Credit Report on BayernLB

February 2009

........................................................................................................................ 6 Effect of the ABS portfolio on BayernLB’s balance sheet and income statement .................................................................................. 16 .......................................................................................... 2 BayernLB’s strategy: Restructuring plans in the light of the current difficult financial markets . 5 Financial assessment of BayernLB ..................................... 4 Financial Snapshot ................................................................................................ 1 Segmental performance..................................................... 1 Profile of BayernLB .......Table of Contents Landesbank industry trends: ...14 SoFFin ................................................. 14 Solidarity/cross-guarantee system .................................................................................................................................................................................................................................................................................................... 3 SWOT analysis of BayernLB .... 15 Bibliography...................................... 2 Financial market turmoil and its effects on BayernLB ........................................................ 9 Appendix.................. 14 Peer Analysis................

the global financial crisis also created a favourable environment for consolidation of Landesbanks. the bank mainly operates in the State of Bavaria and is into corporate lending. As a result. as demonstrated by their recent capital injections (For details refer financial market turmoil and its impact on BayernLB). project finance. As an industry-wide feature. It is also a principal bank in the State of Bavaria and a part of Sparkassen-Finanzgruppe. which comprises 75 Bavarian savings banks. Landesbanks suffered severely due to credit market crisis started in 2007. indirectly owns BayernLB (through BayernLB Holding AG). Due to this ownership structure and the function they perform. They are covered under cross guarantee/solidarity mechanism (Refer Appendix for details). as the profitability and capitalization of all banks have been adversely affected by massive write-downs and revaluations on their securities portfolio. with little contribution from customer deposits. In terms of ownership. They were established with an objective of providing clearing house services to the regional saving banks. This ownership structure helps cover the bank under the guarantee scheme run by German Savings Bank Association as well as reserve fund set up by the Association of Bavarian Savings Banks. they were supported by the capital infusion and bail out measures undertaken by their respective owners and the German federal government. and representative offices in Montreal. SMEs. each with a 50% stake. All the Landesbanks recorded huge write-downs and credit related losses in their portfolio. and is well-positioned in the region of Bavaria. plays a significant role in the German banking industry. The Free State of Bavaria and the Association of Bavarian Savings Banks. Hence. Landesbanks in general are systemic important for the Germany banking sector and command a high probability of support from the owners as well as government. Moscow and Beijing. they heavily invest in structured and other securities to increase their returns. these Landesbanks are wholesale funded and mainly depend on covered bonds issuance (Pfandbriefe) for their funding requirements. the risk profiles of Landesbanks are high as compared to the saving banks. As a side effect. branches in London. these Landesbanks are owned by the savings banks and savings banks association of the region to which they act as the principal bank. Headquartered in Munich. In addition to the clearing bank function. It is the second-largest Landesbank and ninth largest commercial bank in Germany. BayernLB 1 . The bank is strongly supported by its shareholders. especially from the State of Bavaria. Profile of BayernLB BayernLB was formed in 1972 through the merger of Landesbodenkreditansalt and Bayerische Gemeindebank. capital markets and real estate lending to corporates. Also. BayernLB works closely with these savings banks. However. Landesbanks also provide wholesale banking services to corporate clients of the saving banks of the region. putting a pressure on their financial profile further. with an asset base of €426 billion as at 30 September 2008. retail customers and municipal authorities. Tokyo. Due to large investments in risky assets. comprising of 7 Landesbanks. New York and Luxembourg. they work in close association with the saving banks for the banking business.Landesbank industry trends: The German Landesbank sector at present. The bank operates internationally (wholesale and retail banking) as well through its subsidiaries in central and south-eastern Europe and North America.

