 4 consider arrangements as lease agreements that were not originally classified as leases. Credit risk provisions are recognized for liabilities under The two requirements below must both be satisfied for ex- sureties, other guarantees and irrevocable loan commit- isting arrangements to be classified as lease agreements ments involving a default risk. (IFRIC 4.6): – Fulfillment of the arrangement must be dependent on the A potential need to recognize impairment losses is assumed use of a specific asset or assets; and if certain facts exist, such as default over a certain period, – The arrangement conveys a right to use the asset or the initiation of enforcement measures, imminent insolvency assets to the buyer. or overindebtedness, applying for or opening insolvency Postbank has not recognized any additional lease agree- proceedings, or the failure of restructuring measures. ments under IAS 17 based on IFRIC 4. (d) Trading assets (c) Allowances and provisions for losses on loans and Securities and derivatives with positive fair values acquired advances, write-downs and impairment for the purpose of generating a profit from short-term fluc- Identifiable credit risks are covered by recognizing specific tuations in market prices or dealing margins are carried valuation allowances (or collective valuation allowances). under this balance sheet item. It also contains the positive For risks that have arisen but not yet been identified by the fair values of banking book derivatives. These transactions unit concerned within the Group, portfolio-based valuation are recognized at the trade date. allowances are recognized for groups of financial assets with similar default risk profiles, the amounts of which are Trading assets are measured at their fair values. Remeasure- determined on the basis of historical loss experience. The ment gains and losses as well as gains or losses on the sale allowance for losses on loans and advances is deducted or disposal of trading assets are recognized in net trading from assets as a separate balance sheet item. It relates to income. If there are publicly quoted market prices on an active allowances for losses on loans and advances to other banks market as defined by IAS 39.AG 71 ff., these are generally and customers. used as the fair value; if this is not the case, fair value is determined using recognized valuation models. A financial asset is impaired if its estimated recoverable amount is lower than its carrying amount, i.e. if a loan is (e) Securities lending and repurchase agreements presumed to be (partly) uncollectable. If this is the case, Postbank enters into both securities lending and bona fide the loss on assets carried at amortized cost (IAS 39.63) must securities repurchase agreements. Securities sold under repo either be recognized through an indirect write-down (loan and sell-and-buy-back transactions (cash sales) are carried loss allowance) or by writing down the asset directly and as securities in the consolidated balance sheet. Cash inflows recognizing the loss in net profit or loss (IAS 39.63). from such transactions are carried in the balance sheet as deposits from other banks or amounts due to customers,

129 depending on the respective counterparty. As is the case hedge accounting may only be used for hedging relationships under the HGB, these cash inflows are disclosed in the that meet the requirements of IAS 39.88 ff. A hedging rela- amount of the purchase price received (net); prepaid ex- tionship ends when the hedged item or the hedging instru- penses are recognized ratably for the repo rate to be paid. ment expires, is sold or exercised, or if the hedge no longer Interest payments are carried under interest expense. meets the criteria for qualification for hedge accounting.

Reverse repo and buy-and-sell-back transactions (cash Derivatives entered into for the purposes of asset/liability purchases of securities) are carried as loans and advances to management and derivatives from ineffective hedging other banks or loans and advances to customers. The sec- relationships do not meet the conditions set out in IAS urities purchased are not carried in the balance sheet; inter- 39.88 ff., and thus are always recognized in income and est arising from such transactions is carried under interest disclosed at their fair value as banking book derivatives income. under trading assets/liabilities. These derivatives generally relate to interest rate swaps entered into to hedge net IFRSs only require an obligation to return the securities to positions of receivables and liabilities. Under IFRSs, be recognized by the borrower if the securities are passed measurement gains and interest income from these items on to another party. The lender continues to recognize the are recognized in net trading income. securities. The hedge accounting criteria must be satisfied at each (f) Hedging derivates balance sheet date and for each hedging relationship. The aim of asset/liability management at the Postbank Group is to manage the Bank’s overall exposure in a way A fair value hedge is a hedge of the exposure to changes in which minimizes risk while maximizing earnings, with a par- the fair value of assets and liabilities where these changes ticular focus on present value risk and balance sheet-related are based on market price risks. Effectiveness testing for all revenues under the IFRSs (the total of net interest income, fair value hedges is performed prospectively by way of a net trading income and net investment securities). sensitivity analysis of the hedged item and the hedging instrument, supplemented by homogeneity testing of the The hedging strategies employed in asset/liability manage- subportfolios. Actual changes in the fair values of the hedged ment aim to manage these factors in a constantly changing item and the hedging instrument are regularly compared market and portfolio environment; fair value hedges are retrospectively for each hedging relationship, supplemented employed in particular. by simulations in some cases.

For interest-bearing securities and noncurrent receivables, (g) Investment securities the instruments used in fair value hedges are primarily inter- Investment securities are composed of bonds not held for est rate swaps. For issues, cross-currency swaps and struc- trading and other fixed-income securities, equities and other tured swaps are also employed to convert fixed-income or non-fixed-income securities, investments in unconsolidated structured items into variable-rate exposures. Fair value subsidiaries and other equity investments. hedges are used to hedge both individual items and homogeneous subportfolios. Shares are managed using derivatives Investment securities are measured at cost at the time of with option features. initial recognition.

Hedging derivatives relate to those hedging instruments Available-for-sale investment securities are subsequently that meet the requirements for hedge accounting set out in measured at their fair values. Changes in the fair values of IAS 39. available-for-sale investment securities are recognized directly in the revaluation reserve in equity and are not As a rule, a derivative held for hedging purposes may be recognized in income until the gain or loss is realized. If allocated to a single hedged item or to several similar hedged hedge accounting is used for these investment securities, items. Such hedges are generally termed micro-hedges. gains and losses from changes in fair value attributable to IAS 39 restricts the use of hedge accounting. Under IFRSs, the hedged risk are recognized directly in income.

130 Consolidated Financial Statements Fiscal Year 2006

Held-to-maturity bonds and securities not listed on an active Purchased goodwill is not amortized. Instead, it is tested for market are carried at amortized cost. impairment to determine whether an impairment loss must be recognized (IFRS 3.54). Premiums and discounts are allocated directly to the financial instruments and accrued over the remaining maturity Purchased goodwill and intangible assets with indefinite while applying the effective interest method. useful lives are tested for possible impairment at the balance sheet date (impairment test in accordance with IFRS 3.55 A significant or prolonged decline in the fair value of an and IAS 36). This test is performed to ascertain whether the investment in an equity instrument below its cost is an carrying amount exceeds the recoverable amount. Recover- objective evidence of impairment. The entity assesses at able amounts are calculated based on the value in use of each balance sheet date whether there is objective evi- the Retail Banking segment (cash-generating unit), to which dence to impair assets. the purchased goodwill is allocated, and of the intangible assets. Value in use is calculated based on appropriate pro- If hedge accounting is used for these investment securities, jections (management approach). their carrying amount is adjusted for the gains and losses from changes in fair value attributable to the hedged risk. (i) Property and equipment Property and equipment is carried at cost and reduced by Investments in unconsolidated subsidiaries and other equity depreciation over the standard useful life of the asset. investments are generally carried at cost as their fair value Determination of the useful life of an asset reflects physical cannot reliably be determined. Write-downs are charged in wear and tear, technical obsolescence and legal and con- the event of permanent impairment. Investment securities tractual restraints.Write-downs are charged in the event of are recognized at the settlement date. additional impairment.

(h) Intangible Assets Intangible assets are carried at amortized cost, and relate primarily to internally generated and purchased intangible assets and purchased goodwill.

Software development costs in the Postbank Group are capitalized in accordance with IAS 38.21-23 if an economic benefit is expected to flow to the enterprise from the production of internally generated software and the cost can be reliably determined. If the criteria for capitalization are not met, the expenses are recognized immediately in the income statement for the period when they arose. The carrying amounts of intangible assets with a finite useful life are generally reduced by straight-line amortization over a period of three to five years, recognized customer relationships over a period of 25 years, and beneficial contracts over a period of 12 years. The established “BHW” brand is constantly promoted through continuous investments in advertising. Postbank intends to use this brand name over the long term; there is therefore no indication of a decline in its effect. The brand has an indefinite useful life. Impairment losses are recognized in the event of impairment or where no further economic benefits are expected to flow to the enterprise in the future.

131 The carrying amount of property and equipment is reduced by straight-line depreciation over the following periods:

Useful life (years) Buildings 60 IT systems 4–7 Other operating and office equipment 3–20

For reasons of materiality, acquisitions of low-value assets are (l) Trading liabilities expensed immediately. Maintenance and repair costs for prop- Derivatives with negative fair values that were acquired for erty and equipment are also expensed as incurred. the purpose of generating a profit from short-term fluctuations in market prices or dealing margins are carried under IAS 40 (Investment Property) defines investment property as this balance sheet item. It also contains the negative fair property held to earn rentals and/or for capital appreciation, values of banking book derivatives. Remeasurement gains rather than for supply of services or for administrative pur- and losses as well as gains or losses realized on the settle- poses or for sale in the ordinary course of business. ment of trading liabilities are recognized in net trading income. Derivatives carried under trading liabilities are recog- In the case of mixed-use property, a distinction is made nized at the trade date. Interest rate derivatives relating to between investment property and owner-occupied property the hedged items accounted for under the fair value option by way of an assessment to determine whether the leased are also reported here. In addition, short sales of securities portion could be sold separately from the portion used for are recognized at their negative fair value. operating purposes. If this is the case, the two portions are accounted for separately: one portion as an item of property (m) Provisions and equipment (owner-occupied property) and the other Adequate provisions have been recognized for uncertain lia- portion as investment property. A leased portion of less bilities and anticipated losses from onerous contracts at the than 20 % of the total area and less than 20 % of total rental balance sheet date, according to the best estimate of the income is treated as insignificant. expenditure required to settle the obligation.

IAS 40 allows an option to measure investment property at Insurance contracts are generally accounted for in accord- fair value or at cost. Postbank has opted to measure it at ance with the financial reporting standards under German cost, and the necessary disclosures are contained in note commercial law, as allowed by IFRS 4.13 and 4.14. (25). Unearned premiums and aggregate policy reserves for insurance business entered into by the Company contained (j) Other assets in the technical reserves (insurance) are calculated based Prepaid expenses and all assets not allocated to other items on the technical commencement date of each individual of assets are carried under other assets. insurance policy. The unearned premiums serve to match the premiums to the period in which they are earned. (k) Liabilities They are measured on an individual policy basis, reflecting Liabilities and subordinated debt are carried at amortized the exact month of commencement. The aggregate policy cost (IAS 39.47). The carrying amount of securitized liabili- reserve is calculated as the present value of the future ties that meet the requirements for hedge accounting is benefits less premiums outstanding, based on actuarial adjusted for the gains and losses from changes in fair value principles. The underlying discount rate for the balances is attributable to the hedged risk. between 2.25% and 4.0 %, using the mortality tables developed by the German Actuaries Association (DAV). Premiums, discounts and issue costs are recognized in net The reasonableness of the reserves is reviewed by the interest income by applying the effective interest method. responsible actuary as of the balance sheet date as part of the liability adequacy test. If this shows that the reserves

132 Consolidated Financial Statements Fiscal Year 2006

are not sufficient, they are increased accordingly and charged to the income statement. Occupational pensions are governed by defined benefit plans and defined contribution plans. Expenses for defined Provisions for claims that have yet to be settled and repur- contribution plans mainly relate to payments made to chases identified before the balance sheet date are reported Bundes-Pensions-Service für Post und Telekommunikation on an individual basis. Provisions are recognized in the e.V. in the amount of ¤111 million (previous year: ¤64 expected settlement amount for claims that arise after the million). The defined benefit plans are fully funded by provi- balance sheet date. For home savings group insurance poli- sions for pensions and other employee benefits. Provisions cies, the provision for the fiscal year was compared with for pension obligations for defined benefit plans correspond claim payments in prior fiscal years. If the provision is sig- to the present value of pension entitlements earned at the nificantly lower than the comparative figures, the provision valuation date. They reflect expected compensation in- for claims yet to be settled is increased by the calculated creases and forecasted pension growth and are calculated difference due to the special nature of this business. on the basis of actuarial reports in accordance with IAS 19. Pension obligations and pension expenses are calculated The provision for performance-based and non-performance using the projected unit credit method. based premium refunds contains final policyholder bonuses for already determined but not yet issued current policy- The agreements that underlie the pension obligations provide holder bonuses. In addition, it also includes final policyholder for a range of benefits, depending on the beneficiaries bonuses that become due at a later date. The discount rate concerned, such as: for final policyholder bonuses is 4.5 %. ■ Old-age pensions starting at age 62 or 63, or 60 for the The portion of provisions accounted for by reinsurers is cal- severely disabled culated based on the reinsurance contracts. ■ Disability pensions for total or occupational disability; ■ Surviving dependents’ pensions. The consolidated life insurance companies offer primarily endowment, term life, pension, and occupational disability Postbank has assumed a direct occupational pension com- insurance policies as well as term life insurance policies in mitment for pensioners and employees admitted to the connection with mortgage savings. Bank’s occupational pension plan who were previously insured with Versorgungsanstalt Post (VAP – Postal Service Provisions for uncertain obligations resulting from the re- Institution for Supplementary Retirement Pensions). imbursement of arrangement fees and from interest premiums payable retroactively in case of non-availment of loans, or Pension provisions are calculated using the following of changes in interest rates, are recognized for the home actuarial assumptions: savings business in line with the different tariffs and conditions. Provisions are calculated based on current utilization patterns, while also accounting for future expectations.

Discount rate 4.5 % p.a. Salary growth 2.5 % Pension growth 2.0 % Fluctuation 4.0 % p.a. Pensionable age 60–63 years Mortality, disability, etc. 2005G Heubeck tables Average expected return on plan assets 4.25 %

133 In the fiscal year, the discount rate was increased from 4.25 % Deferred tax assets are carried under income tax assets; to 4.50 % to reflect the development of capital market rates. deferred tax liabilities are carried under income tax liabilities. For the German Group companies, longevity was calculated using the mortality tables Richtertafeln 2005G for the 2005 The corresponding current and noncurrent deferred tax and 2006 results published by Prof. Klaus Heubeck. assets and liabilities are offset in accordance with IAS 12.74.

The expected return on plan assets was determined by The calculation as of December 31, 2005 is based on a tax taking into account current long-term rates of return on rate of 39.9 %. bonds (government and corporate) and applying to these rates a suitable risk premium determined on the basis of Income and expenses from deferred taxes are recognized historical market returns and current market expectations under income tax expense in net profit or loss for the period for a given plan’s asset structure. separately from current tax income and expenses. Recog- nition depends on the accounting treatment of the under- In accordance with IAS 19.92, actuarial gains and losses are lying item. For example, deferred taxes are recognized in net not recognized as income or expense until the net cumula- profit or loss if the balance sheet item is itself recognized in tive unrecognized actuarial gains or losses at the end of the net profit or loss. Deferred taxes are credited or charged to previous reporting period exceed the greater of 10 % of the the revaluation reserve in equity if the balance sheet item is present value of the defined benefit obligation or of the fair itself credited or charged directly to equity (IAS 12.61), e. g. value of plan assets at this time. in the case of remeasurement of available-for-sale financial instruments. (n) Currency translation In accordance with IAS 21.23, all foreign currency monetary (5) New developments in international accounting items and equities denominated in foreign currencies that under IFRSs and the restatement of prior-period figures are classified as non-monetary items in accordance with IAS IFRS 7 (Financial Instruments: Disclosures) will be applied for 21.8 are translated into euros at the middle spot rate at the the first time as of fiscal year 2007. IFRS 7 introduces ex- balance sheet date. There were no material non-monetary panded disclosure requirements for improving the provision items at the balance sheet date measured at (amortized) of information on financial instruments. Both qualitative and cost (in particular property and equipment, prepaid expenses quantitative information regarding the extent of risks from and deferred income) and translated at the historical rate in financial instruments, including specified minimum disclo- accordance with IAS 21.23(b). Foreign currency income and sures on credit, liquidity and market risks as well as sensitivity expenses are generally translated at the exchange rate at analyses with respect to market risks are required. The new the end of the month. standard replaces IAS 30 ( Disclosures in the Financial Statements of Banks and Similar Financial Institutions) as Exchange differences were recognized in income in accor- well as disclosure requirements of IAS 32 (Financial Instru- dance with IAS 21.28. ments: Disclosure and Presentation). The amendment to IAS 1 introduces additional disclosure requirements on the amount The subgroup consolidated financial statements of the PB of capital and its management. Both amendments result in (USA) Holdings group prepared in US dollars were trans- additional disclosure requirements for the Group. lated using the modified closing rate method (IAS 21.39). The resulting exchange difference was taken directly to equity. At the time of initial application of IAS 39 in the 2001 consolidated financial statements, fair values of securitized liabilities (o) Income tax were partially not measured correctly. These were corrected Income taxes are recognized and measured in accordance with retrospectively by charging ¤125 million to retained earnings IAS 12. Deferred taxes are generally recognized for all tempo- in accordance with IAS 8.42. The opening balance as of rary differences between the carrying amounts in the IFRS finan- January 1, 2005 in the Statement of Changes in Equity was cial statements and the carrying amounts in the tax accounts restated accordingly. The correction did not effect earnings (tax base). Deferred tax assets are recognized for tax loss per share in fiscal years 2005 and 2006. carryforwards in the amount of probable future utilization.

134 Consolidated Financial Statements Fiscal Year 2006

(6) Significant events after the balance sheet date Postbank will take over payment processing for HypoVereinsbank (HVB) as from January 1, 2007. HVB bundled its payment processing activities into a separate subsidiary, HVB Payments & Services, in 2003. This will be acquired by Postbank subsidiary, Betriebs-Center für Banken Deutschland GmbH & Co. KG, as of January 1, 2007.

Income statement disclosures

(7) Net interest income

2006 2005 ¤m ¤m

Interest and current income Interest income from: Lending and money market transactions 5,083 3,354 Fixed-income and book-entry securities 2,068 1,605 Trading operations 249 206 Net gains/losses on hedges and the fair value option 27 –5 7,427 5,160 Current income from: Equities and other non-fixed-income securities 231 189 Investments in associates 11 1 242 190 7,669 5,350 Interest expense on: Deposits 3,887 2,375 Securitized liabilities 853 727 Subordinated debt 264 171 Swaps 246 289 Trading operations 246 113 5,496 3,675 Total 2,173 1,675

Interest income from lending and money market transactions includes ¤29 million of interest income accrued on impaired assets in accordance with IAS 32.94 (h) (iii) (unwinding in accordance with IAS 39).

Interest income and expenses on swaps used in a hedging relationship are reported as a net expense. The underlying transactions are hedging transactions that meet the qualification criteria for hedge accounting in accordance with IAS 39, amounting to ¤159 million (previous year: ¤289 million). In addition, this includes ¤87 million (previous year: ¤0 million) in derivatives that hedge loans and advances designated under the fair value option.

The interest expense on the trading portfolio refers to imputed interest expenses.

