ANNUAL REPORT 2008 - DG Hyp

dghyp

ANNUAL REPORT 2008 - DG Hyp

Deutsche Genossenschafts-Hypothekenbank AG

ANNUAL REPORT 2008

Member of the

Cooperative Financial

Services Network


€ mn 2008 2007

Development of originated new business 1)

Commercial Real Estate Finance 3,766 2,941

– German originated/cooperative sector 2,425 2,076

– International/secondary market 1,341 865

Portfolio investments 2) 0 2,394

Treasury

– Originated loans to local authorities 750 1,760

– Public-sector lending3) 2,066 5,392

– Pfandbrief sales and other sources of refinancing 7,865 8,862

Special portfolio 4) 10 405

Portfolio development

Total assets 76,016 83,335

Real estate lending 21,774 22,499

Mortgage Backed Securities (MBS) 4,016 4,387

Public-sector3) and local authority loans

Covered bonds (Pfandbriefe)

45,151 47,775

and other debt securities 62,077 67,496

Own funds for solvency purposes 1,733 1,954

Profit and loss account

Gross profit 174 273

Administrative expenses 130 169

Revaluation results – 111 – 121

Provisions for loan losses – 62 – 68

Operating profit – 129 – 86

Net extraordinary income/expenses 187 148

Profit transfer – –

Number of employees

OVERVIEW

Annual average

(full-time equivalent) 473 576

Vocational trainees 6 17

1) Previous year’s figure included loan extensions

2) Completely suspended in response to the financial markets crisis

3) Securities and promissory note loans eligible as cover assets for public-sector covered bonds

4) Retail and non-strategic commercial loan portfolios


CONTENTS

Letter from the Management Board 2

DG HYP: The commercial real estate bank

in the German Cooperative Financial Services Network 4

Management Report Economic environment 6

Commercial Real Estate Finance 8

Treasury

Loans to local authorities and public-sector lending 15

Refinancing 16

Special portfolio 18

Strategic realignment 20

Financial position and results of operations 22

Risk Report 27

Our staff 35

Report on material events after the balance sheet date

and forecast 37

Financial Statements Balance sheet 41

Profit and loss account 47

Notes to the financial statements 53

General notes 53

Notes to the balance sheet 55

Notes to the profit and loss account 67

Cash flow statement 68

Coverage 69

Other information on the annual financial statements 75

Responsibility Statement 79

Audit Opinion 80

Report of the Supervisory Board 81

Corporate Bodies And Committees; Executives Supervisory Board 83

Management Board, Department Heads 84

Trustees, Advisory Council 85

DG HYP Offices 87

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

1


Our Management Board from left to right: Dr. Georg Reutter, Hans-Theo Macke (Chairman), Manfred Salber

Ladies and Gentlemen, dear business associates,

The year 2008 will be remembered as the year of the worldwide financial markets crisis, a crisis that

has rapidly spread to the real economy and a crisis that we, like every other bank, have been unable

to avoid entirely unscathed. However, from DG HYP’s perspective, 2008 was also a year

marked by the Bank’s successful strategic realignment as a commercial real estate bank within the

German Cooperative Financial Services Network.

The financial markets crisis is increasingly impeding worldwide money and capital movements and

has caused the interbank and Pfandbrief markets to grind to a halt. This can be attributed to the

huge loss in confidence among market participants, without which the money and capital markets

cannot function properly. To an ever greater extent, the crisis is having an impact beyond the financial

sector itself, causing a worldwide drop in economic growth. The commercial real estate markets

have also been hit by this development, with a significant reduction in transaction volumes being

recorded during the second half of 2008.

Despite such difficult market conditions, we were able to increase new business in commercial real

estate finance at home and abroad during the past financial year and achieved our operational

goals. The fact that we are strongly anchored in the German Cooperative Financial Services Network,

and thanks to our being integrated into DZ BANK’s group liquidity management, we remained

able to fulfil our customers’ finance wishes during the second half of the year.

As a result of the crisis on the financial markets, traditional lending business is gaining in importance,

whilst complex capital market transactions are being pushed into the background. One effect

of the crisis will be that lending will once again be viewed as a demanding and complex product

area, and as a product that must come with a price – with the recognition that loans that

cannot simply be produced in as high a quantity as possible, like a commodity. This requires a high

degree of individual attention and quality in the form of responsibility and trust.

2 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008


We successfully implemented our strategic realignment process during 2008, completing the associated

restructuring measures more quickly than anticipated. By the middle of 2008 the commercial

realignment, the new organisational structures in sales, the back office and in the services and support

departments, as well as key personnel changes were all already in place. On the basis of solutions

reached by mutual agreement with nearly all of the employees affected by redundancies, we

had reached our target size of approximately 400 full-time employees by the year-end. Additionally,

over the course of the second half of the year, we analysed our processes, structures and IT so

that these could be optimised to generate further improvements in efficiency and to reduce their

complexity. We will continue to pursue this aim as one of our priorities for 2009.

Based on personnel changes and the rapid restructuring process, we were able to record a significant

reduction in administrative expenses during the reporting period, thereby creating the necessary

basic framework for a streamlined and commercially focused real estate bank.

In order to bolster our market position, we will be further expanding our real estate centres

and building up our team of employees with well-qualified staff who specialise in commercial real

estate lending. For the purposes of training young up-and-coming employees in-house, we have

developed a trainee programme that is geared specifically towards the Bank’s future requirements.

The past year has not only shown that even the most difficult economic phases can offer attractive

opportunities but has also demonstrated that DG HYP is a reliable partner during such periods in

particular. This is why we are working intensively to support our partners with competitive products

and a broad range of services, even during times of economic downturn in commercial real estate

finance. We are looking forward to continuing along this successful path during the current financial

year, and to further expanding our market position.

The Management Board of DG HYP

Hamburg, March 2009

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

3


4

DG HYP: THE COMMERCIAL REAL ESTATE BANK IN THE

GERMAN COOPERATIVE FINANCIAL SERVICES NETWORK

DZ BANK Group is part of the German Cooperative

Financial Services Network, which comprises approximately

1,230 individual cooperative banks. In terms of aggregate

total assets, the cooperative banking sector ranks

among the largest financial services organisations in Germany.

With 30 million customers, of whom around 16 million

are members of their bank, no other group in the

world has such a broadly diversified ownership. Within the

Cooperative Financial Services Network, DZ BANK AG acts

as the central institution for around 1,000 cooperative

banks with a total of 12,000 outlets.

Combining banking services with insurance products

and asset management has a long tradition within the German

Cooperative Financial Services Network. The specialist

institutions within the DZ BANK Group each offer highly

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

competitive, first-rate products in their respective area of

competence. This allows Germany’s cooperative banks to

offer their customers an end-to-end range of excellent

financial services.

As a member of the DZ BANK Group, DG HYP is affiliated

with Bausparkasse Schwäbisch Hall, DZ BANK International,

DZ PRIVATBANK Switzerland, R+V Insurance, Team-

Bank, Union Investment Group, VR LEASING, and various

other specialist financial services providers. The various

DZ BANK Group entities are the cornerstones of a comprehensive

range of financial services offered to (and through)

the German cooperative banking sector. Within this strong

network, DZ BANK Group entities work together to optimise

the products and services delivered to cooperative

banks and their customers.


Management Report

ECONOMIC ENVIRONMENT

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

5


ECONOMIC ENVIRONMENT

A financial markets crisis on a global scale

The international financial markets crisis has taken

everyone by surprise in terms of its sheer scale. The crisis

was triggered in mid-2007 when problems with sub/prime

loans arose in the USA against the background of rising

interest rate levels there. The intensity of international links

among banks meant that the crisis expanded across the

world in the course of the reporting year, impeding the

ability of the international financial markets to function

properly.

Europe was increasingly hard hit by the impact of the

financial crisis from the middle of 2008 onwards. In order

to stabilise the financial system, the international central

banks injected the markets with substantial quantities of

liquidity and reduced key interest rates over a series of rate

cuts.

In Germany, the Federal Government, in conjunction

with the other European governments, agreed on a rescue

package worth € 480 billion in the form of the German

Financial Market Stabilisation Fund („SoFFin“) in mid-October.

This Fund can extend guarantees of up to € 400 billion

and can provide banks with equity capital support of

up to € 80 billion. In taking this step, the German government

is attempting to restore market participants’ confidence

in each other. Banks will be able to receive guarantees

for liabilities and equity capital allocations, and to have

their risk positions assumed by SoFFin in exchange for debt

instruments of the Federal Republic.

During the year under review, fifteen banks availed

themselves of this rescue package. It is our estimate that

stabilising the capital markets and enabling them to function

properly again are tasks that will take until well into

2009.

6 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Management Report

Economic downturn in the second half of 2008

During the second half of 2008 the financial markets

crisis picked up speed, spreading beyond the confines of

the banking sector and hitting the economy as a whole.

After two strong years, there was a clear dip in the state of

the economy during the reporting year. As a result, leading

economic researchers began, one after the other, to revise

their GDP forecasts for 2008 downwards. Whilst the

growth rate in 2007 was still 2.6%, the figure for 2008

was just a mere 1.3% despite getting off to a good start in

the first quarter due to the favourable weather conditions.

A further fall in overall economic output is expected for

2009.

Against this background, in early November 2008 the

Federal Government introduced a package of measures

worth up to € 12 billion designed to strengthen the economy

and safeguard jobs, stimulating investment of € 50

billion over the next two years. This economic package is

limited to fifteen specific measures that can be implemented

in the short term but that will have a sound long-term

impact. These include improved write-down conditions for

companies, tax benefits for craft professions and the limited

waiver of motor vehicle tax. The EU heads of government

also agreed on a comprehensive package of economic

measures in December with a view to harmonising the

national programmes in the member states so as to avoid

unfair competition. The overriding aim is to prevent Europe

from sliding into a long and difficult recession as a result of

the crisis on the financial markets.

The highest level of employment since reunification

was recorded on the German labour market during the

year under review. It was only towards the year-end that

signs of a fall began to emerge, with the cooling of the

economy sparking a turnaround on the labour market too.

The unemployment rate is expected to rise in 2009.


Management Report

COMMERCIAL

REAL ESTATE FINANCE

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008 7


COMMERCIAL REAL ESTATE FINANCE

Mixed fortunes on the German real estate market

The volume of commercial real estate transactions fell

significantly during 2008 after what had been a very good

2007 in Germany. Whilst the level of market activity almost

remained as high during the first quarter of the year, it only

took until the spring for the visibly worsening financial crisis

to impact on the number of deals being concluded.

Activity failed to pick up again for the rest of the year.

Instead, market activities almost collapsed completely. This

meant that transactions in Germany during the reporting

year only totalled some € 18 billion, compared with

€ 55 billion during the previous year. Compared with the

very strong 2007 in terms of sales, there was therefore a

clear collapse in activity, although the figure recorded was

only slightly below the long-term average.

GROWTH OF OFFICE SPACE

2.5

2.0

1.5

1.0

0.5

%

8 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Management Report

At a European level, there was also a marked fall in

transaction volume. The trading volume amounted to only

around 40% of the previous year’s level, whilst in Germany

it was only about one third as high as in 2007. With the

German market still having benefited to a disproportionate

extent from the most recent upturn, the fall this time

round was all the more dramatic. In some cases foreign

investors withdrew from major projects due to a lack of

viable finance options. Elsewhere, large-scale projects were

simply cancelled due to the uncertain prospects for the

economy as a whole.

Hamburg Berlin Frankfurt / Main Munich

Dusseldorf Stuttgart

2007 2008 2009

Hamburg 2007 0.6 2008 0.7 2009 1.0

Hamburg Berlin

0.2 0.6 0.8 0.7 0.5 1.0

Berlin Frankfurt / Main 0.9 0.2 0.4 0.8 2.0 0.5

Frankfurt Munich / Main 0.6 0.9 2.2 0.4 1.9 2.0

Munich Dusseldorf 0.5 0.6 1.0 2.2 1.4 1.9

Stuttgart 0.4 1.1 0.8

2007 2008 2009 e

2007 2008 2009 e

Source: DZ BANK Research

Please note that the charts and diagrams depicted do not constitute a part of the Management Report, for the purpose of the Financial Statements.


Management Report

Differing market developments across the segments

Up until the middle of the year it still looked as if retail

properties would outperform office real estate in terms of

transaction levels. However, retail properties once again

took up second place behind office premises. During the

reporting year, however, the difference in trading volumes

in these sectors was only small, whilst the office segment

had been nearly three times as big as the retail segment

during 2007. Just under € 7 billion was invested in German

office real estate in 2008. The figure for retail properties

was one billion less. It was only the logistics and industrial

real estate market segment that experienced a

below-average decline, to € 1.6 billion, enabling it to

increase its market share from 5 to 9% as a result.

Still no rise in office property vacancy levels in 2008

During the reporting period comparatively few new

builds were completed in the major office locations, with

the exception of Munich. At the same time, however,

demand dipped towards the middle of the year as a result

of the economy as a whole slowing down. Office property

sales were therefore significantly down on 2007, which

was an exceptional year. Nevertheless, in Munich and

Frankfurt rents for office premises in prime locations rose

slightly, whilst they stagnated in Berlin, Dusseldorf and

Stuttgart. Despite the gloomy market situation, the vacancy

rate for office premises in Hamburg and Munich

remained unchanged, with Frankfurt, Berlin and Stuttgart

actually recording a slight improvement. The prospects for

this year are less good. Given that numerous construction

projects will only be finished over the coming months in

many areas, contributing to a further rise in supply at a

time when demand is waning, we are expecting to see an

increase in vacancy rates.

Retail properties benefit from foreign demand

The rents in the top segment increased in 2008 across

all of the major German locations. The expansion in the

available surface area lagged behind demand, largely due

to the limited space available at prime locations. Despite

this rise, rents for retail premises in Germany remained

moderate by international standards, which again bolstered

demand from abroad. Moreover, the share of rental

space in Germany taken up by international chain store

operators is still lower than on other markets. Given that

these foreign chain operators generally do not move away

to less favourable locations, the price difference between

ideal and less ideal locations for retail real estate widened.

Munich – still the most expensive location for retail

properties in Germany – was able to record the best result

of the major German locations with a rise of almost 7% in

the rents paid for prime locations in 2008. The rises in rent

levels recorded in Berlin, Dusseldorf and Frankfurt were

only slightly smaller. Even in Stuttgart, there was a slight

rise of 1% in rent levels, following a succession of falls over

previous years. Vacancy levels, however, also rose in

peripheral areas during the year under review. This is a

trend that can also be expected to continue over the coming

months.

TRANSACTIONS INVOLVING

RETAIL PROPERTIES

€ bn

20

18

16

14

12

10

8

6

4

2

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

6.6

Source: DZ BANK Research

18.6

11.5

2005 2006 2007 2008

5.9

9


Logistics properties being pulled in the wake of the

industrial sector

The expansion in world trade lent momentum to the

market for logistics properties during the first few months

of the past financial year. As of the middle of the year,

however, the economic down-turn and financing difficulties

in relation to large-scale projects stifled demand. The

sector’s strong dependence on the industrial sector, in

which the business climate deteriorated over the course of

the year, meant that investment in storage premises practically

ground to a halt during the autumn. Consequently,

the transaction volume was down on the previous year as

in the other real estate sectors. The expansion in available

space outside the conurbations meant that there was a fall

in the average price payable in Germany for one square

metre of storage space.

TURNOVER OF STORAGE FACILITIES

(thousand sq.m.)

4,000

3,500

3,000

2,500

2,000

1,500

1,000

500

1,900

900

2,366

1,210

2,651

10 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Management Report

The number of newly rented premises was in line with

the previous year. In terms of this financial year, the volume

of goods transportation can at best be expected to stagnate,

with the result that prices and rent levels in the logistics

sector will remain under pressure.

An end to portfolio acquisitions in

commercial housing

The wave of ‘bulk buying’ by foreign investors ended

once and for all in 2008. As a result, the number of residential

units changing hands fell considerably compared

with earlier years. Whilst slight price increases were generally

still achievable in the conurbations in the case of new

builds, prices stagnated in rural areas. Construction activity

with regard to flats has been quite weak across Germany

over previous years and this is likely to remain the case for

the current year. Given that the number of households is

rising in Germany again, the prices for newly completed

homes look likely to remain stable.

2003

Source: DZ BANK Research

2004 2005 2006 2007 2008

1,053

3,230

1,531

3,883

1,275

3,600

1,200

Nationwide

Conurbations


Management Report

With regard to residential rents, the market was once

again muted during the period under review. However, not

least due to the good start to the year in terms of the economy

as a whole, residential rent levels did rise slightly. In

the main economic centres, this slightly positive development

can be expected to continue due to the shortage of

residential properties in the most popular locations. In contrast,

rent levels can be expected to dip slightly in rural

areas.

