annual report - Hypo Real Estate Holding AG

hyporealestate

annual report - Hypo Real Estate Holding AG

2007

DEPFA BANK plc

annual

report


Group Figures and Ratings

Group Figures

Earnings

2007 (1) 2006 (2) Change

. m . m %

Net interest income 392 425 -8%

Net fee and commission income 41 32 28%

Net trading income -52 140 - 137%

Gains less losses from financial assets 348 277 26%

Other operating income 20 34 -41%

Total operating income 749 908 -18%

Operating expenses -417 -269 55%

of which personnel expenditure -235 -138 70%

of which other administrative expenditure -141 -78 81%

of which depreciation and amortisation -13 -9 44%

of which other expenditure -28 -44 -36%

Net operating profit before impairment losses 332 639 -48%

Impairment losses on loans and advances - -

Profit before taxation 332 639 -48%

Taxation -23 -113 -80%

Group Net Income 309 526 -41%

Balance Sheet Items 31/12/2007 31/12/2006 %

Financing volume 198,119 218,927 -10%

of which drawn 171,168 194,586 -12%

of which undrawn 26,951 24,341 11%

Shareholder´s capital 2,951 2,777 6%

Total assets 217,900 222,945 -2%

Key Ratios 2007 2006

Cost/Income ratio (including exceptional items) 55.7% 29.6%

Cost/Income ratio (excluding exceptional items) 40.9% (3) 26.1% (4)

RoE after taxes 10.8% 20.7%

(1) 2007 Results include DEPFA Deutsche Pfandbriefbank AG which is classified as discontinued operations in the financial statements

(2) Including 2006 results from discontinued operations

(3) 2007 exceptional costs include 388 million in personnel costs arising on the change of control of the Group and 323 million arising on the loss on disposal of

DEPFA Deutsche Pfandbriefbank AG

(4) 2006 exceptional costs include 334 million in other income and 341 million in other expenditure arising on tax refunds and related interest from discontinued

operations

Ratings

(short-term/long-term/Financial Strength)

Fitch Moody’s S&P

DEPFA BANK plc F1+/AA-/B P-1/Aa3/C+ A-1/A+/--

DEPFA Deutsche Pfandbriefbank F1/A/-- P-1/Aa3/C+ A-1/A/--

DEPFA ACS BANK F1+/AA-/-- P-1/Aa3/C+ A-1/A+/--


Profile

❚ The only globally operating bank that focusses

exclusively on public sector clients and related business

❚ Operates from 29 locations throughout Europe, America

and Asia

❚ Covers all financial requirements of the public sector

❚ Has extensive experience with the specific financial,

political and social requirements of the public sector

❚ Provides tailor-made solutions for central and regional

governments, municipalities and cities

❚ Is a strong financial partner and independent advisor to

its clients

❚ Has a strong entrepreneurial spirit and a corporate

culture that promotes diversity


DEPFA BANK plc worldwide

Dublin

Albany

Amsterdam

Athens

Boston

Chadds Ford

Chicago

Copenhagen

Dallas

Dortmund

Frankfurt

Glen Allen

Hong Kong

Houston

■ North America (New York City) ■ South America (São Paulo) ■ India (Mumbai)


■ Europe incl. EMEA and

CIS (London/Dublin

/European Offices)

Istanbul

London

Luxembourg

Madrid

Milan

Mumbai

New York

Nicosia

Paris

Rome

Sacramento

San Francisco

Sao Paulo

Tokyo

Warsaw

■ Asia ex-Japan (Hong Kong) ■ Japan (Tokyo)


Content

2

Profile 1

Content 2

Business Principles 9

Corporate Highlights 2007 10

Executive Directors 14

Management Discussion 18

Business Performance 66


Risikoberichtbericht

Accounts 76

Directors and other information 76

Directors’ Report 78

Statement of Directors’ responsibilities 84

Independent Auditors’ Report to the Members of DEPFA BANK plc 85

Consolidated income statement 88

Consolidated balance sheet 89

Company balance sheet 90

Consolidated statement of changes in equity – Group 91

Consolidated statement of changes in equity – Company 92

Consolidated cash flow statement 93

Notes to the consolidated financial statements 95

Addresses 186

3


Damien Legrand:

“One of the key innovative features of DEPFA's refinancing

proposal was the use of an inflation-linked bank

loan, which enabled the borrower to hedge its natural

exposure to inflation on the tolls. The long concession

length together with the fact that traffic figures have

constantly exceeded initial forecasts since the last 2

years have been strong features for the transaction”.

Clients: Eiffage and Caisse des Dépôts et Consignations

Need: To bridge the highway gap on the A10-A71-A75 route, the shortest route between the

North and the South of France, by building the tallest vehicular bridge in the world

Solution: DEPFA BANK acted as Mandated Lead Arranger for the 3573 million refinancing of the toll

viaduct, which is successfully operated by Compagnie Eiffage du Viaduc de Millau under

a 78-year concession granted by the French State

People: Damien Legrand, Managing Director, Head of Infrastructure Finance, France/Benelux

Julien Touzot, Director, Infrastructure Finance, France/Benelux


Millau Viaduct, France


Giancarlo Campagnani:

“ABS issue on healthcare receivables for Region of

Campania has been the benchmark transaction for the

sector in 2007. DEPFA’s underwriting capabilities and

Joint Lead role, indeed helped to turn the deal into a

success story.

Our commitment and performance on that deal allowed

us to become a reference financial institution for the

Region, the third biggest in Italy”


Client: The Region of Campania, Italy

The Region of Campania, Italy

Need: Payment of past due receivables by Local Healthcare Units (LHU) across the Region. LHU have

experienced in the past significant delays and cash flow strains following delayed payments

due from the National Healthcare System to the Region

Solution: DEPFA BANK acted as Joint Lead Manager in the ABS transaction launched to finance the

payment of the above mentioned receivables, backed by the unconditional payment obligation

from the Region of Campania, for an amount of 3452 m

People: Giancarlo Campagnani, Managing Director, Public Sector Organisation (PSO) Italy

Mauro Ferone, Managing Director, Structured Asset Finance


Business Principles

Risikoberichtbericht

Clients DEPFA BANK is a leading provider of financial services

to the Public Sector worldwide. With this comes a unique respon-

si bility towards the respective communities within which we ope-

rate. Our success depends on putting our clients’ interests first

People Our people are the key to our success. Employees must

reflect the integrity, honesty and reputation of our franchise and

the diversity of the communities and cultures we serve. Given the

wholesale nature of our business we strongly believe in flat

hierarchies, entrepreneurial spirit and teamwork. All segments

and all teams work closely together towards our common goals.

Responsibility We are committed to support long-term econo-

mic growth and social responsibility. Therefore we promote vario-

us social projects in the interests of some of the most

disadvantaged people in the world. We encourage our people to

join in with these efforts. We follow a strict policy of neutrality in

political matters, and we try to avoid operating in regions

exposed to military conflicts and refrain from financing offensive

military projects in general.


Corporate Highlights 2007

10

10

Q1:

Q2:

Q3:

Q4:

Hybrid Capital: Tier I Capital; 3500 million perpetual executed March 2007

Long-Term Funding: ACS US$1.25 billion; 5.125% due 16/3/2037

Business Expansion: DEPFA BANK plc agrees to acquire US municipal capital

markets business of First Albany Capital Inc.

Financials: DEPFA BANK reports 2006 net profit of 3526 million (+11%)

Social Responsibility: Support of Concern Livelihood Projects in Rwanda, Sierra

Leone, Liberia

Financials: DEPFA BANK with solid start in 2007: net profit of 3123 million in Q1

Long-Term Funding: ACS 31 billion; 4.75% due 15/12/2009

Share: Capital Markets Day for Institutional Investors in Dublin and

New York

Management: DEPFA BANK plc appoints Cyril Dunne as Chief Operating

Officer and Member of the Executive Committee.

Infrastructure Finance: Successfully closes the 3280 million Dublin Conference Centre

transaction (Infrastructure Journal Global PPP Deal of the Year).

Business Expansion: DEPFA BANK completes its acquisition of the US Municipal

Capital Markets Group of former First Albany Capital, Inc.

Geographic expansion: Opened Istanbul Representative Office and Hong Kong Branch

Share: Recommended Merger of Hypo Real Estate Holding AG and

DEPFA BANK plc; DEPFA EGM in Dublin

Financials: DEPFA BANK reports cumulative half year result of 3 249 million

– Q2 result of 3126 million

Securitisation: DEPFA closes third EPIC CLO of infrastructure assets

Geographic expansion: Opening of Madrid and Nicosia Branch Offices; opening of

Athens Representative Office

Share: DEPFA BANK becomes 100% subsidiary of Hypo Real Estate

Holding AG

Long-Term Funding: DEPFA US$2 billion; 4.75% due 12/10/2010

Infrastructure Finance: The Millau Viaduct won the “Transport Refinancing Deal of the

Year 2007 EMEA” by Project Finance magazine.


Julia Hoggett, Global Head of Capital Markets, Dublin

“The Capital Markets team had a successful

year in 2007, generating the lowest cost of

long-term funding for the Bank in recent his -

tory notwithstanding the more challenging

market environment. The highlights of the year

included the first ever 30yr US$ Covered Bond

and the largest ACS US$ benchmark ever issued.

The 30 year issue in particular reflected

the continued globalisation of DEPFA's investor

base with 88% being sold into the United

States.”

Brian Farrell, Global Head of Money Markets, Dublin

“Throughout 2007 DEPFA Global Money Market

funding platforms performed robustly, despite

sustained dislocation in the funding markets in

the second half of the year. All of our Money

Market funding platforms continued to operate

during this period of market turbulence, sourcing

liquidity in 2007 in significant amounts. Our

cost of funding improved as we were a direct

beneficiary of the significant repricing of the

sovereign and sub-sovereign repo market,

which enabled us to improve our overall funding

spread for 2007.”

11

11


John Kirwan:

“This award winning and landmark transaction incorporates

a unique financial structure which was influenced by

DEPFA as Mandated Lead Arranger. It is also a successful

example of the application of the PPP model to a new

sector aswell as advancing the use of private finance in

Irish public projects.”

Client: Treasury Holdings

Need: The development of a world class convention centre in the Irish capital which, as well as

adding strategic capability to Ireland's business tourism industry, the building when complete,

will make a spectacular impact on the Dublin skyline. The centre is designed by Pritzker Prize

winner, Kevin Roche, the internationally renowned, Irish-born architect who also designed

New York’s Metropolitan Museum of Art.

Solution: DEPFA was mandated to arrange 3280 million of loan facilities to finance the construction and

operation of the convention centre capable of accommodating up to 2,000 delegates under

a 25 year (plus 42 months construction) PPP concession granted by the Irish Government

through the Commissioners of Public Works.

People: John Kirwan, Managing Director, Head of Infrastructure Finance (UK and Ireland)

Dermot Malone, Director · Jason Murphy, Director

Awards: Global PPP Deal of the Year 2007 (Infrastructure Journal)

Global Leisure Deal of the Year 2007 (Project Finance Magazine)


The National Conference Centre, Dublin


Executive Directors

14

Paul Leatherdale, Chief Executive Officer

Paul Leatherdale joined DEPFA Group in September 1999 to set up the Infrastructure

Finance team in Dublin with specialist local teams based in most of the Group's offices

worldwide. Previously, after completing a business degree, he qualified as a Chartered

Accountant and then spent 15 years at Sumitomo Bank in London specialising in Real

Estate, Construction and International Project Finance. He is directly responsible for the

Bank’s origination of new business in Public Sector and Infrastructure Finance.

Angus Cameron, Executive Director and Chief Financial Officer

Angus Cameron joined DEPFA BANK plc as CFO in January 2007. He previously worked

for the Bank of New York Europe where he was also CFO. Prior to that, he held a number

of senior finance roles at Scottish Widows and Barclays Bank. As CFO he is responsible

for all Finance, Accounting and Financial Controls. By mutual agreement he will leave the

Bank on 31 March 2008.

Bo Heide-Ottosen, Executive Director, Public Sector and Infrastructure Finance

Since October 2007 Bo Heide-Ottosen, has been a member of the Management Board of

Hypo Real Estate Holding AG where he has overall responsibility for the Public Sector and

Infrastructure Finance business segment, and in particular for all Treasury and Balance

Sheet Management activities. He joined DEPFA in October 2004 as Head of Treasury. He

previously held senior management positions in Scandinavia and worked as Executive VP

and CFO at the Nordic Investment Bank in Helsinki.


James Campbell, Executive Director and Chief Operating Officer

James Campbell joined Hypo Real Estate Group in September 2003, where he was

responsible for establishing the Internal Audit function within Hypo Real Estate Bank International

and then at a Group level. Since October 2005, he has been a member of the

Board of Directors of Hypo Public Finance Bank plc as Chief Operating Officer. In October

2007 he was appointed to the Board of DEPFA BANK plc as an Executive Director, and

also in the capacity of Chief Operating Officer. Prior to joining the Group, he worked in

practice for 14 years, firstly with Ernst and Young in London, and then with KPMG in Hong

Kong and Ireland. With effect from 1 April 2008, he will also assume the responsibility for

Finance, Accounting, and Financial Controls.

Tom Glynn, Executive Director, Capital Markets and Asset Management

Tom Glynn was appointed to the Board of DEPFA BANK plc in October 2007 as Executive

Director responsible for the Capital Markets and Asset Management business. He is a

member of the Management Board of Hypo Real Estate Holding AG, in charge of the

Capital Markets and Asset Management segment, having joined the Group in January

2004. Since October 2005 he has been Deputy CEO of Hypo Public Finance Bank plc.

Before that he held senior positions at HypoVereinsbank as Head of the Management

Committee in New York and as Global Head of Credit Markets for the HypoVereinsbank

Group in charge of securitization, credit trading and structuring.

Non-Executive Members of the Board of Directors

Georg Funke (Chairman)

Dr. Markus Fell (Deputy Chairman)

Dr. John Bourke

Patrick Ryan

Bettina von Oesterreich

Cyril Dunne

15


Dr. Christian Kummert:

“Probably the first PPP transportation project which combines

project finance with purchase of receivables.”

Clients: BAM PPP, Berger Bau, Egis, Volker Wessel, Fluor

Need: To ease traffic congestion on the A8 Motorway between Munich and Augsburg, Germany

Solution: 3241 million of debt financing for the widening of the motorway by one lane in each direction as

well as operation and maintenance under a 30 year concession

People: Dr. Christian Kummert, Managing Director, Infrastructure Finance Unit, Europe

Dr. Ruprecht von Heusinger, Associate Director, Infrastructure Finance Unit, Germany


A8 Motorway, Germany


Management Discussion – Segments

Management Discussion

2007 was a momentous year for the Bank* in a number

of ways, not least because of the acquisition by

Hypo Real Estate Group AG (“HRE Group”), which was

recommended by the Board of Directors and was

overwhelmingly approved by the shareholders at the

EGM held on 24 September 2007, and finally closed

on 2 October 2007.

DEPFA’s* new strategic position, as the public finance

arm of the enlarged HRE Group (having now acquired

HRE Group’s own specialist public finance subsidiary

(Hypo Public Finance Bank plc (“HPFB”)), brings increased

stability to the Bank and new opportunities for

diversification of the product range being delivered to

its public sector client base – principally in the area of

specialist real estate structuring skills and credit

appetite for the type of high quality transaction that is

often underpinned by the involve ment of public sector

entities.

Not only will DEPFA absorb HPFB’s total assets of

approximately €31 billion, reinforcing its status as one

of the leading public sector lending institutions in the

world, but the enlarged capital base will bolster

DEPFA’s ability to undertake large scale transactions.

An integration process was launched soon after the

closing of the transaction, which has already delivered

good results in terms of identifying and implementing

cost savings, streamlining certain operations and

reducing the extent of non-core activities such as

proprietary trading.

But despite this major change in ownership, and the

resultant changes to the senior management team,

DEPFA’s clear and undiluted focus on serving the financial

needs of governments and public sector entities

worldwide remains unaltered. The benefits of this specialist

focus and strictly applied business policy were

clearly demonstrated during the second half of the year

when the problems of the US sub-prime residential

mortgages which had been securitised and widely

distributed to international investors through structured

CDO products, created widespread market disruption

18

globally and led to a severe restriction of liquidity in the

financial markets. However, during this turbulent

period, the Bank’s short-term unsecured funding cost

actually decreased. DEPFA benefited from a “flight to

quality”, as debt investors and depositors demonstrated

they had confidence in the quality and public

finance focus of DEPFA’s asset portfolio.

The Bank has not been able to escape entirely

unscathed from changes in the financial market landscape

over the year and this has resulted in some

material losses being recognised in the Global Markets

Segment (now part of Capital Markets and Asset

Management from 1 January 2008). However, decisive

action has been implemented to limit further exposure

to adverse market movements, and in co-ordination

with HRE Group, the Bank’s policy on the level of

trading volatility it is willing to accept has been

reassessed so that trading activity will principally be in

conjunction with the need to support the client businesses

of the Bank rather than being an end in itself.

The origination of new business slowed in the last

quarter of 2007, partly as a result of deteriorating credit

markets, but also because, in order to meet target

capital ratios, risk weighted asset volumes had to be

managed carefully. This had less impact on public

sector business (which has commensurately low

capital requirements) than the more capital intensive

infrastructure and utility sectors. It was pleasing that

even in such a difficult market environment, DEPFA

was still able to securitise infrastructure assets in

December which is a testament to the quality of the

underlying asset portfolio, and the placement and

structuring capability of the staff responsible.

* References in this management discussion section to

“DEPFA”, “DEPFA BANK” or “the Bank” refer to the

DEPFA Group excluding HYPO Public Finance Bank

and including DEPFA Deutsche Pfandbriefbank AG,

unless other wise stated.


On another positive note, DEPFA has continued to

expand its activities, both in global presence (with new

offices being established during the year in Greece and

Turkey), and is seeking to penetrate its core markets

more deeply. The important acquisition of a US

municipal finance broker-dealer operation (First Albany

Securities, now “DEPFA First Albany”) was closed in

September 2007 and gives the Bank improved access,

scale and new skill sets to increase its capability to

service the US public finance sector in a number of

different ways.

In the drive for improved cost efficiency, and also

reflective of the need to resource the Bank appropriately

within the revised business scope and the overall

context of the support and resources available from

the HRE Group, headcount was reduced during

the latter part of the year. The Bank would like to

acknowledge the contribution of all former management

and staff colleagues in helping to position DEPFA

proudly as the world’s pre-eminent public finance

bank.

Going forward DEPFA’s business model continues to

be one based principally on intermediating between

the increasingly sophisticated financial requirements of

the global public sector, and the institutional investing

market’s growing appetite for high quality and stable

assets. This is mainly done through the origination of

public sector and infrastructure assets in bond or loan

format, which are held on the Bank’s balance sheet

and refinanced through the issuance of AAA rated

covered bonds (Pfandbriefe in Germany and Asset

Covered Securities (ACS) in Ireland).

One of the expected synergies resulting from the

merging of HPFB into DEPFA BANK (which will be -

come fully effective in the early part of 2008) is the

opportunity to further diversify the Bank’s funding

sources, by utilising HPFB’s covered bond bank in

Luxembourg (which issues AAA rated “Lettre de Gage”

covered bonds).

The Bank expects to be able to continue to take

advantage of some of the more positive effects of the

“sub-prime crisis” – such as improved pricing for credit

availability, and an increased investor requirement for

clarity and understanding of what risks they are

actually taking which should benefit institutions such

as DEPFA with a very clear business focus, while

managing the challenges of the present liquidity

environment.

DEPFA has established an outstanding track record in

public sector finance and places great emphasis on

growing its valuable relationships with its core public

sector clients. As the public sector’s financial needs

continue to evolve the Bank is very well positioned to

respond to the new opportunities and intends to make

sure that it is able to assist, and of course thereby

benefit from, its clients’ requirements.

Budget Finance

Introduction

The Budget Finance segment produces a large proportion

of the Bank’s revenues. This is generated from

the wide range of products provided to the public sector

client base, as well as from the realisation of profits

from the active management of the asset portfolio. The

segment is staffed by specialist teams involved in the

origination of public (“on-budget”) finance assets (both

directly from clients through the Bank’s international office

network (Public Sector Origination “PSO”), and

from the market through the Balance Sheet Management

“BSM” team).

Distribution of products is controlled by the Global

Sales team, which concentrates on providing both

short and long-term products (both assets and

liabilities), to end investors such as central banks,

financial institutions and asset management companies,

as well as the Global Syndications team, which

works closely on the pricing, structuring and placement

of potential transactions with the originators.

The funding of such assets that are retained on the

Bank’s balance sheet is managed by the Money

Markets and Capital Markets teams, who together

19


Management Discussion – Segments

constitute the Funding function for all Public Sector

and Infrastructure related financing. [Note: with effect

from 1 January 2008, the Budget Finance and Infrastructure

Finance segments will be reported together

under a new combined segment, “Public Sector and

Infrastructure Finance” which reflects the more closely

integrated management structure from that date].

Main achievements

Generally the Bank’s high quality public sector asset

portfolio, the diversified global funding platforms and

investor base, and the broad range of products

available and markets accessed mean that DEPFA can

normally achieve sub-LIBOR funding levels, and this

competitive advantage continued to be demonstrated

throughout 2007, and in particular the second half of

the year, even when the difficult financial market

conditions, and the resultant restricted availability of

liquidity in the banking market, presented major

challenges for all banks.

In addition to DEPFA’s exclusive public sector focus,

another important element underpinning the Bank’s

continuing ability to access competitive funding

sources is that DEPFA procures over 50% of its money

market funding directly itself, which has enabled the

Bank to increase the amount of direct deposits

when necessary. Another important component of the

funding model is the repo market, and again the Bank

has benefited from repo margins for its high quality

public sector assets improving during the crisis period.

20

Balance Sheet Management (BSM)

Balance Sheet Management invests in highly rated,

low risk assets across the government, municipal, regional

and government related issuer sectors globally.

Because of the exclusive public sector focus, DEPFA

managed to avoid direct negative impact from the

problems triggered by the U.S. sub-prime real estate

crisis during 2007. Indeed, and especially during the

fourth quarter, the Bank made use of the favourable

volatility in credit pricing to add assets to the portfolio

at attractive margins while achieving funding at better

levels than in previous years, thus demonstrating the

soundness of the business model.

Credit spreads in public finance tightened considerably

in the first half of 2007 which facilitated an optimisation

of the public finance portfolio and a realisation of gains

on legacy exposures. The subsequent market volatility

and ensuing flight to quality over the second half of the

year provided further opportunity to realise gains but

also simultaneously enabled the Bank to rebuild exposures

in certain asset classes at wider credit spreads.

Transaction highlights in 2007 included a Co-Manager

position on a US$5 billion, 16 year, AAA rated Sallie

Mae US government guaranteed bond, the largest

ever Student Loan issue, as well as a Joint Lead

Manager position on a €750 million, 10 year bond

issue for the Export-Import Bank of Korea (KEXIM),

and a Joint Lead Manager position on a €500 million,

18 year Posillipo Finance (Region of Campania,

Italy).

Total drawn financing volume rose by almost €10

billion from €195 billion in 2006 to €205 billion in 2007.

The Bank purchased €64 billion of assets in terms of

net new commitments, and managed to increase the

all-in margin to more than 20bps, while still maintaining

a very high asset quality level of AA2. The geographic

diversification of the portfolio increased, with the USA

share rising to 23% of portfolio allocation, and

Germany decreasing to 15%.


Funding

DEPFA’s Funding Team is split into two units: Money

Markets (which raises funding with a duration of up to

two years) and Capital Markets (responsible for longterm

funding i.e. duration greater than 2 years). The

Bank’s diversified funding model is based on both

long-term e.g. covered bond issues (which represent

approximately half of the funding liabilities); repo of

eligible collateral (which represents roughly a quarter of

funding); and short-term unsecured funding from the

money markets which represents the remainder. Both

teams have a similar mandate: to minimise liquidity risk

and maximise investor access. The Funding Teams are

responsible for optimising the maturity and cost of

funding for the Bank. DEPFA’s attractive funding levels

are made possible by diversifying across funding

platforms, currencies, structures, investors and geographies.

Money Markets

The Money Markets team is responsible for short-term

funding. 2007 was considered to be a successful year

against the background of a challenging environment.

The team provided DEPFA with a stable and diversified

funding platform across the wholesale primary and

secondary markets in a wide range of Money Market

products.

Clients demonstrated throughout the year that they

recognised the quality of the DEPFA name in the everincreasingly

credit sensi tive global market. DEPFA

sourced flows across 28 currencies in 2007. The overall

average cost of funding improved significantly, as

DEPFA’s overall credit risk and high quality asset portfolio

became factors given greater weighting by counterparties.

Outstanding liabilities gradually increased

throughout the year by 20% from €95 billion to €113

billion.

A significant portion of this growth is attributed to the

secured borrowing markets. The market saw improved

funding levels over the year due to the increased

demand for high grade collateralised lending levels

available on bilateral and triparty repo.

The primary Money Market platforms contributed significant

flows to the Balance Sheet throughout the year,

across bilateral and triparty repo, Euro Commercial

Paper, French CDs, Swedish CP, US CP, Yankee CD

and Canadian CP. The majority of these funding platforms

remained generally stable even in the most difficult

times; and the Bank was pleased to see minimal

changes to the funding mix throughout the market

turmoil.

Triparty repo had reduced flows but at normal pricing

levels. Bilateral repo enjoyed a significantly lower cost

of funding, as investors and banks sought sovereign

and sub-sovereign high grade assets. 2007 also saw

banks and institutional investors reduce credit lines

across the credit spectrum.

Capital Markets

The Capital Markets team is responsible for DEPFA’s

long-term funding activities. This is done by using a

broad range of funding instruments including public

benchmarks, private placements and loan transac -

tions. The coordination and execution of hybrid capital

issuance for DEPFA also falls under the team’s remit.

DEPFA enjoys a leading position in the covered bond

market through its AAA rated public sector covered

bonds, Irish Asset Covered Securities (ACS) and

German Pfandbriefe, which are the principal sources of

long-term funding for the Bank. These liquid instruments

are collateralised by high quality, widely diversified

public sector assets and trade on a variety of

electronic platforms including EuroMTS, EuroCredit

MTS, Tradeweb, Marketex and Bond Vision.

In 2007 DEPFA executed two US$ benchmarks. In

March, DEPFA ACS BANK brought a US$1.25 billion

30-year transaction to the market. This was the first,

and so far only, ultra-long US$-denominated covered

bond ever issued. In October this was followed by a

US$2 billion 3 year issue. Both of these transactions

served to further build the Bank’s US$ benchmark

curve, which now has 6 outstanding issues with

maturities ranging from October 2008 to March 2037.

Currently the total outstanding volume of DEPFA ACS

21


Management Discussion – Segments

benchmarks is slightly in excess of €24.5 billion equivalent.

DEPFA’s activities in the primary markets this year led

to the Bank being recognised by EUROMONEY as

“Best Covered Bond Borrower 2007”.

DEPFA’s US$ benchmarks are largely placed outside

Europe (on average 70%), reflecting the strength of

DEPFA’s global investor name recognition. As the USA

is a region where the Bank has seen, and anticipates

further, significant asset growth, DEPFA is committed

to further expanding its US$ funding base with other

capital markets products, including the recently

established AAA 144A USMTN programme.

Investors in DEPFA’s ACS benchmarks are attracted by

the high quality and liquidity of these instruments and

the positive spread to sovereign and agency paper.

Despite the global credit and liquidity crisis, the secondary

market for public sector-backed covered bonds

22

has remained remarkably stable in contrast to other

asset classes. DEPFA was a beneficiary of the stability

in this asset class and was therefore well positioned to

access the primary markets during the second half of

2007.

DEPFA is also an active issuer of EMTN notes, both

secured and unsecured in a wide variety of structures,

currencies and maturities either as private placements

or as public transactions. 2007 was a very strong year

for these markets, with two-thirds of DEPFA’s longterm

funding being sourced in the private placement

markets.

The success of the funding strategy employed by

DEPFA in 2007 is reflected in the fact that the Bank

raised its targeted €13.5 billion of long-term funding at

deeper sub-LIBOR levels than were achieved in 2006

or at any stage in recent years. This was achieved

whilst maintaining an average weighted tenor of new

borrowings of approximately 9 years.

Group currency breakdown of non-benchmark long-term funding transactions

EUR

USD

JPY

GBP

Other

BRL

HKD

ZAR

TRY

CHF

0 10% 20% 30% 40% 50% 60% 70%


Secured MTNs/

Registered Notes

ACS Benchmarks

Unsecured

MTNS/Loans

Structured

Plain Vanilla

Structure of Group primary sale of long-term instruments

0 10% 20% 30% 40% 50% 60% 70%

Group breakdown according to structure type* of non-benchmark long-term transactions

0 20% 40% 60% 80% 100%

* All structures can be provided with cap, floor and call features:

Floating and Fixed Rate Notes, Zero Coupons

Fixed Rate Step-Up Notes, Flip-Flops

Reverse Floaters

Range Accruals

CMS-Structures (e.g. CMS-Spreads, Steepeners)

Power Reverse Dual Currency Notes

Reverse Dual Currency Notes

FX-Digital Notes

TARNs

Equity-Linked Notes

Inflation-Linked

Ratchets (Snowballs)

Volatility Bonds

Quantos

SIFMA-Linked

We can also issue with restructuring options

23


Management Discussion – Segments

Distribution

DEPFA’s Global Sales team consolidated their position

as a leading provider of liquidity to the Group, in both

short-term and long-term products. Against a backdrop

of shrinking liquidity and declining investor

appetite, the Bank directly placed over €232 billion (vs.

€190 billion in 2006) in short-term liquidity instruments

across 8 funding platforms. Meanwhile, the Bank also

increased its sale of long-term covered bonds and

public sector assets from €3.2 billion in 2006 to €3.4

billion in 2007. Participating in over 10 roadshows,

DEPFA attracted over 40 new clients, to enhance its

client base, diversified across Central Banks, Private

Banks, Asset Managers and Building Societies as well

as Corporate Treasuries. For the first time, the Bank

achieved a #1 position on its own Capital Markets

dealer group, distributing €1.45 billion (almost double

the volume of 2006 at €745 million.)

Results*

Net interest income, generated through DEPFA’s

stable, long-term asset and liability base, amounted to

€348 million in 2007, (compared to €356m in 2006), a

2 % decrease on the previous year. This change is

partly because of increased asset sales (taking advantage

of favourable market prices), which accordingly

Budget Finance

24

removed the contribution to net interest income from

such assets sold. Non-interest revenues, generated

through fees from US Liquidity Facilities, the active

management of the Budget Finance asset portfolio

and other activities increased to €368 million in 2007,

(compared to €283 million in 2006), a 30% increase

on the previous year. New business in the mature

markets, most notably in the USA and Italy was

particularly strong. The U.S. now contributes 25% of

the overall budget financing volume of DEPFA whilst

also enhancing the credit quality of the portfolio.

DEPFA’s funding activities remained strong, meeting

and exceeding the Bank’s targets for its long- and

short-term funding mix and enhancing/reducing the

overall cost of funding in 2007. Profit before taxes in

this segment totaled €613 million in 2007.

Outlook

The outlook for 2008 is volatile but not without profitable

opportunities. For those institutions like DEPFA,

which have the ability to utilise their reputation as a

balance sheet investor, operating within high quality

credit (Government and tax-revenue backed) markets,

there may indeed be opportunities to further enhance

the portfolio’s efficient frontier in terms of risk adjusted

return.

€ m 2007 2006 Change Change %

Net interest income 348 356 -8 -2%

Non interest revenues 368 283 85 30%

Total operating income 716 639 77 12%

Operating expenses -103 -84 -19 23%

Profit before taxation 613 555 58 10%

Key Balance sheet items**

Financing volume (on-balance sheet) 125,577 167,438 -41,861 -25%

Financing volume (off-balance sheet) 22,086 21,885 201 1%

Total commitments 147,663 189,323 -41,660 -22%

* For reconciliation of the results to the published in come statement, see page 62.

** For comparability with the financial statements, 2007 volumes include HPFB and exclude DEPFA Deutsche Pfandbriefbank

AG.


DEPFA’s Funding team stands to benefit from the

stable platform which was proven in 2007, by using the

consistent demand for Public Sector Repos (in Money

Markets) enhanced by the premium that professional

investors are willing to pay to access AAA Covered

Bonds (in Capital Markets). Further building out the

distribution platform as the Global Sales team grows

will allow DEPFA to distribute products even more

widely to consolidate and grow its franchise as the

leading specialist bank in Public Sector Finance.

Infrastructure Finance

Introduction

2007 was characterised by rapid growth in the Bank’s

infrastructure finance business. This growth however

took place in the first three quarters of the year. In the

final quarter, in part responding to the deterioration in

credit markets, and in part in fulfilment of its securiti -

sation, sales and syndication plans, the Bank concentrated

on managing down its risk-weighted assets.

Revenues and financing commitments doubled, reflecting

both successful closing of a number of significant

PPP and PFI loan transactions and the continuation of

the initiative begun in 2006 to offer long-term funding

to UK utility companies providing essential services

to the public such as water, electricity and gas. In

addition to the growth in loan margin and commitment

fee income from the arranging and provision of direct

funding, 2007 also saw significant advisory fee and

derivatives income (booked in the CPS segment).

DEPFA maintained its investment in the Infrastructure

Finance Unit (IFU) franchise, increasing headcount

from 53 to 60 employees (of which 15 are based in

Dublin, 13 in New York and 10 in London). All of these

new colleagues are dedicated to the origination and

structuring of new business. In Structured Export

Finance the team established in late 2006 enhanced

the Bank’s capacity to advise on, and arrange the

senior debt financing for industrial and infrastructure

products globally.

Main achievements

During the year IFU made over €10.6 billion of commitments

in 72 transactions across a wide range of sectors

and countries, such as the following:

Eurotunnel – DEPFA invested in a significant portion

of the AAA monoline wrapped refinancing of the debt of

Eurotunnel. This was the largest of several long-dated

index-linked transactions with UK utilities and infrastructure

companies, which will benefit from very favourable

risk-weighted asset treatment under Basel II.

Borealis Healthcare Corporation – in October the

Bank provided Borealis Infrastructure, which is owned

by the Ontario Municipal Employees Retirement

System, with financing for the purchase of MDS

Diagnostics (now called “LifeLabs”), Canada’s largest

laboratory services company, whose principal revenue

stream is payments from public sector health

authorities. Borealis paid C$1.34 billion in total for this

acquisition.

Guardian Digital Communications – again in

October DEPFA concluded, as Mandated Lead

Arranger and Bookrunner, the €2.7 billion (£1.8 billion)

transaction for the purchase and ongoing capital

funding of O2 Airwave, a purpose built digital communications

network for the exclusive use of Britain’s

emergency and public safety services.

Capital Beltway – this €1.3 billion (US$1.9 billion)

“landmark” project is the first dynamic pricing toll road

to close in the US (and only the second in the world),

the first use of Private Activity Bonds in the US and the

largest “TIFIA” loan (under a special Federal Government

loan program enacted to boost private sector

involvement in the development of US transportation

25


Management Discussion – Segments

infrastructure) ever secured. IFU’s New York team

acted as financial advisor to the private sector consortium

led by Transurban USA earning a significant

success fee.

In other countries significant lead arranging mandates

were executed for inter alia the Millau Viaduct refinancing

in France, the A8 Toll Road in Germany and the

National Conference Centre in Ireland.

Risk-weighted assets, securitisation and sales

DEPFA has already shown, through the EPIC I and

EPIC II synthetic PPP CLO transactions, the ability of

IFU to successfully carry out variations on DEPFA’s

“on-balance sheet securitisation” model. Now that the

Bank has established itself as a lead arranger and

underwriter in the infrastructure finance market, its

ability to manage its risk-weighted assets and, by

extension, capital commitment, through not only securitisation,

but also syndication and sales, is important.

This was especially the case in the fourth quarter, as

the deterioration in the credit markets reduced investor

appetite for credit risk generally, and structured and

asset backed products in particular. Despite these

difficult circumstances, DEPFA was able to securitise

c. €900 million of AAA rated monoline wrapped infra-

Infrastructure Finance

26

structure and utility bond exposures in its EPIC III

transaction in December. It should be noted that in all

of the EPIC issues, the Bank has certain call rights

which can be exercised, for example, when the Bank

can fully avail of the benefits of Basel II. The Bank also

syndicated and sold down over €500 million of commitments

without any form of discounting during the

year. This not only demonstrates its ability to manage

down underwriting exposures, but also that the in -

herent credit quality of these long-dated and seemingly

less-liquid assets is recognised by other banks and

institutional investors.