135 Gains or losses from the remeasurement of fair value hedges are carried under net gains/losses on hedges and the fair value option which are composed of the following items:

2006 2005 ¤m ¤m

Net gains/losses on hedges 8 –5 Gains/losses on the fair value remeasurement of hedged items –375 214 Gains/losses on the fair value remeasurement of hedging transactions 383 –219 Net gains/losses accounted for using the fair value option 19 – Losses on the fair value remeasurement of hedged items –284 – Gains on the fair value remeasurement of hedging transactions 303 – Total 27 –5

(8) Allowance for losses on loans and advances

2006 2005 ¤m ¤m

Cost of additions: Specific valuation allowances 384 235 Portfolio-based valuation allowances 19 4 403 239 Cost of additions to provisions for credit risks 21 – Direct loan write-offs 27 19 451 258 Income from reversals: Specific valuation allowances 100 46 Portfolio-based valuation allowances – – 100 46 Income from the reversal of provisions for credit risks – 2 Recoveries on loans previously written off 14 5 114 53 Total 337 205

(9) Net fee and commission income

2006 2005 ¤m ¤m

Giro business 363 363 Securities business 118 110 Lending and guarantee business 105 56 Branch business 542 – Other fee and commission income 279 170 Total 1,407 699

136 Consolidated Financial Statements Fiscal Year 2006

Other fee and commission income includes income from payment transaction services for third parties.

(10) Net trading income Quoted prices are generally used to establish the fair values of trading assets and trading liabilities. The fair values of unlisted products are established using the discounted present value method or suitable option pricing models. In addition to trading income and expenses, net trading income also includes net remeasurement gains on trading assets.

2006 2005 ¤m ¤m

Net income from sale of securities and loans 24 64 Net gain/losses on remeasurement of securities and loans Bonds and other fixed-income securities 1 –8 Equities 1 – Loans (held for trading) –3 – –1 –8 Net gain on derivatives carried in the trading portfolio and the banking book Gain on derivatives 4,581 2,896 Loss on derivatives –4,355 –2,752 226 144 Foreign exchange gain/loss –2 7 Net fee and commission income carried in the trading portfolio –2 –2 Total 245 205

The net gain on derivatives carried in the trading portfolio and the banking book includes an interest expense on swaps of ¤73 million (previous year: ¤21 million). The underlying swap holdings are not part of a hedging relationship as defined by IAS 39.

2006 2005 ¤m ¤m

Net income from interest rate products 26 37 Net gain on derivatives carried in the trading portfolio and the banking book 226 144 Net income from equities –3 19 Foreign exchange gain/loss –2 7 Net fee and commission income carried in the trading portfolio –2 –2 Total 245 205

137 (11) Net income from investment securities Net income from investment securities contains net gains from the sale and remeasurement of investment securities, investments in unconsolidated subsidiaries and investments in associates.

2006 2005 ¤m ¤m

Net income from loans-and-receivables investment securities 28 25 thereof net income from sale 28 29 Gains on sale 85 39 Losses on sale 57 10 thereof net impairment loss – –4

Net income from available-for-sale investment securities 167 224 thereof net income from sale 295 226 Gains on sale 493 391 Losses on sale 198 165 thereof net impairment loss –128 –2

Net income from loans to other banks 15 7 thereof net income from sale of loans and receivables 15 7

Net income from loans to customers 9 –4 thereof net income from sale of loans and receivables 9 –4

Loss from sale of fair value hedges –2 –

Net income from investments in associates 75 –

Total 292 252

2006 2005 ¤m ¤m

Net income from bonds and promissory note loans 38 86 Net income from equities and other non-fixed-income securities 179 166 Net income from investments in associates 75 – Total 292 252

Net income from investments in associates includes the ¤64 million gain on the disposal and deconsolidation of MPSS Modrá Pyramida Vseobecna stavebni sporitelna Komercni banky, a.s., Prague in accordance with IFRS 5.

138 Consolidated Financial Statements Fiscal Year 2006

(12) Administrative expenses Administrative expenses are composed of staff costs, non-staff operating expenses and depreciation and write-downs of property and operating and office equipment. These expenses are composed of the following items:

2006 2005 ¤m ¤m

Staff costs Wages and salaries 1,030 491 Social security contributions 111 47 Expenses for pensions and other benefits 240 125 1,381 663 Other administrative expenses 1,324 1,162 Depreciation and write-downs of property and equipment 107 61 Total 2,812 1,886

¤1 million of the depreciation of property and equipment relates to investment property (previous year: ¤1 million).

Impairment losses of property and equipment in the amount of ¤15 million were charged in the year under review (previous year: ¤24 million).

Other administrative expenses relate primarily to expenses for intragroup services received from Deutsche Post AG in the amount of ¤146 million (previous year: ¤513 million); IT costs of ¤296 million (previous year: ¤235 million); market communication costs of ¤136 million (previous year: ¤90 million); operating building and premises expenses of ¤150 million (previous year: ¤37 million); and legal, consulting and audit costs of ¤74 million (previous year: ¤28 million). ¤2 million of the other administrative expenses relates to investment property (previous year: ¤1 million).

Other administrative expenses include lease expenses of ¤138 million (previous year: ¤59 million), composed of expenses for leased intangible assets, land and buildings, and operating and office equipment under operating leases.

139 (13) Other income

2006 2005 ¤m ¤m

Income from reversal of other provisions 53 21 Income from property and equipment 28 29 Reimbursements from internal welfare institutions 20 1 Income from uncollectable transactions 7 10 Income from the reversal of accruals 2 6 Income from the reversal of risk compensation amounts of the Postbeamtenkrankenkasse (Postal Civil Service Health Insurance Fund) – 67 Income from refund by the civil servants’ special pension fund – 12 Income from the reimbursement of administrative costs of the Postbeamten- krankenkasse (Postal Civil Service Health Insurance Fund) – 7 Other 95 99 Total 205 252

Income from property and equipment relates to book profits of ¤5 million (previous year: ¤8 million) and rental income of ¤23 million (previous year: ¤21 million), ¤1 million of which relates to investment property (previous year: ¤4 million).

¤13 million (previous year: ¤10 million) of the total other income in the amount of ¤205 million is attributable to proportionately consolidated joint ventures.

The miscellaneous item includes lease income in the amount of ¤6 million (previous year: ¤1 million).

(14) Other expenses

2006 2005 ¤m ¤m

Amortization and write-downs of intangible assets 63 50 Expenses for other taxes 12 13 Expenses from property and equipment 8 5 Expenses for the Federal Posts and Telecommunications Agency (BAnstPT and StiftPT) 5 4 Expenses from retail outlet final settlement 1 11 Expenses for special projects – 15 Other 143 175 Total 232 273

Expenses for other taxes relate primarily to land taxes amounting to ¤3 million (previous year: ¤3 million).

The miscellaneous item includes interest expense on payables to tax authorities in the amount of ¤3 million (previous year: ¤1 million).

140 Consolidated Financial Statements Fiscal Year 2006

(15) Income tax Income taxes in the Group were composed of the following items:

2006 2005 ¤m ¤m

Current income tax expense Corporate income tax and solidarity surcharge 54 63 Trade income tax 23 36 77 99 Income/expense from prior-period income tax 16 25 Effective income tax expense 93 124

Expense from deferred taxes from temporary differences 133 14 from the reversal of loss carryforwards 19 88 152 102 Total 245 226

The following reconciliation illustrates the relation between profit after tax and income tax expense:

2006 2005 ¤m ¤m

Profit from ordinary activities after tax 696 493 Income tax expense 245 226 Profit before tax 941 719

Applicable tax rate 39.90 % 39.90 % Expected income taxes 375 287

Tax effects Effect of difference between applicable tax rates in Germany and abroad –30 2 Effect of tax-free foreign income – –8 Effect of tax-free domestic income and non-deductible expenses –8 9 Effect of previously unrecognized tax losses 40 5 Effect of prior-period taxes 12 25 Effect of equities and investments resulting from section 8b KStG –140 –98 Other –4 4 –130 –61 Income tax expense 245 226

141 Balance sheet disclosures

(16) Cash reserve The cash reserve is composed of the following items:

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Cash 807 785 Balances with central banks 208 183 Total 1,015 968

¤140 million (previous year: ¤175 million) of the balances with central banks relates to balances with the Deutsche Bundesbank.

The minimum reserve requirement at end-December 2006 was ¤1,493 million (previous year: ¤1,319 million).

(17) Loans and advances to other banks

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Domestic banks Payable on demand 1,179 525 Other loans and advances 6,028 5,423 7,207 5,948 Foreign banks Payable on demand 727 628 Other loans and advances 8,416 11,225 9,143 11,853 Total 16,350 17,801

As of December 31, 2006, there were bona fide transactions under repurchase agreements amounting to ¤2,013 million (previous year: ¤294 million). Postbank is the lender in such transactions. Securities purchased under agreements to resell relate to listed bonds of public-sector issuers or German banks.

Loans and advances to other banks include fixed-interest loans in the amount of ¤10.4 billion (previous year: ¤17.1 billion) and variable-interest loans in the amount of ¤6.0 billion (previous year: ¤0.7 billion).

In total, ¤207 million of loans and advances to other banks (previous year: ¤108 million) relates to proportionately consolidated joint ventures.

142 Consolidated Financial Statements Fiscal Year 2006

Loans and advances to other banks are classified as follows in accordance with the categories of financial instruments as defined in IAS 39:

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Loans to other banks (loans and receivables) 14,233 16,378 thereof fair value hedges 2,136 2,720 Money market lendings 2,117 1,423 Total 16,350 17,801

(18) Loans and advances to customers

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Mortgage lending 59,148 28,953 Home savings loans 3,147 – Public sector 5,444 8,682 Installment credits 2,447 1,575 Other loans and advances 16,996 13,663 Total 87,182 52,873 thereof: Secured by mortgage charges 45,565 19,088 Public-sector loans 5,444 8,682

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Domestic customers 74,358 44,019 Foreign customers 12,824 8,854 Total 87,182 52,873

Loans and advances to customers without a fixed maturity amounted to 0.8% of total assets (previous year: 1.0 %).

Loans and advances to customers include fixed-interest loans in the amount of ¤77.0 billion (previous year: ¤48.2 billion) and variable-interest loans in the amount of ¤10.2 billion (previous year: ¤4.6 billion).

143 Loans and advances to customers include amounts due under finance leases for ¤95 million (previous year1: ¤82 million). The gross investment value of the leases amounts to ¤108 million (previous year1: ¤96 million).

The total amount of future lease payments is ¤107 million (previous year1: ¤94 million) and has the following maturity structure:

Dec. 31, 2006 Dec. 31, 20051 ¤m ¤m

in the first year after the balance sheet date 32 34 in the second year after the balance sheet date 26 24 in the third year after the balance sheet date 25 16 in the fourth year after the balance sheet date 15 14 in the fifth year after the balance sheet date 6 4 more than five years after the balance sheet date 3 2 Total 107 94

Loans and advances to customers are classified as follows in accordance with the categories of financial instruments as defined in IAS 39:

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Loans to customers (loans and receivables) 80,483 52,300 thereof fair value hedges 1,500 4,115 Loans to customers (held to maturity) 518 573 Loans to customers (fair value option) 6,181 – Total 87,182 52,873

(19) Total credit extended

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Loans and advances to other banks 16,350 17,801 Loans and advances to customers 87,182 52,873 Guarantees 1,974 1,804 Total 105,506 72,478

1 Prior-period figures restated

144 Consolidated Financial Statements Fiscal Year 2006

(20) Allowance for losses on loans and advances The allowance for losses on loans and advances covers all identifiable credit risks. Portfolio-based valuation allowances were recognized for the potential credit risk.

Risks have been provided for by an allowance for losses on loans and advances carried under assets, and by the recognition of provisions for credit risks.

The allowance for losses on loans and advances is composed of the following items:

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Allowances for losses on loans and advances to other banks – – Allowances for losses on loans and advances to customers 1,155 776 Total allowances for losses on loans and advances 1,155 776 Provisions for credit risks 34 7 Total 1,189 783

The allowance for losses on loans and advances carried under assets changed as follows in the year under review:

Specific valuation Portfolio-based Total allowances valuation allowances 2006 2005 2006 2005 2006 2005 ¤m ¤m ¤m ¤m ¤m ¤m

Balance at Jan. 1 732 627 44 40 776 667 Changes in basis of consolidation 267 – 2 – 269 – Additions Allowance charged to the income statement 384 235 19 4 403 239 Disposals Utilization 161 88 – – 161 88 Allowance reversed to the income statement 100 46 – – 100 46 Unwinding 29 – – – 29 – Currency translation differences 3 –4 – – 3 –4 Balance at Dec. 31 1,090 732 65 44 1,155 776

Collective valuation allowances are also reported under the specific valuation allowances.

The total amount of loans at the balance sheet date for which no interest payments are received was ¤926 million (previous year: ¤612 million). Write-downs were charged on loans with a total volume of ¤1,864 million (previous year: ¤1,226 million). The outstanding interest receivables accounted for by these loans amounted to ¤128 million at December 31, 2006 (previous year: ¤102 million).

145 ¤27 million of loans and advances was written off directly in the year under review (previous year: ¤19 million). Recoveries on loans written off amounted to ¤14 million (previous year: ¤5 million).

(21) Trading assets Group trading activities consist of trading in bonds and other fixed-income securities, equities and other non-fixed-income securities, promissory note loans and foreign currencies, as well as derivatives. All trading assets are carried at their fair values.

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Bonds and other fixed-income securities issued by Public-sector issuers 180 61 Other issuers 9,575 7,223 thereof money market instruments 171 – 9,755 7,284 Equities and other non-fixed-income securities 28 10 Available-for-sale building loans held for trading 208 – Positive fair values of derivatives carried as trading assets 2,942 2,617 Positive fair values of banking book derivatives 276 475 Positive fair values from derivatives relating to hedged items accounted for under the fair value option 71 – Total 13,280 10,386

¤0.8 billion of the bonds and other fixed-income securities has a fixed rate of interest over the entire term (previous year: ¤0.6 billion), while ¤9.0 billion (previous year: ¤6.7 billion) has a variable rate of interest (floaters).

The following amounts of bonds and other fixed-income securities, and equities and other non-fixed- income securities carried as trading assets, are negotiable and listed:

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Bonds and other fixed-income securities 9,720 7,277 Equities and other non-fixed-income securities 28 10

146 Consolidated Financial Statements Fiscal Year 2006

(22) Hedging derivatives Hedges with positive fair values that qualify for hedge accounting in accordance with IAS 39 are composed of the following items:

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Assets Hedging derivatives on loans to other banks Loans and receivables 8 4 8 4 Hedging derivatives on loans to customers Loans and receivables 11 5 11 5 Hedging derivatives on investment securities Bonds and other fixed-income securities 281 63 Equities and other non-fixed-income securities – – 281 63 Liabilities Deposits from other banks 35 106 Due to customers 41 110 Securitized liabilities 101 290 Subordinated debt 8 61 185 567 Total 485 639

147 (23) Investment securities Investment securities include bonds and other fixed-income securities, equities and other non-fixed- income securities, investments in associates and investments in unconsolidated subsidiaries.

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Bonds and other fixed-income securities Public-sector issuers 17,252 17,399 Other issuers 40,114 32,262 57,366 49,661 Equities and other non-fixed-income securities Equities 1,287 2,125 Investment fund shares 4,544 3,595 5,831 5,720 Investments in associates 17 15 Investments in unconsolidated subsidiaries 85 27 Total 63,299 55,423

Bonds and other fixed-income securities contain collection documents amounting to ¤75 million (previous year: ¤12 million).

¤44.3 billion of the bonds and other fixed-income securities has a fixed rate of interest over the entire term (previous year: ¤40.7 billion), while ¤13.1 billion (previous year: ¤9.0 billion) has a variable rate of interest (floaters).

¤57 million of investment securities relates to proportionately consolidated joint ventures (previous year: ¤41 million).

148 Consolidated Financial Statements Fiscal Year 2006

Investment securities are classified as follows in accordance with the categories of financial instruments as defined in IAS 39:

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Bonds and other fixed-income securities Loans and receivables investment securities 19,031 12,599 thereof fair value hedges 5,369 2,143 Held to maturity 4,956 3,375 Available for sale 33,379 33,687 thereof fair value hedges 15,770 16,681 57,366 49,661 Equities and other non-fixed-income securities Available for sale 5,831 5,720 thereof fair value hedges – – 5,831 5,720 Investments in associates (available for sale) 17 15 Investments in unconsolidated subsidiaries (available for sale) 85 27 Total 63,299 55,423

The following amounts of investment securities are negotiable and listed:

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Bonds and other fixed-income securities 56,624 48,538 Equities and other non-fixed-income securities 3,327 4,250

Changes in the fair value of unhedged available-for-sale securities in the amount of ¤–125 million were charged to the revaluation reserve (previous year: addition of ¤309 million). ¤177 million (previous year: ¤236 million) carried in the revaluation reserve was reversed to income in the period under review from the disposal of investment securities and the recognition of impairment losses.

To enable it to enter into open market transactions, Postbank has pledged securities with an eligible value of ¤15 billion (previous year: ¤10 billion) as collateral to the European Central Bank. There were open market transactions amounting to ¤10 billion at the balance sheet date (previous year: ¤7 billion). The securities lodged as collateral are reported as investment securities.

Impairment losses totaling ¤128 million (previous year: ¤7 million) were recognized in fiscal year 2006 to reflect the economic performance of the financial instruments.

149 The development of investments in unconsolidated subsidiaries and in associates is as follows:

Investments in Investments in unconsolidated associates subsidiaries ¤m ¤m

Historical cost Balance at Jan. 1, 2006 27 15 Changes in basis of consolidation 103 51 Additions 30 – Disposals 59 41 Balance at Dec. 31, 2006 101 25

Write-downs/reversals of write-downs Balance at Jan. 1, 2006 0 0 Changes in basis of consolidation and other restatements 6 38 Current write-downs/changes 8 5 Remeasurement gains/losses recognized directly in equity 2 – Disposals – –35 Balance at Dec. 31, 2006 16 8

Carrying amounts Balance at Jan. 1, 2006 27 15 Balance at Dec. 31, 2006 85 17

(24) Intangible assets

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Internally generated intangible assets and software 55 16 Acquired software, concessions, industrial rights 721 121 Acquired goodwill 1,626 51 Advance payments on intangible assets and in-process intangible assets 103 35 Total 2,505 223

“Acquired software, concessions, industrial rights” includes the BHW brand, which was capitalized during the purchase price allocation (¤319 million), as well as recognized customer relationships (¤166 million) and beneficial contracts (¤72 million).

150 Consolidated Financial Statements Fiscal Year 2006

A comparison of historical cost and cumulative amortization with the prior-period amounts is presented below:

Internally Acquired Acquired Advance Total generated software, goodwill payments intangible concessions, on intangible assets and industrial rights assets and software in-process intangible assets ¤m ¤m ¤m ¤m ¤m

Historical cost Opening balance at Jan. 1, 2005 – 329 33 18 380 Changes in basis of consolidation – 6 – – 6 Additions – 25 29 53 107 Reclassifications 17 17 – –34 0 Disposals – 11 – 2 13 Closing balance at Dec. 31, 2005 17 366 62 35 480 Changes in basis of consolidation 22 602 – 53 677 Additions 18 21 1,575 59 1,673 Reclassifications 8 34 – –42 0 Disposals 3 10 – 2 15 Closing balance at Dec. 31, 2006 62 1,013 1,637 103 2,815

151 Internally Acquired Acquired Advance Total generated software, goodwill payments intangible concessions, on intangible assets and industrial rights assets and software in-process intangible assets ¤m ¤m ¤m ¤m ¤m

Amortization Opening balance at Jan. 1, 2005 – 207 5 – 212 Changes in basis of consolidation and other restatements – 4 – – 4 Amortization/ impairment 1 43 6 – 50 Additions – – – – – Reclassifications – – – – – Disposals – 9 – – 9 Closing balance at Dec. 31, 2005 1 245 11 – 257 Changes in basis of consolidation and other restatements – – – – – Amortization/ impairment 5 58 – – 63 Additions – – – – – Reclassifications 1 –1 – – 0 Disposals – 10 – – 10 Closing balance at Dec. 31, 2006 7 292 11 – 310

Carrying amount at Dec. 31, 2005 16 121 51 35 223 Carrying amount at Dec. 31, 2006 55 721 1,626 103 2,505

152 Consolidated Financial Statements Fiscal Year 2006

The carrying amounts of intangible assets changed as follows in the year under review:

Carrying Additions Disposals Reclassifications Amortization Carrying amount amount at Jan. 1, at Dec. 31, 2006 2006 ¤m ¤m ¤m ¤m ¤m ¤m

Internally generated intangible assets and software 16 40 3 7 5 55 Acquired software, concessions, industrial rights 121 623 – 35 58 721 Acquired goodwill 51 1,575 – – – 1,626 Advance payments on intangible assets and in-process intangible assets 35 112 2 –42 – 103

Total 223 2,350 5 0 63 2,505

The carrying amount as of December 31, 2006 of advance payments on intangible assets is ¤70 million (previous year: ¤19 million); the carrying amount of in-process intangible assets is ¤33 million (previous year: ¤16 million).

