Landesbank Baden-Württemberg (LBBW) Stuttgart, Karlsruhe, Mannheim, and Mainz. Annual financial state- ments and management report for the business year from 1 January to 31 December 2011. CONTENTS Management report of Landesbank Baden-Württemberg Business and general conditions .............................................3 Business performance of Landesbank Baden-Württemberg (LBBW) Results of operations, net assets, and financial position ...........................................................15 Risk report ...........................................................................22 Events after the reporting date .............................................72 Outlook ................................................................................73 Financial statements ...............................................................79 Balance sheet .......................................................................80 Income statement .................................................................84 Notes ...................................................................................86 Auditor’s report .....................................................................128 1 125071_EZab11GB_1 1 12.04.12 15:56 MANAGEMENT REPORT LBBW (BANK) TheIntrotext following 1 information should be read in conjunction with the annual financial statements of Landesbank Baden-Württemberg (LBBW), Stuttgart, Karlsruhe, Mannheim, and Mainz, for the fiscal year from 1 January to 31 December 2011, consisting of the balance sheet, income statement and the notes. The 2011 annual financial statements and the 2011 management report were issued an unqualified auditor’s report by KPMG Aktiengesellschaft Wirtschaftsprüfungsgesellschaft. 2 125071_EZab11GB_1 2 12.04.12 15:56 MANAGEMENT REPORT LBBW (BANK) — BUSINESS AND GENERAL CONDITIONS Business and general conditions. Business activities of LBBW. Landesbank Baden-Württemberg (LBBW) is a public law institution (rechtsfähige Anstalt öffentlichen Rechts) with four registered offi ces in Stuttgart, Karlsruhe, Mannheim, and Mainz. Its owners are the Savings Bank Association of Baden-Württemberg (Sparkassenverband Baden-Württemberg) with 40.53 %, the state of Baden-Württemberg with 19.57 %, the state capital, Stuttgart, with 18.93 %, Landes- beteiligungen Baden-Württemberg GmbH with 18.26 %, and L-Bank with 2.71 % of shares in LBBW. As a universal and commercial bank, LBBW offers every type of business provided by a large, modern bank in over 200 branches and offi ces, and is particularly geared toward a sustainable customer business. The regional retail banks BW-Bank, Rheinland-Pfalz Bank, and Sachsen Bank are an important part of LBBW. As dependent institutions with own market presence, these three strong regional pillars represent the Bank’s domestic business with corporate and private clients in the respective core markets. In accordance with the state banking law LBBW acts as a savings bank in Stuttgart, the state capital of Baden-Württemberg. This function is assumed by BW-Bank. The business with large corporates operating across Germany and internationally, the real estate business, and the Bank’s function as the central bank for savings banks are located within LBBW itself. The function of a central institution is assumed for savings banks in Baden-Württemberg, Rhineland- Palatinate, and Saxony. Essential staff and service functions are also concentrated within LBBW. LBBW also supports its domestic customers and customers of affi liated savings banks abroad and offers them an on-site service at selected locations. With subsidiaries and representative offi ces, and fi ve German centers, in Beijing, Mexico City, Singapore, Dehli.Gurgaon, and Moscow, LBBW has a presence in the up-and-coming centers in the world’s economy to support local corporate customers. 3 125071_EZab11GB_1 3 17.04.12 17:27 MANAGEMENT REPORT LBBW (BANK) — BUSINESS AND GENERAL CONDITIONS Strategic profile of LBBW. The business strategy is based on fi ve pillars. Since the initiated restructuring in 2009, when fresh capital was injected and a guarantee provided, the business model of LBBW has been based on fi ve pillars. Accordingly, the business model encompasses the business areas of corporate customers, private customers, savings banks, financial markets and real estate financing. Corporate customers. The corporate customer business in the core markets of the three retail banks constitutes a cornerstone of LBBW’s business model. LBBW serves corporate customers in Baden-Württemberg under the BW-Bank brand. In Rhineland-Palatinate and in the neighboring economic areas, this function is assumed by Rheinland-Pfalz Bank and in central Germany by Sachsen Bank. BW-Bank has also been operating selectively in Bavaria since 2011. The Corporate Customer segment also encompasses the business with selected large customers in Germany, Austria, and Switzerland. In addition, LBBW offers its customers special products and services via its subsidiaries SüdLeasing, MKB Mittelrheinische Bank/MMV Leasing and SüdFactoring, particularly in the fields of leasing and the sale of receivables. Furthermore, Süd Beteiligungen enables equity funding for SMEs based in the core markets of LBBW. LBBW Immobilien Management is another important subsidiary. The company primarily offers real estate development, commercial real estate asset management, and real estate services. The business with corporate customers has proved itself to be a stable income basis, especially in the diffi cult environment of the last few years and will therefore be developed further in LBBW’s strategic orientation. On the one hand, a more intensive market development is planned, especially in the regions of Bavaria and North Rhine-Westphalia, on the other hand, growth is aimed for in the existing markets by broadening the product range. Alongside corporate loan lending as an anchor product, LBBW offers a variety of fi nancing options, e. g. capital market products and tailored services. In addition, it will enhance customer support in the international business. Private customers. The private customer business area encompasses activities with private, investment, private banking, and wealth management customers. The products on offer range from classic checking accounts to investment advice right through to specialized services, such as fi nancial planning, asset management, securities account management, and foundation management. In this customer segment LBBW focuses on meeting the needs and requirements of high net-worth private customers via BW-Bank. In private banking and wealth management, the position of BW-Bank will be strengthened as one of the leading providers for the high net-worth segment with specially tailored products and intensive support. Additionally, business with high net-worth customers is operated by Sachsen Bank and Rheinland-Pfalz Bank with a local presence. Furthermore, this pillar represents the classic retail business including the savings bank functions in Stuttgart. 4 125071_EZab11GB_1 4 17.04.12 17:27 MANAGEMENT REPORT LBBW (BANK) — BUSINESS AND GENERAL CONDITIONS Savings banks. The business with savings banks is a further cornerstone of the Bank’s business model. In business with savings banks, LBBW acts as a central bank to savings banks in the core markets of Baden-Württemberg, Saxony, and Rhineland-Palatinate. It supplies products and services to the savings banks, forming a network to support market penetration for private and corporate customers. Overall, the segment caters for three essential types of cooperation: The support for the proprietary business of the savings banks encompasses all product categories for hedging and investment of the savings bank itself. In the market partner business, LBBW products are also offered for resale in the retail business to the end customers of the savings banks, in addition to credit given on joint accounts. Finally, processing transactions are also performed in the service business, such as securities processing, or international payment transactions. Financial markets. The fi nancial markets segment primarily supports companies, savings banks, banks, and private and institutional customers (in particular pension funds, insurance companies, asset managers, local authorities, foundations, and churches). The activities concentrate on German-speaking countries, while international customers are essentially supported on the money and foreign currency markets and in the new issues business. Furthermore, in the fi nancial markets segment trading activities in LBBW’s capital market business are combined. LBBW offers its customers solutions for the management of interest, credit, currency and, selectively, commodity risks, as well as the procurement and investment of short-term and long- term funds on the capital markets. LBBW also offers support regarding the optimization of balance sheet structures and asset/liability management as well as the proprietary business of the savings banks i. e. interest and credit products. LBBW Asset Management Investmentgesellschaft complements the product range offered by LBBW in this line of business. The asset management company primarily focuses on consulting and management of security trust assets for institutional and private investors. Real estate fi nancing. The real estate fi nancing segment is geared toward open and closed-end funds and special funds, private and institutional investors, real estate companies, real estate corporations, project developers, privatization