it bought Hypo Group Alpe Adria (HGAA) in 2007. Hence. The bank is planning to expand in the emerging markets through its stakes in MKB in Hungary. Germany and selected European regions. being the principal bank (clearing bank). to expand its retail banking activities in the eastern and south-eastern European markets. Key subsidiaries .Segmental performance As at 3Q08 (€ million) Corporates Real estate Financial markets Credit investment portfolio* Financial institutions and sovereigns Savings banks and Bavarian market Bayern Labo/LBS Bayern Consolidated subsidiaries Support operations/others Total Total operating profit 330 135 -428 -1614 138 -13 125 -50 -296 -1674 Profit before tax 328 134 -445 -1614 138 -18 125 -57 -330 -1740 Return on equity 22% 24.The bank has 184 subsidiaries. BayernLB has reorganised its business model and is restructuring its operations. To sustain its business position and improve its financial performance.1 million retail clients. It suffered huge losses from its strategic risky investments since mid-2007. This helps the bank to strengthen its core earnings and actively use its collaboration with SparkassenFinanzgruppe. including nine Special Purpose Entities and eight special funds. is well established in the State of Bavaria and uses the network of savings banks to reach its customers. Bulgaria and Romania—it infused capital worth €2. such as institutional clients. thus enriching the bank’s retail portfolio. such as leasing. due to the global financial market crisis.8% <0% <0% 26% <0% 14. Landesbank Saar. The acquisition of HGAA helped BayernLB added 1. Banque LBLux SA and LB (Swiss) Privatbank AG increased its operating income from retail activities by 32% to €536 million (as at 2007 end). It plans to focus more on core customer segments. Strategic subsidiaries include: BayernLB 2 . expand its presence in south-eastern Europe and enhance expertise in attractive product segments. retail customers and commercial real estate lending in Bavaria. to cut administrative expenses by about €670 million until 2013. this acquisition and the bank’s other strategic participation in Deutsche Kreditbank Aktiengesellschaft (DKB). The bank has historically acquired several banks. MKB Bank Zrt (MBK).1% <0% <0% * BayernLB has introduced a new reporting line for disclosing credit investments BayernLB’s strategy: Restructuring plans in the light of the current difficult financial markets BayernLB. savings banks. BayernLB is heavily cutting cost and focusing on its restructuring plan of downsizing and better integrating its subsidiaries.3 million in MKB in January 2009. It has been increasingly diversifying its operations organically as well as geographically and segment-wise through acquisitions.

Recapitalisation up to €5. This significantly dropped the market value of structured finance products. BayernLB has benefited from the strong support from the owners. worth €15 billion for the issue of bonds. In line with the industry trends. Berlin – It has been BayernLB’s wholly owned subsidiary since 1995. the German stabilisation fund. Bulgarian and Romanian markets.5% in retail loans. In first none months of 2008.DKB. 6. Guarantee under SoFFin. BayernLB is also planning a merger with another Landesbank. BayernLB received EU’s approval for the above recapitalisation plan (except that the FMSA’s recapitalisation approved for €3 billion total instead of the proposed €5. HGAA. BayernLB continued to record high securities losses. 11. It is also a part of the guarantee scheme run by the SparkassenFinanzgruppe under the umbrella of the German Savings Bank Association.2% (€482 million) in 2006. It is also an integral component of BayernLB’s business model and a link to the Hungarian. €700 million will be contributed by the Bavaria State. accentuated by the collapse of Lehman Brothers in September 2008 and the bankruptcy of Icelandic banks in November 2008. eventually weakening its profitability and capitalisation levels. and the remaining by German federal government.2% in wholesale deposits.2 billion on its credit investment portfolio in 2007. The credit market crisis continued in 2008.62% in MKB. Bavaria as well as German Savings Bank Association. resulting in a decrease of over 91% in the group’s net profit (yo-y) in 2007.8 billion. Financial market turmoil and its effects on BayernLB In line with the industry.31% stake in HGAA in 2007 to expand in south-eastern Europe.017 million. BayernLB. Income from financial investments had been an important source of revenues. Accordingly. BayernLB holds 89. Klagenfurt – BayernLB acquired a 57. documentary business and structured finance. as it is exposed to Lehman and Icelandic banks. HGAA operates through its two strategic segments—banking and leasing. it offers traditional financing. to be borne by the bank’s owners. they contributed 48. the bank incurred mark-tomarket losses on its trading securities portfolio of €1. In the banking segment. The global financial market turmoil and the US sub prime crisis in mid-2007 resulted in significant mark-to-market and impairment losses for Landesbanks. with an exposure of €33 billion in structured finance products (as at 2007 end). €300 million by the Association of Bavarian Savings Banks. MKB. focusing on selected target groups in the public sector and corporates segments. It operates throughout Germany as a direct bank for retail customers. MKB has a market share of 13. asset management. also suffered write-downs of €1. savings and deposits. the bank received a part capital of €3 billion from the State in 4Q08 and also issued €5 billion bonds guaranteed by the SoFFin with a maturity of three years (refer Appendix). LBBW. such as housing companies and agriculture enterprises. BayernLB has high investments in asset-backed securities (ABS).4% in wholesale loan.7% in investment services. payments.2% in retail deposits and 3. 5. to create Germany’s third-largest financial institution with combined assets worth €916 billion and BayernLB 3 . Protection plan for the ABS investment portfolio worth €4.4 billion (only €3 billion is approved by EU) under German Financial Markets Stabilisation Institution. the bank plans for: Capital injection of €10 billion. In order to sustain its business position and strengthen its capital position.4 billion) in December 2008. Budapest – It is one of Hungary’s largest banks and is actively into corporate and retail banking. sophisticated investment products. Finanzmarktstabilisierungsanstalt (FMSA) support scheme. €7 billion from the State and €3 billion from the Association of Bavarian Savings Banks.