(25) Property and equipment

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Land and buildings 858 726 Operating and office equipment 152 92 Advance payments and assets under development 5 7 Total 1,015 825

153 A comparison of historical cost and cumulative depreciation with the prior-period amounts is presented below:

Land and Operating Advance payments Total buildings and office and assets under equipment development ¤m ¤m ¤m ¤m

Historical cost Opening balance at Jan. 1, 2005 1,066 426 9 1,501 Changes in basis of consolidation – 5 – 5 Additions 10 37 12 59 Reclassifications 1 4 –5 – Disposals 111 44 9 164 Exchange differences – 1 – 1 Closing balance at Dec. 31, 2005 966 429 7 1,402 Changes in basis of consolidation 164 80 2 246 Additions 1 51 5 57 Reclassifications 1 6 –7 – Disposals 2 156 2 160 Closing balance at Dec. 31, 2006 1,130 410 5 1,545

154 Consolidated Financial Statements Fiscal Year 2006

Land and Operating Advance payments Total buildings and office and assets under equipment development ¤m ¤m ¤m ¤m

Depreciation Opening balance at Jan. 1, 2005 249 326 – 575 Changes in basis of consolidation – 4 – 4 Additions 38 47 – 85 Reclassifications – – – – Disposals 47 41 – 88 Exchange differences – 1 – 1 Closing balance at Dec. 31, 2005 240 337 – 577 Changes in basis of consolidation –2 –6 – –8 Depreciation 34 73 – 107 Reclassifications – – – – Disposals – 146 – 146 Closing balance at Dec. 31, 2006 272 258 – 530

Carrying amount at Dec. 31, 2005 726 92 7 825 Carrying amount at Dec. 31, 2006 858 152 5 1,015

The carrying amounts of property and equipment changed as follows in the year under review:

Carrying Additions Disposals Reclassifications Depreciation Carrying amount amount at Jan. 1, at Dec. 31, 2006 2006 ¤m ¤m ¤m ¤m ¤m ¤m

Land and buildings 726 167 2 1 34 858 Operating and office equipment 92 137 10 6 73 152 Advance payments and assets under development 7 7 2 –7 0 5

Total 825 311 14 0 107 1,015

155 At the balance sheet date, assets under development amount to ¤4 million (previous year: ¤7 million).

In 2006, items of property and equipment for which Postbank acts as the lessor under an operating lease consist of land and buildings.

¤m

Historical cost 711 Cumulative depreciation –226 Carrying amount at Dec. 31, 2006 485

The disclosures relating to investment property for fiscal year 2006 are as follows:

Third-party Rental Direct Restraints on Disposal Contractual use income operating disposal proceeds obligations expenses received % ¤m ¤m ¤m ¤m ¤m

Investment Property 100 1 1 – – –

The corresponding figures for fiscal year 2005 are as follows:

Third-party Rental Direct Restraints on Disposal Contractual use income operating disposal proceeds obligations expenses received % ¤m ¤m ¤m ¤m ¤m

Investment Property86 4 – – – –

A comparison of historical cost and cumulative depreciation with the prior-period amounts is presented below:

Historical cost Cumulative depreciation Dec. 31, 2006 Dec. 31, 2005 Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m ¤m ¤m

Investment Property 102 100 29 28

The carrying amounts of investment property changed as follows in the year under review:

Carrying Additions Disposals Reclassifications Depreciation Carrying amount amount at Jan. 1, at Dec. 31, 2006 2006 ¤m ¤m ¤m ¤m ¤m ¤m

Investment property 75 – – – 1 74

The fair value of investment property amounts to ¤74 million (previous year: ¤72 million), according to expert’s opinion.

156 Consolidated Financial Statements Fiscal Year 2006

(26) Income tax assets

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Deferred tax assets from temporary differences 42 296 from tax loss carryforwards 202 138 domestic 202 138 foreign – – Total 244 434

Deferred tax assets were recognized in connection with temporary differences relating to the following balance sheet items, and in connection with unused tax losses:

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Assets Loans and advances 93 36 Allowance for losses on loans and advances 15 11 Trading assets 0 0 Hedging derivatives 0 0 Investment securities 24 4 Property and equipment 3 3 Other assets 125 24 Liabilities Amounts due to other banks and customers 2 6 Trading liabilities 916 782 Hedging derivatives 235 568 Provisions for pensions and other employee benefits 46 0 Other provisions 79 14 Other liabilities 3 13 1,541 1,461 Tax loss carryforwards 202 138 Netted against deferred tax liabilities 1,499 1,165 Total 244 434

At December 31, 2006, there were no deductible temporary differences and tax loss carryforwards for which no deferred tax assets were recognized in the balance sheet.

157 (27) Other assets

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Prepaid expenses 327 280 Receivables from tax authorities 94 50 Collection documents 1 1 Miscellaneous 245 1,153 Total 667 1,484

¤42 million (previous year: ¤64 million) of the prepaid expenses relates to prepaid rent or lease expenses.

Miscellaneous other assets relate in particular to trade receivables amounting to ¤48 million (previous year: ¤48 million), receivables from the insurance business amounting to ¤60 million (previous year: ¤42 million) and advances to members of the mobile sales force amounting to ¤23 million (previous year ¤0 million).

(28) Deposits from other banks

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Domestic banks Payable on demand 2,245 135 With an agreed maturity or withdrawal notice 27,376 14,720 29,621 14,855 Foreign banks Payable on demand 474 450 With an agreed maturity or withdrawal notice 17,224 15,473 17,698 15,923 Total 47,319 30,778

¤2,802 million of the deposits from other banks is covered by fair value hedges (previous year: ¤2,306 million).

Deposits from other banks include fixed-interest deposits in the amount of ¤44.8 billion (previous year: ¤30.4 billion) and variable-interest deposits in the amount of ¤2.5 billion (previous year: ¤0.4 billion).

As of December 31, 2006 there were bona fide securities repurchase agreements amounting to ¤9.2 billion (previous year: ¤6.9 billion).

158 Consolidated Financial Statements Fiscal Year 2006

(29) Due to customers Amounts due to customers are primarily composed of savings deposits, amounts payable on demand and term deposits.

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Savings deposits With an agreed withdrawal notice of three months 35,574 37,702 With an agreed withdrawal notice of more than three months 460 286 36,034 37,988 Home savings deposits 16,981 – thereof: on terminated contracts 68 – thereof: on allotted contracts 5 – Other amounts due Payable on demand 23,525 21,940 With an agreed maturity or withdrawal notice 24,776 18,553 48,301 40,493 Total 101,316 78,481 Domestic customers 97,312 76,329 Foreign customers 4,004 2,152 Total 101,316 78,481

¤4,761 million of the amounts due to customers is covered by fair value hedges (previous year: ¤2,849 million).

Amounts due to customers contain fixed-interest deposits in the amount of ¤43.1 billion (previous year: ¤19.2 billion) and variable-interest deposits in the amount of ¤58.2 billion (previous year: ¤59.3 billion).

(30) Securitized liabilities Amounts reported as securitized liabilities relate to bonds, including mortgage bonds and public- sector mortgage bonds (Pfandbriefe), and money market instruments (e. g. Certificates of Deposit, Euro Notes, Commercial Paper).

Dec. 31, 2006 Dec. 31, 20051 ¤m ¤m

Mortgage bonds 53 67 Public-sector mortgage bonds (Pfandbriefe) 81 319 Other debt instruments 15,752 14,352 Total 15,886 14,738

¤8,012 million of the securitized liabilities is covered by fair value hedges (previous year: ¤13,501 million).

Securitized liabilities include fixed-interest liabilities in the amount of ¤13.7 billion (previous year: ¤10.9 billion) and variable interest liabilities in the amount of ¤2.2 billion (previous year: ¤3.8 billion).

1 Prior-period figures restated (see note 5)

159 Repurchased own bonds amounting to ¤158 million (previous year: ¤103 million) were deducted directly from securitized liabilities.

(31) Trading liabilities Trading liabilities consist of the negative fair values of derivatives carried in the trading portfolio and in the banking book as well as delivery obligations under securities sold short.

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Negative fair values of trading derivatives 2,864 2,770 Negative fair values of banking book hedging derivatives 351 571 Negative fair values from derivatives relating to hedged items accounted for under the fair value option 401 – Delivery obligations under securities sold short 2 4 Total 3,618 3,345

(32) Hedging derivatives Hedges with negative fair values that qualify for hedge accounting in accordance with IAS 39 are composed of the following items:

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Assets Hedging derivatives on loans to other banks Loans and receivables 66 137 Purchased available-for-sale loans – 7 66 144 Hedging derivatives on loans to customers Loans and receivables 50 217 Purchased available-for-sale loans – 4 50 221 Hedging derivatives on investment securities Bonds and other fixed-income securities 344 1,149 Equities and other non-fixed-income securities – – 344 1,149 Liabilities Deposits from other banks 63 6 Due to customers 78 – Securitized liabilities 237 106 Subordinated debt 120 42 498 154 Total 958 1,668

160 Consolidated Financial Statements Fiscal Year 2006

(33) Provisions

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Provisions for pensions and other employee benefits 1,115 585 Technical reserves (insurance) 1,560 158 Provisions for home savings business 727 – Other provisions 289 226 Total 3,691 969

¤269 million of provisions is attributable to proportionately consolidated joint ventures (previous year: ¤166 million).

Technical reserves (insurance) contain unearned premiums and aggregate policy reserves for BHW Lebensversicherung AG, PB Lebensversicherung AG and PB Versicherung AG’s insurance business.

Provisions for BHW Bausparkasse AG’s home savings business are recognized for the reimbursement of arrangement fees and for interest premiums payable retroactively.

Provisions for home savings business changed as follows in the year under review:

Balance at Changes Utilization Reversal Addition Balance at Jan. 1, 2006 in basis of Dec. 31, 2006 consolidation ¤m ¤m ¤m ¤m ¤m ¤m

Provisions for home savings business – 728 197 15 211 727 Total – 728 197 15 211 727

The composition and development of the technical reserves (insurance) are as follows:

Balance at Changes Changes during the fiscal year Balance at Jan. 1, 2006 in basis of recognized directly recognized Dec. 31, 2006 consolidation in equity as income ¤m ¤m ¤m ¤m ¤m

Unearned premiums – 9 – 1 10 Provisions for claims not yet settled – 9 40 39 8 Aggregate policy reserves – 858 – 166 1,024 Provisions for performance-based and non-performance-based premium refunds – 195 21 78 252 Other technical reserves (insurance) 158 1 1 108 266 Total 158 1,072 62 392 1,560

161 (34) Provisions for pensions and other employee benefits The provisions for pensions and other employee benefits relate primarily to provisions for the obligations to pay occupational pensions on the basis of direct pension commitments. The nature and amount of the pension payments of those employees entitled to pension benefits are governed by the applicable pension rules (including pension guidelines and pension fund rules), which depend largely on the date of commencement of employment.

The provisions for pension obligations changed as follows:

Reconciliation of the present value of obligations, fair value of plan assets and net pension provisions 2006 2005 ¤m ¤m

Present value of obligations at December 31 of fully or partially funded benefits 773 73 Present value of obligations at December 31 of non-funded benefits 824 761 Present value of total defined benefit obligation at December 31 1,597 834 Fair value of plan assets at December 31 –381 –59 Unrealized gains/losses –101 –190 Net pension provisions at December 31 1,115 585

Change in present value of total defined benefit obligation 2006 2005 ¤m ¤m

Present value of total defined benefit obligation at January 1 834 714 Current service cost, excluding employee contributions 38 17 Employee contributions – – Interest cost 68 37 Pension benefits paid –69 –43 Past service cost 1 – Plan amendments – –17 Transfers/asset transfers 79 53 Changes in basis of consolidation 726 – Actuarial gains/losses –80 73 Currency effects – – Present value of total defined benefit obligation at December 31 1,597 834

162 Consolidated Financial Statements Fiscal Year 2006

Change in plan assets 2006 2005 ¤m ¤m

Fair value of plan assets at January 1 59 – Employer contributions 16 1 Employee contributions – – Expected return on plan assets 16 3 Gains/(losses) on plan assets –1 3 Pension benefits paid –25 – Transfers –2 52 Changes in basis of consolidation 316 – Plan amendments – – Currency effects 2 - Fair value of plan assets at December 31 381 59

Plan assets primarily consist of fixed-income securities, time deposits, other cash and cash equivalents, etc. (93 %, previous year: 64 %), equities and investment funds (1%, previous year: 17%) and other assets such as real estate (6 %, previous year: 19 %). None of the assets are used directly by the Postbank Group.

Gains and losses

Gains and losses on plan assets 2006 2005

Actual return on plan assets (¤m) 15 6 Expected return on plan assets (¤m) 16 3 Experience gains (+)/losses (–) on plan assets (¤m) –1 3 As a relative proportion of plan assets at January 1 (%) 0 6

Gains and losses on defined benefit obligation 2006 2005

Experience gains (+)/losses (–) on defined benefit obligations (¤m) –12 –13 As a relative proportion of the present value of defined benefit obligations at January 1 (%) –1 –2 Increase (+)/decrease (–) in defined benefit obligations arising from changes in assumptions (¤m) 91 –60 As a relative proportion of the present value of defined benefit obligations at January 1 (%) 11 –8 Total actuarial gains (+)/losses (–) on defined benefit obligations (¤m) 79 –73 As a relative proportion of the present value of defined benefit obligations at January 1 (%) 5 –10

163 Change in net pension provisions 2006 2005 ¤m ¤m

Balance at January 1 585 584 Current service cost 101 42 Pension benefits paid –44 –43 Contributions to fund assets –16 –1 Changes in basis of consolidation 410 – Asset transfer 81 3 Currency effects –2 – Balance at December 31 1,115 585

Postbank expects payments in the amount of ¤77 million for net pension provisions in 2007. Of this figure, ¤51 million is attributable to expected direct pension payments by the Company and ¤15 million to expected pension fund contributions.

Pension expense 2006 2005 ¤m ¤m

Current service cost 38 17 Interest cost 68 37 Expected return on plan assets –16 –3 Recognized past service cost 1 – Amortization of unrecognized gains/losses 10 4 Effects of plan amendments – –13 Other – – Pension expense 101 42

In fiscal year 2006, ¤101 million was transferred from staff costs to provisions for pensions and recognized in the income statement (previous year: ¤42 million).

In accordance with IAS 19.92, actuarial gains and losses are only recognized to the extent that they exceed the greater of 10 % of the present value of the obligation or of the plan assets. The excess amount is amortized over the remaining working lives of the active employees and recognized in income. ¤10 million was recognized in the income statement in 2006 (previous year: ¤4 million).

164 Consolidated Financial Statements Fiscal Year 2006

(35) Other provisions The other provisions changed as follows in the year under review:

Balance at Changes in Utilization Reversal Additions Balance at Jan. 1, 2006 basis of Dec. 31, 2006 consolidation ¤m ¤m ¤m ¤m ¤m ¤m

Restructuring 143 21 75 19 41 111 Risk compensation amounts of the Postbeamtenkrankenkasse (Postal Civil Service Health Insurance Fund) 6 – – – – 6 Miscellaneous 77 77 65 17 100 172 Total 226 98 140 36 141 289

Miscellaneous other provisions include provisions for litigation costs amounting to ¤9 million (previous year: ¤5 million), provisions for year-end closing costs amounting to ¤3 million (previous year: ¤2 million) and provisions for jubilee benefits amounting to ¤9 million (previous year: ¤2 million).

(36) Income tax liabilities

Balance at Changes in Utilization Reversal Additions Balance at Jan. 1, 2006 basis of Dec. 31, 2006 consolidation ¤m ¤m ¤m ¤m ¤m ¤m

Current taxes 75 42 90 5 62 84 Deferred taxes 955 525 – 843 337 974 Total 1,030 567 90 848 399 1,058

Provisions for current taxes relate to current payment obligations to the tax authorities.

165 Deferred tax liabilities relate to the following balance sheet items:

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Assets Loans and advances 384 118 Trading assets 958 797 Hedging derivatives 148 141 Investment securities 475 790 Property and equipment 8 21 Other assets 306 61 Liabilities Amounts due to other banks and customers 83 71 Trading liabilities – – Hedging derivatives – – Provisions for pensions and other employee benefits 22 18 Other provisions 1 10 Other liabilities 88 93 2,473 2,120 Netted against deferred tax assets 1,499 1,165 Total 974 955

(37) Other liabilities

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Trade payables 76 39 Liabilities from other taxes 123 95 Liabilities from income taxes – 2 Miscellaneous liabilities 547 281 Deferred income 40 10 Total 786 427

Miscellaneous liabilities include liabilities from early termination fees amounting to ¤15 million (previous year: ¤13 million), expenses for outstanding invoices amounting to ¤69 million (previous year: ¤44 million), expenses for services performed by Deutsche Post AG amounting to ¤53 million (previous year: ¤57 million), expenses for management bonuses amounting to ¤50 million (previous year: ¤34 million), expenses for commissions and premiums amounting to ¤43 million (previous year: ¤0 million), and expenses for outstanding vacation entitlements and other compensated absences amounting to ¤42 million (previous year: ¤21 million).

In total, ¤40 million of other liabilities relates to proportionately consolidated joint ventures (previous year: ¤25 million).

166 Consolidated Financial Statements Fiscal Year 2006

(38) Subordinated debt

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Subordinated liabilities 2,822 2,020 Hybrid capital instruments 1,039 1,125 Profit participation certificates outstanding 1,132 583 Contributions by typical silent partners 55 55 Total 5,048 3,783

Due to the current maturity structure, only ¤3,354 million of the items reported as subordinated debt represents liable capital in accordance with the Basel Capital Accord.

The interest expense on subordinated liabilities amounts to ¤134 million (previous year: ¤86 million). Deferred interest not yet due amounting to ¤43 million (previous year: ¤29 million) is carried as subordinated debt and allocated to subordinated liabilities.

Hybrid capital instruments represent three issues in the form of Class B preferred securities that were issued by subsidiaries established for this purpose. The Class B preferred securities of Postbank Funding LLC I to III are issued for an unlimited term and represent Tier 1 capital for banking regulatory purposes.

Deferred interest on hybrid capital instruments not yet due amounted to ¤14 million (previous year: ¤14 million).

Holders of profit participation certificates receive an annual profit-related distribution ranking prior to shareholders’ profit rights; the distribution right is reduced if and to the extent that no distributable profit is available.

The interest expense for 2006 on profit participation certificates outstanding totals ¤52 million (previous year: ¤24 million). Deferred interest not yet due amounting to ¤53 million (previous year: ¤22 million) is allocated directly to profit participation certificates.

