EUROHYPO GROUP ANNUAL REPORT 2008 EUROHYPO THE LEADING SPECIALIST BANK FOR REAL ESTATE AND PUBLIC FINANCE
MULTI-AWARD WINNER
In 2008, Eurohypo was honored for the third year in a row with the “Real Estate Award for Excel- lence” sponsored by the trade publication Euromoney Liquid Real Estate. We were No.1 in the category of “Best Global Com- mercial Bank in Real Estate”. For the fourth year in a row, we were declared “Best Commercial Bank in Real Estate in Germany”; the English magazine Property Week Global named us “Funding Partner of the Year” for the second time. OPERNTURM
Frankfurt · The 169 meter high office tower on the west side of the Opera Square will be finished in 2009. It offers in its 42 floors 67,000 square meters of effective surface area. Among other things the headquarters of UBS for Ger- many will be moving in there.
The Opernturm will be gold- certified under the US environ- mental standard LEED – as one of the first new multi-storey office buildings in Europe. O2 WORLD
Berlin · O2 World, located at Berlin’s Ostbahnhof station, has room for up to 17,000 people (seated and standing), 59 entertainment suites and conference suites, making it one of Europe’s largest and most sophisticated multipur- pose arenas. The space can be converted in just a few hours from an ice hockey arena to a festive concert hall.
The multipurpose arena is owned and operated by Anschutz Entertainment Group.
ONE HYDE PARK
London · The residential development project of exceptional standard in the excellent location at Hyde Park in London is to be completed in 2010. In 4 pavi- lions a total of 80 flats will be erected, which offer a complete view of Hyde Park.
JAPAN ICEBERG
Tokyo · The eight storey high business building offers 4,000 square meters of effective surface area. The avant-garde architecture is used as a tenant by, among others, AUDI for the “AUDI Forum Tokyo“. s Contents r 1 e d l o h e k a t S r u o o t r e t t e L s r o t
2 letter to our stakeholders c e r i D g n 6 the board of managing directors i g a n a M
8 report of the supervisory board f o d r a o
12 capital market communication B
(cmc) d r a o B y r
15 management report o s i v r
15 Overall economic performance e p u
18 Business development and strategy S
22 Business development C M
Commercial Real Estate C t
22 Corporate Banking Germany r o p
Core/Non-Core e R t
23 Corporate Banking n e m
Continental Europe and Latin America e g a
24 Corporate Banking UK n a
25 Corporate Banking USA M s e
26 Business development i d o
Public Finance/Treasury B t n
27 Funding e m e
29 Business development Retail Banking g a n
30 Development of income a and financial position M s t
30 Income n 69 consolidated financial e m
32 Financial position and net assets e t
statements – eurohypo group a t
34 Our Employees S l a
70 Income statement i
36 Group Structure and Corporate Investments c n
70 Appropriation of profit a
39 Risk Report n i 60 Supplementary Report and Forecast 71 Balance sheet F t
72 Statement of changes in capital r o p and reserves e 63 management bodies and boards R ’ s
74 Cash flow statement r o t
63 Supervisory Board i
76 Notes d u
63 Board of Managing Directors A 134 Mandates – Supervisory Board, 64 Supervisory Board Committees S
Management Board, Staff G f
65 Trustees e i
137 Management bodies r b
66 Advisory Board Germany d
138 List of affiliated companies, Participating n a 68 Advisory Board International f interests and Special purpose vehicles P 8 2
141 Responsibility Statement by the §
Management Board e c n a l g
142 auditors’ report a t A 143 information under section 28 of the pfandbrief act
158 at a glance 158 Addresses 160 Glossary 2 Letter to our Stakeholders
We can look back at a financial year which brought challenges unlike anything ever experienced in the six years of Eurohypo’s existence. The financial crisis sharpened in September 2008, triggering massive upheavals in the financial markets which in turn sparked a global economic downturn and caused commercial property markets to tumble. At the same time, the cost of borrowing soared, risk premiums mounted, investors made themselves scarce and real estate prices fell. All this made conditions very tough for Eurohypo in the year under review and our results were corre- spondingly disappointing.
core business remains stable Eurohypo’s core business of commercial real estate finance did put in a relatively stable performance despite the adverse market conditions. Were it not for valuation adjustments on our US investment portfolio, which contains securities backed by subprime retail mortgage assets, we would have posted a positive operating result in CRE (Commercial Real Estate) despite significantly increased loan loss provisions. Key financials such as net interest and net commission income remained stable. Our very cautious approach to granting credit notwithstanding, we recorded new busi- ness totalling € 13.7 billion (€ 36.8 billion). The German market proved particularly resilient, and we acquired 39% of all new business there. Our strong position in the real estate finance segment was affirmed by “Euromoney” magazine, which again awarded Eurohypo the title of Best Global Commercial Bank in Real Estate. We also won the title of best real estate bank in Germany for the fourth consecutive year. In order to strengthen our position going forward, Eurohypo has been pro- active in responding to the changing market conditions. By end-2008, the Board of Managing Directors had already launched a project to reposition the bank in the commercial real estate segment. In particular, we are looking at which markets and financial solutions will allow us to earn strong long-term risk-adjusted returns. We will begin to implement the conclusions of the project and adjust our business organization accordingly in the first half of 2009, thereby assuring our bank’s future. Public finance, the second core business at Eurohypo, is also set for a reorgani- zation. Eurohypo successfully completed the merger of the former Hypothekenbank s Letter to our Stakeholders r 3 e d l o h e k a t S r u o o t r e t t e L s r o t c e r i D g n i g a n a M f o d r a o B d r a in Essen AG (Essen Hyp) without any problems on 18 August 2008. Headway is also o B y r
being made with plans to reduce the public finance portfolio following the signifi- o s i v r
cant increase from the addition of Essen Hyp’s assets. Given this necessary portfolio e p u reduction and widening spreads on the capital markets, Eurohypo has been deliber- S ately cautious about accepting new business. New business totalled € 4.1 billion C M C against € 20.2 billion in 2007. Although certain key indicators such as net interest t r o p income performed well, the effects of the financial crisis and the acquisition of the e R t n
Essen Hyp portfolio impacted results, particularly net trading income and results e m e from financial assets. g a n a M s
disappointing results e i d o
The income statement for the Eurohypo Group reflects events on the financial and B t n e
real estate markets, but there are some encouraging elements. For example, net m e g a
interest income was almost on a par with the previous year at a total of € 1,149 n a million (€ 1,179 million). Although we deliberately limited new business approvals, M net commission income was up 11% at € 251 million against the impressive previous year. Through strict cost management we were able to cut administrative expenses to € 460 million (€ 542 million) even with the integration of Essen Hyp. All these factors lessened the impact of the financial and economic crisis, but were unable to offset it completely. The loan loss provisions rose to € 858 million (€ 259 million) as a result of substantial portfolio and specific valuation allowances, particularly in relation to commercial real estate transactions in continental Europe. The acquisition of the Essen Hyp portfolio also created downwards pressure; this was particularly evident in the public finance segment. We posted a net trading loss of € –810 million (€ –11 million), largely as a consequence of the conside- rable valuation and disposal losses on derivative instruments such as total return swaps and credit default swaps. Similarly, we recorded a result from financial assets, which included adjustments in the RMBS securities portfolio in the US and write-downs on Icelandic securities, of € –622 million (€ –9 million). All of these factors contributed to the negative pre-tax result of € –1,409 million (€ +588 million) for 2008. 4 Letter to our Stakeholders
solid reputation in funding and syndication As a wholly owned subsidiary of Commerzbank Group, Eurohypo has access to funding opportunities provided by the parent company. As the sole issuer of Pfandbriefe in the Commerzbank Group, we placed Pfand- briefe volumes totalling € 13.2 billion. Eurohypo remains the leading German issuer of Jumbo-Pfandbriefe: we have a 8% market share on the global jumbo covered bond market. Eurohypo was also able to assert its leading position on the syndication mar- ket. Despite the continued shortage of liquidity in the exit channels, we syndicated a total volume of € 3.4 billion (€ 7.7 billion) to German and foreign banks. This makes Eurohypo the European leader in terms of the value and number of syndi- cated loans in the real estate sector and second worldwide.
cooperation with commerzbank On 25 July 2008, shares held by the remaining minority shareholders were trans- ferred to Commerzbank Inlandsbanken Holding GmbH (squeeze-out). Eurohypo shares were delisted from the stock exchange shortly afterwards. This move was strategically valuable, as we can now fully exploit synergies across the Group – for example by using the global network of branches and sharing the know-how of all Commerzbank Group employees. The radical changes in the global economy have provided an opportunity for Eurohypo to reposition and restructure itself, both in the real estate and public finance segments. By doing so, we will ensure that we retain our competitive edge in this period of global recession and grow earnings in the longer term. s Letter to our Stakeholders r 5 e d l o h e k a t S r u o o t r e t t e L s r o t c e r i D g n i g a n a M f o d r a o B d r a
thanks to our employees o B y r
The opportunity for reorganization had not been possible without the commitment o s i v r
of our employees: their dedicated contributions in the year under review have been e p u vital in these extremely tough market conditions. My colleagues and I would like to S take this opportunity to thank all Eurohypo Group employees for their dedication. C M C On behalf of the Board of Managing Directors, I would also like to thank our part- t r o p ners and business associates for their loyalty and for the confidence they have e R t n
placed in us. e m e g a n a M s e i d o B t n e m e g a n a M
Yours sincerely
Dr Frank Pörschke Chairman of the Board of Managing Directors 6 The Board of Managing Directors
THE BOARD OF MANAGING DIRECTORS
dr frank pörschke thomas köntgen
joachim plesser ralf woitschig s The Board of Managing Directors r 7 e d l o h e k a t S r u o o t r e t t e L s r o t c e r i D g n i g a n a M f o d r a o B d r a o dr frank pörschke thomas köntgen B y r o s i
born 1965 in hamburg born 1967 in düsseldorf v r e
generally authorized agent appointed to the board p u until september 30, 2008 of managing directors S chairman of the board since january 1, 2008 of managing directors C M since october 1, 2008 responsibilities C t r responsibilities Risk Management o p e
Finance/Controlling/Tax R Corporate and Investment t n
Operations Global Markets e
Banking International m e
Audit g a
Credit Portfolio Management n a
Corporate Communication M
Legal s e i d o B t n e m joachim plesser ralf woitschig e g a n a
born 1947 in arnsberg/westfalen born 1967 in braunschweig M appointed to the board appointed to the board of managing directors in 2002 of managing directors since november 11, 2008 responsibilities responsibilities Corporate Banking Germany Retail Banking Public Finance Interest-Rate and Head Office Group Treasury Currency Management IT/Operations Debt Capital Markets Resource Management bernd knobloch henning rasche martin zielke Chairman of the Board born 1953 in hannover born 1963 in hofgeismar of Managing Directors appointed to the board appointed to the board of managing directors in 2001 of managing directors in 2006 born 1951 in münchen until december 31, 2008 until june 30, 2008 appointed to the board of managing directors in 2002 responsibilities responsibilities until september 30, 2008 Public Finance Finance/Controlling/Tax responsibilities Head Office Group Treasury IT/Operations Corporate and Investment Interest-Rate and Operations Global Markets Banking International Currency Management Audit Debt Capital Markets Corporate Communication Legal 8 Report of the Supervisory Board
REPORT OF THE SUPERVISORY BOARD
duties and meetings of the supervisory board In the financial year 2008, the Supervisory Board performed the duties incumbent upon it by law and under the Articles of Association. It advised, monitored and supervised the Board of Managing Directors in its management of the bank. The Board of Managing Directors provided the Supervisory Board with regular, com- prehensive and up-to-date information regarding economic conditions, the bank’s position and performance, particularly in relation to the financial crisis, key finan- cial indicators, special business transactions and risk management at the bank. This information was provided both during meetings and in writing. Dr Stefan Schmittmann Four ordinary meetings of the Supervisory Board were held, at which the Board Chairman of the Supervisory Board discussed business developments, the approval of important transactions, reports from the Board of Managing Directors, reports from the various committees and changes to the business plan. Items covered included the acquisition and subse- quent integration of Hypothekenbank in Essen AG (Essen Hyp) and the effects of the new strategic focus for public finance business. In an ad hoc meeting, the Board of Managing Directors informed the members of the Supervisory Board about plans for a specific issue. In the course of two extraordinary meetings, the Supervisory Board discussed the agenda for the planned Annual General Meeting, the resignation of existing directors, the appointment of new members to the Board of Managing Directors and the election of a new Chairman of the Supervisory Board. The election of the new chairman was included on the agenda of the Constituent Assembly of the Supervisory Board. The Board of Managing Directors discussed topical issues, strategic transac- tions and major events in the course of regular meetings with the Chairman of the Supervisory Board. Through these meetings the Supervisory Board was kept abreast of developments at all times. The Board of Managing Directors answered all questions raised by the Supervisory Board in full and promptly provided any reports requested on the strategy issues covered.
work of the committees of the supervisory board The members of the Supervisory Board have formed three committees: the Standing Committee, the Risk Committee and the Audit Committee. The Standing Committee convened three times in the year under review. In addition to matters relating to the Board of Managing Directors, discussions focused, among other things, on the resignation of existing directors and the appointment of new members to the Board of Managing Directors. Certain business matters requiring approval were agreed by written resolution. s Report of the Supervisory Board r 9 e d l o h e k a t S r u o o t r e t t e L s r o t c e r i D g n i g a n a M f o d r a o B d r a
The Risk Committee (which also functions as the Credit Committee) convened four o B y r
times and discussed the current risk situation in the lending business, existing o s i v r
interest, currency, liquidity and operational risks. Discussions also encompassed the e p u optimization of existing methods and instruments for risk assessment and the risk S strategy. In addition, the Committee assessed the effects of the crisis on the financial C M C markets in terms of the bank’s business and took decisions on other matters for t r o p which it is responsible. The committee members took decisions relating to loans and e R t n
business transactions requiring approval by law, under the Articles of Association e m e or the rules of procedure at the meetings or by way of a written resolution. g a n a
The Audit Committee convened five times in the year under review. Topics M s covered in the meetings included the effects of the financial crisis, the integration e i d o of Essen Hyp, the auditors’ activities and the current business performance. Also B t n e
on the agenda in 2008 were the duties of the Internal Audit department. Every m e g a
meeting was attended by representatives of the audit firm. The Audit Committee n a was declared independent by the auditor. M No other committees were formed. The composition of each committee is shown on page 64 of the annual report. corporate governance The German Corporate Governance Code is primarily aimed at listed companies. The management of the Frankfurt-based securities exchange revoked the authori- zation to trade Eurohypo AG shares on the regulated market on 29 August 2008. In view of Eurohypo AG’s integration into the Commerzbank Group, the Supervisory Board and Board of Managing Directors no longer require separate recognition under the Code, but the principles thereof will remain part of corporate governance at Eurohypo AG. review and approval of the 2008 annual financial statements The auditor PricewaterhouseCoopers AG Wirtschaftsprüfungsgesellschaft, Frank- furt am Main, was selected by the Annual General Meeting and appointed by the Supervisory Board. The accounts, annual financial statements as at 31 December 2008, the management report of the company in accordance with the German Commercial Code (Handelsgesetzbuch – HGB), the Group accounts, consolidated financial statements in accordance with IAS/IFRS and Group management report have been audited and awarded an unqualified opinion by the auditor. The Super- visory Board approved the audit findings. The annual financial statements, the management report of the company in accordance with the German Commercial 10 Report of the Supervisory Board
Code (HGB), the consolidated financial statements in accordance with IAS/IFRS, the Group management report and auditor’s report were received by all Supervisory Board members in good time prior to their discussion and approval. The Audit Committee also discussed these documents at its preparatory meet- ing, during which the auditors gave a detailed report on the audit findings and audit result for financial year 2008. At the financial results meeting, the Chairman of the Audit Committee informed the Supervisory Board of all the salient points covered in the meeting. The auditors also attended this meeting and presented a report on the main audit findings. The auditors were also willing to answer addi- tional queries. The annual financial statements, the company management report in accordance with the German Commercial Code (HGB), the consolidated financial statements in accordance with IAS/IFRS, the Group management report and the audit report were discussed and examined in detail by the Supervisory Board. No objections were raised regarding the results of the audit. The Supervisory Board approved the financial statements of the company produced in accordance with the German Commercial Code (HGB), the consolidated financial statements in accord- ance with IAS/IFRS and the Group management report. The annual financial state- ments of the company produced in accordance with the German Commercial Code therefore stand adopted.
composition of the supervisory board and the board of managing directors In the extraordinary Supervisory Board meeting of 11 November 2008, Klaus-Peter Müller resigned his membership with immediate effect. The Supervisory Board would like to thank Mr Müller for his many years of constructive input and dedication to the Board. The Extraordinary General Meeting held on the same day elected Dr Stefan Schmittmann as the new Chairman of the Supervisory Board. Dr Schmittmann was then elected Chairman in the subsequent Constituent Assembly of the Supervisory Board. Following Mr Müller’s resignation, Dr Schmittmann took over as Chairman of the Standing Committee from 11 November 2008 and became a member of the Risk Committee. Apart from these changes, the composition of the committees remained the same as in 2007. s Report of the Supervisory Board r 11 e d l o h e k a t S r u o o t r e t t e L s r o t c e r i D g n i g a n a M f o d r a o B d r a
With effect from 30 June 2008, Martin Zielke resigned from the Board of Managing o B y r
Directors in order to take on a management position with Commerzbank AG. The o s i v r
Supervisory Board would like to thank Mr Zielke for his dedication and successful e p u work at Eurohypo. S
On 30 September 2008, Bernd Knobloch resigned his position as Chairman C M C of the Board of Managing Directors. The Supervisory Board would like to thank t r o p
Mr Knobloch for his long-standing commitment to the Eurohypo Board of Managing e R t n
Directors. His successor Dr Frank Pörschke was appointed Chairman of the Euro- e m e hypo Board of Managing Directors with effect from 1 October 2008. g a n a
The Supervisory Board meeting on 11 November 2008 accepted Henning M s
Rasche’s request to be released from his duties as a member of the Board of Man- e i d o aging Directors with effect from 31 December 2008. The Supervisory Board would B t n e
also like to extend its thanks to Mr Rasche for all his work. Ralf Woitschig has been m e g a
appointed as Mr Rasche’s successor; Mr Woitschig has been a member of the Board n a of Managing Directors since 11 November 2008. M acknowledgements The Supervisory Board would like to thank the Board of Managing Directors, the staff councils and all of the bank’s employees for their excellent work and outstand- ing commitment in 2008.
Eschborn, 20 March 2009 The Supervisory Board
Dr Stefan Schmittmann Chairman 12 Capital Market Communication (CMC)
CAPITAL MARKET COMMUNICATION (CMC)
squeeze-out takes effect slightly lower than the € 27.19 quoted at the start As of 25 July 2008, Eurohypo has been a wholly of 2008. The Eurohypo share price peaked at owned subsidiary of the Commerzbank Group. € 27.20 on 3 January 2008, reaching its lowest At the 2007 Annual General Meeting, Eurohypo point on 22 January 2008 at € 25.60. shareholders agreed to transfer all shares held Because of the limited free float, no signifi- by external minority shareholders to Commerz- cant number of Eurohypo shares were bought by bank Inlandsbanken Holding GmbH, another institutional investors or rated by analysts prior wholly owned subsidiary of the Commerzbank to being withdrawn from the stock exchange Group (squeeze-out). The minority shareholders listings. appealed against the decision to transfer their Frankfurt was the main exchange on which holdings, but the court ruled in favour of Com- the shares were traded, where they were listed merzbank. The transfer was entered in the com- in the General Standard segment. The shares mercial register on 25 July 2008 with immediate were also traded on Xetra. The Wertpapierkenn- effect. The Annual General Meeting provisionally nummer (WKN) number was 807600; the Inter- scheduled for 29 August 2008 was therefore national Securities Identification Number (ISIN) cancelled and soon after Eurohypo shares were was DE0008076001. withdrawn from the exchange listings. Following the entry into force of the resolu- eurohypo ratings tion to transfer the shares, former minority share- In our annual ratings reviews in July 2008 and holders in Eurohypo AG were only entitled to an as part of the Essen Hyp acquisition, the three appropriate cash settlement. In accordance with major rating agencies, Fitch, Moody’s Investors the resolution passed at the Annual General Service and Standard and Poor’s all confirmed Meeting on 29 August 2007, the settlement their ratings. After Commerzbank required addi- amounts to € 24.32 per bearer share, of which tional financial assistance from the German € 2.60 represents a proportional amount of the Financial Market Stabilisation Fund (SoFFin) share capital. on 8 January 2009, the rating agencies again Prior to the squeeze-out, Commerzbank reviewed the ratings for Commerzbank and its Inlandsbanken Holding GmbH directly and indi- subsidiaries. rectly held a total of 99.07% of Eurohypo shares. On 9 January 2009, Fitch confirmed its “A” The remaining 0.93% of shares were in free long-term issuer default rating and “F1” short- float. The bank’s share capital totalled term issuer default rating. The outlook for both € 913,688,919 as at 31 December 2008, divided ratings was upgraded from “Rating watch nega- into 351,418,815 bearer shares with a pro rata tive” to “Stable outlook”. The “1” support ratings value of € 2.60. were also maintained. On 25 July 2008, when the transfer took On 12 January 2009, the Standard and effect, Eurohypo shares were listed at € 26.82, Poor’s rating agency reaffirmed its “A” rating s Capital Market Communication (CMC) r 13 e d l o h e k a t S r u o o t r e t t e L s r o t c e r i D g n i g a n a M f o d r a o B d r a for long-term counterparty credit rating for o ratings B y r
Eurohypo AG and Eurohypo S.A. The agency o s Standard i v r confirmed its “A-1 watch negative” rating for & Poor’s Moody’s Fitch e p u short term counterparty credit (commercial Eurohypo AG S paper). C Public sector Pfandbriefe AAA Aaa AAA M C Ten days later, Moody’s Investor Service Mortgage Pfandbriefe AAA Aaa AAA t r o p confirmed its “A1” long-term bank debt and Senior unsecured A* A1* A e R t n deposits rating for Eurohypo AG and its “A2” Subordinated debt A– A2 A– e m e subordinated debt rating. The note “under review g Commercial Paper A–1* P–1 F1 a n a for possible upgrade” added on 19 August 2008 Financial strength – D* – M s was removed and replaced by “stable outlook”. e
Support Rating – – 1 i d o
On 2 March 2009, Eurohypo’s bank financial Rating Outlook *negative *negative stable B t n e
strength rating (BFSR) was changed to “D” (out- Eurohypo Luxembourg S.A. m e g a
look negative), while its senior unsecured debt Lettres de Gage AAA – AAA n a and deposits ratings were altered to “negative”. Senior unsecured issues A* – A M Fitch downgraded its ratings for trust-pre- Short term debt A–1* – F1 ferred securities in Eurohypo Capital Funding Support Rating – – 1 Trust I and II to “B+ rating watch negative” on Rating Outlook *negative – stable
27 February 2009. As at March 2, 2009 At the same time, Standard and Poor’s downgraded these securities to “BB watch neg- ative”. we issued a total volume of € 13.2 billion in On 2 March 2009, Moody’s downgraded its public sector and mortgage Pfandbriefe. The A3 (“under review for possible downgrade”) bank was able to expand its share of the jumbo note for our hybrid issues to B2. covered bond market at the end of the year to The covered bond ratings for our public 8%, partly as a result of the integration of Pfandbriefe and mortgage Pfandbriefe remained Essen Hyp. unchanged; the products are still triple A rated With a market share of 23%, Eurohypo is by all three agencies, their top rating. Lettres de the largest issuer of Jumbo-Pfandbriefe. In late Gage – covered bonds under Luxembourg law – May, we placed a volume of € 1 billion jumbo have an AAA rating from both Standard and mortgage Pfandbriefe on very good conditions. Poor’s and Fitch. It was the first ten-year Jumbo-Pfandbrief issued for around two years. Placing this large volume leading jumbo-pfandbriefe issuer of long-dated bonds served to highlight the high Eurohypo is one of the main issuers in the Ger- quality of the Pfandbrief product in extremely man Pfandbrief market: in the year under review volatile capital markets. Eurohypo continues to 14 Capital Market Communication (CMC)
enjoy a reputation for reliability among German capital market communication investors: around 77% of all investors were On our website, www.eurohypo.com, we provide German. detailed information about our company, our In August 2008, the bank issued another issues, financial solutions and services. Recent benchmark product: a five-year jumbo mortgage investor presentations and reports are available Pfandbrief with a volume of € 1 billion. Once in the “Investor” section. Our Capital Market again, the order book was oversubscribed soon Communication team is available for any addi- after being opened, with 75 % of the orders tional questions relating to Eurohypo Pfand- coming from Germany. briefe and other issues. The website also con- tains a range of issuing prospectuses in the “Funding” section. More information about our refinancing instruments is available on page 28. s Management Report >>> Overall economic performance r 15 e d l o h e k a t S r u o o t r e t t
MANAGEMENT REPORT e L s
OVERALL ECONOMIC PERFORMANCE r o t c e r i D g n i g a n a M f o d r a o B d r a overall developments have also produced far-reaching rescue pack- o B y r
The financial year 2008 was extremely eventful ages in order to combat the abrupt economic o s i v r
and produced a range of developments, the inten- downturn. These measures will only begin to e p u sity and magnitude of which far exceeded expec- kick in towards the end of 2009, however, and S tations. The crisis on the international financial will therefore not have any immediate effect on C M C markets rapidly reached acute proportions and the battering currently being taken by the real t r o p began to impact the real economy. The global estate markets. The current downturn will leave e R t n
economy is cooling significantly and revealing a lasting mark on the real estate markets, with e m e the downside of globalization. Nearly all major the extent of the impact varying as a function of g a n a
economies have slipped into a recession that is the structure and volatility found in each market. M s proving more extensive and protracted than the e i d o last one at the turn of the millennium. Small and commercial real estate B t n e
large nations alike have been affected, along- The financial crisis had already caused a con- m e g a
side emerging countries, where economic growth siderable loss of momentum on the real estate n a is slowing visibly. Residential property markets investment market, but as conditions worsened M are continuing to fall after years of high growth. in late 2008, transactions more or less came to House prices in the US, the UK and Ireland have a standstill. Investors with limited equity were already fallen considerably and other markets, forced to withdraw from the market due to the such as France and Spain, have also lost a good lack of access to capital. There were virtually deal of momentum. no large-volume deals or portfolio transactions. After a certain time lag, the economic down- Investors also became more risk-averse, which turn is now having an effect on the labour mar- led to higher risk premiums and real estate ket. A whole range of markets, including the US, yields. In the current financial crisis, this trend UK and Spain, are already seeing unemployment will continue for the foreseeable future as falling figures soar. Other markets that are more strictly rents and increasing numbers of vacancies will regulated and therefore less flexible, such as depress earnings. Although prices have already Germany, will follow suit. Falling oil prices have undergone a correction, we anticipate further slightly lessened the impact of the economic down- adjustments in both residential and commercial turn, with prices reaching an all-time high in real estate values in the current year. mid-2008 before slipping to around one-quarter The office space market tends to lag behind of that value by the end of the year. changes in economic conditions. Consequently, Consequently inflation has eased, giving the downturn will have a greater impact on the central banks scope for drastic rate cuts in order sector in 2009, which will only begin to bottom to help prop up the financial system and the out in 2010. Certain markets – among them the economy. The majority of national governments UK, the US and Spain, which were among the 16 Management Report
office market cycle
(still) in decline finding its bottom in recovery/growth full valuation Paris Los Angeles Berlin Moscow Frankfurt New York Munich Hamburg Madrid Washington DC Tokyo Chicago London Mexico
first to show signs of weakness – are now expe- mid-2008 and remained stable in the latter half riencing a marked slowdown; this trend has of 2008, with very little change in rentals and now spread to France, Italy, Japan and Singa- vacancies. However, demand for office space pore. has been modest this year, indicating a downturn. The retail markets are increasingly suffering As the uptrend of the last two to three years from the effects of the current crisis. Signs of a was less pronounced than in other countries, downward slide initially appeared in the first half the potential for decline should be limited. of 2008 and have since continued and become Retail was unable to benefit significantly from more pronounced. Various factors, including the the last upswing due to the consumers’ caution. banks’ unwillingness to grant credit, higher bor- Consequently potential corrections are assessed rowing costs and a flagging labour market, have as being moderate and are likely to occur in prompted a loss of consumer confidence. Con- secondary locations and among retail models sumer confidence has deteriorated in nearly every that are no longer viable. country. One consequence of this is that all markets are sluggish. The US and Spain are also public finance seeing significant drops in retail sales. A grow- As the crisis on the financial markets became ing number of retailers outside the relatively more acute and began to affect the real economy robust food retailing sector are rethinking their in the course of 2008, this had a significant strategies, while some are experiencing finan- impact on public sector borrowers and budgets. cial difficulties. Fluctuation and the number of Budget deficits tend to escalate during periods vacant premises are therefore set to rise every- of recession, whilst tax revenues decline and where other than prime locations and rental social spending increases. In this instance, the prices will come under more pressure. range of economic policy measures and efforts The German economy and office market felt to stabilize the financial sector will also have an the impact of the financial crisis relatively late. impact on public spending. As a consequence, The office market continued its uptrend until some of our public sector borrowers saw their s Management Report >>> Overall economic performance r 17 e d l o h e k a t S r u o o t r e t t e L s r o t c e r i D g n i g a n a M f o d r a o B d r a ratings downgraded in 2008, but as in previous the financial crisis due to uncertainty about the o B y r
years, no borrowers defaulted. The public finance extent and duration of the crisis. Most banks o s i v r
business was, however, affected by widening are also endeavouring to reduce their total assets, e p u spreads. Overall, this led to a general revaluation which leaves considerably less scope for lend- S of credit risks on the financial markets. Risk ing just when public sector borrowers require C M C aversion has increased across the board during additional funding resources. t r o p e R t n e m e g a n a M s e i d o B t n e m e g a n a M 18 Management Report
BUSINESS DEVELOPMENT AND STRATEGY
As the leading European specialist in real estate from region to region; overall, new business and public finance, Eurohypo was hit hard by contracted by just under two-thirds to € 4.3 bil- the global financial crisis in 2008. The effects lion (€ 12.8 billion). The UK saw a similar pic- took the form of liquidity shortages on the capi- ture, recording a € 3.9 billion drop in new loans tal markets, blocked exit channels and a down- to € 2.0 billion (€ 5.9 billion). In the US, new turn on real estate markets worldwide. Our bank business volumes dropped due to the lack of also had to tackle new challenges created by the CMBS business, falling by almost 75% to € 1.8 merger with Hypothekenbank in Essen (Essen billion (€ 7.1 billion). Hyp) in the second half of 2008. The integration The new markets in the Asia-Pacific region process absorbed substantial resources, particu- recorded new commitments totalling € 0.3 bil- larly in the public finance segment. lion (€ 0.9 billion), which reflected our decision All these factors necessitated changes to to defer the expansion of our franchise. the Eurohypo strategy for the core businesses Whereas previous years were notable for of commercial real estate and public finance to high volumes of new business, in 2008 our focus adapt to the new market conditions. shifted from large-scale landmark deals to trans- actions with medium volumes. We have built up commercial real estate (cre) long-term relationships with our clients, who Eurohypo’s commercial real estate financing are owners and managers of broadly-diversified business covers a wide range of financing and real estate portfolios and include family busi- advisory services, from traditional fixed-interest nesses, international banks, project developers, loans to structured financing to real estate invest- fund managers and institutional investors. ment banking. Eurohypo was unable to match In the unprecedented difficult market envi- the record highs for new real estate business ronment, some key figures remained stable in the achieved in 2007 (€ 36.8 billion). A strict risk commercial real estate financing segment. Net policy was applied to all new lending as a result interest income stayed high, virtually unchanged of the financial crisis and its consequences. year-on-year at € 876 million (€ 885 million). Against a backdrop of lower transaction volumes, Healthy new business commission meant that new market conditions in the syndicated loans net commission income fell only slightly, down segment and the effective lack of commercial 6% to € 251 million (€ 268 million). Administra- mortgage-backed securities (CMBS), the volume tive expenses were cut by € 73 million to € 287 of new loans committed by our bank totalled million, partly as a result of lower personnel € 13.7 billion. Of these, € 5.3 billion were grant- costs (€ 360 million). ed in Germany (€ 10.1 billion), strengthening In 2008, we were unable to match the record our position in the German market even during operating result of the previous year due to the the crisis year. ongoing financial and economic crisis. Loan loss The continental European and Latin Ameri- provisions for commercial real estate financing can markets witnessed differing developments business were increased to € 675 million, well s Management Report >>> Business development and strategy r 19 e d l o h e k a t S r u o o t r e t t e commercial real estate – new business commercial real estate – new business L
by country by property type s r o t
(as at year end 2008) (as at year end 2008) c e r i D
Other Commercial construction sites Other trade g n i
13% 3% 3% g a n Russia Not secured by mortgage a M
4% 4% f o d
Hotels and restaurants Retail property r Spain Germany a Total: 4% Total: o 7% 39% and warehouses B € 13.7 billion € 13.7 billion France Residential 36% d r
10% 19% a o
USA B UK Office and administra- y
13% r
14% tive buildings o s i v
31% r e p u S C M C t r o p e R t n e m e
above the previous year’s figure of € 174 million Both new business and prolongations are agreed g a n a
– mainly due to certain credit commitments on the basis of appropriate risk- and cost-based M s
in continental Europe. In addition, valuation margins. In 2008, we also continued to develop e i d o
adjustments were necessary on our US investment our position as the leading player in Germany, B t n e
portfolio containing subprime retail mortgage- where the repercussions of the financial crisis m e g a
backed securities, which also impacted our were felt later than in other countries. We n a results. In 2008, we carried out valuation adjust- strengthened our position in international real M ments for a further € 454 million, meaning that estate finance within established markets. In the 80% of the portfolio has now been written down. US, market conditions for providers of tradition- Overall, CRE posted a negative pre-tax result of al credit business through the balance sheet € –339 million (€ +478 million). In spite of chal- improved considerably as the financial crisis hit lenging conditions, the commercial real estate the securitization market. We also maintained financing business would have shown a profit our position as a reliable financing partner for had we excluded the valuation adjustments for our clients in continental Europe and the UK. the non-core US investment portfolio. The expansion of our branches abroad – in southeast Europe, Latin America and Asia – pro- focused strategy ceeded with caution in 2008. Nearly all markets Most of the bank’s earnings come from credit were affected by the crisis, albeit to different business. In addition to appropriate risk manage- degrees. As the financial crisis reached the Far ment (see the risk report on page 39 ff.), pro- East, we took immediate action, postponing fessional credit portfolio management is also plans to expand our network of offices in Asia crucial. This allows us to optimize our use of for the time being. In April 2008, we concluded expensive equity capital and refinancing resources. our first consortium operation in China, which Essentially, Eurohypo can only remain financial- was soon followed by further syndicated loan ly sound and retain its competitive edge in the commitments. Our activities in this field have longer term if the earnings from each credit in been focused on the growth regions around the Eurohypo portfolio at least match the capital Hong Kong, Beijing and Shanghai. In December costs and the majority of the portfolio meets our 2008 we opened a new representative office in ambitious return on equity target (RoE). Shanghai. 20 Management Report
commercial real estate – new business new business public finance by transaction volume by country (as at year end 2008) (as at year end 2008)
€ 250 – 500 million € 0.5 – 5 million Latvia 3% Other 3% 8% 4% Czech Republic 3% € 5 – 10 million 5% Hungary 4% Germany 20% € 10 – 20 million Spain 6% € 100 – 250 million Total: 10% Total: Japan 6% 26% € 13.7 billion € 4.1 billion € 20 – 50 million Greece 16% USA 11% 21% € 50 – 100 million Italy 14% UK 14% 26%
Our business model to date has largely built on mately € 100 billion by end-2010, which is effec- a consistent relationship-oriented strategy and a tively a return to the public finance volumes broad geographic base. In the Real Estate Awards prior to the merger with Essen Hyp. for Excellence, Eurohypo was ranked Best Global Following the acquisition of Essen Hyp and Bank for Real Estate Finance for the third year the incorporation of Erste Europäische Pfand- running. In the coveted awards from the indus- brief- und Kommunalkreditbank AG (EEPK), part try magazine Euromoney, the bank successfully of Commerzbank, into overall portfolio manage- defended its first place in the category Best ment, the Commerzbank Group has created a Global Commercial Bank in Real Estate. In its competence center for public finance within domestic market, Eurohypo was awarded the Eurohypo. Public Finance became part of the title of Best Commercial Bank in Real Estate in Corporates and Markets division of Commerz- Germany for the fourth consecutive year. The bank in 2008. magazine Property Week Global also selected Eurohypo as Funding Partner of the Year for modern funding and exit management the second time. All these awards are proof As a wholly owned subsidiary of Commerzbank, of satisfied clients. In order to guarantee our we are integrated in the Commerzbank funding long-term earnings potential, we will need to structure and therefore are not solely dependent continue adapting our business processes and on the capital market. Eurohypo performed well organizational structures to reflect the needs of on the capital market. As a leading issuer of our clients and market conditions. Pfandbriefe and jumbo covered bonds, Eurohypo also has access to the traditional funding instru- public finance ment that has been least affected by the financial Public finance business was marked by asset crisis. In 2008, we successfully placed Pfand- reduction in the latter half of 2008. The acquisi- briefe totalling € 13.2 billion. tion of Essen Hyp led to an initial increase The ongoing financial crisis limited access in Eurohypo’s public finance assets, but by 31 to established exit channels. The global securi- December 2008 the total portfolio had been tization market effectively ground to a halt in reduced to € 154 billion. The target is approxi- 2008. In the syndication market, however, Euro- s Management Report >>> Business development and strategy r 21 e d l o h e k a t S r u o o t r e t t e syndication and placement volumes without guarantees L
(as at year end 2008) s r o t in € million c e r i D
Continental Europe 2,712.7 g n i g
Germany 550.0 a n UK a
659.4 M f USA 2,934.3 o d r a
Syndication volume 6,856.4 o B Final Take 3,497.1 d r
Placing volume 3,359.3 a o B
Commercial banks 1,319.0 y r o s
State banks (Landesbanken) 740.6 i v r Mortgage banks, building societies e
1,299.7 p u S C
Syndicated volume M C Placement volume t r o p e R t n e m e g a n a M s e i d o
hypo was able to continue business as usual, integration with commerzbank B t n e
thanks to our reputation as a globally active On 25 July 2008, shares held by external share- m e g a
syndication business in the real estate sector. holders in Eurohypo were transferred to Com- n a Although confidence between banks in general merzbank Inlandsbanken Holding GmbH, a wholly M fell, Eurohypo syndicated commercial real estate owned subsidiary of Commerzbank AG (squeeze- loan volumes totalling € 3.4 billion (€ 7.7 billion) out). In addition to the cost savings generated, for German and foreign banking partners. Of being a full member of the Commerzbank Group these loan volumes, 6% were in Germany, a will make our decision-making processes more further 22% in continental Europe, 8% in the flexible, thereby allowing us to respond more UK and 64% related to the US. rapidly to changes in market conditions. Other This makes Eurohypo the European leader synergies with the parent company have been in terms of the value and number of syndicated generated by the successful integration of the loans in the real estate sector. Worldwide, the Resource Management and Audit Corporate bank ranks second. Centers into Commerzbank and the sale of Euro- hypo Systems GmbH to the parent company. 22 Management Report
BUSINESS DEVELOPMENT OF COMMERCIAL REAL ESTATE
corporate banking germany The return on equity (RoE) in the CBG Core seg- (cbg) core ment rose by 6 percentage points to 24.0% In our home market of Germany, we differenti- (18.0%). The cost/income ratio also improved, ate between loans in the core (CBG Core) and falling to 21.1% from 23.0% and thus remain- non-core (CBG Non-Core) portfolios. The latter ing at an encouragingly low level within the comprises loans – still almost exclusively origi- industry. Credit volumes rose to € 33.1 billion nating from our predecessor institutions – clas- (€ 32.0 billion) following the integration of sified as non-performing or sub-standard as at Essen Hyp’s portfolios and the near standstill in 31 December 2006 (cut-off date). This separa- exit channels in the second half of 2008. CBG tion has enhanced transparency and highlighted accounted for 32.2% (33.2%) of Eurohypo’s the profitability of our business with profession- total real estate financing portfolio at the end of al real estate clients in Germany. the year under review, a level which was almost In the 2008 financial year, the CBG Core seg- unchanged from the previous reporting period. ment generated a pre-tax profit of € 344 million, With a volume of € 5.3 billion, the CBG seg- only some 7% lower than the high level achieved ment accounted for some 39% of new business in the previous year (€ 368 million). The trend in commercial real estate financing. We there- in key financials for this business line has been fore succeeded in consolidating our leading role gratifying in light of the financial market crisis. in this sector in Germany, even in the challeng- Due to the targeted optimization of our ing market environment at the present time. credit portfolio and declining early repayment The trend towards investing in existing proper- penalties, net interest income fell to € 367 mil- ties continued, accounting for 55% of our new lion (€ 396 million), as planned. Average risk- business in Germany. In terms of regional distri- weighted assets (RWA) fell to € 20.4 billion (€ 29.1 bution, the majority of loans were provided by billion). A considerable portion of this decrease our offices in Berlin (€ 1.5 billion) and Düssel- was a result of the changeover to Basel II. Dur- dorf (€ 1.3 billion). ing the year under review, loan loss provisions amounted to € 10 million (€ 8 million income). outlook At € 78 million (€ 70 million), net commis- Up to mid-2008, the German real estate sector sion income performed well, with an increase of benefited from stable conditions, as the financial 11% on the high level achieved in the previous market crisis did not affect the overall economy year despite the considerable decline in new and office markets in the country until fairly business. This pleasing result was partially due late by international standards. Office markets to unused commission provisions for planned remained stable even in the second half of 2008, syndications and securitizations. The decrease but subdued demand for office space so far this in administrative expenses, which fell by 11% year suggests there will be a downswing. Demand to € 95 million (€ 107 million) thanks to rigorous on the real estate investment market has fallen cost management, is also worthy of note. dramatically since the end of 2008. In particu- s Management Report >>> Business development of Commercial Real Estate r 23 e d l o h e k a t S r u o o t r e t t e L s r o t c e r i D g n i g a n a M f o d r a o B d r a lar, high-volume deals and portfolio transactions year. This was due mainly to declining interest o B y r
were notable for their absence and investors income in the portfolio as a result of reduction o s i v r
with low levels of equity have been forced to and restructuring measures, while loan loss pro- e p u withdraw from the market due to the substantial visions were unchanged versus the previous S tightening of risk standards. year at € 152 million (€ 152 million). C M C The trend on the financial markets and the t r o p resulting recession which has now reached the outlook e R t n
German economy mean that it is not possible to The aim is to run down the bulk of the portfolio e m e make a forecast for 2009. However, in the medi- over the next three years, while at the same g a n a
um to long term we continue to expect a high time using restructuring measures to enhance M s level of interest in real estate investment activity the quality of the credit exposures likely to be e i d o in Germany and, as a result, good business retained in the portfolio for a longer period. B t n e
opportunities for Eurohypo. As far as new busi- Further details of the Core and Non-Core m e g a
ness and prolongations are concerned, we portfolios can be found in the notes on page n a remain committed to pursuing a risk-adjusted 100 ff. M and income-oriented policy while continuously enhancing the quality of our lending portfolio. corporate banking continental europe corporate banking germany and latin america (cib-i-cela) (cbg) non-core The Corporate Banking Continental Europe and Almost all the loans bundled in the CBG Non- Latin America segment comprises established Core segment were originated by predecessor real estate markets, with a focus on western institutions of Eurohypo (legacy portfolio). In Europe, alongside young, emerging markets addition, some € 400 million was allocated to such as Mexico or countries in eastern Europe. the CBG Non-Core segment from Essen Hyp’s During the year under review, this division portfolios in the 2008 financial year as part of posted a pre-tax loss of € –149 million (€ +279 its integration into Eurohypo. All the assets have million), due primarily to an increase in loan loss been classified as non-strategic and are pre- provisions, which amounted to € 482 million as dominantly high-risk or already non-performing. opposed to € 16 million in the previous year. This The portfolio is being gradually scaled back by increase was due to specific valuation allowances specialist restructuring and workout teams, the which impacted results in connection with vari- aim being to maximize the proceeds from ous exposures in established markets, but also to restructurings and realizations. portfolio valuation allowances resulting from the In the 2008 financial year, the portfolio was change in the financial environment. reduced by a further 16% to € 5.1 billion (€ 6.1 The trend in net interest income, which billion). At € –203 million (€ –145 million), the rose by 15% to € 330 million (€ 287 million), pre-tax result was worse than in the previous was positive thanks to higher margins and rising 24 Management Report
financing volumes. Despite the limitations on corporate banking uk (cib-i-uk) new business, net commission income, at € 95 The Corporate Banking UK segment generated million, was only 8% lower than the previous a pre-tax profit of € 64 million (€ 93 million) in year’s high level of € 103 million. This was pre- the 2008 financial year. Due to the low level of dominantly due to good commissions on new new commitments and the slight contraction in business and high income from interest rate and the size of the portfolio, net interest income fell currency management. Even though headcount by 7% to € 84 million (€ 90 million); at the same rose slightly, we succeeded in cutting administra- time, net commission income decreased by € 20 tive expenses by € 10 million to € 83 million million to € 40 million (€ 60 million). As a result (€ 93 million). of portfolio and specific loan loss provisions, At –9.0% (+16.0%), return on equity (RoE) risk costs increased by some € 5 million to € 16 was well below the previous year’s figure. The million (€ 11 million). The pre-tax result was cost/income ratio improved to 19.9% (23.9%). again impacted by a special, one-off effect in the As a result of our selective lending policy, fourth quarter – the disposal of securities – which the volume of new business was € 4.3 billion led us to post a € 19 million loss in income from (€ 12.8 billion), around two-thirds lower than the financial assets. As planned, we reduced admin- high level achieved in 2007, though there were istrative expense by 37% to € 29 million (€ 46 variations in the number of new contracts from million), partially by cutting headcount due to region to region. With a figure of € 2.8 billion, the lack of sales opportunities. The return on our financing activities focused on our estab- equity (RoE) fell to 11.6% (15.1%), predomi- lished markets in southern and western Europe. nantly on account of heightened capital require- Countries in northern and eastern Europe, such ments. The cost/income ratio improved to 26.7% as Russia and the Czech Republic, accounted for (30.8%) thanks to the more efficient structure almost € 1.4 billion of new commitments; a fur- of our business units. ther € 0.1 billion was attributable to Mexico. Since we adjusted our lending activities to the volatile market situation and our restrictive outlook risk policy, our new commitments contracted to The global economic downturn has considerably € 2.0 billion (€ 5.9 billion). limited business opportunities on European and Latin American commercial property markets. outlook As the year progresses, we therefore intend to The downtrend on the UK real estate markets conduct a detailed examination of the markets will continue in the course of this year, further which will be important to us and our business restricting the new business performance of our partners in the medium to long term so that we business units in the country. At the same time, can ensure risk-adjusted returns on a sustain- banks such as Eurohypo will be unable to grant able basis. Further valuation allowances over as many loans as planned due to the global eco- the course of the year on individual exposures nomic downturn. We nevertheless expect our or portfolios cannot be ruled out in light of the business activities to recover as soon as the volatile market situation. s Management Report >>> Business development of Commercial Real Estate r 25 e d l o h e k a t S r u o o t r e t t e L s r o t c e r i D g n i g a n a M f o d r a o B d r a market has emerged from its current slowdown. Net interest income was down by 8% to € 80 o B y r
This is predominantly attributable to our long- million (€ 87 million), primarily as a result of o s i v r
standing and healthy relationships with estab- higher funding costs and exchange rate effects. e p u lished and well capitalized market participants. Despite a fall in new commitments, net commis- S
We are not in a position to forecast the timing sion income rose by 14% to € 33 million (€ 29 C M C of the bottom of the market, however; weak million), and this was due mainly to good new t r o p rental demand and rent defaults in commercial business commissions. With the commercial e R t n
property are likely to continue. This means that mortgage backed securities (CMBS) business e m e key financials such as loan loss provisions and coming to a standstill in the 2008 financial year, g a n a
net commission income will continue to suffer we posted a net trading loss of € –2 million fol- M s in the 2009 financial year from limited busi- lowing the high result for 2007 of € 33 million. e i d o ness opportunities and market corrections. There was a positive trend in administrative B t n e
Nevertheless, we are confident that our good expenses, which we succeeded in cutting by 41% m e g a