Asset quality

The rapid growth in the IFU portfolio has not been

achieved at the cost of asset quality. At the end of

2006 the weighted average rating of the portfolio was

A1, and remained unchanged at the end of 2007.

DEPFA will continue to take the prudent approach

towards the management of credit risk in this area

which has served it well to date.

Results*

The infrastructure segment shows a substantial increase

in revenues to €121 million (2006: €55 million) and

financing commitments to €18 billion at the year end

€ m 2007 2006 Change Change %

Net interest income 97 39 58 149%

Non interest revenues 24 16 8 50%

Total operating income 121 55 66 120%

Operating expenses -31 -19 -12 63%

Loan loss provisions - - -

Profit before taxation 90 36 54 150%

Key Balance sheet items**

Financing volume (on-balance sheet) 15,572 5,741 9,831 171%

Financing volume (off-balance sheet) 2,780 2,456 324 13%

Total commitments 18,351 8,197 10,154 124%

* For reconciliation of the results to the published in come statement, see page 62.

** For comparability with the financial statements, 2007 volumes include HPFB and exclude DEPFA Deutsche Pfandbriefbank

AG.


(2006: €8.2 billion). 72 infrastructure and PPP transactions

were closed during the year (2006: 63) across a

wide range of sectors and countries. Despite the

substantial growth in funding commitments during the

year, the quality of the portfolio remains good with no

impairment provisions in 2007. Profit before taxes in

this segment totalled €90 million in 2007.

Outlook

The global requirement for new infrastructure financing

and development continues to grow strongly. The

Bank has positioned itself in all the major markets with

strong, locally based teams (supported from other

locations such as Dublin and London as necessary)

who can originate and transact advisory and lending

opportunities for private sector clients bidding for

infrastructure/PPP concessions and for the acquisition

of essential infrastructure assets being privatised

(wholly or partly) by public sector owners in an effort to

“monetise” the present values of future revenue

streams and thereby generate an important alter native

source of public funding.

Furthermore, the current restrictions in credit markets,

the increased attention paid by investors in structured

products to understand the underlying risk of the

assets they are buying into and the resultant rising

credit spreads, provide increased opportunities for the

Bank and the prospect of improved risk structures and

return profiles.

In some targeted emerging market countries,

DEPFA’s newly established Structured Export Finance

team can assist government and public sector clients

to procure new infrastructure assets through using the

credit enhancement provided by Export Credit Agencies

(ECA’s, such as NEXI in Japan or Hermes in

Germany), or multilateral development banks (such as

the World Bank/IFC and the Inter-American Development

Bank). Financing structures using such products

result in substantial mitigation of the political and

commercial risks of the underlying project (typically a

minimum of 95% or more) for the lenders. The insured

and/or guaranteed part of the loan is sovereignbacked

and therefore such exposures are of the

highest credit quality, and are eligible for DEPFA’s

cover pools, and this is obviously a good way in

which DEPFA can assist clients with infrastructure

development in countries which may not yet be investment

grade but which offer good future growth

potential, without taking large exposures to lower-rated

risks.

As a result of the acquisition of DEPFA by Hypo Real

Estate and the subsequent merging of HPFB into

DEPFA, the Bank absorbed the infrastructure and

asset finance teams of HPFB based in London and

New York. These teams bring expertise in new areas in

which the Group intends to continue to invest: energy,

including oil and gas, and asset finance (e.g. aircraft,

rolling stock and ship finance). In developing these

lines, as in all of our infrastructure finance business,

DEPFA will adhere to its credit focus on providing

funding for “essential” assets and infrastructure which

are important to the success of the national and

regional economy.

27


Capital Beltway HOT Lanes in Virginia, USA


Clients: Transurban (USA) Inc. and Fluor Enterprises Inc.

Conor Kelly:

“The financing for this pioneering transaction was de -

signed by DEPFA as Financial Advisor to the project

sponsors.”

Need: The Capital Beltway is a vital link in the surface transportation network along the East Coast.

It provides connections to other roadways within the Virginia-Maryland-Washington DC region

and carries more traffic than any other road in Virginia. Although there have been incremental

improvements to correct specific safety and operational problems during its 40+ years of

operation, the last major improvements to the Beltway were completed in 1977, when it was

widened from four to eight lanes.

The Capital Beltway is at the center of a growing transportation crisis in the Washington D.C.

region. According to the Texas Transportation Institute, commuters in the region experience

the third worst congestion in the United States and spend an average of 69 hours a year

sitting in traffic, which translates to a cost to the local economy of $5.5 billion per year.

Solution: Under the terms of a concession from the Virginia DOT, Transurban and Fluor will widen the

Capital Beltway from 8 to 12 lanes over a 14-mile section of the roadway. They will convert

the four existing inner lanes to High Occupancy Toll Lanes (“HOT Lanes”) which Transurban

and Fluor will operate for a period of 75 years. Tolls in the HOT Lanes will fluctuate throughout

the day to reflect real-time traffic conditions and to maintain free-flow conditions in the HOT

Lanes at all times – even during peak periods.

This is the first private transportation project to be financed with Private Activity Bonds and

only the third private project to utilize a TIFIA Loan provided by the US DOT. DEPFA's financial

advisory team orchestrated financial close in the most challenging credit environment in

recent history. All agreements governing the project and its financing were executed by all

relevant parties on December 20, 2007. These agreements included a forward bond

purchase agreement, a forward swap, and a forward LC commitment from DEPFA to

enhance the bonds.

People: Conor Kelly, Managing Director, Head of Infrastructure Finance - Americas

Michael Uhouse, Managing Director · Yann Megret, Associate Director

Victoria Taylor, Associate


Aguas de Portugal (AdP), Portugal


José Manuel Casares:

“We consider Aguas de Portugal a very special trans -

action for us in the Portuguese market, since it was the

company’s first stand alone bond issue. It is also an

important reference for us of a Government Related Institution

financing in the water sector”

Client: Aguas de Portugal (AdP), Lisbon, Portugal, 100% owned by the Portuguese State

Need: Aguas de Portugal Group has responsibility for the design, construction, operation and

management of water supply systems, wastewater sanitation, solid domestic/industrial waste

treatment, and the recovery systems and is engaged in a 3 3 billion investment program.

Solution: DEPFA BANK acted as Mandated Lead Arranger and Sole Underwriter for the first 3 200

million stand alone 15 year bullet bond.

People: Jose Manuel Casares, Managing Director, Public Sector Origination, Spain & Portugal

Carlos Figueiredo, Director, PSO Portugal

Marta Olivares, Client Transaction Management, Dublin


Public Sector and Infrastructure Finance Regional Commentary

Regional Trends: Europe

Benelux countries

In both Belgium and the Netherlands DEPFA provides

long-term lending and interest rate hedging products

to the public sector. The Bank is also a well recognised

market player in infrastructure finance and is supporting

various consortia bidding for the larger con -

cession projects currently being tendered. Both

markets continue to be very competitive.

Croatia

DEPFA has pursued a policy of increasing its activities

in the Balkans and former Yugoslavian countries, and

particularly in Croatia in view of the advanced stage of

its EU accession negotiations. The Bank has established

close contact with key public sector enterprises

involved in various activities linked to the socio-economic

development of the country and has become an

important partner bank assisting in the financing of development

programmes. Even though DEPFA does

not have a physical presence in the country, it has

steadily established a good reputation as a professional

and competitive bank in the public sector.

32

France

The French public finance market remains highly

competitive with many banks competing for a share

of public sector business. Although the market is

relatively expensive compared to other European markets,

it is very sophisticated and offers cross selling

opportunities. In this environment, DEPFA has been

able to increase business origination volumes, both

with existing and new clients. The Bank has achieved

a leading position in the PPP area, both as a lead arranger

of senior debt financing and as a financial advisor

both to public and private sector entities. Key

achievements in this area include among others the

refinancing of the Millau Viaduct, the tallest vehicular

bridge in the world, and the completion of several

smaller PPPs, together with Challenger Investissement

and the Bouygues Group for which DEPFA acted

as lead arranger and financial advisor.

Germany and Austria

Despite a lowering of state funding requirements on

account of higher than expected tax revenues, DEPFA


successfully captured attractive new business in the

form of closed tailor-made transactions in both Germany

and Austria. As well as strengthening its relationships

with existing key clients, the Bank also

entered into promising new public sector related areas

including medical services, education and transportation

infrastructure projects being procured using the

PPP financing framework.

Although the structure of the federal government

system does not lend itself easily to a standardisation

of PPP procedures and contracts, the establishment

of regional PPP units by the Länder (i.e. regional

governments) is an encouraging initiative which will

provide a formal platform for the Länder to pool their

respective experiences with PPP, to harmonise

procedures, and to support local authorities in the

procurement of PPP projects.

The German PPP market continues to grow: the project

pipeline has increased significantly and according

to internal estimates the level of planned PPP

investments was approximately 320 billion at the end

of 2007. During the year DEPFA obtained mandates

as lead arranger for transactions such as the A8 Motor -

way in Southern Germany and for the refinancing of

the Midlum Windpark in Northern Germany and also

participated in the financing of several infrastructure

transactions such as a waste to energy plant and a

prison project. DEPFA is well placed to take advantage

of further opportunities and has strong links with different

consortia involved with all major transactions.

Greece

2007 was a milestone year for DEPFA’s global footprint

with the establishment of a new office in Athens.

This development was in line with the Bank’s clear

strategy to further enhance its local presence in EU

member states and to actively pursue opportunities with

the Greek public sector. In 2007 DEPFA successfully

arranged a 3265 million bond transaction for Hellenic

Railways (HRO) and for the first time targeted direct

origination of new business with Greek municipalities.

As a result, in 2007 DEPFA was appointed as the credit

rating advisor for the City of Athens and the jointarranger

and joint-underwriter for a 3200 million loan

for the City of Amaroussion (to be completed in 2008).

Hungary, Czech Republic and Slovakia

The market for public finance is dominated by a handful

of foreign owned commercial banks. The funding

requirements of local authorities stem from local infrastructure

projects in connection with transportation,

social and leisure facilities. Projects of national relevance

are financed through PPP’s and budget financing.

In addition to the above funding instruments, municipalities

and regions are currently endeavouring to exploit

EU Structural Funds to the fullest extent possible

as such funds have an availability period window of

2007-2013.

Besides offering continued support to its larger clients

at sovereign level (deals were successfully closed with

government agencies in all three countries) and in

33


Public Sector and Infrastructure Finance Regional Commentary

assisting the debt restructuring effort of a Slovakian

government owned company, DEPFA has initiated an

effort to support the investment needs of municipalities

and regions.

Ireland

New business lending volumes remained buoyant in

2007. DEPFA's product range utilised by its Irish

customers expanded to include commercial paper, interest

rate restructuring and infrastructure financing.

The customer base was enlarged in 2007 with several

new government related entities. DEPFA concluded its

first transactions with the university sector and also lead

arranged the 3200 million financing of the new National

Conference Centre in Dublin for Treasury Holdings.

Italy

2007 was an important year for consolidating

DEPFA’s position in Italy. The office in Milan was officially

opened (mid-March 2007), existing client coverage

was enhanced, a number of new clients were

acquired and new products were developed to complete

the range of services offered by DEPFA to the

public sector.

Italian public sector net borrowing needs were much

lower than in the previous year, mainly following stricter

rules arising from the Internal Stability Pact imposed

by the State. Notwithstanding this, DEPFA acted

as Joint Lead on deals such as the 32.1 billion securitization

of healthcare receivables from the Region of

Campania, and the 3164.5 million Eurobond issue for the

Region of Friuli-Venezia Giulia. However, the reduced

34

amount of new borrowing was more than compensated

for by the business opportunities resulting from the

renegotiation of clients’ existing debt obligations, both

on a bilateral basis and on a “consent solicitation” basis.

As part of a much wider advisory mandate, DEPFA

arranged the first ever consent solicitation for the City

of Naples. Much work has also been done on im -

proving the contribution of the Rome Branch to the

Bank’s funding position. The procedure to make Italian

domestic loans eligible as collateral for ECB funding is

now fully in place, and plans for the usage of Italian

domestic bonds as collateral for domestic repos are

being made.

Nordic and Baltic countries

Denmark, Finland, Iceland, Sweden and the Baltic

countries are covered from DEPFA’s Copenhagen

Representative Office. In this region the Bank has seen

a general trend of fewer but larger and more complex

transactions. A typical example of this was Energinet.dk’s

acquisition of a gas storage facility from

DONG. This transaction included a DKK1.5 billion

acquisition financing plus a 30 year guarantee of

DKK1 billion.

Iceland has for many years been a very attractive market

for DEPFA, but due to fewer investments and a

strong ISK, borrowing in EUR by public sector entities

has declined. In addition to this there has been tough

competition from the multilateral banks such as the

Nordic Investment Bank (NIB), the European Investment

Bank (EIB) and the Council of Europe Development

Bank (CEB).


Likewise DEPFA has seen the Swedish state owned

bank Swedish Export Kredit targeting new business

aggressively outside their traditional home market (e.g.

in Iceland, Finland and Estonia). Despite this strong

competition, DEPFA has continued to make progress

in all the Baltic countries. The activity is targeted both

at central and local governments. Besides the traditional

on-budget lending, DEPFA sees good opportunities

in infrastructure project financing, particularly in

the property and transportation sectors, where the

Bank’s financial structuring and securitisation skills

can assist its clients to monetise the value of public

capital tied up in infrastructure and property assets.

Sweden and Finland have been characterised by a

vast surplus of liquidity within the financial sector,

which has led the Bank to focus on risk management

and derivatives sales. DEPFA does this both on a portfolio

basis and on a loan by loan basis. Accordingly,

DEPFA has managed to establish a group of core

clients in these two countries, where it plays an important

role in their ongoing debt portfolio management

decisions.

The Bank has successfully established a good track

record with its clients over many years and it believes

their confidence in its capabilities will enable it to expand

this business activity even further in the future.

Portugal

Following the trend of 2006, the first half of the year

was marked by further spread compression; nevertheless

DEPFA was able to successfully close a 355

million bond issue for Transtejo guaranteed by the Por-

tu guese State. The second half of the year witnessed

some spread widening following the sub-prime financial

crisis. During the year DEPFA won the mandate to

issue 3200 million bonds to partly finance the investments

of Águas de Portugal (a non-Government guaranteed

transaction) and the mandate to refinance

part of the short-term debt of Metro do Porto (a 3100

m, non- Government guaranteed loan). Metro do Porto

has also mandated DEPFA to advise on the financing

structure for the extension of the network and the

refinancing of the current debt stock.

Romania & Bulgaria

DEPFA continued to see good opportunities in both

Romania and Bulgaria, particularly with Bulgarian municipalities,

where the Bank provided funding for essential

infrastructure related developments (e.g. in the

transportation, water treatment and distribution and

sewerage systems). Many of these projects are also

supported by EU regional development, structural and

cohesion funds. This represents a sound opportunity

for DEPFA to substantially expand its involvement in

both the budget finance and infrastructure areas.

Russia

Russia is going through a phase of accelerated investment

in infrastructure, some of which has been carried

out in the the form of PPP structures. The Ministry of

Regional Development which now has a greater say in

how the State Infrastructure Fund is managed, coupled

with an active State policy of encouraging regions

to pursue infrastructure related projects, has created

a very favourable backdrop for DEPFA’s business acti-

35


Public Sector and Infrastructure Finance Regional Commentary

vities. DEPFA's advisory, budget finance and infrastructure

finance teams are actively developing good

relationships with all key parties in the transaction process,

including the newly established State Development

Corporation (Vnesheconombank), as well as the

private sector consortia bidding for the PPP projects in

the country.

The growing influence of the State in the economy is

supported by the strategic decision of the Russian Federation

to manage the extraction and distribution of

its huge natural resources, as well as to launch several

state-sponsored programmes in areas such as agricultural

development, affordable housing and other

public infrastructure investment. This process will lead

to greater demand for financing from various government-related

institutions, utility companies and state

controlled banks, as well as greater and more transparent

state support for such entities, at both the level of

central federal authorities and regional authorities.

Therefore there are good opportunities for specialist

institutions like DEPFA to provide the requisite advisory

services and financing arrangements for this client

category.

Spain

Despite the financial turmoil and credit crunch experienced

in the last quarter of 2007 the Spanish public

sector in general, and the Spanish regions in particular,

were able to refinance maturing liabilities with only

slight increases in their margins. DEPFA won Lead

36

Manager mandates for bond issues with Castilla La

Mancha, repeating the success of the previous year,

and the Region of Andalucía.

In relation to loans, DEPFA continued to be very active

in the financing of infrastructure projects such as hospitals

in the Region of Catalunya and the Instituto Catalan

de Finanzas, where DEPFA was in the winning

group for the second consecutive year. DEPFA was

particularly active in 2007 in the financing of regional

television companies including Baleares, Valencia and

Catalunya. Another recent trend which is positive for

DEPFA is the more frequent acceptance of the

Schuldschein loans format under German Law, not

only by regions but also by cities like Madrid.

DEPFA has also helped in the restructuring of municipal

loan portfolios such as that for the City of Jerez in

order to enhance not only the financial health of the

City but also the quality of the risk for its bank counterparties.

In this regard, DEPFA designed an innovative

financing structure with the involvement of the Region

of Andalucía and the City itself. In the PPP sector

DEPFA won the MLA mandate for the 390 million

Barbanza shadow-toll road in the Region of Galicia.

Switzerland

In Switzerland, DEPFA continues its development

in the long-term financing of local authorities and

the health sector, providing tailor-made structured

financing as well as derivatives. The Bank’s client base


continues to expand despite a very competitive

environ ment impacted by new market entrants and

regulatory changes. In the future, the Bank also

expects to see more PPP opportunities in this

market.

Turkey

DEPFA established a representative office in Istanbul

in the summer of 2007. Turkey is a growing economy

with a young population; therefore, the infrastructure

investment requirements are substantial. At the same

time, central government imposes strict borrowing

and deficit controls under its standby arrangements

with the IMF. During the year, the Bank was mandated

as Lead Arranger for the funding activities of the major

state-owned bank Vakifbank, and more recently, the

Turkish Eximbank.

DEPFA has also been active in cultivating the relationship

with the National Treasury, and the City of Istanbul,

and initiated discussions with the larger cities in the

country, especially with a view to providing rating

advisory services to those entities who have not yet

been rated. As well as developing contacts with major

government related institutions, the Bank is actively

pursuing large infrastructure project financings, particularly

the toll motorways.

The devolution trend is increasing the political and

economic weight of the metropolitan municipalities in

infrastructure investments in Turkey as well, parti -

cularly in urban mass transportation, water supply,

and health, and there is a new PPP law under

discussion to facilitate concessions to develop infrastructure

projects.

United Kingdom

The public finance market in the UK is unique, as

there is a State funded provider of cheap funding to

local authorities (the Public Works Loan Board, or

PWLB). However, by lending to local authorities for

long periods (with commitments of up to 70 years,

albeit with pre-agreed break options), DEPFA has

been able to provide funding at a lower level than the

PWLB.

2007 was only DEPFA's second full year of marketing

directly to the UK public sector, and it was another

strong year of both new lending opportunities and

restructuring existing obligations, both with new and

existing clients. In addition, 2007 saw the strong

emergence of DEPFA as a counterparty for cash rich

local authorities looking to place deposits with well

rated financial institutions.

DEPFA’s business was given a welcome boost in the

final months of the year as the PWLB changed the

rules on rescheduling loans, meaning that new borrowing

by local authorities from the PWLB in the future

would be far less attractive than before. DEPFA expects

good flows of new local authority business in

2008 as a result.

37


Vincent Matrone:

“We were the lead bookrunner on this unique financing.

Our ability to react quickly in an unfavorable market

environment allowed us to leverage our relationships

both internally and with the financial advisor to under -

write the whole issue. The results were a very favorable

interest cost for the ratepayers of West Virginia.”


Public Service Commission, West Virginia, USA

Client: Public Service Commission of West Virginia

Need: The pollution control facility was in need of equipment which would aid the local economy

by allowing them to use local coal without negatively impacting the environment.

Solution: Even before the closing of DEPFA BANK’s acquisition of First Albany’s Municipal Capital

Markets Division, cross-selling synergies were underway. First Albany served as the lead

bookrunner on a US$459.3 million taxable financing, the first ever done for a pollution control

facility using ratepayer charges, and DEPFA BANK acquired approximately US$ 285 million of

the bonds in three tranches

People: DFAS · Vincent Matrone, Managing Director · Mark Kim, Associate Director

Thomas Jacobs, Managing Director · McKim deGuzman, Managing Director

Peter Tindell, Director Budget Finance · DEPFA BANK: Jim Ryan, Managing Director, BSM

Andrew Cree, Director


Marnin Lebovits:

“The State of Michigan is a very high profile and credit

worthy Borrower in the US market, with whom the Bank

has had a strong and growing relationship. The Bank

views the State as a very important customer to the

DEPFA organization. This large transaction closed during

a very challenging period in the credit markets and highlighted

the Bank’s commitment to the US market and our

dedication to meeting the needs of our customers”.

Client: State of Michigan

Need: Credit support needed quickly for one year public debt offering to finance the State's

US$1.4 billion cash flow

Solution: As the sole provider of credit enhancement for this transaction – which was very important

to the State, DEPFA helped the State close the transaction quickly while lowering its total

borrowing costs in the public market. The transaction helped the State of Michigan, one

of PSO Americas’ largest clients in the United States and represented the single largest

individual credit support transaction completed by the Bank in the US market.

People: DEPFA BANK · Marnin Lebovits, Managing Director · Hiromi Suzuki, Associate


State of Michigan, USA


Public Sector and Infrastructure Finance Regional Commentary

Regional Trends: The Americas

United States of America

2007 was a very interesting year, to say the least, in

the capital markets globally, as well as in the United

States. The two halves of the year were distinct. Pre–

liquidity crunch, investment bond issuance was strong

in most of the Bank’s chosen sectors, while margins

continued to contract. This was particularly noticeable

in the FFELP (US government-backed) student loan

market where benchmark deals from the likes of Sallie

Mae and Nelnet tested the tightest spread levels seen

this decade. However, from August onwards, primary

issuance dried up, and secondary market offerings

were made at historically wide spreads as some investors

sought to liquidate their holdings of high quality

rated paper. DEPFA benefited significantly from this

situation in the second part of the year, as new asset

purchases were made at attractive spreads.

Toward the end of the first quarter of 2007, DEPFA announced

its acquisition of First Albany Capital’s municipal

securities business. The acquisition was closed

during the third quarter and DEPFA First Albany Securities

LLC, a brokerage firm specializing in the origination,

distribution and secondary trading of U.S.

municipal securities and in advising large municipal

issuers on their capital financings, was established.

During 2007 the team, working as First Albany and

then DEPFA First Albany, seamlessly made the tran -

sition and underwrote, as lead or co-manager, 218

municipal financings totalling more than US$50 billion

and advised issuers on 27 debt and/or derivative

transactions totalling US$5.2 billion.

42


DEPFA First Albany’s origination and distribution team

includes 71 professionals. Highlights of DEPFA First

Albany’s 2007 activities include ongoing advisory work

for the Port Authority of New York and New Jersey,

Denver International Airport and other major airports

around the US, participation in the State of Ohio’s

US$5.5 billion securitization of tobacco settlement

revenues and participation in US$12.6 billion financings

for the City of New York and the State of New York.

In 2007 DEPFA purchased a total of US$12.5 billion of

US originated bonds with a continued focus on high

credit quality (the average rating of these investments

was AA1) with a weighted average life of c. 10 years.

The two main investment categories were government-backed

student loans and taxable municipal

bonds; these two sectors represented over 80% of

purchased paper during the year.

Overall the government-guaranteed student loans

market totaled c. US$60 billion in 2007, and DEPFA

continued to play a significant role with close to US$7

billion of direct purchases. The Bank particularly enhanced

its reputation in this market by acting as both

an investor and co-manager in the ‘SLMA 2007-4’

US$5 billion ‘AAA’ student loan deal. In common with

other asset classes after the liquidity crunch/subprime

contagion, there has been a widening of student

loan spreads since August, but it is important to recognise

that there has been no change to the credit

quality of the underlying collateral. Having said that,

this market does face challenges in 2008, mainly due

to new government legislation (the Higher Education

Act), which has reduced considerably the fee income

generation potential in this sector and therefore the

general level of profitability. Despite the challenges in

this market, the cost of education and enrollment continues

to increase, and hence the need for educational

loans will remain strong throughout the year.

Taxable municipal issuance was largely in line with

2006 at US$27.4 billion, and DEPFA’s share of that primary

market was c.11% in 2007. Overall issuance of

larger deals was scarce, and at times the Bank found

it difficult to source paper. Despite the fact that a

number of US states have material under-funded

pension deficits, few states chose to tackle this situation

through term bonding in 2007. Given the lower interest

rate environment in the US, the Bank would

anticipate that this will become a more attractive

option in 2008, and would expect more issuance. Its

specialist pension advisory business is well positioned

to assist its clients in determining the optimal strategies

to follow.

As DEPFA had forecast, there was continued strong

growth in the stranded asset sector as utility companies

chose to finance environmental costs for equipment

and build reserves through the issuance of

securitized bonds. A number of issuers came with

state-supported bonds in 2007, including Texas, West

Virginia and Florida – and DEPFA was able to increase

its exposure to these highly rated state backed bonds.

The Bank continues to research new product invest-

43


Public Sector and Infrastructure Finance Regional Commentary

ments in the US public sector. Also in 2007, tax-exempt

new issuance volume remained strong. Yield

curve and interest rate dynamics during the year along

with this exempt volume by municipal issuers saw

aggressive use of derivatives. Accordingly the Bank

saw an improvement in its 2007 client derivatives business

activity over 2006 by growing the total notional

volume executed, the number of transactions executed

and diversifying the client base. A key highlight of

this diversification was a US$453 million forward

starting swap for the Puerto Rico Sales Tax Financing

Corporation (COFINA).

Canada

Demand for Canadian public sector assets was strong

in the first half of 2007. Swap spreads remained wide

resulting in a tightening of margins. DEPFA has strong

client relationships in the Canadian market and secured

attractive private placement business in 2007.

Deals concluded included transactions with two

principal Canadian cities. The Bank’s product offering

increased to customers with several customers

purchasing the Bank’s liability products.

Latin and South America

Formal representative office status was granted by the

Central Bank of Brazil for DEPFA BANK Representações

Ltda. in Sao Paolo, Brazil in February 2007. At

the same time the Bank entered into an exclusive cooperation

agreement for Argentina and Uruguay with

BAICO Buenos Aires Investment Company. DEPFA is

also at present in the process of applying for a representative

office license and Sociedad Financiera de

44

Objecto Multiple (SOFOM) authorization in Mexico.

The overriding objective is to roll out the Bank’s core

product lines of public sector and infrastructure-finance

in selected countries in the region to be complemented

gradually with Hypo Real Estate’s commercial

property activities. These activities come in addition to

DEPFA’s traditionally strong presence in the region as

a deposit taking institution.

Given that the region is new for the Bank in terms of

business origination and the higher risk profile of many

of the countries (albeit improving in most cases) compared

to DEPFA’s traditional markets, emphasis has

been placed in most countries on entering into transactions

alongside multilateral institutions active in the

region (both for public sector and infrastructure finance),

to seek coverage of the Bank’s credit exposure

through Export Credit Agencies, to get exposures collateralized

(for example through reverse repurchases

of public sector assets in the capital markets area) and

to closely tie in the origination of new business with its

strengthened syndication function.

In Brazil the Bank has acted as Lead Arranger alongside

the Interamerican Development Bank (IDB) in a Petrobras

related oil and gas platform financing and it is

presently working with the IDB on a number of different

projects at different stages (from short-listed bidder

stage to documentation) in the areas of

infrastructure (e.g. ports, roads) and public sector lending

(water utility sector).

In Chile DEPFA participated in the structuring and

financing (on an A/B-loan structure with the IDB) for


Transchile for a transmission line linking the regions of

Temuco and Charrua. Other financings include Metro

de Santiago and motorway concessions for Autopista

del Maipo and Autopista Central.

In both Colombia and Uruguay, DEPFA participated at

the primary level in Japan Bank for International

Co-operation (JBIC) guaranteed transactions for the

sovereigns and selectively has built up a small port -

folio of sovereign/public sector assets in Peru and

Colombia.

In Argentina the Bank established a sustainable business

platform with various banks – both public and

private sector – consisting of financial structures with

relatively short-term maturities. Additionally, and taking

advantage of DEPFA’s expertise, the Bank is in close

contact with leading local and international firms involved

with the infrastructure development program.

Throughout the region (and particularly in Brazil, Chile

and Argentina) DEPFA is actively involved in repo/

reverse repurchase transactions through its Capital

Markets Group mostly with public sector-owned and

central banks and in all cases with government bonds

as collateral. Unlike as recently as 2 years ago, when

DEPFA was totally unknown in the region, the Bank

has managed to establish an active presence in a

number of key countries in South America in its

chosen fields with important client relationships

developing and an active deal pipeline built up.

For 2008 DEPFA has a series of significant transac -

tions coming (partly mandated pending implementa -

tion) on the origination-distribution side for public sector

assets (infrastructure related, sovereign and subsovereign),

through the Structured Export Finance

group (particularly in Brazil) with untied transactions

through JBIC (which is owned by the Japanese

Government) which guarantees a significant part of

the exposure, as well as in the area of infrastructure

finance, here particularly on the advisory side and

related to road projects.

The establishment of DEPFA’s Mexican presence is set

to be completed by mid-year and it will provide the

Bank with an entry into a country where there already

is a solid finance market for the public and infrastructure

sectors and where substantial growth is expected

in the next few years. The Bank’s Mexican office will

also serve as a platform for the origination of business

in Central America and the Caribbean basin.

Last but not least DEPFA is involved in a number of socalled

private finance and PPP initiatives throughout

the region in the context of which the Bank is supporting

major international contractors at a very early

stage in the development of proposals for infrastructure

projects at state or sovereign level putting the Bank

in a good position to get involved in the advisory work

and the arrangement and ultimate financing of these

projects when they materialize.

Thus, combined with the Bank’s new initiative for

Mexico and the mix of current, pipeline and longerterm

prospective business, it believes that it is well

positioned for doing profitable, value added business

in Latin and South America in the coming years.

45


Export-Import Bank of Korea


Client: Export-Import Bank of Korea (KEXIM)

Need: KEXIM needed to adopt an execution strategy that delivered price and size certainty. In 2006,

KEXIM’s previous international benchmark was badly received by the market and criticized for

generous concessions that had to be made to key investors to complete the offering. Despite

these concessions, the final offering still ultimately fell short of the market’s expected size. In

the context of the market's bad experience with KEXIM's previous offering, it was imperative

that this time round in 2007, KEXIM completed an extremely successful offering.

Solution: In February 2007, KEXIM surprised the market by mandating DEPFA to act as Bookrunner for

its 3750 million 10 year offering. DEPFA’s anchor order played a critical role in transforming

KEXIM’s pre-launch tactics: for the first time KEXIM was able to launch definitive guidance

on the price and size of the issue, from which bookbuilding could progress. In response to

KEXIM’s clear communication, over 31.4 billion of orders were received from 63 investors

in 21 countries enabling KEXIM to complete the largest EUR offering by a South Korean

borrower. DEPFA’s significant lead order helped KEXIM achieve a US$-equivalent price of

27bp over US$ mid-swaps which was 4bp through its existing US$ yield curve.

People: Stephen Diao, Managing Director, PSO, Asia · Evelina Wang, Director, PSO, Asia

Stephen Diao:

“DEPFA leveraged its anchor order to win a role as Bookrunner

and Joint Lead Manager on KEXIM's 3750 million

10 year benchmark offering in February 2007. By extending

the strength of DEPFA’s balance sheet, DEPFA was

able to deliver momentum early in the bookbuilding

process to provide the utmost certainty of successful and

aggressive execution”


Public Sector and Infrastructure Finance Regional Commentary

Regional Trends: Asia

Korea

DEPFA’s 2007 origination efforts in Asia focused on

furthering its market penetration in Korea, and diversifying

its regional footprint to capture strategic business

opportunities in the rest of Asia. On both

accounts, and in the context of challenging market

conditions in the second half of 2007, DEPFA has

been successful.

In Korea, DEPFA significantly increased its share of

total issuance by the public sector, originating US$2

billion or approximately 45% of the total US$4.47

billion issued in the international debt capital markets

in 2007. To accomplish this, DEPFA leveraged its

balance sheet early in 2007, before markets capitulated,

to capture important Bookrunner and Joint Lead

Manager mandates for 2 global bond offerings by

the Export-Import Bank of Korea and the Korea

Development Bank.

48

In the second half of 2007, the deteriorating conditions

in the global markets sidelined investors and undermined

borrowers’ plans to fund in the international

capital markets. International benchmarks were cancelled

or postponed, with borrowers choosing instead

to seek out alternative sources of funding. DEPFA’s

ability to work directly with borrowers and address

their balance sheet requirements without relying on

end investors enabled us to meet the Korea Development

Bank’s funding needs directly with a US$300

million private placement.

Korea will continue to be a key market for DEPFA in

2008. In Asia, it has the deepest pool of public sector

borrowers who are large users of the international

capital markets, and its OECD country status and

20% risk weighting (under Basel I rules) at the state

policy bank level make it an attractive asset for

DEPFA’s portfolio. In the current environment, widening

spreads present a good opportunity for DEPFA to

accumulate assets for the portfolio faster than previously

anticipated.


Emerging market issuers in the region faced a challenging

environment in 2007 with markets effectively

closed for issuers in the second half year, against a

deteriorating market backdrop.

Despite this challenging environment, in the rest of

Asia, DEPFA managed to diversify its regional footprint

by winning a role as Mandated Lead Arranger for Vietnam

National Shipbuilding Corporation’s US$600 million

loan in May. This was DEPFA’s debut mandate in

Vietnam. DEPFA also acted as an anchor investor for

the Republic of Indonesia’s US$1.5 billion international

benchmark in February.

India

The Mumbai Representative office was opened in February

2007 to communicate and channel DEPFA’s

global products and services into India, the world's

largest democracy and home to, arguably, the world's

largest number of public sector entities.

During the year DEPFA quickly worked on establishing

its local presence and the Bank acted as Mandated

Lead Arranger and Bookrunner on two high profile public

sector transactions: DEPFA assisted Hindustan

Petroleum Corp Limited (HPCL), one of India’s largest

oil and gas companies in successfully raising US$150

million equivalent in Japanese Yen for 5 years from the

syndicated loan market, with the size being increased

from US$100 million equivalent as a result of successful

road shows held in Singapore, Taipei and London.

DEPFA also worked with Standard Chartered Bank as

Mandated Lead Arranger and Joint Bookrunner on a 5

year Japanese Yen denominated (US$200 million

equivalent) syndicated loan for the Rural Electrification

Corporation, a first time borrower in the hard currency

markets.

India's funding needs are substantial, especially within

the infrastructure sector (estimated to be in the region

of US$500 billion over the next five years). A large part

of this borrowing requirement is being (and will continue

to be) financed through the domestic financial

markets due to regulatory concerns over an apprecia-

ting currency and significant liquidity generated as a

result of an economy that has grown at more than 8%

p.a . However, the effects of tighter global liquidity

conditions during the fourth quarter of 2007 are being

felt locally, resulting in a greater willingness by local entities

to tap international products and thereby generating

interesting financing opportunities for the Bank

going forward.

Japan

In 2007, DEPFA’s Japanese activity focused mainly on

primary market business with public sector borrowers

and/or depositors. Meanwhile, the Bank continued to

seek alternative opportunities arising from the slow but

steady reform of the central (and local government)

financing structure.

Origination activity was very healthy in a difficult pricing

environment with 31.9 billion worth of business concluded

consisting of over 170 transactions. Market

conditions were characterised by continued fierce

competition among lending institutions and tight spreads

for public sector issuance, which was exacerbated

by strong liquidity from the huge amount of net

financial assets of domestic households (amounting to

3 9 trillion equivalent) as well as the flight to quality by

institutional investors caused by the turmoil in the international

financial markets. The ability of the Bank to

still capture good quality new business can be attributed

to its strong client relationships and consistency in

meeting financing needs. As a designated member of

21 local governments’ underwriting syndicates (out of

the 42 local governments who issue public bonds) the

Bank has a valuable access point in securing business.

In addition, the Tokyo Branch played an important role

as a funding vehicle for the Bank, most notably in the

second half of 2007 in which public entities as well as

local governments placed considerable amounts of

term deposits with the Bank. This high degree of investor

confidence enjoyed by the Bank in Japan underlines

the advantages of having a global profile, which

enable it to benefit from different regional and national

market circumstances.

