DZ BANK AG Deutsche Zentral-Genossenschaftsbank


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DZ BANK AG Deutsche Zentral-Genossenschaftsbank

  1. 1. Rating Report Report Date: 21 December 2007 Previous Report: 22 June 2007 DZ BANK AG Deutsche Zentral-Genossenschaftsbank Analysts Rating Michael Dawson- Debt Rating Rating Action Trend Kropf Short-Term Debt R-1 (middle) Confirmed Stable +49 (0)69 9716 8144 Senior Unsecured Long-Term Debt AA (low) Confirmed Stable mdawson- Subordinated Debt A (high) Confirmed Stable Sam Theodore Rating Strength and Challenges +44 (0)20 7562 5627 Strengths Challenges (1) Strong cohesion among the members of the (1) The current stage of CFSN’s intrinsic The Company DZ BANK AG Deutsche FinanzVerbund (Cooperative Financial Services fundamentals is shaped by relatively late Zentral- Network (CFSN or the Sector)) under the concentration processes in the group and the Genossenschaftsbank strategic leadership of the Bundesverband der legacy of inadequate risk management in the past has its headquarters in Deutschen Volksbanken und Raiffeisenbanken (2) U.S. sub-prime and a potential U.S. recession Frankfurt, Germany, and (BVR, the central organisation of Germany’s should not have a structural impact on CFSN’s reported total group co-operative banking group) consolidated financial fundamentals assets of EUR461 billion (2) CFSN is Germany’s second largest provider of (3) Some heterogeneity among local banks adds at the end of June 2007. financial services to retail customers, businesses complexity to the co-operative banking group’s Recent Actions and small corporates and is well placed for efforts but could turn into a strength if solidarity 28 September 2007 future growth in savings and asset gathering as is maintained at the same time Confirmed well as credit intermediation (4) Growing price competition for savings and (3) CFSN’s overall sound and predictable financial mortgages, in the industry marginally less fundamentals compare well with other retail customer loyalty and an increase in alternatives banking groups in Germany and Continental to CFSN’s proximity banking model will Europe continue to put pressure on the Sector’s core (4) DZ BANK AG Zentralgenossenschaftsbank earnings (DZ BANK Group) is gaining strategic and financial flexibility and should further benefit from group-wide capital management tools (5) DZ BANK Group cautiously, selectively and coherently pursues expansion in neighbouring Europe (6) Progressing cooperation and consolidation among group members offers potential for efficiency gains Rating Drivers Factors with Positive Rating Implication Factors with Negative Rating Implications • CFSN continues to optimize cooperation and • CFSN fails to progress in concentrating and concentration among its members, including coordinating its operations, which could lead to back-office functions and distribution, the unexpected scenario where the group fails to resulting in increased efficiency and protection defend its franchise against new competitors of its unique customer franchise • BVR’s newly developed risk management tool is • CFSN’s improved risk management can in the rollout process to the local banks and is not contain a number of rescue cases among its yet used everywhere as a defence measure in a members in a less benign operating potentially deteriorating environment. If BVR fails environment to use this instrument effectively, it would have a negative rating implication Recent Developments (1) In December 2007, a German financial newspaper reported that DZ BANK expected a 40% drop in 2007 results againts 2006 due to evaluations adjustments in the Bank’s securities portfolio (both ABS and bonds) and restructuring expenses for the DZ BANK Group’s real estate lender, Deutsche Genossenschafts-Hypothekenbank (DG Hyp). (Continued on page 2.) 1 Financial Institutions: Banks & Trusts
  2. 2. DZ BANK AG Financial Information* Deutsche Zentral- DZ BANK Group [Consolidated] 30/06/200730/06/200631/12/200631/12/2005 31/12/2004 Genossenschaft NGAAP NGAAP NGAAP NGAAP NGAAP sbank Total Assets (EUR millions) 461587 n/a 438,984 401,628 356,234 Report Date: Equity (EUR millions)1 10460 n/a 10,141 8,380 7,445 21 December 2007 Net Income (EUR millions)2 404 374 1,168 421 344 Risk-Weighted Earning Capacity (%) n/a n/a 1.54 1.57 1.42 Post-provision Risk-Weighted Earning Capacity (%) n/a n/a 1.22 1.21 1.01 Efficiency Ratio (%) 72.41 70.64 73.56 70.65 72.33 Impaired Loans % Gross Loans n/a n/a n/a n/a n/a 3 4 4 4 Tier 1 Capital Ratio (%) 8.89 9,10 9,70 9,00 9,104 CFSN [Consolidated] 31/12/2006 31/12/2005 31/12/2004 NGAAP NGAAP NGAAP Total Assets (EUR millions) 961,240 909,179 847,855 Equity (EUR millions) 40,191 36,573 34,854 Net Income (EUR millions) 2,140 1,695 1,457 Risk-Weighted Earning Capacity (%) 2.02 1.67 1.68 Post-provision Risk-Weighted Earning Capacity (%) 1.04 0.89 0.88 Efficiency Ratio (%) 67.36 71.09 70.17 Impaired Loans % Gross Loans n/a n/a n/a Tier 1 Capital Ratio (%) 7.80 8.00 7.70 n/a – not applicable 1. Reserves according to §340g HGB included 2. After minority interests 3. According to SolvV 4. According to Principle I KWG * For further CFSN financials please refer to the issuer profile Recent Developments (Continued from page 1.) (2) In September 2007, DG Hyp and Münchener Hypothekenbank eG (MünchenerHyp, one of the three specialised real estate financing banks of the CFSN) terminated merger talks. This decision is an example of CFSN’s difficulties to optimize its organizational structure. In this context, DZ BANK and WGZ Bank broke up their preliminary merger talks in January 2007. Nevertheless, DZ BANK from the beginning communicated different alternative scenarios for consolidating its real estate lending activities. Thus now it’s consequently pursuing the second-ranked scenario. (3) In June, BVR announced the 2006 results for the group of local co-operative banks and CFSN. The good news was that CFSN was defending its market shares in mortgages and was able to enhance its regulatory capital ratios, mainly due to large non-recurring tax items, as well as the overall risk absorbing capacity by increasing par 340f reserves. However, the 2006 results also highlighted the Group’s modest efficiency and the strains on its profitability caused by intense competition. (4) On 20 March 2007, the German BaFin (the Authority) approved that loans granted by members of the BVR Protection Scheme do not need to be taken into account for calculation of members’ capital ratios. DBRS believes that this reflects the Authority’s view that CFSN represents one risk unit. Rating Rationale The AA (low) and R-1 (middle) long- and short-term ratings of DZ BANK AG Zentral-genossenschaftsbank (DZ BANK Group) reflect its important role in the German FinanzVerbund (Cooperative Financial Services Network, or CFSN) and its improving risk return profile, which benefits from its specialised subsidiaries and ultimately from the intrinsic fundamentals of the entire CFSN, underpinned by the high cohesiveness and strong support mechanisms existing among its member banks. The ratings also reflect the expectation of some form of systemic external support on a timely basis for CFSN. 2 Financial Institutions: Banks & Trusts
