Annual Report and Accounts
2003
Bayerische Landesbank Group at a glance
Performance
01/01/ – 31/12/2003 EUR million
01/01/ – 31/12/2002 EUR million
2,169
2,223
–2.4
Net commission income
343
387
–11.5
Administrative expenses
–1,185
–1,331
–11.0
Net result from financial transactions
105
140
–25.0
Operating result
547
203
>100.0
Net income for the year
79
255
–68.9
Allocation to revenue reserves/ profit shares of minority shareholders
16
198
–92.0
Cost-income ratio
45.3%
48.4%
–6.4 (–3.1 Pp**)
Return on equity
4.9%
4.3%
14.0 (0.6 Pp**)
31/12/2003 EUR million
31/12/2002 EUR million
Change in %
Total assets
313,431
341,297
–8.2
Lending volume
223,960
240,036
–6.7
Total deposits
185,233
199,600
–7.2
Securitised liabilities
95,597
108,174
–11.6
Equity disclosed
17,177
18,049
–4.8
Net interest income*
Balance sheet figures
Derivatives transactions Nominal volume Credit risk equivalent
Key banking regulatory data under the German Banking Act (balance sheet figures) Own funds Core capital ratio Own funds ratio (group level)
Number of employees
Change in %
31/12/2003 EUR million
31/12/2002 EUR million
Change in %
934,243
1,141,946
–18.2
8,191
9,530
–14.1
31/12/2003 EUR million
31/12/2002 EUR million
Change in %
15,468
17,660
7.8%
6.4%
21.9 (1.4 Pp**)
11.3%
10.3%
9.7 (1.0 Pp**)
31/12/2003
31/12/2002
–12.4
Change in %
Bank
5,543
5,932
–6.6
Group
9,061
9,605
–5.7
* As from 2003 interest expenditure for capital contributions of silent partners will be disclosed under partial profit transfer (appropriation of profits) which is in line with other landesbanks. ** Percentage points
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Contents
Section I
Board of Management and executive bodies
04
Section II
Report on the Bank and the Group
15
Section III
Business area and support operations activities
49
Section IV
Our staff
89
Section V
Public sector mandate
95
Section VI
Report by the Board of Administration, accounts and notes on the accounts
101
Section VII
Advisory Boards and addresses
159
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Contents
Board of Management and executive bodies
4
Foreword by the Board of Management Profile Sparkassenfinanzgruppe Bayern Organisation Chart BayernLB, Board of Management Board of Administration Financial Statements Audit Commitee General Meeting BayernLB – Holding AG Board of Management of BayernLB Holding AG Supervisory Board of BayernLB Holding AG
4 6 7 8 9 10 11 13 13 13
Report on the Bank and the Group
15
Overview Global economy has bottomed out Financial sector in Germany: Changes still required New strategy for BayernLB Participations portfolio – changes and transactions Institutional security agreement of the German Savings Bank Organisation Our staff Environmental protection Management report Assets, liabilities and financial position Regulatory capital and reserves Earnings position Segment results Outlook Risk report Counterparty risk Investment risk Country risk Liquidity risk Market price risk Operational risk Summary and outlook
15 15 15 17 19 20 21 22 22 22 25 25 29 30 32 33 38 38 41 42 45 47
Business area and support operations activities
49
Business area activities Corporates Financial Institutions & Sovereigns Landesbodenkreditanstalt (Labo)
49 49 53 57
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Real Estate Bayerische Landesbausparkasse (LBS) Global Markets Savings Banks, Bavarian Municipals/Corporates Support operations activities Risk Office Corporate Services Corporate Center
59 62 64 68 71 71 75 78
Our staff
89
Structural and personnel changes Cultivating fresh talent: Opportunity and systematic training as success factors Internal communication Further revisions in personnel-related instruments – Outlook for 2004 Our thanks to the Staff Council
89 91 92 93 93
Public sector mandate
95
Corporate responsibility Environmental protection Culture and the Arts
95 96 98
Report by the Board of Administration, accounts and notes on the accounts
101
Report by the Board of Administration Balance sheet and profit and loss account Consolidated balance sheet and profit and loss account Consolidated statement of changes in shareholders’ equity Cash flow statement for the Group Segment report Group Notes to the Accounts and Consolidated Accounts
101 105 115 123 124 126 128
Advisory Boards and addresses
159
Trustees Economic Advisory Council Savings Bank Advisory Council In Memoriam Domestic locations International locations Subsidiaries of the Bank
159 160 162 163 164 164 165
A glossary is available on our website www.bayernlb.de under „Press“.
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Section I
4
Board of Management and executive bodies Foreword by the Board of Management Ladies and Gentlemen, Dear Friends, The year 2003 will be remembered as a pivotal point for the German economy. In the spring of that year the three-yearlong stock market slump came to an end. In the summer, a sluggish phase that had also persisted for three years was finally overcome. And in the autumn, the economic policy reforms began picking up pace when parts of what is referred to as the Agenda 2010 were passed. But even in the beginning of 2004, the economic upswing in Germany is still far from being self-propelled and prevalent. The reforms that have been introduced will only promote sustained growth and employment if they are carried forth swiftly and determinedly. As the company insolvencies recorded in 2003 were the result of the economic situation prevailing before that period, there were still no signs of alleviation in that year. German banks therefore posted large-scale write-offs from their credit operations, albeit to a somewhat lesser degree than in the “record-breaking” year 2002. The ensuing rise in operating profits was also due to lower costs. Last autumn, the International Monetary Fund emphasised the importance of higher bank revenues for the stability of the German financial system.
During the third convention on the new equity capital requirements (Basel II) the German representatives were successful in having the circumstances peculiar to corporate financing taken into more consideration. In view of the imminent withdrawal of the guarantee mechanisms and the resulting environment for the business activities of our Bank, sweeping changes to BayernLB’s business strategy, structure and control systems were initiated in 2002 and continued in the year under review. We are convinced that if our new business model is applied with consistency, the Bank will be afforded a good opportunity to strengthen its earnings capacity on a long-term basis and attain a competitive rating. There is still a great deal to be accomplished, however, before we can achieve the target rating of A+ after the abolition of the state guarantees. The requisite reductions are just as urgent as they are profound and will require a great amount of effort on our part in 2004 as well. Nevertheless, we firmly believe that BayernLB, with its new business model
5
focusing on Bavaria and its bordering regions, will be successful in the future. The solid retail activities of Landesbausparkasse, Landesbodenkreditanstalt, the credit card business and the Deutsche Kreditbank AG, SaarLB, Hungarian Foreign Trade Bank (MKB), LB(Swiss) Privatbank AG and Banque LBLux S.A. group companies will help promote this success. At the same time, BayernLB will retain its international presence. Together with the Bavarian savings banks, we will establish and expand our market position on the basis
of our business with customers in the core market of Bavaria. The realignment of the Bank in 2003 was only possible with the trust of our customers, the support of the owners and the unfailing commitment of our staff. Our heartfelt gratitude goes out to them all. Sincerely, Bayerische Landesbank (BayernLB) Board of Management
Werner Schmidt
Dr. Peter Kahn
Chairman
Deputy Chairman
Werner Strohmayr
Dr. Rudolf Hanisch
Dieter Burgmer
Theo Harnischmacher
Stefan W. Ropers
Dr. Gerhard Gribkowsky
Section I
Board of Management and executive bodies
6
Profile Bayerische Landesbank (BayernLB) was founded in 1972 with the merger of Landesbodenkreditanstalt and Bayerische Gemeindebank. It is one of the largest banks in Germany and has the legal status of a “corporation established under public law“. BayernLB is (indirectly) owned by the Free State of Bavaria and the Association of Bavarian Savings Banks, each with a 50% stake. In 2002, the two owners transferred their holdings in BayernLB to BayernLB Holding AG in exchange for 50% each of the shares. BayernLB Holding AG is entrusted with the duties of the sole shareholder of BayernLB and is not a bank itself (see diagram of the holding structure on p.13). BayernLB is subject to legal supervision by the Bavarian State Ministries of Finance and the Interior as well as the German Financial Supervisory Authority (BaFin) and the Deutsche Bundesbank. BayernLB is the central bank to the Bavarian savings banks and an important member of the Sparkassen-Finanzgruppe Bayern. It is a service provider for the partner institutes of the Sparkassen-Finanzgruppe, acting as their network bank and enabling them, with its support and product policies, to exploit existing market potential in the Bavarian market together with the savings banks.
In addition, BayernLB functions as a principal bank to the Free State of Bavaria and actively supports national and local governments, financial institutions, medium and large companies and real estate customers. It is also one of the major issuers of bonds in Germany. Bayerische Landesbodenkreditanstalt (Labo) and Bayerische Landesbausparkasse (LBS), both legally dependent institutions, are integral parts of the Bank. BayernLB is a financial service provider that is focused on its core market of Bavaria and the bordering regions while also being present in selected financial centres around the world. Two key elements of BayernLB’s business model are the elaboration of its central bank function to the savings banks and, in connection with that, the further intensification of its joint market development with the Bavarian savings banks. For this purpose a number of agreements were signed by the individual savings banks and BayernLB which will increase their economic efficiency by providing for jointly-developed solutions while strengthening the market position of the Sparkassen-Finanzgruppe Bayern.
7
Sparkassen-Finanzgruppe Market leader in Bavaria Aggregated total assets banking business EUR 466 billion
Aggregated premium volume insurance business EUR 4.8 billion
Staff 65,084
82 savings banks
Bayerische Landesbank
Versicherungskammer Bayern
Aggregated total assets: EUR 153 billion
Consolidated total assets: EUR 313 billion
Staff: 50,451
Staff: Bank 5,543 Group 9,061
Branches: 2,799 Self-service branches: 242 Advisory centres: 287
Bayerische Landesbausparkasse Portfolio of 2,030,599 building-saving contracts with a volume of EUR 42.7 billion
Staff: 5,572
Premium volume: EUR 4.8 billion
Investment portfolio: EUR 26.3 billion
Bayerische Landesbodenkreditanstalt Loan volume: EUR 15.1 billion Subsidised contracts: 17,459 homes 1,713 places in homes
Sparkassenverband Bayern Association members: 82 Bavarian savings banks and their guarantors Joint owners and guarantors of Bayerische Landesbank together with the Free State of Bavaria. Owners and guarantors of Versicherungskammer Bayern
Organisation Chart BayernLB, Board of Management* Corporate Center
Savings Banks, Bavarian Municipals/ Corporates
Corporates
Financial Institutions & Sovereigns
Real Estate
Werner Schmidt
Theo Harnischmacher,
Stefan Ropers
Dr. Rudolf Hanisch
Dr. Peter Kahn
Chairman of the Board
Member of the Board
Member of the Board
Member of the Board
Deputy Chairman
of Management
of Management
of Management
of Management
of the Board of Management
Law Division
Savings Banks,Bavarian
Global Corporate Banking
Financial Institutions &
Bayerische Landesbank
Walther Schmidt-
Municipals/Corporates
Division
Sovereigns Division
Real Estate Division
Lademann
Division
Dr. Detlev Gröne
Michael von Hallwyl
Michael Doranth
(BA Spokesman),
(BA Spokesman),
Dr. Theodor Klotz,
Jörg Bauer,
Stefan Unterlandstättner
Ernst Holland
Corporate Development / BoM Support Division Dr. Ralph Schmidt Press & Media Relations Division Peter Kulmburg Financial Accounting, Tax & Controlling Division Günther Kopf Personnel Division Dr. Wolfram Peitzsch Audit Division Peter Vökt Economics/ Research Division Dr. Jürgen Pfister
* Global responsibility
Karlheinz Müller, Thomas Neher
Global Structured Finance Division Frank Hahn
Global Markets
LBS Bayern
Bayerische Landesbodenkreditanstalt
Risk Office
Corporate Services
Dieter Burgmer
Dr. Peter Kahn
Dr. Rudolf Hanisch
Dr. Gerhard Gribkowsky
Werner Strohmayr
Member of the Board
Deputy Chairman
Member of the Board
Member of the Board
Member of the Board
of Management
of the Board
of Management
of Management
of Management
of Management Investor Relations
Bayerische
Bayerische
Credit Consult Division
Corporate IT Division
Hans Christoph Groscurth
Landesbausparkasse
Landesbodenkreditanstalt
Andreas Dörhöfer
Robert Berhof,
Dr. Franz Wirnhier
Gerhard Flaig (Manage-
(Management
ment Spokesman),
Spokesman),
Dr. Ulrich Kühn
Global Treasury & Funding Division Klaus Sturm
Wolfgang Kube, Equities Division Karl Filbert Global Trading & Sales II Division Jürgen Adamitza Global Trading & Sales I Division Florian Drexler
Risk Office Corporates/
Fritz Zehrer
Financial Institutions
Private & Transaction
Division
Banking Division
Thomas Hierholzer
Peter Greppmair,
Credit & Collateral
Dr. Dietrich Keymer,
Services Division
Otto Schwendner
Michaela Aumann
Corporate Organisation &
Risk Controlling &
Services Division
Procedures Division
Michael Ludwig,
Ulrich Ströhlein
Christian Seidel,
Helmut Straubinger
Risk Office Real Estate/ Structured Finance Division Peter Weidemann
Dieter Seipt
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Board of Administration*
Prof. Dr. Kurt Faltlhauser Chairman State Minister, Bavarian State Ministry of Finance Dr. Siegfried Naser First Vice Chairman Executive President of the Association of Bavarian Savings Banks Dr. Günther Beckstein Second Vice Chairman State Minister, Bavarian State Ministry of the Interior Hansjörg Christmann Third Vice Chairman Chief District Administrator of the District of Dachau First President of the Association of Bavarian Savings Banks
Alois Hagl (with effect from 1 May 2003) Chairman of the Board of Directors of Sparkasse im Landkreis Schwandorf Chief Representative of the Bavarian savings banks Hermann Regensburger (until 31 October 2003) Permanent Secretary (retired), Bavarian State Ministry of the Interior Georg Schmid (with effect from 1 November 2003) Permanent Secretary, Bavarian State Ministry of the Interior Klaus Weigert Deputy Secretary, Bavarian State Ministry of Finance
Josef Deimer Lord Mayor of the City of Landshut Chairman of the Bayerischer Städtetag
Prof. Hubert Weiler Chairman of the Board of Directors of Sparkasse Nürnberg
Gerhard Fleck (until 30 April 2003) Former Chairman of the Board of Directors of Sparkasse Bamberg Former Chief Representative of the Bavarian savings banks
Dr. Otto Wiesheu State Minister, Bavarian State Ministry of Economic Affairs, Infrastructure, Transport and Technology
* For the period from 1 January to 31 December 2003
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Board of Management and executive bodies
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Financial Statements Audit Committee*
Prof. Dr. Kurt Faltlhauser Chairman State Minister, Bavarian State Ministry of Finance
Hermann Regensburger (until 31 October 2003) Permanent Secretary (retired), Bavarian State Ministry of the Interior
Dr. Siegfried Naser Deputy Chairman Executive President of the Association of Bavarian Savings Banks
Georg Schmid (with effect from 2 December 2003) Permanent Secretary, Bavarian State Ministry of the Interior
Gerhard Fleck (until 30 April 2003) Former Chairman of the Board of Directors of Sparkasse Bamberg Former Chief Representative of the Bavarian savings banks
Professor Hubert Weiler Chairman of the Board of Directors of Sparkasse Nürnberg
Alois Hagl (with effect from 5 May 2003) Chairman of the Board of Directors of Sparkasse im Landkreis Schwandorf Chief Representative of the Bavarian savings banks
* For the period from 1 January to 31 December 2003
Dr. Otto Wiesheu State Minister, Bavarian State Ministry of Economic Affairs, Infrastructure, Transport and Technology
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11
General Meeting*
Dr. Siegfried Naser Chairman Executive President of the Association of Bavarian Savings Banks Prof. Dr. Kurt Faltlhauser Deputy Chairman State Minister, Bavarian State Ministry of Finance Dr. Michael Bauer (until 30 November 2003) Under-Secretary, Bavarian State Ministry of Finance Dr. Günther Beckstein State Minister, Bavarian State Ministry of the Interior Ludwig Bronold Chairman of the Board of Directors of Kreissparkasse Mühldorf Hansjörg Christmann First President of the Association of Bavarian Savings Banks Chief District Administrator of the District of Dachau Wolfgang Dandorfer Lord Mayor of the City of Amberg Gerhard Fleck (until 30 April 2003) Former Chairman of the Board of Directors of Sparkasse Bamberg Former Chief Representative of the Bavarian savings banks * For the period from 1 January to 31 December 2003
Heinrich Frey Chief District Administrator of the District of Starnberg Dr. Martin Geiger (until 30 April 2003) First Lord Mayor of the City of Wasserburg Martin Haf Deputy Chairman of the Board of Directors of Sparkasse Allgäu Alois Hagl (with effect from 1 May 2003) Chairman of the Board of Directors of Sparkasse im Landkreis Schwandorf Chief Representative of the Bavarian savings banks Rudolf Heiler (with effect from 1 May 2003) First Lord Mayor of the City of Grafing Dr. Erhard Hübener Chairman of the Board of Directors of Sparkasse Miltenberg-Obernburg Dr. Jörg Jung Under-Secretary, Bavarian State Ministry of the Interior Gebhard Kaiser Chief District Administrator of the District of Oberallgäu Norbert Kastner Lord Mayor of the City of Coburg
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Wolfgang Kelsch First Lord Mayor of Markt Wendelstein Andreas Knie Lord Mayor of the City of Kaufbeuren Dr. Joachim Kormann Deputy Secretary, Bavarian State Ministry of Economic Affairs, Infrastructure, Transport and Technology Harald Leitherer Chief District Administrator of the District of Schweinfurt Hans Lindner (until 31 August 2003) Chairman of the Board of Directors of Sparkasse im Landkreis Tirschenreuth Franz Meyer (with effect from 1 December 2003) Permanent Secretary, Bavarian State Ministry of Finance Josef Miller State Minister, Bavarian State Ministry of Agriculture and Forestry Matthias Nester Chairman of the Board of Directors of Sparkasse Mittelfranken-Süd
Helmut Reich Chief District Administrator of the District of Nürnberger Land Dr. Klaus-Jürgen Scherr (with effect from 1 September 2003) Chairman of the Board of Directors of Sparkasse Kronach-Ludwigsstadt Dr. Werner Schnappauf State Minister, Bavarian State Ministry for Environment, Health and Consumer Protection Dr. Walter Schön Deputy Secretary, Bavarian State Chancellery Christa Stewens State Minister, Bavarian State Ministry of Employment and Social Order, the Family and Women Dr. Reinhard Wieczorek Councillor of the City of Munich Friedrich Wimberger (with effect from 1 May 2003) Chairman of the Board of Directors of Sparkasse Landshut
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BayernLB – Holding AG Free State of Bavaria
Association of Bavarian savings banks
Shareholder
Option: Other shareholders
Shareholder each 50 % (at least 25.01 %)
max. 49.98 %
BayernLB Holding AG Entity entrusted with the holding of Bayerische Landesbank 100 %
Bayerische Landesbank Corporation established under public law without maintenance and guarantee obligation
Board of Management of BayernLB Holding AG Werner Schmidt Chairman of the Board of Management Bayerische Landesbank, Munich
Dr. Peter Kahn Board Member Deputy Chairman of the Board of Management Bayerische Landesbank, Munich
Dr. Rudolf Hanisch Board Member Member of the Board of Management Bayerische Landesbank, Munich
Supervisory Board of BayernLB Holding AG Dr. Siegfried Naser Chairman until 23 March 2004 Deputy Chairman with effect from 23 March 2004, Executive President of the Association of Bavarian Savings Banks Prof. Dr. Kurt Faltlhauser Chairman with effect from 23 March 2004 Deputy Chairman until 23 March 2004 State Minister, Bavarian State Ministry of Finance
Dr. Günther Beckstein State Minister Bavarian State Ministry of the Interior Dr. Otto Wiesheu State Minister Bavarian State Ministry of Economic Affairs, Infrastructure, Transport and Technology
Alois Hagl Chairman of the Board of Directors of Sparkasse Schwandorf Chief Representative of the Bavarian savings banks Dr. Uwe Brandl First Lord Mayor of the City of Abensberg President of the Bayerischer Gemeindetag
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Section II
Report on the Bank and the Group Overview
Moderate economic recovery
Global economy has bottomed out Uncertainty in connection with the war in Iraq, the concomitant increase in crude oil prices and the spread of SARS (Severe Acute Respiratory Syndrome) dampened the global economy at the beginning of 2003. But with the military action being halted, economic sentiment became brighter in the spring and the stock markets saw a rapid rise in prices following a persistent downtrend. From the middle of the year onward, this increased confidence was also reflected in production figures. In the United States and Japan particularly, recovery exceeded expectations. In Western Europe, by contrast, the economic recovery was slow during the second half of the year. This was due mainly to the lack of fervour in domestic demand, which in turn was the result of unresolved structural problems. In some of the industrialised nations this upswing was buttressed by a very expansive monetary policy. In others, particularly in the United States, it was also supported by enormous stimuli in the fiscal policy. By early summer 2003 capital market rates had dropped further as a result of a misguided debate on deflationary threats – and remained comparatively low for the remainder of the year. The international financial markets watched with increasing concern the huge twin deficit of the current account and federal budget of the United States. The resulting apprehension led to a significant depreciation of the dollar over the course of the year.
Amid a difficult international environment, the German economy remained stagnant until mid-2003, when it came out of a sluggish phase lasting three years in total. The effects of this extremely disappointing situation – a situation which hadn’t prevailed for decades – can be felt in the labour market, in the social security budgets as well as the budgets of the central, regional and local authorities and, finally, in the balance sheets of the banks.
15
Persistent stagnancy in Germany
The revival during the second half-year was weaker than in other industrial countries and was triggered mainly by foreign demand. The result for the year 2003 was again overall disappointing: Real gross domestic product contracted by 0.1 percent on average. In particular domestic demand remained weak. Private consumer spending, adjusted for price changes, decreased from the spring onward while investments did not recover until the last quarter. The crisis in the construction industry, which emerged in the mid-nineties, continued in 2003 with building investments shrinking by a real 3.4 percent. Owing to the unfavourable macroeconomic development, nearly another 400,000 jobs on balance were lost. Unemployment figures, averaging 4.4 million for the year, remained very high. Financial sector in Germany: Changes still required Following the turmoil at the end of 2002 and the beginning of 2003 the German banking industry managed to recuperate over the latter year. Restructuring measures and cost-cutting programmes began
Slight recuperation in the banking sector
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Report on the Bank and the Group
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to exert a positive impact, and risk provisioning was slightly lower than for the previous year. The difficult economic environment in Germany is also discernible in the credit business. Loans by German banks to companies and selfemployed individuals have been declining since the spring of 2002 whereas banks in other EMU countries have been expanding their credit volume. The reasons for the shrinking number of loans can be found on both the supply and the demand side. Corporate demand for credit went down during the economic slump while banks tightened their requirements placed on borrowers and tried to improve their margins. The savings banks and landesbanks in Germany have increased their credit volume on balance and in this way acquired additional private and corporate customers, thereby contributing to the stabilisation of the otherwise weak economy in the country. Securitisation initiative for loans
In the spring of 2003 BayernLB and twelve other German banks launched together with the Reconstruction Loan Corporation (KfW) a “true sale initiative” (TSI) for the securitisation of claims. Under a true sale securitisation, claims of one or several banks are pooled into a single portfolio and, after being divided into tranches with different degrees of risk, are placed on the market. For this purpose a securitisation platform run by several non-profit organisations is to be set up and supplemented by a service company. The KfW will act as facilitator and help promote viable securitisation markets in Germany.
Discussions on the future of the threepillar system, sparked by the earnings crisis in the German banking industry and the International Monetary Fund report on the stability of the German financial system, grew more vigorous in 2003. The importance of this model for the provision of banking services throughout all regions must not be disregarded. Moreover, the weak earnings posted by German banks are in all probability the result of the general economic development as well as strategic errors committed by certain institutions (in the fields of private, corporate and investment banking) rather than a consequence of the three-pillar model. As all customers are benefiting from the extremely intense competition in the German banking market, furthermore, no disadvantages to the German economy can be discerned in this model.
Three-pillar model
Cooperation across the three pillars is always desirable whenever synergy effects in non-competitive fields can be exploited by all parties involved. At the beginning of November 2003 the Sparkassen-Finanzgruppe Bayern and the HVB Group agreed on a cooperation in payment transactions. As a first step, all of HypoVereinsbank’s non-electronic payments will be outsourced to ServiceZentrum Bayern (SZB), a payment processing company owned by the Bavarian savings banks, as per 1 April 2004. Additional cooperations, for example in foreign and domestic electronic payments and in the securities business, are also being investigated and considered.
Cooperation across all pillars
The deadline originally set by the Basel Committee on Banking Supervision for
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Basel II – requirements and commencement of test phase
Landesbanks found joint Rating Service Unit
the planned revision of the capital requirements and controlling standards (Basel II) was not met. An ultimate resolution on the joint recommendation will purportedly be passed by mid-2004. How the deadline extension may affect Basel II’s coming into effect, which is still set for the end of 2006, remains unclear. BayernLB nevertheless took steps in 2003 towards satisfying the requirements defined in the drafts by the Basel Committee on Banking Supervision and will continue to do so throughout 2004 and 2005. Most of the activities targeted at revising the internal rating procedures were completed in 2003. In December of that year, BayernLB, DekaBank and seven other German landesbanks founded RSU Rating Service Unit GmbH & Co. KG. The mission of this company is to develop and refine systems and procedures for evaluating credit risks, in particular rating procedures and the related software. New strategy for BayernLB In view of the imminent abolition of the guarantee mechanisms and the resulting set of circumstances surrounding the Bank’s business activities, sweeping changes to BayernLB’s business strategy, structure and control systems were initiated in 2002 and continued in the year 2003.
Strategic targets
BayernLB’s strategy is to enhance its market position as a bank for ■ medium- and large-sized corporate customers ■ institutional and real estate customers ■ savings banks
syndicate partners Bavarian local governments, the Free State of Bavaria and non-Bavarian local governments ■ German federal states and ■ specific private customers in close cooperation and consultation with the Bavarian savings banks and the other partners of the Sparkassen-Finanzgruppe. ■ ■
In this context, BayernLB’s activities will be focused on its core market of Bavaria and the bordering regions. The Bank will nevertheless continue to serve its customers in selected economic and financial centres around the world. One of BayernLB’s core objectives is a long-term issuer rating of at least A+ once the guarantee mechanisms have been withdrawn. Based on this strategy, controlling targets were defined for the BayernLB Group’s core capital ratio (> 7.5 percent), return on equity (> 15 percent before tax) and costincome ratio (< 45 percent) which are to be achieved by the end of 2004 through a number of requisite transformation measures. These measures have already been initiated and some have been completed. On 1 January 2003 the Bank’s new structure was introduced. Since this date, global market development has been the task of the Corporates, Financial Institutions & Sovereigns, Real Estate and Global Markets Business Areas, all of which have been entrusted with worldwide competence, as well as Landesbausparkasse (LBS) and Landesbo-
New structure
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Savings Banks, Bavarian Municipals/ Corporates Business Area
Bundling of competencies
denkreditanstalt (Labo). The business areas are mainly responsible for acquiring customers and providing them with consulting and support services.
Operations is in charge of Group-wide risk controlling, market succession activities (credit) and the central reconstruction and settlement of problem loans.
In addition, the Savings Banks, Bavarian Municipals/Corporates Business Area was established as an interface to optimise market development and service quality owing to its strategic significance. Moreover, business with medium-sized corporate customers and asset management for private customers in the Bavarian core market were integrated into this business area in the course of 2003. Further progress was also made in realising the network model within the Sparkassen-Finanzgruppe. In December 2003 a master contract between the Association of Bavarian Savings Banks and BayernLB was signed. This agreement regulates the framework conditions for a market cooperation with the savings banks as well as the establishment of a joint think tank to cope with different business areas and issues. This will serve as a basis for separate agreements between the individual savings banks and BayernLB.
With a view to reaching the objectives fixed for the new strategy, medium-term business plans were developed for the business areas. In this process, the relevant target products, customers and markets were delineated while regulations were defined for the risk strategy and measures drafted for securing proceeds long term. The medium-term plans for the support operations were developed on the basis of these business plans, taking account of the controlling goals defined.
Mediumterm business plans for the business areas
As part of BayernLB’s new strategy, the Bank’s credit process also underwent fundamental restructuring. The main objectives behind the new credit process are the fulfilment of external requirements, an increase in efficiency and an improved risk management.
New credit process
The year 2003 saw the initial stages of the downsizing of the foreign and domestic entities. All the domestic branches and representative offices outside Bavaria (Berlin, Frankfurt, Düsseldorf, Stuttgart, Essen, Hamburg, Hanover, Cologne and Dortmund) were closed on 31 July 2003 with the respective liquidation measures being completed by year’s end. All the foreign representative offices (with the exception of Beijing) were closed on 31 December 2003. Furthermore, the Regional Head Offices in Asia (Hong Kong) and America (New York) were shut down. The intention is to con-
Resizing the corporate network
The business areas are assisted by the Bank’s centrally-controlled support operations, whose organisation is uniform throughout the world. All units responsible for coordinating activities at Group and global levels were therefore integrated under the Corporate Center Support Operations. The Corporate Services Support Operations is responsible for providing the requisite IT infrastructure, data and process management and backoffice services. The Risk Office Support
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centrate the Bank’s foreign credit and trading activities on a few selected entities in the medium term. This is to be followed by the bundling of the IT and back-office functions at the remaining foreign entities. More costcutting and personnel reduction measures required
In addition to the job cuts achieved through the closure of the domestic branches in 2003, other measures to reduce costs and staff have been and will be taken. Other personnel-specific measures that have been taken were aimed at training and recruiting junior staff and rewarding as well as attracting top performers. Most of the staff reductions will take place within the areas of the core Bank. Landesbausparkasse (LBS) and Landesbodenkreditanstalt (Labo), the Bank’s legally dependent institutions, are steadily conforming their resources and costs to the market and to their earnings situation. This also applies for the major consolidated subsidiaries, these being MKB, DKB, SaarLB, Banque LBLux, LB(Swiss) Privatbank. The Bank’s participations portfolio will be based on, and measured against, the fixed controlling targets mentioned above. While the strategic participations shall serve primarily to support and round off the Bank’s core activities, all the financial participations will have to achieve a specific return on investment. The participations portfolio management was redesigned with effect from 1 January 2003 with the aim of further optimising the participations administration.
