COMMERZBANK AKTIENGESELLSCHAFT

Group over the long term. In particular, following the integration of the former Dresdner Bank into the
Group, there is a risk that the customer base will shrink due to customer defections. This could have a
material adverse effect on the Group’s business, results of operations and financial condition.
Credit Risks
The Group is subject to credit risks, especially creditworthiness and counterparty risks, arising from
the credit business with customers and banks, the credit substitution business (i.e., transactions
involving structured credit products), financial instruments in the investment portfolio (such as bonds
issued by industrials, banks, insurance companies and governments), other financial instruments and
derivative transactions. The Group defines credit risks as risks from possible losses in value that may
be caused by changes in a business partner’s creditworthiness or default on the part of a business
partner (e.g., due to insolvency). In addition to risks relating to creditworthiness and default,
subcategories of credit risks include settlement risks, counterparty risks and country risks. A
deterioration in borrowers’ economic situation, defaults and impairments on collateral provided may
necessitate increased risk provisions to cover acute and latent credit default risks and/or heightened
capital adequacy requirements for the Group due to higher risk-weighted assets.
Furthermore, the Group may be exposed to additional provisioning charges, especially in respect of
financing leveraged buyout (“LBO”) 1 transactions, the shipping portfolio, the Central and Eastern
Europe segment or other parts of the portfolio. Specifically, the global recession is expected to
necessitate an increase in risk provisions for loans to small and medium-sized enterprises.
If any or all of the risks described above arose, this could have material adverse implications for the
Group’s business, results of operations and financial condition.
A substantial portion of the Group’s assets and liabilities comprises financial instruments that have to
be recognized at fair value in the Bank's consolidated balance sheet. This also applies to the Group’s
holdings that are not part of the portfolio of instruments with subprime exposure and other structured
financial instruments. For specific risks relating to these portfolios please see "Risks arising from
Structured Credit Products".
For many financial instruments there are no objective market prices. In these cases, the fair value is
calculated on the basis of the valuation methods appropriate to the instrument in question. The
application of valuation methods to determine the fair value necessitates assumptions and estimates
which depend on, among other factors, the characteristics of the respective instrument and the
complexity and liquidity of the underlying market. Examples of necessary decisions relate to the
selection of modeling procedures and model parameters. If individual assumptions or estimates
change owing to negative market trends or other reasons, revaluations of the instrument in question
may result in significant adjustments to the fair value, which could entail considerable losses.
Furthermore, it should be noted that any loss in connection with adjustments to the fair value of an
asset or liability are netted against any profits from related risk-hedging transactions. However, such
profits are latent until the transaction is completed, and losses may be incurred in future periods, due
for example to a deterioration in the contracting partner’s creditworthiness. Such losses would offset
the gains reported in full or in part. Even though these losses do not necessarily result from changes
in the fair value of the underlying asset, they could have material adverse implications for the Group’s
business, results of operations and financial condition.
To a large degree, the commercial success of the real estate finance operations of Eurohypo
Aktiengesellschaft ("Eurohypo") depends on trends in the property markets, which recently have
shown a high degree of uncertainty. In the real estate finance business, the risk of counterparty default
not only includes credit risk, but also collateral risk, which primarily comprises the possibility of a
1 Leveraged buyout means the takeover of a company financed with a (sometimes) high level of debt and only a small amount
of equity. Principal and interest are paid from the cash flow of the target company or the proceeds of the sale on exit.
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