000 employees. as demonstrated by the frequent capital injections and guarantees received. due to Lehman brother’s filling of bankruptcy. managing which would be a challenge. There is a possibility that ownership would change and in that case we might expect reduction support from existing owners. In the beginning of December 2008 (when the group released 3Q financials) the CDS spreads have again sprung up. SWOT analysis of BayernLB Strength High likelihood of support from the government due to its high systemic importance Very high likelihood of support from both the owners. Figure 1: CDS spreads Source: Bloomberg The CDS spreads of the group are traded at 105 basis points. BayernLB 4 . as demonstrated by recent capital injections Increasing diversification into retail banking business with specific customer segment focus Growing its international presence in central and eastern Europe through M&A Well integration of subsidiaries and cost containment Credit Assessment The credit assessment of the group is moderate. High risk securities portfolio continues to pressurise the bank’s financial profile. if happens.nearly 33. due to the losses incurred. will strengthen the bank’s position and strategic importance in the German market. In October 2008. It is largely driven by the high likelihood of support from its owners (State of Bavaria and the Association of Bavarian Savings Banks). this merger. We believe that. Weakness Huge write-downs and revaluations on its securities portfolio Modest risk management systems . the CDS for the group have shot up. The group has also received support from SoFFin which is subject to EU’s approval. The above chart shows the trend of CDS chart for past one year.

740 -1.29% 7.546 121.330 2.097 12.598 78.65 47. In addition.65% 77.622 67.05% 1.288 -0.895 84.09% 8% 11% 2.639 92.73 22.957 62. The financial metrics has weakened due to the heavy losses made on the securities portfolio.871 63.46 0. Though the management has taken various business restructuring initiatives.13 0.46% 5.228 2.351 -630 -731 179 287 1.65% 26. the global financial crisis and difficult operating environment has further rattled the group’s credit profile.943 186.58% 0.54% 61. The effect of credit market turmoil is expected to be seen in the group financials even in 2009.195 9.177 151.202 99.27% 2.244 76.812 67.91 40.161 2.88% 0.151 1.739 2.78% 29.641 95.59% 75.83% 2007 415.52 0. Financial Snapshot BayernLB (EUR mn) Total assets Deposits Gross loans Equity Securitised liabilities Trading assets Investment assets Liquid assets Loan-loss reserves Operating income Net income LLP Net fee-based income Net interest income ROAA ROAE NIM Cost/income Cost/average assets NPL/gross loans LLR/NPL Write-offs/equity Tier 1 Total capital Equity/assets Hybrid capital/equity 9M08 426.14 25.142 59.740 333 452 1.38% 0.168 11.1 NA 8% 11% 3.64% NA 0.170 0.60% 7% 11% 2.55% -21.06% 7% 11% 3.57 17.250 195.10% 0.704 137.332 989 182 404 1.369 76.567 12. their positive effect is expected only in the medium term.475 -1. The securities portfolio is consistently weakening due to its risky investments portfolio.280 151.949 -0.34% NA 1H08 415.BayernLB’s credit profile on a standalone basis is much weaker.10% 32.438 130.559 107. as BayernLB may book high losses from securities portfolio.73% 2006 344.617 175.51% BayernLB 5 .820 0.43% 3.35% -13.960 122.893 122.827 157.307 255 175 115 380 2.42% NA NA 32.

respectively. BayernLB’s core business is wholesale lending. as the group has a sizeable securities portfolio (with high investments in structured products). The group does not clearly disclose its assets quality in its quarterly results. which will be affected during the ongoing financial turmoil. except in the case of critical time-sensitive information where 3Q08 financials are used to show correct trend. plant and equipment Intangible assets 1% 45% Income tax assets Other assets 1% 0% 1% 14% 1% 1% Source: BayernLB’s interim 3Q08 report The bank is highly focused on domestic clients. as the effect of consolidation with HGAA is not reflected in 3Q07 results. Figure 2: Asset classification Cash reserve 1% 17% Loans and advances to banks Loans and advances to customers Risk provisions 0% Assets held for trading Positive fair values from derivative financial instruments Investment assets 18% Investment property Property. the bank has diversified business.95% The group has adopted IFRS reporting structuring since 2007.75% 37. concentrating in Bavaria and other German regions. Credit risk position: The group’s credit risk position is weakening on account of losses incurred in its securities portfolio (especially ABS).85% 52. as about three-fourths of the customer loan book consist of domestic customers.37% 51.Liquid assets/total assets Deposits/loans 35. to total assets. However.54% 37. At 3Q08. We expect the asset quality to weaken further. So we have based our analysis on 1H08 results.60% 50. with gross loan portfolio accounting for 45.6%. The group’s 3Q08 financials are not as per IFRS. the ratio (considered as default on the credit risk exposure entirely) declined to BayernLB 6 . trading and investments portfolios contributed 18.1% and 14.82% 55. as it does not have to comply with IFRS requirements for interim results. Though the bank has not disclosed its impaired loans position for 3Q08. Cost/income= operating expenses/operating income Liquid assets= cash and balance central bank+ interbank assets+ trading assets (excluding derivatives) Financial assessment of BayernLB Please note that 3Q08 and 3Q07 financials are not comparable. *NPL= Default on credit exposure (in absence of disclosure) NIM= Net interest income/ average earning assets. with high investments in risky structured finance products leading to significant credit quality deterioration.8% of total assets at 3Q08.85% 36.