relationships with clients and our innovative to € 44 million (€ 74 million) due to synergies n a approach to providing professional finance and with Commerzbank (USA) and lower staff costs. M advisory services will help us to be a successful In response to the market turmoil in 2008, market player in the medium and long term. our sales performance was lower than in the previous year at € 1.8 billion (€ 7.1 billion). We corporate banking usa (cib-i-us) maintained our focus on return and risk orienta- In spite of challenging market conditions, in the tion, and this enabled us to further optimize our 2008 financial year the Corporate Banking USA commercial real estate portfolio. The US busi- segment succeeded in strengthening its core ness accounted for 13% of the bank’s new business of financing commercial real estate. commitments in commercial real estate financ- The positive trend in this business is, however, ing, while its share of the bank’s overall real being overshadowed by the level of valuation estate financing book remained unchanged at adjustments proving necessary. In the year under around 5%. review, re-adjustments to the value of Eurohypo’s US investment portfolio, which contains subprime outlook residential mortgage-backed securities, totalled Thanks to our long-term approach to relation- € 454 million (€ 188 million), with these charges ships in commercial real estate financing, we impacting on the income from financial assets. succeeded in further enhancing our excellent This means that as at 31 December 2008, the reputation in the US. We are therefore in a strong bank had already written down through the position to make optimum use of the business income statement some 80% of its subprime opportunities that emerge in the current year. portfolio. As a result, the pre-tax result was The ongoing recession in the US will have a € –400 million (€ –115 million). Without these major impact on our lending business. As a result, valuation adjustments, the pre-tax result in this we are unable to rule out limited additional val- segment would have been positive. uation adjustments at present. 26 Management Report
BUSINESS DEVELOPMENT OF PUBLIC FINANCE /TREASURY
public finance/treasury (pft) The PFT segment’s pre-tax result of € –949 mil- The Public Finance/Treasury segment consists lion (€ +187 million) is a direct reflection of the of the public finance and Treasury business negative impact the capital markets crisis has areas. These areas made differing contributions had. Despite the challenging market environ- to the segment’s results. ment, net interest income rose by 20% to € 107 The core business area of public finance million (€ 89 million) in the 2008 financial year. was realigned in 2008 as part of the takeover of For the first time, and to an extent because Hypothekenbank in Essen AG. Within the Com- of the insolvency of Lehman Brothers and the merzbank Group, public finance activities were credit rating developments in Iceland, Eurohypo performed at Eurohypo AG in Eschborn, Euro- was obliged to make loan loss provisions totalling hypo Europäische Hypothekenbank S.A. in Lux- € 39 million in the PFT segment. The segment embourg, Hypothekenbank in Essen AG and also posted a negative result from financial assets Erste Europäische Pfandbrief- und Kommunal- of € –149 million (€ +179 million). kreditbank AG in Luxembourg. Acquiring all the General and specific widening of credit remaining outstanding shares in Essen Hyp in spreads impacted on our holdings of derivative January 2008 gave Commerzbank the business financial instruments such as credit default and strategic flexibility to reposition this busi- swaps and total return swaps and was reflected ness area. The decision was subsequently taken in the net trading result of € –813 million (€ –44 to integrate Essen Hyp into Eurohypo. This million). This also affected the revaluation reserve process was completed with the entry into the relating to available-for-sale (AfS) holdings via commercial register on 18 August 2008 and the securities held as part of asset swap packages, technical merger of portfolios in early October as well as some assets where there were no 2008. For the purposes of German commercial creditworthiness issues. law, the merger of the two banks took retroac- As far as new public finance business was tive effect as of 1 January 2008. concerned, we were highly cautious during the Alongside the integration measures, Public period under review, generating volumes of Finance’s business model was subject to a detailed € 4.1 billion (€ 20.2 billion). We also concluded review. The original value proposition of the busi- credit derivative transactions worth € 2.3 billion ness model was based on stable income contri- (€ 3.2 billion). butions capable of being planned and high RoEs The integration of Essen Hyp caused admin- with very low default, liquidity, interest rate and istrative expense to rise to € 82 million (€ 66 currency risks. However, temporary value fluc- million). We expect administrative costs to fall in tuations due to changes in credit spreads – such the coming periods, due to in part to the reali- as those being witnessed in the current finan- zation of synergies. As at year-end, the number cial market crisis – are inherent in the business of full-time equivalent employees was 107 (93). model. Although their impact can be mitigated, they cannot be completely prevented. s Management Report >>> Business development of Public Finance / Treasury r 27 e d l o h e k a t S r u o o t r e t t e funding volume in year-on-year comparison L s
in € billion r o t c e r i D g n i g a
2008 47.2 88.7 16.1 108.1 n 260.1 a M f 2007 38.9 47.2 16.4 95.0 197.5 o d r a o
2006 43.4 53.6 15.8 95.4 208.1 B d r a o B y r 0 0 0 0 0 0 o 5 0 0 5 5 s 2 1 1 2 i v r e p
Mortgage Pfandbriefe u S Public Sector Pfandbriefe C
Lettres de Gage Publiques M Other funding C t r o p e R t n e m e g a n a
outlook funding M s
The integration of Essen Hyp led to the increase The German Pfandbrief market has a volume e i d o
of the Public Finance portfolio. The fluctuations outstanding of € 806 billion. Pfandbriefe there- B t n e
in value that were exacerbated by the crisis on fore continue to play a major role in the covered m e g a
the capital markets, in particular, do not fall within bond market, which has a total volume of approx- n a the scope of the Commerzbank Group’s risk pro- imately € 2,000 billion. At around € 153 billion, M jections. A decision was therefore taken to reduce sales by German Pfandbrief issuers outstripped public finance holdings to some € 100 billion by the previous year’s level by some 13%. The 2010. As at 31 December 2008, the outstanding financial market crisis has taken its toll, however, Public Finance/Treasury loan volume was € 170 especially in Jumbo-Pfandbrief transactions. billion. The insolvency of the US bank Lehman Brothers In the current financial year, we expect in September 2008 made investors even more Public Finance to continue to make a negative uneasy than they were already. Spreads continued contribution to earnings. Even though, in them- to widen on the capital markets. The primary selves, results would be comfortably in positive market for benchmark transactions collapsed, territory, we cannot rule out negative effects on and the money markets remained illiquid due earnings as a result of the capital markets crisis, to a mutual lack of trust among banks. and this aspect has been incorporated into our Eurohypo nevertheless turned in a good planning. In addition, the realization of valuation capital market performance in 2008. With a effects that currently have no impact on income volume outstanding of € 62.7 billion, which will continue to weigh on the segment’s results. equates to a market share of 7.6%, it consoli- The total return swap portfolio, meanwhile, has dated its position as the leading bank in the been discontinued, and will therefore no longer Jumbo-Pfandbrief segment. One example of its exert any further downward pressure. In the strong position was the successful issuance of medium term, we expect further downsizing of two jumbo mortgage Pfandbriefe in June and the portfolio to continue to have a negative impact August with a volume of € 1 billion each and on income. with maturities of ten and five years, respectively. 28 Management Report
funding mix new funding (as at year end 2008)
Bearer bonds Lettres de Gage 8% 2%
Public Sector 9% Total: Mortgage Pfandbriefe € 24.1 billion 46%
Promissory note loans 35%
At this time, the bulk of issuance on the market Overall, Eurohypo Group raised € 24.1 billion was for short-dated maturities. This marked the (€ 25.6 billion). Pfandbriefe with a volume of first placement of a jumbo mortgage Pfandbrief € 13.2 billion were issued (€ 11.5 billion), includ- in the 10-year segment for over two years. Around ing € 11.1 billion (€ 5.1 billion) in mortgage three-quarters of both issues were placed with Pfandbriefe, € 2.1 billion (€ 6.4 billion) in public German investors, who remain the main pillars sector Pfandbriefe, and € 0.4 billion (€ 3.3 bil- of German Pfandbrief sales. In addition, a sig- lion) in Lettres de Gage via Eurohypo Europä- nificant portion of funding requirements was ische Hypothekenbank S.A., Luxembourg. Other covered by private placements of bearer and, in funding totalled € 10.5 billion (€ 10.7 billion). particular, registered paper. As well as issuing secured bonds, Eurohypo has access to other funding sources via the Com- funding volume merzbank Group. Thus, a significant portion of Following the integration of Essen Hyp, the vol- unsecured funding was obtained via the Group ume of funding instruments including subordi- parent company. Internally available funding nated capital and hybrid capital amounted to totalled € 61.5 billion (€ 36.9 billion), of which € 260.1 billion as at end-2008. Public sector € 23.5 billion (€ 15.7 billion) came from money covered bonds, at € 104.8 billion (€ 63.6 billion), market transactions, € 22.0 billion (€ 14.5 bil- continued to dominate, and included € 88.7 bil- lion) from repo transactions and € 16.0 billion lion (€ 47.2 billion) in public sector Pfandbriefe (€ 6.7 billion) from longer-dated facilities. and € 16.1 billion (€ 16.4 billion) in Lettres de Eurohypo will continue to draw on Com- Gage Publiques, which are covered bonds merzbank Group’s funding resources in future. under Luxembourg law. The volume outstand- Eurohypo is the Pfandbrief issuer for the Com- ing of mortgage Pfandbriefe was € 47.2 billion merzbank Group, which is also underscored by (€ 38.9 billion); other funding, including subor- usage of the funding register. dinated capital, totalled € 108.1 billion (€ 95.0 billion). s Management Report >>> Business development of Public Finance / Treasury / Business development of Retail Banking r 29 e d l o h e k a t S r u o o t r e t t
BUSINESS DEVELOPMENT OF RETAIL BANKING e L s r o t c e r i D g n i g a n a M f o d r a o B d r a retail banking (rb) from Essen Hyp’s portfolio from July 2008. In o B y r
Within Retail Banking, Eurohypo now only man- addition, special one-off factors and changes to o s i v r
ages its existing lending portfolio. The service processes led to an increase in provisions for e p u and distribution functions for this segment were loan losses from € 81 million to € 144 million. S transferred to our parent company Commerz- Administrative expenses were broadly unchanged C M C bank back in 2007. The loan portfolio has been from the previous year’s level, at € 66 million t r o p reduced by means of scheduled redemptions (€ 67 million). e R t n
and other repayments. However, the integration e m e of Essen Hyp’s retail portfolio during the 2008 outlook g a n a
financial year resulted in a year-on-year increase During the year under review, we successfully M s in the portfolio to € 23.9 billion (€ 21.7 billion). used Eurohypo’s refinancing expertise for the e i d o
Regulatory approval of our rating proce- benefit of the Commerzbank Group by arrang- B t n e
dures and processing logic has enabled us to ing refinancing for the Commerzbank’s private m e g a
calculate capital adequacy requirements in first-ranking property financing business via n a accordance with the advanced internal ratings- Eurohypo Pfandbriefe. This facility was then M based approach (AIRB). As a result, we achieved used as planned. a year-on-year reduction in our capital require- Thanks to the successful establishment of ment of € 0.7 billion to € 0.3 billion. the funding register, we will be able to make At € –67 million, the pre-tax result was well more extensive use of this funding channel in below the previous year’s level (€ +42 million). the current financial year. In addition, the inte- This was partly due to the fall in net interest gration of loan processing operations at our income, which decreased by 19% to € 166 mil- parent company offers improved economies of lion (€ 205 million) in line with the planned scale in administrative expenses. We will gradu- reduction of the original Eurohypo loan book ally run down existing business as redemptions and in spite of the additional interest income are made. 30 Management Report
INCOME
In the 2008 financial year, Eurohypo Group’s especially in Continental Europe. In total, loan performance reflected the market turmoil caused loss provisions in commercial real estate rose by the global financial market crisis, which inten- to € 675 million (€ 174 million). In the Public sified dramatically in the second half of the year Finance/Treasury segment, the default of Lehman in particular, prompting a slump in the world Brothers in the third quarter of 2008 and the economy. Following additional valuation adjust- defaults in Iceland led to increased provision- ments to our US mortgage portfolio, significant ing requirements. market value losses in the net trading income and Please refer to page 85 of the notes for fur- increasing provisions for losses, we posted a ther details of our risk structure and the methods negative operating result before tax of € –1,409 used to identify risk provisions at Commerzbank billion (€ +588 million) for the period up to year- Group. end 2008. Some key financials in the income Particularly noteworthy is the positive trend statement nevertheless performed satisfactorily; in net commission income, which at € 251 mil- among these were net interest and commission lion (€ 227 million) exceeded the high level income and administrative expenses. achieved in the previous year by 11% despite At € 1,149 million (€ 1,179 million), interest the subdued trend in new business. This good income remained on a par with the level achieved result is largely based on high income from in the previous year. This was partially due to the interest rate and currency management and rel- increase of the commercial real estate finance atively stable commission from new business. portfolio resulting from the lack of exit opportu- Eurohypo posted a net trading loss of € –810 nities. The high level achieved in 2007 was million (€ –11 million). The main reasons for matched in spite of a higher level of non-accrual this were high valuation losses from total return classifications and considerably lower income swaps and credit default swaps in Public Finance/ from early repayment penalties. This was reflected Treasury. However, losses from derivative valua- in the substantial decline in the net interest result tions and charges from the derivative portfolio from Treasury, which amounted to € –102 mil- taken over in the third quarter following the inte- lion (€ –78 million). Net interest income was gration of Essen Hyp, some of which were due positive in Public Finance/Treasury, rising to € 107 to the insolvency of Lehman Brothers, were also million (€ 89 million) thanks to higher margins a major factor. The situation was compounded on repo transactions. by the lack of CMBS business in the US, which We made loan loss provisions of € 858 mil- was hit by the difficult market situation. lion in 2008 after a figure of € 259 million for The result from financial assets totalled the previous financial year. As a result of the € –622 million (€ –9 million) in the 2008 finan- global economic downturn, market turmoil led cial year; the main negative influences in this to higher portfolio and specific allowances in area were the valuation adjustments on our US relation to commercial real estate financing, investment portfolio totalling € –454 million. s Management Report >>> Development of income and financial position >>> Income r 31 e d l o h e k a t S r u o o t r e t t e L s r o t c e r i D g n i g a n a M f o d r a o B d r a
This portfolio is used exclusively for investment expenses and the transfer of services to Com- o B y r
purposes; the assets in the portfolio are secured merzbank, other operating expenses increased o s i v r
by subprime mortgages with private customers. to € 254 million (€ 211 million). e p u In addition, losses from the disposal of securities Due to the negative impact on income from S and the valuation adjustments that were neces- the items referred to above, the return on equity C M C sary on the securities of Icelandic banks also (RoE) before tax decreased to –23.4% (10.1%). t r o p weighed on this result. In total, the downward The cost/income ratio was also impacted and e R t n
pressure from exposure to Lehman Brothers was therefore mathematically negative. e m e and Icelandic banks amounted to € 235 million. Further details of the individual lines of g a n a
The result from investment property con- income and expenses are given in the income M s tracted to € 2 million (€ 16 million). These prop- statement of the individual businesses in the e i d o erties are assets we have acquired as part of segment report on page 100 ff. and in the notes B t n e
collateral realization and which we will dispose to the income statement. The results per quar- m e g a
of once the market trend is sufficiently positive. ter are listed on page 99 of the notes. n a The declining trend is mainly due to valuation M adjustments on these properties, which are stat- impairment tests ed at fair value. The impairment tests performed on goodwill led There was a positive trend in administrative to valuation allowances of € 7 million. expenses during the year under review, with our efficient cost management helping us to cut implications of the controlling costs by 15.1% to € 460 million (€ 542 million). and profit agreement When adjusted for the migration costs relating The controlling and profit transfer agreement to the former Essen Hyp of € 38 million, these between Commerzbank Inlandsbanken Holding expenses actually went down by € 120 million. GmbH – a wholly owned subsidiary of Commerz- This was due to lower staff costs on account of bank AG – and Eurohypo AG has been in force the more subdued expansion of sales units since 4 September 2007. During the term of this abroad and considerably lower provisions for agreement, Eurohypo is obliged to transfer its performance-related pay. The staff cost ratio – profits to its majority shareholder; in turn, the the ratio of staff costs as a proportion of total latter is obliged to cover any losses made by expenses – was 44% (57%). Due to higher IT Eurohypo. 32 Management Report
FINANCIAL POSITION AND NET ASSETS
For investment volumes, please refer to the state- by € 4.4 billion to € 78.9 billion. Alongside the ment of changes in fixed assets that can be acquisition of Essen Hyp’s portfolio of € 3.1 bil- found in the notes. There are no plans for major lion, this was predominantly due to the deterio- investments in 2009. Liquidity was maintained ration in overall conditions and the resultant at all times in 2008. Details of our liquidity man- lack of placement opportunities via syndications agement tools and limitation of liquidity risks and securitizations. The deconsolidation of can be found in the risk report on page 39 ff. Glastonbury Finance 2007-1 Ltd., on the other The cash flow statement and associated notes hand, led to a € 0.2 billion reduction in the port- can be found in the notes on page 74 ff. The folio. For the first time, foreign business was in minimum reserve commitments stipulated by the the majority, at € 40.7 billion, or 52% (€ 36.5 Bundesbank were adhered to during the year billion/49%). Germany accounted for € 38.2 bil- under review, as were the capital adequacy and lion, or 48% (€ 38.1 billion/51%). Europe, at liquidity requirements laid down under banking 84% (87%), was once again the focus for the supervision regulations. lion’s share of our financing outside of Germany, while 14% (12%) was attributable to the US. substantial increase in total The increase in Retail Banking of € 2.2 bil- assets due to the integration lion to € 23.9 billion was due to the acquisition of essen hyp of the Essen Hyp portfolio worth € 5.3 billion. Eurohypo AG’s total assets increased significantly If this effect is excluded, the volume of private compared with 31 December 2007 to € 292 bil- real estate financing transactions was reduced lion (€ 214 billion) as a result of the integration by a further € 3.1 billion to € 18.6 billion through of Essen Hyp. The incorporation of Essen Hyp scheduled redemptions and other repayments, with effect from 2 July 2008 had the following following the transfer to Commerzbank AG in consequences for the balance sheet (see table). 2007 of activities related to new business. This Excluding the effect of Essen Hyp, total is exclusively a German portfolio. Retail Bank- assets decreased by € 4 billion. ing continues to account for an unchanged In spite of the considerably lower volume of 23% of total real estate financing volumes. new business on account of the restrictive risk The most major effect from the integration policy and the volatile market situation, the of Essen Hyp was in public finance business, in commercial real estate financing portfolio grew which a volume of € 66.4 billion was acquired.
balance sheet consequences of the incorporation of essen hyp per 2 july 2008
assets liabilities in € million in € million Assets held for trading purposes 2,049 Liabilities from trading activities 2,426 Claims on banks 10,754 Liabilities to banks 16,351 Claims on customers 26,628 Liabilities to customers 8,251 Financial assets 38,845 Securitized liabilities 50,697 Other assets 3,940 Other liabilities 4,491 82,216 82,216 s Management Report >>> Development of income and financial position >>> Financial position and net assets r 33 e d l o h e k a t S r u o o t r e t t e L s r o t c e r i D g n i g a n a M f o d r a o B d r a
Excluding this volume taken over from Essen capital base o B y r
Hyp, there was a significant decrease in public Regulatory capital in accordance with Basel II o s i v r
finance business, primarily due to planned repay- stood at € 9.4 billion as at 31 December 2008 e p u ments and the subdued trend in new business. (2007: € 9.3 billion in line with BIS), and com- S
As at 31 December 2008, the total volume of prised tier 1 core capital of € 6.4 billion (€ 6.5 C M C the public finance portfolio was € 154.4 billion, billion) and tier 2 additional capital of € 3.0 bil- t r o p
€ 52.7 billion more than at 31 December 2007 lion (€ 2.8 billion). Core capital included hybrid e R t n
(€ 101.7 billion). There is broad geographical capital, which was unchanged at € 0.9 billion. e m e diversification within public finance business as There was a year-on-year decline in risk- g a n a
well; the domestic share amounted to 51% (56%). weighted assets of € 6.9 billion to € 81.6 billion. M s
Under the IASB’s amendment to the reclassifica- The substantial decrease in risk-weighted assets e i d o tion of financial instruments, securities in the was due to the switch to the new regulatory B t n e
public finance portfolio for which no active mar- requirements in line with Basel II. m e g a
ket exists were reclassified and moved from IAS 39 As at 31 December 2008, this marks an n a category available for sale (AfS) into IAS 39 cate- improvement in the tier 1 capital ratio under M gory loans and receivables (LaR), with a nominal Basel II of 0.4% to 7.8% (previous year 7.4% volume of € 74.9 billion. The fair value determined under BIS) and an improvement of 0.9% in the at the time of reclassification was taken as the total capital ratio to 11.6% under Basel II new book value of this securities portfolio. (10.7% under BIS). With reference to current Excluding the effect of the integration of capital requirements this means that we have a Essen Hyp, the funding volume also declined satisfactory capital base, thanks in part to our due to the sharp reduction in public finance moves to reduce risk-weighted assets. transactions. Including € 50.7 billion in volumes The bank’s equity totalled € 4.0 billion (€ 5.6 taken over from Essen Hyp, securitized liabili- billion). An addition of € 0.2 billion was made ties increased by only € 34.7 billion to € 133.3 to retained earnings. On the basis of the profit billion. Public sector Pfandbriefe accounted for transfer agreement concluded with Commerz- € 86.1 billion of these securitized liabilities, with bank Inlandsbanken Holding GmbH in 2007, no € 35.7 billion in mortgage Pfandbriefe and € 11.5 net profit is recognized. The revaluation reserve billion in other issued debt. Liabilities to banks relating to available for sale (AfS) securities, and clients increased by € 27.5 billion to €122.3 which has no effect on income, was revised from billion as at 31 December 2008. The volume € –0.4 billion to € –2.0 billion. The decrease taken over from Essen Hyp amounted to € 24.6 was due to the widening of credit spreads and billion. The liabilities to banks included liabili- mainly relates to temporary valuation changes ties from repo transactions amounting to € 36.6 in connection with public finance securities billion (€ 33.7 billion). which are intended to be long-term holdings. 34 Management Report
OUR EMPLOYEES
active human resources management Center Resource Management, its senior man- As was the case in the previous year, a substan- agement and a large proportion of its employees tial part of human resources work in 2008 focused were transferred to Commerzbank. This transfer on the integration of Eurohypo into the Commerz- of operations enables us to use standardized bank Group. human resources systems, processes and prod- Eurohypo Systems GmbH was sold to Com- ucts across the Group, thus creating a one-stop merzbank in July 2008. In August, Corporate provider of the best possible service for all staff. The Corporate Center Audit was integrated international into the central internal audit unit at Commerz- employee structure bank in December 2008. Change 20081) 20071) in % Integration work entered a new phase at Germany 1,263 1,345 –6.1 the beginning of this year. With effect from Outside Germany 381 400 –4.8 1 February 2009, the Legal, Internal Services, Amsterdam 7 12 –41.7 Finance Controlling Tax, Operations Global Athens 4 5 –20.0 Markets and IT/Operations Corporate Centers Budapest 1 3 –66.7 were integrated into Commerzbank. Responsi- Helsinki 2 2 0.0 bility for integration within Commerzbank rests Copenhagen 3 4 –25.0 with the relevant internal units. Lisbon 9 9 0.0 Besides integration work into Commerzbank, London 87 100 –13.0 the incorporation of the former Essen Hyp into Madrid, Barcelona 35 31 12.9 Eurohypo was another main focus for human Milan 18 17 5.9 resources work. As part of the integration meas- Moscow 7 6 16.7 ures, 81 former employees of Essen Hyp were
New York, Chicago, L.A. 136 147 –7.5 given the opportunity to pursue their careers Paris 30 29 3.5 within the Commerzbank Group, including 27 at Prague 3 3 0.0 Eurohypo. The migration of all the data to Euro- Stockholm 6 8 –25.0 hypo’s systems at the end of October marked Warsaw 5 4 25.0 the successful completion of the integration Zurich 3 4 –25.0 work. Other locations 25 16 56.3
Total Eurohypo AG 1,644 1,745 –5.8 initial professional training programs and qualifications
Consolidated companies Offering support to young people and enabling Germany 55 245 –77.6 them to obtain qualifications is part of Eurohypo’s Outside Germany 49 44 11.4 commitment to assuming social responsibility. Total 104 289 –64.0 During the 2008 financial year, seven young people successfully completed their banking
Total Group 1,748 2,034 –14.1 training programs, five of whom obtained
1) As at December 31 s Management Report >>> Our Employees r 35 e d l o h e k a t S r u o o t r e t t e L s r o t c e r i D g n i g a n a M f o d r a o B d r a suitable positions with permanent employment o
corporate structure B y r
contracts. In August, twelve young men and o
of eurohypo ag s i v Change r women began their professional training at the e p
2008 2007 in % u bank, eleven of whom were embarking on a S
Operational units 832 885 –6.0 C combined degree and vocational training course. M CIB1) Continental Europe 195 195 0.0 C This three-year integrated course of studies t r
CIB USA/UK/Asia-Pacific 178 196 –9.2 o p with the Hessische Berufsakademie Frankfurt e R
Corporate Banking t n
(Hessian State Professional Academy Frankfurt) e m
Germany 387 413 –6.3 e provides trainees with the opportunity to gain g a n
Retail Banking 0 3 –100.0 a a Bachelor of Arts while at the same time com- M Public Finance/Treasury 72 61 18.0 s pleting the Chamber of Commerce bank trainee- e i d
Corporate Center 812 860 –5.6 o ship program in the first two years. Initial pro- B t n
Total 1,644 1,745 –5.8 e
fessional training at Eurohypo is carried out in m e
1) g Corporate and Investment Banking a cooperation with Commerzbank. At the end of n a the reporting year, a total of 24 young people M were in some form of training at our bank. Our staff are benefiting from the link between planned restructuring measures at a number of Eurohypo’s training offering and the programs sales units in Germany and abroad. provided at Commerzbank. “QNET”, the Com- The average period of service at Eurohypo merzbank Group’s online training catalogue, AG in Germany was 13.2 years in 2008 (14.1 provides a clear overview of all the courses years) and the average age of our employees available, and seminars can be booked directly was 41.7 years (41.3 years). Staff turnover, as using this shared platform. There was continued measured by the number of departures during broad-based interest in the management semi- the year, was 13.0% (11.4%) in 2008, and the nars focusing on sharing ideas across the Group. absentee rate was 2.6% (2.9%). Part-time With over 1,000 registrations, demand for inter- employees accounted for 13.2% (9.9%) of the nal and external training offerings was encour- workforce. agingly high. thank you for your commitment personnel changes at We would like to take this opportunity to express eurohypo group our thanks to all our employees for their excep- At the end of the 2008 financial year, Eurohypo tional commitment and loyalty to our company. Group employed 1,748 staff, some 14% fewer We also extend our sincere thanks to the mem- than in the previous year. This change is a reflec- bers of the Staff Council and its committees, as tion of business transfers to Commerzbank as well as the committee representing senior exec- well as transfers by individual staff members utives. Their professional and constructive work to our parent group. The decline in employee has helped to ensure that many decisions were numbers was also due to the realization of realized in a spirit of consensus. 36 Management Report
GROUP STRUCTURE AND CORPORATE INVESTMENTS
group structure eurohypo europäische Eurohypo is Europe’s leading specialist provider hypothekenbank s.a. of commercial real estate and public finance. The activities of Eurohypo Europäische Hypo- Our business activities cover the seven segments thekenbank S.A. in Luxembourg focus exclusively described in detail on page 100 ff. All operational on public sector financing in OECD countries. units are consistently managed as profit cen- Its acquisition activities in France, Belgium, ters. To this end, we use an integrated control Luxembourg and Switzerland and its key role as system to ensure targeted management in the the second issuing entity in the Eurohypo Group business units. underscore the company’s strategic significance in public finance. During the year under review, corporate investments Eurohypo Europäische Hypothekenbank S.A.’s There was a moderate reduction in the scope total assets fell slightly, by 4.2% from € 26.2 of strategic corporate investments in the 2008 billion to € 25.1 billion, and equity totalled € 336.9 financial year. These continue to include Euro- million (€ 330.6 million). hypo Europäische Hypothekenbank S.A., Luxem- New lending business amounted to € 1.1 bourg; EH Estate Management GmbH, Eschborn; billion (€ 5.0 billion), while net interest and Kenstone GmbH, Eschborn; Servicing Advisors commission income increased from € 40.4 mil- Deutschland GmbH, Frankfurt am Main; Euro- lion to € 72.7 million. After net income from hypo (Japan) Corp., Tokyo and Eurohypo Repre- financial transactions and expenses, the company sentacoes Ltda., Sao Paulo. This group of cor- generated an operating result before provisions porate investments no longer includes Eurohypo for loan losses of € 68.7 million (€ 85.3 million). Systems GmbH, Eschborn. This resulted in an after tax profit of € 46.3 mil- In accordance with their significance to the lion (€ 58.9 million). These are the second-best Group, strategic corporate investments are directly results in the 19-year history of Eurohypo Euro- assigned to the appropriate operational unit or päische Hypothekenbank S.A. The figures for Corporate Center for the purposes of organiza- the company are reported in the segment report tion and reporting. All of the bank’s other cor- under Public Finance/Treasury (please see page porate investments are handled by Corporate 110 ff. for further information). Center Legal, whose tasks include monitoring regulatory requirements and optimizing the cor- eh estate management gmbh porate investment portfolio. Further details of EH Estate Management GmbH in Eschborn is the corporate investments and an overview of a wholly owned subsidiary of Eurohypo and is Eurohypo’s shareholdings as at 31 December linked to it through a controlling and profit trans- 2008 are available in the notes on pages 138 ff. fer agreement. The company provides various s Management Report >>> Group structure and corporate investments r 37 e d l o h e k a t S r u o o t r e t t e L s r o t c e r i D g n i g a n a M f o d r a o B d r a real estate-related services to the Group. In par- kenstone gmbh o B y r
ticular, it manages the development and market- Kenstone GmbH was launched at the start of o s i v r
ing of properties which the bank has acquired 2007 as a specialist in real estate appraisal and e p u as a result of restructuring by relevant special consulting. The company’s activities focus on S purpose companies. EH Estate Management calculating market and mortgage lending values C M C GmbH has nominal capital of € 26,000. As at for real estate and the issuing of corresponding t r o p
31 December 2008, it had total assets of € 3.5 appraisals. Other service offerings include port- e R t n
million (€ 3.9 million); its profit of € 1.0 million folio valuations, due diligence, construction cost e m e
(€ 0.26 million) was transferred to Eurohypo in monitoring, market and property rating and g a n a
accordance with the profit transfer agreement consulting. From six offices across Germany, a M s in place. total of 25 employees look after clients, which e i d o
include Eurohypo and Commerzbank as well as B t n eurohypo (japan) corp. e external clients. The company has nominal capi- m e g a
Tokyo-based Eurohypo (Japan) Corp., which tal of € 26,000. As at 31 December 2008, it held n a was founded in June 2006 and has a staff of 14, total assets of € 4.1 million (€ 3.4 million) and M succeeded in establishing itself on the Japanese net profit amounted to € 2.3 million (€ 1.2 mil- market. New lending business amounted to lion). This was transferred to Eurohypo on the € 105 million and net interest and commission basis of profit transfer agreements. income totalled € 13 million. As the second largest national economy in eurohypo representacoes ltda. the world, Japan has a considerable real estate The most recent addition to the group of strate- market. The country’s strongly export-driven gic corporate investments is Eurohypo Repre- economy is not immune to the current global sentacoes Ltda., which was founded in December economic crisis, however, which is also weigh- 2007 and has its registered office in Sao Paulo, ing on its real estate market. Following an upswing Brazil. The aim of the company, which is equipped that lasted for several years, the Japanese real with € 0.2 million in share capital, is to act as a estate sector is currently experiencing a sharp representative office for Eurohypo, optimizing correction which will continue to weigh heavily access to the real estate markets in Latin America, on activities in this market in 2009. Eurohypo and especially in Brazil. In recent years, property (Japan) Corp.’s share capital equates to some markets in Latin America (and in Brazil in par- € 23 million. Total assets as at 31 December ticular) have benefited from globalization and 2008 amounted to approximately € 1.0 million thus from heightened investor interest. This trend (€ 0.5 million), while profit stood at roughly has also been accompanied by increasing pro- € 4.0 million. fessionalism in the real estate industry. Even 38 Management Report
though Brazil is performing relatively well in NPLs. In light of the uncertainty in the financial spite of the current global turmoil, its real estate industry – and particularly in lending activities – sector will not be left unscathed by the substan- triggered by the subprime crisis, the market for tial decline in economic growth either. services relating to NPLs has not performed in line with expectations. As a result, no new port- servicing advisors folios were acquired in the year under review. deutschland gmbh Servicing Advisors Deutschland GmbH – a joint eurohypo systems gmbh venture with Citigroup and Capmark Financial Eurohypo Systems GmbH, a wholly owned Group Inc. – is a specialist in non-performing subsidiary of Eurohypo whose main business consumer real estate loans. From six Germany- focuses on providing IT services for the Eurohypo based offices, the company provides market-ori- Group, was transferred to Commerzbank on ented management of non-performing loans, or 1 July 2008. s Management Report >>> Group structure and corporate investments / Risk Report r 39 e d l o h e k a t S r u o o t r e t t
RISK REPORT e L s r o t c e r i D g n i g a n a M f o d r a o B d r a risk-oriented overall and unquantifiable risks such as reputational o B y bank management r
and compliance risks. o s i v r
risk management organization Risk management is firmly established as a e p u The financial market crisis is showing how impor- function covering the entire bank at all organi- S tant professional limitation and management of zational and procedural levels. Risk management C M C banking risks are for our business success. The and the business units are strictly separated t r o p identification of all major risks and risk drivers, organizationally up to the Board of Managing e R t n
independent measurement and evaluation of Directors. The roles and responsibilities of the e m e these risks, and commensurate risk-return ori- business units and the Corporate Center are g a n a
ented management are crucial to successful risk clearly described and documented, responsibili- M s management. ties are defined to avoid overlapping. The organi- e i d o
We welcome the action of the Institute of zation follows the bank’s risk structures. CC Risk B t n e
International Finance (IIF) in July 2008, when it Management is an independent part of the Cor- m e g a
responded to the financial market crisis by pub- porate Center and reports directly to the responsi- n a lishing a series of “Principles of Conduct” for ble member of the Board of Managing Directors, M organizing risk management which are binding the Chief Risk Officer (CRO). on the IIF (Commerzbank and Eurohypo are The CRO, who is responsible for all quantifi- members), and which cover six areas (risk man- able risks, is also responsible for implementing agement, compensation, liquidity, valuation, the risk policy guidelines established by the securitization, disclosure). These principles Board of Managing Directors. The CRO regularly are given concrete form through best practice reports on the bank’s overall risk situation to recommendations which are strongly recom- the full Board of Managing Directors and to the mended to members for implementation, with Risk Committee of the Supervisory Board. In due consideration to their structure and business addition to responsibility for risk management, model. The goal of these measures is to avoid the CRO is also responsible for the back office a repeat of the errors which led to the current units throughout Group. financial market crisis. For the operational implementation of risk The result of a group-wide gap analysis shows management, the Board of Managing Directors that many of these requirements are already has delegated tasks to specific committees. Under being met. We have bundled the outstanding the direction of the CRO, the Risk Management requirements into action areas and have created Committee (RiMCo) regularly evaluates the bank’s corresponding measures which should be overall risk situation, and discusses and decides implemented by the end of 2009. on arising questions of principle. Eurohypo defines risk as the danger of pos- The Group’s Asset Liability Committee (ALCo) sible losses or lost profits due to internal or is the central management body for liquidity external factors. Risk management distinguish- risks at Eurohypo. es between quantifiable risks – those for which Credit risks are managed by the bank’s Credit a value can normally be given in annual finan- Committee, which is established as a “CRE sub- cial statements or in commitment of capital – committee” of the group-wide Credit Committee. 40 Management Report
risk-bearing capacity and risk strategy (as at year end 2008) in € million
Economic capital with diversification effects between risk categories 5,160 Economic capital with risk buffer 7,060 Available risk cover pool 8,325
Credit & market risk OpRisk Business risk
integration into the group The conclusion is that its risk bearing capacity Risk management has undergone other personnel was ensured at all times in 2008. and organizational changes within the Group. The bank’s Board of Managing Directors Eurohypo’s membership in the Commerzbank defines risk policy guidelines as part of its Group resulted in the transfer of responsibility established overall business and risk strategy, for risk methodology to the parent company. which consists of various sub-strategies for the Further development of a uniform approach is main categories of risk. accordingly handled entirely within the Group. In coordination with the parent company’s Members of the Board of Managing Direc- risk strategy, guidelines and limits are defined tors and executives at Eurohypo are included in for entering into risk positions. the committees at Group level. The risk strategy is made more detailed in In integrating Eurohypo the credit-approval the relevant sub-risk strategies. Limits for the structure was also standardized throughout the relevant risk parameters of the portfolios are Group. Depending on the rating and credit defined and systematically monitored, they inform exposure, all major credit decisions are now management of correlation and concentration taken in accordance with uniform principles. risks which cover multiple risk categories. Sig- nificant deviations immediately trigger counter- risk bearing capacity measures or adjustments and involve the rele- and risk strategy vant boards and committees, in compliance with As part of the ICAAP process, the Eurohypo sub- MaRisk. group’s aggregate bank-wide risk (measured as Unquantifiable risks are subjected to strict economic capital at a confidence level of 99.95% qualitative monitoring within the Group in com- and a holding period of one year) is compared pliance with the requirements of MaRisk. with the capital available to cover risk (primarily The risk strategy is reviewed annually, equity components according to IFRS). This adopted by the Board of Managing Directors determines at the bank level whether Eurohypo and approved by the Supervisory Board. has the necessary risk bearing capacity. The risk policies supplement the risk strategy to ensure ongoing compliance with statutory and internal requirements. s Management Report >>> Risk Report r 41 e d l o h e k a t S r u o o t r e t t e L s r o t c e r i D g n i g a n a M f o d r a o B d r a capital management under basel ii In this we mainly provide data on the risk situa- o B y r
Since January 2008 Eurohypo has been using tion in all business units and portfolios, real estate o s i v r
the advanced internal ratings based approach markets, early risk identification, the largest e p u (IRBA). The first official calculation of the capital problem loans, and risk provisioning and risk- S adequacy requirement as at 31 March 2008 bearing capacity. We also use “batches” to report C M C showed the expected reduction in the capital on specific industries and countries. In addition t r o p requirement of over 10% despite the first-time there are regular risk reports on separate sub- e R t n
obligation to cover operational risks, confirming portfolios and market price exposure, and occa- e m e the fundamentally good quality of the credit sional reports as needed. g a n a
portfolio. Externally, the requirements for disclosing M s
As planned, we continued with the certifica- risk ratios have become significantly more strin- e i d o tion of other approaches during the year. By the gent due to the new Solvency Regulation (SolvV), B t n e
end of 2008, approximately 80% of the portfo- which came into force in 2008. The disclosure m e g a
lio had been approved under regulatory provi- requirements relate to capital adequacy, risk n a sions for valuation based on the IRBA approach. strategy, and the qualitative and quantitative M With the IRBA approach under Basel II, the reporting of risks incurred, and are published capital adequacy requirement is much more risk- at Commerzbank Group level. sensitive. It is possible, based on internal rating methods, that a higher capital requirement counterparty default risks ensues for high-risk portfolios and a lower capital In credit risk management we have systemati- requirement ensues for portfolios with a lower cally implemented the Basel II parameters. In risk content than previously under Principle I. addition to rating systems approved by the reg- An economic slowdown can, however, mean ulatory agencies, this involves a firmly estab- that the capital reduction effect may also be lished, common and uniform standardized under- counteracted by rating downgrades and lower standing of the risk situation (credit culture). collateral proceeds. We maintain this culture through a comprehen- sive training and continuing education program, risk communication and review portfolio status and migration through The most important medium for presenting risks regular asset quality reviews. in Eurohypo is the internal risk report, which gives a detailed quarterly overview of the Group’s rating systems quantifiable risks (Quarterly Risk Report – QRR) A good scoring or rating process is character- and forms the basis for reporting within the Board ized by good discriminatory power, which of Managing Directors and the Risk Committee means that the methods used must differentiate of the Supervisory Board. reliably between “good” and “bad” clients. 42 Management Report
exposure at default (ead) breakdown risk density in bp (as at year end 2008) (as at year end 2008)
Retail Banking Public Finance 2 € 22 billion Commercial Real Estate 31 Retail Banking 16
Commercial Real Estate € 83 billion Public Finance € 152 billion
The results of our scoring or rating processes provided by the rating process. By using simu- are the future probability of default (or PD) for lations and stress tests, it is possible to develop our borrowers. optimum strategies for portfolio positioning and Beyond the default risk rating, correct assess- optimization. Daily business is managed by set- ment of the severity of the loss (loss given default, ting operating guidelines (e.g. limits, minimum or LGD) is essential for reliable and integrated margins, documentation). Close cooperation risk assessment. The loss given default is prima- and good communication between front and rily determined by the expected proceeds from back office functions and naturally also with our collateral and unsecured loan components and clients are absolutely essential for the success by the exposure (outstanding loan amount) on of the business and risk strategy. the default date (EAD). Our management process is based on two Finally, combining the above components parameters: unexpected loss (UL) and expected yields an assessment of the risk of loss or the loss (EL = PD * EAD * LGD). While the analyses expected loss (EL) and the ratio of EL to EAD, of risk-bearing capacity and risk appetite based or loss density or risk density (%EL). on unexpected loss (= economic capital consump- The internal master scale is used to assign tion) determine strategic orientation and serve both the percentage probability of borrower default to limit bulk risks, operational implementation (client rating) and the risk density of a loan of risk management is based on expected loss commitment (credit rating) to rating classes. limits. In addition, the EAD and its rating migra- The group-wide use of equivalent rating tion are closely monitored. These limits are easy processes for each asset class is ensured by the to implement in day-to-day operations, and EL Commerzbank Group’s uniform rating landscape. is also the key parameter for systematic risk- This uniform process architecture not only facil- return-adjusted pricing. itates risk management and monitoring but also prevents rating arbitrage within the Commerz- eurohypo bank Group. The starting point for controlling and monitor- ing counterparty default risks under Basel II is credit risk management exposure at default (EAD). Valuation of banking Management itself begins with the transparency book items depends on whether holdings are s Management Report >>> Risk Report r 43 e d l o h e k a t S r u o o t r e t t e retail banking unit retail banking unit L
regions property type s r o t
(as at year end 2008) (as at year end 2008) c e r i Baden-Württemberg Bayern Other D g n 7% 7% 5% i g a n Sachsen-Anhalt, Sachsen, Multi-family units a M
Thüringen Nordrhein-Westfalen 15% f o
11% 31% Privately-occupied flats d r a
Berlin, Brandenburg, 59% o Single-family housing B Mecklenburg-Vorpommern 21% d
13% Niedersachsen, Bremen, r a
Schleswig-Holstein, o
Hessen, Rheinland-Pfalz, B
Hamburg y Saarland r o
18% s 13% i v r e p u S C M C t r o p e R t n e m e
posted as loans and receivables (LaR) or avail- the maximum credit risk position. Uncertainty g a n a
able for sale (AFS). In 2008 Eurohypo reclassi- about utilization of contingent liabilities is M s
fied items from AFS to LaR (for details, see note accounted for conservatively. To reduce the credit e i d o
4, pp. 81 et seq.). risk, Eurohypo primarily holds collateral in the B t n e
Provisions for expected loan losses are form of real estate. Guarantees, warranties, life m e g a
made in the case of LaR, but the accounting insurance policies and building loan contracts n a measurement is different for AFS items. If the are also taken into account. M impairment as indicated by market prices or The expected loss on the bank’s EAD thus indexes is only temporary in nature, then it is yields the counterparty default risk based on booked to the revaluation reserve as a deduction uniform standards, regardless of whether the item. However, if the impairment is classified default is later booked as a loan loss provision. as permanent, then the item must be impaired. The EL on the bank’s EAD of € 258 billion as of Impairments directly impact the income state- the end of 2008 was € 316 million, which corre- ment, in contrast to booking to the revaluation sponds to a risk density of 12 bp. The charges reserve. against earnings totalled € 1,480 million (includ- The remaining AFS items include both the ing loan loss provisions of € 858 million, AFS major portion of the asset-backed securities impairment of € 10 million, LaR € 612 million) (ABS) items and the securities investments of and were therefore significantly higher than the the Public Finance unit. EL. There are no trading book items. In view of the continuing weakness of the All of the bank’s counterparty default risks market for secondary-market ABS items, we are are combined in one number in the Basel II expecting several additional impairments in concept of exposure (EAD). The goal is to create 2009. In addition, we are forecasting further a uniform measure for counterparty default decreases in market values for residential mort- risks. All products (e.g. open committed lines, gage-backed securities (RMBSs). derivatives, etc.) are converted to the default risk of a cash loan based on the individual cred- retail banking it conversion factor (CCF). For internal control Since February 2007, servicing of the Retail purposes, EAD represents the best estimate of Banking unit’s credit portfolio has been performed 44 Management Report
public finance unit public finance unit exposure at default (ead) breakdown risk density in bp (as at year end 2008) (as at year end 2008) Scandinavia 1% Other 2% Germany 0.3 Japan 1% USA/Canada 0.8 Switzerland 2% Greece 2% Spain/Portugal 0.4 UK 3% Germany 52% Italy 0.7 France/Belgium 3% Austria 0.6 Other EU 4% Other EU 4.7 Austria 4% France/Belgium 0.2 Italy 7% UK 6.7 Spain/Portugal 9% USA/Canada 10% Greece 1.1 Switzerland 0.5 Japan 0.2 Scandinavia 0.6 Other 46.2
by Commerzbank – earnings and risks, i.e. inclu- Risk limiting measures are in place in the Com- sion in results and risk provisioning, remain merzbank Group for the unit as a whole. with Eurohypo. The total of c. € 3.5 billion for “Other” The Retail Banking credit portfolio focuses includes c. € 2 billion of supranational organiza- on financing low-risk real estate (privately-owned tions and various items in Asia and the emerging flats, one and two family homes and multi-unit markets with risk-adequate rating. homes with a minor commercial element), reflect- There were no trading book activities. ing the acquisition policy of previous years. The This year, Public Finance includes for the risk density in the white book is low at 16 bp, first time the public finance books of the former reflecting the high first-ranking share in the credit Essen Hyp. As a result, this unit now accounts portfolio. Based on collateral, around 95% of the for almost 60% of the bank’s total EAD. portfolio is investment grade. No new business As part of the strategic reorganization of the has been booked in Eurohypo’s Retail Banking Public Finance unit, we are expediting integra- unit since September 2007. tion into the Commerzbank Group Corporates & Besides the move to individual default risks Markets unit and are also planning to reduce our in flat-rate specific adjustments, the change in portfolio volume to € 100 billion with due con- provisions for loan losses in 2008 was decisively sideration to earnings over the next two years. influenced by the implementation of group wide In this connection, new business was sharply depreciation rules. After completing the integra- reduced in 2008. tion, the loans, income and risk provisioning of The global financial markets crisis is the Retail Banking share in the Essen Hyp credit increasingly impacting our Public Finance port- portfolio have also been reported since the sec- folio, so that the risk density has risen over the ond half of 2008. course of the year. Exposure at the reporting date was reduced to € 152 billion, largely through public finance maturities. The public finance business concentrates on The regional focus continued to be on the German state and regional governments, muni- public finance business in Germany. The invest- cipal governments and supranational institutions ment grade share of the white and grey books and other publicly-backed loans. remained unchanged at 99%, Icelandic commit- ments were transferred to the black book. s Management Report >>> Risk Report r 45 e d l o h e k a t S r u o o t r e t t e commercial real estate unit commercial real estate unit L
exposure at default (ead) breakdown risk density in bp s r o t
(as at year end 2008 (2007)) (as at year end 2008 (2007)) c e r i Italy Other D Germany 29 (30) g n € 5 (5) billion € 6 (4) billion i g
Other EU 22 (15) a n France UK a
40 (22) M
€ 6 (4) billion f USA 41 (23) o
Germany d
Spain r € 38 (38) billion a Spain 39 (14) o
€ 6 (8) billion B France 17 (18) USA d r
€ 7 (6) billion Italy 39 (19) a o B
UK Other EU Other 40 (15) y r o
€ 8 (9) billion € 10 (10) billion s i v r e p u S C exposure at default (ead) breakdown risk density in bp M C
(as at year end 2008 (2007)) (as at year end 2008 (2007)) t r o p e R t
Building land Other n Office 26 (22) e
€ 2 (3) billion € 8 (11) billion m Retail e 21 (15) g a n
Market/trade fair/ Residential 42 (39) a warehousing M Office Hotel 32 (34)
€ 4 (4) billion s e € 29 (30) billion Market/trade fair/warehousing 31 (27) i d
Hotel o Building land 44 (22) B € 4 (5) billion t n
Other 57 (33) e m e g
Residential Retail a n
€ 13 (12) billion € 23 (19) billion a M
commercial real estate more stringent lending standards; the sharp The merger of Essen Hyp with Eurohypo and reduction in new business reflects a significant the associated consolidation of books increased improvement in the risk-return profile compared EAD in the period under review to € 83 billion. with just a year ago. Both for new business and The economic environment is still weighing in portfolio management, we are systematically very heavily on the real estate markets, and no applying the “look-through” approach for each revival is likely before the end of 2010. Global transaction, regardless of product type, region, investment almost came to a standstill at the asset class or level of the targeted syndication end of 2008, and as a result of market and risk volume. The volume in the syndication pipeline conditions the volume of new financing commit- fell by € 2 billion in the period under review, ments for commercial real estate in 2008 fell to with a simultaneous increase in final hold. We € 13.7 billion, compared with € 36.8 billion in do not expect any significant improvement in 2007. A further halving of new business is expect- liquidity in the securitization markets in the ed in the 2009 financial year. foreseeable future, and the syndication market As part of our strategy we concentrate on will also remain at a very low level in 2009. value-creating and risk-adequate new business. The investment grade share in the perform- The withdrawal of many competitors from CRE ing portfolio fell over the year to 89% as a activities leaves very good opportunities for busi- result of market conditions. In view of the con- ness in our core portfolios, even with significantly tinuing weakening of the market in the three 46 Management Report
syndication pipeline cmbs pipeline commercial real estate commercial real estate in € billion in € billion
Pipeline as at 31.12.2008 2.8 Pipeline as at 31.12.2008 0 Closed 1)
Pipeline as at 31.12.2007 4.8 Pipeline as at 31.12.2007 2.8
1) All commitments in the securitization pipeline are currently on final hold because of the current unsatisfactory market situation.