Long-term safeguarding of proceeds
The long-term safeguarding of proceeds will be the main objective of the Bank’s
additional transformation measures within the individual business areas. Apart from this, the measures initiated to contain and manage risks are to be continued and further modifications to the cost structure are still required. The Board of Management of BayernLB is convinced that if the new business model is applied with consistency, the Bank will be afforded a good opportunity to strengthen its earnings capacity long term and attain a competitive rating. Participations portfolio – changes and transactions The key changes made to the participations portfolio in the financial year 2003 are summarised below: The strategic cooperation with Landesbank Hessen-Thüringen (Helaba) was intensified and expanded upon in 2003. The main focal point was the jointlyowned LB Transaktionsbank GmbH (TxB), a securities settlement firm which was awarded bank status in February 2003. Apart from handling securities for the two parent companies (BayernLB and Helaba) and the affiliated savings banks in Bavaria, Hesse and Thuringia, TxB has become successful in offering its range of services to partners in the market as well. As part of a squeezeout in September 2003, BayernLB acquired the approximately 0.32 percent remainder of Magyar Külkereskedelmi Bank Rt. (MKB, Budapest) from minority shareholders and has been holding an 89.62 percent share in it since. The remaining shares are owned by Bank für Arbeit und Wirtschaft AG (BAWAG, Vienna). MKB,
Success for LB Transaktionsbank
Changes in the participations portfolio
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in turn, purchased 99.6 percent of the Hungarian Konzumbank Rt. in December 2003. This bank will be operated as an MKB subsidiary for the time being. In September 2003 BayernLB also sold its 59.08 percent participation in Interbanka a.s. (Prague) to BAWAG (Vienna). Since the end of 2000, BayernLB has had an indirect stake in Österreichische Postsparkasse (P.S.K.) through KSP Unternehmensverwaltungsgesellschaft mbH. Having purchased the P.S.K. shares at the end of 2003, BAWAG is now sole owner of the institution. BayernLB sold its 32.42 percent stake in LBA LandesBausparkasse AG (Vienna) to BAWAG and P.S.K. in October 2003. The subsidiary BLG Finance B.V. (Amsterdam) was sold to the Dutch ABN Amro Bank in August. By realising collateral, BayernLB acquired shares in Speed Investments Ltd. in the year 2003 and now owns 62.20 percent of the company as a result. The shareholders and leading car manufacturers (GPWC) signed a memorandum of understanding in December that summarises the key aspects of the future structure of Formula 1. This is to secure the longterm continuation of the racing series, which is one of the world’s most popular sports and media events. Final contractual regulations are planned for 2004. The charter airline Aero-Lloyd Flugreisen GmbH & Co Luftverkehrs-KG, in which BayernLB holds an indirect interest of
66 percent, filed for insolvency in midOctober 2003. The financial consequences for BayernLB are outlined below under the Assets, liabilities and financial position. Together with the French CDC/EULIA and the Italian SANPAOLO IMI, BayernLB created a pan-European investment structure in October 2003. E.A. Partners, a European alliance providing growth capital and leveraged buy-out equity, has a volume of EUR 300-500 million and is the first private equity structure under which three experienced management teams from continental Europe cooperate with renowned sponsors and their networks in Germany, France and Italy. E.A. Partners will invest in mediumsized companies as temporary financial investor and concentrate on successor arrangements and management buy-out spin-offs as well as on growth financing. The closing of the fund is planned for the first half of 2004.
Private equity structure launched
As part of its restructuring activities, BayernLB outsourced individual task fields. For this purpose BLB Objektbewachungs GmbH, a wholly-owned subsidiary of BayernLB, was renamed LB Corporate Services GmbH.
Outsourcing
Institutional security agreement of the German Savings Bank Organisation In preparing for the abolition of the guarantee mechanisms in mid-2005, the institutional security agreement of the Sparkassen-Finanzgruppe was reformed in 2003 and adapted to the new risk situation. The executive bodies of the Ger-
Reform of the institutional security agreement
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man Savings Bank Organisation passed resolutions to this effect in December 2003.
duction of a standardised risk monitoring system for the individual guarantee schemes.
BayernLB and Landesbausparkasse are members of the institutional security agreement of the German Savings Bank Organisation through the landesbank deposit guarantee reserve and, in the case of Landesbausparkasse, also through the guarantee fund of the regional home loan and savings associations. In addition to these reserves there are savings bank support funds of the regional savings bank associations and guarantee funds of the regional home loan and savings associations. Transfers shall be carried out between these guarantee schemes should exceptional support be required.
The reform of the institutional security agreement has strengthened the close ties between the partners of the German Savings Bank Organisation at regional and supra-regional level and has confirmed the viability of the organisation.
The statutes of the deposit guarantee reserves have been revised to improve the transparency of the risk situation of all institutions in the German Savings Bank Organisation, to enable a more riskbased calculation of the contributions to be made to the guarantee funds and for any required funding measures and, ultimately, to safeguard the existence of the organisation members. These statutes, as well as those of the other guarantee schemes of the German Savings Bank Organisation, now include clauses aimed at identifying actual risks as early as possible and keeping them at a minimum through preventive measures. These measures entail differentiated information, review and participation rights vis-à-vis the member institutes for special risk situations as well as the intro-
Our staff For the first time in the history of BayernLB, an active reduction in the Bank’s workforce became necessary in 2003. This was carried out on the basis of a company agreement concluded with the Staff Council. The instruments developed under the personnel reduction process proved successful in most instances and were used to find mutually acceptable solutions. Layoffs were therefore necessary only in exceptional cases. Offers made to staff members on maternity leave for the termination of their employment contracts under a bilateral agreement were largely accepted. All the representative offices abroad were closed by the end of 2003. The closure of all the domestic branches outside of Bavaria led to a reduction of this portion of the workforce. The number of personnel at the locations in Bavaria (Munich and Nuremberg) was also cut considerably. The voluntary cash benefits (14th month’s salary, Christmas bonus and vacation pay) received by staff members under the standard pay scale were converted into a performance- and profitbased bonus system in 2003. These bonuses will be awarded in part or in full
Necessary reductions in the workforce
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once all of the Bank’s objectives have been achieved.
Ten years of environment management at BayernLB
Climate protection as a social challenge
Environmental protection For over ten years BayernLB has been practising a future-oriented, responsible environment management to help it fulfil its corporate responsibilities and duties. In the product segment BayernLB has carried out a project on environmental aspects and risks in the credit business. The resulting criteria for evaluating environmental risks are used regularly during credit rating checks, depending on the situation. In addition, structured finance transactions in emerging markets and developing countries are conducted based on the standards set by the World Bank. This is especially the case for covered export financing (e.g. Hermes). In cooperation with its subsidiary Energy & Commodity Services GmbH, BayernLB developed a consulting product called Carbon Risk Management Solutions in 2003 as a contribution to climate protection. This product helps our customers run climate protection projects in keeping with the Kyoto Protocol while preparing them for CO2 emissions trading, which will be launched in the EU in 2005. As a testimony to our commitment, we were admitted in 2003 to the bond universe of Sustainable Asset Management, a rating agency based in Zurich.
Management report Assets, liabilities and financial position The realignment measures introduced at BayernLB led to a risk-based reduction in business volume as planned. The balance sheet total for BayernLB (including Bayerische Landesbausparkasse (LBS) and Bayerische Landesbodenkreditanstalt (Labo)), which decreased by EUR 26.9 billion, stood at EUR 272.8 billion. The decline has mostly to do with the Bank’s international business; approximately one third of the decrease was caused by the shrinking US dollar. In Germany, by contrast, the Bank’s business volume remained virtually unchanged. The consolidated balance sheet total (down EUR 27.9 billion to EUR 313.4 billion) was again largely influenced by BayernLB, which contributed 81.7 percent to it (as opposed to 83.1 percent in the previous year). The largest subsidiaries (in terms of the balance sheet total) were Deutsche Kreditbank AG (DKB) in Berlin (EUR 26.4 billion), SaarLB, which is domiciled in Saarbrücken, (EUR 16.5 billion) and Banque LBLux S.A. in Luxembourg (EUR 12.4 billion). No longer part of the group of consolidated companies is Interbanka a.s., Prague, which was acquired in full by the Viennese Bank für Arbeit und Wirtschaft AG (BAWAG) during the year under review. The business volume, comprising total assets, contingent liabilities from the endorsement of bills as well as liabilities from guarantees and indemnity agreements, went down at BayernLB by EUR
Business volume reduced as planned
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Total assets and business volume of BayernLB and the Group BayernLB
Group
31/12/03 31/12/02 Change 31/12/03 31/12/02 Change EUR billion EUR billion in % EUR billion EUR billion in % Total assets
272.8
299.7
–9.0
313.4
341.3
–8.2
Business volume
289.9
316.8
–8.5
331.9
360.3
–7.9
26.9 billion to EUR 289.9 billion. At Group level the year-on-year decrease was EUR 28.4 billion, with the business volume for 2003 standing at EUR 331.9 billion. While amounts due from banks constituted the largest position on BayernLB’s balance sheet (40.6 percent), the Group balance sheet was dominated by customer receivables, which made up 41.1 percent of the asset side. Declining foreign credit business
BayernLB’s customer receivables dropped in 2003 by EUR 10.6 billion to EUR 91.9 billion as planned. This decline
comes first and foremost from the Bank’s international business. In particular, loans to foreign companies and private customers were cut back. The weakened US dollar accounted for EUR 1.8 billion. In the Group, the EUR 10.1 billion decline to EUR 128.8 billion was somewhat more moderate owing to the fact that the subsidiaries had expanded their activities slightly. Having risen sharply in the previous year, loans to banks for the most part remained steady at this new level in 2003. The Bank posted EUR 110.8 billion in amounts due from other banks, which
Credit operations Bank
Group
31/12/03 31/12/02 Change 31/12/03 31/12/02 Change EUR billion EUR billion in % EUR billion EUR billion in % Due from banks
110.8
112.2
–1.2
105.7
108.1
–2.2
- of which savings banks
19.3
19.6
–1.4
20.0
20.4
–2.0
Due from customers
91.9
102.5
–10.3
128.8
138.9
–7.2
Securities
51.4
66.2
–22.4
60.9
76.2
–20.0
Lending volume*
192.2
209.1
–8.1
224.0
240.0
–6.7
* Claims vis-à-vis customers and banks (without amounts due upon demand) excluding accrued interest plus discount credit
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was EUR 1.4 billion less than in 2002. At Group level, this position decreased by EUR 2.4 billion to EUR 105.7 billion. The EUR 19.3 billion in BayernLB’s loans to savings banks hardly constituted a change from the previous year’s sum (EUR 19.6 billion). BayernLB’s total credit volume shrank 8.1 percent in 2003 to EUR 192.2 billion. In the Group, loans contracted 6.7 percent to EUR 224.0 billion. Application of the strict principle of the lower of cost or market unchanged for entire securities portfolio
The securities portfolio of both the Bank and the Group tightened substantially – by approximately 20 percent. While the “shares and other non fixed-income securities” position, which is made up primarily of investment shares, grew slightly (EUR 2.4 billion at the Bank following EUR 2.2 billion in 2002, EUR 3.4 billion in the Group as opposed to EUR 3.1 billion in 2002), the “bonds and other fixed-income securities” portfolio became considerably thinner. At BayernLB the decrease was 23.4 percent to EUR 48.9 billion, at the Group 21.2 percent to EUR 57.6 billion. The main causes of the decline were risk-
based portfolio adjustments as well as securities which had fallen due but were not replaced. As before, the entire securities portfolio of the Bank and the Group were valued in accordance with the strict principle of the lower of cost or market. Following a surge in recent years, the nominal volume of derivatives transactions in the Group went down to EUR 934.2 billion – an approximately 18 percent decrease – in the year under review. Nearly 75 percent of this sum is allocable to interest rate risks (EUR 693.7 billion as compared with EUR 868.8 billion in the year before) while 22 percent goes to currency risks (EUR 205.9 billion, down from EUR 243.4 billion in 2002). The gross credit risk equivalent of the derivatives transactions sank 14.1 percent from EUR 9.5 billion to EUR 8.2 billion. Adjusted for netting agreements, this amount is reduced by another EUR 3.7 billion to EUR 4.5 billion. On the liability side, amounts due to banks fell in the Bank by 10.9 percent to EUR 100.1 billion and, at Group level, by 11.4 percent to EUR 119.9 billion.
Funding BayernLB
Group
31/12/03 31/12/02 Change 31/12/03 31/12/02 Change EUR billion EUR billion in % EUR billion EUR billion in % Due to banks
100.1
112.4
–10.9
119.9
135.4
–11.4
– of which savings banks
7.5
9.8
–23.0
7.8
10.1
–22.2
Due to customers
52.2
52.0
0.3
65.3
64.2
1.8
Securitised liabilities
90.4
104.3
–13.4
95.6
108.2
–11.6
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The decrease in amounts due to savings banks, which fell EUR 2.3 billion to EUR 7.5 billion in the Bank and EUR 2.3 billion to EUR 7.8 billion in the Group, respectively, is almost entirely the result of short-term money market trading. Funding
Deposits from customers, on the other hand, picked up by a slight 0.3 percent to EUR 52.2 billion in BayernLB. At Group level this growth was 1.8 percent, rendering EUR 65.3 billion in customer deposits at year’s end. With operations in Germany and in other countries, BayernLB, one of the largest regular issuers, launched a number of mortgage and bearer bonds in 2003. Among these were the first public mortgage bond of a foreign issuer in Swiss francs and a EUR 1.5 billion jumbo mortgage bond with an eight-year maturity. In addition, over EUR 1 billion in structured bonds (such as the Catch-UpBond, Power-Bond and Oktoberfestanleihe) was successfully placed. The drop in total securitised liabilities (down 13.4 percent to EUR 90.4 billion in the Bank and 11.6 percent to EUR 95.6 billion in the Group, respectively) was the result of the lower financing demand, particularly in the short-term area. This was demonstrated by the plunge in the Bank’s money market instruments, which went down 60.5 percent to EUR 6.7 billion and, at Group level, 60.6 percent to EUR 6.7 billion.
Further improved core capital ratio
Regulatory capital and reserves The risk positions as per Principle I dropped by approximately 20 percent in 2003 to EUR 137.2 billion. As a result of
this and the fact that nominal capital was raised by EUR 153 million as from the beginning of that year, the core capital ratio went up 1.4 percentage points to a satisfying 7.8 percent. Supplementary capital decreased mostly as a result of the expiration of subordinated funds which, due to the sound capital base, were no longer borrowed. The total equity ratio therefore grew less strongly – by 1.0 percentage point to 11.3 percent. Key banking regulatory figures in accordance with the German Banking Act (KWG)* Group 31/12/03 31/12/02 EUR billion EUR billion Risk positions as per Principle I
137.2
171.4
15.5
17.7
9.6
9.5
Equity ratio (total capital ratio)
11.3%
10.3%
Core capital ratio
7.8%
6.4%
Own funds – of which core capital
* Based on the approved financial accounts
Earnings position Owing to the intended decline in business volume and to the exchange rate changes, operative earnings in 2003 were not as high as in the previous year. We kept this reduction in check through consistent cost-cutting measures and the resulting contraction in administrative expenses. As the year 2003 was marked by a difficult national and international
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environment, risk provisions were once again far above the average calculated for the preceding years. Compared with 2002, however, they were considerably low. The Group’s return on equity, reflecting the relationship between operating profit (including partial profit transfer) and equity capital, improved moderately to 4.9 percent (up from 4.3 percent in the previous year). Net interest income
Net commission income
At EUR 1.608 billion, BayernLB’s net interest income was 6.0 percent lower than in 2002. This was due first and foremost to the drops in volume, loans that were put on a non-accrual basis and the fall of the US dollar and its dependent currencies against the euro. Net interest income disclosed for the Group slipped 2.4 percent to EUR 2.169 billion. Interest expenses for capital contributions of silent partners (EUR 219 million at BayernLB, EUR 237 million in the Group) are now being shown in the “partial profit transfer” position, in keeping with common practice. BayernLB’s EUR 37 million decline in net commission income to EUR 253 million was due to the outsourcing of its securities settlement to LB Transaktionsbank (TxB); however, commission from loan transactions also plummeted as a result of the Bank’s risk-based credit policy. Commission from the credit card business, on the other hand, showed a positive trend. Net commission income for the Group went down EUR 44 million to EUR 343 million.
Amid highly volatile interest markets, recovering stock markets and dynamic foreign exchange markets, the second half of 2003 produced EUR 105 million in net income from financial transactions both in the Bank and in the Group. The corresponding figure in 2002 amounted to EUR 108 million (Bank) and EUR 140 million (Group).
Net income from financial transactions
The cost-cutting measures taken throughout BayernLB led to a further, sharper decrease in administrative expenses. For the Bank this meant a 14.5 percent slash down to EUR 861 million; in the Group these expenses dropped 11.0 percent to EUR 1.185 billion.
Sharp cutback in administrative expenses
Personnel expenses sank 13.6 percent to EUR 472 million at BayernLB. The Group saw a decline of 10.4 percent to EUR 656 million. Contributing to this reduction were outsourcing measures and the closure of all the domestic branches and representative offices outside Bavaria. Furthermore, all the foreign representative offices (except Beijing) were shut down. By the end of 2003 the Group counted 544 fewer staff members than at the end of the previous year. In BayernLB the workforce decreased by 389 employees. In addition to the staff reductions, the much-weaker US dollar also helped to ease some of the pressure. Thanks to an ever-stringent cost management, the Bank’s operating expenses also sank. This difference once again comprised a two-digit percentage (-15.6 percent to EUR 389 million). In the Group, this position dropped 11.6 percent to EUR 529 million.
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Improved cost-income ratio
The cost-income ratio for the Bank improved 4.0 percentage points as compared with 2002: In that year it was 47.8 percent as opposed to the 43.8 percent posted in 2003. The Group was also able to lower this ratio, namely by 3.1 percentage points to 45.3 percent. The balance of other operating expenses and income (EUR 123 million in the Bank; EUR 120 million in the Group) in 2003 was influenced mainly by tax refunds from Germany and abroad. The high figure posted for the Group in 2002 (EUR 474 million) was primarily the result of a write-back of a subsidiary’s provisions.
Lower risk provisions
Although risk costs remained high in the year under review, they were considerably lower than in the year before. In 2003 the Bank posted EUR 697 million in risk provisions (as compared with EUR 1.679 billion in the previous year). In the Group this position stood at EUR 953 million (down from EUR 2.257 billion in 2002). Provisions for default and country risks, which totalled EUR 4.249 billion after write-offs, made up 2.1 percent of the Bank’s claims portfolio. In the Group, risk provisions amounted to EUR 5.038 billion (after write-offs), or 2.2 percent of the claims portfolio, at the end of 2003. The revaluation result, which in 2002 was positive thanks to high amounts in special income, stood in the following year at EUR -42 million in BayernLB (2002: EUR +486 million) and EUR -52 million in the Group (2002: EUR +567 million). The plunge was due to necessary write-downs on participations.
The 2003 operating profit of EUR 489 million (after risk provisioning / revaluation) was significantly higher than the EUR 11 million posted for the previous year. The main reasons for the climb were the cost-cutting measures and the ease in risk provisioning requirements. The Group’s operating result was EUR 547 million, up from EUR 203 million in 2002. BayernLB’s new strategy, which is tied to its new business model, required EUR 127 million in restructuring expenditure, the vast majority of which having been used for restructuring provisions for the years to come. This position comprises mostly severance payments, extraordinary transfers to pension reserves due to premature retirement, and pension payments. Tax expenses in 2003 added up to EUR 80 million in the Bank and EUR 104 million in the Group. In the year before, we posted a positive tax position of EUR 89 million for BayernLB and EUR 52 million for the Group. With EUR 219 million in interest expenses for capital contributions of silent partners for BayernLB (EUR 237 million for the Group) taken into account, the remaining annual net income for 2003 was EUR 63 million. As in the year 2002, this enabled a distribution of 4 percent after tax (equivalent to 7 percent before tax) on the nominal capital, which was raised by EUR 153 million.
Operating profit
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Earnings position BayernLB
Group
1/1 – 1/1 – Change 1/1 – 1/1 – Change 31/12/03 31/12/02 in % 31/12/03 31/12/02 in % EUR million EUR million EUR million EUR million Net interest income
1,608
1,710
–6.0
2,169
2,223
–2.4
Net commission income
253
290
–12.8
343
387
–11.5
Net result from financial transactions
105
108
–2.7
105
140
–25.0
Personnel expenditure
–472
–547
–13.6
–656
–733
–10.4
Operating expenditure
–389
–462
–15.6
–529
–598
–11.6
123
104
18.5
120
474
–74.5
–697
–1,679
–58.5
–953
–2,257
–57.8
Revaluation result
–42
486
> –100.0
–52
567
> –100.0
Operating profit
489
11
> 100.0
547
203
> 100.0
–127
0
> 100.0
–127
0
> 100.0
Corporate income tax*
–80
89
> 100.0
–104
52
> 100.0
Partial profit transfer
–219
0
> 100.0
–237
0
> 100.0
63
100
–36.7
79
255
–68.9
0
43
–100.0
16
198
–92.0
63
57
10.7
63
57
10.7
Balance of other operating income and expenditure Risk provisions
Restructuring expenditure
Net income for the year Allocation to revenue reserves / minority shareholders Profit available for distribution
* See also the notes to the accounts, below
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Segment results For the first time, the Bank is publishing a segment report for the BayernLB Group. This report as per 31 December 2003 reflects the structure of the new business model. The operative business areas contributed to the EUR 547 million operating profit as follows: EUR million Corporates
133
Real Estate
–250
Financial Institutions & Sovereigns
116
Savings Banks, Bavarian Municipals/ Corporates
–11
Global Markets
253
Labo/LBS
173
Subsidiaries strategic to the Group
153
Other (see segment report)
–20
The Corporates segment achieved an operating profit of EUR 133 million in 2003. Furthermore, much headway was made in reducing the risk positions in the financial year 2003, as planned. Due to the high risk provisioning requirements, the 6.1 percent return on equity fell short of our target. The cost-income ratio, however, was at a comfortably low 23.0 percent. The result for the Real Estate segment suffered in 2003 because of high risk provisioning requirements, which in turn were due to conservative assessments. Its operating profit and return on equity were therefore negative. The cost-
income ratio of 29.6 percent, on the other hand, turned out better than planned. With a 23.8 percent return on equity, the segment Financial Institutions & Sovereigns overshot its target and proved resilient to the difficult economic environment. Operating profit remained impervious to risk provisioning measures in the financial year 2003 and, at EUR 116 million, made a very positive contribution to the results. The cost-income ratio was at a very encouraging 18.8 percent. In the segment Savings Banks, Bavarian Municipals/Corporates, transactions are bundled as part of the savings bank retail business. This is the main reason for the high cost-income ratio of 77.4 percent. With an operating profit of EUR 253 million, the Global Markets segment made the largest positive contribution to the Group operating result for the financial year 2003. Posting 13.2 percent in return on equity, this segment is close to the finish line. However, its cost-income ratio of 45.3 percent falls short of the target set at Group level. The Labo/LBS segment comprises the activities of Bayerische Landesbodenkreditanstalt (Labo) and Bayerische Landesbausparkasse (LBS). Labo once again attained a high positive operating result for the Group. As for LBS, the financial year 2003 was the most successful one in its entire history. The costincome ratio disclosed for the Labo/LBS segment stood at 45.5 percent, which was somewhat poorer than planned.
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Given the retail character of this segment, however, this was a very satisfactory result. The segment consisting of the subsidiaries strategic to the Group involves the entrepreneurial activities of the BayernLB Group. These activities are divided up among the following Bank participations: ■ Deutsche Kreditbank AG, Berlin ■ Banque LBLux S.A., Luxembourg ■ Magyar Külkereskedelmi Bank Rt. (MKB), Budapest ■ Landesbank Saar, Saarbrücken ■ LB (Swiss) Privatbank AG, Zurich In the financial year 2003 this segment contributed approximately 28 percent to the Group operating profit. The resulting return on equity of 5.6 percent was below the Group target. The disclosed cost-income ratio of 46.6 percent fulfilled expectations, especially in light of the strong retail orientation to be found within this segment (Deutsche Kreditbank, MKB). Outlook The forecasts relating to the future performance of the BayernLB Group are estimates that we arrived at using all the information that was available to us at the time when the annual report was drawn up. If the assumptions underlying our forecasts prove incorrect, the actual results may differ from those currently anticipated. Prognosis for global economy
The economic recovery is expected to gain both territory and momentum in
2004. We assume a 4.5 percent growth for the USA, 1.7 percent for the euro area and 1.5 percent for Germany. These figures are based on the assumptions that global trade will undergo a major expansion (boosted primarily by sharp growth in the developing countries and emerging markets), the annual average crude oil price (Brent) will amount to approximately USD 30 per barrel and the financial markets will not disrupt the economic upswing. Considering the exchange rate of the US dollar, however, the last of these three suppositions may fail to materialise. We have not incorporated such dollar-moving factors as political uprisings or new terrorist attacks into our forecasts. The following disputes are also likely to affect BayernLB’s performance in the financial year 2004: ■ US veterans of the so-called first Gulf War (in 1991) filed a lawsuit in September 2003 in the United States against a dozen industrial corporations (mostly from the chemicals sector) as well as about 30 European and Asian banks, among them BayernLB. The plaintiffs claim they have suffered bodily damage from chemicals illegally supplied to the former Iraqi regime by these industrial corporations and that the delivery was financed – also illegally – by the banks in question. BayernLB considers this charge to be unfounded and regards the initial statements made by renowned law firms as confirmation of this belief. ■ The European Commission might make a decision in 2004 on the state aid legislation proceedings against five Ger-
Class action suit filed by Gulf War veterans
Proceedings on state aid legislation
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man landesbanks, including BayernLB. These banks are charged with failing to effect payments in conformity with the market for the transfers of special housing construction funds and for the incorporation of state housing construction agencies. BayernLB is still of the opinion that, even under the most unfavourable circumstances, it would have to pay considerably less than the sum required pursuant to the Commission’s pilot decision on WestLB/Wohnungsbauförderungsanstalt (WfA) dated 8 July 1999. This decision was reversed by the European Court of First Instance (CFI) when it ruled on 6 March 2003 that there was insufficient justification for the repayment amount demanded by the Commission. Participations
No decision has been taken yet on the future significance of certain participations with regard to the Group strategy, i.e. contractual provisions are yet to be made. For this reason, no revaluation was conducted. In October 2003 BayernLB signed an agreement on the sale of its 10 percent share in Südtiroler Sparkasse to the Südtiroler Sparkasse foundation. The approval of the transaction by the Italian National Bank is still pending.
Liquidity
The liquidity of both the Bank and the Group were secured in 2003 at all times. In view of the withdrawal of the guarantee mechanisms as from July 2005 and the anticipated downgrades by the major rating agencies, the Bank and the Group have adopted the following measures that are aimed at preserving their liquidity:
■
■
■
■
■
Closing liquidity gaps in a steady and complete manner and in accordance with given schedules; applies for maturities between 19 July 2005 and 31 December 2015 Establishing a liquidity buffer by broadening the open register of cover Funding new business in congruence with the commitment of capital Improving the technical infrastructure for managing the liquidity status of the Bank and the register of cover, particularly in relation to a separate rating for mortgage bonds in the future Reporting the implementation status of the closure and portfolio measures to the whole Board of Management on a weekly basis.
These measures will ensure a successive rather than abrupt change in the Bank’s funding options once the guarantee mechanisms have been withdrawn, meaning that the Bank will be able to master the immediate consequences of these changes. Preliminary indications for ratings of non-guaranteed, uncovered liabilities of the landesbanks are expected to be published as early as in 2004. As from mid-2005, the decisive factors for the Bank’s rating will be the results of the year 2004, the status of the transformation measures and the assessment of BayernLB’s business outlook. Accordingly, one of our main objectives in 2004 will be the strict and swift implementation of the Bank’s new strategy. The measures taken in 2003 towards implementing the new business model,
Preliminary indications for ratings expected
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as well as those still to be realised in 2004, are aimed at a sustained improvement in profitability. We have begun concentrating our activities abroad and will continue to do so in the year 2004. In Asia, operations will be bundled in our Hong Kong and Shanghai offices. Business with customers in this region will be conducted from within these two locations. The branches in Singapore, Labuan and Tokyo, as well as BLB Asia Pacific Ltd., will be closed. Our Canadian customers will be served from Montreal through an office to be set up at New York Branch as Toronto Branch will also be shutting down in the course of 2004. In Europe BayernLB will maintain its activities at the London, Paris and Milan branches. For BayernLB as a whole we predict a stable operating result in 2004, especially in view of the expected decrease in risk provisions and an improved revaluation result. Risk report Overall Bank controlling concept
BayernLB identifies, measures, aggregates and controls its risks under an overall Bank controlling concept that provides capital to the business areas and support operations for their strategies while also containing the various risk types through limits. One factor that is becoming increasingly important for controlling and limitation purposes is economic capital (which is measured using strictly economic benchmarks); this implies what is known as
the Value at Risk model. Value at Risk is a method used for quantifying the risk potential that is offset by the capital allocated for risk hedging in the risk capacity calculation. The risk potential arising from country, market and operational risks is calculated, limited and controlled using the Value at Risk method; similar procedures will be introduced in 2004 for counterparty risks. These risks will be controlled by limiting the risk assets provided and by using the expected losses as a basis. The objective of this overall controlling system is to secure an appropriate risk profile for BayernLB’s capitalisation. This in turn will ensure that the scarce resource of capital is used in those business areas which are highly profitable from a risk perspective. At BayernLB’s banking subsidiaries the executive bodies in charge are in the process of adopting this system and the related processes, strategies and procedures. BayernLB’s risk policy is the basis for a healthy risk/return ratio in its portfolio – and thus for the cooperation between the business areas and the Risk Office Support Operations. At the heart of the risk policy is the Bank’s credit policy, which was introduced for credit and country risks in 2003. The main thrust of the credit policy is to fulfil prescribed standards set for the credit business in order to keep credit risks within tolerable limits and minimise credit losses while also achieving appropriate risk/return
Risk/credit policy
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ratios. By installing its credit policy, the Bank has created a framework for ensuring that the following goals are attained: ■ definition of the Bank’s willingness to accept – and measure and control as appropriate – credit, country, market price and operational risks ■ an effective and efficient organisational structure which enables credit, country, market price and operational risks to be controlled and managed actively ■ establishment of the fundamental principles for managing credit, country, market price and operational risks ■ distinct regulations governing the discretionary powers for controlling credit, country, market price and operational risks ■ guaranteed compliance with and fulfilment of statutory and regulatory requirements. The wide-ranging credit policy will, furthermore, be enhanced by specific regulations on certain products and risks. Application of “MAK”
Organisation of risk controlling and management
While expanding upon the Group risk policy and the Bank control system, BayernLB took great efforts in the year under review to adopt the “Minimum Requirements for the Credit Business of Credit Institutions” (MAK) as scheduled. These measures affected mainly the credit process, risk management and credit policy of the Bank. The sales units, which have first-vote status, and the Risk Office units, which are entrusted with second-vote authority, have been functionally segregated throughout the Bank (and the world) since February 2003. Risk controlling and
conceptualisation, now the responsibilities of Risk Office, are thereby segregated from the sales activities, as are problem loan processing and – since the beginning of 2004 – credit and collateral administration. Risk Office thereby encompasses all of the Bank’s risk analysis units for counterparty, country, market price and operational risks. It is chiefly responsible for conducting credit analyses, ratings and collateral valuations, and for preparing and voting on all resolutions affecting the related risks. Problem loans are reconstructed and reprocessed in the Credit Consult unit. The Group Audit Division supports the Board of Management in its capacity as a process-independent unit within the internal monitoring system. Its activities are defined primarily by the “Minimum Requirements for the Structure of Internal Audits at Banking Institutions” (MAIR) issued by the BaFin. Counterparty risk BayernLB defines counterparty risk as the potential loss resulting from a counterparty’s default or from a decreased value owing to an unforeseeable deterioration in a counterparty’s credit standing. Counterparty risks may be broken down into risks arising from classical credit business, issuer risks resulting from securities transactions and counterparty risks from trading transactions. The year 2003 was characterised by subdued economic activity in Europe. This holds true particularly for Germany. Here,
Definition
Influential factors
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the construction and trading sectors were hit hardest by dwindling demand. Additional negative factors for the aviation and tourism industries were the Iraq war, the uncertainty resulting from terrorist attacks and diseases such as SARS. Despite greater qualitative demands placed on new business, BayernLB did not remain unscathed by these negative trends.
