A partnership built on trust

#sharinginspiration Annual Report 2017

S Finanzgruppe Key performance indicators Content at a glance

Excerpt from the Profit and Loss Account Board of Management and Supervisory Board 2017 2016 in € m Organs of the Bank and Other Important Functions 2 16.9 % Net interest 270.9 255.9 Supervisory Board Report of Berlin Hyp AG 2017 4 Return on equity Net commission income 39.1 42.5 Operating expenditure 134.8 122.3 Corporate Governance Report 8 Risk provisioning 56.2 −35.7 Operating result after risk provisioning 184.4 120.1 Company Provision for general banking risks 70.0 50.0 Milestones 2017 14 Profit transfer 117.0 73.0 Net income for the year 0.0 0.0 What inspires you, Mr Klaus? 16 Cost-income ratio after bank levy in % 51.2 44.0 Digital Age – what­ does that mean for Berlin Hyp? 20 8.1 bn € Return on equity in % 16.9 11.8 Only Sustainable Action can ensure long-term success 26 Team Spirit which customers appreciate 30 New lending business berlinhyp21 33 (including capital employed ≥ 1 year) Excerpt from the Balance Sheet in € m 2017 2016 Inspiration for Europe: Selected Reference Projects 36 Balance sheet total 27,123 26,354 Mortgage loans 20,081 18,125 Management Report NPL1 256 447 I Principles of the Bank 40 1 Screening of NPL portfolio by rating in accordance with EBA guideline from 2017 onwards (previously: risk class); comparable figure for previous year adjusted. II Economic Report 44 III Opportunities, Forecast and Risk Report 61 IV Accounting-Related Internal Control System Aaa Business Development in € m 2017 2016 and Risk Management System 86 (Moody's) New lending 6,666 5,367 V Remuneration Report 88 Pfandbrief issue rating Extensions (capital employed ≥ 1 year) 1,465 651 VI Corporate Governance Statement Pursuant to Section 289f German Commercial Code 94 VII Non-Financial Statement in Accordance with Section 289b and c German Commercial Code 95 Regulatory law key figures2 2017 2016 RWA in € m 9,151 7,972 Annual Accounts Hard core capital ratio (CET1 ratio) in % 12.5 13.5 Balance Sheet 96 Total capital ratio in % 15.5 17.5 Profit and Loss Account 100 70 Leverage Ratio in % 4.0 3.9 Statement of Changes in Equity and Cash Flow Statement 102 Transactions 2 After adoption Notes 104 with new customers Independent Auditor's Report 132 Issue ratings Moody’s Fitch

Senior Unsecured A1 A+ Service Pfandbriefe Aaa – List of Important Abbreviations 137 Sustainability ratings oekom Sustainalytics Addresses 138 B- (Prime) 86/100 (Leader) Contacts 139 Imprint 140

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Organs of the Bank and Other Important Functions

Supervisory Board Andrea Schlenzig Supervisory Board Committees Cover Pool Monitor Thomas Mang Bank employee Chair (since 27 November 2017) Staff and Strategy Committee Christian Ax President of Savings Banks Association of Helmut Schleweis Lower Saxony President of Deutscher Sparkassen-und­ Thomas Mang Giroverband e. V. Chair (since 27 November 2017) Deputy Cover Pool Monitor Georg Fahrenschon (until 30 November 2017) Chair (until 24 November 2017) Peter Schneider Georg Fahrenschon Wolfgang Rips President of Deutscher Sparkassen- und President of Savings Banks Association of (until 24 November 2017) Giroverband e.V. (ret.) Baden-Württemberg Chair (until 24 November 2017) Philip Warner

Jana Pabst Walter Strohmaier Helmut Schleweis Deputy Chair Chair of the Board of Management of Deputy Chair Bank employee Sparkasse­ Niederbayern-Mitte Chair of the Works Council of Berlin Hyp AG Landesobmann of the Bavarian Savings Dr. Harald Langenfeld Banks Joachim Fechteler Thomas Meister Bank employee René Wulff Member of the Works Council of Berlin Hyp AG Bank employee Andrea Schlenzig Deputy Chair of the Works Council of Berlin Gerhard Grandke Hyp AG Managing President of German Loans Committee ­Savings Banks and Giro Association of Hesse-Thuringia­ Board of Management Thomas Mang Sascha Klaus Chair Artur Grzesiek Chair Former Chairman of the Board of Dr. Harald Langenfeld ­Management of Sparkasse Cologne-Bonn Gero Bergmann Deputy Chair

Dr. Harald Langenfeld Roman Berninger Artur Grzesiek Chair of the Board of Management of ­Stadt-und Kreissparkasse Leipzig Walter Strohmaier Managing Director Thomas Meister Dr. Michael Schieble René Wulff Bank employee (until 31 December 2017)

Siegmar Müller  Audit Committee Chair of the Board of Management of Sparkasse­ Germersheim-Kandel Helmut Schleweis Landesobmann of the Rhineland-­Palatinate Chair Savings Banks Board of Management Members Gerhard Grandke Deputy Chair Reinhard Sager President of German Administrative District Joachim Fechteler Parliament County Council Chairman of East Holstein Siegmar Müller District Peter Schneider

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Supervisory Board Report of Berlin Hyp AG 2017

Berlin Hyp is a subsidiary of Landesbank Berlin the Board of Management and the auditor. In the meeting on 18 September 2017, the Continuing Education for the Supervisory Holding AG and an independent commercial Moreover, the annual audit report, the annual Supervisory Board defined the key audit issues Board real estate financer within the Savings Banks compliance report, the report on the efficacy of for the financial year 2017 based on a proposal The Supervisory Board of Berlin Hyp took part Finance Group. The Supervisory Board – which, the internal control system (ICS) and a report from the Audit Committee. Adjustments to the in a continuing education seminar in June 2017 apart from the five employee representatives, is on security measures to defend against cyber risk strategy were also discussed and adopted. that focused on regulation, the period of low made up entirely of representatives of the Sav- risks were acknowledged in this meeting. The The Board of Management’s plans to acquire a interest rates and digitalisation. In Septem- ings Banks Finance Group and a representative Supervisory Board Report and the ­German Cor- strategic stake in BrickVest Ltd. were presented ber 2017, the Supervisory Board discussed of the local authorities – advises and monitors porate Governance Code Report were adopted. to the Supervisory Board and discussed in challenges, strategies and priorities for the real the Board of Management. It also supports the The Supervisory Board also passed the neces- detail. The Chairman of the Supervisory Board estate bank of the future following an expert talk. Board of Management, particularly in the crea- sary resolutions on the agenda of the Annual presented a summary report of the findings tion of a network with savings banks throughout General Meeting of Berlin Hyp. It ­discussed the from the efficiency and suitability review of the Supervisory Board Committees Germany. attainment of non-monetary ­targets in 2016 in Supervisory Board and the Board of ­Management. The work of the Supervisory Board of Berlin Hyp line with the 2015/2016 business strategy and The review revealed that the Supervisory is supported by three committees − the Audit In light of the fierce competition in commercial adjustments to the risk strategy. In addition, the Board’s work is effective and that the members Committee (PA), the Staff and Strategy Commit- real estate financing, the ongoing phase of Supervisory Board addressed the new require- of the Board of Management and Supervisory tee (PSA) and the Loans Committee (KA) − each low interest rates and tough regulatory require- ments under the German Act Reforming the Board possess the necessary expertise, skills of which convenes approximately 10 to 14 days ments, Berlin Hyp is extremely pleased with the Audit of Annual Financial Statements (AReG), and experience. prior to Supervisory Board meetings. After- ­development of and result from the financial adopted a catalogue of permissible non-audit wards, written committee reports are presented year 2017. The Supervisory Board regards services and adjusted the rules of procedures In the meeting on 27 November 2017, a new in the Supervisory Board meetings. Berlin Hyp’s performance and its ability to hold for the Audit Committee accordingly. chair was elected as the first order of ­business, its own in a difficult market environment while after the previous chair, Georg Fahrenschon, The main objective of the PA is to assist in the adhering to a conservative risk strategy as In accordance with the provisions of the had stepped down from this position. The review and preparation of the adoption of the highly favourable. ­Institutional Remuneration Ordinance (IVV), Board of Management’s ­periodic reports were annual accounts. Moreover, it is responsible for the Supervisory Board took note of the overall then supplemented to include a presentation monitoring the accounting process, the efficacy In accordance with the legal requirements, the bonus pool for employees set by the Board of on Treasury activities. The Super­visory Board of the risk management system, the internal Supervisory Board once again concerned itself Management and established the total amount took note of the updated strategy ­document, management and controlling system, and the promptly, regularly and comprehensively with of variable remuneration for the Board of Man- especially with regard to measures for achiev- functionality of the Internal Audit division. It is the position and the development of Berlin Hyp, agement. The Supervisory Board then reviewed ing strategic targets and enhancing efficiency also concerned with compliance issues. The PA the planning situation, the risk situation, risk the extent to which the Board of Management through digitalisation initiatives. It then took a consists of five members. management as well as compliance, both orally achieved the targets for 2016 and decided on closer look at the projections for 2017 and the and in writing, in 2017. It constantly monitored the particular target bonuses of the individual medium-term planning for 2018 to 2022. The The PSA is tasked with personnel issues, the actions of the Board of Management and Board of Management members as well as the Supervisory Board also took note of the findings strategy, planning and basic company issues, satisfied itself that it was acting properly, payment of conditional bonuses. from the Staff and Strategy Committee’s efforts and it regularly reviews compliance with the ­deliberated on all relevant aspects in this to monitor the remuneration systems for staff German Corporate Governance Code. It also acts ­context and provided recommendations. In the meeting of 26 June 2017, the Supervisory and the Board of Management, as well as of as a remuneration controlling and nomination Board took note of reports on donations and information on the implementation of the new committee. The PSA consisted of six members Focus of the Supervisory Board’s Activities sponsorships, on foreign business and on Institutional Remuneration Ordinance (IVV). until 24 November 2017. Since 25 November The subject-matter of all Supervisory Board the development of sustainable products, in 2017, it has comprised five members. meetings in 2017 was the Board of Man- addition to the regular reports (current business At the same time, the Supervisory Board agement’s detailed reporting on the current development, risk situation, S-Group business, performed a regular update of the Declaration of The KA has its own loan approval powers and business development and the risk situation status update on various audits), all of which it Compliance in accordance with the German Cor- also acts as a risk committee. It therefore primar- of Berlin Hyp. The Board of Management also discussed with the Board of Management. The porate Governance Code (GCGC) and addressed ily deals with loan decisions which exceed the reported regularly on the development of Supervisory Board updated the selection and the new obligation under the CSR Directive powers of the “overall Board of Management”, S-Group business, as well as on the external diversity strategy, as well as job descriptions Implementation Act to prepare a non-financial as well as with the risk strategy, the regular risk audits currently underway at Berlin Hyp. and applicant profiles for future Supervisory report and have it audited by the auditor. To reports and the principles of the loan business Board and Board of Management members. speed up its approval processes, Berlin Hyp has policy. Apart from its meetings, written circulation In the balance sheet meeting of the Supervisory The Supervisory Board also set the targets until revised its division of powers for the lending procedures and teleconferences also regularly Board on 28 March 2017, the annual accounts 30 June 2022 concerning the percentage of business. The Supervisory Board discussed the occur in the KA. The KA consists of five members. and Management Report as at 31 December women on the Supervisory Board and Board of resulting adjustments to the rules of procedure 2016 were approved and adopted after being Management of Berlin Hyp. for the Loans Committee and adopted them. The committees reported regularly and in detail reviewed and following consultation with to the Supervisory Board on their work.

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Corporate Governance Mr Mang stepped down as Chair of the Super- of € 2.2 million will be carried forward to new As an unlisted company, Berlin Hyp is generally visory Board and of the PSA at the beginning­ of account. By resolution of the next Annual General not subject to the regulations of the German the balance sheet meeting on 26 March 2018. In Meeting, the plan is to allocate this profit to the Corporate Governance Code (GCGC). However, the same meeting, Helmut Schleweis was then other retained earnings in the year ahead. in light of its activities on the capital market, elected as the new Chairman of the Supervisory Berlin Hyp has decided to follow the principles Board. During the audit of the annual accounts, the of good corporate governance defined in the Chairman of the PA regularly informed himself German Corporate Governance Code. Berlin Annual Accounts 2017 of the audit’s status in consultation with the Hyp has been following the Code since 2002 The annual accounts of Berlin Hyp and the auditor KPMG. and has published a Declaration of Compliance Management Report for the 2017 financial year each year ever since. Details are available in the have been audited by KPMG AG Wirtschafts­ Sustainability Report (Non-Financial Report) Corporate Governance Report. prüfungsgesellschaft, Düsseldorf, Berlin branch, The PA and the Supervisory Board also appointed by the Annual General Meeting, addressed the non-financial report 2017 Meetings and Attendance taking into account the auditing focus defined ­separately prepared by the Board of Manage- A total of four plenum meetings and fifteen by the Supervisory Board, and have received an ment for the first time. In its role as auditor, committee meetings – of which six were tele­ unqualified audit certificate. The Supervisory KPMG ­performed an audit to attain limited conferences – were held in the financial year Board has acknowledged the audit certificate. certainty and found no grounds for objection. 2017. The KA passed 26 loan resolutions in The Board of Management ­provided a detailed 20 instances of using the written circulation The annual accounts of Berlin Hyp were prepared explanation of the documents in the PA meeting procedure. In three cases, the KA took note of in accordance with the provisions of the German in preparation for the balance sheet meeting, loan resolutions that the Board of Management Commercial Code (HGB). The accounts, the and in the balance sheet meeting of the Super- had passed within the scope of its special power Management Report and the auditor’s reports visory Board, while the representatives­ of KPMG to act in urgent matters. were presented to the Supervisory Board before reported on the material findings of their audit its meetings in time. The Board of Management and answered follow-up questions from the The cycle of meetings was readjusted in the explained the accounts and the risk management Supervisory Board members. The Supervisory financial year 2017. Committee meetings were system in detail at the two meetings of the PA in Board had no objections after performing its held 10 to 14 days prior to the plenum meetings. preparation for the balance sheet meeting and review. Members prevented from attending usually also at the Supervisory Board’s balance sheet participated in the passing of resolutions through meeting. The auditor attended these three The Supervisory Board thanks the members voting instructions. All Supervisory Board meetings and reported on the scope, focus and of the Board of Management as well as all ­members took part in more than half of the material results of the audit. The auditor came to ­employees for the very good results and for meetings of the plenum and the committees to the overall conclusion that there were no major their performance in the 2017 financial year. which they belong. weaknesses in the internal control system or the risk management system. The Supervisory Board has passed regulations Berlin, March 2018 designed to prevent conflicts of interest. In The KA also dealt with the audit reports for the the financial year 2017, one conflict of interest 2017 annual accounts, to the extent that they requiring disclosure arose. The Board member make statements about the lending business For the Supervisory Board did not take part in the discussion of the issue and risk situation of Berlin Hyp, and raised no and received no preparatory documents or objections. Helmut Schleweis records about it. In one further decision, four Chairman Board members abstained from voting on the The PA closely examined the documents and resolution in order to avoid even the appear- recommended that the Supervisory Board ance of a conflict of interest. approve the annual accounts. The Supervisory Board acknowledged the audit results and Supervisory Board Appointments raised no objections after conducting its own Georg Fahrenschon stepped down from his post review. The Supervisory Board also examined as Chair of the Supervisory Board and of the PSA the annual accounts and Management Report at the end of the day on 24 November 2017. He as well as the recommendation for the appro- left the Supervisory Board at the end of the day priation of the balance sheet profit itself and on 30 November 2017. approved the results of the audit of the annual accounts. It approved the annual accounts pre- Thomas Mang was elected as the new Chair of pared by the Board of Management. The 2017 the Supervisory Board in the Supervisory Board annual accounts are thereby adopted. According meeting on 27 November 2017. to the profit transfer agreement, the earnings for 2017 are transferred to Landesbank Berlin Holding AG. The remaining balance sheet profit

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Corporate Governance Report 2017

Corporate governance stands for the responsible, Management members ensures that the Board of environment and its banking business. questionnaire, as in the past, which addressed transparent management and control of an enter- Management remains sufficiently diversified. On relevant topics according to the German Cor- prise that is directed at the long-term creation of 26 June 2017, the Supervisory Board set a target The Supervisory Board has recorded the porate Governance Code and Section 25d (11) added value. Corresponding guidelines have been of 0 % for the proportion of women on the Board detailed requirements in writing in a selection Nos. 3 and 4 German Banking Act (KWG) and prepared. These are summarised for German com- of Management based on the current contractual and diversity strategy. It describes details of the which each Supervisory Board member was able panies in the German Corporate Governance Code relationships. The target is initially valid until 30 knowledge, skills and experience required for to individually fill out before the meeting. The (GCGC) and were updated on 7 February 2017. June 2022. The target will be reviewed when a effective monitoring of the Board of Manage- findings of the evaluation were then presented contract of employment is terminated, a member ment. These include, in particular, knowledge by the Supervisory Board Chair at the meeting The Board of Management and the Supervisory is reappointed or a new member is appointed. and experience in the fields of securities, real and jointly discussed and debated by the body. Board believe firmly that good corporate govern- estate, the capital market and accounting. Inde- The 2017 review indicated that the efficiency of ance, which is manifested in compliance with the Supervisory Board pendence rules are also defined pursuant to the Supervisory Board activity was given. Further- Code, is an essential part of the foundation on The Supervisory Board of Berlin Hyp – which, in German Corporate Governance Code. more, the Supervisory Board noted that its which the lasting success of the company and the 2017, consisted of 15 members until 30 Novem- members have the required knowledge, abilities confidence of business partners and ­employees, ber 2017 and 14 members from 1 December Based on the assumption that the employee and experience for the activities of the Supervi- as well as the trust of financial markets in our 2017 – advises and monitors the Board of Man- re­presentatives also fundamentally fulfil the inde- sory Board and its committees. The staggered company,­ is built. Therefore, the Board of Manage- agement in the management of the Bank, works pendence criteria for Supervisory Board members scheduling of committee and Supervisory ment and Supervisory Board continue to observe with it to ensure long-term succession planning within the meaning of the Code, the Supervisory Board meetings and the written reports by the the principles of the German Corporate Govern- ensures a degree of diversity in the composition Board finds all members to be independent. The committees, which were introduced in 2017 and ance Code even though Berlin Hyp is no longer of both the Board of Management and the Super- members of the Supervisory Board are not subject permit better preparation for Supervisory Board a listed company, so that some GCGC provisions visory Board that is appropriate­ to the bank’s to any conflicts of interest, particularly any that meetings, received positive feedback. According (e.g. regarding the organisation of Annual General business activities. According to the regulations could result from an advisory function or board to statements by the members, the new way Meetings) are no longer relevant to Berlin Hyp. of the German One-Third Participation Act, it membership on behalf of customers, suppliers, of holding meetings brings Berlin Hyp’s dates comprises five Supervisory Board members on lenders or other business partners of the company. more in line with the timing of the LBBH Group’s Board of Management the staff side and ten on the shareholder side. committee meetings. Berlin Hyp’s Board of Management leads the The Chair of the Supervisory Board coordinates Members of the bodies do not participate in the Bank at its own responsibility with the objective the work within the Supervisory Board, chairs discussion and passing of resolutions by the The members of the Supervisory Board are of sustainable value creation and in the best its meetings and represents the interests of the bodies if conflicts of interest or the impression responsible for obtaining the necessary training interests of the company. It is committed to the Supervisory Board in relation to third parties. of a conflict of interest exist in individual cases. and continuing education for their duties at their principles of good, responsible and efficient The Supervisory Board has formed three com- own responsibility and are supported in this business management and control. It manages mittees from its own members. Its functioning The composition of the Supervisory Board process by Berlin Hyp. The company regularly the Bank in compliance with statutory provisions, is governed by the Rules of Procedure. therefore corresponds to the stated goals. informs the Supervisory Board about the latest the Articles of Association, the Rules of Procedure changes in statutory law and offers opportunities and the internal company guidelines. The Board The employees vote for their representatives in According to the equality law provisions of the for continuing education within the framework of of Management develops the strategic orientation their own election in accordance with the pro- Equality Act, relevant for Berlin Hyp, the Super- in-house events. of the bank, agrees on it in consultation with the visions of the German One-Third Participation visory Board set a target for itself in a resolution Supervisory Board and ensures its implementation. Act. The Supervisory Board cannot influence the dated 26 June 2017 to maintain the status quo of In addition, the Staff and Strategy Committee selection of employee candidates. 13 % (two women) with regard to the proportion also reviewed compliance with the GCGC at the In the financial year 2017, the Board of Man- of women on the Supervisory Board until 30 June meeting on 9 November 2017 using an analysis agement continued to consist of three persons. The Supervisory Board has decided to pursue 2022. Two women are currently members of the report prepared by the Board of Management. Regardless of the overall responsibility of the the following aims when new Supervisory Board Supervisory Board. No objections were raised. Board of Management, the individual members members are nominated: lead the divisions assigned to them by the Attention is given to potential conflicts of interest Close Cooperation between the Board of business organisation plan at their own respon- The diversity of the Board is established so that and compliance with the age limit of 70 years as ­Management and the Supervisory Board sibility. The members consistently act for the the qualifications and personalities of the indi- stipulated in the Rules of Procedure. A criterion for Berlin Hyp’s Board of Management and Super- benefit of the company as a whole. The members vidual members guarantee optimal supervision new Supervisory Board members is that they are visory Board work together closely based on of the Board of Management inform each other of the company in accordance with legal stipula- able to commit the expected amount of time. mutual trust. At least four Supervisory Board about all material developments in their divisions tions, including the German Corporate Gover­ meetings usually take place during the financial and coordinate­ all measures affecting multiple nance Code, and in the interests of the company, The Supervisory Board submits itself to efficiency year, as in 2017. The Supervisory Board moni- spheres of responsibility. its shareholders and the employees. This requires reviews each year. The most recent review was tors and advises the Board of Management with that all Supervisory Board members have knowl- conducted at the Supervisory Board meeting on regard to company management. The Board The varied expertise of the individual Board of edge, in particular, of Berlin Hyp’s relevant market 18 September 2017 and was based on a detailed of Management informs the Supervisory Board

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extensively and promptly on all issues relevant to and the Supervisory Board, as well as the Berlin Hyp to produce consolidated accounts 1. Berlin Hyp AG has complied with all recom- the company relating to strategy, planning, busi- spheres of responsibility of the individual mem- in accordance with the International Finan- mendations of the Government Commission ness development, the risk situation, risk man- bers of the Board of Management, is presented cial Reporting Standards (IFRS). The annual on the German Corporate Governance Code, agement and bank compliance. The Supervisory on pages 2 and 38 of the Annual Report. accounts, the half-year financial report and any as revised on 7 February 2017, announced by Board coordinates the company strategy and its interim reports are published within 90 days the Federal Ministry of Justice in the official implementation with the Board of Management. It Efficiency Improvement by Committees after the end of the financial year or 45 days part of the electronic Federal Gazette, with explores deviations in business performance from The Supervisory Board has formed three after the end of the respective reporting period. the exception specified in Section 2. plans and goals and states the reasons for these. committees to support the work of the Super- visory Board. These are the Staff and Strategy Before the proposal for selection of the auditor is 2. Berlin Hyp AG deviates from the following The Supervisory Board reviews and approves Committee, the Audit Committee and the Loans submitted to the General Meeting, the Supervi- recommendations of the German Corporate the annual financial statements in consider- Committee. The Staff and Strategy Committee sory Board obtains a declaration from the auditor Governance Code: ation of the auditor’s reports and decides on also acts as a nomination committee and as regards existing relations with the Bank or its a) At the time of the conclusion or extension of the Board of Management’s proposal regarding remuneration controlling committee. The Loans organs. The current declaration of independence Board of Management contracts, such contracts the appropriation of the balance sheet profit. Committee is also active as the Risk Committee of the auditor dates from 20 February 2018. have not always included and do not always Furthermore, it decides on the resolutions to be pursuant to the German Banking Act (KWG). According to this declaration, there is no doubt include a settlement payment cap stipulating proposed to the Annual General Meeting. Written and additional oral reports are used about the independence of the auditor. The that, in the case of premature termination of at the Supervisory Board meetings to provide Supervisory Board has agreed with the auditor work for the Board of Management without The Board of Management’s reporting ­obligations information about the work of the committees. that the auditor will report without undue delay good cause, settlement payments are limited to and duties to inform are stated in specific terms The Chair of the Supervisory Board does not on all findings and occurrences that become an amount corresponding to two years’ remu- in the Rules of Procedure for the Board of chair the Audit Committee. For details regarding evident during the conduct of the audit and that neration including ancillary benefits (Section Management. The Supervisory Board has also the responsibilities of the various committees are important for the Supervisory Board’s tasks. 4.2.3 German Corporate Governance Code). defined important transactions that the Board of and the areas they focused on in 2017, see the Likewise it was established that the auditor Management may only conduct with the Super- Supervisory Board Report in this Annual Report. shall inform the Supervisory Board or make a The general agreement of settlement payment visory Board’s consent. In addition, it has also notation in the audit report if divergences from caps removes the possibility of considering the established rules designed to prevent conflicts Annual General Meeting of the Sole Shareholder the German Corporate Governance Code and the circumstances of each individual case in case of interest. There was one conflict of interest The sole shareholder exercises its rights at the Declaration of Compliance issued jointly by the of contract agreements or extensions. For this requiring disclosure in the 2017 financial year. Annual General Meeting. The Annual General Board of Management and the Supervisory Board reason, decisions should be made in each indi- The member did not participate in the discussion Meeting decides on the tasks incumbent upon it are found. No such divergences were found. vidual case as to whether a settlement payment of the topic and did not receive any documents or by law, including the appropriation of net earn- cap should be agreed. records. In one additional decision, four members ings, discharge of the Board of Management Essential Features of the Remuneration of the body abstained from voting to avoid the and the Supervisory Board, appointment of the ­System for Board of Management Members b) The Supervisory Board has not decided to appearance of a conflict of interest. The Board of auditor, election of Supervisory Board members, and Supervisory Board Members impose a general maximum term limit for the Management continuously exchanges informa- amendments to the Articles of Association and The remuneration of the Board of Management length of membership of the Supervisory Board tion with the Chair of the Supervisory Board. capital measures. Berlin Hyp’s shares are held members and Supervisory Board members is (fig. 5.4.1 German Corporate Governance Code). by Landesbank Berlin Holding AG. As a result, published in a separate report as part of the The approach to risks in connection with the bank’s the Annual General Meeting of Berlin Hyp takes Management Report. Furthermore, in accordance The general establishment of a maximum term business activity is extremely important to the place as a plenary meeting behind closed doors. with the stipulations of the German Corporate for the duration of membership restricts the Board of Management and the Supervisory Board. Governance Code, the remuneration of Board of possibility of flexible succession planning. For Both bodies require regular reports about risks Transparency Management and Supervisory Board members this reason, nomination is instead decided in and their development. Berlin Hyp’s risk manage- The Bank’s website provides information about is shown individually in the Notes and is broken the respective individual case regardless of ment system is continually developed further by all significant developments and events related down into fixed and variable elements. the length of membership duration to date. the bank and is examined by the auditors. The to the Bank. For example, the planned publication Board of Management passes on information that dates for financial reporting are found in the Directors’ and officers’ insurance exists for the 3. Furthermore, Berlin Hyp AG has complied is significant from a risk standpoint to the Chair of financial calendar. All annual reports and interim members of the Board of Management and the with all recommendations of the Government the Supervisory Board without undue delay. reports are also archived and available on the Supervisory Board. In order to emphasise the Commission on the German Corporate website. All compliance declarations hitherto Bank’s responsibility and attitude towards the Governance Code, as revised on 5 May 2015, The work of both organs and of the three Super- provided by the Board of Management and the shareholders, a reasonable deductible of at least announced by the Federal Ministry of Justice visory Board committees is regulated in the Supervisory Board pursuant to Section 161 Stock 10 % of the damage up to one and a half times in the official part of the electronic Federal Rules of Procedure. These are checked regularly Corporation Act can also be accessed on the com- the fixed annual remuneration was agreed. Gazette, with the exception specified in Sec- to ensure that they are up to date. In 2017, pany website. Almost all information published tion 2, since the last Declaration of Compliance changes were made following the revision of the by the Bank online is also published in English. Joint Compliance Declaration by the Board of was issued on 14 December 2016. assigned spheres of competence for the lending Management and the Supervisory Board business, and an amendment was adopted due Accounting and Auditing the Annual Accounts The compliance declaration of the Board of Berlin, 26 March 2018 to the requirements of the German Audit Reform Berlin Hyp’s annual accounts in the reporting Management and the Supervisory Board pur- Act (Abschlussprüferreformgesetz – AReG). year were produced in accordance with the suant to Section 161 Stock Corporation Act was Board of Management and Supervisory Board German national provisions (German Com- updated in November 2017. It reads as follows: of Berlin Hyp AG The composition of the Board of Management mercial Code), as there is no statutory duty for

10 11 Innovation requires inspiration. Berlin Hyp launched an innovation initiative in 2017 under the motto #sharinginspiration. Innovative new products are being developed in ­cooperation with customers. Our goal is to continue offering individual financing solutions and tailor-made products Our path now and in the future. Exchanging ideas sparks mutual inspiration in order to accomplish this and shape the future to the future. together. #sharinginspiration 

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Milestones 2017 28 June The year in review

8 June 20 December

16 February Berlin Hyp extends invitations 4 October to the first Green Bond event More than 50 representatives of investors, capital market partners, law firms and sustainability agencies gathered for the first Green Bond event in Frankfurt by invitation of 9 January Berlin Hyp. A study of the Climate Bonds Initiative on the topic of First successful Second Green Pfandbrief A productive partnership Kinderhaus awards the “Best reporting was presented as part of ­benchmark issue in 2017 issued Berlin Hyp announced at Enabler” prize the event. Berlin Hyp launched its Berlin Hyp successfully issued EXPO Real that it is investing The Christmas party for friends ­issuing business in 2017 its second Green Pfandbrief in BrickVest, an online and sponsors of Kinderhaus with a 2.5 times over­ with an issue volume of platform for commercial real Berlin-Mark Brandenburg e. V. was subscription. The eight- € 500 million. The bank used estate investments based held in December 2017. Sascha year bond had a volume the Green Bonds to refinance 26 September in London/Berlin, as part of Klaus and Monika Peterhänsel of € 500 million and was loans for sustainable, energy-­ a strategic partnership. It is accepted the “Best Enabler” prize rated Aaa by Moody’s. efficient buildings. Altogether, the only regulated platform on this occasion on behalf of ­International orders 20 % of Berlin Hyp’s loan of its kind. The bank is ­Berlin Hyp. Among other things, ­accounted for 39 %. portfolio is intended to comprise expanding its value chain Berlin Hyp provides decisive green building financing by 2020. through this investment. essential financial support for the mission E – in the interest of annual autumn excursion. greater energy awareness Reducing behaviour-related electricity and heat consump- 14–17 March 5 October tion is the focal point of the information and motivation campaign launched at the start of the year. The goal: getting employees to save energy by changing their habits, with no loss of comfort.

Berlin Hyp ranked as industry Berlin Hyp exhibits technical leader expertise as industry expert The sustainability rating agencies Berlin Hyp launched the oekom research and Sustainalytics publication of several reports MIPIM have ranked Berlin Hyp as an “Indus- with the study “Logistics Europe has two real estate hub for business meetings try Leader”. With a B- rating from and Real Estate 2017 – City trade fairs of great impor- and conferences with our oekom research, the Bank takes first Logistics. With New Ideas in tance: EXPO REAL in Munich international clientele at the place out of a total of 52 evaluated the City”. The housing market and MIPIM in Cannes. For start of each year. companies in the Financials/Mort- report and retail study will Berlin Hyp, Cannes is the gage & Public Sector peer group. follow. Several newsletters for Sustainalytics ranks the Bank fifth select target groups will be out of 332 banks worldwide. published as well.

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Utilise current strengths. Master challenges. Prepare for the future.

2017 – another record year expand our international investor base. In for Berlin Hyp addition, we enhanced our reputation as a key player in Germany and various European Sascha Klaus is proud of what he and his ­countries,” Sascha Klaus says in summary. employees achieved in 2017. “The past year ­Despite the second consecutive record year, was not merely a good financial year, it was he also includes a warning: “Currently the an outstanding one, and I am very pleased market position is highly positive. Never- that we actually managed to outperform the theless, we must not forget that the market record year of 2016,” the Chair of the Board of environment still poses numerous challenges. Management of Berlin Hyp says. Strong competition in commercial real estate financing­ and the very high pressure Berlin Hyp was able to significantly improve on ­margins that this entails, along with its results compared to 2016. For example, the increas­ingly strict regulatory requirements, net real estate financing portfolio increased are having an impact on the results of our by € 2 billion to more than € 20 billion. business activities. We also need to prepare ­Berlin Hyp saw no less than five very signi­ for a changing market environment, starting ficant landmark transactions. With a total new right now.” business volume of around € 8.1 billion, the record year of 2016 was exceeded by 35 % Notwithstanding the challenges, Berlin Hyp (previous year: € 6 billion). was able to improve its earnings before profit transfer and contributions to the fund for Return on equity improved from 11.8 % to general banking risks to € 187 million. 16.9 %. Sascha Klaus views the successful Sascha Klaus, Chair of the Board of Management issue of two Green Bonds of € 500 million, each in the benchmark format, as highlights in 2017. “Both issues were successful and over- subscribed several times,” Sascha Klaus says. Berlin Hyp has issued Green Bonds with a total value of € 2 billion since 2015. This issue ­volume makes Berlin Hyp the biggest Euro- What inspires you, pean issuer of Green Bonds in the commercial­ bank sector.

“We achieved a lot last year and emerged from the financial year in a stronger position. Mr Klaus? We gained new customers and were able to

Sascha Klaus has been Chair of the Board of Management of Berlin Hyp AG since 1 October 2016 and is also a member of the Board of Management of LBB Holding AG. The past 2017 financial year was his first as Chair of the Board of Management of Berlin Hyp.

Regular updates for employees and personal interaction with them are especially important to Sascha Klaus.