49


Sam Miller:

“The transaction with Dauphin County represented my

first opportunity to work with the professionals at DEPFA

as a swap counterparty. The execution of the transaction

was flawless and the County was able to achieve its

financing goals in a timely fashion.”

David Burke:

“DEPFA’s execution of the Dauphin County SIFMA index

swaption was a direct result of DEPFA BANK’s acquisition

of the municipal capital markets business of First Albany

Capital and the creation of DEPFA First Albany

Securities. With the long-standing and strong relationship

between Sam Miller from DFAS and Dauphin County, our

team demonstrated quickly how the bank and the broker-dealer’s

complementary product and relationship

strengths could and will bring greater value to our clients

and to our shareholders.”

Client: Dauphin County, Pennsylvania

Need: Dauphin County wanted to lower its debt costs by converting a portion of its debt structure to

a variable interest rate basis. The County anticipated there would be long-term benefit to

having variable text exempt rates. A portion of its portfolio was already synthetically converted

to fixed rate through an interest rate swap. The County contemplated reversing this transaction

to return to variable rate but was concerned about the long-term implications of having this

debt unhedged.

Solution: DEPFA had a unique understanding of the County’s needs due to its long standing relationship

with First Albany. The newly created DEPFA First Albany team was able to work with the

County to develop a financing strategy that met Dauphin’s requirements. DEPFA implemented

a SIFMA Index swaption that gave the County upfront debt service savings through variable

rate exposure while addressing their long-term concerns.

People: DFAS · DEPFA BANK · Sam Miller, Managing Director · David Burke, Managing Director

Tom Jacobs, Managing Director · Brian Nevel, Director · Richard Pengelly, Associate Director

David Atkins, Associate


Dauphin County, Pennsylvania, USA


Puerto Rico Sales Tax Financing Corporation


Client: Puerto Rico Sales Tax Financing Corporation (COFINA)

Need: COFINA was created with the purpose of refinancing a portion of the Commonwealth of

Puerto Rico’s debt. COFINA’s debt would be supported by a new sales tax. To lock in the

cost of its anticipated inaugural bond issuance, COFINA needed a forward starting interest

rate hedge.

Solution: In August of 2007 COFINA awarded DEPFA an interest rate swap through a competitive pro-

cess. DEPFA competed among the leading banks in the municipal derivatives market and

provided the best execution level for the interest rate swap. This was a one of the largest

municipal swap transactions done in 2007.

People: DEPFA BANK · David Burke, Managing Director · Brian Nevel, Director

Brittanie Schmieder, Associate Director

David Burke:

“Originally planned as a negotiated swap away from us,

COFINA’s financial advisor asked DEPFA to participate

in a competitive bid as COFINA believed it was not

getting efficient pricing or best execution. DEPFA was

approached because of being known for our singular

client-focus and efficient execution.”


Energinet, Denmark


Clients: Energinet.dk & DONG Energy A/S on behalf of Energinet.dk.

Need: Energinet.dk is a utility controlled by the Danish government, which manages and operates

the electricity transmission grid in Denmark.

Solution: DEPFA BANK arranged and underwrote an acquisition finance loan to an SPV owned by

Energinet.dk for the latter to purchase a gas storage facility and also structured and provided

a standalone contingent guarantee facility regarding future acquisition cashflows.

People: Ole Witmeur, Managing Director, PSO Nordic & Baltic countries

Joe Hughes, Director, Structured Asset Finance

Fiona Sheil, Director, Client Transaction Management

Ole Witmeur:

“A milestone transaction as it highlighted DEPFA’s

detailed understanding of the utility sector and ability to

provide structured finance solutions, particularly when it

comes to monetizing future revenues. We believe the

transaction will boost DEPFA’s efforts to do similar types

of transactions going forward across the region.”


Management Discussion – Segments

Client Product Services (CPS)

Note: with effect from 1 January 2008 the CPS and

Global Markets segments (see below) will be reported

together in a new segment “Capital Markets and Asset

Management” which reflects the integrated way in

which these areas are now being managed.

Introduction

The CPS segment encompasses products such as

derivatives and structured transactions that provide

added value to clients.

Main achievements

In its second full year of operation, the segment focused

on consolidating the excellent performance of

2006 by expanding the product offering to the existing

client base while also providing structured solutions to

a range of new clients. The client derivatives business

provided the base for this. After scaling their staffing requirements

to the appropriate levels, the other product

groups in the segment placed increased focus on originating

new business and contributed regular revenue

streams to the overall performance.

Client Derivatives and Structuring

The client derivative business continues to be a success

story for DEPFA. The derivatives team has again

provided significant revenues for the CPS segment

throughout 2007 with the internal relationships between

the derivatives team and the public sector and

infrastructure finance origination teams continuing to

provide the main pipeline for new derivative business

opportunities.

56

The establishment of locally based specialist product

teams (alongside the general business originators) has

also facilitated an increase in the geographical spread

of the client base. Central Europe and the US have

produced the main revenue flows, with Asia focusing

on building its product delivery capabilities.

2007 showed a consistent level of transactions closed

throughout the year. The seasonality of the Public

Sector business resulted in the expected reduced

flow of transactions in the third quarter. Despite the

uncertainty and turbulence in the global credit markets

in quarter four, the Public Sector business demonstrated

its relative safety with the derivative

transaction flow during this period not being severely

restricted.

While the Group continues to target trades which make

large contributions to income, the broadened client

base offers a more diversified and dependable income

stream.

The derivative team concluded transactions with 125

clients with the transaction notional volumes reaching

€6.2 billion. This also points towards more consistent

and diversified revenue sources and is a trend the

Bank would wish to continue into 2008. Additionally

the derivatives team enhanced their reputation as

market leaders in providing quality structured solutions

directly to the client by restructuring €1.3 billion in

existing client debt throughout 2007.


Structured Asset Finance (SAF)

DEPFA continued to build its Structured Asset Finance

operation focusing on the Iberian Peninsula and

Southern Europe. The mandate of the team is to

identify, structure and monetize the cash flows of

public sector assets.

The focus of the team is on bilateral transactions where

increased value added can be produced. The team

has been particularly active in offering bespoke solutions

to Italian public sector health care providers. Also of

significance was the team’s activity in supporting the

capital funding requirements of government related institutions,

in particular the Energinet finance deal as

profiled in this report.

Strong asset growth was recorded over 2007; how -

ever, quarter four activity was restricted by the market

turbulence. With a solid pipeline in place the team is

well placed to deliver a strong performance in 2008,

where two of the main areas of focus will be consolidation

in the new markets entered, and on bespoke

bilateral transactions.

Guaranteed Investment Contracts (GIC)

This product is unique to the US market and allows

municipal issuers a flexible way to invest proceeds

raised from bond issues. As the GIC provider, DEPFA

gains an attractive additional source of funding. Additionally,

as this product is principally focused on the

municipal market, it provides DEPFA with increased

access to new public sector clients.

The team was enlarged at the beginning of 2007 and

this translated immediately into an increased level of

mandates being won. The contribution in 2007 was

impressive with the desk winning almost US$8.5 billion

in new funds from 127 municipal clients and delivering

substantial savings to the Bank’s cost of funding.

Pension Finance (PF)

2007 was the first full year of operation for the Pension

Finance team. The team’s mandate is to advise

DEPFA’s clients on the impact of policy choices on the

funding costs and affordability of pension and other

social benefits and provides alternatives in the area of

structuring, financing and investing reserves for clients.

The planning and analysis is carried out using proprietary

quantitative models with the results used as a starting

point for determining a long-term financial plan for

the sustainability of social benefits.

With a firm pipeline of transactions in place, 2008 is expected

to be a key year for the PF team, particularly in

the US market where the combination of the specialist

PF product knowledge, combined with DEPFA First Albany’s

public sector origination network will provide

good opportunities.

57


Management Discussion – Segments

DEPFA First Albany Securities LLC (DFAS)

In September 2007, DEPFA completed the acquisition

of the Municipal Capital Markets Group from First Albany

Capital. Post the acquisition DEPFA has established

DEFPA First Albany Securities LLC.

This acquisition has been a key element in DEPFA’s

expansion plans for the US market and provides

DEPFA with a team that has a wealth of experience in

the US municipal markets. Coupled with the newly

established broker dealer operation and the expanded

network of local offices, DEPFA’s US presence is now

very well positioned to significantly increase its US

market penetration and to contribute strong growth to

the Group.

Despite the short period of operation of DFAS in 2007,

they closed some significant transactions that point the

way to how this acquisition will be of benefit to DEPFA

in the future.

Client Product Services

58

Results*

The main driver of non-interest revenues is the profit

recognised on interest rate swaps for clients, with the

majority of transactions connected with the Bank’s

financing activities (in Infrastructure and Budget

Finance). In addition to a number of first time CPS

clients for DEPFA, there is already an important element

of repeat business with a rising proportion of trans -

actions arranged with the same public sector clients.

Revenue streams from newly started businesses will

help to sustain this segment’s earnings growth in the

future.

Outlook

The acquisition of DEPFA by HRE Group will see

changes in the focus of some of the CPS operations in

2008. As stated above, from 2008 on the CPS segment

will become part of the Capital Markets and

Asset Management segment of the enlarged HRE

Group. The acquisition will provide significant oppor -

€ m 2007 2006 Change Change %

Net interest income 27 2 25 1,250%

Non interest revenues 33 59 -26 -44%

Total operating income 60 61 -1 -2%

Operating expenses -51 -24 -27 113%

Profit before taxation 9 37 -28 -76%

Key Balance sheet items**

Financing volume (on-balance sheet) 13,349 2,372 10,977 463%

Financing volume (off-balance sheet) 401 0 401

Total commitments 13,750 2,372 11,378 480%

* For reconciliation of the results to the published in come statement, see page 62.

** For comparability with the financial statements, 2007 volumes include HPFB and exclude DEPFA Deutsche Pfandbriefbank

AG.


tunities to expand the CPS product offering into the

Public Sector Real Estate area. Servicing the needs of

Public Sector clients in the Real Estate area is now

within the DEPFA mandate and helping the Group

access business opportunities in this developing

market is a key priority throughout 2008, although for

the avoi dance of doubt, it is intended that any ex -

posure to residual real estate market risk will be booked

in another appropriate HRE Group entity (i.e. outside of

the Bank).

The core derivatives and structuring operations will

continue to expand and the Bank expects the increasing

demand for tailored products and structured

transactions from its public sector clients in its established

markets to continue. The Bank will broaden its

product range and place an increased focus on developing

its targeted growth countries by building its presence

in these target markets to ensure increased

revenue and diversified revenue sources.

In 2008 the GIC team will continue to be an important

source of USD funding and a strong revenue stream.

The DEPFA GIC team will be merged into the HRE

Group GIC team with the combined and expanded

team initially focused on consolidating the current

position and then expanding the existing programmes

that are in place.

In Pension Finance the Bank will focus on building on

the client relationships developed throughout 2007

and executing some key transactions to firmly

establish the team as a key product line in the Group

structure.

Global Markets

Introduction

The Global Markets segment encompasses the Bank’s

proprietary trading activities and its legacy interest rate

carry book. In 2007, Global Markets contributed a loss

to the Bank’s results. From 1 January 2008, the results

from the legacy interest rate carry book will be reported

in Corporate Centre.

Main achievements

Due to adverse market conditions in the wake of the

sub-prime crisis in the U.S. the trading performance

was disappointing across the board in 2007. In order

to limit the downside effect from possible further

market deteriorations, the Bank had decided to de-risk

its books in Global Markets. Accordingly, Global

Markets has significantly reduced the overall segmental

Value at Risk from €95 million to €37 million (- 61%)

at the year-end.

59


Management Discussion – Segments

Results*

Net interest income from the Bank’s legacy interest

rate carry book was negative in 2007. This is a result of

adverse market conditions and of hedging expenses to

eliminate the legacy book’s interest rate exposure.

Trading income was also negative. The weak trading

performance is mainly the result of the US sub-prime

mortgage crisis spilling over to other markets in which

the Bank operates. Global Markets’ result before

taxes was negative at -€147 million (including DEPFA

Deutsche Pfandbriefbank AG).

Global Markets

60

Outlook

The Bank’s decision to de-risk the books in Global

Markets was reaffirmed after its acquisition by HRE

Group. Following the change of ownership trading

activities are being reduced or run off in these

areas and results from the “legacy positions” will be

reported in the Corporate Centre from 1 January

2008.

These legacy positions are expected to continue to

have a negative impact on the net interest income

result in the corporate centre segment.

€ m 2007 2006 Change Change %

Net interest income -50 59 -109

Non interest revenues -74 85 -159

Total operating income -124 144 -268

Operating expenses -23 -22 -1 5%

Profit before taxation -147 122 -269

Key Balance sheet items**

Financing volume (on-balance sheet) 16,253 14,445 1,808 13%

Financing volume (off-balance sheet) 1,684 0 1,684

Total commitments 17,937 14,445 3,492 24%

* For reconciliation of the results to the published in come statement, see page 62.

** For comparability with the financial statements, 2007 volumes include HPFB and exclude DEPFA Deutsche Pfandbriefbank

AG.


Corporate Centre

Introduction

The Corporate Centre consists of various cost and revenue

items that, due to their special character, do not

fit into any particular business segment or can be seen

as supporting the entire organization as a whole rather

than individual segments.

For example, support related costs cover Group

functions like group accounting and reporting, opera -

tions, corporate communications, internal audit and

compliance among others. Items of special character

include charitable donations and sponsorships, such

as DEPFA’s ongoing relationship as corporate sponsor

to the Irish charity Concern. The segment also includes

residual property assets which have been a non-core

activity since DEPFA decided to focus exclusively on

public finance in 2002.

Corporate Centre

Results*

The negative net interest income results from interest

expenditure relating to subordinated debt (lower Tier II

and profit participation certificates) which is charged in

its entirety to the Corporate Centre. Non-interest

revenues showed a positive result, mainly due to

interest on tax refunds.

The significant increase in operating expenses was due

to exceptional merger related costs of €88 million and

€23 million of a loss on disposal of DEPFA Deutsche

Pfandbriefbank AG and also, to a lesser extent, higher

direct costs. Included in the prior year are exceptional

impacts relating to tax refunds and related interests

from discontinued operations, consisting of €34 million

under operating income and €41 million under

operating expenses.

€ m 2007 2006 Change Change %

Net interest income -30 -31 1 -3%

Non interest revenues 6 40 -34 -85%

Total operating income -24 9 -33 -367%

Operating expenses -209 -120 -89 74%

Profit before taxation -233 -111 -122 110%

Key Balance sheet items**

Financing volume (on-balance sheet) 416 4,590 -4,174 -91%

Financing volume (off-balance sheet) 0 0 0

Total commitments 416 4,590 -4,174 -91%

* For reconciliation of the results to the published in come statement, see page 62.

** For comparability with the financial statements, 2007 volumes include HPFB and exclude DEPFA Deutsche Pfandbriefbank

AG.

61


Management Discussion – Segments

The table below presents a reconcilation of the segmental results for continuing and discontinued operations as

presented in the financial statements to the segmental results presented in the management discussion:

Continuing Operations* 2007 € m

Infra- Client

Budget structure product Global Corporate

€ m Finance Finance services markets Centre Total

Net interest income 268 97 27 -50 -33 309

Non interest revenues 239 24 33 -72 -4 220

Total Revenues 507 121 60 -122 -37 529

Total Expenditure -92 -30 -48 -23 -179 -372

Impairment losses on loans and advances - - - - - -

Profit before tax 415 91 12 -145 -216 157

Taxation -29

Profit for the year 128

Continuing Operations* 2006 € m

Infra- Client

Budget structure product Global Corporate

€ m Finance Finance services markets Centre Total

Net interest income 247 39 2 59 -33 314

Non interest revenues 169 16 59 85 7 336

Total Revenues 416 55 61 144 -26 650

Total Expenditure -73 -18 -21 -22 -66 -200

Impairment losses on loans and advances - - - - - -

Profit before tax 343 37 40 122 -92 450

Taxation -107

Profit for the year 343

Discontinued Operations** 2007 € m

Infra- Client

Budget structure product Global Corporate

€ m Finance Finance services markets Centre Group

Net interest income 80 - - - 3 83

Non interest revenues 129 - - -2 20 147

Total Revenues 209 - - -2 23 230

Total Expenditure -11 -1 -3 - -40 -55

Impairment losses on loans and advances - - - - - -

Profit before tax 198 -1 -3 -2 -17 175

Taxation 6

Profit for the year 181

Discontinued Operations** 2006 € m

Infra- Client

Budget structure product Global Corporate

€ m Finance Finance services markets Centre Group

Net interest income 109 - - - 2 111

Non interest revenues 114 - - - 38 152

Total Revenues 223 - - - 40 263

Total Expenditure -11 -1 -3 - -59 -74

Impairment losses on loans and advances - - - - - -

Profit before tax 212 -1 -3 - -19 189

Taxation -6

Profit for the year 183

* Presented in note 5 of the financial statements ** Presented in note 14 of the financial statements

62


Consolidation 2007 € m

Infra- Client

Budget structure product Global Corporate

€ m Finance Finance services markets Centre Total

Net interest income - - - - - -

Non interest revenues - - - - -10 -10

Total Revenues - - - - -10 -10

Total Expenditure - - - - 10 10

Impairment losses on loans and advances - - - - - -

Profit before tax - - - - - -

Taxation -

Profit for the year -

Consolidation 2006 € m

Infra- Client

Budget structure product Global Corporate

€ m Finance Finance services markets Centre Total

Net interest income - - - - - -

Non interest revenues - - - - -5 -5

Total Revenues - - - - -5 -5

Total Expenditure - - - - 5 5

Impairment losses on loans and advances - - - - - -

Profit before tax - - - - - -

Taxation -

Profit for the year -

Group* 2007 € m

Infra- Client

Budget structure product Global Corporate

€ m Finance Finance services markets Centre Group

Net interest income 348 97 27 -50 -30 392

Non interest revenues 368 24 33 -74 6 357

Total Revenues 716 121 60 -124 -24 749

Total Expenditure -103 -31 -51 -23 -209 -417

Impairment losses on loans and advances - - - - - -

Profit before tax 613 90 9 -147 -233 332

Taxation -23

Profit for the year 309

Group* 2006 € m

Infra- Client

Budget structure product Global Corporate

€ m Finance Finance services markets Centre Group

Net interest income 356 39 2 59 -31 425

Non interest revenues 283 16 59 85 40 483

Total Revenues 639 55 61 144 9 908

Total Expenditure -84 -19 -24 -22 -120 -269

Impairment losses on loans and advances - - - - - -

Profit before tax 555 36 37 122 -111 639

Taxation -113

Profit for the year 526

* Presented in the management discussion on pages 18 to 65

63


Project Omega, Northern Ireland


John Kirwan:

“DEPFA's first Mandated Lead Arranger role on a

Northern Ireland PPP was to arrange the finance for this

important environmental project. Project Omega is not

only the largest NI PPP to close to date it is also one of

the largest ever European Waste Water PPP deals. This

PPP transaction is now deemed a template for

similar projects across Europe driven by the growing

need to comply with EU waste water requirements.”

Client: Thames Water Services Limited/Laing O'Rourke Portfolio Solutions Limited

Need: The Project involves the financing of the installation and operation of wastewater and sludge

treatment facilities at four separate sites across Ulster. When completed, the new facilities will

be responsible for providing around 20% of Northern Ireland’s wastewater treatment capacity

and 100% of its sludge disposal. As pressure mounts on countries to fully comply with the

European Urban Wastewater Directive, the need for this type of project will naturally increase.

Solution: DEPFA arranged a Stg £170 million financing backed by a 25 year PPP Concession granted by

the NI Water Services. The payment structure is complex and unique in that it is based entirely

on the volume of wastewater and weight of sludge arriving at the facilities for treat ment. This

structure provides greater risk transfer for the public sector, however for the Client and the

funders it is appropriately mitigated under the project's contractual and financial structure.

People: John Kirwan, Managing Director, Head of Infrastructure Finance (UK and Ireland)

Dermot Malone, Director · Niall McInerney, Associate Director


Business Performance

Business Performance 2007

Overall DEPFA BANK’s result in 2007 was characte -

rised by several notable and contrasting factors: on the

one hand the core Budget Finance and Infrastructure

Finance businesses performed strongly and made a

record combined contribution of approximately €700

million to the Group pre-tax result. These activities will

continue to be one of the main profit drivers within the

enlarged HRE Group. On the other hand, deterioration

in the trading performance, caused in large part by the

negative impact of widening credit spreads on valuations

of public sector instruments held in the trading

book, weighed on the overall result. In addition, costs

associated with the merger with HRE Group amounting

to €88 million were recog nised in the 2007

accounts and this must be taken into consideration in

the yearly comparison. The net in come of the Group in

2007 totalled €309 million compared to €526 million

in 2006.

Net interest income declined by 8% to €392 million.

The interest income contribution generated by the

public finance portfolio was virtually flat in 2007, which

was to be expected in a cycle of narrowing spread levels

still prevailing for a good part of the year. In such

an environment it was considered more appropriate to

take advantage of gains in the valuation of assets in the

portfolio, which is reflected in the strong sale of assets

contribution. Losses from the legacy interest rate carry

book in Global Markets started to have an adverse

impact on the interest income result in the second half

of the year. Action taken by the Bank has limited further

exposure to adverse market developments. HRE Group

has given high priority to closing down these interest

positions entirely by the early part of 2008 and the interest

rate risk exposure had by the end of 2007 already

been successfully managed down to significantly lower

levels.

Net fee and commission income rose by 28% to €41

million. This increase is the result of higher contri -

butions from two main sources: the Bank’s liquidity

support and letter of credit business in the US muni -

cipal bond market as well as higher advisory and

66

success fees from DEPFA’s infrastructure financing

activity.

Net trading income was negative at -€52 milllion,

which represents a significant swing from the 2006

level (€140 million). The growing scarcity of liquidity in

the global debt markets that became dramatically evident

in the latter period of 2007, has also led to spread

widening in the public sector asset class, with negative

consequences for the valuation of debt instruments

held in DEPFA’s trading book such as investment grade

CDS instruments. The Bank anticipates that these valuation

losses are only of a temporary nature and can

be expected to reverse over time when the reference

issues mature at par value. A further reason for the

weakness in the trading result was the impact of in -

efficient hedges that had to be treated as trading

derivatives for accounting purposes. The proprietary

trading activities have been scaled back significantly as

part of a reordering of strategic priorities within the new

HRE Group and the focus of the Bank going forward

will be very much on its traditional strengths in public

sector and infrastructure financing.

Gains from sale of assets increased by 26% to €348

million, which reflects a continuation of the favourable

conditions in the spread environment that continued

well into the year. As part of the Bank’s long-term approach

to portfolio management, substantial efforts

were made to replenish the asset base with sufficient

volumes of new business origination (amounting to

€64 billion in 2007). The contribution of asset sales is

expected to fall sharply in 2008 due to a new cycle of

spread widening, which will shift the balance of re -

venues generated from public sector assets towards

interest income as the Bank takes advantage of opportunities

to originate new business at higher locked-in

margins.

Operating expenses increased by 55% to €417

million. This development was exaggerated by the

one-off impact of €88 million of merger related costs,

which were fully absorbed into the 2007 accounts.

These costs related to such items as the costs for

shares in the employee share compensation scheme


that were brought forward as a result of the purchase

of DEPFA’s share capital by HRE Group, as well as to

other legal and investment banking expenses. Another

factor in the above average cost growth was the consolidation

of the Municipal Capital Markets unit of First

Albany that became effective in September 2007. In

order to achieve the planned merger synergies certain

cost reduction measures, including cutbacks in staffing

levels across all DEPFA’s operations and locations,

were introduced in the fourth quarter. Costs for these

measures were also partly reflected in the 2007 financial

statements. In the medium-term such measures

together with the concentration of capacity with Hypo

Public Finance Bank that has been integrated into DEPFA,

are expected to generate important cost savings.

Income Statement € m

Profit before taxation amounted to €332 million. Net

income after taxes amounted to €309 million. It is

important to mention that in the accompanying overview

DEPFA Deutsche Pfandbriefbank AG has been included

in the individual line items whereas in the

consolidated income statement this entity has been

classified as a ‘discontinued operation’ as this legal

entity has been transferred within the new Group

structure to now be a subsidiary of Hypo Real Estate

Holding as of 31 December 2007.

Future financial statements of DEPFA will reflect the

contribution to income of Hypo Public Finance Bank

which was acquired by DEPFA effective as of 31 December

2007.

Earnings 2007* 2006** % Change

Net interest income 392 425 -8%

Net fee and commission income 41 32 28%

Net trading income -52 140 -137%

Gains less losses from financial assets 348 277 26%

Other operating income 20 34 -41%

Total operating income 749 908 -18%

Operating expenses -417 -269 55%

of which personnel expenditure -235 -138 70%

of which other administrative expenditure -141 -78 81%

of which depreciation and amortisation -13 -9 44%

of which other expenditure -28 -44 -36%

Net operating income before impairment losses 332 639 -48%

Impairment losses on loans and advances - -

Profit before taxation 332 639 -48%

Taxation -23 -113 -80%

Group net income 309 526 -41%

* 2007 results include DEPFA Deutsche Pfandbriefbank AG which is classified as a discontinued operation in the financial statements

** 2006 results include the gross up of the result from discontinued operations for consistency with the current year presentation.

67


Business Performance

Balance Sheet

The on-balance sheet commitments fell by 12% to

€171 billion. However this includes a net reduction of

€34 billion as at 31 December 2007 from the disposal

of DEPFA Deutsche Pfandbriefbank AG, net of the

acquisition of HPFB. Excluding this exceptional effect,

the on-balance sheet commitments grew by 6%.

This shows that the Bank has been able to maintain its

overall public sector financing volume at a virtually

constant level despite significant asset sales activity

during the course of the year involving over €30 billion

of assets. Almost 50% of the drawn financing volume

is made up of 0% risk-weighted sovereign borrowers,

including central governments, government agencies,

multilateral institutions as well as certain local and

regional authorities.

There has been a perceptible shift in 2007 towards

20% risk-weighted borrowers reflecting the growth

especially in the municipal business in the United

States where local and regional authorities are

assigned a 20% risk weighting, as well as the quasisovereign

student loan market. The volume of 100%

risk-weighted assets has grown to €19 billion but still

represents a small portion (11%) of the drawn total.

68

Typi cally, this category refers in particular to public

sector related concession based lending under Public

Private Partnership (PPP) financing arrangements in

which the Bank’s debt is often serviced by cash flows

from the public sector (subject to satisfactory performance

by the private sector partner).

The Bank’s treasury management activities have continued

to provide very stable support for the Bank’s

asset side even in the very difficult market environment,

which were evident since the summer. The success of

the funding strategy employed by DEPFA in 2007 is

reflected in the fact that the Bank raised its targeted

€13.5 billion of long-term funding at deeper sub-LIBOR

levels than was achieved in 2006 or at any stage in

recent years. This was achieved whilst maintaining an

average weighted tenor of new borrowings of approximately

9 years. The public sector asset base of DEPFA

was deployed to an increasing degree in the repo

markets during the latter half of the year given the

strong appetite among market participants for this

asset class during the ongoing credit crisis, reflecting

the flight to quality. The Bank’s total secured funding

including covered bond issuance and repo finance

amounted to 69% of total funding.

2007* % 2006

Change from

previous year

Drawn Financing Volume – Group € m € m € m %

Total 171,168 100% 194,585 -23,417 -12%

of which loans with 0% weighting 83,199 49% 134,507 -51,308 -38%

of which loans with 10% weighting 640 0% 110 530 482%

of which loans with 20% weighting 66,577 39% 51,943 14,634 28%

of which loans with 50% weighting 1,900 1% 826 1,074 130%

of which loans with 100% weighting 18,852 11% 7,199 11,653 162%

* Consisting of DEPFA including HPFB and excluding DEPFA Deutsche Pfandbriefbank AG


2007* % 2006

Change from

previous year

New Commitments – Group € m € m € m %

Total 72,061 100% 67,413 4,648 7%

of which loans with 0% weighting 24,209 34% 30,767 -6,558 -21%

of which loans with 10% weighting 3,572 5% 3,782 -210 -6%

of which loans with 20% weighting 29,530 41% 21,338 8,192 38%

of which loans with 25% weighting 183 0% - 183

of which loans with 50% weighting 5,064 7% 4,864 200 4%

of which loans with 100% weighting 9,503 13% 6,662 2,841 43%

* Consisting of DEPFA excluding HPFB and excluding DEPFA Deutsche Pfandbriefbank AG

Regulatory Capital and Capital Adequacy Ratios

in accordance with BIS

The regulatory capital and capital adequacy ratios

were produced in accordance with the Bank for International

Settlements (BIS), Basle Accord regulations to

facilitate international comparisons.

DEPFA BANK plc is regulated by the Irish Financial

Regulator. On a group level, DEPFA BANK plc has to

conform to the regulations of the Irish Financial Regulator,

which applies a capital /risk assets framework for

measuring capital adequacy based on the European

Union Solvency Ratio Directive (SRD) and the Capital

Adequacy Directive (CAD). Both the BIS and the Irish

Financial Regulator require banks to maintain a minimum

Core Capital ratio of 4% and a Total Capital ratio

of 8%.

With a Core Capital ratio of 9.3% and a Total Capital

ratio of 11.6% the Group comfortably exceeds the

minimum required ratios.

The Irish Financial Regulator uses the term Alternative

Capital Instruments (ACIs) to describe non-standard

Regulatory Capital (€ million) 31.12.2007 31.12.2006

Core capital (Tier I) 4,181 3,144

Supplementary (Tier II) 1,053 1,350

Total Regulatory Capital 5,234 4,494

Capital Adequacy Ratios 31.12.2007 31.12.2006

BIS Risk Weighted Assets (€million) 44,938 33,351

Core capital ratio (Tier I) 9.3% 9.4%

Total capital ratio (Tier I +II) 11.6% 13.5%

69


Business Performance

forms of capital that are generally referred to in the

market as “hybrid capital”. The following structures

qualify as ACI’s under Notice BSD S1/04, ‘Alternative

Capital Instruments: Eligibility as Tier I Capital’, an

amendment to the implementation of EC Own Funds

and Solvency Ratio Directives BSD S 1/00 of the Irish

Financial Regulator.

70

Under the terms and conditions of the ACI’s issued out

of DEPFA Funding II LP as listed below, DEPFA BANK

plc (as the General Partner) has certain call rights.

DEPFA BANK plc will not exercise any call right if such

exercise would breach any of the eligibility criteria for

Tier I Capital set out in Notice BSD S1/04 quoted

above.

Nominal amount

Year of issue . million Issuer Instrument Coupon

Guaranteed Non-voting

Non-cumulative Perpetual

2003/2004 400 DEPFA Funding II LP Preferred Securities 6.5%

Guaranteed Non-voting 7% until 08/06/2008,

Non-cumulative Perpetual 10yr CMS

2005 300 DEPFA Funding III LP Preferred Securities +0.1% thereafter

Guaranteed Non-voting 5.029% until 21/03/

Non-cumulative Perpetual 2017, 3m EURIBOR

2007 500 DEPFA Funding IV LP Preferred Securities +1.87% thereafter

Total 1,200


Jack Angelides:

“This transaction highlights DEPFA’s commitment to

support key public sector entities in Bulgaria. DEPFA’s

expertise in assessing the company and its role in the

Bulgarian economy was a vital component in concluding

this important transaction. This deal is another example

of the premier position DEPFA has in the public sector

domain and its desire to expand its involvement in

Bulgaria.”


Client: Bulgarian State Railways (BDZ EAD)

Bulgarian State Railways

Need: BDZ is on the list of strategically important companies in Bulgaria. It is fully owned by the

Bulgarian government and is one of the largest companies in Bulgaria. Its main activities

include freight and passenger transportation and maintenance and repair of rolling stock.

Solution: DEPFA BANK plc was Joint Arranger on this 3120 million bond issue – the second by BDZ

and the largest domestic bond issue for Bulgaria – the proceeds of which will be used for

the restructuring of existing debt and the rolling stock finance.

People: Jack Angelides, Managing Director, Public Sector Origination, South East Europe

Catalin Voloseniuc, Managing Director, Public Sector Origination, Central Eastern Europe

Desislava Gaytanikova, Associate, Client Transaction Management


John Kirwan:

“Central to DEPFA securing the sole arranging mandate

to fund the construction of four secondary schools, was

our delivery of a tailored funding solution. The project

structure successfully combines traditional and PFI

procurement techniques and accommodates the

differing needs of multiple school authorities under a

single financial package."


Client: Royal BAM (BAM PPP Limited)

Solihull Schools BSF, England

Need: This project involves the financing of the building of 3 new secondary schools and 1 new

special needs school in Birmingham for the Solihull Metropolitan Borough Council. The

'Building Schools for the Future' or BSF is a major part of the UK Government's future

funding of capital projects in the secondary school sector which is now replacing the Private

Finance Initiative (PFI) as a method of procurement.

Solution: DEPFA solely arranged a long term financing package for this project under a 28 year BSF PPP

contract. The financial structure accommodates the requirement for one of the four schools to

opt out of the long term BSF arrangements but at the same time benefit from the efficiencies

derived from bundling 4 seperate projects under a single larger contractual package.

People: John Kirwan, Managing Director, Head of Infrastructure Finance (UK and Ireland)

Garret Tynan, Director · Fiona O'Driscoll, Associate


Group Accounts

Directors and other information

Board of Directors

Mr. G. Funke* (Chairman) (appointed 5th October 2007)

Mr. G. Bruckermann (Chairman) (resigned 2nd October 2007)

Dr. M. Fell* (Deputy Chairman) (appointed 5th October 2007)

Dr. T. M. Kolbeck* (Deputy Chairman) (resigned 5th October 2007)

Mr. H. Reich* (Deputy Chairman) (resigned 5th October 2007)

Ms. B. von Oesterreich* (appointed 5th October 2007)

Dr. J. Bourke* (appointed 5th October 2007)

Mr. P. Ryan* (appointed 5th October 2007)

Mr. C. Dunne* (appointed 5th October 2007)

Mr. A. Cameron (appointed 5th October 2007)

Mr. P. Leatherdale (appointed 5th October 2007)

Mr. A. Readinger (appointed 5th October 2007, resigned 13th March 2008)

Mr. J.W. Campbell (appointed 24th October 2007)

Mr. T. Glynn (appointed 24th October 2007)

Mr. B. Heide-Ottosen (appointed 7th November 2007)

Dr. R. Brantner* (resigned 5th October 2007)

Mr. D. M. Cahillane (resigned 5th October 2007)

Dr. R. Grzesik (resigned 20th April 2007)

Prof. Dr. A. Hemmelrath* (resigned 5th October 2007)

Mr. M. O’Connell* (resigned 5th October 2007)

Mr. J. Poos* (resigned 5th October 2007)

Prof. Dr. Dr. h.c. mult. H. Tietmeyer* (resigned 5th October 2007)

*Non-Executive

Audit Committee

Dr. J. Bourke (Chairman) (appointed 5th October 2007)

Mr. M. O’Connell (Chairman) (resigned 5th October 2007)

Mr. P. Ryan (appointed 5th October 2007)

Mr. G. Funke (appointed 5th October 2007)

Dr. M. Fell (appointed 5th October 2007)

Dr. R. Brantner (resigned 5th October 2007)

Prof. Dr. Dr. h.c. mult. H. Tietmeyer (resigned 5th October 2007)

76


Risk Committee

Ms. B. von Oesterreich (Chairperson) (appointed 5th October 2007)

Dr. T. Kolbeck (Chairman) (resigned 5th October 2007)

Ms. F. Flannery (appointed 5th October 2007)

Mr. J. Van der Ende (resigned 5th October 2007)

Mr. D.M. Cahillane (resigned 5th October 2007)

Secretary & Registered Office

Ms. E. Tiernan

1 Commons Street

Dublin 1

Ireland

Solicitors

McCann Fitzgerald

Riverside One

Sir John Rogerson's Quay

Dublin 2

Ireland

Auditors

PricewaterhouseCoopers

Chartered Accountants and Registered Auditors

One Spencer Dock

North Wall Quay

Dublin 1

Ireland

Registered Number

348819

Risikoberichtbericht

77


Group Accounts

Blindtext Directors’ strategische Report und sonstige Risiken

nterdum The Directors volgus of rectum DEPFA videt, BANK est plc ubi present peccat. their Si report veteres and ita miratur the audited laudatque financial poetas, statements ut nihil for anteferat, the year nihil ended illis

comparet, 31 December errat. 2007. Si quaedam nimis antique, si peraque dure dicere credit eos, ignave multa fatetur, et sapit et

mecum facit et Iova iudicat aequo. Non equidem insector delendave carmina Livi esse reor, memini quae plagosum

Principal mihi parvo activities Orbilium dictare; sed emendata videri pulchraque et exactis minimum distantia miror. Inter quae

verbum DEPFA BANK emicuit plc si forte and decorum, its subsidiary et si undertakings versus paulo concinnior (“the Group”)*, unus operating et alter, iniuste in Ireland totum and ducit in venditque other parts poema. of the

world, provide a comprehensive range of banking, financial and related services.