  3. 3. DZ BANK AG Intrinsic Assessment (IA) Deutsche DZ BANK Group is the main provider of financial products and services for Germany’s approximately Zentral- 1,250 co-operative local banks, which are the powerful distribution arm of CFSN. These products include Genossenschaft sbank banking products (through the operating holding company DZ BANK), insurance products (R+V Versicherung AG (R+V)), mortgages and home savings (Bausparkasse Schwäbisch Hall AG (BSH) and Report Date: DG Hyp), leasing (VR Leasing), asset management (Union Investment), consumer finance (TeamBank) 21 December 2007 and process and transaction services (Deutsche Wertpapier Service Bank AG (dwpbank) and EQUENS). The co-operative sector is Germany’s second largest provider of financial services to retail customers, businesses and small corporates, with market shares ranging from 7% to 30%. Through its strong brands and its well-entrenched distribution network, which encompasses more than 14,000 branches servicing approximately 16 million members and an estimated 30 million customers, it is well placed for future growth in savings and asset gathering as well as credit intermediation in Germany. The Sector’s overall sound and predictable financial fundamentals compare well in terms of most parameters, such as recurring risk-adjusted earnings, liquidity and capitalisation, with other retail banking groups in Germany and continental Europe. The Sector has made considerable progress in recent years to coordinate its risk management, controlling and marketing efforts, especially after the merger of DG BANK and GZ Bank in 2001 and the modernisation of the group support mechanism in 2003 (Sicherungseinrichtung; protection scheme). Achieving this level of risk discipline in the entire sector has been essential to support the rating levels, especially in view of the fact that CSFN’s solidarity is based more on the qualitative assessment of managerial, strategic and operational cohesion than on the legal framework of the protection scheme. DBRS said that it expects to rate both DZ BANK and the regional/local banks of CSFN – if these banks would request a rating – at the same level (group rating) 1 . We believe that a support mechanism sufficiently funded and with a track record combined with a strong level of “willingness,” as is the case of CFSN, can offset any structural and legal weaknesses inherent in the support mechanism. A continuing progress in risk management, cooperation and concentration among its members is needed in order for the Sector to reach its full potential in distributing its wide range of financial products and services to its existing customer base more effectively and to align its asset quality with higher-rated banking groups. In this context, the failed merger between DZ BANK/WGZ BANK and DG Hyp/Münchener Hyp in 2007 highlights the fact that the group’s structure is still in an evolutionary process, which DBRS believes can further strengthen the group’s efficiency. In contrast with other European co-operative banking groups, the German co-operative Sector is late in developing an international expansion plan; therefore, opportunities that would allow CFSN to leverage its business without departing from its conservative management style are limited. Having said that, DBRS views positively that the Sector, through DZ BANK Group, is conducting its international growth strategy cautiously, selectively and especially coherently with its existing strengths; for example, in leasing, insurance and home loan savings as well as in transaction services and more recently as “a bank for banks” with capital market products, especially in Europe (i.e., Austria, Greece, Italy). However, we believe that DZ BANK’s expansion of its capital markets activities outside of Europe, especially in Asia, is challenged to deliver connectivity to CFSN’s domestic franchise. In conclusion, the Sector’s sound fundamentals translate into an A (high) Intrinsic Assessment equivalent. Support Assessment (SA) DZ BANK is a well-entrenched element of the Sector, which is characterised by a strong support mechanism, progressing strategic and managerial coherence and converging risk management standards. The risk management for the group is conducted at the various legal entities independently but integrated at DZ BANK for its subsidiaries, similar to WGZ BANK and for the group of local Volks- und Raiffeisenbanken indirectly by BVR, as BVR assesses the risk-return profile of each member bank in its role as the administrator of the support funds. Although CFSN’s support mechanism is not tantamount to a guarantee, the economic, contractual and operational ties among its members are so strong that DBRS views the group as one economic and risk unit, where it is inconceivable that members would not be supported 2. 1 For further details on group ratings, please see Analytical Background and Methodology for European Co-operative Banks, April 2006. 2 For more details please see Analytical Background and Methodology for European Co-operative Banks, especially our criteria for applying rating floors and group ratings. 3 Financial Institutions: Banks & Trusts
  4. 4. DZ BANK AG The Sector’s importance in Germany is underpinned by its strong position in the German banking system, Deutsche specifically in savings, payments and lending, and bolstered by its 16 million members. Because of their Zentral- importance, CFSN and DZ BANK would likely receive some form of timely systemic support in case of Genossenschaft sbank need, a consideration that underpins an SA2 Support Assessment. That said, we believe that the scenario of a financially robust Sector such as CFSN needing any form of support is very unlikely for the Report Date: foreseeable future. 21 December 2007 Rating Strengths and Challenges Details Strengths (1) Strong cohesion among the members of CFSN under the strategic leadership of BVR, the central organisation of Germany’s co-operative banking group The co-operative banking Sector in Germany is organised into three tiers in theory, but two in practice: Approximately 1,250 Volkbanken and Raiffeisenbanken (co-operative banks that historically specialised in various professional groups are included here), which are the strong distribution arm of the group, represent the first tier; the second tier is composed of their product providers, foremost DZ BANK, the federal central financial institution, and its subsidiaries (DZ BANK Group), but also WGZ BANK, the regional central financial institution, and some other specialised financial institutions (for more details, see Issuer Profile). Due to the close cooperation among the local banks and these specialised financial institutions, the local banks can offer their customers – individuals, businesses and small- and medium-sized corporates – a wide range of financial services that would be impossible for them to produce on their own. Market Positions of German Financial Institutions Market Shares as in 2006, % 100% 0.1% 1.0% 0.0% 0.0% 0.1% 90% 20.0% 21.1% 19.6% 24.1% 30.0% 80% 4.2% 4.1% 7.1% 5.7% 70% 2.6% 60% 29.8% 29.9% 33.7% 50% 40.6% 6.4% 50.8% 7.7% 40% 3.1% 30% 1.3% 20% 39.6% 38.8% 33.9% 7.1% 28.1% 10% 9.5% 0% Retail loans Retail Savings Mortgages Business deposits deposits loans* Others Postbank Savings banks Landesbanken Co-ops Central co-ops The aggregated figures for co-ops and central co-ops (DZ BANK Group and WGZ BANK) represent the CFSN retail banking services, for savings banks and Landesbanken – the Sparkassen- Finanzgruppe retail banking services. * Loans to small private businesses The benefits of CFSN’s membership are not limited to accessing products but are especially important for co-operative banks’ back-office, risk management, IT and regulatory compliance functions. The relatively small banks could not achieve the economies of scale that are available to the whole group in the processing and handling of payments, securities transactions and services. Similarly, developing Basel II-compliant rating tools is being outsourced by the local banks and becoming centralised. 4 Financial Institutions: Banks & Trusts