Due to their contractual arrangements and economic substance, contributions by typical silent partners represent debt and are reported under subordinated debt in accordance with IAS 32.

The interest expense on contributions of assets by silent partners amounts to ¤4 million (previous year: ¤4 million).

A total of ¤1,668 million of the subordinated debt (previous year: ¤2,290 million) is hedged against changes in fair value, of which ¤629 million (previous year: ¤663 million) is attributable to subordinated liabilities and ¤1,039 million (previous year: ¤1,125 million) to hybrid capital instruments.

¤4.2 billion of subordinated debt is (previous year: ¤3.2 billion) fixed-interest, while ¤0.8 billion (previous year: ¤0.5 billion) is variable-interest.

167 (39) Equity

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Issued capital 410 410 Share premium 1,160 1,160 Retained earnings 3,051 2,764 Foreign currency translation reserve –117 –77 Revaluation reserve 6 311 Unappropriated surplus 695 492 Minority interest 2 1 Total 5,207 5,061

Postbank’s issued capital is composed of 164,000,000 no-par value registered shares.

The Management Board is authorized, with the consent of the Supervisory Board, to increase the Bank’s share capital on one or more occasions by up to a total of ¤41 million up to March 24, 2009 by issuing new, non-voting no-par value registered shares (preference shares) against non-cash contributions (authorized capital). This authorization can be exercised in full or in part. Shareholders’ pre-emptive subscription rights are disapplied. The Management Board is authorized, with the consent of the Supervisory Board, to determine all additional rights attached to the shares and the conditions governing their issuance.

The Management Board is authorized, with the consent of the Supervisory Board, to increase the Bank’s share capital on one or more occasions by up to a total of ¤137 million up to May 10, 2011 by issuing new, non-voting no-par value registered shares against cash contributions (authorized capital II). This authorization can be exercised in full or in part. Shareholders must be granted pre- emptive rights. However, the Management Board is authorized, with the consent of the Supervisory Board, to disapply shareholders’ pre-emptive rights if this is required to eliminate fractions. The Management Board is authorized, with the consent of the Supervisory Board, to determine all additional rights attached to the shares and the conditions governing their issuance.

The Management Board was authorized at the Annual General Meeting on May 11, 2006 to purchase own shares for the purposes of securities trading in accordance with section 71 (1) no. 7 of the AktG (German Stock Corporation Act) amounting to up to a total of 5 % of the share capital or for other purposes in accordance with section 71 (1) no. 8 of the AktG amounting to up to a total of 10 % of the share capital. In accordance with the legal regulation, the aggregate number of own shares held may not account for more than 10 % of the share capital. The authorizations took effect at the end of the Annual General Meeting and are valid until November 10, 2007. The authorizations on the purchase of own shares in accordance with section 71 (1) no. 7 of the AktG as well as section 71 (1) no. 8 of the AktG existing at the time of the Annual General Meeting, originally restricted until November 18, 2006, were revoked when the new authorization became effective.

168 Consolidated Financial Statements Fiscal Year 2006

The gains or losses on the measurement of available-for-sale financial instruments reported in the revaluation reserve in equity changed as follows:

Available-for-sale financial instruments ¤m ¤m 2006 2005

Balance at January 1 311 222 Remeasurement gains/losses –247 294 Available for sale, hedged (due to changes in credit risk) –122 –15 Available for sale, unhedged –125 309 Disposals and impairment –187 –224 Available for sale due to impairment 128 2 thereof hedged financial instruments – – thereof unhedged financial instruments 128 2 Available for sale due to disposal/hedge termination –315 –226 thereof hedged financial instruments –10 12 thereof unhedged financial instruments –305 –238 Deferred taxes recognized directly in equity 129 19 Balance at December 31 6 311

An amount of ¤187 million (previous year: ¤224 million) carried in the revaluation reserve was reversed to income from disposals and impairment on available-for-sale financial instruments in the year under review. In addition, the revaluation reserve decreased by ¤247 million (previous year: increase by ¤294 million) due to the remeasurement of available-for-sale financial instruments. Deferred taxes recognized directly in equity changed by ¤129 million (previous year: ¤19 million) in the fiscal year under review to a closing balance of ¤109 million (previous year: ¤20 million); the revaluation reserve rose accordingly.

169 Other disclosures

(40) Segment reporting Segment reporting by business division Postbank Group manages its activities on the basis of a management information system whose core component is management accounting by business division. The business divisions correspond to the Group’s organizational structure.

Retail Corporate Transaction Financial Others1 Group1 Banking Banking Banking Markets 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 ¤m ¤m ¤m ¤m ¤m ¤m ¤m ¤m ¤m ¤m ¤m ¤m

Net interest income 2,358 1,682 260 238 5 5 92 83 –542 –333 2,173 1,675 Net trading income 13 – 5 1 – – 46 55 181 149 245 205 Net income from investment securities 25 – 2 8 –1 – 6 – 260 244 292 252 Balance sheet-related revenues 2,396 1,682 267 247 4 5 144 138 –101 60 2,710 2,132 Net fee and commission income 1,061 388 105 108 263 278 63 62 –85 –137 1,407 699 Total income 3,457 2,070 372 355 267 283 207 200 –186 –77 4,117 2,831 Administrative expenses –2,178 –1,335 –171 –165 –245 –263 –78 –80 –140 –43 –2,812 –1,886 Allowance for losses on loans and advances –277 –148 –38 –39 – – –3 2 –19 –20 –337 –205 Other income/ expenses –78 1 2 –2 5 3 6 –2 38 –21 –27 –21 Profit before tax 924 588 165 149 27 23 132 120 –307 –161 941 719

Cost/income ratio (CIR) 63.0% 64.5% 46.0% 46.5% 91.8% 92.9% 37.7% 40.0% – – 68.3% 66.6% Return on equity before taxes (RoE) 32.7% 27.3% 46.7% 43.2 % – – 23.8% 22.0 % –25.6 % –9.4 % 18.9 % 15.0 %

Segment assets 77,370 31,762 16,364 14,580 82 239 28,209 23,337 58,086 66,565 180,111 136,483 Segment liabilities 93,200 58,978 17,179 13,732 0 143 11,313 11,957 46,447 42,532 168,139 127,342

The “Others” item contains consolidation adjustments, items not attributable to the business divisions, unallocated overhead costs and Postbank’s proprietary trading result.

Since the settlement of payment transactions is not banking business in the traditional sense, we do not report return on equity in our Transaction Banking business segment.

The prior-period amounts were adjusted to reflect the organizational structures prevailing in 2006 as well as modified allocation criteria.

1 Prior-period figures restated (see note 5)

170 Consolidated Financial Statements Fiscal Year 2006

Pro forma segment reporting by business divisions2

Retail Corporate Transaction Financial Others1 Group1 Banking Banking Banking Markets 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 ¤m ¤m ¤m ¤m ¤m ¤m ¤m ¤m ¤m ¤m ¤m ¤m

Net interest income 2,358 2,177 260 238 5 5 92 83 –542 –555 2,173 1,948 Net trading income 13 25 5 1 – – 46 55 181 150 245 231 Net income from investment securities 25 17 2 8 –1 – 6 – 260 245 292 270 Balance sheet-related revenues 2,396 2,219 267 247 4 5 144 138 –101 –160 2,710 2,449 Net fee and commission income 1,061 1,081 105 108 263 278 63 62 –85 –150 1,407 1,379 Total income 3,457 3,300 372 355 267 283 207 200 –186 –310 4,117 3,828 Administrative expenses –2,178 –2,301 –171 –165 –245 –263 –78 –80 –140 –61 –2,812 –2,870 Allowance for losses on loans and advances –277 –229 –38 –39 – – –3 2 –19 –20 –337 –286 Other income/ expenses –78 36 2 –2 5 3 6 –2 38 8 –27 43 Profit before tax 924 806 165 149 27 23 132 120 –307 –383 941 715

Cost/income ratio (CIR) 63.0 % 69.7 % 46.0 % 46.5 % 91.8 % 92.9 % 37.7 % 40.0 % – – 68.3 % 75.0% Return on equity before taxes (RoE) 32.7 % 29.2 % 46.7 % 43.2 % – – 23.8 % 22.0 % –25.6 % –34.7 % 18.9 % 14.9 %

Segment reporting by geographical region The allocation of segments by the domicile of the branch or Group company produces the following distribution:

Assets Liabilities1 Income Profit before tax 2006 2005 2006 2005 2006 2005 2006 2005 ¤m ¤m ¤m ¤m ¤m ¤m ¤m ¤m

Germany 145,171 97,408 134,940 90,063 3,884 2,637 785 592 Others 34,940 39,075 33,199 37,279 233 194 156 127 Europe 30,081 35,327 28,765 33,907 142 130 106 87 USA 4,484 3,748 4,116 3,372 85 64 49 40 Asia 375 – 318 – 6 – 1 – Total 180,111 136,483 168,139 127,342 4,117 2,831 941 719

1 Prior-period figures restated (see note 5); 2 see note 2

171 (41) Contingencies and other obligations Contingent liabilities arise from past events that will lead to possible future obligations. These obligations arise from the occurrence of uncertain future events whose settlement amount cannot be estimated with sufficient reliability.

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Contingent liabilities on guarantees and warranties 1,974 1,804 Other obligations Irrevocable loan commitments 21,369 16,583 of which: building loans provided 1,536 – Total 23,343 18,387

(42) Fair value of financial instruments carried at amortized cost or hedge fair value The fair values of financial instruments carried at amortized cost or hedge fair value on the balance sheet are compared with their carrying amounts in the following table:

Dec. 31, 2006 Dec. 31, 20051 Carrying Full fair Carrying Full fair amount value amount value ¤m ¤m ¤m ¤m

Assets Cash reserve 1,015 1,015 968 968 Loans and advances to other banks 16,350 16,357 17,801 17,862 Loans and advances to customers 87,182 89,195 52,873 54,975 Allowance for losses on loans and advances –1,155 –1,155 –776 –776 Investment securities 63,299 63,175 15,974 16,037 166,691 168,587 86,840 89,066

Liabilities Deposits from other banks 47,319 47,366 30,778 30,986 Due to customers 101,316 101,439 78,481 78,871 Securitized liabilities and subordinated debt 20,934 21,019 18,521 18,931 169,569 169,824 127,780 128,788

1 Prior-period figures restated (see note 5)

172 Consolidated Financial Statements Fiscal Year 2006

In general, fair value is calculated for all financial instruments. The only exceptions are items payable on demand and savings deposits with an agreed withdrawal notice of one year or less.

If there is an active market for a financial instrument (e. g. a stock exchange), the fair value is expressed by the market or quoted exchange price at the balance sheet date. If there is no active market, the fair value is determined using recognized valuation models (present value method or option pricing models). The valuation models used must reflect the key factors affecting the value of the financial instruments, and their parameters are based on market conditions at the balance sheet date. The cash flows used in the present value method are based on the contractual terms of the financial instruments.

(43) Financial instruments in accordance with IAS 39 – Measurement categories

Fair value hedges/option Unhedged Total Dec. 31, 2006 Dec. 31, 20051 Dec. 31, 2006 Dec. 31, 20051 Dec. 31, 2006 Dec. 31, 20051 ¤m ¤m ¤m ¤m ¤m ¤m

Assets 31,512 26,298 149,084 110,824 180,596 137,122 Loans and receivables 9,005 8,978 106,859 73,722 115,864 82,700 Loans to other banks 2,136 2,720 14,214 15,081 16,350 17,801 Loans to customers 1,500 4,115 78,983 48,185 80,483 52,300 Investment securities 5,369 2,143 13,662 10,456 19,031 12,599 Available-for-sale assets 15,770 16,681 23,542 22,768 39,312 39,449 Investment securities 15,770 16,681 23,542 22,768 39,312 39,449 Held-to-maturity investments – – 5,474 3,948 5,474 3,948 Loans to other banks – – – – – – Loans to customers – – 518 573 518 573 Investment securities – – 4,956 3,375 4,956 3,375 Held for trading 71 – 13,209 10,386 13,280 10,386 Trading assets 71 – 13,209 10,386 13,280 10,386 Fair value option 6,181 – – – 6,181 – Loans to customers 6,181 – – – 6,181 – Hedging derivatives 485 639 – – 485 639

Liabilities 18,602 22,614 155,543 110,179 174,145 132,793 Liabilities 17,243 20,946 152,326 106,834 169,569 127,780 Deposits from other banks 2,802 2,306 44,517 28,472 47,319 30,778 Due to customers 4,761 2,849 96,555 75,632 101,316 78,481 Securitized liabilities 8,012 13,501 7,874 1,237 15,886 14,738 Subordinated debt 1,668 2,290 3,380 1,493 5,048 3,783 Held for trading 401 – 3,217 3,345 3,618 3,345 Trading liabilities 401 – 3,217 3,345 3,618 3,345 Hedging derivatives 958 1,668 – – 958 1,668

1 Prior-period figures restated (see note 5)

173 (44) Derivatives The Postbank Group uses derivatives to hedge positions as part of its asset/liability management policy. They are also entered into for trading purposes.

Derivatives on foreign currencies are mostly entered into in the form of currency forwards, currency swaps, cross-currency swaps and currency options. Interest rate derivatives relate primarily to interest rate swaps, forward rate agreements and interest rate futures and options; forward transactions in fixed-income securities are occasionally entered into. Equity derivatives are entered into in the form of equity options and equity/index futures in particular. Credit derivatives (credit default swaps) were also entered into to a limited extent.

The notional amounts represent the gross volume of all sales and purchases. The notional amount is a reference value for determining reciprocally agreed settlement payments; it does not represent recognizable receivables or liabilities.

The fair values of the individual contracts were calculated using recognized valuation models and do not reflect any netting agreements.

Holdings of derivatives are composed of the following items:

Notional amounts Positive fair values Negative fair values Dec. 31, 2006 Dec. 31, 2005 Dec. 31, 2006 Dec. 31, 2005 Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m ¤m ¤m ¤m ¤m

Trading derivatives438,244 361,833 3,289 3,092 3,616 3,341 Hedging derivatives43,568 41,909 485 639 958 1,668 Total 481,812 403,742 3,774 3,731 4,574 5,009

174 Consolidated Financial Statements Fiscal Year 2006

The following table presents the open interest-rate and foreign currency, conditional and unconditional forward and option contracts of the Postbank Group at the balance sheet date.

Fair value Notional amount Positive fair values Negative fair values Dec. 31, 2006 Dec. 31, 2005 Dec. 31, 2006 Dec. 31, 2005 Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m ¤m ¤m ¤m ¤m

Trading derivatives Foreign currency derivatives OTC products Currency forwards 4,115 2,238 36 19 22 25 Currency swaps 17,767 13,840 152 157 129 140 Total holdings of foreign currency derivatives 21,882 16,078 188 176 151 165 Interest rate derivatives OTC products Interest rate swaps 398,821 301,793 3,068 2,892 3,436 3,147 Cross-currency swaps 55 15 2 1 – 1 FRAs 2,632 10,433 9 1 1 – OTC interest rate options 645 408 – – 1 – Other interest rate contracts 479 457 1 2 1 2 Exchange-traded products Interest rate futures 4,131 16,606 – – – – Interest rate options 7,996 14,665 1 1 – 1 Total holdings of interest rate derivatives 414,759 344,377 3,081 2,897 3,439 3,151

175 Fair value Notional amount Positive fair values Negative fair values Dec. 31, 2006 Dec. 31, 2005 Dec. 31, 2006 Dec. 31, 2005 Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m ¤m ¤m ¤m ¤m

Equity/index derivatives OTC products Equity options (long/short) 165 198 13 14 19 16 Exchange-traded products Equity/index futures 8 147 – – 2 – Equity/index options 83 112 1 2 1 – Total holdings of equity/ index derivatives 256 457 14 16 22 16 Credit derivatives Credit default swaps 1,347 921 6 3 4 9 Total holdings of credit derivatives 1,347 921 6 3 4 9

Total holdings of trading derivatives 438,244 361,833 3,289 3,092 3,616 3,341 of which banking book derivatives 22,214 36,757 276 475 351 571 of which: derivatives relating to hedged items accounted for under the fair value option 8,097 – 71 – 401 – Hedging derivatives Fair value hedges Interest rate swaps 41,423 39,776 482 602 733 1,539 Cross-currency swaps 1,796 2,132 3 37 222 129 Credit default swaps 349 – – – 3 – Other interest rate contracts – – – – – – Total holdings of hedging derivatives from fair value hedges 43,568 41,908 485 639 958 1,668 Cash flow hedges Credit default swaps – 1 – – – – Total holdings of hedging derivatives from cash flow hedges – 1 – – – –

Total holdings of hedging derivatives 43,568 41,909 485 639 958 1,668 Total holdings of derivatives 481,812 403,742 3,774 3,731 4,574 5,009

176 Consolidated Financial Statements Fiscal Year 2006

Total holdings of recognized derivative assets and liabilities:

Hedging derivatives Positive Negative Positive Negative fair values fair values fair values fair values Dec. 31, 2006 Dec. 31, 2006 Dec. 31, 2005 Dec. 31, 2005 ¤m ¤m ¤m ¤m

Remaining maturity less than 3 months 63 123 304 316 3 months to 1 year 15 27 32 54 from 1 to 2 years 11 65 16 82 from 2 to 3 years 22 148 14 118 from 3 to 4 years 31 129 44 144 from 4 to 5 years 21 50 28 141 more than 5 years 322 416 201 813 485 958 639 1,668

Trading and banking book derivatives Positive Negative Positive Negative fair values fair values fair values fair values Dec. 31, 2006 Dec. 31, 2006 Dec. 31, 2005 Dec. 31, 2005 ¤m ¤m ¤m ¤m

Remaining maturity less than 3 months 471 749 1,203 1,348 3 months to 1 year 105 116 110 103 from 1 to 2 years 120 151 32 65 from 2 to 3 years 182 272 33 18 from 3 to 4 years 226 193 74 103 from 4 to 5 years 144 170 111 57 more than 5 years 2,041 1,965 1,529 1,647 3,289 3,616 3,092 3,341

The remaining maturity is the period between the balance sheet date and the contractual maturity of the asset or liability.

