Annual Report 2012 Portigon Group Key Figures 1. 1. – 31. 12. 2012 1. 1. – 31. 12. 2011 Change absolute percentage Performance figures in € millions Net interest income 756 1,102 – 346 – 31 Impairment charge for credit losses – 127 – 95 – 32 – 34 Net interest income after impairment charge for credit losses 629 1,007 – 378 – 38 Net fee and commission income 305 365 – 60 – 16 Net trading result – 706 300 – 1,006 > – 100 Result from financial investments – 16 – 283 267 94 Administrative expenses 856 987 – 131 – 13 Other operating expense and income 3 75 – 72 – 96 Restructuring expenses 351 440 – 89 – 20 Net expense from spin-offs 364 0 364 – Profit/loss before income tax – 1,356 37 – 1,393 > – 100 Income taxes 6 – 85 91 > 100 Profit/loss after income tax – 1,350 – 48 – 1,302 > – 100 Dec. 31, 2012 Dec. 31, 2011 Change absolute percentage Balance sheet figures in € billions Total assets 98.7 167.9 – 69.2 – 41 Equity 2.4 3.0 – 0.6 – 20 Bank regulatory capital ratios Core capital in € billions 3.0 4.3 – 1.3 – 30 Own funds in € billions 4.6 6.7 – 2.1 – 31 Risk-weighted assets in € billions 2.8 48.3 – 45.5 – 94 Core capital ratio in % 109.3 8.8 – – Overall ratio in % 167.7 13.8 – – Employees Number of employees 2,776 4,429 – 1,653 – 37 Full-time employees 2,624 4,188 – 1,564 – 37 Current ratings Short term Long term Public Pfandbrief Fitch Ratings F1+ A+ – Contents Portigon Group Key Figures Chairman’s Statement 2 The Managing Board 4 Transforming a Systemically Relevant Bank into a Portfolio Servicer 6 A Changing Financial Industry 10 Portigon Financial Services – The Independent Portfolio Servicer 14 Financial Report 2012 21 Audit Opinion 147 Responsibility Statement 149 Report of the Supervisory Board 150 Corporate Governance at Portigon AG 156 Locations 160 Glossary 161 Contact Addresses/Disclaimer 1 Chairman’s Statement The 2012 financial year marks a historic turning-point for Portigon AG: On July 2, 2012 the company relinquished the name WestLB, bringing to a close a history of banking activity dating back 180 years. Today Portigon operates in the market as an independent portfolio servicer. This means that we have fully implemented the decision of the European Commission of December 20, 2011. Together with our former owners and Landesbank Hessen-Thüringen (Helaba), Erste Abwicklungsanstalt (EAA) and the Federal Agency for Financial Market Stabilisation (FMSA), we signed the agreements to this effect within the set time limit of mid-2012. These agreements governed the transfer of the Verbundbank to Helaba as well as the transfer to EAA of all portfolios that were neither sold nor formed part of the Verbundbank by June 30, 2012. With the entry in the commercial register on September 17, 2012, the transfers to Helaba and EAA became legally effective. The present financial statements therefore essentially reflect the effects of the radical transformation and expenses incurred in connection with the restructuring of the bank. As already announced in the 2011 financial statements, Portigon ended the 2012 financial year with a negative result, posting an after-tax loss in the Group of € – 1.350 million. The current financial year will likewise be heavily influenced by the challenges involved in transforming the bank into an effective and flexible financial service provider. Thus, at the end of March we reached an agreement with NRW.BANK on the final reimbursement of pension provisions for employees of Portigon AG who are eligible to receive pension payments under a defined benefit pension plan. Moreover, we believe it is necessary to accelerate the process of downsizing the remaining parts of the Group. At the same time we are planning in the second half of 2013 to transfer our servicing activities into a separate subsidiary which, precisely adjusted to market requirements, will then be equipped with the necessary resources and positioned in the market. Of one thing we are certain: Portigon’s service profile is highly attractive for many companies in the financial industry. The entire sector is currently undergoing a fundamental and irreversible period of change. Numerous financial institutions are being obliged to thoroughly overhaul their business models, reduce operating and personnel costs and divest themselves of activities which no longer form part of their core business. Compared with other industries, the production depth at banks and other financial enterprises traditionally remains high. However, the industrialisation of the banking sector, too, is gathering momentum. Business processes which can reasonably be standardised are increasingly being wholly or partially outsourced to specialised third parties that focus, for example, on distribution, transaction banking or portfolio servicing. There is a need for service providers who are able to shape and accompany this process of change. 