Indignor quicquam reprehendi, non quia crasse compositum illepedeve putetur, sed quia nuper, nec veniam antiquis,

Ownership sed honorem et praemia posci. Recte necne crocum floresque perambulet Attae fabula si dubitem, clament

periisse On 2 October pudorem 2007 cuncti the entire paene ordinary patres, share ea cum capital reprehendere of the Company coner, quae was acquired gravis Aesopus, by Hypo quae Real doctus Estate Roscius Holding

egit; AG (“HRE vel quia Group”). nil rectum, DEPFA nisi BANK quod placuit plc shareholders sibi, ducunt, received vel quia cash turpe consideration putant parere of minoribus, €6.80 and et .189 quae shares imberbes in Hypo didicere

Real Estate senes.Quod Holding si AG tam for Graecis each DEPFA novitas share invisa held. fuisset quam nobis, quid nunc esset vetus? Aut quid haberet quod

legeret tereretque viritim.

Business Review

Kreditportfolio-Entwicklung

The information that satisfies the requirements of the business review can be found in the management discussion

Ut section primum on pages positis 18 nugari to 65 Graecia and in the bellis business coepit et performance in vitium fortuna section labier on pages aequa, 66 nunc to 75. athletarum studiis, nunc arsit

equorum, marmoris aut eboris fabros aut aeris amavit, tibicinibus, nunc est gavisa tragoedis; sub nutrice puella. Interdum

Dividends volgus rectum videt, est ubi peccat. Si veteres ita miratur laudatque poetas, ut nihil anteferat, nihil illis comparet,

A dividend errat. of Si €138 quaedam million nimis was paid antique, in 2007 si peraque in respect dure of dicere the year credit ended eos, 31 ignave December multa 2006. fatetur, The et Directors sapit et mecum do not

propose facit et Iova a dividend iudicat aequo. in respect of the year ended 31 December 2007.

Non Directors equidem insector delendave carmina Livi esse reor, memini quae plagosum mihi parvo Orbilium dictare; sed

emendata The names videri of the pulchraque Directors in et office exactis at 25 minimum March 2008 distantia are miror. set out Inter on page quae 76. verbum emicuit si forte decorum, et si

versus paulo concinnior unus et alter, iniuste totum ducit venditque poema.

Indignor In accordance quicquam with reprehendi, the Articles non of Association, quia crasse Georg compositum Funke, illepedeve Markus Fell, putetur, Bettina sed von quia Oesterreich, nuper, nec John veniam Bourke, antiquis,

Patrick sed Ryan, honorem Cyril Dunne, et praemia Bo Heide-Ottosen, posci. Paul Leatherdale, Tom Glynn and James Campbell retire by rotation

Recte at the necne 2008 Annual crocum General floresque Meeting perambulet and, being Attae fabula eligible si and dubitem, recommended clament periisse by the Directors, pudorem cuncti offer themselves paene patres, for

ea re-election. cum reprehendere coner, quae gravis Aesopus, quae doctus Roscius egit; vel quia nil rectum, nisi quod placuit

sibi, ducunt, vel quia turpe putant parere minoribus, et quae imberbes didicere senes.Quod si tam Graecis novitas

invisa fuisset quam nobis, quid nunc esset vetus? Aut quid haberet quod legeret tereretque viritim.

Ut primum positis nugari Graecia bellis coepit et in vitium fortuna labier aequa, nunc athletarum studiis, nunc arsit

equorum, marmoris aut eboris fabros aut aeris amavit, tibicinibus, nunc est gavisa tragoedis; sub nutrice puella. Interdum

volgus rectum videt, est ubi peccat. Si veteres ita miratur laudatque poetas, ut nihil anteferat, nihil illis comparet,

errat. Si quaedam nimis antique, si peraque dure dicere credit eos, ignave multa fatetur, et sapit et mecum

facit et Iova iudicat aequo. Non equidem insector delendave carmina Livi esse reor, memini quae plagosum mihi

parvo Orbilium dictare; sed emendata videri pulchraque et exactis minimum distantia miror. Inter quae verbum emicuit

si forte decorum, et si versus paulo concinnior unus et alter, iniuste totum ducit venditque poema.

Indignor * References quicquam in the reprehendi, financial statements non quia crasse to “the compositum Group”, “DEPFA” illepedeve or to “the putetur, Bank” sed refer quia to nuper, DEPFA nec BANK veniam plc anti- and

quis, its subsidiary sed honorem undertakings. et praemia posci. Recte necne crocum floresque perambulet Attae fabula si dubitem, clament

periisse pudorem cuncti paene patres, ea cum reprehendere coner, quae gravis Aesopus, quae doctus Roscius

egit; vel quia nil rectum, nisi quod placuit sibi, ducunt, vel quia turpe putant parere minoribus, et quae imberbes didicere

senes.Quod si tam Graecis novitas invisa fuisset quam nobis, quid nunc esset vetus? Aut quid haberet quod

legeret tereretque viritim.

Ut primum positis nugari Graecia bellis coepit et in vitium fortuna labier aequa, nunc athletarum studiis, nunc arsit

78


Directors’ and Secretary’s interest in the share capital

The interests of the Directors and Company Secretary, in office at 31 December 2007 and of their spouses and

minor children in the shares of the Company or Group undertakings are set out below:

Interest in Shares Interest in Shares

in Hypo Real Estate in Hypo Real Estate Interest in Shares

Holding AG Holding AG in DEPFA BANK plc

31 December at appointment date 31 December

2007 (see page 76) 2006

Georg Funke 40,876 40,876 n/a

Markus Fell 5,188 5,188 n/a

Bettina von Oesterreich - - n/a

Patrick Ryan - - n/a

John Bourke - - n/a

Cyril Dunne 36,079 36,079 n/a

Bo Heide-Ottosen 55,546 55,546 n/a

Paul Leatherdale 16,293 16,293 n/a

Angus Cameron 14,000 26,500 n/a

James Campbell - - n/a

Tom Glynn 3,032 3,032 n/a

Andrew Readinger 30,083 35,990 n/a

Company Secretary

Ms. E. Tiernan - - 1,624

No Directors held any options on Hypo Real Estate Holding AG shares at 31 December 2007 (2006: nil).

Own Shares

Details of own shares transactions are disclosed in note 36 to the financial statements.

Going concern

After making enquiries, the Directors have a reasonable expectation that the Bank has adequate resources to

continue in operational existence for the foreseeable future. Accordingly they continue to adopt the going concern

basis in preparing the financial statements.

Political donations

The Electoral Act, 1997 requires companies to disclose all political donations over €5,079 in aggregate made

during the financial year. The Directors, on enquiry, have satisfied themselves that no such donations have been

made by the Bank during the financial year.

79


Group Accounts

Accounting records

The Directors have taken appropriate measures to secure compliance with the Bank’s obligation to keep proper

books of account through the use of appropriate systems and procedures and employment of competent persons.

The books of account are kept at 1 Commons Street, IFSC, Dublin 1, Ireland.

Subsidiary undertakings

Details of subsidiary undertakings are shown in note 22 to the financial statements.

Measurement and management of the various types of risk

The Group has established a comprehensive system for the identification, measurement, early recognition and

control of risk as an integral part of its business process. The Group applies policies and procedures to the

management of credit risk, market risk, operational risk and liquidity risk. The following is an overview of these

policies and procedures:

Credit Risk

Credit risk is the risk of impairment and partial or total loss of a receivable due to deterioration of credit quality on

the part of a counterparty. The relevant receivable may be based on traditional on-balance sheet lending business

or derivative business. Whereas in traditional lending business, risk arises from the creditworthiness of the borrower

and the value of the collateral, for derivative transactions counterparty risk is a function of the counterparty’s ability

to perform in accordance with its contractual obligations as well as the market value of the future cash flows,

which – only if positive for DEPFA – would lead to a loss when executing a substitute transaction in the market at

less favourable terms.

The Bank’s business is focused on sovereign and sub-sovereign borrower and public sector supported specialist

entities.

Credit scoring of counterparties is critical to the Group’s business. The scoring model of the Group is reviewed

continuously. In recent years, the Group moved to a unitary scoring system for its four main credit risk pools

(sovereign, sub-sovereign, financial institutions and infrastructure finance). The unitary scoring has 22 grades. The

Group’s 22-grade internal rating system is similar to the grading system used by the External Credit Assessment

Institutions (“ECAI”). All counterparties across all risk groups are graded in accordance with this system.

Within the Group, exposure to financial institutions from the Treasury business arises from securities transactions,

money market transactions and OTC (over-the-counter) derivatives entered into with bank counterparties.

The Group operates an independent credit approval process, which includes assessments by and formal limit

recommendations from those not involved in the business areas.

The allocation of an internal rating defines both, a desirable minimum return and a corridor for the maximum

acceptable exposure limit. The Group Credit Committee operates on authority devolved to it by the CEO and ultimately

the Board of Directors and is empowered to set limits up to prudent levels taking into account regulatory

lending limits. DEPFA subsidiaries operate their own credit committees, which act on individual counterparty limits

once Group approval is in place.

80


Risikoberichtbericht

The credit process centres on an independent Credit Committee which presides over the four borrowers and

counter party risk pools, and which is provided with both rating and limit recommendations from the dedicated

independent risk teams.

The heads of the risk units report directly to their respective Executive Committee Member as well as the Credit

Committee.

The monitoring of sub-sovereign and country limits, tenor limits, large exposures and default events is carried out

on a Group-wide basis by monitoring staff dedicated to this function.

To monitor the counterparty risk arising from Treasury business, the Group has a Group-wide counterparty limit

system that directly accesses the front-office system, providing real-time information on limits and limit utilisation.

The credit exposure resulting from these transactions is calculated on a mark-to-market basis, taking into

consideration the regulatory add-ons.

Market Risk

Market risk refers to the risk of potential loss arising from changes in market data such as interest rates, credit

spreads, foreign currency exchange rates, equity prices, price or rate volatilities. The Group defines its market risk

as changes in fair value of financial instruments as a result of market data movements.

The Group’s market risk policies and procedures follow three core principles:

Policy framework for all key market risk activities approved by the Board.

Market risk management is centralized in the Asset & Liability Committee and the treasury and product units,

managed by specialized personnel and monitored using appropriate systems and controls.

Market risk control function measures and monitors the risks independently of the risk-taking units.

The Market risk control function has sub-categorized market risk into risk factors. The relevant risk factors for the

Group are interest rate, credit spread and foreign exchange. As a bank focusing on public sector finance, the

Group is not generally exposed to equity or commodity risk. With regard to foreign exchange risk, the Group has a

policy that Treasury must match all foreign currency assets with liabilities in the same currency or swap out the

foreign exchange exposure. Only a limited foreign currency exposure is accepted in the emerging markets port folio.

Hence, the primary risk factors for the Bank are interest rate and credit spread risk.

For the quantification and control of these risks, the Group determines daily Value at Risk (VaR) figures in line with

industry wide practice using the variance/covariance methodology for both trading and banking books. The VaR

monitoring is based on a comprehensive risk factor set, consolidated across the Group, as well as broken down to

legal entity, portfolio and desk level. A ten-day holding period with a 99% confidence interval is used to derive the

calculation. Correlations and volatilities are calculated based on a history of 250 trading days. The choice of a tenday

holding period was selected to give a conservative VaR measure in relation to hedging the risk of the port -

folio’s positions.

81


Group Accounts

The Group recognizes that variance/covariance VaR has certain inherent limitations. The past may not always

provide a reliable indicator of future market movements and moreover the statistical assumptions employed may

understate the probability of very large market moves. For this reason, additional management tools such as

sensitivity measures and stress testing are used to supplement VaR. Moreover, historical simulation VaR was

introduced in the prior year for trading portfolios to supplement variance/covariance VaR.

Liquidity Risk

Liquidity risk is defined as the risk of being unable to fulfil current or future payment obligations in full on or at the

due date.

The objective of the Group’s liquidity management is to ensure that sufficient funds are available to meet the

Group’s commitments to its customers and counterparties, both in terms of demand for loans and repayment of

liabilities and in terms of satisfying the operational liquidity needs of the Group. The Group is assisted in this task

by the fact that a substantial portion of both its assets and liabilities are long-term and that it maintains a continuing

presence in the European money markets.

The underlying aim is to minimise the liquidity risks for both the Bank and the Group as a whole. It is the task of

liquidity management to control the cash flow of the business in such a manner as to ensure that efficient use of

cash flows is maintained. To this extent, the Group primarily funds its assets through the issuance of covered asset

securities and through money market transactions. Liquidity balance sheets and cash flow forecasts are used to

manage the liquidity of the Group and to control future liquidity risks.

Hedging

The Group’s policy is to hedge (accounting or economic) the following banking book exposures:

interest rate risk – using interest rate swaps

currency exposures – using cross-currency swaps and forward foreign exchange swaps

The following table provides examples of certain activities undertaken by the Group, the related risks associated

with such activities and the types of derivatives used in managing such risks. Such risks may also be managed by

using on-balance sheet instruments as part of an integrated approach to risk management.

Activity Risk Type of Hedge

Fixed rate lending/borrowing Sensitivity to increases/decreases Pay/receive fixed interest

in interest rates rate swaps

Investment in foreign currency Sensitivity to Cross-currency swaps

assets/liabilities strengthening/weakening of Euro Foreign exchange swaps

against other currencies Foreign currency funding

Derivatives which meet the hedging criteria of IAS 39 are accounted for as fair value hedges or cash flow hedges.

82


Risikoberichtbericht

Branches outside the State

The Group has established branches within the meaning of Regulation 25 of the European Communities

(Accounts) Regulations, 1993, in Germany, Italy, France, United Kingdom, Spain, Cyprus, Hong Kong, United

States of America and Japan.

Auditors

In accordance with section 160(2) of the Companies Act 1963, the auditors PricewaterhouseCoopers will continue

in office.

On behalf of the Board

Georg Funke John Bourke Angus Cameron Elaine Tiernan

Director Director Director Company Secretary

25 March 2008

83


Group Accounts

Statement of Directors’ responsibilities

The Directors are responsible for preparing the Annual Report and the financial statements of DEPFA BANK plc in

accordance with International Financial Reporting Standards (“IFRSs”) and IFRIC interpretations endorsed by the

European Union, and with those parts of the Companies Acts, 1963 to 2006 applicable to companies reporting

under IFRS, Article 4 of the IAS Regulation and the European Communities (Credit Institutions : Accounts) Regulations,

1992.

Irish company law requires the Directors to prepare financial statements for each financial year. Under that law the

Directors have prepared the Group and Parent company financial statements in accordance with IFRS as adopted

by the European Union. The financial statements are required by law to give a true and fair view of the state of

affairs of the Company and the Group and of the profit or loss of the Group for that period. In preparing these

financial statements, the Directors are required to:

select suitable accounting policies and then apply them consistently;

make judgements and estimates that are reasonable and prudent;

state that the financial statements comply with IFRS as adopted by the European Union;

prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group

will continue in business, in which case there should be supporting assumptions or qualifications as necessary.

The Directors confirm that they have complied with the above requirements in preparing the financial statements.

The Directors are responsible for keeping proper books of account that disclose with reasonable accuracy at any

time the financial position of the company and enable them to ensure that the financial statements are prepared in

accordance with IFRS and IFRIC interpretations endorsed by the European Union, with those parts of the Companies

Acts, 1963 to 2006 and, as regards the Group financial statements Article 4 of the IAS Regulation and the

European Communities (Credit Institutions : Accounts) Regulations, 1992. They are also responsible for safeguarding

the assets of the Company and the Group and hence for taking reasonable steps for the prevention and

detection of fraud and other irregularities.

The maintenance and integrity of the DEPFA website is the responsibility of the directors; the work carried out by

the auditors does not involve consideration of these matters and accordingly, the auditors accept no responsibility

for any changes that may have occurred to the financial statements since they were initially presented on the website.

Legislation in the Republic of Ireland concerning the preparation and dissemination of financial statements

may differ from legislation in other jurisdictions.

Georg Funke John Bourke Angus Cameron Elaine Tiernan

Director Director Director Company Secretary

25 March 2008

84


Risikoberichtbericht

Independent Auditors' Report to the Members of DEPFA BANK plc

We have audited the Group and Parent company financial statements (the “financial statements”) of DEPFA BANK

plc for the year ended 31 December 2007 which comprise the Consolidated Income Statement, the Group and

Company Balance Sheets, the Group and Company Cash Flow Statements, the Group and Company Statement

of Change in Shareholders' Equity and the related notes. These financial statements have been prepared under the

accounting policies set out therein.

Respective responsibilities of Directors and auditors

The Directors’ responsibilities for preparing the Annual Report and the financial statements, in accordance with

applicable Irish law and International Financial Reporting Standards (IFRSs) as adopted by the European Union, are

set out in the Statement of Directors’ Responsibilities.

Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements

and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for

and only for the company’s members as a body in accordance with Section 193 of the Companies Act, 1990 and

for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to

any other person to whom this report is shown or into whose hands it may come save where expressly agreed by

our prior consent in writing.

We report to you our opinion as to whether the Group financial statements give a true and fair view, in accordance

with IFRSs as adopted by the European Union. We report to you our opinion as to whether the parent financial

statements give a true and fair view, in accordance with IFRSs as adopted by the European Union as applied in accordance

with the provisions of the Companies Acts 1963 to 2006. We also report to you whether the financial

statements have been properly prepared in accordance with Irish statute comprising the Companies Acts, 1963 to

2006, Article 4 of the IAS Regulation and European Communities (Credit Institutions : Accounts) Regulations, 1992.

We state whether we have obtained all the information and explanations we consider necessary for the purposes

of our audit, and whether the financial statements are in agreement with the books of account.

We also report to you our opinion as to:

whether the company has kept proper books of account;

whether the Directors’ Report is consistent with the financial statements; and

whether at the balance sheet date there existed a financial situation which may require the company to convene

an extraordinary general meeting of the company; such a financial situation may exist if the net assets of the company,

as stated in the company balance sheet, are not more than half of its called-up share capital.

85


Group Accounts

We also report to you if, in our opinion, any information specified by law regarding Directors’ remuneration and

Directors’ transactions is not disclosed and, where practicable, include such information in our report.

We read the other information contained in the Annual Report and consider whether it is consistent with the

audited financial statements. The other information comprises only: Business Principles, Corporate Highlights

2007, Management Discussion, Business Performance and the Directors’ Report. We consider the implications for

our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements.

Our responsibilities do not extend to any other information.

Basis of audit opinion

We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the

Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and

disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements

made by the Directors in the preparation of the financial statements, and of whether the accounting policies are

appropriate to the Group’s and company’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered

necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements

are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion

we also evaluated the overall adequacy of the presentation of information in the financial statements.

Opinion

In our opinion:

the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European

Union, of the state of the Group’s affairs as at 31 December 2007 and of its profit and cash flows for the year then

ended;

the parent company financial statements give a true and fair view, in accordance with IFRSs as adopted by the

European Union as applied in accordance with the provisions of the Companies Acts 1963 to 2006, of the state

of the parent company’s affairs as at 31 December 2007 and of its cash flows for the year then ended;

the financial statements have been properly prepared in accordance with the Companies Acts, 1963 to 2006 and

Article 4 of the IAS Regulation and the European Communities (Credit Institutions : Accounts) Regulations, 1992.

86


Risikoberichtbericht

We have obtained all the information and explanations which we consider necessary for the purposes of our audit.

In our opinion proper books of account have been kept by the company and proper returns adequate for our audit

have been received from branches of the company not visited by us. The company balance sheet is in agreement

with the books of account.

In our opinion, the information given in the Directors’ Report is consistent with the financial statements.

The net assets of the company, as stated in the company balance sheet, are more than half of the amount of its

called-up share capital and, in our opinion, on that basis there did not exist at 31 December 2007 a financial situation

which, under Section 40 (1) of the Companies (Amendment) Act, 1983, would require the convening of an

extraordinary general meeting of the company.

PricewaterhouseCoopers

Chartered Accountants and Registered Auditors

Dublin, Ireland

25 March 2008

87


Group Accounts

Consolidated income statement

88

Note Year ended 31 December

2007 2006

€ m € m

Interest and similar income 6 6,826 5,597

Interest expense and similar charges 6 -6,517 -5,283

Net interest income 309 314

Fee and commission income 7 49 40

Fee and commission expense 7 -7 -6

Net fee and commission income 42 34

Net trading income 8 -50 141

Gains less losses from financial assets 9 218 159

Other operating income 10 10 2

Total operating income 529 650

Operating expenses 11 -372 -200

Net operating profit before impairment losses 157 450

Impairment losses on loans and advances - -

Operating Profit / Profit before taxation 157 450

Taxation 13 -29 -107

Profit for the year continuing operations 128 343

Operating result from discontinued operations 14 204 183

Loss on disposal of discontinued operations 14 -23 -

Result from discontinued operations 181 183

Profit for the year 309 526

Attributable to:

Equity holders of the parent 309 526

The notes on pages 95 to 185 are an integral part of these consolidated financial statements.

Georg Funke John Bourke Angus Cameron Elaine Tiernan

Director Director Director Company Secretary

25 March 2008


Risikoberichtbericht

Consolidated balance sheet Note As at 31 December

ASSETS

2007 2006

€ m € m

Cash and balances with central banks 15 8,426 1,743

Loans and advances to banks 16 28,996 34,708

Trading assets 17 13,574 1,311

Derivative financial instruments 18 8,444 6,880

Other financial assets at fair value through profit or loss 19 4,417 2,075

Loans and advances to customers 20 110,648 125,247

Investment securities – available-for-sale 21 43,120 50,833

Intangible assets 23 38 53

Property, plant and equipment 24 20 26

Deferred income tax assets 32 180 39

Other assets 25 37 30

Total assets 217,900 222,945

LIABILITIES

Deposits from banks 26 89,845 63,199

Other deposits 27 30,226 31,118

Derivative financial instruments and other trading liabilities 18 18,903 12,583

Due to customers 28 10,532 7,904

Debt securities in issue 29 62,876 102,857

Other borrowed funds 30 2,271 2,133

Other liabilities 31 124 100

Current income tax liabilities 10 69

Deferred income tax liabilities 32 161 141

Retirement benefit obligations 33 1 64

Total liabilities 214,949 220,168

EQUITY

Equity attributable to equity holders of the Company

Share capital 37 106 106

Share premium 37 1,142 1,142

Capital reserve 38 200 -

Retained earnings 39 1,520 1,402

Other reserves 40 -17 127

Total equity 2,951 2,777

Total equity and liabilities 217,900 222,945

The notes on pages 95 to 185 are an integral part of these consolidated financial statements.

Georg Funke John Bourke Angus Cameron Elaine Tiernan

Director Director Director Company Secretary

25 March 2008

89


Group Accounts

Company balance sheet

ASSETS

90

Note As at 31 December

2007 2006

€ m € m

Cash and balances with central banks 15 8,334 1,699

Loans and advances to banks 16 40,309 45,020

Trading assets 17 547 747

Derivative financial instruments 18 8,890 6,223

Other financial assets at fair value through profit or loss 19 2,708 1,846

Loans and advances to customers 20 59,519 39,026

Investment securities – available-for-sale 21 30,654 32,475

Shares in Group undertakings 22 1,281 2,278

Intangible assets 23 22 9

Property, plant and equipment 24 17 16

Deferred income tax assets 32 20 21

Other assets 25 30 60

Total assets 152,331 129,420

LIABILITIES

Deposits from banks 26 87,999 71,037

Other deposits 27 29,487 31,118

Derivative financial instruments and other trading liabilities 18 10,628 9,264

Due to customers 28 10,909 7,327

Debt securities in issue 29 9,243 6,976

Other borrowed funds 30 1,160 971

Other liabilities 31 78 51

Current income tax liabilities 3 12

Deferred income tax liabilities 32 15 19

Retirement benefit obligations 33 1 3

Total liabilities 149,523 126,778

EQUITY

Capital and reserves attributable to equity holders of the company

Share capital 37 106 106

Share premium 37 1,142 1,142

Capital reserve 38 1,103 903

Retained earnings 39 472 433

Other reserves 40 -15 58

Total equity 2,808 2,642

Total equity and liabilities

The notes on pages 95 to 185 are an integral part of these consolidated financial statements.

152,331 129,420

Georg Funke John Bourke Angus Cameron Elaine Tiernan

Director Director Director Company Secretary

25 March 2008


Consolidated statement of changes in equity - Group

Other reserves

Risikoberichtbericht

Unrealised

Unrealised

gains/

gains/ losses on Accumulated

losses on available- effects of Total

Share Share Capital Retained cash flow for-sale currency Shareholders’

€ m

Balance at

capital premium reserve earnings hedges securities translations Equity

1 January 2006 106 1,142 - 940 2 114 - 2,304

Profit for the year

Net change in

available-for-sale

- - - 526 - - - 526

investments, net of tax

Net changes in

cash flow hedges,

- - - - - 11 - 11

net of tax - - - - - - - -

Total recognised income - - - 526 - 11 - 537

Dividends - - - -86 - - - -86

Purchase of own shares - - - -9 - - - -9

Share based payments

Balance at

- - - 31 - - - 31

31 December 2006 106 1,142 - 1,402 2 125 - 2,777

Profit for the year

Net change in availablefor-sale

investments,

- - - 309 - - - 309

net of tax

Net changes in

cash flow hedges,

- - - - - -140 - -140

net of tax - - - - -2 - - -2

Net changes in currency

translation reserve - - - - - - -2 -2

Total recognised income - - - 309 -2 -140 -2 165

Dividends - - - -138 - - - -138

Purchase of own shares - - - -9 - - - -9

Share based payments

Re-issue of shares under

- - - 73 - - - 73

scheme of arrangement - - - 16 - - - 16

Capital contribution

Acquisition under

- - 200 - - - - 200

common control

Balance at

- - - -133 - - - -133

31 December 2007 106 1,142 200 1,520 - -15 -2 2,951

The notes on pages 95 to 185 are an integral part of these consolidated financial statements.

91


Group Accounts

Consolidated statement of changes in equity – Company

Unrealised

gains/

losses on

available- Total

Share Share Capital Retained for-sale Shareholders’

€ m capital premium reserve earnings securities Equity

Balance at 1 January 2006 106 1,142 903 97 26 2,274

Profit for year

Net change in available-

- - - 400 - 400

for-sale investments, net of tax - - - - 32 32

Total recognised income - - - 400 32 432

Dividends - - - -86 - -86

Purchase of own shares - - - -9 - -9

Share based payments - - - 31 - 31

Balance at 31 December 2006 106 1,142 903 433 58 2,642

Profit for the year

Net change in available-

- - - 97 - 97

for-sale investments, net of tax - - - - -73 -73

Total recognised income - - - 97 -73 24

Dividends - - - -138 - -138

Purchase of own shares - - - -9 - -9

Share based payments

Re-issue of shares under

- - - 73 - 73

scheme of arrangement - - - 16 - 16

Capital contribution - - 200 - - 200

Balance at 31 December 2007 106 1,142 1,103 472 -15 2,808

The notes on pages 95 to 185 are an integral part of these consolidated financial statements.

92


Consolidated cash flow statement

Cash flows from operating activities

Risikoberichtbericht

Group Company

2007 2006 2007 2006

€ m € m € m € m

Net profit before taxation 332 639 116 474

Adjustments for non-cash movements:

Depreciation and amortisation of tangible and intangible assets 13 9 10 5

Foreign exchange (gain)/loss -2 4 -2 7

Net (increase)/decrease in accrued interest income -1,314 -884 -1,372 -753

Net increase/(decrease) in accrued interest expenditure 955 1,046 929 724

Provisions for losses on loans - - - -

(Gains)/losses on sale of investment securities and loans -349 -277 -108 -147

Other non cash items 47 -41 202 -38

Net (increase)/decrease in loans and advances to banks 3,483 -1,904 9,299 -10,488

Net (increase)/decrease in loans and advances to customers -15,822 -16,027 -20,567 -7,323

Purchase of investment securities -28,212 -13,767 -22,654 -12,098

Sale/maturity of investment securities 29,962 18,989 22,385 14,445

Net (increase)/decrease in other assets -25 -6 21 -12

Net increase/(decrease) in deposits from other banks 18,693 -2,110 19,218 11,613

Net increase in other deposits 351 3,182 351 3,223

Net increase in amounts due to customers 4,094 585 4,317 360

Net increase in debt securities issued 1,370 6,017 2,559 174

Net increase/(decrease) in other liabilities 73 -495 22 -484

Net (increase) in trading assets and other receivables -2,184 -1,257 -2,885 -1,920

Net (increase)/decrease in derivatives and trading liabilities 106 -347 2 -391

Net cash from operating activities 11,571 -6,644 11,843 -2,629

Tax paid -73 -61 -21 -55

Cash flows from investing activities

Acquisition of subsidiaries, net of cash and cash equivalents acquired

Disposal of subsidiaries and capital repayments,

1,385 - -949 -

net of cash and cash equivalents acquired 711 - 1,946 -

Purchase of property and equipment -9 -13 -8 -4

Sale of property and equipment 3 3 1 2

Purchase of intangible assets -15 -1 -16 -

Net cash from investing activities 2,075 -11 974 -2

93


Group Accounts

Consolidated cash flow statement (continued)

Cash flows from financing activities

94

Group Company

Note 2007 2006 2007 2006

€ m € m € m € m

Purchase of own shares -9 -9 -9 -9

New issues of other borrowed funds 500 - 155 -

Repayments of other borrowed funds - -220 - -95

Capital contribution received 200 - 200 -

Re-issue of ordinary shares under scheme of arrangement 16 - 16 -

Dividends paid -138 -86 -138 -86

Net cash from financing activities 569 -315 224 -190

Net increase in cash and cash equivalents 14,142 -7,031 13,020 -2,876

Cash and cash equivalents at the beginning of the year 43 4,948 12,049 3,904 6,843

Effect of exchange rate changes on cash and cash equivalents -176 -70 -168 -63

Cash and cash equivalents at the end of the year 43 18,914 4,948 16,756 3,904

Included in the cash flows for the year are the following amounts:

Group Company

2007 2006 2007 2006

€ m € m € m € m

Interest income received 5,512 7,624 3,690 3,306

Interest expense paid -5,535 -7,037 -3,959 -3,160

Dividend income received - - 109 162

The notes on pages 95 to 185 are an integral part of these consolidated financial statements.


Notes to the consolidated financial statements

1. General information

Risikoberichtbericht

DEPFA BANK plc is a provider of financial services to public sector clients worldwide. The Bank serves public

sector authorities by providing for their financial needs with a broad range of products and services. It is a Dublinbased

public limited company, incorporated under Irish law, with a network of subsidiaries and branch offices

across Europe, as well as in Asia and the Americas. The Group is regulated by the Irish Financial Regulator and the

German Bundesanstalt für Finanzdienstleistungsaufsicht (“BaFin”).

On 2 October 2007 the entire ordinary share capital of the Company was acquired by Hypo Real Estate

Holding AG, which is also the ultimate parent company of the Group.

2. Summary of significant accounting policies

The principal accounting policies adopted in the preparation of these consolidated financial statements are set out

below. These policies have been consistently applied to all the years presented, unless otherwise stated.

Basis of preparation

These consolidated financial statements have been prepared in accordance with European Union (EU) endorsed

International Financial Reporting Standards (“IFRSs”), IFRIC interpretations and the Companies Acts, 1963 to 2006

applicable to companies reporting under IFRS and the European Communities (Credit Institutions: Accounts)

Regulations, 1992. The consolidated financial statements have been prepared under the historical cost conven tion

as modified by the revaluation of available-for-sale investments, financial assets and liabilities at fair value through

the profit or loss and derivatives.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates.

It also requires management to exercise its judgement in the process of applying the Group’s accounting

policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates

are significant to the consolidated financial statements are disclosed in Note 4.

Consolidation

Subsidiaries

Subsidiaries comprise all entities (including special purpose entities) over which the Group has the power to govern

the financial and operating policies. The existence and effect of potential voting rights that are currently exercisable

or convertible are considered when assessing whether the Group controls an entity. Subsidiaries are fully consolidated

from the date on which control is transferred to the Group and cease to be consolidated from the date that

control ceases.

The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition

is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed

at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities

and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition

date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value

of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less

than the net fair value of the identifiable assets, liabilities, and contingent liabilities of the subsidiary acquired, the

difference is recognised directly in the income statement.

95


Group Accounts

Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated.

Unrealised losses are also eliminated unless the transaction provides evidence of impairment of the asset

transferred.

The financial statements and group reporting of all subsidiaries are drawn up to the year ended 31 December, and

the accounting policies applied in their preparation are consistent with the Group accounting policies.

Minority interests comprise minority shareholders’ proportionate share in shareholders’ equity and net income.

The Group applies the parent company method of consolidation. Therefore, goodwill can arise on the acquisition

of minority interests and the sale of such interests can give rise to a profit or loss in the income statement.

Common control transactions

Common control transactions are business combinations involving businesses or entities under common control.

These transactions are accounted for at book value. Consequently, any differences between consideration

paid/received and the book value are transferred directly to shareholders equity and no goodwill arises.

In 2002, the Group was reorganised, the purpose of which was to de-merge the Property Finance and IT Services

activities from the Public Finance business and which resulted in the formation of the current parent company,

DEPFA BANK plc. This de-merger was treated as a discontinued operation.

DEPFA BANK plc was created by a share for share exchange with the previous parent company, DEPFA Deutsche

Pfandbriefbank AG. This share for share exchange and other transfers of assets and property as part of the re orga -

nisation were treated as a transaction under common control and accounted for at book value.

Under Irish company law, a share premium was created on the above share for share exchange. A merger adjustment

arose being the difference between the fair value of the shares issued and the book value of the net assets

acquired. The merger adjustment was transferred to retained earnings.

The Group availed of the exemption in IFRS 1 to apply IFRS to business combinations, including common control

transactions, from 15 March 2002, the date of the Group restructuring.

On 31 December 2007 the Company acquired Hypo Public Finance Bank from Hypo Real Estate Holding AG. This

was accounted for as a transaction under common control. A merger adjustment arose being the difference between

the fair value of the shares acquired and the book value of the net assets acquired. The merger adjustment

was transferred to retained earnings.

Segment reporting

A business segment is a group of assets and operations engaged in providing products or services that are

subject to risks and returns that are different from those of other business segments. A geographical segment is

engaged in providing products or services within a particular economic environment that are subject to risks and

returns that are different from those of segments operating in other economic environments.

The Group’s primary segments are based on the nature of the products provided (“business segment”) whereas

the secondary segments are based on the geographical location of the booking entity (“geographical segment”).

96


Risikoberichtbericht

Expenses incurred centrally, including expenses incurred by support, administrative and back-office functions are

charged to the business segments as far as they are reasonably attributable to the business segments’ activities

in accordance with their estimated proportionate share of overall activities.

Segment assets and liabilities are those assets and liabilities that are directly attributable to the operating activities

of the segment.

Foreign currency translation

(a) Functional and presentation currency

Items included in the financial statements of each of the Group’s entities are measured using the currency of the

primary economic environment in which the entity operates (“the functional currency”).

The consolidated financial statements are presented in Euro, which is the functional and presentation currency of

the parent.

(b) Transactions and balances

Foreign currency transactions are translated into Euro using the exchange rates prevailing at the dates of the transactions.

Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation

at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are

recognised in the income statement, except when deferred in equity as qualifying cash flow hedges.

Translation differences on equities held at fair value through the profit and loss account are reported as part of the

fair value gain or loss in the income statement. Translation differences on equities classified as available-for-sale are

included in the fair value reserve in equity.

(c) Group companies

The results and financial position of all the Group entities that have a functional currency other than Euro are translated

into the presentation currency as follows:

(i) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that

balance sheet;

(ii) income and expenses for each income statement are translated at average exchange rates (unless this

average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction

dates, in which case income and expenses are translated at the dates of the transactions); and

(iii) all resulting exchange differences are recognised as a separate component of equity.