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Sascha Klaus explains: “We took advantage developing products for savings banks in of these very favourable figures to further 2017. “For example, we successfully intro- strengthen our equity base and contribute duced the ImmoAval. It allows savings banks to the provision reserves. This is necessary for which financing with long terms or a neg- “We are not going to rest on our laurels. to ensure the Bank is well prepared for the ative EURIBOR represents a hurdle to partic- future.” Berlin Hyp contributed € 70 million ipate in profitable loan transactions through Sustainability will continue to be a very high to the fund for general banking risks alone. liability participation. We also made good The year before, the contribution stood at progress with the expansion of our promis- priority in future.” € 50 million. sory note platform. Our goal here is to allow savings banks to participate in large transac- Sascha Klaus, Chairman of the Board of Management of Berlin Hyp tions with great flexibility,” Sascha Klaus says. Partnership with savings banks 96 institutions from all S-Group regions have further expanded. participated in Berlin Hyp financing through ImmoSchuldscheine (real estate promissory Berlin Hyp was also able to expand S-Group notes) totalling € 121 million (previous year: business ties within the Savings Banks € 476 million). ­Finance Group. “By now, we are a partner to Currently it is modernising its entire core bank- It is important to him that Berlin Hyp employ- 116 savings banks in all S-Group regions. The Change is considered the only constant in ing system and pressing ahead with the loan ees are not afraid of change. “We are working total joint financing volume stood at € 1.5 this day and age, and Sascha Klaus firmly optimisation programme. In order to ­develop towards a culture of open discussion, because billion in the past year (2016: € 1.5 billion),” believes that change needs to be addressed promising digital business models, the Bank this is the only way to address concerns and Sascha Klaus reports. Berlin Hyp generates pro­actively. “We view constant change not has established a Digital Unit that analyses gain employee support for the processes,” a large portion of this financing through the only as a challenge, but above all as an op- the market and customer preferences, and Sascha Klaus says. Intensive communication is joint syndicate business with the savings portunity for improvement,” he says. That is searches for new, innovative approaches. important to him in this process, not only with banks. Berlin Hyp had several successes in why Berlin Hyp initiated numerous measures employees, but also with partners, customers early on in order to continue being successful Berlin Hyp has also secured itself a leading and stakeholders. It helps him gain new per- in the future. The future-focused process edge in expertise through a strategic partner­ spectives, and he uses the information as a ­“berlinhyp21”, intended to drive internal ship with a leading online platform for com- source of personal inspiration: “When you lis- cultural change, was initiated in 2016, and a mercial real estate financing in Europe. ten very intently to your conversation partner, digitalisation and sustainability strategy was you are better able to identify newly emerging adopted. Twice during the past year, sustainability needs, trends and wishes, and use them as the ­rating agencies have named the bank “Indus- springboard for innovations.” In terms of digitalisation, Berlin Hyp laid try Leader” for its green financing and invest- the foundation for the Bank’s digital trans­ ment products. Sascha Klaus is particularly Creating incentives, leading the way and formation in 2017 with the introduction of the pleased about one ranking: “Berlin Hyp took ­shaping and embracing the future together electronic file system and the alignment of all fifth place out of 332 banks in the global rank- are the key elements of another Berlin processes with digital requirements. ing by Sustainalytics. This result proves that Hyp initiative as well. “We want to develop our efforts and the strategic realignment were innovations and trendsetting business the right moves, and that we are held in high models ­together with the employees and esteem in Germany and abroad as a result,” he our customers­ under the motto #sharing­ says. “We are not going to rest on our laurels. inspiration. Our customers and partners Sustainability will continue to be a very high will c­ ­ontinue to benefit from the added priority in future.” value offered by Berlin Hyp in the future,” Sascha Klaus ­explains. He adds, “As one of A winning team: Board of Management trio Roman Berninger, “We have made excellent progress with the leading German real estate financing and Sascha Klaus and Gero Bergmann the implementation of numerous new Pfandbrief banks, we − after 150 years of regulatory requirements in the past year, business − intend to continue supporting our regardless of whether they have to do with customers with individual financing solutions digital transformation,­ cultural change, and innovative products in future. Innovation the ­expansion of our customer base or the requires inspiration.” Success factor for the future: positioning of Berlin Hyp as a leader in the area of sustainability.” Sascha Klaus is also Preparing today for changes in aware that such changes demand significant courage and patience. “It often means taking the market environment entirely new, previously unknown paths,” he says. “Sometimes such a path turns out to be a dead end. But this should not be a reason for discouragement.”

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Digitalisation is not just automation

The digital path in the commercial real Berlin Hyp as a pioneer ­estate financing sector “We are exploring uncharted territory in Roman Berninger, member of the Berlin many areas of digitalisation and assuming a Hyp Board of Management, is convinced pioneering role. We are therefore networking that digitalisation will establish itself in the intensively with other companies, also out- ­commercial real estate financing sector over side the financial sector. At the same time, the coming years. “Just look at the retail we are sharing our experiences with our ­banking business,” he says. “Digitalisation ­competitors,” says Thomas Haeske, Head of is already in full swing there. You can file IT at Berlin Hyp. The goal is to revolutionise your loan application online and conduct the entire loan process, from the point of your financial transactions around the clock. customer contact to approval, using state-of- ­Meanwhile, you do not even need a com- the-art digital technologies. puter; an app on the smartphone is usually sufficient. What has become commonplace That is why the website was also entirely in our private lives will establish itself in the reworked based on a new technology, SAP commercial sector as well.” Hybris. The goal is to offer customers portal solutions in future and support digital com- Digital transformation is far more than munication. “The bank’s website is the ideal Roman Berninger and Cornelia Rees-Görsch are convinced that digitalisation just the automation of individual business starting point for digital communication with Thomas Haeske has already will revolutionise commercial real estate financing in the next few years. reached important milestones processes. “We see it as far-reaching change customers,” Haeske continues. “We want to with his team on the way to a in all existing business models. Digital trans- largely parallelise our credit check ­activities ­digital future. The Head of ­ formation has to be viewed and implemented­ with maximum technological support in order IT regularly shares experiences not only from the Bank’s perspective, but to become faster and reduce interfaces.” gained in this field to date with above all from the customer’s point of view. competitors as well. Raising awareness about digitalisation among all stakeholders is the greatest ­challenge in Cultural change through digitalisation the course of this transformation,” Roman Digital Age – ­ Berninger says. Digital transformation of the business pro- cesses and models is shaping not only tech- Berlin Hyp began dealing with digitalisation nical, but above all cultural change at Berlin­ very early on. While many competitors are Hyp. New attributes, such as digital skills, what does that mean only just working on a digitalisation strategy networking and mobile work, are ­becoming now, Berlin Hyp is already a step ahead: the increasingly important. digitalisation strategy was adopted in 2016, the digital file system was introduced in 2017, “Our employees are the most important factor for Berlin Hyp? and all processes have been aligned with in digitalisation. Our ambitious digital trans- digital requirements in the course of the formation plan would not be possible without Bali project. them. It is therefore essential to regularly inform all stakeholders about the process and Humanity is currently at the beginning of a digital and fully Berlin Hyp will press ahead with its loan to involve them in the implementation. ­connected world. Even so, the digital revolution is already extend- optimisation programme KPO 4.0 in 2018 and ing into more and more areas of life. It will irrevocably change all is the first bank to pursue and implement a Our goal is to rise to the challenges of digital- traditional banking processes in the coming years as well. consistent S/4HANA strategy. Key pillars of the isation and pursue our further development,” digitalisation strategy intended for implemen- Roman Berninger says. He is aware that many tation by the end of 2019. new things are coming Berlin Hyp’s way and

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Berlin Hyp learned about BrickVest in 2017 during this analysis and invested in the ­company. Matthias Arnheiter sees many benefits for Berlin Hyp in this shared effort: “BrickVest is the only regulated online ­platform for commercial real estate invest- ments in Europe. The strategic partnership gives us access to a turnkey technology that is highly scalable. With this platform, “Many of our competitors are only just now developing a we are able to continue expanding our ­digitalisation strategy. We have a headstart of about 1.5 to structuring expertise­ and provide even 2 years,” Roman Berninger estimates. He has been a member of more ­comprehensive, integrated consulting Berlin Hyp’s Board of Management since 1 January 2010 and is ­services to our customers.” responsible for IT, among other things.

For Matthias Arnheiter and Berlin Hyp digitalisation facts Daniela Kärcher, testing new technologies such as the ´´ Berlin Hyp is investing € 25 visual projection of additional million in the implementation information into live pictures of its digitalisation strategy. (augmented reality) is impor- that there will be changes in the operating transformation in front of the Bank building. tant to develop new inspira- procedures as well. However, he views change Regular dialogue events will be held in future tion for their own ideas. as progress and believes the digitalisation so employees can continue to discuss the top- ´´ Berlin Hyp is a digitalisation process can be pursued together. He sees ics and share experiences and suggestions. leader and the first bank to digitalisation within the Bank as making the convert its entire core banking system to SAP S/4 HANA. workflows easier, since the technology can Guaranteed success for the future. handle automated processes. The capacities that this frees up can be put to good use, for In addition to the digitalisation of its existing ´´ The implementation of the example to strengthen customer relationships business models, Berlin Hyp is already going digitalisation strategy is due to be completed in many areas or for more intensive risk analysis of financing a step further. The Bank is looking for ideas by the end of 2019. requests. and topics for new business models and has ­established its own Digital Unit. It develops in- Intensive discussion of the digital transfor- novative approaches for new digital offerings­ mation in the company is important to Roman outside of actual banking operations. “We Berninger. He emphasises that “we all need are currently examining the existing business to know what goals we are pursuing, what the models, questioning them, and reviewing advantages and disadvantages of digitalisa- where forward-looking extensions may be tion are, and what changes there will be at possible,” says Matthias Arnheiter, Head of the Bank.” For example, Berlin Hyp reported Corporate Strategy. on numerous digitalisation topics during For Oliver Mehrholz, Head of Infra­ structure and Central Purchasing at an IT day in 2017. Aside from information “We are also taking a close look at the market Berlin Hyp, regular meetings facilitating booths in “raum21”, there were various pres- and its demands, and developing new ideas the mutual exchange of information entations and even an SAP promotion truck and solutions for the future.” with colleagues are key to working that ­provided information about the digital successfully.

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“The open and highly connected way of working initially required us to adopt a new mindset”

Viola Siedler and Aaron Israel, Berlin Hyp employees

agile. networked. creative. – The Digital Unit at Berlin Hyp

Viola Siedler and Aaron Israel are two Openly exchanging thoughts and information Berlin Hyp employees who temporarily with people in many different industries and ­exchanged their own offices for those fields is possible here at any time. The office at MindSpace in Berlin’s Friedrichstraße doors are open, no matter what company ­starting in June 2017. They are part of the somebody works for. “The open and highly Digital Unit that is developing future digital connected way of working initially required business models “outside” the bank. us to adopt a new mindset,” say Viola Siedler and Aaron Israel in agreement. “Now, how- Their work revolves around the central ever, we can’t imagine doing without this ­question: “What products and service form of work.” approaches solve the problems of our ­customers?” They found ideal conditions Their activities in the Digital Unit began with for the development of new ideas in the a comprehensive market analysis and more co-­working space, which boasts a special than 60 discussions with customers. “We atmosphere preferred by start-ups and a high interviewed numerous customer contacts in “Our time in the co-working space expanded my horizons in various ways. Through the ongoing ex- concentration of creative minds. order to find out what they want and need,” change with others in the co-working space, we were able to benefit from their knowledge, perspectives Viola Siedler explains. In the subsequent and experiences in the development of new approaches,” Aaron Israel says. brainstorming and creative process, she and her fellow team members developed the most promising ideas further and assessed “Every day in the Digital Unit was new and their feasibility. A total of three business inspiring. We worked incredibly quickly there, models were prepared and presented to the in a spirit of cooperation free from competitive Berlin Hyp Board of Management at the start thinking,” is how Viola Siedler sums up her of 2018. They are currently being reviewed to experience. determine the market response.

New paths also mean new ways of working and new workplaces. Aaron Israel and Viola Siedler found these at MindSpace in Berlin.

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Sustainability is an important Only Sustainable factor in Berlin Hyp’s business Action can ensure strategy long-term success

“Push me when you leave” says a small sticker on almost every light switch at “We are committed to sustainability! This € 500 million. “We have issued Green Bonds ­Berlin Hyp. It exemplifies collective thought and action at Berlin Hypregarding­ applies to both simple matters and complex with a total volume of € 2 billion since 2015. the environment and the use of natural resources. This brief request is not only financing. Only if a shift towards sustainable This makes Berlin Hyp the most active issuer action occurs in all areas can we be successful of Green Bonds in the European commercial ­intended to encourage employees to turn off the lights, but to spark responsible over the long term,” says Gero Bergmann, banking segment,” Bodo Winkler says. As and sustainable action in all areas. Board of Management member responsible for Head of Investor Relations & Sales at Ber- markets at Berlin Hyp. lin Hyp, he shares responsibility for issuing the Green Bonds. Berlin Hyp became aware of sustainability early on and firmly anchored it in the compa- ny’s strategy. “Over the past three years, we In the focus of international investors have worked on the sustainable development of our core business with great success and More and more market players are paying Gero Bergmann is the Board come up with new products,” says Gero attention to Berlin Hyp’s bonds, which is illus- of Management member Bergmann. “We issued the world’s first Green trated for example by the four times oversub- responsible for markets at Pfandbrief in 2015 and a Green Unsecured scribed Green Senior Unsecured Bond: 51 % Berlin Hyp since 1 January Bond in 2016. The results and successes in the of all the investors came from abroad, most 2011. past financial year confirm that we are on the of them from France and the Benelux states. right track with our efforts.” “The expansion and internationalisation of the investor base is a particularly important milestone for Berlin Hyp,” Bodo Winkler points On the way to the “20 % goal”. out. “It shows that both domestic and foreign investors have great confidence in our work, Financing highly energy-efficient, sustainable and that we were able to further strengthen buildings was a focal point in the past finan- our good reputation as one of Europe’s lead- cial year. A total of € 2.7 billion, or 12 %, of ing bond issuers.” Berlin Hyp’s real estate portfolio consisted of green financing at the end of 2017. The loan portfolio for green building financing is to Berlin Hyp as a trailblazer be increased to 20 % by the year 2020. In the light of this, the Bank has established struc- The considerable oversubscription of the is- tures and processes in order to identify green sues and the high percentage of international building financing in a timely manner. investors are not the only indicators of Ber- lin Hyp’s successful course. Sustainable action The Bank also focused on issuing new Green is also recognised in the ratings. Berlin Hyp Bonds in 2017. Berlin Hyp is using these was rewarded with top rankings in 2017 by the bonds to refinance loans for energy-efficient, sustainability rating agencies oekom research sustainable buildings. Berlin Hyp placed two and Sustainalytics. of these Green Bonds last year. It successfully issued its second Green Pfandbrief in June Changing behaviour, taking responsibility and serving as a role model – for Gero Bergmann, these­ three and a second Green Senior Unsecured Bond factors are particularly important for successfully establishing sustainable action over the long term, in October. The respective issue volume was both in business and in our private lives.

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“We are committed to sustainability! This applies to both simple matters and complex financing.”

Gero Bergmann, Board of Management member responsible for markets at Berlin Hyp

At oekom, Berlin Hyp advanced to “Industry environmental management in 2017. They Sustainability for success Leader” in September and holds first place in provide tips and are available to answer the comparison group. Sustainalytics ranked employee questions. “We also implemented ´´ Berlin Hyp defined the financing of green buildings as a strategic Berlin Hyp fifth out of 332 banks worldwide. numerous resource conservation measures business objective in 2017. With their rankings, the rating agencies con- in the past year,” says Marion Voigt, Environ-

firmed Berlin Hyp’s exceptional commitment mental Management Officer at Berlin Hyp. “For ´´ 20 % of the real estate portfolio is to sustainability management and simulta- example, we switched printing service provid- planned to consist of green build- neously recognised its dedication to green ers and replaced the associated technology, ing financing by 2020. investment products and responsible action realising energy savings of about 50 % and with regard to people and the environment. simultaneously eliminating around 60 % of ´´ 96 new investors were acquired with the four Green Bonds to date. the workstation printers. We achieved similar savings through the replacement of our server ´´ Berlin Hyp received the EMAS Sustainability is the responsibility of all infrastructure. Overall, the introduction of seal of quality from the European concerned environmental management, which was suc- Union in 2016. EMAS is the cessfully recertified according to DIN 14001 world’s most demanding system “We have been placing greater emphasis in 2017, is bearing fruit in many parts of the for sustainable environmental on sustainability since 2015. A cross-de- Bank.” management. The seal of quality is awarded to organisations that partmental team was formed especially for meet the strict requirements of the purpose. Awareness within the bank Further measures to reduce environmental the EMAS Regulation. has increased considerably since then. We impact are planned for 2018. All company are pleased that these efforts are now also cars are to be converted to hybrid or electric reflected by highly positive ratings,” says drives with the “Green Fleet” project. Charging Oliver Mehrholz, Head of Infrastructure and stations will also be installed at all Berlin Hyp Central Purchasing at Berlin Hyp. Together parking spaces in the course of the conversion. with Alexandra Czoski, who is responsible for Similar stations will then be installed and used sustainability matters concerning corporate by the company car drivers at home. strategy, he believes the efforts in the area of governance, modern HR management and the Christiane Groh (photo on the activities in the capital market are especially left) and Alexandra Czoski are important factors contributing to the excellent dedicated to a sustainable rating results. future.

Berlin Hyp rests its commitment to sustain- ability on numerous shoulders. In addition to an Environmental Management Officer, it has a Sustainability Steering Committee that ­discusses strategic matters, in addition to a Sustainability Board. Seven employees were also trained as internal auditors in € 2 billion in Green Bonds have been issued by Berlin Hyp since 2015.

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Team Spirit which customers appreciate

Berlin Hyp is changing. This change is not only noticeable within the Bank, but can also be seen in interactions with the Bank’s customers. Deal teams and working together as partners are two important components that have ­contributed to Berlin Hyp’s success, as the Bank has grown significantly during the past year both in the new customer business and in the number of ­customers.

Reinforcing the Bank’s good reputation as a leading real estate finance provider and ­reliable partner is especially important to Adrian Ziem, Oliver Hecht and Assem El Alami, which is why they regularly meet with employees and customers to exchange ideas.

Oliver Hecht, Head of S-Group and Domestic reduces coordination and decision-making The loans, legal and valuation departments level of activity­ seen in both investor groups Business at Berlin Hyp, is convinced this is effort. Loan decisions can be made very work together much more efficiently as a ­contributed to our record year,” Assem El due to a different way of interacting. “For quickly as a result, even in highly complex result. Expanding the deal team approach Alami notes. Berlin Hyp was also able to us, customers are partners on an equal foot- projects. “For example, we were able to ­creates a feeling of shared responsibility ­benefit from the extremely high level of ing, and we develop a suitable, individual provide GSG Gewerbesiedlungs-Gesellschaft across departments. Our customers usually investment activity in the strategic foreign ­financing solution in cooperation with them.” mbH in Berlin with financing of € 510 million notice this because their requests are handled markets. ­Depending on the complexity and scope, within just four months in 2017,” Oliver very quickly, reliably and accurately.” customers are assisted by not just one Hecht says. He notes that “the cultural trans- contact person, but several experts at once. formation initiated by Berlin Hyp two years The syndication market is gaining Berlin Hyp assembles a deal team for this ago has resulted in numerous successes Berlin Hyp as a key market player ­importance again purpose, ­consisting of experts from ­various concerning cross-departmental cooperation. departments, tailored specifically to the Our team spirit is stronger. We engage in This speed, professionalism and expertise for After the 2008 financial crisis, the market for ­financing request and the project volume. co-management and coordinate schedules highly complex financing projects have further issuing large loans by banking syndicates­ This bundling of know-how considerably with each other closely. strengthened Berlin Hyp’s market position was virtually wiped out. In the meantime, the as one of Germany’s leading real estate and syndication business has gained importance Pfandbrief banks. “We are now seen as an again. “We saw numerous larger transactions important key player, not only in Germany, but again for the first time in the past year,” Assem in various European markets as well,” Assem El Alami notes. “We are seeing syndication El Alami says with satisfaction. The sales activity developing and gaining momentum,” manager is responsible for all international he adds. business at Berlin Hyp. Berlin Hyp also participated in this trend. The 2017 financial year was extraordinarily For example, it financed the acquisition of a strong, with more than € 8 billion in new pan-European multistorey car park portfolio ­business including prolongations. by the Bouwfonds European Real Estate “Numerous international investors were ­Parking Fund “BEREPF III” as the syndicate “Together for the customer” is active in the domestic market during the leader in July 2017, jointly with Deutsche Post- not only the motto of Dr. Peter Maurer (photo on the left), Nicole first few months of 2017. German investors bank. The syndicate provided a total of € 92 Hanke and Jens Völkner, but all did not begin stepping up their investments million for twelve multistorey car parks, total- Berlin Hyp employees. until the second quarter. Overall, the high ling 6,300 parking spaces. Syndicate financing

30 31 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service berlinhyp21

“Our innovative products, Future-oriented working methods, innovative products and the evolution of ­corporate culture are just three factors that Berlin Hyp focused on last year to help individual customer it advance. The Bank has initiated the “berlinhyp21” future process to make itself support and the digital fit to meet the coming challenges. transformation of all There is probably no other place within Berlin defined by a strong WE feeling and pro- business processes are Hyp where the transformation and dynamic ductive ­collaboration. The room offers an changes are more evident than in “raum21”. ideal ambience­ and literally invites lateral generating genuine It symbolises “berlinhyp21” and the ongoing and innovative­ thinking,” Ralf Behnke says. implementation of the “agile. networked. ­“Initially there were some reservations about added value for our creative.” vision for the future. the room. Now, making do without ‘raum21’ customers.” would be inconceivable.” Space for new ways of thinking and working. Adrian Ziem, Head of Sales Management Adrian Ziem and Oliver Hecht consider the development of Group decisions viewed as opportunities at Berlin Hyp innovative products crucial to Berlin Hyp’s future success. “raum21” is not a normal room. It can be used simultaneously as a venue for events,­ Changes are not only being made with regard ­brainstorming and meetings, a workshop to brainstorming and working methods in the space or a place to retreat to for individual course of the “berlinhyp21” project. Adopting conversations. The flexible design of its a new mindset is required in decision-making ­various areas permits adaptation to the as well. with a volume of € 205 million was issued in S-Group business as a key pillar individual needs of the users. “The agility and December 2017 in cooperation with Erste flexibility that ‘raum21’ radiates have had a Group Bank. This amount was made available Berlin Hyp wants to keep growing in the pronounced impact on how we work within to IMMO-FINANZ AG, a leading commercial real German market, including when it comes to the Bank. Even though the room has only estate group, for refinancing a Warsaw office S-Group business with the Savings Banks been around for about a year, it has noticeably property portfolio with a total of seven office Finance Group. Financial transactions in this advanced the cultural change in the bank,” buildings. segment totalled € 1.5 billion during the past says Ralf Behnke, Head of Governance at financial year. A change is perceptible here Berlin Hyp. The room’s atmosphere promotes Berlin Hyp is planning to further expand its as well. New, innovative products are being dialogue across departments and hierarchy activities in the syndication market in 2018. added to the range and will contribute to levels, new ways of working and the develop- “Thanks to our good reputation, the ability to ­expanding S-Group business in future. ment of innovative ideas. handle highly complex financing transactions and our membership in the Savings Banks Berlin Hyp introduced a new product to ­market Finance Group, many partners trust us with in 2017 with ImmoAval. “The launch and the A creative hot spot for new impulses ­arranging and leading syndicates. We are feedback from our contacts at the savings going to build on this trust and will continue banks were positive. We believe that we are Morning, noon or evening – employees living up to it,” Assem El Alami says with going to be very successful with the ImmoAval engage in discussions and networking ­confidence. product in particular over the long term,” in “raum21”. Together, they look for new Adrian Ziem, Head of Sales Management, ­solutions and optimisation potential as well says. He believes Berlin Hyp is well positioned as trendsetting business models. “Compared for the future: “Our innovative products, to typical conference­ rooms, meetings are Exchanging ideas and individual customer support and the digital not as distanced any more. Now they are ­providing mutual impetus – for Denise Bellin, Dr Peter transformation of all business ­processes are Mauerer (both top photo) generating genuine added value for our cus- and Alexander Beer, tomers.” “raum2” is the ideal space for developing new ideas.

32 33 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service Everything

in motion. “A lot has changed during the last two Developing new ideas through cluster work years. In particular, joint decision-making in ­competency groups and not only by managers More than 100 employees are working on requires new ways of thinking and acting. ideas and measures for implementing the Everyone first has to get used to this way goals of the future-oriented project in a total collaborating,” says Nicole Hanke, Head of of six different clusters. Aside from greater Communications & Marketing. employee participation, the plan is to reduce employee workload and dismantle internal Jens Völkner and Nicole Hanke use one of the many available From her perspective, it is important for bureaucracy. meeting and conference areas at Berlin Hyp to jointly prepare managers to learn how to let go and cede concepts or presentations. responsibility to the group. Employees, on “The Bank’s digitalisation initiative has the other hand, have to actively contribute resulted in many additional work projects to decision-making as part of the group and ­during the past year. This meant we were deal with different opinions and perspectives. unable to get closer to the goal of reducing A consensus needs to be found in the end. the employee workload overall,” says Jens “The agility and flexibility “Reaching this goal requires intensive dis- Völkner, who is intensively assisting the cussions. That often leads to friction and is process in addition to his tasks as Head of that ‘raum21’ radiates therefore much more time-consuming at the Finance. However, this is going to happen outset,” Nicole Hanke explains. gradually as the numerous ongoing digitalisa- have had a pronounced tion projects are concluded. She sees this type of decision-making as an impact on how we work opportunity for higher-level, more intense In contrast, a lot has been achieved in the employee participation. Such participation way of dismantling bureaucracy during the within the bank.” in this context is one of a total of three aims past financial year. “We have restructured pursued by the "berlinhyp21" future process. competencies, simplified the purchasing Ralf Behnke, Head of Governance process and further optimised the existing at Berlin Hyp loan process. Ongoing optimisation of the loan process will be a focal point in 2018. A new social media strategy was developed and “agile. networked. creative.” is not just the motto of Berlin Hyp’s vi- Meeting Pilots were trained in other clusters,” sion for the future; it is put into practice as well. Sabine Olejnik and Jens Völkner says. He considers the Meeting Ralf Behnke (top), Sandra Cyron (bottom left) and Katrin Schlicke- Pohlisch therefore regularly use “raum21” for joint brainstorming Pilots a particularly good example of the new into our HR development programmes,” says sessions and networking. corporate culture that is developing, defined ­Sabine Olejnik, Head of Human Resources at by voluntary commitment, synergy effects, Berlin Hyp. The Meeting Pilots are one of many collaboration across hierarchies and greater projects intended to drive the ­“berlinhyp21” employee cohesion. future process in 2018. Projects to ­optimise the loan process (KPO 4.0), convert the core banking system to SAP 4/SHANA, and in the Trained experts as Meeting Pilots areas of employee tools and management development are going to be implemented in A total of eleven employees have obtained 2018 as well. training on how to organise and conduct meetings using the “design thinking” method. Sabine Olejnik is convinced that the trans- Their goal is to make workshops more formation of Berlin Hyp is now unstoppable. ­effective with goal-oriented moderation. Much has been initiated and is in motion, “Training the Meeting Pilots was a great countless ideas and projects are starting success. They have been very well received. to grow. “Now we must continue utilising We are therefore going to integrate training the momentum of this process and proceed on new approaches to meetings more tightly ­resolutely along the chosen path.”

34 35 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

Berlin Paris, Amsterdam, The Hague and Bonn (excerpt) Inspiration for Europe: Refinancing of a GSG commercial portfolio

Pan-European multistorey Selected Reference Projects Berlin Hyp provided GSG Gewerbesiedlungs-Gesellschaft mbH with a total loan amount of € 510 million for refinancing a commercial real car park portfolio estate portfolio. Berlin Hyp, in cooperation with Deutsche Berlin Hyp specialises in large-volume real estate financing for professional investors and The financing is for a total of 41 business parks in Berlin with an Postbank AG, financed a multistorey car park housing companies. It once again financed numerous national and international real estate overall rental area of 770,000 m2 and 5,600 parking spaces. Most portfolio for the III. Bouwfonds European projects in the past financial year. Berlin Hyp’s net real estate financing portfolio grew by of the portfolio­ is located in Berlin-Kreuzberg, complemented by Real Estate Parking Fund “BEREPF III”. Asset class Commercial € 2 billion to more than € 20 billion in 2017. As a result, Berlin Hyp has further strengthened its ­additional properties in the west of the city as well as the eastern role as one of Germany’s leading real estate financing and Pfandbrief banks. Berlin districts of Marzahn, Pankow and Hohenschönhausen. These are Customer GSG Gewerbesiedlungs- The loan amount for the acquisition of a multifunctional rental spaces that can be used as offices, warehouses Gesellschaft mbH pan-European multistorey car park portfolio

and production floors. The spaces are mainly rented to small and Financing type Refinancing is € 92 million. The newly financed portfolio ­medium-sized craft enterprises and businesses, as well as start-ups. ­encompasses twelve car parks: seven in Major tenants include the Technical University of Berlin, the broad- Financing volume € 510 million in two France, three in Germany and two in the tranches of € 346 million caster Deutsche Welle, Fraunhofer ­Gesellschaft e.V. and the co-working ­Netherlands, with a total of approximately Warsaw and € 164 million space provider Ahoy Berlin. 6,300 parking spaces. They are centrally Polish office property portfolio Function of Berlin Hyp Sole lender ­located in various European cities and man- aged by renowned international operators. of IMMOFINANZ AG Closing September 2017 Financing term 7 years In cooperation with Erste Group Bank AG, Asset class Commercial used real Berlin Hyp provided IMMOFINANZ AG with a estate syndicate loan totalling € 205 million. The loan Customer III. Bouwfonds amount was used to refinance seven existing European Real Estate IMMOFINANZ AG loans, combining them under Munich Parking Fund one roof. Financing type Portfolio financing Urban quarter new construction as a syndicate loan Seven office buildings in very good locations “Perlach PLAZA” Financing volume € 92 million in Warsaw are being financed with the loan over a term of five years. The buildings include Berlin Hyp provided CONCRETE Capital with Function of Berlin Hyp Managing underwriter Park Postepu, IO-1, Nimbus, Brama Zachodnia, around € 128 million for the new construction in a syndicate with Equator, Crown Point and the Crown Tower. of an urban centre. The modern, three-part Deutsche Postbank AG The portfolio has a total rental area of around building complex is planned for the “Kultur Closing July 2017 140,000 m2 and has been held by IMMOFINANZ Quadrat” in Munich-Neuperlach. Construction Financing term 5 years, plus a AG for some time. is scheduled to begin in 2019. 3-year renewal option

2 Asset class Office and Retail space totalling 11,200 m , a hotel with commercial building 150 rooms as well as residential units and student apartments are planned for the urban Customer IMMOFINANZ AG centre. Construction of approximately 440 Financing type Portfolio financing parking spaces is planned as well. (refinancing) as a syndicate­ loan

Financing volume € 205 million Asset class Residential, retail, hotel Function of Berlin Hyp Managing underwriter in a syndicate with Customer CONCRETE Capital Erste Group Bank AG Financing type Development financing Closing December 2017 Financing volume € 127.6 million Financing term 5 years Function of Berlin Hyp Sole lender

36 37 38 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

Berlin I Principles of the Bank Business Model

Organisational Structure Gero Bergmann As a real estate sector partner, Berlin Hyp is ImmoKonsortial product, which is designed to Locations  Berlin Hyp is a stock corporation (Aktienge- Human Resources one of the first ports of call for private investors enable them to participate in regional syndicate Germany and throughout Europe sellschaft) and forms part of the Landesbank Treasury and housing societies that are looking for business with smaller volumes through a simpli- Berlin Holding AG Group (LBBH), Berlin, the S-Group and Domestic Business flexible financing solutions as well as expert yet fied credit process, and the ImmoAval product, majority of whose shares are held by the International Key Accounts and Syndication personal support. Through its business model, which combines co-liability via guarantees with Erwerbsgesellschaft der S-Finanzgruppe today Berlin Hyp focuses on real estate financing clear documentation and professional handling. mbH & Co. KG. As a subsidiary of Landesbank Roman Berninger in economic centres in Germany and select Amsterdam Berlin Holding, Berlin Hyp is included in the Finance and Banking Operations foreign markets. Berlin Hyp also offers the savings banks consolidated financial statements of the Information Technology comprehensive analysis of non-performing real Warsaw Erwerbsgesellschaft der S-Finanzgruppe mbH Company Organisation On the capital market, Berlin Hyp is valued as estate financing in the form of its ImmoRisiko­ Paris & Co. KG (smallest and largest consolidation Risk Controlling a recognised and reliable partner that regularly Dialog service. Detailed analysis of restructuring-­ group as defined in Section 285 Nos. 14 and 14a issues covered and uncovered bonds. The specific aspects is carried out in dialogue of the German Commercial Code [HGB]). A profit In view of future challenges at Berlin Hyp, mortgage Pfandbrief has consistently and with the savings banks and results in options and loss transfer agreement is in place between changes to the organisational structure were lastingly proven its value as the leading means for action evaluated by Berlin Hyp, which the Berlin Hyp and Landesbank Berlin Holding. The implemented on 1 July 2017. These changes of refinancing. ­savings banks can use as a basis for decisions. Group structure is as follows1: related, in particular to digitalisation, the further Berlin Dusseldorf development of information ­technology and Locations Sustainability is a central aspect of Berlin Hyp’s Frankfurt am Main Berlin Hyp’s strategy with regard to overall Berlin Hyp is headquartered in Berlin. It also has company strategy. Since 2015, Berlin Hyp’s Hamburg changes in customer requirements. For example, domestic sales offices in Dusseldorf, Frankfurt value chain has included an additional impor- Munich Erwerbsgesellschaft der Beteiligungsgesellschaft der the pre­viously separate Finance and Banking am Main, Hamburg, Munich and Stuttgart, as tant element of sustainability – green bonds for Stuttgart Renovation of two residential S-Finanzgruppe mbH & Co. KG S-Finanzgruppe mbH & Co. KG ­Operations divisions were merged, the Organ- well as abroad in Amsterdam, Warsaw and Paris. the refinancing of green assets. They thus offer isation/IT division was divided to form the new investors added value beyond the creditwor- buildings with 490 units 89.37 % 10.63 % divisions Information Technology and Company Products and Services thiness of the bank and its cover funds. Green Organisation, and the Company Strategy division Berlin Hyp develops individual financing solu- bonds are issued in the form Green Pfandbriefe Landesbank Berlin Holding AG Berlin Hyp provided a loan amount of € 24.7 Asset class Residential was newly established. Berlin Hyp is divided tions for its customers. A broad range of products and Green Senior Unsecured Bonds. The financ- million to WBF Wohnungsbaugesellschaft overall into 14 divisions with 55 departments is used to meet customers’ requirements. Among ing of green buildings,­ among other things, Customer WBF Wohnungsbau- 100 % 100 % Friedrichshain mbH for the refinancing of gesellschaft Friedrichs- and teams. other products, this includes fixed-interest represents an element of the bank’s sustainability two residential buildings in Berlin-Mitte and Landesbank Berlin AG / loans, reference interest rate loans, cash loans activities that relates directly to its core busi- hain mbH Berlin Hyp AG Berlin-Friedrichshain. WBF is a wholly owned Berliner Sparkasse­ The Supervisory Board of Berlin Hyp has three and sureties, framework lines, interest hedge ness, commercial­ real estate financing. Financing type Refinancing, subsidiary of WBM – Wohnungsbaugesellschaft committees: the Loan Committee, the Staff and products, financing products for construction ImmoAval  100 % Berlin-Mitte mbH. Strategy Committee and the Audit Committee. work (construction enterprises and developers), Medium and long-term refinancing is generally Financing volume € 24.7 million, of which business current accounts, operating equipment carried out by issuing mortgage Pfandbriefe, as Berlin Hyp Immobilien GmbH Financing was used to modernise the blocks € 10 million ImmoAval Business Activities loans and overnight money/term money, as well well as through unsecured issues. of flats in panel construction with a view to Function of Berlin Hyp Sole lender Berlin Hyp is a banking institution that specialises­ as valuations and payment transaction services. energy efficiency, and they now have excellent and managing in commercial real estate finance and ­combines These enable the Bank to offer a full range of energy consumption values. Encompassing a ­underwriter experience from about 150 years in the real customer care as a real estate financer. total of 490 residential units in preferred Berlin Closing March 2017 As at 31 December 2017, the Berlin Hyp Board estate lending business with the ­foresight and ­locations, they are fully rented. The total living of Management comprised three members who effectiveness to address current market trends To manage risks and optimise returns, many space is 34,161 m2. Financing term 10 years had the following areas of responsibility: in order to develop future-oriented ­products and financing transactions are processed together services for professional customers. with partners. For the most part, Berlin Hyp’s Special features of the financing Sascha Klaus (Chair) product range is therefore consequently Several savings banks participated in the financ- Governance Under the umbrella of Landesbank Berlin Holding, ­suitable for syndicates. ing with a total of € 10 million in liable funds as Communication and Marketing Berlin Hyp is a partner and competence centre part of a pilot transaction for the new ImmoAval Lending (Real Estate and Capital Market) for the commercial real estate financing opera- The Agency Desk service unit provides special product. Demand was high, so that the offer Internal Audit tions of the German savings banks. In addition services relating to the syndicate business. ­volume was fully subscribed within three weeks. Company Strategy to its current offering of syndicate financing and Valuation support in valuation and restructuring,­ above In addition to an extensive product range, Berlin all products such as the secured ImmoSchuld- Hyp provides products specially developed for schein and ImmoKonsortial provide particular savings banks, such as the ImmoSchuldschein,

1  The names Landesbank Berlin AG and Berliner Sparkasse are added value to savings banks. which allows them to participate in the potential used synonymously in the following. returns of commercial real estate financing, the

39 40 41 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

Objectives and Strategies Management System

The Berlin Hyp Board of Management has In addition to its current offering of syndicate Berlin Hyp’s business policies are managed on Non-Financial Performance Indicators summarised the company strategy in a strategy financing, including the standardised product the basis of annually recurring strategy and The Bank also applies a number of non-financial document. It describes the business strategy ImmoKonsortial, the ImmoSchuldscheinen planning processes, in compliance with regula- performance indicators that can be broken down that forms a binding strategic framework for the product and classic investment products tory requirements and the risk strategy approved as follows: Bank’s business activities. The operating targets (Pfand­briefe, bonds), and support in the form of by the Board of Management. They are therefore and functional strategies are derived from this. valuation and restructuring services, Berlin Hyp risk- and value-oriented, and are generally based Market: new customer recruitment, target is continuously expanding its product range and on the process stages of planning, implemen- portfolio, S-Group business1 Berlin Hyp continues to pursue two strategic provides savings banks with advice on all issues tation, assessment and adjustment. The Bank’s Employees: employee structure, goals: relevant to the Group. Berlin Hyp’s newest prod- central management tools are the financial ­motivation, management and development ucts, ImmoAval and ImmoRisikoDialog, will in statements and budgets, the financial and risk Sustainability: green issues, green 1. Berlin Hyp continues to strengthen its posi- future complement its product portfolio, which is reports, as well as liquidity and new business ­financing, sustainability rating and tion as one of the leading commercial real aligned to the various needs of the savings banks. reports as prepared in accordance with German compliance­ estate financers in Germany. commercial law and regulations. Potential devia- The sales structure is organised decentrally tions and their causes are continuously analysed We will address the financial and non-financial 2. Berlin Hyp is integrating itself in the Savings in order to strengthen the group philosophy. on the basis of budget/actual comparisons. performance indicators in more detail, particu- Banks Finance Group as a partner for com- Regional savings bank advisers­ and appraisers larly in the Economic Report. mercial real estate financing. work with the savings banks from the Bank’s Financial Performance Indicators branches in Düsseldorf, Frankfurt am Main, Berlin Hyp has defined the following financial Non-Financial Statement For Berlin Hyp, strengthening its position Hamburg, Munich and Stuttgart. Twice a year performance indicators for the management of Berlin Hyp has prepared a separate non-finan- as one of the leading commercial real estate the Savings Bank Advisory Council advises its business activities: cial report in accordance with Sections 289b and Goals for 2020 financers in Germany means that it participates Berlin Hyp on all questions relating to S-Group c of the German Commercial Code (HGB) for the in numerous major real estate transactions in business. Transfer of profit to LBBH1 financial year 2017. It will be published together Germany within the scope of its risk parameters, Net interest and commission income1 with the Management Report. Berlin Hyp will alone or in a syndicate, and that it has a stable Berlin Hyp positions itself on the market as Cost-income ratio1: ratio of operating also publish the sustainability report on its customer base that is successively expanding a sustainable company, and thereby takes a expenditure to net interest and commission website at www.berlinhyp.de/bhyp/de/presse/ within the relevant customer group thanks to leading position (sustainability rating ranking) income, plus other operating income mediacenter. the quality, speed and reliability of its customer in its peer group. Berlin Hyp has set itself the Return on equity1: ratio of operating results service and loan processing. Berlin Hyp intends goal that 20 % of its overall portfolio will be before income tax and profit transfer plus the 20% to remain among the real estate financers with composed of green financing by 2020. That goal change in the special item for general bank the most stable earnings in Germany. is supported in particular by the development of risks in accordance with Section 340g of the of the loan volume should be sustainable products (e.g. green bonds), efforts German Commercial Code (HGB) to average composed of so-called green Berlin Hyp aims to become an increasingly to promote the financing of sustainable real balance sheet equity including the special building financing by 2020 important partner to the savings banks in the estate, the implementation of a comprehensive item for general bank risks in accordance area of commercial real estate financing, and sustainability and environmental management with Section 340g of the German Commercial thereby contribute to the success of the Savings system, and the promotion of employees’ social Code (HGB) Banks Finance Group. commitment. Core capital ratio1: ratio of common equity that is capable of being taken into considera- tion under regulatory law to overall risk New business1

The Bank’s management also relies on other financial performance indicators. For ­example, the liquidity coverage ratio (LCR) and the currently­ still non-compulsory leverage ratio (LR), both of which will become more important in the future.