hot spots USA, UK and Spain, the investment In view of the market developments, our focus grade portions have fallen to 86% (USA), 89% is primarily on portfolio management. Depend- (UK) and 82% (Spain), the last after the transfer ing on the legal situation in the various jurisdic- of c. € 2 billion to the default portfolio. In the tions, we are using all available opportunities default portfolio we are working systematically (maturities or covenant testing) to restructure on reducing risks under uniform Group manage- and improve the risk-return ratio in our portfo- ment and direction. lios. As a result, we have been able to achieve a The fall in market values has continued, substantial improvement in our risk position in driven by rising returns and, increasingly, declin- a number of commitments. ing rents. The decreases in market value which The loans in our portfolio that are secured have already been substantial over the past 12 by a land charge or mortgage are still charac- months will probably continue over the next 12, terized by acceptable LTVs, although further and are the main driver of the sharp rise in risk losses in market value have led to an increase densities. Besides the three hot spots, market in the loan-to-value ratios on our existing port- values have also declined in the French and Ital- folio. Time lags for LTVs also arise from the ian regional markets; given the general economic contractual agreement to renew external valua- trend and clear slowdown in investment, we are tions. In the hot spot markets, the LTVs for also cautious about the future in Germany, and weaker commitments are also reviewed more expect a rising risk density in our home market frequently than annually as part of our internal in 2009. We are submitting all regional sub-port- assessment, as a basis for deciding further folios to quarterly scenario analysis for risk den- action. In the USA, LTVs in the secured lending sity, based on expected rating migration and business are for the most part still moderate, market value forecasts for specific uses. The latest with a maximum of 75%. In the UK and Spain developments in the market pose significant as well as in our core business in Germany our challenges for us in financing commercial prop- LTVs mostly range between 65% and 75%. erty. We are countering these developments with The limited financing opportunities for potential much stricter lending standards, both for new buyers are putting market values in the UK and business and for external renewals. Spain under pressure, so that we expect a shift s Management Report >>> Risk Report r 47 e d l o h e k a t S r u o o t r e t t e commercial real estate L
loan-to-value, stratified breakdown s r o t
(as at year end 2008 (2007)) c e r i D g n LTV band UK Spain USA Total i g a n a M f
>100% 2% (0%) 1% (0%) 2% (0%) o d r a
80%–100% 5% (1%) 3% (1%) 0,1% (0%) 3% (2%) o B 60%–80% 13% (8%) 12% (6%) 10% (12%) 13% (10%) d r a o
40%–60% 23% (21%) 24% (21%) 27% (28%) 23% (20%) B y r o
20%–40% 28% (34%) 30% (32%) 31% (30%) 28% (28%) s i v r e
0%–20% 29% (36%) 30% (40%) 31% (30%) 30% (37%) p u S C M 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 C 1 3 2 1 2 3 2 1 2 3 1 3 t r o p e R
– based on market values Portfolio volumes t n – excluding margin lines and corporate loans e m e
– additional security not taken into account g a n a M s e i d o B t n e
of the stratifications. This is the highest level for to ensure that uniform valuation criteria are m e g a
LTVs in new business in all regions, with most consistently applied. Provision for possible loss- n a LTVs being lower. In the emerging markets, LTVs es is determined in accordance with IFRS. We M are generally between 60% and 70%. In these use the Basel II parameters to determine the markets we only finance top-class properties in GLLP (general loan loss provision). excellent locations. The definition of the default portfolio has The tables above include all performing loans also been harmonized at Commerzbank and (white and grey books only) with the exception Eurohypo. We conform to Basel II in defining of corporate loans in the CRE segment – the “default” as loans exhibiting delinquency of more unsecured loans (i.e. without mortgages) that than 90 days, impaired loans or those against are extended on large real estate portfolios (e.g. which legal recourse has been taken, and loans REITS, funds, etc.) against financial covenants with a rating of cb 6.0 and lower. As at the end or pledged shares. These still total € 4.2 billion of December 2008, the exposures in default in the performing area (12/2007: € 7.0 billion). portfolio totalled € 6,642 million, for which col- The USA currently accounts for € 2.5 billion (pri- lateral in the amount of roughly € 3,509 million marily REITS), while the UK accounts for € 0.5 is available as well as risk provisions (single billion and Spain for € 0.2 billion. All corporate loan loss provision – SLLP) and portfolio loan loans have now been classified as out of policy, loss provision (Port-LLP impaired) of € 2,215 and the portfolio is being successively reduced. million. Risk provisioning in 2008 is dominated by development risk provisioning, the effects of the adverse external situation. At intensive care results € 858 million, provision is far above the previ- Loans and receivables, risk provisioning ous year’s level (€ 259 million). In 2008 we had In the course of Group integration, care is taken to take a special charge in the CRE unit as a 48 Management Report
commercial real estate corporate loans, rating breakdown (only performing loans)
in € billion
1.0 1.0–1.8 1.2
2.6 2.0–2.8 2.9
0.5 >2.8 0.0
31.12.2008 1.0 –1.2: AAA 1.4 –1.6: AA 1.8 –2.0: A 2.2 –2.8: BBB 31.12.2007
direct consequence of the property crisis. In the operational workout solutions partly offset the second half of the year there were additional high inflow, there was still a net increase, result- charges due to defaults by financial counterpar- ing in a total as at December of € 6.6 billion for ties in the USA and Iceland. the sub-group, compared with € 5.4 billion a The development in provisions for loan losses year earlier. Given the adverse trend in the prop- by segment is shown in the table below. erty market, successful and rapid workout is Risk provisioning for the 2008 financial year also becoming increasingly difficult. The future was increased by special effects of the financial development of the default volume depends markets and real estate crisis (particularly in decisively on restructuring or workout of indi- Spain) totalling € 453 million. In addition, there vidual bulk exposures. were write-downs on US and Icelandic financial As at the end of the year, past due interest counterparties of c. € 34 million. and principal payments not technically in Net provision for loan losses in Retail Bank- default totalled € 826 million; of this, € 341 mil- ing is stable and in line with our expectations. lion had already been received by end-January Provision for losses on financial investments 2009. (see table below) for our LaR and AFS totals The table below shows an overview of € 599 million, reflecting the further need for arrears less than 90 days as at December 2008. provisions for the ABS portfolio (€ 454 million); In 2008 the total for debt-to-equity swapped for further details on net income from financial assets increased by € 89 million compared to investments, see note 33 on p. 94 (see also table the previous year (additions € 108 million, of p. 49). which € 12 million from the integration of Essen The adverse economic environment has Hyp, disposals € 11 million and impairments also affected the default portfolio. Although € 8 million).
changes in risk provisioning
in € million 2007 I/2008 II/2008 III/2008 IV/2008 2008 Retail Banking 81 19 7 103 15 144 CRE 174 48 325 123 179 675 Public Finance 0 0 0 28 11 39 Other 4 0 0000 Total 259 67 332 254 205 858 s Management Report >>> Risk Report r 49 e d l o h e k a t S r u o o t r e t t e default portfolio L
(as at year end 2008 (2007)) s r o t c e r i D g n i
6,642 (5,371) g Eurohypo a n
2,215 (2,080) 3,509 (3,090) 265 (201) a M f o
5,165 d r
CRE a o
1,635 2,692 205 B d
1,430 r a
RB o
546 817 54 B y r o s i v r
PF e
34 6 p u S C M C Default portfolio Risk provisioning Collateral GLLP portfolio t r o p e R t n e m e
limiting bulk and Borrower groups with economic capital con- g a n a
concentration risks sumption of at least € 5 million are defined as M s
The target and benchmark for strategic man- a bulk risk. Borrower groups having more than e i d o
agement of credit risk in the Commerzbank € 20 million in economic capital consumption B t n e
Group is the risk-return-based target portfolio are not desired in the long term and are being m e g a
as defined by the credit-risk strategy, along with systematically reduced – including through the n a the resulting sub-portfolios based on target use of modern capital market instruments. The M groups and markets. high importance of limiting bulk risks is also Concentrations of risk in bulks, countries, shown by the fact that the Board of Managing target groups and products are limited by means Directors has specified in its own internal rules of a traffic light system which takes the special that unanimous resolutions are required for any characteristics of each area into account. As board-level credit decisions involving economic a central element of risk policy, bulk risks are capital in excess of € 10 million (based on final managed on the basis of economic capital. In take). Eurohypo’s credit value at risk (VaR) this approach, the key variables include portfolio consumption for bulk risks at the end of the year granularity and correlation assumptions relating was € 893 million. to segment-specific, sector-specific and country- specific factors. changes in risk provisioning, financial assets in € million I/2008 II/2008 III/2008 IV/2008 2008 Impairments 84 119 257 115 575 General provisions 0 0 28 –4 24 Total 84 119 285 111 599 arrears (ead) (as at year end 2008) in € million >0<=30 days >30<=60 days >60<=90 days Total Retail Banking 74 10 7 91 CRE 594 59 52 705 Public Finance 30 30 Total 698 69 59 826 50 Management Report
eurohypo ag cover pool (as at year end 2008)
mortgage pfandbriefe public sector pfandbriefe
Capital cover – nominal € billion Capital cover – nominal € billion – Mortgage assets 51.8 – Public sector assets 89.1 – Mortgage Pfandbriefe outstanding 46.5 – Public sector Pfandbriefe outstanding 85.2 – Surplus cover 5.3 – Surplus cover 3.9 Market value Market value – Market value of mortgage assets 55.1 – Market value of public sector assets 97.1 – Market value of Mortgage – Market value of public sector Pfandbriefe outstanding 48.5 Pfandbriefe outstanding 88.9 – Surplus cover 6.6 – Surplus cover 8.2 – Surplus cover in % 13.5% – Surplus cover in % 9.2% Sensitivity* Sensitivity + Yield curve – shift upwards in % 13.2% + Yield curve shift upwards in % 6.7% – Yield curve – shift downwards in % 11.5% – Yield curve shift downwards in % 9.5% Substitute cover 1.0 Substitute cover 4.2
* Calculation conducted by dynamic simulation according to § 5 (1), 2 PfandBarwert V
country risk management cover portfolio When calculating country risk, the bank meas- Eurohypo is a major bond issuer and market ures both transfer risks and the region-specific leader in the Pfandbrief segment. Property financ- event risks determined by politics and economics ing and public sector lending are the basis of that affect a country’s individual economic assets. the cover portfolio of mortgage and public sec- Country risk management includes all the deci- tor Pfandbrief issues. Eurohypo has a risk man- sions, measures and processes which – drawing agement system which complies with the require- upon the information provided by risk quantifi- ments of section 27 PfandBG. Both mortgage cation – aim at influencing country portfolio Pfandbrief and public sector Pfandbrief busi- structure to meet business and return targets. nesses are fully integrated into Eurohypo’s risk Because of the financial crisis and the glo- management system and are regularly subjected bal economic downswing, the risk situation is to comprehensive internal and external reviews. worsening in many emerging markets as a result The integration of Essen Hyp has more than of the withdrawal of liquidity by the industrial doubled the volume of the public sector cover nations and falling demand for exports; economic pool. There was an increase of c. € 6 billion in growth will weaken further in 2009. The IMF the mortgage Pfandbrief portfolio. The excess has already put together bailout packages for cover ratios were maintained for the enlarged Hungary and the Ukraine, and other countries portfolio. have submitted requests for help. Iceland shows The AAA rating was confirmed for the that even developed countries can be pushed to merged pools by all agencies. the brink of insolvency by extensive internation- Together with Commerzbank, Eurohypo’s al banking activities. favourable refinancing opportunities in the capi- s Management Report >>> Risk Report r 51 e d l o h e k a t S r u o o t r e t t e L s r o t c e r i D g n i g a n a M f o d r a o B d r a tal market have been made available to the whole The mark-to-market valuation of the portfolios o B y r
Group. Both the existing business (eligible for of interest-bearing instruments led to a sharp o s i v r
the cover pool) and new business in Retail Bank- drop in the revaluation reserve. In addition to e p u ing are entered into a funding register, and can the subprime exposures, this was chiefly the S then be used for Eurohypo’s Pfandbrief issues. result of spread widening and resulting valua- C M C This makes possible repayment of unsecured tion losses in the securities portfolios of Euro- t r o p funding and cost-optimized refinancing of new hypo and the former Hypothekenbank in Essen. e R t n
business throughout the Group. e m e
Detailed information on Eurohypo’s cover risk management and limitation g a n a
portfolios is given in the information on the Market risk limits (for value at risk and stress M s transparency rules in accordance with section testing) are defined top down for Eurohypo at e i d o
28 PfandBG, published on Eurohypo’s website the Group level based on economic capital B t n e
and in the notes from page 143. required (risk bearing capacity). The limits for m e g a
the individual business areas and portfolios are n a market and funding risk then allocated on the basis of the achieved and M Market price risk (market risk) includes the risk expected risk-return ratio, market liquidity of of losses due to changes in market prices (inter- assets and business strategy. est rates, spreads, exchange rates, share prices, In 2008, even more stringent limit manage- etc.) or in parameters that affect prices such as ment was implemented, and limits were also volatility and correlations. We also monitor mar- adjusted in connection with the integration of ket liquidity risk, which measures the time it Essen Hyp. takes to close or hedge risk positions to the extent Sensitivity limits for credit spreads were desired. also supplemented, and the cover pool portfo- We have reported on the nature and scale lios of the Public Finance unit were included. of the risks in the notes. Both measures also serve to limit and manage the potential NPV changes in the revaluation market risk in the banking book reserve. The banking books at Eurohypo account for by The limit structure is reviewed regularly. far the greatest part of exposure in the market The extent to which limits are utilized is report- risk area. The VaR (97.5%, 1 day) for these ed by the independent risk control unit on a books at the end of 2008 was € 219 million. Key daily basis to the Board of Managing Directors drivers are the public finance items. The increase and business unit managers. in value at risk here was due primarily to the sharp increase in market volatility in 2008. 52 Management Report
stress and scenario analyses: special portfolios with Comprehensive group-wide backtesting, stress special risk content tests and scenario analyses are carried out as secondary market abs portfolios part of risk monitoring. The goal is to simulate Investor positions the impact of crises, extreme market conditions As at 31 December 2008 the total for investor and major changes in correlations and volatili- positions with ABS credit risks in the banking ties on the bank’s market risk position overall. book was € 6.1 billion. All assets have for years The effects on the various components of the been fully consolidated in the Eurohypo balance revaluation reserve and hidden reserves or charges sheet and are subject to ongoing risk monitoring. are also quantified. The bank wide stress test is Of the market value of € 6.1 billion, only based on a combination of historical and syn- € 0.2 billion still relates to the US real estate thetic scenarios for interest rates, credit spreads sector at December 2008 (see p. 53). and currencies (e.g. 50 bp parallel shift of the interest rate curve). The synthetic scenarios in ABS sub portfolio particular are regularly developed and adapted In the ABS/student loan sub portfolio, monoline to current market trends and expectations. wrapped positions have been reduced through sales and maturities. funding risks For student loans (total c. € 3.9 billion) there Funding risk refers to the risk that the bank will is still an institutional guaranty mechanism be unable to meet its current and future payment extending to the US government. obligations as and when they fall due (liquidity risk). Management and monitoring including Subprime mortgages (RMBS) reviewing stress scenarios are done by Commerz- Our bank is not engaged in financing private bank, which also provides the necessary liquidi- housing in the USA, but holds securities (pre- ty in the form of money market lines. Further dominantly Residential Mortgage Backed Secu- development of the internal model for the asset- rities – RMBS) for investment purposes which net liquidity approach is being carried out by are backed by subprime mortgages. In 2008 Commerzbank in a group-wide project. Eurohypo wrote these receivables down by a For quantitative information on liquidity total of € 454 million. risk, see note 80 “Maturities by remaining life- The reason for this is the further deteriora- time” on page 127, for details of derivatives see tion in the market. the section starting on page 122. The scale of this is documented in the loss of value by the subprime indices. For example, s Management Report >>> Risk Report r 53 e d l o h e k a t S r u o o t r e t t e subprime-index L
abx he 06-02 03.2007 – 01.2009 s r o t c
in % e r i D g n
100 i g a
90 n a
80 M f 70 o d r a
60 o B 50 d
40 r a o
30 B y 20 r o s i
10 v r e
0 p u S 1 0 0 0 9 9 9 8 7 8 8 7 7 6 6 5 6 5 5 4 4 4 3 3 3 2 2 1 2 1 1 0 1 1 2 0 1 2 2 0 2 9 9 8 9 8 8 7 7 7 6 6 6 5 5 5 2 4 4 1 1 2 4 1 1 2 3 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 1 0 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 1 1 1 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ...... C ...... 1 1 1 1 1 1 1 7 7 7 5 6 6 6 2 2 2 5 5 5 5 5 6 6 6 8 8 8 8 8 9 8 9 9 9 9 9 0 0 0 9 9 0 9 0 0 2 2 3 2 3 3 4 4 4 4 4 4 5 5 5 5 5 5 4 4 6 4 0 1 2 2 3 0 1 1 0 2 M 0 0 2 1 1 0 2 1 1 2 2 0 2 0 1 2 0 1 2 1 2 0 1 0 1 2 0 3 1 2 2 1 3 0 2 1 2 1 2 0 1 0 1 2 0 2 1 0 2 1 0 2 1 0 0 2 2 1 C t r o
AAA AA A BBB BBB– p e R t n e m e g a n a M s
the ABX index for BBB rated subprime securi- abs structured by eurohypo e i d o
tized tranches from the second half of 2005 fell Originator positions B t n e
84% over the course of 2008, after already los- In recent years Eurohypo has securitized a few m e g a
ing more than 70% in 2007. receivables, primarily for capital management n a In the second half of 2008, the so-called reasons, of which it held securities with a nomi- M subprime crisis evolved into a global financial nal value of € 1.2 billion on its own books at the crisis. Eurohypo suffered losses in the value of end of December 2008. The first loss pieces of its ABS portfolio which are having a lasting the transactions have a risk weighting of 1.250% impact on 2008 net profit. and are directly deducted from equity (half each The RESI portfolio still had a book value of from Tier I and Tier II). c. € 220 million as at 31 December 2008. Further losses are probable in 2009, due to the continu- CMBS ing poor state of the market, particularly in view Eurohypo’s CMBS portfolio as at 31 December of the ongoing decline in US house prices. 2008 had an EAD of c. € 920 million, with no The collateralized debt obligation CDO port- further additions. Fortunately, no write-downs folio is a sub portfolio of the RESI portfolio. had to be made in 2008 on this portfolio. CDOs are a special form of securitization and accordingly have increased leverage. There are financial institutions signs of a deterioration in the portfolio here, As part of our risk management approach we particularly in subordinated tranches. The valu- examined our Financial Institutions portfolio for ation of and defaults in the portfolio are driven asset classes in danger of default. The task force primarily by the development of the underlying examined banks with en evident risk profile. We RMBSs. The portfolio has been reduced through then adjusted our credit risk strategies to the sales and maturities, and now has a value new situation and expanded risk-minimizing totalling only € 6 million. and risk-eliminating measures. 54 Management Report
Our countermeasures enabled us to substantial- The largest component of this business consists ly reduce the risks in the FI portfolio whenever of OECD countries with good ratings. market liquidity allowed. The current bank rating system is being However, our plans to continue to reduce reviewed in the light of the lessons learned from critical risk assets have been severely hampered the financial market crisis and will be redefined by the illiquidity of the global capital markets to enable an even more precise selection of risk. since the middle of 2008. Although we identified the critical elements total return swaps of the portfolio at an early stage, we were unable The total return swaps (TRS) position was liqui- to escape the fallout from Lehman Brothers. In dated up to February 2009 by sales, maturities the case of Lehman Brothers we were encour- and closings, with a positive result for 2009. aged by the US Treasury Department’s rescue of The total charge against the trading result from Bear Stearns, and shared the market’s mistaken TRS up to that date is € 0.4 billion. belief for too long that Lehman was too big to fail. operational and other risks Despite continuing pressure from the gov- operational risks ernment, there is still no viable restructuring Operational risk is defined in accordance with concept for the Icelandic banking system. Glitnir the Solvency Regulation as the risk of loss result- and Landsbanki were split into “old” and “new” ing from the inadequacy or failure of internal banks, and all the assets of the “old” banks processes, systems and people or from external needed for the Icelandic market were transferred events. This definition includes legal risks; it to the “new” banks (foreign liabilities remain in does not cover reputational or strategic risks. the “old banks”); there is a payment moratorium. Eurohypo has commissioned Commerzbank The early implementation of countermeasures to handle functions in the field of operational meant that we successfully managed to halve risks in line with group guidelines, to satisfy our Iceland portfolio since 2006, but the risks group wide and regulatory requirements. could not be eliminated entirely because mar- Operational risk losses in 2008 totalled € 3 kets became more difficult. Almost all addresses million, and provisions for current litigation had have been transferred to the black book. to be increased to € 21 million. The area of legal As at 31 December 2008 the financial insti- risk was modified to comply with Group regula- tutions portfolio had an EAD of € 51 billion, with tions, while increasing product complexity has a risk density of 2 bp and some 310 borrowers. led to an increase in potential losses. We have an unchanged high risk concentra- The regulatory capital backing for opera- tion in Germany at 61%, followed by Austria at tional risk according to the advanced measure- 9% and Spain at 8%. ment approach (AMA) was € 86 million at the The table on p. 55 shows the full breakdown end of 2008. by region as at 31 December 2008: s Management Report >>> Risk Report r 55 e d l o h e k a t S r u o o t r e t t e L s r o t c e r i D g n i g a n a M f o d r a o B d r a
The following measures were defined to further more qualitative components of operational risk o B y r
optimize the OpRisk profile in the Group: management can result in a mark-up or mark- o s i v r
Further development of the key risk indica- down on capital required. The aim is to estab- e p u tors and internal scenario analyses lish risk management incentives for the organi- S
Optimization of the lending process in zational units in the Group that are otherwise C M C terms of OpRisk reflected in capital allocation only in the medi- t r o p
Realignment of the Operational Risk Com- um term through an improved loss history. e R t n
mittee with the goal of strengthening the e m e
top down view and knowledge transfer bet- Outsourcing g a n a
ween units for early risk detection. In the year under review the bank continued its M s
outsourcing to the parent company. The revised e i d o
The bonus-and-penalty-scorecard was introduced version of MaRisk that was issued on 30 October B t n e
in 2008 as an incentive system under which the 2007, requires banks to carry out risk assess- m e g a n a fi portfolio by rating class M (as at year end 2008) in € PD rating EAD EL CVAR 1.0–1.8 48,462,152,275 1,850,244 30,673,205 2.0–2.8 2,119,190,050 771,081 11,299,121 3.0–3.8 479,414,283 1,586,845 13,539,778 4.0–4.8 237,700,000 3,488,063 21,874,648 >4.8000 fi portfolio by region (as at year end 2008) in € EAD EL CVAR Germany 31,415,383,753 1,876,884 27,006,728 France/Belgium 883,624,987 84,422 1,399,114 Greece 22,000,000 957 14,568 UK 1,609,102,346 3,038,131 20,197,381 Italy 671,000,000 53,653 824,292 Japan 100,298,196 1,602 20,035 Switzerland 1,371,667,116 50,250 682,971 Scandinavia 582,591,656 54,161 738,524 Other 1,846,268,423 101,367 1,224,829 Spain/Portugal 5,010,103,642 291,262 4,372,606 USA/Canada 1,441,864,097 972,422 7,496,632 Austria 4,697,678,868 384,337 6,459,668 Other EU 1,646,873,524 786,786 6,949,404 Total 51,298,456,608 7,696,232 77,386,752 56 Management Report
oprisk losses
in € million
2008 3 21
IV/2008 1 11
III/2008 7
II/2008 1 1
I/2008 2 2
2007 4 3
2006 1
OpRisk losses Provisions for legal risks
ments of their outsourcing arrangements. Banks business risk must form their own view on the materiality of Business risk covers the risk of losses due to outsourcing measures. Implementing these new the negative deviation of income (for Eurohypo, requirements remains the focus of our efforts in essentially commissions from the lending busi- 2009. Special attention will be paid to active ness) and expenses from the budgeted figures, integration of outsourcing into the bank’s risk and is therefore primarily impacted by basic management and monitoring system. conditions in the market environment, customer behaviour or technological developments that Legal risks have changed relative to the assumptions made Legal risks are included in operational risk for planning purposes. modelling. Group wide management of litiga- Business risk is managed by means of clear tion risks is handled jointly by Eurohypo’s legal targets for specific business areas as regards services department and Commerzbank AG’s returns as well as cost/income ratios and contin- Legal Services Corporate Center (ZRA). The main uously flexible cost management in the event of function of ZRA is to recognize potential losses non-performance. from legal risks at an early stage, devise solutions for reducing, limiting or avoiding such risks and other risks create the necessary provisions. To meet the Pillar 2 requirements of the new Basel framework, MaRisk requires a holistic Depositor protection fund view of risk, which means that unquantifiable Eurohypo is a member of the Association of risk categories subject to qualitative manage- German Banks Deposit Protection Fund. In con- ment and controlling processes must be taken nection with major losses in 2008, the possibility into consideration. of special contributions to the fund cannot be ruled out at this time. Personnel risks As in MaRisk, Commerzbank defines four cate- gories of personnal risks: s Management Report >>> Risk Report r 57 e d l o h e k a t S r u o o t r e t t e L s r o t c e r i D g n i g a n a M f o d r a o B d r a
Aptitude risk: employees and those deputizing the German and international market and com- o B y r
for them must have the required knowledge and petitive environment, and of the requirements o s i v r
experience appropriate to their duties, authority imposed by the regulatory authorities and the e p u and responsibilities. Appropriate training and capital markets, key changes and developments S continuing education programs must be offered are continuously analyzed to determine the C M C to ensure that the level of employee qualifica- action needed to ensure long-term corporate t r o p tions keeps pace with the current state of devel- success. e R t n
opment. e m e
Motivation risk: pay and incentive systems Reputational risk g a n a
must be designed so that they do not lead to The risk of deterioration to the bank’s reputation M s conflicts of interest or inappropriate incentives, among shareholders, clients, employees, busi- e i d o especially in the case of senior managers. ness partners and the public is described as B t n e
Departure risk: the company must ensure reputational risk. Risks to the bank’s reputation m e g a
that the absence or departure of employees will are usually the consequence of other types of n a not result in long-term disruptions to opera- risk, e.g. compliance risks. The management’s M tions. The criteria governing appointments to aim is early identification and monitoring of managerial staff positions in particular must be these risks, as well as raising awareness of them defined. among employees. Corporate communications Bottleneck risk: the quantitative and quali- is responsible for managing such risks. The tative staffing of the Bank must be based on central tasks are analysis of reputational risks internal operating requirements, business activi- and coordinating PR and operational manage- ties, strategy and the risk situation. ment of day-to-day business in the event of a crisis. The Board of Managing Directors and Strategic risks Supervisory Board are informed regularly of Strategic risk is the risk of negative impacts on current reputational risks by the responsible the achievement of Eurohypo’s strategic goals reputation manager. as the result of changes in the market and the competitive environment, capital market require- Compliance risks ments, regulations or policies, or inadequate Eurohypo’s success is contingent on the trust implementation of Group strategy or inconsis- and confidence of our clients, our Pfandbrief tent development of business units. investors, our staff and the public in our capacity Responsibility for strategic corporate man- and potential and especially the integrity of our agement lies with the Board of Managing Direc- bank and the entire Commerzbank Group. This tors and is determined in accordance with Group trust is based particularly on compliance with strategy. On the basis of ongoing observation of applicable statutory, regulatory and internal reg- 58 Management Report
market value development
12-month retrospective 12-month outlook
>=25% 20% 15% TR 10% 5% BR HK IT MX 0% BR TR BE HU JPN NL PT SG –5% BE CZ DE FR HU IT MX NL PL PT CZ DE FR PL SE –10% DK ESP RUS UK DK RUS US –15% JPN US ESP –20% SE SG UK >=–25% HK
ulations and conformity with customary market (LTV) and interest-coverage ratio (ICR), together standards and codes of conduct in our global with covenant breaches. In spite of the quality business activities. The Board of Managing of our portfolios and the risk-reducing measures Directors has primary responsibility for compli- already implemented, we expect further growth ance and for 2008 it assigned the function to the in the number of sub-standard and problem Corporate Center Legal Services. The purpose loans, particularly abroad. However, we believe of compliance is to identify at an early stage any that our many years of experience in workout compliance risks that could cast doubt on the gives us a competitive edge in coping with the integrity and therefore the success of the com- impact of the financial market crisis on the real pany, to prevent such risks if possible, manage estate markets. them or resolve them appropriately in the in- terests of the parties involved. financial institutions The impact of the financial market crisis and significant developments global recession on the earnings and capital of and outlook financial institutions increased further in the commercial real estate fourth quarter of 2008, and will continue to have With the worsening of the financial market crisis a significantly adverse effect on their economic and the recessionary prospects for the world’s situation in 2009. However, the bank rescue major economies, the environment for real estate packages and firm commitment by the govern- markets has shown further significant deteriora- ments and central banks of the industrialized tion, and this will continue until 2010/2011. nations to support the financial system have led Global investment came to a virtual standstill at to an easing of the situation in the developed the end of 2008. After substantial declines in markets. We accordingly do not expect further market values over the past 12 months, further defaults by large market players of systemic decreases of up to 30% must be expected over importance, although further defaults and restruc- the next 12 months in the hot spots (Hong Kong turing is likely with smaller financial institutions. –30%, Spain and UK –10% each, USA –15%). Besides the direct economic impact of the crisis, In the three critical markets, we accordingly the questionable future validity of established expect further deteriorations in loan-to-value business models also strengthens our determi- s Management Report >>> Risk Report r 59 e d l o h e k a t S r u o o t r e t t e L s r o t c e r i D g n i g a n a M f o d r a o B d r a nation to continue our risk reduction strategy in risk potential in these countries over the course o B y r
consideration of risk-return aspects. of the year. o s i v r
We regard the emerging markets as having We have already been proactively reducing e p u the highest potential default risk, specifically our risks in selected emerging markets for several S among local banks. In particular, heavy demand months, and we will continue with this strategy. C M C for refinancing from external funding, the spillover t r o p of the recession to emerging markets, and the charges against earnings e R t n
effects of currency depreciations in various coun- For 2009, the situation for provisions for loan e m e tries will create pressure in 2009. While coun- losses in the Commercial Real Estate unit is very g a n a
tries rich in commodities such as Russia were critical. The likelihood that downside scenarios M s able to build up their foreign currency reserves will occur in the uncertain and extremely volatile e i d o during the last boom and are willing to use these environment must be regarded as high, and we B t n e
to protect their banking systems, we believe the see a need for increasing provisions for risk. If, m e g a
situation is critical for banks in countries that in addition, significant bulk or event risks become n a do not have this option and are burdened by critical, even higher levels cannot be ruled out. M high budget and current account deficits. This Under the realistic case assumption, total is confirmed by the current crisis in – for exam- charges against earnings in 2009 are estimated ple – the Ukraine. to be slightly below the 2008 level, while for the However, the sustained low level of com- downside case we expect an increase of around modity prices is increasing default risk even in 20%, or even more in the case of significant countries which have shown good crisis manage- impact from bulk risks. ment thus far, so that we are expecting increased 60 Management Report
SUPPLEMENTARY REPORT AND FORECAST
events after 31 december 2008 sion in nearly all major economies; it is hard to We completed the closure of the total return predict the length and scale of this recession. swap portfolio at the beginning of February 2009, Nearly every single country in which Eurohypo with this transaction posting a profit for the cur- is active has been affected, albeit to different rent financial year. In the period from 1 January degrees. Generally speaking, real estate markets to 6 March 2009 there were no events that would in Germany and abroad have been marked by a have had a significant impact on our annual continued lack of liquidity and limited capital results for 2008. availability for investors. These factors, combined with our restrictive policy on granting credit, forecast will limit our business opportunities in 2009. important note Nevertheless, in the longer term, there are The forecast report and other parts of this report good prospects for recovery within established incorporate expectations and predictions. These markets that have already undergone substan- forward-looking statements are based on plan- tial corrections. Market size, transparency and ning assumptions and estimates made on the proven market structures with clearly defined basis of the information currently available to location and property quality constitute a solid us. We are not under any obligation to update basis for long-term investment decisions. We such statements based on new information or anticipate that investors will return to these future events. Statements concerning the future markets in the medium term as earnings rise, are always subject to risks and uncertainties thereby creating good business opportunities (see also Note 1). for Eurohypo. Nevertheless, in the immediate Actual results and developments may there- future there will be no return to the previous fore deviate substantially from what is currently strong growth trend. predicted. Such deviations can result primarily from changes in the competitive situation and commercial real estate the general economy and developments on the Although market turbulence is weighing signifi- international real estate and capital markets. cantly on our banking business at present, the In addition, possible defaults by borrowers or medium to long term real estate business will counterparties in trading transactions, changes remain a growth sector that requires high levels in national and international legislation, particu- of financing. The new market conditions will, larly concerning taxation, as well as other risks, however, require us to review our position in some of which are presented in more detail in order to maintain and extend our status as a the risk report, have an influence on the bank’s leading player in individual markets. This is a results. challenge that we are addressing proactively by repositioning and restructuring Eurohypo. This overall economic conditions response includes a strategy project during the The global economic downturn sparked by the first half of 2009 which will examine the poten- crisis on the financial markets has caused reces- tial within each market in which we are present. s Management Report >>> Supplementary Report and Forecast r 61 e d l o h e k a t S r u o o t r e t t e L s r o t c e r i D g n i g a n a M f o d r a o B d r a
Only those markets in which we can achieve long- black. We cannot exclude the possibility of fur- o B y r
term, risk-adjusted returns are attractive in the ther negative effects on earnings as a result of o s i v r
longer term, irrespective of whether the market the capital market crisis, however, and in some e p u is well-established and mature or new and instances have factored these into our planning. S developing. From mid-2009, we will gradually In addition, the realization of valuation effects C M C begin implementing the measures identified by that currently have no effect on income will t r o p the strategy project and adapt our operations continue to weigh on the segment’s results. The e R t n
accordingly. total return swap portfolio, meanwhile, has been e m e
Our strict credit selection process is based discontinued, and will therefore no longer exert g a n a
on conservative risk management and is one any further downward pressure. In the medium M s example of how we adapted to the new market term, we expect further downsizing of the port- e i d o conditions in 2008. In view of the new global folio to continue to have a negative impact on B t n e
economic situation, this strategy will be continued income. m e g a
in 2009 and beyond. This will entail further n a reductions in our new business volumes, but since exit management and refinancing M pressures on conditions have lessened, we are New business opportunities for Eurohypo are seeing good margins. As the markets in which also largely dependent on the conditions for Eurohypo is active are still on a downtrend, we successful exit management. Up to now, it has cannot exclude the possibility of high loan loss not been possible to predict when the market provisions and additional valuation adjustments for securitized products will pick up. Syndica- in our US investment portfolio. tion business has been marked by a consider- able loss of mutual confidence among banking public finance partners but is still viable on a smaller scale. Eurohypo’s public finance business was chiefly The Pfandbrief market was affected by the influenced by the integration of Essen Hyp in financial crisis in the second half of 2008 and no the year under review. In parallel with the inte- longer offers the same number of attractive place- gration activities, the bank carried out a com- ment opportunities as in previous years. In the prehensive review of its public finance business first quarter of 2009, we saw the first signs of a model, which is now bundled under the Euro- recovery. However, general funding conditions hypo brand within the Commerzbank Group. look fairly restrictive for the time being, and we The volatility caused by a widening of spreads therefore anticipate higher funding costs. is having an adverse impact on the Bank’s per- formance. A decision was therefore taken to earnings outlook reduce commitments in the segment to around Earnings for the current year will largely be € 100 billion by 2010. influenced by the planned restructuring of com- In 2009, we anticipate a negative contribu- mercial real estate finance, further develop- tion to earnings from public finance, although ments on the capital and real estate markets, the underlying result will stay clearly in the and the reduction of public finance assets. 62 Management Report