  5. 5. DZ BANK AG Last but not least, DZ BANK Group and WGZ BANK are the gatekeepers and managers of the co- Deutsche operative banking group’s liquidity and provide support in balance sheet management. In this context, Zentral- both banks have set up risk-transfer structures within the group, which helps reduce concentration risks Genossenschaft sbank and increase risk-adjusted returns at local banks. Report Date: DZ BANK and the other “producers” in the Sector sell most of their products (e.g., certificates, mutual 21 December 2007 funds and insurance, savings and home loan products) through the powerful distribution network of the local banks. To access this distribution network, the central financial institutions have to pay competitive commissions and fees but also restrict their distribution exclusively to the co-operative banks, whereas the local banks are not contractually bound to exclusively sell the group’s products. The weight of the local banks in CFSN is further underpinned by their majority ownership of DZ BANK and WGZ BANK and by the fact that the assembly of their representatives (Mitgliederversammlung) is the highest decision-making forum in the network. Overall, a balance of power exists between the centralised financial institutions and the local banks, and the intermediary in this complex form of operational cohesion is BVR and its regional associations, which are responsible for the overall strategy of CFSN and above all the administration of the Sector’s support funds (see Issuer Profile for further details). In recent years, the Sector has developed a new level of cooperation and coordination under the guidance of BVR, specifically in marketing, rating tools and financial controlling. This began with the reformation of the support mechanism in 2003 when BVR centralised the funds and introduced a rating for its member banks, which allowed for the measuring of risk-adjusted contributions to the support funds. This process of centralisation was enhanced by the concentration process among the central financial institutions. Since 2001, DZ BANK Group has been the main provider of financial products and services to the local banks. The protection scheme of the German co-operatives is quite unique in Germany and also Europe in the sense that it has been tested under various scenarios (cyclical and single stresses), never needed additional state aid to support one of its members and never failed even one member (in fact, even supported non-members). In addition, this level of cohesiveness and solidarity was achieved despite the fact that it is based on a voluntary membership in the group as well as on the fact that its support framework is not tantamount to a guarantee and the central institutions are not entrusted with the supervision of the local co-operative banks, which is the case with other co-operative banking groups in Europe (e.g., at Rabobank). (2) CFSN is Germany’s second largest provider of financial services to retail customers, businesses and small corporates and is well placed for future growth in savings and asset gathering as well as in credit intermediation CFSN is the second largest provider of financial services and products to the German retail banking market, including businesses and small corporates, behind the aggregated Sparkassen-Finanzgruppe (floor rating at A (high)/R-1 (middle)). It commands leading positions in savings, mortgages and current accounts. Its business model is based on a mix of full-service, local proximity banking (which is true for all Volksbanken und Raiffeisenbanken); selective and price-driven pure private customers retail banking (Sparda-Banken, PSD-Banken); and specialised professional banks (such as Deutsche Apotheker- und Ärztebank). Although competition in the financial services segment has increased as a result of the awakened interest of Germany’s listed banks in this business segment and the influx of new competitors such as direct banks and significant agent sales networks, the Sector has been able to hold its position and even grow in certain areas such as consumer financing, life insurance and mutual funds. However, in time and sight deposits CFSN has lost marginally market shares, but is addressing this development by a co-ordinated, price-driven strategy supported with stronger marketing efforts. This relatively stable franchise in the midst of intensifying competition is also the achievement of better coordinated efforts among the various subsidiaries within the DZ BANK Group and the local banks and DZ BANK Group’s manifested role as a partner for the local co-operative banks: 5 Financial Institutions: Banks & Trusts
  6. 6. DZ BANK AG Insurance: In Germany’s highly fragmented market for life insurance products, R+V, with premiums of EUR9.2 Deutsche billion in 2006, can claim to be one of the leading providers of property and casualty and pension and life Zentral- insurance products. Ranking by gross premium revenues as second for life insurance (EUR5.1 billion of gross Genossenschaft sbank premiums in 2006, or 57% of the insurance group’s total) and fifth in property and casualty (EUR3.8 billion, or 43% correspondingly), it operates through a number of specialised operating subsidiaries. The strengths of R+V Report Date: are a strong brand, close integration into the co-operative Sector and adequate and stable profit contributions and 21 December 2007 diversification benefits to the group’s earnings. DBRS believes that R+V is well placed to take advantage of the expected growing life insurance market, spurred by Germany’s aging population and pension reform. Its solid economic solvency through equalisation provisions and hidden reserves allow R+V to maintain a relatively high equity gearing. One of the key challenges is to capture natural market share in the new pension product market and over the longer term to mitigate the risks associated with relatively high minimum guarantees. Asset Management: CFSN’s mutual funds business is the third largest in Germany (market share in 2006, including open real estate funds, of 17%) and is still gaining market share. In 2006, Union Investment was specifically successful in selling the so-called Riester-Rente, a private pension scheme sponsored by the government, but also felt the pressure on its open real estate funds and plain vanilla equity funds, which is in line with its peers. Leasing: Like insurance, leasing remains a highly fragmented business in Germany, with captives of automotive or industrial companies taking the largest share of the market and bank affiliates coming a distant second. However, VR Leasing is growing faster than the market and is expecting new growth momentum from its Internet-based sales platform, which was recently implemented at the local co- operative banks. Home Savings and Loans: This product is very specific to the German (and Austrian) market, albeit being successfully exported to countries in Central and Eastern Europe (CEE) with home savings and loans legislation. BSH is considered along with BHW and various Landesbausparkassen (Sparkassen- Finanzgruppe) as one of the most prominent brands in this segment and has a market share of more than 28%. Home savings and loans is a low-risk, low-margin business that is regulated by a specific federal law. BSH has historically been one of the most stable earnings contributors for DZ BANK Group, with the additional benefit of a strong mobile sales force that is increasingly applied for cross-selling financial products of other members of the DZ BANK Group. With direct access to such an established and nationwide mobile sales force, DZ BANK Group has a competitive advantage compared with many German banking groups. Mortgages: DG Hyp, Münchener Hyp and WL Bank enable local cooperative banks to fund mortgages efficiently in the highly competitive market. However, after the failed merger of DG Hyp and Münchener Hyp residential mortgage lending remains sub-optimally organized, as production, funding, monitoring and work-out is not streamlined to the full extent possible. After the failed merger DZ BANK decided to concentrate its residential lending and funding at BSH, DG Hyp is now focusing on commercial real estate lending Consumer Finance: This segment represents an example of the Sector’s distribution power and of DZ BANK Group’s progressing role as a strategic partner for the local banks. In 2003, DZ BANK acquired norisbank, AG 3, an established consumer finance bank, to fill this gap in CFSN’s product offering. By 2004, CFSN had reached the number three position in consumer finance. 3 norisbank, branches and branch customers were sold in 2006 to Deutsche Bank Group. The employees, the brand easyCredit, the scoring model and the customers originated in CFSN were retained and renamed TeamBank. 6 Financial Institutions: Banks & Trusts