Interest income and expense

Interest income and expense are recognised in the income statement for all interest bearing financial instruments

using the effective interest method.

The effective interest method is a method of calculating the amortised cost of a financial asset or a financial

liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate

is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial

instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial

liability. When calculating the effective interest rate, the Group estimates cash flows considering all contractual

97


Group Accounts

terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The

calculation includes all fees and points paid or received between parties to the contract that are an integral part of

the effective interest rate, transaction costs and all other premiums or discounts.

The interest element of all derivative and fair valued financial instruments is included in net interest income.

Fee and commission income

Fees and commissions which are not part of the effective interest rate calculation are generally recognised on an

accruals basis when the service has been provided. Loan syndication fees are recognised as income when the

syndication has been completed and the Group has retained no part of the loan package for itself or retained a part

at the same effective interest rate as the other participants.

Commitment fees, together with related direct costs, for loan facilities where draw down is probable are deferred

and recognised as an adjustment to the effective interest on the loan once drawn. Commitment fees in relation to

facilities where draw down is not probable are recognised over the term of the commitment in fee and commis sion

income.

Other advisory and service fees are recognised when the service has been provided.

Financial assets and liabilities

The Group classifies its financial assets in the following categories: financial assets at fair value through profit or

loss; loans and receivables; held-to-maturity investments; and available-for-sale financial assets. Financial Liabilities

are held at fair value through profit or loss or at amortised cost. Management determines the classification

of its financial instruments at initial recognition or in accordance with the transition rules set out in IFRS 1, as

appropriate.

(a) Financial assets and financial liabilities at fair value through profit or loss

This category has two sub-categories: financial assets held for trading, and those designated at fair value through

profit or loss prior to 1 September 2005 or, if later, at inception. A financial asset is classified as fair value through

profit or loss if acquired principally for the purpose of selling in the short term (held for trading) or if so designated

by management in accordance with the fair value rules as set out in IAS 39 “Financial Instruments: Recognition and

Measurement”, namely:

The designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise

arise from measuring assets and liabilities or the gains and losses arising on them on different bases; or

A group of financial assets or liabilities is managed and its performance is evaluated on a fair value basis, in

accordance with a documented risk management or investment strategy, and information about the Group is

provided internally on that basis to management.

Derivatives are also categorised as held for trading unless they are designated as hedges. Interest on financial

assets and financial liabilities at fair value through profit or loss and interest on trading derivatives is included in net

interest income. Other gains and losses arising from changes in fair value are included directly in the income statement

within the trading result.

98


Risikoberichtbericht

(b) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted

in an active market.

On initial recognition, each financial asset is assessed, based on observable market data and judgement where

appropriate, as to whether it is quoted in an active market.

(c) Held-to-maturity

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed

maturities that the Group’s management has the positive intention and ability to hold to maturity. Were the Group

to sell other than an insignificant amount of held-to-maturity assets, the entire category would be tainted and

reclassified as available-for-sale.

(d) Available-for-sale

Available-for-sale investments are those intended to be held for an indefinite period of time, which may be sold in

response to needs for liquidity or changes in interest rates or exchange rates.

Regular-way purchases and sales of financial assets at fair value through profit or loss, held to maturity and availablefor-sale

are recognised on trade-date – the date on which the Group commits to purchase or sell the asset.

Financial instruments at fair value through profit or loss are initially recognised at fair value with transaction costs

being taken to the income statement. Other financial instruments are initially recognised at fair value plus transaction

costs. Financial assets are derecognised when the rights to receive cash flows from the financial assets have

expired or where the Group has transferred substantially all risks and rewards of ownership.

Loans and receivables and held-to-maturity investments are subsequently carried at amortised cost using the

effective interest rate method.

Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at

fair value.

Gains and losses arising from changes in the fair value of financial assets at fair value through profit or loss are included

in the income statement in the period in which they arise. Gains and losses arising from changes in the fair

value of available-for-sale financial assets are recognised directly in equity, until the financial asset is derecognised

or impaired at which time the cumulative gain or loss previously recognised in equity is recognised in the income

statement. However, interest calculated using the effective interest method and foreign currency gains and losses

on monetary assets classified as available-for-sale are recognised in the income statement. Dividends on availablefor-sale

equity instruments are recognised in the income statement when the entity’s right to receive payment is

established.

The fair values of financial instruments in active markets are based on current bid prices for assets and offer prices

for liabilities. If the market for a financial instrument is not active (and for unlisted securities), the Group establishes

fair value by using valuation techniques. These include the use of recent arm’s length transactions, discounted

cash flow analysis or other valuation techniques commonly used by market participants.

99


Group Accounts

Financial liabilities are derecognised when they are extinguished – that is when the obligation is discharged,

cancelled or expires.

Financial guarantee contracts

Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse

the holder for a loss it incurs because a specified debtor fails to make payments when due, in accordance

with the terms of a debt instrument.

Financial guarantees are initially recognised in the financial statements at fair value on the date the guarantee

was given. Subsequent to initial recognition, the Group’s liabilities under such guarantees are measured at the

higher of the initial measurement, less amortization calculated to recognize in the income statement the fee

income earned on a straight line basis over the life of the guarantee and the best estimate of the expenditure

required to settle any financial obligation arising at the balance sheet date. These estimates are determined

based on experience of similar transactions and history of past losses, supplemented by the judgement of

management.

Derivative financial instruments and hedge accounting

Derivatives

Derivatives are used for trading and hedging purposes. They include, in particular, interest rate swaps, crosscurrency

swaps, interest rate options, foreign exchange forwards, interest rate futures and credit derivatives.

Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are

subsequently remeasured at their fair value. Fair values are obtained from quoted market prices in active markets,

including recent market transactions and valuation techniques, including discounted cash flow models and options

pricing models, as appropriate.

All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative.

The best evidence of the fair value of a derivative at initial recognition is the transaction price (i.e. the fair value of

the consideration given or received) unless the fair value of that instrument is evidenced by comparison with other

observable current market transactions in the same instrument (i.e. without modification or repackaging) or based

on a valuation technique whose variables include only data from observable markets. Where such evidence exists,

the Group recognises profits on day one being the difference between the transaction price and fair value at initial

recognition. Where such evidence does not exist, day one profit is deferred and recognised in the income statement

to the extent that it arises from a change in a factor (including time) that market participants would consider

in setting a price. Straight line amortisation is used where it approximates the above. Subsequent changes in fair

value are recognised immediately in the income statement without reversal of deferred day one profits or losses.

Embedded derivatives

Certain derivatives embedded in other financial instruments are treated as separate derivatives when their economic

characteristics and risks are not closely related to those of the host contract and the host contract is not

carried at fair value through profit or loss. These embedded derivatives are measured at fair value with changes in

fair value recognised in the income statement.

100


Risikoberichtbericht

Hedging derivatives

The method of recognising the resulting fair value gain or loss depends on whether the derivative is designated as

a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as

either:

(a) hedges of the fair value of recognised assets or liabilities or firm commitments (fair value hedge); or,

(b) hedges of highly probable future cash flows attributable to a recognised asset or liability, or a forecast trans -

action (cash flow hedge).

Hedge accounting is used for derivatives designated in this way provided certain criteria are met.

The Group documents, at the inception of the transaction, the relationship between hedging instruments and hedged

items, as well as its risk management objective and strategy for undertaking various hedge transactions. The

Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives

that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of

hedged items.

(a) Fair value hedge

Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the

income statement, together with any changes in the fair value of the hedged asset or liability that are attributable

to the hedged risk. The ineffective portion is included in the trading result with the remainder of the fair value

movement on the underlying and the derivative being included in interest.

If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged

item for which the effective interest method is used is amortised to the income statement over the period to

maturity.

(b) Cash flow hedge

The effective portion of changes in the fair value of derivatives that are designated and qualify as cashflow hedges

are recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the income

statement in the trading result.

Amounts accumulated in equity are recycled to the income statement in the periods in which the hedged item will

affect profit or loss (for example, when the forecast sale that is hedged takes place). The transfer is to the income

statement account which includes the hedged item.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting,

any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast

transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to

occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement.

101


Group Accounts

Derivatives that do not qualify for hedge accounting

The Group maintains trading positions in a variety of financial instruments including derivatives. Trading transac -

tions arise both as a result of activity generated by customers and from proprietary trading with a view to generating

incremental income.

Some derivatives, while being economic hedges, do not meet detailed hedge accounting criteria under IFRS.

Derivatives that do not qualify for hedge accounting are accounted for as part of the trading portfolio.

Offsetting financial instruments

Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally

enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the

asset and settle the liability simultaneously.

Sale and repurchase agreements

Securities sold subject to repurchase agreements (“repos”) are carried as assets in the financial statements when

the transferee has the right by contract or custom to sell or repledge the collateral; the counterparty liability is included

in deposits from banks or deposits due to customers, as appropriate. Securities purchased under agreements

to re-sell (“reverse repos”) are recorded as loans and advances to banks or loans and advances to

customers, as appropriate. The difference between sale and repurchase price is treated as interest and accrued

over the life of the agreements using the effective interest method.

Impairment of financial assets

(a) Assets carried at amortised cost

The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or group

of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are

incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred

after the initial recognition of the asset (a “loss event”) and that loss event (or events) has an impact on the estimated

future cash flows of the financial asset or group of financial assets that can be reliably estimated. Objective

evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention

of the Group about the following loss events:

(i) significant financial difficulty of the issuer or obligor;

(ii) a breach of contract, such as a default or delinquency in interest or principal payments;

(iii) the Group granting to the borrower, for economic or legal reasons relating to the borrower’s financial difficulty,

a concession that the lender would not otherwise consider;

(iv) it becoming probable that the borrower will enter bankruptcy or other financial reorganisation;

(v) the disappearance of an active market for that financial asset because of financial difficulties; or

102


Risikoberichtbericht

(vi) observable data indicating that there is a measurable decrease in the estimated future cash flows from a group

of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified

with the individual financial assets in the Group, including:

– adverse changes in the payment status of borrowers in the Group; or

– national or local economic conditions that correlate with defaults on the assets in the Group.

If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments

carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the

asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that

have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of

the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the

income statement. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for

measuring any impairment loss is the current effective interest rate determined under the contract.

When a loan is uncollectable, it is written off against the related provision for loan impairment. Such loans are written

off after all the necessary procedures have been completed and the amount of the loss has been determined.

Subsequent recoveries of amounts previously written off decrease the amount of the provision for loan impairment

in the income statement.

(b) Assets carried as available-for-sale

The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a

group of financial assets is impaired. In the case of equity investments classified as available-for-sale, a significant

or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets

are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as

the difference between the acquisition cost and the current fair value, less any impairment loss on that financial

asset previously recognised in the income statement – is removed from equity and recognised in the income statement.

Impairment losses recognised in the income statement on equity instruments are not reversed through the

income statement. If, in a subsequent period, the fair value of a debt instrument as available-for-sale increases and

the increase can be objectively related to an event occurring after the impairment loss was recognised in the

income statement, the impairment loss is reversed through the income statement.

Property, plant and equipment

Land and buildings comprise mainly branches and offices. All property, plant and equipment is stated at historical

cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the

assets.

Subsequent costs are included in the asset’s carrying amount or are recognised as a separate asset, as appropriate,

only when it is probable that future economic benefits associated with the item will flow to the Group and the cost

of the item can be measured reliably. All repairs and maintenance are charged to the income statement during the

financial period in which they are incurred.

103


Group Accounts

Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to write-down

their cost to their residual values over their estimated useful lives, as follows:

Estimated useful life, in years

Buildings 50

IT-equipment 3

Furniture, fixtures and office equipment 5

Machinery and equipment 5

Vehicle fleet 5

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is

greater than its estimated recoverable amount. The recoverable amount is the higher of the asset’s fair value less

costs to sell and value in use.

Gains and losses on disposals are determined by comparing proceeds with carrying amount and are recognised

in the income statement.

Intangible assets

(a) Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable

assets of the acquired entity at the date of acquisition. Goodwill on acquisitions of subsidiaries is included

in “intangible assets”. Separately recognised goodwill is tested annually for impairment and carried at cost less accumulated

impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal

of an entity include the carrying amount of goodwill relating to the entity sold.

(b) Computer software

Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring to use

the specific software. These costs are amortised on a straight line basis based on their expected useful lives (three

years).

Leases

The leases entered into by the Group are operating leases. The total payments made under operating leases are

charged to the income statement on a straight-line basis over the period of the lease.

When an operating lease is terminated before the lease period has expired, any payment required to be made to

the lessor by way of penalty is recognised as an expense in the period in which termination takes place.

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Risikoberichtbericht

Cash and cash equivalents

For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three

months’ maturity from the date of acquisition, including: cash and non restricted balances with central banks, treasury

bills and other eligible bills, and loans and advances to banks, excluding loans and advances to other Group

entities.

Employee benefits

(a) Pension obligations

The Group operates two types of pension schemes – defined benefit schemes and defined contribution schemes.

A defined contribution scheme is a pension plan under which the Group pays fixed contributions into a separate

fund. In these plans the Group has no legal or constructive obligations to pay further contributions if the fund does

not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior

periods. A defined benefit scheme is a pension plan that is not a defined contribution scheme. Typically, defined

benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent

on one or more factors such as age, years of service and compensation.

The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the

defined benefit obligation at the balance sheet date, together with adjustments for past service costs. The defined

benefit obligation, which is unfunded, is calculated annually by independent actuaries using the projected unit credit

method. The present value of the defined benefit obligation is determined by discounting the estimated future

cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which

the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability.

Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged

or credited to the income statement as they are identified. Past-service costs are recognised immediately in

income, unless the changes to the pension plan are conditional on the employees remaining in service for a

specified period of time (“the vesting period”). In this case, the past-service costs are amortised on a straight-line

basis over the vesting period.

For defined contribution plans, the Group pays contributions to privately administered pension insurance plans on

a mandatory, contractual or voluntary basis. The Group has no further payment obligations once the contributions

have been paid. The contributions are recognised as employee benefit expense when they are due. Prepaid contributions

are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available.

(b) Share compensation scheme

The Group operates an incentive compensation programme under which share awards are made to employees

and Directors of the Group for no consideration. The fair value of employee services received is measured by

reference to the fair value of the share award at the award date and is recognised as an expense in the income

statement over the vesting period with a corresponding credit to equity. At each balance sheet date, the entity

revises its estimate of the number of shares that are expected to vest. It recognises the impact of the revision of

the original estimates, if any, in the income statement, and a corresponding adjustment to equity over the

remaining vesting period.

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Group Accounts

Income tax

Current income tax payable on profits, based on the applicable tax law in each jurisdiction, is recognised as an

expense in the period in which profits arise. The tax effects of income tax losses available for carry forward are

recognised as an asset when it is probable that future taxable profits will be available against which these losses

can be utilised.

Deferred income tax is provided in full on temporary differences arising between the tax bases of assets and liabilities

and their carrying amounts in the consolidated financial statements. Deferred income tax is determined using

tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected

to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction

other than a business combination that at the time of the transaction affects neither accounting, nor taxable profit

or loss.

Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be

available against which the temporary differences can be utilised.

Deferred income tax is provided on temporary differences arising from investments in subsidiaries, except where

the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the difference

will not reverse in the foreseeable future.

Deferred income tax related to the fair value re-measurement of available-for-sale investments and cash flow

hedges, which are charged or credited directly to equity, is also credited or charged directly to equity and is

subsequently recognised in the income statement together with the deferred gain or loss.

Issued debt and borrowings

The classification of instruments as a financial liability or an equity instrument is dependent upon the substance of

the contractual arrangement. Instruments which carry a contractual obligation to deliver cash or another financial

asset to another entity are classified as financial liabilities and are presented under deposits from banks, due to

customers, debt securities in issue, or other borrowed funds as appropriate. The dividends on these instruments

are recognised in the income statement as interest expense.

If the Group purchases its own debt, it is removed from the balance sheet and the difference between the carrying

amount of the liability and the consideration paid is included in other operating income or operating expenses.

106


Risikoberichtbericht

Share capital

(a) Share issue costs

Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax,

from the proceeds.

(b) Dividends on ordinary shares

Dividends on ordinary shares are recognised in equity in the period in which they are approved by the Company’s

shareholders or paid (if declared by the Directors). Dividends for the year that are declared after the balance sheet

date are dealt with in the subsequent events note.

(c) Own shares

Where the Company or other members of the consolidated Group purchases the Company’s equity share capital,

the consideration paid is deducted from total equity as own shares until they are cancelled. Where such shares are

subsequently sold or reissued, any consideration received is included in equity.

Discontinued operations

A discontinued operation is a component of the Group’s business which represents a separate major line of

business or geographical area of operations and has been disposed of or is held for sale. When an operation is

classified as a discontinued operation, the comparative income statement is re-stated as if the operation had been

discontinued from the start of the earliest period presented.

Exceptional items

The Group seeks to highlight significant items within the Group results for the year. Such items may include

restructuring, profit or loss on disposal of significant items of property, plant and equipment, profit or loss on

disposal of investments and impairment of assets. Judgement is used by the Group in assessing the particular

items, which by virtue of their scale and nature, should be disclosed in the notes to the financial statements.

Comparatives

The comparative figures for the 2006 income statement have been re-stated to reflect the classification of

DEPFA Deutsche Pfandbriefbank AG as a discontinued operation.

Where necessary, other comparative figures have been adjusted to conform with changes in presentation in the

current year.

107


Group Accounts

Standards, amendment and interpretations effective in 2007

IFRS 7, This new standard revises and enhances the disclosure requirements of IAS 32, “Financial instruments:

disclosure and presentation”, and IAS 30, “Disclosures in the financial statements of banks and similar financial

institutions”, and combines them in one document. On the same date, the IASB published an amendment to IAS 1,

“Presentation of financial statements”, relating to capital disclosures. The amendment requires an entity to disclose

certain qualitative and quantitative data about its capital (equity resources).

IFRS 7 and the amendment to IAS 1 are effective for the year ended 31 December 2007.

IFRIC 8, “Scope of IFRS 2” requires consideration of transactions involving the issuance of equity instruments,

where the identifiable consideration received is less than the fair value of the equity instruments issued in order to

establish whether or not they fall within the scope of IFRS 2. This standard does not have a material impact on the

Company´s financial statements.

IFRIC 9, “Re-assessment of embedded derivatives” requires an entity to assess whether an embedded derivative

is required to be separated from the host contract and accounted for as a derivative when the entity first becomes

a party to the contract. Subsequent re-assessment is prohibited unless there is a change in the terms of the

contract that significantly modifies the cash flows that otherwise would be required under the contract, in which

case re-assessment is required.

IFRIC 10, “Interim financial reporting and impairment”, prohibits the impairment losses recognised in an interim

period on goodwill and investments in equity instruments and in financial assets carried at cost to be reversed at

a subsequent balance sheet date. This standard does not have a material impact on the Company’s financial

statements.

108


Risikoberichtbericht

Standards, amendments and interpretations effective in 2007 but not relevant

The following standards, amendment and interpretations to published standards are mandatory for accounting

periods beginning on or after 1 January 2007 but they are not relevant to the Company’s operations:

IFRIC 7 “Applyling the re-statement approach under IAS 29, Financial reporting in hyperinflationary economies”.

Prospective accounting standards

The Group has chosen not to early adopt the following standard and interpretations that were issued but not yet

effective for accounting periods beginning on 1 January 2007.

IFRS 8, “Operating segments” (effective 1 January 2009)

IFRIC 11, “IFRS 2 – Group Treasury Share Transactions” (effective for annual periods beginning on or after 1 March

2007)

IFRIC 12, “Service Concession Arrangements” (effective 1 January 2009)

IFRIC 13, “Customer loyalty programmes” (effective 1 July 2008)

IFRIC 14, “IAS 19 – The limit on a defined benefit asset, minimum funding requirements and

their interaction” (effective from 1 January 2008).

IAS 23 (Amendment), “Borrowing costs” (effective 1 January 2009)

IAS 1 (Amendment), “Presentation of Financial Statements” (effective 1 January 2009)

The Company is currently considering the impact of these accounting standards on its financial statements. Once

adopted, it does not expect that they will have a material impact on the Company’s financial position.


Group Accounts

3. Risk Management

1. Risk Management Structure

The prudent taking of risk is fundamental to the business of DEPFA. The primary objectives of risk management are

to protect the financial strength and the reputation of the Bank, while looking to ensure that capital is well deployed

to support business activities and grow shareholder value.

Throughout 2007, the Group maintained a comprehensive system for identification, measurement and control of

risk as an integral part of its business.

DEPFA Risk Governance Structure (effective January 2007 to October 2007)

In October 2007, DEPFA BANK plc became a wholly-owned subsidiary of Hypo Real Estate Holding AG. Prior

to the acquisition of the Bank by Hypo Real Estate Holding AG in October 2007, the Bank’s Risk Governance

structure included the following key Board and executive committees:

Risk Committee of the Board of Directors

Chaired by Dr. Thomas Kolbeck, the Non-Executive Vice-Chairman of the Board.

Objectives: responsible for DEPFA’s risk policy statement and provides strategic direction in relation to the nature

and scale of risk that the Group may assume.

In addition to the Risk Committee, the Board of Directors had established an Audit Committee and a Compen -

sation Committee. These committees were comprised of Non-Executive Directors. The Board of Directors is responsible

for the overall Group strategy.

Additionally, the following executive committees were in place:

Executive Committee

The Executive Committee is responsible for the cross functional management of the Bank. It is responsible for

implementing strategies and controls and cross functional coordination.

Asset & Liability Committee

The Asset & Liability Committee implements the market risk and liquidity strategies of the Bank and allocates

capital by setting related risk limits. It is responsible for managing interest rate and liquidity risk, and minimising

funding costs.

110


Risikoberichtbericht

Credit Committees

The Credit Committees are responsible for counterparty credit risk. They focus on credit review and approval of

individual obligors and on portfolio and country limits.

Transaction Committee

The Transaction Committee acts on its own behalf under delegated authority from the Credit Committee. It

presides over a class of structured transactions, where the credit risk is overlapped by liquidity, volatility and

market risk and the ability to sell down in addition to the pure credit risk. Limits set by the Transaction Committee

provide the basis for underwriting approvals for the Bank, which are not intended to be held to maturity and where

special consideration must be given to the economic value of a trade to enable sell-down.

The chart below sets out DEPFA’s Risk Governance structure effective from January 2007 to October 2007:

Group Govemance: Committee Structure

Executive

Committee

▲▼

Compensation

Committee

Compliance

Asset & Liability

Management

Committee

Board of Directors of DEPFA BANK plc


▲▼ ▲▼

Risk

Committee

Strategic

Planning

Committee

Chairman´s Office

Audit

Committee

Credit

Committee


Country Risk

Committee


Group Internal

Audit

Asset

Management

Committee

111


Group Accounts

HRE Group Risk Governance Structure (effective October 2007 to December 2007)

Since the acquisition of DEPFA BANK plc by Hypo Real Estate Holding AG in October 2007, DEPFA’s risk

management structure has been consolidated into the HRE Group risk management structure. The HRE Group risk

governance structure includes the following key committees:

Group Management Board

The Group Management Board is the decision making body for all strategic and operational decisions.

With regards to risk management, it is responsible for:

Ensuring the proper organisation of credit business (and for the ongoing development of such organisation) as

well as for the proper management and monitoring of the risks arising from credit business

Defining, communicating and reviewing business and risk strategies (based on ICAAP calculations), setting the

frame for all entities in HRE Group taking on credit risks, approving risk strategies and portfolio guidelines. The

Supervisory Boards regularly review the strategies and the risk profile of HRE Group

Approving Credit Authority guidelines setting the frame for every decision required along the credit process chain.

Based on the Credit Authority guideline, individual authorities are assigned as personal credit authorities according

to individual qualification, experience and training

Deciding on strategies concerning market and liquidity risk as well as performance developments in Capital

Markets, Treasury, refinancing business and asset liability management. It acts as point of escalation in combination

with Group ALCO for controversial issues concerning processes as well as for basic principles regarding

asset-liability-management, funding and liquidity management.

Group Risk Management Committee

This committee is the main risk decision making group and is chaired by the Group Chief Risk Officer. It has the

following objectives:

Reviews the overall risk situation of the Group and approves the ICAAP calculation

Reviews the divisions’ credit portfolios, the Group’s country risk exposure and the Group’s market and liquidity

risk exposure

Discusses the Group’s risk position in the context of market developments

Proposes sub-portfolio strategies on risk/return basis to Management Board (Active Credit Portfolio Management

– ACPM)

Proposes Group-wide and divisional (credit) risk strategies and guidelines (annually) to Management Board

Approves limits, e.g. country risk, credit and market risk limits

Approves principles for managing Credit, Country and Market Risk

Approves new concepts regarding methods for risk measurement or the implementation of regulatory

requirements. In combination with Group ALCO decides whether to start business in new product groups, new

business units and/or markets where the risk profile (including reputational risks) possibly has an impact on the

whole HRE Group. It also defines minimum requirements for new product processes.

Reviews the Group’s operational risk profile

112


Risikoberichtbericht

Asset and Liability Committee

The Asset and Liability Committee is chaired by the Group Chief Financial Officer. Its objective is to optimise the

asset/liability mix of the Group and to manage the market and liquidity risk.

The chart below sets out the key HRE Group risk governance structures under which DEPFA’s activities have been

managed effective from October 2007:

Risk Management

Committee

Credit Risk

Management

Commercial

Real Estate

Credit Risk

Management

Public Sector

& Infra struc ture

Finance

Hypo Real Estate Holding Supervisory Board

Hypo Real Estate Holding Management Board

(CEO, CFO, CRO...)

Credit Risk

Management

Capital Markets

& Asset

Management

Chief Risk Officer

Market

Risk

Management

Group

Operational

Risk

Group Risk

Management

Operating

Office

Audit

Committee

Asset and Liability

Committee

Group Risk

Control

113


Group Accounts

2. Credit Risk

Credit risk is defined as the risk of impairment and partial or total loss of a receivable due to deterioration of credit

quality on the part of a counterparty. The relevant receivable may be based on traditional on-balance sheet lending

business or off-balance sheet business, e.g. counterparty risk arising from derivative financial instruments.

Through adhering to very conservative lending principles, over the years DEPFA has built a zero default track

record in managing credit risk in lending to the public sector. These principles can be summarised as follows:

Thorough and careful analysis of each individual credit risk by specialist teams of independent Credit Analysts

supported by quantitative rating models for determining default risk of the borrower and use of early warning

systems.

Ongoing active observation of the market and adjustment of the lending policy where necessary.

Avoiding concentration risks and enforcing systematic diversification of the portfolio by way of credit portfolio

management which draws up appropriate recommendations for action.

Ensuring that the loans can be resold or syndicated.

These principles have been used as the basis for implementing specific credit risk strategies; the general character

of these strategies is the focus on individual borrower/transaction risk and maintaining a very high average port folio

rating. The credit principles also require the banks within DEPFA to carry out cash-flow simulations and stress

tests; particularly in infrastructure and asset finance transactions. Additionally through the continuous monitoring

of covenants, increased credit risks can be identified, and managed at an early stage. These analyses relating to

individual transactions are complemented by scenario observations at the portfolio level.

DEPFA adopts best-practice approaches by way of organizational measures and functional segregation of credit

processes right through to management board level into market risk and back office. This allows DEPFA to meet

regulatory requirements such as MaRisk (German Minimum Requirements for Risk Management).

Internal rating tools are used for all significant customer segments: sovereigns and sub sovereign public sector

entities, entities with public sector support, financial institutions, project finance and asset based finance. The

quality of the valuation methods which are used is continuously monitored by risk control.

Public Sector Credit Risk

Public Sector lending accounts for 78% of DEPFA’s total consolidated on-balance sheet exposures. The business

is focused on sovereign and sub-sovereign borrowers and public sector supported financial and specialist entities.

This is reflected in the risk weightings of the Group’s total public sector portfolio amounting to €158 billion of onbalance

sheet interest-earning assets (amount includes IAS 39 adjustments) at 31 December 2007. A BIS risk

weighting of 0% applies to 55% of these assets, reflecting the focus on sovereign and the upper level of subsovereign

entities. The next largest category is counterparties with a 20% risk weighting, these constitute 36% of

on-balance sheet assets. These are mainly municipalities and credit institutions without explicit central government

guarantees.

114


Risikoberichtbericht

The portfolio is broadly diversified with counterparties in over 40 countries. In order to ensure the top rating for the

Pfandbriefe and Asset Covered Security (“ACS”) cover pools and a high rating for the Bank, business is focused

on clients and counterparties with the highest credit standings. The geographical split of the assets of the Group

is as presented below.

Geographical concentrations of assets, liabilities and off-balance sheet items

At 31 December 2007 € m

Group Company

Total Total Credit Total Total Credit

assets liabilities commit- assets liabilities commitments

ments

Germany 28,002 18,119 440 13,776 11,119 411

Italy 26,600 183 1,794 18,484 185 1,794

France 7,575 15,486 673 3,846 13,303 254

United Kingdom 28,053 45,902 1,695 22,936 39,497 1,562

Spain 12,876 436 431 4,392 396 231

Austria 4,056 484 - 996 485 -

Greece 4,057 3 27 2,788 - -

Ireland 9,885 11,418 1,951 28,880 27,162 210

Other European countries 31,857 25,853 1,545 14,644 22,990 1,312

USA 40,445 27,339 18,383 19,210 20,422 18,202

Canada 6,865 479 182 4,650 453 185

Japan 7,941 9,350 133 7,399 9,534 133

Other Asian countries 1,273 863 68 915 874 18

Other countries 8,415 2,501 200 8,134 2,501 178

Shares in Group undertakings - - - 1,281 - -

Unallocated assets/ liabilities - 56,533 - - 602 -

Total 217,900 214,949 27,522 152,331 149,523 24,490

115


Group Accounts

At 31 December 2006 € m

The above noted information gives the amounts that the Group and Company regard as being their maximum

exposure to credit risk.

In preparing the above information, assets have been allocated geographically based on the location of the credit

risk. Liabilities are allocated on the basis of the location of the counterparty where this can be identified. Credit

commitments are allocated based on the location of the credit risk.

Included in unallocated liabilities are all debt securities in issue where the counterparty cannot be specifically

identified as the securities are transferable.

116

Group Company

Total Total Credit Total Total Credit

assets liabilities commit- assets liabilities commitments

ments

Germany 53,261 19,485 238 10,401 6,729 217

Italy 36,769 592 1,893 22,271 587 1,776

France 12,212 7,268 463 3,642 6,752 159

United Kingdom 16,278 40,222 1,258 11,854 35,267 1,258

Spain 12,818 384 535 4,460 384 157

Austria 8,235 152 - 1,074 98 -

Greece 9,235 95 - 3,939 95 -

Ireland 767 15,221 90 26,523 30,309 5

Other European countries 30,950 15,795 946 13,890 15,631 580

USA 25,177 21,250 18,501 17,244 20,286 18,501

Canada 5,387 2,281 313 3,333 2,281 313

Japan 6,726 4,712 19 5,913 4,712 19

Other Asian countries 2,545 1,143 - 1,839 1,010 -

Other countries 2,585 2,175 85 759 1,974 85

Shares in Group undertakings - - - 2,278 - -

Unallocated assets / liabilities - 89,393 - - 663 -

Total 222,945 220,168 24,341 129,420 126,778 23,070


Risikoberichtbericht

Assessing credit risk – the internal rating system in DEPFA

Credit scoring of counterparties is critical to DEPFA’s business, as a significant part of DEPFA’s population of

borrowers is unrated externally. The scoring model of the Bank is reviewed continuously. In recent years, DEPFA

moved to a unitary scoring system for its four main credit risk pools (sovereign, sub-sovereign, financial institutions

and infrastructure finance). Originally the unitary scoring model had 12 rating grades. The grading has now been

extended to 22 grades.

Internal ratings introduce a more accurate risk evaluation and specifically have been designed in preparation for the

implementation of the New Basel Accord. It is the intention of DEPFA to adopt the Internal Ratings Based Advanced

Approach and in this regard, the Bank has established an Internal Ratings Modeling team, who are

responsible for developing scoring models, individually tailored by country and exposure type, to help estimate

credit scores, and determine probability of default, for all DEPFA credit exposures.

DEPFA has developed four core 22-grade internal rating systems in line with each of its credit risk pools. Whilst the

scores are comparable to the grading system used by the External Credit Assessment Institutions (“ECAI”) and

DEPFA’s models map with a high level of significance to the ratings assigned by the ECAI, the equivalent risk of the

rating assigned from each of the four models is not comparable, but trans late into their own unique default and

recovery scales. Such unique default and recovery statistics have been validated through various default studies

provided by the ECAI.

All counterparties across all risk groups are graded in accordance with this system. The steps to assign and test

the robustness of the internal rating involve:

Grading individual counterparties through the analysis of balance sheet strength, the historic and budgeted

relationship of direct tax and central allocation (grant) revenues with expenses, the relationship of debt to

operating surpluses, indebtedness per capita, political stability and guarantee structures.

The analysis of the sub-sovereign legal framework including the delegation of powers from the sovereign and

financial and regulatory support of its activities.

Mapping internally derived ratings against the ECAI ratings for externally rated borrowers.

The rated clients and counterparties account for a very high proportion of DEPFA’s (excluding Hypo Public

Finance Bank (“HPFB”)) public sector asset volumes. Almost 33% of the portfolio of on-balance sheet interest

earning assets relates to counterparties with triple-A ratings by ECAI while a further 17% of assets relate to double-

A ratings by ECAI. 18% of the total portfolio is unrated by ECAI.

117


Group Accounts

The makeup of both the on-balance sheet and off-balance sheet exposures of both the Group and Company by

internal ratings categories is as illustrated below:

Group On-Balance Sheet December 2007

118

Financial Infrastructure Sub-

Institutions Finance Sovereign Sovereign Other* Total

AAA 0% 1% 2% 29% 2% 34%

AA1 1% 0% 0% 6% 0% 7%

AA2 1% 0% 11% 12% 0% 24%

AA3 2% 0% 0% 7% 0% 9%

A1 1% 0% 2% 4% 0% 7%

A2 1% 0% 2% 2% 0% 5%

A3 3% 0% 1% 1% 0% 5%

BBB1 0% 0% 0% 1% 0% 1%

BBB2 0% 1% 0% 0% 1% 2%

BBB3 0% 2% 0% 0% 0% 2%

Below BBB3 1% 1% 0% 1% 1% 4%

Group Off-Balance Sheet December 2007

Financial Infrastructure Sub-

Institutions Finance Sovereign Sovereign Other* Total

AAA 0% 1% 5% 23% 8% 37%

AA1 1% 0% 2% 5% 0% 8%

AA2 3% 0% 2% 9% 0% 14%

AA3 5% 0% 0% 10% 1% 16%

A1 6% 0% 0% 3% 1% 10%

A2 1% 0% 1% 1% 0% 3%

A3 1% 0% 0% 1% 1% 3%

BBB1 0% 2% 0% 0% 0% 2%

BBB2 1% 1% 0% 0% 0% 2%

BBB3 0% 2% 0% 0% 0% 2%

Below BBB3 0% 1% 0% 2% 0% 3%

* The “Other” category above comprises mainly those HPFB assets acquired which have not been allocated to the

other main DEPFA asset classes as at 31 December 2007.