1  Most important performance indicators.

42 43 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

II Economic Report – Macroeconomic and Sector-Related­ Environment

Macroeconomic Development also resulted in a noticeable decrease in the volume of bond purchases by the Central Bank outstanding senior unsecured bonds. In 2018, In the past financial year 2017, the global reluctance of ­companies to invest. Construction in the scope of its asset purchase programme the future introduction of a second senior asset economy increasingly developed dynamically investment was very high – fully utilising the (APP) was reduced from € 80 billion to € 60 bil- class based on the French example in the form despite numerous political and economic risks. available capacities.­ Extremely high rates of lion. In conjunction with an extension of the of bail-in eligible senior non-preferred bonds is Economic growth stood at approximately 4 % growth were, above all, recorded at the start of programme to October 2018, the purchases expected in Germany. and was therefore significantly higher than in the the year. were further reduced to € 30 billion per month previous year and than forecast. This develop- from January 2018. Like the years before it, 2017 was character- ment resulted in the highest level of growth since While the unresolved coalition negotiations in ised by further tightening and expansion of 2011. There were no negative effects due to the the final quarter created uncertainty, they did not The ongoing quantitative easing measures by ­regulatory requirements. One example is the new administration in the USA, which promised result in an economic slowdown. As expected, the European Central Bank continued to have CRR / CRD IV phase-in, which primarily imposed protectionist economic policies in its election market participants assumed there would be no a considerable influence on the refinancing stricter minimum requirements for capital campaign, because the promised measures could fundamental change in economic policy under ­conditions for European banks on the capital ratios, the definition of equity and deduction not be implemented in 2017. Various geopolitical the new government.1 market in the reporting period. Spreads on core items. The most important driver is the increase crises also had no noticeable effect on economic European covered bonds were negative across in the capital conservation buffer. development. Industry Development nearly all maturities. The differences in the On the other side of the Atlantic, the FED risk premiums for bonds between the ­various Fulfilment of the revised and expanded The Eurozone also achieved a stronger eco- reacted to positive economic development in jurisdictions fell to lower and lower levels as reporting obligations – including AnaCredit, nomic upturn compared to the previous year, the USA by increasing the key rate for the provi- a result of the ECB’s continued purchases­ as Supervisory Benchmarking Portfolio, disclosure with growth of approximately 2.4 %, which also sion of liquidity to commercial banks from 1.25 part of the Covered Bond Purchase Programme – resulted in significant implementation work. ­significantly exceeded the Bank’s expectations. to 1.5 % in three stages during the reporting (CBPP III). This trend continued in the reporting In addition, banks had to deal with considerable Private consumption and investment were, in year. Following Janet Yellen’s four years in office, year, particularly with regard to the spreads Single Resolution Board (SRB) data requests particular, drivers of that positive economic Jerome Powell will lead the FED from early of the southern European countries, while the regarding the creation of individual winding-up development. The pro-European election results February. The capital market expects the FED to spreads of the core countries did not change plans for each institution. Meanwhile, the in the Netherlands and France also eased continue on its present path. significantly. Despite the announcement that the ­finalisation of CRR II/CRD V and the planning uncertainty regarding economic policy. The ECB would halve its purchase programme from processes for the proposed regulatory amend- result of the early parliamentary election in the Against the backdrop of expansive central 2018, maturities will continue to be reinvested ments under Basel IV were simulated using a United Kingdom made a hard Brexit less likely bank policies in the Eurozone, 2017 was again with the aim of supporting the risk premiums for range of scenario calculations. The publication and thereby resulted in a further brightening of ­characterised by low overall interest rates. covered debentures. of the final resolutions regarding Basel IV sentiment in the Eurozone. As a consequence, ­However, while some ten-year German federal in December 2017 represented a decision the various rounds of Brexit negotiations since bonds offered negative returns in 2016, they On the market for uncovered bonds, many ­regarding the modelled parameters for the cal- the middle of the year have been very tough. recovered from that low and fluctuated between investors appeared to ignore the potential loss culation of risk-weighted assets in both stand- Even the political and economic conditions 0.15 and 0.60 % during the reporting period. participation in bonds not treated as preferred ard processes and internal approaches, and the for the transitional phase of the Brexit remain There were similar developments with regard in the case of a bail-in. The fact that the APP introduction of capital/output floors, which will completely unclear at present. to the Euro swap curve. That meant swap rates does not take senior unsecured bonds into impact the capital ratios of the bank as an FIRB were largely positive from a term of four years account resulted in comparatively attractive risk (foundation internal ratings-based approach) The German economy grew for the fourth compared to the six-month Euribor. However, premiums over a long period and meant that institution. As with previous regulations, a consecutive­ year and is currently experiencing there is still no sign of a change in interest rate the entire asset class is in demand, although phase-in is planned. It is expected to become a boom. Growth of approximately 2.3 % was policies. Since March 2016 the benchmark rate the differentiation between banks was more effective from 2022, following implementation in considerably higher than in the previous year has been 0.00 %. The ECB considers reaching significant than with regard to covered bonds. the European regulations. and the forecast. This strong growth was driven the medium-term inflation target of just less Issuers in countries where senior non-preferred by private consumption, which benefited from than 2 % the decisive criterion for its interest products have already been introduced also The German economy continued to grow in 2017. a considerable increase in employment, as well rate decisions. At its most recent meeting in experienced high demand. For example, since The ongoing low level of interest is also made a as higher exports and investment. The positive December 2017, the ECB predicted annual they were introduced in France at the end of decisive contribution to a very favourable invest- development of exports was due to the favoura- inflation rates of significantly less than 2 %, and last year, every new bond in this asset class ment climate, which was reflected by the real ble economic environment in important foreign therefore below its target, until 2020. The last was placed on the market with a lower emission estate market. This resulted in a transaction vol- markets for Germany. The Chinese economy, long-term tender (TLTRO II; Targeted Longer­ spread than all those preceding it. In December ume of approximately € 57 billion in the market in particular, developed more robustly than Term Refinancing Operation) was allotted in the European Central bank announced that, in for commercial real estate in 2017, the second expected, and growth in the EU was stimu- March 2017. From April, the monthly target the case of a bail-in, senior bonds not treated as best result since the boom year of 2007. There lated by brightening sentiment following the preferred would lose their ECB eligibility from was an increase of 9 % on the previous year. 1 Source for the macroeconomic environment: German Ins- ­pro-European election results. High capacity titute for Economic Research (DIW), Institute for the World January 2019. According to the information The market for commercially traded residential utilisation in the manufacturing sector ultimately Economy (IfW), Kiel. currently available, that would affect already real estate also recorded a very high transaction

44 45 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

Business Development

volume of approximately € 15 billion in 2017, net initial yields of 4.4 % and 4 % respectively In view of the intense competition in the achieved. The targeted expansion of the an increase of 11 % compared to the previous were each half a percentage point lower than at commercial real estate financing market, product range to meet the various needs of the year. The significant increase in turnover in the the end of 2016.2 ongoing low interest rates and high regulatory savings banks further expanded its offering residential real estate market was partly due to requirements, Berlin Hyp is very satisfied with of common financing options and services for increased trading in project developments cou- The precautionary principle is taken into developments in 2017. Profits of € 117.0 million savings banks. In addition to existing products pled with of considerably higher purchase prices. account, especially in Germany, through transferred to Landesbank Berlin Holding were and services, such as ImmoSchuldschein, Overall, the high transaction volumes confirm conservative valuation methods, high equity higher than in the previous year (€ 73.0 million) supporting property valuation and access to Berlin Hyp’s expectation of very brisk investment requirements and long fixed interest terms, and significantly exceeded expectations. In its capital markets, the new ImmoAval product and activity in 2017. thereby counteracting credit risks. Favourable forecast for 2017, Berlin Hyp assumed that the ImmoRisikoDialog were introduced to support refinancing for real estate financers, among operating result before profit transfer would savings banks in the restructuring and manage- Lively investment in the past year is, among other things through mortgage Pfandbriefe, had be slightly higher than in the previous year. ment of real estate commitments. other things, a result of increased interest from an added positive effect. The significant factors in the increase will be foreign investors in the German real estate explained in the following sections. The overall very good result before risk provi- market. With its poly-centric structure and very In the commercial real estate financing market, sioning, despite the formation of provisions for positive economic fundamentals, Germany Berlin Hyp faces competition from numerous Berlin Hyp further cemented its position as one the legal risks arising from the German Federal is currently attracting foreign capital, and in providers. This competitive situation, in combi- of the leading commercial real estate financers Court of Justice decision on 4 July 2017 and for 2017 profited from uncertainty in the United nation with the previously described challenges in Germany in 2017. The Bank stayed true to its medium-term measures for sustainable staffing Transfer of profit Kingdom resulting from the Brexit. The pro- in the industry due to monetary policy, regu- conservative risk strategy and its focus on prime (strategic resource planning), was used to to Landesbank portion of total commercial transaction volume lation and structural upheavals, led to falling real estate in the selection of borrowers. strengthen the Bank’s equity basis, and thereby Berlin Holding accounted for by foreign investors increased margins again in 2017. also regulatory equity, by establishing reserves to 49 % in 2017 from 45 % in 2016. The trend In the scope of its comprehensive moderni- according to Section 340g of the German

2 2016 million towards increased interest in Germany on the Sources for real estate market environment: sation process – berlinhyp21 – the Bank has ­Commercial Code (HGB). € 73.0 part of international investors was also visible Berlin Hyp Research, CBRE. made good progress with regard to the focus in the residential real estate market. One areas of digitalisation and optimising the IT reason for the considerable foreign interest system ­environment. Along with the purchase is the comparatively high proportion of rental of a strategic investment for the development properties in Germany. of a financing platform that is appropriate for commercial real estate customers, numerous Limited product availability, particularly in the ideas were collected with the aim of sustainably top German locations, continues to represent positioning the Bank by means of innovative a challenge for investors with regard to the products and the intelligent networking and allocation of funds – that has resulted in an automation of market and back-office processes. 2017 increased tendency on the part of investors to invest in regional markets instead. Office The Bank addresses increasing regulatory € 117.0 million properties continue to be the most popular asset requirements, for example from the new MaRisk class among investors, ahead of retail, logistics and Basel Committee on Banking Supervision and hotel properties. Almost half of the overall (BCBS 239) regulations, through a consistent volume of commercial transactions in 2017 orientation of its core banking system to (approximately € 28 billion) related to office SAP. The aim is to significantly speed up and properties. There was a particularly large rise in increase the availability of data and reports the volume of investment in logistics properties while maintaining high quality standards. Berlin in 2017 – an increase of more than 80 % on the Hyp, as an institution in the regulatory group of previous year took the total volume by value to Erwerbsgesellschaft der S-Finanzgruppe mbH & approximately € 8.3 billion. Continuously high Co. KG, is supervised by the ECB. All regulatory excess demand resulted in a further decrease in requirements and performance indicators were peak net initial yields in 2017. Along with further met by Berlin Hyp in the financial year. declines in yields on office and retail properties in central business and shopping districts in In the past financial year, the continuing the top cities, the logistics and hotel segments, ­positive development of S-Group business which are currently experiencing high demand, continued and further networking of Berlin Hyp suffered the largest fall in yields in 2017. Peak within the Savings Banks Finance Group was

46 47 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

New Lending up on Previous Year New Real Estate Financing S-Group Business Remains Stable Following the début in 2016, the second Berlin Hyp reported very positive new business Business (without Extensions) Business realised jointly with the savings banks mortgage Pfandbrief issues was placed on the in 2017. Contracted new business of € 6.7 bil- continued to develop favourably in 2017, with a capital market with a negative initial rate of by Property Type lion was significantly higher than the previous total volume of € 1.5 billion (2016: € 1.5 billion). return. For the first time, two green bonds were year’s result (€ 5.4 billion). With realised exten- in % Joint syndication business with savings banks also issued in one year – a Green Pfandbrief and sions (capital employed ≥ 1 year) of € 1.4 billion of € 1.4 billion was higher than in the previous Green Senior Unsecured Bond. The funds raised (2016: € 0.6 billion), this put the total new 1 year (€ 1.1 billion), while € 121 million (2016: were used to refinance loans for sustainable 5 business volume at € 8.1 billion (2016: € 6.0 € 476 million) related to an ImmoSchuldschein and energy-efficient buildings. Particularly 5 20 New Lending in billion). This result again significantly exceeded (real estate promissory note) transaction ­noteworthy positive signs included the high Comparison the target and further consolidated Berlin Hyp’s arranged by Berlin Hyp. A further ImmoSchuld- level of oversubscription and the significant position in the real estate market. schein with a volume of € 346 million secured foreign participation in all benchmark issues in including long-term extensions by a commercial real estate portfolio in Berlin the reporting year. Properties located in Germany accounted for is likely to be placed in the first quarter of 2018. 25 67 % of Berlin Hyp’s new business (35 % in the A total of 116 institutions from all association Equity Position Strengthened through old federal states, 26 % in Berlin and 6 % in regions participated in financing by Berlin Further Additions the new federal states). The financing of foreign Hyp in the form of ImmoSchuldschein and The hard core capital ratio after adoption of the properties accounted for 33 %, distributed ­syndication business. annual financial statements was 12.5 % (2016: among the lending regions of Poland (12 %), 13.5 %). The total capital ratio was 15.5 % Benelux (11 %), France (6 %) and the Czech By expanding its range of products and services (2016: 17.5 %). The bank added a further € 70 44 Republic (4 %). for savings banks through the ImmoAval million to the reserves pursuant to Section 340g and ImmoRisikoDialog products, Berlin Hyp of the German Commercial Code (HGB). Despite With a share of 76 %, the investor customer responded to the savings banks’ desire for this increase in equity, the very good level of new group accounted for most of the new business, Residential properties further diversification of investment options business – and the resulting positive increase in 2016 2017 while a further 21 % was realised with devel- 20 Office/business +4425+51N and additional services. interest-bearing business – led to growth in risk opers and builders. Contracts with housing Retail assets and a decrease in capital ratios. 6.0 societies accounted for 3.0 % of new business. Excellent Refinancing Position bn € Logistics 8.1 Mortgage Pfandbrief and unsecured bond bn € Management properties issues are generally used for the medium-to- Other New business long-term refinancing of Berlin Hyp. In 2017, the Bank borrowed € 3.3 billion in capital (2016: Real Estate Financing Business € 2.6 billion) using these instruments. The (Without Extensions) by Lending Public Sector Lending Reduced Further in Line Bank had market access at all times. Berlin Hyp Region with Strategy continues to benefit from the reputation it has in % The Bank no longer actively pursues new public built up over many years as a reliable and sound 26+6+35+33+ N sector lending in accordance with its strategy. As issuer, and its involvement in the Savings Banks Berlin 26 in previous years, no new loans were issued in Finance Group. With a total of four issues, the the financial year 2017. Loan volume decreased Bank engaged in more benchmark transactions New federal states 6 by € 0.7 billion, to € 0.8 billion (including public in 2017 than ever before. Old federal states 35 sector lending to banking institutions of € 0.1 billion) and is being reduced further as and International 33 when individual loans become due.

48 49 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

Earnings Situation

Result Exceeds Expectations Drop in Operating Expenditure after ues to include income from the liquidation Fund for General Bank Risks Increased Despite the challenges presented by the com- Special Effects of reserves, expenditure for the continued In order to continue to meet the equity capital petitive environment, the ongoing low-interest Operating expenditure comprises staff expendi- compounding of pension reserves and the fees requirements for credit institutions, the Bank phase and increasing regulatory requirements, ture, other operating expenditure and write-offs for the Detailed Agreement concluded with the made use of the positive development of risk the 2017 financial year was very favourable. The on fixed assets and intangible assets. Operating State of Berlin in 2001. In the previous year, Ber- provisioning and added € 70.0 million (2016: € Bank thereby profited from the positive eco- expenditure increased to € 134.8 million (2016: lin Hyp took advantage of its positive business 50.0 million) to the special item for general bank nomic conditions and the resulting decrease in € 122.3 million) as a result of the one-off effect performance and added the full amount of the risks. The fund now stands at € 223.0 million. Operating Result risk provisioning. Even taking into account the from the expansion of the evaluation period as yet unretained BilMoG difference pursuant (after risk provisioning) reserves formed, particularly with regard to the for the calculation of pension obligations to 10 to Article 67 (1) Introductory Law to the German Significant Rise in Operating Result before legal risks relating to loan processing fees due years. Adjusted for this effect, they decreased. Commercial Code (EGHGB) of € 19.1 million to Income Taxes and Profit Transfer to the German Federal Court of Justice decision pension provisions. The operating result before income taxes and € 184.4 million on 4 July 2017 and strategic resource planning As planned, staff expenditure increased by profit transfer increased by € 44.7 million to € (totalling € 45.7 million), the operating result € 11.0 million to € 73.6 million. This increase Higher Cost-Income Ratio 117.4 million (2016: € 72.7 million). after risk provisioning increased significantly to related to the expansion of the evaluation The cost-income ratio expresses the relation- € 184.4 million (2016: € 120.1 million). period for the calculation of pension obligations ship of operating expenditure to net interest Profit and Loss Transfer Agreement to 10 years. The resulting increased reversal and commission income, including the other Profit of € 117.0 million was transferred to Including an addition to the special item for amount in the previous year was offset by a operating result. The increase in net interest Landesbank Berlin Holding (2016: € 73.0 general bank risks pursuant to Section 340g lower reversal amount in 2017. Adjusted for and commission income could not compensate million). German Commercial Code (HGB) of € 70.0 mil- this effect, staff expenditure decreased by for the rise in operating expenditure and other lion (2016: € 50.0 million), Berlin Hyp generated € 3.0 million. operating expenditure due to special effects. As Return on Equity Return on Equity € 120.1 million an operating result before income taxes and a result, the cost-income ratio increased from 44 Exceeds Expectations profit transfer of € 117.4 million (2016: € 72.7 Other operating expenditure increased slightly % to 51.2 %. Including the increase in the special item for million), which was significantly higher than to € 55.9 million (2016: € 55.3 million). It general bank risks pursuant to Section 340g % forecast. primarily includes IT expenditure, legal and Risk Provisioning Benefits German Commercial Code (HGB), Berlin Hyp’s 16.9 consulting costs, the expenses from the annual From Favourable Conditions return on equity capital was 16.9 % (2016: The following section examines the individual payment of the European bank levy and the Considering Berlin Hyp’s positive economic and 11.8 %) and therefore exceeded expectations. elements of the result in detail. allocation of the administrative holding costs of financial environment, together with active risk the managing institution under regulatory law. management, in the lending business net risk Higher Net Interest Income The moderate increase can be seen as a positive provisioning of € 33.5 million was released. Net interest income increased by € 15.0 million development in view of the increasing demands An addition of € 51.3 million was made in compared to the previous year, to € 270.9 mil- being placed on information technology and the the ­previous year. The Bank appropriately 11.8 % lion. The increase on the previous year was due regulatory reporting requirements. accounted for recognisable and latent risk. A to the growth in the average mortgage portfolio detailed overview of the development of the as a result of successful new business and, in There was an increase in write-offs on fixed valuation of lending business and adjustments particular, a decrease in refinancing expenses. assets and intangible assets to € 5.3 million is presented in the Notes. (2015: € 4.4 million). Persistently low interest rates, combined with Income of € 22.7 million was reported from the a flat yield curve, continue to represent a Other Operating Result valuation result for securities in the liquidity challenge. Negatively Impacted by Special Effects reserve. This represents an increase of € 7.1 mil- The other operating result amounted to € – 47.0 lion on the positive valuation result in the Prepayment charges of € 37.5 million in con- million (2016: € – 20.3 million). It was signifi- pre­vious year. It primarily includes realised nection with unplanned repayments and further cantly affected by the formation of reserves with gains on disposal from the sale of debentures one-time earnings from option premiums, for regard to the legal risks relating to loan pro- as well as valuations of securities in the liquidity example, were neutralised with compensating cessing fees due to the German Federal Court reserve at the lower of cost or market. measures to avoid future interest charges. of Justice decision on 4 July 2017 and strategic resource planning. The latter resulted from Positive Net Income from Investments Slight Decrease in Net Commission Income benchmarking commissioned and executed by Net income from investments of € 3.2 million Net income of € 39.1 million was slightly lower the Bank regarding sustainable staffing in line (2016: € 2.8 million) primarily resulted from than in the previous year’s very favourable with market requirements, taking into account gains on disposal. figure of € 42.5 million. It benefited from the the increasing digitalisation and automation of very good level of new business. processes. The other operating result contin-

50 51 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

Net Assets Position

Earnings Development 31.12.2017 31.12.2016 Change Change Increased Balance Sheet Total Claims against customers amounted to € m € m € m % The balance sheet total increased by € 0.7 bil- € 21.0 billion. This represented a large increase lion to € 27.1 billion as at 31 December 2017. of € 1.6 billion in the reporting year. While the Net interest and commission income 310.0 298.4 11.6 3.9 The increase was primarily due to the positive portfolio of public sector loans decreased by a Net interest 270.9 255.9 15.0 5.9 development of the mortgage portfolio, while further € 0.4 billion to € 0.8 billion, in line with Commission income 39.1 42.5 −3.4 −8.0 there were further decreases in the portfolios of strategy, the positive development of new busi- public-sector loans and fixed-interest debenture ness volume led to an increase in the mortgage Operating expenditure 134.8 122.3 12.5 10.2 bonds. Overall, the individual balance sheet portfolio by € 2.0 billion, to € 20.1 billion. The Staff expenditure 73.6 62.6 11.0 17.6 items developed in line with the strategic amount of loan commitments not yet disbursed Other operating expenditure 55.9 55.3 0.6 1.1 ­orientation of the Bank. increased by € 0.3 billion to € 2.2 billion over the course of the year. of which: expenditure for bank levy 10.1 10.9 −0.8 −7.3 Changes in Major Write-offs on fixed assets 5.3 4.4 0.9 20.5 Balance Sheet Items The regional distribution of claims against Claims against banking institutions amounted customers on 31 December 2017 was as follows: Other operating revenue/expenditure −47.0 −20.3 −26.7 - to € 0.4 billion on the balance sheet date. This Operating result before risk provisioning 128.2 155.8 −27.6 −17.7 represented a decrease of € 0.2 billion on the

Risk provisioning 56.2 −35.7 91.9 - previous year. The decline was due mainly to a smaller portfolio of public sector loans. Valuation of lending business 33.5 −51.3 84.8 -

Valuation of securities business 22.7 15.6 7.1 45.5

Operating result after risk provisioning 184.4 120.1 64.3 53.5 Receivables

Net income from investments 3.2 2.8 0.4 14.3 in % 3

Fund for general bank risks 70.0 50.0 20.0 40.0 17

Other taxes 0.2 0.2 0.0 0.0 26 Operating result before income taxes and profit transfer 117.4 72.7 44.7 61.5 7 Income taxes ("−" = earnings) 0.4 −0.3 0.7 -

Profits transferred on the basis of the profit transfer agreement 117.0 73.0 44.0 60.3 Berlin

Net income for the year 0.0 0.0 0.0 - New federal states Old federal states International Without specific allocation 1747 +747263N

52 53 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

The portfolio of debentures and other As at 31 December 2017, the issuer structure Securities with a nominal volume of € 0.5 bil- During the reporting year, the requirements fixed-interest securities decreased from of the securities portfolio was as follows: lion (2016: € 0.8 billion) are valued as fixed with respect to regulatory capitalisation (CRR / € 5.8 billion to € 4.6 billion in 2017. Nom- assets, since they are not classified as a CRD IV, Solvency Regulation) were consistently inal maturities of € 0.4 billion and sales of liquidity reserve and partially serve to cover complied with. Berlin Hyp identifies regulatory € 2.0 billion stood in contrast to additions of Pfandbriefe issued by the bank. capital backing for counterparty default risk just € 1.3 billion. with the aid of the IRB-based approach (inter- Liabilities to banking institutions increased nal ratings-based approach). Operational risk by € 0.2 billion to € 5.0 billion. An increase of is calculated using the Advanced Measurement € 1.5 billion in term deposit liabilities to € 3.0 Approach (AMA). The common equity after Issuer structure Lending Risk billion was primarily offset by a decrease of adoption was € 1,144.7 million as at 31 Decem- in % in % € 1.0 billion in Lombard loans to € 0.9 billion. ber 2017, equity was € 1,418.1 million, and 1 overall risk (RWA) amounted to € 9,151.3 mil- 6 10 The € 0.6 billion rise in liabilities to customers lion. The capital ratios were 12.5 % for the hard to € 6.1 billion was mainly the result of term core capital ratio and 15.5 % for the total capi- borrowing. tal ratio. In the financial year, the capital ratios 37 41 53 11 fluctuated in the range of 11.7 % to 14.0 % and Securitised liabilities remained unchanged at 14.7 % to 17.8 % respectively. € 13.6 billion. Maturities of € 2.5 billion were offset by new issues of € 2.5 billion. Additional Performance Indicators The leverage ratio calculated according to the Equity Delegate Regulation (EU) 2015/62 was 4.0 % Berlin Hyp’s subscribed capital amounted to after adoption as at 31 December 2017. The 16 € 753,389,240.32 as at 31 December 2017. It balance-sheet-oriented minimum requirement is fully paid up and divided into 294,292,672 for eligible liabilities (MREL) will probably not bearer shares. The shares have a theoretical become relevant for reporting until 2020 when par value of € 2.56. Furthermore, the special CRR II takes effect. As at 31 December 2016, it 25 item for general bank risks pursuant to Section amounted to 23.3 % of the balance sheet total. 340g of the German Commercial Code (HGB) Foreign issuers Sovereign risk was € 223.0 million as at 31 December 2017 Minimum requirements that need to be met Public-law 53 bodies +416+0N Covered 37+25161110+1N (2016: € 153.0 million). Subordinated capital of have not yet been defined by the regulatory Domestic banks / financing institutions Supranational € 222.3 million can also be taken into consider- authorities for either of these performance Senior unsecured ation as available under regulatory law. indicators – the draft version of CRR II stipulates without guarantee a minimum of 3 %. For the MREL, it is intended Sovereign guaranteed that specific requirements for individual institutions will be issued by the liquidation Corporate authority in relation to overall risk (RWA).

Countries in % 2 2 1 3

7 47

10

Germany North America Supranational Eastern Europe

12 Scandinavia UK France Austria BE / NL / LUX 4716 +151210832+2+1N 54 55 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

Financial Position

In the reporting period, the refinancing funds an amount equal to the proceeds of the issue rating, Aaa. Berlin Hyp’s bank rating at Fitch In December Moody’s changed the outlook raised amounted to € 3.3 billion, of which € 2.0 in additional green building financing. At also remained unchanged at A+, while its of the senior unsecured rating from stable to billion were attributable to mortgage Pfand- 51 %, Berlin Hyp achieved a record for foreign Viability Rating increased from bbb- to bbb in negative, along with that of 15 other German Aaa briefe and € 0.5 billion to unsecured bank investment in an uncovered issue. A total of the reporting year. banks. That was due to change to the BRRD from Moody’s bonds, which were obtained at very favourable 19 % of the Green Senior Unsecured Bond was (Bank Recovery and Resolution Directive), conditions. Furthermore, the bank issued placed with companies in the Savings Bank which requires that EU member states pass a for mortgage Pfandbriefe ­borrower’s note loans and registered bonds Finance Group; 12 % was placed directly with law to introduce bail-in eligible senior unse- and public Pfandbriefe with a volume of € 0.7 billion. In addition to savings banks. The bond also allowed Ber- cured bonds, so-called non­preferred senior issued by Berlin Hyp private placements, Berlin Hyp issued three lin Hyp to attract 38 new investors. bonds. All other ratings have a stable outlook. mortgage Pfandbriefe and an uncovered bond in benchmark format. The Bank’s commitment in the green bond market is attracting increasing attention. With An eight-year mortgage Pfandbrief bench- a current total of four outstanding benchmark mark issue with a volume of € 0.5 billion format bonds, it is the largest European Refinancing Funds1 Portfolio New issues Maturities and Portfolio kicked things off in February. The issue of a issuer among the commercial banks. Berlin excluding 20172 early repayments excluding Green Pfandbrief in benchmark format, also Hyp received several awards at last year’s accrued interest in 20173 accrued interest with a volume of € 0.5 billion, and a term of GlobalCapital Sustainable and Responsi- 31.12.2016 31.12.2017 six years followed in June. A total of 47 % of ble Capital Market Awards, including Most Industry Leader € m € m % € m € m the bond was placed with foreign investors, Impressive Bank Green/SRI Bond Issuer and while sustainable investors accounted for Best Green/SRI Issuer for Post-Deal Reporting. Mortgage Pfandbriefe 8,002.0 2,000.0 61.1 1,400.0 8,602.0 45 %. In November the favourable refinancing In the reporting year, Berlin Hyp was also Public Pfandbriefe 1,589.8 - - 890.2 699.6 5th position was used to for a four-year issue. The upgraded to “Industry Leader” in its peer place Pfandbrief was oversubscribed fourfold and group by the sustainability rating agencies Other bearer debentures 3,903.0 505.0 15.4 239.0 4,169.0 has a rate of return of 0.11 %, making it the oekom research and Sustainalytics. With a Bank’s second bond, following a three-year B rating, the Bank is in first place in oekom Registered mortgage Pfandbriefe 2,681.5 37.0 1.1 136.5 2,582.0 issue in March 2016, with a negative initial research’s ranking of a total of 52 companies Registered public Pfandbriefe 1,263.1 0.2 0.1 376.3 887.0 rate of return. At that time Berlin Hyp was in the Financials / Mortgage & Public Sector Sustainalytics rates the first non-governmental issuer to issue a peer group. Sustainalytics ranks the Bank 5th Berlin Hyp fifth among benchmark bond with a negative initial rate among 332 banks worldwide. Borrower’s note loans 771.3 535.0 16.3 429.0 877.3 332 banks worldwide. of return. At 51 %, the proportion of foreign Registered bonds 1,378.9 198.0 6.0 165.2 1,411.7 investment was higher than with any previous A total of six of Berlin Hyp’s outstanding debt covered bond issued by the Bank. The savings securities with a nominal total volume of € 77 banks accounted for an average share of 11 % million are classified as structured bonds that Subordinated bearer debentures 6.0 - - - 6.0 of subscriptions to the covered benchmark are not subordinated in favour of deposits Subordinated borrower’s note loans 397.2 - - 70.0 327.2 issues in 2017 (Savings Bank Finance Group within the meaning of Section 46f German Subordinated registered bonds 40.0 - - - 40.0 Share of foreign share: 17 %). Banking Act (KWG). investors Total 20,032.8 3,275.2 100.0 3,706.2 19,601.8 In March of the reporting year, the Bank also Against the backdrop of continual strength- invested in three of four tranches of targeted ening of equity in recent years, the continued 1 Excluding residual portfolios longer-term refinancing operations (TLTRO) II high profitability of the Bank and consistent 2 New issues in 2017, including capitalisations at zero. 3 for a total amount of € 1.0 billion. reduction in the value-adjusted loan port­ Maturity dates and early repayments including terminations. folio, at the end of July Moody’s improved the With regard to uncovered refinancing, the Bank’s ­ratings. The issuer rating was raised by Bank consolidated its position as one of one level, from A2 to A1, the Adjusted Base- % the ­leading green bond issuers by issuing a line Credit Assessment (adjusted BCA) was 51 ten-year Green Senior Unsecured Bond. The increased by two levels, from baa2 to a3. of the Green Senior Unsecured issue, with a volume of € 0.5 billion, was used Bond was placed with foreign to refinance financing for green buildings. The rating for junior issues was also increased investors Berlin Hyp defines commercial real estate that by two levels, from Baa3 to Baa1. Moody’s offers particularly high energy efficiency as continued to give Berlin Hyp’s Mortgage green buildings. The Bank also aims to invest Pfandbriefe and Public Pfandbriefe the highest