  7. 7. DZ BANK AG Corporate and Capital Marktes: Both DZ BANK and WGZ BANK are commercial banks with capital Deutsche markets activities in CFSN. DBRS believes that these activities are important for CFSN, especially in an Zentral- area where there is a direct benefit or link to the franchise of the local banks and their risk profile, Genossenschaft sbank specifically in risk management (balance sheet management, credit risk transfer with VR Circle 4), loan syndication (META credit), securities certificates (i.e., AKZENT Invest), private equity and mezzanine Report Date: finance. However, both banks also conduct wholesale banking and capital markets activities for their own 21 December 2007 customers. In addition, DZ BANK is expanding capital markets and lending activities for industrial clients in foreign markets, especially Asia. In this context, DBRS believes that DZ BANK has sufficient protection against potential downside risks due to its conservative management of risks as well as administration expenses, the distribution power of CFSN and the bank’s expertise in certain niches such as equity and fixed-income research, interest rate derivatives and interest rate structures, underpinned by its “bank for banks” competence and corresponding platform approach. The Sector’s market shares in the various product lines reflect the following: (1) The group’s effectiveness in cross-selling to retail clients is probably among the strongest in the German banking system, as the group’s natural market share is achieved in mutual funds and home loans and savings and is growing in insurance and leasing. (2) DBRS believes that the high level of market fragmentation in insurance and leasing and the group’s strategy to rely on organic growth could change going forward. The acquisition of norisbank, the implementation of an internal capital allocation model in the DZ BANK Group (see below) as well as recent public comments by senior management of DZ BANK Group show a paradigm shift toward bolt- on acquisitions, conducted, however, under strict pricing and risk-control parameters. There are inherent challenges for centralised product providers that sell their products in a network with relatively independent banks. In leasing and life insurance, CFSN doesn’t reach its natural market share as it does in home savings and mutual funds, among others, due to the fact that these products compete with the core products of co-operative banks, whereas mutual funds and home loans are complementary and are seen as by-products. Despite the fact that CFSN has reached relatively high market shares in a very competitive and matured market, new growth opportunities, especially around the area of retirement savings, should allow it to apply and further develop its wide range of products and its strong brand and franchise. Similarly, the group also has growth potential in credit cards, consumer finance and asset management. In addition, the Sector still sees growth prospects in the corporate sector, specifically with small- and medium-sized corporates with sales of approximately EUR100 million and up. This segment now receives more intense recourse input than in the past and is targeted in a more coordinated fashion. Although DZ BANK’s management announced general interest for troubled IKB, we believe that at this point in time IKB’s future remains uncertain. (3) DZ BANK Group is gaining strategic and financial flexibility and should further benefit from group-wide capital management tools The predecessor of DZ BANK, DG Bank, had experienced difficult times in the periods from 1990 to 1995 and 2000 to 2001, which were characterised by asset-quality problems, concentration risks and flawed strategies. We believe that this weakness of the central institution weakened the progress of the group over the decade leading up to 2001, when the restructuring began. Now DZ BANK Group has gained resilience, robust regulatory capitalisation levels and a convincing business model and strategy, which should help CFSN approaching the financial parameters of the strongest retail banking groups in Europe in the medium term. 4 WGZ-Loop for WGZ BANK. 7 Financial Institutions: Banks & Trusts
  8. 8. DZ BANK AG With this new level of solidity, DZ BANK Group is becoming a franchise enhancer for CFSN, Deutsche underpinned by its decision to start consumer financing, by implementing a matrix organisation that Zentral- allows coordinated marketing efforts among the product providers and pursuing an active consolidation Genossenschaft sbank among payment and securities-processing companies in Germany and more recently in Europe (see below). In addition, DZ BANK Group has provided the co-operative banks with the potential to improve Report Date: the yield on their low-margin mortgages through the creation and investment in Kreditwerk. 5 21 December 2007 DBRS believes that DZ BANK Group’s strategic decisions with regard to acquisitions and growth will also be guided by an improved and consistently measured economic capital concept. Since 2006, DZ BANK Group has steered the group’s legal entities by its requested economic capital, broken down into the risk categories of credit, market, operational, equity, insurance and strategic/business. In this context, we understand that DZ BANK Group is still somewhat removed from managing business units with economic capital. Having said that, DZ BANK Group’s capital management is conservative in view of the fact that the allocated capital is well below the available risk-absorbing capacity and no correlation between the legal entity’s risk classes is assumed. (4) CFSN shows overall sound and predictable financial fundamentals that compare well with other retail banking groups in Germany and even Europe with regard to most parameters CFSN’s financial fundamentals are characterised by relatively stable and predictable recurring earnings that reflect the contribution of its retail banking franchise. The level of profitability compares well with German and even European peers, especially through the cycle and when the depressed economic environment in Germany between 2000 and 2004 is considered. Whereas in other European countries, an unprecedented house price inflation and strong domestic demand helped banks to double-digit loan growth, Germany’s banks, and especially very “domestic” banks, such as CFSN, had to administer flat loan growth at best. In this context, if Germany’s recovery is not short-lived, CFSN is well placed to benefit. The Sector’s funding profile is very stable, based on the large share of customer deposits and secured funding. Together with capital and insurance-specific provisions, 80% of CFSN’s consolidated balance sheet is relatively insensitive to market perceptions. Even with a positive economic outlook, loan growth should be covered by deposits and changes in CFSN’s balance sheet composition. Performance of German Financial Institutions and GDP Growth Pre-Provisional Profit as % RWA Post-Provisional Profit as % RWA 2.25% 2.00% 2.00% 1.75% 1.75% 3.00% 1.50% 3.00% 1.50% 1.25% 1.25% 1.00% Profit as % of RWA GDP growth y-o-y Profit as % of RWA GDP growth y-o-y 1.00% 1.50% 0.75% 1.50% 0.75% 0.50% 0.50% 0.25% 0.25% 0.00% 0.00% 0.00% 0.00% 2000 2001 2002 2003 2004 2005 2006 2007 2000 2001 2002 2003 2004 2005 2006 2007 -0.25% -0.25% -0.50% -0.50% -0.75% -1.50% -0.75% -1.50% S-Finanzgruppe (aggregated) CFSN DZ Bank Group Average of German nationwide private banks* Germany EU 15 * Deutsche Bank, Commerzbank, HVB, Dresdner Bank. Source: Bundesbank, banks’ annual reports and DBRS estimations. Similarly, CFSN’s capitalisation is recovering and beginning to catch up with the strongly capitalised co- operative groups such as Rabobank. Until now, the group has not accessed the equity markets of its units. This could be an option for the future and could increase the strategic flexibility as well as enhance the range of remuneration schemes of DZ BANK Group’s management. 5 VR Kreditwerk is a directly and indirectly 100%-owned subsidiary of DZ BANK that specialises in processing home savings and loan contracts as well as mortgages and to be the largest of its kind in Germany, according to the company. 8 Financial Institutions: Banks & Trusts
