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Financial Report 2018 As a bank committed to responsibility, KfW promotes sustainable prospects for people, companies, the environment and society. KfW is one of the world’s leading promotional banks. It applies its decades of experience to improve economic, social and environmental living conditions across the globe on behalf of the Federal Republic of Germany and the federal states. In 2018 alone, KfW provided promotional funds totalling EUR 75.5 billion. Of this total, 40% was spent on measures aimed at protecting the climate and the environment. KfW has no retail branches and does not hold any customer deposits. It funds its promotional business activities almost entirely through the international capital markets and in 2018 raised EUR 76.1 billion for this pur- pose. In Germany, KfW Group has offices in Frankfurt am Main, Berlin, Bonn and Cologne. Its global network includes around 80 local and representative offices. Key figures of KfW Group Promotional business volume 2018 2017 EUR in billions EUR in billions 75.5 76.5 Key figures of the income statement 2018 2017 EUR in millions EUR in millions Net interest income (before promotional expense) 2,413 2,579 Net commissions (before promotional expense) 374 316 Administrative expense (before promotional expense) 1,400 1,234 Operating result before valuation (before promotional expense) 1,387 1,661 Risk provisions for lending business –3 –209 Net gains/losses from hedge accounting and other financial instruments at fair value through profit or loss 426 194 Net gains/losses from securities and investments and from investments accounted for using the equity method 25 22 Operating result after valuation (before promotional expense) 1,834 1,669 Net other operating income 5 –2 Profit/loss from operating activities (before promotional expense) 1,839 1,667 Promotional expense 216 213 Taxes on income –13 26 Consolidated profit 1,636 1,427 Consolidated profit before IFRS effects 1,311 1,192 Cost-income ratio before promotional expense1) 50.2% 42.6% 1) Administrative expense (before promotional expense) in relation to adjusted income. Adjusted income is calculated from Net interest income and Net commission income (in each case before promotional expense). Key figures of the statement of financial position 31 Dec. 2018 31 Dec. 2017 EUR in billions EUR in billions Total assets 485.8 472.2 Volume of lending 483.5 471.7 Volume of business 590.7 572.1 Equity 30.3 28.7 Equity ratio 6.2% 6.1% Key regulatory figures 31 Dec. 2018 31 Dec. 2017 EUR in billions EUR in billions Risk position 140.8 133.1 Tier 1 capital 28.3 27.3 Regulatory capital 28.3 27.3 Tier 1 capital ratio 20.1% 20.6% Total capital ratio 20.1% 20.6% Employees of KfW Group1) 2018 2017 6,376 6,113 1) The average number of employees including temporary staff but without members of the Executive Board and trainees Contents Letter from the Executive Board 4 Executive Board, Directors and Managing Directors of KfW Group 16 Report of the Board of Supervisory Directors 17 Members and tasks of the Board of Supervisory Directors 20 Corporate Governance Report 22 Group management report 26 Basic information on KfW Group 28 Economic report 33 Risk report 44 Forecast and opportunity report 68 Declaration of compliance 77 Non-financial statement 77 Consolidated financial statements 79 Consolidated statement of comprehensive income 82 Consolidated statement of financial position 84 Consolidated statement of changes in equity 85 Consolidated statement of cash flows 90 Notes 93 Attestations 227 Statement by the Executive Board 228 Independent auditor’s report 229 The figures in tables were calculated exactly and added up. Figures presented may not add to totals because of independent rounding. Actual zero amounts and amounts rounded to zero are presented as EUR 0 million. Letter from the Executive Board MAKING 75.5 AN IMPACT billion In 2018 KfW released a total volume of EUR euros75.5 billion for projects of particular relevance for the future – in Germany, in Europe and around the globe. “2018 was a successful year. Thanks to the good economic conditions, we were able to focus on issues of particular relevance for the future – sustainability, digitalisation and Africa. These are also the major challenges of our time.” Dr Günther Bräunig Letter from the Executive Board Dear readers, KfW’s role as a promotional bank is to The year 2018 has shown us once again focus on issues of particular relevance the huge challenges in store for society for the future. Promotion in the past year and the economy. The battle against cli- therefore focussed on innovation and dig- mate change is well underway but we italisation in Germany, as well as on the have yet to win it. We should not miss the sustainable improvement of living condi- opportunities presented by digitalisation tions in Africa and other partner