56 57 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

Financial and Non-Financial Performance Indicators

Financial Performance Indicators Adjusted for this special effect, operating conservative risk strategy, were complied with The aims include the early identification and Berlin Hyp generated an operating result before expenditure decreased. overall in 2017. Individual deviations were promotion of female talent and the constant profit transfer of € 117.0 million (2016: € 73.0 analysed. No special management measures development of the corporate culture in this million) in the 2017 financial year. This means The other operating result in the financial year were necessary upon evaluation of the overall regard. Activities for the recruitment and the Bank can look back on very positive business 2017 primarily consisted of costs relating to portfolio. Regular internal research studies are training of junior staff, particularly trainees development that significantly exceeded the the formation of reserves for the legal risks employed to analyse and evaluate Berlin Hyp’s and student trainees, were also strengthened forecast in last year’s Management Report. relating to loan processing fees arising due to markets. in 2017. The higher number of places on the The interest result, in particular, increased as a the ­German Federal Court of Justice decision on Bank’s training programmes were fully filled by result of very strong new business. Meanwhile, 4 July 2017 and for strategic resource planning. In the S-Group business, the ImmoSchuldschein ­appropriate candidates. A total of 13 ­trainees risk provisioning benefited from the very favour- Due to the special effects included in operating product contributed to further strengthening and six students on dual study courses either able economic conditions and was reduced expenditure and the other operating result, the joint business with the savings banks. started or continued their training in 2017. significantly despite the challenges in the which were not compensated by the increase ­Overall, 96 savings banks participated in at Together with 12 student trainees, they sector described under the heading Business in interest and commission income, contrary to least one ImmoSchuldschein transaction. Total represent a solid basis for the fulfilment of the Development. Despite the formation of reserves the forecast the cost-income ratio increased by S-Group business volume in 2017 amounted company’s future qualified staff requirements. for the legal risks arising due to the German 7.2 percentage points to 51.2 %. to € 1.5 billion (2016:€ 1.5 billion). The pilot Federal Court of Justice decision on 4 July 2017 ­transaction for the new ImmoAval product was The "berlinhyp21" change process initiated and for strategic resource planning, the Bank Adjusted for the increase in the special item for fully placed in August 2017. Contacts to the in 2016 and continued in 2017 includes the was able to generate an operating result after general bank risks pursuant to Section 340g of savings banks were further strengthened by ­majority of employees in the broadest possible risk provisioning of € 184.4 million – a increase the German Commercial Code (HGB), the return 191 visits in 2017. A total of 97 savings banks range of functions, and offers them the oppor- of € 64.3 million on the previous year. This on equity capital was an exceptionally­ good ­participated in the Immo Schuldschein and tunity to contribute and pursue their own ideas allowed a further addition to the special item for 16.9 % (2016: 11.8 %) and therefore noticeably ImmoAval products, while 35 savings banks regarding corporate culture and organisation. general bank risks pursuant to Section 340g of exceeded the expected equity yield rate. participated in bonds issued by Berlin Hyp with the ­German Commercial Code (HGB) of € 70.0 a total volume of € 208 million. With regard to With the introduction of trust-based working 99 + 1 N million (2016: € 50.0 million). At 12.5 % (2016: 13.5 %), the hard core capital valuations, Berlin Hyp conducted three quali- hours and the associated mobile working, ratio after the addition to the special item for fication measures for a total of approximately Berlin Hyp has strengthened personal responsi- Net interest and commission income rose by general bank risks pursuant to Section 340g 60 appraisers from the Savings Banks Finance bility among its employees. The fact that more € 11.6 million on the previous year to € 310.0 of the German Commercial Code (HGB) of € Group. than half the employees have already switched million. In line with the Bank’s forecasts, net 70.0 million and after adoption exceeded the to trust-based working hours demonstrates the interest income developed positively, while target value of at least 12 % even taking into Berlin Hyp has signed the Diversity Charter and high level of acceptance of this model among the net commission income decreased slightly. As consideration the strict equity requirements respects the rights of its employees, especially Bank’s staff. As part of an employee event, this a result of the unexpectedly positive economic according to CRR / CRD IV. Additional capital with regard to occupational safety, working instrument was recognised with the audience­ situation described above, new business volume measures were taken into account in mid-term hours and health. The company also protects award for “Most Successful Initiative of the Year”. nevertheless grew beyond our expectations. planning in order to ensure that Berlin Hyp them from discrimination and promotes cultural The resulting increase in the average mortgage maintains this target ratio over the long term, diversity. As part of the change process, Berlin Hyp will portfolio and decrease in refinancing expenses even in view of the expected stricter regulations address optimisation projects and processes led to a greater rise in net interest income than under Basel IV / CRR. Among other things, this is reflected in the as well as the topic of agile working and the assumed when compared to 2016. At the same fact that women make up 49.3 % of the overall anchoring of agile methods in the Bank’s time, the decline in net commission income was At € 6.7 billion, new business volume exceeded ­workforce and hold 27.0 % of management organisational structure. Meanwhile, personnel significantly less than expected. Taking into its predicted level and the total of € 5.4 billion positions. The consideration of employee management instruments are the focus of a account the Bank’s conservative risk strategy in the previous year. Including long-term interests and the promotion of active employee project initiated in 2017. The aim of the project and its focus on prime real estate in new extensions, new business even increased by € participation in an overall business context is to examine and realign those instruments Share of female ­business, this is an indication of Berlin Hyp’s 2.1 billion to € 8.1 billion. are crucial to Berlin Hyp’s business success. and processes using a participative approach, representation very good development. Measures implemented to cement the equal with the broad inclusion of employees, man- Non-Financial Performance Indicators participation of women and men within the agers and governing bodies in the project and As expected, operating expenditure increased For the market segment, the target portfolio for organisation in 2016, such as the modifica- conception process. The aggregation of the by € 12.5 million on the previous year to € management purposes has become estab- tion of the recruiting and application process ideas resulting from the process of change with 134.8 million, particularly as a result of lower lished in recent years. It includes the following and additions to the assessment criteria for the personnel management instruments and 49.3 % deferred amounts due to the extension of aggregation groups: real estate types, cus- employee meetings with regard to the equal processes developed by the project to create a of employees the assessment period for the calculation of tomer groups, lending regions and risk classes participation of women and men, continued to holistic and sustainable model that will support are female ­pension reserves to ten years. and, since 2017, rating classes. The specified contribute to this aim in 2017. the requirement-oriented development of target portfolio values, which reflect the Bank’s employees and managers is the project’s core

58 59 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

III Opportunities, Forecast and Risk Report Opportunities and Forecast Report

activity. Integration in the context of the corpo- Information on all of Berlin Hyp’s sustainable Assumptions Relating to parliamentary elections in Italy, followed by the rate vision and strategy thereby represents the commitments is available at https://www.berlin- Macroeconomic Development1 formation of a government in the Eurozone’s framework for this model. hyp.de/bhyp/de/ueberuns/verantwortung. The In 2018 the global economy is expected to grow third largest economy, could be the first cause Bank plans to publish its sustainability report at the positive high rate seen in the previous of such volatility. However, economic data Loan Portfolio Giving employees the opportunity to contribute for 2017 in accordance with the standards of year. Its dynamism is likely to slow over the regarding the Eurozone is consistently positive. their own ideas within a corporate context and the Global Reporting Initiative (GRI) by the third course of the year. Possible uncertainties that Meanwhile, inflation in the Eurozone will remain honouring those ideas selected for implemen- quarter of 2018. could dampen economic development include below the ECB’s target of close to 2 % in 2018. tation is a part of Berlin Hyp’s philosophy. Idea the protectionist economic policies of the USA Significant interest rate increases by the ECB are management at Berlin Hyp therefore systemati- In October 2017 oekom research AG gave and the too rapid tightening of the FED’s expan- therefore not expected in 2018. This contrasts cally promotes the development, discussion and Berlin Hyp an overall B-rating. It uses a scale sive monetary policies, as well as geopolitical with the situation in the USA. If the strong implementation of ideas for improvement to from A+ to D-, and Berlin Hyp’s rating is the conflict worldwide. ­economic growth seen in 2017 continues, the constantly achieve input on ways to improve the highest in the Financials / Mortgage & Public FED could increase interest rates up to four % company’s profitability. This also pays off for the Sector Finance comparison group to date. It The economic development of the Eurozone times in 2018. 12 employees contributing ideas. also confers “prime status” on Berlin Hyp and in the coming year will be close to the positive of the overall loan portfolio is puts it in the category “good”. In the sustaina- level of development seen in 2017. Despite the In terms of regulation, for European banks comprised of green building The HR reporting to be provided to the Board bility rating by Sustainalytics in October 2017 higher external value of the Euro, its economy 2018 will primarily be characterised by the financing of Management on a half-yearly basis offers Berlin Hyp scored 86 points out of 100. This will benefit from high demand for exports introduction of MiFID II. On the capital market, a ­comprehensive overview of performance makes it an “outperformer” and ranks it fifth in ­resulting from rapid global growth. Employment the development of risk premiums for German ­indicators regarding staff structure, including a the industry at the international level among will continue to increase. In view of expected senior unsecured bonds will, in particular, department-­specific target-actual comparison the 332 financial institutions rated. These very moderate price rises, private consumption will depend on future legislation regarding the of employee capacities, demographic staff good rating results from the rating agencies be able to largely drive that economic growth. inclusion of such debt instruments in potential development and the qualification measures. document Berlin Hyp’s outstanding ­commitment Political measures to promote investment in bail-in measures. Not only the new regulations The Board of Management discusses these to sustainability management, honour its central countries such as France and the Neth- for the issuing of new bonds will be of relevance, figures and, where applicable, uses them to investment products – green bonds – and erlands will contribute to further brightening of but also the approach to existing bonds. determine the required action. In addition, this recognise its responsible attitude to people and the situation. The Brexit negotiations represent data is broken down by division and made avail- the environment. a specific risk to the development of the Euro- Following the extension of the APP, the spreads able to the respective heads so that they can zone in the coming year. A too rapid end to the of covered bonds will continue to benefit manage their units better. Among other things, Overall Statement ECB’s expansionary monetary policy would also from demand from the European System of this creates the basis used to examine all Despite intense competition in commercial real have a negative effect on the financial system Central Banks (ESCB) and the reinvestment of personnel management aspects and introduce estate financing, the continuing low-interest and consequently on economic development. maturities. The spreads of those issuers who department-specific measures in the half-yearly environment and additional regulatory require- have benefited­ the most since the start of the dialogue with Human Resources. ments, Berlin Hyp was able to significantly Growth in Germany is forecast at least to equal programme in 2014 can be expected to widen exceed its expected results in the financial year the level seen in the previous year – despite a should the ECB decide to finally terminate Through the financing of sustainable, climate-­ 2017. The result after taxes of € 117.0 million slight decrease in dynamism over the course the programme in 2018. German Pfandbriefe friendly properties (green buildings), and their was transferred to Landesbank Berlin Holding of the year. The economic upswing will again would benefit in relation to other covered bond refinancing via green bonds, Berlin Hyp has as profit. be largely driven by private consumption and products from this move. actively supported the dynamic development investment spending. While corporate invest- of the market for sustainable bonds since Letter of Comfort of Landesbank Berlin AG ment is primarily being driven by high demand Even under demanding conditions, Berlin Hyp 2015. The world’s first Green Pfandbrief, issued The guarantee provided by the Landesbank for exports, investment in construction will should be able to gain access to all segments by the Bank in 2015, and the Bank’s first Green ­Berlin AG in favour of Berlin Hyp ended with continue to benefit from favourable financing of the capital market on attractive terms due to Senior Unsecured Bond, issued in 2016, were effect to 31 December 2014. The guarantee conditions, high demand for residential space, its involvement in the Savings Banks Finance followed by two further green bonds in the remains in force for the obligation entered into particularly in metropolitan regions, and the Group, the reputation it has built up over many reporting year. The volume of green bonds up to 31 December 2014. increasing availability of public funds. years as a reliable and sound issuer, an MREL totals € 2.0 billion. In addition, the financing of ratio against RWAs of 73.7 % (prior to adoption) energy efficient buildings and their refinancing Assumptions Relating to Industry Development and its having completed its establishment as with Green Bonds has been a permanent goal In Berlin Hyp’s view, the possibility of market an important issuer of Green Bonds. of the Bank’s company strategy since the volatility due to political events cannot be spring of 2016. The bank’s aim is that 20 % of excluded in 2018. Depending on the result, the its loan portfolio will consist of green building ¹ Sources for assumptions relating to macroeconomic deve- financing by 2020 – as at 31 December 2017 lopment: German Institute for Economic Research (DIW), the proportion was 12 %. Institute for the World Economy (IfW), Kiel.

60 61 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

The preparations by banks for the regulatory range and provides savings banks with expert recognised expertise in commercial real estate Creating test areas for the working tightening on the horizon as a result of Basel IV/ advice on all issues relevant to the Group. financing. ­environment of the future CRR tie up both financial and human resources. The secured ImmoSchuldschein and the new Introduction of an environmental The modelling of the respective risk parameters ­product ImmoAval in particular offer added The implementation of initiated digitalisation management­ system adopted by the Basle Committee, especially with value for savings banks. projects will provide additional support. Implementation of trust-based working regard to equity requirements and the intro­ hours and mobile working hours duction of the capital/output floor, is already For 2018, Berlin Hyp forecasts a continued Planned increases in the volume of the mort- clearly showing that real estate financers­ will positive development in the S-Group business. gage portfolio depends directly on customer Key future-oriented topics have been defined feel an above-average impact. The Bank hopes to expand connections to retention and the development in unplanned for the following years and relevant projects and the Savings Bank Finance Group even further repayments. initiatives have been launched, such as: Provided the positive economic development compared to the previous year and to slightly continues and interest rates remain low, increase the total volume of business realised A further decrease of the market interest Project loan process optimisation as part of a Berlin Hyp forecasts strong momentum for the jointly with the savings banks. rate, lower interest margins due to increasing holistic review real estate investment market in 2018. Whether ­competition and a flatter yield curve may also Reviewing other business models that are the total volume seen in 2017 can be achieved In 2017, the transaction volume on the domestic have a negative impact on interest income. viable for the future and generating product again or even exceeded depends largely on the real estate market exceeded the previous year’s ideas supply situation. In view of the ongoing boom level. Low interest rates and a consequently Owing to the expected reduction in new busi- Reworking human resources instruments on the real estate market, which has already robust investment environment will continue to ness volume and the reflection of processing such as employee appraisals and target lasted for quite some time, the possibility of a support Berlin Hyp’s core market, the German fees in net interest income, net commission agreement reversal is increasingly being discussed. A turn- real estate market, in 2018. The German real income will remain significantly below the “Subsequent calculation” optimisation around in interest rates or political upheaval estate market will remain appealing to foreign previous year’s figure. project could be potential triggers. investors. Against the backdrop of the consist- Continuation of digitalisation/­optimisation ently challenging competition in commercial Risk provisioning in the financial year 2017 was of the procurement process via the Business Development real estate financing and the changing frame- influenced by a good economic environment. e-procurement­ project With its stable shareholder backing, closer work conditions, the contracted new business The Bank forecasts higher risk provisioning for Pushing sustainability issues such as integration in the Savings Banks Finance volume for the coming year (excluding exten- 2018. systematically switching the fleet to hybrid Group, the successful refinancing strategy and sions with capital employed equal to or greater or electric cars or giving incentives to finance its experienced, motivated staff, Berlin Hyp is than one year) will be down considerably from For 2018, higher operating expenditure, sustainable real estate projects well positioned for the future in a persistently the very good level seen in 2017. which is particularly due to an increase in staff Creating an SAP landscape in the Bank as a challenging environment and will actively utilise expenditure based on the higher ten-year whole through the SAP-HANA project the business potential which arises. In this context, Berlin Hyp will adhere to its average interest rate for the calculation of pen- Optimising resource management with the restrictive risk policy. In order to enhance flexi- sion obligations, is expected. In addition, the Strategic Resource Planning project With the berlinhyp21 future-oriented initiative bility in terms of management and to leverage challenges related to optimising and improving launched in 2017, key decisions will be made additional earnings potential, the Bank plans to business processes and other digitalisation In this respect, the improvement of the IT that will have a positive impact on Berlin Hyp’s further intensify the syndication business. efforts will trigger a rise primarily in IT and systems and the implementation of the future viability in the years ahead. The measures The public-sector lending business is not part consulting costs. new ­digitalisation strategy is of particular introduced to expand the business model with of the Bank’s core business and will continue to ­importance. regard to external digitalisation, i.e. entering be hived off. The securities portfolio has been The continuation of the berlinhyp21 future-­ into participation interests and the development ­further reduced because of lower expected oriented process will ensure that Berlin Hyp The calculation of the contributions to the EU of relevant products, will contribute to this. yields. In consideration of the regulatory is well equipped for the challenges that lie banking levy will continue to be performed by requirements (e.g. meeting the LCR), however, ahead. This process makes Berlin Hyp’s “agile, the Single Resolution Board (SRB). Berlin Hyp The Bank plans to further consolidate its earnings potential that arises should continue connected, creative” vision tangible. Within assumes that the contributions will not see any position as one of the leading commercial real to be used to support the interest result. ­berlinhyp 21, additional successes were major adjustments compared to the 2017 level. estate financers in Germany. In doing so, the achieved in 2017, such as: Bank focuses on individual financing structures Net interest income is expected to be slightly The significantly negative other operating result with risk-appropriate pricing. Financing in higher in 2018 compared to the financial year Training of Meeting Pilots to optimise in the 2017 financial year was largely driven by selected foreign markets will be continued with 2017. A decline in new lending and extension ­conduct during meetings/communication the formation of reserves. No such expenses the aim of ensuring a well-balanced portfolio mix. margins is likely to have an effect in this regard. Conclusion of the electronic credit file project are expected for 2018, which means that the The planned integration of processing fees in Implementation of initial optimisation of the other operating result will be considerably Berlin Hyp also continues to increasingly the interest margin and distribution over the existing loan process, especially pre-loan better. Berlin Hyp forecasts a slight expenditure integrate itself into the Savings Banks Finance term provide compensatory earnings contri- verification surplus for 2018. Group as a partner for commercial real estate butions. In addition, the ongoing extremely Setting a benchmark in terms of human financing. In addition to its current offering positive development of existing mortgages is resources at the Bank Overall, the Bank anticipates that the result of syndicate financing and classic investment also having a positive impact. Investment in the BrickVest platform before profit transfer for the coming financial products (Pfandbriefe, bonds) and support in Relaunch of the website and completion of year will be considerably below the exceptionally valuation and restructuring services, Berlin Overall, Berlin Hyp stands to continue to the brand project good 2017. Hyp is continuously expanding its product benefit from its excellent market position and Stepping up social media activities

62 63 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

Risk Report

We expect the cost-income ratio to be stable in and support digitalisation efforts and agile, Risk Management System units have to ensure that all risks are transpar- 2018. connected and creative working methods. The Framework Conditions ent and measurable under the uniform Group- impact of digitalisation on the business model Berlin Hyp’s risk management system com- wide methodology. With an expected decline in the result, the aver- and the derived opportunities and risks is a prises an extensive range of tools to deal with age equity capital available will rise primarily constant accompanying core process which risks the Bank enters into as part of the Board These requirements are detailed by the Group due to the addition to provision reserves pursu- Berlin Hyp views with optimism. of Management’s strategy in view of economic risk strategy, for which the Board of Man- ant to Section 340g German Commercial Code and regulatory risk-bearing capacity. agement of Landesbank Berlin Holding AG is (HGB) taking into account in the 2017 results Provided no unexpected shifts occur in the cap- responsible. Risks that do not conform to the analysis. Return on equity will therefore decline, ital and real estate markets, and risk provision- The internal control procedures form the strategy and therefore have to be avoided on but will continue to exceed a level of 10 %. ing is at the planned level, Berlin Hyp expects core components of the system of risk-­ principle are defined within the scope of this to continue the positive business development oriented Bank controlling and in particular strategy. Even though regulatory requirements for capital with its customers. In summary, the result ­comprise risk management and risk con- and equity continue to be tightened, the Bank is before profit transfer will be below the figure in trolling ­processes with no conflicts of interest Compliance with the risk strategy is continu- aiming for a core capital ratio above the target 2017 amongst other things due to the margin and internal auditing. The objective of risk ously monitored. value of 12 %. The regulatory requirements level and costs for optimisation and improve- management is to maintain the risk-bearing­ and changes continue to give rise to the need ment of business processes and other digitali- capacity and compliance with specified The Group risk manual that establishes the for adjustments at Berlin Hyp. The Bank will sation activities. Return on equity will remain at minimum ratios through the specific limitation framework for operational risk controlling adjust to the situation appropriately, as it has above 10 % which takes into account the further of economic risks and by establishing upper defines detailed framework conditions, in the past. The Bank is well prepared for the appropriate allocation of provision reserves limits for fixed capital. responsibilities and methods for the individual new AnaCredit reporting requirement, which is pursuant to Section 340g German Commercial risk management phases. Applied methods applicable from 2018. Code (HGB) to strengthen equity capital to meet Berlin Hyp, as a Pfandbrief Bank and sister determine how risks are measured. Existing the stricter regulatory requirements. bank of Berliner Sparkasse, is part of Landes- limit systems and escalation processes are also Overall Statement bank Berlin Holding. LBBH assumed the described in the manual for each type of risk. Stiff competition in real estate financing, the function of a financial holding company that continuing low-interest phase and the volatile does not transact bank business and is not a Berlin Hyp Risk Management System capital and financial market environment, banking institution in the reporting year. LBBH Risk Policy Principles ­combined with the need to further strengthen is integrated into the Erwerbsgesellschaft The aim of risk management is the conscious equity capital and additional regulatory der S-Finanzgruppe mbH & Co. KG (Group). acceptance of strategic risks in order to gain ­requirements, represent major challenges. Uniform risk policy principles for the Group access to earning opportunities and, in doing Against this backdrop, the 2017 financial year and Group-wide risk management have been so, generate appropriate and sustainable was very favourable and considerably better implemented. income. Risks are accepted in view of profitabil- than expected. An overall very good result ity and a constant improvement in the quality was again used to create additional provision Group Risk Management System of results. One parameter used in this regard reserves and to reinforce the considerable A number of interlinked principles and rules is return on equity on the basis of regulatory growth in the core business. make up the Group-wide risk management and balance sheet capital. In terms of pricing, system. the Bank ensures that the revenues are in a The additional potential resulting from reasonable proportion to the risks entered ­Berlin Hyp’s position on the market, combined As the superordinate regulation, the busi- into. Financing is structured appropriately so with a sound refinancing strategy, are solid ness strategy outlines strategic framework that opportunities and risks are appropriately foundations for the continuation of its success- conditions. It defines that the controlled distributed over the course of time. ful business operations. incurrence of risks within the scope of a risk strategy is an elementary aspect of the banking The risk and equity strategy is implemented In the S-Group business, the range of products business. Standardised Group risk policies by means of mid-term and operating planning. will continue to be geared towards the needs ensure that assumed risks remain acceptable. Planning takes place in consideration of all of the savings banks. The further development These ­policies include, for instance, particular foreseeable risk and equity effects at the overall of our products to meet market needs, the reporting requirements if risk utilisation for bank level. improvement of business processes, and the individual risk types reaches a certain level. procedural measures and technology equip- In addition, a risk buffer that is not permitted Risk Controlling as an independent unit is ment supporting them form the basis of this. to be covered by limits ensures that short- responsible for identifying and evaluating risks, In this context, the Bank will systematically term changes in risk-bearing capacity can be supporting risk management in the company­ pursue its berlinhyp21 future-oriented process absorbed. All companies and organisational and regularly informing management.

64 65 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

Documentation of the core elements of risk reports ­independently to the Board of Manage- Regular reporting at established intervals is Non-monetary risks (such as reputation risks, management at Berlin Hyp is centralised in the ment. differentiated from event-driven reporting, for short-term liquidity risk) on the other hand risk manual. This document contains a complete example when previously defined risk or loss cannot be averted through backing with risk definition of the risk management process with Berlin Hyp is represented in the Risk Manage- limits are exceeded (known as ad-hoc reporting). capital and are therefore not taken into account its components: methods, identification, evalua- ment, OpRisk Committee and the Credit Risk in this anaysis. tion, communication, management and monitor- Committee of the Group. Risks ing. The risk management system encompasses Key Risk Types Every identified risk type is evaluated according both the evaluation of risks in accordance with Berlin Hyp Governing Bodies The Bank performed a risk inventory and to established criteria at least once a year. To do regulatory requirements and a risk assessment Supervisory Board, including its committees identified the following types of risks that were so, the probability of occurrence and magnitude from an economic perspective. Board of Management classified as significant: of the risk on occurrence are taken into account, Financial Steering Committee as a comple- and the measurement results of the last In addition to the annual risk inventory, the Internal ment to Board of Management meetings Counterparty default risks period are analysed. The review also involves Audit division and the external auditor regularly Early Warning Meeting Loans/Sales/Risk (including country risks) a recommendation being submitted to the evaluate the risk management system in the Management Market price risks Board of Management concerning classification course of the annual financial statement audit. Market Assessment Committee Operational risks as material or immaterial risks as well as the Liquidity risks appropriateness of the applied methods. Berlin Hyp Governing Bodies Details regarding the tasks, spheres of com­ The Board of Management together with the petence and members are defined in the Berlin Hyp also differentiates between monetary Supervisory Board defines the strategy, which respective rules of procedure. and non-monetary risks. Monetary risks are is then used as a basis for decisions by all taken into account in the summary overview of divisions of the company. Overall responsibility As a part of risk inventory, the Risk Controlling the Bank’s risk position (overall bank risk) and of management for all essential elements of risk division separately proposes methods and are compared to risk capital. management is explicitly defined for the Board ­models to identify, measure, aggregate and limit of Management in the rules of procedure. risks to the Board of Management ­separately on an annual basis in the light of the results. Opera- In accordance with the business policy focus and tional risk controlling is handled by the division. in consideration of the economic risk-bearing Reporting frequency Subject capacity and regulatory provisions, the Board Responsibility for operational risk management, Daily Market price and liquidity risks (procurement risk) of Management defines risk limits and risk that is the acceptance of risks within the scope ­allocations in the various business areas as of the risk limits, is assigned to the defined Monthly Liquidity risks (price and deadline risk components and short-term liquidity well as risk types by establishing limits and managers. Overall Bank risk management, risk and refinancing risk based on a Group-wide system) structural requirements. It is informed regularly for example, is the responsibility of the entire Development of balance sheet items about Berlin Hyp’s net assets, financial position, Board of Management, while market price risk Development of the earnings situation profitability and risk situation. and liquidity risk management in compliance Risks of counterparty default at portfolio level with the binding requirements of the Board The Supervisory Board is informed regularly of Management adopted on the basis of the Risk-bearing capacity by the Board of Management about the overall proposals by the Financial Steering Committee Quarterly Quarterly Commercial Code reports risk profile. It receives the quarterly risk reports is handled by the Treasury division. Summary risk report on all risk types and the financial statements according to the Development of existing mortgages (including new lending and extension German Commercial Code (HGB). Risk management in the loan business is implemented by the respective decision maker volumes, margins) The Loan Committee consisting of members of according to the assigned spheres of compe- Risk reporting of the cover funds the Supervisory Board consults with the Board tence, taking into consideration the implications of Management regarding the principles of busi- for the loan portfolio. ness policy in the lending business regarding risk, in particular counterparty default, market Reporting price, liquidity and operational risks, and risk The objective of comprehensive reporting is management. to provide data from risk management and ­evaluation for various internal and external tar- Internal Audit is an essential element of the get groups. It represents a summary of content business and process monitoring system. This from the risk management cycle and encom- encompasses a regular review and evaluation passes all types of risks as well as a summary of the risk management processes for all types view of the Bank’s risk-bearing capacity. Risk of risk. It audits the units that conclude, pro- management measures are also defined and cess and control transactions for compliance monitored within the scope of reporting; target/ with regulations. It is subject to the authority actual comparisons, change comments and of the Chair in the organisation structure and other analyses are prepared.

66 67 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

An overview of the measurable risk types Risk Inventory Subordinate capital with a remaining term of defined by Berlin Hyp is presented in the A review of the risks that can have a material over one year and reserves pursuant to Sec- following illustration. impact on the net assets, earnings or liquidity tion 340f German Commercial Code (HGB) and position (risk inventory) is performed con- (to the extent that they are not for a specific tinuously through various specific analyses. purpose) Section 340g that are formed during The Board of Management is informed on the the year are fully allocated. Risk Types of Berlin Hyp AG development of the risk management system as least once a year through the presentation Deducted items (such as hidden liabilities due of the risk inventory. A systematic analysis and to fixed asset write-offs that were avoided) Counterparty identification of risks is also performed within and incurred or (if applicable) planned losses Market Price Risks Liquidity Risks Operational Risks Residual Risks Default Risk the scope of regular reporting. have a negative effect on the risk-covering assets. The Bank has defined a buffer based Credit and credit- Interest rate In addition, through the involvement of the on the volume of the risk-covering assets, Procurement risk Employees Shareholder risk worthiness risk change risk respective divisions, the New Product Process which is to always remain free and not ensures that risks relating to new or changing restricted by limits (risk tolerance). Foreign exchange products are properly reflected. Issuer risk Time-limit risk Internal procedures Real estate risk risk Real estate risks classified as immaterial and Risk-Bearing Capacity shareholder risks as well as the model risks Contractual The internal risk-bearing capacity concept are summarised in the residual risk. The price Spread risk Price risk External influences Model risk¹ party risk ensures that the Bank is able to bear the risks risk in the liquidity risk is a risk classified as of the identified risk types determined using material and disclosed under “residual risk”. Advance Price risk from statistical procedures. As the risk calculations The Bank’s risk-bearing capacity was consist- Volatility risk performance risk liquidity risk² are based on certain confidence intervals, ently given with sufficient leeway in 2017, there is a residual probability that the risks both according the internal standards and Processing actually incurred are higher. The statisti- from a regulatory perspective. risk cally established risk values are limited per (monetary) risk type and it is ensured that the The changes in risk positions arising from the ¹ The model risk is also reported as a residual risk in the context of risk-bearing capacity. risk-covering assets reduced by one buffer planned business performance as well as the Country risk ² The price risk is a component of the liquidity risk and is reported as a residual risk for ­reasons of Group compatibility. correspond to this limit at least. risk-covering assets are analysed as part of the annual planning process. The results are The underlying assumptions as well as the incorporated, for instance, in the planning of corresponding limits are reviewed regularly, capital measures. at least once a year, and adjusted by resolu- The following overview shows the organisa- tion of the Board of Management as needed. In addition to the analyses described above, tional implementation of risk management at unusual economic developments as well as Berlin Hyp for the major risk types: The risk-bearing capacity is regarded as given events specific to individual institutions are if the total of converted risk values based on examined by means of stress tests for the a uniform level of probability of 99.9 % at a counterparty default, market price, liquid- holding period of one year for the individual ity and operational risk types. One of the risk types does not exceed the risk-covering objectives here is to combine the monetary Risk type Risk management by Risk controlling by the divisions/committees the divisions assets reduced by one buffer. The evaluation risk types into a stressed overall scenario and is completed by evaluating the overall risk identify the effects on regulatory and eco- Counterparty default risks Loan Risk Controlling position by assessing the results of various nomic capital. Risk Management stress tests that take the risks into account Sales from an economic as well as a regulatory per- Details of the risk-bearing capacity as at spective. In principle the risk-covering assets 31 December 2017 are disclosed in the sec- Market Price Risks Financial Steering Committee Risk Controlling are derived from the regulatory equity capital. tion “Overall Statement on Risk Situation”. Treasury

Liquidity Risks Financial Steering Committee Risk Controlling The concept implemented at Berlin Hyp to Treasury determine the Bank’s risk-bearing capacity is an economic capital concept which is con-   Operational Risks Divisions responsible for Finance stantly being developed. Due to the assess- processes Risk Controlling ment of liquidity chosen for the risk-bearing

Residual risk: shareholder risk Corporate strategy Risk Controlling capacity model, adjustments have to be made to risk positions that are not or only partly Residual risk: model risk Risk Controlling available in case of insolvency.

68 69 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

Risk Management System by Risk Type are based on the rating of the borrower, taking The proportion of non-performing loans in The securities and public sector loan portfolio Counterparty Default Risk into consideration the security provided. Real the overall portfolio was reduced from the represents a significant aspect of the capital The risk of counterparty default is the risk of a estate ­financing is largely determined using the prior-year level to 1.2 % and currently remains market business. In addition, there are counter­ loss, or loss of profit, due to a deterioration of SparkassenImmobiliengeschäfts-Rating (SIR) at a historically low level. Non-performing loans party risks from the derivatives business. a business partner's creditworthiness, as well and the method for international commercial are covered almost in full by collateral and value In 2017, new capital market business with as a loss in value of the security provided to real estate financing (ICRE). At the same time, adjustments. securities was also restricted, with the aim of the Bank. This is currently the most dominant additional rating procedures developed in reducing the balance sheet total. In general, type of risk for Berlin Hyp. Counterparty default cooperation with other Landesbanks are used Loan commitments are in principle subject to new business is only concluded with credit- risks are managed at the individual business for specific customer groups. These procedures annual ­resubmission and collateral is subject to worthy counterparties within the scope of a partner and overall portfolio levels. Investment particularly pertain to the capital market busi- a regular review. narrowly defined investment strategy. The risk (shareholder risk) is considered to be an ness and specifically to insurance ratings, bank existing capital market exposure is reported on immaterial risk. ratings and ratings for international regional Particular focus is placed on the process of real a regular basis to the Board of Management and authorities, as well as the corporate rating. estate and portfolio valuation. Certified apprais- the Supervisory Board, broken down according Individual Commitment Level ers from an independent division of the Bank or to country and rating class. Efficient lending processes form the basis The rating procedures employed here have certified and independent appraisers working for adequate risk management of the risks been derived from the framework of the on behalf of the Bank undertake valuations on a Derivatives transactions are not only concluded of counterparty­ default. This is guaranteed banking supervisory authority approval system. regular basis. with capital market counterparties but also through a loan approval directive and defined Quality assurance along with ­validation and real estate customers in the course of property processes and interfaces, from acquisition to back-testing­ for rating procedures are the Berlin Hyp uses early warning systems with a financing. new lending through to loan repayment (close responsibility of the Risk Controlling ­division variety of instruments in order to identify loan Counterparty risks from the interbank business integration of acquisition and subsequent in con­junction with the corresponding division­ commitments with increased risk in time. Along- are in principle covered by collateral. In the market sphere). The credit processes are laid at Berliner Sparkasse. Their continued devel- side the definition of quantitative early warning real estate customer business, the established out in writing in the Bank’s regulations. Credit opment and maintenance is provided by indicators as part of an early warning system, mortgage liens for the underlying transaction processes are examined regularly by the Inter- Sparkassen Rating und Risikosysteme GmbH qualitative indicators also exist for the purposes generally also apply to the derivative through nal Audit division, which means that they are (S-Rating) and RSU Rating Service Unit GmbH & of regular loan monitoring. The automated early broad statements of collateral purpose. also subject to constant quality analysis. Co. KG. Berlin Hyp is represented in the relevant warning procedure draws special attention to working groups and bodies itself and through the criteria for rating deterioration, arrears of Early warning indicators ensure daily risk-­ The risk exposure on the individual borrower the Berliner Sparkasse. interest and principal and the deterioration of oriented communication regarding capital level is verified on the basis of regular ­analysis the debt service cover ratio in different degrees. market counterparties as well as any potential of creditworthiness. Rating procedures Based on the rating class system, the counter- Other parameters relate to the loan-to-value as measures to be undertaken by the Bank as approved by the regulatory authorities that party default risk is divided into performing well as the expiry of rental contracts and/or fixed a whole. As in the past, Berlin Hyp has no invest- take debtor- and business-specific character- loans (rating classes 1 to 5) and non-performing interest rates. ments in structured products. istics into account are at the core of the risk loans (rating classes 16 to 18). assessment. Pricing as well as loan decisions Early warning meetings take place each quarter, attended by the Sales, Loan and Risk Manage- ment divisions, at which the risk content of the identified commitments is discussed separately and further measures decided upon if necessary. NPL ratio based on FinRep in % Risky real estate commitments are transferred to Risk Management. Competence for valuation Performing loans adjustments is concentrated here. Upwards of a 99 + 1 N Non-performing loans specific size, such valuation adjustments must 2016 2017 be approved by the entire Board of Management. 98 + 2 N 99 + 1 N

Value adjustments are made for an amount by which the outstanding loan, less any collateral, cannot be paid back with a high degree of probability. Collateral values are reviewed in this context and, if necessary, adjusted depending 97.8 2.2 98.8 1.2 on the necessary measures.