  9. 9. DZ BANK AG (5) DZ BANK Group cautiously, selectively and coherently pursues expansion in neighbouring Europe Deutsche In contrast with the Austrian co-operative banks, which also face a very competitive domestic market but Zentral- have developed a profitable banking franchise in CEE over the last decade, the Sector was occupied with its Genossenschaft sbank restructuring and organisational changes until 2003. Only its subsidiaries, especially BSH, took advantage of this historic opportunity and established joint ventures in Czech Republic, Hungary, Slovakia and Report Date: Romania. Similarly, VR Leasing today generates nearly 50% of its growth in eastern Europe. 21 December 2007 DZ BANK’s international ambitions were, until recently, opportunistic (its successful U.S. structured finance unit), not fully exploited (DZ BANK’s 25% share in Österreichische Volksbanken-AG (OEVAG), the Austrian central financial institution of the Volksbanken sector) or on a smaller scale (DZ BANK’s private banking subsidiaries in Switzerland and Luxembourg, which nevertheless have growth potential). We believe that DZ BANK Group is still conservative and selective in its international expansion, but in areas where it has competitive advantages, it develops European ambitions. In this context, DZ BANK Group has strategic shareholdings in EQUENS and dwpbank, two of the largest transaction operations not only in Germany but also in Europe. EQUENS is a German, Dutch and Belgian full-service payment service provider, with an estimated market share of 10% in Europe. dwpbank is the largest German securities-processing specialist. DBRS believes that these shareholdings should benefit the local banks in the future because the member banks participate in the incremental economies of scale of each strategic partner or customer of these institutions and this should help defend the local franchises. We are more sceptical about the ultimate success of DZ BANK’s more recent initiatives to expand its lending and capital markets activities in Asia. However, in the overall assessment of CFSN the ambitions are of modest relevance. (6) Progressing cooperation and consolidation among group members offer potential for efficiency gains The history of the co-operative banking sector in Germany started more than 150 years ago. In 1989 (before unification), the Sector had 3,343 co-operative banks, eight regional central banks, one federal central bank and more than 19,000 branches. Over the last 17 years, the group has undergone considerable consolidation. However, this was often a painful process since the mergers of local banks and regional central banks were, and still are, most of times caused by financial problems of one of the participants, thus being rescue operations. Moreover, the German federal system, with its emphasis on regional independence, was not supportive of an acceleration of the centralisation process within the Sector. Last but not least, the German co-operative banking sector did not experience the same legislation as other co-operative sectors in Europe (e.g., the Netherlands, France and Finland), where the co-operative banking laws had a major influence on the creation of a more centralised co-operative banking structure. This context also explains why the German co-operative sector still has two central financial institutions, three mortgage banks and, in some regions or sub-sectors, less entrenched cooperation among the members of the group. These examples show that CFSN is still in an evolutionary process to some extent and closer cooperation among its members should lead to further efficiency gains. 9 Financial Institutions: Banks & Trusts
  10. 10. DZ BANK AG Performance of German Financial Institutions vs. European Peers Deutsche Pre-Provisional Profit as % of RWA C / I ratio Tier I ratio Zentral- Average of selected European peers* Genossenschaft CFSN DZ Bank Group S-Finanzgruppe (aggregated) sbank 80.00% 2.50% 15.00% Report Date: 21 December 2007 2.00% 60.00% 10.00% 1.50% 40.00% 1.00% 5.00% 20.00% 0.50% 0.00% 0.00% 0.00% 2005 2006 2005 2006 2005 2006 * Rabobank, OP Group, Banque Populaire, Caisse d’Epargne. Source: Bundesbank, banks’ annual reports and DBRS analysis. (7) CFSN’s improved risk management, in a less benign operating environment, should reduce further the number of rescue cases among its members The risk management for the group is conducted at the various legal entities independently but integrated at DZ BANK for its subsidiaries and at WGZ BANK for its subsidiaries. For the group of local Volks- und Raiffeisenbanken, risk management is conducted indirectly by BVR as it assesses the risk-return profile of each member bank in its role as the administrator of the support funds. In addition, consistency in rating and financial controlling tools is promoting a common risk-management culture. DBRS can state that the risk profile of the local banks is improving, measured by all parameters, such as amount of loan loss provisions (LLP), internal assessments of the local banks by BVR and the decreasing number of banks that need the support. However, the Sector shares this generally positive development in its risk profile with its competitors. DBRS believes that BVR’s risk management could be challenged to successfully contain an increase of troubled members in a more difficult operating environment and intervene at an early stage so that the support fund remains unaffected. However, DBRS believes it is reasonable to assume that the credit monitoring of the local banks in combination with new rights of intervention and an increased number of analysts at BVR should help prevent the protection scheme from being strained similar to the 1999 to 2003 period before improvements were implemented. DBRS views positively that CFSN began using a credit-transfer mechanism to reduce the concentration risk at local banks. DZ BANK (VR Circle) and WGZ BANK (WGZ Loop) pool credit risk of local banks in specific structures and allocate a share in this pool to the participating banks. In the future, these instruments might be used to give local banks in economically weak regions access to diversification benefits that are currently difficult to achieve with their regional franchises and the high standards of the credit pools. Similarly, the co-operative banking sector was the first banking group in Germany with a “bad bank,” a bank specialised in the workout of non-performing loans. The concentration should increase the efficiency of the recoveries and allow the troubled banks to concentrate on their restructuring. CFSN’s amount of sub- or non-performing corporate loans is negatively influenced by DZ BANK Group’s legacy, especially in case of DG Hyp’s commercial real estate portfolio and DZ BANK’s residual commercial real estate portfolio. DZ BANK Group is also the main contributor to market risks in the group, since most of the local banks take interest rates out of their balance sheet, as well as trading activities. 10 Financial Institutions: Banks & Trusts