177 The following table presents the positive and negative values of derivatives by counterparties.

Positive fair values Negative fair values Dec. 31, 2006 Dec. 31, 2005 Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m ¤m ¤m

Counterparties Banks in OECD countries 3,699 3,653 4,457 4,914 Public institutions in OECD countries 17 0 26 0 Other counterparties in OECD countries 58 78 91 95 3,774 3,731 4,574 5,009

(45) Bonds outstanding

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Bonds outstanding Bonds issued 16,034 13,486 Registered mortgage bonds issued as collateral 62 67 Public-sector mortgage bonds (Pfandbriefe)/municipal bonds 23 30 Cover requirement for bonds outstanding 16,119 13,583

178 Consolidated Financial Statements Fiscal Year 2006

(46) Cover for bonds outstanding

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Cover for registered securities Loans to other banks and customers 11,390 10,588 Total registered securities requiring cover 9,191 4,849 Excess cover 2,199 5,739

Mortgage bond cover Loans to other banks and customers (mortgage loans) 3,023 3,805 Total mortgage bonds requiring cover 1,890 2,684 Excess cover 1,133 1,121

Municipal bond cover Loans to other banks and customers and substitute cover in securities 5,640 6,499 Total municipal bonds requiring cover 4,953 5,953 Excess cover 687 546

Cover for interest expenses on registered securities Interest expenses on registered securities 395 213 Interest income from cover assets 555 531 Excess cover 160 318

Cover for interest expenses on mortgage bonds Interest expenses on mortgage bonds 101 145 Interest income from cover assets 160 211 Excess cover 59 66

Cover for interest expenses on municipal bonds Interest expenses on municipal bonds 248 303 Interest income from cover assets 272 326 Excess cover 24 23

179 (47) Foreclosures and compulsory administration

Dec. 31, 2006 Dec. 31, 2005 Number Number

Foreclosures pending 996 942 Compulsory administration proceedings 678 653 Foreclosures completed 218 269

(48) Foreign currency volume

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Foreign currency assets 15,831 12,075 Foreign currency liabilities 15,799 12,029

(49) Disclosures on significant concentration of business The percentage classification of Deutsche Postbank AG’s loans by sector is as follows:

2006 2005 % %

Dependent employees and other private individuals 51.9 39.6 Other enterprises and self-employed individuals 18.1 18.1 Public sector 10.0 14.0 Credit institutions 20.0 28.3 100.0 100.0

The percentage classification by German and foreign residents is as follows:

2006 2005 % %

German residents 83.6 70.2 Foreign residents 16.4 29.8 100.0 100.0

180 Consolidated Financial Statements Fiscal Year 2006

(50) Risk assets and capital ratio The Postbank Group has undertaken to fulfill the capital adequacy requirements set out in the respective framework issued by the Basel Committee on Banking Supervision. This requires credit institutions to maintain capital of at least 8% of their risk-weighted assets (capital ratio). At least 4 % of risk assets must consist of Tier 1 capital (Tier 1 ratio).

The Bank’s regulatory own funds consist of Tier 1, Tier 2 and Tier 3 capital. Tier 1 capital primarily consists of issued capital, reserves and hybrid capital components. Tier 2 capital is primarily composed of profit participation certificates and subordinated long-term liabilities.

The regulatory own funds of the Postbank Group in accordance with the Basel Capital Accord were as follows at December 31, 2006:

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Risk-weighted assets 80,565 62,354 Market risk positions 13,200 7,538 Positions for which capital charges are required 93,765 69,892

Tier 1 capital 4,443 5,164 thereof: hybrid capital instruments 1,151 1,151 Tier 2 capital 3,161 2,342 thereof: Profit participation certificates outstanding 1,079 558 thereof: Subordinated liabilities 2,221 1,780 Tier 3 capital 3 – Eligible own funds 7,607 7,506 Tier 1 ratio (%) 5.5 8.3 Capital ratio (%) 8.1 10.7

181 (51) Maturity structure As of December 31, 2006:

Payable Less 3 months 1 to 2 to 3 to 4 to More Total on than 3 to 1 2 years 3 years 4 years 5 years than demand months year 5 years ¤m ¤m ¤m ¤m ¤m ¤m ¤m ¤m ¤m

Loans and advances to other banks 1,906 5,470 1,733 934 1,254 858 846 3,349 16,350 Loans and advances to customers 2,193 5,777 8,340 8,429 8,976 7,129 10,050 36,288 87,182 Trading assets – 643 827 6,817 1,365 568 708 2,352 13,280 Hedging derivatives – 63 15 11 22 31 21 322 485 Investment securities 46 1,948 5,714 4,484 5,127 4,594 5,540 35,846 63,299 Income tax assets 4 – 15 5 71 5 10 134 244 Other assets 132 127 73 24 16 36 21 238 667 Total 4,281 14,028 16,717 20,704 16,831 13,221 17,196 78,529 181,507

Deposits from other banks 2,719 30,719 4,645 1,614 2,224 508 488 4,402 47,319 Due to customers 21,436 48,379 2,539 793 982 453 2,406 24,328 101,316 Securitized liabilities – 5,227 2,600 1,818 3,552 1,210 116 1,363 15,886 Trading liabilities – 749 116 151 272 193 170 1,967 3,618 Hedging derivatives – 123 27 65 148 129 50 416 958 Provisions 11 86 273 349 206 188 184 2,394 3,691 Provisions for pensions – 19 52 70 68 67 66 773 1,115 Other provisions 11 67 221 279 138 121 118 1,621 2,576 Income tax liabilities 5 – 131 11 5 89 421 396 1,058 Other liabilities 204 228 229 16 13 18 34 44 786 Subordinated debt 16 28 24 300 238 125 1,422 2,895 5,048 Total 24,391 85,539 10,584 5,117 7,640 2,913 5,291 38,205 179,680

The remaining maturities of derivatives are presented separately in a table in note (44).

182 Consolidated Financial Statements Fiscal Year 2006

As of December 31, 2005:

Payable Less 3 months 1 to 2 to 3 to 4 to More Total1 on than 3 to 1 2 years 3 years 4 years 5 years than demand months year 5 years ¤m ¤m ¤m ¤m ¤m ¤m ¤m ¤m ¤m

Loans and advances to other banks 1,153 2,966 2,566 622 1,067 1,566 1,316 6,545 17,801 Loans and advances to customers 2,053 5,689 5,696 5,707 5,468 4,849 3,233 20,178 52,873 Trading assets 3 1,387 571 5,349 966 223 207 1,680 10,386 Hedging derivatives 7 297 32 16 14 44 28 201 639 Investment securities – 1,835 2,818 7,155 4,019 4,177 4,484 30,935 55,423 Income tax assets 243 46 6 4 4 15 89 27 434 Other assets 833 157 19 15 14 51 304 91 1,484 Total 4,292 12,377 11,708 18,868 11,552 10,925 9,661 59,657 139,040

Deposits from other banks 585 21,790 1,674 918 1,233 1,913 352 2,313 30,778 Due to customers 21,940 44,539 2,684 799 615 803 2,246 4,855 78,481 Securitized liabilities – 4,392 1,974 2,370 1,126 2,594 1,187 1,095 14,738 Trading liabilities 14 1,334 103 65 18 103 57 1,651 3,345 Hedging derivatives 31 285 54 82 118 144 141 813 1,668 Provisions 12 23 92 155 63 66 68 490 969 Provisions for pensions – 14 40 52 50 49 47 333 585 Other provisions 12 9 52 103 13 17 21 157 384 Income tax liabilities 29 – 46 – – – 923 32 1,030 Other liabilities 86 284 27 19 1 9 – 1 427 Subordinated debt 4 – 14 – 250 112 39 3,364 3,783 Total 22,701 72,647 6,668 4,408 3,424 5,744 5,013 14,614 135,219

1 Prior-period figures restated (see note 5)

183 (52) Subordinated assets Assets are subordinated if their recovery as receivables ranks behind other creditors in the event of liquidation or bankruptcy of the issuer.

Balance sheet assets contain the following subordinated assets:

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Loans and advances to customers – – Loans and advances to other banks 5 10 Investment securities – – Total 5 10

(53) Other financial obligations Commencing in 2000, Postbank pays 33 % of the gross compensation of its active civil servants and the notional gross compensation of its civil servants on leave of absence to a pension fund (Unterstützungskasse) established for this purpose. Postbank has no further obligations for benefits paid by the pension fund, which are the responsibility of the German government.

Postbank ensures that, with the exception of political risk, its Deutsche Postbank International S.A., Luxembourg, and PB Capital Corp., Delaware, U.S.A., subsidiaries will be able to meet their obligations.

Postbank has issued subordinated comfort letters under the terms of issue of subordinated bonds by Deutsche Postbank Funding LLC I, II, and III, all three of which are domiciled in Delaware, U.S.A.

In accordance with the provisions of that company’s articles of association, the investment in Liquiditäts-Konsortialbank GmbH, Frankfurt am Main, results in a pro rata additional funding obligation of up to ¤5.0 million. Deutsche Postbank AG is also liable pro rata for the fulfillment of the additional funding obligations of other shareholders belonging to the Bundesverband deutscher Banken e.V. (Association of German Banks).

There are also additional funding obligations in respect of the deposit protection fund of the Bundesverband deutscher Banken e.V. in the amount laid down in its statutes, as well as in respect of the Entschädigungseinrichtung deutscher Banken – the mandatory compensation scheme for all deposit-taking institutions in Germany – on the basis of the provisions of the Einlagensicherungs- und Anlegerentschädigungsgesetz (German Deposit Protection and Investor Compensation Act).

In addition, Deutsche Postbank International S.A., Luxembourg, is a member of the “Association pour la Garantie des Dépôts Luxembourg” (AGDL), the Luxembourg deposit guaranty and investor indemnity fund.

184 Consolidated Financial Statements Fiscal Year 2006

Financial obligations from operating leases relate to land and buildings and have the following maturity structures:

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

in the first year after the balance sheet date 20 20 in the second year after the balance sheet date 18 13 in the third year after the balance sheet date 17 10 in the fourth year after the balance sheet date 16 8 in the fifth year after the balance sheet date 11 8 more than five years after the balance sheet date 65 25 Total 147 84

(54) Trust activities Trust activities are composed of the following items:

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Trust assets Loans and advances to other banks 47 42 Loans and advances to customers 1,240 1,372 1,287 1,414 Trust liabilities Trust funds for transmitted loans 594 643 Special fund of the State of Mecklenburg-Western Pomerania 44 42 Retired farmers’ pension fund 11 11 Special-purpose funds 638 718 1,287 1,414

185 (55) Employees The average number of employees in the Group in the period under review was as follows:

Total Total 2006 2005

Full-time Civil servants 6,838 2,372 Salaried employees 11,734 5,813 18,572 8,185 Part-time Civil servants 1,046 707 Salaried employees 2,666 631 3,712 1,338 22,284 9,523

(56) Related party disclosures In addition to the consolidated subsidiaries, the Postbank Group has direct or indirect relationships with a wide range of Deutsche Post World Net companies and a small number of unconsolidated subsidiaries in the course of its ordinary business activities. In the course of these activities, all transactions for the provision of goods and services entered into with the aforementioned companies were conducted on an arm’s length basis at standard market terms and conditions.

The following section provides an overview of the companies included in the Postbank Group.

186 Consolidated Financial Statements Fiscal Year 2006

Consolidated companies

Name and domicile Equity (%) Equity (%) interest interest direct indirect

1) Fully consolidated companies:

BHW Holding AG, Berlin/Hamelin 98.4 BHW Bausparkasse AG, Hamelin 98.4 BHW Bank AG, Hamelin 98.4 BHW Lebensversicherung AG, Hamelin 98.4 BHW Gesellschaft für Wohnungswirtschaft mbH, Hamelin 98.4 BHW Gesellschaft für Wohnungswirtschaft mbH & Co. Immobilienverwaltungs KG, Hamelin 98.4 BHW Gesellschaft für Vorsorge mbH, Hamelin 98.4 BHW Immobilien GmbH, Hamelin 98.4 BHW Home Finance Limited, New Delhi, India 98.4 Postbank Finanzberatung AG, Hamelin 23.3 75.5 Postbank Filialvertrieb AG, Bonn 100.0 Deutsche Postbank International S.A., Munsbach, Luxembourg 100.0 Deutsche Postbank Vermögens-Management S.A., Munsbach, Luxembourg 100.0 Deutsche Postbank Privat Investment Kapitalanlagegesellschaft mbH, Bonn 100.0 Postbank Immobilien und Baumanagement GmbH, Bonn 100.0 Postbank Immobilien und Baumanagement GmbH & Co. Objekt Leipzig KG, Bonn 90.0 Postbank Systems AG, Bonn 100.0 VÖB-ZVD Bank für Zahlungsverkehrsdienstleistungen GmbH, Bonn 75.0 DSL Holding AG i.A., Bonn 100.0 Deutsche Postbank Financial Services GmbH, Frankfurt/Main 100.0 Deutsche Postbank Finance Center Objekt GmbH, Munsbach, Luxembourg 90.0 DPBI Immobilien KGaA, Munsbach, Luxembourg 10.1 Postbank Leasing GmbH, Bonn 100.0 PB (USA) Holdings Inc., Wilmington, Delaware, USA 100.0 PB Capital Corp., Wilmington, Delaware, USA 100.0 PB Realty Corp., New York, USA 94.7 PB Finance (Delaware), Inc., Wilmington, Delaware, USA 100.0 PBC Carnegie LLC, Wilmington, Delaware, USA 100.0 PB Factoring GmbH, Bonn 100.0 PB Firmenkunden AG, Bonn 100.0 Betriebs-Center für Banken Deutschland GmbH & Co. KG, Frankfurt/Main 100.0 Betriebs-Center für Banken Verwaltungs GmbH, Frankfurt/Main 100.0 Betriebs-Center für Banken Zahlungsverkehrsservice GmbH, Frankfurt/Main 100.0 Betriebs-Center für Banken Payments AG, Frankfurt/Main 100.0 Deutsche Postbank Funding LLC I, Wilmington, Delaware, USA 100.0 Deutsche Postbank Funding LLC II, Wilmington, Delaware, USA 100.0 Deutsche Postbank Funding LLC III, Wilmington, Delaware, USA 100.0 Deutsche Postbank Funding Trust I, Wilmington, Delaware, USA 100.0 Deutsche Postbank Funding Trust II, Wilmington, Delaware, USA 100.0 Deutsche Postbank Funding Trust III, Wilmington, Delaware, USA 100.0

2) Proportionately consolidated companies:

PB Lebensversicherung AG, Hilden 50.0 PB Versicherung AG, Hilden 50.0

A complete list of shareholdings in accordance with sections 313 and 287 of the HGB may be consulted in the electronic commercial register.

187 Intragroup and associate receivables Receivables from unconsolidated subsidiaries and associates are presented below:

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Loans and advances to customers Subsidiaries 58 90 Associates – – 58 90 Other assets Subsidiaries 66 1,004 Associates – 17 66 1,021 Total 124 1,111

The items relate primarily to receivables from Deutsche Post AG.

Intragroup and associate payables

Payables to unconsolidated subsidiaries and associates are presented below:

Dec. 31, 2006 Dec. 31, 2005 ¤m ¤m

Deposits from other banks Subsidiaries 431 317 Associates 3 – 434 317 Other liabilities Subsidiaries 70 72 Associates – 43 70 115 Total 504 432

The items relate primarily to payables to Deutsche Post AG.

188 Consolidated Financial Statements Fiscal Year 2006

Income and expense from subsidiaries and associates

2006 2005 ¤m ¤m

Net interest income Subsidiaries 21 –1 Associates – – 21 –1 Net fee and commission income Subsidiaries 549 12 Associates – 9 549 21 Administrative expenses Subsidiaries 565 682 Associates – 1 565 683 Other income Subsidiaries 71 35 Associates – – 71 35 Other expenses Subsidiaries 8 18 Associates – 1 8 19

Administrative expenses for subsidiaries primarily consist of payments to Deutsche Post AG for financial services provided in its retail outlets.

The purchase of Postbank Filialvertrieb AG (formerly Deutsche Post Retail GmbH) was conducted on an arm’s length basis at standard market conditions.

189 Remuneration of the Management Board The annual remuneration of the members of the Management Board is composed of fixed and variable components. Variable components relate primarily to the annual bonuses determined by the Supervisory Board on the basis of the Company’s business development.

Fixed remuneration Performance- Total component* related component ¤ thousand ¤ thousand ¤ thousand

Wulf von Schimmelmann, Chairman 1,047.5 1,047.5 2,095.0 Dirk Berensmann 500.0 800.0 1,300.0 Henning R. Engmann (since March 10, 2006) 404.6 576.4 981.0 Stefan Jütte 500.0 800.0 1,300.0 Wolfgang Klein 500.0 800.0 1,300.0 Loukas Rizos 500.0 1,000.0 1,500.0 Hans-Peter Schmid 433.3 500.0 933.3 Ralf Stemmer 400.0 500.0 900.0 Mario Daberkow (since November 1, 2006) 41.7 58.3 100.0 Total 4,327.1 6,082.2 10,409.3

* In addition, the members of the Management Board received “Other compensation” in the amount of ¤162 thousand, consisting primarily of the use of management cars, the reimbursement of travel costs and telephone costs, and special allowances for expenses incurred abroad and other non-cash benefits. This compensation is taxable by the respective member of the Manage- ment Board. In principle, it is available to all members of the Management Board equally; the amount varies depending on different personal circumstances.

The total remuneration of the members of the Management Board in fiscal year 2006 amounted to ¤10,409.3 thousand, compared with ¤6,932.3 thousand in fiscal year 2005.

The remuneration paid to former members of the Management Board amounted to ¤2.1million (previous year: ¤1.9 million). Provisions for pensions for these individuals were set up in the amount of ¤22,425.8 thousand (previous year: ¤22,301.9 thousand).

The members of the Management Board benefit from individually agreed direct pension commitments. Because each board member has a different career history, the precise arrangements can differ greatly.

A pension shall be paid if the member of the Management Board leaves our service as a result of disability, death or old age.

Pension rights generally accrue after at least five years of service. In the case of disability, this minimum waiting period may be waived in part. Furthermore, Loukas Rizos is entitled to receive a pension if another company acquires a majority holding in the Company or if there is a change in his agreed duties without an important reason for which Loukas Rizos is responsible. In this case, the waiting period shall be waived.

As a rule, old-age pensions are paid from the age of 62. The Chairman of the Management Board has the right to choose between regular pension payments and a lump-sum capital payment.

The size of the pension depends on the length of service and the amount of pensionable remuneration.

190 Consolidated Financial Statements Fiscal Year 2006

The standard pension commitments further include rules for the payment of a transitional allowance for board members who leave the Company upon reaching the age limit or for reasons of disability.

If Dirk Berensmann, Mario Daberkow, Wolfgang Klein, Hans-Peter Schmid or Ralf Stemmer leave the Management Board before the end of their contractual term due to termination of contract by Postbank, the pension benefits shall be calculated as if they had fulfilled their contract as planned, unless Postbank terminates the employment relationship for good cause. As to termination of the contract of employment by a board member, in the case of Wulf von Schimmelmann the pension benefits shall be calculated as if the term of the contract had been served.

According to the latest pension rules, future pension payments will be adjusted in line with the percentage growth in the highest pay group of the collective agreement for the Verband öffentlicher Banken (Association of German Public Sector Banks). Otherwise, payments are adjusted in line with Germany’s consumer price index.

Pension commitments for individual members of the Management Board

Pension commitments Percentage of final Maximum Service cost salary as of percentage of for pension Dec. 31, 2006 final salary obligations in % in % ¤

Wulf von Schimmelmann, Chairman 66 75 1,288,973 Dirk Berensmann 54 60 171,885 Henning R. Engmann (since March 10, 2006) 44.69 60 146,386 Stefan Jütte 33 50 190,585 Wolfgang Klein 60 60 156,020 Loukas Rizos 63 75 384,578 Hans-Peter Schmid 0 60 338,225 Ralf Stemmer 0 60 50,717 Mario Daberkow (since November 1, 2006) 0 60 135,779

Hans-Peter Schmid, Ralf Stemmer and Mario Daberkow have not yet completed their respective waiting periods. As of the end of fiscal year 2006, they therefore have no entitlement to an old-age pension under these arrangements. Ralf Stemmer’s previous pension arrangements will take effect before the expiry of the waiting period. In the case of Henning R. Engmann, the service cost refers to the figure as of December 31, 2006.

191 Members of the Management Board have the opportunity to take part in a deferred compensation program, whereby they accept a lower level of remuneration in return for higher pension benefits. The size of the final pension depends on the amount by which the salary has been reduced and on the age of the individual. In fiscal year 2006, no member of the Management Board opted to take part in the deferred compensation program. The defined benefit obligation (DBO) for current pensions, calculated in line with international accounting principles, totals ¤32.73 million.