70 71 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

Portfolio Level Berlin Hyp has limited the counterparty default As at 31 December 2017, Berlin Hyp’s reported In addition to risk monitoring at individual risk. It has the risk indicators determined daily overall loan exposure was € 28.4 billion, as borrower level, Berlin Hyp also examines credit under an agency contract with BSK. The risk depicted below. The balance sheet assets are risks at the portfolio level. indicators are monitored by Risk Controlling. derived as follows: Variance analyses and limit monitoring are The loan portfolio model simulates potential performed here. The utilisation of limits at the borrower, issuer, counterparty and country portfolio level is monitored daily and reported defaults as well as value changes due to rating weekly. Berlin Hyp has defined processes and Transfer of balance sheet assets to overall loan exposure migrations in a one-year evaluation period on options in the event that the pre-warning level as at 31 December 2017 in € billion the basis of: (90 % of the credit limit) is exceeded and limits are exceeded. Exposure data (availments, externally 30 27.1 28.4 approved limits) The limit is reviewed at least once a year, Collateral values adjusted if necessary and approved by the Board 20 Borrower, issuer and counterparty default of Management as necessary. As of 31 December probabilities 2017, the utilisation was € 488 million and the 10 Country default probabilities limit was € 700 million. 2.4 0.2 0.2 Industry correlations and volatilities −1.5 Country correlations Responsibility for the methodology and vali- 0 Income ratios to determine expected dation of the credit value at risk model under proceeds­ from security consideration of Berlin Hyp’s interests rests at -10 Contribution ratios to value unsecured loan the Group level. Internal and external audits are Balance sheet Disbursement Customer Individual value less balance sheet Overall loan components carried out at Group level as well. Credit Risk assets obligations and derivatives adjustments/ fixed assets + exposure Ratios to value externally approved limits Controlling reviews the processing and con- sureties lump-sum value remaining assets + adjustments other receivables that have not been drawn yet trolling of the simulation results.

Based on the assumption of no fundamental Stress tests are performed within the scope changes to the risk structure of the portfolio of the credit portfolio model to simulate the (constant level of risk, going concern approach), change in a loan portfolio under the assump- the credit default distribution that is determined tion of extreme scenarios in order to review The main divergences to the balance sheet Rating classes makes it possible to make statements regarding the financial stability of an institution against presentation are as follows: in %

the probability of credit defaults in the following macroeconomic crises. The definition of the 51+42+ 6  year. Risk indicators (expected loss, credit value scenarios and their parametrisation are based The inclusion of off-balance-sheet business Rating class 1–3 50.7 at risk and unexpected loss) can be determined on the overall bank stress concept of LBBH, in the form of disbursement obligations and from the credit default distribution. Management which meets the Minimum Requirements for sureties Rating class 4–7 42.3 of default risks is based on unexpected loss at Risk Management (MaRisk). Consideration of customer derivatives with portfolio level. the loan equivalent amount Rating class 8–12 5.6 +1+ 0 Addition of valuation adjustments Rating class 13–18 1.2

The overall loan exposure is broken down into No rating classification 0.2 mortgages of € 23.0 billion and securities Credit value-at-risk development in total in 2017 and public sector loans of € 5.4 billion. In its in € million CVaR Limit quarterly risk report, Berlin Hyp analyses the counterparty default risk from the mortgage Customer groups 700 lending business in particular. in %

600 77+12+ 10 The mortgage loan portfolio is broken down Investors 77.0 500 by ratings, customer groups, regions and real estate types as follows: Housing 400 societies 12.0

300 Builders/developers 10.4 +1 200 Other/retail 0.6 100

0 January February March April May June July August September October November December

72 73 75 Limit December November Spread VaR VaR Spread October September Interest VaR VaR Interest ding payment ding payment

August VaR VaR July June Liquidity Risks Liquidity obligations that fall due in the short term due in the short term fall ­obligations that in the next 30 days balances) (refinancing is market money the unsecured to access if that the ensure This is designed to eliminated. obligations fulfil all payment able to be will Bank is risk The procurement within the next 30 days. basis and the maintenance on a daily reported stress under be maintained even to the buffer of is monitored. conditions ­ market- capital as a is classified As the Bank the within the meaning of institution oriented ensure out to carried checks are MaRisk, daily 30 days or seven for is guaranteed that liquidity conditions with defined MaRisk in accordance 3.2). (BTR for risk liquidity the short-term Furthermore, monitored is additionally the next 30 days the Group for Holding Berlin Landesbank by This LCR. on the basis of and the institutions freely specified, that compares is an indicator with the net securities portfolios ­available Berlin Hyp defines a liquidity risk as the risk that as the risk risk Hyp defines a liquidity Berlin not obligations may payment future and current is a risk The liquidity on time. full or be met in Hyp. A distinction is made Berlin for risk material risks. price deadline and between procurement, is analysed situation liquidity current The Bank’s management the liquidity of within the scope progress a liquidity on the basis of ­system analysis. in the risk (liquidity risk The procurement may Hyp that Berlin sense) is the risk narrower fulfil outstan be able to no longer May - ­

April March February January 0 80 60 40 20 cash value profit and loss analyses. Commu and loss value profit cash are and decision-making processes nication limits are or when warning thresholds triggered exceeded. or reached the management also to reports The monthly - back-test of results on the include comments did not show the back-testing of The results ing. in insufficient model quality of indications any 2017. are tests the stress of results on the Reports and the monthly as part of periodically prepared - fictitious, but pos from Aside reports. quarterly also changes, these scenarios rate sible interest interest historical actual, of include the results curve Alongside interest developments. rate also used simulations are stress modifications, changes spread credit of the effects examine to of the presentation value. Besides on the cash the value impact on these scenarios, the cash on net interest IRRBB scenarios six impact of on. is also reported income low- a long-term of the effects Evaluating rate the interest phase is also part of interest - refi largely Hyp analyses. Berlin change risk with secured market in the capital itself nances this of The costs securities. and unsecured to the cus- on passed generally are refinancing In commitment. the respective as part of tomer has environment the low-interest this regard, impact on the loan business. no direct earnings risks exist long-term Nevertheless, yield and due to a low equity of because These reserves. long-term valuation of the during the plan- account into taken risks are ning process. Value-at-risk development in total in 2017 in total development Value-at-risk in € million 100 ensitivities, s­ Service Market Price Risks Price Market As institution. book a non-trading Hyp is Berlin assumes Hyp largely Berlin bank, a Pfandbrief and interest of form in the risks price ­market amounts, peak for change risks. Except spread open currency any not have does the Bank in business financing estate real the in positions busi- Mortgage strategy. with its risk accordance through is refinanced currencies foreign in ness The hedging transactions. attributable directly risks. price share incur does not Bank risks price market of incurrence The controlled indi- and earnings risk of is based on a range is hedged change risk rate The interest cators. swaptions and securities. For with swaps, derivatives of forms the regarding ­disclosures - used as hedging instruments, see the Deriva section in the Notes. tives ­ risk of a combination uses The Bank stress and other approach value-at-risk the rate interest of the risk measure to tests value at risk risks, a price market changes. For and days trading ten with a holding period of using is determined level a 99.0 % confidence taking into approach, variance-covariance a risks including and non-linear linear account credit also takes value at risk The risks. volatility the from change risks risks and interest spread in addi- account pension liabilities into Bank’s change risks. rate interest general tion to with coefficients, risk determines The Bank mod- value changes are cash Bank which overall an interest of in case equity to elled in relation The stress +/200 basis points. change of rate also include risk price market for scenarios shocks and a net interest various non-parallel simulation. income interest limited. are coefficient and risk value at risk The and change in net value development The cash IRRBB while applying the six income interest - regula under stipulated scenarios rate interest have Thresholds with warnings. law come tory the limits. Recourse been established ahead of was signifi- risk price the market to in relation limit throughout value-at-risk below the cantly the utilisation was date 2017. On the reporting € 7 million and the limit was € 55 million. the to daily reported risks are price Market This includes among Management. of Board about basis point things information other the position, risk-bearing the overall for values utilisation and at risk value the coefficients, risk Statements Financial Annual 46.8 40.4 25.7 26.0 21.2 16.9 Report Management

7.5 4.7 4.0 2.8 4.0 Company Office Retail Berlin Others

17+8+47+26+Abroad 3 26+40+4+21+4+5 Country and Transfer Risks Transfer and Country primarily limited are risks and transfer Country limits, which country volume-based through at least. Limits are annually reviewed are data economic of in consideration determined limiting risk of (concept concept and the cluster of the Board by and resolved concentrations) of risks within the scope Management. Country into entered only activities are new business ­ good credit very with good or in countries it was year, As in the preceding worthiness. a bad recognise to not necessary therefore risks. transfer for value provision debt country through collateralised Individual exposures depending on the classified are property cases, other In all the property. of location of office registered is based on the classification partner. the business in countries was no exposure In 2017 there debt and the sovereign by affected particularly debt crisis. Logistics Residential Management Old federal states Old federal New federal states New federal Property type Property in % Regions in % Without specific allocation 74 Board and Supervisory Management of Board Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

liquidity disbursements in the next 30 days March in connection with a rise in volumes of The price risk encompasses the risk that in case Berlin Hyp’s market liquidity risk is managed under the application of a specified stress available highly liquid assets. of existing incongruities with dates on which through an unencumbered securities portfolio scenario. the capital falls due, the Bank can only carry out which consists almost exclusively of ECB-eligi- The deadline risk (refinancing risk) is the risk follow-up financing in the next 12 months on ble securities. The liquidity buffer comprises An LCR tailored to the requirements of the that the Bank can only make short-term exten- the basis of less favourable refinancing spreads. diversified and high-quality assets and assets institution, a so-called Bank LCR (BLCR), is also sions for refinancing funds that are due and The price risk is considered within the frame- of various categories in accordance with the determined on a daily basis. The minimum­ originally intended for the medium and long work of the risk-bearing capacity concept and is requirements of the Capital Requirements which is derived from the regulatory LCR and term, which are not covered by corresponding limited. As at 31 December 2017, this stood at Regulation (CRR). In principle the Bank does the Bank LCR over the next 30 days forms the assets, because of creditworthiness conditions € 12 million. not enter into any new commitments in markets internal indicator for the short-term liquidity and/or for market reasons. The risk follows on with insufficient liquidity. risk and is limited. As a result, adherence from the procurement risk as regards time, and In addition to monitoring liquidity risk limits, to the internal short-term liquidity ratio encompasses a period from 31 days to one year. the Board of Management is updated on a Berlin Hyp’s Treasury division creates monthly ensures compliance­ with the regulatory LCR The limit is set so that the Bank is able to repay monthly basis on the concentration of secured forecasts on the liquidity situation for a period ­requirements. all medium and long-term refinancing funds and unsecured money market refinancing with of at least twelve months. The assumptions due in the period under review on the basis of individual counterparties. made are checked regularly and adjusted as and In 2017, the minimum ratio for the LCR was the existing liquidity reserve. The deadline risks when required. 80 %. This ratio increased to 100 % as of 1 and compliance with the limits are discussed by Liquidity management occurs subject to January 2018. Internally, the LCR is controlled the Board of Management on a monthly basis as economic limits/warning thresholds; compli- The Bank uses a broad range of refinancing with a target ratio of at least 120 %. On the part of the quarterly risk report and are brought ance with regulatory requirements represents a instruments. In the money market segment reporting date 31 December 2017, the LCR to the attention of the Supervisory Board. compelling constraint. Falling below a warning these are secured and unsecured borrowings ratio was 183 % and therefore well above threshold or a limit triggers defined notifi- concluded both bilaterally and through Eurex the minimum. The established limits and Furthermore, the liquidity risk for the next cations and measures. A regulatory limit on in the case of repo transactions. The Bank pre-warning level for the short-term liquidity twelve months is monitored by LBBH for the liquidity risk continued to apply pursuant to the also participates selectively in the ECB’s open ratio at 100 % and 120 % respectively partly Group and the institutions. This is based on German Liquidity Regulation (LiqV) in 2017. market transactions. exceed the current regulatory requirements. the refinancing risk that is determined and According to the regulatory requirements, the The following chart shows the development of reported daily. The methodology is based on minimum liquidity indicator had to be at least Pfandbriefe as well as unsecured refinancing regulatory LCR, in each case on the last day of the regulatory NSFR but deviating internal 1.0. In the course of the financial year the liquid- are used for capital market borrowing. This is the month: weights are used in part. The established ity indicator was above the internal limit of 1.15 realised through private placements as well limit and the pre-warning level are 100 % and at all times. The illustration that follows shows as bond issues in benchmark format. For the The sharp increase in LCR at the end of February 105 % respectively. On the reporting date of the development of the indicator, in each case development of the refinancing structure, see is largely due to a comparatively high amount 31 December 2017, the refinancing risk for on the last day of the month: the explanations of the financial position in the of time deposits recognised as assets due in Berlin Hyp was 144 %. economic report.

Development of LCR in 2017 Development of the liquidity ratio in 2017 in %

700 2.40

2.20 600

2.00 500

1.80 400 1.60

300 1.40

200 1.20

100 1.00

January February March April May June July August September October November December January February March April May June July August September October November December

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Shareholder Risks Management of operational risks takes place The Bank participates in a data consortium for Berlin Hyp has established a crisis management In addition to the 100 % shareholding in Berlin amongst other things in consultation with the the recording of OpRisk losses. This expansion group to deal with crises in case of ­extraordinary Hyp Immobilien GmbH, a company which is individual specialised divisions. of the database to include external losses is a events that bear the risk of far-reaching no longer operational and pursued real estate This responsibility in particular also covers the mandatory element of the advanced measuring consequences (such as fire and water dam- ­marketing in addition to its activities as a real initiation and implementation of countermeas- approach (AMA) applied in the Bank. age, bomb threats, explosions, assaults with estate agent, the Bank acquired a minority ures, the introduction of appropriate internal hostage-taking and terrorist attacks). Situations investment in a regulated platform for project procedures and measures, and the conclusion Currently the limit is set at € 50 million. falling under the responsibility of the crisis developers and investors of commercial real of insurance policies. Berlin Hyp’s objective is to Pre-warning levels are not defined. The monthly management group are defined by the need for estate based in London in the reporting year. minimise the operational risks from an eco- utilisation of the limit for 2017 is shown in the fast decisions to avert and/or alleviate material The entrepreneurial risk and currency risk nomic point of view. following illustration: (consequential) costs/financial losses related to the shareholding are taken into consideration in the shareholder risk. Various instruments are employed in order to efficiently manage operational risk, Operational Risks including amongst other things: Pursuant to the CRR, operational risk is Utilisation of the limit defined as the risk of losses resulting from the Self-assessment according to the bottom-up in € million Operational risk Limit ­inappropriateness or failure of internal pro- approach (qualitative OpRisk inventory) cesses and systems, human error or as a result Scenario analyses to determine potential 60 of external occurrences. This definition includes losses (quantitative OpRisk inventory). legal risks in addition to operational risks, but Incident recording (internal/external) as 55 not strategic risks and reputation risks. It is a the basis of statistical evaluations for 50 material risk. risk assessment (actuarial approach: loss 50 distribution approach) and for the definition 45 Operational risks are managed in a uniform of scenarios specific to business areas for the 46 manner throughout the Group. Berlin Hyp has scenario analyses 40 appointed an OpRisk Officer for the Group’s Early warning system (identifying and 35 OpRisk Committee to liaise with LBBH. The ­monitoring of risk indicators). Bank, together with the Group, received Measures controlling (identifying and 30 ­authorisation from the supervisory authority for ­monitoring of measures). 33 an internal OpRisk model (Advanced Measure- Risk transfer through insurance protection. 25

ment Approach = AMA model) used to measure 20 and define regulatory capital requirements. Pursuant to Sections 25a and 25h German Banking Act and relevant circulars published by 15 The model is reviewed regularly and the model the banking regulator, Berlin Hyp must estab- 10 assumptions are largely confirmed. Breaches of lish and maintain commensurate business and the model are classified as immaterial, plausible customer-related security systems to prevent 5 or material and follow-up measures are defined money laundering, terrorism financing and to improve the results. any other criminal activities detrimental to the 0 Bank. In order to ensure this, Berlin Hyp has January February March April May June July August September October November December Berlin Hyp’s Board of Management is respon- appointed an Anti-Money Laundering Officer sible for a systematic and consistent process and four employees as contact persons. The comprising the sequences identification, Board of Management is presented with an assessment, monitoring and the management annual report on the Bank’s hazard potential of operational risks. The Board of Management in the form of a hazard analysis. Within the confirms the accuracy of the approved risk framework of the 2016 hazard analysis, the parameters (self-assessment and scenario Anti-Money Laundering Officer determined that ­evaluations) in the quarterly risk report on the risk posed by money laundering, terrorism the one hand and, on the other hand, on a financing and other criminal activities was half-yearly basis through confirmation of the “moderate”. Following the intervention of corresponding half-yearly OpRisk report. Ad-hoc risk-mitigating measures, the risk fell to “low”. reporting follows the occurrence of extra­ ordinary events, in particular significant losses. On the basis of the overall risk assessment derived from Berlin Hyp’s risk-bearing capacity, Overall responsibility for the operational Berlin Hyp’s Board of Management establishes implementation and monitoring of the OpRisk limits for operational risks that are guided results and developments is assigned to the by the proposed Group limits but do not Risk Controlling Division Manager. exceed them.

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System Risks to establish them as an integral element of the Material legal risks that were qualified as No information risks or IT risks with a high bank’s Written Fixed Rules through internal current or impending court proceedings of the residual risk (ratios of damage and probably of specifications about data security and regularly Bank are reported on a half-yearly basis to the occurrence) that could endanger the existence updated and reviewed emergency procedures. Board of Management. Ad-hoc reporting is of the Bank as a going concern are expected at This way, the functionality of the business required for events with especially far-reaching the current time. procedures in the event of technical faults is consequences. guaranteed with the aid of back-up solutions The Bank has an operational information which are quickly available. Borrower Claims for the Reimbursement of security and IT risk management system that Processing Fees is managed by the information security and IT Further measures to guarantee IT security were In 2017, the German Federal Court of Justice risk officer for the systematic improvement of implemented in accordance with the recom- ruled that agreements relating to processing ­information security while taking into account mendations of the Federal Office for Safety in fees charged within the scope of general terms the risk situation and for the purposes of Information Technology (BSI) within the scope of and conditions are also unlawful in the case of ­effective risk management. the IT security management system and under commercial loans. However, the Federal Court of the stewardship of the IT Security Officer. Justice views pricing in the processing fee into Following the introduction of the integrated the interest margin or an individual agreement SAP system, Berlin Hyp has a powerful IT system Legal Risks on processing fees as lawful in principle. commensurate with the type and scope of its Legal risks are those risks arising from the business activities. The implemented systems ­violation of applicable and changing legal It also states that reimbursement claims based are stable throughout the year. ­provisions, in particular from contractual, on processing fees paid prior to 1 January 2014 ­statutory or judicially developed legal pro- are time-barred. Loan agreements based on With the integrated SAP system as an overall visions. This includes the risk arising from foreign law are not affected by the Federal Court solution for the entire Bank, Berlin Hyp ­benefits violations of legal provisions due to ignorance, of Justice’s ruling. As the Bank must assume from a comprehensive state-of-the-art IT a lack of diligence in applying the law (care- that borrowers in Germany may want to assert landscape, and the increasing importance of less interpretation), negligence or a failure to reimbursement claims under this ruling, it information technology as a competitive factor ­implement in good time. ­performed an analysis of the method of agree- is taken into account. ing processing prices practiced since 2014 and In addition to the specialist departments, the accordingly set aside appropriate provisions. This is also closely linked to a very high level Compliance function and Risk Controlling, the It was taken into account that, as a rule, Berlin of protection against system risks, such as by Legal department (Governance division) is Hyp agreed the processing fees on an individual a high degree of automation, homogenous responsible for the identification and avoidance basis. system environments as well as integrated of legal risks. Monitoring legal risks incurred is interfaces, which results in the avoidance of fundamentally part of the Legal department’s Risk Management Pursuant to Article 27 manual processing steps where possible. duties. Major projects are centrally coordinated ­German Pfandbrief Act with consideration of legal aspects. For risk Pursuant to Section 27 German Pfandbrief Act Through accompanying organisational meas- prevention, the Legal department provides (PfandBG), each Pfandbrief bank must employ ures, an appropriate access protection system ­templates and explanations for contracts and a risk management system that is suitable for has been implemented that prevents unau- other legally important declarations to the the Pfandbrief business. The risk management thorised and undesired read or write access to extent this is reasonable. Involving the Legal of the cover funds is in principle integrated databases. In addition, appropriate protective department is mandatory where deviating or into the overall bank risk management system measures were established to ensure the novel provisions are concerned. of Berlin Hyp for counterparty, market price, integrity/authenticity of the data and for the To the extent to which external law firms are liquidity, operational and other risks. Moreover, availability of IT services. involved, control generally rests with the Legal there are limits in accordance with regulatory department. Human Resources is responsible requirements. The maintenance of these limits To protect against possible catastrophe for labour court proceedings. is monitored daily within the scope of the risk scenarios in own and service provider computer management of cover funds and reported to the centre operations, Berlin Hyp has devised and When unforeseen developments to the Board of Management in a separate report on a implemented a concept together with its IT ser- ­detriment of the Bank or errors have occurred, quarterly basis. vice partner. A major element of this concept is a the Legal department participates in the identi- backup environment to which operations can be fication, elimination and future avoidance of the switched quickly in the event of a catastrophe. errors. It also reviews and evaluates incidents This catastrophe case backup was reviewed based on legally relevant facts and manages with the IT service partner and the specialist any legal proceedings. This applies in particular divisions users in 2017. for defending against claims asserted against the Bank. Adequate reserves were formed for In order to limit IT risks, critical business pro- pending cases. cesses and their IT systems were also identified

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Overall Statement on Risk Situation The combination of specific stress tests for Inverse stress tests are applied to determine Human Resources Risks The risks assumed by Berlin Hyp were in the various types of risk with Bank-wide how drastically those scenarios affecting the Availability Risk reasonable proportion to the risk-covering stress tests taking multiple risk types into entire Bank that would entail the most severe Quantitative and qualitative supply availability assets in the reporting year. As at 31 December account allows the influence of macroeconomic effects would have to develop before all is managed on the basis of the specific aims 2017, risk-weighted assets (RWA) came to changes on the risk-covering assets and on the risk-covering assets on the one hand and the and requirements of the Bank’s divisions. Berlin € 9,151.3 million. regulatory capital ratio to be evaluated. minimum capital level on the other hand would Hyp cannot escape the effects of demographic fall too low. change, the lack of qualified workers, globalisa- Risk-covering assets amounted € 1,516.5 mil- Sufficient scenarios were developed for this tion and corporate social responsibility as well lion as at 31 December 2017. purpose in accordance with the Minimum Other Risks as digitalisation and automation. Requirements of Risk Management (MaRisk), Business Policy and Strategic Decisions Berlin Hyp’s flexibility and the development of taking into account the correlations of the Strategic risk is the risk of failing to achieve In view of this, Berlin Hyp developed a vision risk-covering assets within the framework of assumed developments between individual long-term company objectives due to strate- with the help of an external consultant in 2017 the risk-bearing concept at Berlin Hyp is shown risk types. gic decisions that are incorrect, inadequately that sheds light on quantitative and qualitative in the following chart: prepared or based on incorrect assumptions. supply availability. As part of an additional pro- Managing strategic risks is the responsibility ject, the Bank examined which skills will be rel- of the entire Board of Management; certain deci- evant for employees in future, especially taking sions also require the consent of the Supervi- the digitalisation and automation trends into sory Board. account. Initial steps were also taken towards Percentage of recourse per risk type as of 31 December 2017 the concept of a holistic and sustainable human in %¹ Landesbank Berlin Holding as the Group’s resources development model. It focuses on parent company in the reporting year was the employees’ individual development needs Risk type Recourse € m responsible for strategic decision-making in as derived from the skills needed in the future. the Group. The overall bank strategy approved In spite of or due to the innovative trends, the Credit risk 488 70 and regularly updated by the LBBH Board of Bank should not lose sight of employees as Market price risk2 51 14 Management summarises the strategies of the individuals and their specific needs – this is Group companies and consists of the strat- particularly important to Berlin Hyp. Operational risk 50 100 egy document and planning. The long-term Residual risk 42 60 company objectives and strategic framework In recent years, Berlin Hyp has likewise stepped (incl. model, real estate, shareholder conditions are established by the Board of up its activities in the area of the next genera- and liquidity price risk) Management in the annual strategy meeting. tion of talent in order to be able to respond to Monitoring and controlling the strategic objec- demographic changes and the related lack of Total risk² 630 53 tives for the strategic business areas, subsidiar- qualified workers in a timely manner. It focuses Flexibility 887 47 ies and divisions takes place once a year based primarily on trainees and students of dual study on the defined target achievement indicators courses and has also increased the deployment Risk-covering assets 1,517 100 and targets. Select financial and risk targets of student employees and interns. Berlin Hyp’s are also monitored during the year based on presence in social media and at job fairs for ¹ The underlying holding period of the risk-bearing capacity concept is one year. standardised reports. pupils and students contribute to the Bank’s ² The market price risk is scaled by multiplying VaR by a factor of 6.64. positioning as an attractive employer, especially Berlin Hyp further defined the business strategy for young people. according to its specific requirements within the binding Group requirements. These are Berlin Hyp draws on all available recruitment Development of financial flexibility in 2017 reviewed annually as well and serve as the sources to cover its staffing requirements, with in € million subsequent basis for Berlin Hyp’s planning. internal recruitment always taking precedence over external recruitment. Aside from the inter- 1,000 Reputational Risks nal job market, Berlin Hyp also publishes job 900 The Bank monitors print and online media also offers in appropriate, publicly accessible media 800 with respect to potential reputational risks. and obtains targeted assistance from recruit- 700 In the event of negative media coverage, the ment experts in the case of key positions. 600 Bank has installed an escalation procedure 500 to ensure a suitable response. There were no 400 events that involved reputational risks in 2017. 300 200 100 0 January February March April May June July August September October November December

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Motivation Risk on a model of constructive exchange regarding excellent technical and methodology standards. Motivational working conditions are based on conduct and results is not just provided periodi- In 2017, for example, networking with training a transparent information policy, attractive pay cally within the scope of the employee appraisal, facilities of German savings banks, the Spar- and voluntary social insurance contributions, rather also on a situational basis. kassenakademien, was intensified. In addition, flexible working hours to assist in creating numerous internal qualification measures a healthy work-life balance and promoting Qualification Risk involved greater use of the staff’s professional employees’ participation in the process of The Bank conducts targeted education and expertise through deploying them in internal change. further training measures on the basis of the teaching activities. Only through continuous, annual staff discussions and the current and autonomous learning in the workplace can Berlin Hyp gives its employees the chance to future task structure of the staff. Training the qualifications of the Bank’s employees be spend a day volunteering for a charitable cause; requirements in individual specialist depart- adapted quickly to the constantly changing work once again, many Berlin Hyp employees took ments are determined first of all, before qual- environment. the opportunity to do so in the financial year ification measures are initiated by the Human Managers closely accompany their employees 2017. Resources division. on an equal level in this process. They jointly Alongside specialist seminars, personality define development objectives, provide Health management has a long-standing seminars, language seminars and IT seminars feedback and structure individual on-the-job tradition at Berlin Hyp. Two health days were were also on offer in 2017. training with the employee. held in 2017. Both days were dedicated to In addition, employees are also given the oppor- specific topics. “Movement” was the focus in the The specialist programme was also conducted tunity to job-shadow in other divisions of the first half of the year and “relaxation” was on the in financial year 2017, which is geared towards Bank. These measures guarantee that staff can agenda in the second half. developing personalities and networking the meet current and future challenges with a high The response to the varied offering, which Bank’s best specialists. In addition, Berlin Hyp degree of specialist and social competence. combined hands-on activities and diagnostic offers advanced qualification measures for services, was extremely positive and was very various target groups within the company. This popular with the staff. includes promoting young employees who are As a result, the health courses offered by able to apply for a mentoring training pro- external providers held in the Bank’s offices gramme or a place to study real estate economics are being constantly expanded. Berlin Hyp also at university. The two openings in 2017 were offers its employees an extensive prevention allocated while maintaining the principle of programme, such as the annual flu vaccination, equal treatment of male and female candidates. massages, sports classes and back-strength- In addition, advanced qualification was also ening exercises outside the scope of the health implemented for the specific qualification needs days. Employees can also seek advice from the of the second level and for employees who seek occupational health officer at any time on how to complete a university degree alongside work. to make their workstation more ergonomic. Furthermore, training for selected employees and managers in terms of agile and efficient Berlin Hyp employees should be given the working methods derived from the 2016 change chance to change their career path. process were continued and finalised. That is why vacant positions are initially advertised internally, with suitably qualified The concept implemented in 2016 for the applicants being offered an interview. The holistic development of managers was revised recruitment process puts particular empha- in 2017 following the project to review and sis on employee potential and development rework the Bank’s personnel management opportunities. The performance, potential and instruments. Individual existing measures such willingness of Berlin Hyp’s employees to accept as basic training for new managers, coaching change gives them the opportunity for horizon- and the SeitenWechsel® personality training tal as well as vertical career steps. Decisions concept were combined with new methods such on recruitment are made in a transparent and as leadership training from the perspective of a traceable manner. They are made on the basis healthy lifestyle, to form a modular system. The of standardised procedures, particularly in the concept is based on individual, flexible person- case of management recruitment. nel development for managers and is geared towards on the corporate vision and strategy in Promotion and development are particularly terms of personnel development content. important in annual employee appraisals. Discussions also centre on the need for the Both as a partner for conducting the in-house employee to adapt to a constantly changing seminars and in seminars for individual working environment. However, feedback based employees, Berlin Hyp engages providers with

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IV Accounting-Related Internal Control System and Risk Management System

The annual accounts of Berlin Hyp are produced accounting processes, compliance with relevant discussed. A thorough separation of functions ing framework, please refer to the comments in accordance with the provisions of the German legal provisions and ensuring the effectiveness along with organisational instructions and on risks in the Annual Report as well as to the Commercial Code, supplemented by corporate of the monitoring of accounting processes. The the distribution of technical roles and access Notes. law provisions and taking into consideration implementation of controls is decided on the rights ensure in advance that interventions in A number of external audits were carried out at the Pfandbrief Act (Pfandbriefgesetz) and the basis of suitability, effectiveness and profitability. accounting processes can only be undertaken Berlin Hyp in financial year 2017 alongside the Accounting Ordinance for Banking Institutions in accordance with official responsibilities and audit of the annual financial statements. These (Verordnung über die Rechnungslegung der The accounting-related internal risk manage- competence. Unless specialised, two-person audits concerned either Berlin Hyp directly as a Kreditinstitute). The accounting standards of ment system encompasses measures for the integrity systems have been established, separate financial institution or in its capacity as the German Accounting Standards Committee identification, assessment and limitation of organisational control activities are under- part of the regulatory group. are applied. According to the IFRS, Berlin Hyp risks opposing the objective of ensuring the taken on a standardised basis. Electronically is not obliged to present consolidated financial regulatory conformity of the annual accounts. generated raw data as well as the various Particularly noteworthy in this regard are the statements since no subsidiary has significant interim and final results are analysed, tested ECB’s on-site inspections on the issues of influence on the presentation of Berlin Hyp’s The objective of the internal control system for plausibility and randomly examined by the managing the risk of interest rate changes and earnings, financial and assets position. is to record business transactions and events divisions using a variety of system-supported audits on the German Saving Savings Banks in accordance with the legal regulations, the comparisons, agreements, target comparisons Finance Group’s (DSVG) deposit protection The Finance and Banking Operations division is ­Articles of Association and other internal and time-­series developments on an individual system. The on-site inspections on liquidity responsible for accounting. The organisational ­directives, in a complete, swift and correct man- transaction basis. Both technical requirements risk management and internal and external unit carries responsibility for the general ledger ner, to process and document them as well as to and workflow descriptions are in place for the reporting quality and coverage audit performed and accounting and for technical matters and accurately assess, show and evaluate assets and individual processing steps within the frame- in 2016 were reported on and assessed in final portfolio management in the subsidiary ledgers. liabilities, thus allowing for a correct identi- work of the relevant development process. form in the financial year. External tax audits Pursuant to the principle of the separation fication of results. The controls also serve to were once again conducted. of functions, the assessment of financial provide this final information in a swift, reliable Internal and external reporting is also subjected ­instruments by the Risk Controlling division and and complete manner. to a multistage quality-assurance process None of the audits resulted in material findings. the evaluation of credit risks by the Risk Man- before financial information is released. The Bank followed up and rectified the findings agement division is pursued on a case-by-case The Board of Management is responsible for the in a coordinated procedure led by the Internal basis within the financial reporting process. structure and maintenance of the internal con- Accounting processes are an integral compo- Audit division. Job descriptions are available for all relevant trol system. The established accounting-related nent of the Audit division’s risk-oriented audit positions and sufficient human, technical and internal control system consists of process-in- planning system. Audit focuses are changed organisational resources are also available in tegrated, error prevention regulations and on a regular basis. Audits take place as process order to ensure the sustainable and disruption-­ facilities, as well as in the form of integrated audits and are, as a matter of principle, under- free handling of tasks. The divisions are and organisational controls. In addition, regular, pinned by case-by-case audits of samples. assigned to the Board’s credit function sphere. case-related monitoring measures independent of processes have been implemented. In the financial year 2017, audits on the methods In their management reports, corporations as for producing tax returns, account management defined in Section 264d German Commercial At Berlin Hyp, accounting processes are stand- issues and current account reconciliations, Code (HGB) must describe the significant ardised and are subject to constant supervision. among other things, were carried out. characteristics of the internal control and risk The processing, entry and documentation As in previous years, the Internal Audit division management system with regard to accounting of relevant­ accounting data occurs using IT monitored and accompanied the process of processes. Berlin Hyp regards as “significant” systems that keep accounting books and other reconciling loan accounts within the scope of any legal violations as well as errors having records in electronic form. Berlin Hyp applies the dispatch of annual statements in its role as a a qualitative and quantitative influence on the core SAP application as an integrated neutral body. the validity of accounting processes that are comprehensive banking solution. This system ­relevant to decisions pertaining to the recipients largely avoids interfaces between various data There were no significant findings, as in of the information. processing applications, weak links in the data ­previous years. flow as well as manual interventions and pro- The accounting-related internal control system cesses. Regulations and measures regarding IT Regarding special measures concerning the encompasses principles, measures and security, which are also of particular importance management and monitoring of accounting procedures for the regularity and reliability of when it comes to accounting, have already been units that are to be depicted within the account-

