Facts | Figures BAYERNLB | 2011 ANNUAL REPORT AND ACCOUNTS SEPARATE FINANCIAL STATEMENTS BayernLB . 2011 Annual Report and Accounts BayernLB’s financial statements at a glance Income statement (HGB) 1 Jan – 31 Dec 1 Jan – 31 Dec EUR million 2011 2010 Change in % Net interest income 1,611 1,423 13.2 Net commission income 159 158 0.6 Net income from the trading portfolio – 50 157 Administrative expenses – 735 – 765 – 4.0 Operating profit/loss – 97 455 Balance sheet (HGB) EUR million 31 Dec 2011 31 Dec 2010 Change in % Total assets 256,728 279,346 – 8.1 Business volume 293,743 318,961 – 7.9 Credit volume 162,132 175,660 – 7.7 Total deposits 110,840 129,159 – 14.2 Securitised liabilities 79,019 87,215 – 9.4 Reported equity 19,181 20,441 – 6.2 Banking supervisory ratios under the German Banking Act (KWG) EUR billion 31 Dec 2011 31 Dec 2010 Change in % Core capital 12.5 13.1 – 4.6 Own funds 17.9 18.8 – 4.8 Risk positions under the Solvency Ordinance 85.8 94.0 – 8.7 Core capital ratio 14.6% 13.9% 0.7 pp1 Own funds ratio (overall ratio) 20.8% 20.0% 0.8 pp1 1 Percentage points Employees EUR million 31 Dec 2011 31 Dec 2010 Change in % Number of employees 4,139 4,184 – 1.1 ›› 2 Contents BayernLB . 2011 Annual Report and Accounts ›› Contents 3 4 Report by the Board of Administration 10 Management report 12 Overview 19 Financial position and performance 25 Events after the end of the reporting period 26 Outlook 29 Risk report 54 Financial statements 56 Balance sheet 60 Income statement 62 Notes 109 Responsibility statement by the Board of Management 110 Auditor’s Report 112 Committees and advisory boards 114 General Meeting 115 Board of Administration 116 Audit Committee 116 Risk Committee 117 Trustees 117 Savings Bank Advisory Council 118 Economic Advisory Council 122 Locations and addresses BayernLB . 2011 Annual Report and Accounts ›› 4 Report by the Board of Administration BayernLB . 2011 Annual Report and Accounts ›› Report by the Board of Administration 5 BayernLB . 2011 Annual Report and Accounts ›› 6 Report by the Board of Administration Due to the persistently difficult and volatile market environment for banks, the deterioration in the European sovereign debt crisis and extraordinary impact on earnings from government inter- ference in Germany and Hungary (e.g. the restructuring law, bank levy and Foreign Currency Loan Repayment Law), 2011 was another very challenging year for BayernLB. Nevertheless, further pro- gress was made in implementing the Board of Administration-approved corporate strategy, and customer-driven business was buoyant. In its home market, BayernLB carved out a clear position for itself and further strengthened and expanded its role as a lender to companies in Bavaria and the rest of Germany. Systematically implementing the new business model by focusing on serving customers formed the highest strategic priority for the Board of Management and Board of Administration. The Board of Administration regularly monitored the Board of Management and advised it on the management of the business throughout the course of the year. The Board of Management provided the Board of Administration and the Audit and Risk Committees formed from among its members with regular, up-to-date and comprehensive verbal and written reports on the Bank’s business policy and general issues related to corporate planning, particularly financial, invest- ment and human resource planning. The Board of Management also provided the Board of Administration with regular, comprehensive and up-to-date information on the Bank’s perfor- mance, focusing especially on earnings, expenses, risks, liquidity and capital status, legal and business relations with affiliated companies, and material events and business transactions, particularly in the case of affiliated companies. The Board of Management also kept the Board of Administration abreast of the ongoing state-aid proceedings and attendant negotiations with the EU Commission. The two boards held in-depth discussions with each other on the potential impact of the proceedings on the Bank’s business policy. The Board of Administration also looked at the plethora of changes to the legal and regulatory framework and their potential impact on BayernLB and its subsidiaries. Items on the agenda included bank levies in Germany and Hungary, the restructuring law, and the European Banking Authority’s stress test. In the second half of the year, the Board of Administration devoted much of its attention to the macro-economic situation in Hungary and the actions taken by the govern- ment there. The negative impact of extraordinary items resulting from the Foreign Currency Loan Repayment Law and the Hungarian government’s bank levy – a tax which is not assessed on the basis of earnings – made a capital increase necessary for MKB Bank Zrt. by 31 March 2012. In an extraordinary meeting in December 2011, the Board of Administration gave its approval for the Board of Management to provide the necessary funds to cover MKB’s capital requirements as soon as the EU Commission agrees. Over the course of the year ten meetings were chaired by Mr Fahrenschon, who stepped down on 3 November 2011, and three by his successor Dr Söder. The chairmen of both the Audit Committee and Risk Committee regularly reported on the com- mittees’ work to a full session of the Board of Administration. BayernLB . 