International real estate markets

Transaction volumes in numerous European countries

shrank just as sharply as in Germany. In the UK, for example,

a fall of almost one third was recorded. Yet the UK also

recorded the largest trading volume in Europe in the commercial

properties segment. On the UK office market and

in the case of commercial properties, however, this was

only possible through a fall in purchase prices with rising

returns. France also recorded a rise in returns on the office

market, whilst commercial properties stagnated. The

RENT DEVELOPMENTS FOR NEWLY-BUILT FLATS

Change (€/sq. m.)

8

6

4

2

0

-2

-4

-6

-8

Netherlands, meanwhile, was an exceptional case as far as

European office markets were concerned, with purchase

prices still tending slightly upwards in 2008.

In the USA, where the global financial market crisis was

triggered in mid-2007 by rising interest rates and the associated

increase in the number of clients defaulting on subprime

loans, it was not just the private residential markets

that cooled but also the commercial real estate markets.

Despite a weak level of construction activity, which scarcely

increased the volume of office space available across the

country, vacancy rates in this segment increased. The market’s

low absorption of surface area was to blame, only

reaching a quarter of the level recorded during the previous

year. Despite the poor level of demand, rent increases

were still possible in the case of US office properties. In

terms of commercial properties, however, rents struggled

to rise above the previous year’s level and had begun to dip

before the end of the final quarter.

2001 2002 2003 2004 2005 2006 2007 2008

Berlin Dusseldorf Frankfurt / Main Hamburg Munich Stuttgart

Source: DZ BANK Research

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

11


BUSINESS DEVELOPMENT IN

COMMERCIAL REAL ESTATE FINANCE

Business activities at home and abroad

DG HYP’s commercial real estate finance activities

encompass domestic direct and syndicated business, as

well as activities as a partner to the cooperative banks

within the German Cooperative Financial Services Network.

With regard to domestic direct business, DG HYP

focuses on the core segments of office, residential and

retail. The Bank is also involved in the specialist segments

of hotels and logistics as part of its credit risk strategy. In

terms of foreign business, DG HYP operates primarily as a

syndicate partner. DG HYP’s activities also include public

finance and originated lending to local authorities. The

Bank has developed a customised portfolio of commercial

real estate finance services for the cooperative banks,

which has been optimised as part of the Bank’s realignment

process and will be further expanded in future.

NEW COMMERCIAL REAL ESTATE

FINANCE BUSINESS

€ mn

4,000

3,000

2,000

1,000

2005

1,722

2006

1,974

2007

2,941

2008

3,766

12 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Management Report

Good sales performance even under

difficult conditions

DG HYP continued its expansion course of recent years

and, despite the difficult general economic conditions during

the year under review, was once again able to achieve

an increase both domestic and foreign business. Embedded

within the German Cooperative Financial Services Network,

the Bank’s strategy as a Pfandbrief bank and traditional

provider of real estate finance proved its worth. At

the same time, DG HYP also benefited from the fact that

some of its competitors withdrew from the market.

With six real estate centres in the country’s major cities,

namely Hamburg, Berlin, Dusseldorf, Frankfurt, Stuttgart

and Munich, DG HYP has a good decentralised set-up

across Germany. Short decision-making channels, a high

level of market penetration, as well as good networks on

the market thanks to intensive contacts in the cooperative

banking sector and direct customer business, ensure that

DG HYP is a high-performance partner to direct customers

and the German cooperative banks alike.

Outside Germany, DG HYP has representative offices in

New York and London, whilst its business in France and

Scandinavia is dealt with through country desks. The

Bank’s focus during 2008 was on the USA, the UK and

France. During the second half of the year, DG HYP also

began moving in to the Eastern European markets and for

the first time wrote new business in Poland, working in

close cooperation with DZ BANK Polska. In light of the positive

business environment there, Poland is an important

market within the Bank’s Eastern European strategy and

one in which it will be expanding its activities in the 2009

financial year.


Management Report

Products tailored to the cooperative banking sector’s

commercial real estate lending business

DG HYP supports the some 1,230 cooperative banks in

the Cooperative Financial Services Network in the area of

commercial real estate finance by providing a tailored

range of services that is expanded on an ongoing basis. It

offers the cooperative banks syndicate finance from

€ 3 million upwards in the form of its “Immo Meta” and

„Immo-Meta-Reverse” products. Whilst the partner bank

leading the syndicate is the customer’s first point of contact

in the case of the Immo Meta product, the Immo-Meta-

Reverse product is offered by DG HYP to the cooperative

banks, through which they can participate in large-scale

commercial real estate finance projects local to them.

DG HYP has also developed the “Immo-Aval” standard

loan products for commercial real estate finance covering

amounts from € 0.5 to 3 million, and this will be offered

within the Cooperative Financial Services Network from

2009 onwards.

In addition to the specialist range of products, DG HYP

also offers the cooperative banks the opportunity of cooperation

projects to exhaust the regional market potential

for a joint market presence in commercial real estate

finance. As the real estate bank within the Cooperative

Financial Services Network, DG HYP, working together with

the Federal Association of German Credit Unions and Rural

Banking Cooperatives (BVR) and the cooperative associations,

has developed a group rating system for commercial

real estate finance. This is due to be introduced in 2009.

1) Previous year’s figure included loan extensions

Increase in volume of new business at home and

abroad

At € 3.8 billion, originated new business 1) Previous

year’s figure included loan extensions in commercial real

estate finance in the 2008 financial year exceeded the previous

year’s level by 28% (2007: € 2.9 billion). The share of

finance related to domestic direct and cooperative banking

sector business increased from € 2.1 billion in the previous

year to € 2.4 billion in the 2008 financial year. A gratifying

development was recorded with regard to foreign and secondary

market business, where the volume of new business

was up 55% on the previous year to reach € 1.3 billion

(2007: € 865 million).

Despite the fact the market environment clouded over

during the second half of the year, DG HYP was still able to

notch up new business in its domestic and foreign markets

through to the year-end. New commitments at home and

abroad were entered into on the basis of a conservative risk

assessment of the individual transactions, taking due

account of the basic economic conditions on the respective

market. The fact that the financing options on the market

as a whole remain limited enabled DG HYP to enter into

selected transactions with an improved risk and reward

profile. This is clearly reflected in the rise in margins for

new business.

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

13


TREASURY

14 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Management Report


Management Report

LOANS TO LOCAL AUTHORITIES AND

PUBLIC-SECTOR LENDING

Originated loans to local authorities were initially

affected by a fall in demand from the public sector. In the

first half of the 2008 in particular, the improved financial

situation of local authorities meant that there was less

PORTFOLIO OF ORIGINATED LOANS

TO LOCAL AUTHORITIES

€ mn

1,592

1,933

77

1.400

Bremen

North Rhine-

Westphalia

Hesse

Rhineland-

Palatinate

1,542

329

Saarland

424

Schleswig-Holstein

Mecklenburg-Western

Pomerania

Hamburg

Lower Saxony

1,060

137

1,776

Baden-

Württemberg

82

262

Brandenburg

Berlin

209

Saxony-Anhalt

Thuringia

Bavaria

271

Saxony

€ bn

Local authorities / municipalities / cities 8.46

Special public-sector administrative unions / administrative districts / 2.64

companies under a public-sector guarantee

Total originated loans to local authorities 11.10

31 Dec 2008

demand for finance. During the second six months, the

impact of the financial markets crisis changed the pricing

structure for the provision of liquidity for public financing

projects and, as a result, stifled business activity in this segment

further.

Through its involvement in originated lending to local

authorities, DG HYP supports the banks within the cooperative

sector in terms of their market positioning. This

makes DG HYP a competent point of contact for these

banks with regard to the financing of local authority projects

– provided, of course, that an adequate margin is generated

for the Bank.

In this environment the volume of new business, at

€ 750 million, was down, as expected (-57% year-onyear).

With the change in market circumstances also affecting

public financing tenders, DG HYP was able to impose

higher margins on the market, particularly during the second

half of 2008.

A similar scenario emerged with regard to securitised

public financing business. The strategic direction of this

area of business was adapted in line with the volatile market

environment and lower margins. Overall, this implies a

reduction of securities portfolios taking into account a profitability-oriented

approach to new business. In line with this

strategy, the volume of new business in securitised public

finance fell by 62% year-on-year to € 2.1 billion.

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

15


REFINANCING

The German Pfandbrief – a highly secure refinancing

tool

The German Pfandbrief continued to enjoy its reputation

as a stable and particularly secure refinancing tool during

the year under review. This is based first and foremost

on the statutory provisions of the German Pfandbrief Act,

which provides a high degree of investor protection. There

has not been a single case of a German Pfandbrief failing

during the product’s 200-year history. Against this background,

the Federal Government also felt that it was not

necessary to explicitly include the Pfandbrief in the Financial

Market Stabilisation Act (FMStG) adopted in October

2008.

Even if a Pfandbrief issuer should become insolvent, the

cover assets held by the Pfandbrief bank are exclusively

available to the Pfandbrief creditors for the purposes of

satisfying their claims. From the investors’ perspective, a

crucial aspect is, therefore, the intrinsic value of the cover

assets. To ensure that these assets are of the highest possible

quality, in addition to the provisions of the Pfandbrief

Act, the Mortgage Lending Value Ordinance, for example,

also sets out further conditions for determining the value

of mortgage cover assets. These stringent statutory

requirements and the priority right of recourse to the cover

assets enjoyed by the Pfandbrief creditors provide investors

with a particularly high degree of protection.

Pfandbrief sales impaired by financial market crisis

Due to its high security standards, the German Pfandbrief

was in demand among investors as a financing tool

during the first six months of the reporting year particularly

as the financial market crisis spread to and took hold in

Europe. Pfandbrief sales rose by 25% during the first half

of 2008 compared with the same period of the previous

year. Yet as the financial market crisis intensified the Pfandbrief

market was also hit by distortions, with its ability to

function properly still not being fully restored by the end of

2008.

16 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Management Report

The Pfandbrief market is expected to pick up again in

2009. Meanwhile, their experiences of the financial markets

crisis have made investors more aware of potential

problems. As a result, in addition to considering the product

itself, future investors will be increasingly scrutinising

the quality and structure of the cover assets and the risk

management approach of the Pfandbrief bank in question.

DG HYP is in a good position to deal with such scrutiny,

which means that there is a good basic framework in place

for ongoing refinancing.

Good placement opportunities create scope for

sound refinancing base

Despite the difficult market environment, DG HYP was

able to raise funding of € 7.9 billion. In line with the Bank’s

strategy, mortgage bonds in the covered segment totalled

€ 2.5 billion, with public-sector covered bonds totalling

€ 0.6 billion. Unsecured refinancing involved the sale of

bearer bonds and the taking up of promissory note loans

totalling € 4.8 billion. The good placement opportunities

open to DG HYP meant that the Bank enjoyed a solid refinancing

base even when faced with a difficult year on the

capital market. The financial market crisis has only had a

minor impact on professional investors and private customers’

attitude to Pfandbrief products. The volume of

outstanding Pfandbriefe from both cover pools at the end

of the reporting year was € 51 billion.


Management Report

SPECIAL PORTFOLIO

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008 17


SPECIAL PORTFOLIO

Successive reduction of the special portfolio

In line with its new business strategy and the strategic

realignment, DG HYP ceased to take on new lending business

in the area of private real estate finance – providing

finance for residential property to retail customers, effective

1 January 2008. As a result, new private construction

financing business is to be transferred within the DZ BANK

Group to Bausparkasse Schwäbisch Hall. The existing business

will remain with DG HYP; exposures not exceeding

€ 500,000 will be serviced by VR Kreditwerk AG in accordance

with section 25a of the German Banking Act. With

effect from 1 October 2008, VR Kreditwerk AG will provide

these processing services through its Mannheim-based

subsidiary Kreditwerk Hypotheken Management GmbH.

Loan portfolios to be kept within the

Cooperative Financial Services Network

Within the special portfolio, the loan portfolio that no

longer comprises DG HYP’s target business will be

processed and gradually reduced. The special portfolio primarily

comprises retail business in the area of finance for

residential property. As at 31 December 2008, DG HYP’s

portfolio included some 159,000 retail customers accounting

for a volume of approximately € 12.7 billion.

18 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Management Report

The aim, within the process of prolongation of loans, is

to transfer as many loans as possible at interest maturity to

the cooperative banks that arranged the business, and to

Bausparkasse Schwäbisch Hall. Additionally, the business

shall be processed as lean and efficient as possible. At the

request of the cooperative banks concerned, DG HYP in

2008 began transferring back the retail portfolios that the

banks had arranged. A first portfolio transfer was successfully

concluded at the end of 2008. Further cooperative

banks have expressed an interest in this move, with the

result that further transfers can be expected in the 2009

financial year.

In addition to retail business in the area of residential

real estate finance, within the special portfolio the NPL

portfolio and the non-strategic commercial real estate

lending business, representing a volume of € 2 billion, are

also being processed. The latter comprises small-scale commercial

lending and the residual portfolios from agricultural

lending business. DG HYP ceased actively pursuing agricultural

lending business back in 2003.


Management Report

STRATEGIC REALIGNMENT

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008 19


STRATEGIC REALIGNMENT

Realignment of DG HYP successfully concluded

DG HYP successfully implemented its strategic realignment

in its capacity as a commercial real estate bank during

the 2008 financial year. In terms of its business strategy,

DGH HYP has placed the focus on commercial real

estate lending business in Germany and abroad. As

planned, residential real estate business in the retail banking

sector was no longer pursued with effect from 1 January

2008. Existing loan portfolios relating to private real

estate finance will continue to be maintained by DG HYP.

Where loans are due to be extended, the customers will be

given the opportunity of having their loans extended by

the respective cooperative bank, or by Bausparkasse

Schwäbisch Hall. Where preferred by the cooperative

banks in question, DG HYP will transfer the loans that they

arranged back to them en bloc. The first portfolio transfer

took place during the reporting year with further transfers

scheduled for 2009.

Optimisation of internal processes

and organisational structures

DG HYP had already begun with the rapid implementation

of its reorganisation during the first half of 2008.

Processes and organisational structures in sales, the back

office and in the various staff departments have been

DG HYP‘S STRATEGIC POSITION

Originated

German

Business

DG HYP

Commercial real estate bank

Commercial Real Estate Finance

International

and Secondary

Market Business

20 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Management Report

geared towards the new business model. The Bank’s personnel

capacity has also been reduced. In addition, the

Bank’s main sources of non-personnel costs – such as infrastructure

and IT – have been optimised. This task also

extended to comprehensive outsourcing activities. Implementation

of these measures had already led to a marked

reduction in personnel and non-personnel costs by the end

of 2008.

With regard to 2009, the further optimisation of the

way in which the Bank is aligned on its new business

model will be one of the main tasks facing DG HYP. With

regard to activities in the domestic direct and cooperative

banking sector markets, as well as in foreign and secondary

market business, the expansion of sales capacity and

sales management, as well as ongoing process optimisation

in relation to the front and back office activities, will

be the main priorities during the current financial year.

The realignment of the Bank and the measures that

have already been successfully put in place mean that

DG HYP has created the prerequisites for growth in its

capacity as a commercial real estate bank. DG HYP will

consistently continue to pursue the route embarked upon

during the year under review.

Cooperative

Sector Sales

Local Authority

Lending,

Public Finance,

Treasury


Management Report

FINANCIAL SITUATION

AND RESULTS OF OPERATIONS

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008 21


FINANCIAL SITUATION AND RESULTS OF OPERATIONS

Financial situation

Following the changes to the Bank’s business model,

DG HYP’s total assets fell as planned during the 2008

financial year, down by 8.8% to € 76.0 billion.

The real estate loan portfolio developed in line with the

Bank’s strategy overall, down by 3.2% to € 21.8 billion.

The increase of € 1.7 billion in the commercial real estate

loan portfolio was more than offset by a planned reduction

of € 2.1 billion in the portfolio for private real estate lending

business.

At the same time, the public finance and local authority

lending portfolio was cut by € 2.6 billion due to a fall

in demand from the public sector and as a result of our

investment strategy being focused to a greater extent on

profitability. Reflecting a change in the intention to hold,

DEVELOPMENT OF LENDING VOLUME

22 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Management Report

DG HYP reclassified a securities portfolio worth € 4.7 billion

from the liquidity reserve to fixed assets.

We basically suspended any investments in mortgagebacked

securities (MBS) from the middle of 2007 onwards

as the first problems with sub-prime loans in the USA

began to emerge. During the year under review, only the

cancellation of an MBS transaction with an opportunity

and risk lever led to a risk-neutral increase in the portfolio.

Taking into account scheduled repayments, the MBS portfolio,

at € 4.0 billion, was approx. € 0.4 billion lower than

in the previous year.

Overall, our lending portfolio was therefore reduced

in line with our strategy by a total of € 3.7 billion to

€ 70.9 billion.