In order to identify serious rating deteriorations at an early stage, the Bank introduced an early detection system. This tool enhances the monitoring process for problem loans and the rating procedure. The aim of early detection is to identify the companies actually running the risk of defaulting as early as possible so that potential damage can be kept at a minimum.
Controlling
BayernLB bases every credit approval on an individual analysis and assessment of the borrower’s credit standing. As part of the analysis, all information required for taking a decision and forecasting the default probability is identified and evaluated. The main instruments used for this purpose are a modern balance sheet analysis and sophisticated rating procedures.
Assessment of creditworthiness and default probability
Every rating score is assigned a default probability. The probability indicates the likelihood of a transaction with a counterparty becoming non-performing in a specific year within the term. The default probability is checked on a regular basis.
The early warning system comprises quantitative and qualitative elements. Quantitative analyses (such as statistical assessments of observed changes in capital market data) are carried out for the Bank centrally and at short intervals. At the same time, however, individual qualitative and quantitative analyses are performed locally on an ongoing basis. Additional early warning indicators are undergoing testing and will be introduced where necessary. In the past two years, BayernLB has participated in joint projects with several other German landesbanks and with the German Savings Bank Association and
Credit portfolio of BayernLB as per December 2003 – by customer group* – Public sector 15%
Private customers 3%
Banks 26%
Institutional investors 1%
Landesbanks 4%
Real estate customers 8%
Savings banks 10% Corporate customers / Multinationals 30%
Other public banks 3% *from a legal perspective
Early warning procedure
Refinement of the internal rating system
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played a major role in refining the rating method then employed. The new procedures that were developed cover the Bank’s business areas. In 2003, the first of these new, more fine-tuned procedures were used in the Corporates and the Financial Institutions & Sovereigns Business Areas. In the process, the existing 11-tier rating scale was replaced by a more detailed 21-tier scale. Apart from these tiers, however, there are three additional rating levels called “default categories”. Depending on the criteria, the exposures in default are classified under a specific level. The calibration of the new rating scale is based on historical data supplied by the landesbanks involved and by external rating agencies. The credit rating analysis was thus carried out with the help of rating systems based on the scorecard method. Moreover, simulation-based procedures with additional, comprehensive information are available for special financing transactions, in particular for the financing of properties and projects. Used in conjunction with special software for analysing financial accounts, these tools helped improve the quality of the Bank’s credit analyses. The specific default probabilities can also be used to compare the internal rating categories directly with the rating scales used by the leading international rating agencies. The intention is to have the new rating tools ready for use in all business areas in 2004. Based on a detailed analysis of the risk content (credit rating) and/or transaction
structures (transaction rating), the Bank makes a decision on the loan, the credit risk limits and, above all, the risk-appropriate terms and conditions. The purpose of the limitation is to set ceilings for the exposures of borrowers and financiallylinked borrower groups (e.g. multinationals) and to review them annually. The limits are monitored permanently.
Credit limits, limit monitoring and pricing
The credit policy will help modify the limit concept to reflect the new definitions, processes and structures. In limiting credit risks, BayernLB distinguishes between the following risk type limits: ■ cash limit ■ replacement limit ■ guarantee limit and ■ performance risk limit. In the year 2003, BayernLB embedded this limit structure (including the weighting on maturity bands) into its new credit and country risk management principles and covered most of the controlling for its trading business in a first major step. This controlling was based on the risk type limits. The trading limits are always monitored immediately. BayernLB limits counterparty risks as much as possible through a risk-oriented structuring and by accepting collateral. In the real estate business and in structured financing, this is achieved with the help of real estate / movable assets serving as collateral and municipal guarantees and ECA cover, respectively. Master agreements are usually concluded with the Bank’s major derivatives trading partners for the purpose of close-out netting. Some collateral agreements restrict the
Limitation on counterparty risk
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Gross exposure* of BayernLB Group – December 2003 SaarLB 3.1% Banque LBLux 2.6%
Bank– domestic and foreign entities, incl. Labo und LBS 85.1%
MKB 1.4% Other 14.9% LBSwiss 0.2% BLB Asia Pacific 0.2% DKB 7.5%
* with the consolidation of internal Group accounts taken into consideration
default risk associated with individual trading partners to an agreed maximum and authorise the call for (additional) collateral should this maximum be exceeded. Risk clusters
Reporting
To limit counterparty risks at portfolio level, a specific concept is in use for controlling economic risk clusters and concentration risks. On the basis of this concept, a ceiling on clusters is determined for each borrower group in accordance with its default probability and the Bank’s risk cover funds. Uniform standards for portfolio management and reporting were developed and introduced throughout BayernLB to warrant efficient and consistent portfolio management and to fulfil the MAK requirements. Reporting is performed with the help of the credit and country risk report, sector reports and special reports for structured finance, real estate and problem exposures.
The BayernLB Group’s credit portfolio shrank by approximately EUR 19 billion in the year under review. The main reasons for this decrease were the subdued economic trend, the concomitant lower demand for credit and the disparity between the US dollar and the euro and their dependent currencies. A new sector code was introduced at BayernLB in 2003 to enable sector portfolio management based on risk and added value. This code serves a “substance over form” portfolio management at sector level. The organisation of the Risk Office analysis units responsible for assessing risks was modelled on the sector groupings. Based on this new management and control element, the Bank’s portfolio is as follows:
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Risk provisions in 2003 and credit process
In 2003, as in previous years, the economy failed to gain momentum. The number of company insolvencies continued to rise. All counterparty risks identified in this period were covered appropriately through risk provisions and/or direct write-downs. The amount of the required specific loan loss provisions depends on the value of the collateral available. As part of the credit process, all credit exposures are reviewed regularly as prescribed under the credit policy and, if necessary, revalued with respect to the amount of the loss. High-risk credit exposures or exposures for which loan loss provisions have been set up are subject to shorter examination intervals. In 2003 on balance, EUR 1.346 billion was allocated to provisions for counterparty and country risks at Group level (EUR 1.059 billion at Bank level). Direct write-offs on claims came to EUR 146 million at Group level and EUR 138 million at Bank level. The default rate (utilisation plus direct write-offs less receipt of payments on claims, in relation to average credit volume) was 0.35 percent for the Group and 0.38 percent for BayernLB.
Derivatives business in 2003
In global derivatives trading, our clients favoured customised instruments for individual management and control of market and/or counterparty risks. Derivative components, however, were also widely used for structured financing. Derivatives were also employed at BayernLB for its internal risk management of proprietary trading positions and for asset/liability management. In this way, positive trends on the credit market
Gross exposure BayernLB by sector group* Private customers Utilities 4% 4%
Automotive Aviation 2% 2%
Technology 1% Construction 1%
Real estate 6% Non-profit org. / sovereigns 13%
Other banks 11%
Other 16%
Large banks 21%
Savings banks 19%
* “substance over form”, i.e. not comparable with the differentiation by customer group
were exploited right through to the end of the financial year 2003 to place credit risks profitably on the market by way of credit default swaps. At Group level, the credit equivalent amount from derivative transactions
Provisions for counterparty and country risks* Group 2003 2002 2001 EUR million EUR million EUR million As at 1 January
4,625
2,784
2,178
Write-backs
–420
–398
–220
Utilisation
–692
–346
–377
Allocations
1,766
2,659
1,166
–241
–74
37
5,038
4,625
2,784
Other changes** As at 31 December
*) excluding general loan loss provisions, other loan loss provisions, change in Sections 340f and 340g German Commercial Code reserve and credit standing-related write-downs on securities **) Change in consolidated Group, exchange rate changes and account transfers
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(taking account of the risk-reducing effect of netting agreements) totalled EUR 4.5 billion at year-end, which corresponds to 0.48 percent of the nominal contract volumes. (For detailed information on the derivatives business, refer to the notes to the accounts and consolidated accounts in Section VI.) Outlook
Definition
Influential factors
Controlling
BayernLB will continue its qualitative consolidation in 2004. This entails changing and implementing the credit risk strategy, optimising the risk analysis, evaluating and controlling the individual credit exposures and, finally, achieving an optimal portfolio structure. Investment risk Along with counterparty risk, the shareholder risk (investment risk) represents potential losses arising from the provision of equity capital and related collateral to third parties. It is mainly concerned, however, with the possible loss of the equity capital invested. The shareholder risk is affected by the general economic development, specific trends in individual sectors and the attributes of individual investments. BayernLB participates in other companies and outsources functions to subsidiaries when it considers this expedient in terms of strategy and/or yield. The Bank exerts an influence on the business and risk policies of its subsidiaries through its representation at their shareholder committees and supervisory bodies. The chief principle in shareholder risk monitoring at BayernLB is the functional
segregation between “managing” and “making”, that is, between assuming responsibility for profit contribution at Group level and “monitoring” the profits. In this context, a distinction is made between ■ subsidiaries with strategic significance for the Group (Deutsche Kreditbank AG, Berlin; Banque LBLux S.A., Luxembourg; Hungarian Foreign Trade Bank, Budapest; Landesbank Saar Girozentrale, Saarbrücken) and ■ other strategic subsidiaries as well as financial participations. In terms of the functional segregation mentioned above, majority subsidiaries with strategic significance for the Group are defined as participations that are responsible for their contributions to the consolidated results. These subsidiaries report monthly to the Board of Management.
Subsidiaries strategic to the Group
The other strategic subsidiaries and financial participations come under the responsibility of individual business areas / support operations. Their allocation to these units is based on functional relevance.
Other strategic subsidiaries and financial participations
To ensure the functional segregation between profit-managing and profit-monitoring in these units as well, their individual portfolio performances are monitored. Country risk A country risk is the risk that, due to ■ a possible worsening of macro-economic conditions ■ political or social upheaval
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■
■
■ ■
the nationalisation or expropriation of assets the non-recognition by a government of cross-border liabilities foreign exchange control measures or currency depreciations or devaluations
in the country concerned, a borrower or the country itself is unable to fulfil its obligations at all or in due time. Country risk is broken down into transfer risk, conversion risk and political risk. Influential factors
The situation in Central and South America, which has been improving only slowly, and the tension in the Near and Middle East (Iraq conflict) were reflected in the restrictive business policies in these regions. BayernLB maintained its stringent business policy vis-à-vis these regions in 2003 and reduced its portfolio to approximately EUR 2.3 billion.
Controlling
For the purpose of assessing the country risk, the economic situation of the respective country and, more importantly, the ability to effect debt service payments are analysed on an ongoing basis with the help of both quantitative and qualitative information. The country rating is derived from this assessment. Under a project entitled “Internal ratings for the landesbanks”, a new concept was developed for the rating procedure used for determining country risks.
Limit system
Country risks are contained on the basis of country limits. Country limits, in turn, are fixed on the basis of an internal risk assessment for the particular country (country rating) and an estimate of the country’s potential. A country limit sys-
tem that is linked to the cover funds is useful in setting the limit amounts and also provides for an optimal diversification of the country risk exposures. The Board of Management determines the country limits for the entire Bank and thus the composition of the country portfolio. In the year under review, the VaR for country risk amounted to EUR 716 million. The country risk controlling unit permanently monitors limit utilisation. All limit overdrafts are reported directly to the Board of Management. The countries, too, are subject to ongoing monitoring, which sometimes prompts the Board of Management to change a limit. The credit and country risk reporting entails quarterly reports to the Board of Management on current limits, their utilisation (including changes) and the need for action. Extraordinary events are brought to the attention of the Board in the form of special analyses.
Monitoring and reporting
Ninety percent of BayernLB’s foreign exposures are in countries that do not have limits (countries under the top two rating categories). One exception to this is Singapore, which has a country limit although it is classified under rating category 2. Countries with limits account for 10 percent of the Bank’s exposures abroad. Owing to the prevailing crises (such as the Iraq conflict) and the slack global economy, the aggregate exposure in countries with limits declined by 25 percent to EUR 14.8 billion in the Group and by 19 percent to EUR 12.0 billion Bankwide.
Risk structure
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Net country exposure in countries with limit by country rating category (RC)
RC 7 5%
RC 8 4%
RC 9 4%
RC 10 2%
RC 11 3%
RC 2 11% RC 3 4%
RC 6 9% RC 4 18%
RC 5 40%
The risk structure was improved by reducing the aggregate exposure and carefully reshuffling the country portfolio. Eighty-two percent of the Group-wide exposures are in countries with low risks (rating category 6 or lower). Forty percent alone falls under rating category 5, whereas only 18 percent, or EUR 2.8 billion of the Group exposure portfolio, concerns countries with higher risks (rating categories 7 to 11). Status and outlook for Central and South America
After a severe recession in 2003, the emerging markets in Central and South America are showing first signs of stabilisation and recovery. However, Argentina, Brazil and Venezuela still rank among the world’s problem countries. In spite of South America’s recovery trends, exposures in this region were cut back again in 2003. The 25 percent exposure reduction (Bank-wide: -25 percent) is a result of the restrictive risk policy (limit reduction) resolved in 2002. Changes to the business policy with regard to this region are considered and investigated regularly. Owing to the persistently high price of oil and the stabilisation of demand in the
major industrial countries over the second half of 2003, the economic perspectives in the oil-producing countries have brightened since the end of the Iraq war. The political risks in this part of the world (the security situation in Iraq, unsolved conflict in the Middle East), however, remain acute. The terrorist attacks in Saudi Arabia and Turkey have again shattered hopes of stability in the region.
Status and outlook for the Near and Middle East
Prior to the military conflict in early 2003, BayernLB installed a more stringent business policy (limiting transaction terms, setting maximum amounts for specific products, narrowing down its target customers); these restrictions have so far been lifted in only minor ways since the official end of the war. The aggregate exposure in the region shrank by 19 percent at both Group and Bank level. The Asian economies – with the exception of Singapore and Hong Kong – underwent a positive development after the end of the Iraq war and the SARS crisis. Having overcome the many years of recession, Japan’s economy is now gaining momentum again, albeit moderately. Real GDP growth in the People’s Republic of China was a stunning +8.5 percent. The issues which stand to be resolved in the region include the demerging of enterprises in the banking and government sectors and the much-needed changes in the institutional environment. As a consequence of the current limit restrictions for Pakistan, Indonesia, the Philippines and Malaysia, the exposure contracted by 25 percent (Bank-wide: -25 percent).
Status and outlook for Asia
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Status and outlook for Central and Eastern Europe/CIS
BayernLB’s exposure in Central and Eastern Europe and in the CIS countries remained largely unchanged in 2003 (-7 percent). The 31 percent decline in the regional exposure at Group level is due primarily to the sale of Interbanka a.s., Prague, and the modified weighting procedure for local transactions.
Country risk provisions
All discernible country risks were accounted for by risk provisioning in the balance sheet. In the table on counterparty and country risk provisions, pure country risk provisions fell to EUR 97 million in 2003. Neither at Group nor at Bank level were there direct write-offs on claims. Provisions for country risks Group 2003 2002 2001 EUR million EUR million EUR million
Net exposure* Country risk provisions Provision ratio
167
182
292
97
112
198
58.3%
61.6%
67.9%
* Total of individual country-related exposures for which provisions were made
Note: The figures in this table are included under “Provisions for counterparty and country risks“.
Definition
Liquidity risk BayernLB defines liquidity risk as the risk of any liquidity it may need at some future point in time not being available then, or not being available in its entirety, or of it being available but only at a much higher price than anticipated.
As BayernLB will probably lose its AAA rating as from 2005, it is channelling much of its energies towards the procurement of liquidity at acceptable market rates. As part of its liquidity management – and in consideration of future rating scenarios – specific Treasury strategies (such as, in particular, increasing the use of netting/collateral, and funding with matching liquidity) are being developed and will be implemented successively by the end of 2005.
Influential factors
The Global Markets Business Area is responsible for liquidity management at BayernLB. It is responsible for compliance with the liquidity principle (Principle II) under the German Banking Act, overall funding, collateral management, the coordination and funding of securities in the liquidity portfolio and for transfer pricing. The tools and models which are employed for these purposes are customary for the sector. The Board of Management lays down the liquidity policy in the form of a strategic liquidity budget. By way of regular reporting, the Board is informed of the current liquidity situation and the status of essential liquidity management measures.
Controlling
Thanks to its permanent presence in international money and capital markets, BayernLB is able to place a wide range of instruments including certificates of deposit, medium-term notes, bearer bonds, mortgage-backed bonds (pfandbriefe) and local government bonds. In addition, the Bank holds an appropriate portfolio of highly-liquid securities. By way of repo and central bank tender deals BayernLB can procure sufficient
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liquidity at any time, even when markets are tight. On the basis of a central collateral management, the money market is the chief source for safeguarding shortterm liquidity. Guaranteed, adequate access to central bank funds is considered a major instrument in managing the liquidity position (from overnight to one month). A staggered, Bank-wide limit system is in place to immediately identify and deal with short-term liquidity mismatches. Every subsidiary of the BayernLB Group balances its liquidity independently (e.g. through the European Central Bank account). The subsidiaries (Hungarian Foreign Trade Bank (MKB), Banque LBLux, SaarLB, Deutsche Kreditbank (DKB) AG) submit capital commitment balance sheets to the Group Treasury to disclose their structural liquidity statuses. Their positionings with respect to structural liquidity are then reconciled with the Group Treasury. According to supervisory requirements (Principle II), a bank’s liquidity is deemed sufficient if the weighted liquid funds available within 30 days cover the weighted payment obligations that are callable during this period. This was always the case in the year under review. In that year, the relevant liquidity ratio stood between 1.14 and 1.25, thus exceeding the required minimum of 1.0 at all times. In 2003, BayernLB enhanced its portfolio of eligible collateral further and diversified it across the world’s major currencies.
A project aimed at improving the transparency of the liquidity status will be completed in 2004. A system of regular reporting will subsequently be installed on the basis of the project results. Furthermore, a limit system for monitoring and managing liquidity risk will be implemented. Under the new system, the procedures used for measuring interest rate risk and liquidity risk will undergo constant refinement. Market price risk Market risk comprises interest rate, currency, share price and commodity risk including special option price risk. The source of these market risks may be securities (or similar products), money market or foreign exchange products, commodities, derivatives, currency or performance hedging, equity or quasi-equity or the Group Treasury (interest rate and currency risks from mismatching).
Outlook
Definition
Market risks at BayernLB are monitored by Market Risk Controlling, which is independent of Trading. The maximum loss permitted for the assumption of market risks is limited by a fixed amount of risk capital covering this risk type. Market risks are actively managed and monitored using a limit system.
Controlling
A Value-at-Risk calculation method was introduced to quantify market risks. VaR is a measure of the probable maximum loss of value (based on a 99 percent confidence level) of a given portfolio resulting from market fluctuations and arising within a defined period (holding period). VaR is calculated on the basis of historic
Quantification of market price risk
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market fluctuations (volatilities) and market correlations. It is determined anew on every day of trading. As a rule, two different scenarios are used for calculating the Group’s market risks: standard case and market liquidity shortfall. These scenarios are determined based on a Monte Carlo, or variance/covariance, method. The difference between them lies in the “holding period” parameter. The holding period in the standard case scenario is one day while that of the market liquidity shortfall scenario is 20 days. These methods provide ratios which quantify risk under normal market fluctuations. However, the impact of extraordinary market price changes and extreme market situations or disturbances to normal market situations are also analysed. Therefore, worst-case analyses and stress tests in the form of crisis scenarios are also carried out in addition to the traditional risk scenarios. Backtesting
Performance
By means of backtesting, the soundness and quality of the individual risk methods are verified. This entails a comparison of the risk forecast with the actual results (profit or loss). Different methods may be used for determining the latter: ■ In non-transaction backtesting, the actual results are determined only for the static portfolio, which is also the basis for the risk forecast. ■ Transaction backtesting, by contrast, also takes account of all changes in the transaction data that occurred during the holding period. Economic performance measures the change in value of a transaction or port-
folio within a certain period of time. The value of the transaction/portfolio itself is determined using the current market price or a theoretical valuation based on current market data. The value that could be achieved for this transaction/portfolio in the event of a sale is also calculated. Economic performance is thus defined as the difference between the current market values and those as per a given reference day plus all cash payments effected during this period. Funding costs are also added to this calculation. Furthermore, the results from exchange rate fluctuations must be sufficiently taken account of. The Board member responsible for the Risk Office Business Area receives a daily report on the Bank’s risk and performance situation. In addition, Risk Office submits a monthly report to the whole Board of Management in which the risk and performance situations of the individual units are described and the results explained. This report includes details on special risks, significant limit overdrafts and peculiarities in performance development.
Reporting
In the financial year 2003, BayernLB’s market risk capital was set at EUR 900 million. EUR 736.4 million of this amount was allotted to the individual portfolios. The remaining reserves amounted to EUR 163.6 million. During 2003 the market risk, encompassing the risks from the trading and investment books, averaged EUR 66 million and fluctuated between EUR 36 million
Market risk (VaR)
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VaR in EUR 000’s 110,000
90,000 New risk engine introduced 70,000
50,000
30,000 03 03 03 03 03 03 03 03 03 03 03 03 02 20 20 20 20 20 20 20 20 20 20 20 20 20 2/ 1/ 0/ 9/ 8/ 7/ 6/ 5/ 4/ 3/ 2/ 1/ 2/ / / / / / / / / / 1 1 1 1 / / / / 30 30 30 30 30 30 30 28 30 30 30 30 30
and EUR 106 million. The market risk increase in March was due to a doubling of the long-term interest rate volatility caused by the war in Iraq. The EUR 106 million peak reached in July was the result not only of the elimination of hedge positions used to help offset climbing interest rates but also of the conclusion of new interest rate swap deals. In August 2003 a simulation model was implemented at BayernLB to improve the quality of the Bank’s risk calculations. This system enables an accu-
rate management and monitoring of the Bank’s market risks while optimising the limit utilisation. Since the introduction of this risk measuring method, the market risk has been fluctuating only between EUR 36 million and EUR 65 million. The “market liquidity shortfall” scenario (simulation of a liquidity shortfall in the market) captures the risk at a 20-day holding period. At year’s end the VaR for this scenario stood at EUR 196 million. BayernLB’s risk capital of EUR 900 mil-
The following table shows the VaR for the different risk factors: Average Minimum Maximum 31/12/03 31/12/02 VaR in 2003 VaR VaR in EUR 000’s in EUR 000’s in EUR 000’s in EUR 000’s in EUR 000’s Interest rate risk
54,436
33,590
92,745
40,940
63,819
Share price risk
9,151
1,651
17,214
7,760
11,213
Currency risk
5,018
1,867
15,771
4,911
4,555
63
2
286
235
3
Commodity risk
Note: The method of calculation was changed in August 2003.
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Backtesting
Participation in IMF stress test
lion was sufficient to cover potential losses.
sufficient to cover all potential losses at any time and under any scenario.
In compliance with regulatory requirements (MAH), BayernLB conducts backtestings of its forecasts. Under the Basel traffic light approach and Principle I, the forecasting quality of the risk model has received a “green light”. On none of the 247 trading days was the prognosis for the overall risk exceeded as a result of a poor day’s performance. Owing to the conservative aggregation of risks at BayernLB level, the risk assessment tends to be high. The prognoses with regard to interest rates will be further optimised for individual portfolios.
Operational risk BayernLB defines operational risk (OpRisk) as the risk of an unexpected change in assets occurring as a result of human error, a process or control deficiency, a technical failure, a disaster or any negative external factor. OpRisks also encompass legal risks.
As part of a BaFin survey entitled “IMF stress test for the Bank”, test scenarios were analysed for MAH-relevant portfolios (as at 31 March 2003). The risk capital total of EUR 900 million that was provided for market risks would have been
VaR in EUR 000’s 60,000 40,000 20,000 0 -20,000 -40,000 -60,000 -80,000 -100,000 -120,000
VaR
Peformance
Definition
Basel II requires that regulatory capital be allocated internally for OpRisks and that a separate OpRisk management be set in place. BayernLB is striving for an advanced method of OpRisk management and controlling (AMA) which offers the option of partial use of the standard approach for subsidiaries/participations.
Influential factors
BayernLB’s central, independent OpRisk controlling unit has been entrusted with the task of guiding the Group on relevant methods, processes and systems.
Controlling
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The control systems entail, above all, compiling and evaluating operational loss data continuously as part of an institutionalised reporting system, and calculating the Value at Risk (OpVaR) based on historic internal and external loss data. Furthermore, high-quality valuation instruments are employed in the process. These valuations include self assessments by the business areas / support operations regarding their specific OpRisk environments as well as qualitative assessments by the central OpRisk controlling unit as to the functioning of the local OpRisk management systems. Key risk indicators (KRI) for operational risks were developed with the business areas and support operations in 2003 and have been in practice since the beginning of 2004. Classification of loss
All these components aim at minimising BayernLB’s OpRisk potential through suitable measures that are to be taken as part of a continuous process of OpRisk controlling and management. In the future this will also include the allocation of economic capital for OpRisks. Losses are classified by risk category. At BayernLB risk categories are divided among three tiers. The lowest tier is reserved for approximately 100 types of losses. The main risk categories are: illegal activities; sales practices; unauthorised activities; weaknesses in management, processes and controls; human error; and transactions. At the second level of this three-tiered system are those risk categories which are clearly allocable to the Basel II categories.
The qualitative assessment practised at BayernLB is completed by all divisions and foreign entities every six months. The assessment of the local OpRisk management systems was installed in the divisions as a new component.
Qualitative assessment
In the first half of 2003 a piece of OpRisk controlling software called ORC was introduced. ORC simulates BayernLB’s OpRisk controlling process via workflow capability, authorisation concepts, local loss entry and central quality assurance. The software can be accessed from anywhere within the Group and is used not only at BayernLB but also in some of the subsidiaries/participations. The semi-annual OpRisk report was restructured with additions being made to its content. It now includes the following: losses, OpRisks of loans for which loan loss provisions have been established, risk ratios (OpVaR and risk costs), assessments of the local OpRisk management systems, qualitative assessments and legal risks. Different versions of the report are forwarded to the Board of Management, the business areas and support operations and the internal Audit Department. The OpRisk report also contains loss data information from the subsididaries/participations. To quantify OpRisk in terms of risk provisioning, the term “loss” has acquired a broader meaning. It is now also to encompass risk potential which has not led to losses recorded in the accounting system. This includes, for example, near misses and opportunity risks.
Reporting
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For the purpose of forecasting risks, BayernLB discloses the “expected loss” and “Value at Risk” key ratios based on a loss distribution method using a simulation model that was refined in 2003. The expected loss calculated for 2003 stood at EUR 7.6 million. The actual loss was below this figure and exhibited a moderate downtrend. In addition to the risk ratios, fundamental concepts for the required allocation of economic capital were devised in 2003. In 2004, comprehensive business areaand division-specific key risk indicators will be incorporated into the internal reporting system for the purpose of reducing risks. Outlook
BayernLB is actively participating in the founding of a syndicate for loss data under the Association of German Public Sector Banks (VÖB). The goal is to improve – in cooperation with other public-law banks – the data basis for forecasting risks. This would also provide a way of benchmarking OpRisks. Summary and outlook The year 2003 and, consequentially, the risk situation of BayernLB were dominated by a difficult macro-economic environment. Current forecasts indicate an economic upswing. For these prognoses to prove accurate, however, the political and economic uncertainties still prevailing around the globe and particularly in Germany must be resolved. A revival of the economy would then also have a positive impact on the Bank’s risk results.
In the year under review BayernLB focused its risk controlling and management activities on risk optimisation. The most important steps towards this end were the implementation of the BayernLB business model and the further improvement of the control tools required for risk management. Other milestones were: ■ the improved structural and procedural organisation for credit transactions ■ the complete revision of the risk policy and strategy ■ the improvement of the methods and tools used for risk analysis and assessment ■ the development and enhancement of VaR methods used for calculating risk capacity ■ the introduction of new concepts to support cluster and portfolio management. Because credit risk continues to dominate the overall risk, BayernLB will take greater account of the fungibility factor when structuring its portfolio in 2004. The Bank will also make use of loan securitisation and syndication options. Undesirable risk concentrations in the portfolio will be actively controlled. Thanks to the improved analysis, pricing for new business will be based even more strongly on risk aspects.
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Business area activities Corporates The Corporates Business Area serves large SMEs and multinational customers in Germany as well as multinational customers in the Bank’s core regions of Europe, North America and Asia. The minimum sales volume of these companies is EUR 500 million in Germany while our customers abroad generate EUR 2 billion and more in revenues*. This business is based on long-standing customer relationships characterised by trust and is propelled by our wide range of products. In collaboration with customers and product specialists at the Bank, our relationship managers design solutions for traditional credit financing, special financing (export, project and trade financing, leasing), payment transactions and all capital market and Treasury products. Number of customers: 31/12/2003: 2,951
Segment assets: 31/12/2003: EUR 38.130 billion
Stefan W. Ropers Member of the Board of Management
As part of a series of changes taking place throughout the Bank in preparing for the withdrawal of the Gewährträgerhaftung (guarantee obligation) and Anstaltslast (maintenance obligation) in 2005, the Corporates Business Area modified its strategy in 2003 with the objectives of improving earnings power, reducing risk assets and tapping into savings potential. The most fundamental of these modifications was the increased focus on core customers and regions.
* In the Bavarian market our customers are companies with minimum sales volumes of approx. EUR 50 million; we serve these companies in collaboration with the Bavarian savings banks (cf. Savings Banks, Bavarian Municipals/Corporates Business Area).
