Landeskreditbank Baden-Württemberg - L-Bank

Loan Portfolio Risks
We maintain a policy of conservative evaluation of our loan portfolio. We establish what we believe to be
adequate reserves to take account of all identifiable risks in our loan portfolio.
At year-end 2004, 54.0% of our total outstanding loans (other than fiduciary loans and administrative loans)
and guaranties were backed by credit support, (compared to 56.4% at year-end 2003): 34.6% of total loans
(compared to 37.9% at year-end 2003) were secured by mortgages and other collateral and 19.5% (compared to
18.5% at year-end 2003) were loans to, or guarantied by, the Federal Republic of Germany or Baden-
Württemberg, political subdivisions thereof or other governmental authorities, or were insured.
According to our internal guidelines determined by the board of management direct lendings generally have
to be secured, unless the debtor is, or is guaranteed by, a Member State of the European Union, a municipality or
by another public law entity of a Member State of the European Union, or if the debtor is a company engaged in
the utility sector and the majority of its equity is owned by any of the public law entities mentioned before.
Furthermore, credit support may not be required, if the debtor has a high degree of credit-worthiness and other
credit institution would normally extend loans to this company on an unsecured basis. We have established an
internal rating framework and each debtor is classified according to a predefined rating methodology suitable for
the category of debtors to which the debtor belongs. As a general rule, credit support is not necessary, if the
debtor is classified in one of the two highest internal rating categories.
At December 31, 2004, most of our loans and guaranties not backed by credit support were made to banks
and other credit institutions.
As part of our lending in support of housing and agriculture, we make fiduciary loans, which are loans in
our name on behalf of other entities, and administrative loans, which are loans in the name of other entities on
behalf of the other entities, in each case using funds supplied by other entities. We do not bear any credit risk in
connection with fiduciary loans and administrative loans. See “General—Introduction” and “—Glossary—
Fiduciary assets; fiduciary liabilities.”
In accordance with the L-Bank Statutes, if loans and guaranties extended by us are secured, they are
generally secured on a junior basis. Housing-related loans are usually secured by junior mortgages or, on a
temporary basis until the perfection of a mortgage, by bank guaranties or guaranties by local authorities or
entities established under public law. Bridge loans to persons with an unmatured building-society savings
contract (nicht zuteilungsreifer Bausparvertrag) are additionally secured by an assignment of such contract.
Because of the risk inherent in junior mortgages, the municipality in which the housing construction is located is,
subject to its prior approval, obligated by law to cover one-third of any losses incurred by us, provided that the
relevant loan is granted under the State Housing Program and is used for the construction of houses or
apartments. A Baden-Württemberg state administrative regulation, however, limits our claims under the guaranty
to an amount based on a ratio of 75% of the overall reasonable cost.
In certain areas of financing, such as trade-, industry- and agriculture-related lending, we very frequently
extend loans through intermediary banks that on-lend the funds to their own borrowers — the end customers. In
addition to assuming the credit risk, we generally require intermediary banks to secure such loans. To a very
limited extent we may guaranty collection of loans made by intermediary banks. Trade and industry-related loans
are in most cases secured by mortgages or security interests in equipment, accounts receivable and other
collateral.
In various areas of our business we make loans, including fiduciary loans, to entities and, to a limited extent,
to individuals — German and foreign — that are incorporated or located outside of Germany, purchase debt
securities of foreign issuers and make equity investments in foreign entities. To the extent these transactions are
not denominated in Euros, we generally hedge any currency risks by means of currency swaps. See “Business—
Funding and Investment Policy.”
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