Change from the previous year

€ mn 31 Dec 2008 31 Dec 2007 € mn %

Real estate lending 21,774 22,499 – 725 – 3.2

MBS

Public-sector and

4,016 4,387 – 371 – 8.5

local authority loans 45,151 47,775 – 2,624 – 5.5

Total portfolio 70,941 74,661 – 3,720 – 5.0

The volume of DG HYP Pfandbriefe outstanding during

the 2008 financial year was marked by the Bank’s new

strategic direction. In the same way as the loan portfolio, the

volume of outstanding mortgage Pfandbriefe was reduced

by € 2.0 billion overall to € 13.9 billion (with € 4.5 billion

falling due). In parallel to the low level of new business in the

public finance sector, the volume of public-sector covered

bonds outstanding fell by € 5.2 billion to € 39.1 billion.

Maturities totalling € 5.7 billion contrasted with only a low

level of new issues for the refinancing of local authority lending

business. At the same time, there was a rise in the volume

of uncovered other bonds in circulation, up by

€ 1.8 billion to € 9.0 billion, due to the reclassification of

securities which were transferred from the liquidity reserve

to fixed assets. Overall, the distorted movements on the

Pfandbrief market did not have a material impact on our refinancing

opportunities, not least due to the Bank’s integration

in the German Cooperative Financial Services Network.

Own funds and risk-weighted assets

DG HYP’s own funds for regulatory purposes are

reported in accordance with the requirements of the German

Banking Act, as last amended with effect from 1 January

2007, and pursuant to the terms of the Solvency Ordinance

which fleshes out the detail of the Banking Act. The

internal rating-based approach (IRBA) is applied to this

reporting.

In accordance with the Solvency Ordinance, aggregate

own funds for solvency purposes total € 1,733 million. The

fall of € 221 million compared with the previous year is

due to subordinated capital falling due, and to greater

account being taken of deductible items in accordance

with section 10 (6a) no. 3 of the German Banking Act.


Management Report

OWN FUNDS FOR SOLVENCY PURPOSES

€ mn 31 Dec 2008 31 Dec 2007

Core capital 1,243 1,314

Supplementary capital 490 640

Total capital 1,733 1,954

During the 2008 financial year, the German Federal

Financial Supervisory Authority (BaFin) confirmed three further

rating systems as suitable with regard to the internal

rating-based approach (IRBA). There was a further fall in

the risk-weighted items after these systems had been

applied:

RISK-WEIGHTED ASSETS ACCORDING TO THE SOLVABILITY ORDINANCE

(SOLVV – BASEL II) AS OF 31 DEC 2008

€ mn 31 Dec 2008 31 Dec 2007

Counterparty risk (total) 16,349 19,775

- Credit Risk Standard Approach 1,702 6,475

- Internal Rating-Based Approach (IRBA) 14,647 13,300

Total currency position 50 18

Operational risk

Transitory capital adequacy requirements

518 525

in accordance with section 339 of the SolvV 0 388

Total portfolio 16,917 20,706

The weighted amounts for the individual risk assets

according to the Solvency Ordinance totalling € 16.9 mil-

REGULATORY INDICATORS

lion on the balance sheet date were € 3.8 million lower

than the previous year’s figure.

€ mn 31 Dec 2008 31 Dec 2007

Total capital ratio 10.2 9.4

Core capital (Tier 1) ratio 7.3 6.3

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

23


RESULTS OF OPERATIONS

The restructuring of DG HYP and the implementation

of the new business model progressed according to plan

during the 2008 financial year. The discernible successes

notched up in new business and in the key income and

expenditure items confirm that our decision to embark on

a process of strategic realignment was the right one. At the

same time, however, the Bank’s result for the year is still

affected by extraordinary factors from the ongoing crisis on

the financial markets and the knock-on effects of restructuring.

Gross profit

Against this background, gross profit, as expected, was

down from € 273.1 million to € 174.0 million. This fall can

be attributed in particular to the fact that DG HYP purposely

avoided structural measures during the 2008 financial

year that were used the year before to stabilise interest

income levels. Adjusted to take account of these effects,

interest income was in line with the Bank’s expectations,

approximately 5 per cent down on the previous year.

At the same time, net commission income, at

€ 1.5 million, showed an improvement of € 37.7 million

on the previous year. This reflects the key effects of our

new business model. Whilst commission expenses for the

procurement of private real estate finance ceased to be

incurred with the abolition of the relevant division, there

was a rise in commission income generated by the issuing

of guarantees and service fees in the core area of commercial

real estate finance. Furthermore, issue commissions

were down due to the lower funding requirement.

Costs development

Administrative expenses, at € 129.8 million during the

reporting period, were 23.3% down on the previous year’s

figure of € 169.0 million. This fall can be attributed to our

consistent restructuring and redimensioning of DG HYP.

The savings relate to all of the key expense items. In addition

to the 17% reduction in personnel expenses to

€ 47 million and the drop of € 17.8 million (or 52.1%) in

processing costs for private real estate lending, particular

mention should be made of the fall in legal, auditing and

consultancy expenses, which were cut by € 6.7 million to

€ 6.4 million.

24 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Management Report

Provisions for loan losses

Based on our cautious risk policy, provisions for loans

losses were cut further, from € 68.2 million in 2007 to

€ 61.5 million during the reporting period. This marks the

successful continuation of the downward trend of the past

few years.

Valuations/impact of the financial market crisis

In contrast, the ongoing liquidity squeeze and crisis of

confidence on the financial markets had a negative impact

on DG HYP’s earnings in 2008. The direct and indirect

consequences are reflected in our revaluation losses of

€ 111.3 million. These include valuation losses of

€ 25.8 million for securities held in the liquidity reserve.

These temporary valuation adjustments are mostly due to

the widening of credit spreads in response to the liquidity

situation. Additionally, long-term write-downs of

€ 47.1 million were also recorded with regard to some

mortgage-backed securities. Unsecured bank and government-issued

papers also required a write-down of

€ 48.5 million.

Extraordinary restructuring expenses

As part of the restructuring of DG HYP, the Bank’s main

sources of non-personnel costs – such as infrastructure and

IT – were further optimised during the 2008 financial year.

The sale and lease-back transactions for the Bank’s headquarters

in Rosenstrasse and a further rented property,

which have been in existence since 2003/04, were

unwound. The repurchase of this building at market prices

resulted in extraordinary expenses of € 24.8 million. Implementation

of these measures also resulted in a significant

reduction in personnel and non-personnel costs. Moreover,

restructuring provisions in conjunction with personnel

measures and consultancy services totalling € 11.6 million

were included in the category of extraordinary expenses.

Extraordinary contribution to income

On the basis of the existing profit and loss transfer

agreement, the notable burdens on income during the current

period were compensated for by DZ BANK, in the

form of an extraordinary contribution to income that was

unchanged on the previous year, at € 223 million.

DZ BANK has thus further underscored its readiness to

provide support for DG HYP’s consistent restructuring

program.


Management Report

Net income

During the reporting year € 153.8 million of silent partnership

contributions that had fallen due were repaid.

DG HYP – also as a result of the lower interest rate level –

transferred a partial profit of € 57.7 million, down

€ 17.8 million, to its silent partners, with the result that the

Bank reported a balanced result overall.

OVERVIEW OF THE PROFIT AND LOSS ACCOUNT

Change from the previous year

€ mn 2008 2007 € mn %

Net interest income 163.0 297.9 – 134.9 – 45.3

Net commission result 1.5 – 36.2 37.7 104.1

Other operating income 9.5 11.4 – 1.9 – 16.7

Gross profit 174.0 273.1 – 99.1 – 36.3

Administrative expenses 129.8 169.0 – 39.2 – 23.2

Provisions for loan losses – 61.5 – 68.2 6.7 9.8

Revaluation results – 111.3 – 121.4 10.1 8.3

Operating profit – 128.6 – 85.5 – 43.1 – 50.4

Net extraordinary income/expenses 186.6 147.8 38.8 26.3

Taxes 0.3 – 13.2 13.5 102.3

Partial profit transfer 57.7 75.5 – 17.8 – 23.6

Net income 0.0 0.0 0.0 0.0

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

25


RISK REPORT

26 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Management Report


Management Report

RISK REPORT

I) Risk management – objectives and organisation

a) Objectives of risk management

DG HYP’s risk management process is geared towards

exploiting the business potential within the scope of the

bank’s capacity to carry and sustain risk, emphasising profitability.

Within this context, we aim to optimise the

risk/return profile of the lending business, with respect to

individual transactions as well as within the framework of

active management of the entire portfolio. The individual

types of risk in the lending and securities business are standardised

to permit comparison, in order to provide a basis

on which capital allocation throughout the entire bank is

managed, with an emphasis on risk and return.

b) Responsibilities

The regulatory organisational requirements and the

allocation of risk management responsibilities are set out,

in particular, in the Minimum Requirements for Risk Management

(Mindestanforderungen an das Risikomanagement

- MaRisk). DG HYP meets these requirements, adapting

its relevant processes to the specific needs of its

business model. DG HYP has also developed and implemented

risk management and risk controlling systems that

take into account market and competitive requirements.

This forms the basis that ensures the proper operation and

efficiency of the risk management process.

Management Board.All members of the Management

Board are jointly responsible for risk management at

DG HYP. The Management Board determines the risk policy

with regard to defining the business and risk strategies,

determining the types of business pursued and the scope

of the justifiable overall risk level, in line with the bank’s

capacity to carry and sustain risk.

Risk/Return Management Committee. The

Risk/Return Management Committee is responsible for

managing the risks facing the entire bank at portfolio level

and for equity allocation. As well as including the members

of the Management Board, the Committee also comprises

the heads of Finance and Treasury.

Credit Committee. The Credit Committee is responsible

for managing and monitoring all of DG HYP’s credit

risks. It comprises the entire Management Board and the

heads of Front Office Credit, Back Office Credit and Controlling.

The Credit Committee deals with strategic issues

regarding the bank’s lending business. These include, in

particular, the credit risk strategy, current risk events and

risk provisioning, credit portfolio management and income

optimisation as well as credit workflow optimisation.

Risks and Participations Committee of the Supervisory

Board. This Committee is responsible for decisionmaking

regarding those loan exposures, portfolio transactions

and participating interests that – in line with the

Internal Rules of Procedure – do not fall within the remit of

the Management Board. In addition, the Lending and Participations

Committee of the Supervisory Board deals with risk

management, and the overall bank strategy according to the

minimum requirements for risk management (MaRisk).

Audit Committee of the Supervisory Board. The

Audit Committee is responsible for supervisory issues in

relation to accounting, the internal monitoring system and

the requisite independence of the auditor of the financial

statements.

Supervisory Board.The entire Supervisory Board

decides on the acquisition or disposal of participating interests

in the event of changes exceeding € 500,000 in the

carrying amount of such interests, as well as on the establishment

or disposal of business lines, establishing branches

and representative offices, the internal rules of procedure

of the Management Board, the business distribution

plan, and on material issues related to loans or participations

that are not explicitly assigned to the Risk and Participations

Committee of the Supervisory Board.

c) Functions

Risk Planning. Planning, as a bank-wide exercise,

comprises the planning of income and costs, as well as the

risks associated with DG HYP’s individual business activities.

Based on the strategic business orientation as part of

a five-year plan, the bank carries out operative planning on

an annual basis. Within this planning process, risk limits

and earnings projections are determined on the basis of

the Bank’s capacity to carry and sustain risk.

Risk management. As part of the credit risk strategy

defined by the committees detailed above, the back office

together with Credit Risk Controlling is responsible for

managing the risk of counterparty default at an individual

exposure level and controlling risks at a portfolio level. This

involves both the implementation of rules as part of the

credit risk strategy as well as the active management and

monitoring of counterparty risks in the context of the issuing

and processing of loans. The early identification of risk

potential in lending business and the intensive handling,

restructuring and settlement of loan commitments are governed

by strictly defined processes and control systems.

The management of market and liquidity risks is the

responsibility of Treasury, within the scope of asset/liability

management.

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

27


RISK MANAGEMENT – OBJECTIVES AND EXECUTIVE BODIES

OBJECTIVES

EXECUTIVE BODIES

To manage the allocation of (risk) capital with a focus on risks and profitability

Management

Board

Risk Controlling. The Controlling units are responsible

for current reporting and – together with the respective

risk management unit – for monitoring risk on a portfolio

level. This comprises quantifying the risk exposure, monitoring

the quality and accuracy of data relevant to the risk

exposure, monitoring the limit utilisations, and risk reporting

to the Management Board. For this purpose, Credit

Risk Controlling prepares a MaRisk-compliant credit risk

report on a quarterly basis outlining the key structural features

of the lending business. The regular portfolio evaluations

are used to recognise abnormalities in the portfolio at

an early state, and counter these in good time if required.

In addition, portfolio evaluations form the basis for the

annual review of the credit risk strategy.

28 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Management Report

To exploit the business potential within the scope of the Bank’s risk-bearing capacity, emphasising profitability

To optimise the Bank’s risk / return profile

Risk/Return

Management

Committee

Credit

Committee

Risks and

Participations

Committee

Supervisory

Board

Holds overall responsibility for risk management: determines the risk policy with regard to defining the business

and risk strategies, determining the types of business pursued, and defining the justifiable overall risk level,

in line with the Bank’s risk-bearing capacity.

Management Board, plus the Heads of Finance, Treasury, and ASM (International and Secondary Market Business)

> Managing the risks of the entire Bank at a portfolio level, as well as the allocation of capital.

Management Board, plus the heads of front office and back office units

> Managing the Bank’s overall credit risk exposure (including current risk exposures, risk provisioning,

credit portfolio management, optimising profitability and credit processes) at single-exposure and portfolio

level; allocating equity capital; defining the credit risk strategy.

(a Supervisory Board committee)

> Decisions regarding loan exposures, portfolio transactions and participating interests that –

in line with the Internal Rules of Procedure – do not fall within the remit of the Management Board.

> Decisions regarding the acquisition or disposal of participating interests in the event of changes exceeding ¤

€ 500,000 in the carrying amount of such interests, as well as on the establishment or disposal of business

lines, establishing branches and representative offices, the internal rules of procedure of the Management

Board, the business distribution plan, and on material issues related to loans or participations that are not

explicitly assigned to the Risk and Participations Committee.

A risk report for the Bank as a whole is drafted monthly,

illustrating credit risks as well as market, operational and

strategic risks. The measured risks are standardised for

each risk type on the basis of a confidence level of 99.95%

and a holding period of one year. The risk capital requirement

calculated in this way for the Bank as a whole is then

contrasted against DG HYP’s capacity to carry and sustain

risk. The consideration of scenarios for all risk types and

their impact on the Bank as a whole, as required by

MaRisk, is regularly carried out, with the results being

reported to the management/Supervisory Board.


Management Report

Furthermore, Risk Controlling also carries out daily risk

reporting on the market risks and existing liquidity risks to

which DG HYP is exposed, in accordance with MaRisk. The

key findings are regularly reported to the Supervisory

Board, or to the Risk and Participations Committee of the

Supervisory Board.

Risks arising from investments in other companies are

only of minor significance to DG HYP.

Internal Audit. The internal audit examines whether

the demands on the internal controlling systems, the risk

management and controlling systems, and the necessary

reporting, are adequately met.

d) Basel II

The new Basel Capital Accord (commonly referred to as

“Basel II”), which came into force as of 1 January 2007 in

the form of the Solvability Ordinance, is focused on securing

the stability of the banking system and promoting

banking supervision with greater qualitative focus. The

core element of Basel II is greater risk-adjusted differentiation

of the regulatory capital requirements for loans,

depending on the credit quality of the borrower.

DG HYP has implemented the Foundation Internal Rating

Based Approach (FIRB) as part of Basel II. The acceptance

audit for the first entry level of FIRB from 1 January

2007 by the Bundesbank and the Bundesanstalt für Finanzdienstleistungsaufsicht

(BaFin – the German Financial

Supervisory Authority) took place in the autumn of 2006

and was successfully completed, with confirmation of

admission. Following a further audit in November 2007,

BaFin confirmed the suitability of further rating systems

and the supervisory reference point with effect from 1 July

2008. This means that the coverage rate for IRBA item values

and risk-weighted IRBA item values with appropriate

risk systems is at least 80%. The exit threshold (92% coverage

for IRBA positions and risk-weighted IRBA positions)

is almost achieved at the current time with a level of just

under 90%, although this is not actually required until

2012.

Developing our internal rating systems to implement

the requirements of the Basel II Accord remains on schedule.

All of the Basel II projects have been implemented in

close coordination with the DZ BANK Group since 2003.

The bank-wide Basel II projects are also implemented with

the Federal Association of German Credit Unions and Rural

Banking Cooperatives (Bundesverband der Deutschen

Volksbanken und Raiffeisenbanken- (BVR) and the Association

of German Pfandbrief Banks (Verband deutscher

Pfandbriefbanken - vdp).

All told, the regulations of the Basel Committee confirm

our approach to a risk/return-oriented business and

portfolio management. The FIRB admission and the ongoing

further developments confirm the high performance of

our risk management system.