  11. 11. DZ BANK AG During DZ BANK’s restructuring from 2001 to 2003, the improvement in risk management tools, Deutsche reporting and personnel was a key priority and was complemented by a conservative risk appetite at Zentral- senior management level. Today, DZ BANK Group has a group-wide portfolio reporting for credit risks, Genossenschaft sbank monitors its concentration risks, works with Basel II-compliant rating tools and is preparing a group rating desk for larger exposures and upgrades of its rating tools. Report Date: 21 December 2007 Challenges (1) The current stage of CFSN’s intrinsic fundamentals is still shaped by relatively late concentration processes in the group and the legacy of inadequate risk management The Sector’s asset quality, earnings diversification and efficiency are lacking somewhat compared with its European peers. The main reasons are the following: • The difficult economic environment from 2000 to 2003 as mentioned above, which had an impact on all financial parameters and absorbed management capacities. • The competitive market in retail banking and the fragmented market in leasing, insurance and consumer finance, which has had a negative effect on margins and revenue composition. In comparison with co-operative banking groups in France, bancassurance and consumer finance are less mature markets. • In comparison with French, Dutch or Austrian co-operative banking groups, the German co- operative sector generates fewer earnings outside Germany, which has intensified the impact of the economic downturn. However, we do not see CFSN being less ambitious in wholesale and investment banking than other European co-operative groups as negative. • In comparison with some other European co-operative groups, the German co-operative sector is less centralised and started concentrating activities in the Sector later, which in our view affects the efficiency ratios somewhat. A consensus-based decision-making process and its network structure do not always ensure the lowest transaction costs. Composition of Pre-Tax Income at European Banking Groups Pre-Tax Income Breakdown 1% 100% 0% 0% 0% 0% 9% 10% 11% 0% 13% 6% 13% 31% 15% 9% 80% 8% 21% 9% 0% 25% 26% 8% 21% 60% 11% 19% 40% 81% 59% 58% 57% 53% 60% 20% 0% -10% -2% -3% -14% -5% -20% Rabobank CFSN Groupe Crédit Groupe Crédit Groupe Caisse Banques Populaires Agricole Mutuel D'Epargne Domestic Retail Wholesale and Investment Banking Specialised Financial Services Investment Management Foreign Retail Other Domestic Retail (aggregated retail banks), Foreign Retail (none), Specialised Financial Services (property financing: Münchener Hyp, DG Hyp, WL Bank; consumer financing: easyCredit; leasing services: VR Leasing), Wholesale/Investment Banking (corporate finance: DZ BANK, WGZ BANK, DVB), Investment Management (asset management: Union Invest; private banking: DZ BANK International, DZ Privatbank; insurance: R+V) and Other (holding activities, proprietary investments). Source: Banks’ annual reports and DBRS analysis. 11 Financial Institutions: Banks & Trusts
  12. 12. DZ BANK AG • In addition to this delay in concentration, partially inadequate internal controlling systems, Deutsche accompanied by mis-estimations of economic development, have misled some German co- Zentral- operative banks (Volksbanken and Raiffeisenbanken) – the most prominent case being Genossenschaft sbank Berliner Volksbank – to develop an undue risk appetite in the past. The belated concentration process has delayed the sector in developing a stronger SME and wholesale banking franchise Report Date: at home. As a consequence, concentration risks have been a challenge at the former DG Bank. 21 December 2007 However, the legacy entails very little downside risks, especially because the credit risks are identified and sufficiently provisioned. Nevertheless, the number of loans that pay no interest or do not have risk- adjusted margins in the lowest asset classes remains a drag on CFSN’s profitability ratios. (2) U.S. sub-prime and a potential U.S. recession shall not have a structural impact on CFSN’s consolidated financial fundamentals In this context, we believe that the direct impact of the U.S. sub-prime crisis and a potential U.S. recession shall be manageable without a structural impact on CFSN’s financial fundamentals. If we look at CFSN’s direct exposure to the United States, structured finance products with a U.S. background and operations/assets in the United States, we can point out the following: - The Group has considerable exposure to securitizations products with U.S. assets through on-balance sheet investments at DZ BANK, WGZ Bank and to a smaller extent at the remaining co-operative banks as well as other DZ BANK’s subsidiaries. The total amount is not disclosed. However, DZ BANK AG and WGZ Bank announced recently that they have a total of EUR21 billion of securitized investment products on their balance sheet, thereof 99% of DZ BANK’s investment products are rated AAA or AA. We understand that U.S. assets make a considerable part of the underlying assets. The banks have not publicly disclosed the asset classes or rating levels, but we believe that the quality of the assets should prevent considerable impairments, assuming the U.S. mortgage and consumer markets do not take a turn for the worse. - DZ BANK runs two ABCP conduits, Autobahn Funding Company, through which it helps securitizing a great variety of U.S. assets for U.S. customers, and CORAL Capital Limited, a hybrid multi-seller conduit with some exposure to U.S. assets. Currently the outstanding amount of both conduits is over USD5 billion. DZ BANK has liquidity commitments towards these transactions and some transactions and receivables are linked to the financial health of U.S. consumers. The largest co-operative bank, Deutsche Apotheker und Ärztebank, owns one of the largest CDO managers in Europe with around EUR30 billion under management. We understand that the bank has no equity nor liquidity commitments toward the CDOs and its USD1.3 billion leveraged ABS funds under its LAAM brand 6. However, the bank has announced its commitment to protect its core customers from losses on their investments in these vehicles. - DZ BANK operations in the United States were specifically focused on credit investments as well as project and trade finance. In this context, DZ BANK Group’s U.S. ABS and loan portfolio is exposed to a potential deterioration of credit quality in the United States, not only corporate but also consumer. DG Hyp is doing some commercial real estate lending in the United States. We estimate that DZ Bank Group’s U.S. exposure is around single digit of its loan exposure. We believe that CFSN’s financial fundamentals should sustain potential pressure on its U.S. exposures: - We estimate that only 1% to 2% of consolidated assets and under 1% of CFSN’s consolidated earnings respectively are coming directly from its U.S. operations or assets. - The amount of potential actual credit losses or impairments is still difficult to predict. However, potential evaluation losses should be manageable in light of the current rating levels and CFSN’s recurring loss absorbing capacity. In this context, we point to the fact that DZ BANK is changing in 2007 to IFRS accounting standards. We expect that the bank will not switch assets among accounting classification standards (available for sale, hold-to-maturity or the the fair value option) in light of the current market developments. 6 According to recent press release of Deutsche Apotheker- und Ärztebank on 5 November 2007. 12 Financial Institutions: Banks & Trusts
