2017 Annual Financial Statements and Management Report of DZ BANK AG DZ BANK AG 1 2017 Annual Financial Statements and Management Report Contents Contents 02 Management report of DZ BANK AG 06 DZ BANK AG fundamentals 16 Business report 30 Events after the balance sheet date 32 Human resources report and sustainability 38 Outlook 44 Combined opportunity and risk report 152 Annual financial statements of DZ BANK AG 154 Balance sheet as at December 31, 2017 156 Income statement for the period January 1 to December 31, 2017 158 Notes 212 Responsibility statement 213 Independent auditors’ report (translation) 2 DZ BANK AG 2017 Annual Financial Statements and Management Report Management report of DZ BANK AG Contents Management report of DZ BANK AG 06 DZ BANK AG fundamentals 30 Events after the balance sheet date 06 Business model 32 Human resources report 07 Strategic focus as a network-oriented and sustainability central institution and financial services group 32 Human resources report 07 Cooperative Banks / Verbund 32 HR work in the year of the migration 08 Corporate Banking 32 Professional development 08 Retail Banking 32 Training and development of young talent 09 Capital Markets 33 Health management 09 Transaction Banking 33 Work-life balance 33 TeamUp trainee program 10 Management of DZ BANK 33 ‘Verbund First’ career development program 10 Management units 33 Corporate Campus for Management & Strategy 10 Governance 34 DZ BANK Group’s employer branding campaign 13 Key performance indicators 34 Employer awards 13 Management process 34 Declaration on corporate governance 36 Sustainability 16 Business report 16 Economic conditions 38 Outlook 16 The banking industry amid continued 38 Economic conditions efforts to stabilize the economy of the 38 Global economic trends eurozone 38 Trends in the USA 38 Trends in the eurozone 19 Financial performance 39 Trends in Germany 19 Financial performance at a glance 39 Trends in the financial sector 20 Financial performance in detail 27 Number of branches 40 Changes in financial position and financial performance 27 Net assets 40 Financial performance 40 Liquidity 28 Financial position DZ BANK AG 3 2017 Annual Financial Statements and Management Report Management report of DZ BANK AG Contents 44 Combined opportunity 87 Bank sector and risk report 87 Credit risk 44 Disclosure principles 87 Definition and business background 88 Risk strategy 45 DZ BANK Group 88 Organization, responsibility, and risk reporting 88 Risk management 45 Summary 96 Specific risk factors 45 Statements from the Board of Managing Directors 96 Lending volume 45 Opportunity and risk management system 103 Credit portfolios with increased risk content 48 Risk factors, risks, and opportunities 106 Non-performing lending volume 108 Allowances for losses on loans and advances 49 Fundamental principles of managing 110 Risk position opportunities and risks 111 Summary and outlook 49 Regulatory framework for risk management 49 Risk strategies 112 Equity investment risk 52 Risk appetite 112 Definition and business background 53 Opportunity and risk-oriented corporate governance 112 Risk strategy and responsibility 58 Risk management tools 112 Risk management 112 Specific risk factors 64 Opportunities 113 Risk position 64 Management of opportunities 64 Potential opportunities 113 Market risk 113 Definition and business background 65 General risk factors 113 Risk strategy 65 Market and sector risk factors 115 Organization, responsibility, and risk reporting 71 Overarching bank-related risk factors 115 Management of market risk 118 Management of market liquidity risk 72 Liquidity adequacy 118 Specific risk factors 72 Principles 119 Risk position 72 Economic liquidity adequacy 119 Summary and outlook 77 Regulatory liquidity adequacy 78 Outlook 120 Technical risk of a home savings and loan company 78 Capital adequacy 120 Definition and business background 78 Principles 121 Risk strategy and responsibility 79 Economic capital adequacy 121 Risk management 82 Regulatory capital adequacy 121 Specific risk factors 86 Stress tests for types of risk covered by capital 121 Risk position 4 DZ BANK AG 2017 Annual Financial Statements and Management Report Management report of DZ BANK AG Contents 122 Business risk 135 Management of health actuarial risk 122 Definition and business background 136 Management of non-life actuarial risk 122 Organization and risk management 138 Specific risk factors 122 Specific risk factors 138 Claims rate trend in non-life insurance 123 Risk position 138 Risk position 139 Summary and outlook 124 Reputational risk 124 Definition and business background 139 Market risk 124 Risk strategy and responsibility 139 Definition and business background 124 Risk management 140 Risk management 124 Specific risk