II) Counterparty risk

Risk management in the real estate lending sector

focuses on the risk of counterparty default. Counterparty

risk denotes the risk that a business partner has defaulted

on a major liability for more than 90 days, or can only repay

liabilities by way of recourse to pledged collateral. Valuing

the collateral is of particular importance due to the fact

that real estate is involved. The management of counterparty

default risk is conducted largely as follows:

rating and portfolio-oriented management of new business

and loan extensions;

risk-oriented credit pricing;

active portfolio management (constant portfolio monitoring

and management);

active management of problem loans (early warning

process, intensified handling, restructuring and settlement).

annual review of credit risk strategy.

a) Lending process

The front and back offices for commercial real estate

finance in Germany are located in DG HYP’s Real Estate

Centres. Key workflow stages include the credit rating,

which is identified using rating systems that comply with

Basel II, and also property and project assessments. In the

latter case, DG HYP benefits from the proximity of its Real

Estate Centres and surveyors – who are also decentralised

– to its clients. Each lending decision requires a separate

vote by the market unit as well as by the back-office unit.

The loan application is authorised on the basis of lending

volume and risk classification. The corresponding parameters

are laid down in the credit and portfolio strategies.

Credit analysis and the processing of foreign commitments,

domestic secondary market transactions in the

banking market and small-scale commercial commitments

are dealt with centrally in Hamburg by specialist backoffice

departments.

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

29


With regard to capital market products, the existing

portfolio of mortgage backed securities (MBS) is also

looked after centrally in Hamburg by a specialist backoffice

department. New business is not currently being pursued

in this product area in the wake of the global financial

markets crisis.

b) Limit system

DG HYP has a limit system in place to manage and

monitor counterparty and country risks. This system calculates

the utilisation of external limits (country risk limits in

the DZ BANK Group, and default risks in accordance with

section 13 of the KWG), setting internal limits for country

and default risks simultaneously and independently of one

another. The respective limits must be upheld and can be

viewed at any time via an online system.

During the back-office monitoring processes, the utilisation

of the individual limits is monitored daily. If the limits

are exceeded a process of escalation is induced, during

which support is provided to ensure that the limit is

returned to, and that suitable measures are implemented.

Internal individual risk limits are identified depending

on the individual counterparty risk of the business partner.

Essentially, this is carried out in cooperation with the parent

company DZ BANK, which calculates an individual VR

rating per counterparty risk and makes this available to

DG HYP. Additionally, as part of Group risk management,

limits and ceilings on counterparty risks are taken into

account, whilst an agreed traffic light system for the early

detection of risks is also in place.

c) Credit rating

In order to take the particular demands on the commercial

real estate lending business into account, DG HYP

has developed (in cooperation with the central institutions

of the German cooperative banking sector and BVR) and

implemented a special Basel-II compliant rating system for

specialised lending (SLRE – Specialised Lending Real

Estate). These rating procedures apply to the following customer

groups: real estate developers, residential property

developers, development companies, closed-end funds,

project developers and commercial real estate investors.

The procedures underwent end-to-end validation, updates

and optimisation during the period under review. An independent

consultancy company has described the procedures

as ‘state of the art’. Given this particularly high level

of quality, the procedures will therefore also be rolled out

in the cooperative banks in 2009 in the context of a rating

desk solution.

30 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Management Report

The calculated data forms the basis for the lending

decision and pricing. The borrower’s rating in conjunction

with the property’s ability to cover interest and principal

repayments, is at the forefront of DG HYP’s forward-looking

credit analysis. Also taken into account is the security

situation and, where applicable, any existed intertwining of

risks.

For local authority lending, credit ratings are also estimated

based on a rating method that complies with

Basel II. DG HYP played a major role in developing the

municipal rating system, particularly within the scope of a

cooperative project where vdp joined forces with S&P Risk

Solutions. We use the VR rating procedures implemented

in DZ BANK within the framework of a ‘rating desk’ solution

for the rating of sovereigns, banks and key accounts.

As part of the implementation of Basel II, the review of

loan exposure – including a rating update required under

section 18 of the KWG – has been expanded for all customer

categories registered for IRBA. In addition, monitoring

documents are prepared regularly for exposures

exceeding EUR 2.5 million per primary obligor group. The

monitoring comprises the rating analysis and other customer

records, an assessment of the current rental situation,

and the tenant rating(s). The property or other collateral

is revalued if deemed necessary.

d) Management of problem loans

DG HYP uses what is known as an individual risk management

system for the purposes of early warning and the

management of problem loans, this being used in a similar

way at the parent company DZ BANK. Cases with early

warning signs of a possible long-term negative development

are assigned to a yellow list. Loans with regard to

which a subsequent loss cannot be excluded are kept on a

watch list. The loans included on this watch list are not

subject to individual write-downs. Where there is clear

negative trend, coupled with an existing requirement for

risk provisioning in the form of individual value adjustments,

the cases are included on the list of individual writedowns.

The processing rules and requirements on the

transfer from one ERM list to another are subject to

defined criteria.

Those problem credit exposures whose economic perspective

can be assessed as positive are processed in the

restructuring department, which forms part of the back

office. Submitting a concept that must comprise a differentiated

analysis and assessment of the overall situation of

the exposure and a cost-benefit analysis, as well as a com-


Management Report

prehensive restructuring plan, forms the basis for a restructuring

decision. Loan exposures are transferred to workout

if restructuring has failed or if this is deemed to be fruitless

from the outset.

Detailed reporting on ailing exposures is carried out

quarterly.

III) Market risks

For us, the concept of ‘market risks’ comprises the risks

associated with fluctuations in market prices (market risks

in the narrower sense), and liquidity risk. Market price risk

is the impact of interest rate fluctuations on the money and

capital markets, and changes in exchange rates. Liquidity

risk comprises the threat that DG HYP is unable to borrow

the funds required to maintain payments, or the risk of

only being able to do so at considerably less favourable

terms.

a) Risks associated with market price fluctuations

DG HYP uses various hedging tools in its dynamic management

of interest rate risk and currency risk for the bank

as a whole. This consists mainly of macro hedge transactions

employing interest-rate swaps and caps; options on

interest-rate swaps (known as “swaptions”) are also concluded

occasionally, albeit to a limited extent. In addition,

a number of large-sized transactions, such as granting

promissory note loans to institutional clients, are hedged

regularly through micro hedges against the interest rate

risk. Interest-rate swaps and swaptions are also used for

this purpose.

In order to quantify the bank’s market price risk exposure,

DG HYP calculates VaR figures daily using a

variance/co-variance procedure for all positions in each of

the portfolios. This is done with due account being taken

of the provisions of section 315 of the Solvency Ordinance

with regard to internal risk models.

RISK CAPITAL REQUIREMENTS

The forecasting quality of our internal VaR model is

checked daily. We apply the requirements of section 318 of

the SolvV for this back-testing.

Market Risk Controlling compares the projected

changes in present value that are calculated according to

these parameters, with the negative changes in present

value that actually occur the following day. On this basis,

we determine how often the actual negative changes in

the present value exceeded the VaR figures in the risk

model. The results from back-testing in 2008 confirm the

quality of our calculations.

Market Risk Controlling informs the Management

Board (as well as the Treasury) on the day-to-day Treasury

performance and utilisation of the VaR limit. The Management

Board decides on the management of the risk structure

for the entire bank at the regular meetings of the

Risk/Return Management Committee.

The impact of the sub-prime crisis also made itself felt

in the development of the entire bank’s VaR during 2008.

The overall positioning was relatively constant, and low in

terms of the basis point value. However, the volatility

surges during September 2008 in particular led to a substantial

increase in VaR.

In parallel, DG HYP reviewed and adapted its concept

for managing market price risks during the year under

review, adapting it to the new business model. In parallel,

Treasury management was more strongly focused on managing

profit and loss, taking into account the intent to hold

investment securities permanently. The associated changes

to the value-at-risk model led to a VaR reduction towards

the year-end.

Maximum Minimum Mean value Year-end value

€ mn in 2008 in 2008 in 2008 2008

Risk capital requirement, VaR, 1 year

holding period, 99.95% confidence level

497.6 165.7 390.1 285.5

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

31


) Liquidity risks

The bank’s liquidity situation is determined daily in line

with the regulatory and daily business requirements. For

this purpose, Market Risk Controlling provides Treasury

with a differentiated overview on a daily basis, indicating

future liquidity flows resulting from the individual positions

in the portfolio. Additionally, at its meetings the

Risk/Return Management Committee is provided with an

overview of the short- and long-term liquidity projection.

Liquidity is managed on the basis of this overview, with the

RISK CAPITAL REQUIREMENTS

BY TYPE OF RISK

Credit risk

Operational risks

Business risks and

strategic risks

Market risk

Credit risk

%

52

Market risk 38

Operational risks 5

Business risks and strategic risks 5

Total 100

30 Dec 2008

32 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Management Report

dual objectives of securing the Bank’s long-term liquidity

and achieving compliance with the Liquidity Ordinance.

A suitable liquidity controlling system is already in place

in line with the requirements of Basel II for measuring and

reporting on liquidity risk. On the basis of the short- and

long-term liquidity projection, a limit system is implemented

on a daily basis and integrated into the risk monitoring

process. The results from the scenarios are fed into the risk

analysis process.

IV) Operational risks

The Basel Committee defines operational risk as “the

risk of direct or indirect losses resulting from inadequate or

failed internal processes, people and systems, or from

external events”. DG HYP has adopted this definition,

albeit with marginal changes to detail in order to adjust it

to the bank’s own special interests. According to the Basel

II regulations, DG HYP has been subject to capital requirements

for operational risks since 1 January 2007. DG HYP

has adopted the standardised approach for quantification,

and has notified BaFin accordingly.

A system for collecting and recording loss data has

already been in place since 2002. Incoming loss reports are

collected systematically in a database arranged according

to predefined categories: they are subsequently used as

indicators for further improving the operating processes,

and hence for reducing operational risks.

In addition, all of DG HYP’s organisational units have

regularly conducted self-assessments since 2004. Current

risks are estimated using a standardised electronic questionnaire.

In addition, Risk Controlling carries out continuous

plausibility and consistency checks.

In order to also be able to identify operational risks in

good time, an early warning system regularly records various

risk indicators (such as system failures, fraud, staff fluctuation).

The agreed risk indicators and the collated reports

are submitted anonymously within the scope of groupwide

reporting to DZ BANK.


Management Report

From an organisational perspective, DG HYP’s Controlling

unit is responsible for measuring operational risks. It

reports regularly on operational risk issues to DG HYP’s

Management Board, and on the activities for further developing

the quantification approach, within the scope of the

Risk/Return Management Committee meetings.

V) Strategic risks

Strategic risks include the threat of losses arising from

management decisions regarding DG HYP’s business policy.

Strategic risks can also include long-term success factors in

DG HYP’s environment. These include, for example,

changes to the legal or corporate environment, changes to

the market and competitive conditions, customers or refinancing

partners. We also include planning and reputation

risks in this risk category.

In order to reduce planning risks, variance analyses are

prepared as a basis for continuously reviewing planning

data and assumptions.

Reputation risk concerns direct or indirect losses

incurred by the erosion of DG HYP’s reputation among

shareholders, staff, customers, business partners and the

general public. All activities and events that can affect the

Bank’s reputation are identified in both the Corporate

Development, Organisation and IT units, and in the market

units concerned. They are evaluated in close cooperation

with the Management Board, in order to mitigate their

impact as early as possible.

DG HYP generally uses, amongst other things, investment

calculations and projections, business plans including

scenario-based simulations, cost/benefit analyses, and risk

analyses as the basis for strategic decisions, in order to

identify and minimise strategic risks. In addition, all decision

proposals submitted that may involve or induce strategic

risks include a statement by the responsible organisational

unit on the risk content, which is taken into account

in the resolution passed.

Given that, as a rule, strategic risks are subject to very

complex and irregular factual connections, they cannot be

included in an integrated system as special risks. They are

therefore specially monitored by the Management Board;

they are also monitored and continuously analysed by the

respective individual organisational units responsible. The

regular review of business unit strategies is also a core element

of the continuous process of business unit planning

and control.

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

33


34

OUR STAFF

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Management Report


Management Report

OUR STAFF

Job and personnel planning reworked

As part of the strategic realignment of DG HYP, the

Bank’s personnel planning has also been overhauled in line

with the changed requirements. A settlement of conflicting

interests and a social plan have been agreed. The planning

horizon for the medium-term job and personnel plans has

been set as 31 December 2012. Measures will be gradually

implemented by then, and the social plan will also

remain in force until this date. The jobs plan involved a

reduction in personnel to 445.6 full-time equivalents by

31 December 2008. This reduction in numbers has been

implemented in the Retail division and in the staff departments

in particular.

On 31 March 2008 – immediately before the conclusion

of the settlement of conflicting interests and the introduction

of the personnel measures – DG HYP employed

518 active members of staff (equating to 493.7 FTEs). By

31 December 2008, this figure had been reduced to

419 employees (404.4 FTEs) through termination agreements

and the use of a small number of redundancies for

operational reasons. This meant that the target of

445.6 FTEs by the year-end was not just achieved but actually

exceeded as a result of the rapid and successful restructuring

process.

Over the final few weeks of the reporting year DG HYP

further stepped up its efforts to acquire skilled employees

for its core business and for credit risk analysis activities

with regard to foreign markets.

Internal communication concept successfully

implemented

Implementation of the new jobs and personnel plan

was accompanied by intensive communications work and

change management measures. DG HYP kept its staff up

to date on progress made in relation to the “Aufbruch

2008” (Re-positioning 2008) project and with regard to

the next stages in the process. This created transparency

with regard to the process itself and the need for the

changes being introduced. Workshops were also staged at

which managers were prepared for the change processes

and given appropriate training. In this way, DG HYP succeeded

in presenting the arguments for the changes to its

middle management and employees.

The fact that the labour market was very absorbent

through until the third quarter of the reporting year meant

that those employees who left the Bank were able to enter

new employment relatively quickly. The outplacement

advice provided within the context of the social plan was

also helpful in this regard.

Following the complete separation from VR Kreditwerk

AG, the workforce elected a new works council in December

2008, now only composed of eleven members. The

Management Board has taken the new election as an

opportunity to thank all of the members of the Works

Council for their constructive contribution to the Bank’s

reorganisation during the past financial year.

Thanks must also go to the employees of DG HYP who

were forced to take on many changes during the restructuring

phase and who, thanks to their ongoing dedication

and commitment, guaranteed a smooth transition. In this

way our employees have helped to ensure that DG HYP

could successfully move forwards and capture new business.

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

35


REPORT ON EVENTS AFTER THE

BALANCE SHEET DATE AND FORECAST

36 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Management Report


Management Report

REPORT ON EVENTS AFTER THE BALANCE SHEET DATE

AND FORECAST

Report on material events after the reporting date

Events after 31 December 2008

No events occurred between 1 January and 10 February

2009 that would have had a material impact on our

2008 results.

Report on expected developments

Cautionary forward-looking statement

The forecast and other parts of the Annual Report

include expectations and forecasts that relate to the future.

These forward-looking statements, in particular regarding

DG HYP’s business and earnings growth, are based on

forecasts and assumptions, and are subject to risks and

uncertainties. As a result, the actual results may differ

materially from those currently forecast. There are a large

number of factors that impact on our business, and which

are beyond our control. These factors primarily include

changes to the general economic situation, the competitive

situation and developments on the national and international

real estate and capital markets. In addition, results

can be impacted by possible defaults by borrowers or other

risks, some of which are discussed in detail in the risk

report.

In this regard, it must be pointed out that, at the time

of writing, there is major uncertainty surrounding the

development of the capital and real estate markets over

the rest of 2009. What does appear to be certain is that it

will take until well into 2009 for the Pfandbrief and interbank

markets to become fully functional again. The extent

of the economic downturn and the related negative impact

on the real estate markets are all the subject of very different

assessments.

Anticipated business development

In implementing its restructuring, DG HYP has ensured

that its business strategy and organisational approach are

geared towards the future developments and needs of the

market. DG HYP’s strategy, with its focus on traditional balance-sheet

real estate lending business and based on a

strong anchoring in the cooperative banking sector, has

proven its worth. Despite the increasingly difficult liquidity

situation as a result of the crisis of confidence on the market,

we were able to position ourselves at the year-end as

a strong, well-functioning provider of commercial real

estate finance. Whilst DG HYP was still able to enter into

new business during the fourth quarter thanks to the allocation

of liquidity via the DZ BANK Group, some of its competitors

were forced to withdraw from the market. In this

way, the Bank has proved itself to be a reliable provider of

commercial real estate finance for its new and existing customers

alike in Germany and abroad even in difficult times.

From this position, we are confident that we can

achieve our goals. Looking to 2009, we expect to see

greater growth in new business in our domestic and foreign

markets. As a centre of excellence within the German

Cooperative Financial Services Network, we will be further

developing customised commercial real estate finance

products and services for the cooperative banks and supporting

them as they present themselves on the market

and tap into regional potential.

Our commercial real estate financing expertise, our network

in the German cooperative banking sector and the

expansion of our international activities form solid foundations

for a high-performance real estate bank focused on

the commercial real estate sector.