  13. 13. DZ BANK AG (3) Some heterogeneity among local banks adds complexity to CFSN’s efforts but could turn into a Deutsche strength if solidarity is maintained at the same time Zentral- The larger share of CFSN is contributed by approximately 1,250 local banks with a combined balance Genossenschaft sbank sheet of approximately EUR608 billion. About 20% comes from banks that compete with other member banks and that carry different brands and pursue more discriminating customer selections, which Report Date: historically has shown to have had a considerable impact on their business profiles and benefited in 21 December 2007 reduced risk costs. For example, the group of Sparda Banken, with a combined balance sheet of EUR47.9 billion in 2005, is focused on banking for individuals, offering a lean product range with attractive pricing. Other banks, which are “different,” are the professional banks (especially the largest co-operative bank, Deutsche Apotheker- und Ärztebank, with a balance sheet of EUR29.6 billion) and the Kirchenbanken (“church banks”). Given the nature of these kinds of deviating strategies, it might be assumed that solidarity within the co- operative banking group in Germany may weaken; but historic evidence has shown that the opposite is true. We believe that in the future, these groups can provide considerable advantages to the group. The Sparda Banken in particular are a successful defence against the growing market penetration of direct banks in Germany. With their strong, focused business model, lean operations and attractive pricing, they have grown their market shares within the co-operative banking group and helped defend market shares in deposits and current accounts. However, CFSN might need to provide more benefits to these groups going forward in order to advance its integration in the Sector. (4) Growing price competition for savings and mortgages, customer changeability and an increase in alternatives to CFSN’s proximity banking model will continue to put pressure on CFSN’s core earnings In the German retail banking market, several structural changes have taken place over the last five years, including growing competition from more flexible agent sales networks, leaner direct banks with price- driven penetration strategies and progressing Postbank. CFSN’s proximity banking model is vulnerable to a commodisation of savings products and mortgages and the advent of the “free” current account. At the same time, fees for payment services, base fees for current accounts, interest rate arbitrage with time, savings deposits and mortgages still represent a solid bulk of revenues for the local banks. We believe that CFSN, similar to other German retail banking groups with large branch networks and with inflexible remuneration models, will continue to feel the pressure on their profitability through these competitors. In addition, some local banks might be inclined to seek higher returns in new asset classes with risk characteristics they are not familiar with. In this context, we believe that CFSN’s cognizance of the fact that the value of its membership needs enhancement to maintain any discernable advantage when compared with the new competition and that preserving the loyalty of its members will be a challenge to do without jeopardising the group’s risk- return profile. 13 Financial Institutions: Banks & Trusts
  14. 14. DZ BANK AG Issuer Profile Deutsche Zentral- Genossenschaft sbank Background Information Report Date: (1) General 21 December 2007 Headquarters: Frankfurt am Main, 60325 Germany Total staff (full-time): 24, 186 as of June 2007 1850–1860 – first co-operative banks in Germany are founded. 1920 – first co-operative organisation, Deutscher Genossenschaftsverband e.V. 1930 – driven by economic crisis, the banks arrange a collective centralised protection scheme. 1964 – Volksbanken are the first financial institutions in the German market to introduce a new financial product: Sparbriefe (savings certificates). 1970 – WGZ BANK is transformed from the central payment unit for the members of the region of Rhineland-Westphalia to a central co-operative bank. 1972 – introduction of new organisational structure for German co-operative Sector, consisting of DGRV(Deutscher Genossenschafts- und Raiffeisenverband, a central umbrella organisation) and three subordinated functional divisions, among others the banking unit BVR (Bundesverband der Deutschen Volksbanken und Raiffeisenbanken). 2001 – after several mergers within the Sector in the context of a centralisation process, two major central co-operative banks come into being: DZ BANK, rising from the merger of GZ-Bank and DG Bank, with 1,300 member institutions and a balance sheet totalling approximately EUR400 billion, and WGZ BANK, with 240 member institutions and a balance sheet totalling EUR73 billion. 2003 – reformation and improvement of the protection mechanism of the co-operative banking group. 2004 – partial centralisation of the group and transfer of strategic competence to BVR. (2) Business Profile German Co-operative Banking Sector Traditionally considered to be one of the three pillars of the German banking system, co-operative banks play a fundamental role in the German financial market and, with total assets of EUR 961 billion, 1,294 local co-operative banks, 16 million co-operative members and 30 million customers, have the second largest market position after the group of savings banks (Sparkassen-Finanzgruppe). This position is based on the retail and regionally oriented franchise of the group’s core entities – the local co-operative banks (Volksbanken and Raiffeisenbanken), which at the end of 2006 on the consolidated basis have represented 64% of the Sector’s assets and contributed about 70% of its pre-provisional income. The local co-operative banks traditionally have offered universal banking services mainly to retail and small and medium-sized enterprises (SMEs) on a regional basis as well as in selected business areas. Thus these banks benefit from a broad customer base and are deeply integrated in their local communities by the total network of 14,000 branches. Consequently, the Sector benefits from the large market shares of an estimated 21% of loans and 20% of deposits as of 2006, behind the savings banks group, with market shares of 29% and 27%, respectively, and far ahead of its peers. Despite the strong competitive environment and low growth rates in the German banking market, local banks can benefit from such advantages as the centralisation of resources (by the central banks and by other group members with strategic knowledge and expertise) and the exploitation of their distribution network and apply this to a broad range of their traditional and newly developed products. 14 Financial Institutions: Banks & Trusts
  15. 15. DZ BANK AG BVR/CFSN Deutsche The Cooperative Financial Services Network (CFSN or FinanzVerbund), under the strategic leadership of Zentral- Bundesverband der Deutschen Volksbanken und Raiffeisenbanken (BVR), functions as an umbrella Genossenschaft sbank organisation, representative and strategic partner for the members of the group, which in addition to the member co-operative banks and their central offices includes also other specialised financial institutions Report Date: such as Sparda-Banken, PSD-Banken, Kirchenbanken plus the group’s auditing entities. BVR is 21 December 2007 committed to supporting the interests of its members on national and international levels and the development and coordination of a collective strategy within the group as well as supplying legal, fiscal and overall economic support. In particular, it is also responsible for the management and maintenance of the group’s support mechanism. CFSN Network Structure COOPERATIVE FINANCIAL SERVICES NETWORK BVR Umbrella organisation for German co-operative banks DZ BANK GROUP Central bank: DZ BANK WGZ BANK GROUP (1,300 members, assets EUR 461 billion) Central bank: WGZ BANK Cooperative Service Organisations: (240 members, R+V-Versicherungsgruppe assets EUR 81 billion) (insurance) Cooperative Service Organisations: Deutsche Genossenschafts- WL BANK Westfälische Landschaft Hypothekenbank AG (property Bodenkreditbank AG (property financing) financing) Bausparkasse Schwäbisch Hall (building society) Union Investment-Gruppe (asset management) Münchener Hyp (mortgage bank) VR Leasing (leasing) TeamBank (consumer finance) Etc.