2 Chairman’s Statement However, this pressure for change not only results from the need to reduce costs. The high degree of specialisation offered by servicers at the same time ensures access to new technologies, a better infrastructure and broad expertise. Financial enterprises which rely on such a strategy can bring their core expertise to bear in the market more effectively and strengthen their competitive position. In this process, Portigon views itself as a professional partner of its customers. As a former international universal bank, we have detailed knowledge of the needs and requirements of our customers, support them as an experienced partner and help to lay the foundation for long-term success. As a reliable, professional and above all autonomous service provider, we offer service packages tailored to suit the needs of the market. In doing so, we rely on our efficient platforms as well as our profound expertise in a wide variety of banking products. In an unprecedented effort our employees demonstrated over the past year that it is possible to withdraw a globally operating universal bank – closely interwoven with the international financial sector – from the market without any problems. The efficiency of Portigon is evidenced, moreover, by the successful cooperation with EAA and Helaba. On behalf of the employees of Portigon AG, the Managing Board expresses its gratitude to all clients and business partners for their continued loyalty and support in these challenging times. Yours, Dietrich Voigtländer Chairman of the Managing Board 3 Managing Board Managing Board of Portigon AG Dietrich Dr. Kai Wilhelm Stefan Voigtländer Franzmeyer Dreesbach Chairman of the Managing Board Member of the Managing Board Member of the Managing (CEO) since September 2009. (CFO/CRO) since August 2012. Board since October 2012. Responsible for Operations Responsible for Finance Services, Responsible for Customer Services, IT Services, Corporate Risk Services, Credit Services, Services and Capital Markets. Services/Compliance, Audit, Controlling & Tax, Loan & Portfolio Previously Head of Debt Group Services and Restructuring. Management and HR. Markets and General Manager Previously a member of the Previously Senior Advisor with of London Branch; Managing Managing Board of DZ Bank AG. Bain & Company; member of Director of Royal Bank of Aged 54 the “task force” delegated to the Scotland and Executive Managing Board of Hypo Real Director of Goldman Sachs. Estate Holding AG. Aged 40 Aged 49 4 Managing Board From left to right: Dr. Kai Wilhelm Franzmeyer, Dietrich Voigtländer, Stefan Dreesbach 5 Transformation TRANSFORMATION 6 Transformation McKinsey & Company, Annual Review of the Banking Industry, October 2012: To improve productivity through­ out the sector, banks must embrace the changes that have already taken place in other industries – this begins with standardised products which at the same time meet clients’ needs, as well as leaner operating processes with strategic procurement and digi­ tised processes. What we require is an entirely new culture of total process transparency and control. The time has come to take a giant leap forwards; economic pressure and technological potential form the basis for change. 7 Transformation Transforming a Systemically Relevant Bank into a Portfolio Servicer The 2012 financial year was clearly dominated by the transformation of WestLB. A systemically relevant, globally operating wholesale bank was successfully removed from the market without negative consequences for the money and capital markets, clients and investors. At the same time, Portigon AG, an identical legal entity to WestLB, was established with a new business objective as a portfolio servicer. Until just a few years ago, WestLB was one of Germany’s five largest banks. Within a decade it went through an unprecedented restructuring process: • More than 10,000 full-time employees have been cut since 2001, • risk-weighted assets have been reduced by more than 90% since 2007, • almost 20 locations in Germany and abroad have been closed since 2009 and • a portfolio comprising more than 200 participations has been almost entirely phased out since the beginning of 2009. The restructuring entered the final phase in the course of 2012. In a challenging market environment, further participations and businesses were sold off. The focus throughout was on supporting continuity in the business relationships with clients and investors and securing jobs for employees. Portigon AG is born With retrospective effect as of July 1/January 1, 2012 Sales Sectoral/regional sales Verbundbank • Savings-bank-related business with SMEs and public-sector clients Transfer • Depot A and B, certificates, Pfandbriefe • Total assets of € 40 billion, 417 employees • Portfolios not transferred to Verbundbank Transfer Erste and not sold to third parties Abwicklungsanstalt • Transferred volume of € 90 billion Implementation of new business model Identical legal entity as international portfolio servicer A key element of the transformation was the transfer of the Verbundbank activities, including payment transactions and custodian functions, to Landesbank Hessen-Thüringen (Helaba). In the context of the transformation Helaba acquired total assets of approximately € 40 billion, risk-weighted assets of € 8.3 billion and 417 employees.