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

37


Earnings forecast

DG HYP recognised at an early stage the need for a

new strategic direction in a market environment that has

grown increasingly difficult for all credit institutions and

implemented a viable business model during the 2008

financial year. As part of this process we have looked intensively

at the changing market conditions in the wake of the

financial market crisis and, on this basis, geared our

growth targets to the expected level of market potential.

The successful implementation of the new business

model will be reflected in a clear improvement in our operating

result before the end of 2009, resulting in a tangible

reduction in the required contribution from income from

DZ BANK. We anticipate sustained positive results from

2010 following the conclusion of the reorientation process.

We also expect the fall-out from the current financial crisis

to have been largely dealt with by the end of the 2009

financial year.

The predicted level of interest income for 2009 is some

13 per cent above that of the 2008 financial year, due to

the less marked impact of earlier structural measures and

the rising margins from new business from 2007 and

2008. The successive increase in the volume of commercial

real estate financing will be reflected in a constant increase

in net interest income in the following financial years. This

forecast is based on the margins that can currently be

realised on the market.

38 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Management Report

The improvement in the net commission result already

recorded during 2008 will be maintained on the basis of

the new business model.

The organisational restructuring and redimensioning of

DG HYP was successfully concluded in 2008. We have

therefore laid the foundation for a greatly improved cost

structure, which we will further optimise as we continue

our efforts to reduce our non-strategic lending portfolio.

With the focus on commercial real estate finance, foreign

business with professional clients, alongside domestic

business, will have a long-term role to play. The risk measurement

system in place is appropriate for the risks associated

with our business model and will be developed further

on an ongoing basis. Against this background, despite

our cautious business policy, our risk position will also

increase over the years to come as our business volumes

rise. We have taken due account of this with regard to provisioning

for loan losses.

Overall, it is our view that our decision to embark on a

new strategy has been proved correct: we firmly believe in

the long-term profitability of our business model with the

turnaround in 2010. These strategic objectives are based

on the first signs of a calming on the financial markets

emerging during the second half of 2009, accompanied by

a renewed upturn on the Pfandbrief market.


FINANCIAL STATEMENTS

Financial Statements

Page

Balance as at 31 December 2008 41

Profit and Loss Account

for the period from 1 January to 31 December 2008 47

Notes to the Financial Statements

General Notes 53

Notes to the Balance Sheet 55

Notes to the Profit and Loss Account 67

Cash flow statement 68

Coverage 69

Other information

on the annual financial statements 75

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

39


BALANCE SHEET

AS AT 31 DECEMBER 2008

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

41


ASSETS

BALANCE SHEET

31 Dec 2007

€ 000’s Note # € 000’s € 000’s € 000’s

Cash funds 54,795 33,309

a) Cash on hand 9 16

b) Balances with central banks 54,786 33,293

of which: with Deutsche Bundesbank 54,786 (33,293)

Loans and advances to banks (4) 4,327,010 7,174,567

a) Loans secured by property mortgages 133,221 159,096

b) Loans to local authorities 2,647,235 4,319,910

c) Other loans and advances 1,546,554 2,695,561

of which: Payable on demand 140,819 (156,880)

Loans and advances to customers (4) 39,089,815 40,763,277

a) Loans secured by property mortgages 21,641,134 22,339,652

b) Loans to local authorities 16,573,506 17,817,321

c) Other loans and advances 875,175 606,304

Debt securities and other fixed-income securities (7) 31,290,214 34,202,704

a) Bonds and debt securities (30,162,724) (33,835,301)

aa) Public-sector issuers 12,606,762 16,322,450

of which: Securities eligible as collateral

with Deutsche Bundesbank 11,810,615 (15,222,425)

ab) Other issuers 17,555,962 17,512,851

of which: Securities eligible as collateral

with Deutsche Bundesbank 14,208,211 (13,419,322)

b) Own bonds issued 1,127,490 367,403

Nominal amount 1,125,943 (365,294)

Equities and other non-fixed income securities (7) 1,316 2,042

Participations (7) 167 726

Investments in affiliated companies (7) 2,569 2,044

Trust assets (6) 696,499 685,666

of which: Trustee loans 663,789 (652,956)

Intangible fixed assets (7) 543 10,188

Tangible fixed assets (7) 153,589 2,997

Other assets (22) 241,757 268,148

Prepaid expenses (9) 157,601 189,626

a) From new issues and lending 156,685 188,719

b) Other 916 907

Total assets 76,015,875 83,335,294


AS AT 31 DECEMBER 2008

LIABILITIES AND EQUITY

31 Dec 2007

€ 000’s Note # € 000’s € 000’s € 000’s

Liabilities to banks (12) 10,006,152 11,930,167

a) Outstanding registered mortgage bonds

(Hypotheken-Namenspfandbriefe) 772,769 784,936

b) Outstanding registered public sector covered bonds

(öffentliche Namenspfandbriefe) 2,099,194 2,550,288

c) Other liabilities 7,134,189 8,594,943

of which: Payable on demand 306,427 (1,408,867)

Registered mortgage bonds 2 (3)

and registered public-sector covered bonds 3,281 (9,833)

surrendered to lenders as collateral for borrowings

Liabilities to customers (12) 17,000,069 17,127,557

a) Outstanding registered mortgage bonds

(Hypotheken-Namenspfandbriefe) 2,606,015 2,685,224

b) Outstanding registered public sector covered bonds

(öffentliche Namenspfandbriefe) 11,207,081 11,126,050

c) Other liabilities 3,186,973 3,316,283

of which: Payable on demand 391,505 (345,984)

Registered mortgage bonds 5,113 (5,113)

and registered public-sector covered bonds 7,113 (9,669)

surrendered to lenders as collateral for borrowings

Securitised liabilities (12) 45,392,241 50,349,525

Bonds issued

a) Mortgage bonds (Hypothekenpfandbriefe) 10,535,048 12,430,851

b) Public-sector covered bonds (öffentliche Pfandbriefe) 25,819,136 30,686,292

c) Other debt securities 9,038,057 7,232,382

Trust liabilities (6) 696,499 685,666

of which: Trustee loans 663,789 (652,956)

Other liabilities (23) 110,927 119,802

Deferred income (9) 121,817 129,797

a) From new issues and lending 121,740 129,704

b) Other 77 93

Provisions 111,142 114,218

a) Provisions for pensions and similar obligations 71,086 69,702

b) Provisions for taxes 734 767

c) Other provisions 39,322 43,749

Subordinated liabilities (13) 619,926 731,899

Profit-participation certificates (14) 109,928 145,718

of which: Due within two years 53,686 (89,476)

Shareholders’ equity 1,847,174 2,000,945

a) Subscribed capital (15) (1,164,916) (1,318,687)

aa) Share capital 90,000 90,000

ab) Silent partnership contributions 1,074,916 1,228,687

b) Capital reserves (16) 589,113 589,113

c) Retained earnings (16) (93,145) (93,145)

ca) Legal reserves 945 945

cb) Other retained earnings 92,200 92,200

Total equity and liabilities 76,015,875 83,335,294

Contingent liabilities (17)

Liabilities from guarantees and indemnity agreements 470,357 1,575,437

Other commitments

Irrevocable loan commitments 1,946,311 2,067,839


PROFIT AND LOSS ACCOUNT

FOR THE PERIOD FROM 1 JANUARY TO 31 DECEMBER 2008

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

47


PROFIT AND LOSS ACCOUNT

FOR THE PERIOD FROM 1 JANUARY TO 31 DECEMBER 2008

2007

€ 000’s Note # € 000’s € 000’s € 000’s

Interest income from

a) Lending and money market transactions 2,227,730 2,437,958

b) Fixed-income securities and debt register claims 1,519,397 1,587,143

3,747,127 4,025,101

Interest expense 3,584,187 3,728,335

162,940 296,766

Current income from

equities and other non-fixed-income securities 62 79

Income from profit-pooling, profit transfer,

and partial profit transfer agreements 0 1,087

Commission income 28,356 20,242

Commission expenses 26,844 56,425

Net commission result 1,512 – 36,183

Other operating income

General administrative expenses

a) Personnel expenses

(26) 9,458 11,415

aa) Wages and salaries

ab) Compulsory social security contributions and

35,936 44,096

expenses for pensions and other employee benefits 10,769 11,822

46,705 55,918

of which: Pension expenses 6,122 (6,074)

b) Other administrative expenses 69,920 104,193

116,625 160,111

Amortisation/depreciation and write-downs of

intangible and tangible fixed assets 10,579 7,410

Other operating expenses (27) 2,607 1,547

Amortisation and write-downs of loans

and advances and specific securities,

as well as additions to loan loss provisions 87,318 131,113

Amortisation and write-downs on participations,

interests in affiliated companies,

and investment securities 85,463 58,475

Result from ordinary activities – 128,620 – 85,492

Extraordinary income (28) 223,000 237,000

Extraordinary expenses (29) 36,424 89,146

Net extraordinary income/expenses 186,576 147,854

Taxes on income

Other taxes not disclosed under

(30) 267 – 13,172

“Other operating expenses” 0 – 1

267 – 13,173

Profits transferred under

partial profit transfer agreements 57,689 75,535

Net income 0 0


Notes to the Financial Statements

NOTES TO THE FINANCIAL STATEMENTS

General notes

(1) General information on the preparation of financial

statements

The financial statements of DG HYP for the financial

year 2008 have been prepared in accordance with the provisions

of the German Commercial Code (Handelsgesetzbuch

– “HGB”) and the provisions of the German

Accounting Directive for Banks (Verordnung über die Rechnungslegung

der Kreditinstitute – “RechKredV”). At the

same time, the financial statements fulfil the requirements

of the German Public Limited Companies Act (Aktiengesetz

– “AktG”) and the German Pfandbrief Act (Pfandbriefgesetz

– “PfandBG”).

Given the non-materiality of all subsidiaries, in accordance

with section 296 (2) of the HGB, the company has

not prepared consolidated financial statements.

All amounts have been quoted in euros, in accordance

with section 244 of the HGB.

(2) Accounting policies

Loans and advances to banks/to customers

Loans and advances to banks and customers are recognised

at nominal value, in accordance with section 340e (2)

of the HGB. Where their stated value of the loans differs

from the amount disbursed, or cost, the amount of the difference

is reported under prepaid expenses/deferred

income and amortised in interest income over the term of

the transaction.

Loans and advances which are fully classified as current

assets are valued strictly at the lower of cost or market. All

existing individual lending risks are covered by specific loan

loss provisions. Existing risks of default in the retail lending

business are covered by recognising specific provisions at a

flat rate. We have formed a tax-deductible general loan

loss provision to cover expected loan losses which have

been incurred but not identified as such at the balance

sheet date.

Early repayment penalties charged for loan repayments

or extensions during the fixed-interest term of a loan are

fully recognised in interest income. With regard to interest

claims, we no longer recognise interest income where it

becomes obvious during execution proceedings that the

realisable proceeds will fall short of the carrying amount.

Debt securities and other fixed-income securities

At the balance sheet date, all debt securities and other

fixed-income securities are carried as fixed assets (invest-

ment securities), at amortised cost, except repurchased

own issues which are valued strictly at the lower of cost or

market. Premiums and discounts are amortised in net interest

income over the term of the securities.

At the balance sheet date, the fair value of investment

securities was € 85 million higher than their book value.

The fixed-income securities of the investment portfolio are

grouped with interest rate hedges (swaps), to establish

hedging relationships. The accounting of hedging relationships

and the effectiveness test are both performed on

portfolio level. Taking these hedges into account, we did

not recognise an extraordinary write-down in the amount

of € 997 million for investment securities due to the

expected temporary nature of the impairment, pursuant to

section 253 (2) sentence 3 of the HGB. Based on our current

assessment, no impairment of interest and principal

payments is expected to occur with respect to these securities.

In contrast, extraordinary write-downs pursuant to section

253 (2) sentence 3 of the HGB were required due to

an expected permanent impairment of government and

bank bonds (write-down of € 49 million) and mortgagebacked

securities (MBS; write-down of € 47 million).

To ensure a uniform measurement within the DZ BANK

Group, price data used to determine the fair value of debt

securities and other fixed-income securities as at the 2008

balance sheet date was taken from a DZ BANK price feed

for the first time. As a result of the lacking validity of market

values in view of increasingly illiquid markets and

applying a valuation model complying with generally

accepted accounting principles, future cash flows from

interest and principal were projected and discounted to

their present value, using market interest rates in line with

the risks and maturities concerned, and applying adequate

liquidity yield add-ons (discounted cash flow method).

Yield add-ons to reflect risk and liquidity were determined

on the basis of most recent values observed on an active

market, taking into account current market developments.

Given the illiquid market for mortgage-backed securities,

the liquidity yield add-ons for a portfolio in the amount of

€ 4.0 billion were derived from still liquid bond markets.

Valuation parameters for all other securities were derived

from market prices and rates prevailing on the 2008 balance

sheet date.

Participations and interests in affiliated companies

Participations and interests in affiliated companies are

carried at amortised cost.

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

53


Intangible and tangible fixed assets

Tangible fixed assets are carried at cost less regular

depreciation, where applicable. In the year under review, a

write-down to the lower going concern value under German

tax laws (Teilwert) was recognised for the building in

Rosenstrasse 2, Hamburg. Movable tangible fixed assets

are predominantly depreciated on a straight-line basis,

using the maximum rates permissible under tax laws, or

based on the declining-balance method with a subsequent

transfer to straight-line depreciation. Low-value assets are

written off in full during their year of purchase. Standard

software is reported under intangible assets, as prescribed

by accounting standard HFA 11 issued by the Main Committee

of the IDW (IDW RS HFA 11). As a result of the

change of the business model, write-downs in the amount

of € 6.5 million had to be recognised for a securitisation

software and a capitalised expected economic benefit due

to the resulting impairment.

Liabilities

Liabilities are shown on the balance sheet at the

amount due for repayment. The difference between the

nominal value and the initial carrying amount of liabilities is

recognised under deferred items and amortised over the

term of the transaction.

Liabilities classified as structured products (as defined in

Accounting Practice Statement BFA 1.003 issued by the

Banking Committee of the IdW) are accounted for as uniform

liabilities as they only contain embedded interest rate

derivatives. Such liabilities are grouped with corresponding

hedge transactions, to establish hedging relationships.

The partial profits to be paid for silent partnership contributions

are carried in their full amount.

Provisions

Contingent liabilities are covered by provisions

equalling the anticipated amount of the liability, on the

basis of prudent business judgement. Provisions for pensions

are determined using the cost (“Teilwert”) method in

accordance with actuarial principles, using the actuarial

tables 2005 G by Dr. Klaus Heubeck. The imputed rate used

for discounting was 4.5 per cent.

54 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Notes to the Financial Statements

Derivative financial instruments

Financial derivatives are accounted for separately in

auxiliary ledgers. These instruments are generally used to

hedge the interest rate and currency risk exposure of onbalance

sheet transactions. Current interest payments are

amortised and recorded in net interest income.

Income from the disposal (close-out) of interest ratebased

derivative financial instruments is generally recognised

in interest income. Where interest rate swaps are

grouped with securities, to establish hedging relationships

(asset swaps), income realised upon closing out swaps are

recognised in line with the recognition of income of the

underlying transaction, in the net result on financial assets,

or in the net risk provisioning balance, respectively.

Premiums paid or received for credit default swaps are

amortised in commission income over the terms of the

transactions.

Premium payments for swaptions entered into as a

hedge against the impact of statutory loan termination

rights pursuant to section 489 of the German Civil Code

(Bürgerliches Gesetzbuch - „BGB“) are allocated to the

investment portfolio and carried at cost.

(3) Currency translation

Assets and liabilities from foreign exchange transactions

are translated in line with section 340h of the HGB and

Statement BFA 3/1995 issued by the IdW. Book receivables,

securities, liabilities and unsettled spot transactions are

generally translated using the ECB reference rate prevailing

on the balance sheet date. Income and expenses from currency

translation are recognised in the income statement in

accordance with section 340h of the HGB. Income and

expenses from foreign exchange forwards, which were

entered into exclusively for the purpose of hedging interestbearing

balance sheet items, are recognised in interest

income.


