EUROHYPO GROUP ANNUAL REPORT 2007 DIVISIONS corporate banking corporate banking reib and corporate germany core continental europe and banking usa latin america As market leader in commercial real estate In continental Europe and Latin America In the USA we continued to strenghten our finance we benefit from our size, our we are represented by established teams market position. Our positive performance structuring expertise and our reputation in the most important real estate locations in commercial real estate , however, does as banking partner. and offer customized solutions to our not compensate for the required valuation customers. adjustments. in € million 2007 2006 in € million 2007 2006 in € million 2007 2006 New business 10,139 9,820 New business 12,782 13,015 New business 7,120 7,322 in € billion in € billion in € billion Segment assets 32.0 33.1 Segment assets 23.9 20.8 Segment assets 4.4 4.7 in € million in € million in € million Net interest income 396 393 Net interest income 287 249 Net interest income 87 84 Provisions for Provisions for Provisions for loan losses 8 9 loan losses –16 –2 loan losses –3 –1 Commission income 70 71 Commission income 103 71 Commission income 29 34 Profit before tax 368 365 Profit before tax 279 248 Profit before tax –115 74 in % in % in % Cost/income ratio 23.0 22.8 Cost/income ratio 23.9 21.5 Cost/income ratio –198.9 52.3 Return on equity1) 18.0 16.6 Return on equity1) 16.0 17.0 Return on equity1) –26.7 19.2 1) Profit before tax/average tied-up equity (7.0% of average risk-weighted assets (RWA) according to BIS). DIVISIONS european reib and retail banking public finance / treasury corporate banking uk In the UK we benefit from our multifaceted In retail banking we succeeded in con- Next to commercial real estate finance, and further developed range of services in solidating the efficient loan processing public finance is the second core business commercial real estate and rely on estab- of Eurohypo with the established sales area of Eurohypo, and, in company with lished customer relationships. network of Commerzbank. Treasury activities, forms the basis for the segment Public Finance/Treasury (PFT). in € million 2007 2006 in € million 2007 2006 in € million 2007 2006 New business 5,857 4,672 New business 288 620 New business 20,249 15,651 Inland 11,185 7,075 in € billion in € billion Ausland 9,064 8,576 Segment assets 7.6 7.0 Segment assets 21.7 24.5 in € billion in € million in € million Segment assets 112.1 123.2 Net interest income 90 80 Net interest income 205 244 Public Finance 100.5 109.3 Provisions for Provisions for 0% weighting 74.8 81.3 loan losses –11 –2 loan losses –81 –160 20% weighting 25.3 27.9 Commission income 60 49 Commission income –9 –10 Germany 57.0 64.8 Profit before tax 93 77 Profit before tax 42 –52 Abroad 43.5 44.5 in % in % in € million Cost/income ratio 30.8 38.9 Cost/income ratio 35.2 50.1 Net interest income 89 154 Return on equity1) 15.1 18.2 Return on equity1) 4.4 –4.8 Result from financial assets 179 63 Profit before tax 187 205 in % Cost/income ratio 26.0 23.8 overview – eurohypo group 2007 2006 Change € million € million (%) New commitments – commercial real estate finance 36,831 34,887 5.6 Corporate Banking Germany Core 10,139 9,820 3.2 Corporate Banking Continental Europe and Latin America 12,782 13,015 –1.8 European REIB and Corporate Banking UK 5,857 4,672 25.4 REIB and Corporate Banking USA 7,120 7,322 –2.8 REIB and Corporate Banking Asia/Pacific 933 58 >100 Public Finance/Treasury 20,249 15,651 29.4 Funding taken up in the capital market 20,338 23,711 –14.2 Pfandbriefe 14,865 17,507 –15.1 Other funding 5,274 6,004 –12.2 Subordinated debt 200 200 0 Figures from the income statement Net interest income 1,179 1,249 –5.6 Provisions for loan losses –259 –360 –28.1 Net commission income 227 177 28.2 Net trading income –11 98 >–100.0 Administrative expenses 542 547 –0.9 Operating income 588 668 –12.0 Profit before tax 588 653 –10.0 Profit after tax 355 434 –18.2 Balance sheet figures Real estate finance Germany 59,790 64,841 –7.8 Real estate finance international 36,453 32,591 11.8 Public finance 100,518 109,252 –8.0 Funding volume 193,405 204,065 –5.2 Subordinated debt 4,086 4,017 1.7 Capital and reserves 5,572 6,168 –9.7 Total assets 214,215 224,332 –4.5 Key ratios (in %) %-Points Return on equity before tax 10.1 11.5 –1.4 Return on equity after tax 6.1 7.7 –1.6 Cost income ratio 39.0 34.7 4.3 Capital ratios (in %) Tier 1 capital ratio BIS1) 7.4 7.2 0.2 Total capital ratio BIS1) 10.7 10.4 0.3 Staff 2,034 2,404 –15.4% 1) Eurohypo is not participating in the official procedure for the implementation of the Basel