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External factors affecting the Corporates Business Area in 2003 In the first half of 2003 – as in the year before – demand was influenced by the poor economy and a low willingness to invest, especially in Germany. This was the case both for traditional credit operations and structured financing. Given the strong international orientation of the business area, not only the domestic economy but the global environment as well exerted a negative impact during the first six months. Setbacks like the war in Iraq, SARS and the embarkment of the dollar on its downward course
hampered business development. The latter half of the year, by contrast, saw a strong impulse in the general economy. This impetus got operations going again. Business performance in 2003 In the classic credit business, the low demand for financing was accompanied by a selective trimming down of the credit portfolio. Risk assets were also cut. The main measure taken in the year under review, however, was the restructuring of the core customer segment, which was completed by year’s end. Also, additional resources were invested in an internal project to analyse the customer relationships as a whole.
Consistent action based on new strategy
International project financing operations produced a higher total income despite an unchanged business volume. In the energy and infrastructure sectors in particular, the important positions of lead arranger and underwriter were assumed for customers in Europe and the Middle East. In the USA, too, the Bank was awarded a number of arranger mandates in the energy sector, including those for financing wind parks.
Successful year for project financing with highlevel lead arranger mandates
In export financing, the decreased volume of new business made an impact on commission income. With oil prices constantly high and the world market prices for steel and steel products experiencing a sustained recovery, investments requiring medium- to long-term financing were stable. The revenues generated from exports to Western customers with good credit standing are used directly to amortise and hedge
Good market position in export financing goes back many years
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such loans (counter-transaction structure). Coverage from government credit insurance agencies and private credit insurers is used to minimise risks. The steady improvement in the economic and political environment in the Russian Federation and in some neighbouring states, boosted by upgrades from international rating agencies, had a positive impact on the risk/return position for this region. The fourth quarter of 2003 saw the acquisition of major projects in the Near and Middle East in the energy, oil and gas and transport sectors. These projects will be realised in 2004. The overall modest performance in the leasing business was held back by the debate over a higher taxation for company cars and the associated “leasing tax” proposal. But despite the contract-
ing finance volume, interest and commission income were on par with the figures posted for 2002. As in the previous year, we were very reserved in our activities in asset-backed aircraft financing as the market situation was still tense. Outlook for 2004 The traditional credit business will continue to play a major role in our business model. In the interest of a “strategic credit facility”, however, we will be linking this product closely to structured financing solutions akin to those on the capital market as well as to products for managing currencies and interest rates. We therefore do not consider ourselves lenders in the strict sense of the word but rather partners in finding complex and individual all-in financing solutions
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that do not strip away at the customer’s equity capital. Thus, our future activities will not centre on the individual transaction but on the overall relationship with the customer. The business area’s risk policy will be aimed at generating a balanced total portfolio with an adequate ratio between imminent risk and appropriate return. The Corporates Business Area will continue to pursue the strategy defined in 2003. In this context, it changed its organisational structure at the beginning of the year by integrating its global activities into two divisions, Corporate Banking and Structured Finance. Each is headed by a manager entrusted with worldwide responsibility.
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Financial Institutions & Sovereigns BayernLB’s Financial Institutions & Sovereigns Business Area manages business relations worldwide with banks, insurance companies and other institutional customers, as well as government and non-Bavarian municipal customers. This low-risk customer group accounts for the bulk of BayernLB’s business volume. Despite lower margins, the lending business achieved a relatively good return on capital employed because lower risk assets were required. The customers are also key partners in our syndication, securities, refinancing and transaction businesses. Number of customers: 31/12/2003: 22,160; 1,000 of which credit customers Segment assets: 31/12/2003: EUR 38.804 billion Dr. Rudolf Hanisch Member of the Board of Management
Interest and commission income beats previous year
Volumes in this business area grew more strongly in Germany than elsewhere. Earnings in the year under review far outstripped those in the previous year, with contributions coming from stable net interest income and improved net commission income. Costs were also kept below the previous year’s level. Interbank business / loan syndication On the international markets, lending between banks revived in 2003, while lending to the private sector remained sluggish. The creditworthiness of the banking sector improved overall, which
slowed the rise in margins seen in recent years. BayernLB’s interbank lending business was expanded in 2003. Besides Western European countries, Central and Eastern European customers are accounting for an increasingly large slice of new business. Despite an extremely selective risk policy, interest margins were slightly above 2002 levels.
Lending to banks expanded further
BayernLB consolidated its position in the international syndicated loan markets, which helped net commission income to rise further. This reflected a one-third increase year-on-year in the number of
Consolidation of position in syndicated lending
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Again named “Best arranger”
syndicated loans arranged in Munich. The volume of such transactions in fact doubled versus the previous year. In 2003, the specialist magazine “Euroweek” named BayernLB “Best arranger for loans for financial institutions” for the second successive year. Despite a clear tendency for the financial markets to favour shorter durations in 2003, BayernLB also successfully syndicated long-term transactions with durations of up to ten years. The Bank’s leading role in the syndication of the EUR 1.3 billion loan for Deutsche Bahn AG’s aurelis real estate portfolio was one example. In the shorter-duration segment, the Bank acted as book runner and facility agent, putting together syndicates consisting of up to 64 inter-
national institutions. BayernLB also enjoyed increasing success in making use of its links to banks involved in international loan syndication for the benefit of its Bavarian SME customers. Sovereigns business / support programmes With the global economy remaining weak, tax receipts of the central, regional and local authorities were also below expectations in 2003. Spending was virtually unchanged at a high level, so public budget deficits again increased. The deficits in Germany rose by around another third in 2003, to approximately EUR 80 billion. While the tendency for the länder to issue securitised debt continued, schuldschein loans found increasing favour with the
Federal government makes increasing use of schuldschein loans
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federal government again after a long time. BayernLB’s domestic government lending (which includes loans to the federal government, länder, public-sector lenders at federal and länder level, and government-related companies) performed positively. In all, new lending volumes grew by a half. Demand from municipal borrowers remains high
Demand for loans from municipal institutions outside Bavaria remained at a high level, with an increased need for cash advances in particular. Customers took advantage of interest rates staying low to lock into interest rates long-term and to take early interest rate hedging measures. New loan volumes more than doubled versus the previous year. Subsidized loan programmes were again issued in 2003 using the Free State of Bavaria’s share of the Bank’s
profits and the State’s direct budget allocation. These loans at favourable interest rates were used for local water/sewage measures, the construction of student residences and the purchase of existing housing stock. As leading bank for the execution of Bavarian development policies, we also distributed subsidies under the agricultural investment development programme to the applicants’ banks. Institutional investors The high liquidity available on the market prompted a recovery in institutional investors’ business in 2003. In particular, insurers enjoyed greater scope for action as the stock markets picked up over the course of the year. BayernLB provides these customers with advice on asset allocation issues. Insurers and foundations are again among the Bank’s major investors.
Insurers and foundations are important investors for the Bank
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BayernLB has in numerous cases developed special tailored instruments for this customer group. The range of payment services for insurers has also been extended. On the asset side, the Bank concentrated on refinancing loans to building and loan associations (Bausparkassen) and the participation in letter-of-credit transactions in the reinsurance sector, where we operate strict customer creditworthiness criteria.
Outlook In 2004, the Bank is determined to further consolidate its position as one of the world’s most active loan syndication institutions in interbank lending. Business with sovereigns is to be expanded, with careful attention paid to earnings targets.
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Landesbodenkreditanstalt (Labo) Bayerische Landesbodenkreditanstalt (Labo) is a legallydependent institution of Bayerische Landesbank. In 2003 Labo made another major contribution towards state-subsidised housing as part of its public-sector mandate. Number of customers: 31/12/2003: 198,890; 85,890 of which from fiduciary business Segment assets: 31/12/2003: EUR 14.702 billion
Dr. Rudolf Hanisch Member of the Board of Management
Government subsidy decreases offset by further growth in proprietary business
Despite another sharp reduction in government subsidies, Labo almost matched its positive 2002 result for state-subsidised business amid a difficult economic environment. Declines in fiduciary operations were largely offset by another rise in the proprietary business. The latter comprises Labo’s programmes for creating and acquiring owner-occupied residential space, modernising rented housing and helping to fund sports facilities. As part of these programmes, low-interest funds from the Kreditanstalt für Wiederaufbau (KfW) receive a further interest subsidy from Labo’s own funds and funds from the Free State of Bavaria. Through its
activities, Labo once again made an important contribution to the overall performance of BayernLB. Labo’s fiduciary operations helped finance a total of 5,580 owner-occupied homes and rented apartments as well as 1,713 rooms in homes for the elderly via loans worth EUR 253.6 million. In Labo’s proprietary state-subsidised business, loans in the amount of EUR 470.3 million were allocated for the construction and purchase of 7,264 homes while EUR 102.7 million in loans went to the modernisation of another 4,615 homes. A credit total of EUR 52.6 million was approved under the special sports facil-
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Over 20-percent growth in lending volume
ity funding programme. Compared with the previous year, this represents an increase of more than 20 percent in lending in proprietary business, while the fiduciary business volume shrank by about 34 percent. This means that the share of fiduciary operations in Labo’s total for new business amounted to just under 30 percent. Outlook In 2004 Labo will continue its furtherance of residential construction and urban development in Bavaria through trust loans and interest-subsidised loans from its own funds as well as from government and KfW funds, thereby providing a boost to the construction industry.
Budgetary decisions of the German federal government and the Free State of Bavaria have further reduced state subsidies. Labo will continue to seize every opportunity in its proprietary business to offset the impact of these decreases. Details on Labo’s business performance can be found in Landesbodenkreditanstalt’s report on its statesubsidized business.
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Real estate As part of the realignment of BayernLB, the Real Estate Business Area revised its strategic focus in 2003. A key aspect of business policy in this context is the adjustment of the target portfolio. In future, the possibility of outplacing and syndicating loans will be a main criterion when assessing new business here. The focus of activities in 2003 was on the integration of the domestic and foreign entities’ real estate operations into the Real Estate Business Area, and on establishing worldwide management of real estate business in line with a target portfolio that is based on a consistent earnings-after-risk model. The realignment of the credit process in accordance with the Minimum Requirements for the Credit Business of Credit Institutions (MAK) was also of key importance.
Dr. Peter Kahn Deputy Chairman of the Board of Management
Number of customers: 31/12/2003: High net worth customer segment: 1,200 Retail banking customer segment: 26,000 Segment assets: 31/12/2003: EUR 18.379 billion
Traditionally, the real estate market follows the economic cycle with a slight time lag. In 2003, the sluggish performance of the economy was reflected in the commercial segment by increasing difficulties with letting and marketing properties, particularly in Munich, Frankfurt and Hamburg, which had previously been enjoying a boom. Many companies have postponed their requirements for commercial space. Demand for retail premises was also lower, except in the case of inner-city shopping space.
The operating environment for residential real estate business was encouraging in 2003. The healthy market trend was driven in particular by strong demand for owner-occupied property and by persistently low interest rates. Further positives were the shortage of residential space in some western German conurbations and the fact that investors are moving back into real estate after some bad experiences in the stock markets. The residential sector is also driven by its own particular
Encouraging environment for residential lending
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trends, such as the change in family structures with an increasing number of private households; and the rise in average living space per occupant. At the same time, factors such as the high vacancy rates in eastern Germany highlight the need to differentiate between regions when assessing the residential market in Germany. Pleasingly, we were able to maintain revenues in the Real Estate Business Area at last year’s levels. Earnings in the year 2003 were, however, hit hard by relatively high risk provisions which were established for transactions carried out in previous years in accordance with the principle of prudence. Commercial real estate financing
In commercial real estate financing, we largely achieved the objectives of our risk-oriented lending policy. In doing so,
we improved the quality of new business while increasing earnings potential. In residential real estate development, we were also close to meeting our 2003 target. And in financing to completion, we improved slightly on our good 2002 result in our target market, Bavaria. LBImmoWert, a real estate valuation subsidiary that we own jointly with Helaba, performed satisfactorily in its first full year of business (see in the strategic partnership section of the Corporate Center report). Through our wholly-owned subsidiary REAL I.S. and its LB Immo Invest, we offer savings banks attractive special funds under the German Investment Companies Act (KAGG) (see in the strategic partnership section of the
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Corporate Center report). Overall, REAL I.S. AG was able to successfully consolidate its position in key markets such as fund products and real estate management.
As before, good business potential in real estate financing
Outlook In commercial business in particular we expect the operating environment to remain tough over the next two years, but in the medium to long term we see further potential in real estate financing – especially when it comes to innovative products – given the normalisation of the commercial property market.
In residential financing, we anticipate that 2004 will be a difficult year for all regions of Germany, as the economic outlook and tax conditions remain unclear. Here, in cooperation with the local savings banks, we will continue in 2004 to focus on our target market Bavaria, and in particular on Munich, which we expect to be the driving force in the residential sector.
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Bayerische Landesbausparkasse (LBS) Bayerische Landesbausparkasse (LBS) is a legally-dependent institution of Bayerische Landesbank. In 2003, LBS delivered the best sales result in its history It took on 352,828 building savings contracts with a total volume of EUR 7.8 billion, representing an increase in new business of 66 percent (number of contracts) or 64.3 percent (volume of savings) compared with 2002. Thanks to the enormous marketing efforts on the part of the Bavarian savings banks and the LBS sales force, LBS’s growth outstripped the building savings market as a whole. In particular, the savings banks were able to tap their market potential to a large extent. Number of customers: 31/12/2003: 1,448,282
Segment assets: 31/12/2003: EUR 8.353 billion
Dr. Peter Kahn Deputy Chairman of the Board of Management
The performance of LBS’s financing business was uneven. Due to the low level of interest rates, building savings deposits and loans from collective funds were less in demand, while onthe-spot financing was very popular. The volume of prefinancing and bridging loans disbursed rose by 48.4 percent to EUR 463.9 million. The German government’s plans to abolish the home ownership subsidy made an impact here. Many buyers have brought forward their decisions to purchase a home so that they can benefit from the subsidy while it is still in place. LBS also boosted business by launching a special lending programme.
LBS’s earnings situation remained stable. Net interest income fell from EUR 187.4 million to EUR 178.5 million. The decline was due to low interest rate levels and the effect of an exceptional gain in 2002 from the sale of shares in the Bavarian saving bank organisation’s estate agent business (“Sparkassenimmo”, name changed from “Landesimmo” at the beginning of 2003). Net commission income fell by EUR 5.2 million to EUR -1.8 million due to the very good level of new business. Administrative expenses were further reduced thanks to strict cost management, standing at EUR 117.1 million compared with EUR 120.8 million in 2002. Operat-
Administrative expenses further reduced
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ing profit before risk provisions was EUR 67.4 million. The decline against the previous year’s figure (EUR 108.9 million) is due to another exceptional item in the profit and loss account that drove up earnings in 2002, i.e. the release of reserves for the reimbursement of completion fees. Taking into account the exceptional gains in the previous year, earnings in 2003 can be said to have normalised at their 2001 level. This result reaffirms LBS’s profitability, particularly in view of the low level of interest rates.
Continuation of lean cost management
Outlook LBS’s primary strategic objective is to strengthen its capital base and market position. It aims to generate stable revenues through the efficient use of available resources. A top priority is therefore to continue with the lean cost management of recent years. Sales and service processes are being continually improved in order to increase productivity. LBS is leveraging here on the efficiency of its IT operation, which develops and implements solutions in line with the IT strategy pursued by the
Bavarian savings bank organisation. New business is to be acquired in particular by further stepping up the cooperation with the Bavarian savings banks. LBS will reinforce its message to clients that building savings can make an important contribution to private wealth and retirement provisions via home ownership. Further innovations in collective fund and other products are also planned. Details of LBS’s business performance can be found in its annual report.
Cooperation with the savings banks to be stepped up further
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Global Markets The Global Markets Business Area operates in all corners of the world, bundling trading and issuing activities and the Treasury operation of BayernLB. We offer our domestic and international customers a one-stop shop for all primary and secondary market products: issues, bonds, money market instruments, foreign exchange, equities and energy and commodity derivatives. New measures will be introduced in 2004 in order to implement the long-term Global Markets business model. Fuller use is to be made of cross-selling potential with our target customers, and products with market success are to be further expanded and developed (e.g. structures, credit trading, asset securitisation). Segment assets: 31/12/2003: EUR 117.627 billion Dieter Burgmer Member of the Board of Management
There was strong demand for structured equity and interest rate products among the business area’s customers. We met the increased demand for asset securitisation by expanding the product spectrum and making use of BayernLB’s experience in issuing operations. By centralising most of the trading activities at Head Office and bringing the European investment portfolios together, we have optimised risk and increased the contribution to earnings from proprietary trading. Treasury As part of its refinancing strategy, BayernLB will close outstanding liquidity gaps, by mid-2005. It will also create
adequate cash reserves through targeted issuing activity covered by the guarantee obligation. Furthermore, the technical preconditions have also been created so that from 2005 use can be made of a refinancing source independent of the issuer’s rating, in the form of mortgage-backed bond (pfandbrief) refinancing. Structured interest rate and index products made a substantial contribution to the Bank’s funding on favourable terms. The year 2003 was a record for structured products. The first event was the Catch-Up-Bond, which was fully placed at EUR 250 million. The subscription period for its successor, the Catch-UpBond with kick, had to be closed prematurely after just three weeks, when the
Structured products set record in 2003
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Record sales for the Oktoberfest bond
whole EUR 200 million was subscribed for. In products without capital protection, power bond sales of EUR 70 million set a good tone in the market. In addition to retail issues with capital protection, there were also placements for savings banks, with a total sales volume of around EUR 66 million. The highlight came with the Oktoberfest bond’s record sales of EUR 430 million, which meant that structured product sales topped the EUR 1 billion mark in 2003. New issues In 2003, as in earlier years, BayernLB was one of the leading regular issuers on the German and international capital markets. BayernLB has issued pfandbriefe, uncovered bearer bonds and structured bonds as constant issues and under its international issue programme. Besides the euro, which is the main currency used for these instruments, other important issue currencies were the Swiss franc, US dollar and Japanese yen. But there was also keen interest in bonds denominated in Australian, Canadian and New Zealand dollars, Norwegian krone and Swedish krona, particularly from private investors. At the beginning of 2003, BayernLB issued the first Swiss franc-denominated public pfandbrief from a foreign issuer in Switzerland. There were three transactions in this market segment, worth a total of CHF 1.3 billion. In the yen segment, BayernLB used all three available instruments (euro-yen, Uridashi and Samurai bonds). It created one of the biggest yen benchmark bonds of the year, with a volume of JPY 60 billion.
In the fast-growing international market for covered bonds, an eight-year EUR 1.5 billion jumbo pfandbrief was issued. This broadly syndicated issue was the subject of brisk interest in Germany and abroad. BayernLB’s international standing as an issuer should be strengthened in 2004, as a range of large strategic issues are planned. BayernLB was lead manager on issues on behalf of the Free State of Bavaria, the Province of Quebec, BAWAG, Banque LB Lux SA, Deutsche Apotheker- und Ärztebank eG, Österreichische Kontrollbank AG, Bayer AG, Daimler-
Chrysler Co-Ordination Center SA, DaimlerChrysler Canada Finance Inc., Volkswagen Bank GmbH and Volkswagen International Finance N.V. Also worthy of mention was BayernLB’s involvement as lead manager in the successful placement of the first schuldschein loan for Celesio AG, with a volume of EUR 243.5 million. BayernLB is the exclusive sales partner in Germany for Overture’s ABS transaction – collat-
Brisk issuing activity
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eralised debt obligations (CDO) from AXA IM with a volume of USD 3 billion.
Focal point in Munich
Money market, foreign exchange and interest rate derivatives trading As part of the new trading strategy, interbank foreign exchange trading for the European time zone has been concentrated in Munich. The risks posed by foreign exchange transactions have been considerably reduced, helped by the successful application of continuous linked settlement (CLS). Our market position in international foreign exchange trading and strategic focus on customer requirements contributed to the success in 2003. A positive contribution also came from interest rate derivative trading. We drew on our experience to successfully support customers in optimising their portfolio returns and risks.
Capital market business Fixed-income business with savings banks and German and international investors was also greatly stepped up in 2003. Insurers were above all on the lookout for quality with good credit ratings. Business with savings banks progressed well last year, and we benefited from increased acquisitions. While there was still no recovery in new equity market issuing in 2003, there were more transactions relating to capital measures. BayernLB was involved in a public conversion offer for E.ON Energie AG, which met with great success. In order to strengthen our competitive position and to benefit issuers, a cooperative agreement was reached with Helaba including an additive underwriting commitment for share issues and comprehensive marketing and sales
Successful business with the savings banks
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services. This should also strengthen the position of the Sparkassen-Finanzgruppe in international transactions.
Bayern Invest bundles asset management services
Asset management The Bank transferred its institutional asset management activities to its Bayern-Invest subsidiary with effect from 1 April 2003. This means that Bayern-Invest now carries out the key asset management functions of BayernLB Group. At end-2003, Bayern-Invest managed assets of EUR 16 billion (EUR 13 billion in 2002). Of these, EUR 14 billion related to management and advisory services for special funds, EUR 1.4 billion to institutional asset management and EUR 0.6 billion to advisory services for publicly offered funds. The range of products and services includes active and passive management of investment portfolios consisting of equities, bonds, derivatives and currencies. The investments focus on Europe. The broad product range was extended to include risk reduction and loss recovery strategies for equity portfolios. In 2003, BayernInvest maintained its position as Germany’s tenth-biggest investment company in terms of special fund volumes. By strengthening its sales operation and expanding the products and services on offer in 2004, the company is seeking to achieve greater market penetration and improve its earnings power.
BayernLB International Fund Management S.A. As at 31 December 2003, Bayern LB International Fund Management S.A., a Luxembourg-based investment company, managed a total of 22 publicly offered funds under three structures, with assets totalling EUR 749 million. Investor demand last year focused on bond funds. Fund volumes grew by EUR 128 million, or 21 percent.
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Savings Banks, Bavarian Municipals/Corporates The objective of the Savings Bank Central Bank function is to strengthen the Savings Banks Association, and as a result ensure a comprehensive offering of financial services, both nationally and internationally. Bayerische Landesbank’s role here is primarily in the Bavarian market; the Saving Banks, Bavarian Municipals/Corporates Business Area is responsible for carrying out the activities that its role entails. Number of customers: 31/12/2003: approx. 2,850
Segment assets: 31/12/2003: 31.654 billion
Theo Harnischmacher Member of the Board of Management
Strategic focus
Among the key elements of the new BayernLB business model are extending the function of the Savings Bank Central Bank; focusing on the Bavarian market; and stepping up and enhancing the joint marketing efforts with the Bavarian savings banks. Management of the relation-
ships with the savings banks and with Bavarian municipal and corporate customers is concentrated within a single business area that acts as an interface. The cooperation with the savings banks rests on various pillars:
Savings Bank Central Bank function
Savings banks as customers
Savings banks as sales partners
Savings banks as service partners
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Optimising cooperation
Segment performance in 2003
The basis for implementing this model is the framework agreement between the Association of Bavarian Savings Banks (SVB) and BayernLB, which was concluded on 2 December 2003 and regulates the overall structure under which the two partners provide services for each other. On this basis, individual agreements have since been signed between the Bavarian savings banks and BayernLB, setting out binding regulations governing their bilateral cooperation. The cornerstones of these agreements are “cooperative marketing” (systematic marketing at individual customer level) and the “competence centres” across Bavaria (international business, corporate finance, municipals, real estate, investment business, credit risk management). All parties benefit since the efficiency within the cooperation structure is enhanced, thanks to jointlydeveloped solutions, while the market position of the Sparkassen-Finanzgruppe Bayern is strengthened. Performance in 2003 Business performance was sluggish at the start of the year, but in the business area’s corporate customer segment, demand from Bavarian savings banks for BayernLB’s services as a syndicating partner picked up significantly in the second half of 2003. However, the environment remained tough throughout the year – economic conditions were harsh and the risk situation of individual SMEs remained problematic. International business with SMEs was heavily influenced by the new EU price regulations for payment transactions, which became effective on 1 July 2003. A concept for
implementing these provisions was devised together with the Bavarian savings banks. By merging international documentary operations at the Nurem-
berg location, the quality and service provided for customers and savings banks alike were improved, and a center of competence for these activities was established. A very cautious approach was also taken to syndicated commercial real estate underwriting business
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with Bavarian savings banks. However, the number of financing requests from savings banks and the demand for advisory services has picked up. In the area of subsidised lending, where BayernLB acts as an advisor and transmits loans to savings banks, the volume of business increased steadily. The Sparkassen-Finanzgruppe Bayern has the biggest share of the market for programmes set up by LfA Förderbank Bayern, the Bavarian Development Institute. Advisory services aimed at meeting specific requirements and proposing practical solutions, like the real estate benchmarking project planned by the Sparkassen-Finanzgruppe Bayern for
2004, enable local authorities to substantially reduce their municipal real estate management expenses in some cases, and are attracting a lot of interest from municipal customers. A crucial factor for the future effectiveness of the Sparkassen-Finanzgruppe Bayern is a harmonised approach. Here, BayernLB acts as a network bank, whose core function is cooperation with the Bavarian savings banks. Even though they are linked by the framework agreement, the individual partners retain their legal, financial and strategic independence, which further underpins the ongoing and successful joint marketing efforts in Bavaria.
Outlook: pooling of services under the cooperation framework
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Support operations activities Risk Office Overall, the year 2003 posed major challenges. The growing demands associated with fulfilling external regulatory guidelines – in particular Basel II and the Minimum Requirements for the Credit Business of Credit Institutions (MAK) – exerted a great impact on business. At the beginning of 2003, activities for analysing single borrowers, managing loans in need of restructuring, risk controlling and risk management were brought together in the newly-formed Risk Office (RO). January 2004 saw the introduction of the new credit process, the last step in the reorganisation of BayernLB’s risk management. The risk-relevant tasks of credit administration – in particular drafting agreements, processing collateral and managing the data warehouse – which up until then had still been carried out in the market areas, were bundled together in Risk Office’s newlycreated “Credit & Collateral Services (CCS)” unit. Dr. Gerhard Gribkowsky Member of the Board of Management
By bringing all risk-relevant tasks into Risk Office, introducing the new credit process and making appropriate changes to the fundamental structure, we have achieved an overall increase in efficiency through synergy effects and improved risk management, including greater specialisation and standardisation. Throughout the reorganisation process, a focus on core competences and compliance with external benchmarks and standards were key considerations. The analysis function in operational credit
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business is concentrated in RO Corporates / Financial Institutions and RO Real Estate / Structured Finance. A systematic sector-oriented approach was implemented in the analytical units of operational credit business. The Risk Office units of the foreign entities were integrated into RO Corporates / Financial Institutions in order to ensure a standardised risk culture. The most important tasks performed by Credit & Collateral Services are the development of Bank-wide standards for credit and collateral agreements, including collateral policy, the drafting of credit and collateral agreements, the uniform monitoring of risk-relevant credit business and a transaction- and service-oriented portfolio management, including data management. In Credit Consulting, the chief feature is a greater focus on workouts. The Risk Controlling & Procedures Division has been entrusted with the design, implementation and monitoring of management systems, in addition to the implementation of more accurate methods for risk measurement and reporting. For the purpose of better managing credit and country risks, we enhanced and approved the Bank-wide credit policy, which also defines the scope of our risk policy. It will furthermore help shape our lending policy and form the basis for BayernLB’s credit culture. A key component of the regulations under this policy was the establishment of the Credit Committee as the highest competence holder below the Board of Management. With the Credit Committee, the quality of credit risk management will be improved and a fast, flexible deci-
Integration of the foreign Risk Office units
New credit policy
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sion-making process ensured. The introduction of the credit policy also entailed designing and adopting a new, transparent and risk-oriented competence structure which provides a solid framework for the changed structural and decisionmaking processes. Risk management
Additional progress was made in early risk recognition thanks to BayernLB’s new IT-supported early warning function and a standardised monitoring tool. Other systems for early recognition on the basis of capital market information were also successfully implemented, enabling the Bank to take prompt action. Steady progress was made in terms of ratings with the introduction of a new rating system – developed in conjunction with nine other landesbanks – and the DSGV rating system. The methodology for the landesbank rating system was completed. The Corporates / Financial Institutions Division will be using interim solutions until the complete IT system is rolled out. The previous rating system will be gradually phased out, which will represent another milestone in fulfilling the Basel II requirements. New software enabled us to improve the monitoring of counterparty risks and to calculate market risks in trading. The limit system currently used for our classic credit operations is being examined and adapted to meet MAK requirements. As for our credit portfolios, further progress was made in creating and developing the groundwork for a risk management system that is oriented towards economic capital requirements.
The business areas and Credit Portfolio Controlling together developed the basis for a target portfolio that incorporates business and risk targets at customer, sector and country level. This was aided by improvements in the tools used for identifying cluster and concentration risks. Should fixed limits be reached during the planning process, certain regulations will be applied which will restrict additional business in line with the credit policy and trigger measures to limit the exposure. When the basis for the target portfolio was first being created, the entire portfolio reporting process was reviewed and revised. A further focus is the design and implementation of an IT solution for a standardised and centralised, Bank-wide data warehouse for internal risk management. Weaknesses in the credit systems were identified and analysed, and measures were taken to eradicate them, thereby creating the general framework for optimising the existing system environment.
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Outlook Our focus in 2004 will be to steadily continue with the measures that have been induced. These measures include first and foremost the introduction of the new credit process, acceleration of the approval process, improvements in risk controlling and optimisation of the effectiveness and efficiency of IT systems.
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Corporate Services The Corporate Services Support Operations is BayernLB’s central service provider. It comprises the Corporate IT, Private & Transaction Banking and Organisation & Services Divisions. In addition to its service tasks, Corporate Services is also responsible for the sale and processing of credit card programmes, private customer business transaction handling for Bank staff and HNW customers and the Corporate Services custodian bank function. Number of customers: 31/12/2003: 638,756
Werner Strohmayr Member of the Board of Management
Payments
BayernLB acts as a central service provider of efficient domestic and international payment transactions for its customers. Large numbers of transfers are made, particularly once the Bavarian savings banks are included. There were again more than one billion paperless domestic payments in 2003. A new payment procedure allowed foreign payment transactions to be expanded. Since 1 July 2003, crossborder payments between euro-zone countries for amounts of up to EUR 12,500 have been processed on the same terms as domestic payments. The transition was seamless. Just three
months afterwards, 70-80 percent of EU orders were quoting the bank identifier code (BIC) and international bank account number (IBAN). To achieve economies of scale, BayernLB last year outsourced the scanning of paper payments to ServiceZentrum Bayern, a SparkassenFinanzgruppe Bayern company. In e-banking, Corporate Services offers traditional media such as magnetic tape and data transmission, but also Internet-based solutions like the BayernLB e:Web and BayernLB Online:Banking products to serve this
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ever-growing market. It also offers customers the BayernLB e:Web PRO product to network its customer entities over the Internet. An improved platform for electronic bill presentment and payment is being launched in the first quarter of 2004.