BayernLB % 7 .91% 47. Historically. North America.5 billion. The group has investments in securitised assets and it also structures securitisation transactions for customers through its special-purpose entities. followed by other European countries (34%). and rest relates to its subsidiaries (HGAA. but was partly offset by a €65 million expense for portfolio provisions at the end of 3Q08. BayernLB’s ABS portfolio was around €21 billion. The core banking operations accounted for about 95% of the ABS portfolio. This reclassification resulted in a €1. The group’s trading portfolio is largely exposed to money market instruments at 60%. with effect from 1 July 2008. €39 billion at 30 September 2008.2. BayernLB’s total credit exposure (on-balance sheet and off-balance sheet) was marginally reduced by 3. however.14% 3. its equity exposure is very low. Landesbank Saar and Banque LBLux). for the foreseeable future. which formed a high 2. We view this as a fairly well-diversified credit exposure. mainly due to write-offs. which were reclassified retroactively. nearly half of the group’s credit exposure is from Germany (44%). 98% percent of which has an internal rating of at least ‘A’. The group has major credit exposures to financial institution/banks (36%) and real estate (20%). while bonds and other fixed interest securities formed 17% at 1H08.65% 5.2 billion positive effect on the revaluation reserves. The fair value of these reclassified securities represents the new carrying amount at the time of the reclassification—i. In accordance with the International Accounting Standards Board (IASB) publication titled ‘Reclassification of Financial Assets’. mainly on account of restrictive business policies and international currency rate fluctuations.e. Figure 3: Loan loss coverage 60% 50% 40% 30% 20% 10% 0% 1H08 2007 LLR/NPL Source: Interim results of 1H08 Figure 4: Impaired loans ratio 6% 40. Geographically.65% in 1H08 from 5.10% 5% 4% 3% 2% 1% 0% 2006 1H08 2007 NPL/Gros 2006 % 2. the group has reclassified the securities reported in the balance sheet under investment assets from AFS to LAR. concerning amendments to IAS 39 and IFRS 7.14% (FYE07). The group intends to hold these securities. Structuring ABS securitisation transactions for BayernLB’s customers amounted to about €6.57% At 1H08.73% 25. BayernLB has used accounting flexibility to reclassify certain securities from trading assets and AFS assets into Loans and Receivables (LAR). As at 1H08.0% to €469 billion. and continued the trend with the coverage ratio of only 48% in 1H08. the bank has had low loanloss coverage similar to its peers. but not enough to mitigate the perils of the current global financial crisis. Asia and Middle East.12x of total equity.

Figure 5: BayernLB's exposure to structured securities (EUR In MM) 30. BayernLB 8 . Figure 6: Landesbank's Losses on securities portfolio in 1H08 in EUR MN 1. resulting in a €1.4 billion on its ABS portfolio in 1H08. The actual defaults from asset-backed securities remained low.200 1.1 billion direct effect on equity.000 0 2007 Prime RMBS Source: Financial stability report 3Q08 CDO CMBS Consumer ABS Commercial ABS Non-prime RMBS The above chart indicates reduction in the group’s ABS portfolio in past 9 months (from FYE07 to 9M08).000 10.000 15. It also gives break up of types of securities included in the portfolio.3 billion (including impairments of €0.9 billion) effect on income statement and about €1.000 25.000 5.000 20.000 800 600 400 200 0 Balaba LBBW Landesbank Berlin HELABA NORDLB HSH Nord West LB Losses on securities portfolio in 1H08 Source: Annual reports BayernLB booked fair value losses of around €2.