These changes should allow us to optimize the we will be able to cut administrative expenses structure of our overall portfolio, thereby reduc- further. This will be achieved in part through ing our exposure to risk. However, by reducing the integration of the Corporate Centers into our assets, we will be initially unable to match Commerzbank and subsequent synergies gene- the levels for key financials – such as net interest rated with Commerzbank in this regard. and commission income – achieved in 2006 and Given the global economic downturn and 2007. These indicators remained healthy in the continued volatility on the financial and real crisis year. estate markets, it is virtually impossible to make Our earnings potential will be burdened in reliable forecasts for 2009. However, the current 2009 by loan loss provisions, by trading income recession is likely to trigger further corrections and by results from financial assets. However, in the real estate markets over the next two to once the markets have stabilized, these pressures three years. Our aim is to hold a sustainable will ease. leading position in those markets where we can Effective cost management enabled us to achieve good risk-adjusted returns in the medium reduce administrative expenses significantly to long term. We will therefore be introducing in the year under review despite the expenses further structural enhancements in 2009 and associated with integrating Essen Hyp. In 2009, 2010 to gradually increase our earnings potential. s Management Bodies and Boards >>> Management Bodies >>> Supervisory Board / Board of Managing Directors r 63 e d l o h e k a t S r u o o t r e t t
MANAGEMENT BODIES e L s r o t c e r i D g n i g a n a M f o d r a o B d r a o supervisory board board of B y r o
managing directors s i v r e p u S
1)
Dr Stefan Schmittmann Dr Frank Pörschke C M
Chairman Chairman C t
since november 11, 2008 since october 1, 2008 r o p e R t n e m e g
Klaus-Peter Müller Bernd Knobloch a n Chairman Chairman a M until november 11, 2008 until september 30, 2008 s e i d o B t n e m e
Klaus Müller-Gebel Thomas Köntgen g a n
Deputy Chairman a M
Ingo Felka2) Joachim Plesser
Wolfgang Hartmann Henning Rasche until december 31, 2008
Eva-Maria Jäger2) Ralf Woitschig since november 11, 2008
Michael Reuther Martin Zielke until june 30, 2008
1) Appointed on the Annual General Meeting on 11 November 2008 2) Employee representative 64 Management Bodies and Boards
SUPERVISORY BOARD COMMITTEES
standing committee audit committee risk committee
Dr Stefan Schmittmann Klaus Müller-Gebel Wolfgang Hartmann Chairman Chairman Chairman since november 11, 2008
Klaus-Peter Müller Eva-Maria Jäger Dr Stefan Schmittmann Chairman since november 11, 2008 until november 11, 2008
Wolfgang Hartmann Michael Reuther Klaus-Peter Müller until november 11, 2008
Klaus Müller-Gebel Klaus Müller-Gebel s Management Bodies and Boards >>> Supervisory Board Committees / Trustees r 65 e d l o h e k a t S r u o o t r e t t e L s r o t c e r i D g n i g a n a M f o d r a o B d r a o trustees deputy trustees B y r o s i v r e p u S
Jost Keiner Dr Jürgen Daniels Gunthard Hansen C M
Counsellor at the Hessen Presiding Judge at the Senior Counsellor at the Tax C t
Government Audit Office Hanseatic Higher Regional Authorities in Hamburg (retired) r o p
in Darmstadt Court (retired) Hamburg e R t
Frankfurt am Main Hamburg n e m e g a n a
Bernd Dürr Dr Hans-Joachim Schmidt M Accountant, Counsellor at the Hessen s e i
Tax Consultant Ministry of Finance d o B
Frankfurt am Main Wiesbaden t n e m e g a n a Hartmut Graf Thomas Schwenkreis M Accountant, Accountant, Tax Consultant Tax Consultant Lübeck Frankfurt am Main
Wolfgang Barchewitz1) Heinrich Drügh1) Lawyer Lawyer Köln Lohmar since august 4, 2008 since august 4, 2008
Dr Thomas Geer Franz-Josef Schwarzhof Director Accountant Thyssen Krupp AG (retired) Essen Essen from august 4, 2008 from august 4, 2008 until november 30, 2008 until november 30, 2008
Prof Dr Dr h.c. Franz Peter Lang University lecturer Essen from august 4, 2008 until november 30, 2008
1) with specific function in the Zurich Group Investment Europe (Deutschland) GmbH
66 Management Bodies and Boards
ADVISORY BOARD
germany
Dr Patrick Adenauer Bernhard H. Hansen Michael A. Kremer Managing Partner Managing Director Managing Director Bauwens GmbH & Co. KG VIVICO Real Estate GmbH Strategie Value Partners Köln Frankfurt am Main (Deutschland) GmbH Frankfurt am Main
Dr Hans-Jürgen Ahlbrecht Dr Nikolaus Hensel Hermann Marth Managing Director Lawyer and Notary Chairman of the Deutsche Real Corp (DRC) Bögner Hensel Gerns & Board of Directors GmbH & Co. KG Schreier Stiftung Zollverein Berlin Frankfurt am Main Essen
Dieter Becken Karsten Hinrichs Friedrich von Metzler Managing Director BECKEN Member of the Management Personally liable partner Investitionen & Vermögens- Board and CEO Bankhaus Metzler seel. verwaltung Greve Bau-und Boden-Aktien- Sohn & Co. KGaA Hamburg gesellschaft, Hamburg Frankfurt am Main
Caspar-Florens Ulrich Höller Dr Job von Nell von Consbruch Chairman of the Managing Director BEOS Lawyer Management Board Projektentwicklung GmbH Hiddenhausen DIC Asset AG Berlin Frankfurt am Main
Alfons Doblinger Michael Jung Dr Peter Noé Chairman of the Member of the Board Member Management Board Management Board HOCHTIEF Aktiengesellschaft DIBAG Industriebau AG Vivacon AG Essen München Köln until november 27, 2008
Dirk Große-Wördemann Dr Ralph Ulrich Knist Dr Matthias Ottmann Managing Director Member of the Management Managing Director Pacific Star Europe GmbH Board Greve Bau- und Boden- Ottmann GmbH & Co. München Aktiengesellschaft Südhausbau KG Hamburg München s Management Bodies and Boards >>> Advisory Board Germany r 67 e d l o h e k a t S r u o o t r e t t e L s r o t c e r i D g n i g a n a M f o d r a o B d r a o B y r o s i v r e p u S
Dr Knut Riesmeier Jürgen Schulte-Laggenbeck C M
Managing Director Member of the C t
MEAG Munich ERGO Asset Management Board r o p
Management GmbH Otto (GmbH & Co. KG) e R t
München Hamburg n e m
until november 27, 2008 e g a n a
Prof Dr-Ing Martin Rohr Horst-Günther Schulz M Member of the Egling s e i
Management Board until november 27, 2008 d o B
HOCHTIEF AG t n e
Essen m e g a n a Dr Helmut Röschinger Prof Dr Hans Sommer M Managing Partner Chairman of the Argenta Internationale Management Board Anlagegesellschaft mbH Drees & Sommer AG München Stuttgart
Philipp Schmitz-Mohrkramer Hubert Spechtenhauser Member of the Board Spokesman Management Board Commerz Real AG Quantum Immobilien AG Düsseldorf Hamburg
Stefan Schörghuber Michael Zimmer Chairman of the Board Chairman of the Board Schörghuber Stiftung & Co. of Directors Holding KG Corpus Sireo Holding München GmbH & Co. KG deceased on november 25, 2008 Düsseldorf Prof Dr Karl-Werner Schulte IREBS Institut für Immobilien- wirtschaft International Real Estate Business School Wiesbaden 68 Management Bodies and Boards
ADVISORY BOARD
international
Léon Bressler Volker Kurr Joseph E. Robert, Jr. Partner Managing Director Chairman & CEO Perella Weinberg Partners LP COMINVEST Asset Management J.E. Robert Companies London GmbH, Frankfurt am Main McLean until august 15, 2008
Alice M. Connell William L. Mack Stuart M. Rothenberg Greenhollow Associates Apollo Real Estate New York New York Advisors LP New York
Sebastián Escarrer Jaume Dan Neidich Barry Sternlicht Vice-Chairman and CEO Chairman & CO-CEO Chairman and CEO Grupo Sol Meliá Dune Capital Management LP Starwood Capital Group Palma de Mallorca New York Greenwich
Mike Fascitelli Mark Newman Birger Strom President Managing Director Chairman Vornado Realty Trust Lehman Brothers Europe Ltd. Société des New York London Centres Commerciaux Paris
Heinz-Wilhelm Fesser Jeremy Newsum Georg von Werz Member of the Board Group Chief Executive CEO of Directors Grosvenor Group Holdings Ltd. Pramerica Real Estate Investors DWS Investment GmbH London (Europe) Frankfurt am Main until november 2008 München
Arnold L. de Haan Eyal Ofer Samuel Zell Principal and Vice-Chairman President Chicago Meyer Bergmann Carlyle M.G. Ltd. until february 18, 2008 London London
Gerald Hines Luis José Pereda Chairman Advisor Hines Europe Grupo Lar London Madrid
Dr Michael Korn Álvaro C.C. Portela Managing Director Chairman Allianz Global Investors Sonae Sierra SGPS, SA Kapitalanlagegesellschaft mbH Maia Frankfurt am Main until january 17, 2008 Management Bodies and Boards >>> Advisory Board International / Consolidated Financial Statements – Eurohypo Group 69
CONSOLIDATED FINANCIAL STATEMENTS EUROHYPO GROUP s t n 69 consolidated financial e m e t
statements – eurohypo group a t S l a
70 Income statement i c n
70 Appropriation of profit a n i 71 Balance sheet F t
72 Statement of changes in capital r o p and reserves e R ’ s
74 Cash flow statement r o t i
76 Notes d u 134 Mandates – Supervisory Board, A S
Management Board, Staff G f e i
137 Management bodies r b d
138 List of affiliated companies, Participating n a f P
interests and Special purpose vehicles 8 2
141 Responsibility Statement by the §
Management Board e c n a l g
142 auditors’ report a t A 143 information under section 28 of the pfandbrief act
158 at a glance 158 Addresses 160 Glossary 70 Consolidated Financial Statements
the eurohypo group INCOME STATEMENT
income statement 1.1.– 31.12.2008 1.1.– 31.12.2007 Change Notes € million € million € million % Interest income 11,500 10,621 879 8.3% Interest expenses 10,351 9,442 909 9.6% Net interest income 28 1,149 1,179 –30 –2.5% Provisions for loan losses 29 –858 –259 599 >100% Net interest income after provisions 291 920 –629 –68.4% Commission income 297 298 –1 –0.3% Commission expenses 46 71 –25 –35.2% Net commission income 30 251 227 24 10.6% Result from hedge accounting 31 –34 –8 –26 >–100% Net trading income 32 –810 –11 –799 >–100% Result from financial assets 33 –622 –9 –613 >–100% Result from at equity investments 34 –1 –2 1 >100% Result from investment property 35 2 16 –14 –87.5% Administrative expenses 36 460 542 –82 –15.1% Net other operating income/expenses 37 –19 –3 –16 >–100% Operating income –1,402 588 –1,990 >–100% Amortization of goodwill 38 7 – 7 100% Profit before tax –1,409 588 –1,997 >–100% Income taxes 39 –169 233 –402 >–100% Consolidated Profit/loss –1,240 355 –1,595 >–100% Profit/loss attributable to minority interests 0 0 0– Profit/loss attributable to the shareholders of Eurohypo AG –1,240 355 –1,595 >–100%
APPROPRIATION OF PROFIT
appropriation of profit in € million 2008 2007 Net income attributable to the shareholders of Eurohypo AG –1,240 355 Transfer of profits –1,055 103 Allocation to retained earnings –185 252 Distributable profit of Eurohypo AG –– Consolidated Financial Statements >>> Income Statement / Appropriation of profit / Balance sheet 71
BALANCE SHEET assets 31.12.2008 31.12.2007 Change Notes € million € million € million % Cash reserve 7, 42 19 128 –109 –85.2% Claims on banks 8, 9, 43, 45 31,248 21,033 10,215 48.6% Claims on customers 8, 9, 44, 45 150,263 128,961 21,302 16.5% Positive fair values attributable to derivative hedging instruments 11, 46 5,096 2,304 2,792 >100% Assets held for trading purposes 12, 47 12,618 4,747 7,871 >100% Financial assets 13, 48 89,729 55,820 33,909 60.7% At equity investments 14, 49 0 1 –1 –100% Investment property 15, 50 198 110 88 80.0% Intangible assets 16, 51 153 159 –6 –3.8% Fixed assets 17, 52 177 162 15 9.3% Deferred tax assets 18, 54 1,583 330 1,253 >100% Other assets 55 516 460 56 12.2% Total 291,600 214,215 77,385 36.1%
liabilities 31.12.2008 31.12.2007 Change Notes € million € million € million % Liabilities to banks 19, 56 85,408 64,327 21,081 32.8% Liabilities to customers 19, 57 36,867 30,446 6,421 21.1% Securitized liabilities 19, 58 133,285 98,633 34,652 35.1% s t n
Negative fair values attributable e m e to derivative hedging instruments 20, 59 13,991 5,689 8,302 >100% t a t S
Liabilities from trading activities 21, 60 12,807 4,525 8,282 >100% l a i c
Provisions 22, 23, 61 296 518 –222 –42.9% n a n Deferred tax liabilities 18, 62 171 150 21 14.0% i F Other liabilities 63 243 269 –26 –9.7% t r o
Subordinated liabilities 24, 64 3,610 3,186 424 13.3% p e R
Hybrid capital 24, 65 900 900 0 0 ’ s r o t
Capital and reserves 25, 66, 67 4,022 5,572 –1,550 –27.8% i d u
Subscribed capital 66 914 914 0 0 A Capital reserve 66 3,992 3,992 0 0 S G f
Retained earnings 66 1,194 1,037 157 15.1% e i r b
Revaluation reserve 66 –2,036 –365 –1,671 >–100.0% d n a Reserve for cash flow hedges 66 –47 0 –47 100.0% f P 8
Reserve for currency translation 4 –2 6 >100.0% 2 § Consolidated profit – – – – e c
Minority interests 1 –4 5 >100.0% n a l Total 291,600 214,215 77,385 36.1% g a t A 72 Consolidated Financial Statements
STATEMENT OF CHANGES IN CAPITAL AND RESERVES
Subscribed Capital Revenue Revaluation cash flow currency Distributable Minority Revaluation in € million capital reserve reserve reserve hedges translation profit/loss interests reserve Total Balance as at January 1, 2007 914 3,992 785 95 –4 –1 387 0 0 6,168 Distributable profit/loss 0 Allocation to retained earnings1) 2521) Revaluation reserve Change in revaluation reserve – Reserve for cash flow hedges Change in reserve for cash flow hedges 4 Gains from currency translation – Net result of items recognized directly in equity 2007 252 –460 4 –1 0 –4 –209 Dividend for financial year 2006 – Changes in consolidated entities and other changes Balance as at December 31, 2007 914 3,992 1,037
1) from group net income/loss 2007
Subscribed Capital Revenue Revaluation cash flow currency Distributable Minority Revaluation in € million capital reserve reserve reserve hedges translation profit/loss interests reserve Total Balance as at January 1, 2008 914 3,992 1,037 Distributable profit/loss 0 Allocation to retained earnings –185 – Revaluation reserve Change in revaluation reserve – Reserve for cash flow hedges Change in reserve for cash flow hedges 6 Gains from currency translation 6 Net result of items recognized directly in equity 2008 –185 –1,055 6 4 –4 –1,228 Dividend for financial year 2007 Changes in consolidated entities and other changes 342 Balance as at December 31, 2008 914 3,992 1,194 Consolidated Financial Statements >>> Statement of changes in capital and reserves 73
Reserve for Reserve for Minority interests Revaluation cash flow currency Distributable Minority Revaluation reserve hedges translation profit/loss interests reserve Total 95 –4 –1 387 0 0 6,168 00 252
–460 –4 –464
4 4 –1 –1 –460 4 –1 0 –4 –209 –387 –387
–365 0 –2 0 0 –4 5,572
Reserve for Reserve for Minority interests Revaluation cash flow currency Distributable Minority Revaluation reserve hedges translation profit/loss interests reserve Total –365 0 –2 0 0 –4 5,572 0 s
–185 t n e m e t a
–1,055 –1,055 t S l a i c n
6 6 a n i 6 6 F t
–1,055 6 4 –4 –1,228 r o p e R ’ s
–616 –53 1 4 –322 r o t i
–2,036 –47 4 0 1 0 4,022 d u A S G f e i r b d n a f P 8 2 § e c n a l g a t A 74 Consolidated Financial Statements
CASH FLOW STATEMENT
information concerning the cash flow statement The cash flow statement shows the change in cash and cash equivalents at the Eurohypo Group as a result of cash flow from operating activity, investment activity and financing activity. The analysis is carried out in accordance with IAS7 and the German Accounting Standard, DRS2, supplemented by the specific German accounting standard for banks, DRS2-10.
The cash flows (inflows and outflows) from claims on banks and customers as well as other assets are reported as net cash provided by operating activities. Inflows and outflows from liabilities to banks and customers, securi- tized liabilities and other liabilities also form part of the operating activities. The interest and dividend payments resulting from operating activities are similarly reflected in the net cash provided by operating activities.
The cash flow from investment activity results from incoming and outgoing payments in connection with the sale or acquisition of financial assets or tangible assets. Cash flows from financial assets result primarily from payment flows from transactions with public sector securities. The effects of changes in the entities included in the con- solidated financial statements are also taken into account in the cash flow from investment activity.
All cash flows from transactions involving share capital, subordinated capital or profit participation certificates are reported under cash flow from financing activities.
In accordance with the strict definition, the cash and cash equivalents shown include only the cash reserve (see note 42), which comprises the cash at bank and credit balances with central banks. Claims on banks due on demand are not included.
Cash flow statements are not very meaningful for banks and replace neither our liquidity nor financial planning, nor are they used as a management tool. Consolidated Financial Statements >>> Cash flow statement 75
cash flow statement in € million Notes 31.12.2008 31.12.2007 Consolidated profit-/loss –1,240 355 Non-cash items included in net income and adjustments to reconcile net profit with net cash provided by operating activities Depreciation, write-downs and write-ups of claims, fixed assets and financial assets 36, 37, 38 1,225 453 Changes in other non-cash positions 61 103 Profit from the sale of assets –24 –117 Profit from the sale of financial- and fixed assets 33, 37 27 –184 Other adjustments –1,190 –898 Sub-total –1,141 –288 Change in assets and liabilities from operating activities after correction for non-cash items Claims – on banks 43 984 3,741 – on customers 44 8,641 6,690 Securities held for trading purposes – 0 Other assets from operating activity 238 –1,458 Liabilities – on banks 56 4,529 2,921 – on customers 57 –3,119 –3,887 Securitized liabilities 58 –20,354 –7,905 Other liabilities from operating activities –92 –123 Interest and dividends received 28 9,737 11,114
Interest paid 28 –8,753 –9,158 s t n
Income tax paid 39 –56 82 e m e t
Net cash provided by operating activities –9,386 1,729 a t S
Proceeds from the disposal of l a i c
– Financial assets 12,628 15,290 n a n i
– Fixed assets 4 2 F
Disbursements for investment in t r o
– Financial assets –41,880 –16,710 p e R ’
– Fixed assets –30 –12 s r o t Effects of changes in the entities included in the consolidation 38,870 – i d u
Cash flow from investing activities 9,592 –1,430 A
Proceeds from capital increases 66 0 0 S G f e
Dividend payments 66 –103 –387 i r b
Changes in funds from d n a f
– subordinated capital 64 –212 93 P 8 – other financing activities –– 2 § Cash flow from financing activities –315 –294 e c
Cash and cash equivalents at the end of the previous period 128 123 n a l g
+/– Net cash provided by operating activities –9,386 1,729 a t
+/– Cash flow from investing activities 9,592 –1,430 A +/– Cash flow from financing activities –315 –294 +/– Effects of exchange-rate changes on cash and cash equivalents 0 0 Cash and cash equivalents at the end of the reporting period 19 128 of which: Cash on hand 42 0 0 Balances with central banks 42 19 128 Bills of exchange rediscountable at central banks 42 – –
Cash and cash equivalents do include € 115 million from companies consolidated for the first time at year end. 76 Consolidated Financial Statements
NOTES
Page Page Basis of consolidation and significant Information concerning accounting policies 78 the income statement 92 Accounting and valuation policies 78 (28) Net interest income 92 (1) Basic principles 78 (29) Provisions for loan losses 92 (2) Amendments to accounting (30) Net commission income 93 and valuation policies 79 (31) Result from hedge accounting 93 (3) Consolidated entities and (32) Net trading income 93 principles of consolidation 79 (33) Result from financial assets 94 (4) Financial instruments: (34) Result from at equity investments 94 Recognition and measurement (IAS 39) 81 (35) Result from investment property 95 (5) Currency translation 85 (36) Administrative expenses 95 (6) Netting 85 (37) Net other operating income/expenses 96 (7) Cash reserve 85 (38) Amortization of goodwill 96 (8) Claims 85 (39) Income taxes 97 (9) Provisions for loan losses 85 (40) Quarterly results 99 (10) Genuine repurchase agreements (41) Segment reporting 100 and securities – lending transactions 85 (11) Positive fair values from derivative hedging instruments 86 (12) Assets held for trading purposes 86 (13) Financial assets 86 (14) At equity investments 87 (15) Investment property 87 (16) Intangible assets 87 (17) Fixed assets 88 (18) Income taxes 88 (19) Liabilities to banks and customers and securitized liabilities 89 (20) Negative fair values from derivative hedging instruments 89 (21) Liabilities from trading activities 89 (22) Provisions 89 (23) Provisions for pensions and similar obligations 89 (24) Subordinated and hybrid capital 90 (25) Capital and reserves and minority interests 90 (26) Trust transactions 91 (27) Contingent liabilities and irrevocable credit commitments 91 Consolidated Financial Statements >>> Notes 77
Page Page Information concerning Information concerning the balance sheet (assets) 105 financial instruments 122 (42) Cash reserve 105 (69) Derivatives 122 (43) Claims on banks 105 (70) Use of financial derivatives 124 (44) Claims on customers 105 (71) Cash flow hedges 124 (45) Provisions for loan losses 106 (72) Market price risks 124 (46) Positive fair values from derivative (73) Interest rate risks 124 hedging instruments 106 (74) Credit spread risks 124 (47) Assets held for trading purposes 107 (75) Currency risks 125 (48) Financial assets 107 (76) Information in accordance with IFRS 7.31-42 125 (49) At equity investments 108 (77) Information on the management of capital 125 (50) Investment property 108 (78) Fair value of financial instruments 125 (51) Intangible assets 108 (79) Assets assigned as collateral 126 (52) Fixed assets 108 (80) Maturity breakdown according to residual terms 127 (53) Statement of changes in fixed assets and investments 108 (54) Tax assets 112 (55) Other assets 112
Page Page Information concerning Other information 128 the balance sheet (liabilities) 113 (81) Repo and reverse repo transactions, (56) Liabilities to banks 113 cash collateral 128 s t n
(57) Liabilities to customers 113 (82) Subordinated assets 128 e m e (58) Securitized liabilities 113 (83) Off-balance sheet obligations 128 t a t S
(59) Negative fair values from derivative (84) Trust transactions 129 l a i c
hedging instruments 114 (85) Employees (average) 129 n a n i
(60) Liabilities from trading activities 114 (86) Details of material transactions F
(61) Provisions 114 with related parties 129 t r o
(62) Income tax liabilities 117 (87) Staff remuneration plans 131 p e R ’
(63) Other liabilities 117 (88) Securitization of loans 133 s r o t (64) Subordinated liabilities 117 (89) Other obligations 133 i d u
(65) Hybrid capital 119 (90) Date of release for publication 133 A
(66) Equity structure 120 (91) Letters of comfort 133 S G f e
(67) Authorized capital 121 i r b
(68) Foreign-currency positions 122 d n a f P 8 2 § e c n a l g a t A 78 Consolidated Financial Statements
NOTES
basis of consolidation and significant accounting policies Eurohypo AG is a bank and has its registered office in Eschborn, Germany. The present consolidated financial statements as at December 31, 2008 were prepared in accordance with section 315 a clause 1 HGB and the Directive (EC) No. 1606/2002 (IAS directive) of the European parliament and the European Council of July 19, 2002 as well as other Directives on the adoption of certain international accounting standards on the basis of the International Accounting Standards (IAS) defined and published by the International Accounting Standards Board (IASB) and the International Financial Reporting Standards (IFRS) and their interpretations by the Standing Interpretations Committee (SIC) and the International Financial Reporting Committee (IFRIC). All mandatory standards and inter- pretations applicable in the EU to the financial year 2008 have been applied.
We have not applied any standards and interpretations which are only mandatory from January 1, 2009 or later (IFRS 8, revised IFRS 3, IFRS 6, IAS 1, IAS 23, changes to IFRS 2; IAS 1, 16, 19, 23, 27, 31, 32, 39, 40; changes result- ing from the annual review process; IFRIC 13, 15, 16 and 17) as permitted by IAS. However, we do not expect these new standards to lead to any material changes in accounting or valuation.
The standards and interpretations applied for the first time in the financial year 2008 (IFRIC 11, 12 und 14) had no material impact on the consolidated financial statements.
In addition to the consolidated balance sheet and the consolidated income statement, the consolidated financial statements also include the statement of changes in capital and reserves, the cash flow statement and the notes. The segment report is in the notes section on pages 100 to 104.
The management report including the separate report on future risks and opportunities pursuant to section 315 HGB (risk report) is on pages 39 to 59 of the Annual Report.
All amounts are shown in millions of euros unless otherwise stated.
accounting and valuation policies (1) basic principles The financial statements are based on the going concern principle. Income and expenses are treated on an accruals basis and are recognized through profit or loss in the period in which they apply financially.
The financial statements are drawn up on the basis of the classification and valuation principles laid down by IAS 39. For derivative hedging instruments the hedge accounting rules apply (see note 4d for further explanation).
Uniform accounting policies are used throughout the Eurohypo Group in preparing the financial statements. All material fully consolidated companies have prepared their financial statements for the year-end December 31, 2008.
The consolidated financial statements contain figures which are determined on the basis of estimates and assump- tions, as permitted by IAS. The estimates and assumptions used are based on past experience and other factors such as planning figures and forecasts currently considered probable. Estimates are subject to uncertainties, in particular with respect to the determination of provisions for loan losses, pension obligations and other provisions, goodwill, deferred taxes and fair value measurement.
An asset is recognized in the balance sheet if it is likely that it will produce future economic benefits for the com- pany and it is possible to produce a reliable figure for its acquisition or production cost or some other value.
A liability is recognized in the balance sheet if it is probable that there will be a direct outflow of resources entailing economic benefits as a result of the fulfilment of a present obligation and the amount to be paid can be reliably assigned a value. Consolidated Financial Statements >>> Notes 79
(2) amendments to accounting and valuation policies We have employed essentially the same accounting policies as for the consolidated financial statements as at December 31, 2007.
Claims on banks and claims on customers are now reported net on the balance sheet and the loan loss provisions are explained separately in the notes.
We have separated out the market values of the hedging instruments from the balance sheet items other assets and other liabilities into separate balance sheet items.
We have combined the balance sheet items subordinated liabilities and profit participation certificates into a single item, subordinated capital.
(3) consolidated entities and principles of consolidation The consolidated financial statements of Eurohypo include all material subsidiaries in which the bank has a direct or indirect holding of 50% or more or over which the bank can exert a controlling influence. Subsidiaries are included in the group of consolidated companies as of the date on which the group obtains de facto control and are excluded from the consolidated group on disposal or in the event that Eurohypo ceases to exert a con- trolling influence.
Mergers and acquisitions of companies On July 2, 2008, as part of an internal restructuring of the Commerzbank Group, Eurohypo AG acquired 100% of the shares in Hypothekenbank in Essen Aktiengesellschaft, Essen, which was then merged into Eurohypo AG. Under IDW RS HFA 2 the acquired assets, debts and contingent liabilities were valued using predecessor account- ing at their Commerzbank consolidated book values at the date of the transaction. The difference between the purchase price and the value of the acquired assets, liabilities and contingent liabilities was recognized in equity.
As a result of the acquisition of the shares, the following assets and liabilities were included in the consolidated s financial statements of Eurohypo for the first time: t n e m e t a assets liabilities t S l a in € million in € million i c n a
Assets held for trading purposes 2,049 Liabilities from trading activities 2,426 n i Claims on banks 10,754 Liabilities to banks 16,351 F t r
Claims on customers 26,628 Liabilities to customers 8,251 o p e
Financial assets 38,845 Securitized liabilities 50,697 R ’ s r
Other assets 3,940 Other liabilities 4,491 o t i d
82,216 82,216 u A S G f e
Consolidated companies i r b
As at December 31, 2008 the group of consolidated companies consists – in addition to Eurohypo AG – of 38 fully d n a f
consolidated German and international subsidiaries (2007: 36). In addition to the 38 subsidiaries we incorporated P 8 two special purpose vehicles in our consolidated financial statements during the financial year in accordance with 2 § IAS 27 and SIC 12. Three associated or joint-venture companies were again consolidated using the equity method. e c
A complete list of the subsidiaries and special purpose vehicles included in the consolidated financial statements n a l can be found from page 138 onwards. g a t A In 2008 the following entities were consolidated for the first time:
Eurohypo Representacoes Ltda., Sao Paulo, Brazil TARA Immobilienprojekte GmbH, Eschborn Grundbesitz Gesellschaft Berlin Rungestraße 22-24 mbH, Essen as well as the special purpose vehicle
Semper Finance 2006-1 GmbH, St. Helier, Jersey, Channel Islands
Eurohypo Systems GmbH, Eschborn, was sold to Commerzbank AG in 2008 and is therefore no longer part of the consolidated group. 80 Consolidated Financial Statements
The special purpose vehicles Times Square Funding LLC, KP Semper No.1 Ltd. and Glastonbury Finance 2007-1 Limited also left the consolidated group in 2008.
Subsidiaries which are only of minor significance in terms of a true and fair view of the assets, liabilities, financial position and profit or loss of the Group are not included in the consolidated financial statements. The total assets of the 12 (2007: 10) companies and 5 (2007: 6) special purpose vehicles which are not consolidated for materiality reasons amount to less than 0.1% of the total assets of the Eurohypo Group.
In 2008 the following subsidiaries joined the group of companies not included in the consolidated financial state- ments:
TARA Immobilien Besitz GmbH, Eschborn TARA Immobiliengesellschaft mbH, Eschborn TARA Immobilienverwaltungs GmbH, Eschborn TARA Property Management GmbH, Eschborn Rosaria Grundstücksvermietungs GmbH & Co. Objekt Cap Kiel KG, Düsseldorf Cap Kiel Betriebs GmbH, Kiel
Principles of consolidation Subsidiaries are companies in which Eurohypo Aktiengesellschaft directly or indirectly holds a majority of the voting rights or is able to determine the company’s financial and business policies and so exercises a controlling influence. They are consolidated from the date when Eurohypo Aktiengesellschaft acquires a majority of the voting rights or a controlling influence.
In the course of the consolidation we measure assets and liabilities of subsidiaries completely afresh at the date of the acquisition irrespective of the size of the stake held. The newly measured assets and liabilities are transferred to the consolidated balance sheet taking account of deferred taxes. Any hidden reserves and debts which have been identified are dealt with in subsequent accounting periods in line with the applicable standards. If a positive difference remains after revaluation, this is shown as goodwill.
All companies in which Commerzbank Aktiengesellschaft directly or indirectly has a significant influence are shown as associated companies. A significant influence is presumed if between 20% and 50% of the voting shares are held. Further criteria are, for example, material business transactions with the participating interests, membership of a management or supervisory body and involvement in shaping the business policy of the partici- pating interest.
Associated companies are valued using the equity method and reported as investments in associated companies under financial assets. The acquisition costs of these investments including the related goodwill are determined at the date of first inclusion in the consolidated financial statements. The same rules are applied as for subsidiaries. For material associated companies, the carrying amount of the equity book value which is recognized through profit or loss or in equity is based on auxiliary calculations for the associated companies, prepared and audited in accordance with our instructions, with IAS/IFRS rules applied.
Subsidiaries are no longer consolidated once the proportion of voting shares held falls below 50%. Associated companies are no longer reported under the equity method once the proportion of voting shares held falls below 20%.
Holdings in subsidiaries not consolidated because of their minor significance as well as investments are shown at their fair value, or if this cannot be reliably established, at cost under financial assets.
The obligation to consolidate special purpose vehicles under certain circumstances arises from the interpretation of SIC12 published by the International Financial Reporting Interpretations Committee (IFRIC). This states that consolidation is required if, in substance: Consolidated Financial Statements >>> Notes 81
the special purpose vehicle conducts its activities to meet the specific needs of the reporting enterprise and the reporting enterprise derives benefit accordingly; the reporting enterprise has decision-making powers to obtain the majority of the benefits of the special purpose vehicle’s activities; the reporting enterprise has rights to obtain the majority of the benefits of the special purpose vehicle’s activities; the reporting enterprise retains the majority of the residual or ownership risks related to the special purpose vehicle.
In the Eurohypo Group the obligation to consolidate is established on the formation of special purpose vehicles, with decisions on consolidation being reviewed regularly. The listing of all consolidated special purpose vehicles is an integral part of the list of holdings.
(4) financial instruments: recognition and measurement (ias 39) In accordance with IAS 39 all financial assets and liabilities – which also include derivative financial instruments – have to be recognized in the balance sheet and valued in accordance with the category to which they are assigned. A financial instrument is a contract which simultaneously creates a financial asset for one company and a finan- cial liability or equity instrument for the other company. Financial instruments are recognized in the balance sheet at (amortized) cost or fair value according to their category. The fair value is the amount for which the financial instruments can be sold or purchased at fair terms on the balance-sheet date. Fair value is determined by the price established for the financial instrument on an active market (mark-to-market). Where no market prices are available, the fair value is calculated by marking to model, for which, so far as possible, market data are used as parameters.
The following notes provide an overview of how the rules of IAS 39 in their current version have been applied within our Group: s a) Categorization of financial assets and liabilities and their valuation (loans and receivables): t n e
Non-derivative financial instruments with fixed or determinable payment claims for which no active market exists m e t a are assigned to this category. This applies irrespective of whether the financial instruments were originated by t S l a the Bank or acquired in the secondary market. An active market exists if quoted prices are regularly made available, i c n a
for example by an exchange or a broker, and these prices are representative of current transactions between n i unconnected third parties. Valuation is at amortized cost, which must be adjusted through profit or loss in the F t r
event of an impairment. Premiums and discounts are recognized in net interest income over the lifetime of the o p e
asset. R ’ s r o t i d
Financial assets held to maturity u Non-derivative financial assets with fixed or determinable payments and a fixed maturity may be included in this A S category if an active market exists for them and there is both the intention and the ability to hold them to maturity. G f e i r
Valuation is at amortized cost, which must be adjusted through profit or loss in the event of an impairment. Pre- b d n miums and discounts are recognized in net interest income over the lifetime of the asset. In the financial year a f P
2008 the Eurohypo Group has again made no use of the category of held-to-maturity financial assets. 8 2 §
Financial assets or liabilities at fair value through profit or loss; e c n a this category consists of two sub-categories: l g a t A Financial assets or liabilities held for trading: This category includes all financial assets and liabilities held for trading purposes. Financial assets held for trading purposes include original financial instruments (especially interest-bearing securities, equities and promissory notes), precious metals and derivatives with a positive fair value. Financial liabilities from trading include deriva- tive financial instruments with a negative fair value.
Derivative financial instruments used as hedging instruments are only recognized as assets held for trading pur- poses or liabilities from trading activities if they do not meet the conditions for the application of the hedge accounting rules (see below in this note). Otherwise they are shown as fair values attributable to hedging instru- ments. 82 Consolidated Financial Statements
Assets held for trading purposes and liabilities from trading activities are valued at their fair value at the year-end. Gains or losses on these valuations are included in net trading income in the income statement.
The Eurohypo Group has carried out transactions for which the fair value was calculated using a valuation method where not all material input parameters were based on observable market parameters. Such transactions are accounted for at their transaction price. The difference between the transaction price and the fair value produced by the model is known as day one profit or loss. The day one profit or loss is not recognized immediately but is instead recognized over the term of the transaction in net income in the income statement. Where a reference price can be calculated for a transaction on an active market or the material input parameters are based on observable market data, the accrued day one profit or loss is recognized directly in the income statement.
Designated at fair value through profit or loss: In accordance with the fair value option it is possible to value every financial instrument at fair value and record the net result of this valuation in the income statement. The decision whether or not to use the fair value option has to be made on the acquisition of the financial instrument and is irrevocable.
The fair value option may be applied for a financial instrument provided that:
an accounting mismatch will be prevented or significantly reduced, or a portfolio of financial instruments is managed, and its performance measured, on a fair value basis, or the financial instrument contains one or more embedded derivatives that must be separated.
Financial instruments for which a fair value option is used are shown at their fair value in the appropriate balance- sheet item for their respective category. Gains or losses on these valuations are included in net trading income in the income statement.
The Eurohypo Group does not currently make use of the fair value option sub-category.
Financial assets available for sale: This category includes all non-derivative financial instruments which have not been assigned to any of the above categories or which have been designated as available for sale. These are primarily interest-bearing securities, equities and investments. They are valued at fair value. If the fair value for an equity instrument cannot be reliably determined, valuation is at cost. Gains and losses on valuation are recognized net of deferred taxes directly in equity in a separate item under capital and reserves (the revaluation reserve). Premiums and discounts are recognized in net interest income over the lifetime of the asset. If the financial asset is sold, the cumulative valu- ation previously recognized in the revaluation reserve is released and recognized through profit or loss. In the event of impairment the revaluation reserve is adjusted for the impairment and the amount recognized through profit or loss.
Reclassification: In a press release of October 13, 2008 the IASB issued an amendment on the reclassification of financial instru- ments. Under the amendment, securities in the public finance portfolio for which there is no active market have been reclassified from the IAS 39 category available for sale (AfS) to the IAS 39 category loans and receivables (LaR). There is an intention and the ability to hold the securities in the reclassified portfolio for the foreseeable future or until maturity. The fair value at the date of reclassification is recognized as the new carrying amount of these securities holdings. The reclassified portfolio consists predominantly of securities issued by public sector borrowers (including European and North American public sector entities) and financial institutions. The Eurohypo Group has not used the option of retrospective reclassification. Consolidated Financial Statements >>> Notes 83
Other financial liabilities: All financial liabilities not categorized as held for trading and for which the fair value option has not been used fall under the category of other financial liabilities. This category includes liabilities to banks and customers and securiti- zed liabilities. Valuation is at amortized cost. Premiums and discounts are recognized in net interest income over the lifetime of the asset.
The net gains and losses include impairments, write-ups, realized gains and losses on disposal and amounts recovered on written-down financial instruments from the IAS 39 category described above.
b) Financial guarantee contracts IAS 39 defines a financial guarantee as a contract under which the guarantor is obliged to make certain payments that compensate the party to whom the guarantee is issued for a loss arising in the event that a particular debtor does not meet payment obligations on time as stipulated in the original or amended terms of a debt instrument. If the guaran- tee is issued to the Eurohypo Group the guarantee is not recognized in the balance sheet and is only taken into account if the impairment of a secured asset is being determined. When the Eurohypo Group is the guarantor the lia- bility arising from a financial guarantee is recognized when the contract is signed. Initial measurement is at fair value at the date of recognition. The fair value of a financial guarantee is zero at the date of concluding the guarantee, because for fair market contracts the value of the agreed premium generally corresponds to the value of the guarantee obligation. On subsequent measurement a review is performed to determine whether a provision is necessary.