Securities transaction volumes (orders received) stabilised in 2003, reaching the same level as in 2002. The same applies to securities accounts and related account movements. BayernLB is successfully processing securities transactions on behalf of its customers and itself via the Transaktionsbank (TxB), which also handles such transactions for other large customers (see the strategic partnership section in the Corporate Center report). BayernLB was able to further improve on its strong position in the credit card business. Key contributions came from successful cooperations with high-profile partners, such as Lufthansa AG.
Securities service
Strong position in the credit card business
As part of its co-branding business, BayernLB issued jointly-designed credit card products under its partners’ brands. The Bayern Card-Services subsidiary is the product manager. The number of credit cards issued rose by 3.4 percent to 802,000, and the 2003 transaction volume was EUR 3.66 billion. This meant that volume growth was 13 percent – about twice as fast as in the German credit card market as a whole. By outsourcing certain types of services, costs were made more flexible still. The mail and security departments were transferred to LB Corporate Services GmbH in 2003 and the Bank is currently considering outsourcing the whole of Facility Management (FM). Systematically implementing these measures in conjunction with an established FM partner will bring considerable
Costs even more flexible through outsourcing
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Non-core Bank service units to be investigated for outsourcing potential
cost savings. According to the FM partnership plan, the merger of business activities will offer employees in the new company attractive prospects. All service units will continue to be scrutinised for scope for outsourcing, with the focus on core banking business, cost-cutting and flexibilisation potential and the generation of earnings from business with third parties.
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Corporate Center The Corporate Center Support Operations was formed in 2002. It bundles all the central support areas of BayernLB, furthering a central, consistent Group management and strategy. Corporate Center has global responsibility for all the areas under its remit. Its services are drawn on by internal customers (the Board of Management, business areas and support operations and subsidiaries of the Bank), the Bank’s owners and outside parties such as auditors, authorities, rating agencies and members of the press.
Werner Schmidt Chairman of the Board of Management
In-house Corporate Governance Principles endorsed
Corporate Governance Principles While BayernLB is an unlisted publicsector bank, it still places great importance on making its corporate governance system transparent and comprehensible. The BayernLB Board of Management decided in November 2003 to issue its own Corporate Governance Principles. These are based in large part on the recommendations of the 21 May 2003 edition of the German Corporate Governance Code drawn up by the German federal government’s Cromme Commission. The BayernLB Board of Management, Board of Administration and General Meeting adhere to these principles in fulfilling their man-
dates, promoting confidence in BayernLB among customers, employees and the broader public. Our Corporate Governance Principles entered into force on 1 January 2004 and are regularly reviewed and amended as necessary to reflect new experiences and legal requirements and changes to German and international standards. BayernLB will report on its observance of these Corporate Governance Principles in each annual report. Participations Our strategic participations portfolio contains mainly participations in other banks in Germany and elsewhere.
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These aid us in expanding market share and broaden our customer potential (see report on the Bank and Group (Section II) for the major changes to the participations portfolio). Outside the banking sector, another focus of our strategic participations is on those areas where the Bank has a tradition of high-level expertise in financing and where it can offer a broad range of products. These include, in particular, real estate and housing construction. Rounding off our range of strategic participations are various service companies, chiefly in securities settlement and computer services. The portfolio is supplemented by financial holdings, which we expect to increase in value in the coming years.
ped up further last year. The asset management product range was tailored more closely to the requirements of savings bank customers. The collaboration in asset management and securities research with BayernLB and Landesbank Hessen-Thüringen (Helaba) the two parent companies, was also expanded upon. Proprietary trading activities were greatly scaled back on risk grounds, which led to lower total assets and trading income.
Below are the main participations that are of strategic significance to the Group. These are managed in part by BayernLB. For many years, BayernLB has been active in its enlarged core European market through its subsidiaries and participations in other banks. LB(Swiss) Privatbank AG, Zurich
LB(Swiss) Privatbank AG, Zurich, concentrates on international private banking. Its core business activities are asset management, investment consulting, funds and, rounding off its operations, its strongly customer-focused credit business. As a reflection of the strategic focus on the German market, the cooperation with savings banks, particularly in Bavaria, Hesse and Thuringia, was step-
In a volatile stock market environment, LB(Swiss) maintained its position in private banking. Result from the commission and services business and from other interest-earning business was roughly in line with the previous year.
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LB(Swiss) Privatbank AG, Zurich Core business activities
Private bank; takes advantage of operating environment in Swiss financial centre; asset management, investment consulting and fund business for high net worth private clients and all associated banking business; credit and treasury business to a lesser extent
Size of participation in percent
BayernLB 50 percent; Helaba 50 percent
Total assets
EUR 1.4398 billion
Equity
EUR 73.8 million
Number of employees
81
Operating profit before and after risk provisions
EUR 15.4 million, EUR 15.2 million
Net income for the year and profit available for distribution
EUR 11.6 million, EUR 11.9 million
Number of customers: 31/12/2003:
9,368
Assets under management: 31/12/2003:
EUR 2.1833 billion
Key ratios
– Cost-income ratio 53.0 percent – Return on equity 20.9 percent
Strategic objectives for the participation in 2004-2005
To further step up cooperation with savings banks, particularly in Bavaria, Hesse and Thuringia, reflecting the strategic focus on the German market. Credit business will continue to be operated either as an add-on to private banking or in highly profitable niches.
Banque LBLux S.A., Luxembourg
Banque LBLux S.A., Luxembourg, is a European bank with an international focus. In 2003, it again concentrated on corporate banking in the Benelux region and international private banking. These areas were supported by the Trading/ Treasury Division, which again actively conducted proprietary trading. The bank was also an IT service provider for a number of entities of the Bayerische Landesbank Group. Banque LBLux reinforced its position in corporate customer business in the
Benelux countries in 2003. The business volume stabilised, and margins improved substantially. In the real estate area, the bank participated in the financing of prestige properties in Luxembourg and Brussels. As a consequence of the current economic situation, Banque LBLux further tightened up its risk management and associated risk policy. In private banking, a customer survey was conducted and service standards were developed with the aim of systematically improving quality. The range
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of products and services was extended to include succession planning, and the documents already available in several languages were translated into others to help with the acquisition of international customers. A more active customer contact approach was put into practice,
and the service for institutional partners and savings banks was enhanced. Deliberate, well thought-out cost management and the accompanying process optimisation measures will also ensure profitability in the future.
Banque LBLux S.A., Luxembourg Core business activities
International financing / corporate customer business (with Group responsibility for the Benelux countries), trading/treasury, private banking and IT hub function for foreign entities of the BayernLB Group.
Size of participation in percent
BayernLB 75 percent minus one share Helaba 25 percent plus one share
Total assets
EUR 12.432 billion
Equity
EUR 470.6 million
Number of employees
199
Operating profit before and after risk provisions
EUR 35.9 million, EUR 35.7 million
Net income for the year and profit available for distribution
EUR 25.3 million, EUR 0 (due to advance dividend on 29/12/2003)
Number of customers (private banking): 31/12/2003:
10,275
Assets under management: 31/12/2003:
EUR 4.1 billion
Key ratios*
– Cost-income ratio 35.8 percent – Return on equity 12.2 percent
Strategic objectives for the participation in 2004-2005
LBLux is pursuing a niche strategy, based mainly on consulting services tailored to customer profiles: – active and systematic target-customer oriented support in private banking – in corporate banking, focus on listed companies and large local companies in the Benelux region; relationship management – in trading, short-term markets/products requiring high levels of trading expertise; credit trading
* Applies to the operating profit as adjusted for special factors
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Landesbank Saar, Saarbrücken (SaarLB)
Since 1 January 2002, BayernLB has held an increased stake of 75.1 percent in the partner’s capital of Landesbank Saar, Saarbrücken (SaarLB), with which it has been in ever-closer partnership since 1993. With total assets of around EUR 16 billion and working in close conjunction with the BayernLB Group, SaarLB operates a universal banking business in its region with an emphasis on lending to the commercial sector. Together with the Saarland savings banks, it has over 60 percent of all loans granted by regional institutions to non-banks and was able to strengthen its market position further last year. Its operations do not stop at the border: SaarLB has been building up its credit business in neighbouring areas of France and enjoying impressive growth rates there. This has involved some cooperation with French partners. It opened a representative office in Metz at the start of 2004 in order to support its distribution channels. Collaboration with the Saarland savings banks was placed on a wider footing last year. The entire Saarland savings bank sector also stands to benefit from the close relationship with BayernLB, particularly with respect to the transfer of expertise on complex products. Although the economic operating environment remained challenging, SaarLB succeeded in increasing its corporate and private customer credit volumes in 2003. It again presented improved earnings figures, with a better cost income ratio and net profit now standing at EUR
13 million. This was founded on a significant increase in interest and trading income, with costs rising only moderately. The operating profit left plenty of scope for open and hidden reserves to be topped up in addition to making risk provisions. All exceptional income generated from the sale of participations was fully allocated to reserves in accordance with Section 340 g of the German Commercial Code (HGB). With its cooperation with BayernLB, SaarLB looks well placed overall to handle the period after the current guarantee mechanisms cease to apply.
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Landesbank Saar, Saarbrücken (SaarLB)
Deutsche Kreditbank Aktiengesellschaft, Berlin (DKB)
Core business activities
While maintaining its independence, SaarLB operates a regionally oriented universal banking business in conjunction with BayernLB. It draws on many years’ experience with most of its customers (market leader in Saarland) and pursues a niche policy in business in the rest of Germany and abroad.
Size of participation in percent
BayernLB 75.1 percent, Sparkassen- und Giroverband Saar 14.9 percent; Saarland 10.0 percent
Total assets
EUR 16.515 billion
Equity
EUR 375.2 million
Number of employees
637
Operating profit before and after risk provisions
EUR 62.1 million, EUR 33.4 million
Net income for the year and profit available for distribution
both EUR 13 million
Number of customers: 31/12/2003:
63,195
Key ratios
– Cost-income ratio 50.0 percent – Return on equity 11.2 percent
Strategic objectives for the participation in 2004-2005
Geographical expansion of business operations to bordering areas of France via new representative office in Metz. Expansion of lending business to SME corporate customers (principal bank function) in the local Saarland/western Palatinate/ Trier/Eifel market. Intensification of cooperation with BayernLB in syndicated business. Strengthening of regional position in real estate financing, otherwise selective approach with high calibre private investors. International business and trading/treasury not regarded as core areas.
The regional focus of Deutsche Kreditbank Aktiengesellschaft, Berlin (DKB) is on the new federal states. DKB is positioned as a multi-speciality bank and concentrates on selected target customer groups in the corporate, public sector and private customer segments. Against the backdrop of the Minimum Requirements for the Credit Business of Credit Institutions (MAK), internal deve-
lopments in 2003 centred on the complete segregation of marketing and market succession activities as well as on the realignment of the credit portfolio. Another key area was the systematic updating of the corporate strategy. Product development was standardised to a large extent and quality management was stepped up, both of which helped make processes more efficient.
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Targeted risk management was also rigorously applied, using focused portfolio structuring. The top priority in the corporate customer business is to concentrate on defined target sectors. The public sector segment is the most
important one in DKB’s credit business. This solid core market was expanded further last year by means of strategic acquisitions in the old federal states. Private customer business shared the positive growth trend.
Deutsche Kreditbank Aktiengesellschaft, Berlin (DKB) Core business activities
Multi-speciality bank targeted towards SME customers and with a geographical focus on the new federal states Three market areas: Corporate Customers, Public Sector Customers and Private Customers
Size of participation in percent
100.00 percent
Total assets *
EUR 26.431 billion
Equity *
EUR 1.196 billion (31/12/03), including profits available for distribution: EUR 1.221 billion
Number of employees
2,128 (DKB Group)
Operating profit before and after risk provisions *
EUR 162.9 million, EUR 25 million
Net income for the year and profit available for distribution *
EUR 25 million, EUR 25 million
Number of customers: 31/12/2003:
101,021
Key ratios
– Cost-income ratio 41.3 percent – Return on equity 2.0 percent
Strategic objectives for the participation in 2004-2005
Further quality improvements in the defined target customer groups and greater integration of working processes into BayernLB’s risk management structures
* DKB AG figures (no sub-group accounts)
Magyar Külkereskedelmi Bank Rt. (MKB) – Hungarian Foreign Trade Bank, Budapest
In 2003, BayernLB adjusted the ownership structure of Magyar Külkereskedelmi Bank Rt. (MKB), Budapest, and acquired the remaining 0.32 percent of shares owned by minority shareholders by means of a public takeover offer and squeeze-out. MKB, which represents a strategic investment and bridgehead in Eastern Europe, is now in the sole
hands of BayernLB with 89.62 percent and BAWAG with 10.38 percent. For MKB and the Hungarian banking industry as a whole, 2003 was a year of intensive lending activity and stepping up of preparations for EU accession in May 2004. MKB’s total assets grew by some 19 percent to around EUR 4.4 bil-
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lion, largely driven by the credit business. The bank is well prepared for EU accession and sees market opportunities in the new customer requirements that will result, not least because of its international connections. Despite considerable capital and IT expenditure, net income for the year increased by approximately 13 percent to EUR 53 million.
of 2003 MKB acquired the Hungarian Konzumbank Rt. when it was privatised. With total assets in the region of EUR 390 million, Konzumbank focuses on retail business, business with SMEs and state subsidised lending. The main emphasis in 2004 will be on integrating Konzumbank and the ensuing restructuring of the entire retail side, as well as on expanding the investment banking operation.
In order to further build on its position in the profitable retail segment, at the end
Magyar Külkereskedelmi Bank Rt. (MKB) Core business activities
MKB is a universal bank, operating in all areas of corporate and private customer business. It is the third-biggest bank in Hungary. MKB further expanded its retail base in 2003 by acquiring Konzumbank. For BayernLB and the savings banks, MKB is a foothold and bridgehead in Eastern Europe (German Desk).
Size of participation in percent
BayernLB 89.62 percent; BAWAG, Vienna, 10.38 percent
Total assets
EUR 4.348 billion
Equity
EUR 347 million
Number of employees
1,281
Operating profit before and after risk provisions
EUR 69.6 million, EUR 58.8 million
Net income for the year and profit available for distribution
EUR 49.7 million, EUR 35.9 million
Number of customers: 31/12/2003:
104,300
Key ratios
– Cost-income ratio 53.8 percent – Return on equity 18.2 percent
Strategic objectives for the participation in 2004-2005
To maintain the strong market position in corporate customer business. To further improve market position in SME and retail segments.
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The cooperation with Helaba dates back to May 2000, and this integral element of the corporate strategy was further deepened and expanded last year. Developments at LB-Immobilienbewertungsgesellschaft mbH (LBImmoWert), LB Immo Invest GmbH and LB Transaktionsbank GmbH Frankfurt (Main) – München (TxB) merit particular mention.
TxB was founded in 2002. It acquired bank status last year and now trades under the name LB Transaktionsbank GmbH. TxB’s business is being built up rapidly. Various potential customers expressed an interest in collaboration and invited TxB to tender its services and demonstrate its capabilities. The interested parties include some wellknown names, with whom letters of intent have been signed.
LB Transaktionsbank GmbH (TxB) Core business activities
Securities processing (order, custody and Eurex transactions including settlement) for its owners, savings banks and other third parties
Size of participation in percent
BayernLB 50 percent plus 1 vote Helaba 50 percent minus 1 vote
Total assets
EUR 76.3 million
Equity
EUR 52.1 million
Number of employees
484
Operating profit before and after risk provisions
EUR -15.7 million
Number of customers: 31/12/2003:
137 full-service customers
Number of securities transactions: 31/12/2003:
3,116,432
Number of custodian accounts: 31/12/2003:
1,196,114
Net income for the year and profit available for distribution
EUR -15.7 million
Strategic objectives for the participation in 2004-2005
To win further customers and enter into cooperations with the aim of long-term economies of scale on costs and establishing itself in the market
LB Transaktionsbank GmbH (TxB)
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LB Immobilienbewertungsgesellschaft mbH (LBImmoWert)
LBImmoWert is BayernLB’s and Helaba’s centre of competence in real estate valuation and research. In its first full year of business, LBImmoWert successfully continued down the route adopted since it commenced trading in 2002. By taking over the real estate valuation activities of the Group subsidiaries DKB and SaarLB in the year under review, it was also able to further expand its geographical reach. All types of real estate valuation and research services are now offered from six locations: Frankfurt, Munich, Nuremberg, Erfurt, Berlin and Saarbrücken. LBImmoWert’s range of services is also available to customers outside the Group, particularly members of the Sparkassen-Finanzgruppe.
LB Immo Invest GmbH
LB Immo Invest GmbH is jointly owned by Helaba, HSH Nordbank and REAL I.S. AG Gesellschaft für Immobilien Assetmanagement, Munich. The company was founded in 2002 and was developed further last year. Its business is the issuing and distribution of special real estate funds. Its target customers are institutional investors, who have the opportunity to diversify their portfolios according to different types of use. This is achieved via fund modules for retail, office and residential properties, etc.
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Section IV
Our staff Structural and personnel changes For Bayerische Landesbank, the financial year 2003 was dominated by a new strategy and the systematic realisation of the BayernLB business model. The centralisation associated with these changes and the new focus on the Bank’s core competencies had drastic consequences for our staff. The restructuring measures prescribed by Basel II and the Minimum Requirements for the Credit Business of Credit Institutions (MAK) led to sweeping changes in the organisation structure and process, particularly in the sales units (business areas) and risk offices (support operations). This in turn resulted in the termination of 544 jobs throughout the Group in the financial year 2003, with the number of staff totalling 9,061. The majority of the job cuts affected the core Bank, i.e. BayernLB in Germany and abroad, excluding Bayerische Landesbausparkasse (LBS) and Bayerische Landesbodenkreditanstalt (Labo). By the end of 2003, all the foreign representative offices were closed (except for Beijing) and arrangements were made in consultation with the staff members concerned to terminate their employment with the Bank. Furthermore, the closure of all the domestic branches and representative offices outside Bavaria led to a corresponding reduction in personnel. The number of employees at the locations in Bavaria (Munich and Nuremberg) was decreased by mutual agreement. The Nuremberg branch was restructured in mid-2003 and the staff capacity lowered. Further
89
concrete arrangements have already been made to reduce the number of staff in the financial year 2004 and in the following years. The foreign branches will undergo a gradual downsizing in 2004. In the future, the size of all the locations and their staff capacity will be based on their individual tasks and earnings potential. The first steps toward this end have already been taken. Most of these job cuts were the result of a natural flux coupled with a qualified hiring freeze (not applying to junior staff). The Board of Management and the Staff Council signed a company agreement in June 2003 on an array of instruments for curbing personnel expenses. This contract contains regulations that are aimed at securing jobs by hav-
Personnel reduction measures – company agreement
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Our staff
90
2003
2002
9,061
9,605
34 164 22
40 210 17
Change absolute in %
Number of employees at year-end in the Group1) of which – top management2) – apprentices – temporary trainees in the Bank in Germany and abroad3) of which – abroad – apprentices – graduate trainees – temporary trainees – part-time staff
–544
–5.7%
–6 –15.0% –46 –21.9% +5 +29.4%
5,543
5,932
699 138 24 19 768
761 178 34 11 748
In the core Bank4)
4,581
4,969
–388
–7.8%
Average length of service in the Bank (in years)
12.61
11.87
+0.74
6.2%
Average age in the Bank (in years)
39.60
39.16
+0.44
1.1%
656,481 732,629
–76,148
–10.4%
493,485 533,224
–39,739
–7.5%
Personnel expenses in the Group (in EUR thousand) of which – wages and salaries – social security contributions and employee benefits – pension contributions Average number of staff in the Group
–389
–6.6%
–62 –8.1% –40 –22.5% –10 –29.4% +8 72.7% +20 2.7%
81,192 100,910
–19,718 –19.5%
81,804
98,495
–16,691 –16.9%
9,029
9,390
–361
–3.8%
1) The Group includes Bayerische Landesbank. 2) Boards of directors, managing directors, supervisory boards and boards of management. 3) Bayerische Landesbank in Germany and abroad, including Landesbodenkreditanstalt and Landesbausparkasse. 4) The Bank in Germany and abroad, excluding Landesbodenkreditanstalt and Landesbausparkasse
ing staff members acquire new skills. It also provides a framework for a bilateral agreement on the termination of employment through, for example, classic outplacement measures or transfers to company holdings. This step made it possible to largely avoid mass layoffs in the financial year 2003. Apart from the measures cited above, a range of activities for outsourcing nonbanking specific tasks was carried out throughout 2003 and led to a decrease in personnel. The mail and security/ reception departments, for example, were transferred to LB Corporate Services GmbH. This reduced the number of staff at the core Bank by 61. Furthermore, participations peripheral to the core business of the Bank were sold. The sale of Interbanka a.s., Prague, alone, for instance, resulted in a decrease of 112 employees. In addition, the Board of Management resolved that voluntary benefits, particularly bonus payments both to employees under the standard pay agreement and those under the Bank’s own pay scale, will not be awarded until the annual accounts for the financial year 2003 have been approved. These bonus amounts, furthermore, are to reflect the Bank’s earnings situation, taking account of appropriate risk provisioning and distributions to its owners. Strengthening the Bank’s financial position must remain a chief priority in the future, as must securing jobs and rewarding staff on the basis of set objectives.
Systematic reduction of personnel expenditure
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Cultivating fresh talent: Opportunity and systematic training as success factors BayernLB has always strongly believed in furthering the potential of dedicated and motivated trainees. The Bank has a reputation in the entry-level job market as being an attractive, reliable training institution. This is reflected especially in the increasing number of highly-qualified applicants who seek work with BayernLB. BayernLB offers these applicants tailored trainee programmes as well as on-the-job and extensive offthe-job training. A particularly successful programme is our cooperation with the Bavarian savings banks, which allows trainees to gain experience and exchange valuable information while alternating between the savings banks and the Bank. True to our “train-andhire” philosophy, the main thrust of our recruiting efforts is to fill positions from within the company. We are pleased to report that we were able to permanently hire 36 trainees in 2003 — a relatively
high number given the difficulties that had marked that year. BayernLB strives to train staff systematically by providing the right combination of job experience and goal-oriented responsibilities. In particular the training programmes that are run parallel to work activities, some of which lasting several years, were taken up with an especially high degree of commitment and were concluded very successfully. As part of our efforts in developing new managers, we identify highly-qualified next-generation managers through an internal application procedure. These employees are fostered under a special programme designed to develop and broaden management competencies. The goal is to even better prepare team leaders, with the support of the next-highest management level, for current and future challenges. The Risk Office Support Operations is an example of such systematic training: It is being set up with the help of broadly diversified training measures in risk management and controlling. Our staff are highly flexible and mobile. Their sense of self-initiative in terms of honing their job skills has increased significantly. This self-initiative is also exhibited, for example, in the activities they pursue in their spare time.
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Our staff
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Internal communication Especially in times of restructuring, delivering the relevant information to the right employees in a timely manner poses a challenge. In this respect, the Board of Management is placing emphasis – based on the Corporate and Management Principles and the Bank’s strategy – on the importance of open and swift communication. The goal of the Bank’s internal communication is to ensure a cascade-like flow of information so that staff are always provided with news as well as background information that explains decisions and processes. This presupposes a close interplay between online and personal/direct communication and classic print media. News is posted on the Intranet (LIONet) in two languages on the day of occurrence. As the LIONet is called up approximately 50,000 times a day, it is the main medium of the Bank’s internal communication. Information for man-
agers is communicated via a separate Intranet-based management information system. Furthermore, projects that are relevant for the whole Group are provided with separate portals (as is the case, for example, with the New Business Model project, whose portal is in the form of a main rubric). The staff magazine, EinBlick, is the chief print medium used in-house. It is distributed to all staff members, including those on leave as well as retired employees, and affords them the opportunity for discussion. The magazine contains background reports, interviews and in-depth information, thereby providing staff with a personal, tangible medium in addition to the online means of communication. Selected articles are also published in Insight Online, the English electronic version of the magazine. The direct communication between the Board of Management and staff plays an important role in supplementing these instruments. Special manage-
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ment forums and staff events, for example, provide the Board of Management the opportunity to explain the reasoning behind major decisions. Further revisions in personnel-related instruments – Outlook for 2004 In order for the BayernLB business model to be fully implemented, the number of staff in Munich and the foreign entities will have to be lowered again in 2004. BayernLB is aiming to increase efficiency in 2004 despite this additional reduction. Further ways to constructively and effectively outsource activities which are not part of the Bank’s core business are being investigated carefully and implemented systematically. The objectives agreement process is being optimised and the evaluation procedures expanded upon so that the Bank can pursue its new business strategy more quickly. To increase the performance and flexibility of our staff, we will in the future also make use of an IT-supported qualification management. This will allow qualification deficiencies to be identified early and individual measures to be taken. In order to identify and avoid risks related to personnel expenses, our human resource risk management is being further developed and fine-tuned under consideration of the impending Basel II requirements.
Voluntary payments to employees with salaries based on the standard pay agreement are being replaced by a modern bonus system. Under this system, bonuses will be awarded to individual staff members in recognition of their contribution to a successful performance of the Bank. Our thanks to the Staff Council The Staff Council has helped create a climate of trust, cooperation and mutual respect. We would like to express our special thanks to these staff representatives for their commitment and responsible cooperation in all operational and social matters. Their role in designing the much-needed modifications in personnel expenses – most of which have already been implemented – has proven particularly constructive, as these measures are both socially responsible and in keeping with the company agreement. Especially in economically challenging times, the Board of Management and all other managers are highly aware and appreciative of the importance of responsible staff representation and the necessity of cooperating in an atmosphere of trust.
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Section V
Public sector mandate Corporate responsibility Assuming corporate responsibility
BayernLB has always committed itself to furthering social causes. Whether by donating to charitable institutions or supporting selected projects, BayernLB acknowledges its corporate responsibility. Sternstunden One project which BayernLB has been supporting since its launch ten years ago is the campaign “STERNSTUNDEN – We help children”. Since 1993 STERNSTUNDEN has collected donations totalling over EUR 48 million, thereby supporting more than 850 children’s aid projects both in Germany and abroad. During the financial year 2003, STERNSTUNDEN gathered over EUR 6.7 million in donations and sponsored 113 children’s aid projects, 56 of which in Bavaria alone. Particularly noteworthy is the “Sterntaler für STERNSTUNDEN” project, which was initiated by BayernLB, the Bavarian savings banks and Versicherungskammer Bayern (Bavarian public-sector insurance company) on the occasion of the transition to the euro. This unprecedented campaign yielded over 114 tonnes of coins with a total value of EUR 3 million. As sponsor of “STERNSTUNDEN – We help children”, BayernLB settles all payment transactions, for example, and also manages the printing and dispatch of over 6 million transfer forms.
The Academic Prize For many years we have been supporting young researchers at Bavarian universities by awarding them the Academic Prize for their dedication to finding solutions to complex banking/economic matters. In addition to promotion prizes for dissertations and post-doctorate theses, the Academic Prize consists of two main
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prizes for research which the independent jury deems to be outstanding achievements. These main prizes are awarded once a year.
The Academic Prize 2003, endowed with EUR 5,000, was awarded to Dr. Mandy Krafczyk, a graduate of the Catholic University of Eichstätt. The 30year old researcher received the reward for her dissertation on “Quality Added Value – Value-Based Quality Controlling as Exemplified by Banks’ Corporate Customer Business”. Value-based quality controlling is an instrument used for measuring the impact of quality-improving measures, such as staff training, on a bank’s profitability. With her dissertation, Krafczyk closes the theoretical gap in evaluating the success of a bank’s quality orientation. The second main prize was awarded to Professor Martin Wallmeier of the University of Augsburg for his paper on “Option Prices and Implicit Price Processes”. This study deals with the evaluation of share options and scrutinises the most widely used price calculation model in the world, for which the economists Black and Scholes received the Nobel Prize in 1997.
The jury comprises the Chairman of the Board of Management and an additional member of the Board of Management of BayernLB plus the President of the Bavarian Rectors’ Conference, the Bavarian State Minister for Economic Affairs, Infrastructure, Transport and Technology, the Bavarian State Minister for Science, Research and the Arts, the Executive President of the Association of Bavarian Savings Banks and the President of the Chamber of Industry and Commerce for Munich and Upper Bavaria.
The Clinic Sponsoring Prize In 2003 BayernLB awarded the nationwide Clinic Sponsoring Prize for the sixth time. Endowed with EUR 25,000, this prize promotes innovations in the health care sector. The purpose of the Clinic Sponsoring Prize, which is run under the auspices of the Social Welfare Minister for Bavaria, is to foster solutions to conflicting medical and economic demands.
One of the first two prizes ever to be awarded went to the “Munich Intensive Naturopathic Programme for Treating Pain”, which is run by the Ludwig Maximilian University. Under this project, a three-stage concept was developed for long-term success in treating chronically ill patients. An important aspect of the programme was to give the patients a sense of personal responsibility for the alleviation of their pain. The other of the first two projects to earn first prize was the “Nuremberg Alliance Against Depression”. Five partner hospitals opened a model facility in Nuremberg for the prevention of depression, which is an epidemic disease, and its related suicidal risk. One of the purposes of this measure was to show the public that depression is an illness which can be treated successfully.
Environmental protection We wish to take the year 2003 as an opportunity to look back to ten years of successful environment management. BayernLB demonstrated that it has achieved long-term ecological benefits by taking specific measures.
Ten years of environment management at BayernLB
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These measures include: ■ carefully sorting and disposing of waste ■ replacing the air conditioners in our offices with a cooling system which entails cooling ceilings and exploiting differences in indoor and outside temperatures (so-called free cooling) ■ recycling building materials and using low-energy lighting and sanitary products ■ raising the staff members’ sensitivity to environmental protection issues. These measures save BayernLB hundreds of thousands of euros in costs each year. The latest findings in environment management show that the commitment to environmental protection does not run counter to a profit-oriented company strategy but rather harbours considerable cost-cutting potential. This optimisation of the use of resources within the Bank, however, is only part of the range of tasks falling under BayernLB’s environment management, which has been validated by European standards (Eco Management and Audit Scheme II). The second major set of tasks involves the Bank’s products. As early as 1998, BayernLB carried out a project on factoring in ecological aspects and risks in credit transactions. The criteria for environmental risks are used regularly during credit rating checks, depending on the situation at hand. Moreover, structured finance transactions in emerging markets and developing countries are conducted based on the standards set by the World Bank. This holds true particu-
larly for covered export finance (e.g. Hermes). From a global perspective, climate protection is of prime importance. Together with our subsidiary Energy & Commodity Services GmbH, BayernLB’s environment management staff developed a consulting service called Carbon Risk Management Solutions (CRMS) in 2002. This product helps our customers run climate protection projects in keeping with the Kyoto Protocol while preparing them for CO2 emissions trading, which will be launched in the EU in 2005.