* Cooperative local banks (Volksbanken and Raiffeisenbanken) * Please also see the operational structure of the DZ BANK Group below. Source: Company presentations. DZ BANK Group As a result of consolidation process that has been going on for the past 30 years, DZ BANK has become the larger of the two remaining central banks in the Sector (the other being WGZ Bank). According to this supportive role, it offers such services as clearing, capital market products and international business support to more than 84% of German local banks. It acts both as the group’s central bank and holding institution and as an independent commercial banking entity. Whereas on the central bank level, DZ BANK provides the Sector with financial processing services, funding and treasury expertise; as a commercial banking entity, it is active in corporate and investment banking businesses, with emphasis on large- and medium-sized corporate lending, structured finance, trading and private banking services. As a holding company, DZ BANK provides support to and bears responsibility for its subsidiaries, mainly highly integrated into the Sector entities, which follow the strategy of specialisation and can therefore often claim leading positions in the domestic market, such as Bausparkasse Schwabisch Hall (building society), R+V-Versicherungsgruppe (R+V, insurance unit), Union-Investment-Gruppe (asset management), Deutsche Genossenschafts- Hypothekenbank AG (DG HYP, property financing), VR Leasing (leasing entity) and TeamBank (consumer credits entity). The holding company aims to provide its products and services on the integrated basis and to be complementary to its functional units, following bancassurance principles (Allfinanz-Gruppe). 15 Financial Institutions: Banks & Trusts
  16. 16. DZ BANK AG The activities of the holding company lie within the scope of its four core segments: Bank, Retail, Deutsche Property Finance and Insurance. The first segment includes such entities as DZ Equity Partner (equity Zentral- specialist), DZ BANK Ireland (ABS services), EQUENS (specialist in payment transactions), VR Genossenschaft sbank Leasing, Deutsche Verkehrsbank (DVB, one of the leading international transport financers) and ReiseBank (cash manager). Report Date: 21 December 2007 The group’s asset management entity, Union Asset Management Holding AG, belongs to the Retail segment and is one of the four largest specialists in this field on the domestic market, with a market share of almost 12% in 2006 (based on assets under management). Notably, the entity is a very strong player in the pension products market (the market leader in the Riester-Rente sector). The segment also includes consumer credit specialist TeamBank, with its successively growing product easyCredit, and the group’s private banking subsidiaries, DZ BANK International and DZ Privatbank (Schweiz) AG. In the Property Finance segment, the group’s business is underpinned by the strong franchises of Bausparkasse Schwaebisch Hall (BSH) and DG HYP, the country’s largest specialists in their fields, and is also supported by VR Kreditwerk, a standardised property finance products expert. Finally, the Insurance segment contains the group’s insurance unit, R+V, which offers both life and property products to retail and corporate clients and is a solid market player with an estimated domestic market share of 6%. Group Structure (Based on Operational Division) DZ BANK Group Bank Retail Property Finance Insurance Corporate Banking Asset Management Insurance DZ BANK Union Asset Management Holding R+V VR-Leasing DVB Bank ReiseBank Retail and Private Banking TeamBank (easyCredit) DZ BANK International Investment Banking DZ PRIVATBANK Schweiz DZ Equity Partner DZ BANK Ireland Property Financing Bausparkasse Schwäbisch Hall Process Management DG HYP EQUENS* VR Kreditwerk** dwpbank* * Consolidated at equity on the group level. ** Consolidated with the Property Finance segment. Source: Company presentations. Protection Scheme of the Group All local banks are members of the group’s protection scheme, which is coordinated by BVR. The aim of the mechanism is to prevent potential insolvencies and remedy the existing financial difficulties of all CFSN member institutions. The protection fund is based on the regular risk-adjusted contribution of the member banks, which in turn is determined by their internal rating results (on an annual basis). In 2003, the scheme was modified to provide incentives for good management and to reinforce BVR’s supervision and corrective influence. 16 Financial Institutions: Banks & Trusts
  17. 17. DZ BANK AG The protection mechanism is based on constant risk-monitoring principles and the mandatory Deutsche classification of member banks and consists of two building blocks: preventive actions and restructuring Zentral- actions. Under the scheme, the banks with higher risks and offensive business policies (e.g., undue risk Genossenschaft sbank appetite, unaccountable credit granting and disproportional investments) will be subject to preventive measures, which could include constant supervision by BVR, compulsory amendments to the bank’s Report Date: management policy, a complete change in the bank’s management board and strict reporting 21 December 2007 requirements. If an institution, on the other hand, faces solvency problems, restructuring measures and the use of guarantee funds will become necessary. The level of risk-adjusted contributions lies within the allowable range of between 0.05% and 0.2% of the sum of customer loans, contingent liabilities and counterparty derivative risks. Notably, available funds have remained stable over the past years, with the maximum contribution level required during 2004 to 2005, and have declined during the past few years; thus from 2008, its level has been set to 0.075% (0.125% at current). Additionally the regular funds can be increased according to the scheme’s statute by access to the members’ contribution guarantees (up to 0.4% of total customer loans). 7 CFSN Protection Scheme A member bank faces financial difficulties High risk appetite, offensive Solvency problems management policy BVR undertakes BVR undertakes preventive measures: restructuring measures information requests and supervision by BVR; special audit measures; restructuring plans; replacement of management board; amendments in business policy BVR accesses guarantee By insufficient capacity fund, financed by annual BVR accesses the contributions of all additional guarantee member banks, currently network of all member amounting up to 0.2% of banks, maximum 0.4% of total customer loans total customer loans Source: Group’s presentations and Group’s statute of protection scheme. 7 For more details, please refer to the Statute of the Protection Scheme of BVR. 17 Financial Institutions: Banks & Trusts
  18. 18. DZ BANK AG Financial Profile DZ BANK Group Deutsche Zentral- (1) Revenue Breakdown Genossenschaft sbank Breakdown of DZ BANK Group's Operating Report Date: Revenues 21 December 2007 100% 80% 42% 43% 48% 60% 7% 6% 8% 17% 16% 40% 15% 20% 32% 34% 33% 0% 2004 2005 2006 Other operating income (incl. dividends) Trading / FX Income Commission income Interest and similar income Source: company’s reports. (2) Income Contribution from Business Segments (As of 2006) Breakdown of DZ BANK Group's post-provisional income by segments 100% 80% 15% 13% 9% 11% 22% 15% 16% 19% 60% 33% 37% 40% 41% 40% 20% 65% 62% 60% 56% 0% -28% -28% -30% -26% -20% 2005 2006 HY2006 HY2007 Insurance Property Finance Retail Bank Other/Consolidation Source: company’s reports. 18 Financial Institutions: Banks & Trusts