2 -21.9 -188. there is a need to develop more robust risk management systems. The results were severely affected by the massive widening of credit spreads and the insolvency of Lehman Brothers. in tandem with widening spreads. despite almost stable income from core banking operations. Like most of the German Landesbanks. of which nearly €2. The group posted €1. Overall.6 -27.Effect of the ABS portfolio on BayernLB’s balance sheet and income statement EUR mn Asset category Commercial ABS Consumer ABS CDO CMBS Non-prime RMBS Prime RMBS Total Recognised through profit or loss 30-Jun-08 -1. is chiefly due to the continuing credit crunch.6 million would account for 27% of equity. In the near term the probability of earnings recovery is very low.2 -41. which forms 8% of the group’s equity.30 31-Dec-07 -7. BayernLB has suffered from the financial markets volatility.8 -50.1 -107.306. Given the recent acquisition of HGAA.7 billion net loss before tax in nine months ended September 2008 as against €191 million profits in the same period last year. the group’s risk management systems are at moderate levels.1 -956 Source: Financial stability report released on 30 June 2008 As at May 2008. with a total nominal volume of €4. its average market price risk (VaR based on a 1-day holding period and 99% confidence level) on trading and bank books was €299.5 -414.8 million (€113.9 -123.0 -1.5 -254. The group uses VaR methodology to measure its market risk.8 million in FY07). With the outbreak of credit crisis profitability has suffered badly.100. Price volatility on the ABS and bond markets has also risen significantly.6 billion.7*8)) of €3.6 -1.1 -618. as it is more exposed to structured finance investments in the current global market meltdown.017 million on its trading securities portfolio for 9M08 that is closely linked to international financial market events.2 -1. The financial market BayernLB 9 .9 billion was in the form of liquidity facilities committed to US municipal bonds guaranteed by the insurer. BayernLB has a high market risk. We do not expect any substantial improvement in the bank’s credit risk position in the short term.9 579. BayernLB had direct and indirect exposures to US monoliners. The sharp rise in overall risk.133.30 Not recognised through profit or loss 30-Jun-08 -31.6 -63 -634.6 -42. mainly on account of write-downs in its ABS and other securities portfolio. During 1H08. But the credit quality can deteriorate further and affect the bank’s investment portfolio.30 31-Dec-07 -7. Out of the total exposure the indirect exposure to monoline insurer was €4.8 -5.2 -21. if the credit market turmoil continues. When converted to 10-day holding period VaR on the trading and banking book accounts to €948 million (€357.113.5 -3. The earnings base is volatile due to investment losses. Earnings: Bayern LB has historically maintained low profitability (due to the nature of business).1 million in FYE07). since the start of the year.8 billion.9 -754.8 -1.9 473. The group incurred mark-to-market losses of €1. which is on the higher end. resulting from the write offs on its investments portfolio. The stressed VaR (max VaR * 8 (391.

55% 0.38 0.54% 0. mainly due to the HGAA acquisition and financial consolidations.58% respectively (0. its cost-to-income ratio is not a good indicator of its operating efficiency.60% 0.35 1. which deteriorated to 0.178 million (€252 million in 9M07).05% and 1.crisis also weighed heavily on the results from financial investments (AFS).65% in the last few years. in spite of volatile markets. The true picture is reflected by the cost-to-averageasset ratio. Annual report 2007 0. The group’s performance in the past 15 months has been hampered due to the financial market turmoil.42% in 3Q08 from 0.70% 0.50% 9M08 1H08 NIM Source: Interim reports of 3Q08 and 1H08.1 9M08 -0. which registered write-offs of €1. from €285 million a year ago.65% 2007 2006 In line with most of its peers. The cost base increased as a result of a one-off restructuring expense (€66 million as at 3Q08) incurred on account of strategic BayernLB 10 . BayernLB has maintained its core banking income. The group would have shown improved performance.88 0.05 7.38% as at FYE07). The bank’s NIM remained almost flat at 0. with high dependence on interest income and a moderate contribution of fee and commission income. Figure 7: Net interest margin 0.55 -0.29 1H08 ROAA 2007 ROAE 2006 Source: Interim reports of 3Q08 and 1H08.64% 0. Figure 8: Returns metrics 10 5 0 % -5 -10 -15 -13. Also it has high cost base.65% (%) 0. Both in 3Q08 and 1H08.27% in 1H08. BayernLB has a history of consistently lower profitability.59% 0.55% and -21. It has a concentrated revenue base. BayernLB’s pre-provisioning operating profits have increased as a result of the HGAA acquisition. and its ROAA and ROAE in 3Q08 have declined to 0. Net fee and commission income nearly doubled to €452 million during first 9M08. Returns metrics have turned unfavourable for the group. if there had been no large write-offs in the securities portfolio. Annual report 2007 Given the volatile nature of the group’s earnings.