If a financial guarantee is held for trading purposes it will, in contrast to the foregoing description, be dealt with in accordance with the regulations for the held-for-trading category (cf. note 4a).
c) Embedded derivatives IAS 39 also regulates the treatment of derivatives embedded in original financial instruments. Such financial instruments are also referred to as hybrid financial instruments. They include, for example, reverse convertible bonds (bonds with a right to repayment in the form of equities) or bonds with index-related interest payments. In accordance with IAS39, s under certain conditions the embedded derivative must be shown separately from the original host contract as a t n e standalone derivative. m e t a t S
Embedded derivatives have to be shown separately if the following three conditions are met: l a i c n a
the characteristics and risks of the embedded derivative are not closely related to those of the original host contract n i the separated embedded derivative fulfils the definition of a derivative under IAS39, and F t r
the host contract is measured at fair value through profit and loss. o p e R ’
In this case the separated embedded derivative has to be regarded as part of the trading portfolio and recognized at s r o t its fair value. Changes on revaluation have to be shown in profit and loss. The host contract is accounted for and valued i d u by applying the rules of the category to which the financial instrument is assigned. A S
If the above three conditions are not fulfilled the embedded derivative is not shown separately and the hybrid financial G f e i r
instrument is valued as a whole in accordance with the general provisions of the category to which the financial b d n instrument is assigned. a f P 8 2 d) Hedge accounting §
IAS 39 contains extensive hedge accounting regulations, i.e. accounting for hedging instruments – especially e c n a derivatives – and the underlying hedged transactions. l g a t
In line with the general regulations, derivatives are classified as trading transactions (assets held for trading purposes A or liabilities from trading activities) and are valued at their fair value. The result of such valuation is shown under net trading income.
If it can be demonstrated that derivatives are used to hedge risks from non-trading transactions, IAS 39 permits the application of hedge accounting rules under certain conditions. Two main forms of hedge accounting are used: 84 Consolidated Financial Statements
Fair value hedge accounting: IAS 39 prescribes the use of hedge accounting for derivatives which are employed to hedge the fair value of recognized assets or liabilities. It is primarily the Group’s issuing and lending business, insofar as these are fixed-income securities, that are subject to this fair value risk. Interest rate and interest rate/currency swaps are the primary instruments used to hedge these risks.
In line with the regulations for fair value hedge accounting the derivative financial instruments used for hedging purposes are shown at fair value as fair values attributable to derivative hedging instruments. Changes on revaluation appear as profit or loss in the income statement under result from hedge accounting. Any changes in the fair value of the hedged asset or hedged liability resulting from the hedged risk have to be recognized and similarly shown in the income statement under result from hedge accounting. In the case of a perfect hedge, the changes on revaluation recognized in the income statement for the hedge and the hedged transaction will balance each other out.
Cash flow hedge accounting: IAS 39 prescribes the use of cash flow hedge accounting for derivatives which are employed to hedge the risk of a change in future cash flows. A cash-flow risk exists in particular for floating-rate loans, securities and liabilities and for forecast transactions (for example, forecast fund-raising or financial investments). Within the Eurohypo Group the interest rate risks in asset/liability management are also hedged through cash flow hedges. Interest-rate and interest-rate/currency swaps are the main instruments used to hedge these exposures.
Derivative financial instruments used in cash flow hedge accounting are carried at fair value as fair values attributable to derivative hedging instruments. Changes in value are divided into effective and ineffective portions. The effective valuation result is that part of the change in the fair value of the hedging derivative that represents an effective hedge against the cash flow risk from the hedged underlying transaction and is recognized net of deferred taxes in equity in a separate item (valuation result of cash flow hedges). By con- trast, the ineffective portion is shown in the income statement. There is no change in the general accounting rules described above for the transactions underlying cash flow hedges.
A number of conditions must be satisfied before the hedge accounting rules can be applied. These relate primarily to the documentation of the hedge and to its effectiveness.
The hedge has to be documented at the time it is established. Documentation must include, in particular, the identification of the hedging instrument and the underlying hedged transaction as well as the details of the hedged risk and the method employed to determine the effectiveness of the hedge. The documentation of an underlying transaction hedged with a derivative may relate either to an individual asset or assets, liability or liabilities, pen- ding business or forecast transaction(s) or to a portfolio of such items. It is not sufficient, however, to document a net risk position to be hedged.
In addition to documentation, IAS 39 calls for evidence of an effective hedge in order for hedge accounting rules to be applied. Effectiveness in this context means the relationship between the change in fair value or the cash flow resulting from the hedged underlying transaction and the change in fair value or the cash flow resulting from the hedge. If these changes almost completely balance each other out, a high degree of effectiveness exists. Proof of effectiveness requires, firstly, that a high degree of effectiveness can be expected from a hedge in the future (prospective effectiveness); secondly, when a hedge exists, it must be regularly demonstrated that this was highly effective during the period under review (retrospective effectiveness). A high degree of retrospective effective- ness exists if the ratio of changes in the fair values or the cash flow lies between 0.8 and 1.25. The methods used for determining effectiveness must be disclosed. Consolidated Financial Statements >>> Notes 85
(5) currency translation Monetary assets and liabilities denominated in foreign currencies and outstanding spot foreign–exchange trans- actions are translated at the spot rates, and foreign-exchange forward contracts at the forward rates, on the balance- sheet date. Income and expenses are translated at market rates. Currency translation for investments and share- holdings in subsidiaries denominated in foreign currencies is effected with historical rates at historical cost. Translation gains and losses on consolidation are recognized directly in equity. Translation differences on the disposal of these assets are recognized through profit or loss at the time of disposal.
(6) netting Liabilities are netted against claims if they relate to the same counterparty, are due on demand, and it has been agreed with the counterparty that interest and commission are calculated as if only a single account existed.
(7) cash reserve The cash reserve of the Eurohypo Group comprises cash at bank and balances with central banks. These are reported at nominal value.
(8) claims The Eurohypo Group’s claims on banks and customers which are not held for trading purposes and are not quoted on an active market are shown at amortized cost. Premiums and discounts are recognized in net interest income over the lifetime of the claim. The book values of claims which qualify for hedge accounting are adjusted for the changes in fair value attributable to the hedged risk.
(9) provisions for loan losses We fully provide for the particular counterparty default risks associated with the lending business by forming specific valuation allowances and portfolio valuation allowances.
In order to account for the credit risks contained in our claims on customers and banks, we have formed specific s t n valuation allowances based on uniform standards across the Group. A valuation allowance has to be formed for a e m e loan if it is probable that not all the interest payments and repayments of principal will be performed as agreed. t a t S
The level of the valuation corresponds to the difference between the book value of the loan less the net present l a i c value of the expected future cash flow. n a n i In addition we also account for credit risks by means of portfolio valuation allowances. The level of the portfolio F t r
valuation allowances to be formed is determined by an approach derived from the Basel II system. o p e R ’
Insofar as it relates to claims in the balance sheet, the aggregate provision for loan losses is deducted directly s r o t from claims on banks and claims on customers. However, provisions for the off-balance sheet business (guaran- i d u tees, endorsement liabilities, lending commitments) are shown under provisions for lending risks (under other A
provisions) in the S G f e
liabilities. i r b d n
Unrecoverable amounts for which no specific valuation allowance has been formed are written down immediately. a f P
Amounts recovered on written-down claims are booked to the income statement. Written-down claims are partly 8 2 or wholly written off utilizing any existing specific valuation allowances if the claim proves to be partly or wholly § unrecoverable. Parts of written-down claims which exceed the existing provisions are also directly written off in e c n a the event that they are unrecoverable. l g a t A (10) genuine repurchase agreements and securities – lending transactions Repo transactions combine the spot purchase or sale of securities with their forward sale or repurchase, the counterparty being identical in both cases. The securities sold under repurchase agreements (spot sale) still appear, and are valued, in the consolidated balance sheet as part of the securities portfolio.
According to counterparty, the inflow of liquidity from the repo transaction is shown in the balance sheet as a liability either to banks or customers. The agreed interest payments are booked as interest paid, reflecting the respective maturities. 86 Consolidated Financial Statements
The outflows of liquidity as a result of reverse repos appear as claims on banks or customers and are recognized and valued accordingly. The securities bought under repurchase agreements and on which the financial transaction is based (spot purchase) are not carried in the balance sheet, nor are they valued. The agreed interest payments from reverse repos, if they are not the result of trading transactions, are treated as interest income, reflecting the respective maturities. Claims arising from reverse repos are not netted against liabilities from repos involving the same counterparty.
(11) positive fair values from derivative hedging instruments Derivative financial instruments used for hedging purposes which qualify for hedge accounting and have a positive fair value are reported under this item. These instruments are measured at fair value.
Listed hedging instruments are measured at market prices; non-listed hedging instruments are measured using comparable prices and internal valuation models (net present value or option pricing models). The hedge accounting results for fair value hedges appear in the income statement under result from hedge accounting. By contrast, effective portions of the gains and losses on cash flow hedges are recognized under measurement of cash flow hedges in equity.
(12) assets held for trading purposes All claims which are held for trading purposes are included in this category. They are valued at fair value in the balance sheet at the balance sheet date. Also shown at fair value are all derivative financial instruments which are not used as hedging instruments under hedge accounting rules and have a positive fair value. For listed pro- ducts exchange-based prices are used; non-listed products are measured via the net present value method or other suitable measurement models (for instance, option-price models). All realized gains and losses as well as unrealized valuation changes are reported in net trading income in the income statement.
(13) financial assets The financial assets comprise financial instruments that are not allocated to any other balance sheet item. Included in financial assets are all bonds, notes and other fixed-income securities, shares and other equity-related securities, investments and holdings in non-consolidated subsidiaries which are not held for trading purposes.
Financial instruments from the loans and receivables category contained in this item are measured at amortized cost.
The financial assets assigned to the available for sale category are measured at fair value or according to the equity method. If the fair value cannot be obtained from an active market, items are measured by means of com- parable prices, indicative prices of pricing service providers or other banks (lead managers) or internal valuation models (net present value or option pricing models). Where the fair value of equity instruments cannot be reliably determined they are carried in the balance sheet at amortized cost less any necessary impairment.
Net changes in portfolios in the available for sale category are reflected – net of deferred taxes – in the revaluation reserve in equity.
Realized gains and losses are only recognized in the result from financial assets when the assets are sold. Premiums and discounts are recognized in net interest income over the lifetime of the investment or security. Net interest income also includes interest income from bonds, dividend payments on shares and shareholdings in non-con- solidated companies and income from participating interests.
If, however, an effective hedge with a derivative financial instrument exists for financial instruments shown here, that part of the change in fair value attributable to the hedged risk is shown under the result from hedge accounting.
In accordance with IAS 39.59 financial assets must be reviewed for any objective indications (e.g. breach of con- tract, loss event, increased probability of financial reorganisation or insolvency) that the expected cash flow from the asset will not be realized. An impairment exists if the net present value of the expected cash flow is less than the book value of the financial instrument concerned. In the event of an impairment, the net change is no longer recognized in the revaluation reserve in equity, but is instead shown as an impairment expense under income from financial assets in the income statement. Consolidated Financial Statements >>> Notes 87
For equity instruments, an impairment exists if, among other circumstances, the value falls either significantly or persistently below acquisition cost.
In the Eurohypo Group equity instruments in the available for sale portfolio are written down if the fair value falls below the acquisition cost either significantly (>30 %) or on a long-term basis (over a period of at least nine months). In addition to these quantitative trigger events, these instruments are also reviewed according to the qualitative trigger events of IAS 39.59.
Equity instruments in the available for sale category may not be written up through profit or loss; instead any write-ups are booked directly to the revaluation reserve. Therefore the only impact on profit or loss for these instruments is on impairment or disposal. No write-ups whatsoever may be made for unlisted equity instruments for which the fair value cannot be reliably determined and which are therefore measured at acquisition cost less any necessary impairment.
If any of the qualitative trigger events of IAS 39.59 apply, debt instruments in the available for sale portfolio are written down. In implementing the qualitative trigger events operationally, the Eurohypo Group has developed additional indicators for write-downs. Accordingly, for example, debt instruments in the available for sale portfolio are normally written down if the borrower’s rating is CCC or lower and the fair value is below the amortized cost.
If the reasons for an impairment of debt instruments in the available for sale portfolio cease to apply, the debt instrument is written up, at a maximum by the amount of the previously recognized impairment. The amount in excess of the acquisition cost is recognized in the revaluation reserve.
(14) at equity investments Shares in associated companies and joint ventures in the available for sale portfolio are accounted for using the equity method. In the financial year 2008, as in 2007, Delphi I LLC, Wilmington, Delaware, USA, Urbanitas Grund- besitzgesellschaft mbH, Berlin, and Servicing Advisors Deutschland GmbH, Frankfurt/Main were reported in this category. The at equity valuations are based on the financial statements for 2008. s t n
The shareholding in Delphi I LLC, Wilmington, Delaware, USA was 33.3% at December 31, 2008. The shareholding e m e in the other two companies indicated above was 50% at the reporting date. t a t S l a The total assets of the associated companies amounted to € 0.3 billion and revenues stood at € 27 million. Income i c n a
for the financial year 2008 was a loss of € 25 million. n i F
The assets of approximately € 0.3 billion relate mainly to claims under loan agreements. t r o p e R
(15) investment property ’ s r o t Investment properties are defined as land and buildings held for the purpose of earning rental income or because i d u they are expected to increase in value. The Eurohypo Group mainly reports property acquired during collateral A
realization under investment property. S G f e i IAS 40 r Investment property is valued at the date of acquisition at cost in accordance with , taking into account the b d n directly attributable transaction costs. The fair value model is used for the subsequent valuation of property held a f P
as a financial investment. Fair value is determined on the basis of annually updated valuations by surveyors as 8 2 well as on the market values achievable in the current market. Commercial properties are usually valued based § on capitalized earnings; individual apartment buildings are generally valued on an asset or comparative value e c n a basis. Gains and losses arising from changes in fair value are recognized in the income statement for the period. l g a t A (16) intangible assets We report software and goodwill under intangible assets. Valuation is normally at amortized cost. On each balance- sheet date, all goodwill is examined with a view to its future economic utility on the basis of cash-generating units. The book value of the cash-generating unit (including any attributable goodwill) is compared with the value in use of this unit. The value in use is based on the expected cash flows of the relevant unit in accordance with the business plan, discounted by a risk-adjusted interest rate. If it appears that the expected utility will not mate- rialize an impairment loss is recognized. Any additional writing-down requirement will be distributed proportion- ately over the remaining assets of the unit. 88 Consolidated Financial Statements
Software is depreciated on a straight-line basis over its expected useful economic life of three to eight years, with the depreciation being charged to administrative expenses. Software includes both software developed in-house and software purchased externally.
If the reason for an impairment carried out in a previous financial year no longer applies, the assets are written up at a maximum to cost. Write-ups of goodwill are not permitted.
(17) fixed assets Fixed assets are reported at cost less scheduled straight-line depreciation in line with the expected useful life, during which the assets are depreciable. Extraordinary depreciation is carried out if a permanent impairment is likely. If the grounds for the extraordinary depreciation no longer apply, the asset is written up at a maximum to amortized cost. Fixed assets are depreciated on a straight-line basis in line with their expected economic useful life over the following timescales:
useful life Years Office buildings 40 Residential buildings up to 50 Operating and office equipment 3 to 23
Acquisitions of minor-value assets in the financial year are recorded directly as an expense in the reporting period for reasons of materiality. Interest on borrowings to finance fixed assets is not capitalized. Measures to maintain fixed assets are recorded as an expense in the year in which they arise.
Depreciation is reported under administrative expenses. Gains and losses on the disposal of fixed assets are recorded under other operating income.
(18) income taxes Current tax assets and liabilities were calculated by applying the current tax rates at which a refund from, or a payment to, the relevant tax authorities is made.
Deferred tax assets and liabilities are formed to reflect differences between the IFRS book values of assets or liabilities and the taxable value, provided that these temporary differences are expected to increase or reduce future taxes on income. In addition, deferred tax assets are also formed for tax loss carryforwards and tax credits not yet used. The valuation of deferred taxes is based on income tax rates already enacted at December 31, 2008 and applicable in the event of realization of the temporary differences. Deferred taxes, for example on as yet unused losses carried forward, are only shown on the balance sheet if taxable profits are likely to be generated by the same unit in future. Tax assets and liabilities may not be discounted. Deferred tax assets and liabilities are formed and carried such that – depending on the reason for the deferral – they are recognized either under income taxes in the income statement or directly in the relevant equity item.
Income tax expenses or income are reported under income taxes in the consolidated income statement and divided in the notes into current and deferred tax assets and liabilities for the financial year. Other taxes which are not related to profits appear under other operating income. Current and deferred tax assets and tax liabilities appear as separate asset or liability items in the balance sheet.
Deferred tax assets and tax liabilities have been netted where the right to net current income taxes exists and the deferred tax assets and liabilities relate to income taxes charged by the same tax authority on the same taxable entity.
The definitions of current and deferred tax assets as well as of current and deferred tax liabilities are set out in notes 54 and 62. Consolidated Financial Statements >>> Notes 89
(19) liabilities to banks and customers and securitized liabilities Financial liabilities are reported at amortized cost. The derivatives embedded in liabilities have been separated from their host debt instrument, valued at fair value and shown either under assets held for trading purposes or liabilities from trading activities. As part of hedge accounting, hedged liabilities are adjusted for the fair value attributable to the hedged risk.
(20) negative fair values from derivative hedging instruments Derivative financial instruments used for hedging purposes and which qualify for hedge accounting are shown under this item if they have a negative fair value. These instruments are measured at fair value. Listed hedging instruments are measured at market prices; unlisted hedging instruments are measured using comparable prices and internal valuation models (net present value or option pricing models). Under the terms of fair value hedges, changes in the fair value of hedging instruments are shown in the income statement under the result from hedge accounting. By contrast, we show the effective portions of the gains or losses on cash flow hedges in equity under the valuation result of cash flow hedges.
(21) liabilities from trading activities Derivative financial instruments and lending commitments which have a negative fair value, and delivery obligations from short sales of securities, are shown as liabilities from trading activities. Liabilities from trading activities are recorded at fair value through profit or loss. Market prices are applied for listed financial instruments; for unlisted products comparable prices or internal valuation models (net present value or option pricing models) are used. All realized gains or losses and any unrealized valuation gains or losses are reported in net trading income in the income statement. Trading profit also includes interest and dividend income from trading portfolios, less the cost of funding them.
(22) provisions A provision must be shown if, on the balance sheet date, as the result of an event in the past, a current legal or s factual obligation has arisen, an outflow of resources to meet this obligation is likely and it is possible to make a t n e reliable estimate of the amount of this obligation. We therefore form provisions on the scale deemed necessary m e t a for liabilities of uncertain amount towards third parties and for anticipated losses related to uncompleted trans- t S l a actions. i c n a n i
The amount recognized as a provision represents the best possible estimate of the expense required to meet F
the current obligation on the reporting date. Risks and uncertainties are taken into account in the estimate. Pro- t r o visions are recognized at their net present value if the interest rate effect is material. p e R ’ s r
The different types of provisions are allocated via a number of different items in the income statement. Provisions o t i d
in the lending business are charged to loan loss provisions and restructuring provisions to restructuring expenses. u The remaining provisions are usually charged to administrative expenses. A S G f e i (23) provisions for pensions and similar obligations r b d n
The company pension scheme for current and former employees of Eurohypo Aktiengesellschaft and some a f P
domestic subsidiaries and their surviving dependants is based on a number of different benefit schemes, (both 8 2 defined benefit and defined contribution plans). § e c
Firstly, employees obtain an entitlement to benefits based on an indirect pension commitment (a defined contri- n a l bution plan). To finance the scheme, the Group, together with its employees, pays a fixed amount to external g a t pension providers (including Versicherungsverein des Bankgewerbes a.G. (BVV), Berlin and Versorgungskasse A des Bankgewerbes e.V., Berlin).
The level of the current and future pension benefits is determined in this case by the contributions paid and the related income on the assets. IAS 19 accounting principles for defined contribution plans are applied to these indirect systems, i.e. the contributions to the external providers are shown under staff expenses. No provisions are formed. 90 Consolidated Financial Statements
Secondly, there are pension entitlement and current benefit obligations based on a direct pension commitment by Eurohypo where the level of the benefit is fixed and determined by factors such as age, remuneration and length of service (defined benefit plan). IAS 19 accounting principles for defined benefit pension plans are applicable to these benefit schemes and provisions can therefore be formed.
In order to meet direct pension liabilities, in 2008 cover assets were transferred to a legally independent trustee, Commerzbank Pension-Trust e.V (CPT).
The assets held by CPT qualify as plan assets as defined by IAS 19.7. In accordance with IAS 19.54 the transferred assets are netted with the pension provisions, which results in a corresponding reduction in pension provisions within the Group.
The pension expenses for direct pension commitments reported under staff expenses consist of several compo- nents. They include the service cost, which represents the entitlements earned by members during the financial year, and the interest cost on the net present value of the pension obligations, as the time when the pension obli- gations will have to be met has moved forward by one period. On the other hand the expected net income from the assets in the scheme reduces the pension expenses. Moreover, the level of pension expenses continues to be affected by the amortization of actuarial gains and losses not previously recognized in the income statement. If the direct pension commitments are changed and this leads to a change in the benefit obligation, a retroactively calculated service cost/income has to be reported.
The amount of the provision in accordance with IAS19.54 is therefore as follows:
The net present value of the defined benefit obligation (DBO) less the fair value of the plan assets less/plus unrecognized actuarial gains or losses less/plus, as applicable, any unrecognized retroactive service cost or income
= Amount of pension provision
For defined benefit schemes the pension provisions and similar obligations (age-related short-time working, early retirement and anniversary provisions) are calculated annually by an independent actuary using the projected unit credit method). This calculation is based on biometric assumptions (for example, Heubeck tables 2005G), the current market interest rate for top-quality long-term corporate bonds and on assumptions for staff turnover and career trends as well as future rates of salary and pension increases.
According to IAS 19.92 et seq., any actuarial profits and losses that have not yet been amortized do not have to be recognized until the reporting period in which they exceed or fall below the corridor of 10% of the greater of DBO or the fair value of the plan assets at the beginning of the period. Only that part comprising the amount that falls outside of the corridor divided by the average expected remaining working lives of the employees covered by the plan has to be charged as an expense.
(24) subordinated and hybrid capital Under subordinated and hybrid capital we report issues of profit participation certificates, as well as securitized and non-securitized subordinated liabilities. They are reported at amortized cost. Premiums and discounts are recognized in net interest income over the lifetime of the liability.
(25) capital and reserves and minority interests In accordance with IFRS, a company’s capital and reserves or equity gives rise to a residual claim on its assets after deduction of all its liabilities or claims for which the investor has no termination option.
In accordance with IAS 39, changes in the value of available for sale assets and effective portions of the changes from cash-flow hedges are reported directly in equity. Consolidated Financial Statements >>> Notes 91
Buybacks of own equity instruments are deducted from equity in accordance with IFRS and the resultant gains or losses recognized directly in equity. Under IAS 1 minority holdings are accounted for within equity.
(26) trust transactions Trust business involving the management or placement of assets for the account of others is not shown on the balance sheet. Commissions received from such business are included under net commission income in the income statement.
(27) contingent liabilities and irrevocable credit commitments This item mainly shows contingent liabilities arising from guarantees and indemnity agreements as well as irrevocable lending commitments at their nominal value.
Situations where the reporting company acts as guarantor to the creditor of a third party for the fulfilment of a liability of that third party must be shown as guarantees. This item mainly shows contingent liabilities arising from guarantees and indemnity agreements as well as irrevocable lending commitments at their nominal value.
All obligations that could incur a credit risk must be shown as irrevocable lending commitments. These include obligations to grant loans (for example, lines that have been advised externally to customers), to buy securities or issue guarantees or acceptances. s t n e m e t a t S l a i c n a n i F t r o p e R ’ s r o t i d u A S G f e i r b d n a f P 8 2 § e c n a l g a t A 92 Consolidated Financial Statements
information concerning the income statement (28) net interest income
in € million 2008 2007 Interest income from Real estate finance 5,033 4,797 Public finance 2,563 2,387 Other lending and money-market business 622 853 Fixed-income securities and book entry-securities 3,279 2,541 Current income from participating interests and from non-consolidated affiliated companies 0 1 Profits on the sale of loans and receivables 3 42 Total interest income 11,500 10,621 Interest expenses for Securitized liabilities 5,033 4,462 Registered Pfandbriefe 1,206 1,182 Loans taken up 1,203 810 Other borrowings and money-market business 2,156 2,190 Subordinated liabilities 143 134 Profit participation certificates 47 38 Hybrid Capital 52 53 Current result from swap transactions (Net of interest income and interest expense) 506 572 Losses on the sale of loans and receivables 5 1 Total interest expenses 10,351 9,442 Total 1,149 1,179
The net interest income includes € 11,491 million (2007: € 10,562 million) interest income and € 9,846 million (2007: € 8,870 million) interest expense for financial assets and liabilities which are not measured at fair value through profit or loss. The interest income from real estate financing includes € 25 million (€ 76 million) in early redemption penalties.
Netting payments in relation to interest rate swaps with off-market coupons are amortized on a straight-line basis in interest income over the maturity of the swap.
(29) provisions for loan losses Provisions for loan losses consist of valuation allowances and provisions for off-balance-sheet commitments in relation to the lending business and are reported in the income statement as follows:
Retail Commercial Eurohypo lending business real estate Public finance Group in € million 2008 2007 2008 2007 2008 2007 2008 2007 Additions to loan loss provisions 246 140 660 397 39 0 945 537 Releases of loan loss provisions 133 96 253 276 0 0 386 372 Direct write-downs 35 44 271 57 – – 306 101 Recoveries on loans previously written down 4 7 3 – – – 7 8 Total 144 81 675 178 39 0 858 259 Consolidated Financial Statements >>> Notes 93
(30) net commission income in € million 2008 2007 Securities transactions 00 Lending and guarantee business 207 208 Services 90 90 Total commission received 297 298 Securities transactions 64 Lending and guarantee business 30 59 Services 10 8 Total commission paid 46 71 Commission surplus Securities transactions –6 –4 Lending and guarantee business 177 149 Services 80 82 Total 251 227
Commission income includes € 35 million (2007: € 32 million) derived from transactions with financial instruments which are measured at fair value through profit or loss.
(31) result from hedge accounting in € million 2008 2007 Result from hedge accounting from fair-value hedges –34 –8 from cash flow hedges 0 0 s Total –34 –8 t n e m e t a The result from hedge accounting includes the valuation gains and losses on effective hedges under the hedge t S l a accounting rules. i c n a n i
The result from fair value hedges of € –34 million (2007: € –8 million) comprises a loss of € 5,324 million (2007: F
€ 734 million gain) on derivatives used for hedging purposes and a gain of € 5,290 million (2007: € 742 million t r o loss) on the valuation of hedged items. p e R ’ s r o t
(32) net trading income i d u A in € million 2008 2007 S G f
CMBS transactions New York including associated derivatives –2 31 e i r b
Result from other derivative financial instruments (no hedge accounting) –823 1 d n a Result from own trading –3 –1 f P 8
Other trading result 18 –42 2 § Total –810 –11 e c n a l The financial instruments in the trading portfolio are measured at fair value. Unlisted transactions are based on g a t recognized net present value or option price models. The net trading income is produced by offsetting trading A income against the corresponding expenses. The results from fair value measurement are included in the port- folios, i.e. unrealized price gains and losses are included in the result reported.
The net trading income comprises € –43 million on realizations, € –767 million on valuations and € 0 million of net interest income.
The other trading income comprises the realized gain on the redemption of liabilities of € 14 million (2007: € –37 million). 94 Consolidated Financial Statements
(33) result from financial assets The result from financial assets includes net gains on valuation and disposal of available for sale securities and of participating interests, stakes in associated companies and stakes in unconsolidated subsidiaries.
in € million 2008 2007 Net result from interest-bearing business –622 –21 in the available-for-sale category –10 167 Gains on disposal (Transfer from the revaluation reserve)1) 16 168 Losses on disposal (Transfer from the revaluation reserve)1) –26 –1 in the loans and receivables category –13 – Gains on disposal 0– Losses on disposal –13 – Net valuation gains –599 –188
Net result from equity instruments 0 12 in the available-for-sale category Gains on disposal 012 Losses on disposal –– Net valuation gains 00 Total –622 –9
1) This includes € –467 million (prior year: € 25 million) of rebookings from the revaluation reserve during the financial year.
The available for sale portfolio is measured at fair value. However, if there is no liquid market price or no reliable relevant factors can be determined for the valuation model, shares in affiliated companies and participating interests are carried at amortized cost.
For the subprime-related CDO and RMBS portfolios, this analysis led to pre-tax impairment charges under the result from financial assets of € 84 million in the first quarter, € 119 million in the second quarter, € 144 million in the third quarter and € 107 million in the fourth quarter of 2008 respectively. This produces a total charge against income of € 454 million. The revaluation reserve contains a positive change of € 109 million.
(34) result from at equity investments The results from disposal and valuation of the associated companies and joint ventures valued at equity are reported under the result from at equity investments.
in € million 2008 2007 Result from at equity investments Gains on disposal – – Result from at equity valuation –– Expenses for at equity investments Losses on disposal –– Expenses from at equity valuation –1 –2 Total –1–2
In 2008 the expenses from at equity valued companies derived from Servicing Advisors Deutschland GmbH, Frankfurt am Main. Consolidated Financial Statements >>> Notes 95
(35) result from investment property in € million 2008 2007 Result from investment property Rental income 33 Income from disposals 97 Write-ups 011 Other income 05 Expenses for investment property Building occupancy and office costs 2 3 of which: rented property 12 of which: vacant property 11 Expenses for disposals 00 Depreciation and impairment 81 Other expenses 06 Total 216
(36) administrative expenses The Group’s administrative expenses of € 460 million consist of staff expenses of € 190 million, other administra- tive expenses of € 254 million and depreciation on operating and office equipment and real estate and amortiza- tion of other intangible assets of € 16 million. The expenses break down as:
Staff expenses in € million 2008 2007 Wages and salaries 175 273 s t n
Expenses for pensions and other employee benefits 15 39 e m e
of which: Contributions to BVV 5 6 t a t S
Total 190 312 l a i c n a n i
Staff expenses contains expenses for social security contributions of € 22 million (2007: € 30 million) F t r o
Other administrative expenses p e R ’ s r o t in € million 2008 2007 i d u
Expenses for office space 23 22 A IT expenses 78 47 S G f
Compulsory contributions, consulting, other operating and company-law expenses 109 77 e i r b
Advertising, PR and promotional expenses 14 18 d n a Workplace expenses 10 11 f P 8
Sundry expenses 20 36 2 § Total 254 211 e c n a l The auditors’ fee of € 4,299,000 (excluding VAT) recognized as an expense for the financial year in Germany is g a t
made up as follows: A in € ’000 2008 2007 Audit of financial statements 3,290 2,637 Provision of other certificates or assessments 480 52 Tax consulting services 51 78 Other services 478 280 Total 4,299 3,047 96 Consolidated Financial Statements
Depreciation, amortization and impairments on operating and office equipment and real estate and other intangible assets
in € million 2008 2007 Office furniture and equipment 67 Property 43 Other intangible assets 69 Total 16 19
With regard to depreciation, amortization and impairments on intangible assets, fixed assets and operating and office equipment, Eurohypo reviews the previous method of depreciation or amortization and residual useful life at each balance-sheet date. If there are signs of impairment, an impairment test is carried out. Subsequent valuation did not lead to any extraordinary write-downs in the financial year 2008 (2007: zero).
(37) other net operating income/expenses
in € million 2008 2007 Other net operating income/expenses Rental income 2 0 Realization gains on the disposal of fixed assets 1 1 Realization gains on repurchased liabilities 10 – Income from the release of provisions 11 8 Sundry other operating income 32 61 Total other net operating income 56 70
Other net operating expenses Realization losses on the disposal of fixed assets 1 1 Realization losses on repurchased liabilities 17 – Allocation to provisions 22 3 Sundry other operating expenses 35 69 Total other net operating expenses 75 73
Other net operating income/expenses –19 –3
Other operating income and expenses comprise items which cannot be allocated to other items in the income statement.
The main items in sundry other operating income and sundry other operating expenses are sales revenue and the associated expenses of Eurohypo Systems GmbH from third-party client business. Sundry other operating expenses also includes non profit-related taxes of € 5 million (2007: € 5 million)
(38) amortization of goodwill
in € million 2008 2007 Amortization of goodwill 7– Total 7 –
The amortization was carried out on the goodwill arising from the acquisition of a minority interest of 10% in Eurohypo Europäische Hypothekenbank S.A., Luxembourg. Consolidated Financial Statements >>> Notes 97
(39) income taxes The Group’s income tax expense comprises the following: in € million 2008 2007 Current taxes on income 79 122 Deferred taxes –248 111 Deferred tax expense/income from changes in temporary differences and loss carry forwards –263 75 Effect of changes in tax rates 15 36 Total –169 233
In addition to current taxes on income, deferred tax income and expenses are also reported under income taxes. The deferred tax income or expense results from the recognition in profit or loss of deferred taxes on the basis of changes in temporary differences, the creation or utilization of loss carryforwards and adjustments to the value of deferred tax assets and changes in tax rates.
The current income tax payable on the Group’s net income for the year is reported in the relevant period as an expense in line with the tax legislation in the relevant jurisdictions.
With the registration of the control and profit transfer agreement between Eurohypo AG, Eschborn, and Commerz- bank Inlandsbanken Holding GmbH, Frankfurt am Main, in the Commercial Register on September 4, 2007, the requirements for fiscal unity for corporation tax and trade tax purposes as defined by section 14 of the Corporation Tax Act (KStG) and section 2 (2) sentence 2 of the Trade Tax Act (GewStG) were met with effect from January 1, 2007. Eurohypo AG, Eschborn, stands in a relationship of fiscal unity with Commerzbank AG, Frankfurt am Main through Commerzbank Inlandsbanken Holding AG, Frankfurt, which itself is in a relationship of fiscal unity with Commerzbank AG.
AG AG
The tax loss of Eurohypo Inlandsbank in Germany in 2008 has been added to that of Commerzbank , s t n
Frankfurt am Main, via Commerzbank Inlandsbanken Holding AG, Frankfurt am Main, for the purposes of corpo- e m e ration tax and trade tax. t a t S l a The expected nominal average tax rate of Commerzbank AG, Frankfurt am Main, remains unchanged at 30.85%. i c n a
This is made up of a corporation tax rate including solidarity surcharge of 15.83% and an effective trade tax rate n i of 15.02%. F t r o
The current and deferred taxes for Europäische Hypothekenbank S.A., Luxembourg, Eurohypo Japan Corp., J-Tokyo p e R ’
and the foreign branches were calculated using the tax rates applicable in the countries concerned. s r o t i d
The following table shows the reconciliation of the expected income tax expense (income) in the relevant financial u year with the reported income tax expense (income). A S G f e
The expected income tax expense (income) is calculated by multiplying the profit before tax by the overall tax i r b rate for the financial year of 30.85%. d n a f P 8 2 § e c n a l g a t A 98 Consolidated Financial Statements
in € million 2008 2007 Net pre-tax profit according to IFRS: –1,409 588 Group’s income-tax rate 30.85% 39.38% Calculated income-tax payments in financial year –435 231 Effects due to differing tax rates affecting income during periods question –57 –38 Tax transfer ––14 Tax effect due to profit transfer 244 – Effects of taxes from previous years recognized in past financial year 5 5 Effects of non-deductable operating expenses and tax-exempt income 24 5 Effects of changes in recognition and adjustments to deferred tax assets 4 46 Effect of disappearing loss carryforwards 47 – Other effects –1 –2 Taxes on income –169 233
With the establishment of fiscal unity for income tax purposes with effect from 1 January 2007 the taxable income of Eurohypo AG, Eschborn, is added to that of the parent company Commerzbank AG, Frankfurt am Main, via the intermediate parent company Commerzbank Inlandsbanken Holding GmbH, Frankfurt am Main.
On the basis of the transfer agreement Eurohypo AG, Eschborn, makes a tax transfer via the intermediate parent company to the ultimate parent company if there is a positive figure for taxable income. In view of the tax loss in Germany no transfer has been made for 2008. The allocation of the loss to Commerzbank AG, Frankfurt am Main, produces a reconciliation effect of € 244 million, as no deferred tax may be recognized on this loss.
A reconciliation effect of € 57 million results from differences between foreign tax rates and the tax rate payable by the Group. Tax loss carryforwards, which under local US law can neither be carried back nor forward, produce a reconciliation effect of € 47 million.
The following current and deferred taxes have been credited or debited directly to the relevant entry under capital and reserves. The current income taxes arise from matters already realized for tax purposes, which have to be reported in equity under IFRS rules:
in € million 2008 2007 Current taxes on income 36 42 Deferred taxes 889 124 Valuation differences resulting from cash flow hedges 868 – Revaluation reserve 21 124 Others –– Total 925 166 Consolidated Financial Statements >>> Notes 99
(40) quarterly results
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 in € million 2008 2008 2008 2008 2007 2007 2007 2007 Interest income 3,322 3,211 2,460 2,507 2,785 2,669 2,560 2,607 Interest expense 3,046 2,915 2,155 2,235 2,462 2,394 2,258 2,328 Net interest income 276 296 305 272 323 275 302 279 Provisions for loan losses –205 –254 –332 –67 –66 –78 –57 –58 Net interest income after provisions 71 42 –27 205 257 197 245 221 Commission received 64 80 70 83 86 73 72 67 Commission paid 6 14 11 15 17 19 15 20 Net commission income 58 66 59 68 69 54 57 47 Result from hedge accounting 18 –40 –13 1 12 20 –19 –21 Net trading income –437 –385 11 1 –72 –11 28 44 Result from financial assets –146 –282 –114 –80 9 –98 30 50 Result from at equity investments 0 0 –1 0 –1 –1 0 0 Result from investment property 2 0 0 0 –34 46 0 4 Administrative expenses 96 129 122 113 144 128 131 139 Net other operating income/expenses –26 0 9 –2 –1 –3 1 0 Net operating income –556 –728 –198 80 95 76 211 206 Amortization of goodwill 7 – – – – – – – Restructuring expenses – – – – – 0 0 0 Earnings before tax –563 –728 –198 80 95 76 211 206 Income taxes –91 –43 –60 25 20 63 74 76 Consolidated profit/loss –472 –685 –138 55 95 76 211 206 Profit/loss attributable to minority interests 0 0 0 0 0 0 0 0 s Profit/loss attributable to the shareholders t n e
of Eurohypo AG –472 –685 –138 55 75 13 137 130 m e t a t S l a i c n a n i F t r o p e R ’ s r o t i d u A S G f e i r b d n a f P 8 2 § e c n a l g a t A 100 Consolidated Financial Statements
(41) segment reporting
income statement by segment
CBG CBG Core Non-Core CIB-I-CELA CIB-I-UK CIB-I-US in € million 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 Net interest income 367 396 0 20 330 287 84 90 80 87 Provisions for loan losses –10 8 –152 –152 –482 –16 –16 –11 –13 –3 Net interest income after provisions 357 404 –152 –132 –152 271 68 79 67 84 Net commission income 78 70 0 4 95 103 40 60 33 29 Result from hedge accounting – – – – – – – – – – Net trading income 1 1 – – 0 – 4 – –2 33 Result from financial assets 0 – 0 0 – – –19 0 –454 –188 Result from at equity investments – – – – – – – – – – Result from investment property 3 – –1 16 0 0 – – – – Administrative expenses 95 107 23 30 83 93 29 46 44 74 Net other operating income/expenses 0 0 –27 –3 –9 –2 0 0 0 1 Operating income 344 368 –203 –145 –149 279 64 93 –400 –115 Amortization of goodwill – – – – – – – – – – Earnings before tax 344 368 –203 –145 –149 279 64 93 –400 –115
Volume Segment assets (in € bn) 33.1 32.0 5.1 6.1 26.7 23.9 7.3 7.6 5.5 4.4 Average RWA (in € bn) 20.4 29.1 5.6 4.6 23.7 24.8 7.7 8.8 4.1 6.2 Average allocated equity capital (in € bn) 1.4 2.1 0.4 0.3 1.6 1.7 0.6 0.6 0.4 0.4
Key ratios RoE before tax (in %) 24.0 18.0 –51.4 –45.3 –9.0 16.0 11.6 15.1 –108.9 –26.7 CIR (in %) 21.1 23.0 –83.0 80.7 19.9 23.9 26.7 30.8 –12.8 –198.9 Average full-time equivalent (FTE) 370 402 – – 190 186 53 64 114 129 Consolidated Financial Statements >>> Notes 101
income statement by segment
Cross-divisional Eurohypo PFT RB positions Group in € million 2008 2007 2008 2007 2008 2007 2008 2007 Net interest income 107 89 166 205 15 5 1,149 1,179 Provisions for loan losses –39 0 –144 –81 –2 –4 –858 –259 Net interest income after provisions 68 89 22 124 13 1 291 920 Net commission income –3 –4 –12 –9 20 –26 251 227 Result from hedge accounting –34 –8 – – – – –34 –8 Net trading income –813 –44 – – 0 –1 –810 –11 Result from financial assets –149 179 0 0 0 0 –622 –9 Result from at equity investments – – –1 –2 – – –1 –2 Result from investment property 0 – 0 0 0 0 2 16 Administrative expenses 82 66 66 67 38 59 460 542 Net other operating income/expenses 71 41 –10 –4 –44 –36 –19 –3 Operating income –942 187 –6742–49 –121 –1,402 588 Amortization of goodwill 7 – – – – – 7 – Earnings before tax –949 187 –6742–49 –121 –1,409 588
Volume Segment assets (in € bn) 169.7 112.1 23.9 21.7 2.3 0.5 273.6 208.3 Average RWA (in € bn) 9.2 8.5 4.8 13.7 1.4 –4.8 76.9 90.9 Average allocated equity capital (in € bn) 0.7 0.6 0.3 1.0 –0.6 –0.8 4.8 5.9 s t
Key ratios n e m
RoE before tax (in %) – – –20.0 4.4 – – –23.4 10.1 e t a t
CIR (in %) –10.0 26.0 46.1 35.2 – – –552.6 39.0 S l a i
Average full-time equivalent (FTE) 133 92 – 39 1.038 1.088 1.898 2.000 c n a n i F t r o p e R ’ s r o t i d u A S G f e i r b d n a f P 8 2 § e c n a l g a t A 102 Consolidated Financial Statements
income statement by geographic region
Rest Eurohypo Germany of Europe America Group in € million 2008 2007 2008 2007 2008 2007 2008 2007 Net interest income 580 660 483 426 86 93 1,149 1,179 Provisions for loan losses –345 –229 –500 –27 –13 –3 –858 –259 Net interest income after provisions 235 431 –17 399 73 90 291 920 Net commission income 84 36 134 162 33 29 251 227 Result from hedge accounting –51 –2 17 –6 0 0 –34 –8 Net trading income –787 –41 –21 –3 –2 33 –810 –11 Result from financial assets –142 135 –26 44 –454 –188 –622 –9 Result from at equity investments –1 –2 – – – – –1 –2 Result from investment property 2 16 0 0 0 0 2 16 Administrative expenses 297 321 119 146 44 75 460 542 Net other operating income/expenses –8 0 –11 –4 0 1 –19 –3 Operating income –965 252 –43 446 –394 –110 –1,402 588 Amortization of goodwill – – 7 – – – 7 – Earnings before tax –965 252 –50 446 –394 –110 –1,409 588
in € billion Segment assets 208.6 147.8 59.5 56.1 5.5 4.4 273.6 208.3
Average full-time equivalent (FTE) 1,509 1,586 275 282 114 132 1,898 2,000 Consolidated Financial Statements >>> Notes 103
Segment reporting by group units The above segment report was prepared in accordance with the provisions of IAS 14. It is based on the internal management, information and planning systems of the Eurohypo Group and analyses the relevant results and portfolios first by operating division (primary reporting format) and then by geographic region (secondary report- ing format).
On the sales side, the segment reporting by operating division is based on the different customer responsibilities. The divisions Corporate Banking Germany (CBG), Corporate Banking Continental Europe and Latin America (CIB- I-CELA), Corporate Banking UK (CIB-I-UK), Corporate Banking USA (CIB-I-US) und Public Finance/Treasury (PFT) and Retail Banking (RB) are each headed by a member of the Board of Managing Directors as an independent division with its own profit center.
The CBG division is broken down into CBG Core and CBG Non-Core, with separate figures being reported for each of these segments.
The regular expenses and income of EH Estate Management GmbH and the other property realization companies are – as is the case for income and expenses arising from the valuation of properties – allocated to the segments in which they originate.