Company On-Balance Sheet December 2007

Risikoberichtbericht

Financial Infrastructure Sub-

Institutions Finance Sovereign Sovereign Total

AAA 1% 2% 2% 30% 35%

AA1 1% 0% 0% 2% 3%

AA2 2% 0% 19% 8% 29%

AA3 1% 0% 0% 5% 6%

A1 1% 0% 2% 4% 7%

A2 0% 0% 2% 3% 5%

A3 4% 0% 1% 1% 6%

BBB1 0% 0% 1% 1% 2%

BBB2 1% 1% 0% 0% 2%

BBB3 0% 1% 0% 1% 2%

Below BBB3 1% 2% 0% 0% 3%

Company Off-Balance Sheet December 2007

Financial Infrastructure Sub-

Institutions Finance Sovereign Sovereign Total

AAA 0% 2% 7% 28% 37%

AA1 2% 0% 0% 5% 7%

AA2 3% 0% 2% 12% 17%

AA3 1% 0% 0% 12% 13%

A1 6% 0% 1% 3% 10%

A2 0% 0% 1% 1% 2%

A3 1% 0% 1% 1% 3%

BBB1 0% 0% 1% 1% 2%

BBB2 1% 1% 0% 1% 3%

BBB3 0% 1% 0% 1% 2%

Below BBB3 0% 1% 0% 3% 4%

119


Group Accounts

Group On-Balance Sheet December 2006

120

Financial Infrastructure Sub-

Institutions Finance Sovereign Sovereign Total

AAA 1% 0% 5% 33% 39%

AA1 1% 0% 0% 4% 5%

AA2 1% 0% 9% 18% 28%

AA3 1% 0% 1% 11% 13%

A1 0% 0% 4% 4% 8%

A2 0% 0% 2% 2% 4%

A3 0% 0% 1% 1% 2%

BBB1 0% 0% 0% 0% 0%

BBB2 0% 0% 0% 0% 0%

BBB3 0% 0% 0% 0% 0%

Below BBB3 0% 1% 0% 0% 1%

Group Off-Balance Sheet December 2006

Financial Infrastructure Sub-

Institutions Finance Sovereign Sovereign Total

AAA 0% 3% 0% 39% 42%

AA1 0% 0% 0% 7% 7%

AA2 0% 0% 2% 25% 27%

AA3 0% 1% 0% 12% 13%

A1 0% 0% 0% 2% 2%

A2 0% 0% 0% 1% 1%

A3 0% 1% 0% 2% 3%

BBB1 0% 2% 0% 0% 2%

BBB2 0% 0% 0% 0% 0%

BBB3 0% 2% 0% 0% 2%

Below BBB3 0% 1% 0% 0% 1%


Company On-Balance Sheet December 2006

Risikoberichtbericht

Financial Infrastructure Sub-

Institutions Finance Sovereign Sovereign Total

AAA 0% 1% 2% 32% 35%

AA1 1% 0% 0% 3% 4%

AA2 2% 0% 14% 14% 30%

AA3 1% 0% 3% 10% 14%

A1 0% 0% 4% 4% 8%

A2 0% 0% 3% 3% 6%

A3 0% 0% 1% 1% 2%

BBB1 0% 0% 0% 0% 0%

BBB2 0% 0% 0% 0% 0%

BBB3 0% 0% 0% 0% 0%

Below BBB3 0% 1% 0% 0% 1%

Company Off-Balance Sheet December 2006

Financial Infrastructure Sub-

Institutions Finance Sovereign Sovereign Total

AAA 0% 3% 0% 41% 44%

AA1 0% 0% 0% 7% 7%

AA2 0% 0% 2% 24% 26%

AA3 0% 1% 0% 11% 12%

A1 0% 0% 0% 2% 2%

A2 0% 0% 0% 1% 1%

A3 0% 1% 0% 2% 3%

BBB1 0% 2% 0% 0% 2%

BBB2 0% 0% 0% 0% 0%

BBB3 0% 2% 0% 0% 2%

Below BBB3 0% 1% 0% 0% 1%

121


Group Accounts

Financial Institutions Exposure

Included in the on-balance sheet interest earning assets portfolio descriptions above is an amount of €22 billion

relating to Group exposures to financial institution counterparties. Within the Group, on-balance sheet financial

institution counterparty risk arises from securities, money market transactions, sale and repurchase agreements

and derivatives.

Any existing netting master agreements and collateral agreements with business partners are taken into account

to adequately map counterparty risk. These agreements are used to reduce both the capital cover required and the

utilisation of bank-internal counterparty limits. DEPFA has a Group-wide counterparty limit system that directly

accesses the front-office system used by Treasury, providing real-time information on limits and limit utilisations.

Within the Group, financial institution counterparty business is geared towards high credit-quality counterparties.

The Credit Approval Process

The Group operates an independent credit approval process, which includes assessments by, and formal limit

recommendations from, those not involved in the business areas. The chart below sets out the initiation and

approval process for DEPFA for all four risk pools.

The allocation of an internal rating determines both the pricing and the potential exposure amount. The Credit

Committee operates on authority devolved to it by the Board of Directors and is empowered to set limits up to

prudent levels taking into account large exposure parameters. DEPFA subsidiaries operate their own credit

committees, which act on individual counterparty limits once Group approval is in place.

The Credit Process

122

Sovereign/

Country Risks

Sub-Sovereign Risks

Financial Institution

Risks

Infrastructure Finance

Risks

Country Risk Committee, Credit Risk Unit, Special Risk Unit: Assess, assign rating and

make recommendation for pre-approval limit, taking risk mitigation into account

Group Credit Committee: 5 voting members, not drawn from business area

Credit limit and Duration decision

Decision advised to various Group

entities and business units

Group Subsidiary Credit Committee decision

Minimum annual review of limit decision

(more frequent reviews as required)

Limits monitored for utilisation


DEPFA’s Counterparty Risk Pools

Risikoberichtbericht

1. Sovereign/Country Risk

Sovereign/Country risks are managed by the Country Risk Committee. Reviews of sovereign risks are carried out

at least annually, with detailed reports on the social, political and economic situation of all countries presented to

the Group Credit Committee for approval. All sovereign/countries are rated in accordance with the Group internal

rating grades. DEPFA currently has 94 countries rated for international business of which a limit has been established

for 90. Of these, 61 fall into A-rated cohorts. The Bank’s country exposure for countries rated below single-A

stood at 1.48% of the Group’s total cross border exposure as at 31 December 2007, with maximum limits available

of 1.5% of total Group country limits.

2. Sub-Sovereign Risk

The Credit Risk Unit, a specialised team of professionals based in Dublin, carries out sub-sovereign risk analysis.

This team is independent from business origination/relationship management. This unit is responsible for assessing

and rating (in accordance with the DEPFA internal grading system) the credit risk for all sub-sovereign entities.

The unit assesses the distinct characteristics of the country in which the sub-sovereign is located, especially those

characteristics related to intergovernmental arrangements. The unit also assesses political, demographic, economic,

fiscal and financial factors.

3. Financial Institution Risk

The Credit Risk Unit also carries out assessment of DEPFA’s exposure to financial institutions. Specialised professionals

work with the front office personnel to evaluate the credit risks involved in these counterparties. The approval

process applied is the same as for sub-sovereign counterparties. In addition, all financial institutions are rated

internally. All counterparties must have pre-approval limits in place as a prerequisite to conducting transactions with

DEPFA.

4. Infrastructure Finance Credit Risk

The Infrastructure Finance Unit (“IFU”), a team of project finance specialists and support staff, carries out trans -

action execution and portfolio management of all infrastructure loan assets. Project finance transactions are often

carried out in conjunction with other similarly experienced lenders (e.g. as a member of a syndicate of banks), thus

limiting DEPFA’s exposure on any one particular transaction.

A standard pre-condition for IFU participation in an infrastructure financing transaction is the ongoing involvement

of the public sector, most typically as the grantor of a long-term concession to a privately financed special purpose

company, and often as the payer of revenues (paid in return for the successful provision of the required service),

typically the main source of the loan repayment; or as a regulator (e.g. for utility companies).

In addition, the purpose of the financing must be for the provision of an essential public asset or service, which

could be reasonably expected to continue to be required even in times of budgetary cutbacks (such as schools,

hospitals, prisons, roads and water supply and treatment facilities).

Credit proposals put forward by the IFU are subject to an independent review by the Credit Risk Management

team. This unit makes an independent recommendation to the Credit Committee.

123


Group Accounts

When financing infrastructure projects, DEPFA generally requires the involvement of international financial institu -

tions, such as the European Investment Bank (“EIB”) or the European Bank for Reconstruction and Development

(“EBRD”) and leading local banks. While these institutions do not necessarily provide DEPFA with formal guarantees

for commercial or political risk, they do provide an implicit comfort that purely politically motivated

discriminatory action by the host government is unlikely due to the consequential damage to that government’s

ability to access future funding support from the international financial institutions.

There are standard internal procedures for the monitoring of, and reporting on, current loan transactions: for

projects during the construction phase, a report on progress is submitted to the Credit Committee every 6 months;

operational projects are subject to an annual review. The respective account managers in IFU liaise closely with an

independent engineer who is usually appointed by the lenders to monitor the project. This allows the Group to

follow progress closely and take remedial action, if necessary, to ensure that the project is completed on time and

to budget. IFU’s monitoring reviews are independently checked by the SRU to ensure that objectivity is maintained.

The concentration of credit risk by counterparty type for loans and advances to banks and customers, securities

and derivatives is summarised below:

Group Company

31 December 2007 31 December 2007

€ m Loans Securities Derivatives Total Loans Securities Derivatives Total

Public Authorities

Banks and Financial

116,901 41,168 132 158,201 64,240 30,237 130 94,607

institutions 14,619 7,186 7,858 29,663 30,158 2,871 8,631 41,660

Other 11,091 9,790 454 21,335 6,231 - 129 6,360

142,611 58,144 8,444 209,199 100,629 33,108 8,890 142,627

Group Company

31 December 2006 31 December 2006

€ m Loans Securities Derivatives Total Loans Securities Derivatives Total

Public Authorities

Banks and Financial

144,906 50,441 71 195,418 47,490 32,895 71 80,456

institutions 11,039 1,658 6,745 19,442 36,096 327 6,088 42,511

Other 5,856 274 64 6,194 2,306 - 64 2,370

161,801 52,373 6,880 221,054 85,892 33,222 6,223 125,337

124


Risikoberichtbericht

Credit Risk Management

The credit risk of DEPFA’s credit exposures is constantly monitored using tools such as “pre calculation models”.

Pre-calculation models are used to set management impetus in the individual financial statements which enable

risk-adequate margins to be established for new business or refinancing of existing transactions. These models

take into account funding cost, capital cost and general administrative expenses as well as potential credit risk

costs to cover expected and unexpected losses. For this purpose, for each individual exposure, an estimate is

made of the probability of default (PD) and also the loss ratio to be expected in the event of a default, the loss given

default (LGD).

Early recognition of potential problem loans can be described as a fundamental principle of our credit risk culture.

In addition, existing problem loans (sub-performing or non-performing loans) are intensively monitored and regularly

analysed. Early warning systems have been installed in order to ensure that loans which may be exposed to an

enhanced level of credit risk can be identified at an early stage. Affected exposures are placed on a “watch” list in

order to ensure that they are the subject of greater attention. The following table sets out the performance of loans

in the segments Budget Finance including Global Markets and Infrastructure Finance that are exposed to an

increased level of risk in relation to the overall credit portfolio as of 31 December 2007.

Budget Finance and Global Markets € m Infrastructure Finance € m

Watchlist 164 184

– Sub-performing 2 -

– Non-performing - 7

Loan loss provisions are made for all those assets where there is objective evidence that the asset or group of assets

is impaired due to a “loss event” and that event has an impact on the estimated future cash flows to be generated

by the asset or group of assets. No new loan loss provisions were created by DEPFA in 2007. An impairment

provision of €3m is carried against the above noted non-performing or impaired exposure.

125


Group Accounts

Loans and advances past due but not impaired

At 31 December 2007, the following amounts were noted by the Group as being past due. However, no impairment

provision was made against these amounts as the Group does not consider that there is any issue regarding their

recoverability. Such timing issues in receipts of payments due occur frequently in the normal course of business

and do not, by themselves impair the quality of the receivable. The total book value in relation to the amounts has

also been disclosed to put the size of the amounts in question into context.

Loans past due Loans and Loans and Available-

advances to advances to for-sale

Banks Customers Assets

€ m € m € m

Assets: past due but not impaired (due amount)

Past due but not impaired less than 90 days 5 19 4

Past due but not impaired between 3 months and 6 months 2 3 1

Past due but not impaired between 6 months and 1 year - 7 2

Past due but not impaired greater than 1 year - 1 1

Total 7 30 8

Assets: past due but not impaired (total investment)

Past due but not impaired less than 90 days 311 2,612 2,379

Past due but not impaired between 3 months and 6 months 412 2,394 25

Past due but not impaired between 6 months and 1 year - 1,258 483

Past due but not impaired greater than 1 year - 275 1,625

Total 723 6,539 4,512

Carrying amount of the individually assessed

impaired financial assets

Loans - 4 -

Other financial assets - - -

Total - 4 -

The Group has no assets that would have been impaired had they not been re-negotiated.

The Group did not obtain any assets by taking possession of collateral or calling on any other credit enhancements

in relation to the above outstanding amounts.

As at the date of signing the Financial Statements, the Group had received in full approximately 80% of the above

amounts outstanding. This evidences the Group´s view that such overdue amounts are the results of operational

timing issues and administrative difficulties in allocating payments and do not in any way represent credit concerns

on these assets.

126


Risikoberichtbericht

Further Credit risk mitigation techniques

The Group restricts its exposure to credit losses by entering into collateral support agreements and master netting

arrangements with counterparties with which it undertakes a significant volume of transactions. Under the terms of

the Collateral Support Agreement, in the event that the value of a counterparty’s derivative exposure to the Group

exceeds a defined limit, the counterparty must post collateral to the amount of the excess with the Group. In the

event of a default by the counterparty, the Group then has recourse to the collateral, up to the amount of the loss

suffered. Master netting arrangements do not generally result in an offset of balance sheet assets and liabilities, as

transactions are usually settled on a gross basis. However, the credit risk associated with favourable contracts is

reduced by a master netting arrangement to the extent that if an event of default occurs, all amounts with the

counterparty are terminated and settled on a net basis. The Group’s overall exposure to credit risk on derivative

instruments subject to master netting arrangements can change substantially within a short period, as it is

affected by each transaction subject to the arrangement.

The Group has transacted a number of credit derivatives that provide an economic hedge, to some of its public

sector credit exposure. As such instruments meet the accounting definition of a derivative, they have been

accounted for at fair value and the change in their fair value has been recognised through profit or loss.

The Group has also, as disclosed in note 34, accepted collateral in the form of securities to reduce the credit risk

on derivative assets with a positive market value.

3. Market Risk

Market risk refers to the risk of potential loss arising from changes in market data such as interest rates, credit

spreads, foreign currency exchange rates, equity prices, price or rate volatilities. DEPFA defines its market risk as

changes in fair value of financial instruments as a result of market related movements.

The Bank’s market risk policies and procedures follow three core principles:

Policy framework for all key market risk activities approved by the Board,

Market risk management is centralised in the Risk Management Committee (since DEPFA’s acquisition by the

HRE Group; until then in the Asset & Liability Committee) and the Treasury and product units, managed by

specialised personnel and monitored using appropriate systems and controls,

Market risk control function measures and monitors the risks independently of the risk-taking units.

The market risk control function has sub categorised market risk into risk factors. The relevant risk factors for

DEPFA are interest rate, credit spread and foreign exchange risk. As a bank focusing on public sector finance,

DEPFA is not generally exposed to equity or commodity risk. With regard to foreign exchange risk, DEPFA has a

policy that Treasury must match all foreign currency assets with liabilities in the same currency or swap out the foreign

exchange exposure. Only a limited foreign currency exposure is accepted in the emerging markets portfolio.

Hence, the primary risk factors for the Bank are interest rate and credit spread risk.

127


Group Accounts

For the quantification and control of these risks, DEPFA determines daily Value at Risk (VaR) figures in line with

industry wide practice using the variance/covariance methodology for both trading and banking books. The VaR

monitoring is based on a comprehensive risk factor set, consolidated across the Group, as well as broken down to

legal entity, portfolio and desk level. A ten-day holding period with a 99% confidence interval is used to derive the

calculation. Correlations and volatilities are calculated based on a history of 250 trading days. The ten-day holding

period was chosen to give a conservative VaR measure in relation to hedging the risk of the portfolio’s positions.

DEPFA recognises that variance/covariance VaR has certain inherent limitations. The past may not always provide

a reliable indicator of future market movements and moreover the statistical assumptions employed may understate

the probability of very large market moves. For this reason, additional management tools such as sensitivity

measures and stress testing are used to supplement VaR. Moreover, historical simulation VaR is used in trading

portfolios to supplement variance/covariance VaR. The VaR figures for DEPFA in 2007, with comparative figures for

2006 are as illustrated below.

2007 2006 2007 2006 2007 2006 2007 2006

Group € m 31 Dec 31 Dec Low Low Avg Avg High High

Interest Rate VaR 14 101 9 73 51 130 100 183

Foreign Exchange VaR 21 12 2 1 6 6 25 31

Credit Spread VaR 43 26 22 17 34 25 45 41

Total VaR 49 96 38 84 61 129 98 182

At 31 December 2007, DEPFA BANK plc sold DEPFA Deutsche Pfandbriefbank AG to Hypo Real Estate Holding

AG. At the same date, DEPFA BANK plc acquired Hypo Public Finance Bank (“HPFB”) from Hypo Real Estate

Holding AG. The above Group VaR numbers for the year ended 31 December 2007 include VaR contributed by

DEPFA Deutsche Pfandbriefbank AG and do not include VaR that would have been contributed by HPFB during

this time. For comparability the year end VaR numbers have also been presented on this basis. At 31 December

2007, the stand alone VaR of both HPFB and DEPFA Deutsche Pfandbriefbank AG was as noted below:

HPFB €m

Interest Rate VaR 5

Foreign Exchange VaR 2

Credit Spread VaR 43

Total VaR 44

128


DEPFA Deutsche Pfandbriefbank AG €m

Interest Rate VaR 3

Foreign Exchange VaR 0

Credit Spread VaR 1

Total VaR 4

Risikoberichtbericht

In relation to the above VaR figures for the Group, they do not include a credit spread VaR measure for the core

banking book assets. The VaR disclosed above, accords with the measures used to manage credit risk in the

Bank, as while credit spread VaR is used to manage credit spread risk on the trading portfolios, it is not used to

manage credit spread risk on the core banking book. In terms of the sensitivity of either profit or loss or equity to a

move in the credit spread of the core banking book assets, a 1 basis point change in the credit spread level of the

banking book counterparties, would have a nil effect on profit or loss and an effect on equity of €38 million. It

should be noted however, that such a calculation assumes that all assets experience a similar change in credit

spread moving in the same direction and at the same time.

DEPFA Trading book VaR

DEPFA introduced segmental reporting in 2006, grouping its business activities into Budget Finance, Infrastructure

Finance, Client Product Services and Global Markets. DEPFA’s trading portfolios belong to the Client Product

Services and the Global Markets segments. The table below shows VaR statistics for the year 2007 and the VaR

exposure on 31 December 2007 relating to the consolidated trading books of the Group. The average exposure in

the consolidated trading books of the Group amounted to €12.2 million and the total consolidated trading expo -

sure did not exceed €18.5 million throughout the year 2007. The table also compares the trading related VaR

exposure of the Group at the end of 2007 to the respective VaR exposure at the end of 2006. For consistency of

presentation, the trading book VaR figures below, include the VaR of DEPFA Deutsche Pfandbriefbank AG and

exclude that of HPFB.

Trading Book Risk

10 Day 99% VaR (. m)

Average 12.2

High 18.5

Low 6.5

31 December 2007 9.5

31 December 2006 8.0

129


Group Accounts

The following graph shows the evolution of the consolidated trading VaR profile of DEPFA’s trading books,

during 2007.

15

10

5

0

As can be seen above, the average monthly VaR (10 day, 99% confidence, in million EUR) varies around an overall

average of €12.2 million. Reports detailing the local and Group VaR as well as the limit utilisation are distributed

daily to senior management. The setting of risk limits is the responsibility of Risk Management Committee since the

acquisition of DEPFA by Hypo Real Estate Holding AG in October 2007, previously the responsibility of the Asset &

Liability Committee.

Validity of the VaR model – back testing for the trading books in DEPFA

The accuracy of the Group’s VaR model is calibrated by means of back testing to ensure the quality of the statistical

process. This process entails the comparison of changes in portfolio value incurred against the most likely

range of such changes forecast by the VaR model. Backtesting is based on 1 day 99 % VaR figures. In this case,

actual losses would not be expected to exceed the forecast by the VaR model on more than four occasions in any

one year (250 trading days). The graphical representation below shows the consolidated back-testing results for

DEPFA’s trading books in 2007.

130

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec


Risikoberichtbericht

As can be seen from the graph below there were only 2 backtesting exceptions for the trading books in 2007 (28

August and 21 December). Therefore, the number of observed exceptions did not exceed the number of 4 permissible

exceptions in a 1 year time range.

8

6

4

2

0

-2

-4

-6

-8

Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

daily P&L VaR 1 day -VaR 1 day

On balance sheet exposure to foreign exchange rate risk

The Group is exposed to the effects of fluctuations in the prevailing foreign currency exchange rates on its

financial position and cash flows. The table below summarises the Group’s exposure to foreign currency exchange

rate risk at 31 December. Included in the table are the Group’s assets and liabilities at carrying amounts, categorised

by currency.

131


Group Accounts

Concentrations of assets and liabilities

EUR USD JPY GBP Other Total

As at 31 December 2007 – Group . m

Total assets 126,325 52,832 9,963 16,512 12,268 217,900

Total liabilities 123,607 52,649 9,955 16,474 12,264 214,949

Net on-balance sheet position 2,718 183 8 38 4 2,951

EUR USD JPY GBP Other Total

As at 31 December 2006 – Group . m

Total assets 153,696 34,505 6,430 15,598 12,716 222,945

Total liabilities 150,927 34,492 6,420 15,548 12,781 220,168

Net on-balance sheet position 2,769 13 10 50 -65 2,777

EUR USD JPY GBP Other Total

As at 31 December 2007 – Company . m

Total assets 95,228 26,628 8,912 13,335 8,228 152,331

Total liabilities 92,468 26,622 8,914 13,319 8,200 149,523

Net on-balance sheet position 2,760 6 -2 16 28 2,808

EUR USD JPY GBP Other Total

As at 31 December 2006 – Company . m

Total assets 76,151 26,879 5,662 12,605 8,123 129,420

Total liabilities 73,538 26,862 5,664 12,595 8,119 126,778

Net on-balance sheet position 2,613 17 -2 10 4 2,642

4. Liquidity Risk

Liquidity risk is the risk that DEPFA will not have access to funding without incurring an excessive cost and as a

consequence will be unable to meet maturing liabilities, fund asset growth, meet contractual obligations or fund

unanticipated events. Liquidity risk arises from mismatches in the timing of cash flows between assets and the

liabilities funding those positions. Funding risk (which is a significant sub component of liquidity risk) arises when

the bank cannot access funding at a reasonable rate, with which to fund illiquid or non transferable asset positions.

Liquidity risk management

The management of the liquidity risk of the HRE Group is the joint responsibility of the HRE Group Asset and Liability

Committee (“ALCO”) as defined on page 113 and the HRE Group Risk Management Committee on page 112.

With specific regard to liquidity risk, the ALCO is responsible for:

The development and implementation of the HRE Group’s liquidity policy

The review and management of HRE Group liquidity

The review of liquidity scenario stress testing results

The review and approval of contingency funding plans

The setting of targets for the long and short term funding mix

The preparation of the annual funding and liquidity plan

132


The HRE Group risk management committee is responsible for:

The review of ALCO reports detailing compliance with liquidity limits

The review of the HRE Group’s liquidity policy

The review of the HRE Group’s funding position

Risikoberichtbericht

Liquidity risk management policies

The liquidity management process of the Group, that has been developed by the above risk management

framework includes the following liquidity policies:

DEPFA will, as a minimum, comply with limits set down by the Financial Regulator.

The notional amount of liquidity support facilities must not exceed EUR €20 billion.

The Bank must maintain sufficient liquid assets, to enable it to access funding sufficient to continue to fund the

balance sheet activities for a minimum of 20 days, should access to unsecured money markets or capital

markets be disrupted.

DEPFA has put in place and will continue to update contingency plans that address the strategy for handling

liquidity crises and include procedures for emergency situations.

Liquidity Risk Management through the DEPFA business model

Aspects of the business model of DEPFA, as they impact liquidity risk, are summarised through review of the

following characteristics of the Group’s balance sheet:

Credit quality of the Bank’s assets

Diversity of the sources of funds

Increased demand for collateral

Credit quality of the bank’s assets

DEPFA’s balance sheet is predominantly composed of highly rated assets of high credit quality. Some 34% of the

assets of DEPFA as at 31 December 2007 are AAA rated using internal ratings models whilst a further 40% are

AA rated. This reflects the concentration on public sector lending to the top tier of sovereigns and sub-sovereigns

(as defined in the credit risk section above). In general, the higher the rating of the asset base, the better the

access the Bank has to the secured short term funding markets, such as bilateral and tri-party repo markets and

the long term covered security market.

Diversity of the sources of funds

DEPFA has developed an extremely diversified source of funding, diversified both across maturities and currencies.

This reduces the reliance of the Group on any one source of funding and allows it flexibility in the event of an un -

anticipated market event in any one funding segment. DEPFA is a large issuer of Pfandbriefe and Asset Covered

Securities, which provide significant medium to long term financing to the Bank. The Group has also issued a

number of unsecured medium term notes (“MTNs”).

In the short term, the Bank is also active in the issuance of unsecured bearer bonds, promissory notes and

commercial paper (“CP”), repurchase agreements (“repos”) as well as participating in money market transactions.

Such products are traded across a variety of currencies. The Bank also receives deposits from other banks and

directly from institutional investors worldwide. Investor categories include central banks, state agencies,

supranationals, fund managers, insurance companies and corporates.

133


Group Accounts

Increased demand for collateral

As noted above, DEPFA has a comprehensive holding of highly rated unencumbered securities, which are

available for repo with financial counterparties or central banks. A surplus buffer of these assets is also available to

cover additional collateral calls that might be made on OTC derivative contracts.

The tables below analyse the Group’s assets and liabilities into relevant maturity groupings based on the remaining

period at balance sheet date to the contractual maturity date.

As at 31 December 2007 Up to 3 3-12 1-5 Over 5 Non-financial

– Group . m

Assets

months Months years years instruments Total

Cash and balances with central banks 8,388 29 9 - - 8,426

Loans and advances to banks 11,296 2,074 4,351 11,275 - 28,996

Trading assets 2,974 2,723 3,750 4,127 - 13,574

Derivative financial instruments

Other financial assets

639 476 991 6,338 - 8,444

at fair value through profit or loss 56 133 1,105 3,123 - 4,417

Loans and advances to customers 1,208 2,074 16,377 90,989 - 110,648

Investment securities – available-for-sale 700 2,569 4,760 35,091 - 43,120

Intangible assets - - - - 38 38

Property, plant and equipment - - - - 20 20

Deferred income tax assets - - - - 180 180

Other assets - - - - 37 37

Total assets 25,261 10,078 31,343 150,943 275 217,900

Deposits from banks 67,578 19,296 2,414 557 - 89,845

Other deposits

Derivative financial instruments

25,818 4,373 4 31 - 30,226

and other trading liabilities 2,616 1,646 4,251 10,390 - 18,903

Due to customers 5,964 1,017 2,743 808 - 10,532

Debt securities in issue 288 10,224 22,601 29,763 - 62,876

Other borrowed funds - - - 2,271 - 2,271

Other liabilities - - - - 124 124

Current income tax liabilities - - - - 10 10

Deferred income tax liabilities - - - - 161 161

Retirement benefit obligations - - - - 1 1

Total liabilities 102,264 36,556 32,013 43,820 296 214,949

Net liquidity gap -77,003 -26,478 -670 107,123 -21 2,951

134


Risikoberichtbericht

As at 31 December 2006 Up to 3 3-12 1-5 Over 5 Non-financial

– Group . m months Months years years instruments Total

Assets

Cash and balances with central banks 1,712 31 - - - 1,743

Loans and advances to banks 8,286 4,300 7,477 14,645 - 34,708

Trading assets 8 76 869 358 - 1,311

Derivative financial instruments

Other financial assets

572 230 1,702 4,376 - 6,880

at fair value through profit or loss 456 153 1,295 171 - 2,075

Loans and advances to customers 3,934 7,347 21,894 92,072 - 125,247

Investment securities – available-for-sale 840 2,112 6,531 41,350 - 50,833

Intangible assets - - - - 53 53

Property, plant and equipment - - - - 26 26

Deferred income tax assets - - - - 39 39

Other assets - - - - 30 30

Total assets 15,808 14,249 39,768 152,972 148 222,945

Deposits from banks 53,354 7,175 1,225 1,445 - 63,199

Other deposits

Derivative financial instruments

27,125 3,989 - 4 - 31,118

and other trading liabilities 690 430 2,085 9,378 - 12,583

Due to customers 4,786 1,186 1,379 553 - 7,904

Debt securities in issue 6,089 9,432 43,791 43,545 - 102,857

Other borrowed funds 1 - 851 1,281 - 2,133

Other liabilities - - - - 100 100

Current income tax liabilities - - - - 69 69

Deferred income tax liabilities - - - - 141 141

Retirement benefit obligations - - - - 64 64

Total liabilities 92,045 22,212 49,331 56,206 374 220,168

Net liquidity gap -76,237 -7,963 -9,563 96,766 -226 2,777

135


Group Accounts

As at 31 December 2007 Up to 3 3-12 1-5 Over 5 Non-financial

– Company . m months Months years years instruments Total

Assets

Cash and balances with central banks 8,305 29 - - - 8,334

Loans and advances to banks 25,068 4,243 3,876 7,122 - 40,309

Trading assets 27 8 422 90 - 547

Derivative financial instruments

Other financial assets

791 352 810 6,937 - 8,890

at fair value through profit or loss - - 112 2,596 - 2,708

Loans and advances to customers 939 993 6,579 51,008 - 59,519

Investment securities – available-for-sale 667 2,032 2,412 25,543 - 30,654

Shares in Group undertakings - - - - 1,281 1,281

Intangible assets - - - - 22 22

Property, plant and equipment - - - - 17 17

Deferred income tax assets - - - - 20 20

Other assets - - - - 30 30

Total assets 35,797 7,657 14,211 93,296 1,370 152,331

Deposits from banks 63,222 18,166 2,863 3,748 - 87,999

Other deposits

Derivative financial instruments

25,386 4,066 4 31 - 29,487

and other trading liabilities 281 338 1,047 8,962 - 10,628

Due to customers 6,156 1,058 2,855 840 - 10,909

Debt securities in issue 235 1,288 5,399 2,321 - 9,243

Other borrowed funds - - - 1,160 - 1,160

Other liabilities - - - - 78 78

Current income tax liabilities - - - - 3 3

Deferred income tax liabilities - - - - 15 15

Retirement benefit obligations - - - - 1 1

Total liabilities 95,280 24,916 12,168 17,062 97 149,523

Net liquidity gap -59,483 -17,259 2,043 76,234 1,273 2,808

136


Risikoberichtbericht

As at 31 December 2006 Up to 3 3-12 1-5 Over 5 Non-financial

– Company . m

Assets

months Months years years instruments Total

Cash and balances with central banks 1,673 26 - - - 1,699

Loans and advances to banks 28,974 3,132 2,605 10,309 - 45,020

Trading assets - - 461 286 - 747

Derivative financial instruments

Other financial assets

335 132 514 5,242 - 6,223

at fair value through profit or loss 227 153 - 1,466 - 1,846

Loans and advances to customers 1,029 1,231 6,254 30,512 - 39,026

Investment securities – available-for-sale 636 1,522 2,043 28,274 - 32,475

Shares in Group undertakings - - - - 2,278 2,278

Intangible assets - - - - 9 9

Property, plant and equipment - - - - 16 16

Deferred income tax assets - - - - 21 21

Other assets - - - - 60 60

Total assets 32,874 6,196 11,877 76,089 2,384 129,420

Deposits from banks 61,778 6,216 1,273 1,770 - 71,037

Other deposits

Derivative financial instruments

27,125 3,989 - 4 - 31,118

and other trading liabilities 415 149 839 7,861 - 9,264

Due to customers 4,559 1,001 1,334 433 - 7,327

Debt securities in issue 578 2,150 2,477 1,771 - 6,976

Other borrowed funds - - - 971 - 971

Other liabilities - - - - 51 51

Current income tax liabilities - - - - 12 12

Deferred income tax liabilities - - - - 19 19

Retirement benefit obligations - - - - 3 3

Total liabilities 94,455 13,505 5,923 12,810 85 126,778

Net liquidity gap -61,581 -7,309 5,954 63,279 2,299 2,642

The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental

to the liquidity management of the Group. The maturities of assets and liabilities and the ability to replace, at an

acceptable cost, interest-bearing liabilities as they mature are important factors in assessing the liquidity of the

Group and its exposure to changes in interest rates and exchange rates.

137


Group Accounts

The following tables provide a maturity analysis of the cash flows contractually due on financial liabilities of the

Bank, as at 31 December 2007 and 31 December 2006. The analysis has been performed on the basis of gross

cashflows due in the future. The effects of taking into account the time value of money by discounting these flows

are not reflected

Up to 3 3-12 1-5 Over 5

As at 31 December 2007 – Group months Months years years

Debt securities in issue 1,388 11,336 29,325 42,895

Deposits from banks 70,077 19,795 3,062 764

Due to customers 6,267 1,214 3,133 1,650

Other borrowed funds 96 55 604 6,603

Other deposits 25,856 4,380 9 63

Derivative financial instruments and other trading liabilities 5,949 1,797 677 11,246

Total Cash Flows 109,633 38,577 36,810 63,221

Up to 3 3-12 1-5 Over 5

As at 31 December 2006 – Group* months Months years years

Debt securities in issue 6,112 3,768 21,001 36,373

Deposits from banks 48,144 6,874 1,347 1,711

Due to customers 4,603 1,109 1,488 882

Other borrowed funds 5 62 266 3,247

Other deposits 27,241 4,071 - 4

Derivative financial instruments and other trading liabilities 493 620 2,445 13,547

Total Cash Flows 86,598 16,504 26,547 55,764

* For comparability with current year figures, the prior year figures have been presented excluding DEPFA Deutsche Pfandbriefbank

AG.

Up to 3 3-12 1-5 Over 5

As at 31 December 2007 – Company months Months years years

Debt securities in issue 349 1,472 5,922 4,056

Deposits from banks 63,771 18,551 3,250 4,124

Due to customers 6,216 1,214 3,130 1,609

Other borrowed funds 15 49 253 1,839

Other deposits 25,485 4,144 9 63

Derivative financial instruments and other trading liabilities 404 -244 -394 13,121

Total Cash Flows 96,240 25,186 12,170 24,812

Up to 3 3-12 1-5 Over 5

As at 31 December 2006 – Company months Months years years

Debt securities in issue 599 2,322 2,817 4,877

Deposits from banks 61,815 7,219 1,489 1,861

Due to customers 4,603 1,103 1,488 882

Other borrowed funds 7 39 184 1,510

Other deposits 27,241 4,071 - 4

Derivative financial instruments and other trading liabilities 884 -303 -1,135 15,735

Total Cash Flows 95,149 14,451 4,843 24,869

138


Risikoberichtbericht

5. Operational Risk

The Basel Committee on Banking Supervision defines Operational Risk for regulatory and supervisory purposes as:

"the risk of loss resulting from inadequate or failed internal processes, people and systems or from external

events".

The Group has adopted this definition.

The risk is associated with human error, systems failure, and inadequate controls and procedures. The definition

includes legal risk but excludes strategic and reputational risk.

Operational risk, if unmitigated, may result in unavailability of service, information deficiencies, financial loss,

increased costs, loss of professional reputation and failure to retain or increase market share.

Increasingly, banking regulators require management to be in a position to demonstrate to them that they have

implemented a structured and formal approach to the management and measurement of operational risk. The

specific requirements for this are incorporated in the Basel II Accord and the EU Capital Requirements Directive.

The Bank’s primary aim is the early identification, recording, assessment, monitoring, prevention and mitigation of

operational risk, as well as timely and meaningful management reporting. The Bank’s approach to operational risk

is not designed to completely eliminate risk per se but, rather, to try and minimise unexpected loss. The Bank’s

approach aims to ensure that it has sufficient information to make informed decisions about additional controls,

adjustments to controls, or other risk responses. The HRE Group CRO and the HRE Group Head of Operational

Risk, who reports to her, are responsible for the independence, objectivity and effectiveness of the Group’s

operational risk framework.

Operational risk is inherent in most aspects of the Bank’s activities and comprises a large number of disparate

risks. Whilst market and credit risk are often chosen for the prospect of gain, operational risk is normally accepted

as a necessary consequence of doing business. In comparison to market or credit risk, the sources of operational

risk are difficult to identify comprehensively and the amount of risk is also intrinsically difficult to measure. The Bank

therefore manages operational risk differently from market and credit risk. The Bank believes that effective management

of operational risks requires ownership by the management responsible for the relevant business process.

Operational risk is thus controlled through a network of controls, procedures, reports and responsibilities. Within

the Bank, each individual business area and management level takes responsibility for its own operational risks and

provides adequate resources and procedures for the management of those risks.

In addition, the Bank has established a central function that focuses on the coordination of consistent policy, tools

and practices throughout DEPFA for the management, measurement, monitoring and reporting of relevant operational

risks. This function is also responsible for the overall operational risk measurement methodology, and

knowledge and experience are shared throughout the Bank to maintain a coordinated approach. The Bank uses a

risk-based approach to the design and implementation of its internal control framework, and this prioritises its

focus on risks that are potentially high impact.