8% as at 3Q08 from 52. thereby reducing administration expenses by €670 million in 2013. In 1H08. The group is expected to book losses even in 1Q09. the provisions/net interest income was just 17%. The management has announced a series of restructuring initiatives. To a large extent. the provisions/net interest income was just 17%.7% in 2007 end. like most of its German peers. Overnight and time deposits at BayernLB averaged more than €8 billion over the year. In 1H08. BayernLB 11 . BayernLB plans to improve its cost structure by better integrating its subsidiaries and achieving synergies. the bank did not disclose its refinancing position. as provisioning requirements increased significantly up to 95% of the net interest income. It has also planned to cut headcount by around 5. subordinated capital and other liabilities formed 16%. we expect to see the positive results of these initiatives in the medium to long term. we infer that the weakening of cost-to-average-assets ratio is due to the one-off event and should not be considered as negative. Hence. with customer deposits/loan ratio declining to 50. which is on the higher end when compared with its German peers. As at 3Q08. Securitised liabilities (Pfandbriefe and other debts) contributed 29% of the total liabilities (excluding equity) as at 3Q08. BayernLB depends on Pfandbriefe issuances for refinancing. Funding and Liquidity: BayernLB. BayernLB has a history of severe credit quality problems in its lending books that intensified in 2001– 2002. BayernLB has a history of severe credit quality problems in its lending books that intensified in 2001– 2002. which is on the higher end when compared with its German peers. to sustain business position and contain costs. resulting in significant losses. is largely wholesale funded. given the extremely volatile global financial market conditions and deteriorating operating environment in Germany. the group had a much lower need for refinancing loans. In FY07 (pre-crisis affected period). marginally declining from 31% (FYE07). pressurising the group’s margins. as provisioning requirements increased significantly up to 95% of the net interest income. In the current market situation.200 over a five-year period. Figure 9: Funding mix 1% 1% 1% 16% 1% 3% 24% Securitised liabilities Liabilities held for trading Negative fair values from derivative financial instruments Provisions Income tax liabilities 24% Other liabilities Subordinated capital Liabilities to banks Liabilities to customers 29% The group is increasing its reliance on wholesale funding to support its loan growth. However. Interbank funding and deposits contributed 24% each while trading liabilities. to improve its operating efficiency in the future. The group is focusing on the restructuring programme. 3% and 4% of total liabilities.realignment of Financial Markets Business Area and downstream.600 from the current 19. resulting in significant losses. respectively. the refinancing costs have increased. especially in HGAA.

0% 11.0% 11. once the capital is infused from the government.9 billion from €11. as per the package.7 billion write-down in revaluation reserve. State of Bavaria offered a risk shield to the group in a bid to cover the losses incurred in 2007 and early 2008. The group has a good liquidity position. affected the equity (depletion of reserves). owners and SoFFin. Nevertheless. However. Capitalisation problems sprang up due to losses incurred in its securities portfolio that in turn. The quality of group’s capital is expected to deteriorate as amount of hybrid capital is increasing and we consider hybrid capital as quasi equity (low quality equity). Earlier in June 2008.5 billion in 1H08 due to €1. as these were invested in ABS).0% As at 3Q08. the group increased its core banking business. Figure 10: BayernLB's capitalisation 12% 10% 8% 6% 4% 2% 0% 9M08 1H08 Tier 1 2007 Total Capital 2006 7. The BayernLB 12 . this depends on the capital injections made by the owners and internal capital generation capacity. As at 3Q08. We believe that the group may refinance these liabilities.0% 11.8%. the group’s total and core capital ratios declined to 10. BayernLB’s capitalisation has been distressed for over a year. In H108 the group’s hybrid capital/ equity is around 30% We expect some restructuring and strategic realignment to happen. a bail-out package was announced.0% 7. as against a regulatory requirement of 1%.BayernLB did not release detailed disclosures related to liquidity along with 3Q08 results. respectively. In such a situation. it would also receive €3 billion from SoFFin for recapitalisation.5% and 6. In December 2008. there is a liquidity shortfall of about €20 billion up to five years. Capitalisation: BayernLB’s capitalisation is weakening due to reserve write-offs. However. In the medium term. driven by large portion of liquid bond portfolio and substantial interbank funding. considering the strong support received by the owners. As disclosed in the annual report. as at FYE07. through which the State planned to inject €10 billion.0% 8. refinancing costs are expected to be higher. It maintained a stable liquidity ratio of 1. despite of liquidity support from the government. indicating the need for a capital infusion. BayernLB has maintained huge portfolio of liquid securities after July 2005 to insure against the effect of the removal of state guarantees from its liabilities (which backfired. However. the bank maintained a positive liquidity gap in the short-term bucket. the group had 41% of its securitised liabilities maturing in the one to five years. the group’s equity base slumped to €9. looking at the group’s business profile.25–1.0% 11. this was partially offset by the positive effect of reclassification of securities from recent IFRS amendments. Also. However. we expect its liquidity profile to remain stable. the State support is crucial to maintain the group’s solvency. Going ahead. funding problems may arise if huge write-offs on securities portfolio continue. there is no maturity disclosure in the interim reports.0% 8. with raising loan leverage and declining liquidity.35% in 1H08. As at 1H08. However.