Public Finance and Treasury fall under PFT together with the money and capital market business. This segment also includes the results of EUROHYPO Europäische Hypothekenbank S.A., Luxembourg.
The cross-divisional item shows all results components that cannot be directly allocated to one of the above seg- ments or only by imposing arbitrary ratios on them. The cross-divisional position also includes income from the third party business of Eurohypo Systems GmbH, Eschborn. This item also contains some smaller results compo- nents from the expansion of the Asian business.
The secondary reporting format shows the results and key figures by geographic region. Eurohypo shows its core regions of Germany, Rest of Europe and America. s t n
The criterion used for segmentation is the registered office of the group company or foreign branch. For central- e m e ized organizational units, the regional responsibility of the unit is used for segmentation purposes. Otherwise t a t S segmentation is carried out using the same methods as for reporting by operating unit. l a i c n a
The regional segments are also shown on a consolidated basis, with unallocated overheads generally reported n i under Germany. F t r o
The Germany segment therefore comprises the operating units CBG Core, CBG Non-Core, RB, the German portion p e R ’
of PFT and the unallocated overheads. The Europe segment includes CIB-ICELA and CIB-I-UK as well as Eurohypo s r o t Luxembourg. The America segment shows the activities of CIB-I-US and the Treasury Desk in New York. i d u A
The principles of segment reporting S G f e
The aim of segment reporting is to allocate the pre-tax income from the income statement of the Eurohypo i r b
Group and the segment assets to the segments in which they originate. d n a f P
As a first step, net interest income is split on the basis of the market interest rate method into the two components 8 2 of the interest contribution and the maturity transformation contribution. The interest contribution is calculated § separately for each individual client transaction and subsequently allocated to the customer segment in which it e c n a originates. The maturity transformation contribution is allocated to PFT. l g a t
In addition to the interest contribution, the net interest income for the relevant segment also includes imputed A income from interest on the non-interest-bearing balance sheet positions (capital and reserves, provisions, fixed assets). The imputed interest rate corresponds to the risk-free rate on the capital market.
This capital benefit is allocated to the segments in proportion to the risk-weighted assets associated with the segment in line with the Solvency Regulation (SolvV) pursuant to Basel II (2007: BIS definitions used). In addition, PFT receives an imputed compensation payment from the customer segments for increased spreads that have to be paid for the procurement of subordinated capital, profit participation certificates and hybrid capital.
When prepayment penalties for prepaid loans are allocated, the margin loss is allocated to the customer segments and the funding loss to Treasury. 104 Consolidated Financial Statements
The provisions for loan losses reported in the segments comprise both new provisions and the release of specific valuation allowances, direct write-downs of claims and recoveries on written-down loans and portfolio valuation allowances. Provisions for loan losses in the cross-divisional positions relate to portfolio valuation allowances for loans intended for short-term syndication which have arisen at the year-end. This temporary charge will disap- pear after the syndication of the loan.
Net commission income is allocated directly to the segments.
The item result from hedge accounting is allocated to PFT.
In net trading income, the result from derivatives not included in hedge accounting as well as the result from the redemption of liabilities is allocated to PFT. Only the portion of the derivative result attributable to CMBS transac- tions is shown in CIB-I-US together with changes in valuation of the CMBS loans.
Delphi I LLC, Wilmington, Delaware, USA and Servicing Advisors Deutschland GmbH, Frankfurt am Main are reported in the RB segment under result from at equity investments.
Income and expenses from investment property are reported in the segment in which they originate.
Administrative expenses include staff expenses and operating expenses as well as depreciation and amortization of fixed assets and other intangible assets (excluding goodwill). Administrative expenses are allocated to the seg- ment in which they originate and in addition to direct expenses also include indirect expenses from internal charges for services. This results in a corresponding credit entry for the service provider. Results from transac- tions between segments are allocated on the basis of bilateral agreements. Intragroup service providers (corpo- rate centers, Eurohypo Systems GmbH, EH Estate Management GmbH) allocate their operating expenses to the relevant service recipient. The allocation criteria are stipulated by central Controlling in co-ordination with the business divisions and the service providers.
The segment profit is measured on the basis of pre-tax profit and the return on equity before tax and CIR.
The return-on-equity ratio shows the relevant segment result in relation to the average capital tied up in the seg- ment.
The average capital tied up is calculated on the basis that risk-weighted assets (RWA) are backed by 7% core capital in line with the Solvency Regulation pursuant to Basel II (2007: RWA with 7% core capital under BIS definitions).
The cost-income ratio (CIR) shows the ratio of administrative expenses to the total of all other operating income items in the income statement with the exception of loan loss provisions.
Given the special funding practices in the mortgage business (macro funding by PFT with no segment relation- ship), we have only shown an analysis of the segment assets and have not provided a detailed presentation of segment balance sheets, as the resultant information would not have been meaningful.
In addition to public sector finance the segment assets of PFT also comprise deposits invested with other credit institutions. The segment assets of the real estate divisions also comprise securities portfolios backed by real estate. Consolidated Financial Statements >>> Notes 105
notes to the balance sheet (assets) (42) cash reserve in € million 2008 2007 Cash at bank 00 Credit balances with central banks 19 128 Bills –– Total 19 128
Credit balances at Deutsche Bundesbank also serve to meet the minimum reserve requirements. The minimum credit reserve as at December 2008 amounted to € 52.5 million (2007: € 90.0 million). As at the reporting date, there were no holdings of public sector debt securities or bills eligible for refinancing at central banks.
(43) claims on banks in € million 2008 2007 Due on demand 12,219 3,021 Other claims Real estate finance 393 198 Loans to public sector entities 15,650 10,655 Other claims 3,021 7,160 Total 31,283 21,034
Germany 25,294 17,620 Abroad 5,989 3,414 Total 31,283 21,034 s t n e
Less provisions for loan losses –35 –1 m e t a
Balance sheet disclosure 31,248 21,033 t S l a i c n a
The claims on banks fall into the category of loans and receivables. n i F t (44) claims on customers r o p e R ’ s in € million 2008 2007 r o t i
Real estate finance 101,850 94,598 d u Loans to public sector entities 49,631 36,445 A S
Other claims 1,123 199 G f e i Total 152,604 131,242 r b d n a f P
Germany 99,702 85,206 8 2
Abroad 52,902 46,036 §
Total 152,604 131,242 e c n a l g a
Less provisions for loan losses –2,341 –2,281 t A Balance sheet disclosure 150,263 128,961
The claims on customers fall into the category of loans and receivables. 106 Consolidated Financial Statements
(45) provisions for loan losses The loan loss provisions are recognized in accordance with group-wide standards and cover all identifiable credit risks. For on-balance sheet items portfolio valuation allowances are recognized for risks which have been identified but for which no losses have yet been incurred and are recognized in the provisions for loan losses. The portfolio valuation allowances use parameters derived from Basel II methodology.
Specific allowances Portfolio allowances Total in € million 2008 2007 2008 2007 2008 2007 Balance as at 1.1. 2,081 2,384 201 249 2,282 2,633 Additions 861 529 8 – 869 529 Reductions 874 852 – 48 874 900 of which amounts utilised 511 531 – – 511 531 of which amounts released 363 321 – 48 363 369 Changes in consolidation group 89 – 7 – 96 – Other adjustments with no impact on income –12 21 15 – 3 21 Adjustments due to currency translation 3 –1 –3 – – –1 Balance as at 31.12. 2,148 2,081 228 201 2,376 2,282
The loan loss provisions break down as follows:
Retail Commercial Eurohypo lending Real Estate Public Finance Group in € million 2008 2007 2008 2007 2008 2007 2008 2007 Balance as at 1.1. 582 648 1,699 1,984 1 1 2,282 2,633 Additions 245 140 585 389 39 0 869 529 Reductions 239 206 635 694 0 0 874 900 of which amounts utilised 106 111 405 420 – – 511 531 of which amounts released 133 95 230 274 0 0 363 369 Changes in consolidation group 9 – 87 – – – 96 – Other adjustments with no impact on income 1 – 2 21 0 – 3 21 Adjustments due to currency translation 0 – 0 –1 0 – 0 –1 Balance as at 31.12. 598 582 1,738 1,699 40 1 2,376 2,282
Taking into account direct write-downs, recoveries on written-down receivables and additions to and releases of provisions, the additions and releases incorporated into the income statement produce provisions for loan losses of € 858 million (2007: € 259 million). In 2008 the unwinding effect came to € 110 million.
For contingent liabilities, provisions were created on the liabilities side for € 104 million (2007: € 53 million), of which € 37 million (2007: € 39 million) relate to portfolio allowances.
(46) positive fair values from derivative hedging instruments Derivative financial instruments with positive fair values used for hedging purposes and which qualify for hedge accounting are reported here. These instruments are measured at fair value.
in € million 2008 2007 Positive fair values from effective fair value hedges 5,096 2,304 Positive fair values from effective cash flow hedges 0 0 Total 5,096 2,304 Consolidated Financial Statements >>> Notes 107
(47) assets held for trading purposes Claims assigned to the held-for-trading category are reported under assets held for trading purposes, as are derivatives not used for hedging purposes.
All trading assets are recognized at fair value.
in € million 2008 2007 Claims 180 264 Positive fair values attributable to derivative financial instruments (no hedge accounting) Interest rate related transactions 10,917 4,015 Currency-related transactions Cross Currency Swaps 748 224 Currency futures transactions 769 242 Credit derivatives 42 Other derivatives –– Total derivative financial instruments 12,438 4,483 Total 12,618 4,747
(48) financial assets Financial assets comprise bonds, other fixed-income securities and shares and other non fixed-income securities as well as shareholdings in affiliated companies and participating interests not included in the consolidated financial statements. At equity investments are reported separately. in € million 2008 2007 Bonds and other fixed-income securities 89,525 55,801 Bonds and notes 89,525 55,801 s t n
of public issuers 49,448 32,617 e m e
of other issuers 40,077 23,184 t a t S
of which: at fair value 10,538 55,801 l a i c
of which: at cost 78,987 – n a n Shares and other equity-related securities 187 – i F of which: at fair value 187 – t r o
of which: at cost –– p e R
Participating interests 14 15 ’ s r o t
of which: at fair value –– i d u
of which: at cost 14 15 A Shares in other non-consolidated affiliated companies 3 4 S G f
of which: at fair value –– e i r b
of which: at cost 34 d n a Total 89,729 55,820 f P 8 2 §
Fair value of financial assets eligible for stockmarket-listing listed unlisted e c n a in € million 2008 2007 2008 2007 l g a
Bonds and other fixed-income securities 75,127 49,321 14,398 6,480 t A Shares and other equity-related securities 187 – – – Participating interests – – – – Shares in other non-consolidated affiliated companies – – – – Total 75,314 49,321 14,398 6,480
The financial assets are categorized as loans and receivables (LaR), € 78,987 million, and available for sale (AfS), € 10,538 million.
Details of securities reclassified from AfS to LaR: at the reclassification date the nominal volume of the reclassi- fied holdings was € 74,851 million and the fair value € 74,725 million. The revaluation reserve for the reclassified securities after deferred taxes is € –1,011 million compared with € –375 million as at December 31, 2007. The creation of a general loan loss provision (GLLP) created a one-off effect of € –24 million in the income state- ment. 108 Consolidated Financial Statements
On the balance sheet date the holdings had a nominal volume of € 74,082 million and a fair value of € 76,664 million.
The transactions have average effective interest rates of between 1.0% and 16.9% and are expected to generate an inflow of funds of € 102.6 billion.
Without the reclassification there would have been a revaluation reserve of € –1,262 million (after tax) for these holdings as at December 31, 2008.
(49) at equity investments Investments in associated companies and joint ventures are reported in the available-for-sale portfolio as invest- ments in companies accounted for using the equity method. In financial year 2008, this item again included Del- phi I LLC, Wilmington, Delaware, USA, Urbanitas Grundbesitzgesellschaft mbH, Berlin and Servicing Advisors Deutschland GmbH, Frankfurt am Main.
The at equity valuation was based on the most recent financial statements for financial year 2008 prepared under national accounting principles and analysed in accordance with IAS/IFRS.
in € million 2008 2007 At equity investments 01 Total 01
listed unlisted 2008 2007 2008 2007 At equity investments – – 0 1 Total – –01
(50) investment property This item essentially comprises foreclosed assets acquired as part of collateral realization. For details see note (53).
(51) intangible assets
in € million 2008 2007 Goodwill 128 135 Own software 18 18 Purchased software 76 Total 153 159
(52) fixed assets
in € million 2008 2007 Land and buildings 151 135 Operating and office equipment 26 27 Total 177 162
The amount reported under land and buildings relates mainly to the bank’s offices in Eschborn.
(53) statement of changes in fixed assets and investments Amortization of goodwill is reported under a separate line item in the income statement. Amortization of software, other intangible assets and depreciation of land and buildings and operating and office equipment are shown in the item depreciation, amortization and impairments of intangible and fixed assets under administrative expenses.
Goodwill is the amount by which the Group’s share of the fair value of the acquired net assets of a company exceeds the cost of acquisition as at the acquisition date. Consolidated Financial Statements >>> Notes 109
Goodwill is recorded as an asset with an indefinite economic life and is subject to an impairment test at least once a year. A permanent impairment of goodwill exists when the book value of a reporting unit exceeds its estimated fair value. All permanent impairments are recognized immediately through the income statement.
The recoverable amount of the assets of a cash-generating unit is the higher of its fair value less costs of sale and its value-in-use.
The impairment tests are based on enterprise value calculations for the relevant cash-generating units carried out using the discounted cash-flow method to determine the value-in-use.
All the goodwill has been allocated to the cash-generating units. The cash-generating units of the Group are the Group’s business divisions or the level below.
After the first-time adoption of IFRS, the Group carries out an impairment review at least once a year or as required.
The annual impairment review as at December 31, 2008 indicated a permanent impairment for the cash-generat- ing unit Public Finance/Treasury (PFT). The allocated goodwill of € 7 million was recognised as permanently impaired and was written down. As in the previous year, the impairment test of the other cash-generating units did not indicate any permanent impairment of goodwill.
The cash-generating unit Corporate Banking UK (CIB-I-UK) was allocated goodwill of € 34 million resulting from the acquisition of REIB London from Deutsche Bank in 2002.
The cash-generating unit Corporate Banking USA (CIB-I-US) was allocated goodwill of € 36 million resulting from the acquisition of REIB US from Dresdner Bank in 2003.
The cash-generating unit Corporate Banking Germany (CBG-Core) was allocated goodwill of € 58 million resulting from the acquisition of the Real Estate Finance division of Deutsche Bank in 2003.
The cash-flow projections are based on multi-year financial plans approved by the Board of Managing Directors,
prepared on the basis of the past performance of the individual cash-generating units and the expectations of the s t n
Board of Managing Directors with regard to market trends. e m e t a The basis for determining the value of the basic assumptions for the cash-generating units CBG-Core, CIB-I-UK t S l a and CIB-I-US is as follows: i c n a n i
Profitable new business within the Group’s refinancing capacity F
Risk-focused portfolio management and reduction of value-eroding portfolios t r o
Strict cost management p e R ’ s r
Today’s Eurohypo was formed in 2002 from the merger of three institutions: “old” Eurohypo, Deutsche Hyp and o t i d
Rheinhyp. To be able to provide a suitably long monitoring period, the planning for all cash-generating units was u extended to include an outline budget phase for the period 2012 to 2014. The growth rate in terminal value was A S assumed to be 1.5%. Segment-specific discount rates of between 11.7% and 16.2% were used. G f e i r b d n a f P 8 2 § e c n a l g a t A 110 Consolidated Financial Statements
The movements in non-current financial assets, at equity investments, investment property, intangible assets and tangible assets in financial year 2008 were as follows:
statement of changes in fixed assets and investments At equity investments Non-current financial assets (companies) Shares in non-consolidated At equity Participating affiliated investments in € million interests companies (joint ventures) Cost Balance as at 1.1.2008 16 7 20 Additions 0 – – Disposals 2 1 – Reclassifications/Changes in consolidated companies 0 0 – Adjustments due to currency translation 1 – – Balance as at 31.12.2008 15 6 20 Depreciation Balance as at 1.1.2008 1 3 – Unscheduled depreciation in financial year – – 1 Balance as at 31.12.2008 14 3 – Accumulated changes from fair value or at equity measurement – – –19 Book values Balance as at 31.12.2008 14 3 0 Previous year 15 4 1
statement of changes in fixed assets and investments
Investment property
in € million Rescue acquisitions Investment property Cost Balance as at 1.1.2008 109 1 Additions 15 – Disposals 11 –1 Reclassifications/Changes in consolidated companies 93 – Balance as at 31.12.2008 206 – Depreciation Balance as at 1.1.2008 –– Unscheduled depreciation in financial year – – Extraordinary amortization in financial year – – Write-ups in financial year – – Reclassifications/Changes in consolidated companies 0 – Disposals –– Balance as at 31.12.2008 0– Accumulated changes from fair value –8 – Book values Balance as at 31.12.2008 198 – Previous year 109 1 Consolidated Financial Statements >>> Notes 111
statement of changes in fixed assets and investments
Intangible assets
in € million Goodwill Purchased software Own software Cost Balance as at 1.1.2008 135 199 27 Additions – 3 4 Disposals – 1 – Reclassifications/Changes in consolidated companies – 3 – Balance as at 31.12.2008 135 204 31 Depreciation Balance as at 1.1.2008 0 192 9 Unscheduled depreciation in financial year – 2 4 Extraordinary amortization in financial year 7 – – Write-ups in financial year – – – Reclassifications/Changes in consolidated companies 0 3 – Disposals – – – Balance as at 31.12.2008 0 197 13 Accumulated changes from fair value – – – Book values s t
Balance as at 31.12.2008 128 7 18 n e
Previous year 135 6 18 m e t a t S l a i c n a n i
statement of changes in fixed assets and investments F t
Fixed assets r o p e R ’
Operating and office s r o t in € million Land and buildings equipment i d u
Cost A
Balance as at 1.1.2008 151 76 S G f e
Additions 15i r b
Disposals 111d n a f
Reclassifications/Changes in consolidated companies 40 8 P 8 Balance as at 31.12.2008 191 78 2 § Depreciation e c
Balance as at 1.1.2008 17 48 n a l g
Unscheduled depreciation in financial year 4 6 a t
Extraordinary amortization in financial year – – A Write-ups in financial year – – Reclassifications/Changes in consolidated companies 19 8 Disposals –10 Balance as at 31.12.2008 40 520 Accumulated changes from fair value – – Book values Balance as at 31.12.2008 151 26 Previous year 135 27 112 Consolidated Financial Statements
(54) tax assets Deferred tax assets represent the potential income tax relief arising from temporary differences between the carrying value of assets and liabilities under IFRS and the taxable values under the local tax regulations applicable to Group companies, and the future income tax relief arising from tax loss carryforwards. There was an increase in deferred tax assets in the reporting year due to the first-time consolidation of Hypothekenbank Essen.
in € million 31.12.2008 31.12.2007 Current tax assets 5974 in Germany 15 24 Abroad 44 50 Deferred tax claims 1,524 256 tax claims affecting net income 635 131 tax claims not affecting net income 889 125 Total 1,583 330
The tax loss carryforwards mainly relate to the New York branch of Eurohypo. We believe that the full value of deferred tax assets in respect of tax loss carryforwards of Eurohypo’s New York branch (€ 183 million) can be applied, despite the losses made in 2007 and 2008, as the losses are mainly the result of the financial market crisis that began in 2007. We have assumed that New York branch will start generating operating profits when the US economy recovers, enabling it to utilise the loss carryforwards within the budget period. No deferred tax assets were created in respect of corporation tax loss carryforwards of € 186 million and trade tax loss carryforwards of € 129 million, which relate mainly to Eurohypo Inlandsbank, for periods before the establishment of the Group’s fiscal unity.
in € million 2008 2007 Corporation tax/federal tax 795 206 Completly carryforward 602 206 Limited carryforward 193 – there of loss in subsequent period – – Trade tax/local tax 544 174 ability to carryforward – unlimited 544 174 ability to carryforward – limited –– there of loss in subsequent period – –
Deferred tax assets have been recognized in connection with the following items:
in € million 31.12.2008 31.12.2007 Fair values of derivative hedging instruments 6,477 1,819 Assets held for trading purposes and liabilities from trading activities 1 1 Claims on banks and customers 22 8 Financial investments 868 117 Provisions 39 38 Liabilities to banks and customers 264 1 Securitized liabilities 676 9 Sundry balance sheet items 91 61 Tax loss carry-forwards 242 45 Total 8,680 2,099
(55) other assets The other assets comprise the following:
in € million 2008 2007 Collection documents 487 434 Deferred items 16 22 Sundry other assets 13 4 Total 516 460 Consolidated Financial Statements >>> Notes 113
information concerning the balance sheet (liabilities) (56) liabilities to bank The breakdown of the liabilities to banks is as follows: in € million 2008 2007 Due on demand 528 1,113 Term liabilities Loans taken up 20,183 11,335 Registered Pfandbriefe 4,069 3,451 Other liabilities 60,628 48,428 Total 85,408 64,327
Germany 66,415 49,689 Abroad 18,993 14,638 Total 85,408 64,327
The liabilities to banks are categorized under liabilities measured at amortized cost.
(57) liabilities to customers The breakdown of liabilities to customers is as follows: in € million 2008 2007 Due on demand 545 1,666 Term liabilities Loans taken up 9,857 10,023 Registered Pfandbriefe 26,118 18,416 s Other liabilities 347 341 t n e
Total 36,867 30,446 m e t a t S l a
Germany 35,873 28,727 i c n
Abroad 994 1,719 a n i Total 36,867 30,446 F t r o p e
The liabilities to customers are categorized as liabilities measured at amortized cost. R ’ s r o t i
( ) d
58 securitized liabilities u A S
in € million 2008 2007 G f e i Bonds issued 133,285 98,633 r b d n
mortgage Pfandbriefe 35,715 29,584 a f P
public sector Pfandbriefe 86,103 51,018 8 2
Other bonds 11,467 18,031 §
Other securitized liabilities – – e c n a
Total 133,285 98,633 l g a t A The securitized liabilities are categorized under liabilities measured at amortized cost. 114 Consolidated Financial Statements
(59) negative fair values from derivative hedging instruments Derivative instruments that are used for hedging, have a negative fair value and are not held for trading are reported under this item. These financial instruments are measured at fair value.
in € million 2008 2007 Negative fair values from effective fair value hedges 13,991 5,659 Negative fair values from effective cash flow hedges 0 30 Total 13,991 5,689
(60) liabilities from trading activities Liabilities from trading activities comprise negative fair values from derivative financial instruments not used as hedges under hedge accounting.
in € million 2008 2007 Negative fair values from derivatives (not hedge accounting) Interest rate-related transactions 11,402 4,401 Currency-related transactions Cross-currency swaps 774 26 Currency futures transactions 78 26 Credit derivatives 548 71 Other derivatives 5 1 Total 12,807 4,525
(61) provisions Provisions break down as follows:
in € million 2008 2007 Provisions for pensions and similar obligations 0 276 Other provisions 296 242 Total 296 518
Provisions for pensions and similar obligations Pension obligations are calculated annually by independent actuaries using the projected unit credit method. The calculations are based on the following assumptions:
2008 2007 Calculatory interest rate 6.00% 5.50% Change in salaries 2.50% 2.50% Adjustment to pensions 1.60% 1.60% Expected return from plan assets 5.50% – Consolidated Financial Statements >>> Notes 115
These assumptions produced the following changes in pension obligations: in € million 2008 2007 2006 2005 2004 Pension obligations as at January 1 301 341 342 279 256 Allocation to provisions for pensions 21 27 23 19 19 Service cost 5 9 7 5 6 Interest cost 16 15 13 14 13 Amortisation of actuarial losses 0 3 3 – – Pension payments 15 15 14 14 13 Changes to the actuarial gains/losses –18 –42 –9 62 17 Other changes (currency movements, transfers, changes in list of consolidated companies, plan changes) –6 –10 –1 –4 – Pension obligations as at December 31 283 301 341 342 279 of which fully or partially financed plan assets 283 –––– of which not financed by plan assets – 301 341 342 279
Pension expenses in the reporting year totalled € 15 million (2007: € 27 million), of which € 11 million relates to allocations to pension provisions (2007: € 27 million). The amount of € 11 million represents the balance of € 21 million in allocations to pension provisions less the forecast income from plan assets of € 10 million.
The expected income from plan assets is based on long-term yields in the capital market at the balance sheet date for fixed-interest securities and on past market performance for other investments.
The changes in plan assets are as follows: in € million 2008 Fair value as at January 1 0 s t n
Allocation/withdrawal 269 e m e
Expected income from plan assets 10 t a t S
Difference between expected and current income from plan assets –11 l a i c
Changes in consolidated companies 3 n a n Fair value as at December 31 271 i F Current income from plan assets –1 t r o p e
In April 2008, Eurohypo AG outsourced its pension obligations, representing a total volume of € 269 million, into R ’ s r
a Contractual Trust Arrangement (CTA). The assets required to finance the pension obligations were transferred o t i d
to the legally independent trustee Commerzbank Pension-Trust e.V. (CPT). The trust assets held by CPT qualify as u A plan assets within the meaning of IAS19.7. In accordance with IAS19.54, the transferred assets are netted against S the pension provisions, which results in a corresponding reduction in the Group’s pension provisions. G f e i r b
As at the balance sheet date, there are no plans to increase the plan assets in 2009. d n a f P
Pension payments in 2009 are expected to be € 15 million. 8 2 § The plan assets break down as follows: e c n a l 2008 g a t
Liquid assets 8.5% A Equities 10.0% Fixed income securities 67.5% Investment funds 0.0% Other 14.0% 116 Consolidated Financial Statements
In the year under review, the changes in pension provisions were as follows:
in € million 2008 Balance as at 1.1.2008 276 Pension payments 15 Allocations 21 Changes in plan assets 279 Transfers/changes in consolidated companies –9 Balance as at 31.12.2008 –6
The following table shows how the pension obligations are covered:
in € million 2008 2007 2006 2005 2004 Pension entitlements 283 301 341 342 279 Fair value of plan assets 271 – – – – unrecorded actuarial gain/loss –18 –25 –67 –78 –16 Pension provisions (+)/surplus of plan assets (–) –6 276 274 264 263
The surplus of € –6 million in fair value attributable to plan assets is reported as an asset under other assets.
Statement of changes in other provisions:
Provisions Provisions Loan loss Loan loss for for Sundry provisions provisions personnel Restructuring litigation other in € million SLLP GLLP matters provisions risks provisions Total Balance as at 1.1.2008 15 38 13 119 10 47 242 Addition 64 14 4 5 22 7 116 Utilisation – – 3 27 3 10 43 Release 9 14 2 11 1 3 40 Reclassification –3 ––––––3 Changes in consolidation group – – –120– 625 Adjustments due to currency translation – –1 – – – – –1 Balance as at 31.12.2008 67 37 11 106 28 47 296
Provisions for personnel matters largely comprise anniversary provisions as well as provisions for obligations relating to age-related short-time working and early retirement, which are calculated using actuarial methods.
Restructuring provisions relate primarily to the integration of the former Hypothekenbank in Essen, the cost- cutting and efficiency project and the amalgamation of locations as well as merger-related restructuring expenses arising from the merger of the three predecessor institutions. The existing provisions cover future personnel obligations for early retirement and age-related short-time working arrangements as well as rental agreements.
Due to the passage of time, a further € 5 million was added to the restructuring provisions and charged to interest expenses.
The addition to provisions for litigation risks is partly due to revisions in estimates.
The additions to sundry other provisions mainly relate to claims by third parties in respect of interest received for tax rebates and advisory and audit costs. Consolidated Financial Statements >>> Notes 117
(62) income tax liabilities in € million 31.12.2008 31.12.2007 Current income-tax liabilities 120 101 Income-tax liabilities to tax authorities – – Provisions for income-tax 120 101 Deferred income-tax liabilities 5149 tax liabilities affecting net income 51 49 tax liabilities not affecting net income – – Total 171 150
Provisions for income taxes are potential tax liabilities where no legally binding tax assessment has yet been issued. Liabilities to tax authorities include obligations to pay current income tax to German and foreign tax authorities. Deferred tax liabilities are potential income tax charges arising from temporary differences between the carrying value of assets and liabilities under IFRS and the taxable values under the local tax regulations applicable to Group companies.
Deferred tax liabilities have been recognized in connection with the following items: in € million 31.12.2008 31.12.2007 Assets held for trading purposes and liabilities from trading activities – – Fair values of derivative hedging instruments 3,429 708 Financial investments 2,419 379 Claims on banks and customers 1,229 239 Liabilities to banks and customers 14 187 Securitized liabilities – 287 Sundry balance-sheet items 118 92 s t n
Total 7,209 1,892 e m e t a t S
(63) other liabilities l a i c
Other liabilities amounted to € 243 million (2007: € 269 million) and include deferred items of € 70 million (2007: n a n i
€ 27 million) and other liabilities of € 173 million (2007: € 242 million). F t r o
(64) subordinated liabilities p e R ’
Subordinated liabilities are own funds within the meaning of section 10 (5a) of the German Banking Act (KWG). s r o t In the event of insolvency proceedings on the assets of the bank or the liquidation of the bank, the subordinated i d u liabilities are not repayable until all non-subordinated creditors have been satisfied. There can be no obligation A
for early repayment on the part of the issuer S G f e i r b
in € million 2008 2007 d n a Bearer bonds 606 566 f P 8
Loans taken out 2,205 1,888 2 § Total 2,811 2,454 e c n a l Subordinated liabilities are measured at amortized cost. g a t A As at the balance sheet date there were no individual items which exceeded 10% of the total subordinated liabilities.
Interest expenses of € 143 million (2007: € 134 million) were incurred for subordinated liabilities. 118 Consolidated Financial Statements
in € million 2008 2007 Profit participation certificates 799 732 Total 799 732
List of main profit participation certificate issues:
profit participation certificates Nominal amount Date of Special Year of issue in € million Interest rate maturity Repayment conditions1) 19982) 57,776 5.700 – 6.660% 31.12.2008 30.06.2009
19992) 25,000 Euribor twelve-month 31.12.2008 01.09.2009 Call right on 31.12.2004 deposits plus 125 basis at the earliest points on 2nd working day prior to start of interest period 19992) 30,678 Euribor twelve-month 31.12.2009 30.11.2010 Call right on 31.12.2004 deposits plus 125 basis at the earliest points on 2nd working day prior to start of interest period 20002) 12,556 7.300% 31.12.2010 30.06.2011 20002) 200,000 Euribor twelve-month 31.12.2012 01.07.2013 deposits plus 150 basis points on 2nd working day prior to start of interest period 20012) 33,500 7.050 – 7.060% 31.12.2011 02.07.2012 20032) 1,000 6.620% 31.12.2012 01.07.2013 20032) 39,500 6.650 – 6.700% 31.12.2013 01.07.2014 2006 200,000 Euribor twelve-month 31.12.2016 01.07.2017 deposits plus 110 basis points on 2nd working day prior to start of interest period 2007 200,000 Euribor twelve-month 31.12.2017 01.07.2018 deposits plus 85 basis points on 2nd working day prior to start of interest period
1) The bank may call the profit participation certificates by giving at least 2 years’ notice at the end of any calendar year if a legal regulation is adopted, amended or applied in the Federal Republic of Germany such that the bank would incur a tax charge on the interest payment in the form of trade or corporation tax, or the profit participation capital can no longer be deducted as debt items for wealth tax purposes.
2) When the Eurohypo AG merger came into force, holders of participation certificates in the former Rheinhyp were granted participation rights of equal value with the same payment commitment to the holders, which are subordinate to all liabilities due to other creditors but rank equally with profit participation certificates already issued.
Interest payable on the profit participation certificates for financial year 2008 amounted to € 47 million (2007: € 38 million). € 49 million (2007: € 24 million) of pro-rata interest was reported under other liabilities.
The participation certificates grant a share in the profits which ranks ahead of the annual dividend distribution to the shareholders; they are subordinate to other creditors unless these too are subordinated. Subject to the provi- sions on participation in a loss, repayment takes place at the nominal amount.
Profit participation certificates are categorized under liabilities measured at amortized cost. Consolidated Financial Statements >>> Notes 119
authorization for the issue of profit participation certificates At the Annual General Meeting of May 19, 2003 the Board was authorized to issue profit participation certificates on one or more occasions up to a total of € 1,500,000,000 by May 17, 2008.
The profit participation certificates must comply with the conditions of section 10 (5) of the German Banking Act, according to which the capital obtained in return for the issue of profit participation rights can be allocated to the liable capital. The term of the participation rights can be up to fifteen years. When utilizing the authorization, the Board of Managing Directors can exclude residual amounts from shareholders’ subscription rights.
In addition, the Board of Managing Directors was authorized to exclude shareholders’ subscription rights for an amount totalling € 750,000,000. This authorization can only be used, however, if the profit participation certifi- cates are structured in the same way as bonds, i.e. they do not convey any rights of membership or subscription or conversion rights to shares, or grant participation in liquidation proceeds, and if the level of interest is not linked to the net income for the year, the distributable profit or the dividend.
In addition, the interest and amount issued for the profit participation certificates in this instance must corre- spond to current market conditions for comparable borrowings at the date of the issue. The Board of Managing Directors was authorized to determine the details and terms and conditions of the issues, particularly the time of issue, type, level and maturity of the distribution and repayment claim, the issue price and the term of the profit participation certificates.
If subscription rights are not excluded, issues of profit participation certificates will be underwritten by a consor- tium of banks, with the obligation to offer them to shareholders.
At the Annual General Meeting of August 30, 2008 the Board was authorized to issue profit participation certifi- cates on one or more occasions up to a total of € 700,010,000 by August 24, 2013.
The profit participation certificates must comply with the conditions in section 10 (5) of the German Banking Act, according to which the capital obtained in return for the issue of profit participation rights can be treated as s liable capital. The term of the participation rights can be up to fifteen years. When utilizing the authorization, the t n e
Board of Managing Directors can exclude residual amounts from shareholders’ subscription rights. m e t a t S
In addition, as a result of the merger of Hypothekenbank with Eurohypo and in accordance with section 23 of the l a i c
Reorganization of Companies Act (Umwandlungsgesetz) the Board of Managing Directors has been authorized to n a n i
issue up to € 200,009,954.85 of profit participation certificates, excluding shareholder subscription rights, to the F
holders of profit participation rights issued by Hypothekenbank in Essen AG. This authorization was used in full t r o in the year under review. p e R ’ s r
The Board of Managing Directors is authorized to determine the details and terms and conditions of the issues, o t i d
particularly the time of issue, type, level and maturity of the distribution and repayment claim, the issue price u and the term of the profit participation certificates. A S G f e i (65) hybrid capital r b d n a f P
in € million 2008 2007 8 2
Hybrid capital 900 900 §
Total 900 900 e c n a l g a
Eurohypo AG issued hybrid capital with a nominal amount of € 600 million in 2003 at an interest rate of 6.445% t A via Eurohypo Capital Funding LLC I, Delaware USA and Eurohypo Capital Funding Trust I, Delaware USA. There is a call option as at May 23, 2013.
In 2005, a further € 300 million of hybrid capital was issued via Eurohypo Capital Funding LLC II, Delaware, USA and Eurohypo Capital Funding Trust II, Delaware, USA, at an interest rate of 6.75%. There is an annual call option, the first being on March 8, 2011.
Interest expenses of € 52 million (2007: € 53 million) were incurred for the hybrid capital.
Hybrid capital is categorized under liabilities measured at amortized cost. 120 Consolidated Financial Statements
(66) equity structure Composition of capital and reserves
in € million 31.12.2008 31.12.2007 Subscribed capital 914 914 Capital reserve 3,992 3,992 Retained earnings 1,194 1,037 Revaluation reserve –2,036 –365 Reserve for cash flow hedges –47 0 Reserve for currency translation 4–2 Distributable profit/loss 00 Minority interests 1–4 Total 4,022 5,572
Subscribed capital The subscribed capital of Eurohypo AG as at December 31, 2008 was € 913,688,919.00, divided into 351,418,815 no-par-value-shares. The shares are fully paid up.
No. in thousands Number of outstanding shares as at 31.12.2008 351,419 Number of shares issued as at 31.12.2008 351,419 Less: treasury shares on reporting date – Number of outstanding shares as at 31.12.2008 351,419
The value of the shares issued, outstanding and approved is as follows:
31.12.2008 31.12.2007 € million No. in thousands € million No. in thousands Issued shares 914 351,419 914 351,419 Outstanding shares (subscribed capital) 914 351,419 914 351,419 Plus: shares not yet issued from authorized capital 183 70,280 183 70,280 Total 1,097 421,699 1,097 421,699
The resolution passed at the Annual General Meeting on August 29, 2007 to transfer the shares owned by out- standing minority shareholders in Eurohypo AG to Commerzbank Inlandsbanken Holding GmbH, Frankfurt am Main (the majority shareholder) was entered in the Commercial Register of the company on July 25, 2008 and has thus taken effect.
Following the entry into force of the transfer resolution, the shares owned by minority holders now only repre- sent an entitlement to an appropriate cash settlement. According to the resolution of the General Meeting held on August 29, 2007 this amounts to € 24.32 per bearer share, of which € 2.60 represents a proportional amount of the share capital of the company.
Commerzbank Inlandsbanken Holding GmbH, Frankfurt am Main holds 100% of the shares and is thus the sole owner of our Bank. The financial statements of the Eurohypo AG sub-group are consolidated in the financial statements of Commerzbank Group, which are drawn up under IFRS. The Commerzbank consolidated financial statements are published in the electronic Federal Gazette.
On August 29, 2007 the AGM of Eurohypo AG approved the control and profit transfer agreement between Com- merzbank Inlandsbanken Holding GmbH and Eurohypo AG. This took effect upon registration in the Commercial Register on September 4, 2007. For the term of this agreement, Eurohypo AG is obliged to transfer its profits to its shareholder; in turn, the latter is obliged to cover any losses made by Eurohypo AG. Consolidated Financial Statements >>> Notes 121
Capital reserve The capital reserve shows the premium from the issue of shares including subscription rights in excess of the nominal or arithmetical value.
Retained earnings The retained earnings comprise statutory reserves and other revenue reserves.
The statutory reserves amounted to € 4 million as at December 31, 2008 (2007: € 4 million) and are subject to a restriction on distribution. Other revenue reserves of € 1,190 million (2007: € 1,033 million) include reinvested consolidated profit including accumulated amounts from consolidation effects recognized through profit or loss as well as the effects of first-time adoption of IFRS from the conversion date of January 1, 2003.
As at December 31, 2008 the Group had not issued any convertible bonds or bonds with warrants. There is therefore no requirement to split financial instruments into equity and debt components.
Revaluation reserve The revaluation reserve as at December 31, 2008 includes unrealized gains and losses on the revaluation of available-for-sale financial instruments amounting to € –2,939 million (2007: € –531 million).
Deferred taxes of € 903 million arising on revaluation are included in this figure (2007: € 166 million).
Reserve for cash flow hedges Changes in fair value of the effective portion of hedges amounting to € –68 million were recognized for cash flow hedges (2007: zero).
This includes deferred taxes arising on the hedges of € 21 million (2007: zero).
Reserve for currency translation s The reserve for currency translation comprises the translation gains and losses arising on consolidation. t n e m e t a (67) authorized capital t S l a On May 17, 2004, the General Meeting authorized the bank to increase the share capital of the bank in one amount i c n a
or several smaller amounts by May 16, 2009, subject to the approval of the Supervisory Board, by a total of up to n i € 182,728,000.00 by issuing new no-par value bearer shares against cash or non-cash contributions. The Board F t r
of Managing Directors was authorized to exclude shareholders’ subscription rights with the approval of the Super- o p e
visory Board, provided that the capital increase takes place on the basis of contributions in kind for the purpose R ’ s r
of the acquisition of companies, company divisions or units, or participating interests in companies. If sharehold- o t i d
ers’ subscription rights are not excluded, they must be granted by placing the new shares with a consortium of u banks subject to the obligation to offer them to shareholders. In addition, the Board of Managing Directors was A S authorized to exclude share fractions from shareholders’ subscription rights, with the approval of the Supervisory G f e i r
Board. b d n a f
The Board of Managing Directors did not make use of the authorization to increase capital during the reporting P 8 period. 2 § e c n a l g a t A 122 Consolidated Financial Statements
(68) foreign-currency positions As at December 31, 2008 the Group reported the following assets and liabilities (excluding fair values from derivatives) in foreign currencies:
31.12.2008 31.12.2007 in € million USD CHF GBP JPY Other Total Total Cash reserve – – 1 – 0 1 2 Assets held for trading purposes 180 – – – – 180 263 Claims on banks 78 879 118 409 21 1,505 1,917 Provisions for loan losses 6,707 4,422 7,681 774 922 20,506 17,932 Risk provisions –26 –52 –27 –1 – –106 –21 Financial assets 16,866 302 1,768 1,956 1,189 22,081 14,212 Other assets 303 – 37 2 2 344 236 Total assets in foreign currencies 24,108 5,551 9,578 3,140 2,134 44,511 34,541 Liabilities to banks 8,213 1,829 4,290 2,211 803 17,346 9,271 Liabilities to customers 56 9 40 4 90 199 191 Securitized liabilities 10,419 3,227 1,666 508 668 16,488 14,193 Other liabilities –164 5 –56 –27 –3 –245 –160 Total liabilities in foreign currencies 18,524 5,070 5,940 2,696 1,558 33,788 23,495
Incoming and outgoing payments were made in these currencies in financial year 2008.
The open balance sheet positions are matched by forward currency transactions or currency swaps with similar maturities.
information concerning financial instruments (69) derivatives The tables below show Eurohypo Group’s transactions in derivatives as at the balance sheet date.
A derivative is a financial instrument whose value depends on the value of an underlying asset. This may be, for example, an interest rate, an exchange rate or the price of a bond or equity.
Most of the derivative transactions involve OTC derivatives, where the nominal amount, maturity and price are negotiated each time between the bank and its counterparties. However, the bank also enters into derivatives transactions on regulated exchanges. These involve standardized contracts with standardized nominal amounts and delivery dates.
The amount traded by the bank is the nominal amount. The positive and negative market values shown in the tables represent the cost to the bank or the counterparty of replacing the contract originally entered into with economically equivalent transactions. A positive market value is the bank’s maximum potential counterparty- related default risk from derivative transactions as at the balance sheet date.
In order to minimise both the economic and regulatory credit risk from these instruments, our Legal department enters into bilateral master netting agreements with our business partners, such as the 1992 ISDA Master Agree- ment (Multicurrency Cross Border) and the German Master Agreement for Financial Futures Transactions. These bilateral netting agreements allow us to offset the positive and negative market values of the derivative contracts covered and reduce regulatory risk add-ons for future risks of these products. The netting process reduces the credit risk to a single net claim on the contract partner (close-out netting).
Both for regulatory reporting and internal measurement and monitoring of our credit commitment, we only use such risk-reduction techniques where we believe they are enforceable in the relevant jurisdiction in the event of the insolvency of the business partner.