Climate protection as a societal challenge
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The image of BayernLB’s environment management is a reflection of the will and motivation of all parties involved to constantly and steadily improve our environmental programme. Our admission to the bond universe of the Zurichbased rating agency Sustainable Asset Management (SAM) in 2003 was a testimony to our endeavours. We are on the right track and will continue to think and act ecologically in our daily activities. Because of this conviction, we are also committed to environmental initiatives taken elsewhere. Our sense of corporate responsibility is evidenced by our signature on the United Nations Environment Program (UNEP) declaration for banks, by our participation in the Environmental Pact of Bavaria and in the working group Munich Financial Institutions and Local Agenda 21, and by our membership in the environmental committee of the Chamber of Industry and Commerce for Munich and Upper Bavaria as well as in the Association for Environmental Management in Banks, Savings Banks, and Insurance Companies (VfU). Culture and the Arts Art, culture and good contacts
The promotion of art and culture is important at BayernLB. This is demonstrated by the fact that the Bank makes major works of art available to museums and cultural institutions in Bavaria on permanent loan. These institutions include the Egyptian Collection, the Municipal
Gallery in Lenbachhaus, the Bavarian State Painting Collections and the Bavarian administration for public castles, gardens and lakes. Much of BayernLB’s patronage of the arts, however, takes place in the Bank’s own Gallery. These premises, measuring 700 m2, provide a public forum for retrospectives of Munich artists as well as for contemporary works of art, most of which stemming from Bavaria. One indication of the Gallery’s success in promoting these works came when the poster advertising the exhibition
“Colour – Light – Time” by Rupprecht Geiger and Igor Sacharow was named “Placard of the Month” by the Munich placard jury at Deutsche Städtereklame. Particular highlights last year were the “Julius Seyler – A Munich Impressionist” exhibition and the joint “Malerei5” exhibition featuring five women painters, Isolde Folger, Carmen Jäckel, Eva Kunze, Hertha Miessner and Elke Weickelt. In addition to fostering the visual arts, however, BayernLB was also an active sponsor of “Klassik am Odeonsplatz” and “Residenzwoche München”, two major concert events in Munich.
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Exhibitions in 2004
29 January – 21 March 2004
Christoph Drexler – Munich Time Spaces, Paintings
2 April – 27 June 2004
100 Years of Dalí Divine Comedy, Graphic Cycles R. H. Mayer Collection, Bamberg, Germany
15 July – 12 September 2004
Christine Wieland – Munich (Upper level) Paintings
21 July – 12 September 2004
Edeltraud M. Göpfert – Ortenburg (Lower level) Bronze Sculptures
10 – 12 September 2004
OPEN ART – 10.00 a.m. to 6.00 p.m.
30 September – 21 November 2004
Detlef Hartung, Marina Herrmann, Roland Kronschnabl, Bruno Kuhlmann, Matthias Mücke, Nosch – Munich A time of pictures and paintings
16 October 2004
LONG NIGHT OF THE MUSEUMS AND GALLERIES 7.00 p.m. to 2.00 a.m.
1 December 2004 – 23 January 2005
Wilhelm Holderied – Munich Paintings, Sculptures, Installations
(Schedules subject to change)
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Section VI
Report by the Board of Administration, accounts and notes on the accounts Report by the Board of Administration In the year under review, the Board of Management promptly provided the Board of Administration with details regarding the business development and situation of the Bank. In its 15 meetings the Board of Administration discussed in depth the major features of the business policy as well as fundamental questions of corporate planning – in particular financial, investment and personnel planning. Important strategic decisions and business transactions which were of significance to the Bank’s profitability and liquidity were presented to the Board of Administration in due time. The Board of Management regularly submitted items (as required by law and/or the Bank’s Statutes) to the Board of Administration for approval or information/acknowledgement. Where prescribed by law or by the Bank’s Statutes, formal resolutions were passed. Against the backdrop of the withdrawal of the maintenance obligation and guarantee obligation with effect from 18 July 2005, the new strategy of the Bank became a vital issue. The Board of Administration held intense discussions on the key strategic features of the business model as formulated by the Board of Management. The aim of the business model is to achieve an A+ rating in the medium term. The Board of Administration is in favour of the Board of Management’s strategy of realigning the Bank – under its statutory mandate – as a wholesale bank focussing on core regions and core activities, and also approves of the requisite measures, some of which are quite drastic. As part of the necessary structural changes, the
Bank’s business activities were combined at the beginning of 2003 to form centrallycontrolled business areas operating around the world while the central support and service functions were integrated into support operations with global responsibility. In parallel with the competent bodies of the Organisation of Bavarian Savings Banks, furthermore, the Board of Administration investigated ways of optimising the cooperation between the Bank and the Bavarian savings banks. To this end, the Bank and the Association of Bavarian Savings Banks signed a framework agreement on 2 December 2003 under which more specific contracts between the Bank and individual savings banks have since been concluded. The Board of Administration began examining the issue of compliance with banking supervisory requirements, in particular with the Minimum Requirements for the Credit Business of Credit Institutions (MAK), at an early stage. As part of the new organisation structure, Group-wide responsibility for analysing, assessing and managing credit risks was placed with the “Risk Office” Support Operations, which is functionally segregated from the sales units, thus fulfilling the highest MAK principle. In addition, a new rating system for credit operations was installed in cooperation with other landesbanks and with the German Savings Bank Association (DSGV). In its meeting on 2 December 2003, the Board of Administration approved the newly-developed credit policy of the Bank. The credit policy comprises principles for managing credit and country risks as well as specifications for the competence regu-
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Report by the Board of Administration, accounts and notes on the accounts
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lations. It also requires that a credit committee be set in place, as from 1 February 2004, as a decision-making body that presides over credit issues and reports to the Board of Management. The Board of Administration also receives regular reports on individual, portfolio and sector risks as well as on concentration risks. In their meetings on 2 December 2003, the Bank’s Board of Administration and General Meeting approved the Corporate Governance Principles submitted by the Board of Management. These principles are largely based on the provisions of the German Corporate Governance Codex, which defines national and international standards for responsible and transparent company management and control for listed corporations in particular. Though it is not a listed company but rather a publiclaw bank, Bayerische Landesbank, with its national and international operations, is also striving for transparency and clarity in its Corporate Governance System based on the German codex. Bayerische Landesbank’s annual accounts and consolidated accounts and its summarised report on the Bank and the Group have been audited by KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft. The audit of the annual accounts and reports of Bayerische Landesbodenkreditanstalt and Bayerische Landesbausparkasse, both of which are institutions of the Bank, has been conducted by PwC Deutsche Revision Aktiengesellschaft Wirtschaftsprüfungsgesellschaft. Unqualified audit certificates were granted by the auditors. The Board of Administration and the derivative Financial Statements Audit Committee
have discussed the auditors’ reports on the outcome of their audit at length and have raised no objections. With representatives of the respective external auditors in attendance, the Board of Administration approved the annual accounts of Bayerische Landesbodenkreditanstalt and Bayerische Landesbausparkasse in its meeting on 3 May 2004. During this meeting, the Board of Administration also adopted the annual accounts of the Bank and approved of the Board of Management’s report on the Bank as well as the consolidated accounts. The Board of Administration has recommended to the General Meeting that the disclosed profit available for distribution in the amount of EUR 63,400,193.28 be transferred to BayernLB Holding AG, which holds 100 percent of the nominal capital of the Bank. The distribution is tantamount to a return of 4 percent on the paid-in capital of the Bank. The Board of Administration has also proposed that the Board of Management be discharged accordingly. In its meeting on 3 May 2004, the General Meeting gave its approval to these proposals. The Board of Administration would like to express its gratitude towards the Board of Management and to the employees of the Bank for their work and immense commitment in the financial year 2003 – a period which was marked by the difficult challenge of strategically realigning the Bank. Munich, 3 May 2004 The Chairman of the Board of Administration Prof. Dr. Kurt Faltlhauser
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Balance Sheet as at 31 December 2003
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Bayerische Landesbank Balance Sheet as at 31 December 2003 Assets 2002 EUR 000’s 1. Cash reserves a) Cash b) Balances with central banks of which: with the Deutsche Bundesbank c) Balances in postal giro accounts
EUR 000’s
EUR 000’s
EUR 000’s
12,172 744,521
12,663 686,102
–
186,484 –
285,672 756,693
2. Debt certificates issued by public entities and bills of exchange eligible for refinancing with central banks a) Treasury bills and Treasury discount paper and similar debt certificates issued by public entities of which: eligible for refinancing at the Deutsche Bundesbank 472,592 b) Bills of exchange of which: eligible for refinancing at the Deutsche Bundesbank 20,695
4. Due from customers of which: secured by mortgage public-debt loans building loans of Home Loan division: building-saving loans preliminary and interim financing other building loans of which: secured by mortgages 5. Bonds and other fixed-interest securities a) Money market instruments aa) issued by public-sector borrowers aa) of which: aa) eligible as collateral at aa) Bundesbank advances ab) issued by other borrowers aa) of which: aa) eligible as collateral at aa) Bundesbank advances
1,011,520
20,695
252,183 13,573
13,573
9,196,850 101,639,690
c) Own debt securities nominal value
1,025,093
3,741,505 108,479,778
14,767 – –
17,275 – – 110,836,540
112,221,283
91,862,521
102,464,137
19,166,290 29,458,024
20,242,526 27,164,542
2,573,780 2,218,900 8,611
2,826,583 2,031,026 11,192
3,879,950
3,934,791
24,642
36,418
475,514
– 1,150,460
–
–
60,449 500,156
b) Bonds and other debt securities ba) issued by public-sector borrowers aa) of which: aa) eligible as collateral at aa) Bundesbank advances bb) issued by other borrowers aa) of which: aa) eligible as collateral at aa) Bundesbank advances
698,765
472,592
493,287 3. Due from banks a) Payable on demand b) Other receivables of which: building loans of Home Loan division: building-saving loans preliminary and interim financing loans other building loans
EUR 000’s
1,186,878
13,918,343
18,552,795
33,171,086
4,852,725 39,037,495
3,674,387
13,425,677
12,685,837 47,089,429 1,338,665
57,590,290 5,139,328 5,031,151
1,306,975
carried forward:
48,928,250
63,916,496
252,877,291
280,325,774
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Bayerische Landesbank Balance Sheet as at 31 December 2003 Liabilities 2002 EUR 000’s 1. Due to banks a) Payable on demand b) With agreed maturities or periods of notice c) Building-savers’ deposits with Home Loan division of which: on terminated contracts on advanced contracts
EUR 000’s
EUR 000’s
EUR 000’s
7,990,370 92,069,381
8,845,365 103,491,223
23,756
35,180
– 5,166
– 7,685 100,083,507
2. Due to customers a) Savings deposits aa) with periods of notice of three months ab) with periods of notice of more than three months ac) Building-savers’ deposits with Home Loan division of which: on terminated contracts on advanced contracts
–
–
–
6,463,369
6,232,292 89,804 189,070 6,463,369
6,232,292
8,514,934
6,581,238
37,228,226
39,225,552 45,743,160
45,806,790 52,206,529
3. Securitised liabilities a) Bonds issued b) Other securitised liabilities of which: Money market instruments own acceptances and promissory notes outstanding
4. Liabilities administered on behalf of third parties of which: loans for third-party account
112,371,768
–
72,273 208,515
b) Other liabilities ba) payable on demand bb) with agreed maturities or periods of notice
EUR 000’s
81,391,518 8,966,897
52,039,082 81,875,677 22,422,950
6,748,524
17,095,986
73,044
964,387 90,358,415
104,298,627
8,428,769
8,732,674
8,372,013
8,676,562
5. Other liabilities 6. Deferred income
carried forward:
2,490,638
2,149,050
984,920
1,076,959
254,552,778
280,668,160
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Bayerische Landesbank Balance Sheet as at 31 December 2003 Assets 2002 EUR 000’s
6. Shares and other non fixed-interest securities 7. Investments of which: in financial institutions in financial service providers 8. Shares in affiliated companies of which: in financial institutions in financial service providers 9. Assets administered on behalf of third parties of which: loans for third-party account 10. Equalisation claims on public authorities including bonds originating from the conversion of such claims 11. Intangible assets 12. Tangible assets 13. Other assets 14. Deferred taxes 15. Deferred charges Total assets
EUR 000’s
EUR 000’s
EUR 000’s
EUR 000’s
carried forward:
252,877,291
280,325,774
2,422,602
2,238,591
2,069,959
2,101,619
739,288 –
749,117 _ 3,210,910
2,409,162 –
2,724,454 2,413,672 –
8,428,769 8,372,013
8,732,674 8,676,562
35,889
53,993
–
–
203,265
250,286
2,050,146
1,871,968
418,993
457,962
1,053,881
947,665
272,771,705
299,704,986
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Bayerische Landesbank Balance Sheet as at 31 December 2003 Liabilities 2002 EUR 000’s
EUR 000’s
7. Provisions for liabilities and charges a) For pensions and similar obligations b) For taxes c) Other provisions
EUR 000’s
EUR 000’s
EUR 000’s
carried forward:
254,552,778
280,668,160
748,625 214,288 1,087,134
7a. Reserve funds for Home Loan division 8. Special reserve 9. Subordinated liabilities 10. Profit-participation certificates of which: due in less than two years
2,050,047
2,005,260
17,780
9,699
–
3,309
4,459,909
5,412,197
2,675,281
2,751,975
434,598
153,388
11. Fund for general banking risks 12. Capital and reserves a) Subscribed capital aa) nominal capital ab) uncalled nominal capital
716,982 413,566 874,712
385,759
1,738,500 –153,495
1,738,500 –306,883 1,585,005
ab) capital contributions of silent ab) partners b) Capital reserve of which: specific-purpose reserve c) Revenue reserves ca) statutory reserve cb) other reserves
1,431,617
2,894,172
2,892,171 4,479,177
4,323,788
663,146
663,146
612,016
d) Profit available for distribution
612,016 1,268,000 2,156,428
1,268,000 2,156,428 3,424,428 63,400
Total liabilities 1. Contingent liabilities a) Contingent liabilities from the endorsement of bills rediscounted b) Contingent liabilities from guarantees and indemnity agreements (for further reference, please see the Notes) c) Contingent liabilities from collateral furnished for third-party obligations
3,424,428 57,265 8,630,151
8,468,627
272,771,705
299,704,986
4,522
21,009
17,145,150
17,092,520
–
– 17,149,672
2. Other obligations a) Contingent obligations from non-genuine sale and repurchase agreements b) Underwriting and issuance facilities c) Irrevocable loan commitments
385,759
– – 50,475,618
17,113,529
– – 58,482,423 50,475,618
58,482,423
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Bayerische Landesbank Profit and Loss Account for the year ended 31 December 2003 2002 EUR 000’s 1. Interest income from a) Lending and money market transactions of which: interest income of Home Loan division: from building-saving loans from preliminary and interim financing loans from other building loans b) Fixed-interest securities and debt-register claims
2. Interest expenses of which: for building-savers’ deposits
EUR 000’s
EUR 000’s
EUR 000’s
8,499,440
9,481,473
129,070
137,969
114,976 557
112,503 703 1,961,175
2,729,721 10,460,615
12,211,194
9,088,219
10,816,921
169,335
165,879 1,372,396
3. Current income from a) Shares and other non fixed-interest securities b) Investments c) Shares in affiliated companies
101,922 69,812 58,806
4. Income from profit-pooling agreements, profit transfer agreements and partial profit transfer agreements 5. Commission income of which commission income of the Home Loan division: from concluding and procuring contracts from advanced contracts from providing and processing preliminary and interim financing loans 6. Commission expenses of which: for concluding and procuring contracts by the Home Loan division
EUR 000’s
1,394,273
145,671 75,455 90,240 230,540
311,366
5,311
4,451
592,605
569,877
62,828 16,491
37,915 16,331
–
– 339,890
280,061
90,957
59,599 252,715
289,816
7. Net income or net expenses from financial operations
105,346
108,272
8. Other operating income
210,192
270,758
3,151
6,236
9. Write-back of special reserve 10. General administrative expenses a) Personnel expenses aa) salaries and wages ab) social security contributions, pensions and other employee benefits
346,419
383,829
125,950
162,764 472,369
of which: pensions b) Other administrative expenses
546,593
72,822
89,456 338,878
402,156 811,247
948,749
11. Depreciation and valuation adjustments on intangible assets and tangible assets
50,485
59,360
12. Other operating expenses
77,290
152,099
1,240,629
1,224,964
carried forward:
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Bayerische Landesbank Profit and Loss Account for the year ended 31 December 2003 2002 EUR 000’s
13. Write-downs of and valuation adjustments on receivables and certain securities and additions to provisions in loan business of which: allocation to the fund for general banking risks 14. Income from reversals of write-downs of receivables and certain securities and from write-backs of provisions in loan business
EUR 000’s
EUR 000’s
EUR 000’s
EUR 000’s
carried forward:
1,240,629
1,224,964
696,879
1,679,275
–
–
–
– 696,879
15. Write-downs of and valuation adjustments on investments, shares in affiliated companies and securities treated as fixed assets
40,245
16. Income from reversals of write-downs of investments, shares in affiliated companies and securities treated as fixed assets
–
1,679,275
–
546,371
17. Expenses from loss transfers
40,245 4,724
546,371 66,128
18. Allocation to special reserve
–
–
498,781
25,932
19. Result from ordinary activities 20. Extraordinary income 21. Extraordinary expenses
–
–
127,129
–
22. Extraordinary result 23. Taxes on income 24. Other taxes, unless disclosed under position 12
127,129 79,804
26. Net income for the year 27. Allocation from net income for the year to revenue reserves a) To the statutory reserve b) To other reserves
28. Profit available for distribution
–88,812
9,545
25. Profits transferred under partial profit transfer agreement
–
14,529 89,349
–74,283
218,903
–
63,400
100,215
– –
– 42,950 –
42,950
63,400
57,265
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Consolidated Balance Sheet as at 31 December 2003
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Bayerische Landesbank Consolidated Balance Sheet as at 31 December 2003 Assets 2002 EUR 000’s 1. Cash reserves a) Cash b) Balances with central banks of which: with the Deutsche Bundesbank c) Balances in postal giro accounts
EUR 000’s
EUR 000’s
EUR 000’s
48,803 1,025,328
49,048 1,006,201
2,729
379,276 3,944
459,719 1,076,860
2. Debt certificates issued by public entities and bills of exchange eligible for refinancing with central banks a) Treasury bills and Treasury discount paper and similar debt certificates issued by public entities of which: eligible for refinancing at the Deutsche Bundesbank 472,592 b) Bills of exchange of which: eligible for refinancing at the Deutsche Bundesbank 24,769
4. Due from customers of which: secured by mortgage public-debt loans building loans of Home Loan division: building-saving loans preliminary and interim financing other building loans of which: secured by mortgages 5. Bonds and other fixed-interest securities a) Money market instruments aa) issued by public-sector borrowers of which: eligible as collateral at Bundesbank advances ab) issued by other borrowers of which: a) eligible as collateral at Bundesbank advances
1,012,531
26,201
252,183 32,225
31,449
9,228,685 96,466,497
c) Own debt securities nominal value
1,044,756
4,999,839 103,060,904
14,790 – –
17,418 – – 105,695,182
108,060,743
128,836,563
138,850,419
27,672,073 39,108,466
27,598,268 36,424,158
2,718,091 2,426,082 225,383
2,976,915 2,231,459 179,962
4,372,959
4,379,536
24,643
47,263
479,216
– 1,150,460
–
–
60,449 503,859
b) Bonds and other debt securities ba) issued by public-sector borrowers of which: eligible as collateral at Bundesbank advances bb) issued by other borrowers of which: eligible as collateral at Bundesbank advances
1,059,193
481,419
507,620 3. Due from banks a) Payable on demand b) Other receivables of which: building loans of Home Loan division: building-saving loans preliminary and interim financing loans other building loans
EUR 000’s
1,197,723
14,543,801
19,278,712
38,408,669
5,104,911 44,805,419
3,872,188
17,255,988
16,439,111 52,952,470 4,105,304
64,084,131 7,728,335 7,551,398
4,022,259
carried forward:
57,561,633
73,010,189
293,677,858
322,025,300
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Bayerische Landesbank Consolidated Balance Sheet as at 31 December 2003 Liabilities 2002 EUR 000’s 1. Due to banks a) Payable on demand b) With agreed maturities or periods of notice c) Building-savers’ deposits with Home Loan division of which: on terminated contracts on advanced contracts
EUR 000’s
EUR 000’s
EUR 000’s
8,543,810 111,338,353
8,251,762 127,114,214
23,756
35,613
– 5,166
– 7,685 119,905,919
2. Due to customers a) Saving deposits aa) with periods of notice of three months ab) with periods of notice of more than three months ac) Building-savers’ deposits with Home Loan division of which: on terminated contracts on advanced contracts
7,089
1,441
1,454
6,839,304
6,583,913 90,421 201,830 6,848,526
6,592,456
13,236,403
10,680,936
45,242,449
46,924,790 58,478,852
57,605,726 65,327,378
3. Securitised liabilities a) Bonds issued b) Other securitised liabilities of which: money market instruments own acceptances and promissory notes outstanding
4. Liabilities administered on behalf of third parties of which: loans for third-party account
135,401,589
7,781
72,946 222,158
b) Other liabilities ba) payable on demand bb) with agreed maturities or periods of notice
EUR 000’s
86,630,258 8,966,897
64,198,182 85,712,087 22,461,743
6,748,524
17,134,779
73,044
964,387 95,597,155
108,173,830
8,632,267
8,991,886
8,472,501
8,798,505
5. Other liabilities
2,696,954
2,326,474
6. Deferred income
1,071,412
1,169,115
7. Provisions for liabilities and charges a) For pensions and similar obligations b) For taxes c) Other provisions
769,186 245,875 1,926,782
7a. Reserve funds for Home Loan division 8. Special reserve 9. Subordinated liabilities
carried forward:
736,800 445,957 1,734,315 2,941,843
2,917,072
17,780
9,699
–
3,309
4,676,232
5,602,649
300,866,940
328,793,805
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Bayerische Landesbank Consolidated Balance Sheet as at 31 December 2003 Assets 2002 EUR 000’s
6. Shares and other non fixed-interest securities 7. Investments of which: in financial institutions in financial service providers 7a. Shares in associated companies of which: in financial institutions in financial service providers 8. Shares in affiliated companies of which: in financial institutions in financial service providers 9. Assets administered on behalf of third parties of which: loans for third-party account 10. Equalisation claims on public authorities including bonds originating from the conversion of such claims 11. Intangible assets 12. Tangible assets 13. Other assets 14. Deferred taxes 15. Deferred charges Total assets
EUR 000’s
EUR 000’s
EUR 000’s
EUR 000’s
carried forward:
293,677,858
322,025,300
3,350,965
3,146,330
1,671,566
1,745,219
253,513 14,108
284,142 15,927 586,867
586,867 –
534,999 534,999 –
1,326,336 79,105 16,204
691,050 47,555 9,764
8,632,267 8,472,501
8,991,886 8,798,505
118,803
417,631
–
–
280,796
370,259
2,251,318
1,955,067
431,408
457,853
1,102,816
961,821
313,431,000
341,297,415
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Bayerische Landesbank Consolidated Balance Sheet as at 31 December 2003 Liabilities 2002 EUR 000’s
10. Profit-participation certificates of which: due in less than two years
EUR 000’s
EUR 000’s
EUR 000’s
EUR 000’s
carried forward:
300,866,940
328,793,805
2,838,588
2,913,496
451,749
170,539
11. Fund for general banking risks 12. Capital and reserves a) Subscribed capital aa) nominal capital ab) uncalled nominal capital
550,962
1,738,500 –153,495
1,738,500 –306,883 1,585,005
ab) capital contributions of silent ab) partners b) Capital reserve of which: specific-purpose reserve c) Revenue reserves ca) statutory reserve cb) other reserves d) Minority shareholders e) Profit available for distribution
1,431,617
3,129,059
3,127,059 4,714,064
4,558,676
663,146
663,146
612,016
612,016 1,268,000 2,253,910
1,268,000 2,281,288 3,521,910 211,990 63,400
Total liabilities 1. Contingent liabilities a) Contingent liabilities from the endorsement of bills rediscounted b) Contingent liabilities from guarantees and indemnity agreements (for further reference, please see the Notes) c) Contingent liabilities from collateral furnished for third-party obligations
3,549,288 223,709 57,265 9,174,510
9,052,084
313,431,000
341,297,415
4,522
21,010
18,510,496
19,007,614
–
– 18,515,018
2. Other obligations a) Contingent obligations from non-genuine sale and repurchase agreements b) Underwriting and issuance facilities c) Irrevocable loan commitments
3. 165 special assets managed on behalf of shareholders (2002: 152)
538,030
– – 53,963,280
19,028,624
– – 62,409,376 53,963,280
62,409,376
13,338,978
12,572,150
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Bayerische Landesbank Consolidated Profit and Loss Account for the year ended 31 December 2003 2002 EUR 000’s 1. Interest income from a) Lending and money market transactions of which interest income of Home Loan division: from building-saving loans from preliminary and interim financing loans from other building loans b) Fixed-interest securities and debt-register claims
2. Interest expenses of which: for building-savers’ deposits
EUR 000’s
EUR 000’s
EUR 000’s
10,096,266
11,204,926
136,521
145,842
126,631 11,607
123,502 10,131 2,294,754
3,122,549 12,391,020
14,327,475
10,511,809
12,438,704
179,739
175,690 1,879,211
3. Current income from a) Shares and other non fixed-interest securities b) Investments c) Shares in affiliated companies d) Shares in associated companies
144,441 65,651 9,683 24,883
4. Income from profit-pooling agreements, profit transfer agreements and partial profit transfer agreements 5. Commission income of which commission income of the Home Loan division: from concluding and procuring contracts from advanced contracts from providing and processing preliminary and interim financing loans 6. Commission expenses of which: for concluding and procuring contracts by the Home Loan division
EUR 000’s
1,888,771
181,818 75,082 30,854 41,787 244,658
329,541
45,400
4,601
723,666
701,124
66,643 17,585
40,596 17,495
32
– 381,402
314,405
95,594
62,609 342,264
386,719
7. Net income or net expenses from financial operations
104,990
140,069
8. Other operating income
229,316
688,514
–
7,310
9. Write-back of special reserve 10. General administrative expenses a) Personnel expenses aa) salaries and wages ab) social security contributions, pensions and other employee benefits of which: pensions b) Other administrative expenses
493,485
533,224
162,996
199,405 656,481
732,629
466,080
98,495 524,230
81,804 1,122,561
1,256,859
11. Depreciation and valuation adjustments on intangible assets and tangible assets
62,817
74,364
12. Other operating expenses
98,005
198,424
1,562,456
1,915,878
carried forward:
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Bayerische Landesbank Consolidated Profit and Loss Account for the year ended 31 December 2003 2002 EUR 000’s
13. Write-downs of and valuation adjustments on receivables and certain securities and additions to provisions in loan business of which: allocation to the fund for general banking risks 14. Income from reversals of write-downs of receivables and certain securities and from write-backs of provisions in loan business
EUR 000’s
EUR 000’s
EUR 000’s
EUR 000’s
carried forward:
1,562,456
1,915,878
952,642
2,256,969
13,003
75,000
–
– 952,642
15. Write-downs of and valuation adjustments on investments, shares in affiliated companies and securities treated as fixed assets
47,113
16. Income from reversals of write-downs of investments, shares in affiliated companies and securities treated as fixed assets
–
2,256,969
–
628,010 47,113
628,010
17. Expenses from loss transfers
5,499
68,281
18. Allocation to special reserve
–
–
557,202
218,638
19. Result from ordinary activities 20. Extraordinary income 21. Extraordinary expenses
–
–
127,129
–
22. Extraordinary result 23. Taxes on income 24. Other taxes, unless disclosed under position 12
127,129 103,219
26. Net income for the year 27. Releases of revenue reserves a) Statutory reserve b) Other reserves
–51,301
10,237
25. Profits transferred under partial profit transfer agreement
15,169 113,456
–36,132
237,389
–
79,228
254,770
– –
– – –
28. Allocation from net income for the year to revenue reserves a) Statutory reserve b) Other reserves
–
– 4,522
–
– 178,244 4,522
178,244
29. Profit share of minority shareholders
11,306
19,261
30. Profit available for distribution
63,400
57,265
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Consolidated statement of changes in shareholders' equity Parent company
Minority shareholders
Dividends paid Change in the group of consolidated companies Other changes (Currency conversion, consolidation effects and other capital changes)
13
–112 8,221
–82 –16
238
204
0
Consolidated net profit/loss Other consolidated result
250
Dividends paid Change in the group of consolidated companies Other changes (Currency conversion, consolidation effects and other capital changes)
–307
663 3,708
19
13
–128 8,828
–57
2
154
0
0
67
772
0
19 0
255 –3
19
252
224
0
–57
2
–3
9
8
–4
0
–4
4
72
–37
–7
184
–6
–2
–8
176
11
2
68 –38
–2
11 –2
79 –40
9
39
–40
Total consolidated result
30 –153
224 9,052
–57
68
4,868
Consolidated equity –16
236 –3
26
Equity
Offsetting item from foreign currency conversion
–16
233 4,866
157 8,378 –82
67
–16
0
–82
705
236
Consolidated net profit/loss Other consolidated result
As of 31/12/2003
157
13
Total consolidated result As of 31/12/2002
Minority capital
663 3,540
Equity
–511
Other neutral transactions
Capital reserve
4,628
Offsetting item from foreign currency conversion
Uncalled outstanding capital
As of 31/12/2001
Subscribed capital
in EUR million
Generated consolidated capital
Aggregated other consolidated result
663 3,725
As of 31 December 2003 EUR 63 million is available for distribution to the owners.