2011 Annual Report and Accounts ›› Report by the Board of Administration 7 Under its chairman Dr Klaus von Lindeiner-Wildau, the principal duties of the Audit Committee are to monitor the accounting process and the effectiveness of the internal control system, the internal auditing system, the system used for risk management and the audit of the annual finan- cial statements and of the consolidated financial statements, and to review and monitor the inde- pendence of the auditors, particularly the additional services performed by the auditors for the Bank. The Board of Administration assigned additional duties to the Audit Committee. During the year, for example, the Audit Committee received updates on the work of Internal Audit and Com- pliance. It also considered assessments on the threats from money laundering and financial crime and what the focuses of the audit of the 2011 Annual Report should be as permitted by Section 30 of the German Banking Act. The Audit Committee played a full role in the process to select the new auditors for the 2012 annual financial statements relating to the Bank, Group, BayernLabo and LBS Bayern. The Audit Committee and Board of Administration both recommended appointing Deloitte & Touche GmbH Wirtschaftsprüfungsgesellschaft to be the auditors for 2012, and this was confirmed in a resolution by the General Meeting. The Audit Committee held four meetings in 2011. Under its chairman Alexander Mettenheimer, the Risk Committee has been involved in all major issues relating to the risk strategy established by the Board of Management and to BayernLB’s risk situation at both the Group and Bank level. It discussed and approved the risk and sub-portfolio strategies defined by the Board of Management Group-wide, discussed the reports by the Board of Management on BayernLB’s performance in relation to the risk situation (particularly risk- bearing capacity), and decided on all loans requiring approval by the Board of Administration. In 2011 the Risk Committee considered the progress of the Restructuring Unit (particularly the ABS portfolio), the analysis of the impact of Basel III and the implementation status of the third amendment to the MaRisk regulations at BayernLB. Other areas it looked at in detail included the European sovereign debt crisis and its impact on the banking sector in general and on the Bank in particular. The Risk Committee held six meetings in 2011. The chairman of the Board of Management promptly informed the chairman and deputy chairmen of the Board of Administration about any events that were of material significance in assessing the Bank’s situation and performance. The regulatory requirements governing the reporting by the Board of Management of irregularities identified by Internal Audit were met. At their various meetings the Board of Administration, Audit Committee and Risk Committee passed the resolutions required by law and under the Statutes and the Rules of Procedure of the respective committees. In addition, important issues and pending decisions were also discussed in regular meetings between the chairmen of the Board of Administration and Board of Manage- ment. Meetings were held both in person and in the form of telephone conferences. When necessary, resolutions were also passed between meetings using a circulation procedure. BayernLB . 2011 Annual Report and Accounts ›› 8 Corporate governance The BayernLB Corporate Governance Principles set out the regulations on corporate management and supervision that apply to BayernLB on the basis of binding and in-house regulations. In its meeting of 23 January 2012, the Board of Administration discussed compliance with these corporate governance principles in 2011. It agreed with the Board of Management that it was aware of no evidence that these principles had not been observed. The General Meeting passed a resolution to the same effect. In moving from the old Landesbank model to become a customer-focused commercial bank, BayernLB has opted to make changes so that its corporate governance is more commercially orientated. Board members Various changes occurred in the composition of the Board of Administration in 2011. Mr Georg Fahrenschon ceased to be a member of the Board of Administration on 3 November when he stepped down as the Bavarian Finance Minister. He was succeeded as chairman by Dr Markus Söder, the new Bavarian Finance Minister. Mr Diethard Irrgang ceased to be a member of the Board of Administration on 15 August 2011 after a new employee representative was chosen in the Staff Council elections.