In the same way as with master agreements, we enter into collateral agreements such as the Credit Support Annex for Financial Futures Transactions with our business partners in order to protect the net claim or liability after netting by posting or receiving collateral. Consolidated Financial Statements >>> Notes 123
The following table shows the nominal amounts and market values of derivatives transactions broken down by contracts based on interest rates, currencies and other price risks, and also the maturity structure of these trans- actions. The market values stated are the sum of positive and negative amounts per contract with no reduction for collateral or any netting agreements which may be in place, as these are not product-based. Where options have been sold, there is by definition no positive market value. The nominal amount is the gross volume of all purchases and sales. The maturity breakdown given is based on remaining maturities, taking the term of the con- tract rather than the underlying asset. breakdown by term
Notional amount/term Fair value Fair value Over Total Total Positive Negative Positive Negative in € million Up to 1 year 1–5 years 5 years 31.12.2008 31.12.2007 31.12.2008 31.12.2008 31.12.2007 31.12.2007 Foreign-currency-based forward transactions OTC-Products Foreign-exchange spot and forward contracts 8,540 60 4 8,604 10,991 769 78 224 26 Interest-rate and currency swaps 687 4,936 6,545 12,168 3,530 867 1,124 318 108 Total 9,227 4,996 6,549 20,772 14,521 1,636 1,202 542 134 Interest-based forward transactions OTC-Products Forward-rate Agreements 35,100 – – 35,100 11,342 7 – – – Interest-rate swaps 130,464 264,479 197,429 592,372 399,699 15,802 24,695 6,151 9,776 Call options on s t
interest-rate futures 37 151 428 616 963 14 – 11 – n e m
Put options on e t a t
interest-rate futures 292 1,013 1,112 2,417 2,360 – 223 – 122 S l a i
Other interest-rate contracts 1,908 9,484 3,150 14,542 14,036 71 124 81 111 c n a n
Products traded on a i F stock exchange t r
Interest-rate futures – – – – 3 – – – – o p e
Total 167,801 275,127 202,119 645,047 428,403 15,894 25,042 6,243 10,009 R ’ s r
Other forward transactions o t i d
OTC-Products u A Credit derivatives 923 – 1,756 2,679 3,913 4 548 2 71 S G
Equity call options 7––712–5–1f e i r
Total 930 – 1,756 2,686 3,925 4 553 2 72 b d n a f P
Total immatured 8 2 forward transactions § e
OTC-Products 177,958 280,123 210,424 668,505 446,846 17,534 26,797 6,787 10,215 c n a l
Products traded on a g a stock exchange – – – –––––3t A Total 177,958 280,123 210,424 668,505 446,849 17,534 26,797 6,787 10,215
The table below shows the positive and negative market values of the derivative transactions of Eurohypo Group broken down by counterparty. The majority of the derivatives business of Commerzbank Group is carried out with counterparties of impeccable credit standing. The overwhelming majority of market value is concentrated in counterparties located in OECD states.
derivatives breakdown Notional Notional Fair value Fair value Positive Negative Positive Negative 31.12.2008 31.12.2007 31.12.2008 31.12.2008 31.12.2007 31.12.2007 OECD banks 623,868 408,310 15,618 26,711 6,529 9,724 Other companies, private individuals 44,637 38,539 1,916 86 258 491 Total 668,505 446,849 17,534 26,797 6,787 10,215 124 Consolidated Financial Statements
(70) use of financial derivatives The table below shows how we use financial derivatives. Derivatives are used for hedging. Our accounting policies describe the following criteria.
Fair value Fair value Positive Negative Positive Negative 31.12.2008 31.12.2008 31.12.2007 31.12.2007 Hedging derivatives that cannot be used for hedge accounting 12,438 12,807 4,483 4,525 Derivatives used as hedging instruments for fair value hedge accounting 5,096 13,991 2,303 5,660 for cash flow hedge accounting 1 30 Total 17,534 26,797 6,787 10,215
(71) cash flow hedges At December 31, 2008 there was one interest rate swap with a notional value of € 25 million which is used to hedge future payment flows subject to the cash flow hedge accounting rules. This hedges future interest pay- ments of € 0.6 million on a floating-rate loan that falls due in the second quarter of 2009.
The change in the fair value of hedging instruments recognized in the reserve for cash flow hedges in equity was € 0.2 million (2007: € 7 million). This included deferred taxes of € 0.1 million (2007: € –3 million), which were also recognized in the reserve for cash flow hedges in equity.
A further change relates to the cash flow reserve arising from the merger with the former Hypothekenbank in Essen. This reserve is being released on a scheduled basis as the underlying transactions mature. As at Decem- ber 31, 2008 the reserve amounted to € –46.8 million, after deferred taxes of € 20.9 million.
(72) market price risks Market risk means the danger of sustaining losses due to changes in market parameters. During the financial year methodological and organizational changes were implemented relating primarily to the calculation of value at risk (VaR).
The concentration of default risks is described in the risk report.
(73) interest rate risks Interest rate risk is taken to mean the risk of loss arising when the benchmark yield curve changes. Eurohypo uses the swap curve of the relevant currency as the benchmark yield curve.
Interest rate risk is calculated every day using net present value methodology and applying delta (a measure of sensitivity to moves in interest rates). In order to ascertain these indicators, the net present values of all assets and liabilities on the balance sheet and of all derivatives are calculated. The interest rates on the underlying benchmark yield curve are then raised by one basis point in certain maturity ranges. The delta for a specific maturity band is the cash equivalent loss – or gain – incurred if the benchmark yield curve rises.
(74) credit spread risks Since January 2008 we calculate a credit spread value at risk in addition to the interest rate risk for the securities holdings both within and outside our cover pool.
In both cases the measure used to quantify these risks is value at risk (VaR). VaR quantifies risk as a negative deviation from the current value of all financial transactions carried out by the bank. It is calculated daily on the basis of a historical simulation.
A confidence level of 97.5% is used throughout the Group. The holding period is set at one day. To limit the market risks, VaR is capped at € 185 million. As at the balance sheet date, VaR amounted to € 219.1 million. This figure includes interest rate risk of € 11.1 million (2007: € 1 million). The sharp rise in VaR is mainly due to the integration of the former Hypothekenbank in Essen and to the credit spread risks in PF. For the time being the VaR and stress limits for PF have not been increased owing to the rise in market volatility, and a temporary limit excess will be tolerated until March 2009. Consolidated Financial Statements >>> Notes 125
(75) currency risks Currency risk is the risk of incurring losses due to exchange rate movements. This risk is determined by means of net exposure summaries, in compliance with the provisions of the German Banking Act (KWG). This risk is restricted by means of a volume restriction which sets a limit on the net level of open foreign-currency positions. The utilization rate of the limit at the year-end was 67% (2007: 24%).
(76) information in accordance with ifrs 7.31–42 We have provided further information on the nature and scale of risks arising from financial instruments in the risk report.
(77) information on management of capital We refer to the risk report with respect to information on capital management.
(78) fair value of financial instruments For the cash reserve, fair value is taken as the nominal amount.
There is frequently no market price available for claims on banks, so fair value is determined using valuation models. A major part of claims on banks has an original term to maturity of less than one year. In these cases fair value is taken for reasons of simplicity as being equal to carrying value.
It is also frequently not possible to use market prices to determine the fair value of claims on customers, so again valuation methods are applied. Generally, the net present value method is used. This involves determining the fair value of the contractual cash flow of an instrument by applying a discount factor that includes both the risk- free rate and the individual credit spread of the claims. Where no market data on credit spreads is available, these are calculated using internal ratings and allowing for any collateral that may be held, with the result that an indi- vidual spread is used for each transaction. The discount factor is also adjusted by adding a flat rate premium to reflect the costs of liquidity, administration and risk capital. s t n
Fair value of hedging instruments (both assets and liabilities) is calculated using net present value or option pric- e m e ing models. Observations of relevant market data as at the balance sheet date are taken as the input parameters t a t S for these models. l a i c n a
Fair value for derivatives included under assets and liabilities held for trading are also calculated using net pres- n i ent value and option pricing models, taking the relevant market data as observed on the balance sheet date. In F t r
the case of non-derivative financial instruments, fair value is normally taken to be the market price. Where there o p e
are no market prices, the instrument is valued on the basis of standard market procedures, applying market R ’ s r
parameters specific to each instrument. Net present value is the main method used. o t i d u
Fair value of financial assets is also determined by means of market prices. Where these are not available, the A
net present value method is applied. For reasons of simplicity, holdings in partnerships and unlisted companies S G f e
where no reliable valuation can be performed are recognized at carrying value. i r b d n
Fair value of liabilities to customers and banks is determined using net present value, as market prices are gen- a f P
erally not available. As with claims on banks, liabilities to banks frequently also have an original term to maturity 8 2 of less than one year and so for reasons of simplicity fair value is taken as being equivalent to carrying value. § e c
In some cases, market prices are available for securitized liabilities, and these are used to determine fair value. n a l Where there no market prices, net present value is used. g a t A Fair value of subordinated and hybrid capital uses market prices as far as possible. If these are not available, valuation models are applied.
For financial instruments carried at amortized cost, fair value is in some cases determined using valuation models with input parameters that are based on the company’s internal estimates. 126 Consolidated Financial Statements
However, where the balance sheet contains fair values calculated using valuation models, these are based solely on parameters observable in the market.
Fair Value Book value Fair Value Book value in € billion 31.12.2008 31.12.2008 31.12.2007 31.12.2007 Assets Cash reserve 0.0 0.0 0.1 0.1 Claims on banks 31.3 31.3 21.1 21.0 Claims on customers 152.7 152.6 131.5 131.2 Assets held for trading purposes 12.6 12.6 4.8 4.8 Positive fair values attributable to derivative hedging instruments 5.1 5.1 2.3 2.3 Financial assets 89.3 89.7 55.8 55.8 Liabilities Liabilities to banks 84.2 85.4 64.3 64.3 Liabilities to customers 36.3 36.9 30.3 30.5 Securitized liabilities 132.8 133.3 99.0 98.6 Negative fair values attributable to derivative hedging instruments 14.0 14.0 5.7 5.7 Liabilities from trading activities 12.8 12.8 4.5 4.5 Subordinated capital 3.3 3.6 3.1 3.2 Hybrid capital 0.3 0.9 0.8 0.9
The net total difference between carrying value and market value (fair value) across all items was € 2.9 billion as at December 31, 2008 (2007: zero).
(79) assets assigned as collateral Assets were assigned at the values indicated below as collateral for the following liabilities:
in € million 31.12.2008 31.12.2007 Liabilities to banks 36,558 33,738 Securitized liabilities – 432 Total 36,558 34,170
The following assets have been assigned as collateral for the abovementioned liabilities:
in € million 31.12.2008 31.12.2007 Claims on banks 533 2,239 Claims on customers 200 – Financial assets 39,009 31,162 Total 39,742 33,401
The collateral was provided for funds raised under repo transactions. The transactions were carried out under standard conditions for securities repurchase transactions. In addition, a pledge was granted on a € 200 million portfolio of loans. Consolidated Financial Statements >>> Notes 127
(80) maturity breakdown according to residual terms The residual term is the length of time between the balance sheet date and the date of contractual maturity of the claim or liability. For claims and liabilities due in instalments, the residual term for each individual tranche is shown.
2008 Term Term Due on demand up to 3 3 months – 1 year – Term in € million and unlimited months 1 year 5 years over 5 years Claims on banks 12,219 2,415 3,901 6,052 6,696 Claims on customers 6,992 17,747 12,837 63,746 51,282 Bonds and other fixed-income securities (financial assets) and promissory notes from assets held for trading purposes – 4,315 2,430 22,359 60,601 Total 2008 19,211 24,477 19,168 92,157 118,579 Liabilities to banks 528 56,360 7,991 16,238 4,291 Liabilities to customers 545 1,863 2,822 10,666 20,971 Securitized liabilities – 12,158 23,195 78,433 19,499 Subordinated capital – 209 105 1,672 1,624 Hybrid capital – – – – 900 Total 2008 1,073 70,590 34,113 107,009 47,285
2007 Term Term Due on demand up to 3 3 months – 1 year – Term in € million and unlimited months 1 year 5 years over 5 years s t n
Claims on banks 3,021 8,018 2,853 5,656 1,486 e m e
Claims on customers 6,211 16,324 14,469 50,429 43,809 t a t S
Bonds and other l a i fixed-income securities c n a n (financial assets) and i F promissory notes from assets t r o
held for trading purposes – 2,659 2,715 14,819 35,608 p e R
Total 2007 9,232 27,001 20,037 70,904 80,903 ’ s r o t
Liabilities to banks 1,113 45,188 5,187 9,872 2,967 i d u
Liabilities to customers 1,666 1,641 2,104 10,557 14,478 A Securitized liabilities – 8,882 16,043 53,733 19,975 S G f
Subordinated capital – 57 173 1,005 1,951 e i r b
Hybrid capital – –––900 d n a Total 2007 2,779 55,768 23,507 75,167 40,271 f P 8 2 § e c n a l g a t A 128 Consolidated Financial Statements
other information (81) repo and reverse repo transactions, cash collateral Eurohypo Group enters into repo transactions by selling securities with an obligation to buy them back and buying securities with an obligation to sell them back. The consideration received under repos where Eurohypo Group is the repo seller (and thus obliged to buy securities back) is recognized as a liability to banks or cus- tomers.
In securities lending transactions, counterparty credit risk can be avoided by lodging collateral, for example in the form of cash. Where collateral is given for a lending transaction this is known as ‘cash collateral out’; where collateral is received it is known as ‘cash collateral in.’
Repo and cash collateral transactions outstanding at the balance sheet date broke down as follows:
in € million 31.12.2008 31.12.2007 Repo transactions as repo seller (Repo-Agreements) Liabilities to banks 36,558 32,953 Cash collateral in Liabilities to banks 17 321 Total 36,575 33,274 Repo transactions as repo buyer (Reverse-Repo-Agreements) Claims on banks 535 1,460 Cash collateral out Claims on banks 8,700 2,788 Total 9,235 4,248
(82) subordinated assets In the event of the bankruptcy or liquidation of the issuer, subordinated assets rank after the claims of all other creditors.
in € million 31.12.2008 31.12.2007 Claims on banks 105 103 Claims on customers 11 – Total 116 103
(83) off-balance sheet obligations
in € million 31.12.2008 31.12.2007 Liabilities under indemnities and guarantees 1,371 1,010 of which: credit guarantees 387 332 of which: other guarantees 984 678 of which: letters of credit –– Other contingent liabilities –– Other obligations Irrevocable credit commitments 10,777 14,758 of which: book credits 1,474 1,990 of which: mortgage loans/public finance 8,761 12,768 Sundry obligations 542 – Total 12,148 15,768
For reasons of practicality we have not disclosed the information required by IAS 37.86 and IAS 37.89. Consolidated Financial Statements >>> Notes 129
(84) trust transactions Trust transactions amounted to the following on the balance sheet date: in € million 31.12.2008 31.12.2007 Claims on customers 77 88 Trust assets 77 88 of which liabilities to banks 12 14 of which liabilities to customers 65 74 Trust liabilities 77 88
(85) employees (average)
2008 2007 Average for the year Female Male Total Female Male Total Full time 643 1,071 1,714 697 1,116 1,813 Part time 194 25 219 175 22 197 Trainees 2 6 8 4 6 10 School leavers 9 11 20 7 13 20 Total 848 1,113 1,961 883 1,157 2,040
(86) details of material transactions with related parties Eurohypo AG is an indirect subsidiary of Commerzbank AG, Frankfurt. Various service and price agreements have been concluded with Commerzbank AG on the basis of a master agreement from 2006 governing the mutual pro- vision of services.
Eurohypo carried out both secured and unsecured money market transactions with Commerzbank AG during the AG reporting period. Eurohypo bearer securities and promissory notes were sold to Commerzbank in the capital s t n markets. All transactions in derivatives with the exception of asset swap packages are carried out with Commerz- e m e bank AG. These transactions are conducted at standard market terms and conditions. t a t S l a The following table shows the claims on and liabilities to related companies and key staff. For these purposes it i c n a
is immaterial whether a company is included in the Eurohypo consolidated financial statements as a subsidiary n i or associate company. F t r o p in € million 2008 2007 e R ’ s Claims on banks 8,547 6,645 r o t i
Parent company 7,651 5,852 d u Subsidiary 896 793 A S
Joint venture –– G f e i Claims on customers 1,920 665 r b d n
Parent company 1,537 396 a f P
Subsidiary 305 240 8 2
Associated companies 32 29 §
Other related parties 42 42 e c n a
Key management personnel 41 l g a
Positive fair values attributable to derivative hedging instruments 2,399 990 t A Parent company 2,399 990 Subsidiary –– Joint venture –– Trading assets 7,473 2,926 Parent company 7,473 2,926 Subsidiary –– Joint venture –– Financial assets – – Parent company – – Subsidiary –– Joint venture – – Total claims 20,339 11,226 130 Consolidated Financial Statements
in € million 2008 2007 Liabilities to banks 61,724 37,232 Parent company 61,719 37,228 Subsidiary 54 Joint venture –– Liabilities to customers 1,242 141 Parent company – 114 Subsidiary 11 13 Other related parties 1,231 14 Securitized liabilities 7,556 1,718 Parent company 7,541 1,703 Subsidiary 15 15 Joint venture –– Negative fair values attributable to derivative hedging instruments 4,964 2,220 Parent company 4,964 2,220 Subsidiary –– Joint venture –– Trading liabilities 6,564 1,389 Parent company 6,564 1,389 Subsidiary – – Joint venture –– Other liabilities 1,055 – Parent company 1,055 – Subsidiary –– Joint venture –– Subordinated liabilities 1,039 1,042 Parent company 37 Subsidiary 1,036 1,035 Joint venture –– Hybrid capital – – Parent company –– Subsidiary –– Joint venture –– Total liabilities 84,144 43,742
As in 2007, there were no provisions for doubtful claims on subsidiaries. Consolidated Financial Statements >>> Notes 131
remuneration of the board of managing directors and the supervisory board of eurohypo ag board of managing directors Salaries of the members of the Board of Managing Directors amounted to € 3,475,000 (2007: € 3,462,000). This includes payments related to the departure of one member of the Board and payments to members of the Board under the LFI 2004 staff remuneration plan of € 1,136,000 (2007: € 120,000). A provision had been made in pre- vious years for the payment under the LFI 2004. Payments to previous members of the Board and their surviving dependents came to € 5,476,000 (2007: € 5,465,000). Pension provisions of € 54,092,000 (2007: € 52,277,000) have been made for previous members of the Board and their surviving dependents.
Members of the Board of Managing Directors of Eurohypo AG have been eligible to participate in the Commerz- bank Long Term Performance Plan (LTP) since 2006. Overall the members of the Board of Managing Directors have contributed 48,450 shares to the plan; the fair value per share on the day of the grant was between € 31.58 and € 34.91. Fair value per unit is between € 0.00 and € 8.87. The members of the Board of Managing Directors are also entitled to 31,969 shares in total under the Eurohypo LFI 2005 long-term incentive plan. Fair value of the entitlements is € 4,000.
Salaries of the members of the Supervisory Board amounted to € 214,000 (2007: € 383,000). loans granted to members of management bodies No loans have been granted to members of the Board of Managing Directors.
Loans have been granted to members of the Supervisory Board, including employee representatives, totalling € 2,664,000, with terms ending between 2022 and 2032 and at nominal interest rates of between 3.95% and 5.5%. All loans are secured on land charges.
(87) staff remuneration plans LFI LFI
Senior managers at Eurohypo have their own long-term incentive plan, 2005. No new s have been set up s t n since 2006. Instead, since that date the members of the Board of Managing Directors have been eligible to parti- e m e cipate in the Commerzbank AG Long-term Performance Plan (LTP); since 2007 this has been open to all senior t a t S managers at Eurohypo. Under the LFI, staff are entitled to acquire shares in Eurohypo once a certain target level l a i c of pre-tax return on equity is hit. If this target is exceeded or missed, the number of shares which may be acqui- n a n i
red is increased or diminished by 25% per percentage point of outperformance or underperformance. The num- F
ber of shares which may be acquired is based on the average stock exchange price in the year 2003. In 2006, t r o vested entitlements to shares in Eurohypo were converted 1:1 into entitlements to shares in Commerzbank AG. p e R ’
In June 2008 the LFI 2004 was settled by paying € 2 million to qualifying staff. This was based on the Commerz- s r o t bank share price of € 23.52 at the end of the Annual General Meeting of Commerzbank AG in May 2008. The ear- i d u liest date for paying out the LFI 2005 will be the end of the Annual General Meeting of Commerzbank AG which A
votes on the appropriation of earnings for the financial year 2008. Whether the LFI 2005 will be paid out in cash S G f e
or shares is at the discretion of Eurohypo. i r b d n
Every year long-term performance plans (LTPs) are set up for senior managers and selected other staff of Com- a f P
merzbank Group. The LTPs for the years 2006 to 2008 are still in place and permit remuneration based on the per- 8 2 formance of the shares and the index. Participation is open to employees of Commerzbank AG, various domestic § subsidiaries and selected non-German operating units. e c n a l In order to participate in the LTP, those entitled must invest their own money in Commerzbank shares. The size g a t of this investment varies between 100 and 1,200 shares, depending on the participant’s position. Payment from A the LTP is contingent on reaching at least one of the following milestones:
For 50% of the shares purchased with the participant’s own money, the performance of Commerzbank shares has to exceed that of the Dow Jones Euro Stoxx® Banks index. Outperformance of at least 1 percentage point is rewarded with € 10, and each additional percentage point of outperformance attracts an additional € 10 per share, up to a maximum of € 100 per share. For the other 50% of the shares purchased with the participant’s own money, Commerzbank shares must rise in absolute terms. A price increase of 25% or more is rewarded with € 10, and each additional 3 percentage points attracts an additional € 10 per share, up to a maximum of € 100 per share. 132 Consolidated Financial Statements
Participants may receive a maximum of € 100 per share, paid out in cash. Payment from the LTP is also contingent on a dividend for the financial year being distributed by Commerzbank Aktiengesellschaft.
The base value of the performance comparison index and of Commerzbank shares is set at the end of March each year a plan is issued.
The base price of Commerzbank shares is the average daily closing price on Xetra in the first quarter of the year of issue, adjusted for any capital changes. The base value for the index is the average daily closing price of the Dow Jones Euro Stoxx Banks Index (price only) in the first quarter of the year of issue.
After three years the base values of the year of issue are compared with the data from the first quarter of the reporting year to determine if the Dow Jones Euro Stoxx Banks Index has been outperformed by at least 1% and if the Commerzbank share price has risen by at least 25% from the base value.
If the exercise criteria have not been met after three years the comparison is repeated annually. The base data remain those of the year of issue. If neither of the milestones has been met after five years, the plan is terminated. Members of the Board of Managing Directors will reinvest a minimum of 50% of the gross amount paid out in Commerzbank shares.
accounting treatment The staff remuneration plans just described are treated in accordance with IFRS 2 Share-based Payments. This draws a distinction between remuneration plans settled with equity instruments and those settled in cash. In both cases, where share-based payments are made these must be recognised at fair value in the financial state- ments for the year. The majority of the remuneration plans described are regarded as cash-settled, and treated accordingly.
Share-based payments settled in cash That part of the fair value of share-based payments settled in cash that relates to work performed before the measurement date is recognised as a staff expense and a matching provision created. Fair value is determined anew on each reporting date, up to and including the day payment is made. All changes in the fair value of the liability must be taken to income. Hence, on the day payment is made the size of the provision should be equal to the payment to the beneficiaries.
Measurement models We have appointed external actuaries to determine the fair value of the staff remuneration plans in place at Euro- hypo. They are measured using either a Monte Carlo method or a binomial method.
A Monte Carlo model is used to simulate changes which would boost future share prices in order to value the awards granted under LTPs. The model is based on the assumption that stock returns are statistically normally distributed around a mean corresponding to a risk-free deposit. Consolidated Financial Statements >>> Notes 133
(88) securitization of loans Securitization is an important core element of our equity and risk management. The aim is to reduce the bank’s risk-weighted assets, free up the capital base and create scope for new business with higher margins and there- by achieve a higher return on equity. Through securitization, we sell claims in the form of loan portfolios on the capital market. The assets assigned are securitized by the special purpose vehicles acquiring the loans and sold to third parties.
(89) other obligations The Eurohypo Group is a lessee under operating leases. As at December 31, 2008 a variety of non-terminable operating leases were in place for properties and other fixed assets (vehicles, photocopiers) which are used to carry out the bank’s operating activities. The main leases include extension options and exit clauses, which are in line with market conditions for business properties and which link adjustments in the lease payments to the price index. The minimum obligations under non-terminable leases for properties and other fixed assets will lead to expenses of € 23 million in financial year 2009, € 58 million for financial years 2010 to 2013 and € 38 million for the period from 2014 onwards.
(90) date of release for publication The present consolidated financial statements were approved for submission to the Supervisory Board by the Board of Managing Directors on March 6, 2009. The Supervisory Board has to examine the consolidated financial statements and declare its approval or otherwise. The Board of Managing Directors approved the preliminary figures of the financial statements for publication on February 18, 2009.
(91) letters of comfort We have given undertakings that, except in the event of political risks, the following companies will perform their contractual obligations:
Grundbesitzgesellschaft Berlin Rungestraße 22–24 mbH, Essen s t n
Rosaria Grundstücksvermietungs GmbH & Co. Objekt Cap Kiel, Düsseldorf e m e t a t S l a i c n a n i F t r o p e R ’ s r o t i d u A S G f e i r b d n a f P 8 2 § e c n a l g a t A 134 Consolidated Financial Statements
SUPERVISORY BOARD MANDATES mandates pursuant to section 340 a paragraph 4 no. 1 of the german commercial code (hgb) in supervisory bodies to be established under law of large corporations (section 267 paragraph 3 hgb)
Mandates in other Supervisory Membership of comparable Boards (of German companies) German and international to be established under law supervisory bodies of com- Name, Profession mercial companies
Dr Stefan Schmittmann Commerz Real AG, Düsseldorf/Wiesbaden* KG Allgemeine Leasing GmbH/Co., Frankfurt am Main (Chairman) Grünwald since November 13, 2008 (Chairman of the Administrative Board) Chairman Commerz Real Investmentgesellschaft mbH., since January 14, 2009 Member of the Board Wiesbaden*, (Chairman) Kunzmann GmbH & Co. KG, Aschaffenburg of Managing Directors since November 13, 2008 Deutsche Schiffsbank AG, Hamburg/Bremen*, of Commerzbank AG (Chairman) since november 11, 2008 since November 28, 2008 Dresdner Bank AG, Frankfurt am Main*, since January 19, 2009 Schaltbau Holding AG, München, Verlagsgruppe Weltbild GmbH, Augsburg
Klaus-Peter Müller Linde AG, München Assicurazioni Generali S.p.A., Triest Frankfurt am Main Steigenberger Hotels AG, Frankfurt am Main Kreditanstalt für Wiederaufbau, Fresenius AG, Bad Homburg Frankfurt am Main Chairman since May 21, 2008 Liquiditäts-Konsortialbank GmbH, Speaker of the Board Fraport AG, Frankfurt am Main Frankfurt am Main of Commerzbank AG since May 28, 2008 Parker Hannifin Corporation, Cleveland, Ohio until november 11, 2008 Commerzbank International S.A., Luxembourg* until April 9, 2008
Klaus Müller-Gebel comdirect bank AG, Quickborn – Bad Soden (Deputy Chairman) Commerzbank AG, Frankfurt am Main Deputy Chairman Deutsche Schiffsbank AG, Bremen/Hamburg Lawyer
Ingo Felka – – Maintal Bank employee
Wolfgang Hartmann Hypothekenbank in Essen AG, Essen* – Kelkheim until August 18, 2008 Member of the Board of Managing Directors of Commerzbank AG
Eva-Maria Jäger – – Schmitten/Taunus Bankangestellte
Michael Reuther Hypothekenbank in Essen AG, Essen Commerzbank Capital Markets Corp., New Bad Nauheim (Chairman)* York, Member of the Board of Directors* until August 18, 2008 Erste Europäische Pfandbrief- und Kommu- Member of the Board nalkreditbank AG, Luxembourg, Chairman of Managing Directors of the Administrative Board* of Commerzbank AG
* Internal Group mandate Consolidated Financial Statements >>> Supervisory Board Mandates / Management Board Mandates 135
MANAGEMENT BOARD MANDATES mandates pursuant to section 340 a paragraph 4 no. 1 of the german commercial code (hgb) in supervisory bodies to be established under law of large corporations (section 267 paragraph 3 hgb)
Mandates in other Supervisory Membership of comparable Boards (of German companies) German and international to be established under law supervisory bodies of com- Name, Profession mercial companies
Dr Frank Pörschke – – Chairman since october 1, 2008
Bernd Knobloch Commerz Real-Investmentgesellschaft mbH, Eurohypo Investment Banking Ltd., London1) Chairman Wiesbaden (Chairman)2) (Member of the Board of Directors) until November 12, 2008 Palatium Investment Management Ltd., until september 30, 2008 Commerz Real AG, Eschborn (Chairman) London3) (Member of the Board of Directors) until November 12, 2008
Thomas Köntgen Commerz Real AG, Eschborn 3) EUROHYPO Europäische since january 1, 2008 since May 26, 2008 Hypothekenbank S.A., Luxembourg, Commerz Real Investmentgesellschaft mbH, (Member of the Administrative Board)1) Wiesbaden (Deputy Chairman)2) since January 1, 2008 since May 26, 2008 EH Estate Management GmbH, Eschborn, (Member of the Supervisory Board)4) since January 1, 2008 KENSTONE GmbH, Eschborn (Member of the Board of Advisors) 1) since January 1, 2008 CORECD Commerz Real Estate Consulting und Development mbH, Berlin s
(Chairman of the Supervisory Board) t n until November 17, 2008 e m e t a t S
Joachim Plesser – HypZert Gesellschaft zur Zertifizierung von l a i Immobiliensachverständigen für Beleihungs- c n a
wertermittlungen GmbH, Berlin n i (Member of the Supervisory Board) F
EH Estate Management GmbH, Eschborn, t r
4) o
(Member of the Supervisory Board) p e
CORECD Commerz Real Estate Consulting R ’ s
und Development GmbH, Berlin r o t (Member of the Supervisory Board) i d u
until November 17, 2008 A S G f
Henning Rasche – EUROHYPO Europäische e i r until december 31, 2008 Hypothekenbank S.A., Luxembourg b d 1) (Chairman of the Administrative Board) n a f
until November 26, 2008 P 8 2 §
Ralf Woitschig – EUROHYPO Europäische e c since november 11, 2008 Hypothekenbank S.A., Luxembourg n a
1) l
(Chairman of the Administrative Board) g
since November 26, 2008 a t A
Martin Zielke comdirect bank AG, Quickborn BRE Bank SA, Warsaw until june 30, 2008 since May 9, 2008 since March 14, 2008 Commerzbank Auslandsbanken Holding Nova GmbH, Frankfurt am Main (Deputy Chairman) since March 18, 2008 Eurohypo Systems GmbH 1) (Deputy Chairman of the Board of Advisors) until October 31, 2008
1) Internal Group mandate 2) formerly CommerzLeasing und Immobilien AG, Düsseldorf 3) formerly Eurohypo Asset Management Ltd., London 4) formerly CASIA Immobilien-Management GmbH, Eschborn 136 Consolidated Financial Statements
STAFF MANDATES mandates pursuant to section 340 a paragraph 4 no. 1 of the german commercial code (hgb) in supervisory bodies to be established under law of large corporations (section 267 paragraph 3 hgb)
Mandates in other Supervisory Membership of comparable Boards (of German companies) German and international to be established under law supervisory bodies of com- Name, Profession mercial companies
Rupert Hackl Ratgeber AG, München Alba BAUPROJEKT MANAGEMENT GmbH, Bürgerliches Brauhaus Immobilien Oberhaching Ingolstadt (BBI) AG
Dr Peter Otto – VBW Bauen und Wohnen GmbH, Bochum
Ralf Pechter Pentasys AG, München –
Christian Schaarschmidt Agaplesion gemeinnützige AG, – Frankfurt am Main
Dirk Schuster EH Estate Management GmbH, Eschborn* Servicing Advisors Deutschland GmbH, until December 31, 2008 Frankfurt am Main Corecd Commerz Real Estate Consulting GmbH, Berlin until November 17, 2008
Peter Steinmetz – Conjekt AG, München
Theo Weyandt – MOMENI Projektentwicklung GmbH, Hamburg
* Internal Group mandate ** Mandate in large corporations pursuant to Section 340a Paragraph 4 No.1 HGB Consolidated Financial Statements >>> Staff Mandates / Management Bodies 137
MANAGEMENT BODIES
supervisory board board of managing directors
Dr Stefan Schmittmann1) Dr Frank Pörschke Chairman Chairman since november 11, 2008 since october 1, 2008
Klaus-Peter Müller Bernd Knobloch Chairman Chairman until november 11, 2008 until september 30, 2008
Klaus Müller-Gebel Thomas Köntgen Deputy Chairman
Ingo Felka2) Joachim Plesser s t n e m e t a t S l a i
Wolfgang Hartmann Henning Rasche c n a
until december 31, 2008 n i F t r o p e R ’ s r o
2) t i
Eva-Maria Jäger Ralf Woitschig d u
since november 11, 2008 A S G f e i r b d n a f P
Michael Reuther Martin Zielke 8 2 until june 30, 2008 § e c n a l g a t A
1) Appointed further to the Annual General Meeting on 11 November 2008 2) Employee representative 138 Consolidated Financial Statements
LIST OF AFFILIATED COMPANIES, PARTICIPATING INTERESTS AND SPECIAL PURPOSE VEHICLES
Eurohypo Capital Funding Trust I WESTBODEN-Bau- und fully consolidated Delaware, USA Verwaltungsgesellschaft mbH companies 65760 Eschborn Eurohypo Capital Funding Trust II AGV Allgemeine Grundstücks- Delaware, USA Westend Grundstücksgesellschaft verwaltungs- und Verwertungs- mbH Eurohypo (Japan) Corporation gesellschaft mbH 65760 Eschborn Tokyo, Japan 65760 Eschborn KENSTONE GmbH Eurohypo Representacoes Ltd. GVG Gesellschaft zur Verwertung 65760 Eschborn Sao Paulo, Brasilien von Grundbesitz mbH G-G-B Gebäude- und Grundbesitz 65760 Eschborn Frankfurter Gesellschaft GmbH für Vermögensanlagen IVV Immobilien-Verwaltungs- und 65760 Eschborn mit beschränkter Haftung Verwertungsgesellschaft mbH 65760 Eschborn gr Grundstücks GmbH Objekt 65760 Eschborn Corvus & Co. Sossenheim KG FHB Immobilienprojekte GmbH BACUL Immobilien- 65929 Frankfurt am Main 65760 Eschborn gesellschaft mbH gr Grundstücks GmbH Objekt 65760 Eschborn FI Pro-City GmbH Corvus 65760 Eschborn EH Estate Management GmbH 60489 Frankfurt am Main 65760 Eschborn GBG Grundbesitzgesellschaft Berlin Verwaltungs- und Verwertungs- Forum Immobiliengesellschaft Rungestrasse 22-24 mbH gesellschaft für Grundbesitz mbH mbH 45127 Essen 65760 Eschborn 65760 Eschborn Property Invest GmbH Messestadt Riem Futura Hochhausprojekt- 65760 Eschborn »Office am See I« GmbH gesellschaft mbH 60760 Eschborn TARA Immobilienprojekte GmbH 65760 Eschborn 65760 Eschborn Messestadt Riem Unica Immobiliengesellschaft »Office am See II« GmbH Wohnbau-Beteiligungsgesellschaft mbH 65760 Eschborn mbH 65760 Eschborn 65760 Eschborn Messestadt Riem EHY Real Estate Fund I LLC »Office am See III« GmbH New York, USA 65760 Eschborn EHY Sub Assett LLC, Nordboden Immobilien- und fully consolidated Delaware, USA Handelsgesellschaft mbH special purpose vehicles EUROHYPO Europäische 65760 Eschborn and funds further Hypothekenbank S.A. to ias 27/sic 12 SB Bauträger GmbH & Co. 1736 Luxembourg-Senningerberg Urbis Hochhaus KG Semper Finance 2007-1 GmbH Eurohypo Capital Funding LLC I 60329 Frankfurt am Main Frankfurt am Main Delaware, USA SB Bauträger GmbH & Co. Semper Finance 2006-1 Ltd. Eurohypo Capital Funding LLC II Urbis Verwaltungs KG Jersey JE1 OBD, Channel Islands Delaware, USA 60329 Frankfurt am Main
SB-Bauträger Gesellschaft mit beschränkter Haftung 65760 Eschborn Consolidated Financial Statements >>> List of Affiliated Companies, Participating Interests and Special purpose vehicles 139
associated companies non-consolidated non-consolidated valued at equity companies special purpose vehicles
Delphi I LLC Eurohypo Investment Banking Opera Germany (No.1) GmbH Delaware, USA Limited Frankfurt am Main London EC2N 2DB, Großbritannien Servicing Advisors Deutschland Opera Germany (No.2) p.l.c. GmbH Dublin, Irland Proudreed Investment Fund S.a.r.l. 60323 Frankfurt am Main Paris, Frankreich Opera Germany (No.3) Urbanitas Grundbesitz- Frankfurt am Main Fonds d’Investissements gesellschaft mbH Proudreed SCI Opera France One FCC 10785 Berlin Paris, Frankreich Paris, Frankreich
Eurohypo Nominees 1 Opera White Tower France FCC Limited Paris, Frankreich associated companies London, Großbritannien not valued at equity BELUS Vermietungsgesellschaft mbH Ampton B .V. participating interests 40215 Düsseldorf Amsterdam, Niederlande Cap Kiel Betriebs GmbH, Apollo Real Estate Parallel 121 KHS Limited Kiel Fund V-B-L.P. London, Großbritannien USA Delphi I Eurohypo LLC s BONUS Vermietungsgesellschaft t n
Delaware, USA BATOR Vermietungsgesellschaft e mbH m e mbH t a 40215 Düsseldorf TARA Immobiliengesellschaft mbH t S
40215 Düsseldorf l a 65760 Eschborn i c
Delphi Immobilien I GmbH n BATOR a
Vermietungsgesellschaft n i
Frankfurt am Main TARA Immobilien-Besitz GmbH F mbH Objekt Nürnberg KG
65760 Eschborn t r
Delphi Immobilien II GmbH 40215 Düsseldorf o p e
Frankfurt am Main TARA Immobilien-Verwaltungs- R ’
Bürgschaftsgemeinschaft s r
GmbH o t Delphi Immobilien III GmbH Hamburg GmbH i d
65760 Eschborn u
Frankfurt am Main 22305 Hamburg A
TARA Property-Management GmbH S
Delphi Immobilien IV GmbH Börse Düsseldorf AG G f e
65760 Eschborn i Frankfurt am Main 40215 Düsseldorf r b d n
Newincco 308 Limited a f
MARIUS Grundstücks- CETERA Vermietungsgesellschaft P
London, Großbritannien 8 Vermietungsgesellschaft mbH & Co. Objekt Weinheim KG 2 § mbH & Co. Objekt Hannover KG 40227 Düsseldorf e c
40227 Düsseldorf n a CHRISTA Grundstücks- l g a
Registra Securita Trust GmbH Vermietungsgesellschaft t A 60329 Frankfurt am Main mbH & Co. Objekt Rottweil KG 40215 Düsseldorf Rosaria Grundstücksvermietungs GmbH & Co. Objekt Cap Kiel KG 40215 Düsseldorf 140 Consolidated Financial Statements
Dr Gubelt Grundstücks- LECTIO Grundstücks-Vermietungs- Real Estate Top Tegel Zwei GmbH Vermietungsgesellschaft gesellschaft mbH & Co. Objekt 65760 Eschborn mbH & Co. Objekt Dortmund KG Essen KG Real Estate Top Tegel Drei GmbH 40227 Düsseldorf 40227 Düsseldorf 65760 Eschborn Dr Gubelt Grundstücks- Liquiditäts-Konsortialbank GmbH Real Estate Top Tegel Vier GmbH Vermietungsgesellschaft 60311 Frankfurt 65760 Eschborn mbH & Co. Objekt Duisburg KG MAECENA Grundstücks- 40227 Düsseldorf Real Estate Top Tegel Sechs Vermietungsgesellschaft GmbH Dr Gubelt Grundstücks- mbH & Co. Objekt Bremen KG 65760 Eschborn Vermietungsgesellschaft 40215 Düsseldorf mbH & Co. Objekt Stuttgart KG SARIO Grundstücks- MAECENA Grundstücks- 40227 Düsseldorf Vermietungsgesellschaft Vermietungsgesellschaft mbH & Co. Objekt Nürnberg KG GAG Gemeinnützige Aktien- mbH & Co. Objekt Dortmund KG 40215 Düsseldorf gesellschaft für Wohnungs-, 40227 Düsseldorf Gewerbe- und Städtebau Ski Leasing No. 1 MANICA Grundstücks- 67061 Ludwigshafen am Rhein London, Großbritannien Vermietungsgesellschaft GEWOBA Aktiengesellschaft mbH & Co. Objekt Neustraubing KG Ski Leasing No. 2 Wohnen und Bauen 40227 Düsseldorf London, Großbritannien 28195 Bremen Merino Grundstücks- Joparny S.L. Goldmann Sachs RE Partners LP Verwaltungsgesellschaft Spanien New York, USA mbH & Co. KG SOREX Grundstücks- 82031 Grünwald Vermietungsgesellschaft Inter IKEA Center Grundbesitz MIDAS Grundstücks- mbH & Co. Objekt Hamburg KG GmbH & Cie. KG Vermietungsgesellschaft 40215 Düsseldorf 80333 München mbH & Co. Objekt Langenhagen KG TABA Grundstücks- ILLIT Grundstücks-Verwaltungs- 40227 Düsseldorf Vermietungsgesellschaft gesellschaft mbH & Co. KG MINERVA Grundstücks- mbH & Co. Objekt München KG 82031 Grünwald Vermietungsgesellschaft 40215 Düsseldorf Interessengemeinschaft mbH & Co. Objekt Radolfzell KG True Sale International GmbH Frankfurter Kreditinstitute GmbH 40215 Düsseldorf 60329 Frankfurt am Main 60311 Frankfurt am Main NESTOR Grundstücks- TSI Services GmbH Kingswood Unit Trust Vermietungsgesellschaft 60329 Frankfurt am Main Jersey mbH & Co. Objekt Landau KG 40227 Düsseldorf VBW Bauen und Wohnen GmbH Korona Grundstücks-Verwaltungs- 44803 Bochum gesellschaft mbH & Co. KG Nossia Grundstücks- 82031 Grünwald Verwaltungsgesellschaft ZEPAS Beteiligungs GmbH & Co. mbH & Co. KG Vermietungs-KG 82031 Grünwald 80538 München
Real Estate Top Tegel Eins GmbH 65760 Eschborn
The list of the participations pursuant to the section 313 (2) HGB has been lodged with the electronic commercial register of the Municipal Court of Frankfurt am Main (HRB 45701). The key subsidiaries are included in this list. Consolidated Financial Statements >>> Responsibility Statement by the Management Board 141
responsibility statement by the management board To the best of our knowledge, and in accordance with the applicable reporting principles, the consolidated finan- cial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group, and the management report of the Group includes a fair review of the development and performance of the busi- ness and the position of the Group, together with a description of the principal opportunities and risks associated with the expected development of the Group for the remaining months of the financial year.
Eschborn, March 6, 2009
Eurohypo Aktiengesellschaft The Board of Managing Directors
Dr Frank Pörschke Thomas Köntgen s t n e m e t a t S l a i c n a
Joachim Plesser Ralf Woitschig n i F t r o p e R ’ s r o t i d u A S G f e i r b d n a f P 8 2 § e c n a l g a t A 142 Auditors’ Report
AUDITORS’ REPORT 1)
We have audited the consolidated financial statements prepared by the Eurohypo Aktiengesellschaft, Eschborn, comprising the balance sheet, the income statement, statement of changes in equity, cash flow statement and the notes to the consolidated financial statements, together with the group management report for the business year from 1. January to 31. December 2008. The preparation of the consolidated financial statements and the group management report in accordance with the IFRSs, as adopted by the EU, and/or the additional requirements of German commercial law pursuant to § (Article) 315a Abs. (paragraph) 1 HGB (“Handelsgesetzbuch”: German Commercial Code) is the responsibility of the parent Company’s Board of Managing Directors. Our responsibility is to express an opinion on the consolidated financial statements and on the group management report based on our audit.