considering the bad phase the group is undergoing. BayernLB’s has weak solvency position as reflected by net NPL/equity ratio of 47% at H108. this is highly likely as reserve coverage is very low and seems to be inadequate. In the longer term.possibility of external capital infusion (by any other third party) is very low. This could be partially mitigated. Capitalisation for BayernLB is expected to weaken further. this could be a long and arduous process. as we do not expect any major improvement in the group’s performance in 4Q08 and even in 2009. Any further increase in unprovided NPL will in turn affect the capitalization. however. We could witness further depletion in the AFS reserves. capital levels need to be restored from internal business sources. if the owners inject adequate capital. BayernLB 13 .

11 regional Sparkassenstützungsfonds (savings bank guarantee funds) and guarantee fund of the state building societies (central building societies). BayernLB 14 . SoFFin plans to do this through three tools: Federal government guarantee for refinancing up to €400 billion. to provide a backup for the member savings banks or BayernLB in the event of any emergency. This fund aims to provide coverage and protection to the member banks by providing guarantee to their liquidity and solvency. the Association of Bavarian Savings Banks has shared a reserve fund of €1 billion with BayernLB since July 2005.Appendix SoFFin The German government has established a Financial Markets Stabilisation Fund (SoFFin) for €480 billion under the Financial Markets Stabilisation Act to stabilise its financial markets. This protection is not limited to any specific maximum amount. applicable on new debt instruments issued on or before 1 December 2009 with maturity of less than 36 months Recapitalisation of financial institutions Option to acquire problematic assets Solidarity/cross-guarantee system BayernLB is a member of the Landesbank guarantee fund and hence a part of the guarantee scheme run by the Sparkassen-Finanzgruppe under the German Savings Bank Association. so that they are readily available to one another as extra coverage. All these form a cross-guarantee system. if needed. The fund aims to ease the current liquidity crunch and also support the capital base of financial firms incorporated in Germany. This indicates solidarity between the Association and BayernLB. The guarantee scheme comprises Landesbank guarantee fund. Apart from the guarantee fund. This reserve fund is operated independently of the crossguarantee system and ensures both institutional and credit protection.

672 52.096 5.260 64.168 10.095 21.309 57.239 142.731 10.003 29.442 33.890 64.440 51.464 81.485 14.582 43.871 63.906 88.295 76.436 63.216 51.216 66.406 146.032 2.739 78.043 26.219 38.075 68.893 175.923 5.231 50.045 55.481 50.052 11.296 172.288 287 1.617 11.691 NA 38.416 29.567 92.465 15.780 15.787 4.287 81.243 53.736 2.521 63.192 196.894 51.825 46.147 2.291 88.475 50.410 10.219 33.702 4.142 1.914 58.278 112.647 106.443 76.731 69.881 188.442 38.219 66.654 147.848 11.247 2.894 52.168 95.764 28.639 500.355 24.831 47.814 15.729 3.324 204.254 238.351 38.641 11.742 54.643 144.546 186.611 105.215 1.152 93.142 54.177 30.309 57.696 50.819 443.219 45.333 174.032 1.226 228.108 43.362 4.243 68.355 28.942 50.007 66.810 83.260 48.913 27.339 -115 -155 -574 -144 1142 259 -64 -23 339 -580 311 2127 584 347 186 568 -714 117 563 158 138 19 NA -131 220 815 297 291 53 NA -49 76 530 117 121 46 -155 -184 353 936 215 402 106 -126 -136 160 706 88 202 75 -380 -202 305 1478 162 487 38 -307 -450 121 799 100 720 131 -64 -228 280 1602 326 1131 1 -591 -933 580 561 193 657 186 674 773 -1601 1090 406 -1502 238 -1616 -1325 117 706 158 202 46 -94 -202 280 1.584 38.585 201.114 141.452 238.587 84.142 2.979 68.560 286.639 12.268 58.794 71.863 4.943 4.408 96.194 28.923 5.341 21.288 24.538 NA 81.128 8.926 151.446 68.363 8.446 143.858 20.478 326 402 53 -231 -574 415.096 43.172 204.969 107.812 67.047 63.742 54.541 67.514 64.085 146.177 96.340 115.452 Aa2/Watch Negative A/Negative A+/Stable Aa1/Stable A+/Negative A+/stable A+/Stable Not Rated AA-/Stable Aa2/Stable A/Stable A+/Stable Aa2/Stable A/Negative A/Stable Aa3/Stable A/Watch Negative A/Stable A2/Negative A-/Watch Negative A/Stable 2007 Landesbank BadenWurttemberg 1H08 2007 Landesbank Berlin AG 1H08 2007 Landesbank HessenThueringen Girozentrale HELABA 1H08 2007 Norddeutsche Landesbank Girozentrale NORD/LB 1H08 2007 HSH Nordbank AG 1H08 2007 WestLB AG 1H08 2007 Peer Medians H108 2007 EUR million BayernLB 15 .490 9.108 18.264 19.188 31.119 96.459 -179 -124 -1060 92 2170 380 2.851 NA 107.552 NA 37.048 415.686 26.564 267.451 3.764 28.376 142.587 4.255 43.906 80.311 152.890 165.524 173.733 2.942 50.295 64.863 5.372 157.569 6.585 204.Peer Analysis Bayerische Landesbank 1H08 External Ratings Moody's S&P Fitch Balance Sheet Items Total assets Equity Gross loans to customers Customer deposits Gross impaired loans Liquid assets Trading assets Financial investments Interbank borrowing (liabilities) Interbank lending (assets) Securities portfolio (trading + AFS) P&L Items Net income Net interest income Net fee and commission income Operating income Loan-loss provisions Trading losses Losses on securities portfolio -722 1.119 107.863 4.902 62.541 71.993 24.827 93.767 2.