–14
–126 8,963
214
–2
212 9,175
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124
Cash flow statement for the Group Figures in EUR million Annual net income
2003 79
Items under annual net income not affecting the cash flow and transition to the cash flow from operating activities write-downs, LLPs and write-ups on receivables, fixed and financial assets changes to provisions changes to other items not affecting the cash flow gains on the disposal of fixed and financial assets other adjustments (balance)
1,438 25 –33 –7 –2,760
Sub-total
–1,257
Changes to assets and liabilities from operating activities after revision for components not affecting the cash flow due from banks customers securities (unless financial assets) other assets from operating activities due to banks customers securitised liabilities other liabilities from operating activities Interest and dividends received Interest paid
2,297 8,795 8,065 1,137 –15,495 1,210 –12,577 388 4,085 –565
Extraordinary cash inflow
0
Extraordinary cash outflow
0
Income tax payment
–103
Cash flow from operating activities
–4,019
Cash inflow from the sale of financial assets fixed assets
12,596 31
Cash outflow for the acquisition of financial assets fixed assets
–6,700 –20
Effects resulting from the change in the group of consolidated companies cash inflow from the sale of consolidated companies and other business units cash outflow resulting from the acquisition of consolidated companies and other business units Change in financial resources resulting from other investment activities (balance) Cash flow from investment activities
38 –1 0 5,943
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125
Figures in EUR million
2003
Cash inflow from allocations to equity Disbursements to company owners and minority shareholders dividend payments other disbursements
–57 –770
Change in financial resources resulting from subordinated capital and other hybrid capital (balance)
–923
Cash flow from financing activities
77
–1,673
Change in the financial resources fund affecting the cash flow Exchange-rate, consolidation-group and revaluation-related change in the financial resources fund
252 –19
Financial resources balance at end of previous period
1,339
Financial resources balance at end of period
1,572
Comment on the cash flow statement: The DRS 2-10 standards (German Accounting Standards) issued by the DRCS (German Accounting Standards Committee) were duly observed when the cash flow statement was drawn up. The cash flow statement shows the cash flows of the financial year classified into “operating activities”, “investment activities” and “financing activities”. The financial resources balance disclosed comprises the cash balance and deposits with central banks, along with debt instruments issued by public-sector entities and bills of exchange eligible for funding at the Deutsche Bundesbank. Financial resources are not sub-
ject to any drawing restrictions. EUR 7 million of the financial resources are apportionable to consolidated companies on a pro rata basis. The change in other items not affecting the cash flow includes also the net write-back of deferred taxes and the revaluation result of the trading and liquidity portfolio. During the financial year, EUR 40 million were paid for the acquisition of participations and affiliated companies with the whole amount being taken from financial resources. Sales proceeds of EUR 54 million were fully allocated to financial resources.
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126
Segment report Group Principles of segmentation The primary segmentation is based on the new business model and represents the business areas, the dependent entities of Labo and LBS, and the Group subsidiaries. The “Other” segment shows the profit contributions which are
Figures in EUR million
Corporates
Real Estate
Financial Savings InstituBanks, tions & Bavarian Sovereigns Municipals/ Corporates
not attributable to the operational business areas. This includes the profit contributions made by the support operations, unless they can be allocated to the operational units according to the causation principle.
Global Markets
Labo/LBS
Subsidiaries strategic to the Group
Other
Group
Net interest income
496
194
104
102
600
286
592
–205
2,169
Net commission income
107
27
38
0
24
30
77
39
343
Administrative expenses
–139
–65
–27
–83
–317
–144
–312
–99
–1,185
0
0
0
5
76
0
0
24
105
–10
–2
0
0
1
7
–1
124
120 –1,005
Result from financial transactions Other operating result Risk provisioning / Revaluation result
–323
–404
0
–35
–131
–6
–203
97
Operating result
133
–250
116
–11
253
173
153
–20
547
Segment assets
38,130
18,379
38,804
31,654
117,627
23,055
60,609
–14,829
313,431
Risk positions
38,115
14,238
8,472
8,459
31,497
4,307
27,926
4,227
137,242
2,190
818
487
486
1,916
1,859
2,747
–1,328
9,175
Return on equity (%)
6.1%
–30.6%
23.8%
–2.3%
13.2%
9.3%
5.6%
–
6.0%
Cost-income ratio (%)
23.0%
29.6%
18.8%
77.4%
45.3%
45.5%
46.6%
–
45.3%
377
234
111
222
635
877
3,322
3,020
8,797
Equity capital disclosed
Avg, staff capacity
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Within the context of segment reporting, the equity capital disclosed is allocated to the business areas in accordance with their risk positions, i.e. the risk assets and market risks to be covered according to the banking supervisory Principle I relating to Section 10 KWG.
ating result and the allocated equity capital disclosed. The CIR is the quotient of administrative expenses and the sum total of net interest income, net commission income and the result from financial transactions. In order to provide a breakdown of BayernLB’s regional business activities, the primary segmentation has been extended to include a region-related secondary segmentation providing the following results:
The “RoE” and “CIR” ratios are used in the segment report to assess the business areas’ performance. The RoE shown here is the quotient of the oper-
Figures in EUR million
Germany
Result before risk provisioning / revaluation result
755
Return on equity (%) Avg. staff capacity
Asia/ Pacific
Group
322
107
1,552
–832
13
–147
–40
–1,005
–77
381
175
68
547
94,048
26,887
10,658
5,650
137,242
6,208
1,985
646
335
9,175
–1.2%
19.2%
27.1%
20.3%
6.0%
6,491
1,869
217
220
8,797
Operating result
Equity capital disclosed
America
368
Risk provisioning / revaluation result
Risk positions
Europe (excl. Germany)
The streamlining of the credit and participations portfolio produced a negative operating result for the region of Germany in the region-related segmentation.
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Notes to the Accounts and Consolidated Accounts The notes below relate to both the annual accounts at Bank level and the consolidated annual accounts of Bayerische Landesbank pursuant to Section 298, Sub-section 3 of the German Commercial Code (HGB). Unless otherwise stated the notes apply to both accounts. All figures are shown in millions of euros. The annual accounts at Bank level and the consolidated annual accounts have been prepared in accordance with the provisions of HGB and the Ordinance Regulating the Accounting Requirements for Financial Institutions and Financial Service Providers (RechKredV). The layout of our balance sheets and our profit and loss accounts corresponds to the forms pursuant to the RechKredV (Ordinance) and also includes the items stipulated for building societies (Bausparkassen). Accounting policies The valuation of assets and liabilities adheres to the general valuation provisions of Section 252 ff. HGB, taking account of the special provisions applicable to banks (Section 340e ff. HGB). Accounts receivable
Claims are reported at the nominal amount or at cost. Low-interest or noninterest bearing claims are discounted, if necessary. All recognisable risks have been taken into account through the setting up of specific loan loss provisions. Moreover, hidden credit risks are
covered by general loan loss provisions. To provide for general banking risks, reserves have been built up pursuant to Section 340f HGB. All loan loss provisions and reserves have been netted against the corresponding items on the assets side. In addition, a fund for general banking risks exists pursuant to Section 340g HGB. Liabilities are generally reported at their repayment amount. Bonds issued at a discount and similar liabilities are reported at their present values.
Liabilities
Premiums and discounts on claims and liabilities are included in deferred charges and income and amortised on a pro rata basis.
Premiums and discounts
The securities portfolios have been valued according to the stringent principle of lower of cost or market by observing the requirement of reinstating original values. In some cases, securities have been combined with their hedging instruments to form separately documented valuation units.
Securities portfolios
Investments and shares in affiliated companies have been valued in accordance with the rules applying to fixed assets at historical cost or, in the case of an anticipated permanent decrease in value, at the lower of cost or market as per the balance sheet date.
Investments and shares in affiliated companies
Fixed assets have been valued at historical cost or cost of production or, if subject to depreciation, reduced by scheduled depreciation reflecting their useful lives. Depreciation has been generally
Fixed assets
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based on the permissible tax rates. Assets of low value are fully depreciated in the year of acquisition. Tax deferrals
Tax deferrals will be based on the temporary differences between the results under German commercial law and tax law in as much as these differences will probably converge in subsequent years. The volume of deferred taxes is geared to the probable tax liability / tax relief effective in the immediately subsequent business years. Deferred tax assets and liabilities are netted.
Pension provisions
Provisions for pensions have been set up in line with actuarial principles, taking account of Section 6a EStG (German income tax law) and the 1998 guidelines (Richttafeln, i.e. benchmark tables) and of comparable foreign regulations.
Derivative financial transactions
Derivative financial transactions (forward transactions, swaps, options, credit derivatives) are allocated to a hedging or trading portfolio depending on their intended use. As forward transactions, they are not disclosed in the balance sheet. Hedging transactions and hedged transactions are combined to form revaluation units and treated pursuant to the principles of the hedged transaction. The revaluation of trading transactions is performed individually by applying the imparity and realisation principle. Unrealised profits and losses are netted within trading portfolios which have been combined to adequately reflect risks. Remaining profit balances are not
taken into account, whereas provisions are established for loss balances. As a rule, profits from trading transactions are disclosed under net income from financial transactions. Interest paid on securities of the trading portfolio is recorded in interest income. Currency translation Currency translation has been based on the principles of Section 340h HGB and the expert opinion of the BFA (banking committee) 3/95. Assets denominated in foreign currencies and treated as fixed assets, without hedging in the same currency, are translated at historical exchange rates. Other assets and liabilities denominated in foreign currencies and outstanding spot deals are translated at year-end spot rates, while outstanding forwards are translated at the year-end forward rates. When forward exchange transactions serve to hedge balance sheet items generating interest, the swap amounts are accrued pro rata temporis. The spot price differences resulting from the translation of these balance sheet items are disclosed as a balance under “Other assets” or “Other liabilities”. Gains from the translation of other transactions hedged in the same currency are only taken into account in so far as they compensate for temporary losses from the translation of hedging transactions (Section 340h, Sub-section 2, Sentence 3 HGB), whereas translation losses are always taken into account as affecting net income.
Trading transactions
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The translation of currencies in the annual accounts of the subsidiaries and joint ventures included in the consolidated accounts is based on the same principles. In the consolidated accounts, the balance sheet items and the expenses and income of our foreign subsidiaries and joint ventures, are translated at the spot exchange rates as per the balance sheet date, unless their annual accounts have been prepared in euros. Translation gains and losses resulting from the consolidation of equity capital are set off within the revenue reserves. Group of consolidated companies The consolidated accounts include Bayerische Landesbank and the six companies shown under Item I. in the inventory of shareholdings. Interbanka a.s., Prague, left the group of consolidated companies in 2003 when it was sold to Bank für Arbeit und Wirtschaft AG, Vienna. The sale did not have any major impact on the balance sheet and on the profit and loss account. LB(Swiss) Privatbank AG, Zurich, is included in proportion to its shares. Against the backdrop of ongoing negotiations held to reduce the quotas, the associated company LB Transaktionsbank GmbH Frankfurt (Main) – München, Aschheim-Dornach, is evaluated according to the equity method for the first time. Pursuant to Section 296, Sub-section 1, No. 2 HGB, one associated company has not been included in the consolidated accounts due to a delay in the provision of data. The remaining sub-
sidiaries have neither been consolidated nor valued according to the equity method because they are of subordinate importance with respect to the Group’s assets, financial and earnings position; their combined share of the consolidated balance sheet total comes to around 1.5 percent. Consolidation principles The consolidated accounts have been drawn up in accordance with the accounting and valuation methods applicable to the annual accounts of Bayerische Landesbank. The balance sheet profit disclosed in the consolidated accounts is identical with that shown in the parent company’s individual accounts. Capital consolidation has been effected according to the book value method, using the values at the time of acquisition or first consolidation of the subsidiary. Assets-side and liabilities-side balancing items remaining after the allocation procedure laid down in Section 301, Sub-section 1, Sentence 3 HGB are netted, the balance being transferred to revenue reserves. The assets-side balancing item resulting from first-time consolidations stood at EUR 7 million in the year under review. Following final consolidation, an assets-side balancing item of EUR 11 million was written back affecting net income. Claims and liabilities as well as expenses and income among the integrated group of companies have been consolidated. Intragroup results from transactions within the Group have been eliminated in so
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far as they are not of minor significance. Joint ventures, included on a pro-rata basis in the consolidated accounts, are treated according to the same principles. LB Transaktionsbank GmbH Frankfurt (Main) – München, Aschheim-Dornach, was valued in accordance with the book value method pursuant to Section 312, Sub-section 1 HGB on the basis of the values stated as per 1 January 2003. This led to a balancing item on the liabilities side in the amount of EUR 3 million. The associated company shown under V. in the list of affiliated companies has been valued according to the book value method pursuant to Section 312, Subsection 1 HGB on the basis of the values stated at the time it was consolidated for the first time. The valuation method applied by the company has not been adjusted to the standard valuation provisions applicable to the Group.
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Disclosures relating to the balance sheet and the consolidated balance sheet – excluding accrued interest, unless otherwise stated – Assets Bank – EUR million – Due from banks This item includes: – Other receivables with a residual maturity of – up to three months (including accrued interest) – over three months up to one year – over one year up to five years – over five years – Due from affiliated companies – Due from companies in which investments are held – Due from affiliated savings banks – Subordinated receivables Committed but not yet disbursed building saving loans of our Home Loan division – from allotment Due from customers This item includes: – Receivables with a residual maturity of – up to three months (including accrued interest) – over three months up to one year – over one year up to five years – over five years – Receivables without a fixed date of maturity – Due from affiliated companies – Due from companies in which investments are held – Subordinated receivables – Overdue interest and redemption payments from building saving loans of our Home Loan division Committed but not yet disbursed building saving loans of our Home Loan division – from allotment – for preliminary and interim financing purposes – other
Group
2003
2002
2003
2002
34,254 22,224 25,792 19,370 14,074 290 19,316 1,226
38,693 24,385 24,314 21,088 13,369 361 19,591 1,348
35,781 19,612 24,921 16,152 169 263 19,977 1,169
38,479 24,191 22,972 17,419 226 305 20,375 1,311
104
93
109
97
15,051 10,061 27,243 37,708 1,800 404 628 9
18,588 11,481 28,772 41,443 2,180 930 703 3
18,778 12,712 35,194 58,812 3,341 1,203 691 66
20,794 14,445 36,788 61,461 5,362 1,628 770 22
6
6
7
6
395 121 –
412 70 –
425 127 10
437 76 10
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Bank – EUR million – Bonds and other fixed-interest securities This item includes: – Amounts falling due in the following year (including accrued interest) – Securitised receivables from affiliated companies – Securitised receivables from companies in which investments are held – Subordinated securities – Marketable securities, of which – listed – unlisted
Group
2003
2002
2003
2002
9,676 2,252
14,855 1,622
11,213 –
16,710 –
– 10
13 –
23 10
38 –
28,515 19,403
36,061 26,697
35,394 21,024
42,583 29,050
Shares and other non-fixed interest securities This item includes: – Subordinated securities – Marketable securities, of which – listed – unlisted
10
22
16
28
262 22
71 25
304 634
113 645
Investments This item includes: – Marketable securities, of which – listed – unlisted
– 606
5 602
1 644
6 621
Shares in affiliated companies This item includes: – Marketable securities, of which – listed – unlisted
17 1,824
17 1,828
17 250
17 200
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Bank
Group
– EUR million –
2003
2002
2003
2002
Assets administered on behalf of third parties This item mainly includes housing loans granted by Bayerische Landesbodenkreditanstalt and breaks down as follows: – Due from banks – Due from customers – Bonds and other fixed-interest securities – Other assets
272 8,101 51 5
296 8,382 50 5
375 8,201 51 5
433 8,504 50 5
Tangible assets This item includes: – Land and buildings used for own operations – Office furniture and equipment
107 94
110 138
158 115
171 165
Other assets This item includes: – Premium claims from credit derivatives – Premiums from credit derivatives not yet received – Claims on the German Tax Authorities – Investments
574 573 433 11
281 247 312 471
574 573 450 17
281 247 333 471
419
458
431
458
Deferred taxes At Bank level, deferred taxes have been disclosed pursuant to Section 274 HGB. At Group level, deferred taxes have been combined pursuant to Sections 274 and 306 HGB. The figures have been computed on the basis of the income tax rates which apply in the case of the respective consolidated companies. The deferred taxes are largely due to the fact that the impact of the German Tax Relief Act 1999/2000/2002, the non-recognition for tax purposes of provisions for anticipated unrealised losses, as well as the non-taxrelevant loan loss provisions and write-downs on securities of the foreign entities have been taken into account.
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Bank – EUR million – Deferred income This item includes: – Premium on receivables – Discount on liabilities
Group
2003
2002
2003
2002
356 395
244 423
378 419
248 429
Changes in fixed assets and investments – EUR million – Bank
Purchase/ manufacturing costs
Additions
Disposals
Transfers
Appreciation
Depreciation/ Net book writedown value (accumulated) 31/12/2003
Changes +/– * –32
Investments
Net book Depreciation/ value writedown 31/12/2002 for financial year
2,070
2,102
Shares in affiliated companies
+487
3,211
2,724
Investment securities
–6,987
13,964
20,951
Tangible assets Other fixed assets Group
599
3
31
–
–
368
203
250
50
46
–
–
–24
–
5
17
41
–
Additions
Disposals
Transfers
Purchase/ manufacturing costs
Appreciation
Depreciation/ Net book writedown value (accumulated) 31/12/2003
Changes +/– * –73
Investments
Net book Depreciation/ value writedown 31/12/2002 for financial year
1,672
1,745
Shares in associated companies
+52
587
535
Shares in affiliated companies
+635
1,326
691
Investment securities
–6,976
16,025
23,001
Tangible assets Other fixed assets
821
11
86
–
–
465
281
370
63
48
–
–
–24
–
5
19
43
–
* The aggregation option pursuant to Section 34, Sub-section 3 RechKredV was utilised.
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Bank
Group
– EUR million –
2003
2002
2003
2002
Genuine sale and repurchase agreements Book values of assets transferred under sale and repurchase agreements
6,121
7,088
6,841
7,883
74,233
94,764
81,017
102,166
8,139
7,029
8,139
7,029
5 10,836 2,702
13 10,117 3,101
5 10,836 2,702
13 10,117 3,101
50,152
48,452
50,152
48,452
29,035 21,725 608
27,958 22,207 1,713
29,035 21,725 608
27,958 22,207 1,713
Assets in foreign currency Total amount of assets denominated in foreign currency
Assets held as cover for bonds to be covered pursuant to the law on mortgage-backed bonds (pfandbriefe) and related bonds issued by public-law banks Mortgage-backed bonds and Landesbodenbriefe Cover contained in: – Due from banks – Due from customers Excess cover Public-debt bonds Cover contained in: – Due from banks – Due from customers Excess cover
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Shareholdings (extract) The complete inventory of shareholdings pursuant to Section 285 No. 11, Section 313 Sub-section 2 and Section 340 a Sub-section 4 No. 2 HGB has been lodged with the Munich Register of Companies.
Name and legal domicile of the affiliated company I. Subsidiaries included in the consolidated accounts – Banque LBLux S.A., Luxembourg – Bayern-Invest Kapitalanlagegesellschaft mbH, Munich – BLB Asia Pacific Ltd., Singapore – Deutsche Kreditbank Aktiengesellschaft, Berlin – Landesbank Saar, Saarbrücken – MKB – Magyar Külkereskedelmi Bank Rt., Budapest
Letter Percentage 1 of Comfort held
Equity2 in EUR’000
Earnings in EUR’000
X
75.0
470,627
25,260
X X
100.0 100.0 100.0 75.1
11,516 110,783 1,220,909 375,161
717 –29,010 25,000 13,000
89.6
381,003
52,723
50.0
67,901
–6,500
II. Subsidiaries evaluated in accordance with the equity method – LB Transaktionsbank GmbH Frankfurt (Main) – München, Aschheim-Dornach III. Subsidiaries not included in the consolidated accounts which are covered by the Letter of Comfort – BayernLB Motorsport Limited, London
X
100.0
3
3
IV. Joint ventures – LB(Swiss) Privatbank AG, Zurich
X
50.0
80,283
11,591
46.4
1,213,600
95,100
V. Associated companies – Bank für Arbeit und Wirtschaft AG, Vienna
Comments: Amounts in foreign currency were converted to euros at the respective spot exchange rate on 31 December 2003. 1 For the wording of the Letter of Comfort, please see “Contingent liabilities and other liabilities”. 2 Equity as defined in Sections 266 and 272 HGB. 3 Approved annual accounts are not available yet.
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Liabilities Bank – EUR million –
Group
2003
2002
2003
2002
Due to banks This item includes: – Term liabilities with a residual maturity of – up to three months (including accrued interest) – over three months up to one year – over one year up to five years – over five years – Due to affiliated companies – Due to companies in which investments are held – Due to affiliated savings banks
46,081 15,249 17,083 13,656 1,703 51 7,514
52,396 18,945 17,607 14,543 1,901 222 9,753
56,659 18,024 19,737 16,918 47 213 7,841
66,969 22,125 20,292 17,728 8 366 10,080
Due to customers This item includes: – Other term liabilities with a residual maturity of – up to three months (including accrued interest) – over three months up to one year – over one year up to five years – over five years – Due to affiliated companies – Due to companies in which investments are held
12,409 2,642 7,148 15,029 135 190
14,163 2,498 9,318 13,247 102 161
18,006 3,113 7,800 16,323 290 200
19,706 3,021 9,986 14,212 157 215
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Bank – EUR million –
Group
2003
2002
2003
2002
19,219
20,229
19,724
21,395
5,645 3,262 60 – 446 17
15,255 6,569 599 – 12 23
5,645 3,262 60 – 3 10
15,289 6,574 599 – 5 25
92 8,332 5
114 8,614 5
101 8,526 5
141 8,846 5
Other liabilities This item includes: – Covering obligation resulting from the sale of securities borrowed – Premium liabilities from credit derivatives – Premiums from credit derivatives not yet paid – Offsetting item for translation of foreign currencies
791 645 515 89
536 293 253 430
791 650 515 145
536 293 253 518
Deferred income This position includes: – Discount on receivables
150
214
182
245
–
3
–
3
Securitised liabilities This item includes: – Bonds issued – amounts falling due in the following year – Other securitised liabilities with a residual maturity of – up to three months (including accrued interest) – over three months up to one year – over one year up to five years – over five years – Due to affiliated companies – Due to companies in which investments are held Liabilities administered on behalf of third parties This item breaks down as follows: – Due to banks – Due to customers – Other liabilities
Special reserve This position includes: – Special item under Section 52, Sub-section 16, Sentence 3 EStG (German income tax law)
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Bank – EUR million – Subordinated liabilities This item includes: – Due to companies in which investments are held In the year under review interest expenses amounted to:
Group
2003
2002
2003
2002
–
–
–
1
244
312
256
323
On the balance sheet date, funds exceeding 10 percent of the total amount of subordinated liabilities had not been raised. All subordinated liabilities are issued under the following terms: In the case of the Bank’s insolvency or liquidation, repayment shall not take place until all non-subordinated creditors have been satisfied. An obligation to make premature repayment at the creditor’s request cannot arise. The prerequisites under which these subordinated liabilities can be counted as liable capital pursuant to Section 10, Sub-section 5a KWG are fulfilled.
Bank – EUR million – Liable capital The following unrealised reserves count as part of the liable capital pursuant to Section 10, Sub-section 2b, Sentence 1, No. 7 KWG: Liabilities in foreign currency Total amount of assets denominated in foreign currency
Group
2003
2002
2003
2002
46
43
59
65
70,163
96,577
77,403
106,569
Contingent liabilities and other liabilities Neither of these items, disclosed below the bottom line of the balance sheet, contains any elements which have a significant bearing on the Bank’s overall activities. Letter of comfort For all financial institutions and other companies which are stated to be covered by the letter of comfort in the inventory of shareholdings, we shall ensure, proportionate to the size of our respective equity interest, that – with the exception of cases of political risk – they will be in a position to fulfil their contractual obligations.
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Bank
Group
– EUR million –
2003
2002
2003
2002
Assignment of collateral for the Bank’s own liabilities Assets have been assigned as collateral in the case of the following liabilities: – Due to banks – Due to customers – Contingent liabilities
7,907 – 30
7,614 – 62
12,694 401 33
11,726 291 66
The provision of collateral for the Bank’s own liabilities predominantly concerns open market transactions with the European System of Central Banks and funds of development institutions such as the DAB and LfA, which are passed on to customers on these institutions’ own terms. Additionally, securities with a nominal value of EUR 2,812 million at Bank level and EUR 3,454 million at Group level have been deposited as collateral in connection with transactions on EUREX, EEX, Clearstream Banking Frankfurt/Main, Clearstream Banking Luxembourg, Euroclear and other stock exchange and clearing systems. Other financial obligations Other financial obligations notably arise from rental, use and maintenance contracts, and from consulting and marketing agreements. On the balance sheet date, there were call commitments for capital not fully paid up of EUR 54 million at Bank level and EUR 55 million at Group level, of which EUR 34 million was due to affiliated companies. There were joint liabilities pursuant to Section 24 German Law on Limited Liability Companies (GmbHG) in the amount of EUR 17 million. Moreover, there were additional funding obligations amounting to EUR 54 million at Bank level (of which EUR 18 million due to affiliated companies) and to EUR 51 million at Group level (of which EUR 3 million due to non-consolidated affiliated companies), as well as a directly enforceable guarantee for the funding obligation of shareholders of the Frankfurt/Main-based Liquiditäts-Konsortialbank GmbH, who are members of Deutsche Sparkassen- und Giroverband e.V. Bayerische Landesbausparkasse has a commitment under a joint venture agreement with CEC S.A. Casa de Economii s¸i Consemnat¸iuni, the purpose of the agreement being to jointly establish the bank EBS Romania, Banca pentru locuint¸e S.A. Pursuant to Section 157 Conversion law (Umwandlungsgesetz), there is a secondary liability for the Berlin-based Deutsche Kreditbank AG. In the case of another affiliated company, there is a compensation duty with respect to turnover value added tax towards one of the shareholders. On the balance sheet date, the Bank’s liability as a member of the guarantee fund of the landesbanks came to EUR 93 million and that of the Group to EUR 98 million. Under the terms of the statutes of the deposit insurance fund run by the Association of German Public-Law Banks (VÖB), the Bank has undertaken to exempt the VÖB from any losses which may be suffered due to measures taken in favour of two credit institutions which are majority-owned by the Bank. As members of deposit protection schemes, individual consolidated institutions are also liable under the provisions governing those schemes.
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Changes in the portfolio of building-saving contracts and contract amounts of our Home Loan division (Landesbausparkasse) Not allotted
A. Portfolio at end of previous year B. Additions in financial year through 1. New contracts (effective) 2. Transfers 3. Waivers and revocations of allotment 4. Splits 5. Allotments 6. Other Total C. Reductions in financial year through 1. Allotments 2. Reductions 3. Terminations 4. Transfers 5. Consolidations 6. Contract expiries 7. Waivers and revocations of allotment 8. Other Total D. Net additions/reductions E. Portfolio at end of financial year Of which: building-savers outside the Federal Republic of Germany
Portfolio of contracts not yet effective a) Concluded prior to 01/01/2003 b) Concluded in financial year 2003
Allotted
Total
No. of contracts
Contract amounts EUR million
No. of contracts
Contract amounts EUR million
No. of contracts
Contract amounts EUR million
1,509,805
30,272
486,030
10,594 1,995,835
40,866
303,092 14,762
6,753 292
– 3,295
– 67
303,092 18,057
6,753 359
11,586 2,181 – 20,423 352,044
197 – – 486 7,728
– 61 107,318 1,771 112,445
– – 1,954 27 2,048
11,586 2,242 107,318 22,194 464,489
197 – 1,954 513 9,776
107,318 – 133,201 14,762 – 3,262
1,954 170 2,212 292 – 29
– – 39,984 3,295 8,286 87,345
– 6 648 67 – 1,854
107,318 – 173,185 18,057 8,286 90,607
1,954 176 2,860 359 – 1,883
– 20,263 278,806
– 498 5,155
11,586 423 150,919
197 10 2,782
11,586 20,686 429,725
197 508 7,937
73,238
2,573
-38,474
-734
34,764
1,839
1,583,043
32,845
447,556
9,860 2,030,599
42,705
4,265
87
761
19
5,026
106
No. of contracts
Contract amounts EUR million
5,488 86,341
198 1,793
As far as changes in the individual tariffs are concerned, please refer to the annual report of our Home Loan division.
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Changes in the volume of the allotment fund of our Home Loan division EUR million A. Additions I. Brought forward from previous year (surplus): Amounts not yet disbursed
3,383
II. Additions in financial year 1. Building-savers’ deposits (incl. building-saving premiums) 2. Redemption amounts1 (incl. building-saving premiums) 3. Interest on building-savers’ deposits 4. Reserve funds for Home Loan division
1,555 833 170 8
Total additions
5,949
B. Reductions I. Reductions in financial year 1. Allotted amounts, if disbursed a) Building-savers’ deposits b) Building loans 2. Repayment of building-savers’ deposits on building-saving contracts not yet allotted
901 570 604
II. Additions surplus (amounts not yet disbursed) at end of financial year2
3,874
Total reductions
5,949
Comments: 1 Redemption amounts are the proportions of the redemption amounts which are purely used for redemptions. 2 The additions surplus includes, among other items: a) Building-savers’ deposits not yet disbursed relating to allotted building-saving contracts b) Building loans not yet disbursed relating to allotments
214 499
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Changes in the portfolio of building-saving contracts and contract amounts of our Home Loan division (Landesbausparkasse) and of the Landesbausparkasse Saarbrücken Not allotted
A. Portfolio at end of previous year B. Additions in financial year through 1. New contracts (effective) 2. Transfers 3. Waivers and revocations of allotment 4. Splits 5. Allotments 6. Other Total C. Reductions in financial year through 1. Allotments 2. Reductions 3. Terminations 4. Transfers 5. Consolidations 6. Contract expiries 7. Waivers and revocations of allotment 8. Other Total D. Net additions/reductions E. Portfolio at end of financial year Of which: building-savers outside the Federal Republic of Germany
Portfolio of contracts not yet effective a) Concluded prior to 01/01/2003 b) Concluded in financial year 2003
Allotted
Total
No. of contracts
Contract amounts EUR million
No. of contracts
Contract amounts EUR million
No. of contracts
Contract amounts EUR million
1,603,907
32,029
520,562
11,217 2,124,469
43,246
322,895 15,129
7,131 299
– 3,343
– 68
322,895 18,472
7,131 367
14,149 2,267 – 21,263 375,703
236 – – 504 8,170
– 61 116,436 2,515 122,355
– – 2,101 29 2,198
14,149 2,328 116,436 23,778 498,058
236 – 2,101 533 10,368
116,436 – 141,029 15,129 – 3,262
2,101 175 2,342 299 – 29
– – 41,496 3,343 9,540 93,267
– 6 668 68 – 1,954
116,436 – 182,525 18,472 9,540 96,529
2,101 181 3,010 367 – 1,983
– 21,367 297,223
– 520 5,466
14,149 464 162,259
236 18 2,950
14,149 21,831 459,482
236 538 8,416
78,480
2,704
-39,904
-752
38,576
1,952
1,682,387
34,733
480,658
10,465 2,163,045
45,198
7,123
151
1,265
30
8,388
181
No. of contracts
Contract amounts EUR million
6,963 91,754
224 1,896
As far as changes in the individual tariffs are concerned, please refer to our Home Loan division’s annual report and the annual report of Landesbausparkasse Saarbrücken.