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V Remuneration Report

The reenactment of the Institutional Remunera- Landesbank Berlin Holding has concluded a depend on the development of the institution’s as a parameter here. Determining the Group’s tion Ordinance (Institutsvergütungsverordnung) lump-sum pecuniary loss third-party liability value over the long term and be subject to an overall success is the basis for other deci- entered into effect on 4 August 2017. group insurance (D & O insurance) in favour of appropriate time-limit. For (listed) institutions sions at the level of Group institutions. Any The amendments were being integrated in members of organs within the Group. organised as an Aktiengesellschaft (stock cor- deviations to this rule in the case of negative the remuneration strategy and remuneration This also covers the personal liability risk of the poration), the sustainability requirement is also overall performance are to be comprehensive- systems at the time this report was prepared. Berlin Hyp Board of Management members in to be complied with using share-based forms ly justified and presented to the responsible As a result, this remuneration report is based case the relevant group of persons is called to of remuneration. The issue of Berlin Hyp shares regulatory body for advance approval. on the Institutional Remuneration Ordinance account for pecuniary loss in connection with is not regarded as practical, as Berlin Hyp in the previous version dated 1 January 2014 the performance of its work. shares are not listed. Berlin Hyp shares, which 2. Determining Berlin Hyp’s overall success and does not reflect the amendments of In accordance with the regulations contained cannot be traded on a liquid market, also do not Berlin Hyp’s overall success is determined 4 August 2017. in Section 93 (2) German Stock Corporation Act represent a reasonable incentive instrument using the method as applied at Group level. (AktG), the deductible is agreed as at least 10 % for Board of Management remuneration. In the This Remuneration Report summarises the of the claim up to a maximum amount of one opinion of the Supervisory Board, shares are 3. Determining the total variable principles that were applied in determining the and a half times the fixed annual remuneration. therefore not suited as a form of remuneration remuneration­ amount remuneration of the Board of Management at Landesbank Berlin Holding pays the premiums at Berlin Hyp. The creation of shares-based In determining the total variable remuner- Berlin Hyp, and explains the levels and structure for this D & O insurance which is also in the instruments (phantom stocks) provides no ation amount for the Board of Management of Board of Management benefits. In addition, interests of the Group. benefits vis-à-vis the determination of variable (total bonus pool), the Supervisory Board in- the principles and levels of the remuneration for remuneration in cash, since such share-based itially uses a bonus base value. This compris- the Supervisory Board and its committees are During the financial year, the Board of Manage- instruments would also be payable in cash and es 20 % of the fixed Board of Management described. The report takes into consideration ment consisted of Sascha Klaus, Gero Bergmann would have to be guided by the same criteria remuneration and is adjusted in line with suc- the recommendations of the German Corporate and Roman Berninger. The individual rights and upon which the determination of variable cess. Besides an evaluation of the sustainable Governance Code in the version of 7 Febru- duties of members of the Board of Management remuneration is based. Instead of using share- financial success, qualitative factors are also ary 2017. resulting from their employment relationship based forms of remuneration, that part of the taken into account. The final step is a review; are regulated for each member by his contract variable remuneration which is to be structured where necessary a reduction of the calculated Remuneration of the Board of Management of employment. The following remuneration pursuant to Section 20 (4) of the Remuneration overall bonus pool is conducted pursuant The Supervisory Board establishes and annually elements have been set: Ordinance for Institutions (InstitutsVergV) to Sections 7 and 20 of the Remuneration reviews the remuneration system, including (sustainable instruments), is to be based on the Ordinance for Institutions (InstitutsVergV), the major contractual elements, for the Board Fixed annual salary: The fixed annual salary of development of equity capital pursuant to the following a check for conflicts with the of Management at Berlin Hyp. Pursuant to the members of the Board of Management con- German Commercial Code (HGB) as provided risk-bearing capacity and/or the Bank’s equity Section 3 (2) of the Remuneration Ordinance for sists of a basic salary in the form of pensionable in Berlin Hyp’s annual accounts in accordance capital requirements, among other factors, Institutions (InstitutsVergV), the supervisory and non-pensionable components which are with the German Commercial Code (HGB) as until all criteria have been met. body is responsible for the structure of the payable in monthly instalments. In accordance this adequately illustrates the development of remuneration systems for the members of the with the respective employment contracts, the Berlin Hyp’s value. 4. Determining individual target bonuses management. The specifics of the remuneration fixed payments are reviewed for appropriate- The individual success of each member of systems for the members of the management ness and adjusted by the Supervisory Board The Supervisory Board stipulates the maximum the Board of Management is determined by body were resolved by the Supervisory Board every two years or, in the event of effective amount of the variable remuneration to be paid whether the member achieves the agreed in the “Richtlinien des Aufsichtsrats der Berlin collective wage increases, adjusted according to each member of the Board of Management targets (individual targets), taking into Hyp AG für die Festsetzung und Auszahlung der to the salary increase of the respective highest in a financial year (so-called “target bonus”). account both quantitative and qualitative variablen Vergütung (Tantieme) der Vorstands­ salary group in terms of percent in accordance Variable remuneration is measured using a remuneration parameters, which are inspired mitglieder” (Guidelines prepared by Berlin Hyp’s with the collective bargaining agreement for multi-stage system: by the strategies and support the reaching of Supervisory Board for establishing and paying the private banking trade and the public banks. the strategic targets. Negative performance out the variable remuneration (bonuses) for There were no adjustments in the financial year 1. Determining the Group’s overall success contributions made by a member of the Board members of the Board of Management). 2017. The Group’s overall success is determined of Management will reduce the amount of at the level of Erwerbsgesellschaft der variable remuneration or lead to complete The Supervisory Board has transferred the Variable remuneration: The members of the ­S-Finanzgruppe mbH & Co. KG. The size of the forfeiture of such variable remuneration. duties of the Remuneration Controlling Com- Board of Management can receive variable contribution to value, which fundamentally Complete forfeiture of variable remuneration mittee pursuant to Section 25d (12) German remuneration for their work in the respective encompasses the operating result and capital occurs in particular if the preconditions of Banking Act (KWG) to its Staff and Strategy Com- past financial year. costs and is determined based on the finan- Section 20 (5) No. 1 or 2 of the Remuneration mittee. The Committee assists the Supervisory Pursuant to Section 20 (4) of the Remuneration cial statements of Erwerbsgesellschaft der Ordinance for Institutions (InstitutsVergV) Board in structuring the remuneration systems Ordinance for Institutions (InstitutsVergV), S-Finanzgruppe mbH & Co. KG according to are fulfilled. The target bonus may not exceed for the members of the Board of Management. at least 50 % of variable remuneration must the German Commercial Code (HGB), is used the fixed annual salary (basic salary com-

88 89 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

prising pensionable and non-pensionable The Board of Management members did not The Board of Management members Gero The pension claim acquired pursuant to this as components) of the member of the Board of receive any other remuneration components Bergmann and Roman Berninger have a claim to at 31 December 2017 is 34.0 % of the pension- Management. (subscription rights, other share-based remu- retirement pension after the end of the contrac- able salary for Gero Bergmann and 58.0 % for neration components, etc.) in the financial year tual relationship upon reaching the age of 65. Roman Berninger. The total remuneration calculated in this 2017. Board of Management members have not According to their contracts of employment, way (basic salary plus target bonus) will be been promised or have not received payments In the case of Roman Berninger, this claim for the Board of Management members have a reviewed by means of a market comparison from third parties in the financial year in pension also applies upon expiry of the term claim to the adjustment of their current pension and considering the institution’s remuneration ­connection with their work as Board of Manage- of appointment or as a result of the Bank’s benefits once they have started receiving them. structure to ensure that it is appropriate. ment members. termination of the contractual relationship, This adjustment is made in accordance with The target bonus is then determined by the provided termination is not occasioned by the percentage payment developments of the Supervisory Board. Other remuneration: Company cars were also cause connected with the person of the Board of collective bargaining agreements for the private provided to Sascha Klaus, Roman Berninger and Management member (Section 626 German Civil banking trade and the public banks. Taking into account the position and the tasks Gero Bergmann for company and private use in Code (BGB)). of the Board of Management at Berlin Hyp and the financial year 2017, with a chauffeur also The cash value of the pension reserves formed the regular amount of the variable remunera- provided for company use. Gero Bergmann or the Bank may terminate his for the Board of Management was T€ 3,607 tion, 40 % of the target bonus determined by employment contract once he has reached the on the balance sheet date (2016: T€ 3,905). In the Supervisory Board will be paid immediately Total remuneration: In the financial year 2017, age of 62. In this case, he retains his claim to 2017, T€ 322 (2016: T€ 555) was contributed (“instant bonus”). the members of the Board of Management retirement pension even before the age of 65. to reserves in anticipation of pension commit- The remaining 60 % of the target bonus will be received remuneration totalling T€ 1,833 ments and similar obligations to members of spread over a period of four years and may only (previous year: T€ 2,424). This amount contains If Gero Bergmann or Roman Berninger leave the the Board of Management. be awarded in four instalments over the four the performance-related elements of the remu- Bank due to incapacity, they will receive a dis- financial years following further calculations neration for the financial years 2012 and 2015, ability pension. A widow’s or orphan’s pension In addition, a total of T€ 2,919 (2016: T€ 2,755) by Supervisory Board. The Supervisory Board totalling T€ 113.5, and for the financial year is also paid to the surviving dependants of the was paid in the financial year 2017 in overall will resolve the conditional bonuses once the 2016 totalling T€ 172, disbursed in the financial Board of Management members Bergmann and benefits (retirement pensions, surviving annual accounts have been prepared for each year 2017. Berninger upon their death. dependants’ benefits and payments of a related financial year, taking into account the develop- nature) to former Board of Management mem- ment of Berlin Hyp’s value over the long term as In 2017, variable remuneration of T€ 460 was The retirement pension payable to the Board of bers or their surviving dependants. The cash well as personal performance contributions. determined for the Board of Management for Management members Bergmann and Ber- value of the obligations to pay such benefits the financial year 2016. ninger is determined by a certain percentage for this group of persons is T€ 34,425 on the A maximum of 15 % of the target bonus may be of their pensionable fixed salary, and increases balance sheet date. paid out as a conditional bonus. Each portion of The total amount of variable remuneration paid by 2 % for each year of service as a Board of the conditional bonus still to be agreed on will to the Board of Management in 2017 was deter- Management member, whereas a maximum be determined once the sustainability of the mined in in accordance with Section 7 Remuner- limit of 75 % is contractually agreed for Roman performance contributions for the financial year ation Ordinance for Institutions (InstitutsVergV). Berninger and a maximum limit of 50 % for Gero for which the target bonus had been intended Bergmann. The valuation basis for the retire- at the time (base year) has been reviewed. Any In accordance with the criteria defined above, no ment pension is the full amount of pensionable negative performance contributions at the variable remuneration was paid for the financial fixed salary. Group or bank level or non-sustainable indi- years 2011, 2013 and 2014 for the activities of vidual performance contributions result in the the members of the Board of Management who bonus being reduced or forfeited. held their positions in financial years 2011, 2013 and 2014. 50 % of both the instant and conditional bonuses will be paid out immediately following The sum of variable remuneration for the finan- their determination. The remaining 50 % are cial year 2017 as well as the payable retention dependent on the development of the compa- sums from the 2012 and 2015 financial years ny’s value over the long term and are subject to could not yet be determined at the time of the a one-year holding period, after which they will preparation of the annual accounts. be paid (“sustainable instruments”). The net asset value over time needs to be Pension and benefits commitments: In case of established for this. If a member leaves the incapacity for work caused by accident or illness, Board of Management through termination the members of the Board of Management of the appointment and/or termination of the are entitled to full payment for the following employment relationship, the determination periods: Gero Bergmann and Sascha Klaus – of instalments extending across the retention up to twelve months; Roman Berninger – up period will not be affected; other income will not to 18 months, but in each case no longer than be offset. until the end of the respective employment relationship.

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The following overviews of the remuneration of Remuneration of the Supervisory Board If a member only belongs to the Supervisory members of the Board of Management in the The members of the Supervisory Board receive Board for part of the financial year, he/she financial year 2017 comply with the disclosure remuneration for their work; this amount is receives the pro-rata share of the annual requirements of the German Corporate Govern- ­stipulated in the Articles of Association, which ­remuneration for this period. ance Code: state that Supervisory Board members receive fixed annual remuneration. No variable remu- Members of the Supervisory Board receive Amounts neration is paid. Additional remuneration is remuneration for their work in the respective in T€ paid for membership in the committees, for financial year in each case after the expiry of the chairmanship and deputy chairmanship of financial year in question. the Supervisory Board and its committees.

­Remuneration of the Supervisory Board mem- Total remuneration of T€ 306 (2016: T€ 305), bers is regulated as follows pursuant to Section without value added tax, is payable to the 14 of the Articles of Association: members of the Supervisory Board of Berlin Hyp and its committees for 2017.

Instant bonus for the 2016 for bonus Instant the plan) of term year (1 FY In addition to reimbursement of their ex­penditure All employees’ representatives on the Super­ Conditional bonus for the 2010 for bonus Conditional the plan) of term year (6 FY the 2012 for bonus Instant the plan) of term year (3 FY the 2012 for bonus Conditional the plan) of term year (6 FY the 2015 for bonus Instant the plan) of term year (1 FY the 2015 for bonus Conditional the plan) of term year (5 FY

Fixed annual remuneration Fixed benefits Ancillary Total variable One-year remuneration variable Multi-year remuneration Total expenditure² Benefit remuneration Total (including value added tax), members of the visory Board are employees of Berlin Hyp. They Sascha Klaus Supervisory Board committees also receive fixed receive appropriate remuneration for this work Chair of the Board of Management annual remuneration. For individual members, and the usual bank pension commitment for 1 October 2016 this amounts to T€ 12 per annum; the Chair staff. They receive no further pension commit­

¹ of the Supervisory Board receives double this ments for their activity on the Supervisory 2016 187 5 192 100 0 0 0 0 0 0 0 292 0 292 amount, and each Deputy Chair receives one Board. No remuneration or benefits for personal 2017 560 19 579 0 0 0 0 0 0 0 0 579 0 579 and a half times the stated figure. performance, particularly for consulting and

2017 (Min) 560 19 579 0 0 0 0 0 0 0 0 579 0 579 referral services, were paid or granted to the In addition to reimbursement of their expenditure members of the Supervisory Board. 2017 (Max) 560 19 579 0 0 0 0 0 0 0 0 579 0 579 Benefits granted (including value added tax), members of the 2016 187 5 192 0 0 0 0 0 0 0 0 192 0 192 Supervisory Board committees also receive fixed annual remuneration in addition to their tions³

- Alloca 2017 560 19 579 100 0 0 0 0 0 0 0 679 0 679 Supervisory Board remuneration. For individual Roman Berninger members, this amounts to T€ 6 per annum; the Board of Management respective committee chair receives one and a 1 January 2010 half times this amount, and each deputy chair 2016 455 23 478 0 215 37 42 84 52 0 0 693 305 998 receives one and a quarter times the stated figure.

¹ 2017 455 25 480 0 139 0 0 21 26 20 72 619 270 889 In the event that members of the Supervisory ted 2017 (Min) 455 25 480 0 0 0 0 0 0 0 0 480 270 750 Board acting in this capacity assume a particular

- Benefits gran duty in the interests of the company, the Super- 2017 (Max) 455 25 480 0 139 0 0 21 26 20 72 619 270 889 visory Board can resolve to grant additional 2016 455 23 478 0 168 37 42 63 26 0 0 646 305 951 remuneration. tions³

- Alloca 2017 455 25 480 0 93 0 0 21 26 10 36 573 270 843

Gero Bergmann Board of Management 1 January 2011 ¹ 2016 455 30 485 0 178 0 42 84 52 0 0 663 144 807

2017 455 33 488 0 139 0 0 21 26 20 72 627 113 740

2017 (Min) 455 33 488 0 0 0 0 0 0 0 0 488 113 601

Benefits granted 2017 (Max) 455 33 488 0 139 0 0 21 26 20 72 627 113 740

2016 455 30 485 0 131 0 42 63 26 0 0 616 144 760 tions³

- Alloca 2017 455 33 488 0 93 0 0 21 26 10 36 581 113 694

¹ This table indicates the value of the benefits granted for the reporting year. It is also supplemented by the levels which can be achieved as a minimum and/or maximum amount in the reporting year, depending on the achievement of the agreed targets. ² For pension schemes and other benefits, the benefit expense, i.e. the service cost, is shown accordance with IAS 19. The service cost to be recognised in profit or loss is calculated according to the Projected Unit Credit Method and corresponds to the actuarial cash value of those payment elements which are newly earned by the active staff in the current accounting period. ³ This table shows the allocations for the financial year.

92 93 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

VI Corporate Governance Statement Pursuant to VII Non-financial Statement pursuant to Sections Section 289f German Commercial Code (HGB) 289b and c German Commercial Code (HGB)

Compliance Declaration in Accordance with First and Second Management Levels below For the financial year 2017 Berlin Hyp prepared Section 161 German Stock Corporation Act the Board of Management a separate non-financial report pursuant to (AktG) Regarding the German Corporate Berlin Hyp’s Board of Management established Sections 289b and c German Commercial Code Governance Code a graduated scheme for raising the target for (HGB). This report is published together with The Declaration of Compliance pursuant to the first and second management levels. It the management report. ­Section 161 German Stock Corporation Act calls ­for achieving targets for the first (divisional In addition, Berlin Hyp will publish its sustaina- (AktG) on the German Corporate Governance man­agement) and second (department man- bility report on its website at www.berlinhyp.de/ Code was published by Berlin Hyp in its Internet agement) management levels below the Board bhyp/de/presse/mediacenter . portal under www.berlinhyp.de/bhyp/de/ of Management as follows: 23 % and 30 % ueberuns/corporategovernance. respectively by 31 December 2020, 25 and 35 % respectively by 31 December 2024. Establishment of Targets for the Proportion of Women in the Supervisory Board, Board of The target set for the first level of management Women in manage- Management and in Management Positions below the Board of Management (divisional Berlin Hyp is subject to representative management) of 23 % by 2020 was already ment positions ­participation according to the German One- exceeded as at 31 December 2017 at 28.6 %. Target by 2024 Third Participation Act and, in accordance with At the second level of management below the the legal requirements, has established targets Board of Management (department manage- for the proportion of women on the Supervisory ment), new appointments led to about a 3 % Board and Board of Management through its increase in female representation to 26.7 % First level 25 % Supervisory Board. when compared to 2016. The targeted 30 % by 2020 has not yet been achieved, but still has Supervisory Board sufficient potential to be reached in terms of Second level 35% Berlin Hyp’s Supervisory Board is made up time. of ten shareholder representatives and five employee representatives. Berlin Hyp has Overall, the percentage of women in manage- currently met its target of having at least two ment positions at all levels of management at women in the Supervisory Board. Berlin Hyp increased slightly at 27 %.

Board of Management The Board of Management currently has three members. The share of female representation of 0 % determined by the Supervisory Board continues to apply until the review on 30 June 2022 or the termination of current contracts of employment prior to reappointment.

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Balance Sheet of Berlin Hyp AG as at 31 December 2017

Assets Liabilities 31.12.2017 31.12.2016 31.12.2017 31.12.2016 € € T€ € € T€

1. Cash reserves 1. Liabilities to banking institutions a) Cash in hand 2,969.72 4 a) Registered mortgage Pfandbriefe issued 251,360,116.03 354,760 b) Central bank balances 543,467,185.59 8,845 b) Registered public Pfandbriefe issued 251,257,884.33 279,830 of which: at Deutsche Bundesbank c) Other liabilities 4,452,944,815.26 4,179,123 € 543,467,185.59 (2016: T€ 8,845) 543,470,155.31 8,849 of which: due on demand € 1,077,989.87 (2016: T€ 142,136) 4,955,562,815.62 4,813,713 Registered mortgage Pfandbriefe delivered 2. Public-sector debt and bills of exchange admitted to the lender as collateral for loans taken up € 0.00 (2016: T€ 0) for refinancing at central banks 0.00 0 and public registered Pfandbriefe delivered € 0.00 (2016: T€ 0) 3. Claims against banking institutions 2. Liabilities to customers a) Mortgage loans 0.00 0 a) Registered mortgage Pfandbriefe issued 2,376,272,563.01 2,373,998 b) Public-sector loans 51,956,780.82 263,448 b) Registered public Pfandbriefe issued 665,685,657.22 1,029,696 c) Other claims 390,443,034.97 288,046 c) Other liabilities 3,051,881,609.79 2,072,768 of which: due on demand € 2,046,048.72 (2016: T€ 2,658) 442,399,815.79 551,494 of which: due on demand € 259,961,115.59 (2016: T€ 242,367) 6,093,839,830.02 5,476,462 with securities as collateral T€ 0 (2016: T€ 0) Registered mortgage Pfandbriefe delivered 4. Claims against customers to the lender as collateral for loans taken up € 0.00 (2016: T€ 0) a) Mortgage loans 20,081,589,761.75 18,124,709 and public registered Pfandbriefe delivered € 0.00 (2016: T€ 0) b) Public-sector loans 763,983,070.25 1,228,336 3. Securitised liabilities c) Other claims 128,631,551.34 16,639 a) Debentures issued of which: with securities as collateral € 0.00 (2016: T€ 0) 20,974,204,383.34 19,369,684 aa) Mortgage Pfandbriefe 8,629,738,456.58 8,039,879 5. Debentures and other fixed-interest securities ab) Public Pfandbriefe 720,422,659.51 1,639,590 a) Money market securities ac) Other debentures 4,201,536,785.18 3,935,397 aa) Issued by public institutions 0.00 0 13,551,697,901.27 13,614,866 of which: eligible as security at Deutsche Bundesbank b) Other securitised liabilities 0.00 0 € 0.00 (2016: T€ 0) of which: money market securities € 0.00 (2016: T€ 0) 13,551,697,901.27 13,614,866 ab) From other issuers 0.00 0 3a. Trading portfolio 0.00 0 of which: eligible as security at Deutsche Bundesbank € 0.00 (2016: T€ 0) 4. Trust liabilities 0.00 0 0.00 0 of which: trustee loans € 0.00 (2016: T€ 0) b) Bonds and debentures 5. Other liabilities 589,229,945.38 526,484 ba) Issued by public institutions 1,922,009,968.01 2,939,514 of which: eligible as security at Deutsche Bundesbank 6. Prepaid income € 1,922,009,968.01 (2016: T€ 2,939,514) a) From issue and loan business 170,125,475.13 216,996 bb) From other issuers 2,702,101,772.82 2,842,478 b) Other 0.00 0 of which: eligible as security at Deutsche Bundesbank 170,125,475.13 216,996 € 2,702,101,772.82 (2016: T€ 2,842,478) 6a. Deferred tax liabilities 0.00 0 4,624,111,740.83 5,781,992 c) Own debentures 0.00 0 7. Reserves Nominal amount € 0.00 (2016: T€ 0) 4,624,111,740.83 5,781,992 a) Provisions for pensions and similar obligations 141,964,054.00 132,574 b) Tax provisions 891,200.00 665 6. Shares and other non-fixed-interest securities 0.00 0 c) Other provisions 77,884,629.72 29,948 6a. Trading portfolio 0.00 0 220,739,883.72 163,187

7. Interests 2,252,561.34 0 8. Subordinated liabilities 383,297,848.26 453,587 of which: in banking institutions € 0.00 (2016: T€ 0) Carryover 25,964,493,699.40 25,265,295 in financial services institutions € 0.00 (2016: T€ 0)

Carryover 26,586,438,656.61 25,712,019

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Balance Sheet of Berlin Hyp AG as at 31 December 2017

Assets Liabilities 31.12.2017 31.12.2016 31.12.2017 31.12.2016 € € T€ € € T€

Carryover 26,586,438,656.61 25,712,019 Carryover 25,964,493,699.40 25,265,295

8. Shares in affiliated enterprises 25,646.61 26 9. Profit-sharing rights capital 0.00 0 of which: in banking institutions € 0.00 (2016: T€ 0) of which: due within two years € 0.00 (2016: T€ 0) in financial services institutions € 0.00 (2016: T€ 0) 10. Fund for general bank risks 223,000,000.00 153,000 9. Trust assets 0.00 0 11. Equity of which: trustee loans € 0.00 (2016: T€ 0) a) Called-up capital 10. Equalisation claims against public-sector institutions, aa) Subscribed capital 753,389,240.32 753,389 including debentures arising from their exchange 0.00 0 ab) Less unpaid contributions not called up 0.00 0 753,389,240.32 753,389 11. Intangible investment assets b) Capital reserve 158,316,268.74 158,316 a) Internally produced industrial property rights and c) Profit reserves similar rights and values 0.00 0 ca) Statutory reserve 22,022,655.29 22,023 b) Purchased concessions, industrial property rights 5,749,171.00 6,810 and similar rights and values as well as licences for such cb) Reserve for own shares in companies with a controlling rights and values or majority holding 0.00 0 c) Goodwill 0,00 0 cc) Articles of Association reserve 0.00 0 d) Payments in advance 6,221,409.65 3,462 cd) Other profit reserves 0.00 0 11,970,580.65 10,272 22,022,655.29 22,023 d) Balance sheet profit 2,174,992.78 2,175 12. Tangible assets 58,331,391.75 58,131 935,903,157.13 935,903

13. Unpaid called-up contributions to the subscribed capital 0.00 0 Total liabilities 27,123,396,856.53 26,354,198 14. Other assets 273,227,660.64 337,222

15. Prepaid expenses a) From issue and loan business 192,230,892.21 235,584 b) Others 1,172,028.06 944 1. Contingent liabilities 193,402,920.27 236,528 a) Liabilities from guarantees and warranty contracts 206,964,237.43 129,626

16. Deferred tax assets 0.00 0 2. Other obligations a) Irrevocable loan commitments 2,177,924,533.30 1,895,248 17. Surplus arising from offsetting 0.00 0

18. Deficit not covered by equity 0.00 0

Total assets 27,123,396,856.53 26,354,198

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Profit and Loss Account of Berlin Hyp AG for the period from 1 January to 31 December 2017

Expenditure Income 2017 2016 2017 2016 € € T€ € € T€

1. Interest expenditure 131,093,358.03 220,432 1. Interest income from less positive interest 14,021,670.69 117,071,687.34 19,912 200,520 a) Lending and money market business 376,954,976.82 419,480 less negative interest from 3,019,236.17 6,228 413,252 2. Commission expenditure 5,518,176.84 5,497 loan and money market transactions 373,935,740.65 3. Net expenditure of the trading portfolio 0.00 0 b) Fixed interest securities and book-entry securities 14,001,308.29 43,134 4. General operating expenditure 387,937,048.94 456,386 a) Staff expenditure aa) Wages and salaries 56,000,569.46 55,291 2. Current income from ab) Social security contributions and expenditure for retirement a) Shares and other 0.00 0 pensions and support non-fixed interest securities of which: for retirement pensions b) Interests 0.00 0 € 10,135,988.79 (2016: T€ 101) 17,593,341.77 7,322 c) Shares in affiliated companies 0.00 0 73,593,911.23 62,613 0.00 0 b) Other administrative expenses 55,873,420.69 55,308 3. Income from profit pooling, profit transfer or of which: expenditure for bank levy € 10,062,201.55 (2016: T€ 10,940) partial profit transfer agreements 0.00 0 129,467,331.92 117,921 4. Commission income 44,611,141.79 48,088 5. Depreciations and valuation adjustments on intangible investment assets and tangible assets 5,280,348.38 4,401 5. Net earnings of the trading portfolio 0.00 0

6. Other operating expenditure 53,394,968.25 28,849 6. Income from attributions to claims and specific securities and the dissolution of reserves 7. Depreciations and valuation adjustments on claims and for lending 56,256,634.03 0 specific securities and additions to provisions made for lending 0.00 35,709 7. Income from attributions to interests, shares in affiliated enterprises and securities treated 8. Depreciations and valuation adjustments on participations, as investment assets 3,186,590.70 2,782 shares in affiliated enterprises and securities held as investment assets 0.00 0 8. Other operating income 6,374,166.31 8,551

9. Expenditure for loss assumptions 0.00 0 9. Income from the dissolution of the fund for general bank risks 0.00 0 10. Allocation to the fund for general bank risks 70,000,000.00 50,000 10. Net loss for the year 0.00 0 11. Extraordinary expenditure 0.00 0 Total income 498,365,581.77 515,807 12. Taxes on income and earnings 427,890.33 –296

13. Other taxes not shown under Item 6 181,717.98 183

14. Profits transferred on the basis of a profit pool, a profit transfer or partial profit transfer agreement 117,023,460.73 73,023

15. Net income for the year 0.00 0

Total expenditure 498,365,581.77 515,807

1. Net income for the year 0.00 0

2. Profit/loss carryforward from the previous year 2,174,992.78 2,175

3. Balance sheet profit 2,174,992.78 2,175

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Statement of Changes in Equity and Cash Flow Statement

T€ Subscribed Capital reserve Profit reserves Balance Total equity Cash Flow Statement in T€ (+ = cash inflow, − = cash outflow) 2017 2016 capital sheet profit Net income for the year 0 0 Depreciations, value adjustments/attributions to claims and items of investment assets −27,748 136,379 As at 31.12.2016 753,389 158,316 22,023 2,175 935,903 Increase/decrease in reserves 57,553 −869 Capital increases 0 0 0 0 0 Other expenditure/income without payment effect 0 0 Dividend payments 0 0 0 0 0 Profit/loss from the sale of investment asset items −23,715 −8,235 Other changes 0 0 0 0 0 Profit and loss transfer agreement 117,023 73,023 pursuant to Section 272 No. 4 HGB Other adjustments (on balance) 5,950 −78,481 As at 31.12.2017 753,389 158,316 22,023 2,175 935,903 Increase/decreases in claims against banking institutions 69,980 88,173 against customers −1,582,187 1,138,279 of the securities (unless they are financial investments) 825,808 −38,154 Other assets from current business operations 107,160 129,838 Liabilities to banking institutions 174,372 −1,415,692 to customers 606,611 −878,983 The cash flow statement provides information The cash and cash equivalent shown includes Asset-backed liabilities −24,210 246,977 on the status and development of the Bank’s the cash reserve, which is composed of cash Other liabilities from current business operations −27,842 −115,143 funds, separated according to the divisions holdings and credit balances with central banks. Interest expenditure/interest income −270,865 −255,866 of operating business activities, investment There are no restrictions on the disposal of cash Expenditure/income from extraordinary items 0 19,076 activities and finance activities. It is prepared in and cash equivalents. Income tax expenditure/earnings 428 −296 accordance with German Accounting Standard Interest payments and dividend payments received 466,097 560,922 No. 21 (DRS 21). Expenses from the profit transfer agreement Interest paid −178,068 −276,246 with Landesbank Berlin Holding AG, Berlin of Extraordinary in-payments 0 0 Extraordinary disbursements 0 0 Cash flows for operating business activities are € 117.0 million are reported separately. The Income tax payments −202 −35 allocated by separating them from operating transfer of profits for the financial year 2016 is Cash flow from operating activities 296,144 −675,334 results. The cash flow from investment activities reported in cash flow from financing activities. In-payments from disposals of the largely results from deposits and withdrawals financial investment assets 321,221 727,235 in connection with the sale or acquisition of tangible assets 0 0 financial and/or tangible assets. In assessing intangible investment assets 0 0 net cash from financing activity, changes in sub- Disbursements for investments in ordinated liabilities are taken in consideration financial investment assets −2,253 0 alongside relations to equity suppliers. tangible assets − 3,097 −1,689 intangible investment assets − 4,082 −5,215 Change of funds from other investment activity (balance) 0 0 In-payments from extraordinary items 0 0 Disbursements from extraordinary items 0 0 Cash flow from investment activities 311,789 720,331 In-payments from equity contributions by shareholders of the parent company 0 0 In-payments from equity contributions by other shareholders 0 0 Disbursement from reductions in equity to shareholders of the parent company 0 0 Disbursement from reductions in equity to other shareholders 0 0 In-payments from extraordinary items 0 0 Disbursements from extraordinary items 0 0 Dividends paid to shareholders of the parent company 0 0 Dividends paid to other shareholders 0 0 Change of funds from other capital (balance) −289 50,000 Change of funds from previous year’s profit and loss transfer −73,023 −92,025 Cash flow from financing activities −73,312 −42,025 Cash and cash equivalents at the end of the previous period 8,849 5,877 Cash flow from operating activities 296,144 −675,334 Cash flow from investment activities 311,789 720,331 Cash flow from financing activities −73,312 −42,025 Cash and cash equivalents at the end of the period 543,470 8,849

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Notes

Berlin Hyp AG is a public company under are concerned is reported as prepaid expenses exceed the amortised cost. Fair value in active processing fees are calculated on the basis of an German law and is headquartered in Berlin. It and prepaid income, respectively, to the extent markets corresponds to the stock market or evidence list that contains all relevant process- is registered in the Commercial Register of the that it is classified as interest and released over market price on the reporting date. ing fees agreed in Germany. Reserves for strate- District Court of Charlottenburg under HRB their term according to schedule. gic resources planning are based on empirical 560530 and is licensed to provide banking Discounted debentures are displayed with their Securities valued like assets were evaluated figures taken from past personnel measures and business and financial services. issue amount including accrued interest on the as amortised costs and, providing there are no from operative procedural planning. basis of issue yields. grounds for sustained impairment, they are General Information on the Structure of the written up or off at the nominal value in case of The materiality of the discounting of reserves Annual Accounts and on the Balance Sheet Recognisable risks in the loan business were purchase prices that deviate from the nominal with residual terms of more than one year and Evaluation Methods taken into proper consideration through the value at consistent interest rates up to the is reviewed regularly. Material items with a The annual accounts of Berlin Hyp are prepared formation of specific valuation allowances, respective due date. Reversal of an impairment remaining term of over one year are discounted. according to the provisions of the German lump-sum specific valuation allowances and loss in the fixed assets of rededicated securities Commercial Code (HGB), supplementary reserves. Lump-sum value adjustments are in is presented in the net income from investments. Pension reserves are assessed based on stock corporation law provisions (AktG) and place for latent risks in the accounts receivable – actuarial principles employing a discount rate of in ­consideration of the German Pfandbrief Act in addition to the fund for general Bank risks Participations and Shares in Affiliated 3.68 % (4.01 %) of the cash value of the obliga- (PfandBG) and the Regulation on the Accounts in accordance with Section 340g ­German Companies­ tions already accrued. The actuarial interest rate of Banking Institutions (RechKredV). ­Commercial Code (HGB) reported in the balance Participations and shares in affiliated enter- refers to the interest rate determined by the sheet. The lump-sum specific valuationallowances ­ prises are included at cost. Where a loss of value Deutsche Bundesbank as at 31 December 2017, The balance sheet and profit and loss account and the lump-sum value adjustments are is expected to be ­permanent, they are written which results as a ten-year average interest are structured in accordance with the provisions de­termined using mathematical statistical down to the lower fair value. If the reasons for rate from an assumed residual term of 15 years of the Regulation on the Accounts of Banking procedures on the basis of the expected loss the decrease in value no longer exist, write-ups (Section 253 (2) Sentence 2 German Commer- Institutions (RechKredV), and supplemented by concept. When identifying income and expenses are undertaken to an amount which may not cial Code (HGB)). The difference between the the items stipulated for Pfandbrief banks. related to risk provisioning, the right to choose exceed the amortised cost. recognition of reserves in accordance with the full compensation is exercised (Section 340f (3) actuarial interest rates of the past ten financial Berlin Hyp holds shares in a subsidiary and a German Commercial Code (HGB)). Interest is not Tangible Assets and Intangible Assets years and the recognition of reserves in accord- participation that have no material influence recognised for irrecoverable claims. Tangible and intangible assets with limited ance with the corresponding average market on the representation of the financial, assets useful lives are reported at amortised cost, interest rates for the past seven financial years and earnings situation of Berlin Hyp either Repurchase Agreements less impairment losses to the lower fair value. (discount rate of 2.80 % (3.24 %)) amounts to ­individually or as a whole. Berlin Hyp has no The financial instruments that the Bank, in its Planned amortisation and depreciation are € 25.0 million (€ 19.5 million); the difference is legal obligation to produce consolidated annual capacity as a pension provider, transfers within spread over the useful economic life of the not taken into account as being suspended for accounts according to Section 290 German the framework of genuine repurchase agreements assets. Low-value fixed assets (Section 6 (2) payment. The pension obligations are based on ­Commercial Code (HGB). are entered in the balance sheet and evaluated German Income Tax Code (EStG)) are written the projected unit credit method using the 2005 according to their classification. The corre- off either completely in the acquisition year or G Heubeck Guideline Tables as the biometric Reporting and Valuation Principles sponding liability is carried in the amount of the else consolidated during a period of five years. basis for calculation. A salary and career trend The valuation of assets and liabilities occurs agreed redemption price, taking into account The period of amortisation for the software and of 2.5 % per annum is calculated. The projected according to the provisions of Sections 252 ff accrued interest. The difference between the licences listed under “Intangible investment pension trend has accordingly been set at German Commercial Code (HGB), taking into redemption price and the amount received is assets” ranges between three and five years. between 1.0 % and 2.0 % per annum, depend- account the special regulations for banking considered in the interest result on a pro rata basis. Payments in advance are recognised at their ing on the pension scheme involved. institutions pursuant to Sections 340 ff German nominal amounts. Commercial Code (HGB). Securities Active members of the Board of Management With the exception of the accounting units Reserves have a calculated salary and career trend of The same reporting and valuation principles pursuant to Section 254 German Commercial For contingent liabilities, reserves were formed between 0.0 % and 5.0 %. The age-dependent were applied in the annual accounts as at 31 Code (HGB) and the investment portfolio, the for the settlement amounts required according turnover has been considered at a rate of 1.5 % December 2017 as were applied in the annual amounts included in the “Debentures and other to prudent commercial judgement, taking into (over 40 years) to 4.8 % (up to 30 years). accounts for the previous year. fixed-interest securities” item were evaluated account expected price and cost increases. The according to the strict lower-of-cost-or-market Bank determines the amount of these liabilities As at 1 January 2010, the revaluation of pension Claims and Liabilities principle (Section 253 German Commercial using estimates, which take into account the reserves in accordance with the German Claims are shown at their nominal amount, and Code (HGB)). The accounting units pursuant to respective circumstances and relevant deter- Accounting Law Adjustment Act (BilMoG) liabilities are shown at their settlement amount. Section 254 German Commercial Code (HGB) mining factors appropriately. Reserves for the resulted in an adjustment amount in the sum of The difference between amounts paid out and and the investment portfolio were consequently legal risks arising from the Federal Court of € 31.8 million which, pursuant to Article 67 (1) par value where claims in the lending business recognised at fair value to the extent it does not Justice ruling on 4 July 2017 concerning credit Introductory Law to the German Commercial