factors 143 Specific risk factors 143 Lending volume 124 Operational risk 145 Credit portfolios with increased risk content 124 Definition and business background 145 Risk position 125 Risk strategy 146 Summary and outlook 125 Organization, responsibility, and risk reporting 125 Central risk management 146 Counterparty default risk 126 Management of special risks 146 Definition and business background 130 Loss events 146 Risk management 131 Risk position 147 Specific risk factors 131 Summary and outlook 147 Risk position 131 Insurance sector 147 Operational risk 147 Definition and business background 131 Basic principles of risk management in the 147 Risk management Insurance sector 148 Specific risk factors 131 Risk strategy 149 Risk position 132 Organization, responsibility, and risk reporting 149 Risks from non-controlling interests in 133 Actuarial risk insurance companies and from entities in 133 Definition and business background other financial sectors 134 Management of life actuarial risk DZ BANK AG 5 2017 Annual Financial Statements and Management Report Management report of DZ BANK AG Contents Note DZ BANK AG Deutsche Zentral-Genossenschafts- bank, Frankfurt am Main, (DZ BANK) implements the transparency requirements as specified in section 289 of the German Commercial Code (HGB) with the publication of this management report. In addition, the report satisfies German accounting standard no. 20 (Group Management Report), which relates to management reports that apply at group level. All figures are rounded to the nearest whole num- ber. This may result in very small discrepancies in the calculation of totals and percentages. 6 DZ BANK AG 2017 Annual Financial Statements and Management Report Management report of DZ BANK AG DZ BANK AG fundamentals I DZ BANK AG fundamentals 1 Business model DZ BANK AG Deutsche Zentral-Genossen- schaftsbank, Frankfurt am Main, (DZ BANK) focuses closely on the local cooperative banks, which are its customers and owners. The DZ BANK Group makes a significant contribution to helping the cooperative banks strengthen their market position by providing them with competitive products and services on a decentralized basis for incorporation into their end- customer business. The focus on network-based business is always given priority, especially in times when resources are in short supply. In its role as a corporate bank, DZ BANK offers complementary services using existing products, platforms, and support activities. These services are constantly reviewed both from a strategic perspective (for example, so that there is no direct competition with the cooperative banks) and from an economic perspective (for example, so that the returns are appropriate and the risk acceptable). DZ BANK AG 7 2017 Annual Financial Statements and Management Report Management report of DZ BANK AG DZ BANK AG fundamentals 2 Strategic focus as a network-oriented systems at DZ BANK over a period of twelve months. central institution and financial services The implementation of the target organizational group structure also made great progress, to the extent that all 28 departments of DZ BANK had been Strengthening the market position of the cooperative reorganized into the target structure by the end of the banks is a key factor for the success of the Volksbanken final stage of the implementation on January 1, 2018. Raiffeisenbanken cooperative financial network. DZ BANK supports the pursuit of this objective In the next step, DZ BANK aims to refine the within the framework of its network-focused governance structure along the lines of a holding corporate strategy based on the principles of company model. During the course of 2018, it will subsidiarity, decentralization, and regional market firstly set up a central advisory council – as specified in responsibility. It is guided by its overarching mission the merger agreement – to ensure that the primary as a network-oriented central institution and financial banks’ involvement in, and influence over, strategic services group, within which its activities are shaped decisions is safeguarded and expanded over the long by a three-pronged strategy with a systematic focus term. Over the next two years, the responsibilities for on growth in accordance with the needs of the the holding company activities and those for the cooperative financial network, a continuation of the corporate bank activities within DZ BANK will be focusing of business activities, and integration within separated from each other as far as possible. The the network and with the cooperative banks. configuration from a legal perspective requires further extensive preparations and checks to be carried out, Against a backdrop of advancing digitalization, particularly with regard to separating DZ BANK’s