4% -5.7% 211.4% 77.8% 44.4% 361.5% 209.6% NA 23.4% 194.8% 44.5% 10.2% NA NA NA NA 10.9% 0.8% 1.5% 7.7% -0.4% 41.7% 48.8% 1.0% 3.6% -3.2% 76.1% 7.8% 3.3% 91. BayernLB 16 .1% 6.4% 4.4% 64.1% 6.2% 21.2% 10.3% 219.3% 39.4% 0.7% 52.2% 74.5% 82.9% 30.2% 0.1% 7.3% 5.0% 11.9% 26.6% 0.4% 82.5% -6.7% 87.6% 7.7% 0.1% 52.7% 56.9% 3.8% 2.8% 1.1% 37.4% 85.4% 2.2% 5.6% 1.7% 9.9% NA NA NA NA 2.5% 11.5% 0.4% -13.5% 1.9% NA NA 9.2% 56.8% 26.7% 6.7% 0.0% 2.0% 0.6% 23.3% 45.EUR million Bayerische Landesbank 1H08 2007 Landesbank BadenWurttemberg 1H08 2007 Landesbank Berlin AG 1H08 2007 Landesbank HessenThueringen Girozentrale HELABA 1H08 2007 Norddeutsche Landesbank Girozentrale NORD/LB 1H08 2007 HSH Nordbank AG 1H08 2007 WestLB AG 1H08 2007 Peer Medians H108 2007 Profitability ratios Net interest margins ROAA ROAE Cost/income LLP/net interest income Asset Quality NPL/gross loan Loan-loss reserves/ impaired loans Liquidity Gross loans to customers/deposits from customers Liquid asset/total assets Interbank ratio Capital ratios Tier I ratio Total capital ratio Total equity/assets 8.1% 2.6% 10.7% Liquid assets: Cash and central bank balance + interbank and trading assets excluding derivatives and financial assets through P&L Bibliography 1) Bloomberg for CDS charts and write-downs.9% 2.0% 36.3% 29.2% 78.1% 14.4% 1.8% 7.6% 317.5% 10.4% 77.4% 49. 3) Annual reports.7% 0.5% 5.4% 2.2% 157.3% 66.7% 2.2% 1.9% 0.2% 77.3% 5.9% 200.7% 48.4% 0.4% 6.8% 209.2% 10.9% 22.0% 26.9% 34.6% 2.7% 7.5% 17.7% 2.1% 77.5% 151.7% 5.9% 30.7% 45.8% 1.1% 68.2% 52.6% 49.1% 73.9% 9.0% 2.6% 1.5% 11.5% 0.1% 36.8% 7.5% -0.0% 78.6% 0. credit losses details.6% 8.9% 0.0% 9.7% -0.1% 26.5% 11.9% 5.1% 138.8% 2.6% 189.5% 52.6% 1.3% 2.5% 70.3% 99.6% 2.9% 30.6% 34.5% 0.4% 266.4% 0.6% 2.1% 6.2% 5.6% 0.0% 11. financial sustainability report and press releases by Bayern LB.4% 2. 2) Latest updates from Reuters.2% 74.3% 20.8% 5.0% 0.3% 11.7% 47.8% 0.7% 2.4% 45.1% 1.4% NA NA 0.0% 67.8% 7.6% 200. interim reports.1% 38.8% 15.6% 0.5% 3.3% 53.6% -28.6% 10.8% 6.9% 3.2% 8.7% 6. Financial Times and WSJ.2% 159.5% 9.8% 1.0% 0.5% 327.5% 71.5% 0.6% 3.3% 66.6% 0.3% 2.0% 76.7% 3.

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