104 105 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

Code (EGHGB), was to be distributed over a and other fixed-income securities, book claims, Currency Conversion ward rate, with the swap rate being discounted period of up to 15 years. In 2016, the then-­ short-term liabilities, securitised liabilities and The valuation of assets, debts and off-balance- over the term of the swap and recognised as unretained difference of T€ 19.1 was repaid in pending transactions (payment obligations sheet transactions in foreign currencies is interest income on a pro rate basis. Currency full through profit and loss. The reserve for early relating to irrevocable loan commitments) undertaken on the basis of Section 256a Ger- effects from currency conversion are reported retirement obligations is set at cash value calcu- against the risk of a change in interest rates. man Commercial Code (HGB) in connection with net under “Other operating income”. lated using a maturity-linked discounting factor As accounting units pursuant to Section 254 Section 340h German Commercial Code (HGB). of future earnings. The 2005 G Heubeck Guideline German Commercial Code (HGB), underlying The conversion is carried out at the reference Compliance Declaration Tables are used as a biometric accounting basis. debentures and other fixed-income securities prices provided on a daily basis by the Risk The Bank has filed a compliance declaration The Bank reports income from the adjustment of are designated at the level of the individual ­Controlling division of Landesbank Berlin AG, in accordance with Section 161 German Stock parameters under the operating result. transactions with a total nominal holding value Berlin. Currency swaps used to hedge interest-­ Corporation Act and has made it available on its of € 3.9 billion as at 31 December 2017 (2016: € bearing balance sheet items denominated in website www.berlinhyp.de. Please refer to the Derivatives 4.6 billion). Accounting units are only formed at foreign currencies are translated at the split for- Management Report. The reporting and entering of derivative the micro level, meaning that changes in values financial instruments occurs in off-balance-sheet from the hedged risk are offset by the under- accounts. There are no trading positions. In terms lying transactions of the individual hedging of derivative contracts, both banking institutions instruments; the hedging relationships in and the Bank’s borrowers (customer derivatives) questions are perfect hedging relationships. No Explanations of the Profit and Loss Account and the Balance Sheet are possible counterparties. Accrued interest ineffectiveness relevant to the accounting can Profit and Loss Account from interest and currency swaps is treated as arise on account of the correlation of all factors deferred interest according to period; the entry affecting value between the hedged portion Net Interest Income occurs under the headings “Claims” and “Liabili- of the underlying transaction and the portion ties”. Interest income and expenses from secured of the hedging instrument to be hedged. As a swap transactions are settled with the interest result, the critical term match method is used to Net Interest Income in T€ 2017 2016 income and expenses of the respective secured assess both the prospective and the retrospec- Interest income from item; thus the interest result from the entire tive effectiveness of the accounting unit. Risks Mortgage loans 372,859 408,953 hedging relationship is displayed in the corre- hedged by the accounting units amounted to Public-sector loans 2,460 4,655 sponding item of the profit and loss account. € 138.2 million as at the reporting date (2017: Other receivables −1,383 −356 € 303.1 million). The Bank applies the net Fixed-income securities and book-entry securities 14,001 43,134 Among other instruments, the Bank uses hedge presentation method. Changes in the 387,937 456,386

­swaptions and forward rate agreements to man- value of underlying transactions and hedging Earnings from profit and loss transfer agreements 0 0 age its interest-bearing operations at macro instruments attributable to unsecured risks are level. Paid option premiums are presented not offset and recognised in accordance with Interest expenditure for Deposits and registered Pfandbriefe under the balance sheet heading “Other assets” general provisions. 81,474 120,677 Securitised liabilities 24,010 67,633 and received option premiums under “Other Subordinated liabilities and profit-sharing rights 11,588 12,210 ­liabilities” and are accrued on a time basis Loss-Free Evaluation of the Banking Book 117,072 200,520 immediately following the termination of the Berlin Hyp conducts an audit of the loss-free option period in case of expiry or utilisation in evaluation of interest rate-related transactions Net interest income 270,865 255,866 respect of the term of the underlying trans- on the banking book (interest book) on the actions over prepaid expenses and deferred basis of IDW RS BFA 3. As Berlin Hyp did not income. Paid and received non-recurring allocate any transactions to the trading book, payments (upfront payments) and premiums the banking book includes all interest-bearing Net interest income increased by € 15.0 million The net interest income shows interest expend- for caps/floors/collars are entered in the balance transactions, including derivative financial to € 270.9 million compared to the previous iture and interest income from derivatives sheet as deferred income and deferred on a instruments. Taking a cash value approach, the year. The year-on-year rise was particularly due entered in the balance together with the inter- pro-rata basis over their respective terms. The audit yielded no provisioning requirements. to the fall in refinancing expenses. est expenditure and interest income from the compensation payments due from forward rate respective secured balance sheet items. agreements following the termination of the Calculating Fair Values Interest income from balance sheet transactions waiting period are entered immediately. The In individual cases where prices for securities that result from negative interest rates due to Net interest and commission income and other Bank does not hold any credit derivatives. and claims were not available as at the balance prevailing market conditions are reported under operating income were predominantly gener- sheet date on the basis of active markets via interest income at € 3.0 million (previous year, ated in Germany. The market values of the derivatives were external market suppliers, the market values for including derivatives: € 6.2 million) and under ­calculated on the basis of a tenor-specific swap such financial instruments were determined on interest expenses at € 14.0 million (previous yield curve, taking into consideration counter- the basis of evaluation models. These are year, including derivatives: € 19.9 million). A party risks. standard discounted cash flow procedures that preliminary column was added to the profit and consider issuer and asset class-specific interest loss account to ensure transparent presenta- Accounting Units curves and credit spreads. tion. Within the context of economic hedging relationships, the bank hedges debentures

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Operating Expenditure The balance of risk provisioning expenditure is comprised as follows: Other operating expenditure in T€ 2017 2016 IT expenditure 14,217 12,984 In T€ 2017 2016 Services by third parties 13,007 14,126 Risk provisioning for lending business −33,544 51,318 Bank levy 10,062 10,940 Risk provisioning for securities business −22,713 −15,609 Group set-off 5,351 5,312 Building and premises costs 4,239 4,102 −56,257 35,709 Staff-related material costs 3,158 2,984 Earnings with negative advance signs Business operating costs 2,854 2,262 Advertising and marketing 2,249 1,922 Operating and business equipment 736 676 Risk provisioning for the lending business

55,873 55,308 developed as follows:

In T€ Counterparty risk exposure The total fee calculated by the auditor and Direct Ind. Lump- RST Total Total Profit and attributable to the financial year comprises the write- value sum loss relevant following (excluding VAT): down adjust- value ad- ment justment – other RP In T€ 2017 2016 2017 2017 2017 2017 2017 2016 2017 2016 Auditing the annual accounts - current financial year 609 584 As at 1 January 157,663 104,706 4,319 266,688 220,087 - Over-endowment (–) / Under-endowment (+) previous year −53 0 Net allocations and write-backs −29,626 −1,023 2,827 −27,822 62,396 −27,822 62,396 Other certification services Utilisation −13,119 0 0 −13,119 −14,551 - current financial year 133 44 Direct write-downs 350 350 88 - Over-endowment (–) / Under-endowment (+) previous year 0 0 Receipts on written-off receivables −6,072 −6,072 −11,166 Tax advisory services Transfers - current financial year 0 0 Foreign currency effects −285 0 0 −285 −1,244 - Over-endowment (–) / Under-endowment (+) previous year 0 0 Other services As at 31 December −5,722 114,633 103,683 7,146 225,462 266,688 −33,544 51,318 - current financial year 9 176 Earnings with negative advance signs - Over-endowment (–) / Under-endowment (+) previous year 0 0

Other Information Balance Sheet Services performed for third parties include, Securities with a nominal volume of The other certification services mainly affect from the compounding of reserves relates to the among other things, the preparation of proper- € 508.0 million are evaluated as fixed assets the audit of the Sustainability Report, the audit compounding of pension reserves. ty-specific expert opinions within the framework since they do not serve as a liquidity reserve pursuant to Section 36 Securities Trading Act of real estate valuations. and are partially used to cover Pfandbriefe and the production of the letter of comfort for Depreciation and Valuation Adjustments issued by the Bank. The book value of the secu- the basic project. on Claims and Specific Securities and The annual surplus includes a balance of rities, which stands above their market value ­Additions to Provisions Made for Lending aperiodic income and expenses of € 9.8 million of € 88.8 million, amounts to € 90.8 million. Other Operating Result The balance shown results from the settlement (2016: € 15.1 million), which primarily includes This takes into account the valuation results The other operating results includes expenses of expenditure and income items shown in the income from the reversal of reserves of € 3.4 from interest swaps. The Bank took into account from additions to reserves related to legal profit and loss account items “Depreciation and million (2016: € 5.5 million) as well as receipts latent default risks of the investment securities risks concerning credit processing fees of valuation adjustments on claims and specific on receivables written off in the previous year of in the form of lump-sum value adjustments. € 19.6 million and reserves relating to strategic securities and additions to provisions made € 5.9 million (2016: resources planning of € 26.1 million. This items for lending” and “Income from attributions to € 9.0 million). continues to include income from the reversal of claims and specific securities and the dissolu- other provisions of € 3.4 million (€ 5.5 million) tion of reserves for lending”. and income from foreign currency valuation of Negotiable Securities and Interests Listed Listed Unlisted Unlisted € 0.2 million (€ 1.0 million) as well as expenses in T€ from the compounding of reserves of € 5.3

million (€ 5.2 million) and cost reimbursements 31.12.2017 31.12.2016 31.12.2017 31.12.2016 for the Detailed Agreement with the State of Debentures and other fixed- Berlin of € 1.9 million (€ 2.2 million). A total interest securities 4,624,112 5,781,992 0 0 of € 5.2 million (€ 5.1 million) of the expenses

108 109 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

Security for the Bank’s Own Liabilities the same time, the Bank has provided deben- Schedules of Shares Held under Within the European System of Central Banks ture bonds with a book value totalling € 875.1 Sections 285 Nos. 11 and 11a, 313 (2) German Commercial Code (HGB) (ESCB), securities with a nominal value of € million (2016: € 1,729.9 million) in repurchase 3,108.2 million (2016: € 1,647.2 million) were agreements. Company Total share of Voting rights Equity Result Annual accounts pledged as security to Deutsche Bundesbank. capital diverging at The volume of the associated open market Intangible Investment Assets 31.12.2017 operations amounted to € 2,000.0 million This item only shows the software and licences % % T€ T€ (2016: € 1,000.0 million) and USD 500 million used by the Bank. (€ 472.5 million) on the balance sheet date. At Affiliated enterprises Berlin Hyp Immobilien GmbH, Berlin 100 100 80 −53 31.12.2016 Investments BrickVest Ltd., London 6,74 6,79 879 −1,239 31.12.2016 Development of Fixed Assets Other Assets These include, amongst other things, Statement of changes These figures largely contain claims from liabilities from collateral received in relation in assets collateral in relation to derivatives amounting to derivatives amounting to € 445.8 million in T€ to € 250.5 million (2016: € 310.2 million), (2016: € 438.9 million), received option premi- paid option premiums of € 8.4 million (2016: ums of € 13.8 million (2016: € 6.6 million) as well € 1.7 million), as well as unrealised gains from as profits of € 117.0 million (2016: € 73.0 million) forward exchange deals with with extra cover. transferable to Landesbank Berlin Holding AG, Berlin. Acquisition/ costs manufacturing 01.01.2017 Additions 2017 2017 Disposals 2017 transfers Account Acquisition/ costs manufacturing 31.12.2017 Attributions year in the current Depreciations as at 01.01.2017 Additions 2017 2017 Disposals 2017 transfers Account Depreciations as at 31.12.2017 value book Residual 31.12.2017 value book Residual 31.12.2016 Other Liabilities Intangible investment Other Reserves b) Concessions and licenses Other reserves include: acquired commercially 56,791 738 0 585 58,114 0 49,981 2,384 0 0 52,365 5,749 6,810 In T€ 31.12.2017 31.12.2016 d) Down-payments made 3,473 3,345 0 −585 6,233 0 11 0 0 0 11 6,222 3,462 Reserves for human resources 15,488 14,576

Sum of intangible Reserves for litigation costs risks 2,443 3,319 investment­ assets 60,264 4,083 0 0 64,347 0 49,992 2,384 0 0 52,376 11,971 10,272 Other 59,954 12,054

Tangible assets Total 77,885 29,949 a) Sites and buildings for own use 62,695 64 0 0 62,759 0 10,060 1,024 0 0 11,084 51,675 52,636 b) Operating and business Other reserves primarily include reserves for Interest is paid on subordinate liabilities at the equipment and legal risks arising from the Federal Court of nominal rate of between 0.171 % to 6.56 % installations under ­Justice ruling dated 4 July 2017 concerning and is only to be reimbursed in the case of the construction 11,720 3,033 180 0 14,573 0 6,225 1,872 180 0 7,917 6,656 5,495 loan processing fees of € 19.6 million and Bank’s bankruptcy or liquidation after satis- Total tangible assets 74,415 3,097 180 0 77,332 0 16,285 2,896 180 0 19,001 58,331 58,131 reserves for strategic resources planning of faction of all non-subordinate creditors. Early

Total intangible € 26.1 million. repayment is excluded. The repayments are to ­investment assets and occur in the years 2018 to 2029. Based on a tangible assets 134,679 7,180 180 0 141,679 0 66,277 5,280 180 0 71,377 70,302 68,403 Subordinated Liabilities stock of € 373.2 million, € 222.3 million fulfil Book value Changes* Residual book value In the financial year 2017, interest paid the requirements of the CRR for recognition as amounted to € 11.6 million. applicable equity capital. 01.01.2017 31.12.2017 31.12.2016

Bonds and The 10 % of the loans and debentures sur- debentures 801,172 −297,415 503,757 801,172 passing the total stock was assumed under the Interests 0 2,253 2,253 0 following conditions: Shares in affiliated enterprises­ 26 0 26 26 Nominal Interest rate Repayment amount p. a. % on * Summary pursuant to Section 34 (3) Banking Institutions Accounting Ordinance T€

60,000 0.171* 21.7.2020 40,000 4.12 4.3.2024

* Basis: three-month Euribor

110 111 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

Equity Board’s consent, is authorised to increase the Claims from and Liabilities to Affiliated Enterprises The subscribed capital of € 753.4 million is company’s subscribed capital by issuing new and Related Companies composed of 294,292,672 non-par value bearer non-par shares in return for contributions in cash in T€ shares with a rounded nominal value of € 2.56. once or several times, but only up to € 205.8 mil- 31.12.2017 31.12.2016 The Board of Management, with the Supervisory lion (authorised capital 2015), by 31 May 2020. Affiliated enterprises Claims against banking institutions 3,930 7,192 Claims against customers 0 0 Other assets 9 847 Liabilities to banking institutions 157,390 193,007 Liabilities to customers 625 477 Classification by Remaining Maturity in T€ 31.12.2017 31.12.2016 Securitised liabilities 0 0 Other liabilities 117,130 78,636 Assets Subordinated liabilities 60,020 100,061

Claims against banking institutions a) Due on demand 2,046 2,658 b) Less than three months 440,354 388,045 c) Between three months and one year 0 110,790 Prepaid Expenses and income d) Between one year and five years 0 50,000 in T€ 31.12.2017 31.12.2016 e) More than five years 0 0 Total 442,400 551,493 Deferred income from issuing and lending operations includes: Claims against customers Discount from issuing lending operations 35,672 28,119 a) Less than three months 694,395 604,369 Premium from issuing and lending operations 27,998 38,194 b) Between three months and one year 1,224,591 1,435,111 Other 129,733 169,271 c) Between one year and five years 4,704,879 3,971,779 193,403 235,584 d) More than five years 14,350,339 13,358,425 Prepaid expenses for issuing and Total 20,974,204 19,369,684 lending operations include: Premium from issuing and lending operations 8,065 8,597 of which: claims with an indefinite term 686 695 Discount from lending operations 1,410 1,421 Other 160,650 206,978 Bonds and debentures 170,125 216,996 - due in the following year 639,744 826,001

Liabilities

Liabilities to banking institutions a) Due on demand 1,078 142,136 Deferred income recognised under “Other” accrued up-front payments and premium pay- b) Less than three months 2,131,707 2,556,451 includes accrued up-front payments and ments from hedging derivatives concluded that premium payments from caps, floors and collars mirror the customer derivatives. c) Between three months and one year 251,764 197,136 of € 122.2 million (2016: € 162.3 million), which d) Between one year and five years 2,423,487 1,731,657 resulted from the transfer of customer deriv- Price risks are predominantly neutralised e) More than five years 147,527 186,333 atives from Landesbank Berlin AG, Berlin, to through fixed-term deposits, currency futures Total 4,955,563 4,813,713 Berlin Hyp (portfolio transfer). Prepaid expenses and currency swaps. Liabilities to customers recognised under “Other” ­particularly include a) Due on demand 259,961 242,367 b) Less than three months 980,712 513,769 c) Between three months and one year 769,138 107,000 d) Between one year and five years 911,262 1,265,320 e) More than five years 3,172,767 3,348,006 Foreign Currency Volumes 31.12.2017 31.12.2016 Total 6,093,840 5,476,462 in T€ Assets 331,835 557,073 Securitised liabilities a) Less than three months 1,256,098 1,140,267 Liabilities 571,882 141,797 b) Between three months and one year 1,257,000 1,504,000 Irrevocable loan commitments 0 3,406 c) Between one year and five years 6,393,600 7,725,600 d) More than five years 4,645,000 3,245,000 Total 13,551,698 13,614,867 - due in the following year 2,513,098 2,644,267

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Information Pursuant to Section 285 Ger- According to the Detailed Agreement with Completed business transactions largely market price. All derivatives – with the exception man Commercial Code (HGB) Regarding the State of Berlin, in some cases joint and serve to hedge exchange rate and credit risks of customer derivatives and transactions with ­Obligations Arising from Transactions and ­several liability for various companies has been of on-balance sheet underlying transactions. Landesbank Berlin – are hedged using collateral Financial Obligations Not Included in the ­established for the obligations of the companies The market values of the derivative financial agreements. Group affiliation means that the Balance Sheet with shares in the Bankgesellschaft Berlin AG ­instruments are shown on the basis of the Bank does not provide collateral for transactions Irrevocable lending commitments as part of real Group (now Landesbank Berlin Holding AG). applicable interest rate on 29 December 2017 with LBB. In the case of customer derivatives, estate and capital market business amounted The apportionment of liability in the internal without taking into account interest accruals. the land charges assigned as collateral for the to € 2,177.9 million (€ 1,895.2 million) as at the relationship arises through the agreement of The market values of the derivatives are underlying loans also serve as collateral for end of the year. Contingent liabilities consist August 2002, which was amended in August counteracted by the valuation advantages of derivatives transactions. of the assumption of guarantees for largely 2004. It is largely oriented towards the the balance sheet operations not assessed at ­mortgage-backed loans of € 207.0 million ­participation relationship of the liability-causing (2016: € 129.6 million). Particularly due to companies that were sold to the State of Berlin collateralisation, off-balance sheet items do not in 2006. present increased risks. Number of Staff Landesbank Berlin Holding AG must pay a Berlin Hyp is an affiliated member of the fixed annual amount of € 15.0 million to the Annual average Male Female 2017 2016 ­security reserve of the Landesbanken and State of Berlin for the assumption of the risk Total Total central savings banks (Girozentralen) and shield. The internal distribution of these costs Full-time employees 274 175 449 454 therefore also a member of the guarantee is carried out through the agreement of August Part-time employees 19 113 132 130 system of the Savings Banks Finance Group, 2002, amended in August 2004, and provides School-leaver trainees / BA students 3 1 4 1 which is ­recognised under the German Deposit for a partial reimbursement of costs through Protection Act (EinSG). Berlin Hyp’s annual Berlin Hyp in accordance with the ratio of Total 296 289 585 585 contributions are calculated according to the the volumes of the credits of Berlin Hyp that amount of its covered deposits. In the event are shielded by loan guarantees to the total of compensation or support being reported shielded credits. Expenses from reimburse- by a member institution, one-off or additional ments amounted to € 1.9 million in 2017 (2016: payments can be levied; however, the amount of € 2.2 million). Group Affiliation Information on a Reported Holding the payments is also calculated according to the Berlin Hyp is a subsidiary of Landesbank Berlin (Section 160 (1) No. 8 German Stock amount of Berlin Hyp’s covered deposits and is Holding AG and is included in the consolidated ­Corporation Act (AktG)) therefore not currently foreseeable. annual accounts of Erwerbsgesellschaft der In a letter dated 7 January 2015, Landes- ­S-Finanzgruppe mbH &Co. KG (smallest and bank Berlin Holding AG, Berlin, announced largest consolidation group as defined in that it directly holds all shares in Berlin Hyp Section 285 Nos. 14 and 14a German Com- AG – ­following the transfer of Berlin Hyp from Derivatives as at 31.12.2017 mercial Code (HGB)). A profit and loss transfer Landesbank Berlin AG to Landesbank Berlin agreement and a tax group for VAT and income Holding AG as at 31 December 2014/1 January Statement of changes in derivatives Nominal amount / Remaining term tax purposes are in force between Berlin Hyp 2015. Its share in the voting rights of the Bank’s in € m and Landesbank Berlin Holding AG, Berlin. The subscribed capital therefore amounted to up to 1 to over Total Total Total consolidated annual accounts of the acquiring 100.00 % as at the balance sheet date. 1 year 5 years 5 years nominal negative positive company will be published in the electronic value values values Federal Gazette. Letter of Comfort of Landesbank Berlin AG The letter of comfort issued by Landesbank Interest-related transactions Berlin AG in favour of Berlin Hyp ended as at Interest rate swaps 5,071 15,087 21,612 41,770 −709 1,025 31 December 2014. The guarantee remains Swaptions 9,775 1,490 0 11,265 −8 7 in force for the obligation entered into until Caps 251 1,529 382 2,162 −2 3 31 December 2014. Floors 0 1,900 251 2,151 −1 0

15,097 20,006 22,245 57,348 −720 1,035

Currency-related transactions Forward exchange dealings 417 0 0 417 −5 0 Interest and currency swaps 0 134 67 201 0 19

417 134 67 618 −5 19

Total 15,514 20,140 22,312 57,966 −725 1,054

114 115 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

Organs of Berlin Hyp Loans to Members of Organs Benefits of the Board Members As in the previous year, there were no Remuneration for the Board of Management Board of Management loans receivable from members of organs. The Board of Management members received Sascha Klaus, Chair of the Board of the following remuneration in the financial year Management­ 2017: Gero Bergmann, Chief Market Officer Roman Berninger, Chief Financial Officer

Supervisory Board Members of the Board of Annual remuneration Other remuneration2 Total ­Management Thomas Mang Siegmar Müller in T€ Chair (since 27 November 2017) Chair of the Board of Management of Other Performance-related  President of the Savings Banks Association of Sparkasse­ Germersheim-Kandel remuneration remuneration for the Lower Saxony Landesobmann of the Rhineland-Palati- financial year1 nate Savings Banks Board of Management Georg Fahrenschon (until 30 November 2017) Members­ 2017 2016 2017 2016 2017 2016 2017 2016 Chair (until 24 November 2017) Sascha Klaus 560 187 100 0 19 5 679 192 President of the Deutscher Sparkassen und Reinhard Sager of which non-pensionable 560 187 Giroverband e. V. (ret.) President of German Administrative District Roman Berninger 455 455 93 168 25 23 573 646 Parliament of which non-pensionable 149 149 County Council Chairman of the East Holstein Gero Bergmann 455 455 93 131 33 30 581 616 Jana Pabst District Deputy Chair of which non-pensionable 116 116 Bank employee Andrea Schlenzig Total remuneration 2017 1,470 1,097 286 299 77 58 1,833 1,454 Employee representative Bank employee Chair of the Works Council of Berlin Hyp AG Employee representative ¹ The payments for the financial year 2017 contain the performance-related remuneration elements for the financial years 2012, 2015 and 2016, which were paid out in 2017. Joachim Fechteler Helmut Schleweis ² Other remuneration relating to benefits in kind (pecuniary benefits from company car use) of T€ 55 and the so-called net Bank employee President of the German Sparkassen- und benefits employer’s contribution (the assumption of tax payments on pecuniary benefits by the employer) of T€ 22. In Employee representative Giroverband e.V. addition, chauffeurs were also used under the usual tariff conditions. Member of the Works Council of Berlin Hyp AG Peter Schneider Gerhard Grandke President of the Savings Banks Association of Managing President of the German Baden-Württemberg Savings Banks and Giro Association of in T€ In 2017 Recognised Cash value of the Allocated or reserved pension reserves pension claim acquired Hesse-Thuringia Walter Strohmaier amount as at 31.12.2017 as at 31.12.2017 Chairman of the Board of Management of Artur Grzesiek Sparkasse Niederbayern-Mitte Sascha Klaus³ 0 0 0 Former Chairman of the Board of Bundesobmann of the German Saving Banks Roman Berninger 238 2,029 2,029 ­Management of Sparkasse Cologne-Bonn Gero Bergmann 84 1,578 1,578 René Wulff Total 322 3,607 3,607 Dr. Harald Langenfeld Bank employee Chairman of the Board of Management of Employee representative Stadt- und Kreissparkasse Leipzig Deputy Chair of the Works Council of ³ Sascha Klaus will only receive a pension commitment after re-appointment as a member of the Board of Management after ­Berlin Hyp AG the expiry of the first term of office of three years. Thomas Meister Bank employee Employee representative In addition, a total of T€ 2,919 (2016: T€ The cash value of the obligations to pay such 2,755) was paid in the financial year 2017 benefits for this group of persons is T€ 34,425 in overall benefits (retirement pensions, (2016: T€ 34,181) on the balance sheet date. ­surviving dependants’ benefits and ­payments of a related nature) to former Board of Management members or their surviving dependants.

116 117 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

Remuneration for the Supervisory Board Statement of Cover Assets 31.12.2017 31.12.2016 The remuneration payable to the members of the in € m Supervisory Board for the 2017 financial year, including committee activity, amounts to T€ 306 A. Mortgage Pfandbriefe (excluding VAT). Ordinary cover 1. Claims against banking institutions Mortgage loans 0.0 0.0 2. Claims against customers Members of the Board of Management 2017 2016 Mortgage loans 12,347.0 11,561.6 in T€ 3. Tangible assets (land charges on Bank-owned real estate) 0.0 0.0 Thomas Mang, Chair from 27.11.2017 28 27 Total 12,347.0 11,561.6 Jana Pabst, Deputy Chair 18 18 Additional cover Georg Fahrenschon until 30.11.2017 30 33 1. Other claims against banking institutions 200.0 0,0 Joachim Fechteler 18 18 2. Debentures and other fixed-interest securities 1,568.5 1,103.0 Gerhard Grandke 19 19 Total 1,768.5 1,103.0 Artur Grzesiek 18 15 Dr. Harald Langenfeld 26 26 Total cover 14,115.5 12,664.6 Thomas Meister 18 18 Total mortgage Pfandbriefe requiring cover 13,494.5 11,839.1

Siegmar Müller 18 18 Excess cover 621.0 825.5 Reinhard Sager 12 12 Andrea Schlenzig 18 10 B. Public Pfandbriefe Helmut Schleweis 29 28 Ordinary cover Peter Schneider 18 18 1. Claims against banking institutions Walter Strohmaier 18 18 a) Mortgage loans 0.0 0.0 René Wulff 18 18 b) Public-sector loans 50.0 260.8 Supervisory Board members who left in 2016 0 9 2. Claims against customers Total 306 305 a) Mortgage loans 85.3 128.7 plus VAT 56 52 b) Public-sector loans 742.2 1,199.0 Total expenditure 362 357 3. Debentures and other fixed-interest securities 718.0 1,442.0 Total 1,595.5 3,030.5

Additional cover 1. Other claims against banking institutions 0.0 50.0

Major Mandates of the Board No legal representatives or employees had 2. Debentures and other fixed-interest securities 59.5 30.0 of Management Members ­mandates in statutory supervisory boards Total 59.5 80.0

of large corporations (with the exception of Total cover 1,655.0 3,110.5 Sascha Klaus employees’ representatives in Berlin Hyp’s Total public Pfandbriefe requiring cover 1,586.7 2,852.9 Member of the Board of Management of Supervisory Board) in the financial year 2017. Landesbank Berlin Holding AG, Berlin Excess cover 68.3 257.6

Gero Bergmann No mandates requiring disclosure

Roman Berninger Member of the Board of Management of Landesbank Berlin Holding AG, Berlin Member of the Supervisory Board of DIIR Deutsches Institut für interne Revision e. V.

118 119 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

Information pursuant to Section 28 German Pfandbrief Act (Pfandbriefgesetz) On b) Maturity Structure (Remaining Term) Public Pfandbriefe Cover funds

Section 28 (1) Nos. 1 to 3 German Pfandbrief Act (Pfandbriefgesetz) 31.12.2017 31.12.2016 31.12.2017 31.12.2016 Up to 6 months 227.1 1,125.2 421.1 733.5 Amounts in € m Between 6 and 12 months 20.0 25.0 34.9 500.0 Between 12 and 18 months 802.6 227.0 51.4 460.3 Between 18 months and 2 years 5.0 20.0 1.5 132.9 a) Mortgage Pfandbriefe Outstanding and Between 2 and 3 years 190.0 807.6 16.1 39.1 Cover Used Nominal Present value Risk-adjusted present value* Between 3 and 4 years 50.0 190.0 161.5 91.7 Between 4 and 5 years 10.0 50.0 0.8 198.1 31.12.2017 31.12.2016 31.12.2017 31.12.2016 31.12.2017 31.12.2016 Between 5 and 4 years 152.0 64.0 594.7 335.2 Mortgage Pfandbriefe 13,494.5 11,839.1 14,291.8 12,917.5 15,060.1 13,342.9 Longer than 10 years 130.0 344.1 373.1 619.7 of which: derivatives 0.0 0.0 0.0 0.0 0.0 0.0 Cover funds 14,115.5 12,664.6 15,169.3 13,753.9 15,724.6 13,788.3 of which: derivatives 0.0 0.0 0.0 0.0 0,0 0.0 Excess cover 621.0 825.5 877.5 836.4 664.5 445.4 Section 28 (1) Nos. 4 to 11 German Pfandbrief Act (PfandBG) Surplus cover pursuant to vdp differentiation model 621.0 825.5 877.5 836.4 - - Section 28 (1) Nos. 4 to 6 Pfandbrief Act (PfandBG) (Mortgage Pfandbriefe) * For the calculation of the stress scenarios, the static amount reported is taken for currencies and the dynamic amount reported is taken for interest. Additional Cover for Mortgage Pfandbriefe

On a) Maturity Structure Section 28 (1) No. 4 PfandBG Equalisation claims pursuant to Section 19 (Remaining Term) Mortgage Pfandbriefe Cover funds (Mortgage Pfandbriefe) (1) No. 1 German Pfandbrief Act (PfandBG)

31.12.2017 31.12.2016 31.12.2017 31.12.2016 31.12.2017 31.12.2016

Up to 6 months 1,465.0 1,160.5 1,098.2 1,005.8 Total 0.0 0.0 Between 6 and 12 months 1,442.2 363.5 947.6 943.4 Between 12 and 18 months 1,459.0 1,464.5 603.1 624.2 Between 18 months and 2 years 423.7 1,442.3 670.2 910.9 Between 2 and 3 years 972.0 1,882.7 1,562.9 980.6 Section 28 (1) of which: covered Between 3 and 4 years 1,739.0 972.0 1,592.7 1,537.9 No. 5 PfandBG debentures as defined under Article Between 4 and 5 years 1,796.0 1,239.0 1,498.9 1,706.3 (Mortgage Receivables as defined in Section 19 129 of Regulation (EU) Between 5 and 10 years 3,159.0 2,069.0 5,735.5 4,384.8 Pfandbriefe) (1) No. 2 PfandBG No. 575/2013 Longer than 10 years 1,038.6 1,245.6 406.4 570.7 31.12.2017 31.12.2016 31.12.2017 31.12.2016

Germany 365.0 152.0 135.0 94.0 Finland 10.0 10.0 0.0 0.0 Canada 10.0 10.0 0.0 0.0 b) Public Pfandbriefe Outstanding Netherlands 125.0 85.0 0.0 0.0 and Cover Use Nominal Present value Risk-adjusted present value* Sweden 90.5 85.5 90.5 85.5 Total 600.5 342.5 225.5 179.5 31.12.2017 31.12.2016 31.12.2017 31.12.2016 31.12.2017 31.12.2016

Public Pfandbriefe 1,586.7 2,852.9 1,820.2 3,341.3 1,768.8 3,173.1 of which: derivatives 0.0 0.0 0.0 0.0 0.0 0.0 Cover funds 1,655.0 3,110.5 1,943.2 3,547.7 1,830.8 3,337.4 Section 28 (1) No. 6 German Pfandbrief Act Receivables as defined in of which: derivatives 0.0 0.0 0.0 0.0 0.0 0.0 (PfandBG) (Mortgage Pfandbriefe) Section 19 (1) No. 3 PfandBG Excess cover 68.3 257.6 123.0 206.4 62.0 164.3 31.12.2017 31.12.2016 Surplus cover pursuant to vdp differentiation model 68.3 257.6 123.0 206.4 - - Germany 989.5 603.0 European Union (EU) 80.5 0.0 * For the calculation of the stress scenarios, the static amount reported is taken for currencies and the dynamic amount reported is taken for interest. France 25.0 0.0 Canada 73.0 50.0 Luxembourg 0.0 107.5 Total 1,168.0 760.5

120 121 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

Amounts in € m Section 28 (1) Nos. 7 to 11 PfandBG Other Disclosures on the Cover Funds and on the Pfandbriefe Outstanding Section 28 (1) Nos. 4 to 6 PfandBG Total amount (Mortgage Pfandbriefe) Additional cover for mortgage Pfandbriefe Section 28 (1) No. 7 PfandBG Total claims exceeding the threshold 31.12.2017 31.12.2016 (Mortgage Pfandbriefe) defined under Section 13 (1) PfandBG Total 1,768.5 1,103.0 31.12.2017 31.12.2016