Notes to the Financial Statements

Notes to the balance sheet

(4) Lending business

Principal Carrying amount

Mortgage loans € mn € mn

to banks 132 133

to customers 21,331 21,641

Total 21,463 21,774

Portfolio development (principal) € mn € mn

Balance at 31 Dec 2007 22,297

Additions during the financial year 2008 2,817

Disbursements 2,807

Transfers 9

Other additions 1

Disposals during the financial year 2008 3,651

Scheduled repayments 2,054

Unscheduled repayments 1,563

Transfers 9

Other disposals 25

Balance at 31 Dec 2008 21,463

Principal Carrying amount

Loans to local authorities € mn € mn

to banks 2,597 2,647

to customers 16,313 16,574

Total 18,910 19,221

Portfolio development (principal) € mn € mn

Balance at 31 Dec 2007 21,801

Additions during the financial year 2008 1,245

Disbursements 1,220

Transfers –

Other additions 25

Disposals during the financial year 2008 4,136

Scheduled repayments 3,349

Unscheduled repayments 787

Transfers –

Other disposals –

Balance at 31 Dec 2008 18,910

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

55


(5) Negotiable securities

56 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Notes to the Financial Statements

Balance sheet item Listed Unlisted Amount of negotiable

securities not valued at

the lower of cost or market

31 Dec 2008 31 Dec 2007 31 Dec 2008 31 Dec 2007 31 Dec 2008 31 Dec 2007

€ 000’s € 000’s € 000’s € 000’s € 000’s € 000’s

Debt securities

and other fixed-

income securities 29,150,767 32,446,678 2,139,447 1,756,026 9,746,437 17,571,028

Equities and

other non-fixed

income securities – – 1,316 2,042 – –

(6) Trust business

31 Dec 2008 31 Dec 2007

€ 000’s € 000’s

Assets held in trust comprise:

– Loans and advances to customers 663,789 652,956

– Participations 32,710 32,710

696,499 685,666

Trust liabilities are carried vis-á-vis:

– Banks 602,434 577,044

– Customers 94,065 108,622

696,499 685,666


Notes to the Financial Statements

(7) Breakdown of, and statement of changes in fixed assets

I. Intangible

Purchase or production cost Depreciation and amortisation Carrying amounts

1 Jan 2008 Additions Reclassi- Disposals Financial Reclassi- Disposals Total

fications year fications 31 Dec 2008 1 Jan 2008

€ 000’s € 000’s € 000’s € 000’s € 000’s € 000’s € 000’s € 000’s € 000’s € 000’s

assets 48,362 354 0 6,948 9,930 0 6,879 41,225 543 10,188

II. Tangible

fixed assets

1. Land and

buildings 881 174,366 0 303 22,3851) 0 0 22,436 152,5082) 2. Office furniture

and

830

equipment 3) 23,442 134 0 3,984 649 0 3,413 18,511 1,081 2,167

24,323 174,500 0 4,287 23,034 0 3,413 40,947 153,589 2,997

Net change

III. Financial assets

1. Participations

2. Investments in

affiliated

2,853 – 2,686 167 726

companies

3. Equities and

other non-fixed

income

2,044 525 2,569 2,044

securities

4. Investment

2,042 -726 1,316 2,042

securities 29,416,007 746,717 30,162,724 29,823,585

1) The extraordinary write-down on the building in Rosenstrasse, amounting to € 22.4 million, is reported in extraordinary expenses.

2) Owner-occupied properties: € 62 million; used by third parties: € 90.5 million.

3) Fully used for the bank’s own operations.

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

57


(8) List of investments pursuant to sections 285 no. 11 and 340a of the HGB

58 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Notes to the Financial Statements

Minimum stake of 20 % Equity interest Shareholders’ equity Result 2007

Name/Sitz % € 000’s € 000’s

Landschaftliche

Grundstücksgesellschaft mbH, Kiel 100.0 800 750 *)

VR WERT Gesellschaft für

Immobilienbewertungen mbH, Hamburg 100.0 100 221 *)

IMMOFORI Gesellschaft für Immobilien

Forderungsinkasso mbH, Hamburg 100.0 1,000 15 *)

VR HYP GmbH, Hamburg 100.0 25 0

VR REAL ESTATE GmbH, Hamburg 100.0 25 – 1

TXS Financial Products GmbH, Ellerau 26.0 100 199

*) Profit and loss transfer agreement with DG HYP

(9) Prepaid expenses and deferred income

Prepaid expenses

Sub-item a) From new issues

and lending comprises:

31 Dec 2008 31 Dec 2007

€ 000’s € 000’s

– Difference between the nominal amount

and the higher disbursement amount

of receivables 16,212 21,815

– Difference between the nominal amount

and the lower issuing amount

of liabilities 94,585 124,073

Deferred income

Sub-item a) From new issues

and lending comprises:

– Difference between the nominal amount

and the lower disbursement amount

of loans and advances 47,836 48,972


Notes to the Financial Statements

(10) Open-market transactions

31 Dec 2008 31 Dec 2007

€ 000’s € 000’s

Open-market transactions entered into with

Deutschen Bundesbank 3,609,689 3,445,302

(11) Securities repurchase agreements

There were no securities repurchase agreements on the balance sheet date.

(12) Breakdown of, and statement of changes

in debt securities and borrowed funds

Carrying

Principal amount

€ mn € mn

Registered mortgage bonds

to banks 753 773

to customers 2,554 2,606

Mortgage bonds 10,294 10,535

13,601 13,914

Registered public-sector covered bonds

to banks 2,060 2,099

to customers 10,948 11,207

Public-sector covered bonds 25,316 25,819

38,324 39,125

Other debt securities 8,898 9,038

Borrowed funds

from banks 1,438 1,460

from customers 2,701 2,777

4,139 4,237

Total 64,962 66,314

Development (principal)

Balance on Additions Disposals Balance on

31 Dec 2007 31 Dec 2008

€ mn € mn € mn € mn

Mortgage bonds and

registered mortgage bonds 15,537 2,518 4,454 13,601

Public-sector covered bonds

and registered public-sector covered bonds 43,449 603 5,728 38,324

Other debt securities 7,124 4,151 2,377 8,898

Borrowed funds 4,350 706 917 4,139

Total 70,460 7,978 13,476 64,962

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

59


(13) Subordinated liabilities

60 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Notes to the Financial Statements

31 Dec 2008 31 Dec 2007

€ 000’s € 000’s

Subordinated

other debt securities 160,000 160,000

borrowed funds 459,926 571,899

619,926 731,899

Expenses incurred 38,778 42,547

On the basis of the requirements of section 10 (5a) of the German Banking Act (Kreditwesengesetz or „KWG“), an amount of

€ 436,305 thousand is included as modified available capital for solvency purposes. Early repayment obligations are not provided

for in all cases. There are no provisions or plans for a conversion of such funds to capital, or into another form of debt.

Subordinated liabilities carry an average interest of 5.4 per cent, and have original maturities of between 9 and 20 years.

Disclosures on subordinated liabilities amounting to 10.0 per cent or more of the aggregate amount of subordinated liabilities:

(14) Profit-participation certificates

Amount Currency Coupon Maturity

€ mn %

100.0 EUR 4.27 7 Dec 2015

100.0 EUR 4.63 23 Nov 2016

90.0 EUR 5.52 23 Jan 2017

Issuer Year of issue Amount Coupon Repayment*

€ mn %

DG HYP 1993 51.1 7.25 11 Jun 2009

DG HYP 1993 51.1 7.00 1 Jun 2014

DG HYP 1999 5.1 6.79 11 Jun 2011

DG HYP 1999 2.6 6.63 11 Jun 2009

109.9

* The term of profit-participation certificates ends on 31 December of the preceding year.

An amount of € 56.2 million of the profit-participation certificates represent supplementary capital pursuant to section 10 (5) of

the KWG. The holders of profit-participation certificates receive an annual distribution in the amount of the respective coupon,

which takes precedence over the profit entitlements of shareholders.


Notes to the Financial Statements

(15) Subscribed capital

31 Dec 2008 31 Dec 2007

€ 000’s € 000’s

Issued share capital 90,000 90,000

Silent partnership contributions 1,074,916 1,228,687

Total 1,164,916 1,318,687

The issued share capital amounts to € 90,000,000 and is divided into 3,500,000 notional no-par value shares (“unit shares”).

DZ PB-Beteiligungsgesellschaft mbH, Frankfurt/Main holds 3,321,500 shares (94.9 per cent), of which 1,131,320 shares are held in

trust on behalf of DZ PB-Beteiligungsgesellschaft mbH by other entities. The remaining 178,500 shares (5.1 per cent) are held by

DZ BANK Deutsche Zentral-Genossenschaftsbank AG, Frankfurt/Main.

The silent partnership contributions are partial profit transfer agreements within the meaning of section 292 (1) no. 2 of the AktG.

Of the silent partnership contributions, € 635.0 million are unlimited, and € 635.0 million comply with the provisions of section

10 (4) of the KWG on the balance sheet date.

(16) Breakdown of, and statement of changes in reserves

Balance on Additions Disposals Balance on

31 Dec 2007 31 Dec 2008

€ 000’s € 000’s € 000’s € 000’s

Capital reserve 589,113 – – 589,113

Retained earnings (93,145) – – (93,145)

– Legal reserves 945 – – 945

– Other retained earnings 92,200 – – 92,200

Total 682,258 – – 682,258

(17) Contingent liabilities

This item mainly includes guarantees extended to other banks for commercial real estate loans.

(18) Revaluation reserves

No revaluation reserves pursuant to section 10 (2b) sentence 1 no. 6 of the KWG were included in liable capital.

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

61


(19) Relationships with affiliated enterprises and subsidiaries

Affiliated enterprises

62 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Notes to the Financial Statements

31 Dec 2008 31 Dec 2007

€ 000’s € 000’s

Loans and advances to

– banks 358,657 1,894,356

– customers 25,263 26,705

Debt securities and other

fixed-income securities 1,107,437 –

Liabilities to

– banks 3,546,299 5,332,527

– customers 1,066,530 1,093,785

Securitised liabilities 10,772,339 9,827,240

Subordinated liabilities 308,271 315,940

Subsidiaries

There were no loans and advances, or liabilities, to subsidiaries at the reporting date.


Notes to the Financial Statements

(20) Breakdown of maturities for receivables and liabilities

31 Dec 2008 31 Dec 2007

€ 000’s € 000’s

Assets

Loans and advances to banks

Remaining term – payable on demand 140,819 156,880

– up to three months 1,710,814 3,082,615

– between three months and one year 579,085 1,205,302

– between one year and five years 993,448 1,224,482

– more than five years 902,844 1,505,288

4,327,010 7,174,567

Loans and advances to customers

Remaining term – payable on demand 239,301 212,671

– up to three months 1,474,815 1,744,833

– between three months and one year 2,139,258 1,937,588

– between one year and five years 10,908,450 9,962,649

– more than five years 24,327,991 26,905,536

39,089,815 40,763,277

Bonds and other fixed-income

securities maturing

in the following year 3,747,569 2,698,058

Liabilities

Liabilities to banks

Remaining term – payable on demand 306,427 1,408,867

– up to three months 5,545,544 4,535,618

– between three months and one year 340,504 1,837,746

– between one year and five years 1,842,783 1,669,844

– more than five years 1,970,894 2,478,092

10,006,152 11,930,167

Liabilities to customers

Remaining term – payable on demand 391,505 345,984

– up to three months 577,443 744,077

– between three months and one year 921,643 545,268

– between one year and five years 4,178,374 3,588,421

– more than five years 10,931,104 11,903,807

17,000,069 17,127,557

Certificated liabilities maturing

in the following year 9,936,095 12,700,569

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

63


(21) Assets and liabilities in foreign currencies

64 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Notes to the Financial Statements

31 Dec 2008 31 Dec 2007

€ 000’s € 000’s

Assets include foreign-currency receivables

in the total amount of 1,086,768 1,959,083

Liabilities and equity include foreign-currency liabilities

in the total amount of 1,151,696 2,116,297

(22) Other assets

Other assets include loans and advances to fiscal entity subsidiaries in the amount of € 224.6 million as well as interest

rate options with a carrying amount of € 10.2 million.

(23) Other liabilities

This item includes mainly € 58.4 million in profits to be transferred under partial profit transfer agreements.


Notes to the Financial Statements

(24) Forward contracts not reflected in the balance sheet

The following types of forward transactions based on foreign currencies, interest rates or other underlying instruments

were outstanding as at the balance sheet date:

Nominal amounts by Fair value

residual term Total 2008 2007

€ mn _< 1 year > 1–5 yrs > 5 yrs 2008 2007 positive negative positive negative

Interest rate instruments 24,453 56,758 73,975 155,186 174,478 2,909 4,496 1,991 3,229

OTC products

Interest rate swaps*) 23,859 56,609 73,975 154,443 173,122 2,831 4,490 1,928 3,225

including: Forward swaps – 179 229 408 404 6 28 2 15

including: With embedded

caps/floors 143 70 51 264 264 3 18 2 12

including: With embedded

puts/calls 10 100 510 620 498 14 20 12 7

Interest rate options 594 149 – 743 1,356 78 6 63 4

including: Swaptions bought 594 139 – 733 1,312 78 – 63 –

including: Swaptions sold – 10 – 10 44 – 6 – 4

Exchange-traded products – – – – – – – – –

Currency-related instruments 86 2,827 614 3,527 2,283 496 102 179 7

Cross-currency swaps 86 2,827 614 3,527 2,283 496 102 179 7

Foreign exchange forwards – – – – – – – – –

Foreign exchange swaps – – – – – – – – –

Credit-related transactions – 1,150 928 2,078 2,414 30 125 64 4

Credit default swaps – 1,150 568 1,718 2,075 10 2 14 4

including: Protection seller – 172 8 180 198 – – – –

including: Protection buyer – 978 560 1,538 1,877 10 2 14 4

Total Return Swaps – – 360 360 340 20 123 50 0

including: Protection seller – – 360 360 340 20 123 50 0

including: Protection buyer – – – – – – – – –

Forward transactions exposed

to other price risks – – – – – – – – –

Total 24,539 60,735 75,517 160,791 179,176 3,435 4,723 2,234 3,240

Of which part of hedging relationships with investment securities**). 14 1,096 510 332

*) Including interest rate swaps with identical foreign currency.

**) The negative market value of € 1,082 million is included in the write-downs which were not recognized in accordance with section 253 (2) sentence 3 of

the HGB (as mentioned in Note (2)).

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

65


66 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Notes to the Financial Statements

The breakdown of the carrying amounts of forward contracts not reflected on the balance sheet by balance sheet items pursuant to

section 285 sentence 1 no. 18 b) of the HGB is as follows:

Carrying Carrying Balance sheet item Carrying Carrying Balance sheet item

amount amount amount amount

2008 2007 Assets 2008 2007 Liabilities and equity

€ mn € mn € mn € mn

Interest rate swaps 130 108 Loans and advances to banks, 274 283 Liabilities to banks,

loans and advances to customers, Liabilities to customers,

prepaid expenses deferred income

Interest rate options 10 18 Other assets 0 0

Cross-currency swaps 460 168 Loans and advances to banks 17 7 Liabilities to banks,

deferred income

Credit default swaps 1 2 Other assets 2 2 Other liabilities

prepaid expenses

Total Return Swaps 26 26 Loans and advances to banks,

prepaid expenses

The forward transactions identified above are used to manage interest rate, currency and counterparty risk exposure. As a rule, counterparties

are OECD banks, OECD financial services institutions or OECD central governments. In addition, borrowers also appear as counterparties

(market value € 12.3 million) in connection with loan agreements. Interest rate swaps are valued using present values, determined

by discounting cash flows using market interest rates in line with the credit risk and maturities concerned, as indicated by the yield

curve prevailing on the balance sheet date.

Options are valued using option pricing models. These are applied on the basis of generally recognised assumptions regarding valuation

parameters, in particular the value and volatility of the underlying instrument, the agreed exercise price (interest rate), the remaining lifetime

of the contract, as well as the risk-free interest rate for that lifetime.

Credit derivatives are valued on an individual basis, predominantly on the basis of the default probability of the reference obligations concerned.

Market values are determined without consideration of netting agreements. No add-ons or credit quality weightings – as defined pursuant

to methodology of the German Solvability Ordinance (Solvabilitätsverordnung) – are taken into account. Negative market values of

derivatives are offset by positive market values of the related hedged balance sheet items.


Notes to the Financial Statements

Notes to the profit and loss account

(25) Breakdown of income by geographic markets within the meaning of section 34 (2) no. 1 of the RechKredV

The breakdown of interest income, current income from equities and other non-fixed-income securities, commission income

and other operating income is as follows:

in % 2008 2007

Germany 68.1 69.8

International 31.9 30.2

(26) Other operating income

Other operating income totalling € 9.5 million is mostly due to rental income totalling € 4.7 million and income on services

totalling € 2.4 million.

(27) Other operating expenses

Other operating expenses totalling € 2.6 million includes purchases of goods in the amount of € 0.9 million.

(28) Extraordinary income

The restructuring expense and the impact of the crisis on the international capital markets have weighed on DG HYP’s earnings

in the year under review. In order to compensate for these extraordinary factors, and to support a future realignment

of DG HYP, the DZ BANK made a contribution to income of € 223 million, which was derived from the existing profit and

loss transfer agreement and was recognised as extraordinary income in financial year 2008.

(29) Extraordinary expense

As part of the restructuring of DG HYP, the Bank’s main sources of non-personnel costs – such as infrastructure and IT –

were further optimised during the 2008 financial year. The sale and lease-back transactions for the Bank’s headquarters in

Rosenstrasse and a further rented property, which have been in existence since 2003/04, were unwound. The repurchase of

this building at market prices resulted in extraordinary expenses of € 24.8 million. Moreover, restructuring provisions in conjunction

with personnel measures and consultancy services totalling € 11.6 million were included in the category of extraordinary

expenses.