Remuneration of the Supervisory Board Deutsche Postbank AG’s Annual General Meeting last changed the remuneration of the Supervisory Board in 2004, adjusting it in line with the Corporate Governance Code. Article 15 of the Articles of Association of Deutsche Postbank AG establishes the system of remuneration. In accordance with this article, the annual remuneration of Supervisory Board members comprises a fixed component, a performance-related component, and a performance-related component with a long-term incentive effect. It takes into account the responsibility and scope of Supervisory Board activity as well as the financial success of Deutsche Postbank AG. The roles of chair and deputy chair as well as membership of a committee are reflected in the remuneration.

Members of the Supervisory Board will be entitled to performance-related remuneration with a long- term incentive effect for fiscal year 2006 in the amount of ¤300 for each 1% by which the consolidated net profit per share for fiscal year 2008 exceeds the consolidated net profit per share for fiscal year 2005. This remuneration is payable following the end of the 2009 Annual General Meeting.

Neither of the variable components may exceed ¤15,000.

The Chairman of the Supervisory Board receives double the remuneration specified above, while the Deputy Chairman receives one and a half times the remuneration specified above. The chairmanship of a Supervisory Board committee is remunerated by an additional amount the same as that specified above, while members of Supervisory Board committees additionally receive half this amount for each such position held. This does not apply for the committee formed in accordance with section 27 (3) of the Mitbestimmungsgesetz (MitbestG – German Codetermination Act). Persons who are members of the Supervisory Board for only part of a fiscal year receive the corresponding remuneration ratably.

The members of the Supervisory Board are entitled to claim out-of-pocket expenses incurred in the exercise of their office. Any value added tax on the Supervisory Board remuneration and on any out- of-pocket expenses is reimbursed. In addition, each member of the Supervisory Board attending a meeting receives an attendance allowance of ¤250 for each meeting of the full Supervisory Board or one of the committees.

The total remuneration paid to members of the Supervisory Board for fiscal year 2006 amounted to ¤962 thousand (previous year: ¤790 thousand). The increase in the variable remuneration for the Supervisory Board is largely due to the distinctly improved and sustainably positive net profit of the Deutsche Postbank Group.

192 Consolidated Financial Statements Fiscal Year 2006

The total remuneration was paid to the individual members of the Supervisory Board as follows:

Fixed Variable Total Entitlement to remuneration remuneration* remuneration with long- term incentive effect ¤ thousand ¤ thousand ¤ thousand ¤ thousand

Zumwinkel 52.5 47.5 100.0 45.0 Sommer 45.0 39.5 84.5 37.5 Asmussen 15.0 16.0 31.0 15.0 Auer 22.5 24.3 46.8 22.5 Bolte 15.0 16.0 31.0 15.0 Boysen 15.0 16.0 31.0 15.0 Ernst 30.0 32.3 62.3 30.0 Harms 15.0 16.0 31.0 15.0 Hoch 37.5 32.7 70.2 30.0 Höhmann 15.0 16.0 31.0 15.0 Kallfelz 45.0 34.3 79.3 30.0 Krüger 37.5 33.0 70.5 30.0 Kuhlow 22.5 24.0 46.5 22.5 Petram 15.0 16.0 31.0 15.0 Pfaffenbach 15.0 15.5 30.5 15.0 Schlede 22.5 24.0 46.5 22.5 von Schorlemer 15.0 16.0 31.0 15.0 Schwarz 15.0 16.0 31.0 15.0 Tausendfreund 22.5 24.2 46.7 22.5 Weiler 15.0 16.0 31.0 15.0 Total 487.5 475.3 962.8 442.5

* incl. attendance allowances

193 For his work on the Supervisory Board of the BHW Group, Peter Hoch received remuneration of ¤12.4 thousand.

No further payments or benefits were granted to members of the Supervisory Board in return for services provided individually in addition to members’ Supervisory Board activities, especially consulting and arrangement services. This does not apply to the remuneration of employee representatives as set out in their respective employment contracts.

In accordance with section 15a of the Wertpapierhandelsgesetz (WpHG – German Securities Trading Act), members of the Supervisory Board and the Management Board are required to disclose the purchase or sale of shares of Deutsche Postbank AG or rights to these shares, to the extent that they exceed the stipulated lower limit or were not acquired as a component of remuneration. For transactions notified, pursuant to section 15a of the WpHG, to Deutsche Postbank AG by members of the Management Board and the Supervisory Board involving securities of the Company, please see the website of the company at http://ir.postbank.com

194 Consolidated Financial Statements Fiscal Year 2006

(57) Other disclosures Deutsche Postbank AG’s consolidated financial statements are included in the consolidated financial statements of Deutsche Post AG.

In accordance with section 2 (4) of the Postumwandlungsgesetz (PostUmwG – Postal Service Transformation Act), the German government guarantees settlement of all liabilities existing at the time of Deutsche Postbank AG’s registration in the commercial register. The government guarantee for savings deposits expired five years after the date of registration in the commercial register.

Deutsche Postbank AG is a member of the deposit protection fund of the Bundesverband deutscher Banken e.V. and the Entschädigungseinrichtung deutscher Banken GmbH investor compensation scheme.

Deutsche Postbank AG has issued guarantee bonds for its subsidiary PB Capital Corp., Delaware, USA, in the amount of $3,994.4 million. These include a guarantee bond for swaps ($84.2 million), a rental guarantee for business premises in New York ($16.0 million) and a guarantee bond for the Commercial Paper program ($3,894.2 million).

(58) Members of executive bodies Management Board

The members of the Management Board are:

Wulf von Schimmelmann, Bonn (Chairman) Dirk Berensmann, Unkel Henning R. Engmann, Bonn since March 10, 2006 Stefan Jütte, Bonn Wolfgang Klein, Bonn Loukas Rizos, Bonn Hans-Peter Schmid, Baldham Ralf Stemmer, Königswinter Mario Daberkow, Bonn Deputy Member of the Management Board since November 1, 2006

195 Offices held by members of the Management Board of Deutsche Postbank AG as of December 31, 2006 on supervisory boards or other supervisory bodies:

Wulf von Schimmelmann

Function Company Chairman of the Supervisory Board BHW Holding AG, Berlin/Hamelin (since January 28, 2006) Member of the Supervisory Board (until January 27, 2006) Chairman of the Supervisory Board BHW Bausparkasse AG, Hamelin (since January 28, 2006) Member of the Supervisory Board (from January 16 to January 27, 2006) Chairman of the Supervisory Board Postbank Filialvertrieb AG, Bonn* (since February 10, 2006) Member of the Supervisory Board (until February 9, 2006) Chairman of the Supervisory Board (since August 22, 2006) Postbank Finanzberatung AG, Hamelin Member of the Supervisory Board (from July 12 to August 21, 2006) Chairman of the Supervisory Board PB Lebensversicherung AG, Hilden Chairman of the Supervisory Board PB Versicherung AG, Hilden Chairman of the Board of Directors PB (USA) Holdings, Inc., Wilmington (Delaware, USA) Chairman of the Board of Directors PB Capital Corp., Wilmington (Delaware, USA) Deputy Chairman of the Supervisory Board Deutsche Postbank Financial Services GmbH, Frankfurt/Main Member of the Supervisory Board (since May 3, 2006) Deutsche Telekom AG, Bonn Member of the Supervisory Board TCHIBO Holding AG, Hamburg Member of the Board of Directors accenture Corp., Irving (Texas, USA) Member of the Board of Directors Altadis S.A., Madrid (Spain) Member of the the Management Board Bundesverband deutscher Banken e.V., Berlin

Dirk Berensmann

Function Company Chairman of the Supervisory Board Postbank Systems AG, Bonn Chairman of the Advisory Board einsnull IT-Support GmbH, Cologne Chairman of the Board of Directors (since May 4, 2006) Eurogiro Network A/S, Taastrup (Denmark) Member of the Board of Directors (until May 3, 2006) Member of the Supervisory Board (since January 13, 2006) BHW Holding AG, Berlin/Hamelin Member of the Supervisory Board (since January, 11 2006) Postbank Filialvertrieb AG, Bonn* Member of the Supervisory Board (since July 12, 2006) Postbank Finanzberatung AG, Hamelin Member of the the Management Board e-Finance Lab Frankfurt am Main, Frankfurt University

*Operated under the name of Deutsche Post Retail GmbH, Bonn until July 26, 2006

196 Consolidated Financial Statements Fiscal Year 2006

Henning R. Engmannn Member of the Management Board since March 10, 2006

Function Company Chairman of the Supervisory Board BHW Bank AG, Hamelin Chairman of the Supervisory Board BHW Lebensversicherung AG, Hamelin Chairman of the Supervisory Board BHW Pensionskasse AG, Hamelin Deputy Chairman of the Supervisory Board Frankfurter Service Kapitalanlage-Gesellschaft mbH, Frankfurt/Main Member of the Supervisory Board EUWAX AG, Stuttgart Member of the Board of Directors BHW Home Finance Limited, New Delhi (India) Member of the Advisory Board (until December 31, 2006) Verband der Sparda-Banken e.V., Frankfurt/Main

Offices relinquished during the year Member of the Supervisory Board (until March 15, 2006) FRANKFURT-TRUST Investment-Gesellschaft mbH, Frankfurt/Main Member of the Management Board (until July 12, 2006) Verband der Privaten Bausparkassen e.V., Berlin Member of the Supervisory Board (until August 25, 2006) SAB Spar- und Anlageberatung AG, Bad Homburg

Stefan Jütte

Function Company Chairman of the Supervisory Board Postbank Leasing GmbH, Bonn Chairman of the Supervisory Board PB Factoring GmbH, Bonn Chairman of the Supervisory Board PB Firmenkunden AG, Bonn Member of the Board of Directors Deutsche Postbank International S.A., Luxembourg Member of the Board of Directors PB (USA) Holdings, Inc., Wilmington (Delaware, USA) Member of the Board of Directors PB Capital Corp., Wilmington (Delaware, USA) Member of the Supervisory Board BVVG Bodenverwertungs- und -verwaltungsgesellschaft mbH, Berlin Member of the Supervisory Board (since April 18, 2006) Oppenheim Immobilien-Kapitalanlagegesellschaft mbH, Wiesbaden Member of the Advisory Board SIREO REAL Estate Asset Management GmbH, Heusenstamm

197 Wolfgang Klein

Function Company Chairman of the Supervisory Board Comma Soft AG, Bonn Member of the Advisory Board VÖB-ZVD Bank für Zahlungsverkehrsdienstleistungen GmbH, Bonn Deputy Chairman of the Board of Directors Deutsche Postbank International S.A., Luxembourg Deputy Chairman of the Board of Directors Deutsche Postbank Vermögens-Management S.A., Luxembourg Deputy Chairman of the Board of Directors VISA Deutschland e.V., Frankfurt/Main Member of the Supervisory Board (since January 12, 2006) Deutsche Postbank Financial Services GmbH, Frankfurt/Main Member of the Supervisory Board (since January 13, 2006) BHW Holding AG, Berlin/Hamelin Member of the Supervisory Board (since January 16, 2006) BHW Bausparkasse AG, Hamelin Member of the Supervisory Board PB Lebensversicherung AG, Hilden Member of the Supervisory Board PB Versicherung AG, Hilden

Offices relinquished during the year Chairman of the Supervisory Board (until July 14, 2006) Postbank Vermögensberatung AG, Bonn Deputy Chairman of the Board of Directors Deutsche Postbank Asset Management S.A., (until November 22, 2006) Luxembourg Deputy Chairman of the Board of Directors Deutsche Postbank Capital Management S.A., (until December 27, 2006) Luxembourg

New offices from 2007 Member of the Advisory Board (since January 1, 2007) Verband der Sparda-Banken e.V., Frankfurt/Main .

Loukas Rizos

Function Company Chairman of the Supervisory Board Deutsche Postbank Privat Investment Kapitalanlage- gesellschaft mbH, Bonn Chairman of the Supervisory Board Deutsche Postbank Financial Services GmbH, Frankfurt/Main Chairman of the Board of Directors Deutsche Postbank International S.A., Luxembourg Chairman of the Board of Directors Deutsche Postbank Vermögens-Management S.A., Luxembourg Deputy Chairman of the Supervisory Board Postbank Finanzberatung AG, Hamelin (since August 22, 2006) Member of the Supervisory Board (from July 12 to August 21, 2006) Deputy Chairman of the Supervisory Board PB Firmenkunden AG, Bonn

Offices relinquished during the year Member of the Supervisory Board (until July 14, 2006) Postbank Vermögensberatung AG, Bonn Chairman of the Board of Directors Deutsche Postbank Asset Management S.A., Luxembourg (until November 22, 2006) Chairman of the Board of Directors Deutsche Postbank Capital Management S.A., Luxembourg (until December 27, 2006)

198 Consolidated Financial Statements Fiscal Year 2006

Hans-Peter Schmid

Function Company Member of the Supervisory Board Deutsche Postbank Privat Investment Kapitalanlage- (since January 23, 2006) gesellschaft mbH, Bonn Member of the Supervisory Board (since February 1, 2006) PB Lebensversicherung AG, Hilden Member of the Supervisory Board (since February 1, 2006) PB Versicherung AG, Hilden Member of the Supervisory Board (since July 12, 2006) Postbank Finanzberatung AG, Hamelin

Offices relinquished during the year Member of the Supervisory Board (from January 23 to July 14, 2006) Postbank Vermögensberatung AG, Bonn

Ralf Stemmer

Function Company Chairman of the Supervisory Board Postbank Immobilien und Baumanagement GmbH, Bonn Deputy Chairman of the Supervisory Board Postbank Systems AG, Bonn Deputy Chairman of the Supervisory Board Deutsche Postbank Privat Investment Kapitalanlage- gesellschaft mbH, Bonn Deputy Chairman of the Advisory Board einsnull IT-Support GmbH, Cologne Member of the Supervisory Board (since January 13, 2006) BHW Holding AG, Berlin/Hamelin Member of the Supervisory Board (since January 16, 2006) BHW Bausparkasse AG, Hamelin Member of the Supervisory Board Postbank Filialvertrieb AG, Bonn* Member of the Supervisory Board PB Firmenkunden AG, Bonn Member of the Supervisory Board PB Pensionsfonds AG, Hilden Member of the Supervisory Board Danzas Deutschland Holding GmbH, Düsseldorf Member of the Supervisory Board DHL Freight GmbH, Düsseldorf Member of the Administrative Board Bundesanstalt für Post und Telekommunikation Deutsche Bundespost, Bonn

Offices relinquished during the year Chairman of the Advisory Board (until July 31, 2006) CREDA Objektanlage- und Verwaltungsgesellschaft mbH, Bonn

*Operated under the name of Deutsche Post Retail GmbH, Bonn until July 26, 2006

199 Mario Daberkow Deputy Member of the Management Board

Function Company Chairman of the Supervisory Board Betriebs-Center für Banken Payments AG, Frankfurt/Main Chairman of the Supervisory Board Betriebs-Center für Banken Zahlungsverkehrsservice GmbH, Frankfurt/Main Chairman of the Advisory Board CREDA Objektanlage- und -verwaltungsgesellschaft mbH, (since August 1, 2006) Bonn Deputy Chairman of the Supervisory Board PB Pensionsfonds AG, Hilden Member of the Supervisory Board (since October 28, 2006) BHW Holding AG, Berlin/Hamelin Member of the Supervisory Board (since October 28, 2006) BHW Bausparkasse AG, Hamelin

New offices from 2007 Chairman of the Supervisory Board HVB Payments & Services GmbH, Munich (since January 23, 2007) Member of the Supervisory Board (from January 1 to January 22, 2007)

The members of the Supervisory Board of Deutsche Postbank AG are:

1. Shareholder representatives

Klaus Zumwinkel, Chairman of the Board of Management of Deutsche Post AG, Cologne (Chairman) Jörg Asmussen, Head of Department, Federal Ministry of Finance, Berlin Wilfried Boysen, Hamburg Edgar Ernst, Member of the Board of Management of Deutsche Post AG, Bonn Peter Hoch, Munich Ralf Krüger, management consultant, Kronberg Hans-Dieter Petram, Member of the Board of Management of Deutsche Post AG, Bonn Bernd Pfaffenbach, State Secretary, Federal Ministry of Economics and Technology, Wachtenberg-Pech Klaus Schlede, Carabietta/Lugano Elmo von Schorlemer, lawyer, Aachen

2. Employee representatives

Michael Sommer, Chairman of the German Trade Union Federation, Berlin (Deputy Chairman) Marietta Auer, Head of Department, Deutsche Postbank AG, Head Office, Unterhaching Rosemarie Bolte, Regional Head of Department, Financial Services, at ver.di Trade Union, Stuttgart Annette Harms, Deputy Chair of Deutsche Postbank AG’s Works Council, Hamburg Branch, Hamburg Ralf Höhmann, Chairman of Deutsche Postbank AG’s Works Council, Stuttgart Branch, Korntal-Münchingen Elmar Kallfelz, Member of Deutsche Post AG’s Group Works Council, Wachtberg Harald Kuhlow, Member of Deutsche Postbank AG’s Works Council, Weingarten Sabine Schwarz, Chair of Deutsche Postbank AG’s Works Council, Berlin Branch, Berlin Gerd Tausendfreund, trade union secretary of the ver.di Trade Union, Nidderau Christine Weiler, employee of Deutsche Postbank AG, Munich Branch, Kreiling

200 Consolidated Financial Statements Fiscal Year 2006

Offices held by members of the Supervisory Board of Deutsche Postbank AG as of December 31, 2006 on supervisory boards or other supervisory bodies:

Shareholder representatives

Klaus Zumwinkel

Function Company Chairman of the Supervisory Board Deutsche Telekom AG, Bonn Member of the Supervisory Board Deutsche Lufthansa AG, Cologne Member of the Supervisory Board KarstadtQuelle AG, Essen Member of the Board of Directors Morgan Stanley, Delaware, USA

Jörg Asmussen

Function Company Deputy Chairman of the Administrative Board Bundesanstalt für Finanzdienstleistungsaufsicht, Bonn Member of the Supervisory Board IKB Deutsche Industriebank AG, Düsseldorf Member of the Supervisory Board Euler Hermes Kreditversicherungs-AG, Hamburg

Edgar Ernst

Function Company Member of the Supervisory Board Allianz Versicherungs-AG, Munich

Peter Hoch

Function Company Member of the Supervisory Board Giesecke & Devrient GmbH, Munich Member of the Supervisory Board BHW Holding AG, Berlin/Hamelin Member of the Supervisory Board BHW Bausparkasse AG, Hamelin

Ralf Krüger

Function Company Chairman of the Supervisory Board KMS AG, Frankfurt/Main Chairman of the Supervisory Board KMS Asset Management AG, Frankfurt/Main Chairman of the Supervisory Board (since September 1, 2006) DIAMOS AG, Sulzbach Member of the Supervisory Board Deutsche Post AG, Bonn Member of the Advisory Board SIREO REAL Estate Asset Management GmbH, Heusenstamm

201 Hans-Dieter Petram

Function Company Chairman of the Advisory Board (until April 24, 2006) Deutsche Post Bauen GmbH, Bonn Chairman of the Advisory Board (until April 24, 2006) Deutsche Post Immobilienentwicklung GmbH, Bonn Chairman of the Advisory Board (until March 29, 2006) Global Mail Inc., Weston, USA Chairman of the Board of Directors (since March 24, 2006) Williams Lea Holdings PLC, London Member of the Supervisory Board HDI Industrie Versicherung AG, Hanover Member of the Supervisory Board HDI Privat Versicherung AG, Hanover Member of the Supervisory Board HDI Service AG, Hanover Member of the Supervisory Board (since May 1, 2006) Talanx AG, Hanover Member of the Board of Directors (since August 2, 2006) Williams Lea Group Limited, London

Bernd Pfaffenbach

Function Company Member of the Supervisory Board Deutsche Bahn AG, Berlin Member of the Supervisory Board Lufthansa Cargo AG, Frankfurt/Main

Klaus Schlede

Function Company Member of the Supervisory Board Deutsche Lufthansa AG, Cologne Member of the Supervisory Board Deutsche Telekom AG, Bonn Member of the Board of Directors SWISS International AIR LINES AG, Basel, Switzerland

Elmo von Schorlemer

Function Company Chairman of the Supervisory Board Securess AG Die Versicherungsmakler, Essen Chairman of the Supervisory Board Caruno AG, Cologne Chairman of the Supervisory Board Consuno AG, Cologne Chairman of the Supervisory Board Schneider Golling Die Assekuranzmakler AG, Düsseldorf Member of the Supervisory Board VHV Allgemeine Versicherung AG, Hanover

202 Consolidated Financial Statements Fiscal Year 2006

Employee representatives

Michael Sommer

Function Company Deputy Chairman of the Supervisory Board DGB Rechtschutz GmbH, Düsseldorf Member of the Supervisory Board Deutsche Telekom AG, Bonn Member of the Supervisory Board Salzgitter AG, Salzgitter Member of the Board of Supervisory Directors Kreditanstalt für Wiederaufbau, Frankfurt/Main

Rosemarie Bolte

Function Company Member of the Supervisory Board Karlsruher Lebensversicherung AG, Karlsruhe

Annette Harms

Function Company Member of the Supervisory Board Deutsche Post AG, Bonn

Ralf Höhmann

Function Company Chairman of the Administrative Board Deutsche BKK, Wolfsburg Member of the Management Board Head of Department 1, Financial Services, for Baden-Württemberg, ver.di Trade Union, Stuttgart Member of the Management Board UKPT, Tübingen Member of the Administrative Board BKK Bundesverband (BKK federal association) (since May 25, 2006) Member of the Administrative Board BKK Landesverband Niedersachsen-Bremen (BKK regional (since February 13, 2006) association for Lower Saxony and Bremen)

Elmar Kallfelz

Function Company Member of the Administrative Board Bundesanstalt für Post und Telekommunikation Deutsche Bundespost, Bonn

203 (59) Auditors’ fee in accordance with section 314 (1) no. 9 of the HGB

2006 2005 ¤m ¤m

Audits of the financial statements 5.6 3.4 Other assurance of valuation services 3.2 1.6 Tax advisory services 0.1 0.1 Other services rendered to the parent company or subsidiaries 5.3 0.8 Total 14.2 5.9

(60) Declaration of Compliance with the German Corporate Governance Code On November 30, 2006, the Management Board and the Supervisory Board of Deutsche Postbank AG together published the declaration of compliance with the German Corporate Governance Code for fiscal year 2006 required by section 161 of the Aktiengesetz (German Stock Corporation Act). The declaration of compliance can be accessed on the Internet on our homepage at www.postbank.de.