agreements. Contents 1 Letter to Shareholders 2 letter to shareholders 6 the board of managing directors 8 report of the supervisory board 12 capital market communication of Managing Directors Board (cmc) 14 the pfandbrief 16 management report Supervisory Board Supervisory 16 Overall economic performance in 2007 18 Business development and strategy CMC 24 Business development in the divisions 24 Corporate Banking Germany (CBG Core/CBG Non-Core) Pfandbrief 27 Corporate Banking Continental Europe and Latin America (CIB-I-CELA) 29 European REIB and Corporate Banking UK (CIB-I-REIB & UK) 31 REIB and Corporate Management Report Banking USA (CIB-I-US) 33 Public Finance/Treasury (PFT) 35 Funding 38 Retail Banking (RB) 39 Development of income and financial position Remuneration Report Remuneration 39 Income 43 Financial position and net assets 44 Disclosures in accordance with sections 289 (4) and 315 (4), German Commercial Code (HGB) 83 consolidated financial 46 Our Employees statements – eurohypo group 49 Group Structure and Corporate Investments Governance Corporate 84 Income Statement 52 Risk Report 85 Appropriation of profit/earnings per share 65 Supplementary Report and Forecast 86 Balance sheet 65 Supplementary report 88 Statement of changes in capital 65 Report of our forecasts and reserves 66 Earnings outlook 90 Cash flow statement Management Bodies 68 remuneration report 92 Notes 166 Mandates – Supervisory Board, 74 corporate governance Management Board, Staff 171 Management bodies 77 management bodies and boards 172 List of affiliated companies, Participating Interests and special purpose vehicles Statements Financial 77 Supervisory Board 175 Responsibility Statement by the 77 Board of Managing Directors Management Board 78 Supervisory Board Committees 79 Trustees 176 auditors’ report 80 Advisory Board Germany Auditors’ Report Report Auditors’ 82 Advisory Board International 177 information under section 28 of the pfandbrief act GS 195 at a glance 195 Glossary § 28 Pfandbrief 200 Editorial information At a glance 2 Letter to Shareholders In financial year 2007, we successfully reaffirmed our leadership role as a specialist bank in the two areas that form the pillars of our business: Commercial Real Estate and Public Finance. Thanks to our international positioning, our diverse range of products and our active portfolio management, we rank among the top providers worldwide. The planned merger with the public-sector finance institution Hypo- thekenbank in Essen AG (Essen Hyp), which is a subsidiary of Commerzbank, with Eurohypo represents a further milestone in the development of the bank to a valu- able key component of Commerzbank Group. Looking ahead, the entire public finance business in Commerzbank Group will be marketed under the Eurohypo brand. Consequently, this pillar of our business will be placed on an even broader international footing, with an expansion of our financing and market strength. In addition, Eurohypo will be the sole issuer of Pfandbrief securities in Commerzbank Group, a fact that will serve to further strengthen our already prominent position in the capital market. new business remains strong For the vast majority of the real estate sector, 2007 was a trying, but ultimately successful business year. Real estate investment markets saw historically high trans- action volumes, although activity did slow noticeably towards the end of last year. The reporting year was marked chiefly by the subprime crisis in the United States, which spread to global financial markets in the second half of the year, and still has a lingering effect on the capital market. As a result, liquidity is in shorter supply and has become more expensive. Conditions for successful exit management are now more difficult. In addition, many market players remain wary. Despite the ongoing weakness of the international financial markets, Eurohypo has again set records in new business volume: new commitments in the area of commercial real estate were more than 5% higher, at € 36.8 billion. Our outstanding position in real estate financing has been highlighted once again by the magazine “Euromoney”, which awarded Eurohypo the title of “Best Global Commercial Bank in Real Estate”. At the same time, the bank has been recognized – for the third consecutive year – as the no. 1 mortgage bank in Germany. Letter to Shareholders 3 Letter to Shareholders Board of Managing Directors of Managing Directors Board In line with the success of commercial real estate business, our Public Finance segment recorded a 29% rise in new business, to € 20.2 billion. We have expanded our range of derivative financial instruments.