139


Group Accounts

The Bank utilises a number of firm-wide risk processes and tools for the management, measurement, monitoring

and reporting of operational risk. These include:

Operational risk self-assessments - based on the identification of threats to business processes, the impact of

those threats and the subsequent evaluation of controls in place to mitigate the risk;

Risk event management - the collection, reporting and analysis of internal risk event data enables the Bank to

identify weak controls, ineffective processes or activities, and poor systems; and ensures that the Bank takes

appropriate action to mitigate any exposures;

Key risk indicator reporting - provide potential early warning of increased risk associated with non-attainment of

control objectives.

Targeted risk reviews – in partnership with the business, examine in depth predefined key areas of risk and

provide recommendations for risk mitigation;

New Business - The Group’s New Business Process is key to the assessment and management of risks pertaining

to potential new business initiatives and is co-ordinated by the New Business function within HRE Group

Operational Risk.

The totality of this information is reviewed to determine the operational risk profile of the organisation and the

actions required to address specific issues. Regular reports are made to the HRE Group CRO and the HRE Group

Risk Management Committee to allow senior management and the HRE Management Board to assess DEPFA’s

overall operational risk profile.

6. Internal Audit

The Group Internal Audit (“GIA”) function of HRE Group is an independent organisational function whose purpose

is to promote a culture of efficient and effective management and controls within all entities and functions of the

HRE Group.

GIA helps the HRE Group accomplish its objectives by bringing a systematic and disciplined approach to evaluating

and improving the effectiveness of risk management procedures, internal control systems, information systems

and governance processes. GIA is responsible for carrying out audits worldwide in line with the Audit Charter and

the Annual Audit Plan.

GIA is split on a divisional basis, with the main DEPFA activities falling under the Public Sector & Infrastructure

Finance business line. The Divisional Head of GIA for Public Sector & Infrastructure Finance reports to the Head of

GIA and also acts as the Head of Internal Audit for DEPFA Bank plc and in this capacity reports to the Audit Committee

of DEPFA Bank plc.

GIA has staff based in Munich, Dublin, Eschborn and New York and as a result has good local knowledge of the

business and being part of a larger department is better able to share skills and expertise. All auditors are obliged

to follow professional standards on Internal Auditing.

140


Risikoberichtbericht

7. Compliance

The Compliance department in DEPFA oversees the adherence to the principles set out by the Irish Financial

Regulator in relation to the Code of Practice of Credit Institutions and any relevant requirements from regulators

in other jurisdictions. The department also supports the implementation of certain internal governance rules and

policies set by the Board of Directors.

The department is managed by the Head of Compliance who is based in Dublin, and who reports directly to the

Board of Directors. In addition to this reporting line, the Compliance department is strongly embedded in the Group

Compliance function of HRE Group to ensure a group wide approach on all Compliance affairs and to ensure the

adherence to German laws which are applicable for subsidiaries of a German regulated institution. Compliance

Officers located in each of DEPFA’s legal entities report directly to the Head of Compliance.

The Compliance department is responsible for ensuring compliance with the various rules, guidance and legislation

pertaining to an Irish regulated bank. In addition, as a subsidiary of a Bank located and regulated in Germany,

DEPFA must comply with all relevant regulations applicable to a subsidiary of a German-regulated bank.

The Compliance function is also responsible for compliance with regulations such as the Markets in Financial

Instruments Directive, and the Anti-Money Laundering and Counter Terrorist Financing policy of the Group. The

policy aims to reduce the risk of regulatory sanction and reputational risk inherent in the discovery of money

laundering within a bank.

Compliance is also responsible for monitoring the regulatory agenda of the Irish Financial Regulator and any

impending regulatory changes.

141


Group Accounts

4. Critical accounting estimates and judgements

The Group believes that of its significant accounting policies and estimates, the following may involve a higher

degree of judgement and complexity.

Fair value of financial instruments

Some of the Group’s financial instruments are carried at fair value, including derivatives, available-for-sale investments

and loans and assets and liabilities at fair value through profit or loss. Fair values are based on quoted

market prices or appropriate pricing models. Where models are used, the methodology is to calculate the expected

cash flows and discount these back to a present value. The models use independently sourced parameters

including interest rate yield curves, equity prices, option volatility and currency rates. The calculation of fair value for

any instrument may require adjustment to reflect credit and other risk (where not embedded in the model used)

which may not be directly observable in the market place. The valuation model used for a specific instrument, the

quality, timeliness and liquidity of market data and the source and quantum of other adjustments, all require the

exercise of judgement. The use of different models or other assumptions could result in changes in reported

financial results.

Investment securities

Investment securities are included as either available-for-sale investments or loans and receivables.

Available-for-sale investments are valued at fair value using market values where available. Where market values

are not available, fair values are represented by the use of other means such as price quotations for similar investments,

or pricing models.

Loans and receivables have fixed or determinable payments, recover substantially all of their initial investment other

than for reasons of credit and must not be quoted in an active market. Due to the specialised market in which the

Group operates and the fact that the majority of the Group’s securities trades are done on a bilateral basis,

judgement is required as to whether an active market may be held to exist in a security. Details of the fair value of

financial assets not carried at fair value in the financial statements are disclosed in Note 46. If an active market was

held to exist for these assets, the movement in fair value, net of tax, would be posted to equity.

The Group conducts regular impairment reviews of its available-for-sale portfolio and considers indicators such as

downgrades in credit ratings or breaches of covenants as well as the application of judgement in determining

whether creation of a provision is appropriate. The use of different models or other assumptions and methods with

respect to the valuation of investment securities could result in changes in reported financial results.

142


Risikoberichtbericht

Taxation

The taxation charge includes for amounts due to fiscal authorities in the various territories in which the Group

operates and includes estimates based on a judgement of the application of law and practice in certain cases to

determine the quantification of any liabilities arising. In arriving at such estimates, management assesses the

relative merits and risks of tax treatments assumed, taking into account statutory, judicial and regulatory guidance

and, where appropriate, external advice.

Impairment provisions

Where there is a risk that the Group will not receive full repayment of the amount advanced, provisions are made

in the financial statements to reduce the carrying value of loans and receivables to the amount expected to be

recovered. The estimation of credit losses is inherently uncertain and depends on many factors such as general

economic conditions, cash flows, structural changes and other external factors.

The calculation of specific provisions is based on discounted cash flows. Certain aspects of this process may

require estimation, such as the amounts and timing of future cash flows.

The Group considers that the provisions for impairment were adequate based on information available at that time.

However, actual losses may differ as a result of changes in the timing and amounts of cash flows or other economic

events.

Securitisations and special purpose vehicles

The Group sponsors the formation of special purpose vehicles (“SPVs”) primarily for the purpose of allowing clients

to hold investments, for securitisations transactions, and for buying or selling credit protection. The Group does not

consolidate SPVs that it does not control. As it can sometimes be difficult to determine whether the Group controls

the SPV, it makes judgements about its exposure to the risks and rewards, as well as its ability to make operational

decisions for the SPV in question.

143


Group Accounts

5. Business segments

The Group is organised on a worldwide basis into the following main business segments:

Budget Finance

The Budget Finance segment incorporates the traditional public finance lending business of DEPFA in the form of

bond and loan financing with public sector authorities. The Group does not take any interest rate risks within this

segment. It also includes all of the Group’s funding positions which are recharged to other segments at agreed

rates. Unhedged public sector loans and bonds are included in Global Markets.

Client Product Services

This area of business comprises the provision of various forms of balance sheet financing as well as off-balance

sheet products and services to customers. This segment relates specifically to derivative products, structured

transactions, securitisation and advisory services.

Global Markets

Global Markets consists of the Group´s unhedged loan and bond books and the Group´s trading activities.

Infrastructure Finance

Infrastructure Finance relates to financing of infrastructure projects. DEPFA focuses on essential infrastructure i.e.

roads, bridges, tunnels and public buildings.

Corporate Centre

This area contains overhead costs, project costs as well as surplus capital. In addition, the corporate centre

segment under discontinued operations includes the residual property portfolio of DEPFA Deutsche Pfand -

briefbank AG.

Segment assets and liabilities are those assets and liabilities that are directly attributable to the operating activities

of the segment.

Expenses incurred centrally, including expenses incurred by support, administrative and back office functions are

charged to the business segments where practical in accordance with their estimated proportionate share of overall

activities. Unallocated expenses are retained at the corporate centre.

The presentation below is for continuing operations. Discontinued operations segmental result is disclosed in Note

14 to the financial statements.

144


Risikoberichtbericht

Corporate

Infra- Client Centre/

Budget structure Product Global Consolida-

€ m Finance Finance Services Markets tion items Group

Net interest income 268 97 27 -50 -33 309

Non interest revenues 239 24 33 -72 -4 220

Total revenues 507 121 60 -122 -37 529

Total expenditure -92 -30 -48 -23 -179 -372

Impairment losses on loans and advances - - - - - -

Profit before tax 415 91 12 -145 -216 157

Taxation -29

Profit for the year 128

Balance sheet

Assets 162,163 12,505 14,141 28,740 351 217,900

Liabilities 160,723 11,716 14,037 28,152 321 214,949

Corporate

Infra- Client Centre/

Budget structure Product Global Consolida-

€ m Finance Finance Services Markets tion items Group

Net interest income 247 39 2 59 -33 314

Non interest revenues 169 16 59 85 7 336

Total revenues 416 55 61 144 -26 650

Total expenditure -73 -18 -21 -22 -66 -200

Impairment losses on loans and advances - - - - - -

Profit before tax 343 37 40 122 -92 450

Taxation -107

Profit for the year 343

Balance sheet

Assets 192,256 5,895 2,589 17,074 5,131 222,945

Liabilities 190,737 5,502 2,512 16,506 4,911 220,168

2007

2006

145


Group Accounts

The Group’s secondary segments are geographical in nature. For this purpose, a distinction is made between

”Ireland”, “Germany” and “Other” based on the registered office or location of the respective Group company or

branch office.

The calculation of results is based on the assumption that the Group companies in the region are legally independent

units responsible for their respective operations.

€ m

Revenues 2007

Ireland Germany Other Consolidation Total

(continuing operations) 523 9 155 -158 529

Total assets at 31 December 2007 209,299 4 31,454 -22,857 217,900

€ m

Revenues 2006

Ireland Germany Other Consolidation Total

(continuing operations) 503 1 152 -6 650

Total assets at 31 December 2006 154,936 63,916 22,657 -18,564 222,945

146


6. Net interest income

Interest and similar income

Risikoberichtbericht

Interest and similar income and interest expense and similar charges are generated by the following classes of

financial instruments

Interest income on impaired loans amounted to nil (2006: nil).

2007 2006

€ m € m

Loans and advances 4,809 3,618

Other lending business and money market transactions 850 545

Fixed income securities 1,167 1,434

Interest expense and similar charges

6,826 5,597

Asset covered bonds -1,429 -1,303

Other debt securities -442 -380

Borrowings -268 -152

Subordinated debt -89 -46

Other banking transactions -4,289 -3,402

Interest and similar income

-6,517 -5,283

2007 2006

€ m € m

Financial assets at fair value through profit or loss 120 21

Available-for-sale investment securities 1,167 1,434

Loans and advances 5,539 4,142

Interest expense and similar charges

6,826 5,597

Other financial liabilities -6,720 -4,918

Derivatives (net) 203 -365

-6,517 -5,283

147


Group Accounts

7. Net fee and commission income

Fee and commission income

None of the above fees arose on either trust or fiduciary activities that result in the holding or investing of assets on

behalf of individuals, trusts, retirement benefit plans, and other institutions.

None of the above fee income arose on instruments that have been designated at fair value through profit or loss.

8. Net trading income

9. Gains less losses from financial assets

Gain less losses from financial assets reflect income from the sale of non-trading book financial assets and

amounted to €218 million (2006: €159 million).

Gains and losses from financial assets can be split by IAS 39 category as follows:

148

2007 2006

€ m € m

Commission income from liquidity facilities 20 22

Other fees 29 18

Fee and commission expense

49 40

Fees paid -7 -6

-7 -6

2007 2006

€ m € m

Securities and derivatives held for trading -49 144

Foreign exchange transaction gains less losses -1 -3

-50 141

2007 2006

€ m € m

Financial assets at fair value through profit or loss - -

Available-for-sale investment securities 143 112

Loans and receivables 75 47

218 159


10. Other operating income

Other operating income consists mainly of gains on buy-backs of debt securities issued.

11. Operating expenses

Risikoberichtbericht

2007 2006

€ m € m

Other operating income 10 2

10 2

2007 2006

€ m € m

Staff costs (Note 12) -223 -127

Administrative expenses -135 -66

Depreciation and amortisation -10 -7

Other operating expenditure -4 -

-372 -200

Included in operating expenses are exceptional costs of €88 million (2006: nil) arising on the change of control

which took place during the year, analysed as follows:

Other administrative expenses consist mainly of professional fees incurred in relation to the change of control.

Operating expenses also include auditors’ remuneration of €2 million (2006: €2million) and operating lease rentals

of €12 million (2006: €11 million).

2007

Staff costs (note 12) 56

Administrative expenses 32

€ m

88

149


Group Accounts

12. Staff costs

The average number of persons employed by the Group during the year was 707 (2006: 580).

Included under wages and salaries is share compensation cost amounting to €73 million (2006: €31 million), of

which €39 million relates to the accelerated share scheme expense arising on the change of control.

In addition, included in staff costs for the current year are restructuring expenses of €17 million arising on the

change of control.

13. Taxation

2007 2006

€ m € m

Current tax -24 -79

Deferred tax -5 -28

-29 -107

Further information about deferred income tax is presented in Note 32. The tax on the Group’s profit before tax

differs from the theoretical amount that would arise using the basic tax rate of the parent as follows:

150

2007 2006

€ m € m

Wages and salaries -198 -115

Social security costs -17 -5

Pension costs:

– defined contribution plans -6 -4

– defined benefit plans (Note 33) -2 -3

-223 -127

2007 2006

€ m € m

Profit before tax 157 450

Tax calculated at a tax rate of 12.5% (2006: 12.5%) -20 -56

Effect of different tax rates in Ireland 11 -8

Effect of different tax rates in other countries -20 -43

Income tax expense -29 -107


Risikoberichtbericht

14. Result from discontinued operations

On 31 December 2007, the Group sold its wholly owned subsidiary DEPFA Deutsche Pfandbriefbank AG to

another HRE Group entity as part of a group restructuring. Cash consideration of €1,218 million was received for

net assets with a book value of €1,241 million, resulting in a loss on disposal of €23 million. This loss is not tax

deductible for Irish tax purposes so there is no related tax charge or credit.

2007 2006

€ m € m

Interest and similar income 2,676 3,069

Interest expense and similar charges -2,593 -2,958

Net interest income 83 111

Fee and commission income 2 1

Fee and commission expense -3 -3

Net fee and commission income -1 -2

Net trading income -2 -1

Gains less losses from financial assets 131 118

Other operating income 19 37

Total operating income 230 263

Operating expenses -32 -74

Net operating profit before impairment losses 198 189

Impairment losses on loans and advances - -

Operating Profit/Profit before taxation 198 189

Taxation 6 -6

Operating result from discontinued operations 204 183

Loss on disposal of discontinued operations -23 -

Result from discontinued operations 181 183

151


Group Accounts

The above income statement is analysed as follows:

Net interest income

152

2007 2006

Interest and similar income € m € m

Loans and advances 1,896 2,177

Other lending business and money market transactions 262 267

Fixed income securities 518 625

Interest expense and similar charges

2,676 3,069

Asset covered bonds -2,077 -2,224

Other debt securities -77 -92

Borrowing -28 -32

Subordinated debt -63 -65

Other banking transactions -348 -545

Net fee and commission income

-2,593 -2,958

2007 2006

Fee and commission income € m € m

Other fees 2 1

Fee and commission expense

2 1

Fees paid -3 -3

-3 -3

Net trading income 2007 2006

€ m € m

Securities and derivatives held for trading -1 1

Foreign exchange transaction gains less losses -1 -2

-2 -1

Other operating income 2007 2006

€ m € m

Intercompany recharges 4 2

Other operating income 15 35

19 37


Risikoberichtbericht

Operating expenses 2007 2006

€ m € m

Staff costs -13 -11

Administrative expenses -15 -17

Depreciation and amortisation -3 -2

Other operating expenditure -1 -44

-32 -74

Staff costs 2007 2006

€ m € m

Wages and salaries -12 -7

Social security costs

Pension costs

-1 -1

- defined benefit plans - -3

-13 -11

Taxation 2007 2006

€ m € m

Current tax 10 28

Deferred tax -4 -34

6 -6

153


Group Accounts

The segmental result from discontinued operations is analysed as follows:

2007

Infra- Client

Corporate

Centre/

Budget structure Product Global Consolida-

€ m Finance Finance Services Markets tion items Group

Net interest income 80 - - - 3 83

Non interest revenues 129 - - -2 20 147

Total revenues 209 - - -2 23 230

Total expenditure -11 -1 -3 - -40 -55

Impairment losses on loans and advances - - - - - -

Profit before tax 198 -1 -3 -2 -17 175

Taxation 6

Profit for the year 181

2006

Infra- Client

Corporate

Centre/

Budget structure Product Global Consolida-

€ m Finance Finance Services Markets tion items Group

Net interest income 109 - - - 2 111

Non interest revenues 114 - - - 38 152

Total revenues 223 - - - 40 263

Total expenditure -11 -1 -3 - -59 -74

Impairment losses on loans and advances - - - - - -

Profit before tax 212 -1 -3 - -19 189

Taxation -6

Profit for the year 183

154


Cashflows from discontinued operations consisted of the following:

The effects of the disposal on the financial position of the Group are as follows:

Risikoberichtbericht

2007 2006

€ m € m

Net cash from operating activities -66 -893

Net cash from investing activities 710 -6

Net cash from financing activities - -

644 -899

Cash and balances with central banks 42

Loans and advances to banks 11,220

Derivative financial instruments 2,161

Loans and advances to customers 31,168

Investment securities – available-for-sale 11,097

Intangible assets 46

Property, plant and equipment 5

Deferred income tax assets 9

Other assets 20

Deposits from banks -3,353

Derivative financial instruments and other trading liabilities -2,734

Due to customers -356

Debt securities in issue -45,703

Other borrowed funds -2,156

Other liabilities -24

Current income tax liabilities -60

Deferred income tax liabilities -82

Retirement benefit obligations -59

Net identifiable assets and liabilities 1,241

Consideration received in cash 1,218

Loss on disposal of discontinued operation -23

€ m

155


Group Accounts

15. Cash and balances with central banks

Balances with central banks other than

156

Group Company

2007 2006 2007 2006

€ m € m € m € m

mandatory reserve deposits 8,312 808 8,305 804

Mandatory reserve deposits with central banks 114 935 29 895

8,426 1,743 8,334 1,699

Mandatory reserve deposits are not available for use in the Group’s day to day operations.

16. Loans and advances to banks

Group Company

2007 2006 2007 2006

€ m € m € m € m

Public sector loans 15,017 23,669 10,383 8,924

Term deposits 484 2,641 4,362 1,955

Reverse repurchase agreements 6,242 1,574 6,264 1,371

Cash collateral 3,416 5,938 2,842 3,655

Other loans and advances 3,837 886 16,458 29,115

28,996 34,708 40,309 45,020

Of which due from group companies 1,824 - 16,209 28,582

Balances due from group companies in the Group balance sheet include amounts receivable from other HRE

Group entities.


17. Trading assets

18. Derivative financial instruments and other trading liabilities

Risikoberichtbericht

Group Company

2007 2006 2007 2006

€ m € m € m € m

Loans and advances 2,398 - 232 -

Debt securities 11,176 1,311 315 747

Total trading assets 13,574 1,311 547 747

Debt securities are analysed by counterparty as follows:

Group Company

2007 2006 2007 2006

Debt securities € m € m € m € m

Government and other public sector securities 2,187 1,311 197 747

Other securities 8,989 - 118 -

Total trading debt securities 11,176 1,311 315 747

Assets

Group Company

2007 2006 2007 2006

€ m € m € m € m

Derivatives 8,444 6,880 8,890 6,223

Liabilities

8,444 6,880 8,890 6,223

Derivatives 11,370 11,995 10,532 8,704

Short positions 7,533 588 96 560

18,903 12,583 10,628 9,264

157


Group Accounts

Derivatives are contracts or agreements whose values are determined on the basis of changes in an underlying,

such as interest rates, foreign exchange rates, securities prices, financial and commodity indices or other variables.

The timing of cash receipts and payments for derivatives is generally determined by contractual agreement.

Derivatives are either standardised contracts traded on exchanges or over-the-counter (OTC) contracts agreed

individually by the parties to the contract. Futures and certain options are examples of standard exchange-traded

derivatives. Forwards, swaps, and other option contracts are examples of OTC derivatives. OTC derivatives are not

freely tradable. In the normal course of business, however, they may be terminated or assigned to another

counterparty if the current party to the contract agrees.

Derivatives may be used for trading purposes or for risk management purposes. The Group uses derivative financial

instruments primarily as a means of hedging the risk associated with asset/liability management in the context

of interest bearing transactions. Interest rate derivatives are primarily entered into to hedge the fair value interest

rate risk in fixed-rate available-for-sale securities, loans extended, promissory note loans and debt securities in

issue. Derivatives are also entered into, to a smaller extent, for the purpose of hedging foreign currency risks.

Foreign exchange risks are primarily hedged by means of suitable fair value hedges for available-for-sale securities,

loans extended and debt securities in issue. However, some derivatives used for risk management purposes do not

qualify for hedge accounting and are therefore classified as part of the “trading portfolio” in the Group financial

statements.

Derivatives used by the Group include:

Interest rate and currency swaps

Interest rate futures, FRAs and interest rate options

Forward foreign exchange contracts

Credit default swaps

Interest rate swaps involve the exchange of fixed and variable rate interest payments between two parties at

specified times based on a common nominal amount and maturity date. The nominal amounts are normally not

exchanged.

Cross currency swaps have nominal amounts in two different currencies. The interest is paid in these two currencies.

An exchange of the nominal amount often takes place at the beginning and at the end of the contract.

Interest rate options are contracts that allow the purchaser to enter into contracts on financial instruments or to buy

or sell an underlying, at a specified price at a specified point of time. The option writer is obligated to buy, sell or

enter into a financial instrument, if the purchaser chooses to exercise the option. Option contracts purchased or

written by the Group include caps and floors, which are interest rate hedging instruments, as the agreed payment

covers the difference in interest between the agreed interest rate and the market rate. Exposure to current and

future movements in interest rates and the ability of the counterparties to meet the terms of the contracts represent

the primary risks associated with interest rate options.

158


Risikoberichtbericht

Futures are standardised exchange-traded contracts to receive or sell a specific financial instrument at a specific

future date and price. FRAs (forward rate agreements) provide for the payment or receipt of the difference between

a specified interest rate and reference rate at a future trade date. Interest rate risks reflect the material risks associated

with such contracts. Where these are OTC transactions, counterparty default risk also exists.

Forward foreign exchange contracts involve an agreement to exchange two currencies at a specific price and date

agreed in advance. Exposure to changes in foreign currency exchange rates and foreign interest rates and the

counterparty default risk are the primary risks associated with forward foreign exchange contracts.

Credit default swaps are contracts which transfer credit risk on an underlying reference asset or group of assets

from one party to another in exchange for a fee. The material risk from credit default swaps is exposure to changes

in the credit risk of the underlying reference asset and the ability of the counterparties to meet the terms of the

contracts.

The notional amounts of certain types of financial instruments provide a basis for comparison with instruments

recognised on the balance sheet but do not necessarily indicate the amounts of future cash flows involved or the

current fair value of the instruments and, therefore, do not indicate the Group’s exposure to credit or price risks.

The derivative instruments become favourable (assets) or unfavourable (liabilities) as a result of fluctuations in

market factors such as interest rates or foreign exchange rates relative to their terms. The aggregate contractual or

notional amount of derivative financial instruments on hand, the extent to which instruments are favourable or

unfavourable, and thus the aggregate fair values of derivative financial assets and liabilities, can fluctuate

significantly from time to time. The fair values of derivative instruments held are set out below.

159


Group Accounts

At 31 December 2007 Group Company

1) Derivatives held for trading

160

Fair values Fair values

Contract/ Contract/

notional notional

amount Assets Liabilities amount Assets Liabilities

€ m € m € m € m € m € m

Interest rate and currency swaps 203,106 4,275 3,974 269,450 6,787 6,515

Interest rate futures 4,685 10 1 2,453 4 -

Interest forward rate agreements 459 - - 459 - -

Interest rate options purchased 3,464 15 13 2,138 1 -

Interest rate options written 3,929 - 4 79 - 4

Other interest rate derivative contracts 6,093 18 14 286 2 -

Foreign exchange contracts 30,761 369 267 30,230 355 261

Credit derivatives 49,919 518 444 17,251 63 91

Other derivatives 1,601 7 50 - - -

2) Derivatives held for hedging

a) Derivatives designated as fair value hedges

304,017 5,212 4,767 322,346 7,212 6,871

Interest rate and currency swaps 162,355 3,184 6,098 68,536 1,678 3,169

Interest rate options purchased 221 - 1 - - -

Foreign exchange contracts 2,995 48 12 - - -

b) Derivatives designated as cash flow hedges

165,571 3,232 6,111 68,536 1,678 3,169

Interest rate and currency swaps 1,533 - 492 1,533 - 492

1,533 - 492 1,533 - 492

Total derivative assets/

(liabilities) held for hedging 167,104 3,232 6,603 70,069 1,678 3,661

Total recognised

derivative assets/(liabilities) 471,121 8,444 11,370 392,415 8,890 10,532


Risikoberichtbericht

At 31 December 2006 Group Company

1) Derivatives held for trading

Fair values Fair values

Contract/ Contract/

notional notional

amount Assets Liabilities amount Assets Liabilities

€ m € m € m € m € m € m

Interest rate and currency swaps 97,149 2,906 2,847 219,893 4,773 4,756

Interest rate futures 6,286 1 5 6,286 1 5

Interest rate options purchased 4,645 23 3 4,601 22 3

Interest rate options written 5,777 1 32 5,722 1 32

Other interest rate derivative contracts 3,043 18 3 2,822 18 3

Foreign exchange contracts 13,457 66 196 11,079 56 179

Credit derivatives 14,513 57 10 15,206 17 3

2) Derivatives held for hedging

a) Derivatives designated as fair value hedges

144,870 3,072 3,096 265,609 4,888 4,981

Interest rate and currency swaps 217,566 3,806 8,468 61,123 1,333 3,298

b) Derivatives designated as cash flow hedges

217,566 3,806 8,468 61,123 1,333 3,298

Interest rate and currency swaps 1,936 2 431 1,906 2 425

1,936 2 431 1,906 2 425

Total derivative assets/

(liabilities) held for hedging 219,502 3,808 8,899 63,029 1,335 3,723

Total recognised

derivative assets/(liabilities) 364,372 6,880 11,995 328,638 6,223 8,704

161


Group Accounts

19. Other financial assets at fair value through profit or loss

The loans and advances consist of a portfolio of loans that have been designated as at fair value through profit or

loss to reduce the measurement inconsistency with the relevant offsetting derivative, which is an economic hedge

of the position.

The portfolio of debt securities have also been designated at fair value through profit or loss to reduce the

measurement inconsistency with the relevant offsetting derivative, which is an economic hedge of the position.

In 2007, the loans and advances designated as at fair value through profit or loss had a fair value change of -€4

million attributable to a change in the credit risk of the asset (2006: nil). This was offset by a fair value move on the

credit derivative of €4 million.

The above change in the fair value of the loans and advances that is attributable to credit risk has been

determined as the amount of the change in the fair value that is not attributable to changes in market conditions

that give rise to market risk.

The Group regards the book value of the above loans and advances as the maximum exposure to credit risk on

these assets. This credit exposure is reduced by €564 million by the related credit derivative noted above.

20. Loans and advances to customers

162

Group Company

2007 2006 2007 2006

€ m € m € m € m

Loans and advances 569 551 569 569

Debt securities 3,848 1,524 2,139 1,277

4,417 2,075 2,708 1,846

Group Company

2007 2006 2007 2006

€ m € m € m € m

Public sector and infrastructure loans 109,696 123,417 59,503 39,028

Term deposits 671 1 10 1

Reverse repurchase agreements 9 6 9 -

Property loans 279 1,846 - -

110,655 125,270 59,522 39,029

Allowances for losses on loans and advances -7 -23 -3 -3

110,648 125,247 59,519 39,026

Of which due from group companies - - - -


Allowance for losses on loans and advances

Movement in allowance for losses on loans and advances:

The total allowance for losses on loans and advances is made up as follows:

Interest accrued on impaired loans at 31 December 2007 amounted to nil (2006: nil).

21. Investment securities available-for-sale

Risikoberichtbericht

Group Company

2007 2006 2007 2006

€ m € m € m € m

Balance at 1 January -23 -26 -3 -3

Impairment losses - - - -

Loan transfers - -3 - -

Disposal of discontinued operations 20 - - -

Acquisition under common control -4 - - -

Balance at 31 December -7 -23 -3 -3

Group Company

2007 2006 2007 2006

€ m € m € m € m

Public sector and infrastructure loans 7 3 3 3

Property loans - 20 - -

Securities available-for-sale

Debt securities – at fair value :

7 23 3 3

Group Company

2007 2006 2007 2006

€ m € m € m € m

– listed 37,228 41,276 27,346 27,047

– unlisted 5,891 9,537 3,307 5,408

Equity securities – at fair value:

– listed 1 - 1 -

– unlisted - 20 - 20

Total securities available-for-sale 43,120 50,833 30,654 32,475

Net gains on disposal of investment securities for the year amounted to €182 million (2006: €213 million).

163


Group Accounts

The movement in investment securities may be summarised as follows:

The investment securities balance at 31 December is analysed by counterparty risk below:

22. Shares in Group undertakings

164

Group Company Group Company

Available-for-sale

2007 2007 2006 2006

€ m € m € m € m

At 1 January 50,833 32,475 58,776 34,718

Exchange differences on monetary assets -1,060 -767 -1,250 -930

Additions 28,212 22,654 13,767 12,098

Acquisitions under common control (note 47) 8,332 - - -

Disposals (sale and redemption) -29,962 -22,385 - 18,989 -14,445

Gains/(losses) from changes in fair value -2,138 -1,323 -1,471 1,034

Disposal of discontinued operations -11,097 - - -

At 31 December 43,120 30,654 50,833 32,475

Group

2007 2006

€ m € m

AFS-debt AFS-equity Total AFS AFS-debt AFS-equity Total AFS

securities securities securities securities securities securities

Government bonds 34,025 - 34,025 45,820 - 45,820

Local government bonds 2,196 - 2,196 3,795 - 3,795

Other bonds and notes 6,898 1 6,899 1,198 20 1,218

Total 43,119 1 43,120 50,813 20 50,833

Company

2007 2006

€ m € m

AFS-debt AFS-equity Total AFS AFS-debt AFS-equity Total AFS

securities securities securities securities securities securities

Government bonds 28,188 - 28,188 30,352 - 30,352

Local government bonds 1,582 - 1,582 1,788 - 1,788

Other bonds and notes 883 1 884 315 20 335

Total 30,653 1 30,654 32,455 20 32,475

Company

2007 2006

€ m € m

At 1 January 2,278 2,305

Additions 949 -

Capital repayments -728 -

Impairment of investment - -27

Disposals -1,218 -

At 31 December 1,281 2,278


Shares in Group undertakings are included in the financial statements on a historical cost basis.

The Group undertakings at 31 December 2007 were:

Risikoberichtbericht

Name Principal Activity Country of Registered Office Share in

Incorporation Capital

DEPFA Bank Europe plc Public Finance Banking Ireland 1 Commons Street, Dublin 1, Ireland 100%

DEPFA Investment Bank Ltd Advisory services and placement of securities Cyprus 10 Diomidous Street, 2024 Nicosia, Cyprus 100%

DEPFA ACS Bank Issuance and ongoing administration

of asset covered securities

Ireland 1 Commons Street, Dublin 1, Ireland 100%

DEPFA First Albany Securities LLC Securities Broker/Dealer USA 623 Fifth Avenue,22nd Floor NY 10022, USA 100%

DEPFA Bank plc Purchase of shares for Incentive Jersey 1 Commons Street, Dublin 1, Ireland -

Deferred Stock Trust Compensation Programme

DEPFA Asset Management Asset management Romania 155 Calea Victoriei Street, 90%

Romania S.A. Building D1, Bucharest, Romania

DEPFA Royalty Management Ltd

(formerly DEPFA Asset

Management Ireland Ltd)

Dormant Ireland 1 Commons Street, Dublin 1, Ireland 100%

DEPFA International Holdings GmbH

(in liquidiation)

Holding Company Germany An der Welle 5, 60322 Frankfurt, Germany 100%

DEPFA Erste GmbH Dormant Germany An der Welle 5, 60322 Frankfurt, Germany 100%

Nebra Hold One Ltd

(formerly DEPFA Assurance Ltd)

Financial Guaranty (dormant) Ireland 1 Commons Street, Dublin 1, Ireland 100%

DEPFA Hold Six Ltd Holding Company Ireland 1 Commons Street, Dublin 1, Ireland 100%

DEPFA Ireland Holding Holding Company Ireland 1 Commons Street, Dublin 1, Ireland 100%

DEPFA Funding II LP Special purpose vehicle for Tier I Capital raising UK 105 Wigmore Street London W1U 1QY, UK 100%

DEPFA Funding III LP Special purpose vehicle for Tier I Capital raising UK 105 Wigmore Street London W1U 1QY, UK 100%

DEPFA Funding IV LP Special purpose vehicle for Tier I Capital raising UK 105 Wigmore Street London W1U 1QY, UK 100%

DEPFA Hold One Ltd Holding Company Ireland 1 Commons Street, Dublin 1, Ireland 100%

DEPFA Hold Two Ltd Holding Company Ireland 1 Commons Street, Dublin 1, Ireland 100%

DEPFA Hold Three Ltd Holding Company Ireland 1 Commons Street, Dublin 1, Ireland 100%

DEPFA Hold Four Ltd Holding Company Ireland 1 Commons Street, Dublin 1, Ireland 100%

DEPFA Holdings B.V Holding Company Netherlands Herengracht 551,1017 BW Amsterdam,Netherlands 100%

DBE Property Holdings Ltd Procurement of office equipment Ireland 1 Commons Street, Dublin 1, Ireland -

Depfa Bank Representaçoes Ltda Representation of Depfa Bank plc Brazil Av. Brig. Faria Lima, 201 13th Floor – 100%

in Brazil Suite 131, 05426-100 Sao Paulo, SP, Brazil

The India Dept Opportunities Investing in public sector Mauritius c/o International Fund Services Limited, IFS 100%

Fund Ltd securities in India Court, Twenty Eight, Cybercity, Ebene, Mauritius

Green Finance S.r.l Special purpose vehicle for Italy Via Eleonora Duse 53, 00197 Rome, -

lending business Italy

Third Essential Public Infrastructure Special purpose vehicle Germany c/o Wilmington Trust SP Services (Frankfurt) -

Capital GbmH for securitisation GmbH, Steinweg 3-5, 60313 Frankfurt, Germany

Hypo Public Finance Bank Public Finance Banking and Ireland 3 Harbourmaster Place, IFSC, Dublin 1, 99.99%

Capital Markets activities Ireland

Collineo Asset Asset management Germany Beishhoffstrasse 4, Dortmund 44137, 100%

Management GmbH Germany

Hypo Dublin Properties Ltd Property Management Services Ireland 3 Harbourmaster Place, IFSC, Dublin 1, Ireland 100%

Hypo Public Finance USA Inc. Public Finance Banking USA 522 Third Avenue, New York, NY 10017, USA 100%

Collineo Asset Management USA Inc. Asset management USA 522 Third Avenue, New York, NY 10017, USA 100%

Hypo Capital Markets Inc. Securities Broker/Dealer USA 522 Third Avenue, New York, NY 10017, USA 100%

Hypo Pfandbrief Bank International S.A. Public Finance Banking Luxembourg 4 Rue Alphonse Weicker, 2099 Luxembourg 99.99%

165


Group Accounts

23. Intangible assets

Other Other

intangible intangible

€ m Goodwill assets Total Goodwill assets Total

Cost Group Group Group Company Company Company

At 1 January 2006 51 4 55 7 3 10

Additions - 1 1 - - -

Disposals - -3 -3 - -1 -1

At 31 December 2006 51 2 53 7 2 9

Accumulated depreciation

At 1 January 2006 - - - - - -

Disposals - - - - - -

Amortisation charge for year - - - - - -

At 31 December 2006 - - - - - -

Net book value

At 31 December 2006 51 2 53 7 2 9

€ m

Cost

At 1 January 2007 51 2 53 7 2 9

Additions 9 6 15 10 6 16

Acquisition under common control 10 20 30 - - -

Disposals of discontinued operations -45 -1 -46 - - -

At 31 December 2007 25 27 52 17 8 25

Accumulated depreciation

At 1 January 2007 - - - - - -

Acquisition under common control - 10 10 - - -

Disposals of discontinued operations - - - - - -

Amortisation charge for year - 4 4 - 3 3

At 31 December 2007 - 14 14 - 3 3

Net book value

At 31 December 2007 25 13 38 17 5 22

166


24. Property, plant and equipment

Risikoberichtbericht

Land and Fixtures Land and Fixtures

€ m property and fittings Total property and fittings Total

Cost Group Group Group Company Company Company

At 1January 2006 2 43 45 - 28 28

Additions - 13 13 - 4 4

Disposals - -6 -6 - -2 -2

At 31 December 2006 2 50 52 - 30 30

Accumulated depreciation

At 1January 2006 - 21 21 - 10 10

Disposals - -4 -4 - -1 -1

Charge for year - 9 9 - 5 5

At 31 December 2006 - 26 26 - 14 14

Net book value

At 31 December 2006 2 24 26 - 16 16

€ m

Cost

At 1January 2007 2 50 52 - 30 30

Additions - 9 9 - 8 8

Acquisition under common control - 4 4 - - -

Disposals -2 -1 -3 - -1 -1

Disposal of discontinued operations - -11 -11 - - -

At 31 December 2007 - 51 51 - 37 37

Accumulated depreciation

At 1January 2007 - 26 26 - 14 14

Acquisition under common control - 2 2 - - -

Disposal of discontinued operations - -6 -6 - - -

Charge for year - 9 9 - 6 6

At 31 December 2007 - 31 31 - 20 20

Net book value

At 31 December 2007 - 20 20 - 17 17

167


Group Accounts

25. Other assets

Balances due from group companies in the Group balance sheet include amounts receivable from other entities in

the HRE Group.