(30) Taxes on income

The tax income of € 0.3 million recorded in the year under review results from the adjustment of the negative tax overhead

credit that was recognised in 2007. This credit related to partial profit transfers, covered by section 8a of the KStG.

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

67


Cash flow statement

(31 ) Cash flow statement

68 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Notes to the Financial Statements

€ mn 2008 2007

1. Net income for the period

(including minority interests)

excluding extraordinary items and taxes

Non-cash items included in net income and

reconciliation to cash flow from operating activities

– 129 – 85

2. +/– Depreciation, write-downs and write-ups on loans and advances,

tangible fixed assets and financial assets 177 142

3. +/– Increase / decrease in provisions – 3 18

4. +/– Other non-cash expenses/income 28 99

5. –/+ Profits/losses from the disposal of tangible fixed assets and financial assets – 11 – 2

6. –/+ Other adjustments (net balance) – 176 – 298

7. = Subtotal

Net changes in assets and liabilities

from operating activities

– 114 – 126

8. Loans and advances

8a. +/– – to banks 2,798 – 756

8b. +/– – to customers 1,599 556

9. +/– Securities (excluding financial assets) – 1,015 3,073

10. +/– Other assets from operating activities 48 – 75

11. Liabilities

11a. +/– – to banks – 1,934 – 1,563

11b. +/– – to customers – 126 2,723

12. +/– Securitised liabilities – 4,840 – 3,619

13. +/– Other liabilities from operating activities – 59 – 124

14. + Interest and dividends received 3,885 4,053

15. – Interest paid – 3,698 – 3,905

16. + Extraordinary cash receipts 223 237

17. – Extraordinary cash payments – 1 – 71

18. +/– Income tax payments – 13

19. = Cash flow from operating activities – 3,234 416

20. Receipts from the disposal of

20a. + – financial assets 5,438 2,637

20b. + – tangible fixed assets 1 –

21. Payments for investments in

21a. – – financial assets – 1,708 – 3,372

21b. – – tangible fixed assets – 174 – 1

22. + Cash receipts from the disposal of consolidated companies

and other business units – –

23. – Cash payments for the acquisition of consolidated companies

and other business units – –

24. +/– Changes in cash funds due to other investing activities (net balance) – – 1

25. = Cash flow from investing activities 3,557 – 737

26. + Cash receipts from issue of capital – 35

27. Cash payments to owners and minority shareholders

27a. – – Dividends paid – –

27b. – – Other distributions/cash payments – 58 – 76

28. +/– Changes in cash funds due to other capital movements (net balance) – 243 371

29. = Cash flow from financing activities – 301 330

30. Cash funds at the beginning of the period 33 24

31. +/– Cash flow from operating activities – 3,234 416

32. +/– Cash flow from investing activities 3,557 – 737

33. +/– Cash flow from financing activities – 301 330

34. +/– Effect on cash funds of exchange rate movements,

changes in reporting entity structure and revaluation – –

35. = Cash funds at the end of the period 55 33


Notes to the Financial Statements

Coverage

(32) Coverage by balance sheet item

Mortgage Mortgage Public-sector Public-sector

bonds bonds covered bonds covered bonds

31 Dec 2008 31 Dec 2007 31 Dec 2008 31 Dec 2007

€ mn € mn € mn € mn

Ordinary cover 15,346 16,982 35,657 42,856

Loans and advances to customers 15,346 16,982 16,760 18,027

Loans secured by property mortgages to customers 15,346 16,982 1,580 *) 1,640 *)

Loans to local authorities, to customers – – 15,180 16,387

Loans and advances to banks – – 2,429 4,013

Loans secured by property mortgages to banks – – 8 *) 10 *)

Loans to local authorities, to banks – – 2,421 4,003

Own bonds issued – – 16,468 20,816

Extended cover 342 1,201 3,999 3,325

Loans and advances to banks – – 2,973 2,299

Balances held with banks – – 2,973 2,299

Own bonds issued 342 1,201 1,026 978

Derivatives – – – 48

Total 15,688 18,183 39,656 46,181

Market value of hedging derivatives**) – – – – 6

*) under a municipal guarantee

**) negative market value of a cross currency swap employed to hedge the outstanding Pfandbriefe

(33) Details pursuant to section 28 of the German Pfandbrief Act

Outstanding Pfandbriefe and related cover assets

Nominal amount Present value Risk-adjusted present value*)

a) Total amount 31 Dec 2008 31 Dec 2007 31 Dec 2008 31 Dec 2007 31 Dec 2008 31 Dec 2007

of outstanding € mn € mn € mn € mn € mn € mn

Mortgage bonds 13,606 15,542 14,273 15,867 13,931 15,532

Cover assets pool 15,688 18,183 16,825 18,597 16,025 17,892

of which: Derivatives 0 0 0 0 0 0

Excess cover 2,082 2,641 2,552 2,730 2,094 2,360

Excess cover (%) 15.3 17.0 17.9 17.2 15.0 15.2

*) When calculating stress scenarios, the static method is used for currencies and the dynamic method for interest rates.

ad a) Maturity structure Mortgage bonds Cover assets pool

31 Dec 2008 31 Dec 2007 31 Dec 2008 31 Dec 2007

€ mn € mn € mn € mn

up to 1 year 1,482 4,439 1,963 2,485

> year – 5 years 8,858 7,554 7,259 6,440

> 5 years – 10 years 3,228 3,485 5,429 7,988

> 10 years 38 64 1,037 1,270

Total 13,606 15,542 15,688 18 ,183

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

69


70 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Notes to the Financial Statements

Nominal amount Present value Risk-adjusted present value*)

b) Total amount 31 Dec 2008 31 Dec 2007 31 Dec 2008 31 Dec 2007 31 Dec 2008 31 Dec 2007

of outstanding € mn € mn € mn € mn € mn € mn

Public-sector covered bonds 37,419 43,326 39,375 43,296 37,056 41,458

Cover assets pool 39,656 46,181 42,333 46,783 39,895 44,911

of which: Derivatives 0 48 0 48 0 41

Excess cover 2,237 2,855 2,958 3,487 2,839 3,453

Excess cover (%) 6.0 6.6 7.5 8.1 7.7 8.3

*) When calculating stress scenarios, the static method is used for currencies and the dynamic method for interest rates.

ad b) Maturity structure Public-sector covered bonds Cover assets pool

31 Dec 2008 31 Dec 2007 31 Dec 2008 31 Dec 2007

€ mn € mn € mn € mn

up to 1 year 6,165 5,752 5,585 6,635

> 1 year – 5 years 13,029 16,188 16,651 18,431

> 5 years – 10 years 11,723 14,221 10,337 13,635

> 10 years 6,502 7,165 7,083 7,480

Total 37,419 43,326 39,656 46,181

Assets included in cover for mortgage bonds, by loan amount

Mortgages serving as cover

31 Dec 2008 31 Dec 2007

€ mn € mn

up to € 300,000 11,337 13,241

> € 300,000 to € 5 million 2,042 2,197

> € 5 million 2,309 2,745

Total 15,688 18,183


Notes to the Financial Statements

Assets included in cover for mortgage bonds,

by country where real property collateral is located, and by type of property

€ mn

Commercial

properties

Commercial

housing properties

Residential properties

Single-family homes

Multi-family homes

Office buildings

Commercial buildings

Industrial buildings

Other commercial properties

Unfinished new buildings

not yet yielding returns

Securities

Total

Financial year

Belgium

Federal Republic of Germany

Denmark

France

Greece

UK

2008 – 3.2 – – – – – – – – – 3.2

2007 – 3.8 – – – – – – – – – 3.8

2008 – – – – – – – – – – – –

2007 – – – – – – – – – – – –

2008 – 1,917.2 – 0.9 – 0.4 – 0.1 – – – 1,918.6

2007 0.1 2,265.3 – 1.1 – 0.4 0.1 0.1 – – – 2,267.1

2008 0.3 6,739.1 0.1 14.8 – 0.2 0.7 0.2 – – – 6,755.4

2007 0.3 7,770.2 0.1 17.6 – 0.2 0.8 0.2 0.1 – – 7,789.5

2008 – 2,434.6 – 0.2 – – – 0.1 – – – 2,434.9

2007 – 2,756.3 – 0.2 – – – 0.1 – – – 2,756.6

2008 – 1,306.0 14.4 291.4 – 99.8 8.0 12.4 – 3.0 21.4 1,756.4

2007 – 1,252.9 0.1 251.1 – 39.9 31.0 12.4 – 3.4 – 1,590.8

2008 – 659.1 0.5 41.4 – 2.5 – 77.0 – 28.2 – 808.7

2007 – 645.7 – – – 4.9 – – – 24.2 – 674.8

2008 – 93.7 – – – – – – – – – 93.7

2007 – 94.9 – – – – – – – – – 94.9

2008 – 1,432.4 1.4 36.4 – – – – – – – 1,470.2

2007 – 1,644.8 – 31.0 – – – – – – 1,675.8

2008 – 104.3 – 0.3 – – – – – – – 104.6

2007 – 127.9 – 0.3 – – – – – – – 128.2

2008 – 342.3 – – – – – – – – – 342.3

2007 – 681.1 – – 351.5 – – – 168.5 – – 1,201.1

2008 0.3 15,031.9 16.4 385.4 – 102.9 8.7 89.8 – 31.2 21.4 15,688.0

2007 0.4 17,242.9 0.2 301.3 351.5 45.4 31.9 12.8 168.6 27.6 – 18,182.6

Netherlands

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Austria

Portugal

Sweden

USA

Total

71


Aggregate payments in arrears by at least 90 days

on cover assets for mortgage bonds

72 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Notes to the Financial Statements

31 Dec 2008 31 Dec 2007

€ mn € mn

Germany 50.52 42.42

France 0.25 0.35

Netherlands – –

Total 50.77 42.77

Assets included in cover for mortgage bonds

Forced sales/forced administration

No. 3a

Commercial properties Housing properties

2008 2007 2008 2007

Number Number Number Number

Forced sales pending 144 207 1,247 1,195

Forced administrations pending 60 96 444 479

of which: Included in forced sales pending 52 86 429 447

Forced sales executed 132 195 715 590

No. 3b

Number Number Number Number

Purchases of properties to prevent losses

(foreclosed assets) – – – 1

of which: Still part of cover assets – – – –

No. 3c

€ mn € mn € mn € mn

Total arrears 13.6 11.5 85.1 54.4

of which: on interest due 2.8 2.7 9.2 16.2

No. 3d

Repayments of mortgage loans

€ mn € mn € mn € mn

through redemption 249.0 185.5 1,603.9 490.2

through other forms of repayment 591.3 674.5 978.5 1,550.5


Notes to the Financial Statements

Assets included in cover for public-sector covered bonds,

by country of domicile of the borrower and, in the case of full guarantee, of the guarantor

Regional Local

Sovereign public-sector public-sector Other

€ mn borrowers entities entities borrowers Total

2008 2007 2008 2007 2008 2007 2008 2007 2008 2007

Belgium 70 340 94 96 – – – – 164 436

Federal Republic of Germany 2 98 8,395 10,757 10,559 11,416 6,870 9,242 25,826 31,513

Denmark – – – – – – 20 20 20 20

Finland – 150 – – – – – – – 150

France – – 225 225 – – 210 410 435 635

Greece 436 990 235 235 – – 240 – 911 1,225

UK – – – – – – 304 204 304 204

Ireland 50 100 – – – – 95 95 145 195

Iceland 30 30 – – – – – – 30 30

Italy 822 965 851 875 175 175 – – 1,848 2,015

Canada – – 511 449 – – – – 511 449

Latvia 25 25 – – – – – – 25 25

Lithuania – – 23 23 – – – – 23 23

Luxembourg – – – – – – 180 200 180 200

Netherlands – 150 – – – – 230 330 230 480

Austria 180 205 315 315 – – 648 640 1,143 1,160

Poland 133 83 – – – – – – 133 83

Portugal 727 637 75 75 – – 270 196 1,072 908

Switzerland – – 191 172 – – 200 195 391 367

Slowakia 35 35 – – – – – – 35 35

Slovenia 65 65 – – – – 10 10 75 75

Spain – – 4,520 4,513 31 31 1,259 1,085 5,810 5,629

Czech Republic 50 50 – – – – – – 50 50

Hungary 81 81 – – – – – – 81 81

USA – – 114 92 48 49 45 45 207 186

Cyprus 7 7 – – – – – – 7 7

Total 2,713 4,011 15,549 17,827 10,813 11,671 10,581 12,672 39,656 46,181

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

73


Aggregate payments in arrears by at least 90 days

on cover assets for public-sector covered bonds

Germany

74 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Notes to the Financial Statements

31 Dec 2008 31 Dec 2007

€ mn € mn

Sovereign states – –

Regional public-sector entities – 6.4

Local public-sector entities – 0.3

Other 11.4 –

Total 11.4 6.7


Notes to the Financial Statements

Other information on the annual financial statements

(34) Audit and consulting fees within the meaning of section 285 no. 17 of the HGB

In the 2008 financial year, € 1,267,000 was recorded as fee expenses for the auditor within the meaning of section 319 (1)

sentences 1 and 2 of the HGB. The breakdown pursuant to Accounting Practice Statement HFA 1006 of the IDW is as follows.

Audit of financial statements Other audit Tax advisory services Other services

or valuation services

875,000 € 249,000 € 5,000 € 138,000 €

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

75


(35) Executive bodies of DG HYP

Supervisory Board

Dr. Thomas Duhnkrack

Member of the Management Board

DZ BANK Deutsche Zentral-

Genossenschaftsbank AG,

Frankfurt/Main

– Chairman –

Dr. Christopher Pleister

President of the Federal

Association of German

Credit Unions and Rural

Banking Cooperatives (BVR)

– Deputy Chairman –

(until 15 Jul 2008)

Dagmar Mines

Bank employee

Deutsche Genossenschafts-

Hypothekenbank AG

– Deputy Chairman –

Peter Bade

Member of the Management

Board

Volksbank Lüneburger Heide eG

Maik Brammer

Bank employee

Deutsche Genossenschafts-

Hypothekenbank AG

Hans-Jürgen Buhlert

Bank employee

Deutsche Genossenschafts-

Hypothekenbank AG

Carl-Christian Ehlers

Chairman of the Management Board

Kieler Volksbank eG

Management Board

Hans-Theo Macke

CEO

Ralph Gruber

Bank employee

Deutsche Genossenschafts-

Hypothekenbank AG

Jürgen Handke

Member of the Management Board

VR Bank Hof eG

Rainer Kattinger

Chairman of the Management Board

Stuttgarter Volksbank AG

Klaus Kohlmorgen

Bank employee

Deutsche Genossenschafts-

Hypothekenbank AG

Dietmar Küsters

Chairman of the Management Board

Volksbank Straubing eG

(until 31 Dec 2008)

Dr. Reinhard Kutscher

Chairman of the Management Board

Union Investment

Real Estate AG

(since 17 Jun 2008)

Jens Meyer

Bank employee

Deutsche Genossenschafts-

Hypothekenbank AG

(until 9 Jun 2008)

Thomas Müller

Chairman of the Management Board

Dresdner Volksbank

Raiffeisenbank eG

Dr. Georg Reutter

(since 1 Aug 2008)

76 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Notes to the Financial Statements

Manfred Nüssel

President of the German Raiffeisen

Federation

Herbert Schindler

Director

Badischer Genossenschaftsverband

e.V. (Association of Cooperative Banks

in Baden)

Martin Schmitt

Chairman of the Management Board

Kasseler Bank eG Volksbank

Raiffeisenbank

Diedrich Taaken

Chairman of the Management Board

Volksbank Esens eG

Dietrich Voigtländer

Member of the Management Board

DZ BANK Deutsche Zentral-

Genossenschaftsbank AG

(until 26 May 2008)

Thorsten Wenck

Bank employee

Deutsche Genossenschafts-

Hypothekenbank AG

(since 22 Sep 2008)

Frank Westhoff

Member of the Management Board

DZ BANK Deutsche Zentral-

Genossenschaftsbank AG

Winfried Willer

Employee

VR Kreditwerk Hamburg –

Schwäbisch Hall AG

Manfred Salber


Notes to the Financial Statements

(36) Remuneration of the executive bodies

(37) Loans to members of executive bodies

31 Dec 2008 31 Dec 2007

€ 000’s € 000’s

Supervisory Board 1,654 1,710

Advisory Council 1,881 2,794

Management Board – –

(38) Offices held by members of the Management Board or members of staff in supervisory bodies

of large limited companies

As at 31 December 2008, members of the Management Board held the following offices in supervisory bodies of large

limited companies:

Hans-Theo Macke

2008 2007

€ 000’s € 000’s

Supervisory Board 259 275

Management Board 1,385 1,708

Former members of the Management Board

or their surviving dependants 1,647 2,654

Provisions for current pensions

and pension commitments

for former members of the Management Board

or their surviving dependants 20,114 20,124

Bausparkasse Schwäbisch Hall AG, Schwäbisch-Hall: member of the Supervisory Board

VR Kreditwerk Hamburg – Schwäbisch Hall AG, Hamburg/Schwäbisch Hall: member of the Supervisory Board

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

77


(39) Average number of employees

78 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Notes to the Financial Statements

2008 2007

Male Female Total Male Female Total

Total number of employees *) 280 193 473 353 223 576

of which: Full-time employees 277 165 442 349 188 537

Part-time employees

Number (10) (47) (57) (8) (63) (71)

weighted 3 28 31 4 35 39

Vocational trainees

(not included in total) 3 3 6 10 7 17

*) Weighted in line with the hours worked.