Total 0.0 0.0

Section 28 (1) Nos. 4 and 5 PfandBG (regarding public Pfandbriefe) Additional Cover for Public Pfandbriefe

Section 28 (1) No. 8 PfandBG Total claims exceeding Section 28 (1) No. 4 PfandBG Equalisation claims pursuant to Section 20 (regarding mortgage Pfandbriefe) the percentages pursuant to (Public Pfandbriefe) (2) No. 1 PfandBG Section 19 (1) No. 2 PfandBG

31.12.2017 31.12.2016 31.12.2017 31.12.2016

Total 0.0 0.0 Total 0.0 0.0

Section 28 (1) Of which: covered Section 28 (1) No. 8 PfandBG Total claims exceeding No. 5 PfandBG debentures as defined in Article (regarding mortgage Pfandbriefe) the percentages pursuant to (Public Pfandbriefe) Claims as defined in Section 20 (2) 129 Regulation (EU) Section 19 (1) No. 3 PfandBG No. 2 PfandBG No. 575 / 2013 31.12.2017 31.12.2016 31.12.2017 31.12.2016 31.12.2017 31.12.2016 Total 0.0 0.0 Germany 34.0 62.0 10.0 12.0 Denmark 7.5 0.0 0.0 0.0 Netherlands 18.0 18.0 0.0 0.0

Total 59.5 80.0 10.0 12.0 Section 28 (1) No. 9 PfandBG Percentage share of Percentage share of fixed-interest (regarding mortgage fixed-interest cover funds in terms of Pfandbriefe in terms of liabilities to be Pfandbriefe) cover assets covered

Section 28 (1) Nos. 4 and 5 PfandBG Total amount 31.12.2017 31.12.2016 31.12.2017 31.12.2016 (Public Pfandbriefe) Additional cover for public Pfandbriefe In % 66.1 59.2 78.8 85.0

31.12.2017 31.12.2016

Total 59.5 80.0 Section 28 (1) No. 10 PfandBG Net present value pursuant to value (regarding mortgage Pfandbriefe) regulations for each foreign currency

31.12.2017 31.12.2016

CHF 38.4 40.3 GBP 204.5 390.7

122 123 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

Section 28 (2) No. 1 b and c German Pfandbrief Amounts in € m Act (PfandBG) Claims Used as Cover for Mortgage Pfandbriefe Classified According to Areas in which the Mortgaged Property is Allocated and Type of Section 28 (1) Use* No. 11 PfandBG For mortgage cover: volume-weighted average of the elapsed term since lending

31.12.2017 31.12.2016 Cover – total 31.12.2017 31.12.2016

In years 4.0 4.4 Commercial Residential Commercial Residential

Flats 20.6 23.5 Single- and two-family houses 39.2 20.1 Residential buildings for several families 2,714.9 2,581.7 Section 28 (1) No. 8 PfandBG Total claims Office buildings 4,509.5 4,158.4 (regarding public Pfandbriefe) exceeding the percentages pursuant Retail buildings 2,803.1 2,643.0 to Section 20 (2) No. 2 PfandBG Industrial buildings 92.0 104.2 31.12.2017 31.12.2016 Other commercially used buildings 2,076.5 2,020.3 Unfinished, as yet unprofitable new buildings 0.0 0.0 0.0 0.0 Total 0.0 0.0 Building sites 78.8 12.4 4.2 6.2 Total 9,559.9 2,787.1 8,930.1 2,631.5

Section 28 (1) No. 9 PfandBG Percentage share of Percentage share of (regarding public fixed-interest cover funds in terms fixed-interest Pfandbriefe Belgium 31.12.2017 31.12.2016 Pfandbriefe) of cover assets in terms of liabilities to be covered Commercial Residential Commercial Residential 31.12.2017 31.12.2016 31.12.2017 31.12.2016 Flats 0.0 0.0 In % 93.0 86.0 100.0 99.8 Single- and two-family houses 0.0 0.0 Residential buildings for several families 0.0 0.0 Office buildings 194.7 189.6 Retail buildings 0.0 0.0 Section 28 (1) No. 10 PfandBG Net present value pursuant to Section Industrial buildings 0.0 0.0 (regarding public Pfandbriefe) 6 Pfandbrief Net Present Value Re- Other commercially used buildings 0.0 0.0 gulation (PfandBarwertV) per foreign Unfinished, as yet unprofitable new buildings 0.0 0.0 0.0 0.0 currency Building sites 0.0 0.0 0.0 0.0

31.12.2017 31.12.2016 Total 194.7 0.0 189.6 0.0

– – – 0.0 0.0

Germany 31.12.2017 31.12.2016 Section 28 (2) Nos. 1 to 3 German Pfandbrief Act (PfandBG) Commercial Residential Commercial Residential Flats 20.6 23.5 Section 28 (2) No. 1 a German Pfandbrief Act Single- and two-family houses 15.6 20.1 (PfandBG) Payments in Arrears on Receivables Residential buildings for several families 2,648.1 2,545.8 Used as Cover for Mortgage Pfandbriefe* Office buildings 2,341.6 2,059.5 Retail buildings 1,699.0 1,657.8 Industrial buildings 92.0 104.2 Cover Mortgages 31.12.2017 31.12.2016 Other commercially used buildings 1,910.5 1,863.6 Unfinished, as yet unprofitable new buildings Up to and including € 300,000 69.2 85.7 0.0 0.0 0.0 0.0 Building sites From € 300,000 up to and including € 1 million 137.0 166.6 78.8 12.4 4.2 6.2 From € 1 million up to and including € 10 million 2,591.8 2,703.2 Total 6,121.9 2,696.7 5,689.3 2,595.6 More than € 10 million 9,549.0 8,606.1 Total 12,347.0 11,561.6

* Without further cover pursuant to Section 19 (1) PfandBG. * Without further cover pursuant to Section 19 (1) PfandBG.

124 125 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

Amounts in € m Poland 31.12.2017 31.12.2016 Commercial Residential Commercial Residential France 31.12.2017 31.12.2016 Flats 0.0 0.0 Single- and two-family houses 0.0 0.0 Commercial Residential Commercial Residential Residential buildings for several families 0.0 0.0 Flats 0.0 0.0 Office buildings 342.9 253.6 Single- and two-family houses 0.0 0.0 Retail buildings 374.4 309.9 Residential buildings for several families 0.0 0.0 Industrial buildings 0.0 0.0 Office buildings 527.4 521.8 Other commercially used buildings 0.0 0.0 Retail buildings 343.8 267.9 Unfinished, as yet unprofitable new buildings 0.0 0.0 0.0 0.0 Industrial buildings 0.0 0.0 Building sites 0.0 0.0 0.0 0.0 Other commercially used buildings 19.1 19.1 Total 717.3 0.0 539.7 0.0 Unfinished, as yet unprofitable new buildings 0.0 0.0 0.0 0.0 Building sites 0.0 0.0 0.0 0.0 Total 890.3 0.0 808.8 0.0 Czech Republic 31.12.2017 31.12.2016

Commercial Residential Commercial Residential Flats 0.0 0.0 UK 31.12.2017 31.12.2016 Single- and two-family houses 0.0 0.0 Residential buildings for several families 0.0 0.0 Commercial Residential Commercial Residential Office buildings 144.0 35.0 Flats 0.0 0.0 Retail buildings 154.0 127.2 Single- and two-family houses 0.0 0.0 Industrial buildings 0.0 0.0 Residential buildings for several families 0.0 0.0 Other commercially used buildings 0.0 0.0 Office buildings 159.4 320.3 Unfinished, as yet unprofitable new buildings 0.0 0.0 0.0 0.0 Retail buildings 31.7 44.8 Building sites 0.0 0.0 0.0 0.0 Industrial buildings 0.0 0.0 Total 298.0 0.0 162.2 0.0 Other commercially used buildings 0.0 15.3 Unfinished, as yet unprofitable new buildings 0.0 0.0 0.0 0.0 Building sites 0.0 0.0 0.0 0.0 Total 191.1 0.0 380.4 0.0 Section 28 (2) No. 2 German Pfandbrief Act (PfandBG) Payments in Arrears on Receivables Used as Cover for Mortgage Pfandbriefe

Total amount of payments in arrears Total claims, Netherlands 31.12.2017 31.12.2016 for at least 90 days where the respective arrears amount to at least 5 % of the claim Commercial Residential Commercial Residential 31.12.2017 31.12.2016 31.12.2017 31.12.2016 Flats 0.0 0.0 Single- and two-family houses 23.6 0.0 Germany 0.1 0.2 0.0 0.0 Great Britain Residential buildings for several families 66.8 35.9 0.0 0.0 0.0 0.0 Office buildings 799.5 778.6 Summe 0.1 0.2 0.0 0.0 Retail buildings 200.2 235.4 Industrial buildings 0.0 0.0 Other commercially used buildings 146.9 122.3 Unfinished, as yet unprofitable new buildings 0.0 0.0 0.0 0.0 Section 28 (2) No. 3 PfandBG Building sites 0.0 0.0 0.0 0.0 Average weighted loan-to-value ratio Total 1,146.6 90.4 1,136.3 35.9 Amounts in %

31.12.2017 31.12.2016 Average weighted loan-to-value ratio (based on the respective loan values) 55,8 55,6

126 127 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

Section 28 (3) Nos. 1 to 3 PfandBG Canada 31.12.2017 31.12.2016

Direct receivables Warranties Direct receivables Warranties Section 28 (3) No. 1 PfandBG Central government 0.0 0.0 0.0 0.0 Claims Used as Cover for Public Pfandbriefe Regional authority 25.0 0.0 25.0 0.0 Classified According to Size * Local authority 0.0 0.0 0.0 0.0 Other 0.0 0.0 0.0 0.0

Amounts in € m Total (direct claims and warranties) 25.0 25.0 Warranties included in this amount for reasons of export promotion 0.0 0.0 Cover 31.12.2017 31.12.2016 Up to and including € 10 million 5.9 6.4 From € 10 million up to and including € 100 million 738.3 879.9 Lithuania 31.12.2017 31.12.2016 More than € 100 million 851.3 2,144.2 Direct receivables Warranties Direct receivables Warranties Total 1,595.5 3,030.5 Central government 3.0 0.0 3.0 0.0 Regional authority 0.0 0.0 0.0 0.0 Local authority 0.0 0.0 0.0 0.0 Section 28 (3) No. 2 PfandBG Other 0.0 0.0 0.0 0.0 Claims Used as Collateral for Public Pfand- briefe Classified According to Country and Total (direct claims and warranties) 3.0 3.0 Type of Debtor or Guarantor * Warranties included in this amount for reasons of export promotion 0.0 0.0

Total Cover 31.12.2017 31.12.2016 Austria 31.12.2017 31.12.2016

Direct receivables Warranties Direct receivables Warranties Direct receivables Warranties Direct receivables Warranties Central government 95.0 0.0 95.0 0.0 Central government 198.0 0.0 300.2 0.0 Regional authority 0.0 0.0 0.0 0.0 Regional authority 1,144.2 91.0 2,154.5 170.4 Local authority 0.0 0.0 0.0 0.0 Local authority 0.0 0.3 0.0 0.4 Other 0.0 0.0 0.0 0.0 Other 162.0 0.0 405.0 0.0 Total (direct claims and warranties) 95.0 95.0 Total (direct claims and warranties) 1,595.5 3,030.5 Warranties included in this amount for reasons of export promotion 0,.0 0.0 Warranties included in this amount for reasons of export promotion 0.0 0.0

Poland 31.12.2017 31.12.2016 Belgium 31.12.2017 31.12.2016 Direct receivables Warranties Direct receivables Warranties Direct receivables Warranties Direct receivables Warranties Central government 100.0 0.0 100.0 0.0 Central government 0.0 0.0 0.0 0.0 Regional authority 0.0 0.0 0.0 0.0 Regional authority 0.0 0.0 0.0 0.0 Local authority 0.0 0.0 0.0 0.0 Local authority 0.0 0.0 0.0 0.0 Other 0.0 0.0 0.0 0.0 Other 0.0 0.0 55.0 0.0 Total (direct claims and warranties) 100.0 100.0 Total (direct claims and warranties) 0.0 55.0 Warranties included in this amount for reasons of export promotion 0.0 0.0 Warranties included in this amount for reasons of export promotion 0.0 0.0

Switzerland 31.12.2017 31.12.2016 Germany 31.12.2017 31.12.2016 Direct receivables Warranties Direct receivables Warranties Direct receivables Warranties Direct receivables Warranties Central government 0.0 0.0 0.0 0.0 Central government 0.0 0.0 102.2 0.0 Regional authority 0.0 0.0 0.0 0.0 Regional authority 1,119.2 91.0 2,129.5 170.4 Local authority 0.0 0.0 0.0 0.0 Local authority 0.0 0.3 0.0 0.4 Other 0.0 0.0 100.0 0.0 Other 162.0 0.0 250.0 0.0 Total (direct claims and warranties) 0.0 100.0 Total (direct claims and warranties) 1,372.5 2,652.5 Warranties included in this amount for reasons of export promotion 0.0 0.0 Warranties included in this amount for reasons of export promotion 0.0 0.0

* Without further cover pursuant to Section 20 (2) German Pfandbrief Act (PfandBG).

128 129 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

Section 28 (3) No. 3 PfandBG Statement of the Legal Representatives Payments in Arrears on Claims Used as Cover “To the best of our knowledge, we give the for Public Pfandbriefe assurance that, in accordance with the appli- cable accounting principles, the corporate accounts provide an accurate picture of the actual circumstances of the net assets, financial and earnings situation of the Bank, and that the course of business, including the results, and Amounts in € m Total amount of payments Total claims, the Bank’s position are shown in the Manage- in arrears for at least 90 days where the respective arrears amount to at least 5 % of the receivable ment Report in such a way that the picture con- veyed corresponds to the actual circumstances, 31.12.2017 31.12.2016 31.12.2017 31.12.2016 and the material opportunities and risks of Central government 0.0 0.0 0.0 0.0 the probable development of the company are Regional authority 0.0 0.0 0.0 0.0 described.” Local authority 0.0 0.0 0.0 0.0 Other 0.0 0.0 0.0 0.0 Berlin, 6 February 2018

Total 0.0 0.0 0.0 0.0

Section 28 (2) No. 4 PfandBG

Section 28 (2) No. 4 a to c German Pfandbrief Act (PfandBG) Information on Foreclosures and Administrative Receiver­ ­ ship Proceedings, Overdue Interest and Repayments of Sascha Klaus Gero Bergmann Roman Berninger Mortgage Loans

Number 31.12.2017 31.12.2016

Commercial Residential Commercial Residential

No. 4a Pending foreclosures 1 0 1 0 Pending administrative receiverships 1 0 1 0 Of which included 1 0 1 0 in the pending foreclosures Foreclosures carried out 0 0 0 0 No. 4b Cases in which property has been 0 0 0 0 seized to prevent losses

Amounts in € m 31.12.2017 31.12.2016

Commercial Residential Commercial Residential No. 4c Total interest in arrears 0.1 0.0 0.2 0.0

130 131 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

Independent Auditor's Report

To Berlin Hyp AG, Berlin Pursuant to Section 322 (3) sentence 1 German Recognition and evaluation of the reserves consistency of the assumptions and estimates Commercial Code, we declare that our audit for strategic resource planning based on the detailed, formal workforce reduc- Report on the Audit of the Annual Financial has not led to any reservations relating to the Please refer to the section on reserves in the tion plan. We also compared and critically Statements and of the Management Report legal compliance of the annual financial state- notes to the financial statements for further evaluated the assumptions with the workforce ments and of the management report. information on the recognition and meas- reduction measures previously implemented Opinions urement policies applied. Disclosures on the by Berlin Hyp AG. We have audited the annual financial statements Basis for the Opinions provision for strategic resource planning can of Berlin Hyp AG, Berlin, which comprise the We conducted our audit of the annual financial be found in the management report in Section Finally, we reviewed the computational accuracy balance sheet as at 31 December 2017, the statements and of the management report in II Economic report, in subsections 'Business of the calculation of the reserves. ­statement of profit and loss, the statement of accordance with Section 317 German Com- development' and 'Earnings situation'. cash flows and the statement of changes in equity mercial Code and EU Audit Regulation No. OUR OBSERVATIONS for the financial year from 1 January to 537/2014 (referred to subsequently as "EU THE FINANCIAL STATEMENT RISK The requirements for the recognition of the 31 December 2017, and notes to the financial Audit Regulation") and in compliance with Reserves totalling EUR 26.1 million were reserves for strategic resource planning as at statements, including the recognition and meas- German Generally Accepted Standards for formed in the annual financial statements of 31 December 2017 are satisfied. The assump- urement policies presented therein. In addition, Financial Statement Audits promulgated by Berlin Hyp AG as at 31 December 2017, which tions and estimates used for the measurement we have audited the management report of the Institut der Wirtschaftsprüfer [Institute relate to the strategic resource planning of are appropriate and plausibly derived from Berlin Hyp AG, Berlin, for the financial year from of Public Auditors in Germany] (IDW). Our Berlin Hyp AG until 2027. available information. 1 January to 31 December 2017. In accordance responsibilities under those requirements with German legal requirements we have not and principles are further described in the Appropriate reserves must be formed for Measurement of the provision for loan audited the content of the corporate governance "Auditor's Responsibilities for the Audit of personnel measures resulting from the strategic administration fees (Bearbeitungsentgelte) statement which is included in the management the Annual Financial Statements and of the resource planning if the recognition criteria are Please refer to the section on provisions in the report. Management Report" section of our auditor's satisfied. We believe this matter to be particu- notes to the financial statements for further report. We are independent of the Company in larly significant as the recognition and measure- information on the recognition and measure- In our opinion, on the basis of the knowledge accordance with the requirements of European ment of expenses that are significant in terms of ment policies applied. Notes on the judgment obtained in the audit, law and German commercial and professional amount are heavily dependent on the estimates of the German Federal Court of Justice [BGH] law, and we have fulfilled our other German and assumptions of management, particularly from 4 July 2017 can be found in the manage- the accompanying annual financial state- professional responsibilities with regard to laying off staff, the structure of a ment report in Section II Economic Report, ments comply, in all material respects, with in accordance with these requirements. In social plan and early retirement and severance subsections 'Business development' and the requirements of German commercial addition, in accordance with Article 10 (2) payment amounts, as well as other costs. 'Earnings situation'. law applicable to business corporations point (f) of the EU Audit Regulation, we declare and give a true and fair view of the assets, that we have not provided non-audit services The risks for the annual financial statements Berlin Hyp AG had formed reserves of EUR 19.6 liabilities and financial position of the prohibited under Article 5 (1) of the EU Audit are that the requirements for the recognition million as at 31 December 2017 for potential Company as at 31 December 2017 and of Regulation. We believe that the evidence we of these reserves are not present and/or that customer claims in connection with the BGH its financial performance for the financial have obtained is sufficient and appropriate to these have been inaccurately measured. judgment from 4 July 2017 on the issue of year from 1 January to 31 December 2017 in provide a basis for our opinions on the annual loan administration fees in loan agreements compliance with German Legally Required financial statements and on the management OUR AUDIT APPROACH that are independent of the actual loan term. Accounting Principles, and report. We first evaluated the recognition criteria on the basis of the measures already initiated A requirement for the recognition of the the accompanying management report as a Key Audit Matters in the Audit of the Annual as at 31 December 2017, in particular we reserves for loan administration fees is that whole provides an appropriate view of the Financial Statements assessed whether the requisite external obli- there is a current external obligation that Company's position. In all material respects, Key audit matters are those matters that, in gation existed as at 31 December 2017. To this will result in the probable recourse to the this management report is consistent with our professional judgement, were of most end, we evaluated whether the corresponding reserves. The amount of the reserves for loan the annual financial statements, complies significance in our audit of the annual finan- resolution of the Board of Management on administration fees is determined based on with German legal requirements and appro- cial statements for the financial year from 1 implementing the strategic resource planning the best estimate of the settlement amount. priately presents the opportunities and January to 31 December 2017. These matters was adopted and communicated to the works The reserves for loan administration fees are risks of future development. Our opinion were addressed in the context of our audit of council and senior staff representatives. subject to estimation uncertainties arising on the management report does not cover the annual financial statements as a whole, from judgement, in particular in relation to the the content of the corporate governance and in forming our opinion thereon, we do not We then had the Board of Management explain expected reclamation of loan administration statement mentioned above. provide a separate opinion on these matters. to us the assumptions and estimates used fees and the associated obligation of the Bank when valuing the reserves. We assessed the to refund the amounts already collected.

132 133 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

There is the risk for the annual financial Our opinions on the annual financial state- appropriately presents the opportunities and statements and of the management report, statements that the reserves were not ­valued ments and on the management report do not risks of future development. In addition, the whether due to fraud or error, design and correctly, in particular where the Bank's cover the other information, and consequently statutory representatives are responsible for perform audit procedures responsive to assumptions and estimates in measuring the we do not express an opinion or any other form such arrangements and measures (systems) as those risks, and obtain audit evidence that is reserves are not appropriate. of assurance conclusion thereon. they have considered necessary to enable the sufficient and appropriate to provide a basis preparation of a management report that is in for our opinions. The risk of not detecting a OUR AUDIT APPROACH In connection with our audit, our responsibility accordance with the applicable German legal material misstatement resulting from fraud To audit the reserves for loan administration fees is to read the other information and, in so requirements, and to be able to provide suffi- is higher than for one resulting from error, as we questioned the Board of Management and doing, to consider whether the other information cient appropriate evidence for the assertions in fraud may involve collusion, forgery, inten- contacts from finance and banking ­operations the management report. tional omissions, misrepresentations, or the as well as the Bank's legal department. We also is materially inconsistent with the annual override of internal controls. analysed written correspondence with rele- financial statements, with the management The Supervisory Board is responsible for vant borrowers and evaluated the underlying report or our knowledge obtained in the overseeing the Company's financial reporting Obtain an understanding of internal control documents and minutes. In this way we assessed audit, or process for the preparation of the annual finan- relevant to the audit of the annual finan- whether the assumptions and estimates cial statements and of the management report. cial statements and of arrangements and regarding the potential claimants and amounts otherwise appears to be materially measures (systems) relevant to the audit of to be refunded used by the Bank to measure the ­misstated. Auditor's Responsibilities for the Audit of the management report in order to design provision were reasonably and properly derived the Annual Financial Statements and of audit procedures that are appropriate in the from the documents. Responsibilities of the Statutory Repre- the Management Report circumstances, but not for the purpose of sentatives and the ­Supervisory Board for Our objectives are to obtain reasonable expressing an opinion on the effectiveness To the extent that an agreement on individual the Annual Financial Statements and the assurance about whether the annual financial of these systems. claims has been reached in the meantime, we Management Report statements as a whole are free from mate- compared the originally estimated amounts with The statutory representatives are responsible rial misstatement, whether due to fraud or Evaluate the appropriateness of accounting the final obligations and thus obtained an for the preparation of the annual financial error, and whether the management report policies used and the reasonableness of overview of the quality of the estimates. statements that comply, in all material as a whole provides an appropriate view of accounting estimates and related disclo- respects, with the requirements of German the Company's position and, in all material sures made by the board of management. Finally, we reviewed the computational accuracy commercial law applicable to banks, and that respects, is consistent with the annual financial of the calculation of the provision. the annual financial statements give a true statements and the knowledge obtained in the Conclude on the appropriateness of man- and fair view of the assets, liabilities, financial audit, complies with the German legal require- agement's use of the going concern basis of OUR OBSERVATIONS position and financial performance of the ments and appropriately presents the opportu- accounting and, based on the audit evidence The assumptions and estimates used to Company in compliance with German Legally nities and risks of future development, as well obtained, whether a material uncertainty ­measure the reserves as at 31 December Required Accounting Principles. In addition, as to issue an auditor's report that includes our exists related to events or conditions that 2017 are appropriately derived from available management is responsible for such internal opinions on the annual financial statements may cast significant doubt on the Company's information. control as they, in accordance with German and on the management report. ability to continue as a going concern. If we Legally Required Accounting Principles, have conclude that a material uncertainty exists, Other Information determined necessary to enable the prepara- Reasonable assurance is a high level of we are required to draw attention in the The statutory representatives are responsible tion of annual financial statements that are free assurance, but is not a guarantee that an audit auditor's report to the related disclosures in for the other ­information. The other informa- from material misstatement, whether due to conducted in accordance with Section 317 the annual financial statements and in the tion comprises: fraud or error. German Commercial Code and the EU Audit management report or, if such disclosures Regulation and in compliance with German are inadequate, to modify our respective the content of the corporate governance In preparing the annual financial statements, Generally Accepted Standards for Financial opinions. Our conclusions are based on the statement, which is included in the manage- The statutory representatives are responsible Statement Audits promulgated by audit evidence obtained up to the date of our ment report, for assessing the Company's ability to continue the Institut der Wirtschaftsprüfer (IDW) will auditor's report. However, future events or as a going ­concern. They also have the respon- always detect a material misstatement. Mis- conditions may cause the Company to cease assurance pursuant to Section 264 (2) sibility for disclosing, as applicable, matters statements can arise from fraud or error and to be able to continue as a going concern. sentence 3 HGB regarding the financial related to going concern. In addition, they are are considered material if, individually or in the statements and assurance pursuant to responsible for financial reporting based on the aggregate, they could reasonably be expected Evaluate the overall presentation, struc- Section 289 (1) sentence 5 HGB regarding going ­concern basis of accounting, provided no to influence the economic decisions of users ture and content of the annual financial the management report, actual or legal circumstances conflict therewith. taken on the basis of these annual financial statements, including the disclosures, and statements and this management report. whether the annual financial statements the remaining parts of the annual report, Furthermore, the statutory representatives present the underlying transactions and with the exception of the audited annual are responsible for the preparation of the We exercise professional judgement and events in a manner that the annual financial financial statements and management management report that as a whole provides maintain professional scepticism throughout statements give a true and fair view of the report and our auditor's report. The Annual an appropriate view of the Company's position the audit. We also: assets, liabilities, financial position and Report is expected to be made available to and is, in all material respects, consistent financial performance of the Company in us after the date of this auditor's report. with the annual financial statements, com- Identify and assess the risks of material compliance with German Legally Required plies with German legal requirements, and misstatement of the annual financial Accounting Principles.

134 135 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

List of Important Abbreviations

Evaluate the consistency of the management Other Legal and Regulatory Requirements Abs. Absatz (paragraph) HQE Haute Qualite Environnementale report with the annual financial statements, Further Information pursuant to Article 10 of AG Aktiengesellschaft (stock corporation) (High Quality Environmental standard) AktG Aktiengesetz HRB Handelsregister Teil B (Commercial Register) its conformity with German law, and the view the EU Audit Regulation AMA Advanced Measurement Approach IA Inanspruchnahme (called to account) of the Company's position it provides. We were elected as auditor by the Annual APP Asset Purchase Programme iBoxx Index family for bond market indices General Meeting on 29 March 2017. We were AReG Abschlussprüferreformgesetz IDW Institut der Wirtschaftsprüfer Perform audit procedures on the future-­ engaged by the Supervisory Board on 26 April (German Audit Reform Act) (Institute of Public Auditors in Germany) AT non-tariff IF Immobilienfinanzierung oriented information presented by manage- 2017. We have been the auditor of Ber- BA Berufsakademie (real estate financing) ment in the management report. On the basis lin Hyp AG, Berlin, without interruption since (University of Cooperative Education) IFRS International Financial Reporting Standards of sufficient appropriate audit evidence we the financial year 2016. BCBS Basel Committee on Banking Supervision InstitutsVergV Verordnung über die aufsichtsrechtlichen BGB Bürgerliches Gesetzbuch Anforderungen an Vergütungssysteme von evaluate, in particular, the significant assump- (German Civil Code) Instituten (Institutional Remuneration Ordinance) tions used by management as a basis for the We declare that the opinions expressed in BGH Bundesgerichtshof IREBS International Real Estate Business School future-oriented information, and evaluate the this auditor's report are consistent with the (Federal Court of Justice) IRRBB Interest Rate Risk in the Banking Book BilMoG Bilanzrechtsmodernisierungsgesetz IT Information technology proper derivation of the future-oriented infor- additional report to the audit committee pur- (German Accounting Law Adjustment Act) IWF Internationaler Währungsfonds mation from these assumptions. We do not suant to Article 11 of the EU Audit Regulation BIP Bruttoinlandsprodukt (International Monetary Fund) express a separate opinion on the prospective (longform audit report). (gross domestic product) KA Kreditausschuss (Loans Committee) information and on the assumptions used as BL Bereichsleiter (division head) K-Fälle Katastrophenfälle (catastrophe case) BREEAM Building Research Establishment KR Kredit (loan) a basis. There is a substantial unavoidable German Public Auditor Responsible for the Environment Assessment KWG Kreditwesengesetz (German Banking Act) risk that future events will differ materially Engagement BRRD Bank Recovery and Resolution Directive LCR Liquidity Coverage Ratio from the future-oriented information. The German Public Auditor responsible for the BSG Betriebssportgemeinschaft LGD lost given defaults (Company Sports club) LEED Leadership in Energy and Environmental Design engagement is Jörg Kügler. BSI Bundesamt für Sicherheit in der Informationstechnik LMA Loan Market Association We communicate with those charged with gov- (Federal Office for Information Technology Security) LR Leverage Ratio ernance regarding, among other matters, the Berlin, 20 February 2018 CBPP III Covered Bond Purchase Program LTV Loan-to-Value CCF Credit Conversion Factor MaRisk Mindestanforderungen an das Risikomanagement KPMG AG planned scope and timing of the audit and sig- CD Corporate Design (Minimum Requirements for Risk Management) nificant audit findings, including any significant Wirtschaftsprüfungsgesellschaft CRD Capital Requirements Directive MaSan Mindestanforderungen an die Ausgestaltung von deficiencies in internal control that we identify CRR Capital Requirements Regulation Sanierungsplänen (Minimum Requirements for the during our audit. CSR Corporate Social Responsibility Structure of Restructuring Plans) D & O Directors & Officers MREL Minimum Requirement for Eligible Kügler Ludwig DCGK Deutscher Corporate Governance Kodex Liabilities We also provide those charged with govern- German Public Auditor German Public Auditor (German Corporate Government Code) NPL Non-Performing Loans ance with a statement that we have complied DGNB Deutsche Gesellschaft für Nachhaltiges Bauen NSFR Net Stable Funding Ratio (German Sustainable Building Council) OHG Offene Handelsgesellschaft (private partnership) with the relevant independence requirements, DIIR Deutsches Institut für Interne Revision OI Organisation/Informationstechnologie and communicate with them all relationships (German Institute of Internal Auditors) (organisation/information technology) and other matters that may reasonably be DRS Deutscher Rechnungslegungs Standard OpRisk Operationelle Risiken (operational risks) (German Accounting Standard) PA Prüfungsauschuss (Audit Committee) thought to bear on our independence, and DSGV Deutscher Sparkassen- und Giroverband PE Personal (staff) where applicable, the related safeguards. (German Savings Bank Association) PfandBG Pfandbriefgesetz (Pfandbrief Act) DV Datenverarbeitung (data processing) PSA Personal- und Strategieausschuss EGHGB Einführungsgesetz zum Handelsgesetzbuch (Intro- From the matters communicated with those (Staff and Strategy Committee) ductory Law to the German Commercial Code) PWB Pauschalwertberichtigung charged with governance, we determine those EStG Einkommensteuergesetz (lump-sum value adjustments) matters that were of most significance in the (German Income Tax Code) RechKredV Verordnung über die Rechnungslegung der audit of the annual financial statements of the ESZB Europäisches System der Zentralbanken Kreditinstitute (Regulation on the Accounts of (European System of Central Banks) Banking Institutions) current period and are therefore the key audit EU European Union RST Rückstellungen (reserves) matters. We describe these matters in our EURIBOR Euro Interbank Offered Rate RWA Risk-weighted asset auditor's report unless law or regulation pre- EWB Einzelwertberichtigung SAG Sanierungs- und Abwicklungsgesetz (specific valuation allowances and reserves) (Restructuring and Winding-Up Act) cludes public disclosure about the matter. EZB Europäische Zentralbank SAP Systems, applications, products (European Central Bank) SEPA Single Euro Payments Area FED Federal Reserve Bank SolvV Solvabilitätsverordnung (Solvency Regulation) FRA Forward Rate Agreement SRB Single Resolution Board GbR Gesellschaft bürgerlichen Rechts SRM Single Resolution Mechanism (civil law partnership) SSM Single Supervisory Mechanism GmbH Gesellschaft mit beschränkter Haftung TLTRO Targeted longer-term refinancing operations (private limited company) TR Treasury GuV Gewinn- und Verlustrechnung VaR Value-at-Risk (profit and loss account) vdp Verband deutscher Pfandbriefbanken e.V., Berlin HGB Handelsgesetzbuch ZIA Zentraler Immobilien Ausschuss (German Commercial Code) (German Property Federation)

136 137 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

Addresses Contacts

Headquarters International Key Accounts Other Functional Spheres If you have any questions about our Annual Publications for our business partners and Syndication Report, our company, or if you would like to in 2018 Berlin Hyp AG Banking Operations order further publications, please contact: Budapester Strasse 1 Origination International Budapester Strasse 1 Annual Report 2017 10787 Berlin Investors 10787 Berlin Berlin Hyp AG (German/English) T +49 30 2599 90 Budapester Strasse 1 T +49 30 2599 9260 Communication and Strategy Half-Year Financial Report to 30.06.2018 F +49 30 2599 9131 10787 Berlin Budapester Strasse 1 (German/English) www.berlinhyp.de T +49 30 2599 5710 Treasury 10787 Berlin Interim Report to 30.09.2018 Budapester Strasse 1 T +49 30 2599 9123 (German/English) Syndication 10787 Berlin F +49 30 2599 998 9123 Separate Non-Financial Company Report ­ S-Group and Budapester Strasse 1 T +49 30 2599 9510 www.berlinhyp.de of Berlin Hyp AG for 2017 Domestic Business 10787 Berlin (German/English) T +49 30 2599 5620 Risk Management Berlin Branch Budapester Strasse 1 Budapester Strasse 1 Office Amsterdam 10787 Berlin Important company information is In this Annual Report, reference to the 10787 Berlin WTC Schiphol Airport T +49 30 2599 9931 available on www.berlinhyp.de. ­masculine form naturally also includes the T +49 30 2599 5586 Schiphol Boulevard 263 feminine form. 1118 BH Schiphol Düsseldorf Branch Netherlands Königsallee 60c T +31 20 20659 63 40212 Düsseldorf T +49 211 8392 350 Office Paris 40, Rue La Pérouse Frankfurt am Main Branch F-75116 Paris NEXTOWER France Thurn- und Taxis Platz 6 T +33 1 730425 21 60313 Frankfurt am Main T +49 69 1506 211 Office Warsaw Plac Malachowskiego 2 Hamburg Branch PL-00-066 Warsaw Neuer Wall 19 Poland 20345 Hamburg T +48 22 376 5121 T +49 40 2866589 21

Munich Branch Isartorplatz 8 80331 Munich T +49 89 291949 10

Stuttgart Branch Friedrichstrasse 6 70174 Stuttgart T +49 711 2483 8821

138 139 Board of Management and Supervisory Board Company Management Report Annual Financial Statements Service

Imprint

Published by Berlin Hyp AG Communication and Marketing Budapester Strasse 1 10787 Berlin

Conception, Editorial – Text and Design, Layout and Typesetting Heimrich & Hannot GmbH Bayrische Strasse 18 01069 Dresden

Photography Michael Bader (Title picture, p. 13 / View of office, p. 14 / 9 January and 8 June, p. 16–35) Berlin Hyp AG (p. 12–13, 14–15, p. 29 / right lower picture) IMMOFINANZ AG (p. 36) WBF Wohnungsbaugesellschaft Friedrichshain­ mbH (p. 37) Gewerbesiedlungs-Gesellschaft mbH, CONCRETE Capital (p. 38) III. Bouwfonds European Real Estate Parking Fund (p. 39)

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Berlin Hyp AG Budapester Strasse 1 10787 Berlin T +49 30 2599 9123 www.berlinhyp.de