26. Deposits from banks

Balances due to group companies in the Group balance sheet include amounts owed to other HRE Group entities.

27. Other deposits

Money market securities consist primarily of commercial paper issues and certificates of deposit.

28. Due to customers

168

Group Company

2007 2006 2007 2006

€ m € m € m € m

Accounts receivable and prepayments 2 2 1 20

Accrued income 2 1 1 1

Other 33 27 28 39

37 30 30 60

Of which due from group companies 3 - 16 20

Group Company

2007 2006 2007 2006

€ m € m € m € m

Term deposits 12,163 13,782 12,637 10,859

Call deposits 257 1,757 257 1,582

Repurchase agreements 60,777 42,477 50,389 39,345

Other liabilities 16,648 5,183 24,716 19,251

89,845 63,199 87,999 71,037

Of which due to group companies 2,714 - 11,494 15,501

Group Company

2007 2006 2007 2006

€ m € m € m € m

Money market securities 30,226 31,118 29,487 31,118

30,226 31,118 29,487 31,118

Group Company

2007 2006 2007 2006

€ m € m € m € m

Term deposits 6,700 4,728 6,700 4,421

Call deposits - 689 - 689

Repurchase agreements 255 85 204 85

Other liabilities 3,577 2,402 4,005 2,132

10,532 7,904 10,909 7,327

Of which due to group companies - - - -


29. Debt securities in issue

30. Other borrowed funds

Risikoberichtbericht

Group Company

2007 2006 2007 2006

€ m € m € m € m

Public sector covered bonds 51,359 93,440 - -

Other covered bonds 1,332 392 598 -

Other debt securities in issue 10,185 9,025 8,645 6,976

62,876 102,857 9,243 6,976

Group Company

2007 2006 2007 2006

€ m € m € m € m

Subordinated debt 2,271 1,186 1,160 971

Profit participation certificates - 947 - -

2,271 2,133 1,160 971

Of which due to group companies 511 - 630 471

The subordinated debt and profit participation certificates are analysed by nominal, maturity and interest rate

below:

Group

Interest rate % 2007 2006

Nominal € m Nominal € m

Subordinated notes

DEPFA Bank plc 15/12/15 Euribor + 0.2% 500 500

DEPFA Funding II LP, perpetual note 6.5% 400 400

DEPFA Funding III LP, perpetual note 7% until 2008, thereafter CMS 10 yr + 0.1% 300 300

DEPFA Funding IV LP, perpetual note 5.029% until 2017, thereafter Euribor + 1.87% 500 -

Hypo Public Finance Bank, perpetual note Euribor + 1% 360 -

Hypo Public Finance Bank, 28/11/16 Euribor + 0.52% 40 -

Hypo Public Finance Bank, 21/11/16 Euribor + 0.52% 110 -

Hypo Public Finance Bank, 18/05/26 6.800% 25 -

2,235 1,200

Profit participation certificates

1986 DEPFA Deutsche Pfandbriefbank AG 31/12/10 7.5% - 102

1994 DEPFA Deutsche Pfandbriefbank AG 31/12/08 6.5% - 256

1996 DEPFA Deutsche Pfandbriefbank AG 31/12/11 7.65% - 383

2000 DEPFA Deutsche Pfandbriefbank AG from 31/12/09 7.44-7.56% - 45

2003 DEPFA Deutsche Pfandbriefbank AG from 31/12/09 7.75-7.82% - 77

- 863

2,235 2,063

The Group has not had any defaults of principal, interest or redemption amounts during the period on its borrowed

funds (2006: nil).

169


Group Accounts

31. Other liabilities

Balances due to group companies in the Group balance sheet include amounts payable to other entities in the HRE

Group.

32. Deferred income tax

Deferred income taxes are calculated on all temporary differences under the liability method using the effective tax

rate in the relevant jurisdiction.

Deferred tax balances consist of the following:

The movement on the deferred income tax account is as follows:

170

Group Company

2007 2006 2007 2006

€ m € m € m € m

Creditors 1 64 1 38

Accruals 87 15 59 3

Other 36 21 18 10

124 100 78 51

Of which due to group companies 2 - 1 3

Group Company

2007 2006 2007 2006

€ m € m € m € m

Deferred tax assets 180 39 20 21

Deferred tax liabilities -161 -141 -15 -19

Net deferred tax balance 19 -102 5 2

Group Company

2007 2006 2007 2006

€ m € m € m € m

At 1 January -102 -58 2 7

Income statement charge -9 -62 -5 -7

Acquisition under common control 19 - - -

Disposal of subsidiary 73 - - -

Fair value measurement on AFS securities 37 18 8 2

Fair value measurement on cash-flow hedges 1 - - -

At 31 December 19 -102 5 2


Deferred income tax assets and liabilities are attributable

to the following items:

The deferred tax charge in the income statement comprises

the following temporary differences:

Risikoberichtbericht

Deferred income tax assets are recognised for tax losses carried forward only to the extent that realisation of the

related tax benefit is probable.

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax

assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority.

There are no unremitted earnings of subsidiaries (2006: €576 million) on which withholding taxes or other taxes would

be payable and as such, no deferred income tax liabilities have been established at 31 December 2007 (2006: nil).

33. Retirement benefit obligations

Amounts recognised in the balance sheet:

The amounts recognised in the balance sheet are

determined as follows:

Group Company

2007 2006 2007 2006

€ m € m € m € m

Fair value hedges 1 -3 - -

Derivatives valuation -4 -95 -4 -3

Unrealised (gains)/losses on AFS securities 26 -20 13 4

Pensions - 6 - -

Cash-flow hedges - -1 - -

Tax losses carried forward 6 1 - -

Other temporary differences -10 10 -4 1

19 -102 5 2

2007 2006

€ m € m

Fair value hedges -1 8

Derivatives 6 -43

Cash-flow hedges - -

Pensions -2 -1

Tax losses carried forward 1 -3

Other temporary differences -13 -23

-9 -62

Group Company

2007 2006 2007 2006

€ m € m € m € m

Pension schemes – defined benefit 1 64 1 3

1 64 1 3

Group Company

2007 2006 2007 2006

€ m € m € m € m

Present value of unfunded obligations 1 64 1 3

Liability in the balance sheet 1 64 1 3

171


Group Accounts

The amounts recognised in the income statement are as follows:

Group

2007 2006

€ m € m

Current service cost 1 1

Interest cost 3 2

Net actuarial (gains)/ losses recognised in year -2 3

Total included in staff costs 2 6

Movement in the liability recognised in the balance sheet:

The principal actuarial assumptions used were as follows:

An actuarial valuation of the scheme is undertaken annually. Mortality rates are calculated based on the Heubeck

tables of 2005.

34. Contingent liabilities and commitments

(a) Contingent liabilities

172

Group Company

2007 2006 2007 2006

€ m € m € m € m

At 1 January 64 63 3 5

Total expense 2 6 3 1

Transfer from group company - - - -3

Transfer to group company -59 - -5 -

Contributions paid -6 -5 - -

At 31 December 1 64 1 3

Group Company

2007 2006 2007 2006

Discount rate 5.30% 4.25% 5.30% 4.50%

Future salary increases 2.50% 2.00% 2.50% 2.00%

Inflation rate 2.00% 1.75% 2.00% 1.75%

Group Company

2007 2006 2007 2006

€ m € m € m € m

Contingent liabilities & indemnity agreements 60 23 - -


(b) Loan commitments

Risikoberichtbericht

(c) Assets pledged

Pledged assets for which the counterparty has the right to sell or re-pledge the assets are disclosed in note 35.

In addition, at the balance sheet date, restricted assets consisting of investment securities and loans in the amount

of €57 billion (2006: €98 billion) were entered on a trustee register as collateral for covered bonds.

The Group has accepted collateral that it is permitted to sell or re-pledge in connection with reverse repurchase

transactions and as collateral for swap agreements. The fair value of the collateral accepted is €8,162 million (2006:

€1,408 million).

The Group has also accepted cost collateral as disclosed in note 16.

(d) Operating lease commitments

Where a group company is the lessee, the future minimum lease payments under non-cancellable building operating

leases are as follows:

Group Company

2007 2006 2007 2006

€ m € m € m € m

No later than 1 year 10 10 10 8

Later than 1 year and no later than 5 years 32 29 32 24

Later than 5 years 51 56 51 56

93 95 93 88

35. Pledged assets

Group Company

2007 2006 2007 2006

€ m € m € m € m

Irrevocable undrawn loan commitments 9,306 8,833 8,082 7,562

Revocable undrawn loan commitments 18,216 15,508 16,408 15,508

Total loan commitments 27,522 24,341 24,490 23,070

Group

2007 2006

Related Related

Asset liability Asset liability

€ m € m € m € m

Loans and advances to banks 7,729 7,629 5,349 4,979

Trading assets 3,230 3,128 - -

Loans and advances to customers 22,459 22,405 10,000 9,778

Investment securities 32,081 29,848 30,649 28,573

Total 65,499 63,010 45,998 43,330

173


Group Accounts

Pledged assets consist of assets pledged under repurchase agreements and as collateral for swap agreements.

36. Own shares and Incentive Compensation Programme

In 2002, the Group established an Incentive Compensation Programme (“the scheme”) under which its Compensation

Committee was entitled to make awards of restricted shares to employees and Directors of DEPFA. In

conjunction with the formation of the scheme, the Group established a Trust that was used to purchase shares of

DEPFA BANK plc with funds provided by the Group. Shares purchased were held for the benefit of employees until

the satisfaction of the associated vesting requirements. The rules of the scheme were that the shares vested over

a specified period or on change of control of the Group.

As a result of the acquisition of the Group by Hypo Real Estate Holding AG on 2nd October 2007, all shares awarded

to employees of the Group vested in full. However there were 1,115,871 DEPFA BANK plc shares held in the

Trust which were not allocated under share awards to Group employees. On the change of control, the Trust received

€6.80 and .189 shares in Hypo Real Estate Holding AG for each of the DEPFA shares held by Trust. As a result,

the Trust acquired 211,896 shares in Hypo Real Estate Holding AG. Of these shares 181,820 were awarded to

employees of the Group. These shares will vest in full in February 2009.

These shares are held by the Trust until the specified vesting conditions are satisfied. The restricted shares carry

no voting rights, but are entitled to receive dividends as and when declared. Restricted shares are awarded for no

consideration, and are subject only to continued employment over the vesting period.

On 31 December 2007 the Trust held 211,896 Hypo Real Estate Holding AG shares (2006: 8,736,288 DEPFA

BANK plc shares) on behalf of the Group employees and Directors. These shares had a fair value of €8 million at

31 December 2007 (2006: €118 million for shares held in DEPFA BANK plc).

Details of the share awards of DEPFA BANK plc shares under the compensation scheme are as follows:

Award date No. of DEPFA BANK plc Weighted average grant date fair value

shares awarded € m

2003 4,521,000 18

2004 3,280,100 38

2005 2,539,344 31

2006 1,965,505 27

2007 4,191,171 57

Total 16,497,120 171

174

Company

2007 2006

Related Related

Asset liability Asset liability

€ m € m € m € m

Loans and advances to banks 7,340 7,232 4,427 4,111

Loans and advances to customers 21,401 21,390 9,537 9,343

Investment securities 28,447 26,225 28,960 26,868

Total 57,188 54,847 42,924 40,322


Details of the share awards of Hypo Real Estate Holding AG shares are as follows:

The total compensation cost recognised to date amounts to:

Risikoberichtbericht

Award date No. of Hypo Real Estate Holding AG Weighted average grant date fair value

shares awarded € m

2007 181,820 8

Total 181,820 8

Year ended Compensation cost recognised

The fair value of employee services received is measured by reference to the fair value of the shares awarded at the

award date.

Included in the share expense for the current year is an amount of €39 million arising from an acceleration of the

share expense due to the change of control during the year.

The movement on own shares held in the Trust during the year is as follows:

DEPFA BANK plc Hypo Real Estate Holding AG

shares shares

€ m € m

2003 10 -

2004 27 -

2005 32 -

2006 31 -

2007 73 1

Total 173 1

No. of shares Cost of shares

€ m

Own shares held 1 January 2007 8,736,288 94

Purchased in year 725,390 9

Vested in year -8,345,807 -88

Reissued in year -1,115,871 -15

Own shares held 31 December 2007 - -

175


Group Accounts

37. Share capital and share premium

The total authorised number of ordinary shares at year end was: 433,333,340 (2006: 433,333,340) with a par value

of €0.30 per share (2006: €0.30 per share). All issued shares are fully paid.

The total authorised number of non-cumulative redeemable preference shares at year end was 10,000,000 (2006:

10,000,000) with a par value of €0.01 per share (2006: €0.01 per share). No non-cumulative redeemable

preference shares have been issued to date.

On 2 October 2007, the Group was party to a scheme of arrangement under Section 201 of 1963 Companies Act.

The scheme involved an application by the Company to the Irish Court to sanction the scheme where by the

existing shares of the Company were cancelled pursuant to Sections 72 and 74 of the Act. The reserve arising from

the cancellation of these shares was capitalised by being used to issue fully paid new shares in the Group to Hypo

Real Estate Holding AG.

38. Capital reserve

The capital reserve is non-distributable.

39. Retained earnings

The Group has availed of the exemption in Regulation 5 of the European Communities (Credit Institution: accounts)

Regulations 1992. Accordingly, the income statement of the Group is not shown.

176

Group and Company

Number of Ordinary Share

shares in issue shares premium Total

€ m € m € m € m

At 31 December 2006 353,019,720 106 1,142 1,248

At 31 December 2007 353,019,720 106 1,142 1,248

Group Company

2007 2006 2007 2006

€ m € m € m € m

At 1 January - - 903 903

Capital contribution 200 - 200 -

At 31 December 200 - 1,103 903

Group Company

2007 2006 2007 2006

€ m € m € m € m

At 1 January 1,402 940 433 97

Net profit for year 309 526 97 400

Dividends -138 -86 -138 -86

Purchase of shares for compensation scheme -9 -9 -9 -9

Share compensation scheme 73 31 73 31

Reissue of shares 16 - 16 -

Merger reserve on acquisition under common control (note 47) -133 - - -

At 31 December 1,520 1,402 472 433


40. Other reserves

Unrealised gains/(losses) from available-for-sale

investment securities

Risikoberichtbericht

Group Company

2007 2006 2007 2006

€ m € m € m € m

At 1 January 125 114 58 26

Net gain/(loss) from changes in fair value, net of tax 37 173 59 122

Net (gains)/losses transferred to net profit, net of tax -177 -162 -132 -90

At 31 December -15 125 -15 58

Accumulated currency translation reserve

Group Company

2007 2006 2007 2006

€ m € m € m € m

Unrealised gains/(losses) from cash flow hedges

Unrealised gains/(losses) from available-for-sale

- 2 - -

investment securities -15 125 -15 58

Accumulated currency translation reserve -2 - - -

Total other reserves at 31 December -17 127 -15 58

Group Company

2007 2006 2007 2006

€ m € m € m € m

Unrealised gains/(losses) from cash flow hedges

At 1 January 2 2 - -

Net gain/(loss) from changes in fair value, net of tax -63 -206 -62 -162

Net (gains)/losses transferred to net profit, net of tax 61 206 62 162

At 31 December - 2 - -

Group Company

2007 2006 2007 2006

€ m € m € m € m

At 1 January - - - -

Net gain/(loss) from currency translation -2 - - -

At 31 December -2 - - -

177


Group Accounts

41. Deferred day one profit or loss

Movements of deferred day one profit and loss from the acquisition of certain derivatives were as follows:

42. Dividends per share

Final dividends are not accounted for until they have been ratified at the Annual General Meeting.

No dividend is proposed for the year ended 2007.

43. Cash and cash equivalents

For the purposes of the cash flow statement, cash and cash equivalents comprise the following balances with less

than three months’ maturity from the date of acquisition.

44. Hedges

Fair value hedges

The Group hedges substantially all of the fixed interest rate risk in its long term financial assets and financial liabilities,

through fair value hedges using a variety of interest rate derivatives. The Group also hedges foreign exchange

risk using a variety of foreign exchange derivatives. The net fair value of these derivatives at 31 December 2007

was -€2,879 million (2006: -€4,462 million).

Cash flow hedges

The Group also hedges a portion of the cash flow interest rate and foreign currency risk, arising on future payments

and receipts on variable rate assets and liabilities. The Group manages this risk through the use of cross currency

interest rate swaps. The net fair value of these derivatives at 31 December 2007 was -€492 million (2006: -€429

million). The ineffectiveness recognised in profit or loss from the application of hedge accounting to these positions

was nil (2006 nil).

The Group’s policies and objectives in managing the risks that arise in connection with the use of financial

instruments are set out in the Directors’ Report on pages 78 to 83.

178

Group Company

2007 2006 2007 2006

€ m € m € m € m

At 1 January 15 - 15 -

Arising from new transactions 45 48 45 48

Released to profit or loss during the period -18 -33 -18 -33

At 31 December 42 15 42 15

Group Company

2007 2006 2007 2006

€ m € m € m € m

Cash and balances with central banks 8,312 808 8,305 804

Loans and advances to banks 10,602 4,140 8,451 3,100

18,914 4,948 16,756 3,904


Risikoberichtbericht

45. Fair values of financial assets and liabilities

The following table summarises the carrying amounts and fair values of those financial assets and liabilities not

presented on the Group’s balance sheet at their fair value. Bid prices are used to estimate fair values of assets,

whereas offer prices are applied for liabilities.

Group

Carrying value Fair value

2007 2006 2007 2006

€ m € m € m € m

Financial assets

Cash and balances with central banks 8,426 1,743 8,426 1,743

Loans and advances to banks 28,996 34,708 28,496 34,679

Loans and advances to customers 110,648 125,247 109,979 125,663

Financial liabilities

Deposits from banks 89,845 63,199 89,844 63,202

Other deposits 30,226 31,118 30,226 31,118

Due to customers 10,532 7,904 10,539 7,900

Debt securities in issue 62,876 102,857 62,667 103,086

Other borrowed funds 2,271 2,133 2,052 2,189

Company

Carrying value Fair value

2007 2006 2007 2006

€ m € m € m € m

Financial assets

Cash and balances with central banks 8,334 1,699 8,334 1,699

Loans and advances to banks 40,309 45,020 39,856 44,916

Loans and advances to customers 59,519 39,026 59,149 39,005

Financial liabilities

Deposits from banks 87,999 71,037 87,999 71,038

Other deposits 29,487 31,118 29,487 31,118

Due to customers 10,909 7,327 10,916 7,327

Debt securities in issue 9,243 6,976 9,115 6,975

Other borrowed funds 1,160 971 1,139 971

a) Deposits from banks/due to customers

The fair value of floating due to customers rate placements and overnight deposits is their carrying amount. The

estimated fair value of fixed interest bearing deposits is based on discounted cash flows using prevailing money

market interest rates for debts with similar credit risk and remaining maturity.

179


Group Accounts

b) Loans and advances to banks and customers

Loans and advances are net of provisions for impairment. The estimated fair value of loans and advances represents

the discounted amount of estimated future cash flows expected to be received. Expected cash flows are

discounted at current market rates to determine fair value.

c) Deposits and borrowings

The estimated fair value of deposits with no stated maturity, which includes non interest bearing deposits, is the

amount repayable on demand. The estimated fair value of fixed interest bearing deposits and other borrowings

without a quoted market price is based on discounted cash flows using interest rates for new debts with similar

remaining maturity.

d) Debt securities in issue

The aggregate fair values are calculated based on quoted market prices. For those notes where quoted market

prices are not available, a discounted cash flow model is used based on a current yield curve appropriate for the

remaining term to maturity for a similar credit rating.

46. Gains and losses from fair value adjustments for recognised assets and liabilities

The following table details the gains and losses from fair value adjustments relating to available-for-sale investment

securities, financial assets at fair value through profit or loss, and from hedge accounting:

Group 2007

Financial

Fair value AFS instruments Total fair

hedge investment at fair value value

accounting securities through P&L adjustments

Assets € m € m € m € m

Loans and advances to banks -491 - - -491

Other financial instruments at fair value through profit or loss - - -634 -634

Loans and advances to customers 1,303 - - 1,303

Investment securities – available-for-sale -420 -188 - -608

Total assets 392 -188 -634 -430

Liabilities

Deposits from banks 63 - - 63

Other deposits 5 - - 5

Due to customers -426 - - -426

Debt securities in issue -589 - - -589

Other borrowed funds -27 - - -27

Total liabilities -974 - - -974

Hedging instruments -1,336 - 620 -716

Net equity (pre-tax) 30 -188 -14 -172

180


Company 2007

Risikoberichtbericht

Financial

Fair value AFS instruments Total fair

hedge investment at fair value value

accounting securities through P&L adjustments

Assets € m € m € m € m

Loans and advances to banks -379 - - -379

Other financial instruments at fair value through profit or loss - - -634 -634

Loans and advances to customers 1,882 - - 1,882

Investment securities – available-for-sale 177 -84 - 93

Total assets 1,680 -84 -634 962

Liabilities

Group 2006

Financial

Fair value AFS instruments Total fair

hedge investment at fair value value

accounting securities through P&L adjustments

Assets € m € m € m € m

Loans and advances to banks 70 - - 70

Other financial instruments at fair value through profit or loss - - 3 3

Loans and advances to customers -3,383 - - -3,383

Investment securities – available-for-sale -2,941 -6 - -2,947

Total assets -6,254 -6 3 -6,257

Liabilities

Deposits from banks -11 - - -11

Other deposits 3 - - 3

Due to customers -25 - - -25

Debt securities in issue -2,959 - - -2,959

Other borrowed funds -8 - - -8

Total liabilities -3,000 - - -3,000

Hedging instruments 3,257 - 3 3,260

Net equity (pre-tax) 3 -6 6 3

Deposits from banks 21 - - 21

Other deposits 5 - - 5

Due to customers -2 - - -2

Debt securities in issue -121 - - -121

Other borrowed funds - - - -

Total liabilities -97 - - -97

Hedging instruments -1,757 - 620 -1,137

Net equity (pre-tax) 20 -84 -14 -78

181


Group Accounts

182

Company 2006

Financial

Fair value AFS instruments Total fair

hedge investment at fair value value

accounting securities through P&L adjustments

Assets € m € m € m € m

Loans and advances to banks 408 - - 408

Other financial instruments at fair value through profit or loss - - -3 -3

Loans and advances to customers -969 - - -969

Investment securities - available-for-sale -1,495 30 - -1,465

Total assets -2,056 30 -3 -2,029

Liabilities

Deposits from banks 30 - - 30

Other deposits 2 - - 2

Due to customers -6 - - -6

Debt securities in issue -7 - - -7

Other borrowed funds - - - -

Total liabilities 19 - - 19

Hedging instruments 2,080 - 3 2,083

Net equity (pre-tax) 5 30 - 35


Risikoberichtbericht

47. Acquisition under common control

On 31 December 2007 the Group acquired 99.99% of the ordinary share capital of Hypo Public Finance Bank from

Hypo Real Estate Holding AG as part of a HRE Group restructuring. This was accounted for as a transaction under

common control. A merger adjustment arose being the difference between the fair value of the shares acquired and

the book value of the net assets acquired. The merger adjustment was transferred to retained earnings.

The effects of the acquisition on the financial position of the Group are as follows:

Cash and balances with central banks

€ m

70

Loans and advances to banks 3,309

Trading assets 12,944

Derivative financial instruments 1,098

Other financial assets at fair value through profit or loss 2,034

Loans and advances to customers 3,018

Investment securities – available-for-sale 8,332

Intangible assets 20

Property, plant and equipment 2

Deferred income tax assets 159

Other assets 8

Deposits from banks -13,760

Other deposits -738

Derivative financial instruments and other trading liabilities -8,628

Due to customers -51

Debt securities in issue -6,535

Other borrowed funds -539

Other liabilities -31

Current income tax liabilities -5

Deferred income tax liabilities -140

Net identifiable assets and liabilities acquired 567

Consideration paid in cash 700

Consideration less book value of net assets acquired (“merger reserve”) 133

183


Group Accounts

48. Related-party transactions

(a) Group

Transactions with companies in which a participating interest is held amount to:

2007 2006

Group € m € m

Investment securities – available-for-sale - 20

2007 2006

Key management compensation € m € m

Short term employee benefits 23,862,607 10,118,424

Post employee benefits 444,014 2,001,923

Share awards 28,470,991 16,125,972

52,777,612 28,246,319

Key management include the Board of Directors and Executive Committee members.

Included above is Directors’ compensation as follows:

2007 2006

Directors’ compensation € m € m

Directors’ fees 756,018 964,934

Other remuneration 21,836,889 15,947,766

22,592,907 16,912,700

Loans to directors of DEPFA BANK plc

There were no loans to members of the Board at 31 December 2007 (2006: € nil)

DEPFA BANK plc, as the parent company of the Group, has issued letters of comfort to certain of its subsidiaries.

These letters of comfort set out that parent will ensure that DEPFA ACS BANK, Dublin, DEPFA Bank Europe plc, Dublin,

DEPFA Investment Bank Ltd, Nicosia, and DEPFA Funding II LP, London are able to fulfil their contractual obligations.

(b) Company

Balances due to and from group companies are disclosed in the notes to the balance sheet. Transactions with

group companies consisted of:

2007 2006

Company € m € m

Interest and similar income 968 795

Interest expense and similar charges -318 -312

Net trading income -1 -11

Gains less losses from financial assets - 1

Other operating income 19 22

Other operating expenditure -7 -6

These amounts arise on intercompany borrowings and lending and transfers of assets between DEPFA BANK plc

and other group companies as well as recharges for certain services provided.

184


Risikoberichtbericht

49. Capital management

The Group’s objectives when managing capital, which is a broader concept than the “equity” on the face of

balance sheets, are:

To comply with the capital requirements set by the regulators of the banking markets where the companies

within the Group operate;

To safeguard the Group’s ability to continue as a going concern so that it can continue to provide returns for

shareholders and benefits for other stakeholders; and

To maintain a strong capital base to support the development of its business.

Capital adequacy and the use of regulatory capital are monitored daily by the Group’s management, employing

techniques based on the guidelines developed by the Basel Committee and the European Community Directives,

as implemented by the Irish Financial Regulator (the “Authority”), for supervisory purposes. The required informa -

tion is filed with the Authority on a quarterly basis.

The Authority requires each bank or banking group to: (a) hold the minimum level of the regulatory capital of €6

million, and (b) maintain a ratio of total regulatory capital to the risk-weighted assets (the “Basel ratio”) at or above

the internationally agreed minimum of 8.5% for the Group or 8% for the Company. In addition, those individual

banking subsidiaries or similar financial institutions not incorporated in the European Union are directly regulated

and supervised by their local banking supervisor, which may differ from country to country.

The Group’s regulatory capital as managed by its central Group Treasury is divided into two tiers:

Tier I Capital: share capital (net of any book values of the treasury shares), minority interests arising on consolidation

from interests in permanent shareholders’ equity, retained earnings and reserves created by appropriations of

retained earnings. The book value of goodwill is deducted in arriving at Tier I Capital; and

Tier II Capital: qualifying subordinated loan capital, collective impairment allowances and unrealised gains arising

on the fair valuation of equity instruments held as available-for-sale.

The risk-weighted assets are measured by means of a hierarchy of five risk weights classified according to the

nature of and reflecting an estimate of credit, market and other risks associated with each asset and counterparty,

taking into account any eligible collateral or guarantees. A similar treatment is adopted for off-balance sheet exposure,

with some adjustments to reflect the more contingent nature of the potential losses.

50. Events after the balance sheet date

There have been no significant events after the balance sheet date which require disclosure.

51. Approval of financial statements

The financial statements were approved by the directors on 25 March 2008.

185


Addresses

DEPFA BANK plc

1 Commons Street Phone: +353 1 792 2222

Dublin 1, Ireland Fax: +353 1 792 2211

Amsterdam Representative Office

World Trade Centre Amsterdam, Zuidplein 58 - Tower H, 6th Floor Phone: +31 20 794 0340

1077 XV Amsterdam, The Netherlands Fax: +31 20 794 0349

Athens Representative Office

4, Gravias & Granikou Street Phone: +30 210 610 7390 399

15124 Amaroussion, Athens, Greece Fax: +30 210 610 8949

Chicago Representative Office

30 North LaSalle Street, Suite 1510 Phone: +1 312 332 9100

Chicago, IL 60602, USA Fax: +1 312 332 9192

Copenhagen Representative Office

Frederiksgade 7 Phone: +45 33 93 7571

1265 Copenhagen K, Denmark Fax: +45 33 93 7579

Frankfurt Representative Office

Neue Mainzer Straße 75 Phone: +49 69 92882 0

60311 Frankfurt, Germany Fax: +49 69 92882 100

Hong Kong Branch

1106-7 ICBC Tower, Citibank Plaza, 3 Garden Road Phone: + 852 2509 9100

Central, Hong Kong Fax: + 852 2509 9099

Istanbul Representative Office

Harmanci Solak 5, Harmanci Giz Plaza, Kat 18/35 Phone: +90 212 317 9393

34394 Levent Istanbul, Turkey Fax: +90 212 269 5868

London Branch

105 Wigmore Street Phone: +44 20 7290 8400

London W1U 1QY, United Kingdom Fax: +44 20 7495 0580

Madrid Branch

Monte Esquinza, 30, 4th Floor Phone: +34 91 7004 640

28010 Madrid, Spain Fax: +34 91 3100 791

Milan Representative Office

Largo Augusto, 7 Phone: +39 2 778 7111

20122 Milan, Italy Fax: +39 2 778 7112 16

Mumbai Representative Office

204 Ceejay House, Dr. Annie Besant Road - Worli Phone: +91 22 66191400

Mumbai 400018, India Fax: +91 22 66191415

New York Branch

623 Fifth Avenue, 22nd Floor Phone: +1 212 796 9200

New York, NY 10022, USA Fax: +1 212 796 9217

186


Nicosia Branch

10 Diomidous Street, 3rd Floor Phone: +357 22 396 300

2024 Nicosia, Cyprus Fax: +357 22 396 399

Paris Branch

1, Rue Saint-Georges Phone: +33 1 44 94 8270

75009 Paris, France Fax: +33 1 42 66 4698

Rome Branch

Via di Torre Argentina, 21 (Palazzo Origo) Phone: +39 06 6840 2801

00186 Rome, Italy Fax: +39 06 6840 2831

Sacramento Representative Office

Esquire Plaza, 1215K Street, 17th Floor Phone 916-503-2277

Sacramento, CA 95814, USA

São Paulo Representative Office

Av. Brigadeiro Faria Lima, 201, 13th Floor - Suite 131 Phone: +55 11 3554 7569

05426-100 - São Paulo, SP – Brazil Fax: +55 11 3816 1631

Tokyo Branch

Atago Green Hills MORI, Tower, 41F, 2-5-1 Atago, Minato-ku Phone: +81 3 5402 9000

Tokyo 105-6241, Japan Fax: +81 3 5402 9010

Warsaw Representative Office

Centrum Gieldowe, ul. Książęca 4 Phone: +48 22 537 7600

00-498 Warsaw, Poland Fax: +48 22 537 7601

DEPFA ACS BANK

1 Commons Street Phone: +353 1 792 2222

Dublin 1, Ireland Fax: +353 1 792 2211

DEPFA First Albany Securities LLC

New York Office

Public Finance, 623 Fifth Avenue, 22nd Floor Phone +1 212 461-9421

New York, NY 10022, USA Fax +1 212 461-9621

Underwriting/Trading and Sales, 444 Madison Avenue, Suite 400 Phone: +1 212 461 9500

New York, NY 10022, USA Fax: +1 212 461 9622

Albany Office

Public Finance, 677 Broadway, 12th Floor Phone: +1 518 447 7941

Albany, NY 12207-2990, USA Fax: +1 518 447 8074

187


Addresses

Boston Office

Public Finance and Sales, 60 State Street, Suite 700 Phone: +1 617 854 7403

Boston, MA 02109, USA Fax: +1 617 854 745

Chadds Ford Office

Public Finance, 9 Orchard View, First Floor Phone: +1 610 388 0533

Chadds Ford, PA 19317, USA Fax: +1 610 388 0531

Chicago Office

Public Finance, 200 South Wacker Drive, Suite 3100 Phone: +1 312 242 3224

Chicago, IL 60606, USA Fax: +1 312 242 3766

Dallas Office

Public Finance, 15950 Dallas Parkway, Suite 525, Tollway Plaza II, 5th Floor Phone: +1 972 341 8210

Dallas, TX 75248, USA Fax: +1 972 341 8215

Glen Allen Office

Taxable Trading, Highwoods Plaza, 4470 Cox Road, Suite 225 Phone: +1 804 747 0648

Glen Allen, VA 23060, USA Fax: +1 804 747 1183

Houston Office

Public Finance, 12 Greenway Plaza, Suite 1100 Phone: +1 713 425 4907

Houston, TX 77046, USA Fax: +1 713 425 4917

Sacramento Office

Public Finance, Esquire Plaza, 1215 K Street, Suite 1728 Phone: +1 916 503 2277

Sacramento, CA 95814, USA Fax: +1 916 503 3244

Hypo Public Finance Bank

Hypo Public Finance Bank

Collineo Asset Management GmbH, Brinkhoffstr. 4 Phone: +49 (0) 231 1082 1

44137 Dortmund, Germany Fax: +49 (0) 231 1082 468

Hypo Public Finance Bank

International House, 3, Harbourmaster Place Phone: +353 1 611 6000

IFSC, Dublin 1, Ireland Fax: +353 1 611 6001

Hypo Public Finance Bank

London Branch, 105 Wigmore Street Phone: +44 20 7290 8400

London W1U 1QY, United Kingdom Fax: +44 20 7495 0580

Hypo Pfandbrief Bank International S.A

4, rue Alphonse Weicker Phone: +352 26 41 4700

L- 2099 Luxembourg, Luxembourg Fax: +352 26 41 4799

Hypo Public Finance USA, Inc.

Hypo Capital Markets, Inc.

Collineo Asset Management USA, Inc., 622 Third Avenue Phone: +1 212 905 4600

New York, NY 10017, USA Fax: +1 212 905 4700

188


DEPFA BANK plc

Member of Hypo Real Estate Group

1, Commons Street

Dublin 1, Ireland

Tel.: +353 1 792 2222

Fax: +353 1 792 2211

www.depfa.com

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