(40) Information about the parent company pursuant to section 285 no. 14 of the HGB

DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt/Main, prepares consolidated financial statements

which incorporate the financial statements of DG HYP. The consolidated financial statements of DZ BANK are published

in the electronic German Federal Gazette (elektronischer Bundesanzeiger).

Hamburg, 10 February 2009

Deutsche Genossenschafts-Hypothekenbank Aktiengesellschaft

Hans-Theo Macke Dr. Georg Reutter Manfred Salber


RESPONSIBILITY STATEMENT

To the best of our knowledge, and in accordance

with the applicable reporting principles, the annual financial

statements give a true and fair view of the assets, liabilities,

financial position and profit or loss of the company,

and the management report of the company includes a fair

Hamburg, 10 February 2009

Deutsche Genossenschafts-Hypothekenbank Aktiengesellschaft

Hans-Theo Macke Dr. Georg Reutter Manfred Salber

review of the development and performance of the business

and the position of the company, together with a

description of the principal opportunities and risks associated

with the expected development of the company.

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

79


The following is an English translation of the Audit Opinion, which has been prepared on the basis of the German language version of

the Financial Statements and the Management Report. The translation of the Financial Statements, the Management Report, and the

Audit Opinion are provided for convenience; the respective German versions shall be exclusively valid for all purposes.

AUDIT OPINION

We have issued the following opinion on the financial

statements and management report:

We have audited the annual financial statements,

comprising the balance sheet, the income statement and

the notes to the financial statements, together with the

bookkeeping system, and the management report of Deutsche

Genossenschafts-Hypothekenbank Aktiengesellschaft,

Hamburg, for the fiscal year from 1 January 2008 to

31 December 2008. The maintenance of the books and

records and the preparation of the annual financial statements

and management report in accordance with German

commercial law are the responsibility of the Company’s

management. Our responsibility is to express an opinion on

the annual financial statements, together with the bookkeeping

system, and the management report based on our

audit.

We conducted our audit of the annual financial statements

in accordance with Sec. 317 HGB („Handelsgesetzbuch“:

„German Commercial Code“] and German

generally accepted standards for the audit of financial statements

promulgated by the Institut der Wirtschaftsprüfer

(Institute of Public Auditors in Germany) (IDW). Those standards

require that we plan and perform the audit such that

misstatements materially affecting the presentation of the

net assets, financial position and results of operations in the

annual financial statements in accordance with (German)

Hamburg, 12 February 2009

Ernst & Young AG

Wirtschaftsprüfungsgesellschaft

Steuerberatungsgesellschaft

Bühring Kaltschmidt

Wirtschaftsprüfer Wirtschaftsprüfer

(German Public Auditor) (German Public Auditor)

80 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

principles of proper accounting and in the management

report are detected with reasonable assurance. Knowledge

of the business activities and the economic and legal environment

of the Company and expectations as to possible

misstatements are taken into account in the determination

of audit procedures. The effectiveness of the accountingrelated

internal control system and the evidence supporting

the disclosures in the books and records, the annual financial

statements and the management report are examined

primarily on a test basis within the framework of the audit.

The audit includes assessing the accounting principles used

and significant estimates made by management, as well as

evaluating the overall presentation of the annual financial

statements and management report. We believe that our

audit provides a reasonable basis for our opinion.

Our audit has not led to any reservations.

In our opinion, based on the findings of our audit,

the annual financial statements comply with the legal

requirements and give a true and fair view of the net assets,

financial position and results of operations of the Company

in accordance with German principles of proper accounting.

The management report is consistent with the annual

financial statements and as a whole provides a suitable

view of the Company’s position and suitably presents the

opportunities and risks of future development.“


REPORT OF THE SUPERVISORY BOARD

Dr. Thomas Duhnkrack,

Chairman of the Supervisory Board

In the 2008 financial year, the Supervisory Board and its committees monitored

the Management Board’s management of the Bank according to statutory regulations

and those regulations set out in the Bank’s articles of association, and

also took decisions on those transactions required to be presented to the

Supervisory Board.

In fulfilling its tasks, and in accordance with statutory requirements, the Supervisory

Board formed a Human Resources Committee, an Audit Committee and

a Risk and Participations Committee. These Committees convened several

times during the 2008 financial year.

The Management Board reported to the Supervisory Board on the bank’s situation

and growth and on general business regularly, in good time and comprehensively,

both in writing and in verbal reports. In addition, the Management

Board reported regularly to the Supervisory Board on ongoing business as well

as future business policy including the bank’s strategic and organisational orientation.

The Supervisory Board also dealt with the bank’s risk situation, and

particularly the development of credit, market price, liquidity and operating

risks as well as additional key typical banking risks.

The Supervisory Board convened four times during the 2008 financial year. At these meetings, the

Supervisory Board received detailed reports on the current situation and the future strategic positioning

of DG HYP, with updates on the work of the Committees being provided in rotation at two

of these meetings.

At its meeting on 5 March 2008, the Supervisory Board dealt with the 2007 financial statements

and the Bank’s realignment. At the meeting of 21 April 2008, Dr. Georg Reutter was appointed to

the Bank’s Management Board as an ordinary member. Following the implementation of the Bank’s

new organisational structure with effect from 1 June 2008, the Supervisory Board, at its meeting

on 18 June 2008, dealt with the future business development and direction of the Bank. At its

meeting on 19 November 2008, discussion focused in particular on the developments on the financial

and capital markets and the resulting impact on the Bank.

Between meetings of the Supervisory Board, the Management Board informed it in writing of key

transactions. In urgent cases, the Supervisory Board approved key transactions outside of its meetings

by passing written resolutions.

In regular discussions with the Chairman of the Management Board outside the meetings, the

Chairman of the Supervisory Board and the Chairman of the Audit Committee and the Risk and

Participations Committee also discussed key decisions, particular transactions, the bank’s business

growth, and, in particular, the future strategic realignment of the bank.

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

81


Ernst & Young AG Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft, Hamburg, presented

a declaration of independence to the Supervisory Board and audited the annual financial

statements as at 31 December 2008, including the accounting and management report of DG HYP

for the financial year from 1 January 2008 to 31 December 2008 presented to it by the Management

Board, and found these to be in line with statutory requirements. It issued an unqualified

audit opinion. The audit reports were submitted to members of the Supervisory Board, and were

discussed in detail. The Supervisory Board approved the results of the audit by the auditors.

The auditor participated in the Supervisory Board meeting to adopt the annual financial statements

according to section 171 (1) sentence 2 of the Aktiengesetz (AktG – German Public Limited Companies

Act), and in the preparatory meetings of the Audit Committee and the Risk and Participations

Committee, and reported on the key audit findings. The auditor was available to answer the

Supervisory Board’s questions.

The Supervisory Board, and the Audit Committee formed from amongst its number, reviewed in

detail the annual financial statements of DG HYP and the management report of DG HYP at their

meetings, and acknowledged and approved the findings of the auditor’s audit. There were no

objections to the annual financial statements and the annual report, which includes the management

report.

At its meeting on 6 March 2009, the Supervisory Board approved the financial statements of

DG HYP as at 31 December 2008 prepared by the Management Board. The financial statements

are thus confirmed.

The Supervisory Board would like to thank the Management Board and all of the Bank’s employees

for their work during 2008, a year marked by the Bank’s realignment and the impact of the developments

on the financial and capital markets.

Hamburg, 6 March 2009

Deutsche Genossenschafts-Hypothekenbank

Aktiengesellschaft

The Supervisory Board

Dr. Thomas Duhnkrack

Chairman of the Supervisory Board

82 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008


Corporate Bodies And Committees; Executives

CORPORATE BODIES AND COMMITTEES; EXECUTIVES

Supervisory Board

Dr. Thomas Duhnkrack

Member of the Management Board

DZ BANK AG Deutsche

Zentral-Genossenschaftsbank,

Frankfurt/Main,

Chairman

Dagmar Mines

Deutsche Genossenschafts-

Hypothekenbank AG,

Hamburg,

Deputy Chairman

Peter Bade

Member of the Management Board,

Volksbank Lüneburger Heide eG,

Soltau

Maik Brammer

Deutsche Genossenschafts-

Hypothekenbank AG,

Hamburg

Hans-Jürgen Buhlert

Deutsche Genossenschafts-

Hypothekenbank AG,

Hamburg

Carl-Christian Ehlers

Chairman of the Management Board,

Kieler Volksbank eG,

Kiel

Ralph Gruber

Deutsche Genossenschafts-

Hypothekenbank AG,

Hamburg

Updated: 1 March 2009

Jürgen Handke

Chairman of the Management Board,

VR Bank Hof eG,

Hof

Peter Heinrich

Chairman of the Management Board,

Münchner Bank eG,

Munich

Rainer Kattinger

Chairman of the Management Board,

Stuttgarter Volksbank AG,

Stuttgart

Klaus Kohlmorgen

Deutsche Genossenschafts-

Hypothekenbank AG,

Hamburg

Dr. Reinhard Kutscher

Chairman of the Management Board,

Union Investment Real Estate AG,

Hamburg

Thomas Müller

Chairman of the Management Board,

Dresdner Volksbank Raiffeisenbank

eG,

Dresden

Manfred Nüssel

President of the German Raiffeisen

Federation,

Berlin

Herbert Schindler

Director

Badischer Genossenschaftsverband

e.V. (Association of Cooperative

Banks in Baden), Karlsruhe

Martin Schmitt

Chairman of the Management Board,

Kasseler Bank eG

Volksbank Raiffeisenbank,

Kassel

Diedrich Taaken

Chairman of the Management Board,

Volksbank Esens eG,

Esens

Thorsten Wenck

Deutsche Genossenschafts-

Hypothekenbank AG,

Hamburg

Frank Westhoff,

Member of the Management Board

DZ BANK Deutsche Zentral-

Genossenschaftsbank AG,

Frankfurt/Main

Winfried Willer

VR Kreditwerk Hamburg –

Schwäbisch Hall AG,

Hamburg

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

83


Management Board, Department Heads

Management Board

(and distribution of responsibilities)

Hans-Theo Macke

Chairman

– Management Board Office /

Legal / Communication

– Human Resources

– Internal Audit

– Corporate Development,

Organisation and IT

Department Heads

Sibylle von Brunn

Human Resources

Steffen Günther

International and

Secondary Market Business

Dr. Cornelius Riese

Corporate Development,

Organisation and IT

Peter Vögelein

Internal Audit

Updated: 1 March 2009

Dr. Georg Reutter Manfred Salber

– German Originated and

Cooperative Sector Business

– International and

Secondary Market Business

– Treasury

Patrick Ernst

Treasury

Jörg Hermes

Finance

Siegfried Schneider

Treasury Settlements

Eckhard Wulff

Management Board Office /

Legal / Communications

84 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Corporate Bodies And Committees; Executives

– Back Office I

– Back Office II / Special Portfolio

– Treasury Settlements

– Finance

Detlef Gäßler

Back Office II / Special Portfolio

Axel Jordan

German Originated and

Cooperative Sector Business

Frank Stöfer

Back Office I


Corporate Bodies And Committees; Executives

Trustees, Advisory Council

Trustees

Dr. Michael Labe

Judge at the Hamburg Higher

Regional Court (Hanseatisches Oberlandesgericht

Hamburg),

Hamburg

Advisory Council

Rolf Witezek

Member of the Management Board,

Volksbank Mittelhessen eG,

Gießen,

Chairman

Dr. Dr. Claus Becker

Chairman of the Management Board,

Volksbank Darmstadt eG,

Darmstadt,

Deputy Chairman

Dr. Rolf Flechsig

Member of the Management Board,

Berliner Volksbank eG,

Berlin,

Deputy Chairman

Willi Braun

Member of the Management Board,

Aachener Bank eG,

Aachen

Bernhard Carl

Member of the Management Board,

H + G Bank Heidelberg Kurpfalz eG,

Heidelberg

Updated: 1 March 2009

Volker Thilo

Deputy Trustee,

Certified public accountant

and tax adviser (retired),

Hamburg

Wolfgang Eckert

Chairman of the Management Board,

VR-Bank eG,

Regen

Enno Emmerinck

Member of the Management Board,

Hamburger Volksbank eG,

Hamburg

Alfred Foistner

Chairman of the Management Board,

Raiffeisenbank Oberschleißheim eG,

Oberschleißheim

Klaus Geurden

Chairman of the Management Board,

Volksbank Krefeld eG,

Krefeld

Manfred Geyer

Chairman of the Management Board

Raiffeisen Volksbank eG

Gewerbebank,

Ansbach

Willi Göttsche

Member of the Management Board,

Raiffeisenbank eG,

Bad Bramstedt

Dr. Peter Lassen

Deputy Trustee,

Judge (retired),

Hamburg

Dietmar Herderich

Chairman of the Management Board,

Raiffeisenbank Mutlangen eG,

Mutlangen

Ulrich Jakobi

Chairman of the Management Board,

Volksbank Wetzlar-Weilburg eG,

Wetzlar

Michael Joop

Member of the Management Board,

Volksbank Hameln-Stadthagen eG,

Hameln

Andreas Mann

Member of the Management Board,

Volksbank Regensburg eG,

Regensburg

Rudolf Müller

Chairman of the Management Board,

Volksbank Bonn Rhein-Sieg eG,

Bonn

Lothar Peters

Member of the Management Board,

Raiffeisenbank Ratzeburg eG,

Ratzeburg

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

85


Advisory Council

Hans-Werner Reuter

Member of the Management Board,

Dithmarscher Volksund

Raiffeisenbank eG,

Heide

Wilhelm Rippen

Member of the Management Board,

Raiffeisenbank Wesermarsch-Süd eG,

Brake

Tilman Römpp

Member of the Management Board,

Volksbank Bautzen eG,

Bautzen

Updated: 1 March 2009

Alfred Salz

Member of the Management Board,

Volksbank Rhein-Wupper eG,

Leverkusen

Elmar Stender

Chairman of the Management Board,

Volksbank Marl-Recklinghausen eG,

Marl

Gerd Streuber

Member of the Management Board,

Volksbank Hildesheimer Börde eG,

Söhlde-Hoheneggelsen

86 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

Corporate Bodies And Committees; Executives

Günther Wainowski

Member of the Management Board,

Vereinigte Volksbank AG

Böblingen/Sindelfingen – Schönbuch

– Calw/Weil der Stadt,

Sindelfingen

Horst Weyand

Chairman of the Management Board,

Volksbank Nahetal eG,

Bad Kreuznach


DG HYP ADDRESSES

Deutsche Genossenschafts-Hypothekenbank AG

20095 Hamburg, Germany

Rosenstrasse 2

Postfach 10 14 46

20009 Hamburg

Phone +49 40 33 34-0

Fax +49 40 33 34-11 11

Internet:www.dghyp.de

Real Estate Centres for commercial investors

DG HYP

Real Estate Centre Berlin

Pariser Platz 3

10117 Berlin

Phone +49 30 3 19 93-51 01

Fax +49 30 3 19 93-50 36

DG HYP

Real Estate Centre Hamburg

Rosenstrasse 2

20095 Hamburg

Phone +49 40 33 34-37 78

Fax +49 40 33 34-11 02

Representative offices

DG HYP

London Representative Office

10, Aldersgate Street

London EC1A 4HJ

United Kingdom

Phone +44 20 777 676-13

Fax +44 20 777 676-19

Updated: 1 March 2009

DG HYP

Real Estate Centre Düsseldorf

Ludwig-Erhard-Allee 9

40227 Dusseldorf

Phone +49 2 11 22 04 99-10

Fax +49 2 11 22 04 99-40

DG HYP

Real Estate Centre Munich

Türkenstrasse 16

80333 Munich

Phone +49 89 51 26 76-10

Fax +49 89 51 26 76-30

DG HYP

New York Representative Office

609 Fifth Avenue, 6th Floor

New York NY 10017

USA

Phone +1 212 796 43-00

Fax +1 212 796 43-13

DG HYP

Real Estate Centre Frankfurt

CITY HAUS 1, Platz der Republik 6

60325 Frankfurt / Main

Phone +49 69 75 06 76-21

Fax +49 69 75 06 76-99

DG HYP

Real Estate Centre Stuttgart

Heilbronner Strasse 41

70191 Stuttgart

Phone +49 7 11 12 09 38-0

Fax +49 7 11 12 09 38-30

Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2008

87


Production

This Annual Report is climate-neutral and printed on PEFC-certified

paper. The greenhouse gas emissions caused by the production

and distribution of this publication have been offset by investments

in an additional climate protection project.

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