We conducted our audit of the consolidated financial statements in accordance with § 317 HGB and German gen- erally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer (Institute of Public Auditors in Germany) (IDW). Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation of the net assets, financial position and results of opera- tions in the consolidated financial statements in accordance with the applicable financial reporting framework and in the group management report are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the Group and expectations as to possible misstatements are taken into account in the determination of audit procedures. The effectiveness of the accounting-related internal control system and the evidence supporting the disclosures in the consolidated financial statements and the group man- agement report are examined primarily on a test basis within the framework of the audit. The audit includes assessing the annual financial statements of those entities included in consolidation, the determination of the entities to be included in consolidation, the accounting and consolidation principles used and significant estimates made by the Company´s Board of Managing Directors, as well as evaluating the overall presentation of the con- solidated financial statements and the group management report. We believe that our audit provides a reasonable basis for our opinion.
Our audit has not led to any reservations.
In our opinion based on the findings of our audit the consolidated financial statements comply with the IFRSs as adopted by the EU, and the additional requirements of German commercial law pursuant to § 315 a Abs.1 HGB and give a true and fair view of the net assets, financial position and results of operations of the Group in accordance with these requirements. The group management report is consistent with the consolidated financial statements and as a whole provides a suitable view of the Group’s position and suitably presents the opportunities and risks of future development.
Frankfurt am Main, March 6, 2009
PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft
sign. Lothar Schreiber sign. Clemens Koch Wirtschaftsprüfer Wirtschaftsprüfer (German Public Auditor) (German Public Auditor)
1) Translation of the auditors’ report issued in German languange on the consolidated financial statements prepared in German language by the management of Eurohypo Aktiengesellschaft, Eschborn. Information under Section 28 of the Pfandbrief Act 143
INFORMATION UNDER SECTION 28 OF THE PFANDBRIEF ACT
pfandbrief act section 28 (1) no. 1
Net present value of risks Nominal value Net present value dynamic procedure in € million 31.12.2008 31.12.2007 31.12.2008 31.12.2007 31.12.2008 31.12.2007 Hypothekenpfandbriefe Outstanding 46,477 38,915 48,531 39,024 50,117 37,938 Cover pool 51,814 43,618 55,096 44,950 55,902 43,706 – Cover assets 50,781 41,981 54,005 43,287 54,766 42,083 – Further cover assets according to Section 19 No.1 PfandBG 1,033 1,637 1,091 1,663 1,136 1,623 Surplus cover 5,337 4,703 6,565 5,926 5,785 5,768
Öffentliche Pfandbriefe Outstanding 85,206 47,119 88,902 47,972 84,922 46,553 Cover pool 89,090 49,590 97,081 51,905 90,628 50,201 – cover assets according to Section 20 No.1 PfandBG 84,901 49,540 92,554 51,855 86,437 50,151 – cover assets according to Section 20 No. 2 PfandBG 4,189 50 4,527 50 4,191 50 Surplus cover 3,884 2,471 8,179 3,933 5,706 3,648
pfandbrief act section 28 (1) no. 2
Hypothekenpfandbriefe Öffentliche Pfandbriefe s t in € million 31.12.2008 31.12.2007 31.12.2008 31.12.2007 n e m e
Maturity structure of outstanding Pfandbriefe: t a t
Term ≤ 1 year 6,781 7,408 24,046 10,157 S l a i
Term > 1 year ≤ 5 years 30,469 24,446 43,115 23,518 c n a n
Term > 5 years ≤ 10 years 8,053 6,526 8,423 7,463 i F Term > 10 years 1,174 535 9,622 5,981 t r Total result 46,477 38,915 85,206 47,119 o p e R ’ s r o t Cover pool Cover pool i d u
Hypothekenpfandbriefe Öffentliche Pfandbriefe A in € million 31.12.2008 31.12.2007 31.12.2008 31.12.2007 S G f
Fixed rate terms for cover pools: e i r b
Term ≤ 1 year 22,806 17,738 37,197 19,411 d n a Term > 1 year ≤ 5 years 17,068 15,020 26,996 17,787 f P 8
Term > 5 years ≤ 10 years 10,313 9,172 10,972 5,985 2 § Term > 10 years 1,627 1,688 13,925 6,407 e c
Total result 51,814 43,618 89,090 49,590 n a l g a t A pfandbrief act section 28 (1) no.3
As at December 31, 2008, there are no derivatives in the cover pool. 144 Information under Section 28 of the Pfandbrief Act
pfandbrief act section 28 (2) no.1
claims used as cover for hypothekenpfandbriefe by volume in € million 31.12.2008 31.12.2007 Cover mortgages Up to and including € 300,000 17,867 14,822 Over € 300,000 up to and including € 5 million 9,352 9,655 Over € 5 million 23,562 17,504 Total 50,781 41,981
claims used as cover for hypothekenpfandbriefe by region in which mortgaged real estate is based and type of use
germany Cover assets 31.12.2008 Cover assets 31.12.2007 in € million Commercial Residential Commercial Residential Flats – 4,054 – 3,458 Single family homes – 11,473 – 8,880 Multi-dwellings – 8,548 – 8,311 Office buildings 6,147 – 5,881 – Retail buildings 5,238 – 4,128 – Industrial buildings 1,586 – 1,584 – Other commercially used real estate 1,699 – 1,430 – Unfinished new buildings not yet generating income 244 108 119 80 Building sites 33 51 15 16 Country total 14,947 24,234 13,157 20,745
austria Cover assets 31.12.2008 Cover assets 31.12.2007 in € million Commercial Residential Commercial Residential Flats –––– Single family homes – – – – Multi-dwellings – – – – Office buildings 171 – 119 – Retail buildings 123 – 124 – Industrial buildings – – – – Other commercially used real estate 15 – 50 – Unfinished new buildings not yet generating income – – – – Building sites – – – – Country total 309 – 293 –
belgium Cover assets 31.12.2008 Cover assets 31.12.2007 in € million Commercial Residential Commercial Residential Flats –––– Single family homes – – – – Multi-dwellings – 1 – 1 Office buildings 47 – 40 – Retail buildings 46 – 61 – Industrial buildings – – – – Other commercially used real estate 5 – 5 – Unfinished new buildings not yet generating income – – – – Building sites – – – – Country total 98 1 106 1 Information under Section 28 of the Pfandbrief Act 145
czech republic Cover assets 31.12.2008 Cover assets 31.12.2007 in € million Commercial Residential Commercial Residential Flats –––– Single family homes – – – – Multi-dwellings – – – – Office buildings 120 – 57 – Retail buildings 114 – 57 – Industrial buildings – – – – Other commercially used real estate 24 – – – Unfinished new buildings not yet generating income – – – – Building sites – – – – Country total 258 – 114 –
denmark Cover assets 31.12.2008 Cover assets 31.12.2007 in € million Commercial Residential Commercial Residential Flats –––– Single family homes – – – – Multi-dwellings – – – – Office buildings 8 – 8 – Retail buildings 2 – 2 – Industrial buildings 18 – 18 – Other commercially used real estate – – – – Unfinished new buildings not yet generating income – – – – Building sites – – – –
Country total 28 – 28 – s t n e m e t a t S finland Cover assets 31.12.2008 Cover assets 31.12.2007 l a i c in € million Commercial Residential Commercial Residential n a n i
Flats – – – – F
Single family homes – – – – t r o
Multi-dwellings – – – – p e R ’
Office buildings 101 – 103 – s r o t Retail buildings 43 – 30 – i d u
Industrial buildings 27 – 10 – A
Other commercially used real estate – ––– S G f e
Unfinished new buildings not yet generating income – – – – i r b
Building sites – – – – d n a f
Country total 171 – 143 – P 8 2 § e c france Cover assets 31.12.2008 Cover assets 31.12.2007 n a l g
in € million Commercial Residential Commercial Residential a t
Flats – – – – A Single family homes – – – – Multi-dwellings – 1 – 1 Office buildings 984 – 664 – Retail buildings 356 – 48 – Industrial buildings 131 – 80 – Other commercially used real estate 47 – 49 – Unfinished new buildings not yet generating income 39 – 6 – Building sites – – – – Country total 1,557 1 847 1 146 Information under Section 28 of the Pfandbrief Act
hungary Cover assets 31.12.2008 Cover assets 31.12.2007 in € million Commercial Residential Commercial Residential Flats –––– Single family homes – – – – Multi-dwellings – – – – Office buildings 190 – 66 – Retail buildings 80 – 62 – Industrial buildings 7 – 7 – Other commercially used real estate 33 – 5 – Unfinished new buildings not yet generating income 14 – – – Building sites – – – – Country total 324 – 140 –
iceland Cover assets 31.12.2008 Cover assets 31.12.2007 in € million Commercial Residential Commercial Residential Flats –––– Single family homes – – – – Multi-dwellings – – – – Office buildings 27 –9– Retail buildings 43 – 43 – Industrial buildings – – – – Other commercially used real estate – ––– Unfinished new buildings not yet generating income – – – – Building sites – – – – Country total 70 – 52 –
ireland Cover assets 31.12.2008 Cover assets 31.12.2007 in € million Commercial Residential Commercial Residential Flats – – – – Single family homes –––– Multi-dwellings –––– Office buildings – – 61 – Retail buildings 61 – – – Industrial buildings – – – – Other commercially used real estate – ––– Unfinished new buildings not yet generating income – – – – Building sites – – – – Country total 61 – 61 –
italy Cover assets 31.12.2008 Cover assets 31.12.2007 in € million Commercial Residential Commercial Residential Flats – – – – Single family homes – – – – Multi-dwellings – – – – Office buildings 439 – 448 – Retail buildings 432 – 348 – Industrial buildings 30 – 30 – Other commercially used real estate 78 – 56 – Unfinished new buildings not yet generating income – – – – Building sites – – – – Country total 979 – 882 – Information under Section 28 of the Pfandbrief Act 147
lithuania Cover assets 31.12.2008 Cover assets 31.12.2007 in € million Commercial Residential Commercial Residential Flats –––– Single family homes – – – – Multi-dwellings – – – – Office buildings – – – – Retail buildings 42 – 42 – Industrial buildings – – – – Other commercially used real estate – – – – Unfinished new buildings not yet generating income – – – – Building sites – – – – Country total 42 – 42 –
luxembourg Cover assets 31.12.2008 Cover assets 31.12.2007 in € million Commercial Residential Commercial Residential Flats –––– Single family homes – – – – Multi-dwellings – – – – Office buildings 198 – 189 – Retail buildings – – –– Industrial buildings – – – – Other commercially used real estate – ––– Unfinished new buildings not yet generating income – – – – Building sites – – – –
Country total 198 – 189 – s t n e m e t a t S netherlands Cover assets 31.12.2008 Cover assets 31.12.2007 l a i c in € million Commercial Residential Commercial Residential n a n i
Flats –––– F
Single family homes – – – – t r o
Multi-dwellings – – – – p e R ’
Office buildings 519 – 304 – s r o t Retail buildings 28 – 24 – i d u
Industrial buildings 71 – 54 – A
Other commercially used real estate 176 – 45 – S G f e
Unfinished new buildings not yet generating income – – – – i r b
Building sites – – – – d n a f
Country total 794 – 427 – P 8 2 § e c norway Cover assets 31.12.2008 Cover assets 31.12.2007 n a l g
in € million Commercial Residential Commercial Residential a t
Flats –––– A Single family homes – – – – Multi-dwellings – – – – Office buildings – – –– Retail buildings – – 36 – Industrial buildings – – – – Other commercially used real estate – – – – Unfinished new buildings not yet generating income – – – – Building sites – – – – Country total – –36– 148 Information under Section 28 of the Pfandbrief Act
poland Cover assets 31.12.2008 Cover assets 31.12.2007 in € million Commercial Residential Commercial Residential Flats –––– Single family homes – – – – Multi-dwellings – – – – Office buildings 108 – 19 – Retail buildings 571 – 338 – Industrial buildings – – – – Other commercially used real estate – – – – Unfinished new buildings not yet generating income – – – – Building sites – – – – Country total 679 – 357 –
portugal Cover assets 31.12.2008 Cover assets 31.12.2007 in € million Commercial Residential Commercial Residential Flats –––– Single family homes – – – – Multi-dwellings – – – – Office buildings 484 – 331 – Retail buildings 1,081 – 771 – Industrial buildings 5 – 4 – Other commercially used real estate 35 –30– Unfinished new buildings not yet generating income – – – – Building sites 3 – – – Country total 1,608 – 1,136 –
romania Cover assets 31.12.2008 Cover assets 31.12.2007 in € million Commercial Residential Commercial Residential Flats – – – – Single family homes – – – – Multi-dwellings – – – – Office buildings – – – – Retail buildings – – – – Industrial buildings 9 – – – Other commercially used real estate – ––– Unfinished new buildings not yet generating income – – – – Building sites – – – – Country total 9 – – –
slovakia Cover assets 31.12.2008 Cover assets 31.12.2007 in € million Commercial Residential Commercial Residential Flats – – – – Single family homes – – – – Multi-dwellings – – – – Office buildings 19 – – – Retail buildings 12 – 12 – Industrial buildings 49 – 12 – Other commercially used real estate – – – – Unfinished new buildings not yet generating income – – – – Building sites – – – – Country total 80 – 24 – Information under Section 28 of the Pfandbrief Act 149
spain Cover assets 31.12.2008 Cover assets 31.12.2007 in € million Commercial Residential Commercial Residential Flats –––– Single family homes – – – – Multi-dwellings – – – – Office buildings 858 – 597 – Retail buildings 645 – 515 – Industrial buildings 2 – 5 – Other commercially used real estate 258 – 230 – Unfinished new buildings not yet generating income 12 – – – Building sites 63 – – – Country total 1,838 – 1,347 –
sweden Cover assets 31.12.2008 Cover assets 31.12.2007 in € million Commercial Residential Commercial Residential Flats –––– Single family homes – – – – Multi-dwellings – 32 – 38 Office buildings 98 – 146 – Retail buildings 14 – 23 – Industrial buildings 22 – 14 – Other commercially used real estate – ––– Unfinished new buildings not yet generating income – – – – Building sites – – – –
Country total 134 32 183 38 s t n e m e t a t S switzerland Cover assets 31.12.2008 Cover assets 31.12.2007 l a i c in € million Commercial Residential Commercial Residential n a n i
Flats –––– F
Single family homes – – – – t r o
Multi-dwellings – 2 – 12 p e R ’
Office buildings 266 – 143 – s r o t Retail buildings 51 – 45 – i d u
Industrial buildings 21 – 19 – A
Other commercially used real estate 165 – 86 – S G f e
Unfinished new buildings not yet generating income – – – – i r b
Building sites – – – – d n a f
Country total 503 2 293 12 P 8 2 § e c uk Cover assets 31.12.2008 Cover assets 31.12.2007 n a l g
in € million Commercial Residential Commercial Residential a t
Flats – – – – A Single family homes – – – – Multi-dwellings – 50 – 14 Office buildings 794 – 480 – Retail buildings 258 – 318 – Industrial buildings 296 – 238 – Other commercially used real estate 108 – 200 – Unfinished new buildings not yet generating income 129 – 65 – Building sites – – 12 – Country total 1,585 50 1,313 14 150 Information under Section 28 of the Pfandbrief Act
usa Cover assets 31.12.2008 Cover assets 31.12.2007 in € million Commercial Residential Commercial Residential Flats –––– Single family homes – – – – Multi-dwellings – – – – Office buildings 189 – – – Retail buildings – – – – Industrial buildings – – – – Other commercially used real estate – – – – Unfinished new buildings not yet generating income – – – – Building sites – – – – Country total 189 – – –
totals Cover assets 31.12.2008 Cover assets 31.12.2007 in € million Commercial Residential Commercial Residential 26,461 24,320 21,170 20,811
pfandbrief act section 28 (2) no.2
arrears on mortgage claims in € million 31.12.2008 31.12.2007 Total amount of payments in arrears by at least 90 days Germany 129.0 81.9 Austria –– Belgium –– Czech Republic –– Denmark –– Finland –– France –– Hungary –– Iceland 0.6 – Ireland –– Italy 0.2 – Lithuania –– Luxembourg –– Netherlands – – Norway –– Poland – – Portugal – – Romania –– Slovakia –– Spain 0.6 – Sweden – – Switzerland –– UK –– USA – – Total 130.4 81.9 Information under Section 28 of the Pfandbrief Act 151
pfandbrief act section 28 (2) no. 3 enforcement measures of which attributable to Commercial Residential Pending as at December 31, 2008: No. of cases real estate real estate Forced sales 2,043 314 1,729 Forced administration 1,1211) 335 786 Forced sales in 2008 842 106 736
1) For 762 of the total 1,121 cases of forced administration, forced auction was also pending.
No property was taken over to prevent losses. During the financial year one property was sold. The property was mainly commercially used.
interest arrears from mortgage business where the receivable were used to cover hypothekenpfandbriefe Total interest arrears from mortgage debtors not already written off in earlier years was € 16.2 million. in € million 2008 2007 Interest arrears attributable to commercial real estate 5.3 6.7 residential real estate 10.9 12.8 Total 16.2 19.5
amortizations The following repayments were made on mortgages serving as cover for Hypothekenpfandbriefe: s t n e
Total Of which commercial Of which residential m e t a 2008 2007 2008 2007 2008 2007 t S l a Scheduled repayments 2,282 2,366 1,164 1,091 1,118 1,275 i c n Extraordinary repayments 4,476 4,989 2,182 3,091 2,294 1,898 a n i Total 6,758 7,355 3,346 4,182 3,412 3,173 F t r o p e R ’ s r o t i d u A S G f e i r b d n a f P 8 2 § e c n a l g a t A 152 Information under Section 28 of the Pfandbrief Act
pfandbrief act section 28 (3) no. 1
claims used as cover for öffentliche pfandbriefe Cover assets Cover assets in € million 31.12.2008 31.12.2007 Substitute cover according to Section 20 no.2 PfandBG 4,189 50
germany Cover assets Cover assets in € million 31.12.2008 31.12.2007 Central government 3,442 8,239 Regional bodies 54,522 28,491 Local bodies 2,927 1,241 Other 762 443 Country total 61,653 38,414
austria Cover assets Cover assets in € million 31.12.2008 31.12.2007 Central government 1,322 1,108 Regional bodies 2,354 571 Local bodies 35 40 Other – – Country total 3,711 1,719
belgium Cover assets Cover assets in € million 31.12.2008 31.12.2007 Central government 391 190 Regional bodies 140 65 Local bodies –– Other –– Country total 531 255
bulgaria Cover assets Cover assets in € million 31.12.2008 31.12.2007 Central government 7 7 Regional bodies – – Local bodies –– Other –– Country total 77
canada Cover assets Cover assets in € million 31.12.2008 31.12.2007 Central government –– Regional bodies 566 137 Local bodies 32 – Other 53 – Country total 651 137 Information under Section 28 of the Pfandbrief Act 153
cyprus Cover assets Cover assets in € million 31.12.2008 31.12.2007 Central government 120 50 Regional bodies –– Local bodies –– Other –– Country total 120 50
czech republic Cover assets Cover assets in € million 31.12.2008 31.12.2007 Central government 201 95 Regional bodies 40 40 Local bodies 19 19 Other –– Country total 260 154
denmark Cover assets Cover assets in € million 31.12.2008 31.12.2007 Central government –– Regional bodies 11 12 Local bodies –– s t
Other –– n e m e
Country total 11 12 t a t S l a i c n a n i
estonia F Cover assets Cover assets t r in € million 31.12.2008 31.12.2007 o p e R
Central government – – ’ s r o
Regional bodies –– t i d Local bodies 18 19 u A Other –– S G Country total 18 19 f e i r b d n a f P 8 finland 2 § Cover assets Cover assets e in € million 31.12.2008 31.12.2007 c n a l
Central government 38 153 g a t
Regional bodies –– A Local bodies 129 134 Other – – Country total 167 287
france Cover assets Cover assets in € million 31.12.2008 31.12.2007 Central government 2,233 1,731 Regional bodies 24 123 Local bodies 44 36 Other –– Country total 2,301 1,890 154 Information under Section 28 of the Pfandbrief Act
greece Cover assets Cover assets in € million 31.12.2008 31.12.2007 Central government 909 877 Regional bodies –– Local bodies –– Other –– Country total 909 877
hungary Cover assets Cover assets in € million 31.12.2008 31.12.2007 Central government 567 320 Regional bodies 50 – Local bodies –– Other –– Country total 617 320
iceland Cover assets Cover assets in € million 31.12.2008 31.12.2007 Central government 261 167 Regional bodies –– Local bodies 40 – Other 47 44 Country total 348 211
ireland Cover assets Cover assets in € million 31.12.2008 31.12.2007 Central government –– Regional bodies –– Local bodies – – Other 10 – Country total 10 –
italy Cover assets Cover assets in € million 31.12.2008 31.12.2007 Central government 383 102 Regional bodies 1,705 607 Local bodies 437 58 Other –– Country total 2,525 767
japan Cover assets Cover assets in € million 31.12.2008 31.12.2007 Central government 8– Regional bodies 173 50 Local bodies 86 – Other – – Country total 267 50 Information under Section 28 of the Pfandbrief Act 155
latvia Cover assets Cover assets in € million 31.12.2008 31.12.2007 Central government 128 40 Regional bodies –– Local bodies –– Other –– Country total 128 40
lithuania Cover assets Cover assets in € million 31.12.2008 31.12.2007 Central government 120 120 Regional bodies –– Local bodies –– Other –– Country total 120 120
luxembourg Cover assets Cover assets in € million 31.12.2008 31.12.2007 Central government –– Regional bodies –– Local bodies 120 – s t
Other –– n e m e
Country total 120 – t a t S l a i c n a n i
netherlands F Cover assets Cover assets t r in € million 31.12.2008 31.12.2007 o p e R
Central government – – ’ s r o
Regional bodies –40 t i d Local bodies 75 – u A Other –– S G Country total 75 40 f e i r b d n a f P 8 poland 2 § Cover assets Cover assets e in € million 31.12.2008 31.12.2007 c n a l
Central government 658 153 g a t
Regional bodies –– A Local bodies –– Other – – Country total 658 153
portugal Cover assets Cover assets in € million 31.12.2008 31.12.2007 Central government 51 51 Regional bodies 120 – Local bodies –– Other 80 80 Country total 251 131 156 Information under Section 28 of the Pfandbrief Act
slovakia Cover assets Cover assets in € million 31.12.2008 31.12.2007 Central government 307 100 Regional bodies 50 50 Local bodies –– Other –– Country total 357 150
slovenia Cover assets Cover assets in € million 31.12.2008 31.12.2007 Central government 163 20 Regional bodies –– Local bodies –– Other –– Country total 163 20
spain Cover assets Cover assets in € million 31.12.2008 31.12.2007 Central government 369 197 Regional bodies 2,323 582 Local bodies 91 – Other –– Country total 2,783 779
sweden Cover assets Cover assets in € million 31.12.2008 31.12.2007 Central government 102 102 Regional bodies –– Local bodies 165 – Other –– Country total 267 102
switzerland Cover assets Cover assets in € million 31.12.2008 31.12.2007 Central government – – Regional bodies 1,147 617 Local bodies 129 15 Other – – Country total 1,276 632
supranational Cover assets Cover assets in € million 31.12.2008 31.12.2007 Central government 87 68 Regional bodies 393 486 Local bodies –– Other –– Country total 480 554 Information under Section 28 of the Pfandbrief Act 157
uk Cover assets Cover assets in € million 31.12.2008 31.12.2007 Central government 622 866 Regional bodies 125 158 Local bodies 7– Other 216 – Country total 970 1,024
usa Cover assets Cover assets in € million 31.12.2008 31.12.2007 Central government 362 – Regional bodies 1,075 464 Local bodies 1,685 162 Other 25 – Country total 3,147 626
pfandbrief act section 28 (3) no.2 total amount outstanding by a minimum of 90 days
There are no payments outstanding on claims used as cover for Öffentliche Pfandbriefe. s t n e m e t a t S l a i c n a n i F t r o p e R ’ s r o t i d u A S G f e i r b d n a f P 8 2 § e c n a l g a t A 158 At a glance
ADDRESSES
head office corporate banking Representative Office Istanbul continental europe TR-34394 Levent-Istanbul 65760 Eschborn and latin america Kanyon Ofis Blogu Kat: 3 Helfmann-Park 5 Buyukdere Caddesi No: 185 Tel. +49 (0) 69. 25 48-0 Amsterdam Branch Tel. (+90) 212. 3 17 22 22 www.eurohypo.com NL-1077 ZZ Amsterdam Fax (+90) 212. 3 17 22 10 Atrium Toren A Representative Office Copenhagen Strawinskylaan 2701 DK-1256 Copenhagen Tel. (+31) 20. 7 99 36 00 Amaliegade 6, 2.TV. corporate banking Fax (+31) 20. 7 99 36 79 Tel. (+45) 33. 30 07 51 germany Athens Branch Fax (+45) 33. 32 07 55 GR-10674 Athens 10117 Berlin Lisbon Branch Vasilissis Sofias Avenue 23 Leipziger Platz 11 P-1050-094 Lisbon Tel. (+30) 210. 7 29 49 00 Tel. +49 (0) 30. 8 00 95-2 19 00 Praca Duque de Saldanha 1 Fax (+30) 210. 7 29 49 06 Fax +49 (0) 30. 8 00 95-8 19 00 Edificio Atrium Saldanha, 3° B Representative Office Brussels Tel. (+351) 21. 3 51 03 70 40212 Düsseldorf B-1040 Brussels Fax (+351) 21. 3 51 03 80 Königsallee 53 Rue de la Science 41 Tel. +49 (0) 211. 8 82 96-2 15 00 Madrid Branch Tel. (+32) 2. 2 90 87 60 Fax +49 (0) 211. 8 82 96-8 15 00 E-28046 Madrid Fax (+32) 2. 2 90 87 69 Paseo de la Castellana 110, 7 a 60329 Frankfurt Representative Office Budapest Tel. (+34) 91. 7 87 74 50 Taunusanlage 9 H-1054 Budapest Fax (+34) 91. 7 87 74 90 Tel. +49 (0) 69. 25 48-2 87 00 ECE City Center Fax +49 (0) 69. 25 48-8 87 00 Representative Office Mexico Széchenyi rkp. 8 MX-Mexico City 06500, DF 20354 Hamburg Tel. (+36) 1. 4 84 70 20 Torre Mayor ABC-Straße 13 Fax (+36) 1. 4 84 70 27 Paseo de la Reforma 505, Floor 40 Tel. +49 (0) 40. 30 86-2 12 00 Representative Office Bucharest Tel. (+52) 55. 52 56 06 20 Fax +49 (0) 40. 30 86-8 12 00 RO-010458 Bucharest Fax (+52) 55. 52 56 06 25 50678 Köln Dionisie Lupu Street 64-66, 4th Floor Milan Branch Anna-Schneider-Steig 10 Sector 1 I-20123 Milan Tel. +49 (0) 221. 57 45-2 27 00 Tel. (+4) 021. 300 29 49 Via Cordusio 2 Fax +49 (0) 221. 57 45-8 27 00 Fax (+4) 021. 300 34 54 Tel. (+39) 02. 8 69 59 92 40 01 80333 München Representative Office Helsinki Fax (+39) 02. 86 98 44 43 Karlstraße 10 FIN-00130 Helsinki Representative Office Moscow Tel. +49 (0) 89. 20 50 86-2 16 00 Eteläesplanadi 12 A RUS-117071 Moscow Fax +49 (0) 89. 20 50 86-8 16 00 Tel. (+358) 961. 20 38 00 15a, Leninsky Prospekt, floor 10 Fax (+358) 961. 20 28 10 70178 Stuttgart Tel. (+7) 49. 59 67 67 30 Rotebühlplatz 23 Fax (+7) 49. 59 67 67 49 Tel. +49 (0) 711. 4 90 87-2 21 00 Fax +49 (0) 711. 4 90 87-8 21 00 At a glance >>> Addresses 159
Paris Branch corporate banking uk corporate banking F-75008 Paris asia/pacific 30, Avenue George V London Branch Tel. (+33) 1. 73 02 56 00 GB-London WC2E 9RA Representative Office Hong Kong Fax (+33) 1. 73 02 56 10 90 Long Acre, Covent Garden Hong Kong 4th Floor 21/F Hong Kong Club Building Representative Office Prague Tel. (+44) 20. 77 59 76 00 3a Chater Road CZ-11000 Prague 1 Fax (+44) 20. 77 59 76 72 Tel. (+852) 2848. 7578 Václavské námestí 2 Fax (+852) 2848. 7577 Tel. (+420) 2. 24 23 27 22 Fax (+420) 2. 24 23 96 17 Representative Office Shanghai 200120 Shanghai Representative Office São Paulo corporate banking usa 37F Shanghai World Financial Center CEP-04534 São Paulo 100 Century Avenue Rua Joaquin Floriano, 1052 New York Branch Tel. (+86) 21 6877 8608 14th Floor/Room 142 New York, NY 10036 Fax (+86) 21 6877 8602 Tel. (+55) 11. 25 88 38 52 1114 Avenue of the Americas Fax (+55) 11. 25 88 38 55 29th Floor Eurohypo Japan Corporation Tel. (+1) 212. 4 79-57 00 Tokyo 105-6240 Stockholm Branch Fax (+1) 212. 4 79-58 00 40 F Atago Green Hills MORI Tower S-11435 Stockholm Atago, 2-5-1, Minato-ku Biblioteksgatan 29 Representative Office Chicago Tel. (+81) 3. 4530-88 00 Tel. (+46) 8. 53 52 40 50 Chicago, IL 60606 Fax (+81) 3. 4530-88 02 Fax (+46) 8. 4 11 90 99 123 North Wacker Drive Suite 2300 Eurohypo AG Representative Office Tel Aviv Tel. (+1) 312. 6 60-19 40 Relationship Management IL-52521 Ramat Gan Fax (+1) 312. 6 60-19 41 Middle East
3 Ha’yetzira St. (S.A.P. Tower) s t
c/o Commerzbank AG Dubai Branch n Tel. (+972) 3611. 46 20 Representative Office Los Angeles e m
Dubai, United Arab Emirates e t
Fax (+972) 3611. 46 21 Los Angeles, CA 90045 a t
Suite 11-15, Building GV 05, S 6100 Center Drive l a
th i
Representative Office Vienna 4 floor c
Suite 925 n a
A-1010 Vienna Gate Village, DIFC n i
Tel. (+1) 310. 2 15-12 75 F Kohlmarkt 1 P.O. Box 506596
Fax (+1) 310. 2 15-12 77 t r
Tel. (+43) 1. 5 32 19 31 Tel. (+971) 4 428 4972 o p e
Fax (+43) 1. 5 32 19 31 24 Fax (+971) 4 343 8886 R ’ s r o t i
Representative Office Warsaw d u
PL-00-124 Warsaw A
Rondo ONZ 1 S G
group companies f e Tel. (+48) 22. 5 44 83 00 i r b d
Fax (+48) 22. 5 44 83 09 n a
EUROHYPO f P
Representative Office Zurich Europäische Hypothekenbank S.A. 8 2 CH-8001 Zurich L-1736 Senningerberg/Luxembourg § e
Gessnerallee 28 Airport Center, 5, rue Heienhaff c n a l
Tel. (+41) 44. 2 13 20 00 Tel. (+352) 26. 34 55-1 g a
Fax (+41) 44. 2 13 20 05 Fax (+352) 26. 34 55-222 t A
Registered Office Eschborn, HRB 45701 Amtsgericht Frankfurt am Main 160 At a glance
GLOSSARY
Accrual Bonds Cover funds The re-investment of interest income Collective term for fixed-interest The cover fund of a mortgage bank or other revenue from securities in debt instruments. is the total mortgage lending and new securities. public sector finance which is eligible Bonds and other fixed-income as cover for Pfandbriefe or Öffent- Asset Backed Security securities liche Pfandbriefe pursuant to the Tradable notes which are collatera- Claims owed to the bank by its bor- requirements of the German Pfand- lized by claims. rowers may be shown as bonds and brief law. The cover funds are other fixed-income securities on the managed separately from other Available for Sale assets side of the balance sheet. assets. Compliance with the provi- A category defined by IAS 39 which sions of the German Pfandbrief law is applied to financial instruments Commercial mortgage backed on cover is monitored by trustees which are classified or designated securities (CMBS) and regular checks by BaFin. as available for sale. Bonds which are used to securitize credit risks arising from a commer- Credit Default Swap (CDS) Backtesting cial property portfolio (see also mort- Financial instrument which transfers Procedure for monitoring the quality gage backed securities). the credit risk of an underlying asset of value at risk (VaR) models. This (e.g. a security or a loan). The buyer involves checking over time how Confidence level of protection pays the seller of pro- often the potential losses estimated The confidence level defines the tection a premium and in return using the VaR approach have been probability of a potential loss arising receives a compensation payment if retrospectively exceeded. during the time specified by the a specified credit event occurs. value at risk. Basel II Declaration of conformity Capital adequacy recommendations Core capital Under Section 161 of the Stock Cor- for internationally active banks pro- The core capital of a bank, in the poration Act (AktG), this must be duced by the Basel Committee on form of a public limited company, submitted annually by the Board of Banking Supervision. The Basel II comprises essentially the paid up Managing Directors and the Super- regulations are intended to increase share capital (without preference visory Board of a listed company. the risk-sensitivity of the capital shares) and the reserves. It is a statement of the extent to adequacy requirements compared which the company has complied with the previous regime. The Basel Corporate Governance with the German Corporate Gover- II framework has been implemented In general terms Corporate Gover- nance Code (DCGK). in Germany through the transposition nance refers to the totality of all of the EU Capital Requirements national and international standards Derivatives Directive into national law in the and values of good and responsible Financial instruments whose value form of the Solvency Regulation, management applying to both com- depends on the value of another which is applicable at the latest pany staff and management. The financial instrument. The price of from 2008. attributes of good corporate gover- the derivative is derived from the nance include effective management, price of an underlying value (i.e. Basis point protection of shareholder interests, the interest rate). These instruments A basis point is one hundredth of a co-operation at management level, offer extensive opportunities for percentage point (0.01%). monitoring of regulatory compliance, risk management and control. transparency in communication and Benchmark bonds a responsible approach to risk. In Fair value The major mortgage banks, which Germany these principles have been Amount at which financial instru- regularly issue high volume Pfand- laid down in the German Corporate ments are bought or sold at fair briefe (Jumbo-Pfandbriefe), aim to Governance Codex (see also “Decla- terms. Valuation is based on either position these Pfandbriefe, which ration of conformity”). market prices (stock exchange pri- feature high liquidity and credit ces) or, where these are missing, ratings, as benchmark bonds. internal valuation models. At a glance >>> Glossary 161
Fair value hedge financial position and result of ope- Mark-to-Market Describes a fixed-interest balance rations of the company and changes A method of valuing positions at sheet item (e.g. receivables or secu- in these over the course of time. In current market prices including rities), where a swap is used to contrast to this, the primary focus unrealized profits and losses and hedge against market risks. Valua- of annual financial statements in ignoring acquisition costs. tion is based on the fair value. accordance with the HGB is the pro- tection of creditors. Maturity transformation Hedge accounting The professional management of Presentation of opposing perfor- IFRS (International Financial different maturities and the associa- mance of a hedging transaction Reporting Standards) ted varying interest rate implica- (e.g. an interest rate swap) and the Since 2002, IFRS has been the term tions for assets and liabilities on the underlying transaction (e.g. a loan). used for the overall concept of the balance sheet. Current and anticipa- The aim of hedge accounting is to standards adopted by the Interna- ted future market interest rates are minimize the impact of the valua- tional Standards Board. Standards taken into account for this purpose. tion affecting income and recording already adopted are also cited as of the valuation results of derivatives International Accounting Standards Mezzanine loans transactions on the Income State- (IAS). Mezzanine loans rank subordinate ment. to bank loans and are often used in Issue of securities the financing of leveraged buy-outs. Hedging Securities can either be issued The increased risk for the lender as A strategy in which hedging trans- directly by an issuing entity itself or a result of the subordinate status is actions are agreed with the aim of by commissioning banks to do so. compensated with a higher interest protecting against the risk of unfa- In the latter case the bank either rate and often with an option to vourable price trends (interest rates, carries out the sale of the securities participate in the equity of the share prices). on behalf of the issuer on a com- acquired company. mission basis or buys the securities s
Hybrid capital at a fixed price and offers them to Minimum requirements for risk t n e
Offerings in the form of assets of the public at a higher price (market management (“MaRisk”) m e t a silent shareholders or preference placement). Regulations issued by the German t S l a
shares, which are issued under banking regulators on the imple- i c n intervention of a group SPV and Jumbo-Pfandbriefe mentation of the requirements of a n i recognized under banking regula- Fixed-coupon, bullet repayment Section 25a of the German Banking F t tions as core capital. Pfandbriefe with annual retrospective Act in risk management. The mini- r o p
payment of interest and an issue mum requirements for risk manage- e R ’ s
Hypothekenpfandbrief volume of at least € 1 billion, issued ment were published by the Federal r o t i
Bonds issued by mortgage banks. by a consortium of banks. Financial Supervisory Authority on d u They enable the bank to finance December 20, 2005. A S
mortgage loans. Liable equity G f e i
German banks must provide back- Mortgage backed securities (MBS) r b d
IAS (International Accounting ing for the risks from their lending MBS are a special form of asset n a f Standards) business (risk of counterparty default) backed securities. In this process, a P 8 2
Accounting regulations adopted by and from their market positions bank sells or securitizes parts of its §
the International Accounting Stan- (market price risks) with their own credit risks from property lending e c n a dards Committee. Under IAS, the resources, in accordance with inter- by issuing bonds. The main purpose l g purpose of annual financial state- national guidelines. The liable equity of this kind of transaction is to ease a t ments is to communicate informa- is in turn structured into tier 1 and the burden of the risk assets, which A tion relevant to the decision-making tier 2 capital. The liable equity is of have to be backed by equity. of investors regarding the net assets, particular importance to banks, as it largely determines their business scope on the basis of the provisions laid down by the Federal Banking Supervisory Authority. 162 At a glance
Opera Real Estate Investment Trust Securitization “Opera” is a documentation envelope (REIT) The securitizing of assets. Tradable for securitizations which, with the REITs are companies which own, securities replace book credits. appropriate modifications, enables and usually also operate, real estate. Mortgage backed securities (see different types of securitization trans- Shares in many REITs are freely entry above) are a form of securiti- action to be carried out through traded, usually on major stock zation. special purpose vehicles under exchanges. a single brand name and so via a Shareholder Value single platform. Repo business This concept refers to raising the (Repurchase agreement) value of a company for the share- Participation certificates Repurchase agreements for securi- holder. The increase in value is Certificates granting the right to ties transactions (true repo transac- manifested in an improved perfor- participate in the net profit and/or tions, whose object continues to mance of the stock price and/or proceeds of liquidation (particularly accrue to the borrower). an increase in the dividend. for public limited companies and limited liability companies). The Return on equity (RoE) Spread right is vested in the participation The ratio of profit before or after The spread refers to the difference certificate. tax to the average balance sheet between the buying (bid/ask) and equity. The return on equity shows selling (offer) price. Portfolio the yield generated by the capital Part or all of one or all classes of employed in the business. Squeeze-Out assets (i.e. securities, loans, holdings Under the German “squeeze-out” or property). Risk Premium rules (Ss. 327 a ff. Stock Corporation An interest premium which inves- Act, 39a German Securities Acquisi- Primary market tors may demand when investing in tion and Takeover Act) a majority The primary market covers all acti- a risky asset. If an investment has a shareholder who holds a stake of vities in connection with the distri- high risk of loss or default, it nor- 95% or more in a company may bution of new issues. mally carries a high interest rate buy out the minority shareholders premium. German federal govern- in an Aktiengesellschaft (public Public private partnership (PPP) ment bonds represent the base level limited company) in return for a Partnerships between the public and benchmark for interest rates. cash indemnity. sector and private companies for the implementation of infrastructure Risk-weighted assets (RWA) Standard risk costs for credit risks projects. The bank must allocate regulatory Ex ante calculated risk premiums risk weightings to all assets and off- for the lending business. These Rating balance sheet items and add up the indicate the loss anticipated, on the Standardized assessment of the risk-weighted values of the asset basis of historical experience, within credit standing of the issuer and its positions. A risk weighting of 100% one year as a result of defaulting debt paper by specialized agencies means that the full value of the loans. (e.g. Moody’s and Standard & Poor’s). asset has been taken into account in calculating the risk weighting. Stress test Real Estate Investment Banking The regulatory minimum require- Stress tests are intended to model Supports large real estate invest- ment for the equity ratio is 8% of the effects of extreme market fluc- ments and transactions with own this value. According to the applica- tuations in terms of losses. These and external capital (structured ble regulations, the individual risk effects cannot be adequately taken finance) together with services (real weightings depend on the general into account using VaR models. VaR estate M & A, financial advice), and risk weighting of the debtor (i.e. risk indicators are based on “nor- sells the property finance risks states, banks or commercial compa- mal” market fluctuations and not on generated by means of direct place- nies). the very rare, extreme situations ment or securitization (see entry which are difficult to record statisti- below) in the capital market. cally. Stress tests therefore are a meaningful supplement to the VaR analyses; they are also promoted by the supervisory authorities. At a glance >>> Glossary 163
Subprime Value Added Subprime mortgages are mortgage Valued Added is that portion of loans granted to borrowers with a post-tax income remaining after poor standard of creditworthiness. deducting the cost of capital. The greater the Value Added the higher Swaps the intrinsic value of a company. A financial instrument in which cur- rency and/or interest exposures are Value at risk swapped between two counterpar- Method used to record interest rate ties (e.g. by swapping future liabili- change risks. With the VaR method, ties in US dollars for Euro liabilities the risk is defined as negative devi- or by swapping variable for fixed ation from the current value of all interest payments). financial transactions of the bank. In order to be meaningful, the hold- Syndication ing period and the confidence level This refers to the issue of securities (see above) must also be stated. The or lending (syndicated loans) by a VaR value indicates the upper loss consortium. limit, which will not be exceeded within the holding period, with a True Sale Initiative (TSI) probability corresponding to the A total of 13 banks are involved in confidence level. the TSI of the KfW banking group. The aim of the initiative is to carry Volatility out true sale securitizations via which Indicator of price fluctuations of banking receivables are pooled, sold securities or currencies. Volatility is as a portfolio to a specialist company often calculated on the basis of the s and – after division into tranches price history. The higher the volatility, t n e
with varying risk content – sold on the greater the risk, for example, in m e t a to investors in the capital market. holding an asset. t S l a
In return for a risk premium, the i c n investors carry the possible risk a n i which can arise following acquisi- F t tion. By taking the loans off their r o p books, banks receive liquid funds e R ’ s and therefore reduce their regulatory r o t i capital burden. d u A S
Underwriting guarantee G f e i
When securities are issued a finan- r b d cial institution may provide a guaran- n a f tee in the underwriting agreement P 8 2 to purchase a certain proportion of §
the issue. e c n a l g a t A CHRYSLER BUILDUNG
New York · The iconic Chrysler Building in New York is just like the Empire State Building and the Rockefeller Center a “National Historic Landmark”. This Art déco style Building of 319 meter was upon its comple- tion in the 1930s the highest building in the world. After its refurbishment from 1998 to 2000 it fulfils the most modern technical requirements and tenants needs. The building has 77 floors with 111,202 square meters of floor space. FINANCIAL CALENDAR 2009
Publication of preliminary figures for 2008 18 February 2009 Publication of 2008 Annual Report End of March 2009 Publication of Interim Report Mid-August 2009
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EDITORIAL INFORMATION
Publisher Further information Design and production Eurohypo Aktiengesellschaft Hilger & Boie GbR, Wiesbaden Capital Market Communication Helfmann-Park 5 +49 (0)69. 2548 28208/23854 Lithographic print 65760 Eschborn Koch Lichtsatz und Scan, Wiesbaden +49 (0)69. 2548-0 Press Department www.eurohypo.com +49 (0)69. 2548 22039/21316 Printers Volkhardt Caruna Medien, Kleinheubach www.eurohypo.com