Bonn, February 27, 2007 Deutsche Postbank Aktiengesellschaft

Management Board

Wulf von Schimmelmann

Dirk Berensmann Henning R. Engmann Stefan Jütte Wolfgang Klein

Loukas Rizos Hans-Peter Schmid Ralf Stemmer Mario Daberkow

204 Consolidated Financial Statements Fiscal Year 2006

Auditors’ Report

We have audited the consolidated financial statements The audit includes assessing the annual financial statements prepared by Deutsche Postbank AG, comprising the balance of those entities included in consolidation, the determination sheet, the income statement, statement of changes in equity, of the entities to be included in consolidation, the account- cash flow statement and the notes to the consolidated ing and consolidation principles used and significant estimates financial statements, together with the group management made by the Company´s Board of Managing Directors, as report for the business year from January 1 to December 31, well as evaluating the overall presentation of the consoli- 2006. The preparation of the consolidated financial state- dated financial statements and the group management report. ments and the group management report in accordance with We believe that our audit provides a reasonable basis for the IFRSs, as adopted by the EU, and the additional require- our opinion. ments of German commercial law pursuant to § (Article) 315a Abs. (paragraph) 1 HGB (“Handelsgesetzbuch”: Our audit has not led to any reservations. German Commercial Code) are the responsibility of the parent Company's Board of Managing Directors. Our respon- In our opinion based on the findings of our audit the con- sibility is to express an opinion on the consolidated financial solidated financial statements comply with the IFRSs as statements and on the group management report based adopted by the EU and the additional requirements of German on our audit. commercial law pursuant to § 315a Abs. 1 HGB and give a true and fair view of the net assets, financial position and We conducted our audit of the consolidated financial state- results of operations of the Group in accordance with these ments in accordance with § 317 HGB and German generally requirements. accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer (Institute The group management report is consistent with the conso- of Public Auditors in Germany) (IDW). Those standards lidated financial statements and as a whole provides a suit- require that we plan and perform the audit such that mis- able view of the Group's position and suitably presents the statements materially affecting the presentation of the net opportunities and risks of future development. assets, financial position and results of operations in the consolidated financial statements in accordance with the applicable financial reporting framework and in the group management report are detected with reasonable assurance. Düsseldorf, February 28, 2007 Knowledge of the business activities and the economic and legal environment of the Group and expectations as to PricewaterhouseCoopers possible misstatements are taken into account in the deter- Aktiengesellschaft Wirtschaftsprüfungsgesellschaft mination of audit procedures. The effectiveness of the accounting-related internal control system and the evidence Eckes Scherello supporting the disclosures in the consolidated financial (Wirtschaftsprüfer) (Wirtschaftsprüfer) statements and the group management report are examined (German Certified (German Certified primarily on a test basis within the framework of the audit. Public Accountant) Public Accountant)

205 Consolidated Income Statement Quarterly Overview1

2006 2005 2006 2005

Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Jan.–Dec. Jan.–Dec. ¤m ¤m ¤m ¤m ¤m ¤m ¤m ¤m ¤m ¤m

Interest income 2,017 1,914 1,867 1,871 1,402 1,332 1,325 1,291 7,669 5,350 Interest expense –1,437 –1,372 –1,328 –1,359 –982 –925 –899 –869 –5,496 –3,675 Net interest income 580 542 539 512 420 407 426 422 2,173 1,675 Allowance for losses on loans and advances –103 –79 –77 –78 –50 –52 –52 –51 –337 –205 Net interest income after allowance for losses on loans and advances 477 463 462 434 370 355 374 371 1,836 1,470 Fee and commission income 414 402 398 409 209 200 196 196 1,623 801 Fee and commission expense –59 –53 –51 –53 –39 –22 –20 –21 –216 –102 Net fee and commission income355 349 347 356 170 178 176 175 1,407 699 Net trading income 64 60 62 59 51 59 64 31 245 205 Net income from investment securities 109 55 58 70 86 67 38 61 292 252 Administrative expenses –702 –695 –700 –715 –479 –471 –469 –467 –2,812 –1,886 Other income 45 47 53 60 175 28 25 24 205 252 Other expenses –58 –57 –61 –56 –206 –22 –24 –21 –232 –273 Profit before tax 290 222 221 208 167 194 184 174 941 719 Income tax –17 –76 –79 –73 –33 –68 –64 –61 –245 –226 Profit from ordinary activities after tax 273 146 142 135 134 126 120 113 696 493 Minority interest –2 1 1 –1 – – – –1 –1 –1 Net profit for the period 271 147 143 134 134 126 120 112 695 492

1 Q1 to Q3 2005 restated in accordance with IAS 8.22 due to accrual of selling expenses for mortgage lending in accordance with the matching principle

206 Consolidated Income Statement – Quarterly Overview and Pro Forma Quarterly Overview Fiscal Year 2006

Consolidated Income Statement Pro Forma Quarterly Overview1

2006 2005 2006 2005

Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Jan.–Dec. Jan.–Dec. ¤m ¤m ¤m ¤m ¤m ¤m ¤m ¤m ¤m ¤m

Interest income 2,017 1,914 1,867 1,871 1,826 1,755 1,749 1,715 7,669 7,045 Interest expense –1,437 –1,372 –1,328 –1,359 –1,338 –1,279 –1,256 –1,224 –5,496 –5,097 Net interest income 580 542 539 512 488 476 493 491 2,173 1,948 Allowance for losses on loans and advances –103 –79 –77 –78 –70 –73 –72 –71 –337 –286 Net interest income after allowance for losses on loans and advances 477 463 462 434 418 403 421 420 1,836 1,662 Fee and commission income 414 402 398 409 399 390 385 386 1,623 1,560 Fee and commission expense –59 –53 –51 –53 –59 –42 –39 –41 –216 –181 Net fee and commission income355 349 347 356 340 348 346 345 1,407 1,379 Net trading income 64 60 62 59 58 66 70 37 245 231 Net income from investment securities 109 55 58 70 91 71 43 65 292 270 Administrative expenses –702 –695 –700 –715 –726 –716 –715 –713 –2,812 –2,870 Other income 45 47 53 60 202 55 52 52 205 361 Other expenses –58 –57 –61 –56 –217 –33 –35 –33 –232 –318 Profit before tax 290 222 221 208 166 194 182 173 941 715 Income tax expense –17 –76 –79 –73 –33 –68 –64 –60 –245 –225 Profit from ordinary activities after tax 273 146 142 135 133 126 118 113 696 490 Minority interest –2 1 1 –1 – – – –1 –1 –1 Net profit for the period 271 147 143 134 133 126 118 112 695 489

1 see note 2

207 Consolidated Income Statement Multi-Year Overview

2002 2003 2004 2005 2005 2006 pro forma ¤m ¤m ¤m ¤m ¤m ¤m

Interest income 6,458 5,610 5,271 5,350 7,045 7,669 Interest expense –4,606 –3,957 –3,704 –3,675 -5,097 –5,496 Net interest income 1,852 1,653 1,567 1,675 1,948 2,173 Allowance for losses on loans and advances –137 –154 –185 –205 –286 –337 Net interest income after allowance for losses on loans and advances 1,715 1,499 1,382 1,470 1,662 1,836 Fee and commission income 517 539 706 801 1,560 1,623 Fee and commission expense –62 –72 –94 –102 –181 –216 Net fee and commission income 455 467 612 699 1,379 1,407 Net trading income 80 183 198 205 231 245 Net income from investment securities 36 75 297 252 270 292 Administrative expenses –1,883 –1,809 –1,869 –1,886 –2,870 –2,812 Other income 121 218 161 252 361 205 Other expenses –125 –136 –133 –273 –318 –232 Profit before tax 399 497 648 719 715 941 Income tax –259 –144 –212 –226 –225 –245 Profit from ordinary activities after tax 140 353 436 493 490 696 Minority interest –8 –1 –1 –1 –1 –1 Net profit for the period 132 352 435 492 489 695

Cost/income ratio (CIR) 77.7 % 76.1% 69.9 % 66.6 % 75.0% 68.3 %

Return on equity (RoE) before tax 8.6 % 10.7 % 14.0 % 15.0 % 14.9 % 18.9 % after tax 2.9 % 7.6 % 9.4 % 10.3 % 10.2 % 14.0 %

208 Consolidated Income Statement – Multi-Year Overview/Annex Fiscal Year 2006

Annex

International Financial Reporting Standards (IFRSs) applied as of December 31, 2006

Standard0) Status1) Original Title German Title Effective Adopted since2) by EU Regulation3)

1. International Financial Reporting Standards (IFRSs)4) 1.1. International Accounting Standards (IASs) IAS 1 rev. 2003 Presentation of Financial Darstellung des Jan. 1, 2005 2238/2004, Statements Abschlusses Dec. 29, 2004 IAS 7 rev. 1992 Cash Flow Statements Kapitalflussrechnungen Jan. 1, 1994 1725/2003, Sept. 29, 2003 IAS 8 rev. 2003 Accounting Policies. Changes Bilanzierungs- und Jan. 1, 2005 2238/2004, in Accounting Estimates and Bewertungsmethoden, Dec. 29, 2004 Errors Änderungen von Schätzungen und Fehler IAS 10 rev. 2003 Events after the Balance Sheet Ereignisse nach dem Jan. 1, 2005 2238/2004, Date Bilanzstichtag Dec. 29, 2004 IAS 12 rev. 2000 Income Taxes Ertragsteuern Jan. 1, 1998 1725/2003, Sept. 29, 2003 IAS 14 rev. 1997 Segment Reporting Segmentbericht- July 1, 1998 1725/2003, erstattung Sept. 29, 2003 IAS 16 rev. 2003 Property, Plant and Sachanlagen Jan. 1, 2005 2238/2004, Equipment Dec. 29, 2004 IAS 17 rev. 2003 Leases Leasingverhältnisse Jan. 1, 2005 2238/2004, Dec. 29, 2004 IAS 18 rev. 1993 Revenue Erträge Jan. 1, 1995 1725/2003, Sept. 29, 2003 IAS 19 rev. 2002 Employee Benefits Leistungen an May 31, 2002 1725/2003, Arbeitnehmer Sept. 29, 2003 IAS 21 rev. 2003 The Effects of Changes in Auswirkungen von Jan. 1, 2005 2238/2004, Foreign Exchange Rates Änderungen der Dec. 29, 2004 Wechselkurse IAS 24 rev. 2003 Related Party Disclosures Angaben über Jan. 1, 2005 2238/2004, Beziehungen zu nahe- Dec. 29, 2004 stehenden Unternehmen und Personen IAS 27 rev. 2003 Consolidated and Separate Konzern- und seperate Jan. 1, 2005 2238/2004, Financial Statements Einzelabschlüsse nach IFRS Dec. 29, 2004 IAS 28 rev. 2003 Investments in Associates Anteile an assoziierten Jan. 1, 2005 2238/2004, Unternehmen Dec. 29, 2004

0) – 4) See page 211

209 Standard0) Status1) Original Title German Title Effective Adopted since2) by EU Regulation3)

IAS 30 1991 Disclosures in the Financial Angaben im Abschluss Jan. 1, 1991 1725/2003, Statements of Banks and Similar von Banken und ähn- Sept. 29, 2003 Financial Institutions lichen Finanzinstitutionen IAS 31 rev. 2003 Interests in Joint Ventures Anteile an Joint Ventures Jan. 1, 2005 2238/2004, Dec. 29, 2004 IAS 32 rev. 2003 Financial Instruments: Finanzinstrumente: Jan. 1, 2005 2237/2004, Disclosure and Presentation Angaben und Darstellung Dec. 29, 2004 IAS 33 rev. 2003 Earnings per Share Ergebnis je Aktie Jan. 1, 2005 2238/2004, Dec. 29, 2004 IAS 34 1998 Interim Financial Reporting Zwischenbericht- Jan. 1, 1999 2238/2004, erstattung Dec. 29, 2004 IAS 36 rev. 2004 Impairment of Assets Wertminderung von March 31, 2004 2236/2004, Vermögenswerten Dec. 29, 2004 IAS 37 1998 Provisions, Contingent Liabilities Rückstellungen, Eventual- July 1, 1999 1725/2003, and Contingent Assets schulden und Eventual- Sept. 29, 2003 forderungen IAS 38 rev. 2004 Intangible Assets Immaterielle March 31, 2004 2236/2004, Vermögenswerte Dec. 29, 2004 IAS 39 rev. 2003 Financial Instruments: Finanzinstrumente: Jan. 1, 2005 2086/2004, Recognition and Measurement Ansatz und Bewertung Nov. 19, 2004 IAS 39 am. Fair Value Option Fair-Value-Option Jan. 1, 2006 1864/2005, June 15, Nov. 15, 2005 2005 IAS 39 am. Cash Flow Hedge Accoun- Cash Flow Hedge Account- Jan. 1, 2006 2106/2005, Apr. 14, ting of Forecast Intragroup ing hochwahrscheinlicher Dec. 21, 2005 2005 Transaction konzerninterner Transaktionen IAS 39 am. Financial Gurantee Contracts Finanzgarantien Jan. 1, 2006 108/2006, Aug. 18, Jan. 11, 2006 2005 IAS 40 rev. 2003 Investment Property Als Finanzinvestition Jan. 1, 2005 2238/2004, gehaltene Immobilien Dec. 29, 2004

210 Annex Fiscal Year 2006

Standard0) Status1) Original Title German Title Effective Adopted since2) by EU Regulation3)

1.2. International Financial Reporting Standards (IFRSs)4)

IFRS 3 rev. 2004 Business Combinations Unternehmenszusam- March 31, 2004 2236/2004, menschlüsse Dec. 29, 2004 IFRS 4 2004 Insurance Contracts Versicherungsverträge Jan. 1, 2005 2236/2004, Dec. 29, 2004 IFRS 5 2004 Non-current assets held for sale Zur Veräußerung gehal- Jan. 1, 2005 2236/2004, and discountinued operations tene langfristige Vermö- Dec. 29, 2004 genswerte und aufge- gebene Geschäftsbereiche 1.3. Standard Interpretation Commitee (SIC)

SIC-12 1998 Consolidation – Special Purpose Konsolidierung – July 1, 1999 1751/2005, Entities Zweckgesellschaften Oct. 25, 2005 1.4. International Financial Reporting Interpretation Commitee (IFRIC)

IFRIC-4 2004 Determining whether an Feststellung, ob eine Jan. 1, 2006 1910/2005, arrangement contains a lease Vereinbarung ein Nov. 08, 2005 Leasingverhältnis enthält 2. Deutscher Rechnungslegungs Standard (DRS)

DRS 5-10 2005 n.r.5) Risikoberichterstattung Jan. 1, 2005 n.r.5) von Kredit -und Finanzdienst- leistungsinstitutionen DRS 15 rev. 2005 n.r.5) Lageberichterstattung Jan. 1, 2003/ n.r.5) Jan. 1, 2004/ Jan. 1, 2005

Key: 0) Not all pronouncements that exist as of the reporting date are listed, but only those that are relevant to the Postbank Group. 1) rev.= revised. Date of the last, more comprehensive revision. Amendments (am.) may have been effected in the interim. 2) The date from which application is compulsory; voluntary, earlier application is often possible. Should Postbank voluntarily apply a pronouncement earlier, this is explicitly referred to in the notes. 3) In accordance with section 315a (1) HGB in conjunction with the IAS Regulation (EU Regulation 1606/2002), Postbank is obliged to apply the IFRSs adopted by the EU (endorsement). The date shown corresponds to the date of approval by the European Commission (publication in the EU Official Journal follows shortly thereafter). As a rule, the date of application of the IFRSs adopted by the EU is the same date as given in the standards (see “Effective since” column). Should the EU adopt an IFRS in the period after the balance sheet date and before the day that the annual financial statements are signed, this IFRS may be applied in the annual financial statements (clarification by the European Commission at the ARC meeting on November 30, 2005). 4) IFRS: a generic term for all financial reporting standards published by the International Accounting Standards Board (IABS). Also the name for new financial reporting standards issued by the IABS since 2003. The pronouncements issued up to 2002 continue to be referred to as International Accounting Standards (IASs). IASs are only renamed IFRSs if fundamental changes are made to standards. 5) n.r. = not relevant

211 Glossary

Amortized cost The amount at which a financial asset or liability was measured at initial recognition, minus principal repayments, plus or minus the reversal of a premium/discount, and minus any write-downs for impairment or uncollectability.

Asset-backed securities Special form of securitization of claims for payment in the form of tradable securities. These securities are created by the repackaging of certain financial assets.

Associate An enterprise that is included in the consolidated financial statements using the equity method (rather than full or proportionate consolidation), and over whose business or financial policies a consolidated company has significant influence. At Postbank, such companies are alternatively proportionately consolidated.