countries either. of our Financial Cooperation. The pace of change demands that we Promotional year 2018 was quickly find practical solutions to secure positive and successful. Germany as a prime location of the future. KfW released a total volume of funding But we must also look at the bigger picture. of EUR 75.5 billion (2017: EUR 76.5 bil- Our most sustainable means of address- lion), with a slight shift in our activities ing the causes of migration is by giving from domestic to international financing. our neighbouring continent Africa pros- Given the strong economic performance pects for the future. KfW Financial Report 2018 Letter from the Executive Board | 5 “Promoting innovation and digitali- sation in Germany is one of our core tasks. The speed of change forces us to quickly find practical solutions to preserve Germany’s appeal as a business location of the future.” Dr Ingrid Hengster and the sustained positive financing Development projects in Africa and the environment for private and commercial Middle East are financed with nearly 48% investors in Germany, KfW decreased of all new commitments; 71% of the Ger- its domestic promotion of commercial, man Federal Government’s budget funds private and public-sector investors to were channelled to this region. DEG EUR 46.0 billion from EUR 51.8 billion commitments in 2018 reached a record in 2017. level of around EUR 1.9 billion for invest- ments of private companies in develop- International business volume increased ing countries and emerging economies by 20% to EUR 28.3 billion (2017: (2017: EUR 1.6 billion). EUR 23.5 billion). As in the preceding years, KfW focused As German exports rose by another 3%, its promotional activities on qualitative commitments in our export and project targets such as supporting climate and finance business increased as well, in environmental protection in 2018. “Green concrete terms by 29% to EUR 17.7 billion finance” projects received 40% of financ- (2017: EUR 13.8 billion). ing (2017: 43%). Financial Cooperation continued its struc- KfW also consequently continues to foster tural growth trend. In 2018, KfW Develop- sustainability on the capital market, ment Bank provided around EUR 8.7 bil- for example, through its increased involve- lion in financing to developing countries ment in the green bond sector or the and emerging economies on behalf of even stricter orientation of its sustainable the German Federal Government (2017: investment approach in its liquidity EUR 8.2 billion). Around 58% was ear- portfolio. marked for climate change mitigation and environmental protection projects. With issues of EUR 1.6 billion in 2018, the outstanding volume of “Green Nearly 13% of new commitments are Bonds – Made by KfW” rose to a total of allocated for directly supporting refugees EUR 14.5 billion. in developing countries. 6 | KfW Financial Report 2018 Letter from the Executive Board STRENGTHENING THE SME SECTOR41 % KfW financing related to small and medium- sized enterprises in 2018 amounted to 41%. CREATING 18PROSPECTS billionAt EUR 4 billion, KfW’s commitments for Africa reached a new record high in 2018. The over- euros all portfolio now amounts to around EUR 18 billion. “Although reducing poverty remains a major task, Africa also offers opportunities with its expanding middle class and high potential for economic development.” Prof. Dr Joachim Nagel In order to fund its promotional business, tional expense) however, declined to KfW raised funds of EUR 76.1 billion on EUR 1.4 billion due to falling interest in- the international capital markets in 2018. come and rising administrative costs (2017: EUR 1.7 billion). As in the previous year, the Financial markets business sector invested a total The valuation result was up on the previ- of around EUR 1.5 billion in the promo- ous year due to the low net risk provision- tional business via the capital markets in ing charge and a positive contribution 2018. Around EUR 1.1 billion of this total from the equity investment portfolio. This was used in securitisation transactions result was reinforced also due to the to promote SMEs. KfW supported climate positive IFRS-induced effects from hedg- change mitigation and environmental ing and income from deferred taxes. protection by investing EUR 0.4 billion in green bonds. KfW’s domestic promotional expense, which had a negative impact on KfW Group’s Just as important as “green finance” for earnings position, remained below ex- KfW is support for small and medium- pectations at EUR 216 million (2017: sized enterprises in investment finance. EUR 213 million) in the continuing low Overall, the ratio of KfW financing relat- interest rate environment. ed to SMEs in Germany was 41% (2017: 44%). Consolidated total assets rose by EUR 13.6 billion to EUR 485.8 billion in Annual result 2018 2018 (2017: EUR 472.2 billion).

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