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Changes in the volume of the allotment fund of our Home Loan division and that of the Landesbausparkasse Saarbrücken EUR million A. Additions I. Brought forward from previous year (surplus): Amounts not yet disbursed
3,586
II. Additions in financial year 1. Building-savers’ deposits (incl. building-saving premiums) 2. Redemption amounts1 (incl. building-saving premiums) 3. Interest on building-savers’ deposits 4. Reserve funds for Home Loan division
1,653 879 180 8
Total additions
6,306
B. Reductions I. Reductions in financial year 1. Allotted amounts, if disbursed a) Building-savers’ deposits b) Building loans 2. Repayment of building-savers’ deposits on building-saving contracts not yet allotted
961 604 634
II. Additions surplus (amounts not yet disbursed) at end of financial year2
4,107
Total reductions
6,306
Comments: 1 Redemption amounts are the proportions of the redemption amounts which are purely used for redemptions. 2 The additions surplus includes, among other items: a) Building-savers’ deposits not yet disbursed relating to allotted building-saving contracts b) Building loans not yet disbursed relating to allotments
236 534
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Derivatives transactions within the Group – presentation of volumes – The table below shows interest rate-related and foreign currency-related forward transactions as well as other forward transactions and credit derivatives not yet settled as per the balance sheet date. The majority of the deals was concluded to hedge fluctuations in interest rates, exchange rates or market prices and trading on behalf of customers. – Interest rate, currency, share price and other price risks – Nominal values
– EUR million –
Credit risk equivalents1
Cost of replacement2
2003
2002
2003
2003
Interest rate risks Interest rate swaps FRAs Interest rate options – purchases – sales Caps, floors Exchange-traded contracts Other FRAs and interest rate futures
544,716 28,119 12,461 4,224 8,237 21,486 86,160 747
521,715 62,592 14,190 4,574 9,616 41,906 207,221 21,140
3,591 3 28 28 – 46 – 33
12,329 8 68 68 – 123 – 3
Interest rate risks – total –
693,689
868,764
3,701
12,531
Currency risks Forward exchange transactions Currency swaps/cross currency swaps Foreign exchange options – purchases – sales Exchange-traded contracts Other currency futures
159,728 40,704 5,226 2,698 2,528 – 215
199,121 36,771 7,387 3,624 3,763 – 164
1,417 2,475 42 42 – – 6
3,901 4,212 130 130 – – 19
Currency risks – total –
205,873
243,443
3,940
8,262
Share and other price risks Forward share transactions Index options – purchases – sales Share options – purchases – sales Exchange-traded contracts Other forward transactions
94 470 128 342 1,384 768 616 421 218
49 364 208 156 215 138 77 – 1,161
28 13 13 – 41 41 – – 95
– 8 8 – 90 90 – – 1
Share and other price risks – total –
2,587
1,789
177
99
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– Risks from credit derivatives – Nominal values
Credit risk equivalents1
Cost of replacement2
– EUR million – Risks from credit derivatives Credit default swaps – protection buyer – protection seller Credit linked notes – protection buyer – protection seller Total return swaps – protection buyer – protection seller Credit spread options – protection buyer – protection seller
2003
2002
2003
2003
30,642 16,737 13,905 586 586 – 474 237 237 392 – 392
26,792 14,288 12,504 674 290 384 – – – 484 – 484
371 64 307 – – – 2 1 1 – – –
38 38 – – – – 1 1 – – – –
Risks from credit derivatives – total –
32,094
27,950
373
39
Derivatives transactions within the Group – maturities structure – Nominal values – EUR million – Residual terms – up to three months – up to 1 year – up to 5 years – more than 5 years Total
Interest rate risks
Currency risks
2003
2002
2003
2002
80,275 178,026 253,033 182,355 693,689
243,172 204,301 239,312 181,979 868,764
79,899 69,279 32,811 23,884 205,873
126,071 85,945 24,634 6,793 243,443
Share and other price risks 2003 2002
Risks from credit derivatives 2003 2002
1,207 595 407 378 2,587
5,304 403 14,749 11,638 32,094
1,463 138 162 26 1,789
1,245 1,487 8,388 16,830 27,950
Derivatives transactions within the Group – counterparty structure – Nominal values
– EUR million – OECD banks Non-OECD banks Public-sector entities within the OECD Other counterparties * Total * including exchange-traded contracts
Credit risk equivalents1
Cost of replacement2
2003
2002
2003
2003
749,622 4,895 4,642 175,084 934,243
793,726 41,282 3,937 303,001 1,141,946
4,998 31 9 3,153 8,191
16,622 28 355 3,926 20,931
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Derivatives transactions within the Group – trading transactions3 – Nominal values
– EUR million –
Credit risk equivalents1
Cost of replacement2
2003
2002
2003
2003
Interest rate-based contracts Currency-based contracts Share-based contracts Credit derivatives contracts
538,003 153,924 1,344 20,132
710,879 182,733 357 11,686
2,544 2,237 36 65
8,636 5,010 70 39
Trading transactions – total –
713,403
905,655
4,882
13,755
Comments: 1 The credit risk equivalents have been determined on the basis of the mark-to-market method. Netting agreements worth EUR 3,663 million reduced the gross amount of EUR 8,191 million disclosed for the credit risk equivalent to EUR 4,528 million. 2 The cost of replacement has been determined on the basis of market prices. It represents the potential additional expenses or lower income which would result from the conclusion of a substitute deal in the case of a default of a contract partner. All contracts with a positive value have been included, and there has been no counterparty-related netting against contracts with a negative value. 3 Trading transactions in derivative instruments include transactions carried out within the framework of the Bank's business strategies and limits by the competent trading units with the aim of achieving gains from proprietary trading.
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Disclosures relating to the profit and loss statement of the Bank and the consolidated profit and loss statement Other operating income and expenses The main items included under Other operating income are earnings from tax refunds of EUR 142 million for the Bank and EUR 145 million for the Group (disclosed in the previous year under Taxes on income and earnings or Other taxes in the amount of EUR 108 million for the Bank and EUR 112 million for the Group), as well as from the write-back of other provisions worth EUR 27 million at Bank level and worth EUR 30 million at Group level. Other operating expenses do not include any major items. Early repayment indemnity (2002: EUR 30 million at Bank level, EUR 45 million at Group level) which was included in Other operating income and expenses in the previous year, is disclosed under Net interest income as from 2003. Income from reversals of write-downs on investments, shares in affiliated companies and securities treated as fixed assets In the previous year, this item included gains from the sale of both direct and indirect participations. Extraordinary expenses This position includes the Bank’s restructuring costs for the year 2003 and the following years. Taxes on income and earnings Taxes disclosed on income and earnings relate basically to the result from ordinary business. The tax position is also influenced by the writing back of tax deferrals. Profits transferred under profit pooling, profit transfer or partial profit transfer agreements Interest expenditure for capital contributions of silent partners is disclosed under this item for the first time. Last year, interest expenses included EUR 226 million at Bank level and EUR 245 million at Group level.
Bank
Group
– EUR million –
2003
2002
2003
2002
Geographical markets The total amount of income disclosed in items 1, 3, 5, 7 and 8 breaks down into the following geographical markets: – Germany – Europe (excluding Germany) – America – Asia
9,058 1,119 1,095 327
9,683 1,825 1,414 549
10,351 1,917 1,094 332
11,425 2,795 1,413 554
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Supplementary information The administrative bodies of Bayerische Landesbank* Board of Administration Prof. Dr. Kurt Faltlhauser Chairman State Minister, Bavarian State Ministry of Finance Dr. Siegfried Naser First Vice Chairman Executive President of the Association of Bavarian Savings Banks
Josef Deimer Lord Mayor of the City of Landshut Gerhard Fleck (until 30/04/2003) Chairman of the Board of Directors of Sparkasse Bamberg
Dr. Günther Beckstein Second Vice Chairman State Minister, Bavarian State Ministry of the Interior
Alois Hagl (as from 01/05/2003) Chairman of the Board of Directors of Sparkasse im Landkreis Schwandorf
Hansjörg Christmann Third Vice Chairman Chief District Administrator of the District of Dachau
Hermann Regensburger (until 31/10/2003) Permanent Secretary, Bavarian State Ministry of the Interior
Georg Schmid (as from 01/11/2003) Permanent Secretary, Bavarian State Ministry of the Interior Klaus Weigert (as from 03/11/2003) Deputy Secretary, Bavarian State Ministry of Finance Prof. Hubert Weiler Chairman of the Board of Directors of Sparkasse Nürnberg Dr. Otto Wiesheu State Minister, Bavarian State Ministry of Economic Affairs, Infrastructure, Transport and Technology
Board of Management Werner Schmidt Chairman
Dr. Eberhard Zinn (until 30/06/2003)
Dieter Burgmer Theo Harnischmacher
Dr. Peter Kahn Deputy Chairman
Werner Strohmayr
Stefan W. Ropers
Dr. Rudolf Hanisch
Dr. Gerhard Gribkowsky
* The information is relevant for the period from 1 January to 31 December 2003
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Bank – EUR thousand –
Group
2003
2002
2003
2002
4,857
4,454
5,113
4,715
473
476
517
556
3,910
3,607
3,938
3,627
–
–
–
7
34,115
36,295
34,115
36,295
1,600
2,729
1,645
2,963
419
547
419
664
Remunerations of the governing bodies of Bayerische Landesbank Total remunerations of the financial year: Members of the Board of Management of Bayerische Landesbank Members of the Board of Administration of Bayerische Landesbank Former members of the Board of Management of Bayerische Landesbank and their surviving dependants Former members of the Board of Administration of Bayerische Landesbank and their surviving dependants Pension provisions set up for former members of the Board of Management and their surviving dependents Loans to the governing bodies of Bayerische Landesbank Total amount of advances, loans and guarantees granted to members of the Board of Management and the Board of Administration: Members of the Board of Management of Bayerische Landesbank Members of the Board of Administration of Bayerische Landesbank
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Mandates held by legal representatives or by other employees of Bayerische Landesbank* Name
Mandates held in supervisory bodies to be constituted under German law for major incorporated companies (including all credit institutions)
Board of Management Dieter Burgmer
Banque LBLux S.A., Luxembourg Bayern-Invest Kapitalanlagegesellschaft mbH, Munich BayernLB International Fund Management S.A., Luxembourg BLB Asia Pacific Ltd., Singapore GBWAG Bayerische Wohnungs-AG, Munich
Dr. Gerhard Gribkowsky
debis Air Finance B.V., Amsterdam Formula One Administration Ltd., London Formula One Management Ltd., London
Dr. Rudolf Hanisch
Banque LBLux S.A., Luxembourg Bayern-Invest Kapitalanlagegesellschaft mbH, Munich CDC IXIS S.A., Paris E.ON Energie AG, Munich GBWAG Bayerische Wohnungs-AG, Munich
Theo Harnischmacher
Bayern-Invest Kapitalanlagegesellschaft mbH, Munich Landesbank Saar, Saarbrücken SchmidtBank AG, Hof
Dr. Peter Kahn
Bank für Arbeit und Wirtschaft AG, Vienna Banque LBLux S.A., Luxembourg Bayern-Invest Kapitalanlagegesellschaft mbH, Munich Deutsche Kreditbank Aktiengesellschaft, Berlin Ed. Züblin AG, Stuttgart GBWAG Bayerische Wohnungs-AG, Munich GEWOFAG Gemeinnützige Wohnungsfürsorge AG, Munich Knaus AG, Jandelsbrunn Landesbank Saar, Saarbrücken LB(Swiss) Privatbank AG, Zurich Warema Renkhoff Holding AG, Marktheidenfeld
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Name
Mandates held in supervisory bodies to be constituted under German law for major incorporated companies (including all credit institutions)
Stefan W. Ropers
Deutsche Factoring Bank Deutsche Factoring GmbH & Co., Bremen MKB – Magyar Külkereskedelmi Bank Rt., Budapest RUEFA Reisen AG, Vienna
Werner Schmidt
Bank für Arbeit und Wirtschaft AG, Vienna DekaBank Deutsche Girozentrale, Frankfurt/Main Deutsche Kreditbank Aktiengesellschaft, Berlin Deutsche Lufthansa AG, Cologne Drees & Sommer AG, Stuttgart Herrenknecht AG, Schwanau Jenoptik AG, Jena Landesbank Saar, Saarbrücken LB(Swiss) Privatbank AG, Zurich Liquiditäts-Konsortialbank GmbH, Frankfurt/Main Wieland-Werke AG, Ulm
Werner Strohmayr
Bank für Arbeit und Wirtschaft AG, Vienna Banque LBLux S.A., Luxembourg Bürgerliches Brauhaus Ingolstadt AG, Ingolstadt Deutsche Kreditbank Aktiengesellschaft, Berlin EPCOS AG, Munich HUK-Coburg-Allgemeine Allgemeine Versicherungs-Aktiengesellschaft der HUK-Coburg, Coburg HUK-Coburg-Krankenversicherungs AG, Coburg HUK-Coburg-Leben Lebensversicherungs-Aktiengesellschaft der HUK-Coburg, Coburg Landesbank Saar, Saarbrücken MKB – Magyar Külkereskedelmi Bank Rt., Budapest sd&m Software Design & Management AG, Munich
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Name
Mandates held in supervisory bodies to be constituted under German law for major incorporated companies (including all credit institutions)
Staff members Jörg M. Bauer
Bürgerliches Brauhaus Ingolstadt AG, Ingolstadt DKB Immobilien AG, Berlin-Charlottenburg
Oliver Becker
RUEFA Reisen AG, Vienna
Michael Doranth
Deutsche Real Estate AG, Bremerhaven DKB Immobilien AG, Berlin-Charlottenburg LB Immo Invest GmbH, Hamburg
Norbert Enck
trans-o-flex Schnell-Lieferdienst GmbH, Weinheim
Harald Glöckl
Formula One Administration Ltd., London Formula One Management Ltd., London
Ernst Holland
mfi Management für Immobilien AG, Essen
Andreas Nerantzakidis
Bürgerliches Brauhaus Ingolstadt AG, Ingolstadt Haupt Pharma AG, Berlin
Dr. Bernhard Oswald
Bürgerliches Brauhaus Ingolstadt AG, Ingolstadt
Michael Schmittlein
trans-o-flex Schnell-Lieferdienst GmbH, Weinheim
Manfred Werner
DKB Immobilien AG, Berlin-Charlottenburg
Dr. Franz Wirnhier
DKB Immobilien AG, Berlin-Charlottenburg
* The information is valid as per 31 December 2003.
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Number of employees (annual average) Women
Men
Total
Bayerische Landesbank Consolidated companies
2,698 2,112
2,858 1,361
5,556 3,473
Bayerische Landesbank Group
4,810
4,219
9,029
17
25
42
of which: consolidated companies on a pro rata basis (in proportion to participation)
The total includes 1,063 part-time employees, whose working hours correspond to those of 651 full-time employees. Our 165 trainees are not included.
Munich, 16 March 2004 Bayerische Landesbank The Board of Management
Schmidt
Dr. Kahn
Strohmayr
Dr. Hanisch
Burgmer
Harnischmacher
Ropers
Dr. Gribkowsky
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Independent Auditors’ Report We have audited the annual financial statements, together with the bookkeeping system, of Bayerische Landesbank (hereinafter called “Bank”), a corporation established under public law, Munich, as well as the consolidated financial statements comprising the balance sheet, the P/L statement, cash flow statement, segment reporting, statement of changes in shareholders’ equity and the notes and its report on the position of the Bank and the Group prepared by the Bank for the financial year from 1 January to 31 December 2003. The preparation of these documents in accordance with German commercial law and supplementary provisions in the Law on Bayerische Landesbank in the version officially published on 1 February 2003 and its Statutes is the responsibility of the Bank’s management. Our responsibility is to express an opinion on the annual financial statements, together with the bookkeeping system, as well as on the consolidated financial statements and the report on the position of the Bank and the Group based on our audit. We conducted our audit of the annual and consolidated financial statements in accordance with Section 317 HGB (German Commercial Code) and the German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer (IDW). Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation of the net assets, financial position and results of operations in the annual and consolidated financial statements and the cash flow statement in the consolidated financial statements in accordance with principles of proper accounting and in the report on the position of the Bank and the Group are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the Bank and the Group and evaluations of possible misstatements are taken into account in the determination of audit procedures. The effectiveness of the accounting-related internal control system and the evidence supporting the disclosures in the books and records, the annual and consolidated financial statements and the report on the position of the Bank and the Group are examined primarily on a test basis within the framework of the audit. The audit includes assessing the accounting and consolidation principles used and significant estimates made by management, as well as evaluating the overall presentation of the annual and the consolidated financial statements and the report on the position of the Bank and the Group. We believe that our audit provides a reasonable basis for our opinion. Our audit has not led to any reservations. In our opinion, the annual and the consolidated financial statements give a true and fair view of the net assets, financial position and results of operations of the Bank and the Group and the cash flows for the year of the Group, respectively, in accordance with principles of proper accounting. On the whole the report on the position of the Bank and the Group provides a suitable understanding of the Bank’s and the Group’s position and suitably presents the risks of future development. Munich, 29 March 2004 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft Wohlmannstetter Auditor
Ufer Auditor
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Section VII
Advisory Boards and addresses Trustees* Dr. Werner Böhme Senior Assistant Secretary (retired) Ismaning
Deputy Norbert Schulz Senior Assistant Secretary Bavarian State Ministry of the Interior Munich Dr. Manfred Seume Senior Assistant Secretary Bavarian State Ministry of the Interior Munich
* For the period from 1 January to 31 December 2003
159
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Advisory Boards and addresses
160
Economic Advisory Council*
Dkfm. Ander Amonn President Südtiroler Sparkasse AG Bozen
Dipl.-Kfm. Fritz Haberl Former Chairman of the Supervisory Board MAHAG-Firmengruppe
Dr. Ferdinand Graf von Ballestrem Member of the Board of Directors MAN Aktiengesellschaft Munich
Dr. Max Häring Chairman of the Board of Management Landesbank Saar Girozentrale Saarbrücken
Willi Berchtold Chairman of the Board of Directors Giesecke & Devrient GmbH Munich
Dipl.-Ing., Dipl.-Wirtsch.-Ing. Peter Hamberger Manager Hamberger Industriewerke GmbH Rosenheim
Karl J. Dersch Former Member of the Board of Directors Deutsche Aerospace AG Helmut Elsner Chief Executive Officer (retired) Chairman of the Board of Trustees Bank für Arbeit und Wirtschaft AG Vienna until 31 December 2003 Dr. Dr. h.c. Manfred Gentz Member of the Board of Directors DaimlerChrysler AG Stuttgart Dipl.-Kfm. Heinz-Werner Götz Auditor Director of the Verband Bayerischer Wohnungsunternehmen e.V. Munich
Willi Hermsen Former Chief Executive Officer Flughafen Munich GmbH Ottobrunn Gerhard Hess Lawyer Chief Executive Officer Bayerischer Bauindustrieverband e.V. Munich Erwin Horak President Staatliche Lotterieverwaltung Munich Dr. Gerhard Jooss Former Member of the Board of Directors Thyssen Krupp AG Essen
* For the period from 1 January to 31 December 2003
Dr. Eng. h.c. Volker Jung Chairman of the Supervisory Board MAN Aktiengesellschaft Munich Daniel Just Member of the Board of Directors Bayerische Versorgungskammer Munich with effect from 6 February 2003 Dr. Jürgen F. Kammer Chairman of the Board of Directors Süd-Chemie AG Munich Dr. Klaus Ketzler Chairman of the Board KfH Kuratorium für Dialyse und Nierentransplantation e.V. Neu-Isenburg until 30 April 2003 Alfred H. Lehner Former Chairman of the Board of Management Bayerische Landesbank Utting am Ammersee Gerhard Luther Former Chairman of the Board of Directors Bayerische Versorgungskammer Gröbenzell until 31 December 2003
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Dr. Ing. Hanns Maier Honorary General Consul Grand Duchy of Luxembourg Munich
Dr. jur. Otto Majewski Former Deputy Chairman of the Board of Directors Eon-Energie AG Gauting until 31 July 2003
Prof. Dr. Marbod Muff Member of the Board of Directors Boehringer Ingelheim C.H. Boehringer Sohn Ingelheim am Rhein
Dr. rer. pol. Dieter Nagel Member of the Supervisory Board Thüga Aktiengesellschaft Munich
Franz Neubauer Minister of State (retired) Former Chairman of the Board of Management Bayerische Landesbank Nußdorf/Inn
Heinz Prokop Chairman of the Board of Directors Versicherungskammer Bayern Munich
Dr. Georg Graf von Schall-Riaucour Chief Executive Officer Wittelsbacher Ausgleichsfonds Munich
Dr. Péter Stotz Deputy Chief Executive Member of the Board of Directors Hungarian Foreign Trade Bank Ltd. Budapest
Prof. Dr. h.c. Albert Scharf Former Director Bayerischer Rundfunk Munich until 30 April 2003
Dieter Teichmann Deputy Chairman of the Board of Directors Bayerische Versorgungskammer Munich
Rudolf W. Schmitt Chairman of the Board of Directors LfA Förderbank Bayern Munich Dipl.-Kfm. Dieter Schön Managing Director Schön-Klinik Verwaltung GmbH Prien Stefan Schörghuber Proprietor of Schörghuber Corporate Group Munich Dr.-Ing. Dieter Soltmann Honorary President of the Chamber of Industry and Commerce for Munich and Upper Bavaria Chairman of the Supervisory Board Löwenbräu AG Munich
Karl-Heinz Trautmann President of the Association of Saar Savings Banks Saarbrücken Prof. Dr. h.c. Ignaz Walter President of the Main Federation of the German Construction Industry Chairman of the Supervisory Board Walter Holding AG Augsburg Dr. Wolfgang Weiler Board Member HUK-Coburg Coburg Dr. rer. pol. Walter Wübben Managing Partner ABG Allgemeine Baubetreuungsgesellschaft Cologne
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162
Savings Bank Advisory Council* Dieter Bartke Savings Bank Director Chairman of the Board of Directors Kreis- und Stadtsparkasse Erding-Dorfen Erding
Hans Reiter Savings Bank Director Chairman of the Board of Directors Sparkasse Landsberg-Dießen Landsberg
Rudolf Faltermeier Vice President Association of Bavarian Savings Banks Munich
Siegmund Schiminski Savings Bank Director Chairman of the Board of Directors Sparkasse Bayreuth Bayreuth
Günter Götz Savings Bank Director Chairman of the Board of Directors Stadtsparkasse Weiden Weiden Rainer Heller Savings Bank Director Chairman of the Board of Directors Sparkasse Fürth Fürth Werner Netzel Vice President Association of Bavarian Savings Banks Munich Friedel Neumann Savings Bank Director Member of the Board of Directors Sparkasse Miltenberg-Obernburg Miltenberg (until 31 May 2003)
* For the period from 1 January to 31 December 2003
Hans Schmittner Savings Bank Director Member of the Board of Directors Sparkasse Miltenberg-Obernburg Miltenberg (as from 1 June 2003) Ludwig Seeberger Savings Bank Director Chairman of the Board of Directors Sparkasse Allgäu Kempten Josef Waschinger Savings Bank Director Chairman of the Board of Directors Sparkasse Freyung-Grafenau Freyung
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In Memoriam
Dr. jur. Dr. h.c. mult. Ludwig Huber Minister of State (retired) President of Bayerische Landesbank Girozentrale from 1977 to 1988 Deceased since 14 June 2003 Recipient of the Bavarian Order of Merit as well as the Grand Order of Merit with star and sash of the Federal Republic of Germany
Dr. rer. pol. Eberhard Zinn Member of the Board of Management of Bayerische Landesbank from 1986 to 2003 Deceased since 6 March 2004
We will keep the memory of the deceased in high regard.
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Domestic locations ■ Munich Bayerische Landesbank (Head Office) Brienner Straße 18 · 80333 München Tel.: +49 89 2171-01 Fax: +49 89 2171-23579 Telegramm Bayernbank München Teletex 89 88 27 GZMtex Reuters Monitor BLAX, BAYA-B SWIFT BIC: BYLA DE MM E-mail:
[email protected] Internet: www.bayernlb.de ■ Nuremberg Bayerische Landesbank Lorenzer Platz 27 · 90402 Nürnberg Tel.: +49 911 2359-0 Fax: +49 911 2359-212 SWIFT BIC: BYLA DE 77 ■ 15 Sales Offices of LBS-Bayern with locations in: Ansbach, Bad Tölz, Bamberg, Bayreuth, Erding, Erlangen, Fürstenfeldbruck, Ingolstadt, Landshut, Munich, Neumarkt, Neu-Ulm, Nürnberg, Oberviechtach, Würzburg and 111 additional advisory centers in Bavaria
International locations Our network in Europe ■ London Bayerische Landesbank Bavaria House · 13/14 Appold Street GB-London EC2A 2NB Tel.: + 44 20 7247-0056 Fax: + 44 20 7955-5173 SWIFT BIC: BYLA GB 22 ■ Luxembourg Bayerische Landesbank 3, rue Jean Monnet L-2180 Luxembourg Tel.: + 352 43 3122-1 Fax: + 352 43 3122-4599 SWIFT BIC: BYLA LU LB
■ Milan Bayerische Landesbank Via Cordusio, 2 · I-20123 Milano Tel.: + 39 02 86390-1 Fax: + 39 02 864216 SWIFT BIC: BYLA IT MM E-mail:
[email protected] ■ Paris Bayerische Landesbank 203, rue du Faubourg Saint-Honoré F-75380 Paris Cedex 08 Tel.: + 33 1 442114-00 Fax: + 33 1 442114-44 SWIFT BIC: BYLA FR PP Our network in the Americas ■ New York Bayerische Landesbank 560 Lexington Avenue New York, N.Y. 10022/USA Tel.: + 1 212 310-9800 Fax: + 1 212 310-9841 SWIFT BIC: BYLA US 33 ■ Toronto Bayerische Landesbank BCE Place-Suite 3210 181 Bay Street, PO BOX 814 Toronto, Ontario M5J 2T3/Canada Tel.: + 1 416 862-8840 Fax: + 1 416 862-2381 SWIFT BIC: BYLA CA TT E-mail:
[email protected] ■ Montreal Bayerische Landesbank 1501, Avenue McGill Collège · Bureau 2060 Montréal, Québec H3A 3M8/Canada Tel.: + 1 514 985-0047 Fax: + 1 514 985-2610 E-mail:
[email protected] Our network in Asia ■ Hong Kong Bayerische Landesbank 19/F., Standard Chartered Bank Building 4A Des Voeux Road Central Hong Kong/Hong Kong Tel.: + 852 2978-8333 Fax: + 852 2877-3817 SWIFT BIC: BYLA HK HH
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■ Labuan Bayerische Landesbank Licensed Offshore Bank (940028C) Unit 14 - C, Level 14 Block 4, Office Tower Financial Park Labuan, Jalan Merdeka 87000 Federal Territory of Labuan/Malaysia Tel.: + 60 87 591-000 Fax: + 60 87 422-175 SWIFT BIC: BYLA MY KA E-mail:
[email protected] ■ Beijing Bayerische Landesbank Suite C302B Beijing Lufthansa Center 50 Liangmaqiao Road Beijing 100016/P.R. China Tel.: + 86 1 06465-1071/2 Fax: + 86 1 06465-1093 E-mail:
[email protected] ■ Shanghai Bayerische Landesbank 17/F., Hua Du Mansion 828-838 Zhang Yang Road Pudong Shanghai 200122/PR China Tel.: + 86 21 6876-6600 Fax: + 86 21 6876-7700 ■ Singapore Bayerische Landesbank 300 Beach Road # 37-01 The Concourse Singapore 199555/Singapore Tel.: + 65 62 933-822 Fax: + 65 62 932-151 SWIFT BIC: BYLA SG SG E-mail:
[email protected] ■ Tokyo Bayerische Landesbank 5 F, Yusen Building 3-2, Marunouchi , 2 - chome Chiyoda - ku Tokyo 100 - 0005/Japan Tel.: + 81 3 3201-5360 Fax: + 81 3 3201-5763 SWIFT BIC: BYLA JP JT E-mail:
[email protected]
Subsidiaries of the Bank ■ Berlin Deutsche Kreditbank AG Kronenstraße 8/10 · 10117 Berlin Tel.: +49 30 20155-0 Fax: +49 30 20155-465 E-mail:
[email protected] ■ Saarbrücken SaarLB Ursulinenstraße 2 · 66111 Saarbrücken Tel.: +49 681 383-01 Fax: +49 681 383-1200 E-mail:
[email protected] ■ Budapest Ungarische Außenhandelsbank AG (MKB) Váci u. 38. · H-1056 Budapest Tel.: + 36 1 327 8600 Fax: + 36 1 269 0959 SWIFT BIC: MKB HU HB E-mail:
[email protected] Internet: www.mkb.hu ■ Luxembourg Banque LBLux S.A. 3, rue Jean Monnet B.P. 602 · L-2016 Luxembourg Tel.: + 352 42 434-1 Fax: + 352 42 434-5099 SWIFT BIC: BYLA LU LL E-mail:
[email protected] Internet: www.lblux.lu ■ Singapore Merchant Bank BLB Asia Pacific Ltd. 300 Beach Road # 36-01 The Concourse Singapore 199555/Singapore Tel.: + 65 62 988-770 Fax: + 65 62 988-875 ■ Zurich LB(Swiss) Privatbank AG Börsenstr. 16 · Postfach CH-8022 Zürich Tel.: + 41 1 26544-44 Fax: + 41 1 26544-11 SWIFT BIC: BYLA CH ZZ E-mail:
[email protected] Internet: www.lbswiss.ch
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Munich Bayerische Landesbank (Head Office) Brienner Straße 18 · 80333 Munich Telephone +49 89 2171-01 Fax +49 89 2171-23579 Telegramm bayernbank München Teletex 89 88 27 GZMtex Reuters Monitor BLAX, BAYA-B SWIFT BIC: BYLA DE MM Internet: www.bayernlb.com
Editorial details: Publisher:
Text/editorial staff/production:
Bayerische Landesbank Corporate Center Support Operations Press & Media Relations Division
Printed by:
Lipp GmbH Graphische Betriebe, Munich
Photography:
Jürgen Zeiss, BayernLB; Axel Griesch, Munich (Photos of the members of the BoM) Airport Munich, page 52 Messe München, page 53 Press bureau of the city of Nuremberg, page 72
The annual report is printed on environmentally compatible non-chlorine bleached cellulose. The annual report is also available in German and can be downloaded (together with a glossary) as a pdf file from www.bayernlb.com under Press / Facts and Figures.
Bayerische Landesbank Brienner Straße 18 80333 München www.bayernlb.de