Available for sale Financial assets that are available for sale (see Available-for-sale securities).

Available-for- Securities which are not held for trading purposes and, in the case of debt securities, which are not held to sale securities maturity. They are carried at fair value. Changes in fair values are generally recognized directly in the revaluation reserve in equity. If, due to lasting impairment, the fair value of a security is lower than its amortized cost, the difference between these amounts is recognized in expenses (see Impairment). Realized gains and losses are also recognized in income.

Backtesting Procedure for monitoring the quality of value-at-risk models (VaR). Backtesting is used to check whether, retrospectively over a longer period of time, the estimated potential losses based on the VaR approach were actually exceeded substantially more regularly than would be expected given the confidence level applied (see Confidence level).

Cash flow hedge Cash flow hedges are primarily taken to mean hedges against the risk associated with future interest payments from a variable-interest recognized transaction by means of a swap. They are measured at their fair values.

Cash flows Inflows and outflows of cash and cash equivalents.

Cash flow statement Calculation and presentation of the cash flow generated or consumed by an enterprise during a fiscal year as a result of its operating, investing and financing activities, as well as an additional reconciliation of the cash and cash equivalents (cash reserve) at the beginning and the end of the fiscal year.

Commercial Paper Short-term, unsecured debt instruments with flexible maturities (max. 270 days) from prime-rated issuers. They allow companies to cover their short-term financing requirements directly via major issuers.

Confidence level The probability that a potential loss will not exceed an upper limit defined by value at risk.

Counterparty This relates to the risk of loss due to changes in creditworthiness or default by a counterparty. Counterparty (default) risk (default) risk includes credit (issuer) risk, country or transfer risk, and counterparty risk. Credit risk is defined as possible losses arising from the inability of a counterparty to discharge its payment obligations, or from a deterioration in its credit rating. Country or transfer risk can arise during cross-border payments due to the unwillingness (political risk) or inability (economic risk) of a country to discharge its payment obligations. Counterparty risk denotes the risk of losses arising from default in the settlement of payment obligations or the untimely performance of payment obligations. . Currency risk The risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates.

Deferred taxes Income tax to be paid or received as a result of differences in the carrying amounts in the financial accounts and the tax base. At the date of recognition, deferred taxes do not yet represent actual amounts receivable from or due to tax authorities.

212 Glossary Fiscal Year 2006

Derivative A financial instrument whose own value is dependent on the value of another financial instrument. The price of a derivative is derived from the price of an underlying equity, currency, interest rate, etc. These instruments provide wider options for risk management and control.

Discount The difference between the cost of a financial instrument and its notional value.

Effective interest The amortization of differences between cost and notional value (premium/discount) using the effective method interest rate of a financial asset or financial liability. The effective interest rate is the rate that exactly discounts the expected stream of future cash payments through maturity or the next market-based repricing date to the current net carrying amount of the financial asset or financial liability.

Embedded derivatives Embedded derivatives form part of an originated financial instrument and are inseparably linked with the instrument (“hybrid” financial instruments, such as equity-linked bonds). These components are legally and economically linked, but are accounted for separately under certain circumstances.

Equity method Method of accounting for investments in companies over whose business policies a consolidated company has significant influence (associates). Under the equity method, the investor’s share of the net income/loss of the investee is credited/charged to the carrying amount of the investment. Distributions reduce the carrying amount by the investor’s proportionate share of the distribution.

Fair value The positive/negative fair value of a financial instrument is the change in its fair value between the trade date and the balance sheet date due to increases or decreases in its market price.

Fair value (full fair value) The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. The fair value of an asset or liability is often the same as its market price.

Fair Value Option (FVO) In accordance with the fair value option, financial assets or financial liabilities may be (voluntarily) designated at fair value through profit or loss, provided this leads – among other things – to the elimination or significant reduction of inconsistencies in the measurement or recognition (accounting mismatches).

Fair value hedge Fair value hedges primarily relate to fixed-interest balance sheet items (e.g. receivables, equities or securities), which are hedged against market price risk by means of a derivative. They are measured at their fair values.

Financial instruments These are in particular loans and receivables, interest-bearing securities, equities, investments, liabilities and derivatives.

German Accounting Recommendations on the application of (German) consolidated accounting principles, published by the Standards (GASs) Deutscher Standardisierungsrat (DSR – German Accounting Standards Board/GASB), a body of the Deutsches Rechnungslegungs Committee e.V. (DRSC – Accounting Standards Committee of Germany/ Standard ASCG).

Hedge accounting Presentation of the opposing performance of a hedging instrument (e.g. an interest rate swap) and the related hedged item (e.g. a loan). The objective of hedge accounting is to minimize the impact on the income statement of the measurement and recognition in income of gains and losses on the remeasurement of derivatives.

Hedge fair value Remeasurement gains or losses on hedged items including determination of unhedged risk factors.

Hedges Transactions whose change in fair value offsets the change in the fair value of the hedged item.

Hedging A strategy by which transactions are entered into for the purpose of protecting against the risk of unfavorable price developments (interest rates, share prices).

Held-to-maturity Financial assets with fixed or determinable payments and fixed maturity which an enterprise intends and is investments able to hold to maturity, with the exception of loans and advances originated by the enterprise.

213 Impairment Amount by which the amortized cost of a financial instrument exceeds its estimated recoverable amount on the market.

International Financial This is both the generic term for all financial reporting standards (IFRSs) issued by the International Account- Reporting Standards ing Standards Board (IASB) and for new financial reporting standards issued by the IASB since 2003. (IFRSs) Standards issued up to 2002 will continue to be published as International Accounting Standards (IASs). Only if fundamental changes are made to the existing IAS will it be renamed an IFRS.

Investment book Risk positions which are not allocated to the trading book.

Investment property Land and/or buildings held to earn rentals or for capital appreciation and not used in the production or supply of goods or services or for administrative purposes.

Liquidity risk Describes the risk of being unable to meet current and future payment obligations, either as they fall due or in the full amount due. The funding risk arises when the necessary liquidity cannot be obtained on the expected terms when required.

Loans and receivables Loans and receivables are financial assets that are not quoted in an active market. These include in particular receivables and certain investment securities. Prior to IAS 39 (rev. 2003) these were designated “originated financial instruments”.

Market price risk Market price risk refers to potential losses from financial transactions that may be triggered by changes in interest rates, volatility, foreign exchange rates and share prices. The changes in value are derived from daily marking to market, irrespective of the carrying amounts of assets and liabilities.

Marking to market Valuation of all of an enterprise’s proprietary trading activities at current market prices including unrealized gains, ignoring their historical cost.

Net trading income Balance of income and expenses from proprietary trading in securities, financial instruments (in particular derivatives), foreign currencies and precious metals valued at market prices.

Netting agreements Agreements whereby, under certain circumstances, receivables between two parties can be offset against each other, such as in the event of insolvency. The inclusion of a legally binding netting agreement reduces the default risk from a gross to a net amount.

Operational risk Operational risk is defined by Basel II as “the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events”. Legal risks are also included here in accordance with the Basel II definition.

Option Right to purchase (call option) or sell (put option) an underlying asset, such as securities or currency, from a counterparty (writer) at a predetermined price and at a specific date or during a specific period.

Originated financial Financial instruments that are not derivatives, in particular loans and receivables, liabilities and securities. instruments

OTC derivatives Non-standardized financial instruments (derivatives) which are traded not on a stock exchange, but directly between market participants (over the counter).

Portfolio Similar transactions, particularly in securities or derivatives, grouped together according to price risk criteria.

Premium The difference between the historical cost of a financial instrument and its notional value.

Rating External rating: standardized evaluation of an issuer’s creditworthiness and debt instruments carried out by specialist agencies. Internal rating: detailed risk assessment of every exposure associated with a debtor.

214 Glossary Fiscal Year 2006

Repos (repurchase Agreements to repurchase securities (bona fide transactions under repurchase agreements; the subject of agreements) the agreement is still allocated to the borrower). From the perspective of the lender, such agreements are known as reverse repos.

Return on equity (RoE) Fundamental ratio showing the relationship between the results of operations of an enterprise (net profit for the period) and the capital employed (net profit as a percentage of average capital employed over the period).

Revaluation reserve Changes in the fair values of available-for-sale securities and investments in associates as well as the related deferred tax effects are recognized directly in the revaluation reserve in equity.

Reverse repos see Repos (repurchase agreements)

Securities loan The lending of fixed-income securities or equities; a distinction is made between closed term (retransfer of the same type and quantity of securities at an agreed date in the future) and open term (securities are made available until future notice) loans.

Securitization Replacing loans or the financing of various kinds of loans and advances by issuing securities (such as bonds or Commercial Paper).

Segment reporting Disclosure of an enterprise’s assets and income, broken down by area of activity (division) and geographical area (region).

Sell-and-buy-back A combination of two purchase agreements, i.e. a separate agreement for each of the spot and forward trades.

Sustainability Companies commit to the guiding principle of sustainable development that encompasses responsibility for the social and ecological aspects of their business decisions. In addition, as corporate citizens, they actively address social and environmental issues and support their implementation by using targeted measures.

Swap Exchange of cash flows. Interest rate swap: exchange of flows of interest payments denominated in the same currency but with different terms (e.g. fixed/variable rates). Currency swap: exchange of cash flows and principal amounts denominated in different currencies.

Trading assets This balance sheet item contains securities, promissory note loans, foreign currencies, precious metals and derivatives held for trading and measured at their fair values.

Trading book A banking regulatory term for positions in financial instruments, shares and tradable claims held by a bank which are intended for resale in the short term in order to benefit from price and interest rate fluctuations. This also includes transactions which are closely associated with trading book positions, e.g. for hedging purposes. Risk positions not belonging to the trading book are allocated to the investment book.

Trading liabilities This balance sheet item contains derivatives used for proprietary trading with negative fair values and delivery obligations under securities sold short. They are carried at their fair values.

Unwinding Recognition in profit or loss of changes in the present value of expected future cash flows from impaired loans due to the passage of time.

Value-at-risk model VaR is a method of quantifying risks. VaR is currently used primarily in conjunction with the measurement (VaR) of market price risks. In order to provide meaningful information, the holding period (e.g. 10 days) and the confidence level (see Confidence level) (e.g. 99.0 %) must also be disclosed. The VaR thus describes the potential future loss that will not be exceeded during the holding period with a probability equal to the confidence level.

Volatility Price fluctuation of a security or a currency, often calculated in terms of standard deviation on the basis of historical performance, or implicitly on the basis of a price-setting formula. The higher the volatility, the higher the risk associated with holding the investment.

215 Postbank Contact Details

Deutsche Postbank AG BHW Immobilien GmbH PB Firmenkunden AG Head Office Lubahnstraße 2 Friedrich-Ebert-Allee 114–126 Friedrich-Ebert-Allee 114–126 31789 Hameln, Germany 53113 Bonn, Germany 53113 Bonn, Germany Postfach 1013 42 Postfach 40 00 Postfach 40 00 31763 Hameln, Germany 53105 Bonn, Germany 53105 Bonn, Germany Phone: +49 (0) 515118-33 50 Phone: +49 (0) 180 30 40-636 Phone: +49 (0) 2 28 9 20-0 Fax: +49 (0) 5151 18-35 44 Fax: +49 (0) 180 30 40-696 Fax: +49 (0) 2 28 9 20-3 5151 E-mail: info@bhw-immobilien.de E-mail: [email protected] Internet: www.postbank.com E-mail: [email protected] BHW Lebensversicherung AG PB Lebensversicherung AG/ Lubahnstraße 2 PB Versicherung AG 31789 Hameln, Germany ProACTIV-Platz 1 Postfach 1013 22 40721 Hilden, Germany 31763 Hameln, Germany Phone: +49 (0) 2103 3 45-100 Phone: +49 (0) 515118-0 Fax: +49 (0) 21 03 3 45-109 Fax: +49 (0) 5151 18-52 99 E-mail: [email protected] E-mail: [email protected] Postbank Filialvertrieb AG Deutsche Postbank Financial Services GmbH Friedrich-Ebert-Allee 114–126 Ludwig-Erhard-Anlage 2–8 53113 Bonn, Germany Subsidiaries 60325 Frankfurt am Main, Germany Postfach 40 00 Postfach 15 02 55 53105 Bonn, Germany Betriebs-Center für Banken 60062 Frankfurt am Main, Germany Phone: +49 (0) 2 28 9 20-0 Deutschland GmbH & Co. KG Phone: +49 (0) 69 7 89 86-0 Fax: +49 (0) 2 28 9 20-3 5151 Eckenheimer Landstr. 242 Fax: +49 (0) 69 7 89 86-5 70 01 E-mail: [email protected] 60320 Frankfurt am Main, Germany E-mail: [email protected] Phone: +49 (0) 69 6 89 76-0 Postbank Finanzberatung AG Fax: +49 (0) 69 6 89 76-50 99 Deutsche Postbank International S.A. Lubahnstraße 2 E-mail: [email protected] PB Finance Center 31789 Hameln, Germany 18–20, Parc d’Activité Syrdall Postal adress: BHW Bank AG 5365 Munsbach, Luxembourg 31770 Hameln, Germany Lubahnstraße 2 Postal adress: Phone: +49 (0) 515118-0 31789 Hameln, Germany 2633 Luxembourg, Luxembourg Fax: +49 (0) 515118-30 01 Postfach 1013 02 Phone: +352 34 95 31-1 E-mail: [email protected] 31770 Hameln, Germany Fax: +352 34 95 31-550 Phone: +49 (0) 515118-0 E-mail: [email protected] Postbank Leasing GmbH Fax: +49 (0) 515118-49 71 Friedrich-Ebert-Allee 114–126 E-mail: [email protected] Deutsche Postbank 53113 Bonn, Germany Privat Investment Postfach 40 00 BHW Bausparkasse AG Kapitalanlagegesellschaft mbH 53105 Bonn, Germany Lubahnstraße 2 Ahrstraße 20 Phone: +49 (0)18 05 72 53 27 31789 Hameln, Germany 53175 Bonn, Germany Fax: +49 (0)18 05 72 53 28 Postfach 1013 22 Postfach 22 22 E-mail: [email protected] 31781 Hameln, Germany 53012 Bonn, Germany Phone: +49 (0) 515118-0 Phone: +49 (0) 2 28 9 20-5 88 00 Postbank P.O.S. Transact GmbH Fax: +49 (0)515118-30 01 Fax: +49 (0) 2 28 9 20-5 88 09 Frankfurter Straße 71–75 E-mail: [email protected] E-mail: [email protected] 65760 Eschborn, Germany Phone: +49 (0) 6196 96 96-0 BHW Holding AG PB Capital Corporation Fax: +49 (0) 6196 96 96-200 Lubahnstraße 2 230 Park Avenue E-mail: [email protected] 31789 Hameln, Germany 19 & 20th Floor Postfach 10 13 04 New York, NY 10169 Postbank Systems AG 31763 Hameln, Germany USA Baunscheidtstraße 8 Phone: +49 (0) 515118-0 Phone: +1212 7 56-55 00 53113 Bonn, Germany Fax: +49 (0) 515118-26 16 Fax: +1212 7 56-55 36 Postfach 26 0146 E-mail: [email protected] E-Mail: [email protected] 53153 Bonn, Germany Phone: +49 (0) 2 28 9 20-0 BHW Home Finance Ltd. PB Factoring GmbH Fax: +49 (0) 2 28 9 20-6 30 10 202, 2nd & 3rd Floor, Friedrich-Ebert-Allee 114–126 E-mail: [email protected] Okhla Industrial Estate, Phase-III 53113 Bonn, Germany New Delhi 110020 Postfach 40 00 India 53105 Bonn, Germany Phone: +91116 65 64-100 Phone: +49 (0) 180 5 09 05 22 Fax: +91116 65 64-290 Fax: +49 (0) 180 5 09 05 33 E-mail: [email protected] E-mail: [email protected]

216 *including selected subsidiaries *including ■ ■ ■ Milestones 2006 Group Structure* oprt eeomn conig&SlsMntrn rdtMngmn oe,FrxadCptl prtosCnrlStrategic Projec OperationsControl Money,ForexandCapital CreditManagement SalesMonitoring& Accounting& Corporate Development ufvnShmemn Hen Wulf vonSchimmelmann among Germanbanks With 14.6millioncustomers,largest singleinstitution lending, withportfolioamountingto¤62.3billion Postbank nowno.1inGermanyprivatemortgage thepurchaseofBHWHoldingAG,Hamelin – theacquisitionof850DeutschePostretailoutlets – Multi-channel salesdecisivelystrengthenedthrough ru aaeetFnnePoutMreigBac ae edn iaca akt evcsI/prtosResources IT/Operations Services FinancialMarkets Lending BranchSales Product Marketing Finance Group Management netrRltos& otoln aktn R rdtMngmn rauyCsoes&SlsAcutMngmn HROperations AccountManagement Customers&Sales Treasury CreditManagement Marketing&CRM Controlling Investor Relations& BVrihrn GBWPostbank BHW PB VersicherungAG Finance Ltd.,India H odn GPsbn otakPBCapital Postbank Postbank BHW HoldingAG omnctosIvsmn nuac edn ydct uiesOperations SyndicateBusiness Lending Investment&Insurance Communications esceugA GmbH versicherung AG versicherung AG nenlAdtCallCenters, Internal Audit H ees H moiinPBFirmenkundenAG BHWImmobilien BHW Lebens- Investments BHW Home BLbn-BWBn GPBFactoringGmbH BHWBankAG PB Lebens- oprt ikCnrligPoutMngmn pca susIse n Pyet uoFnnilMres Coordination FinancialMarkets PaymentsEuro Issuesand SpecialIssues Product Management RiskControlling Corporate taei Third-PartySales Strategic Research igR nmn ofagKenHn-ee cmdSea üt oksRzsMroDbro ikBrnmn RalfStemmer DirkBerensmann MarioDaberkow LoukasRizos StefanJütte Hans-PeterSchmid WolfgangKlein ning R.Engmann ae rdtMngmn oetcMarkets Domestic CreditManagement Taxes ■ ■ ■ Direct SalesChannels iazeaugA iiletibA Corporation,NewYork FilialvertriebAG Finanzberatung AG companies index ofthe30mostimportantlisted stock of themobilesalesforcesBHW andPostbank Finanzberatung AGand,withit,theintegration September 18,2006:Admission totheDAX July 17,2006:EstablishmentofPostbank Postbank Int.S.A.(PBI) In May2006,inclusionofbranchinDeutsche Consolidation ofactivitiesinLuxembourg: asakseA LeasingGmbH Bausparkasse AG Sales Support Loans in Germany Deutsche ® Postbank AG ■ ■ – BHWRückversicherung,Luxembourg – ModráPyramidahomeloan and savingsbank, Focus onthecoremarkets:Fourth quartersaleof % over 20 2007: Marketshareintransactionbankingnow HypoVereinsbank AG,Munich,startingonJanuary1, of paymenttransactionsettlementfor November 22,2006:Announcementoftheacquisition International Czech Republic Vermögensmanagement Kapitalanlage GmbH Deutsche Postbank Deutsche Postbank etcePsbn Betriebs-Centerfür Deutsche Postbank Deutsche Postbank nentoa .. BankenDeutschland International S.A., S.A., Luxembourg Privat Investment Financial Services uebugGmbH&Co.KG Luxembourg GmbH cons&Srie ietSls LegalAffairs DirectSales Accounts &Services amnsGoa rnhSls HRManagement BranchSales Payments Global rdtSrie RealEstateManagement Credit Services Postbank SystemsAG Service Field Service Field sHRStrategy ts Employees andTrustee Customers